03 Mar 22. Given what has clearly been a very challenging two year period for all those engaged within the civil aerospace and aviation industries it is pleasing to see that Meggitt, a leading international engineering group manufacturing high performance components and sub-systems for the aerospace, defence and selected energy markets has produced a robust set of results for FY21 and, on the back of increased order momentum, is looking forward to better times ahead.
Meggitt reported that organically based orders rose 9% last year to £1.53bn with a particularly large element of the increase witnessed during the second half of the year. Noticeable too was strong cash generation – free cash flow of £46million and debt was stable at £780 million. In still challenging market conditions and global supply chain disruption, FY21 revenue was not surprisingly lower by 5% on the previous year but noted that growth in H2 was up 8% vs the same period a year earlier and that sequential growth was 12% in H2 vs that of H1.
The company noted in its report to investors that Civil aerospace aftermarket activities witnessed organic revenue growth of 7% for the full year with 51% growth in the second half and 58% in the final quarter of the year. This bodes well for the future as does the noticeably strong improvement in Group underlying operating margin with H2 margin of 14.3%, 520 basis points higher than H1 (9.1%).
FY21 underlying operating profits of £177.3m (FY 2020 £190.5) were reported with profits before tax down 7% to £149.3m. At the statutory level, operating profits were £63.4m against a loss of £297.3m – prior year figures having been impacted by the non-cash impairment of intangible assets and other asset write downs.
A company that has stepped up investing in its future over the past few years and in making itself more efficient and competitive, the past year has understandably been one of significant challenges for Meggitt. But equally true is that it has also been a year of major successes.
Of particular note is that the company has now completed its superb new manufacturing centre of excellence at Ansty Park in Coventry along with investment at various other of its global sites. The now complete Ansty Park development on the outskirts of Coventry can best be described as being as modern as the hour. Completion of this huge new development has not only enabled Meggitt to combine many of its former operational sites spread over the UK country to move to one location, but to provide a location where they can work more closely together, create new ideas and ultimately benefit.
The investment at Ansty Park positions Meggitt very well for the future and I am certain that it will play a significant part in development of differentiated technologies and that will enable transition to a net zero aviation environment and sustainability through the use of cleaner energy.
During the year Meggitt also confirmed a recommended all cash offer of 800p per share from Parker-Hannifin which was subsequently approved by Meggitt shareholders last September. last year and which the company expects to complete in the third quarter of this year. I have previously written on this and view that, unlike some other recent takeover announcements of UK firms by US companies, a merger between Parker-Hannifin and Meggitt makes absolute sense in respect of fit between the two organisations and reduction of risk.
A combined Parker-Hannifin/Meggitt provides two already important and complimentary market players the ability to grow and right from the outset I have believed this to not only be a good industry fit but one that will benefit Meggitt employees and the UK as a whole. The proposed merger is subject to investigation by the UK competition regulator which is expected to report to the government on March 18th.
In the end year results statement CEO Tony Wood who with his team has worked hard to position Meggitt for a better future through a fascinating and large-scale process of modernisation and change investment said:
“We delivered a robust performance in 2021, during which we adapted to challenging market conditions and finished the year with a good cash performance and increasing momentum, as shown by our encouraging order intake. Throughout this period the safety of our employees and delivering for our customers remained our priorities and I would like to thank all Meggitt employees for how they rose to the challenges posed by the effects of the pandemic and supply chain disruption.
As we look ahead, and notwithstanding that the recovery in civil aerospace is likely to remain uneven in the short-term, the outlook and long-term fundamentals for our civil aerospace business remain positive. As a result of our successful strategy, the work we have done to position the Group and the proposed acquisition by Parker-Hannifin, I am confident about the prospects and opportunities that lie ahead for our employees and all our other stakeholders.”
Meggitt operates in three main segments of the civil aerospace market: large jets, regional aircraft and business jets. The large jet fleet includes over 24,000 aircraft, the regional aircraft fleet over 7,000 and business jets around 20,000.
Meggitt has products on the vast majority of aircraft platform types and thus has a large, installed base. Some 55% of civil aftermarket revenues in 2019 generated from platforms under 10 years old and I share the company view that it should be well placed to continue to generate good returns over the coming years as the market recovers.
The split of civil revenue in the year and which accounted for 46% of the Group total, was 38% original equipment (OE) and 62% aftermarket (AM). Civil OE revenue ended the year down 10% on an organic basis, with large jets, the largest component of the OE revenue, down 13% – this being driven by wide bodies including the Boeing 787, 777 and Airbus A350-XWB.
Civil OE revenue in regional aircraft and business jets was down 7% and 4% respectively on an organic basis. Within the year, civil OE was down 28% and up 17% in the first and second halves respectively year on year on an organic basis as demand for OE parts for new build aircraft from the OEMs increased.
Group civil Aftermarket (AM) revenues increased 7% on an organic basis with large jets and regional aircraft up 1% and 6% respectively and a strong performance from business jets where revenue was up 21% – this driven by a good performance in the brakes business.
Defence activities accounted for 42% of Group revenue in FY21 with 60% of revenue from OE and 40% from the aftermarket. The company has equipment on an installed base estimated to be around 22,000 fixed wing and rotary aircraft plus a significant number of ground vehicles and is clearly well placed into the future having secured strong positions on some of the newest and hardest worked platforms.
Direct sales to US customers accounted for 72% of defence revenue, with 19% to European customers and 9% to the rest of the world.
Following three years of strong organic growth in the defence business between 2018 and 2020, market conditions softened through 2021 – this being reflecting a combination of reasons including inventory destocking, lower aftermarket orders from the US Defense Logistics Agency and COVID-related disruption at two US sites. As a result, defence revenues were 11% lower on an organic basis than in FY20, with OE business down 7 % and aftermarket down 17%.
The company said that with the 2022 US defence budget of $ 715bn now approved – an increase of 2% on that of 2021 – it believes the outlook for defence is likely to remain stable.
Energy and other revenues represent 12% of Group revenues – business activity here coming from a variety of end markets of which the single most significant is energy (9% of Group total).
Capabilities in this smaller divisional activity 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.
The energy businesses performed well during the year with revenues increasing by 6 % on an organic basis. Heatric revenue was 5% ahead during the year and valve and condition monitoring business was up 12% – this reflecting a robust order book that the company had as it entered 2021 together with additional customer orders secured during the year. Revenue from other markets was however 8 % lower on an organic basis.
The outlook for our energy businesses remains good. 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 alternative, lower carbon energy sources including renewables, positions this business well for the future.
CHW (London – 3rd March 2022)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785