Ahead of completion of the acquisition of the company by Parker-Hannifin and which is likely to occur next month Meggitt plc, a leading international engineering company that specialises in high performance components and sub-systems for the aerospace, defence and selected energy markets has this morning published interim results for the six-month period ended 30th June.
Having received all necessary regulatory approvals and assuming completion of the acquisition by Parker Hannifin completes in Q3 these will be the last set of results published by Meggitt as an independent company. I would like to state here that while there have been many adverse comments made in relation to takeovers of UK aerospace and defence related companies over recent months, the acquisition of Meggitt by Parker-Hannifin makes absolute sense for both companies, their employees and customers. The commitments already made by Parker Hannifin as to future operation of Meggitt are a very positive sign for the future and of the extraordinary good fit that both companies bring to each other. Meggitt, as the latest set of results amply demonstrate, is in very good shape and looking forward to further building on its established success. As an important company within the international aerospace and defence sector, my view is that as part of Parker-Hannifin Meggitt will better prosper in the years ahead and I wish them well.
Having known him for very many years, I would also like to thank Meggitt CEO Tony Wood for what has been exceptional leadership during his tenure in office, his continued belief in investment (the new Coventry operation that has brought many Meggitt subsidiary activities under one roof and which I have been up to see is a perfect example along with US based expansion) and in seizing of opportunities to grow the company as they arose. As an equity analyst as I was for 28 years, Meggitt was always been a very interesting company to follow through good and bad periods. Like many other aerospace related companies, the Covid pandemic has undoubtedly been very damaging for Meggitt but having made objective decisions and in very quickly putting them into practice with efficiency, it is pleasing that Meggitt has come out on the other side in a much better place.
In his statement to shareholders this morning CEO Tony Wood said:
We delivered a robust trading performance in the first half, with Group organic revenue up 11%, reflecting strong growth in our civil aftermarket and civil original equipment business, as well as a good performance in energy. We ended the half with a Group book to bill ratio of 1.23x.
We are encouraged by the strong recovery in passenger demand for our civil business as airlines bring more aircraft into service and the improving prospects for defence as we come out of a period of significant destocking in the aftermarket.
The Group has continued to invest in technologies and capabilities to support the decarbonisation of aviation and the delivery of clean energy. In the first half we concluded the acquisition of the remaining 67% of HiETA Technologies which specialises in additive manufacturing and the remaining 30% of our joint venture in Mexico which specialises in aerospace composites. Combined with our recent investments in facilities and the ongoing development of our engineering and manufacturing capabilities, the Group remains well positioned for the future.
However, we are mindful of the challenges that our industry continues to face with availability across the supply chain and continued cost inflation on materials and labour. We remain focused on mitigating these effects and the Group is well placed to do so.
The acquisition of Meggitt by Parker-Hannifin remains on track for completion in Q3 and I would like to thank all of my global colleagues for their hard work, resilience and dedication in delivering for our customers and wider stakeholders through the first half of the year.”
H1 revenue rose to £821m against £680m in the previous period. Underlying operating profits were £78.6m (H1 2021 £61.7m) and pre-tax profits were £63.6m (H1 2021 £48.4m). The order book at 30th June stood at £996m against £671m in the previous half year period.
Highlights as stated in the company report are:
- Group organic revenue up 11% in the period against the corresponding period last year(down 21% vs. H1 2019) with sequential improvement of 15% in the second quarter versus Q1 22.
- Group book to bill at 1.23x, with book to bill ratio in civil original equipment at 1.40x, civil aftermarket at 1.59x, Defence at 0.82x and Energy at 1.28x.
- Civil aerospace organic revenue up 30% in the first half (down 30% vs. H1 2019)with civil aerospace aftermarket organic orders and revenue up 112% and 36% respectively compared with H1 21.
- Defence revenue 8% lower on an organic basis compared with the first half of 2021.
- Underlying operating profit for the first half higher at £78.6m (H1 2021: £61.7m), an organic increase of 13%.
- Statutory operating profit of £10.0m (H1 2021: £49.0m) which includes the impairment of assets relating to the MC21 due to cessation of work following Russia’s invasion of Ukraine.
- Free cash outflow of £44.2m (H1 2021: outflow of £34.5m), reflecting our normal seasonal working capital patterns, but also including inventory build to support growth and mitigate current supply chain challenges.
- Net debt of £885.5m (H1 2021: £822.6m) with ratios of net debt/EBITDA of 1.8x and interest cover of 11.8x at 30 June 2022. Liquidity remains strong with committed facilities of £1,207.5m and headroom of £523.5m.
- In the period, we completed the disposal of our Danish business for a cash consideration of £62.3m,subject to customary adjustments for working capital and net debt.
- Recommended all cash offer of 800 pence per share from Parker-Hannifin approved by shareholders on 21 September 2021 with the transaction still expected to complete in the third quarter of 2022.
- In line with the terms of the previously announced proposed transaction with Parker-Hannifin, the Group is not paying an interim dividend for 2022.
- Since the Group is in an offer period under the UK Takeover Code, we are not providing financial guidance for 2022, nor are we able to comment on expected performance relative to any analyst forecasts that may be available.
Meggitt operates in three main segments of the civil aerospace market: large jets, regional aircraft and business jets. The large jet fleet includes over 23,000 aircraft, the regional aircraft fleet over 6,000 and business jets around 19,000. The Group has products on the vast majority of these platforms and hence a large installed base. With c.55% of our civil aftermarket revenue (full year 2019) generated from platforms under 10 years old, we are well placed to continue to generate good returns over the coming years as the market recovers.
The split of civil revenue in the first half, which accounted for 51% of the Group total, was 38% original equipment (OE) and 62% aftermarket (AM).
Civil – Original Equipment (OE)
In the first six months of 2022 compared with the same period in 2021, civil OE revenue was up 21%, with large jets, the largest component of our OE revenue, up 20% and regional jets up 31%. Business jet OE revenue was up 23%. Within the first half, civil OE was up 13% and 30% in the first and second quarters of 2022 respectively, in comparison to the corresponding quarters in 2021, and up 16 % sequentially between the first and second quarters of 2022.
Civil Aftermarket (AM)
Global air traffic has continued to recover during the half, with global ASKs and RPKs in the first five months of the year 53% and 85% higher respectively than the same period in 2021.
Sequentially, in the first half, civil AM orders were down 20 % and revenue up 21 % in the second quarter compared with the first quarter of this year.
As a result of increasing passenger demand and the corresponding increase in air traffic activity across the period, civil AM revenue was up 36% in the first half. Within that, large jets were up 33%, regional jets up 61% and business jets up 26%. Within the first half, in the first and second quarters, civil AM revenue was up 39% and 34% respectively compared with the corresponding periods in 2021.
Defence business accounted for 37% of Group revenues in H1 2022 with 60% of revenue from OE and 40% from the aftermarket. The company has equipment on an installed base of around 22,000 fixed wing and rotary aircraft and a significant number of ground vehicles and is well placed having secured strong positions on some of the newest and hardest working platforms. Direct sales to US customers accounted for 73% of defence revenue, with 19% to European customers and 8% to the rest of the world.
Defence revenue was 8% lower where in OE, revenue was down 7% with the aftermarket 9% lower, this reflecting the continued effects of inventory destocking and weaker ordering from the US Defence Logistics Agency in the aftermarket.
The order book remains solid with book to bill of 0.82x, and the company believes that it is starting to see initial signs of restocking in the aftermarket as well as original equipment growth.
Energy and other revenues (12% of Group total) come from a variety of end markets of which the single most significant is energy (9% 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 (3% of Group total) include the automotive, industrial, test, consumer goods and medical sectors.
Energy revenue was up 18% with Heatric revenue up 50%, partially offset by Energy Sensing and Controls where revenue was down 65%. Revenue from other markets was flat against the comparative period.
Our energy businesses had a strong book to bill of 1.28x for the period underpinned by a number of contract awards together with a robust pipeline of new growth opportunities, particularly in the renewables and green energy space. We have differentiated aero-derivative technologies which play a critical role in the extraction of deep-water offshore gas reserves and the growth in demand for liquid natural gas, green and renewable energy positions this business well for the future.
CHW (London -4th August 2022)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785