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
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Smart engineering is second nature to us.
ANNUAL REPORT AND
ACCOUNTS 2014
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Quick reference
Contents
What is Meggitt?
How did we
perform in 2014?
02
04
31
What is our
strategy and
business model?
06
08
What are our
markets and
what drives
them?
10
How do we
manage risk?
What are our key
performance
indicators?
24
27
How do we
perform as
corporate
citizens?
38
Who runs Meggitt
and how do we
reward them?
01-41 Strategic report
01
02
03
04
05
06-07
08-09
10-12
13-17
18-19
20-21
22-23
24-26
27-30
31-37
38-41
Introduction
Group overview
Capabilities
Financial highlights
Chairman’s statement
Chief Executive’s review
Group strategy
Market review
Meggitt divisions
The Meggitt Production System
Talent
Technology
Principal risks and uncertainties
Key performance indicators
Chief Financial Officer’s review
Corporate responsibility
42-79 Governance reports
Chairman’s introduction
43
Board of directors
44-45
Corporate governance report
46-50
Audit Committee report
51-53
Nominations Committee report
54
Directors’ remuneration report
55-75
Directors’ report
76-79
80-140 Financial statements
80-84
Group financial statements
Independent auditors’ report to the members
of Meggitt PLC
Consolidated income statement
85
Consolidated statement of comprehensive income
86
Consolidated balance sheet
87
Consolidated statement of changes in equity
88
89
Consolidated cash flow statement
90-132 Notes to the consolidated financial statements
44
55
133
Company financial statements
Independent auditors’ report to the members
of Meggitt PLC
Company balance sheet
134
135-140 Notes to the financial statements of the Company
Smart engineering is second nature to us
High pressure air travelling through the
geometry of bleed air valves cast or
machined in the traditional way is
extremely noisy, something that will be
familiar to those who live near airports.
In future, air could flow more quietly
through a radical new concept from
Meggitt based on a fir-cone design, an
organic structure made possible through
additive layer manufacturing. The bold use
of innovative processes forms part of
Meggitt’s centrally coordinated and highly
focused technology strategy.
141-144 Supplementary information
141
142
143-144 Glossary
Five-year record
Investor information
Download the 2014 Meggitt PLC annual report
and accounts from www.meggitt.com
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
1
Meggitt’s smart engineering for
extreme environments attracted
an unprecedented number of
programme wins in the current civil
aerospace cycle of new platform
launches, making 2014 a year of
accelerating new product
introduction ready to meet the
manufacturing ramp-up that will
drive financial returns for the next
decade and more.
We will continue to focus on the industrialisation of
new products in 2015, supported by the widening
implementation of the Meggitt Production System
(MPS). This combination of tried-and-tested
business improvement methodologies tailored to
Meggitt is fundamental to defining how we work
throughout the Group.
The system consists of six demanding phases, with
the final Silver and Gold certifications delineating
operations excellence as a defining, sustainable
competitive advantage. While achieving gains in
productivity and employee engagement wherever
MPS has been introduced, we are at the beginning
of a journey that will extend from the factory floor
into every function and that will touch every
Meggitt employee.
Operations excellence at the core
Across the Group, MPS has strengthened the
foundations for greater operations excellence,
giving us a comprehensive but flexible framework
for continuous improvement. On-time-delivery and
quality are up in many of our businesses as a result.
MPS’ new global standards make our core stronger,
creating a secure platform for growth. (See page 18).
Making more of our talent
MPS is also reshaping our culture. Our new
operating system has renewed employee
confidence and commitment. Increasing numbers
of operators, supervisors and managers have the
tools and processes they need to make a very
personal contribution to improving the business
and leaders now have more time to lead, spotting
opportunities for growth and innovation.
(See page 20).
A new wave of technology
The operational savings and productivity
improvements won by MPS will allow us
to invest more in innovation—what we make
and how we make it.
We’re looking ahead not only to product
innovation but advances in how we make products.
We are already investigating a new approach to
manufacturing engineering, taking the first steps
toward developing the factories of the future.
(See page 22).
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2
MEGGITT PLC REPORT AND ACCOUNTS 2014
Group overview
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.
Over 10,500 people are employed across
manufacturing facilities in Asia, Europe and
North America and in sales offices in Brazil,
India and the Middle East.
Our civil aerospace interests cover large
commercial jets, regional aircraft, business jets,
helicopters and general aviation.
Our military markets encompass all aircraft types,
land systems, naval platforms and aerial, land-
based and marine threat simulation for personnel
training and weapons systems development.
Training extends to law enforcement and security
organisations.
The Group’s growing presence in energy is driven
by core capabilities in 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.
These 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 and the test and
measurement industry worldwide.
Revenue by market Total revenue (£ millions)
1,553.7
Civil aerospace
741.2 | 48%
Military
539.4 | 34%
Energy and other
273.1 | 18%
Revenue by destination Total revenue (£ millions)
1,553.7
USA
771.1 | 49%
UK
152.4 | 10%
Rest of Europe
338.1 | 22%
Rest of World
292.1 | 19%
Employees by region Number of employees
10,823
USA
5,385 | 50%
UK
2,847 | 26%
Mainland Europe
1,554 | 14%
Rest of World
1,037 | 10%
Total R&D as a % of revenue
14
13
12
11
10
9.5
8.2
7.6
7.6
7.2
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
3
Capabilities
Just some of the smart
sub-systems and critical
components created by
Meggitt.
For the full picture, take
our Meggitt-in-a-Minute
e-tour.
www.meggitt.com/e-tour
USA
771.1 | 49%
UK
152.4 | 10%
Rest of Europe
338.1 | 22%
Rest of World
292.1 | 19%
PR TECT
Aircraft safety and security
Avionics
Combat support
BULLET
Composites
Fire protection
Fuel containment
Pressure up to
Heat transfer engineering
Ice protection
Polymer seals
Power products
Precision micro metal
engineering
Sensing and health
monitoring
STRUCTURAL
DESIGN
MATERIALS
TECHNOLOGY
THERMAL
MANAGEMENT
Small arms training systems
Thermal management
and fluid control
Wheels, brakes and
brake control
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4
MEGGITT PLC REPORT AND ACCOUNTS 2014
Financial highlights
Meggitt’s 2014 results continued to demonstrate the breadth
and resilience of its portfolio during a period when our suite of
products is being substantially refreshed. Our equipment is
installed on over 63,000 aircraft worldwide—a growing fleet—
with a predictable 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 £148.3m (9.5% of revenue), gives
us confidence in making good progress in the years to come.
Revenue
(£ millions)
1,553.7
Underlying profit before tax
(£ millions)1
Free cash flow
(£ millions)
328.7
146.8
14
13
12
11
10
1,553.7
1,637.3
1,605.8
1,455.3
1,162.0
14
13
12
11
10
328.7
377.8
366.0
325.3
263.7
14
13
12
11
10
146.8
110.4
182.4
193.0
163.0
i See page 31
i See page 32
i See page 35
Underlying earnings per share
(pence)1
Dividends per share
(pence)
Return on trading assets
(%)
32.4
13.75
26.5
14
13
12
11
10
i See page 34
32.4
37.5
36.5
32.1
28.6
14
13
12
11
10
i See page 34
13.75
12.75
11.80
10.50
9.20
14
13
12
11
10
i See page 28
26.5
36.0
40.8
39.4
35.4
1 The definition of ‘underlying’ is provided in notes 10 and 15 to the consolidated financial statements on pages 103 and 106 respectively.
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SUPPLEMENTARY INFORMATION
5
Chairman’s statement
“
Meggitt was one of the first UK
companies to commit to
comprehensive ethics policies.
As Chairman of the Group’s
Ethics and Trade Compliance
Committee, I take great pride in
the strength of our programmes.
”
Growing the Group
It’s been over a decade since I joined
Meggitt as a non-executive director,
becoming Chairman in 2004. During that
time, Meggitt has evolved from a group
of individually-run industrial businesses
into an increasingly integrated
international enterprise focusing
on aerospace, defence and energy.
We have grown revenue threefold,
organically and by acquisition, increased
our market capitalisation five-fold and
doubled our workforce to over 10,500.
A brand-new braking systems business
has emerged from two significant
acquisitions, both of which also boosted
our existing thermal management and
polymers and composites capabilities.
An industry leader in aircraft fire protection
and control emerged from another.
In 2009, we restructured our business
into capability-based divisions with
streamlined management that made us
easier to do business with. In 2013, we
launched our continuous improvement
initiative, the Meggitt Production System
(MPS), which is already having a marked
impact on our operational performance
with much more to come.
Talent
Meggitt has a strong focus on talent
development, sponsoring aspiring
engineers through successive Arkwright
Scholarship Trust awards; entering into
a long-term partnership with the
Institution of Mechanical Engineers to
provide training, management and
leadership development for Meggitt
engineers; appointing technical fellows;
and creating a world-class biannual
executive training programme with Oxford
University’s Saïd Business School.
In the last three years we have launched
a hugely successful graduate training
programme. We have attracted the best
recruits from leading engineering
faculties worldwide. Participants have
been given the time and resources to
focus on specific projects with excellent
results, exemplified most recently by
development work on a critical component
for a major engine manufacturer using
Meggitt’s growing capability in additive
layer manufacturing.
Doing business the right way
Meggitt’s growth has been based on fair
and impartial conduct of business, fully
compliant with applicable laws and
regulations worldwide and integrity in
every business relationship.
Meggitt was one of the first UK companies
to commit to comprehensive ethics
policies, programmes and practice when
we signed the 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 take great
pride in the strength of our programmes.
Capital deployment
Meggitt’s capital allocation policy focuses
on investing in organic growth, increasing
ordinary dividends in line with earnings
through the cycle and, where appropriate,
enhancing capability in its core markets
through targeted, accretive acquisitions.
As the year closed, we acquired Precision
Engine Controls Corporation (PECC). This
leading supplier of actuation systems and
fuel metering valves to manufacturers of
small-frame gas turbines complements
Meggitt Control Systems’ capability, further
extending its reach in the oil and gas and
power generation sectors.
Demonstrating our commitment to
maintaining an efficient balance sheet,
we launched a share buyback programme
for the first time in 2014. This is already
improving shareholder returns and will
deliver gearing at or slightly above
1.5 times net debt to EBITDA (earnings
before interest, taxes, depreciation and
amortisation) by the end of 2015.
Board of directors
Alison Goligher was appointed non-executive
director to the Board in October. Alison, an
Executive Vice President in Shell’s Upstream
International Division, brings a wealth of
experience in technology deployment and
integrated project management in the
energy sector.
In December, non-executive director,
Philip Cox resigned to take up a new role
as chairman of Drax Group plc. We thank
Philip for his outstanding contribution to
the Board.
I will be retiring at April’s AGM and will
be succeeded by Sir Nigel Rudd, whose
extensive international business and
boardroom experience spans many
industries including those in which
we specialise.
I have enjoyed my time at Meggitt
immensely and I am proud to have played
my part in its transformation into a
FTSE-100 global engineering group
delivering critical products and solutions
in its chosen markets. I look forward to
seeing even greater success as Meggitt
continues to evolve and grow.
I would like to take this opportunity to extend
my heartfelt thanks to all Meggitt employees
for their outstanding work during my tenure
as Chairman, particularly after a challenging
year in some of our key markets.
Sir Colin Terry Chairman
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Chief Executive’s review
“
Superior performance,
defined by quality, cost
and on-time delivery, is
key to realising our
growth potential and we
are determined to make
operations excellence
a core competitive
strength.
”
Group strategy
Meggitt aims to be a leading provider
of smart engineering for extreme
environments. We invest in developing
high-technology components and sub-
systems which play mission or safety-
critical roles over long operating lives.
We seek to improve our operational
performance continuously to offer
industry-leading levels of quality,
on-time delivery and competitiveness,
enabling us to reinvest in new capabilities
and technologies while generating
attractive returns for shareholders.
Technology
We focus on targeted investment to
drive future growth. We seek to grow
organically by investing in the product
and manufacturing technologies
that count across a broad range of
platforms and customers. To secure
positions on specific platforms, we
align our development focus with our
customers’ technology roadmaps.
We look to supplement organic growth
with acquisitions that enhance our
capabilities and routes to market.
In 2014, we continued to refine our
complete ATA26 fire protection
systems for aircraft as we progressed
our development of innovative
environmentally-sound suppression
technology. We continued to invest in fluid
control and thermal management products
capable of operating at the ever-higher
temperatures required to enable the latest
generation of jet engines to deliver the
efficiencies demanded by their operators.
To deliver these and many other
capabilities competitively, we maintained
our investment in cutting-edge
manufacturing technologies such as
additive layer manufacturing, which we
now employ in the production of some
in-service components, and Meggitt
Modular Modifiable Manufacturing (M4),
our pioneering approach to the factories
of the future. M4 is designed to enable
operators to manufacture a broader
range of low-volume, highly complex
components through greater deployment
of technology through the factory. This
includes the real-time monitoring of
key parameters including product weight
and touch-time and the provision of
instant-access support to the operator
if required. The result is greater
optimisation of all aspects of the
manufacturing process from machining
and assembly to machine utilisation and
traceability, enabling our businesses to
invest in state-of-the-art equipment in
the knowledge that it will be fully utilised
in ‘smart’ facilities.
Our acquisition of Precision Engine
Controls Corporation (PECC) in December
2014 exemplifies targeted, value-added
portfolio enhancement. PECC, now
a Meggitt Control Systems product range,
builds on our existing thermal management
and fluid control capabilities in the
aero-derivative gas turbine market,
broadening our reach into small-frame
gas turbines in the 1-30MW power range
and widening our actuation technology
offering for the combined customer base.
Operations excellence
Superior performance, defined by quality,
cost and on-time delivery, is another key
to realising our growth potential and we
are determined to make operations
excellence a core competitive strength.
With meaningful improvements in
operating performance such as Defective
Parts Per Million down 84% and on-time
delivery up 10%, the Meggitt Production
System—our single, global approach to
continuous improvement—has progressed
well since its inception. We have launched
the system across two thirds of our
manufacturing estate and expect to see
it adopted at all primary sites by the end of
2015. Several sites have entered the second
phase in the six-phase programme,
extending the reach of the system beyond
the factory floor and supply chain into
functions and leadership.
We have undertaken considerable work
optimising our manufacturing footprint
over the last few years, consolidating six
sites into three and investing in low-cost
manufacturing centres in China, Vietnam
and Mexico. In 2014, we made good
progress in enhancing the level of
manufacturing capability of our facility
in Querétaro, Mexico, with the start of
a substantial transfer of product lines
from our Control Systems businesses
in North America. In China, we increased
the scope of our Xiamen facility,
responding to customers’ global sourcing
requirements with the successful
replication of a high-tech process from
one of our European facilities involving
the printing of sensors onto printed
circuit boards. We will continue to evolve
our manufacturing estate in response to
the requirements of our customer base.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
7
decline than in recent years and even
some suggestion of growth in the
all-important US budget from 2016.
Order intake in 2014 has been strong, with
book to bill of 1.03 covering a number of
short-term and multi-year contracts.
On this basis we expect a return to
modest growth in 2015 driven by good
growth in military training, partially
offset by a decline in MABS following the
completion of the B1-B and Taiwanese
upgrade programmes. We maintain our
medium-term expectation of an average
of 2% growth per annum excluding the
effects of sequestration.
Our energy businesses, driven by
heightened demand for our printed circuit
heat exchangers and increasing market
share in condition-monitoring equipment,
should continue to deliver revenue growth
averaging greater than 10% over the
medium term. However, in 2015 we expect
good organic growth in energy control
valves and condition monitoring to be
largely offset by a decline at Heatric
reflecting the impact of capital
expenditure deferrals by our major
oil and gas customers.
On the basis of the above, the
Group continues to expect organic
revenue growth in 2015 of low to
mid-single digit percentage points,
in line with the guidance given in our
interim management statement in
November 2014.
Stephen Young Chief Executive
Renewing our customer focus
Making ourselves easy to do business
with while responding to the dynamic
markets in which we operate is core to
our business philosophy for original
equipment (OE) and aftermarket
customers alike. To enhance our
customer focus, we have recently
appointed two senior executives
dedicated to the requirements of our
OE customers and the aftermarket
respectively.
The manufacturers of aircraft and
engines will see a renewed focus on their
interests as we strengthen key account
relationship management and bring
together cross-group product packages
that simplify their supply chains.
The aftermarket is central to the Meggitt
business model. We will improve service
through the Meggitt Production System
and focus on the development of innovative
support solutions for our OE customers
as they seek to maintain more of their
products in service.
Cradle-to-grave programme
management underpins Original
equipment manufacturer (OEM) and
aftermarket relationships. We are
strengthening this function, shortening
the lines of communication between
OEMs and operators, championing their
interests inside Meggitt and allowing
closer collaboration than ever before.
This is how we will achieve specific
programme success, insights into
customer’s technology aspirations over
the longer term and opportunities to
create better products from our
existing portfolio.
Performance in 2014
Performance in our end-markets was
mixed. Good growth in civil aerospace
was driven by a rise in aircraft deliveries
from the major manufacturers, greater
Meggitt content on newer platforms
and a continued recovery in
aftermarket revenues.
There were, however, challenges in our
military market, particularly during the
first half of the year. The effect of the US
military drawdown from Afghanistan was
compounded by the completion of two
large retrofit contracts in the first half
of the prior year. Both issues constituted
a significant headwind to military
aftermarket performance, although our
overall military revenues stabilised on an
organic basis in the second half of 2014.
In energy, we continued to make good
progress on the issue highlighted in 2013
concerning the lack of availability of
tourmaline, a key raw material. This is
now behind us—we have migrated a
number of customers onto alternative
in-house materials and we are receiving
positive customer feedback on product
performance. Energy performance in the
second half was hampered by lower
revenues at Heatric, our printed circuit
heat exchanger business. Its local content
provider in Brazil is experiencing financial
challenges, causing revenue to be
deferred from 2014.
Against this background, we have
delivered flat organic revenues in 2014,
with a decrease in underlying earnings
per share of 5.1p to 32.4p reflecting
currency movements, business mix,
disposals and the investment being made
in new aircraft programmes. Net debt to
EBITDA at the end of the year was 1.2x.
In November we announced a share
buyback with the intention of increasing
this ratio to 1.5x by the end of 2015 to
maintain an efficient balance sheet.
Outlook
The outlook for our civil aerospace
markets remains encouraging.
Production rates of large jets are
expected to continue to grow and the
relatively high shipset values we enjoy
on the latest generation of widebody
aircraft, together with our positions on
the re-engined narrowbodies, should
underpin organic civil OE revenue growth
of 7 to 8% over the medium term.
Reflecting recent inventory build at
aircraft manufacturers ahead of new
product launches and production rate
increases, 2015 will be moderately
below this level.
Available seat kilometres, the key driver
of our large and regional jet aftermarket,
are growing at above the long-term trend,
and lower oil prices should see this
continue. However, we are seeing
month-to-month volatility in revenues
and a continuing impact from surplus
parts. We therefore expect civil
aftermarket growth in mid-single
digits for 2015.
In the military market, we look to be
entering a more benign phase, with
military budgets seeing lower rates of
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8
8
MEGGITT PLC REPORT AND ACCOUNTS 2014
Group strategy
Strategy
We select high-growth markets where we can deploy our smart engineering
for extreme environments and ability to navigate the complex regulatory and
certification environment associated with safety- and mission-critical
products. These markets must deliver long-term, predictable revenue
streams in line with our business model.
We set strategic priorities according to the dynamics of this business model.
Today, we are addressing core technology, consolidating our resources and
sharpening our focus to extend our intellectual property; operations
excellence from the factory floor to every function based on the Meggitt
Production System; and renewed focus on customers, with dedicated
management responsibility for OEM and aftermarket customer relations,
underpinned by strong programme management.
Meggitt’s strategy by market and capability is outlined in the Market review
(see page 10) and under Meggitt divisions (see page 13).
Customer
focus
GRowTH
operations
excellence
Technology
Business model
We deliver strong and sustainable
shareholder returns through leading
positions in aerospace, defence and
energy markets.
Throughout the business cycle, revenue
comes from successfully executing
original equipment programmes (often
sole-source) and the aftermarket that
flows from them. Aftermarket demand
is driven by condition-based demand
caused by the wear and tear associated
with the harsh environments in which
our products operate.
T
N
E
M
T
S
E
V
N
E
R
I
Technology
operations
Installed
base
KNowLEdGE
Field knowledge
enhances our
intellectual property.
Aftermarket
Shareholders
Returns
Airframers, turbine manufacturers, oil and
gas platforms and processing vessels—
60,000-plus platforms carry Meggitt products
Airlines, militaries, distributors, MRO integrators
Winning new programmes, often on
a sole-source basis, through technology
and operations excellence.
Selling Meggitt content onto new platforms
provides aftermarket access.
Supporting end-users through sales of spares
and repairs for the life of programmes is a
significant driver of returns.
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STRATEGIC REPORT
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
9
Investment cycle
We develop technology for applications involving product
life-cycles measured in decades. Products must perform
without fail in environmental extremes, requiring replacement
or overhaul, generating strong returns from our initial investment
over many years.
Our business model requires significant cash investment in the
development phase of programmes. For our wheels and brakes
business, this includes production. We make strong positive
cashflow within our civil aerospace and military end-markets
during the in-service phase, resulting in cash break-even between
years 11 and 18 typically, with a shorter cash break-even in the
energy market.
As our products are developed in line with our customers’
technology goals, we have performed strongly in recent bid cycles,
securing positions on key platforms and refreshing the long-term
aftermarket pipeline.
Our near-term business is weighted therefore towards investment
in new development programmes and the transition of new products
to full run-rate manufacturing, 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
Energy
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10
MEGGITT PLC REPORT AND ACCOUNTS 2014
Market review
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
Civil
Original equipment
Aftermarket
Military
Original equipment
Aftermarket
Energy
Other
>10% of Group revenue
3—10% of Group revenue
1 —3% of Group revenue
Market review
Meggitt’s core civil aerospace, military
and energy markets share a common
requirement for smart engineering for
extreme environments: mission- and
safety-critical components and sub-systems
that function without fail for many years in
highly demanding operating conditions,
from suppliers capable of meeting rigorous
certification requirements.
Civil aerospace
Civil aerospace accounts for 48% of Group
revenue, with products and sub-systems
installed on almost every jet airliner,
regional aircraft and business jet in
service. This fleet has grown recently,
totalling over 43,000 aircraft today versus
31,000 a decade ago. New aircraft
deliveries drive sales of original equipment
(OE) and aircraft utilisation generates
demand for spare parts and repairs over
many decades, so the growth of our fleet is
a strong indication of future aftermarket
revenue growth.
Original equipment
We classify civil aircraft deliveries by seat
capacity: large jets (>100 seats), regional
aircraft (<100 seats) and business jets.
Large jet deliveries in 2014 stood at a
record 1,380, 8% higher than in 2013.
Growth is underpinned by the order books
of Boeing and Airbus, the two major civil
aircraft manufacturers, which extend over
seven years at current production levels,
plus other manufacturers investing in the
large jet market including Bombardier,
Sukhoi and AVIC. The high level of demand
for new aircraft deliveries in recent years
has been 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. Despite the recent decrease in oil
prices, we expect no significant changes to
new aircraft demand in the short term.
Regional aircraft deliveries of 269 in 2014
represented a 2% increase on 2013, with
growth driven by 70-plus seat aircraft.
Growth looks set to continue over the
medium term, mirroring the increasing
internationalisation of the regional
aircraft fleet. Regional fleets outside
North America account for 55% of the
global fleet, up from 44% a decade ago.
Business jet deliveries totalled 675, a 6%
increase on 2013, although deliveries
remain around 40% below the peak in
2008. Inventories are continuing to decline,
however, and rising corporate profitability,
a good driver of business jet demand
historically, is forecast to continue. As with
regional aircraft, the fleet is becoming
increasingly global—customers in the
Americas currently comprise 75% of
the global business jet fleet but order
trends suggest this will move to around
60% over the next decade. Ten years
ago, the Americas represented 85% of
the global fleet. Over the medium term,
we see deliveries continuing to recover,
particularly at the smaller end of the
market, driven by an improved economic
growth outlook in developed economies and
the large number of new aircraft models.
Meggitt performance
Meggitt’s OE revenue grew organically by
6% in 2014, with significant contributions
from the ramp-up of the Boeing 787 and
initial production revenue from the
A350XWB. Large jet deliveries drive the
majority of our OE revenues, involving the
supply of products and sub-systems on
engines and airframes covering thermal
management 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. Strong OE
performance is also driven by higher
shipset values on new aircraft
programmes, whose order books and
delivery forecasts lend confidence in
growth prospects averaging 7 to 8%
per annum for the medium term.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
11
Large jet delivery forecast
1,640
1,701
1,603
1,513
1,417
1,380
1,279
1,800
1,500
1,200
900
600
300
2013
2014
2015
2016
2017
2018
2019
Source: Meggitt management estimates
Regional aircraft delivery forecast
288
291
297
320
306
400
300
263
269
200
100
2013
2014
2015
2016
2017
2018
2019
Source: Meggitt management estimates
Business jet delivery forecast
881
932
811
835
757
675
637
1,200
1,000
800
600
400
200
2013
2014
2015
2016
2017
2018
2019
Source: Meggitt management estimates
Aftermarket
The civil aerospace aftermarket is driven
primarily by aircraft utilisation which,
for large jets and regional aircraft, is
measured using available seat kilometres
(ASKs). We use take-offs and landings
as a proxy for business jet utilisation.
ASKs in the commercial aircraft fleet
grew 5.5% in 2014, above the 5% long-
term average. The Middle East and Asia
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 2014 up 3% versus 2013.
We would normally expect our
aftermarket revenues to follow these
leading indicators after a lag of a few
months. However, revenue can be
impacted by short-term perturbations
including destocking or restocking cycles
and excess spare part inventory arising
from the retirement of old aircraft and
subsequent harvesting of serviceable
components from these aircraft.
Meggitt performance
Meggitt’s organic aftermarket revenue
was up 5% for the year, with 2% growth in
the first half accelerating to 7% growth in
the second half. The growth rate in the final
quarter was 10%, above our medium-term
expectation of 8 to 9%. Air traffic was good
given the previously referenced 5.5% ASK
growth. However, aftermarket revenue
growth overall was held back to a degree by
the parting out of old aircraft resulting from
the high delivery rates of new, more
fuel-efficient aircraft.
Regional aircraft and business jets
are important contributors to the Group’s
aftermarket revenue. The continued
increase in fleet size and recovery in
regional aircraft utilisation in 2014
boosted overall aftermarket growth.
Our regional aircraft aftermarket grew
4% in the year, with business jet aircraft
up an impressive 13%.
Aircraft utilisation remains very
encouraging, with ASKs now tracking above
the long-term average. A reduction in some
of the current cyclical factors such as
retirement rates and the subsequent parting
out of aircraft would drive confidence in our
medium-term aftermarket revenue growth
expectation of 8 to 9% on average.
Military
Military accounts for 34% of Group
revenue. Meggitt has equipment on over
20,000 aircraft and a variety of ground
vehicles, naval vessels and training
installations worldwide.
Defence budgets in some key markets
remained under pressure in 2014,
notably in the US where the effect of
the drawdown from Afghanistan and
absence of equipment reset affected
Available seat kilometres (ASKs)
(billions)
7
6
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2014
Source: Meggitt management estimates
1983
1976
1979
1974
1981
1973
1971
1978
1977
1982
1972
1984
1986
1987
1988
1989
1991
1992
1993
1994
1996
1997
1998
1999
2001
2002
2003
2004
2006
2007
2008
2009
2011
2012
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12
MEGGITT PLC REPORT AND ACCOUNTS 2014
Market review continued
Military revenue by region Total revenue (£ millions)
539.4
USA
319.5 | 59%
Europe
137.3 | 26%
Rest of World
82.6 | 15%
Meggitt performance
Meggitt’s energy revenue declined 3%
on an organic basis in 2014. Sales to
power generation customers declined
modestly, particularly in the first half
of the year, as a shortage of tourmaline
impacted our ability to fulfil customer
requirements. We have, however, seen
a considerable improvement as a result
of migrating customers onto alternative
technologies and we anticipate a return
to growth from 2015. Revenue at our
Heatric printed circuit heat exchanger
business also declined as a result of the
deferral of revenue out of 2014 driven by
financial difficulties at our local content
provider in Brazil.
Heightened demand for our printed circuit
heat exchangers from an identified project
pipeline totalling nearly £600 million and
increasing market share in condition-
monitoring equipment should continue to
deliver revenue growth averaging greater
than 10% over the medium term.
However, in the short term we anticipate
good growth in energy control valves and
condition monitoring to be largely offset
by a decline at Heatric, reflecting the
impact of project deferrals resulting
from the recent decline in the oil price.
spending levels and the Continuing
Resolution in the early part of the year
impacted 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 subject to ongoing fiscal
pressures, although industry forecasts
suggest we are moving into a more
benign budgetary environment in US and
international markets.
While we do not expect significant growth
in military expenditure in the near term,
opportunities remain for the reset and
upgrade of repatriated equipment and the
supply of new products as a significant
tranche of military assets reach the end
of their service lives.
Meggitt performance
Meggitt’s military revenue declined
organically by 7% in 2014. The first half
decline was particularly affected by the
completion of two substantial retrofit
programmes in 2013 and a reduction in
the sale of spares and repairs on some
helicopter and heavy-lift platforms
following the withdrawal of US equipment
from Afghanistan. Military revenues were
flat in the second half.
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
few years. We expect to continue to do so
over the medium term. We have enjoyed
considerable success, for example,
securing retrofit programmes for
blast-proof fuel tanks for the Bradley
fighting vehicle fleet and fuel bladders
for the KC135 tanker aircraft. While we
have now completed these retrofit
programmes, further opportunities exist
in the reset of recently repatriated
equipment from Afghanistan, and we are
engaged with US military customers on
further ground vehicle fuel tank retrofits.
Further revenue growth is supported by
continuing expansion of the fleet of
platforms on which we have good content
such as the F-35 Joint Strike Fighter and
A400M. Accordingly, we are targeting an
average of 2% per annum organic
revenue growth in the medium term,
excluding the impact of sequestration.
Energy
Our energy business accounted for 11%
of Group revenue in 2014. 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, particularly
in the first half of 2014, drove 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
remained robust through 2014.
Exploration and production companies
have been 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 demand for
floating, production, storage and offload
(FPSO) and floating liquefied natural gas
(FLNG) vessels. However, the sharp
decline in the global oil price over the last
few months of the year is likely to
significantly dampen oil producers’
appetite for new capital projects in the
short term, resulting in the deferral and
possible cancellation of projects.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
13
Meggitt divisions
Meggitt Aircraft Braking Systems
A leading supplier of aircraft wheels,
brakes and brake control systems.
Markets
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
327.0
21.1
127.5
Revenue by end market
327.0
Civil OE
6%
Civil AM
64%
Military
30%
Energy and other
0%
Civil aerospace
Fixed wing military aircraft
Rotary wing military aircraft
Capabilities
Growth strategy
• Wheels and brakes
• Control systems—brake, nose wheel steering and landing gear
• Monitoring systems
• Extend core landing gear sub-systems technologies
• Secure sole-source positions on new aircraft programmes
• Expand share of maintenance, repair and overhaul market
Controlling more critical systems
creating an effective anti-skid system is amongst the
greatest challenges a braking systems provider can
overcome. Since 1948, we have accomplished this for
over 90 aircraft programmes, which is why
customers are awarding more responsibility for
aircraft safety to us. With leading-edge developments
including the landing gear control and monitoring
unit, nose wheel steering and aircraft hydraulics for
Dassault’s all new Falcon 5X business jet, advanced
braking and monitoring systems for the Gulfstream
G500 and G600 and pioneering large-jet style
autobrakes for the G650 and G650 Extended Range
aircraft, we remain the large cabin business jet
manufacturers’ preferred supplier.
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14
MEGGITT PLC REPORT AND ACCOUNTS 2014
Meggitt divisions continued
Meggitt Control Systems
A leading supplier of pneumatic, fluid control,
thermal management and electro-mechanical
equipment and sub-systems, and complete
fire protection solutions.
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
348.7
22.4
91.8
Revenue by end market
348.7
Civil OE
26%
Civil AM
39%
Military
25%
Energy and other
10%
Markets
Civil aerospace
Military aircraft
Military ground
vehicles
Energy, industrial
Marine
Ground fuelling
Capabilities
Growth strategy
• Heat exchangers
• Control valves and sub-systems
• Electro-mechanical controls
• Environmental control
• Fuel handling
• Aircraft fire protection and control systems
• Develop lightweight control systems for extreme
temperature and pressure environments to improve
aircraft performance
• Diversify product range to a wider range of energy
and industrial turbines
• Deploy full fire protection systems to secure sole-source
positions on new platforms
• Develop ‘green’ fire suppressants to meet changing regulations
and gain competitive advantage by being first to market
Maximising aircraft take-off readiness
turning an aircraft back on a false alarm can
cost up to US$1 million which is why our goal is
to maximise aircraft take-off readiness without
compromising safety. Our complete fire protection
and control systems are highly discriminating,
with our latest smoke detectors reaching the
state-of-the-art in particulate recognition. What’s
more, we have the largest range of components in
the industry and world-class integration expertise,
which is why our systems, from detectors and
controllers to fire extinguishers, are carried by the
latest generation of narrowbody aircraft including
A320neo and 737 MAX.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
15
Meggitt Polymers & Composites
A leading specialist in fuel containment,
engineered aircraft sealing solutions and
technical polymers, electro-thermal ice
protection and complex composite
structures and assemblies.
Markets
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
162.3
10.5
20.2
Revenue by end market
162.3
Civil OE
27%
Civil AM
18%
Military
54%
Energy and other
1%
Civil aerospace
Military aircraft and ground vehicles
Missile systems
and UAVs
Nuclear, marine, heavy transportation
and oil and gas sectors
Capabilities
Growth strategy
• Flexible fuel tanks for military and civil aircraft and military
ground vehicles
• Smart electro-thermal ice protection with energy-saving
• Expand our industry-leading operational performance in
polymers with further investment in manufacturing technology
• Invest in advanced polymer materials to enter attractive
proportional control
• Complex composites
• Airframe, engine and oil and gas sealing solutions
adjacent markets
• Expand capabilities in complex composites
• Complete fuel management systems
Components to systems
we made our mark in flexible, ballistically-resistant,
crashworthy fuel cells for a range of aerospace
applications, recently launching an IED-resistant
design for land vehicles. Now we are leveraging this
expertise with capabilities from other Meggitt
divisions to deliver a fully-certified fuel containment
system for Sikorsky’s advanced S-92® helicopter
in a multi-million dollar contract extending to 2030.
Our design significantly reduces manufacturing
risk and the cost of field repairs, an investment
in line with our strategy to move into total fuel
management systems.
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16
MEGGITT PLC REPORT AND ACCOUNTS 2014
Meggitt divisions continued
Meggitt Sensing Systems
A leading provider of high-performance sensing
and condition-monitoring solutions for high-value
rotating machinery and other assets.
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
398.2
25.6
58.4
Revenue by end market
398.2
Civil OE
35%
Civil AM
16%
Military
21%
Energy and other
28%
Markets
Civil aerospace
Military: fixed wing and rotary aircraft,
ships, missiles
Energy
Test and measurement
Capabilities
Growth strategy
• High-performance sensing in extreme environments
• Condition monitoring for air and land-based machinery
• Power electronics
• Real-time remote aircraft surveillance
• Aircraft ground manoeuvring collision prevention
• Wireless emergency systems
• Develop leading-edge sensing and condition-monitoring
technologies to minimise emissions, conserve fuel, optimise
engine performance and manage maintenance economically
• Accelerate growth in energy segment, launching innovative
new products and expanding sales and aftermarket services
in high-growth markets
• Exploit capabilities in power generation, conversion and
storage for more electric aircraft
• Deploy advanced sensing knowledge and intellectual property
for high-growth medical ultrasound applications
Improving aircraft operating economics
our latest on-engine condition monitoring system
enters service in 2015 on the Airbus A350, the latest
widebody. The system, which has already been adopted
by the Airbus A380 and Boeing 787, plays a critical role
in an aircraft’s economics, enabling maintainers not
only to diagnose problems but anticipate wear and tear
to prevent schedule disruption and expensive
unscheduled maintenance. On-engine monitors are of
particular interest to engine-makers who provide total
care packages to operators.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
17
Meggitt Equipment Group
Created to enable a set of strong, technologically-
distinct businesses to market their offerings to
specialist customers, while benefiting from the wider
Meggitt Group’s investment in shared services and
common processes.
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
317.5
20.4
48.1
Revenue by end market
317.5
Civil OE
3%
Civil AM
1%
Military
58%
Energy and other
38%
Markets
Civil aerospace
Fixed and rotary wing
military aircraft
Defence and
security
Energy
Automotive and industrial
Capabilities
Growth strategy
• Combat support (ammunition-handling, military electronics
cooling and countermeasure launch and recovery systems)
• Live-fire and virtual training systems
• Heat transfer equipment for offshore oil and gas
• Standby flight displays and air data systems
• Linear motion control
• Automotive and industrial control electronics
• Build on market-leading position in compact and high-pressure
heat exchangers for high-growth energy markets
• Leverage growing US military system-of-record status in live
and virtual training systems for international customers in
defence and law enforcement markets
• Provide smart thermal management solutions for military
electronics systems and extend automatic ammunition
handling capability into larger calibre weapons
System-of-record status grows
business and influence
meggitt’s next generation small arms trainer will
become the system-of-record for the US Army and
US Marine Corps—an unprecedented dual win worth
around US$130 million. Both contracts, won
for Best Value, optimise the cost of personnel
training through technology. Meggitt’s significant
investment in software architecture and military
training expertise provides a virtual product that
will not only improve the quality of training to
soldiers but the efficiency and effectiveness of
training instructors.
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18
MEGGITT PLC REPORT AND ACCOUNTS 2014
The aim of the Meggitt Production System (MPS)
is to transform performance at our sites around
the world, day in, day out. New global standards
of excellence will strengthen our core, creating
a solid platform for growth and innovation.
Individual improvements are sometimes small.
Together, however, they will reshape our future.
The Meggitt
Production System
Excellence as standard 1
Singapore: outpacing the
industry
With a brand-new facility designed on
Lean manufacturing principles, Meggitt
Aerospace Asia Pacific (MAAP) already
had very high standards of operational
performance. In the seven months it took
to implement the first stage of the MPS,
however, standards rose even higher.
“We believe MPS is leading the industry,”
says James Mariadass, Director of
Operations & Continuous Improvement in
Singapore. “And it looks like the industry
does too: we won Silver in the ‘Singapore
Aerospace Industry Excellence Award’ for
outpacing the industry. Now we’re aiming
for Gold next time round.”
Everyone accountable, every day
Daily Layered Accountability is a key
concept within the MPS. It starts with
factory floor meetings that take place
at the same time every day. Issues that
cannot be solved by operators or
supervisors are escalated same day to
functional leaders, site leaders, general
managers and even divisional presidents.
Issues are visited daily through this
process until they are solved.
Above:
The Meggitt Aerospace Asia
Pacific Aftermarket team holds
its daily functional review.
L-R: James Mariadass,
Director of Operations &
Continuous Improvement,
Sharon Fan, Head of Customer
Service, Trebas Kwek, Regional
Financial Controller, Adrian
Plevin, General Manager, Roland
Thia, Head of Quality & EHS, Dior
Ang, Materials Manager, Mango
Tan, Inside Sales Manager and
Jeanali Wu, HR Manager.
MPS boosting performance in our Singapore facility
Safety—number of lost time accidents
0
0
2014
2013
Quality—DPPM2 (External – All)
243
1,854
Quality—number of MRO3
escapes (workmanship)
0
4
Delivery—MRO OTD4 performance
95%
84%
2 Defective Parts Per Million
3 Maintenance, repair and overhaul
4 On-time delivery
1 See page 8 for a full description of our strategy, articulated within three themes: Technology; Operations excellence; and Customer focus.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
19
California: closer analysis,
shop floor know-how saves
US$50,000
In 2013 the main cause of internal scrap
at Meggitt Control Systems’ Corona site
was stator failure on a motor production
line. About two a week were failing the
final test, amounting to a loss of about
US$50,000 a year.
A cross-functional team ran a root cause
investigation using a range of MPS tools,
revealing that shorting thermostats were
a major cause of stator failure. Based on
an idea from Judy Bunch, leader of the
motor-winding cell, one of the engineers
on the line solved the problem by
pre-impregnating the thermostats.
Judy also observed that when the
stators were fitted into the motor
housing, the wires would occasionally
get damaged and later short. Working
with her, a manufacturing engineer
developed a replica of the motor housing.
Assemblers now check for clearance
issues without damaging the wires prior
to fitting. The failure rate has dropped
to zero.
“These are typical examples of how more
ideas are coming up from the floor,” says
Site Operations Director, Garret Mertz.
“With MPS, we start the day with a set of
short, interlocking meetings which
cascade information up and down the
business, escalating problems and
potential solutions so they get the
attention they need.”
“It’s not ‘Get it done’ anymore,” says Judy.
“It’s ‘How can we help you get it done’.
That’s a huge difference.”
Model planning:
Helge Huerkamp, General
Manager, Meggitt Sensing
Systems Switzerland,
has confidence in data
run through MPS’s more
reliable planning and
simulation models.
Creativity on the factory floor:
Garrett Mertz, Site Director, Business
operations, Judy Bunch, Lead Assembly
Technician and Derek Harris, Lead Test
Technician eliminating scrap at Meggitt’s
control systems facility in Corona, California.
Switzerland: better planning
means higher productivity,
lower inventory
For the last 18 months, Helge
Huerkamp, General Manager, Meggitt
Sensing Systems Switzerland, has
been using MPS to drive more accurate
sales, inventory and operations planning.
As well as driving efficiencies throughout
the business cycle, the revamped process
allows managers to simulate the impact of
new business more accurately.
At the end of 2014, a key customer asked
for 120 additional engine monitoring
units, each one consisting of thousands
of components. Running the data through
a more reliable planning and simulation
model highlighted potential bottlenecks.
But just as important, because key people
are now used to a more rigorous step-by-
step process of discussion, forecasting
and sign-off, there’s a much more
accurate picture of what new business
can be taken on and when.
“That information is invaluable in
customer discussions,” says Helge.
“We know we can trust it and, of course,
the customer picks up on that too.
We were able to confirm this additional
order, plus we’ve been able to ramp up
production in other areas: productivity has
increased by 8% over the last two years
and inventory has improved by 10 days.”
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20
MEGGITT PLC REPORT AND ACCOUNTS 2014
To be the best in your field, you need the
best people.
Our senior leadership programme ensures
we have a strong global leadership team.
Our graduate programme attracts talent from
the world’s top universities, adding cutting-edge
technical knowledge to the Group today and
engaging technology thinking for the longer term
We continue to broaden the range of training
for all employees. A recent Meggitt Production
System (MPS) initiative, for example, funnels
expertise right through the business via
a network of subject matter experts.
Talent More power
to our people 1
Flying higher
Ensuring we have the right talent to
lead the organisation today and
tomorrow is a key priority.
MPS continues to strengthen training at
site level with leadership ‘standard work’
and a set of four competencies, such as
leading by example and coaching. Daily,
weekly and monthly, leaders are held
accountable for ensuring their people
are equipped to hit performance goals.
We have also developed a bespoke
executive leadership programme with
Oxford University’s Saïd Business
School. Taught by external experts
from academia and business, the one-
year Oxford Leadership Programme
focuses on strategy, operations and
personal skills.
“Since 2008, it’s helped our brightest and
best develop a greater understanding of
Meggitt as a whole, helping them to
develop systemic thinking beyond their
functional areas,” explains Robin Young,
Group Organisation & Development
Director.
Participants attend three off-site
intensives, carrying out assignments
in between on live strategic issues.
Participants develop their ideas in small
teams, presenting recommendations
and implementation plans to our
Executive Board.
“Each year the programme brings
together a peer group of very diverse
talent, new joiners and old Meggitt hands.
It’s a powerful networking tool,” says
Young. The people who have taken the
programme so far create the core of
a strong global leadership team, with
a shared sense of priorities and values.
We gather round and help should the going
get tough and we make sure everyone in
our respective teams understands their
role in the bigger picture.”
The next generation
Now in its third year, the Meggitt
Graduate Programme has a dual
purpose; creating a group of
future leaders in the key disciplines of
engineering, operations and procurement;
and bringing new insight into cutting-
edge technology from the world’s
leading universities.
“A lot of research into areas such as
additive layer manufacturing and
nanotechnology is happening at places
like Georgia Tech, Cal Tech and MIT,” says
Chief Technology Officer, Keith Jackson.
“The best graduates are ready to apply that
knowledge to new and existing products.”
In his first assignment, Blaise Guélat, who
has a PhD in microsystems, was part of the
team who produced a prototype for a next
generation inclinometer. It replaces
electromechanical technology with a
micro-electro-mechanical system (MEMS)
sensor. In his second assignment, he is
developing a new algorithm for secondary
flight displays to improve attitude and
heading accuracy.
“It uses a statistical approach known
as Kalman filtering to generate a more
accurate estimate than you get with
a single measurement,” explains Blaise.
“And it’ll be able to use other data sources
such as magnetic data and GPS when
they come online.”
Elsewhere, we have been working with
local schools and universities to develop
skills and create a pipeline of talent for
tomorrow. In the UK, Meggitt sponsored
Sheffield University’s Formula Student
team. Thousands of young engineers
from more than 100 universities all
over the world compete to design and
manufacture a single-seat racing car
to run at Silverstone.
“It gets our name as a top graduate choice
out into the fast lane,” says Jackson,
“And it helps us get a good look at talent
from all over the world.”
Learn, teach, learn, teach—
the smart way to embed
new knowledge
As part of the second phase of MPS
implementation, subject matter
experts in many of our sites around
the world are training to become experts in
one of 10 critical subjects, from statistical
analysis to project leadership. Engineer
Paul Thomson has spent this year becoming
one of the first 2 problem-solving experts at
Securaplane, our aircraft security and
battery specialists in Tucson, Arizona.
1 See page 8 for a full description of our strategy, articulated within three themes: Technology; Operations excellence; and Customer focus.
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21
(Left)
Tomorrow’s leaders, refreshing
our technologies today: Dr Blaise
Guélat, front, with fellow graduate
programme participants, back
L-R: Dr Yair Korenblit, John
Borton, Stefan Lespezeanu and
Dr Jeff LeHew.
(Below)
First among experts: As part of
the Meggitt Production System
implementation, Paul Thompson
(Sustaining Engineering Manager)
is the first in a cadre of experts
being developed at every Meggitt
site in ten core disciplines
ranging from problem-solving
to project management.
“We started with offsite training in Six
Sigma and presentation skills—you need
to get people on your side when it comes to
solving complex problems,” he says. “After
that came two assignments designed to
put what we’d learned into practice.”
The first assignment focused on quality
issues with an emergency lighting
system. Some 30 possible issues were
revealed, 80% of recommendations were
implemented within two weeks and after
one month, there was a 30% improvement
in the First Pass Yield (FPY). FPY shows
how well standard work is undertaken,
minimising deviation from plans and
the introduction of rework into our
production processes.
Paul is now passing on his learning in a
train-the-trainer programme that will take
all 180 people at the site up to the first tier of
expertise in the subject by the end of 2015.
“We start with around six people, they train
up another four or five and on it goes.”
Once the training is complete, Meggitt
experts continuously develop their own
understanding, sharing best practice
and benchmarking across the sector
in order to champion their subject
within the business.
Model scores: Teri Samsel, Buyer/Planner, reviews production scorecards for
Meggitt’s emergency back-up battery line with Paul Thompson in Securaplane’s
brand-new model factory.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
To continue leading the world in our chosen
fields, we must become even better innovators.
By empowering people at every level to drive
change themselves, the Meggitt Production
System (MPS) is improving the way we innovate,
freeing up capital to reinvest in technology.
We are not only focusing on developing greater
maturity in next generation technologies, we
are looking at the advanced manufacturing
capabilities needed to industrialise them.
Technology Smarter
engineering, generation
after generation 1
Factories of the future
Our focus on manufacturing high-value
complex parts requires great expertise
in assembling sub-components. That
makes conventional automation difficult.
But, as the volume, variety and complexity
of these parts grows, we need to take
performance optimisation up to the
next level.
Our pioneering approach, known
as Meggitt Modular Modifiable
Manufacturing (M4), will do just that,
giving operators the right tools, parts,
and information at the right time so they
can radically improve performance. At
site level, it will enable us to reconfigure
our factories in real time, adjusting plans
to satisfy customer requirements and
optimise inventory.
In 2014, we started this journey in
partnership with the UK’s Advanced
Manufacturing Research Centre (AMRC),
creating a prototype workstation. Laser
and video projected guides, plus sensor-
enabled smart assembly fixtures, allow
operators to build a wider variety of
products, faster and more accurately.
Automatic cameras keep detailed records
throughout, enhancing traceability, while
capturing ideas for improvement.
Starting in 2015, we will develop the other
technologies M4 requires in partnership
with the AMRC, the Manufacturing
Technology Centre (MTC) and a leading
software provider. We have also attracted
significant interest from Innovate UK,
the UK’s innovation agency and Britain’s
Aerospace Technology Institute.
“M4 will optimise factory performance by
responding to changes at the micro level,
such as late customer demand, and at the
macro level, such as buying more efficient
equipment,” says Steve Parker, Director
of Engineering. “It supports investment in
people and equipment by maximising our
resources: advanced workstations
enable individual operators to work
on the widest range of products.”
Although the full programme will
take three years, M4 will initially run
alongside existing factory operations,
using a combination of simulated and
actual environments.
“We’re already looking at introducing
findings from the scoping phase to some
of our other facilities and that will continue
throughout the programme,” says Parker.
“M4 isn’t just a one-off improvement.
It’s giving us the tools we need to drive
improvements, year on year.”
Lighter, quieter, more reliable
and faster to manufacture
New manufacturing techniques are
enabling us to improve existing product
designs and create totally new ones.
Take compressor bleed valves, for
example. They’re used to prevent stalling
by controlling engine pressure. High
pressure air makes a huge amount of
noise as it travels through the valve
geometry that has been cast or machined
in a traditional way.
A team of Meggitt engineers on our Group
graduate programme have used additive
layer manufacturing (ALM) to create a
radical new component design for our
engine customers.
The valve will significantly cut noise over
residential areas surrounding major
airports, an important regulatory
requirement for almost all existing
jet-engined planes.
Scott Lathrope, Matt Scovell and David
Skolnik, have led work on the new control
valve concept which aims to be 25%
lighter as well as quieter, more reliable
and quicker to manufacture.
“Air flows much more quietly around the
kind of organic designs you can create
with ALM,” explains Lathrope. “And our
model is simpler to assemble as there are
fewer parts. That means less potential
error and an increase in reliability.”
Group Engineering and Strategy Director,
Chris Allen says, “We hope to use
optimisation techniques developed on
this project to create a wide range
of advanced components for next-
generation aero platforms, as well
as products for the medical and
energy sectors.”
1 See page 8 for a full description of our strategy, articulated within three themes: Technology; Operations excellence; and Customer focus.
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23
Intelligent workbench (above and right):
AMRC Technician, John Hall examines a
flexible fixturing solution, a product of
Meggitt’s Closed Loop Adaptive
Assembly Workbench (CLAAW) project,
the aim of which is to achieve a quantum
leap not only in production output but
quality, repeatability and traceability
using guidance via lasers and display
screens and ‘smart’ tools. The sample
part is Meggitt’s electric brake.
Below right: CLAAW’s fixture includes
targets to guide the calibration of an
overhead laser. A shaft is encoded to
enable precise rotation measurements.
A power-on brake provides stability for
torque operations. Product assemblies
can be mounted and removed swiftly
using a pneumatic easy-click clamp.
Revolution: low-noise
aero-engine valve, a
concept enabled
by Meggitt additive
layer manufacturing.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Principal risks and uncertainties
Meggitt’s risk management framework includes
a formal process for identifying, assessing and
responding to risk, supporting the delivery of
the Group’s strategy and business objectives.
reports and the Group Risk Register. This was
supported by process and guidance documentation
detailing the revised Group-wide framework.
These processes were in place throughout 2014.
During 2014, we enhanced our risk management
process further. The Board approved a Group risk
appetite statement and related financial risk
tolerances to ensure that identified risks are
managed within acceptable limits. These risk
tolerance levels are flowed down to divisional and
functional levels for incorporation in the process
described below. We started a risk maturity exercise
to capture the improvements which had been made
to the Group’s risk management culture following
the implementation of the new processes.
Change in risk in year
No change ← →
Higher risk ↑
Lower risk ↓
Risk management operates at all levels
throughout Meggitt. However, the Board takes
overall responsibility, determining the nature and
extent of the principal risks it is willing to take in
achieving Meggitt’s strategic objectives, and
maintaining the Group’s risk governance structure
and an appropriate internal control framework.
Willis Risk Advisory Services, supported by Alvarez
& Marsal, have been assisting in the implementation
of the Group’s risk management framework.
During 2013, the Board approved an updated Risk
Management Policy, a Group risk management
strategy and updated formats for regular Board
Types of risk
Risk disclosure
We monitor risk across strategic,
operational, business environment
and financial categories.
• Strategic
Includes, for example, risk arising
from making poor business decisions
or sub-standard execution of
business objectives.
• Operational
Covers business processes and
the technical, quality and project
management or organisational risk
associated with programmes.
• Business environment
Arises when external forces could
significantly change the fundamentals
driving our overall objectives
and strategies.
• Financial
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.
In accordance with the Group’s enhanced
risk management policy and process, we
have evaluated our risk disclosure and
focused this report on our most significant
risks. General financial risks including
foreign exchange and tax risks are not
disclosed here but are described in the
Chief Financial Officer’s review on
pages 31 to 37.
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.
The process requires each risk to have an
individual owner who is responsible for
regular review of that risk (and
consideration of new risks in that area).
Risk identification is embedded in other
processes, for example project and
programme management, bid approvals
and other operational activities.
After identification, each risk is reviewed
at a site level and then aggregated and
reviewed at divisional and functional level,
and during the business review process.
At the end of this process there is a detailed
review and discussion of the Group Risk
Register at the Executive Board. The Board
of Directors review the output of this
process. The senior executives also meet
to discuss risks which may not have been
identified through the normal channels.
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25
Risk
Description and impact
How we manage it
Strategic
Business model
→
Technology strategy
New
Operational
Quality escape/
equipment failure
→
Customer
satisfaction
← →
IT/systems failure
← →
Failure to respond to fundamental
changes in the aerospace business
model, such as the accelerated
pace of OE deliveries leading to
earlier retirement of older aircraft
and the continued development of
an indigenous Chinese aerospace
manufacturing industry.
Impact: decreased revenue
and profit
Failure to develop and implement
meaningful technology strategies to
meet customers’ needs.
Impact: restriction of ability of
Group to compete on new
programmes with consequent
decrease in revenue and profit
Defective product leading to
in-service failure, accidents, the
grounding of aircraft and prolonged
production shut-downs for Meggitt
and its customers.
Impact: decreased revenue and
profit, damage to reputation and
operational performance
Failure to meet customers’ cost,
quality and delivery standards or
qualify as preferred suppliers.
Impact: failure to win future
programmes, decreased revenue
and profit
Prolonged lack of availability 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; cyber attack.
Impact: decreased revenue
and profits, damage to
operational performance
• Long-term customer agreements in place
• Customer-facing organisation restructured and strengthened
• Investing in research and development to maintain and enhance
Meggitt’s intellectual property
• Ongoing strategic review of aftermarket including evaluation
of operational model
• Meggitt Production System (MPS) implementation and facilities investment
in our aftermarket businesses
• Maintaining a pricing strategy
• Development of strategy for manufacture of non-aerospace products in China
• Build relationships with Chinese aerospace customers
• Creation of technology roadmaps
• Investing in advanced research and technology
• Focus on technology during the Group strategy process
• Recruiting top calibre engineers with appropriate technology skills
• Ring-fenced budgets focused on longer-term technology developments
• Well-developed verification, validation and system safety analysis policy
and processes in place
• Quality and customer audits and industry certifications
• Implementing MPS across the Group
• Implementing an enhanced supplier quality assurance process
• Implemented supplier excellence framework through risk-based intervention
following risk analysis and on-site assessments
• Step change in performance enabled through ongoing implementation of MPS
• Implementation of programme lifecycle management process
• Programme management reorganised to increase capability and focus on
programme delivery and governance
• Developing our commercial function and engineering capability
• Increased utilisation of low-cost manufacturing base
• Rolling programme of system upgrades (including SAP implementation)
to replace legacy systems
• Ongoing programme of IT security enhancements
• Reviewing existing systems, third-party service providers and risks,
including resilience and disaster recovery processes, taking mitigating
action where appropriate
• Roll-out of deployment and architectural review processes
Group strategy
Technology
Operations excellence
Customer focus
Meggitt’s corporate strategy is designed to optimise our business model and mitigate the risk inherent in it.
See page 8 for a full description of our strategy and business model.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Principal risks and uncertainties continued
Risk
Description and impact
How we manage it
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, and successfully
transition new products
into manufacturing.
Impact: significant financial
penalties leading to decreased
profit, damage to reputation
• Implementation of supplier excellence 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 including the development of long-term agreements
• Implementation of programme lifecycle management process
and a range of engineering support applications
• Implementation of improved technology readiness and bid approval
diligence methodology
• Delivering 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 the MPS implementation
• Enhanced internal review process to stress-test readiness
to proceed at each stage of key programmes
Significant breach of increasingly
complex trade compliance, bribery
and corruption and ethics laws and
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 and continuing investment
in other compliance programmes
• Board-approved trade compliance, ethics and anti-corruption policies
• Implementing a trade compliance global IT solution
• Regular monitoring by the Ethics and Trade Compliance Committee
• Ongoing trade compliance programme including external audits and
comprehensive ethics programme including training, anti-corruption policy,
external audits and Ethics line
• Implementing import compliance programme
Failure to protect intellectual
property or other sensitive
information arising from cyber
attack and physical theft of IT
and business assets.
Impact: compromised market
position, damage to reputation,
financial or contractual liabilities
Significant variation in demand for
products should military and civil
business downcycles coincide,
a serious political, economic
or terrorist event taking place
or an industry consolidation
materially changing the
competitive landscape.
Impact: volatility in underlying
profitability
• Ongoing implementation 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 self-assessment
and audits, prioritising higher risk environments and regions
• Monitoring external economic and commercial environment
and long-lead indicators
• Focusing on balanced portfolio including expansion of energy-related
businesses
• Regularly communicating strategy to shareholders
• Maintaining sufficient headroom in committed bank facilities
and against bank covenants
• Maintaining appropriate cost-base contingency plans
Supply chain
← →
Project/programme
management
→
Legal and regulatory
← →
IT and physical
security
← →
Business
environment
Product demand
← →
Group strategy
Technology
Operations excellence
Customer focus
Meggitt’s corporate strategy is designed to optimise our business model and mitigate the risk inherent in it.
See page 8 for a full description of our strategy and business model.
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27
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 profit before tax 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.
There have been no changes to the KPIs used in the year or to
how they are calculated.
Strategic objectives
Technology
Operations excellence
Customer focus
Organic revenue growth
%
14
400
12
10
8
6
4
2
0
-2
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 32 for a reconciliation of organic revenue to statutory revenue.
Target
Low to mid-single digit in 2015. 6 to 7% over the medium term.
Result
2014: 0.0% (2013: 1.4%). Average achieved over last five years: 3.6%. Average achieved
over four years since target was set: 4.8%. See page 31 for details.
2010
2011
2012
2013
2014
Directors’ incentive plans
Organic revenue growth is a performance measure for the 2014 and 2015 Long Term
Incentive Plan (LTIP). See pages 68 and 71 for details.
Underlying PBT
Definition and basis of calculation
Underlying PBT is reconciled to statutory measures in note 10 of the Group
consolidated financial statements on page 103.
400.0
400
350.0
300.0
250.0
£’m
200.0
150.0
100.0
50.0
0
2010
2011
2012
2013
2014
Target
We do not publish profit targets.
Result
2014: £328.7 million (2013: £377.8 million). See page 32 for details.
Directors’ incentive plans
Underlying PBT is a performance measure in the 2014 Short Term Incentive Plan
(STIP). For the purpose of this plan, underlying PBT is measured at constant currency.
See page 66 for details. Underlying operating profit is the new profit measure to be
used in the 2015 STIP, for the reasons described on page 71. In 2015, the Group will
therefore replace the existing KPI based on underlying PBT with one based on
underlying operating profit.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Key performance indicators continued
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 consolidated financial statements on page 103. Underlying
operating profit after tax applies the Group’s underlying tax rate to underlying
operating profit.
Trading assets are defined as net assets adjusted to exclude goodwill, other intangible
assets arising on the acquisition of businesses, net debt, share buyback commitment,
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 the amount of operating capital deployed.
Target
Target is to achieve an average return on trading assets of 25.4% over the next three
years. The target has been reduced from that set in prior years, recognising the need
to continue to invest in trading assets during this elevated investment period in the
aerospace cycle.
Result
2014: 26.5% (2013: 36.0%). Average achieved over last five years: 35.6%. See page 32
for details of the Group’s operating profit performance in the year. See page 34 for
details of the current high levels of investment to support future growth.
Directors’ incentive plans
Return on trading assets is a performance measure for the 2014 and 2015 LTIP. For the
purpose of these plans, underlying operating profit after tax and trading assets are
measured at constant currency. See pages 68 and 71 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
consolidated financial statements on page 106.
Target
We do not publish profit targets. However, the proposed 2015 LTIP includes EPS targets
equivalent to growth ranging from 5.5 to 10.0% per annum over the next three years.
Return on trading assets
50
40
30
20
10
0
2010
2011
2012
2013
2014
Underlying EPS growth
%
%
20
15
10
5
0
-5
-10
-15
-20
2010
2011
2012
2013
2014
Result
2014: -13.6% (2013: 2.7%). Average achieved over last five years: 4.7%. See page 34
for details.
Directors’ incentive plans
Underlying EPS is a performance measure for the 2014 and 2015 LTIP. For the purpose
of these plans, underlying EPS is adjusted to exclude the impact of any scrip dividends.
See pages 68 and 71 for details.
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Free cash flow
250
200
150
£’m
100
50
0
2010
2011
2012
2013
2014
R&D investment
%
10
8
6
4
2
0
2010
2011
2012
2013
2014
Accident/incident rate
500
400
300
%
200
100
0
2011
2012
2013
2014
Definition and basis of calculation
Cash generated excluding amounts in respect of acquisition of businesses, disposal
of businesses and paid to shareholders. See page 35 for a reconciliation of free cash
flow to statutory measures.
Target
We do not publish free cash flow targets.
Result
2014: £146.8 million (2013: £110.4 million). See page 35 for details.
Directors’ incentive plans
Free cash flow is a performance measure in the 2014 and 2015 STIP. For the purpose of
these plans, actual and target free cash flow figures are measured at constant currency.
See pages 66 and 71 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 typical investment fluctuation
within the industry cycle.
Result
2014: 9.5% (2013: 8.2%). Average achieved over last five years: 8.0%. See page 34
for details.
Directors’ incentive plans
R&D investment is not a specific measure used in directors’ incentive plans.
However, the 2014 and 2015 LTIP include measures focused on delivery of R&D
programmes. See pages 68 and 71 for details.
Definition and basis of calculation
The number of injuries reportable under local laws and regulations multiplied
by 100,000 and then divided by the average employee headcount during the year.
Target
Year-on-year improvement with an ultimate goal of nil.
Result
2014: 337 (2013: 317). See page 40 for details.
Directors’ incentive plans
Health and safety performance is included in the personal objectives of the
Chief Executive.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Key performance indicators continued
Reduction in defective
parts per million (DPPM)
2012
2013
2014
0
-20
-40
%
-60
-80
-100
On-time delivery
improvement
%
15
12
9
6
3
0
2012
2013
2014
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 then 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 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: 84% (2013: 54%). See page 34
for details.
Directors’ incentive plans
DPPM is a performance measure for the 2014 and 2015 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 68 and 71 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 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% (2013: 10%). See page 34
for details.
Directors’ incentive plans
On-time delivery is a performance measure for the 2014 and 2015 LTIP. For the
purpose of these plans, it is measured by reference to the number of sites achieving
individual targeted improvements in on-time delivery figures. See pages 68 and 71
for details.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
31
Chief Financial Officer’s review
Overall performance
Good growth in civil aerospace original equipment (OE)
and the accelerating recovery in civil aftermarket (AM)
was tempered by softness in military and energy
markets. Organic revenue was flat, and underlying profit
before tax decreased by 11% resulting in a 14% decrease
in underlying EPS to 32.4 pence. However, with a strong
order book and 3% organic revenue growth in the second
half of the year, there is good momentum going into 2015.
Financial highlights (Table 1)
2014
£’m
2013
£’m
Reported
change %
Organic
change %
Revenue
1,553.7
1,637.3
-5
0
Underlying 1:
EBITDA 2
Operating profit
Profit before tax
Earnings per share (EPS)
Statutory:
Operating profit
Profit before tax
EPS
Free cash flow3
Net debt
429.6
346.0
328.7
32.4p
236.2
208.9
22.0p
146.8
575.5
479.3
397.2
377.8
37.5p
300.3
269.4
29.4p
110.4
564.6
-10
-13
-13
-14
-21
-22
-25
+33
+2
-8
-11
-11
+38
1 Underlying profit and EPS are defined and reconciled to statutory measures in notes
10 and 15 respectively of the Group financial statements.
2 Underlying EBITDA represents underlying operating profit adjusted to add back
depreciation, amortisation and impairment losses.
3 Free cash flow is defined and reconciled to statutory measures in note 40
of the Group financial statements.
Revenue
Reported revenue declined by 5%
to £1,553.7 million. Table 2 details the
revenue performance by end market.
As expected, currency and disposals had
a significant adverse impact on revenue.
Currency movements, reflecting the
strength of Sterling against the Group’s
major operating currencies of US Dollar,
Swiss Franc and Euro, contributed
£57 million, or 3% to the decline, of
which £43 million is attributable to
Sterling/US Dollar. Net disposals
represented an additional net headwind of
£26 million, primarily reflecting the 2013
disposals of the Addison and Sunbank
businesses. Good organic growth in
civil in 2014 was offset by declines in
military and energy, resulting in a flat
overall organic revenue performance.
Encouragingly, the trajectory within the
year was positive with second half organic
revenue growth of 3%.
Total civil aerospace revenues grew
6% on an organic basis. Large jet OE,
the most significant driver of our OE
revenues, grew 7% driven principally
by the 787 ramp-up and some initial
A350XWB revenues, with regional aircraft
up 10% and business jets up 4%. The
aftermarket recovery seen in the latter
half of 2013 continued through 2014,
although we still experienced significant
monthly variations. Nevertheless,
the trend was positive with total civil
aftermarket growing 5% organically for
the full year and 7% in the second half.
Business jets were the most significant
contributor to the overall aftermarket
performance, delivering growth of 13%
for the year, while large jet grew 3% and
regional aircraft grew 4%. The parting out
of older aircraft continued, fuelled by the
increased retirement rate in recent years,
although quantification of the impact is
difficult. Aftermarket order intake was
positive, with orders for the year up
13% on an organic basis and a book
to bill of 1.08.
Military revenues declined by 7% on an
organic basis, with a substantial decline
in the first half of the year contrasting
with a flat performance in the second
half. The full-year decline was in part due
to the previously announced wind-down
of two retrofit programmes in the first
half of 2013, with the remainder driven
by the larger than expected impact of
the drawdown in Afghanistan on
military spares sales.
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32
MEGGITT PLC REPORT AND ACCOUNTS 2014
Chief Financial Officer’s review continued
Energy revenue declined by 3% on an
organic basis. The tourmaline shortage
impacted growth in our condition
monitoring business for the majority of
the year, although the situation is now
resolved and we expect a return to growth
in 2015. Heatric, our printed circuit heat
exchanger business, saw a modest
revenue decline largely due to the
financial difficulties being experienced by
our local content provider in Brazil which
resulted in the deferral of revenue from
2014. We continue to anticipate headwinds
in this business in the short term, largely
driven by the decline in the oil price which
is causing a number of our customers to
delay capital expenditure on new gas
projects. Some contracts we expected to
be awarded in 2015 have been deferred for
a year, and it is possible that we will see
further deferrals in the near future,
though we have not seen any
project cancellations.
Meggitt’s other specialist markets saw
organic growth of 5%, with growth in
medical and automotive products
offsetting weakness in the test and
measurement market.
with OE growth outpacing that of
aftermarket in both civil and military
markets, combined with a further
increase in investment in research
and development and new product
introduction and the previously
disclosed lower profitability on legacy
contracts, partially offset by operational
improvements and a one-time benefit
of a new arrangement for our US retiree
healthcare provision. We also took
a £6 million provision against our
investment on the Learjet 85 following
Bombardier’s announcement in
January 2015 that they were pausing
the development programme.
Underlying net finance costs decreased
to £17.3 million (2013: £19.4 million) as
a result of lower average debt and lower
interest rates following the repayment
of $180 million of US private placement
debt in June 2013, partly offset by
a non-recurring £1.8 million charge
relating to the cost of refinancing the
Group’s debt in September.
Underlying profit before tax was
£328.7 million (2013: £377.8 million).
Revenue growth (Table 2)
Civil OE
Civil AM
Total civil aerospace
Military
Energy
Other
Total
Organic growth (Table 3)
Revenue
2014
£’m
2013
£’m
Growth
%
1,553.7
1,637.3
-5.1
Reported
(8.9)
56.8
(35.4)
-
Impact of M&A1
Impact of currency2
2014
Revenue
Growth
%
Organic
growth %
301.6
439.6
741.2
539.4
163.1
110.0
1,553.7
+0
+1
+1
-12
-6
-1
-5
+6
+5
+6
-7
-3
+5
0
Underlying profit before tax
2014
£’m
328.7
(0.6)
5.1
2013
£’m
377.8
(2.1)
-
Growth
%
-13.0
1,601.6
1,601.9
0.0
Organic
333.2
375.7
-11.3
1 Excludes the results of businesses acquired or disposed of during the current and prior year.
2 Restates the current year using 2013 translation and transaction exchange rates.
Profit
The Board’s preferred measure of the
Group’s trading performance is
underlying profit. Underlying operating
profit for the year was £346.0 million
(2013: £397.2 million), representing a
margin of 22.3% (2013: 24.3%). The
principal drivers included adverse mix,
The underlying tax rate was 21% (2013:
21%), lower than our forecast 22% due to
a change in the geographical mix of profit
delivery. Underlying earnings per share
was 32.4 pence (2013: 37.5 pence).
On a statutory basis, profit before tax was
£208.9 million (2013: £269.4 million), with
the year-on-year decline driven by the fall
in underlying operating profit and the
marking to market of forward currency
contracts. Earnings per share was
22.0 pence (2013: 29.4 pence).
Operational performance
Meggitt Aircraft Braking Systems (MABS)
provides wheels, brakes and brake control
systems for over 34,000 in-service aircraft.
It continues to develop innovative technology
for new programmes allowing the business
to retain its leading position in its target
markets, underscored by the recent
programme awards on the Dassault Falcon
8X business jet and Gulfstream 500/600
family of aircraft. The division targets
sole-source programmes and is particularly
strong in regional aircraft, large business
jets and military aircraft. The division
represents 21% of Group revenue,
generating 86% of its revenue from the
aftermarket and 14% from OE sales.
MABS’ revenue grew by 3% on an organic
basis, with growth in civil aftermarket and
military. Regional aftermarket grew 4%
driven by increases in fleet size and
utilisation, and business jet aftermarket
grew by 7%. These were partially offset by
a 9% decline in large jet aftermarket. Total
military revenue grew 8% with aftermarket
benefiting from upgrade contracts for the
US B1-B fleet and the Taiwanese Air Force
which were completed at the end of the
year. Operating margins grew from 37.0%
to 39.0%, benefiting from positive mix and
operating efficiencies.
Meggitt Control Systems (MCS) designs
and manufactures products which manage
the flow of liquids and gases around aero
and industrial turbines, and control the
temperature of oil, fuel and air in aircraft
engines. The division, which also provides
fire protection equipment to engines and
airframes, represents 22% of Group
revenue, generating 46% of its revenue from
OE and 54% from the aftermarket.
For MCS, revenue was up 1% on an organic
basis, with 7% growth in civil aerospace,
spread across both OE and aftermarket,
being partly offset by an 11% decline in
military, primarily aftermarket. The most
significant contributor to the military
performance was a marked reduction in
military spares, largely related to the
drawdown from Afghanistan. Unfavourable
mix within military, the provision against our
investment in the Learjet 85 programme
and increased costs related to new product
introduction saw operating margins
decrease from 29.6% to 26.3%. PECC will
be reported as part of MCS in 2015.
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
33
Meggitt Polymers & Composites (MPC)
has a bias towards military, representing
54% of its revenue. It supplies flexible
bladder fuel tanks, ice protection
products and composite assemblies for
a range of fixed wing and rotorcraft
platforms and complex seals packages
for civil and military platforms. These
products are linked by their dependence
on similar materials technology and
manufacturing processes. It supplies
over 80% of the US military requirements
for fuel bladders and ballistically-
resistant and crashworthy fuel tanks.
MPC represents 11% of Group revenue
and generated 55% of its revenue from
OE and 45% from the aftermarket.
MPC revenue declined by 7% on an
organic basis, largely reflecting the
impact of the Bradley and KC135 retrofit
programmes completed in 2013. Overall
military revenue reduced by 17%, partially
offset by growth in civil aerospace of 9%.
Operating margins declined from 16.7%
to 12.4% due to lower volumes in the fuel
bladder facility and high levels of up-front
new product introduction costs ahead of
production ramp-up on upcoming aircraft
programmes over the next few years.
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 as well as power storage, conversion
and distribution systems for aerospace
applications. Its products are designed
to operate effectively in the extreme
conditions of temperature, vibration and
contamination that exist in an aircraft or
ground-based turbine engine. Sensors
are combined into broader electronics
packages, providing condition data to
operators and maintainers of engines,
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. Combining its capabilities
with MABS, it is currently developing a
number of civil aerospace tyre pressure
monitoring systems, having secured
positions for this technology on 10 aircraft
platforms. MSS represents 26% of Group
revenue and generated 81% of its revenue
from OE and 19% from the aftermarket.
MSS revenue grew 4% on an organic
basis, with 8% growth in civil offsetting
a 6% decline in military, largely
aftermarket, and a 3% decline in energy.
The military decline reflected the
Afghanistan drawdown and disruption
linked to the US site consolidation in 2013,
as well as the shortage of tourmaline
which impacted both military and energy
growth. Operating margins decreased
from 17.6% to 14.7% reflecting adverse
mix in the lower margin civil OE revenue
stream and additional costs incurred as
a result of the tourmaline shortage,
offset by the renegotiation of a loss-
making contract against which provision
had previously been held. Operating
margin in the second half showed good
improvement versus the first half.
Meggitt Equipment Group (MEG)
comprises principally our avionics,
non-engine actuation, dedicated military
and Heatric businesses. The division
represents 20% of Group revenue and
generates 81% of its revenue from OE and
19% from the aftermarket. With effect
from 1 January 2015, Meggitt Avionics
will be reported as part of Meggitt
Sensing Systems.
Revenue in MEG declined by 3% on an
organic basis. Good growth in civil,
largely avionics, was more than offset by
a modest decline in Heatric revenue and
strong comparators in our training
business. Operating margins decreased
from 18.4% to 15.1% driven by lower
volumes, adverse mix and the provision
against our investment in the Learjet 85
programme, in addition to the previously
disclosed investment in the Heatric
business for future growth and lower
profitability on three contracts.
Taxation
Meggitt’s underlying tax rate remained at
21% (2013: 21%), lower than our forecast
22% due to a change in the mix of profit
delivery. Our medium-term guidance is
unchanged at 22%, based on our current
business mix and barring any material
changes in the tax legislation in the main
countries in which we operate. Cash tax
paid as a percentage of underlying profit
was 6% (2013: 12%). The rate of cash tax
paid is typically 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. It is lower than normal in
2014 due to excess payments on account
in prior years.
Our statutory tax rate, which includes
items reported below underlying profit
before tax, was 15% (2013: 14%). Cash tax
paid as a percentage of statutory profit
was 9% (2013: 16%) and is lower than
normal for 2014 for the reasons
described above.
The Group is committed to complying
fully with the laws in the countries in
which it operates. It seeks to achieve
a competitive tax rate by maintaining
appropriate levels of debt in high tax
jurisdictions, claiming available tax
credits and incentives and utilising
common financing structures where
appropriate. We are rated as low risk
by HM Revenue and Customs. As for all
companies, the Group is exposed to
changing tax legislation in the territories
in which we operate, including as an
international business changes that may
arise due to local legislation arising from
the OECD’s current Base Erosion and
Operational performance (Table 4)
Revenue
2014
£’m
327.0
348.7
162.3
398.2
317.5
20131
£’m
330.4
364.3
181.0
397.5
364.1
1,553.7
1,637.3
Growth
%
-1.0
-4.3
-10.3
+0.2
-12.8
-5.1
Organic
growth2
%
+2.5
+0.6
-7.3
+3.5
-3.3
0.0
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Underlying operating profit
2014
£’m
127.5
91.8
20.2
58.4
48.1
346.0
20131
£’m
122.4
107.7
30.2
69.9
67.0
397.2
Growth
%
+4.2
-14.8
-33.1
-16.5
-28.2
-12.9
Organic
growth2
%
+5.6
-12.3
-33.3
-11.0
-29.3
-11.0
1 Restated for the change in segmental structure announced on 7 May 2014 and as described in note 6 of the Group financial statements.
2 Organic growth excludes the impact of M&A and currency and is reconciled in Table 3.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Chief Financial Officer’s review continued
Profit Shifting project. We manage
these risks by monitoring international
developments, participating in
pre-legislative consultations where
appropriate and adapting our approach
where necessary and practical.
Earnings per share (EPS)
Underlying EPS declined by 14% to
32.4 pence (2013: 37.5 pence). An increase
in shares in issue, which includes the 51%
take up of scrip dividend on 2014 dividend
payments, resulted in the EPS reduction
being slightly greater than the reduction
in underlying profit before tax.
The timing of the commencement of the
share buyback programme in November
2014 meant it had no significant impact on
reported underlying EPS this year but the
programme will be accretive in 2015 as
the issued share capital reduces.
In 2015, the scrip dividend plan will be
replaced by a dividend reinvestment plan.
The dividend reinvestment plan provides
an efficient reinvestment option for
shareholders, without the need for
new shares to be issued.
Statutory EPS declined by 25% to
22.0 pence (2013: 29.4 pence). The decline
is higher than in statutory profit before
tax due to the increase in statutory tax
rate and the higher issued share capital.
Dividends
The Board has recommended a final
dividend of 9.50 pence (2013: 8.80 pence)
which would result in an 8% increase in
the full-year dividend to 13.75 pence
(2013: 12.75 pence).
The Company has a balance on its profit
and loss reserve at 31 December 2014 of
£1.2 billion, the substantial majority of
which relates to reserves which can be
distributed as a dividend or used for share
buybacks, and accordingly we have a
comfortable level of headroom. We are
monitoring the FRC’s Financial Reporting
Lab project on dividend policy and
capacity and will consider their final
recommendations on future disclosures
in this area.
Investing for the future
Targeted investment in technology
development remains critical to our
long-term organic growth. Total R&D
expenditure in 2014 of £148.3 million was
9.5% of revenues (2013: £134.9 million,
8.2%), of which 19% (2013: 18%) was
funded by customers. The net charge to
operating costs including amortisation
and impairment increased by 5% on
an organic basis to £58.5 million
(2013: £57.1 million).
Growth in R&D largely reflects our
impressive win rate on new programmes,
as well as our ongoing investment in new
technology aligned to our customers’
future technology requirements. About
30% of the expenditure was on new
wheels and brakes programmes and over
50% focused on products for engines and
engine accessories, including working
towards meeting the long-term
requirement of the aerospace industry to
eliminate the use of halon gas in on-board
fire protection systems. The balance was
spread across a range of civil, military and
energy applications including the initial
investment resulting from the strong
order intake in the period, notably in
military training. This investment in R&D
supports our medium-term revenue
growth assumptions and increases
revenue security, particularly as the
majority of the investment is on platforms
where we have won sole-source positions.
The record number of programmes
entering service in the next few years will
also drive new product introduction costs
higher. In 2014 we industrialised new
products at three times our historical
average rate, which is good for future
revenues but which impacts profitability
in the short term.
Our investment in programme
participation costs including the supply of
equipment free of charge to new aircraft,
mostly in MABS, increased by 33%
organically. The pace of deliveries on
programmes equipped with our wheels
and brakes including the Gulfstream 280
and 650 platforms is expected to grow
further over the medium term. These
programmes will drive aftermarket
revenue for decades. Our market share of
wheels and brakes on the fleet of super-
mid size and large business jets in 2014
was 64%, supportive of our expectation
that we will have a market share on the
overall fleet in excess of 70% by 2020.
Capital expenditure on property, plant and
equipment and intangible assets was
£42.2 million (2013: £66.9 million), with
2013 expenditure inflated by site
consolidations and expansions. We expect
growth in expenditure in 2015 driven by
increased investment in manufacturing
equipment, including new carbon furnaces
in MABS and further movement
of production to low-cost
manufacturing locations.
Analysis of R&D expenditure (Table 5)
Total R&D expenditure
% of revenue
Customer-funded R&D
Capitalised
Amortisation/
impairment
Charge to net
operating costs
2014
£’m
148.3
9.5%
(28.9)
(77.7)
16.8
2013
£’m
134.9
8.2%
(24.5)
(70.2)
16.9
58.5
57.1
Driving organic growth through
operational excellence
The Meggitt Production System (MPS),
our single, global approach to continuous
improvement, was launched during 2013.
MPS will create the sustainable quality and
delivery culture that confers competitive
advantage beyond our technical expertise,
enabling the Group to deliver a higher rate
of organic growth over the long term. It
will also enable us to become more cost
competitive through the reduction of
working capital and the elimination of the
cost of poor quality. MPS, a six-phase
programme which will take five to seven
years to become fully embedded, has been
launched at 29 sites in total, representing
71% of our manufacturing footprint, with
sixteen sites having successfully exited the
first phase and one site having exited the
second, more demanding phase. The
launch of the programme at the remainder
of the Group’s primary facilities will be
complete by the end of 2015.
We have already seen some significant
improvements in quality and delivery
since inception, with defective parts per
million down 84% and on-time delivery up
by 10%. The quality performance in the
year improved significantly, and the stable
year-on-year on-time delivery metric
reflects good underlying performance in
reducing production arrears. Given the
demonstrable success we have seen
internally, we have accelerated the
planned deployment of the key tools and
competencies to long-term partners in
our supply chain.
Our culture of continuous improvement
has resulted in the expansion of our
footprint in low-cost manufacturing
locations, notably a 30% increase in
activity in our Mexican operations and an
8% increase in our Chinese facility in 2014.
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GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
35
These activities will drive consistently
high levels of quality and delivery
performance across all of our
businesses, while retaining our focus on
cost control. In turn, this will help us fund
future technology development
programmes and respond to changing
customer requirements.
Cash flow and borrowings
Free cash flow of £146.8 million (2013:
£110.4 million) represents a substantial
year-on-year improvement despite the
reduction in profit and continued high
levels of investment to support future
growth. This was driven by better working
capital management and lower tax
payments reflecting the unwinding
of excess payments on account in
prior years.
Net cash flow reduced to £21.1 million
(2013: £63.2 million), largely driven by the
£28.3 million acquisition of Precision
Engine Controls Corporation (PECC) and a
£33.7 million outflow (2013: Nil) from the
purchase of shares as part of the share
buyback programme implemented in
November 2014. Dividend payments for
the year reduced to £51.4 million (2013:
£75.6 million) as a result of higher
take-up of the scrip dividend. The scrip
dividend option has been replaced by
a dividend reinvestment plan for future
dividend payments.
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 took the
opportunity to refinance its bank
facilities, agreeing a new USD900 million
committed revolving credit facility, from
13 international banks.
The new facility has a five year term with
one-year extension options at the end of
the first and second years. It replaces
existing facilities of USD700 million and
USD400 million which were due to expire
in 2016 and 2017 respectively. The early
refinancing resulted in £1.8 million
accelerated amortisation of debt issue
costs, relating to the old facilities, being
recorded within finance costs in 2014.
The terms of the new facility are
substantially unchanged from those which
it replaced, except for a relaxation of the
net debt/EBITDA covenant to allow it to
rise to 4.0x for two six month reporting
periods after a significant acquisition.
There were no other changes in facilities
available to the Group in the year.
At 31 December, 2014, the Group had
undrawn committed credit facilities of
£431 million after taking account of
surplus cash (2013: £504 million).
With the exception of USD70 million
private placement notes, which mature
in June 2015 and will be repaid out of
existing facilities, the Group has no
committed facilities which expire
before 2017.
Facility headroom (£’m) (Table 6)
Headroom £431 million
Net debt
£576 million
1,500
1,200
900
600
300
00
2014 2015 2016 2017 2018 2019
Floating rate
Fixed rate
Share buyback programme
The Group has a strong track record of
cash generation and net debt reduction,
even in periods of the aerospace cycle, as
we are currently experiencing, that drive
elevated organic investment. In addition
to supporting our regular dividend, we
seek to deploy this cash by investing in
the acquisition of complementary
businesses that will enhance our offering
to customers, accelerate the Group’s
growth and deliver good returns to
shareholders.
Whilst we continue to actively evaluate
acquisition opportunities, there is
currently a relative lack of sizeable
acquisition opportunities meeting our
strict investment criteria.
The Board believes that in maintaining an
efficient balance sheet, a net debt/
EBITDA ratio of between 1.5x and 2.5x is
appropriate, whilst retaining the flexibility
to move outside the range if appropriate.
The Group had a net debt/EBITDA ratio of
1.3x at 30 June 2014 and accordingly in
November 2014, announced the
introduction of a share buyback
programme with the intention of
delivering a net debt/EBITDA ratio at, or
slightly above, 1.5x (as measured under
the Group’s committed credit facilities) by
the end of 2015. A share buyback
programme was chosen as the most
appropriate way to return excess capital
to shareholders because the Board wish
to retain flexibility to evaluate future
organic growth and acquisition
opportunities.
At 31 December 2014, the Group had
purchased 6.8 million shares at an
average share price of 490.49 pence
and a cost of £33.7 million under the
buyback programme. The programme
has continued in 2015 with a further
2.9 million shares purchased at an
average share price of 522.64 pence
and a cost of £15.2 million as at
13 February 2015. These shares
have all been cancelled.
Debt financing risks
The Group seeks to minimise debt
financing risk as follows:
Movements in net debt (£’m) (Table 7)
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 (investment in)/proceeds from M&A
Dividends
(Purchase)/issue of own shares
Share buyback
Net cash generated
Currency movements
Other non-cash movements
Opening net debt
Closing net debt
2014
364.0
(16.6)
(34.7)
(123.7)
(42.2)
146.8
(29.1)
(51.4)
(11.5)
(33.7)
21.1
(24.7)
(7.3)
(564.6)
(575.5)
2013
361.9
(15.3)
(63.4)
(105.9)
(66.9)
110.4
25.9
(75.6)
2.5
–
63.2
2.7
12.0
(642.5)
(564.6)
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Chief Financial Officer’s review continued
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 13 international institutions spread
across North America, Europe and Asia.
No single bank accounts for more than 6%
of the Group’s total credit facilities and
the credit rating of lenders is monitored
by our treasury department. Our largest
lenders are Bank of America, Bank of
China, Barclays, BNP Paribas, Crédit
Industriel et Commercial, HSBC,
JP Morgan, Bank of Tokyo-Mitsubishi and
Sumitomo Mitsui Banking Corporation.
We 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 any refinancing
is 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)
2014
2013
Sterling
US Dollar
Euro
Swiss Franc
Other
Net debt
(17.7)
545.8
42.4
12.0
(7.0)
(21.2)
462.9
53.9
78.9
(9.9)
575.5
564.6
e. Covenant risk
Our 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 (£’m) (Table 9)
Covenant
2014
2013
Net debt/EBITDA
≤3.5x1
1.2x
1.2x
Interest cover
≥3.0x
20.8x
22.0x
1
A ratio of 4.0x applies in the two six month reporting
periods following a significant acquisition.
Interest risk
The Group 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 2014, the
percentage of net debt at fixed rates was
48% (2013: 46%) and the weighted
average period to maturity of the first
25% was 4.5 years (2013: 5.4 years).
Foreign exchange risk
The Group is exposed to both translation
and transaction risk 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 translation risk for the Sterling/
Euro and Sterling/Swiss Franc and
transaction risk for the US Dollar/Euro
and US Dollar/Swiss Franc.
Exchange rates (Table 10)
2014
2013
Average translation rates against Sterling:
US Dollar
Euro
Swiss Franc
Average transaction rates:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
1.63
1.24
1.51
1.54
1.30
1.08
Year-end rates against Sterling:
US Dollar
Euro
Swiss Franc
1.56
1.29
1.55
1.57
1.18
1.45
1.62
1.29
1.06
1.66
1.20
1.47
The results of overseas businesses are
translated into Sterling at weighted
average exchange rates. Compared to
2013, the Group’s underlying profit before
tax for the year was adversely affected by
£9.6 million from currency translation, of
which £7.8 million arose on US Dollar
denominated profits with the balance on
other currencies.
Translation currency sensitivity (£’m)
(Table 11)
Revenue
PBT1
Impact of 10 cent movement2 :
US Dollar
Euro
Swiss Franc
55.0
10.0
7.0
12.0
1.0
2.0
1
Underlying profit before tax as defined and
reconciled to statutory measures in note 10 of the
Group financial statements.
2 As measured against the 2014 average translation
rates against Sterling set out in Table 10.
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 in the currencies of those net
assets, principally the US Dollar.
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 2013, the Group’s underlying
profit before tax for the year benefited by
£4.5 million from currency transaction
movements, including a favourable
impact of £5.6 million relating to US
Dollar/Sterling exposure and adverse
impacts from other currency pairs.
Each ten cent movement in the US Dollar
against the average hedge rates achieved
in 2014, would affect underlying profit
before tax by approximately £8.0 million
in respect of US Dollar/Sterling exposure,
£3.0 million in respect of US Dollar/Euro
exposure and £4.0 million in respect of
US Dollar/Swiss Franc exposure.
At 31 December 2014, US Dollar/Sterling
cover for our estimated 2015 exposure is
96% hedged at an average rate of $1.57
and we have covered approximately 80%
of our exposure for the four subsequent
years at an average rate of $1.54. We have
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GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
37
due to remeasurement gains on
scheme assets, principally driven
by the continued global recovery in
equity markets.
following which the Group continues to
provide comparable benefits, resulted
in a past service credit being recognised
of £8.4 million (2013: Nil).
also hedged 96% of our estimated 2015
US Dollar/Euro exposure at a rate of 1.36
and 100% of our estimated 2015 US Dollar/
Swiss Franc exposure at a rate of 1.08.
Further hedging of approximately 80% of
our US Dollar/Euro exposure for the four
subsequent years is in place at an average
rate of 1.21. We do not have any hedging
in place for 2016 or subsequent years
in respect of US Dollar/Swiss
Franc exposure.
•
Post-retirement benefit schemes
The Group’s principal defined benefit
pension schemes are in the UK and US
and are closed to new members.
Total pension scheme deficits increased
to £271.0 million (2013: £189.8 million).
The main drivers of the movement were:
•
An increase in the deficit of
£124.6 million (2013: Reduction of
£10.6 million) due to remeasurement
losses on scheme liabilities. The main
cause of the increase was a significant
reduction in the rates used to discount
scheme liabilities. Accounting
standards require these liabilities to be
discounted using the yields on high
quality AA corporate bonds, with a
maturity that reflects the duration of
the scheme liabilities. These yields,
reflecting the falls seen in gilt
markets, have reduced in 2014 by 100
basis points in the UK and 70 basis
points in the US to levels not seen in
the last 10 years. There has also been
a modest increase in US liabilities
following the adoption of new life
expectancy tables which were
published during the year.
•
A reduction in the deficit of
£30.9 million (2013: £25.5 million)
Net deficit reduction payments of
£27.8 million (2013: £26.7 million).
Regulations in the UK and US require
repayment of deficits over time. In the
UK, the Group is making deficit
payments in accordance with an
agreement reached with the trustees
following the last actuarial valuation in
2012. This agreement provides for
payments to gradually increase over
the period to 2024. The next actuarial
valuation date is April 2015. In the US,
the level of deficit payments is
principally driven by regulations.
Amounts required to be paid in the
US decreased slightly in the year
reflecting the impact of new legislation
regarding funding payments and are
expected to reduce further in 2015 due
to the full year impact of these
changes. Overall, the Group expects
deficit contributions to reduce to
£25.7 million in 2015 based on the
existing deficit reduction agreement
with the UK trustees and absent
further regulatory changes in the US.
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 £46.8 million
(2013: £48.3 million). Deficit payments
during the year were £1.5 million (2013:
£0.7 million). During the year, the Group
made changes to the way in which medical
benefits are provided. These changes,
Defined benefit pension scheme summary (£’m) (Table 12)
Opening net deficit
Service cost
Group cash contributions
Deficit reduction payments
Other amounts charged to income statement1
Remeasurement gains—schemes’ assets
Remeasurement losses/(gains)—schemes’ liabilities
Currency movements
Closing net deficit
Assets
Liabilities
Closing net deficit
Funding status
2014
189.8
11.9
(39.7)
(27.8)
10.3
(30.9)
124.6
5.0
271.0
761.1
1,032.1
271.0
74%
2013
241.2
12.7
(39.4)
(26.7)
11.4
(25.5)
(10.6)
–
189.8
688.4
878.2
189.8
78%
1 Comprises past service amounts, administration expenses borne directly by schemes and net finance costs.
Going concern
The Group’s business activities are
described on pages 10 to 17 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 24 to 26.
The Group describes in the Strategic
Report on pages 8 to 9 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 elevated level in the
aerospace investment cycle, has
considerable headroom against existing
bank facilities and covenants and there is
no material facility expiry before 2017.
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.
Doug Webb Chief Financial Officer
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Corporate responsibility
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 believe that our
focus on corporate responsibility creates
value for Meggitt and our stakeholders.
It helps us manage our businesses more
efficiently, which in turn helps us mitigate
risks, reduce costs and protect the
communities in which we operate. We are
also 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 and responsible manner;
Minimising the environmental impact of
products and processes and maintaining
internationally-accredited environmental
management systems;
Acting as a responsible supplier and
encouraging our contractors and
suppliers to do the same;
• Independent audits in key
•
•
compliance areas;
• 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.
Board-approved policies on corporate
responsibility, health and safety,
environment, ethics and business conduct
and trade compliance are published on the
policies section of our website.
The Board’s Ethics and Trade Compliance
Committee meets quarterly to discuss these
programmes in detail. HSE matters are
reviewed and discussed at every
Board meeting.
Sustainability
Meggitt appreciates the importance of
conducting business in a sustainable
manner and we will continue to incorporate
this principle into the way we carry out
our operations. During 2014, we held
initial discussions with Business in
the Community, a leading charitable
organisation in this field, to help
develop our thinking further.
Activity in 2014
Environment
Meggitt strives to achieve high levels
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,
16 sites were audited in 2014.
Some 86% of our manufacturing
facilities had achieved ISO 14001
standard certification by the end of 2014.
The remaining facilities are targeting
certification in 2015.
Performance
Table 1 shows our performance for key
environmental metrics and Table 2
shows our progress on achieving
internally set targets.
Our performance is on track to meet
targets for most metrics, but facility
consolidations and increased production of
carbon brakes has impacted our progress
on electricity and waste recycled in 2014.
Although we had already achieved our
five-year target on CO2 emissions relative
to revenue as at the end of last year, our
performance slipped in 2014 to a 7%
reduction compared to our baseline year
which means that we did not reach our
five-year CO2 reduction target by the end of
2014. The increase in CO2 emissions in
2014 was primarily due to a significant
increase in electricity and gas consumption
in our US carbon manufacturing operations
because of an increase in production as
new aircraft programmes enter service.
We recycle an estimated average of 87,000
cubic metres of water each year through
closed-loop water recycling systems
installed at several facilities. Other water
conservation measures include
installation of thermostatically controlled
water circulation systems on process
tanks reducing evaporative losses. In
2014, despite an increase in cooling water
used in our carbon manufacturing
operations, our closed-loop recycling
systems and other water conservation
efforts resulted in a decrease in absolute
water consumption and consumption
relative to revenue and we remain on track
to meet our five-year target of reducing
water consumption relative to revenue.
We were able to realise the benefits of
integrating the waste minimisation ideals
of the Meggitt Production System (MPS) by
reducing the environmental impact of
waste at many facilities within the Group
and were able to decrease the absolute
amount of waste generated by 13%. An
example of the progress made in 2014 is at
one of our US braking systems facilities,
which found a way to recycle carbon dust
from carbon brake disk machining into
electrically conductive plastic. This facility
also identified a recycling method for
waste carbon insulation as an oxygen
scavenger in third-party metal recovery
Environmental metrics1 (Table 1)
Utilities
Electricity—gWh
MWh per £m revenue
Natural gas—gWh
MWh per £m revenue
GHG Emissions (CO2e)1—tonnes
Tonnes per £m revenue
Waste—tonnes
Tonnes per £m revenue
Water—cubic metres
Cubic metres per £m revenue
2014
Change
201
127
190
120
131,897
83.5
12,200
7.72
722,200
457
+6%
+4%
+5%
-13%
-2%
2013
192
120
183
115
126,720
79.3
14,182
8.87
744,196
466
1 Metrics per £m are calculated using revenue converted at constant exchange rates. Greenhouse gas
emissions are calculated using conversion factors published in the 2013 and 2014 Guidelines to DEFRA/
DECC’s GHG Conversion Factors for Company Reporting. Emissions from overseas electricity are in CO2
only (not CO2e). The 2013 reported GHG emissions have been restated to reflect the change in using the
updated conversion factors.
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GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
39
furnaces. In total, these efforts have
resulted in the facility diverting 35 tonnes
of waste away from landfill. Since 2007,
we have been a participant in the Carbon
Disclosure Project (CDP) detailing our
approach and performance in managing
climate change. In 2014, we increased our
score by 60% and our submission can be
viewed on the CDP website.
Greenhouse gas emissions (GHG)
Table 3 shows the GHG emissions data for
the Large and Medium-Sized Companies
and Groups (Accounts and Reports)
Regulation 2013 (the Regulations).
The sites reporting GHG data are the
same as those consolidated in the
Group’s financial statements.
We had an absolute increase in our GHG
emissions in 2014 and our GHG emissions
relative to revenue increased slightly
due to an increase in electricity and
natural gas consumed in our US carbon
manufacturing operations as described
above. Notwithstanding, this increase was
partially offset by reductions in electricity
and gas consumption and associated
GHG emissions elsewhere due to site
consolidations and energy efficiency
measures as well as an increase in carbon
recycling and reuse under our carbon
refurbishment initiative described below.
To align the Group’s emissions targets
with the Regulations, we will be setting
new five-year GHG emission reduction
targets from 2016 using 2015 as the
baseline year. We will set separate GHG
reduction targets for our carbon
manufacturing operations due to the
unique and complex process involved.
Saving energy
In 2014, we achieved reductions in key
sustainability metrics through investments
in several energy efficiency projects. These
are exemplified by upgrading compressed
air plants, improving furnace controls and
installing high efficiency lighting and
controls at our facilities as follows:
•
Recladding of roofing insulation at
a UK facility resulted in improved
heating and cooling efficiencies.
Significant lighting upgrade projects
at several facilities, saving around
300 tonnes of CO2 per annum.
•
• Replacement of fluorescent lighting with
more efficient LED lighting and
replacement of two inefficient boilers
with higher efficiency rated gas boilers
at another of our UK facilities saving
25 tonnes of CO2 per annum. The same
facility made insulation upgrades to
improve heating and cooling efficiencies.
Targets (Table 2)
CO2 emissions
Gas
Electricity
Water consumption
Waste to landfill
Waste recycled
Baseline
year
2009
2011
2011
2011
2011
2011
Five year
performance period
(financial years)
Target
improvement
over performance
period
Achieved during
performance
period up to
31 December 2014
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%
-7%
-11%
+10%
-6%
-6%
0%
• The carbon refurbishment programme
at our braking systems facility in Akron,
US continued to expand in 2014 with a
59% increase in carbon discs recovered
and refurbished from 2013. Reductions
in processing time and associated
energy consumption of around 81%
resulted in savings of approximately
2,300 tonnes of CO2 that would have
otherwise been emitted in 2014.
Meggitt UK facilities will be required
to comply with the Energy Savings
Opportunity Scheme (ESOS) in 2015.
As a result, the facilities comprising at
least 90% of our energy consumption in
the UK will undergo energy assessments.
Conducted by certified lead assessors,
these will assist us in identifying additional
energy conservation opportunities. The
ESOS is derived from European Union (EU)
legislation and it is likely that EU member
countries will implement similar schemes
requiring energy assessments for other
EU Meggitt facilities.
We recognise the need to reduce our
dependence on fossil fuels and are
actively investigating cleaner energy
technologies including fuel cell power
generation systems and solar energy
throughout the Group.
(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. We participate in an aerospace
industry group involved in researching the
replacement of hexavalent chromium used
in common applications impacting
aerospace manufacturing.
Obsolescence
The Obsolescence Review Board (ORB)
continued to identify and define a
coordinated response to issues
potentially affecting our business
including conflict minerals, counterfeit
and fraudulent materials and chemical
obsolescence. Working with our
customers and suppliers, we continue to
strive for the reduction and substitution of
materials and substances impacted by
regulatory developments, performing
material assessments, surveying our
suppliers and undertaking reliability and
qualification testing of alternatives.
REACH
Compliance with the European Community
regulation on Registration, Evaluation,
Authorisation and Restriction of Chemicals
Health and safety
We want our employees to work in safe and
secure environments and believe that
occupational injuries and illnesses are
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, normalised to tonnes per £m revenue
2014
Tonnes of
CO2e
35,693
96,204
131,897
20132
Tonnes of
CO2e
34,239
92,480
126,719
83.5
79.3
1 Global GHG emissions are calculated using conversion factors published in the Guidelines to DEFRA/
DECC’s GHG Conversion Factors for Company Reporting. Emissions factors from overseas electricity are
in CO2 only (not CO2e).
2 2013 numbers have been restated to the updated 2013 conversion factors.
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 emissions.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Corporate responsibility continued
Reportable accidents and incidents (Table 4)
Reportable accidents and incidents1
Reportable accident/incident rate2
2014
36
337
Change
+3%
+6%
2013
35
317
1 Directly reportable to a regulatory authority.
2 The number of reportable accidents/incidents per 100,000 employees.
preventable. Our health and safety policy
makes clear that we do not tolerate unsafe
behaviours or conditions in our workplaces
and that we seek to continuously improve
our safety culture and performance with an
ultimate goal of zero injuries and illnesses.
In 2014, we continued to implement
measures to improve safety in the
workplace. These included:
•
•
•
•
•
Group-wide online health and safety
awareness training for all employees;
Implementation of a behavioural
health and safety programme at five
facilities in 2014, with plans to roll it
out at another ten facilities in 2015;
Development of a health and safety
maturity index and a revision of the
Meggitt Safety Star recognition
programme to focus on proactive
health and safety leading indicators.
This will emphasise the importance
of preventative actions to reduce
incidents and injuries occurring
in the workplace;
Integration of the reporting and
investigation of near-miss accidents
and unsafe conditions with MPS;
Continued dissemination of
information and best practice through
intra-Group HSE conferences, health
and safety alerts and all-employee
safety bulletins.
•
Roll out of a further three new Meggitt
health and safety procedures across
the Group.
As a result of these measures we have
made good progress on some of our
safety metrics across the Group,
most notably a 25% decrease in the
US Occupational Safety and Health
Administration (OSHA) recordable
frequency rate for our US operations
compared to the prior year. However, due
to a substantial increase in the number of
reported incidents at a small number of
our sites, the Group overall experienced
a slight increase in reportable incidents
and associated incident rates, as shown
in Table 4. In 2014, 80% (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, 23 facilities will receive
a Platinum Safety Star award for
outstanding performance in 2014.
As reported in last year’s annual report, we
continue to cooperate fully with regulatory
authorities in the investigation of the fatal
accident that occurred at our Rockmart,
US facility last year and we expect the
investigation to conclude in 2015.
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 2014, we provided training across the
Group, on our Code of Conduct, ‘Reporting
Concerns—Someone Else’s Problem’, and
Global Anti-Corruption. We held two
in-house ethics conferences, one in the UK
and one in the USA, where facility-based
ethics coordinators reviewed and provided
feedback on the Ethics Programme. As a
result of this feedback, we are redesigning
our Ethics Guide, which will be available to
all staff in printed form and on our website.
Meggitt is a charter member of the
International Forum on Business Ethical
Conduct for the aerospace and defence
industries and Barney Rosenberg, our Vice
President, Ethics and Business Conduct,
serves on the Steering Committee that
runs this global organisation.
The Board revised the Trade Compliance
Policy (which is available on our website)
in 2014. 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 2014,
we continued to implement our global
trade management software solution to
enhance our trade compliance programme,
and continued implementation of our
enhanced import compliance programme
at a number of facilities in the US and the
UK. We also implemented Phases 2 to 5
of the US Government’s Export Control
Reform programme.
Local communities and
charitable donations
We are committed to being good
corporate citizens, and continue to
support the communities in which we
operate. Our businesses and employees
give back to our communities through
volunteerism, educational business
partnerships and charitable donations
as demonstrated by the following:
•
•
•
Since 2007, we have continued to
sponsor the Arkwright Engineering
Scholarship Trust, an independent,
charity that identifies, inspires and
nurtures future leaders in engineering
and technical design. The scholarship
supports Science, Technology,
Engineering and Mathematics (STEM)
initiatives that grant an annual financial
award to young scholars and their
schools. The 2014 scholar will benefit
from mentoring by an experienced
member of the Meggitt Global
Engineering Group and valuable work
experience over the next two years.
Meggitt US businesses and employees
have donated over USD 1 million in the
past five years to the United Way, a
US-based non-profit organisation
focusing on resolving local community
issues through partnerships with local
schools, government agencies and
voluntary and neighbourhood
associations. Several Meggitt US
businesses hold annual United Way
drives to encourage employee
engagement in local community
activities and initiatives designed to
improve education, financial stability
and health care for local families.
Our McMinnville Oregon facility
partnered with local businesses,
community leaders and the
McMinnville Economic Development
Partnership to establish a
manufacturing training programme at
a local high school to address a
shortage of skilled local labour.
Meggitt donated equipment
and materials for student training and
assisted in developing the syllabus.
Local congressional officials who
visited the high school and Meggitt
facility acknowledged the importance
of innovative partnerships between the
private sector and local schools to
provide training leading to well-paid
local manufacturing jobs. Some 260
of the school’s 400 students enrolled.
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41
Analysis of employees (Table 5)1
Employees by division
Number of employees
10,823
Employees by length
of service (years)
Number of employees
Employees by region
Number of employees
10,823
10,823
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Cross-group facilities
1,267
1,902
1,827
3,120
1,995
712
12%
17%
17%
29%
18%
7%
Less than 5
Between 5 and 10
Between 10 and 15
Between 15 and 20
Between 20 and 25
Over 25
4,841
2,252
1,211
976
350
1,193
45%
21%
11%
9%
3%
11%
USA
UK
Mainland Europe
Rest of World
5,385
2,847
1,554
1,037
50%
26%
14%
10%
1
As at 31 December 2014.
•
•
•
Our Poole UK facility partnered with
the local Bournemouth and Poole
College to develop an apprenticeship
and training programme.
An annual charitable golf outing
sponsored by our Saginaw, Michigan
facility is held in June, donating funds to
the local amyotrophic lateral sclerosis
association and the Saginaw YMCA.
In the UK, our Birmingham facility
commemorated the 100-year
anniversary of the start of World War 1
with support for the Help for Heroes
military charity.
Our employees
Learning, career development, employee
engagement, strong leadership and
effective teamwork are vital components
of Meggitt’s performance culture.
Various initiatives are underway, many
of which have overt goals to improve or
sustain engagement. Investment in
learning and development is one. We
continue to increase corporate training
enabling employees from different
businesses to learn together and create
a common culture. The most significant
investment is in 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.
Table 6
Level
Board of Directors
Executive Board
Senior executives
All employees
% of females at
31 December 2014
Number of females
Number of males
20%
13%
9%
29%
2
1
22
3,111
8
7
236
7,712
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,
reinforced through our ethics training
programme and its values, to treat all
colleagues fairly and with respect. We
recognise the value of diversity amongst
our employees. Table 6 shows the number
of women employed at all levels of the
workforce. The Board’s approach to
diversity is discussed in the Nominations
Committee report (see page 54).
Human rights
We confirm our commitment to the
human rights of our employees in our
Corporate Responsibility Policy, which
we apply across all our businesses.
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 2014 Strategic report on pages 1
to 41 is hereby signed on behalf of the
Board of Directors.
Our very successful graduate training
scheme continues with a third generation
of graduates and post-graduates from
some of the world’s best engineering
institutions. Our next executive leadership
programme begins in 2015, tailored for
Meggitt by the Saïd Business School
(see page 20).
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
Stephen Young
Chief Executive
23 February 2015
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Who runs Meggitt
and how do we
reward them?
44
55
42-79
Governance reports
43
Chairman’s introduction
44-45 Board of directors
46-50 Corporate governance report
51-53
Audit Committee report
54
Nominations Committee report
55-75 Directors’ remuneration report
76-79 Directors’ report
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43
Corporate governance report
Chairman’s introduction
Throughout the financial year ended 31 December 2014 and to
the date of this report, we have complied with the provisions set
out in the UK Corporate Governance Code 2012 (the Code)
published by the Financial Reporting Council (FRC). 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 Audit Committee
report, the Nominations Committee report (including a report
from the Chairman Succession Sub-Committee) and in the
Directors’ remuneration report. The FRC published a revised UK
Corporate Governance Code on 17 September 2014, applicable to
reporting periods beginning on or after 1 October 2014 (the 2014
Code), although the Board has adopted some of the new
provisions in the 2014 Code earlier than required.
In December 2014, we announced that as a result of the
additional time commitments required for his new appointment
as non-executive director and chairman designate of Drax Group
plc, Phil Cox had decided to resign as a non-executive director
with effect from 31 January 2015. On behalf of the Board I would
like to thank David and Phil for their significant contributions to
the Board and to wish them well for the future.
Effectiveness
As reported last year, the main findings from our 2013 internal
evaluation were to enhance our strategy reviews and risk
management process and continue to improve the annual Board
schedule. In 2014, the Board engaged in additional strategy
presentations and discussions and we continued to enhance our
risk management process. We have since conducted our 2014
internal evaluation and a report is included on page 49.
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 shareholder value.
Accountability
The Board considered the 2014 Code, and assessed our current
processes and reporting of risk management and internal
control against the associated guidance issued by the Financial
Reporting Council in September 2014. In 2015, we will start
preparing for the new long-term viability statement which is first
required for our 2015 Annual Report. Our shareholders can read
about our most significant risks and uncertainties and our risk
management process on pages 24 to 26.
Leadership
At our AGM in May 2014, I announced my intention to retire
following the appointment of a suitable successor, having had the
privilege of chairing the Board of Directors for nearly 11 years.
I have thoroughly enjoyed my time as the Chairman of Meggitt
and am delighted to hand over to Sir Nigel Rudd, a highly
experienced and successful director and chairman. With his
prior role as a non-executive director of BAE Systems, and
current exposure to the industry at BBA Aviation, Sir Nigel has
exceptional knowledge of the aerospace sector. I know that his
experience across a wide range of businesses will be of
significant benefit to the Group.
In terms of other Board changes, in May 2014, David Robins
retired from the Board and in October 2014 we appointed Alison
Goligher as a non-executive director. Alison introduces specific
oil and gas experience to our Board, which will be of great value
to Meggitt’s energy businesses. At the same time, her technology
management expertise and experience running a wide range of
functions within globally significant corporations will benefit the
Group as a whole.
The Board have confirmed that this Annual Report is fair,
balanced and understandable, and you will find an explanation of
the process we have used to make this determination on page 51.
Remuneration
At our AGM in 2014, we received 98.95% votes in favour of our
Remuneration Policy. Shareholders also overwhelmingly
approved our Directors’ remuneration report and a new
long-term incentive plan. The Directors’ remuneration report
(pages 55 to 75) provides a detailed review of the Remuneration
Committee’s 2014 activities and bonus and share scheme
performance in 2014. For ease of reference, we have also
included the Remuneration Policy approved at our AGM in 2014
(which is valid until the AGM held in 2017).
Sir Colin Terry
Chairman of the Board of Directors
23 February 2015
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MEGGITT PLC REPORT AND ACCOUNTS 2014
MEGGITT PLC REPORT AND ACCOUNTS 2014
Board of directors
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.
Stephen Young
Alison Goligher
Sir Colin Terry
Guy Berruyer
Philip Green
Sir Colin Terry KBE CB DL FREng
Non-Executive Chairman + §
Appointed: 2004 | Nationality: British
Retiring at the conclusion of the 2015 AGM
Skills and experience
Chartered engineer with extensive civil and military
aerospace, logistics and industrial experience.
Qualified military and civilian pilot.
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, Non-Executive Chairman of
AviaMedia Tech Limited and Non-Executive Director
and Chairman of the Remuneration Committee
of Aveillant 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, where he was Chief Engineer (RAF),
a Commander in Chief and the Air Force Board
Member for Logistics. Since retiring from the
regular RAF, 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. Served for several years as an RAF
Volunteer Reserve Pilot.
Committee membership
* Audit Committee
+ Nominations Committee
‡ Remuneration Committee
§ Ethics and Trade Compliance Committee
◊ Finance Committee
Stephen Young
Chief Executive + § ◊
Appointed: 2013 | Nationality: British
Appointed to the Board as Group Finance Director
in 2004, prior to appointment as Chief Executive
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
Non-Executive Director, Audit Committee Chairman
and member of Risk and Remuneration committees
of Derwent London plc.
Previous appointments
Senior financial positions held previously include
Group Finance Director, Thistle Hotels plc and
Group Finance Director of the Automobile
Association.
Guy Berruyer
Non-Executive Director * + ‡
Appointed: 2012 | Nationality: French
Skills and experience
Trained as electrical engineer at the École
Polytechnique Fédérale de Lausanne and holds
Harvard Business School MBA. Brings significant
experience to the Board as a recently serving
FTSE-100 Chief Executive.
Current appointments
None.
Previous appointments
Group Chief Executive of The Sage Group plc until
5 November 2014. Chief Executive of Sage Group
plc’s Europe and Asia division. Early career spent
with software and hardware vendors in French
and European management roles.
Alison Goligher OBE
Non-Executive Director * + ‡
Appointed: 2014 | Nationality: British
Skills and experience
MEng Petroleum Engineering. Brings specific oil and
gas experience to the Board, including technology
management expertise and experience running
diverse functions and businesses within globally
significant energy corporations.
Current appointments
Joined Royal Dutch Shell in 2006; appointed
Executive Vice President, Upstream International
Unconventionals in 2013.
Previous appointments
17 years at Schlumberger, a leading supplier of
technology, integrated project management and
information solutions to oil and gas customers
worldwide.
Philip Green
Group Corporate Affairs Director § ◊
Appointed: 2001 | Nationality: British
Skills and experience
Fellow of the Institute of Chartered Secretaries
and Administrators, with significant legal and
compliance experience.
Current Appointments
Member of the GC100 and the Dorset Employment
and Skills Board. To be appointed as Non-Executive
Director of Poole Hospital NHS Foundation Trust
from 25 April 2015.
Previous appointments
Meggitt’s Company Secretary from 1994 to 2006,
after 14 years at British Aerospace in company
secretarial roles.
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45
Paul Heiden
Doug Webb
Brenda Reichelderfer
David Williams
Sir Nigel Rudd
Sir Nigel Rudd DL
To be appointed as Non-Executive Director and
Deputy Chairman on 1 March 2015
Assuming the role of Non-Executive Chairman
at the conclusion of the AGM on 23 April 2015 |
Nationality: British
Skills and experience
Chartered accountant with extensive Board
experience spanning multiple sectors including
aerospace, retail and financial services.
Current appointments
Non-Executive Chairman of BBA Aviation plc and
Heathrow Airport Holdings Limited, Chairman of
Aquarius Platinum Ltd, Non-Executive Director of
Sappi Limited and Chancellor of Loughborough
University.
Previous appointments
Chief Executive of Williams Holdings plc. Chairman
of Kidde plc, BAA Limited, The Boots Company,
Pilkington PLC, Pendragon PLC and Invensys plc.
Deputy Chairman of Barclays PLC and
Non-Executive Director of BAE Systems plc.
Paul Heiden
Non-Executive Director * + ‡
Appointed: 2010 | Nationality: British
Doug Webb
Chief Financial Officer § ◊
Appointed: 2013 | Nationality: British
Skills and experience
Chartered accountant, with considerable experience
in senior executive and financial roles in aerospace.
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 (formerly Filtrona 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
and Non-Executive Director of Federal
Signal Corporation.
Previous appointments
Senior roles at ITT Industries Corporation including
Senior Vice President, Director of Engineering,
Chief Technology Officer and Group President
of two operating divisions. Non-Executive Director
of Wencor Aerospace.
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 of SEGRO Plc and
Chairman of their Audit Committee and member
of the Hundred Group of Financial Directors.
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).
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.
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. Non-Executive Director and Audit
Committee Chairman of DP World Limited until
his retirement in April 2014.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Corporate governance report continued
LEADERSHIP
Our governance framework as at 31 December 2014:
Board of directors
Sir Colin Terry (Chairman)
Three executive directors
Six independent non-executive directors
Creating and delivering
sustainable shareholder value
Board committees
Remuneration
Audit
Nominations
Six independent
non-executive directors
Six independent
non-executive directors
Chairman, Chief Executive and six
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 Succession
Chairman, one non-executive director
and three executive directors
Three executive directors
and Chief Operating Officer
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
This committee existed during 2014
but not at the year end
Independent non-executive directors
Select and interview candidates and
recommend candidate to the Board
Management committees
Executive Board
Operations Board
Commercial Committee
Three executive directors, the Chief
Operating Officer and four senior
functional executives
The Chief Operating Officer
and five divisional presidents
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 two Executive
Board members
Reviews/approves bids and proposals
and any other commercial activity
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47
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 other stakeholders are met.
A Schedule of Matters Reserved for the Board (updated in 2012)
sets out the matters on which the Board must make the final
decisions. These include, for example, changes to the Group’s
capital structure and capital allocation policy, acquisitions and
disposals above a certain threshold and approval of results
announcements, annual reports and dividends. If a decision is
not reserved for the Board, authority lies, in accordance with
authorisation policies and terms of reference, with a Board
committee, a management committee, the Chief Executive or
other executive director, Chief Operating Officer, divisional
president or site director.
Board membership and attendance during 2014
The Board met eight times in 2014, attendance for which is
shown in the table below.
Name
Title
Chairman
Sir Colin Terry
Non-executive director
Mr G S Berruyer
Mr P G Cox1
Non-executive director
Ms A J P Goligher2
Non-executive director
Corporate Affairs Director
Mr P E Green
Mr P Heiden
Non-executive director
Ms B L Reichelderfer Non-executive director
Mr D A Robins3
Non-executive director
Chief Financial Officer
Mr D R Webb
Non-executive director
Mr D M Williams
Chief Executive
Mr S G Young
1 Resigned 31 January 2015
2 Appointed 30 October 2014
3 Resigned 7 May 2014
Meetings
eligible
to attend
Meetings
attended
8
8
8
2
8
8
8
2
8
8
8
8
8
8
2
8
8
8
2
8
8
8
Chairman
•
Sir Colin Terry met the independence criteria on appointment
as Chairman on 1 July 2004. Sir Nigel Rudd will join the Board
on 1 March 2015, initially as a non-executive director and
Deputy Chairman, becoming Chairman at the end of the
Annual General Meeting (AGM) on 23 April 2015 upon Sir Colin
Terry’s retirement from the Board and as Chairman. Sir Nigel
Rudd will meet the independence criteria on appointment
as Chairman.
•
•
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 (i) setting the Board’s
agenda; (ii) ensuring that adequate time is available for
discussion of agenda items, including strategic issues;
(iii) leading the Board; and (iv) 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, however Mr Williams
did not Chair the Nominations Committee for the recent
Chairman succession process because he was a candidate
for the role. The chairman selection process employed in 2014
is outlined in more detail on page 54; 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 challenging
executive management 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 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.
Company Secretary
The appointment and removal of the Company Secretary
is a matter for the Board.
The work of the Board in 2014
The Board approved the appointment of Ms Goligher as a non-
executive director and Sir Nigel Rudd as non-executive director
and Deputy Chairman (to become Chairman at the conclusion of
the AGM on 23 April 2015). The Board visited several facilities
and 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 implemented enhancements to its 2014
programme as a result of the evaluation of the Board
undertaken in 2013, including:
•
An update and Board discussion on Group strategy, focusing
on technology, aftermarket and operations;
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Corporate governance report continued
•
Greater focus on risk, including a session to review and
approve the Group’s risk appetite.
The Board received and discussed:
•
The Group’s budget for 2015;
•
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 2013 Annual Report and Accounts, the 2013 full-year
results announcement and the 2014 interim results
announcement;
Interim management statements released in May
and November 2014;
Recommendations to shareholders on the final dividend
payment for the year ended 31 December 2013 and
approved the interim dividend payment for the year
ended 31 December 2014;
• The Group’s risk appetite and risk register;
• The appointment of a second corporate broker;
• The decision to commence a share buyback programme;
•
Fees payable to the Group’s auditors and a recommendation
to shareholders on their reappointment;
•
Amended terms of reference for all Board committees; and
•
Revisions to the Group’s share dealing rules, health and
safety and trade compliance policies.
Since the year-end, up to the date of the Annual Report, the
Board has approved the 2014 Annual Report and Accounts,
the 2014 full-year results announcement and the proposed
final dividend for the year ended 31 December 2014.
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 non-executive directors
are considered independent under the Code.
All non-executive directors (other than the Chairman) are
members of the Audit and Remuneration Committees on
appointment. All non-executive directors are asked to join the
Nominations Committee 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 can
be invited. Committee chairmen, members and regular meeting
invitees are noted in the respective Committee reports below.
Each of these Committees’ written terms of reference were
reviewed and updated in 2014 by the Board. 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 make
recommendations to the Board on 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,
Nominations Committee and Directors’ remuneration reports.
Appointments to the Board
There is a formal, rigorous and transparent procedure for the
appointment of new directors. Full details of the process for
appointments made during the year are available in the
Nominations Committee report set out on page 54.
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 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 2014, the Chairman became a non-executive director of
Aveillant Limited. Sir Colin confirmed that he continues to have
sufficient time to discharge his role as Chairman of the Board.
Mr Philip Cox was appointed as non-executive director and
chairman designate of Drax Group plc with effect from 1 January
2015 and, as a result of the additional time commitments
required, resigned as a non-executive director of the Company
with effect from 31 January 2015.
Development
The Board is supplied with the information it needs to discharge
its duties.
In 2014, Ms Alison Goligher joined the Board and has since had
meetings with other directors, senior management, auditors,
brokers and other professional advisors, as well as site visits and
a comprehensive induction pack. Sir Nigel Rudd will commence a
similar induction process in March 2015 following his
appointment to the Board. The Board will continue to enhance
the induction process as feedback is received and incorporated
from the 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 site visits. 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
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49
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.
Process controls—for example financial controls including
the Group Financial Policies and Procedures Manual, bid
approvals, programme management and execution,
IT security and risk management. The risk management
process enables the Group to identify, evaluate and manage
the principal risks faced by the Group and this process was
in place for 2014 and up to the date of approval of the Annual
Report and has been regularly reviewed by the Board; and
Board performance evaluation
In 2014, 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 2015. 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 2014 evaluation of the Board and its Committees was
undertaken internally, using questionnaires and group and
individual discussions. The Board continues to be thoroughly
engaged with the review process, and the main findings and
recommendations of the 2014 evaluation relate to further
developing our succession planning and administrative matters
relating to the issue of papers. The Board noted that progress
had been made in areas selected for improvement in 2013.
It is anticipated that the 2015 evaluation will be
externally facilitated.
Accountability
Financial and business reporting
The financial statements contain an explanation of the directors’
responsibilities in preparing the Annual Report and the financial
statements (pages 78 to 79) and a statement by the auditors
concerning their responsibilities (page 84). The directors also
report that the business is a going concern (page 37) and detail
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 41).
Risk management and internal control
The Board is responsible for the Group’s system of internal
control and for maintaining and reviewing its financial and
operational effectiveness. The Board has taken into account the
guidance provided by the FRC on Risk Management, Internal
Control and Related Financial and Business Reporting in 2014 in
reviewing the effectiveness of the Group’s risk management and
internal control systems. 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 functions are responsible for determining Group
policies and processes, and businesses are responsible for
implementing them, with internal and/or external audits to
confirm business unit compliance. The key features of the risk
management and internal control system are described below,
including those relating to the financial reporting process, as
required under the Disclosure and Transparency Rules:
•
Group policies—key policies are approved by the Board and
most other policies are approved by Group functions;
• The forecasting, budget and strategic plan processes.
The Group has programmes for insurance and business
continuity which form part of the risk management and
internal control framework.
The following features of the internal control framework allow
the Group to monitor the effective implementation of policy and
process controls by business units:
•
•
•
•
A business performance review process (including financial,
operational and compliance performance);
Annual business unit and divisional sign-off of compliance
with Group policies and processes;
Compliance programmes and external audits (including trade
compliance, ethics, anti-corruption, health, safety and
environmental);
An effective internal audit function which, primarily, performs
business unit reviews by rotation (including finance, IT, HR,
ethics and the bid process); and
•
A whistleblowing line to enable employees to raise concerns.
The Board and Audit Committee applied the following
processes in 2014 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, risk register
and risk appetite;
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
and 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;
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;
Strategy reviews, review of the ten year financial plan
and review and approval of the 2015 budget;
Written report to the Ethics and Trade Compliance Committee
on the effectiveness of whistleblowing procedures; and
•
Reports on insurance coverage and uninsured risks.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Corporate governance report continued
The risk management and internal control systems have been in
place for the year under review and up to the date of approval of
the Annual Report, and are regularly reviewed by the Board.
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
The Directors’ remuneration report is set out on pages 55 to 75
and provides details of our remuneration policy which was
approved at our AGM in 2014, and how it has been implemented
in 2014, 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 our Group Head of 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, principally, 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 specific letter was
issued to major shareholders after the AGM in 2014, offering a
meeting with the Chairman and Senior Independent Director. A
number of such meetings on corporate governance took place in
2014. We also received a number of requests from shareholders
to have meetings with the Chairman Succession sub-committee,
which were held before and after the announcement of our
chosen candidate.
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.
We provide annual reports and other documents to shareholders
in their elected format under the electronic communications
provisions, which were approved by shareholders at our AGM in
2007. Electronic copies of this Annual Report and Accounts 2014
and the Notice of AGM will be posted on our website, where our
announcements, press releases and other investor information
are also available. An analysis of ordinary shareholders by size of
holdings and shareholder type is also available on our website.
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.
Meggitt encourages shareholders to vote at the 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.
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 also attend.
At the AGM to be held on 23 April 2015, shareholders’ consent
will be sought on the following item of special business, in
addition to the routine business: on the 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. All directors in
office at the date of the AGM (23 April 2015) will be subject to
election or re-election except for Sir Colin Terry, who will retire
from the Board as Chairman and non-executive director at the
conclusion of the AGM.
By order of the Board
M L Thomas
Company Secretary
23 February 2015
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Audit Committee report
policies and the methods used to account for significant or
unusual transactions; (ii) whether appropriate accounting
standards have been followed; (iii) whether appropriate
estimates and judgements have been made, taking into
account the views of the external auditor; and (iv) the clarity
and completeness of disclosure in the Group’s financial
reports and the context in which the statements are made;
Reviewing the content of the annual report and advising the
Board on whether, taken as a whole, it is fair, balanced and
understandable;
Reviewing the adequacy and effectiveness of the Group’s
internal financial controls and financial risk management
system, reviewing and approving the statements to be
included in the annual report concerning internal financial
controls and financial risk management and reviewing the
Group’s procedures for detecting fraud;
Overseeing the internal audit function, including assessing
the annual work plan, receiving reports on a periodic basis
and monitoring the effectiveness of the internal audit function;
Overseeing the relationship with the external auditor,
including the decision to tender external audit services, the
approval of fees paid to external auditors and their terms of
engagement, and recommending to the Board, to be put to
shareholders for approval at the AGM, the appointment,
re-appointment and removal of the external auditor; and
•
•
•
•
• Reviewing the Committee’s own effectiveness.
Work of the committee
The Audit Committee reviewed:
•
The financial information contained in the 2013 Annual Report
and 2013 full-year and 2014 interim results announcements
and recommended them to the Board for approval;
•
•
•
2014 external audit fees, and recommended them to the
Board for approval;
The external audit strategy memorandum and interim audit
clearance report for 2014;
The independence, effectiveness and reappointment of the
external auditors;
• The internal audit plan for 2015 and regular update reports;
•
•
Their own terms of reference and agreed to transfer the
responsibility for reviewing whistleblowing procedures to the
Ethics and Trade Compliance Committee;
Technical accounting and governance updates provided by
the Group Financial Controller, Company Secretary and the
external auditors;
• A treasury update from the Head of Tax and Treasury; and
• The effectiveness of the Committee and internal audit.
Since the year end, the Committee has approved the 2014 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 2014 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.
Chairman’s introduction
I am pleased to present the report of the Audit Committee for 2014.
I chair the Audit Committee and as a Fellow of the ICAEW, former
Audit Committee Chairman of DP World Limited and Finance
Director at Bunzl plc, I bring recent and relevant financial
experience to the Committee. My fellow committee members
throughout 2014 were Guy Berruyer, Philip Cox, Paul Heiden and
Brenda Reichelderfer, who attended all three Committee meetings
during the year. Alison Goligher joined the Committee for her first
meeting in December 2014 (which was the last meeting for Philip
Cox before stepping down from the Board in January 2015). 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 (for the February 2014 meeting) 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 2014 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
Name
Mr D M Williams (Committee chairman)
Mr G S Berruyer
Mr P G Cox
Ms A J P Goligher
Mr P Heiden
Ms B L Reichelderfer
Meetings
eligible to attend
Meetings
attended
3
3
3
1
3
3
3
3
3
1
3
3
Terms of Reference
The Committee operates within agreed terms of reference, which
were updated in 2014 and are available on our website.
Responsibilities
The responsibilities of the Audit Committee include:
•
Monitoring the integrity of the financial statements of the
Group, including its annual and half-yearly reports, and any
other formal announcement relating to its financial
performance, reviewing and reporting to the Board on
significant financial reporting issues and judgements having
regard to matters communicated to it by the external auditor;
•
Reviewing and challenging where necessary: (i) the
consistency of and any changes to significant accounting
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Audit Committee report continued
Significant judgements relating to the financial statements
The table below summarises the significant judgements reviewed 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
The principal judgements are management’s determination of the level at which impairment testing
should be performed, 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,
confirmation that the cash flows used were derived from the 2015 budget and strategic plan (which
in their role as members of the Board, committee members had previously reviewed), 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, the aggregation
of related intangible assets at an aircraft platform level and the appropriateness of the estimated
useful lives assigned to the assets. 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 and estimated useful lives of the assets appropriate.
Provision for environmental
matters relating to
historic sites
The Committee considered a report from management setting out the basis for the judgements
made and the extent to which these were supported by third party specialist advice. The Committee
discussed with management, the sensitivity of the estimates to increases in cost estimates
and changes in discount rates applied to future cash flows. The Committee agreed with the
judgements made by management.
Provision for onerous
contracts and other matters
Retirement benefit
obligations
Income taxes
The key areas reviewed by the Committee were the provision held for the supply from a vendor of
non-conforming raw material identified in the prior year, judgements made by management relating
to selling prices, product quantities and unit costs on a small number of onerous production contracts
and the impact of Heatric’s local content provider in Brazil having filed for creditor protection.
The Committee considered a report from management setting out the bases for the judgements
made on each of these items. 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 2014 assumptions had been determined, including the revised mortality tables used for the
Group’s US schemes. Additionally, the Committee reviewed a benchmarking, they had requested, of
the Group’s assumptions used in the 2013 consolidated financial statements against those disclosed
by other large corporate entities. The Committee concluded that the assumptions recommended,
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. The Committee concluded that the position taken was appropriate.
Contract accounting revenue The Committee considered a report from management setting out the key judgements made
by management in recognising revenue under contract accounting principles, focusing on the
process by which amounts recognised were determined using estimates of total contract costs
and the historical reliability of such estimates. The Committee concluded that the basis of revenue
recognition was appropriate.
Treatment of exceptional
operating items
The Committee discussed the treatment and disclosure of items included within exceptional operating
items. The Committee noted items were treated appropriately and consistently year on year.
The Committee also discussed each of the above judgements with the external auditors in reaching their conclusions.
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Key areas of oversight
External audit
The external auditors are PricewaterhouseCoopers LLP (PwC)
who were appointed as Group auditors for the financial year
commencing 1 January 2003 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 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 2015. It has
recommended that the Board submit the re-appointment
of PwC to shareholders for approval at the AGM in 2015.
The Committee has reviewed the tendering and rotation
provisions from the EU, Competition and Markets Authority
(CMA) and those contained in the UK Corporate Governance
Code. The Committee does not expect to put the external audit
services out for tender before the end of the current audit
partner rotation period i.e. after the audit for the financial year
ending 31 December 2017. This is subject to (i) any clarifications
or changes issued by the CMA relating to their transitional
provisions; (ii) the detailed implementation of the EU auditor
rotation rules in UK law, scheduled for later in 2015; (iii) any other
changes to the regulatory regime; and (iv) the Committee
continuing to be satisfied with the effectiveness of the auditors
which is considered annually.
The Committee routinely meet 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 7 to the financial
statements. The fees paid for non-audit services in 2014 were less
than £0.1 million (Nil% of the total audit fee) and the average fees
paid for non-audit services for the last three years to 2014 was
£0.1 million (4% of the total audit fee over that period). Fees paid
in prior years 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 and 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.
In 2014, the risk assessment process was reviewed. It was
agreed that businesses would be split into three tiers based on
their significance to the Group’s results, prior year audit findings,
a self-assessment questionnaire and discussions with key
stakeholders throughout the Group. Tier 1 businesses are visited
annually, with Tier 2 businesses visited every other year and
Tier 3 every third year.
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. In 2014, internal audits
were carried out at a number of Group sites, including post-SAP
implementation audits and the annual audit of the finance shared
service centres.
IT was added to the scope of internal audit in 2014, using the
services of Grant Thornton UK LLP. The 2014 IT audit scope
included reviews of IT strategy and risk management, IT security,
a data centre which has been established in the UK, and the
global template utilised on SAP, our ERP system.
The Committee routinely meet 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
During the year, the Committee transferred responsibility
for reviewing the process for handling allegations from
whistleblowers to the Ethics and Trade Compliance Committee.
In January 2015, the Ethics and Trade Compliance Committee
confirmed that it was satisfied with the Group’s process for
handling whistleblowing allegations. Whistleblowing is covered
under our Ethics and Business Conduct Policy and Code of
Conduct, which are 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.
On behalf of the Audit Committee
David Williams
Chairman of the Audit Committee
23 February 2015
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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.
David Robins retired from the Board at the end of the 2014 AGM.
Following a rigorous search process using search firm Zygos
Associates, a number of candidates for the position of non-
executive director were interviewed by the Board. The
Nominations Committee recommended the appointment of
Ms Alison Goligher as a non-executive director, as her career in
the energy sector in a wide range of functional and operational
roles would be of great value to Meggitt’s energy businesses.
In December 2014, we announced the appointment of Sir Nigel
Rudd as a non-executive director and Deputy Chairman effective
from 1 March 2015 (becoming Chairman at the conclusion of the
AGM in April 2015). He is a highly experienced and successful
director and chairman and with his prior role as a non-executive
director of BAE Systems, and current exposure to the industry at
BBA Aviation, Sir Nigel has exceptional knowledge of the
aerospace sector. His experience across a wide range of
businesses and expertise will be of significant benefit to the
Group and make him ideally positioned to be the next Chairman
of Meggitt PLC.
We announced in December 2014 that Mr Philip Cox has resigned
from the Board to concentrate on his new role as non-executive
director and chairman designate of Drax Group plc.
In 2015, the Committee will continue to review the composition of
the Board and succession plans for executive and non-executive
directors, and is considering succession plans for Mr David
Williams as he approaches his ninth year as a non-executive
director during 2016.
•
•
Committee membership and attendance during 2014
Sub-Committee of the Board be formed, for the purpose of
running the Chairman selection process. Sir Colin Terry was not
involved in the selection of his successor and Ms Reichelderfer
chaired the Sub-Committee, which was formed entirely of
non-executive directors. Advisers (including Russell Reynolds
Associates acting as search adviser), the Chief Executive and
other executive directors were consulted during the process.
The role of Chairman was defined in writing and approved by the
Board. The selection process for the role included consideration
of prior successful FTSE 100 chair experience, solid experience
in aerospace and defence or engineering/industrial, as well as
broad international experience, time availability and preferably
previous experience of being a Chief Executive. Just over 30
candidate profiles were initially reviewed in the long list, from
which a short list was identified and around ten candidates
(including external and internal) were interviewed.
Taking into account the requirements of the role and the
structure, size and composition (including the skills, knowledge,
experience and diversity) of the Board, the Chairman Succession
Sub-Committee decided to recommend to the Board that
Sir Nigel Rudd be appointed as Chairman. It was the view of the
Board who approved his appointment, that Meggitt would benefit
from the counsel and governance of Sir Nigel Rudd, a seasoned
chairman with extensive international business experience
spanning many industries, including aerospace.
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;
Disclosing statistics on gender diversity in every Annual
Report (see page 41); and
Reviewing this policy from time to time and continuing to
disclose this policy in the Annual Report.
Name
Sir Colin Terry (Chairman)
Mr S G Young
Mr G S Berruyer
Mr P G Cox
Ms A J P Goligher
Mr P Heiden
Ms B L Reichelderfer
Mr D M Williams
Meetings
eligible to attend
Meetings
attended
3
3
3
3
1
3
3
3
3
3
3
3
1
3
3
3
Terms of reference
The Committee operates within agreed Terms of Reference
which were reviewed and updated in 2014 and 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.
Based on the current size and composition of the Board and
taking into account current succession plans, the Board has
determined that there should be a minimum of two female
directors, which is currently the case (for gender diversity
statistics, see page 41). The Board remains committed to
ensuring that the directors bring a wide range of skills,
knowledge, experience, backgrounds and perspectives. Our
directors are from the UK, US and France, and have a range of
different skills and experience, from energy to aerospace,
financial and technology backgrounds to an electrical engineer.
External search consultancies
During 2014, the Committee used Russell Reynolds Associates
to assist in the search for the Chairman (and assist the Group
with searches for other senior management posts from time to
time). Zygos Associates were used to assist in the search for the
non-executive director. Neither Russell Reynolds Associates nor
Zygos Associates have any other connection with the Group.
On behalf of the Nominations Committee
Chairman Succession Sub-Committee of the Board
In 2014, after a number of internal applications were received for
the role of Chairman, it was agreed that a Chairman Succession
Sir Colin Terry
Chairman of the Nominations Committee
23 February 2015
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Directors’ remuneration report
Chairman’s introduction and annual statement
It is my pleasure to present the Directors’ remuneration report for the year ended
31 December 2014.
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.
2014 activity
In 2014, we finalised the review of the remuneration package (which commenced last year and
was extensively reported on in our 2013 report) and submitted the Directors’ remuneration
report and remuneration policy (Policy) to shareholders for approval at our AGM. 98.95% of
those shareholders who voted at the AGM approved our Policy and 99.79% voted for the
Directors’ remuneration report.
We also finalised the effectiveness review of the Committee and Kepler Associates (Kepler),
our advisers, which was carried out using questionnaires and Committee discussion. Overall
the ratings for the Committee and Kepler were satisfactory; there was a valuable discussion
about effectiveness but no significant areas highlighted for improvement.
Since May, we have approved awards under the new shareholder-approved Long Term
Incentive Plan (LTIP), updated our terms of reference to reflect the new remuneration
reporting and policy regime and confirmed the Equity Participation Plan (EPP) vesting
outcome (see page 67). We also discussed performance targets for 2015 and agreed the fees
for Sir Nigel Rudd, who will become Chairman at the conclusion of the AGM on 23 April 2015.
The intended remuneration arrangements for 2015, outlined in this report, are in line with the
Policy approved by shareholders at our 2014 AGM.
2014 performance
Civil original equipment revenue enjoyed another year of strong growth, and the civil
aftermarket gained momentum through the year resulting in full year organic growth in civil
aerospace of 6%. However, this was offset by declines in military and energy resulting in flat
organic Group revenue for the year. Underlying organic profit before tax declined by 11%
reflecting adverse product mix and increased investment in new product introduction costs,
with a 14% decline in underlying EPS reflecting also adverse movements in foreign exchange
and the disposal of non-core businesses. This has resulted in the earnings per share (EPS)
and cash elements of the awards granted in 2012 under the Executive Share Option Scheme
(ESOS) and EPP failing to meet their performance conditions (the total shareholder return
outcome on the EPP will be confirmed at the vesting date). Under our Short Term Incentive
Plan (STIP), we did not hit our financial targets which account for two thirds of the award, but
the targets for personal performance objectives were met and vesting outcomes for 2014 are
as a result of this personal performance element. With growing order intake and building
aftermarket momentum, we anticipate a return to organic growth in 2015.
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 UK Corporate Governance Code 2012 (the Code),
are applied in practice. The FRC published a revised UK Corporate Governance Code on
17 September 2014, applicable to reporting periods beginning on or after 1 October 2014
(the 2014 Code), although the Board has adopted some of the new provisions in the
2014 Code earlier than required.
Paul Heiden
Chairman of the Remuneration Committee
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The Policy report
This section of the report sets out the Policy for the directors, which shareholders approved at the 2014 AGM and is effective for a
period of three years from the date of the 2014 AGM. The only amendments to the Policy from the version approved by shareholders
are to update the data used in the pay-for-performance scenario analysis from 2014 to 2015 and to remove references to future
approval of the Long Term Incentive Plan (which was approved at the AGM in 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 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 entitle them to
receive a pension allowance of 50% of salary and this arrangement will continue for these directors.
Performance
metrics
None.
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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 (Short Term Incentive Plan—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.
Under the STIP 2014 rules as approved by the Committee, the Committee may decide to apply malus and/or
clawback to STIP awards and deferred STIP awards to reduce the vesting of awards and/or require repayment
of awards in the event of a review of the conduct, capability or performance of the director where there has been
misconduct by the director or material misstatement of the Company’s or a Group members financial results
for any period.
Deferred STIP awards may lapse in certain leaver circumstances (see page 62).
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.
Performance
metrics
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.
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).
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Long Term Incentive Plan (LTIP)
Function
Operation
To align the interests of executive directors with shareholders in growing the value of the Group over the long
term.
The LTIP replaced the ESOS and EPP in 2014. Under the LTIP, executive directors are eligible to receive annual
awards over Meggitt shares vesting after three years, subject to the achievement of stretching performance
targets.
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.
Under the LTIP 2014 rules as approved by shareholders at the AGM in 2014, the Committee may decide to apply
malus and/or clawback to awards to reduce the vesting of awards and/or require repayment of awards in the
event of a review of the conduct, capability or performance of the director where there has been misconduct by
the director or material misstatement of the Company’s or a Group members financial results for any period.
Opportunity
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).
Performance
metrics
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 intangible assets
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 27 to 30. 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 LTIP 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 (SIP)
Function
Operation
To align the interests of employees and shareholders by encouraging all employees to own Meggitt shares.
Sharesave Scheme—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.
SIP—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.
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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 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 74 to 75 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
The vesting of 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 SIP on identical terms.
Share ownership guidelines
In 2013, 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 73).
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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
£3,546
Maximum
£2,236
Maximum
£1,892
48%
31% 21%
44%
34% 22%
48%
31% 21%
On-target
£2,164
On-target
£1,320
On-target
£1,155
100%
100%
Minimum
£1,040
Minimum
£575
100%
Minimum
£556
Salary and benefits
Pension
STIP
LTIP
Potential reward opportunities are based on the Policy, applied to 2015 base salaries and 2015 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:
Fees
Function
Operation
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.
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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
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 appointees will be granted awards under the LTIP on similar terms as other executive
directors, 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
Where a new executive director is appointed 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.
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 60.
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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 directors’ 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 an executive 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 on page 63, under the terms of their service contracts, the executive directors may be required to work
during their notice period or may, if the Group 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 Company 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, EPP and LTIP is governed by the rules of the plans which have been approved by
shareholders and is described below.
Awards 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 vest on the normal vesting date.
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A summary of the key terms of the executive directors’ service contracts on termination of employment or change of control is set out
below:
Name
Position
Notice period
from employer
Notice period
from employee
Mr S G Young
Service contract
dated 1 May 2013
Chief Executive
12 months
6 months
Compensation payable on termination of employment or change of control
As set out in the Policy, but service contract includes an
obligation for the Committee to allow Mr Young to exercise
awards under the Group’s share plans that have already
vested at the point of termination.
No change of control provisions.
Mr D R Webb
Service contract
dated 6 June 2013
Mr P E Green
Service contract
dated 26 February
2001
Chief Financial
Officer
Group Corporate
Affairs Director
12 months
6 months
As set out in the Policy.
No change of control provisions.
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.
Payments to Mr Green under his service contract differ from
the Policy 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 six 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 72.
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.
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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 2014.
Remuneration Committee—2014 membership and attendance
Name
Mr P Heiden (Chairman)
Mr G S Berruyer
Mr P G Cox
Ms A J P Goligher
Ms B L Reichelderfer
Mr D M Williams
Meetings
eligible
to attend
Meetings
attended
3
3
3
1
3
3
3
3
3
1
3
3
Mr Cox resigned from the Committee on 31 January 2015 on his departure from the Board. There was one meeting between the end
of the financial year and the date of signing of this report on 16 February 2015, which all current members of the Committee attended.
The Committee operates within agreed Terms of Reference, which are available on our website and were updated in 2014. 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
2014 were £88,000 (2013: £87,000).
2014 AGM voting
The following table shows the results of the AGM votes on the 2013 Directors’ Remuneration Policy and Directors’ remuneration
report at the 2014 AGM:
Resolution text
Votes withheld
(abstentions)1
Approval of Directors’ Remuneration Policy
Approval of Directors’ remuneration report
Votes for
623,092,269
654,155,733
% of votes
cast for
98.95
99.79
Votes against
6,598,635
1,368,456
% of votes
cast against
1.05
0.21
Total votes cast
629,690,904
655,524,189
Votes withheld
(abstentions) 1
30,502,072
4,668,787
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.
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SUPPLEMENTARY INFORMATION
65
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 2014 and the prior year:
Base salary
Taxable benefits2
Pension
STIP3
EPP basic4
EPP matching4
ESOS5
Total
Mr S G Young1
Mr D R Webb1
Mr P E Green
2014
£’000
658
24
329
221
–
–
–
2013
£’000
554
21
277
250
136
96
244
1,232
1,578
2014
£’000
436
14
118
198
–
–
–
766
2013
£’000
240
8
57
93
–
–
–
398
2014
£’000
339
14
170
166
–
–
–
689
2013
£’000
325
14
163
126
106
74
190
998
4
5
1 Mr Young was promoted to Chief Executive on 1 May 2013. Mr Webb was appointed on 6 June 2013.
2
3
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 2014 STIP, including performance measures, actual performance and
bonus payouts, can be found on page 66.
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 2014, the figure represents the actual vesting outcome of the EPS and cash elements of the 2012 award (the performance
period ended on 31 December 2014) and an estimate of the outcome of the TSR element of the 2012 award (the performance period of which will end in
August 2015) based on performance to 31 December 2014. The market value of vested shares is based on the average share price over the last quarter
of 2014 of 474.07 pence. The valuation of the 2012 award will be amended for the actual vesting outcome of the TSR element in August 2015 and the
share price on the date of vesting (22 August 2015) in next year’s annual report on remuneration. For 2013, the figure represents the actual vesting
outcome of the 2011 award, which has been trued up, compared to that reported last year, to reflect the final vesting outcome of the TSR element
(Nil%) and the share price on the date of vesting (467.80p). Further details on performance criteria, achievement and resulting vesting levels can be
found on page 67.
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 2014, the figure represents the actual vesting outcome of the 2012
award. The market value of vested shares is based on the average share price over the last quarter of 2014 of 474.07 pence and an exercise price of
397.20p. For 2013, the figure represents the actual vesting outcome of the 2011 award, trued up, compared to that reported last year, to reflect the
embedded gain based on the actual share price at vesting (504.00p). Further details on performance criteria, achievement and resulting vesting levels
can be found on page 67.
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 2014 and the prior year:
Sir Colin Terry
Mr D M Williams
Mr G S Berruyer
Mr P G Cox
Ms A J P Goligher1
Mr P Heiden
Ms B L Reichelderfer
Mr D A Robins2
Appointed on 30 October 2014.
1
2 Retired on 7 May 2014.
2014
£’000
175
74
53
53
9
63
53
18
2013
£’000
170
72
52
52
–
62
52
52
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Directors’ remuneration report continued
Incentive outcomes for the year ended 31 December 2014
STIP in respect of 2014 performance
The Board set stretching financial and strategic targets for the STIP at the start of the 2014 financial year. These targets, and our
performance against these, are summarised in the table below.
Measure
Underlying profit before tax (Weighting: one-third of the award)
Performance targets
Threshold
Target
£370m
£390m
Stretch
£410m
Free cash flow1 (Weighting: one-third of the award)
£195m
£228m
£260m
Actual
performance
Below
threshold
Below
threshold
Personal performance2 (Weighting: one third of the award)
Mr S G Young
Mr D R Webb
Mr P E Green
2
2
2
3
3
3
4
4
Target
Between
target and
stretch
4
At stretch
1 Adjusted to exclude capital expenditure.
2
Individual personal performance is measured on a scale of 1 to 5. The average of all ratings drives the STIP outcome, where 2 indicates expectations
are partially met, 3 is fully met and 4 exceeds expectations. Details of the personal performance measures are provided below.
It is the view of the Committee that notwithstanding that 2014 has been a challenging year and that the STIP financial targets have not
been met, the personal performance objectives of the executive directors have been satisfied to the extent shown above, and STIP awards
should vest on this basis.
A full listing of personal performance objectives has not been provided owing to commercial sensitivity, however, the following is a
summary of the conditions applying to each executive director. Mr Young’s personal performance objectives related to transforming
execution capability (e.g. through successful implementation of the Meggitt Production System), shaping the business for competitive
advantage, positioning for future growth (e.g. progressing technology projects) and ensuring best practice governance (e.g. health and
safety improvements at sites). Mr Webb’s personal objectives related to assessing the Group’s strategic financial planning and capital
allocation priorities, delivering sustainable cost improvements, implementing a mid-life ERP effectiveness programme, delivering a
cyber-security risk reduction programme and shaping the business for competitive advantage. Mr Green’s personal objectives related to
continued enhancement of the risk management programme, continued improvement of health, safety and environment standards,
implementation of the US Department of State’s Consent Agreement and enhancing the import compliance and ethics programmes.
The following STIP awards were received by directors in respect of 2014 performance:
Mr S G Young
Mr D R Webb
Mr P E Green
% salary
33
45
48
£’000
221
198
166
STIP—deferral into shares
As a result of the 2014 performance STIP vesting outcome described above, 25% of the STIP bonus will be deferred into shares and
released (with no further performance conditions attached) after a further period of two years, per the Policy.
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SUPPLEMENTARY INFORMATION
67
2012 EPP
The EPP award made in August 2012 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
Vesting schedule
50
31.12.14
Cash conversion
25
31.12.14
TSR
25
22.08.15
0% vesting below 110p
30% vesting for 110p per share
100% vesting for 122p 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 for performance below median TSR
30% vesting for performance in line with median TSR
100% vesting for outperformance of median TSR
by 8% per annum;
Straight line vesting between these points
Outcome
Vesting %
Below 110p
Nil
Below 87%
Nil
N/A1
N/A1
1 The vesting outcome will be confirmed at the end of the three-year performance period ending on 22 August 2015. For the purposes of the single figure
of remuneration table, the estimated vesting of this element of the 2012 award is Nil%, based on Meggitt’s relative TSR performance to 31 December
2014.
2012 ESOS
The ESOS award made in April 2012 did not vest, based on three-year cumulative underlying EPS performance to 31 December 2014.
Measure
EPS
Weighting %
Period ending
Vesting schedule
100
31.12.14
0% vesting below 110p
30% vesting for 110p per share
100% vesting for 122p or more;
Straight line vesting between these points
Outcome
Vesting %
Below 110p
0%
2011 EPP
As disclosed in the 2013 annual report on remuneration, the Committee determined that 50% of the 2011 EPP award subject to the
three-year cumulative underlying EPS performance condition and the 25% subject to the cash conversion performance condition vested
in full based on performance to 31 December 2013. The remaining 25% 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 17 August 2014. TSR for all
comparator companies is measured on a common currency basis.
Measure
TSR
Weighting %
Period ending
Vesting schedule
25
17.08.14
0% vesting for performance below median TSR
30% vesting for performance in line with median TSR
100% vesting for outperformance of median TSR
by 8% per annum;
Straight line vesting between these points
Outcome
Vesting %
Below median
TSR
0%
Following confirmation of the vesting outcome of the TSR element, the overall vesting outcome for the 2011 EPP award (taking into
consideration the outcome of both the EPS and TSR elements) was 38% of maximum.
To allow for comparability going forward, the Committee has elected to capture the vesting of the entire 2011 EPP award in the
financial year ending 31 December 2013 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
76,663
53,768
59,719
41,884
Vesting %
38
38
38
38
Interests
vested
29,131
20,431
22,693
15,915
Date
vested
Market price
at vesting
Value
£’000
17.08.14
17.08.14
17.08.14
17.08.14
467.80p
467.80p
467.80p
467.80p
£136
£96
£106
£74
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Scheme interests awarded in the year ended 31 December 2014 (audited)
2014 LTIP
Executive
Mr S G Young
Mr D R Webb
Mr P E Green
Form of award
Date of grant
Nil cost option
Nil cost option
Nil cost option
22.05.14
22.05.14
22.05.14
Shares over which
awards granted
312,443
207,041
161,868
Face value
1
Award price
£’000
% of salary1
Date of vesting
467.54p
467.54p
467.54p
£1,460
£968
£757
220
220
220
22.05.17
22.05.17
22.05.17
1
The award price is the average of the last five days close prices before the award date. The face value has been calculated using the award price for
each award.
2 Based on 2014 salary at the date of award.
Vesting is dependent on the achievement of three-year targets based on the following performance measures:
Weighting
Measure
33.3%
33.3%
Underlying EPS (pence) three-year aggregate (equivalent to CAGR range of 5 to 10%)
ROTA average over three years
Quality
% sites on target2
Threshold
Mid-point
124.0
33.0%
57.0%
130.5
34.5%
71.0%
Stretch
137.0
36.0%
86.0%
33.3%
Strategic measures1
average over three years
Execution
Growth
Delivery
% sites on target2
43.0%
57.0%
71.0%
Meggitt Production
System
Average status
per schedule
Organic revenue
growth
Programme
management
% organic revenue
growth (CAGR over
three years)
Average status
per reviews
Average status
per schedule
2.0
3.0
4.0
5.0%
6.5%
8.0%
2.0
2.0
3.0
3.0
4.0
4.0
Innovation
Schedule
1
2
Performance against each strategic measure will be assessed at the end of the three-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
The targets for quality and delivery are for year 1 of the 2014 LTIP award. Please refer to the 2015 LTIP award performance measures for the targets
which also apply to year 2 of the 2014 LTIP award.
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SUPPLEMENTARY INFORMATION
69
Total pension entitlements (audited)
The table below sets out details of the pension entitlements under the Meggitt Pension Plan (MPP) for Mr Young and Mr Green.
Under the MPP, Mr Young and Mr Green 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 in
April 2012, Mr Young and Mr Green ceased accruing further benefit under the MPP and received a 50% pension allowance on their full
salary. 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, but is not a member of any defined benefit or defined contribution
pension scheme operated by the Group.
The pension allowance payments made in 2014 are included in the single total figure of remuneration table.
Accrued benefit
Date benefit receivable
Total value of additional benefit if director retires early
Mr S G Young1
Mr P E Green2
2014
£’000
27
2013
£’000
27
2014
£’000
75
2013
£’000
73
05.04.2012
05.04.2012
26.10.2018
26.10.2018
Left MPP
and taken
benefits
Left MPP
and taken
benefits
Nil. Early
retirement factors
cost neutral
Nil. Early
retirement factors
cost neutral
1 Mr Young opted to leave the MPP and take his pension benefits with effect from 5 April 2012.
2 Mr Green opted to leave the MPP with effect from 31 March 2012. He has not drawn his pension.
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 300 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
20141
£’000
658
24
221
903
CEO
% change
2013-2014
Executive
employees%
change
2013-2014
+1.7
Nil
-9.4
-1.3
+3.52
+2.03
Nil4
+3.0
20131
£’000
647
24
244
915
1
2
3
4
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 since May 2013.
The base salary for executive employees is calculated using the increase in the earnings of full-time executive employees using a consistent set of
employees.
For benefits, this information is not collected for the executive employee population and is therefore estimated from a sample of executive employees,
using a consistent set of employees.
For STIP, the increase is estimated as at 13 February 2015 as the validation processes for personal performance ratings for executive employees below
the level of the Board and Executive/Operations Boards is not yet complete. To the extent there is a significant variation between the actual outcome
and the estimate, this will be declared in the 2015 Directors’ remuneration report.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
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 2014 and the
prior year, along with the percentage change in both.
Shareholder distributions—dividends1
Shareholder distributions—buybacks1
Total employee expenditure2
2014
£’m
110.4
33.7
461.3
2013
£’m
101.4
–
475.1
% change
2013-2014
+8.9
N/A
-2.9
1 See notes 16 and 40 respectively 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 2014.
Payments to past directors (audited)
There were no payments to past directors in 2014. A de minimis of £10,000 applies to all disclosures under this note.
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 graph and table below show how the CEO’s pay has been
sensitive to the share price over the last six years.
This graph illustrates the Group’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 six-year period from 1 January 2009 to 31 December 2014:
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
31 Dec
2014
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 outcome1 (% of maximum)
EPP vesting1 (% of maximum)
ESOS vesting1 (% of maximum)
Mr T Twigger
Single total figure of remuneration (£’000)
STIP outcome1 (% of maximum)
EPP vesting1 (% of maximum)
ESOS vesting1 (% of maximum)
2009
2010
2011
2012
20132
2014
–
–
–
–
1,758
86%
0%
100%
–
–
–
–
2,947
86%
50%
100%
–
–
–
–
4,252
100%
69%
100%
–
–
–
–
3,812
80%
88%
100%
1,296
39%
38%
76%
1,845
35%
56%
98%
1,232
33%
0%
0%
1
The outcomes are for those awards which are included in the single figure of remuneration for that year. For 2014, this represents the outcome of
ESOS and EPP awards vesting in 2015. The final vesting of the EPP award will not be confirmed until the vesting date in 2015 because of the TSR
performance condition.
2 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.
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SUPPLEMENTARY INFORMATION
71
Implementation of Remuneration Policy for 2015
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 2015 and, effective 1 April 2015, will be as follows for the
executive directors:
Mr S G Young
Mr D R Webb
Mr P E Green
2015
£’000
677
449
361
% change
+2.0
+2.0
+5.0
2014
£’000
664
440
344
For context, salary adjustments across the Group vary from region to region according to local salary inflation; in the UK and the US
the average salary adjustment will be 2%. Mr Green assumes additional responsibilities in 2015, including for the commercial
contracts function. The Committee therefore agreed to increase his salary by 5% in recognition of this change in role and in view of
his salary continuing to be below competitive levels.
Pension and benefits
There were no changes in pension contribution rates or benefit provision.
2015 STIP measures
STIP measures for 2015 are based on underlying operating profit (one third), free cash flow (one third) and personal performance
(one third). The definition of profit for the purposes of this target has been changed for 2015 from underlying profit before tax to
underlying operating profit because it is considered by the Committee to be more aligned to the metrics used to monitor our business
units and therefore more relevant to STIP participants. The STIP targets for 2015, together with details of whether they have been
met, will be disclosed (subject to commercial sensitivity) in the 2015 Directors’ remuneration report. The opportunity is in line with
the Policy disclosed on page 57.
2015 LTIP measures
The executive directors will be granted awards under the LTIP in 2015, the vesting of which will be subject to the measures and
targets set out in the table below. A number of the strategic measures have agreed annual schedules and, to ensure that the LTIP
targets for these measures remain relevant and stretching over the entire three-year performance period, targets for these
measures will be set as three sets of annual targets (i.e. at the start of each year and measured over a 12-month period). Therefore,
the quality and delivery targets shown below are effective for year 1 of the 2015 LTIP award, and also for year 2 of the 2014 LTIP
award. In determining the final vesting outcome at the end of each LTIP cycle, the Committee will consider performance over the
three-year performance period for each strategic measure.
Vesting of the LTIP awards will be subject to the following measures and targets:
Weighting
Measure
33.3%
33.3%
Underlying EPS (pence) three-year aggregate (equivalent to CAGR range of 5.5 to 10%)
ROTA average over three years
Quality
% sites on target2
Threshold
Mid-point
108.3
23.4%
57.0%
113.6
25.4%
71.0%
Stretch
119.1
27.4%
86.0%
33.3%
Strategic measures1
average over three years
Execution
Growth
Delivery
% sites on target2
36.0%
50.0%
65.0%
Meggitt Production
System
Average status
per schedule
Organic revenue
growth
Programme
management
% organic revenue
growth (CAGR over 3
years)
Average status
per reviews
Average status
per schedule
2.0
3.0
4.0
5.0%
6.5%
8.0%
2.0
2.0
3.0
3.0
4.0
4.0
Innovation
Schedule
1 Performance aga inst each strategic measure will be assessed at the end of the three-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
2 The targets set out above on quality and delivery apply to year 1 of the 2015 LTIP award and year 2 of the 2014 LTIP award.
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Directors’ remuneration report continued
Chairman and non-executive director fees
The remuneration of the Chairman and non-executive directors has been in line with our Policy in 2014.
Chairman fee2
Non-executive director base fee
Additional fee for chairing Audit or Remuneration Committee
Additional fee for Senior Independent Director
20151
£’000
350
55
11
11
20141
£’000
176
54
10
10
1
2
Fees shown here are effective for a year from 1 April.
On 23 April 2015, Sir Nigel Rudd will assume the role of Chairman. As part of the selection process, the Chairman’s fee was reviewed and it was
agreed that it would be appropriate to review the fee against a benchmark based on Chairman fees at other FTSE 100 companies, and for the fee
to reflect Sir Nigel Rudd’s extensive experience at Board level across multiple industries. With his prior role as a non-executive director of BAE
Systems, and current exposure to the industry at BBA Aviation, Sir Nigel has exceptional knowledge of the aerospace sector. His experience
across a wide range of businesses and expertise will be of significant benefit to the Group and make him ideally positioned to be the next
Chairman. It was also agreed that Sir Nigel Rudd will receive additional benefits of £20,000 per annum for secretarial and car services needed for
business purposes.
Directors’ beneficial interests (audited)
The beneficial interests of the directors and their connected persons in the ordinary shares of the Company at 31 December 2014, 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 S G Young
Mr G S Berruyer
Mr P G Cox1
Ms A J P Goligher2
Mr P E Green
Mr P Heiden
Ms B L Reichelderfer
Mr D A Robins3
Mr D R Webb4
Mr D M Williams
1
2
3
4
Resigned on 31 January 2015.
Appointed on 30 October 2014.
Retired on 7 May 2014.
Appointed on 6 June 2013.
Shareholding
Ordinary shares of 5p each
2013
2014
12,274
431,501
3,000
6,162
3,000
558,928
6,008
6,000
–
26,488
5,000
12,041
413,351
3,000
6,824
–
557,978
5,841
6,000
73,008
25,648
5,000
Between 1 January 2015 and 13 February 2015, the only changes to the beneficial interests of the directors in the ordinary shares
of the Company are that Mr Young, Mr Webb 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
Total
Non-executive director
Chairman of Audit Committee
Total
Fees retained
2014
£’000
40
9
4
53
53
10
63
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SUPPLEMENTARY INFORMATION
73
Directors’ shareholding requirements (audited)
Shares which are included within the shareholding requirement are:
Source of shares
Description
ESOS, EPP and LTIP
Investment shares
Deferred Bonus
Ordinary shares
Share dividend plan
SIP
Sharesave Scheme
Share awards exercised and retained.
Shares purchased as investment shares in respect of matching awards held under the EPP.
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 SIP.
Shares exercised and retained.
The table below shows the shareholding of each executive director against their respective shareholding requirement as at
31 December 2014:
Name
Mr S G Young
Mr D R Webb
Mr P E Green
Shareholding
guideline
(% 2014
salary)
300
200
200
Current
shareholding
(% 2014
salary)2
337
31
843
Shares owned
outright1
431,501
26,488
558,928
Guideline
met?
Met
Building
Met
Includes shares invested to be eligible for outstanding EPP matching awards.
1
2 Assessment of shareholding is based on a share price of 519.00 pence (the value of a Meggitt share on 31 December 2014).
93987_p55-75.indd 73
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Directors’ remuneration report continued
Directors’ interests in share schemes (audited)
All of the ESOS, EPP and LTIP 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 2014):
•
The awards made up to and including 2011 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 2012, 2013 and 2014 were unvested as at 31 December 2014.
Sharesave awards are not subject to performance conditions.
Mr S G Young
1996 ESOS No1 (options)
ESOS 2005, Part B (stock SARs)
EPP—Basic (nil cost options)
EPP—Match (nil cost options)
LTIP (nil cost options)
Sharesave (options)
Total
Number of shares under award
Date of award
At 1 Jan
2014
Awarded/
(exercised/
lapsed)
At 31 Dec
2014
Exercise
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
22.05.14
12.09.14
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
–
–
(17,200)
–
–
–
–
–
–
(50,634)
–
–
–
–
(47,532)
–
–
–
–
(33,337)
–
–
312,443
2,405
–
186,615
210,871
192,642
285,149
297,345
251,660
160,341
288,520
243,114
115,418
77,729
29,131
73,236
114,556
64,359
57,630
20,431
47,547
66,946
312,443
2,405
174.40p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
526.50p
–
–
–
–
–
–
–
–
–
–
–
374.19p
2,931,943
166,145
3,098,088
449.50p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
22.05.17
01.11.17
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
21.05.19
01.05.18
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SUPPLEMENTARY INFORMATION
75
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)
LTIP (nil cost options)
Sharesave (options)
Number of shares under award
Date of award
At 1 Jan
2014
Awarded/
(exercised/
lapsed)
At 31 Dec
2014
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
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
22.05.14
06.09.10
14.09.12
12.09.14
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
58,173
49,163
44,022
41,884
38,461
33,996
–
1,389
1,835
–
–
–
–
–
–
–
–
(39,443)
–
–
–
–
(37,026)
–
–
–
–
(25,969)
–
–
161,868
–
–
1,619
2,759
12,832
20,662
23,365
217,822
214,306
192,240
124,902
233,384
123,456
88,167
59,377
22,693
59,240
58,173
49,163
44,022
15,915
38,461
33,996
161,868
1,389
1,835
1,619
299.00p
169.50p
278.65p
263.67p
252.50p
169.50p
286.10p
351.70p
397.20p
526.50p
–
–
–
–
–
–
–
–
–
–
222.35p
326.94p
374.19p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
29.03.10
30.04.12
10.10.08
27.09.09
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
22.05.17
01.11.15
01.11.17
01.11.19
28.03.17
29.04.19
09.10.15
26.09.16
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
21.05.19
01.05.16
01.05.18
01.05.20
Total
1,740,597
61,049
1,801,646
Number of shares under award
Date of award
At 1 Jan
2014
Awarded/
(exercised/
lapsed)
At 31 Dec
2014
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
22.05.14
13.09.13
5,698
155,745
60,281
39,868
–
3,517
–
–
–
–
207,041
–
5,698
155,745
60,281
39,868
207,041
3,517
526.50p
526.50p
526.50p
526.50p
–
426.40p
265,109
207,041
472,150
–
–
–
–
–
–
05.09.16
05.09.16
05.09.16
05.09.16
22.05.17
01.11.18
04.09.23
04.09.23
04.09.23
04.09.23
21.05.19
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)
LTIP (nil cost options)
Sharesave (options)
Total
By order of the Board
Paul Heiden
Chairman, Remuneration Committee
23 February 2015
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76
MEGGITT PLC REPORT AND ACCOUNTS 2014
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
(IFRSs as adopted by the European Union 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 2014.
There are no significant events affecting the Group since the
end of the year requiring disclosure.
Incorporation by reference
Certain laws and regulations require that specific information
should be included in the Directors’ report. The table below
shows the items which are incorporated into this Directors’
report by reference:
Information incorporated into the Directors’ report by reference
Location and page
Likely future developments in the Group’s business
Strategic report (page 1 to 41)
The Corporate governance report
Research and development activities
Board of Directors and Corporate governance report
(pages 43 to 50)
Note 8 of the Group’s consolidated financial statements
(page 102) and Chief Financial Officer’s review (page 34)
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
Note 3 of the Group’s consolidated financial statements (page
95)
Greenhouse gas emissions
Employee information
Employee involvement
Employment of disabled persons
Corporate responsibility report (page 39)
Corporate responsibility report (page 41)
Independent auditors—disclosure of relevant audit information
Statement of directors responsibilities (page 79)
Statement of the amount of interest capitalised by the Group during the year with an
indication of the amount and treatment of any related tax relief
Note 19 of the Group’s consolidated financial statements
(page 109)
Details of long term incentive plans
Directors’ remuneration report (pages 58 to 59)
Details of any arrangements under which a director of the Company has waived or agreed
to waive any emoluments from the Company or any subsidiary undertaking.
Nothing to disclose
Details of allotments for cash of ordinary shares made during the period under review.
Note 34 of the Group’s consolidated financial statements
(page 125)
Contracts of significance to which the Company is a party and in which a director is
materially interested.
Nothing to disclose
Contracts of significance between a Company and a controlling shareholder.
Contracts for the provision of services to the Company by a controlling shareholder.
Not applicable, as the Company does not have a controlling
shareholder
Not applicable, as the Company does not have a controlling
shareholder
Details of any arrangement under which a shareholder has waived or agreed to waive
dividends.
Nothing to disclose
Agreements related to controlling shareholder requirements under LR 9.2.2 A
Not applicable, as the Company does not have a controlling
shareholder
Statement of directors interests
Interests disclosed by shareholders under DTR 5
Going concern disclosure
Directors’ remuneration report (page 72)
Substantial shareholdings (page 78)
Chief Financial Officer’s review (page 37)
Details of shareholder authority for the purchase of the Company’s own shares
Share capital and control (page 77)
A statement of how the Company has complied with the Code and details of any non-
compliance.
Corporate governance report (page 43)
Details of directors service contracts
Share capital and control (page 78) and Directors’ remuneration
report (pages 62 to 63)
Share buyback disclosures
Chief Financial Officer’s review (page 35)
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SUPPLEMENTARY INFORMATION
77
Dividends
The directors recommend the payment of a final dividend of
9.50p net per ordinary 5p share (2013: 8.80p), to be paid on 8 May
2015 to those members on the register at close of business on
20 March 2015. An interim dividend of 4.25p (2013: 3.95p) was
paid on 3 October 2014. If the final dividend as recommended
is approved the total ordinary dividend for the year will amount
to 13.75p net per ordinary 5p share (2013: 12.75p).
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.
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 (2013: None).
Share dividend plan
During 2014, the Company made a share dividend plan available
for the dividends paid in May 2014 (the final dividend for 2013)
and in October 2014 (the interim dividend for 2014). The cash
dividend necessary to give an entitlement to one new ordinary
share was fixed at 454.54p and 467.40p respectively.
A share buyback programme was announced on 5 November
2014. Consistent with introducing a share buyback programme,
the Board determined that a dividend reinvestment plan would
be offered instead of a scrip dividend in 2015. Further details of
the share buyback programme are contained in the Chief
Financial Officer’s review (page 35).
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 S G Young (Chief Executive),
Mr G S Berruyer, Mr P G Cox (resigned 31 January 2015),
Ms A J P Goligher (appointed 30 October 2014), Mr P E Green,
Mr P Heiden, Ms B L Reichelderfer, Mr D A Robins (retired 7 May
2014), Mr D R Webb and Mr D M Williams (Senior Independent
Director). Since the year end and up to the date of this Directors’
report, Mr Philip Cox resigned as a director on 31 January 2015.
Additionally, the Board announced in December 2014 that on
1 March 2015, Sir Nigel Rudd will join the Board, initially as a
non-executive director and Deputy Chairman, and then as
Non-Executive Chairman at the conclusion of the Annual
General Meeting (AGM) being held on 23 April 2015, following
the retirement of Sir Colin Terry.
All directors will be submitted for election or re-election at the
AGM, except Sir Colin Terry who is due to retire at its conclusion.
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 pages 44 to 45 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.
Share capital and control
The issued share capital of the Company at 31 December 2014
and details of shares issued and cancelled during the financial
year are shown in note 34 of the Group’s consolidated financial
statements. On 31 December 2014 there were 802,330,037
ordinary shares in issue. A further 2,916,114 ordinary shares
were bought back and cancelled between 1 January 2015 and 13
February 2015 with an aggregate amount paid of £15.2m, all of
which were cancelled as a result of the share buyback
programme, and 1,031 shares have been allotted under the
Sharesave Scheme. The ordinary shares are listed on the
London Stock Exchange.
The rights and obligations attaching to the Company’s ordinary
shares are set out in the Articles. A copy of the Articles is
available for inspection at the registered office. The holders of
ordinary shares are entitled to receive the Company’s report
and accounts, to attend and speak at general meetings of the
Company, to appoint proxies to exercise full voting rights and
to participate in any distribution of income or capital.
There are no restrictions on transfer, or limitations on holding
ordinary shares and no requirements for prior approval of any
transfers. There are no known arrangements under which
financial rights are held by persons other than holders of the
shares and no known agreements or restrictions on share
transfers or on voting rights. Shares acquired through Company
share plans rank pari passu (on an equal footing) with the
shares in issue and have no special rights.
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.
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78
MEGGITT PLC REPORT AND ACCOUNTS 2014
Directors’ report continued
Share capital and control continued
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 900 million revolving credit agreement dated
September 2014, 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.
Agreements with the Company’s directors or employees
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 13 February 2015, 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:
Direct voting
rights (m)*
Indirect voting
rights (m)*
Percentage of total
voting r ights
attaching to the
issued or dinary
share capital of
the company
The Capital Group
Companies, Inc.
Harris Associates L.P.
FMR LLC
Standard Life
Investments Ltd
–
–
–
22.2
Legal & General Group plc
23.7
*One voting right per ordinary share.
120.8
15.11%
41.3
40.6
3.8
–
5.16%
5.07%
3.24%
2.97%
These holdings are published on a regulatory information
service and on the Company’s website.
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 prepared the Group financial statements in accordance
with International Financial Reporting Standards (IFRSs) as
adopted by the European Union, and the parent company
financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law).
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
79
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
23 February 2015
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 European Union and
applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in
the Group and parent Company financial statements
respectively.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and the Group and 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 IAS
Regulation. They are also responsible for safeguarding the
assets of the Company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities. The directors are also responsible for the
maintenance and integrity of the Company’s website. Legislation
in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Each of the directors, whose names and functions are listed in
the Board of Directors on page 44 to 45, 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.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Independent auditors’ report to the
members of Meggitt PLC
Report on the group financial statements
Our opinion
In our opinion, Meggitt PLC’s group financial statements (the
“financial statements”):
•
•
give a true and fair view of the state of the group’s affairs as
at 31 December 2014 and of its 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.
What we have audited
Meggitt PLC’s financial statements comprise:
•
the Consolidated balance sheet as at 31 December 2014;
Our audit approach
Overview
Materiality
Audit Scope
•
•
•
Overall group materiality: £11m which
represents approximately 5% of profit before tax.
We conducted audit work at 17 reporting units.
Business units where we performed audit work
accounted for 100% of group profit before tax
and 77% of group net assets.
Areas of focus
•
Goodwill and intangible asset impairment
assessments.
•
•
Environmental and contractual provisions.
Revenue recognition under long term contract
accounting primarily in the group’s energy
business.
• Retirement benefit obligation liability.
• Provision for uncertain tax positions.
the Consolidated income statement and Consolidated
statement of comprehensive income for the year then
ended;
The scope of our audit and our areas of focus
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).
•
•
•
•
the Consolidated cash flow statement for the year then
ended;
the Consolidated statement of changes in equity for the
year then ended; and
the notes to the financial statements, which include a
summary of significant accounting policies and other
explanatory information.
Certain required disclosures have been presented elsewhere
in the Annual Report and Accounts (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.
The financial reporting framework that has been applied in the
preparation of the financial statements is applicable law and
IFRSs as adopted by the European Union.
We designed our audit by determining materiality and
assessing the risks of material misstatement in the financial
statements. In particular, we looked at where the directors
made subjective judgements, for example in respect of
significant accounting estimates that involved making
assumptions and considering future events that are inherently
uncertain. As in all of our audits, we also addressed the risk of
management override of internal controls, including
evaluating whether there was evidence of bias by the directors
that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect
on our audit, including the allocation of our resources and effort,
are identified as ‘areas of focus’ in the table below. We have also
set out how we tailored our audit to address these specific areas in
order to provide an opinion on the financial statements as a whole,
and any comments we make on the results of our procedures should
be read in this context. Each of the areas of focus below is also
referred to in the Audit Committee report on page 52 and in the
critical accounting estimates and judgements on pages 96 to 98. This
is not a complete list of all risks identified by our audit.
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Independent auditors’ report to the
members of Meggitt PLC continued
Area of focus
How the scope of our audit addressed the area of focus
Goodwill and intangible asset impairment assessments
Refer also to notes 18, 19 and 20 (pages 107 to 110)
The group holds significant amounts of goodwill
(£1.5bn), acquired intangibles (£0.7bn),
development costs (£0.3bn) and programme
participation costs (£0.2bn) on the balance sheet.
We focused on the risk that certain of these
balances could be overstated.
We focused in particular on the estimated value in
use of the Meggitt Sensing Systems business as it
has the lowest percentage headroom of estimated
value in use over book value (headroom £53.4m)
and also the Meggitt Aircraft Braking Systems
business as it has the highest net book value of
goodwill and intangibles at £1.5bn and has the
second lowest percentage headroom of estimated
value in use over net book value (headroom
£313.6m).
Environmental and contractual provisions
Refer also to note 31 (page 119)
The group has liabilities of £133.0m relating to
environmental matters and £42.6m relating to
other matters. We focused on these areas
because certain of these provisions include
significant subjective judgements as set out
below.
The environmental matters, which primarily
relate to site remediation and clean up liabilities
at legacy manufacturing sites in the US, are
based on judgements as to the estimated
clean-up cost and also the length of time that
operation and monitoring of the site is required.
In addition the group has contract related and
other provisions based, for example, on
estimates of the potential cost of settling any
claims for damages by customers and, where
appropriate, the cost of any new equipment or
rework required under the contract.
We evaluated and challenged the directors’ future cash flow forecasts, and the process by
which they were drawn up, and tested the underlying value in use calculations. We
compared the directors’ forecast to the latest Board approved five year plans and assessed
the actual performance in the year against the prior year budgets to evaluate budgeting
accuracy.
The key assumption in the Sensing Systems business forecast is the planned level of
profitability following a significant decline in profits during 2014. In assessing this assumption
we evaluated in particular the likelihood of the factors that drove the decline in profits during
2014 impacting the business over the 5 year forecast period.
The key assumption in the Braking Systems business forecast is the assumed level of
growth. In assessing this assumption the factors we considered included the expected
growth in the number of aircraft on which the braking business has its equipment (based on
third party forecasts) during the forecast period, in particular the aftermarket size and
whether a sole source supplier position is held.
In respect of both forecasts, we also challenged:
•
•
the directors’ assumptions for terminal growth rates in the forecasts by comparing them
to economic and industry forecasts; and
the discount rate by assessing the cost of capital for the company and comparable
organisations.
We performed sensitivity analysis in respect of the assumptions noted above to ascertain
the extent of change in those assumptions which either individually or collectively would be
required for the goodwill and intangible assets to be impaired and we assessed the
likelihood of these changes in assumption arising.
Although uncertainties exist in any long term forecasting exercise, based on the work
performed we reached the view that the cash flows required to support the carrying values
are achievable.
Our work on the valuation of environmental liabilities comprised the following:
•
•
•
We obtained the cost estimates and reports prepared by the group’s external
environmental consultants, for the most significant sites, and discussed these with the
group’s internal legal counsel. We agreed the provisions recorded to the cost estimates
included in these reports. In addition we assessed the consistency of the cost estimates
year on year and the level of costs incurred compared to the prior year estimates.
We assessed the competence of the external environmental consultants including
reviewing their qualifications and we assessed the level of historical accuracy of the
estimates produced by these consultants and in-house legal experts by comparing them
to the actual costs or settlements.
We assessed the extent of insurance coverage against the known exposures including
obtaining evidence of the insurers’ financial position to assess their ability to meet the
commitments in these policies.
We found no material exceptions in these tests.
Our work on contract related and other provisions included obtaining corroborating
evidence for the directors’ cost estimates including looking at the historical level of actual
costs incurred against the estimated costs and comparing the future cost estimates to the
current actual costs. We also read legal and other correspondence with customers for
evidence regarding claims outstanding or provided for at year end. In addition where
insurance exists in respect of an exposure we read the correspondence with the insurers.
We found no material exceptions in these tests.
We performed sensitivity analysis in respect of the cost estimates of contractual disputes
(including estimated costs of settlement and the expected cost of production of new
equipment or rework), to ascertain the extent of change in those estimates that either
individually or collectively would be required for the provisions to be materially misstated.
We discussed the likelihood of such a change in these estimates with the directors and
agreed with their conclusion that this was unlikely.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Independent auditors’ report to the
members of Meggitt PLC continued
Area of focus
How the scope of our audit addressed the area of focus
Revenue recognition under long term contract accounting primarily in the group’s energy business
Refer also to note 5 (page 98)
We focused on the recognition of revenue because
where long term contract accounting is used,
estimates and judgements are made in
determining the amount of revenue to be recorded.
The group’s long term contract accounting is
primarily concentrated in its energy business
which contracts to manufacture printed circuit
heat exchangers. These comprise the majority of
the group contract accounting revenue of £98.3m.
The recognition of revenue is largely dependent on
the estimated stage of completion of each contract
which is determined based on the proportion of
contract costs incurred for work performed to date
compared to the estimated total contract costs.
As these contracts sometimes span a number of
reporting periods, changes in the estimate of total
contract costs or the inappropriate recording of
costs around the year end could result in material
amounts of revenue being recorded in the
incorrect period.
Retirement benefit obligation liability
Refer also to note 33 (pages 121 to 125)
The group has retirement benefit obligations with
gross liabilities of £1,078.9m, which are significant
in the context of the overall balance sheet of the
group.
The valuation of retirement benefit obligations
requires significant levels of judgement and
technical expertise in choosing appropriate
assumptions. Small changes in a number of the
key assumptions (including salary increases,
inflation, discount rates and mortality) can have a
material impact on the calculation of the liability.
Provisions for uncertain tax positions
Refer also to note 14 (page 105)
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. These uncertain tax outcomes result
from the complexity of the group’s legal
structure (including multiple legal entities) and
the multiple tax jurisdictions (primarily the UK
and US) and the changing tax environment in
which the group operates. In addition uncertainty
arises from the level of tax credits claimed and
the level of intergroup transactions that are
recorded.
We tested revenue recognised under long term contract accounting as follows:
•
•
•
•
•
•
Tested the calculation of stage of completion including testing the costs incurred and
recorded against the contract for occurrence and accuracy, assessing the basis for
determining the total contract cost and reperforming the percentage of completion
calculation.
Agreed that the revenue recognised was consistent with the calculated stage of
completion.
Tested whether the work allocated to contracts had been carried out in the period in
which the revenue had been recognised.
For raw materials in stock at year end and allocated to contracts, tested to confirm that
these were made specifically for the contract and therefore that revenue was recorded
in the appropriate period.
Assessed the estimates of costs to complete for major contracts and also assessed the
historical accuracy of the estimates of total contract costs.
Examined any loss making contracts to determine the level of provisioning required and
also assessed the actual profit or loss achieved on contracts that completed in the year
compared to the forecast position in the prior year.
We found no instances of inappropriate revenue recognition.
We evaluated the assumptions made in relation to the valuation of the liabilities. In
particular:
• We compared assumed mortality rates to national and industry averages.
•
•
•
We assessed the assumption for salary increases against the group’s historic trend and
expected future outlook.
We agreed the discount and inflation rates used to our internally developed benchmarks.
We validated the census data used by the group’s actuaries to the underlying data held
by the group and scheme administrators.
We found no material exceptions in these tests.
We evaluated the process by which management have calculated each exposure and we
challenged the estimates made by management in arriving at the provision for uncertain tax
positions. We also calculated our own range of outcomes in respect of each of the significant
tax exposures. In addition we considered any tax opinions or other tax reports the group had
received from its tax advisors in relation to the exposures identified to determine if the
treatment is consistent with the advice obtained. We also tested the underlying calculation
of the provision for uncertain tax positions. We found that the assumptions management
have used in developing the estimated exposure provided a reasonable basis for
provisioning.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the geographic
structure of the group, the accounting processes and controls,
and the industry in which the group operates.
The group’s accounting process is structured around a local
finance function in each of the group’s reporting units. These
functions maintain their own accounting records and controls
(although transactional processing and certain controls for
some reporting units are performed at the group’s shared
service centres) and report to the head office finance team
through an integrated consolidation system.
In establishing the overall group audit strategy and plan, we
determined the type of work that needed to be performed at
the reporting units by the group engagement team and by
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83
component auditors from other PwC network firms or by our
shared service centre teams. Where the work was performed
by component auditors or our shared service centre teams, we
determined the level of involvement we needed to have in the
audit work at those reporting units so as 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.
For each reporting unit we determined whether we required
an audit of their complete financial information or whether
specified procedures addressing parts of their financial
information would be sufficient. Those where a complete audit
was required included the largest reporting unit (Meggitt
Aircraft Braking Systems Akron), because this makes up more
than 15% of the group’s revenue and profits. We included a
further 9 reporting units in 4 countries based on their size or
risk and performed specified procedures on a further 7
reporting units in respect of specific balances.
The group consolidation, financial statement disclosures and a
number of complex items were audited by the group
engagement team at the head office. These included derivative
financial instruments, hedge accounting, defined benefit
pension schemes, share based payments and goodwill. The
group engagement team also visited 10 businesses in 3
countries (UK, USA and Switzerland) to review the work
undertaken by component auditors and to assess the findings.
Together these 17 reporting units accounted for 100% of Group
profit before tax and 77% of net assets. This gave us the
evidence we needed for our opinion on the financial statements
as a whole.
Materiality
The scope of our audit is influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures and to evaluate the
effect of misstatements, both individually and on the financial
statements as a whole.
•
Based on our professional judgement, we determined
materiality for the financial statements as a whole as follows:
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.
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic report
and the Directors’ report for the financial year for which the
financial statements are prepared is consistent with the
financial statements.
ISAs (UK & Ireland) reporting
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 financial
statements; or
We have no
exceptions to
report arising from
this responsibility.
– 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.
the statement given by the directors on page
79, in accordance with provision C.1.1 of the
UK Corporate Governance Code (“the
Code”), 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 is materially inconsistent
with our knowledge of the group acquired in
the course of performing our audit.
We have no
exceptions to
report arising from
this responsibility.
Overall group materiality
£11m (2013: £14m).
How we determined it
Approximately 5% of profit before tax.
Rationale for benchmark
applied
Consistent with last year, we applied this
benchmark, a generally accepted
auditing practice, in the absence of
indicators that an alternative benchmark
would be more appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above £500,000 (2013:
£500,000) as well as misstatements below that amount that, in our
view, warranted reporting for qualitative reasons.
Going concern
Under the Listing Rules we are required to review the directors’
statement, set out on page 37, in relation to going concern. We
have nothing to report having performed our review.
As noted in the directors’ statement, the directors have
concluded that it is appropriate to prepare the financial
• the section of the Annual Report on page 51,
as required by provision C.3.8 of the Code,
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.
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.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
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 are not made. We have no
exceptions to report arising from this responsibility.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We
obtain audit evidence through testing the effectiveness of
controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial
information in the Annual Report to identify material
inconsistencies with the audited 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.
Other matter
We have reported separately on the company financial
statements of Meggitt PLC for the year ended 31 December
2014 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
23 February 2015
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 ten provisions of the UK Corporate Governance
Code. We have nothing to report having performed our review.
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 pages 78 to 79, the directors are
responsible for the preparation of the 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
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.
What an audit of financial statements involves
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 primarily focus 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.
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85
Consolidated income statement
For the year ended 31 December 2014
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
Notes
5
6
12
13
14
15
15
10
10
15
15
2014
£’m
2013
£’m
1,553.7
(935.9)
1,637.3
(981.1)
617.8
656.2
(381.6)
(355.9)
236.2
300.3
1.2
(28.5)
(27.3)
0.3
(31.2)
(30.9)
208.9
269.4
(31.9)
177.0
(37.1)
232.3
22.0p
21.7p
346.0
328.7
32.4p
31.9p
29.4p
28.9p
397.2
377.8
37.5p
36.9p
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Consolidated statement of comprehensive income
For the year ended 31 December 2014
Profit for the year attributable to equity owners of the Company
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
2014
£’m
2013
£’m
177.0
232.3
14
33
14
77.4
(0.8)
(0.2)
76.4
(97.7)
24.2
(73.5)
(37.2)
1.9
0.1
(35.2)
46.8
(21.6)
25.2
Other comprehensive income/(expense) for the year
2.9
(10.0)
Total comprehensive income for the year attributable to equity owners of the Company
179.9
222.3
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Consolidated balance sheet
As at 31 December 2014
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
2014
£’m
2013
£’m
18
19
19
20
21
23
30
32
22
23
30
24
1,541.1
342.9
242.4
673.0
251.1
93.4
29.6
0.9
1,457.1
270.5
210.6
707.3
245.5
89.9
35.5
9.1
3,174.4
3,025.5
327.2
331.9
1.1
3.3
105.5
769.0
299.2
328.9
11.2
2.8
116.1
758.2
6
3,943.4
3,783.7
25
30
27
28
31
26
30
32
27
28
31
33
34
(358.5)
(9.6)
(36.5)
(0.1)
(58.9)
(45.1)
(329.1)
(0.7)
(40.6)
(2.4)
(7.2)
(44.3)
(508.7)
(424.3)
260.3
333.9
(5.9)
(2.9)
(214.8)
(5.3)
(616.7)
(130.5)
(317.8)
(5.2)
(0.1)
(219.3)
(5.1)
(666.0)
(149.2)
(238.1)
(1,293.9)
(1,283.0)
(1,802.6)
(1,707.3)
2,140.8
2,076.4
40.1
1,218.9
14.4
159.1
708.3
39.9
1,166.3
14.1
82.7
773.4
2,140.8
2,076.4
The financial statements on pages 85 to 132 were approved by the Board of Directors on 23 February 2015 and signed on its behalf by:
S G Young
Director
D R Webb
Director
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Consolidated statement of changes in equity
For the year ended 31 December 2014
Equity attributable to owners of the Company
Share
capital
Share
premium
Other
reserves*
Hedging and
translation
Retained
earnings
Total
equity
Notes
£’m
39.3
£’m
1,143.9
£’m
14.1
At 1 January 2013
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
Profit for the year
Other comprehensive income for the year:
Currency translation differences:
Arising in the year
Cash flow hedge movements:
Movement in fair value
Transferred to income statement
Remeasurement of retirement benefit obligations
Other comprehensive income/(expense) before tax
Tax effect
Other comprehensive income/(expense) for the year
Total comprehensive income for the year
Employee share schemes:
Value of services provided
Purchase of own shares
Issue of equity share capital
Share buyback – purchased in year
Share buyback – close period commitment
Dividends
At 31 December 2014
reserves**
£’m
117.9
£’m
590.2
£’m
1,905.4
–
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)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.4
0.2
–
2.6
19.8
–
–
–
–
–
–
–
–
–
–
–
–
–
39.9
1,166.3
14.1
82.7
773.4
2,076.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.3)
–
0.5
–
–
0.1
–
–
52.5
–
–
–
–
–
–
–
–
–
–
–
–
0.3
–
–
–
177.0
177.0
77.4
(1.6)
0.8
–
76.6
(0.2)
76.4
–
–
–
(97.7)
(97.7)
24.2
(73.5)
77.4
(1.6)
0.8
( 97.7)
(21.1)
24.0
2.9
76.4
103.5
179.9
–
–
–
–
–
–
1.1
(11.6)
–
(33.7)
(20.0)
(104.4)
1.1
(11.6)
0.1
(33.7)
(20.0)
(51.4)
40.1
1,218.9
14.4
159.1
708.3
2,140.8
33
14
16
33
14
16
* Other reserves relate to capital reserves of £14.1 million (2013: £14.1 million) arising on the acquisition of businesses in 1985 and 1986 where
merger accounting was applied and a capital redemption reserve of £0.3 million (2013: £Nil million) created as a result of the share buyback
programme commenced during 2014.
** Hedging and translation reserves at 31 December 2014 comprise a credit balance on the hedging reserve of £2.5 million (2013: £3.2 million) and
a credit balance on the translation reserve of £156.6 million (2013: £79.5 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 2013, in respect of the disposal of foreign subsidiaries, have been recorded in net operating costs.
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
89
Consolidated cash flow statement
For the year ended 31 December 2014
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
Purchase of own shares
Issue of equity share capital
Share buyback – purchased in year
Proceeds from borrowings
Debt issue costs
Repayments of borrowings
Cash outflow from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at start of the year
Exchange gains/(losses) on cash and cash equivalents
Cash and cash equivalents at end of the year
Notes
11
39
42
19
19
20
16
34
24
2014
£’m
364.0
(17.1)
346.9
0.3
(16.3)
(18.7)
312.2
(28.6)
–
(77.7)
(46.0)
(12.0)
(33.0)
2.8
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
(194.5)
(146.0)
(51.4)
(11.6)
0.1
(33.7)
218.3
(2.8)
(249.9)
(75.6)
–
2.5
–
181.5
–
(231.4)
(131.0)
(123.0)
(13.3)
116.1
2.7
105.5
13.3
104.9
(2.1)
116.1
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements
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 and
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 control. The Group has control over an entity
where the Group is exposed to, or has the rights to, variable returns
from its involvement with the entity, and it has the power over the entity
to affect those returns. The results of subsidiaries acquired are fully
consolidated from the date on which control transfers to the Group.
The results of subsidiaries disposed are fully consolidated up to the
date on which control transfers 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 meeting the conditions
for recognition under IFRS 3 are recognised at 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. Costs directly attributable to an acquisition are recognised
in the income statement as incurred.
When a subsidiary is acquired, the fair value 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.
When a foreign subsidiary is disposed, 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’).
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;
• Costs directly attributable to the acquisition and integration of
a subsidiary;
• Any gain or loss arising from the disposal of a subsidiary; and
• Adjustments to 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 exchange rates
prevailing on the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are reported at exchange
rates 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 hedging and translation reserves within other
comprehensive income.
Foreign subsidiaries
The results of foreign subsidiaries are translated at average exchange
rates for the period. Assets and liabilities of foreign subsidiaries are
translated at exchange rates 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.
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 exchange rates prevailing at the
balance sheet date.
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SUPPLEMENTARY INFORMATION
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2. Summary of significant accounting policies continued
Segment reporting
Operating segments are those segments for which results are
reviewed by the Group’s Chief Operating Decision Maker (‘CODM’) to
assess performance and make decisions about resources to be
allocated. The CODM has been identified as the Board (see page 46 of
the Corporate governance report). The Group has determined that its
segments are Meggitt Aircraft Braking Systems, Meggitt Control
Systems, Meggitt Polymers & Composites, Meggitt Sensing Systems
and the Meggitt Equipment Group. On 7 May 2014, the Group
announced that the divisional structure had been realigned to reflect
the following changes:
• The fire protection business has moved from Meggitt Equipment
Group to Meggitt Control Systems; and
• The power businesses have moved from Meggitt Equipment Group
to Meggitt Sensing Systems.
Prior period comparatives have been restated to reflect this new
divisional structure.
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 the notes to the
financial statements in respect of ‘trading assets’, which are defined to
exclude from total assets amounts which the CODM does not review at
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 on liabilities is provided in the notes to the
financial statements 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 total contract revenue, the
proportion costs incurred for work performed in the period bear to
total estimated contract costs. Where it is not possible to reliably
estimate the outcome of a contract, revenue is recognised equal to
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, the stage of completion
is typically measured by reference to contractual milestones achieved,
number of aircraft flying hours or number of aircraft landings.
Revenue from funded research and development
Revenue is recognised according to the stage of completion of the
contract. The stage of completion is typically measured by reference
to contractual milestones achieved.
Exceptional operating items
Items which are significant by virtue of their size or nature, 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, gains or losses
made on the disposal or closure of a business, 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 and integration of a business, and
significant site consolidation and other restructuring costs.
Additionally in 2013, given its significance and non-recurring nature,
the raw material supply issue described in note 11 was 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 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, 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 and that the asset will generate future economic
benefit based on all relevant available information are recognised as
an intangible asset. Capitalised development costs are carried at cost
less accumulated amortisation and impairment losses. Amortisation is
charged over the periods expected to benefit, commencing with the
launch of the product. During the year, the period over which
amortisation is charged was reassessed and, as a result, the
maximum life extended from 10 years to 15 years. The impact of this
change, which has been applied prospectively, was to reduce the
charge to the income statement in 2014 by approximately £7.0 million.
Development costs not meeting the criteria for capitalisation are
expensed as incurred.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
Borrowing costs
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 impairment losses. For manufactured parts supplied
on a free of charge or deeply discounted basis, cost represents the cost
of manufacture transferred from inventory less the value of any
revenue received or receivable. Amortisation is charged over the
periods expected to benefit from receiving the status of principal
supplier, through the sale of replacement parts, typically up to
15 years.
Other intangible assets
a) Intangible assets acquired as part of a business combination
For acquisitions, the Group recognises intangible assets separately
from goodwill provided they are separable or arise from contractual or
other legal rights and their fair value can be measured reliably.
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 impairment losses. Where
intangible assets 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 and impairment losses.
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 impairment losses, except for land which is recorded
at cost less accumulated impairment losses. 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
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 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 12 months. All other borrowing costs are recognised in the
income statement as incurred.
Taxation
Tax payable is based on taxable profit for the period, calculated using
tax rates enacted or substantively enacted at the balance sheet date.
Deferred tax is provided in full using the liability method on temporary
differences between the tax bases of assets and liabilities and their
corresponding book values as recorded in the Group’s financial
statements. Deferred tax is provided on unremitted earnings of foreign
subsidiaries, except where the Group can control the remittance and it
is probable that the earnings will not be remitted in the foreseeable
future. Deferred tax assets are recognised only to the extent it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. 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 their 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 inflows which are
largely independent of cash inflows 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.
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
93
2. Summary of significant accounting policies continued
Provisions
Trade receivables
Trade receivables are initially recognised at fair value and
subsequently measured at amortised cost less any impairment losses.
An impairment is 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
measured 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 on a straight-line basis 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 liabilities, onerous contracts,
product warranty claims and other liabilities 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 credits and costs are recognised immediately in the
income statement.
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.
Where the Group has a statutory or contractual minimum funding
requirement to make contributions to a scheme in respect of past
service and any such contributions are not available to the Group once
paid (either as a reduction in future contributions or as a refund during
the life of the scheme or when the scheme liabilities are settled, to
which the Group has an irrevocable right), an additional liability for
such amounts is recognised.
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.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
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 initially 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 not meeting 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 retained earnings.
Share buyback
On 5 November 2014, the Group announced the intention to commence
a share buyback programme. The total consideration payable for
shares purchased is deducted from retained earnings. The shares
when purchased are cancelled and the nominal value of the cancelled
shares is transferred from share capital to a separate capital
redemption reserve. Where the Group has entered into an irrevocable
non-discretionary contract to purchase for cancellation shares on its
behalf during a close period, the obligation to purchase shares is
recognised in full at the inception of the contract, even when the
obligation is conditional on the share price. The obligation is
remeasured at each balance sheet date with changes recognised in the
income statement.
Adoption of new and revised accounting standards
During the year, no new accounting standards became effective which
had a significant impact on the Group’s consolidated financial
statements.
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 2018. This standard is subject to
endorsement by the European Union.
• IFRS 15, ‘Revenue from contracts with customers’. This standard
establishes principles for reporting the nature, amount and timing of
revenue arising from an entity’s contracts with customers. The
Group is yet to assess the full impact of IFRS 15 which becomes
effective for accounting periods beginning on or after 1 January
2017. This standard is subject to endorsement by the European
Union.
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95
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 (see also pages 35 to 37 of the Chief Financial Officer’s review). 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 exposure arises 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 exposure 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 exposure 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 interest rate derivatives 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
350.1
49.5
20.5
1.1
(9.1)
0.8
412.9
Less than
1 year
£’m
316.6
4.1
20.6
3.4
(8.2)
0.7
337.2
2014
1-2 years
2-5 years
Greater than
5 years
£’m
1.7
256.8
17.3
12.4
Total
£’m
356.0
650.3
102.0
17.5
(9.8)
–
(50.7)
2.8
£’m
2.7
343.9
45.2
3.0
(22.8)
1.2
373.2
278.4
1,077.9
£’m
1.5
0.1
19.0
1.0
(9.0)
0.8
13.4
2013
1-2 years
2-5 years
£’m
1.2
42.4
19.1
1.0
(8.5)
0.7
55.9
£’m
2.2
370.4
48.2
2.8
(23.5)
1.9
402.0
Greater than
5 years
£’m
1.8
241.9
28.6
12.7
(15.8)
–
Total
£’m
321.8
658.8
116.5
19.9
(56.0)
3.3
269.2
1,064.3
* Excludes social security and other taxes of £8.4 million (2013: £12.5 million) (see note 25).
** Assumes no change in interest rates from those prevailing at year end.
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Notes to the consolidated financial statements continued
3. Financial risk management continued
Sensitivity analysis
The Group’s principal exposure 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%
2014
2013
Income
statement
£’m
28.3
4.6
Equity
£’m
44.1
3.3
Income
statement
£’m
25.2
4.6
Equity
£’m
36.1
4.1
The impact on equity from movements in the exchange rate comprises £53.2 million (2013: £46.3 million) in respect of US dollar net debt, offset by
£9.1 million (2013: £10.2 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. The impact of a 1% movement in the US yield curve
includes the effect on the Group’s forward foreign exchange contracts as well as other financial assets and liabilities.
Capital risk management
The Group’s objective when managing its capital structure is to minimise the cost of capital whilst 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 Group’s current
post-tax average cost of capital is approximately 8% (2013: 8%) and its capital structure at 31 December is as follows:
Net debt (see note 40)
Total equity
Debt/equity %
2014
£’m
2013
£’m
575.5
2,140.8
564.6
2,076.4
26.9%
27.2%
The Board believes that in maintaining an efficient balance sheet, a net debt/EBITDA ratio of between 1.5x and 2.5x is appropriate, whilst retaining
the flexibility to move outside the range if appropriate. Further details on the share buyback programme announced as part of the Group’s
strategy for delivering net debt/EBITDA in this range can be found on page 35 of the Chief Financial Officer’s review, which also includes details
on how the Group has complied with the two principle financial covenant requirements contained in its committed credit facilities for the year
ended 31 December 2014.
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 described below. Further consideration of these critical estimates
and judgements can be found in the Audit Committee report on page 52.
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 assets are dependent on estimates of attributable future revenues, margins, cash flows and appropriate
discount rates to be applied to future cash flows. The Group takes advice from third parties in determining fair values and the estimated useful
lives of intangible assets arising on significant acquisitions. Intangible assets are subject to impairment testing at least annually or if events or
changes in circumstances indicate their carrying value may not be recoverable. Estimates of remaining useful lives of assets are also reviewed at
least annually, and revised if appropriate (see note 20 for further details).
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4. Critical accounting estimates and judgements continued
Development costs
The majority of capitalised development costs relate to technology developed for aerospace programmes. In such cases, costs are typically not
capitalised until a contract to develop the technology is awarded by a customer as, prior to this date, it is generally not possible to reliably
estimate the point at which research activities conclude and development activities commence. Absent a contract, the Group also does not believe
there is generally sufficient certainty over the future economic benefits that will be generated from the technology, to allow capitalisation of those
costs. Post contract award, the Group will capitalise development costs provided it retains the intellectual property in the technology throughout
the life of the aircraft or engine and it is probable that future economic benefits will flow to the Group. In making a judgement as to whether
economic benefits will arise, the Group will make estimates of aircraft or engine volumes (taking into account the extent to which the Group has
a sole-source position), aftermarket revenues which are dependent on aircraft utilisation, fleet lives and operator service routines, costs of
manufacture and costs to complete the development activity.
Capitalised development 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. Estimates of remaining useful lives of assets are also
reviewed at least annually, and revised if appropriate.
At 31 December 2014, the programme with the largest capitalised development balance has a net book value of £44.5 million. Fleet volumes
would need to reduce by approximately 60% from management estimates, without any mitigation actions taken by the Group, before any
impairment would need to be recognised.
Programme participation costs
Approximately 80% of capitalised programme participation costs relate to free of charge or deeply discounted manufactured parts (‘FOC’), with
the balance relating to cash payments. All amounts relate to aerospace programmes. FOC costs are typically incurred just prior to individual
aircraft entering service and only where the Group is satisfied the incremental aftermarket revenues that will be generated over the life of the
part are sufficient, will amounts be capitalised. In making this judgement, the Group makes estimates of aircraft utilisation rates and fleet
lives and operator service routines. The capitalisation of cash payments is subject to similar judgements to those described in development
costs above.
Capitalised programme participation 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. Estimates of remaining useful lives of assets are
also reviewed at least annually, and revised if appropriate.
At 31 December 2014, the programme with the largest capitalised programme participation balance has a net book value of £29.0 million.
No reasonably foreseeable change in assumptions would cause an impairment to be recognised.
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. 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).
Legal, regulatory and other similar matters
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 any provisions required and
any impairment of related receivables 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).
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
4. Critical accounting estimates and judgements continued
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 2014, a number of new mortality tables were published in the US. Advice was taken from the Group’s third party US
actuary as to the most appropriate tables to use to reflect current and future improvements in life expectancy for each of the Group’s US
schemes. Further details on these estimates and sensitivities of the retirement benefit obligations to these estimates are provided in note 33.
Contract accounting revenue
In determining amounts to be recognised as revenue under long-term contracts, the Group makes an assessment of the stage of completion of
each contract and its expected profit at completion based on an estimate of total contract costs. Contract cost estimates are based on an internal
evaluation taking into account the specific nature of the contract, including its level of technical risk, together with the historical accuracy of
previous contract estimates. Estimates are reviewed and updated regularly throughout the life of the contract, which typically will span more
than one accounting period. The total amount of revenue recognised under long-term contracts in the year is disclosed in note 5.
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 2014, the impact on the tax charge would be approximately £5.0 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
6. Segmental analysis
Analysis by operating segment
2014
£’m
1,351.7
98.3
75.0
28.7
2013
£’m
1,428.8
110.1
73.9
24.5
1,553.7
1,637.3
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. On 7 May 2014, the Group announced that the divisional structure had
been realigned to reflect the following changes:
• The fire protection business has moved from Meggitt Equipment Group to Meggitt Control Systems; and
• The power businesses have moved from Meggitt Equipment Group to Meggitt Sensing Systems.
Prior year comparatives have been restated to reflect this new divisional structure.
Details of the Group’s divisions can be found on pages 13 to 17 of the Strategic report.
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6. Segmental analysis continued
Year ended 31 December 2014
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
Meggitt
Aircraft
Braking
Systems
£’m
327.1
(0.1)
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
349.7
(1.0)
£’m
163.2
(0.9)
£’m
402.4
(4.2)
£’m
320.1
(2.6)
£’m
1,562.5
(8.8)
Revenue from external customers
327.0
348.7
162.3
398.2
317.5
1,553.7
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
127.5
91.8
20.2
58.4
48.1
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)**
Impairment loss (see note 19)
Depreciation (see note 21)***
0.5
70.9
–
6.7
3.0
12.2
4.0
6.1
0.3
6.4
–
3.3
6.9
15.0
3.1
9.0
1.8
8.1
0.9
6.1
*
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, £44.5 million has been charged to underlying operating profit as defined in note 10.
*** Of the total depreciation in the year, £31.1 million has been charged to underlying operating profit as defined in note 10.
The Group’s largest customer accounts for 6.2% of revenue (£96.3 million). Revenue from this customer arises across all segments.
346.0
(109.8)
236.2
1.2
(28.5)
(27.3)
208.9
(31.9)
177.0
12.5
112.6
8.0
31.2
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
30.1
40.4
0.3
6.1
76.9
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
£’m
£’m
£’m
£’m
16.5
5.6
1.3
4.5
27.9
4.1
–
0.5
5.9
10.5
21.7
–
1.1
9.1
31.9
5.3
–
1.0
7.7
77.7
46.0
4.2
33.3
14.0
161.2
* Relate to those non-current assets included within segmental trading assets reviewed by the CODM.
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Notes to the consolidated financial statements continued
6. Segmental analysis continued
As at 31 December 2014
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
568.3
295.0
94.0
325.2
200.6
1,483.1
181.4
1,541.1
597.4
29.6
0.9
1.1
3.3
105.5
3,943.4
* 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.
Year ended 31 December 2013 (Restated)
The key performance measure reviewed by the CODM is underlying operating profit. A detailed reconciliation of operating profit to underlying
operating profit is provided in note 10.
Gross segment revenue
Inter-segment revenue
Revenue from external customers
Meggitt
Aircraft
Braking
Systems
£’m
330.4
–
330.4
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
365.2
(0.9)
364.3
£’m
182.9
(1.9)
181.0
£’m
399.5
(2.0)
397.5
£’m
365.2
(1.1)
£’m
1,643.2
(5.9)
364.1
1,637.3
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
122.4
107.7
30.2
69.9
67.0
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)**
Impairment loss (see note 19)
Depreciation (see note 21)***
1.5
74.5
–
8.1
8.6
13.4
3.2
4.8
–
6.7
–
3.2
8.9
16.3
–
9.4
9.4
12.3
–
6.7
*
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, £47.5 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
123.2
3.2
32.2
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6. Segmental analysis continued
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
16.8
3.2
5.1
14.4
39.5
£’m
2.5
–
0.8
2.7
6.0
£’m
£’m
£’m
21.4
1.0
2.3
18.6
43.3
4.7
–
0.9
10.2
15.8
70.2
35.7
9.5
49.9
165.3
* Relate to those non-current assets included within segmental trading assets reviewed by the CODM.
As at 31 December 2013 (Restated)
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
241.9
87.8
314.5
194.9
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.
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
2014
£’m
152.4
338.1
771.1
292.1
2013
£’m
165.8
365.1
811.7
294.7
1,553.7
1,637.3
2014
£’m
2013
£’m
602.0
203.6
2,235.4
9.5
714.4
215.6
1,953.0
8.0
3,050.5
2,891.0
Segmental non-current assets are based on the location of the assets. They exclude trade and other receivables, derivative financial instruments
and deferred tax.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
7. Auditor’s remuneration
Payable to PricewaterhouseCoopers LLP 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 accounts of any subsidiary of the Company in respect of the current year
For audit related assurance services
Total
8. 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*
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)
Impairment loss on capitalised development costs (see note 19)
Depreciation (see note 21)
Loss/(gain) on disposal of property, plant and equipment
Exceptional operating items (see note 11)
Financial instruments (see note 10)
Net foreign exchange loss
Operating lease rentals
Other operating income
2014
£’m
0.7
–
0.7
–
1.4
2014
£’m
423.2
(13.4)
541.8
70.6
8.8
24.9
10.8
68.1
8.0
31.2
0.4
12.5
29.2
0.6
15.3
(3.1)
2013
£’m
0.8
0.1
0.6
0.1
1.6
2013
£’m
450.6
(5.9)
566.1
64.7
13.7
25.4
9.8
74.3
3.2
32.2
(1.1)
28.4
(6.1)
2.1
14.3
(4.6)
* Total research and development expenditure in the year was £148.3 million (2013: £134.9 million) of which £28.9 million (2013: £24.5 million) was
charged to cost of sales, £41.7 million (2013: £40.2 million) was charged to net operating costs and £77.7 million (2013: £70.2 million) was
capitalised as development costs (see note 19).
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
2014
£’m
434.7
78.8
26.6
1.7
541.8
2013
£’m
441.0
79.1
34.1
11.9
566.1
Details of directors’ remuneration is provided in the Directors’ remuneration report on pages 55 to 75, 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
Prior year comparatives have been restated to reflect the new divisional structure (see note 6).
2014
Number
2013
Restated
Number
1,228
1,811
1,876
3,138
1,975
657
1,191
1,804
1,979
3,078
2,402
581
10,685
11,035
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SUPPLEMENTARY INFORMATION
103
10. Reconciliations between profit and underlying profit
Underlying profit is used by the Board to monitor and measure the underlying trading performance of the Group. It excludes certain items as
described below:
Operating profit
Exceptional operating items (see note 11)
Amortisation of intangible assets acquired in business combinations
Disposal of inventory revalued in business combinations
Financial instruments
Adjustments to operating profit*
Underlying operating profit
Profit before tax
Adjustments to operating profit per above
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
2014
£’m
2013
£’m
236.2
300.3
12.5
68.1
–
29.2
109.8
346.0
28.4
74.3
0.3
(6.1)
96.9
397.2
208.9
269.4
109.8
10.0
119.8
328.7
96.9
11.5
108.4
377.8
177.0
232.3
119.8
(36.6)
83.2
260.2
108.4
(43.8)
64.6
296.9
* Of the adjustments to operating profit, £5.5 million (2013: £28.8 million) relating to exceptional operating items and £Nil (2013: £0.3 million)
relating to the disposal of inventory revalued in business combinations has been charged to cost of sales, with the balance of £104.3 million
(2013: £67.8 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
2014
£’m
78.9
(10.8)
68.1
2013
£’m
84.1
(9.8)
74.3
b. 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 – loss/(gain)
2014
£’m
31.1
(1.9)
(4.2)
4.2
29.2
2013
£’m
(12.0)
0.8
18.6
(13.5)
(6.1)
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
11. Exceptional operating items
Site consolidations
Loss/(gain) on disposal or closure of businesses
Raw material supply issue
Costs related to acquisition and integration of businesses
Other
Exceptional operating items
Note
a
b
c
Income statement
Cash expenditure
2014
£’m
7.5
2.9
–
2.1
–
12.5
2013
£’m
8.2
(9.0)
20.0
7.9
1.3
28.4
2014
£’m
7.5
0.5
4.7
4.4
–
2013
£’m
6.4
0.5
3.1
5.0
1.2
17.1
16.2
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 movement of production to the Group’s low cost manufacturing locations.
b. The charge in 2014 relates to the closure of a business in the US. In the prior year, the Group disposed of the shares of Meggitt (Addison), Inc,
realising a profit of £14.9 million and the shares of the Sunbank Family of Companies LLC, realising a loss of £5.9 million. Cash expenditure
relates to business disposal expenses. Proceeds from the disposal of businesses are reported separately as part of cash outflow from
investing activities.
c. In 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 provision of £20.0 million was made for the estimated cost of this issue, including where necessary the replacement of the
relevant parts over the next few years. No amounts were recorded in the income statement in respect of this issue in 2014.
The tax credit in respect of exceptional operating items was £4.1 million (2013: £10.7 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 (see note 31)
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 note 19)
Finance costs
2014
£’m
0.1
0.9
0.2
1.2
2014
£’m
2.7
12.7
0.9
1.1
10.0
3.1
(2.0)
28.5
2013
£’m
0.1
–
0.2
0.3
2013
£’m
3.5
15.4
1.1
–
11.5
1.2
(1.5)
31.2
* An additional charge of £1.8 million was recorded in 2014, following the early refinancing of the Group’s committed syndicated bank facilities.
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SUPPLEMENTARY INFORMATION
105
14. Tax
Current tax – current year
Current tax – adjustment in respect of prior years
Deferred tax – origination and reversal of temporary differences
Deferred tax – effects of changes in tax rates
Deferred tax – adjustment in respect of prior years
Total taxation
2014
£’m
20.4
0.2
17.2
–
(5.9)
31.9
2013
£’m
38.0
(6.5)
12.7
(5.4)
(1.7)
37.1
The Finance Act 2013, included legislation to reduce the main rate of corporation tax in the UK from 23% to 21% with effect from 1 April 2014 and
to 20% with effect from 1 April 2015. As these changes were substantively enacted during 2013, they were reflected in the tax charge for that year.
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 21.5%* (2013: 23.25%)
Effects of:
Different tax rates of subsidiaries operating in other jurisdictions
Permanent differences
Temporary differences
Changes in statutory tax rates
Tax credits and incentives
Current tax – adjustment in respect of prior years
Deferred tax – adjustment in respect of prior years
Total taxation
2014
£’m
44.9
12.5
(16.0)
(0.6)
–
(3.2)
0.2
(5.9)
31.9
2013
£’m
62.6
14.1
(20.1)
(1.5)
(5.4)
(4.4)
(6.5)
(1.7)
37.1
* The sensitivity of the tax charge to changes in the tax rate is such that a one percentage point increase, or reduction, in the tax rate would cause
the total taxation charge for 2014 to increase, or reduce respectively, by approximately £2.1 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 (charge)/credit relating to share-based payment expense
Total
After
tax
£’m
76.7
0.4
(73.5)
(0.7)
2.9
Before
tax
£’m
(31.9)
(5.3)
46.8
1.9
11.5
Before
tax
£’m
77.0
0.4
(97.7)
(0.8)
(21.1)
2014
Tax credit/
(charge)
£’m
(0.3)
–
24.2
0.1
24.0
(0.3)
24.3
24.0
2013
Tax credit/
(charge)
£’m
0.2
0.2
(21.6)
(0.3)
(21.5)
0.2
(21.7)
(21.5)
2014
£’m
1.2
(1.8)
(0.6)
After
tax
£’m
(31.7)
(5.1)
25.2
1.6
(10.0)
2014
£’m
5.3
3.3
8.6
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MEGGITT PLC REPORT AND ACCOUNTS 2014
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
0.1 million shares (2013: Nil). 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.
2014
Profit*
£’m
177.0
–
177.0
2014
Shares
Number ‘m
804.1
11.0
815.1
2014
EPS
Pence
22.0
(0.3)
21.7
2013
Profit*
£’m
2013
Shares
Number ‘m
232.3
–
232.3
791.1
13.1
804.2
2013
EPS
Pence
29.4
(0.5)
28.9
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
2014
Pence
22.0
1.1
5.5
2.9
0.9
32.4
2013
Pence
29.4
2.2
5.6
(0.7)
1.0
37.5
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 31.9 pence (2013: 36.9 pence).
16. Dividends
In respect of earlier years
In respect of 2013:
Interim of 3.95p per share
Final of 8.80p per share
In respect of 2014:
Interim of 4.25p per share
Dividends paid
Less paid as scrip dividend (see note 41)
Dividends paid in cash
2014
£’m
–
–
70.2
34.2
104.4
(53.0)
51.4
2013
£’m
64.4
31.2
–
–
95.6
(20.0)
75.6
A final dividend in respect of 2014 of 9.50p per share (2013: 8.80p), amounting to an estimated total final dividend of £76.2 million
(2013: £70.2 million) is to be proposed at the Annual General Meeting on 23 April 2015. This dividend is not reflected in these
financial statements as it is has not been approved by the shareholders at the balance sheet date.
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SUPPLEMENTARY INFORMATION
107
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 for 2014 as members of the Board, the Executive Board and the Operations Board, is set out below. Prior year
comparatives have not been restated to reflect changes to the definition of key management personnel during the current year:
Salaries and other short-term employee benefits
Retirement benefit expense
Share-based payment expense
Total
2014
£’m
7.3
0.3
0.6
8.2
2013
£’m
6.8
0.4
3.2
10.4
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
Meggitt Long Term Incentive Plan 2014
2014
Average
exercise
price
Pence
393.00
359.71
–
–
2014
Number
outstanding
‘m
0.1
5.1
2.5
1.5
2013
Average
exercise
price
Pence
348.66
353.23
–
–
2013
Number
outstanding
‘m
0.1
5.7
2.8
–
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 55 to 75 which forms part of these financial statements.
18. Goodwill
Cost at 1 January
Exchange rate adjustments
Businesses acquired (see note 42)
Businesses disposed
Cost at 31 December
2014
£’m
1,457.1
64.1
19.9
–
2013
£’m
1,494.2
(19.6)
9.0
(26.5)
1,541.1
1,457.1
Goodwill is tested for impairment annually or more frequently if there is any indication of impairment. No impairment charge was required in the
year (2013: £Nil) and the cumulative impairment charge recognised to date is £Nil (2013: £Nil). The total amount of goodwill and other intangible
assets acquired as part of the acquisition of Precision Engine Controls Corporation (see note 42) that are expected to be deductible for tax
purposes will be assessed during 2015.
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
2014
£’m
699.9
188.0
137.7
81.9
72.8
66.8
294.0
2013
£’m
665.3
177.2
129.6
82.9
68.6
62.9
270.6
1,541.1
1,457.1
* During 2014, the Group announced the divisional structure had been realigned and the power businesses have moved from Meggitt
Equipment Group to Meggitt Sensing Systems (see note 6). For the purpose of impairment testing, the power businesses currently continue to
be considered as individual CGUs, and are excluded from the MSS CGU shown above.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
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 2014. 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, capacity measured in available seat kilometres (ASKs) 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 traffic growth is supported by the sustained high levels of order intake at
Boeing and Airbus. Large jet deliveries increased by 8% in 2014, and the Group expects good delivery growth over the next five years
underpinned by continued strong order intake and a backlog at Boeing and Airbus which equates to over seven years of deliveries at the current
production rate. Deliveries of regional aircraft increased by 2% in 2014, with modest growth anticipated over the next five years, driven
principally by demand for 70-90 seat aircraft, on which the Group has a strong shipset content. Total business jet deliveries increased by 6% in
2014 but deliveries of super-midsize and long-range aircraft, where the Group benefits from particularly strong market positions, grew more
strongly. Further growth is anticipated in this market over the next five years, driven by increasing internationalisation of the customer base
and the ongoing improvement in the US economy. Military markets look to be entering a more benign phase, with lower rates of decline than
have been seen in recent years and even some suggestion of growth in the all important US budget from 2016. The threat of sequestration
remains, although the likelihood, timing and impact are unknown at this stage. However, the Group has key positions on future growth
platforms and, in the absence of any clarity on if or where sequestration 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: 2.3% (2013: 2.4%), US: 2.4% (2013: 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 10.2% (2013: 10.3%), Meggitt (North Hollywood), Inc., 10.9% (2013:
11.0%), Meggitt Safety Systems, Inc./Pacific Scientific HTL 10.9% (2013: 10.8%), MSS 10.1% (2013: 9.7%), Meggitt (Rockmart), Inc. 10.4% (2013:
10.7%), and Meggitt Training Systems, Inc. 9.8% (2013: 10.9%). The discount rates used for ‘Other’ CGUs ranged between 8.3% to 11.0% (2013:
9.3% to 10.9%).
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 CGU with the least headroom in percentage terms is MSS followed by MABS. ‘Other’ goodwill of £294.0 million (2013:
£270.6 million) relates to approximately 10 individual CGUs, all of which have headroom in percentage terms greater than that of MABS and MSS.
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)
Headroom
MABS
MSS
18%
62%
14%
£313.6m
14%
100%
14%
£53.4m
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
109
19. Development costs and programme participation costs
At 1 January 2013
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2013
Opening net book amount
Exchange rate adjustments
Additions – Internal development costs
– Free of charge/deeply discounted manufactured parts
– Cash payments
Disposals
Interest capitalised
Impairment loss
Amortisation*
Net book amount
At 31 December 2013
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2014
Opening net book amount
Exchange rate adjustments
Additions – Internal development costs
– Free of charge/deeply discounted manufactured parts
– Cash payments
Interest capitalised
Impairment loss
Amortisation*
Net book amount
At 31 December 2014
Cost
Accumulated amortisation
Net book amount
Development
costs
£’m
276.0
(54.5)
221.5
221.5
(3.8)
70.2
–
–
(2.0)
1.5
(3.2)
(13.7)
270.5
340.7
(70.2)
270.5
270.5
9.5
77.7
–
–
2.0
(8.0)
(8.8)
Programme
participation
costs
£’m
326.9
(123.3)
203.6
203.6
(3.3)
–
30.4
5.3
–
–
–
(25.4)
210.6
356.0
(145.4)
210.6
210.6
10.7
–
43.3
2.7
–
–
(24.9)
342.9
242.4
431.2
(88.3)
419.2
(176.8)
342.9
242.4
* 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 1.5% (2013: 1.6%).
The net book amount of development costs includes £125.5 million (2013: £91.1 million) in respect of Meggitt Aircraft Braking Systems which have
an estimated weighted average remaining life of 14.2 years (2013: 9.1 years). The net book amount of programme participation costs includes
£228.6 million (2013: £202.7 million) in respect of Meggitt Aircraft Braking Systems which have an estimated weighted average remaining life of
9.0 years (2013: 8.4 years).
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
20. Other intangible assets
At 1 January 2013
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2013
Opening net book amount
Exchange rate adjustments
Business acquired
Businesses disposed
Additions
Amortisation – net operating costs (see note 10)
Net book amount
At 31 December 2013
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2014
Opening net book amount
Exchange rate adjustments
Businesses acquired (see note 42)
Additions
Amortisation – net operating costs (see note 10)
Net book amount
At 31 December 2014
Cost
Accumulated amortisation
Net book amount
Customer
relationships
Technology
Order
backlogs
(*)
£’m
(*)
£’m
(*)
£’m
Trade
names and
trademarks
(*)
£’m
Other
purchased
(**)
£’m
Total
£’m
832.1
(279.8)
552.3
552.3
(5.8)
10.0
(9.5)
–
(54.7)
492.3
807.9
(315.6)
492.3
492.3
22.0
1.7
–
(50.7)
240.5
(93.9)
146.6
146.6
(1.4)
5.6
(1.1)
–
(17.0)
132.7
238.8
(106.1)
132.7
132.7
5.3
–
–
(15.3)
465.3
122.7
848.5
(383.2)
249.6
(126.9)
465.3
122.7
11.2
(10.9)
0.3
0.3
–
0.1
–
–
(0.3)
0.1
10.9
(10.8)
0.1
0.1
–
–
–
(0.1)
–
–
–
–
29.9
(18.2)
11.7
11.7
–
–
(0.6)
–
(2.3)
8.8
27.9
(19.1)
8.8
8.8
0.4
–
–
(2.0)
7.2
98.4
(30.4)
68.0
1,212.1
(433.2)
778.9
68.0
(0.4)
0.1
–
15.5
(9.8)
73.4
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
73.4
0.9
2.3
12.0
(10.8)
77.8
707.3
28.6
4.0
12.0
(78.9)
673.0
29.0
(21.8)
7.2
126.4
(48.6)
77.8
1,253.5
(580.5)
673.0
* 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 £Nil (2013: £1.4 million) has been charged to exceptional operating items and is
excluded from the Group’s underlying profit figures (see note 10).
During 2014, cost and accumulated amortisation relating to completed order backlogs were eliminated.
The net book amount of customer relationships includes £332.1 million (2013: £350.2 million) in respect of Meggitt Aircraft Braking Systems and
£55.7 million (2013: £59.8 million) in respect of Meggitt Sensing Systems which have an estimated weighted average remaining life of 9.0 years
(2013: 10.0 years) and 10.2 years (2013: 11.2 years) respectively. The net book amount of technology includes £66.4 million (2013: £70.2 million) in
respect of Meggitt Aircraft Braking Systems and £19.4 million (2013: £22.0 million) in respect of Meggitt Sensing Systems which have an
estimated weighted average remaining life of 9.0 years (2013: 10.0 years) and 6.9 years (2013: 7.9 years) respectively. Meggitt Sensing Systems
comparatives for 2013 have been restated to reflect the impact of the change in divisional structure described in note 6.
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
111
21. Property, plant and equipment
At 1 January 2013
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2013
Opening net book amount
Exchange rate adjustments
Business acquired
Businesses disposed
Additions
Disposals
Depreciation*
Net book amount
At 31 December 2013
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2014
Opening net book amount
Exchange rate adjustments
Businesses acquired (see note 42)
Additions
Disposals
Reclassification
Depreciation*
Net book amount
At 31 December 2014
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£’m
169.2
(55.0)
114.2
114.2
(0.8)
–
(0.1)
21.9
(0.1)
(6.5)
128.6
185.9
(57.3)
128.6
128.6
1.3
0.1
3.6
(1.8)
(2.4)
(6.3)
Plant,
equipment
and vehicles
£’m
380.7
(262.7)
118.0
118.0
(1.1)
0.7
(4.0)
29.6
(0.6)
(25.7)
116.9
Total
£’m
549.9
(317.7)
232.2
232.2
(1.9)
0.7
(4.1)
51.5
(0.7)
(32.2)
245.5
385.0
(268.1)
116.9
570.9
(325.4)
245.5
116.9
2.7
0.5
31.6
(1.2)
2.4
(24.9)
245.5
4.0
0.6
35.2
(3.0)
–
(31.2)
123.1
128.0
251.1
179.6
(56.5)
123.1
413.8
(285.8)
128.0
593.4
(342.3)
251.1
* Depreciation of £0.1 million (2013: £0.8 million) 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 (2013: £4.4 million) and £0.1 million (2013: £0.2 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
2014
£’m
9.3
–
9.3
121.1
141.0
55.8
327.2
2013
£’m
10.8
(3.0)
7.8
115.1
127.9
48.4
299.2
The cost of inventories recognised as an expense and included in cost of sales was £897.6 million (2013: £923.7 million). The cost of inventories
recognised as an expense includes £6.4 million (2013: £2.3 million) in respect of write-downs of inventory to net realisable value, and has been
reduced by £3.0 million (2013: £7.4 million) in respect of the reversal of write-downs made in previous years.
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112
MEGGITT PLC REPORT AND ACCOUNTS 2014
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
2014
£’m
232.3
55.1
14.5
123.4
425.3
93.4
93.4
2013
£’m
244.6
35.9
12.2
126.1
418.8
89.9
89.9
331.9
328.9
Other receivables includes £95.5 million (2013: £95.9 million) in respect of insurance receivables arising on environmental issues relating to
businesses sold by Whittaker Corporation prior to its acquisition by the Group (see note 31) of which £11.1 million (2013: £10.5 million) is shown
as current.
Trade receivables are stated after a provision for impairment of £3.7 million (2013: £4.1 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
2014
£’m
4.1
0.1
–
(0.5)
3.7
2013
£’m
6.6
0.1
(0.5)
(2.1)
4.1
At 31 December 2014, trade receivables and amounts recoverable on contracts of £67.5 million (2013: £61.8 million) were past due but not
impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade
and other receivables is as follows:
Up to 3 months overdue
Over 3 months overdue
Total
2014
£’m
41.5
26.0
67.5
2013
£’m
53.2
8.6
61.8
The maximum exposure to credit risk at the balance sheet date is the fair value of each class of receivable reported above. The Group does not
hold any collateral as security.
Trade and other receivables are denominated in the following currencies:
Sterling
US dollar
Euro
Other
Total
2014
£’m
87.9
295.9
28.6
12.9
425.3
2013
£’m
79.2
289.3
41.7
8.6
418.8
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
113
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
Share buyback - close period commitment
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
2014
£’m
95.4
10.1
105.5
2014
£’m
0.3
25.5
77.4
2.3
2013
£’m
101.0
15.1
116.1
2013
£’m
0.7
29.0
81.7
4.7
105.5
116.1
2014
£’m
31.5
127.3
8.4
52.6
20.0
118.7
358.5
2014
£’m
3.0
2.9
5.9
2013
£’m
42.2
128.2
12.5
47.8
–
98.4
329.1
2013
£’m
2.9
2.3
5.2
2013
£’m
2.4
1.3
3.8
7.5
Minimum
lease payments
Present value
of minimum
lease payments
2014
£’m
0.1
0.2
5.1
5.4
2014
£’m
1.1
4.0
12.4
2013
£’m
3.4
3.8
12.7
17.5
(12.1)
19.9
(12.4)
5.4
5.3
0.1
7.5
5.1
2.4
Obligations under finance leases are principally US dollar denominated. The weighted average period to maturity is 15.4 years (2013: 11.0 years)
and the weighted average interest rate is 18.0% (2013: 13.9%).
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MEGGITT PLC REPORT AND ACCOUNTS 2014
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
Analysis of bank and other borrowings:
Drawn under committed facilities
Less unamortised debt issue costs
Fair value adjustment to fixed rate borrowings
Drawn under uncommitted facilities
Interest accruals
Total
2014
£’m
10.8
48.1
58.9
212.6
404.1
616.7
2013
£’m
3.9
3.3
7.2
245.8
420.2
666.0
675.6
673.2
58.9
344.4
272.3
675.6
644.9
(3.6)
19.5
11.6
3.2
675.6
7.2
413.7
252.3
673.2
653.2
(3.9)
15.3
5.6
3.0
673.2
Debt issue costs are amortised over the period of the facility to which they relate. The Group has no secured borrowings (2013: £Nil).
The Group has the following committed facilities:
Senior notes (USD 70.0 million)
Senior notes (USD 600.0 million)
Syndicated credit facility (USD 700.0 million)
Syndicated credit facility (USD 400.0 million)
Syndicated credit facility (USD 900.0 million)
2014
Drawn
£’m
Undrawn
£’m
44.9
384.8
–
–
215.2
–
–
–
–
362.0
Total
£’m
44.9
384.8
–
–
577.2
Total
644.9
362.0
1,006.9
Drawn
£’m
42.3
362.3
186.4
62.2
–
653.2
2013
Undrawn
£’m
–
–
236.1
179.3
–
415.4
Total
£’m
42.3
362.3
422.5
241.5
–
1,068.6
The Group issued USD 70.0 million of loan notes to private placement investors in 2003. The notes 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 also due for repayment in 2020 and USD 125.0 million
carry an interest rate of 5.12% and are due for repayment in 2022.
During 2014, the Group secured a new five year USD 900.0 million syndicated revolving credit facility which matures in 2019 to replace the existing
USD 700.0 million and USD 400.0 million syndicated revolving credit facilities which were due to mature in 2016 and 2017 respectively. The new
facility includes one-year extension options at the end of the first and second years. At 31 December 2014, the amounts drawn under revolving
credit facilities were £215.2 million (2013: £248.6 million) represented by borrowings denominated in US dollars of £142.5 million (2013:
£97.0 million), in Euros of £50.4 million (2013: £62.3 million), in Swiss francs of £10.3 million (2013: £78.3 million) and in Sterling of £12.0 million
(2013: £11.0 million). Borrowings under the facilities are subject to interest at floating rates.
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
115
28. Bank and other borrowings continued
The committed facilities available at each balance sheet date expire as follows:
2014
Drawn
£’m
Undrawn
£’m
In one year or less
In more than one year but not more than five years
In more than five years
Total
44.9
343.5
256.5
644.9
The Group also has various uncommitted facilities with its relationship banks.
The fair value of bank and other borrowings is as follows:
Current
Non-current
Total
Total
£’m
44.9
705.5
256.5
–
362.0
–
362.0
1,006.9
Drawn
£’m
–
411.7
241.5
653.2
2013
Undrawn
£’m
–
415.4
–
415.4
Total
£’m
–
827.1
241.5
1,068.6
2014
2013
Book
value
£’m
58.9
616.7
675.6
Fair
value
£’m
61.6
625.7
687.3
Book
value
£’m
7.2
666.0
673.2
Fair
value
£’m
7.2
676.3
683.5
After taking account of financial derivatives that alter the interest 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 2014:
US dollar
Swiss franc
Euro
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
As at 31 December 2013:
US dollar
Swiss franc
Euro
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
Fixed rate borrowings
Weighted
average
interest rate
%
3.7
Weighted
average
period
for which
rate is fixed
Years
3.3
Fixed rate borrowings
Weighted
average
interest rate
%
4.2
0.7
Weighted
average
period
for which
rate is fixed
Years
4.3
3.1
Floating
Fixed
£’m
317.6
14.8
50.4
18.1
400.9
(2.8)
£’m
277.4
–
–
–
277.4
(0.8)
398.1
276.6
Non-interest
bearing
£’m
–
–
0.9
–
0.9
–
0.9
Floating
Fixed
£’m
262.7
79.6
62.3
11.0
415.6
(3.2)
412.4
£’m
259.6
–
0.3
–
259.9
(0.7)
259.2
Non-interest
bearing
£’m
–
–
1.6
–
1.6
–
1.6
Total
£’m
595.0
14.8
51.3
18.1
679.2
(3.6)
675.6
Total
£’m
522.3
79.6
64.2
11.0
677.1
(3.9)
673.2
The weighted average interest rate reflects the relative impact of interest rates based on both principal amounts and duration of borrowings.
The weighted average period to maturity for non-interest bearing borrowings is 4.4 years (2013: 3.5 years).
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
29. Financial instruments
As at 31 December 2014:
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 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
Held at fair value
Held at amortised cost
Through
profit
& loss
£’m
Derivatives
used for
hedging
£’m
Loans &
receivables
Liabilities
£’m
£’m
–
28.3
–
1.1
–
29.4
–
(9.6)
–
–
–
(2.9)
–
(276.9)
(289.4)
–
1.3
–
–
–
1.3
–
–
–
–
–
–
–
–
–
93.4
–
317.4
–
105.5
516.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(350.1)
–
(0.1)
(58.9)
(5.9)
–
(5.3)
(339.8)
Total
book
value
£’m
93.4
29.6
317.4
1.1
105.5
547.0
(350.1)
(9.6)
(0.1)
(58.9)
(5.9)
(2.9)
(5.3)
(616.7)
Total
fair
value
£’m
93.4
29.6
317.4
1.1
105.5
547.0
(350.1)
(9.6)
(0.1)
(61.6)
(5.9)
(2.9)
(5.3)
(625.7)
(760.1)
(1,049.5)
(1,061.2)
(260.0)
1.3
516.3
(760.1)
(502.5)
(514.2)
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
–
–
–
–
–
–
–
–
–
2.1
522.7
–
–
–
–
–
–
(316.6)
–
(2.4)
(7.2)
(5.2)
–
(5.1)
(409.2)
(745.7)
(745.7)
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)
(1,003.3)
(1,013.6)
(433.9)
(444.2)
* Excludes prepayments and accrued income of £14.5 million (2013: £12.2 million) (see note 23).
** Excludes social security and other taxes of £8.4 million (2013: £12.5 million) (see note 25).
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
117
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 floating rate bank and other borrowings, fair values approximate to book values due to the short maturity periods of these financial
instruments. For trade and other receivables, allowances are made within book value for credit risk.
Derivative financial instruments measured at fair value, are classified as level 2 in the fair value measurement hierarchy, as they have been
determined using significant inputs based on observable market data. The fair 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.
The same methods of valuation have been used to derive the fair value of the current element of fixed rate bank and other borrowings and the
non-current element of bank and other borrowings which are held at amortised cost, but for which fair values are 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 unrealised 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
Credited/(charged) to net operating costs
Fair value at 31 December
2014
£’m
7.0
0.7
7.7
2013
£’m
10.0
(3.0)
7.0
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
Loss/(gain) recognised in net operating costs
At 31 December
2014
£’m
276.9
(19.5)
257.4
2013
£’m
256.8
(15.3)
241.5
2014
£’m
256.8
16.1
4.0
276.9
2013
£’m
274.9
(4.4)
(13.7)
256.8
The largest movement in credit spread seen in a six month period since inception of the borrowings is 70 basis points. A 70 basis point movement
in the credit spread used as an input in determining the fair value at 31 December 2014, would impact profit before tax by approximately
£9.0 million.
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118
MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
30. Derivative financial instruments
As at 31 December 2014:
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 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
Interest rate swaps
Contract or underlying
principal amount
Fair value
Assets
£’m
Liabilities
£’m
Assets
£’m
Liabilities
£’m
102.6
256.5
134.3
493.4
102.6
256.5
72.0
431.1
–
–
(284.3)
(284.3)
–
–
(131.2)
(131.2)
62.3
(153.1)
1.3
27.0
2.4
30.7
1.3
27.0
1.3
29.6
1.1
–
–
(12.5)
(12.5)
–
–
(2.9)
(2.9)
(9.6)
Contract or underlying
principal amount
Fair value
Assets
£’m
96.6
241.5
344.5
682.6
96.6
241.5
170.6
508.7
173.9
Liabilities
£’m
Assets
£’m
Liabilities
£’m
–
–
(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)
The total notional principal amount of outstanding interest rate swap contracts at 31 December 2014 is £359.1 million (2013: £338.1 million), of
which £64.1 million will expire in 2017, £102.6 million will expire in 2018, £112.2 million will expire in 2020 and £80.2 million will expire in 2022. The
contracts are all denominated in USD. Of the notional principal amount outstanding, £102.6 million (2013: £96.6 million) has the economic effect of
converting floating rate US dollar borrowings into fixed rate US dollar borrowings and £256.5 million (2013: £241.5 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.
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
2014
Assets
£’m
2014
Liabilities
£’m
2013
Assets
£’m
2013
Liabilities
£’m
2.3
0.1
2.4
(3.8)
(8.7)
(12.5)
17.4
4.4
21.8
–
(0.8)
(0.8)
93987_p90-132.indd 118
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
119
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 2014
Exchange rate adjustments
Business acquired (see note 42)
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
Charge to income statement – net finance costs (see note 13)
Utilised
At 31 December 2014
Current
Non-current
At 31 December 2014
Environmental
(a)
£’m
120.4
7.6
–
–
25.2
–
(8.6)
1.1
(12.7)
133.0
Onerous
contracts
(b)
£’m
Warranty
costs
(c)
£’m
40.2
0.8
–
2.5
–
(7.5)
(4.0)
–
(9.7)
22.3
12.6
0.3
0.1
8.1
–
(0.2)
–
–
(7.9)
13.0
2014
£’m
4.0
26.7
–
30.7
Other
(d)
£’m
20.3
0.4
–
–
3.6
(2.4)
(9.9)
–
(4.7)
7.3
2014
£’m
45.1
130.5
175.6
2013
£’m
7.2
33.8
5.7
46.7
Total
£’m
193.5
9.1
0.1
10.6
28.8
(10.1)
(22.5)
1.1
(35.0)
175.6
2013
£’m
44.3
149.2
193.5
a. Provision has been made for known exposures arising from environmental remediation 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. The provisions are expected
to be substantially utilised over the next fifteen years and are discounted, where appropriate, using an appropriate discount rate. 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). The net charge to net operating costs of £16.6 million was partly offset by a credit to net operating costs of £9.7 million, recognised in
respect of an increase in the year in amounts recoverable under these insurance policies and from other parties.
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 was 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. 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.
d. 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 2013, 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 is
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.
93987_p90-132.indd 119
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MEGGITT PLC REPORT AND ACCOUNTS 2014
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 2013
Exchange rate adjustments
Business acquired
Businesses disposed
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
Exchange rate adjustments
Reclassifications
(Charge)/credit to income statement (see note 14)
Credit to other comprehensive income (see note 14)
Charge to equity (see note 14)
At 31 December 2014
Deferred tax liabilities
At 1 January 2013
Exchange rate adjustments
Businesses disposed
Reclassifications
(Charge)/credit to income statement (see note 14)
At 31 December 2013
Exchange rate adjustments
Reclassifications
Charge to income statement (see note 14)
Charge to other comprehensive income (see note 14)
At 31 December 2014
* Acquired in business combinations.
Retirement
benefit
obligations
£’m
94.3
(0.1)
–
–
–
(4.5)
(21.6)
–
68.1
2.7
–
(7.3)
24.2
–
Other
Total
£’m
21.0
0.1
(0.1)
4.6
0.6
(13.4)
(0.1)
3.3
16.0
0.3
(3.7)
2.1
0.2
(1.8)
£’m
115.3
–
(0.1)
4.6
0.6
(17.9)
(21.7)
3.3
84.1
3.0
(3.7)
(5.2)
24.4
(1.8)
87.7
13.1
100.8
Accelerated
tax
depreciation
£’m
Intangible
assets
(*)
£’m
(16.5)
0.3
–
(0.3)
(2.8)
(19.3)
(0.9)
(0.1)
(1.8)
–
(288.1)
4.0
(6.0)
–
15.1
(275.0)
(14.1)
0.9
(4.3)
(0.1)
Total
£’m
(304.6)
4.3
(6.0)
(0.3)
12.3
(294.3)
(15.0)
0.8
(6.1)
(0.1)
(22.1)
(292.6)
(314.7)
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets against current tax liabilities
and when the deferred income taxes relate to the same tax authority. The balances after allowing for such offsets are as follows:
Deferred tax assets
Deferred tax liabilities
Net balance at 31 December
Deferred tax assets are analysed as follows:
To be recovered within one year
To be recovered after more than one year
Total
Deferred tax liabilities are analysed as follows:
Due within one year
Due after more than one year
Total
2014
£’m
0.9
(214.8)
(213.9)
2014
£’m
0.2
0.7
0.9
2014
£’m
–
(214.8)
2013
£’m
9.1
(219.3)
(210.2)
2013
£’m
0.2
8.9
9.1
2013
£’m
(0.3)
(219.0)
(214.8)
(219.3)
The Group has unrecognised tax losses of £23.5 million (2013: £25.2 million) for which no deferred tax asset has been recognised. Deferred tax
assets have not been recognised in respect of these losses, 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 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.
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SUPPLEMENTARY INFORMATION
121
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 also 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.
The UK scheme is a registered scheme and subject to the statutory scheme-specific funding requirements outlined in UK legislation, including the
payment of levies to the Pension Protection Fund. It is established under trust and the responsibility for its governance lies with the trustees who
also agree funding arrangements with the Group.
The funded US schemes are tax-qualified pension schemes regulated by the Pension Protection Act 2006 and are insured by the Pension Benefit
Guarantee Corporation up to certain limits. They are established under, and governed by, the US Employee Retirement Income Security Act 1974.
Meggitt is a named fiduciary with the authority to manage the operation of the US schemes.
For all unfunded schemes, benefit payments are made by the Group as 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
Past service credit*
Net interest expense on retirement benefit obligations
Total (credit)/charge in respect of healthcare schemes
Total charge
2014
£’m
21.7
11.9
1.1
7.8
20.8
0.8
(8.9)
2.2
(5.9)
36.6
2013
£’m
19.2
12.7
0.7
9.5
22.9
1.5
–
2.0
3.5
45.6
* During the year, the Group made changes to the way in which medical benefits are provided. These changes, following which the Group
continues to provide comparable benefits, resulted in a past service credit being recognised of £8.4 million (2013: Nil) which is included within
the amounts shown in the table.
Of the total charge, £26.6 million (2013: £34.1 million) has been charged to operating profit (see note 9), of which £19.5 million (2013: £18.9 million)
has been included in cost of sales and £7.1 million (2013: £15.2 million) in net operating costs. The remaining £10.0 million (2013: £11.5 million) is
included in finance costs (see note 13).
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
33. Retirement benefit obligations continued
Amounts recognised in the balance sheet
Present value of scheme liabilities
Fair value of scheme assets
Retirement benefit obligations
Present value of scheme liabilities
Fair value of scheme assets
Retirement benefit obligations
2014
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
350.7
(259.7)
91.0
46.8
–
46.8
2013
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
304.8
(238.5)
66.3
48.3
–
48.3
UK
pension
scheme
£’m
681.4
(501.4)
180.0
UK
pension
scheme
£’m
573.4
(449.9)
123.5
Of the total deficit of £317.8 million (2013: £238.1 million), £63.8 million (2013: £61.0 million) is in respect of unfunded schemes.
Changes in the present value of retirement benefit obligations
At 1 January
Exchange rate adjustments
Service cost
Past service (credit)/cost
Interest expense/(income) (see note 13)
Contributions – Group
Contributions – members
Benefits paid
Remeasurement of retirement benefit obligations:
Loss/(gain) from change in demographic assumptions
Loss/(gain) from change in financial assumptions
Return on schemes’ assets excluding amounts included
in interest income
Total remeasurement loss/(gain)
Administrative expenses borne directly by schemes
2014
2013
Liabilities
(*)
£’m
Assets
(**)
£’m
Total
£’m
Liabilities
(*)
£’m
Assets
(**)
£’m
926.5
15.6
12.7
(7.8)
38.9
–
3.2
(38.8)
10.8
117.8
(688.4)
(7.9)
–
–
(28.9)
(42.0)
(3.2)
38.8
–
–
238.1
7.7
12.7
(7.8)
10.0
(42.0)
–
–
10.8
117.8
–
(30.9)
(30.9)
128.6
–
(30.9)
1.4
97.7
1.4
934.4
(4.0)
14.2
0.7
36.4
–
3.6
(37.5)
(6.9)
(14.4)
–
(21.3)
–
(634.7)
3.1
–
–
(24.9)
(41.6)
(3.6)
37.5
–
–
(25.5)
(25.5)
1.3
Total
£’m
1,078.9
(761.1)
317.8
Total
£’m
926.5
(688.4)
238.1
Total
£’m
299.7
(0.9)
14.2
0.7
11.5
(41.6)
–
–
(6.9)
(14.4)
(25.5)
(46.8)
1.3
At 31 December
1,078.9
(761.1)
317.8
926.5
(688.4)
238.1
* Present value of schemes’ liabilities.
** Fair value of schemes’ assets.
93987_p90-132.indd 122
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GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
123
33. Retirement benefit obligations continued
Analysis of pension scheme assets
Quoted
Unquoted
2014
Equities
Government bonds
Corporate bonds
Cash
Other assets
UK pension scheme
Equities
Government bonds
Corporate bonds
Property
Cash
Other assets
Overseas pension schemes
Equities
Government bonds
Corporate bonds
Property
Cash
Other assets
£’m
146.0
196.6
80.1
35.7
8.2
466.6
58.0
67.5
85.2
8.9
2.2
24.4
246.2
204.0
264.1
165.3
8.9
37.9
32.6
£’m
–
1.9
18.9
–
14.0
34.8
–
–
–
13.5
–
–
13.5
–
1.9
18.9
13.5
–
14.0
Total
£’m
146.0
198.5
99.0
35.7
22.2
501.4
58.0
67.5
85.2
22.4
2.2
24.4
%
29.1
39.6
19.8
7.1
4.4
100.0
22.3
26.0
32.8
8.7
0.8
9.4
259.7
100.0
204.0
266.0
184.2
22.4
37.9
46.6
26.8
34.9
24.2
3.0
5.0
6.1
Total pension schemes’ assets
712.8
48.3
761.1
100.0
Quoted
Unquoted
2013
£’m
199.4
132.7
42.7
22.3
14.6
411.7
112.6
22.8
65.9
9.9
10.6
5.2
227.0
312.0
155.5
108.6
9.9
32.9
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
21.4
10.6
5.2
238.5
312.4
157.4
135.0
21.4
32.9
29.3
688.4
%
44.4
29.9
15.4
5.0
5.3
100.0
47.2
9.6
27.6
9.0
4.4
2.2
100.0
45.4
22.8
19.6
3.1
4.8
4.3
100.0
Other assets include hedge funds, commodities and derivatives. The schemes have no investments in any assets of the Group.
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.
2014
UK
pension
scheme
Overseas
pension
schemes
Overseas
healthcare
schemes
3.60%
3.10%
2.10%
3.00%
4.10%
3.85%
N/A
N/A
N/A
4.74%
3.85%
N/A
N/A
N/A
N/A
UK
pension
scheme
4.60%
3.40%
2.60%
3.30%
4.40%
2013
Overseas
pension
schemes
Overseas
healthcare
schemes
4.55%
N/A
N/A
N/A
4.76%
4.55%
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 scheme, 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 were previously based on the RP2000 IRS RPA tables. During 2014, new mortality tables have been adopted and
the assumptions are now based on the RPH-2014 headcount weighted table, for schemes where benefits are not salary-linked, and the RP-2014
table for other schemes, with both tables projecting rates of mortality to fall using the Social Security Administration’s projection scale
(‘Scale SSA’).
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
33. Retirement benefit obligations continued
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
2014
2013
UK
scheme
Years
Overseas
schemes
Years
UK
scheme
Years
Overseas
schemes
Years
23.6-25.3
26.4-28.0
21.9-23.6
24.5-26.1
21.6-22.2
23.4-23.7
20.3-20.9
22.3-22.5
23.5-25.2
26.3-27.9
21.8-23.6
24.3-26.0
19.3
21.1
19.3
21.1
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 2014 to increase by approximately
£18.3 million;
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2014 to increase by
approximately £13.5 million;
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2014 to
increase by approximately £27.5 million.
The above sensitivity analyses are based on a change in a single assumption while keeping all other assumptions constant. In practice, this is
unlikely to occur, and changes in some 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
are consistent with the previous year.
Risks
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. Except as discussed below, the Group has not changed the processes used to manage defined benefit scheme risks
during the year.
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, hedge funds, commodities and derivatives 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. During the year, part of the equity portfolio held by the UK and US
schemes was disinvested. The amounts disinvested totalled approximately £100 million. The proceeds were used to purchase structured
investments consisting of high quality government bonds together with equity derivatives. The structured investments enable the schemes to
benefit from equity-like returns, subject to certain caps, on the amounts invested, whilst providing an element of protection against falls in equity
markets. 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 index linked securities with maturities that match the benefit payments as
they fall due.
Interest 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 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.
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SUPPLEMENTARY INFORMATION
125
33. Retirement benefit obligations continued
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.
Other information
In the UK, the last triennial valuation was in 2012 following which the Group agreed with the trustees to increase deficit reduction payments, with
the aim being to eliminate the deficit by 2024. Under the agreement with the trustees, deficit payments in 2015 will be £21.4 million and will
increase by approximately 5% per annum until 2024. Although the present value of future deficit payments agreed as part of the 2012 actuarial
valuation exceed the scheme deficit at 31 December 2014, such amounts would be recoverable by the Group under the scheme rules once the last
member has died and accordingly no additional minimum funding liability arises.
In the US, deficit reduction payments are driven by regulations and provide for deficits to be eliminated over periods up to 15 years. Deficit
payments in 2015 are expected to be £4.4 million and, absent any changes in legislation, will reduce over the following two years before increasing
to £6.7 million by 2019. Thereafter, annual payments are expected to remain relatively stable for the remainder of the recovery period. The present
value of deficit payments due under legislation do not exceed the schemes’ deficits at 31 December 2014 and accordingly no additional minimum
funding liability arises.
There is no significant deficit in the Swiss scheme.
The estimated total Group contributions expected to be paid to the schemes during 2015 are £43.1 million.
The weighted average duration of the UK schemes’ defined benefit obligation is 19.6 years. The weighted average duration of the overseas
schemes’ defined benefit obligation is 11.5 years. The expected maturity of undiscounted pension and healthcare benefits at 31 December 2014 is
as follows:
Less than a year
Between 1-2 years
Between 2-5 years
Between 5-10 years
Between 10-15 years
Between 15-20 years
Between 20-25 years
Over 25 years
Total
34. Share capital and share schemes
Issued 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
Issued on exercise of executive share awards
Share buyback – purchased in year
Scrip dividends
At 31 December 2014
Pension
schemes
£’m
Healthcare
schemes
£’m
35.8
36.6
112.1
199.7
246.3
257.6
252.8
696.5
3.4
3.2
9.7
15.4
12.5
9.8
7.6
14.5
Total
£’m
39.2
39.8
121.8
215.1
258.8
267.4
260.4
711.0
1,837.4
76.1
1,913.5
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
785.0
7.2
1.1
3.8
797.1
0.4
(6.8)
11.6
802.3
39.3
0.3
0.1
0.2
39.9
–
(0.3)
0.5
40.1
0.5
2.0
20.0
0.1
(33.7)
53.0
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
34. Share capital and share schemes continued
Share Options
Year of grant
Meggitt 2008 Sharesave Scheme
2008
2010
2010
2012
2012
2013
2013
2014
2014
Meggitt Executive Share Option Scheme 2005 Part A
2005
2006
2007
2008
2009
2010
2011
2012
2013
2013
Number of
ordinary shares
under award
Exercise
price
per share
Exercise period
From
To
65,963
430,711
50,781
682,810
369,802
398,515
136,635
578,493
382,956
51,759
9,384
7,459
990
30,531
8,686
48,031
211,862
217,649
5,504
171.40p
222.35p
222.35p
326.94p
326.94p
426.40p
426.40p
374.19p
374.19p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
526.50p
545.00p
01.11.15
01.11.15
01.11.17
01.11.15
01.11.17
01.11.16
01.11.18
01.11.17
01.11.19
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
09.09.16
30.04.16
30.04.16
30.04.18
30.04.16
30.04.18
30.04.17
30.04.19
30.04.18
30.04.20
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
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 3.4 years (2013: 4.2 years).
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
146,630
202,199
175,934
32,533
459,613
156,656
811,243
719,939
511,432
70,519
1,038,807
–
–
316,625
411,002
415,045
73,332
895,082
258,109
1,204,679
1,604,329
1,586,569
210,948
4,426,443
3,688,877
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 an indicative share price of 519.00p, the share price at 31 December 2014.
All the above share appreciation rights, which were granted for nil consideration, may in certain circumstances, be exercised earlier than the
dates given. The weighted average remaining contractual life of outstanding awards is 6.3 years (2013: 7.1 years).
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 £1.7 million (2013: £11.9 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 Long Term Incentive Plan 2014
Equity-settled
Under the Meggitt Long Term Incentive Plan 2014, an annual award of shares may be made to certain senior executives. For awards made in 2014
the number of shares, if any that an executive ultimately receives, depends on three performance conditions:
• An earnings per share (EPS) measure (33% of the award);
• A return on trading assets (ROTA) measure (33% of the award); and
• A strategic goals measure (33% of the award).
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SUPPLEMENTARY INFORMATION
127
35. Share-based payment continued
Each of the conditions is measured over a three year performance period. An expense of £1.7 million (2013: £Nil) was recorded in the year. Awards
are made as nil cost options. An employee is generally entitled to a payment at the end of the vesting period, equivalent to dividends that would
have been paid during the vesting period, on any shares that vest. The fair value of the award made in 2014 has been estimated at the market price
of the share on the date of grant, which was 467.54 pence. Movements in the number of outstanding shares that may potentially be released to
employees are as follows:
At 1 January
Awarded
At 31 December
At 31 December 2014, none of the shares under award are eligible for release.
Meggitt Executive Share Option Scheme 2005
2014
Number of
shares
under award
outstanding
‘m
–
4.2
4.2
Equity-settled
Awards are no longer made under this scheme. Share awards under the scheme were granted to certain senior executives at an exercise price
equal to the market price of the shares on the day before the grant was made. The awards are generally exercisable at the earliest three years
after the grant date. 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 scheme provide for the executive on exercise to be entitled, on
payment of the exercise price, to the number of shares under award. Awards under Part B of the scheme 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
exercise price and the market price on the date of exercise. Awards may be exercised at any point between the vesting date and ten years after the
date the award was made.
A credit of £0.9 million (2013: £2.5 million expense) was recorded in the year. Movements in the number of outstanding awards and their related
weighted average exercise prices are as follows:
At 1 January
Granted
Lapsed
Modified from cash-settled
Exercised
At 31 December
2014
Average
exercise
price
Pence
360.49
–
371.43
–
292.76
2014
Number of
awards
outstanding
‘m
21.1
–
(2.0)
–
(3.4)
373.89
15.7
2013
Average
exercise
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
At 31 December 2014, of the total number of awards outstanding, 7.1 million are exercisable at an average exercise price of 274.59 pence (2013:
7.2 million at an average exercise price of 245.50 pence). The fair values of the awards made in 2013 were determined using the Black-Scholes
option pricing model. The significant assumptions used in the model and the fair values determined were:
Share price at date of grant/modification (pence)
Exercise 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
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
Expected volatility figures were based on volatility over the last five years measured using a statistical analysis of daily share prices.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
35. Share-based payment continued
Cash-settled
Awards are no longer made under this scheme. Under the scheme the Group was able to grant cash-settled SARs to certain overseas employees.
The Group is required to pay the intrinsic value of the SARs to the employee at the date of exercise. Awards can only be exercised if the Group
meets an earnings per share performance condition. Awards may be exercised at any point between the vesting date and ten years after the date
the award was made.
An expense of £Nil (2013: £3.1 million) was recorded in the year. The Group has recorded a liability at the balance sheet date of £0.1 million (2013:
£0.7 million). The total intrinsic value at the balance sheet date was £0.1 million (2013: £0.9 million). Movements in the number of outstanding
awards and their related weighted average exercise prices are as follows:
At 1 January
Granted
Lapsed
Modified to equity-settled
Exercised
At 31 December
2014
Average
exercise
price
Pence
354.05
–
326.04
–
264.18
436.22
2014
Number of
awards
outstanding
‘m
0.6
–
(0.1)
–
(0.2)
0.3
2013
Average
exercise
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
At 31 December 2014, of the total number of awards outstanding, Nil million are exercisable (2013: 0.2 million at an average exercise price of
205.24 pence). As a cash-settled award, the fair value of outstanding awards is remeasured at each balance sheet date.
Meggitt Equity Participation Plan 2005
Awards are no longer made under this scheme. Under the Meggitt Equity Participation Plan 2005, an annual award of shares could be made
to certain senior executives. For awards made under the plan, the number of shares 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. An expense of £0.3 million (2013: £5.4 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
2014
Number of
shares
under award
outstanding
‘m
2013
Number of
shares
under award
outstanding
‘m
7.7
–
(1.5)
(1.1)
5.1
7.8
2.1
(0.6)
(1.6)
7.7
At 31 December 2014, of the total number of shares under award outstanding, 1.1 million are eligible for release (2013: 1.5 million).
The fair value of the award made in 2013, subject to the EPS and cash flow performance conditions, was 478.00 pence. The fair value of the award
made in 2013, subject to the TSR performance condition, was determined using a Monte Carlo model. The significant assumptions used in the
model and the fair value determined were:
Share price at date of grant (pence)
Vesting period (years)
Expected volatility
Expected life of award (years)
Risk free rate
Fair value at date of award (pence)
2013
Award in
March
478.00
3.0
26%
3.0
0.26%
248.00
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SUPPLEMENTARY INFORMATION
129
36. Own shares
Own shares represent shares in the Company that are held by an independently managed Employee Share Ownership Plan Trust (‘the trust’)
formed to acquire shares to be used to satisfy share options and awards under the employee share schemes as described in the Directors’
remuneration report on pages 55 to 75. At 31 December 2014, the trust held 337,664 ordinary shares (2013: Nil) of which 281,638 were
unallocated, being retained by the trust for future use. The balance of 56,026 shares were held in vested share accounts to satisfy particular
awards which have fully vested in employees. All shares, whether or not allocated, are held for the benefit of employees. The shares were
purchased during the year and have a cost of £1.7 million at 31 December 2014. The market value of the shares at 31 December 2014 was
£1.8 million representing 0.04% of the issued share capital of the Company.
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
2014
£’m
0.9
11.0
11.9
2013
£’m
1.4
7.5
8.9
The Group leases various factories, warehouses and offices under non-cancellable operating leases. These leases have various lease periods,
escalation clauses and renewal rights. None of these terms represent unusual arrangements or create material onerous or beneficial rights or
obligations. 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 8.
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
2014
£’m
12.7
37.2
24.1
74.0
2013
£’m
13.0
38.2
25.7
76.9
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. Based on latest OE
delivery forecasts from external agencies, the future estimated expenditure under contractual commitments to incur development costs and
programme participation costs at 31 December, 2014, which are expected to be recognised as intangible assets when incurred 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
Development
costs
£’m
Programme
participation
costs
£’m
62.0
19.2
2.7
83.9
40.1
220.5
732.4
993.0
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
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)
Impairment loss (see note 19)
Loss/(gain) on disposal of property, plant and equipment
Loss/(gain) on disposal or closure 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
Businesses disposed
Business disposal expenses (see note 11)
Dividends paid to Company’s shareholders (see note 16)
Purchase of own shares
Issue of equity share capital
Share buyback - purchased in year
Net cash generated – inflow
Debt acquired with businesses
Exchange rate adjustments
Other non-cash movements
At 31 December
Analysed as:
Bank and other borrowings – current (see note 28)
Bank and other borrowings – non-current (see note 28)
Obligations under finance leases – current (see note 27)
Obligations under finance leases – non-current (see note 27)
Cash and cash equivalents (see note 24)
Total
2014
£’m
2013
£’m
177.0
232.3
(1.2)
28.5
31.9
31.2
112.6
8.0
0.4
2.9
29.2
(29.3)
1.7
(17.7)
9.8
(10.1)
(28.0)
(0.3)
31.2
37.1
32.2
123.2
3.2
(1.1)
(9.0)
(6.1)
(27.4)
11.9
(16.4)
(24.6)
(13.1)
(27.4)
346.9
345.7
2014
£’m
2013
£’m
564.6
642.5
(146.8)
28.6
–
–
0.5
51.4
11.6
(0.1)
33.7
(21.1)
–
24.7
7.3
(110.4)
26.5
0.4
(53.3)
0.5
75.6
–
(2.5)
–
(63.2)
0.3
(2.7)
(12.3)
575.5
564.6
2014
£’m
58.9
616.7
0.1
5.3
(105.5)
575.5
2013
£’m
7.2
666.0
2.4
5.1
(116.1)
564.6
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SUPPLEMENTARY INFORMATION
131
41. Major non-cash transactions
During the year, the Company issued 11.6 million shares worth £53.0 million in respect of scrip dividends (2013: 3.8 million shares worth
£20.0 million) (see notes 16 and 34).
42. Business combinations
On 31 December 2014, the Group acquired 100% of the voting rights of Precision Engine Controls Corporation (‘PECC’). PECC is a leading supplier
of actuation systems and fuel metering valves to manufacturers of small-frame gas turbines used predominantly in the oil and gas and power
generation industries. PECC’s products are complementary to Meggitt’s existing valve technology in the aero-derivative gas turbine market and
expand our range of actuation capabilities.
The assets and liabilities of PECC at the date of acquisition, including the goodwill arising on consolidation, were as follows:
Goodwill (see note 18)
Other intangible assets
Property, plant and equipment
Inventories
Trade and other receivables - current
Trade and other payables - current
Provisions - non-current (see note 31)
Net assets
Consideration satisfied in cash
Less amounts recoverable under working capital mechanism
Total consideration payable
Net assets
£’m
19.9
3.9
0.4
3.0
1.4
(0.6)
(0.1)
27.9
28.3
(0.4)
27.9
Due to the proximity of the acquisition to the balance sheet date, the difference between the book value of acquired net assets and consideration
payable has been provisionally recognised as goodwill. During 2015, the Group will determine the fair value of the identifiable assets acquired and
liabilities and contingent liabilities assumed, with any corresponding adjustment necessary being made to the value of goodwill recognised. Costs
related to the acquisition were £0.5 million. 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 2014.
Total consideration paid in respect of acquisitions during the year is as follows:
Cash paid in respect of PECC
Cash paid in respect of Piezotech
Cash paid in respect of other acquisitions*
Total
2014
£’m
28.3
–
0.3
28.6
2013
£’m
–
26.5
–
26.5
* On 10 September 2014, the Group acquired a small business which included the acquisition of other intangible assets of £0.1 million and
property, plant and equipment of £0.2 million.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the consolidated financial statements continued
43. Group companies
The following information is not a complete listing of all subsidiary companies at 31 December 2014 and relates only to those subsidiaries
principally affecting the revenues, profits or assets of the Group.
United Kingdom
Meggitt Aerospace Limited
Meggitt Finance Limited ‡
Continental Europe
Artus SAS – France
North America
Linear Motion LLC
Meggitt Aircraft Braking Systems Corporation
Meggitt Defense Systems, Inc.
Meggitt GP, Inc. ‡
Meggitt Oregon, Inc.
Meggitt Safety Systems, Inc.
Meggitt Training Systems, Inc.
Meggitt USA, Inc. ‡
Meggitt (UK) Limited
Meggitt SA – Switzerland
Meggitt (North Hollywood), Inc.
Meggitt (Orange County), Inc.
Meggitt (Rockmart), Inc.
OECO, LLC
Pacific Scientific Company
Securaplane Technologies, Inc.
Whittaker Corporation ‡
Rest of World
Meggitt Aerospace Asia Pacific Pte Limited – Singapore
Meggitt Brasil (Soluçeos de Engenharia) Limited – Brazil
a. 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.
b. The ordinary shares of all subsidiaries were 100% owned by the Company, either directly or indirectly, at 31 December 2014.
c. All companies listed above are included in the consolidation.
d. 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.
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133
Independent auditors’ report to the
members of Meggitt PLC
Report on the company financial statements
Our opinion
In our opinion, Meggitt PLC’s company financial statements (the
‘financial statements’):
•
give a true and fair view of the state of the company’s affairs as
at 31 December 2014;
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.
•
•
What we have audited
Meggitt PLC’s financial statements comprise:
• the Company balance sheet as at 31 December 2014; and
•
the notes to the financial statements, which include a summary of
significant accounting policies and other explanatory information.
Certain required disclosures have been presented elsewhere in the
Annual Report and Accounts (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.
The financial reporting framework that has been applied in the
preparation of the financial statements is applicable law and United
Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice).
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic report and
the Directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial
statements.
ISAs (UK & Ireland) reporting
Under International Standards on Auditing (UK and Ireland) (‘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
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.
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 financial statements and the part of the Directors’
remuneration report to be audited are not in agreement with
the accounting records and returns.
•
•
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion, certain disclosures of directors’ remuneration
specified by law are not made. 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 pages 78 to 79, the directors are responsible for the
preparation of the 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 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.
What an audit of financial statements involves
We conducted our audit in accordance with 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
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 primarily focus 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.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We obtain
audit evidence through testing the effectiveness of controls,
substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited 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.
Other matter
We have reported separately on the group financial statements of
Meggitt PLC for the year ended 31 December 2014.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Directors’ remuneration report - Companies Act 2006
opinion
In our opinion, the part of the Directors’ remuneration report to be
audited has been properly prepared in accordance with the
Companies Act 2006.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
23 February 2015
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134
MEGGITT PLC REPORT AND ACCOUNTS 2014
Company balance sheet
As at 31 December 2014
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
Capital redemption reserve
Other reserves
Profit and loss reserve
Total shareholders’ funds
Notes
2014
£’m
2013
£’m
3
9
4
5
9
6
9
7
8
9
12
13
13
13
13
13
34.5
30.6
2,070.1
2,135.2
997.0
6.6
3.8
1,007.4
(212.2)
(10.4)
784.8
31.1
35.5
2,069.9
2,136.5
940.0
11.4
17.0
968.4
(79.5)
(9.3)
879.6
2,920.0
3,016.1
(403.3)
(2.8)
(3.1)
(664.5)
(1.7)
(10.2)
2,510.8
2,339.7
40.1
1,218.9
0.3
17.5
1,234.0
39.9
1,166.3
-
17.5
1,116.0
2,510.8
2,339.7
The financial statements on pages 134 to 140 were approved by the Board of Directors on 23 February 2015 and signed on its behalf by:
S G Young
Director
D R Webb
Director
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
135
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 and under the historical cost accounting convention, as modified
by the revaluation of certain 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
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
impairment losses. 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 their estimated useful lives
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.
Deferred taxation is provided in full, without discounting, on timing
differences that result in an obligation at the balance sheet date to pay
more tax, or a right to pay less tax, at a future date, at rates expected
to apply when they crystallise based on current tax rates and law.
Deferred taxation assets are recognised to the extent it is regarded as
more likely than not that they will be recovered.
Deferred taxation is not provided on timing differences arising from
the sale or revaluation of fixed assets unless, at the balance sheet date,
a binding commitment to sell the asset has been entered into and it is
unlikely that any gain will qualify for rollover relief.
Transactions in foreign currencies are recorded at exchange rates
prevailing at the dates of the transactions. Monetary assets and
liabilities, denominated in foreign currencies at the balance sheet date,
are reported at exchange rates 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’).
Awards made to employees of the Company are equity-settled. 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.
The grant by the Company of options over its equity instruments to
employees of subsidiary undertakings, is treated as a capital
contribution. The fair value of the awards made is recognised, over the
vesting period, as an increase in investment in subsidiary
undertakings, with a corresponding credit to the profit and loss
reserve.
Shares in the Company are held by an independently managed
Employee Share Ownership Trust (‘ESOP Trust’), to meet future
obligations in respect of the Company’s employee share schemes.
The cost of own shares held by the ESOP Trust is deducted from
shareholders’ funds.
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the financial statements of the Company continued
2. Summary of significant accounting policies continued
Loans
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.
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. Fixed interest rate
borrowings 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.
Share buyback
On 5 November 2014, the Company announced the intention to
commence a share buyback programme. The total consideration
payable for shares purchased is deducted from the profit and loss
reserve. The shares when purchased are cancelled and the nominal
value of the cancelled shares is transferred from share capital to a
separate capital redemption reserve. Where the Company has entered
into an irrevocable non-discretionary contract to purchase for
cancellation, shares on its behalf during a close period, the obligation
to purchase shares is recognised in full at the inception of the contract,
even when that obligation is conditional on the share price. The
obligation is remeasured at each balance sheet date with changes
recognised in the profit and loss account.
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SUPPLEMENTARY INFORMATION
137
3. Tangible fixed assets
Cost at 1 January 2014
Additions
Disposals
Cost at 31 December 2014
Accumulated depreciation at 1 January 2014
Charge for year
Disposals
Accumulated depreciation at 31 December 2014
Net book amount at 31 December 2014
Net book amount at 31 December 2013
Net book amount of land and buildings:
Short leasehold
Total
4. Investments
Shares in subsidiaries:
At 1 January
Capital contributions (see note 13)
Less contributions from subsidiary companies
At 31 December
Land and
buildings
£’m
0.7
–
(0.1)
0.6
0.4
–
(0.1)
0.3
0.3
0.3
Plant,
equipment
and vehicles
£’m
39.0
7.5
(0.2)
46.3
8.2
4.0
(0.1)
12.1
34.2
30.8
2014
£’m
0.3
0.3
Total
£’m
39.7
7.5
(0.3)
46.9
8.6
4.0
(0.2)
12.4
34.5
31.1
2013
£’m
0.3
0.3
2014
£’m
2013
£’m
2,069.9
1.2
(1.0)
2,060.7
9.2
–
2,070.1
2,069.9
The directors believe the carrying value of investments is supported by their underlying assets. A list of principal subsidiaries is included in note
43 of the 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
Share buyback – close period commitment
Accruals
Total
Bank loans and overdrafts, other loans and amounts owed to subsidiary undertakings are unsecured.
2014
£’m
2013
£’m
993.4
0.3
3.3
997.0
2014
£’m
6.1
48.0
1.4
115.6
13.1
2.7
1.7
20.0
3.6
212.2
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
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the financial statements of the Company continued
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
Movements in the deferred tax provision are analysed as follows:
At 1 January
Charge/(credit) to profit and loss account
(Credit)/charge to profit and loss reserve
At 31 December
The deferred tax provision is analysed as follows:
Accelerated capital allowances
Other short-term timing differences
Total
2014
£’m
–
403.3
403.3
2014
£’m
6.1
–
6.1
2014
£’m
48.0
131.3
272.0
451.3
2014
£’m
1.7
1.3
(0.2)
2.8
2014
£’m
2.9
(0.1)
2.8
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
2013
£’m
1.8
(0.2)
0.1
1.7
2013
£’m
1.7
–
1.7
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139
9. Derivative financial instruments
Interest rate swaps
Foreign currency forward contracts
Total
Less non-current portion:
Interest rate swaps
Foreign currency forward contracts
Non-current portion
Current portion
2014
Assets
£’m
2014
Liabilities
£’m
28.3
8.9
37.2
28.3
2.3
30.6
6.6
–
(13.5)
(13.5)
–
(3.1)
(3.1)
(10.4)
2013
Assets
£’m
24.9
22.0
46.9
24.9
10.6
35.5
11.4
2013
Liabilities
£’m
–
(19.5)
(19.5)
–
(10.2)
(10.2)
(9.3)
The Company is exempt from the FRS 29 disclosures as the consolidated financial statements of the Group give the disclosures required by IFRS
7 (see Group accounts notes 29 and 30).
10. Commitments
Capital commitments
Contracted for but not incurred:
Plant, equipment and vehicles
Total
Operating lease commitments
Annual commitments under non-cancellable operating leases, all of which relate to land and buildings, expire as follows:
Later than five years
Total
11. Pensions
2014
£’m
0.2
0.2
2014
£’m
0.1
0.1
2013
£’m
0.1
0.1
2013
£’m
0.1
0.1
The directors believe the FRS 17 deficit for the scheme in which the Company participates would be consistent with the IAS 19 deficit reported in
note 33 to the Group accounts in respect of the UK scheme. At 31 December 2014, an amount of £0.1 million (2013: £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 2014
Issued on exercise of executive share awards
Share buyback – purchased in year
Scrip dividends
At 31 December 2014
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
797.1
0.4
(6.8)
11.6
802.3
39.9
–
(0.3)
0.5
40.1
0.1
(33.7)
53.0
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140
MEGGITT PLC REPORT AND ACCOUNTS 2014
Notes to the financial statements of the Company continued
13. Reconciliation of movements in shareholders’ funds
Called-up
share
capital
£’m
Share
premium
account
£’m
Capital
redemption
reserve
£’m
At 1 January 2014
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
Purchase of own shares
Shares issued
Share buyback - purchased in year
Share buyback - close period commitment
Scrip dividends
39.9
–
–
–
–
–
–
–
–
(0.3)
–
0.5
1,166.3
–
–
–
–
–
–
–
0.1
–
–
52.5
At 31 December 2014
40.1
1,218.9
–
–
–
–
–
–
–
–
–
0.3
–
–
0.3
Details of the Group’s employee share schemes are included in note 35 of the Group accounts.
Other
reserves
£’m
17.5
–
–
–
–
–
–
–
–
–
–
–
Profit and
loss
reserve
£’m
1,116.0
286.5
(104.4)
(0.6)
0.1
1.2
0.5
(11.6)
–
(33.7)
(20.0)
–
Total
2014
£’m
2,339.7
286.5
(104.4)
(0.6)
0.1
1.2
0.5
(11.6)
0.1
(33.7)
(20.0)
53.0
Total
2013
£’m
2,309.3
90.3
(95.6)
1.6
0.2
9.2
2.2
–
2.5
–
–
20.0
17.5
1,234.0
2,510.8
2,339.7
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
141
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
2014
£’m
2013
£’m
2012
£’m
2011
£’m
2010
£’m
1,553.7
1,637.3
1,605.8
1,455.3
1,162.0
328.7
(12.5)
(68.1)
–
(29.2)
(10.0)
208.9
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
22.0p
32.4p
13.75p
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
26.9%
27.2%
33.7%
44.0%
50.2%
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MEGGITT PLC REPORT AND ACCOUNTS 2014
Investor information
Contacts
Investor relations
Information on Meggitt PLC, including the latest share price: www.meggitt.com
T: 01202 597597
E: investors@meggitt.com
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.
Other useful contacts
Share dealing services are provided for shareholders by Computershare Investor Services PLC. These
services are provided by telephone (0870 703 0084) and online (to access the service, shareholders should
have their SRN and log onto www.computershare.com/dealing/uk).
ShareGift (www.sharegift.org, registered charity number 1052686): 17 Carlton House Terrace, London,
SW1Y 5AH (0207 930 3737). ShareGift, 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.
Other Information
Dividends
The proposed 2014 final dividend of 9.50p per ordinary share, if approved, will be paid on 8 May 2015 to
shareholders on the register on 20 March 2015. The expected payment date for the 2015 interim dividend
is 2 October 2015.
2015 provisional financial calendar
Key dates 2015
Full-year results for year ended 31 December 2014
Final dividend ex-dividend date
Final dividend record date
Report and accounts for year
ended 31 December 2014 despatched
Deadline for receipt of dividend reinvestment plan elections
AGM and trading statement
2014 Final dividend payment date
Interim results for period ended 30 June 201
5
Interim dividend ex-dividend date
Interim dividend record date
Deadline for receipt of dividend reinvestment plan elections
2015 Interim dividend payment date
24 February
19 March
20 March
20 March
16 April
23 April
8 May
4 August
3 September
4 September
11 September
2 October
FEBRUARY
APRIL
AUGUST
24
Full-year
results
23
AGM & interim
management
statement
4
Interim
results
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STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
143
Glossary
Aftermarket
Spares and repairs
AGM
ALM
ASK
ATA
Annual general meeting
Additive layer manufacturing
Available seat kilometres
Air Transport Association Chapter numbers
represent an industry-wide approach to
commercial aircraft system numbering and
documentation. Meggitt offers full ATA Chapter
26 fire protection and is expanding its ATA 32
landing gear system offering
Board
Board of directors
Book to bill
The ratio of orders received to revenue
recognised in a specific period
CAGR
Compound annual growth rate
Capability
Expertise in technology and manufacturing
CGU
CO2
Code
CODM
Cash generating unit
Carbon dioxide
UK Corporate Governance Code
Chief operating decision-maker
FRC
FRS
FTSE
GAAP
GBP
GC 100
GDP
GHG
Group
HMRC
HSE
IAS
IDIQ
IED
IFRIC
Financial Reporting Council
Financial Reporting Standard
Share index of companies listed on the London
Stock Exchange
Generally Accepted Accounting Practice
British pound or pound sterling
Association of General Counsel & Company
Secretaries of FTSE-100 companies
Gross domestic product
Greenhouse gas
Meggitt PLC and its subsidiaries
HM Revenue & Customs
Health, safety and environment
International Accounting Standards
Indefinite delivery, indefinite quantity
Improvised explosive device
International Financial Reporting Interpretations
Committee
Company
Meggitt PLC
IFRS
International Financial Reporting Standards
Condition-monitoring Monitoring the condition of aerospace and land-
Installed base
The sum total of the Meggitt products and sub-
systems installed on customers’ equipment
based turbines and supporting equipment to
predict wear and tear, promoting safety, up-time
and planned maintenance
Continuing Resolution Appropriations legislation restricting
modification from prior-year funding patterns
IRS
ISA
KPI
Internal Revenue Services
International Standards on Auditing
Key performance indicator
Department of Energy & Climate Change
Large jets
Commercial aircraft with greater than 100 seats
DECC
DEFRA
DoD
DPPM
DRIP
DTR
EBITDA
ESOP
EU
Executive Board
Department for Environment, Food & Rural
Affairs
(United States) Department of Defense
Defective Parts Per Million
Dividend reinvestment plan
Disclosure and Transparency Rules
Earnings Before Interest, Tax, Depreciation and
Amortisation
Employee Share Ownership Plan
European Union
Board which 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
Facility
Factory
FAA
FCA
FIFO
FLNG
FOC
FPSO
Federal Aviation Administration
Financial Conduct Authority
First-in first-out
Floating liquefied natural gas
Free of charge
Floating production, storage and offload
LIBOR
LTIP
LNG
MAAP
London Inter-Bank Offered Rate
Long-Term Incentive Plan
Liquefied natural gas
Meggitt Aerospace Asia Pacific, the Group’s
maintenance, repair and overhaul hub in
Singapore
MABS
Meggitt Aircraft Braking Systems
M&A
MCS
MEG
Meggitt Production
System (MPS)
Mix
MoD
MPC
MPP
MRO
Mergers and acquisitions
Meggitt Control Systems
Meggitt Equipment Group
Our single global approach to continuous
improvement using tools and processes tailored
for the Group, and extending from the factory
floor into every function
The impact on performance of revenue streams
with higher or lower profitability growing at
differing rates
UK Ministry of Defence
Meggitt Polymers & Composites
Meggitt Pension Plan
Maintenance, repair and overhaul
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144
MEGGITT PLC REPORT AND ACCOUNTS 2014
Glossary continued
MSS
M4
Meggitt Sensing Systems
Meggitt Modular Modifiable Manufacturing, an
advanced manufacturing engineering concept
that will underpin the more efficient aerospace
factories of the future. They will continue to
accommodate low volumes of largely handmade
products but those products will become
increasingly complex and often involve new
manufacturing technologies requiring new kinds
of factory operators and managers and new
standards of traceability
SCRIP
SIP
Shipset
Smart engineering
for extreme
environments
Share dividend plan
Share Incentive Plan
Total value of the components and subsystems
installed on a single aircraft or ground vehicle
type
What Meggitt specialises in: long-life, highly
reliable, often mission-critical products
that must operate effectively in the harsh
conditions of aero-engines, oil and gas and
power generation environments and combat
Sequestration
US government defence budget cuts
SRN
STEM
STIP
TRI
TSR
UAV
USD
Shareholder Reference Number
Science, technology, engineering and
mathematics
Short Term Incentive Plan
Total reportable injuries
Total shareholder return
Unmanned aerial vehicle
United States dollar
WACC
Weighted average cost of capital
Organic growth
Growth excluding the impact of currency and
acquisitions and disposal of businesses
OE
OECD
Original equipment
Organisation for Economic Cooperation
and Development
OEM
Original equipment manufacturer
Operations Board
Operations excellence
ORB
OTD
PBT
PCHE
PECC
Platform
Assists the Chief Operating Officer to
manage the Group’s operations and
discharge the responsibilities delegated
by the Executive Board
A system of tools and processes that
embraces the way in which every aspect
of Meggitt is managed from the factory floor to
all functions and every level of leadership from
supervisors to the Executive Board
The Group’s obsolescence review board
On-time Delivery
Profit before tax
Printed circuit heat exchanger – a block of flat,
diffusion-bonded plates on to which fluid flow
channels have been chemically milled
Precision Engine Controls Corporation
Aircraft or ground vehicle model incorporating
Meggitt products
PPC
Programme Participation Cost
Programme
The production and utilisation lifecycle of an
aircraft model or ground vehicle
PwC
R&D
REACH
PricewaterhouseCoopers LLP
Research and development
Registration, Evaluation and Authorisation
of Chemicals
Regional aircraft
Commercial aircraft with fewer than 100 seats
Registrar
Computershare Investor Services PLC
RIDDOR
ROTA
RPA
SAP
SARs
SAYE
The Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations
Return on trading assets
Retirement Protection Act
The Group’s selected enterprise management
system
Share appreciation rights
Sharesave Scheme
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Quick reference
Contents
What is Meggitt?
How did we
perform in 2014?
02
04
31
What is our
strategy and
business model?
06
08
What are our
markets and
what drives
them?
10
How do we
manage risk?
What are our key
performance
indicators?
24
27
How do we
perform as
corporate
citizens?
38
Who runs Meggitt
and how do we
reward them?
01-41 Strategic report
01
02
03
04
05
06-07
08-09
10-12
13-17
18-19
20-21
22-23
24-26
27-30
31-37
38-41
Introduction
Group overview
Capabilities
Financial highlights
Chairman’s statement
Chief Executive’s review
Group strategy
Market review
Meggitt divisions
The Meggitt Production System
Talent
Technology
Principal risks and uncertainties
Key performance indicators
Chief Financial Officer’s review
Corporate responsibility
42-79 Governance reports
Chairman’s introduction
43
Board of directors
44-45
Corporate governance report
46-50
Audit Committee report
51-53
Nominations Committee report
54
Directors’ remuneration report
55-75
Directors’ report
76-79
80-140 Financial statements
80-84
Group financial statements
Independent auditors’ report to the members
of Meggitt PLC
Consolidated income statement
85
Consolidated statement of comprehensive income
86
Consolidated balance sheet
87
Consolidated statement of changes in equity
88
89
Consolidated cash flow statement
90-132 Notes to the consolidated financial statements
44
55
133
Company financial statements
Independent auditors’ report to the members
of Meggitt PLC
Company balance sheet
134
135-140 Notes to the financial statements of the Company
Smart engineering is second nature to us
High pressure air travelling through the
geometry of bleed air valves cast or
machined in the traditional way is
extremely noisy, something that will be
familiar to those who live near airports.
In future, air could flow more quietly
through a radical new concept from
Meggitt based on a fir-cone design, an
organic structure made possible through
additive layer manufacturing. The bold use
of innovative processes forms part of
Meggitt’s centrally coordinated and highly
focused technology strategy.
141-144 Supplementary information
141
142
143-144 Glossary
Five-year record
Investor information
Download the 2014 Meggitt PLC annual report
and accounts from www.meggitt.com
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The papers used for the production of this report are
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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
M
E
G
G
I
T
T
P
L
C
A
N
N
U
A
L
R
E
P
O
R
T
A
N
D
A
C
C
O
U
N
T
S
|
2
0
1
4
Smart engineering is second nature to us.
ANNUAL REPORT AND
ACCOUNTS 2014
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