ANNUAL REPORT AND ACCOUNTS 2016
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18-22
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Strategic report
Group at a glance
Our capabilities
Financial highlights
Chairman’s statement
Chief Executive’s review
Our business model
Group strategy
Customer focus
Technology and Portfolio
Operations Excellence
Market review
Meggitt divisions
Risk management
Key performance indicators
Chief Financial Officer’s review
Corporate responsibility
53-92 Governance reports
Chairman’s introduction
53
Board of directors
54-55
Corporate governance report
56-60
Audit Committee report
61-63
Nominations Committee report
64-65
Directors’ remuneration report
66-88
Directors’ report
89-92
93-165 Financial statements
93-99
Group financial statements
Independent auditors’ report to the members
of Meggitt PLC
Consolidated income statement
100
Consolidated statement of comprehensive income
101
Consolidated balance sheet
102
Consolidated statement of changes in equity
103
104
Consolidated cash flow statement
105-152 Notes to the consolidated financial statements
153-154
Company financial statements
Independent auditors’ report to the members
of Meggitt PLC
Company balance sheet
Company statement of changes in equity
155
156
157-165 Notes to the financial statements of the Company
166-169 Supplementary information
166
167
168-169 Glossary
Five-year record
Investor information
Quick reference
What is Meggitt?
How did we
perform in 2016?
2
4
38
What is our
strategy and
business model?
6 to 11
What are our
markets and
what drives
them?
18
How do we
manage risk?
What are our key
performance
indicators?
28
34
How do we
perform as
corporate
citizens?
44
Who runs Meggitt
and how do we
reward them?
54
66
Download the 2016 Meggitt PLC Annual Report
and Accounts from www.meggitt.com
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.
1
Meggitt’s smart engineering for
extreme environments has resulted
in the Group securing strong
positions on the latest wave of new
aircraft platforms. 2016 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 to our
manufacturing facilities faster than ever,
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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 2
Group at a glance
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.
Over 11,000 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 scoring systems used for
training and weapons systems development. Training also
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.
Our capabilities
Just some of the smart
sub-systems and critical
components created
by Meggitt.
For the full picture, take
our Meggitt-in-a-Minute
e-tour.
www.meggitt.com/e-tour
Aircraft safety and security
Avionics
Combat support
Fire protection
Fuel containment
Heat transfer engineering
MEGGITT PLC REPORT AND ACCOUNTS 2016 3
Revenue by market Total revenue (£ millions)
Employees by region Number of employees
1,992.4
Civil aerospace
1,009.3 | 51%
Military
697.1 | 35%
Energy and other
286.0 | 14%
11,210
USA
5,920 | 53%
UK
2,699 | 24%
Rest of Europe
1,503 | 13%
Rest of World
1,088 | 10%
Revenue by destination Total revenue (£ millions)
Total R&D as a % of revenue
1,992.4
USA
1,081.7 | 54%
UK
201.8 | 10%
Rest of Europe
422.2 | 21%
Rest of World
286.7 | 15%
16
15
14
13
12
9.6
9.5
7.9
8.2
7.6
Composites
Polymer seals
Power products
Wheels, brakes and
brake control
Sensing and health
monitoring
Small arms training systems
Thermal management
and fluid control
Precision micro metal
engineering
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
4
Financial highlights
Meggitt’s 2016 results reflect good momentum
in civil aerospace enhanced by currency and
the composites acquisitions completed in late
2015. We are a long-term business. Our
installed base on over 67,000 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.
Revenue
(£ millions)
1,992.4
16
15
14
13
12
Free cash flow
(£ millions)
131.1
Dividend per share
(pence)
15.10
1,992.4
1,647.2
1,553.7
1,637.3
1,605.8
16
15
14
13
12
131.1
199.0
146.8
110.4
182.4
16
15
14
13
12
15.10
14.40
13.75
12.75
11.80
i See page 38
i See page 41
i See page 40
Underlying profit before tax 1
(£ millions)
Underlying earnings per share 1
(pence)
Return on trading assets
(%)
352.1
34.8
20.8
16
15
14
13
12
352.1
310.3
328.7
377.8
366.0
16
15
14
13
12
34.8
31.6
32.4
37.5
36.5
16
15
14
13
12
20.8
21.7
26.5
36.0
40.8
i See page 39
i See page 40
i
i See page 35
1 The definition of ‘underlying’ is
provided in notes 10 and 15 to the
consolidated financial statements on
pages 119 and 123 respectively.
MEGGITT PLC REPORT AND ACCOUNTS 2016 Chairman’s statement
5
retiring on 27 April 2017. We thank
Brenda for six years of excellent service
and contribution to the Board. Nancy’s
experience in the fast-moving automotive
industry will help sharpen Meggitt’s
operational focus.
Results
Group revenue increased by 21% to
£1,992m, driven by foreign currency
translation and the composites
acquisitions completed in late 2015.
Organic revenue grew by 1% with 4%
growth in civil aerospace and 1% in
military, partially offset by continued
challenges in the Group’s energy
markets. Underlying operating profit
increased by 17% to £380m and
underlying earnings per share by
10% to 34.8 pence.
In a year, where we have seen the
UK public vote to leave the EU and a
significant change in the political
landscape in the US, Meggitt remains a
resilient business that is well positioned
for the future. We are pleased to see the
UK Government’s Industrial Strategy has
committed £3.9bn of funding to aerospace
and defence. We have had good recent
success in securing research grants
and will continue to benefit from
funding as we look to develop further
the technologies that will propel our
growth into the future.
Reflecting this confidence in the
medium term outlook, the Board is
proposing a final dividend of 10.3p per
share (2015: 9.8p per share), taking the
full-year dividend up 5% to 15.1p per
share (2015: 14.4p per share).
On behalf of the Board, I would like to
thank all of the Group’s employees for
their significant contribution to Meggitt’s
performance over the past year.
Sir Nigel Rudd Chairman
core markets. CSS launched its regional
model halfway through 2016 and is
now responsible for 40% of Meggitt’s
aftermarket operations. In a trading
environment that differs profoundly
from that of Meggitt’s original equipment
operations, CSS is meeting the targets
we set for it and improving the level of
service we provide to our aftermarket
customers.
Through the Meggitt Production System
(MPS), we have made excellent progress
on safety, quality and delivery, and this
has played no small part in our recent
programme wins. As the first of our
sites enters the Bronze stage of the MPS,
our focus turns to accelerating the
financial benefits. During 2016, a series
of pilots have demonstrated the potential
of the programme to drive meaningful
reductions in inventory and improvements
in productivity. As more of our sites enter
the latter stages of MPS over the coming
years, we expect to see margin and cash
move decisively as a result.
The lifeblood of Meggitt is smart
engineering for extreme environments.
What we are today represents the efforts
of past generations of engineers. Given an
increasingly global approach to doing
business, our centralised Applied
Research & Technology (AR&T) function is
investing now for the next bid cycle, likely
to begin in the mid to late 2020s. Meggitt’s
AR&T programmes closely follow our
customers’ technology roadmaps and are
further validated by contributions from
EU and UK funding institutions.
Board changes
In December, Tony Wood was appointed
as an executive director and Group Chief
Operating Officer. Tony has outstanding
experience in civil aerospace and defence.
In senior leadership positions at Rolls-
Royce and Messier-Dowty, he has run
aftermarket businesses, consolidated
production across sites and introduced
continuous improvement systems.
Now that we have passed the peak of
investment in new product development,
Tony’s appointment enables Meggitt to
accelerate the pace of operational
initiatives, whilst ensuring that we deliver
on our commitments to our customers.
In April, Nancy Gioia will join the Board
of Directors and will serve on the Audit,
Remuneration and Nominations
Committees. She offers the critical US
and manufacturing experience currently
provided by Brenda Reichelderfer, who is
Over the past four years, Meggitt has
secured increased content on a new
generation of large civil aircraft during
a period of unprecedented product
renewal by the major airframe and engine
manufacturers. The value of our products
that will be installed on each of these
aircraft has increased between 20% and
an outstanding 250%. As we mostly supply
products as sole-source provider, we will
be the only provider of spare parts.
With Meggitt products installed on over
67,000 military and civil aircraft, increased
content on over 20 new aircraft platforms
and the continued growth in demand for
air travel, Meggitt is well-positioned
for growth over the coming years
and decades.
Winning contracts triggers significant
investment. Designing and developing
products is complex and painstaking work
that is highly regulated and subject to
onerous certification. Manufacturing
capability and capacity is needed to bring
these products to market.
Meggitt has now passed the peak of
investment in research and development,
with capital expenditure ramping up to
ensure that we have the capability and
capacity to deliver these new programmes
to our customers.
Progress on strategic initiatives
While we have been winning new business
and investing in new programmes from
the current cycle, we have continued to
invest across the Group to leverage our
scale and boost customer satisfaction.
After its formal launch in 2015, our
centralised Customer Services & Support
(CSS) organisation has made great
progress, growing revenues ahead of its
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 6
Chief Executive’s review
aftermarket supply and demand.
Our real-time insight into surplus part
availability has enabled us to price
more effectively and to purchase our
own surplus parts for resale. We believe
CSS supplied approximately 10% of the
addressable market of Meggitt surplus
parts in 2016 and we plan to capture
a much greater share as our
capability matures.
CSS will also target a greater share of the
market for repair and overhaul of Meggitt
components, which account for over 20%
of our aftermarket as a whole. Repair
work provides an opportunity for growth,
greater understanding of the market for
piece parts and significant insight into
in-service performance. This additional
intelligence will help our engineers to
design better products for new aircraft
platforms, as well as modify and upgrade
existing products to refresh our existing
product pipelines and improve our
customers’ operating economics.
Operations Excellence
Defined by quality, cost, efficiency and
on-time delivery, we are determined to
make operations excellence a core
competitive strength. This is key to
meeting our commitments to customers
and delivering growing returns for
shareholders.
The Meggitt Production System (MPS)
— our global approach to continuous
improvement — is far more than a roll-out
of lean manufacturing tools. It is a
comprehensive operating system built on
work, people and improvement systems.
Work is undertaken to a set of standards,
proven to deliver results. The system
defines how we acquire, develop, coach,
place and motivate talent. In essence, it is
a major culture change programme. MPS
provides a framework in which our
employees are equipped to identify, deliver
and sustain the thousands of incremental
improvements which, in aggregate, drive
significant results at Group level.
MPS has achieved good results in customer
service, with on-time delivery up 15% and
quality, measured in defective parts per
million, improved by 87% since 2012. At the
end of 2016, we saw our first factory
successfully complete the Bronze (fourth)
phase of the system. As a critical mass of
our business enters this phase over the
next few years, we expect to see cash
conversion and margin improvement as
sites focus increasingly on inventory
management and productivity gains.
Examples of this improvement can be
seen at some of our more advanced
sites, such as Fareham UK, where MPS
has contributed to a gross margin
improvement of 5% since the early stages
of MPS, and Meggitt Sensing Systems in
Orange County, California where a pilot
programme on inventory management
has enabled a 22% reduction in inventory
during 2016.
In 2016, we announced the closure of
four sites. We plan to reduce our
manufacturing footprint by a further 20%
by 2021 as part of a continuous effort to
improve our efficiency.
In addition to MPS and factory
consolidation, we continue to focus on
building a robust and high performing
supply chain. This is key to meeting
customers’ demands in an era in which
our customers expect us to perform,
without fail, on quality and delivery whilst
accepting a greater share of risk than we
did five to ten years ago. At the same time,
reducing fragmentation provides an
opportunity to reduce cost, share risk and
increase the pace of strategy deployment.
We have continued to work closely
with suppliers to drive performance
improvements. Their on-time delivery
has increased by a further 6% and quality
by 64% since January 2015. We reduced
the number of suppliers that make up
80% of spend from 601 to 570 and have
consolidated more of our purchasing with
preferred suppliers who work on the
same terms we have committed to with
our customers. We have much more to
do here, including reducing the long tail
of small suppliers.
Technology
Our technology strategy is designed to
drive long term organic growth through
investments in core products and
manufacturing capabilities in line with
our customers’ technology roadmaps.
Strong success in winning new aircraft
contracts has meant that we have
invested significantly in research and
development. We have now passed the
peak of investment in technology for
platforms entering service this decade.
Several major new development
programmes entered service in the
year, notably the Bombardier CSeries
incorporating Meggitt’s pioneering
e-Brake™ technology and the Airbus
A320neo. Within Meggitt Aircraft
Braking Systems (MABS), we have
passed a number of critical programme
milestones, with an unprecedented six
first flights for aircraft equipped with
Strategy
Meggitt is a leading provider of smart
engineering for extreme environments. We
invest in technologies and capabilities for
complex and highly regulated markets and
in industry-leading levels of operational
excellence and customer service.
Over the past five years, this investment
has enabled us to significantly increase the
number of Meggitt parts on engine and
aircraft platforms. At the same time, we
have focused our operations on delivering
for our customers, on-time and to the
required specification. We continue to
leverage our scale, integrating our
businesses and creating the infrastructure
needed to grow a world-class organisation.
We will achieve superior financial
performance and returns for shareholders
over the medium and longer term by
delivering cash sustainably, from mostly
sole-source original equipment business
which we have won across a broad spread
of platforms. We will protect and extend
the value of our intellectual property
throughout the in-service lives of
platforms; and continue to increase the
sophistication, efficiency and pace of
the Group as we focus on our strategic
fundamentals of: customer focus,
operations excellence, technology and
strengthening our portfolio of businesses.
Customer Focus
Airlines are taking an increasingly
sophisticated approach to maintaining and
operating their aircraft. To serve these
customers better, we launched our
Customer Services & Support (CSS)
organisation in 2015 to protect and grow
our share of Meggitt spares and repairs,
and to realise the full value of our
significant and growing installed base.
In its first full year, CSS has significantly
improved our understanding of what drives
MEGGITT PLC REPORT AND ACCOUNTS 2016 7
Meggitt braking systems. These included
the Boeing TX trainer, Gulfstream’s new
G500 and G600 business jets; and the
Global 7000, Bombardier’s large
widebody business jet. Our R&D spend in
2016 amounted to 7.9% of revenue, down
from 9.6% in 2015 and back within our
normal range of 6-8%. We expect this
investment to reduce further, but to do so
gradually as a series of further
programmes, including the Boeing
737MAX and 777X, Embraer E2 and
Dassault Falcon 5X, enter service.
For several years now, we have set aside
‘ring-fenced’ funds for applied research
and technology investment. This money
is supplemented by partner and EU/
Government contributions and funds our
development of next generation product
and manufacturing technologies. This will
enable Meggitt to increase its content on
the next generation aircraft that are likely
to be bid in the mid to late 2020s.
Acquisitions and Disposals
In late 2015, the acquisition of the
advanced composites businesses of
EDAC and those previously owned by
Cobham, enhanced our position in
complex composite structures and
engine composites, one of the fastest
growing areas of the aerospace market.
Integrated into our Meggitt Polymers
& Composites (MPC) division, the new
businesses have performed in line with
expectations, despite some delays to
new engine programmes where the
EDAC acquisition, in particular, has good
content. We have made good progress in
realising initial synergies, for example by
avoiding the costly expansion of one of the
acquired sites and leveraging existing
operations to halve the time required to
manufacture a composite radome by
moving the product line to an established
MPC facility. The integration of these
businesses has made good progress and
we have increased our synergy target by
30% to $12.7m of savings by the end of
2018, with the one-off costs to achieve
these higher synergies increasing to $14m.
In December 2016, we completed the
disposal of Meggitt Target Systems (MTS)
to QinetiQ Group plc for £58.6m. MTS was
built from acquisitions completed in 1989
and 2004 and developed a range of targets
used by military customers for training
and weapons evaluation. MTS had limited
synergies with the broader Group and
would have diluted our ability to sustain
our targeted growth rates over the
long term.
Performance
Revenue increased by 21%, driven by
currency and the composites acquisitions.
Organic revenue growth of 1% was in line
with expectations, including 4% growth in
civil aerospace. Underlying earnings per
share increased by 3.2p to 34.8p, while
net debt to EBITDA at the end of the year
was 2.1x (2015: 2.3x).
Within civil aerospace, original
equipment revenue grew organically
by 3%, with increased shipset content
on large jets offsetting a decline in
business jets. Aftermarket revenue
increased organically by 5%, with strong
performance in large and regional jets
offsetting lower demand for business
jet spares.
Military revenues recovered well in the
second half of the year. Broad demand for
original equipment and spares increased
steadily across the majority of equipment
types, with the exception of helicopters.
The Continuing Resolution passed in
late 2016, ahead of the 2017 budget
agreement, continues to challenge the
release of funds from the growing US
Department of Defense budget, but we
remain confident that this will benefit us
in future years. Revenue for the year
increased by 1% but was up 7% in the
second half after a challenging first half.
As anticipated, energy revenues
continued to decline, with the Heatric
business having another challenging year
as oil price weakness continued to
severely suppress customers’ appetites
for investment. The power generation
part of our energy business also saw
reduced investment, primarily from the
utility companies, with slow demand for
gas turbines contributing to a particularly
weak first half. Overall energy revenues
declined by 17% during the year.
Outlook
The outlook for our civil markets is
encouraging despite recent delays to some
civil aircraft programmes. In the medium
term, production of large jets is expected
to continue to grow and our increased
shipset content on the latest generation of
aircraft supports a positive outlook for
civil OE revenues. In 2017, we expect civil
OE to grow organically by 6 to 8%.
Available seat kilometres, an important
driver of our large and regional jet
aftermarket, continue to grow above the
long-term trend of 5% per annum. This,
combined with the effect of our new CSS
organisation and expanded content on
new aircraft, signals that we will outgrow
the market for civil spares in the medium
term. In 2017, we will continue to be
affected by the availability of surplus
parts and lack of demand from younger
fleets under warranty. This is expected to
limit organic aftermarket growth in 2017
to 4 to 6%.
In military markets, the long-term budget
outlook is positive with organic orders up
6% and a book-to-bill ratio of 1.06 in 2016.
Our strong technology offering and broad
platform exposure should enable us to
outgrow the market overall. However,
we remain cautious for 2017, reflecting
delays to budget approvals as the new
administration takes over in the US.
We therefore anticipate organic growth
in 2017 of 1 to 3%.
Our energy businesses continue to
operate in a difficult market
characterised by a lack of investment in
infrastructure. This is particularly so for
Heatric, which depends on large capital
projects in the oil and gas sector where
a recovery is unlikely in the near term.
Continued decline in oil and gas will be
only partially offset by power generation
where we expect modest recovery with
slow growth anticipated in demand for
gas turbines in the US, Middle East and
China. As a result, we expect further
organic revenue decline of 5 to 10% in the
energy market overall in 2017, although
multiple cost reduction activities in 2015
and 2016 will help mitigate the financial
impact of this decline. Medium term,
Heatric’s strong technology franchise 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 overall 2 to 4% organic revenue
growth in 2017 and that growth will
accelerate into the medium term. Also,
on the basis of these growth rates and our
key strategic initiatives, we are targeting
2017 operating margin between 19.1% and
19.4%, and we are targeting a 200-250
basis point margin improvement by 2021.
Stephen Young Chief Executive
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 8
Our business model
We deliver smart engineering for extreme environments.
This comprises primarily components and sub-systems
for commercial aero-engines and airframes that
perform to specification in severe conditions over an
aircraft’s lifetime.
Revenues come principally from two sources: supplying
original equipment to aircraft manufacturers for
brand-new platforms; and delivering spares and
repairs to airlines for as long as an aircraft is in service.
This can range from at least 20 to over 50 years.
We supply similar products to military aircraft,
land-based defence vehicles, hydro, gas and steam
turbines and markets requiring highly specified sensors
such as test and measurement, industrial process control
and clinical instruments.
Revenue by market
Civil aerospace
51%
Military
35%
Energy and other
14%
What our customers
are looking for
While the emphasis varies by market, our customers come to
us for products that perform critical functions in severe
conditions, safely, reliably, economically and cleanly.
Civil aircraft manufacturers want products that help
develop more competitive aircraft and engines. Our
components and systems must be lightweight and
yet perform at high temperatures and pressures.
They must reduce emissions and noise. They must
be easy to install and maintain. They must be
reliable enough to ensure that aircraft are ready to
dispatch without fail, boosting the economics of
airline performance by helping to optimise the use
of very costly assets.
Defence manufacturers choose Meggitt technology
to extend aircraft range, capacity and speed but are
increasingly concerned about minimising the cost
of repairs and spares through the operating life of
their assets.
Gas turbine manufacturers focus on reliability,
enabling them to deliver energy profitably and safely.
Please refer to the Market review on pages 18 to 22 for
more detail on our markets.
Our investment cycle
1. Pre-bid »
Investing for insight and technology
and manufacturing readiness
We develop close customer relationships
to anticipate and influence technology
requirements. We are increasingly required to
invest in working prototypes that engender
confidence in our ability to meet programme
deadlines and to show how our innovations
can be made cost-effectively.
We usually win business as a sole-source
provider in exchange for differentiated
technology and the significant investment
required from us during subsequent
development phases.
The value of Meggitt products
installed on major new
commercial aircraft platforms
has risen between 20% and
250%.
Cumulative cash flow
Our business model requires significant cash
investment in the development phase of
programmes.
We deliver strong positive cash flow within our civil
aerospace and military end-markets during the
in-service phase, breaking even on cumulative
cash between years 11 and 18 typically, and around
five years earlier in the energy market where
upfront investments are lower.
MEGGITT PLC REPORT AND ACCOUNTS 2016
Our investment cycle
Investments and rates of return differ according to the dynamics of market segments. However,
the cycle of investment in relationship-building, research and development, product
industrialisation and maintenance and support is common. This results in highly attractive,
annuity-like returns in the form of recurring aftermarket demand (i.e. spares and repairs) over
product lifecycles measured in decades.
9
2. Development »
Investing in our customers’
competitiveness
As our products require significant
cash investments during the technology
development phases of new programmes,
we only commit to those offering visible,
worthwhile returns. These are
characterised by sole-source contracts
for the life of programmes and platforms
backed by established original equipment
manufacturers targeting clear, addressable
markets and with ambitious investment
plans of their own.
Military customers often fund developments
to secure a lower through-life cost on
original equipment production and spares.
By contrast, we tend to bear the majority of
development costs for civil airframe and
engine manufacturers. In return for helping
them secure competitive prices for
production aircraft, we receive sole-source
contracts for original equipment and its
aftermarket.
3. Production »
Revenues start
4. Maturity
Revenues gain momentum
As our products age, they require
maintenance or replacement at
varying intervals based on condition.
In the case of a highly-utilised
aircraft braking system, this can be
every 18 months, offering an early start
to returns on our significant investments.
Spares make up the bulk of this
aftermarket segment.
Many of our other products must be
designed to last for ten years or more
and so spare parts are priced to reflect
the investment made and the long
pay-back period.
Revenue is usually generated when a
programme moves into production. For civil
aircraft, production of any one platform can
last for up to ten years before it is replaced.
Military equipment is manufactured over
much longer periods. Ground-based gas
turbines tend to be in production for
around five years.
In many instances, we continue to
subsidise the original equipment to help
our customers compete, notably in wheels
and brakes where original equipment is
often provided to aircraft manufacturers
free of charge.
When an operator takes delivery of a
new aircraft platform it will typically order
a series of spare parts to ensure that it
has sufficient inventory to enable initial
maintenance activity. This initial
provisioning activity drives early
demand for our spare parts.
7.9% of 2016 revenue was
invested in new development
programmes.
Over 2,000 new aircraft
entered service in 2016,
supported by Meggitt
products and technologies.
We own around 75% of the
intellectual property used in
our products which are in
service on an installed base
of over 67,000 aircraft.
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0
5
10
15
20
25
30
35
40
Typical product lifecycle (years)
Wheels and brakes
Development
In production
Mature
Civil
Development
In production
Mature
Military
Development
In production
Mature
Energy
Development
In production
Mature
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
10
Group strategy
Our strategy is designed to achieve competitive
advantage at every stage of our business model
(see pages 8 to 9).
We aim to grow or develop leading positions in
attractive markets with smart engineering for
extreme environments that must meet the
complex regulation and certification associated
with safety- and mission-critical products.
We invest in operations excellence as a core
competitive strength and in the people and
culture needed to deliver our strategy through
our world-class operating model, the Meggitt
Production System.
We invest in high-quality, timely service and
support to promote customer satisfaction while
maximising the value of our products throughout
their lifecycles.
Our focus today
With some 22 new aircraft platforms entering service
between 2014 and 2019, the civil aerospace market is
experiencing an unprecedented phase of product
renewal. Meggitt content on these platforms has
reached record highs with increases of between
20% and 250%.
Accordingly, we are prioritising activities that will enable
us to drive superior shareholder returns from these
excellent positions over the medium to long term. They
conform to Meggitt’s strategic themes of customer
focus, targeted and timely technology development and
operations excellence from factories to functions.
Customer
focus
GROWTH
ROTA
Operations
excellence
Technology
People and c u l
t u r
e
People and culture
Engaging and developing our workforce for current
and future business is key to successfully delivering
our strategy and meeting customer commitments.
Examples of how we are investing in our people and
managing our talent effectively can be found in the
Corporate responsibility section (pages 44 to 52).
MEGGITT PLC REPORT AND ACCOUNTS 2016
11
Customer focus
Case study
The launch of our Customer Services & Support (CSS) organisation is
enabling Meggitt to accelerate aftermarket growth. CSS is changing the
way we serve and develop our aftermarket. We are participating in the
trade for new and refurbished spare parts; growing our share of repair
business; forming partnerships with the integrators of maintenance,
repair and overhaul services; and using field performance data to
identify opportunities for product upgrades during the life of an aircraft
programme, cutting costs for customers and extending our product
pipeline. In addition, deployment of the Meggitt Production System,
tuned to the aftermarket, is enabling CSS to boost operational
performance, improve turnaround times and reduce inventory.
Please refer to the customer focus feature on pages 12 and 13.
Technology and portfolio
Our technology strategy will see Meggitt continue to invest in
attractive market segments where we lead or can develop leading
positions. These investments will enable us to enhance further our
competitive position on next generation aircraft, focusing on core
capabilities in, say, the high temperature systems needed to realise
radical improvements in operating performance and fuel efficiency
– just one amongst a dozen of Meggitt’s core capabilities.
Please refer to the technology feature on pages 14 and 15.
Development of retrofit, modification and
upgrade (‘RMU’) parts is a critical priority
for CSS, as we look to improve customer
support whilst developing effective
countermeasures to the redeployment of
used Meggitt surplus parts in the fleet.
Effective engagement with customers and a
close working partnership with our product
engineering teams has enabled CSS to build
a solid pipeline of RMUs which will drive
growth over the coming years.
Having entered into service in 2016, the
Bombardier CSeries showcases a range of
leading edge aircraft technologies and
promises 20% reduced fuel burn and 15%
lower direct operating costs than previous
generation aircraft. We have secured
excellent content including complex
composites, power systems, valves, sensors
and our first electrically actuated braking
system, complete with integrated tyre
pressure monitoring systems.
Operations excellence
The Meggitt Production System (MPS), underpins our goal to make
operations excellence a core competitive strength. Our continuous
improvement system has been launched across the Group and is
stimulating the behavioural change across factories and functions which
are resulting in thousands of incremental process and other improvements.
This adds up to big gains in safety, quality and delivery at Group level. Now
in its fourth year, we are seeing our first factories reach the Meggitt
Production System’s more mature Bronze and Silver stages. Here, the focus
widens from the day-to-day delivery of product on time and to the required
specification, to productivity growth, inventory reduction and long-term
strategic business development.
Meggitt Avionics in Fareham, UK is our most
advanced MPS site and is currently working
towards its Silver exit. The site has made
significant gains in performance by
synchronising every functional activity
(including factory operations) to deliver a
focused set of breakthrough performance
goals. Since the Red phase, the site has
increased gross margin by 5% and secured a
landmark win on the Boeing 777X for its vGen
standby flight display.
Our integrated supply chain initiative, which addresses the way we deploy
our manufacturing strategy, will enable us to streamline the fragmented
supply base that characterises our primary aerospace market and to build
a high-performance supply chain capable of sharing the commitments we
make to our customers whilst delivering substantial operating efficiencies.
The efforts of external suppliers and our factories are inextricably linked
so the initiative will ensure our own manufacturing footprint is fit for
purpose. There will be greater utilisation of our low-cost manufacturing
facilities while others will be consolidated to leverage our scale, enabling
more automation, for example, and higher usage of under-exploited
capital assets.
Please refer to the operations excellence feature on pages 16 and 17.
Meggitt Sensing Systems in Orange County,
California has delivered meaningful savings
through the deployment of the Group’s supply
chain strategy in 2016, executed in tandem
with the roll-out of MPS. The site has reduced
inventory by 22% and materially reduced the
price of critical parts for civil aerospace
programmes through the deployment of tools
and processes including buyer/planner
standard work and plan for every part
(‘PFEP’) strategies; whilst leveraging
preferred suppliers in low cost regions
and e-auction procurement campaigns.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
12
CUSTOMER FOCUS
Greater intelligence
Being in the MRO business gives
Meggitt vital intelligence on how
our parts are used in service.
Participating in the surplus
market worldwide gives us
additional information on
demand and fair market value.
Global reach
Dedicated maintenance, repair
and overhaul (MRO) centres in
Singapore, Miami, Florida and
Maidenhead, UK.
The right talent
CSS is now responsible
for some 23 MRO and
distribution facilities and
over 400 employees.
Owning the aftermarket
To generate top-line revenue
growth, CSS is building a
capability to enable it to
trade in surplus parts.
Knowledge
We designed and developed many
of the products our customers
depend on. We know them best.
The OEM tag, representing quality
and reliability, still matters.
Proactive
Dynamic, fast response service.
MEGGITT PLC REPORT AND ACCOUNTS 2016 13
Intelligence-gathering: To enhance performance data, CSS has now
put the tools in place to identify repair patterns so it can develop
product upgrades and modifications. “Meggitt has never been able
to connect the dots like this before.”
Support for life: More than 67,000 aircraft in service today carry Meggitt
parts. Our global CSS team keep them flying at the lowest possible
operating cost.
partnership
To generate top-line revenue growth, CSS is building
a capability to enable it to trade in surplus parts. It is
building partnerships with the maintenance
integrators and the airlines themselves to strengthen
access to the market and actively target component
retrofit, modification and upgrade opportunities. CSS is
improving operations by optimising its distribution and
facility footprint and by implementing the Meggitt
Production System. It is strengthening its commercial
capability to protect Meggitt’s intellectual property.
“It is a full-service organisation built on
firm foundations, designed right from
the start, with a strategy and plans
that are starting to work,” says CSS
President, Lorraine Rienecker.
Vital part: With thousands of individual
parts, in almost every respect, our work
boils down to a part number. There is no
silver bullet to aftermarket success—it’s
the attention to detail across many fronts
that counts.
V2500 High Pressure Compressor Bleed
Valve. Four of these valves are fitted per
engine, three at the HP7 stage and one
at the HP10 stage. Previously Meggitt
supplied the three HP7 valves, but we
have recently been able to displace
another manufacturer’s offering and
now supply all four.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 14
TECHNOLOGY AND PORTFOLIO
Leading edge technology
The Bombardier CSeries is optimised for the 100 to
150 seat market segment, showcasing a range of
leading edge aircraft technologies and achieving 20%
reduced fuel burn and 15% lower direct operating
costs than previous generation aircraft.
Complex composites
Meggitt’s advanced materials
technology can be found in the
ultra-lightweight components used to
improve engine performance while
reducing overall weight. The engine
spinner and fairing are manufactured
from advanced carbon reinforced
polymer composites in order to
increase stiffness and strength while
vastly reducing weight.
Brakes
Leading the industry trend towards more
electric aircraft, the braking system provided by
Meggitt is both electronically controlled and
electrically actuated. This novel brake
technology, combined with a fly-by-wire brake
control system and integrated tyre pressure
monitoring, significantly decreases the need for
inspections and ensures system health can be
continuously monitored by sending real-time
data to flight and maintenance crews.
Engines
The Pratt and Whitney PurePower®
engine introduces geared turbofan
technology to the large aircraft
segment for the first time. Meggitt
technology is critical to the operation
of these engines. Meggitt Sensing
Systems provides key sensor
technology solutions for engine
control and monitoring. Meggitt
Control Systems provides valves for
engine starting, and regulation and
provides bleed air to power aircraft
pneumatic systems as well as
systems to manage the thermal
performance of the engine’s oil, air
and fuel systems.
Advanced seals
Meggitt’s advanced seals are used
to maintain performance while
coping with the higher pressure and
temperature requirements required
to improve engine performance.
Power sub systems
Meggitt’s power sub-systems ensure
reliable and efficient operation of the
auxiliary power systems on the CSeries.
Our high-tech battery system and power
controllers ensure seamless electrical
power transitions while the aircraft is
on the ground.
MEGGITT PLC REPORT AND ACCOUNTS 2016 15
The Bombardier CSeries entered into service in 2016, with Swiss
International Air Lines, and promises good growth, given the strong
positions Meggitt technology has secured across the airframe and
its engine.
The e-Brake™ has been central to Meggitt research into advanced
manufacturing technologies, such as our Closed Loop Adaptive
Assembly Workbench (CLAAW) prototype.
aircraft
Our applied research and technology programme extends
beyond the development of next generation product
technologies, such as the e-Brake™, which is now
successfully deployed in service on the Bombardier CSeries.
We are also looking at the advanced manufacturing capabilities
needed to industrialise them.
Meggitt Modular Modifiable Manufacturing (M4) is a pioneering
programme designed to give operators the right tools, parts,
and information at the right time so they can radically improve
performance. At a site level it will enable us to reconfigure our
factories in real time, adjusting plans to satisfy customer
requirements and optimise inventory. The CLAAW workbench is
a good example. It uses laser and video projected guides, plus
enabled smart assembly fixtures, which allow operators to build
a wider variety of products, faster and more accurately.
e-Brake™: Electrically-actuated brakes
enhance braking efficiency and aircraft
dispatch reliability. They are easier to install
and remove than hydraulic brakes, which
saves time in the aircraft manufacturing
process and aircraft maintenance.
CLAAW’s fixture includes targets to guide the calibration of an overhead
laser. A shaft is encoded to enable precise rotation measurements.
A power-on brake provides stability for torque operations. Product
assemblies can be mounted and removed swiftly using a pneumatic
easy-click clamp.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 16
OPERATIONS EXCELLENCE
Managing the future
We’ve been securing positions that will provide a strong
order backlog for many years. We are confident in
delivering these programmes through our solid
foundation of operations excellence enabled by MPS.
Transparency
Through Daily Layered Accountability
(DLA) we are delivering a culture that
fosters complete transparency from
the shop floor to the general
manager’s office.
Financial benefit
During the Bronze stage,
sites deliver improvements
in inventory and productivity.
Never missing a beat
Great operational performance allows
the sales and marketing team to be on
the front foot. That enables us to bring
new business ideas to the meeting
room, rather than excuses and
workaround plans.
Across all functions
MPS enables all functions to connect
and align, allowing everyone to focus
on what really makes an impact in
delivering promises to customers.
First class business
MPS enables sites to keep
strategic objectives front and
centre of every management
conversation, constantly reviewing
progress and iterating it where
needed based on good insight.
MEGGITT PLC REPORT AND ACCOUNTS 2016 17
The Avionics team: Collaboration between functions enables
integrated teams to deliver smart solutions to our customers.
Excellence room: The Business Development Excellence Room is
not only linked to the shop floor, where electronic DLA boards are now
universal, but also to excellence rooms for programme management
and engineering.
factories After four years of focusing on making our factories better,
by improving quality and delivery, we are now seeing our
first sites move into the latter stages of the Meggitt
Production System (MPS). The first site to complete the Bronze
stage is Meggitt Avionics (part of Meggitt Sensing Systems) in
Fareham. This site shows what is possible when MPS moves from
a focus on operations improvement at the factory level, towards
delivering enhanced financial performance by improving and
integrating functions.
Visiting the site the evidence of this shift is clear, with engineering,
finance and business development all working in collaboration
with ‘Excellence Rooms’, where you can see how data flows
through and between functions. Through MPS, Meggitt Avionics
has now become what customers really like: a non-issue supplier,
where the focus of the team is about managing the future for
growth and not trying to smooth over the issues of the past.
“Transparency and the involvement of all
the members of management as a team
is what the process is all about. It works
because of the rigour that DLA imposes on
it. And it is that constant rigour—attention
to detail—that gets stuff done.”
Louis Chavez, Director of Meggitt Production Systems
Meggitt Avionics has secured landmark
wins for its new generation secondary
flight display on the new Boeing 777X and
air data attitude heading reference system
(ADAHRS) on the Airbus Helicopters
H125 and H130 platforms.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
18
Market review
Meggitt’s core civil aerospace, military and energy markets
share a common requirement for smart engineering for extreme
environments. These mission- and safety-critical components and
sub-systems must perform to exacting requirements for many years
in highly demanding operating conditions. Suppliers must be capable
of meeting rigorous certification. The environments in which many
of our products operate result in high levels of wear and tear and
demand for spares and repairs. This drives aftermarket revenues
for decades after initial product delivery.
Civil aerospace
Civil aerospace accounts for 51% of Group
revenue, with products and sub-systems
installed on almost every jet airliner,
regional aircraft and business jet in
service. The global fleet has grown
significantly in recent years, totalling over
45,000 aircraft compared with 31,000 a
decade ago. New aircraft deliveries drive
sales of original equipment. Aircraft
utilisation generates demand for spare
parts and repairs. The growth of our fleet,
therefore, is a strong indication of future
aftermarket revenue.
Original equipment
We classify civil aircraft by seat capacity:
large jets (>100 seats), regional aircraft
(<100 seats) and business jets. Large jet
deliveries in 2016 stood at a record 1,452,
5% higher than in 2015. Growth in new
deliveries of an estimated 4% per annum
to 2021 is driven by demand for large jets.
This is underpinned by the order books of
Boeing and Airbus, the two major civil
aircraft manufacturers, which extend to
between five and eight years based on
forecast production rates. Other
manufacturers investing in the large jet
market include Bombardier, Irkut and
COMAC. Deliveries of new aircraft have
grown at an average of over 6% per
annum during the last five years. This has
been influenced by high oil prices, the low
cost of debt and newer, more advanced
aircraft coming to market. Offering
greater fuel efficiency, lower maintenance
costs and quicker gate turnaround times,
Boeing’s 737MAX, Airbus’ A320neo and
the CSeries from Bombardier enable
operators to reduce operating costs.
Despite recent decreases in the oil price,
no significant reduction in new aircraft
demand is expected in the short term.
Regional aircraft deliveries of 259 in 2016
declined by 13% on the previous year, but
included an increasing proportion of
70-plus seat aircraft where we have a
particularly strong market share.
Deliveries should continue at this level
over the medium term.
Business jet deliveries totalled 646 in
2016, compared with 717 in 2015.
Inventories of used aircraft are continuing
to decline, although market drivers such
as falling commodity prices and a
relatively benign M&A market have
suppressed recent demand. Ten years
ago, the Americas represented 84% of the
global fleet. However, the fleet is
becoming increasingly global. Order
trends suggest that this will reduce to
around 60% over the next decade, driven
principally by the economic growth
outlook and potential for airspace
deregulation in developing economies
such as China.
Meggitt performance
Meggitt’s civil original equipment (OE)
revenue grew organically by 3% in 2016.
Good growth in parts for Airbus A320,
A350XWB and A380, Boeing 737 and
initial deliveries on Bombardier CSeries
offset a slow-down in demand for Boeing
777 and Airbus A330 parts, where
deliveries are decreasing ahead of the
introduction of the 777X and A330neo
respectively. 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. Strong OE
Large jet delivery forecast
Regional aircraft delivery forecast
Business jet delivery forecast
2022
2021
2020
2019
2018
2017
2016
0
1,794
1,748
1,759
1,723
1,698
1,570
1,452
1
,
0
0
0
1
,
5
0
0
1
,
5
0
0
2
,
0
0
0
2022
2021
2020
2019
2018
2017
2016
0
293
2022
278
2021
2020
2019
2018
2017
2016
260
258
251
256
259
3
0
0
1
0
0
2
0
0
720
661
706
757
710
672
646
1
0
00
2
0
0
3
0
0
4
0
0
5
0
0
6
0
0
7
0
0
8
0
0
MEGGITT PLC REPORT AND ACCOUNTS 2016 19
Available seat kilometres (ASKs) (billions)
9
8
7
6
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
Source: Meggitt management estimates
1983
1976
1979
1971
1973
1972
1978
1981
1982
1974
1977
1984
1986
1987
1988
1989
1991
1992
1993
1994
1996
1997
1998
1999
2001
2002
2003
2004
2006
2007
2008
2009
2011
2012
Retirements as a percentage of deliveries
80
70
60
50
40
30
20
10
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Meggitt management estimates
grew organically by 14%. Healthy demand
for spares and repairs on parts for the
Airbus A320 and A380, Boeing 747, 757
and 787 combined with initial spares
provisioning for the CSeries and A320neo
(which contributed 3% of the growth),
more than offset lower revenue on Airbus
A330 and DC9 aircraft. The regional
aircraft aftermarket grew organically by
3% with modest growth in utilisation
driving continued demand for our braking
systems and other spares where we are
weighted towards larger regional jets.
Our Customer Services & Support
(‘CSS’) organisation has made good
progress during 2016, having completed
its transition to manage the complete
customer value chain for MRO and spares
distribution for over 40% of Group
aftermarket revenue. In its first full year,
CSS has more than doubled the volume
of revenue from trade in used Meggitt
surplus parts; consolidated three repair
facilities into regional hubs; and made
good progress in delivering operational
improvements through the deployment
of MPS.
Commercial aircraft utilisation remains
encouraging, with ASKs continuing to
track above the long-term average.
The continued reduction in aircraft
retirements over the last twelve months
is an encouraging indicator that the
headwind we have been experiencing
from the premature parting out of
younger aircraft may subside although,
structurally, the greater levels of parting
out seen in recent years will not reverse.
Over the medium term, we are confident
about growing aftermarket revenue
above the broader civil spares market.
Rising content on new platforms and the
younger average age of the aircraft on
which our products are installed, offers
strong future growth in large and
regional jets.
Business jet aftermarket was down 8%,
with a particularly weak first half against
performance, particularly in large jets is
magnified by increasing shipset values on
new aircraft. Given robust order books
and healthy growth in forecast deliveries,
we are confident that these market share
gains will enable organic growth to exceed
market growth over the medium term.
Our largest exposure to regional aircraft
and business jets is through our wheels
and brakes business. Here the market
model dictates the provision of most
original equipment free of charge to civil
aircraft manufacturers for which no
revenue is recognised. Good success in
recent competitive tenders means we
have also expanded the number of new
business jet platforms with Meggitt
wheels and brakes.
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 large commercial aircraft fleet grew
6.2% in 2016, above the 5% long-term
average. Traffic continues to grow rapidly
in the Middle East, Asia Pacific and Africa,
offsetting slower growth of 4% in US and
European markets. Regional aircraft
utilisation decreased by 4.8% during the
year but, within this, larger (>70 seat)
aircraft grew modestly at 1.4%,
demonstrating the continued move away
from smaller aircraft. The recent recovery
in business jet utilisation in the US and
Europe slowed during 2016, with take-offs
and landings unchanged compared to 2015.
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
fluctuations arising from destocking and
restocking cycles, increased pooling of
spares between airlines and maintenance,
repair and overhaul providers and surplus
spare parts arising from the retirement of
old aircraft.
Meggitt performance
Meggitt’s organic aftermarket revenue
was up 5% for the year, with strong ASK
growth partly eroded by the use of
surplus materials and increased pooling
of parts by airlines.
Large jet aftermarket demand increased
compared to prior years when the effect
of parting out had the greatest impact on
demand for some of our high value
spares. Large jet aftermarket revenue
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 20
Market review continued
Military revenue by region Total revenue (£ millions)
697.1
USA
439.2 | 63%
Europe
181.2 | 26%
Rest of World
76.7 | 11%
an exceptionally strong performance
during the same period in 2015. The
business jet aftermarket is much more
concentrated than commercial air
transport, as the OEMs often meet the
servicing requirements of their customers.
As a result, they aggregate demand for
spares and can often make large
purchases to build up inventory in order
to meet their commitments to provide
maintenance, repair and overhaul (MRO)
for their customers, leading to lumpy
demand from one year to the next.
Nevertheless, our strong gains in market
share, particularly in wheels and brakes,
underpin future growth. This should
exceed the growth rate in business jet
utilisation over the medium term.
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 2016, 63% of our military
revenue came from the US, with 26% from
Europe and 11% from the rest of the world.
The release of funds from increasing
defence budgets in some key markets
remained under pressure in 2016, notably
in the US where the effect of the Continuing
Resolution in the latter part of the year
impacted the timing and size of orders.
The overall outlook for defence spending,
however, is more positive than it has
been for a number of years. The change
of President in the US looks likely to be
positive for military spending, with
President Trump calling for an end to
sequestration and increased funding for
manpower and equipment during his
pre-election campaign. Increasing global
security threats are driving other nations
to prioritise defence spending. For example,
the UK government has announced plans to
increase defence spending by 0.5% above
inflation for each of the next five years.
Increases in global defence budgets
suggest military revenues will grow in the
medium term. In 2017 though we expect
the flow of funds to again lag behind the
top-line budget growth. 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 grew at 1% on
an organic basis in 2016, with the expected
challenging first half offset by good growth
in the second. The first half weakness was,
in part, relative to strong growth of 6% in
the first half of 2015 when we benefited
from the catch-up on prior year delays and
a large order for T-50 braking systems
from the Korean Air Force. 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 continued to provide resilience
in an uncertain funding environment, with
increased demand across our portfolio
driving the stronger second half.
Growth varied across the business with
particularly strong organic growth in MPC,
driven by strong demand for V-22, F-18 and
Apache. In contrast, MSS suffered from
declines in demand for some legacy
avionics repairs and OE power systems for
NH90 and V22 platforms; and revenues at
MEG were flat, driven by a series of delays
for defence systems across a range of
helicopter and land vehicle programmes.
With military markets returning to growth,
we are well positioned to capitalise from
the expansion of the fleet of programmes
on which we have good content, such as
the F-35 and Typhoon, retrofit work arising
from the repatriation of equipment from
the conflict in Afghanistan and the
reinvestment in military training systems
by a number of armed forces. Accordingly,
we expect to outperform the market in the
medium term. The future outlook is also
supported by good growth in military orders
during 2016 (book-to-bill of 1.06).
Energy
Energy accounted for 7% of Group revenue
in 2016. We target power generation and oil
and gas markets with condition-monitoring,
control valves and printed circuit heat
exchanger technology.
Investment in capital equipment in the
oil and gas sector has remained under
significant pressure during 2016.
Over the long term, the energy sector
remains attractive with increasing global
demand for power driven by population
growth and rising levels of industrialisation
in emerging economies. This demand will
be satisfied in part through increased
production of industrial gas turbines that
require Meggitt valves, actuators and
condition-monitoring systems.
We are well positioned when there is a
return to investment in infrastructure,
including deep-water reserve exploration
and extraction. This capital investment
would drive strong opportunities for the
advanced high-performance, compact
heat exchangers produced by our Heatric
business. Growth potential is further
enhanced by development of innovative
new power generation technologies that
depend on heat transfer engineering which
enable turbines to operate at extreme
temperatures and pressures, not possible
with traditional heat exchangers.
Meggitt performance
Meggitt’s energy revenue declined 17% on
an organic basis in 2016. Revenue at
Heatric, which accounts for around 25% of
our overall energy revenue, declined by
36% as the oil and gas investment projects
that drive demand for our printed circuit
heat exchangers continue to face
cancellations and deferrals. Our broader
power generation revenue declined by 7%
driven by continued reduction in demand for
gas turbines.
MEGGITT PLC REPORT AND ACCOUNTS 2016
21
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.
Original equipment
Aftermarket
Civil
Military
Energy
Other
Meggitt Aircraft
Braking Systems
6%
70%
24%
Meggitt Control
Systems
Meggitt Polymers
& Composites
Meggitt Sensing
Systems
Meggitt Equipment
Group
Group
26%
36%
26%
8%
4%
31%
10%
53%
6%
33%
16%
26%
12%
13%
2%
2%
66%
14%
16%
22%
29%
35%
7%
7%
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 22
The Boeing 737MAX aircraft will enter into
service in 2017 and will operate with nearly 60%
more Meggitt content than its predecessor the
737NG. Strong positions across the airframe
and engine, including in valves, sensors, safety
systems, seals and composites, will drive good
growth for decades.
MEGGITT PLC REPORT AND ACCOUNTS 2016 23
Meggitt divisions
Meggitt Aircraft Braking Systems (MABS)
A leading supplier of aircraft wheels,
brakes and brake control systems.
Capabilities
• Wheels and brakes
• Control systems—brake, nose wheel steering
and landing gear
• Monitoring systems
Operational performance
MABS provides wheels, brakes and brake control systems for
around 34,000 in-service aircraft. Underscored by strong gains in
recent years, notably on super mid-size and long-range business
jets, it continues to develop innovative technology for new
programmes enabling the business to expand market share.
MABS targets sole-source programmes and is particularly strong
in regional aircraft, large business jets and military aircraft. The
division represents 20% of Group revenue and generated 88% of its
revenue from the aftermarket in 2016. MABS’ civil revenue grew by
5% on an organic basis, with 7% growth in civil AM driven by strong
demand for Boeing 757, DC10, MD90, Embraer E-170/175 and
Bombardier CRJ aircraft together with initial provisioning for
the CSeries.
In contrast, the business jet aftermarket declined by 8% with a
particularly weak first half against very strong growth in 2015.
MABS’ military revenue declined organically by 2%. Strong
aftermarket growth driven by healthy demand for Typhoon brakes
was offset by weaker OE revenues where declines across a broad
spectrum of fighter and trainer aircraft was partly offset by
growth on F-35.
Operating margins declined from 37.3% to 36.1% in 2016, with
unfavourable mix driven principally by lower demand for business
jet spares, where margins are higher, and the first half production
inefficiencies. Margins in the second half increased in line with
recovery in business jet aftermarket, where revenues increased
by 2%.
Markets
Civil aerospace
Fixed wing military aircraft
Rotary wing military aircraft
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
Revenue by end market
406.1
20
146.6
406.1
Civil OE
6%
Civil AM
70%
Military
24%
Energy
0%
Other
0%
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 24
Meggitt divisions continued
Meggitt Control Systems (MCS)
A leading supplier of pneumatic, fluid control,
thermal management and electro-mechanical
equipment and sub-systems, and complete
fire protection solutions.
Operational performance
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 54% of
its revenue from the aftermarket.
Revenue was up by 6% on an organic basis. Civil aerospace grew
by 7% overall, with good growth in OE driven by initial deliveries
on A320neo and continued demand for A350 and A320. Aftermarket
growth was also strong, with good demand for Boeing 787, 747
and 777, together with Airbus A320, A330 and A380, further
supplemented by initial provisioning on the A320neo.
Markets
Capabilities
• Control valves and sub-systems
• Aircraft fire protection and control systems
• Thermal management
• Electro-mechanical controls
• Environmental control
• Fuel handling
Military revenue grew by 7% driven by strong aftermarket growth
in the second half. MCS’ energy revenues declined by 3% during
the year with a challenging first half partly offset by a recovery
in the valves business during the second half. Operating margins
increased from 24.4% to 24.7%.
Civil aerospace
Military aircraft
Military ground vehicles
Energy and industrial
Marine
Ground fuelling
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
Revenue by end market
475.9
24
117.6
475.9
Civil OE
26%
Civil AM
36%
Military
26%
Energy
8%
Other
4%
MEGGITT PLC REPORT AND ACCOUNTS 2016 25
Meggitt Polymers & Composites (MPC)
A leading specialist in fuel containment and
systems, sealing solutions and advanced
composites.
Capabilities
• Complex, high-temperature composite structures
and sub-assemblies
• Flexible fuel tanks for military and civil aircraft
and military ground vehicles
• Smart electro-thermal ice protection
• Airframe, engine and oil and gas sealing solutions
Operational performance
MPC supplies flexible fuel tanks and systems, ice protection
equipment and advanced composite assemblies for fixed and rotary
wing aircraft and complex seals packages for civil and military
customers. These products are linked by materials technology and
manufacturing processes. MPC represents 17% of Group revenue.
It generated 34% of revenue from the aftermarket.
MPC revenue increased by 3% on an organic basis. Military
revenues grew by 7%, particularly fuel tanks, offsetting weakness
in the civil aerospace business. Reported revenue increased by
86% including the full year benefit of the composites acquisitions
and foreign exchange movements. Operating margins increased
from 8.7% to 12.0% due to accretive margins from the acquired
composites businesses and the recovery in our fuel
systems business.
Markets
Civil aerospace
Military aircraft
Military ground vehicles
Military systems and UAVs
Automotive and industrial
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
Revenue by end market
329.7
17
39.5
329.7
Civil OE
31%
Civil AM
10%
Military
53%
Energy
0%
Other
6%
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 26
Meggitt divisions continued
Meggitt Sensing Systems (MSS)
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.
Capabilities
• 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
Operational performance
MSS designs and manufactures highly engineered sensors that
measure virtually all physical parameters including vibration,
temperature, pressure, fluid level and flow. These are designed to
operate effectively in the extreme conditions of aircraft or ground-
based turbine engines. Sensors are combined into broader
electronics packages, providing condition data to operators and
maintainers, contributing to improved safety and up-time, and
lower operating costs.
Meggitt’s sensors are in demand from other specialist markets
requiring products with similar characteristics. These include test,
measurement and medical. The division also includes capabilities in
power storage, conversion and distribution systems and avionics.
MSS represents 27% of Group revenue and generated 25% of its
revenue from the aftermarket.
MSS revenue declined 1% on an organic basis, with growth of 4% in
civil aerospace driven by modest growth in OE relating to A320 and
A350 and 8% growth in the aftermarket. Military revenue declined
by 4% on an organic basis, driven by decreasing demand for Typhoon
and a broad range of helicopters. Within energy and other markets
(including test, measurement and medical), MSS revenues
decreased by 6%.
Operating margins decreased from 15.2% to 13.8% reflecting
unfavourable mix.
Markets
Civil aerospace
Military aircraft, ships, ground vehicles and missiles
Energy and industrial
Test and measurement
Medical
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
Revenue by end market
530.7
27
73.0
530.7
Civil OE
33%
Civil AM
16%
Military
26%
Energy
12%
Other
13%
MEGGITT PLC REPORT AND ACCOUNTS 2016 27
Capabilities
• Combat support (ammunition handling, military electronics
cooling and countermeasure launch and recovery systems)
• Live-fire and virtual training systems
• Heat transfer equipment for offshore oil and gas
• Linear motion control
• Automotive and industrial control electronics
sub-systems, offset growth in target systems to deliver flat
organic military revenue.
Meggitt Target Systems generated £29.8m of revenue during the
year, prior to its disposal to QinetiQ Group plc in December 2016,
realising a profit on sale of £40.7m.
Operating margins decreased from 3.7% to 1.2% driven principally
by the weakness in Heatric, which made a loss in the year.
Meggitt Equipment Group (MEG)
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.
Operational performance
MEG mostly comprises our non-engine actuation capability,
dedicated military businesses and Heatric, a provider of
diffusion-bonded heat exchangers for energy markets. The
division represents 12% of Group revenue and generates 82%
of its revenue from OE.
Revenue in MEG declined by 7% on an organic basis. The principal
driver was a 36% decline in Heatric resulting from a continued lack
of investment in large capital projects in the oil and gas sector.
Programme delays in the training businesses and reduced demand
for defence systems in helicopter, ground vehicle and scoring
Markets
Civil aerospace
Fixed and rotary wing military aircraft
Defence and security
Energy
Automotive and industrial
Revenue (£ millions)
% of Group
revenue
Underlying
operating profit
(£ millions)
Revenue by end market
250.0
12
3.0
250.0
Civil OE
2%
Civil AM
2%
Military
66%
Energy
14%
Other
16%
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 28
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.
During 2016, we continued to refine our approach. The Board
approved an updated Group risk appetite statement with
associated risk tolerances to ensure that identified risks
are managed within acceptable limits. Where appropriate,
insurance is used to manage risks and our risk management
procedures are shared with our insurers when assessing any
potential exposures.
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
2016, 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.
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 Leadership Team as a
whole regularly reviews the Group’s principal risks, while individual members own specific
risks.
Principal risks and uncertainties
In accordance with the Group’s risk
management procedures, we have evaluated
our risk disclosures and focused this report
on the principal risks. Financial risks
associated with a multinational business,
including foreign exchange, are disclosed in
the Chief Financial Officer’s review on pages
38 to 43.
The risks posed by the UK Brexit vote and the
US presidential election have been considered
in the risk assessment process and, where
appropriate, their impacts reflected in the
relevant existing risks rather than being
presented as standalone new risks.
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 a material
adverse impact.
Our risk management processes require
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 strategy, project
and programme management, bid approvals
and other operational activities. Risk
tolerance levels are flowed down to the
divisions and functions. The likely timeframe
within which the impact of risks might be
felt (‘risk velocity’) and how we prioritise
risks is considered as part of our risk
management strategy and feeds into our
assessment of long term viability.
After they have been identified, risks are
reviewed at facility level and aggregated for
review at divisional and functional levels on
a consistent basis before being submitted
for the Group’s regular review process.
The resultant Group Risk Register is then
subject to a detailed review and discussion
by the Group Leadership Team which
includes discussion of risks which may not
have been identified through the normal
channels. The Board assesses the outputs
from this process and takes comfort from
the ‘3 lines of defence’ risk assurance
model. The first line represents operational
management who own and manage risk on a
day-to-day basis, utilising effective internal
controls. Group functions and divisions
monitor and oversee these activities,
representing governance and compliance at
the second line. The third line is the
independent assurance over these activities
provided by internal and external audits.
Meggitt’s corporate strategy is designed to
optimise our business model and take risk,
with the required controls, on an informed
basis. See pages 8 to 11 for a full description
of our business model and strategy. To
enable value to be created for our
shareholders, we set varying risk tolerances
and associated criteria. We accept and
manage risk 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
risks 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 taxation, pension
funding, failure to provide adequate
liquidity to meet our obligations and
managing currency, interest rate and
credit risks.
MEGGITT PLC REPORT AND ACCOUNTS 2016 29
Change in risk in year
KPIs
Risk velocity
No change
← →
Increase in risk ↑
Decrease in risk ↓
• Financial performance
(organic revenue growth, underlying operating profit, return
on trading assets, underlying EPS growth and free cash flow)
• R&D investment
• Accident/incident rate
• DPPM (defective parts per million)
• OTD (on-time delivery)
High
Impact within 6 months of risk
occurring
Medium
Impact between 6 and 36 months
of risk occurring
Low
Impact after more than 3 years
of risk occurring
Risk
Description and impact
How we manage it
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
and accelerated pace of new aircraft deliveries
leading to the earlier retirement of older aircraft.
Impact: decreased revenue and profit
• Alignment of Group, divisional and functional strategy processes
• Establishment of dedicated full-service 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
• Strengthened commercial function
Significant variation in demand for products
should civil aerospace, military 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
Strategic
Business model
← →
KPIs:
– Financial
performance
– R&D investment
Velocity: Medium
Product demand
← →
KPIs:
– Financial
performance
Velocity: Medium
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
• Partnerships with government, academia and other companies to
leverage our R&D budgets
← →
KPIs:
– Financial
performance
– R&D investment
Velocity: Low
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 pages 8 to 11 for a full description of our business model and strategy.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 30
Risk management continued
Risk
Description and impact
How we manage it
Operational
Quality escape/
equipment failure
Defective product leading to in-service failure,
accidents, the grounding of aircraft or prolonged
production shut-downs for the Group and its
customers.
Impact: decreased revenue and profit, damage to
operational performance and reputation
• Implementation of well-developed system safety analysis,
verification and validation policy and processes, combined with
quality and customer audits and industry certifications
• Implementing MPS across the Group
• Implementation of enhanced supplier quality assurance process
← →
KPIs:
– Financial
performance
– DPPM
Velocity: High
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 and damage to reputation
diligence methodology
• Delivery of applied research and technology objectives in line with
Group strategy
• Incremental improvement in performance following MPS
implementation and reorganisation of programme management
to increase capability and focus on delivery and governance
• Active participation in customer rate-readiness processes
A catastrophic event such as an earthquake (The
Group has a significant operational presence in
Southern California) or fire could lead to
infrastructure and property damage which
prevents the Group from fulfilling its contractual
obligations.
Impact: decreased revenue and profit, damage to
operational performance and reputation
• Group-wide business continuity and crisis management plans,
subject to regular testing
• Comprehensive insurance programme, renewed annually and
subject to property risk assessment visits
Programme management
risk has reduced as a
result of enhanced
procedures and progress
on existing projects
KPIs:
– Financial
performance
– R&D investment
Velocity: Medium
Business interruption
← →
Whilst not a new risk for
Meggitt, it has been
separately disclosed for
2016, rather than being
included within other
risks
KPIs:
– Financial
performance
Velocity: High
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 pages 8 to 11 for a full description of our business model and strategy.
MEGGITT PLC REPORT AND ACCOUNTS 2016 31
Risk
Description and impact
How we manage it
Customer
satisfaction
Failure to meet customers’ cost, quality and
delivery standards or qualify as preferred
suppliers.
• Creation of dedicated aftermarket organisation
• Implementation of supplier excellence framework following
risk analysis and on-site assessments
Impact: failure to win future programmes,
decreased revenue and profit
• 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
• Regular monitoring of customer scorecards and ensuring
responsiveness to issues via Voice of the Customer process
Failure to integrate effectively the composites
acquisitions and realise expected financial
returns in line with business case.
Impact: decreased revenue and profit
• Internal pre-acquisition due diligence supplemented by external
experts
• 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
• PMO established to manage integration and delivery of financial
model, including cost synergies
Prolonged lack of availability of critical systems
such as SAP due to badly-executed
implementation or change of 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 profit, 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
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
operational performance and reputation
• Maintenance of buffer inventory for critical and sole-source
suppliers
• Implementation of measures to mitigate counterfeit and fraudulent
parts at high-risk facilities
← →
KPIs:
– Financial
performance
– DPPM
– OTD
Velocity: Medium
Acquisition
integration
← →
KPIs:
– Financial
performance
Velocity: Medium
IT/systems failure
← →
KPIs:
– Financial
performance
Velocity: High
Supply chain
← →
KPIs:
– Financial
performance
– OTD
Velocity: Medium
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 32
Risk management continued
Risk
Description and impact
How we manage it
Corporate
Legal & regulatory
Significant breach of increasingly complex trade
compliance, bribery & corruption, ethics,
environmental and health & safety laws.
• Continuing investment in compliance programmes
• Implementation of Board-approved trade compliance, ethics and
anti-corruption policies
Impact: damage to reputation, loss of supplier
accreditations, suspension of activity, fines from
civil and criminal proceedings
• 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 third
party audits; and comprehensive ethics programme including
training, anti-corruption policy, external audits and Ethics line
• MPS implementation to enhance safety measures validated by
third party audits
Tax legislation is complex and compliance can be
subject to interpretation. Legislation, including
response to the OECD BEPS programme and the
new US Presidential administration, is subject to
change which could negate the effectiveness of
the Group’s current, well-established, tax-
efficient international structures, including those
used to finance acquisitions.
Impact: higher effective tax rates resulting in
decreased profit
• 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
• Use of multiple expert third party tax advisors
↑
Legal & regulatory risk
has increased with
complex legislation such
as the US government’s
DFARS data security
requirements
KPIs:
– Financial
performance
– Accident/
incident rate
Velocity: High
Financial
Taxation
↑
Taxation uncertainty has
increased following
political regime changes
in key markets
KPIs:
– Financial
performance
Velocity: Medium
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 pages 8 to 11 for a full description of our business model and strategy.
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 its 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 Guidance
and Transparency Rules (DTR):
• 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 lifecycle
management reviews, IT security
framework and risk management. The
risk management process, which enables
MEGGITT PLC REPORT AND ACCOUNTS 2016 33
the Group to identify, evaluate and
manage the Group’s principal risks was in
place for 2016 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);
• Semi-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 2016 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 2017 budget;
• Written reports to the Ethics and
Trade Compliance Committee on the
effectiveness and outcomes 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 five-year strategic plan
covers an initial five-year period. Modelling
by the Group for periods of over five years
involves extrapolating the trend in years
three to five and thus inevitably is 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 the longer term nature
of our platform cycles is explained
elsewhere in the Annual Report; 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:
• Discussed and agreed key assumptions in
the stress testing model used by
management;
• 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;
• Assessed the outcome of the stress-
testing, carried out using the Group’s
five-year strategic plan as the base case.
The five-year strategic plan considers the
Group’s cash flows, dividend cover, Net
Debt:EBITDA covenant ratio and other key
financial ratios over the period. These
metrics are assessed against the Group
Risk Register to determine the most
impactful ones to stress test against, and
this is carried out to evaluate the potential
impact of the Group’s principal risks
actually occurring.
• Considered the Group Risk Register 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”.
• 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
• Specifically assessed the impact of the
UK’s decision to leave the EU which is not
expected to be significant, for two key
reasons (i) from a trade perspective the
World Trade Organisation treaty for trade
in civil aviation parts provides for tariff
free trade (military is generally covered
under separate trade arrangements), and
(ii) the Group has a significant amount of
non-GBP denominated revenue, and
non-GBP denominated debt, meaning it is
naturally hedged against material,
persistent foreign exchange movements.
• Specifically assessed the exposure to
cross border trade, in relation to potential
changes to import and export tariffs.
Based on the results of its review and as set
out above, 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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 34
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 that 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.
There have been no changes to the KPIs used in the year or to
how they are measured. In 2016, given the proximity of the date
of disposal of Meggitt Target Systems to the balance sheet date,
its results are included within the organic figures calculated.
Strategic objectives
Technology
Operations excellence
Customer focus
Organic revenue growth
400
%
6
5
4
3
2
1
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
39 for a reconciliation of organic revenue to revenue.
Target
Growth of 2% to 4% in 2017.
Result
Achieved 0.9% (2015: 0.2%) against a target of low single digit. Average achieved over
last five years: 1.6%. See page 38 for details.
2012
2013
2014
2015
2016
Directors’ incentive plans
Organic revenue growth is a performance measure for both the 2016 and 2017 Long
Term Incentive Plan (LTIP). See pages 80 and 84 to 85 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 119.
450
400400
350
300
250
£’m
200
150
100
50
0
2012
2013
2014
2015
2016
Target
We do not publish profit targets.
Result
Achieved £379.7m (2015: £325.5m). See page 39 for details.
Directors’ incentive plans
Underlying operating profit is a performance measure for both the 2016 and 2017 Short
Term Incentive Plan (STIP). For the purpose of these plans, actual and target
underlying operating profit figures are measured at constant currency. See pages 78
and 83 for details.
MEGGITT PLC REPORT AND ACCOUNTS 2016 35
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 119. Underlying
operating profit after tax applies the Group’s underlying tax rate for the year to
underlying operating profit. (For 2016, the underlying tax rate was 23.5%. For 2015, it
was 20.0%).
Trading assets are defined as net assets adjusted to exclude goodwill, other intangible
assets arising on the acquisition of businesses, investments, net debt, retirement
benefit obligations, derivative financial instruments and deferred tax. Average trading
assets are calculated as the average of trading assets at the start and end of the year.
Return on trading assets measures performance by linking operating performance to
the amount of operating capital employed.
Target
To achieve an average return on trading assets of 18.7% over the three-year period
starting with 2017. The target recognises the need to continue to invest in trading
assets during this elevated period in the aerospace cycle.
Result
2016: 20.8% (2015: 21.7%). See page 40 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 both the 2016 and 2017 LTIP.
For the purpose of these plans, underlying operating profit after tax and trading assets
are measured at constant currency. See pages 80 and 84 to 85 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 123.
Target
We do not publish profit targets. However, the proposed 2017 LTIP includes EPS targets
equivalent to growth ranging from 4.0% to 9.0% per annum over the next three years.
Result
2016: 10.1% (2015: -2.5%). CAGR achieved over last five years: 1.6%. See page 40
for details.
Return on trading assets
50
400
40
30
20
10
0
%
2012
2013
2014
2015
2016
Underlying EPS growth
400
15
10
5
0
-5
-10
-15
%
2014
2015
2012
2013
2016
Directors’ incentive plans
Underlying EPS is a performance measure for both the 2016 and 2017 LTIP. See pages
80 and 84 to 85 for details.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 36
Key performance indicators continued
Free cash flow
400
200
150
£’m
100
50
0
2012
2013
2014
2015
2016
R&D investment
40010
% of
revenue
8
6
4
2
0
2012
2013
2014
2015
2016
Accident/incident rate
400
400
300
Rate
200
100
0
2012
2013
2014
2015
2016
Definition and basis of calculation
Cash generated excluding amounts in respect of the acquisition and disposal of
businesses and payments to shareholders. Free cash flow is presented in note 41
to the Group consolidated financial statements on page 146.
Target
We do not publish free cash flow targets.
Result
2016: £131.1m (2015: £199.0m). See page 41 for details.
Directors’ incentive plans
Free cash flow is a performance measure for both the 2016 and 2017 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 78 and 83 for details.
Definition and basis of calculation
Investment in research and development (R&D) expressed as a percentage of revenue.
Investment is measured as total expenditure in the year and is not adjusted for amounts
capitalised, amortised, impaired or incurred on contracts funded by customers.
Target
Investment of 6 to 8% per annum. This range reflects typical investment fluctuation
within the industry cycle.
Result
2016: 7.9% (2015: 9.6%). Average achieved over last five years: 8.6%. See page 40
for details.
Directors’ incentive plans
R&D investment is not a specific measure used in directors’ incentive plans. However,
the 2016 and 2017 LTIP both include measures focused on the effective delivery of R&D
programmes. See pages 80 and 84 to 85 for details.
Definition and basis of calculation
The number of injuries reportable under local laws and regulations multiplied by
100,000 and then divided by the average employee headcount during the year.
Target
Year-on-year improvement with an ultimate goal of nil.
Result
2016: 200 (2015: 369). See page 47 for details.
Directors’ incentive plans
Health and safety performance is not a specific measure used in directors’ incentive
plans. However, it is integrated into the Meggitt Production System (MPS) and both the
2016 and 2017 LTIP include measures focused on MPS execution. MPS execution was
also included in the personal performance conditions for the Chief Executive in the
2016 STIP. See pages 78, 80 and 84 to 85 for details.
MEGGITT PLC REPORT AND ACCOUNTS 2016 37
Definition and basis of calculation
Definition and basis of calculation
DPPM for the year expressed as a percentage improvement from that achieved at 31
DPPM for the year expressed as a percentage improvement from that achieved at 31
December 2011, the date at which the Meggitt Production System (MPS) introduced this
December 2011, the date at which the Meggitt Production System (MPS) introduced this
consistent method of measurement. DPPM is defined as the number of defective parts
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
returned by customers in the year multiplied by one million and then divided by the
total number of parts delivered.
total number of parts delivered.
Figures include the results of disposed businesses up to the date of sale and of
Figures include the results of disposed businesses up to the date of sale and of
acquired businesses from the later of the start of the financial year following
acquired businesses from the later of the start of the financial year following
acquisition and the date the information is first available.
acquisition and the date the information is first available.
This KPI monitors the success of MPS.
This KPI monitors the success of MPS.
Target
Target
To achieve the levels of performance excellence (e.g. sometimes referred to as
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
‘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
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
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
number of customers we serve, we also track performance as reported by our
customers through their own supplier scorecards.
customers through their own supplier scorecards.
Result
Result
Cumulative improvement since 31 December 2011: 87% (2015: 87%). See page 6
Cumulative improvement since 31 December 2011: 87% (2015: 87%). See page 6
for details.
for details.
Directors’ incentive plans
Directors’ incentive plans
DPPM is a performance measure for the 2016 LTIP. See page 80 for details. Quality, as
DPPM is a performance measure for the 2016 LTIP. See page 80 for details. Quality, as
measured by DPMM, is now embedded in the Group’s MPS criteria for moving through
measured by DPMM, is now embedded in the Group’s MPS criteria for moving through
the six-phase programme. Whilst MPS will therefore continue to focus on further
the six-phase programme. Whilst MPS will therefore continue to focus on further
improvements in quality performance, the strategic measures considered by the Group
improvements in quality performance, the strategic measures considered by the Group
to be the next key outputs from MPS are gross margin improvement and reductions in
to be the next key outputs from MPS are gross margin improvement and reductions in
inventory levels. Such measures are being introduced for the 2017 LTIP and will be
inventory levels. Such measures are being introduced for the 2017 LTIP and will be
reported as new KPI’s from 2017. See pages 84 to 85 for details.
reported as new KPI’s from 2017. See pages 84 to 85 for details.
Definition and basis of calculation
Definition and basis of calculation
Average on-time delivery achieved in the year expressed as a percentage improvement
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
from that achieved at 31 December 2011, the date at which the Meggitt Production
System (MPS) introduced this consistent method of measurement. It is calculated as
System (MPS) 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
the 12-month average of the number of parts delivered on delivery dates agreed with
customers, divided by the total number of parts delivered.
customers, divided by the total number of parts delivered.
Figures include the results of disposed businesses up to the date of sale and of
Figures include the results of disposed businesses up to the date of sale and of
acquired businesses from the later of the start of the financial year following
acquired businesses from the later of the start of the financial year following
acquisition and the date the information is first available.
acquisition and the date the information is first available.
This KPI monitors the success of MPS.
This KPI monitors the success of MPS.
Target
Target
To achieve the levels of performance excellence (e.g. sometimes referred to as
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
‘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
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
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
number of customers we serve, we also track performance as reported by our
customers through their own supplier scorecards.
customers through their own supplier scorecards.
Reduction in defective
Reduction in defective
parts per million (DPPM)
parts per million (DPPM)
2012
2013
2014
2015
2016
%
0
-20
-40
-60
-80
-100
On-time delivery
On-time delivery
improvement
improvement
40015
12
%
9
6
3
0
2012
2013
2014
2015
2016
Result
Result
Cumulative improvement since 31 December 2011: 15% (2015: 14%). See page 6
Cumulative improvement since 31 December 2011: 15% (2015: 14%). See page 6
for details.
for details.
Directors’ incentive plans
Directors’ incentive plans
On-time delivery is a performance measure for the 2016 LTIP. See page 80 for details.
On-time delivery is a performance measure for the 2016 LTIP. See page 80 for details.
It is now embedded in the Group’s MPS criteria for moving through the six-phase
It is now embedded in the Group’s MPS criteria for moving through the six-phase
programme. Whilst MPS will therefore continue to focus on further improvements in
programme. Whilst MPS will therefore continue to focus on further improvements in
on-time delivery, the strategic measures considered by the Group to be the next key
on-time delivery, the strategic measures considered by the Group to be the next key
outputs from MPS are gross margin improvement and reductions in inventory levels.
outputs from MPS are gross margin improvement and reductions in inventory levels.
Such measures are being introduced for the 2017 LTIP and will be reported as new
Such measures are being introduced for the 2017 LTIP and will be reported as new
KPI’s from 2017. See pages 84 to 85 for details.
KPI’s from 2017. See pages 84 to 85 for details.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 38
Chief Financial Officer’s review
Financial highlights (Table 1)
Revenue
1,992.4
1,647.2
+21
+1
2016
£’m
2015
£’m
Reported
growth %
Organic4
growth %
Underlying1:
EBITDA2
Operating profit
Profit before tax
487.8
379.7
352.1
414.5
325.5
310.3
Earnings per share (EPS)
34.8p
31.6p
Statutory:
Operating profit
Profit before tax
EPS
233.7
195.5
236.6
210.2
22.1p
23.2p
Free cash flow3
Net debt5
131.1
199.0
1,179.1
1,051.2
+18
+17
+13
+10
-1
-7
-5
-34
+12
-1
-3
-3
-35
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 41 to
the Group financial statements.
4 Organic numbers exclude the impact of acquisitions and foreign exchange. The
results of Meggitt Target Systems, which was disposed of by the Group on 21
December 2016, have been included in organic performance for the year given
the proximity of the disposal to the balance sheet date.
5 Restated following the finalisation of fair values and alignment to the
Group’s accounting policies of businesses acquired in late 2015. See note
44 to the Group financial statements.
Overall performance
Reported revenue grew strongly during the
year, with the benefit of foreign currency and
acquisitions contributing to 21% growth overall.
On an organic basis, revenue grew 1% with good
growth in our civil aerospace markets offset by
continued challenges in our energy markets,
particularly oil and gas. Underlying profit before
tax increased by 13%, with a 10% increase in
underlying EPS reflecting the full year impact of
debt from the composites acquisitions completed
in late 2015 and a higher tax rate.
Revenue
Reported revenue increased by 21% to
£1,992.4m in 2016 (2015: £1,647.2m).
Table 2 details the revenue performance
by end market.
As expected, revenue benefited from
foreign exchange and the full-year effect
of acquisitions completed in late 2015.
Currency movements, allowing for the
fall in sterling against the Group’s major
operating currencies, which accelerated
post the UK’s EU referendum, contributed
£203.7m to reported revenue.
Acquisitions contributed a further
£134.4m. Organic revenue growth of 4%
in our civil aerospace business and 1%
growth in our military end-markets was
offset by a continued decline in energy.
Civil OE revenue grew 3% on an organic
basis. Large jet OE, the most significant
driver of our OE revenue, grew 10% driven
principally by growth in Airbus A320,
A350XWB and A380, Boeing 737 and
initial deliveries on the Bombardier
CSeries. Strong growth in large jet OE
revenue was offset by business jet and
general aviation which decreased by
11% during the year. Regional aircraft
OE revenue was flat.
Civil aftermarket revenue grew
organically by 5% with very strong large
jet growth of 14%, driven in part by good
demand on older aircraft and initial
provisioning to support entry into service
of the A320neo and CSeries, offset by
business jets which were down 8% for the
year. Business jet aftermarket, which is
weighted towards wheel and brake
products, recovered well in the second
half of the year (up 6%) after a weak first
half (down 21% against a very strong first
half in 2015).
Military revenue was up 1% on an organic
basis, with the expected challenging first
half of the year offset by 7% growth in the
second half. The second half recovery
was particularly strong, with increase in
demand in Meggitt Aircraft Braking
Systems (MABS) for Typhoon and F-35,
and in Meggitt Control Systems (MCS)
driven by strong demand within military
transport aircraft.
Energy revenue declined by 17% in 2016,
on an organic basis, including a 36%
decline at Heatric, our printed circuit heat
exchanger business, reflecting continued
challenges in the global oil and gas market.
Organic revenues in power generation
segments also declined during the year
(down 7%), but were flat in the second
half, driven by increased demand for gas
turbines which contributed to growth of
12% at MCS. We continue to expect
headwinds in the energy businesses in the
short term, largely driven by the continued
absence of capital expenditure on
significant new gas projects, on which
Heatric’s technology is deployed. We have
taken further 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
an organic revenue decline of 2%, with
growth in automotive products offset by
a decline in medical and other industrial
end-markets.
MEGGITT PLC REPORT AND ACCOUNTS 2016
39
Revenue growth (Table 2)
Civil OE
Civil AM
Total civil aerospace
Military
Energy
Other
Total
2016
Revenue
£’m
432.0
577.3
1,009.3
697.1
137.9
148.1
1,992.4
Growth
%
Organic1,2
growth %
+33
+20
+25
+22
-8
+25
+21
+3
+5
+4
+1
-17
-2
+1
Organic growth (Table 3)
Revenue
2016
£’m
2015
£’m
Growth
%
1,992.4
1,647.2
+21.0
Reported
(134.4)
(203.7)
(7.2)
–
Impact of M&A1
Impact of currency2
1,654.3
1,640.0
+0.9
Organic
Underlying profit before tax
2016
£’m
352.1
(9.3)
(43.3)
299.5
Growth
%
+13.5
2015
£’m
310.3
(0.4)
–
309.9
-3.4
1 Excludes the results of businesses acquired during the current and prior year. The results of Meggitt
Target Systems, which was disposed of by the Group on 21 December 2016, have been included in organic
performance for the year given the proximity of the disposal to the balance sheet date.
2 Restates the current year using 2015 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 £379.7m (2015:
£325.5m), representing a margin of 19.1%
(2015: 19.8%). The margin decline reflects
unfavourable mix in energy and civil
aerospace, the expected dilution from
acquisitions, and increased depreciation
and amortisation (D&A) charges. The
divisional results are shown in table 4
and discussed further on pages 23 to 27.
Underlying net finance costs increased
to £27.6m (2015: £15.2m) reflecting a full
year interest charge on the higher debt
from the financing of the composites
acquisitions, which was refinanced in
July 2016 at higher, fixed interest rates,
and a stronger US dollar.
Underlying profit before tax was £352.1m
(2015: £310.3m).
On a statutory basis, profit before tax was
£195.5m (2015: £210.2m). The reduction (vs.
underlying) in profit reflects the £66.4m
negative (2015: £4.8m negative) non-cash
marking to market of financial instruments,
principally currency hedges against our
future transaction exposures, and the
full year amortisation of intangible
assets arising on the acquisitions of
the advanced composites businesses,
partially offset by a £40.7m gain on the
disposal of Meggitt Target Systems.
Taxation
Meggitt’s underlying tax rate increased to
23.5% (2015: 20.0%), reflecting the growth
in the proportion of profit generated
Divisional results (Table 4)
Revenue
2016
£’m
406.1
475.9
329.7
530.7
250.0
2015
£’m
353.1
397.9
177.4
474.8
244.0
1,992.4
1,647.2
Growth
%
+15.0
+19.6
+85.9
+11.8
+2.5
+21.0
Organic
growth1
%
+2.7
+5.6
+2.5
-1.1
-6.8
+0.9
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
in the US following the two composites
acquisitions completed in 2015, the
strengthening of the US dollar and the
absence of any significant one-off items
this year. Our guidance for 2017 remains
unchanged at 24% but, as highlighted
last year and below, the international
tax environment is currently very
unclear following the publication of the
recommendations from the Base Erosion
and Profit Shifting project (the “BEPS
project”) together with the statements
about fundamental change to the US tax
system from the new US administration.
Cash tax paid as a percentage of underlying
profit before tax was 8% (2015: 5%). The
rate of cash tax is typically lower than our
underlying tax rate due to tax deductible
items which do not affect underlying profit
including amortisation of intangible assets
arising on the acquisition of businesses
and tax relief on retirement benefit
reduction payments.
Our statutory tax rate, which includes
items reported below underlying profit
before tax, was 12.4% (2015: 13.4%). Cash
tax paid as a percentage of statutory profit
before tax was 14% (2015: 7%).
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 & 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 BEPS project. Out
of the 15 strands covered by the project,
at least three will impact the Group.
Underlying operating profit
2016
£’m
146.6
117.6
39.5
73.0
3.0
379.7
2015
£’m
131.7
97.0
15.4
72.3
9.1
325.5
Growth
%
+11.3
+21.2
+156.5
+1.0
-67.0
+16.7
Organic
growth1
%
-0.9
+5.4
+15.6
-13.6
-78.0
-3.3
1 Organic growth excludes the impact of M&A and currency and is reconciled in Table 3. The results of Meggitt Target Systems, which was disposed of by the Group
on 21 December 2016, have been included in organic performance for the year given the proximity of the disposal to the balance sheet date.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
40
Chief Financial Officer’s review continued
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. In addition, with the
majority of the Group’s profits generated
in the US, a significant debt shield in place
and substantial cross border transactions
(US imports and exports), changes to the
US tax landscape could have a significant
impact on the Group. Given the current
uncertainty as to the nature and timing of
any such changes, it is not possible to
determine whether any impact would be
positive or negative for the Group.
Earnings per share (EPS)
Underlying EPS increased by 10% to 34.8p
(2015: 31.6p). The EPS increase was lower
than the increase in underlying profit
before tax mainly due to the increase in
underlying tax rate.
Statutory EPS reduced by 5% to 22.1p
(2015: 23.2p). The reduction is lower than
in statutory profit before tax mainly due to
the reduction in the statutory tax rate
driven by the non-taxable gain of £40.7m
made on the disposal of the Target
Systems business.
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 10.30p (2015: 9.80p)
which would result in a 5% increase in the
full-year dividend to 15.10p (2015: 14.40p).
The Company has a balance on its profit
and loss reserve at 31 December 2016 of
£996.7m (2015: £1,027.7m), of which
approximately £850.0m (2015: £900.0m)
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
2017. 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 reduced in 2016 to
£157.8m representing 7.9% of revenue
(2015: £158.7m, 9.6%), of which 20% (2015:
17%) was funded by customers. The
charge to net operating costs, including
amortisation and impairment, increased
by 4% on an organic basis to £71.0m
(2015: £61.4m).
Reduced spend on R&D reflects the
progress made on development
programmes for major new aircraft
platforms including the A320neo and
CSeries which entered service in 2016
and the 737MAX which is due to begin
service in 2017. As more programmes
pass key milestones over the next few
years, we expect R&D to reduce further
as a percentage of revenue. The new
product introduction (NPI) expenditure
associated with these platforms will peak
in 2018. This reflects the increased
content we have secured on a wide range
of new platforms which is good for future
revenues but the cost of introducing
record numbers of new parts impacts
profitability in the short term. We
continue to expect growth in expensed
R&D relating to our successful applied
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
2016
£’m
157.8
2015
£’m
158.7
7.9%
9.6%
(31.7)
(72.4)
17.3
71.0
(26.8)
(84.8)
14.3
61.4
Growth
%
-1
+18
-15
+21
+16
Organic1
growth %
-12
-1
-24
+7
+4
1 Organic growth excludes the impact of M&A and currency and is reconciled in Table 3. The results of
Meggitt Target Systems, which was disposed of by the Group on 21 December 2016, have been included
in organic performance for the year given the proximity of the disposal to the balance sheet date.
research and technology (AR&T)
programmes which will develop the next
generation products and manufacturing
technologies required to enable future
aircraft programmes.
Our investment in programme
participation costs including the supply of
equipment free of charge to new aircraft,
mostly in MABS, increased by 19%
organically reflecting growth in new
platforms where we have strong
positions, particularly the CSeries that
entered service in 2016. Growth is
expected to continue into 2017 and well
beyond as deliveries of aircraft equipped
with our wheels and brakes increase
further, 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 2016 was 65%,
supportive of our expectation that we will
have a market share on the overall fleet in
excess of 70% by 2021.
Capital expenditure on property, plant
and equipment and intangible assets was
£65.5m (2015: £55.4m). This includes
investment required to support factory
consolidations and the integration of the
composites acquisitions. It also includes
initial investment in the expansion of our
Vietnam facility and in new plant and
equipment to build global capacity to
support new engine programmes. Capital
expenditure will increase in 2017, as we
accelerate plans to consolidate the
Group’s manufacturing footprint and
increase investment in building capacity
and capability across our existing sites,
some of which had been anticipated, but
not spent, during 2016.
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, the two
USD300m bilateral credit facilities, raised
in 2015 to fund the acquisitions of the
composites businesses of Cobham plc
and EDAC, were repaid. They were
refinanced in the US private placement
market through the issue of USD300m
seven-year notes with a coupon of 3.31%
and USD300m ten-year notes with a
coupon of 3.60%. The terms of the new
notes, including covenants, are
substantially similar to our existing 2010
US private placement issuance. In
addition, and as provided under the
MEGGITT PLC REPORT AND ACCOUNTS 2016 41
Movements in net debt (£’m) (Table 6)
Underlying EBITDA
Working capital (outflow)/inflow
Post-retirement benefit deficit reduction payments2
Cash flow from operations before exceptional and M&A costs
Exceptional operating costs
Interest and tax
Capitalised development costs
Capitalised programme participation costs
Capital expenditure
Free cash flow
Net proceeds from/(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
2016
487.8
(57.0)
(35.0)
395.8
(18.3)
(53.8)
(69.6)
(57.5)
(65.5)
131.1
59.8
(113.0)
–
77.9
–
(195.4)
(10.4)
(1,051.2)
(1,179.1)
2015
Restated1
414.5
29.8
(24.4)
419.9
(10.7)
(31.3)
(80.5)
(43.0)
(55.4)
199.0
(363.2)
(111.1)
(156.1)
(431.4)
(4.4)
(39.6)
(0.3)
(575.5)
(1,051.2)
1 Restated following the finalisation of the fair values and alignment to the Group’s accounting policies of
businesses acquired in late 2015. See note 44 to the Group financial statements.
2 Includes in 2016, an additional one-off payment of £10.2m paid into the UK scheme upon the disposal of
the UK Target Systems business.
facility agreement, the Group requested
a one year extension of its USD900m
committed revolving credit facility. This
request was approved by all of the
participating banks and accordingly the
facility now matures in September 2021.
During the year, the Group accepted a
commitment letter from Sumitomo Mitsui
Banking Corporation under which the
bank offered the Group a £75m three-
year bilateral facility to commence in the
second half of 2017, aligned to the date on
which USD200m of the 2010 private
placement debt is due to be repaid. The
loan agreement terms will be based on
the acquisition bilateral agreements
refinanced during 2016.
There were no other changes in facilities
available to the Group in the year.
At 31 December 2016, the Group had
undrawn committed credit facilities of
£520m after taking account of surplus
cash (2015: £372m).
Capital structure
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 which will
expand 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. Net
debt/EBITDA was 2.1x at 31 December
(2015: 2.3x).
Facility headroom (Table 7)
1,800
Headroom £520 million
1,500
1,200
900
600
300
0
Net debt
£1,179 million
2016
2017 2018 2019 2020
2021
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 8% of
the Group’s total credit facilities and the
credit rating of lenders is monitored by
our treasury department. The Group’s
largest lenders are Bank of America,
HSBC, Bank 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 £100m of
undrawn committed facilities, net of
cash, as a buffer.
b. Set-off arrangements
The Group utilises set-off and netting
arrangements 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)
Sterling
US Dollar
Euro
Swiss Franc
Other
Net debt
2016
(49.9)
20151
(33.6)
1,260.3
1,062.8
(21.1)
(3.6)
(6.6)
36.4
(6.8)
(7.6)
1,179.1
1,051.2
1 Restated following the finalisation of fair values
and alignment to the Group’s accounting policies
of businesses acquired in late 2015. See note 44 to
the Group financial statements.
e. Covenant risk
Our committed credit facilities contain
two financial ratio covenants—net debt to
EBITDA and interest cover. The covenant
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
42
Chief Financial Officer’s review continued
calculations are drafted to protect
us from potential volatility caused by
accounting standard changes, sudden
movements in exchange rates and
exceptional items. This is achieved by
measuring EBITDA on a frozen GAAP
basis, retranslating net debt and EBITDA
at similar average exchange rates for the
year and excluding exceptional items from
the definition of EBITDA. We continue to
have considerable headroom on both key
financial covenant measures.
Covenant ratios (Table 9)
Covenant
Net debt/EBITDA
≤3.5x1
2016
2.1x
2015
2.3x
Interest cover
≥3.0x
14.5x
21.4x
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 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 2016, the percentage of net
debt at fixed rates was 66% (2015: 23%)
and the weighted average period to
maturity was 5.7 years (2015: 2.9 years).
The floating rate bilateral bank credit
facilities taken out to fund the acquisitions
last year, resulted in a reduction in the
proportion of net debt at fixed rates to
below 25% at 31 December 2015. During
2016, this floating rate debt has been
repaid and replaced with fixed rate
private placement debt. The substantial
increase in the proportion of debt held at
fixed rates will help to insulate the Group
from the effects of any further increases
in US interest rates.
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,
principally 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)
2016
2015
Average translation rates against Sterling:
US Dollar
Euro
Swiss Franc
Average transaction rates:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
1.33
1.21
1.32
1.49
1.21
1.08
Year-end rates against Sterling:
US Dollar
Euro
Swiss Franc
1.24
1.17
1.26
1.53
1.38
1.47
1.57
1.36
1.08
1.47
1.36
1.48
The results of foreign subsidiaries are
translated into Sterling at weighted
average exchange rates. The weakening
of Sterling against all of the Group’s major
currencies has had a significant benefit to
our reported results for the year.
Compared to 2015, the Group’s revenue
increased by £176.6m and underlying
profit before tax for the year by £33.2m
from currency translation movements.
These benefits include favourable
impacts of £144.4m and £28.1m
respectively relating to US Dollar
denominated revenues and profits.
Translation currency sensitivity (£’m)
(Table 11)
achieved in 2016, would affect underlying
profit before tax by approximately £9.0m
in respect of US Dollar/Sterling exposure,
£3.0m in respect of US Dollar/Euro
exposure and £5.0m in respect of US
Dollar/Swiss Franc exposure.
Transaction hedging (Table 12)
Hedging
in
place %1
Average
transaction
rates2
2017:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
2018 – 2021 inclusive:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
90
100
96
67
48
29
1.49
1.18
1.06
1.39
1.18
1.08
1 Based on forecast transaction exposures and
hedging in place at 31 December 2016.
2 Based on hedging in place at 31 December 2016,
with unhedged exposures based on exchange
rates at 31 December 2016.
Post-retirement benefit schemes
The Group’s principal defined benefit
pension schemes are in the UK and US
and are closed to new members.
Total pension scheme deficits increased
to £360.2m (2015: £239.1m). Drivers of the
movement in net deficit included:
Impact of 10 cent movement2 :
Revenue
PBT1
•
US Dollar
Euro
Swiss Franc
95.0
11.0
8.0
17.0
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 2016 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 2015, the Group’s revenue
benefitted by £27.1m and underlying profit
before tax for the year by £10.1m from
currency transaction movements. These
benefits include favourable impacts of
£24.4m and £10.8m respectively relating
to US Dollar denominated revenues and
profits. Each ten cent movement in the US
Dollar against the average hedge rates
An increase of £193.1m (2015:
Reduction of £32.6m) due to
remeasurement losses on scheme
liabilities. The main cause of the
increase was a fall in the rates used to
discount scheme liabilities. Accounting
standards require these liabilities to
be discounted using the yields on high
quality AA corporate bonds, with a
maturity that reflects the duration of
the scheme liabilities. The fall in yields
was most noticeable in the UK,
particularly following Brexit, with
rates 120 basis points lower than at
the end of 2015 and almost 100 basis
points lower than those seen in the
12 years since this method of
measurement of liabilities was
introduced in 2004. Coupled with a
modest increase in inflation rates, this
resulted in remeasurement losses on
the UK scheme of £183.2m (2015:
Gain £55.6m).
• A reduction of £72.4m (2015: Increase
of £7.2m) due to remeasurement gains
on scheme assets, principally driven
by strong performance from equity
and bond markets.
MEGGITT PLC REPORT AND ACCOUNTS 2016 43
• Net deficit reduction payments of
£33.3m (2015: £22.4m). Upon the sale
of the Group’s UK Target Systems
business in December 2016 and the
withdrawal of that company from the
scheme, an additional one-off payment
of £10.2m was agreed with the trustees
and made to the UK scheme.
• An increase of £22.7m (£2015: £4.8m)
from exchange differences arising on
the translation of deficits in the US and
Switzerland.
Regulations in the UK and US require
repayment of deficits over time. During
the year, the Group reached an agreement
with the trustees of the UK scheme
following the 2015 triennial actuarial
valuation. Under the agreed recovery
plan, the funding deficit measured at April
2015 at £249.4m, will be addressed by
payments which gradually increase over
the period to 2024. This compares with an
accounting deficit at 31 December 2016 of
£209.6m (December 2015: £122.1m).
Since the date of the 2015 actuarial
valuation, it is estimated that the funding
deficit has increased further, and an
additional £80.0m is not covered by the
agreed recovery plan. This increase,
which is driven principally by the fall in
gilt yields seen in the latter part of 2016,
does not have an immediate impact on
Group cash requirements but, were
financial conditions to remain at current
levels when the next valuation is
completed in 2019, would likely have an
impact on cash payments from that year.
At the date of the valuation, the buy-out
deficit, which assumes the Group was to
transfer the responsibility of the scheme
to an insurance company, was measured
at £544.1m. The Group has no current
plans to make such a transfer.
In the US, the level of deficit payments is
principally driven by regulations.
Amounts required to be paid reduced in
the year to £2.0m, as expected, reflecting
the impact of legislation implemented in
the latter part of 2014. Absent any further
changes in legislation, annual payments
are expected to increase to £10.0m in
2017 and will increase gradually over the
following four years to £23.0m by 2019,
before stabilising around this level.
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
It is difficult to be precise about the
overall impact of IFRS 15 on revenue
and profit, but with the exception of the
accounting for free of charge or heavily
discounted hardware, we expect it to be
relatively small in a Group context.
IFRS 16, the new leasing standard, comes
into effect from 2019 and will require
certain operating leases to be recognised
on the balance sheet. Rather than make
accounting changes in successive years,
it is our plan to early adopt IFRS 16 in
2018, to align with the timetable for
implementation of IFRS 15.
Most critically, neither standard will have
an impact on cash or the economic return
from a programme and therefore on the
intrinsic value of Meggitt.
Further details on the potential impact of
both IFRS 15 and IFRS 16 are provided in
note 2 to the Group financial statements
on page 110.
Doug Webb Chief Financial Officer
costs provided under these plans is
capped. Both schemes are unfunded and
have a combined deficit of £54.5m (2015:
£45.4m), with the increase principally
driven by exchange differences. Deficit
payments during the year were £1.7m
(2015: £2.0m).
Recent accounting developments
IFRS 15, the new revenue accounting
standard, comes into effect from 2018.
It is a complicated standard, requiring the
terms of every customer contract to be
considered against new revenue
recognition rules. Fortunately, more
than 90% of our revenue is derived from
the sale of goods where we recognise
revenue when we ship product and we
do not currently expect this to change
significantly under the new standard.
The area likely to be most impacted for
the Group is programme participation
costs, where the manufactured cost of
free of charge or heavily discounted
hardware will no longer be capitalised
and then amortised, but instead expensed
as incurred. Most typically found in
MABS, these account for the majority of
our programme participation costs. Had
the Group adopted this policy for 2016, its
profit before tax and total assets would be
lower by £23.4 million and £283.4 million
respectively.
Other areas of revenue recognition which
are likely to be affected by the new
standard include power by the hour and
cost per brake landing contracts, those
for which contract accounting is currently
applied and funded R&D contracts.
Defined benefit pension scheme summary (£’m) (Table 13)
Opening net deficit
Service cost
Group cash contributions1
Deficit reduction payments
Other amounts charged to income statement2
Remeasurement (gains)/losses – schemes' assets
Remeasurement losses/(gains) – schemes' liabilities
Currency movements
Closing net deficit
Assets
Liabilities
Closing net deficit
Assets as percentage of liabilities
2016
239.1
15.3
(48.6)
(33.3)
11.0
(72.4)
193.1
22.7
360.2
952.5
1,312.7
360.2
73%
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%
1 Includes in 2016, an additional one-off payment of £10.2m paid into the UK scheme upon the disposal of the UK
Target Systems business.
2 Comprises past service amounts, curtailment amounts, administration expenses borne directly by schemes and
net interest expense.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
44
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 approach to corporate responsibility
creates value for Meggitt and our stakeholders.
It helps us to manage our businesses more
efficiently, which in turn helps us to mitigate risks,
reduce costs and support the communities in
which we operate.
Policy
We are committed to:
• Upholding sound corporate governance
• Conducting business relationships in an
principles;
ethical and responsible manner;
• Upholding our employees’ human rights;
• Encouraging dialogue with employees;
• Supporting the Ten Principles outlined in the
United Nations Global Compact, relating to
human rights, labour, the environment and
anti-corruption;
• Complying with the Modern Slavery Act 2015;
• Supporting our local communities;
• 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
• Improving our financial, social and
environmental performance.
Action
For our stakeholders this means:
• Complying with relevant national laws and
• Having effective risk identification and
regulations;
mitigation across all areas of the business;
• Providing a supportive, rewarding and safe
• Conducting independent audits in compliance
working environment;
areas;
• Delivering comprehensive training for
• Adopting robust internal and external
employees;
• Developing communication and collaboration
tools;
• Maintaining modern, safe and efficient
operational practices;
• Contributing to the social and economic
enrichment of local communities, focusing
particularly on activities related to education;
reporting and controls and ensuring financial
probity; and
• Supporting Business in the Community, the
British business-community outreach charity,
where members work together to tackle a
range of issues that are essential to building a
fairer society and a more sustainable future.
MEGGITT PLC REPORT AND ACCOUNTS 2016 45
Governance and compliance
In 2016, the Board approved a revised
Corporate Responsibility Policy to include
a statement on modern slavery. The
revised policy highlights our commitment
to abstain from practices such as slavery,
human trafficking, forced labour and child
labour, and our commitment to take all
reasonable measures to ensure that our
suppliers and other entities acting on our
behalf do not engage in practices that
violate applicable laws and regulations
relating to slavery, human trafficking,
forced labour and child labour. In February
2017, the Board approved a statement in
compliance with the Modern Slavery Act
2015 which is available on our website. The
Board also approved updates to the the
Ethics and Business Conduct Policy, Code
of Conduct and Anti-Corruption Policy in
2016. These updated policies and all other
Board-approved policies are published on
our website.
The Board is responsible for
implementation and performance of
the Corporate Responsibility Policy.
On a day-to-day basis, the Executive
Director, Commercial & 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
Operating Officer. 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 businesses can
fulfil the requirements outlined in
our policies.
Activity in 2016
Environment
We are committed to achieving and
maintaining a culture that places a high
priority on environmental performance
and being proper stewards in the
communities and locations in which we
operate. Our commitment is demonstrated
by our compliance record which shows no
fines for breaches of environmental
regulations during 2016 after numerous
inspections by environmental authorities.
This achievement is due, in part, to our
comprehensive rolling environmental
auditing programme which assessed 40%
of our sites in 2016 for compliance with
Learning from robotic teens
Meggitt volunteers who mentor
teenagers in a nationwide robotics
challenge are learning new lessons
for advanced automation.
The first robot is set to arrive at
Meggitt Polymers & Composites,
Oregon in early 2017. It’s designed to
automate trimming on the sealing
skirts for in-flight internet radomes,
a new product line that arrived with
the 2015 advanced composites
acquisitions.
To help ensure a pipeline of talented
young engineers who can drive
further advances in robotics, MPC
Oregon mentors two local high-school
teams, known as ‘Hotwire Robotics’
and the ‘Nerd Herd’. Each year, they
battle against more than 3,000
competitors in a robotics challenge
run by For Inspiration and Recognition
of Science & Technology (FIRST).
“The students get a very specific brief
from FIRST, detailing what the robot
must do. A team of about ten Meggitt
volunteers from engineering, finance
and customer service help them
refine their thinking and crack the
problems that come up as they plan
and build,” explains Steve Fackler,
MPC Oregon’s Director of Advanced
Technology. “It’s the perfect way to
learn real-world technical and
business skills.”
“In return, we get in front of some
of the best young talent in the local
community and show them what’s
on offer here,” adds Engineering
Manager Trevor Crumrine. “And
we get to learn from them too.”
Tapping into tomorrow’s generation
Mentoring not only helps MPC Oregon
engineers to stretch their thinking
generally. It has also helped to
improve the technology behind a new
equipment tracking system at the site.
“Gathering data about temperature
and running time on our presses is
essential for optimising
performance,” says Crumrine.
“Working with the two FIRST teams
showed us ways to create a wireless
monitoring network which is much
more accurate and efficient than the
wired counterpart we were looking
to install.”
“We’re also talking to the schools
about the possibility of students
helping us build and programme the
200 or so circuit boards we need to
implement the system.”
“3M, Boeing, Rockwell, UTC, Google…
many of the country’s biggest
engineering businesses work with
FIRST. And for good reason too: it
helps nurture the next generation of
engineers, it’s good for recruitment
and it’s good for our engineers
too—the lessons we learn can often
be put into practice right away,”
says Andrew Barnes, one of MPC
Oregon’s engineering mentors on
the programme.
“Hotwire Robotics finished 16th in
2016 which was an amazing result.
And a tough one to beat next year.
But that’s the challenge!”
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 46
Corporate responsibility continued
applicable regulatory requirements as
well as compliance against industry
best practice.
Beyond compliance, we require our
manufacturing facilities to maintain
an environmental management system
certified to the ISO 14001 international
standard. All of our manufacturing
facilities, excluding the 2015 composites
acquisitions, have obtained this
certification with those newly acquired
businesses set to achieve certification
by the end of 2017.
Performance
Table 1 shows our performance for key
environmental metrics and Table 2 shows
our progress on achieving internally set
targets.
Our environmental performance in 2016
was good and we achieved decreases in
all metrics relative to revenue, as shown
in Table 1.
included installation of energy efficient
lighting and occupancy sensors in both
factories and offices and upgrading
compressors to more energy efficient
systems. We also continue to investigate
sources of alternative energy and other
energy savings measures as these will be
crucial to achieving our 10-year target.
In terms of our performance for our other
five-year targets in Table 2, we exceeded
our gas target. We also beat our target
for water consumption. We saved a
significant amount of water usage as we
expanded the use of closed loop recycling
systems across the Group and we hope
to see further gains in this area as this
technology is introduced to the
composites acquisitions.
We did not achieve our electricity usage
target, largely due to the energy intensive
carbon brake disk manufacturing process
at MABS. However, in 2016 we did achieve
a 2% reduction in electricity consumption.
The decrease in greenhouse gas (GHG)
emissions meant we started our internally
set 10-year plan strongly, achieving a 5%
reduction relative to revenue against an
annual target of 2.5%. We exceeded
our target through the continued
implementation of energy conservation
measures across the Group. These
Waste produced during 2016 declined by
14% relative to revenue. However, we fell
short on our performance against our
waste recycled five-year target, and our
waste to landfill was also below target.
Our manufacturing facilities are now
required to develop waste minimisation
plans and identify and implement
opportunities for waste reduction and
recycling. We expect to see improvement
in waste performance as these plans
are implemented.
GHG emissions
Table 3 shows the GHG emissions data
as per 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.
The composites acquisitions, which were
not included in the Group’s reporting for
2015, led to a small increase in overall
GHG emissions during 2016. Excluding the
acquisitions, absolute emissions declined
by 2% and we aim to build on the strong
start to our 10-year reduction plan.
Saving energy
In 2016, we focused on lighting projects at
our facilities such as upgrading current
fixtures to LED or other more efficient
technology and the installation of
occupancy sensors. Together, these
projects saved approximately 620 tonnes
of GHG emissions. In addition, our MABS
carbon refurbishment programme
contributed to a saving of approximately
3,865 tonnes of GHG emissions.
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
2016
213
120
189
107
135,026
76.1
11,224
6.32
705,279
397
Change
-2%
-13%
-5%
-14%
-8%
2015
201
122
203
123
132,074
80.2
12,098
7.34
711,385
432
1 Metrics per £m are calculated using revenue converted at constant exchange rates. Greenhouse gas emissions are calculated using conversion factors published in
the 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)
GHG emissions – tonnes per £m
Electricity – MWh per £m
Gas – MWh per £m
Water consumption – cubic metres per £m
Waste to landfill – as a % of total waste
Waste recycled – as a % of total waste
Baseline year
2015
2011
2011
2011
2011
2011
Performance
period (financial years)
To 31 December 2025
To 31 December 2016
To 31 December 2016
To 31 December 2016
To 31 December 2016
To 31 December 2016
Target improvement
over performance
period
Achieved as at
31 December 2016
-25%
-15%
-15%
-10%
-10%
+10%
-5%
+8%
-18%
-16%
-5%
+9%
MEGGITT PLC REPORT AND ACCOUNTS 2016
GHG emissions1 data (Table 3)
Combustion of fuel and operation of facilities2
Electricity, heat, steam and cooling purchased for own use
Intensity measurement:
Emissions reported above, normalised to tonnes per £m revenue
47
2016
Tonnes of
CO2e
35,186
99,840
135,026
2015
Tonnes of
CO2e
37,796
94,278
132,074
76.1
80.2
1 Global GHG emissions were calculated using conversion factors published in the Guidelines to DEFRA/DECC’s GHG Conversion Factors for Company Reporting and
the WRI/WBCSD Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard. Emissions factors from overseas electricity are in CO2 only (not CO2e).
2 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 – this is evaluated annually and continues to be the case.
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 risks associated with the potential
obsolescence of chemicals used by
aerospace manufacturers. We continuously
track substances regulated under REACH
and work closely with our chemical
suppliers to ensure substances are
registered and will be approved for
continued use, or identify suitable
alternatives. We participate in aerospace
industry trade groups in the US and Europe
that are involved in researching
replacements for hexavalent chromium
and other substances targeted for
restrictions.
Obsolescence
Our Obsolescence Review Board
continues 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 lead safe, healthy and
productive lives by actively promoting
policies and programmes that help
individuals safeguard themselves, their
co-workers and visitors.
In 2016, further health and safety
measures were integrated into DLA
including standardising and improving
how we report, action and close out near
miss and unsafe conditions identified by
employees. We continued implementation
of industry leading health and safety
practices by issuing new Meggitt Health
and Safety Procedures applicable to all
sites on the topics of blood-borne
pathogen exposure control and managing
change to ensure that health, safety and
environmental impacts are assessed
prior to any operational change being
implemented.
We focus on preventative health and
safety measures, and have revised our
incident investigation procedures to
include human factors analysis in any
reported near miss incidents and unsafe
conditions. Since 2015, we have rolled out
Behaviour Based Safety training in 56% of
our manufacturing facilities, and more of
this training is planned for 2017.
These measures have resulted in
significant improvement in all health and
safety performance measures throughout
the Group.
Compared to 2015, we achieved:
• A reduction of 37% in the number of
lost time cases reported and
associated incident rate;
• A reduction of 36% in the number of
RIDDOR equivalent cases and
associated incident rate;
• A reduction of 69% in the number of
days absent due to injury; and
• A reduction of 48% in the number of
OSHA recordable cases reported by
our US sites.
Similarly, our total reportable incidents
and associated incident rate decreased by
43% and 46% respectively (see Table 4).
These incidents include all injuries
globally that were required to be reported
directly to a regulatory authority.
During 2016, 76% of our manufacturing
facilities achieved Platinum level (35% in
2015) in our Meggitt Safety Star award
programme which recognises proactive
measures that sites have taken in respect
of accident prevention. Platinum is the
highest level of achievement that can be
awarded within the programme.
Our comprehensive auditing programme
also covers health and safety, and 40% of
our manufacturing facilities were
reviewed in 2016 for their compliance with
applicable regulatory requirements as
well as compliance against industry best
practice standards, as required by our
Meggitt Health and Safety Procedures.
Reportable accidents and incidents (Table 4)
Reportable accidents and incidents1
Reportable accident/incident rate2
1 Reportable accidents and incidents are those directly reportable to a regulatory authority.
2 The accident/incident rate is the number of reportable accidents/incidents per 100,000 employees.
2016
23
200
Change
-43%
-46%
2015
40
369
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 48
Corporate responsibility continued
Ethics and business conduct
and trade compliance
Our Ethics Programme is built on the
foundation of honesty, integrity and
respect for others. We reaffirm those
principles through our Group policies and
regular training. In addition, every
employee receives a printed Ethics Guide,
available in seven languages. The Guides,
also available on our website, are a
resource containing our Ethics and
Business Conduct Policy, Code of Conduct
and Anti-Corruption Policy.
Each Meggitt business site has a
designated Ethics Coordinator who is
available to assist employees who have
questions or concerns. If they prefer, we
operate an Ethics Line which enables
employees to raise questions or concerns
confidentially or anonymously, 24 hours a
day, 7 days a week from anywhere in the
world. Employees are entitled to a
thorough investigation and receive
feedback whether the issues are
substantiated or not.
Through industry associations like the
Aerospace, Defence, Security and Space
organisation (ADS) and the International
Forum on Business Ethical Conduct
(IFBEC), Meggitt has taken a leadership
position with others in our industries
when it comes to conducting business
ethically and in compliance with laws
and regulations. During 2016, Meggitt
was invited to join Transparency
International’s Business Integrity Forum.
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 2016, we
continued to incorporate new regulatory
requirements associated with the US
Export Controls Reform (ECR) initiative,
expanded implementation of our global
trade management software solution
and continued to implement our 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 and updated in 2016 with
associated guidance provided. This policy
encourages our facilities to contribute to
Training for the future
Turmoil in the energy sector has been a
challenge for Heatric, Meggitt’s specialist
heat exchanger business. But continued
investment in the apprentice scheme is
helping to ready the business for growth
when the market recovers.
Racing the family stock car since the
age of 11, Natasha Churchill also liked
to get her hands dirty with the repairs.
“I got into welding very early,” she
smiles.
Her experience and enthusiasm
helped her win a place on the four-
year Heatric apprentice programme in
2015. “Heatric welding is some of the
highest standard in the world because
our exchangers have to withstand such
extreme pressures (up to 8700 psi)
and temperatures (-150 to 900°C),”
she explains.
After six months in the training school,
apprentices are given starter projects
to build up their skills. Assignments
on the factory floor start after a year.
“I’ve just finished modifying a travel
cradle for one of our exchangers.
They’re all bespoke and this one had a
specification change halfway through
manufacture. It was only a short job
but I learned so much from the senior
welder as we went through it.”
Looking ahead, Natasha is interested
in design for manufacture and how
advanced automation can improve
productivity. “Working alongside
robots is the future for high-
specification welding. My ambition is
to lead the field in this area one day.’’
Colleague Ashley Whittaker finished
the apprentice scheme in 2016 and
joined Heatric’s nine-person
innovation team in December. Earlier
in the year, he was assigned an
£80,000 research project to trial a
keyhole tungsten inert gas welding
system. A month’s trial on site proved
Ashley’s cost benefit and break-even
analysis was correct.
“This system can significantly reduce
lead time and consumables, resulting
in a cost saving of up to 90%,” he said.
In 2017, Ashley will be helping his
team expand business with existing
customers, exploring new
opportunities in areas like nuclear
waste disposal and helping to
cross-sell with other Meggitt
businesses. In terms of his own
future, Ashley would like to begin a
part-time undergraduate degree in
engineering as other apprentices have
before him. Nearly 50 young people
have joined the programme over the
last 13 years.
“The training and support here helped
me tackle much bigger challenges
than I thought possible,” he says. “So
it’s very satisfying to now be running
projects that are cutting costs and
developing growth for the future.”
MEGGITT PLC REPORT AND ACCOUNTS 2016 49
Meggitt on the move
We all know how important a healthy lifestyle is. Sometimes,
however, it can be hard to find the time or the motivation to
make wellness a priority. What’s more, with so much health
information available, it can be hard to separate fact from
fiction. That’s where Vitality comes in.
Vitality is a wellness programme we offer to nearly 6,000 US
employees to help them become healthy, stay healthy and receive
rewards along the way. By completing the Vitality Health Review,
employees find out what areas of their lifestyle they need to focus
on, and get a programme with health goals tailored just for them.
Vitality initially piloted in late 2012 and offers on-line courses to
help employees make informed choices about health and achieve
individual health goals. Now well-embedded and into its 4th year,
each US Meggitt site has Vitality Wellness Champions who
organise events from pot luck lunches and daily walks to ‘Biggest
Loser’ contests and charity fun runs.
Employees across all of our US facilities are making positive
changes to their lifestyles and reaping the rewards. As well as
earning Vitality points as they exercise (individually, or in a group
or club), employees can take part in ongoing education
programmes—such as heart health, maternity care and nutrition/
diet, use preventive screening and study for certificates:
cardiopulmonary resuscitation training (CPR) and First Aid.
The great news is that Vitality is making a difference to the health
of our US employees. Overall physical activity levels have risen
(our US employees are 150% more active than 2013), while blood
cholesterol and stress levels are down, as is the overall risk to
health. Meggitt people are stepping up and completing more
physical activities every month, resulting in more Platinum
members (the highest level possible in the Vitality programme)
than ever before. As well as the physical benefits of weight loss
and body toning, employees testify to the many other benefits
their healthier lifestyles entail—including enhanced memory,
concentration, energy and improved relationships, to name a few.
Some of the 2016 programme highlights include:
• At the beginning of the year, our US employees were
challenged to walk to the moon five times (a distance of
1,179,275 miles). They completed the challenge by July and
by the end of the year had walked a total of seven times to
the moon.
• Several US sites ran ‘Get Moving’ challenges: an eight week
challenge put on by the local gym or wellness centre during
which time participants aimed to complete at least 150
minutes of activity each week, by any means—walking,
aerobics class, swimming or whatever they fancy.
• Our Kentucky facility held ‘Biggest Loser’ contests, where
employees vie to win the coveted title by losing the most body
fat over the competition. This year’s winners lost 13% and
16% body fat respectively – and their health improvements
continue long after the contest is over.
• Securaplane ran a first-of-its-kind wellness expo where
employees toured a selection of health and wellbeing booths,
at each of which they had to get a signature on their ‘Health
Passport’. Vendors included acupuncture, elderly care,
chiropractor, gym, doctors and dentists, and after the expo,
participants tucked into a complimentary healthy lunch.
• Two California sites, North Hollywood and Orange County,
offer weekend hiking clubs which not only boost fitness by
offering progressively challenging hikes around the local
hills and canyons, but also foster cross-functional
communication and relationship-building as employees from
different departments get to know each other better. Our
OECO facility in Oregon holds monthly ‘Stair Crawls’ at a
local railway station, where participants work in teams to
complete eight laps of the station’s five flights of stairs.
• Meggitt’s Piezo Technologies site supported Colorado’s Ride
To Work Day, with almost 60% of their office joining in to cycle
distances of between 5 and 65 miles in the challenge.
• Many sites participate in ‘Go Red’ walks to raise awareness
of heart health.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 50
Corporate responsibility continued
the communities in which our employees
live and work, aiming to enhance the
well-being of people living in our
communities. The policy also encourages
facilities to undertake activities and
fundraising to benefit the health and
welfare of military personnel and to
support education initiatives, scholarships
and competitions in science, technology,
engineering and mathematics subjects.
Each Meggitt business is responsible for
agreeing and administering its own
budget for charitable donations and
sponsorships to have a positive impact
on its local community or to support the
sectors in which the business operates.
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
2016 included:
• Meggitt US businesses and employees
have donated over USD1m in the past
five years to the United Way, a US-
based non-profit organisation focusing
on resolving local community issues
through partnerships with local
schools, government agencies and
voluntary and neighbourhood
associations. Several Meggitt US
businesses hold annual United Way
drives to encourage employee
engagement in local community
activities and initiatives designed to
improve education, financial stability
and health care for local families. In
2016 our businesses raised over
USD 180,000.
• MABS Akron sponsor the All-American
Soap Box Derby which has a newly
created ‘Meggitt Braking Zone’ at the
end of the world famous Derby Downs
track. A safety video, presented by
Meggitt, is viewed by all drivers
participating in the many events at
Derby Downs throughout the year.
The site is also a partner of the Derby’s
‘Gravity Racing Challenge’ (a science,
technology, engineering and
mathematics themed event) and three
cars have been provided to schools
who participate in the challenge
each year.
• For more than a decade, our Heatric
facility has entered teams into the
annual Poole Lions Swimathon event,
where entrants swim laps for an hour,
relay-style, to raise money for several
local causes including two hospices,
a school and a community group for
young adults with learning disabilities.
Here’s the challenge … here’s the training
Garret Mertz’s first assignment at Meggitt
was managing a hydrogen reformer
prototype project as a 20-year old intern.
“It was a big stretch but I learned a lot
because the training dovetailed with the
opportunity. I’ve been here ten years now
and with each new role, I’ve always had
the training I need to succeed.”
At the beginning of 2016, I was given the
opportunity to become General Manager
at the Meggitt Control Systems (MCS)
facility in San Diego, California. It
specialises in all-electric fuel control
valves and actuators and we acquired it at
the end of 2014.
Meggitt valued the business’s technology,
culture and customer relationships and
the strategy has been to use the Meggitt
Production System to build on these
strengths and transform the business into
a centre of excellence. Twelve months
later, we are well on the way: on-time-
delivery, for example, rose from the high
80s at the start of 2016 to average 99%
from July onwards.
Within weeks of starting my new role,
I was selected to go on the Oxford
Leadership Programme. It gave me the
tools and contacts I needed to lead
transformation. It’s a demanding
programme – three week-long sessions
during the year, extensive hours, live
business assignments, workshops and
several presentations to deliver. But the
instructor and facilitators from the Said
Business School at the University of
Oxford are excellent. In addition, 25 senior
managers from Meggitt attended so there
was no shortage of mental firepower!
Maximise the potential,
at every level
The most useful lessons I learned on the
programme were about motivation and
delegation: how to lead by instruction,
how to empower others to tackle new
challenges and how to adapt my style to
suit the situation.
When it came to the workshop we ran
with the San Diego senior management to
develop a common vision and strategy, I
would not have succeeded without having
attended the programme. I would have
run into many more difficulties without
being able to pick up the phone to
colleagues on the course. They had the
experience I needed to lead
transformation at the facility.
The programme has also been great
personally, helping me think about how I
balance the demands of a young child
with a busy professional life. It inspired
me to further my formal education and I
am now enrolled on an MBA and I look
forward to taking on bigger challenges at
Meggitt in the future.
MEGGITT PLC REPORT AND ACCOUNTS 2016 51
In the 2016 event Heatric entered three
teams, swimming a combined total of
186 laps, and were awarded the Harold
Brown Cup for being the company who
raised the most money at the event.
• A group from Meggitt’s head office
took part in a 100km bike ride to raise
money for the Julia’s House children’s
hospices in Dorset and Wiltshire. The
team comprising experienced riders,
those who had never done an activity
like this before and even one person on
a folding Brompton commuter bike,
ended up at the charity’s new hospice
in Devizes, Wiltshire. The team raised
over £15,000 to support the charity
which is dedicated to helping life-
limited children and their families
across the two counties.
Although our Policy allows a broader
range of charitable activity, the Group’s
priority is to support charities or
community organisations which focus
on science, technology, engineering and
mathematics education initiatives:
• Meggitt has many links with the
University of Sheffield and from 2016
is the sponsor of the annual prize for
the best Science and Engineering
Foundation Year student in the
Automated Controls and Systems
Engineering department. In 2016,
previous graduates attended the prize
giving to present the award to its
inaugural recipient, Beth Jenkinson.
• Meggitt supports several future
engineers identified through the
Arkwright Scholarship, facilitating
work experience, mentoring, providing
technical guidance on projects and
advice on university selection and
applications.
• We are now expanding our involvement
in encouraging students to take up
engineering as a career through IET’s
Engineering Horizon Bursaries,
offering support to students who have
faced obstacles or challenges and
require financial support as well as
work placements.
• We continue to sponsor the School’s
Aerospace Challenge, which offers
shortlisted 16-18 year olds the chance
to experience what the aerospace
world has to offer in a five day Summer
School at Cranfield University.
A new generation of operations excellence
The three-year international Graduate
Programme gives graduates tough,
real life assignments. Graduate Ypatia
Limniati is learning operations
excellence the best possible way: by
making it happen.
As vice-captain of the Greek U20
basketball team I looked everywhere
for incremental improvement: warm-up
techniques, kinesio tape for boosting
muscle elasticity, joint protection and
video performance review. We had tricks
and tools for improving every aspect of
individual and team performance.
It’s very similar to my first assignment
on Meggitt’s three-year international
Graduate Programme. Based at the
Meggitt Sensing Systems facility in
Fribourg, Switzerland, my brief was to
deepen and widen the practice of DLA—
the series of tiered meetings that kicks
off each working day.
DLA ensures that quality and delivery
issues are identified and addressed
immediately—at the right level by the
right people. As problems are solved,
employees gain more confidence that
their skills and experience are capable of
improving their team’s performance: it’s
their knowledge that shapes the tools and
processes we need to succeed.
Observing that first-hand, was the best
introduction to corporate change
management I could have had. Working
with site leadership, my task was to
establish a standard assessment process,
coaching the leader of each DLA and
sharing best practice. We also helped
bring the total number of employees
participating in DLA to over 70%.
New machining produces complex
parts, faster and at low volumes
One of the strategic goals at Fribourg
last year was to reduce inventory. Our
‘planning for every part’ process
corroborated what many of our operators
were saying: old turning and milling
machines were taking too long to set (up
to 10 hours in some cases).
Working with the plant’s manufacturing
director and two in-house experts, I was
tasked with putting together the business
case for an investment in new machinery.
By sourcing a second-hand machine, we
estimated savings of more than
CHF400,000, inventory savings of more
than CHF80,000 and a return on
investment within two years. It’s now
installed and producing parts.
Talking to others on the programme, it’s
clear that working closely with Meggitt
leaders on critical strategic projects is
standard for this programme—it’s key to
our rapid growth and development. I’ve
learned a lot about myself and about
operations excellence and am looking
forward to the next chapter.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 52
Corporate responsibility continued
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 pages 64 and 65).
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 includes a
statement on slavery and human
trafficking, committing to our abstention
from practices such as slavery, human
trafficking, forced labour and child labour,
and taking all reasonable measures to
ensure that our suppliers and other
entities acting on our behalf do not
engage in practices or violate applicable
Table 6
Level
Board of Directors
Group Leadership Team
Senior executives
All employees
% of females at
31 December 2016
Number of females
Number of males
20%
15%
8%
28%
2
2
23
3,146
8
11
252
8,064
The directors encourage employees to
become shareholders to improve active
participation in, and commitment to, the
Group’s success. This policy has been
pursued for all UK employees through
the Share Incentive Plan and the
Sharesave Scheme.
Strategic report
This 2016 Strategic report on pages
1 to 52 is hereby signed on behalf of
the Board.
Stephen Young
Chief Executive
27 February 2017
laws and regulations relating to slavery,
human trafficking, forced labour and
child labour.
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 meetings on shop floors,
all-employee ‘Town Hall’ meetings, team
briefings and works councils. We respect
all employee relations regulations.
Corporate communications take a variety
of forms, including presentations from
the Chief Executive via audio-visual
media, global web-enabled conferences,
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.
Analysis of employees (Table 5)1
Employees by division
Number of employees
11,210
Employees by length
of service (years)
Number of employees
Employees by region
Number of employees
11,210
11,210
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Cross-Group functions
1,265
1,853
2,712
3,224
1,662
494
11%
17%
24%
29%
15%
4%
Less than 5
Between 5 and 10
Between 10 and 15
Between 15 and 20
Between 20 and 25
Over 25
4,866
2,325
1,293
1,050
446
1,230
43%
21%
12%
9%
4%
11%
USA
UK
Rest of Europe
Rest of World
5,920
2,699
1,503
1,088
53%
24%
13%
10%
1 As at 31 December 2016.
MEGGITT PLC REPORT AND ACCOUNTS 2016 Corporate governance report
53
non-executive at US businesses Exelon Corporation and Brady
Corporation, as well as holding several non-profit advisory roles.
Nancy’s appointment enables the Board to retain critical US and
engineering experience. Nancy’s experience in the fast-moving
automotive industry is also important for Meggitt with our current
focus on accelerating the operational performance of the Group.
Effectiveness
During 2016, we carried out an externally facilitated Board
evaluation. Overall the evaluation was positive, but further
details can be found later in this report.
Accountability
In 2016, the Audit Committee discussed the 2015 viability
statement process and confirmed that it was appropriate to
retain the same process for the 2016 viability statement. The
impact of the UK’s vote to leave the European Union was taken
into account in the assessment of viability. A description of the
process and the resulting statement is set out in the Risk
management report (pages 28 to 33). That report also includes
our annual confirmations on risk management and internal
control.
During the year, the Audit Committee reviewed the changes
being made to the Code which were published by the FRC in 2016
and are effective for the financial year commencing 1 January
2017 (the 2016 Code). The Committee also reviewed the FRC’s
Guidance on Audit Committees. The Audit Committee was
satisfied that we comply with the 2016 Code, and has considered
the Guidance on Audit Committees.
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. At the end of the year, the Committee
considered and agreed an audit tender timetable which indicates
that the tender process will commence in 2017 after our half year
results are released, and finish before the end of the year.
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 61.
Remuneration
At our AGM in 2016, shareholders approved our Directors’
remuneration report. We are due to present our Remuneration
Policy for approval at the 2017 AGM, as it has been three years
since our Policy was approved in 2014. The 2016 remuneration
report (pages 66 to 88) provides details of our proposed Policy
and a detailed review of the Remuneration Committee’s
activities, and bonus and share scheme performance in 2016.
Prior to submitting the Policy to shareholders for approval, we
have consulted with our major shareholders. As a result of this
consultation, we have decided to (i) introduce a two year post-
vesting holding period into our Long Term Incentive Plan (LTIP);
(ii) change the ROTA performance target in our LTIP to ROCE for
executive directors. Both changes are applicable for awards
made after the approval of the new Policy.
Sir Nigel Rudd
Chairman of the Board of Directors
27 February 2017
Chairman’s introduction
Throughout the financial year ended 31 December 2016 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). The Group
has applied all the 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 Guidance 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 2016. On
1 December 2016, Tony Wood was appointed as Chief Operating
Officer. Tony has significant business and operational experience
in the aerospace industry, most recently at Rolls-Royce plc
where he held a number of senior management positions during
a 16-year career, latterly as President, Aerospace. Tony reports
to Stephen Young, Chief Executive and was also appointed to the
Board of Directors as an Executive Director effective 1 December
2016. Tony has a specific focus on accelerating the operational
performance of the Group.
We also announced in December that Brenda Reichelderfer
would retire from her position as Non-Executive Director on
27 April 2017, immediately prior to the AGM. Brenda has brought
significant US, engineering and operational experience from the
aerospace industry to the Board and her independent advice and
counsel since her appointment in 2011 has been invaluable. On
behalf of the Board, I would like to extend our sincere thanks to
Brenda for the excellent contribution she has made to the Board
and to wish her all the best for the future.
The Board has agreed to appoint Nancy Gioia to the Board of
Directors (and as a member of the Audit, Remuneration and
Nominations Committees) immediately before the AGM on
27 April 2017 (with her due for first election by shareholders at the
2017 AGM). Nancy, a US citizen and an electrical engineer, joined
Ford Motor Company in 1982 and worked there until 2014 in a
number of senior roles across engineering and manufacturing/
operations. Retired for just over two years, Nancy is currently a
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTSSTRATEGIC REPORT 54
54
MEGGITT PLC REPORT AND ACCOUNTS 2016
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.
Committee membership
* Audit Committee
+ Nominations Committee
‡ Remuneration Committee
§ Ethics and Trade Compliance Committee
◊ Finance Committee
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 and
Non-Executive Chairman of Sappi Limited.
Appointments in unlisted companies: Non-
Executive Chairman of Business Growth Fund Plc.
Previous appointments
Chairman of Williams Holdings plc, Kidde plc,
Heathrow Airport Holdings Limited (formerly
BAA Limited), The Boots Company, Pilkington
PLC, Pendragon PLC, Invensys plc and Aquarius
Platinum Limited. Deputy Chairman of Barclays
PLC and Non-Executive Director of BAE
Systems plc.
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
Colin Day
Non-Executive Director * + ‡
Appointed: 2015 | Nationality: British
Alison Goligher OBE
Non-Executive Director * + ‡
Appointed: 2014 | Nationality: British
Skills and experience
Trained as electrical engineer at the École
Polytechnique Fédérale de Lausanne and holds a
Harvard Business School MBA. Brings significant
experience to the Board as a former FTSE-100
Chief Executive.
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.
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
Appointments in unlisted companies: Chairman of
software engineering company Linaro Limited,
director of the French software and services
company Berger Levrault and 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.
Current appointments
Colin served as Chief Executive of Essentra PLC
until 31 December 2016 and will remain on the
Board until the conclusion of Essentra’s AGM on
20 April 2017.
Senior Independent Director of Amec Foster
Wheeler plc.
Appointments in unlisted companies:
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.
Current appointments
Non-Executive Director of United Utilities Group
PLC, the UK’s largest listed water company.
Appointments in unlisted companies: Executive
Chairman of Silixa Limited, a provider of distributed
fibre optic monitoring solutions.
Previous appointments
Various roles at Royal Dutch Shell from 2006 to 2015,
most recently, Executive Vice President, Upstream
International Unconventionals. Previously spent
17 years at Schlumberger, a supplier of technology,
integrated project management and information
solutions to oil and gas customers worldwide.
MEGGITT PLC REPORT AND ACCOUNTS 2016 55
Philip Green
Executive Director, Commercial and
Corporate Affairs § ◊
Appointed: 2001 | Nationality: British
Paul Heiden
Non-Executive Director
Senior Independent Director * + ‡
Appointed: 2010 | Nationality: British
Brenda Reichelderfer
Non-Executive Director * + ‡ §
Appointed: 2011 | Nationality: American
Retiring from the Board on 27 April 2017
Skills and experience
Fellow of the Institute of Chartered Secretaries
and Administrators and Fellow of the Institute of
Directors with significant legal and compliance
experience.
Current Appointments
Appointments in unlisted companies:
Non-Executive Director and Vice Chairman of Poole
Hospital NHS Foundation Trust since 25 April 2015
and Chairman of their 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.
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 companies: 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 United Utilities Group
PLC, Bunzl plc, Essentra PLC and Chairman of
Talaris Topco Limited.
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 companies: 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
Tony Wood
Chief Operating Officer § ◊
Appointed: 2016 | Nationality: British
Skills and experience
Extensive aerospace industry experience gained
during a 15-year career with Rolls-Royce plc where
he held a number of senior management positions,
latterly as President, Aerospace. Previously
spent 16 years at Messier-Dowty, now part of
Safran Group.
No other current or previous appointments
to disclose.
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 companies: 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 and QinetiQ Group Plc and various senior
financial roles in both the UK and US for Logica
(now CGI).
Nancy Gioia
To be appointed as Non-Executive Director on 27
April 2017
Nationality: American
Skills and experience
Electrical engineer who has held senior engineering
and operational roles with a strong background in
manufacturing.
Current appointments
Non-Executive Director of Exelon Corporation and
Brady Corporation and Chairman of their
Technology Committee.
Appointments in unlisted companies: Member of
the University of Michigan Electrical and Computer
Engineering Advisory Council and Dearborn
Engineering Dean’s Advisory Board. Principal of
Gioia Consulting Services, LLC., a strategic
business advisory company.
Previous appointments
Held several key executive positions at Ford Motor
Company during a 33-year career. Chairman of
AutomotiveNEXT and Stanford University Alliance
for Integrated Manufacturing.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTSSTRATEGIC REPORT 56
Corporate governance report continued
Board of directors
Board of directors
Membership
Sir Nigel Rudd (Chairman),
executive and independent
non-executive directors
Creating and delivering
sustainable shareholder value
• Retains full and effective
control of the Group and
collectively responsible for
its success;
• Sets the Group’s strategy,
ensures appropriate
resources are in place to
achieve the Group’s
objectives;
• Reviews performance
regularly;
• Sets the Group’s values and
standards; and
• Ensures obligations to
shareholders, employees and
other stakeholders are met.
Leadership | Our governance framework:
Chairman
Sir Nigel Rudd
• Leads the Board and sets the agenda;
• Ensures the Board is effective;
• Facilitates the contribution of non-executive
directors and oversees the relationship between
them and the executive directors; and
• Ensures there is an effective system for
communication with shareholders.
Senior Independent Director
Paul Heiden
• Makes himself available to shareholders if they
have concerns which cannot be resolved through
the normal channels;
• Chairs the Nominations Committee when it is
considering the Chairman of the Board’s
succession;
• Appraises the Chairman’s performance annually
with the non-executive directors; and
• Acts, if necessary, as a focal point and
intermediary for the other directors.
Chief Executive
Stephen Young
• Leads executive directors and the senior
executive team in the day-to-day running of the
Group’s business;
• Ensures effective implementation of Board
decisions;
• Regularly reviews the strategic direction and
operational performance of the Group’s business;
and
• Keeps the Chairman informed on all important
matters.
Remuneration
The independent non-executive directors
Audit
The independent non-executive directors
Board committees
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.
Executive Directors
Stephen Young, Doug Webb, Tony Wood and
Philip Green
• Responsible for successful achievement of the
Group’s objectives and strategy; and
• Managing various functions and operations
across the Group.
Non-Executive Directors
Guy Berruyer, Colin Day, Alison Goligher,
Paul Heiden and Brenda Reichelderfer
• Constructively challenge management and
scrutinise their performance;
• Contribute to the development of the Group’s
strategy;
• Monitor reporting of the Group’s performance;
• Satisfy themselves on the integrity of financial
information and the effectiveness of financial
controls and risk management; and
• Determine appropriate levels of remuneration
for executive directors and participate in the
selection and recruitment of new directors and
succession planning.
Company Secretary
Marina Thomas
• Acts as secretary to the Board and its
Committees;
• Ensures compliance with Board procedures and
advises on governance issues;
• Facilitates the induction process for new
directors; and
• Ensures good information flow within the Board
and between non-executive directors and senior
management.
Nominations
Chairman and the independent non-executive
directors
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
Chairman, one independent non-executive
director and the executive directors
Finance
The executive directors
Disclosure
Chairman, Senior Independent Director, Chairman
of the Audit Committee and the executive directors
Ensures the implementation and application of the
Ethics and Business Conduct and Trade Compliance
policies and programmes.
Approves treasury-related activity, insurance
and other matters delegated by the Board.
Discusses and approves all matters related to
inside information under the market abuse regime.
Group Leadership Team
Chief Executive and his direct reports plus the
direct reports of the Chief Operating Officer
Management committees
Operations Leadership Team
Chief Operating Officer and his direct reports
The most senior decision-making and supervisory
group, responsible for oversight of the Group’s
implementation of the strategies, aims and
objectives of the Board, and other matters as
specified by the Chief Executive.
The operational decision-making and supervisory
group, responsible for implementing the strategies,
aims and objectives of the Board and Group
Leadership Team, and other matters as specified by
the Chief Operating Officer.
Commercial Committee
Executive directors, Group Head of Sales & Marketing
and Group Director, Engineering & Strategy
Reviews and approves bids and proposals of Group
significance and any other significant commercial
activity.
MEGGITT PLC REPORT AND ACCOUNTS 2016
57
Board membership, attendance and governance
Name
Sir Nigel Rudd1
Mr G S Berruyer
Mr C R Day
Ms A J P Goligher
Mr P E Green
Mr P Heiden
Ms B L Reichelderfer2
Mr D R Webb
Mr A Wood3
Mr S G Young
Title
Chairman
Non-executive director
Non-executive director
Non-executive director
Executive Director, Commercial and Corporate Affairs
Non-executive director
Non-executive director
Chief Financial Officer
Chief Operating Officer
Chief Executive
Scheduled meetings
eligible to attend
7
7
7
7
7
7
7
7
1
7
Meetings
attended
7
7
7
7
7
7
7
7
1
7
1 Met the independence criteria on appointment as Chairman on 23 April 2015.
2
Retiring from the Board on 27 April 2017.
Appointed on 1 December 2016.
3
Board governance documents
Document
Last reviewed and
approved by the
Board
Notes
Roles of the
Chairman and
Chief Executive
2016
These document the separate and clear division of responsibilities that have been
approved by the Board.
Non-executive
directors terms of
appointment
On appointment and
re-confirmed on a
three-yearly basis
Available for inspection at the Company’s registered office during normal business hours
and at the AGM.
Service contracts for
executive directors
• On appointment
• Not routinely
Available for inspection at the Company’s registered office during normal business hours
and at the AGM.
reviewed but would
be updated on
role change or if
legislation required
Schedule of matters
reserved for the
Board1
2015
• Setting the Group strategy, approving the annual budget;
• Changing the Group’s capital structure and capital allocation policy;
• Approving acquisitions and disposals above a certain threshold; and
• Approving results announcements, annual reports and dividends.
Terms of Reference
2016
For Board Committees.
Articles of
Association
2010
Available for inspection at the Company’s registered office during normal business hours
and at the AGM. Also available on Companies House online.
1
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, divisional president or site director.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
58
Corporate governance report continued
2016 activity
In 2016, the Board visited facilities in the US and UK and
received regular reports from executive management on
strategy and business performance, financial performance
(including treasury activity) and commercial and corporate
affairs (including commercial, legal and compliance).
The Board covered the following specific items during 2016:
• In October, there was a Board session dedicated to a
detailed review and discussion of the Group’s strategy
including a full portfolio review;
• The Board also received information on the new market
abuse regime and took into consideration the impact of
those new requirements (which came into effect in July
2016), approved a new Disclosure Committee which would
be responsible for matters relating to inside information
and listing, and approved a revised Share Dealing Policy;
• Divisional and functional updates and presentations
on operational performance, Customer Services & Support
(aftermarket), engineering and technology, programme
management, 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.
In 2016, the Board reviewed and approved:
• The appointment of Tony Wood as Chief Operating Officer
(effective from 1 December 2016) and Nancy Gioia as a
non-executive director (effective from 27 April 2017);
• The sale of Meggitt Target Systems businesses in the UK
and Canada;
• The 2017 budget;
• The 2015 Annual Report and Accounts, 2015 full-year
results and 2016 interim results announcement;
• The April and November 2016 trading statements;
• Recommendations to shareholders on the final dividend
payment for the year ended 31 December 2015 and approval
of the interim dividend payment for the year ended 31
December 2016;
• The Group’s risk appetite and risk register;
• The conflicts of interest register for the Board;
• The Treasury Policy, Risk Management Policy,
Anti-Corruption Policy, Ethics and Business Conduct Policy,
Code of Conduct and Share Dealing Policy;
• Terms of Reference for the Committees of the Board;
• The documents defining the roles of the Chairman and CEO;
and
• Resolutions to be put to shareholders at the AGM.
Since the year-end, up to the date of the Annual Report, the
Board has approved the 2016 Annual Report and Accounts,
the 2016 full-year results announcement and the proposed
final dividend for the year ended 31 December 2016.
In 2016, the Senior Independent Director met with the non-
executive directors to assess the performance of the Chairman
and the Chairman held regular meetings with non-executive
directors without the executive directors present. The
Chairman and the non-executive directors find it useful to have
the opportunity to review and discuss the performance of
executive management regularly.
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.
Board Committee disclosures:
• All non-executive directors are members of the Audit,
Remuneration and Nominations Committees on appointment.
Chairmanship of Committees is considered during
discussions on composition and succession.
• No one other than Committee chairmen and members are
entitled to attend the meetings, although others can be
invited.
• Each of these Committees’ written terms of reference were
reviewed and updated in 2016 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.
Further details of the composition and activities of these
Committees are set out in the separate Committee reports.
Appointments and time commitment
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 pages 64 and 65. The
appointment and removal of the Company Secretary is a matter
for the Board.
The letters of appointment for the Chairman and non-executive
directors set out the time they are expected to commit. The
Chairman and non-executive directors may undertake several
appointments, which require approval of the Board and are
reported on pages 54 and 55.
MEGGITT PLC REPORT AND ACCOUNTS 2016 59
During 2016, the Chairman attended all scheduled Board and
Committee meetings, including a tour of several of our US and
UK sites. He also had regular meetings with the Chief
Executive, attended multiple shareholder meetings about
governance and represented Meggitt and our interests at other
events. The Chairman holds other appointments, but the Board
and the Senior Independent Director can confirm that the time
dedicated to Meggitt matters in 2016 by the Chairman was
significant and appropriate for the activities and issues that
arose during the year.
Development
The Chairman agrees a personalised approach to the training
and development of each director and reviews this regularly. The
Company Secretary, who facilitates the induction of new directors
and assists with professional development where required,
continues to enhance the induction process following feedback
from directors.
Since Tony Wood 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
extensive site visits in the UK, US and Europe.
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 and is satisfied that
effective communication, principally by the Chief Executive
and Chief Financial Officer, is undertaken with shareholders.
The Board is supplied with the information it needs to discharge
its duties. 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 discuss the effectiveness of the
annual Board schedule during the Board evaluation.
During the 2016 Board evaluation, the content of the Board
papers and annual Board schedule were reviewed by the
directors and assessed by the external facilitators. It was
determined that both were working well and enabled the Board
to carry out its business effectively and efficiently.
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.
During 2016, the Board and Committees held specific
governance discussions on the 2016 Code and Guidance for
Audit Committees, the Market Abuse Regulation and the
requirements related to the Modern Slavery Act and Gender
Pay Gap.
The Board allows all directors to take external independent
professional advice at the Group’s expense.
Board evaluation
The Board conducted an externally facilitated review in 2016.
Independent Audit were selected as external facilitators, and they
interviewed all of the Board members and the Company Secretary.
Independent Audit have no other connection with the Group.
Key themes identified in the report from Independent Audit:
• The Board benefits from a good balance of skills in terms
of industry focus and functional expertise.
• The non-executives have diverse backgrounds and are able
to tackle issues from a range of perspectives.
• Meeting dynamics are positive with a good level of
contribution and constructive challenge.
• The Board is led by a skilled Chairman who is appreciated
by his colleagues. The Chief Executive and Chairman enjoy
a good working relationship and, more generally,
relationships between non-executives and executives
appear to be working well.
• The non-executives perception of the executive team is that
they are professional and hard-working and they
particularly value their openness and the way the Chief
Executive has driven improvements on a variety of fronts.
• Processes around deliberating and approving strategic
decisions and risk management continue to evolve
positively.
• The Board sets itself high standards of integrity, and a
clear and rigorous ethics programme is in place.
• Committees at Meggitt work well, and Committee chairmen
are highly regarded.
Opportunities to improve:
• Continuing to evolve Board discussions on succession
planning, strategy and risk management. The evaluation
found that significant progress had been made in all of
these areas over the last few years, and that the Board
agreed that there is always scope to further progress the
depth and quality of discussions in these areas.
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 91 and 92) and a statement by the auditors
concerning their responsibilities (page 99). The directors also
report that the business is a going concern (page 92), detail how
the Group generates and preserves value over the longer term
(the business model) and describe the Group’s strategy for
delivering its objectives in the Strategic report (pages 1 to 52).
The directors have also made a statement about the long-term
viability of the Group, as required under the Code (page 33).
Relations with shareholders
The Group values its dialogue with institutional and private
investors.
The Board communicates with private investors via direct
communication with our Vice President, Strategy & 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).
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 60
Corporate governance report continued
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 Vice President, Strategy & Investor
Relations on the views of shareholders, which are discussed. The
Chairman and other non-executive directors are available to
attend meetings with shareholders. Directors’ understanding of
major shareholders’ views is enhanced by reports from the Vice
President, Strategy & Investor Relations, our brokers and
attending analysts’ briefings. Analysts’ notes on the Group are
made available to all directors.
Investor relations activity, 2016 highlights:
• An investor day was held in April 2016 and covered an
update on our Customer Services & Support organisation,
an overview of our applied research and technology
activities (including a focus on research in manufacturing
technologies), and profiles of both our Meggitt Aircraft
Braking Systems and Meggitt Polymers & Composites
divisions, which included an overview of the expanded
composites capability following the acquisitions completed
in late 2015. It was attended by 26 sell-side analysts and eight
buy-side investors who also participated in tours of our two
facilities in Shepshed, UK. The feedback from the day was
positive and the presentation on our Customer Services &
Support function was particularly well received. All of the
presentations are available on the investors page on our
website.
• A specific letter was issued to major shareholders after the
AGM in 2016, offering a meeting with the Chairman. As a
result, the Chairman met with a number of our major
shareholders to discuss matters relating to governance and
strategy. We will continue to offer these meetings annually.
• A consultation letter was issued on our revised
Remuneration Policy in the Autumn, as a result of which,
a number of policy changes have been proposed to
shareholders for approval (see page 68).
We also engaged with ISS (Institutional Shareholder Services),
IVIS (Institutional Voting Information Service) of the Investment
Association and Glass Lewis before and after the AGM.
Shareholder documents
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 2016 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 27 April 2017, 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). The shorter notice period would not be used as a
matter of routine for such meetings, but only where
time-sensitive matters are to be discussed and where merited
in the interests of shareholders as a whole. The directors also
intend to follow other best practice recommendations as
regards this authority’s use.
At the 2017 AGM, in line with emerging best practice, the
Company has split the dis-application of pre-emption rights
resolution into two separate resolutions. The first resolution
seeks authorisation for 5% of the issued share capital to be
issued without application of pre-emption rights, whilst the
second resolution seeks authority for an additional 5% of the
issued share capital to be used for an acquisition or a specified
capital investment. This is in accordance with the Statement of
Principles issued by the UK’s Pre-Emption Group in 2015. In
asking shareholders to approve this additional authority, the
directors confirm that they intend to adhere to the
requirements set out in the Statement of Principles.
All directors are subject to election by shareholders at their
first AGM after their appointment, as will be the case in 2017 for
Mr A Wood and Ms N Gioia. After that, all directors are subject to
re-appointment annually to comply with the Code. All directors
in office at the date of the AGM will be subject to election or
re-election with the exception of Ms B Reichelderfer who is
retiring from the Board on 27 April 2017 and will not stand for
re-election.
By order of the Board
M L Thomas
Company Secretary
27 February 2017
MEGGITT PLC REPORT AND ACCOUNTS 2016 Audit Committee report
61
Work of the committee in 2016
In 2016, the Audit Committee:
• Reviewed the financial information contained in the 2015
Annual Report and Accounts, 2015 full-year and 2016
interim results announcements and recommended them to
the Board for approval;
• Negotiated and approved the 2016 external audit fees;
• Discussed the external auditor’s strategy memorandum
and interim audit clearance report for 2016;
• Reviewed the independence and effectiveness of the
external auditors, and agreed their terms of engagement;
• Received reports from internal audit at each meeting,
discussed significant items and the effectiveness of internal
audit, and approved the 2017 internal audit plan;
• Received a treasury update from the Head of Tax and
Treasury;
• Reviewed and approved updated Terms of Reference;
• Received technical accounting and governance updates
provided by the Group Financial Controller, Group
Company Secretary and the external auditors. This included
a presentation from the Group Financial Controller on IFRS
15, the new revenue accounting standard that becomes
effective for the Group in 2018. The Committee discussed
with management its process to date, preliminary
conclusions and implementation plan;
• Discussed and agreed the timetable for external audit
tender;
• Discussed the impact of the amendments in the 2016 Code
and the FRC’s Guidance on Audit Committees;
• Reviewed the adequacy and effectiveness of (i) the systems
of internal control; (ii) the risk management process, and
(iii) the process executive management used to enable the
Board to make the viability statement; and
• Reviewed the effectiveness of the Committee, external and
internal audit using the process described on page 63. 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 2016 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 2016 Annual Report and Accounts,
taken as a whole, is fair, balanced and understandable. The
Committee provided this advice having reviewed managements’
process and confirmed 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 33) and confirmed their agreement to propose
the reappointment of the external auditors to shareholders
for the 2017 financial year.
Chairman’s introduction
I am pleased to present the report of the Audit Committee for 2016.
I chair the Audit Committee and as a Fellow of the Association of
Chartered Certified Accountants, and previous Chief Executive
Officer of Essentra plc and Chief Financial Officer of Reckitt
Benckiser Group plc, I can confirm that I bring recent and
relevant financial experience to the Committee.
Committee members throughout 2016 were Guy Berruyer,
Alison Goligher, Paul Heiden and Brenda Reichelderfer.
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, Chief Operating Officer and the
Executive Director, Commercial & Corporate Affairs also
attended meetings 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 2016 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
oversight of the risk management process.
Committee membership and attendance in 2016
Name
Mr C R Day (Committee chairman)
Mr G S Berruyer
Ms A J P Goligher
Mr P Heiden
Ms B L Reichelderfer
Meetings
eligible to attend
Meetings
attended
3
3
3
3
3
3
3
3
3
3
Terms of Reference
The Committee operates within agreed terms of reference, which
outline the key responsibilities of the Committee and are
available on our website.
The Terms of Reference were reviewed and updated in 2016.
Since their last review in 2014, the Committee has taken on
responsibility for the oversight of risk management processes,
and the FRC’s viability statement requirements have come into
force, so the Terms of Reference were amended to reflect the
Committee’s increased responsibilities in these areas.
Audit Quality Review
In 2016, the FRC’s Audit Quality Review team reviewed the audit
work carried out by PwC on our 2015 Annual Report and
Accounts. The Committee discussed the FRC review with PwC.
There were no significant findings arising from the review. As a
result, there were no significant actions identified, by either the
auditors or the Committee, to be undertaken.
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62
Audit Committee report continued
Significant judgements relating to the financial statements
The table below summarises the significant judgements reviewed by the Committee in respect of the Group’s financial statements.
Significant judgements
Action
Goodwill and other
intangible assets arising
on an acquisition
Development costs
and programme
participation costs
The principal judgements are management’s determination of the level at which impairment testing should
be performed, the achievability of 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 discussed a report from management setting out the basis for the
assumptions, confirmation that the cash flows used were derived from the 2017 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 at each significant level at which testing was
performed. During the year, management determined that certain CGU’s should be grouped together for
impairment testing, reflecting the extent to which the Group had become more integrated and these were
set out in the report to the Committee. The Committee agreed the judgements made by management were
appropriate, including the change to the level at which impairment testing was performed, and that no
impairment was required.
The Committee discussed a report from management covering exposure to different aircraft platforms and
manufacturers and a sensitivity analysis on specific programmes. The Committee focused in particular
on the Bombardier CSeries and Dassault 5X in light of the values capitalised on these platforms. Further
analysis was also requested of management on amounts capitalised in the year and the extent to which
the level of capitalisation, excluding the impact of exchange differences, was starting to reduce as aircraft
programmes entered service. The Committee concluded 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 discussed 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 and delays to the timing of
clean-up activities, including the impact on insurance policy limits and insurance policy periods of cover.
The Committee agreed with the judgements made by management.
Retirement benefit
obligations
Fair value of assets and
liabilities acquired in business
combinations
Income taxes
Assumptions on mortality, inflation and, particularly in the current market environment, the rates at
which scheme liabilities are discounted 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 2016 assumptions had been determined, how the Group’s assumptions
used in its 2015 financial statements benchmarked against those disclosed by other large corporate entities
and, for the UK scheme, the extent to which demographic assumptions reflected the results of the triennial
actuarial valuation completed in the year. The Committee concluded that the assumptions used, which were
supported by third party actuarial advice, were appropriate.
The Committee discussed a report from management setting out the principal areas of judgement applied in
finalising the fair values of the assets and liabilities of the businesses acquired in late 2015. These included
attributing fair values to intangible assets acquired in the business combinations, the method of accounting
and fair value of the joint venture arising from the EDAC acquisition and assumptions made on anticipated
sales volumes, future pricing and the outcome of ongoing discussions with third parties in respect of
onerous production contracts. The Committee agreed with the conclusions reached by management on
the method of accounting for the joint arrangement and concluded that the fair values attributable to the
acquired assets and liabilities, which in the case of the acquired intangible assets and joint venture were
supported by third party valuation 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 assessing the appropriateness of the provision recognised
in respect of uncertain tax positions, the Committee considered a report from management setting out the
basis for the assumptions made. They discussed the assumptions in light of the current tax environment and
the status of tax audits in the main jurisdictions in which the Group operates. The Committee concluded that
the position taken on uncertain tax provisions 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. The Committee noted the items reflected
the way in which they, as members of the Board, reviewed the underlying performance of the Group, were
treated consistently year on year and were disclosed appropriately.
The Committee discussed each of the above judgements with the external auditors before reaching their conclusions.
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.
MEGGITT PLC REPORT AND ACCOUNTS 2016 63
During the year the Committee discussed and agreed an outline
audit tender process to select the Group’s auditors for the 2018
financial year, the key dates of which are:
• Determination of selection panel/criteria, short list for tender
•
– June 2017
Issue RFP, meetings, presentations and responses from invited
parties – July to September 2017
• Committee decision/recommendation – end of October 2017
• Board approval – November 2017
The tender process will take into account FRC audit quality review
reports. The mandatory rotation of auditor under EU rules does not
take place until 2023.
Under the current regulations, the Committee is required to
tender and rotate the external audit by 2023. However, the
Committee determined that as the audit had been with PwC
since 2003 and was reaching the end of the current audit partner
rotation period, it was appropriate and in the best interests of the
Company and our shareholders to tender the audit for the 2018
financial year.
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.
The Committee assessed the effectiveness of PwC and the
external audit process using a questionnaire and a Committee
discussion on responses to the questionnaire. The Committee
was satisfied with PwC’s performance and the external audit
process, that PwC had employed an appropriate level of
professional challenge in fulfilling their role and there were no
significant findings from the evaluation process. The Committee
also considered the result of the FRC’s Audit Quality Review (see
above). The Committee has determined, on the basis of the
satisfactory outcome of the evaluation and the Audit Quality
Review, that it will recommend that the Board submit the
re-appointment of PwC to shareholders for approval at the AGM
in 2017 for the 2017 financial 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 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 fees paid for audit services, audit-related services
and non-audit services can be found in note 7 to the Group’s
consolidated financial statements. Fees paid for non-audit
services in 2016 were less than £0.1 million (2% of the total audit
fee) and average fees paid for non-audit services for the last
three years to 2016 were less than £0.1 million (1% 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 was updated in 2016 to
reflect the latest regulatory position, and covers services that
can be provided and which are generally prohibited (for example
internal audit services and tax planning) and sets out the
procedures for approving non-audit services. The full policy is
available 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.
In 2016, internal audits were carried out at 27 Group sites,
including the UK and US finance shared service centres, as part
of the three year rotational audit cycle. The business unit audit
programme’s scope includes finance, sales agents/distributors,
HR/payroll and commercial bid & proposal activity. The scope of
internal audit continues to develop with the business, particularly
as a result of any acquisition and disposal activity. A key role of
the Committee is to monitor the level of internal audit resource to
ensure it remains appropriate as both the Group and internal
audit evolve.
The Committee remains cognisant of increasing cyber complexity
and associated risks. Internal audit have a co-source arrangement
with Grant Thornton UK LLP to assist with resourcing specialist
audits, such as IT. The 2016 IT audit plan included reviews of IT
security, IT strategy, third party providers, data protection, policies
& procedures and disaster recovery.
The results of these audits are regularly discussed with the
Group Head of Audit & Risk by the Chairman of the Audit
Committee between Audit Committee meetings. At each meeting,
the Committee receives a status update on the internal audit
programme, discusses and challenges any significant issues
arising and monitors implementation by the businesses of any
recommendations made.
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 2017, 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
27 February 2017
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64
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.
In December 2016, the Board, taking into account investor
feedback on the Chief Executive being a member of the
Nominations Committee, reviewed the Terms of Reference for
the Committee and amended them to remove the Chief Executive
as a member. As a result, Stephen Young stepped down as a
member of the Committee in December 2016. There were no
further changes to the Committee, which is now comprised of
the Non-Executive Chairman and the non-executive directors.
All appointment decisions were made following a rigorous
search process using executive search firm The Zygos
Partnership. The Zygos Partnership assists with other senior
executive searches below Board level, but has no other
connection with the Group.
Committee membership and attendance during 2016
Name
Sir Nigel Rudd (Chairman)
Mr S G Young1
Mr G S Berruyer
Mr C R Day
Ms A J P Goligher
Mr P Heiden
Ms B L Reichelderfer
Meetings
eligible to attend
Meetings
attended
4
4
4
4
4
4
4
4
4
4
4
4
4
4
1 Stephen Young stepped down from the Committee on 14 December 2016.
Terms of Reference
The Committee operates within agreed terms of reference.
These were reviewed and updated in 2016 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.
2016 Board changes
Who?
Key facts
Relevant experience for Meggitt
Tony Wood
• Chief Operating Officer
• UK citizen
• Engineer
• Joined the Board on
1 December 2016
• Significant business and operational experience in the
aerospace industry, most recently at Rolls-Royce plc
where he held a number of senior management
positions during a 15-year career, latterly as President,
Aerospace.
• Extensive industry experience invaluable to support our
customers with the unprecedented ramp-ups of their
new programmes, whilst accelerating the progress of
our strategic initiatives.
Nancy Gioia
• Non-executive director
• A number of senior roles across engineering and
• US citizen
• Electrical engineer
• Joining the Board on
27 April 2017
manufacturing/operations most recently at Ford Motor
Company during a 30-year career.
• Enables the Board to retain critical US and engineering
experience and gain the benefit of experience from the
fast-moving automotive industry as we accelerate the
pace on our key strategic initiatives.
It was also announced that Brenda Reichelderfer will retire from the Board in April 2017. Brenda has brought significant
US, engineering and operational experience from the aerospace industry to the Board and her independent advice and
counsel since her appointment in 2011 has been invaluable to the Board.
MEGGITT PLC REPORT AND ACCOUNTS 2016 65
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 2016, 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 Leadership Team and other high
potential individuals around the Group. 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
During 2016, the Board used Independent Audit to perform an
external evaluation using the process described on page 59.
One of the outcomes of the evaluation is that the Nominations
Committee should continue to evolve discussions around
succession planning for the Board and senior executives.
Sir Nigel Rudd
Chairman of the Nominations Committee
27 February 2017
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 52); 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, and will continue to be the
case when Brenda Reichelderfer is replaced by Nancy Gioia. 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.
The Committee notes the updated requirement under the
Disclosure Guidance and Transparency Rules (DTR) for our 2017
Annual Report to disclose our diversity policies with regard to
aspects such as, for instance, age, gender, educational and
professional backgrounds. Our diversity data is disclosed in our
Corporate responsibility report.
The Board appointment process for the Nominations Committee
is to engage an external recruitment consultant and agree a role
specification for the role to be filled. A sub-committee of
directors are then usually engaged to conduct a search for a
long-list of candidates, which is then reduced to a short-list of
candidates whom are interviewed. As well as their experience
and suitability for the role, the Committee and the Board take
account of the number of positions a director already holds in
other companies, to ensure that they will have sufficient time
to fulfil their role at Meggitt.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 66
Directors’ remuneration report
2016 activity
The 2015 Directors’ remuneration report was submitted to
shareholders for approval at our 2016 AGM, gaining an approval
rating of 91.25%. The Committee reviewed its Terms of Reference
and no significant updates were needed. We also finalised the
effectiveness review of the Committee and Kepler, our advisers,
which was carried out using questionnaires and through
Committee discussion. Overall, the ratings for the Committee and
Kepler were satisfactory and no significant areas were highlighted
for improvement.
We approved awards under the LTIP and confirmed the vesting
outcomes of the STIP award for 2015 and awards made in 2013
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 2017 STIP and LTIP
awards which are detailed in this report, agreed the salaries for
the executive directors and confirmed the vesting outcome of the
2016 STIP and 2014 LTIP awards.
On 1 December 2016, Tony Wood was appointed as Chief Operating
Officer. In agreeing his remuneration, the Committee took into
account the size and responsibilities of the role, Tony’s extensive
industry experience and market data for comparable roles,
among other factors. His salary will be eligible for an increase in
2018 (and annually thereafter), or sooner in the event his
responsibilities change. He was not eligible for a 2016 STIP award,
but was awarded a 2016 LTIP award on appointment, to align his
interests with those of his executive colleagues and shareholders
from the date of his joining Meggitt. Details of Tony’s package are
set out in the Annual Report on Remuneration.
2017 Remuneration Policy Update
In 2016, the Committee also conducted a thorough review of our
Remuneration Policy, which took into account the effectiveness
of the Policy in practice at Meggitt as well as the wider market
context and developments in remuneration governance over the
last three years. I wrote to our major shareholders in the Autumn
and received useful feedback, which formed part of a Committee
discussion in December to finalise our Policy. It was agreed as a
result of the consultation process, that for the LTIP we would put
in place a two-year post-vesting holding period for executive
directors after the three-year vesting period. We also agreed to
replace, for executive directors only, the ROTA performance
measure with ROCE, following feedback from some shareholders,
and to better reflect the value that our acquisitions bring to
Meggitt. These changes will take effect for any LTIP awards made
after the revised policy is approved at the 2017 AGM.
2016 Group performance
Revenue increased by 21%, driven by currency and the composites
acquisitions. Organic revenue growth of 1% was in line with
expectations, including 4% growth in civil aerospace but a 17% decline
in energy as customers continue to reduce capital expenditure in
response to low commodity prices. Underlying operating profit
declined organically by 3%, reflecting unfavourable product mix
(including the continued challenges in the energy market) and a
growing headwind from depreciation and amortisation. Underlying
earnings per share increased by 3.2p to 34.8p.
The EPS and ROTA elements of the LTIP award made in 2014
(accounting for two thirds of the award) have failed to meet their
performance conditions. The strategic measures in the LTIP (one
third of the award) have partially met their targets, to the extent
noted on page 79, and therefore the Committee has confirmed
that the 2014 LTIP award will vest at 17.3%. For the 2016 STIP
award, the profit element vested at 62.4% of target, the free cash
flow element vested at 109.2% of target and personal measures
vested as disclosed later in this report.
Chairman’s introduction and annual statement
It is my pleasure to present the Directors’ remuneration report
for the year ended 31 December 2016.
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 through
sustainable performance for our customers. The package aligns
with our strategy (see below), is clear and transparent, and aims
to provide all participants with performance metrics which are
relevant to their daily work. 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.
Strategy
Remuneration
Operations
excellence
LTIP: MPS execution targets, quality and delivery
improvement targets, programme management
targets based on gate review progress, ROTA, gross
margin and inventory improvement targets are
measures in the LTIP.
STIP: Underlying operating profit and free cash flow.
MPS, quality and delivery, programme management,
improvement in supply chain quality and delivery are
covered in Chief Executive’s personal performance
measures. Integration and financial returns from
acquisitions in both Chief Executive’s and Chief
Financial Officer’s personal performance measures.
Technology LTIP: Innovation targets are measures in the LTIP.
STIP: Applied research and technology targets are
covered in the Chief Executive’s personal
performance measures.
Customer
focus
LTIP: Organic revenue growth, quality, delivery and
Meggitt Production System execution targets are
measures in the LTIP.
STIP: Quality, delivery and MPS execution targets
plus performance of our new CSS division are in the
Chief Executive’s personal performance measures.
Pay environment
The Committee is mindful of the continuing debate around
executive remuneration and recent updates to remuneration
governance and shareholder guidance, and the implications of
these for Meggitt. During the year the Committee reviewed the
latest guidelines published by investors, the Investment
Association (shareholder representative body) and Institutional
Shareholder Services (proxy advisor), together with the
Corporate Governance Green Paper published by the Department
of Business, Energy, & Industrial Strategy. The Committee will
continue to keep remuneration under review in the context of
governance developments, as we consider the appropriateness
of our remuneration practices each year.
MEGGITT PLC REPORT AND ACCOUNTS 2016 67
2016 Remuneration at a glance – executive directors
Remuneration at a glance is a summary of remuneration activity in the year. For more detailed disclosures and commentary,
see the relevant section of the annual report on remuneration, which starts on page 76.
2016 Single total figure of remuneration
Base salary
Taxable benefits
Pension
STIP
LTIP
Total
1 Mr A Wood was appointed on 1 December 2016.
2016 STIP outcomes
Financial targets
Mr S G Young
£’000
Mr D R Webb
£’000
A Wood1
£’000
Mr P E Green
£’000
688
28
344
625
247
456
14
114
435
164
1,932
1,183
38
1
10
–
–
49
367
14
184
354
128
1,047
Performance targets
Measure
Weighting
Threshold
Target
Stretch
Actual
performance
Underlying operating profit
Free cash flow
33.3%
33.3%
£342.0m
£360.0m
£387.0m
£346.4m
£139.5m
£164.5m
£189.5m
£169.2m
1 Mr A Wood was appointed on 1 December 2016 and so did not receive a 2016 STIP award.
Vesting
(% salary)
20.8%
36.4%
Vesting for
financial
performance
57.2%
Overall STIP outcomes
Executive Director
Mr S G Young
Mr D R Webb
Mr A Wood1
Mr P E Green
Vesting for
financial performance
(% of salary)
Vesting for
personal performance
(% of salary)
Overall bonus outcomes
% of salary
% of maximum
57.2%
57.2%
Nil
57.2%
33.3%
37.8%
Nil
38.6%
90.5%
95.0%
Nil
95.8%
60.3%
63.3%
Nil
63.9%
1 Mr A Wood was appointed on 1 December 2016 and so did not receive a 2016 STIP award.
2014 LTIP outcomes
Executive Director
Mr S G Young
Mr D R Webb
Mr A Wood1
Mr P E Green
Overall % vesting
(% of maximum)
17.3%
17.3%
Nil
17.3%
Interests
vesting
54,052
35,818
Nil
28,003
Date
vesting
22.05.17
22.05.17
Nil
22.05.17
£
625
435
–
354
Estimated
value
£’000
£247
£164
–
£128
1 Mr A Wood was appointed on 1 December 2016 and so did not receive a 2014 LTIP award.
Executive share ownership
Name
Mr S G Young
Mr D R Webb
Mr A Wood¹
Mr P E Green
1 Mr A Wood was appointed on 1 December 2016.
Shareholding
guideline
(% 2016
salary)
300%
200%
200%
200%
Current
shareholding
(% 2016
salary)
Guideline
met?
424%
Met
102% Building
Building
Met
–
712%
Shares owned
outright
638,514
102,235
–
572,934
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 68
Directors’ remuneration report continued
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 Guidance and Transparency Rules (DTR). 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.
The Policy report
This section of the report sets out the proposed Policy for the directors, which is being put to shareholders for approval at the 2017
AGM. If approved, this Policy will be effective for a period of three years from the date of the 2017 AGM. The Policy applicable for 2014,
2015 and 2016 can be viewed in the Directors’ remuneration reports for 2013, 2014 and 2015 respectively.
Changes to Policy
The Committee commenced its review of the remuneration Policy earlier in 2016, and consulted shareholders in Autumn 2016. As a
result of that consultation, the Committee discussed various matters in December 2016 and agreed certain changes should be made
to the LTIP awards to executive directors during the life of the proposed Policy. These changes are as follows:
LTIP
LTIP
The Committee proposes to amend the rules of the LTIP (subject to the approval of this Policy) to apply a two-year
post-vesting holding period to future awards. It was agreed that two-year holding periods for executive directors
are increasingly common and accepted 'best practice', and that a holding period further helps to ensure close
alignment of executive director and shareholder interests.
The Committee proposes to replace the Return on Trading Assets (ROTA) performance measure (subject to the
approval of this Policy) with a Return on Capital Employed (ROCE) performance measure to ensure the way
executive directors' performance is measured aligns more directly to the performance of corporate acquisitions.
Executive Director Remuneration Policy Table
Base salary
Function
Operation
Opportunity
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, prevailing market conditions, and market data for FTSE companies in similar
industries and those with similar market capitalisation.
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).
The percentage salary increases for executive directors will not exceed those of the wider workforce over the life
of this Policy in the normal course of business. Higher increases may be awarded (i.e. in excess of the wider
employee population) in instances where, for example, there is a material change in the responsibility, size or
complexity of the role, or if a new director was intentionally appointed on a below-market salary. The Committee
will provide the rationale for any such higher increases 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.
MEGGITT PLC REPORT AND ACCOUNTS 2016
69
Pension
Function
To provide post-retirement benefits for executive directors in a cost-efficient manner.
Operation
The pension plans operated by the Group which executive directors are, or could be, members of are:
Opportunity
—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.
New executive director external appointments since 2013 are eligible for a pension allowance of 25% of salary,
payable either as a 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 the Policy approved by shareholders in 2014 (“2014
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 the
2014 Policy which entitle them to receive a pension allowance of 50% of salary and this arrangement will continue
for these directors during the life of the new proposed Policy.
Performance
metrics
None.
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 new proposed 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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 70
Directors’ remuneration report continued
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.
Opportunity
The STIP provides for a maximum award opportunity of up to 150% of salary in normal circumstances, with an
on-target opportunity of 100% of salary and an opportunity of 50% of salary at threshold performance.
Performance
metrics
The Committee has discretion to make a STIP award of up to 200% of salary in exceptional circumstances (e.g. a
substantial contract win which has a significant positive financial impact in the long term but which has no, or
negative, short term financial impact).
Dividends accrue on unvested deferred STIP awards over the vesting period and are released on the vesting date.
STIP awards are based on the achievement of financial and personal performance targets. For the executive
directors, the STIP will be based on a combination of the financial performance of the Group and 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. However, the weighting for
personal performance will not exceed one-third of the maximum STIP opportunity in any year.
The award for performance under each element of the STIP will be calculated independently. The Committee has
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 and performance in core competency areas, which are seven core skills specifically selected as critical for
the Group’s employees.
Details of the measures, weightings and targets applicable to the STIP for each year, including a description of
how they were chosen and whether they were met, will be disclosed retrospectively in the annual report on
remuneration for the following year (subject to commercial sensitivity).
MEGGITT PLC REPORT AND ACCOUNTS 2016 71
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.
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 of conditional shares, market value share options and phantom
awards.
Under the LTIP 2014 rules, 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.
LTIP awards made to executive directors over the life of the new proposed Policy will be subject to a two-year
holding period after the three-year vesting period. The rules of the LTIP will be amended to implement this.
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 each 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 for awards made over the life of the new proposed Policy:
• Earnings per Share (EPS);
• Return on Capital Employed (ROCE); and
• Strategic goals (typically but not always to be based on strategic priorities around execution, growth and
innovation), which will be explained in the relevant annual report on remuneration.
The way these measures link to our KPIs can be seen on pages 34 to 37. It is the 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.
Awards made under the LTIP 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, and which are not deemed commercially
sensitive, are disclosed in the annual report on remuneration for the relevant year of grant. Any commercially-
sensitive information on measures, targets and performance will be disclosed retrospectively.
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 UK executive directors) may
save up to a maximum monthly savings limit 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 UK executive directors) may contribute up
to a monthly maximum to purchase shares monthly from pre-tax pay; and (ii) all UK employees (including UK
executive directors) may receive free shares up to an annual maximum value.
Opportunity
Savings, contributions and free shares are capped at or below the legislative maximum for tax-qualifying
approved share plans at the time UK employees are invited to participate.
Performance
metrics
None.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 72
Directors’ remuneration report continued
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 Equity Participation Plan and the Executive Share Option Scheme,
the Group’s long term incentive plans which operated prior to the introduction of the LTIP in 2014. These awards have all vested in
accordance with the applicable performance conditions and are capable of exercise during the period over which this Policy applies.
The tables on pages 87 and 88 highlight outstanding and vested awards.
Approach to target setting and performance measure selection
Performance measures have been selected to closely align with, and reinforce, Meggitt’s strategic priorities. 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,
market practice and external expectations for growth in Meggitt’s markets.
STIP
The performance measures used in 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 to be made during the life of this Policy will be linked to EPS, ROCE 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.
ROCE helps to balance the achievement of growth and returns. The Committee believes ROCE is a good proxy for total shareholder
return (TSR) which focuses executives on managing the balance sheet and Meggitt’s operational performance. For executive
directors, the use of ROCE targets reflects the fact that acquisition decisions come within the collective responsibility of the Board.
The Committee believes that the strategic goals component will help reinforce the realisation of the Group’s 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 personal performance, 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 awards on similar terms as the executive directors (except some of the performance conditions may vary),
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
The minimum shareholding guideline for executive directors are 300% of base salary for the Chief Executive and 200% of base salary
for each of the other executive directors. There is no set time frame within which executive 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 86).
MEGGITT PLC REPORT AND ACCOUNTS 2016 73
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: ‘Minimum’, ‘On-target’ and ‘Maximum’.
Potential reward opportunities are based on the Policy, applied to 2017 base salaries and 2017 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.
S G Young (£’000)
100%
Minimum
£1,086
48%
31%
21%
A Wood (£’000)
100%
Minimum
£589
44%
34% 22%
On-target
Maximum
29%
29%
42%
26%
30%
44%
£2,256
On-target
£1,353
£3,694
Maximum
£2,291
D R Webb (£’000)
100%
Minimum
£598
44%
34% 22%
On-target
£1,373
26%
30%
44%
P E Green (£’000)
100%
Minimum
£579
48%
31% 21%
On-target
£1,204
29%
29%
42%
Maximum
£2,326
Maximum
£1,972
Salary and benefits
Pension
STIP
LTIP
The following assumptions have been made in compiling the above charts:
Scenario
Minimum
On-target
Maximum
STIP
No STIP payout
On-target STIP payout
(two-thirds of Maximum)
Maximum STIP payout
(150% of base salary)
LTIP
Nil vesting
Threshold vesting
(30% of award)
Full vesting
(220% of base salary)
Fixed pay
Latest disclosed base salary,
benefits and pension
Non-Executive Directors’—Remuneration Policy Table
Non-executive directors stand 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 the 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. Additional fees may also be paid to any
non-executive director to cover the cost of attendance at meetings which take place outside their continent of
residence. In addition, non-executive directors are reimbursed for reasonable business-related expenses.
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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 74
Directors’ remuneration report continued
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 the year actually worked. 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 either in the RIS notification made at the time of appointment or 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 73.
MEGGITT PLC REPORT AND ACCOUNTS 2016 74a
MEGGITT PLC REPORT AND ACCOUNTS 2016
Directors’ remuneration report continued
Discretion
The Committee will operate the Group’s incentive plans according to their respective rules and the Policy set out above, and in
accordance with the Listing Rules and HMRC rules, where relevant. In line with common market practice, the Committee retains
discretion as to the operation and administration of these incentive plans, including with respect to:
• Who participates;
• The timing of grant and/or payment;
• The size of an award and/or payment;
• The manner in which awards are settled;
• The choice of (and adjustment of) performance measures and targets in accordance with the Policy set out above and the rules of
each plan;
• The measurement of performance in the event of a variation of share capital, change of control, special dividend, distribution or any
other corporate event which may affect the current or future value of an award;
• Determination of a good leaver (in addition to any specified categories) for incentive plan purposes, based on the rules of each plan
and the circumstances of the individual leaving; and
• Adjustments required in certain circumstances (e.g. rights issues, share buybacks, special dividends, other corporate events, etc.).
Any use of the above discretion in relation to the executive directors would, where relevant, be explained in the annual report on
remuneration for the year in which the discretion was exercised. As appropriate, it might also be the subject of consultation with the
Group’s major shareholders.
Minor changes
The Committee may make minor amendments to the rules of the Group’s incentive plans (for regulatory, exchange control, tax or
administrative purposes or to take account of a change in legislation) without requiring prior shareholder approval for that
amendment.
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 awards held by the executive directors:
• Compensation for loss of office in service contracts
Except as set out in the table on page 75, 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 Group without notice or payment in lieu of notice in specific circumstances including summary dismissal, bankruptcy or
resignation.
• Treatment of STIP
Executive directors have no automatic entitlement to any bonus on termination of employment under the STIP, but the Committee
may use its discretion to award a bonus (normally pro-rated). Where any bonus is deferred into shares, the award will normally
lapse if an executive director’s employment terminates unless the executive director leaves for specified ‘good leaver’ reasons. The
‘good leaver’ reasons are death, redundancy, retirement, injury, disability, the business or company which employs the executive
director ceasing to be part of the Group or any other circumstances in which the Committee exercises discretion to treat the
executive director as a ‘good leaver’. If the executive director is a ‘good leaver’ their award will vest on the normal vesting date and
will not be subject to pro-rating. Awards normally vest early on a change of control of the Company.
• 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 LTIP, awards vest on the normal vesting date subject
to performance over the normal performance period, unless the Committee decides otherwise. Awards normally vest early on a
change of control of the Company subject to performance conditions and time pro rating.
75
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
Chief Financial
Officer
Mr A Wood
Service contract
dated 14 November
2016
Chief Operating
Officer
Mr P E Green
Service contract
dated 26 February
2001
Executive Director,
Commercial &
Corporate Affairs
12 months
6 months
As set out in the Policy.
No change of control provisions.
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 86.
Consideration of conditions elsewhere in the Group
The Committee does not consult with employees specifically on executive remuneration policy and framework but the Committee
does review salary data from across the Group. The Committee seeks 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.
In making remuneration decisions for the executive directors, the Committee considers the pay and employment conditions
elsewhere in the Group. To assist in this, the Committee members receive updates from the executives on pay decisions throughout
the Group, including STIP payments and share awards made to executives outside the Committee’s remit.
Consideration of shareholder views
The Committee Chair is available to discuss remuneration matters with the Group’s major shareholders, and is also regularly
updated on feedback on remuneration received by the Chairman of the Board and executive directors directly from shareholders.
The Committee Chair ensures the Committee is kept informed of shareholder views. The Committee Chair has consulted with
shareholders, reviewed their guidelines and guidelines released by other shareholder representative bodies, before putting this
2017 Policy to shareholder approval in 2017.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 76
Directors’ remuneration report continued
Annual report on remuneration
The following report provides details of how our existing Policy was implemented during the year ended 31 December 2016.
Remuneration Committee—2016 membership and attendance
Name
Mr P Heiden (Chairman)
Mr G S Berruyer
Mr C R Day
Ms A J P Goligher
Ms B L Reichelderfer
Meetings
eligible
to attend
Meetings
attended
4
4
4
4
4
4
4
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
reviewed and reapproved in 2016 (with no significant amendments made).
The Committee is responsible for determining the remuneration policy and packages for all executive directors and senior executive
direct reports to the Chief Executive and Chief Operating Officer (covering the most senior executives across the Group) and for
agreeing the fees for the Chairman. The Chairman, Chief Executive and HR Director attend meetings of the Committee by invitation;
they are absent when their own remuneration is under consideration. The Chief Financial Officer attended the meetings in December
2016 and February 2017 to provide cover whilst a new HR Director was appointed.
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 (part of Marsh & McLennan Companies, Inc.) who
were appointed in 2010 as a result of a competitive tender process. The Committee regularly reviews Kepler’s independence and is
satisfied that Kepler continue to act as independent 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 other than
through their parent company, Marsh & McLennan Companies, the Group’s primary advisors on insurance (Marsh) and UK pensions
and benefits (Mercer). Kepler are a member of the Remuneration Consultants Group and adhere to its code of conduct
(www.remunerationconsultantsgroup.com). Their total fees in 2016 were £47,364 (2015: £41,000).
2016 AGM voting
The following table shows the results of the advisory vote on the 2015 Directors’ remuneration report at the 2016 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
571,589,195
91.25
54,793,990
8.75
626,383,185
3,392,829
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 2014 Remuneration Policy was approved by shareholders at the 2014 AGM, receiving support from 98.95% of the votes cast (1.05% voted
against, and 30.5 million votes were withheld).
MEGGITT PLC REPORT AND ACCOUNTS 2016 77
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 2016 and the prior year:
Base salary
Taxable benefits2
Pension
STIP3
LTIP4
Total
Mr S G Young
Mr D R Webb
Mr A Wood¹
Mr P E Green
2016
£’000
688
28
344
625
247
2015
£’000
674
24
337
312
–
2016
£’000
456
14
114
435
164
1,932
1,347
1,183
2015
£’000
447
13
112
209
–
781
2016
£’000
38
1
10
–
–
49
2015
£’000
–
–
–
–
–
–
2016
£’000
367
14
184
354
128
1,047
2015
£’000
357
14
178
192
–
741
1 Mr A Wood was appointed on 1 December 2016.
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 2016 STIP, including performance measures, actual performance and
bonus payouts, can be found on page 78.
LTIP is calculated as the number of shares vesting based on certain performance measures and valued at the market value of the shares on the vesting
date. For 2016, the figure represents the actual vesting outcome of the 2014 award, for which the performance measures were based on EPS, ROTA and
strategic measures. Based on performance to 31 December 2016, the 2014 LTIP award will vest at 17.3%. The market value of vested shares has been
estimated using the average share price over the last quarter of 2016 of 457.18p. This value will be trued up in next year’s Report to reflect the share
price on the vesting date. Further details on performance criteria, achievement and resulting vesting levels can be found on pages 79 and 80.
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 2016 and the prior year:
Sir Nigel Rudd1
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
1
2
3
4
5
Appointed on 1 March 2015.
Retired on 31 January 2015.
Appointed on 1 October 2015.
Retired on 23 April 2015.
Retired on 31 December 2015.
2016
£’000
350
56
–
67
56
78
56
–
–
2015
£’000
306
55
4
16
55
65
55
56
73
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 78
Directors’ remuneration report continued
Incentive outcomes for the year ended 31 December 2016
STIP in respect of 2016 performance
The Board set stretching financial and strategic targets for the STIP at the start of the 2016 financial year. These targets, and our
performance against these, are summarised in the table below.
Measure
Performance targets
Threshold
Target
Stretch
Actual
performance
Underlying operating profit1 (Weighting: one-third of the award)
£342.0m
£360.0m
£387.0m
£346.4m
Free cash flow1 (Weighting: one-third of the award)
£139.5m
£164.5m
£189.5m
£169.2m
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 at exchange rates set prior to the UK’s decision to leave the EU in June 2016.
2
Individual personal performance is measured on a scale of 1 to 5. There is also a weighting applied to the outcome of performance against seven
core competencies which are specific characteristics and behaviours in how executive directors performed their work and accomplished their goals
(collaboration, driving results, ensuring accountability, being resilient, situational adaptability, customer focus and decision quality). The average of all
ratings drives the STIP outcome, where 2 indicates expectations are partially met, 3 is fully met and 4 exceeds expectations.
In terms of personal performance conditions, the following is a summary of the conditions which applied in 2016 to each executive
director:
Mr Young: (i) achieve Customer Services & Support (CSS) revenue target and CSS implementation phase two working well; (ii) MPS
launches, quality and delivery targets and improvement in operating profit/cash from MPS; (iii) progress with AR&T and programme
management against specific schedules; (iv) continue improvement in supply chain quality and delivery; and (v) financial performance
of the 2015 composites businesses and progress with the integration programme. Overall, Mr Young’s achievement against these
goals was determined to be on target, and progress made in 2016 in many of these areas is described elsewhere in the Annual
Report.
Mr Webb: (i) ensure CSS has the right IT solutions and financial reporting systems in place, and providing support on delivering
the appropriate operating model for CSS; (ii) continue to progress IT security and optimise IT assets to support the businesses;
(iii) deliver the integration plan for the composites acquisitions and make progress with the portfolio strategy; (iv) refinance the
acquisition bridge finance and reassess interest rate hedging arrangements; and (v) finance and investor relations – goals related to
IFRS 15 and IFRS 16 accounting changes and simplify the forecasting and budgeting process. Overall, Mr Webb’s achievement against
these goals was determined to be between target and stretch.
Mr Green: (i) continue to improve the professionalism and effectiveness of the commercial function; (ii) improve broad based
commercial awareness across the Group; (iii) begin implementation of regionalisation of import compliance activity; (iv) effectively
manage the DFARS cyber security project relating to safeguarding US defense information; and (v) develop government relations
activity in the US and UK. Overall, Mr Green’s achievement against these goals was determined to be between target and stretch.
The following STIP awards were received by directors in respect of 2016 performance:
Mr S G Young
Mr D R Webb
Mr P E Green
% salary
90.5
95.0
95.8
£’000
625
435
354
MEGGITT PLC REPORT AND ACCOUNTS 2016
79
STIP—deferral into shares
As a result of the 2016 STIP vesting outcome described above, 25% of the STIP payout 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 2016, as a result of the 2015 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
05.04.2016
05.04.2016
05.04.2016
19,382
13,017
11,965
401.84p
401.84p
401.84p
78
52
48
25
25
25
05.04.2018
05.04.2018
05.04.2018
The award price is the average close price for the five days prior to the award date.
1
2 Based on 2015 STIP outcomes.
2014 LTIP
The LTIP award made in May 2014 was subject to 3-year cumulative underlying EPS, 3-year average ROTA and a scorecard of strategic
measures. Performance against each of these measures over the completed performance period is summarised in the table below:
Element
Underlying EPS (pence) three-year aggregate
ROTA average over three years
Strategic measures
(Progress against the
targets for all strategic
measures other than
revenue growth are
assessed annually, and the
final vesting outcome based
on performance period)
Organic revenue
growth (CAGR)
Programme
management
(average performance
score per programme,
out of 5)
MPS
(average performance
score per schedule,
out of 5)
Innovation
(average performance
score per schedule,
out of 5)
Weighting
33.3%
33.3%
5.6%
5.6%
5.6%
5.6%
Quality
(% of sites on target)
5.6%
Delivery
(% of sites on target)
5.6%
Overall outcome
Yr 1
Yr 2
Yr 3
Yr 1
Yr 2
Yr 3
Yr 1
Yr 2
Yr 3
Yr 1
Yr 2
Yr 3
Yr 1
Yr 2
Yr 3
Targets
Threshold
Mid-point
Stretch
124.0p
130.5p
137.0p
33.0%
34.5%
36.0%
5.0%
6.5%
8.0%
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
57%
57%
57%
43%
36%
45%
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
71%
71%
68%
57%
50%
61%
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
86%
86%
80%
71%
65%
77%
Actual
performance
Below
threshold
Below
threshold
Below
threshold
2.80
2.47
2.66
Average
3.50
3.79
3.49
Average
3.10
3.60
3.67
Average
64%
68%
70%
Average
29%
54%
47%
Average
% vesting
(of LTIP)
0%
0%
0%
3.1%
2.6%
3.0%
2.9%
4.5%
5.2%
4.6%
4.7%
3.9%
4.8%
4.9%
4.5%
2.6%
3.2%
4.0%
3.2%
0.0%
4.0%
1.9%
2.0%
17.3%
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
80
Directors’ remuneration report continued
Based on these performance outcomes, 17.3% of the 2014 LTIP award will vest. Details of the awards vesting to executive directors
are set out in the table below:
Executive
Mr S G Young
Mr D R Webb
Mr P E Green
Interests held
Vesting %
Interests vesting
Date of vesting
312,443
207,041
161,868
17.3
17.3
17.3
54,052
35,818
28,003
22.05.17
22.05.17
22.05.17
Share price
at vesting1
457.18
457.18
457.18
Value £'000
247
164
128
1
The market value of vested stock is based on the average share price over the last quarter of 2016.
Scheme interests awarded in the year ended 31 December 2016 (audited)
2016 LTIP1
Executive
Mr S G Young
Mr D R Webb
Mr A Wood4
Mr P E Green
Form of award
Date of grant
Shares over which
awards granted
Award price
2
£’000
% of salary3
Date of vesting
Face value
Nil cost option
Nil cost option
Nil cost option
Nil cost option
05.04.16
05.04.16
01.12.16
05.04.16
378,309
250,746
215,944
202,020
401.84p
401.84p
468.64p
401.84p
1,520
1,008
1,012
812
220
220
220
220
05.04.19
05.04.19
01.12.19
05.04.19
1
2
The 2016 LTIP measures were disclosed and explained in the 2015 Directors’ Remuneration Report.
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.
3 Based on salary at the date of award.
4
A 2016 LTIP award was made to Mr A Wood on appointment, to align his interests with those of his executive colleagues and shareholders from the
date of his joining Meggitt. This award vests three years from the date of grant and is subject to the same performance conditions as the LTIP awards
made in 2016 to other executive directors.
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 4% to 9%)
ROTA average over three years
Quality
% sites on target2
Threshold
Mid-point
103.0
19.0%
57.0%
108.0
20.9%
68.0%
Stretch
113.0
23.0%
80.0%
33.3%
Strategic measures1
average over three years
Execution
Growth
Delivery
% sites on target2
45.0%
61.0%
77.0%
Meggitt Production
System
Average status
per schedule2
Organic revenue
growth
Programme
management
% organic revenue
growth (CAGR over
three years)
Average status
per reviews2
Average status
per schedule2
2.0
3.0
4.0
4.0%
5.5%
7.0%
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 apply to year 1 of the 2016 LTIP award, they also apply to year 2 of the 2015 LTIP award and year 3 of the 2014 LTIP award.
MEGGITT PLC REPORT AND ACCOUNTS 2016
81
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.
Mr Webb and Mr Wood receive a pension allowance of 25% of base salary, but are not members of any defined benefit or defined
contribution pension scheme operated by the Group.
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.
The pension allowance payments made in 2016 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
2016
£’000
29
2015
£’000
28
2016
£’000
76
2015
£’000
76
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 senior executive population 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 salary1
Taxable benefits2
STIP³
Total
2016
£’000
688
28
625
2015
£’000
674
24
312
1,341
1,010
CEO
% change
2015-2016
+2.0
+13.8
+100.3
+32.8
Executive
employees
% change
2015-2016
4.5
4.0
44.1
10.8
1
2
3
The base salary for executive employees is calculated using the increase in the earnings of around 220 full-time executive employees using the same
employee data set in 2015 and 2016. Half of the executives received pay rises of up to 2%, with the other half receiving pay rises above 2% based on
merit and change of responsibilities.
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.
The STIP for executive employees is calculated using the increase in the STIP payout to around 220 full-time executive employees using the same
employee data set in 2015 and 2016. The percentage change in the Chief Executive’s STIP payment between 2015 and 2016 would have been 50% if
Mr Young had not voluntarily reduced his 2015 STIP payment by 25% as reported in our 2015 Directors remuneration report.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
82
Directors’ remuneration report continued
Relative importance of spend on pay
The chart below shows shareholder distributions (i.e. dividends and share buybacks) and total employee expenditure for 2016 and the
prior year, along with the percentage change in both.
600
500
400
300
200
100
0
+19.0%
£599.5m £503.9m
+5.2%
£117.1m £111.3m
£0m £146.4m
Dividends1
Buybacks1
Employee costs2
Shareholder distributions
2016
2015
1
2
See notes 16 and 41 respectively to the Group consolidated financial statements.
Comprises wages and salaries and retirement benefit costs. See note 9 to the Group consolidated financial statements. Contributory factors to the
increase in employee costs between 2015 and 2016 were currency movements and that 2016 includes a full year of employee costs for the 2015
composites acquisitions.
Exit payments made in the year
No exit payments have been made in 2016.
Payments to past directors (audited)
There were no payments to past directors in 2016. 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 eight 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 eight-year period from 1 January 2009 to 31 December 2016:
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
31 Dec
2016
MEGGITT PLC REPORT AND ACCOUNTS 2016
83
The table below details the CEO’s single total figure of remuneration over the same period:
2009
2010
2011
2012
20132
2014
2015
2016
Mr S G Young
Single total figure of remuneration (£’000)
STIP outcome1 (% of maximum)
EPP vesting1 (% of maximum)
ESOS vesting1 (% of maximum)
LTIP vesting1 (% of maximum)
Mr T Twigger
Single total figure of remuneration (£’000)
STIP outcome1 (% of maximum)
EPP vesting1 (% of maximum)
ESOS vesting1 (% of maximum)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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%
–
1,932
60%
N/A
N/A
17%
1
The outcomes are for those awards which are included in the single figure of remuneration for that year. For 2016, this represents the outcome of the
LTIP award which will vest in 2017.
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.
Implementation of Remuneration Policy for 2017
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 2017 and, effective 1 April 2017, will be as follows:
Mr S G Young
Mr D R Webb
Mr A Wood
Mr P E Green
2017
£’000
705
467
460
377
% change
+2.0
+2.0
+0.0
+2.0
2016
£’000
691
458
460
369
The Committee periodically benchmarks executive director salaries against other FTSE companies of similar size, as well as a
defined group of UK-listed industry comparators, comprising: BAE Systems, BBA Aviation, Cobham, Halma, IMI, Melrose, Rolls-
Royce, Rotork, Senior, Spectris, Spirax-Sarco, Ultra Electronics and Weir Group.
The Committee decided to award Mr Young, Mr Webb and Mr Green a 2% salary increase for 2017. In agreeing these increases the
Committee took into account average expected salary increases across the general workforce, industry benchmarks and broader
retail inflation, as well as the performance of executive directors in 2016. The agreed salary adjustments for the executive directors
are lower than the expected increase across the general workforce.
Mr A Wood’s salary was set on appointment on 1 December 2016, in the context of salaries for other Chief Operating Officer roles and
his extensive past experience in aerospace. His salary was not reviewed for 2017 but he will be eligible for a salary increase in 2018,
or sooner in the event his responsibilities change.
There were no changes in pension contribution rates or benefit provision.
2017 STIP measures
STIP measures for 2017 are based on underlying operating profit (one third), free cash flow (one third) and personal performance
(one third). The STIP targets for 2017, together with details of whether they have been met, will be disclosed (subject to commercial
sensitivity) in the 2017 Directors’ remuneration report. STIP award opportunities will be in line with the Policy disclosed on page 70.
2017 STIP measures
Underlying operating profit 33.3%
Free cash flow
33.3%
Personal performance
33.3%
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 84
Directors’ remuneration report continued
2017 LTIP measures
The executive directors will be granted awards under the LTIP, the vesting of which will be subject to the measures shown below.
EPS
33.3%
ROTA
33.3%
Strategic
measures
33.3%
Innovation
11.1%
Execution
11.1%
Growth
11.1%
Measures chosen
The measures used in our incentive plans continue to capture key aspects of our business strategy that will, if realised, create
sustainable shareholder value over the longer term. The underlying earnings per share measure has been included in the LTIP since
inception in 2014. Elsewhere in this report we have explained that subject to the proposed new Policy being approved at our AGM in
April 2017, LTIP awards for executive directors from 2018 onwards will include ROCE as a measure instead of ROTA.
The strategic measures selected for inclusion in the 2017 LTIP have been selected because they are key drivers to accelerate
operational performance and critical to the deployment of our key strategic goals. Organic revenue growth has been included in the
strategic measures since 2014. For 2017, the Committee is introducing two new strategic measures – inventory and gross margin.
The operating review which commenced late last year has determined that these measures are critical to improving our focus on
margin and cost. These new measures replace the separate quality and delivery targets, which are effectively covered by the metric
relating to MPS launches (as quality and delivery is a core part of MPS). Programme management and innovation are our other
strategic goals and these targets are set to measure our performance in successfully passing programme gate reviews and
innovation programme milestones respectively.
Target setting
For 2017 awards, the Committee has set performance measures for underlying EPS, ROTA, organic revenue growth and gross
margin using a consistent method, with reference to actual performance in 2016 and the Group’s budget for 2017. For EPS, the
Committee 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 2017 targets for ROTA start from a lower
base than the 2016 targets because of the continuing organic investment in the business. The targets for the 2017 LTIP award have
been set in relation to these reference points and the 2016 outturn and are considered by the Committee to be appropriately
stretching for the three-year cycle.
The inventory target is a 13-point target based on the end of month Group inventory value from December 2016 to December 2017,
measured at constant currency.
A number of the strategic measures have agreed annual schedules, 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, some of the measures shown below are
effective for year 1 of the 2017 LTIP award, year 2 of the 2016 LTIP award and year 3 of the 2015 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.
MEGGITT PLC REPORT AND ACCOUNTS 2016 Vesting of the LTIP awards will be subject to the following measures and targets:
Weighting
Measure
33.3%
33.3%
Underlying EPS (pence) three-year aggregate (equivalent to CAGR range of 4% to 9%)
ROTA average over three years1
33.3%
Strategic measures2
average over three years
Execution
Growth
Inventory3
Gross margin3
13-point inventory
value4
Gross margin
percentage
Meggitt Production
System3
Average status
per schedule
Organic revenue
growth
Programme
management3
% organic revenue
growth (CAGR over
three years)
Average status
per reviews
Average status
per schedule
Innovation
Schedule3
85
Threshold
Mid-point
113.0
17.7%
118.7
18.7%
Stretch
124.3
19.7%
£514.0m
£496.4m
£454.3m
38.7%
39.5%
40.3%
2.0
3.0
4.0
4.0%
5.5%
7.0%
2.0
2.0
3.0
3.0
4.0
4.0
1 ROTA performance measure will be replaced by ROCE for 2018 awards if the revised Policy is approved.
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
3 The targets apply to year 1 of the 2017 LTIP award, year 2 of the 2016 LTIP award and year 3 of the 2015 LTIP award.
4 Inventory is measured at constant currency, gross of provisions, averaging month end balances over a year.
Chairman and non-executive director fees
The remuneration of the Chairman and non-executive directors in 2017 will be as follows:
Chairman fee2
Non-executive director base fee3
Additional fee for chairing Audit or Remuneration Committee
Additional fee for Senior Independent Director
20171
£’000
350
57
11
11
1
2016
£’000
350
56
11
11
1
2
3
Fees shown are effective for a year from 1 April.
Sir Nigel Rudd receives additional benefits of £20,000 per annum for secretarial and car services required for business purposes.
It has been agreed, subject to the approval of the proposed new Policy at the AGM, to pay a fee of £4,000 per meeting to US directors when
travelling to meetings outside of their home continent.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 86
Directors’ remuneration report continued
Directors’ beneficial interests (audited)
The beneficial interests of the directors and their connected persons in the ordinary shares of the Company at 31 December 2016, as
notified under the Disclosure Guidance 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 Rudd
Mr S G Young
Mr G S Berruyer
Mr C R Day
Ms A J P Goligher
Mr P E Green
Mr P Heiden
Ms B L Reichelderfer
Mr D R Webb
Mr A Wood1
1
Appointed on 1 December 2016.
Shareholding
Ordinary shares of 5p each
2015
2016
122,000
638,514
13,000
25,868
3,000
572,934
6,275
6,000
102,235
–
97,000
637,486
13,000
25,000
3,000
565,139
6,064
6,000
78,307
–
Between 1 January 2017 and 17 February 2017, the only changes to the beneficial interests of the directors in the ordinary shares of
the Company are that Mr Young and Mr Webb acquired 56 shares, and Mr Green acquired 57 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
2016
£’000
42
8
12
62
55
10
65
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 2016:
Name
Mr S G Young
Mr D R Webb
Mr A Wood
Mr P E Green
Shareholding
guideline
(% 2016
salary)
300
200
200
200
Current
shareholding
(% 2016
salary)2
Guideline
met?
424%
Met
102% Building
Building
Met
–
712%
Shares owned
outright1
638,514
102,235
–
572,934
Includes shares invested to be eligible for outstanding EPP matching awards.
1
2 Assessment of shareholding is based on a share price of 458.60 pence (the value of a Meggitt share on 31 December 2016).
MEGGITT PLC REPORT AND ACCOUNTS 2016
87
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 2016.
The awards made up to and including 2013 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 2014, 2015 and 2016 were
unvested as at 31 December 2016.
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)
Deferred Share Bonus Plan (awards)
Sharesave (options)
Total
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)
Deferred Share Bonus Plan (awards)
Sharesave (options)
Total
Number of shares under award
Date of award
At 1 Jan
2016
Awarded/
(exercised/
lapsed)
At 31 Dec
2016
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
29.03.07
25.03.08
30.04.09
12.03.10
02.03.11
05.09.13
05.08.09
21.04.11
17.08.11
18.03.13
12.08.09
21.04.11
17.08.11
18.03.13
22.05.14
01.04.15
05.04.16
01.04.15
05.04.16
12.09.14
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
–
9,897
–
2,405
–
–
–
–
–
(243,114)
–
–
–
(114,556)
–
–
–
(66,946)
–
–
378,309
–
19,382
–
192,642
285,149
297,345
251,660
160,341
–
115,418
77,729
29,131
–
64,359
57,630
20,431
–
312,443
266,503
378,309
9,897
19,382
2,405
2,567,699
(26,925)
2,540,774
299.00p
252.50p
169.50p
286.10p
351.70p
526.50p
–
–
–
–
–
–
–
–
–
–
–
–
–
374.19p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
29.03.10
25.03.11
30.04.12
12.03.13
02.03.14
05.09.16
05.08.12
21.08.13
17.08.14
18.03.16
12.08.12
21.08.13
17.08.14
18.03.16
22.05.17
01.04.18
05.04.19
01.04.17
05.04.18
01.11.17
28.03.17
24.03.18
29.04.19
11.03.20
01.03.21
04.09.23
04.08.19
20.04.21
16.08.21
17.03.23
04.08.19
20.04.21
16.08.21
17.03.23
21.05.19
31.03.20
04.04.21
15.03.18
15.03.19
01.05.18
Number of shares under award
Date of award
At 1 Jan
2016
Awarded/
(exercised/
lapsed)
At 31 Dec
2016
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
05.04.16
01.04.15
05.04.16
13.09.13
5,698
155,745
60,281
39,868
207,041
176,598
–
8,853
–
3,517
(5,698)
(155,745)
(60,281)
(39,868)
–
–
250,746
–
13,017
–
–
–
–
–
207,041
176,598
250,746
8,853
13,017
3,517
657,601
2,171
659,772
526.50p
526.50p
–
–
–
–
–
–
–
426.40p
–
–
–
–
–
–
–
–
–
–
05.09.16
05.09.16
05.09.16
05.09.16
22.05.17
01.04.18
05.04.19
01.04.17
05.04.18
01.11.18
04.09.23
04.09.23
04.09.23
04.09.23
21.05.19
31.03.20
05.04.21
15.03.18
15.03.19
01.05.19
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
88
Directors’ remuneration report continued
Mr A Wood
LTIP (nil cost 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)
Deferred Share Bonus Plan (awards)
Sharesave (options)
Date of award
01.12.16
Number of shares under award
At 1 Jan
2016
Awarded/
(exercised/
lapsed)
At 31 Dec
2016
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
–
–
215,944
215,944
–
–
01.12.19
30.11.21
215,944
215,944
Number of shares under award
Date of award
At 1 Jan
2016
Awarded/
(exercised/
lapsed)
At 31 Dec
2016
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
29.03.07
30.04.09
27.09.06
25.03.08
30.04.09
12.03.10
02.03.11
05.09.13
05.08.09
21.04.11
17.08.11
18.03.13
12.08.09
21.04.11
17.08.11
18.03.13
22.05.14
01.04.15
05.04.16
01.04.15
05.04.16
06.09.10
14.09.12
12.09.14
11.09.15
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
–
7,434
–
1,389
1,835
1,619
750
–
–
(23,365)
–
–
–
–
(123,456)
–
–
–
(58,173)
–
–
–
(33,996)
–
–
202,020
–
11,965
(1,389)
–
–
–
2,759
12,832
–
217,822
214,306
192,240
124,902
–
88,167
59,377
22,693
–
49,163
44,022
15,915
–
161,868
142,128
202,020
7,434
11,965
–
1,835
1,619
750
299.00p
169.50p
263.67p
252.50p
169.50p
286.10p
351.70p
526.50p
–
–
–
–
–
–
–
–
–
–
–
–
–
222.35p
326.94p
374.19p
399.79p
–
–
461.10p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
411.40p
–
–
–
29.03.10
30.04.12
27.09.09
25.03.11
30.04.12
12.03.13
02.03.14
05.09.16
05.08.12
21.08.13
17.08.14
18.03.16
12.08.12
21.08.13
17.08.14
18.03.16
22.05.17
01.04.18
05.04.19
01.04.17
05.04.18
01.11.15
01.11.17
01.11.19
01.11.20
28.03.17
29.04.19
26.09.16
24.03.18
29.04.19
11.03.20
01.03.21
04.09.23
04.08.19
20.04.21
16.08.21
17.03.23
11.08.19
20.04.21
16.08.21
17.03.23
21.05.19
31.03.20
04.04.21
15.03.18
15.03.19
01.05.16
01.05.18
01.05.20
01.05.21
Total
1,600,211
(26,394)
1,573,817
By order of the Board
Paul Heiden
Chairman, Remuneration Committee
27 February 2017
MEGGITT PLC REPORT AND ACCOUNTS 2016
89
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:
Directors’ report
The directors present their report with the Group’s audited
consolidated financial statements (prepared in accordance with
International Financial Reporting Standards (IFRSs as adopted
by the European Union and the Companies Act 2006)) and
Company’s 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 2016.
There are no significant events affecting the Group since the
end of the year requiring disclosure.
Information incorporated into the Directors’ report by reference
Location and page
Likely future developments in the Group’s business
Strategic report (pages 1 to 52)
The Corporate governance report
Research and development
Board of directors and Corporate governance report (pages 53
to 60)
Note 8 to the Group’s consolidated financial statements
(page 118) and Chief Financial Officer’s review (page 40)
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 (pages
110 to 112)
Greenhouse gas emissions
Employee information
Employee involvement
Employment of disabled persons
Corporate responsibility report (pages 46 and 47)
Corporate responsibility report (page 52)
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 126)
Details of long-term incentive plans
Directors’ remuneration report (pages 66 to 88)
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 35 to the Group’s consolidated financial statements
(page 143)
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
Nothing to disclose
Contracts for the provision of services to the Company by a controlling shareholder
Nothing to disclose
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
Nothing to disclose
Statement of directors’ interests
A statement of how the Company has complied with the Code and details of any
non-compliance
Directors’ remuneration report (pages 87 and 88)
Corporate governance report (page 53)
Details of directors’ service contracts
Related parties disclosures
Share buyback disclosures
Company registration information
Share capital and control (pages 90 and 91) and Directors’
remuneration report (pages 66 to 88)
Note 17 to the Group’s consolidated financial statements
(page 124)
Note 35 to the Group’s consolidated financial statements
(page 143)
Note 1 to the Group’s consolidated financial statements
(page 105)
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 90
Directors’ report continued
Dividends
The directors recommend the payment of a final dividend of
10.30p net per ordinary 5p share (2015: 9.80p), to be paid on
5 May 2017 to those members on the register at close of
business on 24 March 2017. An interim dividend of 4.80p (2015:
4.60p) was paid on 30 September 2016. If the final dividend as
recommended is approved, the total ordinary dividend for the
year will amount to 15.10p net per ordinary 5p share (2015:
14.40p).
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 2016, the Company made the DRIP available to
shareholders for the dividends paid in May 2016 and September
2016. The Board currently intends to continue to make the DRIP
available to shareholders in 2017, 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 (Chairman), Mr S G Young (Chief Executive),
Mr G S Berruyer, Mr C R Day, Ms A J P Goligher, Mr P E Green,
Mr P Heiden (Senior Independent Director from 1 January 2016),
Ms B L Reichelderfer (retiring from the Board on 27 April 2017),
Mr D R Webb, and Mr A Wood (appointed to the Board as Chief
Operating Officer on 1 December 2016).
All directors will be submitted for election or re-election at the
annual general meeting (AGM). Nancy Gioia is due to be appointed
as a non-executive director immediately before the AGM on
27 April 2017 and will also be submitted for election. 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 54 to 55 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 (2015: None).
Share capital and control
As at 31 December 2016, the Company held 20,541 treasury
shares with a nominal value of 5p each, and the Company’s
issued share capital (excluding shares held as treasury shares)
consisted of 775,709,804 shares with a nominal value of 5p
each. As at 15 February 2017, the Company held 20,541 treasury
shares with a nominal value of 5p each, and the Company’s
issued share capital (excluding shares held as treasury shares)
consisted of 775,718,157 shares with a nominal value of 5p each.
The issued share capital of the Company at 31 December 2016
and details of shares issued during the financial year are shown
in note 35 to the Group’s consolidated financial statements.
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.
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 USD600m note purchase agreement dated May
2016, a USD900m syndicated revolving credit agreement dated
September 2014 and a USD600m note purchase agreement
dated June 2010.
MEGGITT PLC REPORT AND ACCOUNTS 2016 91
Share capital and control continued
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.
Substantial shareholdings
At 15 February 2017, the Company had been notified under the
Disclosure Guidance and Transparency Rules (DTR) of the
following substantial interests in the issued ordinary shares of
the Company requiring disclosure:
Agreements with the Company’s directors or employees
providing compensation in the event of a takeover bid:
Director
Contractual entitlement
Mr S G Young
Mr D R Webb
Mr A Wood
Mr P E Green
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.
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.
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 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.
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.
BlackRock, Inc.
Harris Associates L.P.
First Pacific Advisors,
LLC
FMR LLC
Standard Life
Investments Ltd
Legal & General Group plc
Norges Bank
–
–
–
–
–
22.2
23.7
23.6
75.2
48.9
41.3
39.1
38.1
3.8
–
–
9.69%
6.30%
5.32%
5.04%
4.91%
3.34%
3.06%
3.04%
*One voting right per ordinary share.
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 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).
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. 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; and
• state whether IFRSs as adopted by the European Union and
applicable United Kingdom Accounting Standards, including
FRS 101 have been followed, subject to any material
departures disclosed and explained in the Group and
Company financial statements respectively.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
92
Directors’ report continued
Statement of directors’ responsibilities continued
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 responsible for the maintenance and integrity
of the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Each of the directors, whose names and functions are listed in
the Board of directors on pages 54 to 55 who is a director in
office at the date of this report, confirm that, to the best of their
knowledge:
• the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and
fair view of the assets, liabilities, financial position and profit
of the Group; and
• the Strategic report and this Directors’ report include a fair
review of the development and performance of the business
and the position of the Group, together with a description of
the principal risks and uncertainties that it faces.
Each of the persons who is a director in office at the date of this
report confirms that:
(a) so far as the director is aware, there is no relevant audit
information of which the Company’s auditors are unaware;
and
(b) the director has taken all steps that he or she 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.
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 Annual
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 29 (Bank and other borrowings) and note 31
(Derivative financial instruments);
• the resources available to the Group taking account of its
financial projections and considerable existing headroom
against committed debt facilities and covenants; and
• the principal risks and uncertainties to which the Group
is exposed, as set out on pages 28 to 33, the likelihood of
them arising and the mitigation actions available.
By order of the Board
M L Thomas
Company Secretary
27 February 2017
MEGGITT PLC REPORT AND ACCOUNTS 2016
Independent auditors’ report to the
members of Meggitt PLC
93
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 2016 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, comprise:
• the Consolidated balance sheet as at 31 December 2016;
• 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 and Accounts, 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 IFRSs as adopted by
the European Union, and applicable law.
Our audit approach
Overview
Materiality
• Overall Group materiality: £17 million
which represents 5% of underlying profit
before tax.
Audit Scope
• We identified 12 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 5 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 13 reporting
units, with the Group team performing the
remainder.
• 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.
• Reporting units where we performed audit
procedures accounted for 64% of Group
profit before tax; 63% of Group underlying
profit before tax; and 82% 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
• 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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 94
Independent auditors’ report to the
members of Meggitt PLC continued
Area of focus
How our audit addressed the area of focus
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 three CGUs we focused our additional audit procedures on, we
assessed the directors’ assumptions for future cash flow growth in the plan, by:
• Obtaining corroborating evidence to support growth assumptions in excess of
our assumed weighted average market growth rate. Based on the evidence
obtained we found that the directors’ assumptions were not unreasonable; and
• Performing 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. It would require
significant downside changes before a material impairment was required. We
assessed the likelihood of these changes in assumptions arising and
concluded that these are not considered to be reasonably possible.
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;
• 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, and observed these to be within a reasonable range; and
• Assessed the Group’s disclosures regarding the extent to which 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 estimate and
judgement.
Goodwill impairment assessments
Refer to note 18 (pages 124 to 125)
The Group holds significant amounts of
goodwill (£2,095.7m) 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 require estimates
to be made to calculate the recoverable
amount, determined by value in use, of its
cash generating units (“CGUs”) or groups of
CGUs. The key estimates and assumptions
assessed 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”);
• the growth rate used beyond the period
covered by the plan; and
• the discount rate applied to future cash
flows.
We applied the following scoping criteria to
identify those CGUs requiring additional
audit procedures:
• CGUs that indicated a shortfall in value
in use compared to total CGU carrying
value when, for the period covered by
the plan, the level of underlying profit
growth was capped at a weighted
average market growth rate, using
economic and industry forecasts. The
weighted average market growth rates
were derived as follows:
• For CGUs operating predominantly in
the civil aerospace market, the civil
aerospace capacity long-term trend rate
measured in available seat kilometres
(ASKs); and
• For CGUs operating predominantly in
the military, energy and other markets,
territory Gross Domestic Product
(“GDP”) growth projections, based on
our published economic projections.
This identified the following CGUs for
further consideration:
• EDAC and Advanced Composites. This
CGU has goodwill of £241.7m;
• Meggitt Training Systems. This CGU has
goodwill of £84.2m; and
• One CGU within “Other”. This group of
CGUs has total goodwill of £37.7m.
MEGGITT PLC REPORT AND ACCOUNTS 2016
95
Area of focus
How our audit addressed the area of focus
Development costs and programme participation costs impairment assessments
Refer also to note 19 (page 126)
The Group holds significant amounts of
development costs (£533.5m) and
programme participation costs (£333.5m)
on the balance sheet. These intangible
assets are subject to impairment testing at
the individual asset (“programme”) level, at
least annually and, where the programme
value in use compared to its carrying value
is limited, or if events or changes in
circumstances indicate the carrying value
may not be recoverable, more frequently.
An impairment charge of £3.3m has been
recorded against these balances in the
current year.
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 2031 used in calculating the programme
forecast cash flow to external market forecasts, taking into account the extent
to which the Group has a sole-source position. We 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;
• Tested the discount rates, by comparing key inputs, where relevant, to
Our audit focused on the risk that the
carrying value of these intangible assets
could be overstated.
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
We focused our audit procedures on those
programmes against which the directors
have recorded an impairment provision and
those with limited excess of value in use over
carrying value, or significant carrying value.
• Assessed the Group’s disclosures regarding the extent to which key
assumptions would need to change for the recoverable amount to fall below
the programme carrying values, in particular in relation to those with a
significant carrying value. We determined that these disclosures appropriately
draw attention to the significant areas of estimate.
The key estimates and assumptions
assessed were:
• The estimated aircraft or engine
volumes (“fleet forecasts”) and the
period over which future cash flows
are forecast (“fleet lives”);
• The sales price per part; and
• The discount rate applied to future
cash flows.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 96
Independent auditors’ report to the
members of Meggitt PLC continued
How our audit addressed the area of focus
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 confirmed that the Group’s external environmental consultants 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 period over which operating and monitoring
activities are conducted and the application of additional provisions 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 and other third party 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 and consider the recognition of the insurance
and other third party receivable is supportable.
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 Group’s historical
trend and expected future outlook; and
• Confirmed that the Group’s external specialists, are qualified and affiliated
with the appropriate industry bodies in the respective local territory, and are
independent of the Group.
Based on the evidence obtained, we found that the assumptions used by the
directors were reasonable.
Area of focus
Environmental provisions
Refer also to note 32 (page 137)
The Group has liabilities of £121.7m relating
to environmental matters.
The environmental matters primarily relate
to known exposures arising from
environmental investigation and
remediation of certain sites in the US for
which the Group has been identified as a
potentially responsible party under US law.
The liabilities are based on subjective
estimates of the level and timing of
remediation costs, including the period
of operating and monitoring activities
required. Our audit focused on the risk that
the provisions in relation to these matters
could be understated.
The Group has separately recognised
insurance and other third party receivables
of £77.4m. We focused on the required
asset recognition criteria being met and
recoverability of these receivables.
Retirement benefit obligation liabilities
Refer also to note 34 (pages 139 to 143)
The Group has retirement benefit
obligations with gross liabilities of
£1,367.2m, 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 to
support the directors in selecting
appropriate assumptions. Small changes in
a number of the key financial and
demographic assumptions used to value
the Group’s retirement benefit obligation,
(including discount rates, inflation rates,
salary increases and mortality) could have
a material impact on the calculation of the
liability. Our audit procedures focused on
the risk that the assumptions used result in
an understatement of the retirement
benefit obligation.
MEGGITT PLC REPORT AND ACCOUNTS 2016 97
Area of focus
How our audit addressed the area of focus
Provisions for uncertain tax positions
Refer also to note 4 (page 114)
The Group has a provision for uncertain tax
positions of £43.4m.
Estimates 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 directors’
judgement of the probable amount of the
liability, or expected amounts recoverable.
Our audit procedures focused on the risk that
conclusion of the ultimate tax determination
by tax authorities is at an amount materially
different to the amount recorded.
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 tax exposures; and
• Evaluated and concluded that the liabilities and potential exposures were
appropriately disclosed in the financial statements.
We evaluated that 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 geographic
structure of the Group, the accounting processes and controls,
and the industry in which the Group operates.
The Group’s accounting process is structured around a local
finance function in each of the Group’s reporting units. These
functions maintain their own accounting records and controls
(although transactional processing and certain controls for
some reporting units are performed at the Group’s shared
service centres) and report to the head office finance team
through an integrated consolidation system.
In establishing the overall Group audit strategy and plan, we
determined the type of work that needed to be performed at the
reporting units by the Group engagement team and by
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 underlying profit before tax. We performed a full
scope audit at a further 11 reporting units, based on their size
or risk. Senior members of the Group audit engagement team
visited all of these reporting units, to review the work
undertaken by component auditors and assess the audit
findings. We also performed specified procedures on 5
reporting units to address specific risk characteristics or to
provide sufficient overall Group coverage of revenue. In
addition to the work performed at the in-scope reporting units,
there is a substantial amount of work performed at head office
by the Group audit engagement team. 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, investments, derivative
financial instruments and related hedge accounting, bank and
other borrowings and related finance costs, environmental
provisions and related insurance receivables, certain onerous
contracts and other provisions, retirement benefit obligations,
share based payments and central adjustments raised as part
of the consolidation process. These audit procedures
accounted for 64% of Group profit before tax; 63% of Group
underlying profit before tax; and 82% of Group total assets
(“key coverage metrics”). As a result of its structure and size,
the Group also has a large number of small reporting units
that are individually immaterial but, in aggregate, make up a
material portion of the key coverage metrics. These small
reporting units are covered by the work performed by the
Group audit engagement team, where we perform analytical
review procedures. A significant proportion of these remaining
reporting units not selected for local procedures were subject
to an analysis of year on year movements, at a level of
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
98
Independent auditors’ report to the
members of Meggitt PLC continued
disaggregation to enable a focus on higher risk balances and
unusual movements. 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.
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 £17 million (2015: £10 million).
How we determined it
5% of underlying profit before tax.
Other required reporting
Consistency of other information and compliance with
applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of
the audit:
• 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; and
• the Strategic report and the Directors’ report have been
prepared in accordance with applicable legal
requirements.
In addition, in light of the knowledge and understanding of
the Group and its environment obtained in the course of the
audit, we are required to report if we have identified any
material misstatements in the Strategic report and the
Directors’ report. We have nothing to report in this respect.
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if,
in our opinion:
Rationale for benchmark
applied
We applied this benchmark, which
is different from the benchmark we
applied in the prior year (statutory
profit before tax), because we
consider that underlying profit before
tax is the primary performance
measure considered by the primary
users of the Annual Report and
Accounts. Further, we consider it
appropriate to eliminate volatility
and to preserve the link between
materiality and the performance of
the underlying business.
We agreed with the Audit Committee that we would report to
them misstatements identified during our audit above
£850,000 (2015: £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 92, 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.
•
information in the Annual Report and
Accounts 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 92, 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
and 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 and
Accounts on page 61, 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.
We have no
exceptions to
report.
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
we have anything material to add or to draw attention to in
relation to:
• the directors’ confirmation on page 28 of
the Annual Report and Accounts, 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.
MEGGITT PLC REPORT AND ACCOUNTS 2016 99
We have
nothing
material to
add or to draw
attention to.
We have
nothing
material to
add or to draw
attention to.
• the disclosures in the Annual Report and
Accounts that describe those risks and
explain how they are being managed or
mitigated.
• the directors’ explanation on page 33 of
the Annual Report and Accounts, 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
Our responsibilities and those of the directors
As explained more fully in the Statement of directors’
responsibilities set out on pages 91 and 92, 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.
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 and Accounts 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. With respect to the Strategic
report and Directors’ report, we consider whether those
reports include the disclosures required by applicable legal
requirements.
Other matter
We have reported separately on the parent company financial
statements of Meggitt PLC for the year ended 31 December
2016 and on the information in the Directors’ remuneration
report that is described as having been audited.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
27 February 2017
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 100
Consolidated income statement
For the year ended 31 December 2016
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
2016
£’m
2015
£’m
5
1,992.4
(1,217.2)
1,647.2
(997.2)
6
12
13
775.2
650.0
(541.5)
(413.4)
233.7
236.6
2.0
(40.2)
(38.2)
2.7
(29.1)
(26.4)
195.5
210.2
14
(24.3)
(28.1)
171.2
182.1
15
15
10
10
15
15
22.1p
21.8p
379.7
352.1
34.8p
34.3p
23.2p
22.9p
325.5
310.3
31.6p
31.2p
MEGGITT PLC REPORT AND ACCOUNTS 2016
Consolidated statement of comprehensive income
For the year ended 31 December 2016
101
Profit for the year attributable to equity owners of the Company
Items that may be reclassified to the income statement in subsequent periods:
Currency translation differences
Cash flow hedge movements
Tax effect
Items that will not be reclassified to the income statement in subsequent periods:
Remeasurement of retirement benefit obligations
Tax effect
Notes
2016
£’m
2015
£’m
171.2
182.1
14
34
14
312.1
(0.2)
(3.6)
308.3
(120.7)
20.1
(100.6)
82.7
(0.7)
2.1
84.1
29.4
(9.5)
19.9
Other comprehensive income for the year
207.7
104.0
Total comprehensive income for the year attributable to equity owners of the Company
378.9
286.1
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
102
Consolidated balance sheet
As at 31 December 2016
2016
Notes
£’m
Non-current assets
Goodwill
Development costs
Programme participation costs
Other intangible assets
Property, plant and equipment
Investments
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
Restated
(see note 44)
£’m
1,815.5
408.4
267.6
800.0
288.8
11.4
62.2
25.5
0.3
2,095.7
533.5
333.5
817.6
336.9
14.8
58.4
21.8
15.9
4,228.1
3,679.7
468.5
434.5
4.2
4.4
173.8
1,085.4
401.6
351.4
8.4
5.5
147.3
914.2
18
19
19
20
21
22
24
31
33
23
24
31
25
6
5,313.5
4,593.9
26
31
28
29
32
27
31
33
28
29
32
34
35
(464.0)
(31.2)
(35.6)
(0.1)
(175.7)
(53.6)
(401.8)
(12.7)
(35.1)
(0.1)
(4.0)
(40.0)
(760.2)
(493.7)
325.2
420.5
(5.0)
(45.7)
(322.6)
(6.5)
(1,170.6)
(131.8)
(414.7)
(4.2)
(13.7)
(278.8)
(5.4)
(1,189.0)
(146.1)
(284.5)
(2,096.9)
(1,921.7)
(2,857.1)
(2,415.4)
2,456.4
2,178.5
38.8
1,219.8
15.7
551.5
630.6
38.8
1,218.9
15.7
243.2
661.9
2,456.4
2,178.5
The financial statements on pages 100 to 152 were approved by the Board of Directors on 27 February 2017 and signed on its behalf by:
S G Young
Director
D R Webb
Director
MEGGITT PLC REPORT AND ACCOUNTS 2016
Consolidated statement of changes in equity
For the year ended 31 December 2016
103
Equity attributable to owners of the Company
Share
capital
Share
premium
Other
reserves*
Hedging and
translation
Retained
earnings
Total
equity
Notes
£’m
40.1
£’m
1,218.9
£’m
14.4
At 1 January 2015
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 the 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
At 31 December 2015
Profit for the year
Other comprehensive income for the year:
Currency translation differences:
Arising in the year
Transferred to the income statement
Cash flow hedge movements:
Movement in fair value
Transferred to the 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
Issue of equity share capital
Dividends
At 31 December 2016
reserves**
£’m
159.1
£’m
708.3
£’m
2,140.8
–
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)
–
–
–
–
–
–
–
–
–
–
–
(1.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.3
–
–
–
38.8
1,218.9
15.7
243.2
661.9
2,178.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
171.2
171.2
312.6
(0.5)
(0.6)
0.4
–
311.9
(3.6)
–
–
–
–
(120.7)
(120.7)
20.1
308.3
(100.6)
312.6
(0.5)
(0.6)
0.4
(120.7)
191.2
16.5
207.7
308.3
70.6
378.9
–
–
–
12.0
(0.9)
(113.0)
12.0
-
(113.0)
38.8
1,219.8
15.7
551.5
630.6
2,456.4
34
14
16
43
34
14
16
* Other reserves relate to capital reserves of £14.1 million (2015: £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 (2015: £1.6 million) created as a result of the share buyback
programme which commenced in 2014 and was completed in 2015.
** Hedging and translation reserves comprise a credit balance on the hedging reserve of £1.8 million (2015: £1.9 million) and a credit balance
on the translation reserve of £549.7 million (2015: £241.3 million). Amounts recycled from the hedging reserve to the income statement, in
respect of cash flow hedge movements, have been recorded in net finance costs. Amounts recycled from the translation reserve to the income
statement, in respect of the disposal of foreign subsidiaries, have been recorded in net operating costs.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
104
Consolidated cash flow statement
For the year ended 31 December 2016
Cash inflow from operations before business acquisition and disposal expenses and exceptional operating items
Cash outflow from business acquisition and disposal 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
Share buyback – purchased in year
Proceeds from borrowings
Debt issue costs
Repayments of borrowings
Cash (outflow)/inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at start of the year
Exchange gains on cash and cash equivalents
Cash and cash equivalents at end of the year
2016
Notes
£’m
2015
Restated
(see note 44)
£’m
11
40
42
43
19
16
35
395.8
(1.9)
(18.3)
375.6
0.2
(26.6)
(27.4)
321.8
2.1
59.6
(69.6)
(57.5)
(14.7)
(51.7)
0.9
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
(130.9)
(539.6)
(113.0)
–
–
466.0
(1.2)
(537.5)
(111.1)
(9.7)
(146.4)
537.0
(0.4)
(65.5)
(185.7)
203.9
5.2
147.3
21.3
39.7
105.5
2.1
25
173.8
147.3
MEGGITT PLC REPORT AND ACCOUNTS 2016
Notes to the consolidated financial statements
105
1. General information and 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 Atlantic House, Aviation Park West, Bournemouth
International Airport, Christchurch, Dorset, BH23 6EW.
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. The accounting policies of
acquired businesses are changed where necessary to be consistent
with those of the Group.
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 together with the Group’s
share of the results of its joint venture.
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.
A joint venture is a contractual arrangement between the Group and
one or more other parties, under which control is shared between the
parties and the Group and other parties have rights to the net assets of
the arrangement. A joint venture is accounted for using the equity
method of accounting whereby the Group’s share of the profits and
losses of the joint venture are recognised in the income statement
within net operating costs and its share of the net assets and goodwill
of the joint venture are recognised as an investment.
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 disposed, the difference between the fair value of
consideration received or receivable and the value at which the net
assets of the subsidiary were recorded, immediately prior to disposal,
is recognised in the income statement 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, subsidiary companies are
eliminated together with unrealised gains on inter-group transactions.
Unrealised losses are eliminated to the extent the asset transferred is
not impaired. Unrealised gains and losses on transactions with the
joint venture are eliminated to the extent of the Group’s interest in the
arrangement.
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 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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 106
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 56
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.
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), investments, 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, the
expected loss is recorded immediately in the income statement within
cost of sales.
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 (power by the hour contracts) or
number of aircraft landings (cost per brake landing contracts).
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 businesses
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 arising on the
acquisition, disposal and closure of businesses 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.
MEGGITT PLC REPORT AND ACCOUNTS 2016 107
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. Amortisation is
charged on a straight line basis over their estimated useful economic
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) Software and other intangible assets
Software and purchased licences, trademarks and patents are
recorded at cost less accumulated amortisation and impairment
losses. Amortisation is charged on a straight-line basis over their
estimated useful economic lives, typically over periods up to 10 years.
Residual values and useful lives are reviewed annually and adjusted
if appropriate.
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.
Provision is made for current tax liabilities, when the Group has a
present obligation as a result of past events, it is probable an outflow
of economic benefits will be required to settle the obligation and the
amount can be reliably estimated. The Group typically uses a weighted
average of outcomes assessed as possible to determine the level of
provision required, unless a single best estimate of the outcome is
considered to be more appropriate. Assessments are made at the level
of an individual tax uncertainty, unless uncertainties are considered to
be related, in which case they are grouped together. Provisions are not
discounted given the short period over which they are expected to be
utilised and are included within current tax liabilities. Any liability
relating to interest or penalties on tax liabilities is included in the tax
charge.
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 generally tested individually
or at a CGU level which represents 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. Where it is not
possible to allocate goodwill on a non-arbitrary basis to individual
CGUs, it is allocated to the group of CGUs which represent the lowest
level within the Group at which goodwill is monitored by management.
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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 108
Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
Borrowings
Inventories continued
Provision is made for obsolete, slow moving or defective items
where appropriate.
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 such
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).
Trade and other 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, within net
operating costs, 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.
Where the Group recognises a provision, to the extent the outflows of
economic benefits required to settle the obligation are recoverable
from an insurer or other third party, an other receivable is recognised.
Other receivables 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 receivable which have not been
reflected in the undiscounted receivable. The impact of the unwinding
of discounting is recognised in the income statement within finance
income.
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.
Borrowings are initially recognised at fair value, being proceeds
received less directly attributable transaction costs incurred.
Borrowings are generally subsequently measured at amortised cost at
each balance sheet date 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, where 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.
Provisions
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 and curtailment gains and losses 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.
MEGGITT PLC REPORT AND ACCOUNTS 2016 109
2. Summary of significant accounting policies continued
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. 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.
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 bank and other 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 bank and other 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,
the Group utilises cross currency derivatives and treasury lock
derivatives (as described in note 31) 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.
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.
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 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).
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 110
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 early adopted 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 Group is continuing to assess the full impact of IFRS 9 which becomes effective for accounting periods
beginning on or after 1 January 2018. 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.
• IFRS 15, ‘Revenue from contracts with customers’. This standard establishes principles for reporting the nature, amount and timing of revenue
arising from an entity’s contracts with customers. The Group is continuing to assess the full impact of IFRS 15. The principal areas of the
Group’s existing accounting that are currently expected to be affected include:
•
•
•
•
Programme participation costs. It is likely that the cost of free of charge/deeply discounted manufactured parts (but generally not cash
programme payments) will be expensed as incurred under IFRS 15, rather than being recognised as an intangible asset and amortised over
their useful lives. Had the Group adopted this policy for 2016, its profit before tax and net assets (after taking account of related deferred tax
balances) would be lower by £23.4 million and £195.1 million respectively.
Revenue from sale of goods (2016 revenue: £1,798.8 million). The timing of revenue recognised on the substantial majority of such contracts
is not expected to be significantly affected by IFRS 15 with revenue continuing to be recognised as goods are delivered to the customer. A
minority of contracts will require changes to the timing of recognition of revenue to reflect IFRS 15 guidance on areas such as the
accounting for customer price changes and whether multiple deliveries and services provided to a customer should be accounted for
individually or aggregated.
Contract accounting revenue (2016 revenue: £59.8 million). It is likely that revenue on most contracts for which revenue is currently
recognised using contract accounting will continue to be accounted for as performance occurs, although the method by which the stage of
completion is measured may change on certain contracts. A small number of contracts may no longer qualify to be contract accounted and
revenue will instead be deferred until completion of the contract.
Revenue from power by the hour and cost per brake landing type contracts (2016 revenue: £39.0 million). An element of revenue on these
contracts is likely to no longer be recognised by reference to the number of aircraft flying hours or aircraft landings but when maintenance
events are carried out. This will lead to revenue being recognised in different accounting periods to those in which it is currently
recognised. Across all cost per brake landing contracts (2016 revenue: £29.1 million), the impact in any one period is likely however, to be
mitigated by virtue of the large number of aircraft covered by such contracts and the relatively short period between maintenance events.
•
Revenue from other services (2016 revenue: £56.0 million). No significant changes are currently expected.
•
Revenue from funded research and development contracts (2016 revenue: £38.8 million). Revenue from certain contracts is likely to no
longer be recognised as contractually agreed milestones are achieved, but either as costs are incurred (thus accelerating the recognition
of revenue) or when the contract is completed (thus delaying the recognition of revenue).
•
The adoption of the standard may also require certain reclassifications between revenue, cost of sales and net operating costs, but which
have no overall impact on operating profit.
The standard becomes effective for accounting periods beginning on or after 1 January 2018.
• IFRS 16, ‘Leases’. The Group is continuing to assess the full impact of IFRS 16 which becomes effective for accounting periods beginning on or
after 1 January 2019. 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. As at 31 December 2016, the Group has a future commitment in respect of
operating leases which expire more than 12 months from the balance sheet date of £110.2 million, mainly in respect of property leases, and for
which the present value is likely to be recognised on the balance sheet at transition. This standard is subject to endorsement by the European
Union. Subject to such endorsement, it is the Group’s current intention to early adopt this standard in its accounting periods beginning on or
after 1 January 2018.
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 41 to 42 of the Chief Financial Officer’s review). Regular reports monitor exposures and assist in
managing the associated risks.
MEGGITT PLC REPORT AND ACCOUNTS 2016 111
3. Financial risk management continued
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 31. 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 and floating rate borrowings into fixed rate borrowings.
Details of hedges in place are provided in note 31.
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. Note 24 details the Group’s
credit risk exposures in relation to its customers. 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. The credit quality of the Group’s counterparties is set out in notes 25
and 31.
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 28)
Derivative financial instruments:
Inflows**
Total
Trade and other payables as restated (see note 44)*
Bank and other borrowings
Interest payments on borrowings
Obligations under finance leases (see note 28)
Derivative financial instruments:
Inflows**
Outflows**
Total
Less than
1 year
£’m
453.1
162.0
41.8
1.2
(11.6)
646.5
Less than
1 year
£’m
391.5
0.1
21.5
1.1
(8.4)
0.5
2016
1-2 years
2-5 years
£’m
1.2
0.2
33.3
1.7
(7.1)
29.3
£’m
1.8
569.0
86.0
3.4
(14.1)
646.1
2015
1-2 years
2-5 years
£’m
0.9
543.2
20.1
1.0
(8.2)
0.4
£’m
1.4
545.6
39.5
3.2
(17.6)
0.2
572.3
Greater than
5 years
£’m
2.0
586.9
62.4
13.1
Total
£’m
458.1
1,318.1
223.5
19.4
(1.3)
(34.1)
663.1
1,985.0
Greater than
5 years
£’m
1.9
84.9
6.5
12.1
(4.0)
–
Total
£’m
395.7
1,173.8
87.6
17.4
(38.2)
1.1
101.4
1,637.4
406.3
557.4
* Excludes social security and other taxes of £10.9 million (2015: £10.3 million) (see note 26).
** Assumes no change in interest rates from those prevailing at year end.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
112
Notes to the consolidated financial statements continued
3. Financial risk management continued
Sensitivity analysis
The Group’s principal exposure in relation to market risks are to changes in the exchange rate between the US dollar and Pound sterling and to
changes in US interest rates. The table below illustrates the sensitivity of the Group’s results to changes in these key variables at the balance
sheet date. The analysis covers only financial assets and liabilities held at the balance sheet date and is made on the basis of the hedge
designations in place on those dates and assuming no hedge ineffectiveness.
USD/GBP exchange rate +/- 10%
US yield curve +/- 1%
2016
2015
Income
statement
£’m
49.0
14.2
Equity
£’m
123.0
3.3
Income
statement
£’m
32.8
21.7
Equity
£’m
101.5
5.0
The impact on equity from movements in the exchange rate comprises £124.8 million (2015: £106.9 million) in respect of US dollar net debt,
offset by £1.8 million (2015: £5.4 million) in respect of other financial assets and liabilities. However, as all US dollar net debt is designated as
a net investment hedge, this element of the impact is entirely offset by the retranslation of foreign subsidiaries. The impact shown above of
a 1% movement in the US yield curve includes the effect on the Group’s foreign currency forward 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 6.2% (2015: 8.0%) and its capital structure at 31 December is as follows:
Net debt (see note 41)
Total equity
Debt/equity %
2016
£’m
1,179.1
2,456.4
2015
Restated
(see note 44)
£’m
1,051.2
2,178.5
48.0%
48.3%
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 Group’s strategy for delivering net debt/EBITDA in this range can
be found on page 41 and 42 of the Chief Financial Officer’s review, which 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 2016.
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 level at which impairment testing of goodwill is
performed and the use of the equity accounting method for one of the businesses acquired as part of EDAC, the accounting for which was finalised
in the year, are considered by management to be additional critical judgements in the current year. The decrease in the proportion of contract
accounting revenue and the level of provision for legal, regulatory and other similar matters, included within other provisions, are such that they
are no longer considered to be critical estimates.
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 62.
Critical accounting estimates and assumptions
Impairment testing of goodwill
Each year the Group carries out impairment tests of goodwill which require estimates to be made of the value in use of its CGU’s or groups of
CGU’s. 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. Further details on these estimates and sensitivities of the carrying value of goodwill to these estimates are
provided in note 18.
MEGGITT PLC REPORT AND ACCOUNTS 2016
113
4. Critical accounting estimates and judgements continued
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. 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).
During the year, the Group finalised the fair values and estimated lives of the intangible assets arising from its acquisition of the advanced
composite businesses in late 2015, after taking advice from a third party valuation specialist (see note 42). The third party provided a range of
discount rate assumptions that could reasonably have been used to determine the fair value of customer relationships (the most significant
intangible asset arising on acquisition). Using the lower or upper end of this range would have increased or reduced the fair value recognised by
£17.0 million or £14.0 million respectively. A change in the estimated future cash flows, used to determine the fair value of customer relationships
of 10% would have increased or reduced the fair value recognised by approximately £11.0 million.
Impairment testing of development costs
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. Impairment testing requires 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, costs to complete any remaining development activity and the appropriate discount rates applied
to future cash flows.
At 31 December 2016, the programme with the largest capitalised development balance is the Bombardier CSeries which has a net book value of
£85.5 million. The most critical estimate is considered to be the size of the future fleet for this aircraft, which has now entered service. Fleet
volumes would need to reduce however, by approximately 60% from management estimates (which are based on public forecasts, from
independent industry experts), without any mitigation actions taken by the Group, before any impairment would need to be recognised.
At 31 December 2016, the programme with the next largest capitalised development balance is the Dassault 5X which has a net book value of
£52.7 million. This aircraft is yet to enter service and a two year delay was announced by the aircraft manufacturer at the start of 2016. The most
critical estimates are considered to be the date of entry into service and the size of the future fleet, both of which are based on public forecasts,
from independent industry experts. If entry into service were delayed by a further two years, without any mitigation actions taken by the Group, an
impairment of approximately £8.0 million would need to be recognised. The largest observed annual movement in fleet estimates for this aircraft
in the last five years has been 8%. A reduction of this level in 2017, without any mitigation actions taken by the Group, would not result in a
significant impairment.
No reasonably foreseeable change in assumptions relating to any other capitalised development costs would cause a significant impairment
to be recognised.
Impairment testing of programme participation costs
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. Impairment testing requires estimates of aftermarket revenues which are dependent
on aircraft utilisation, fleet lives and operator service routines and the appropriate discount rates applied to future cash flows.
At 31 December 2016, the programme with the largest capitalised programme participation balance has a net book value of £44.1 million. No
reasonably foreseeable change in assumptions would cause an impairment to be recognised. No reasonably foreseeable change in assumptions
relating to any other capitalised programme participation costs would cause a significant impairment to be recognised.
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 34.
Environmental provisions
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 (see note 32 for further details). In determining the provision to be recognised, advice is received by the Group from its environmental
consultants and legal advisors to assist in the estimate of the level and timing of remediation costs, including the period for which operations and
monitoring activities will be required to be carried out. In the last five years, annual reductions and increases in costs estimates have both been
experienced. If cost estimates were to change by 15%, the largest observed overall annual movement seen in this period, the provision recognised
would need to change by approximately £18.0 million.
The Group has extensive insurance arrangements in place to mitigate the on-going impact of historical environmental events on the Group (see
note 32 for further details). These insurance policies have monetary caps and in some cases are term policies, whereby costs are only
recoverable if incurred by specified dates. The estimates of the level and timing of remediation costs, used to determine the provision, are also
used in determining the level of receivable to recognise. If remediation cost estimates were to reduce by 15%, the receivable recognised would
need to reduce by approximately £15.0 million. If remediation cost estimates were to increase by 15%, the receivable recognised would need to
increase by approximately £2.0 million, reflecting the impact of the insurance policy caps that are in place. Whilst the timing of remediation is
based on advice from third party environmental consultants, it is possible that delays of up to 12 months could occur. If ongoing remediation
activities were to be delayed by 12 months, without any mitigating action taken by the Group, a reduction in the receivable recognised of
approximately £10.0 million would need to be recorded, reflecting the impact of policy expiration dates.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 114
Notes to the consolidated financial statements continued
4. Critical accounting estimates and judgements continued
Onerous contract provisions
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. Whilst each contract provision is
subject to its own unique risks, none are individually material. Accordingly whilst a range of outcomes on each contract is reasonably possible,
the Group would expect, based on its recent past experience, the net outcome across all onerous contracts to range from a potential increase of
£5.0 million in the provision to a potential reduction of £9.0 million (see note 32 for further details).
Income taxes
In determining the Group’s tax provision, it is necessary to consider transactions in a small number of key tax jurisdictions for which the ultimate
tax determination is uncertain. The Group’s tax provision at 31 December 2016 is £43.4 million and reflects a number of areas of judgement where
the amount of tax payable is either currently under audit by the tax authorities or relates to a period which has yet to be audited. These areas
include the deductibility of interest on certain borrowings used to finance acquisitions made by the Group and the price at which goods and
services are transferred between Group companies. The nature of the items, for which a provision is held, is such that the final outcome could
vary from the amounts held once a final tax determination is made, although currently none of these exposures is considered individually
material. Based on the Group’s recent experience of revisions to previous tax estimates as more information has become available, and assuming
no significant changes in legislation, it currently expects the outcome across all open items to range from a potential increase of £4.0 million in
the provision to a potential reduction of £10.0 million. To the extent the estimated 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.
Critical accounting judgements
Level at which impairment testing of goodwill is performed
Goodwill is required to be allocated to CGUs or groups of CGUs for the purpose of impairment testing. In the Group’s judgement, with the
exception of businesses within its Equipment Group segment and the advance composite businesses acquired in late 2015 (see note 42), it is
appropriate to allocate goodwill to the group of CGUs represented by its operating segments. In making this judgement, the Group has considered
the extent to which the increasing recent consolidation of activities within each segment (other than in the Meggitt Equipment Group) has meant it
is no longer possible in 2016 to allocate goodwill to individual CGU’s within that segment without the need to perform significant arbitrary
allocations. The allocation of goodwill at a segment level is consistent with the level at which it is monitored by management.
Due to the nature of CGUs within the Meggitt Equipment Group, which principally operate independently of one another, goodwill can be reliably
allocated to each CGU within the segment for testing.
The cash inflows of the two advanced composites businesses are not considered independent of one another, and accordingly are treated as a
single CGU in 2016. Although integration of the activities of the CGU with the rest of the businesses within its operating segment is progressing
well, it is still possible to reliably allocate goodwill to the CGU and it continues to be monitored by management at this level. Accordingly
impairment testing in the year has been performed at the CGU level.
Capitalisation of development costs
The Group is required to make judgements as to when development costs meet the criteria to be recognised as intangible assets. 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 expects to retain the intellectual property in the technology throughout
substantially all of 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. During 2016, the Group recognised £72.4 million of development costs as an
intangible asset (see note 19).
Capitalisation of programme participation costs
The Group is required to make judgements as to when programme participation costs meet the criteria to be recognised as intangible assets.
Approximately 85% of capitalised programme participation costs relate to free of charge or deeply discounted manufactured parts (‘FOC’), with
the balance relating to cash programme 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 it is probable the costs will be recovered through incremental
aftermarket revenues generated over the life of the part, will amounts be capitalised. In making this judgement, the Group makes estimates of
aftermarket revenues which are dependent on aircraft utilisation, fleet lives and operator service routines. The capitalisation of cash payments is
subject to similar judgements to those described for development costs above. During 2016, the Group recognised £57.9 million of programme
participation costs as an intangible asset (see note 19).
Accounting for joint venture
As part of the acquisition of EDAC, the Group acquired 70% of the equity shares in a joint arrangement. The arrangement is structured as a legal
entity and the contractual agreements between the Group and the other equity holder, provide both with rights to the net assets of the entity.
Although the Group owns 70% of the equity, unanimous consent of both parties to the arrangement is required in respect of the entities relevant
activities including approval of the annual business plan and strategy, significant funding decisions affecting the entity, the appointment of key
management, distributions to shareholders and changes in share capital. In the Group’s judgement, the entity meets the definition of a joint
venture and accordingly has been accounted for using the equity method (see note 22 for further details).
MEGGITT PLC REPORT AND ACCOUNTS 2016 115
2016
£’m
1,798.8
59.8
39.0
56.0
38.8
2015
£’m
1,470.4
66.7
38.8
40.1
31.2
1,992.4
1,647.2
5. Revenue
The Group’s revenue is analysed as follows:
Sale of goods
Contract accounting revenue
Revenue from services – Power by the hour/Cost per brake landing
Revenue from services – Other
Revenue from funded research and development
Total
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 23 to 27 of the
Strategic report.
Year ended 31 December 2016
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
406.2
(0.1)
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
476.7
(0.8)
£’m
331.2
(1.5)
£’m
543.6
(12.9)
£’m
262.8
(12.8)
£’m
2,020.5
(28.1)
Revenue from external customers
406.1
475.9
329.7
530.7
250.0
1,992.4
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
146.6
117.6
39.5
73.0
3.0
Operating profit (see note 10)
Finance income (see note 12)
Finance costs (see note 13)
Net finance costs
Profit before tax
Tax (see note 14)
Profit for the year
Exceptional operating items (see note 11)
Amortisation of intangible assets (see notes 19 and 20)**
Impairment loss/(reversal of impairment loss) (see note 19)
Depreciation (see note 21)
3.3
87.8
1.5
7.7
0.2
19.2
(1.5)
7.6
7.0
23.6
–
7.9
2.7
20.8
3.3
11.6
2.3
10.7
–
6.5
379.7
(146.0)
233.7
2.0
(40.2)
(38.2)
195.5
(24.3)
171.2
15.5
162.1
3.3
41.3
*
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, £63.5 million has been charged to underlying operating profit as defined in note 10.
The Group’s largest customer accounts for 6.6% of revenue (£132.4 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
34.0
49.0
1.3
8.4
92.7
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
£’m
£’m
£’m
2.0
6.1
0.3
10.7
19.1
0.7
0.2
0.9
14.8
16.6
27.3
2.6
1.1
14.6
45.6
£’m
5.6
–
0.5
4.8
Total
£’m
69.6
57.9
4.1
53.3
10.9
184.9
* Relate to those non-current assets included within segmental trading assets reviewed by the CODM.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
116
Notes to the consolidated financial statements continued
6. Segmental analysis continued
As at 31 December 2016
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
Investments (see note 22)
Derivative financial instruments – non-current (see note 31)
Deferred tax assets (see note 33)
Derivative financial instruments – current (see note 31)
Current tax recoverable
Cash and cash equivalents (see note 25)
Total assets
Total
£’m
832.6
364.2
230.0
463.2
178.6
2,068.6
176.0
2,095.7
738.3
14.8
21.8
15.9
4.2
4.4
173.8
5,313.5
*
Centrally managed trading assets principally include amounts recoverable from insurers and other third parties in respect of environmental
issues relating to former sites, other receivables and property, plant and equipment of central companies.
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
Revenue from external customers
Meggitt
Aircraft
Braking
Systems
£’m
353.3
(0.2)
353.1
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
398.8
(0.9)
397.9
£’m
178.0
(0.6)
177.4
£’m
480.8
(6.0)
474.8
£’m
244.9
(0.9)
£’m
1,655.8
(8.6)
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
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
* 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.
The Group’s largest customer accounts for 6.6% of revenue (£109.0 million). Revenue from this customer arises across all segments.
MEGGITT PLC REPORT AND ACCOUNTS 2016
6. Segmental analysis continued
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
39.4
£’m
8.5
–
0.9
4.2
* Relate to those non-current assets included within segmental trading assets reviewed by the CODM.
As at 31 December 2015 (As restated – see note 44)
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
Investments (see note 22)
Derivative financial instruments – non-current (see note 31)
Deferred tax assets (see note 33)
Derivative financial instruments – current (see note 31)
Current tax recoverable
Cash and cash equivalents (see note 25)
Total assets
117
Total
£’m
80.5
43.0
5.7
39.5
13.6
168.7
Total
£’m
666.6
303.7
173.6
387.7
145.9
1,677.5
179.8
1,815.5
722.7
11.4
25.5
0.3
8.4
5.5
147.3
4,593.9
* Centrally managed trading assets principally include amounts recoverable from insurers and other third parties 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
2016
£’m
2015
£’m
201.8
422.2
1,081.7
286.7
153.9
357.6
854.9
280.8
1,992.4
1,647.2
2016
£’m
2015
Restated
(see note 44)
£’m
700.8
211.2
3,194.1
11.1
698.3
182.2
2,688.5
11.3
4,117.2
3,580.3
Segmental non-current assets are based on the location of the assets. They exclude the investment in the Group’s joint venture, trade and other
receivables, derivative financial instruments and deferred tax assets.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
118
Notes to the consolidated financial statements continued
7. Auditor’s remuneration
Payable to PricewaterhouseCoopers LLP and its associates:
For the audit of the Company and consolidated financial statements in respect of the current year
For the audit of the Company and consolidated financial statements in respect of the prior year
For the audit of the accounts of any subsidiary of the Company in respect of the current year
Total
Non-audit fees payable to PricewaterhouseCoopers LLP were £Nil million (2015: £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 gains
Operating lease rentals
Share of profit after tax of joint venture (see note 22)
Other operating income
2016
£’m
1.2
0.2
0.7
2.1
2015
£’m
0.8
0.1
0.6
1.5
2016
£’m
588.5
24.0
708.2
85.4
14.0
33.4
16.1
98.6
3.3
41.3
1.4
15.5
(39.1)
66.4
(5.3)
16.9
1.2
(2.3)
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)
* Total research and development expenditure in the year was £157.8 million (2015: £158.7 million) of which £31.7 million (2015: £26.8 million)
was charged to cost of sales, £53.7 million (2015: £47.1 million) was charged to net operating costs and £72.4 million (2015: £84.8 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 34)
Share-based payment expense (see note 36)
Total
2016
£’m
2015
£’m
554.3
100.7
45.2
8.0
708.2
464.5
82.6
39.4
4.1
590.6
Details of directors’ remuneration is provided in the Directors’ remuneration report on pages 66 to 88 which forms part of these
financial statements.
MEGGITT PLC REPORT AND ACCOUNTS 2016
9. Employee information continued
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
119
2016
Number
2015
Restated
Number
1,280
1,845
2,730
3,272
1,872
480
1,300
1,885
1,818
3,365
2,042
441
11,479
10,851
Prior year comparatives have been restated to reflect the transfer of Meggitt Xiamen into Meggitt Equipment Group and Meggitt Aerospace Asia
Pacific into Meggitt Control Systems. Both businesses were previously reported within ‘Corporate including shared services’. The transfers
did not have any significant impact on segmental information provided in note 6 and accordingly comparative information in that note has not
been restated.
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.
Delivery of the Group’s strategy includes investment in acquisitions that enhance its technology portfolio and the restructuring of its cost base to
deliver operational improvements. The exclusion of significant items arising from M&A activity and business restructuring is designed by the
Board to align short-term operational decisions with this longer-term strategy. Accordingly 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, business restructuring and site consolidation costs are excluded from underlying profit measures.
To ensure appropriate and timely commercial decisions are made as to when and how to mitigate the Group’s foreign currency and interest rate
exposures, any gains and losses arising from the marking to market of financial instruments that are not hedge accounted are also excluded
from underlying profit measures.
The Board considers net interest expense on retirement benefit obligations to be a non-cash, non-trading item and accordingly excludes it
from underlying profit measures.
The items excluded from underlying profit measures are treated consistently with the way performance is measured under the Group’s
short-term and long-term incentive plans and covenant requirements defined in the Group’s committed credit facilities.
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 34)
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
2016
£’m
2015
£’m
233.7
236.6
a
b
c
d
15.5
(39.1)
98.6
4.6
66.4
146.0
379.7
10.4
0.2
71.9
1.6
4.8
88.9
325.5
195.5
210.2
146.0
10.6
156.6
352.1
88.9
11.2
100.1
310.3
171.2
182.1
156.6
(58.4)
98.2
269.4
100.1
(33.9)
66.2
248.3
*
Of the adjustments to operating profit, £3.6 million (2015: £4.0 million) relating to exceptional operating items and £4.6 million
(2015: £1.6 million) relating to the disposal of inventory revalued in business combinations has been charged to cost of sales, with the balance
of £137.8 million (2015: £83.3 million) included within net operating costs.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
120
Notes to the consolidated financial statements continued
10. Reconciliations between profit and underlying profit continued
a.
The Group separately presents 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.
Gain on disposal of businesses (see note 43)
Remeasurement of fair value of contingent consideration receivable relating to previously disposed businesses
Costs related to the acquisition of businesses
Amounts arising on the acquisition, disposal and closure of businesses
2016
£’m
(40.7)
0.3
1.3
(39.1)
b. The Group excludes from its underlying profit figures the amortisation of intangible assets acquired in business combinations.
Amortisation of other intangible assets (see note 20)
Less amortisation of other purchased intangible assets (see note 20)
Amortisation of intangible assets acquired in business combinations
2016
£’m
114.7
(16.1)
98.6
2015
£’m
(1.2)
(2.5)
3.9
0.2
2015
£’m
84.2
(12.3)
71.9
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.
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 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 derivatives
Movement in the fair value of treasury lock derivative
Remeasurement of share buyback close period commitment
Financial instruments – loss
2016
£’m
48.0
2.3
3.8
0.8
2.9
8.6
–
66.4
2015
£’m
16.1
(0.1)
2.2
(1.1)
(4.4)
(3.7)
(4.2)
4.8
MEGGITT PLC REPORT AND ACCOUNTS 2016
121
11. Exceptional operating items
Business restructuring costs
Integration of acquired businesses
Site consolidations
Raw material supply issue
Exceptional operating items
Note
a
b
c
d
Income statement
Cash expenditure
2016
£’m
5.7
6.6
7.0
(3.8)
15.5
2015
£’m
9.2
0.3
0.9
–
2016
£’m
6.2
6.6
4.7
0.8
2015
£’m
4.8
0.1
0.9
4.9
10.4
18.3
10.7
a. This relates to costs incurred as part of a Group-wide initiative to structurally reduce its cost base announced on 28 October 2015, which
completed in 2016. Total costs incurred since the announcement in 2015 are £11.0 million.
b. This relates to costs incurred in respect of the on-going integration of the Advanced Composites and EDAC businesses acquired in November
and December 2015 respectively.
c. This principally relates to the closure of the Group’s sensor operations in Rugby, UK and control systems operations in Corona, USA and
transfer of their activities to the Group’s existing operations in Hampshire, UK and California, USA together with the consolidation of the
Group’s US braking systems maintenance, repair and overhaul services onto a single site in Kentucky.
d. This relates to unused amounts reversed in the year in respect of the provision originally created in 2013 relating to the supply from a vendor
of non-conforming raw materials in one of our businesses (see note 32).
The tax credit in respect of exceptional operating items was £4.9 million (2015: £3.2 million).
12. Finance income
Interest on bank deposits
Unwinding of interest on other receivables (see note 32)
Other finance income
Finance income
13. Finance costs
Interest on bank borrowings
Interest on senior notes
Interest on obligations under finance leases
Unwinding of discount on provisions (see note 32)
Net interest expense on retirement benefit obligations (see note 34)
Amortisation of debt issue costs
Less: amounts capitalised in the cost of qualifying assets (see note 19)
Finance costs
14. Tax
Current tax – current year
Current tax – adjustment in respect of prior years
Deferred tax – origination and reversal of temporary differences
Deferred tax – effects of changes in tax rates
Deferred tax – adjustment in respect of prior years
Total taxation
2016
£’m
0.1
1.8
0.1
2.0
2016
£’m
7.0
21.8
1.1
2.5
10.6
1.2
(4.0)
40.2
2016
£’m
26.2
1.6
1.7
(1.2)
(4.0)
2015
£’m
0.1
2.5
0.1
2.7
2015
£’m
4.1
11.7
1.0
3.2
11.2
0.8
(2.9)
29.1
2015
£’m
21.4
(2.9)
6.3
(1.0)
4.3
24.3
28.1
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 prior year. The Finance Act 2016, included legislation to further reduce the main rate of corporation tax in the UK to 17% from 1 April 2020.
As this change was substantively enacted during 2016, it has been reflected in the tax charge for the current year. The impact of this change
on net deferred tax liabilities at 31 December 2016, profit for the year (underlying and statutory) and comprehensive income for the year was
not significant.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
122
Notes to the consolidated financial statements continued
14. Tax continued
Reconciliation of total tax charge
A reconciliation of the tax charge based on the weighted average tax rate applicable to the profits of the Group’s consolidated businesses is as
follows:
Profit on ordinary activities before tax at weighted average tax rate of 27.0%* (2015: 25.7%)
Effects of:
Changes in statutory tax rates
Share-based payment tax relief
Non taxable gain on disposal of businesses
Tax concessions
Tax credits and incentives
Additional provisions/(unused amounts reversed) in respect of historical tax uncertainties
Other permanent differences
Tax losses not recognised in deferred tax
Current tax – adjustment in respect of prior years
Deferred tax – adjustment in respect of prior years
Total taxation
2016
£’m
52.8
(1.2)
(0.8)
(7.9)
(16.8)
(4.4)
3.1
1.9
–
1.6
(4.0)
24.3
2015
£’m
54.0
(1.0)
0.6
–
(14.5)
(4.1)
(11.4)
1.1
2.0
(2.9)
4.3
28.1
*
The sensitivity of the tax charge to changes in the tax rate is such that a one percentage point increase, or reduction, in the tax rate would
cause the total taxation charge for 2016 to increase, or reduce respectively, by approximately £2.0 million.
The tax reconciliation for 2016 includes £7.9 million in respect of the benefit of a UK capital gains exemption on the disposal of Meggitt Target
Systems (see note 43), £16.8 million in respect of tax concessions in the UK and Switzerland which allow income to be taxed at beneficial rates,
£4.4 million in respect of tax credits and incentives in the UK and US for items such as research & development expenditure and a provision of
£3.1 million in respect of various historical tax issues in the Group.
Tax relating to components of other comprehensive income
2016
Before
tax
£’m
Tax (charge)/
credit
£’m
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
310.9
1.2
(0.2)
(120.7)
191.2
Current tax
Deferred tax
Total
Tax relating to items recognised directly in equity
Current tax credit relating to share-based payment expense
Deferred tax credit/(charge) relating to share-based payment expense
Total
(3.5)
(0.2)
0.1
20.1
16.5
(3.5)
20.0
16.5
After
tax
£’m
307.4
1.0
(0.1)
(100.6)
2015
Before
tax
£’m
Tax credit/
(charge)
£’m
80.3
2.4
(0.7)
29.4
207.7
111.4
2.4
(0.4)
0.1
(9.5)
(7.4)
2.4
(9.8)
(7.4)
2016
£’m
0.2
0.4
0.6
After
tax
£’m
82.7
2.0
(0.6)
19.9
104.0
2015
£’m
0.5
(2.5)
(2.0)
MEGGITT PLC REPORT AND ACCOUNTS 2016
123
15. Earnings per ordinary share
Earnings per ordinary share (‘EPS’) is calculated by dividing the profit attributable to owners of the Company by the weighted average number of
shares in issue during the year. The weighted average number of shares used excludes 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 37). The weighted average number of treasury
shares excluded was 0.2 million shares (2015: 0.3 million shares) and the weighted average number of own shares excluded was 1.5 million
shares (2015: 0.7 million shares). The calculation of diluted EPS adjusts the weighted average number of shares to reflect the assumption that
all potentially dilutive ordinary shares convert. For the Group this means assuming all share awards in issue are exercised.
Basic EPS
Potential effect of dilutive ordinary shares
Diluted EPS
* Profit for the year attributable to equity owners of the Company.
2016
Profit*
£’m
171.2
–
171.2
2016
Shares
Number ‘m
774.7
11.3
786.0
2016
EPS
Pence
22.1
(0.3)
21.8
2015
Profit*
£’m
2015
Shares
Number ‘m
182.1
–
182.1
785.4
10.9
796.3
2015
EPS
Pence
23.2
(0.3)
22.9
Underlying EPS is based on underlying profit for the year (see note 10) and the same number of shares as is used in the calculation of basic EPS.
It is reconciled to basic EPS below:
Basic EPS
Adjust for effects of:
Exceptional operating items
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
2016
Pence
22.1
1.4
(5.1)
8.2
0.4
6.8
1.0
2015
Pence
23.2
0.9
0.2
5.8
0.1
0.4
1.0
34.8
31.6
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 34.3 pence (2015: 31.2 pence).
16. Dividends
In respect of earlier years
In respect of 2015:
Interim of 4.60p per share
Final of 9.80p per share
In respect of 2016:
Interim of 4.80p per share
Dividends paid in cash
2016
£’m
–
–
75.8
37.2
113.0
2015
£’m
75.6
35.5
–
–
111.1
A final dividend in respect of 2016 of 10.30p per share (2015: 9.80p), amounting to an estimated total final dividend of £79.9 million
(2015: £75.8 million) is to be proposed at the Annual General Meeting on 27 April 2017. This dividend is not reflected in these financial
statements as it had not been approved by the shareholders at the balance sheet date.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
124
Notes to the consolidated financial statements continued
17. Related party transactions
During the year, the Group made sales to the joint venture of £3.4 million and purchases from the joint venture of £0.7 million. Amounts due from
the joint venture at the balance sheet date are shown in note 24. There are no amounts due to the joint venture at the balance sheet date.
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 2016 as members of the Board and the Group Leadership
Team, is set out below:
Salaries and other short-term employee benefits
Retirement benefit expense
Share-based payment expense
Total
2016
£’m
11.3
0.3
2.7
14.3
2015
£’m
9.0
0.3
1.3
10.6
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 appreciation rights – equity-settled
Equity participation plan shares
Meggitt Long Term Incentive Plan 2014
2016
Average
exercise
price
Pence
263.54
–
–
2016
Number
outstanding
‘m
2.1
0.7
5.1
2015
Average
exercise
price
Pence
349.19
–
–
2015
Number
outstanding
‘m
3.2
1.6
3.0
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 66 to 88 which forms part of these financial statements.
18. Goodwill
Cost at 1 January
Exchange rate adjustments
Businesses acquired as restated (see note 42)
Businesses disposed (see note 43)
Cost at 31 December
2016
£’m
1,815.5
282.8
–
(2.6)
2015
Restated
(see note 44)
£’m
1,534.7
69.8
211.0
–
2,095.7
1,815.5
Goodwill is tested for impairment annually or more frequently if there is any indication of impairment. No impairment charge was required in the
year (2015: £Nil) and the cumulative impairment charge recognised to date is £Nil (2015: £Nil).
An analysis of goodwill by CGU or group of CGUs is shown below:
Meggitt Aircraft Braking Systems (‘MABS’)
Meggitt Control Systems (‘MCS’)*
Meggitt Polymers & Composites (‘MPC’)
Excluding EDAC & Advanced Composites*
EDAC & Advanced Composites**
Meggitt Sensing Systems (‘MSS’)*
Meggitt Training Systems (‘MTS’)
Other*
Total
2016
£’m
854.2
474.9
138.2
241.7
264.8
84.2
37.7
2015
Restated
£’m
734.0
406.3
123.4
212.9
231.4
70.6
36.9
2,095.7
1,815.5
*
During the year, the Group determined that certain CGUs are now so highly integrated with one another that allocating goodwill on a
non-arbitrary basis to individual CGUs was no longer possible. Accordingly, goodwill is allocated to the group of CGUs which represents the
lowest level at which goodwill is monitored by management.
** Following the acquisition of the EDAC and Advanced Composites businesses in 2015, management has continued to monitor the goodwill of
the combined acquired businesses separately from the rest of the division during 2016.
MEGGITT PLC REPORT AND ACCOUNTS 2016
125
18. Goodwill continued
For each CGU or group of CGUs, the Group has determined its recoverable amount from value in use calculations. The value in use calculations
are based on cash flow forecasts derived from the most recent budgets and plans for the next five years, as approved by management in
December 2016. 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 to the relevant CGU or group of CGU’s.
The key assumptions for the value in use calculations are as follows:
• Sales volumes over the five years covered by management’s detailed plans. These are based on management estimates for growth in civil
aerospace OE, civil aerospace aftermarket, military and energy markets, and reflect the position each business has on individual aerospace
and other programmes. They are derived from industry forecasts for deliveries of large jets, regional aircraft and business jets, air traffic
growth, military spending by the US DoD and other major governments and oil prices. The exposure of MABS, MCS, MPC and MSS to these
markets, is set out in the Strategic report on pages 23 to 27. MTS operates entirely within the military market. The Group’s medium term
expectations for growth in these markets, is set out in the Strategic report on pages 18 to 21.
• Selling prices and production cost changes over the five years covered by management’s detailed plans. These are based on contractual
agreements with customers and suppliers, management’s past experience and expectations of future market changes and the continued
maturity of the Meggitt Production System.
• 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 or group of CGUs operates, external
industry forecasts of long-term growth in the aerospace and defence sectors, the extent to which a CGU or group of CGUs has sole-source
positions on platforms where it is able to share in a continuing stream of highly profitable aftermarket revenues, the maturity of the platforms
it supplies and the technological content of its 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 or group of CGUs operates
(UK: 2.1% (2015: 2.3%), US: 2.3% (2015: 2.5%)), 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 or group of CGUs not already
reflected in its future cash flows. The discount rates used were as follows: MABS 9.6% (2015: 10.1%), MCS 10.2% (2015: 10.8%), MPC 9.9% (2015:
10.1%), MSS 8.4% (2015: 10.2%), EDAC & Advanced Composites 10.1% (In 2015, no testing was performed due to the proximity of the acquisitions
to the balance sheet date) and MTS 11.3% (2015: 10.0%). The discount rates used for ‘Other’ CGUs ranged between 8.7% to 12.0% (2015: 8.7%
to 11.1%).
A sensitivity analysis was carried out at each level at which impairment testing was performed to determine the extent to which assumptions
would need to change for the calculated recoverable amounts from value in use, to fall below its carrying value of goodwill. Management has
concluded that no reasonably foreseeable change in the key assumptions used in the impairment model would result in a significant impairment
charge being recorded in the financial statements. The least headroom in percentage terms are in MABS, MTS and EDAC & Advanced Composites.
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
MTS
25%
49%
25%
£593.5m
27%
100%
31%
£42.6m
EDAC &
Advanced
Composites
38%
100%
41%
£240.4m
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
126
Notes to the consolidated financial statements continued
19. Development costs and programme participation costs
At 1 January 2015
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
Year ended 31 December 2016
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
Impairment loss*
Amortisation*
Net book amount
At 31 December 2016
Cost
Accumulated amortisation
Net book amount
Development
costs
£’m
431.2
(88.3)
342.9
342.9
17.7
84.8
–
–
(4.3)
2.9
(21.3)
(6.4)
(7.9)
408.4
506.9
(98.5)
408.4
408.4
68.8
72.4
–
–
(2.8)
4.0
(3.3)
(14.0)
Programme
participation
costs
£’m
419.2
(176.8)
242.4
242.4
11.1
–
41.4
1.6
–
–
–
–
(28.9)
267.6
479.7
(212.1)
267.6
267.6
41.4
–
53.5
4.4
–
–
–
(33.4)
533.5
333.5
657.1
(123.6)
609.1
(275.6)
533.5
333.5
* 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% (2015: 1.5%). Tax relief claimed on
interest capitalised in the year was £0.8 million (2015: £0.6 million).
The net book amount of development costs includes £246.3 million (2015: £182.0 million) in respect of Meggitt Aircraft Braking Systems which
have an estimated weighted average remaining life of 14.6 years (2015: 14.1 years).
The net book amount of programme participation costs comprises £283.4 million (2015: £226.4 million) in respect of free of charge/deeply
discounted manufactured parts and £50.1 million (2015: £41.2 million) in respect of cash programme payments. The net book amount of
programme participation costs includes £303.5 million (2015: £248.3 million) in respect of Meggitt Aircraft Braking Systems which have an
estimated weighted average remaining life of 9.2 years (2015: 8.6 years).
MEGGITT PLC REPORT AND ACCOUNTS 2016
20. Other intangible assets
Customer
relationships
Technology
Order
backlogs
At 1 January 2015
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2015 (As restated)
Opening net book amount
Exchange rate adjustments
Businesses acquired as restated (see note 42)
Additions
Amortisation – net operating costs
Net book amount – As restated
At 31 December 2015 (As restated)
Cost
Accumulated amortisation
Net book amount – As restated
Year ended 31 December 2016
Opening net book amount
Exchange rate adjustments
Businesses disposed (see note 43)
Additions
Amortisation – net operating costs
Net book amount
At 31 December 2016
Cost
Accumulated amortisation
Net book amount
(*)
£’m
(*)
£’m
859.4
(383.2)
252.5
(126.9)
476.2
125.6
476.2
22.2
113.5
–
(53.4)
558.5
125.6
5.4
36.0
–
(16.2)
150.8
1,013.9
(455.4)
300.1
(149.3)
558.5
150.8
558.5
89.1
–
–
(71.5)
150.8
23.2
–
–
(21.8)
576.1
152.2
1,179.0
(602.9)
348.6
(196.4)
576.1
152.2
(*)
£’m
0.3
–
0.3
0.3
0.1
7.8
–
(0.3)
7.9
8.2
(0.3)
7.9
7.9
1.0
–
–
(3.7)
5.2
9.6
(4.4)
5.2
127
Trade
names and
trademarks
(*)
£’m
29.0
(21.8)
7.2
7.2
0.3
–
–
(2.0)
5.5
Software
and other
(**)
£’m
124.2
(48.6)
75.6
75.6
1.7
0.4
11.9
(12.3)
77.3
Total
£’m
1,265.4
(580.5)
684.9
684.9
29.7
157.7
11.9
(84.2)
800.0
30.2
(24.7)
5.5
139.0
(61.7)
77.3
1,491.4
(691.4)
800.0
5.5
0.9
–
–
(1.6)
4.8
77.3
6.3
(0.1)
11.9
(16.1)
79.3
800.0
120.5
(0.1)
11.9
(114.7)
817.6
34.5
(29.7)
4.8
164.0
(84.7)
79.3
1,735.7
(918.1)
817.6
* Acquired in business combinations. Amortisation of these items is excluded from the Group’s underlying profit figures (see note 10).
The net book amount of customer relationships includes £317.0 million (2015: £310.0 million) in respect of Meggitt Aircraft Braking Systems,
£147.1 million (2015: £135.8 million) in respect of Meggitt Polymers & Composites, £57.4 million (2015: £56.5 million) in respect of Meggitt Control
Systems and £54.4 million (2015: £17.0 million) in respect of Meggitt Sensing Systems, which have estimated weighted average remaining lives
of 7.0 years (2015: 8.0 years), 11.9 years (2015: 12.9 years), 8.0 years (2015: 9.0 years) and 8.2 years (2015: 9.0 years) respectively.
The net book amount of technology includes £62.7 million (2015: £61.8 million) in respect of Meggitt Aircraft Braking Systems and £48.0 million
(2015 as restated: £46.1 million) in respect of Meggitt Polymers & Composites which have estimated weighted average remaining lives of 7.0 years
(2015: 8.0 years) and 8.4 years (2015 as restated: 9.1 years) respectively.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
128
Notes to the consolidated financial statements continued
21. Property, plant and equipment
At 1 January 2015
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2015 (As restated)
Opening net book amount
Exchange rate adjustments
Businesses acquired as restated (see note 42)
Additions
Disposals
Depreciation
Net book amount – As restated
At 31 December 2015 (As restated)
Cost
Accumulated depreciation
Net book amount – As restated
Year ended 31 December 2016
Opening net book amount
Exchange rate adjustments
Businesses disposed (see note 43)
Additions
Disposals
Depreciation
Net book amount
At 31 December 2016
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£’m
Plant,
equipment
and vehicles
£’m
179.6
(56.5)
123.1
123.1
2.8
6.9
4.8
–
(7.0)
130.6
197.4
(66.8)
130.6
130.6
14.2
(0.6)
8.3
(1.3)
(7.9)
413.8
(285.8)
128.0
128.0
4.4
13.5
39.5
(0.7)
(26.5)
158.2
466.3
(308.1)
158.2
158.2
23.2
(1.3)
47.9
(1.0)
(33.4)
Total
£’m
593.4
(342.3)
251.1
251.1
7.2
20.4
44.3
(0.7)
(33.5)
288.8
663.7
(374.9)
288.8
288.8
37.4
(1.9)
56.2
(2.3)
(41.3)
143.3
193.6
336.9
224.5
(81.2)
143.3
559.0
(365.4)
193.6
783.5
(446.6)
336.9
The Group’s obligations under finance leases (see note 28) are secured by the lessors’ title to the leased assets, which have a carrying amount of
£4.9 million included within land and buildings (2015: £4.4 million).
22. Investments
The Group’s investment in its joint venture, Parkway-HS, LLC has been accounted for using the equity method and is stated as follows:
At 1 January
Exchange rate adjustments
Arising on the acquisition of EDAC (see note 42)
Share of profit after tax
At 31 December
2016
£’m
11.4
2.2
–
1.2
14.8
2015
Restated
(see note 44)
£’m
–
0.1
11.3
–
11.4
Summarised financial information for joint venture
Set out below is summarised financial information for the joint venture which is accounted for using the equity method. The information reflects
amounts presented in its financial statements adjusted to reflect the Group’s accounting policies (and not the Group’s share of those amounts). Due
to the timing of the acquisition of the joint venture, its impact on the results of the Group for the year-ended 31 December 2015 was not significant.
MEGGITT PLC REPORT AND ACCOUNTS 2016
22. Investments continued
Summarised statement of comprehensive income
for the year ended 31 December 2016
Revenue
Operating profit*
Finance costs
Profit before tax
Tax
Profit after tax
Total comprehensive income from continuing operations
* After charging depreciation and amortisation of £0.2 million.
Summarised balance sheet
as at 31 December 2016
Property, plant and equipment
Cash and cash equivalents
Other current assets
Total current assets
Financial liabilities (excluding trade payables)
Other current liabilities
Total current liabilities
Net assets
Reconciliation of summarised financial information
as at 31 December 2016
Net assets at 1 January
Total comprehensive income
Net assets at 31 December
Group’s interest in joint venture at 70%
Goodwill
Group’s investment at 31 December
There are no contingent liabilities relating to the Group’s interest in the joint venture.
23. 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
129
2016
£’m
20.8
1.8
(0.1)
1.7
(0.1)
1.6
2.1
2015
£’m
1.5
–
6.5
6.5
(1.9)
(3.6)
(5.5)
2.5
2016
£’m
2.5
2.1
4.6
3.2
11.6
14.8
2016
£’m
1.7
0.1
6.3
6.4
(0.9)
(2.6)
(3.5)
4.6
2016
£’m
40.3
(1.3)
39.0
170.3
185.4
73.8
468.5
2015
Restated
(see note 44)
£’m
32.3
(1.7)
30.6
137.4
163.5
70.1
401.6
The cost of inventories recognised as an expense and included in cost of sales was £1,169.8 million (2015: £956.3 million). The cost of inventories
recognised as an expense includes £5.0 million (2015: £2.8 million) in respect of write-downs of inventory to net realisable value, and has been
reduced by £4.3 million (2015: £3.8 million) in respect of the reversal of write-downs made in previous years.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
130
Notes to the consolidated financial statements continued
24. 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
2016
£’m
334.1
40.6
21.6
96.6
492.9
58.4
58.4
2015
Restated
(see note 44)
£’m
263.2
25.7
18.0
106.7
413.6
62.2
62.2
434.5
351.4
Other receivables includes £77.4 million (2015: £83.4 million) in respect of amounts recoverable from insurers and other third parties principally
relating to businesses sold by Whittaker Corporation prior to its acquisition by the Group (see note 32) of which £21.7 million (2015: £23.4 million)
is shown as current. Other receivables are discounted where the impact is significant.
Trade receivables include £0.4 million due from the joint venture (2015: £Nil million). Trade receivables are stated after a provision for impairment
of £6.1 million (2015: £6.1 million as restated). 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
(Credit)/charge to income statement – net operating costs
At 31 December
2016
£’m
6.1
0.7
–
(0.7)
6.1
2015
Restated
£’m
3.8
0.1
1.2
1.0
6.1
At 31 December 2016, trade receivables and amounts recoverable on contracts of £57.1 million (2015: £49.8 million as restated) 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
2016
£’m
49.2
7.9
57.1
2015
Restated
£’m
43.9
5.9
49.8
The maximum exposure to credit risk at the balance sheet date is the fair value of each class of receivable reported above. The Group does not
hold any collateral as security. Trade and other receivables are denominated in the following currencies:
Sterling
US dollar
Euro
Other
Total
2016
£’m
71.7
380.6
30.8
9.8
492.9
2015
Restated
£’m
70.9
304.8
29.8
8.1
413.6
MEGGITT PLC REPORT AND ACCOUNTS 2016
25. Cash and cash equivalents
Cash at bank and on hand
Short-term bank deposits
Total
131
2016
£’m
142.8
31.0
173.8
2015
Restated
(see note 44)
£’m
125.2
22.1
147.3
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
26. Trade and other payables – current
Payments received on account
Trade payables
Social security and other taxes
Accrued expenses
Other payables
Total
27. Trade and other payables – non-current
Contingent consideration relating to acquired businesses
Other payables
Total
28. 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
2016
£’m
0.2
51.1
65.8
56.7
2015
Restated
£’m
0.8
66.3
36.0
44.2
173.8
147.3
2015
Restated
(see note 44)
£’m
29.5
161.9
10.3
59.6
140.5
401.8
2016
£’m
27.2
172.9
10.9
81.9
171.1
464.0
2016
£’m
3.8
1.2
5.0
2015
£’m
3.2
1.0
4.2
2015
£’m
0.1
0.2
5.2
5.5
Minimum
lease payments
Present value
of minimum
lease payments
2016
£’m
0.1
0.3
6.2
6.6
2016
£’m
1.2
5.1
13.1
19.4
(12.8)
6.6
6.5
0.1
2015
£’m
1.1
4.2
12.1
17.4
(11.9)
5.5
5.4
0.1
Obligations under finance leases are US dollar denominated. The weighted average period to maturity is 14.0 years (2015: 14.8 years) and the
weighted average interest rate is 18.6% (2015: 18.4%).
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
132
Notes to the consolidated financial statements continued
29. 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
2016
£’m
0.3
175.4
175.7
2015
£’m
0.7
3.3
4.0
344.6
826.0
763.2
425.8
1,170.6
1,189.0
1,346.3
1,193.0
175.7
577.0
593.6
4.0
1,097.2
91.8
1,346.3
1,193.0
1,317.2
(3.2)
19.2
0.8
12.3
1,172.8
(3.1)
18.4
1.1
3.8
1,346.3
1,193.0
Debt issue costs are amortised over the period of the facility to which they relate. The Group has no secured borrowings.
The Group has the following committed facilities:
2010 Senior notes (USD 600.0 million)
2016 Senior notes (USD 600.0 million)
Syndicated credit facility (USD 900.0 million)
Bilateral credit facilities (USD 600.0 million)
2016
Drawn
£’m
Undrawn
£’m
485.6
485.6
346.0
–
–
–
382.2
–
Total
£’m
485.6
485.6
728.2
–
Drawn
£’m
407.1
–
358.6
407.1
2015
Undrawn
£’m
–
–
252.0
–
Total
£’m
407.1
–
610.6
407.1
Total
1,317.2
382.2
1,699.4
1,172.8
252.0
1,424.8
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 the year, the Group issued USD 600.0 million of loan notes to private placement investors to replace the two USD 300 million bilateral
credit facilities which were due to mature in 2017. The notes are in two tranches as follows: USD 300.0 million carry an interest rate of 3.31% and
are due for repayment in 2023 and USD 300.0 million carry an interest rate of 3.60% and are due for repayment in 2026.
During 2014, the Group secured a five-year USD 900.0 million syndicated revolving credit facility which matures in 2021, following a one-year
extension agreed during 2015 and a further one-year extension agreed during 2016. At 31 December 2016, the amounts drawn under the
revolving credit facility were £346.0 million (2015: £358.6 million) represented by borrowings denominated in US dollars of £346.0 million
(2015: £312.4 million) and in Euros of £Nil million (2015: £46.2 million). Borrowings under the facility are subject to interest at floating rates
which are linked to LIBOR.
During the year, the Group executed a commitment offer letter from Sumitomo Mitsui Banking Corporation for the provision of a three-year
£75.0 million committed bilateral facility to commence between 1st September 2017 and 15th October 2017.
MEGGITT PLC REPORT AND ACCOUNTS 2016
133
29. 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
2016
Drawn
£’m
Undrawn
£’m
161.9
568.6
586.7
–
382.2
–
Total
£’m
161.9
950.8
586.7
Drawn
£’m
–
1,088.0
84.8
2015
Undrawn
£’m
–
252.0
–
Total
£’m
–
1,340.0
84.8
Total
1,317.2
382.2
1,699.4
1,172.8
252.0
1,424.8
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
2016
2015
Book
value
£’m
Fair
value
£’m
Book
value
£’m
Fair
value
£’m
175.7
1,170.6
177.2
1,160.2
4.0
1,189.0
4.0
1,196.9
1,346.3
1,337.4
1,193.0
1,200.9
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 bank and other borrowings is:
As at 31 December 2016:
US dollar
Swiss franc
Euro
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
As at 31 December 2015:
US dollar
Swiss franc
Euro
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
Floating
Fixed
£’m
346.9
–
–
346.9
£’m
787.0
159.3
55.5
1,001.8
(1.2)
(2.0)
345.7
999.8
Non-interest
bearing
£’m
–
–
0.8
0.8
–
0.8
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
Fixed rate borrowings
Weighted
average
interest rate
%
Weighted
average
period
for which
rate is fixed
Years
2.8
4.7
Fixed rate borrowings
Weighted
average
interest rate
%
Weighted
average
period
for which
rate is fixed
Years
3.4
2.5
Total
£’m
1,133.9
159.3
56.3
1,349.5
(3.2)
1,346.3
Total
£’m
1,083.5
65.3
47.3
1,196.1
(3.1)
1,193.0
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 3.3 years (2015: 3.8 years).
Hedges of net investments in foreign subsidiaries
The Group’s bank and other borrowings as disclosed above includes £1,345.5 million designated as hedges of net investments in the Group’s
foreign subsidiaries. The foreign exchange loss of £195.4 million (2015: £39.6 million) on retranslation of these borrowings during the year is
recognised in other comprehensive income.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
134
Notes to the consolidated financial statements continued
30. Financial instruments
As at 31 December 2016:
Non-current:
Trade and other receivables (see note 24)
Derivative financial instruments (see note 31)
Current:
Trade and other receivables*
Derivative financial instruments (see note 31)
Cash and cash equivalents (see note 25)
Financial assets
Current:
Trade and other payables**
Derivative financial instruments (see note 31)
Obligations under finance leases (see note 28)
Bank and other borrowings (see note 29)
Non-current:
Trade and other payables (see note 27)
Derivative financial instruments (see note 31)
Obligations under finance leases (see note 28)
Bank and other borrowings (see note 29)
Financial liabilities
Total
As at 31 December 2015 (As restated):
Non-current:
Trade and other receivables (see note 24)
Derivative financial instruments (see note 31)
Current:
Trade and other receivables*
Derivative financial instruments (see note 31)
Cash and cash equivalents (see note 25)
Financial assets
Current:
Trade and other payables**
Derivative financial instruments (see note 31)
Obligations under finance leases (see note 28)
Bank and other borrowings (see note 29)
Non-current:
Trade and other payables (see note 27)
Derivative financial instruments (see note 31)
Obligations under finance leases (see note 28)
Bank and other borrowings (see note 29)
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
(5.0)
–
(6.5)
(909.6)
(5.0)
(45.7)
(6.5)
(1,170.6)
(5.0)
(45.7)
(6.5)
(1,160.2)
(1,466.7)
(1,887.9)
(1,879.0)
(416.6)
21.4
645.1
(1,466.7)
(1,216.8)
(1,207.9)
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
58.4
21.8
412.9
4.2
173.8
671.1
(453.1)
(31.2)
(0.1)
(175.7)
Total
fair
value
£’m
58.4
21.8
412.9
4.2
173.8
671.1
(453.1)
(31.2)
(0.1)
(177.2)
Total
book
value
£’m
62.2
25.5
333.4
8.4
147.3
576.8
(391.5)
(12.7)
(0.1)
(4.0)
Total
fair
value
£’m
62.2
25.5
333.4
8.4
147.3
576.8
(391.5)
(12.7)
(0.1)
(4.0)
–
–
–
–
–
–
(453.1)
–
(0.1)
(92.4)
–
–
–
–
–
–
(391.5)
–
(0.1)
(4.0)
–
2.3
–
2.3
–
4.6
–
(31.2)
–
(83.3)
–
(45.7)
–
(261.0)
(421.2)
–
19.5
–
1.9
–
21.4
–
–
–
–
–
–
–
–
–
58.4
–
412.9
–
173.8
645.1
–
–
–
–
–
–
–
–
–
–
0.1
–
8.4
–
8.5
–
(12.7)
–
–
–
(13.7)
–
(290.8)
(317.2)
–
25.4
–
–
–
25.4
–
–
–
–
–
–
–
–
–
62.2
–
333.4
–
147.3
542.9
–
–
–
–
–
–
–
–
–
(4.2)
–
(5.4)
(898.2)
(4.2)
(13.7)
(5.4)
(1,189.0)
(4.2)
(13.7)
(5.4)
(1,196.9)
(1,303.4)
(1,620.6)
(1,628.5)
(308.7)
25.4
542.9
(1,303.4)
(1,043.8)
(1,051.7)
* Excludes prepayments and accrued income of £21.6 million (2015: £18.0 million) (see note 24).
** Excludes social security and other taxes of £10.9 million (2015: £10.3 million) (see note 26).
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.
MEGGITT PLC REPORT AND ACCOUNTS 2016
135
30. Financial instruments continued
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 cross currency derivatives have 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 current and non-current portion of bank and other borrowings measured at fair value, are classified as level 3 in the fair value measurement
hierarchy, as they have 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 and 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 fair value of the current and non-current portions of bank and other borrowings arising from changes in credit
risk are as follows:
Fair value at 1 January
Loss recognised in net operating costs
Fair value at 31 December
2016
£’m
3.3
(2.3)
1.0
2015
Restated
£’m
5.0
(1.7)
3.3
The difference between fair value and contractual amount at maturity of the current and 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
Loss/(gain) recognised in net operating costs
Loss recognised in net finance costs
At 31 December
2016
£’m
344.3
(20.6)
323.7
2015
£’m
290.8
(19.4)
271.4
2016
£’m
290.8
52.3
0.8
0.4
344.3
2015
£’m
276.9
14.9
(1.1)
0.1
290.8
The largest movement in credit spread seen in a six month period since inception of the borrowings is 70 basis points. A 70 basis point
movement in the credit spread used as an input in determining fair value at 31 December 2016, would impact net operating costs by approximately
£7.0 million.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
136
Notes to the consolidated financial statements continued
31. Derivative financial instruments
As at 31 December 2016:
Interest rate swap – cash flow hedge
Interest rate swaps – fair value hedges
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Total
Less non-current portion:
Interest rate swap – cash flow hedge
Interest rate swaps – fair value hedges
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Non-current portion
Current portion
As at 31 December 2015:
Interest rate swap – cash flow hedge
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 swap – cash flow hedge
Interest rate swaps – fair value hedges
Foreign currency forward contracts – not hedge accounted
Non-current portion
Current portion
Credit quality of derivative financial assets
The credit quality of derivative financial assets is as follows:
Moody’s rating:
Aa
A
Total
Interest rate swaps
Contract or underlying
principal amount
Fair value
Assets
£’m
Liabilities
£’m
Assets
£’m
Liabilities
£’m
129.5
323.7
214.7
88.4
756.3
129.5
242.8
159.2
69.5
601.0
155.3
–
–
–
(687.2)
(687.2)
–
–
–
(456.0)
(456.0)
(231.2)
0.5
20.9
1.9
2.7
26.0
0.5
19.0
0.4
1.9
21.8
4.2
–
–
–
(76.9)
(76.9)
–
–
–
(45.7)
(45.7)
(31.2)
Contract or underlying
principal amount
Fair value
Assets
£’m
108.5
271.4
61.0
135.7
8.5
585.1
108.5
271.4
3.2
383.1
202.0
Liabilities
£’m
Assets
£’m
Liabilities
£’m
–
–
–
–
(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
2016
£’m
4.9
21.1
26.0
–
–
–
–
(26.4)
(26.4)
–
–
(13.7)
(13.7)
(12.7)
2015
£’m
8.2
25.7
33.9
The total notional principal amount of outstanding interest rate swap contracts at 31 December 2016 is £453.2 million (2015: £379.9 million), of
which £80.9 million will expire in 2017, £129.5 million will expire in 2018, £141.6 million will expire in 2020 and £101.2 million will expire in 2022.
The contracts are all denominated in US dollars. Of the notional principal amount outstanding, £129.5 million (2015: £108.5 million) has the
economic effect of converting floating rate US dollar borrowings into fixed rate US dollar borrowings and £323.7 million (2015: £271.4 million)
has the economic effect of converting fixed rate US dollar borrowings into floating rate US dollar borrowings. To the extent they meet the criteria
for hedge accounting, the floating rate to fixed rate swap contract is accounted for as a cash flow hedge and the fixed rate to floating rate swap
contracts as fair value hedges.
Cross currency swaps
The cross currency swaps have been used to synthetically convert US dollar denominated floating borrowings into Swiss franc and Euro
denominated fixed borrowings to commercially hedge against Swiss franc and Euro denominated assets of foreign subsidiaries. The cross
currency swaps do not qualify to be hedge accounted.
MEGGITT PLC REPORT AND ACCOUNTS 2016
137
31. Derivative financial instruments continued
Treasury lock
The treasury lock was entered into in 2015 to secure current market interest rates for specified amounts of future fixed rate funding. It matured in
2016 and did not qualify for hedge accounting.
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
32. Provisions
2016
Assets
£’m
2016
Liabilities
£’m
2015
Assets
£’m
2015
Liabilities
£’m
1.5
1.2
2.7
(60.5)
(16.4)
(76.9)
–
0.2
0.2
(13.0)
(13.4)
(26.4)
At 1 January 2016 (As restated – see note 44)
Exchange rate adjustments
Businesses disposed (see note 43)
Additional provision in year*
Unused amounts reversed*
Charge/(credit) to net finance costs (see notes 13 and 12 respectively)
Transfer to trade and other payables
Utilised
At 31 December 2016
Environmental
(a)
£’m
117.8
21.3
–
2.7
–
2.5
–
(22.6)
121.7
Provisions
Onerous
contracts
(b)
£’m
Warranty
costs
(c)
£’m
45.9
4.3
–
1.3
(7.7)
–
(0.1)
(5.6)
38.1
17.0
2.3
(0.2)
6.6
(0.8)
–
(0.1)
(7.0)
17.8
Current
Non-current
At 31 December 2016
Environmental
receivables
Other
Total
(d)
£’m
5.4
0.4
–
5.6
(2.0)
–
–
(1.6)
7.8
£’m
186.1
28.3
(0.2)
16.2
(10.5)
2.5
(0.2)
(36.8)
(a)
£’m
(83.4)
(14.3)
–
(4.7)
2.0
(1.8)
–
24.8
185.4
(77.4)
2016
£’m
53.6
131.8
185.4
2015
Restated
£’m
40.0
146.1
186.1
* Amounts in respect of environmental and other provisions have been recorded in net operating costs. Amounts in respect of onerous contracts
and warranty costs have been recorded in cost of sales. Included within unused amounts reversed for onerous contracts is £3.8 million which
has been treated as an exceptional operating item (see note 11).
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.
Movements in the receivable are shown in the table above (see also note 24).
b. Provision has been made for estimated losses under certain trading contracts. Onerous trading contract provisions are expected to be
substantially utilised over the next five years and are not discounted given the short period over which they will be utilised.
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, included within other provisions, for certain claims which cannot be recovered from insurers. 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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
138
Notes to the consolidated financial statements continued
33. 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 2015
Exchange rate adjustments
Reclassifications
Businesses acquired as restated (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 (As restated)
Exchange rate adjustments
Reclassifications
(Charge)/credit to income statement (see note 14)
Credit to other comprehensive income (see note 14)
Credit to equity (see note 14)
At 31 December 2016
Retirement
benefit
obligations
£’m
87.7
2.7
(1.1)
–
(1.6)
(9.5)
–
78.2
12.2
–
(2.8)
20.1
–
Other
(*)
£’m
69.0
4.3
0.5
16.1
2.9
(0.2)
(2.5)
90.1
14.1
(0.2)
6.4
0.1
0.4
Total
£’m
156.7
7.0
(0.6)
16.1
1.3
(9.7)
(2.5)
168.3
26.3
(0.2)
3.6
20.2
0.4
107.7
110.9
218.6
* Includes balances arising from temporary differences in relation to provisions, accruals, share based payments, finance costs and derivative financial
instruments.
Deferred tax liabilities
At 1 January 2015
Exchange rate adjustments
Reclassifications
Businesses acquired as restated (see note 42)
Charge to income statement (see note 14)
Charge to other comprehensive income (see note 14)
At 31 December 2015 (As restated)
Exchange rate adjustments
Reclassifications
Businesses disposed (see note 43)
Credit/(charge) to income statement (see note 14)
Charge to other comprehensive income (see note 14)
At 31 December 2016
Accelerated
tax
depreciation
£’m
Intangible
assets
Total
£’m
£’m
(22.1)
(1.2)
–
(1.6)
(4.2)
–
(29.1)
(4.5)
–
–
1.6
–
(354.6)
(19.0)
0.5
(37.8)
(6.7)
(0.1)
(417.7)
(74.1)
0.2
0.2
(1.7)
(0.2)
(376.7)
(20.2)
0.5
(39.4)
(10.9)
(0.1)
(446.8)
(78.6)
0.2
0.2
(0.1)
(0.2)
(32.0)
(493.3)
(525.3)
During 2016, the Group reassessed the way in which deferred tax liabilities relating to development costs and programme participation costs
are presented. Such items are now disclosed within the ‘Intangible assets’ category, previously having been reported within ‘Other.’ Prior year
comparatives have been restated to reflect this change. The change had no impact on balances reported after allowing for the offsets referred
to below. 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
2016
£’m
15.9
(322.6)
2015
Restated
£’m
0.3
(278.8)
(306.7)
(278.5)
2016
£’m
1.4
14.5
15.9
2015
£’m
0.2
0.1
0.3
Deferred tax liabilities all fall due after more than one year.
The Group has unrecognised tax losses of £24.3 million (2015: £24.3 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.
MEGGITT PLC REPORT AND ACCOUNTS 2016
139
34. 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
Curtailment gain (see note 43)
Net interest expense on retirement benefit obligations
Total charge in respect of defined benefit pension schemes
Healthcare schemes:
Service cost
Past service cost
Net interest expense on retirement benefit obligations
Total charge in respect of healthcare schemes
Total charge
2016
£’m
30.2
15.3
(1.2)
8.6
22.7
0.9
–
2.0
2.9
2015
£’m
23.8
14.5
–
9.5
24.0
0.8
0.3
1.7
2.8
55.8
50.6
Of the total charge, £45.2 million (2015: £39.4 million) has been charged to operating profit (see note 9), of which £26.7 million (2015: £22.2 million)
has been included in cost of sales and £18.5 million (2015: £17.2 million) in net operating costs. The remaining £10.6 million (2015: £11.2 million)
is included in finance costs (see note 13).
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
140
Notes to the consolidated financial statements continued
34. 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
2016
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
483.6
(333.0)
150.6
54.5
–
54.5
2015
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
396.1
(279.1)
117.0
45.4
–
45.4
UK
pension
scheme
£’m
829.1
(619.5)
209.6
UK
pension
scheme
£’m
637.1
(515.0)
122.1
Total
£’m
1,367.2
(952.5)
414.7
Total
£’m
1,078.6
(794.1)
284.5
Of the total deficit of £414.7 million (2015: £284.5 million), £70.7 million (2015: £62.0 million) is in respect of unfunded schemes.
Changes in the present value of retirement benefit obligations
At 1 January
Exchange rate adjustments
Service cost
Past service cost
Curtailment gain
Interest expense/(income) (see note 13)
Contributions – Group
Contributions – members
Benefits paid
Remeasurement of retirement benefit obligations:
Experience (gain)/loss
Gain from change in demographic assumptions
Loss/(gain) from change in financial assumptions
Return on schemes’ assets excluding amounts included
in finance costs
Total remeasurement loss/(gain)
Administrative expenses borne directly by schemes
Liabilities
(*)
£’m
1,078.6
83.4
16.2
–
(1.2)
40.3
–
3.2
(46.4)
(11.7)
(12.2)
217.0
–
193.1
–
2016
Assets
(**)
£’m
(794.1)
(51.9)
–
–
–
(29.7)
(51.2)
(3.2)
46.4
–
–
–
(72.4)
(72.4)
3.6
At 31 December
1,367.2
(952.5)
* Present value of schemes’ liabilities.
** Fair value of schemes’ assets.
Total
£’m
284.5
31.5
16.2
–
(1.2)
10.6
(51.2)
–
–
(11.7)
(12.2)
217.0
(72.4)
120.7
3.6
414.7
Liabilities
(*)
£’m
1,078.9
20.7
15.3
0.3
–
37.9
–
2.9
(40.8)
11.4
(6.3)
(41.7)
–
(36.6)
–
2015
Assets
(**)
£’m
(761.1)
(13.4)
–
–
–
(26.7)
(39.7)
(2.9)
40.8
–
–
–
7.2
7.2
1.7
Total
£’m
317.8
7.3
15.3
0.3
–
11.2
(39.7)
–
–
11.4
(6.3)
(41.7)
7.2
(29.4)
1.7
1,078.6
(794.1)
284.5
MEGGITT PLC REPORT AND ACCOUNTS 2016
141
%
30.4
43.4
20.9
1.3
4.0
100.0
22.5
24.9
33.8
9.6
1.2
8.0
34. Retirement benefit obligations continued
Analysis of pension scheme assets
2016
2015
Quoted
Unquoted
Total
Quoted
Unquoted
Total
£’m
£’m
£’m
%
£’m
£’m
£’m
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
149.6
274.0
81.1
40.8
11.2
556.7
78.6
102.5
92.4
14.3
2.4
29.2
319.4
228.2
376.5
173.5
14.3
43.2
40.4
876.1
–
2.5
43.4
–
16.9
62.8
–
–
–
13.6
–
–
13.6
–
2.5
43.4
13.6
–
16.9
149.6
276.5
124.5
40.8
28.1
619.5
78.6
102.5
92.4
27.9
2.4
29.2
333.0
228.2
379.0
216.9
27.9
43.2
57.3
24.2
44.6
20.1
6.6
4.5
100.0
23.6
30.8
27.7
8.4
0.7
8.8
156.6
221.6
81.0
6.7
8.9
474.8
62.9
69.4
94.4
13.3
3.3
22.4
100.0
265.7
24.0
39.8
22.8
2.9
4.5
6.0
219.5
291.0
175.4
13.3
10.0
31.3
740.5
–
2.1
26.5
–
11.6
40.2
–
–
–
13.4
–
–
13.4
–
2.1
26.5
13.4
–
11.6
156.6
223.7
107.5
6.7
20.5
515.0
62.9
69.4
94.4
26.7
3.3
22.4
279.1
100.0
219.5
293.1
201.9
26.7
10.0
42.9
27.6
36.9
25.4
3.4
1.3
5.4
76.4
952.5
100.0
53.6
794.1
100.0
Other assets principally comprise 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.
2016
UK
pension
scheme
Overseas*
pension
schemes
Overseas
healthcare
schemes
2.65%
3.30%
2.30%
3.20%
4.30%
3.95%
N/A
N/A
N/A
4.51%
3.95%
N/A
N/A
N/A
N/A
UK
pension
scheme
3.85%
3.10%
2.10%
3.00%
4.10%
2015
Overseas*
pension
schemes
Overseas
healthcare
schemes
4.20%
N/A
N/A
N/A
4.66%
4.20%
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 2016 Social Security Administration’s
projection scale (‘Scale SSA’).
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
* Provided in respect of the most significant overseas schemes.
2016
2015
UK
scheme
Years
Overseas*
schemes
Years
UK
scheme
Years
Overseas*
schemes
Years
23.1-24.9
26.0-27.8
21.7-23.2
24.1-25.8
21.5-22.1
23.4-23.7
20.2-20.8
22.3-22.6
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
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
142
Notes to the consolidated financial statements continued
34. Retirement benefit obligations continued
Details on the sensitivity of scheme liabilities to changes in assumptions are provided below:
• The impact of a 50 basis point reduction in discount rate would cause scheme liabilities at 31 December 2016 to increase by approximately
£129.0 million.
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2016 to increase
by approximately £16.0 million.
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2016
to increase by approximately £44.0 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 sensitivity provided in respect of the discount rate has been increased to 50 basis points this
year, reflecting the average movement experienced over the last five years. No change has been considered necessary to other sensitivity levels,
given recent past experience.
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. The Group currently does not use derivatives to
mitigate this risk.
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. The Group currently does
not use derivatives to mitigate this risk.
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 to mitigate this risk.
MEGGITT PLC REPORT AND ACCOUNTS 2016 143
34. Retirement benefit obligations continued
Other information
In the UK, the 2015 triennial actuarial valuation was completed during 2016. At the date of the valuation, the deficit was measured for funding
purposes at £249.4 million. The buy-out valuation at the same date, which assumes the Group were to transfer the responsibility of the scheme to
an insurance company, was measured at £544.1 million. The Group has no current plans to make such a transfer. The Group agreed with the
trustees to finance the increase in funding deficit experienced since the previous 2012 valuation, through increased annual deficit reduction
payments commencing in 2016 with the aim of eliminating the scheme deficit by 2024. Under the agreement with the trustees, deficit payments in
2017 will be £27.4 million and will increase by approximately 5% per annum until 2024. The present value of future deficit payments agreed as part
of the 2015 actuarial valuation exceeds the scheme accounting deficit at 31 December 2016 by approximately £8.0 million however, 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. Following the disposal of Meggitt Defence Systems Limited (see note 43), the Group agreed with the trustees to make a one-off
additional payment into the UK scheme of £10.2 million which was made in December 2016.
In the US, deficit reduction payments are driven by regulations and provide for deficits to be eliminated over periods up to 15 years. Absent any
changes in legislation, deficit payments in 2017 are expected to be £6.3 million and will then increase over the following four years to £19.0 million
by 2021. Thereafter, annual payments are expected to remain relatively stable for the remainder of the recovery period. The present values of
deficit payments due under legislation do not exceed the schemes’ deficits at 31 December 2016 and accordingly no additional minimum funding
liability arises.
The Swiss scheme has a surplus on a funding basis of £22.6 million which has not been recognised in the financial statements.
The estimated total Group contributions expected to be paid to the schemes during 2017 are £49.4 million.
The weighted average duration of the UK schemes’ defined benefit obligation is 20.2 years. The weighted average duration of the overseas
schemes’ defined benefit obligation is 12.1 years. The expected maturity of undiscounted pension and healthcare benefits at 31 December 2016
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
35. Share capital
Issued share capital
Allotted and fully paid:
At 1 January 2015
Share buyback – purchased
Share buyback – transfer to treasury shares
At 31 December 2015
Issued on exercise of Sharesave awards
At 31 December 2016
Pension
schemes
£’m
Healthcare
schemes
£’m
44.3
45.6
143.4
267.6
286.9
286.4
269.1
879.8
3.8
3.8
11.6
17.7
14.0
11.0
8.4
15.6
Total
£’m
48.1
49.4
155.0
285.3
300.9
297.4
277.5
895.4
2,223.1
85.9
2,309.0
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
802.3
(28.3)
1.5
775.5
0.2
775.7
40.1
(1.3)
–
38.8
–
38.8
(146.4)
–
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
144
Notes to the consolidated financial statements continued
36. 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 £8.0 million (2015: £4.1 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).
Each of the conditions is measured over a three year performance period. An expense of £5.4 million (2015: £2.4 million) was recorded in the year.
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 2016 has been estimated at the market price of the share on the date of
grant, which was 401.84 pence (2015: 559.10 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 2016, none of the shares under award are eligible for release.
Deferred Share Bonus Plan
Equity-settled
2016
Number of
shares
under award
outstanding
‘m
2015
Number of
shares
under award
outstanding
‘m
8.0
6.0
(0.3)
13.7
4.2
3.9
(0.1)
8.0
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 the executive remaining in service for a specified period of time. There are no other significant
performance conditions.
An expense of £1.8 million (2015: £1.1 million) was recorded in the year. 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
2016 were estimated at the market price of the share on the date of each grant. The average price at the date of grant was 350.00 pence.
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
At 31 December 2016, none of the shares under award are eligible for release.
2016
Number of
shares
under award
outstanding
‘m
2015
Number of
shares
under award
outstanding
‘m
0.5
0.3
(0.1)
0.7
–
0.5
–
0.5
MEGGITT PLC REPORT AND ACCOUNTS 2016
145
37. 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 66 to 88. At 31 December 2016, the trust held 1.4 million ordinary shares (2015: 1.9 million ordinary shares) of
which 1.3 million were unallocated (2015: 1.7 million), being retained by the trust for future use. The balance was 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 2016 were purchased during 2015 at a cost of £7.0 million. The shares held at 31 December 2015 were purchased
during 2015 at a cost of £9.7 million. The market value of the shares at 31 December 2016 was £6.5 million (2015: £7.2 million) representing 0.18%
of the issued share capital of the Company (2015: 0.25%).
During the Group’s share buyback programme, which was suspended in 2015, 1.5 million purchased ordinary shares were not cancelled but
retained as treasury shares. Of these, 0.4 million shares (2015: 1.1 million shares) were used to satisfy share options and awards in the year
under the UK Share Incentive Plan and Sharesave Scheme. At 31 December 2016, less than 0.1 million shares (2015: 0.4 million shares) remained
in treasury with a market value of £0.1 million (2015: £1.3 million), representing less than 0.01% (2015: 0.05%) of the issued share capital of the
Company.
38. Contractual commitments
Capital commitments
Contracted for but not incurred:
Intangible assets
Property, plant and equipment
Total
Operating lease commitments
2016
£’m
1.3
13.5
14.8
2015
£’m
0.6
8.2
8.8
The Group leases various factories, warehouses and offices under non-cancellable operating leases. These leases have various lease periods,
escalation clauses and renewal rights. 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
2016
£’m
17.4
54.4
55.8
127.6
2015
£’m
15.6
43.4
32.0
91.0
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 2016, which under the Group’s current accounting polices (prior to any impact the adoption of
IFRS 15 may have on the future accounting for certain programme participation costs), are expected to be recognised as intangible assets when
incurred are as follows:
In one year or less
In more than one year but not more than five years
In more than five years
Total
51.8
17.4
3.4
72.6
43.5
220.2
1,051.0
1,314.7
2016
Development
costs
2016
Programme
participation
costs
£’m
£’m
2015
Development
costs
£’m
38.7
10.5
8.6
57.8
2015
Programme
participation
costs
£’m
49.4
209.5
909.1
1,168.0
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
146
Notes to the consolidated financial statements continued
39. Contingent liabilities
The Company has given guarantees in respect of credit facilities for certain of its subsidiaries, some property leases, other leasing arrangements
and the performance by some current and former subsidiaries of certain contracts. Also, there are similar guarantees given by certain other
Group companies. The directors do not believe that the effect of giving these guarantees will have a material adverse effect upon the Group’s
financial position.
The Company and various of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of
business. The directors do not anticipate that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have
a material adverse effect upon the Group’s financial position.
40. 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
Gain on disposal and closure of businesses (see note 10)
Remeasurement of fair value of contingent consideration receivable (see note 10)
Financial instruments (see note 10)
Share of profit after tax of joint venture (see note 22)
Retirement benefit obligation deficit payments
Share-based payment expense (see note 36)
Changes in working capital:
Inventories
Trade and other receivables
Trade and other payables
Provisions
Cash inflow from operations
41. Movements in net debt
At 1 January
Free cash inflow
Businesses acquired (see note 42)
Business acquisition expenses
Businesses disposed (see note 43)
Business disposal expenses
Dividends paid to Company’s shareholders (see note 16)
Purchase of own shares
Share buyback – purchased (see note 35)
Net cash generated – (inflow)/outflow
Debt acquired with businesses (see note 42)
Exchange rate adjustments
Other non-cash movements
At 31 December
2016
£’m
2015
£’m
171.2
182.1
(2.0)
40.2
24.3
41.3
162.1
3.3
1.4
(40.7)
0.3
66.4
(1.2)
(35.0)
8.0
(12.5)
(31.3)
11.3
(31.5)
(2.7)
29.1
28.1
33.5
121.0
6.4
–
(1.2)
(2.5)
4.8
–
(24.4)
4.1
(14.6)
55.8
27.3
(40.1)
375.6
406.7
2016
£’m
2015
Restated
(see note 44)
£’m
1,051.2
575.5
(131.1)
(2.1)
1.6
(59.6)
0.3
113.0
–
–
(199.0)
362.7
2.5
(2.0)
–
111.1
9.7
146.4
(77.9)
431.4
–
195.4
10.4
4.4
39.6
0.3
1,179.1
1,051.2
MEGGITT PLC REPORT AND ACCOUNTS 2016
41. Movements in net debt continued
Analysed as:
Bank and other borrowings – current (see note 29)
Bank and other borrowings – non-current (see note 29)
Obligations under finance leases – current (see note 28)
Obligations under finance leases – non-current (see note 28)
Cash and cash equivalents (see note 25)
Total
42. Business combinations
147
2016
£’m
175.7
1,170.6
0.1
6.5
(173.8)
2015
Restated
£’m
4.0
1,189.0
0.1
5.4
(147.3)
1,179.1
1,051.2
IFRS 3 requires fair values of assets and liabilities acquired to be finalised within 12 months of the acquisition date. During 2016, the Group
finalised the fair values of the assets and liabilities of the advanced composites businesses of Cobham plc (‘Advanced Composites’) which
completed on 25 November 2015 and of EDAC Composites LLC (‘EDAC’) which completed on 21 December 2015. Changes were made as
necessary to align the accounting policies of the acquired businesses with those of the Group. The adjustments made in finalising fair values
primarily relate to the recognition of intangible assets separately from goodwill, obligations in respect of onerous production contracts and
associated deferred tax liabilities. Additionally, with regards to EDAC, it was determined that one of the businesses acquired met the criteria to be
treated as a joint venture and accounted for using the equity method. Goodwill is attributable to the profitability of the acquired businesses and
expected future synergies arising following their acquisition. The total amount of goodwill and other intangible assets acquired as part of the
acquisitions that is deductible for tax purposes is £Nil. Fair values as at the date of each acquisition are shown below:
Advanced Composites
Goodwill (see note 18)
Other intangible assets (see note 20)
Property, plant and equipment (see note 21)
Trade and other receivables – non-current
Inventories
Trade and other receivables – current
Current tax recoverable
Trade and other payables – current
Current tax liabilities
Bank and other borrowings – current
Provisions – current
Deferred tax liabilities (see note 33)
Provisions – non-current
Net assets
As
reported
£’m
102.8
1.0
12.3
–
20.8
10.6
–
(9.5)
(0.6)
(4.1)
–
(0.6)
(0.6)
132.1
Adjustments*
£’m
(8.7)
49.8
(0.3)
2.3
(10.4)
(1.4)
1.7
(2.9)
0.6
–
(4.0)
(2.3)
(25.7)
Fair
value
£’m
94.1
50.8
12.0
2.3
10.4
9.2
1.7
(12.4)
–
(4.1)
(4.0)
(2.9)
(26.3)
(1.3)
130.8
Total consideration payable satisfied in cash
132.1
(1.3)
130.8
* Adjustments relate to finalisation of fair values and alignment with the Group’s accounting policies.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
148
Notes to the consolidated financial statements continued
42. Business combinations continued
EDAC
Goodwill (see note 18)
Other intangible assets (see note 20)
Property, plant and equipment (see note 21)
Investments (see note 22)
Trade and other receivables – non-current
Inventories
Trade and other receivables – current
Current tax recoverable
Trade and other payables – current
Bank and other borrowings – current
Deferred tax liabilities (see note 33)
Provisions – non-current
Net assets
As
reported
£’m
158.0
47.4
9.6
–
–
16.9
12.7
0.1
(11.5)
(2.2)
–
–
231.0
Adjustments*
£’m
(41.1)
59.5
(1.2)
11.3
1.0
(3.0)
(2.8)
(0.1)
3.2
1.9
(20.4)
(8.9)
(0.6)
Fair
value
£’m
116.9
106.9
8.4
11.3
1.0
13.9
9.9
–
(8.3)
(0.3)
(20.4)
(8.9)
230.4
Total consideration payable satisfied in cash
231.0
(0.6)
230.4
* Adjustments relate to finalisation of fair values and alignment with the Group’s accounting policies. It includes the elimination of assets and
liabilities of the business which it has been determined should be accounted for using the equity method. The assets and liabilities eliminated
are not significantly different to those at 31 December 2015 disclosed in note 22.
The adjustments to consideration in respect of Advanced Composites and EDAC of £1.3 million and £0.6 million respectively, relate to agreement
of final working capital adjustments in respect of the acquired businesses. These amounts were received by the Group in cash in 2016.
Total consideration received/(paid) in respect of acquisitions was as follows:
In respect of Advanced Composites*
In respect of EDAC*
In respect of an acquisition in prior years
Total
2016
£’m
1.4
0.7
–
2.1
2015
£’m
(132.1)
(231.0)
0.4
(362.7)
* The amounts received during the year differ from those recorded at the date of acquisition due to the effect of exchange rate movements.
MEGGITT PLC REPORT AND ACCOUNTS 2016
149
43. Business disposals
On 21 December 2016, the Group disposed of 100% of the ordinary shares of Meggitt Defence Systems Ltd and Meggitt Training Systems Canada
Inc, (collectively ‘Meggitt Target Systems’) for an initial consideration of £58.6 million which is subject to an adjustment for the working capital in
the businesses at the date of disposal. Meggitt Target Systems was engaged in the provision of unmanned target packages for weapon simulation
and training programmes. The businesses, which were not a major line of business or geographical area of operation of the Group, were no
longer considered core to the Group’s operations. The net assets of Meggitt Target Systems at the date of disposal were as follows:
Goodwill (see note 18)
Other intangible assets (see note 20)
Property, plant and equipment (see note 21)
Inventories
Trade and other receivables – current
Current tax recoverable
Cash and cash equivalents
Trade and other payables – current
Current tax liabilities
Provisions – current (see note 32)
Deferred tax liabilities (see note 33)
Net assets
Currency translation gain transferred from equity
Curtailment gain (see note 34)
Business disposal expenses
Gain on disposal (see note 10)
Total consideration received in cash
Net cash inflow arising on disposal:
Total consideration received in cash
Less: cash and cash equivalents disposed of
Businesses disposed
Less: business disposal expenses paid
Total cash inflow
Total consideration received in respect of disposed businesses was as follows:
In respect of Meggitt Target Systems
In respect of a business disposed of in prior years
Total
2016
£’m
57.1
2.5
59.6
Total
£’m
2.6
0.1
1.9
8.6
6.9
1.1
1.5
(3.7)
(0.8)
(0.2)
(0.2)
17.8
(0.5)
(1.2)
1.8
40.7
58.6
58.6
(1.5)
57.1
(0.3)
56.8
2015
£’m
–
2.0
2.0
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
150
Notes to the consolidated financial statements continued
44. Restatement of prior year comparatives
As described in note 42, the fair values of the assets and liabilities of Advanced Composites and EDAC were finalised during 2016. IFRS 3 requires
fair value adjustments to be recorded with effect from the date of acquisition and consequently result in the restatement of previously reported
financial results. The impact on the balance sheet as at 31 December 2015 is shown below:
Goodwill
Other intangible assets
Property, plant and equipment
Investments
Trade and other receivables – non-current
Inventories
Trade and other receivables – current
Current tax recoverable
Cash and cash equivalents
Trade and other payables – current
Current tax liabilities
Bank and other borrowings – current
Provisions – current
Deferred tax liabilities
Provisions – non-current
Other net liabilities - not affected by restatement
Net assets
2015
As
Reported
31 December
Advanced
Composites
Adjustments
EDAC
Adjustments
£’m
1,866.0
689.1
290.3
–
58.9
415.2
353.7
5.5
145.4
(402.1)
(37.3)
(4.0)
(36.0)
(255.8)
(111.0)
(799.4)
2,178.5
£’m
(8.7)
49.8
(0.3)
–
2.3
(10.4)
(1.4)
1.7
–
(2.9)
0.6
–
(4.0)
(2.3)
(25.7)
–
(1.3)
£’m
(41.1)
59.5
(1.2)
11.3
1.0
(3.0)
(2.8)
(0.1)
–
3.2
-
1.9
–
(20.4)
(8.9)
–
(0.6)
Total
adjustments
as at
acquisition
£’m
(49.8)
109.3
(1.5)
11.3
3.3
(13.4)
(4.2)
1.6
–
0.3
0.6
1.9
(4.0)
(22.7)
(34.6)
–
(1.9)
Other*
As
Restated
31 December
£’m
(0.7)
1.6
–
0.1
–
(0.2)
1.9
(1.6)
1.9
–
1.6
(1.9)
–
(0.3)
(0.5)
–
1.9
£’m
1,815.5
800.0
288.8
11.4
62.2
401.6
351.4
5.5
147.3
(401.8)
(35.1)
(4.0)
(40.0)
(278.8)
(146.1)
(799.4)
2,178.5
* Represents the impact of exchange rate movements on the Advanced Composites and EDAC adjustments from the date of acquisition to the
balance sheet date and other reclassifications.
The Group has not restated the income statement for the year ended 31 December 2015, as the impact on underlying profit and statutory profit
was not significant.
45. Information about related undertakings
In accordance with section 409 of the Companies Act 2006, a full list of subsidiaries and equity accounted investments as at 31 December 2016 is
disclosed below. Unless otherwise stated, ownership comprises ordinary shares representing 100% of the issued share capital and the registered
office is Atlantic House, Aviation Park West, Bournemouth International Airport, Christchurch, Dorset, BH23 6EW. No subsidiary undertakings
have been excluded from the consolidation.
Subsidiaries – directly owned
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
Meggitt Pension Trust Limited
Negretti & Zambra Limited
Negretti Limited
Phoenix Travel (Dorset) Limited1
The Microsystems Group Limited
Subsidiaries – indirectly owned
ABL Systems (USA)2
1204 Massillon Road, Akron, Ohio 44306
Aero-Tech Composites de Mexico,
S. de R.L. de C.V. (Mexico)3
Carretera a Zacatecas 5570-1, Parque Industrial
Amistad Sur, Saltillo, CA 250701
Aircraft Braking Systems Europe Limited
Aircraft Braking Systems Services Limited
Alston Properties LLC (USA)4
14600 Myford Road, Irvine, California 92606
Artus SAS (France)
37 Chemin du Champ des Martyrs, BP 20009, 49241
Avrillé Cedex
Artus Vietnam Co Ltd (Vietnam)5
#7-9, Road 16A, Industrial Zone 2 of Bienhoa,
Bienhoa, Dong Nai Province
Atlantic House Pension Trustee Limited
Aviation Mobility, LLC (USA)4
8041 Arrowridge Boulevard, Suite A, Charlotte,
North Carolina 28273
BAJ Coatings Limited6
Bells Engineering Limited
Bestobell Aviation Products Limited
Bestobell Engineering Products Limited
Bestobell Insulation Limited
Bestobell Meterflow Limited
Bestobell Mobrey Limited
Bestobell Service Co Limited
Bestobell Sparling Limited
Cavehurst (Finance) Ireland Unlimited
Company (Ireland)7
Gorse Valley, Tipperkevin, Ballymore
Eustace, Co Kildare
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 U.K. Limited
Endevco Vertriebs GmbH (Germany)
Kaiserleistraße 51, 63067 Offenbach/Main
Erlanger Acquisition Corporation (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Europeenne de Conception d’Etudes
Technologiques SAS (France)
8 Chemin de l’Etang, BP 15, F-16730 FLEAC
Evershed & Vignoles Limited
MEGGITT PLC REPORT AND ACCOUNTS 2016
151
45. Group Companies continued
Subsidiaries – indirectly owned
continued
Fotomechanix Limited
GB Aero Engine LLC (USA)4
1955 N. Surveyor Avenue, Simi Valley, California 93063
Heatric Limited9
King Tool International Limited
Linear Motion LLC (USA)4
628 N. Hamilton Street, Saginaw, Michigan 48602
Meggitt (Baltimore) Inc. (USA)8
3310 Carlins Park Drive, Baltimore, Maryland 21215
Meggitt (Canford) Limited
Meggitt (Colehill) Limited
Meggitt (Erlanger), LLC (USA)4
1400 Jamike Avenue, Erlanger, Kentucky 41018
Meggitt (France) SAS (France)
8 Chemin de l’Etang, BP 15, F-16730 FLEAC
Meggitt (Hurn) Limited
Meggitt (Maryland), Inc. (USA)8
20511 Seneca Meadows Parkway, Germantown,
Maryland 20876
Meggitt (North Hollywood), Inc. (USA)8
12838 Saticoy Street, North Hollywood,
California 91605
Meggitt (Orange County), Inc. (USA)8
14600 Myford Road, Irvine, California 92606
Meggitt (Rockmart), Inc. (USA)8
669 Goodyear Street, Rockmart, Georgia 30153
Meggitt (San Diego), Inc. (USA)8
10540 Heater Court, San Diego, California 92121
Meggitt (Sensorex) SAS (France)
196 Rue Louis Rustin, BP 63108, F-74166
Archamps Cedex
Meggitt (Shapwick) Limited
Meggitt (Simi Valley), Inc. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Meggitt (Tarrant) Limited
Meggitt (Troy), Inc. (USA)8
3 Industrial Drive, Troy, Indiana 47588
Meggitt (UK) Limited
Meggitt (Xiamen) Sensors & Controls Co
Limited (China)10
No.230 South 5 Gaoqi Road, Xiamen Area of China
(Fujian) Pilot Free Trade Zone 361006
Meggitt A/S (Denmark)
Porthusvej 4, 3490 Kvistgaard
Meggitt Acquisition (Erlanger), Inc. (USA)11
1955 N. Surveyor Avenue, Simi Valley, California 93063
Meggitt Acquisition (France) SAS (France)
37 Chemin du Champ des Martyrs, BP 20009, 49241
Avrillé Cedex
Meggitt Acquisition Limited
Meggitt Advanced Composites Limited
Meggitt Aerospace Asia Pacific Pte Limited
(Singapore)
1A Seletar Aerospace Link, Singapore 797552
Meggitt Aerospace Holdings Limited
Meggitt Aerospace Limited
Meggitt Aircraft Braking Systems Corporation
(USA)8
1204 Massillon Road, Akron, Ohio 44306
Meggitt Aircraft Braking Systems Kentucky
Corporation (USA)8
190 Corporate Drive, Danville, Kentucky 40422
Meggitt Aircraft Braking Systems Queretaro,
S. de R.L. de C.V. (Mexico)3
Carretera Estatal 200 Queretaro-Tequisquiapan,
KM 22 547 Interior A, Parque Aeroespacial,
Queretaro, CP 76278
Meggitt Asia Pacific Pte Ltd (Singapore)
1A Seletar Aerospace Link, Singapore 797552
Meggitt Brasil (Solucoes de Engenharia) Ltda.
(Brazil)10
Avenida João Cabral de Mello Neto, No. 850, Suites 815
and 816, Barra da Tijuca, CEP 22.775-057, City and
State of Rio de Janeiro
Meggitt Defense Systems, Inc. (USA)8
9801 Muirlands Boulevard, Irvine, California 92618
Meggitt Filtration & Transfer Limited
Meggitt Finance (Beta)
Meggitt Finance Limited
Meggitt Finance S.a.r.l (Luxembourg)
20 Rue des Peupliers, L-2328
Meggitt GmbH (Germany)
Kaiserleistraße 51, 63067 Offenbach/Main
Meggitt GP Inc. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93065
Meggitt Holdings (France) SNC (France)
37 Chemin du Champ des Martyrs, BP 20009, 49241
Avrillé Cedex
Meggitt Holdings (USA) Inc. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93065
Meggitt India Pvt Ltd (India)12
901, Brigade Road, No. 20. HMT Main Road, HMT
Township, North Bangalore 560022
Meggitt International Limited
Meggitt Investments Limited
Meggitt-Oregon, Inc. (USA)8
2010 Lafayette Avenue, McMinnville, Oregon 97128
Meggitt Properties PLC13
Meggitt Queretaro LLC (USA)4
1204 Massillon Road, Akron, Ohio 44306
Meggitt SA (Switzerland)14
Rte de Moncor 4, PO Box 1616, CH-1701 Fribourg
Meggitt Safety Systems, Inc. (USA)8
1785 Voyager Avenue, Simi Valley, California 93063
Meggitt Training Systems (Quebec) Inc. (Canada)8
6140 Henri Bourassa West, Montreal, Quebec, H4R3A6
Meggitt Training Systems Australia Pty Limited
(Australia)
Unit 2, 48 Conrad Place, Lavington, New South
Wales 2641
Meggitt Training Systems Europe BV
(The Netherlands)
Ringweistraat 7, 4181CL Waardenburg
Meggitt Training Systems, Inc. (USA)8
296 Brogdon Road, Suwanee, Georgia 30024
Meggitt Training Systems Limited
Meggitt Training Systems Pte Limited
(Singapore)
1A Seletar Aerospace Link, Singapore 797552
Meggitt-USA Holdings LLC (USA)4
1955 N. Surveyor Avenue, Simi Valley, California 93063
Meggitt-USA Services, Inc. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Meggitt-USA, Inc. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Metal Maps Limited
Micro Metallic Limited
Microponent Development Limited
Microponents (Plates) Limited
Microponents Limited
Miller Insulation & Engineering Limited
Nasco Aircraft Brake, Inc. (USA)8
13300 Estrella Avenue, Gardena, California 90248
OECO, LLC (USA)4
4607 SE International Way, Milwaukie, Oregon 97222
Pacific Scientific Company (USA)8
1785 Voyager Avenue, Simi Valley, California 93063
Park Chemical Company (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Piezotech, LLC (USA)4
8431 Georgetown Road, Suite 300, Indianapolis,
Indiana 46268
Piher International GmbH (Germany)
Orchideenstrasse 6, 90542 Eckental
Piher International Limited
Piher Sensors & Controls SA (Spain)
Poligono Industrial Municipal, Vial Transversal
2, s/n 31500 Tudela, Navarra
Precision Engine Controls Corporation (USA)8
11661 Sorrento Valley Road, San Diego, California
92121
Precision Micro Limited
Securaplane Technologies, Inc. (USA)8
12350 N. Vistoso Park Road, Oro Valley, Arizona 85755
Serck Aviation Limited
Sparkleglen Limited
Target Technology Petrel Limited
Techniques et Fabrications Electroniques
SAS (France)
Zone Actisud, 18 rue Jean Perrin, 31100 Toulouse
The Rotameter Manufacturing Co Limited
Tri-scan Limited
Valley Association Corporation (USA)15
1204 Massillon Road, Akron, Ohio 44306
Vibro-Meter Limited
Vibro-Meter S.a.r.l (Switzerland)
Rte de Moncor 4, PO Box 1616, CH-1701 Fribourg
Wallaby Grip Australia Pty Ltd (in liquidation)
(Australia)
Bradley Tonks, PKF Sydney, Level 8, 1 O’Connell Street,
Sydney, New South Wales 2000
Wallaby Grip Industries Australia Pty Limited
(in liquidation) (Australia)
Bradley Tonks, PKF Sydney, Level 8, 1 O’Connell Street,
Sydney, New South Wales 2000
Wallaby Grip Limited
Whittaker Aerospace16
Whittaker Corporation (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Whittaker Development Co. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 152
Notes to the consolidated financial statements continued
45. Group Companies continued
Subsidiaries – indirectly owned
continued
Whittaker Ordnance, Inc. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Whittaker Technical Products, Inc. (USA)8
1955 N. Surveyor Avenue, Simi Valley, California 93063
Zambra Legal Pty Limited (Australia)
Suite 2, Level 11, 60 Castlereagh Street, Sydney,
New South Wales 2000
Equity accounted investments
Parkway-HS, LLC (USA)17
1400 Jamike Avenue, Erlanger, Kentucky 41018
Parkway-Hamilton Sundstrand Mexico S. de
R.L. de C.V. (Mexico)18
Carretera 54 a Zacatecas SN, Colonia Las Teresitas,
Saltillo, Coahuila, CP 25084
Registered charity
Evershed & Ayrton Fund
Private company limited by guarantee
without share capital
Meggitt Pension Plan Trustees Limited
Notes
1
2
3
4
5
6
Ownership held as ordinary B shares (50%)
Ownership held as ordinary shares (50%)
Ownership held as quota interest (100%)
Ownership held as membership interest
(100%)
Ownership held as owner’s capital (100%)
Ownership held as deferred shares
(55.55%) and ordinary shares (44.45%)
7 Private unlimited company
8 Ownership held as common stock (100%)
9
Ownership held as ordinary A shares (60%)
and ordinary B shares (40%)
10 Ownership held as registered capital
(100%)
11 Ownership held as class A shares (67.5%),
class B shares (12.5%) and class C
shares (20%)
12 Ownership held as equity shares (100%)
13 Public limited company
14 Ownership held as bearer shares (100%)
15 Ownership held as ordinary shares (33%)
16 Private unlimited company
17 Joint venture with Hamilton Sundstrand
Corporation – ownership held as
membership interest (70%)
18 Subsidiary of Parkway-HS, LLC –
ownership held as quota interest (99.97%)
MEGGITT PLC REPORT AND ACCOUNTS 2016 153
Independent auditors’ report to the
members of Meggitt PLC
Report on the parent company financial statements
Our opinion
In our opinion, Meggitt PLC’s parent company financial
statements (the “financial statements”):
• give a true and fair view of the state of the parent company’s
affairs as at 31 December 2016;
• 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.
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 and Accounts 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.
What we have audited
The financial statements, included within the Annual Report
and Accounts, comprise:
• the Company balance sheet as at 31 December 2016;
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:
• the Company statement of changes in equity for the year
• we have not received all the information and explanations
then ended; and
we require for our audit; or
• the notes to the financial statements, which include a
summary of significant accounting policies and other
explanatory information.
• 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
Certain required disclosures have been presented elsewhere
in the Annual Report and Accounts, 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 and compliance with
applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of
the audit:
• 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; and
• the Strategic report and the Directors’ report have been
prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding of the
parent company and its environment obtained in the course of
the audit, we are required to report if we have identified any
material misstatements in the Strategic report and the
Directors’ report. We have nothing to report in this respect.
• 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 page 91 and 92, 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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 154
Independent auditors’ report to the
members of Meggitt PLC continued
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
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 and Accounts 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. With respect to the Strategic report and
Directors’ report, we consider whether those reports include
the disclosures required by applicable legal requirements.
Other matter
We have reported separately on the Group financial
statements of Meggitt PLC for the year ended
31 December 2016.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
27 February 2017
MEGGITT PLC REPORT AND ACCOUNTS 2016 Company balance sheet
As at 31 December 2016
Non-current assets
Intangible assets
Property, plant and equipment
Investments
Derivative financial instruments
Deferred tax assets
Current assets
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
Bank and other borrowings
Net current assets
Non-current liabilities
Derivative financial instruments
Bank and other borrowings
Retirement benefit obligations
Total liabilities
Net assets
Equity
Share capital
Share premium
Capital redemption reserve
Other reserves
Retained earnings:
At 1 January
Profit for the year attributable to owners of the company
Other changes in retained earnings
Total equity attributable to owners of the Company
155
Notes
2016
£’m
2015
£’m
4
5
6
9
11
7
9
8
9
10
9
10
12
13
34.4
3.2
2,074.0
44.7
34.8
2,191.1
1,380.5
63.9
3.0
48.5
1,495.9
3,687.0
(123.3)
(32.3)
–
(175.2)
(330.8)
34.2
4.0
2,070.9
28.5
18.7
2,156.3
1,142.3
33.8
–
34.5
1,210.6
3,366.9
(60.9)
(12.9)
(17.9)
(3.4)
(95.1)
1,165.1
1,115.5
(46.9)
(825.3)
(209.6)
(1,081.8)
(13.7)
(831.5)
(122.1)
(967.3)
(1,412.6)
(1,062.4)
2,274.4
2,304.5
38.8
1,219.8
1.6
17.5
38.8
1,218.9
1.6
17.5
1,027.7
173.8
(204.8)
1,090.0
149.7
(212.0)
2,274.4
2,304.5
The financial statements on pages 155 to 165 were approved by the Board of Directors on 27 February 2017 and signed on its behalf by:
S G Young
Director
D R Webb
Director
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
156
Company statement of changes in equity
As at 31 December 2016
Notes
12
12
At 1 January 2015
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
At 31 December 2015
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
Issue of equity share capital
Dividends
At 31 December 2016
Equity attributable to owners of the Company
Share
capital
Share
premium
£’m
40.1
£’m
1,218.9
Capital
redemption
reserve
£’m
0.3
–
–
–
–
–
–
–
–
–
–
(1.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38.8
1,218.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.9
–
–
–
–
–
–
–
–
–
–
–
1.3
–
–
–
1.6
–
–
–
–
–
–
–
–
–
–
–
Other
reserves*
Retained
earnings
Total
equity
£’m
17.5
£’m
£’m
1,090.0
2,366.8
–
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)
17.5
1,027.7
2,304.5
–
173.8
173.8
–
–
–
–
–
–
–
–
–
–
(0.2)
(120.2)
(120.4)
20.4
(0.2)
(120.2)
(120.4)
20.4
(100.0)
(100.0)
73.8
73.8
6.3
2.8
(0.9)
6.3
2.8
–
(113.0)
(113.0)
38.8
1,219.8
1.6
17.5
996.7
2,274.4
*
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.
MEGGITT PLC REPORT AND ACCOUNTS 2016
Notes to the financial statements of the Company
157
1. Basis of preparation
Operating leases
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 prepared its financial
statements in accordance with Financial Reporting Standard 101
‘Reduced Disclosure Framework’ (FRS 101).
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) and 134-136 of IAS 1 ‘Presentation of
financial statements’,
• IAS 7, ‘Statement of cash flows’,
• Paragraph 17 of IAS 24, ‘Related party disclosures’,
• The requirement in paragraph 38 of IAS 1 ‘Presentation of financial
statements’ to present comparative information in respect of:
(i) paragraph 73(e) of IAS 16 ‘Property, Plant and Equipment’; and
(ii) paragraph 118(e) of IAS 38 ‘Intangible assets’, and
• 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
lives, typically over periods up to 10 years. Residual values and useful
lives are reviewed annually and adjusted if appropriate.
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
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.
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 in 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 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 and curtailment gains and
losses 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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
158
Notes to the financial statements of the Company continued
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. 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 period for which services
are provided. 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 non-current liability. All other derivative
financial instruments are reported as current assets or current
liabilities.
Fair value hedges
Changes in fair value of derivative financial instruments, that are
designated and qualify as fair value hedges, are recognised in the
income statement together with changes in 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 recognised in other comprehensive income. Changes in fair
value of any ineffective portion are recognised immediately in the
income statement. To the extent changes in fair value are recognised
in other comprehensive income, they are recycled to the income
statement in the periods in which the hedged item affects the income
statement. The Company currently only applies cash flow hedge
accounting to the hedging of floating interest rate risk on certain loans
due to subsidiary undertakings and bank and other 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 under IAS 39 ‘Financial Instruments: Recognition and
Measurement’ are not merited.
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 at
each balance sheet date 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, where 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 current liabilities 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.
Details of own shares in the Company is presented in note 37 to the
Group consolidated financial statements.
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. Details of the dividends paid and
proposed by the Company are disclosed in note 16 to the Group
consolidated financial statements.
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 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.
MEGGITT PLC REPORT AND ACCOUNTS 2016 159
3. Critical accounting estimates and judgements
In applying the Company’s accounting policies set out in note 2, the Company 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 assumptions that have the most significant effect on the amounts included in these financial statements are described below.
There are no judgements considered to be critical relating to the year.
Critical accounting estimates and assumptions
Investment in subsidiaries
At least annually, the Company assesses the carrying value of its investments in subsidiaries, which requires estimates to be made of the value
in use of each entity. 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. No reasonably foreseeable change in assumptions would cause a significant impairment to be
recognised.
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 12.
4. Intangible assets
At 1 January 2015
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
Year ended 31 December 2016
Opening net book amount
Additions
Amortisation
Net book amount
At 31 December 2016
Cost
Accumulated amortisation
Net book amount
Software
£’m
43.0
(10.3)
32.7
32.7
6.1
(4.6)
34.2
49.1
(14.9)
34.2
34.2
7.4
(7.2)
34.4
56.5
(22.1)
34.4
Software assets include costs relating to the Group’s enterprise resource planning system. The asset has a net book amount of £22.7 million
(2015: £24.1 million) and has a remaining amortisation period of 4 years (2015: 5 years).
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
160
Notes to the financial statements of the Company continued
5. Property, plant and equipment
At 1 January 2015
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
Year ended 31 December 2016
Opening net book amount
Additions
Disposals
Depreciation
Net book amount
At 31 December 2016
Cost
Accumulated depreciation
Net book amount
6. Investments
Leasehold
property
£’m
0.6
(0.3)
0.3
0.3
–
–
0.3
0.6
(0.3)
0.3
0.3
0.2
–
(0.1)
0.4
0.8
(0.4)
0.4
Plant,
equipment
and vehicles
£’m
3.3
(1.8)
1.5
1.5
2.9
(0.7)
3.7
6.2
(2.5)
3.7
3.7
0.8
(0.1)
(1.6)
2.8
6.6
(3.8)
2.8
Total
£’m
3.9
(2.1)
1.8
1.8
2.9
(0.7)
4.0
6.8
(2.8)
4.0
4.0
1.0
(0.1)
(1.7)
3.2
7.4
(4.2)
3.2
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 45 to the Group consolidated financial statements on pages 150 to 152.
7. Other receivables
Amounts owed by subsidiary undertakings
Prepayments and accrued income
Other receivables
Total
Amounts owed by subsidiary undertakings are unsecured.
2016
£’m
2015
£’m
2,070.9
5.2
(2.1)
2,070.1
2.8
(2.0)
2,074.0
2,070.9
2016
£’m
1,374.4
4.2
1.9
2015
£’m
1,135.5
6.3
0.5
1,380.5
1,142.3
MEGGITT PLC REPORT AND ACCOUNTS 2016
8. Trade and other payables – current
Trade payables
Amounts owed to subsidiary undertakings
Social security and other taxes
Accrued expenses
Other payables
Total
Amounts owed to subsidiary undertakings are unsecured.
9. Derivative financial instruments
Interest rate swap – cash flow hedge
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 swap – cash flow hedge
Interest rate swaps – fair value hedges
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Non-current portion
Current portion
161
2016
£’m
3.5
108.7
3.0
6.3
1.8
123.3
2015
£’m
6.8
44.9
2.1
4.3
2.8
60.9
2016
Assets
£’m
2016
Liabilities
£’m
2015
Assets
£’m
2015
Liabilities
£’m
0.5
20.9
1.9
–
85.3
108.6
0.5
19.0
0.4
24.8
44.7
63.9
–
–
–
–
(79.2)
(79.2)
–
–
–
(46.9)
(46.9)
(32.3)
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)
The Company is exempt from certain FRS 101 disclosures as the Group consolidated financial statements give the disclosures required by IFRS 7
(see note 31 to the Group consolidated financial statements on pages 136 to 137).
The loss recorded in the income statement within net operating costs arising from the remeasurement at fair value of derivative financial
instruments was £12.1 million (2015: Gain £12.8 million).
The contract or underlying principal amount of foreign currency forward contracts in respect of assets was £678.3 million (2015: £497.3 million)
and in respect of liabilities was £762.4 million (2015: £598.3 million).
Foreign currency forward contracts
Fair value:
US dollar forward sales and purchases (USD/£)
Forward sales and purchases denominated in other currencies
Total
2016
Assets
£’m
2016
Liabilities
£’m
2015
Assets
£’m
2015
Liabilities
£’m
76.4
8.9
85.3
(61.8)
(17.4)
(79.2)
21.2
7.5
28.7
(13.0)
(13.6)
(26.6)
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
162
Notes to the financial statements of the Company continued
10. Bank and other borrowings
Current
Bank loans
Other loans
Total
Non-current
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
Interest accruals
Total
2016
£’m
–
175.2
175.2
–
825.3
825.3
175.2
231.8
593.5
1,000.5
971.1
(1.7)
19.2
11.9
1,000.5
Debt issue costs are amortised over the period of the facility to which they relate. The Company has no secured borrowings (2015: £Nil).
The Company has the following committed facilities:
2010 Senior notes (USD 600.0 million)
2016 Senior notes (USD 600.0 million)
Bilateral credit facilities (USD 600.0 million)
Total
2016
Drawn
£’m
Undrawn
£’m
485.6
485.6
–
971.2
–
–
–
–
Total
£’m
485.6
485.6
–
971.2
Drawn
£’m
407.1
–
407.1
814.2
2015
Undrawn
£’m
–
–
–
–
Further details on each of the above committed facilities can be found in note 29 to the Group consolidated financial statements on page 132.
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
2016
Drawn
£’m
Undrawn
£’m
161.9
222.6
586.7
971.2
–
–
–
–
Total
£’m
161.9
222.6
586.7
971.2
Drawn
£’m
–
729.4
84.8
814.2
2015
Undrawn
£’m
–
–
–
–
The Company also has various uncommitted facilities with its relationship banks.
The fair value of bank and other borrowings is as follows:
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
Total
£’m
407.1
–
407.1
814.2
Total
£’m
–
729.4
84.8
814.2
Current
Non-current
Total
2016
2015
Book
value
£’m
175.2
825.3
1,000.5
Fair
value
£’m
176.7
814.9
991.6
Book
value
£’m
3.4
831.5
834.9
Fair
value
£’m
3.4
839.4
842.8
MEGGITT PLC REPORT AND ACCOUNTS 2016
163
10. Bank and other borrowings continued
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 2016:
US dollar
Less unamortised debt issue costs
Bank and other borrowings
As at 31 December 2015:
US dollar
Less unamortised debt issue costs
Bank and other borrowings
Fixed rate borrowings
Weighted
average
interest rate
%
3.8
Weighted
average
period
for which
rate is fixed
Years
6.6
Fixed rate borrowings
Weighted
average
interest rate
%
4.2
Weighted
average
period
for which
rate is fixed
Years
2.9
Floating
Fixed
Total
£’m
344.8
(0.4)
344.4
£’m
£’m
657.4
(1.3)
1,002.2
(1.7)
656.1
1,000.5
Floating
Fixed
£’m
591.7
–
£’m
244.3
(1.1)
591.7
243.2
Total
£’m
836.0
(1.1)
834.9
The weighted average interest rate reflects the relative impact of interest rates based on the principal amounts and the duration of borrowings.
11. 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 2015
Charge to income statement
Charge to other comprehensive income
At 31 December 2015
Charge to income statement
Credit to other comprehensive income
At 31 December 2016
Deferred tax liabilities
At 1 January 2015
Charge to income statement
Charge to other comprehensive income
Credit to equity
At 31 December 2015
Credit to income statement
Credit to other comprehensive income
Credit to equity
At 31 December 2016
After taking account of the offsetting of balances, deferred tax assets are analysed as follows:
To be recovered within one year
To be recovered after more than one year
Total
Retirement
benefit
obligations
£’m
36.0
(4.0)
(9.2)
22.8
(6.2)
20.4
37.0
Accelerated
tax
depreciation
£’m
(2.9)
–
–
–
(2.9)
0.8
–
–
(2.1)
Other
Total
£’m
0.1
(0.1)
–
–
–
–
–
£’m
36.1
(4.1)
(9.2)
22.8
(6.2)
20.4
37.0
Other
Total
£’m
–
(1.2)
(0.3)
0.3
(1.2)
0.8
0.1
0.2
£’m
(2.9)
(1.2)
(0.3)
0.3
(4.1)
1.6
0.1
0.2
(0.1)
(2.2)
2016
£’m
–
34.8
34.8
2015
£’m
3.0
15.7
18.7
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.
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
164
Notes to the financial statements of the Company continued
12. 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 these financial statements. Further details
on the plan are reported in note 34 to the Group consolidated financial statements on pages 139 to 143 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
£1.1 million (2015: £1.0 million).
Changes in the present value of retirement benefit obligations
2016
2015
Liabilities
(*)
£’m
Assets
(**)
£’m
Total
£’m
Liabilities
(*)
£’m
Assets
(**)
£’m
At 1 January
Service cost
Interest expense/(income)
Contributions – Company
Contributions – members
Benefits paid
Curtailments
Remeasurement of retirement benefit obligations:
Experience gains
Gain from change in demographic assumptions
Loss/(Gain) from change in financial assumptions
Return on scheme assets excluding amounts included
in finance income
Total remeasurement loss/(gain)
Administrative expenses borne directly by scheme
637.1
6.8
24.0
–
–
(20.9)
(1.2)
(9.3)
(9.8)
202.3
–
183.2
–
(515.0)
–
(20.0)
(43.0)
–
20.9
–
–
–
–
(63.0)
(63.0)
0.7
At 31 December
829.0
(619.4)
Present value of scheme liabilities.
*
** Fair value of scheme assets.
122.1
6.8
4.0
(43.0)
–
–
(1.2)
(9.3)
(9.8)
202.3
(63.0)
120.2
0.7
209.6
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
Total
£’m
180.0
7.1
6.0
(27.7)
–
–
–
(22.6)
(1.3)
(31.8)
11.6
(44.1)
0.8
637.1
(515.0)
122.1
Details on the sensitivity of scheme liabilities to changes in assumptions are provided below:
• The impact of a 50 basis point reduction in discount rate would cause scheme liabilities at 31 December 2016 to increase by approximately
£94.0 million.
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2016 to increase
by approximately £16.0 million.
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2016
to increase by approximately £29.0 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 sensitivity provided in respect of the discount rate has been increased to 50 basis points this
year, reflecting the average movement experienced over the last five years. No change has been considered necessary to other sensitivity levels,
given recent past experience.
The weighted average duration of the UK scheme defined benefit obligation is 20.2 years.
The expected maturity of undiscounted pension benefits at 31 December 2016 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
Total
£’m
18.5
19.7
65.3
137.2
165.2
183.6
188.3
725.2
1,503.0
MEGGITT PLC REPORT AND ACCOUNTS 2016
165
13. Share capital
Disclosures in respect of share capital of the Company are provided in note 35 to the Group consolidated financial statements on page 143.
14. Share-based payment
Share options have been granted to employees of the Company under various plans. Details of the general terms and conditions of each share-
based payment plan are given in the Director’s remuneration report on pages 66 to 88. Disclosure is also made in the Group consolidated
financial statements in note 36 on page 144.
15. Commitments
Capital commitments
The Company has no capital commitments (2015: Nil).
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
16. Other information
Directors’ remuneration
2016
£’m
0.1
0.4
–
0.5
2015
£’m
0.1
0.4
0.1
0.6
Details of the remuneration paid to directors of the Company has been presented in the Directors’ remuneration report on pages 66 to 88.
Auditor’s remuneration
Details of remuneration paid for the audit of the Company is given in note 7 to the Group consolidated financial statements on page 118.
Employee information
The average number of persons employed by the Company in the financial year was 183 (2015: 175). Total staff costs, excluding share-based
payment charges, for the year were £26.5 million (2015: £21.4 million).
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT
166
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 in respect of the year
Gearing ratio
Net debt as a percentage of total equity
2016
£’m
2015
£’m
2014
£’m
2013
£’m
2012
£’m
1,992.4
1,647.2
1,553.7
1,637.3
1,605.8
352.1
(15.5)
39.1
(98.6)
(4.6)
(66.4)
(10.6)
195.5
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
22.1p
34.8p
15.10p
23.2p
31.6p
14.40p
22.0p
32.4p
13.75p
29.4p
37.5p
12.75p
30.1p
36.5p
11.80p
48.0%
48.3%
26.9%
27.2%
33.7%
MEGGITT PLC REPORT AND ACCOUNTS 2016
167
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. In April 2016, dividend tax vouchers were replaced by
dividend confirmations in line with the introduction of a tax-free dividend allowance which replaced
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 2016 final dividend of 10.30p per ordinary share, if approved, will be paid on 5 May 2017
to shareholders on the register on 24 March 2017. The expected payment date for the 2017 interim
dividend is 29 September 2017.
2017 provisional financial calendar
Key dates 2017
Full-year results for year ended 31 December 2016
2016 Final dividend ex-dividend date
2016 Final dividend record date
Report and accounts for year
ended 31 December 2016 despatched
Deadline for receipt of dividend reinvestment plan elections
AGM
2016 Final dividend payment date
Interim results for period ended 30 June 2017
2017 Interim dividend ex-dividend date
2017 Interim dividend record date
Deadline for receipt of dividend reinvestment plan elections
2017 Interim dividend payment date
28 February
23 March
24 March
24 March
11 April
27 April
5 May
1 August
7 September
8 September
15 September
29 September
FEBRUARY
28
Full-year
results
APRIL
27
AGM
MAY
5
2016
Final dividend
payment
AUGUST
SEPTEMBER
1
Interim
results
29
2017
Interim dividend
payment
SUPPLEMENTARY INFORMATIONFINANCIAL STATEMENTSGOVERNANCE REPORTS STRATEGIC REPORT 168
Glossary
ADS
Aerospace, Defence, Security and Space
Organisation
Aftermarket (AM)
Spares and repairs
AGM
AR&T
ASK
Annual general meeting
Applied research and technology
Available seat kilometres
Basis point
One‑hundredth of a percent
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
Bronze stage
Fourth stage of MPS
Business jets
Aircraft used for non‑commercial operations
CAGR
Compound annual growth rate
Capability
Expertise in technology and manufacturing
CGU
CHF
CI
CLAAW
CO2
Code
CODM
Cash generating unit
Swiss franc
Continuous improvement
Closed loop adaptive assembly workbench
Carbon dioxide
UK Corporate Governance Code 2014
Chief operating decision maker
Company
Meggitt PLC
Condition‑monitoring Monitoring the condition of aerospace and
DRIP
DTR
EBITDA
ECR
EPP
EPS
ESOS
ESOS
EU
FCA
FIFO
FIRST
FOC
FRC
FRS
FTSE
GAAP
GBP
GDP
GHG
Dividend reinvestment plan
Disclosure Guidance and Transparency Rules
Earnings Before Interest, Tax, Depreciation
and Amortisation
(US) Export Controls Reform
Equity Participation Plan
Earnings per Share
Energy Savings Opportunity Scheme
Executive Share Option Scheme
European Union
Financial Conduct Authority
First‑in first‑out
For Inspiration and Recognition of Science and
Technology
Free of charge
Financial Reporting Council
Financial Reporting Standard
Share index of companies listed on the
London Stock Exchange
Generally Accepted Accounting Practice
British pound or pound sterling
Gross domestic product
Greenhouse gas
Group
Meggitt PLC and its subsidiaries
land‑based turbines and supporting equipment
to predict wear and tear, promoting safety,
up‑time and planned maintenance
Group
Leadership Team
Continuing Resolution Appropriations legislation restricting
Assists the Chief Executive to develop and
implement the Group’s strategy, manage
operations and discharge responsibilities
delegated by the board
CR
CREST
CSS
D&A
DECC
DEFRA
DFARS
DLA
DoD
DPPM
modification from prior‑year funding patterns
HMRC
HM Revenue & Customs
Corporate responsibility
Certificateless Registry for Electronic
Share Transfer
Customer Services & Support, Meggitt’s
centralised aftermarket organisation
Depreciation and amortisation
Department of Energy & Climate Change
Department for Environment, Food &
Rural Affairs
Defense Federal Acquisition Relation Supplement
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
HSE
IAS
IET
IFBEC
IFRS
Health, safety and environment
International Accounting Standards
Institution of Engineering and Technology
International Forum on Business Ethical Conduct
International Financial Reporting Standards
Installed base
The sum total of the Meggitt products and
sub‑systems installed on customers’ equipment
IP
ISA
KPI
Intellectual property
International Standards on Auditing
Key performance indicator
Large jets
Commercial aircraft with greater than 100 seats
Lean
LIBOR
LTIP
MABS
A method for the continual elimination of waste
within a manufacturing system
London Inter‑Bank Offered Rate
Long Term Incentive Plan
Meggitt Aircraft Braking Systems, one of five
Meggitt divisions
M&A
Mergers and acquisitions
MEGGITT PLC REPORT AND ACCOUNTS 2016
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
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
RIS
RMU
ROCE
ROTA
RPH
SAP
SARs
Shipset
SIP
Smart engineering
for extreme
environments
SRN
STIP
TSR
UAV
UKLA
USD
WACC
WBCSD
The Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations
Regulatory Information Service
Retrofit, modification and upgrade
Return on capital employed
Return on trading assets
Retirement Plan Headcount
The Group’s selected enterprise management
system
Share appreciation rights
Value of Meggitt’s content on aircraft platforms
Share Incentive Plan
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
Short Term Incentive Plan
Total shareholder return
Unmanned aerial vehicle
UK Listing Authority
United States dollar
Weighted average cost of capita
World Business Council for Sustainable
Development
WRI
World Resources Institute
MCS
MEG
Meggitt Production
System (MPS)
Mix
MoD
MPC
MPP
MRO
MSS
MTS
M4
NPI
OE
OECD
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
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 Target Systems
Meggitt Modular Modifiable Manufacturing, an
advanced manufacturing engineering concept
that will underpin the more efficient aerospace
factories of the future. They will continue to
accommodate low volumes of largely handmade
products but those products will become
increasingly complex and often involve new
manufacturing technologies requiring new kinds
of factory operators and managers and new
standards of traceability
New product introduction
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
Organic growth
Growth excluding the impact of currency and
acquisitions and disposals of businesses
OSHA
OTD
PBT
PCHE
PFEP
Platform
PMO
PPC
Occupational Safety and Health Administration
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
Plan for every part
Aircraft or ground vehicle model incorporating
Meggitt products
Project management office
Programme Participation Cost
Company information
Meggitt PLC
Atlantic House
Aviation Park West
Bournemouth International Airport
Christchurch
Dorset BH23 6EW
United Kingdom
T +44 (0) 1202 597 597
F +44 (0) 1202 597 555
www.meggitt.com
Registered in England and Wales
Company number 432989
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