Smart materials just got smarter.
ANNUAL REPORT AND
ACCOUNTS 2015
Meggitt’s smart engineering for
extreme environments has resulted
in the Group securing strong
positions on the latest wave of new
aircraft platforms. 2015 has been a
year of consolidating these positions
by focusing relentlessly on the
product development processes
and manufacturing capability
needed to industrialise the
unprecedented number of parts
and sub-systems won from the
current development cycle.
New products are being introduced faster than ever
to our manufacturing facilities, supported by the
Meggitt Production System which has now been
launched at all major facilities. This combination
of established business improvement techniques,
which can be tailored to accommodate the rich
diversity of Meggitt capabilities and facilities,
defines our internal processes and, increasingly,
the experiences of our customers.
Growing composites capabilities
The 2014 strategy review identified the fast-growing advanced
composites market for aerospace as a key priority for the Group.
Following a year-long market review, the two acquisitions
announced in 2015 position Meggitt strongly on the new
generation of engines that are now entering service.
(See page 18).
Reclaiming our aftermarket
Responding to the needs of our customers is critical to our growth
ambitions. The formation of our Customer Services & Support
(CSS) organisation in 2015 will make Meggitt more agile and easier
to do business with in the increasingly dynamic aftermarket
business environment. Its focus is on creating superb service
throughout the lifecycle of our products so that our airline
customers look to us as the suppliers who can help run their
operations as cost-effectively as possible. (See page 20).
Why our Bronze is their Gold
The first Meggitt operating facility to enter the fourth—Bronze—
stage of the Meggitt Production System is the Singapore-based hub
of the Group’s new Customer Services & Support organisation. In
addition to the requirement that customers be completely satisfied,
this exacting Meggitt phase is the point at which we expect to start
seeing meaningful financial benefits arising from enhanced
operating efficiency. (See page 22).
Communicate, collaborate, create
The foundation of Meggitt’s performance culture is increasingly
based on delegating decision-making as far down the hierarchy
as possible where problems are resolved by the teams who
understand them most. The technique of Daily Layered
Accountability or ‘DLA’ and new ‘value streams’ are playing a role
at all levels, enabling Meggitt to respond quickly to customer and
market needs, while stimulating our employees’ careers through
the promotion of early responsibility. (See page 24).
Front cover:
Smart materials just got smarter
Around 40% of future aircraft weight will come from
composite materials. In 2015, Meggitt acquired two advanced
composites businesses with innovative products and mastery
of the processes needed to deliver them—moves that
substantively strengthen Meggitt’s ability to compete for
content on next generation aircraft.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
1
Quick reference
Contents
What is Meggitt?
How did we
perform in 2015?
2
4
34
What is our
strategy and
business model?
6
8
What are our
markets and
what drives
them?
10
How do we
manage risk?
What are our key
performance
indicators?
26
30
How do we
perform as
corporate
citizens?
41
Who runs Meggitt
and how do we
reward them?
50
60
1-47
2
3
4
5
6-7
8-9
10-12
13-17
18-19
20-21
22-23
24-25
26-29
30-33
34-40
41-47
Strategic report
Group overview
Capabilities
Financial highlights
Chairman’s statement
Chief Executive’s review
Group strategy
Market review
Meggitt divisions
Technology
Customer focus
Operations Excellence
People and culture
Risk management
Key performance indicators
Chief Financial Officer’s review
Corporate responsibility
48-84 Governance reports
Chairman’s introduction
49
Board of directors
50-51
Corporate governance report
52-55
Audit Committee report
56-58
Nominations Committee report
59
Directors’ remuneration report
60-80
Directors’ report
81-84
85-156 Financial statements
85-91
92
93
94
95
96
97-141
142-143
Group financial statements
Independent auditors’ report to the members
of Meggitt PLC
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
Notes to the consolidated financial statements
Company financial statements
Independent auditors’ report to the members
of Meggitt PLC
Company balance sheet
Company statement of changes in equity
144
145
146-156 Notes to the financial statements of the Company
Download the 2015 Meggitt PLC Annual Report
and Accounts from www.meggitt.com
157-160 Supplementary information
157
158
159-160 Glossary
Five-year record
Investor information
Forward-looking statements
The Annual Report and Accounts contains certain forward looking statements with regard to the operations, performance and financial
condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results
to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of
preparation of this Annual Report & Accounts and the Company undertakes no obligation to update these forward looking statements.
Nothing contained in this Annual Report and Accounts should be construed as a profit forecast. This report is intended to provide
information to shareholders, is not designed to be relied upon by any other party or for any other purpose, and the Company and its
directors accept no liability to any other person other than that required under English law.
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2
MEGGITT PLC REPORT AND ACCOUNTS 2015
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 market applications
within civil aerospace, military and energy markets.
Nearly 12,000 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 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)
1,647.2
Civil aerospace
808.7 | 49%
Military
570.2 | 35%
Energy and other
268.3 | 16%
Revenue by destination Total revenue (£ millions)
1,647.2
USA
854.9 | 52%
UK
153.9 | 9%
Rest of Europe
357.6 | 22%
Rest of World
280.8 | 17%
Employees by region Number of employees
11,926
USA
6,045 | 51%
UK
2,999 | 25%
Rest of Europe
1,562 | 13%
Rest of World
1,320 | 11%
Total R&D as a % of revenue
15
14
13
12
11
9.6
9.5
8.2
7.6
7.6
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CapabilitiesJust 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-tourCombat supportPR TECTHeat transfer engineeringBleed air ice protectionWheels, brakes and brake controlAircraft safety and securitySensing and health monitoringSmall arms training systemsPolymer sealsCompositesPower productsFire protectionFuel containmentThermal management and fluid control Pressure up toPrecision micro metal engineeringSTRUCTURALDESIGNMATERIALSTECHNOLOGYTHERMALMANAGEMENTAvionicsSUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT3156768.01 Text 001-047-NEW-06.03.16.indd 307/03/2016 04:15 4
MEGGITT PLC REPORT AND ACCOUNTS 2015
Financial highlights
Meggitt’s 2015 results reflect the
effects of significant volatility in the
civil aerospace aftermarket and
pressure from the low oil price on our
energy businesses. However, we are a
long-term business. Our installed base
on over 64,000 aircraft worldwide, with
a strong and growing presence on the
wave of new aerospace platforms
entering into service over the next few
years, demonstrates the fundamental
strength of our business model, and
gives us confidence in making good
progress in the years to come.
1 The definition of ‘underlying’ is
provided in notes 10 and 15 to the
consolidated financial statements on
pages 110 and 113 respectively.
Revenue
(£ millions)
1,647.2
15
14
13
12
11
Underlying profit before tax 1
(£ millions)
310.3
1,647.2
1,553.7
1,637.3
1,605.8
1,455.3
15
14
13
12
11
310.3
328.7
377.8
366.0
325.3
i See page 34
i See page 35
Free cash flow
(£ millions)
199.0
Dividend per share
(pence)
14.40
15
14
13
12
11
146.8
110.4
199.0
182.4
193.0
15
14
13
12
11
i See page 38
i See page 37
14.40
13.75
12.75
11.80
10.50
Underlying earnings per share 1
(pence)
Return on trading assets
(%)
31.6
21.7
15
14
13
12
11
31.6
32.4
37.5
36.5
32.1
15
14
13
12
11
21.7
26.5
36.0
40.8
39.4
i See page 36
i
i See page 31
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GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
5
Chairman’s statement
“
Meggitt’s safety record at every
facility has benefited in recent
years from the establishment of
global standards, measurement
and direction.
”
Difficult trading conditions in several
end-markets made 2015 a challenging
year for Meggitt, with weakness in energy
and slower than expected growth in civil
aftermarket impacting results. However,
the Group made good progress with a
number of key strategic initiatives targeted
at improving our operational efficiency and
market access.
The Meggitt Production System, our global
approach to continuous improvement, has
now been launched at virtually all Meggitt
facilities. We are very pleased with the
operational improvements we have seen
so far, and the programme is gaining
excellent traction both inside the Group
and with our suppliers and customers.
We formed a new aftermarket organisation
to respond better to the requirements of
our customers, who are looking for
long-term partnerships and strategies to
improve airline economics. We also
strengthened our capability in aerospace
composites with two high-quality
acquisitions, both of which will deliver
good growth on new platforms entering
into service over the coming years.
Results
In 2015, Group revenue increased by 6% to
£1,647.2 million, driven largely by foreign
currency translation, with organic revenue
flat. Underlying operating profit decreased
by 6% to £325.5 million and underlying
earnings per share by 2% to 31.6 pence.
While this was a solid performance given
difficult trading conditions, it was below our
expectations and those of our stakeholders.
The cash-generative nature of the Group’s
activities remained unchanged, however,
and 2015 saw a good improvement in free
cash flow to £199.0 million, even with the
continuing high levels of investment in the
business arising from an unprecedented
level of new business won during the
recent bid cycle.
Dividend
The Board is proposing a final dividend of
9.80 pence per share (2014: 9.50 pence
per share), taking the full-year dividend to
14.40 pence per share (2014: 13.75 pence
per share). This is a 5% increase for the
year, reflecting the Board’s progressive
dividend policy and continuing confidence
in the Group’s medium-term growth and
cash generation prospects.
Investing for growth
Our continued investment in technology
will ensure the future growth of the
business. In 2015, research and
development expenditure comprised
9.6% of revenue or £158.7 million (2014:
£148.3 million), of which £26.8 million
was funded by customers. The vast
majority of this investment supports
positions secured on future aerospace
platforms and will continue at an elevated
level during 2016 before declining as the
wave of programmes in development
starts to enter commercial service.
These investments have a very attractive
payback and will support revenue growth
for many years.
Corporate governance and
the Board
The Board recognises that good corporate
governance is a major contributor to the
delivery of strong Group performance,
and is therefore committed to maintaining
the highest standards at Board level. As
part of the normal evolution of the Board,
there were a few changes since the last
annual report. In April 2015, Sir Colin
Terry retired after 12 years on the Board
and I succeeded him as Chairman. In
October, we welcomed Colin Day to the
Board as non-executive director and
Chairman of the Audit Committee. After
over nine years as non-executive director,
most recently as senior independent
director, David Williams retired at the
end of the year and Paul Heiden was
appointed senior independent director
with effect from January 2016. I would
like to take this opportunity to thank
Sir Colin and David for their significant
contributions to the business and wish
them well for the future.
Our people
People are central to the success of any
business. All deserve to work in safe
environments and reach their full
potential. Meggitt’s safety record at every
facility has benefited in recent years from
the establishment of global standards,
measurement and direction, and in 2015,
for instance, we saw a 20% decrease in
lost-time incidents in the workplace. The
Meggitt Production System’s success is
predicated on harnessing talent at every
level in the organisation. We continue to
invest in the delivery of superior graduate
training, with an international rotation
programme attracting high-calibre
individuals from leading engineering
faculties worldwide. After launching it
three years ago, our first cohort
graduated in October 2015 after making
significant contributions to technology
development, engineering programmes
and a range of projects in their non-
engineering rotation. Given the wide-
ranging nature of our production system
implementation, we have extended the
programme with the addition of an
operations excellence stream, now in its
second year of admissions.
I would like to take this opportunity to
extend my warm thanks to all employees
for their outstanding commitment during
the Group’s challenging year.
Sir Nigel Rudd Chairman
6
MEGGITT PLC REPORT AND ACCOUNTS 2015
Chief Executive’s review
“
End market weakness
presents challenges in
any business. Our
focus on superior
performance, defined
by quality, cost and
on-time delivery, will
help us grow faster
than the markets in
which we operate.
”
Group strategy
Meggitt is a leading provider of smart
engineering for extreme environments.
Our strategy involves investing in
technologies and capabilities targeted at
high-growth, complex and highly
regulated markets, underpinned by
market-leading levels of operational
excellence. Our aim is to deliver financial
performance exceeding that of our target
markets, enabling us to reinvest for
future growth while generating attractive
returns for shareholders.
Technology
The technology component of our strategy
is designed to drive organic growth
through targeted investment in key
products and manufacturing capabilities
aligned with our customers’ technology
roadmaps. We invest where we have
pedigree and where we can add most
value to customers and shareholders.
We aim to supplement organic growth
with targeted acquisitions that enhance
our capabilities and routes to market.
A year of record spend on research and
development in 2015 ensured we are set
to support the entry into service of many
new platforms including the re-engined
narrowbody aircraft from Boeing and
Airbus, the Bombardier C-Series and a
wide range of business jets.
Meggitt’s applied research and
technology activity, conducted at a
divisional level, supports product
development for new and existing
applications. This has been supplemented
with dedicated central funding for the
development of cutting-edge technologies
for next-generation platforms, which we
have been successful in augmenting
through grants from governments and
industry. This funding source has enabled
us to boost our progress in projects such
as additive layer manufacturing, a
technology which is now used in our
production facilities. Under the EU Clean
Sky initiative, we are a core partner,
leading a consortium of parties
developing Green Airframe Icing Novel
Systems (GAINS) for energy-efficient
anti-ice technology for next-generation
aircraft. We continued to invest in 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 to a consistently high
standard. It deploys smart tools and big
data for real-time monitoring of key
parameters such as product weight and
touch-time. The resulting optimisation of
all aspects of the manufacturing process
from machining and assembly to machine
utilisation and traceability is hugely
beneficial, particularly in an aerospace
environment. M4 projects have already
been seeded in several Meggitt factories
in the UK with many more to come in
future years.
Investing in these and other new
technologies is becoming an increasingly
important activity for aerospace
equipment suppliers, as customers
require ever greater levels of technology
readiness prior to awarding work on new
aircraft platforms.
Our acquisitions of the composites
businesses of EDAC and Cobham plc
exemplify targeted, value-added portfolio
enhancement. These two transactions,
both of which completed in the fourth
quarter of 2015, build on our existing
composite component technology,
broadening our reach beyond airframe and
anti-ice products into high-growth, higher
temperature engine products. They have
established positions on a range of
significant new platforms including the
PurePower, F135 and LeapX engines. The
integration of these businesses into the
Group is just starting, but we are
encouraged by what we have seen to date
and delighted to welcome 1,148 new
employees to the Meggitt family.
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.
The Meggitt Production System – our
global approach to continuous
improvement – has progressed well since
its inception in 2013, with the initial
launch now complete at all main
manufacturing facilities. We have seen
meaningful improvements in operating
performance such as Defective Parts Per
Million down 87% and on-time delivery up
14%. Two sites have now successfully
exited the third phase of the six-phase
programme, which extends the system
beyond the factory floor, supply chain and
programme management, and into
functions and leadership. We expect
further progress toward this level of
maturity during 2016. This is the stage
at which we expect to start seeing
meaningful financial benefits arising
from enhanced operating efficiency.
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GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
7
We have continued to invest in low-cost
manufacturing centres in China and
Mexico. In 2015, we acquired a new site
next to our existing Vietnam factory
enabling us to increase capacity
significantly. The operational focus for
the next two years is to ensure we are
equipped to accelerate production to
support the rapid growth of new aircraft
programmes, following which we will
accelerate our work on footprint
optimisation.
Renewing our customer focus
Making ourselves easy to do business
with is central to our business philosophy.
During 2015, we dedicated a senior
executive to the requirements of our
original equipment customers and
another to the aftermarket.
Original equipment manufacturers are
seeing a renewed focus on their priorities.
Transactional relationships with
procurement teams at key engine and
airframers in Europe, the US and China are
giving way to the collaborative, technology-
led discussions needed to deliver positions
on next generation platforms. At the same
time, refined key account strategies are
enabling us to bring together cross-group
product packages that simplify their supply
chains today.
We established a Customer Services &
Support (CSS) organisation designed to
strengthen revenue growth through
better customer support and satisfaction
in the aftermarket, which is central to the
Meggitt aerospace business model. CSS
will centralise much of our customer-
facing aftermarket resource and will
enhance our relationships with
customers. CSS is also working on a
range of initiatives including building a
greater presence in the market for
maintaining, repairing and overhauling
our own components, consolidating our
global distribution network and engaging
directly in the surplus parts market via
strategic partnerships. As these activities
will enable us to build greater knowledge
of changing market behaviour and the
in-service performance of our products,
we will be able to maximise Meggitt
revenue across the product lifecycle by
focusing on profitable modification and
retrofit opportunities.
Performance in 2015
Our end markets experienced a
challenging year in 2015. Growth in civil
aerospace was lower than expected, with
organic civil OE revenue growth of 4%
reflecting lower growth in deliveries of
new aircraft, and 3% organic growth in
aftermarket demonstrating weakness in
large jet spares from increased surplus
market activity, more than offset by good
growth in business jet aftermarket.
Military revenues saw a good recovery in
the first half from a weak 2014. However,
the second half was hampered by the
Continuing Resolution put in place in
September in the US ahead of the
agreement of the full-year 2016 budget,
resulting in a flat year overall. As
anticipated, energy revenues saw a
further decline, with the offshore oil and
gas-focused Heatric business having a
particularly challenging year as continued
oil price weakness impacted its
customers’ appetites for investment. The
power generation part of our energy
business saw good growth in the first half
but the second half was weaker, driven by
reduced investment by our customers,
primarily utility companies.
Against this background, organic revenue
was flat. Underlying earnings per share
decreased by 0.8p to 31.6p reflecting
adverse business mix in the year from the
weaker than expected aftermarket
performance, particularly in the higher
margin old aircraft spares, partially offset
by the benefits from foreign exchange and
the share buyback. Contribution from the
acquisitions completed late in the year
was not significant at the earnings level.
Net debt to EBITDA at the end of the year
was 2.3x (2014: 1.2x). The increase from
last year reflects the effect of the
aggregate £509m spend on acquisitions
and the share buyback, and lower profit.
Outlook
The outlook for our civil markets is
encouraging. Production of large jets is
expected to continue to grow in the
medium term, and the high and growing
shipset values we enjoy on the latest
generation of large jets support organic
civil OE revenue growth over the medium
term ahead of the overall market growth.
In 2016, we expect civil OE to grow
organically in the low- to mid-single-digit
percentage range, and for the composites
acquisitions to add a further 20%.
Available seat kilometres, an important
driver of our large and regional jet
aftermarket, are growing at above the
long-term trend. In combination with the
expected output from the CSS
organisation, which will enable us to
address some of the areas of weakness
we have seen in recent years, we expect
to be able to outgrow the market for civil
spares in the medium term. Shorter term,
however, we anticipate a continued impact
from the availability of surplus parts. This
is expected to limit organic aftermarket
growth in 2016 to low- to mid-single
digits, with a further modest negative
impact from revenue mix.
In military markets, we look to be
entering a more benign phase with
military budgets returning to growth for
the first time in a number of years. We
believe our strong technology offering
and broad platform and customer
exposure will enable us to outgrow the
overall military market over the medium
term, but we maintain a relatively
cautious stance for 2016 reflecting
weaker orders in 2015 and our view that it
will take some time for cash to flow on the
back of the recently agreed 2016 budget in
the US. We therefore anticipate organic
growth in the low-single-digit percentage
range, with a further 10% from the
composites acquisitions.
Our energy businesses have been
impacted by the global slowdown in
investment following the decline in the oil
price, and we expect that this weakness
will continue through 2016 resulting in
further organic revenue decline, although
the cost reduction activities we have
initiated, and recently intensified, will
partially mitigate the financial impact of
this decline. Medium term, however, the
strong technology franchise in Heatric
and growth opportunities in energy
condition monitoring give us confidence
that our energy revenues will resume
their growth trajectory.
On the basis of the above, the Group
expects organic revenue growth in 2016 of
low-single-digit percentage points, in line
with the guidance given in December, with
revenue phasing expected to return to
normal levels. The headcount reduction
programme will offset the negative mix
impact in the civil aftermarket. The
acquisitions completed in the fourth
quarter will increase reported revenue
growth, as will foreign exchange if rates
stay at or close to current levels.
Stephen Young Chief Executive
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Strategy Our strategy centres on outperforming our chosen markets by realising competitive advantage at every stage of our business model. We operate in high-growth markets where smart engineering and the ability to navigate the complex regulatory and certification environment associated with our safety- and mission-critical products is essential. We target our technology investments in attractive segments where Meggitt has—or can—develop leading positions. We invest in operations excellence as a core competitive strength and in the people and culture needed to deliver our strategy, through the Meggitt Production System. This all-embracing operating system is rooted in realising the potential of every employee from factory floors to functions at every level. Our organisation maximises the value of our products throughout their lifecycles, with strong programme management integrating the efforts of our dedicated original equipment and aftermarket teams to meet the exacting needs of our customers. Meggitt’s strategy by market and capability is outlined in the Market review (see page 10) and Meggitt divisions (see page 13). OperationsexcellenceCustomer focusGROWTHTechnologyPeople and cultureBusiness modelWe deliver strong and sustainable shareholder returns over the long term through leading positions in aerospace, defence and energy markets, secured on the basis of our intellectual property and proprietary manufacturing capabilities.We develop and manufacture components and sub-systems to enhance the performance of airframes, engines and other high value industrial plant. Revenue comes from successfully executing original equipment programmes (often sole-source) and maximising revenue from the aftermarket opportunities that flow from the wear and tear associated with the harsh environments in which our products operate. High quality services and support and close relationships with operators deliver the field performance data needed to improve existing products and create next generation technologies.Airframers, engine manufacturers, oil and gas platforms and processing vessels— 64,000-plus platforms carry Meggitt productsAirlines, armed forces, distributors, integrated MRO providersField knowledge enhancing intellectual property and enablingcontinuous improvementREINVESTMENTKNOWLEDGEInstalled baseAftermarketReturnsShareholdersTechnologyOperations1234Winning new programmes, often on a sole-source basis, through technology and operations excellence.1Delivering Meggitt content onto new platforms generates revenue and provides aftermarket access.2Reinvesting returns into new technologies, capital equipment and people.4Supporting the customer through the product lifecycle delivers additional revenue-generating opportunities through maintenance, repair and overhaul and mid-life product modifications and upgrades. 3Group strategy8MEGGITT PLC REPORT AND ACCOUNTS 2015156768.01 Text 001-047-NEW-06.03.16.indd 807/03/2016 04:15 STRATEGIC REPORT
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FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
9
Investment cycle
We develop technology for applications with 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, we often supply equipment free of charge to the
original equipment manufacturer. We deliver strong positive
cashflow within our civil aerospace and military end-markets
during the in-service phase, resulting in a cumulative cash
break-even period between years 11 and 18 typically, with a
shorter cash break-even in the energy market where up front
investments are lower.
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. In the near-term, our business
is focused on the delivery of 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 2015
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
Group
6%
69%
25%
Civil
Original
equipment
Aftermarket
Military
Energy
Other
27%
16%
56%
1%
25%
35%
26%
9%
5%
32%
15%
28%
13%
12%
2%
1%
61%
22%
14%
20%
29%
35%
9%
7%
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 operate flawlessly for many
years in highly demanding operating
conditions, from a supplier capable of
meeting rigorous certification
requirements. The extreme environments
in which many of our products operate
results in high levels of wear and tear,
which drives aftermarket revenues
stretching out for many decades from
initial product delivery.
Civil aerospace
Civil aerospace accounts for 49% of Group
revenue, with products and sub-systems
installed on almost every jet airliner,
regional aircraft and business jet in
service. The global fleet of aircraft has
grown significantly in recent years,
totalling over 44,000 aircraft today versus
32,000 a decade ago. New aircraft
deliveries drive sales of original
equipment 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 by seat capacity:
large jets (>100 seats), regional aircraft
(<100 seats) and business jets.
Large jet deliveries in 2015 stood at a
record 1,389, 1% higher than in 2014.
Future growth estimated at an average of
5-6% per annum is underpinned by the
order books of Boeing and Airbus, the two
major civil aircraft manufacturers, which
extend to eight years at current production
levels, with other manufacturers investing
in the large jet market including
Bombardier, Sukhoi and COMAC. The
high level of demand for new aircraft,
deliveries of which have grown at an
average of over 8% during the last five
years, has been driven in part 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 737MAX, Airbus’ A320neo and
the CSeries from Bombardier. Despite the
recent decrease in oil prices, the strong
order backlogs mean that no significant
reduction in new aircraft demand is
expected in the short term.
Regional aircraft deliveries of 297 in 2015
represented a 10% increase on 2014, with
an increasing proportion of these being
70-plus seat aircraft where we have a
particularly strong market share.
Deliveries look set to continue at this level
over the medium term. Regional fleets
outside North America account for over
50% of the global fleet, up from 10% a
decade ago.
Business jet deliveries totalled 717, a 6%
increase on 2014, although considerably
below the peak in 2008. Inventories of
used aircraft are continuing to decline,
although falling commodity prices are
likely to reduce demand in the near term.
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 84% of the
global fleet. Over the medium term, we
see deliveries continuing to recover,
driven by increasing globalisation and an
improving economic growth outlook in
developed economies, enhanced by the
large number of new aircraft models due
to enter into service in the coming years.
Meggitt performance
Meggitt’s civil original equipment (OE)
revenue grew organically by 4% in 2015,
with good growth in 737 and A320 families
of aircraft and initial OE revenue from the
A350XWB offsetting modest reductions in
A330 and A380 platforms. 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
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free of charge to civil aircraft
manufacturers. Strong OE performance
is also driven by shipset values on new
aircraft which exceed those of their
predecessors. Order books and delivery
forecasts remain robust and lend
confidence in organic growth prospects
ahead of the market growth rate over the
medium term.
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 5.8% in 2015, 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
2015 up by over 2% versus 2014. 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,
increased pooling of spares between
airlines and MRO providers and excess
spare part inventory arising from the
retirement of old aircraft and the
subsequent harvesting of serviceable
components from these aircraft. The
impact of spare parts harvesting, or
surplus parts, has intensified in recent
years, driven by increased availability of
parked aircraft which can be broken up
and heightened sophistication in third
party repair and distribution capability,
which has caused a greater than expected
dislocation between aircraft utilisation
and aftermarket demand. Recent
organisational changes have been made
in the Group with the formation of CSS,
which will leave us better equipped to
directly address the surplus parts issue.
Meggitt performance
Meggitt’s organic aftermarket revenue
was up 3% for the year, with 5% growth in
the first half decelerating to 2% growth in
the second. Air traffic was good given the
previously referenced 5.8% ASK growth.
However, aftermarket revenue growth
overall was held back by the parting out
of old aircraft resulting from the high
delivery rates of new, more fuel-efficient
aircraft. Large jet aftermarket, where the
effect of parting out is most pronounced,
particularly in components with
long lifecycles, saw flat revenue on
an organic basis.
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 2015
boosted overall aftermarket growth.
Available seat kilometres (ASKs) (billions)
8
7
6
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: Meggitt management estimates
1983
1976
1979
1971
1974
1972
1973
1978
1977
1981
1982
1984
1986
1987
1988
1989
1991
1992
1993
1994
1996
1997
1998
1999
2001
2002
2003
2004
2006
2007
2008
2009
2011
2012
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Market review continued
Military revenue by region Total revenue (£ millions)
570.2
USA
330.7 | 58%
Europe
148.3 | 26%
Rest of World
91.2 | 16%
Our regional aircraft aftermarket
revenue grew organically by 4% in the
year, with business jet aircraft revenue
up 11% organically.
Aircraft utilisation remains very
encouraging, with ASKs now tracking
comfortably above the long-term average.
The reduction we have seen in aircraft
retirements over the last twelve months
is an encouraging indicator that the
headwind we have been experiencing
from the parting out of older aircraft may
subside over time, although we expect the
negative impact of parting out to persist
through 2016. Over the medium term,
however, we maintain confidence in our
ability to grow aftermarket revenue
above the broader civil spares market.
Military
Military accounts for 35% of Group
revenue. Meggitt has equipment on around
21,000 aircraft and a variety of ground
vehicles, naval vessels and training
installations worldwide. During 2015, 58%
of our military revenue came from US
customers, with 26% from Europe and
16% from the rest of the world.
Defence budgets in some key markets
remained under pressure in 2015, notably
in the US where the effect of recent
budget cuts and the Continuing Resolution
in the latter part of the year impacted the
timing and size of orders. Declining
commodity prices have also had an impact
on budgets in the Middle East, although
European markets remained stable. The
overall outlook for defence spending,
however, is more positive than it has been
for a number of years, with a recently
agreed budget increase in the US budget
spread over 2016 and 2017 and modest
increases in European budgets in
response to greater perceived threat
levels resulting in a more benign
budgetary environment than has been
seen since the financial crisis in 2008/9.
While we do not expect an immediate
rebound in military expenditure, driven in
part by weaker orders in 2015 and the
anticipated lag between budget approval
and cash deployment, 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 was flat on an
organic basis in 2015, with good growth
in the first half being offset by a weaker
second half. The second half weakness
reflected tougher comparators, the timing
of programme deliveries and the US DoD
entering a period of Continuing Resolution.
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. Military markets
look to be entering a more benign
environment now, with budgets in many
regions expected to return to growth for
the first time in a number of years. This
will present opportunities through the
expansion of the fleet of programmes on
which we have good content, such as the
F-35 and Rafale, as well as retrofit work
arising following the repatriation of
equipment from the recent conflict in
Afghanistan, and the reinvestment in
military training systems for a number
of armed forces, where we have seen
considerable contract success in recent
years. Accordingly, we are targeting
organic revenue growth in the low-single-
digit percentage range in the medium term.
Energy
Our energy business accounted for 9% of
Group revenue in 2015. We target power
generation and oil and gas markets with
condition-monitoring hardware and
software, control valves for aero-derivative
gas turbines and microturbines, and printed
circuit heat exchanger technology.
The overall energy market was very
challenging in 2015. Lower demand for
new equipment and deferrals of capital
projects in oil and gas markets reflected
the impact of lower commodity prices on
the investment appetite of exploration
and production companies. The market
has also seen reduced demand for gas
turbines used in power generation,
driven by reduced investment by utilities.
Longer term, however, the power
generation market remains very
attractive, with increasing global demand
for power driven by population growth
and increasing levels of industrialisation
in emerging economies. Meanwhile, the
structural demand drivers for the oil
and gas market remain strong. Gas,
particularly is a relatively low-cost
high-efficiency energy source, and our
Heatric product fulfils a core
technological requirement of this market.
There are also significant opportunities
for Heatric, our printed circuit heat
exchanger business, outside of its core
oil and gas market, including in power
generation where a contract for the
provision of heat exchangers for an
innovative power station design is
currently being fulfilled.
Meggitt performance
Meggitt’s energy revenue declined 20%
on an organic basis in 2015. Sales to
power generation customers increased
modestly, with a good recovery from a
weak 2014 in the first half of the year
tailing off through the second half as
investment budgets became more
constrained. Revenue at Heatric, which
accounts for 35% of our overall energy
revenue, declined by 40% as the
investment projects of our oil and gas
customers were deferred following the
reduction in the oil price.
Heightened demand for our printed circuit
heat exchangers driven by a strong
project pipeline and increasing market
share in condition-monitoring equipment
should continue to deliver strong revenue
growth over the medium term. In the
short term, however, we anticipate
modest growth in energy control valves
and condition monitoring to be more than
offset by further weakness at Heatric,
where further project deferrals are
anticipated as capital expenditure
budgets continue to be pared back.
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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)
353.1
21.4
131.7
Revenue by end market
353.1
Civil OE
6%
Civil AM
69%
Military
25%
Energy
0%
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
Page turns on another chapter
December 2015 saw the Falcon 8X, the flagship of
Dassault’s high-end business jet range, successfully
conduct one of the most critical certification tests—a
maximum energy rejected take-off. Like the Falcon
900EX and 7X, it undertook this milestone test with
Meggitt’s wheels and brakes and brake control
system on board, plus Meggitt’s safety-critical brake
temperature and tyre pressure monitoring systems.
In line with Meggitt’s strategy to develop core landing
gear sub-systems, the scope of Meggitt work on
Dassault’s all-new Falcon 5X will expand still further
into responsibility for safety functions—nose wheel
steering, hydraulic system control and monitoring
and landing gear control itself.
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MEGGITT PLC REPORT AND ACCOUNTS
MEGGITT PLC REPORT AND ACCOUNTS 2015
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)
397.9
24.2
97.0
Revenue by end market
397.9
Civil OE
25%
Civil AM
35%
Military
26%
Energy
9%
Other
5%
Markets
Civil aerospace
Military aircraft
Military ground
vehicles
Energy and industrial
Marine
Ground fuelling
Capabilities
Growth strategy
• Control valves and sub-systems
• Aircraft fire protection and control systems
• Heat exchangers
• Electro-mechanical controls
• Environmental control
• Fuel handling
• Develop lightweight control systems for extreme temperature
and pressure environments to improve aircraft performance
• Deploy full fire protection systems to secure sole-source
positions on new platforms
• Continue diversification of product offering to a wider range
of energy and industrial turbines
Service entries
The fast-selling next generation single-aisle aircraft,
the A320neo, entered into service with Lufthansa in
January 2016. Its engine, Pratt & Whitney’s award-
winning fuel-efficient “PurePower” PW1000G, is
cooled by an extensive suite of Meggitt thermal
management products. Seven sub-systems feature
Meggitt valves, pumps, oil coolers and heat exchang-
ers. The engine will power yet more innovative
aircraft soon to enter service—the Bombardier
C-Series, Mitsubishi MRJ, Irkut MC21 and Embraer
E2 family. Working closely with the Group’s newly-
launched Customer Services & Support organisation,
Meggitt Control Systems is gearing up to support
these programmes for life, which could be 40 years
or more.
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Meggitt Polymers & Composites
A leading specialist in fuel containment and
systems, sealing solutions and advanced
composites.
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
177.4
10.8
15.4
Revenue by end market
177.4
Civil OE
27%
Civil AM
16%
Military
56%
Energy
1%
Other
0%
Markets
Civil aerospace
Military aircraft
Military ground
vehicles
Missile systems
and UAVs
Nuclear, marine, heavy transportation
and oil and gas
Capabilities
Growth strategy
• Complex, high-temperature composite structures and
• Expand capacity and capability in complex and
sub-assemblies
high-temperature composites
• Flexible fuel tanks for military and civil aircraft and military
• Exceed target financial returns through effective integration
ground vehicles
• Smart electro-thermal ice protection
• Airframe, engine and oil and gas sealing solutions
of recently acquired businesses
• Invest in advanced polymer materials to meet the demands
of growing wet-wing applications across metal and
composite structures
• Broaden capability in fuel systems
Components to systems
The world’s first load-bearing composite in a rotating
part is now in production for the GE90 115B engine.
Exemplifying Meggitt’s newly-acquired advanced
carbon fibre composites capability, the flow path
spacer directs air into the bypass section of the
engine, improving efficiency. At just over nine
kilograms, half the weight of the stainless steel
original, the component is more than an advert for
weight savings. A composite rotating part has
significant performance requirements that can only
be met by experts in design analysis and engineering,
tooling, processing and onerous qualification and
testing—capabilities used to create the new Meggitt
composite products in their thousands, in-service on
multiple GE, Pratt & Whitney and Snecma engines.
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Meggitt divisions continued
Meggitt Sensing Systems
A leading provider of high-performance sensing,
monitoring, power and motion systems, specialising
in products designed to operate in demanding
conditions across a diverse range of applications.
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
474.8
28.8
72.3
Revenue by end market
474.8
Civil OE
32%
Civil AM
15%
Military
28%
Energy
13%
Other
12%
Markets
Civil aerospace
Military aircraft, ships,
ground vehicles and missiles
Energy and industrial
Test and measurement
Medical
Capabilities
Growth strategy
• High-performance sensing in extreme environments
• Condition and health monitoring for air and land-based machinery
• Power generation, conversion and storage
• Aircraft surveillance and security systems
• Aircraft ground manoeuvring collision prevention
• Wireless emergency systems
• Standby flight displays and air data systems
• Develop leading-edge sensing and condition-monitoring
technologies to minimise emissions, conserve fuel, optimise
engine performance and manage maintenance efficiently
• Use our aerospace experience to offer innovative new products
to the energy and industrial sectors whilst expanding our sales
and aftermarket services in high-growth markets
• Expand power management capability under newly-created
value stream organisation
LEAP forward in operating economics
Eight Meggitt extreme environment sensors,
measuring vibration, speed, temperature and fluid
level, are being integrated inside the LEAP, the
fastest-selling aero-engine in aviation history. These
measurements detect nascent engine conditions and
prevent catastrophic failures. However, as core
health monitoring tools, our sensors also boost
day-to-day operating economics. Maintenance can
be planned cost-effectively based on component
condition, maximising product life on wing. And fuel
burn deterioration rates can be extrapolated. This
enables airlines to rotate aircraft around their
networks, ensuring newly refurbished engines that
consume less fuel are scheduled for routes where
efficiency really counts.
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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)
244.0
14.8
9.1
Revenue by end market
244.0
Civil OE
2%
Civil AM
1%
Military
61%
Energy
22%
Other
14%
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)
• Short-term cost management through current oil and gas
market downturn while maintaining core capability
• Live-fire and virtual training systems
• Heat transfer equipment for offshore oil and gas
• Linear motion control
• Automotive and industrial control electronics
• Longer-term, build on market-leading position in compact and
high-pressure heat exchangers for energy markets
• Leverage 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
It’s not a game
Meggitt Training Systems looks beyond the defence
arena to drive innovation into its virtual small arms
training systems, adopting gaming industry engines
for the ultimate in realistic training scenarios. Known
for the unsettling realism of combat scenarios in
far-flung territories, it also creates virtual worlds
nearer home, simulating the live-fire ranges of
specific US military bases. There are economic and
environmental imperatives. Ammunition is expensive
and polluting. After using a Meggitt virtual training
system, soldiers progress to live-fire ranges,
qualifying faster, using fewer bullets. Our newest
small arms trainer is the system-of-record for the
US Army, US Marine Corps and the defence
ministries of the UK, Canada and Australia.
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TECHNOLOGY
Growing composites
capabilities
At the close of 2015, Meggitt acquired two new
businesses in one of the fastest growing sectors
of aerospace—advanced carbon fibre composites.
This exemplifies a sharp focus on strategic investment
in higher growth market segments with attractive
fundamentals and the potential to lead the market
through differentiated technology and advanced
manufacturing processes.
David Horner, President of Meggitt Polymers & Composites.
Protecting helicopter engine air
inlets and mission-critical flight
components from the effects of ice
build-up is the geometric and thermal
challenge in which Meggitt Polymers &
Composites has excelled for 50 years.
With its complete understanding of
thermosetting composite materials—
which it also applies to structures and
specialist assemblies resistant to
corrosion, lightning strikes and fatigue—
the division remains the industry’s
leading supplier.
This is the core of expertise Meggitt has
extended through the acquisition of the
advanced composites businesses of
Cobham plc (Advanced Composites) and
EDAC. The two deals concluded a
year-long review of assets in this market
after the Group’s 2014 strategy review
identified engine composites, in
particular, as a fast-growing market
opportunity on which Meggitt was
well-placed to capitalise.
Meggitt Polymers & Composites had a
long-held strategy to focus on complex
secondary structures that are of less
interest to the manufacturers of primary
wings and fuselages. David Horner
explains “These Tier 1 producers like
very large structures made from fibre
that can be placed along a consistent arc
by machine, not man. It’s very capital
intensive. We, on the other hand, like hand
lay-up, complex secondary structures,
difficult geometries and tight tolerances.
And that’s exactly the type of work we are
going to build on with our new businesses.”
The market for complex secondary
structures is very fragmented. Very small
producers take simple, low-value
components and build them to the
designers’ specifications. “Aerospace
customers want suppliers with greater
expertise and scale. They want mature
manufacturing processes that reduce
risk,” continues Horner.
Why composites count
£
Aerospace
composites market
= £5.1 billion
worldwide
Greater than 7%
compound annual
growth per annum
40%
Strong as
conventional
alloys, 40% less
density
Maintenance costs
up to 30% lower
Faster product
development and
industrialisation
cycles
Percentage
reduction
in weight
corresponds to
percentage
reduction
in fuel
Up to 50% of next
generation aircraft
will be composite
Estimated
carbon fibre
market CAGR
= 9.9%
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With Meggitt Polymers &
Composites’ new scale, now
1.5 million square feet of
manufacturing space in Europe and the
Americas, comes an extension of the
Group’s intellectual property.
The acquisitions extend Meggitt’s smart
engineering for extreme environments
further into manufacturing processes.
“For radomes and electro-thermal ice
protection, the smart engineering with
which Meggitt has been so traditionally
associated is still very necessary,” says
Horner, “but the essential qualifier for
engine composites and secondary
structures is manufacturing process IP
for extreme environments.”
In the world of composites, customers
provide the engineering drawing for a
given component and the composite
supplier is responsible for addressing the
geometric challenge. To develop optimal
solutions, those suppliers need to deploy
a range of tools and materials. “Our new
composites businesses may have
competitors for individual processes but
there are none offering the required
diversity,” says Horner.
The list of Meggitt Polymers & Composites’
capabilities includes resin and vacuum-
assisted resin transfer moulding,
compression moulding—up to six-axis—
hand lay-up and fibre-wind. Horner
explains: “I had a discussion with a
customer recently about how we might
replace an aluminium part with composite.
If we had been just EDAC, we would have
had two ways to do it. If we were just talking
Advanced Composites—also two ways. As
Meggitt, with our established integration
expertise and capabilities, we now have six
ways to do it. And that’s what counts if you
want to provide a solution that is not only
great technically but makes sense
commercially.”
Composites deliver in-service weight
efficiencies plus design flexibility, lower
costs and shorter cycle times—providing
they are manufactured by experienced
providers. High tech equipment isn’t worth
much in isolation. “It’s our formula—our
process IP—that controls heat and pressure
at six different angles and enables us to
make the highly complex parts that
virtually no-one else in the world can,”
says Horner.
Engine of growth
He had ambitious growth plans for Meggitt
Polymers & Composites’ existing
composites businesses. These acquisitions
take that ambition very much further.
Meggitt now has first-class customer
relationships in Europe and North America
on the high growth engine programmes,
We’ve got scale
Meggitt Polymers & Composites
Was
REVENUE £170 million
FACILITIES 4
SQUARE FEET 1 million
EMPLOYEES 1,800
OUTPUT Glass-fibre based
Now
c£300 million
12
1.5 million
2,900
Carbon fibre
and premier positions in the growing
inflight wifi market and in structural
components.
EDAC’s engine composites order pipeline is
worth over USD600 million for the next four
years. Meggitt is now on every major
commercial aerospace platform worldwide,
including the fastest growing engines:
LEAP, the PW1000G, the GEnX and the GE90.
“Meggitt is well-placed to capitalise on many
more opportunities to replace metal with
composite as customers work their way
through the engine, converting as much as
they can based on available technologies,”
adds Horner.
While EDAC was a predominantly civil
business whose capability grew with
progressive civil engine manufacturers,
Advanced Composites evolved by
responding to demanding military
requirements. Weight and cost savings
aside, they are in demand for stealth and
One of the most exciting growth
opportunities relates to the highly
specified radomes it already produces in
repeatable high quality volumes for major
fighter jets, maritime aircraft and
electronic warfare platforms, including
the P8 Poseidon, Eurofighter Typhoon,
F16 and F18 variants and the Apache
Attack Helicopter.
Gogo, a leading internet service provider
on commercial and business aircraft,
recorded a transmission peak of 3.1
million bits per second in 2010 and
forecast a peak of 70 million this year.
Its new system has a higher transmission
capability by some order of magnitude, all
of which will go through Meggitt radomes.
The business is taking this capability into
the global inflight connectivity market,
which is experiencing very high and
accelerating growth. With production
on both sides of the Atlantic, Meggitt
It’s our formula—our process IP—that enables
us to make the highly complex parts that
virtually no one else in the world can make
low radar observability and high degrees
of engine performance and extreme
aerodynamics.
Its engine components, which encompass
flight critical products such as spinners and
stators, exhaust flaps and internal multi-
stage components, are present on high-
volume, high-growth platforms like the Joint
Strike Fighter. There are now 100 Meggitt
composite parts on the F135 engine for the
F35, one of the US Department of Defense’s
most significant programmes.
Advanced Composites had also secured
good commercial business, enhancing
Meggitt’s positions on the A320neo,
C-Series, MRJ, 777X, 787, A380 and
the G650.
is positioned well to surf this wave,
partnering with Gogo, the global leader
in inflight connectivity.
Meggitt Polymers & Composites ticks
many of the technology boxes that will
secure positions on next generation
aircraft—composite engine components,
secondary structures, radomes and ice
protection. These are the foundation on
which Meggitt will build its scale
composites business, one that is
diversified across military and civil
markets and one that has the capacity
to satisfy the demanding production
requirements of the impending ramp-up
in production of new models. ■
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MEGGITT PLC REPORT AND ACCOUNTS 2015
CUSTOMER FOCUS
Reclaiming our aftermarket
In May 2015, Meggitt launched the first phase of its centralised
Customer Services & Support (CSS) organisation, streamlining the
Group’s interface with aftermarket customers. The global operating
model, launched in January 2016, is designed to develop the agility
Meggitt needs to compete in the increasingly dynamic market for
spares and repairs. Its success is one of the Group’s strategic
priorities. “We will succeed by delivering superb service throughout
the product lifecycle and, ultimately, helping our airline customers
run their operations as cost-effectively as possible,” says
Lorraine Rienecker, the new organisation’s President.
The civil aftermarket is changing.
While traffic growth, the underlying
driver of aftermarket demand,
remains strong, we need to respond to a
maturing market and increased
competition. Better data is resulting in
delayed and extended maintenance
intervals, while bigger, stronger
integrators are offering larger
maintenance packages and capturing a
greater share of the aftermarket as airlines
continue to outsource maintenance repair
and overhaul (MRO) services.
The Group has been disproportionately
impacted by cyclical threats in recent
times, cutting demand for its highest
margin spares. Aircraft from the cycle of
the late 1980s to early 1990s are reaching
their natural retirement age and are
increasing the supply of surplus parts.
However, says Lorraine Rienecker, “we
must assume this will continue for some
time, and adjust accordingly.”
The aim of the new organisation is to
simplify the interface between Meggitt
and its aftermarket customers.“ We need
to coordinate the efforts of sales and
customer support personnel more
effectively and build partnerships for
growth.” Common metrics will be
established for all Meggitt aftermarket
operations to ensure that every team rises
to the cost, quality and delivery standards
set by the best. CSS will facilitate a more
efficient feedback loop between
customers and Meggitt engineering
teams, delivering the data needed to
design product upgrades to improve
in-service operation.
The launch of CSS during 2015 was the first
step on the road to reclaiming Meggitt’s
aftermarket in a dynamic market
environment with many cross-currents.
Phase one saw the establishment of a
management team to centralise
customer-facing teams. The sales effort
has been organised regionally and by key
account to offer a greatly simplified
interface to customers—one single source
of service rather than multiple points of
contact across capabilities and regions.
Control Systems and Meggitt Sensing
Systems—plus those of Meggitt Aircraft
Braking Systems’ UK facility in Coventry.
As CSS develops and matures, it will take
responsibility for more of Meggitt’s
aftermarket operations. While complete
control over operational performance will
lead to systemic improvement and
best-practice sharing, Rienecker wants to
optimise the opportunity to meet
customers’ requirements for the long
term. “A fully mature CSS organisation will
enable us properly align all elements of
It’s all about maximising Meggitt revenue
across the life cycle by creating an innovation
loop. The opportunities to boost Meggitt’s
product pipelines with upgrades and next
generation products are significant
The feedback from customers has been
universally positive. “Our customers are
starting to see the number of Meggitt
phone numbers in their address books
cut and their understanding of Meggitt’s
full range of capabilities rise,“ says
Rienecker.
CSS’s initial operational responsibility
centred on existing dedicated aftermarket
facilities in Singapore, UK, Germany and
the United States. At the beginning of
2016, it assumed responsibility for key
commercial and military aerospace
spares distribution and the MRO
operations of two divisions—Meggitt
our aftermarket services across the
product lifecycle.”
CSS is not a discrete organisation within
the Group. “To guarantee CSS success, we
are remaining fully integrated with our
original equipment businesses and will
retain strong interfaces at all levels,” says
Rienecker. Clearly, this is critical if CSS is
to maintain high ratings on its customers’
delivery scorecards. However, CSS wants
to communicate a greater understanding
of operators’ needs and in-service product
performance to Meggitt’s original
equipment engineering teams. “It’s all
about maximising Meggitt revenue across
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21
Meggitt Customer Services & Support
will capture value across the product
lifecycle, delivering field data that will
enable profitable original equipment
modifications and upgrades for
near-term growth and brand-new
products for next generation platforms.
Lorraine Rienecker, President, Meggitt Customer Services & Support.
the lifecycle by creating an innovation
loop,” she explains. “The opportunities to
boost Meggitt’s product pipelines with
upgrades and next generation products
are significant.”
To ensure that the new organisation is
equipped to exploit retrofit, modification
and upgrade opportunities, CSS technical
teams are now focusing on developing
more in-depth reliability and maintenance
data for all Meggitt products. Over the
past 18 months Meggitt Control Systems
(MCS) has systematised electronic MRO
data capture to better understand product
performance in the field. This meets the
aviation industry’s Spec2000 requirement
for industry partners to exchange detailed
information easily and cost-effectively.
Having successfully deployed Spec2000
on MCS legacy product lines, CSS will
now drive a global project to deploy this
data-recording methodology across all
Meggitt facilities performing MRO
services. “Capturing data is only the
start,“ Rienecker emphasises. “Having
the processes to accurately assess and
interpret the data and to act on the
findings are critical. This is why designing
them will be a priority for CSS and Group
engineering over the next 12 months.”
The goal is to provide mid-life, product
refreshment opportunities, boosting the
operating economics of the airlines.
As the original equipment manufacturer,
Rienecker believes Meggitt has intrinsic
competitive advantage. “Our customers
want to keep their parts on wing for as
long as possible. With more data and
trend analysis behind it, our team of
outstanding product designers will be
extremely well-placed to redesign
longer-life products for retrofit.”
For the moment, Meggitt has an
immediate requirement to start
thinking like an aftermarket trader.
The surplus market has expanded with
parts from retired fuel-inefficient aircraft,
and Meggitt is now participating through
a partnership with a leading provider of
aviation services and logistics to repair
and resell ‘as removed’ parts. Rienecker
is confident: “The OEM tag remains
important and provides our customers
with the assurance that their products
have been repaired by those who know
them best—the Meggitt designer and
manufacturer. The partnership will
also provide better insights into real-
time market value and demand for
Meggitt product.”
From a commercial perspective, with its
developing understanding of in-service
revenues and opportunities, CSS will
enable more precision in Meggitt’s
contract arrangements with customers
for new and existing products across all
stages of their lifecycles.
CSS is also reviewing its distributor
network. It is fragmented, complex
and costly to manage. Over the next few
years, that network will be rationalised
and strengthened, with communication
channels improved through one
CSS interface.
After putting a centralised aircraft-on-
ground (AOG) emergency call centre in
place last year, CSS is developing it
further to meet its obligations for new
aircraft entering service. “We want to
make it more efficient for the operators
and more cost-effective for the Group so
24/7 support will be delivered with fewer
points of contact and optimised inventory
management,” says Rienecker.
CSS operations will be underpinned by
the Meggitt Production System. This will
make fast, efficient service as much a
competitive advantage in aftermarket
centres as it is for those facilities
concerned with the industrialisation
of product for original equipment
manufacturers. “There are many
outstanding aftermarket teams at Meggitt
but the competition is becoming stronger
and airlines are having a greater
influence over their supply chain.
Meggitt’s original equipment customers
—the airframers and engine-makers—
want to partner with suppliers who can
deliver for their customers. MPS will
ensure CSS provides that assurance.”
After spending close to a decade as
Meggitt’s Executive Vice President of
Strategy, Sales & Marketing, Rienecker
is enjoying the opportunity to specialise
in one business, albeit a multi-faceted
one. “In the OE market, programmes can
be very long. The aftermarket is much
more dynamic and service-driven. I am,
however, delighted to be working within
the entrepreneurial service culture of
the aftermarket trade, backed by our OE
businesses—after all, they are the best
manufacturers of our products and the
best engineers.” ■
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MEGGITT PLC REPORT AND ACCOUNTS 2015
OPERATIONS EXCELLENCE
Why our Bronze is their Gold
Why MPS counts
The first Meggitt operating facility to enter the fourth
Bronze stage of the Meggitt Production System
looks like a business that is on the home straight
to operations excellence. However, it could take
the group’s Customer Services & Support hub
in Singapore between one and two years of hard
yards to make the exacting Meggitt grade, which
includes rigorous financial targets.
Left: No going back to the old days, James Mariadass, Site Leader, Customer Services & Support,
Singapore. Right: MPS is the way we do business. Group Operations Director, Amir Allahverdi.
Quality up 87%
Safety: lost-time
incidents down
20% in 2015 on
2014
On-time delivery
up 14%
Continuous
improvement
activities
486 in 2014
1,481 in 2015
The Meggitt Production System (MPS)
is a six-stage operating system
designed to make operations
excellence a core competitive strength.
The early stages focus on tools and
techniques that enable products to be
delivered, consistently, on time and to the
required specification. The continuous
elimination of waste is intrinsic to the
system. Practised at the highest level,
MPS aims to deliver superior incremental
growth and performance as leadership,
liberated by smoothly-running operations,
can focus more on maximising returns
from trading assets and long-term
business strategy.
Since its launch in 2013, all Meggitt’s
main facilities, apart from the recent
composites acquisitions, have
entered the first Red phase with many
moving into the second, Yellow, and third,
Green, phases. The initial goal is tactical
quality and delivery improvement and the
establishment of a sustainable continuous
improvement culture. Facilities will not be
able to graduate from the next three
phases, however, without meeting rigorous
financial targets.
James Mariadass, whose facility is now in
the fourth ‘Bronze’ Meggitt Production
System phase, explains how it works. As a
starting point, MPS is not a rigidly applied
set of tools and structures but a
framework that local leaders and
employees can adopt and adapt to realities
on the ground. “Implementing it like a
check list doesn’t work. Full involvement
of everyone is essential, backed by good
cross-functional collaboration.”
And the phases? “Red sets the foundation.
That’s when we set up our visual factory
boards, define our metrics, look at
organisation and structure and start to
work with basic Lean and related
continuous improvement (CI) tools. It’s
very much about problem-solving and
removing barriers to success.
“Yellow is about culture change. Daily
Layered Accountability (DLA) meetings get
maximum involvement from everyone—
technicians all the way to the site leader.
At the beginning, employees would be a
little uncomfortable, thinking they were
being blamed for non-delivery. Now
employees understand that DLA is not
about targeting individuals but issues and
how we, as a team, go about resolving them.
UIltimately, this leads to happy employees
as they have an avenue to resolve difficult
issues, up the line, on a daily basis.
“Green fans MPS into the functions that
feed the factory floor and focuses on
material and inventory management, sales
inventory and order processing, supplier
selection and management. It is really
about further developing an open cross-
functional network to resolve issues and
performance. Ultimately, it tests the
resilience of our approach.”
Mariadass has joked with his people
about going back to the ‘old days’. The
response was universal: “We couldn’t go
back to phone calls and emails and
departmental meetings. We’d be lost.”
Singapore’s staff retention figures prove
the point, contributing to a reduction in
the Group’s overall personnel turnover
by 50% in 2015.
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Starting with Bronze, precious
metals denote operations excellence
at a Meggitt facility as a core
competitive strength.
“Customers of a Bronze Meggitt factory
are very happy indeed,” Amir Allahverdi,
Meggitt Group Operations Director,
explains, ”Our Bronze rating maps well
to customers’ own ‘Gold’ standards.” So
what’s the point of our Silver and Gold?
“At these levels of operations excellence,
factories run like clockwork.
Management can lift its gaze away from
internal problem-solving to growth—
filling our factory pipelines with new
business. Silver and Gold operations
anticipate customer demands and market
forces, rather than being driven only by
immediate requirements. It is the point
Meggitt Production System
Customer satisfaction
Quality and on-time delivery
start to make efficiency gains,
consolidating spares inventory in fewer
sites,” he says. If the interface between
CSS facilities is critical, CSS must also
create effective links into Meggitt’s
original equipment engineering teams to
deliver the field performance data needed
for profitable mid-life product refresh
opportunities.
And this, emphasises Allahverdi, is where
a world-class Meggitt operating model
shows its worth. “While reliable
processes and open, regular
communication have boosted employee
morale on the production floor, MPS also
equips functions, businesses and
divisions to work together at the macro
level. The languages of problem-solving
and continuous improvement are the
While reliable processes and open, regular
communication have boosted employee morale
on the production floor, MPS equips functions,
businesses and divisions to work together at the
macro level. The languages of problem-solving
and continuous improvement are the same
Competitive advantage
Exacting financial targets
at which operational advantage must turn
to real strategic and financial advantage.“
Mariadass is already starting to ease into
the new way of thinking. “Instead of being
pushed by sales guys to fulfill orders, I
am finding myself pushing the sales guys
to top up my production pipeline.”
He is particularly excited about the
Singapore operation becoming part of the
new Customer Services & Support (CSS)
organisation. It is now responsible for
most of Meggitt’s spares distribution and
MRO operations in Asia and he is keen for
his new sister facilities to catch up. His
Singapore-based facility is at the sharp
end of the aftermarket where a Mach 3
approach to service is a basic
requirement. He knows that there can be
no weak links in the chain of CSS
excellence. Bronze for Mariadass,
therefore, points the way to a proactive
approach to building the strong network
needed to build even stronger
aftermarket service and improved
financial performance.
same.” Meggitt’s progress in operating
efficiency in just three years has been
exceptional. In aggregate, the Group’s
on-time delivery (OTD) has risen by 14%
and quality is up by 87%.
And customers have noticed. MPS
‘immersion’ attracted one of our power
product businesses’ largest orders. After
a supplier assessment, Meggitt was
lauded as the only one to have
demonstrated deep understanding across
multiple facilities of Lean deployment and
standardised improvement processes.
Another chose Meggitt to pilot the next
revision to its supplier health
assessment. Endorsed by customers,
several Meggitt businesses are using
MPS to map out realisable paths to
‘supplier Gold’ in 2016—a critical
accreditation for quality and on-time
delivery that is the price of entry for next
generation aircraft programme bids. A
top original equipment customer was so
impressed by progress at one facility, he
demanded “more, more quickly”.
And there are plenty of tools to assist.
Now that MPS’s global “SIOP”—sales
inventory order processing—process has
matured, the scope for advanced planning
and forecasting is greater in the
expanding CSS organisation. “SIOP is
firmly established in Singapore and if we
share this best practice, we can really
Allahverdi and team have already been
orchestrating change on a grander scale
in 2015. MPS was launched at divisional
level, leading to Meggitt Sensing Systems’
new ‘value stream’ structure (see People
and culture, page 24) and a clearly-
defined approach to leadership
development. A Group programme
management council was established to
fully deploy Meggitt’s highly developed
programme life cycle management
processes. A functional launch was
undertaken by the Group’s HR operations
team. Meggitt’s supply chain was
risk-assessed prior to starting a
programme of relationship development
and MPS integration.
In 2016, Allahverdi will turn up the
temperature again at facility level to
deliver ”more, more quickly”. Now MPS
principles and practice are embedded
across Meggitt, the MPS cadre will focus
on 12 Meggitt sites to accelerate
breakthrough improvements in the year.
These include three of the eight
businesses acquired by Meggitt Polymers
& Composites at the end of 2015 (see
Technology, page 18). He reflects on
future progress. “Meggitt has a wider
vision of excellence and the potential of an
entire organisation equipped to execute
strategy smoothly and run on world-class
processes—processes that maximise the
return on trading assets and link us
inextricably to customers, suppliers and
each other. “For now, Allahverdi is
impressed by what he describes as a
critical identity level achievement for the
Group. “MPS is part of who we are at
Meggitt and there’s no going back.” ■
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MEGGITT PLC REPORT AND ACCOUNTS 2015
PEOPLE AND CULTURE
Communicate, collaborate, create.
Meggitt’s performance culture is based on delegating decision-making
as far down the hierarchy as possible where problems can be resolved
by the teams who understand them most. That is Meggitt Production
System basic equipment, facilitated through the technique of Daily
Layered Accountability or ‘DLA’. New ‘value streams’ are playing
a role at divisional level too, devolving responsibility to where it is
best discharged, MPS-style. The focus on international networking
continues through the international graduate programme, the executive
leadership programme with Oxford University and the launch in 2016
of the Group’s first global intranet.
1
Paul Devaux
President, Power & Motion
Robin Young
Group Organisation Development Director
Karl Elkjaer
Meggitt Production System Leader
When Group Organisation
Development Director, Robin
Young, joined Meggitt, the Group
was half the size, a conglomerate of small
to medium-sized enterprises. “It was good
for innovation and speed but we needed
to leverage our scale to really count in our
markets for the long term.” And that’s
what Meggitt did in 2009, organising its
businesses around core capabilities into
integrated divisions. Meggitt is changing,
subtly, again. “The divisional structure
remains firmly in place but as our
business has become more international
and more intricate, the way we think about
some of these divisions at an identity level
is evolving again.” Young is referring to
the new “value streams” created by
Meggitt’s Sensing Systems and Polymers
& Composites divisions to provide
customers with the best solutions and
improved support.
One man’s industrial paradise
Paul Devaux heads up Meggitt Sensing
Systems’ Power & Motion value stream.
An operations expert and French national
based in Meggitt’s power management
facility in Avrillé, France, he has spent his
career working for international
companies. From Morocco to France and
the UAE to Indonesia, he has experienced
the extremes of disaffecting “command
and control” processes to what he
describes as the “industrial paradise of
engagement”. However, the impact of the
Meggitt Production System could not
have been greater when he joined
Meggitt in 2015.
Devaux is DLA (see box right). “It’s what
you do every day at Meggitt. It is not ‘in
addition to’ anything else. You just do that.
And it works.”
To some, the daily monitoring and
problem-solving system seems too simple.
Devaux asserts: “Some organisations have
forgotten the world we are living in.
Complex systems can be very satisfying
intellectually but they are not always
efficient. We are engineers and
manufacturers. We are not making
philosophy. We are trying to make
profitable parts that satisfy our customers.
Simplification in our world has to be one
of the greatest virtues.”
“This operating system is done in a very
smart way. It is not beside the business. It
is inside the business. It is fully
integrated. That is unusual.” The most
palpable expression of integration for
And this touches on a fundamental of
Meggitt culture—common sense. At the
helm of an outward-looking value stream,
Devaux knows he will not be taken aside as
he once was by a customer who told him:
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25
The DNA of DLA
= Safety
= Quality
= Delivery
= Inventory
= Productivity
DLA is the daily drumbeat of early morning meetings all over Meggitt
where progress against production goals is monitored and obstacles to
success identified. There and then, problem-solving paths are devised,
actioned and recorded for all, in the most visible way possible on SQDIP
(Safety, Quality, Delivery, Inventory and Productivity) boards.
“at your company, you seem more
interested in your culture than your
customers!”
at the leash to reach out to each other and
explore the possibilities,” he says.
Devaux knows about the effectiveness
of the value stream approach to
delivering growth from product lines
within individual factories. Now Meggitt is
innovating, applying a common sense
principle to aggregate businesses at an
international level. Devaux is very
comfortable with this.
With his team, he is combining the
capabilities of five specialist centres
Graduate programme cohort
expands into operations
Meggitt’s international graduate
programme is in its fourth year and the
first cohort to finish its three-year rotation
is starting full-time roles across the
Group. Predominantly engineering-
focused, the programme piloted
operational streams last year, which has
led to a 50% increase in intake in 2015
You can take the best person and drop
them into a poor process and they will fail
in France, the United States and Vietnam
into a rich seam of power generation,
conversion, storage and management
technologies, providing customers with
the best solutions and improved support.
It takes Devaux back to his “industrial
paradise” in which control is given to
businesses rather than functions. For
Devaux, being part of the Meggitt group
means access to investment, functional
expertise and world-class systems like
MPS. As owner of a value stream, he can
benefit from the parent but have the
freedom to make decisions relating to
customers and markets with which he
and his team are in step. That is exactly
where he wants to be in professional
terms. He is equally ambitious for his
people. The opportunities to showcase
best practice from one facility to another
are significant. The engineering
challenges will grow in complexity and
deliver greater professional satisfaction.
“The Power & Motion teams are straining
including the Meggitt Production System
leaders of the future. Surprises unfold
from the programme, including changes of
career aspiration and what Young calls the
effect of ‘random nodes’, where
technologies and markets find new
intersections.
From nanotechnology to
industrial psychology
Karl Elkjaer exemplifies this idea. With
his Masters in physics and nanotechnology
he might have been expected to take a
route to a Meggitt Technical Fellowship.
Instead, he has discovered the satisfying
immediacy of solving problems in
operations. His chosen permanent role is
as Meggitt Production System leader at
the Group’s specialist piezoceramics
facility in Denmark. The problems are
equally as complex in operations, to which
the new discipline of ‘psychology’ can be
added, he explains. “You can take the
best person and drop them into a poor
process and they will fail. My role is about
creating the right conditions for people to
succeed and enabling them to work better
in teams.”
Eureka moments
Elkjaer’s graduate programme rotation
started in Denmark, followed by nine-
month cycles in the US and UK. He is
sensitised to different national
management styles and has had
significant exposure to Meggitt’s
international customer base. As he
changed his perspectives so, he believes,
his hosts changed theirs, if only to learn
about other businesses in the Meggitt
group. The effect of Young’s desired
‘random intersection’ occurred when he
rotated from a sensing business in
Denmark, where he had been looking at a
paint form of piezoceramic sensor, to a
composites business in the UK looking for
actuating technologies for anti-ice
systems. An ultra-low power solution
deploying this technology contributed to
Meggitt Polymers & Composites
(Loughborough) beating the industry’s
odds-on favourites in a competition to lead
a state-of-the-art anti-ice systems
research project with EUR 6.2 million
European Union funding.
Networking
Meggitt employees with senior leadership
potential continue to enjoy the networking
value of the biannual executive training
programme with Oxford University’s Said
business school. Its fourth cohort is now
benefiting from the one-year bespoke
programme. Diverse talents, from new
joiners to old hands, work on special
projects to develop systems thinking
beyond their functional areas. Several
alumni now serve on Meggitt’s executive
management team.
And there’s a new information democracy
to come. In 2016, Meggitt will launch its
first global intranet. Any employee,
worldwide, will be able to tap into the
richness of what Meggitt has to offer and
act on the information through the
intranet’s latest communication and
collaboration tools. Young concludes: “A
new level of creativity will be enabled as
these tools become available for use in
day-to-day activities. All this contributes to
a fertile environment for sharing and
developing ideas that lead to revenue-
generating new products and technologies.
Meggitt is a treasure trove of capability
and talent that deserves to be shared
widely, inside the business and, ultimately,
with our customers. Our new intranet is
central to providing that narrative.” ■
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Risk management
Meggitt seeks to operate within a low risk appetite
range overall. Effective risk management is
required to deliver to this appetite while
supporting the achievement of the Group’s
strategy and business objectives. Our risk
management framework is based on ISO 31000
and includes a formal process for identifying,
assessing and responding to risk.
appetite statement with associated risk tolerances
to ensure that identified risks are managed
within acceptable limits. These risk tolerance
levels are flowed down to the divisions and
functions. The likely timeframe within which
the impact of risks might be felt and how we
prioritise risk is considered as part of our risk
management strategy.
During 2015, we continued to refine our approach.
The Board approved an updated Group risk
The Group Risk Register is then subject to a
detailed review and discussion at the Group
Executive Committee which includes
discussion of risks which may not have been
identified through the normal channels. The
Board reviews the output of this process.
Meggitt’s corporate strategy is designed to
optimise our business model and take risk,
with the required controls, on an informed
basis. To enable value to be created for
our shareholders, we set varying risk
tolerances and associated criteria. We
accept risk and manage our risk universe
on the following basis:
• Strategic – medium to low tolerance for
risks arising from poor business
decisions or sub-standard execution of
business objectives.
• Operational – low to near-zero tolerance
for risks arising from business processes
including the technical, quality, and
project management or organisational
risk associated with programmes and
products.
• Corporate – low to near-zero tolerance
for compliance and reputational risks
including those related to the law, health,
safety and the environment.
• Financial – medium to low tolerance for
financial risks including failure to provide
adequate liquidity to meet our obligations
and manage currency, interest rate and
credit risks.
Principal risks and uncertainties
In accordance with the Group’s risk
management procedures, we have evaluated
our risk disclosure and focused this report on
the most significant risks. Financial risks
associated with a multinational business,
including foreign exchange are disclosed in
the Chief Financial Officer’s review on pages
34 to 40.
The risks outlined below, 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.
Change in risk in year
No change ← →
Higher risk ↑
Lower risk ↓
Governance
The responsibility for risk management
operates at all levels throughout Meggitt:
• The Board – 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 overseeing the Group’s
risk governance structure and internal
control framework. During 2015, the
Board has carried out a robust
assessment of the principal risks facing
the Group, including those that would
threaten its business model, future
performance, solvency or liquidity. This
report describes those risks and how
they are being managed or mitigated.
• The Audit Committee – The Board has
delegated responsibility for reviewing
and ensuring the effectiveness of the
risk management process to the
Audit Committee.
• Other Board and Management
committees – Divisional and functional
leadership are responsible for the
management of risk and for compiling and
maintaining their own risk registers,
which outline risks at business unit and
programme levels. The Group Executive
Committee as a whole regularly reviews
the Group’s principal risks, while
individual members own specific risks.
Our risk management process requires
identified risks throughout the Group to be
owned by a named individual. They must
review them regularly and consider related
new risks. Risk identification is embedded
in other processes, including project and
programme management, bid approvals
and other operational activities.
After they have been identified, risks are
reviewed at facility level and aggregated for
review at divisional and functional levels
and during the Group’s regular business
review process.
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Risk
Description and impact
How we manage it
Strategic
Business model
← →
Failure to respond to fundamental changes in our
aerospace business model, primarily the evolving
aftermarket. This includes more durable parts
requiring less frequent replacement, a growing
supply of surplus parts, OE customers seeking
greater control of their aftermarket supply chain,
accelerated pace of new aircraft deliveries
leading to the earlier retirement of older aircraft
and longer term development of indigenous
Chinese aerospace manufacturing industry.
Impact: decreased revenue and profit
• Establishment of dedicated customer-facing aftermarket
organisation
• Implementation of long-term customer agreements as part of
maintaining and monitoring pricing strategy
• Implementation of Meggitt Production System (MPS) in aftermarket
operations
• Investment in research and development to maintain and enhance
Meggitt’s intellectual property
• Development of manufacturing strategy for products in China while
building relationships with Chinese aerospace customers
Product demand
← →
Significant variation in demand for products
should military, civil aerospace and energy
business downcycles coincide, a serious political,
economic or terrorist event take place or
industry consolidation materially change the
competitive landscape.
• Monitoring external economic and commercial environment and
long-lead indicators whilst maintaining focus on balanced portfolio
• Regularly communicating strategy to shareholders
• Maintaining sufficient headroom in committed bank facilities and
against bank covenants whilst implementing appropriate cost-base
contingency plans
Impact: volatility in underlying profitability
Technology strategy
Failure to develop and implement meaningful
technology strategies to meet customers’ needs.
• Creation of technology roadmaps with customers and investment
in applied research and technology
Impact: restriction of ability to compete on new
programmes with consequent decrease in
revenue and profit
• Focus on technology during Group strategy process
• Recruiting first-class engineers with appropriate technology skills
• Ring-fenced budgets focused on longer-term technology
developments
Failure to integrate effectively acquisitions and
realise expected financial returns in line with
business case.
Impact: decreased revenue and profit
• Pre-acquisition due diligence performed internally and externally
• Implementation of MPS as part of proven post-merger integration
process led by incumbent divisional management, supported by
experienced dedicated integration teams with a senior oversight
committee
← →
Acquisition
integration
New
Operational
Quality escape/
equipment failure
Defective product leading to in-service failure,
accidents, the grounding of aircraft or prolonged
production shut-downs for Meggitt and its
customers.
Impact: decreased revenue and profit, damage to
reputation and operational performance
• Implementation of well-developed verification, validation and
system safety analysis policy and processes, combined with quality
and customer audits and industry certifications
• Implementing MPS across the Group
• Implementation of enhanced supplier quality assurance process
Failure to meet customers’ cost, quality and
delivery standards or qualify as preferred
suppliers.
Impact: failure to win future programmes,
decreased revenue and profit
• Implementation of supplier excellence framework following risk
analysis and on-site assessments
• Implementation of MPS combined with a programme lifecycle
management process leading to step change in performance
• Reorganisation of programme management to increase capability
and focus on delivery and governance
• Development of commercial function and engineering capability
• Increased utilisation of low-cost manufacturing base
← →
Customer
satisfaction
← →
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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Risk management continued
Risk
Description and impact
How we manage it
IT/systems failure
← →
Prolonged lack of availability of critical systems
such as SAP due to badly-executed
implementation or change control; poor
maintenance, business continuity or back-up
procedures; failure of third-parties to meet
service level agreements; or cyber attack
including failure to protect IP or other
sensitive information.
Impact: decreased revenue and profits, damage
to operational performance and reputation
• Implementation of rolling programme of system upgrades
(including SAP implementation) to replace legacy systems
• Ongoing implementation of IT security strategy and enhancement
of IT security infrastructure, policies and procedures
• Establishment of Group-wide intellectual property protection
programme
• Review of existing systems, third-party service providers and risks,
including resilience and disaster recovery processes, undertaking
mitigating action where appropriate
• Roll-out of deployment and architectural review processes
Supply chain
Failure or inability of critical suppliers to supply
unique products, capabilities or services
preventing the Group from satisfying customers
or meeting contractual requirements.
• Implementation of supplier excellence framework combined with
integrated commercial and procurement approach to contractual
terms and conditions including development of long-term
agreements
← →
Impact: decreased revenue and profit, damage
to reputation
• Maintenance of buffer inventory for critical and sole-source
suppliers
• Implementation of measures to mitigate counterfeit and fraudulent
parts at high-risk facilities
Project /
programme
management
Failure to meet new product development
programme milestones and certification
requirements and successfully transition new
products into manufacturing as production
rates increase.
• Implementation of a programme lifecycle management process
and engineering support applications, combined with enhanced
internal review process to stress-test readiness to proceed at each
stage of key programmes
• Implementation of improved technology readiness and bid approval
← →
Impact: significant financial penalties leading to
decreased profit, damage to reputation
Corporate
Legal & regulatory
← →
Significant breach of increasingly complex trade
compliance, bribery and corruption and ethics
laws and violation of terms of Meggitt’s 2013
Consent Agreement with US Department
of State.
Impact: damage to reputation, loss of supplier
accreditations, suspension of activity, fines from
civil and criminal proceedings
Financial
Taxation
New
Tax legislation is complex and compliance can be
subject to interpretation. Legislation, including in
response to the OECD BEPS programme, is
subject to change which could negate the
effectiveness of current, well-established,
tax-efficient international structures used to
finance acquisitions.
Impact: higher effective tax rates resulting in
decreased profits
diligence methodology
• Delivery of applied research and technology objectives in line with
Group strategy
• Incremental improvement in performance following MPS
implementation and re-organisation of programme management
to increase capability and focus on delivery and governance
• Active participation in customer rate-readiness processes
• Substantial investment in measures to ensure compliance with
2013 US Department of State Consent Agreement and continuing
investment in other compliance programmes
• Implementation of Board-approved trade compliance, ethics and
anti-corruption policies
• Roll-out of global trade compliance IT solution and import
compliance programme
• Regular monitoring by Ethics and Trade Compliance Committee,
supported by ongoing trade compliance programme including
external audits; and comprehensive ethics programme including
training, anti-corruption policy, external audits and Ethics line
• Monitoring international tax developments to assess implications
of future legislation
• Maintenance of a low-risk rating with UK HMRC and other tax
authorities through open dialogue and, where possible, pre-
agreement of arrangements to confirm compliance with legislation
• Assessment of options to mitigate impact of legislative changes on
the Group’s effective tax rate
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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Oversight of risk and
internal control
The Board is responsible for risk
management and 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 and Internal
Control in carrying out their duties. 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.
The 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 other policies are
approved by Group functions;
• Process controls—for example financial
controls including the Group Financial
Policies and Procedures Manual, the bid
approval process, programme
management and execution, IT security
and risk management. The risk
management process, which enables the
Group to identify, evaluate and manage
the Group’s principal risks was in place
for 2015 and up to the date of approval of
the Annual Report and has been regularly
reviewed by the Audit Committee and
approved by the Board; and
• The forecasting, budget and strategic
plan processes.
The Group’s programmes for insurance
and business continuity form part of our
risk management and internal control
framework.
The following features allow the Group
to monitor the effective implementation
of policies 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.
To review the effectiveness of the system
of internal controls, the Board and Audit
Committee applied the following processes
and activities in 2015 and up to the date of
approval of the Annual Report:
• 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
Executive Director, Commercial and
Corporate Affairs; 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 2016 budget;
• Written report to the Ethics and Trade
Compliance Committee on the
effectiveness of whistleblowing
procedures; and
• Reports on insurance coverage and
uninsured risks.
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 identified
any significant failings or weaknesses in the
Group’s systems of risk management or
internal control as a result of information
provided to the Board and resulting
discussions.
Viability statement
In accordance with provision C.2.2 of the
2014 Code, the directors have assessed the
prospects of the Group over a period of five
years from the balance sheet date (the
Board having determined five years as the
appropriate period for the reasons stated
below), taking account of its current position
and the potential impact of the principal
risks set out above.
The Board selected the period of five years
for the following reasons:
i) The Group’s strategic plan covers an initial
five-year period, with subsequent years
modelled by extrapolating the trend in
years three to five and thus inevitably are
more uncertain.
ii) The investment cycle for a typical
engineering development programme is up
to five years.
iii) Although individual platforms operate for
periods of 30 years or more, our five-year
viability period aligns with the typical
aerospace cycle; and
iv) The five-year viability period is consistent
with the period over which we consider risks
covered by the Group Risk Register.
In making this statement, the Board has
reviewed and discussed the overall process
undertaken by management and has:
• Considered the Group’s current
position and future prospects, the
Group’s strategy and principal risks
and how these are managed as
detailed in the Strategic Report;
• Discussed and agreed key assumptions
in the stress testing model used by
management;
• Assessed the likelihood of bank and
other debt facilities continuing to be
available to the Group as existing
facilities mature over the next five years;
and
• Assessed the outcome of the stress-
testing, carried out using the Group’s
five-year strategic plan as the base
case. The Group Risk Register was
considered to determine those risks
which could potentially pose the most
significant threat to viability across the
Group over this period and which
should be modelled, including:
– A significant market downturn, of
greater magnitude than both the after
effects of 9/11 and the global recession
in 2008. The downturn was assumed to
last for the full stress testing period,
impacting both civil aerospace and
energy, with military being unaffected
(as history has shown);
– A decline commensurate with losing
one of our most significant customers,
leading to a sharp loss of revenue
across the full stress test period; and
– A combination of these two scenarios
to provide an indication of a plausible
“worst case”.
Based on the results of its review, the
directors have a reasonable expectation
that the Group will be able to continue in
operation and meet its liabilities as they fall
due over the five-year period of their
assessment.
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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 operating profit 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.
As previously announced, and to align with the new profit
measure used in the 2015 Short Term Incentive Plan (STIP), an
underlying profit KPI has been introduced for 2015. It replaces
the previously reported underlying profit before tax KPI. There
have been no other changes to the KPIs used in the year or to
how they are calculated.
Strategic objectives
Technology
Operations excellence
Customer focus
Organic revenue growth
400
12
10
8
6
4
2
0
%
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 35 for a reconciliation of organic revenue to statutory revenue.
Target
Low single digit in 2016. Ahead of end-market growth rates over the medium term.
Result
2015: 0.2% (2014: 0.0%). Compound annual growth rate (CAGR) achieved over last five
years: 3.8%. See page 34 for details.
2011
2012
2013
2014
2015
Directors’ incentive plans
Organic revenue growth is a performance measure for the 2015 and 2016 Long Term
Incentive Plan (LTIP). See pages 73 and 76 for details.
Underlying operating profit
Definition and basis of calculation
Underlying operating profit is defined and reconciled to statutory measures in note 10
to the Group consolidated financial statements on page 110.
Target
We do not publish profit targets.
Result
2015: £325.5 million (2014: £346.0 million). See page 35 for details.
Directors’ incentive plans
Underlying operating profit is a performance measure in the 2015 and 2016 STIP.
For the purpose of these plans, actual and target underlying operating profit figures
are measured at constant currency. See pages 71 and 76 for details.
400400
350
300
250
£’m
200
150
100
50
0
2011
2012
2013
2014
2015
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Return on trading assets
400
40
30
%
20
10
0
2011
2012
2013
2014
2015
Underlying EPS growth
400
15
10
5
0
-5
-10
-15
%
2014
2015
2011
2012
2013
Definition and basis of calculation
Underlying operating profit after tax expressed as a percentage of average trading
assets. Underlying operating profit is defined and reconciled to statutory measures
in note 10 to the Group consolidated financial statements on page 110. 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
To achieve an average return on trading assets of 20.9% over the next three years.
The target recognises the need to continue to invest in trading assets during this
elevated investment period in the aerospace cycle.
Result
2015: 21.7% (2014: 26.5%). Average achieved over last five years: 32.9%. See page 35
for details of the Group’s operating profit performance in the year. See page 37 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 2015 and 2016 LTIP. For the
purpose of these plans, underlying operating profit after tax and trading assets are
measured at constant currency. See pages 73 and 76 for details.
Definition and basis of calculation
The percentage change in underlying earnings per share (EPS) from the previous year.
Underlying EPS is defined and reconciled to statutory measures in note 15 to the Group
consolidated financial statements on page 113.
Target
We do not publish profit targets. However, the proposed 2016 LTIP includes EPS targets
equivalent to growth ranging from 4.0% to 9.0% per annum over the next three years.
Result
2015: -2.5% (2014: -13.6%). CAGR achieved over last five years: 2.0%. See page 36
for details.
Directors’ incentive plans
Underlying EPS is a performance measure for the 2015 and 2016 LTIP. For the purpose
of these plans, underlying EPS is adjusted to exclude an element of the benefit arising
from any share buyback. See pages 73 and 76 for details.
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Key performance indicators continued
Free cash flow
400
200
150
£’m
100
50
0
2011
2012
2013
2014
2015
Definition and basis of calculation
Cash generated excluding amounts in respect of acquisition of businesses, disposal
of businesses and payments to shareholders. Free cash flow is reconciled to statutory
measures in note 40 to the Group consolidated financial statements on page 136.
Target
We do not publish free cash flow targets.
Result
2015: £199.0 million (2014: £146.8 million). See page 38 for details.
Directors’ incentive plans
Free cash flow is a performance measure in the 2015 and 2016 STIP. For the purpose of
these plans, actual and target free cash flow figures are measured at constant currency
and exclude interest and tax. See pages 71 and 76 for details.
R&D investment
40010
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, amortised or incurred on contracts funded by customers.
% of
revenue
8
6
4
2
0
Target
Investment of 6 to 8% per annum. This range reflects typical investment fluctuation
within the industry cycle.
Result
2015: 9.6% (2014: 9.5%). Average achieved over last five years: 8.5% reflecting high
levels of investment in the last two years following the Group’s high win rate on new
aerospace platforms during a period of elevated growth for the industry. See page 37
for details.
2011
2012
2013
2014
2015
Directors’ incentive plans
R&D investment is not a specific measure used in directors’ incentive plans.
However, the 2015 and 2016 LTIP include measures focused on delivery of R&D
programmes. See pages 73 and 76 for details.
Accident/incident rate
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.
Rate
400500
400
300
200
100
0
2011
2012
2013
2014
2015
Target
Year-on-year improvement with an ultimate goal of nil.
Result
2015: 369 (2014: 337). See page 44 for details.
Directors’ incentive plans
Health and safety performance is not a specific measure used in directors’ incentive
plans. However, during 2015 health and safety has been integrated into the Meggitt
Production System (“MPS”) and the 2015 and 2016 LTIP include measures focused
on execution of MPS. See pages 73 and 76 for details.
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Reduction in defective
parts per million (DPPM)
2011
2012
2013
2014
2015
%
0
-20
-40
-60
-80
-100
On-time delivery
improvement
40015
12
%
9
6
3
0
2011
2012
2013
2014
2015
Definition and basis of calculation
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 one million and then divided by the
total number of parts delivered.
Figures include the results of disposed businesses up to the date of sale and 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: 87% (2014: 84%). See page 37
for details.
Directors’ incentive plans
DPPM is a performance measure for the 2015 and 2016 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 73 and 76 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. It is 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 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: 14% (2014: 10%). See page 37
for details.
Directors’ incentive plans
On-time delivery is a performance measure for the 2015 and 2016 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 73 and 76
for details.
34
MEGGITT PLC REPORT AND ACCOUNTS 2015
Chief Financial Officer’s review
Financial highlights (Table 1)
Revenue
1,647.2
1,553.7
+6
0
2015
£’m
2014
£’m
Reported
growth %
Organic4
growth %
-7
-10
-9
-4
-6
-6
-2
0
+1
+5
Underlying1:
EBITDA2
Operating profit
Profit before tax
414.5
325.5
310.3
429.6
346.0
328.7
Earnings per share (EPS)
31.6p
32.4p
Statutory:
Operating profit
Profit before tax
EPS
Free cash flow3
Net debt
236.6
210.2
236.2
208.9
23.2p
22.0p
199.0
1,053.1
146.8
575.5
+36
+83
+33
1 Underlying profit and EPS are defined and reconciled to statutory measures in
notes 10 and 15 respectively to 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 to
the Group financial statements.
4 Organic growth excludes the impact of M&A and currency. See Table 3 for
further details.
Overall performance
Organic revenue was flat in 2015, with the impact
of 4% growth in civil original equipment (OE) and
3% growth in civil aftermarket (AM) being
tempered by flat military revenue and a 20%
decline in energy resulting from ongoing
weakness in commodity prices. Underlying profit
before tax decreased by 9% organically, with a 2%
decrease in underlying EPS reflecting the benefit
of the share buyback programme.
Revenue
Reported revenue increased by 6% to
£1,647.2 million. Table 2 details the
revenue performance by end market.
As expected, revenue benefited from
foreign exchange and acquisitions during
the year. Currency movements, reflecting
the movement of Sterling against the
Group’s major operating currencies,
contributed £68.9 million to reported
revenue, represented by a £79.3 million
increase from the strengthening US
Dollar and Swiss Franc, partly offset by a
weakening Euro. Acquisitions contributed
a further £20.9 million to reported
revenue. Organic revenue growth of 4% in
civil aerospace and a flat performance in
military, was offset by a decline in energy.
Total civil aerospace revenue grew 4% on
an organic basis. Large jet OE, the most
significant driver of our OE revenue, grew
4% driven principally by growth in
narrow-body and A350XWB revenue, with
regional aircraft up 5% and business jets
up 11%. The aftermarket recovery seen
during 2014 and the first half of 2015
slowed to 2% organic growth during the
second half of 2015. Overall performance
for the year, however, remained positive,
with flat large jet aftermarket revenue,
4% growth in regional aircraft and 11%
growth in business jets. The parting out of
older aircraft, fuelled by a high retirement
rate in recent years, has continued to
impact our large jet aftermarket
business, although actions currently
being taken within the newly formed
Customer Service & Support (CSS)
organisation, including direct
participation in the surplus parts market
and seeking a greater share of
maintenance, repair and overhaul work
on our components, will partially mitigate
the impact in future years.
Military revenue was flat on an organic
basis, with strong growth in the first half
of the year being offset by tougher
comparators and the effects of Continuing
Resolution in the US in the second half.
Energy revenue declined by 20% on an
organic basis, driven principally by a 40%
organic decline in Heatric, our printed
circuit heat exchanger business,
reflecting challenges in the global oil and
gas market following the significant
decline in the oil price over the last 18
months. Our energy condition monitoring
revenues were broadly flat on an organic
basis, while revenues in our MCS energy
business grew organically by 18%
reflecting strong demand for silicon-
dioxide cables which facilitate signal
transmission in safety-critical power
applications. This growth was bolstered
by the £15.1 million full-year revenue
contribution from PECC, acquired in
December 2014. We continue to expect
headwinds in the energy businesses 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
2016 have been deferred, and it is likely
that we will see further deferrals in the
near future. We have taken significant
action on costs within Heatric, while
retaining the long-term capability of the
business to respond when the market turns.
Meggitt’s other specialist markets saw
organic revenue growth of 6%, with
growth in automotive and medical
products offsetting a decline in ground
fuelling system revenue.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
35
Revenue growth (Table 2)
Civil OE
Civil AM
Total civil aerospace
Military
Energy
Other
Total
2015
Revenue
£’m
326.0
482.7
808.7
570.2
149.8
118.5
1,647.2
Organic growth (Table 3)
Revenue
2015
£’m
2014
£’m
Growth
%
1,647.2
1,553.7
+6.0
Reported
(20.9)
(68.9)
–
–
Impact of M&A1
Impact of currency2
1,557.4
1,553.7
+0.2
Organic
2015
£’m
310.3
(0.4)
(10.5)
299.4
Growth
%
Organic
growth %
+4
+3
+4
0
-20
+6
0
Growth
%
-5.6
+8
+10
+9
+6
-8
+8
+6
2014
£’m
328.7
–
–
Underlying profit before tax
328.7
-8.9
1 Excludes the results of businesses acquired or disposed of during the current and prior year.
2 Restates the current year using 2014 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 £325.5 million
(2014: £346.0 million), representing a
margin of 19.8% (2014: 22.3%). The
principal drivers of the margin decline
included our Heatric business moving
from a profit in 2014 to a small loss in
2015, adverse mix, primarily within civil,
and continued expenditure on new
product introduction. Within civil, organic
OE growth outpaced that of AM, with
particular weakness being seen in AM
revenue associated with older aircraft
where margins tend to be higher.
Underlying net finance costs decreased to
£15.2 million (2014: £17.3 million) with the
benefit of lower interest rates and the
non-recurrence of a £1.8 million
refinancing charge in 2014, partly offset
by higher average debt due to the share
buyback programme and acquisitions.
The full year impact of both the buyback
and the acquisitions will increase finance
costs in 2016.
Underlying profit before tax was
£310.3 million (2014: £328.7 million).
The underlying tax rate was 20%
(2014: 21%), benefiting from a lower UK
corporation tax rate and the release of
provisions against historical tax
uncertainties. The underlying tax rate is
expected to increase to 23% from 2016,
reflecting a growing proportion of
revenue being generated in the US
following the two recent acquisitions.
Underlying earnings per share was
31.6 pence (2014: 32.4 pence).
On a statutory basis, profit before tax was
£210.2 million (2014: £208.9 million),
reflecting the favourable year-on-year
impact of the marking to market of
financial instruments (£24.4 million)
offsetting lower underlying profitability.
Earnings per share increased by 5% to
23.2 pence (2014: 22.0 pence), with the
effect of the share buyback and the lower
tax rate accounting for most of the
improvement.
Operational performance
Meggitt Aircraft Braking Systems
(MABS) provides wheels, brakes and
brake control systems for around
34,000 in-service aircraft. It continues
to develop innovative technology for new
programmes enabling the business to
retain its leading position in its target
markets, underscored by the strong
market share gains in recent years,
notably on super mid-size and long-
range business jets. 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 2% on an organic
basis, with good growth in civil, both OE
and AM, being partially offset by a 16%
decline in military following the
previously reported completion of the US
B-1B and Taiwanese Air Force retrofit
programmes. Regional aftermarket grew
5% driven by increases in fleet size and
utilisation, and business jet aftermarket
grew by 18%, with a particularly strong
first half. Large jet aftermarket saw
growth of 6% with strong DC10 spares
revenue more than offsetting modest
declines in MD80 and MD90. Operating
margins declined from 39.0% to 37.3%,
with unfavourable mix and the non-
recurrence of the US retiree medical
benefit in 2014 the principal contributors.
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 24%
of Group revenue, generating 48% of its
revenue from OE and 52% from the
aftermarket.
For MCS, revenue was up by 3% on an
organic basis. Civil aerospace declined
by 1% overall, with 4% growth in OE being
more than offset by a 4% decline in
aftermarket, driven by weakness in large
jets caused by the availability of surplus
parts. Military revenue grew by 14%,
primarily aftermarket, following a
particularly weak 2014. Operating
margins decreased from 26.3% to 24.4%
driven by the mix effect of civil OE growth
and civil aftermarket decline.
Meggitt Polymers & Composites (MPC)
has a bias towards military, representing
56% of its revenue in 2015. 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 57% of its revenue from
OE and 43% from the aftermarket. The
recent acquisitions of the composites
businesses of EDAC and Cobham plc
are reported as part of MPC.
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Chief Financial Officer’s review continued
MPC revenue declined by 1% on an
organic basis, with unchanged military
revenues and weakness in civil
aftermarket offsetting growth in civil OE.
Operating margins declined from 12.4% to
8.7% due to high levels of up-front new
product introduction expenditure ahead of
production ramp-up on upcoming aircraft
programmes over the next few years, and
a weaker product mix.
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 and avionics
suites 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 has a number of civil aerospace
tyre pressure monitoring systems already
in service and further systems under
development, having secured positions
for this technology on ten aircraft
platforms. MSS represents 29% of Group
revenue and generated 76% of its revenue
from OE and 24% from the aftermarket.
MSS revenue grew 3% on an organic
basis, with a modest decline in military
and broadly flat energy revenue being
more than offset by 3% growth in civil,
largely OE, and strong growth in other
markets including medical and
automotive. Operating margins decreased
from 16.8% to 15.2% reflecting adverse
mix in the lower margin civil OE revenue
stream and the non-recurrence of the
favourable renegotiation of a loss-making
contract in 2014.
Meggitt Equipment Group (MEG)
comprises principally our non-engine
actuation, dedicated military businesses
and Heatric. The division represents
15% of Group revenue and generates
84% of its revenue from OE and 16%
from the aftermarket.
Revenue in MEG declined by 10% on an
organic basis. 5% growth in military
revenue, driven by a strong performance
in the training businesses, was more
than offset by a 40% decline in Heatric
resulting from reduced expenditure by oil
and gas customers following the decline
in the oil price. Operating margins
decreased from 11.6% to 3.7% driven
principally by the weakness in Heatric,
which made a small loss in the year.
Taxation
Meggitt’s underlying tax rate reduced to
20% (2014: 21%) as a result of the release
of provisions against prior period tax
uncertainties and reduction in the UK
corporation tax rate. Our guidance is
increased to 23% (2014: 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 5% (2014: 6%). 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.
Our statutory tax rate, which includes
items reported below underlying profit
before tax, was 13% (2014: 15%). Cash tax
paid as a percentage of statutory profit
was 7% (2014: 9%).
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 and our tax
policy seeks to retain this low risk rating.
As for all companies, the Group is
exposed to changing tax legislation in the
territories in which we operate and, being
multinational, also to international
initiatives such as the current OECD Base
Erosion and Profit Shifting project (“BEPS
project”). The BEPS project published its
recommendations at the end of 2015. Out
of the 15 strands covered by the project,
at least three could impact the Group
depending on how territories take
forward the BEPS recommendations and
the final form of any legislation. These
three strands are those covering hybrid
mismatch arrangements, interest
deductibility and transfer pricing/country
by country reporting. The Group is
currently monitoring these developments,
participating in public consultations
where appropriate, reviewing data
collection systems and developing
contingencies to mitigate the impact,
should our existing arrangements be
made ineffective.
Earnings per share (EPS)
Underlying EPS declined by 2% to 31.6
pence (2014: 32.4 pence). The EPS decline
was lower than the reduction in
underlying profit before tax due to the
accretive nature of the share buyback
programme and the reduction in
underlying tax rate.
Statutory EPS increased by 5% to 23.2
pence (2014: 22.0 pence). The increase is
higher than in statutory profit before tax
Operational performance (Table 4)
Revenue
2015
£’m
353.1
397.9
177.4
474.8
244.0
20141
£’m
327.0
348.7
162.3
451.0
264.7
1,647.2
1,553.7
Growth
%
+8.0
+14.1
+9.3
+5.3
-7.8
+6.0
Organic
growth2
%
+2.0
+3.0
-0.6
+2.8
-9.5
+0.2
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Underlying operating profit
2015
£’m
131.7
97.0
15.4
72.3
9.1
325.5
20141
£’m
127.5
91.8
20.2
75.7
30.8
346.0
Growth
%
+3.3
+5.7
-23.8
-4.5
-70.5
-5.9
Organic
growth2
%
-0.9
-0.3
-30.2
-4.1
-72.7
-9.6
1 Restated for the change in segmental structure announced on 23 February 2015 and as described in note 6 to 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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GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
37
due to the reductions in issued share
capital as a result of the buyback
programme and the reduction in the
statutory tax rate.
Dividends
The Group’s policy is to grow dividends
broadly in line with underlying EPS over
the cycle. The Board has recommended
a final dividend of 9.80 pence (2014: 9.50
pence) which would result in a 5%
increase in the full-year dividend to
14.40 pence (2014: 13.75 pence).
The Company has a balance on its profit
and loss reserve at 31 December 2015 of
£1.0 billion (2014: £1.1 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.
The dividend reinvestment plan,
introduced in 2015, will be continued in
2016. It provides an efficient reinvestment
option for shareholders, without the
need for new shares to be issued by
the Company.
Investing for the future
Targeted investment in technology
development remains critical to our
long-term organic growth. Total R&D
expenditure in 2015 of £158.7 million was
9.6% of revenues (2014: £148.3 million,
9.5%), of which 17% (2014: 19%) was
funded by customers. The charge to net
operating costs including amortisation
and impairment increased by 1% on an
organic basis to £61.4 million (2014: £58.5
million).
Growth in R&D largely reflects our
impressive win rate on new programmes
during the last bid cycle, and the ongoing
investment in new technology aligned to
our customers’ future technology
requirements. A third of the expenditure
was on new wheels and brakes
programmes and over 40% focused on
products for engines and engine
accessories. These two categories
support future revenue exceeding £10
billion. The balance was spread across
a range of civil, military and energy
programmes including a step-up in
development costs in our training
businesses in response to recent contract
successes, which will start to have a
meaningful impact on revenue from the
end of 2016. R&D is expected to remain at
elevated levels during 2016, supporting
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
2015
£’m
158.7
2014
£’m
148.3
9.6%
9.5%
(26.8)
(84.8)
14.3
61.4
(28.9)
(77.7)
16.8
58.5
Growth
%
+7
-7
+9
-15
+5
Organic1
growth %
+2
-10
+3
-18
+1
1 Organic growth excludes the impact of M&A and currency.
our medium-term revenue growth
assumptions and increasing revenue
security, particularly as the majority of
the investment is on platforms where we
have won sole-source positions. As the
large number of aircraft programmes
currently in development start to enter
into service, we expect R&D investment
as a percentage of revenue to start to
decline. New product introduction
expenditure associated with these
platforms, which is expensed as incurred,
will remain elevated for a period of time,
which is good for future revenues but
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, decreased by 11%
organically reflecting completion of the
B-1B retrofit programme in 2014. Growth
is expected to resume in 2016 and beyond
as deliveries of aircraft equipped with our
wheels and brakes increase, which in
turn will drive aftermarket revenue
stretching out for decades. Our market
share of wheels and brakes on the fleet
of super mid-size and large business jets
in 2015 was 65%, 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
£55.4 million (2014: £42.2 million). This
includes investments in additional
furnace capacity in MABS and capacity
increases in the MCS North Hollywood
and MPC Rockmart facilities. While
significant, the 27% organic increase in
capital expenditure was off a very low
base from 2014 and was less than
originally expected, reflecting the
cancellation of investment in additional
capacity at Heatric and the cash impact of
some capital commitments slipping into
2016. Capital expenditure will accelerate
in 2016, including the impact of deferrals
from 2015 and additional capacity
requirements at the recently acquired
composites businesses ahead of delivery
growth of some key platforms including
A320neo and 737MAX.
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 now been launched at all
of our major manufacturing sites, and will
be rolled out across the additional
composites sites acquired during 2015 as
part of the integration activities. As at the
end of 2015, two sites have exited the
third stage - the point at which we expect
to start to see meaningful improvements
in financial performance – and we expect
further maturity of the programme during
2016. Meanwhile, the functional roll-out
of the programme beyond operations is
well under way.
We have already seen some significant
improvements in quality and delivery
since inception, with defective parts per
million down 87% and on-time delivery
up by 14%. This sustained improvement
is recognised and appreciated by our
customers, and has been instrumental
in the Group having received 12 supplier
awards from a number of different
customers during the year. Given the
demonstrable success we have seen
internally, we have accelerated the
planned deployment of the key tools and
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Chief Financial Officer’s review continued
competencies to long-term partners in
our supply chain.
Facility Headroom (Table 6)
Cash flow and borrowings
Free cash flow of £199.0 million (2014:
£146.8 million) represents a 36% year-on-
year improvement despite the reduction
in profit and continued high levels of
investment to support future growth. This
was driven by strong working capital
management, enhanced by higher cash
receipts at Heatric as projects were
completed.
The net cash outflow of £431.4 million
(2014: inflow of £21.1 million) reflects
M&A activity totalling £363.2 million,
principally the acquisitions of two
composites businesses, and the share
buyback totalling £146.4 million (2014:
£33.7 million). The cash dividend payment
also increased to £111.1 million (2014:
£51.4 million) following the withdrawal of
the scrip dividend option.
Debt structure and financing
The Group’s borrowings comprise a
combination of US private placement debt
and syndicated and bilateral bank credit
facilities. During the year, and as provided
under the facility agreement, the Group
requested a one year extension of its
USD900 million committed revolving
credit facility. This request was approved
by all of the participating banks and
accordingly the facility now matures in
September 2020. There is one further
option year under the facility agreement,
which the Group would expect to exercise,
subject to bank approval.
To fund the acquisition of the composites
businesses of Cobham plc and EDAC, the
Group agreed two new two-year USD300
million bilateral credit facilities with each
of Bank of America and HSBC, maturing
in September 2017. The terms of these
facilities are substantially similar to the
existing USD900 million revolving credit
facility with the exception of margins, fees
and duration which are more typical of
bridge finance arrangements. We will be
assessing the capital markets in 2016
with a view to refinancing the bilateral
facilities on a longer term basis.
There were no other changes in facilities
available to the Group in the year.
At 31 December 2015, the Group had
undrawn committed credit facilities of
£372 million after taking account of
surplus cash (2014: £431 million).
meeting our strict investment criteria,
the Group commenced a share buyback
programme. Following the announcement
of the acquisitions of the two composites
businesses, the Group suspended the
share buyback programme in September
2015. At 31 December 2015, the Group had
a net debt/EBITDA ratio of 2.3x.
During 2015, the Group purchased 28.3
million shares at an average share price
of 512.90 pence and a cost of £146.4
million under the buyback programme.
With the exception of 1.5 million shares
retained in treasury, shares purchased
under the programme in the year were
cancelled. The total number of shares
purchased under the buyback
programme, from its commencement in
November 2014 to its suspension, was
35.2 million at an average share price of
508.54 pence, with a total of £180.1 million
of capital returned to shareholders.
Debt financing risks
The Group seeks to minimise debt
financing risk as follows:
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 18%
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, HSBC, Bank
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
organically to accelerate the Group’s
growth and investing in the acquisition of
complementary businesses that will
enhance our offering to customers and
deliver enhanced returns to
shareholders.
The Board believes that in maintaining an
efficient balance sheet with appropriate
covenant headroom and investment
capacity, a net debt/EBITDA ratio, as
measured on a bank covenant basis, of
between 1.5x and 2.5x is appropriate,
whilst retaining the flexibility to move
outside the range if appropriate.
In November 2014, with a net debt/
EBITDA ratio of 1.3x and a relative lack of
sizeable acquisition opportunities
Movements in net debt (£’m) (Table 7)
Underlying EBITDA
Working capital inflow/(outflow)
Post retirement benefit deficit reduction payments
Cash flow from operations before exceptional and M&A costs
Exceptional operating costs
Interest and tax
Capitalised development costs/programme participation costs
Capital expenditure
Free cash flow
Net investment in M&A including costs
Dividends
Share buyback/Purchase of own shares
Net cash flow
Net debt acquired with businesses
Currency movements
Other non-cash movements
Opening net debt
Closing net debt
2015
414.5
29.8
(24.4)
419.9
(10.7)
(31.3)
(123.5)
(55.4)
199.0
(363.2)
(111.1)
(156.1)
(431.4)
(6.3)
(39.6)
(0.3)
(575.5)
(1,053.1)
2014
429.6
(36.3)
(29.3)
364.0
(16.6)
(34.7)
(123.7)
(42.2)
146.8
(29.1)
(51.4)
(45.2)
21.1
–
(24.7)
(7.3)
(564.6)
(575.5)
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SUPPLEMENTARY INFORMATION
39
of China, Barclays, BNP Paribas, Crédit
Industriel et Commercial, JP Morgan,
Bank of Tokyo-Mitsubishi and Sumitomo
Mitsui Banking Corporation. We seek to
maintain at least £100 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)
2015
2014
Sterling
US Dollar
Euro
Swiss Franc
Other
Net debt
(33.6)
1,064.7
36.4
(6.8)
(7.6)
(17.7)
545.8
42.4
12.0
(7.0)
1,053.1
575.5
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
2015
Net debt/EBITDA
<3.5x1
2.3x
2014
1.2x
Interest cover
≥3.0x
21.4x
20.8x
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 and
bilateral 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
generally maintain at least 25% of net
debt at fixed rates with a weighted
average maturity of two years or more. At
31 December 2015, the percentage of net
debt at fixed rates was 23% (2014: 48%)
and the weighted average period to
maturity was 2.9 years (2014: 4.5 years for
the first 25%). The floating rate bilateral
bank credit facilities taken out to fund the
acquisitions in the year, resulted in a
reduction in the proportion of net debt at
fixed rates to below 25%. It is the intention
to seek to refinance this floating rate
debt with fixed rate debt. At the same
time as the new bilateral facilities were
taken out, the Group entered a USD200
million treasury lock to secure current
market interest rates for future fixed
rate financing.
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)
2015
2014
Average translation rates against Sterling:
US Dollar
Euro
Swiss Franc
Average transaction rates:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
1.53
1.38
1.47
1.57
1.36
1.08
Year-end rates against Sterling:
US Dollar
Euro
Swiss Franc
1.47
1.36
1.48
1.63
1.24
1.51
1.54
1.30
1.08
1.56
1.29
1.55
The results of overseas businesses are
translated into Sterling at weighted
average exchange rates. Compared to
2014, the Group’s underlying profit before
tax for the year benefited by £12.6 million
from currency translation including a
favourable impact of £13.6 million
relating to US Dollar denominated profits
partly offset by an adverse impact on
other currencies.
Translation currency sensitivity (£’m)
(Table 11)
Revenue
PBT1
Impact of 10 cent movement2 :
US Dollar
Euro
Swiss Franc
70.0
15.0
9.0
7.0
1.0
2.0
1 Underlying profit before tax as defined and
reconciled to statutory measures in note 10 to the
Group financial statements.
2 As measured against the 2015 average translation
rates against Sterling set out in Table 10.
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 2014, the Group’s underlying
profit before tax for the year was
adversely impacted by £2.1 million from
currency transaction movements,
including an adverse impact of £1.2
million relating to US Dollar/Sterling
exposure. Each ten cent movement in the
US Dollar against the average hedge
rates achieved in 2015 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.
Transaction hedging in place (Table 12)
Hedging
in
place1 %
Average
transaction
rates
2016:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
2017 - 2020 inclusive:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
89
100
96
70
70
50
1.56
1.21
1.06
1.50
1.19
1.05
1 Based on forecast transaction exposures and
hedging in place at 22 February 2016.
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have a combined deficit of £45.4 million
(2014: £46.8 million). Deficit payments
during the year were £2.0 million
(2014: £1.5 million).
Doug Webb Chief Financial Officer
40
MEGGITT PLC REPORT AND ACCOUNTS 2015
Chief Financial Officer’s review continued
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 reduced
to £239.1 million (2014: £271.0 million).
Drivers of the movement in net
deficit included:
• A reduction of £32.6 million (2014:
Increase of £124.6 million) due to
remeasurement gains on scheme
liabilities. The main cause of the
increase was an increase in the rates
used to discount scheme liabilities in
the UK and US. 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
increased by 25 basis points in the UK
and 35 basis points in the US from the
10 year low yields at the end of 2014.
There has also been a modest
reduction in UK liabilities from
experience gains arising from the 2015
actuarial valuation. These gains were
partly offset by reduction in the rate
used to discount Swiss liabilities.
• An increase of £7.2 million (2014:
reduction of £30.9 million) due to
remeasurement losses on scheme
assets, principally driven by volatility
in equity markets.
• An increase of £9.5 million (2014: £7.8
million) arising from net interest
expense on the deficit.
• Net deficit reduction payments of
£22.4 million (2014: £27.8 million).
Regulations in the UK and US require
repayment of deficits over time. In the
UK, the Group is currently 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. In the US, the level
of deficit payments is principally driven
by regulations. Amounts required to be
paid in the US reduced in the year, as
expected, reflecting the impact of new
legislation implemented in the latter
part of 2014 and are expected to fall
further in 2016, before increasing
from 2017.
Overall, the Group would have
expected deficit contributions to
reduce to £20.8 million in 2016 based
on the existing 2012 deficit reduction
agreement with the UK trustees and
absent further regulatory changes in
the US. The April 2015 UK triennial
valuation is however, approaching
completion and discussions have
commenced with the trustees over a
revised recovery plan to address the
increase in deficit of approximately
£70.0 million since the previous
valuation. Additional payments to
address this deficit will likely start in
quarter 2 of 2016, once the recovery
plan is agreed with the trustees.
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
Defined benefit pension scheme summary (£’m) (Table 13)
Opening net deficit
Service cost
Group cash contributions
Deficit reduction payments
Other amounts charged to income statement1
Remeasurement losses/(gains)—schemes’ assets
Remeasurement (gains)/losses—schemes’ liabilities
Currency movements
Closing net deficit
Assets
Liabilities
Closing net deficit
Funding status
2015
271.0
14.5
(36.9)
(22.4)
11.1
7.2
(32.6)
4.8
239.1
794.1
1,033.2
239.1
77%
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%
1 Comprises past service amounts, administration expenses borne directly by schemes and net interest expense.
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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 to
support the communities in which we operate.
Policy
We are committed to:
• Upholding sound corporate governance
principles;
• Upholding our employees’ human rights;
• Encouraging dialogue with employees;
• Professional and comprehensive employee
training programmes;
• 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; and
• Supporting our local communities;
• Improving our financial, social and
• Conducting business relationships in
an ethical and responsible manner;
Action
For our stakeholders this means:
environmental performance.
• Complying with relevant national laws
• Modern, safe and efficient operational
and regulations;
practices;
• Supporting the Ten Principles outlined in the
United Nations Global Compact on Human
Rights;
• Contributing to the social and economic
enrichment of local communities, focusing
particularly on activities related to education;
• Providing a supportive, rewarding and safe
• Effective risk identification and mitigation
working environment;
across all areas of the business;
• Delivering comprehensive training for
• Conducting independent audits in
employees;
compliance areas; and
• Developing state of the art communication
and collaboration tools;
• Robust internal and external reporting and
controls and ensuring financial probity.
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Corporate responsibility continued
Governance and compliance
In 2015, the Board approved a revised
Corporate Responsibility Policy to align it
further with ISO 26000 and to confirm our
commitment to uphold our employees’
human rights and our support for the Ten
Principles outlined in the United Nations
Global Compact. The revised policy
highlighted our commitment to working
with and supporting local schools, colleges,
universities and other education initiatives.
The updated policy is published on our
website, together with Board-approved
policies on health and safety, environment,
ethics and business conduct, anti-
corruption and trade compliance.
The Board is responsible for
implementation and performance of the
Corporate Responsibility Policy. On a
day-to-day basis, the Executive Director,
Commercial and Corporate Affairs has
functional responsibility for corporate
responsibility (CR) matters on behalf of the
Chief Executive, including ethics and
business conduct, trade compliance and
charity and community activity. The Group
Operations Director has functional
responsibility for health, safety and
environment on behalf of the Chief
Executive. Divisional presidents and site
directors are responsible for implementing
our policies and procedures locally. The
Group is committed to providing the support
needed to ensure our facilities can fulfill the
requirements outlined in our policies.
Activity in 2015
Environment
Meggitt continues to target high levels of
environmental performance throughout
our businesses based on global standards
and procedures. 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 audits
of environmental management
systems and practices.
Our global environmental audit
programme, supported by external
consultants, includes a comprehensive
review of applicable regulatory
requirements. In 2015, our environmental
audit programme, supported by external
consultants, was integrated with our
health and safety audit programme and
the audits included a comprehensive
review of applicable regulatory
requirements as well as site compliance
against industry best practice standards.
In total, ten sites were audited in 2015.
All our manufacturing facilities are
required to obtain the ISO 14001
standard. At the end of 2015, all had
achieved certification, except our new
acquisitions which are currently setting
out their plans to achieve certification.
Performance
Table 1 shows our performance for key
environmental metrics and Table 2
shows our progress on achieving
internally set targets.
Our overall performance in 2015 reflects
the challenges we face reducing
Greenhouse Gas Emissions (GHGs) arising
from the significant energy consumption
demands associated with our carbon
brake manufacturing processes at
Meggitt Aircraft Braking Systems (MABS).
The carbon densification process requires
large amounts of electricity and natural
gas due to high processing temperatures
over lengthy cycle times. Primarily due to
a significant increase in carbon production
in 2015, our GHG emissions remained
relatively flat as shown in Table 1 below.
This is also reflected in our performance
against the five-year targets for electricity
and natural gas consumption (Table 2). It
will be challenging for us to achieve the
targets by the end of 2016.
Excluding MABS, the Group would have
achieved a 4% reduction in GHG emissions
on an absolute basis and a 6% reduction
in GHG emissions normalised to revenue.
We are evaluating new strategies and
technologies which should enable us to
reduce absolute GHG emissions from
MABS, including the use of cogeneration
and new renewable energy technologies
such as fuel cells.
In 2015, we announced new targets for the
reduction of GHG emissions across the
Group. Excluding MABS, we have set an
aggressive target to reduce our GHG
emissions by 25% relative to revenue over
a ten-year period using 2015 as the
baseline year. For MABS, we have set a
separate 2016 GHG ceiling efficiency
target of 138 kilogrammes of GHGs
emitted per kilogramme of carbon
produced. This separate target is
necessary due to the difficulties in
reducing electricity and natural gas
consumed during the carbon brake
manufacturing process. The ceiling target
is based on analysis of data gathered over
prior years that shows this to be the
maximum amount of carbon brake
material that could be produced when the
carbon furnaces run at peak efficiency.
Environmental metrics1 (Table 1)
Utilities
Electricity—gWh
MWh per £m
Natural gas—gWh
MWh per £m
Greenhouse gas emissions (CO2e)1—tonnes
Tonnes per £m
Waste—tonnes
Tonnes per £m
Water—cubic metres
Cubic metres per £m
2015
201
126
203
127
132,074
82.7
12,098
7.58
711,385
446
Change
-1%
+6%
-1%
-2%
-3%
2014
201
127
190
120
131,897
83.5
12,200
7.72
722,200
457
1 Metrics per £m are calculated using revenue converted at constant exchange rates. Greenhouse gas
emissions (GHG) are calculated using conversion factors published in the 2014 and 2015 Guidelines to
DEFRA/DECC’s GHG Conversion Factors for Company Reporting. Emissions from overseas electricity are in
CO2 only (not CO2e).
Targets (Table 2)
Baseline
year
Performance period
CO2 emissions
Electricity
Gas
Water consumption
Waste to landfill
Waste recycled
2015
2011
2011
2011
2011
2011
1 January 2016 – 31 December 2025
1 January 2012 – 31 December 2016
1 January 2012 – 31 December 2016
1 January 2012 – 31 December 2016
1 January 2012 – 31 December 2016
1 January 2012 – 31 December 2016
Target
improvement
over performance
period
Achieved as at
31 December 2015
-25%
-15%
-15%
-10%
-10%
+10%
N/A
+10%
-5%
-8%
-9%
+6%
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Meggitt recycles an estimated average
100,000 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. As a result of these efforts in 2015,
we continued to decrease our water
consumption despite increased water
used at the MABS UK facility during the
carbon manufacturing process and
significant leaks which were resolved in
the water supply at one site. Decreased
production demands at some UK facilities
and water restrictions implemented in
response to drought conditions in
California contributed to the overall
decrease in water consumption in 2015.
We are on track to meet our five-year
target for reduction in water usage.
We continued to decrease the amount of
waste generated in 2015 with the
conclusion of consolidation, demolition
and construction projects that began in
2014. Our facilities continued to improve
their recycling efforts in 2015 by
identifying waste recycling vendors for
items such as cardboard and waste
carbon material. As a result, we increased
our waste recycled by 13% and decreased
our waste to landfill by 9% in 2015
compared to 2014. We are on track to
meet our five-year target for increases
in recycled waste and reduction of waste
to landfill.
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.
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
2015
Tonnes of
CO2e
37,796
94,278
132,074
20142
Tonnes of
CO2e
35,693
96,204
131,897
82.7
83.5
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 2014 numbers have been restated to the updated 2014 DEFRA/DECC 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.
Career-long learning
Encouraging employees to take on new challenges is a key principle
across the Group. There are numerous initiatives but one of the most
successful is the tuition reimbursement programme at Meggitt
Aircraft Braking Systems (MABS).
It grew more than 50% in 2015, with USD200,000 paid in fees for 32
employees studying postgraduate qualifications in areas such as
law, engineering, project management and business.
Doug Moseley, VP of Applied Research and Technology, used the
scheme 20 years ago to complete a Masters in engineering and is
now using it to help finance a law degree.
“I was spending more and more time dealing with intellectual
property in my role and found the legal aspects fascinating. The
degree is demanding—20-30 hours a week—but it’s food for the mind
and it’s very useful in my work. Patents can cost USD150,000 during
their lifespan so the question of whether to file is not taken lightly.”
“The R&D—in areas like quiet carbon braking—is also expensive but
it could give us a strong competitive edge. The more I understand
the legal issues, the better I can steer our decision making. And once
I’m fully qualified, there are opportunities at division and Group level
to get more involved with legal. I’m very excited about this next stage
in my career.”
The programme has also proved a good recruiting tool. One of the
reasons Programme Manager Jennifer Flowers joined MABS was
to study for a Masters in engineering management.
“The scheme covered 70% of the fees and my manager was very
supportive throughout. It’s broadened my horizons and opened a lot
of doors for me.”
“The degree was very much rooted in aerospace so my industry
knowledge expanded rapidly. And there were classes in finance,
project management and systems engineering alongside the main
management component.”
“It qualified me to take a certificate in project management too
which, in turn, led to a promotion. I’ve put a lot of my learning into
practice since, developing templates and tools to streamline
processes at MABS within programme management.”
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Corporate responsibility continued
We had a slight increase in our absolute
GHG emissions in 2015 and our GHG
emissions relative to revenue remained
relatively static due to the increases in
electricity and natural gas consumed at
MABS facilities. The rest of the Group
achieved a reduction in absolute GHG
emissions through site consolidations and
relocation to newer, more energy efficient
properties.
under REACH and work closely with our
chemical suppliers to ensure substances
are registered and will be approved for
continued use, or identify suitable
alternatives. We participate in aerospace
industry trade groups in the United States
and Europe involved in researching
replacements for hexavalent chromium
used in common aerospace manufacturing
applications.
Obsolescence
Our Obsolescence Review Board 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.
Health and safety
As a Group, we strive to ensure our
employees can work safely and live healthy,
productive lives by actively promoting
policies and programmes that help
individuals safeguard themselves, their
co-workers and visitors. We have integrated
health and safety into our Meggitt
Production System (MPS) by driving
standard safe work in every facility, product
line and operation plan. Our safety first
culture is reinforced in safety reviews of
every production cell as part of the MPS
daily layered accountability (DLA) daily
management cycle (see People and Culture,
page 24). Our guiding philosophy is that
since all accidents and injuries are
preventable, our ultimate goal can be zero
accidents and injuries. In 2015, we continued
to implement measures to improve safety in
the workplace, including:
• Regular external health and safety
audits, which monitor site compliance
with laws. These audits were integrated
with our environmental audits from
2015;
• A revised scoping of internal
compliance audits to include a review of
Saving energy
In 2015, our facilities continued to focus
energy reduction initiatives on improving
facility lighting, replacing older, inefficient
equipment and upgrading building
insulation. Improvements included:
•
Ongoing lighting upgrade projects at
many facilities resulting in reductions
of approximately 55% of the energy
used in previous lighting;
• Installation of variable speed drive
compressors resulting in 10%
electricity consumption savings;
• The carbon refurbishment programme
at MABS continues to expand with over
6,000 carbon discs reused and
refurbished in 2015. The reduction in
process time saved 3,486 tonnes of
CO2 that otherwise would have been
emitted (representing approximately
5% of MABS overall CO2 emissions);
and
• Recladding of building insulation at
a UK facility resulting in increased
heating and cooling efficiencies.
In 2015, Meggitt UK facilities representing
90% of our UK energy consumption
conducted energy efficiency audits under
the Energy Savings Opportunity Scheme
(ESOS) requirements. Recommendations
were made from the audits and our
facilities are assessing their feasibility.
Many of the recommendations are being
shared beyond the UK in similar
operations, providing further opportunities
for energy reduction initiatives.
We continue to actively investigate cleaner
energy technologies including fuel cell
power generation systems and solar
energy throughout the Group.
REACH
Compliance with the European Community
regulation on Registration, Evaluation,
Authorisation and Restriction of Chemicals
(REACH) is managed by the Group’s REACH
Steering Committee which continues to
address the risks associated with the
potential obsolescence of chemicals used
by aerospace manufacturers. We
continuously track substances regulated
site adherence to Meggitt Health and
Safety Procedure (MHSP) and process
documents incorporating the best
industry-recognised safety practices;
• Group-wide online health and safety
awareness training for all employees;
• Implementation of a behavioural health
and safety programme at four facilities
in 2015, with the requirement for
facilities to build such programmes
into the MPS process;
• Health and safety provisions built into
the MPS process, allowing facilities to
continuously improve on their health
and safety performance;
• Continued dissemination of
information and best practice through
intra-Group health, safety and
environment (HSE) conferences, health
and safety alerts and all-employee
safety bulletins;
• Roll-out of a MHSP for safe industrial
lift truck operation and process
documents for safety when working
with hexavalent chromium or
hydrofluoric acid across the Group;
and
• Roll-out of a HSE topic of the week for
discussion at the DLA reviews held in
every production cell.
As a result of these measures great
progress was made on our safety metrics
across the Group, with a 20% decrease in
days lost due to injury and lost time cases
reported. We achieved a 37% decrease in
the Occupational Safety and Health
Administration (OSHA) recordable incident
rate across our US sites. Since 2009 we
have achieved a 72% decrease in the OSHA
recordable incident rate at our US facilities.
Although we made progress in 2015, our
total reportable incidents and associated
incident rate increased (see Table 4). The
increase is due primarily to incidents that
occurred at three of our overseas facilities
accounting for 65% of all reportable
incidents. Some of those incidents involved
first aid only which did not result in any
lost time from work, and some, although
not work related, were required to be
reported to the local government
Reportable accidents and incidents (Table 4)
Reportable accidents and incidents1
Reportable accident/incident rate2
2015
40
369
Change
+11%
+9%
2014
36
337
1 Reportable accidents and incidents are those directly reportable to a regulatory authority.
2 Accident/Incident rates are the number of reportable accidents/incidents per 100,000 employees.
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authorities under applicable laws and
regulations. We have implemented
measures including behaviour-based
safety training at these sites as part of
our goal to achieve zero incidents,
including reportable cases at any site.
In 2015, we modified the criteria used in our
Meggitt Safety Star award programme to
include accident prevention measures
through leading indicators as a measure of
improved health and safety performance.
During the year, 91% of our manufacturing
facilities achieved at least a Meggitt Gold
Safety Star award. Of those, 18 facilities
achieved a Platinum Safety Star, the
highest level of achievement that can be
awarded within the programme.
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 2015, we provided training across the
Group on the following topics: ‘Crack the
Code: Maintaining Integrity;’ ‘Anti-Bribery
Principles;’ and ‘Professional Behaviour:
Mutual Respect.’ We held two in-house
ethics conferences in the UK and US,
where facility-based ethics coordinators
participated in live training on new
directions for the business and reinforced
the importance of the Ethics
Programme. During the year, we
published and distributed our new Ethics
Guide in seven languages to all
employees and directors. The Guide is
available on our website. We also
launched a Gifts Register to track gifts
and hospitality given and received.
We have a highly-developed trade
compliance programme, based on
guidelines issued by the regulatory
authorities and the Nunn-Wolfowitz Task
Force Report of 2000 (the influential
report on export compliance best
practice). During 2015, 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 facilities in the
US and the UK.
Local communities and
charitable donations
Meggitt has a policy which underpins our
approach to charitable giving and
charitable sponsorship which was
approved in 2014. We are committed to
being good corporate citizens, and
continue to support the communities in
which we operate. Yearly reports reveal
the exceptional generosity of many
employees who give time and money to a
wide range of national and local
initiatives. Activity in 2015 included:
•
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
Training the next generation
When 22-year-old Benjamin Broch from our Fribourg facility came
to Meggitt’s UK Data Centre to train the IT team on a new set of tools,
they were surprised at his age. Once the session was over, they were
even more surprised at how much he knew.
“I did start working at Meggitt when I was 15,” he smiles.
“Apprentices get a good head start.”
Ensuring there are enough skilled young people who have had the
chance to develop their practical talents is as important for Meggitt’s
future as it is for society in general.
Each year about ten teenagers join Meggitt Sensing Systems’
apprenticeship scheme in Switzerland, specialising in one of five
areas: electrical or mechanical engineering, IT, commercial and
logistics. The three or four-year programme combines rigorous on
and off-the-job training at Meggitt with as many as eight academic
subjects at school.
Second-year apprentice Daniel Fonseca is rotating through the key
engineering departments this year and will specialise over the next
two years. Having moved from Portugal only three years ago, he
spent an additional year at school to build up his language skills and
get to grips with the Swiss curriculum.
This year, in addition to spending time in production, quality control,
maintenance and prototyping to learn the basics, he has had the
opportunity to design and build assembly stands for his colleagues
in operations.
“I chose Meggitt because it’s global and it’s a technology leader.
That means I can practice my languages here and I get to train on
machines that many of my classmates don’t get access to. There’s
a lot of opportunity but that means expectations are high too. You’ve
got to get the work done.”
Combining theory and practise in a commercial setting from a young
age not only helps apprentices get a head start. Once they’re
finished, they’re also ready and willing to train the next in-take.
“My time is now split 80/20 between Group and Fribourg projects,”
says Benjamin. “I was an apprentice not long ago so when it comes
to training, I know what’s helpful to pass on and when.”
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Corporate responsibility continued
engagement in local community
activities and initiatives designed to
improve education, financial stability
and health care for local families. In
2015 our businesses raised over
USD200,000.
• For more than a decade, our MPC
facility in Rockmart, Georgia has held
an annual toy donation drive for needy
children in local communities. Through
these donations, hundreds of children
have received toys during the holiday
season. Similar “Toys for Tots” drives
have been held annually at several of
our other US facilities.
• MABS Akron US Women in Leadership
group won the Corporate Service
Award “Champions for Children” given
by the local county children’s services
organisation for their leadership and
participation in community charitable
events during the year including raising
funds for over 200 Easter baskets for
under-privileged children in the last five
years.
• Our Piher facility in Spain held two fund
raising events involving employees
which resulted in 2,000 Euros being
donated to a local food bank. Some
6,000 Euros were donated to the School
CPI-ETI to equip a new technology
classroom with new computers in
recognition of its collaboration with
Piher over several years to provide
engineering and technical education.
• Meggitt PLC has for many years funded
annual excellence awards for staff at
the local Poole Hospital NHS
Foundation Trust and during 2015 our
Executive Director, Commercial &
Corporate Affairs joined its Board.
Meggitt PLC regularly supports the
Dorset Community Foundation, a
Analysis of employees (Table 5)1
Employees by division
Number of employees
11,926
provider of donor advisory and grant
services which acts as an advocate at
national and regional level for Dorset’s
voluntary sector, and Julia’s House, a
children’s hospice charity in Dorset
dedicated to helping life-limited
children and their families across
Dorset and Wiltshire.
Although our Policy allows a broader
range of charitable activity, the Group’s
priority is to support charities or
community organisations which focus on
education initiatives. The Arkwright
Scholarships and Akron bursary
apprentice programmes are highlighted
elsewhere in this report. Other activities
include:
•
The Royal High School in California has
an arrangement with our corporate
office in Simi Valley to provide interns
in support of the Regional Occupational
Program. Each year, at least one
student from that secondary school
spends eight hours a week at the
Meggitt-USA office, learning about
business and undertaking specific
projects that earn academic credits
towards graduation.
• Our facility in McMinnville, Oregon,
driven by a shortage of skilled
manufacturing labour in the
community and surrounding area,
set up a manufacturing training
programme at the local high school,
engaging with local business,
community leaders and the McMinnville
Economic Development Partnership.
Meggitt devised a training syllabus with
the school, donated equipment for
student training and trained the high
school manufacturing shop teacher.
Our employees
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 59).
Table 6
Level
Board of Directors
Group Executive Committee
Senior executives
All employees
% of females at
31 December 2015
Number of females
Number of males
22%
14%
9%
28%
2
2
24
3,324
7
12
252
8,602
Employees by length
of service (years)
Number of employees
Employees by region
Number of employees
11,926
11,926
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Cross-Group functions
1,322
1,789
2,916
3,373
1,755
771
11%
15%
24%
28%
15%
7%
Less than 5
Between 5 and 10
Between 10 and 15
Between 15 and 20
Between 20 and 25
Over 25
5,550
2,330
1,300
1,014
419
1,313
47%
20%
11%
8%
3%
11%
USA
UK
Rest of Europe
Rest of World
6,045
2,999
1,562
1,320
51%
25%
13%
11%
1
As at 31 December 2015.
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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.
Our updated Policy included a new
commitment to uphold our employees’
human rights and support the Ten
Principles outlined in the United Nations
Global Compact, relating to human
rights, labour, the environment and
anti-corruption. We are reviewing our
processes as a result of the recent
modern slavery legislation enacted
in the UK and expect to make the
required statement in 2017 for the
2016 financial year.
meetings on shop floors, monthly
all-employee ‘Town Hall’ meetings, team
briefings and works councils. We respect
all employee relations regulations.
Strategic report
This 2015 Strategic report on pages
1 to 47 is hereby signed on behalf of
the Board.
Corporate communications take a variety
of forms, including presentations from
the Chief Executive via audio-visual
media, global web-enabled conferences,
top-down strategy dissemination from the
Chief Executive, 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.
Stephen Young
Chief Executive
22 February 2016
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 formats including daily
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.
Inspiring young engineers
Engineering has a long, proud history in the UK but with energy,
aerospace, manufacturing and the technology sectors all playing a
key role in the economy, the demand for young engineers outweighs
the supply.
To help turn the tables, Meggitt joined leaders such as Thales,
Korean firm Doosan and Lockheed Martin to mentor young
engineers in partnership with the Arkwright Scholarships Trust, one
of the UK’s leading engineering education organisations. It works
with more than 800 schools across the country to identify and inspire
the next generation of engineers.
In 2014, graduate engineer Tom Newman started mentoring Calum
Mills, one of three Arkwright teenagers Meggitt has worked with
over the past two years.
“We spoke regularly on the phone and I helped organise work
experience at Meggitt Aircraft Braking Systems. We set what I
thought was a tough assignment to design a landing gear shock
absorber. But they really applied themselves and completed it in just
a few days.”
“I’m very grateful,” says Calum, who recently earned a place at
Loughborough University, a leading UK engineering school. “The
work experience really helped me make my mind up about my future
career. And Tom was very helpful in advising me on a design project I
undertook, looking at the design and build of a drone for surveying
disaster areas and delivering emergency supplies.”
Students on the scheme also benefit from advice on university
selection and application. Mentors are generally recent graduates
who draw on their own experience to advise on the respective
strengths of leading engineering universities and suggest
extracurricular activities to strengthen applications.
“Mentoring is an important part of my own professional
development as I work towards becoming a Chartered Engineer,”
says Tom. “But it’s been very rewarding on a personal level, too.
It’s great to have an opportunity to give back to the engineering
industry even though I’m only just getting started myself.”
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Who runs Meggitt
and how do we
reward them?
50
60
48-84 Governance reports
49
Chairman’s introduction
50-51 Board of directors
52-55 Corporate governance report
56-58 Audit Committee report
59
Nominations Committee report
60-80 Directors’ remuneration report
81-84 Directors’ report
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Corporate governance report
Chairman’s introduction
Throughout the financial year ended 31 December 2015 and to
the date of this report, we have complied with the provisions set
out in the UK Corporate Governance Code 2014 (the Code)
published by the Financial Reporting Council (FRC). This
excludes Code Provision B.6.2, which is the requirement for the
board evaluations of FTSE 350 companies to be facilitated
externally at least every three years. Our last externally
facilitated evaluation was in 2012. The Board decided in 2015
that because of the timing of my appointment as Chairman in
April 2015, there would be more value in having an externally
facilitated evaluation in 2016. The Group has applied all other
main and supporting principles set out in the Code and
explanations are included in this report and in the Audit
Committee, Nominations Committee and the Directors’
remuneration reports. The information required under
Disclosure and Transparency Rule 7.2.6 is located in the
Directors’ report.
The Board is committed to maintaining the high standards of
corporate governance, which are fundamental to discharging
our responsibilities. It is my responsibility to ensure that Meggitt
is governed and managed in the best interests of shareholders
and wider stakeholders. This includes encouraging open
discussion and constructive challenge. In this report, we set out
our governance framework and explain how sound and effective
corporate governance practices support our strategy to create
sustainable shareholder value over the long term.
Leadership
As part of the planned and continued evolution of the Board,
there have been a number of Board changes in 2015. Phil Cox
retired on 31 January 2015 to take up the Chairmanship of
Drax Group plc. I joined the Board on 1 March 2015, replacing
Sir Colin Terry as Chairman at the end of the annual general
meeting (AGM). On 1 October, Colin Day joined the Board as
a non-executive director and assumed responsibility for the
Chairmanship of the Audit Committee from David Williams who,
after over nine years as a non-executive director, retired from the
Board on 31 December 2015. Paul Heiden took over from David
as Senior Independent Director from 1 January 2016.
On behalf of the Board I would like to thank Sir Colin, Phil and
David for their significant contributions to the Board and to wish
them well for the future, and to welcome Colin Day as a non-
executive director.
Effectiveness
In 2015, Board processes were improved as a result of the 2014
evaluation and the Board agreed to defer our externally
facilitated evaluation to 2016.
The main findings from our 2015 internal evaluation related
to administrative board processes and improvements in risk
management and succession planning. More details on the
evaluation process and findings are later in this report.
Accountability
In 2015, the Audit Committee discussed and agreed the process
we needed to undertake to enable the Board to make the viability
statement as required under the Code. A description of the
process and the resulting statement is set out in the Risk
management report (page 29). The report also includes our
annual confirmations on risk management and internal control
that were previously included in this Corporate governance
report. The risk management process has been further
enhanced in 2015. The process continues to evolve through the
Group Risk Register, risk assurance map and revised risk
appetite statement. During the year, the Board provided authority
to the Audit Committee to oversee the risk management process.
The Board has confirmed that this Annual Report is fair,
balanced and understandable. You can find an explanation of the
process we have used to make this determination on page 56.
Remuneration
At our AGM in 2015, shareholders overwhelmingly approved our
Directors’ remuneration report. The 2015 report (pages 60 to 80)
provides a detailed review of the Remuneration Committee’s
2015 activities and bonus and share scheme performance in
2015. For ease of reference, we have also included the
Remuneration Policy approved at our AGM in 2014 (valid until the
2017 AGM). The 2014 Code introduced new requirements relating
to remuneration, including inserting clawback/malus into
remuneration schemes. Our remuneration package and policy
approved in 2014 is compliant with those requirements.
Sir Nigel Rudd
Chairman of the Board of Directors
22 February 2016
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MEGGITT PLC REPORT AND ACCOUNTS 2015
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
Colin Day
Sir Nigel Rudd
Guy Berruyer
Alison Goligher
Sir Nigel Rudd DL
Non-Executive Chairman + §
Appointed: 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.
Appointments in unlisted entities: Non-Executive
Chairman of Heathrow Airport Holdings Limited
(due to retire in September 2016) and Aquarius
Platinum Ltd and Non-Executive Director of
Sappi Limited.
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.
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
Appointments in unlisted entities: Chairman of
Linaro Limited since October 2015 and a member of
the Council of the University of Southampton.
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 other European management roles.
Colin Day
Non-Executive Director * + ‡
Appointed: 2015 | Nationality: British
Skills and experience
Chartered certified accountant with significant
experience in senior operational and financial roles
gained across a variety of sectors including
engineering and technology, pharmaceuticals, oil
and gas and aerospace.
Current appointments
Chief Executive of Essentra PLC (formerly Filtrona
PLC) and Non-Executive Director of Amec Foster
Wheeler plc.
Appointments in unlisted entities:
Non-Executive Director of FM Global.
Previous appointments
Chief Financial Officer, Reckitt Benckiser Group plc,
Group Finance Director of Aegis Group plc,
Non-Executive Director of WPP plc, Easyjet plc,
Imperial Tobacco Group plc and Cadbury plc.
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
None.
Previous appointments
Various roles at Royal Dutch Shell from 2006 to
2015, most recently, Executive Vice President,
Upstream International Unconventionals. Previously
spent seventeen years at Schlumberger, a supplier
of technology, integrated project management
and information solutions to oil and gas
customers worldwide.
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Philip Green
Brenda Reichelderfer
Paul Heiden
Doug Webb
Philip Green
Executive Director, Commercial and
Corporate Affairs § ◊
Appointed: 2001 | Nationality: British
Skills and experience
Fellow of the Institute of Chartered Secretaries
and Administrators, with significant legal and
compliance experience.
Current Appointments
Appointments in unlisted entities:
Non-Executive Director of Poole Hospital NHS
Foundation Trust since 25 April 2015, Deputy
Chairman of the Board and Chairman of the Audit
and Governance Committee since 1 December 2015.
Member of the GC100 and the Dorset Employment
and Skills Board.
Previous appointments
Meggitt’s Company Secretary from 1994 to 2006,
after 14 years at British Aerospace in company
secretarial roles.
Paul Heiden
Non-Executive Director
Senior Independent Director * + ‡
Appointed: 2010 | Nationality: British
Skills and experience
Chartered accountant, with considerable experience
in senior executive and financial roles in aerospace.
Current appointments
Senior Independent Director and Chairman of
the Audit Committee of London Stock Exchange
Group plc. Non-Executive Chairman of Intelligent
Energy Holdings plc.
Appointments in unlisted entities: Non-Executive
Chairman of A-Gas (Orb) Limited.
Previous appointments
Chief Executive of FKI Plc, 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
Non-Executive Director of Federal Signal
Corporation and Chairman of their Compensation
and Benefits Committee and Non-Executive
Director of Moog, Inc..
Appointments in unlisted entities: Senior Vice
President and Managing Director of private equity
sector consulting firm TriVista.
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.
Doug Webb
Chief Financial Officer § ◊
Appointed: 2013 | Nationality: British
Skills and experience
Chartered accountant who has held senior
international financial positions in defence,
aerospace, engineering, technology and
financial services.
Current appointments
Non-Executive Director of SEGRO Plc, Chairman
of their Audit Committee and member of their
Nominations Committee.
Appointments in unlisted entities: Member of the
Hundred Group of Finance Directors and the
Investment Advisory Committee of Fitzwilliam
College, Cambridge University.
Previous appointments
Chief Financial Officer of London Stock Exchange
Group Plc, QinetiQ Group Plc and various senior
financial roles in both the UK and US for Logica
(now CGI).
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Corporate governance report continued
LEADERSHIP
Our governance framework as at 31 December 2015:
Board of directors
Sir Nigel Rudd (Chairman)
Three executive directors
Five independent non-executive directors
Creating and delivering
sustainable shareholder value
Board committees
Remuneration
Audit
Nominations
Five independent
non-executive directors
Five independent
non-executive directors
Chairman, Chief Executive and five
independent non-executive directors
Determines the reward strategy for
the executive directors and senior
management, to align their interests
with those of the shareholders
Monitors the integrity of the Group’s
financial statements and the effectiveness
of the external and internal auditors
Ensures the Board and senior management
team have the appropriate skills, knowledge
and experience to operate effectively and to
deliver the Group’s strategy
Ethics and trade compliance
Finance
Chairman, one independent
non-executive director and
three executive directors
Three executive directors
and the 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
by the Board
Management committees
Group Executive Committee
Commercial Committee
Three executive directors, the Chief Operating Officer,
five senior functional executives
and five divisional presidents
Three executive directors, the Chief
Operating Officer and two other Group
Executive Committee members
Assists the Chief Executive to develop and implement the
Group’s strategy, manage operations and discharge
responsibilities delegated by the Board
Reviews and approves bids and proposals
of Group significance and any other
commercial activity
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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 2015)
sets out the matters on which the Board must make the final
decisions. These include setting the Group’s strategy and
approving the annual budget, changing the Group’s capital
structure and capital allocation policy, approving acquisitions
and disposals above a certain threshold and agreeing 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 2015
The Board met ten times in 2015 (seven scheduled meetings,
shown in the table below, and three unscheduled meetings).
Name
Sir Nigel Rudd3
Mr G S Berruyer
Mr P G Cox4
Mr C R Day5
Ms A J P Goligher
Mr P E Green
Title
Chairman
Non-executive director
Non-executive director
Non-executive director
Non-executive director
Executive Director,
Commercial and
Corporate Affairs
Non-executive director
Mr P Heiden
Ms B L Reichelderfer Non-executive director
Sir Colin Terry6
Mr D R Webb
Mr S G Young
Mr D M Williams7
Chairman
Chief Financial Officer
Chief Executive Officer
Non-executive director
Scheduled
meetings
eligible to
attend1
6
7
–
3
7
7
Meetings
attended
6
7
–
3
7
7
7
7
2
7
7
7
7
7
2
7
7
6
1 All of the directors attended the scheduled meetings in the year with the
exception of Mr Williams who sent his apologies for the meeting held in
October 2015.
2 Three unscheduled meetings took place which were attended by all the
directors eligible to attend, except Mr Green and Mr Heiden who sent
apologies for one unscheduled meeting each owing to travel commitments,
and Mr Williams who sent his apologies for two unscheduled meetings.
3 Appointed 1 March 2015.
4 Retired 31 January 2015.
5 Appointed 1 October 2015.
6 Retired 23 April 2015.
7 Retired 31 December 2015.
• 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
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 Heiden, as Senior Independent Director, is to:
• make himself available to shareholders if they have concerns
that cannot be resolved through normal channels;
• chair the Nominations Committee when it is considering
the Chairman of the Board’s succession; and
• meet with the non-executive directors at least once a year
to appraise the Chairman’s performance.
Non-executive directors
The non-executive directors:
• play a full part by challenging executive management and
contributing to the development of the Group’s strategy;
• 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;
• are responsible for determining appropriate levels of
remuneration for executive directors and participating in the
selection and recruitment of new directors and succession
planning; and
• have terms and conditions of appointment which 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 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 approved
the appointment of Colin Day as a non-executive director.
The Board covered the following specific items during 2015:
• there was a Board session dedicated to a detailed review
Chairman
• Sir Nigel Rudd met the independence criteria on appointment
and discussion of the Group’s strategy. The Group’s strategy
process was significantly enhanced in 2015; and
as Chairman on 23 April 2015.
• 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.
• there was greater focus on risk, including a session to review
and approve the Group’s risk appetite and a formal delegation
of authority to the Audit Committee to oversee the risk
management process.
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Corporate governance report continued
The Board received and discussed:
• divisional and functional updates and presentations
on operational performance, Customer Services & Support
(aftermarket), M&A, engineering and technology, senior
executive succession, operations, IT and investor relations;
• the Group’s strategic plan;
• reports on internal control, risk management and
going concern; and
• reports on the activities of its committees.
The Board reviewed and approved:
• the 2016 budget;
• the 2014 Annual Report and Accounts, 2014 full-year results
and 2015 interim results announcements;
• the May and October 2015 trading statements;
• recommendations to shareholders on the final dividend
payment for the year ended 31 December 2014 and
approval of the interim dividend payment for the year
ended 31 December 2015;
• the acquisition of the Cobham and EDAC composites
businesses;
• the Group’s risk appetite and risk register;
• the conflicts of interest register for the Board;
• the decision to suspend the share buyback programme;
• fees payable to the Group’s auditors and a recommendation
to shareholders on their reappointment;
• a Corporate Responsibility Policy for the Group; and
• a Schedule of Matters Reserved for the Board.
Since the year-end, up to the date of the Annual Report, the
Board has approved the 2015 Annual Report and Accounts,
the 2015 full-year results announcement and the proposed
final dividend for the year ended 31 December 2015.
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 has 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 and 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 59.
Commitment
The letters of appointment for the Chairman and non-executive
directors set out the time they are expected to commit.
These can be inspected 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.
Details of significant appointments for all of the Board members
are provided on pages 50 to 51.
Development
The Board is supplied with the information it needs to discharge
its duties.
Since Sir Nigel Rudd joined the Board, he has been through
a comprehensive formal induction programme, including
meetings with other directors, senior management, investors,
auditors, brokers and other professional advisors, as well as site
visits in the UK and US and a detailed induction pack. Mr Colin
Day started a similar induction process in October 2015 following
his appointment to the Board. The Company Secretary, who
facilitates the induction of new directors and assists with
professional development where required, will continue to
enhance the induction process following feedback from directors.
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
to develop and update their knowledge and capabilities.
Information and support
The Chairman is responsible for ensuring directors receive
accurate, timely and clear information. The Company Secretary
is responsible for ensuring good information flows within the
Board and Committees and between senior management and
non-executive directors. The Board members have regular
discussions about their information and support requirements,
and are involved in setting the annual Board schedule.
The Board and its Committees have been provided with sufficient
resources to undertake their duties. All directors have had
access to the advice and services of the Company Secretary
who is responsible to the Board for advising on all governance
matters. The Board allows all directors to take external
independent professional advice at the Group’s expense.
Board performance evaluation
The Board recognised that compliance with the UK Code on
Corporate Governance would require an externally facilitated
review in 2015. However, following the appointment of Sir Nigel
Rudd as Chairman in April 2015, the Board considered this
matter and concluded that conducting an external review in 2016
would be more valuable and effective than an external evaluation
carried out in 2015 when the Chairman had only recently
assumed his role.
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Accordingly, starting in December 2015 the Chairman led an
internal performance evaluation and appraisal process for the
Board, its members and its main Committees. The effectiveness
review, carried out using questionnaires and group and individual
discussions, covered strategy, risk management, the annual
Board schedule, composition, succession, the appointment
process, diversity, remuneration, audit and open channels
of communication.
The Board continues to be thoroughly engaged with the review
process. A report summarising the findings of the evaluation
was discussed by the Board and Committees at their meetings
in February 2016. The main findings and recommendations of
the 2015 evaluation were: (i) continuing to improve the Board’s
involvement in the strategy process, which was already
enhanced in 2015 with the introduction of a detailed Board
strategy session; (ii) conducting more site visits in 2016 (as some
had been postponed in 2015 owing to the appointment of the
new Chairman) and increasing contact with senior executives
other than those on the Board; (iii) continuing to enhance and
embed the risk management process; and (iv) enhancing the
succession process.
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 83 to 84) and a statement by the auditors
concerning their responsibilities (page 91). The directors also
report that the business is a going concern (page 84) 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 47). The directors
have also made a statement about the long-term viability of the
Group, as required under the Code (page 29).
Remuneration
The Directors’ remuneration report is on pages 60 to 80. It sets
out the activities of the Committee and provides details of the
remuneration policy which was approved at our AGM in 2014,
and how it has been implemented in 2015.
Relations with shareholders
The Group values its dialogue with institutional and
private investors.
The Board communicates with private investors via direct
communication with our Head of Investor Relations and the
Company Secretary and content 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
and discusses 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. A specific letter was
issued to major shareholders after the AGM in 2015, offering
a meeting with the Chairman and Senior Independent Director.
Several such meetings on corporate governance took place
in 2015. The Chairman met a number of investors at their request
after the trading update issued in October 2015.
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 approved by shareholders at our AGM in 2007.
Electronic copies of this Annual Report and Accounts 2015 and
the Notice of AGM will be posted on our website, with
announcements, press releases and other investor information,
including an analysis of ordinary shareholders by size of holdings
and shareholder type.
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 on
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 customary for all other directors to attend.
At the AGM to be held on 21 April 2016, in addition to the routine
business, shareholder consent will be sought 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 are subject after that to
re-election annually to comply with the Code. All directors in
office at the date of the AGM will be subject to election or
re-election.
By order of the Board
M L Thomas
Company Secretary
22 February 2016
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Audit Committee report
Terms of Reference
The Committee operates within agreed terms of reference, which
outline the key responsibilities of the Committee, were last
updated in 2014 and are available on our website.
Work of the committee
In 2015, the Audit Committee:
• reviewed the financial information contained in the 2014
Annual Report and 2014 full-year and 2015 interim results
announcements and recommended them to the Board for
approval;
• reviewed the 2015 external audit fees, and recommended
Chairman’s introduction
them to the Board for approval;
I am pleased to present the report of the Audit Committee for 2015.
• discussed the external audit strategy memorandum and
I chair the Audit Committee and as a Fellow of the Association of
Chartered Certified Accountants, current Chief Executive Officer
of Essentra plc, and previously Chief Financial Officer of Reckitt
Benckiser Group plc, I can confirm that I bring recent and
relevant financial experience to the Committee. I took over the
Chairmanship of the Committee from David Williams on my
appointment on 1 October 2015 and chaired my first meeting in
December 2015.
Committee members throughout 2015 were Guy Berruyer, Alison
Goligher, Paul Heiden and Brenda Reichelderfer. Phil Cox and
David Williams were also on the Committee, retiring on
31 January 2015 and 31 December 2015 respectively. The
Committee would like to thank Phil Cox and David Williams,
particularly for the significant contribution made by David in his
role as Chairman of the Committee.
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 and the Executive Director, Commercial &
Corporate Affairs also attended each meeting by invitation.
The Audit Committee’s key role is to engender 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 2015 is described below in detail.
It included advising the Board on whether these accounts are
fair, balanced and understandable, review of the work carried out
by executive management on the viability statement and taking
on responsibility for oversight of the risk management process
from the Board.
Committee membership and attendance
Name
Mr C R Day (Committee chairman)
Mr G S Berruyer
Mr P G Cox1
Ms A J P Goligher
Mr P Heiden
Ms B L Reichelderfer
Mr D M Williams2
1 Retired 31 January 2015.
2 Retired 31 December 2015.
Meetings
eligible to attend
Meetings
attended
1
3
–
3
3
3
3
1
3
–
3
3
3
3
interim audit clearance report for 2015;
• reviewed the independence and effectiveness of the external
auditors, agreed their terms of engagement and fees;
• received reports from internal audit at each meeting,
discussed significant items and the effectiveness of internal
audit, and approved the internal audit plan for 2016;
• received an IT audit update from Grant Thornton LLP;
• received a tax update from the Head of Tax and Treasury;
• received technical accounting and governance updates
provided by the Group Financial Controller, Company
Secretary and the external auditors;
• reviewed the adequacy and effectiveness of the systems of
internal control;
• took responsibility for oversight of the risk management
process, a duty which was delegated to the Committee by the
Board in 2015;
• took responsibility for the oversight of the process executive
management used to enable the Board to make the viability
statement; and
• reviewed the effectiveness of the Committee and internal
audit using the process described on page 55. There were no
significant findings and the Committee confirmed it was
satisfied with the outcome of the evaluation.
Since the year end, the Committee has approved the 2015 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 2015 Annual Report and Accounts, taken as
a whole, is fair, balanced and understandable. The Committee
provided this advice having verified and confirmed the
managements’ process and its output, and provided confirmation to
the Board that this process was effective. The Committee also
recommended that the Board approve the viability statement,
having overseen the viability statement process throughout the year
(as described on page 29) and confirmed their agreement to
propose the reappointment of the external auditors to
shareholders for the 2016 financial year.
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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.
There were no new areas of significant judgement in 2015.
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),
growth rates beyond the period covered by the five-year business plans 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 2016 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 noted the increased level of sensitivity
analysis undertaken in view of the increased market volatility and its impact on the Group’s results
for 2015. The Committee agreed the assumptions made by management were appropriate and that no
impairment was required. The Committee agreed with management that due to the proximity of the
two acquisitions of businesses in 2015 to the balance sheet date, the fair value of net assets acquired
would be finalised in 2016.
The Committee considered the method of testing for potential impairment used by management and
the aggregation of related intangible assets at an aircraft platform level. The Committee addressed
this through consideration of a report from management covering these areas, exposure to different
platforms and a sensitivity analysis on specific programmes. The Committee concluded that
assumptions made by management were reasonable and the carrying value and estimated useful
lives of the assets were appropriate.
Provision for environmental
matters relating to
historic sites and related
insurance receivables
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 amounts recorded to increases in cost estimates,
including the impact on insurance policy limits, and to 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 2013 and the impact of Heatric’s local content provider in Brazil
having received Court approval for its restructuring plan. 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 2015 assumptions had been determined and how the Group’s assumptions used in its
2014 financial statements benchmarked against those disclosed by other large corporate entities.
The Committee concluded that the assumptions used, 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 including the release of provisions held against prior period tax uncertainties. The
Committee concluded that the position taken was appropriate.
Treatment of items excluded
from underlying profit
measures
The Committee discussed the treatment and disclosure of costs and income included within
exceptional operating items and merger and acquisition (M&A) related items, together with the
exclusion from underlying profit of gains made from remeasurement of the share buyback close
period commitment and the Group’s new cross currency and treasury lock derivatives. The Committee
noted items were treated appropriately and, where applicable, consistently year on year.
The Committee also discussed each of the above judgements with the external auditors before reaching their conclusions.
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Audit Committee report continued
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 Andrew 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 and there were no
significant findings from the evaluation process. The Committee
has determined, on the basis of the satisfactory outcome of the
evaluation, that the external audit will not be subject to tender
in 2016. It has recommended that the Board submit the re-
appointment of PwC to shareholders for approval at the
AGM in 2016.
The Committee reviewed recent tendering and rotation provisions
from the EU and Competition and Markets Authority, and has also
taken into account the length of appointment of the incumbent
auditors but balanced against their continued effectiveness. The
Committee intends to put the external audit for the financial year
ending 31 December 2018 out to tender and to commence that
process in 2017. This is in the best interests of the Company as it
ensures continuity of audit services until the end of the current
audit partner rotation period. This plan is subject to any other
changes to the regulatory regime and the Committee continuing
to be satisfied with the effectiveness of the auditors, which is
evaluated annually.
The Committee routinely meets PwC without executive management
present and no concerns have been raised. 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 consolidated
financial statements. The fees paid for non-audit services in 2015
were less than £0.1 million (1% of the total audit fee) and the average
fees paid for non-audit services for the last three years to 2015 were
£Nil million (2% of the total audit fee over that period). Fees paid for
non-audit services related to services allowed to be provided by PwC
under the Group’s policy on non-audit services.
The Group’s policy on non-audit services covers the services that
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 (under Audit Committee in the
Governance section).
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. The
risk assessment process divides our business units into three
tiers determined by financial measures, but subject to
a discretionary risk based adjustment if there are circumstances
which suggest a site should have an audit accelerated. Tier 1
businesses are visited annually, with Tier 2 businesses visited
every other year and Tier 3 businesses every third year.
At each meeting, the Committee receives a status update on the
audit programme and discusses and challenges any significant
issues arising and monitors implementation by the businesses of
any recommendations made. In 2015, internal audits were
carried out at over 25 Group sites, including the finance shared
service centres, as part of the 3 year rotational audit cycle.
Internal audit’s remit was expanded in 2014 to include IT, using
the services of Grant Thornton UK LLP. The 2015 IT audit scope
included reviews of IT security and our SAP (enterprise resource
planning) and HR systems.
The Committee routinely meets internal audit without executive
management present. No concerns have been raised and it was
confirmed that the internal auditors had been able to carry out
their work and offer constructive challenge to executive
management during the year. The Committee considered the
effectiveness of internal audit and confirmed that they
were satisfied.
Whistleblowing
The Ethics and Trade Compliance Committee is responsible
for reviewing the process for handling allegations from
whistleblowers. In February 2016, the Ethics and Trade
Compliance Committee confirmed that it was satisfied with the
Group’s process for handling whistleblowing allegations.
Whistleblowing is included in 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 received regularly by the Ethics and Trade
Compliance Committee as part of the report from the Executive
Director, Commercial and Corporate Affairs.
Compliance with audit services order
We comply with the Competition and Market Authority Order 2014
relating to the audit tendering and the provision of non-audit
services, as discussed further above.
On behalf of the Audit Committee
Colin Day
Chairman of the Audit Committee
22 February 2016
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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 ensures that a succession plan is in place.
Candidates continue to be considered on merit against specific
criteria determined by the Committee.
Following a rigorous search process using executive search firm
The Zygos Partnership, Mr Colin Day was appointed as non-
executive director on 1 October 2015. Mr Day is a chartered
accountant and is currently Chief Executive at Essentra PLC and
non-executive director at Amec Foster Wheeler plc and FM
Global. Mr Day’s extensive experience in senior financial roles
across a range of sectors including aerospace, engineering and
technology, oil and gas and pharmaceuticals make him an
excellent addition to the Board. There were other Board changes
in 2015 as described on page 82.
In 2016, the Committee will continue to review the composition of
the Board and succession plans for executive and non-executive
directors, taking into account diversity and the skills, knowledge
and experience that will be of benefit to the Board in the future.
Committee membership and attendance during 2015
Name
Sir Nigel Rudd (Chairman)1
Mr S G Young
Mr G S Berruyer
Mr P G Cox2
Mr C R Day3
Ms A J P Goligher
Mr P Heiden
Ms B L Reichelderfer
Sir Colin Terry4
Mr D M Williams5
Meetings
eligible to attend
Meetings
attended
2
3
3
–
–
3
3
3
1
3
2
3
3
–
–
3
3
3
1
2
1 Appointed 1 March 2015.
2 Retired 31 January 2015.
3 Appointed 1 October 2015.
4 Retired 23 April 2015.
5 Retired 31 December 2015. Mr Williams sent his apologies for one
Committee meeting.
Terms of reference
The Committee operates within agreed Terms of Reference.
These were reviewed and updated in 2014 and are published
on our website.
Responsibilities
The Committee reviews the structure, size and composition
(including the skills, knowledge, experience and diversity) of the
Board and, in consultation with the directors, makes
recommendations to the Board on any proposed changes.
Decisions on Board changes are taken by the Board as a whole.
In performing its duties, the Committee has access to the
services of the Company Secretary and may seek external
professional advice at the Group’s expense.
Board diversity
The Board confirms a strong commitment to diversity (including,
but not limited to, gender diversity) at all levels of the Group. The
Board’s policy on diversity commits Meggitt to:
• ensuring the selection and appointment process for
employees and directors includes a diverse range of
candidates;
• disclosing statistics on gender diversity in every Annual
Report (see page 46); and
• reviewing this policy from time to time and continuing to
disclose this policy in the Annual Report.
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. 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.
Succession
The Group operates a succession planning process which
enables the identification and development of employees with the
potential to fill key business leadership positions in the Group.
In 2015, the Board reviewed detailed executive succession plans
for each division and function with the Group Organisational
Development Director, including plans for the executive directors
and each member of the Group Executive Committee. Each
individual on the succession plan has regular performance
reviews and individual development plans.
Board composition and succession for the Chairman and
non-executive directors is regularly discussed by the
Nominations Committee.
Evaluation
The Committee performed an internal evaluation using the
process described on page 55. The results of the evaluation were
generally positive. Although the succession planning process
had been enhanced in 2015, the need for continued improvement
was noted during the Board evaluation.
External search consultancies
During 2015, the Committee used The Zygos Partnership to
assist in the search for a non-executive director. The Zygos
Partnership has no other connection with the Group.
On behalf of the Nominations Committee
Sir Nigel Rudd
Chairman of the Nominations Committee
22 February 2016
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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 2015.
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.
2015 activity
Having approved and implemented our new remuneration policy and package in 2014,
2015 was a year of little change for our remuneration plans. The 2014 Directors’ remuneration
report was submitted to shareholders for approval at our 2015 AGM, gaining an approval rating
of 99.77%. During the year, the Committee considered whether the recently implemented Long
Term Incentive Plan (LTIP) and Short Term Incentive Plan (STIP) were providing fair outcomes
taking into account Group performance, and determined that they were. The Committee also
reviewed various governance updates relating to remuneration, including feedback from the
Department for Business, Innovation & Skills on remuneration reports and the Investment
Association’s updated Principles of Remuneration.
We approved awards under the LTIP and confirmed the vesting outcomes under the STIP
awards made in 2014 and awards made in 2012 under our legacy share plans (the Executive
Share Option Scheme (ESOS) and Equity Participation Plan (EPP)). Since the year end, we have
approved performance targets for the STIP and LTIP for 2016 awards which are detailed in
this report, agreed the salaries for the executive directors and confirmed the vesting outcome
of the 2015 STIP and awards made under the legacy ESOS and EPP share plans in 2013,
as outlined below.
We also finalised the effectiveness review of the Committee and 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 were highlighted for improvement.
The intended remuneration arrangements for 2016, outlined in this report, are in line with
the Policy approved by shareholders at our 2014 annual general meeting (AGM).
2015 performance
Group revenue was flat year on year on an organic basis, with 4% organic growth in
civil aerospace and flat military revenue being offset by a 20% organic decline in energy
as customers cut back on capital expenditure in response to lower commodity prices.
Underlying profit before tax declined organically by 9% reflecting adverse product mix,
particularly in civil aftermarket. Underlying earnings per share (EPS) declined by 2%.
The EPS, cash and total shareholder return elements of the awards granted in 2013 under
the ESOS and EPP have failed to meet their performance conditions. For awards made under
the STIP in 2015, the profit element did not reach threshold, the free cash flow element
vested at 83% of target and the personal objective element of the award vested to the extent
indicated on page 71 for each director. This outcome would have resulted in STIP payouts of
61%-71% of salary for the executive directors. However, in recognition of the fact that Group
profit performance was below threshold in 2015, the executive directors agreed with the
Committee that the STIP outcome for executive directors should be reduced by 25%.
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 also 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 2014 (the Code), are applied in practice.
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 amendment to the Policy from the version approved by shareholders
in 2014 is to update the data used in the pay-for-performance scenario analysis to provide figures for 2016.
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 member’s financial results
for any period.
Deferred STIP awards may lapse in certain leaver circumstances (see page 67).
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.
The Committee has discretion to make a STIP award of up to 200% of salary in exceptional circumstances
(e.g. a substantial contract win which has a significant positive financial impact in the long term but which has no,
or negative, short term financial impact). Dividends accrue on unvested deferred STIP awards over the vesting
period and are released on the vesting date.
Performance
metrics
STIP awards are based on the achievement of financial and personal performance targets. For the executive
directors, two-thirds of the STIP will be weighted to financial performance, with the remainder subject to
personal performance. The relative weightings of the financial and personal elements for any STIP period,
and the measures used to assess financial and non-financial performance, will be set by the Committee in its
absolute discretion to align with the Group’s operating and strategic priorities for that year.
The award for performance under each element of the STIP will be calculated independently. The Committee
will have discretion to review the consistency of the pay-out of the financial and personal elements and adjust
the total up or down (within the levels specified above) if it does not consider this to be a fair reflection of the
underlying performance of the Group or the individual.
The personal performance element will typically be based on three to five objectives relevant to the executive’s role.
Details of the measures, weightings and targets applicable to the STIP for each year, including a description
of how they were chosen and whether they were met, will be disclosed retrospectively in the annual report on
remuneration for the following year (subject to commercial sensitivity).
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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 member’s 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 30 to 33. 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 79 to 80 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 report on remuneration (see page 78).
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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
£3,616
Maximum
£2,280
Maximum
£1,930
48%
31% 21%
44%
34% 22%
48%
31% 21%
On-target
£2,207
On-target
£1,346
On-target
£1,178
100%
100%
Minimum
£1,060
Minimum
£586
100%
Minimum
£567
Salary and benefits
Pension
STIP
LTIP
Potential reward opportunities are based on the Policy, applied to 2016 base salaries and 2016 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 element 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, but only
UK employees 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 65.
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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 68, 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
Executive Director,
Commercial &
Corporate Affairs
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 77.
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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Annual report on remuneration
The following report provides details of how our Policy was implemented during the year ended 31 December 2015.
Remuneration Committee—2015 membership and attendance
Name
Mr P Heiden (Chairman)
Mr G S Berruyer
Mr P G Cox1
Mr C R Day2
Ms A J P Goligher
Ms B L Reichelderfer
Mr D M Williams3
1
Retired on 31 January 2015.
2 Appointed on 1 October 2015.
3 Retired on 31 December 2015.
Meetings
eligible
to attend
Meetings
attended
4
4
-
1
4
4
4
4
4
-
1
4
4
4
There was one meeting between the end of the financial year and the date of signing of this report, 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 direct reports to the Chief Executive (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.
Advisors to the Committee
During the year, the Committee’s independent remuneration advisors were Kepler who were appointed in 2010 after a competitive
tender process was run by the Committee. During 2015, Kepler were acquired by Mercer. The Committee considered this
development in light of the existing business relationship between the Company and Mercer, as Mercer act as the Company’s primary
advisors on UK pensions and benefits. However the Committee determined that this did not impact Kepler’s independence and that
they were satisfied that Kepler could continue to act as advisors to the Committee. The Committee evaluates the support provided
by Kepler annually and is comfortable that they provide effective and 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
are a member of the Remuneration Consultants Group and adhere to its code of conduct (www.remunerationconsultantsgroup.com).
Their total fees in 2015 were £41,000 (2014: £88,000).
2015 AGM voting
The following table shows the results of the advisory vote on the 2014 Directors’ remuneration report at the 2015 AGM:
Resolution text
Votes for
% of votes
cast for
Votes against
% of votes
cast against
Total votes cast
Votes withheld
(abstentions) 1
Approval of Directors’ remuneration report
680,195,804
99.77
1,599,751
0.23
681,795,555
370,441
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.
The Policy Report was approved by shareholders at the 2014 AGM. As disclosed in last year’s report, the Policy Report received
support from 98.95% of the votes cast (1.05% voted against, and 30.5 million votes were withheld).
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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 2015 and the prior year:
Base salary
Taxable benefits1
Pension
STIP2
EPP basic3
EPP matching3
ESOS4
Total
Mr S G Young
Mr D R Webb
Mr P E Green
2015
£’000
674
24
337
312
–
–
–
2014
£’000
658
24
329
221
–
–
–
1,347
1,232
2015
£’000
447
13
112
209
–
–
–
781
2014
£’000
436
14
118
198
–
–
–
766
2015
£’000
357
14
178
192
–
–
–
741
2014
£’000
339
14
170
166
–
–
–
689
1
2
3
4
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 2015 STIP, including performance measures, actual performance and
bonus payouts, can be found on page 71.
EPP is calculated as the number of shares vesting based on certain performance measures and valued at the market value of the shares. For 2015, the
figure represents the actual vesting outcome of the 2013 award, for which the performance measures were based on EPS, total shareholder return and
cash conversion. Based on performance to 31 December 2015, the 2013 EPP award will lapse and therefore no value is ascribed to this award in this
table. Further details on performance criteria, achievement and resulting vesting levels can be found on page 72.
ESOS is calculated as the number of shares vesting based on certain performance measures and valued at the difference between the market
value of the shares and the exercise price of the award. For 2015, the figure represents the actual vesting outcome of the 2013 award, for which the
performance measure was based on EPS. Based on performance to 31 December 2015, the 2013 ESOS award will lapse and therefore no value is
ascribed to this award in this table. Further details on performance criteria, achievement and resulting vesting levels can be found on page 72.
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 2015 and the prior year:
Sir Nigel Rudd1
Mr G S Berruyer
Mr P G Cox 2
Mr C R Day3
Ms A J P Goligher4
Mr P Heiden
Ms B L Reichelderfer
Sir Colin Terry5
Mr D M Williams6
1
Appointed on 1 March 2015.
2 Retired on 31 January 2015.
3 Appointed on 1 October 2015.
4 Appointed on 30 October 2014.
5 Retired on 23 April 2015.
6 Retired on 31 December 2015.
2015
£’000
306
55
4
16
55
65
55
56
73
2014
£’000
–
53
53
–
9
63
53
175
74
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Incentive outcomes for the year ended 31 December 2015
STIP in respect of 2015 performance
The Board set stretching financial and strategic targets for the STIP at the start of the 2015 financial year. These targets, and our
performance against these, are summarised in the table below.
Measure
Underlying operating profit1 (Weighting: one-third of the award)
Performance targets
Threshold
Target
£358m
£374m
Stretch
£408m
Actual
performance
Below
threshold
Free cash flow1 (Weighting: one-third of the award)
£201m
£236m
£271m
£224m
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
4
Target
Between
target and
stretch
Between
target and
stretch
1 Measured at constant currency.
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.
A full listing of 2015 personal performance objectives has not been provided owing to commercial sensitivity, however, the following is
a summary of the conditions which applied in 2015 to each executive director.
Mr S G Young: Driving effectiveness in all functions (e.g. agreeing effective aftermarket functional strategy, cost reduction from functions),
increasing the pace of change in execution (e.g. through continued implementation of the Meggitt Production System and maintaining
customer relationships during successful programme ramp up phase), maintaining investment balance (e.g. hitting milestones on
central AR&T programmes), maintaining FTSE 100 governance standards (e.g. sites reaching targets on health, safety and environment
continuous improvement schedule).
Mr D R Webb: Delivery of a cyber security risk reduction programme, strategic development of the IT function and execution of key
projects, delivery of ongoing cost reductions, driving the M&A programme forward through portfolio analysis and strong processes and
procedures on implementing transactions, deliver on key tax and treasury initiatives, implement key financial reporting requirements
such as the viability statement.
Mr P E Green: Enhancing the legal and compliance audit programme, improving the process for consulting external law firms, enhancing
the efficiency and effectiveness of the Group trade compliance programme, continued implementation of the US Department of State’s
Consent Agreement and assuming responsibility for the Group Commercial function.
For awards made under the STIP in 2015, the profit element did not reach threshold, the free cash flow element vested at 83% of target and
the personal objective element of the award vested to the extent indicated above for each director. This outcome would have resulted in STIP
payouts of 61%-71% of salary for the executive directors. However, in recognition of the fact that Group profit performance was below threshold
in 2015, the executive directors agreed with the Committee that the STIP outcome for executive directors should be reduced by 25%.
The following STIP awards were received by directors in respect of 2015 performance:
Mr S G Young
Mr D R Webb
Mr P E Green
% salary
46.0
46.6
53.2
£’000
312
209
192
STIP—deferral into shares
As a result of the 2015 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, in line with the Policy.
In 2015, as a result of the 2014 STIP vesting, the following share awards were made under the Deferred Share Bonus Plan:
Executive
Form of award
Date of grant
Shares over which
awards granted
Award price1
£'000
% of bonus2
Date of vesting
Mr S G Young
Mr D R Webb
Mr P E Green
Award
Award
Award
01.04.2015
01.04.2015
01.04.2015
9,897
8,853
7,434
559.10p
559.10p
559.10p
55
49
42
25
25
25
01.04.2017
01.04.2017
01.04.2017
The award price is the average close price for the five days prior to the award date. The face value has been calculated using the award price for each award.
1
2 Based on 2014 STIP.
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2013 EPP
The EPP award made in August 2013 was measured 50% on cumulative underlying EPS performance, 25% on cash conversion over
three financial years and 25% on the Group’s relative TSR performance, and will not vest as the performance conditions were not met.
Measure
EPS
Weighting %
Period ending
Vesting schedule
50
31.12.15
Cash conversion
25
31.12.15
TSR
25
31.12.15
0% vesting below 121p
30% vesting for 121p per share
100% vesting for 133p or more;
Straight line vesting between these points
0% vesting below 87%
30% vesting 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 121p
0%
Below 87%
0%
Below median
TSR
0%
2013 ESOS
The ESOS award made in April 2013 was measured on three-year cumulative underlying EPS performance to 31 December 2015
and will not vest as the performance condition was not met.
Measure
EPS
Weighting %
Period ending
Vesting schedule
100
31.12.15
0% vesting below 121p
30% vesting for 121p per share
100% vesting for 133p or more;
Straight line vesting between these points
Outcome
Vesting %
Below 121p
0%
2012 EPP
As disclosed in the 2014 remuneration report, the Committee determined that the 50% of the 2012 EPP award subject to the three-year
cumulative underlying EPS performance condition and the 25% subject to the cash conversion performance condition did not vest based
on performance to 31 December 2014. The remaining 25% of the award was dependent on the Group’s TSR performance compared
to a group of international aerospace and defence companies over the three-year period to 22 August 2015. TSR for all comparator
companies is measured on a common currency basis.
Measure
TSR
Weighting %
Period ending
Vesting schedule
25
22.08.15
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 2012 EPP award (taking into
consideration the outcome of the EPS, cash conversion and TSR elements) was 0%.
Scheme interests awarded in the year ended 31 December 2015 (audited)
2015 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
01.04.15
01.04.15
01.04.15
Shares over which
awards granted
266,503
176,598
142,128
Face value
1
Award price
£’000
% of salary2
Date of vesting
559.10p
559.10p
559.10p
£1,490
£987
£795
220
220
220
01.04.18
01.04.18
01.04.18
1
The award price is the average close price for the five days prior to the award date. The face value has been calculated using the award price for
each award.
2 Based on 2015 salary at the date of award.
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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 5.5 to 10.5%)
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
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 2015 LTIP award; they also apply to year 2 of the 2014 LTIP award.
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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 receive 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 2015 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
2015
£’000
28
2014
£’000
27
2015
£’000
76
2014
£’000
75
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
20151
£’000
674
24
312
1,010
CEO
% change
2014-2015
+2.4
Nil
+41.2
+11.8
Executive
employees%
change
2014-2015
+5.12
+2.23
+31.04
+9.8
20141
£’000
658
24
221
903
1
2
3
4
The CEO’s remuneration includes base salary, taxable benefits and STIP.
The base salary for executive employees is calculated using the increase in the earnings of full-time executive employees using the same employee
data set in 2014 and 2015. Approximately 50% of the executive employees had pay rises of 2% or less, 20% had pay rises of between 2 and 5% and the
remainder had pay rises of over 5%. Pay rises above 2% are awarded on merit, for increased responsibilities or to bring salaries in line with benchmark.
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 15 February 2016 as the validation processes for personal performance ratings for executive employees below
the level of the Board/Group Executive Committee 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 2016 Directors’ remuneration report.
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Relative importance of spend on pay
The table below shows shareholder distributions (i.e. dividends and share buybacks) and total employee expenditure for 2015 and the
prior year, along with the percentage change in both.
Shareholder distributions—dividends1
Shareholder distributions—buybacks1
Total employee expenditure2
2015
£’m
111.5
146.4
503.9
2014
£’m
109.8
33.7
461.3
% change
2014-2015
+1.5
+334.4
+9.2
1 See notes 16 and 40 respectively to the Group consolidated financial statements.
2 Comprises wages and salaries and retirement benefit costs. See note 9 to the Group consolidated financial statements.
Exit payments made in the year
No exit payments have been made in 2015.
Payments to past directors (audited)
There were no payments to past directors in 2015. 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 seven years.
This graph illustrates the Group’s performance compared to the FTSE 100 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 seven-year period from 1 January 2009 to 31 December 2015:
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
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
31 Dec
2014
31 Dec
2015
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
2015
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
23%
0%
0%
1,347
31%
0%
0%
1
The outcomes are for those awards which are included in the single figure of remuneration for that year. For 2015, this represents the outcome of
ESOS and EPP awards vesting in 2016.
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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Implementation of Remuneration Policy for 2016
Base salary, pension and benefits
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 2016 and, effective 1 April 2016, will be as follows:
Mr S G Young
Mr D R Webb
Mr P E Green
2016
£’000
691
458
368
% change
+2.0
+2.0
+2.0
2015
£’000
677
449
361
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%.
There were no changes in pension contribution rates or benefit provision.
2016 STIP measures
STIP measures for 2016 are based on underlying operating profit (one third), free cash flow (one third) and personal performance
(one third). The STIP targets for 2016, together with details of whether they have been met, will be disclosed (subject to commercial
sensitivity) in the 2016 Directors’ remuneration report. The opportunity is in line with the Policy disclosed on page 62.
2016 LTIP measures
The executive directors will be granted awards under the LTIP, the vesting of which will be subject to the measures shown below.
The Committee sets performance measures for underlying EPS, ROTA and organic revenue growth annually using a consistent
method, with reference to performance in the prior year (2015) and the Group’s budget for 2016. For EPS, the Committee also takes
into account other external benchmarks such as analyst consensus EPS, and EPS ranges for comparator companies. The organic
growth range also takes into account external market trends. The targets for the 2016 LTIP award have been set in relation to these
reference points and the 2015 outturn (which was lower than for 2014) and are considered by the Committee to be appropriately
stretching for the three-year cycle.
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 2016 LTIP award, year 2 of the 2015 LTIP award and year 3 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
Threshold
Mid-point
33.3%
33.3%
Underlying EPS (pence) three-year aggregate (equivalent to CAGR range of 4% to 9%)
ROTA average over three years
Quality
% sites on target2
Execution
Delivery
% sites on target2
103
19.0%
57%
36%
2.0
108
20.9%
71%
50%
3.0
Stretch
113
23.0%
86%
65%
4.0
33.3%
Strategic measures1
average over three years
Growth
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
4.0%
5.5%
7.0%
2.0
2.0
3.0
3.0
4.0
4.0
Innovation
Schedule
1 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
2 The targets set out above on quality and delivery apply to year 1 of the 2016 LTIP award, year 2 of the 2015 award and year 3 of the 2014 award.
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Chairman and non-executive director fees
The remuneration of the Chairman and non-executive directors has been in line with our Policy in 2015.
Chairman fee2
Non-executive director base fee
Additional fee for chairing Audit or Remuneration Committee
Additional fee for Senior Independent Director
20161
£’000
350
56
11
11
20151
£’000
350
55
11
11
1
2
Fees shown here are effective for a year from 1 April.
Sir Nigel Rudd receives 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 2015,
as notified under the Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority (FCA) (including shares held
beneficially in the SIP by executive directors), were as follows:
Sir Nigel Rudd1
Mr S G Young
Mr G S Berruyer
Mr P G Cox2
Mr C R Day3
Ms A J P Goligher
Mr P E Green
Mr P Heiden
Ms B L Reichelderfer
Sir Colin Terry4
Mr D R Webb
Mr D M Williams5
Shareholding
Ordinary shares of 5p each
2014
2015
97,000
637,486
13,000
–
25,000
3,000
565,139
6,064
6,000
–
78,307
5,000
–
431,501
3,000
6,162
–
3,000
558,928
6,008
6,000
12,274
26,488
5,000
Appointed on 1 March 2015.
Retired on 31 January 2015.
Appointed on 1 October 2015.
1
2
3
4 Retired on 23 April 2015.
5
Retired on 31 December 2015.
Between 1 January 2016 and 15 February 2016, 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 70 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
Non-executive director
Chairman of Audit Committee
Member of Remuneration, Audit and Risk Committees
Mr D R Webb
SEGRO plc
Total
Non-executive director
Chairman of Audit Committee
Total
Fees retained
2015
£’000
42
8
12
62
53
10
63
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Directors’ remuneration report continued
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
Dividend reinvestment 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 dividend reinvestment plan.
Shares acquired under the SIP (including those held in trust).
Shares exercised and retained.
The table below shows the shareholding of each executive director against their respective shareholding requirement as at
31 December 2015:
Name
Mr S G Young
Mr D R Webb
Mr P E Green
Shareholding
guideline
(% 2015
salary)
300
200
200
Current
shareholding
(% 2015
salary)2
353
65
586
Shares owned
outright1
637,486
78,307
565,139
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 374.70 pence (the value of a Meggitt share on 31 December 2015).
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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 2015):
•
The awards made up to and including 2012 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 2013, 2014 and 2015 were unvested as at 31 December 2015.
Sharesave awards are not subject to performance conditions.
Mr S G Young
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
2015
Awarded/
(exercised/
lapsed)
At 31 Dec
2015
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
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
01.04.15
12.09.14
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
(186,615)
(210,871)
–
–
–
–
–
(288,520)
–
–
–
–
(73,236)
–
–
–
–
(47,547)
–
–
266,503
–
–
–
192,642
285,149
297,345
251,660
160,341
–
243,114
115,418
77,729
29,131
–
114,556
64,359
57,630
20,431
–
66,946
312,443
266,503
2,405
3,098,088
(540,286)
2,557,802
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
526.50p
–
–
–
–
–
–
–
–
–
–
–
–
374.19p
542.50p
542.50p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
01.04.18
01.11.17
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
31.03.20
01.05.18
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Directors’ remuneration report continued
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
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
2015
Awarded/
(exercised/
lapsed)
At 31 Dec
2015
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
01.04.15
13.09.13
5,698
155,745
60,281
39,868
207,041
–
3,517
–
–
–
–
–
176,598
–
5,698
155,745
60,281
39,868
207,041
176,598
3,517
526.50p
526.50p
–
–
–
–
426.40p
–
–
–
–
–
–
–
05.09.16
05.09.16
05.09.16
05.09.16
22.05.17
01.04.18
01.11.18
04.09.23
04.09.23
04.09.23
04.09.23
21.05.19
31.03.20
01.05.19
472,150
176,598
648,748
Number of shares under award
Date of award
At 1 Jan
2015
Awarded/
(exercised/
lapsed)
At 31 Dec
2015
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
01.04.15
06.09.10
14.09.12
12.09.14
11.09.15
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
–
–
(20,662)
–
–
–
–
–
(233,384)
–
–
–
–
(59,240)
–
–
–
–
(38,461)
–
–
–
142,128
1,389
1,835
1,619
–
–
–
–
750
2,759
12,832
–
23,365
217,822
214,306
192,240
124,902
–
123,456
88,167
59,377
22,693
–
58,173
49,163
44,022
15,915
–
33,996
161,868
142,128
1,389
1,835
1,619
750
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
399.79p
–
–
542.50p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
01.04.18
01.11.15
01.11.17
01.11.19
01.11.20
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
31.03.20
01.05.16
01.05.18
01.05.20
01.05.21
Total
1,801,646
(208,869)
1,592,777
By order of the Board
Paul Heiden
Chairman, Remuneration Committee
22 February 2016
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81
Directors’ report
The directors present their report 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 Financial Reporting Standard 101 Reduced Disclosure
Framework (FRS 101) and the Companies Act 2006) for the year
ended 31 December 2015.
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 (pages 1 to 47)
The Corporate governance report
Research and development
Board of directors and Corporate governance report (pages 49
to 55)
Note 8 to the Group’s consolidated financial statements
(page 109) and Chief Financial Officer’s review (page 37)
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 to the Group’s consolidated financial statements
(page 102)
Greenhouse gas emissions
Employee information
Employee involvement
Employment of disabled persons
Corporate responsibility report (page 43)
Corporate responsibility report (page 46)
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 to the Group’s consolidated financial statements
(page 116)
Details of long-term incentive plans
Directors’ remuneration report (pages 60 to 80)
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 to the Group’s consolidated financial statements
(page 132)
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
Not applicable
Contracts for the provision of services to the Company by a controlling shareholder
Not applicable
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
Statement of directors interests
A statement of how the Company has complied with the Code and details of any non-
compliance
Directors’ remuneration report (page 77)
Corporate governance report (page 49)
Details of directors service contracts
Related parties disclosures
Share buyback disclosures
Share capital and control (page 83) and Directors’ remuneration
report (pages 67 to 68)
Note 17 to the Group’s consolidated financial statements
(page 114)
Chief Financial Officer’s review (page 38) and note 34 to the
Group’s consolidated financial statements (page 132)
82
MEGGITT PLC REPORT AND ACCOUNTS 2015
Directors’ report continued
Dividends
The directors recommend the payment of a final dividend of 9.80p
net per ordinary 5p share (2014: 9.50p), to be paid on 6 May 2016
to those members on the register at close of business on
29 March 2016. An interim dividend of 4.60p (2014: 4.25p) was
paid on 2 October 2015. If the final dividend as recommended
is approved the total ordinary dividend for the year will amount
to 14.40p net per ordinary 5p share (2014: 13.75p).
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.
Dividend reinvestment plan
The Company operates a Dividend Reinvestment Plan (DRIP)
which enables shareholders to buy the Company’s shares on
the London Stock Exchange with their cash dividend. Further
information about the DRIP is available from Computershare,
the Company’s registrars.
During 2015, the Company made the DRIP available to
shareholders for the dividends paid in May 2015 and October
2015. The Board currently intends to continue to make the DRIP
available to shareholders in 2016, and the date by which relevant
DRIP elections must be received is disclosed on the financial
calendar page on our website.
Directors
The directors of the Company in office during the year and up to
the date of signing the financial statements were: Sir Nigel Rudd
(appointed to the Board as a non-executive director from
1 March 2015 becoming Chairman from 23 April 2015), Mr S G
Young (Chief Executive), Mr G S Berruyer, Mr P G Cox (retired
from the Board on 31 January 2015), Mr C R Day (appointed to the
Board as a non-executive director on 1 October 2015), Ms A J P
Goligher, Mr P E Green, Mr P Heiden (Senior independent director
from 1 January 2016), Ms B L Reichelderfer, Sir Colin Terry
(retired as Chairman on 23 April 2015), Mr D R Webb, and Mr D M
Williams (retired from the Board and his position as Senior
independent director on 31 December 2015).
All directors will be submitted for election or re-election at the
annual general meeting (AGM). Details of any unexpired terms of
the directors’ service contracts are in the Directors’ remuneration
report. Membership of committees and biographical information
is disclosed on pages 50 to 51 and in the AGM notice.
The directors benefit from qualifying third-party indemnity
provisions for the purposes of Section 236 of the Companies Act
2006 pursuant to the Articles in effect throughout the financial
year and up to the date of this Directors’ report. The Company
also purchased and maintained throughout the year Directors’
and Officers’ liability insurance. No indemnity is provided for
the Company’s auditors.
Conflicts of interest
The Company has a procedure for the disclosure, review,
authorisation and management of directors’ conflicts of
interest and potential conflicts of interest, in accordance with
the provisions of the Companies Act 2006. In deciding whether to
authorise a conflict or potential conflicts 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 (2014: None).
Share capital and control
As at 31 December 2015, the Company held 350,966 treasury
shares with a nominal value of 5p each, and the Company’s
issued share capital (excluding shares held as treasury shares)
consisted of 775,167,523 shares with a nominal value of 5p each.
As at 15 February 2016, the Company held 332,722 treasury
shares with a nominal value of 5p each, and the Company’s
issued share capital (excluding shares held as treasury shares)
consisted of 775,185,767 shares with a nominal value of 5p each.
The issued share capital of the Company at 31 December 2015
and details of shares issued and cancelled during the financial
year are shown in note 34 to the Group’s consolidated
financial statements.
The Company operated a share buyback programme during the
year until 4 September 2015, and details of the shares bought
back in 2015 under that programme are contained in the Chief
Financial Officer’s Review on page 38.
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 also seeks authority at each AGM from shareholders
to purchase its own shares up to the limits set out in the
Notice of Meeting.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
83
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 600 million note purchase agreement
dated June 2010, a USD 900 million syndicated revolving
credit agreement dated September 2014, and two USD
300 million bilateral credit facility agreements, both dated
September 2015.
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 15 February 2016, 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 rights
attaching to the
issued ordinary
share capital of
the company
The Capital Group
Companies, Inc.
Harris Associates L.P.
BlackRock, Inc.
First Pacific Advisors,
LLC
FMR LLC
Standard Life
Investments Ltd
–
–
-
–
–
22.2
Legal & General Group plc
23.7
*One voting right per ordinary share.
114.6
14.78%
41.3
40.3
39.1
38.1
3.8
–
5.32%
5.20%
5.04%
4.91%
3.34%
3.06%
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 applicable law and
United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice), including Financial
Reporting Standard 101 Reduced Disclosure Framework
(FRS 101).
84
MEGGITT PLC REPORT AND ACCOUNTS 2015
Directors’ report continued
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 and the Company for that period.
• the director has taken all steps that he ought to have taken
as a director in order to make himself or herself aware
of any relevant audit information and to establish that the
Company’s auditor is aware of that information.
In preparing these financial statements, the directors are
required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and accounting estimates that are
reasonable and prudent;
• state whether IFRSs as adopted by the EU and applicable
United Kingdom Accounting Standards, including FRS 101
have been followed, subject to any material departures
disclosed and explained in the Group and parent company
financial statements respectively; and
• notify its shareholders in writing about the use of disclosure
exemptions, if any, of FRS 101 used in the preparation of
financial statements.
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.
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, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group’s position, 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.
Going Concern
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 a period of at least
12 months from the date of this report. For this reason, the
directors continue to adopt the going concern basis in preparing
the Group and Company financial statements.
In reaching this conclusion, the directors have considered:
• the financial position of the Group as set out in this report
and additional information provided in the financial
statements including note 3 (Financial risk management),
note 28 (Bank and other borrowings) and note 30
(Derivative financial instruments);
Each of the directors, whose names and functions are listed in
the Board of directors on pages 50 to 51, confirm that to the best
of their knowledge:
• the resources available to the Group taking account of its
financial projections and considerable existing headroom
against committed debt facilities and covenants; and
• the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and
fair view of the assets, liabilities, financial position and profit
of the Group; and
• the Strategic report and this Directors’ report include a fair
review of the development and performance of the business
and the position of the Group, together with a description of
the principal risks and uncertainties that it faces.
Each of the persons who is a director in office 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 principal risks and uncertainties to which the Group is
exposed, as set out on pages 26 to 29, the likelihood of them
arising and the mitigation actions available.
By order of the Board
M L Thomas
Company Secretary
22 February 2016
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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 2015 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
The financial statements, included within the Annual Report
and Accounts (“The Annual Report”), comprise:
• the Consolidated balance sheet as at 31 December 2015;
• the Consolidated income statement and the Consolidated
statement of comprehensive income for the year then ended;
• 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, 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.
Our audit approach
Overview
Materiality
• Overall Group materiality: £10 million
which represents 5% of profit before tax.
Audit Scope
• We identified 10 reporting units which, in
our view, required a full scope audit based
on their size or risk. In addition we
determined that specified audit procedures
were required at a further 8 reporting units
to address specific risk characteristics or
to provide sufficient overall Group coverage
of particular financial statement line items.
• We used component teams in 4 countries to
perform a combination of full scope audits
and specified procedures at 12 reporting
units, with the Group team performing
the remainder.
• Reporting units where we performed audit
procedures accounted for 63% of Group
profit before tax and 84% of Group total
assets. Our audit scope provided sufficient
appropriate audit evidence as a basis for
our opinion on the Group financial
statements as a whole.
Areas of focus
• Goodwill impairment assessments
• Development costs and programme
participation costs impairment
assessments
• Environmental provisions
• Revenue recognition under long term
contract accounting primarily in the
Group’s energy business
• Retirement benefit obligation liabilities
• Provisions for uncertain tax positions
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)”).
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.
This is not a complete list of all risks identified by our audit.
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Area of focus
How the scope of our audit addressed the area of focus
Goodwill impairment assessments
Refer to notes18 (pages 114 to 116)
The Group holds significant amounts of
goodwill (£1,866.0m) on the balance sheet
which is supported by an annual
impairment review. No impairment charge
has been recorded against goodwill in the
current year.
Our audit focused on the risk that
the carrying value of goodwill could
be overstated.
Certain assumptions used in the
impairment review are subjective and
are key judgements, these include:
• The future cash flow growth
assumptions used in the Group’s most
recent budgets and plans for the next
five years approved by management (the
“plan”), and the growth rate used beyond
the period covered by the plan; and
• The discount rate applied to future
cash flows.
We focused in particular on the following
cash-generating units (“CGUs”):
• Meggitt Aircraft Braking Systems
(“MABS”), as it has the highest carrying
value of goodwill of £734.0m, and the
second lowest percentage headroom.
Headroom is £356.3m;
• The CGU with the least headroom in
percentage terms. This CGU has
a goodwill balance of £58.0m and
limited headroom of £4.6m.
We evaluated the directors’ future cash flow forecasts and the process by which
they were drawn up, and tested the integrity of the underlying discounted cash
flow model. We compared the forecasts used in this model to the plan and
assessed the actual performance in the year against the prior year budgets to
evaluate historical forecasting accuracy.
In respect of the two CGUs we focussed on, we assessed the directors’
assumptions for future cash flow growth in the plan, by:
• Comparing the future cash flow growth assumptions to economic and industry
forecasts, including the civil aerospace capacity trend rate of 5%, measured in
available seat kilometres (ASKs) and where growth exceeded this sensitising
the model down to this rate.
• Evaluating the historical accuracy of the directors’ forecast to actual
performance, which in respect of these CGUs, showed performance in line
with or in excess of forecast;
• Additionally we performed sensitivity analysis in respect of the key
assumptions to ascertain the extent of change in those assumptions which,
either individually or collectively, would be required for the goodwill to be
impaired. We assessed the likelihood of these changes in assumptions arising.
For all impairment assessments we:
• Tested the discount rates, by comparing key inputs, where relevant, to
externally derived data or data for comparable listed organisations. We used
our specialists in assessing the overall discount rates used, and observed
them to be within a reasonable range; and
• Considered the use of the long-term GDP growth rate for the country in which the
CGU operates for the growth rate used beyond the period covered by the plan.
Although inherent uncertainties exist in any long term forecasting exercise, based
on the audit procedures performed, we found that the directors’ judgements were
supported by reasonable assumptions. For all CGUs, with the exception of one,
with a carrying value of goodwill of £58.0m, it would require significant downside
changes before a material impairment was required. For that one CGU, we found
that reasonably foreseeable changes in key assumptions could result in
a material impairment charge.
We assessed whether the Group’s disclosures regarding the extent to which
changes in key assumptions would need to change for the recoverable amount to
fall below the carrying value of goodwill, in particular in relation to those CGUs
with the lowest percentage headroom. We determined that these disclosures
appropriately draw attention to the significant areas of judgement.
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Area of focus
How the scope of our audit addressed the area of focus
Development costs and programme participation costs impairment assessments
Refer also to note 19 (page 116)
The Group holds significant amounts
of development costs (£408.4m) and
programme participation costs (£267.6m)
on the balance sheet. These intangible
assets are subject to impairment testing at
the individual asset (“programme”) level,
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.
An impairment charge of £6.4m has been
recorded against these balances in the
current year. Our audit focused on the risk
that the carrying value of these intangible
assets could be overstated.
We focused our audit procedures on those
programmes against which the directors
have recorded an impairment provision and
those with limited headroom or significant
carrying value.
The key assumptions assessed were:
• the estimated aircraft volumes
(“fleet forecast”);
• the period over which future cash
flows are forecast;
• the sales price per part; and
• the discount rate applied to
future cash flows.
Environmental provisions
Refer also to note 31 (page 126)
The Group has liabilities of £111.0m
relating to environmental matters.
The environmental matters primarily
relate to known exposures arising from
environmental investigation and remediation
of a number of manufacturing sites in the US
where the Group has been identified as
a potentially responsible party under US
law. The liabilities are based on subjective
judgements as to the estimated clean-up
cost and length of time that operating and
monitoring of the site is required.
The Group has separately recognised
insurance receivables of £80.1m, in relation
to these environmental matters. We focused
on the required recognition criteria being
met and recoverability of these receivables.
We evaluated the directors’ future cash flow forecasts and the process by which
they were drawn up, and tested the integrity of the underlying discounted cash
flow model. In respect of the programme impairment assessments tested we:
• Agreed the fleet forecast data up to 2030 used in calculating the programme
forecast cash flow to external market forecasts, and corroborated any
significant deviations applied by the directors to supporting evidence.
We assessed fleet forecasts used beyond the period covered by the external
market forecasts, considering average aircraft lives and trend analysis and
considered them to be reasonable;
• Agreed the sales price per part to customer contract and did not identify
any material exceptions in these tests; and
• Tested the discount rates, by comparing key inputs, where relevant, to
externally derived data or data for comparable listed organisations. We used
our specialists in assessing the overall discount rates used, and observed
them to be within a reasonable range.
Although inherent uncertainties exist in any long term forecasting exercise,
based on the audit procedures performed, we found that these judgements were
supported by reasonable assumptions.
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. We assessed the
consistency of the cost estimates year on year and the level of costs incurred
compared to the prior year estimates to assess the historical accuracy of
the estimates and understand changes to the scope of remediation plans.
The changes in scope have been appropriately reflected in the provision;
• We assessed the competence and objectivity of the Group’s external
environmental consultants, confirming that they are qualified and affiliated
with the appropriate industry bodies in the respective local territory, and
are independent of the Group; and
• We reconciled the cost estimates and reports to the provision recorded and
gained an understanding of all significant adjustments applied by the directors
such as differences in the operating and monitoring period and the application
of additional provision for incremental costs. We assessed the reasonableness
of these, including reviewing historical data where appropriate and consider
the provision to be supported by reasonable assumptions.
Our work on the valuation of insurance receivables comprised the following:
• We obtained the insurance policies to confirm the coverage limits;
• We obtained confirmation from the insurer of the claims and settlements
to date, and assessed the extent of insurance coverage against the known
exposures, including the likelihood of reimbursement; and
• We obtained evidence of the insurers’ financial position to assess their ability
to meet the policy obligations. The recognition of the insurance receivable
is supportable.
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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 (pages 105)
We focused on the recognition of revenue
where long term contract accounting
is used, due to the application by the
directors of estimates and judgements in
determining the amount of revenue to be
recorded.
Our work on the revenue recognised under long term contract accounting
comprised the following:
• We tested the calculation of percentage of completion, which included testing
the costs incurred and recorded against the contract to invoice or other
supporting evidence and agreeing the total contract costs to cost summaries.
We re-performed the percentage of completion calculation, confirming that
the revenue recognised was accurate based on the total contract value as
per the signed contract or purchase order. We found no material exceptions
in these tests;
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’s
long term contract accounting revenue
of £66.7m. The recognition of revenue
is largely dependent on the estimated
percentage of completion of each
contract, which is determined based on
the proportion of contract costs incurred
to date compared to the estimated total
contract costs.
As these contracts may span reporting
periods, changes in the estimate of
total contract costs or the inappropriate
recording of costs around the year end
could result in revenue being recorded
in the incorrect period.
Retirement benefit obligation liabilities
Refer also to note 33 (pages 128 to 132)
The Group has retirement benefit
obligations with gross liabilities of
£1,078.6m, which are significant in the
context of the overall Group balance sheet.
The valuation of retirement benefit
obligations requires significant levels
of judgement and technical expertise,
including the use of actuarial experts
in selecting appropriate assumptions.
Small changes in a number of the key
assumptions used to value the Group’s
retirement benefit obligation, (including
salary increases, inflation, discount rates
and mortality) could have a material impact
on the calculation of the liability.
• We assessed the estimates of costs to complete for significant contracts,
obtaining an understanding of the performance and status of the contracts
through discussion with contract project managers, and where appropriate,
corroborated explanations by examination of evidence, such as customer
correspondence and receipt of milestone payments. Further we evaluated
the historical accuracy of the estimates of total contract costs. We found that
these estimates were supportable and we identified a satisfactory degree of
historical estimation accuracy; and
• We examined any loss making contracts and considered low margin contracts
to determine the level of provisioning required. This included assessing
the actual profit or loss achieved on contracts that completed in the year
compared to the forecast position.
We evaluated the assumptions made in relation to the valuation of the liabilities,
with input from our actuarial specialists. In particular we:
• Agreed the discount and inflation rates used to our internally developed
benchmarks, based on externally derived data and comparable organisations;
• Compared assumed mortality rates to national and industry averages;
• Assessed the assumption for salary increases against the company’s historical
trend and expected future outlook; and
• Assessed the competence and objectivity of the Group’s external specialists,
confirming they are qualified and affiliated with the appropriate industry
bodies in the respective local territory.
Based on the evidence obtained, we found that the assumptions used by the
directors were reasonable.
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Area of focus
How the scope of our audit addressed the area of focus
Provisions for uncertain tax positions
Refer also to note 14 (page 112 to 113)
Judgements have to be made by the
directors on the tax treatment of a number
of transactions in advance of the ultimate
tax determination being certain.
This is due to the complexity of the Group’s
legal structure (including multiple legal
entities), the number of tax jurisdictions
(primarily the UK and US) in which
the Group operates, the complexity of
international tax legislation and the
changing tax environment. In addition
uncertainty arises from intergroup
transactions relating to goods, services
and internal financing.
Where the amount of tax payable or
recoverable is uncertain, the Group
establishes provisions based on the
director’s judgement of the probable
amount of the liability, or expected
amounts recoverable. There is a risk
that the conclusion of the appropriate
tax treatment with tax authorities is at an
amount materially different to the amount
provided for.
In conjunction with our internal UK and international tax specialists we:
• Evaluated the process by which the directors calculated each tax exposure and
assessed whether the assumptions they have used, in conjunction with their
advisors, in developing the estimated exposure, provided a supportable and
reasonable basis to calculate the provision for uncertain tax positions;
• Considered any tax opinions or other tax advice the Group had received from
its tax advisors in relation to the exposures identified to determine that the
treatment is consistent with the advice obtained. We also considered the
evidence of recent tax audits and external tax cases which may have an impact
on existing tax exposures;
• Assessed and formed our own views on the key judgements with respect to
open and uncertain tax positions and concluded that the judgements made by
the directors were materially consistent with our own views in respect of the
significant tax exposures; and
• Evaluated and concluded that the liabilities and potential exposures were
appropriately disclosed in the financial statements.
The directors’ judgements in respect of the Group’s position on uncertain tax
items are supportable and reasonable in the context of the information currently
available to them and no material matters were identified by our work that the
directors had not adequately reflected in their estimate.
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 geographical
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 component
auditors from other PwC network firms. Where the work was
performed by component auditors, 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 (“full scope”)
or whether specified procedures addressing specific risk
characteristics or particular financial statement line items
would be sufficient. Those where a full scope audit was
required included the largest reporting unit (Meggitt Aircraft
Braking Systems in Akron), determined as individually
financially significant because it contributes more than 15%
of the Group’s profit. We performed a full scope audit at
a further 9 reporting units, based on their size or risk. Senior
members of the Group engagement team visited all of these
reporting units, with the exception of one, for which a number
of conference calls were held, to review the work undertaken
by component auditors and assess the audit findings. The
Group consolidation, financial statement disclosures and
a number of complex items, prepared by the head office
finance function, were audited by the Group engagement
team. These included goodwill, other intangible assets,
derivative financial instruments and related hedge accounting,
retirement benefit obligations, environmental and contractual
provisions, share based payments and central adjustments
raised as part of the consolidation process. These audit
procedures together with those performed on the 10 reporting
units accounted for 63% of Group profit before tax and 84% of
Group total assets. We also performed specified procedures
on 8 reporting units to address specific risk characteristics
or to provide sufficient overall Group coverage of particular
financial statement line items, principally in relation to
revenue and provisions. In addition to the work performed
at the in scope reporting units, there is a substantial amount
of work performed at the consolidated level. As a result of
its structure and size, the Group also has a large number of
small reporting units that have an immaterial profit before
tax but, in aggregate, make up a material portion of its profit
before taxation and total assets. These small reporting units
are covered by the work that we perform at the consolidated
level, whereby we perform analytical review procedures.
A significant proportion of these remaining reporting units not
selected for local procedures were subject to this analysis of
year on year movements, at a level of disaggregation to enable
a focus on higher risk balances and unusual movements.
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Those not subject to analytical review procedures were
individually, and in aggregate, immaterial. This gave us the
evidence we needed for our opinion on the financial statements
as a whole.
Other required reporting
Consistency of other information
Companies Act 2006 opinion
Materiality
The scope of our audit was 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 on the individual
financial statement line items and disclosures and in
evaluating 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:
Overall Group materiality £10 million (2014: £11 million).
How we determined it
5% of profit before tax.
Rationale for benchmark
applied
Consistent with last year, we applied
this benchmark, the application
of which is an accepted auditing
practice. We note reference by
the directors of an alternative
profit measure (underlying profit
before tax), and we specifically
consider the related adjustments
and disclosure in reconciling to
statutory profit before tax as part
of our audit procedures.
We agreed with the Audit Committee that we would report
to them misstatements identified during our audit above
£500,000 (2014: £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 84, in relation to going concern. We
have nothing to report having performed our review.
Under ISAs (UK & Ireland) we are required to report to you
if we have anything material to add or to draw attention to
in relation to the directors’ statement about whether they
considered it appropriate to adopt the going concern basis in
preparing the financial statements. We have nothing material
to add or to draw attention to.
As noted in the directors’ statement, the directors have
concluded that it is appropriate to adopt the going concern
basis in preparing the financial statements. 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.
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:
We have no
exceptions
to report.
We have no
exceptions
to report.
•
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 Group acquired in the
course of performing our audit; or
– otherwise misleading.
• the statement given by the directors on
page 84, 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 position. performance,
business model and strategy is materially
inconsistent with our knowledge of the
Group acquired in the course of
performing our audit.
• the section of the Annual Report on page
56, 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.
The directors’ assessment of the prospects of the Group and
of the principal risks that would threaten the solvency or
liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if,
in our opinion:
• the directors’ confirmation on page 26 of
the Annual Report, in accordance with
provision C.2.1 of the Code, that they
have carried out a robust assessment of
the principal risks facing the Group,
including those that would threaten its
business model, future performance,
solvency or liquidity.
We have nothing
material to add
or to draw
attention to.
• the disclosures in the Annual Report
that describe those risks and explain
how they are being managed
or mitigated.
We have nothing
material to add
or to draw
attention to.
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Under ISAs (UK & Ireland) we are required to report to you if,
in our opinion:
We have nothing
material to add
or to draw
attention to.
• the directors’ explanation on page 29 of
the Annual Report, in accordance with
provision C.2.2 of the Code, as to how
they have assessed the prospects of the
Group, over what period they have done
so and why they consider that period to
be appropriate, and their statement as
to whether they have a reasonable
expectation that the Group will be able
to continue in operation and meet its
liabilities as they fall due over the period
of their assessment, including any
related disclosures drawing attention
to any necessary qualifications
or assumptions.
Under the Listing Rules we are required to review the
directors’ statement that they have carried out a robust
assessment of the principal risks facing the Group and the
directors’ statement in relation to the longer-term viability of
the Group. Our review was substantially less in scope than an
audit and only consisted of making inquiries and considering
the directors’ process supporting their statements;
checking that the statements are in alignment with the
relevant provisions of the Code; and considering whether
the statements are consistent with the knowledge acquired
by us in the course of performing our audit. We have nothing
to report having performed our review.
Adequacy of information and explanations received
Under the Companies Act 2006 we are required to report to
you if, in our opinion, we have not received all the information
and explanations we require for our audit. We have no
exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report to
you if, in our opinion, certain disclosures of directors’
remuneration specified by law are not made. We have no
exceptions to report arising from this responsibility.
Corporate governance statement
Under the Listing Rules we are required to review the part of
the Corporate Governance Statement relating to ten further
provisions of the Code. We have nothing to report having
performed our review.
Responsibilities for the financial statements and
the audit
This report, including the opinions, has been prepared for
and only for the parent 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.
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 parent company
financial statements of Meggitt PLC for the year ended
31 December 2015 and on the information in the Directors’
remuneration report that is described as having been audited.
Our responsibilities and those of the directors
As explained more fully in the Statement of directors
responsibilities set out on pages 83 to 84, the directors are
responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
22 February 2016
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.
156768.01 Text 085-091_NEW-06.03.16.indd 91
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92
MEGGITT PLC REPORT AND ACCOUNTS 2015
Consolidated income statement
For the year ended 31 December 2015
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
2015
£’m
2014
£’m
1,647.2
(997.2)
1,553.7
(935.9)
650.0
617.8
(413.4)
(381.6)
236.6
236.2
2.7
(29.1)
(26.4)
1.2
(28.5)
(27.3)
210.2
208.9
(28.1)
182.1
(31.9)
177.0
23.2p
22.9p
325.5
310.3
31.6p
31.2p
22.0p
21.7p
346.0
328.7
32.4p
31.9p
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
93
Consolidated statement of comprehensive income
For the year ended 31 December 2015
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
Other comprehensive income for the year
Notes
2015
£’m
2014
£’m
182.1
177.0
14
33
14
82.7
(0.7)
2.1
84.1
29.4
(9.5)
19.9
77.4
(0.8)
(0.2)
76.4
(97.7)
24.2
(73.5)
104.0
2.9
Total comprehensive income for the year attributable to equity owners of the Company
286.1
179.9
94
MEGGITT PLC REPORT AND ACCOUNTS 2015
Consolidated balance sheet
As at 31 December 2015
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
2015
Notes
£’m
2014
Restated
(see note 43)
£’m
18
19
19
20
21
23
30
32
22
23
30
24
1,866.0
408.4
267.6
689.1
290.3
58.9
25.5
0.3
1,534.7
342.9
242.4
684.9
251.1
93.4
29.6
0.9
3,606.1
3,179.9
415.2
353.7
8.4
5.5
145.4
928.2
327.9
331.8
1.1
3.3
105.5
769.6
6
4,534.3
3,949.5
25
30
27
28
31
26
30
32
27
28
31
33
34
(402.1)
(12.7)
(37.3)
(0.1)
(4.0)
(36.0)
(358.5)
(9.6)
(36.5)
(0.1)
(58.9)
(45.1)
(492.2)
(508.7)
436.0
260.9
(4.2)
(13.7)
(255.8)
(5.4)
(1,189.0)
(111.0)
(284.5)
(5.9)
(2.9)
(220.9)
(5.3)
(616.7)
(130.5)
(317.8)
(1,863.6)
(1,300.0)
(2,355.8)
(1,808.7)
2,178.5
2,140.8
38.8
1,218.9
15.7
243.2
661.9
40.1
1,218.9
14.4
159.1
708.3
2,178.5
2,140.8
The financial statements on pages 92 to 141 were approved by the Board of Directors on 22 February 2016 and signed on its behalf by:
S G Young
Director
D R Webb
Director
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
95
Consolidated statement of changes in equity
For the year ended 31 December 2015
Equity attributable to owners of the Company
Share
capital
Share
premium
Other
reserves*
Hedging and
translation
Retained
earnings
Total
equity
Notes
£’m
39.9
£’m
1,166.3
£’m
14.1
At 1 January 2014
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 and cancelled
Share buyback – close period commitment
Dividends
At 31 December 2014
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 before tax
Tax effect
Other comprehensive income for the year
Total comprehensive income for the year
Employee share schemes:
Value of services provided
Purchase of own shares
Share buyback – purchased and cancelled
Share buyback – purchased and transferred to treasury shares
Share buyback – movement in close period commitment
Dividends
reserves**
£’m
82.7
£’m
773.4
£’m
2,076.4
–
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)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.3)
–
0.5
–
–
0.1
–
–
52.5
–
–
–
–
–
–
–
–
–
–
–
–
0.3
–
–
40.1
1,218.9
14.4
159.1
708.3
2,140.8
–
–
–
–
–
–
–
–
–
–
–
(1.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.3
–
–
–
–
182.1
182.1
82.7
(1.5)
0.8
–
82.0
2.1
84.1
–
–
–
29.4
29.4
(9.5)
19.9
82.7
(1.5)
0.8
29.4
111.4
(7.4)
104.0
84.1
202.0
286.1
–
–
–
–
–
–
3.0
(9.7)
(138.8)
(7.6)
15.8
(111.1)
3.0
(9.7)
(138.8)
(7.6)
15.8
(111.1)
33
14
16
33
14
16
At 31 December 2015
38.8
1,218.9
15.7
243.2
661.9
2,178.5
* Other reserves relate to capital reserves of £14.1 million (2014: £14.1 million) arising on the acquisition of businesses in 1985 and 1986 where
merger accounting was applied and a capital redemption reserve of £1.6 million (2014: £0.3 million) created as a result of the share buyback
programme commenced during 2014.
** Hedging and translation reserves comprise a credit balance on the hedging reserve of £1.9 million (2014: £2.5 million) and a credit balance on
the translation reserve of £241.3 million (2014: £156.6 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.
156768.01 Text 092-096.indd 95
07/03/2016 17:47
96
MEGGITT PLC REPORT AND ACCOUNTS 2015
Consolidated cash flow statement
For the year ended 31 December 2015
Cash inflow from operations before business acquisition expenses and exceptional operating items
Cash outflow from business acquisition expenses
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 net of funding from customers
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 inflow/(outflow) from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at start of the year
Exchange gains on cash and cash equivalents
Cash and cash equivalents at end of the year
Notes
11
39
42
19
19
16
34
24
2015
£’m
419.9
(2.5)
(10.7)
406.7
0.2
(16.2)
(15.3)
375.4
(362.7)
2.0
(80.5)
(43.0)
(10.4)
(45.8)
0.8
2014
£’m
364.0
(0.5)
(16.6)
346.9
0.3
(16.3)
(18.7)
312.2
(28.6)
–
(77.7)
(46.0)
(12.0)
(33.0)
2.8
(539.6)
(194.5)
(111.1)
(9.7)
–
(146.4)
537.0
(0.4)
(67.4)
202.0
37.8
105.5
2.1
145.4
(51.4)
(11.6)
0.1
(33.7)
218.3
(2.8)
(249.9)
(131.0)
(13.3)
116.1
2.7
105.5
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
97
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. Contingent consideration payable is measured
at fair value at each subsequent balance sheet date, with any changes
in fair value recorded in the income statement within net operating
costs. 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 within net operating costs.
Costs directly attributable to an acquisition are recognised in the
income statement within net operating costs 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 within net operating costs.
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 receivable is measured at fair value at each
subsequent balance sheet date, with any changes in fair value recorded
in the income statement within net operating costs.
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.
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 within net operating costs 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 in
hedging and translation reserves within other comprehensive income.
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.
98
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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 52
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.
With effect from 1 January 2015, the Meggitt Avionics business was
transferred from Meggitt Equipment Group to Meggitt Sensing
Systems. Prior period comparatives have been restated to reflect
this change in 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, costs directly
attributable to the integration of an acquired business, significant
site consolidation costs and other significant restructuring costs.
Exceptional operating items are included within the appropriate
consolidated income statement category but are highlighted
separately in the notes to the financial statements.
Amounts arising on the acquisition, disposal and
closure of a business
These items are excluded from the underlying profit measures used by
the Board to monitor and measure the underlying performance of the
Group (see note 10). 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 and costs directly
attributable to the acquisition of a business. Amounts 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, typically up to 15 years,
commencing with launch of the product. Development costs not
meeting the criteria for capitalisation are expensed as incurred.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
99
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 recorded 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 recorded 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
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.
100
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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 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 unconditional 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 share-based compensation schemes,
which are principally equity-settled.
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.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
101
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 derivative 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. Any such gains or losses are excluded from
the underlying profit measures used by the Board to monitor and
measure the underlying performance of the Group (see note 10).
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 within net operating costs. 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. Additionally, in 2015
the Group has entered a cross currency derivative and a treasury lock
derivative (as described in note 30) which do not meet the criteria for
hedge accounting. Gains and losses arising from measuring these
derivatives 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
The total consideration payable for shares purchased is deducted
from retained earnings. The shares when purchased are generally
cancelled, unless they are to be used to satisfy obligations under
employee share plans. The nominal value of 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.
Any gain or loss arising from the remeasurement of the obligation
is excluded from the underlying profit measures used by the Board
to monitor and measure the underlying performance of the Group
(see note 10).
102
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
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. The 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, along with the aerospace industry as a whole, is continuing to assess the full
impact of IFRS 15. Areas which are currently under review by the Group, and where a change to current practice may be required, are the
recognition as an intangible asset of programme participation costs, the method of accounting for revenue on power by the hour and cost per
brake landing contracts and contract revenue recognition. The standard becomes effective for accounting periods beginning on or after
1 January 2018 and is subject to endorsement by the European Union.
• IFRS 16, ‘Leases’. The main change is expected to relate to the recognition on the Group’s balance sheet of assets and liabilities relating to
leases which are currently being accounted for as operating leases. The Group is yet to assess the full impact of IFRS 16 which becomes
effective for accounting periods beginning on or after 1 January 2019. This standard is subject to endorsement by the European Union.
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 38 to 39 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 partially 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
generally 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, floating rate borrowings into fixed rate borrowings
and in 2015 through a treasury lock which secures the rates of fixed interest payable on specified amounts of future fixed rate financing.
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.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
103
3. Financial risk management continued
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
391.8
0.1
21.5
1.1
2015
1-2 years
2-5 years
£’m
0.9
543.2
20.1
1.0
£’m
1.4
545.6
39.5
3.2
(8.4)
0.5
(8.2)
0.4
(17.6)
0.2
Greater than
5 years
£’m
1.9
84.9
6.5
12.1
(4.0)
–
Total
£’m
396.0
1,173.8
87.6
17.4
(38.2)
1.1
406.6
557.4
572.3
101.4
1,637.7
Less than
1 year
£’m
350.1
49.5
20.5
1.1
(9.1)
0.8
412.9
2014
1-2 years
2-5 years
£’m
1.5
0.1
19.0
1.0
(9.0)
0.8
13.4
£’m
2.7
343.9
45.2
3.0
(22.8)
1.2
373.2
Greater than
5 years
£’m
1.7
256.8
17.3
12.4
(9.8)
–
Total
£’m
356.0
650.3
102.0
17.5
(50.7)
2.8
278.4
1,077.9
* Excludes social security and other taxes of £10.3 million (2014: £8.4 million) (see note 25).
** Assumes no change in interest rates from those prevailing at year end.
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%
2015
2014
Income
statement
£’m
32.8
21.7
Equity
£’m
101.5
5.0
Income
statement
£’m
28.3
4.6
Equity
£’m
44.1
3.3
The impact on equity from movements in the exchange rate comprises £106.9 million (2014: £53.2 million) in respect of US dollar net debt, offset by
£5.4 million (2014: £9.1 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% (2014: 8%) and its capital structure at 31 December is as follows:
Net debt (see note 40)
Total equity
Debt/equity %
2015
£’m
2014
£’m
1,053.1
2,178.5
575.5
2,140.8
48.3%
26.9%
104
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
3. Financial risk management continued
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 38 of the Chief Financial Officer’s review, which also includes details on how
the Group has complied with the two principal financial covenant requirements contained in its committed credit facilities for the year ended
31 December 2015.
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 described below. Further consideration of these critical estimates
and judgements can be found in the Audit Committee report on page 57.
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).
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 2015, the programme with the largest capitalised development balance has a net book value of £65.5 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 85% 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 for 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 2015, the programme with the largest capitalised programme participation balance has a net book value of £29.9 million.
No reasonably foreseeable change in assumptions would cause an impairment to be recognised.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
105
4. Critical accounting estimates and judgements continued
Environmental matters
The Group is involved in the investigation and remediation of certain sites for which it has been identified as a potentially responsible party under
US law. Advice is received by the Group from its environmental consultants and legal advisors to assist in the determination of the timing and
estimation of the costs the Group may incur in respect of such claims and appropriate provisions are made. The Group has extensive insurance
arrangements in place to mitigate the impact of historical environmental events on the Group. To the extent estimates in respect of claims
change as more information becomes available, adjustments are made to the carrying value of these provisions and, if the costs are determined
to be covered by insurance, to the amounts recoverable from insurers. 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).
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. 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 2015, the impact on the tax charge would be approximately £4.0 million. Judgements
also need to be made as to the extent to which deferred tax assets and liabilities can be offset against one another (see note 32 for further details).
5. Revenue
The Group’s revenue is analysed as follows:
Sale of goods
Contract accounting revenue
Revenue from services
Revenue from funded research and development
Total
2015
£’m
1,470.4
66.7
78.9
31.2
2014
£’m
1,351.7
98.3
75.0
28.7
1,647.2
1,553.7
106
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
6. Segmental analysis
Analysis by operating segment
The Group manages its businesses under the key segments of Meggitt Aircraft Braking Systems, Meggitt Control Systems, Meggitt Polymers &
Composites, Meggitt Sensing Systems and the Meggitt Equipment Group. Details of the Group’s divisions can be found on pages 13 to 17 of the
Strategic report. With effect from 1 January 2015, the Meggitt Avionics business was transferred from Meggitt Equipment Group to Meggitt
Sensing Systems. Prior year comparatives have been restated to reflect this new divisional structure.
Year ended 31 December 2015
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
353.3
(0.2)
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
398.8
(0.9)
£’m
178.0
(0.6)
£’m
480.8
(6.0)
£’m
244.9
(0.9)
£’m
1,655.8
(8.6)
Revenue from external customers
353.1
397.9
177.4
474.8
244.0
1,647.2
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
131.7
97.0
15.4
72.3
9.1
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)***
0.9
77.7
–
7.3
1.2
16.0
–
6.4
0.8
6.9
–
4.1
4.9
15.1
6.4
10.1
2.6
5.3
–
5.6
*
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, £49.1 million has been charged to underlying operating profit as defined in note 10.
*** All of the total depreciation in the year has been charged to underlying operating profit as defined in note 10.
The Group’s largest customer accounts for 6.6% of revenue (£109.0 million). Revenue from this customer arises across all segments.
Additions to non-current assets*
Development costs net of customer funding (see note 19)
Programme participation costs (see note 19)
Other purchased intangible assets
Property, plant and equipment
Total
Meggitt
Aircraft
Braking
Systems
£’m
37.5
37.4
2.0
8.5
85.4
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
£’m
£’m
£’m
7.4
4.8
1.2
8.0
21.4
1.6
–
0.4
6.9
8.9
25.5
0.8
1.2
11.9
£’m
8.5
–
0.9
4.2
39.4
13.6
168.7
* Relate to those non-current assets included within segmental trading assets reviewed by the CODM.
325.5
(88.9)
236.6
2.7
(29.1)
(26.4)
210.2
(28.1)
182.1
10.4
121.0
6.4
33.5
Total
£’m
80.5
43.0
5.7
39.5
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
107
6. Segmental analysis continued
As at 31 December 2015
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
666.6
303.7
187.5
387.7
145.9
1,691.4
179.8
1,866.0
612.0
25.5
0.3
8.4
5.5
145.4
4,534.3
* 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 2014 (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
327.1
(0.1)
327.0
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
349.7
(1.0)
348.7
£’m
163.2
(0.9)
162.3
£’m
456.5
(5.5)
451.0
£’m
265.4
(0.7)
£’m
1,561.9
(8.2)
264.7
1,553.7
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
127.5
91.8
20.2
75.7
30.8
Operating profit (see note 10)
Finance income (see note 12)
Finance costs (see note 13)
Net finance costs
Profit before tax
Tax (see note 14)
Profit for the year
Exceptional operating items (see note 11)
Amortisation of intangible assets (see notes 19 and 20)**
Impairment loss (see note 19)
Depreciation (see note 21)***
0.5
70.9
–
6.7
0.2
12.2
4.0
6.1
0.3
6.4
–
3.3
7.0
16.2
4.0
9.9
1.0
6.9
–
5.2
* Central costs are allocated using a variety of bases designed to reflect the beneficial relationship between the costs and the segments.
Bases include headcount, payroll costs, gross assets and revenue.
** Of the total amortisation in the year, £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
9.0
112.6
8.0
31.2
108
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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
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
23.8
–
1.2
9.9
34.9
3.2
–
0.9
6.9
77.7
46.0
4.2
33.3
11.0
161.2
* Relate to those non-current assets included within segmental trading assets reviewed by the CODM.
As at 31 December 2014 (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
568.3
295.6
94.0
365.8
160.0
1,483.7
181.4
1,534.7
609.3
29.6
0.9
1.1
3.3
105.5
3,949.5
* 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
2015
£’m
153.9
357.6
854.9
280.8
2014
£’m
152.4
338.1
771.1
292.1
1,647.2
1,553.7
2015
£’m
2014
Restated
(see note 43)
£’m
677.7
182.2
2,650.2
11.3
602.0
203.6
2,240.9
9.5
3,521.4
3,056.0
Segmental non-current assets are based on the location of the assets. They exclude trade and other receivables, derivative financial instruments
and deferred tax assets.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
109
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
Total
Non-audit fees payable to PricewaterhouseCoopers LLP were £Nil million (2014: £Nil million).
8. Operating profit
Operating profit is stated after charging/(crediting):
Raw materials and consumables used
Change 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 on disposal of property, plant and equipment
Exceptional operating items (see note 11)
Amounts arising on the acquisition, disposal and closure of businesses (see note 10)
Financial instruments (see note 10)
Net foreign exchange (gain)/loss
Operating lease rentals
Other operating income
2015
£’m
0.8
0.1
0.6
1.5
2015
£’m
492.5
(34.0)
590.6
73.9
7.9
28.9
12.3
71.9
6.4
33.5
–
10.4
0.2
4.8
(2.6)
14.9
(1.9)
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
9.0
3.5
29.2
0.6
15.3
(3.1)
* Total research and development expenditure in the year was £158.7 million (2014: £148.3 million) of which £26.8 million (2014: £28.9 million)
was charged to cost of sales, £47.1 million (2014: £41.7 million) was charged to net operating costs and £84.8 million (2014: £77.7 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
2015
£’m
464.5
82.6
39.4
4.1
590.6
2014
£’m
434.7
78.8
26.6
1.7
541.8
Details of directors’ remuneration is provided in the Directors’ remuneration report on pages 60 to 80 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
Total
Prior period comparatives have been restated to reflect the change to the divisional structure described in note 6.
2015
Number
2014
Restated
Number
1,300
1,835
1,818
3,365
1,798
735
1,228
1,811
1,876
3,367
1,746
657
10,851
10,685
110
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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)
Amounts arising on the acquisition, disposal and closure of businesses
Amortisation of intangible assets acquired in business combinations
Disposal of inventory revalued in business combinations
Financial instruments
Adjustments to operating profit*
Underlying operating profit
Profit before tax
Adjustments to operating profit per above
Net interest expense on retirement benefit obligations (see note 33)
Adjustments to profit before tax
Underlying profit before tax
Profit for the year
Adjustments to profit before tax per above
Tax effect of adjustments to profit before tax
Adjustments to profit for the year
Underlying profit for the year
Note
a
b
c
d
2015
£’m
2014
£’m
236.6
236.2
10.4
0.2
71.9
1.6
4.8
88.9
325.5
9.0
3.5
68.1
–
29.2
109.8
346.0
210.2
208.9
88.9
11.2
100.1
310.3
109.8
10.0
119.8
328.7
182.1
177.0
100.1
(33.9)
66.2
248.3
119.8
(36.6)
83.2
260.2
* Of the adjustments to operating profit, £4.0 million (2014: £5.5 million) relating to exceptional operating items and £1.6 million (2014: £Nil
million) relating to the disposal of inventory revalued in business combinations has been charged to cost of sales, with the balance of
£83.3 million (2014: £104.3 million) included within net operating costs.
a. In 2015, the Group has decided to separately present amounts arising on the acquisition, disposal and closure of businesses. These include
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 and costs directly attributable to the acquisition of a business. Such amounts
were previously recorded as exceptional operating items. Prior year comparatives have been restated to reflect this change.
Costs related to the acquisition of businesses
Remeasurement of fair value of contingent consideration receivable relating to previously disposed businesses
(Gain)/loss on closure of businesses
Amounts arising on the acquisition, disposal and closure of businesses
b. The Group excludes from its underlying profit figures the amortisation of intangible assets acquired in business combinations.
2015
£’m
3.9
(2.5)
(1.2)
0.2
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
2015
£’m
84.2
(12.3)
71.9
2014
£’m
0.6
–
2.9
3.5
2014
£’m
78.9
(10.8)
68.1
c. IFRS 3 requires finished goods acquired in a business combination to be recorded at fair value, which is typically estimated selling price less
costs of disposal and a reasonable profit allowance for the selling effort. Work in progress acquired in a business combination is recorded
at fair value, which is typically estimated selling price less costs to complete, costs of disposal and a reasonable profit allowance for work
still to be carried out. The fair value of acquired inventory is thus significantly higher than the same items built post acquisition, the value of
which includes no profit element. The difference between the fair value of the inventory consumed and its cost is excluded from the Group’s
underlying profit figures.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
111
10. Reconciliations between profit and underlying profit continued
d. 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. Where cross currency derivatives and treasury lock
derivatives do not qualify to be hedge accounted, movements in the fair value of the derivatives are excluded from underlying profit.
Gains or losses arising from the remeasurement of the fair value of close period share buyback commitments are 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
Movement in the fair value of cross currency derivative
Movement in the fair value of treasury lock derivative
Remeasurement of share buyback close period commitment
Financial instruments – loss
11. Exceptional operating items
Site consolidations
Business restructuring costs
Integration of acquired businesses
Raw material supply issue
Exceptional operating items
2015
£’m
16.1
(0.1)
2.2
(1.1)
(4.4)
(3.7)
(4.2)
4.8
2014
£’m
31.1
(1.9)
(4.2)
4.2
–
–
–
29.2
Note
a
b
Income statement
Cash expenditure
2015
£’m
0.9
9.2
0.3
–
10.4
2014
£’m
7.5
–
1.5
–
9.0
2015
£’m
0.9
4.8
0.1
4.9
2014
£’m
7.5
–
4.4
4.7
10.7
16.6
a. This relates to the movement of production to the Group’s low cost manufacturing locations and, in 2014, to the consolidation of the Group’s
two North American sensor businesses onto a single new site in California, USA.
b. This principally relates to costs incurred as part of a Group-wide initiative to structurally reduce its cost base announced on 28 October 2015.
A further cost of approximately £8.0 million is expected to be incurred in 2016.
The tax credit in respect of exceptional operating items was £3.2 million (2014: £4.1 million).
12. Finance income
Interest on bank deposits
Unwinding of interest on other receivables (see note 31)
Other finance income
Finance income
2015
£’m
0.1
2.5
0.1
2.7
2014
£’m
0.1
0.9
0.2
1.2
112
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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
2015
£’m
4.1
11.7
1.0
3.2
11.2
0.8
(2.9)
29.1
2014
£’m
2.7
12.7
0.9
1.1
10.0
3.1
(2.0)
28.5
* An additional charge of £1.8 million was recorded in 2014, following the early refinancing of the Group’s committed syndicated bank facilities.
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
2015
£’m
21.4
(2.9)
6.3
(1.0)
4.3
28.1
2014
£’m
20.4
0.2
17.2
–
(5.9)
31.9
The Finance (No 2) Act 2015, included legislation to reduce the main rate of corporation tax in the UK from 20% to 19% with effect from 1 April 2017
and to 18% with effect from 1 April 2020. As these changes were substantively enacted during 2015, they are reflected in the tax charge for the
year. The impact of this change on net deferred tax liabilities at 31 December 2015, profit for the year (underlying and statutory) and comprehensive
income for the year was not significant.
Reconciliation of total tax charge
A reconciliation of the tax charge based on the UK standard rate of tax to the actual tax charge is as follows:
Profit on ordinary activities before tax at UK corporation tax rate of 20.25%* (2014: 21.50%)
Effects of:
Different tax rates of subsidiaries operating in other jurisdictions
Changes in statutory tax rates
Reversal of provisions against historical tax issues
Tax credits and incentives
Other permanent differences
Temporary differences
Current tax – adjustment in respect of prior years
Deferred tax – adjustment in respect of prior years
Total taxation
2015
£’m
42.6
11.4
(1.0)
(11.4)
(4.1)
(10.8)
–
(2.9)
4.3
28.1
2014
£’m
44.9
12.5
–
–
(3.2)
(16.0)
(0.6)
0.2
(5.9)
31.9
* 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 2015 to increase, or reduce respectively, by approximately £2.1 million.
Tax relating to components of other comprehensive income
Current tax – currency translation differences
Deferred tax – currency translation differences
Deferred tax – cash flow hedge movements
Deferred tax – remeasurement of retirement benefit obligations
Other comprehensive income
Current tax
Deferred tax
Total
Before
tax
£’m
80.3
2.4
(0.7)
29.4
111.4
2015
Tax credit/
(charge)
£’m
2.4
(0.4)
0.1
(9.5)
(7.4)
2.4
(9.8)
(7.4)
After
tax
£’m
82.7
2.0
(0.6)
19.9
104.0
Before
tax
£’m
77.0
0.4
(0.8)
(97.7)
(21.1)
After
tax
£’m
76.7
0.4
(0.7)
(73.5)
2.9
2014
Tax credit/
(charge)
£’m
(0.3)
–
0.1
24.2
24.0
(0.3)
24.3
24.0
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
113
14. Tax continued
Tax relating to items recognised directly in equity
Current tax credit relating to share-based payment expense
Deferred tax charge relating to share-based payment expense
Total
15. Earnings per ordinary share
2015
£’m
0.5
(2.5)
(2.0)
2014
£’m
1.2
(1.8)
(0.6)
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 treasury shares and 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 treasury
shares excluded was 0.3 million shares (2014: Nil million) and the weighted average number of own shares excluded was 0.7 million shares
(2014: 0.1 million). 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.
2015
Profit*
£’m
182.1
–
182.1
2015
Shares
Number ‘m
785.4
10.9
796.3
2015
EPS
Pence
23.2
(0.3)
22.9
2014
Profit*
£’m
2014
Shares
Number ‘m
177.0
–
177.0
804.1
11.0
815.1
2014
EPS
Pence
22.0
(0.3)
21.7
Underlying EPS is based on underlying profit for the year (see note 10) and the same number of shares as is used in the calculation of basic EPS.
It is reconciled to basic EPS below:
Basic EPS
Adjust for effects of:
Exceptional operating items
Amounts arising on the acquisition, disposal and closure of businesses
Amortisation of intangible assets acquired in business combinations
Disposal of inventory revalued in business combinations
Financial instruments
Net interest expense on retirement benefit obligations
Underlying basic EPS
2015
Pence
23.2
0.9
0.2
5.8
0.1
0.4
1.0
2014
Pence
22.0
0.8
0.3
5.5
–
2.9
0.9
31.6
32.4
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 31.2 pence (2014: 31.9 pence).
16. Dividends
In respect of earlier years
In respect of 2014:
Interim of 4.25p per share
Final of 9.50p per share
In respect of 2015:
Interim of 4.60p per share
Dividends paid
Less paid as scrip dividend (see note 41)
Dividends paid in cash
2015
£’m
–
–
75.6
35.5
111.1
–
111.1
2014
£’m
70.2
34.2
–
–
104.4
(53.0)
51.4
A final dividend in respect of 2015 of 9.80p per share (2014: 9.50p), amounting to an estimated total final dividend of £76.0 million (2014: £76.2 million)
is to be proposed at the Annual General Meeting on 21 April 2016. This dividend is not reflected in these financial statements as it is has not been
approved by the shareholders at the balance sheet date.
114
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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 2015 as members of the Board and the Group Executive Committee, 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
2015
£’m
9.0
0.3
1.3
10.6
2014
£’m
7.3
0.3
0.6
8.2
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
2015
Average
exercise
price
Pence
N/A
349.19
–
–
2015
Number
outstanding
‘m
-
3.2
1.6
3.0
2014
Average
exercise
price
Pence
393.00
359.71
–
–
2014
Number
outstanding
‘m
0.1
5.1
2.5
1.5
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 60 to 80 which forms part of these financial statements.
18. Goodwill
Cost at 1 January
Exchange rate adjustments
Businesses acquired (see notes 42 and 43)
Cost at 31 December
2015
2014
Restated
(see note 43)
£’m
£’m
1,534.7
70.5
260.8
1,457.1
64.1
13.5
1,866.0
1,534.7
Goodwill is tested for impairment annually or more frequently if there is any indication of impairment. No impairment charge was required in the
year (2014: £Nil million) and the cumulative impairment charge recognised to date is £Nil million (2014: £Nil million). The total amounts of goodwill
and other intangible assets acquired as part of the acquisitions in the year of the advanced composites businesses of Cobham plc (“Advanced
Composites”) and the composites division of EDAC (“EDAC”) that are expected to be deductible for tax purposes will be assessed during 2016.
The total amount of goodwill and other intangible assets acquired as part of the acquisition of Precision Engine Controls Corporation in 2014
that is deductible for tax purposes is £Nil million.
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.
EDAC
Meggitt Safety Systems, Inc.
Advanced Composites
Meggitt Sensing Systems (‘MSS’)*
Meggitt (Rockmart), Inc.
Meggitt Training Systems, Inc.
Other
Total
2015
2014
Restated
(see note 43)
£’m
734.0
198.8
159.7
145.7
103.6
83.9
77.1
70.6
292.6
£’m
699.9
188.0
–
137.7
–
81.9
72.8
66.8
287.6
1,866.0
1,534.7
* During 2014, the power businesses were moved from Meggitt Equipment Group to Meggitt Sensing Systems. 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.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
115
18. Goodwill continued
For each CGU, the Group has determined its recoverable amount from value in use calculations. Such calculations were not performed for
Advanced Composites or EDAC due to the proximity of their acquisition to the balance sheet date. 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 2015. 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. 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. 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. 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 they are a leading supplier of flexible fuel tanks. Meggitt Training Systems, Inc. supplies integrated live
and virtual training packages for armed forces and law enforcement agencies across the world.
In civil aerospace, growth in capacity terms, measured in available seat kilometres (ASKs), is forecast to grow in line with the long-term trend
rate of 5%, which together with the Group’s growing fleet, price increases and the expected output of the formation of the customer services and
support organisation, should facilitate revenue growth in excess of the overall market for civil spares over the medium term. The Group’s continuing
confidence in air passenger travel growth is supported by the sustained high levels of order intake at Boeing and Airbus. Large jet deliveries
increased by 1% in 2015, and the Group expects good delivery growth over the next five years underpinned by continued strong recent order intake
and a backlog at Boeing and Airbus which equates to over eight years of deliveries at current production rates. Deliveries of regional aircraft
increased by 10% in 2015, with modest growth anticipated over the next few years, driven principally by demand for 70-90 seat aircraft, on which the
Group has a strong shipset content. Total business jet deliveries increased by 6% in 2015. Further growth is anticipated in this market over the next
five years, driven by increasing globalisation of the customer base and the ongoing improvement in the US economy, partially offset by the impact of
a weaker oil and gas sector. Military markets look to be entering a more benign phase, with the expectation of a return to growth in military budgets
in a number of regions. The Group has key positions on a broad range of military applications, including future growth platforms and is likely to
benefit from increased expenditure on the retrofit and reset of repatriated military equipment. The Group therefore continues to anticipate average
compound organic military percentage growth in low single digits 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 principal countries in which the CGU operates (UK: 2.3% (2014: 2.3%), US: 2.5%
(2014: 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 10.1% (2014: 10.2%), Meggitt (North Hollywood), Inc., 11.3% (2014: 10.9%),
Meggitt Safety Systems, Inc. 11.1% (2014: 10.9%), MSS 10.0% (2014: 10.1%), Meggitt (Rockmart), Inc. 10.7% (2014: 10.4%), and Meggitt Training
Systems, Inc. 10.0% (2014: 9.8%). The discount rates used for ‘Other’ CGUs ranged between 9.2% to 11.1% (2014: 8.3% to 11.0%).
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 in respect of the principal CGU’s described above. The principal CGU with the least headroom in percentage terms is MABS
followed by Meggitt (Rockmart), Inc. then Meggitt (North Hollywood), Inc.. 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
Meggitt
(Rockmart)
Inc.
19%
62%
14%
£356.3m
21%
66%
16%
£39.0m
Meggitt
(North
Hollywood)
Inc.
25%
100%
23%
£100.8m
116
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
18. Goodwill continued
‘Other’ goodwill of £292.6 million (2014: £287.6 million) relates to approximately 10 individual CGUs. The CGU with the least headroom in percentage
terms has a goodwill balance of £58.0 million and limited headroom of £4.6 million based on value in use calculations and using a discount rate of
10.8%. A potential impairment would be required if there were more than a 4% reduction in estimated cash flows, 10% reduction in long-term
growth rates or 2% increase in the discount rate applied. Restructuring of the way the business operates in 2016, which is not reflected in the five
year plan, is expected to lead to further headroom being created, when impairment testing is carried out in future years.
19. Development costs and programme participation costs
At 1 January 2014
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
Year ended 31 December 2015
Opening net book amount
Exchange rate adjustments
Additions – Internal development costs
– Free of charge/deeply discounted manufactured parts
– Cash payments
Funding from customers
Interest capitalised
Transfers to inventory
Impairment loss*
Amortisation*
Net book amount
At 31 December 2015
Cost
Accumulated amortisation
Net book amount
Development
costs
£’m
340.7
(70.2)
270.5
270.5
9.5
77.7
–
–
2.0
(8.0)
(8.8)
342.9
431.2
(88.3)
342.9
342.9
17.7
84.8
–
–
(4.3)
2.9
(21.3)
(6.4)
(7.9)
Programme
participation
costs
£’m
356.0
(145.4)
210.6
210.6
10.7
–
43.3
2.7
–
–
(24.9)
242.4
419.2
(176.8)
242.4
242.4
11.1
–
41.4
1.6
–
–
–
–
(28.9)
408.4
267.6
506.9
(98.5)
479.7
(212.1)
408.4
267.6
* Charged to net operating costs in respect of development costs and to cost of sales in respect of programme participation costs.
Interest has been capitalised using the average rate payable on the Group’s floating rate borrowings of 1.5% (2014: 1.5%).
The net book amount of development costs includes £182.0 million (2014: £125.5 million) in respect of Meggitt Aircraft Braking Systems which
have an estimated weighted average remaining life of 14.1 years (2014: 14.2 years). The net book amount of programme participation costs
includes £248.3 million (2014: £228.6 million) in respect of Meggitt Aircraft Braking Systems which have an estimated weighted average
remaining life of 8.6 years (2014: 9.0 years).
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
117
20. Other intangible assets
At 1 January 2014
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2014
Opening net book amount
Exchange rate adjustments
Businesses acquired as restated (see note 43)
Additions
Amortisation – net operating costs (see note 10)
Net book amount – restated
At 31 December 2014
Cost
Accumulated amortisation
Net book amount – restated
Year ended 31 December 2015
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 2015
Cost
Accumulated amortisation
Net book amount
Customer
relationships
Technology
Order
backlogs
(*)
£’m
(*)
£’m
(*)
£’m
Trade
names and
trademarks
(*)
£’m
Other
purchased
(**)
£’m
Total
£’m
807.9
(315.6)
492.3
492.3
22.0
12.6
–
(50.7)
476.2
238.8
(106.1)
132.7
132.7
5.3
2.9
–
(15.3)
125.6
859.4
(383.2)
252.5
(126.9)
476.2
125.6
476.2
21.0
29.3
–
(53.4)
125.6
5.2
18.3
–
(16.2)
473.1
132.9
928.5
(455.4)
282.2
(149.3)
473.1
132.9
10.9
(10.8)
0.1
27.9
(19.1)
8.8
110.8
(37.4)
73.4
1,196.3
(489.0)
707.3
0.1
–
0.3
–
(0.1)
0.3
0.3
–
0.3
0.3
–
–
–
(0.3)
–
0.3
(0.3)
–
8.8
0.4
–
–
(2.0)
7.2
73.4
1.0
–
12.0
(10.8)
75.6
707.3
28.7
15.8
12.0
(78.9)
684.9
29.0
(21.8)
7.2
124.2
(48.6)
75.6
1,265.4
(580.5)
684.9
7.2
0.2
0.6
–
(2.0)
6.0
75.6
1.7
0.2
11.9
(12.3)
77.1
684.9
28.1
48.4
11.9
(84.2)
689.1
30.7
(24.7)
6.0
138.8
(61.7)
77.1
1,380.5
(691.4)
689.1
* Acquired in business combinations. Amortisation of these items is excluded from the Group’s underlying profit figures (see note 10).
** Principally relates to software costs.
The net book amount of customer relationships includes £310.0 million (2014: £332.1 million) in respect of Meggitt Aircraft Braking
Systems and £56.5 million (2014: £60.3 million) in respect of Meggitt Control Systems which have an estimated weighted average remaining
life of 8.0 years (2014: 9.0 years) and 9.0 years (2014: 10.3 years) respectively. The net book amount of technology includes £61.8 million
(2014: £66.4 million) in respect of Meggitt Aircraft Braking Systems and £28.2 million (2014: £10.7 million) in respect of Meggitt Polymers &
Composites which have an estimated weighted average remaining life of 8.0 years (2014: 9.0 years) and 5.8 years (2014: 6.8 years) respectively.
118
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
21. Property, plant and equipment
At 1 January 2014
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2014
Opening net book amount
Exchange rate adjustments
Businesses acquired
Additions
Disposals
Reclassification
Depreciation
Net book amount
At 31 December 2014
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2015
Opening net book amount
Exchange rate adjustments
Businesses acquired (see note 42)
Additions
Disposals
Depreciation
Net book amount
At 31 December 2015
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£’m
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
385.0
(268.1)
116.9
116.9
2.7
0.5
31.6
(1.2)
2.4
(24.9)
Total
£’m
570.9
(325.4)
245.5
245.5
4.0
0.6
35.2
(3.0)
–
(31.2)
123.1
128.0
251.1
179.6
(56.5)
123.1
123.1
2.8
7.3
4.8
–
(7.0)
413.8
(285.8)
128.0
128.0
4.4
14.6
39.5
(0.7)
(26.5)
593.4
(342.3)
251.1
251.1
7.2
21.9
44.3
(0.7)
(33.5)
131.0
159.3
290.3
197.8
(66.8)
131.0
467.4
(308.1)
159.3
665.2
(374.9)
290.3
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 (2014: £4.4 million) and £Nil million (2014: £0.1 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
2015
£’m
37.1
(1.7)
35.4
141.2
167.6
71.0
415.2
2014
Restated
(see note 43)
£’m
9.3
–
9.3
121.1
141.6
55.9
327.9
The cost of inventories recognised as an expense and included in cost of sales was £956.3 million (2014: £897.6 million). The cost of inventories
recognised as an expense includes £2.8 million (2014: £6.4 million) in respect of write-downs of inventory to net realisable value, and has been
reduced by £3.8 million (2014: £3.0 million) in respect of the reversal of write-downs made in previous years.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
119
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
2015
£’m
265.9
25.7
17.9
103.1
412.6
58.9
58.9
2014
Restated
(see note 43)
£’m
232.2
55.1
14.5
123.4
425.2
93.4
93.4
353.7
331.8
Other receivables includes £80.1 million (2014: £102.8 million) in respect of insurance receivables arising on environmental issues
relating principally to businesses sold by Whittaker Corporation prior to its acquisition by the Group (see note 31) of which £23.4 million
(2014: £11.1 million) is shown as current. Other receivables are discounted where the impact is significant.
Trade receivables are stated after a provision for impairment of £4.9 million (2014: £3.8 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 acquired as restated (see note 43)
Charge/(credit) to income statement – net operating costs
At 31 December
2015
£’m
3.8
0.1
–
1.0
4.9
2014
Restated
£’m
4.1
0.1
0.1
(0.5)
3.8
At 31 December 2015, trade receivables and amounts recoverable on contracts of £49.9 million (2014: £67.5 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
2015
£’m
44.0
5.9
49.9
2014
£’m
41.5
26.0
67.5
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
2015
£’m
70.9
303.8
29.8
8.1
412.6
2014
Restated
£’m
87.9
295.8
28.6
12.9
425.2
120
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
24. Cash and cash equivalents
Cash at bank and on hand
Short-term bank deposits
Total
2015
£’m
123.3
22.1
145.4
Cash and cash equivalents are subject to interest at floating rates. The credit quality of the financial institutions where the cash and cash
equivalents is held are as follows:
Moody’s rating:
Aaa
Aa
A
Baa
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
145.4
105.5
2015
£’m
0.8
64.4
36.0
44.2
2015
£’m
29.2
165.1
10.3
57.3
–
140.2
402.1
2015
£’m
3.2
1.0
4.2
2014
£’m
95.4
10.1
105.5
2014
£’m
0.3
25.5
77.4
2.3
2014
£’m
31.5
127.3
8.4
52.6
20.0
118.7
358.5
2014
£’m
3.0
2.9
5.9
2014
£’m
0.1
0.2
5.1
5.4
Minimum
lease payments
Present value
of minimum
lease payments
2015
£’m
0.1
0.2
5.2
5.5
2015
£’m
1.1
4.2
12.1
17.4
(11.9)
5.5
5.4
0.1
2014
£’m
1.1
4.0
12.4
17.5
(12.1)
5.4
5.3
0.1
Obligations under finance leases are US dollar denominated. The weighted average period to maturity is 14.8 years (2014: 15.4 years) and the
weighted average interest rate is 18.4% (2014: 18.0%).
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
121
2015
£’m
0.7
3.3
4.0
763.2
425.8
1,189.0
2014
£’m
10.8
48.1
58.9
212.6
404.1
616.7
1,193.0
675.6
4.0
1,097.2
91.8
1,193.0
1,172.8
(3.1)
18.4
1.1
3.8
1,193.0
2014
Undrawn
£’m
–
–
362.0
–
58.9
344.4
272.3
675.6
644.9
(3.6)
19.5
11.6
3.2
675.6
Total
£’m
44.9
384.8
577.2
–
362.0
1,006.9
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
Debt issue costs are amortised over the period of the facility to which they relate. The Group has no secured borrowings (2014: £Nil million).
The Group has the following committed facilities:
Senior notes (USD 70.0 million)
Senior notes (USD 600.0 million)
Syndicated credit facility (USD 900.0 million)
Bilateral credit facilities (USD 600.0 million)
Total
2015
Drawn
£’m
Undrawn
£’m
–
407.1
358.6
407.1
–
–
252.0
–
Total
£’m
–
407.1
610.6
407.1
1,172.8
252.0
1,424.8
Drawn
£’m
44.9
384.8
215.2
–
644.9
The Group issued USD 70.0 million of loan notes to private placement investors in 2003. The notes carried an interest rate of 5.46% and were
repaid 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 five-year USD 900.0 million syndicated revolving credit facility which matures in 2020, following a one-year
extension which was agreed during 2015. The facility includes a further one-year extension option at the end of the second year. At
31 December 2015, the amounts drawn under the revolving credit facility were £358.6 million (2014: £215.2 million) represented by borrowings
denominated in US dollars of £312.4 million (2014: £142.5 million), in Euros of £46.2 million (2014: £50.4 million), in Swiss francs of £Nil million
(2014: £10.3 million) and in Sterling of £Nil million (2014: £12.0 million). Borrowings under the facility are subject to interest at floating rates.
During 2015, the Group secured two new USD 300.0 million bilateral credit facilities which mature in 2017. At 31 December 2015, the facilities
were fully drawn and borrowings are all denominated in US dollars. Borrowings under the facilities are subject to interest at floating rates.
122
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
28. Bank and other borrowings continued
The committed facilities available at each balance sheet date expire as follows:
In one year or less
In more than one year but not more than five years
In more than five years
Total
2015
Drawn
£’m
Undrawn
£’m
–
1,088.0
84.8
–
252.0
–
Total
£’m
–
1,340.0
84.8
1,172.8
252.0
1,424.8
Drawn
£’m
44.9
343.5
256.5
644.9
2014
Undrawn
£’m
–
362.0
–
Total
£’m
44.9
705.5
256.5
362.0
1,006.9
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
2015
2014
Book
value
£’m
Fair
value
£’m
4.0
1,189.0
4.0
1,196.9
1,193.0
1,200.9
Book
value
£’m
58.9
616.7
675.6
Fair
value
£’m
61.6
625.7
687.3
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 2015:
US dollar
Swiss franc
Euro
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
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
Fixed rate borrowings
Weighted
average
interest rate
%
Weighted
average
period
for which
rate is fixed
Years
3.4
2.5
Fixed rate borrowings
Weighted
average
interest rate
%
Weighted
average
period
for which
rate is fixed
Years
3.7
3.3
Floating
Fixed
£’m
839.2
–
46.2
885.4
(2.0)
£’m
244.3
65.3
0.3
309.9
(1.1)
883.4
308.8
Non-interest
bearing
£’m
–
–
0.8
0.8
–
0.8
Total
£’m
1,083.5
65.3
47.3
1,196.1
(3.1)
1,193.0
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
Total
£’m
595.0
14.8
51.3
18.1
679.2
(3.6)
675.6
The weighted average interest rate reflects the relative impact of interest rates based on the principal amounts and the duration of borrowings.
The weighted average period to maturity for non-interest bearing borrowings is 3.8 years (2014: 4.4 years).
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
123
29. Financial instruments
As at 31 December 2015:
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 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
Held at fair value
Held at amortised cost
Through
profit
& loss
£’m
Derivatives
used for
hedging
£’m
Loans &
receivables
Liabilities
£’m
£’m
Total
book
value
£’m
58.9
25.5
335.8
8.4
145.4
574.0
(391.8)
(12.7)
(0.1)
(4.0)
Total
fair
value
£’m
58.9
25.5
335.8
8.4
145.4
574.0
(391.8)
(12.7)
(0.1)
(4.0)
–
–
–
–
–
–
(391.8)
–
(0.1)
(4.0)
(4.2)
–
(5.4)
(898.2)
(4.2)
(13.7)
(5.4)
(1,189.0)
(4.2)
(13.7)
(5.4)
(1,196.9)
(1,303.7)
(1,620.9)
(1,628.8)
–
24.8
–
8.4
–
33.2
–
(12.7)
–
–
–
(13.7)
–
(290.8)
(317.2)
–
0.7
–
–
–
0.7
–
–
–
–
–
–
–
–
–
58.9
–
335.8
–
145.4
540.1
–
–
–
–
–
–
–
–
–
(284.0)
0.7
540.1
(1,303.7)
(1,046.9)
(1,054.8)
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
–
317.3
–
105.5
516.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(350.1)
–
(0.1)
(58.9)
(5.9)
–
(5.3)
(339.8)
Total
book
value
£’m
93.4
29.6
317.3
1.1
105.5
546.9
(350.1)
(9.6)
(0.1)
(58.9)
(5.9)
(2.9)
(5.3)
(616.7)
Total
fair
value
£’m
93.4
29.6
317.3
1.1
105.5
546.9
(350.1)
(9.6)
(0.1)
(61.6)
(5.9)
(2.9)
(5.3)
(625.7)
(260.0)
1.3
516.2
(760.1)
(502.6)
(514.3)
(760.1)
(1,049.5)
(1,061.2)
* Excludes prepayments and accrued income of £17.9 million (2014: £14.5 million) (see note 23).
** Excludes social security and other taxes of £10.3 million (2014: £8.4 million) (see note 25).
124
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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 and the treasury lock derivative, have been derived from forward interest rates based on yield curves observable at the balance sheet
date together with the contractual interest rates. The fair value of the cross currency derivative has been derived from forward interest rates
based on yield curves observable at the balance sheet date, forward exchange rates observable at the balance sheet date and the contractual
interest and forward exchange 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 and 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
(Gain)/loss recognised in net operating costs
Fair value at 31 December
2015
£’m
7.7
(1.1)
6.6
2014
£’m
7.0
0.7
7.7
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 and loss:
At 1 January
Exchange rate adjustments
(Gain)/loss recognised in net operating costs
At 31 December
2015
£’m
290.8
(18.4)
272.4
2014
£’m
276.9
(19.5)
257.4
2015
£’m
276.9
16.0
(2.1)
290.8
2014
£’m
256.8
16.1
4.0
276.9
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 2015, would impact profit before tax by
approximately £7.6 million.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
125
30. Derivative financial instruments
As at 31 December 2015:
Interest rate swaps – cash flow hedges
Interest rate swaps – fair value hedges
Cross currency swap - not hedge accounted
Treasury lock - not hedge accounted
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 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
Interest rate swaps
Contract or underlying
principal amount
Fair value
Assets
£’m
Liabilities
£’m
Assets
£’m
Liabilities
£’m
108.5
271.4
61.0
135.7
8.5
585.1
108.5
271.4
3.2
383.1
202.0
–
–
–
–
(596.9)
(596.9)
–
–
(391.6)
(391.6)
(205.3)
0.7
24.8
4.5
3.7
0.2
33.9
0.7
24.8
–
25.5
8.4
–
–
–
–
(26.4)
(26.4)
–
–
(13.7)
(13.7)
(12.7)
Contract or underlying
principal amount
Fair value
Assets
£’m
102.6
256.5
134.3
493.4
102.6
256.5
72.0
431.1
62.3
Liabilities
£’m
Assets
£’m
Liabilities
£’m
–
–
(284.3)
(284.3)
–
–
(131.2)
(131.2)
(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)
The total notional principal amount of outstanding interest rate swap contracts at 31 December 2015 is £379.9 million (2014: £359.1 million), of
which £67.8 million will expire in 2017, £108.6 million will expire in 2018, £118.7 million will expire in 2020 and £84.8 million will expire in 2022.
The contracts are all denominated in US dollars. Of the notional principal amount outstanding, £108.5 million (2014: £102.6 million) has the
economic effect of converting floating rate US dollar borrowings into fixed rate US dollar borrowings and £271.4 million (2014: £256.5 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.
Cross currency swap
The cross currency swap has been used to synthetically convert US dollar denominated floating borrowings into Swiss franc denominated
fixed borrowings to hedge against Swiss franc denominated assets of overseas subsidiaries. The cross currency swap does not qualify to be
hedge accounted.
Treasury lock
The treasury lock has been used to secure current market interest rates for specified amounts of future fixed-rate funding. The treasury lock
does not qualify to be hedge accounted.
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
2015
Assets
£’m
2015
Liabilities
£’m
2014
Assets
£’m
2014
Liabilities
£’m
–
0. 2
0.2
(13.0)
(13.4)
(26.4)
2.3
0.1
2.4
(3.8)
(8.7)
(12.5)
126
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
30. Derivative financial instruments continued
Credit quality of derivative financial assets
The credit quality of derivative financial assets is as follows:
Moody’s rating:
Aa
A
Total
31. Provisions
At 1 January 2015
Exchange rate adjustments
Businesses acquired (see note 42)
Additional provision in year*
Unused amounts reversed*
Charge/(credit) to net finance costs (see notes 13 and 12)
Transfer (to)/from trade and other payables
Utilised
At 31 December 2015
Current
Non-current
At 31 December 2015
Environmental
(a)
£’m
133.0
6.6
–
–
(15.9)
3.2
–
(15.9)
111.0
Provisions
Onerous
contracts
(b)
£’m
Warranty
costs
(c)
£’m
22.3
0.5
0.6
0.6
(1.9)
–
(0.6)
(5.2)
16.3
13.0
0.5
–
6.8
(0.7)
–
0.4
(5.8)
14.2
2015
£’m
8.2
25.7
33.9
2014
£’m
4.0
26.7
30.7
Environmental
insurance
receivables
(a)
£’m
(102.8)
(4.9)
–
–
15.9
(2.5)
–
14.2
£’m
175.6
7.7
0.6
11.2
(21.3)
3.2
(0.2)
(29.8)
147.0
(80.1)
2015
£’m
36.0
111.0
147.0
2014
£’m
45.1
130.5
175.6
Other
Total
(d)
£’m
7.3
0.1
–
3.8
(2.8)
–
–
(2.9)
5.5
* Amounts in respect of onerous contracts and warranty costs have been recorded in cost of sales. Amounts in respect of environmental and
other provisions have been recorded in net operating costs.
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
and for which movements in that receivable are shown in the table above (see also note 23). During the year, further information regarding
the extent of remediation required was received, which resulted in the reversal of £15.9 million of provision previously held. As the revision of
cost estimates related to sites which are insured, there was a corresponding reduction in the insurance receivable and no net impact on net
operating costs.
b. Provision has been made for estimated losses under certain trading contracts. 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. The provisions
are not discounted given the short period over which they will be utilised.
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 certain 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 approved certain past or future remedial costs incurred or to be incurred by the Group’s US subsidiaries. Such approval was
received during the year. In addition, the Group was required to implement additional future compliance measures. 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.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
127
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 2014
Exchange rate adjustments
Reclassifications
Businesses acquired as restated (see note 43)
(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 as restated
Exchange rate adjustments
Reclassifications
Businesses acquired (see note 42)
(Charge)/credit to income statement (see note 14)
Charge to other comprehensive income (see note 14)
Charge to equity (see note 14)
At 31 December 2015
Deferred tax liabilities
At 1 January 2014
Exchange rate adjustments
Reclassifications
Businesses acquired as restated (see note 43)
Charge to income statement (see note 14)
Charge to other comprehensive income (see note 14)
At 31 December 2014 as restated
Exchange rate adjustments
Reclassifications
Businesses acquired (see note 42)
Charge to income statement (see note 14)
Charge to other comprehensive income (see note 14)
At 31 December 2015
* Acquired in business combinations.
Other
Total
Retirement
benefit
obligations
£’m
68.1
2.7
–
–
(7.3)
24.2
–
87.7
2.7
(1.1)
–
(1.6)
(9.5)
–
78.2
£’m
16.0
0.3
(3.7)
(0.2)
2.1
0.2
(1.8)
12.9
0.7
0.5
0.2
0.4
(0.2)
(2.5)
12.0
Accelerated
tax
depreciation
£’m
Intangible
assets
(*)
£’m
(19.3)
(0.9)
(0.1)
–
(1.8)
–
(22.1)
(1.2)
–
(0.8)
(4.2)
–
(275.0)
(14.1)
0.9
(5.9)
(4.3)
(0.1)
(298.5)
(15.1)
0.5
–
(4.2)
(0.1)
£’m
84.1
3.0
(3.7)
(0.2)
(5.2)
24.4
(1.8)
100.6
3.4
(0.6)
0.2
(1.2)
(9.7)
(2.5)
90.2
Total
£’m
(294.3)
(15.0)
0.8
(5.9)
(6.1)
(0.1)
(320.6)
(16.3)
0.5
(0.8)
(8.4)
(0.1)
(28.3)
(317.4)
(345.7)
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
2015
£’m
0.3
(255.8)
2014
Restated
£’m
0.9
(220.9)
(255.5)
(220.0)
2015
£’m
0.2
0.1
0.3
2014
£’m
0.2
0.7
0.9
Deferred tax liabilities all fall due after more than one year.
The Group has unrecognised tax losses of £24.3 million (2014: £23.5 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.
128
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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.
The Swiss scheme is a tax qualified pension plan subject to the Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension
Plans which constitutes a legal framework setting out the minimum requirements for occupational pension plans. The responsibility for its
governance lies with a foundation, which is similar in nature to a UK trustee board.
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 cost/(credit)*
Net interest expense on retirement benefit obligations
Total charge/(credit) in respect of healthcare schemes
Total charge
2015
£’m
23.8
14.5
–
9.5
24.0
0.8
0.3
1.7
2.8
50.6
2014
£’m
21.7
11.9
1.1
7.8
20.8
0.8
(8.9)
2.2
(5.9)
36.6
* In 2014, 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, which is included within the amounts shown
in the table.
Of the total charge, £39.4 million (2014: £26.6 million) has been charged to operating profit (see note 9), of which £22.2 million (2014: £19.5 million)
has been included in cost of sales and £17.2 million (2014: £7.1 million) in net operating costs. The remaining £11.2 million (2014: £10.0 million)
is included in finance costs (see note 13).
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
129
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
UK
pension
scheme
£’m
637.1
(515.0)
2015
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
396.1
(279.1)
122.1
117.0
45.4
-
45.4
UK
pension
scheme
£’m
681.4
(501.4)
180.0
2014
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
350.7
(259.7)
91.0
46.8
–
46.8
Of the total deficit of £284.5 million (2014: £317.8 million), £62.0 million (2014: £63.8 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 cost/(credit)
Interest expense/(income) (see note 13)
Contributions – Group
Contributions – members
Benefits paid
Remeasurement of retirement benefit obligations:
Experience losses
(Gain)/loss from change in demographic assumptions
(Gain)/loss from change in financial assumptions
Return on schemes’ assets excluding amounts included
in finance income
Total remeasurement (gain)/loss
Administrative expenses borne directly by schemes
2015
2014
Liabilities
(*)
£’m
Assets
(**)
£’m
Total
£’m
Liabilities
(*)
£’m
Assets
(**)
£’m
1,078.9
20.7
15.3
0.3
37.9
–
2.9
(40.8)
11.4
(6.3)
(41.7)
–
(36.6)
–
(761.1)
(13.4)
–
–
(26.7)
(39.7)
(2.9)
40.8
–
–
–
7.2
7.2
1.7
317.8
7.3
15.3
0.3
11.2
(39.7)
–
–
11.4
(6.3)
(41.7)
7.2
(29.4)
1.7
926.5
15.6
12.7
(7.8)
38.9
–
3.2
(38.8)
–
10.8
117.8
–
128.6
–
(688.4)
(7.9)
–
–
(28.9)
(42.0)
(3.2)
38.8
–
–
–
(30.9)
(30.9)
1.4
Total
£’m
1,078.6
(794.1)
284.5
Total
£’m
1,078.9
(761.1)
317.8
Total
£’m
238.1
7.7
12.7
(7.8)
10.0
(42.0)
–
–
–
10.8
117.8
(30.9)
97.7
1.4
At 31 December
1,078.6
(794.1)
284.5
1,078.9
(761.1)
317.8
* Present value of schemes’ liabilities.
** Fair value of schemes’ assets.
130
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
33. Retirement benefit obligations continued
Analysis of pension scheme assets
Quoted
Unquoted
2015
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
Total pension schemes’ assets
£’m
156.6
221.6
81.0
6.7
8.9
474.8
62.9
69.4
94.4
13.3
3.3
22.4
265.7
219.5
291.0
175.4
13.3
10.0
31.3
740.5
Quoted
Unquoted
2014
£’m
–
2.1
26.5
–
11.6
40.2
–
–
–
13.4
–
–
13.4
–
2.1
26.5
13.4
–
11.6
Total
£’m
156.6
223.7
107.5
6.7
20.5
515.0
62.9
69.4
94.4
26.7
3.3
22.4
%
30.4
43.4
20.9
1.3
4.0
100.0
22.5
24.9
33.8
9.6
1.2
8.0
£’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
279.1
100.0
246.2
219.5
293.1
201.9
26.7
10.0
42.9
27.6
36.9
25.4
3.4
1.3
5.4
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
53.6
794.1
100.0
712.8
48.3
761.1
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
* Provided in respect of the most significant overseas schemes.
** To the extent not overridden by specific scheme rules.
2015
2014
UK
pension
scheme
Overseas*
pension
schemes
Overseas
healthcare
schemes
UK
pension
scheme
Overseas*
pension
schemes
Overseas
healthcare
schemes
3.85%
3.10%
2.10%
3.00%
4.10%
4.20%
N/A
N/A
N/A
4.66%
4.20%
N/A
N/A
N/A
N/A
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
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 an analysis of
members used to support the 2015 triennial UK actuarial valuation. Allowance has been made for rates of mortality to continue to fall at the rate of
1.25% per annum.
In the US, mortality assumptions are based on the 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’).
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
131
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
2015
2014
UK
scheme
Years
Overseas*
schemes
Years
UK
scheme
Years
Overseas*
schemes
Years
23.3-25.0
26.2-28.0
21.9-23.4
24.4-26.1
21.6-22.2
23.5-23.7
20.3-21.0
22.3-22.6
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
* Provided in respect of the most significant overseas schemes.
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 2015 to increase by approximately
£17.8 million.
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2015 to increase
by approximately £11.7 million.
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2015
to increase by approximately £31.7 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. The Group has not changed the process 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.
In 2014, part of the equity portfolio held by the UK and US schemes was disinvested. The amounts disinvested totalled approximately
£100.0 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 UK and
US 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 the 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.
132
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
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 2016 will be £21.9 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. The 2015 triennial valuation is approaching completion and
discussions with the trustees have commenced over a revised recovery plan to address the additional deficit of approximately £70.0 million
arising since the 2012 valuation. Assuming the additional deficit is funded on a similar basis to the existing recovery plan, additional annual deficit
payments of approximately £7.5 million would be required, commencing in 2016.
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 2016 are expected to be £Nil million and, absent any changes in legislation, will then increase over the following two years to
£8.0 million by 2018. 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 2015 and accordingly no additional minimum
funding liability arises.
The Swiss scheme has a surplus on a funding basis.
The estimated total Group contributions expected to be paid to the schemes during 2016 are £42.3 million, assuming the additional deficit under
the 2015 UK valuation is funded on a similar basis to the existing recovery plan.
The weighted average duration of the UK schemes’ defined benefit obligation is 19.3 years. The weighted average duration of the overseas
schemes’ defined benefit obligation is 11.0 years. The expected maturity of undiscounted pension and healthcare benefits at 31 December 2015
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 2014
Issued on exercise of executive share awards
Share buyback – purchased
Scrip dividends
At 31 December 2014
Share buyback – purchased
Share buyback – transfer to treasury shares
At 31 December 2015
Pension
schemes
£’m
Healthcare
schemes
£’m
35.0
35.9
115.9
220.9
244.1
249.4
238.2
828.9
3.5
3.3
9.9
15.5
12.2
9.4
7.3
13.4
Total
£’m
38.5
39.2
125.8
236.4
256.3
258.8
245.5
842.3
1,968.3
74.5
2,042.8
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
797.1
0.4
(6.8)
11.6
802.3
(28.3)
1.5
775.5
39.9
–
(0.3)
0.5
40.1
(1.3)
–
38.8
0.1
(33.7)
53.0
(146.4)
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
133
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
2015
2015
Meggitt Executive Share Option Scheme 2005 Part A
2006
2007
2009
2011
2013
2013
Number of
ordinary shares
under award
Exercise
price
per share
Exercise period
From
To
9,365
47,797
50,781
68,791
342,190
340,901
111,596
480,435
320,863
594,046
245,818
5,687
7,459
12,832
16,556
200,555
5,504
171.40p
222.35p
222.35p
326.94p
326.94p
426.40p
426.40p
374.19p
374.19p
399.79p
399.79p
263.67p
299.00p
169.50p
351.70p
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
01.11.18
01.11.20
27.09.09
29.03.10
30.04.12
02.03.14
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
30.04.19
30.04.21
26.09.16
28.03.17
29.04.19
01.03.21
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 3.0 years (2014: 3.4 years).
Share Appreciation Rights – Equity-settled
Year of grant
Meggitt Executive Share Option Scheme 2005 Part B
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
56,073
75,243
8,340
268,044
92,331
595,285
310,881
73,217
13,297
–
–
–
189,233
372,437
36,359
821,898
202,673
1,087,004
1,314,752
1,192,808
170,629
96,884
3,283,948
11,679
263.67p
299.00p
288.75p
252.50p
204.00p
169.50p
286.10p
351.70p
345.50p
397.20p
526.50p
545.00p
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
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 374.70p, the share price at 31 December 2015.
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 5.1 years (2014: 6.3 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 £4.1 million (2014: £1.7 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. 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).
134
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
35. Share-based payment continued
Each of the conditions is measured over a three year performance period. An expense of £2.4 million (2014: £1.7 million) 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 2015 has been estimated at the
market price of the share on the date of grant, which was 559.10 pence (2014: 467.54 pence). Movements in the number of outstanding shares that
may potentially be released to employees are as follows:
At 1 January
Awarded
Lapsed
At 31 December
At 31 December 2015, none of the shares under award are eligible for release.
Deferred Share Bonus Plan
Equity-settled
2015
Number of
shares
under award
outstanding
‘m
2014
Number of
shares
under award
outstanding
‘m
4.2
3.9
(0.1)
8.0
–
4.2
–
4.2
Under the Deferred Share Bonus Plan, an award of shares may be made to certain senior executives. The number of shares, if any that an executive
ultimately receives, depends on them remaining in service for a specified period of time. There are no other significant performance conditions.
An expense of £1.1 million (2014: £0.1 million) 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 awards made in 2015 were estimated at the market price of the share on the date of each grant. The average price at the date
of grant was 540.00 pence. No significant grants were made in 2014. Movements in the number of outstanding shares that may potentially be
released to employees are as follows:
At 1 January
Awarded
Exercised
At 31 December
2015
Number of
shares
under award
outstanding
‘m
2014
Number of
shares
under award
outstanding
‘m
–
0.5
–
0.5
0.1
–
(0.1)
–
At 31 December 2015, none of the shares under award are eligible for release.
Meggitt Executive Share Option Scheme 2005
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.
No charge (2014: £0.9 million credit) 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
Lapsed
Exercised
At 31 December
2015
Average
exercise
price
Pence
373.89
406.36
290.60
2015
Number of
awards
outstanding
‘m
15.7
(5.0)
(1.6)
2014
Average
exercise
price
Pence
360.49
371.43
292.76
2014
Number of
awards
outstanding
‘m
21.1
(2.0)
(3.4)
370.89
9.1
373.89
15.7
At 31 December 2015, of the total number of awards outstanding, 5.6 million are exercisable at an average exercise price of 273.19 pence
(2014: 7.1 million at an average exercise price of 274.59 pence).
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
135
36. Own shares and treasury 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 60 to 80. At 31 December 2015, the trust held 1.9 million ordinary shares (2014: 0.3 million ordinary shares) of
which 1.7 million were unallocated (2014: 0.3 million), being retained by the trust for future use. The balance were held for employees in a vested
share account to satisfy particular awards which had fully vested. All shares, whether or not allocated, are held for the benefit of employees.
The shares held at 31 December 2015 were purchased during the year at a cost of £9.7 million (2014: £1.7 million). The market value of the shares
at 31 December 2015 was £7.2 million (2014:£1.8 million) representing 0.25% of the issued share capital of the Company (2014: 0.04%).
During the Group’s share buyback programme, 1.5 million of the shares purchased in 2015 were not cancelled but retained as treasury
shares. Of these, 1.1 million were used to satisfy share options and awards under the UK Share Incentive Plan and Sharesave Scheme.
At 31 December 2015, 0.4 million shares remained in treasury with a market value of £1.3 million, representing 0.05% of the issued share
capital of the Company.
37. Contractual commitments
Capital commitments
Contracted for but not incurred:
Intangible assets
Property, plant and equipment
Total
Operating lease commitments
2015
£’m
0.6
8.2
8.8
2014
£’m
0.9
11.0
11.9
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
2015
£’m
15.6
43.4
32.0
91.0
2014
£’m
12.7
37.2
24.1
74.0
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 2015, which are expected to be recognised as intangible assets when incurred are as follows:
2015
Development
costs
2015
Programme
participation
costs
£’m
£’m
In one year or less
In more than one year but not more than five years
In more than five years
Total
38. Contingent liabilities
38.7
10.5
8.6
57.8
49.4
209.5
909.1
1,168.0
2014
Development
costs
£’m
62.0
19.2
2.7
83.9
2014
Programme
participation
costs
£’m
40.1
220.5
732.4
993.0
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.
136
MEGGITT PLC REPORT AND ACCOUNTS 2015
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 on disposal of property, plant and equipment
Remeasurement of fair value of contingent consideration receivable*
(Gain)/loss on closure of businesses (see note 10)
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
* In respect of previously disposed businesses (see note 10).
40. Movements in net debt
At 1 January
Free cash inflow
Businesses acquired (see note 42)
Business acquisition expenses
Businesses disposed
Business disposal expenses
Dividends paid to Company’s shareholders (see note 16)
Purchase of own shares
Issue of equity share capital
Share buyback - purchased (see note 34)
Net cash generated – outflow/(inflow)
Debt acquired with businesses (see note 42)
Exchange rate adjustments
Other non-cash movements
At 31 December
Analysed as:
Bank and other borrowings – current (see note 28)
Bank and other borrowings – non-current (see note 28)
Obligations under finance leases – current (see note 27)
Obligations under finance leases – non-current (see note 27)
Cash and cash equivalents (see note 24)
Total
2015
£’m
2014
£’m
182.1
177.0
(2.7)
29.1
28.1
33.5
121.0
6.4
–
(2.5)
(1.2)
4.8
(24.4)
4.1
(14.6)
55.8
27.3
(40.1)
(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)
406.7
346.9
2015
£’m
2014
£’m
575.5
564.6
(199.0)
362.7
2.5
(2.0)
–
111.1
9.7
–
146.4
(146.8)
28.6
–
–
0.5
51.4
11.6
(0.1)
33.7
431.4
(21.1)
6.3
39.6
0.3
–
24.7
7.3
1,053.1
575.5
2015
£’m
4.0
1,189.0
0.1
5.4
(145.4)
2014
£’m
58.9
616.7
0.1
5.3
(105.5)
1,053.1
575.5
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
137
41. Major non-cash transactions
During 2014, the Company issued 11.6 million shares worth £53.0 million in respect of scrip dividends (see notes 16 and 34). In 2015, the scrip
dividend plan was replaced by a dividend reinvestment plan which provides an efficient reinvestment option for shareholders without the need
for new shares to be issued.
42. Business combinations
On 25 November 2015, the Group acquired the advanced composites businesses of Cobham plc (“Advanced Composites”) for USD 200 million in
cash, subject to an adjustment for working capital in the business at completion. The acquisition comprised 100% of the voting rights of Cobham
Advanced Composites Limited and Cobham Composites Products Inc. together with certain assets of Cobham Advanced Electronic Solutions Inc.
Advanced Composites is a global leader in the design, development and production of highly engineered aerospace composite engine components
(spinners, internal multi-stage components, exhaust flaps), radomes (C4I and defensive measures radomes, with a growing position in civil
radomes) and complex secondary structures (air-to-air refuelling, structural munitions components). It has operating facilities located in the
UK and United States. Advanced Composites is being integrated into the Meggitt Polymers & Composites division.
On 21 December 2015, the Group acquired 100% of the voting rights in EDAC Composites LLC (“EDAC”), the owner and operator of the former
EDAC composites business, formerly known as Parkway Aerospace & Defense, from Greenbriar Equity Group and other associated sellers for
USD 340 million in cash, subject to an adjustment for working capital in the business at completion.
EDAC produces highly engineered aerospace components for jet engine and airframe applications, with over 85% of revenues in civil aerospace
composites. It has a substantial presence, via multi-year long-term agreements, on high-growth jet engine platforms including the GEnX, Pratt
& Whitney PurePower family and LEAP engines. It has operating facilities in the USA and Mexico. EDAC is being integrated into the Meggitt
Polymers & Composites division.
Total consideration paid in respect of acquisitions during the year is as follows:
Cash paid in respect of Advanced Composites
Cash paid in respect of EDAC
Cash (received)/paid in respect of PECC
Cash paid in respect of other acquisitions
Total
2015
£’m
132.1
231.0
(0.4)
–
362.7
2014
£’m
–
–
28.3
0.3
28.6
Due to the proximity of the acquisitions of Advanced Composites and EDAC 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 2016, 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.
138
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
42. Business combinations continued
The assets and liabilities at the date of acquisition, including the goodwill arising on consolidation, were as follows:
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Current assets
Inventories
Trade and other receivables
Current tax recoverable
Total assets
Current liabilities
Trade and other payables
Current tax liabilities
Bank and other borrowings
Net current assets
Non-current liabilities
Deferred tax liabilities
Provisions
Total liabilities
Net assets
Consideration satisfied in cash
Total consideration payable satisfied in cash
Advanced
Composites
EDAC
Notes
£’m
£’m
18
20
21
102.8
1.0
12.3
158.0
47.4
9.6
Total
£’m
260.8
48.4
21.9
116.1
215.0
331.1
20.8
10.6
–
31.4
16.9
12.7
0.1
29.7
37.7
23.3
0.1
61.1
147.5
244.7
392.2
(9.5)
(0.6)
(4.1)
(14.2)
17.2
(0.6)
(0.6)
(1.2)
(15.4)
132.1
(11.5)
–
(2.2)
(21.0)
(0.6)
(6.3)
(13.7)
(27.9)
16.0
33.2
–
–
–
(0.6)
(0.6)
(1.2)
(13.7)
(29.1)
231.0
363.1
132.1
132.1
231.0
231.0
363.1
363.1
40
32
31
For the period from acquisition to 31 December 2015, Advanced Composites contributed revenue of £7.1 million, an underlying profit before tax
of £0.4 million and a profit before tax of £0.2 million. The pro forma consolidated results of the Group, had Advanced Composites been acquired
on 1 January 2015, would show an increase in revenue of £46.7 million and a reduction in profit before tax of £3.0 million.
Due to the timing of the acquisition of EDAC, the impact on the results of the Group for the year is not significant. The pro forma consolidated
results of the Group, had EDAC been acquired on 1 January 2015, would show an increase in revenue of £69.4 million and a reduction in profit
before tax of £0.7 million.
Pro forma information above has not been adjusted to reflect the Group’s accounting policies (due to the proximity of the acquisitions to the
balance sheet date), to eliminate any costs that are not expected to recur, to adjust for any item that the Group would exclude from its underlying
profit measures or to reflect any synergies arising from the acquisitions. It includes however, acquisition related expenses incurred by the Group
of £3.9 million (see note 10) and finance costs that would have been payable in respect of borrowings incurred to finance the acquisitions had they
completed on 1 January 2015. The information therefore is for illustrative purposes only and is not indicative of the results of the Group, had the
acquisitions been made on 1 January 2015.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
139
43. Restatement of prior year comparatives
IFRS 3 requires fair values of assets and liabilities acquired to be finalised within 12 months of the acquisition date. All fair value adjustments
are required to be recorded with effect from the date of acquisition and consequently result in the restatement of previously reported financial
results. During 2015, the Group finalised the fair values of PECC which completed on 31 December 2014 and this resulted in adjustments
to the balance sheet at that date. These amendments primarily relate to the recognition of intangible assets separately from goodwill and
associated deferred tax liabilities. Goodwill is attributable to the profitability of the acquired business and expected future synergies arising
following the acquisition.
The impact of the restatements is shown below:
Goodwill (see note 18)
Other intangible assets (see note 20)
Property, plant and equipment
Inventories
Trade and other receivables - current
Trade and other payables - current
Provisions - non-current
Deferred tax liabilities (see note 32)
Net assets
2014
As
reported
£’m
2014
Fair value
adjustments
£’m
2014
As
restated
£’m
19.9
3.9
0.4
3.0
1.4
(0.6)
(0.1)
–
27.9
(6.4)
11.9
–
0.7
(0.1)
–
–
(6.1)
–
13.5
15.8
0.4
3.7
1.3
(0.6)
(0.1)
(6.1)
27.9
The finalisation of fair value adjustments had no impact on the 2014 income statement.
44. Group companies
The Group and its subsidiaries are involved in 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. Certain subsidiary companies provide
ancillary functions which support these operations.
Unless otherwise indicated, the Group percentage of equity capital and voting rights is 100%. All entities primarily operate in their country
of incorporation and all companies listed are included in the consolidation.
Subsidiaries: Direct holdings of the Company
Incorporated in the United Kingdom
Entity Name
Description and proportion
of shares held (%)
Entity Name
Avica Limited
Dunlop Aerospace Limited
Integrated Target Services Limited
KDG Holdings Limited
Meggitt (Pamphill) Limited
Meggitt (Wimborne) Limited
Meggitt Engineering Limited
Meggitt International Holdings Limited
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Subsidiaries: Indirect holdings of the Company
Incorporated in the United Kingdom
Meggitt Pension Trust Limited
Negretti & Zambra Limited
Negretti Limited
Phoenix Travel (Dorset) Limited
The Microsystems Group Limited
Description and proportion
of shares held (%)
Ordinary shares
Ordinary shares
Ordinary shares
The Group’s holding is
comprised of ordinary B
shares (50%)
Ordinary shares
Entity Name
Description and proportion
of shares held (%)
Entity Name
Description and proportion
of shares held (%)
Aircraft Braking Systems Europe Limited
Aircraft Braking Systems Service Limited
Atlantic House Pension Trustee Limited
BAJ Coatings Limited
Ordinary shares
Ordinary shares
Ordinary shares
The Group's holding is
comprised of deferred
shares (55.55%) and
ordinary shares (44.45%)
Bells Engineering Limited
Bestobell Aviation Products Limited
Bestobell Engineering Products Limited
Bestobell Insulation Limited
Bestobell Meterflow Limited
Bestobell Mobrey Limited
Bestobell Service Co Limited
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Meggitt (Tarrant) Limited
Meggitt (UK) Limited
Meggitt Acquisition Limited
Meggitt Advanced Composites Limited
Meggitt Aerospace Holdings Limited
Meggitt Aerospace Limited
Meggitt Defence Systems Limited
Meggitt Filtration & Transfer Limited
Meggitt Finance (Beta)
Meggitt Finance Limited
Meggitt International Limited
Meggitt Investments Limited
Meggitt Pension Plan Trustees Limited
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Private company limited
by guarantee
140
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the consolidated financial statements continued
44. Group companies continued
Subsidiaries: Indirect holdings of the Company
Incorporated in the United Kingdom
Entity Name
Description and proportion
of shares held (%)
Entity Name
Bestobell Sparling Limited
Cavehurst Limited
Chempix Limited
Dunlop Aerospace Group Limited
Dunlop Aerospace Holdings Limited
Dunlop Aerospace Overseas
Investments Limited
Dunlop Aerospace Overseas Limited
Dunlop Holdings Limited
Dunlop Limited
Endevco UK Limited
Evershed & Ayrton Fund
Evershed & Vignoles Limited
Firearms Training Systems Limited
Fotomechanix Limited
Heatric Limited
King Tool International Limited
Meggitt (Canford) Limited
Meggitt (Colehill) Limited
Meggitt (Hurn) Limited
Meggitt (Shapwick) Limited
Incorporated in Rest of Europe
Entity Name
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Registered charity
Ordinary shares
Ordinary shares
Ordinary shares
The Group's holding is
comprised of ordinary
A shares (60%) and
ordinary B shares (40%)
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Meggitt Properties PLC
Metal Maps Limited
Micro Metallic Limited
Microponent Development Limited
Microponents (Plates) Limited
Description and proportion
of shares held (%)
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
The Group's holding is
comprised of ordinary A
shares (0.04%), ordinary B
shares (0.04%), ordinary
C shares (59.95%) and
redeemable preference
shares (39.97%)
Microponents Limited
Miller Insulation & Engineering Limited
Piher International Limited
Precision Micro Limited
Serck Aviation Limited
Sparkleglen Limited
Target Technology Petrel Limited
The Rotameter Manufacturing Co Limited
Triscan Limited
Vibro-Meter Limited
Wallaby Grip Limited
Whittaker Aerospace
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Description and proportion
of shares held (%)
Entity Name
Description and proportion
of shares held (%)
Artus SAS – France
Cavehurst (Finance) Ireland Unlimited
Company - Ireland
Endevco Vertriebs GmbH – Germany
Europeenne de Conception d’Etudes
Technologiques SAS – France
Meggitt (France) SAS – France
Meggitt (Sensorex) SAS – France
Meggitt A/S – Denmark
Meggitt Acquisition (France) SAS – France
Meggitt Finance S.a.r.l – Luxembourg
Meggitt GmbH – Germany
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Meggitt Holdings (France) SNC – France
Meggitt SA – Switzerland
Meggitt Training Systems Europe
BV – Holland
Piher International GmbH – Germany
Piher Sensors & Controls SA – Spain
Techniques et Fabrications Electroniques
SAS – France
Vibro-Meter SARL – Switzerland
Ordinary shares
The Group’s holding
is comprised of
bearer shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Incorporated in North America
Entity Name
ABL Systems – USA
Alston Properties, LLC – USA
Aviation Mobility, LLC – USA
Erlanger Acquisition Corporation – USA
GB Aero Engine, LLC – USA
Linear Motion, LLC – USA
Meggitt (Baltimore), Inc. – USA
Meggitt (Maryland), Inc. – USA
Meggitt (North Hollywood), Inc. USA
Meggitt (Orange County), Inc. – USA
Meggitt (Rockmart), Inc. – USA
Description and proportion
of shares held (%)
Entity Name
Description and proportion
of shares held (%)
The Group’s holding is
comprised of ordinary
shares (50%)
Membership interest
Membership interest
Common stock
Membership interest
Membership interest
Common stock
Common stock
Common stock
Common stock
Common stock
Meggitt (Erlanger), LLC – USA
Meggitt Holdings (USA), Inc. – USA
Meggitt Holdings Canada Inc. – Canada
Meggitt-Oregon, Inc. – USA
Meggitt Queretaro, LLC – USA
Meggitt Safety Systems, Inc. – USA
Meggitt Training Systems (Quebec), Inc.
– Canada
Meggitt Training Systems Canada Inc.
– Canada
Meggitt-USA Holdings, LLC – USA
Meggitt-USA Services, Inc. – USA
Meggitt-USA, Inc. – USA
Nasco Aircraft Brake, Inc. – USA
Membership interest
Common stock
Common stock
Common stock
Membership interest
Common stock
Common stock
Common stock
Membership interest
Common stock
Common stock
Common stock
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
141
44. Group companies continued
Incorporated in North America
Entity Name
Meggitt (San Diego), Inc. – USA
Meggitt (Simi Valley), Inc. – USA
Meggitt (Troy), Inc. – USA
Meggitt Acquisition (Erlanger), Inc. – USA
Meggitt Aircraft Braking Systems
Corporation – USA
Meggitt Aircraft Braking Systems
Kentucky Corporation – USA
Description and proportion
of shares held (%)
Entity Name
Common stock
Common stock
Common stock
The Group’s holding is
comprised of class A shares
(67.5%), class B shares
(12.5%) and class C
shares (20%)
Common stock
Common stock
OECO, LLC – USA
Pacific Scientific Company – USA
Park Chemical Company – USA
Parkway-HS, LLC – USA
Piezotech, LLC – USA
Precision Engine Controls
Corporation – USA
Radatec, Inc. – USA
Securaplane Technologies, Inc. – USA
Valley Association Corporation – USA
Meggitt Defense Systems, Inc. – USA
Meggitt GP, Inc. – USA
Meggitt Training Systems, Inc. – USA
Common stock
Common stock
Common stock
Whittaker Corporation – USA
Whittaker Development Co – USA
Whittaker Ordnance, Inc. – USA
Whittaker Technical Products, Inc. – USA
Common stock
Incorporated in other overseas countries
Entity Name
Description and proportion
of shares held (%)
Entity Name
Quota interest
Meggitt India Private Limited – India
Description and proportion
of shares held (%)
Membership interest
Common stock
Common stock
Membership interest (70%)
Membership interest
Common stock
Common stock
Common stock
The Group’s holding is
comprised of ordinary
shares (33%)
Common stock
Common stock
Common stock
Description and proportion
of shares held (%)
The Group's holding
is comprised of
equity shares
Ordinary shares
Aero-Tech Composites de Mexico,
S. de R.L. de C.V. – Mexico
Artus Vietnam Co Limited – Vietnam
Meggitt (Xiamen) Sensors & Controls
Co Limited – China
Meggitt Aerospace Asia Pacific Pte
Limited – Singapore
Meggitt Aircraft Braking Systems
Queretaro, S. de R.L. de C.V. – Mexico
Meggitt Asia Pacific Pte
Limited – Singapore
Meggitt Brasil Solucoes de Engenharia
Ltda – Brazil
The Group's holding
is comprised of
owner's capital
The Group's holding
is comprised of
registered capital
Ordinary shares
Quota interest
Ordinary shares
The Group’s holding
is comprised of
registered capital
Meggitt Training Systems Australia
Pty Limited – Australia
Meggitt Training Systems Pte Limited
– Singapore
Ordinary shares
Parkway-Hamilton Sundstrand Mexico
S. de R.L. de C.V. – Mexico
Wallaby Grip Australia Pty Limited
(in liquidation) – Australia
Wallaby Grip Industries Australia
Pty Limited (in liquidation) – Australia
Zambra Legal Pty Limited – Australia
Quota interest (70%)
Ordinary shares
Ordinary shares
Ordinary shares
142
MEGGITT PLC REPORT AND ACCOUNTS 2015
Independent auditors’ report to the
members of Meggitt PLC
Report on the company financial statements
Our opinion
In our opinion, Meggitt PLC’s parent company financial
statements (the “financial statements”):
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:
• give a true and fair view of the state of the parent company’s
affairs as at 31 December 2015;
• we have not received all the information and explanations
we require for our audit; or
• 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
The financial statements, included within the Annual Report,
comprise:
• the Company balance sheet as at 31 December 2015;
• the Company statement of changes in equity; 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, 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 United Kingdom
Accounting Standards, comprising FRS 101: “Reduced
Disclosure Framework”, and applicable law (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 parent company
acquired in the course of performing our audit; or
• otherwise misleading.
We have no exceptions to report arising from this
responsibility.
• adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
• the financial statements and the part of the Directors’
remuneration report to be audited are not in agreement
with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
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.
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 83 to 84, 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 parent 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.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
143
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 parent company’s circumstances and have been
consistently applied and adequately disclosed;
• the reasonableness of significant accounting estimates
made by the directors; and
• the overall presentation of the financial statements.
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 2015.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
22 February 2016
144
MEGGITT PLC REPORT AND ACCOUNTS 2015
Company balance sheet
As at 31 December 2015
Fixed assets
Intangible assets
Property, plant and equipment
Derivative financial instruments
Investments
Current assets
Other receivables
Derivative financial instruments
Cash and cash equivalents
Creditors - amounts falling due within one year:
Trade and other payables
Derivative financial instruments
Current tax liabilities
Bank and other borrowings
Net current assets
Total assets less current liabilities
Creditors - amounts falling due after more than one year:
Derivative financial instruments
Bank and other borrowings
Retirement benefit obligations
Net assets
Equity
Share capital
Share premium
Capital redemption reserve
Other reserves
Retained earnings
Total equity attributable to owners of the Company
Notes
2015
£’m
2014
£’m
3
4
9
5
6
9
7
9
8
9
8
11
12
34.2
4.0
28.5
2,070.9
2,137.6
1,161.0
33.8
34.5
1,229.3
(60.9)
(12.9)
(17.9)
(3.4)
(95.1)
1,134.2
32.7
1.8
30.6
2,070.1
2,135.2
1,030.2
6.6
3.8
1,040.6
(145.0)
(10.4)
(13.1)
(54.1)
(222.6)
818.0
3,271.8
2,953.2
(13.7)
(831.5)
(122.1)
(967.3)
(3.1)
(403.3)
(180.0)
(586.4)
2,304.5
2,366.8
38.8
1,218.9
1.6
17.5
1,027.7
40.1
1,218.9
0.3
17.5
1,090.0
2,304.5
2,366.8
The financial statements on pages 144 to 156 were approved by the Board of Directors on 22 February 2016 and signed on its behalf by:
S G Young
Director
D R Webb
Director
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
145
Company statement of changes in equity
As at 31 December 2015
Equity attributable to owners of the Company
At 1 January 2014
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
Remeasurement of retirement benefit obligations
Other comprehensive expense before tax
Tax effect
Other comprehensive expense for the year
Total comprehensive income for the year
Employee share schemes:
Value of subsidiary employee services
Value of services provided
Purchase of own shares
Issue of equity share capital
Share buyback – purchased and cancelled
Share buyback – close period commitment
Dividends
At 31 December 2014
Profit for the year
Other comprehensive income for the year:
Cash flow hedge movements:
Movement in fair value
Remeasurement of retirement benefit obligations
Other comprehensive income before tax
Tax effect
Other comprehensive income for the year
Total comprehensive income for the year
Employee share schemes:
Value of subsidiary employee services
Value of services provided
Purchase of own shares
Share buyback – purchased and cancelled
Share buyback – purchased and transferred to treasury shares
Share buyback – movement in close period commitment
Dividends
Notes
Share
capital
Share
premium
£’m
39.9
£’m
1,166.3
11
11
Capital
redemption
reserves
£’m
–
–
–
–
–
–
–
–
–
–
–
–
–
0.3
–
–
Other
reserves*
Retained
earnings
Total
equity
£’m
17.5
£’m
£’m
1,017.2
2,240.9
–
298.2
298.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
0.1
(0.8)
(71.1)
(71.8)
14.4
(57.4)
(0.8)
(71.1)
(71.8)
14.4
(57.4)
240.8
240.8
1.2
0.5
(11.6)
–
(33.7)
(20.0)
(104.4)
1.2
0.5
(11.6)
0.1
(33.7)
(20.0)
(51.4)
–
–
–
–
–
–
–
–
–
–
–
–
(0.3)
–
0.5
–
–
–
–
–
–
–
–
–
–
–
0.1
–
–
52.5
40.1
1,218.9
0.3
17.5
1,090.0
2,366.8
–
–
–
–
–
–
–
–
–
–
(1.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.3
–
–
–
–
149.7
149.7
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.7)
44.1
43.4
(9.1)
34.3
(0.7)
44.1
43.4
(9.1)
34.3
184.0
184.0
2.8
2.3
(9.7)
(138.8)
(7.6)
15.8
(111.1)
2.8
2.3
(9.7)
(138.8)
(7.6)
15.8
(111.1)
At 31 December 2015
38.8
1,218.9
1.6
17.5
1,027.7
2,304.5
* Other reserves relate to the cancellation of the Company’s share premium account during 1988, which was transferred to a non-distributable
capital reserve at that time.
146
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the financial statements of the Company
1. Basis of preparation
Operating leases
The Company transitioned from UK GAAP to Financial Reporting
Standard 101’ Reduced Disclosure Framework’ (FRS 101) for all
periods presented. Transition reconciliations showing all material
adjustments are disclosed in note 15. 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 has taken advantage of the legal dispensation contained
in Section 408 of the Companies Act 2006 allowing it not to publish
a separate income statement 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 other comprehensive income.
The following exemptions from the requirements of IFRS have been
applied in the preparation of these financial statements, in accordance
with FRS 101:
• Paragraphs 45(b) and 46-52 of IFRS 2, ‘Share-based payment’
• IFRS 7, ‘Financial Instruments: Disclosures’
• Paragraphs 10(d), 10(f) and 134-136 of IAS 1 ‘Presentation of
financial statements
• IAS 7, ‘Statement of cash flows’
• Paragraphs 30 and 31 of IAS 8 ‘Accounting policies, changes in
accounting estimates and errors’
• Paragraph 17 of IAS 24, ‘Related party disclosures’
• The requirements in IAS 24, ‘Related party disclosures’ to disclose
related party transactions entered into between two or more
members of a group
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 using the deemed cost exemption in IFRS 1 on transition
to FRS 101.
Intangible assets
Intangible assets, consisting of software are recorded 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. 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:
Leasehold property ..................................... Over period of lease
Plant and equipment ................................... 3 to 10 years
Motor vehicles.............................................. 5 years
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.
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 Company’s financial
statements. Deferred tax is provided on unremitted earnings of foreign
subsidiaries, except where the Company can control the remittance
and it is probable that 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 ion the income statement,
other comprehensive income or directly in equity depending on where
the item to which they relate has been recognised.
Foreign currencies
The Company’s financial statements are presented in pounds sterling.
Transactions in foreign currencies are recorded at exchange rates
prevailing at 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 in which case the exchange differences are recognised in other
comprehensive income.
Retirement benefit schemes
For defined benefit schemes, pension costs 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 Company 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 Company
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 Company has an unconditional 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 Company has no further
obligations once the contributions have been paid.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
147
2. Summary of significant accounting policies continued
Share-based compensation
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
income statement 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 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.
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 retained earnings.
Derivative financial instruments and hedging
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
Company 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 creditor falling due after more than one year. All
other derivative financial instruments are reported as current assets
or creditors falling due within one year.
Fair value hedges
Changes in fair value of derivative financial instruments, that are
designated and qualify as fair value hedges, are recognised in the
income statement together with changes in the fair value of the hedged
item. The Company 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 recorded in other comprehensive income. Changes in fair value
of any ineffective portion are recognised immediately in the income
statement. To the extent changes in fair value are recognised in other
comprehensive income,they are recycled to the income statement in
the periods in which the hedged item affects the income statement.
The Company 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.
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 Company utilises a large 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 in order to apply hedge
accounting are not merited. Additionally, in 2015 the Company has
entered a cross currency derivative and a treasury lock derivative (as
described in note 30 to the Group consolidated financial statements on
page 125) which do not meet the criteria for hedge accounting.
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 Company 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.
Any related interest accruals are included within borrowings.
Borrowings are classified as creditors falling due within one year
unless the Company has an unconditional right to defer settlement of
the liability for at least 12 months after the balance sheet date.
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 Trust.
Consideration paid for own shares, including any incremental directly
attributable costs, is recorded as a deduction from retained earnings.
Dividends
Interim dividends are recognised when they are approved by the Board.
Final dividends are recognised when they are approved by the
shareholders. Details of the dividends paid and proposed by the
Company are disclosed in note 16 to the Group consolidated financial
statements on page 113.
Share buyback
The total consideration payable for shares purchased is deducted from
retained earnings. The shares when purchased are generally
cancelled, unless they are to be used to satisfy obligations under
employee share plans. The nominal value of 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
income statement.
148
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the financial statements of the Company continued
3. Intangible assets
At 1 January 2014
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2014
Opening net book amount
Additions
Amortisation
Net book amount
At 31 December 2014
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2015
Opening net book amount
Additions
Amortisation
Net book amount
At 31 December 2015
Cost
Accumulated amortisation
Net book amount
Software
£’m
36.7
(6.8)
29.9
29.9
6.3
(3.5)
32.7
43.0
(10.3)
32.7
32.7
6.1
(4.6)
34.2
49.1
(14.9)
34.2
Software assets include costs relating to the Group’s enterprise resource planning system. The asset has a net book amount of £24.1 million
(2014: £25.0 million) and has a remaining amortisation period of 5 years (2014: 6 years).
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
149
4. Property, plant and equipment
At 1 January 2014
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2014
Opening net book amount
Additions
Disposals
Depreciation
Net book amount
At 31 December 2014
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2015
Opening net book amount
Additions
Depreciation
Net book amount
At 31 December 2015
Cost
Accumulated depreciation
Net book amount
5. Investments
Leasehold
property
£’m
0.7
(0.4)
0.3
0.3
–
–
–
0.3
0.6
(0.3)
0.3
0.3
–
–
0.3
0.6
(0.3)
0.3
Plant,
equipment
and vehicles
£’m
2.3
(1.4)
0.9
0.9
1.2
(0.1)
(0.5)
1.5
3.3
(1.8)
1.5
1.5
2.9
(0.7)
3.7
6.2
(2.5)
3.7
Total
£’m
3.0
(1.8)
1.2
1.2
1.2
(0.1)
(0.5)
1.8
3.9
(2.1)
1.8
1.8
2.9
(0.7)
4.0
6.8
(2.8)
4.0
Shares in subsidiaries:
At 1 January
Capital contributions
Less contributions from subsidiary companies
At 31 December
A list of all subsidiaries is included in note 44 to the Group consolidated financial statements on pages 139 to 141.
6. Other receivables
Amounts owed by subsidiary undertakings
Prepayments and accrued income
Deferred tax assets (see note 10)
Other receivables
Total
2015
£’m
2014
£’m
2,070.1
2.8
(2.0)
2,069.9
1.2
(1.0)
2,070.9
2,070.1
2015
£’m
1,135.5
6.3
18.7
0.5
2014
£’m
993.4
3.3
33.2
0.3
1,161.0
1,030.2
Amounts owed by subsidiary undertakings are unsecured. Deferred tax assets include £15.7 million receivable in more than one year (2014: £28.8
million).
150
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the financial statements of the Company continued
7. Trade and other payables - current
Trade payables
Amounts owed to subsidiary undertakings
Social security and other taxes
Accrued expenses
Share buyback – close period commitment
Other payables
Total
Amounts owed to subsidiary undertakings are unsecured.
8. Bank and other borrowings
Creditors - amounts falling due within one year:
Bank loans
Other loans
Total
Creditors - amounts falling due after more than one year:
Bank loans
Other loans
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 adjustments to fixed rate borrowings
Drawn under uncommitted facilities
Interest accruals
Total
2015
£’m
6.8
44.9
2.1
4.3
–
2.8
60.9
2015
£’m
0.3
3.1
3.4
406.7
424.8
831.5
3.4
739.9
91.6
834.9
814.2
(1.1)
18.4
–
3.4
834.9
Debt issue costs are amortised over the period of the facility to which they relate. The Company has no secured borrowings (2014: £Nil).
The Company has the following committed facilities:
Senior notes (USD 70.0 million)
Senior notes (USD 600.0 million)
Bilateral credit facilities (USD 600.0 million)
Total
2015
Drawn
£’m
Undrawn
£’m
–
407.1
407.1
814.2
–
–
–
–
Total
£’m
–
407.1
407.1
814.2
Drawn
£’m
44.9
384.8
–
429.7
2014
Undrawn
£’m
–
–
–
–
Further details on each of the above committed facilities can be found in note 28 to the Group consolidated financial statements on page 121.
2014
£’m
1.4
115.6
2.7
3.6
20.0
1.7
145.0
2014
£’m
6.1
48.0
54.1
–
403.3
403.3
54.1
131.3
272.0
457.4
429.7
(0.9)
19.5
6.1
3.0
457.4
Total
£’m
44.9
384.8
–
429.7
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
151
8. Bank and other borrowings continued
The committed facilities available at each balance sheet date expire as follows:
In one year or less
In more than one year but not more than five years
In more than five years
Total
2015
Drawn
£’m
Undrawn
£’m
–
729.4
84.8
814.2
–
–
–
–
Total
£’m
–
729.4
84.8
814.2
Drawn
£’m
44.9
128.3
256.5
429.7
2014
Undrawn
£’m
–
–
–
–
Total
£’m
44.9
128.3
256.5
429.7
The Company also has various uncommitted facilities with its relationship banks.
The fair value of bank and other borrowings is as follows:
Current
Non-current
Total
2015
2014
Book
value
£’m
3.4
831.5
834.9
Fair
value
£’m
3.4
839.4
842.8
Book
value
£’m
54.1
403.3
457.4
Fair
value
£’m
56.8
412.3
469.1
After taking account of financial derivatives that alter the interest basis of the financial liabilities entered into by the Company, the interest rate
exposure on gross bank and other borrowings is:
As at 31 December 2015:
US dollar
Less unamortised debt issue costs
Bank and other borrowings
As at 31 December 2014:
US dollar
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
Fixed rate borrowings
Weighted
average
interest rate
%
4.2
Weighted
average
period
for which
rate is fixed
Years
2.9
Fixed rate borrowings
Weighted
average
interest rate
%
3.7
Weighted
average
period
for which
rate is fixed
Years
3.3
Floating
Fixed
Total
£’m
591.7
–
591.7
£’m
£’m
244.3
(1.1)
243.2
836.0
(1.1)
834.9
Floating
Fixed
Total
£’m
174.8
6.1
180.9
(0.1)
£’m
277.4
–
277.4
(0.8)
180.8
276.6
£’m
452.2
6.1
458.3
(0.9)
457.4
The weighted average interest rate reflects the relative impact of interest rates based on the principal amounts and the duration of borrowings.
152
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the financial statements of the Company continued
9. Derivative financial instruments
Interest rate swaps - cash flow hedges
Interest rate swaps - fair value hedges
Cross currency swaps - not hedge accounted
Treasury lock - not hedge accounted
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
2015
Assets
£’m
2015
Liabilities
£’m
2014
Assets
£’m
2014
Liabilities
£’m
0.7
24.7
4.5
3.7
28.7
62.3
0.7
24.7
3.1
28.5
33.8
–
–
–
–
(26.6)
(26.6)
–
–
(13.7)
(13.7)
(12.9)
1.3
27.0
–
–
8.9
37.2
1.3
27.0
2.3
30.6
6.6
–
–
–
–
(13.5)
(13.5)
–
–
(3.1)
(3.1)
(10.4)
The Company is exempt from certain FRS 101 disclosures as the Group consolidated financial statements give the disclosures required by IFRS 7
(see Group consolidated financial statements notes 29 and 30 on pages 123 to 126).
The gain recorded in the income statement within net operating costs in respect of derivative financial instruments was £12.8 million
(2014: Loss £3.0 million).
The contract or underlying principal amount of foreign currency forward contracts in respect of assets was £497.3 million (2014: £501.2 million)
and in respect of liabilities £598.3 million (2014: £330.3 million).
Foreign currency forward contracts
Fair value:
US dollar forward sales and purchases (USD/£)
Forward sales and purchases denominated in other currencies
Total
10. Deferred tax
2015
Assets
£’m
2015
Liabilities
£’m
2014
Assets
£’m
2014
Liabilities
£’m
21.2
7.5
28.7
(13.0)
(13.6)
(26.6)
4.2
4.7
8.9
(5.2)
(8.3)
(13.5)
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 2014
Charge to income statement
Credit to other comprehensive income
At 31 December 2014
Charge to income statement
Charge to other comprehensive income
At 31 December 2015
Deferred tax liabilities
At 1 January 2014
Charge to income statement
At 31 December 2014
Charge to income statement
Charge to other comprehensive income
Credit to equity
At 31 December 2015
Retirement
benefit
obligations
£’m
24.7
(2.9)
14.2
36.0
(4.0)
(9.2)
22.8
Accelerated
tax
depreciation
£’m
(2.5)
(0.4)
(2.9)
–
–
–
(2.9)
Other
Total
£’m
0.8
(0.9)
0.2
0.1
(0.1)
–
–
£’m
25.5
(3.8)
14.4
36.1
(4.1)
(9.2)
22.8
Other
Total
£’m
–
–
–
(1.2)
(0.3)
0.3
(1.2)
£’m
(2.5)
(0.4)
(2.9)
(1.2)
(0.3)
0.3
(4.1)
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
153
10. Deferred tax continued
Deferred tax assets are analysed as follows:
To be recovered within one year
To be recovered after more than one year
Total
2015
£’m
3.0
15.7
18.7
2014
£’m
4.4
28.8
33.2
The Company has unrecognised tax losses of £7.3 million (2014: £7.3 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.
11. Retirement benefit obligations
The Company is the sponsoring employer of the Meggitt Pension Plan, a funded defined benefit plan. Each participating company in the Meggitt
Pension Plan bears employer contributions in respect of future service. No other amounts are recharged by the Company to any other
participating employer. The Company has recognised the total deficit on the Meggitt Pension Plan in its financial statements. The directors believe
the FRS 101 deficit for the plan would be consistent with the IAS 19 deficit reported in note 33 to the Group consolidated financial statements on
pages 128 to 132 in respect of the UK scheme.
The total charge to net operating expenses in respect of the defined contribution scheme in which employees of the Company participate was
£1.0 million (2014: £0.7 million). At 31 December 2015, an amount of £0.1 million (2014: £0.1 million) relating to contributions payable in respect
of the scheme were outstanding.
Changes in the present value of retirement benefit obligations
At 1 January
Service cost
Past service cost
Interest expense/(income)
Contributions – Company
Contributions – members
Benefits paid
Remeasurement of retirement benefit obligations:
Experience gains
Gain from change in demographic assumptions
Gain from change in financial assumptions
Return on scheme assets excluding amounts included
in finance income
Total remeasurement (gain)/loss
Administrative expenses borne directly by scheme
2015
2014
Liabilities
(*)
£’m
Assets
(**)
£’m
Total
£’m
Liabilities
(*)
£’m
Assets
(**)
£’m
681.4
7.1
–
24.2
–
0.1
(20.0)
(22.6)
(1.3)
(31.8)
–
(55.7)
–
(501.4)
–
–
(18.2)
(27.7)
(0.1)
20.0
–
–
–
11.6
11.6
0.8
180.0
7.1
–
6.0
(27.7)
–
–
(22.6)
(1.3)
(31.8)
11.6
(44.1)
0.8
573.5
6.1
0.6
26.0
–
–
(19.0)
–
–
94.2
–
94.2
–
(450.0)
–
–
(20.9)
(27.2)
–
19.0
–
–
–
(23.1)
(23.1)
0.8
Total
£’m
123.5
6.1
0.6
5.1
(27.2)
–
–
–
–
94.2
(23.1)
71.1
0.8
At 31 December
637.1
(515.0)
122.1
681.4
(501.4)
180.0
* Present value of scheme liabilities.
** Fair value of scheme assets.
The liability recognised in respect of the plan is dependent on a number of estimates including those relating to mortality, inflation, salary
inflation and the rate at which liabilities are discounted. External actuarial advice is taken with regard to the most appropriate assumptions
to use. 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 2015 to increase by approximately
£12.4 million;
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2015 to increase
by approximately £11.6 million;
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2015
to increase by approximately £18.8 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.
The weighted average duration of the UK scheme defined benefit obligation is 19.3 years.
154
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the financial statements of the Company continued
11. Retirement benefit obligations continued
The expected maturity of undiscounted pension benefits at 31 December 2015 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
12. Share capital
Total
£’m
17.4
18.1
61.4
129.0
157.9
176.1
181.4
728.9
1,470.2
Disclosures in respect of share capital of the Company are provided in note 34 to the Group consolidated financial statements on pages 132 to 133.
13. Commitments
Capital commitments
Contracted for but not incurred:
Plant, equipment and vehicles
Total
Operating lease commitments
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
2015
£’m
–
–
2015
£’m
0.1
0.4
0.1
0.6
2014
£’m
0.2
0.2
2014
£’m
0.1
0.4
0.2
0.7
14. Profit of the Company
The profit attributable to the shareholders of Meggitt PLC was £149.7 million (2014: £298.2 million).
15. Transition to FRS 101
For all periods up to and including the year ended 31 December 2014, the Company prepared its financial statements in accordance with
the previously extant United Kingdom generally accepted accounting practice (UK GAAP). These financial statements, for the year ended
31 December 2015, are the first the Company has prepared in accordance with FRS 101. Accordingly, the Company has prepared individual
financial statements which comply with FRS 101 applicable for periods beginning on or after 1 January 2014 and the significant accounting
policies meeting those requirements are described in the relevant notes.
In preparing these financial statements, the Company has started from an opening balance sheet as at 1 January 2014, the Company’s date of
transition to FRS 101, and made those changes in accounting policies and other restatements required for the first-time adoption of FRS 101.
As such, this note explains the principal adjustments made by the Company in restating its balance sheet at 1 January 2014 prepared under
previously extant UK GAAP and its previously published UK GAAP financial statements for the year ended 31 December 2014.
On transition to FRS 101, the Company has applied the requirements of paragraphs 6-33 of IFRS 1 ‘First time adoption of International
Financial Reporting Standards’.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
155
15. Transition to FRS 101 continued
Reconciliation of equity at 1 January 2014
Fixed assets
Intangible assets
Property, plant and equipment
Derivative financial instruments
Investments
Current assets
Other receivables
Derivative financial instruments
Cash and cash equivalents
Creditors - amounts falling due within one year
Trade and other payables
Derivative financial instruments
Current tax liabilities
Bank and other borrowings
Net current assets
Total assets less current liabilities
Creditors - amounts falling due after more than one year
Derivative financial instruments
Deferred tax liabilities
Bank and other borrowings
Retirement benefit obligations
Net assets
Equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity attributable to owners of the Company
a. Reclassification of software assets to intangible assets.
b. Recognition of retirement benefit obligations.
c. Recognition of deferred tax asset relating to retirement benefit obligations.
Notes
UK GAAP
£’m
Adjustments
£’m
FRS 101
£’m
a
a
c
c
b
–
31.1
35.5
2,069.9
2,136.5
940.0
11.4
17.0
968.4
(60.3)
(9.3)
(16.2)
(3.0)
(88.8)
879.6
29.9
(29.9)
–
–
–
23.0
–
–
23.0
–
–
–
–
–
29.9
1.2
35.5
2,069.9
2,136.5
963.0
11.4
17.0
991.4
(60.3)
(9.3)
(16.2)
(3.0)
(88.8)
23.0
902.6
3,016.1
23.0
3,039.1
(10.2)
(1.7)
(664.5)
–
(676.4)
–
1.7
–
(123.5)
(121.8)
(10.2)
–
(664.5)
(123.5)
(798.2)
2,339.7
(98.8)
2,240.9
39.9
1,166.3
17.5
1,116.0
2,339.7
–
–
–
(98.8)
39.9
1,166.3
17.5
1,017.2
(98.8)
2,240.9
156
MEGGITT PLC REPORT AND ACCOUNTS 2015
Notes to the financial statements of the Company continued
15. Transition to FRS 101 continued
Reconciliation of equity at 31 December 2014
Fixed assets
Intangible assets
Property, plant and equipment
Derivative financial instruments
Investments
Current assets
Other receivables
Derivative financial instruments
Cash and cash equivalents
Creditors - amounts falling due within one year
Trade and other payables
Derivative financial instruments
Current tax liabilities
Bank and other borrowings
Net current assets
Total assets less current liabilities
Creditors - amounts falling due after more than one year
Derivative financial instruments
Deferred tax liabilities
Bank and other borrowings
Retirement benefit obligations
Net assets
Capital and reserves
Share capital
Share premium
Capital redemption reserve
Other reserves
Retained earnings
Total equity attributable to owners of the Company
Reconciliation of comprehensive income for the year ended 31 December 2014
Profit for the year
Other comprehensive income (net of tax):
Currency translation differences
Cash flow hedge movements
Remeasurement of retirement benefit obligations
Notes
UK GAAP
£’m
Adjustments
£’m
FRS 101
£’m
a
a
c
c
b
–
34.5
30.6
2,070.1
2,135.2
997.0
6.6
3.8
1,007.4
(145.0)
(10.4)
(13.1)
(54.1)
(222.6)
784.8
32.7
(32.7)
–
–
–
33.2
–
–
33.2
–
–
–
–
–
33.2
32.7
1.8
30.6
2,070.1
2,135.2
1,030.2
6.6
3.8
1,040.6
(145.0)
(10.4)
(13.1)
(54.1)
(222.6)
818.0
2,920.0
33.2
2,953.2
(3.1)
(2.8)
(403.3)
–
(409.2)
–
2.8
–
(180.0)
(177.2)
(3.1)
–
(403.3)
(180.0)
(586.4)
2,510.8
(144.0)
2,366.8
40.1
1,218.9
0.3
17.5
1,234.0
2,510.8
–
–
–
–
(144.0)
40.1
1,218.9
0.3
17.5
1,090.0
(144.0)
2,366.8
Notes
b
UK GAAP
£’m
Adjustments
£’m
286.5
11.7
FRS 101
£’m
298.2
b
0.1
(0.6)
–
(0.5)
–
–
(56.9)
(56.9)
0.1
(0.6)
(56.9)
(57.4)
Total comprehensive income for the year
286.0
(45.2)
240.8
a. Reclassification of software assets to intangible assets.
b. Recognition of retirement benefit obligations.
c. Recognition of deferred tax asset relating to retirement benefit obligations.
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
157
Five-year record
Revenue and profit
Revenue
Underlying profit before tax
Exceptional operating items*
Amounts arising on the acquisition, disposal and closure of businesses*
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
2015
£’m
2014
£’m
2013
£’m
2012
£’m
2011
£’m
1,647.2
1,553.7
1,637.3
1,605.8
1,455.3
310.3
(10.4)
(0.2)
(71.9)
(1.6)
(4.8)
(11.2)
210.2
328.7
(9.0)
(3.5)
(68.1)
–
(29.2)
(10.0)
208.9
377.8
(36.7)
8.3
(74.3)
(0.3)
6.1
(11.5)
269.4
366.0
(15.2)
1.9
(80.6)
(0.2)
23.4
(14.0)
281.3
325.3
(14.3)
(6.0)
(75.1)
(11.3)
9.7
(12.1)
216.2
23.2p
31.6p
14.40p
22.0p
32.4p
13.75p
29.4p
37.5p
12.75p
30.1p
36.5p
11.80p
23.1p
32.1p
10.50p
48.3%
26.9%
27.2%
33.7%
44.0%
* Comparative figures have been restated to present “Amounts arising on the acquisition, disposal and closure of businesses” separately from
“Exceptional operating items”, consistent with the treatment adopted in 2015.
158
MEGGITT PLC REPORT AND ACCOUNTS 2015
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: 0370 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. Dividend confirmations are sent
directly to shareholders’ registered addresses. From April 2016, dividend tax vouchers will be replaced
by dividend confirmations in line with changes to dividend tax credits announced as part of the
UK Government Budget in July 2015.
• 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 or dividend confirmation, 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 (0370 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): PO Box 72253, London, SW1P 9LQ
(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 2015 final dividend of 9.80p per ordinary share, if approved, will be paid on 6 May 2016
to shareholders on the register on 29 March 2016. The expected payment date for the 2016 interim
dividend is 30 September 2016.
2016 provisional financial calendar
Key dates 2016
Full-year results for year ended 31 December 2015
Report and accounts for year
ended 31 December 2015 despatched
2015 Final dividend ex-dividend date
2015 Final dividend record date
Deadline for receipt of dividend reinvestment plan elections
AGM
2015 Final dividend payment date
Interim results for period ended 30 June 2016
2016 Interim dividend ex-dividend date
2016 Interim dividend record date
Deadline for receipt of dividend reinvestment plan elections
2016 Interim dividend payment date
23 February
18 March
24 March
29 March
14 April
21 April
6 May
2 August
8 September
9 September
16 September
30 September
FEBRUARY
23
Full-year
results
APRIL
21
AGM
AUGUST
2
Interim
results
156768.01 Text 158_NEW-06.03.16.indd 158
07/03/2016 04:34
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
159
Additive layer manufacturing
ESOP
Employee Share Ownership Plan
EPS
ERP
Earnings per Share
Enterprise resource planning
Glossary
Aftermarket
Spares and repairs
Annual general meeting
AGM
ALM
AOG
ASK
ATA
Aircraft‑on‑ground emergency
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
BEPS
Board
Book to bill
Base Erosion and Profit Shifting
Board of directors
The ratio of orders received to revenue
recognised in a specific period
CAGR
Compound annual growth rate
Capability
Expertise in technology and manufacturing
CGU
CI
CO2
Code
Cash generating unit
Continuous improvement
Carbon dioxide
UK Corporate Governance Code 2014
CODM
Chief operating decision maker
Company
Meggitt PLC
Condition‑monitoring Monitoring the condition of aerospace and
land‑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
CREST
CSS
DECC
DEFRA
DLA
DoD
DPPM
DRIP
DTR
EBITDA
Certificateless Registry for Electronic
Share Transfer
Customer Services & Support, Meggitt’s
new centralised aftermarket organisation
Department for Environment, Food &
Rural Affairs
Daily layered accountability, the nervous
system of the Meggitt Production System,
DLA is a multi‑layered structure of interlocking
meetings at the start of each working day
that flows fresh, accurate performance and
operational information up and down the
business enabling problems to be solved
quickly by those best equipped to do so
(United States) Department of Defense
Defective parts per million, a measure of quality
Dividend reinvestment plan
Disclosure and Transparency Rules
Earnings Before Interest, Tax, Depreciation
and Amortisation
EPP
Equity Participation Plan
ESOS
ESOS
EU
FAA
FCA
FIFO
FLNG
FOC
FPSO
FRC
FRS
FTSE
GAAP
GAINS
GBP
GC 100
GDP
GHG
Group
Group Executive
Committee
Energy Savings Opportunity Scheme
Executive Share Option Scheme
European Union
Federal Aviation Administration
Financial Conduct Authority
First‑in first‑out
Floating liquefied natural gas
Free of charge
Floating production, storage and offload
Financial Reporting Council
Financial Reporting Standard
Share index of companies listed on the
London Stock Exchange
Generally Accepted Accounting Practice
Green Airframe Icing Novel Systems, the name
of a ‘green’ de‑and anti‑ice systems research
project funded by the European Union. Meggitt
Polymers & Composites, a ‘Core Partner’, leads
a consortium of industry and academic partners
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
Assists the Chief Executive to develop and
implement the Group’s strategy, manage
operations and discharge responsibilities
delegated by the board
HSE
IAS
IDIQ
IED
IFRIC
Health, safety and environment
International Accounting Standards
Indefinite delivery, indefinite quantity
Improvised explosive device
International Financial Reporting
Interpretations Committee
IFRS
International Financial Reporting Standards
Installed base
The sum total of the Meggitt products and
sub‑systems installed on customers’ equipment
IRS
ISA
KPI
Internal Revenue Service
International Standards on Auditing
Key performance indicator
Large jets
Commercial aircraft with greater than 100 seats
Lean
A method for the continual elimination of waste
within a manufacturing system
Department of Energy & Climate Change
HMRC
HM Revenue & Customs
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MEGGITT PLC REPORT AND ACCOUNTS 2015
Glossary continued
LIBOR
LNG
LTIP
MAAP
MABS
M&A
MCS
MEG
Meggitt Production
System (MPS)
MHSP
Mix
MoD
MPC
MPP
MRO
MSS
M4
London Inter‑Bank Offered Rate
Liquefied natural gas
Long Term Incentive Plan
Meggitt Aerospace Asia Pacific, the Group’s
maintenance, repair and overhaul hub
in Singapore
Meggitt Aircraft Braking Systems, one of five
Meggitt divisions
OTD
PBT
PCHE
PECC
Platform
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
Mergers and acquisitions
PPC
Programme Participation Cost
Meggitt Control Systems, one of five
Meggitt divisions
Meggitt Equipment Group, one of five
Meggitt divisions
Our single global approach to continuous
improvement using tools and processes tailored
for the Group, and extending from the factory
floor into every function
Meggitt Health and Safety Procedure, procedures
and practices to protect employees, visitors and
contractors from occupational safety and health
risks, and ensure compliance with all applicable
health and safety laws and regulations
The impact on performance of revenue streams
with higher or lower profitability growing at
differing rates
UK Ministry of Defence
Meggitt Polymers & Composites, one of five
Meggitt divisions
Meggitt Pension Plan
Maintenance, repair and overhaul
Meggitt Sensing Systems, one of five
Meggitt divisions
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
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
SCRIP
SIOP
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
Share dividend plan
Sales, inventory and operations planning,
a structured method of regularly translating
customer demands into deliverable action plans
for production internally and throughout the
supply chain
SIP
Share Incentive Plan
Smart engineering
for extreme
environments
SRN
STEM
STIP
TRI
TSR
UAV
USD
Value stream
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
Shareholder Reference Number
Science, technology, engineering and
mathematics
Short Term Incentive Plan
Total reportable injuries
Total shareholder return
Unmanned aerial vehicle
United States dollar
Customer‑facing organisations within Meggitt
divisions that include sales and marketing,
programme management, customer service and
design engineering. Value streams are served by
operations which focus on safety, quality, delivery,
inventory and cost reduction
WACC
Weighted average cost of capital
OE
OECD
Original equipment
Organisation for Economic Cooperation
and Development
OEM
Original equipment manufacturer
Operations excellence
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 Group Executive Committee
ORB
The Group’s Obsolescence Review Board
Organic growth
Growth excluding the impact of currency and
acquisitions and disposal of businesses
OSHA
Occupational Safety and Health Administration
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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