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Annual Report
& Accounts 2018
Our Strategy
Working closely with our customers, we deliver technologically
differentiated systems and products with high certification
requirements in aerospace, defence and selected energy markets.
Through focusing on engineering and operational excellence, we build
broad installed bases of equipment for which we provide support
and services throughout their lifecycle.
Our ambitious and diverse teams act with integrity to create
superior value for all of our stakeholders.
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Contents
STRATEGIC REPORT
03 Highlights
04 At a glance
06 Chairman’s statement
08 Chief Executive’s statement
12 Our business model
14 Our strategy
24 Market review
30 Divisional reviews
40 New organisational structure
42 Key performance indicators
46 Risk management
48 Principal risks and uncertainties
54 Chief Financial Officer’s review
60 Corporate responsibility
GOVERNANCE
74 Chairman’s introduction
76 Board of Directors
80 Corporate governance report
86 Audit Committee report
90 Nominations Committee report
92 Directors’ remuneration report
115 Directors’ report
GROUP FINANCIAL STATEMENTS
119 Independent auditors’ report to
the members of Meggitt PLC
129 Consolidated income statement
130 Consolidated statement
of comprehensive income
131 Consolidated balance sheet
132 Consolidated statement of
changes in equity
133 Consolidated cash flow statement
134 Notes to the consolidated
financial statements
COMPANY FINANCIAL STATEMENTS
186 Company balance sheet
187 Company statement of
changes in equity
188 Notes to the financial statements
of the Company
OTHER INFORMATION
198 Five‑year record
199 Investor information
200 Glossary
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What’s inside our report
Chairman's statement
2018 has proved a successful year
with the smooth and efficient
handover of leadership to Tony
Wood as Chief Executive and the
rate of organic growth accelerating
to 9%.
Sir Nigel Rudd
Chairman
See page 06
Our business model
Differentiated technology, world‑class
services and support and an installed
base of over 71,000 aircraft provide
annuity like revenues the returns from
which are reinvested to sustain
market‑leading positions over
the long term.
See page 12
Our strategy
We are focused on enhancing our
portfolio, improving our ability to
serve customers, increasing our
competitiveness and developing
a high performance culture.
Our culture
We are building a high performance
culture, where high levels of
employee engagement enable
us to accelerate strategy
execution.
See page 14
See page 22
Download the 2018
Meggitt PLC Annual Report
and Accounts from
www.meggitt.com
Our new structure
Increasing our alignment to our
customers provides a unique
opportunity to increase customer
service and accelerate growth.
See page 40
Airframe
Systems
Engine
Systems
Energy &
Equipment
Services &
Support
Meggitt PLC
Annual Report and Accounts 2018
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Meggitt PLC
Annual Report and Accounts 2018
To Fly
Expertise relied upon by customers
to enable safe, cost‑effective and
environmentally responsible flight.
>90%
of western commercial aircraft
are equipped with our fire
and overheat detectors.
To Power
Products and services which enable
customers to reliably operate critical
infrastructure without disruption.
1bn
We keep the lights on for over
1 billion people worldwide.
To Live
Innovative technologies which
enable a more secure world.
Zero
42% of survivable helicopter crashes
used to result in death from fuel fires.
Our crashworthy fuel tanks reduce
this risk to almost zero.
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Highlights
Operational
highlights
• 2% net cost down on
purchasing achieved in
2018, as a result of an
increasingly centre‑led
approach to procurement.
• 2021 footprint consolidation
target achieved – 20%
reduction in sites.
• Inventory turns increased
to 2.7x (2017: 2.5x) in
parallel with investment to
support accelerated growth
and to build buffer stocks
for future site consolidation
and Brexit uncertainty.
1. As described in note 45 to the
Group’s consolidated financial
statements, the Group has adopted
IFRS 15 and IFRS 16 with effect from
1 January 2018, with prior year
comparatives for 2017 restated.
IFRS 15 is a complicated standard,
requiring customer contracts to be
reassessed against revised criteria
for when, and for what value,
revenue should be recognised. It is
therefore not practical to provide a
full restatement of KPIs presented
for the years 2014‑2016 inclusive or
for KPIs presented for 2017, which
are calculated based on growth
compared to performance in 2016.
However, comparatives for these
years have been restated where
appropriate for the most significant
impact of the new standards, the
requirement to expense free of
charge manufactured parts (‘FOC’)
as incurred under IFRS 15.
2. Underlying earnings per share is
reconciled to basic earnings per
share in note 15 to the Group’s
consolidated financial statements
on page 153.
3. Underlying operating profit is
reconciled to operating profit in
note 10 to the Group’s consolidated
financial statements on page 150.
4. Free cash flow is reconciled to cash
from operating activities in note 42
to the Group’s consolidated
financial statements on page 178.
Financial highlights1
Revenue
£2,081m
Underlying earnings per share2
34.2p
2018
2017
2016
2015
2014
2018
£1,994m
2017
£1,992m
2016
£1,647m
2015
£1,554m
2014
Underlying operating profit3
Statutory profit before tax
£367m
£216m
2018
2017
2016
2015
2014
2018
£353m
2017
£357m
2016
£310m
2015
£325m
2014
Dividend per share
16.65p
Return on trading assets
28.2%
2018
2017
2016
2015
2014
2018
15.85p
2017
15.10p
2016
14.40p
2015
13.75p
2014
Free cash flow4
£167m
Cash from operating activities
£295m
2018
2017
2016
2015
2014
2018
£197m
2017
£131m
2016
£199m
2015
£147m
2014
32.0p
32.5p
30.0p
30.2p
£228m
£172m
£194m
£187m
27.1%
30.1%
32.2%
38.3%
£338m
£322m
£375m
£312m
Meggitt PLC
Annual Report and Accounts 2018
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We deliver innovative solutions
for the most demanding
environments.
Our critical technology, products
and services are relied upon by
customers worldwide.
Our core markets
Aerospace
Through engineering expertise,
we take the world further.
Civil aerospace accounts for 54% of Group
revenue, with products and sub‑systems
installed on almost every jet airliner, regional
aircraft and business jet in service.
See more on page 26
Defence
Trusted by defence forces worldwide
Defence accounts for 35% of Group revenue.
We have equipment on an installed base of around
22,000 fixed wing and rotary aircraft and a significant
number of ground vehicles and training applications.
See more on page 28
Energy
Keeping the lights on
Energy and other revenue comes from a variety
of industries including power generation, oil and
gas, and medical and accounted for 11% of
Group revenue.
See more on page 29
High performance culture
HPC training, known as
“unfreezing”, is about building and
nurturing a high performance
culture, where high levels of
employee engagement enable us
to accelerate strategy execution.
Sarah Morris
HPC Facilitator
04
Meggitt PLC
Annual Report and Accounts 2018
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Revenue by market
Our divisions
In 2019, the Group will transition
from six capability based divisions
to four vertically integrated customer‑
aligned divisions.
See more on page 40
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Market
Revenue by market
Civil OE
Civil AM
Defence
Energy & Other
22%
32%
35%
11%
Revenue by destination
Market
Revenue by market
UK
US
Rest of Europe
Rest of World
8%
59%
19%
14%
Meggitt Aircraft
Braking Systems (MABS)
Meggitt Control
Systems (MCS)
One of the world’s top providers of
wheels, brakes and brake control
systems to civil and defence aircraft
manufacturers, airline and charter
operators and distributors and
repair stations.
18%
Percentage of revenue
Market leading provider of aircraft
fire protection, thermal management
systems and fluid control components
and sub‑systems for aerospace and
energy applications.
28%
Percentage of revenue
See more on page 30
See more on page 32
Meggitt Polymers &
Composites (MPC)
Meggitt Sensing
Systems (MSS)
A leading specialist in fuel containment for
defence platforms, aircraft sealing solutions
and advanced engine composite
components.
19%
Percentage of revenue
Provides high performance sensing and
condition‑monitoring systems for aero
and industrial turbines, aircraft power
management and storage technology,
wireless safety systems, real‑time remote
aircraft surveillance and anti‑collision
equipment.
24%
Percentage of revenue
See more on page 34
See more on page 36
Meggitt Equipment
Group (MEG)
Specialises in live‑fire and virtual small arms
weapons training, defence equipment
ranging from electronics cooling to
ammunition handling systems and heat
transfer equipment for off‑shore oil and
gas facilities.
11%
Percentage of revenue
See more on page 38
Meggitt PLC
Annual Report and Accounts 2018
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Chairman’s
statement
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Our first priority is
investing in the organic
growth and operational
efficiency of the business.
A clear and disciplined
approach to capital
allocation.
01
Continued investment to drive
sustainable long term organic
growth
02
Grow our ordinary dividend in line
with earnings through the cycle
03
Expand our portfolio through value
accretive acquisitions
04
Maintain an efficient balance sheet
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Meggitt PLC
Annual Report and Accounts 2018
Accelerating value creation
2018 has proved a successful year with
the smooth and efficient handover of
leadership to Tony Wood as Chief
Executive. The rate of organic revenue
growth accelerated to 9%, thanks to the
significant investments we have made in
differentiated technology during an
unprecedented product renewal by the
major airframe and engine manufacturers.
We have seen strong demand in all of
our end markets during 2018 despite the
more challenging macro environment.
Trade‑tariffs, commodity price volatility
and preparation for the UK’s exit from
the European Union have all increased
uncertainty and added cost to the
business. However, the strong progress
we have made in executing our strategic
priorities has enabled us to continue to
build momentum in line with our 2021
targets for margin and cash improvement.
As we predominently supply products
on a sole‑source basis, we are the sole
provider of spare parts on the new
platforms that will be in operation for
decades. With an installed base of over
71,000 aircraft, this provides a highly
resilient business model and means we
are well positioned to weather the current
uncertainty and sustain long term growth.
Capital allocation
The Board’s priorities for capital
allocation remain unchanged. Continued
investment to drive sustainable long term
organic growth is our first priority.
Research into differentiated technology,
investment in world class infrastructure
and recruiting and developing the best
talent are critical to our success.
Our second priority is to grow our
ordinary dividend in line with earnings
through the cycle. Over the past five
years we have grown our dividend by
5% p.a. during a period of significant
investment. During this period, free cash
flow has exceeded the dividend by 1.5x,
demonstrating the strong cash generative
nature of our business model.
Reflecting the continued confident
outlook, the Board is proposing a
5% increase to the full year dividend to
16.65p per share for 2018 (2017: 15.85p).
Our third priority is to expand our
portfolio through value accretive
acquisitions. Over the last two years,
we have enhanced our focus on attractive
aerospace, defence and selected energy
markets where we have or can achieve a
differentiated position. The Board meets
regularly to discuss the Group’s strategy
and has a clear view on how we can
further improve this position with
carefully targeted acquisitions.
Finally, in the absence of any compelling
investment opportunities for a prolonged
period, our fourth priority is to maintain
an efficient balance sheet in line with the
Board’s guidance range of 1.5x to 2.5x
Net Debt:EBITDA, designed to ensure
clear headroom against our covenants.
Board changes
In September, we announced that
Doug Webb would retire from his role as
Chief Financial Officer in December 2018.
Doug served as our CFO for over five
years, overseeing a critical period in our
evolution from a holding company to an
integrated group. We thank Doug for
the significant role he has played in the
development of the Group and we wish
him well in his retirement.
Doug has been succeeded by Louisa
Burdett who joined us after serving as
Group Finance Director of Victrex, a FTSE
250 industrial polymers group. Louisa has
extensive experience in senior financial
roles at companies including the Financial
Times Group, GE and GlaxoSmithKline
and is also a Non‑Executive Director and
Chair of the Audit Committee of
Electrocomponents plc.
Guy Hachey has joined the Board as a
Non‑Executive Director in January 2019.
Previously President and Chief Operating
Officer of Bombardier, Guy will bring
extensive experience in aerospace and
will be a strong successor for Paul Heiden
who is retiring on 25 April 2019. We thank
Paul for nine years of excellent service.
Paul will be succeeded by Guy Berruyer
as Senior Independent Director and
Alison Goligher as Chairman of the
Remuneration Committee.
We also recently announced the
appointment of Caroline Silver as
a Non‑Executive Director from
25 April 2019. Caroline is a Senior
Managing Director at Moelis & Company,
and will bring 30 years of experience in
investment banking to the Board.
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Investment case
Meggitt PLC specialises in providing smart engineering
for extreme environments. Having passed the peak of
investment in R&D, our focus is on delivering on these
new programmes to our customers and accelerating
growth in returns to shareholders.
Focus on markets with high
certification & long
life assets
• Challenging technology
and certification requirements
mean few providers can do
what we do
• Aerospace and defence
focused (89% of revenue)
Strong positions
in attractive markets
• 72% of revenue in attractive
markets where Meggitt has a
strong competitive position
• Competitive positions continue
to be enhanced by the
development of differentiated
technology and operational
performance improvements
Strength and depth
of intellectual property
supports long-term returns
• Proprietary product and
manufacturing technologies
• Up‑front investment delivers
strong long term returns
Progress on
strategic priorities
• Meggitt Production System,
our lean improvement tool,
reinforced across the portfolio
with a focus on the red and
yellow stage sites
• Inventory turns improved to 2.7x
despite strong growth and
investment in buffer stocks
• CSS launched Smart Support™,
leading to a series of long term
agreements with key aftermarket
customers
Broad and balanced business
• 52:48 split between original
equipment and aftermarket
• No one platform accounts for
more than 5% of revenue
• Content on almost every western
aircraft – installed base of over
71,000 civil and defence aircraft
High quality team
• High performance culture
roll‑out completed to 2,000
leaders supporting the
transition to a new
organisational structure with
closer alignment to our
customers and leaner ways
of working
Caroline is Non‑Executive Chairman of
FTSE 250 consumer products group,
PZ Cussons plc and a Non‑Executive
Director of BUPA.
People
During 2018, the Board had the
opportunity to meet our employees and
experience the Meggitt culture during
visits to a number of our sites including
our recently expanded facilities in Vietnam
and San Diego, our manufacturing campus
in Xiamen, China, and our operations in
Simi Valley and North Hollywood. Board
members also undertook visits in smaller
groups, to our Asia Pacific aftermarket hub
in Singapore; and our sensing centre of
excellence in Fribourg, Switzerland.
The Board continue to be impressed at
the depth of our technology expertise,
and our employees’ passion and
commitment. I am pleased with the
results of the employee engagement
survey which showed a 4% increase.
I am sure that our newly designated
Non‑Executive Director for Employee
Engagement, Nancy Gioia, will give
further impetus for progress in this area.
The Board has discussed and reviewed
the Group’s progress on diversity and
inclusion throughout the year – many
of our Board members have direct
experience of improving diversity in
international companies and they have
provided valuable input to our plans.
At the end of the year, we approved a
Diversity and Inclusion Policy to show our
commitment to this important subject.
The Board recognises the increased
emphasis on culture under the UK
Corporate Governance Code. In 2017,
Meggitt launched a high performance
culture initiative, aimed at aligning and
improving culture across the Group. The
Board is pleased with the progress made
with this excellent initiative, and will have
the opportunity to experience a high
performance culture session with our
employees in 2019, as well as see our
culture in person as we visit further sites.
I would like to thank all of our employees
for their hard work this year, without
which our many achievements would not
have been possible.
Sir Nigel Rudd
Chairman
Meggitt PLC
Annual Report and Accounts 2018
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statement
In 2018, we significantly
increased the pace of
organic revenue growth and
accelerated progress on our
strategic initiatives.
In 2018, we significantly increased the
pace of organic revenue growth and
accelerated progress on our strategic
initiatives. Our increased content on
new platforms contributed to strong
performance across each of our
aerospace, defence and selected energy
markets which grew in aggregate by 9%.
As we continue to transition from
a focus on product development to
industrialisation and execution, we have
also started to see the synergies from our
strategic initiatives accelerate. During the
past twelve months, we delivered both
our target to reduce our footprint by 20%
and achieved purchased cost savings of
2% p.a., which are starting to contribute
to underlying margin improvement, and
will be critical to our goal to improve
operating margins by 200 basis points
by 2021.
To sustain this growth over the medium
term and improve return on capital
employed, we remain focused on:
continued investment in our technology
and strategic portfolio; improving the
service we offer to our customers;
enhancing our competitiveness; and
building a high performance culture,
capable of delivering superior returns
for shareholders.
Tony Wood
Chief Executive Officer
08
Meggitt PLC
Annual Report and Accounts 2018
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Portfolio Strategy
We have continued to make good
progress on our goal to increase our
exposure to attractive and growing
markets where we have strong
competitive positions, through both our
investment in differentiated technology
and programme of non‑core disposals.
Developing innovative products and
technologies which enable our customers
to achieve a step change in the safety,
efficiency and reliability of complex
equipment continues to be a critical
priority for the Group. In 2018, we made
excellent progress on a carefully targeted
group of technology innovation projects
designed to enhance our long term
competitive position in markets with
strong growth potential.
Our applied research into next
generation thermal systems is an
excellent example of one such innovation
project. Building on our strong pedigree
in aero‑engine thermal management, we
are developing a thermal system capable
of managing a two‑fold increase in heat
transfer which is two‑thirds the size and
weight of our current technology.
We also continued to execute a
programme of non‑core divestments.
In March, we completed the sale of
Thomson, a provider of precision
engineered products, to Umbra and
in April, we sold chemical etching
subsidiary, Precision Micro to Lloyds
Development Capital. As a result of
these divestments and five others that
preceded them since December 2016,
we have increased our exposure to
attractive markets where we have a
strong competitive position from 66%
to 72%, further enhancing our platform
for long term growth and returns.
Customers
Organic book to bill of 1.08x in 2018
reflects good progress in growing our
relationships with key customers across
all market segments.
In the civil aftermarket, the launch of our
Smart Support™ offering has been
critical to securing a series of long term
agreements with airlines and third party
maintenance, repair and overhaul (‘MRO’)
providers, including Emirates, SR
Technics, Turkish Technic and Air France
Services. Smart Support™ provides a
flexible service and support package with
a combination of new and surplus parts,
specialist repairs, exchange pools and
technology upgrades to optimise and
increase the predictability of aircraft
maintenance through the product
lifecycle. Expanding the early success of
Smart SupportTM is a key priority for 2019.
Our 2021 targets
We remain confident in delivering our targets
for cash and margin improvement by 2021
Improve underlying
operating margin by
Increase inventory
turns from 2.3x to
200+
basis points
4.0x
Reduce purchase
costs by
Reduce our
footprint by
2%
per annum
20%
And in the defence market, we have
secured a number of new orders which
have enabled us to significantly increase
growth in 2018 and beyond. These
include retrofit fuel tanks for the F/A‑18
Super Hornet and UH‑60 Black Hawk;
a $750m contract for composite parts
for the F‑119 and F‑135 engines; and a
$320m extension of our contract to
provide brakes across a wide range
of platforms for the Defense
Logistics Agency.
To further accelerate long term growth,
we have adopted a new organisation
structure in January 2019, moving from
six capability based units to four
market‑facing divisions: Airframe
Systems, Engine Systems, Energy &
Equipment and Services & Support. This
structural change continues our evolution
to a more integrated and efficient Group
and increases our alignment with
customers whilst ensuring we maintain
a strong focus on innovation across our
businesses. Successfully implementing
our new organisation and delivering the
initial benefits of this transition are an
important priority for 2019.
Competitiveness
In 2018, we delivered two notable
achievements against the 2021 targets
we announced at our Capital Markets Day
in 2017.
As a result of our increasingly centre‑led
approach to procurement, we met our
target to reduce direct purchased costs
by 2%. Working with the Group’s new
preferred suppliers in areas including
electronics, fasteners and machining,
we have been able to simplify our supply
chain whilst better leveraging our scale
to reduce cost.
This approach has been more than
enough to offset some increases on raw
materials and tariffs on products sourced
from low cost countries, most notably
China. Whilst we expect such costs to
remain a headwind in 2019, we believe
the progress we have made in centralised
procurement will continue to support our
goal to improve our underlying operating
margin by 200 basis points by 2021.
During the past 12 months, we have
also met our target to consolidate our
footprint by 20% by 2021, with non‑core
disposals and the closure of our
Maidenhead aftermarket facility
contributing to a further reduction of
three sites. With eight site consolidations
currently in progress and due to
complete over the next three years,
there is good scope for further
rationalisation of our footprint which
currently stands at 45 sites.
An important contributor to our success
in consolidating factories has been the
progress in expanding capacity at some
of our existing facilities. We have
doubled the capacity of our low cost
manufacturing capability in Vietnam and
significantly expanded our composites
facilities in Mexico and San Diego. We
have also made excellent progress on our
Ansty Park site, with construction activity
Meggitt PLC
Annual Report and Accounts 2018
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Chief Executive's statement continued
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+7%
Underlying earnings per share
+9%
Increase in organic revenue
Meggitt Production System
MPS drives innovation in operational
excellence, technology development,
sales pipeline, functional excellence
and customer experience, using our
combined strengths in a standardised
language and deployment approach.
Our fast growing engine
composites site in Erlanger,
KY incurred significantly
higher costs in 2018 due to
extended learning curve
impacts but exited the year
with improving yield and
productivity which we expect
to continue to steadily
improve in the coming year.
These costs were a 150 basis
point headwind to Group
margin in 2018.
10
Meggitt PLC
Annual Report and Accounts 2018
beginning, and which remains on
schedule to complete in late 2019,
for initial occupation in early 2020.
Inventory turns increased to 2.7x (2017:
2.5x) despite the significant increase in
revenue during the year and our
investment in buffer stocks to support
growth, our site consolidation plans and
as part of our contingency planning for
a no‑deal Brexit. We are making good
progress at many of our sites but there
is much improvement yet to come as we
target 4.0x inventory turns by 2021.
Our efforts to increase competitiveness
and reduce costs are underpinned by the
Meggitt Production System, our global
approach to continuous improvement.
The financial and operational
performance improvements at our most
advanced facilities continue to
demonstrate the potential we can achieve
when we move a critical mass of sites to
the latter phases of the programme.
In 2019, we are focusing central resources
to increase MPS maturity and deliver
sustainable operational improvements at
eight large, but early stage sites, that
constrained overall performance in 2018.
This improvement will have a significant
impact on customer service and will lay
the foundation for future operational
efficiency, critical to delivering our 2021
margin improvement target.
Five Polymer and Composites sites are
included within these eight early stage
MPS sites.
Our fast growing engine composites site
in Erlanger, KY incurred significantly
higher costs in 2018 due to extended
learning curve impacts but exited the year
with improving yield and productivity
which we expect to continue to steadily
improve in the coming year. These costs
were a 150 basis point headwind to Group
margin in 2018.
Greater levels of process reliability and
increased volume output will also be key
to securing the support of our customers
to transfer high volume production to
our recently expanded composite
manufacturing facility in Mexico. We
anticipate a progressive improvement in
margin throughout 2019 as we execute
this plan.
These complex components are reliant
upon deep proprietary manufacturing
know‑how which continues to enhance
our position in one of the fastest growing
markets in aerospace.
Culture
Our high performance culture
deployment made strong progress in
2018, with training rolled‑out to over
2,000 of our leaders. This programme is
already having a strong impact on our
business with employee engagement up
4% during a period of significant change
across many of our sites. Changing our
culture will be a long journey but it is
excellent to see the early impact of this
programme which is equipping our teams
to work more effectively and efficiently
across a more integrated Group and
increase the pace of strategy execution.
Inclusion is a key foundation of our
high performance culture. We aspire
to build a diverse workforce, where our
people succeed based on their talent,
skill, knowledge and application.
Non‑executive appointments during
the last 12 months have increased the
representation of female board members
by 50% and in 2019, we will focus on
building the pipeline of future leaders
to ensure that we materially increase
diversity amongst our executive
workforce over the coming years.
A key principal of our corporate culture is
our focus on health and safety. In 2018,
we have seen our total reportable
incident rate improve by 34% and our lost
time incident rate improve by 78%. Whilst
we are pleased with the progress we have
made this year, we aspire to achieve a
culture capable of sustaining upper
quartile performance in terms of the
safety of our employees and have
targeted further improvements in 2019.
Performance
Reported revenue increased by 4% to
£2,081m, after the adverse impact from
currency translation and divestments.
After six years of modest organic growth,
2018 marked a significant acceleration
with organic revenue up 9%, reflecting
strong performance in growing markets.
Underlying earnings per share increased
by 7% to 34.2p (2017 restated: 32.0p).
Within civil aerospace, original
equipment revenue grew organically by
6%, with increased shipset content on
large jets and a return to growth in
business jets offsetting further declines
in regional jets. Aftermarket revenue
increased organically by 8%, with
particularly strong performance in large
jets where growing air traffic demand and
a record low retirement rate contributed
to 10% growth which also benefitted
from one‑off stocking associated with
new distributor agreements.
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Performance in defence was also strong,
with the rate of growth accelerating
significantly after a slow first quarter.
Original equipment growth benefitted
from improving demand on fighter jet
platforms, particularly the F‑35. The
trend for increased investment in fleet
readiness in the US was a growth tailwind
with new orders for retrofit fuel tanks on
the F/A‑18 and UH‑60 contributing to
healthy aftermarket demand.
After five years of declining revenue in
energy, revenue grew by 19% organically
in 2018 with the continued recovery at
Heatric supplemented by growth in our
sensor and valve businesses which offset
falling demand from industrial gas
turbines original equipment manufacturers
by capturing growth from end‑users.
Underlying operating margin was flat
at 17.7%, with the growing financial
contribution from the execution of our
strategic initiatives enough to offset the
extended learning curve costs at our
Polymers & Composites division and
higher levels of free of charge content
supplied during 2018.
Outlook
The outlook for our end markets remains
encouraging. The fundamental driver
of our business is air traffic, which
continues to grow ahead of the long run
average of 4 to 5% per annum. Over the
medium term, production of large jets,
underpinned by backlogs of up to eight
years at current production rates, is
expected to grow as airlines seek to
increase capacity to support anticipated
traffic growth. Our increased shipset
content on the latest generation of
aircraft supports a positive outlook for
civil OE revenues. In 2019, we expect civil
OE to grow organically by 4 to 6%.
Civil aftermarket revenues will continue
to benefit from above average growth in
traffic and the record low retirement rate
in 2018. However, this growth will be
partly offset by lower anticipated
utilisation of both business jets and
regional aircraft which account for 46%
of Group aftermarket exposures; and a
strong comparative period in 2018,
in which aftermarket growth was
supplemented by non‑recurring revenue
associated with new distributor
agreements signed in late 2017. In 2019,
we expect civil aftermarket to grow
organically by 3 to 5%.
Our defence business is well positioned
with significant exposure to the US
Department of Defense and good
content on all of the fastest growing and
hardest worked platforms. We continue
to benefit from the trend to invest in
Changes in our organisational structure
Continued journey from holding company to
integrated group.
Airframe
Systems
Engine
Systems
Energy &
Equipment
Services &
Support
See more on page 40
improving fleet readiness and in 2019,
we anticipate organic growth to increase
by 4 to 6%.
The outlook in our energy markets is
mixed. At Heatric we expect the recovery
to continue into 2019 given organic order
growth of 24% in 2018. This is likely to be
offset by more challenging conditions in
the Group’s power generation exposures
where we continue to offset falling
demand from the industrial gas turbine
OEMs with growth in sales to end users.
In 2019, we expect organic energy growth
of 0 to 5%.
The Group expects margins to improve
in 2019 by 0 to 50 basis points. The
increasing momentum in our strategic
initiatives, greater volume leverage and
gradual improvement in margin in engine
composites will be offset by continued
growth of free of charge units and
unfavourable revenue mix, with civil OE
and defence growth expected to be our
fastest growing segments.
Our medium term underlying operating
margin targets remain unchanged with
the Group targeting improvement of at
least 200 basis points by 2021 to 19.9%.
Tony Wood
Chief Executive Officer
The Group has carefully considered a
range of scenarios and implemented
mitigating actions that arise from the risk
of a potential no‑deal Brexit. These
include investment in buffer inventories,
the recruitment of additional customs
administrators and application for
third‑country EASA status, enabling us to
continue to support European registered
aircraft under these circumstances. Given
that less than 5% of the Group’s revenues
are transacted between the UK and the
EU, this is not considered to be a
significant risk for the Group in 2019.
On the basis of the above, the Group
expects 3 to 5% overall organic revenue
growth in 2019.
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Our business
model
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Our inputs & competitive strengths
Market-leading technology
#1 position in segments including business jet, regional
jet and defence wheels & brakes, aerospace sensing &
monitoring, fuel tanks, fire suppression & detection and
advanced engine composites.
World-class services & support
High quality, timely service and support to promote customer
satisfaction while maximising the value of our products
through their lifecycles.
Global infrastructure
Manufacturing facilities in Asia,
Europe and North America
and regional bases in Mexico,
India and the Middle East.
People and culture
Our c.11,000 highly skilled people
collaborate to create value by
combining extensive technical
capabilities and long‑standing
sector knowledge.
Long-standing relationships
With customers, suppliers
and other strategic partners.
02
How we create value through the product life cycle
Wheels and brakes
Development
In production
Mature
Civil
Development
In production
Mature
Defence
Development
In production
Mature
Energy
Development
In production
Mature
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15
20
25
30
35
40
Typical product lifecycle (years)
Develop
differentiated
technologies
Deploying our deep
expertise to develop
technology that anticipates
future market demands,
meets high certification
requirements and is a
source of competitive
advantage to Meggitt
and our customers.
Invest in operational
excellence,
infrastructure
and supply chain
Investing in the people,
tools, processes and
facilities required to
manufacture cost efficiently
and deliver reliably to our
customers. Building strong
partnerships with suppliers
to drive economies of scale
and broaden our offering
to customers.
Grow market share
and our installed
base
Competing effectively to
increase our content on
new platforms, typically as
a sole‑source provider for
the life of programmes and
platforms.
Provide through-life
services
Providing world‑class
services and support to an
installed base of more than
71,000 aircraft and other
equipment throughout
product lifecycles that
can extend to more than
30 years, while capturing
vital knowledge about how
our products perform in
the field.
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Production
Revenues start
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. Defence and industrial
equipment is manufactured over
much longer periods.
Maturity
Investing in our
customers’ competitiveness
As our products age, they require
maintenance or replacement at
varying intervals based on
condition. This drives demand for
spare parts and repair services
over product lifecycles that can
extend to over 30 years. Spare parts
are priced to reflect the investment
made during the development
phase and as such, the maturity
phase is typified by strong positive
cash flows.
02
Continued
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
typically 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.
03
How we
share value
Customers
• Innovative solutions
• Differentiated technology
Shareholders
• Dividend growth
• EPS accretion
Employees
• Engagement
• Training
• Development opportunities
Governments
• Employment
• Taxes
04
How do
we do it
Clear strategy
We continue to make
progress towards our 2021
goals by successful execution
of our strategy.
Sound governance
High standards of governance
are critical to our success.
Operating responsibly
Doing the right thing for
people and the environment
is a core part of our values.
Managing risk
We actively identify, manage
and mitigate the risks to
executing our strategy.
Rewarding success
Our people are rewarded
fairly and incentivised to
deliver our strategy.
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Delivering
competitive
advantage at
every stage
We are focused on
enhancing our portfolio,
improving our ability
to serve customers,
increasing our
competitiveness and
developing a high
performance culture.
Portfolio Strategy
– Increasing our exposure to
attractive markets where we
have strong competitive
positions
– Investment in differentiated
technology
• 72% of the portfolio now in
attractive markets where Meggitt
has a strong position
• 3 non‑core divestments completed
• Further progress on technology
roadmaps (wireless systems,
optical sensing, thermal systems)
• Continued investment in braking
systems, thermal management, fire
protection, optical sensing, energy
storage and engine composites
• Enhancing the portfolio through
carefully targeted acquisitions
• Digital and additive manufacturing
and digital services
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develop meaningful technologies
to meet customer needs
See more on pages 16 to 23
See more on page 16
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Customers
Competitiveness
Culture
– Moving from transactional
– Driving productivity
– High performance culture
approach to partnerships to
accelerate aftermarket
growth
– Upper quartile performance
improvements through the
Meggitt Production System
– Increasing inventory turns
– Reducing purchased costs
– Optimised factory footprint
– Employee engagement
– Diverse talent
• Organic order growth of 12%
• Wizz Air secured as launch
customer for A321neo
• Smart SupportTM contracts with
Turkish Technic and SR Technics
• Defence awards include $750m
contract to supply composites for
F‑135 and awards to provide
retrofit fuel tanks for F/A‑18 and
UH‑60
• 20% footprint reduction (compared
to 2016) achieved with 45 sites at
year end
• 2% purchased cost reduction
achieved through centralised
approach
• Inventory turns increased from 2.5x
to 2.7x
• HPC training deployed to 2,000
leaders
• Employee engagement score
improved by 4%
• New organisation structure
announced which will accelerate
our journey to a more integrated
Group
• Successfully implement
• MPS focused on increasing
• Successfully implement our
our transition to a customer‑
aligned organisation
maturity and building capability at
early stage sites
• Expand routes to the aftermarket
with further Smart Support™ wins
• Further improvement in inventory
turns
• Successfully deliver Ansty Park
on plan
transition to a customer‑aligned
organisation and embed leaner
ways of working
• Further roll‑out of HPC and
improvements in employee
engagement
• Customer Satisfaction – Failure to
meet customers’ cost, quality and
delivery standards as preferred
suppliers
• Project / programme management
• People – Failure to attract,
– Failure to meet new product
programme milestones or lower
than expected production volumes
retain or mobilise people due
to workforce demographics,
lack of training
See more on page 18
See more on page 20
See more on page 22
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BUILDING
A STRONG
PORTFOLIO
We have made good progress on
our goal to increase our exposure
to attractive markets, where we
have strong competitive positions.
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Developing novel products and
technologies which enable our
customers to achieve a step change
in the safety, efficiency and reliability
of complex equipment.
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Strong growth
Organic revenue growth
was strong as a result of our
increased shipset values and
strong performance in all of
our end markets.
See full review on page 55
9%
Revenue growth
Wireless tyre pressure monitoring system
in development for Cessna business jets
The state‑of‑the‑art connected system provides remote
tyre pressure readings from a distance of up to 50 metres.
Thermal Management
Building on our
100 year pedigree
to develop a thermal
system capable of
managing a two fold
increase in the thermal
transfer at two thirds
the size and weight of
current technology
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DELIVERING
THE HIGHEST
QUALITY FOR
OUR CUSTOMERS
Excellent progress in growing
our relationships with key
customers across all market
segments.
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Meggitt secured a number of
transformational wins in 2018,
increasing our long term
partnerships with customers
across our aerospace, defence
and selected energy markets
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1.08x
Organic book to bill in 2018
$750m order for
advanced composites
Secured 10 year agreement
to provide high temperature
composites for the
F‑135 engine
See page 09
SMART Support™
We work with customers
to supply nose to tail
reliability, performance
and safety, from service
entry to end of life.
New organisation
We launched our new
customer focused
organisation in January
2019, delivering against
our strategy.
See page 40
12%
Organic order growth in 2018
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MAXIMISING
COMPETITIVENESS
Strong progress against our 2021
targets for purchased costs
reduction and site consolidation.
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We met our target to reduce
purchased costs by 2% in 2018,
as well as reaching the 20%
milestone for footprint reduction.
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2021 targets
We have made excellent progress on
our 2021 targets achieving two of
these in 2018.
2%
Purchased cost reduction
20%
Footprint reduction
Expanding low cost capacity and building centres
of excellence
In 2018, Meggitt expanded four facilities in Vietnam, China,
Mexico and San Diego, marking a significant increase in
capability and capacity globally.
Inventory turns
In 2018 inventory turns
improved from 2.5 to 2.7x,
driving towards our target
of 4.0x by 2021
2.7x
In 2018
Centralised purchasing
9%
reduction in direct
materials suppliers
in 2018
46%
spend with preferred
suppliers
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EMBEDDING
A HIGH
PERFORMANCE
CULTURE
Our high performance culture
deployment accelerated in
2018, with over 2,000
employees ‘unfrozen’.
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High Performance Culture allows us
to work effectively within Meggitt,
and with our customers and
suppliers.
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High Performance Culture
By the end of 2020 we plan to have
reached all employees with ‘unfreezing’
and ‘reinforcement’ sessions.
See page 64
This is how we work.
And this is who we are.
Employee Engagement
4%
In 2018 our employee
engagement survey
showed a 4% improvement
in engagement scores
across the Group.
See page 66
TRIR
Reduction in the total
recordable incident rate
34%
Reduction in 2018
Health & Safety
Our continued efforts to raise
awareness about health &
safety have improved all of our
safety metrics in 2018.
See full review on page 66
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Group
Market
MABS
MCS
MPC
MSS
MEG
Introduction
Meggitt’s core civil aerospace, defence
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
requirements. 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.
Revenue
18%
28%
19%
24%
11%
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Meggitt Control Systems
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Revenue
Market
Revenue
Market
Revenue
Civil – Original equipment
Civil – Aftermarket
Defence
Energy
Other
4%
72%
24%
0%
0%
Civil – Original equipment
Civil – Aftermarket
Defence
Energy
Other
25%
48%
17%
7%
3%
Civil – Original equipment
Civil – Aftermarket
Defence
Energy
Other
32%
10%
54%
0%
4%
Meggitt Sensing Systems
Meggitt Equipment Group
Market
Revenue
Market
Revenue
Civil – Original equipment
Civil – Aftermarket
Defence
Energy
Other
36%
15%
29%
10%
10%
Civil – Original equipment
Civil – Aftermarket
Defence
Energy
Other
1%
0%
80%
16%
3%
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Increased content on
growing new platforms
underpinned strong
performance in civil OE.
OE segments
Large Jet >100 seats
Regional Jet <100 seats
Business Jet
Civil Helicopters
£464m
Revenue
01
Civil original
equipment
2018 market trends
• Large jet deliveries in 2018 stood
at a record 1,600, 6% higher than
in 2017.
• The key driver of large jet delivery
growth has been demand for the
new generation narrow‑body aircraft,
the Airbus A320neo and Boeing
737 MAX.
• Regional aircraft deliveries of 241 in
2018 declined by 11%, with fewer
deliveries of both turboprop and
other regional jet aircraft.
• Business jet deliveries declined
modestly in 2018 in a transitional year
where manufacturers reduced
production of older variants and
started to ramp up production of
newer models.
2018 Meggitt performance
Civil OE revenue grew 6% organically.
2019 outlook
Large jet OE, the most significant driver
of our OE revenue, grew 5% driven
principally by growth in Airbus A320neo
and Boeing 737MAX platforms.
Business jet OE also saw strong growth
of 20%, which was partly offset by
declining revenue in regional jets (down
14%).
The strong order backlogs together with
the increased shipset content we have
secured in areas including advanced
composites, sensors, engine controls,
thermal management systems, seals
and power electronics, gives us further
confidence in the growth outlook for
OE revenues.
Strong underlying demand for the
new generation large jet aircraft on
which Meggitt has increased content
by up to 250%.
Airbus taking a controlling stake in
the Bombardier CSeries platform
increases the potential for near term
delivery growth on a platform where
we provide free of charge equipment.
Continued softness in demand for
regional jets likely to be a headwind
to growth in 2019.
Introduction of new large cabin
platforms during 2018 is likely to
stimulate a return to growth in
business jet deliveries.
We expect organic revenue growth of
4‑6% in Civil OE in 2019.
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Meggitt has 70% of its
revenues from sole‑source,
life of programme positions
underpinning aftermarket
demand for decades
to come.
AM exposures
Large Jet >100 seats
Regional Jet <100 seats
Business Jet
Civil Helicopters
£661m
Revenue
2019 outlook
Continued growth in traffic above
the long run average of 4 to 5% and
our increased content on large jets
that entered service in the last decade
will continue to grow.
Utilisation of business jets and
regional jets is expected to grow more
slowly than commercial air transport.
Growth in the large jet retirement rate
during 2019 could increase the
availability of used serviceable
material which would increase
competition for spare parts.
We expect organic revenue growth of
3‑5% in Civil aftermarket in 2019.
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02
Civil
aftermarket
2018 market trends
• The civil aerospace aftermarket is
driven primarily by aircraft utilisation
which, for large jets, is measured using
available seat kilometres. Given our
strong wheel and brake franchise, we
use take‑offs and landings as a proxy
for business jet and regional
jet utilisation.
• ASKs in the large commercial aircraft
fleet grew 6% in 2018, above the
4 to 5% long‑term average.
• Growth in emerging markets continues
to be a key driver of ASKs, particularly
the Asia Pacific region which grew by
8% in 2018.
2018 Meggitt performance
Civil aftermarket revenue grew
organically by 8% within which,
large jets grew by 10%, driven by
Boeing 777, B787 and the Bombardier
CSeries, now the Airbus A220.
One‑off provisioning relating to
distributor agreements signed in late
2017 increased demand, particularly
in the first half.
Revenue in regional jet aftermarket
where we provide brakes for Embraer
E‑Jets and Bombardier CRJs, reflected
strong growth in utilisation on these
aircraft throughout 2018, which led to
organic growth of 6%.
• Large regional jet utilisation increased
by 5% demonstrating the trend of
needing additional aircraft to fly and
deliveries in large jets not satisfying
this demand.
Business jet aftermarket revenue grew
by 4%, as a result of good growth in
Gulfstream G350/450 and G500
platforms, despite negligible growth
in utilisation.
• Business jet utilisation increased
modestly, with growth of 0.4% in
take‑offs and landings.
Market review continued
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Defence
US defence spending
accounts for 73% of defence
revenue at Meggitt and
growth in OE and AM came
through in 2018.
Aerospace markets
Military Helicopters
Military Aircraft
Ground Vehicles
Naval
Training
Space
£731m
Revenue
2018 Meggitt performance
Defence revenue grew 10% organically.
Original equipment revenue grew by 7%,
with strong growth in parts for the F‑35
Joint Strike Fighter and AH‑64 Apache.
Aftermarket revenue (which accounts for
44% of total defence revenue) increased
by 15% as a result of strong demand for
retrofit fuel tanks for the F/A‑18 Hornet,
F‑16 Falcon and F‑15 Strike Eagle.
These were partly offset by lower
demand on platforms such as BAE Hawk
and AH‑1 Cobra.
Market trends
• US Department of Defense budget
increased by 8% in 2018.
• Deliveries of new aircraft grew by
1% with strong growth in fighter jets
(particularly the F‑35) enough to
offset declining demand for special
mission aircraft.
• In contrast, demand for new rotorcraft
decreased by 11% with lower volumes
of UH‑60 Black Hawk and AH‑64
Apache during 2018.
• Increased focus in US for spend on
increasing fleet readiness driving
greater demand for spare and
retrofit parts.
• Global defence spending increased
by 5%.
2019 outlook
The outlook for defence expenditure
in the US, our single most important
defence market, remains healthy with
the overall budget expected to grow
to circa $715bn in 2019.
The budget categories which most
closely correlate with Meggitt growth
are Procurement; Research,
Development, Test & Evaluation; and
Operations & Maintenance. 2019
spending in these areas is expected
to grow by 3%.
Budget challenges outside of the US
are likely to be a headwind to growth
in 2019.
However, 6% organic growth in orders
during 2018 provides momentum to
sustain above market growth.
We expect organic revenue growth of
4‑6% in defence in 2019.
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Energy
Market trends
• Market conditions in oil and gas appear
to have stabilised, with growth in the
oil price through the summer of 2018.
• The demand for large frame industrial
gas turbines remains suppressed but
for small frame turbines has continued
to grow.
• Emerging market demand continues to
drive much of the growth opportunity.
2018 Meggitt performance
Energy revenue grew organically by
19% in 2018. Driven primarily by the
recovery at Heatric which has operated
in challenging end‑markets following
the collapse in the oil price in 2014.
Trading in the Group’s valve and
condition monitoring businesses grew
4% on an organic basis.
This reflects good success in supporting
end users and growth in small frame
turbines enough to offset declining
demand for large frame gas turbines.
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Recovery at Heatric and
growth in supplying end
users of industrial gas
turbines saw energy revenue
grow in 2018.
Energy & equipment markets
Power generation
Oil & Gas
£128m
Revenue
2019 outlook
Long‑term growth expectations for
our energy businesses, particularly
Heatric, remain good.
We have differentiated technology
which plays a critical role in the
extraction of deep‑water offshore gas
reserves and good opportunities in
adjacent markets.
Our energy businesses will benefit
from synergistic relationships across
the Group e.g. optical sensing for the
gas turbine market, as well as the long
term demand for energy, particularly
in emerging markets.
We expect organic revenue growth of
0‑5% in energy in 2019.
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Aircraft
Braking
Systems
Revenue
£382m
£122m
Underlying operating profit
Markets
Civil aerospace
Fixed wing
military aircraft
Rotary wing
military aircraft
Capabilities
• Wheels and brakes
• Control systems:
brake, nose wheel
steering and
landing gear control
• Monitoring systems
Providing wheels,
brakes and brake control
systems for around 35,000
in‑service aircraft.
Operational performance
Meggitt Aircraft Braking Systems (MABS)
provides wheels, brakes and brake control
systems for around 35,000 in‑service aircraft.
It continues to develop innovative technology
for new programmes enabling the business to
retain its leading position in its target markets,
underscored by the strong market share gains
in recent years, notably on super mid‑size and
long range business jets.
The division represents 18% of Group revenue,
generating 91% of its revenue from the
aftermarket and 9% from OE.
MABS civil revenue declined by 1% organically.
Civil aftermarket revenue grew by 1%
organically driven by good growth in regional
jets, particularly Embraer E‑170 which offset
lower demand on Bombardier CRJ900 and a
range of smaller aircraft. Large jet aftermarket
reduced by 17% organically with strong
growth on Airbus A220 offset by significantly
lower demand for spares on mature platforms
which had been strong during 2017.
MABS defence revenue increased by 8%
organically, with increased aftermarket demand
on A‑10 Thunderbolt, F‑16 Falcon, UH60 Black
Hawk and Gripen aircraft partially offset by
lower demand for Eurofighter Typhoon and BAE
Hawk brakes.
Operating margin decreased from 35.0% to
31.8% in 2018 driven by unfavourable revenue
mix and the accelerated growth of free of
charge hardware. This represents a significant
refresh of our installed base and dilutes near
term margins, but will drive aftermarket growth
for decades to come.
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Carbon brakes
Proven in all operating environments,
both commercial and defence
applications, from small general
aviation aircraft to large passenger
jets, our carbon brake products are
amongst the best in the world.
Our brake frame features include:
Latest generation NuCarb® carbon
Well‑designed hydraulic seals
Carbon reinforcement clips to ensure the
disks run correctly
A design that creates the greatest net
space possible for carbon heat‑sink within
the customer’s space envelope
Find out more online at
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Control
Systems
Revenue
£576m
£127m
Underlying operating profit
A leading supplier of
flow control, thermal
management.
Operational performance
Meggitt Control Systems (MCS) designs and
manufactures products which manage the flow
of liquids and gases around aero and industrial
turbines, and control the temperature of oil,
fuel and air in aircraft engines. The division,
which also provides fire protection equipment
to engines and airframes, represents 28% of
Group revenue, generating 39% of its revenue
from OE and 61% from the aftermarket.
Defence revenue increased by 11% on an
organic basis driven by good growth in spares
on fighter jet programmes, including B1‑B
Lancer, UH‑60 Black Hawk and C‑130J Hercules.
Energy revenue increased organically by 5%
driven by growth in demand for small industrial
gas turbine valves.
Operating margin declined by 40 basis points
to 22.1%.
Revenue was up by 13% organically. Civil
aerospace grew by 15% organically, with
strong performance in both OE and
aftermarket.
OE revenue grew by 10% on an organic basis
with good growth on A320neo family, 737MAX
and A350XWB partially offset by lower
demand on B787 and A320ceo aircraft.
Civil aftermarket revenue grew by 19% on an
organic basis with strong growth in large jet
demand, particularly on A320, A350XWB,
B737, B777 and B787.
Markets
Civil aerospace
Fixed wing
military aircraft
Rotary wing
military aircraft
Military ground
vehicles
Energy and
Industrial
Marine
Ground fuelling
Capabilities
• Control valves and
sub‑systems
• Aircraft fire protection
and control systems
• Thermal management
• Electro‑mechanical
controls
• Environmental control
• Fuel handling
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Driving the
future of fire
suppression
Our fire detection systems have been
protecting airline passengers, crew
and defence personnel for more than
forty years. Constantly evolving,
we are exploring new green fire
extinguishing agents and developing
cutting edge fibre optic detection.
Fibre optics
Flexible and easy to install
Small, lightweight, durable, passive,
and intrinsically safe
Faster, more accurate and versatile
detection of fires and overheat
Can be integrated with other sensor
applications, reducing required trunking
and cabling
Find out more online at
www.meggitt.com
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Polymers &
Composites
Revenue
£389m
£6m
Underlying operating profit
A leading specialist in fuel
containment and systems,
sealing solutions and
advanced composites.
Operational performance
Meggitt Polymers & Composites (MPC)
supplies flexible bladder fuel tanks, complex
composites and seals packages for a broad
range of civil and defence platforms. These
products are linked by their dependence
on similar materials technology and
manufacturing processes. It supplies over
80% of the US defence requirements for fuel
bladders and ballistically‑resistant and
crashworthy fuel tanks. MPC represents
19% of Group revenue and generated
64% of its revenue from OE and 36% from
the aftermarket.
On an organic basis, MPC revenue increased
by 16% in 2018, reflecting the strong content
we have on new generation civil platforms
and growing demand for spares on defence
aircraft. Civil revenue grew by 10% organically,
as a result of strong demand for our engine
composites on the fast growth CFM LEAP
and Pratt & Whitney PurePower engine
programmes. Organic order growth of 32%
in civil OE underpins a healthy medium term
outlook for MPC, with continued demand
anticipated for our high temperature engine
composites.
Markets
Fixed wing
defence aircraft
Rotary wing
defence aircraft
Civil aerospace
Defence ground
vehicles
Unmanned
aerial vehicles
Automotive
and industrial
Capabilities
• Complex,
high‑temperature
composite structures
and sub‑assemblies
• Flexible fuel tanks for
defence and civil aircraft
and defence ground
vehicles
• Smart electro‑thermal ice
protection
• Airframe and engine
sealing solutions
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Defence revenue grew by 21% on an organic
basis as a result of strong demand for
composite components on the F‑135 engine
and for retrofit fuel tanks on programmes
including F/A‑18 Super Hornet, F‑16 Falcon
and UH‑60 Black Hawk.
Operating margin decreased from 7.1% to 1.5%
reflecting the full year impact of the elevated
and extended learning curve costs at the
Group’s composite sites which began to impact
financial performance in late 2017. The action we
have taken during 2018 has delivered significant
improvements in operational performance with
yield improving across all major parts. The
significant growth on these parts, associated
with large shipset values on fast growing new
engine programmes, means we have prioritised
near term operational performance over cost
reduction in 2018. Improving yield has enabled
us to reduce scrap costs and with the transfer of
production to low cost regions, increases in
labour productivity and reductions in raw
materials costs expected to provide good scope
for cost reduction in 2019.
The outlook for MPC remains strong given the
extensive capability we have acquired, strong
platform positions and potential for significant
market growth. This is particularly true for
composite components on new engine
programmes where technical barriers remain
high and manufacturing know‑how can be a
critical differentiator.
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Fuel tanks
Our ballistically‑resistant fuel
bladders will self‑seal in less than two
minutes. The wound is sealed using a
proprietary treatment, which stops
fuel leakage in minutes, allowing
crews to return safely to base.
Our self-sealing fuel tanks:
Innovative material technology
Ballistically‑resistant fuel bladders will
self‑seal in less than two minutes
Reduces the risk of fuel related incidents
during flight
Crash resistant, improved survivability
Available for defence and civil applications
Find out more online at
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Sensing
Systems
Revenue
£499m
£84m
Underlying operating profit
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.
Operational performance
Meggitt Sensing Systems (MSS) designs and
manufactures highly engineered sensors to
measure a variety of parameters such as
vibration, temperature, speed, pressure,
fluid level and flow as well as power storage,
conversion and distribution systems and
avionics suites for aerospace applications. Its
products are designed to operate effectively
in the extreme conditions of temperature,
vibration and contamination that exist in an
aircraft or ground‑based turbine engine.
Sensors are combined into broader electronics
packages, providing condition data to
operators and maintainers of engines,
contributing to improved safety and lower
operating costs. MSS has migrated these
products into other specialist markets
requiring similar capabilities, such as test and
measurement, industrial and medical.
Combining its capabilities with MABS, it has
a number of civil aerospace tyre pressure
monitoring systems already in service and
further systems under development, having
secured positions for this technology on
10 aircraft platforms. MSS represents 24% of
Group revenue and generated 77% of its
revenue from OE and 23% from the
aftermarket.
MSS revenue increased by 4% organically,
with 1% growth in civil aerospace driven by
business jet OE growth, particularly on
Bombardier Global 7500 and Embraer Legacy
450/500, which offset falling revenue on
widebody aircraft. Defence revenue increased
by 6%, with strong growth on F‑35 sufficient to
offset declining spares demand on fighter jet
and rotorcraft platforms. In energy and other
markets (including test and measurement,
industrial and medical), MSS revenue increased
organically by 4% reflecting success in reducing
reliance on OEMs and targeting operators of
industrial gas turbines; and growing demand in
industrial and medical markets for our aero‑
derivative sensing capabilities.
Despite 98% growth in free of charge deliveries
on new generation engine programmes,
operating margin increased by 400 basis
points to 16.8% reflecting lower new product
introduction costs, purchasing savings from our
centre‑led approach to category management
and good progress in reducing other costs. This
was supported by our site consolidation activity,
with investment to double capacity at our
facility in Vietnam which opened in 2018.
Markets
Civil aerospace
Defence aircraft,
ships, ground
vehicles and
missiles
Energy and
Industrial
Test and
measurement
Medical
Capabilities
• High performance
sensors
• Condition and health
monitoring for air and
land‑based machinery
• Power generation,
conversion and storage
• Aircraft surveillance and
security systems
• Situational awareness
systems
• Wireless control and
monitoring systems
• Avionics and air data
systems
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Speed sensors
An essential part of the engine
control system that enables aircraft to
take off and land every day. Speed
sensors monitor the critical rotating
components in the gas turbine. With
over 75 years’ experience, our
magnetic speed sensors are trusted
by engine OEMs around the world.
Multi‑channel capability
‘Long‑reach’ capability enabling flight line
maintenance
Acoustically stable technology
Built in a world class manufacturing facility
in Vietnam
Find out more online at
www.meggitt.com
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Equipment
Group
Revenue
£236m
£29m
Underlying operating profit
Markets
Fixed wing
defence aircraft
Rotary wing
defence aircraft
Defence
and security
Energy and
Industrial
Capabilities
• Combat support
(ammunition handling,
electronics cooling and
countermeasure launch
and recovery systems)
• Live‑fire and virtual
training systems
• Heat transfer equipment
for offshore oil and gas
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.
Increased profitability at Heatric together
with greater operational leverage at MDSI
contributed to good growth in operating
margin which increased from 5.8% to 12.2%
in 2018.
In March 2018, we completed the sale of
Thomson to Umbra and in April 2018, the sale
of Precision Micro to Lloyds Development
Capital. The two divested businesses generated
£11.8m of revenue during 2018.
Operational performance
Meggitt Equipment Group (MEG) comprises
our dedicated defence businesses and
Heatric, a provider of printed circuit heat
exchangers to the energy sector. The division
represents 11% of Group revenue and
generates 78% of its revenue from OE and
22% from the aftermarket.
MEG revenue grew by 12% organically,
reflecting good growth in defence as a result
of strong growth at Meggitt Defense Systems
Inc (MDSI), a leading provider of thermal
systems, ammunition handling and scoring
technologies. In energy, revenue increased
organically by 86% in 2018, driven by the
recovery at Heatric which has operated in
challenging end‑markets following the
collapse in the oil price in 2014.
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Environmental
control system
Tried and tested in the hottest
deserts in the world, our auxiliary
cooling and power systems enable
complete cooling systems to crews,
combat equipment and electronics
Key features
Provides up to 7.5Kw cooling capacity
Hydraulically powered, electronically
controlled
Automatic catastrophic hydraulic leak
protection
Modular design adaptable to many
platforms
Find out more online at
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t Looking to 2019
Introducing the new
organisational structure
CAPABILITY BASED
BUSINESS UNITS
Aircraft Braking
Systems
See more on page 30
Polymers
& Composites
18%
Group revenue
See more on page 34
19%
Group revenue
Control Systems
See more on page 32
28%
Group revenue
Sensing Systems
See more on page 36
24%
Group revenue
Equipment Group
See more on page 38
11%
Group revenue
Our new organisation
structure is designed to
accelerate growth by
increasing alignment with
our customers whilst
simplifying our business.
Our new organisation is aligned with our
strategy to accelerate our journey from a holding
company to becoming an integrated group.
We have created four customer‑aligned
divisions, three of which comprise product
groups to maintain a strong focus on technology
and innovation. Our Services & Support division
provides after‑sales support to customers
across end markets.
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Product Groups
1 Braking systems
2 Fire & safety
3 Power & motion
4 Avionics & sensing
5 Polymer seals
6 Fuel systems &
composites
Product Groups
1 Flow control
2 Thermal systems
3 Engine composites
4 Engine sensing
CUSTOMER
ALIGNED DIVISIONS
49%
Group revenue
Airframe
Systems
14%
Group revenue
Engine
Systems
Product Groups
1 Energy sensing & controls
2 Heatric
3 Industrial equipment
4 Training systems
5 Defense systems
18%
Group revenue
Energy &
Equipment
Services
1 Global reach through our
distribution and repair hubs,
including authorised repair
stations and distribution partners
2 24/7 customer response centre
3 Smart Support™ proposition to
better create value for target
customers across all Meggitt
capabilities
19%
Group revenue
Services &
Support
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indicators
The Group uses a mix of financial and non‑financial key
performance indicators (KPIs) to measure execution against
our strategic objectives. To ensure we deliver value to our
shareholders over the cycle, financial KPIs balance short‑term
measures (underlying operating profit and free cash flow in the
year) with longer‑term measures (organic revenue growth, return
on trading assets and underlying EPS growth). Non‑financial
KPIs focus on investment in R&D to drive future revenues,
the health and safety of our employees and raising standards
of operational performance to satisfy our customers.
As described in note 45 to the Group’s consolidated financial
statements, the Group has adopted IFRS 15 and IFRS 16 with
effect from 1 January 2018, with prior year comparatives for
2017 restated. IFRS 15 in particular is a complicated standard,
requiring customer contracts to be reassessed against revised
criteria for when, and at what value, revenue should be
recognised. It is therefore not practical to provide a full
restatement of KPIs presented for the years 2014 to 2016
inclusive or for KPIs presented for 2017, which are calculated
based on growth compared to performance in 2016.
However, comparatives for these years have been restated
where appropriate for the most significant impact of the
new standards, the requirement to expense free of charge
manufactured parts (‘FOC’) as incurred under IFRS 15,
rather than initially recognising costs as an intangible asset
and then amortising them over their useful lives.
Organic revenue growth
8.9%
2018
2017
2016
2015
2014
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 55 for a
reconciliation of organic revenue
to revenue.
8.9
1.6
0.9
0.2
0.0
Target
Growth of 3% to 5% in 2019.
Result
Achieved 8.9% against a target of
7% to 8%. See page 55 for details.
Directors’ incentive plans
Organic revenue growth is a
performance measure for the 2018
LTIP. See pages 107 to 108 for details.
Underlying operating profit
£367.3m
2018
2017
2016
2015
2014
367.3
353.3
356.6
309.5
324.5
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Definition and basis of
calculation
Underlying operating profit is defined
and reconciled to statutory measures in
note 10 to the Group’s consolidated
financial statements on page 150.
Target
We do not publish profit targets.
Result
Achieved £367.3m. See pages 55 to 56
for details.
Directors’ incentive plans
Underlying operating profit is a
performance measure for both the
2018 and 2019 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 104
and 111 for details.
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Link to strategic priorities
Restated to reflect the full impacts of IFRS 15 and
IFRS 16, where appropriate.
Restated only for the impact of expensing FOC
as incurred.
1
2
Portfolio
Customers
3
4
Competitiveness
Culture
Return on trading assets (ROTA)
28.2%
2018
2017
2016
2015
2014
28.2%
27.1%
30.1%
32.2%
38.3%
Definition and basis of calculation
Underlying operating profit expressed
as a percentage of average trading
assets. Underlying operating profit is
defined and reconciled to statutory
measures in note 10 to the Group’s
consolidated financial statements on
page 150.
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.
ROTA measures performance by linking
operating performance to the amount
of operating capital employed.
Target
The target is to achieve a 3 year
average ROTA of 32.9%. The target
recognises the need to continue to
invest in trading assets during this
period in the aerospace cycle.
Result
2018: 28.2% against a target of 26.8%.
See pages 56 to 57 for details of the
current high levels of investment to
support future growth.
Directors’ incentive plans
ROTA is a performance measure for
both the 2018 and 2019 LTIP for
employees excluding executive
directors. For executive directors, the
2018 and 20019 LTIP includes a return
on capital employed (ROCE) measure
rather than ROTA. For the purpose of
these plans, underlying operating
profit and trading assets are measured
at constant currency. See pages 107 to
108 and 111 for details.
Underlying EPS growth
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’s
consolidated financial statements on
page 153.
6.9%
2018
2017
2016
2015
2014
6.9%
-1.5%
8.3%
-0.7%
-18.2%
Target
We do not publish profit targets.
However, the proposed 2019 LTIP
includes EPS targets equivalent to
compound annual growth ranging from
3.0% to 9.0% over the next three years.
Result
2018: 6.9%. CAGR achieved over last
three years: 4.5%. See page 56
for details.
Directors’ incentive plans
Underlying EPS is a performance
measure for both the 2018 and 2019
LTIP. See pages 107 to 108 and 111
for details.
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3
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2
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43
t Key performance indicators continued
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2018
Link to strategic priorities
Restated to reflect the full impacts of IFRS 15 and
IFRS 16, where appropriate.
Restated only for the impact of expensing FOC
as incurred.
1
2
Portfolio
Customers
3
4
Competitiveness
Culture
Free cash flow
£167.4m 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
reconciled to statutory measures in
note 42 to the Group’s consolidated
financial statements on page 178.
2018
2017
2016
2015
2014
167.4
197.4
131.1
199.0
146.8
R&D investment
6.6%
2018
2017
2016
2015
2014
6.6%
7.9%
7.9%
9.6%
9.5%
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 as disclosed in note 8
to the Group’s consolidated financial
statements on page 149. It is not
adjusted for amounts capitalised,
amortised, impaired or incurred on
contracts funded by customers.
Target
We do not publish free cash flow
targets.
Result
2018: £167.4m. See page 57 for details.
Directors’ incentive plans
Free cash flow is a performance
measure for both the 2018 and 2019
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
104 and 111 for details.
Target
Investment of 5% to 7% per annum.
This range reflects typical investment
fluctuation within the industry cycle.
Result
2018: 6.6%. Average over last five years:
8.3%. See pages 56 to 57 for details.
Directors’ incentive plans
R&D investment is not a specific
measure used in directors’ incentive
plans. However, the 2018 and 2019 LTIP
both include programme performance
measures which include the effective
delivery of R&D programmes. See
pages 107 to 108 and 111 for details.
Total recordable incident rate (TRIR)
0.8
2018
2017
Definition and basis of
calculation
The total recordable incident rate
calculated per 100 employees. It is
calculated as the number of recordable
incidents multiplied by 200,000 and
then divided by the total number of
hours worked during the year.
0.8
1.2
Target
To achieve a TRIR of 0.7 by 2019 which
is considered upper quartile safety
performance for our industry.
Result
2018: 0.8. The Group started collecting
TRIR data for this new KPI at a Group
level in 2017. See pages 66 to 67 for
details.
Directors’ incentive plans
Health and safety performance is not
a specific measure used in directors’
incentive plans. However, improvement
in health and safety is included in the
personal performance objectives for
the Chief Executive in the 2019 STIP.
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Result
Achieved 37.4% against a target of
38.8%, reflecting the extended
learning curve costs at our composites
sites as discussed in the divisional
review on page 34.
Directors’ incentive plans
Gross margin is a performance
measure for the 2018 LTIP. For the
purpose of this plan, revenue and
cost of sales reflect the impact were
the Group to be able to apply hedge
accounting for its foreign currency
forward contracts. See pages 107 to
108 for details.
Target
To achieve an inventory turn of 4.0
by 2021.
Result
2.7 turns. See page 10 for details.
Directors’ incentive plans
Inventory reduction is a performance
measure for both the 2018 and 2019
LTIP. See pages 107 to 108 and 111
for details.
1
3
4
1
2
3
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Annual Report and Accounts 2018
45
Gross margin
37.4% Definition and basis of calculation
2018
2017
2016
2015
2014
37.4%
38.5%
38.2%
38.8%
38.7%
Inventory turns
2.7x
2018
2017
2016
2.7
2.5
2.3
Underlying gross profit expressed as
a percentage of revenue. Underlying
gross profit adjusts gross profit for the
impact of items charged to cost of
sales, but which are excluded from the
Group’s underlying profit measures as
disclosed in note 10 to the Group’s
consolidated financial statements on
page 150.
Target
Gross margin is no longer a
performance measure in the 2019 LTIP
and will no longer be considered a KPI
from 2019. See page 103 for details.
Definition and basis of
calculation
Underlying cost of sales divided by
average inventory measured at
constant currency and excluding
businesses acquired or disposed of
in the year.
Underlying cost of sales adjusts cost of
sales for the impact of items which are
excluded from the Group’s underlying
profit measures as disclosed in note 10
to the Group’s consolidated financial
statements on page 150.
Average inventory is calculated as the
13 month average of inventory, gross
of provision, at the end of the previous
financial year and at the end of each
month of the current year. To measure
inventory at constant currency, average
inventory of foreign subsidiaries is
translated at average exchange rates
for the year.
An increase in inventory turns is
considered by the Group to be one of
the next key outputs from MPS.
t Risk management
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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 2018, 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. Comfort over the
management of these risks is demonstrated through the
updated Group risk assurance map which summarises the
assurance activities taking place throughout the Group in
relation to the principal risks. Where appropriate, insurance is
used to manage risks and our risk management procedures
are shared with our insurers when assessing any potential
exposures. Our insurers have provided funding via a bursary
to enable more detailed reviews of certain risks to increase
understanding of the key drivers and enable more efficient
action to address these, either through mitigation or insurance.
These reviews have been well received by the risk owners for
improving their ability to monitor and assess their risks and by
the insurers for providing a more detailed analysis of the causes
and their respective impacts.
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 2018, 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.
Executive Committee
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
Executive Committee as a whole regularly reviews
the Group’s principal risks, while individual members
own specific risks.
Our process
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 within 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.
The resultant Group Risk Register is subject to a detailed review
and discussion by the Executive Committee 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.
Once identified, risks are reviewed at a 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.
Meggitt’s corporate strategy is designed to optimise our business
model and take risk, with the required controls, on an informed
basis. See pages 12 to 23 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 as described on the following page.
46
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Risk heat map
The heat map below shows the outcome of the risk identification and assessment processes used to compile the
Group Risk Register. This shows the relative likelihood and impact of the principal risks identified. Risks rated as green
or those with a low expected impact are not considered principal risks of the Group for inclusion in the Group Risk
Register, although they may feature on divisional or functional risk registers and be managed at that level.
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10
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04
08
12
14
02
09
11
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Medium
03
06
High
Increasing risk impact
05
13
Very high
Strategic risks
Medium to low tolerance for risks
arising from poor business decisions
or sub‑standard execution of business
objectives.
Operational risks
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 risks
Low to near‑zero tolerance for
compliance and reputational risks
including those related to the law,
health, safety and the environment.
13
Legal & compliance
Business model
04 Quality escape/equipment failure
01
02
03
Industry changes
Technology strategy
05
06
07
08
09
10
Business interruption
Project/programme management
Customer satisfaction
Financial risks
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.
Acquisition integration/performance
14
Taxation
Cyber breach
Supply chain
11 Group change management
12
People
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Annual Report and Accounts 2018
47
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and uncertainties
The Group’s strategic objectives can only be achieved if certain risks are taken and managed effectively. We have listed below
the most significant risks that may affect our business, although there may be other risks – of which the Group is unaware or are
considered less significant – which may affect our performance. The potential impacts of each of our principal risks were considered
as part of the viability stress testing and considered to be consistent with, analogous to or less significant than the scenarios modelled.
Strategic priorities
Change in risk
Risk velocity
KPIs
1
2
3
4
Portfolio
Increase
Customers
No change
H
M
High:
Impact within 6 months of
risk occurring
Medium:
Impact between 6 and
36 months of risk occurring
Competitiveness
Decrease
L
Low:
Impact after more than
36 months of risk occurring
Culture
• Financial performance
(gross margin, organic revenue
growth, underlying operating
profit, return on trading assets,
underlying EPS growth and
free cash flow)
• R&D investment
• TRIR (total recordable
incident rate)
• Inventory turns
Strategic risks
Risk
Description
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.
Significant variation in demand
for products should civil
aerospace, defence and energy
business downcycles coincide;
a serious political, economic or
terrorist event that adversely
affects the aerospace industry
occur or consolidation that
materially changes the
competitive landscape.
Failure to develop and
implement meaningful
technology strategies to meet
customers’ needs.
Business model
2
M
KPIs:
• Financial performance
• R&D investment
Industry changes
1
M
KPIs:
• Financial performance
Technology strategy
1
L
KPIs:
• Financial performance
• R&D investment
Decreased
revenue and
profit.
• Alignment of Group, divisional and functional
strategy processes.
• Dedicated full‑service aftermarket organisation.
• Long‑term customer agreements as part of
maintaining and monitoring pricing strategy.
• Investment in research and development to maintain
and enhance Meggitt’s intellectual property.
Volatility in
underlying
profitability.
• Monitoring external economic and commercial
environment and long‑lead indicators whilst
maintaining focus on balanced portfolio.
• EASA (European Aviation Safety Agency) has
acknowledged our application for “third country”
certification that mirrors the existing EASA
certifications held by UK Meggitt sites. We have now
started to be issued with the third country certificates
which allow continued trading with our European
customers.
• Maintaining sufficient headroom in committed credit
facilities and against covenants in those facilities
whilst implementing appropriate cost‑base
contingency plans.
Restriction
of ability to
compete on new
programmes
with consequent
decrease in
revenue and
profit.
• Management of technology development plans
that align technology readiness, market needs and
financial returns using a gated process.
• Recruiting and training first‑class engineers and
scientists with appropriate technology skills.
• Ring‑fenced budgets focused on longer‑term
technology developments.
• Leveraging our R&D budget through partnerships
including government, academia and other
companies.
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Operational risks
Risk
Description
Impact
How we manage it
Quality escape/
equipment failure
3
H
KPIs:
• Financial performance
Business interruption
H
KPIs:
• Financial performance
Project/programme
management
3
M
KPIs:
• Financial performance
• R&D investment
Customer satisfaction
2
M
KPIs:
• Financial performance
• Inventory turns
Defective product leading to
in‑service failure, accidents,
the grounding of aircraft or
prolonged production
shut‑downs for the Group and
its customers.
Decreased
revenue and
profit, damage
to operational
performance
and reputation.
• System safety analysis, verification and validation
policy and processes, combined
with quality and customer audits and industry
certifications.
• Meggitt Production System.
• Supplier quality assurance process.
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.
Failure to meet new product
development programme
milestones and certification
requirements and successfully
transition new products into
manufacturing as production
rates increase. This also covers
lower than expected production
volumes, including programme
cancellations.
Failure to meet customers’ cost,
quality and delivery standards
or qualify as preferred suppliers.
Decreased
revenue and
profit, damage
to operational
performance
and reputation.
Failure to deliver
financial returns
against
investment and/
or significant
financial
penalties leading
to decreased
profit and
damage to
reputation.
Failure to win
future
programmes,
decreased
revenue and
profit.
• Group‑wide business continuity and crisis
management plans, subject to regular testing.
• Comprehensive insurance programme, renewed
annually and subject to property risk assessment
visits.
• Rigorous commercial and technological reviews of
bids and contractual terms before entering into
programmes.
• Continuous review of programme performance
through the Programme Lifecycle Management (PLM)
process including:
– regular monitoring of the end market performance
of key OE programmes;
– internal review process, to stress‑test readiness to
proceed at each stage of key programmes; and
– regular monitoring of the financial health of
customers.
• Creation of a customer facing organisational
structure including a dedicated aftermarket division.
• Regular monitoring of customer scorecards and
ensuring responsiveness to issues via Voice of
the Customer process.
• Functional excellence in operations, project
management and engineering.
• Increased utilisation of low‑cost manufacturing base.
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Operational risks continued
Risk
Description
Impact
How we manage it
Acquisition
integration/
performance
3
M
KPIs:
• Financial performance
Cyber breach
3
H
KPIs:
• Financial performance
Supply chain
3
M
KPIs:
• Financial performance
• Inventory turns
Group change
management
3
M
KPIs:
• Financial performance
• Inventory turns
People
4
H
KPIs:
• Financial performance
Failure to effectively integrate
acquisitions and failure to
realise financial returns from
the advanced composites
acquisitions.
Decreased
revenue and
profit.
• Internal pre‑acquisition due diligence supplemented
by external experts.
• Increase in local capabilities to manage production
ramp‑up and delivery of the financial model,
including cost synergies, under Group PMO
oversight.
• Standard Meggitt processes implemented as part of
a proven post‑merger process led by incumbent
divisional management, supported by experienced
dedicated operational teams with a senior oversight
committee.
Decreased
revenue and
profit, damage
to operational
performance and
reputation.
• IT security infrastructure, policies and procedures.
• Group‑wide intellectual property protection
programme.
• Management of third party service providers and
risks, including resilience and disaster recovery
processes.
• Implementation of rolling programme of system
upgrades (including SAP implementation) to replace
legacy systems.
A breach of IT security due to
cyber crime/terrorism resulting
in intellectual property or other
sensitive information being lost,
made inaccessible, corrupted
or accessed by unauthorised
users. This also includes the
loss of critical systems such as
SAP due to badly executed
implementation or change of
control; poor maintenance,
business continuity or back‑up
procedures and the failure of
third parties to meet service
level agreements.
Failure or inability of critical
suppliers to supply unique
products, capabilities or services
preventing the Group from
satisfying customers or meeting
contractual requirements.
Decreased
revenue and
profit, damage
to operational
performance and
reputation.
Failure to successfully,
simultaneously, deliver the
significant change programmes
currently in process and planned,
including site consolidation
activity such as Ansty Park.
Decreased
revenue and
profit, increased
costs, damage
to operational
performance and
reputation.
• Supplier excellence framework combined with
integrated commercial and procurement approach
to contractual terms and conditions including
development of long‑term agreements.
• Local sourcing strategy to improve operational
efficiency and minimise potential impacts and
disruption from cross‑border tariffs.
• Maintenance of buffer inventory for critical and
sole‑source suppliers.
• Implementation of measures to mitigate counterfeit
and fraudulent parts at high‑risk facilities.
• Creation of dedicated site consolidation and
property management teams for Ansty Park.
• Regular monitoring by Executive Leadership Team
through operational and project reviews.
• MPS implementation at new/expanded sites.
Failure to attract, retain or
mobilise people due to factors
including industrial action,
workforce demographics, lack of
training, availability of talent and
inadequate compensation.
Decreased
revenue and
profit, damage
to operational
performance.
• Roll‑out of High Performance Culture.
• Employee engagement programmes.
• Graduate and apprentice programmes in partnership
with schools and universities.
• Regular monitoring by Executive Leadership Team.
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Corporate risks
Risk
Description
Impact
How we manage it
Legal & compliance
3
H
KPIs:
• Financial performance
• TRIR
Significant breach of increasingly
complex trade compliance,
bribery and corruption, US
Government contracting,
ethics, intellectual property,
data protection, competition/
antitrust laws and facilitation of
tax evasion.
Damage to
reputation,
loss of supplier
accreditations,
suspension of
activity, fines from
civil and criminal
proceedings.
• Continuing investment in compliance programmes
including Board approved policies and roll out of
training and IT solutions.
• Regular monitoring by Ethics and Trade Compliance
Committee, supported by ongoing trade compliance
programme including third party audits.
• Comprehensive ethics programme including training,
anti‑corruption policy and Ethics line.
• Third party audits including HS&E and the Criminal
Finance Act.
• MPS implementation to enhance safety measures,
validated by third party audits.
Financial risks
Taxation
3
H
KPIs:
• Financial performance
Tax legislation is complex and
compliance can be subject to
interpretation. Events such as
the OECD BEPS programme,
the US tax and tariff changes
and the impact of Brexit create
uncertainty which could negate
the effectiveness of the Group’s
current, well established, tax‑
efficient international structures,
including those used to finance
acquisitions.
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.
Meggitt PLC
Annual Report and Accounts 2018
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• 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 2019 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.
Principal risks and uncertainties continued
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Oversight of risk and internal control
The Board is responsible for risk management and internal
control and for maintaining and reviewing its financial and
operational effectiveness. The Board has taken into account
the guidance provided by the FRC on Risk Management and
Internal Control in carrying out 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 Finance Policies and Procedures Manual, the bid
approval process, programme lifecycle management reviews,
IT security framework and risk management; 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,
programme management, IT, HR and ethics); 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 2018 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.
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• 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;
• Assessed the exposure to cross border trade, in relation to
potential changes to import and export tariffs; and
• Specifically assessed the impact of the UK’s decision to leave
the EU which is not expected to be significant, for three key
reasons
– From a trade perspective the WTO treaty for trade
in civil aviation parts provides for tariff free trade
(defence is generally covered under separate trade
arrangements), with non‑tariff barriers not expected
to threaten our ability to operate;
– Levels of trade between the UK and other EU countries are
not especially significant to Meggitt (UK exports to the EU
were 6% of Group revenues in 2018, whilst imports to the
UK from the EU were under 1%); and
– We have a significant amount of non‑Sterling denominated
revenue, costs and debt, meaning we have benefited from
the weakening of the Pound since the UK’s decision to
leave the EU. Remaining net transaction exposures are
hedged forward giving us time to respond to further
movements over time.
In the event of an extension to the timeframe for the UK’s
withdrawal from the EU increasing the risks faced, the impact is
still considered to remain within the scenarios modelled above.
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.
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, 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:
• The Group’s multi‑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;
• The investment cycle for a typical engineering development
programme is up to five years;
• Although individual platforms operate for periods of 30 years
or more, our five‑year viability period aligns with the typical
aerospace cycle. The longer term nature of our platform
cycles, and the support that brings to the expectation of
viability beyond the formal five year assessment period, is
explained elsewhere in the Annual Report; and
• 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 defence 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 set of reverse engineered scenarios which deliberately
stress test to break our banking covenants or our
committed facility requirements, to assess the headroom
against our risk based scenarios.
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t Chief Financial
Officer’s review
The execution of the Group’s
key strategic priorities
underpins margin.
Louisa Burdett
Chief Financial Officer
Our growing installed
base of over 71,000
civil and defence
aircraft is driving
strong growth in
demand for both OE
and aftermarket parts.
Financial highlights (Table 1)
2018
£’m
20174
£’m
Reported
growth
%
Organic
growth5
%
Revenue
2,080.6
1,994.4
Underlying1:
EBITDA2
Operating profit
Profit before tax
Earnings per share (EPS)
Statutory:
Operating profit
Profit before tax
EPS
Free cash flow3
Net debt
461.6
367.3
334.8
34.2p
256.6
216.1
23.2p
447.5
353.3
320.2
32.0p
272.7
228.3
37.8p
167.4
197.4
1,074.1
1,060.8
+9
+4
+4
+4
+4
+3
+4
+5
+7
-6
-5
-39
-15
+1
1 Underlying profit and EPS are defined and reconciled to statutory measures in notes 10 and 15 respectively
to the Group’s consolidated 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 42 to the Group’s consolidated
financial statements.
4 Restated for the effects of IFRS 15 and IFRS 16 as described in note 45 to the Group’s consolidated
financial statements.
5 Organic growth excludes the impact of M&A and currency and is reconciled in Table 3.
54
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Revenue
Reported Group revenue of £2,080.6m
(2017 restated: £1,994.4m) increased by
4%, despite the recovery of Sterling
against our trading currencies,
principally the US dollar, from the low
levels in the first half of 2017. Organic
growth of 9% reflects strong
performance in all of the Group’s
end‑markets. M&A had a £58.6m net
adverse impact, and includes the
disposals of Thomson (sold in March
2018) and Precision Micro (sold in
April 2018).
Civil OE revenue grew 6% organically.
Large jet OE, the most significant driver
of our OE revenue, grew 5% driven
principally by A320neo and B737MAX
platforms. Business jet OE also saw
strong growth of 20%, which was partly
offset by declining revenue in regional
jets (down 14%).
Civil aftermarket revenue grew
organically by 8%, within which large
jets grew by 10%, driven by B777, B787,
A350 XWB and the A220 (formerly the
Bombardier C Series), together with
one‑off stocking relating to distributor
agreements signed in late 2017 which
increased demand in the first half.
Business jets also grew with revenue up
4% for the year with good growth in
G350/450 and G500 platforms. Revenue
in the regional jet aftermarket reflected
a strong growth in traffic throughout
2018, which led to organic growth
of 6%.
Overall civil aerospace revenue
increased by 7% organically.
Defence revenue grew 10% organically.
Original equipment revenue grew by
7%, with strong growth in parts for the
F‑35 Joint Strike Fighter and AH‑64
Apache. Aftermarket revenue increased
by 15% as a result of strong demand for
retrofit fuel tanks for the F/A‑18 Hornet
and UH‑60 Black Hawk. These were
Operational highlights (Table 4)
Revenue growth (Table 2)
Civil OE
Civil AM
Total civil aerospace
Defence
Energy
Other
Group
2018
Revenue
£’m
464.3
660.5
1,124.8
731.2
128.4
96.2
2,080.6
Growth
%
+4
+6
+5
+7
+9
-22
+4
Organic
growth1,2
%
+6
+8
+7
+10
+19
+9
+9
Organic growth (Table 3)
Revenue
2018
£’m
20171
£’m
Growth
%
2,080.6
(33.8)
1,994.4
(92.4)
23.7
-
+4 Reported
Impact of M&A2
Impact of
currency3
Underlying operating profit
Growth
%
+4
2018
£’m
367.3
0.3
1.4
20171
£’m
353.3
0.1
-
2,070.5
1,902.0
+9 Organic
369.0
353.4
+4
1 Restated for the effects of IFRS 15 and IFRS 16 as described in note 45 to the Group’s consolidated
financial statements.
2 Excludes the results of businesses acquired and disposed during the current and prior year.
3 Restates the current year using 2017 translation and transaction exchange rates.
partly offset by lower demand on
platforms such as BAE Hawk and AH‑1
Cobra.
Energy revenue grew organically by 19%
in 2018, driven primarily by the recovery
at Heatric which has operated in
challenging end‑markets following the
sharp decline in the oil price in 2014.
Trading in the Group’s valve and
condition monitoring businesses grew
4% on an organic basis, reflecting good
success in supporting end users and
growth in small frame turbines enough to
offset declining demand for large frame
gas turbines.
Profit
The Board’s preferred non‑statutory
measure of the Group’s trading
performance is underlying profit.
Underlying operating profit was up 4%
to £367.3m (2017 restated: £353.3m),
representing a margin of 17.7% (2017
restated: 17.7%). Margin performance
reflects the growing financial contribution
from the execution of the Group’s key
strategic priorities, including purchasing
savings from a more centralised approach
to category management and efficiencies
from those sites in the latter most stages
of MPS. These operational efficiencies
were offset by extended learning curve
costs required to ramp up production of
2018
£’m
381.8
575.6
388.9
498.6
235.7
£’m
381.6
521.3
337.5
501.2
252.8
2,080.6
1,994.4
Revenue
20171
Growth
Organic
growth2
%
+1 Aircraft Braking Systems
+13 Control Systems
+16 Polymers & Composites
+4 Sensing Systems
+12 Equipment Group
+9 Group
Underlying operating profit
20171
Growth
£’m
133.5
117.2
23.8
64.2
14.6
353.3
%
-9
+8
-75
+31
+97
+4
2018
£’m
121.5
127.0
6.0
84.0
28.8
367.3
Organic
growth2
%
-9
+12
-76
+32
+70
+4
%
+0
+10
+15
-1
-7
+4
1 Restated for the effects of IFRS 15 and IFRS 16 as described in note 45 to the Group’s consolidated financial statements.
2 Organic growth excludes the impact of M&A and currency and is reconciled in Table 3.
Meggitt PLC
Annual Report and Accounts 2018
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Chief Financial Officer’s review continued
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advanced engine composites; together
with an increase in free of charge (‘FOC’)
content on high volume civil programmes
and an unfavourable revenue mix in the
second half.
Underlying net finance costs were £32.5m
(2017 restated: £33.1m) reflecting a lower
net debt level, offset partly by an increase
in interest rates. Underlying profit before
tax increased by 5% to £334.8m (2017
restated: £320.2m).
On a statutory basis, operating profit for
the year was £256.6m (2017 restated:
£272.2m) and profit before tax was
£216.1m (2017 restated: £228.3m).
Statutory profit includes the £10.1m
non‑cash loss (2017: gain of £60.7m),
from the marking to market of financial
instruments, principally currency hedges,
against future transaction exposures as
well as the £25.1m gain (2017: gain of
£25.3m) from disposals completed or
agreed during the year.
Statutory profit for the year was £179.0m
(2017 restated: £292.8m).
Taxation
The Group’s underlying tax rate
decreased to 21.0% (2017 restated:
22.7%) in line with our previous guidance
and as a result of the US tax reforms
enacted at the end of 2017. We expect
the rate to increase to the 22‑23% range
in 2019.
Although the international tax position
is clearer following enactment of the
recommendations from the Base Erosion
and Profit Shifting project in the UK,
together with the US tax reforms, there
are still uncertainties ahead – including
the outcome of the EU’s investigation of
the UK CFC regime, the impact of Brexit
and expected reforms in Swiss tax. On
the first of these, the Group, in common
with many other international companies,
has taken advantage of the benefits
available under the Group Financing
Exemption provisions in the UK
controlled foreign company rules.
Cash tax paid as a percentage of
underlying profit before tax was 6% (2017
restated: 8%). The rate of cash tax is
lower than our underlying tax rate due
to tax deductible items which do not
affect underlying profit, principally the
amortisation of intangible assets arising
on the acquisition of businesses and tax
relief on retirement benefit deficit
reduction payments. In addition, the 2018
cash tax rate benefitted from the impact
of IFRS 15 which accelerated tax
deductions arising from programme
participation costs incurred in the UK.
These costs are now tax deductible as
incurred, mirroring the tax treatment in
the US.
Our statutory tax rate, which includes
items excluded from underlying profit
before tax, was a charge of 17.2% (2017
restated: credit of 28.3%). This is a more
normal rate, following the one time
distortion seen in 2017 due to the US
tax reforms impact. Cash tax paid as a
percentage of statutory profit before tax
was 9% (2017 restated: 11%).
The Group is committed to complying
fully with the laws in the countries in
which it operates. We seek 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.
A copy of the Group’s tax strategy is
available on our website.
Earnings per share (EPS)
Underlying EPS increased by 7% to 34.2p
(2017 restated: 32.0p) benefitting from
the increase in underlying profit before
tax and reduction in our underlying tax
rate. On a statutory basis, EPS reduced
to 23.2p (2017 restated: 37.8p) with the
one off benefit in 2017 of remeasuring
US deferred tax liabilities, following
the reduction in US federal tax rate,
accounting for 10.9p of the adverse
movement. Sterling weakness at the end
of 2018, was reflected in losses on the
marking to market of the Group’s forward
contracts, resulting in an additional 7.3p
reduction in EPS in the year.
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 11.35p (2017: 10.80p)
which would result in a 5% increase in
the full‑year dividend to 16.65p (2017:
15.85p).
The Company has a balance on its profit
and loss reserve at 31 December 2018 of
£1,521m (2017: £1,146m), of which
approximately £1,375m (2017: £1,000m)
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
2019. It provides an efficient reinvestment
option for shareholders, without the need
for new shares to be issued by the
Company.
Investing for the future
Total R&D expenditure reduced in 2018
to £138.3m and was 6.6% of revenue
(2017: £157.9m, 7.9%). Applied research,
combined with targeted investment in
the development of technology, remains
critical to our long‑term growth. We have
significantly increased our content on
new aircraft, which represents a major
refresh of our in‑service portfolio.
Therefore, having passed the peak of
technology development for the current
generation of aircraft, we saw reduced
spend on capitalised development costs
(down 6% organically). However, we are
still investing in our successful applied
research and technology (AR&T)
programmes, which will develop the next
generation products and manufacturing
technologies required to enable future
programmes. We also anticipate that
customer funded R&D will continue to
support AR&T, given our past success in
securing such customer funded
development programmes and grants.
Analysis of R&D expenditure (Table 5)
Total R&D expenditure
% of revenue
Charged to Cost of sales / WIP
Capitalised
Amortisation/impairment2
Charge to net operating costs3
2018
£’m
138.3
6.6%
(31.8)
(58.6)
22.1
70.0
20171
£’m
157.9
7.9%
(38.8)
(62.5)
23.0
79.6
Growth
%
Organic2
growth %
-12
-18
-6
-4
-12
-11
-18
-6
-4
-9
1 Restated for the effects of IFRS15 as described in note 45 to the Group’s consolidated financial statements.
2 Organic growth excludes the impact of M&A and currency and is reconciled in Table 3.
3 Excludes impairment loss charged to exceptional operating items and therefore excluded from the Group’s
underlying profit. See notes 10 and 11 to the Group’s consolidated financial statements.
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Movements in net debt (£’m) (Table 6)
Facility headroom (Table 7)
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Underlying EBITDA
Working capital (outflow)/inflow
Post‑retirement benefit deficit reduction payments
Cash flow from operations before exceptional and M&A costs
Exceptional operating items
Interest and tax
Capitalised development costs
Capitalised programme participation costs
Capital expenditure
Free cash flow
Net proceeds from M&A including costs
Dividends
Purchase of own shares for employee share schemes
£’m
1500
1200
900
600
300
0
2018
461.6
(30.0)
(67.6)
364.0
(12.0)
(52.9)
(58.6)
(0.8)
(72.3)
167.4
31.9
(124.2)
(22.6)
52.5
(65.5)
(0.3)
(1,060.8)
2017
447.5
3.0
(33.5)
417.0
(13.8)
(61.4)
(62.6)
(3.4)
(78.4)
197.4
60.4
(118.6)
(19.0)
120.2
105.0
(7.2)
(1,278.8)
(1,074.1)
(1,060.8)
Headroom
£395.6m
Net
borrowings
£976.6m
2018
2019
2020
2021
2022
Fixed rate
Floating rate
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1500
1200
900
600
300
0
“2018”
“2019”
“2020”
“2021”
“2022”
Net cash flow
Currency movements
Other non‑cash movements
Opening net debt
Closing net debt
The charge to net operating costs,
including amortisation and impairment,
decreased by 12% (9% organically) to
£70.0m (2017: £79.6m).
Our investment in programme
participation costs (‘PPC’) now only
includes cash payments and excludes
investment in FOC hardware which is
expensed under IFRS 15. Such cash
payments are typically associated with
programmes in the development phase.
In 2018 this investment declined to
£0.8m.
Capital expenditure on property, plant
and equipment and intangible assets was
£72.3m (2017: £78.4m). This includes the
investment required to support factory
consolidations and the expansion at sites
in Coventry, Vietnam, Mexico and San
Diego. Capital expenditure is due to
increase significantly in 2019, as we
accelerate plans to consolidate the
Group’s manufacturing footprint,
including investments at the Ansty Park
site and completion of current
construction and fit out projects to
increase capacity in our existing estate.
Cash flow
Free cash flow decreased by 15% to
£167.4m (2017 restated: £197.4m) as a
result of an incremental £30.4m
contribution to reduce US pension deficits
and an increased working capital outflow
of £30.0m (2017: £3.0m inflow). The
working capital outflow is driven by growth
in inventory, with an investment of £37.5m
in buffer stocks ahead of a series of site
consolidations and to support growth.
Inventory turns increased to 2.7x (2017
restated: 2.5x) which reduced the overall
investment in inventory that would
otherwise have been required to deliver
growth by £43.0m in 2018.
The net cash inflow of £52.5m (2017:
inflow of £120.2m) after dividend
payments, includes the £31.9m net
proceeds from the sales of Aviation
Mobility, Thomson and Precision Micro.
Debt structure and financing
The Group’s borrowings comprise a
combination of US private placement
debt and syndicated and bilateral bank
credit facilities. There were no changes
during the year to the committed credit
facilities available to the Group.
At 31 December 2018, the Group had
undrawn committed credit facilities of
£395.6m after taking account of surplus
cash (2017: £331.4m). The Group has no
committed facilities expiring in 2019.
Historically we have disclosed our net
debt:EBITDA ratio on a covenant basis,
which at 31st December 2018 was 1.8x
(2017: 1.9x). This gives us significant
headroom against our covenants which
are not to exceed 3.5x. Going forwards,
we will additionally disclose an
unadjusted net debt to EBITDA metric,
which decreased to 2.3x from 2.4x in 2017
and includes the impact of recognising
additional lease liabilities within net debt
following our early adoption of IFRS 16.
Capital structure
In addition to supporting our regular
dividend, we seek to deploy cash by
investing organically in technologies to
accelerate the Group’s growth as well as
investing in the acquisition of
complementary businesses which expand
our offering to customers and deliver
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, of
between 1.5x and 2.5x is appropriate,
whilst retaining the flexibility to move
outside the range if appropriate.
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 4% 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.
Meggitt PLC
Annual Report and Accounts 2018
57
Chief Financial Officer’s review continued
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Interest risk
The Group seeks to reduce volatility
caused by interest rate fluctuations on
net borrowings. 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 borrowings at fixed rates with
a weighted average maturity of two years
or more. At 31 December 2018, the
percentage of net borrowings at fixed
rates was 56% (2017: 66%) and the
weighted average period to maturity for
the first 25% was 7.5 years (2017: 8.3
years). A higher proportion of debt is
held at fixed interest rates, than the
minimum required under our policy, in
anticipation of further increases in market
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)
2018
2017
Average translation rates against Sterling:
US Dollar
Euro
Swiss Franc
1.31
1.13
1.30
1.30
1.14
1.28
Average transaction rates:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
1.44
1.21
1.06
Year‑end rates against Sterling:
US Dollar
Euro
Swiss Franc
1.28
1.11
1.25
1.47
1.19
1.06
1.35
1.13
1.32
The results of foreign subsidiaries are
translated into Sterling at weighted
average exchange rates. Sterling
remained volatile throughout 2018
against all major currencies, trading at
between $1.25 and $1.43 against the US
Dollar. However, over the year as a whole,
the average Sterling rate against the US
Dollar was only marginally stronger at
$1.31 (2017: $1.30) providing a modest
adverse impact on our reported results
for the year. Compared to 2017, the
Group’s revenue reduced by £15.2m and
underlying profit before tax by £2.7m
from currency translation movements.
These adverse impacts include £13.4m
and £2.1m respectively relating to US
Dollar denominated revenues and profits.
Translation currency sensitivity
(£’m) (Table 11)
Revenue
PBT1
Impact of 10 cent movement 2 :
US Dollar
Euro
Swiss Franc
115.0
11.0
9.0
16.0
2.0
3.0
1 Underlying profit before tax as defined and
reconciled to statutory measures in note 10 to
the Group’s consolidated financial statements.
2 As measured against the 2018 average
translation rates against Sterling disclosed
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 2017, the
Group’s revenue was adversely impacted
by £8.5m and underlying profit before
tax for the year benefitted by £1.5m
from currency transaction movements.
These impacts include an adverse
impact of £6.3m and a benefit of £2.8m
respectively relating to US Dollar
denominated revenues and profits.
Each ten cent movement in the US Dollar
against the average hedge rates achieved
in 2018 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 £4.0m in respect of US
Dollar/Swiss Franc exposure.
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
2018
20171
131.0
969.3
(9.5)
(3.8)
(12.9)
61.5
1,027.6
(14.5)
(3.3)
(10.5)
1,074.1
1,060.8
1 Restated for the effects of IFRS 16 as described in
note 45 to the Group’s consolidated financial
statements.
e. Covenant risk
Our committed credit facilities contain
two financial ratio covenants – net
debt:EBITDA and interest cover. The
covenant calculations are drafted to
protect us from potential volatility caused
by accounting standard changes, sudden
movements in exchange rates and
exceptional items. This is achieved by
measuring EBITDA on a frozen GAAP
basis, retranslating net debt and EBITDA
at similar average exchange rates for the
year and excluding exceptional items
from the definition of EBITDA. We
continue to have considerable headroom
on both key financial covenant measures.
Covenant ratios (Table 9)
Covenant
2018
2017
Net debt:EBITDA ≤3.5x1
Interest cover
1.8x
≥3.0x 14.7x
1.9x
13.6x
1 A ratio of 4.0x applies in the two six month
reporting periods following a significant
acquisition.
58
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Annual Report and Accounts 2018
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Transaction hedging (Table 12)
Defined benefit pension scheme summary (£’m) (Table 13)
Hedging
in
place %1
Average
transaction
rates2
2019:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
2020 – 2023 inclusive:
US Dollar/Sterling
US Dollar/Euro
US Dollar/Swiss Franc
100
91
82
62
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1.43
1.19
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1.37
1.24
1.11
1 Based on forecast transaction exposures and
hedging in place at 31 January 2019.
2 Based on hedging in place at 31 January 2019,
with unhedged exposures at exchange rates at
31 January 2019.
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 decreased to
£161.5m (2017: £258.3m). The principal
drivers of the reduction in net deficit
included:
• A reduction of £93.3m (2017: £9.8m)
due to remeasurement gains on
scheme liabilities. These principally
arise from higher AA corporate bond
yields in both the UK and the US. These
bond yields form the basis of the rate
at which scheme liabilities are
discounted. The impact was partly
mitigated by a remeasurement loss on
scheme assets of £52.1m (2017: Gain of
£56.8m) reflecting the global market
volatility seen particularly in the latter
part of the year.
• Net deficit reduction payments in the
year of £65.7m (2017: £31.5m). Deficit
payments in 2018 included additional
contributions into two of the Group’s
US schemes of USD40.0m (£30.4m).
These contributions, which represent
an acceleration of amounts that would
have been due over the next five years,
are deductible against the Group’s
2017 taxable profits and attract tax
relief at the higher rates that prevailed
prior to the US tax reforms. The
contributions also reduce
administrative expenses linked to
scheme funding positions.
In the UK, the Group is currently making
deficit payments in accordance with a
recovery plan agreed with the trustees
following the 2015 triennial funding
valuation. The recovery plan provides for
the deficit to be addressed by payments
which gradually increase over the period
to March 2024. Under this plan, the
Group will make deficit contributions of
£32.3m in 2019 (2018: £30.9m). The 2018
Opening net deficit
Service cost
Group cash contributions
Deficit reduction payments1
Other amounts charged to income statement2
Remeasurement losses/(gains) – schemes’ assets
Remeasurement gains – schemes’ liabilities
Currency movements
Closing net deficit
Assets
Liabilities
Closing net deficit
Assets as percentage of liabilities
2018
258.3
15.4
(81.1)
(65.7)
5.3
52.1
(93.3)
4.8
2017
360.2
15.9
(47.4)
(31.5)
6.5
(56.8)
(9.8)
(10.3)
161.5
258.3
1,015.6
1,177.1
161.5
86%
995.3
1,253.6
258.3
79%
Includes in 2018, an additional contribution of £30.4 million paid into two US schemes.
1
2 Comprises past service amounts, administration expenses borne directly by schemes and net
interest expense.
triennial valuation is currently in progress
and preliminary results indicate a funding
deficit of £163.0m at April 2018. This
provisional funding position is £34.0m
lower than that projected in the 2015
valuation at the same date. It is expected
that a revised recovery plan, addressing
this modest improvement in funding
position, will be finalised with the trustees
in the first half of 2019 although no change
to the level of payments for 2019 is
currently expected. The provisional
buy‑out deficit at April 2018, which
assumes the Group transfers responsibility
of the scheme to an insurance company,
was measured at £395.0m. The Group has
no current plans to make such a transfer.
In the US, the level of minimum annual
payments is principally driven by
regulations, although additional
contributions in excess of legislative
minimum amounts can be made.
Following the additional USD40m
contributions in 2018, amounts required
to be paid will reduce to approximately
£4.0m in 2019 and, absent any further
changes in legislation, will remain broadly
at this level for the next four years.
Thereafter they are expected to increase
to approximately £11.0m per annum for
the remainder of the recovery period.
Meggitt has two other principal post‑
retirement benefit schemes providing
medical and life assurance benefits to
certain US employees. The Group’s
exposure to increases in future medical
costs provided under these plans is
capped. Both schemes are unfunded and
have a combined deficit of £47.6m (2017:
£49.8m). Deficit payments during the year
were £1.9m (2017: £2.0m).
Recent accounting developments
During 2018, the Group adopted a
number of new accounting standards.
The impact of these was in line with
previous guidance and further details are
provided in note 45 to the Group’s
consolidated financial statements.
The new standards resulted in a
reduction in underlying profit compared
to that which would have been reported
under the Group’s previous accounting
policies. The reduction principally arises
due to the requirement under IFRS 15,
the new revenue standard, to expense,
as incurred, the investment we make in
supplying free of charge/deeply
discounted OE parts, typically in our
braking systems business. The Group’s
net debt has also increased modestly
following the early adoption of IFRS 16,
which results in liabilities now being
recognised on the balance sheet for all
of the Group’s property leases.
Importantly however, the new standards
do not impact the cash generated by the
Group or the economic returns we derive
from our programmes.
Non-financial information
Our non‑financial information statement
is contained in the Directors Report on
page 116.
Louisa Burdett
Chief Financial Officer
Meggitt PLC
Annual Report and Accounts 2018
59
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responsibility
Recognising our
responsibility
As a progressive, global technology company, we acknowledge
our responsibility to shareholders, customers, suppliers,
our employees and the wider community to conduct our
operations safely, responsibly and sustainably.
The responsible and sustainable development of our business is essential for our continued long-term success. A highly
focused approach to corporate responsibility helps us manage our business more efficiently, mitigate risks, reduce costs
and better support the communities in which we operate – creating value for Meggitt and our stakeholders.
Our principal areas of focus are health and safety and our people, the environment, ethics and business conduct (including
anti-corruption) and supporting the communities in which we operate. We review our values and commitments in these
areas regularly and they are set out in our Corporate Responsibility Policy (CR Policy) (available at www.meggitt.com) and
overseen by our Corporate Responsibility Committee (CR Committee).
Policy
We are committed to:
• upholding sound corporate
governance principles and applying
the UK Corporate Governance
code;
• supporting the Ten Principles of the
United Nations Global Compact,
relating to human rights, labour,
the environment and anti‑
corruption;
• upholding our employees’
human rights;
• encouraging dialogue with
employees;
• supporting our local communities;
• minimising the environmental
impact of products and processes
and maintaining internationally
accredited environmental
management systems;
• conducting business relationships
ethically and responsibly;
• complying with the anti‑slavery and
human‑trafficking legislation;
• acting as a responsible supplier and
encouraging our contractors and
suppliers to do the same; and
• building a more diverse and
inclusive Meggitt and complying
with reporting obligations including
gender pay gap reporting and data
submitted to the Hampton
Alexander Review.
60
Meggitt PLC
Annual Report and Accounts 2018
Our focus areas and governance
nities
cutive D i r
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H e a l t h and safety
E m ployees
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Board
CR Comm i t t e e
Custome r s
Environme n t
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Our people deliver solutions for the most
challenging environments in ways others
cannot. Our technology and products are
relied upon by customers worldwide. Our
customers trust us to enhance lives and enable
safe, cost‑effective and environmentally
responsible flight, power and defence systems.
Action
For our stakeholders
this means:
• complying with relevant national
laws and regulations;
• providing a supportive, rewarding
and safe working environment;
• delivering comprehensive training
for 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;
• having effective risk identification
and mitigation across all areas of
the business;
• conducting independent audits
in compliance areas;
• adopting robust internal and
external 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.
Governance and compliance
Ultimately, the Board is responsible for
the implementation and performance
of our Corporate Responsibility Policy.
In 2018, we allocated the day‑to‑day
responsibilities of the Board and the
Chief Executive in relation to the
Corporate Responsibility Policy in the
following way:
• the Group Operations Strategy
Director now has functional
responsibility for health, safety and the
environment;
• the Group HR Director led initiatives
focused on culture, diversity, inclusion
and employee engagement;
• the Group Company Secretary has
functional responsibility for ethics and
business conduct; and
• the Executive Director, Commercial &
Corporate Affairs and Group Company
Secretary have responsibility for charity
and community activity.
Group support is provided to ensure we
fulfil the requirements outlined in our
Corporate Responsibility Policy, and
divisional presidents and site directors
take responsibility for implementing
Group policies and procedures locally.
During 2018, the Ethics and Trade
Compliance Committee became the
Corporate Responsibility Committee (CR
Committee), maintaining oversight of
ethics and business conduct, and adding
further responsibility for oversight of
environment, charity and community
activities.
The CR Committee will also oversee the
Board’s approach to implementing
sections of the 2018 UK Corporate
Governance Code and UK Companies
Act 2006 relevant to stakeholder
engagement. Key stakeholders identified
by the Board during 2018 were our
employees, shareholders, customers
and suppliers.
Previously, the Ethics and Trade
Compliance Committee reviewed Trade
Compliance, but in 2018 the Executive
Director, Commercial & Corporate Affairs
regularly reported on this directly to
the Board.
The Board has also agreed that Nancy
Gioia will perform the role of Non‑
Executive Director responsible for
Employee Engagement. The Board
discussed and agreed a detailed role
brief with Nancy and they are planning
activities for 2019 (see page 62).
We have also formed a new Diversity and
Inclusion Council to share learnings and
coordinate diversity and inclusion
initiatives across the Group.
In addition to financial KPIs, the Group
has a non‑financial KPI on health and
safety (see pages 66 and 67), and we also
include further data to help assess our
performance in key areas, such as
employees, environment, and charity and
community, provided in this report and in
the Nominations Committee report
(see page 90).
Meggitt PLC
Annual Report and Accounts 2018
61
Corporate responsibility continued
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Corporate
Responsibility
Committee
As Chairman of the Corporate Responsibility Committee,
Nancy Gioia’s role is to ensure that we oversee the Group’s
important activities in the areas of ethics and business conduct,
environment and charity and community.
• Investors / shareholders – extensive
engagement already exists in this
area and we describe our investor
engagement activities on page 84.
The CR Committee will continue to
monitor this engagement to ensure it
is appropriate, but the Group does
not propose any specific additional
activities for 2019.
• Customers – extensive engagement
already exists in this area, and the
Strategic Report includes an update
on our markets and key customer
activities. The CR Committee will
continue to monitor this engagement
to ensure it is appropriate, but the
Group does not propose any specific
additional activities for 2019.
• Suppliers – Meggitt’s approach to
supply chain management is evolving,
with a targeted reduction in the cost
and complexity of our supply chain.
The Chief Procurement Officer
presented to the Board in May 2018
and will provide a further update in
2019. Conferences for larger suppliers
took place in 2018 and 2017, and
more active engagement exists with
preferred suppliers. The CR Committee
will review this area in 2019.
Diversity and inclusion continues to be
overseen by the Board and Nominations
Committee. Health and safety is overseen
by the Board.
The Committee has oversight of ethics
and business conduct, environment,
charity and community. It also ensures
that the Board meets its responsibilities
under the 2018 UK Corporate
Governance Code and UK Companies
Act 2006 on stakeholder engagement,
and other reporting requirements such
as on greenhouse gas emissions, Modern
Slavery Act 2015, gender pay gap and
supplier payment practices.
During 2018, the Board identified key
stakeholders as employees, shareholders,
customers and suppliers and in 2019 we
will report back in more detail on the way
we engage with those stakeholders. The
CR Committee will monitor the Board’s
engagement in these areas and suggest
additional activities as appropriate:
• Employees – executive management
engage regularly with employees, using
employee engagement surveys, direct
feedback and discussions, site visits,
town halls, our intranet, and regularly
cascaded communications, which also
give the opportunity for employees to
feed back and ask questions. We also
have a whistleblowing hotline and a full
ethics programme (see page 72). Nancy
Gioia was also appointed by the Board
as Non‑Executive Director responsible
for employee engagement and activities
for 2019 will include reviewing detailed
data from our employee engagement
surveys, visiting a number of sites,
holding skip level meetings during site
visits to ensure a cross section of
employees are engaged, and Board
discussions on site culture – including
attendance of a high performance
culture session with employees in 2019.
Nancy Gioia
Non‑Executive Director
62
Meggitt PLC
Annual Report and Accounts 2018
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Key stakeholders:
Employees
34%
reduction in Total Recordable
Incident rate
2,000
leaders trained on High
Performance Culture
34%
of employees have over
10 years length of service
>£1m
investment in employee
training and development
£6.8m
total value of Share
Incentive Plan shares
Environment
-6%
greenhouse gas emission
reduction relative to
revenue
-14%
greenhouse gas emission
reduction relative to 2015
baseline
£130m
investment in new world
class manufacturing facility
site at Ansty Park, UK
Wider benefits
to society:
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Customers
71,000+
civil and military aircraft with
Meggitt products installed
£138.3m
total R&D expenditure
Shareholders
16.65p
dividend per share
34.2p
underlying earnings
per share
33%
of executive remuneration
linked to achievement of
strategic priorities
Meggitt PLC
Annual Report and Accounts 2018
63
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People
2018 highlights:
• Continued promotion of our safety culture
through behaviour-based safety training across
all of our sites, and an improvement in our total
recordable incident rate (TRIR) of 34% in 2018
• Roll-out of High Performance Culture to over
2,000 leaders and managers across
the organisation
• The Board approved our Diversity and Inclusion
Policy, and we launched a Group Diversity and
Inclusion Council
• A 4% increase in employee engagement
We recognise that our people are the driving force of Meggitt’s progress.
Our focus areas are on our duty of care to our employees to promote their
health and safety, foster a high-performance culture that values diversity
and inclusion, and an environment in which people can work free from bullying
and discrimination. We seek the feedback of our employees directly and
anonymously – with Group-wide employee engagement surveys in 2017
and 2018 to understand whether our employees feel engaged, empowered
and satisfied in their work.
Culture
Culture is important to us, which is why
it is one of our strategic priorities: culture
is the way we do things at Meggitt.
Embedding a high‑performance culture
will ensure that we meet the demands of
our customers, improve our performance
and make Meggitt a great place to work.
Our values reference how we should work
together and the behaviours that are
integral to our drive for success (see
opposite page).
To accelerate our progress towards
becoming a truly integrated global
business, we initiated a High Performance
Culture (HPC) across the Group in 2017,
with the first wave of training targeted
at senior leadership teams across the
organisation. In just a couple of months
more than 700 leaders in Meggitt
participated in our HPC workshops.
We launched wave two ‘unfreezing’
workshops in 2018, targeting an
additional 1,500 managers. By the end
of 2020 we plan to have reached all
employees with our ‘unfreezing’ sessions.
We hope that HPC will deepen
engagement, teamwork and improve
problem‑solving across our new
customer‑aligned divisions. Unlike other
programmes of this kind, we decided at
the outset to recruit employees to deliver
the sessions to other employees – as a
result we have a dedicated and
passionate group of facilitators for our
HPC programme. Our colleagues relate
to workshops delivered by colleagues,
who have a shared understanding and
appreciation of our culture, our history
and our future.
Embedded within our culture and values
are diversity and inclusion. The Board,
executive management, and leaders
across the Group recognise that a diverse
and inclusive workforce is critical to
running a sustainable and successful
business. To reinforce our commitment to
creating a diverse and inclusive
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Annual Report and Accounts 2018
Headcount by division
Number of employees & contractors
Aircraft Braking Systems
Control System
Polymers & Composites
Sensing Systems
Equipment Group
Cross‑Group functions
1,224
2,096
3,484
3,086
1,238
611
Headcount by region
Number of employees & contractors
UK
Rest of Europe
USA
Rest of World
2,763
1,226
6,410
1,340
Headcount by length of
service (years)
Number of employees & contractors
Less than 5
Between 5 and 10
Between 10 and 15
Between 15 and 20
Between 20 and 25
Over 25
5,927
1,962
1,576
817
558
899
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headcount
Board of directors*
30%
Executive team*
18%
Senior executives*
10%
Total headcount*
29%
* Percentage of female employees as at date
of signing the accounts
Our values
Teamwork
At Meggitt, we support each other and recognise
outstanding contributions. By working together,
we bring extraordinary technology to our customers.
We build great relationships with all of our
stakeholders, providing the support they need to
succeed. We build highly skilled teams passionate
about what we do and how we do it.
Integrity
At Meggitt we do the right thing, in the right way
wherever we operate. Our colleagues, customers
and the communities we are part of can count on
us to act with integrity, honesty and respect.
We form lasting positive relationships built on
open communication, understanding, fairness and
impartiality. We conduct ourselves with integrity and
the highest standards of ethical behaviour across
the business.
Excellence
We enable the extraordinary at Meggitt. We’re good
at what we do and that’s why customers come back
to us. We are constantly working to improve our
processes and attention to detail. As a result, we
deliver the most ambitious technologies, products
and services safely, efficiently and cost‑effectively to
our customers.
During 2019 we will encourage employee
engagement in topics related to diversity
and inclusion and seek employee
feedback on our progress in our annual
engagement survey.
environment, in 2018 the Board approved
a Diversity and Inclusion Policy. We also
created divisional‑level diversity plans,
and established a Group‑wide Diversity
and Inclusion Council. The Council
will provide overall guidance and a
framework to help roll out Employee
Resource Groups to facilitate discussions
and initiatives on diversity and inclusion.
The aim of our Diversity and Inclusion
Policy is to state our commitments at
Board‑level to making Meggitt a diverse
and inclusive organisation, which in turn
will support a successful and sustainable
business. We should employ a diverse
workforce that reflects the diverse
communities within which we operate
and always foster an inclusive culture
where people are valued, respected
and supported.
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65
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Employee engagement
and feedback
We recognise that our future success
depends upon our shared sense of
purpose and it is important that we find
out from our employees what they think
about Meggitt and how they feel about
the work that they do.
The results of our 2018 annual
employee engagement survey showed
a 4% improvement in engagement since
2017 and reflected the effort made in a
number of areas under engagement,
alignment and agility. During 2019, we
will invite all employees to participate in
employee forums to further understand
the engagement results and create action
plans for improvement. We will continue
to facilitate annual engagement surveys
and ‘pulse’ surveys.
As well as encouraging employee
feedback and engagement, in the UK we
encourage investment in Meggitt through
participation in the UK employee share
ownership schemes. The total value of
share incentive plan (SIP) shares held by
UK employees is £6.8m.
Investment in employees through
training and development
We invest time and energy into ensuring
we attract, develop and retain the best
talent to ensure people succeed based
on their skills, behaviours, knowledge and
experience. We recognise that a skilled
workforce will help Meggitt achieve
better results. During 2018 we invested
over £1million in our employees through
training and development.
We continue to develop employees’
leadership capabilities and during the
year implemented formal programmes to
raise capability in functional teams,
including procurement, project and
programme management.
In 2018, our graduate programme
received 2,000 applications for 15 places
(a third of those places were allocated to
females).
In 2018, we have launched the Meggitt
Corporate Apprenticeship Programme in
the UK; recruiting two cohorts, totalling
33 apprentices. We continue to work with
the Warwick Manufacturing Group
(WMG) Academy to encourage females
between the ages of 14 to 17 to take up
engineering as a career and help improve
gender diversity in our industry.
Health and safety
The Board, executive management and
all leaders across Meggitt are aware of
their responsibility to ensure that
employees work in a safe, supportive and
healthy workplace. We work continuously
with our employees to raise their
awareness of potential risks in the
workplace and promote our health and
safety policy and programme to help
individuals safeguard themselves, their
colleagues and visitors. We achieve this
by encouraging employees to take steps
to prevent injuries in the workplace.
Risk awareness is an ever‑evolving
process that requires everyone’s ongoing
participation to demonstrate continually
through their actions that safety in the
workplace is a core value that we will
never compromise. We will continue to
focus on this in 2019 and beyond. We
integrate health and safety measures into
Daily Layered Accountability meetings
and implement industry‑leading health
and safety practices at sites by issuing
Meggitt health and safety procedures on
relevant topics.
Case study
High Performance Culture
Switzerland
Continuing to develop a high performance
culture is important to our site in Fribourg,
Switzerland. Collaboration and inclusivity
have always been a key to the success of
this business, in a site where 26 nationalities
work together to support the growing
aerospace industry and the fast‑paced
energy business.
In 2018, 92 employees (around 20% of our
workforce) went through “unfreezing”
sessions and around 20 volunteered to be
culture champions. The culture community
at the site meet every four to six weeks to
reinforce the concepts, discuss their
personal commitments and the challenges
they face at individual or team levels. In
June, the Executive Committee visited our
site and met with the culture community,
exchanging ideas on the application of high
performance culture in day to day activities.
Here are some examples of how we have
applied high performance culture concepts
at our site:
• Feedback: all the employees at the site
and visitors carry a feedback card on
their access badge that has behaviours
to be actively promoted and those to be
discouraged.
• Appreciation: employees can nominate
their colleagues for a “Living our
Values” award which is handed out
quarterly at Town Hall meetings. We
also recognise and thank individuals and
teams for their engagement and great
work as part of Leader Standard Work
(LSW), which is part of the Meggitt
Production System.
• The site has also invested in developing
coaching skills. Starting in 2017, all
leaders have been through a multi‑day
coaching programme which has had a
great impact on developing people,
creating respect, mutual trust and a
sense of belonging.
Find out more online at
www.meggitt.com
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Safety
performance
Reduced the Total Recordable
Incident Rate by
34%
Reduced the Lost Time
Incident Rate by
27%
Reduced the number of days
lost due to injury by
78%
Meggitt PLC
Annual Report and Accounts 2018
67
In 2018, we conducted a number of
‘safety stand downs’, which involved
employees taking a break from
production to focus on specific risks.
In April 2018, cuts and lacerations
became the first area of focus, as the
most frequent injury type that our sites
reported. We issued tasks to all sites,
including detailed discussions at daily
morning safety meetings to review ways
to reduce hazards, evaluation of safer
cutting tools, conducting detailed risk
assessments on cutting operations, and
issuing new safety posters in areas that
pose the greatest risk of these types of
injuries. This initiative resulted in an
average of 40% fewer cut and laceration
injuries reported across the Group.
In 2018, 55% of our sites achieved a
Platinum Safety Star, which is the highest
level awarded under this programme.
Our continued efforts to raise awareness
at sites about risks saw further increases
in the number of unsafe and near miss
conditions and behaviours reported and
addressed by our employees in 2018,
improving all safety metrics as shown
opposite.
We aim to achieve ‘best in class’ health
and safety performance through our
continued focus on injury‑prevention
measures and by implementing industry‑
leading health and safety practices by the
end of 2019.
We have continued to implement our
bespoke behaviour‑based safety (BBS)
training programme, which is designed to
train employees on how to identify risk in
the workplace that may not be apparent
and to take immediate action to stop the
conditions that may lead to injury. We
anticipate that continued focus on
preventing unsafe behaviours through
BBS will help drive improvements in the
TRIR and other health and safety key
performance indicators.
We monitor the performance of our sites
continually through our annual rolling‑
audit programme. Our manufacturing
facilities are reviewed for their
compliance with applicable health and
safety regulatory requirements as well as
compliance against industry best practice
standards, as required by our health and
safety procedures. We also have health,
safety and environmental professionals
available to support sites and help to
share best practice across the Group. Our
external auditing programme and use of
third‑party consultants supplements our
internal monitoring and support teams.
We encourage excellence and our ‘Safety
Star’ programme, recognises outstanding
health and safety performance. It is
based primarily on ‘leading indicators’,
including the reporting and resolution of
unsafe conditions and behaviours, and
near‑miss incidents. Additionally, we
include safety training and education as
one of our key metrics and consider this
when determining ‘Safety Star’ level.
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Environment
2018 highlights:
• Investment in environmentally responsible
products that challenge existing technologies in
the aerospace industry
• Consolidation of sites to reduce our
environmental footprint and optimise our
manufacturing sites
• Investment in building centres of excellence
• Continued monitoring of environmental metrics
and site clean-ups
We are committed to be proper stewards in the communities in which we
operate and to minimise the environmental impacts of our products
and operations.
Our Portfolio – developing
differentiated technologies
As a global leader in braking systems,
fire detection, sensing and control
systems, thermal management and engine
composites, we help to reduce weight,
drag and fuel consumption, and minimise
maintenance and the use of raw materials.
By developing innovative, cutting‑edge
technology and ‘enabling the
extraordinary’, we help our customers to
do more with less to reduce their
environmental footprint.
In 2018, we became an Industrial Member
of the Manufacturing Technology Centre
(MTC) located at Ansty Park, Coventry.
The MTC was established as part of the
UK government’s national manufacturing
strategy, with the aim of bridging the gap
between academic discoveries and
real‑time industry innovation. Through
our partnerships with the UK’s leading
aerospace research bodies and institutions
we can help to develop new products that
are more efficient and that are
environmentally compatible.
As part of our annual review of our
environmental performance in 2018,
we carried out a high‑level review of our
technology and products to assess their
environmental impact. Carbon brake‑disc
manufacturing is the largest contributor
to our carbon footprint. Carbon
manufacturing at Coventry, Danville and
Akron facilities accounts for approximately
40% of the Group’s energy consumption
and carbon emissions. Carbon
manufacturing is the most significant area
of focus for the Group in the pursuit of
reducing our carbon emissions.
Our footprint – investing
in operational excellence
During 2018 we have expanded a number
of our facilities to meet organic growth
requirements, including in Mexico,
Vietnam and San Diego. We made
improvements at other sites, such as the
refurbishment to our North Hollywood
facility, and reduced other footprint
through disposals and planned site
closures.
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Annual Report and Accounts 2018
Case study on
UHBR Thermals
As engines become more efficient they are
getting smaller and more powerful, but
running ever hotter. Removing waste heat
and recycling it into useful energy is where
Meggitt’s thermal systems excel: our
solutions are 20 per cent smaller and lighter
than comparable solutions, and also recycle
50 per cent more energy.
We have developed our solutions using
whole‑system optimisation, where we
design and complete solutions using
advanced modelling and optimisation
methods to find the very best solutions.
Together with our university research and
technology partners, a dedicated team of
subject experts from across the business
designed our system, based at our
Advanced Research & Technology facility
in Coventry.
Our experts played a critical role in
introducing a radical heat exchanger design
for ultra‑high‑bypass ratio (UHBR) engines
to reduce heat exchange by 15%. Our
innovative new technologies will enable the
design of increasingly lighter and smaller
thermal management solutions to maximise
engine performance and reduce fuel burn.
This will enable our customers to do more
with less and ultimately have a positive
environmental impact.
Find out more online at
www.meggitt.com
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As part of our footprint consolidation
programme, we plan to design all new
buildings/constructions to meet high
levels of energy efficiency performance
and ‘best practice’:
• Outside of the USA, we aim to achieve
at least ‘Very Good’ Green Building
Sustainability Standard under the
BREEAM rating system for new
buildings.
• In the USA, all new buildings will be
required to meet at least ‘Silver’ LEED
certification (LEED certification levels
are similar to the BREEAM ratings
referenced above).
• For existing buildings that are
expanded, modified, or newly leased,
we will use BREEAM and LEED ‘In‑Use’
sustainability standards to assess
operational efficiencies that are
available for those buildings. Also, we
will replace fluorescent lamps, motors
and machinery/equipment with
high‑energy efficient replacements
as needed.
In 2017, we announced a £130 million
investment in our Ansty Park facility in
the UK, bringing together a number of
our existing operations. We plan to make
the new facility operational from 2020,
following full consultation with
Site expansion in 2018,
at San Diego, USA.
employees and their representatives.
It is our largest global infrastructure
investment. The facility will position the
business strategically for future growth
and will serve as a hub for next‑
generation aerospace innovation and
R&D and act as a catalyst for world‑class
operational performance. The 440,000
square foot facility aims to combine a
range of operations and will be the new
location for our global headquarters –
within a world‑class aerospace
engineering and technology
environment.
Plans for the site include an engineering
and manufacturing Centre of Excellence
for future aerospace thermal management
technology – already supported by the
UK Aerospace Technology Institute (ATI).
This planned new facility, adjacent to the
Manufacturing Technology Centre and
Advanced Manufacturing Training Centre,
marks a major advance in the
development of our global manufacturing
footprint and positions us strategically for
sustainable growth. By bringing world‑
class innovation and operational delivery
together on this site we will accelerate our
ability to meet the current and future
needs of our customers worldwide.
In August 2018, we opened our
significantly expanded San Diego site,
prior to being awarded a $750m contract
by Pratt & Whitney. This new facility was
designed on lean principles, eliminating
waste and complementing our high
performance culture. In 2016, a cross‑
functional team were selected in San
Diego to design the new facility using our
Production Preparation Process (3P) to lay
out each production line to eliminate
waste in the form of footprint, walking
distances and material travel. The new
facility includes efficient production
lines and environmentally controlled
manufacturing space. In addition to part
flow, teamwork is enhanced by locating
production support functions on the
product lines and establishing an
open‑concept office designed to foster
communication, teamwork and a high
performance culture. The San Diego
MPC location is now a Meggitt Group
Centre of Excellence for complex,
molded aircraft engine components
and structures used in extreme
environments. Its expertise is in high‑
volume components for engines and
adjacencies, missiles and munitions,
and structural components on the
industry‑leading civil and defence
aviation platforms.
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Our site initiatives
As a manufacturing business, we are
committed to ensuring that all of our
sites operate in full compliance with all
applicable environmental laws and
regulations, and we reinforce this through
our Environmental Policy and Corporate
Responsibility Policy. We also require our
manufacturing sites to maintain an
environmental management system
certified to the ISO 14001 international
standard.
In 2018, our auditing programme
assessed 40% of our sites for compliance
with applicable regulatory requirements,
as well as compliance against industry
best practice. All of our facilities
certified successfully to the ISO 14001
international standard were recertified to
the updated ISO 14001:2015 in late 2017
and throughout 2018. Despite numerous
inspections by environmental authorities
during 2018, our compliance record
indicates no fines for breaches of
environmental regulations.
Water consumption increased slightly
on an absolute basis due primarily to an
increase in cooling water used at our
Rockmart facility; our largest water
consumer. Notwithstanding, our water
consumed normalised to revenue showed
a 5% decrease. Numerous water savings
projects were completed in 2018. To
name one, our North Hollywood site
implemented a system that improved the
efficiency of their cooling towers saving
approximately 1.3 million gallons of
water annually.
In addition to taking steps to achieve
our strategic goals successfully by
consolidating sites and investing in
energy‑efficient technologies, many of
our sites implemented a number of
energy‑saving projects, including
upgrading facilities to energy‑efficient
LED lighting and installing occupancy
and machine sensors and timers.
In particular, our MDS Irvine facility
approved a project to install a battery
bank that will enable it to store electricity
purchased in cheaper, off‑peak
consumption times for use in high‑peak
consumption times. Importantly, this
project will allow for quicker and easier
access to planned future solar projects.
In 2019, we will remain focused on
operating more efficiently by
consolidating our businesses and
investing in modern energy‑efficient
technology. Our sites will also continue to
minimise their environmental footprint.
Our Environmental Performance
In 2018, the Board reviewed and
approved an update to our Environmental
Policy (available on www.meggitt.com),
which helps to reinforce our commitment
as an organisation to protecting the
environment.
We have measured our sites against our
new performance targets.
Performance
Table 1 shows our performance for key
environmental metrics and Table 2 shows
our progress on achieving internally set
targets.
We experienced an absolute increase
in our GHG emissions, however, when
normalised to revenue our performance
improved. We also decreased our
waste generated and water consumed
normalised to revenue as shown in
Table 1 opposite.
We achieved a 6% reduction in GHG
emissions relative to revenue versus a
targeted 2.5% year on year decrease.
This was largely due to footprint
reduction activities occurring in 2017
and 2018. However, these activities were
partly offset by an increase in our
production of NuCarb® which requires
an extra densification step in the carbon
manufacturing process. As such, our
absolute GHG emissions increased year
on year. Notwithstanding, we have
achieved a 14% reduction in GHG
emissions relative to revenue as
compared to our baseline year of 2015.
Site disposals in 2018 resulted in a
decrease in absolute waste generated
as well as waste generated relative to
revenue. Our waste sent to landfill as
a percentage of our overall waste
generated did increase slightly by 1%.
However, there were some examples of
good waste management practice: our
Heatric and North Hollywood locations
purchased reusable water bottles for all
of their employees which resulted in an
approximate 99% reduction in plastic
and Styrofoam cup waste.
All of our manufacturing facilities are
required to have environmental
management systems certified to
ISO 14001 and to develop localised
waste minimisation plans to identify
opportunities for waste reduction as
well as recycling.
Our Portland, Oregon location has been
recognised as a Leader in Sustainability
from their County Sustainability
Department and achieved silver level
certification for reducing consumption
of natural resources, generation of waste
and emissions of harmful substances to
the environment. The location is well on
their way to achieving gold level
certification in 2019.
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Environmental
performance
GHG reduction relative
to revenue1
-6%
GHG reduction from
2015 baseline2
-14%
1 Based on year‑on‑year comparative data
as reported in line with DEFRA guidance.
2 Performance against internal 10‑year
target.
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
2018
Change
2017
206
99
197
94
114,626
54.8
10,780
5.16
721,650
345
201
103
186
95
113,738
58.1
12,056
6.16
710,905
363
-4%
-1%
-6%
-16%
-5%
Internal targets (Table 2)
Ten and five year
performance
periods
(financial years)
Target
improvement
over
performance
period
Baseline
year
GHG Emissions
2015
To 31 December 2025
Water consumption
2016
To 31 December 2021
Waste to landfill
2016
To 31 December 2021
-25%
-10%
-10%
Achieved
as at
31.12.2018
-14%
-3%
+1%
Reportable GHG emissions1 data (Table 3)2
Combustion of fuel and operation of facilities3
Electricity, heat, steam and cooling purchased for own use
Intensity measurement:
Emissions reported above, normalised to tonnes
per £m revenue
2018
Tonnes of
CO2e
36,573
78,053
2017
Tonnes of
CO2e
34,448
79,290
114,626
113,738
54.8
58.1
1 GHG emissions are restated annually to use the most up to date conversion factors. Revenue figures for
2018 reporting use 2017 exchange rates. Emissions from overseas electricity are calculated using
conversion factors published in the IEA Emissions factor 2018.
2 Table 3 shows the GHG emissions data for the Large and Medium‑Sized Companies and Groups
(Accounts and Reports) Regulation 2013 (the Regulations). The sites reporting GHG data are the same as
those consolidated in the Group’s financial statements.
3 Does not include GHG emissions generated from Meggitt‑owned and operated vehicles or refrigerant
gases as these emissions are not material to the Group’s emissions.
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Ethics
Ethics and business conduct
2018 highlights:
Ethics policies
• Ethics and business conduct training provided to
all employees
• Ongoing active management of our
whistleblowing hotline
• Continued commitment to reduce the number of
commercial intermediaries in our supply chain
to mitigate against potential risks of corruption
and bribery
• Ongoing compliance with modern slavery
requirements and supplier payment practices
We recognise that acting with integrity, honesty and respect for others in all
of our business relationships is critical for our success, including those with
customers, suppliers and our employees.
Throughout 2018, we continued to
promote our ethics programme through
training issued to all employees, more
targeted training delivered at specific
sites, and also briefings delivered to our
Ethics Champions. Our training reminds
employees about ethics and business
conduct, and we provide examples of
how to apply the principles laid out in
our policies. Every employee receives
a printed Ethics Guide on joining the
Group, which is also available on our
website.
Our programme is supported by our
Group policies, including our Ethics
and Business Conduct Policy, Code of
Conduct and Anti‑Corruption Policy (the
latter of which the Board reviewed and
updated in 2018).
Each Meggitt business site has a
designated Ethics Champion who is
available to assist employees with
questions or concerns, and we operate an
Ethics Line that enables employees to
raise questions or concerns anonymously
and confidentially, 24 hours a day, 7 days
a week from anywhere in the world.
Employees are entitled to a thorough
investigation of concerns raised and
receive feedback whether the issues
are substantiated or not. Our high
performance culture concepts are
strongly supportive of our ethics
programme with their focus on how we
treat each other (which is the main area
for calls received on our Ethics Line).
We also continued to take steps to
reduce the number of our commercial
intermediaries to mitigate potential risks
of corruption and bribery taking place
within our business. As part of our
commitment to acting as a responsible
supplier, we commit to abstaining from
practices such as slavery, human
trafficking, forced labour and child
labour. We also commit 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. Our statement made in
compliance with the UK Modern
Slavery Act is available on our website.
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Drives programme content
and priorities
Leading to annual all-
employee training
Impacts interaction with
each other, our customers
and suppliers
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Social
Local communities and charitable donations
2018 highlights:
• Appointment of STEM ambassadors in the UK to
encourage initiatives focused on promoting
science, technology, engineering and
mathematics education
• Continued support of the local communities
where our sites are based
Our sites contribute to the communities in which our employees live and work,
to enhance the well being of people living in our communities. We reinforce this
through our Charitable Giving Policy. The policy includes our commitment to
activities and fundraising to benefit the health and welfare of defence personnel
and to support education initiatives, scholarships and competitions in science,
technology, engineering and mathematics (STEM) subjects.
national events such as the Cosford and
Farnborough air shows. These workshops
and events give students the opportunity
to meet inspirational and cutting‑edge
engineers from different backgrounds
and at different stages in their careers.
We are also encouraging engineers who
have left engineering for whatever reason
to resume the career they trained for in
the first place. For example, we have a
ground‑breaking programme showing
career‑break returners that we value
those skills that they have gained whilst
out of the industry. The programme
is open to men and women in
Hertfordshire and Leicestershire, UK and
surrounding areas, who have taken any
length career break, as well as those that
wish to transfer sectors but lack the
relevant work experience.
Each site is ultimately responsible for
agreeing and administering its own
budget for charitable donations and
sponsorships to ensure they have a
positive impact on the local community
or support sectors in which their business
operates. Annual reports reveal the
exceptional generosity of many
employees who give time and money
to a wide range of national and local
initiatives.
STEM forms the basis of everything we
do at Meggitt, from manufacturing our
NuCarb® brakes to analysing the systems
that keep our intranet running. Having an
active STEM programme within Meggitt
is something that we value highly as we
seek to create an innovative, engaging,
inclusive and high‑performing culture.
In 2018, we encouraged UK employees
to become STEM Ambassadors. This
targeted STEM programme is aiming to
increase the diversity of the Meggitt
workforce by engaging with schools and
university communities and encouraging
people from all backgrounds to apply for
roles within Meggitt. Our investment in
STEM outreach in 2018 has seen our
employees support school science clubs
and enrichment activities and attend
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Examples of our ongoing
STEM activities:
• Links with the University of
Sheffield and sponsorship of the
annual prize for the best Science
and Engineering Foundation Year
student in the Automated Controls
and Systems Engineering
department.
• The Arkwright Scholarship, which
supports future engineers by
facilitating work experience,
mentoring and providing technical
guidance on projects and advice
on university selection and
applications.
• Our involvement in encouraging
students to take up engineering as
a career through the Institution of
Engineering and Technology’s
Engineering Horizon Bursaries,
which offers support to students
who have faced obstacles or
challenges and require financial
support as well as work
placements.
• Sponsorship of the Schools
Aerospace Challenge, which offers
shortlisted 16 to 18 year olds the
chance to experience what the
aerospace world has to offer in
a five‑day Summer School at
Cranfield University.
Find out more online at
www.meggitt.com
Strategic report
This 2018 Strategic report on pages
2 to 73 is hereby signed on behalf of
the Board.
Tony Wood
Chief Executive
Meggitt PLC
Annual Report and Accounts 2018
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Chairman’s introduction
The Board is committed to maintaining 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 our activities as a
Board throughout the year have supported our strategy.
Leadership
As part of the planned and continued evolution of the Board,
there have been a number of Board changes in 2018. In
September 2018, we announced that Louisa Burdett would join
the Company as Chief Financial Officer‑designate in late
October, and succeed Doug Webb as Chief Financial Officer
and join the Board as an Executive Director from 1 January
2019. Louisa brings significant relevant financial and commercial
experience to the role. Most recently she was Group Finance
Director of Victrex plc from January 2014 until April 2018. Doug
Webb retired with effect from 31 December 2018 after five
years at Meggitt.
In October 2018 we announced that Paul Heiden will retire from
his position as Non‑Executive Director, Senior Independent
Director and Chairman of the Remuneration Committee on
25 April 2019, immediately prior to the Annual General Meeting
(AGM). Guy Berruyer, who has been a Non‑Executive Director
since 2012, will become Senior Independent Director, and
Alison Goligher, who has been a Non‑Executive Director since
2014, will become Chairman of the Remuneration Committee.
Alison has gained relevant experience of current remuneration
trends and practices as a member of the Remuneration
Committee since 2014.
Guy Hachey was appointed to the Board (and as a member of
the Audit, Remuneration and Nominations Committees) with
effect from 1 January 2019. Guy was President and Chief
Operating Officer of Bombardier Aerospace from April 2008 to
his retirement in 2014. Over a period of six years, Guy led the
transformation of the entire product portfolio of Bombardier,
overseeing product programme investments in excess of $8bn.
He is currently a Non‑Executive Director of Hexcel Corporation,
a global leader in manufacturing advanced composite materials
for the commercial aerospace, space and defence, and
industrial markets. Guy will bring valuable sector experience to
the Board.
We recently announced that Caroline Silver will join the Board
as a Non‑Executive Director on 25 April 2019, immediately prior
to the AGM. Caroline will also join the Audit, Remuneration
and Nominations Committees. Caroline is a Senior Managing
Director at Moelis & Company, a leading global independent
investment bank, where she specialises in financial institutions
and fintech advisory and capital raising. She has previously held
senior investment banking roles at Bank of America Merrill
Lynch and Morgan Stanley. She started her career as a
chartered accountant with PricewaterhouseCoopers. Caroline
is currently Non‑Executive Chairman of FTSE 250 consumer
products group, PZ Cussons plc, and Non‑Executive Director of
BUPA, the global healthcare company, where she serves on the
audit and risk committees. Caroline will bring significant
investment banking experience to the Board.
Sir Nigel Rudd
Chairman of the Board of Directors
2018 Board attendance
Sir Nigel Rudd1
(Chairman)
Mr G S Berruyer
Non‑executive director
Mrs N L Gioia
Non‑executive director
Mr P E Green
Executive Director,
Commercial &
Corporate Affairs
Mr D R Webb
Chief Financial Officer
7/7
7/7
7/7
7/7
7/7
Mr A Wood
Chief Executive
Mr C R Day2
Non‑executive director
Ms A J P Goligher
Non‑executive director
Mr P Heiden
Non‑executive director
7/7
6/7
7/7
7/7
1 Met the independence criteria on appointment as Chairman on
23 April 2015.
2 On personal leave of absence during one of the scheduled Board
meetings.
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Effectiveness
The Board conducted an internal evaluation for 2018. The
positive progress made in Board succession, including
improving the diversity of the Board and increasing domain
knowledge in aerospace and defence was highlighted. Areas for
improvement in 2019 include making sure that the 2019 agenda
planner dedicated sufficient time for presentations during Board
visits, continuing evolution of risk management and increasing
the amount of customer satisfaction data visible to the Board.
The evaluation also highlighted the importance for Board
members to experience high performance culture sessions.
Accountability
In 2018, the Audit Committee discussed the 2017 viability
statement process and confirmed that it was appropriate to
retain the same process for the 2018 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. That report also includes our annual
confirmations on risk management and internal control.
This year we also held detailed briefing sessions on the 2018 UK
Corporate Governance Code (the 2018 Code). A summary of
our approach to implementing the 2018 Code in 2019 is
included in this report and also in the Corporate Responsibility
Report (see page 61).
The Board has confirmed that this Annual Report and Accounts,
taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess
the Group’s performance, business model and strategy. You can
find an explanation of the process we have used to make this
determination on page 118.
Remuneration
During the year, executive management reviewed the structure
of Group wide incentive plans: a number of recommended
changes were proposed as a result, however none of these
impact the executive directors (for a summary of the changes
below executive level see page 103). The Committee also
considered the impact of the 2018 Code and other reporting
regulations and proxy advisor and investor guidance on
remuneration governance. This is described in more detail in
the Directors’ remuneration report (see page 110).
Sir Nigel Rudd
Chairman of the Board of Directors
25 February 2019
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In this section
Board of Directors
This introduces our individual Board
members by providing details of the skills
and experience they bring to the Board and
the Committees on which they serve.
See more on page 76
Corporate governance report
The Corporate governance report analyses the
leadership provided by the Board, the steps
taken to ensure that the Board is an effective
one and the framework by which the Board
manages relationships with shareholders.
See more on page 80
Audit Committee report
Introduced by its Chairman, Colin Day, this
report describes the Audit Committee’s work
during the year by reference to the principal
responsibilities of the Committee for financial
reporting, external audit, the risk management
process, internal controls and internal audit.
See more on page 86
Nominations Committee report
Introduced by its Chairman, Sir Nigel Rudd, this
report outlines the Committee’s philosophy on
appointments and diversity and describes the
activities of the Committee during the year.
See more on page 90
Directors’ remuneration report
The Directors’ remuneration report includes an
introduction from its Chairman, Paul Heiden,
summarising the Committee’s overall approach
to remuneration and the link between our
strategy and remuneration plans. It also includes
the remuneration policy which was approved by
shareholders at the 2017 AGM and describes
how the policy has been applied in 2018.
See more on page 92
Directors’ report
The Directors’ report is prepared in accordance
with section 415 of the Companies Act 2006,
and sets out information that the directors are
required to present in accordance with the Act.
See more on page 115
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Tony Wood
Chief Executive
Appointed as CEO: 2018 | Nationality:
British
Skills and experience
Extensive aerospace industry experience
gained 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.
Tony’s significant operational experience
both in aerospace and defence and other
industrial sectors, extremely strong
customer relationships and strategic
oversight of the Group are critical to the
Board as the business continues to grow.
Tony’s passion for high performance
culture and diversity and inclusion, and
experience of leading cultural change in
previous roles has also brought the
Meggitt culture into focus just as the
expectations of the Board are being
raised in these areas under the UK
Corporate Governance Code.
No current or previous appointments to
disclose.
01
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.
Sir Nigel plays a critical role in managing
the Board and the Nominations
Committee, and brings decades of
executive leadership and chairmanship
experience, across many industrial
companies including aerospace and
defence, and other complex sectors.
His commercial, financial and general
business acumen and shareholder focus
are extremely valuable to the Board.
Current appointments
Non‑Executive Chairman of BBA Aviation
plc and Sappi Limited.
Appointments in unlisted companies
Non‑Executive Chairman of BGF 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, Aquarius Platinum
Limited and Destiny Pharma PLC. Deputy
Chairman of Barclays PLC and Non‑
Executive Director of BAE Systems plc.
Committee membership
Audit
Nominations
Remuneration
Corporate Responsibility
Finance
Disclosure
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Guy Berruyer
Non-Executive Director
Appointed: 2012 | Nationality: French
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Louisa Burdett
Chief Financial Officer
Appointed: 2019 | Nationality: British
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Colin Day
Non-Executive Director
Appointed: 2015 | Nationality: British
Skills and experience
Trained as an electrical engineer at
the École Polytechnique Fédérale
de Lausanne and holds a Harvard
Business School MBA.
Guy brings his experience as a former
Chief Executive of a FTSE 100
multinational enterprise software
company to the Board. He is also due to
become Senior Independent Director in
April 2019.
Appointments in unlisted companies
Chairman of software engineering
company Linaro Limited and Director
of the French software and services
company Berger Levrault. Senior adviser
to the European software team at
Warburg Pincus.
Previous appointments
Group Chief Executive of The Sage
Group plc and Chief Executive of Sage
Group plc’s Europe and Asia division.
Early career spent with software and
hardware vendors in France and other
European management roles.
Skills and experience
Louisa is a chartered accountant.
She has held senior financial positions
in industrial, manufacturing, publishing
and pharmaceutical companies.
Louisa brings solid financial, commercial
and M&A experience across a broad
range of sectors, including aerospace,
to the Board.
Current appointments
Non‑Executive Director and Chair of the
Audit Committee of Electrocomponents
plc, a global distributor of industrial
and electronic products.
Organisations
Member of the Institute of Chartered
Accountants in England and Wales.
Previous appointments
Chief Financial Officer of Victrex plc,
which provides innovative composite
polymer solutions to a variety of end
markets, including aerospace. CFO roles
with Optos plc, the Financial Times
Group, GE Healthcare and Chep Europe.
She also spent time in various roles at
GlaxoSmithKline, including Finance
Integration Director.
Skills and experience
Colin, a chartered certified accountant
makes a significant contribution as
Chairman of the Audit Committee,
responsible for the interface between
the Committee and the auditors and
internal audit. He has more than 25 years
experience in senior roles and non‑
executive positions at blue‑chip
companies across a wide range of
industries, including engineering and
technology, oil and gas and aerospace,
he brings significant commercial and
financial expertise to the Board.
Current appointments
Non‑Executive Director of Euromoney
International Investor PLC and Chair of
their Audit Committee.
Appointments in
unlisted companies
Non‑Executive Director of FM Global. In
March 2018, Colin was named Non‑
Executive Director for the Department for
Environment, Food & Rural Affairs,
chairing their Audit and Risk Assurance
Committee. Chairman of MK:U Limited.
Organisations
Independent member of the Council of
Cranfield University.
Previous appointments
Chief Executive of Essentra PLC, Chief
Financial Officer of Reckitt Benckiser
Group plc, Group Finance Director of
Aegis Group plc, Non‑Executive Director
of WPP plc, Easyjet plc, Imperial Tobacco
Group plc, Cadbury plc and Senior
Independent Director of Amec Foster
Wheeler plc.
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Philip Green
Executive Director, Commercial
& Corporate Affairs
Appointed: 2001 | Nationality: British
Skills and experience
Fellow of the Institute of Chartered
Secretaries and Administrators and the
Institute of Directors. Philip has nearly
40 years experience across aerospace
and defence. During his time at Meggitt,
he has made a significant contribution to
the Group, leading activities relating to
commercial, contracts, legal, trade
compliance, ethics, risk and government
relations.
Organisations
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 Research
and Innovation Advisory Board of
Leeds University Business School.
Previous appointments
Meggitt’s Company Secretary from
1994 to 2006, after 14 years at British
Aerospace in company secretarial roles.
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Non-Executive Director
Appointed: 2017 | Nationality: American
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Alison Goligher OBE
Non-Executive Director
Appointed: 2014 | Nationality: British
Skills and experience
Trained engineer and holds a MEng
Petroleum Engineering from Heriot‑Watt
University.
Alison brings important energy sector
experience with her background in oil
and gas, and she has a strong operations
focus and makes an excellent contribution
to strategic discussions. Alison is
becoming Chairman of the Remuneration
Committee in April 2019.
Current appointments
Non‑Executive Director of United Utilities
Group PLC and United Utilities Water
Limited.
Appointments in
unlisted companies
Executive Chair of Silixa Limited,
a provider of distributed fibre optic
monitoring solutions.
Organisations
Trustee of Edinburgh Business School,
part of Heriot‑Watt University.
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.
Skills and experience
An electrical engineer, Nancy brings
extensive engineering and operational
experience in manufacturing to the
Board. Her role in the fast paced
automotive manufacturing area gives
important perspective in Board
discussions about strategic initiatives,
and she also has a keen interest in cyber
security. Nancy’s prior roles also mean
she understands the value of culture,
diversity and inclusion and the Board
recently appointed her as Chairman of
the Corporate Responsibility Committee
and as Non‑Executive Director
responsible for employee engagement.
Current appointments
Non‑Executive Director of Brady
Corporation and Chair of their
Technology Committee.
Appointments in
unlisted companies
Executive Chairman of Blue Current, a
privately held start‑up company focused
on battery technologies. Principal of
Gioia Consulting Services, LLC.
Organisations
Member of the University of Michigan‑
Dearborn Electrical and Computer
Engineering Advisory Council and
Engineering Dean’s Advisory Board.
Previous appointments
Held several key executive positions at
Ford Motor Company during a 33 year
career. Non‑Executive Director of Exelon
Corporation, Chair of AutomotiveNEXT
and Stanford University Alliance for
Integrated Manufacturing.
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Guy Hachey
Non-Executive Director
Appointed: 2019 | Nationality: Canadian
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Senior Independent Director
Appointed: 2010 | Nationality: British
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Non-Executive Director
Appointed: 2019 | Nationality: British
Skills and experience
Guy was president and Chief Operating
Officer of Bombardier Aerospace from
April 2008 to his retirement in 2014.
Skills and experience
Chartered accountant, with considerable
experience in senior executive and
financial roles in aerospace.
Current appointments
Guy is a Non‑Executive Director of
Hexcel Corporation and operating
partner at Advent International.
Previous appointments
Prior to his retirement from Bombardier,
Guy had significant operational roles at
Delphi Corporation and General Motors
Corporation.
Paul is retiring from the Board in
April 2019.
Current appointments
Paul is Senior Independent Director and
Chairman of the Audit Committee of
London Stock Exchange Group plc.
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 Non‑Executive
Chairman of Talaris Topco Limited,
A‑Gas (Orb) and LB‑shell plc.
Skills and experience
Chartered accountant with significant
global investment banking experience
specialising in financial institutions,
financial technology and market
infrastructure, and capital raising.
Current appointments
Senior Managing Director at Moelis &
Company, a leading global independent
investment bank. Non‑Executive
Chairman of FTSE 250 consumer
products group, PZ Cussons plc.
Non‑Executive Director of BUPA, the
global healthcare company, where she
serves on their Audit, Remuneration and
Risk committees.
Organisations
Reappointed as Trustee of the Victoria
& Albert Museum in July 2018.
Previous appointments
Caroline was Vice Chairman of EMEA
Investment Banking at Bank of America
Merrill Lynch and spent 14 years at
Morgan Stanley where she held a number
of senior positions including Global Vice
Chairman of Investment Banking and
European Head of Financial Institutions.
She started her career as a chartered
accountant with PricewaterhouseCoopers.
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Leadership
Our governance framework*:
Board of directors
Membership: Sir Nigel Rudd
(Chairman), executive and
independent non‑executive
directors
Chairman
Sir Nigel Rudd
• Leads the Board and sets the agenda;
• Ensures the Board is effective;
• Facilitates the contribution of non‑executive
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.
Senior Independent Director
Paul Heiden
• Makes himself available to shareholders if they
Chief Executive
Tony Wood
• Leads executive directors and the senior
have concerns which cannot be resolved
through the normal channels;
directors and oversees the relationship
between them and the executive directors;
and
• Chairman of the Nominations Committee when
it is considering the Chairman of the Board’s
succession;
• Ensures there is an effective system for
• Appraises the Chairman’s performance
communication with shareholders.
annually with the non‑executive directors; and
• Acts, if necessary, as a focal point and
intermediary for the other directors.
Executive Directors
Tony Wood, Louisa Burdett and Philip
Green
• Responsible for successful delivery of the
Group’s objectives and strategy; and
Independent Non-Executive Directors
Guy Berruyer, Colin Day, Nancy Gioia,
Alison Goligher, Guy Hachey and Paul
Heiden
• Constructively challenge management and
• Managing various functions and operations
scrutinise their performance;
across the Group.
• Contribute to the development of the Group’s
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.
strategy;
• Monitor 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.
* Accurate as at the date of signing the accounts.
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.
Employee Engagement
Non-Executive Director
Nancy Gioia
• Engage with employees through a range of
formal and informal channels;
• Acts as the conduit for employees to share
ideas and concerns with senior management
and the Board;
• Ensure that employee policies and practices
are in line with the Group’s purpose and
values and support the desired culture; and
• Regularly review ethics line reports.
Board Committees
Remuneration
The independent non-executive
directors
Determines the reward strategy for
the executive directors and senior
management, to align their interests with
those of the shareholders.
Corporate Responsibility
Two independent non-executive
directors and the executive
directors
Oversight of ethics and business conduct,
environmental, stakeholder engagement
and charity and community activity.
Audit
The independent non-executive
directors
Monitors the integrity of the Group’s
financial statements, the effectiveness of
the external and internal auditors, risk
and internal control processes, tax and
treasury.
Finance
The executive directors
Approves treasury‑related activity,
insurance and other matters delegated
by the Board.
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.
Disclosure
The executive directors, Company
Secretary, and Vice President,
Strategy & Investor Relations
Discusses and approves all matters
related to inside information under the
market abuse regime.
Management Committees
Executive Committee
Chief Executive and his direct reports
The most senior decision‑making and supervisory
group, responsible for overall management of the
Group, driving its vision and strategy and ensuring the
organisational culture leverages diversity, industry
knowledge, global perspective and customer insight
of all colleagues.
Commercial Committee
Executive directors and Group Director,
Engineering & Strategy
Reviews and approves bids and proposals of
Group significance and any other significant
commercial activity.
Technology Advisory Board
Group Director, Engineering & Strategy,
Chief Technology Officer, between two and
four external members with backgrounds in
technology or academia, Meggitt
engineering fellows and other appropriate
employees.
Providing advice on the direction and pace of
technology road maps, increasing awareness of
disruptive technologies, business models or business
trends and providing guidance on new areas and
opportunities.
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2018 Board activities
Strategic priority
Key Board activities in 2018
Approve
• The 2019 budget.
• The 2017 Annual Report and Accounts, 2017 full‑year results and 2018 interim results
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Reviews and updates
Visits and culture
announcement.
• The April and October 2018 trading statements and July 2018 upgrade to revenue
guidance.
• The Group’s new organisation structure announced in July 2018 (effective 1 January 2019).
• Recommendations to shareholders on the final dividend payment for the year ended
31 December 2017 and approval of the interim dividend payment for the year ended
31 December 2018.
• Resolutions to be put to shareholders at the 2018 AGM, including that
PricewaterhouseCoopers LLP be reappointed as auditors of the Group for the 2018
financial year.
• Terms of Reference for the Board Committees updated to reflect the 2018 Code (available
on www.meggitt.com) and Schedule of Matters Reserved for the Board.
• The Group’s risk appetite statement and risk register.
• The conflicts of interest register for the Board and the Modern Slavery Statement.
• The Anti‑Corruption Policy, Financial Crime Policy, Diversity and Inclusion Policy and
Group Environmental Policy.
• The appointment of new directors.
• Since the year end, up to the date of the Annual Report, the Board has approved the 2018
Annual Report and Accounts, the 2018 full‑year results announcement and the proposed
final dividend for the year ended 31 December 2018.
• During the year, no unresolved concerns were recorded in the Board’s minutes.
• Detailed strategy session, including external input on market trends and review of the
Group’s strategic plan.
• Regular reports and a detailed presentation on health and safety and environment.
• Regular reports on ethics and business conduct.
• An update from investor relations and the joint corporate brokers.
• An update from IT, and a focused review of cyber security.
• Update on the Group’s insurance arrangements.
• Regular review of the Group’s financial and non‑financial dashboard.
• Regular updates on the potential impacts of Brexit.
• Divisional updates from Polymers & Composites, Control Systems and Services & Support.
• Update on Group operations and procurement.
• Trade Compliance, environmental and legal updates.
• Engineering and technology updates and key programme status reports.
• Detailed sessions on succession planning process and the output of that process (covered
by Nominations Committee).
• Regular reports from executive management on operations, financial performance, risk,
legal, commercial, ethics and compliance activity.
• Detailed post‑acquisition report for the composites businesses acquired in 2015.
• Regular updates on M&A.
• Product safety and regulatory compliance update.
• Reports on internal control, viability and going concern and reports from its Committees.
• Briefing sessions and planning for the implementation of the 2018 Code.
• Governance updates including Modern Slavery, General Data Protection Regulation,
supplier payment practices, Hampton Alexander‑Review and gender pay.
• In May 2018, the Board visited sites in the US including our engine composites site
in San Diego, flow control site in North Hollywood and fire and safety systems site in
Simi Valley.
• In September 2018, the Board visited our Asian facilities in China and Vietnam.
• During all of these visits, the Board received presentations about the sites and met a range
of employees. The Board also received a detailed presentation on our China strategy and
opened the new expanded facility in Vietnam.
• A number of our Board members also visited our Services & Support facility in Singapore,
our Fribourg facility in Switzerland and our Meggitt Avionics site in Fareham, UK.
• High performance culture, diversity and employee engagement reviews.
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AGM 2018 – Sir Nigel Rudd, significant vote against
At our AGM in 2018, 32% of shareholders voted against the
re‑election of Sir Nigel Rudd, our Chairman (with 68% voting
for). Immediately prior to the AGM, a voting recommendation
against the Chairman was issued by ISS proxy advisors, on the
basis that he was also a Chairman of three other listed
companies: BBA Aviation, Destiny Pharma and Sappi. The
company engaged with a number of leading shareholders to
discuss overboarding concerns. We also contacted shareholders
in May 2018 to offer meetings with the Chairman and again in
early 2019 to discuss this topic.
Subsequently, the Senior Independent Director has reviewed
the position on behalf of the Board. This review has concluded
that Sir Nigel has an excellent track record as the Chairman of
Meggitt, reflecting his extensive experience chairing significant
and complex global companies. The Board of Directors is
completely satisfied that Sir Nigel has sufficient capacity to
dedicate the appropriate amount of time to Meggitt as
required. This was evident to the Board during the seamless
transition of Chief Executive in 2018, in which Sir Nigel played
a critical role. Sir Nigel continues to provide excellent leadership
of the Board and his skill set, experience and knowledge remain
of significant value to the Board.
Sir Nigel also reviewed his own portfolio of appointments
during the year, and subsequently retired from the Board of
Destiny Pharma, as announced in September 2018.
Chief Financial Officer
Induction Process
Key induction events
• Comprehensive two month handover with the outgoing
CFO;
• Tours of sites in Europe and the US including the new
•
•
site at Ansty Park;
Individual meetings with the Chairman and other
directors;
Individual meetings with members of the Executive
Committee and other senior executives;
The Board is on this basis recommending to shareholders that
they vote for the re‑election of Sir Nigel Rudd at the 2019 AGM.
• Meetings with brokers and other advisers; and
• High performance culture unfreezing briefing.
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 2016 UK Corporate Governance Code (the 2016 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 chairs and members are
entitled to attend the meetings, although others can be
invited.
• The Audit, Remuneration and Nominations Committees’
written terms of reference were reviewed and updated in
2018 by the Board and are available on the investor section of
our website.
• All Committee chairs report verbally on the proceedings of
their Committee at the next meeting of the Board when
members of the Board are present who were not in
attendance at the Committee meetings. Where appropriate,
the Committee chairs 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 page 90. The
appointment and removal of the Company Secretary is
a matter for the Board.
Louisa was provided with access to our electronic Board
paper system and the Group intranet which provided easy
and immediate access to the following key documents:
• The Group’s risk register;
• Our 2018 budget;
• Strategic priorities including the ten year plan;
• Recent broker reports and feedback from shareholder
engagement; and
• Recent reports from the external auditor, PwC.
Find out more online at
www.meggitt.com
• The letters of appointment for the Chairman and
non‑executive directors set out the time they are expected
to commit to Meggitt.
• The Chairman and non‑executive directors undertake
appointments in other listed and non‑listed companies, which
are declared on pages 76 to 79. The other external
commitments of the Board members do not impact the time
they can spend on Meggitt, and in fact the experience gained
on other company boards is considered of benefit to Board
discussions in many areas.
• Additional appointments by the Chairman require the
approval of the Board. Appointments of non‑executive
directors require the approval of the Chairman.
• The Board has reviewed over‑boarding guidance in the 2018
Code and in guidelines set out by institutional shareholder
advisory organisations, and considers these when discussing
new appointments.
• During 2018, the Chairman and non‑executive directors
attended all scheduled Board meetings except for Colin Day
who missed a scheduled meeting held in December 2018
owing to a personal leave of absence. The Board also visited
Meggitt sites in China and Vietnam and in the USA in San
Diego, North Hollywood and Simi Valley.
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• The Chairman independently visited our Fribourg site in
Switzerland. The Chairman had regular meetings with the
Chief Executive and attended shareholder meetings about
governance and represented Meggitt and our interests at
other events.
• The Chairman and Senior Independent Director have
reviewed the time commitment of the Chairman and
non‑executive directors in 2018 and consider they have
devoted an appropriate amount of time to Meggitt 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.
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.
All directors have had access to the advice and services of the
Company Secretary who is responsible to the Board for advising
on all governance matters.
The Board allows all directors to take external independent
professional advice at the Group’s expense.
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Board evaluation
In order to evaluate its own effectiveness, the Board
undertakes annual effectiveness reviews using a
combination of independent externally facilitated and
internally run evaluations over a three‑year cycle.
November 2018
Internal Board evaluation planning by the Chairman and
Company Secretary.
The questionnaires were reviewed to take account of the
2018 Code.
December 2018/January 2019
Questionnaires issued to the Board, Committees and
other regular attendees.
The Board effectiveness questionnaire posed questions in
the following areas ranked on a scale of 1 to 3 (with space
for comments):
• How well the strategy process works and the Board’s
understanding of the core business and markets.
• To what extent Board meetings are engaging with
high quality discussion and open debate and whether
all Board members contribute to discussions and
work together well.
• Whether the skills and experience on the Board are
appropriate.
• How the Board responds to challenges.
• Whether the Chairman’s leadership style and tone is
effective and how he works with the Chief Executive.
• Whether the Company Secretary is performing
effectively.
• Whether the Board schedule and papers are
•
appropriate.
If the recruitment and induction processes are
working well.
• Whether risk management is undertaken appropriately.
•
If succession planning is working well.
February 2019
A detailed discussion is held by the Board on their
responses to the questionnaire and resulting actions
are agreed.
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 where the performance of executive management
was discussed.
Find out more online at
www.meggitt.com
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Investor relations activity,
2018 highlights
February 2018
The preliminary results presentation took place on 27 February and
included an overview of the 2017 full year financial performance of
the business. This was presented by Tony Wood and Doug Webb.
August 2018
The interim results presentation took place on 7 August and
included an overview of the first six months financial
performance of the business in 2018. This was presented
by Tony Wood and Doug Webb.
At this presentation, we provided guidance on the outlook for the
business in 2018 and covered progress made against strategy
in 2017 and the medium‑term goals for the Group. Investor
roadshows took place in the UK (London) and US (East and West
Coast) immediately following the preliminary results presentation.
Following this, investor roadshows took place in the UK (London
and Edinburgh), Europe (Frankfurt) and the US (East and
West Coast).
April 2018
We engaged with our top 20 shareholders and proxy advisors,
ISS (Institutional Shareholder Services), IVIS (Institutional Voting
Information Service) of the Investment Association and Glass
Lewis, before and after the AGM. In particular we discussed
overboarding concerns around the Chairman. See page 82 for
commentary about the 2018 AGM vote result on the re‑election
of the Chairman.
Following this, investor roadshows took place in Geneva
and Zurich.
October 2018
On 16 October, we further increased our expectation for full
year revenue growth and reconfirmed guidance for underlying
operating margin. This followed stronger than anticipated
growth across the civil aftermarket and defence end markets.
July 2018
On 2 July, we updated the market on our expectation for full
year revenue following stronger than anticipated growth across
the civil aftermarket, defence and energy end markets.
On the same day, it was announced that the current structure
of the business would be replaced by four customer‑aligned
divisions effective from 1 January 2019.
At the Farnborough International Airshow, a number of investors
met with management at the Meggitt chalet, showcasing our
market‑leading technology and discussing the upgrade to
revenue guidance and the newly announced organisational
structure.
November 2018
In November, we hosted a visit to our site in Fribourg,
Switzerland to give a deeper understanding around
our energy business, and experience what the High
Performance Culture programme has enabled the site
to achieve.
December 2018
On 10 December, we hosted an audio webcast teach‑in session
for the sell‑side community to learn more about the new
organisational structure announced in July.
Following this, we held investor meetings in Paris.
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Board evaluation in 2018
In 2018, the Board evaluated its own effectiveness, together
with the effectiveness of the Chairman, individual directors, its
Committees, auditors and remuneration advisers. The process is
described on page 83. The evaluation was carried out by way of
questionnaire with open and closed questions, with follow up
questions asked for clarity if needed.
Overall, the evaluation was positive, with progress noted in
Board succession, including improving the gender diversity of the
Board with the appointment of Louisa Burdett as Chief Financial
Officer and Caroline Silver as a Non‑Executive Director. Another
highlight was the selection of Guy Hachey as Non‑Executive
Director, increasing the Board’s domain knowledge in aerospace
and defence. Areas for improvement in 2019 included making
sure that the 2019 agenda planner dedicated sufficient time for
presentations during Board visits, continuing evolution of the risk
management process and increasing the amount of customer
satisfaction data visible to the Board. The evaluation also
highlighted the importance for Board members to experience
high performance culture sessions to add to their existing
knowledge of the Meggitt culture gained from site visits.
Relations with shareholders
The Board communicates with private investors via direct
communication with the Company Secretary and the Vice
President, Strategy & Investor Relations and content distributed
or made available on the investor relations section of our website
and at the AGM (see below).
Effective communication with fund managers, institutional
investors and analysts about the Group’s strategy, performance
and policies is promoted by meetings involving, principally, the
Chief Executive and Chief Financial Officer. The Board receives
and discusses reports from the Chief Executive and Chief
Financial Officer, the Vice President, Strategy & Investor
Relations and the Group’s brokers on the views of shareholders.
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 during the year.
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 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.
Annual General Meeting
At the AGM to be held on 25 April 2019, in addition to the routine
business, shareholder consent will be sought for resolutions which
give the Company 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.
• to dis‑apply pre‑emption rights for up to 10% of issued share
capital in accordance with the latest guidance from the UK
Pre‑Emption Group. The first resolution will seek authorisation for
5% of the issued share capital to be issued without application of
pre‑emption rights. 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 of a kind
contemplated by the Statement of Principles most recently
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published by the UK Pre‑Emption Group. The Board have
considered shareholder feedback on this topic but continue to
believe that, in order for the Board to have full strategic flexibility
where acquisitions and capital investments are concerned,
it continues to be appropriate to request this authority from
shareholders. 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.
• to adopt revised articles in order to update Meggitt’s current
articles. Full details of the proposed amendments can be found
in the Notice of AGM which, along with a copy of the proposed
revised articles, are available at the Company’s registered office
prior to the AGM and on the Company’s website at
www.meggitt.com.
All directors are subject to election by shareholders at the first AGM
after their appointment. After that, all directors are subject to
re‑election annually to comply with the 2016 Code. All directors in
office at the date of the AGM will be subject to re‑election.
2018 Code
The Board received detailed briefing sessions on the 2018 Code
and has discussed how the 2018 Code will be implemented in
2019, the most significant action point being the appointment
of Nancy Gioia as Non‑Executive Director responsible for
employee engagement (for details of 2019 activities see
page 62) and ensuring continued focus on stakeholder duties
already contained in the Companies Act 2006.
Statement of compliance
Throughout the financial year ended 31 December 2018 and to
the date of this Annual Report, we have complied with the
provisions set out in the 2016 Code published by the Financial
Reporting Council. The Group has applied all the main and
supporting principles set out in the 2016 Code and explanations
are included in this report and in the Audit Committee,
Nominations Committee and the Directors’ remuneration
reports. The information required under Rule 7.2.6 of the
Disclosure Guidance and Transparency Rules is located in the
Directors’ report.
By order of the Board
M L Thomas
Company Secretary
25 February 2019
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Audit Committee report
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Chairman’s introduction
I am pleased to present the report of the Audit Committee
for 2018.
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 2018 were Guy Berruyer,
Nancy Gioia, Alison Goligher and Paul Heiden. Guy Hachey was
appointed in January 2019.
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, Chief Executive, Executive Director, Commercial
& Corporate Affairs and Chief Financial Officer‑designate also
attended meetings by invitation.
Responsibilities
The 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 report includes a description of the work of the Committee
in 2018. It included advising the Board on whether these
accounts are fair, balanced and understandable, reviewing the
work carried out by executive management on the viability
statement and oversight of the risk management process.
Effectiveness
The Committee reviewed its own effectiveness and was satisfied
with the outcome. There were no significant actions to take as a
result of this review.
Colin Day
Chairman of the Audit Committee
Committee membership and attendance in 2018*
Mr C R Day
(Committee Chairman)
Mr G S Berruyer
Mrs N L Gioia
3/3
3/3
3/3
Ms A J P Goligher
Mr P Heiden
3/3
2/3
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Committee activities
Approved
• The 2018 external audit fees.
• The internal audit plan for 2019.
Reviewed
• The financial information contained in the 2017 Annual Report and Accounts, 2017 full year and 2018 interim results announcements
and recommended them to the Board for approval.
• Significant estimates and judgements in respect of the Group’s financial statements.
• The independence and effectiveness of the external auditors, and agreed their terms of engagement.
• 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.
• The effectiveness of the Committee and external audit using the process described on page 89. There were no specific actions to
take and the Committee confirmed it was satisfied with the outcome of the evaluation.
• The outcome of the externally facilitated internal audit review (see page 89).
• The external auditor’s strategy memorandum and interim audit clearance report for 2018.
• A revised Group Treasury Policy which was recommended to the Board for approval.
• Terms of Reference for the Committee, which were recommended to the Board for approval.
Since the year end, the Committee has discussed the external auditor’s final audit clearance report for 2018, reviewed the financial
information contained in the 2018 Annual Report and Accounts and full year results announcement and recommended them to the
Board for approval. The Committee also provided advice to the Board that the 2018 Annual Report and Accounts, taken as a whole,
are fair, balanced and understandable. The Committee provided this advice having reviewed management’s 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 and going concern statements.
Updates and reports
• Received reports at every meeting from the Head of Internal Audit on progress with the internal audit plan and internal controls
across the Group.
• Received an update on the results of the viability statement stress testing.
• Received updates on the risk management process.
• Received an update from the Head of Treasury & Tax.
• Received technical accounting and governance updates provided by the Group Financial Controller, Company Secretary and the
external auditors, including the Criminal Finances Act 2017 and financial fraud.
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FRC thematic review
The Committee received feedback from the Financial Reporting Council (FRC) following the inclusion of Meggitt in its thematic
“Review of Interim Disclosures in the First Year of Adoption” relating to IFRS 15 “Revenue from Contracts with Customers”. The FRC
included areas of the Group’s disclosures as examples of best practice within its final November 2018 report.
Significant estimates and judgements relating to the financial statements
The table below summarises the significant estimates and judgements reviewed by the Committee in respect of the Group’s
financial statements.
Area
Goodwill
Dassault 5X development
costs
Development costs
Provision for
environmental matters
relating to historic sites
and related
insurance receivables
Retirement benefit
obligations
Income taxes
Action
The principal judgement is management’s determination of the level at which impairment testing
should be performed. The Committee discussed and agreed with management’s judgement that the
EDAC/Advanced Composites business should be tested separately. Critical accounting estimates arise
in determining the value in use for the goodwill balances tested, which require assessments of the
achievability of business plans (and therefore future cash flows), growth rates beyond the period
covered by the five‑year business plans and appropriateness of the discount rates applied to future
cash flows. The Committee discussed a report from management setting out the basis for the
assumptions and confirmation that the cash flows used were derived from the 2019 budget and
strategic plan (which in their role as members of the Board, Committee members had previously
reviewed). Given the limited headroom when EDAC/Advanced Composites goodwill was tested for
impairment, additional sensitivities were provided by management and discussed by the Committee.
The Committee agreed with management that no impairment was required but that additional
sensitivity disclosures should be provided.
Following the Group’s selection to provide the wheel and braking system for the Dassault Falcon 6X
programme, a successor to the previously cancelled Falcon 5X aircraft, the Committee considered
whether any element of the impairment recorded in 2017 against previously capitalised Falcon 5X
development costs should be reversed. The Committee discussed a report from management setting
out the Falcon 6X contractual position (which does not include any recovery of previously incurred 5X
costs); the level of redesign and estimated development costs required to meet the 6X specifications,
noting that a complete redesign of the braking system was required; and the cost recording system
use to record the 5X development activities. The Committee concluded that no impairment reversal
should be recognised.
The Committee discussed a report from management covering exposure to different aircraft platforms
and manufacturers, including a sensitivity analysis on specific programmes. The Committee focused in
particular on the Airbus A220 (formerly the Bombardier CSeries), Embraer 450/500, Bombardier Global
7500/8000, Irkut MC‑21 and Gulfstream G500/G600 in light of the material values capitalised on these
platforms. The Committee concluded assumptions made by management were reasonable and the
carrying values and estimated useful lives of the assets were appropriate.
The Committee discussed a report from management setting out the basis for the estimates made and
the extent to which these were supported by third party specialist advice. The Committee focused on
the sensitivity of amounts recorded to increases in cost estimates, including those arising from
extended periods of operations and maintenance activities. The sensitivities included the impact on
insurance policy limits and insurance policy periods of cover. The Committee agreed with the
estimates made by management.
The Committee considered a report from management setting out the basis on which assumptions on
mortality, inflation and the rates at which scheme liabilities are discounted had been determined, how the
Group’s assumptions used in its 2017 financial statements benchmarked against those disclosed by other
large corporate entities in the UK and US and the sensitivity of amounts recorded in the balance sheet to
changes in assumptions. The Committee also discussed the provisional results from the 2018 triennial
valuation of its UK plan and the extent to which, where appropriate, these were reflected in the 2018
assumptions. The Committee concluded that the assumptions used, which were supported by third party
actuarial advice, were appropriate.
Estimates 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 received a presentation on the Group’s
tax position from the Head of Treasury & Tax and 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 amounts included within exceptional
operating 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
disclosed appropriately.
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Key areas of oversight
External audit
The external auditors are PwC who were first appointed for the
financial year commencing 1 January 2003 after a competitive
tender. The Committee undertook a further competitive tender in
2017 (described in our 2017 Audit Committee report) as a result of
which it was agreed that PwC should be reappointed. There are no
contractual obligations restricting the Committee’s choice of
external auditors.
The lead audit partner is Mr J Ellis whose appointment in this
role commenced with the audit for the financial year ended
31 December 2018. Mr Ellis has had no previous involvement
with the Group in any capacity. The mandatory rotation of
auditor under EU rules will take place in 2023.
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 discussion
of the responses. The Committee was satisfied with PwC’s
performance and that PwC had employed an appropriate level
of professional challenge in fulfilling their role and there
were no significant findings from the process. The Committee
determined, on the basis of the satisfactory outcome of the
evaluation, to recommend that the Board submit the
reappointment of PwC to shareholders for approval at the
AGM in 2019 for the 2019 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 2018 were less than £0.1 million (4% of the total audit
fee) and average fees paid for non‑audit services for the last
three years to 2018 were less than £0.1 million (3% of the total
audit fee over that period). Fees paid for non‑audit services
related to services allowed to be provided by PwC under the
Group’s policy on non‑audit services.
The Group’s policy on non‑audit services covers services that
can be provided and those 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 to the PwC office
conducting the audit, or PwC as a whole, and therefore the
objectivity and independence of the external auditors was not
compromised.
Internal audit
The Audit Committee agrees the annual internal audit plan which
is developed according to a risk assessment process and ensures
adequate resources are available to execute the plan. The risk
assessment process initially divides our business units into three
tiers determined by financial measures. Tier 1 businesses are
visited annually, with Tier 2 businesses visited every other year
and Tier 3 businesses every third year. This is then subject to a
further discretionary risk based adjustment if there are
circumstances which suggest a business unit should have an
audit accelerated. Reasons for this can include adverse prior
audit findings, a change in IT system, site location moves, senior
leadership changes or operational performance issues.
In 2018, internal audits were carried out for 32 Group locations
as part of the rotational audit cycle. The business unit audit
programme’s scope includes finance, programme management,
HR/payroll, sales agents/distributors 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 Audit
Committee is to monitor the level of internal audit resource
to ensure it remains appropriate as both the Group and
function evolve.
In addition to the site‑based business unit reviews, internal audit
has a co‑source arrangement with Grant Thornton UK LLP to assist
with resourcing specialist audits, such as IT, treasury and complex
legislation such as DFARS and GDPR. The Audit Committee
remains cognisant of increasing cyber complexity and associated
risks. The approach for 2018 continued to be delivering these
reviews using Grant Thornton’s subject matter experts.
The results of the audits are regularly discussed with the Group
Head of Internal 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 business of any
recommendations made.
The Audit 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 Audit Committee considered the effectiveness of internal
audit in 2018 and confirmed that they continue to be satisfied.
This was supplemented by an independent external effectiveness
review that was commissioned by the Audit Committee and
supported by Group management. The external review considered
that internal audit was effective in its current remit but supported
management’s efforts to continue to broaden its scope.
Whistleblowing
The Corporate Responsibility Committee is responsible for
oversight and review of the process for handling allegations
from whistleblowers. Whistleblowing is included in our Ethics
and Business Conduct Policy and Code of Conduct, which is
available on our website. The Group sponsors an independently
operated and monitored Ethics Line, enabling employees to
report concerns about possible misconduct, with proportionate
and independent investigation and appropriate follow‑up
action.
Compliance with Audit Services Order
We comply with the Competition and Market Authority Order
2014 relating to 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
25 February 2019
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Nominations Committee report
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Chairman’s introduction
The Nominations Committee plays a leading role in assessing
the balance of skills and experience on the Board and
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.
The Committee is comprised of the Non‑Executive Chairman
and the non‑executive directors. During the year, the
Committee had a detailed session on succession planning for
executive management and reviewed and discussed the Board
skills matrix.
All Board level appointment decisions were made following
search processes using executive search firms The Zygos
Partnership and Lygon Group. Both of these firms assist with
other senior executive searches below Board level, but have no
other connection with the Group.
Responsibilities
The Committee reviews the structure, size and composition
(including the skills, knowledge, experience and diversity)
of the Board and, in consultation with the directors, makes
recommendations to the Board on any proposed changes.
Decisions on Board changes are taken by the Board as a whole.
In performing its duties, the Committee has access to the
services of the Group HR Director and the Company Secretary
and may seek external professional advice at the Group’s
expense.
2018 Board changes
The Committee has run detailed recruitment processes for two
non‑executive directors and the Chief Financial Officer in 2018,
with support from our external executive search firms The Zygos
Partnership and Lygon Group and the Group HR Director.
For the role of Chief Financial Officer, the Committee reviewed
and agreed a detailed role brief, and a long list and short list of
diverse candidates were considered and then interviewed,
before selecting the final recommended candidate. Effective
succession planning meant that there was a three month
handover period between Louisa Burdett and Doug Webb.
For the non‑executive roles, the Committee took into account
the structure, size and composition (including the skills,
knowledge, experience and diversity) of the Board. As a result,
the Committee focused on bringing more aerospace and
defence and investment banking expertise to the Board.
Effectiveness
The Committee reviewed its own effectiveness and was satisfied
with the outcome. The only action related to the continued
need to improve succession planning discussions for senior
executives.
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 December 2018, the Board reviewed detailed
executive succession plans for each division and function
with the Group HR Director, including plans for the executive
directors and each member of the Executive Committee
and other high potential individuals around the Group. Each
individual on the succession plan has regular performance
reviews and individual development plans.
Sir Nigel Rudd
Chairman, Nominations Committee
Committee membership and attendance in 2018
Sir Nigel Rudd
(Committee Chairman)
Mr G S Berruyer
Mr C R Day1
5/5
5/5
4/5
Mrs N L Gioia
Ms A J P Goligher
Mr P Heiden
5/5
4/5
5/5
1 On personal leave of absence during one of the scheduled
Committee meetings.
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Board diversity
By age (average)
By gender (ratio)*
61yrs
7:2
Male | Female
By nationality (ratio)
By tenure (average)
7:2
British | Other
* Board diversity at 25 April 2019 – 6:4.
5.4yrs
Diversity and inclusion
2018 Board focus
May 2018: The Board received a detailed update from Group HR on
diversity and inclusion strategy and actions.
August 2018: The Board approved a Diversity and Inclusion Policy.
December 2018: The Board and Nominations Committee reviewed
succession planning from a diverse pipeline perspective.
December 2018: A separate meeting was held between Nancy
Gioia, Alison Goligher and Group HR to help guide and direct
diversity and inclusion activities.
Find out more online at
www.meggitt.com
Board composition and succession for the Chairman and
non‑executive directors is regularly discussed by the
Committee, and succession planning for Paul Heiden as
Senior Independent Director and Chairman of the Remuneration
Committee has been well planned, with Guy Berruyer and
Alison Goligher due to assume those roles in April 2019 after
a lengthy handover period.
UK Corporate Governance Code
At our December Committee meeting, we reviewed the
changes introduced by the 2018 Code. The new UK Code
emphasises the need to refresh boards and undertake
succession planning. The new nine year independence rule will
also be factored in to the Chairman’s succession planning.
The 2018 Code also stated that the Committee should focus
on succession for senior management positions and the
development of a diverse pipeline. To fulfil this, the Committee
will work closely with the Board and HR and take an active role
in setting and meeting diversity objectives and strategies
for the Group as a whole, and in monitoring the impact of
diversity initiatives.
Diversity and Inclusion Policy
The Board, our executive leadership team, and management
at all levels recognise that a diverse and inclusive workforce is
critical to running a sustainable and successful business. In
2018, the Board approved a Diversity and Inclusion Policy
(available on www.meggitt.com). The purpose of our Diversity
and Inclusion Policy is to increase and leverage diversity in all
respects, to help build a sustainable business by employing a
diverse workforce that reflects the diverse communities within
which we operate, and fostering an inclusive culture where
people are valued, respected and supported. The Policy covers
diversity and inclusion at all levels of the Group, from the Board
to the shopfloor.
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. From April 2019, there will be four female directors on
the Board. The Board remains committed to ensuring that the
directors bring a diverse range of skills, knowledge, experience,
backgrounds and perspectives. See pages 76 to 79 for more
details of Board skills and experience.
There are currently no specific targets for the number of diverse
candidates on our Executive Committee, but we do have a
detailed strategy to improve diversity at all levels of the Group
which is disclosed in the Corporate responsibility report. In
terms of policy outcomes, the Corporate responsibility report
also provides details of our 2018 gender diversity metrics.
Sir Nigel Rudd
Chairman of the Nominations Committee
25 February 2019
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Underlying EPS increased from 32.0p to 34.2p. The STIP and
LTIP vesting for 2018 and 2016 awards reflects this strong Group
performance (see pages 104 – 107).
2018 reviews
During the year, the Committee reviewed its own effectiveness
and the effectiveness of Mercer and confirmed it was satisfied
with both. A tender for our remuneration advisory services will
be undertaken later in 2019 (after work is completed on
reviewing our Remuneration Policy in advance of the 2020
AGM). We also reviewed the changes under the 2018 Corporate
Governance Code, updated proxy advisor recommendations on
remuneration and the Companies (Miscellaneous Reporting)
Regulations 2018. Our Terms of Reference were revised to
reflect the 2018 Code. The Committee also received reports
from executive management on their review of Group incentive
schemes (see page 103).
Executive directors
On 1 January 2019, Louisa Burdett was appointed as Chief
Financial Officer. Her remuneration package was set in line with
policy, except her pensions allowance which was set at 20%
(instead of the existing policy level of 25%) to reflect levels other
senior executives in the Company receive. Doug Webb retired
on 31 December 2018, at which point all of his salary and
benefits ceased to accrue. His outstanding incentive awards will
be treated in line with the default ‘good leaver’ treatment set
out in our Policy.
The Committee believes that our remuneration policy and
approach to implementation remain aligned with our strategy
and prevailing market practice. On behalf of the Board, I would
like to thank shareholders for their continued support.
In 2019, the Committee, which will be led by our new chairman
Alison Goligher from April 2019, will review our Remuneration
Policy in advance of the 2020 AGM binding vote.
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 2016 (the 2016 Code), are applied in practice.
There is also commentary on our work to meet the new
compliance obligations in the UK Corporate Governance Code
2018 (the 2018 Code) and the Companies (Miscellaneous
Reporting) Regulations 2018.
Paul Heiden
Chairman of the Remuneration Committee
Paul Heiden
Chairman of the Remuneration Committee
Chairman’s introduction
and annual statement
It is my pleasure to present the Directors’ remuneration report
for the year ended 31 December 2018.
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.
Packages align with our strategy, are clear and transparent, and
incentive plans aim 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.
Performance in 2018
Revenue increased by 4%, despite adverse currency movements
and the impact of M&A. Organic revenue growth of 9%
included 7% growth in civil aerospace, 10% in defence and 19%
in energy. Underlying operating profit increased organically by
4%, with benefits from strategic initiatives including supply
chain rationalisation, the Meggitt Production System and
increased pricing leverage. This was partly offset by headwinds
from mix, depreciation and amortisation, an increase in
expensed free‑of‑charge parts and continued product
introduction costs at Meggitt Polymers & Composites.
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2018 activity
Approved
• The 2017 STIP vesting and deferred bonus awards to executive directors and other Executive Committee members.
• The 2015 LTIP vesting.
• The 2018 STIP and LTIP performance targets.
• 2018 LTIP awards to executive directors and other Executive Committee members together with the application of
a holding period to the 2018 LTIP awards to executive directors.
• Salaries for executive directors and other Executive Committee members, remuneration package for Louisa Burdett,
retirement arrangements for Doug Webb and the Chairman’s fee.
• The 2017 Directors’ Remuneration Report, for submission to shareholders for approval at the 2018 AGM.
• The Meggitt 2018 Sharesave Plan, for submission to shareholders for approval at the 2018 AGM.
• Revised Terms of Reference to reflect the 2018 Code.
• Adjusting 2016 LTIP outcomes for recent M&A, a summary of which is provided on page 106.
• Since the year end, we have approved performance targets for the 2019 STIP and LTIP awards, agreed the
salaries for the executive directors, and confirmed the vesting outcome of the 2018 STIP and 2016 LTIP awards.
In determining the outcome of the 2018 STIP award, the Committee considered the impact of two items:
(1) The Committee reviewed the work completed by the Audit Committee on the Dassault 5x/6x programmes and
agreed no adjustments were necessary to the 2018 STIP (see the Audit Committee Report on page 88 and note 4 to
the Group’s consolidated financial statements on page 143). (2) The Committee also considered the treatment of an
accelerated payment of £30m which the Group made into two of its US pension schemes during 2018. This payment
has been included in the actual 2018 free cash flow performance, but had not been foreseen in the original 2018
free cash flow target. In determining that the original target should be adjusted to reflect the accelerated payment,
the Committee considered the following: Committee members were made aware of the opportunity to make the
accelerated payment, as members of the Board, prior to it being made; the payment has reduced administrative
charges for the schemes; and the payment is deductible against 2017 profits at US tax rates applicable before
the introduction of the Tax Cuts and Jobs Act.
Linking our remuneration to our strategy
Portfolio
Enhance our product and business portfolio
Develop differentiated technology
LTIP: Innovation targets are measures in the LTIP. ROCE
replaced ROTA for awards to executive directors in 2018
to better reflect the value of corporate acquisitions.
STIP: Personal objectives for the executive directors
include portfolio related activity.
Customers
Improve customer service
Mature CSS
LTIP: Quality and delivery targets.
STIP: Personal objectives for the executive directors include
implementing customer aligned organisation and
accelerating customer performance.
Growth
& ROCE
Competitiveness
Deliver through MPS
Invest in infrastructure and increase productivity
Reduce inventory, footprint & purchased costs
LTIP: MPS as measured by quality and delivery targets,
programme management, ROCE and inventory
improvement targets are measures in the LTIP.
STIP: Personal objectives for the executive directors include
operational performance, footprint consolidation and net
purchasing costs.
Culture
Build an inclusive and engaged Meggitt
Live high performance culture
STIP: Personal objectives for the executive directors
include measures to improve employee engagement
and to embed high performance culture.
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Remuneration at a glance
How we performed in 2018
Organic revenue grew by
9%
Underlying operating profit
rose by
4%
Underlying EPS up to
34.2p
ROCE
9.9%
Free cash flow
£167m
Short Term Incentive Plan (STIP)
Long Term Incentive Plan (LTIP)
Underlying
operating
profit
Free cash flow
33.3%
33.3%
Strategic personal
objectives
Total STIP
33.3%
100.0%
Total Shareholder Return
Underlying EPS
33.3%
ROCE
Strategic measures
MPS / Inventory /
Programmes
33.3%
33.3%
Total LTIP
100.0%
£
450
400
350
300
250
200
150
100
50
0
8
0
0
2
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1
3
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1
£
f
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a
V
l
31/12/2008
31/12/2009
31/12/2010
31/12/2011
31/12/2012
31/12/2013
31/12/2014
31/12/2015
31/12/2016
31/12/2017
31/12/2018
Meggitt
FTSE 100
CEO and CFO: single figure in 2018 (£’000)
Executive
Tony Wood – CEO (2017 Stephen Young)
Doug Webb – CFO
2018 Single
figure
2017 Single
figure
£2,200
£1,861
£2,073
£1,281
Employee engagement up
CEO and CFO share ownership in 2018
4%
Name
Mr A Wood
Mr D R Webb
Shareholding
guideline
(% 2018
salary)
Shares owned
outright
Current
shareholding
(% 2018
salary)
Guideline
met?
300%
200%
11,308
145,228
8%
Building
144%
Building
CEO and CFO Pay for performance scenarios 2019
Mr A Wood (£’000)
100%
Mrs L Burdett (£’000)
100%
Minimum
£843
Minimum
£518
43%
34%
23%
43%
35%
22%
On-target
£1,943
On-target
£1,215
26%
30%
44%
25%
30%
45%
Maximum
£3,296
Maximum
£2,072
Salary and benefits
Pension
STIP
LTIP
Components of executive directors’ remuneration
Base salary
Pension
Benefits
Annual bonus (STIP)
LTIP
Sharesave Scheme and
Share Incentive Plan (SIP)
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Set at a competitive level to attract and retain high calibre directors in the relevant talent market.
To provide post‑retirement benefits for executive directors in a cost‑efficient manner. New directors
are eligible for a pension allowance of up to 25% of salary.
Provides non‑cash benefits which are competitive in the market where the director is employed.
Incentivises executive directors on delivering annual financial and personal targets set at the start of
each year. There is a maximum award opportunity of up to 150% of salary.
Aligns the interests of executive directors with shareholders in growing the value of the Group over
the long term. Awards vest after three years and are subject to a two year holding period; directors
are eligible for annual awards up to 220% of salary.
To align the interests of UK employees and shareholders by encouraging all UK employees to own
Meggitt shares.
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The Policy report
This Policy was approved by shareholders at the AGM on 27 April 2017 and is effective for a period of three years from that date.
Executive Director Remuneration Policy Table
Base salary
Function
To attract and retain talent by ensuring base salaries are competitive in the relevant talent market.
Operation
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).
Opportunity 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.
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:
• 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.
Opportunity 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. In
2018, the Committee decided that Mrs Burdett’s pensions allowance should be set at 20% of salary to reflect the
allowances given to other UK executives at Meggitt and it was agreed to further review the pensions allowance as
part of the 2020 Policy review. 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 Green had agreements prior to the
approval of the 2014 Policy which entitled him to receive a pension allowance of 50% of salary and this arrangement
will continue for Mr Green during the life of the Policy.
Performance
metrics
None.
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Benefits
Function
To provide non‑cash benefits which are competitive in the market in which the executive director is employed.
Operation
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.
Opportunity Benefits vary by role and individual circumstances; eligibility and cost is reviewed periodically. Benefits in respect
of the year under review are disclosed in the annual report on remuneration. It is not anticipated that the costs of
benefits provided will increase significantly in the financial years over which this Policy will apply, although the
Committee retains discretion to approve a higher cost in exceptional circumstances (e.g. to facilitate recruitment,
relocation, expatriation, etc.) or in circumstances where factors outside the Group’s control have changed materially
(e.g. market increases in insurance costs).
Performance
metrics
None.
Annual bonus (Short Term Incentive Plan – STIP)
Function
To incentivise executive directors on delivering annual financial and personal targets.
Operation
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.
The Committee has discretion to make a STIP award of up to 200% of salary in exceptional circumstances
(e.g. a substantial contract win which has a significant positive financial impact in the long term but which has no,
or negative, short term financial impact).
Dividends accrue on unvested deferred STIP awards over the vesting period and are released on the vesting date.
Performance
metrics
STIP awards are based on the achievement of financial and personal performance targets. For the executive
directors, 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).
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Long Term Incentive Plan (LTIP)
Function
To align the interests of executive directors with shareholders in growing the value of the Group over the long term.
Operation
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 from 2018 are subject to a two‑year holding period after the three‑year
vesting period.
Opportunity Executive directors will normally be eligible for annual LTIP awards of 220% of salary. Awards up to a maximum of
300% of salary may be granted in exceptional circumstances (e.g. to support the recruitment of a key executive or to
recognise exceptional individual performance).
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.
Performance
metrics
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 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 42 to 45. 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
To align the interests of employees and shareholders by encouraging all employees to own Meggitt shares.
Operation
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.
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Notes to the Policy table
The Committee is satisfied that the above Policy is in the best interests of shareholders and does not promote excessive risk‑taking.
The Committee retains discretion to make minor, non‑significant changes to the Policy without reverting to shareholders.
Payments from outstanding awards
Outstanding awards are currently held by the directors under the Equity Participation Plan and the Executive Share Option Scheme
which were the Group’s long term incentive plans 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 113 to 114 highlight outstanding and vested awards.
Approach to performance measure selection and target setting
Performance measures have been selected to closely align with, and reinforce, Meggitt’s strategic priorities (see pages 14 to 15).
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 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 helps 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. This 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 enables 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 to 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 is 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 on page 113.
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 2019 base salaries. 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 and dividend accrual.
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Mr A Wood (£’000)
100%
Minimum
£843
Mrs L Burdett (£’000)
100%
Minimum
£518
43%
34%
23%
43%
35%
22%
On-target
£1,943
On-target
£1,215
26%
30%
44%
25%
30%
45%
Maximum
£3,296
Maximum
£2,072
Mr P E Green (£’000)
100%
Minimum
£602
48%
31%
21%
On-target
£1,252
29%
29%
42%
Maximum
£2,051
Salary and benefits
Pension
STIP
LTIP
The following assumptions have been made in compiling the above charts:
Scenario
Fixed pay
STIP
LTIP
Minimum
On-target
Maximum
Latest known base salary,
pension and value of benefits
Latest known base salary,
pension and value of benefits
Latest known base salary,
pension and value of benefits
No STIP payable
On‑target STIP payable (67% of
maximum)
Maximum STIP payable
Threshold not achieved (0%
vesting)
Performance warrants threshold
vesting (30%)
Performance warrants full
vesting (100%)
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 on page 112.
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 non‑
executive directors 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 Committee reserves the right to
pay future and existing non‑executive directors in any other currency (converted at the prevailing market rate when
a change is agreed).
Opportunity
Fee increases will be applied taking into account the outcome of the annual review. The maximum aggregate annual
fee for all non‑executive directors (including the Chairman) as provided in the Company’s Articles of Association is
£1,000,000.
Performance
metrics
None.
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Recruitment
External appointments
In cases of hiring or appointing a new executive director from outside the Group, the Committee may make use of all existing
components of remuneration, as follows:
Component
Approach
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 conditions and consideration given to phasing any increases over two or three
years subject to development in the role.
Maximum annual
grant value
N/A
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
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 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 rules and 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 99.
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 an award 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.
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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 below, 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 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.
A summary of the key terms of the executive directors’ service contracts on termination of employment or change of control is set
out below. This table has been updated to reflect the retirement of Doug Webb and appointment of Louisa Burdett.
Name
Position
Notice period
from employer
Notice period
from employee
Compensation payable on termination of
employment or change of control
Mr A Wood
Service contract dated
13 November 2017
Mrs L S Burdett
Service contract dated
17 September 2018
Mr P E Green
Service contract dated
26 February 2001
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.
Chief Executive 12 months
6 months
As set out in the Policy.
Chief Financial
Officer
Executive
Director,
Commercial
& Corporate
Affairs
12 months
6 months
As set out in the Policy.
No change of control provisions.
12 months
6 months
Payments to Mr Green under his service contract differ
from the Policy in the following respects:
No change of control provisions.
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.
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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 112.
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 Chairman 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 Chairman ensures the Committee is kept informed of shareholder views. The Committee Chairman consulted with
shareholders, reviewed their guidelines and also guidelines released by other shareholder representative bodies, before the Policy
was put to shareholders for approval at the 2017 AGM.
Annual report on remuneration
The following report provides details of how our existing Policy was implemented during the year ended 31 December 2018.
Remuneration Committee – 2018 membership and attendance
Mr P Heiden (Chairman)
Mr G S Berruyer
3/3
3/3
Mrs N L Gioia
Ms A J P Goligher
Mr C R Day1
2/3
3/3
3/3
1 On a personal leave of absence for the December meeting.
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, except Mrs Gioia, attended.
The Committee is responsible for determining the remuneration policy and packages for all executive directors and the Executive
Committee, being the direct reports to the Chief Executive, and for agreeing the fees for the Chairman. The Chairman, Chief
Executive, Chief Financial Officer, Chief Financial Officer Designate and Group HR Director attended meetings of the Committee
by invitation; they were absent when their own remuneration was under consideration.
None of the non‑executive directors has, or has had, any personal financial interests or conflicts of interest arising from cross‑
directorships or day‑to‑day involvement in running the business.
Advisors to the Committee
During the year, the Committee’s independent remuneration advisors were Mercer (part of Marsh & McLennan Companies, Inc.)
who were appointed in 2010 as a result of a competitive tender process. As Mercer has advised the Committee for nine years,
it is proposed to tender the remuneration advisory services in the second half of 2019 with a start date for the appointed advisors
straight after the AGM in 2020, after the vote on remuneration policy. During the year, the Committee confirmed it was satisfied
with the independence of Mercer.
The Committee evaluated the support provided by Mercer in 2018 and was comfortable that they provide effective and
independent remuneration advice to the Committee.
Mercer provide guidance on remuneration matters at Board level and below. Mercer do not have any other connection with the
Group other than through their parent company, Marsh & McLennan Companies which is also the parent company of the Group’s
primary advisors on insurance (Marsh) and UK pensions and benefits (Mercer). Mercer are a member of the Remuneration
Consultants Group and adhere to its code of conduct (www.remunerationconsultantsgroup.com). Their total fees in 2018 for
remuneration advice to the Committee were £55,260 (2017: £54,947).
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AGM voting
The following table shows the results of the advisory vote on the 2017 Directors’ remuneration report at the 2018 AGM:
Resolution text
Votes
for
% of votes
cast for
Votes
against
% of votes
cast against
Total
votes cast
Votes withheld1
(abstentions)
Approval of Directors’ remuneration report
589,813,824
94.96
31,322,813
5.04
621,136,637
502,335
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 following table shows the results of the binding vote on the current Directors’ remuneration policy at the 2017 AGM:
Resolution text
Votes
for
% of votes
cast for
Votes
against
% of votes
cast against
Total
votes cast
Votes withheld1
(abstentions)
Approval of Directors’ remuneration policy
548,956,542
90.34
58,674,318
9.66
607,630,860
43,942
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.
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 2018 and the prior year:
Base salary
Taxable benefits1
Pension
STIP2
LTIP3
Total
Mr A Wood
Mr D R Webb
Mr P E Green
2018
£’000
650
14
163
800
573
2017
£’000
460
20
115
467
–
2018
£’000
474
14
118
570
685
2017
£’000
465
14
116
505
159
2018
£’000
382
14
191
460
552
2017
£’000
375
14
187
395
129
2,200
1,062
1,861
1,259
1,599
1,100
1 Taxable benefits consist primarily of company car or car allowance, fuel allowance and private health care insurance. For 2017 and 2018, it also included limited
relocation expenses for Mr A Wood payable under his service contract until 31 December 2018.
2 STIP paid for performance over the relevant financial year. Further details of the 2018 STIP, including performance measures, actual performance and bonus payouts,
3
can be found on pages 104 to 106.
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 2018,
the figure represents the actual vesting outcome of the 2016 award, for which the performance measures were based on EPS, ROTA and strategic measures. Based on
performance to 31 December 2018, the 2016 LTIP award will vest at 52.1%. The market value of vested shares has been estimated using the average share price over the
last quarter of 2018 of 509.27p. This value will be trued up in next year’s report to reflect the share price on the vesting date. For 2017, the figure represents the actual
vesting of the 2015 award which has been trued up, compared to that reported last year, to reflect the share price on the date of vesting (434.26p). Further details on
performance criteria, achievement and resulting vesting levels can be found on pages 106 to 107. The figures include the accrued distribution payable on the shares that
vest (equivalent to a dividend paid as income).
Global incentives review
During 2018, executive management undertook a review of Group‑wide remuneration schemes, to ensure close strategic alignment
with the new organisation. This review resulted in a small number of changes which are outlined below. Where changes detailed in
the following table apply to executive directors, the changes are within the current Remuneration Policy and no policy changes are
proposed this year. A full policy review for executive directors will be conducted in 2019 which will continue to take into account
shareholder feedback, market practice and alignment to our strategy. A revised Remuneration Policy for executive directors is due
to be put before the shareholders at the AGM in 2020 for a binding vote.
Scheme
STIP
Changes
Executive director impact
The plan structure remains the same.
Financial results for 2019 for divisional participants
will be based on Group performance to foster
collaboration and shared success in the new
organisational structure.
None – financial performance is currently
measured at the Group level for executive
directors
LTIP – measures
The plan structure remains the same.
Deferred Bonus Plan
Strategic measures will be simplified to increase
focus on key areas: Meggitt Production System
(measured by quality and delivery), inventory and
programme excellence (which includes innovation
and programme performance).
Leaver rules for bonus deferral awards are
amended so that from 2019 deferred bonus is only
lost on dismissal for cause/gross misconduct.
Vesting of awards does not accelerate with good
leaver status and malus and clawback provisions
will continue to apply.
New simplified strategic measures will apply
to executive directors. The weighting of
strategic versus financial measures remains
the same as for 2018 and 2017.
None of the changes to the deferred bonus
plan apply to executive directors.
Other Incentives
Short term incentive structures and measures
across our management and professional
populations will be standardised from 2019.
None.
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Chief Financial Officer retirement
Mr D R Webb retired from the Board and as an employee on 31 December 2018. Mr Webb submitted his notice to Meggitt on
17 September but agreed to waive the six month notice period he was entitled to, with all salary and benefits instead ceasing to
accrue on 31 December 2018. The Committee confirmed that Mr Webb would be granted the normal rights for retirees under the
executive and UK employee share plans from 31 December 2018, and so all awards vest at the appropriate time, subject to the
normal pro‑rating and other plan rules. As Mr Webb will no longer be an employee when the 2018 STIP is paid, it will not be subject
to deferral. There are no other terms associated with his retirement to note.
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:
Sir Nigel Rudd
Mr G S Berruyer
Mr C R Day
Mrs N L Gioia1
Ms A J P Goligher
Mr P Heiden
Ms B L Reichelderfer
2018
£’000
355
58
69
82
58
80
–
2017
£’000
350
57
68
63
57
79
18
1 For 2018, includes fees to cover the cost of attendance at meetings that took place outside continent of residence.
Incentive outcomes for the year ended 31 December 2018
STIP in respect of 2018 performance
The Board set stretching financial and strategic targets for the STIP at the start of the 2018 financial year. These targets, and our
performance against these, are summarised in the table below.
Executive directors
Measure
Financial Underlying
Weighting
(as a
percentage
of target)
Threshold
for 2018
Target for
2018
Stretch for
2018
Actual1
Percentage
of maximum
opportunity
operating profit
33.3% £353.3m £372.8m £395.4m
£382.7m
Free cash
33.3% £211.3m £235.1m £259.0m
£250.9m
122%
133%
Personal See below
33.3% See tables below
1 For the purpose of STIP, targets and actual performance for both underlying operating profit and free cash flow are measured on a constant currency basis, adjusted
where appropriate for any M&A activity and, in the case of free cash flow, exclude interest and tax. The STIP targets and actual performance for underlying operating
profit are measured before the impact of any share based payment expense. Other adjustments are also made at the discretion of the Remuneration Committee to
ensure the outcome is a fair reflection of the underlying performance of the Group for the year. These are described on page 93 of this report.
A summary of the personal objectives applying to each executive director and the outcome is provided below:
Tony Wood
Chief Executive
Overview
Review and implement portfolio actions to focus the Group,
reduce debt and underpin EPS growth objectives
(weighting: 15%).
Key achievements in the year
• Three non‑core businesses sold in 2018.
• Other potential bolt on acquisition opportunities reviewed
throughout the year.
Review business operating model to accelerate
improvement in customer satisfaction and organic revenue
growth whilst maintaining clarity of accountability
around route to market and operating performance
(weighting: 15%).
Accelerate improvements in the Group’s operating
performance for customers and competitiveness
(weighting: 50%).
Improve inclusiveness and show demonstrable improvement
in employee engagement and health and safety in 2018.
Increase diversity and bench‑strength of top 20 leaders
through external hires and internal promotions
(weighting: 20%).
Payout (% of maximum): 123%
• Strong organic revenue growth of 9% in 2018.
• Revised operating model taking the business to a fully customer
aligned structure created with input from external consultants:
approved by the Board in 2018 and launched on 1 January 2019.
• Operations dashboard metrics impacted by ramp up on key
programmes below threshold including customer satisfaction and
inventory turns. Performance on footprint, purchasing costs,
reducing quality escapes and Services & Support revenue above
target.
• Employee engagement index increased by 4%. Chief Financial
Officer succession plan concluded with hire of Louisa Burdett.
• High performance culture programme rolled out to 2,000 leaders
in 2018, health and safety total recordable incident rate reduced
by 34% year on year, with a corresponding 78% reduction in lost
time incidents.
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Doug Webb
Chief Financial Officer
Overview
Manage Group financial structures in the context of the
substantial changes to international tax regulations
(weighting: 30%).
Key achievements in the year
• Prompt and effective action taken to respond to the implications
of US tax reform and proactive measures taken to anticipate EU
state aid ruling changes and Brexit.
• Very well executed analysis and restatement of accounts to meet
Embed new IFRS accounting standards in both internal and
external reporting, including revised LTIP targets (weighting:
10%).
the requirements of IFRS 15 and 16 changes – auditors agreed with
approach and FRC highlighted Meggitt’s interim disclosures as
examples of best practice.
Manage investor relations programme to maintain balanced
share register and ensure sell‑side analysts and buy‑side
investors understand the impact of IFRS accounting changes
on Meggitt (weighting: 30%).
Obtain Cyber Essentials Plus certification and identify and
execute a plan to move the business towards ISO27001.
Deliver key IT investment projects in 2018 (weighting: 10%).
Complete disposals of three non‑core businesses and
develop pipeline of bolt‑on acquisitions (weighting: 10%).
Deliver 3% improvement in employee engagement score for
Finance and IT and ensure high performance culture is rolled
out to all relevant employees. Mature the finance talent
process (weighting: 10%).
Payout (% of maximum): 120%
Philip Green
Executive Director, Commercial & Corporate Affairs
Overview
Improve customer relationships (weighting: 20%).
• A well executed transition to new Chief Financial Officer over the
last two months of the year and completed work to explain
accounting impacts of new organisation.
• Good progress with conversion of our largest and most complex
site in Simi Valley to SAP with relatively limited disruption.
• Excellent progress with disposals in 2018 as we refocused the
portfolio.
• Improved talent and engagement across the finance and IT
functions and high performance culture implemented amongst
leadership.
Key achievements in the year
• A number of critical Group agreements and commercial
settlements with key customers were finalised during the year.
Continue to develop a professional commercial function
(weighting: 25%).
• Government relations in the UK and US progressed.
• Training relevant to the Commercial team delivered by
Build an engaged and inclusive function (weighting: 25%).
Commercial, Legal and Trade Compliance of approximately
35 hours of CPD.
• All required members of the function have completed high
Develop and enhance appropriate commercial governance
to support our business (weighting: 20%).
performance culture unfreezing and five facilitators have been
provided from the function.
Ensure Bermite remediation is on track for successful
completion by 30 June 2019 (weighting: 10%).
Payout (% of maximum): 120%
• Sales representatives reduced from 65 to 16 at the end of the year
(ahead of the planned reduction to 32). Good progress made in
consolidating distributors in the aerospace and defence sector
• Bermite remediation remains on track to be completed by the end
of June 2019.
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The following STIP awards were received by directors in respect of 2018 performance:
Executive
Mr A Wood
Mr D R Webb
Mr P E Green
% salary
£’000
123
120
120
800
570
460
STIP – deferral into shares
As a result of the 2018 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 2018, as a result of
the 2017 STIP vesting, the following share awards were made under the Deferred Share Bonus Plan:
Executive
Mr A Wood
Mr D R Webb
Mr P E Green
Form
of award
Date
of grant
Award
Award
Award
27.03.2018
27.03.2018
27.03.2018
Shares over
which awards
granted
26,884
29,072
22,739
Award
price1
434.26p
434.26p
434.26p
% of bonus
Date
of vesting
25
25
25
27.03.2020
27.03.2020
27.03.2020
£’000
117
126
99
1 The award price is the average close price for the five days prior to the award date.
LTIP 2016 outcome
The LTIP award made in April 2016 was subject to three‑year cumulative underlying EPS, three‑year average ROTA and a scorecard
of strategic measures. The outcome of the EPS measure has been adjusted for disposals (see footnote 1 to the table). Performance
against each of these measures over the completed performance period is summarised in the table below:
Element
2016
2017
2018 Weighting
Threshold Mid-point
Stretch
Performance period
Targets
Actual
performance
Underlying EPS (pence) three‑year
aggregate
ROTA % average over three years
Strategic measures2
Growth
Organic revenue growth
% (CAGR)
Programme
management3 (average
performance score per
programme,
out of 5)
Innovation
Schedule3
MPS3
Quality3
Execution
Gross margin – delivery
of % improvement
Delivery3
Inventory reduction
Overall outcome
% vesting
(of LTIP)
19.6%
33.3%
103.0p
108.0p
113.0p
107.1p1
33.3%
19.0%
20.9%
23.0%
20.2%
17.5%
5.6%
4.0%
5.5%
7.0%
3.6%
0.0%
5.6%
2.0
3.0
4.0
2.48
2.6%
5.6%
5.6%
5.6%
2.0
2.0
3.0
3.0
4.0
4.0
3.82
2.89
5.2%
3.4%
57.0%
68.0%
80.0%
70.0% 1.3%
38.7%
38.0%
39.5%
38.8%
40.3%
39.6%
38.8%
37.2%
0.6%
0%
1.9%
45.0%
61.0%
77.0%
47.0% 0.6%
5.6% £510.8m £493.1m £451.3m
£490.3m 1.2% 1.9%
£451.4m £421.4m £401.4m
£473.1m
0%
52.1%
1 The Committee agreed that the EPS outcome for the 2016 LTIP should be adjusted for the impact of the disposal of Meggitt Target Systems, Piher, Piezotech,
Meggitt (Maryland), Thomson and Precision Micro all of which were sold in the three year performance period. The Committee agreed that for small acquisitions and
disposals, adjusting the outcome was more appropriate than adjusting the targets, however for more significant M&A adjusting the targets would be considered.
EPS actual figures for the performance period also exclude the impacts of IFRS 15 and IFRS 16, to ensure they are on a basis consistent with how the targets were set.
The resulting EPS in 2018 was 36.6p, versus the unadjusted EPS of 34.2p.
2 Progress against the targets for all strategic measures other than revenue growth are assessed annually, and the final vesting outcome based on performance in each
period.
3 Performance score out of 5. Programme management vesting is an assessment of programme performance and is based on independent assessments of the
performance of our largest programmes (approximately 100 in total) at formal programme gate reviews against standard gate exit criteria. MPS vesting is based on the
number of our sites that have progressed up one stage of MPS in the year, against stretching targets set for overall progression. Innovation vesting is determined based
on progress with certain important innovation projects against detailed milestone criteria, as assessed by our Chief Technology Officer. Quality and delivery vesting is
based on progress against specific targets in each of these areas. For each of these measures, vesting criteria were set at the start of the year and assessed at the end of
the year.
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Based on these performance outcomes, 52.1% of the 2016 LTIP award will vest. Details of the awards vesting to executive directors
are set out in the table below:
Executive
Mr A Wood
Mr D R Webb
Mr P E Green
Interests
held
215,944
250,746
202,020
Vesting
%
52.1
52.1
52.1
Interests
vesting
112,506
130,638
105,252
Date
of vesting
Share price
at vesting1
01.12.2019
05.04.2019
05.04.2019
509.27p
509.27p
509.27p
Value
£’0002
627
727
586
1 The market value of vested stock is based on the average share price over the last quarter of 2018.
2 The value includes the accrued distribution payable on the shares that vest (equivalent to a dividend paid as income).
Awards made in 2018 – STIP and LTIP measures and their rationale for selection
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STIP
Underlying operating profit
Free cash flow
Personal performance
LTIP
Underlying EPS
Rationale for selection
Targets set in the context of:
Measures relate to our short term financial and
strategic priorities
• Our budget for the year
• Our budget for the year
• Key priorities for each director
KPI
Can be benchmarked externally
ROCE
Strategic measures:
Replaces ROTA for executive directors for awards
made in 2018 and subsequent years, in response
to investor feedback and to better reflect the value
that acquisitions bring to Meggitt
Drivers of operational performance that underpin
deployment of our key strategic goals
• Organic revenue growth
KPI
• Inventory
• Gross margin
Reinforces operational excellence and Meggitt’s
overall competitiveness
KPI. Reinforces operational excellence and
Meggitt’s overall competitiveness
• Our strategic plan
• External benchmarks, including analyst
forecasts and EPS ranges for comparators
• Our strategic plan
• Our strategic plan
• External market trends
• Our budget for the year
• Agreed annual target, updated at the start
of each year of the performance period to
ensure the LTIP targets remain relevant and
stretching over the three‑year period
• Our budget for the year
• MPS
• Programme management
• Innovation
Measures our progress in deploying MPS across
the Group, to drive operational improvements,
including in quality and delivery
Measures our performance in passing programme
gate reviews
Measures achievement of innovation programme
milestones
• Agreed annual targets, updated at the start
of each year of the performance period to
ensure the LTIP targets remain relevant and
stretching over the three‑year period
• Calibrated as three sets of annual targets
• In determining the final vesting outcome at
the end of the cycle, the Committee
considers performance over the three‑year
performance period for each measure
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Scheme interests awarded in the year ended 31 December 2018 (audited)
2018 LTIP1
Executive
Form
of award
Date
of grant
Mr A Wood
Mr D R Webb
Mr P E Green
Nil cost option
Nil cost option
Nil cost option
03.04.2018
03.04.2018
03.04.2018
Shares over
which awards
granted
332,852
243,903
196,638
Award
price2
429.62p
429.62p
429.62p
Face value
Date
of vesting
£’000
1,430
1,048
845
% of salary3
220
220
220
03.04.2021
03.04.2021
03.04.2021
1 The 2018 LTIP measures were disclosed and explained in the 2017 Directors’ remuneration report.
2 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.
Vesting is dependent on the achievement of three‑year targets based on the following performance measures:
Weighting
Measure
Threshold Mid-point
Stretch
33.3%
Underlying EPS (pence) three‑year aggregate (equivalent to CAGR range
of 3% to 9%)
33.3%
ROCE average over three years
101.6
11.1%
107.7
114.0
11.5%
11.9%
Inventory2
13‑point
inventory value3
£451.4m £421.4m £401.4m
Gross margin2
Gross margin %
38.0%
38.8%
39.6%
33.3%
Strategic measures1
average over three years
Execution
Growth
Meggitt
Production
System2
Average status
per schedule1
Organic revenue
growth
% organic revenue
growth (CAGR over
three years)
Programme
management2
Innovation
Schedule2
Average status
per reviews1
Average status
per reviews1
1 Performance against each strategic measure will be assessed at the end of the three‑year period against a scale of:
• 1.0 – threshold objective not met
• 2.0 – threshold met
• 3.0 – on target
• 4.0 – stretch objective met
• 5.0 – stretch objective exceeded
2.0
3.0
4.0
4.0%
5.5%
7.0%
2.0
2.0
3.0
3.0
4.0
4.0
2 The targets apply to year 1 of the 2018 LTIP award as well as year 2 of the 2017 LTIP award and year 3 of the 2016 LTIP award.
3
Inventory is measured at constant currency, gross of provisions, averaging month end balances over a year.
Total pension entitlements (audited)
The table below sets out details of the pension entitlements under the Meggitt Pension Plan (MPP) for Mr Green.Since reaching
the government’s Lifetime Allowance in April 2012, Mr Green ceased accruing further benefit under the MPP and receives a 50%
pension allowance on his full salary which is a contractual requirement. Mr Green’s dependants remain eligible for dependants’
pensions and the payment of a lump sum on death in service.
Mr Webb and Mr Wood received a pensions allowance of 25% of base salary in 2018, but are not members of any defined benefit or
defined contribution pension scheme operated by the Group.
Pension entitlements will be reviewed in 2019 as part of the 2020 Policy review, in light of the 2018 Code and recent proxy advisor
guidelines.
The pension allowance payments made in 2018 are included in the single total figure of remuneration table.
Accrued benefit
Date benefit receivable
Total value of additional benefit if director retires early
1 Mr Green opted to leave the MPP with effect from 31 March 2012. He has not drawn his pension.
Mr P E Green1
2018
£’000
80
2017
£’000
76
26.10.2018
26.10.2018
Nil. Early
retirement
factors
cost neutral
Nil. Early
retirement
factors
cost neutral
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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
2018
2017
£’000
650
14
800
£’000
702
30
716
1,464
1,448
CEO
% change
2017-2018
Executive
employees
% change
2017-2018
-7.4
-53.3
+11.7
+1.1
+2.4
+1.1
+28.3
+8.6
1 The base salary for the Chief Executive is based on data for Mr Young in 2017 and Mr Wood in 2018. Base salary for Mr Wood as Chief Executive is disclosed on page 111.
Base salary data 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 2017 and 2018.
2 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.
3 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 2017
and 2018.
Relative importance of spend on pay
The chart below shows shareholder distributions (i.e. dividends and share buybacks) and total employee expenditure for 2018 and
the prior year, along with the percentage change in both.
800
700
600
500
400
300
200
100
0
+3.8%
£636.7m £613.5m
+5.5%
£129.1m £122.3m
Dividends1
Employee costs2
2018
2017
1 See note 16 to the Group’s consolidated financial statements.
2 Comprises wages and salaries and retirement benefit costs. See note 9 to the Group’s consolidated financial statements.
Shareholder distributions
Exit payments made in the year
No exit payments have been made in 2018.
Payments to past directors (audited)
There were no payments to past directors in 2018. 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
correlated to total shareholder return over the last ten years.
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This graph illustrates the Group’s performance compared to the FTSE 100 Index, which is considered an 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 ten year period from 1 January 2009 to 31 December 2018:
£
450
400
350
300
250
200
150
100
50
0
8
0
0
2
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3
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i
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0
1
£
f
o
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u
a
V
l
31/12/2008
31/12/2009
31/12/2010
31/12/2011
31/12/2012
31/12/2013
31/12/2014
31/12/2015
31/12/2016
31/12/2017
31/12/2018
Meggitt
FTSE 100
The table below details the CEO’s single total figure of remuneration over the same period:
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Mr A Wood1
Single total figure of
remuneration (£’000)
STIP outcome2
LTIP vesting2
Mr S G Young1
Single total figure of
remuneration (£’000)
STIP outcome2
EPP vesting2
ESOS vesting2
LTIP vesting2
Mr T Twigger1
Single total figure of
remuneration (£’000)
STIP outcome2
EPP vesting2
ESOS vesting2
1,296
39%
38%
76%
–
1,845
35%
56%
98%
1,758
86%
0%
100%
2,947
86%
50%
100%
4,252
100%
69%
100%
3,812
80%
88%
100%
2,200
123%
52.1%
1,232
23%
0%
0%
–
1,347
31%
0%
0%
–
1,969
60%
N/A
N/A
17%
2,040
68%
N/A
N/A
19%
1 Figures are provided for Mr T Twigger for the period up to 1 May 2013, for Mr S G Young for the period up to 31 December 2017 and for Mr A Wood from his
appointment as CEO on 1 January 2018.
2 The outcomes are for those awards which are included in the single figure of remuneration for that year. For 2018, this represents the outcome of the LTIP award which
will vest in 2019. Outcomes are expressed as a percentage of maximum.
UK Corporate Governance Code and other developments
The Committee met in December 2018 and reviewed the changes introduced to the 2018 Code. The 2018 Code widens the remit
of the Committee, with the requirement to take into account workforce remuneration and related policies when setting directors’
remuneration, ensuring the remuneration policy aligns with company purpose and values and taking account of risk and sets out
how wider remuneration schemes support strategy and long‑term sustainable success.
As part of the remuneration policy review in 2019, we will consider the role of post‑employment shareholding requirements and
review executive pension contribution levels.
In December, we also reviewed and updated our annual schedule and Terms of Reference to take account of the 2018 Code
changes. Amendments to reporting, including the CEO pay ratio and the impact of share price increases on executive remuneration
will be first reported in our 2019 Directors’ remuneration report.
110
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Annual Report and Accounts 2018
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Implementation of Remuneration Policy for 2019
Base salary, pension and benefits
Base salaries were reviewed in early 2019. The base salaries for executive directors will be increased by 2% from 1 April 2019.
In agreeing these increases, the Committee took into account average expected salary increases across the general workforce
(3% in the UK), industry benchmarks and broader retail price inflation, as well as the performance of the executive directors in 2018.
Mr A Wood
Mrs L S Burdett1
Mr D R Webb2
Mr P E Green
1 Mrs Burdett became Chief Financial Officer on 1 January 2019.
2 Mr Webb retired on 31 December 2018.
2019
£’000
663
420
N/A
392
% change
+2%
N/A
N/A
+2%
2018
£’000
650
N/A
476
384
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.
There are no changes in pension contribution rates or benefit provision for 2019.
2019 Incentive Plan Measures
STIP measures for 2019 are unchanged from 2018, as follows:
2019 STIP measures
Underlying operating profit
Free cash flow
Personal performance
33.3%
33.3%
33.3%
The STIP targets for 2019, together with details of whether they have been met, will be disclosed (subject to commercial sensitivity)
in the 2019 Directors’ remuneration report. STIP award opportunities will be in line with the Policy disclosed on page 96.
2019 LTIP measures
The LTIP measures for 2019 are 33% earnings per share, 33% ROCE and 33% based on three strategic measures, which are MPS,
inventory and programme excellence. These strategic measures have been simplified in the following ways for the 2019 award,
as a result of the incentives review:
• Organic revenue growth and gross margin: These measures have been removed from the LTIP, as they are considered to be
duplicative of other profit measures in the LTIP and STIP.
• MPS: The underlying measure has changed from gate exits as sites progress through the process, which is an ‘input’ measure,
to quality and delivery, which is an ‘output’ measure. On review, it was considered that setting quality and delivery targets is
appropriate, as they capture two of the key outputs of MPS.
• Innovation and programme management: These measures have been merged to create a programme excellence measure
(weighted 50/50 innovation and programme management). The Committee wanted to simplify the measures, but retaining both
elements in a single measure will ensure the Group stays focused on customer satisfaction and efficient operation of current
programmes and innovates to develop future products for our customers.
Plan element
Financial measures
EPS (3 year average)
ROCE (3 year average)
Strategic measures*
MPS
Inventory
Programme excellence
Total
Weight
Threshold
Target
Stretch
Targets
33.33%
33.33%
108.9
12.1%
115.5
12.5%
122.3
12.9%
11.11%
11.11%
11.11%
100%
40%
3.0
2.0
50%
3.2
3.0
60%
3.4
4.0
*The targets apply to year 1 of the 2019 award, they also apply to year 2 of the 2018 LTIP and year 3 of the 2017 LTIP.
Meggitt PLC
Annual Report and Accounts 2018
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Chairman and non-executive director fees
The remuneration of the Chairman and non‑executive directors in 2019 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
1 Fees shown are effective for a year from 1 April.
2 Sir Nigel Rudd receives additional benefits of £20,000 per annum for secretarial and car services required for business purposes.
3 A fee of £4,000 is paid per meeting to US directors when travelling to meetings outside of their home continent.
20191
£’000
364
60
11
11
20181
£’000
357
58
11
11
Directors’ beneficial interests (audited)
The beneficial interests of the directors and their connected persons in the ordinary shares of Meggitt at 31 December 2018,
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 A Wood
Mr G S Berruyer
Mr C R Day
Mrs N L Gioia
Ms A J P Goligher
Mr P E Green
Mr P Heiden
Mr D R Webb
Shareholding
Ordinary shares of 5p each
2018
133,850
11,308
13,000
74,742
3,090
3,000
633,496
6,675
145,228
2017
124,650
10,479
13,000
52,454
3,000
3,000
575,684
6,470
130,131
Between 1 January 2019 and 25 February 2019, the only changes to the beneficial interests of the directors in the ordinary shares of
Meggitt are that Mr Green acquired 49 shares through the Meggitt PLC Share Incentive Plan.
External appointments held by executive directors as at 31 December 2018
Executive director
Company
Role
Mr D R Webb
SEGRO plc
Non‑executive director
Chairman of Audit Committee
Total
Fees retained
2018
£’000
60
15
75
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Annual Report and Accounts 2018
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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 2018. Mrs Burdett did not own any shares as at 31 December 2018:
Name
Mr A Wood
Mr D R Webb
Mr P E Green
Shareholding
guideline
(% 2018
salary)
300%
200%
200%
Shares
owned
outright1
Current
shareholding
(% 2018
salary)2
Guideline
met?
11,308
145,228
633,496
8% Building
144% Building
Met
777%
Includes shares invested to be eligible for outstanding EPP matching awards.
1
2 Assessment of shareholding is based on a share price of 471.00 pence (the value of a Meggitt share on 31 December 2018).
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 2018). The awards made up to and including 2015 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 2016 and later years were unvested as at 31 December 2018. Sharesave awards are not subject
to performance conditions.
Number of shares under award
Date of
award
At 1
January
2018
Awarded/
(exercised/
lapsed)
At 31
December
2018
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
Mr A Wood
LTIP (nil cost options)
Deferred Share Bonus Plan (awards)
Total
01.12.16
07.04.17
03.04.18
27.03.18
215,944
228,907
–
–
–
–
332,852
26,884
215,944
228,907
332,852
26,884
444,851
359,736
804,587
–
–
–
–
–
–
–
–
01.12.19
07.04.20
03.04.21
27.03.20
01.12.21
06.04.22
03.04.23
27.03.20
Number of shares under award
Date of
award
At 1
January
2018
Awarded/
(exercised/
lapsed)
At 31
December
2018
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
Mr D R Webb
LTIP (nil cost options)
Deferred Share Bonus Plan (awards)
Sharesave (options)
Total
01.04.15
05.04.16
07.04.17
03.04.18
05.04.16
07.04.17
27.03.18
13.09.13
176,598
250,746
232,390
–
13,017
24,598
–
3,517
(143,221)
–
–
243,903
(13,017)
–
29,072
(3,517)
33,377
250,746
232,390
243,903
–
24,598
29,072
–
700,866
113,220
814,086
–
–
–
–
–
–
–
426.40p
–
–
–
–
423.48p
–
–
505.40p
01.04.18
05.04.19
07.04.20
03.04.21
05.04.18
07.04.19
27.03.20
01.11.18
01.04.20
05.04.21
07.04.22
03.04.23
05.04.18
07.04.19
27.03.20
01.05.19
Meggitt PLC
Annual Report and Accounts 2018
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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)
Number of shares under award
Date of
award
At 1
January
2018
Awarded/
(exercised/
lapsed)
At 31
December
2018
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
30.04.09
25.03.08
30.04.09
12.03.10
02.03.11
05.08.09
21.04.11
17.08.11
12.08.09
21.04.11
17.08.11
22.05.14
01.04.15
05.04.16
07.04.17
03.04.18
05.04.16
07.04.17
27.03.18
12.09.14
11.09.15
07.09.17
12,832
217,822
214,306
192,240
124,902
88,167
59,377
22,693
49,163
44,022
15,915
28,003
142,128
202,020
187,355
–
11,965
19,989
–
1,619
750
905
–
(217,822)
–
–
–
–
–
–
–
–
–
–
(115,266)
–
–
196,638
(11,965)
–
22,739
–
–
–
12,832
–
214,306
192,240
124,902
88,167
59,377
22,693
49,163
44,022
15,915
28,003
26,862
202,020
187,355
196,638
–
19,989
22,739
1,619
750
905
169.50p
252.50p
169.50p
286.10p
351.70p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
374.19p
399.79p
397.55p
–
452.24p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
423.48p
–
–
–
–
–
30.04.12
25.03.11
30.04.12
12.03.13
02.03.14
05.08.12
21.08.13
17.08.14
12.08.12
21.08.13
17.08.14
22.05.17
01.04.18
05.04.19
07.04.20
03.04.21
05.04.18
07.04.19
27.03.20
01.11.19
01.11.20
01.11.20
30.04.19
25.03.18
30.04.19
12.03.20
02.03.21
05.08.19
21.04.21
17.08.21
12.08.19
21.04.21
17.08.21
22.05.19
01.04.20
05.04.21
07.04.22
03.04.23
05.04.18
07.04.19
27.03.20
01.05.20
01.05.21
01.05.21
Total
1,636,173
(125,676) 1,510,497
By order of the Board
Paul Heiden
Chairman, Remuneration Committee
25 February 2019
114
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Annual Report and Accounts 2018
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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 the
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 2018.
There are no significant events affecting the Group since the end of the year requiring disclosure.
Incorporation by reference
Certain laws and regulations require that specific information should be included in the Directors’ report. Our non‑financial
information statement is on page 116 and the table below shows the items which are incorporated into this Directors’ report by
reference:
Information incorporated into the Directors’ report by reference
Location and page
Likely future developments in the Group’s business
Strategic report (pages 2 to 73)
Description of the Group’s internal control and risk
management systems
Risk management report (pages 46 to 53)
Employee information
Employee involvement
Employment of disabled persons
Greenhouse gas emissions
The Corporate governance report
A statement of how the Company has complied with the UK
Corporate Governance Code and details of any non‑compliance
Details of long‑term incentive plans
Statement of directors’ interests
Details of directors’ service contracts
Research and development
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
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
Corporate responsibility report (pages 60 to 73)
Corporate responsibility report (pages 70 to 71)
Board of directors and Corporate governance report
(pages 74 to 85)
Corporate governance report (page 85)
Directors’ remuneration report (pages 92 to 114)
Directors’ remuneration report (pages 112 to 114)
Share capital and control (pages 116 to 117) and Directors’
remuneration report (page 101)
Note 8 to the Group’s consolidated financial statements
(page 149) and Chief Financial Officer’s review (pages 56
to 57)
Note 3 to the Group’s consolidated financial statements
(pages 141 to 142)
Note 19 to the Group’s consolidated financial statements
(page 156)
Details of allotments for cash of ordinary shares made during
the period under review
Note 37 to the Group’s consolidated financial statements
(page 175)
Related parties disclosures
Note 17 to the Group’s consolidated financial statements
(page 154)
Details of share buy back programme
Not applicable – programme currently suspended
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
Doug Webb gave notice of his retirement on
17 September 2018. The Company agreed that he could
reduce his contractual notice period of six months and
cease to be employed by the Company on 31 December
2018. He waived all entitlement to his contractual notice
pay and benefits from this date. (see also page 104 of the
Directors’ remuneration report)
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 the 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 9.2.2A
Nothing to disclose
Post balance sheet events
Nothing to disclose
Meggitt PLC
Annual Report and Accounts 2018
115
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Non-financial information statement
We aim to comply with the new Non‑Financial Reporting requirements contained in sections 414CA and 414CB of the Companies
Act 2006. The below table, and information it refers to, is intended to help stakeholders understand our position on key
non‑financial matters.
Reporting requirement
Policies and standards which govern our
approach
Risk management and additional
information
Environmental matters
Environmental Policy*
Environment (pages 68 to 71)
Employees
Human rights
Ethics and Business Conduct Policy*
Code of Conduct
Health and Safety Policy*
Data Protection Policy*
Modern Slavery Act Statement*
People (pages 64 to 67)
Ethics (page 72)
Ethics (page 72)
Social matters
Charitable Giving and Sponsorship Policy*
Social (page 73)
Anti‑corruption and
anti‑bribery
Anti‑Corruption Policy*
Financial Crime Policy*
Policy embedding, due
diligence and outcomes
Description of principal
risks and impact of business
activity
Description of the business model
Non‑financial KPIs
* Copies of our policies are available on our website www.meggitt.com
Ethics (page 72)
Risk management (pages 46 to 53)
Principal risks (pages 48 to 51)
Creating value for our stakeholders/Direct
and indirect economic contribution (page 63)
Our business model (pages 12 to 13)
Key performance indicators (page 42 to 45)
Dividends
The directors recommend the payment of a final dividend of
11.35p per ordinary 5p share (2017: 10.80p), to be paid
on 3 May 2019 to those members on the register at close of
business on 22 March 2019. An interim dividend of 5.30p (2017:
5.05p) was paid on 28 September 2018. If the final dividend
as recommended is approved, the total ordinary dividend for
the year will amount to 16.65p per ordinary 5p share
(2017: 15.85p).
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 2018, the Company made the DRIP available to
shareholders for the dividends paid in May 2018 and September
2018. The Board currently intends to continue to make the DRIP
available to shareholders in 2019 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 A Wood, Mr G S Berruyer
(becoming Senior Independent Director with effect from
25 April 2019), Mrs L S Burdett (appointed on 1 January 2019),
Mr C R Day, Mrs N L Gioia, Ms A J P Goligher, Mr P E Green,
Mr G C Hachey (appointed on 1 January 2019), Mr P Heiden
(current Senior Independent Director, retiring on 25 April 2019)
and Mr D R Webb (retired on 31 December 2018).
In January 2019, it was announced that Mrs C L Silver will join
the Board on 25 April 2019. All of the directors listed above,
including Mrs Silver, will be submitted for election or re‑election
at the Annual General Meeting (AGM) except for Mr Heiden and
Mr Webb.
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 76 to 79 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
Neither the Group nor the Company made any political
donations or incurred any political expenditure during the year
(2017: None).
Share capital and control
As at 31 December 2018, the Company held 9,859 treasury
shares with a nominal value of 5p each and the Company’s
issued share capital (excluding shares held as treasury shares)
consisted of 776,855,463 shares with a nominal value of
5p each. As at 6 February 2019, the Company held 9,859
treasury shares with a nominal value of 5p each and the
Company’s issued share capital (excluding shares held as
treasury shares) consisted of 776,882,695 shares with a nominal
value of 5p each. The issued share capital of the Company
at 31 December 2018 and details of shares issued during the
financial year are shown in note 37 to the Group’s consolidated
financial statements.
116
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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 Company’s registered office.
The holders of ordinary shares are entitled to receive the
Company’s Annual 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 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.
At the 2018 AGM, the Company was granted authority by
shareholders to purchase up to 77,642,218 ordinary shares,
being 10% of the Company’s issued share capital, in accordance
with the Articles. No shares were bought back under this
authority during the year ended 31 December 2018. Shares
purchased under this authority would have been cancelled or
held as treasury shares to be sold at a later date or used to
satisfy awards under the Company’s share plans as the Board
saw fit.
The directors were also granted authority by shareholders to
allot securities in the Company up to a nominal amount of
£12,940,370 and to allot securities, without the application of
pre‑emption rights, up to a nominal amount of £1,941,055 and
a further £1,941,055 in connection with an acquisition or other
capital investment of a kind contemplated by the Statement of
Principles on Disapplying Pre‑Emption Rights. No such
transaction is contemplated at present.
These authorities apply until the conclusion of the 2019 AGM
or, if earlier, 30 June 2019. The Company will seek shareholder
approval to renew these authorities at the 2019 AGM. Detailed
explanatory notes are set out in the AGM notice.
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 USD750m syndicated revolving credit agreement dated
September 2014 and a USD400m note purchase agreement
dated June 2010.
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 sensitive and their disclosure
could be seriously prejudicial to the Company.
Agreements with the Company’s directors or employees
providing compensation in the event of a takeover bid:
Director
Contractual entitlement
Mr A Wood
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.
Mrs L S Burdett None except that provisions in the Company’s
share plans may cause options and/or awards
granted to employees under such plans to vest
on a takeover.
Mr P E Green Mr Green may terminate his employment
within six months and would be entitled to
compensation from the Company for loss of
office. The compensation would be annual
remuneration plus the value of benefits for the
unexpired notice period less 5%. In addition,
provisions in the Company’s share plans may
cause options and/or awards granted to
employees under such plans to vest on
a takeover.
Non‑executive
directors
None.
All other
employees
There are no agreements that would provide
compensation for loss of employment resulting
from a takeover except that provisions in the
Company’s share plans may cause options and/
or awards granted to employees under such
plans to vest on a takeover.
Substantial shareholdings
At 6 February 2019, 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:
Direct
voting
rights
Indirect
voting
rights
(m)*
(m)*
Other
financial
instruments
with voting
rights (m)*
Total
voting
rights
(m)*
Percentage
of total
voting
rights**
The Capital Group
Companies, Inc.
BlackRock, Inc.
FMR LLC (FIL
Limited)
First Pacific
Advisors, LLC
T. Rowe Price
Associates, Inc.
Harris Associates
L.P.
Standard Life
Investments Ltd
Legal & General
Group plc
Norges Bank
–
–
–
–
–
–
77.0
41.9
43.2
39.1
38.8
38.3
22.2
3.8
23.7
23.5
–
–
–
6.9
77.0
48.8
9.91%
6.28%
0.4
43.6
5.61%
–
–
–
–
–
–
39.1
5.03%
38.8
4.99%
38.3
4.93%
26.0
3.35%
23.7
23.5
3.05%
3.02%
* One voting right per ordinary share.
** Attached to the issued ordinary share capital of the Company.
These holdings are published on a regulatory information
service and on the Company’s website.
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In the case of each director in office at the date the Directors’
report is approved:
• so far as the director is aware, there is no relevant audit
information of which the Group and Company’s auditors are
unaware; and
• they have taken all the steps that they ought to have taken as
a director in order to make themselves aware of any relevant
audit information and to establish that the Group and
Company’s auditors are aware of that information.
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 31 (Bank and other borrowings) and note 33 (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 46 to 53, the likelihood of them
arising and the mitigating actions available.
By order of the Board
M L Thomas
Company Secretary
25 February 2019
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Statement of directors’ responsibilities
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable laws
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 as adopted
by the European Union and Company financial statements in
accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 101 “Reduced Disclosure Framework”, and
applicable law). 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 Company and of the profit or loss of the Group and
Company for that period. In preparing the financial statements,
the directors are required to:
• select suitable accounting policies and then apply them
consistently;
• state whether applicable IFRSs as adopted by the European
Union have been followed for the Group financial statements
and United Kingdom Accounting Standards, comprising
FRS 101, have been followed for the Company financial
statements, subject to any material departures disclosed
and explained in the financial statements;
• make judgements and accounting estimates that are
reasonable and prudent; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and
Company will continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Group and Company
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.
The directors are also responsible for safeguarding the assets of
the Group and Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity
of the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Each of the directors, whose names are listed in the Board of
directors confirm that, to the best of their knowledge:
• the Group financial statements, which have been prepared
in accordance with IFRSs as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial
position and profit of the Group;
• the Company financial statements, which have been prepared
in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 101 “Reduced Disclosure Framework”,
and applicable law), give a true and fair view of the assets,
liabilities, financial position and profit of the Company; 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 and Company, together with
a description of the principal risks and uncertainties that
it faces.
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Independent auditors’ report to the members of Meggitt PLC
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Report on the audit of the financial statements
Opinion
In our opinion:
• Meggitt PLC’s Group financial statements and Company
financial statements (the “financial statements”) give a true
and fair view of the state of the Group’s and of the Company’s
affairs as at 31 December 2018 and of the Group’s profit and
cash flows for the year then ended;
• the Group financial statements have been properly prepared
in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union;
• the Company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 “Reduced Disclosure
Framework”, and applicable law); and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the
IAS Regulation.
We have audited the financial statements, included within the
Annual Report and Accounts 2018 (the “Annual Report”), which
comprise: the Consolidated and Company balance sheets as at
31 December 2018; the Consolidated income statement and
Consolidated statement of comprehensive income, the
Consolidated cash flow statement, and the Consolidated and
Company statements of changes in equity for the year then
ended; and the notes to the financial statements, which include
a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law.
Our responsibilities under ISAs (UK) are further described in the
Auditors’ responsibilities for the audit of the financial statements
section of our report. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis
for our opinion.
Independence
We remained independent of the Group in accordance with
the ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC’s Ethical
Standard, as applicable to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance
with these requirements.
To the best of our knowledge and belief, we declare that
non‑audit services prohibited by the FRC’s Ethical Standard
were not provided to the Group or the Company.
Other than those disclosed in the Directors’ report, we have
provided no non‑audit services to the Group or the Company
in the period from 1 January 2018 to 31 December 2018.
Our audit approach
Overview
• Overall Group materiality:
£16.0 million (2017: £17.0
million), based on 5% of
underlying profit before tax.
• Overall Company materiality:
£34.0 million (2017: £35.0
million), based on 1% of
total assets.
• We identified 11 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
7 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 11 reporting
units, with the Group team
performing the remainder.
Materiality
Audit scope
• The Group consolidation,
Key audit
matters
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 61% of Group
profit before tax; 62% of Group
underlying profit before tax;
and 80% 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.
• Goodwill impairment
assessments (Group).
• Development costs and
programme participation costs
impairment assessments
(Group).
• Environmental provisions
(Group).
• Provisions for uncertain tax
positions (Group).
• Retirement benefit obligation
liabilities (Group and
Company).
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Key audit matters
Key audit matters are those matters that, in the auditors’
professional judgement, were of most significance in the audit
of the financial statements of the current period and include
the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by the auditors,
including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters,
and any comments we make on the results of our procedures
thereon, were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters. This is not a complete list of all risks identified by
our audit.
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements.
Capability of the audit in detecting irregularities,
including fraud
Based on our understanding of the Group/industry, we
identified that the principal risks of non‑compliance with laws
and regulations related to breaches of increasingly complex
trade compliance, environmental regulations, health and safety
and unethical and prohibited business practices (see page 48
of the Annual Report), and we considered the extent to which
non‑compliance might have a material effect on the financial
statements. We also considered those laws and regulations that
have a direct impact on the financial statements such as the
Companies Act 2006, the Listing Rules, pensions legislation,
UK tax legislation and equivalent local laws and regulations
applicable to in scope component teams. We evaluated
management’s incentives and opportunities for fraudulent
manipulation of the financial statements (including the risk of
override of controls), and determined that the principal risks
were related to posting inappropriate journal entries to increase
revenue or reduce expenditure, omitting, advancing or delaying
recognition of events and transactions that have occurred and
management bias in accounting estimates or judgments. The
Group engagement team shared this risk assessment with the
component auditors referred to in the scoping section of our
report below, so that they could include appropriate audit
procedures in response to such risks in their work. Audit
procedures performed by the Group engagement team and/or
component auditors included:
• Discussions with management, internal audit and the Group’s
legal and tax advisors, including consideration of known or
suspected instances of non‑compliance with laws and
regulation and fraud;
• Evaluation of management’s controls designed to prevent
and detect irregularities, in particular their anti‑bribery
controls;
• Assessment of matters reported on the Group’s
whistleblowing helpline and the results of management’s
investigation of such matters;
• Review of directors meeting minutes;
• Challenging assumptions and judgements made by
management in their significant accounting estimates, in
particular in relation to impairment of goodwill, impairment of
development costs, environmental provisions, provisions for
uncertain tax positions and retirement benefit obligation
liabilities (see related key audit matters below);
• Identifying and testing journal entries, in particular any journal
entries posted with unusual account combinations or posted
by senior management or individuals not authorised to post
journals; and
• Incorporated elements of unpredictability into the audit
procedures performed.
There are inherent limitations in the audit procedures described
above and the further removed non‑compliance with laws and
regulations is from the events and transactions reflected in the
financial statements, the less likely we would become aware of
it. Also, the risk of not detecting a material misstatement due
to fraud is higher than the risk of not detecting one resulting
from error, as fraud may involve deliberate concealment by,
for example, forgery or intentional misrepresentations, or
through collusion.
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Goodwill impairment assessments (Group)
Refer also to note 18 of the consolidated financial statements
(pages 154 to 155)
The Group holds significant amounts of goodwill (£2,035.3m) 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, as determined by value in use, of its cash
generating units or groups of cash generating units (“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.
For all impairment assessments we:
• Evaluated the directors’ future cash flow forecasts by
– Testing the integrity of the underlying discounted cash
flow model;
– Comparing the forecasts used in the prior year model to
the actual performance of the business in the current year
to assess the historical accuracy of the plans and
forecasts; and
– Comparing the latest board approved budget to the 2019
forecast used in the model and used this as the basis to
sensitise each model in line with the scoping criteria set
out below.
• Tested the discount rates used in the directors’ impairment
assessment as of 30 June 2018, 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 by the directors, and
observed them to be within our expected range as of 30 June
2018. Following changes in market conditions in the second
half of the year our expected range for discount rates as of
31 December 2018 increased, resulting in the UK and US rates
used by the directors in their June assessment falling below
our revised expected range. We assessed the directors’
assessment of whether this change indicated the carrying
value may not be recoverable, and confirmed that this was not
an impairment trigger.
• Considered the use of the long‑term GDP growth rate for the
countries in which the CGU operates for the growth rate used
beyond the period covered by the plan, and observed these
to be within our expected range.
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
the total CGU carrying value when the level of underlying
profit growth for the period covered by the plans 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, we used the civil aerospace capacity long‑term
trend rate measured in available seat kilometres (“ASKs”);
and
– For CGUs operating predominantly in the defence,
energy and other markets, we used territory Gross
Domestic Product (“GDP”) growth projections, based on
our published economic projections.
This identified the EDAC & Advanced Composites CGU for
further audit procedures, which has goodwill of £226.7m. In
respect of this CGU, we assessed, in addition to the discount
rate set out above, the following key assumptions used in the
impairment assessment:
• Compound annual revenue growth over the five year plan
period of approximately 15%. As this assumed growth is in
excess of our weighted average market growth rate as
defined above, we obtained corroborating evidence to
support this assumption by:
– Comparing planned revenue growth to past performance.
Over the three year period since acquisition, compound
annual revenue growth has been 11%. The revenue
growth in 2018 was 17%, which is in excess of the
compound annual revenue growth assumed of 15%;
– Reviewing the USD750m multi‑year contract with from
Pratt & Whitney, which secures a portion of the planned
growth included in the plan; and
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Key audit matter
How our audit addressed the key audit matter
Goodwill impairment assessments (Group) continued
– Benchmarking the planned revenue growth against third
party market analysis for growth in the advanced
composite market for aerospace engines over the period
covered by the plan. Applying these market growth rates
to the CGU, based on its civil aerospace and military
market mix, we calculated a growth rate that supports the
assumption used.
• An average gross margin over the five year plan period of
approximately 24%. We obtained corroborating evidence to
support this assumption, by:
– Identifying the incremental costs incurred in 2018 related
to operational challenges experienced in ramping up
production to meet higher volume demand and
considering the extent to which these costs can be
eliminated in future periods. We examined the normalised
gross profit calculations prepared by the directors and
obtained support for significant adjustments. We also
assessed the reasonableness of the cost reductions
included in the plan related to the production of certain
high volume parts being moved to low cost
manufacturing facilities. We consider management’s
assumptions to be supportable.
– Comparing planned gross margin to the actual margins
achieved prior to the operational issues in 2018 (i.e. in
2016 and 2017) confirmed that the planned gross margin
is aligned to performance in those years and so supports
the assumptions used.
• In respect of the key assumptions, we performed sensitivity
analysis to ascertain the extent of change in those
assumptions which, either individually or collectively,
would be required for the goodwill to be impaired.
Our analysis considered the risks that:
– Volume growth does not meet expectations.
We confirmed that if compound annual revenue growth
decreased from 15% to 12%, without any mitigating
action on costs, an impairment would be triggered;
– Incremental costs associated with volume growth
continue for longer than had been anticipated. We
confirmed that if the gross margin over the period of the
plan reduced from 24% to 21%, without any mitigating
action on other operating costs, an impairment would be
triggered; and
– Discount rates increase. The Group has used a pre‑tax
discount rate of 8.6% in 2018 for its impairment testing.
We have confirmed that were the discount rate to
increase to 10.1% an impairment would be triggered.
We note the growth assumptions and margin improvements are
supportable and therefore no impairment charge was required
in 2018. Given the level of headroom we agree with the
directors’ assessment that additional disclosure is required to
demonstrate the sensitivity of the level of headroom to
the key assumptions. We determined that these disclosures
appropriately draw attention to the significant areas of estimate
and judgement.
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Development costs impairment assessments (Group)
Refer also to note 19 of the consolidated financial statements
(page 156)
The Group holds significant amounts of development costs
(£557.1m) 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 headroom compared to its carrying
value is limited, or if events or changes in circumstances indicate
the carrying value may not be recoverable, more frequently.
No impairment charge has been recorded against these
balances in the current year.
Our audit focused on the risk that the carrying value of these
intangible assets could be overstated. We focused our audit
procedures on those programmes against which the directors
hold an impairment provision, those with limited excess of value
in use over carrying value and those with a significant carrying
value.
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.
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 2032 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 supported
by the evidence we obtained;
• 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 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
our expected range; and
• Assessed whether 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.
Specifically in respect of Dassault Aviation’s (‘Dassault’) Falcon
5X (‘5X’) programme which was impaired in the prior year, we
assessed whether there was any indication that the impairment
should be reversed following the Group’s selection for
Dassault’s new Falcon programme, the Falcon 6X (‘6X’).
To assess the directors’ judgment that there are no indicators
that the impairment should be reversed we:
• Reviewed the contractual terms agreed with Dassault for the
6X. The contractual terms do not refer to recovery of any
previously incurred 5X costs and is clear that amounts
contractually receivable relate to the 6X contract;
• Confirmed that the specification for the two programmes,
particularly in respect of increased maximum take‑off/landing
weight, are different; and
• Compared the level of forecast development spend required
to complete the 6X development to other new programmes
the Group has been awarded in recent years.
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Key audit matter
How our audit addressed the key audit matter
Environmental provisions (Group)
Refer also to note 34 of the consolidated financial statements
(page 169)
The Group has liabilities of £80.6m 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
receivables of £34.1m. We focused on the required asset
recognition criteria being met and recoverability of
these receivables.
Our work on the valuation of environmental liabilities comprised
the following:
• We confirmed that the Group’s external environmental
consultants have sufficient expertise and are qualified and
affiliated with the appropriate industry bodies in the
respective local territory, and are independent of the Group;
• 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 significant changes
to the scope of remediation plans. We confirmed that the
changes in scope have been appropriately reflected in the
provision;
• We reconciled the cost estimates and reports to the provision
recorded and gained an understanding of all significant
adjustments applied, 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; and
• Evaluated and concluded that the liabilities, related assets
and potential exposures were appropriately disclosed in the
financial statements.
Our work on the valuation of insurance and other receivables
comprised the following:
• We obtained the insurance policies and confirmed 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;
• We obtained evidence of the settlements and claims which
resulted in the recognition of receivables in relation to the
environmental provision and found that the evidence
obtained supported asset recognition;
• We obtained evidence of the insurers’ financial position
to assess their ability to meet the policy obligations and
consider that this supports the recognition of the insurance
receivable; and
• We performed sensitivity analysis in relation to changes in the
timings of costs and incremental increases in costs to assess
the recoverability of the insurance receivables. From the
evidence obtained we found the assumptions used to be
appropriate.
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Key audit matter
How our audit addressed the key audit matter
Provisions for uncertain tax positions
Refer also to note 4 of the consolidated financial statements
(pages 142 to 144)
The Group has a provision for uncertain tax positions of £39.2m.
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 focussed 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. From the evidence obtained we found the
assumptions and methodology used to be appropriate;
• 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. Based on the work
performed we found that this support had been appropriately
considered in determining management’s provision;
• 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.
Retirement benefit obligation liabilities (Group
and parent)
Refer also to note 36 of the consolidated financial statements
(pages 171 to 175) and note 14 of the Company financial
statements (pages 196 to 197)
The Group has retirement benefit obligations with gross
liabilities of £1,224.7m, of which £753.4 is recognised by the
Company. The liabilities are significant in the context of the
overall Group and Company balance sheet.
The valuation of retirement benefit obligations requires
significant levels of estimation 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 focussed on the risk that the assumptions
used result in an understatement of the retirement benefit
obligation.
We evaluated the assumptions made in relation to the valuation
of the liabilities, with input from our actuarial specialists. In
particular we:
• 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.
• Tested the discount and inflation rate assumptions used by
comparing them to our internally developed benchmarks,
based on externally derived data and comparable
organisations. We observed the significant assumptions to be
within our expected range;
• Compared assumed mortality rates to national and industry
averages. From the evidence obtained we found the
assumptions to be within our expected range and
methodology used to be appropriate;
• Assessed the assumption for salary increases against the
Group’s historical trend and expected future outlook.
The assumption used was supported by the evidence we
obtained;
• Considered the appropriateness of the methodology used
to update estimates from the latest actuarial valuation and
assessed changes in assumptions in aggregate from the prior
year to assess the consistency of approach overall. From the
evidence obtained we found the assumptions and
methodology used to be appropriate; and
• Evaluated and concluded that the liabilities and potential
exposures were appropriately disclosed in the financial
statements.
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Independent auditors’ report to the members of Meggitt PLC continued
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 structure of the
Group and the Company, the accounting processes and
controls, and the industry in which they operate.
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 10 reporting units, based on their size or risk. Senior
members of the Group audit engagement team visited a
selection of these reporting units, including the significant
component, to review the work undertaken by component
auditors and assess the audit findings. We held a conference
call with the remaining teams to discuss their approach to key
audit matters and discuss audit findings. We performed a
detailed review of the working papers for the significant
component and other component teams as deemed
appropriate. We also performed specified procedures on
7 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, leases,
environmental provisions and related insurance receivables,
certain onerous contracts and other provisions, retirement
benefit obligations, current and deferred tax, share‑based
payments and central adjustments raised as part of the
consolidation process.
These audit procedures accounted for 61% of Group profit
before tax; 62% of Group underlying profit before tax; and
80% 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, 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
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 in aggregate
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 materiality
£16.0 million (2017: £17.0 million).
£34.0 million (2017: £35.0 million).
How we determined it
5% of underlying profit before tax.
1% of total assets.
Group financial statements
Company financial statements
Rationale for benchmark applied
Based on the benchmarks used in the
Annual Report, underlying profit before
tax is the primary measure used by
the shareholders in assessing the
performance of the Group. Further,
we consider it appropriate to eliminate
volatility and to preserve the link between
materiality and the performance of the
underlying business.
We believe that total assets is the primary
measure used by the shareholders in
assessing the performance and position
of the entity and reflects the Company’s
principal activity as a holding company.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality.
The range of materiality allocated across components was between £0.6 million and £14.4 million. Certain components were
audited to a local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.80 million
(Group audit) (2017: £0.85 million) and £1.70 million (Company audit) (2017: £1.75 million) as well as misstatements below those
amounts that, in our view, warranted reporting for qualitative reasons.
126
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Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add
or draw attention to in respect of the directors’ statement in
the financial statements about whether the directors considered
it appropriate to adopt the going concern basis of accounting
in preparing the financial statements and the directors’
identification of any material uncertainties to the Group’s and
the Company’s ability to continue as a going concern over a
period of at least twelve months from the date of approval of
the financial statements.
We have nothing material to add or to draw attention to.
As not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s and Company’s
ability to continue as a going concern. For example, the terms
on which the United Kingdom may withdraw from the European
Union, which is currently due to occur on 29 March 2019, are
not clear, and it is difficult to evaluate all of the potential
implications on the Group’s and Company’s trade, customers,
suppliers and the wider economy.
We are required to report if the directors’ statement relating to
Going Concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the
audit.
We have nothing 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
We have nothing material to add or draw attention to regarding:
• The directors’ confirmation on page 46 of the Annual Report
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.
• The disclosures in the Annual Report that describe those
risks and explain how they are being managed or mitigated.
• The directors’ explanation on page 53 of the Annual Report
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.
We have nothing to report having performed a review of
the directors’ statement that they have carried out a robust
assessment of the principal risks facing the Group and
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 UK Corporate Governance Code (the “Code”); and
considering whether the statements are consistent with the
knowledge and understanding of the Group and Company
and their environment obtained in the course of the audit.
(Listing Rules).
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our
auditors’ report thereon. The directors are responsible for the
other information. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except to the extent otherwise
explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we
identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to
conclude whether there is a material misstatement of the
financial statements or a material misstatement of the other
information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have
nothing to report based on these responsibilities.
With respect to the Strategic report and Directors’ report,
we also considered whether the disclosures required by the
UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless
otherwise stated).
Strategic Report and Directors’ report
In our opinion, based on the work undertaken in the course
of the audit, the information given in the Strategic report and
Directors’ report for the year ended 31 December 2018 is
consistent with the financial statements and has been prepared
in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and
Company and their environment obtained in the course of the
audit, we did not identify any material misstatements in the
Strategic report and Directors’ report. (CA06)
Meggitt PLC
Annual Report and Accounts 2018
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Independent auditors’ report to the members of Meggitt PLC continued
Use of this report
This report, including the opinions, has been prepared for and
only for the Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no
other purpose. We do not, in giving these opinions, accept or
assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it
may come save where expressly agreed by our prior consent
in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• adequate accounting records have not been kept by the
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
• certain disclosures of directors’ remuneration specified by law
are not made; or
• the Company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we were
appointed by the members on 2 October 2003 to audit the
financial statements for the year ended 31 December 2003 and
subsequent financial periods. The period of total uninterrupted
engagement is 16 years, covering the years ended 31 December
2003 to 31 December 2018.
John Ellis (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Reading
25 February 2019
Other Code Provisions
We have nothing to report in respect of our responsibility to
report when:
• The statement given by the directors, on page 118, that they
consider the Annual Report taken as a whole to be fair,
balanced and understandable, and provides the information
necessary for the members to assess the Group’s and
Company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of the
Group and Company obtained in the course of performing
our audit.
• The section of the Annual Report on page 88 describing the
work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
• The directors’ statement relating to the Company’s
compliance with the Code does not properly disclose a
departure from a relevant provision of the Code specified,
under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006. (CA06)
Responsibilities for the financial statements
and the audit
Responsibilities of the directors for the financial
statements
As explained more fully in the Statement of directors’
responsibilities set out on page 118, the directors are
responsible for the preparation of the financial statements
in accordance with the applicable framework and for being
satisfied that they give a true and fair view. The directors are
also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud
or error.
In preparing the financial statements, the directors are
responsible for assessing the Group’s and the Company’s
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern
basis of accounting unless the directors either intend to
liquidate the Group or the Company or to cease operations,
or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue an auditors’ report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of these financial statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors’ report.
128
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Annual Report and Accounts 2018
Consolidated income statement
For the year ended 31 December 2018
Revenue
Cost of sales
Gross profit
Net operating costs
Operating profit1
Finance income
Finance costs
Net finance costs
Profit before tax2
Tax (charge)/credit
Profit for the year attributable to equity owners of the Company
Earnings per share:
Basic3
Diluted4
Non-GAAP measures
1 Underlying operating profit
2 Underlying profit before tax
3 Underlying basic earnings per share
4 Underlying diluted earnings per share
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£’m
2017
Restated
(see note 45)
£’m
2,080.6
(1,320.1)
1,994.4
(1,235.2)
Notes
5
760.5
759.2
(503.9)
(486.5)
256.6
272.7
1.0
(41.5)
(40.5)
1.4
(45.8)
(44.4)
216.1
228.3
(37.1)
179.0
64.5
292.8
23.2p
22.8p
37.8p
37.1p
367.3
334.8
34.2p
33.7p
353.3
320.2
32.0p
31.3p
6
12
13
14
15
15
10
10
15
15
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Annual Report and Accounts 2018
129
Consolidated statement of comprehensive income
For the year ended 31 December 2018
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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 movements
Movements in fair value of financial liabilities arising from changes in credit risk
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
32
14
36
14
2018
£’m
179.0
2017
Restated
(see note 45)
£’m
292.8
90.7
0.8
(0.3)
2.5
93.7
46.2
(7.3)
38.9
(147.5)
(2.1)
(0.2)
(2.4)
(152.2)
66.6
(27.1)
39.5
Other comprehensive income/(expense) for the year
132.6
(112.7)
Total comprehensive income for the year attributable to equity owners of the Company
311.6
180.1
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Meggitt PLC
Annual Report and Accounts 2018
Consolidated balance sheet
At 31 December 2018
Non-current assets
Goodwill
Development costs
Programme participation costs
Other intangible assets
Property, plant and equipment
Investments
Trade and other receivables
Contract assets
Derivative financial instruments
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Contract assets
Derivative financial instruments
Current tax recoverable
Cash and cash equivalents
Assets classified as held for sale
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31 December
2018
Notes
£’m
31 December
2017
Restated
(see note 45)
£’m
1 January
2017
Restated
(see note 45)
£’m
18
19
19
20
21
22
25
26
33
35
24
25
26
33
27
23
2,035.3
557.1
18.2
610.4
404.0
12.9
21.5
61.1
10.0
16.3
1,944.9
495.8
17.1
672.1
406.2
13.6
38.7
49.7
28.5
26.3
2,095.7
543.0
17.0
817.6
424.4
14.8
58.4
56.9
21.8
28.8
3,746.8
3,692.9
4,078.4
441.2
413.6
47.9
9.3
6.4
181.9
10.3
1,110.6
393.4
389.7
39.7
3.6
4.3
118.5
9.7
958.9
443.0
394.7
33.4
4.2
4.4
173.8
–
1,053.5
Total assets
6
4,857.4
4,651.8
5,131.9
Current liabilities
Trade and other payables
Contract liabilities
Derivative financial instruments
Current tax liabilities
Lease liabilities
Bank and other borrowings
Provisions
Liabilities directly associated with assets classified as held for sale
Net current assets
Non-current liabilities
Trade and other payables
Contract liabilities
Derivative financial instruments
Deferred tax liabilities
Lease liabilities
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
28
29
33
30
31
34
23
28
29
33
35
30
31
34
36
37
(452.5)
(47.9)
(18.8)
(39.5)
(16.1)
(10.2)
(33.0)
–
(402.1)
(52.5)
(17.3)
(39.6)
(16.9)
(71.4)
(65.7)
(7.8)
(419.1)
(31.7)
(31.2)
(35.6)
(17.8)
(175.7)
(53.6)
–
(618.0)
(673.3)
(764.7)
492.6
285.6
288.8
(1.3)
(43.9)
(17.4)
(161.9)
(81.4)
(1,148.3)
(83.7)
(209.1)
(5.5)
(23.1)
(14.6)
(142.2)
(85.2)
(1,005.8)
(82.5)
(308.1)
(4.8)
(19.3)
(45.7)
(235.5)
(88.5)
(1,170.6)
(131.8)
(414.7)
(1,747.0)
(1,667.0)
(2,110.9)
(2,365.0)
(2,340.3)
(2,875.6)
2,492.4
2,311.5
2,256.3
38.8
1,223.9
15.7
493.8
720.2
38.8
1,222.2
15.7
400.1
634.7
38.8
1,219.8
15.7
552.3
429.7
2,492.4
2,311.5
2,256.3
The financial statements on pages 129 to 185 were approved by the Board of Directors on 25 February 2019 and signed on its behalf by:
A Wood
Director
L Burdett
Director
Meggitt PLC
Annual Report and Accounts 2018
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Consolidated statement of changes in equity
For the year ended 31 December 2018
Equity attributable to owners of the Company
Share
capital
Share
premium
Other
reserves*
At 1 January 2017 (Restated – see note 45)
38.8
1,219.8
Notes
£’m
£’m
Profit for the year
Other comprehensive income for the year:
Currency translation movements:
Arising in the year
Transferred to the income statement
Movements in fair value of financial liabilities arising
from changes in credit risk
Cash flow hedge movements:
Transferred to the income statement
Remeasurement of retirement benefit obligations
Other comprehensive (expense)/income before tax
Tax effect
Other comprehensive (expense)/income for the year
Total comprehensive (expense)/income for the year
Employee share schemes:
Value of services provided
Purchase of own shares for employee share schemes
Issue of equity share capital
Dividends
36
14
16
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.4
–
£’m
15.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Hedging and
translation
reserves**
£’m
Retained
earnings
Total
equity
£’m
£’m
552.3
429.7
2,256.3
–
292.8
292.8
(138.9)
(8.6)
(2.1)
(0.2)
–
(149.8)
(2.4)
(152.2)
–
–
–
–
66.6
66.6
(27.1)
39.5
(138.9)
(8.6)
(2.1)
(0.2)
66.6
(83.2)
(29.5)
(112.7)
(152.2)
332.3
180.1
–
–
–
–
12.7
(19.0)
(2.4)
(118.6)
12.7
(19.0)
–
(118.6)
At 31 December 2017 (Restated – see note 45)
38.8
1,222.2
15.7
400.1
634.7
2,311.5
Profit for the year
Other comprehensive income for the year:
Currency translation movements:
Arising in the year
Transferred to the income statement
Movements in fair value of financial liabilities arising
from changes in credit risk
Cash flow hedge movements:
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 for employee share schemes
Issue of equity share capital
Dividends
At 31 December 2018
44
36
14
16
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
179.0
179.0
93.7
(3.0)
0.8
(0.3)
–
91.2
2.5
93.7
–
–
–
–
46.2
46.2
(7.3)
38.9
93.7
(3.0)
0.8
(0.3)
46.2
137.4
(4.8)
132.6
93.7
217.9
311.6
–
–
–
–
16.1
(22.6)
(1.7)
(124.2)
16.1
(22.6)
–
(124.2)
38.8
1,223.9
15.7
493.8
720.2
2,492.4
*
**
Other reserves relate to capital reserves of £14.1m (2017: £14.1m) arising on the acquisition of businesses in 1985 and 1986 where merger accounting was applied and
a capital redemption reserve of £1.6m (2017: £1.6m) created as a result of the share buyback programme which commenced in 2014 and completed in 2015.
Hedging and translation reserves comprise a credit balance on the hedging reserve of £1.1m (2017 restated: £0.7m) and a credit balance on the translation reserve of
£492.7m (2017 restated: £399.4m). Amounts recycled from the hedging reserve to the income statement, in respect of cash flow hedge movements, have been
recognised in net finance costs. Amounts recycled from the translation reserve to the income statement, in respect of the disposal of foreign subsidiaries, have been
recognised in net operating costs.
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Consolidated cash flow statement
For the year ended 31 December 2018
Non-GAAP measures
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
Business acquired
Businesses disposed
Capitalised development costs
Capitalised programme participation costs
Purchase of intangible assets
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Cash outflow from investing activities
Dividends paid to Company’s shareholders
Purchase of own shares for employee share schemes
Proceeds from bank and other borrowings
Repayments of bank and other borrowings
Repayments of lease liabilities
Cash outflow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at start of the year
Exchange gains/(losses) on cash and cash equivalents
Cash and cash equivalents at end of the year
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£’m
2017
Restated
£’m
Notes
364.0
(3.8)
(12.0)
348.2
0.2
(33.1)
(20.0)
295.3
–
35.7
(58.6)
(0.8)
(21.8)
(52.6)
2.1
(96.0)
(124.2)
(22.6)
85.5
(66.8)
(14.3)
417.0
(3.9)
(13.8)
399.3
0.2
(37.5)
(24.1)
337.9
(19.4)
83.7
(62.6)
(3.4)
(18.3)
(62.0)
1.9
(80.1)
(118.6)
(19.0)
64.9
(224.2)
(11.4)
(142.4)
(308.3)
56.9
118.5
6.5
181.9
(50.5)
173.8
(4.8)
118.5
44
11
42
44
19
16
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Annual Report and Accounts 2018
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Notes to the consolidated financial statements
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.
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 and test.
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 financial
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.
Adoption of new and revised accounting standards
A number of new accounting standards have been adopted for
the financial year. The standards which have been adopted for
the first time and which have had a significant impact on the
consolidated financial statements are:
• IFRS 15, ‘Revenue from contracts with customers’;
• IFRS 16, ‘Leases’; and
• IFRS 9, ‘Financial instruments’.
The Group has updated its accounting policies to reflect the
impact of these standards. Comparative financial information for
2017 has been restated with a cumulative adjustment to equity
at 1 January 2017 (see note 45).
IFRS 15, ‘Revenue from contracts with customers’
The standard became effective for periods beginning on or
after 1 January 2018. The Group has elected to apply the
full retrospective approach upon adoption of IFRS 15. This
approach required all open contracts with customers presented
in the consolidated financial statements to be transitioned
under the new standard. The Group has taken the following
practical expedients permitted by the standard:
• Contracts completed prior to the earliest date presented
have not been restated;
• Contracts modified prior to the earliest period presented
have not been restated for such modifications;
• For contracts with variable consideration, and which
completed in comparative reporting periods, the transaction
price at the date of contract completion has been used as the
revenue amount for all periods presented; and
• The transaction price allocated to remaining performance
obligations, and when these outstanding obligations are
expected to be recognised as revenue, are not presented for
comparative periods.
IFRS 16, ‘Leases’
The standard becomes effective for periods beginning on or
after 1 January 2019 with early adoption permitted. The Group
has early adopted IFRS 16 and elected to apply the full
retrospective approach on transition. The Group has taken the
following practical expedients permitted by the standard:
• IFRS 16 guidance has not been applied to short‑term leases
(lease contracts with less than one year to maturity on
adoption) and leases of low‑value assets;
• A single discount rate has been used for a portfolio of leases
with reasonably similar characteristics; and
• Contracts at the date of transition, other than those
previously accounted for as an operating or finance lease
under the Group’s previous accounting policy, have not been
reassessed as to whether they contain a lease.
IFRS 9, ‘Financial instruments’
The standard became effective for periods beginning on or
after 1 January 2018 and required retrospective application.
Basis of consolidation
The Group’s consolidated financial statements consolidate the
financial statements of the Company, all of its subsidiaries and
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 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 whereby the Group’s
share of profits and losses of the joint venture is recognised in
the income statement within net operating costs and its share of
net assets and goodwill of the joint venture is recognised as an
investment (see note 22).
The cost of an acquisition is the fair value of consideration
provided, including the fair value of contingent consideration,
measured at the acquisition date. Contingent consideration
payable is measured at fair value at each subsequent balance
sheet date, with 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. The extent to which the cost of an acquisition
exceeds the fair value of net assets acquired is recorded as
goodwill. Costs directly attributable to an acquisition are
recognised in the income statement within net operating costs
as incurred. Changes in fair value of contingent consideration
payable and costs of an acquisition are excluded from the
underlying profit measures used by the Board to monitor and
measure the underlying performance of the Group
(see note 10).
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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 net assets of foreign subsidiaries
are recognised in hedging and translation reserves within other
comprehensive income. Goodwill and fair value adjustments
arising from the acquisition of a foreign subsidiary are treated
as assets and liabilities of the subsidiary and retranslated at
exchange rates prevailing at the balance sheet date.
Segment reporting
Operating segments are those segments for which results are
reviewed by the Group’s Chief Operating Decision Maker
(‘CODM’) to assess performance and make decisions about
resources to be allocated. The CODM has been identified as
the Board (see page 80 of the Corporate governance report).
The Group has determined that its segments for the year ended
31 December 2018 are Meggitt Aircraft Braking Systems,
Meggitt Control Systems, Meggitt Polymers & Composites,
Meggitt Sensing Systems and the Meggitt Equipment Group.
Airframe Systems, Engine Systems, Energy & Equipment and
Services & Support will be the Group’s new segments from
1 January 2019, the effective date of the new divisional structure
(see page 40 of the Strategic report).
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 consolidated financial statements (see note 6).
Segmental information on assets is provided in the notes to the
consolidated 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 (see note 6).
Excluded assets comprise centrally managed trading assets,
goodwill, other intangible assets (excluding software assets),
investments, derivative financial instruments, deferred tax
assets, current tax recoverable, cash and cash equivalents and
assets classified as held for sale.
No segmental information on liabilities is provided in the notes
to the consolidated financial statements, as no such measure is
reviewed by the CODM.
2. Summary of significant accounting policies continued
Basis of consolidation continued
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 recognised 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.
When a subsidiary is disposed, the difference between the fair
value of consideration receivable and the value at which the net
assets of the subsidiary were recognised, immediately prior to
disposal, is recognised in the income statement within net
operating costs. Contingent consideration receivable is
measured at fair value at the date of disposal in determining
the gain or loss recognised. It is subsequently measured at fair
value at each balance sheet date, with any changes in fair value
recognised in the income statement within net operating costs.
Changes in fair value of contingent consideration receivable are
excluded from the underlying profit measures used by the
Board to monitor and measure the underlying performance of
the Group (see note 10).
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 recognised 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 intra‑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 recognised 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.
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Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
Revenue from external customers
Revenue is recognised when control of goods or services
provided by the Group is transferred to the customer and at
an amount reflecting the consideration the Group expects to
receive from the customer in exchange for those goods and
services.
There are no significant judgements required in either
determining the Group’s performance obligations or, because
the majority of the Group’s revenue is recognised when goods
or services are provided to the customer, in the timing of
revenue recognition. As revenue is typically recognised at
amounts agreed in advance with customers, no significant
estimates are required in determining transaction prices.
Estimates of total contract costs are required to determine
the extent to which revenue is recognised in a period on over
time contracts. The Group does not consider there to be any
reasonably foreseeable changes in these estimates that could
give rise to a significant impact on revenue recognised in the
period.
Transfer of control – At a point in time
For the majority of goods and services provided by the Group,
transfer of control occurs when delivery to the customer takes
place which, depending on the specific terms agreed with the
customer, may be when goods are collected from the Group’s
facilities or when they are delivered either to the customer’s
facilities or to a third party transport agent. The more common
exceptions to this assessment for the Group of when control
passes are:
• Bill and hold arrangements. Where, under the terms of a
contract, a customer agrees to accept title to goods which
remain at the Group’s facility, and normal credit terms apply,
transfer of control occurs when these contractual terms have
been met, which will typically be when goods are completed,
packaged and segregated at the Group’s facility;
• Goods and services are not distinct performance obligations.
Where a contract involves the supply of multiple goods and
services, the Group has concluded that typically each good
and service supplied is a distinct performance obligation.
However, contracts may require the Group to provide
installation and other services specific to the goods but
subsequent to their delivery. Where installation and other
services are specialised, significant and not capable of being
performed by another party, control of the goods transfers
when installation and other services are completed by the
Group and not when delivery of the goods takes place;
• Goods are delivered subject to consignment arrangements.
Where the Group delivers goods to a customer facility, such
as an airline operator, but retains control of those goods until
they are used by the customer, control transfers when the
Group is notified by the customer of their use; and
• Goods supplied subject to customer acceptance. Within
the aerospace industry goods are frequently subject to
customer acceptance testing on delivery, or at the Group’s
facilities. Normally the Group is able, through its own
testing procedures, to predict with reasonable certainty
that acceptance testing will be successful and accordingly
acceptance testing will not affect the determination of when
control passes. Where however the Group cannot predict the
outcome with reasonable certainty, control is not considered
to transfer until the goods have been accepted by
the customer.
Transfer of control – Over time
The principal circumstances in which control transfers over time
are where the Group provides goods or services for which it has
no alternative use and has the enforceable right to payment,
plus a reasonable profit margin, throughout the life of the
contract.
Certain defence contracts include clauses entitling the Group
to be awarded a reasonable profit margin in the event the
customer cancels for convenience. Where the Group considers
such rights to be enforceable; is confident that a reasonable
profit margin would be awarded regardless of the stage of
contract completion and would apply to all costs incurred by
the Group; and the goods and services have no alternative use,
control will transfer over time.
An alternative use exists where there are multiple potential
customers, OEMs and/or aftermarket customers, to whom the
Group could provide those goods or services.
Where a contract is structured such that non‑refundable
milestone payments are receivable from a customer in advance
of work being performed, and the Group is reasonably certain
at contract inception that the cumulative value of such milestone
payments will exceed cumulative costs incurred throughout the
duration of the contract, control will transfer over time.
Where control transfers over time, the Group considers costs
incurred, as a proportion of total expected contract costs, to be
the most appropriate measure of contract completion. For
power by the hour and cost per brake landing contracts this
results in revenue being recognised when maintenance events
are performed.
Consideration expected to be received from the customer
The majority of the Group’s contracts provide that consideration
is payable within a short period after control of goods and
services is transferred to the customer, typically up to three
months, and accordingly no significant financing component to
the consideration receivable exists.
Where a contract includes variable consideration, the Group
estimates the variable consideration to which it will be entitled
at contract inception and revises the estimate throughout the
life of the contract. Estimates are constrained until it is highly
probable that the uncertainty affecting the level of variable
consideration has been resolved and a significant reversal of
cumulative revenue recognised will not arise. For power by the
hour and cost per brake landing contracts this requires the
Group to estimate the number of aircraft flying hours or
landings expected over the contract.
In certain instances the Group will receive contributions from
customers during the development phase of an aerospace
programme, typically in the form of cash, and where the Group
expects to retain the intellectual property of the developed
technology throughout the programme life. Such contributions
are treated as customer consideration and initially recognised
as a contract liability when receivable. Contributions are
subsequently included in the transaction price attributable to
goods and services provided to the customer during the
production phase of the programme. Where the contribution is
received more than 12 months in advance of goods and services
being provided to the customer, the financing element of the
contribution, if significant, is separately identified and
recognised as finance income over the period goods and
services are provided.
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2. Summary of significant accounting policies continued
Revenue from external customers continued
Where the Group makes contributions to customers to
participate in aerospace programmes, typically in the form of
cash, such payments are initially recognised as a contract asset
provided the Group has received, or it is highly probable that
it will receive, contracts from the same customer and relating
to the same aerospace programme (see also programme
participation costs policy). Where the payment is made more
than 12 months in advance of goods and services being
provided to the customer, the financing element of the
contribution, if significant, is separately identified and
recognised as finance costs over the period goods and services
are provided. Other than such payments, the Group does not
incur significant incremental costs to obtain contracts.
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 and significant site consolidation and other
restructuring costs. Additionally in 2017, given its significance,
the impairment loss arising from cancellation by the customer
of the Dassault Falcon 5X programme was treated as an
exceptional operating item. Exceptional operating items are
included within the appropriate consolidated income statement
category but are highlighted separately in the notes to the
consolidated 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 or disposal 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 consolidated 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 held at cost less amortisation charged
prior to 1 January 2004 and accumulated impairment losses.
In the event a 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 benefits
based on all relevant available information, are recognised
as an intangible asset. Capitalised development costs are
subsequently held at cost less accumulated amortisation and
impairment losses. Amortisation is charged to net operating
costs over 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.
Programme participation costs
Programme participation costs consist of cash payments made
to OEMs in connection with their selection of the Group’s
products for installation onto new aircraft where the Group has
obtained principal supplier status. The treatment of programme
participation costs depends on the contractual relationship
between the Group and the third party to whom the payment
is made:
• Where the payment is made to a third party under a revenue
contract (as defined by IFRS 15), or the award of future IFRS
15 revenue contracts on the programme from the same party
is highly probable, payments are initially recognised as a
contract asset (see ‘Revenue from external customers’ policy);
and
• Other payments are initially recognised as an intangible asset
and subsequently held at cost less accumulated amortisation
and impairment losses. Amortisation is charged to net
operating costs over 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 – Assets acquired as part of
a business combination
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 to net operating
costs over the estimated useful economic lives of the assets.
The nature of intangible assets recognised and their estimated
useful lives are as follows:
Customer relationships
Technology
Up to 20 years
Up to 20 years
Trade names and trademarks Up to 15 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).
Other intangible assets – Software and other
intangible assets
Software and purchased licences, trademarks and patents are
held at cost less accumulated amortisation and impairment
losses. Amortisation is charged on a straight‑line basis over the
estimated useful economic lives of the assets, typically over
periods up to 10 years. Residual values and useful lives are
reviewed annually and adjusted if appropriate.
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Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
Property, plant and equipment
Property, plant and equipment is held at cost less accumulated
depreciation and impairment losses. Cost includes expenditure
directly attributable to the acquisition of the asset.
For right‑of‑use assets, cost comprises an amount equal to
the initial lease liability recognised, adjusted to include any
payments made for the right to use the asset, initial direct costs
incurred and estimated costs for dismantling, removing and
restoring the asset at the end of the lease term. Lease incentives
receivable from the lessor are recognised as a reduction in cost.
Depreciation is charged on a straight‑line basis over the
estimated useful economic lives of the assets as follows:
Freehold buildings
Right‑of‑use assets
Plant and machinery
Furnaces
Fixtures and fittings
Motor vehicles
Up to 50 years
Shorter of the useful economic
life of the asset and the lease term
3 to 10 years
Up to 20 years
3 to 10 years
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
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, typically at least 12 months. All
other borrowing costs are recognised in the income statement
within finance costs as incurred.
Taxation
Current tax 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 recognised in
the Group’s consolidated financial statements. It is calculated
using tax rates enacted or substantively enacted at the balance
sheet date. Deferred tax is provided on unremitted earnings of
foreign subsidiaries, except where the Group 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.
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. Given its significance, the tax credit recognised in
the income statement arising from the reduction in the US
federal corporate tax rate in 2017 has been excluded from the
Group’s underlying profit for the year (see note 10).
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,
which are not discounted given the short period over which they
are expected to be utilised, are included within current tax
liabilities. Any liability relating to interest on tax liabilities is
included within finance costs.
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 of an
asset exceeds its recoverable amount, the difference is
recognised as an expense in the income statement. The
recoverable amount used for impairment testing is the higher
of 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 recognised 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 recognised at the lower of cost and net
realisable value. Cost comprises 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. Provision is made for obsolete,
slow moving or defective items where appropriate.
Trade and other receivables
Trade receivables are initially recognised at fair value and
subsequently measured at amortised cost less any impairment
losses.
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.
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2. Summary of significant accounting policies continued
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
The majority of the Group’s leases relate to property. A lease
liability is recognised when the Group obtains control of the
right‑of‑use asset, that is the subject of the lease. The lease
liability is subsequently measured using the effective interest
method, with interest charged to finance costs.
At inception, the Group evaluates whether it is reasonably
certain that any option to extend a lease term will be exercised.
Typically, where the initial lease term for a property used for the
Group’s manufacturing operations is for at least five years,
the option to extend the lease term is at market rates and the
right‑of‑use asset is not considered specialised, it is unusual for
an extension of lease term to be reflected at lease inception.
The Group will however, continue to evaluate the likelihood
of exercising such options throughout the initial lease term.
When the Group is committed to extending the lease, having
considered the alternative options available and, where
appropriate, lessor consent to the extension has been obtained,
the Group will consider the option to be reasonably certain to
be exercised. When an option is reasonably certain to be
exercised, the right‑of‑use asset and lease liabilities recognised
are adjusted to reflect the extended term.
Leases, which at inception have a term of less than 12 months or
relate to low‑value assets, are not recognised on the balance
sheet. Payments made under such leases are charged to the
income statement on a straight‑line basis over the period of
the lease.
Borrowings
Borrowings are initially recognised at fair value, being proceeds
received less directly attributable transaction costs incurred.
Borrowings are generally subsequently held 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 held at fair
value at each balance sheet date with any movement in fair
value attributable to changes in credit risk recognised in other
comprehensive income and any other movements in fair value
recognised in the income statement within net operating costs.
Movements in fair value recognised in net operating costs 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.
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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 (as a reduction in future contributions, or as a
refund to which the Group has an unconditional right either
during the life of the scheme or when the scheme liabilities are
settled), 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.
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Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
Derivative financial instruments and hedging
The Group uses derivative financial instruments to hedge its
exposure to interest rate risk and foreign currency transactional
risk. Derivative financial instruments are initially recognised at
fair value on the date the derivative contract is entered into and
are subsequently held 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 subsequent
measurement at fair value 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 its
inception, the economic 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 effective in
offsetting changes in fair values or cash flows of hedged items
as outlined in the objectives and strategy for undertaking the
hedging transaction and any changes in fair values must not be
dominated by the effect of credit risk.
To the extent the maturity of the derivative financial instruments
are more than 12 months from the balance sheet date, they are
classified as non‑current assets or non‑current liabilities. All
other derivative financial instruments are classified as current
assets or current liabilities.
Fair value hedges
Changes in fair value, not attributable to credit risk, 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 changes in fair value attributable to credit risk
are recognised in other comprehensive income. Any difference
recognised in the income statement between movements 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 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. If the hedging instrument
is sold 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
within net operating costs. The Group no longer holds any
derivative financial instruments for which cash flow hedge
accounting is applied.
Net investment 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. 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-based compensation
The Group operates a number of share‑based compensation
schemes, which are subject to non‑market based vesting
conditions and are principally equity‑settled.
For equity‑settled schemes, at the date of grant, the Group
estimates the number of awards expected to vest as a result of
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 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.
Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new shares are deducted
from the proceeds recognised 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 recognised as a deduction from
retained earnings.
Dividends
Interim dividends are recognised as liabilities when approved by
the Board. Final dividends are recognised as liabilities when
approved by the shareholders.
Recent accounting developments
A number of additional 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 the consolidated financial
statements. None of these are expected to have a significant
impact on the consolidated financial statements when they
are adopted.
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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 57 to 58 of the Chief Financial Officer’s review). Regular reports
monitor exposures and assist in managing the associated risks.
Market risk
Foreign exchange risk
The Group operates internationally and is subject to foreign exchange risks on future commercial transactions and the retranslation
of the results of, and net investments in, foreign subsidiaries. The principal exposure arises with respect to the US dollar against the
Pound sterling. To mitigate risks associated with future commercial transactions, the Group policy is to hedge known and certain
forecast transaction exposure based on historical experience and projections. The Group hedges at least 70% of the next
12 months anticipated exposure and can hedge expected exposures up to five years. Details of hedges in place are provided in
note 33. The Group does not 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 borrowings 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 33.
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 25
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 assets 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 27 and 33.
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 tables analyse the Group’s non‑derivative financial liabilities and derivative assets and liabilities at the balance sheet date.
The amounts disclosed in the tables are the contractual undiscounted cash flows:
Trade and other payables*
Contract liabilities (see note 29)
Derivative financial instruments (Inflows)**
Lease liabilities
Bank and other borrowings (see note 31)
Interest payments on borrowings
Total
2018
Less than
1 year
£’m
441.4
47.9
(5.7)
19.2
–
33.1
1-5 years
£’m
0.9
11.7
(3.5)
60.7
907.9
86.1
535.9
1,063.8
Greater than
5 years
£’m
0.4
32.2
–
34.1
235.2
25.4
327.3
2017 (Restated)
Trade and other payables*
Contract liabilities (see note 29)
Derivative financial instruments (Inflows)**
Lease liabilities
Bank and other borrowings (see note 31)
Interest payments on borrowings
Total
* Excludes social security and other taxes of £11.1m (2017: £10.2m) (see note 28).
** Assumes no change in interest rates from those prevailing at the balance sheet date.
Less than
1 year
£’m
391.9
52.5
(7.3)
20.5
61.7
31.5
550.8
1‑5 years
£’m
2.0
6.2
(12.4)
59.5
551.3
96.5
703.1
Greater than
5 years
£’m
3.5
16.9
–
42.4
444.4
39.4
Total
£’m
442.7
91.8
(9.2)
114.0
1,143.1
144.6
1,927.0
Total
£’m
397.4
75.6
(19.7)
122.4
1,057.4
167.4
546.6
1,800.5
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Notes to the consolidated financial statements continued
3. Financial risk management continued
Sensitivity analysis
The Group’s principal exposure in relation to market risks are to changes in the exchange rate between the US dollar and Pound
sterling and to changes in US interest rates. The table below illustrates the sensitivity of the Group’s results to changes in these key
variables at the balance sheet date. The analysis covers only financial assets and liabilities held at the balance sheet date and is
made on the basis of the hedge designations in place on those dates and assumes no hedge ineffectiveness.
USD/Sterling exchange rate +/‑ 10%
US yield curve +/‑ 1%
2018
2017 Restated
Income
statement
£’m
48.9
14.2
Equity
£’m
107.9
–
Income
statement
£’m
39.6
17.8
Equity
£’m
103.9
0.3
The impact on equity from movements in the exchange rate comprises £100.2m (2017: £93.8m) in respect of US dollar net
borrowings, and £7.7m (2017: £10.1m) in respect of other financial assets and liabilities. However, as all US dollar net borrowings are
designated as a net investment hedge, this element of the impact is entirely offset by the retranslation of foreign subsidiaries. The
impact of a 1% movement in the US yield curve includes the effect on the Group’s foreign currency forward contracts and 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 assets. The strategy is designed to maximise shareholder return over the long term.
The Group’s post‑tax weighted average cost of capital at 31 December 2018 is approximately 6.6% (2017: 6.2%) and its capital
structure is as follows:
Net debt (see note 43)
Total equity
Debt/equity %
2018
£’m
1,074.1
2,492.4
2017
Restated
£’m
1,060.8
2,311.5
43.1%
45.9%
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 pages 57 to 58 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.
4. Critical accounting estimates and judgements
In applying the Group’s accounting policies set out in note 2, the Group is required to make certain estimates and judgements
concerning the future. These estimates and judgements are regularly reviewed and revised as necessary. The estimates and
judgements that have the most significant effect on the amounts included in the consolidated financial statements are described
below. Further consideration of these critical estimates and judgements can be found in the Audit Committee report on page 88.
Critical accounting estimates
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 CGUs or
groups of CGUs. These value in use calculations are dependent on estimates of future cash flows, long‑term growth rates and
appropriate discount rates to be applied to future cash flows. Further details on these estimates and sensitivities of the carrying
value of goodwill to these estimates are provided in note 18.
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4. Critical accounting estimates and judgements continued
Critical accounting estimates continued
Cancellation of Dassault Falcon 5X programme
In late 2017, Dassault Aviation (“Dassault”) announced cancellation of its Falcon 5X programme and the launch of a new
programme, the Falcon 6X, featuring the same cross section, but powered by Pratt & Whitney Canada engines rather than the
Silvercrest engine selected for the Falcon 5X. The cancellation resulted in the Group recording an impairment charge in 2017 of
£58.0m (restated), principally related to development costs incurred by Meggitt Aircraft Braking Systems (‘MABS’).
In 2018, MABS was selected to provide the wheel and braking system for the Falcon 6X. This aircraft is forecast to enter service in
2022. Following the selection of MABS for the Falcon 6X, the Group has reassessed the estimated recoverable value of the Falcon
5X development costs impaired in 2017. The Group has concluded there are no indicators that any element of the impairment
should be reversed. In reaching this conclusion, the Group has considered the following:
• Contractual terms agreed with Dassault for the Falcon 6X. The contractual terms do not include any recovery of previously
incurred 5X costs, either directly or through the pricing mechanism agreed with Dassault for the supply of OE/aftermarket parts
on the Falcon 6X;
• Falcon 6X specifications. The increased maximum take‑off/landing weight of the Falcon 6X, when compared to the Falcon 5X,
will require a redesign of the braking system. The braking system for the Falcon 5X was the most significant and complex area of
development activity for that programme.
Other know‑how developed by MABS for the Falcon 5X is, at least to an extent, capable of being leveraged and applied to the
Falcon 6X programme. However, the cost recording system used to track Falcon 5X development activities was not designed to
retrospectively provide an analysis of costs incurred between those areas requiring different levels of redesign effort to meet the
new Falcon 6X specifications. The Group has concluded it is not possible to derive a reliable estimate of any costs incurred during
the Falcon 5X development that are directly attributable to the Falcon 6X specifications; and
• Forecast Falcon 6X development costs. The level of forecast development spend required by MABS to complete the Falcon 6X
development, compared to other new programmes it has been awarded in recent years, does not indicate any significant transfer
of know‑how from the Falcon 5X programme.
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 36.
Environmental provisions
The Group is involved in the investigation and remediation of environmental contamination at certain sites for which it has been
identified as a potentially responsible party under US law (see note 34). 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. These
estimates are revised regularly as remediation activities progress and further information is obtained on the extent of activities
to be performed by the Group. In the last five years, annual reductions and annual increases in costs estimates have both been
experienced. If the cost estimates on which the provision at 31 December 2018 is based were to change by 15%, the largest
observed overall annual movement seen in this five year period, the provision recognised would need to change by approximately
£12.0m. During the last five years, no significant changes to the estimated period for which operations and maintenance activities
will be required have been necessary. However, as the period for which groundwater testing has been performed increases, the
results of that testing provide a more reliable estimate of the extent to which such activities will continue to be required in the
future. It is reasonably foreseeable that, depending on groundwater testing results in 2019, the periods for which operations and
maintenance will be required could increase by up to five years. Were an increase of five years to be required, the provision
recognised would need to increase by approximately £12.0m.
The Group has extensive insurance arrangements in place to mitigate the ongoing impact of historical environmental events on the
Group (see note 34). These insurance policies however, have monetary caps and in some cases are term policies, whereby costs are
only recoverable if incurred by specified dates. The estimates of the extent 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 change by 15%,
the receivable recognised would need to change by approximately £3.0m reflecting the impact of the insurance policy caps in
place. If additionally, the estimated period for which operations and maintenance is required were to increase by five years, the
receivable recognised would need to increase by £3.5m.
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Notes to the consolidated financial statements continued
4. Critical accounting estimates and judgements continued
Critical accounting estimates continued
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 2018 is £39.2m (2017: £37.4m) and reflects a
number of estimates 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 value 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 from those
already announced, it currently expects the outcome across all open items to range from a potential increase of £16.0m in the
provision to a potential reduction of £5.0m. 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 advanced composite businesses acquired in late
2015, it is appropriate to allocate goodwill to the group of CGUs represented by its operating segments. In making this judgement,
the Group considers the extent of consolidation of activities within each segment (other than in the Meggitt Equipment Group) is
such that allocating goodwill to individual CGUs within that segment would require management 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.
The cash inflows of the advanced composites businesses are not considered independent of one another, and continue to be
treated as a single CGU. Although integration of the activities of the CGU with the rest of the businesses within its operating
segment is substantially complete, 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. 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.
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 these 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 flow to the Group, the Group makes 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 2018, the Group recognised £58.6m of
development costs as an intangible asset (see note 19).
Capitalisation of programme participation costs
Following the adoption of IFRS 15 in 2018, free of charge or deeply discounted manufactured parts (‘FOC’), which represented
approximately 85% of capitalised programme participation costs under the Group’s previous accounting policy, are now expensed
as incurred and no longer recognised as an intangible asset. Accordingly, the Group no longer considers the capitalisation of
programme participation costs to be a critical judgement.
5. Revenue
The Group’s revenue is analysed as follows:
At a point in time
Over time: Power by the hour/Cost per brake landing
Over time: Other
Revenue
2018
£’m
1,916.5
45.0
119.1
2017
Restated
£’m
1,875.3
39.1
80.0
2,080.6
1,994.4
Revenue recognised in the current year relating to performance obligations satisfied or partially satisfied in the prior year was not
significant.
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6. Segmental analysis
Analysis by operating segment
The Group managed its businesses for the year ended 31 December 2018 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 30 to 39 of the Strategic report.
Year ended 31 December 2018: Analysis of income statement items
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
At a point in time
Over time: Power by the hour/Cost per brake landing
Over time: Other
Revenue from external customers by basis of recognition
Civil OE
Civil Aftermarket
Defence
Energy
Other
Revenue from external customers by end market
Meggitt
Aircraft
Braking
Systems
£’m
389.1
(7.3)
381.8
349.3
31.9
0.6
381.8
14.1
275.3
90.9
–
1.5
381.8
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
577.1
(1.5)
575.6
570.7
4.9
–
575.6
145.6
272.7
100.1
39.7
17.5
575.6
£’m
£’m
£’m
£’m
391.3
(2.4)
388.9
385.0
–
3.9
388.9
124.2
39.4
209.0
0.1
16.2
388.9
541.0
(42.4)
498.6
489.9
8.2
0.5
498.6
179.1
72.8
143.2
51.1
52.4
498.6
253.0
(17.3)
2,151.5
(70.9)
235.7
2,080.6
121.6
–
114.1
1,916.5
45.0
119.1
235.7
2,080.6
1.3
0.3
188.0
37.5
8.6
235.7
464.3
660.5
731.2
128.4
96.2
2,080.6
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
121.5
127.0
6.0
84.0
28.8
Operating profit (see note 10)
Finance income (see note 12)
Finance costs (see note 13)
Net finance costs
Profit before tax
Tax charge (see note 14)
Profit for the year
Exceptional operating items**
Amortisation of intangible assets (see notes 19 and 20)***
Depreciation (see note 21)
3.9
62.9
9.2
4.5
21.3
9.6
3.5
21.4
12.3
7.1
20.2
15.8
0.5
6.4
6.7
367.3
(110.7)
256.6
1.0
(41.5)
(40.5)
216.1
(37.1)
179.0
19.5
132.2
53.6
* Central costs are allocated using a variety of bases designed to reflect the beneficial relationship between costs and segments. Bases include headcount, payroll costs,
gross assets and revenue.
** Central exceptional operating items of £14.7m were not included in segmental exceptional operating items reviewed by the CODM. Included within central exceptional
operating items is an impairment loss of £8.2m (see notes 21 and 23).
*** Of the total amortisation in the year, £40.7m has been charged to underlying operating profit as defined in note 10.
The Group’s largest customer accounts for 8.3% of revenue (£172.0m). Revenue from this customer arises across all segments.
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Notes to the consolidated financial statements continued
6. Segmental analysis continued
Year ended 31 December 2018: Analysis of additions to non-current assets*
Development costs (see note 19)
Programme participation costs (see note 19)
Other purchased intangible assets
Property, plant and equipment
Total
Meggitt
Aircraft
Braking
Systems
£’m
24.8
0.7
0.1
11.0
36.6
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
£’m
4.9
0.2
8.7
14.4
28.2
£’m
0.8
–
1.0
23.4
25.2
£’m
23.8
–
2.1
9.3
35.2
£’m
4.3
–
0.4
3.1
7.8
* Relate to those non‑current assets included within segmental trading assets reviewed by the CODM.
At 31 December 2018: Analysis of segmental trading assets
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 33)
Deferred tax assets (see note 35)
Derivative financial instruments – current (see note 33)
Current tax recoverable
Cash and cash equivalents (see note 27)
Assets classified as held for sale (see note 23)
Total assets
Total
£’m
58.6
0.9
12.3
61.2
133.0
Total
£’m
534.3
418.2
282.5
489.5
176.6
1,901.1
146.1
2,035.3
527.8
12.9
10.0
16.3
9.3
6.4
181.9
10.3
4,857.4
* 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
UK
Rest of Europe
United States of America
Rest of World
Revenue
Revenue is based on the location of the customer.
UK
Rest of Europe
United States of America
Rest of World
Non-current assets
2018
£’m
169.1
392.6
1,220.6
298.3
2017
Restated
£’m
192.2
396.0
1,133.5
272.7
2,080.6
1,994.4
31 December
2018
£’m
619.7
205.1
2,782.8
17.4
3,625.0
31 December
2017
Restated
£’m
653.1
201.7
2,669.9
11.4
3,536.1
1 January
2017
Restated
£’m
652.8
211.2
3,020.8
12.9
3,897.7
Segmental non‑current assets are based on the location of the assets. They exclude investments, trade and other receivables, contract assets, derivative financial
instruments and deferred tax assets.
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6. Segmental analysis continued
Year ended 31 December 2017 (Restated): Analysis of income statement items
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
At a point in time
Over time: Power by the hour/Cost per brake landing
Over time: Other
Revenue from external customers by basis of recognition
Civil OE
Civil Aftermarket
Defence
Energy
Other
Revenue from external customers by end market
Meggitt
Aircraft
Braking
Systems
£’m
388.1
(6.5)
381.6
353.6
28.0
–
381.6
17.9
276.5
85.5
–
1.7
381.6
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
£’m
£’m
£’m
£’m
522.5
(1.2)
339.4
(1.9)
525.8
(24.6)
266.4
(13.6)
2,042.2
(47.8)
521.3
337.5
501.2
252.8
1,994.4
517.9
3.4
–
521.3
134.4
235.1
92.9
38.3
20.6
521.3
337.5
–
–
337.5
111.1
38.6
174.1
0.3
13.4
337.5
492.6
7.7
0.9
501.2
178.8
73.0
138.1
57.5
53.8
501.2
173.7
–
79.1
1,875.3
39.1
80.0
252.8
1,994.4
4.9
1.7
191.1
21.6
33.5
447.1
624.9
681.7
117.7
123.0
252.8
1,994.4
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
133.5
117.2
23.8
64.2
14.6
Operating profit (see note 10)
Finance income (see note 12)
Finance costs (see note 13)
Net finance costs
Profit before tax
Tax credit (see note 14)
Profit for the year
Exceptional operating items (see note 11)**
Amortisation of intangible assets (see notes 19 and 20)***
Impairment (gain)/loss (see note 19)****
Depreciation (see note 21)
55.2
58.7
(1.5)
10.1
4.1
19.5
1.7
9.5
4.5
23.1
–
10.8
2.9
20.7
0.7
16.0
2.0
8.9
–
7.5
353.3
(80.6)
272.7
1.4
(45.8)
(44.4)
228.3
64.5
292.8
68.7
130.9
0.9
53.9
* Central costs are allocated using a variety of bases designed to reflect the beneficial relationship between costs and segments. Bases include headcount, payroll costs,
gross assets and revenue.
** Central exceptional operating items of £4.4m were not included in segmental exceptional operating items reviewed by the CODM.
*** Of the total amortisation in the year, £37.4m was charged to underlying operating profit as defined in note 10.
**** Excludes amounts charged to exceptional operating items of £54.4m (see note 19).
The Group’s largest customer accounts for 7.8% of revenue (£155.3m). Revenue from this customer arises across all segments.
Year ended 31 December 2017 (Restated): Analysis of additions to non-current assets*
Development costs (see note 19)
Programme participation costs (see note 19)
Other purchased intangible assets
Property, plant and equipment
Total
Meggitt
Aircraft
Braking
Systems
£’m
29.5
1.8
0.1
8.7
40.1
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
£’m
5.1
–
0.9
9.4
15.4
£’m
0.6
0.2
1.0
32.6
34.4
£’m
24.4
–
0.9
10.7
36.0
£’m
1.9
–
0.7
11.3
13.9
Total
£’m
61.5
2.0
3.6
72.7
139.8
* Relate to those non‑current assets included within segmental trading assets reviewed by the CODM.
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Notes to the consolidated financial statements continued
6. Segmental analysis continued
At 31 December 2017 (Restated): Analysis of segmental trading assets
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 33)
Deferred tax assets (see note 35)
Derivative financial instruments – current (see note 33)
Current tax recoverable
Cash and cash equivalents (see note 27)
Assets classified as held for sale (see note 23)
Total assets
At 1 January 2017 (Restated): Analysis of segmental trading assets
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
Deferred tax assets
Derivative financial instruments – current
Current tax recoverable
Cash and cash equivalents
Total assets
Total
£’m
513.4
346.0
234.1
450.8
199.2
1,743.5
166.9
1,944.9
592.0
13.6
28.5
26.3
3.6
4.3
118.5
9.7
4,651.8
Total
£’m
582.7
370.8
239.9
461.8
196.5
1,851.7
198.4
2,095.7
738.3
14.8
21.8
28.8
4.2
4.4
173.8
5,131.9
* 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.
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 accounts of any subsidiary of the Company in respect of the current year
Auditor’s remuneration
* Includes in 2018, amounts in respect of the transition to IFRS 9, IFRS 15 and IFRS 16.
Non‑audit fees payable to PricewaterhouseCoopers LLP were £0.1m (2017: £0.1m).
2018
£’m
1.5
0.7
2.2
2017
£’m
1.2
0.7
1.9
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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
Free of charge/deeply discounted manufactured parts (‘FOC’)
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 intangible assets acquired in business combinations (see note 10)
Amortisation of software and other intangible assets (see note 20)
Impairment loss on capitalised development costs (see note 19)
Depreciation (see note 21)
Impairment loss on property, plant and equipment (see note 21)
Loss on disposal of property, plant and equipment
Loss on disposal of software and other intangible assets
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
Share of loss/(profit) after tax of joint venture (see note 22)
Other operating income
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2018
£’m
635.3
32.3
66.5
749.9
79.7
22.1
0.8
91.5
17.8
–
53.6
3.6
3.0
–
34.2
(25.1)
10.1
(0.3)
1.5
(3.6)
2017
Restated
£’m
564.4
2.0
56.5
724.4
95.4
22.1
0.6
93.5
14.7
0.9
53.9
2.0
0.8
0.3
73.1
(25.3)
(60.7)
(7.1)
(0.6)
(5.4)
*
Total research and development expenditure in the year is £138.3m (2017 restated: £157.9m) of which £31.8m (2017 restated: £38.8m) is charged to cost of sales or
manufacturing work in progress, £47.9m (2017 restated: £56.6m) is charged to net operating costs and £58.6m (2017 restated: £62.5m) is capitalised as development
costs (see note 19).
9. Employee information
Wages and salaries
Social security costs
Retirement benefit costs (see note 36)
Share‑based payment expense (see note 38)
Employee costs including executive directors
Meggitt Aircraft Braking Systems
Meggitt Control Systems
Meggitt Polymers & Composites
Meggitt Sensing Systems
Meggitt Equipment Group
Corporate including shared services
Total persons employed
Other persons providing similar services
Average monthly number of persons employed including executive directors
2018
£’m
593.4
99.7
43.3
13.5
749.9
2017
£’m
574.8
102.9
38.7
8.0
724.4
2018
Number
2017
Number
1,170
1,651
3,082
2,834
1,251
498
10,486
896
11,382
1,169
1,695
2,632
2,927
1,521
457
10,401
673
11,074
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Notes to the consolidated financial statements continued
10. Reconciliations between profit and underlying profit
Underlying profit is used by the Board to monitor and measure the underlying trading performance of the Group. 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 with covenant requirements defined in the Group’s committed credit facilities.
Operating profit
Amounts arising on the acquisition, disposal and closure of businesses
Amortisation of intangible assets acquired in business combinations
Financial instruments
Exceptional operating items (see note 11)
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 36)**
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
Impact of reduction in the US rate of federal corporate tax (see note 14)***
Adjustments to profit for the year
Underlying profit for the year
Notes
a
b
c
2018
£’m
2017
Restated
£’m
256.6
272.7
(25.1)
91.5
10.1
34.2
110.7
367.3
(25.3)
93.5
(60.7)
73.1
80.6
353.3
216.1
228.3
110.7
8.0
118.7
334.8
80.6
11.3
91.9
320.2
179.0
292.8
118.7
(29.1)
(4.1)
85.5
264.5
91.9
(49.0)
(88.3)
(45.4)
247.4
* Of the adjustments to operating profit, £18.1m (2017 restated: £8.5m) relating to exceptional operating items has been charged to cost of sales, with the balance of
£92.6m (2017 restated: £72.1m) included within net operating costs.
** The Board considers net interest expense on retirement benefit obligations to be a non‑trading item and accordingly excludes it from underlying profit measures.
*** Due to the significance of the tax credits arising from the reduction in the US rate of federal corporate tax, these amounts have been excluded from underlying profit
measures.
a. Delivery of the Group’s strategy includes investment in acquisitions that enhance its technology portfolio. The exclusion of
significant items arising from M&A activity 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 are excluded from underlying
profit measures. 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 and disposal of businesses.
2018
£’m
2017
£’m
Gain on disposal of businesses before disposal expenses (see note 42)
Costs related to the disposal of businesses in the current period
Gain on disposal of businesses (see note 44)
Costs related to the disposal of businesses in prior periods
Costs related to the acquisition of businesses
Remeasurement of fair value of contingent consideration payable relating to previously acquired
businesses
Impairment of assets classified as held for sale (see note 23)
(30.4)
2.5
(27.9)
0.3
–
(3.6)
6.1
(40.3)
0.6
(39.7)
–
0.2
–
14.2
Amounts arising on the acquisition, disposal and closure of businesses
(25.1)
(25.3)
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10. Reconciliations between profit and underlying profit continued
b. For the same reasons as described in note 10a, the Group also 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 software and other intangible assets (see note 20)
Amortisation of intangible assets acquired in business combinations
2018
£’m
109.3
(17.8)
91.5
2017
£’m
108.2
(14.7)
93.5
c. 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, gains and losses arising from the marking to market of financial instruments that are not hedge
accounted are excluded from underlying profit measures.
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 IFRS 9 ‘Financial
Instruments’ are not merited. The Group’s underlying profit figures exclude amounts which would not have been recognised if
hedge accounting had been applied.
When interest rate derivatives qualify to be hedge accounted, any difference recognised in the income statement between the
movements in fair value of the 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 fair value of the
derivatives are excluded from underlying profit.
Movement in fair value of foreign currency forward contracts
Impact of retranslating net foreign currency assets and liabilities at spot rate
Movement in fair value of interest rate derivatives
Movement in fair value of fixed rate borrowings due to interest rate risk (see note 32)
Movement in fair value of cross currency derivatives
Movement in fair value of treasury lock derivative
Financial instruments – Loss/(gain)
2018
£’m
27.9
(1.0)
5.4
(4.9)
(16.8)
(0.5)
10.1
2017
Restated
£’m
(73.8)
0.5
8.1
(8.9)
13.9
(0.5)
(60.7)
11. Exceptional operating items
Delivery of the Group’s strategy includes the restructuring of its cost base to deliver operational improvements. The exclusion from
underlying profit measures of significant items arising from site consolidations and business restructuring is designed by the Board
to align short‑term operational decisions with this longer‑term strategy. Due to the significance of the impairment loss in 2017
arising from cancellation of the Dassault Falcon 5X programme it was excluded from underlying profit measures. The Board
considers the impact of the Court ruling on Guaranteed Minimum Pension equalisation in 2018 to be a non‑trading item and
accordingly has excluded it from underlying profit measures.
Site consolidations
Impairment loss arising from cancellation of Dassault Falcon 5X programme
Business restructuring costs
Guaranteed Minimum Pension equalisation (see note 36)
Integration of acquired businesses
Exceptional operating items
Notes
a
b
Income statement
Cash expenditure
2018
£’m
28.7
–
3.1
1.7
0.7
34.2
2017
Restated
£’m
7.9
58.0
2.7
–
4.5
73.1
2018
2017
£’m
8.2
–
3.1
–
0.7
£’m
8.5
–
0.8
–
4.5
12.0
13.8
a. This relates to costs incurred in respect of the Group’s previously announced plans to reduce its footprint by 20% by the end of
2021. Cumulative costs since the announcement are £43.6m (2017: £14.9m). In 2018, costs are principally in respect of the move
to a new facility being constructed at Ansty Park in the West Midlands which will enable the Group to consolidate a range of
manufacturing, engineering and support operations into a single centre of excellence. The charge in 2018 includes impairment
losses in respect of property, plant and equipment of £3.6m (see note 21) and assets classified as held for sale of £4.6m
(see note 23).
b. On 13 December 2017, Dassault Aviation announced the cancellation of its Falcon 5X programme. The cancellation resulted in a
cost of £58.0m being recognised in 2017, comprising an impairment loss of £54.4m in respect of capitalised development costs
and £3.6m in respect of the reduction of inventory to net realisable value (see note 4).
The tax credit in respect of exceptional operating items is £4.8m (2017 restated: £25.3m).
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12. Finance income
Interest on bank deposits
Unwinding of interest on other receivables (see note 34)
Other finance income
Finance income
13. Finance costs
Interest on bank borrowings
Interest on senior notes
Interest on lease liabilities
Unwinding of discount on provisions (see note 34)
Net interest expense on retirement benefit obligations (see note 36)
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 – impact of reduction in the US rate of federal corporate tax (see note 10)
Deferred tax – effects of changes in other statutory tax rates
Deferred tax – adjustment in respect of prior years
Tax charge/(credit)
2018
£’m
–
0.8
0.2
1.0
2018
£’m
2.6
28.0
3.7
1.7
8.0
0.8
(3.3)
41.5
2018
£’m
32.7
(7.0)
2.2
(4.1)
0.6
12.7
37.1
2017
£’m
0.1
1.2
0.1
1.4
2017
Restated
£’m
2.2
30.0
3.8
2.0
11.3
0.9
(4.4)
45.8
2017
Restated
£’m
27.5
4.2
(3.7)
(88.3)
(2.7)
(1.5)
(64.5)
On 22 December 2017, the US government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(“TCJA”). The TCJA made substantial changes to the Internal Revenue Code of 1986, as amended. Among those changes was a significant
reduction in the generally applicable US federal corporate tax rate from 35% to 21%, with effect from 1 January 2018. The Group’s deferred
tax balances relating to its US operations were remeasured in 2017 to reflect this rate reduction, with the impact excluded from the Group’s
underlying tax charge (see note 10). In 2018, the Group made an additional USD40.0m deficit contribution into certain of its US pension
schemes. This contribution is deductible against the Group’s US taxable profits for the year ended 31 December 2017 and accordingly
attracts federal tax relief at 35%. The difference between the tax relief at 35% and the deferred tax recognised on this deficit at 21% at
31 December 2017 of £4.1m has been excluded from the Group’s underlying tax charge for 2018 (see note 10).
The Finance (No 2) Act 2015 and Finance Act 2016, included legislation to reduce the main rate of corporation tax in the UK from
19% to 17% with effect from 1 April 2020. As these changes were substantively enacted in prior years, they have had no significant
impact on the tax charge for the current year.
Reconciliation of tax charge/(credit)
A reconciliation based on the weighted average tax rate applicable to the profits of the Group’s consolidated businesses is as follows:
Profit before tax at weighted average tax rate of 22.2%* (2017 restated: 18.4%)
Effects of:
Impact of reduction in the US rate of federal corporate tax (see note 10)
Changes in other statutory tax rates
Tax effect of share‑based payments
Non‑taxable gain on disposal of businesses
Tax concessions
Tax credits and incentives
Additional provisions in respect of historical tax uncertainties/(Unused amounts reversed)
Other permanent differences
Current tax – adjustment in respect of prior years
Deferred tax – adjustment in respect of prior years
Tax charge/(credit)
2018
£’m
47.9
(4.1)
0.6
(0.9)
(5.0)
(8.6)
(2.7)
0.9
3.3
(7.0)
12.7
37.1
2017
Restated
£’m
41.8
(88.3)
(2.7)
1.1
(0.4)
(13.5)
(4.2)
(4.1)
3.1
4.2
(1.5)
(64.5)
*
Calculated as the weighted average tax rate applicable to profits of the Group’s businesses in their respective countries in the year. It does not therefore reflect any
changes in tax rates that have been substantively enacted, but are not applicable until future periods. 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 2018 to increase, or reduce respectively, by approximately
£9.8m of which £7.6m arises from the impact of the change in tax rate on net deferred tax liabilities.
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14. Tax continued
The tax reconciliation for 2018 includes £8.6m in respect of tax concessions in the UK and Switzerland which allow income to be
taxed at beneficial rates, £2.7m in respect of tax credits and incentives in the US for items such as research & development
expenditure and additional provisions of £0.9m in respect of various historical tax issues in the Group (see note 4).
Tax relating to components of other comprehensive income
Before
tax
£’m
92.4
(1.7)
0.8
(0.3)
46.2
137.4
Current tax – currency translation movements
Deferred tax – currency translation movements
Deferred tax – movements in fair value of financial liabilities
arising from changes in credit risk
Deferred tax – cash flow hedge movements
Deferred tax – remeasurement of retirement
benefit obligations
Other comprehensive income/(expense)
Current tax
Deferred tax
Total
Tax relating to items recognised directly in equity
Current tax credit relating to share‑based payment expense
Deferred tax charge relating to share‑based payment expense
Total
After
tax
£’m
94.8
(1.5)
0.6
(0.2)
38.9
132.6
Before
tax
£’m
(147.5)
–
(2.1)
(0.2)
66.6
(83.2)
2018
Tax
(charge)/
credit
£’m
2.4
0.2
(0.2)
0.1
(7.3)
(4.8)
2.4
(7.2)
(4.8)
2017 (Restated)
Tax
(charge)/
credit
£’m
(2.8)
–
0.4
–
(27.1)
(29.5)
(2.8)
(26.7)
(29.5)
2018
£’m
0.1
(0.4)
(0.3)
After
tax
£’m
(150.3)
–
(1.7)
(0.2)
39.5
(112.7)
2017
£’m
0.3
(0.2)
0.1
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 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 39).
The weighted average number of treasury shares excluded is Nil shares (2017: Nil shares) and the weighted average number of own
shares excluded is 4.1m shares (2017: 2.4m 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.
2018
Profit*
2018
Shares
2018
EPS
£’m
Number ’m
Pence
179.0
–
179.0
773.2
12.7
785.9
23.2
(0.4)
22.8
2017
Profit*
Restated
£’m
292.8
–
292.8
2017
Shares
Number ’m
774.2
15.0
789.2
2017
EPS
Restated
Pence
37.8
(0.7)
37.1
Underlying EPS is based on underlying profit for the year (see note 10) and the same number of shares used in the calculation of
basic EPS. It is reconciled to basic EPS below:
2018
2017
Restated
Pence
Basic EPS
Adjust for effects of:
Amounts arising on the acquisition, disposal and closure of businesses
Amortisation of intangible assets acquired in business combinations
Financial instruments
Exceptional operating items
Net interest expense on retirement benefit obligations
Impact of reduction in the US rate of federal corporate tax
Underlying basic EPS
Pence
23.2
(3.2)
9.1
1.0
3.8
0.8
(0.5)
34.2
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 is 33.7 pence (2017 restated: 31.3 pence).
37.8
(3.1)
7.8
(6.3)
6.2
1.0
(11.4)
32.0
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Notes to the consolidated financial statements continued
16. Dividends
In respect of earlier years
In respect of 2017:
Interim of 5.05p per share
Final of 10.80p per share
In respect of 2018:
Interim of 5.30p per share
Dividends paid in cash
2018
£’m
–
–
83.3
40.9
124.2
2017
£’m
79.6
39.0
–
–
118.6
A final dividend in respect of 2018 of 11.35p per share (2017: 10.80p), amounting to an estimated total final dividend of £88.2m
(2017: £83.3m) is to be proposed at the Annual General Meeting on 25 April 2019. This dividend is not reflected in the consolidated
financial statements as it has not been approved by the shareholders at the balance sheet date.
17. Related party transactions
During the year, the Group made sales to the joint venture of £3.3m (2017: £3.7m) and purchases from the joint venture of £0.2m
(2017: £0.4m). Amounts due both from and to the joint venture at the balance sheet date are not significant. 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 2018 as members of the Board and the Group
Executive Committee, is set out below. Prior year comparatives have not been restated to reflect changes to the definition of key
management during the year.
2018
£’m
2017
£’m
Salaries and other short‑term employee benefits
Retirement benefit expense
Share‑based payment expense
Total
11.1
–
4.1
15.2
11.7
0.2
2.3
14.2
Full details of all elements in the remuneration package of each director, together with directors’ share interests and share awards,
are disclosed in the Directors’ remuneration report on pages 92 to 114 which forms part of these consolidated financial statements.
18. Goodwill
Cost at 1 January
Exchange rate adjustments
Business acquired
Businesses disposed (see note 44)
Cost at 31 December
2018
£’m
1,944.9
91.2
–
(0.8)
2017
Restated
£’m
2,095.7
(140.9)
10.6
(20.5)
2,035.3
1,944.9
The date at which the Group performs its annual impairment testing is 30 June. If any events or changes in circumstances
subsequent to this date indicate the carrying value may not be recoverable, further testing is performed. No impairment charge
was required in the year (2017: £Nil) and the cumulative impairment charge recognised to date is £Nil (2017: £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
2018
£’m
807.2
484.1
135.3
236.2
242.7
81.6
48.2
2017
Restated
£’m
766.5
462.4
130.4
226.7
234.6
77.1
47.2
2,035.3
1,944.9
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 2018. 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 CGUs.
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18. Goodwill continued
The key assumptions for the value in use calculations for all CGUs and groups of CGUs 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, defence 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; defence 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 page 25. MTS operates entirely within the defence market. The Group’s medium term expectations for growth
in each of these markets, is set out in the Strategic report on pages 26 to 29.
• 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: 1.8% (2017: 2.0%),
US: 2.0% (2017: 2.3%), the latter has been used.
• Discount rates applied to future cash flows
The Group’s post‑tax weighted average cost of capital (WACC) is used as the foundation for determining the discount rates to be
applied. The WACC is adjusted to a pre‑tax rate and to reflect risks specific to the CGU or group of CGUs not already reflected in
its future cash flows. The pre‑tax discount rates used are as follows:
2018*
%
2017
%
MABS
MCS
MPC excluding EDAC & Advanced Composites
EDAC & Advanced Composites
MSS
MTS
Other
9.0
9.7
9.3
8.6
8.0
10.5
8.8-11.0
10.0
10.7
10.1
10.1
8.3
11.9
9.1-12.0
* Each CGU and group of CGUs listed above has significant cash flows that arise in the US. The reduction in US federal tax rate from 35% to 21% at the end of 2017 has
accordingly resulted in the discount rates used for the Group’s 2018 annual impairment testing being lower across all CGUs and groups of CGUs than those used for the
2017 impairment testing, which were performed prior to the tax reductions being enacted.
When the impairment testing was performed in 2018, the least headroom was in EDAC and Advanced Composites and MTS. EDAC
and Advanced Composites had the least headroom in percentage terms at 56% of the carrying value of goodwill. Headroom was
£132.1m (2017: £317.3m). The key assumptions used in the impairment testing were:
• Compound annual revenue growth over the five year plan period of approximately 15%
Over the three year period since acquisition, compound annual revenue growth has been 11%, with 17% growth in 2018. The
plan reflects this past experience, together with recent contract awards, including the USD750m multi‑year award from Pratt &
Whitney for advanced composite parts for the F‑119 and F‑135 engines which power the F‑22 Raptor and F‑35 Lightning II aircraft.
The level of growth has also been benchmarked against third party analysis for growth in advanced composite demand over the
period covered by the plan. Compound annual revenue growth would need to reduce to 12%, without any mitigating action on
costs, before an impairment would be triggered.
• An average gross margin over the five year plan period of approximately 24%
The plan assumes a gradual increase in gross margin over the plan period attributable to increased volumes; elimination of
incremental costs incurred in recent years as operational challenges were experienced in ramping up production for higher
volumes; and reductions in costs as production of certain high volume parts is moved to low cost manufacturing facilities,
commencing in 2019. Average gross margin over the period would need to reduce to 21%, without any mitigating action on
overhead costs, before an impairment would be triggered.
• Growth rates used for periods beyond those covered by the five year plan
Long‑term growth rates for the period beyond five years have been restricted to the US GDP rate of 2.0%, significantly lower than
industry data for the advanced composites market over this period.
• Discount rate applied to future cash flows
The Group has used a discount rate of 8.6% in 2018 for its impairment testing. Were the discount rate to increase to 10.1% an
impairment would be triggered. This is the same rate used for impairment testing in 2017, albeit the rate derived for 2017
reflected the higher US tax rates prevailing at that date.
MTS headroom as a percentage of the carrying value of goodwill is 63%. Headroom was £51.8m (2017: £65.5m). No reasonably
foreseeable change in key assumptions used in the impairment model would result in a significant impairment charge being
recognised in the consolidated financial statements.
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Notes to the consolidated financial statements continued
19. Development costs and programme participation costs
Development
costs
At 1 January 2017 (Restated)
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2017 (Restated)
Opening net book amount
Exchange rate adjustments
Additions – Internal development costs
– Cash payments
Interest capitalised (see note 13)
Impairment loss*
Amortisation*
Net book amount
At 31 December 2017 (Restated)
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2018
Opening net book amount
Exchange rate adjustments
Additions – Internal development costs
– Cash payments
Interest capitalised (see note 13)
Transfer to assets classified as held for sale (see note 23)
Amortisation*
Net book amount
At 31 December 2018
Cost
Accumulated amortisation
Net book amount
£’m
667.1
(124.1)
543.0
543.0
(36.8)
62.6
–
4.4
(55.3)
(22.1)
495.8
683.0
(187.2)
495.8
495.8
24.1
58.6
–
3.3
(2.6)
(22.1)
557.1
774.9
(217.8)
557.1
Programme
participation
costs
£’m
35.9
(18.9)
17.0
17.0
(1.3)
–
2.0
–
–
(0.6)
17.1
34.6
(17.5)
17.1
17.1
1.0
–
0.9
–
–
(0.8)
18.2
38.0
(19.8)
18.2
* Charged to net operating costs. Of the 2017 impairment loss, £54.4m in respect of development costs was charged to exceptional operating items following cancellation
of the Dassault Falcon 5X programme (see note 11).
The net book amount of development costs includes £246.8m (2017: £205.1m) in respect of Meggitt Aircraft Braking Systems which
have an estimated weighted average remaining life of 13.4 years (2017: 14.7 years).
The programme with the largest capitalised balance is the Airbus A220 (previously known as the Bombardier CSeries) with a
net book amount of £95.8m (2017 restated: £90.0m), comprising development costs of £85.1m (2017: £80.4m) and programme
participation costs of £10.7m (2017 restated: £9.6m). Fleet volumes would need to fall to approximately 435 (a reduction of more
than 50% from management estimates, which are based on public forecasts from industry experts), without any mitigation actions
taken by the Group, before any impairment would need to be recognised.
Interest has been capitalised using the average rate payable on the Group’s floating rate borrowings of 2.0% (2017: 2.0%). Tax relief
claimed on interest capitalised in the year is £0.6m (2017: £0.8m).
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20. Other intangible assets
At 1 January 2017
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2017
Opening net book amount
Exchange rate adjustments
Business acquired
Businesses disposed
Additions
Transfer to assets classified as held for sale
Disposals
Amortisation – net operating costs
Net book amount
At 31 December 2017
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2018
Opening net book amount
Exchange rate adjustments
Businesses disposed (see note 44)
Additions
Transfer to assets classified as held for sale (see note 23)
Disposals
Amortisation – net operating costs
Net book amount
At 31 December 2018
Cost
Accumulated amortisation
Net book amount
Acquired in business combinations*
Customer
relationships
Technology
Order
backlogs
£’m
£’m
£’m
Trade
names and
trademarks
£’m
Software
and other
assets
£’m
Total
£’m
1,179.0
(602.9)
576.1
348.6
(196.4)
152.2
576.1
(40.0)
8.6
(7.6)
–
–
–
(67.7)
469.4
152.2
(9.8)
1.1
(4.4)
–
–
–
(21.6)
117.5
1,089.1
(619.7)
469.4
317.3
(199.8)
117.5
469.4
22.1
(0.1)
–
–
–
(66.6)
424.8
117.5
5.1
–
–
–
–
(22.8)
99.8
1,142.6
(717.8)
424.8
332.3
(232.5)
99.8
9.6
(4.4)
5.2
5.2
(0.3)
–
–
–
–
–
(3.5)
1.4
4.7
(3.3)
1.4
1.4
–
–
–
–
–
(1.4)
–
–
–
–
34.5
(29.7)
4.8
164.0
(84.7)
79.3
1,735.7
(918.1)
817.6
4.8
(0.4)
–
–
–
–
–
(0.7)
3.7
79.3
(2.7)
–
(0.7)
20.4
(1.2)
(0.3)
(14.7)
80.1
817.6
(53.2)
9.7
(12.7)
20.4
(1.2)
(0.3)
(108.2)
672.1
31.1
(27.4)
3.7
170.0
(89.9)
80.1
1,612.2
(940.1)
672.1
3.7
0.2
–
–
–
–
(0.7)
3.2
80.1
1.8
–
19.3
(0.5)
(0.3)
(17.8)
82.6
672.1
29.2
(0.1)
19.3
(0.5)
(0.3)
(109.3)
610.4
32.4
(29.2)
3.2
190.6
(108.0)
1,697.9
(1,087.5)
82.6
610.4
* Amortisation of these items is excluded from the Group’s underlying profit figures (see note 10).
During 2018, cost and accumulated amortisation relating to completed order backlogs were eliminated.
The net book amount of customer relationships includes £220.2m (2017: £251.2m) in respect of Meggitt Aircraft Braking Systems,
£119.6m (2017: £124.6m) in respect of Meggitt Polymers & Composites, £49.5m (2017: £54.6m) in respect of Meggitt Control
Systems and £35.5m (2017: £39.0m) in respect of Meggitt Sensing Systems, which have estimated weighted average remaining lives
of 5.0 years (2017: 6.0 years), 13.3 years (2017: 14.0 years), 7.2 years (2017: 7.0 years) and 7.2 years (2017: 8.2 years) respectively.
The net book amount of technology includes £44.6m (2017: £50.9m) in respect of Meggitt Aircraft Braking Systems and £35.9m
(2017: £39.3m) in respect of Meggitt Polymers & Composites which have estimated weighted average remaining lives of 5.2 years
(2017: 6.2 years) and 8.2 years (2017: 9.0 years) respectively.
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Notes to the consolidated financial statements continued
21. Property, plant and equipment
At 1 January 2017 (Restated)
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2017 (Restated)
Opening net book amount
Exchange rate adjustments
Business acquired
Businesses disposed
Additions
Transfer to assets classified as held for sale
Disposals
Impairment loss
Depreciation
Net book amount
At 31 December 2017 (Restated)
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2018
Opening net book amount
Exchange rate adjustments
Businesses disposed (see note 44)
Additions
Transfer to assets classified as held for sale (see note 23)
Disposals
Impairment loss*
Depreciation
Net book amount
At 31 December 2018
Cost
Accumulated depreciation
Net book amount
* Charged to exceptional operating items (see note 11) and included within cost of sales.
Land and
buildings
£’m
Plant,
equipment
and vehicles
£’m
Right-of-use
assets:
property
£’m
Right-of-use
assets:
other
£’m
220.3
(79.1)
141.2
559.0
(365.4)
193.6
143.3
(56.4)
86.9
141.2
(5.8)
–
(1.9)
17.0
(1.3)
(0.6)
–
(8.7)
139.9
193.6
(10.9)
0.2
(5.8)
43.9
(4.3)
(2.1)
(2.0)
(31.4)
181.2
219.3
(79.4)
139.9
518.2
(337.0)
181.2
139.9
3.7
(2.2)
12.9
(14.0)
(0.5)
(3.0)
(8.1)
181.2
8.4
(1.3)
44.1
(0.6)
(4.2)
(0.3)
(31.1)
128.7
196.2
86.9
(6.5)
–
–
15.1
–
–
–
(13.0)
82.5
147.0
(64.5)
82.5
82.5
4.0
–
4.0
–
–
(0.3)
(13.5)
76.7
218.5
(89.8)
128.7
553.6
(357.4)
196.2
158.7
(82.0)
76.7
2.7
–
2.7
2.7
(0.1)
–
–
0.8
–
–
–
(0.8)
2.6
3.4
(0.8)
2.6
2.6
0.1
–
0.6
–
–
–
(0.9)
2.4
4.1
(1.7)
2.4
Total
£’m
925.3
(500.9)
424.4
424.4
(23.3)
0.2
(7.7)
76.8
(5.6)
(2.7)
(2.0)
(53.9)
406.2
887.9
(481.7)
406.2
406.2
16.2
(3.5)
61.6
(14.6)
(4.7)
(3.6)
(53.6)
404.0
934.9
(530.9)
404.0
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22. Investments
The Group’s investment in its joint venture, Parkway‑HS, LLC is accounted for using the equity method and is stated as follows:
At 1 January
Exchange rate adjustments
Share of (loss)/profit after tax
Dividends received
At 31 December
2018
£’m
13.6
0.8
(1.5)
–
12.9
2017
£’m
14.8
(1.3)
0.6
(0.5)
13.6
Summarised financial information for joint venture
The information below reflects amounts presented in the financial statements of the joint venture adjusted to reflect the Group’s
accounting policies (and not the Group’s share of those amounts unless otherwise stated).
Summarised statement of comprehensive income
for the year ended 31 December 2018
Revenue
Operating (loss)/profit
Finance costs
(Loss)/profit before tax
Tax charge
(Loss)/profit after tax
Total comprehensive expense from continuing operations
Summarised balance sheet
At 31 December 2018
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
At 31 December 2018
Net assets at 1 January
Total comprehensive expense
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.
2018
£’m
16.8
(2.0)
(0.1)
(2.1)
(0.1)
(2.2)
(2.0)
2018
£’m
1.8
0.2
6.1
6.3
(2.5)
(3.3)
(5.8)
2.3
2018
£’m
4.3
(2.0)
2.3
1.6
11.3
12.9
2017
£’m
16.5
1.1
(0.1)
1.0
(0.1)
0.9
(0.3)
2017
£’m
1.4
0.7
5.9
6.6
(1.7)
(2.0)
(3.7)
4.3
2017
£’m
4.6
(0.3)
4.3
3.0
10.6
13.6
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Notes to the consolidated financial statements continued
23. Assets classified as held for sale
On 26 March 2018, the Group completed the disposal of Linear Motion LLC, previously classified as a disposal group.
During the year, the Group decided to dispose of the trade and assets of Meggitt (France) SAS, based in Fléac, France and
at 31 December 2018, determined that a sale was highly probable. Accordingly, the related assets have been classified as a
disposal group held for sale and are presented separately at the balance sheet date together with directly associated liabilities.
An impairment loss of £6.1m was recognised to reduce the assets to their recoverable value (see note 10). The business is reported
within Meggitt Sensing Systems.
Additionally, in 2018 the Group has transferred £14.0m in respect of land and buildings relating to its manufacturing facilities in
Coventry, West Midlands, UK to assets classified as held for sale. An impairment loss of £4.6m was recognised to reduce the assets
to their recoverable value (see note 11). These facilities were subject to a sale and leaseback transaction that commenced in the year
and completed in January 2019 (see note 30).
At 1 January 2018
Exchange rate adjustments
Change in carrying value of held for sale assets and liabilities up to date of disposal
Business disposed (see note 44)
Additions
Impairment loss
At 31 December 2018
Development costs (see note 19)
Other intangible assets (see note 20)
Property, plant and equipment (see note 21)
Inventories
Trade and other receivables
Assets classified as held for sale
Trade and other payables
Liabilities directly associated with assets classified as held for sale
24. Inventories
Raw materials and bought‑in components
Manufacturing work in progress
Finished goods and goods for resale
Total
Assets
classified as
held for sale
£’m
9.7
(0.5)
0.8
(10.0)
21.1
(10.8)
10.3
Carrying
value before
classification as
held for sale
£’m
2.6
0.5
14.6
2.9
0.5
21.1
0.1
0.1
2018
Liabilities
directly
associated
with assets
classified as
held for sale
£’m
(7.8)
0.4
4.1
3.3
(0.1)
0.1
–
2018
Allocated
impairment
loss
£’m
(2.6)
(0.5)
(5.2)
(2.0)
(0.5)
Total
£’m
1.9
(0.1)
4.9
(6.7)
21.0
(10.7)
10.3
Total
£’m
–
–
9.4
0.9
–
(10.8)
10.3
(0.1)
(0.1)
–
–
2018
£’m
169.5
179.4
92.3
441.2
2017
Restated
£’m
159.2
163.8
70.4
393.4
The cost of inventories recognised as an expense and included in cost of sales is £1,226.3m (2017 restated: £1,158.7m). The cost of
inventories recognised as an expense includes £3.8m (2017: £7.3m) in respect of write‑downs of inventory to net realisable value of
which £Nil (2017: £3.6m) has been recognised as an exceptional operating item (see note 11). The cost of inventories recognised as
an expense has been reduced by £3.9m (2017: £2.5m) in respect of the reversal of write‑downs of inventory to net realisable value
made in previous years.
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25. Trade and other receivables
Trade receivables
Prepayments
Other receivables
Current portion
Other receivables
Non-current portion
Total
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£’m
344.1
23.1
46.4
413.6
21.5
21.5
2017
Restated
£’m
320.2
18.1
51.4
389.7
38.7
38.7
435.1
428.4
Other receivables includes £34.1m (2017: £64.1m) 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 of which £16.6m (2017: £30.1m) is shown
as current (see note 34).
Trade receivables are stated after a provision for impairment of £7.1m (2017: £4.5m). Other balances within trade and other
receivables do not contain impaired assets.
2018
£’m
At 1 January
Exchange rate adjustments
Businesses disposed
Charge/(credit) to income statement – net operating costs
At 31 December
4.5
0.2
–
2.4
7.1
2017
£’m
6.1
(0.4)
(0.2)
(1.0)
4.5
At 31 December 2018, trade receivables of £73.3m (2017 restated: £66.6m) are past due but not impaired. These relate to a number
of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is
as follows:
Up to 3 months overdue
Over 3 months overdue
Total
2018
£’m
65.6
7.7
73.3
2017
Restated
£’m
54.4
12.2
66.6
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
26. Contract assets
Conditional rights to consideration on over time contracts
Programme participation cash payments
Current portion
Conditional rights to consideration on over time contracts
Programme participation cash payments
Non-current portion
Total
2018
£’m
56.5
340.8
23.0
14.8
435.1
2018
£’m
45.1
2.8
47.9
34.1
27.0
61.1
109.0
2017
Restated
£’m
56.8
331.2
25.3
15.1
428.4
2017
£’m
36.9
2.8
39.7
22.9
26.8
49.7
89.4
Amortisation of programme participation cash payments of £2.8m (2017: £2.5m) has been recognised as a reduction in revenue in
the year. No provision for impairment losses attributable to contract assets was recognised in the year (2017: Nil).
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Notes to the consolidated financial statements continued
27. Cash and cash equivalents
Cash at bank and on hand
Short‑term bank deposits
Total
2018
£’m
150.5
31.4
181.9
2017
£’m
118.5
–
118.5
Cash and cash equivalents are subject to interest at floating rates. The credit quality of the financial institutions where cash and
cash equivalents is held are as follows:
2018
£’m
2017
£’m
Moody’s rating:
Aaa
Aa
A
Total
28. Trade and other payables
Trade payables
Social security and other taxes
Accrued expenses
Other payables
Current portion
Contingent consideration relating to acquired businesses
Other payables
Non-current portion
Total
29. Contract liabilities
Contributions received from customers during development phase of programmes
Cost per brake landing/Power by the hour contracts
Other consideration received in advance of performance
Current portion
Contributions received from customers during development phase of programmes
Cost per brake landing/Power by the hour contracts
Other consideration received in advance of performance
Non-current portion
Total
0.1
131.9
49.9
181.9
2018
£’m
195.0
11.1
70.7
175.7
452.5
–
1.3
1.3
3.2
44.0
71.3
118.5
2017
Restated
£’m
155.0
10.2
81.8
155.1
402.1
4.5
1.0
5.5
453.8
407.6
2018
£’m
0.4
23.1
24.4
47.9
27.6
14.8
1.5
43.9
91.8
2017
£’m
0.3
19.6
32.6
52.5
13.2
9.4
0.5
23.1
75.6
Revenue recognised in the year relating to amounts recognised as a contract liability at the beginning of the period was £22.2m
(2017: £20.9m).
The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partly satisfied at
31 December 2018, is £236.5m. The Group has taken the practical expedients available in IFRS 15 not to include amounts relating
to contracts which had an expected duration of less than 12 months when received or amounts relating to contracts for which
revenue is recognised using a method whereby the value to the customer corresponds to the right to invoice the customer. Of the
£236.5m, the Group expects to recognise £138.1m as revenue during 2019, with the balance recognised in more than one year but
not more than 5 years.
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30. Lease liabilities
The Group leases various factories, warehouses, offices, plant and equipment. The following amounts are included in the Group’s
consolidated financial statements in respect of its leases:
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Depreciation charge for right‑of‑use assets (see note 21)
Additions to right‑of‑use assets (see note 21)
Net book amount of right‑of‑use assets (see note 21)
Interest expense on lease liabilities (see note 13)
Expense related to short‑term leases and low‑value assets
Total cash outflow for leases comprising interest and capital payments
Analysis of lease liabilities:
In one year or less
In more than one year but not more than five years
In more than five years
Present value of lease liabilities
Current portion
Non-current portion
2018
£’m
14.4
4.6
79.1
3.7
0.7
18.0
2017
£’m
13.8
15.9
85.1
3.8
0.7
15.2
Present value
of minimum
lease payments
2018
£’m
16.1
52.3
29.1
97.5
16.1
81.4
2017
Restated
£’m
16.9
48.8
36.4
102.1
16.9
85.2
At 31 December 2018, the Group had the following significant lease commitments:
• A lease relating to its new facility being constructed at Ansty Park, West Midlands, UK (see note 11). The Group expects to
recognise this lease in 2019, when it obtains control of the right‑of‑use asset and to recognise a lease liability and right‑of‑use
asset of approximately £60.0m at that date. The lease term is 30 years. At the date the lease is recognised, the Group expects
undiscounted cash flows to be: £9.0m inflow in one year or less; £11.0m outflow in more than one year but not more than five
years; and £99.0m outflow in more than five years.
• In January 2019, the Group completed a sale and leaseback of its existing manufacturing facilities in Coventry, West Midlands,
UK. Lease liabilities and right‑of‑use assets of approximately £11.0m will be recognised and the lease terms range from two years
for the main manufacturing facilities to 25 years for one of the Group’s specialised operations. An impairment loss of £7.6m has
been recognised in 2018 in respect of the carrying value of the facilities and is included within exceptional operating items
(see note 11). At the date the leases are recognised, the Group expects undiscounted cash outflows to be: £0.9m in one year or
less; £2.4m in more than one year but not more than five years; and £13.4m in more than five years.
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Notes to the consolidated financial statements continued
31. Bank and other borrowings
Bank loans
Other loans
Current portion
Bank loans
Other loans
Non-current portion
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
2018
£’m
0.4
9.8
10.2
2017
£’m
62.1
9.3
71.4
358.5
789.8
254.1
751.7
1,148.3
1,005.8
1,158.5
1,077.2
10.2
913.5
234.8
71.4
562.4
443.4
1,158.5
1,077.2
1,143.1
(1.5)
6.7
–
10.2
995.7
(2.3)
12.4
61.7
9.7
1,158.5
1,077.2
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 (USD400.0m)
2016 Senior notes (USD600.0m)
Syndicated credit facility (USD750.0m)
Committed facilities
Drawn
£’m
313.7
470.5
358.9
1,143.1
2018
Undrawn
£’m
–
–
229.1
229.1
Total
£’m
313.7
470.5
588.0
1,372.2
Drawn
£’m
296.3
444.4
255.0
995.7
2017
Undrawn
£’m
–
–
300.5
300.5
Total
£’m
296.3
444.4
555.5
1,296.2
The Group issued USD600.0m of loan notes to private placement investors in 2010. The notes were in four tranches as follows:
USD200.0m carried an interest rate of 4.62% and were repaid in 2017; USD125.0m carry an interest rate of 5.02% and are due for
repayment in 2020; USD150.0m carry an interest rate of 5.17% and are also due for repayment in 2020; and USD125.0m carry an
interest rate of 5.12% and are due for repayment in 2022.
The Group issued USD600.0m of loan notes to private placement investors in 2016. The notes were in two tranches as follows:
USD300.0m carry an interest rate of 3.31% and are due for repayment in 2023; and USD300.0m carry an interest rate of 3.60% and
are due for repayment in 2026.
In 2014, the Group secured a five‑year USD900.0m 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. During 2017, the Group reduced the facility to
USD750.0m. At 31 December 2018, the amounts drawn under the facility are £358.9m (2017: £255.0m) represented by borrowings
denominated in US dollars of £238.1m and in Sterling of £120.8m. Borrowings under the facility are subject to interest at floating rates
which are linked to LIBOR.
Committed facilities expire as follows:
In more than one year but not more than five years
In more than five years
Committed facilities
Drawn
£’m
907.9
235.2
1,143.1
2018
Undrawn
£’m
229.1
–
229.1
Total
£’m
1,137.0
235.2
1,372.2
Drawn
£’m
551.3
444.4
995.7
2017
Undrawn
£’m
300.5
–
300.5
Total
£’m
851.8
444.4
1,296.2
The Group also has various uncommitted facilities with its relationship banks.
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31. Bank and other borrowings continued
The fair value of bank and other borrowings is as follows:
Current
Non‑current
Total
2018
Book
value
£’m
Fair
value
£’m
2017
Book
value
£’m
Fair
value
£’m
10.2
1,148.3
10.2
1,136.5
71.4
1,005.8
71.4
1,001.9
1,158.5
1,146.7
1,077.2
1,073.3
After taking account of financial derivatives entered into by the Group that alter the interest basis of its financial liabilities, the
interest rate exposure on bank and other borrowings is:
At 31 December 2018:
US dollar
Swiss franc
Euro
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
At 31 December 2017:
US dollar
Swiss franc
Euro
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
Floating
Fixed
Total
£’m
262.4
–
–
120.8
383.2
(0.6)
382.6
£’m
558.7
159.7
58.4
–
£’m
821.1
159.7
58.4
120.8
776.8
(0.9)
1,160.0
(1.5)
775.9
1,158.5
Floating
Fixed
Total
£’m
162.5
–
–
61.7
224.2
(0.6)
223.6
£’m
645.4
152.1
57.8
–
855.3
(1.7)
£’m
807.9
152.1
57.8
61.7
1,079.5
(2.3)
853.6
1,077.2
Fixed rate borrowings
Weighted
average
interest
rate
%
Weighted
average
period
for which
rate is fixed
Years
2.6
4.0
Fixed rate borrowings
Weighted
average
interest
rate
%
Weighted
average
period
for which
rate is fixed
Years
2.7
4.2
The weighted average interest rate reflects the relative impact of interest rates based on the principal amounts and the duration of
borrowings.
Hedges of net investments in foreign subsidiaries
The Group’s bank and other borrowings of £1,158.5m are designated as hedges of net investments in the Group’s foreign
subsidiaries. The foreign exchange loss of £66.9m (2017: gain of £101.1m) on retranslation of these borrowings is recognised in other
comprehensive income.
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32. Financial instruments
At 31 December 2018:
Non‑current:
Trade and other receivables (see note 25)
Contract assets (see note 26)
Derivative financial instruments (see note 33)
Current:
Trade and other receivables*
Contract assets (see note 26)
Derivative financial instruments (see note 33)
Cash and cash equivalents (see note 27)
Held at fair value
Held at amortised cost
Through
profit
& loss
£’m
Derivatives
used for
hedging
£’m
Loans &
receivables
Liabilities
£’m
£’m
–
–
3.4
–
–
9.3
–
–
–
6.6
–
–
–
–
21.5
61.1
–
390.5
47.9
–
181.9
702.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,547.8)
(1,826.7)
(1,814.9)
6.6
702.9
(1,547.8)
(1,104.5)
(1,092.7)
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
21.5
61.1
10.0
390.5
47.9
9.3
181.9
722.2
(441.4)
(47.9)
(18.8)
(16.1)
(10.2)
Total
fair
value
£’m
21.5
61.1
10.0
390.5
47.9
9.3
181.9
722.2
(441.4)
(47.9)
(18.8)
(16.1)
(10.2)
(1.3)
(43.9)
(17.4)
(81.4)
(1,148.3)
(1.3)
(43.9)
(17.4)
(81.4)
(1,136.5)
Total
book
value
£’m
38.7
49.7
28.5
371.6
39.7
3.6
118.5
650.3
(391.9)
(52.5)
(17.3)
(16.9)
(71.4)
Total
fair
value
£’m
38.7
49.7
28.5
371.6
39.7
3.6
118.5
650.3
(391.9)
(52.5)
(17.3)
(16.9)
(71.4)
(5.5)
(23.1)
(14.6)
(85.2)
(1,005.8)
(5.5)
(23.1)
(14.6)
(85.2)
(1,001.9)
–
–
–
–
–
–
–
–
(441.4)
(47.9)
–
(16.1)
(10.2)
(1.3)
(43.9)
–
(81.4)
(905.6)
–
–
–
–
–
–
–
–
(391.9)
(52.5)
–
(16.9)
(71.4)
(5.5)
(23.1)
–
(85.2)
(770.6)
–
–
12.2
–
–
0.4
–
12.6
–
–
–
–
–
–
–
–
–
–
–
38.7
49.7
–
371.6
39.7
–
118.5
618.2
–
–
–
–
–
–
–
–
–
–
–
(1,417.1)
(1,684.2)
(1,680.3)
12.6
618.2
(1,417.1)
(1,033.9)
(1,030.0)
Financial assets
12.7
6.6
Current:
Trade and other payables**
Contract liabilities (see note 29)
Derivative financial instruments (see note 33)
Lease liabilities (see note 30)
Bank and other borrowings (see note 31)
Non‑current:
Trade and other payables (see note 28)
Contract liabilities (see note 29)
Derivative financial instruments (see note 33)
Lease liabilities (see note 30)
Bank and other borrowings (see note 31)
Financial liabilities
Total
At 31 December 2017 (Restated):
Non‑current:
Trade and other receivables (see note 25)
Contract assets (see note 26)
Derivative financial instruments (see note 33)
Current:
Trade and other receivables*
Contract assets (see note 26)
Derivative financial instruments (see note 33)
Cash and cash equivalents (see note 27)
Financial assets
Current:
Trade and other payables**
Contract liabilities (see note 29)
Derivative financial instruments (see note 33)
Lease liabilities (see note 30)
Bank and other borrowings (see note 31)
Non‑current:
Trade and other payables (see note 28)
Contract liabilities (see note 29)
Derivative financial instruments (see note 33)
Lease liabilities (see note 30)
Bank and other borrowings (see note 31)
Financial liabilities
Total
* Excludes prepayments of £23.1m (2017: £18.1m) (see note 25).
** Excludes social security and other taxes of £11.1m (2017: £10.2m) (see note 28).
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–
–
(18.8)
–
–
–
–
(17.4)
–
(242.7)
(278.9)
(266.2)
–
–
16.3
–
–
3.2
–
19.5
–
–
(17.3)
–
–
–
–
(14.6)
–
(235.2)
(267.1)
(247.6)
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32. Financial instruments continued
Fair value measurement and hierarchy
For trade and other receivables, contract assets, cash and cash equivalents, trade and other payables, contract liabilities and the
current portion 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 their book value for credit risk. The fair
values of lease liabilities approximate to their book values due to the measurement of lease liabilities at the Group’s incremental
borrowing rate, which has not changed significantly since the inception of the lease liabilities presented. Leases are also negotiated
at market rates with independent, unrelated third parties and are subject to periodic rental reviews.
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 interest rate derivatives have been
derived from forward interest rates based on yield curves observable at the balance sheet date and contractual interest rates. The
fair values of foreign currency forward contracts have been derived from forward exchange rates observable at the balance sheet
date and contractual forward rates. The fair values 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
contractual interest and forward rates.
The non‑current portion of bank and other borrowings measured at fair value, is classified as level 3 in the fair value measurement
hierarchy, as it has been determined using significant inputs which are a mixture of those based on observable market data (interest
rate risk) and those not based on observable market data (credit risk). The fair value attributable to interest rate risk has been
derived from forward interest rates based on yield curves observable at the balance sheet date and contractual interest rates,
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
non‑current portion of bank and other borrowings which is 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 in the year.
Financial liabilities designated as fair value through profit and loss
Cumulative unrealised changes in fair value of the non‑current portion of bank and other borrowings arising from changes in credit
risk are as follows:
2018
Fair value at 1 January – arising from changes in credit risk
(Gain)/loss recognised in other comprehensive income
Fair value at 31 December – arising from changes in credit risk
£’m
1.1
(0.8)
0.3
2017
Restated
£’m
(1.0)
2.1
1.1
The difference between fair value and contractual amount at maturity of the non‑current portion of bank and other borrowings is as
follows:
2018
£’m
2017
£’m
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
Settled upon maturity
Gain recognised in net operating costs (see note 10)
Loss/(gain) recognised in net finance costs
(Gain)/loss recognised in other comprehensive income
At 31 December
242.7
(7.5)
235.2
235.2
(13.0)
222.2
2018
£’m
2017
Restated
£’m
235.2
13.1
–
(4.9)
0.1
(0.8)
242.7
344.3
(25.3)
(76.1)
(8.9)
(0.9)
2.1
235.2
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 2018, would impact other
comprehensive income by approximately £3.6m.
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Notes to the consolidated financial statements continued
33. Derivative financial instruments
At 31 December 2018:
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Current portion
Interest rate swaps – fair value hedges
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Non-current portion
Total
At 31 December 2017:
Interest rate swap – cash flow hedge
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Current portion
Interest rate swaps – fair value hedges
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Non-current portion
Total
Credit quality of derivative financial assets
The credit quality of derivative financial assets is as follows:
Moody’s rating:
Aa
A
Total
Contract or underlying
principal amount
Fair value
Assets
£’m
Liabilities
£’m
Assets
£’m
Liabilities
£’m
159.8
37.7
197.5
235.2
–
133.0
368.2
565.7
–
(229.6)
(229.6)
–
(58.4)
(306.2)
(364.6)
(594.2)
8.4
0.9
9.3
6.6
–
3.4
10.0
19.3
–
(18.8)
(18.8)
–
(3.6)
(13.8)
(17.4)
(36.2)
Contract or underlying
principal amount
Fair value
Assets
£’m
Liabilities
£’m
Assets
£’m
Liabilities
£’m
118.5
–
92.3
210.8
222.2
–
233.8
456.0
666.8
–
(183.2)
(147.2)
(330.4)
–
(57.8)
(184.1)
(241.9)
(572.3)
0.4
–
3.2
3.6
12.2
–
16.3
28.5
32.1
2018
£’m
4.4
14.9
19.3
–
(5.9)
(11.4)
(17.3)
–
(6.1)
(8.5)
(14.6)
(31.9)
2017
£’m
11.9
20.2
32.1
The maximum exposure to credit risk at the balance sheet date is the fair value of the derivative financial instruments.
Interest rate swaps
The total notional principal amount of outstanding interest rate swap contracts at 31 December 2018 is £235.2m (2017: £340.7m),
of which £137.2m will expire in 2020 and £98.0m will expire in 2022. The contracts are all denominated in US dollars. The interest
rate contracts have the economic effect of converting fixed rate US dollar borrowings into floating rate US dollar borrowings. To the
extent they continue to meet the criteria for hedge accounting, the fixed rate to floating rate swap contracts are accounted for 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.
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33. Derivative financial instruments continued
Foreign currency forward contracts
Although the Group uses foreign currency forward contracts to hedge against foreign currency exposures, it has decided the costs
of meeting the extensive documentation requirements to be able to apply hedge accounting under IFRS 9 ‘Financial Instruments’
are not merited. Foreign currency forward contracts are analysed as follows:
Fair value:
US dollar/Sterling forward sales
Forward sales denominated in other currencies
Total
34. Provisions
At 1 January 2018 (Restated)
Exchange rate adjustments
Additional provisions/(receivables recognised) in year*
Unused amounts reversed*
Charge/(credit) to net finance costs (see notes 13 and 12
respectively)
Transfers to trade and other payables
Utilised
At 31 December 2018
Current
Non‑current
At 31 December 2018
2018
Assets
£’m
2018
Liabilities
£’m
2.8
1.5
4.3
(29.1)
(3.5)
(32.6)
2017
Assets
£’m
14.2
5.3
19.5
2017
Liabilities
£’m
(17.6)
(2.3)
(19.9)
Environmental
(a)
£’m
99.9
5.0
2.5
–
1.7
–
(28.5)
80.6
Provisions
Onerous
contracts
(b)
£’m
Warranty
costs
(c)
£’m
21.8
0.4
4.3
(2.6)
–
(1.6)
(8.6)
13.7
18.9
0.7
9.7
(4.4)
–
(2.1)
(7.1)
15.7
Other
Total
Environmental
receivables
(d)
£’m
7.6
0.2
3.1
(2.6)
–
–
(1.6)
6.7
£’m
148.2
6.3
19.6
(9.6)
1.7
(3.7)
(45.8)
116.7
(a)
£’m
(64.1)
(2.6)
(2.5)
–
(0.8)
–
35.9
(34.1)
2018
£’m
33.0
83.7
2017
Restated
£’m
65.7
82.5
116.7
148.2
*
Amounts in respect of environmental and other provisions have been recognised in net operating costs. Amounts in respect of onerous contracts and warranty costs
have been recognised in cost of sales.
a. Provision has been made for known exposures arising from environmental remediation at a number of sites (see note 4).
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 activities based on information currently available. 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 note 25).
b. Provision has been made for estimated losses under certain trading contracts. 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. Provisions are expected to be substantially utilised over the next three
years and 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. 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.
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Notes to the consolidated financial statements continued
35. Deferred tax
Movements in deferred tax assets and liabilities without taking into consideration the offsetting of balances, are as follows:
At 1 January 2017 (Restated)
Exchange rate adjustments
Reclassifications
Business acquired
Businesses disposed
Transfer to assets classified as held for sale
Credit to income statement – Impact of reduction
in US federal corporate tax rate (see note 14)
Credit to income statement – Other (see note 14)
Charge to other comprehensive income (see note 14)
Charge to equity (see note 14)
At 31 December 2017 (Restated)
Exchange rate adjustments
Reclassifications
Transfer to assets classified as held for sale
Credit to income statement – Impact of reduction
in US federal corporate tax rate (see note 14)
Charge to income statement – Other (see note 14)
Charge to other comprehensive income (see note 14)
Charge to equity (see note 14)
At 31 December 2018
Retirement
benefit
obligations
£’m
107.7
(4.7)
–
–
–
–
(6.9)
(5.9)
(27.1)
–
63.1
1.8
–
–
4.1
(17.7)
(7.3)
–
44.0
Assets
Liabilities
Net
Other
(*)
£’m
113.8
(4.0)
0.6
–
(0.9)
3.3
(27.2)
(24.5)
0.4
(0.2)
61.3
3.5
0.4
(0.7)
–
34.9
0.1
(0.4)
99.1
Total
Intangible
assets
£’m
£’m
221.5
(8.7)
0.6
–
(0.9)
3.3
(34.1)
(30.4)
(26.7)
(0.2)
124.4
5.3
0.4
(0.7)
4.1
17.2
(7.2)
(0.4)
(385.7)
25.6
(0.1)
(3.2)
1.8
–
110.3
35.3
–
–
(216.0)
(11.7)
(0.4)
(2.2)
–
(30.1)
–
–
Other
(**)
£’m
(42.5)
3.2
(0.5)
–
0.4
–
12.1
3.0
–
–
(24.3)
(1.4)
–
–
–
(2.6)
–
–
Total
£’m
£’m
(428.2)
28.8
(0.6)
(3.2)
2.2
–
122.4
38.3
–
–
(240.3)
(13.1)
(0.4)
(2.2)
–
(32.7)
–
–
(206.7)
20.1
–
(3.2)
1.3
3.3
88.3
7.9
(26.7)
(0.2)
(115.9)
(7.8)
–
(2.9)
4.1
(15.5)
(7.2)
(0.4)
143.1
(260.4)
(28.3)
(288.7)
(145.6)
*
*
Includes balances arising from temporary differences in relation to provisions, accruals, share‑based payments, finance costs and derivative financial instruments.
Includes balances arising from accelerated tax depreciation and contract assets.
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 liabilities all fall due after more than one year. Deferred tax assets are analysed as follows:
To be recovered within one year
To be recovered after more than one year
Total
2018
£’m
16.3
(161.9)
2017
Restated
£’m
26.3
(142.2)
(145.6)
(115.9)
2018
£’m
11.4
4.9
16.3
2017
Restated
£’m
0.3
26.0
26.3
The Group has unrecognised tax losses of £12.5m (2017: £24.3m) for which no deferred tax asset has been recognised. No asset has
been recognised in respect of these losses, as it is not regarded as more likely than not that they will be recovered. Deferred tax
assets not recognised, would be recoverable in the event they reverse and suitable taxable profits are available. There are no
unremitted earnings in foreign subsidiaries that would give rise to a tax liability in the event of those subsidiaries remitting
their earnings.
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36. 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 consolidated 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. 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;
• In the US, the Group operates five defined benefit schemes, all of which are closed to new members. With one exception, these
schemes are closed to future accrual. The schemes are a mixture of funded and unfunded schemes. The funded 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 schemes; and
• In Switzerland, the Group operates a funded defined benefit scheme which is open to new members and to future accrual.
The 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. Responsibility for its governance lies with a foundation, which is similar in nature to a UK trustee board.
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. 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
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 and closed to new members.
Amounts recognised in the income statement
Total charge in respect of defined contribution pension schemes
Service cost
Past service cost (see note 11)
Past service credit
Administrative expenses borne directly by schemes
Net interest expense on retirement benefit obligations
Total charge in respect of defined benefit pension schemes
Service cost
Net interest expense on retirement benefit obligations
Total charge in respect of healthcare schemes
Total charge
2018
£’m
30.9
15.4
1.7
(5.4)
2.7
6.3
20.7
0.7
1.7
2.4
2017
£’m
29.2
15.9
–
(7.1)
4.2
9.4
22.4
0.7
1.9
2.6
54.0
54.2
Of the total charge, £43.3m (2017: £38.7m) is included in employee costs (see note 9), of which £28.1m (2017: £26.4m) has been
recognised in cost of sales and £15.2m (2017: £12.3m) in net operating costs. Of the remaining charge, £2.7m (2017: £4.2m) has
been recognised in net operating costs in respect of scheme administration expenses and £8.0m (2017: £11.3m) is recognised in
finance costs (see note 13).
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Annual Report and Accounts 2018
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Notes to the consolidated financial statements continued
36. Retirement benefit obligations continued
The past service cost relates to the impact of the UK High Court ruling on how UK pension schemes should equalise Guaranteed
Minimum Pension benefits. This change, which had not been anticipated in prior year actuarial assumptions, has been treated as an
exceptional operating item (see note 11). The past service credit in 2018 relates to the Group’s decision to freeze two of the US
schemes to future accrual for existing members.
Amounts recognised on the balance sheet
Present value of liabilities
Fair value of assets
Retirement benefit obligations
Present value of liabilities
Fair value of assets
Retirement benefit obligations
2018
UK
pension
scheme
£’m
753.5
(669.0)
Overseas
pension
schemes
£’m
423.6
(346.6)
84.5
77.0
Overseas
healthcare
schemes
£’m
47.6
–
47.6
Total
£’m
1,224.7
(1,015.6)
209.1
UK
pension
scheme
£’m
814.5
(673.6)
140.9
2017
Overseas
pension
schemes
£’m
439.1
(321.7)
117.4
Overseas
healthcare
schemes
£’m
49.8
–
49.8
Total
£’m
1,303.4
(995.3)
308.1
Of the total deficit of £209.1m (2017: £308.1m), £62.3m (2017: £64.9m) 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
Past service credit
Net interest cost (see note 13)
Contributions – Group
Contributions – Members
Benefits paid
Settlements
Remeasurement of retirement benefit obligations:
Experience gain
Loss/(gain) from change in demographic assumptions
(Gain)/loss from change in financial assumptions
Return on schemes’ assets excluding amounts included in
finance costs
Total remeasurement (gain)/loss
Administrative expenses borne directly by schemes
Liabilities
£’m
1,303.4
26.4
16.1
1.7
(5.4)
33.9
–
3.1
(55.0)
(1.2)
(14.0)
3.1
(87.4)
–
(98.3)
–
2018
Assets
£’m
(995.3)
(18.6)
–
–
–
(25.9)
(83.7)
(3.1)
55.0
1.2
–
–
–
52.1
52.1
2.7
Total
£’m
Liabilities
£’m
1,367.2
(40.0)
16.6
–
(7.1)
36.8
–
3.2
(52.1)
(11.4)
(5.9)
(17.9)
14.0
308.1
7.8
16.1
1.7
(5.4)
8.0
(83.7)
–
–
–
(14.0)
3.1
(87.4)
52.1
(46.2)
2.7
2017
Assets
£’m
(952.5)
25.1
–
–
–
(25.5)
(50.1)
(3.2)
52.1
11.4
–
–
–
Total
£’m
414.7
(14.9)
16.6
–
(7.1)
11.3
(50.1)
–
–
–
(5.9)
(17.9)
14.0
–
(56.8)
(56.8)
(9.8)
–
(56.8)
4.2
(66.6)
4.2
At 31 December
1,224.7
(1,015.6)
209.1
1,303.4
(995.3)
308.1
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Annual Report and Accounts 2018
36. Retirement benefit obligations continued
Analysis of pension scheme assets
2018
Quoted
£’m
Unquoted
£’m
2017
Quoted
£’m
Unquoted
£’m
Equities
Government bonds
Corporate bonds
Hedge funds
Property
Cash
Other assets
UK pension scheme
Equities
Government bonds
Corporate bonds
Property
Cash
Other assets
Overseas pension schemes
Equities
Government bonds
Corporate bonds
Hedge funds
Property
Cash
Other assets
Total pension schemes’ assets
160.2
290.2
53.6
–
–
59.5
–
563.5
48.0
153.2
79.0
21.1
4.1
26.9
332.3
208.2
443.4
132.6
–
21.1
63.6
26.9
895.8
–
2.2
11.7
60.9
19.0
–
11.7
105.5
4.1
–
–
10.2
–
–
14.3
4.1
2.2
11.7
60.9
29.2
–
11.7
Total
£’m
160.2
292.4
65.3
60.9
19.0
59.5
11.7
669.0
52.1
153.2
79.0
31.3
4.1
26.9
346.6
212.3
445.6
144.3
60.9
50.3
63.6
38.6
%
24.0
43.7
9.8
9.1
2.8
8.9
1.7
100.0
15.0
44.2
22.8
9.0
1.2
7.8
20.9
43.8
14.2
6.0
5.0
6.3
3.8
199.9
275.1
98.5
–
8.8
17.2
2.8
602.3
82.8
88.8
87.0
18.5
5.6
26.1
282.7
363.9
185.5
–
27.3
22.8
28.9
911.1
–
–
26.4
17.2
18.4
–
9.2
71.2
1.2
–
–
11.8
–
–
13.0
1.2
–
26.4
17.2
30.2
–
9.2
84.2
100.0
308.8
119.8
1,015.6
100.0
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Total
£’m
199.9
275.1
124.9
17.2
27.2
17.2
12.0
673.5
84.0
88.8
87.0
30.3
5.6
26.1
%
29.7
40.8
18.5
2.6
4.0
2.6
1.8
100.0
26.1
27.6
27.0
9.4
1.8
8.1
321.8
100.0
283.9
363.9
211.9
17.2
57.5
22.8
38.1
995.3
28.5
36.6
21.3
1.7
5.8
2.3
3.8
100.0
Other assets principally comprise 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.
UK
pension
scheme
2.90%
3.20%
2.20%
3.10%
2.95%
2018
Overseas*
pension
schemes
4.15%
N/A
N/A
N/A
N/A
Overseas
healthcare
schemes
4.15%
N/A
N/A
N/A
N/A
UK
pension
scheme
2.55%
3.20%
2.20%
3.00%
4.20%
2017
Overseas*
pension
schemes
3.55%
N/A
N/A
N/A
4.43%
Overseas
healthcare
schemes
3.55%
N/A
N/A
N/A
N/A
In determining the fair value of scheme liabilities, the Group uses mortality assumptions which are based on published mortality
tables adjusted to reflect the characteristics of the scheme populations. The Group’s mortality assumptions in the UK are based
on recent mortality investigations of Self Administered Pension Schemes adjusted to reflect the profile of the membership of the
scheme, which include the results of an analysis of members used to support the 2018 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 2018 Social
Security Administration’s Intermediate‑Cost Projections scale.
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.
2018
2017
UK
scheme
Years
Overseas*
schemes
Years
UK
scheme
Years
Overseas*
schemes
Years
23.1-24.9 21.4-22.1 22.8-24.4
25.3-27.0
25.6-26.9 23.5-23.7
21.6-23.1
21.7-23.5 20.2-20.8
23.9-25.5
24.1-25.4 22.3-22.6
21.5-22.1
23.5-23.7
20.2-20.8
22.3-22.6
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Notes to the consolidated financial statements continued
36. 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 2018 to increase by
approximately £97.0m.
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2018
to increase by approximately £9.0m.
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at
31 December 2018 to increase by approximately £40.0m.
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 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 on the balance sheet. The methods and types of
assumptions used in preparing the sensitivity analysis are consistent with the previous year. No change has been considered
necessary to any 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 unless otherwise stated.
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 classes 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 outperform
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. Both the UK and US schemes have purchased equity derivatives which enable
the schemes to benefit from equity‑like returns, subject to certain caps, whilst providing an element of protection against falls in
equity markets. These derivatives cover approximately 29% of the total equities held by the schemes and have an average
remaining life of 1.2 years at 31 December 2018. The Group actively monitors how the duration and expected yield of scheme
assets match the expected cash outflows arising from its 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,
increases in inflation 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 the UK by linking benefits in respect of future service to
average salaries over a period of employment rather than final salary at retirement. In the US, the only scheme open to future
accrual provides for a fixed benefit for each year of service. 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 these estimates, 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.
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36. Retirement benefit obligations continued
Other information
In the UK, at the date of the 2015 triennial valuation the deficit was measured for funding purposes at £249.4m. The buy‑out
valuation at the same date, which assumed the Group were to transfer responsibility of the scheme to an insurance company, was
measured at £544.1m. The Group has no current plans to make such a transfer. The Group agreed with the trustees, following this
valuation, to make annual deficit reduction payments commencing in 2016 with the aim of eliminating the deficit by March 2024.
Under this agreement, deficit payments in 2019 will be £32.3m and will increase by approximately 5% per annum for the remainder
of the recovery period. The present value of future deficit payments agreed as part of the 2015 actuarial valuation exceeds the
scheme accounting deficit at 31 December 2018 by approximately £90.0m 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.
The 2018 triennial valuation is in progress. Preliminary results indicate that the deficit on a funding basis was approximately
£163.0m, an improvement of £34.0m compared to the projected funding deficit at that date based on the 2015 valuation. The
preliminary buy‑out valuation at the 2018 valuation date was approximately £395.0m. The 2018 valuation will be finalised in the
first half of 2019 and is not currently anticipated to impact the level of deficit contributions payable in 2019, agreed following the
2015 valuation.
In the US, minimum deficit reduction payments are driven by regulations and provide for deficits to be eliminated over periods
up to 15 years. In 2018, the Group made an accelerated cash contribution of USD40.0m (£30.4m) into two of its US schemes. As a
result, and absent any changes in legislation, deficit payments in 2019 are expected to reduce to £4.0m and remain relatively stable
at this level over the following four years. Thereafter, annual payments are expected to increase to approximately £11.0m per annum
for the remainder of the recovery period. The present value of deficit payments due under legislation does not exceed the schemes’
deficits at 31 December 2018 and accordingly no additional minimum funding liability arises.
The Swiss scheme has a surplus on a funding basis of approximately £11.0m and no additional minimum funding liability arises.
Estimated total Group contributions expected to be paid to the schemes during 2019 are £49.3m.
The weighted average duration of the UK schemes’ defined benefit obligation is 18.6 years. The weighted average duration of the
overseas schemes’ defined benefit obligations is 11.3 years. The expected maturity of undiscounted pension and healthcare
benefits at 31 December 2018 is as follows:
Benefit payments expected to be made in 2019
Benefit payments expected to be made in 2020
Benefit payments expected to be made in 2021 to 2023
Benefit payments expected to be made in 2024 to 2028
Benefit payments expected to be made in 2029 to 2033
Benefit payments expected to be made in 2034 to 2038
Benefit payments expected to be made in 2039 to 2043
Benefit payments expected to be made from 2044 onwards
46.8
48.0
152.9
274.3
283.5
268.8
244.0
702.1
3.6
3.6
10.5
15.4
12.4
9.8
7.5
13.7
Pension
schemes
£’m
Healthcare
schemes
£’m
Total
£’m
50.4
51.6
163.4
289.7
295.9
278.6
251.5
715.8
Total
37. Share capital
Issued share capital
Allotted and fully paid:
At 1 January 2017
Issued on exercise of Sharesave awards
At 31 December 2017
Issued on exercise of Sharesave awards
At 31 December 2018
2,020.4
76.5
2,096.9
Ordinary
shares of
5p each
Number ’m
Nominal
value
Net
consideration
£’m
£’m
775.7
0.7
776.4
0.5
776.9
38.8
–
38.8
–
38.8
–
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38. Share-based payment
The Group operates a number of share schemes for the benefit of its employees. The total expense recognised in net operating
costs in respect of such schemes is £13.5m (2017: £8.0m) (see note 9) and is analysed as follows:
2018
£‘m
2017
£‘m
Meggitt Long‑Term Incentive Plan 2014 – Equity settled
Meggitt Long‑Term Incentive Plan 2014 – Cash settled
Deferred Share Bonus Plan – Equity settled
Sharesave Plans – Equity settled
Other
Total
12.5
0.5
0.3
0.3
(0.1)
13.5
5.8
0.5
0.7
0.5
0.5
8.0
Meggitt Long-Term Incentive Plan 2014: Equity settled
Under this plan, 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 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 2018 has been estimated at the market price of the share on the date of grant, which was
429.60 pence (2017: 442.10 pence). Movements in the number of outstanding shares that may potentially be released to employees
are as follows:
2018
Number of
shares
under award
outstanding
‘m
2017
Number of
shares
under award
outstanding
‘m
At 1 January
Awarded
Exercised
Lapsed
At 31 December
15.2
5.7
(0.6)
(3.6)
16.7
13.7
6.1
(0.5)
(4.1)
15.2
At 31 December 2018, 0.1m of the shares under award are eligible for release.
39. Own shares
Own shares represent shares in the Company that are held by an independently managed Employee Share
Ownership Plan Trust (‘the trust’) formed to acquire shares to be used to satisfy share options and awards under the
employee share schemes as described in the Directors’ remuneration report on pages 92 to 114. At 31 December
2018, the trust holds 5.6m ordinary shares (2017: 4.2m ordinary shares) of which 5.0m are unallocated (2017: 3.8m),
being retained by the trust for future use. The balance is held for employees in a vested share account to satisfy
particular awards which have fully vested. All shares, whether or not allocated, are held for the benefit of employees.
The shares held at 31 December 2018 were purchased during 2017 and 2018 at a cost of £26.7m. The market value of
the shares at 31 December 2018 is £26.2m (2017: £20.1m) representing 0.72% of the issued share capital of the
Company (2017: 0.54%).
40. Contractual commitments
Capital commitments
Contracted for but not incurred:
Intangible assets
Property, plant and equipment
Total
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£’m
0.6
14.3
14.9
2017
£’m
2.8
18.8
21.6
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40. Contractual commitments continued
Other financial commitments
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 35 years. The directors are satisfied that, at this time, there are no significant contingent liabilities
arising from these commitments. Programme costs comprise programme participation costs and the supply of initial manufactured
parts (‘FOC’) on a free of charge or deeply discounted basis to OEMs in connection with their selection of the Group’s products for
installation onto new aircraft, where the Group has obtained principal supplier status. Programme participation costs are accounted
for as described in note 2, FOC costs are expensed as incurred. Based on latest OE delivery forecasts from external agencies, the
future estimated expenditure under contractual commitments to incur development costs and programme costs at 31 December
2018, are shown in the table below.
In one year or less
In more than one year but not more than five years
In more than five years
Total
2018
Development
costs
£’m
2018
Programme
costs
£’m
2017
Development
costs
£’m
2017
Programme
costs
£’m
49.0
16.9
11.2
77.1
77.0
227.3
825.5
1,129.8
56.5
22.8
9.9
89.2
48.4
241.5
932.3
1,222.2
41. Contingent liabilities
The Company has given guarantees in respect of credit facilities for certain of its subsidiaries, some property and other leases, 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.
42. 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 notes 19 and 21)
Loss on disposal of property, plant and equipment
Loss on disposal of software and other intangible assets
Gain on disposal of businesses (see note 10)
Impairment of assets classified as held for sale (see note 23)
Remeasurement of fair value of contingent consideration payable (see note 10)
Financial instruments (see note 10)
Share of loss/(profit) after tax of joint venture (see note 22)
Dividend income from joint venture (see note 22)
Change in carrying value of held for sale assets and liabilities up to date of disposal
Retirement benefit obligation deficit payments
Share‑based payment expense (see note 38)
Changes in working capital:
Inventories
Trade and other receivables
Contract assets
Trade and other payables
Contract liabilities
Provisions
Cash inflow from operations
2018
£’m
2017
Restated
£’m
179.0
292.8
(1.0)
41.5
37.1
53.6
132.2
3.6
3.0
–
(30.4)
10.7
(3.6)
10.1
1.5
–
(2.0)
(67.6)
13.5
(33.5)
17.2
(18.0)
30.0
9.0
(37.7)
(1.4)
45.8
(64.5)
53.9
130.9
57.3
0.8
0.3
(40.3)
14.2
–
(60.7)
(0.6)
0.5
–
(33.5)
8.0
(11.6)
7.9
(10.5)
26.0
11.8
(27.8)
348.2
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42. Cash inflow from operations continued
The Board uses free cash flow to monitor and measure the underlying trading cash performance of the Group. It is reconciled to
cash from operating activities below:
2018
Cash inflow from operating activities
Add back cash outflow from business acquisition and disposal expenses
Capitalised development costs
Capitalised programme participation costs
Purchase of intangible assets
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Free cash inflow
£’m
295.3
3.8
(58.6)
(0.8)
(21.8)
(52.6)
2.1
167.4
2017
Restated
£’m
337.9
3.9
(62.6)
(3.4)
(18.3)
(62.0)
1.9
197.4
43. Movements in net debt
At 1 January
Cash inflow from operating activities
Cash outflow from investing activities
Dividends paid to Company’s shareholders (see note 16)
Purchase of own shares for employee share schemes
Net cash generated
Debt acquired with business
Debt disposed with businesses
Lease liabilities entered (see note 21)
Exchange rate adjustments
Other non‑cash movements
At 31 December
2018
£’m
2017
Restated
£’m
1,060.8
1,278.8
(295.3)
96.0
124.2
22.6
(337.9)
80.1
118.6
19.0
(52.5)
(120.2)
–
–
4.6
65.5
(4.3)
0.6
(0.8)
15.9
(105.0)
(8.5)
1,074.1
1,060.8
At 1 January 2017 (Restated)
Exchange rate adjustments
Business acquired
Businesses disposed
Cash flows from financing activities*
Other movements
At 31 December 2017 (Restated)
Exchange rate adjustments
Businesses disposed (see note 44)
Cash flows from financing activities*
Other movements
Bank and
other
borrowings:
Current
£’m
Bank and
other
borrowings:
Non-current
£’m
175.7
(12.7)
0.6
(0.1)
(88.1)
(4.0)
71.4
5.1
–
(66.8)
0.5
1,170.6
(88.4)
–
(0.7)
(71.2)
(4.5)
1,005.8
61.8
–
85.5
(4.8)
At 31 December 2018
10.2
1,148.3
Lease
liabilities:
Current
Lease
liabilities:
Non-current
Total
debt
Cash and
cash
equivalents
Net
debt
£’m
17.8
(1.0)
–
–
(11.4)
11.5
16.9
0.7
–
(14.3)
12.8
16.1
£’m
88.5
(7.7)
–
–
–
4.4
85.2
4.4
–
–
(8.2)
£’m
£’m
£’m
1,452.6
(109.8)
0.6
(0.8)
(170.7)
7.4
1,179.3
72.0
–
4.4
0.3
(173.8)
4.8
(0.5)
3.2
47.8
–
(118.5)
(6.5)
0.7
(57.6)
–
1,278.8
(105.0)
0.1
2.4
(122.9)
7.4
1,060.8
65.5
0.7
(53.2)
0.3
81.4
1,256.0
(181.9)
1,074.1
* Cash flows relating to bank and other borrowings are disclosed in the cash flow statement as proceeds from borrowings of £85.5m (2017: £64.9m) and repayments of
borrowings of £66.8m (2017: £224.2m).
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44. Business disposals
On 12 January 2018, the Group disposed of 100% of the equity in Aviation Mobility, LLC (‘Aviation Mobility’) for a consideration of
USD14.0m. Aviation Mobility was previously reported within Meggitt Control Systems.
On 14th November 2017, the Group agreed to the disposal of 100% of the equity of Linear Motion LLC (’Linear Motion’) subject to
certain regulatory clearances being obtained. The related assets were classified as a disposal group held for sale and were
presented separately at 31 December 2017 together with directly associated liabilities. The disposal subsequently completed on
26 March 2018 for a consideration of USD4.2m. Linear Motion was previously reported within the Meggitt Equipment Group.
On 21 April 2018, the Group disposed of 100% of the ordinary shares of Precision Micro Limited (‘Precision Micro’) for a
consideration of £21.9m. The company specialised in production photo etching for the automotive and medical sectors, where
synergies with the rest of the Group were limited. Precision Micro was previously reported within the Meggitt Equipment Group.
On 24 December 2018, the Group disposed of a small number of product lines from within one of its sensing systems businesses for
a consideration of USD10.0m. These product lines were reported within Meggitt Sensing Systems.
The businesses disposed were not a major line of business or geographical area of operation of the Group. The net assets of the
businesses 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
Cash and cash equivalents (see note 43)
Assets classified as held for sale (see note 23)
Trade and other payables – current
Liabilities directly associated with assets classified as held for sale (see
note 23)
Net assets
Currency translation gain transferred from equity
Business disposal expenses
Deferred consideration receivable
Difference between fair value of consideration and amounts received
Gain on disposal (see note 10)
Total consideration received in cash
Cash inflow arising on disposal:
Total consideration received in cash
Less: cash and cash equivalents disposed of (see note 43)
Less: cash paid in respect of businesses disposed in prior periods
Businesses disposed
Less: business disposal expenses paid
Total cash inflow
Aviation
Mobility
Linear
Motion
Precision
Micro
£’m
–
–
–
–
0.3
–
–
–
–
0.3
£’m
–
–
–
–
–
–
10.0
–
(3.3)
6.7
£’m
0.8
0.1
3.5
1.1
3.4
0.7
–
(1.9)
–
7.7
Sensing
product
lines
£’m
–
–
–
0.8
–
–
–
–
–
0.8
Total
£’m
0.8
0.1
3.5
1.9
3.7
0.7
10.0
(1.9)
(3.3)
15.5
(3.0)
2.5
(7.9)
1.8
27.9
36.8
36.8
(0.7)
(0.4)
35.7
(3.8)
31.9
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45. Restatement of prior year comparatives
This note explains the impact on the consolidated financial statements of the adoption of IFRS 15 ‘Revenue from contracts with
customers’ and IFRS 9 ‘Financial instruments’ which became effective for the financial year beginning 1 January 2018 and of IFRS 16
‘Leases’ which the Group has early adopted. As a result of changes required to the Group’s accounting policies arising from
adoption of these standards, prior period comparatives have been restated.
In addition, in 2018 the Group finalised the fair values of assets and liabilities of Elite Aerospace, Inc. (‘Elite’) which was acquired on
28 March 2017. IFRS 3 requires fair value adjustments to be recorded with effect from the date of acquisition and consequently has
resulted in a restatement of previously reported results.
The following tables show the impact of these changes on each line item affected. Line items which are not impacted by the
restatement have been aggregated within the relevant sub‑totals. The impact of each new standard is also explained in more detail
within the footnotes that follow the tables.
Consolidated income statement (extract)
Revenue
Cost of sales
Gross profit
Net operating costs
Operating profit
Net finance costs
Profit before tax
Tax credit/(charge)
Profit for the year
Earnings per share:
Basic (pence)
Diluted (pence)
Non-GAAP measures:
Underlying operating profit
Underlying profit before tax
Underlying basic earnings per share (pence)
Underlying diluted earnings per share (pence)
2017
As previously
reported
£’m
2,027.3
(1,234.0)
793.3
(489.1)
304.2
(41.8)
262.4
87.6
350.0
45.2
44.3
388.4
357.9
35.3
34.6
IFRS 15
IFRS 16
IFRS 9
Elite
2017
Restated
£’m
(32.9)
(1.2)
(34.1)
(0.2)
(34.3)
–
(34.3)
(21.2)
(55.5)
(7.2)
(7.0)
(35.8)
(35.8)
(3.2)
(3.2)
£’m
£’m
£’m
£’m
–
–
–
0.7
0.7
(2.6)
(1.9)
(0.2)
(2.1)
(0.2)
(0.2)
0.7
(1.9)
(0.1)
(0.1)
–
–
–
2.1
2.1
–
2.1
–
–
–
–
–
–
–
(0.4)
1.7
(1.3)
(1.3)
1,994.4
(1,235.2)
759.2
(486.5)
272.7
(44.4)
228.3
64.5
292.8
0.2
0.2
–
–
–
–
(0.2)
(0.2)
37.8
37.1
–
–
–
–
353.3
320.2
32.0
31.3
Consolidated statement of comprehensive income (extract)
Profit for the year
2017
As previously
reported
£’m
350.0
IFRS 15
IFRS 16
IFRS 9
Elite
2017
Restated
£’m
(55.5)
£’m
(2.1)
£’m
1.7
£’m
(1.3)
£’m
292.8
Items that may be reclassified to the income statement in
subsequent periods:
Currency translation movements
Movements in fair value of financial liabilities arising from
changes in credit risk
Cash flow hedge movements
Tax effect
(161.6)
13.7
0.4
–
(0.2)
(2.8)
–
–
–
–
–
–
(164.6)
13.7
0.4
–
(2.1)
–
0.4
(1.7)
Items that will not be reclassified to the income
statement in subsequent periods
39.5
–
–
–
Other comprehensive (expense)/income
Total comprehensive income for the year
(125.1)
224.9
13.7
(41.8)
0.4
(1.7)
(1.7)
–
–
–
–
–
–
–
–
(147.5)
(2.1)
(0.2)
(2.4)
(152.2)
39.5
(112.7)
(1.3)
180.1
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IFRS 16
IFRS 9
Elite
1 January
2017
Restated
45. Restatement of prior year comparatives continued
Consolidated balance sheets (extracts)
1 January
2017
As previously
reported
£’m
£’m
Net assets
2,456.4
(196.5)
Equity
Hedging and translation reserves
Retained earnings
Other equity
Total equity
551.5
630.6
1,274.3
2,456.4
–
(196.5)
–
(196.5)
£’m
(3.6)
–
(3.6)
–
(3.6)
£’m
–
0.8
(0.8)
–
–
£’m
£’m
–
–
–
–
–
2,256.3
552.3
429.7
1,274.3
2,256.3
31 December
2017
As previously
reported
£’m
IFRS 15
IFRS 16
IFRS 9
Elite
31 December
2017
Restated
£’m
£’m
£’m
£’m
£’m
Non-current assets
Goodwill
Development costs
Programme participation costs
Property, plant and equipment
Trade and other receivables
Contract assets
Deferred tax assets
Other non‑current assets
Current assets
Inventories
Trade and other receivables
Contract assets
Other current assets
1,947.0
482.3
332.1
322.9
39.2
–
11.5
714.2
3,849.2
404.1
437.1
–
136.1
977.3
–
13.5
(315.0)
–
(0.5)
49.7
14.7
–
(237.6)
(10.7)
(47.4)
39.7
–
(18.4)
–
–
–
83.3
–
–
0.1
–
83.4
–
–
–
–
–
Total assets
4,826.5
(256.0)
83.4
Current liabilities
Trade and other payables
Contract liabilities
Lease liabilities
Provisions
Other current liabilities
Net current assets
Non-current liabilities
Contract liabilities
Deferred tax liabilities
Lease liabilities
Other non‑current liabilities
Total liabilities
Net assets
Equity
Hedging and translation reserves
Retained earnings
Other equity
Total equity
(445.5)
–
(0.1)
(64.2)
(136.1)
(645.9)
331.4
–
(201.7)
(6.0)
(1,416.5)
(1,624.2)
(2,270.1)
37.6
(52.5)
–
–
–
(14.9)
(33.3)
(23.1)
55.7
–
–
32.6
17.7
2,556.4
(238.3)
386.9
892.8
1,276.7
2,556.4
13.7
(252.0)
–
(238.3)
5.8
–
(16.8)
–
–
(11.0)
(11.0)
–
1.5
(79.2)
–
(77.7)
(88.7)
(5.3)
0.4
(5.7)
–
(5.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2.1)
–
–
–
–
–
–
–
(2.1)
–
–
–
–
–
1,944.9
495.8
17.1
406.2
38.7
49.7
26.3
714.2
3,692.9
393.4
389.7
39.7
136.1
958.9
(2.1)
4,651.8
–
–
–
(1.5)
–
(1.5)
(1.5)
–
2.3
–
–
2.3
0.8
(402.1)
(52.5)
(16.9)
(65.7)
(136.1)
(673.3)
285.6
(23.1)
(142.2)
(85.2)
(1,416.5)
(1,667.0)
(2,340.3)
(1.3)
2,311.5
(0.9)
0.9
–
–
–
(1.3)
–
(1.3)
400.1
634.7
1,276.7
2,311.5
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Notes to the consolidated financial statements continued
45. Restatement of prior year comparatives continued
Impact of IFRS 15
In accordance with the transition provisions in IFRS 15, the standard has been adopted retrospectively with restatements made to
prior year comparatives. A summary of the principal areas of IFRS 15 that have impacted the Group are show in the tables below
and footnotes that follow:
Revenue
Cost of sales
Gross loss
Net operating costs
Operating loss
Tax charge
Loss for the year
Net assets
Development costs
Programme participation costs
Trade and other receivables – non‑current
Contract assets – non‑current
Deferred tax assets
Inventories
Trade and other receivables – current
Contract assets – current
Trade and other payables – current
Contract liabilities – current
Contract liabilities – non‑current
Deferred tax liabilities
Net Assets
Programme
participation
costs
Programme
participation
costs
(a)
£’m
–
(21.4)
(21.4)
–
(21.4)
(b)
£’m
(2.5)
2.5
–
–
–
Programme
participation
costs
Programme
participation
costs
(a)
£’m
(188.3)
(b)
£’m
–
Programme
participation
costs
Programme
participation
costs
(a)
£’m
–
(285.4)
–
–
14.7
–
–
–
–
–
–
50.8
(219.9)
(b)
£’m
–
(29.6)
–
26.8
–
–
–
2.8
–
–
–
–
–
Customer
funding on
development
programmes
(c)
£’m
–
–
–
–
–
Customer
funding on
development
programmes
(c)
£’m
–
Customer
funding on
development
programmes
(c)
£’m
13.5
–
–
–
–
–
–
–
–
(0.3)
(13.2)
–
–
Other
Reclassifications
(d)
£’m
(30.4)
17.7
(12.7)
(0.2)
(12.9)
(e)
£’m
–
–
–
–
–
Other
Reclassifications
(d)
£’m
(8.2)
(e)
£’m
–
2017
Impact
£’m
(32.9)
(1.2)
(34.1)
(0.2)
(34.3)
(21.2)
(55.5)
1 January
2017
Impact
£’m
(196.5)
Other
Reclassifications
31 December
2017
Impact
(d)
£’m
–
–
8.9
(6.5)
–
4.5
(16.6)
7.8
(17.5)
6.0
(9.9)
4.9
(18.4)
(e)
£’m
–
–
(9.4)
29.4
–
(15.2)
(30.8)
29.1
55.1
(58.2)
–
–
£’m
13.5
(315.0)
(0.5)
49.7
14.7
(10.7)
(47.4)
39.7
37.6
(52.5)
(23.1)
55.7
–
(238.3)
a) Programme participation costs – Free of charge/deeply discounted manufactured parts
Programme participation costs consist of incentives given to OEMs in connection with their selection of the Group’s products for
installation onto new aircraft where the Group has obtained principal supplier status. Where these incentives comprise the supply
of initial manufactured parts on a free of charge or deeply discounted basis, amounts are recognised within costs of sales as
incurred. Under the Group’s previous accounting policy, amounts were recognised as an intangible asset and amortised over their
useful lives to cost of sales over periods typically up to 15 years.
b) Programme participation costs – Cash payments
Where programme participation costs are in the form of cash payments, the treatment depends on the contractual relationship
between the Group and the third party to whom the payment is made. Where the payment is made to a third party under a revenue
contract (as defined by IFRS 15), or the award of future IFRS 15 revenue contracts on the programme from the same party is highly
probable, payments are recognised as a contract asset and amortised, as a deduction from revenue, over the periods expected to
benefit from those contracts. This situation most frequently arises where the payment is made to the same party to whom original
equipment and/or aftermarket parts are sold. Other payments are recognised as an intangible asset and amortised as a charge to
cost of sales. Under the Group’s previous accounting policy, all programme participation cash payments were recognised as
intangible assets and amortised as a charge to cost of sales.
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45. Restatement of prior year comparatives continued
Impact of IFRS 15 continued
c) Customer funding towards development costs
Where a customer contributes to the Group’s development costs and those costs meet the criteria under IAS 38 to be recognised
as an intangible asset, the funding is recognised as a contract liability and is amortised, as an increase to revenue, over the periods
expected to benefit from future revenue from the customer over the life of the programme. Under the Group’s previous accounting
policy, customer funding was netted off amounts recognised as development costs and accordingly reduced the subsequent
amortisation charged to net operating costs.
d) Other
A number of other revenue timing differences, none of which is individually significant, arose from the adoption of IFRS 15:
i. Revenue recognised over time
The Group recognises revenue under power by the hour and cost per brake landing type contracts over time using costs
incurred as the measure of contract completion. Under the Group’s previous accounting policy, revenue was recognised
based on the number of aircraft flying hours or the number of aircraft landings.
Where the Group builds a product with no alternative use and has an enforceable right to payment from the customer for
costs incurred, plus a reasonable margin, throughout the life of the contract then revenue is recognised over time using costs
incurred as the measure of contract completion. Under the Group’s previous accounting policy, the majority of contracts that
met this requirement were accounted for in a similar way using contract accounting, although the method of measuring
progress has, in some cases, changed. For instance, funded research and development contracts were previously recognised
as revenue over time using customer agreed milestones achieved as a measure of contract completion. Additionally a small
number of contracts for which contract accounting was previously applied no longer meet the IFRS 15 criteria to be recognised
over time, particularly certain contracts in the Heatric business, and are now recognised at a point in time, usually when the
goods are delivered to the customer. Conversely, certain defence contracts for which revenue was previously recognised as
goods were delivered to the customer meet the IFRS 15 over time criteria and accordingly revenue is recognised as costs
are incurred.
ii. Revenue recognised at a point in time
The timing of revenue on the substantial majority of the Group’s contracts, previously recognised at a point in time, has not
been significantly affected by IFRS 15, with revenue continuing to be recognised as goods are delivered to the customer and
at the price agreed with the customer for those goods. A minority of contracts required changes to the timing of revenue
recognition to reflect IFRS 15 guidance on areas such as whether multiple deliveries and services provided to a customer
should be accounted for individually or as a single performance obligation, variable consideration and material rights.
e) Reclassifications
Certain balances representing amounts recoverable on contracts, previously included within trade and other receivables and
deferred income and advance payments received from customers, previously included within trade and other payables, have been
reclassified to contract assets and contract liabilities as appropriate.
Impact of IFRS 16
The Group has early adopted IFRS 16 using the full retrospective approach on transition. Under IFRS 16, except for certain short
term leases and leases of low‑value assets, a liability is recognised at lease inception equal to the present value of payments due
under the lease. The lease liability is subsequently measured using the effective interest rate method, with interest charged to
finance costs. At lease inception, a right‑of‑use asset is recognised equal to the lease liability, adjusted to reflect any lease
incentives paid to or received from the lessor, asset restoration and other direct costs. The right‑of‑use asset is depreciated over
the shorter of the life of the asset or the lease term to either costs of sales or net operating costs as appropriate.
Under the Group’s previous accounting policy, the majority of the Group’s leases were accounted for as operating leases with
rentals charged to cost of sales or net operating costs on a straight‑line basis over the lease term, with no element of the rentals
charged to finance costs. No right‑of‑use asset or lease liability was recognised on the Group’s balance sheet for these leases.
Impact of IFRS 9
Under IFRS 9, where financial liabilities are subsequently measured at fair value, any element of the fair value gain or loss arising that
is attributable to changes in credit risk is recognised in other comprehensive income. Under the Group’s previous accounting policy,
such amounts were recognised within net operating costs. Overall, IFRS 9 does not have a significant impact since the majority of
the Group’s financial assets continue to be held at amortised cost. The Group is also not exposed to a significant concentration of
credit risk, as outlined in note 3, and accordingly the impact of applying an expected credit loss model to its financial assets was
not significant.
Meggitt PLC
Annual Report and Accounts 2018
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Notes to the consolidated financial statements continued
46. Related undertakings
In accordance with section 409 of the Companies Act 2006, a full list of related undertakings at 31 December 2018 is disclosed
below. Unless otherwise stated, undertakings listed below are registered at Atlantic House, Aviation Park West, Bournemouth
International Airport, Christchurch, Dorset BH23 6EW, United Kingdom, and have a single class of ordinary share with 100% of the
equity owned by the Group. 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
184
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Annual Report and Accounts 2018
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 54 a Zacatecas 5690, Parque Industrial
Amistad Sur Saltillo, Coahuila 25070
Aircraft Braking Systems Europe Limited
Aircraft Braking Systems Services Limited
Alston Properties LLC (USA)4
14600 Myford Road, Irvine, California 92606
Artus SAS (France)
Chemin du Champ des Martyrs, 49240 Avrillé
Atlantic House Pension Trustee Limited
BAJ Coatings Limited5
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
(Republic of Ireland)
Gorse Valley, Tipperkevin, Ballymore Eustace,
Co Kildare
Cavehurst 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)6
1955 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
GB Aero Engine LLC (USA)4
1955 Surveyor Avenue, Simi Valley, California 93063
Heatric Limited7
King Tool International Limited
Meggitt (Baltimore) Inc. (USA)6
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)
10 rue Mercoeur, 75011 Paris
Meggitt (Hurn) Limited
Meggitt (Korea) Limited
Meggitt (North Hollywood), Inc. (USA)6
12838 Saticoy Street, North Hollywood,
California 91605
Meggitt (Orange County), Inc. (USA)6
14600 Myford Road, Irvine, California 92606
Meggitt Overseas Limited
Meggitt (Rockmart), Inc. (USA)6
669 Goodyear Street, Rockmart, Georgia 30153
Meggitt (San Diego), Inc. (USA)6
6650 Top Gun Street, San Diego, California 92121
Meggitt (Sensorex) SAS (France)
196 rue Louis Rustin, Archamps Technopole, 74160
Archamps
Meggitt (Shapwick) Limited
Meggitt (Simi Valley), Inc. (USA)6
1955 Voyager Avenue, Simi Valley, California 93063
Meggitt (Tarrant) Limited
Meggitt (Troy), Inc. (USA)8
3 Industrial Drive, Troy, Indiana 47588
Meggitt (UK) Limited
Meggitt (Vietnam) Co., Limited (Vietnam)8
No 7, 16A Road, Industrial Zone 2 of Bienhoa, Dongnai
Meggitt (Xiamen) Sensors & Controls Co
Limited (China)9
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)10
1955 Surveyor Avenue, Simi Valley, California 93063
Meggitt Acquisition (France) SAS (France)
Chemin du Champ des Martyrs, 49240 Avrillé
Meggitt Acquisition Limited
Meggitt Advanced Composites Limited
Meggitt Aerospace Asia Pacific Pte Ltd
(Singapore)
1A Seletar Aerospace Link, Seletar Aerospace Park,
Singapore 797552
Meggitt Aerospace Holdings Limited
Meggitt Aerospace Limited
Meggitt Aircraft Braking Systems Corporation
(USA)6
1204 Massillon Road, Akron, Ohio 44306
Meggitt Aircraft Braking Systems Kentucky
Corporation (USA)6
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, Seletar Aerospace Park,
Singapore 797552
Meggitt Brasil Solucoes de Engenharia Ltda.
(Brazil)9
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)6
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
Meggitt Holdings (France) SNC (France)
Chemin du Champ des Martyrs, 49240 Avrillé
Meggitt Holdings (USA) Inc. (USA)6
1955 Surveyor Avenue, Simi Valley, California 93063
Meggitt India Pvt Limited (India)11
901, Brigade Rbix, No. 20. HMT Main Road, HMT
Township, North Bangalore Karnataka 560022
Meggitt International Limited
Meggitt Investments Limited
Meggitt‑Oregon, Inc. (USA)6
2010 Lafayette Avenue, McMinnville, Oregon 97128
Meggitt Properties PLC
Meggitt Queretaro LLC (USA)4
1204 Massillon Road, Akron, Ohio 44306
Meggitt SA (Switzerland)
Rte de Moncor 4, PO Box 1616, CH‑1701 Fribourg
Meggitt Safety Systems, Inc. (USA)6
1785 Voyager Avenue, Simi Valley, California 93063
Meggitt Training Systems (Quebec) Inc.
(Canada)6
6140 Henri Bourassa West, Saint‑Laurent, Quebec,
H4R 3A6
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)6
296 Brogdon Road, Suwanee, Georgia 30024
Meggitt Training Systems Limited
Meggitt Training Systems Pte Limited
(Singapore)
1A Seletar Aerospace Link, Seletar Aerospace Park,
Singapore 797552
Meggitt‑USA Services, Inc. (USA)6
1955 Surveyor Avenue, Simi Valley, California 93063
Meggitt‑USA, Inc. (USA)6
1955 Surveyor Avenue, Simi Valley, California 93063
Miller Insulation & Engineering Limited13
NASCO Aircraft Brake, Inc. (USA)6
13300 Estrella Avenue, Gardena, California 90248
OECO, LLC (USA)4
4607 SE International Way, Milwaukie, Oregon 97222
Pacific Scientific Company (USA)6
1785 Voyager Avenue, Simi Valley, California 93063
Park Chemical Company (USA)6
1955 Surveyor Avenue, Simi Valley, California 93063
Piher International Limited
Precision Engine Controls Corporation (USA)6
11661 Sorrento Valley Road, San Diego,
California 92121
Securaplane Technologies, Inc. (USA)6
12350 N. Vistoso Park Road, Oro Valley, Arizona 85755
Serck Aviation Limited
Target Technology Petrel Limited
TFE Techniques et Fabrications Electroniques
SAS (France)
Rue Jean Perrin Zone Industrielle Actisud Le Capitre,
31100 Toulouse
Tri‑scan Limited
Vibro‑Meter Limited
Vibro‑Meter S.a.r.l (Switzerland)
Rte de Moncor 4, PO Box 1616, CH‑1701 Fribourg
Wallaby Grip (NSW) Pty Limited (in liquidation)
(Australia)
Bradley Tonks, PKF Sydney, Level 8, 1 O’Connell
Street, Sydney, New South Wales 2000
Wallaby Grip Australia Pty Limited (in
liquidation) (Australia)
Bradley Tonks, PKF Sydney, Level 8, 1 O’Connell
Street, Sydney, New South Wales 2000
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Wallaby Grip B.A.E. Pty Limited (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 Aerospace
Whittaker Corporation (USA)6
1955 Surveyor Avenue, Simi Valley, California 93063
Whittaker Development Co. (USA)6
1955 Surveyor Avenue, Simi Valley, California 93063
Whittaker Ordnance, Inc. (USA)6
1955 Surveyor Avenue, Simi Valley, California 93063
Whittaker Technical Products, Inc. (USA)6
1955 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
Meggitt UTC Aerospace Systems, LLC (USA)14
1400 Jamike Avenue, Erlanger, Kentucky 41018
Parkway‑Hamilton Sundstrand Mexico S.
de R.L. de C.V. (Mexico)15
Carretera 54 a Zacatecas 5690, Parque Industrial
Amistad Sur Saltillo, Coahuila 25070
Valley Association Corporation (USA)16
1204 Massillon Road, Akron, Ohio 44306
Private company limited by
guarantee without share capital
Meggitt Pension Plan Trustees Limited
Registered charity
Evershed & Ayrton Fund
Notes
1 Ownership held as ordinary B shares (50%).
2 Ownership held as ordinary shares (50%).
3 Ownership held as quota interest (100%).
4
5
Ownership held as membership interest (100%).
Ownership held as deferred shares (55.55%) and
ordinary shares (44.45%).
6 Ownership held as common stock (100%).
7
Ownership held as ordinary A shares (60%)
and ordinary B shares (40%).
8 Ownership held as owner’s capital.
9
Ownership held as registered capital (100%).
10 Ownership held as class A shares (67.5%),
class B shares (12.5%) and class C shares (20%).
11
Ownership held as equity shares (100%).
12 Ownership held as registered shares (100%).
13 Registered at 125 West Regent Street, Glasgow,
Lanarkshire, G2 2SA, Scotland.
14 Joint venture with Hamilton Sundstrand
Corporation – ownership held as membership
interest (70%).
15 Subsidiary of Parkway‑HS, LLC – ownership held
as quota interest (99.97%).
16 Ownership held as ordinary shares (33.33%).
Meggitt PLC
Annual Report and Accounts 2018
185
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Company balance sheet
At 31 December 2018
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
Lease liabilities
Bank and other borrowings
Net current assets
Non-current liabilities
Derivative financial instruments
Lease liabilities
Bank and other borrowings
Provisions
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
Notes
2018
£’m
2017
£’m
4
5
6
10
13
7
10
8
10
9
11
10
9
11
12
14
15
38.6
1.4
2,081.2
14.8
16.7
42.0
1.9
2,074.5
30.6
22.7
2,152.7
2,171.7
1,281.2
36.6
–
37.0
1,378.2
20.7
5.0
5.3
1,354.8
1,409.2
3,507.5
3,580.9
(98.2)
(20.2)
(5.0)
(0.2)
(7.9)
(146.1)
(20.3)
(0.1)
–
(70.9)
(131.5)
(237.4)
1,223.3
1,171.8
(18.3)
(0.2)
(469.6)
(0.2)
(84.5)
(572.8)
(24.4)
–
(751.7)
–
(140.9)
(917.0)
(704.3)
(1,154.4)
2,803.2
2,426.5
38.8
1,223.9
1.6
17.5
1,146.4
481.2
(106.2)
38.8
1,222.2
1.6
17.5
996.7
243.0
(93.3)
2,803.2
2,426.5
The financial statements on pages 186 to 197 were approved by the Board of Directors on 25 February 2019 and signed on its
behalf by:
A Wood
Director
L Burdett
Director
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Company statement of changes in equity
For the year ended 31 December 2018
Equity attributable to owners of the Company
Share
capital
Share
premium
Notes
£’m
38.8
£’m
1,219.8
Capital
redemption
reserve
£’m
1.6
Other
reserves*
Retained
earnings
Total
equity
£’m
17.5
£’m
£’m
996.7
2,274.4
At 1 January 2017
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
14
13
Total comprehensive income for the year
Employee share schemes:
Value of subsidiary employee services
Value of services provided
Purchase of own shares for employee share schemes
Issue of equity share capital
Dividends
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
243.0
243.0
(0.2)
46.6
46.4
(8.6)
37.8
(0.2)
46.6
46.4
(8.6)
37.8
280.8
280.8
6.2
2.7
(19.0)
(2.4)
(118.6)
6.2
2.7
(19.0)
–
(118.6)
At 31 December 2017
38.8
1,222.2
1.6
17.5
1,146.4
2,426.5
Profit for the year
Other comprehensive income for the year:
Movements in fair value of financial liabilities
arising from changes in credit risk:
Arising in the year
Transferred to the income statement
Cash flow hedge movements:
Transferred to the income statement
Remeasurement of retirement benefit obligations
Other comprehensive income before tax
Tax effect
Other comprehensive income for the year
14
13
Total comprehensive income for the year
Employee share schemes:
Value of subsidiary employee services
Value of services provided
Purchase of own shares for employee share schemes
Issue of equity share capital
Dividends
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
481.2
481.2
0.5
(0.5)
(0.3)
33.0
32.7
(5.1)
27.6
0.5
(0.5)
(0.3)
33.0
32.7
(5.1)
27.6
508.8
508.8
10.2
4.5
(22.6)
(1.7)
(124.2)
10.2
4.5
(22.6)
–
(124.2)
At 31 December 2018
38.8
1,223.9
1.6
17.5
1,521.4
2,803.2
*
Other reserves relate to the cancellation of the Company’s share premium account in 1988, which was transferred to a non‑distributable capital reserve.
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Notes to the financial statements of the Company
1. Basis of preparation
These 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 financial instruments)
at fair value, in accordance with the Companies Act 2006.
The Company has taken advantage of the legal dispensation
contained in Section 408 of the Companies Act 2006 allowing
it not to publish a separate income statement and related notes
and not to publish a separate statement of comprehensive
income.
The Company has prepared its financial statements in
accordance with Financial Reporting Standard 101 ‘Reduced
Disclosure Framework’ (FRS 101). In preparing these financial
statements, the Company applies the recognition, measurement
and disclosure requirements of International Financial Reporting
Standards (‘IFRSs’) as adopted by the European Union, but has
taken the following disclosure exemptions permitted by
FRS 101:
• Paragraphs 10(d), 111 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 requirements in IAS 24, ‘Related party disclosures’ to
disclose related party transactions entered into between two
or more members of a group;
• Paragraphs 45(b) and 46‑52 of IFRS 2, ‘Share‑based payment’;
and
• IFRS 7, ‘Financial Instruments: Disclosures’.
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.
Adoption of new and revised accounting standards
The following new standards have been adopted for the first
time but have had no significant impact on amounts included in
the Company’s financial statements:
• IFRS 16, ‘Leases’; and
• IFRS 9, ‘Financial instruments’.
Investments
Investments in subsidiaries are stated at cost less accumulated
impairment losses, 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, which comprise software, are recorded at
cost less accumulated amortisation and impairment losses.
Amortisation is charged on a straight‑line basis over the
estimated useful economic lives of the assets, typically over
periods up to 5 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.
For right‑of‑use assets, cost comprises an amount equal to
the initial lease liability recognised, adjusted to include any
payments made for the right to use the asset, initial direct costs
incurred and estimated costs for dismantling, removing and
restoring the asset at the end of the lease term. Lease incentives
receivable from the lessor are recognised as a reduction in cost.
Depreciation is charged on a straight‑line basis over the
estimated useful economic lives of the assets as follows:
Right‑of‑use assets
Shorter of the useful economic life
of the asset and the lease term
Plant and equipment
3 to 5 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.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits
held at call with banks. Banks overdrafts are disclosed as current
liabilities, within bank and other borrowings, except where the
Company participates in offset arrangements with certain banks
whereby cash and overdraft amounts are offset against
each other.
Leases
The majority of the Company’s leases relate to property. A lease
liability is recognised when the Company obtains control of the
right‑of‑use asset, that is the subject of the lease. The lease
liability is subsequently measured using the effective interest
method, with interest charged to finance costs.
At inception, the Company evaluates whether it is reasonably
certain that any option to extend a lease term will be exercised.
Typically, where the initial lease term for a property used for the
Company’s operations is for at least five years, the option to
extend the lease term is at market rates and the right‑of‑use
asset is not considered specialised, it is unusual for an extension
of lease term to be reflected at lease inception. The Company
will however, continue to evaluate the likelihood of exercising
such options throughout the initial lease term. When the
Company is committed to extending the lease, having
considered the alternative options available and, where
appropriate, lessor consent to the extension has been obtained,
the Company will consider the option to be reasonably certain
to be exercised. When an option is reasonably certain to be
exercised, the right‑of‑use asset and lease liabilities recognised
are adjusted to reflect the extended term.
Leases, which at inception have a term of less than 12 months
or relate to low‑value assets, are not recognised on the balance
sheet. Payments made under such leases are charged to the
income statement on a straight‑line basis over the period of
the lease.
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2. Summary of significant accounting policies continued
Taxation
Current tax 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 recognised in
the Company’s financial statements. It is calculated using tax
rates enacted or substantively enacted at the balance sheet
date. 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.
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.
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 the difference
between the fair value of the scheme assets and the present
value of the scheme 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 (as a reduction in future contributions or as a refund, to
which the Company has an unconditional right either during the
life of the scheme or when the scheme liabilities are settled),
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.
Share-based compensation
The Company operates a number of share‑based compensation
schemes, which are subject to non‑market based vesting
conditions and are principally equity‑settled.
For equity‑settled schemes, at the date of grant, the Company
estimates the number of awards expected to vest as a result of
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 Company revises its
estimate of the number of awards expected to vest 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 measured 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 subsequent
measurement at fair value 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 its
inception, the economic 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 effective in offsetting
changes in fair values or cash flows of hedged items as outlined
in the objectives and strategy for undertaking the hedging
transaction and any changes in fair values must not be
dominated by the effect of credit risk.
To the extent the maturity of the derivative financial instruments
are more than 12 months from the balance sheet date, they are
classified as non‑current assets or non‑current liabilities. All
other derivative financial instruments are classified as current
assets or current liabilities.
Fair value hedges
Changes in fair value, not attributable to credit risk, 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. Any changes
in fair value attributable to credit risk are recognised in other
comprehensive income. The Company no longer holds any
derivative financial instruments for which fair value hedge
accounting is applied.
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Notes to the financial statements of the Company continued
Dividends
Interim dividends are recognised as liabilities when approved by
the Board. Final dividends are recognised as liabilities when
approved by the shareholders. Details of dividends paid and
proposed by the Company are disclosed in note 16 to the
Group’s consolidated financial statements.
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 that have the most significant effect on the
amounts included in the financial statements are described
below. There are no judgements considered to be critical
relating to the year.
Critical accounting estimates
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 disclosed
in note 14.
2. Summary of significant accounting policies continued
Derivative financial instruments and hedging continued
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.
If the hedging instrument is sold 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. The Company no longer holds any derivative
financial instruments for which cash flow hedge accounting
is applied.
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 IFRS 9 ‘Financial
Instruments’ are not merited.
Borrowings
Borrowings are initially recognised at fair value, being proceeds
received less directly attributable transaction costs incurred.
Borrowings are generally subsequently held 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 attributable to changes in credit risk recognised in other
comprehensive income and any other movements in fair value
recognised in the income statement.
Any related interest accruals are included within borrowings.
Borrowings are classified as current liabilities unless the
Company has an unconditional right to defer settlement of
the liability for at least 12 months after the balance sheet date.
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. Details of own shares in the Company are
disclosed in note 39 to the Group’s consolidated financial
statements.
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4. Intangible assets
At 1 January 2017
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2017
Opening net book amount
Additions
Amortisation
Net book amount
At 31 December 2017
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2018
Opening net book amount
Additions
Amortisation
Net book amount
At 31 December 2018
Cost
Accumulated amortisation
Net book amount
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Software
£’m
56.5
(22.1)
34.4
34.4
14.1
(6.5)
42.0
70.6
(28.6)
42.0
42.0
5.6
(9.0)
38.6
76.2
(37.6)
38.6
Software assets include costs relating to the Group’s enterprise resource planning system. The asset has a net book amount of
£19.2m (2017: £24.1m) and a remaining amortisation period of 4 years (2017: 5 years).
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Notes to the financial statements of the Company continued
5. Property, plant and equipment
Land and
buildings
At 1 January 2017
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2017
Opening net book amount
Additions
Disposals
Depreciation
Net book amount
At 31 December 2017
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2018
Opening net book amount
Additions*
Depreciation
Net book amount
At 31 December 2018
Cost
Accumulated depreciation
Net book amount
£’m
0.8
(0.4)
0.4
0.4
0.1
–
(0.1)
0.4
0.9
(0.5)
0.4
0.4
–
(0.2)
0.2
0.9
(0.7)
0.2
Plant,
equipment
and vehicles
£’m
Right-of-use
assets:
property
£’m
Right-of-use
assets:
other
£’m
6.6
(3.8)
2.8
2.8
0.2
(0.3)
(1.2)
1.5
6.1
(4.6)
1.5
1.5
–
(0.7)
0.8
6.1
(5.3)
0.8
–
–
–
–
–
–
–
–
–
–
–
–
0.4
(0.1)
0.3
0.4
(0.1)
0.3
–
–
–
–
–
–
–
–
–
–
–
–
0.1
–
0.1
0.1
–
0.1
Total
£’m
7.4
(4.2)
3.2
3.2
0.3
(0.3)
(1.3)
1.9
7.0
(5.1)
1.9
1.9
0.5
(1.0)
1.4
7.5
(6.1)
1.4
* During the year the Company adopted IFRS 16 ‘Leases’. As the impact on the prior year was not significant, prior year figures have not been restated.
6. Investments
Shares in subsidiary undertakings:
At 1 January
Capital contributions
Less contributions from subsidiary undertakings
At 31 December
2018
£’m
2017
£’m
2,074.5
9.1
(2.4)
2,074.0
3.7
(3.2)
2,081.2
2,074.5
A list of all subsidiary undertakings is disclosed in note 46 to the Group’s consolidated financial statements on pages 184 to 185.
7. Other receivables
Amounts owed by subsidiary undertakings
Prepayments and accrued income
Other receivables
Total
Amounts owed by subsidiary undertakings are unsecured.
2018
£’m
1,275.4
3.9
1.9
2017
£’m
1,372.0
4.4
1.8
1,281.2
1,378.2
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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. Lease liabilities
The following amounts are included in the Company’s financial statements in respect of its leases:
Depreciation charge for right‑of‑use assets (see note 5)
Additions to right‑of‑use assets (see note 5)
Carrying amount of right‑of‑use assets (see note 5)
Short‑term lease expense
Analysis of lease liabilities:
In one year or less
In more than one year but not more than five years
Present value of lease liabilities
Current portion
Non-current portion
10. Bank and other borrowings
Bank loans
Other loans
Current portion
Other loans
Non-current portion
Total
Analysis of bank and other borrowings repayable:
In one year or less
In more than one year but not more than five years
In more than five years
Total
Analysis of bank and other borrowings:
Drawn under committed facilities
Less unamortised debt issue costs
Fair value adjustments to fixed rate borrowings
Drawn under uncommitted facilities
Interest accruals
Total
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£’m
5.3
80.8
3.5
8.2
0.4
98.2
2018
£’m
0.1
0.5
0.4
0.1
2017
£’m
6.0
128.6
3.2
8.0
0.3
146.1
2017
£’m
–
–
–
0.1
Present value
of minimum
lease payments
2018
£’m
0.2
0.2
0.4
0.2
0.2
2018
£’m
–
7.9
7.9
2017
£’m
–
–
–
–
–
2017
£’m
61.6
9.3
70.9
469.6
469.6
751.7
751.7
477.5
822.6
7.9
234.8
234.8
477.5
470.5
(0.9)
–
–
7.9
477.5
70.9
308.3
443.4
822.6
740.7
(1.4)
12.4
61.6
9.3
822.6
Debt issue costs are amortised over the period of the facility to which they relate. The Company has no secured borrowings
(2017: £Nil).
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Notes to the financial statements of the Company continued
10. Bank and other borrowings continued
The Company has the following committed facilities:
2010 Senior notes (USD400.0m)
2016 Senior notes (USD600.0m)
Committed facilities
Drawn
£’m
–
470.5
470.5
2018
Undrawn
£’m
–
–
–
Total
£’m
–
470.5
470.5
Drawn
£’m
296.3
444.4
740.7
2017
Undrawn
£’m
–
–
–
Total
£’m
296.3
444.4
740.7
During the year, the Company novated USD400.0m of Private Placement loan notes to its subsidiary, Meggitt Holdings (USA) Inc.
This reduction in debt obligations was funded through a USD400.0m dividend from Meggitt International Holdings Ltd. In addition,
to ensure all lenders to the Group remained pari passu, the Company, Meggitt Finance Ltd and Meggitt Holdings (USA) Inc all
guaranteed each others’ debt obligations under the Group’s private placement issuances and USD750.0m revolving credit facility.
Guarantee fees are payable between the parties as a result of these new arrangements.
Further details on each of the committed facilities are disclosed in note 31 to the Group’s consolidated financial statements on
page 164.
The committed facilities expire as follows:
In more than one year but not more than five years
In more than five years
Committed facilities
Drawn
£’m
235.3
235.2
470.5
2018
Undrawn
£’m
–
–
–
Total
£’m
235.3
235.2
470.5
Drawn
£’m
296.3
444.4
740.7
2017
Undrawn
£’m
–
–
–
Total
£’m
296.3
444.4
740.7
The Company also has various uncommitted facilities with its relationship banks.
The fair value of bank and other borrowings is as follows:
Current
Non‑current
Total
2018
2017
Book
value
£’m
7.9
469.6
477.5
Fair
value
£’m
7.9
456.0
463.9
Book
value
£’m
70.9
751.7
822.6
Fair
value
£’m
70.9
747.8
818.7
After taking account of financial derivatives entered into by the Company that alter the interest basis of its financial liabilities, the
interest rate exposure on bank and other borrowings is:
At 31 December 2018:
US dollar
Less unamortised debt issue costs
Bank and other borrowings
At 31 December 2017:
US dollar
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Bank and other borrowings
Fixed rate borrowings
Weighted
average
interest
rate
%
3.5
Weighted
average
period
for which
rate is fixed
Years
6.0
Fixed rate borrowings
Weighted
average
interest
rate
%
3.8
Weighted
average
period
for which
rate is fixed
Years
6.4
Floating
Fixed
Total
£’m
£’m
£’m
–
–
–
478.4
478.4
(0.9)
(0.9)
477.5
477.5
Floating
Fixed
Total
£’m
235.6
61.6
297.2
(0.3)
296.9
£’m
526.8
–
526.8
(1.1)
£’m
762.4
61.6
824.0
(1.4)
525.7
822.6
The weighted average interest rate reflects the relative impact of interest rates based on the principal amounts and the duration
of borrowings.
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11. Derivative financial instruments
Interest rate swap – cash flow hedge
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Current portion
Interest rate swaps – fair value hedges
Interest rate swaps – not hedge accounted
Cross currency swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Non-current portion
Total
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a
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F
i
2018
Assets
£’m
2018
Liabilities
£’m
2017
Assets
£’m
2017
Liabilities
£’m
–
8.4
28.2
36.6
–
6.6
–
8.2
14.8
51.4
–
–
(20.2)
(20.2)
–
–
(3.6)
(14.7)
(18.3)
(38.5)
0.4
–
20.3
20.7
12.2
–
–
18.4
30.6
51.3
–
(5.9)
(14.4)
(20.3)
–
–
(6.1)
(18.3)
(24.4)
(44.7)
The Company is exempt from certain FRS 101 disclosures as the Group’s consolidated financial statements provide the disclosures
required by IFRS 7 (see note 33 to the Group’s consolidated financial statements on pages 168 to 169.
The gain recorded in the income statement, recognised in net operating costs, arising from the measurement at fair value of
derivative financial instruments is £19.6m (2017: loss £15.3m).
The contract or underlying principal amount of foreign currency forward contracts in respect of derivative financial assets is £612.7m
(2017: £637.7m) and in respect of derivative financial liabilities is £629.5m (2017: £522.6m).
The fair value of foreign currency forward contracts is analysed as follows:
Fair value:
US dollar forward sales and purchases (USD/£)
Forward sales and purchases denominated in other currencies
Total
12. Provisions
Onerous contracts:
At 1 January
Additional provision in year
At 31 December
2018
Assets
£’m
2018
Liabilities
£’m
2017
Assets
£’m
2017
Liabilities
£’m
34.0
2.4
36.4
(31.3)
(3.6)
(34.9)
32.6
6.1
38.7
2018
£’m
–
0.2
0.2
(28.8)
(3.9)
(32.7)
2017
£’m
–
–
–
13. Deferred tax
Movements in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances,
are as follows:
At 1 January 2017
Charge to income statement
Charge to other comprehensive income
At 31 December 2017
Charge to income statement
Charge to other comprehensive income
Charge to equity
At 31 December 2018
Retirement
benefit
obligations
£’m
37.0
(3.8)
(8.6)
24.6
(4.2)
(5.3)
–
15.1
Assets
Other
Total
£’m
–
–
–
–
2.7
0.2
(0.2)
2.7
£’m
37.0
(3.8)
(8.6)
24.6
(1.5)
(5.1)
(0.2)
17.8
Accelerated
tax
depreciation
£’m
(2.1)
0.2
–
(1.9)
0.8
–
–
(1.1)
Liabilities
Net
Other
Total
£’m
(0.1)
0.1
–
–
–
–
–
–
£’m
(2.2)
0.3
–
(1.9)
0.8
–
–
(1.1)
£’m
34.8
(3.5)
(8.6)
22.7
(0.7)
(5.1)
(0.2)
16.7
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Annual Report and Accounts 2018
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Notes to the financial statements of the Company continued
13. Deferred tax continued
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
2018
£’m
6.0
10.7
16.7
2017
£’m
–
22.7
22.7
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.
14. 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 in respect of the Meggitt Pension Plan
in these financial statements. Further details on the plan are disclosed in note 36 to the Group’s consolidated financial statements
on pages 171 to 175 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 is £1.9m (2017: £1.7m).
Changes in the present value of retirement benefit obligations
At 1 January
Service cost
Past service cost
Net interest cost
Contributions – Company
Benefits paid
Remeasurement of retirement benefit obligations:
Experience gain
Loss/(gain) from change in demographic assumptions
(Gain)/loss from change in financial assumptions
Return on scheme assets excluding amounts included in
finance costs
Total remeasurement (gain)/loss
Administrative expenses borne directly by scheme
At 31 December
*
**
Present value of scheme liabilities.
Fair value of scheme assets.
Liabilities
(*)
£’m
814.5
7.5
1.7
20.5
–
(26.2)
(9.8)
4.4
(59.2)
–
(64.6)
–
2018
Assets
(**)
£’m
(673.6)
–
–
(17.4)
(36.3)
26.2
–
–
–
31.6
31.6
0.6
753.4
(668.9)
Total
£’m
140.9
7.5
1.7
3.1
(36.3)
–
(9.8)
4.4
(59.2)
31.6
(33.0)
0.6
84.5
Liabilities
(*)
£’m
829.1
7.8
–
21.7
–
(25.3)
(5.0)
(13.3)
(0.5)
–
(18.8)
–
2017
Assets
(**)
£’m
(619.5)
–
–
(16.6)
(35.6)
25.3
–
–
–
(27.8)
(27.8)
0.6
Total
£’m
209.6
7.8
–
5.1
(35.6)
–
(5.0)
(13.3)
(0.5)
(27.8)
(46.6)
0.6
814.5
(673.6)
140.9
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 2018 to increase by
approximately £68.0m.
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2018
to increase by approximately £8.0m.
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at
31 December 2018 to increase by approximately £26.0m.
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 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 on the balance sheet. The methods and types of
assumptions used in preparing the sensitivity analysis are consistent with the previous year. No change has been considered
necessary to sensitivity levels, given recent past experience.
The weighted average duration of the UK scheme defined benefit obligation is 18.6 years.
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14. Retirement benefit obligations continued
The expected maturity of undiscounted pension benefits at 31 December 2018 is as follows:
Benefit payments expected to be made in 2019
Benefit payments expected to be made in 2020
Benefit payments expected to be made in 2021 to 2023
Benefit payments expected to be made in 2024 to 2028
Benefit payments expected to be made in 2029 to 2033
Benefit payments expected to be made in 2034 to 2038
Benefit payments expected to be made in 2039 to 2043
Benefit payments expected to be made from 2044 onwards
Total
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£’m
21.6
22.2
76.7
153.6
175.4
181.3
177.6
584.3
1,392.7
15. Share capital
Disclosures in respect of share capital of the Company are provided in note 37 to the Group’s consolidated financial statements on
page 175.
16. 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 provided in the Directors’ remuneration report on pages 92 to 114. Disclosure is also made in
the Group’s consolidated financial statements in note 38 on page 176
17. Commitments
The Company has no capital commitments (2017: Nil).
18. Other information
Directors’ remuneration
Details of the remuneration paid to directors of the Company are provided in the Directors’ remuneration report on pages
92 to 114.
Auditor’s remuneration
Details of remuneration paid for the audit of the Company are disclosed in note 7 to the Group’s consolidated financial statements on
page 148.
Employee information
The average number of persons employed by the Company in the year is 204 (2017: 185). Total staff costs, excluding share‑based
payment charges, for the year are £35.6m (2017: £31.5m).
Meggitt PLC
Annual Report and Accounts 2018
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Five-year record
Revenue and profit
Revenue
Underlying profit before tax
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
Exceptional operating items
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
2018
£’m
2017
£’m
2016
£’m
2015
£’m
2014
£’m
2,080.6
1,994.4
1,992.4
1,647.2
1,553.7
334.8
25.1
(91.5)
–
(10.1)
(34.2)
(8.0)
216.1
320.2
25.3
(93.5)
–
60.7
(73.1)
(11.3)
228.3
352.1
39.1
(98.6)
(4.6)
(66.4)
(15.5)
(10.6)
195.5
310.3
(0.2)
(71.9)
(1.6)
(4.8)
(10.4)
(11.2)
210.2
328.7
(3.5)
(68.1)
–
(29.2)
(9.0)
(10.0)
208.9
23.2p
34.2p
16.65p
37.8p
32.0p
15.85p
22.1p
34.8p
15.10p
23.2p
31.6p
14.40p
22.0p
32.4p
13.75p
43.1%
45.9%
48.0%
48.3%
26.9%
As described in note 45 to the Group's consolidated financial statements, the Group has adopted IFRS 15 and IFRS 16 with effect
from 1 January 2018, with prior year comparatives for 2017 restated. IFRS 15 in particular is a complicated standard, requiring
customer contracts to be reassessed against revised criteria for when, and at what value, revenue should be recognised. It is
therefore not practical to provide a restatement of the numbers presented above for the years 2014 to 2016 inclusive.
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Investor information
Contacts
Investor relations
T: 01202 597597
E: investors@meggitt.com
Shareholder enquiries
Registrar:
Computershare Investor
Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
T: 0370 703 6210
E: www.investorcentre.co.uk/contactus
Other useful contacts
Other Information
Dividends
Information on Meggitt PLC, including the latest share price: www.meggitt.com
Enquiries about the following matters should be addressed to Meggitt PLC’s registrar:
• 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.
Quarterly statements will be available online at www.investorcentre.co.uk.
Shareholders will need their Shareholder Reference Number (SRN) and registered
address details to get started. Statements will be available from 30 April, 31 July,
31 October and 31 January each year.
• 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, 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 may be sent to the shareholder’s registered address
to enable the shareholder to manage their holding.
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.
The proposed 2018 final dividend of 11.35p per ordinary share, if approved, will be paid
on 3 May 2019 to shareholders on the register on 22 March 2019. The expected payment
date for the 2019 interim dividend is 4 October 2019.
2019 financial calendar
Full-year results for year ended 31 December 2018
Report and accounts for year
ended 31 December 2018 despatched
2018 Final dividend ex‑dividend date
2018 Final dividend record date
Deadline for receipt of dividend reinvestment plan elections
AGM
2018 Final dividend payment date
Key dates 2019
February
26
2018 Full‑year
results
April
25
AGM
26 February
21 March
21 March
22 March
10 April
25 April
3 May
May
3
2018
Final dividend
payment
Interim results for period ended 30 June 2019
2019 Interim dividend ex‑dividend date
2019 Interim dividend record date
Deadline for receipt of dividend reinvestment plan elections
2019 Interim dividend payment date
6 August
5 September
6 September
20 September
4 October
May
August
October
8
Capital
Markets Day
6
2019 Interim
results
4
2019
Interim dividend
payment
Meggitt PLC
Annual Report and Accounts 2018
199
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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
Bronze stage
Business jets
CAGR
Capability
CGU
CHF
CI
CO2
Code
CODM
Company
Base Erosion and Profit Shifting
Board of directors
The ratio of orders received to
revenue recognised in a period
Fourth stage of MPS
Aircraft used for non‑commercial
operations
Compound annual growth rate
Expertise in technology and
manufacturing
Cash generating unit
Swiss franc
Continuous improvement
Carbon dioxide
UK Corporate Governance Code
2018
Chief operating decision maker
Meggitt PLC
Condition-monitoring Monitoring the condition of
aerospace and land‑based turbines
and supporting equipment to
predict wear and tear, promoting
safety, up‑time and planned
maintenance
Continuing Resolution Appropriations legislation restricting
modification from prior‑year funding
patterns
CR
CREST
CSS
D&A
DECC
DEFRA
DFARS
DLA
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
200
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Annual Report and Accounts 2018
DoD
DPPM
DRIP
DTR
EBITDA
ECR
EPP
EPS
ESOS
ESOS
EU
Executive Committee
FCA
FIFO
FIRST
FOC
FRC
FRS
FTSE
GAAP
GBP
GDP
GHG
Group
HMRC
HSE
IAS
IET
IFBEC
IFRS
Installed base
IP
ISA
KPI
Large jets
Lean
LIBOR
LTIP
(United States) Department of
Defense
Defective parts per million,
a measure of quality
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
Assists the Chief Executive to
develop and implement the Group’s
strategy, manage operations and
discharge responsibilities delegated
by the Board
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
Meggitt PLC and its subsidiaries
HM Revenue & Customs
Health, safety and environment
International Accounting Standards
Institution of Engineering and
Technology
International Forum on Business
Ethical Conduct
International Financial Reporting
Standards
The sum total of the Meggitt
products and sub‑systems installed
on customers’ equipment
Intellectual property
International Standards on Auditing
Key performance indicator
Commercial aircraft with greater than
100 seats
A method for the continual
elimination of waste within a
manufacturing system
London Inter‑Bank Offered Rate
Long Term Incentive Plan
MABS
M&A
MCS
MEG
Meggitt Production
System (MPS)
Mix
MoD
MPC
MPP
MRO
MSS
Net borrowings
NPI
OE
OECD
OEM
Meggitt Aircraft Braking Systems,
one of five Meggitt divisions
PMO
PPC
Mergers and acquisitions
Programme
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
Net debt adjusted to exclude lease
liabilities
New product introduction
Original equipment
Organisation for Economic
Cooperation and Development
Original equipment manufacturer
PwC
R&D
REACH
Regional aircraft
Registrar
RIDDOR
RIS
RMU
ROCE
ROTA
RPH
SAP
SARs
Shipset
SIP
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
Growth excluding the impact of
currency and acquisitions and
disposals of businesses
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
Organic growth
OSHA
OTD
PBT
PCHE
PFEP
Platform
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Project management office
Programme Participation Cost
The production and utilisation
lifecycle of an aircraft model or
ground vehicle
PricewaterhouseCoopers LLP
Research and development
Registration, Evaluation and
Authorisation of Chemicals
Commercial aircraft with fewer than
100 seats
Computershare Investor Services
PLC
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
Smart engineering for What Meggitt specialises in:
extreme environments
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
SRN
STIP
TSR
UAV
UKLA
USD
WACC
WBCSD
WRI
Shareholder Reference Number
Short Term Incentive Plan
Total shareholder return
Unmanned aerial vehicle
UK Listing Authority
United States dollar
Weighted average cost of capital
World Business Council for
Sustainable Development
World Resources Institute
Meggitt PLC
Annual Report and Accounts 2018
201
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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