Stephen Young, Chief Executive, commented:

"First half revenue growth of 10% was in line with expectations, with military revenue stronger than expected offsetting the effect of challenging trading conditions in the energy market.  We remain confident in delivering low to mid-single digit organic revenue growth for the full year, as guided at the beginning of the year.

"Over the last few years we have made important decisions to further improve our competitiveness in the markets we serve.  With implementation of the Meggitt Production System we are delivering valued improvements in customer experience through enhanced quality and delivery and, while this will take several years to optimise fully, the experience we have gathered to date serves to increase our confidence that over the medium term it will drive further cost and working capital benefits.

"We are investing significant sums in research and development and new product introduction, both of which remain near cyclical highs.  These investments are delivering highly visible, good quality revenue streams extending out for many decades.

Reflecting our continuing confidence in the prospects for the Group, the interim dividend has been increased by 8% to 4.60 pence."

Please contact

Stephen Young, Chief Executive

Doug Webb, Chief Financial Officer

Richard Cashin, Group Head of Investor Relations

Meggitt PLC

Tel:    +44 1202 597597

Charles Ryland, Richard Oldworth or Helen Chan

Buchanan

Tel:    +44 20 7466 5000

GROUP OVERVIEW

Meggitt is a global engineering Group specialising in high-performance components and sub-systems for aerospace, defence and energy markets.  We have a broad-based and well-balanced portfolio, with equipment on over 63,000 aircraft and numerous ground vehicles and energy applications worldwide.  This significant and expanding installed base provides us with an aftermarket revenue stream stretching out for decades.  Our high levels of embedded intellectual property and strong customer relationships are enabling us to continue to win good positions on new more fuel efficient platforms, normally on a sole-source basis, strengthening our future original equipment and aftermarket revenue growth. 

Recent years have seen high levels of new platform announcements by aircraft manufacturers.  The Group has been successful in securing positions on these platforms, resulting in elevated levels of development expenditure.  While this development activity continues, we are now in the process of moving record numbers of new parts into production as the platforms enter service.  This adds cost to the business in the near-term but represents a major enhancement of our in‑service portfolio and will drive revenue for decades ahead.

Our capability-based Group structure is tailored to the requirements of our customers, and our increased focus on operational efficiency and programme management as part of the Meggitt Production System (MPS) will make us ever more attractive as a supplier of choice.  Our customer focus was further enhanced at the beginning of the year by the creation of two key management positions with mandates to strengthen OE customer relationships and to evolve the way we provide products and services to aftermarket customers in response to a more dynamic market environment.

HEADLINE FINANCIALS

Orders declined organically by 6% in the first half, with civil aftermarket and military both having tough comparators from H1 2014 when we received significant orders from a major business jet customer and signed a number of military multi-year contracts.  The 28% growth in civil original equipment orders demonstrates the typical variability in multi-year order placement rates. 

Group revenue in the first half of £793.7m (2014: £718.9m) represents a 10% increase and is analysed in the table below:

Organic revenue growth of 3%, with good growth in civil and military end markets partially offset by weakness in energy, is consistent with our expectation of low to mid-single digit organic growth for the year.  The currency tailwind reflects the relative strengthening of the US Dollar versus Sterling and the Euro, partly offset by the strengthening of Sterling versus the Euro.  Precision Engine Controls Corporation (PECC) was acquired in December 2014. 

The Board's preferred measure of the Group's trading performance is underlying profit.  The adjustments between underlying profit and statutory profit are described in notes 4 and 9.  Underlying operating profit for the first six months was £160.2m (2014: £151.4m), representing a margin of 20.2% (2014: 21.1%).  The principal contributors to the margin decline were the full-year effect of the higher costs associated with new product introduction seen in the second half of 2014, an increase in expensed R&D and the impact of the 40% decline in revenue at Heatric, a relatively high fixed cost business.  These were offset in part by improved efficiency and a modest improvement in mix from higher aftermarket revenue growth.   

Underlying net finance costs increased to £8.2m (2014: £7.6m) as a result of higher average debt driven by the share buyback, partially offset by lower interest rates following the refinancing undertaken in September 2014.   

Underlying profit before tax was £152.0m (2014: £143.8m).

The underlying tax rate was 20% (2014: 22%), with the reduction versus last year reflecting closure of a number of historical tax items.  Our planning assumption remains 22% for future years assuming no legislative changes, but we acknowledge increasing uncertainty in the longer term international tax environment.  Underlying earnings per share was up 9% to 15.3 pence (2014: 14.0 pence).

On a statutory basis, profit before tax was up 18% to £115.8m (2014: £98.2m) and earnings per share was up 23% to 12.5p (2014: 10.2p). 

Reflecting our ongoing confidence in the medium term outlook for the Group, the interim dividend is increased by 8% to 4.60p (2014: 4.25p).

The Group's cash flow each year is significantly second-half weighted.  Free cash flow was 85% higher at £38.1m (2014: £20.6m) and demonstrates a solid improvement in working capital versus 2014, particularly in customer collections, more than offsetting increased investment and higher tax payments.

The increased net cash outflow of £146.2m (2014: outflow of £18.2m) reflects the share buyback (£102.0m, 19.2m shares) and an increase in cash dividends to £75.6m (2014: £33.4m) following the cancellation of the scrip dividend.  Net debt at the end of the first half was £711.6m (2014: £568.3m).

There are two main financial covenants in our banking agreements.  The net debt/EBITDA ratio, which must not exceed 3.5x, was 1.5x at 30 June 2015 (2014: 1.3x) and is on track to be at or slightly above 1.5x by the end of the year, consistent with guidance issued at the time of the commencement of the share buyback programme. Interest cover, which must be not less than 3.0x, was a very strong 20.7x (2014: 23.4x).  The Group has, therefore, significant headroom against both key covenant ratios.

The Group has £243m of undrawn headroom against committed bank facilities, with no refinancing required before 2017.

TRADING SUMMARY

Civil aerospace

Meggitt operates in three main segments of the civil aerospace market: large jets, regional aircraft and business jets.  The large jet fleet includes over 20,000 aircraft, the regional aircraft fleet over 6,000 and business jets over 16,000.  The Group has products on virtually all these platforms and hence a very large, and growing, installed base.  The split of civil revenues, accounting for 49% of the Group total, is 59% aftermarket and 41% original equipment (OE).

Total civil aerospace revenue grew 5% on an organic basis.  OE revenue grew 4%, underpinned by solid growth in large jets and business jets, partially offset by a modest decline in general aviation revenue.  Civil aftermarket revenue grew 5% organically, with a continuation of the uneven improvement seen through 2014.  The most significant contributor to aftermarket growth in the period was business jets, where revenue increased by over 20% with Meggitt Aircraft Braking Systems seeing particularly strong demand.  We are, however, still seeing the effect of the parting out of older aircraft in some areas of the business, most notably on large jets within Meggitt Control Systems.  Further to the announcement made at the time of the 2014 full-year results in February, we now have a team focusing solely on the aftermarket to address, among other things, the issue of parting out and how we can best mitigate any impact it has on our business.  The team is exploring a range of measures including participation in the surplus market and enhancing our overall service offering to compete more effectively with providers of surplus parts.

We have been awarded some notable contracts in the period, including full ATA26 fire protection and control systems on the Airbus A330neo and the AVIC MA700 regional aircraft.  We have also started to see early wins on the GE9X engine for the Boeing 777X, including a comprehensive package of engine sensors.  

Deliveries of large jets by Airbus and Boeing are underpinned by a firm order backlog extending over seven years at current production rates, giving us confidence in the continued growth outlook for OE.  While we continue to anticipate delivery growth, we believe that the rate of growth will slow to an average of 4-5% per annum over the next five years in comparison to an average of 9% over the preceding five years.  Deliveries of regional aircraft are expected to grow strongly in 2015, flattening off over the next few years with business jets, particularly larger ones, continuing to grow.

Available seat kilometres (ASKs), a good proxy for air traffic which is a key driver of the demand from airlines for spares and repairs on large and regional aircraft, grew at 5.7% in 2014.  Year to date trends suggest growth will continue to be above the long term trend rate of 5% in 2015, having grown by 6% in the five months to the end of May.  Business jet utilisation in the US and Europe has been broadly flat this year.  However, our higher value content and growing market share should continue to drive above average revenue growth over the medium term.

The medium term outlook for civil revenues, both OE and aftermarket, remains robust.

Military

Our military business accounts for 34% of the Group's revenues.  We have equipment on an installed base of over 20,000 fixed wing and rotary aircraft and a significant number of ground vehicles and training applications.  Direct sales to US customers account for 53% of military revenue, with 28% to European customers and 19% to the rest of the world.

Military revenues grew by 6% on an organic basis.  The drivers of this better than expected revenue performance include a recovery in aftermarket shipments which were impacted by DCMA inspector availability in the first half of 2014, and strong growth in the training businesses, partially offset by the completion of B-1B and Taiwanese Air Force upgrade programmes in Meggitt Aircraft Braking Systems in 2014.

The Group won some significant contracts during the first half of 2015, including a US$42m contract for the provision of a linkless ammunition handling system on the UK MoD Scout armoured vehicle programme, retrofit fuel tank awards on various platforms within the US military fleet including V-22 and Apache, with the potential for many more to follow, and a number of training and targets contracts, notably in India, Canada and the UK.

Our OE revenues are generated from a broad range of platforms and applications, with good positions on key platforms such as Typhoon, F-35, Rafale, E/F‑18 Hornet and BlackHawk. 

Our medium-term expectation for military revenue remains a compound organic growth rate of 2%, driven by fleet growth and retrofit opportunities. 

Energy and other

Energy and other revenues (17% of Group total) come from a variety of end markets, of which the most significant is energy (10% of Group total).  Our energy capabilities centre on providing valves and condition-monitoring equipment for power generation installations, including ground-based gas and wind turbines, and printed circuit heat exchangers used primarily in the oil and gas market.  Other markets (7% of Group total) include the automotive, test and measurement, consumer goods and medical sectors. 

Energy revenue declined by 18% on an organic basis in the first half, reflecting the particularly challenging trading environment in oil and gas markets following the recent decline in the oil price and associated deferral of capital expenditure by customers.  Within the overall energy performance, Heatric declined by 40%, while the remaining energy businesses within MSS and MCS grew at an aggregated 9% on an organic basis.  PECC bolstered this growth further, contributing £8.2m of revenue in the first half.

The long-term outlook for our energy businesses, and particularly Heatric, remains very strong.  Shorter term, however, visibility is low and the timing of a recovery remains uncertain.  Additionally, the outcome of the judicial review being undertaken at our local content provider in Brazil, and any resultant financial impact from our credit exposure, remain uncertain.  The Heatric business is in the process of realigning its cost base to reflect the challenging near-term revenue environment, while retaining core skills and sufficient flexibility to respond when orders pick up.

OPERATIONAL HIGHLIGHTS

The financial performance of the individual divisions is summarised in the table below:

* 2014 comparators have been restated to reflect the new divisional structure.

Meggitt Aircraft Braking Systems (MABS) provides wheels, brakes and brake control systems for over 30,000 in-service aircraft.  It continues to develop innovative technology for new programmes allowing the business to retain its leading positions in its target markets, underscored by its position as sole-source supplier of the all-electric brake and tyre pressure monitoring system on the Bombardier C-Series, due to enter into commercial service early next year.  The division targets sole‑source programmes and is particularly strong in regional aircraft, large business jets and military aircraft.  The division represents 21% of total Group revenue, generating 85% of its revenue from the aftermarket and 15% from OE sales.

MABS' revenue grew by 3% on an organic basis in the first half, with good growth in civil aerospace across both OE and aftermarket being partially offset by a 12% decline in military following the previously reported completion of retrofit contracts for the US B-1B fleet and Taiwanese Air Force.  Regional aftermarket grew 3% driven by continued improvement in regional aircraft utilisation rates, and business jet aftermarket grew by 28%, largely as a result of market share gains in this segment and restocking at a major aftermarket customer.  These were partially offset by a 1% decline in large jet aftermarket.  Operating margin was flat at 37.5%, with the positive effect of civil aftermarket growth being offset by a decreasing average fleet age and the decline in military aftermarket.

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 25% of total Group revenue, generating 49% of its revenue from OE and 51% from the aftermarket. 

For MCS, revenue grew 6% on an organic basis, with 7% growth in civil OE and 25% growth in military being partially offset by a modest decline in civil aftermarket.  Military revenues saw a recovery from the shipment issues reported at the first half 2014 and growth in A400M fire protection equipment sales.  MCS' civil aftermarket revenue is currently the area of the Group most impacted by parting out.  The unfavourable mix effects of good growth in civil OE and military and a decline in civil aftermarket, and continued growth in investment in new product introduction resulted in operating margin reducing to 25.1% (2014: 27.2%). 

Meggitt Polymers & Composites (MPC) has a bias towards military, representing 53% of its sales.  It supplies flexible bladder fuel tanks, ice protection products and composite assemblies for a range of fixed wing and rotorcraft platforms and complex seals packages for civil and military platforms.  These markets are linked by their dependence on similar materials technology and manufacturing processes.  It supplies over 80% of the US military requirements for fuel bladders and ballistically-resistant and crashworthy fuel tanks.  MPC represents 10% of total Group revenue and generated 56% of its revenue from OE and 44% from the aftermarket. 

MPC revenue was flat on an organic basis, with 2% growth in civil aerospace being offset by a 2% decline in military.  Operating margin declined from 13.0% to 9.2% reflecting lower volume through the fuel bladder facility and an increase in new product introduction costs ahead of the commencement of revenue on a number of new products including the fuel sponson for the S-92 helicopter.  Initial volumes on the S-92 will be a little lower than originally anticipated reflecting weakness in demand from the oil & gas market, but the overall programme size remains very attractive.  Expensed R&D also increased reflecting investment on new programmes in the early phase of development, including the Bell V280 tiltrotor aircraft.

Meggitt Sensing Systems (MSS) designs and manufactures highly engineered sensors to measure a variety of parameters such as vibration, temperature, pressure, fluid level and flow.  Its products are designed to operate effectively in the extreme conditions of temperature, vibration and contamination that exist in an aircraft or ground-based turbine engines.  Sensors are combined into broader electronics packages, providing condition data to operators and maintainers of engines, contributing to improved

safety and lower operating costs.  MSS has migrated these products into other specialist markets requiring similar capabilities, such as test and measurement, automotive crash test and medical.  Combining its capabilities with MABS, it is currently developing civil aerospace tyre pressure monitoring systems for various platforms.  MSS also manufactures power storage, conversion and distribution systems and avionics products for aerospace applications.  MSS represents 30% of total Group revenue and generated 76% of its revenue from OE and 24% from the aftermarket.

MSS revenue grew by 6% in the first half on an organic basis, with growth in all markets including 9% growth in energy reflecting recovery from the lack of availability of tourmaline which impacted performance in the first half of 2014.  Operating margin on a like-for-like basis (including the transfer of Meggitt Avionics affected in the first half of 2015) saw a good recovery to 15.7% (2014: 13.7%) driven by the resolution of operational issues and positive mix, partly offset by increased investment in new product introduction.

Meggitt Equipment Group (MEG) comprises principally our non-engine actuation, dedicated military and Heatric businesses.  The division represents 14% of total Group revenue and generates 83% of its revenue from OE and 17% from the aftermarket.

Revenue in MEG declined by 5% on an organic basis, representing a 40% reduction in Heatric partially offset by an 18% increase in military.  Heatric continues to be impacted by the slowdown in the oil and gas market, but the military businesses have benefitted from strong demand for training products, particularly in the US, and sales of targets and training systems to India, Canada and the UK.  Operating margin of 3.5% (2014: 10.1%) reflects weakness in the relatively high fixed cost Heatric business, and the mix effect of high levels of low margin customer funded military R&D within the division.  Customer funded R&D will lead to good margin production revenues over the next few years. 

INVESTING FOR THE FUTURE

Developing and owning intellectual property is fundamental to Meggitt's successful strategy.  Total research and development expenditure in the six months to June 2015 was £78.9m or 9.9% of revenue (2014: £72.0m, 10.0%), of which 14% (2014: 17%) was funded by customers.  Capitalised development in the first half was £40.1m (2014: £37.9m).  R&D expensed to net operating costs increased by 29% to £35.2m (2014: £27.2m) reflecting, among other items, product upgrade work on a dual-sourced civil platform in MABS and the large number of small development programmes, particularly in Meggitt Polymers & Composites, which fall below the de minimis level at which we do not capitalise spend.  We anticipate total R&D expenditure to trend down towards our long-term average of 6-8% of sales from the end of 2016.  

Targeted investment in technology development remains critical to our long-term organic growth. Organic growth in R&D of 3% in the first half was consistent with our guidance of total development spend remaining at elevated levels through 2015 and 2016, reflecting our impressive win rate on new programmes and our ongoing investment in new technology aligned to our customers' future technology requirements. A third of the expenditure in the first half was on new wheels and brakes programmes and over 40% focused on products for engines and engine accessories. These two categories support future revenues exceeding £10bn. The balance was spread across a range of civil, military and energy applications, including a step-up in development spend in our training businesses in response to the recent high level of contract wins.  

Meggitt's investment in supplying equipment free of charge to new aircraft and making programme participation contributions, mostly in the Aircraft Braking Systems business, increased organically by 10% driven by continued market share gains in business jets.  This increased investment reflects the accelerating pace of deliveries on programmes equipped with our wheels and brakes, and is expected to grow further over the medium term.  These programmes will drive aftermarket revenue for decades.

Capital expenditure on property, plant and equipment and intangible assets was £27.8m (2014: £22.1m), with the organic increase driven primarily by the investment in additional furnace capacity within MABS and capacity increases in the MCS North Hollywood facility.  Overall capital expenditure for the year will be lower than initially expected owing to the deferral of investment in capacity at Heatric.  

DRIVING ORGANIC GROWTH THROUGH OPERATIONAL EXCELLENCE

The Meggitt Production System, our single, global approach to continuous improvement, was launched during 2013.  MPS will create the sustainable quality and delivery culture that confers competitive advantage beyond our technical expertise, enabling the Group to deliver a higher rate of organic growth over the long term.  It will also enable us to become more cost competitive through the reduction of working capital and the elimination of the cost of poor quality.  MPS, a six-phase programme which will take five to seven years to become fully embedded, has been launched at 36 sites in total.  26 sites have now successfully completed the first phase, of which four have also completed the second.  The launch of the programme at the remainder of the Group's facilities is on track to be complete by the end of 2015, and work has now commenced on the functional roll-out, starting with Human Resources, which will enable us to extend the reach of the programme beyond operations.  

We have already seen some significant improvements in quality and delivery, with defective parts per million down 86% and on-time delivery up by 10% since inception.  This sustained improvement is being recognised by our customers, and has resulted in the Group winning a number of supplier awards in the first half of 2015.

FOREIGN EXCHANGE

Foreign exchange movements benefited revenue by £45.9m.  Of this, translation was £34.6m and transaction was £11.3m (hedging only mitigates the impact at the underlying operating profit level). The primary driver was the stronger US Dollar, partially offset by the translation impact of a weaker Euro relative to Sterling.  The foreign exchange impact on underlying operating profit was a benefit of £7.3m, reflecting the translation-driven tailwind partially offset by an adverse transaction effect of £1.8m due to our US Dollar:Sterling hedge rate of 1.57 (H1 2014: 1.54).  Average and closing rates for the US Dollar against Sterling in the first half were $1.52 and $1.57 (2014: $1.67 and $1.71); and for the Euro were €1.38 and €1.41 (2014: €1.22 and €1.25).

RETIREMENT BENEFIT SCHEMES

Scheme deficits reduced in the period from £317.8m (at December 31, 2014) to £285.2m driven principally by an increase in AA corporate bond yields used to discount scheme liabilities and deficit reduction payments.

The Group made deficit reduction payments in the period of £14.8m (2014: £16.4m). Deficit payments on US schemes reduced as expected, due to the impact of changes in legislation on funding requirements which came into effect in the second half of 2014. UK payments continue to be made in accordance with the repayment plan agreed with the trustees following the 2012 triennial actuarial valuation. The 2015 valuation is in process and is expected to be finalised in early 2016.  

BOARD OF DIRECTORS

During the first half of 2015, Sir Colin Terry retired after 12 years of outstanding service on the Board, and Sir Nigel Rudd joined the Board on 1 March 2015, becoming Non-Executive Chairman on 23 April 2015. In the same period, we announced that Phil Cox (Non-Executive Director) left the Board in January 2015.

GROUP OUTLOOK

The outlook for our civil markets remains encouraging.  Production rates of large jets are expected to continue to grow and our increased shipset values on the latest generation of widebody aircraft, together with our positions on the re-engined narrowbodies, should underpin organic civil OE revenue growth of 7-8% over the medium term.  As previously guided, 2015 will be moderately below this level reflecting recent inventory build at aircraft manufacturers ahead of new product launches and production rate increases.  Available seat kilometres, the key driver of our large and regional jet aftermarket, are growing at above the long-term trend, and lower oil prices should see this continue.  We expect that aftermarket revenue growth in the second half of 2015 will be consistent with that seen in the first half.

The military environment looks increasingly benign, with an expected return to growth in military budgets, especially the US, in the short to medium term.  There also looks to be an increasing opportunity for reset and retrofit work, and both of these factors give us confidence in our medium term organic growth guidance of 2% per annum.  The 6% growth in military seen to date was better than expected although, due to the second half weighting of revenue last year, we believe the rate of growth will moderate for the remainder of the year.  

In energy, our Heatric business will remain impacted by the effect of low oil prices on the capital expenditure plans of our customers, although we continue to expect a partial offset in our energy condition monitoring business as we recover from the raw material availability issue seen last year.  Overall, we expect energy revenues to be slightly down in the second half of 2015 compared to the second half of 2014, and it will take some months for the benefits of the initiatives being taken on Heatric's fixed cost base to come through.  Longer term, driven by heightened demand for our printed circuit heat exchangers and increasing market share in condition-monitoring equipment, our combined energy businesses should continue to deliver revenue growth averaging greater than 10%, although we anticipate we will continue to see weakness in 2016.  Other markets should see continued growth in the second half.

On the basis of the above, the Group continues to expect organic revenue growth for 2015 in the low to mid-single digits, in line with our earlier guidance.  Reported revenue will also benefit from the first-half foreign exchange movements and the acquisition of PECC.