Meggitt : 2021 Interim Results (Release)

2 August 2021

Meggitt PLC

2021 Interim results

STRONG CASH PERFORMANCE AS RECOVERY IN CIVIL AEROSPACE CONTINUES

Meggitt PLC ("Meggitt" or "the Group"), a leading international engineering company specialising in high performance components and sub-systems for the aerospace, defence and selected energy markets, today announces unaudited interim results for the six months ended 30 June 2021.

Tony Wood, Chief Executive, commented:

"The sequential quarterly improvement we have seen in our civil aerospace business in the first half is encouraging including a 31% increase in civil aftermarket organic revenue, reflecting the progressive increase in global air traffic and the active fleet. Thanks to the ongoing dedication of our global teams, we delivered a strong cash performance underpinned by our continued focus as we manage the Group through the recovery and position our operations for the anticipated increase in new build rates. With a strengthening order book, particularly in Energy, the pick-up in order activity in the second quarter provides a supportive backdrop as we enter the second half."

Group firsthalf performance
		H1 2021	H1 2020	Change
		£'m	£'m	Reported %	Organic1 %
Orders	671.4)	881.5)	(24)	(9)
Revenue	680.0)	916.8)	(26)	(16)
Underlying2
EBITDA3	116.2)	155.8)	(25)	(20)
Operating profit	61.7)	102.2)	(40)	(37)
Profit before tax	48.4)	85.5)	(43)	(42)
Earnings per share (p)	4.9)	8.7)	(44)
Statutory
Operating profit/(loss)	49.0)	(348.7)	114)
Profit before tax/(loss)	33.6)	(368.4)	109)
Earnings per share/(loss) (p)	3.6)	(44.3)	108)
Free cash outflow	(34.5)	(121.5)	72)
Net cash outflow	(14.9)	(18.8)	21)
Net debt	822.6)	1,000.2)	(18)
Dividend (p)		-)	-)

Summary

• Recommended cash offer for Meggitt at a price of 800p per share by Parker Hannifin Corporation as set out in the separate Rule 2.7 firm offer announcement released this morning
• Sequential quarterly improvement in civil aerospace performance during the first half: civil aerospace aftermarket organic orders and revenue up 40% and 31% respectively in the second quarter compared with the first quarter of 2021
• Increase in Group organic order intake in the second quarter up 20% sequentially; book to bill ratio in Energy at 1.38x, with book to bill in civil aerospace at 1.04x
• Performance of the Group in the first half reflects the impact of COVID-19 on civil aerospace, with Group organic revenue down 16% in the period against a comparator of a normal trading first quarter in 2020 before the onset of the pandemic
• Defence revenue 9% lower on an organic basis compared with a strong first half in 2020
• Underlying operating profit for the first half 37% lower on an organic basis at £61.7m (H1 2020: £102.2m) reflecting a strong comparator in the first quarter of 2020. Sequential improvement in Group profitability in the second quarter after COVID-related disruption and lower productivity at two of our US sites in the first quarter

1. Organic numbers exclude the impact of acquisitions, disposals and foreign exchange.
2. Underlying profit and EPS are used by the Board to measure the trading performance of the Group as set out in notes 5 and 10.
3. Underlying EBITDA represents underlying operating profit adjusted to add back depreciation, amortisation and impairment losses.

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• Statutory operating profit of £49.0m (H1 2020: loss of £348.7m)
• Strong cash performance with free cash outflow ahead of expectations at £34.5m (H1 2020: outflow of £121.5m)
• Net debt of £822.6m (H1 2020: £1,000.2m) with ratios of net debt:EBITDA of 2.4x and interest cover of 9.7x at 30 June 2021, well within covenant limits
• Liquidity remains strong with committed facilities of £1,516.3m and headroom of £857.6m
• Continued focus on key strategic initiatives and rate readiness ahead of recovery in civil OE and AM demand
• The Board recognises the importance of the dividend to its shareholders, but has taken the decision not to pay an interim dividend in light of ongoing market conditions
• Notwithstanding the difficulties in forecasting demand within civil aerospace with precision and the risks associated with regional spikes in COVID-19 infections, for the full year, we continue to expect the Group to generate:

1. Revenue broadly in line with 2020 on an organic basis o Underlying operating profit ahead of 20204
   o Positive free cash flow

Enquiries

Tony Wood, Chief Executive

Louisa Burdett, Chief Financial Officer

Mathew Wootton, Vice President, Investor Relations

Vikas Gujadhur, Investor Relations Manager

Meggitt PLC

Tel: [phone]

Nick Hasell, Managing Director

Dwight Burden, Managing Director

Alex Le May, Managing Director

FTI Consulting

Tel: [phone]

Availability

The interim management report will be available on the Group's website www.meggitt.comfrom 2 August 2021. Paper copies of the report will be available to the public from the Company's registered office at Pilot Way, Ansty Business Park, Coventry, CV7 9JU.

Analyst presentation and Q&A

There will be a webcast of the interim results at 10am BST today available on the Meggitt website at http://www.meggitt.com/investors. Copies of the presentation will also be available.

Please use the following link to watch the webcast.

https://www.investis-live.com/meggit/60e853da0ed69a0a003cd5db/hyr21

Please use the following dial-in details to listen to the broadcast and ask a question:

UK: 0800 640 6441

UK Local: 020 3936 2999

Global: [phone]

Passcode: 500602

Cautionary Statement

This Results Announcement contains forward looking statements with respect to the financial condition, results of operations and businesses of Meggitt PLC and its strategy, plans and objectives. These statements are made in good faith based on the information available at the time this announcement was approved. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward-looking statement and which could cause actual results to differ materially from those currently anticipated. Meggitt does not intend to update these forward-looking statements. Except where expressly identified as such, nothing in this document should be regarded as a profit forecast. This report is intended solely to provide information to shareholders and neither Meggitt PLC nor its directors accept liability to any other person, save as would arise under English law.

4 This statement constitutes a profit forecast for the purposes of Rule 28.1 of the City Code on Takeovers and Mergers. Further information on the basis of the preparation of the Meggitt 2021 Profit Forecast, including the principal assumptions on which it is based, can be found in Appendix I

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END MARKET CONTEXT

Civil aerospace

The progressive rollout of vaccines, lower infection rates and the easing of lockdown restrictions in a number of countries has resulted in a gradual recovery in civil aerospace in the first half of 2021, with airlines increasing capacity and a strong recovery in some domestic markets, business jets and cargo against a backdrop of continuing low levels of international activity as borders remain closed. As at the end of June, the active commercial fleet had increased to 74%, up from 70% at the end of December 2020.

While signs of the recovery are encouraging, its trajectory remains highly sensitive to regional spikes in COVID-19 infection rates, the emergence and spread of new variants and associated government border restrictions. In addition, it is clear that unlocking further airline capacity for the remainder of 2021 and beyond remains dependent on the continued successful global rollout of vaccines and improvements in treatments.

In the first half, the level of global commercial air traffic activity (as measured by ASKs) steadily improved, with ASKs -51.6% at the end of June compared with -57.3% at the end of December 2020 against 2019 levels, with domestic -15.5% and international -71.0%. Regionally, both China and US domestic activity have continued to lead the recovery. While activity in India has improved off its lows, as a result of rising infection rates in other countries across the Asia Pacific region, capacity growth has slowed and at the end of the half stood at 56.9% below 2019 levels. European ASKs continued to lag other regions at -59.1% below 2019 levels however, daily flight activity in the region has improved in recent weeks with activity in July above the equivalent summer peak in 2020.

On the back of the strong domestic recovery in the US, regional jet activity has also strengthened with larger regional jets one of the most active fleets at the end of the period.

Outside of commercial aerospace, both business jets and cargo have performed very strongly with daily flight activity (WINGX data) levels across both sub sectors now above pre pandemic levels at +14.4% and +5.6% respectively at the end of June.

Deliveries of large jets in the first six months of 2021 were 452, up 70% on the comparative period (H1 2020: 266 deliveries). In the second quarter, there were further positive signs of the recovery, with both Airbus and Boeing issuing guidance on future build rates, with major narrow body platforms such as A320neo and 737MAX forecast to ramp up significantly in the coming years. As a result of robust levels of business jet activity, the market for used business jets remains tight with deliveries of new jets down 5% in the first half.

Industry forecasts continue to anticipate air traffic returning to 2019 levels in the 2023/2024 timeframe and new aircraft production rates to recover to pre-COVID-19 levels slightly later in the 2024/2025 timeframe. Beyond the recovery period, the drivers supporting air traffic growth over the long term remain in place with industry forecasting a growth rate in RPKs of up to 3.6% annually over the next 20 years.

Defence

Global defence spending remained robust in the first half and is expected to increase by 2.8% in 2021 and exceed the $2 trillion mark. In the US, outlays in the first six months were +5.1% versus the same period in 2020 with procurement and RDT&E up 8.5% and 10.4% respectively over the same period.

In May 2021, the US DoD FY22 budget request of $715Bn was proposed, a slight increase on FY21 of c.2%, including an increase of 5% in RDT&E, with procurement down 6%. Looking further ahead, US defence spending is expected to remain solid over the next five years and broadly around current levels.

Defence spending in the UK remained robust and is forecast to be up 6% in 2021, with the outlook for defence spending in the EU also solid.

Energy

Investment in renewable energy has continued to increase year on year across all applications including carbon capture, low carbon fuels, solar, wind and hydro. Capital expenditure investments in clean energy by the oil and gas sector has also increased significantly over the past five years.

Oil prices have continued to recover in 2021 driven by a recovery in global economic activity trading at $71.65 per barrel at 27 July representing an increase of 48% since the start of the year, providing a supportive backdrop for ongoing investment in the sector and capital expenditure on energy projects.

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INTERIM MANAGEMENT REPORT 2021

Group Orders and Revenue

While civil aerospace activity levels have continued to recover in 2021 with a sequential improvement in the second quarter compared with the first, our half year results reflect the effects of COVID-19 and continued lower overall levels of civil aerospace activity compared with the prior year period.

Unless otherwise stated, all growth comparisons are presented on an organic basis.

Quarterly trading

In our trading statement on 29 April 2021, we reported Group revenue for the first quarter was 29% lower than the comparative period, with both civil OE and AM down 46%, versus a normal trading quarter in 2020 before the onset of the pandemic.

In the second quarter, Group orders were up 77% compared with the comparative period with Group revenue flat. In Civil Aerospace, revenue grew by 7% with civil OE up 3% and AM up 10% reflecting an improvement in air traffic activity levels in the period. Defence revenue was down 7% with OE -8% and AM -6%, with revenue from Energy 7% higher.

On a sequential basis, Group orders and revenue in the second quarter were up 20% and 10% respectively on the first quarter, with growth in revenue across civil aerospace, defence and energy.

First half trading

Group book to bill for the period stood at 0.97x with civil aerospace at 1.04x, Defence at 0.82x and Energy remaining strong at 1.38x. Group revenue was down 16%. In Civil Aerospace, revenue was 26% lower, with sales from civil OE and civil AM down 28% and 24% respectively. Defence revenue ended the period 9% lower compared with a strong first half last year where revenue grew 7%, with revenue from Energy up 4%.

		£'m	% impact
H1 2020 revenue	916.8)
Business disposals	(36.5)	(4)
Currency movements	(57.1)	(6)
Organic growth	(143.2)	(16)
H1 2021 revenue		680.0)	(26)

The adjustments for business disposals comprise the sale of Meggitt Training Systems on 30 June 2020 and Dunstable on 30 January 2021.

Currency movements in the period reflect the strengthening of the pound sterling against our trading currencies, principally the US dollar. The organic revenue decline largely reflects the impact of COVID-19 on civil aerospace.

Profit and earnings per share

In common with previous years, underlying profit is used by the Board to monitor and measure the underlying trading performance of the Group and excludes certain items including: amounts arising on the acquisition, disposal and closure of businesses; amortisation of intangible assets acquired in business combinations; movements in financial instruments; and exceptional operating items.

Group underlying operating margins decreased by 200 basis points, to 9.1% (H1 2020: 11.1%) reflecting lower revenue (particularly higher margin aftermarket) as well as the impact from COVID-related disruption and lower productivity at two of our sites in the US as previously announced in our first quarter trading update. Underlying operating profit was 37% lower in the period at £61.7m (H1 2020: £102.2m).

Underlying profit before tax decreased by 42% to £48.4m (H1 2020: £85.5m) with underlying earnings per share down

44% on a reported basis at 4.9 pence (H1 2020: 8.7 pence).

Moving from underlying to statutory measures, Group profit before tax was £33.6m (H1 2020: £368.4m loss) and basic

earnings per share was 3.6 pence (H1 2020: loss per share of 44.3 pence), with the prior period performance significantly adversely impacted by exceptional impairment losses and other asset write-downs arising from the uncertainty facing the commercial aerospace industry following the COVID-19 outbreak.

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Cash flow and net debt

We continued to maintain a disciplined approach to managing our cash during the first half. Consistent with normal seasonal patterns, the Group generated a free cash outflow in the first half, although at £34.5m this was better than expected and substantially lower than the comparative period (H1 2020: £121.5m outflow) and also included the cash payment to HMRC of £18.0m in respect of the CFC regime in the UK.

In the first half, investment in working capital generated an outflow of £51.0m (H1 2020: £127.5m outflow).

Investment in capital expenditure was £31.7m (H1 2020: £57.4m). Deficit payments made in respect of retirement

benefit schemes were £21.7m (H1 2020: £7.1m), with the prior period reflecting the deferral of three months deficit contributions to the UK scheme. Including cash proceeds from M&A activity of £18.3m (principally from the sale of Dunstable), the net cash outflow for the Group was £14.9m in the first half (H1 2020: £18.8m outflow).

At the end of June, net debt was £822.6m (H1 2020: £1,000.2m) including lease liabilities of £163.9m, an increase of £49.6m from December 2020 after taking into account adverse currency movements of £7.1m and we had ample headroom of £857.6m on committed facilities of £1,516.3m.

First half cash flow statement
		H1 2021	H1 2020
		£'m	£'m
Underlying operating profit	61.7)	102.2)
Depreciation and amortisation	54.5)	53.6)
Working capital movements	(51.0)	(127.5)
Net interest paid	(14.9)	(16.5)
Tax paid	(29.4)	(24.4)
Exceptional operating items paid	(12.2)	(28.1)
Purchase of property, plant and equipment and intangible assets	(31.7)	(57.4)
Proceeds from sale of property, plant and equipment	22.7)	0.3)
Capitalised development costs/programme participation costs	(12.5)	(19.4)
Retirement benefit deficit reduction payments	(21.7)	(7.1)
Other	-)	2.8)
Free cash flow
(34.5)	(121.5)
Net proceeds from disposal/acquisition of businesses	18.3)	102.0)
Other	1.3)	0.7)
Net cash generated
(14.9)	(18.8)
Lease liabilities entered	(28.0)	(6.5)
Lease liabilities disposed with business	-)	4.5)
Exchange differences	(7.1)	(65.2)
Other movements	0.4)	(3.0)
Net debt movements
(49.6)	(89.0)
Net debt at 1 January	(773.0)	(911.2)
Net debt at 30 June	(822.6)	(1,000.2)

There are two main financial covenants in our financing agreements. The net borrowings:underlying EBITDA ratio, which must not exceed 3.5x, was 2.4x at 30 June 2021 (June 2020: 1.8x) and interest cover, which must be not less than 3.0x, was 9.7x (June 2020: 14.1x). The Group has ample headroom against both key covenant ratios, and net borrowings:underlying EBITDA remains within our target range of 1.5x to 2.5x.

Dividends

The Board is aware of the importance of dividends to our shareholders. However, the Board concluded that in light of ongoing market conditions, it is not recommending the payment of an interim dividend for 2021.

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