0900 Meggitt A&R Covers AW.Indd

01_RUNNING HEADER FINANCIAL HIGHLIGHTS MEGGITT PLC ANNUAL REPORT AND ACCOUNTS 2008 02_Intro Paragraph Overall revenues increased by 32% to £1,162.6 million (2007: £878.2 million) refl ecting strong organic1 REGISTERED OFFICE EUROFIGHTER TYPHOON MEGGITT PLC growth of 10%, favourable currency movements and the inclusion of a full year of the K&F businesses. Meggitt PLC Eurofi ghter Typhoon, the world’s most advanced Atlantic House swing-role combat aircraft, is fl own by the air The Board’s preferred measure of the trading performance of the Group is underlying profi t. Underlying Aviation Park West forces of Britain, Germany, Italy, Spain and operating profi t for the year was up 37% at £296.4 million (2007: £216.3 million) and underlying return on Bournemouth International Airport Austria and has been ordered by the Kingdom ANNUAL REPORT sales increased to 25.5% (2007: 24.6%). On an organic basis, underlying operating profi t increased by10%. Christchurch of Saudi Arabia. The aircraft carries Meggitt Underlying profi t before tax increased by 36% to £243.3 million (2007: £179.0 million). Dorset BH23 6EW sensors, seals, ducts and connectors, engine United Kingdom fi re detectors and pneumatics, air data AND ACCOUNTS Cash fl ow from operations before exceptional operating costs was 100% of underlying operating profi t at transducers, crash survivable memory unit and T +44 (0) 1202 597 597 £295.4 million (2007: 99% at £214.3 million). wheels and carbon brakes. Meggitt integrated F +44 (0) 1202 597 555 2008 the aircraft landing gear sub-systems, including After tax at 28.0% (2007: 27.5 %), underlying earnings per share increased 20% to 26.5 pence (2007: 22.1 pence). control and comprehensive monitoring. On a statutory basis, profi t before tax increased by 13% to £119.3 million (2007: £105.4 million) and earnings per share increased by 3% to 15.0 pence (2007: 14.6 pence). The recommended fi nal dividend of 5.75 pence (2007: 5.75 pence) represents a total dividend for the year of 8.45 pence (2007: 8.20 pence), an increase of 3%.

1,162.6 243.3 295.4 REVENUE (£ MILLIONS) UNDERLYING PROFIT BEFORE TAX (£ MILLIONS) CASH INFLOW FROM OPERATIONS BEFORE EXCEPTIONAL OPERATING COSTS (£ MILLIONS)

04 476.6 04 90.3 04 111.0 05 616.3 05 116.3 05 138.4 06 670.3 06 132.7 06 140.3 07 878.2 07 179.0 07 214.3 08 1,162.6 08 243.3 08 295.4

The deﬁ nition of “underlying” is provided in note 10 to the ﬁ nancial statements on page 66. 1 Organic growth is calculated throughout this 8.45 26.5 report by including K&F results (unaudited) in 2007 for the period prior to acquisition and by DIVIDENDS PER SHARE (PENCE)2 UNDERLYING EARNINGS PER SHARE (PENCE)2 adjusting 2008 results to 2007 exchange rates to give a like-for-like comparison. 04 5.99 04 14.9 2 Comparative data for dividends and earnings 05 6.59 05 17.1 per share in 2004, 2005 and 2006 has been 06 7.36 06 19.1 adjusted for the bonus element of the rights 07 8.20 07 22.1 issue approved by shareholders in 2007. 08 8.45 08 26.5

MEGGITT AT A GLANCE OVERLEAF 01_RUNNING HEADER FINANCIAL HIGHLIGHTS MEGGITT PLC ANNUAL REPORT AND ACCOUNTS 2008 02_Intro Paragraph Overall revenues increased by 32% to £1,162.6 million (2007: £878.2 million) refl ecting strong organic1 REGISTERED OFFICE EUROFIGHTER TYPHOON MEGGITT PLC growth of 10%, favourable currency movements and the inclusion of a full year of the K&F businesses. Meggitt PLC Eurofi ghter Typhoon, the world’s most advanced Atlantic House swing-role combat aircraft, is fl own by the air The Board’s preferred measure of the trading performance of the Group is underlying profi t. Underlying Aviation Park West forces of Britain, Germany, Italy, Spain and operating profi t for the year was up 37% at £296.4 million (2007: £216.3 million) and underlying return on Bournemouth International Airport Austria and has been ordered by the Kingdom ANNUAL REPORT sales increased to 25.5% (2007: 24.6%). On an organic basis, underlying operating profi t increased by10%. Christchurch of Saudi Arabia. The aircraft carries Meggitt Underlying profi t before tax increased by 36% to £243.3 million (2007: £179.0 million). Dorset BH23 6EW sensors, seals, ducts and connectors, engine United Kingdom fi re detectors and pneumatics, air data AND ACCOUNTS Cash fl ow from operations before exceptional operating costs was 100% of underlying operating profi t at transducers, crash survivable memory unit and T +44 (0) 1202 597 597 £295.4 million (2007: 99% at £214.3 million). wheels and carbon brakes. Meggitt integrated F +44 (0) 1202 597 555 2008 the aircraft landing gear sub-systems, including After tax at 28.0% (2007: 27.5 %), underlying earnings per share increased 20% to 26.5 pence (2007: 22.1 pence). control and comprehensive monitoring. On a statutory basis, profi t before tax increased by 13% to £119.3 million (2007: £105.4 million) and earnings per share increased by 3% to 15.0 pence (2007: 14.6 pence). The recommended fi nal dividend of 5.75 pence (2007: 5.75 pence) represents a total dividend for the year of 8.45 pence (2007: 8.20 pence), an increase of 3%.

1,162.6 243.3 295.4 REVENUE (£ MILLIONS) UNDERLYING PROFIT BEFORE TAX (£ MILLIONS) CASH INFLOW FROM OPERATIONS BEFORE EXCEPTIONAL OPERATING COSTS (£ MILLIONS)

04 476.6 04 90.3 04 111.0 05 616.3 05 116.3 05 138.4 06 670.3 06 132.7 06 140.3 07 878.2 07 179.0 07 214.3 08 1,162.6 08 243.3 08 295.4

MEGGITT AT A GLANCE OVERLEAF MEGGITT AT A GLANCE

Headquartered in the United Kingdom, Meggitt PLC is an GROUP STRATEGY EMPLOYEES BY GEOGRAPHICAL KEY DATES CONTACT US international group specialising in extreme environment products LOCATION Deliver sustainable returns through focused leadership positions in aerospace, for the aerospace, defence and energy sectors and related markets. defence, energy and other specialist extreme environments It employs over 8,000 people. 2,341 UK 3 March 2009 4,371 North Preliminary results Our consistent record of strong ﬁ nancial performance comes America 01202 597 597 1,179 Mainland from businesses balanced across market segments; innovative Europe 23 April 2009 Andy Mann, Head of Communications & Investor Relations GROUP STRATEGIC OBJECTIVES products that generate stable, long-term aftermarket revenues; 252 Rest of AGM and interim [email protected] organic growth reinforced by acquisitions; and investment in world management statement Invest in components and Leverage Group capabilities Achieve operational excellence Satisfy our customers and Maintain a culture of strong 8,143 sub-systems with high strengthen our partnerships performance people, facilities, operations and strategic technology development. technology content and 4 August 2009 www.meggitt.com aftermarket positions Our companies have access to an evolving Group infrastructure Interim results Latest Meggitt share price with a 25-minute time delay that enables them to work together, combining talent and resources 30 October 2009 to beneﬁ t customers and operations. Interim management statement Be the leading provider of smart engineering for extreme environments

AEROSPACE EQUIPMENT SENSING SYSTEMS DEFENCE SYSTEMS FINANCIAL CALENDAR ADVISORS Design SAS sasdesign.co.uk Print St. Ives Westerham Press Year-end 31 December Principal clearing bankers Paper This report is printed on paper that Interim management statement 30 October HSBC Bank plc meets international environmental standards, Interim dividend payment 2 October Barclays Bank PLC contains elemental chlorine-free virgin pulp, Interim scrip dividend Bank of America obtained from sustainably managed forests elections by 18 September Merchant bankers Images: Eurofighter Typhoon courtesy of BAE Interim dividend record date 14 August N M Rothschild & Sons Limited Systems. Irsching 4 test power plant courtesy Interim dividend ex-dividend 12 August of Siemens. Gulfstream G650 courtesy of Interim results 4 August Auditors Gulfstream Aerospace Corporation. Abrams Interim period end 30 June PricewaterhouseCoopers LLP tank courtesy of General Dynamics. Final dividend payment 8 May Solicitors AGM 23 April Clifford Chance LLP Interim management statement 23 April Final scrip dividend elections by 21 April Brokers 2008 annual report published End March Merrill Lynch International Final dividend record date 13 March Registrars 66% 23% 11% Final dividend ex-dividend 11 March Computershare Investor Services PLC PERCENTAGE OF GROUP REVENUE PERCENTAGE OF GROUP REVENUE PERCENTAGE OF GROUP REVENUE Preliminary results for year ended 31 December 2008 3 March A group of leading electro-mechanical engineering One of the world’s leading providers of high An international live-ﬁ re and simulation training businesses whose products are on virtually performance sensing and condition-monitoring and combat systems business positioned to meet every western aircraft in service, ensuring stable solutions for high value rotating machinery and the challenges of modern conﬂ ict. aftermarket revenues over the long term. other assets.

Location of Meggitt facility

CAPABILITIES CAPABILITIES CAPABILITIES BALANCED PORTFOLIO • Wheels, brakes and brake control systems • High performance sensing in extreme • Integrated training systems • Thermal management environments • Precision-mechanical combat systems • Strong market and technology positions • Fluid control • Aero-engine and industrial gas turbine condition- • Continued investment in the business • Safety systems monitoring systems • No major exposure to any single platform • Polymer solutions or customer • Broad geographic footprint 51% 49% ORIGINAL EQUIPMENT AFTERMARKET MARKETS MARKETS MARKETS PERCENTAGE OF GROUP REVENUE PERCENTAGE OF GROUP REVENUE Company registered number • Civil aerospace: large, regional and business • Civil aerospace: large, regional and business jets, • Military aircraft and ground vehicles 432989 jets and general aviation general aviation and space • Armed forces, law enforcement and security • Military: ﬁ xed wing and rotary aircraft, ground • Military: ﬁ xed wing and rotary aircraft, ships organisations vehicles, ships, unmanned air vehicles • Energy • 83% of sales to OEMs, 17% to the aftermarket • Energy • Medical, automotive, general industrial • 37% of sales to OEMs, 63% to the aftermarket • 73% of sales to OEMs, 27% to the aftermarket 46% 39% 15% CIVIL MILITARY SPECIALIST OTHER READ MORE ON PAGE 20 READ MORE ON PAGE 24 READ MORE ON PAGE 28 PERCENTAGE OF GROUP REVENUE PERCENTAGE OF GROUP REVENUE PERCENTAGE OF GROUP REVENUE

Financial statements 105 Meggitt PLC Report and accounts 2008

0900_Meggitt A&R_p104-105.indd 105 9/3/09 13:11:33 MEGGITT AT A GLANCE

Location of Meggitt facility

Financial statements 105 Meggitt PLC Report and accounts 2008

0900_Meggitt A&R_p104-105.indd 105 9/3/09 13:11:33 OVERVIEW

Meggitt continued to make excellent progress in 2008. Orders, revenues and underlying earnings have all shown signifi cant double-digit increases. The Group remains well balanced and saw good growth in each of its three main market segments: civil aerospace revenues increased by 31%; military revenues increased by 35% and our energy revenues increased by 21%. As we enter 2009, the global economic outlook remains uncertain. Military and energy revenues are expected to increase, partially offsetting declining air traffi c and diffi cult credit conditions for fi nancing new aircraft which will impact our civil aerospace revenues. With its large installed fl eet, spread across both military and civil platforms, the signifi cant cost reduction plans in place and its sound fi nancial position, the Group is well placed to respond effectively to current challenges and to position the business for the long term.

1-33 BOARD REPORTS 51-102 FINANCIAL STATEMENTS 103-105 INVESTOR INFORMATION

Reports on key strategic, operational and ﬁ nancial Statutory ﬁ nancial statements including the Financial calendar and supplementary information developments during the year independent auditors’ report

Cover: Meggitt at a glance and 51 Independent auditors’ report to 103 Five-year record fi nancial highlights the members of Meggitt PLC 104 Supplementary information 1 Overview 52-94 Group accounts 105 Financial calendar and advisors 52 Consolidated income 2 Chairman’s statement statement 3 Group strategy 53 Consolidated balance sheet 54 Consolidated cash fl ow 4-5 Strategy implementation statement 6-9 Market review 55 Consolidated statement of recognised income and 10–29 Business review expense 15-17 Risks and uncertainties 56-94 Notes to the fi nancial statements 18-21 Aerospace equipment 22-25 Sensing systems 95-102 Company accounts 26-29 Defence systems 95 Independent auditors’ report to the members of Meggitt PLC 30-33 Corporate responsibility 96 Company balance sheet 97-102 Notes to the fi nancial statements of the Company 34-50 CORPORATE GOVERNANCE 34-35 Board of directors

37-40 Report of the directors

41-43 Directors’ statement on corporate governance

44-50 Remuneration report

Introduction 1 Meggitt PLC Report and accounts 2008 CHAIRMAN’S STATEMENT

Another year of strong revenue growth, consistentstent investment,investment, integration successes, organisational alignmentent and hard work from all employees.

SIR COLIN TERRY Chairman

Meggitt’s excellent performance continued In 2008, we won virtually every major I would like to take this opportunity to in 2008. Revenues increased 32% to £1,162.6 braking systems bid we entered and thank them for yet another outstanding year million and underlying profi t before taxation manufacturing increased substantially to of hard work and commitment to building was up 36% to £243.3 million. Cash fl ow was meet demand. Our US carbon facility in our increasingly successful Group. again strong with 100% of underlying Kentucky doubled its capacity as we operating profi t converted to operating cash. shared the best of friction materials Outlook technology and practice from our dual Meggitt is broadly balanced and well Investing for the future facilities in the UK and US. We exceeded fi nanced. We delivered an excellent fi nancial 2008’s synergy target of £10 million and we We continued to invest signifi cant sums performance in 2008. We will roll out are on track to achieve our goal of annual in 2008: £120 million in our facilities and signifi cant cost reduction measures in savings of £22 million by 2010. the development of intellectual property. 2009 and we have plenty of headroom This included new regional offi ces in India K&F’s Engineered Fabrics Corporation (EFC) within our bank facilities and covenants. and Abu Dhabi and expanded low-cost continued to enhance Meggitt’s military With these great strengths, we are manufacturing facilities in Mexico and sales to helicopters and jets with a variety well-placed to address the economic China. Advances in intellectual property of products. Its ballistically-resistant and uncertainties of 2009. Based on current included developments in electric braking crashworthy fuel tanks received a record market indicators and at constant 2008 and control technologies and next follow-on order valued at $41 million for the exchange rates, the Group expects revenues generation training products for our law KC-135 aircraft programme, underpinning in 2009 to be close to those achieved in 2008. enforcement customers. its order book for the next fi ve years. The Board has recommended a fi nal During the year, we closed our UK-based dividend of 5.75 pence, with the total dividend Acquisitions and disposals fuelling products facility, transferring the for the year increasing by 3% to 8.45 pence. In 2008, we disposed of S-TEC, our non-core product lines to our facilities in China and autopilot business, for a net consideration the United States. of £17.2 million and acquired Ferroperm, We also consolidated our US live-fi re and a supplier of advanced sensing materials for virtual training businesses into one new up to £9.8 million. This acquisition extends facility in Atlanta and two UK polymers the ability of our sensing systems division to factories onto a single site in Loughborough. respond to customers’ requirements for more data from cryogenic and higher Our people temperature environments. Meggitt people continue to meet the Integration and rationalisation Group’s ambitious goals, spurred on by the excitement of being part of a growing The integration of the K&F Industries business with a clear vision and strategy Holdings (K&F) acquisition continues to and opportunities for professional progress well. Meggitt’s combined wheels, development at all levels. brakes and brake control systems business now has a leading position in the regional, I continue to be impressed by the drive, business jet and military aircraft markets. enthusiasm and fl air of our people and

2 Chairman’s statement Meggitt PLC Report and accounts 2008 GROUP STRATEGY

Meggitt’s goal is to continue to deliver sustainable returns to our shareholders. We do this through smart engineering for extreme environments, focusing on selected markets where we can occupy profi table leadership positions. These include our primary aerospace, defence and energy markets and related fi elds where our core technologies are a natural fi t.

TERRY TWIGGER Chief Executive

Delivering our strategy low-cost manufacturing, which enhances on recruitment and management pay and our competitiveness. a review of all discretionary costs, current In 2008, Meggitt delivered another overhead structures, headcount and back excellent set of fi nancial results. We continued to invest in organisational offi ce and administrative activity. We have A performance based on a strategy that infrastructure and leadership, making our also strengthened our fi nancial position by enables us to grow consistently in a increasingly integrated Group more renegotiating bank facilities so we require favourable economic climate and hold focused, more effi cient and more effective. no new fi nancing before 2012 and have up well when times are tough. In 2008, we saw a good fl ow of contract signifi cant facilities and covenant headroom. The diverse nature of our portfolio again wins in all business segments and While we are also seeing the benefi ts proved its worth. Meggitt is not dependent executed several major factory of the rising US dollar and larger than on any one market segment, customer or consolidations successfully. Other anticipated K&F and strategic sourcing economy. We offset variation in demand highlights included Bombardier selecting synergies, we continue to identify by spreading risk, balancing exposure to us to fl y a full set of electric brakes on its additional cost savings to ensure Meggitt civil markets with military and energy commercial demonstrator—an industry remains competitive and that any impact business; and sales to original equipment fi rst—and acquiring a hi-tech materials from a civil sales decline is minimised. manufacturers with sales of aftermarket and components business to improve our products and services. We have product on high temperature sensing capability. For 2009, we have identifi ed potential virtually every western aircraft and have a cost-savings of a further £20 million, rising With our customers, BAE Systems, Boeing growing presence in combat vehicles. to £50 million annually by the end of 2010. and Rolls-Royce, we sponsored research We also supply our products to land-based The operating exceptional cost of achieving at Cranfi eld University into integrated gas and steam power plants. Our revenues these savings is estimated at £25 million. vehicle health management to extend our are spread across North America, Europe However, we will maintain investment in market-leading diagnostics and and Asia and our manufacturing capability strategically-important capital projects prognostics capabilities. is global, including low-cost facilities in and R&D. Our business will emerge from China and Mexico. And we are no less ambitious for 2009. this recession lean and competitive with products customers want and best value We maintained investment in product The way ahead manufacturing options worldwide. development to ensure a full pipeline. Our continued investment was the We expect demand in our military and source of profi table repair, replacement energy markets to remain healthy. The and upgrade activity during the year and commercial aerospace market is expected contract wins on new platforms that will to be affected by declining air travel and deliver aftermarket revenues for decades diffi culties in obtaining fi nance for new to come. aircraft, which should lead to a reduction in Meggitt revenues from this segment. We sustained our commitment to operations excellence, driving cost out In response, Meggitt is reviewing its cost of our businesses with modern base, exercising its low-cost manufacturing manufacturing tools and techniques options and taking appropriate action to and investing in strategic sourcing and reduce costs. This has included a freeze

Group strategy 3 Meggitt PLC Report and accounts 2008 STRATEGY IMPLEMENTATION

Focused investment SMART ENGINEERING FOR EXTREME ENVIRONMENTS We focus on smart engineering for extreme environments, investing in highly engineered components and sub-systems. These provide important functionality in aircraft, ships, industrial gas turbines and land vehicles and enable civil, armed services and security FOCUSED INVESTMENT organisations to deploy judgement and • Components and value-added sub-systems skill in extreme situations. • High technology content Our intellectual property secures strong positions on current platforms, often as • Aftermarket value sole supplier. Many products deliver long-term revenues worth hundreds of • Growth by organic investment and acquisition millions of pounds as a result of lifelong repair, replacement and upgrade opportunities.

We grow organically and by acquisition. LEVERAGE GROUP CAPABILITIES We invest internally to maintain our • Adding value with cross-business solutions product leadership positions and extend our capabilities into larger packages • Leveraging scale of operations and integrated sub-systems. We buy companies to acquire technology, • Strengthening central functions fast-track product development and • Sharing services and best practice strengthen market positions. • In 2008, we fully consolidated two substantial aircraft braking systems businesses and became the world’s ACHIEVE OPERATIONAL EXCELLENCE leading supplier of wheels, brakes and brake control systems to regional, • Lean manufacturing and continuous improvement business and military aircraft. We exceeded initial synergy targets. • Strategic sourcing • Our thermal systems businesses • Low-cost manufacturing realigned themselves around their core environmental control and ice protection capabilities to serve general aviation, business jet and helicopter markets.

• Integrating our ground-based live-ﬁ re SATISFY OUR CUSTOMERS and virtual training businesses enabled Meggitt Training Systems to launch an • Develop strategic supplier relations innovative low-cost, portable classroom simulator and a state-of-the-art • Strengthen our customer and industry partnerships wireless live target presentation system • Be easier to do business with for law enforcement organisations. New military training products included an attack helicopter target; a new engine, avionics and airframe to qualify Banshee aerial targets for the MoD’s combined aerial target service; and a MAINTAIN A CULTURE OF STRONG PERFORMANCE fast in-shore attack marine simulator. • Meggitt Sensing Systems acquired • Delivering against targets Ferroperm, a producer of piezo-ceramic • Leadership development materials that will enable us to deliver the higher temperature sensing needed • Financial rigour to help control emissions in aero- engines and industrial turbines.

4 Strategy implementation Meggitt PLC Report and accounts 2008 • Meggitt Polymer Solutions developed Achieve operational excellence the potential for systems sales in our a lightweight polymer weighing 20 per energy and aerospace markets. We continue to optimise Meggitt’s cent less than the industry standard with competitiveness through lean • Product breadth, programme no decline in performance. The potential manufacturing and continuous management, logistics and supply savings of around 100 kilograms from improvement initiatives, strategic chain integration expertise enabled the half tonne of elastomer used on the sourcing at Group and business level us to become the lead sensing and average commercial aircraft could make and low-cost manufacturing. ignition integrator on Rolls-Royce’s a signifi cant contribution to reducing BR725 engine for the Gulfstream fuel consumption. • Meggitt Polymer Solutions consolidated G650. Our ability to include low-cost its UK base and created new factory • We achieved an industry fi rst when elements from our facility in China has layouts for its transatlantic operations to Bombardier fl ew a commercial made us very cost-competitive in this enable lean and continuous improvement demonstrator aircraft fully equipped market segment. activities to be implemented. Meggitt with our pioneering compact, high Defence Systems consolidated its • In 2008, Meggitt performance reaped performance electric brakes. training facilities in a new factory customer satisfaction awards from • We won numerous high value civil and in Atlanta. Gulfstream, Embraer, AVIC1 military contracts that will deliver Commercial Aircraft Company, the • Group-based strategic sourcing substantial aftermarket revenues. Defense Supply Center Richmond continues to drive down costs and Meggitt products were on the fi rst fl ights and others. optimise the competitiveness of of the Cessna CJ4, Phenom 300, Meggitt’s contract bids. • We sponsored Cranfi eld University’s Aermacchi M346, Gripen demonstrator, integrated vehicle health management Tranche 2 Eurofi ghter Typhoon and F35 • We continued to develop our low-cost research centre with Boeing, BAE STOVL aircraft. On the ground, we won facility in Mexico to complement wheel Systems and Rolls-Royce, an industry new ammunition autoloader contracts and brake operations in the United partnership that will help develop for the Abrams tank, Stryker and Future States and United Kingdom. Our Meggitt’s holistic approach to Combat Systems land vehicles. Chinese factory expanded substantially machinery diagnostics. with a third building, adding polymers Leverage Group capabilities and ground fuelling equipment to its Maintain a culture of strong performance sensors and controls production lines. We continue to integrate our Group. Our Singapore maintenance facility now We maintain a culture of strong Strong central coordinating and advisory provides local support for multiple performance based on delivery against functions help our businesses work Group products. targets. This is conditioned by rigorous together, sharing expertise, services and fi nancial discipline and sound ethical best practice. Satisfy our customers practice. In turn, we provide competitive • Group strategy and marketing formed reward and incentive schemes and We deliver broad-based solutions by a cross-division group to spearhead professional development and training. developing strategic relationships with a higher level of investment in all customers and suppliers and • Our fi rst leadership training programme, Meggitt’s energy-related products and participating in industry initiatives. developed with Oxford University, technologies. The initiative resulted facilitated group collaboration and in the opening of Meggitt’s fi rst offi ce • Key customer relationship managers delivered specifi c projects of strategic in India. help businesses meet customers’ importance to Meggitt. expectations, respond to current • Our IT infrastructure continues to evolve opportunities and align R & D activity • In 2008, our second management towards common solutions that enable with customers’ technology roadmaps. conference reinforced the strategic shared services. alignment of top managers and • Complementary Meggitt businesses • Group programme management is consolidated working relationships. continue to combine product marketing helping to sustain complex multi- and management, making procurement • We aligned professional development business programmes and standardise for customers easier and adding value reviews with a new management new product introduction. with more integrated sub-systems and model that feeds into recruitment • Health, safety and environment offi cers larger packages. Meggitt Fluid and selection. now have a Group champion to establish Controls—fi ve businesses that have • Education and development initiatives standards and share expertise. combined forces—had a major success, continued to gather momentum winning a high value bleed air sub- • Group export compliance continues throughout the Group. system on the Embraer Legacy 450/500 its cycle of review and corrective series. Based on modular control action planning. technology, it can be customised quickly • Group ethics launched a revitalised for almost any application. sales representative policy and protocol. This minimises risk and maximises convenience for airframers and unlocks

Strategy implementation 5 Meggitt PLC Report and accounts 2008 MARKET REVIEW

Meggitt’s smart engineering for extreme environments is CHART 1 well-known in aerospace and defence markets and has a TOTAL SPLIT OF REVENUES growing presence in energy, where its core capabilities can be deployed in innovative applications. 46% Civil aerospace 39% Military The civil aerospace market is divided between large jet, 15% Other regional aircraft, business jets and general aviation. Meggitt’s military markets cover ﬁ xed and rotary wing; land and sea; and training and targets. Our industrial segments are predominantly energy market applications.

OVERVIEW CIVIL AEROSPACE CHART 2 CIVIL AEROSPACE REVENUE Meggitt has a balanced portfolio. 15% of In total, 51% of Meggitt’s civil aerospace Group revenue comes from civil original revenues come from large jets, 24% from 16% Large jet OE equipment (OE) manufacturers and 31% regional aircraft and 25% from business from the civil aftermarket. Military OE jets, general aviation and rotorcraft. Of 35% Large jet aftermarket revenues account for 22% (signifi cantly Meggitt’s total civil aerospace revenues, more than civil OE revenues) and military sales to civil OE manufacturers accounted 4% Regional aircraft OE aftermarket revenues 17%. The remaining for 32% and the civil aftermarket 68%. 15% comes from other markets. In total, 20% Regional aircraft Our civil aerospace revenues grew by 31% aftermarket 51% of total revenues relate to OE and in 2008, despite a turbulent economic 12% Business jet, 49% to the aftermarket. background. While the 2009 economic GA and Meggitt has a good geographic spread, outlook remains uncertain, most industry rotorcraft OE making revenues resilient to regional analysts expect demand for air travel to 13% Business jet, GA and trends. In 2008, 52% of revenues were weaken and demand for new aircraft to rotorcraft from North America, 35% from Europe slow. Meggitt has developed a cost plan aftermarket (including the UK) and 13% from the rest to take into account a further decline of the world. in deliveries than current consensus estimates. Air traffi c growth, as measured Our business model combines high-tech, CHART 3 by available seat kilometres, is projected leading edge technologies, with established LARGE JET DELIVERIES to decline by 3 to 5% in 2009 due to a electro-mechanical products for markets slowdown in GDP and a tightening of 1000 where certifi cation requirements are consumer spending. Available seat high and track records important. By kilometres is a key indicator of aircraft 800 establishing a presence in the OE market, usage and, therefore, the demand for preferably as a single source supplier, spares and repairs. The aftermarket will 600 Meggitt aims to benefi t from the 20 to be affected by the resulting reduced 40-year recurring aftermarket. utilisation of the fl eet. OE order books, 400 Continual aircraft usage provides for example, are very healthy but reduced opportunities for Meggitt to replace and demand for air travel and diffi culty in 200 repair its products. As long as aircraft fl y, fi nancing new aircraft is expected to lead Meggitt has a strong and steady revenue to delays and cancellations. 0 stream. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F

Meggitt’s strong proprietary OE positions, Meggitt view of consensus forecasts large installed fl eet, diverse platform mix and strong performance track record confi rmed by a number of signifi cant supplier awards leaves us well placed as we enter 2009.

6 Market review Meggitt PLC Report and accounts 2008 CHART 4 CHART 5 BALANCED PORTFOLIO REVENUE BY GEOGRAPHICAL DESTINATION

15% Civil OE 52% North America 31% Civil aftermarket 22% Mainland Europe 13% UK 22% Military OE 13% Rest of World 17% Military aftermarket 15% Energy and other specialist markets

CHART 6 Large jets Business jets REGIONAL AIRCRAFT DELIVERIES Airbus and Boeing have excellent order The pattern of demand in this market is

400 books and backlogs of more than 7,000 changing. Today, the US accounts for aircraft, which continued to grow in 2008. about 70% of the world ﬂ eet but only 30% 350 Although deliveries of large jets are expected of the order book. Business jet utilisation 300 to peak in 2009 due to cancellations and is becoming increasingly linked to global,

250 deferrals, Meggitt’s OE product revenues are rather than US, GDP. Until 2008, total well spread, helping to mitigate the risk of business jet fl ying hours had been 200 any single platform reduction. increasing steadily since 1992 driven 150 particularly by the growth in fractional The return of the oil price to below $50 per 100 ownership. barrel and the diffi culty of fi nancing new 50 aircraft may encourage airlines to continue Business jet utilisation in the US as 0 to fl y older aircraft for longer. This will help measured by take-offs and landings mitigate the decline in our civil aftermarket started to decline during the second 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F business as a result of reduced aircraft quarter of 2008 and in December was Meggitt view of consensus forecasts usage. 21% down on a year ago. The decline is likely to continue in 2009, resulting in Regional aircraft fewer deliveries and a reduction in Meggitt is very well positioned in this CHART 7 aftermarket revenues. market. These aircraft are among the BUSINESS JET DELIVERIES Excludes GA most highly utilised in the fl eet, typically During 2008, there were several new 1200 taking off and landing several times a day model launches, including the Gulfstream and order books for regional aircraft are G250 and G650, Embraer Legacy 450 and 1000 still strong. So far, where park-ups have 500, Cessna Columbus, Learjet 85 and the occurred, the smaller 30 to 50-seaters Hawker Beechcraft Premier II. Meggitt’s 800 where Meggitt has minimal exposure have equipment will be installed on all these

600 borne the brunt. In contrast, Meggitt is on platforms, amounting to hundreds of every platform in the growing 70 to 90-seat millions of dollars of potential aftermarket 400 segment and because of their better fuel revenues. effi ciency, these aircraft have continued to Maturity profi le 200 stay in the active fl eet. Meggitt is on virtually every aircraft in the 0 If the overall regional fl eet grows in the western fl eet and its fl eet has a healthy

2000 2001 2002 2003 2004 2005 2006 2007 2008 next decade as predicted, Meggitt will overall maturity proﬁ le. 44% of the aircraft 2009F 2010F 2011F 2012F 2013F 2014F beneﬁ t due to its enhanced position on that feature Meggitt products are on Meggitt view of consensus forecasts 70 to 90 seaters. average under ten years old and account for 36% of revenues. 35% of aircraft using Meggitt products are on average between ten and 20 years old and account for 48% of revenues.

Market review 7 Meggitt PLC Report and accounts 2008 MARKET REVIEW CONTINUED

CHART 8 US DEPARTMENT OF DEFENSE BUDGET OUTLOOK ($BN)

700 130 187

600 7666 163

500 115 100 69 66 400 14 17 300

200

100

0 302 328 375 377 385 419 436 472 487 534 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(E) Base budget Supplemental

Source: Defense Appropriations Act, OMB and estimates based on President’s request

The 21% of Meggitt-equipped fl eets over Quadrennial Defense Review, which has CHART 9 20 years old, accounts for only 16% of been brought forward to August 2009. CIVIL AFTERMARKET MATURITY PROFILE revenues, refl ecting the lower utilisation Meggitt has signifi cant systems and TOTAL FLEET BY AGE of older, less effi cient aircraft. Since 79% components content on key platforms of the fl eet on which Meggitt’s products supporting deployments and training. 44% 0 –10 years are installed are under 20 years old, this This positions us well to capture growth 35% 10 – 20 years bodes well for our long-term aftermarket in base funding and reset. 21% 20+ years potential. Fixed wing MILITARY Meggitt’s components and sub-systems are installed on virtually every western Meggitt’s military business, which military aircraft in service. Fighter aircraft represents 39% of Group revenues, are a major driver of medium-term DoD is signifi cant, secure and growing. Of this, spending, led by the Super Hornets (F18 TOTAL REVENUE BY AGE 22% of total revenues comes from military E/F). This balance will eventually shift OE revenues and 17% from military towards Joint Strike Fighter (F35), whilst 36% 0 –10 years aftermarket revenues. By segment, 51% in Europe Eurofi ghter Typhoon continues 48% 10 – 20 years comes from fi xed wing; 20% from rotary; to be the major programme. 16% 20+ years 8% from land and sea; and 21% from training and targets. We are the number one wheels and brakes supplier for the global military aircraft The US Department of Defense (DoD) and market and have strong positions in its prime contractors are Meggitt’s largest secondary fl ight displays, fuel tanks, seals, defence customers. fi re detection and control systems, towed Overall defence spending is coming under countermeasures, pneumatic controls, increasing pressure from the current air data transducers and speed probes. economic climate. However, the base Our military aftermarket is an important budget will grow by 3% in fi scal year 2009 and profi table business, especially since and is expected to grow by up to 10% in key transformational aircraft such as the fi scal year 2010 to cover the reset and F35 and Eurofi ghter Typhoon are predicted repair of equipment. Supplemental to grow signifi cantly in fl eet size between funding levels are expected to reduce with 2008 and 2017. the gradual withdrawal from Iraq and the shift of repair and reset to the base budget. Rotary, land and sea Overall DoD spending is expected to The Black Hawk (H60), Osprey (V22) and remain relatively fl at. No substantial Apache (AH 64) helicopters are particularly budget changes are expected until fi scal important platforms for Meggitt products year 2011 following completion of the such as air data sensors, ammunition-

8 Market review Meggitt PLC Report and accounts 2008 CHART 10 CHART 11 OTHER REVENUE ENERGY REVENUE BY DIVISION

48% Energy 53% Aerospace equipment 16% Consumer goods 47% Sensing systems 36% Other

CHART 12 handling equipment, ice protection systems BEYOND AEROSPACE MILITARY REVENUE BY DIVISION for engine air intakes, health and usage AND DEFENCE monitoring systems and ballistically- These markets comprise 15% of Meggitt’s 54% Aerospace resistant and crashworthy fuel tanks. total revenues and growing, with energy equipment They are strongly represented in both the the biggest single component at 7% of 17% Sensing US and international defence markets. systems total revenues. 29% Defence In the UK, key programmes for Meggitt systems include the Lynx family, EH101 and the The opportunity for Meggitt’s condition- Apache attack helicopters. monitoring systems, fl uid controls and heat exchangers in the energy market Meggitt’s revenues in the land and sea is signifi cant since they help reduce segment are primarily from combat maintenance costs, conserve fuel and MILITARY REVENUE BY PLATFORM support systems such as sensors, control carbon emissions. Our revenues targetry, linkless ammunition-handling in this market have nearly doubled over 51% Fixed wing equipment and mission-critical cooling the last few years and we will see 20% Rotary wing systems for high-density electronics. 8% Land and sea continued growth, particularly in the 21% Training Helicopters and land vehicles are the power generation market in Asia, building and target workhorses of the US armed forces. Many on recent retrofi t successes in China systems of our products are deployed in current and the opening of regional bases in confl icts on platforms such as the Abrams India and Abu Dhabi. tank and the Stryker land vehicle and While market conditions are tough, the active combat aircraft such as the Black Group continues to be active in providing Hawk and Apache helicopter. This sensors for the consumer goods and other positions the Group strongly for future specialist diverse markets. reset programmes.

Training and target systems Meggitt’s live-fi re and virtual simulation training products are market leaders, with over 10,000 Meggitt-supplied live-fi re ranges and 5,200 virtual systems providing training to the armed forces, law enforcement and security organisations. Meggitt played an important part in preparing the UK and US armed forces for current operations in Iraq and Afghanistan and is well-positioned for any post-confl ict revival in training budgets.

Market review 9 Meggitt PLC Report and accounts 2008 BUSINESS REVIEW

REVENUE KEY PERFORMANCE INDICATORS (KPIs)

REVENUE GROWTH RETURN ON SALES Percentage change in Group revenue from Underlying operating profi t as a previous fi nancial year. Target compound percentage of revenue. Target growth in 1,162 . 6 organic growth: 7% across the cycle line with revenue and PBT growth REVENUE 2008 UNDERLYING PBT GROWTH R&D AS PERCENTAGE OF REVENUE (£ MILLION) Percentage change in Group underlying Research and development expenditure profi t before tax from previous fi nancial as a percentage of revenue. Target gross year. Target compound organic growth: 9% spend: 6-8% across the cycle across the cycle CASH CONVERSION UNDERLYING EPS GROWTH Cash infl ow from operations before +32% Percentage change in Group underlying exceptional operating costs as a percentage REVENUE INCREASE ON 2007 earnings per share from previous fi nancial of underlying operating profi t. Target year. Target compound organic growth: 8% conversion: 100% across the cycle

TABLE 1 The Board’s preferred measure of the FINANCIAL HIGHLIGHTS Group’s trading performance is underlying 2008 2007 % profi t. This was up 37% for the year at £’m £’m change £296.4 million (2007: £216.3 million) and Revenue 1,162.6 878.2 +32% the underlying return on sales increased to 25.5% (2007: 24.6%). On an organic basis, Underlying1: revenues increased by a very healthy 10% Operating profi t 296.4 216.3 +37% whilst underlying operating profi t also Profi t before tax (“PBT”) 243.3 179.0 +36% increased by 10%. Earnings per share (“EPS”) 26.5p 22.1p +20% Net fi nance costs increased to £53.1 million Statutory: (2007: £37.3 million) due to the full-year Operating profi t 172.4 142.7 +21% effect of the additional fi nancing required Profi t before tax (“PBT”) 119.3 105.4 +13% to support the K&F acquisition and an Earnings per share (“EPS”) 15.0p 14.6p +3% increase in non-cash pension interest to Cash fl ow from operations before exceptionals 295.4 214.3 +38% £4.7 million (2007:£1.2 million). Underlying PBT increased therefore by 36% to £243.3 Cash conversion2 100% 99% million (2007: £179.0 million). 1 Underlying profi t and EPS are defi ned and reconciled to statutory measures in notes 10 and 16 respectively. After a tax charge of 28.0% (2007: 27.5%), 2 Cash conversion is the ratio of cash fl ow from operations to underlying operating profi t. Cash fl ow from underlying EPS increased 20% to 26.5 pence operations is before exceptional operating costs, interest, tax and investing activities. (2007: 22.1 pence).

On a statutory basis, PBT increased by 13% Overall performance With its large installed fl eet, spread across to £119.3 million (2007: £105.4 million) and both military and civil platforms, the Meggitt continued to make excellent EPS increased by 3% to 15.0p (2007: 14.6p). signifi cant cost reduction plans in place progress in 2008. Orders, revenues and and its sound fi nancial position, the Group The recommended fi nal dividend of 5.75p underlying earnings have all shown is well placed to respond effectively to (2007: 5.75p) represents a total dividend signifi cant double-digit increases. The Group current challenges and to position the for the year of 8.45p (2007: 8.20p), up 3%. remains well balanced and saw good growth business for the long term. in each of its three main market segments: Integration update civil aerospace revenues increased by 31%; Overall revenues increased by 32% to military revenues increased by 35% and our £1,162.6 million (2007: £878.2 million) The integration of our largest acquisition, energy revenues increased by 21%. refl ecting strong organic growth of 10%, K&F (acquired 22 June 2007) has favourable currency movements and the progressed very well. The larger part of As we enter 2009, the global economic inclusion of a full year of the K&F businesses. K&F’s business (wheels and brakes) was outlook remains uncertain. Military and merged with Meggitt’s existing UK wheels energy revenues are expected to increase, The Group’s order intake in 2008 was up and brakes business on 1 January 2008 to partially offsetting declining air traffi c and 26% and our closing order book at form Meggitt Aircraft Braking Systems diffi cult credit conditions for fi nancing new 31 December 2008 was £814 million (2007: (MABS). This merger has established aircraft which will impact our civil £660 million). MABS as the world leader in wheel and aerospace revenues.

10 Business review Meggitt PLC Report and accounts 2008 PIONEERING TECHNOLOGY CONTROLLING ELECTRIC BRAKES

With my First in Mathematics and a control technology doctorate in hand, my fi rst mission at Meggitt Aircraft Braking Systems was to develop control strategies and algorithms for Ebrake® through simulation modelling. With hydraulics, the pilot presses the pedal and brake pressure is transmitted through the system. It’s a straightforward process. With electric braking, control, timing and sequencing can be much more complex. There are multiple signals and communications to get right. But we succeeded. Meggitt was the fi rst to fl y an electric brake successfully on a fully autonomous UAV with EADS—a triumph of control technology—and the fi rst to fl y a full complement on a civil aircraft with Bombardier—a triumph of brake design. In today’s competitive business environment, innovation isn’t enough. Through the Ebrake® programme, we have proved we can create state- of-the art technology and have the engineers who can turn that technology into tangible, saleable results. DR JANE MINIHAN Manager, Systems Engineering, Meggitt Aircraft Braking Systems

brake systems for regional aircraft, increased by 13% to £78.8 million (2007: (2007: 99%) of underlying profi t to operating business jets and military aircraft. £70.0 million), of which approximately cash. After taking into account net investment, 25% is funded by customers. fi nance costs, tax and dividends, the Group Engineered Fabrics Corporation (EFC), generated net cash of £75.0 million. the smaller part of K&F and the leading As a proportion of revenues, the largest supplier of fuel tanks to the US DoD, relative investment was once again in We hold the majority of net debt in also became part of Meggitt Aerospace sensing systems at £30.9 million (12% of currencies other than sterling as a hedge Equipment. Both former K&F businesses segment revenues), followed by defence against our overseas investments. The traded well in 2008. systems at £11.3 million (9% of segment weakening of sterling against, in particular, revenues) and, fi nally aerospace equipment the US dollar, Euro and Swiss franc in the Rationalisation of the MABS facilities is on at £36.6 million (5% of segment revenues). latter part of 2008 led to adverse currency track with the closure of the Slough, Atlanta translation movements of £312.0 million and Liège repair and distribution centres. Meggitt also invested £35.7 million (2007: on net debt. As a result, net debt increased The Group has now completed just over half £20.1 million) in supplying equipment free of to £1,047.9 million at 31 December 2008. the identifi ed integration projects and, in charge to new aircraft coming into the fl eet The currency-related increase in net debt 2008, exceeded its synergy target of £10 and in making programme participation barely impacts our key covenant ratios. This million by £2.5 million. This restructuring has contributions, mostly in MABS. is because our credit agreements contain been achieved with minimal disruption to Capital expenditure on property, plant and a provision that net debt is translated to production schedules and customer support. equipment and other intangibles reduced sterling at the average exchange rates for Meggitt is well on track to achieve the to £40.9 million (2007: £43.8 million). the year, rather than the period-end spot targeted synergy savings of £18 million in rates. This is described further in the 2009 and £22 million in 2010. This will be Cash fl ow covenant risk section starting on page 13. achieved at a one-off cost of £29 million, of Meggitt’s excellent cash generation track which £15 million has been incurred to date. Capital structure record continued with cash infl ow from operations before exceptional operating Meggitt’s operations are fi nanced by a Investing for the future costs of £295.4 million (2007: £214.3 million). combination of equity (share capital and On 7 January 2008, Meggitt acquired This represented cash conversion of 100% retained earnings) and debt. We seek to Ferroperm, a leading manufacturer of piezoceramic materials for specialist TABLE 2 sensor applications, for up to Danish ANALYSIS OF R&D COSTS

Kroner 100 million (£9.8 million). S-TEC, 2008 2008 2008 2008 Aerospace Sensing Defence a general aviation autopilots specialist, Group equipment systems systems was identiﬁ ed as no longer core to the Group and sold on 3 January 2008 for a R&D expenditure 78.8 36.6 30.9 11.3 net consideration of £17.2 million. % of revenue 7% 5% 12% 9% Customer-funded R&D (19.4) (4.0) (8.3) (7.1) Developing and owning intellectual Capitalised (23.7) (12.6) (9.6) (1.5) property is an important part of Meggitt’s Amortisation 3.5 1.5 1.7 0.3 successful strategy. Total product P&L charge 39.2 21.5 14.7 3.0 development expenditure in 2008

Business review 11 Meggitt PLC Report and accounts 2008 BUSINESS REVIEW CONTINUED

TABLE 3 TABLE 4 MATURITY PROFILE OF CREDIT FACILITIES (£’M) GOOD COVENANT (NET DEBT/EBITDA) HEADROOM

1600 £412 million headroom 1400

1200 May Net debt Dec 08 – £1,048 million EBITDA (before exceptionals) 1000 -10% -20% -30% 800

600 Avge $1.50 2.3 2.6 3.0 3.5

400 Mar

Oct Avge $1.25 2.4 2.7 3.2 3.7 200 Apr Jun-Jul Avge $1.00 2.5 2.9 3.3 3.8 0 Net debt (FX sensitivity) 2015 2010 2009 2011 2012 2014 2013 Sensitivity scenario assumes that 2008 results in currency are repeated in 2009. This is for illustrative purposes only and is not a forecast. Committed facilities: Fixed rate Floating rate Calculations per credit agreement deﬁ nitions.

minimise the cost of capital while facility. The USD 500 million facility runs TABLE 6 recognising the constraints of the debt and until July 2013. We will continue to use PROFILE OF TOTAL COMMITTED CREDIT equity markets and the risks associated with the USD 680 million facility to maturity. FACILITIES (YEAR END US $’M) high levels of gearing. Our post-tax average We retain, therefore, nearly USD 2 billion 2008 2007 cost of capital is approximately 8%. of committed credit facilities until 2012. 2009 2,100 2,100 2010 1,920 1,420 Debt structure Interest charge 2011 1,920 1,420 We entered 2008 with committed credit Meggitt seeks to reduce the volatility in 2012 750 250 facilities totalling USD 2.1 billion interest expense from rate fl uctuations. 2013 70 70 comprising USD 250 million of private Our US private placement is at fi xed rates 2014 70 70 placement notes with maturities in 2013 whereas drawings under the bank credit and 2015, and two multi-currency revolving facilities are at fl oating rates. To reduce An element of the interest charge relates to bank credit facilities—USD 680 million our exposure to interest rate movements, the difference between the expected return maturing in May 2010 and USD 1,170 we have entered into a number of interest on retirement benefi t scheme assets and million maturing in March 2012. Despite rate swaps to fi x a proportion of our bank the interest rate applied to scheme the USD 680 million facility having nearly borrowings. At 31 December 2008, the liabilities. This is not a cash charge but the two years to run, in July 2008 we secured percentage of net debt at fi xed rates was amount is subject to volatility. a new extension facility amounting to 70% and the weighted average period to USD 500 million available on maturity or maturity was 3.0 years. Both exceed our TABLE 7 early cancellation of the USD 680 million treasury policy minimum criteria of 25% CURRENCY PROFILE OF and two years respectively. NET DEBT (£’M)

2008 2007 TABLE 5 Sterling (23.5) (11.9) MOVEMENT IN NET DEBT (£’M) US dollars 993.4 765.5 Opening net debt (815.4) Euro 22.3 5.7 Swiss franc 58.8 53.8 Cash ﬂ ow from operations before exceptional operating costs 295.4 Other (3.1) 2.3 Exceptional operating costs paid (16.5) Net interest/tax paid (76.5) Total net debt 1,047.9 815.4 Capitalised development costs/programme participation costs (59.4) Net capital expenditure (40.5) Exchange rates – balance sheet Businesses disposed/acquired 10.7 To mitigate the exchange rate exposures Net amounts paid to shareholders (38.2) arising from the retranslation of the net Reduction in net debt 75.0 assets of our overseas subsidiaries, net debt is held, where cost effective and Currency translation differences (312.0) practical, in the currencies of those Other non-cash movements 4.5 subsidiaries. Closing net debt (1,047.9)

12 Business review Meggitt PLC Report and accounts 2008 STRATEGIC SOURCING SAVING COSTS, WINNING NEW BUSINESS

I am a production guy at heart. I understand overheads, labour and material content and that’s the perspective I’m bringing to Meggitt’s global sourcing programme. With full-time teams in the US, Europe and Asia, we exceeded our goals this year. Some 35 business units act in unison now, exercising their combined spending power. Group specialists in the core Meggitt technologies of casting, forgings, machining, cabling, metal fabrication and PCB assemblies have helped them save up to 70% on some packages this year. Many companies struggle with strategic sourcing but our success comes from looking at it as a way to win new business as well as cut the cost of existing programmes. Strategic sourcing is not just about ‘purchasing’. It is also about sales and quality. We are winning contracts because we are cost competitive and we are ensuring the best suppliers of service and technology work with us. We bring it all together with the superior project management skills needed to migrate Meggitt businesses between supply chains, delivering acceptable ﬁ rst articles on time and establishing the right inventory models. DAVID HORNER Head of Strategic Sourcing (USA)

Exchange rates – income statement dollar, we have extended cover as the current exchange rates, EBITDA would have dollar strengthened during the latter part to fall by close to 30%, without mitigation, The results of overseas operations are of 2008. At 31 December 2008, cover for before this covenant measure is breached. translated into sterling at the weighted the next 12 months was 95% ($/£ rate of average exchange rates shown in Table 8. 1.82) and we have covered roughly half our TABLE 10 Currency denominated net assets are anticipated exposures for the following COVENANTS translated at year end rates. four years at a $/£ rate of around 1.74. Covenant Actual*

TABLE 8 Compared to 2007, the Group’s underlying Net debt/EBITDA <–3.5x 2.4x EFFECTIVE TRANSLATION RATES profi t before taxation for the year was Interest cover >–3.0x 6.6x 2008 2007 adversely affected by £5 million as a result *As calculated in accordance with covenants. of transaction exposure. Hedged rates for Average rates 2009 are similar to those achieved in 2008. Minimising debt fi nancing risks US dollars 1.83 2.02 We seek to minimise debt fi nancing risk Euro 1.23 1.45 TABLE 9 as follows: EFFECTIVE TRANSACTION RATES Year-end rates 2008 2007 a. Concentration of risk US dollars 1.44 1.99 We raise funds through private placement Euro 1.03 1.36 US dollar/£ 1.84 1.82 issuances and bank loans to reduce US dollar/Euro 1.48 1.21 reliance on any one market. Bank Compared to 2007, the Group’s underlying Swiss franc/US dollar 1.11 1.20 fi nancing is sourced from over 20 major profi t before tax for the year was positively international institutions spread across affected by £20 million as a result of Covenants North America, Europe and Asia. No one currency translation. If exchange rates bank accounts for more than 10% of the The Group’s committed credit facilities remain at 31 December 2008 levels, there Group’s total credit facilities and our contain two fi nancial ratio covenants— will be further signifi cant year-on-year largest fi ve lenders are Bank of America, interest cover and net debt to EBITDA. The benefi t in 2009. Each one cent strengthening Barclays, BNP Paribas, HSBC and Lloyds. of the US dollar versus the 2008 average covenant calculations are drafted to protect rate of £1 = $1.83 improves underlying profi t Meggitt from the effects of accounting b. Set-off arrangements before tax by approximately £1 million. standard changes, sudden exchange rate We seek to use set-off and netting movements and exceptional items. As defi ned arrangements where possible to reduce Our policy on transactional currency in the credit agreements, interest cover as at the effect of counterparty defaults. All exposure is to hedge known, and some 31 December 2008 was 6.6 times (must treasury transactions are settled on a net anticipated, exposures based on historical exceed 3.0) and net debt to EBITDA was 2.4 basis where possible and surplus cash is experience and projections. At least 70% of times (must not exceed 3.5). There is deposited with our lenders up to the the next 12 months’ anticipated exposure therefore considerable headroom on both level of their current exposure to us. must be hedged at any time and we can measures. Table 4 shows the sensitivity of the c. Refi nancing risk place cover up to fi ve years ahead. key net debt/EBITDA ratio to changes in profi t We ensure that the maturity of our facilities Because our level of cover has been at or and average exchange rates. The ratio is is staggered and refi nancings are concluded near our policy minimum for some time relatively insensitive to currency movements in good time. Our new USD 500 million due to the prolonged weakness in the US and there is considerable profi t headroom. At

Business review 13 Meggitt PLC Report and accounts 2008 BUSINESS REVIEW CONTINUED

TABLE 11 DEFINED BENEFIT PENSION SCHEMES SUMMARY (£’M)

2008 2007 Opening net defi cits 102.1 97.2 Service cost 12.3 11.6 Employer contributions (33.4) (13.4) Net defi cit reduction payments (21.1) (1.8) Net fi nance costs/(income) 1.3 (0.4) Businesses acquired – 31.5 Net actuarial losses/(gains) 64.1 (24.3) Currency movements 25.6 (0.1) Closing net defi cits 172.0 102.1 Assets 451.9 471.4 Liabilities 623.9 573.5 Closing net defi cits 172.0 102.1 Funding status 72% 82%

forward start facility (2010), arranged Taxation Group and favourable movements in nearly two years before expiry of the assumptions used to determine schemes’ The Group’s underlying tax rate increased USD 680 million facility it replaces, liabilities arising from reductions in from 27.5% to 28.0% this year, refl ecting the demonstrates this approach. infl ation rates and higher yields on full- year impact of the acquisition of K&F corporate bonds. d. Headroom risk which results in more of the Group’s profi ts As our borrowings are principally in US being taxed in higher rate jurisdictions. Regulations in the UK and US require dollars, our credit facilities are denominated repayment of defi cits over time. Following in this currency to avoid headroom erosion Dividends agreement with the schemes’ trustees, due to foreign exchange movements. defi cit reduction payments were increased Meggitt delivered another strong We also model various forward fi nancial in 2008 to £21.1 million (2007: £1.8 million) performance in the year and, whilst scenarios to ensure available headroom in and are expected to increase to recognising the economic uncertainties our committed facilities will be suffi cient. approximately £25.0 million (pre-tax) in that exist, believes it is well placed to face As at 31 December 2008 we had undrawn, 2009. The next fi nancial valuations in the the challenges of the current global committed credit facilities in excess of UK are likely to take place in 2009. economic environment. Accordingly, £400 million after taking account of we have increased the full year dividend Meggitt’s two other principal post- surplus cash. by 3% to 8.45 pence (2007: 8.20 pence). retirement benefi t schemes provide e. Covenant risk The recommended fi nal dividend was held medical and life assurance benefi ts to We reduce the risk of covenant breach fl at at 5.75 pence (2007: 5.75 pence). certain overseas employees. These using frozen UK GAAP to insulate against schemes are unfunded and have a accounting rule changes, inclusion of Retirement benefi t schemes combined defi cit of £69.2 million (2007: pre-acquisition profi ts in the year of £51.2 million) with the increase arising The Group has a number of defi ned benefi t acquisition, exclusion of exceptional items primarily due to currency translation. pension schemes. The principal schemes in calculations and use of average Defi cit reduction payments in the year are closed to new members with the exchange rates for net debt calculations were £1.4 million (2007: £0.6 million). exception of certain schemes arising on (to match rates used for profi t translation). the acquisition of K&F. The impact of this last provision has been Accounting standards dramatic this year with covenanted net Overall, the schemes’ defi cits increased to Meggitt’s results were not affected by changes debt/EBITDA calculated in accordance with £172.0 million (2007: £102.1 million). The to fi nancial reporting standards in 2008. our credit agreements of 2.4 compared to main driver was the impact of the global 3.1 on an accounting basis. economic downturn on equity and bond Restatement of prior year results markets, which resulted in the reduction in As a result of this approach, Meggitt the value of assets held by the schemes. Meggitt restated its 2007 net assets after believes it has credit facilities suffi cient The currency impact of retranslating fi nalising the fair values of K&F acquired for its ongoing operations until at least defi cits held by overseas subsidiaries also in 2007. The adjustments did not affect the 2012 when the next signifi cant bank facility contributed £25.6 million to the increase in income statement of the Group for the year renewal is due, on terms that are defi cits. The schemes’ funding positions ended 31 December 2007. accommodating even in turbulent times were partly mitigated by the increased and from creditors highly likely to meet defi cit reduction payments made by the their obligations to us.

14 Business review Meggitt PLC Report and accounts 2008 RISKS AND UNCERTAINTIES

02_IntroRisks and Paragraph uncertainties affecting the Group’s civil aerospace, military and other markets could have a material impact on the Group’s performance and cause actual results to differ materially from expected and historic performance. Meggitt’s risk management programme covers identiﬁ cation, impact assessment, likely occurrence and mitigation action. Some level of risk, however, will always be present.

RISK POTENTIAL MITIGATION DESCRIPTION IMPACT ACTION

PRODUCT Military spending and priorities, particularly those of Spreading our activities across the civil DEMAND the US government, our largest customer, affects our aerospace, military and energy markets. revenues. Conditions in the air travel industry are also Generating revenues from original equipment important to our revenues. A signifi cant or prolonged manufacturers and aftermarket services. downturn, due to recession, commodity prices, terrorist Operating across different geographical attack or aerospace regulations would decrease demand regions. for the Group’s products. Several airlines have, at the time of publishing, announced plans to park a number Maintaining, where practical, a fl exible of aircraft and defer new deliveries. This and the impact cost base. of the current economic climate on our airline customers, Reducing costs to partially mitigate any will adversely affect our revenues. reduction in demand. 03_Subhead03_Subhead 11 COMPETITION We compete in a highly competitive global market that Protecting our positions by maintaining 03b_Subhead03b_Subhead 22 has experienced signifi cant consolidation in recent years. a broad customer base. 04_Body04_Body CopyCopy Losing contracts to competitors, many of whom have Maintaining diverse products and greater fi nancial, technological and marketing resources, operations to reduce the effect of action or being forced to accept lower margins, would have an by any single competitor. adverse effect on the Group’s results. Maintaining a competitive manufacturing The loss of key intellectual property or the failure to base. enforce its rights could hinder the Group’s development Developing proprietary intellectual and provide an advantage to competitors. property and products in markets that The competitive position of the Group would suffer if it demand high levels of technology, quality were unable to meet future investment requirements; and service and strong, long-term continue research and development; or provide cash relationships with customers. or equipment incentives to original equipment Maintaining a robust intellectual property manufacturers. Such investments, which decrease the protection programme. Group’s cash fl ow in the short term, need to be recovered through future revenues. Maintaining the highest manufacturing and quality standards and attending to individual customer certifi cation requirements. Ensuring good operational cash fl ow and available fi nance.

LEGAL AND We are subject to litigation in the ordinary course of business Maintaining a legal and compliance REGULATORY and provide for such costs. However, there is a risk that function to oversee the management of successful claims or costs could exceed the provisions made. these risks. For example, a number of asbestos-related claims have been Providing for claims which cannot be made against acquired subsidiary companies. To date, the recovered from insurers. amount connected with such claims in any year has not been Introducing a health and safety material and many claims are covered fully or partly by programme across all of our businesses. existing insurance and indemnities. Investing signiﬁ cant resources in The Group is subject to the laws and regulations of the implementing best practice export countries in which it operates, including health and safety, compliance and ethics programmes which environmental, export compliance and government are reviewed quarterly by the Board’s contracting regulations. In the USA there is a system of Ethics and Export Compliance Committee. voluntary disclosure to the relevant authorities to deal with any breach of export laws. Any reported or unreported breach may be investigated and, depending upon its seriousness, result in criminal, civil or administrative penalties, including suspension or debarment. In 2000, the US Government

Business review 15 Meggitt PLC Report and accounts 2008 RISKS AND UNCERTAINTIES CONTINUED

02_Intro Paragraph RISK POTENTIAL MITIGATION DESCRIPTION IMPACT ACTION

LEGAL AND started to investigate the alleged violations of US export REGULATORY control laws by a US Meggitt subsidiary and is also CONTINUED investigating alleged breaches by three other subsidiaries, one of which is in the UK. These investigations are likely to lead to ﬁ nancial penalties for which provision has been made. Criminal charges, suspension or debarment and denial of export privileges are also possible. The aerospace industry is highly regulated so the Group would be adversely affected if a material certiﬁ cation, authorisation or approval were revoked or suspended.

ENVIRONMENTAL Meggitt’s operations and facilities are subject to laws Designing processes that minimise the effect and regulations that govern the discharge of pollutants of the Group’s operations on the environment. and hazardous substances into air and water as well as Commissioning independent third-party the handling, storage and disposal of such materials and audits of our sites. other environmental matters. Failing to comply with our Carrying out extensive environmental due obligations potentially exposes the Group to serious diligence on potential acquisitions and consequences, including ﬁ nes, other sanctions and purchasing environmental insurance for limitations on operations. 03_Subhead03_Subhead 11 all new sites. We are involved in the investigation and remediation 03b_Subhead03b_Subhead 22 Providing for the expected costs arising from of current and former sites for which we have been 04_Body04_Body CopyCopy these sites based on information currently identiﬁ ed as a potentially responsible party under US law. available and establishing a receivable to the extent these costs are recoverable under the Group’s environmental insurance policies.

EQUIPMENT Our products generally operate in extreme environments Designing manufacturing processes that FAULT where a serious incident arising from failure could result ensure stringent quality and reliability in liabilities for personal injury or death and damage to standards. the Group’s reputation. The Group may be subject to Protecting the Group from future product material product warranty obligations to third parties for liability claims subject to coverage limits equipment it manufactures and services. with liability insurance.

CONTRACTS Multi-year, ﬁ xed price contracts with original equipment Ensuring estimates of cost are based on manufacturing customers expose us to the upside and reliable historic data and, where possible, downside of decreases and increases in production costs. by entry into multi-year, ﬁ xed price The Group is subject to contracting risks with the US contracts with major suppliers. government which has a range of sanctions available to it Maintaining guidelines for doing business with in the event of violations. the US Government as part of the Group’s Ethics and Business Conduct Programme.

EXCHANGE We operate in, and sell products to, a range of countries Addressing longer-term risk of exposure to RATES with different currencies, resulting in exchange rate exchange rate ﬂ uctuations by sourcing goods exposure. and services in currencies which match the Transaction risk arises where revenues are denominated revenue exposure where cost-effective. in currencies different from those of the costs of Hedging short-term transaction risk. manufacture. Managing translation risk where possible by Translation risk arises on the translation of net assets the partial currency matching of borrowings and income statements of overseas subsidiaries. with the net assets of overseas subsidiaries.

CREDIT Credit risk exists in relation to customers, banks and Maintaining rigorous credit control insurers. procedures. Maintaining a wide customer base. Maintaining a wide bank group. Monitoring relationships with banks and other counterparty risks through our treasury function. Selecting insurers with good credit ratings.

16 Business review Meggitt PLC Report and accounts 2008 02_Intro Paragraph RISK POTENTIAL MITIGATION DESCRIPTION IMPACT ACTION

INTEREST Fluctuations in rates affect the interest the Group is Using the underlying character of the debt RATES required to pay on our external borrowings. instruments and interest rate derivatives such as interest rate swaps.

RETIREMENT The funding position of the Group’s post-retirement benefi t Closing the defi ned benefi t schemes in the BENEFITS schemes may be adversely affected by poor investment UK and USA to new members, with the FUNDING performance, changes in interest and infl ation rates, exception of certain schemes inherited on improved mortality rates and changes in the regulatory the acquisition of K&F. environment. The income statement and the level of cash Agreeing defi cit recovery plans with the contributions required to be made to the schemes may be trustees based on actuarial advice and the positively or negatively affected by the amounts the Group results of scheme valuations. is required to record for our retirement benefi t obligations. Changing future service benefi ts to See note 35 to the Financial Statements and page 14 of the contain cost. Business Review..

ACQUISITIONS Meggitt continues to pursue acquisitions as part of our Undertaking due diligence. growth strategy. Such acquisitions may not realise the Implementing comprehensive business beneﬁ ts anticipated. integration processes. 03_Subhead 1 Obtaining representations, warranties and indemnities from vendors where possible. 03b_Subhead 2 SUPPLY04_Body Copy CHAIN We rely on our own manufacturing operations and Maintaining signiﬁ cant investment in independent suppliers for key raw materials and modernising facilities and improving components, some of which may be available only from production processes to develop leading a limited number of suppliers. Any disruption to the manufacturing operations. supply chain could have an impact on our ability to Maintaining a supplier risk assessment meet customer requirements and adversely affect the programme. Group’s results. Subjecting robust business continuity plans to regular testing to manage the risk of a loss of a major facility or supplier.

FINANCING The Group’s long term fi nancing is provided by Negotiating debt facility extensions. shareholders in the form of equity and by banks and The Group believes it has credit facilities other institutions in the form of debt. suffi cient for our ongoing operations until Debt facilities are provided for fi nite periods of time at least March 2012. and need to be renewed periodically, unless repaid out Basing covenant calculations on frozen of cash fl ow. Such renewal could be affected by any UK GAAP to reduce volatility arising from structural issues in the credit markets. certain fair value measurements and Debt facilities contain covenants which, if breached, future accounting rule changes. could result in the facilities being withdrawn. Including covenant clauses that enable net debt and EBITDA to be retranslated to sterling at similar exchange rates to reduce exchange movement volatility. Monitoring our actual and forecast results against covenant ratios regularly.

PEOPLE The success of the Group depends upon the efforts, Maintaining development and succession abilities, experience and expertise of certain senior and programmes, competitive remuneration specialist employees. Failure to retain them or recruit packages and good communications at alternatives would have an adverse effect. all levels. Work stoppages or slowdowns at the Group’s facilities or those of our key customers or suppliers would affect the Group.

Business review 17 Meggitt PLC Report and accounts 2008 AEROSPACE EQUIPMENT

A group of leading electro-mechanical engineering businesses specialising in smart engineering for extreme environments. Their products are on virtually every aircraft in service, ensuring stable aftermarket revenues over the long term.

GULFSTREAM G650 The recently launched long range Gulfstream G650 jet, which will become the fastest civil aircraft, will carry Meggitt wheels, brakes and integrated brake- by-wire, ﬂ uid control and sensing and ignition systems. PERCENTAGE OF REVENUE UNDERLYING OPERATING PROFIT GROUP REVENUE £ MILLIONS £ MILLIONS 763.7 230.6

MARKETS CAPABILITIES 65.7 • Civil aerospace: large, regional and • Wheels, brakes and brake business jets and general aviation control systems • Military: ﬁ xed wing and rotary aircraft, • Thermal management ground vehicles, ships, unmanned • Fluid control air vehicles • Safety systems • Energy • Polymer solutions AEROSPACE EQUIPMENT CONTINUED

FINANCIAL HIGHLIGHTS GROWTH STRATEGY

• Invest in component design and • Acquire complementary businesses technology to meet next generation that align with strategic intent platform requirements and create 30.2% • Stabilise product cost base through enduring value RETURN ON SALES astute supply chain management • Adapt new aftermarket business • Consolidate operations further to models to ensure stable, long-term deliver efﬁ ciencies revenues • Further integrate engineering • Develop proﬁ table integrated resources to increase depth and solutions and sub-systems that breadth of capabilities 32.6% add value to our customers ORDER INTAKE UP

KEY POINTS Divisional overview fuel tanks to the KC-135 aircraft. It was integrated into Meggitt Thermal Systems Meggitt Aerospace Equipment represents Total revenues up 45% to as part of an initiative to realign assets and over 65% of total revenues at £763.7 million £763.7 million (14% organic) resources around primary environmental and generates 63% of its revenues from control and ice protection sub-system the aftermarket and 37% from original Underlying operating profi t strategies. Both target the business jet equipment. of £230.6 million, up 46% and general aviation and helicopter (10% organic) Meggitt’s Aerospace Equipment markets, with attractive opportunities businesses had a good year in 2008 with in ice protection being pursued in some Returns on sales, 30.2% strong revenue and underlying operating commercial aviation segments. Meggitt (2007: 30.0%) profi t growth, underpinned by healthy Thermal Systems’ new electro-thermal order intake. ice protection system, in line with Order intake up 32.6% on 2007 developments in More Electric aircraft, Meggitt Fluid Controls secured contracts addresses commercial and regulatory including the gearbox and brake system pressure to cut aircraft fuel burn and for the Future Combat Systems MULE emissions, using 50% less energy than (Multifunction Utility and Logistics traditional bleed air systems while Equipment vehicle) and fans for the optimising performance. V22 Osprey rotorcraft. Meggitt Polymer Solutions received Winning the pneumatic bleed air system numerous orders for seals from customers for Embraer’s Legacy 500 mid-size and as diverse as Alenia Aermacchi, Spirit 450 mid-light jets validated Meggitt Fluid AeroSystems, Hawker Beechcraft, Summa Controls’ investment in motor controller Technologies, Boeing, GKN and Cessna technology. This enables a range of and continued to develop its composite Meggitt components to be packaged materials and manufacturing processes. A into sub-systems that increase platform major customer is evaluating a pioneering content. Its modular approach enables Meggitt polymer that weighs up to 20% equipment to be customised quickly for less than the industry standard. Meggitt virtually any system in any of its markets— Polymer Solutions’ site consolidation in military aircraft and ground vehicles, civil Loughborough UK was completed and, aerospace and energy—providing with the Oregon, USA facility, is benefi ting opportunities worth hundreds of millions from signifi cant operational excellence of dollars over a programme lifetime. initiatives including brand-new factory EFC, our fl exible bladder fuel tanks layout to enable modern manufacturing and ice protection business, won techniques to be implemented. numerous contracts including its record Meggitt Safety Systems had a record year, US$41 million follow-on contract to supply which included securing the contract for

20 Business review Meggitt PLC Report and accounts 2008 SYSTEMS MARKETING CONTROL TECHNOLOGY FOR SUB-SYSTEMS

Systems engineering deals with multiple elements and products and making them work together really drives me. At Meggitt Fluid Controls, I’ve been able to achieve something more: build a multidisciplinary engineering team capable of winning systems work based on superior control technology. This technology consists of a set of modules that can be embedded in Meggitt products across the Group and customised, quickly, for any system. Whether for cabin temperature and pressure control in aircraft, fuel management in industrial power plants or wheel speed and braking in military ground vehicles, it’s about more convenience and less risk for customers all round. And that’s why we won the valves and the bleed air system for Embraer’s Legacy 450 and 500 series aircraft. We added real value, generating a relationship, not just a transaction. Selling multiple products with this enabling technology proves that managing and marketing groups of complementary Meggitt businesses as one not only boosts sales but elevates our professional standing and delivers stimulating work for our talented people. STEVE NEEMEH Controls and Embedded Systems Manager, Meggitt Fluid Controls

the design, development, manufacture Military orders included a multi-million Our compact heat exchanger manufacturer, and support of the Airbus A350 fi re pound follow-on contract from which serves the oil and gas exploration detection systems. AgustaWestland to develop and produce market, won multi-million pound orders in the differential brake control system Australia and Malaysia. Meggitt Aircraft Braking Systems components for the Future Lynx helicopter continued to win signifi cant contracts on and an additional Eurofi ghter Typhoon new aircraft, winning virtually every major order. A contract from BAE Systems for braking system bid it entered. This the wheels, brakes and brake control included the wheel, brakes and brake system for the Mantis unmanned control system on the Gulfstream G650 jet. technology demonstrator reinforced our This was Meggitt’s biggest business leading position in wheel and brake aviation award to date and could provide technology for unmanned air vehicles. revenues worth hundreds of millions of dollars over the life of the programme. Meggitt Aircraft Braking Systems products were tested successfully on the fi rst fl ights In addition, advanced brake control of the Cessna CJ4; Phenom 300; Aermacchi technology, which includes individual M346; Gripen demonstrator; Tranche 2 wheel, brake-by-wire and anti-skid control Eurofi ghter Typhoon and the F35 STOVL for maximum stopping performance, aircraft. In October, a Bombardier test automatic braking and brake temperature aircraft fl ew entirely equipped with monitoring was selected for Gulfstream’s Meggitt’s electrically actuated carbon super mid-size G250 in a year in which the brake system (Ebrake®), a civil aviation 50th anniversary of the Gulfstream I was fi rst. Electric braking can improve dispatch celebrated. This aircraft was equipped with reliability; eliminates the risk of hydraulic Meggitt equipment and we remain the fl uid fi res; reduces aircraft operating and exclusive braking system supplier for all maintenance costs; and responds to the seven of Gulfstream’s current aircraft. fuel-effi cient, fl uid-free aspirations of the Dassault’s Falcon 900LX derivative will More Electric aircraft. We will continue to be equipped with Meggitt’s Falcon 900EX invest in developing Ebrake® technology integrated braking system. Hawker and friction materials in 2009. Beechcraft will be supplied with compact, Meggitt Aircraft Braking Systems continued long-life, lightweight main wheels and to improve its carbon materials – latest brakes for the high-performance Premier formulations improve longevity by 25% II. The integrated braking system win on the current standard – and it started on the Embraer Legacy 450/500 was the developing the friction materials fi rst programme to be executed by a technologies and know-how of its team from our newly-integrated US and combined operations in dual locations UK facilities. in the US and UK.

Business review 21 Meggitt PLC Report and accounts 2008 SENSING SYSTEMS

One of the world’s leading providers of high performance sensing and condition-monitoring solutions for high value rotating machinery and other assets.

IRSCHING 4 GAS TURBINE POWER GENERATOR The Irsching 4 is the test power plant for Siemens’ SGT-8000H, the world’s most powerful gas turbine. Meggitt’s condition- monitoring system is helping to optimise its operations and reduce emissions. PERCENTAGE OF REVENUE UNDERLYING OPERATING PROFIT GROUP REVENUE £ MILLIONS £ MILLIONS 267.8 46.7

MARKETS CAPABILITIES 23.0 • Civil aerospace: large, regional • High performance sensing in extreme and business jets, general aviation environments and space • Aero-engine and industrial gas turbine • Military: ﬁ xed wing and rotary aircraft, ships condition-monitoring systems • Energy • Medical, automotive, general industrial SENSING SYSTEMS CONTINUED

FINANCIAL HIGHLIGHTS GROWTH STRATEGY

• Continue to invest in high performance • Develop our energy segment business sensing technologies and develop our through continued innovation and 17.4% centres of excellence expanded geographical presence RETURN ON SALES • Combine them with advanced • Extend our complete integrated processing electronics, delivering product and service offering condition-monitoring systems that • Invest in strong programme reduce gas turbine operating costs, management, effective systems optimise maintenance regimes and engineering, smooth new product reduce pollution introduction processes and continuous 16.2% • Apply our products and expertise to improvement initiatives ORDER INTAKE UP adjacent aerospace applications and next-generation integrated vehicle health management solutions

KEY POINTS Divisional overview acquisition units (DMAU) for Eurocopter, the engine vibration monitor for the Meggitt Sensing Systems generates 27% • Total revenues up 14% to Learjet LJ85 and several protection and of its revenues from the aftermarket and £267.8 million (4% organic) condition monitoring systems for gas and 73% from original equipment. steam turbines and compressors in • Underlying operating profi t The division performed well in 2008 with Russia, India and China. of £46.7 million, up 13% continued demand from aerospace and The division’s UK facility became an energy customers for its state-of-the-art (9% organic) approved supplier to Pratt & Whitney condition-monitoring systems. These Canada when it won a ten-year contract • Return on sales, 17.4% products enable maintenance to be to develop and supply a new exhaust gas (2007: 17.6%) planned effectively and economically for temperature system for the PW200 family critical rotating machinery in aircraft and of helicopter engines. • Order intake up 16.2% on 2007 land-based power generation, optimising performance, helping to control emissions, Facilities in the US and Switzerland saving fuel and minimising the risk of continued to contribute to the safety of breakdown and brown-outs. troops in Iraq and Afghanistan, providing sensors to help prevent catastrophic Year-on-year revenue growth was mechanical failure in helicopters to negatively impacted as expected by the Sikorsky and Army Aviation. disposal of S-Tec (partially offset by the acquisition of Ferroperm) in January 2008. Meggitt Avionics received new orders for Revenue growth in MSS’ continuing its air data system and crash survivable businesses was 9%. memory units from Eurofi ghter Typhoon. An order for an integrated standby fl ight The Group boosted its energy interests in display with air data sensing for a Korean the autumn by opening a new Indian offi ce Aerospace Industries utility helicopter in Bangalore. Initially, the offi ce will be could extend to 200-plus rotorcraft over used as a platform from which to market the next ten years. There was strong Meggitt’s Sensing Systems products to demand for the helicopter air data system India’s coal-fi red power plants and nuclear installed on Boeing’s Apache attack facilities, with condition-monitoring helicopter—the Block III upgrade will systems topping the bill. Meggitt India will include Meggitt’s secondary fl ight display also be used to market energy-oriented from 2011 onwards, substantially products from across the Group. increasing its Apache shipset value. When its advanced airborne vibration Meggitt Avionics also delivered its threat monitor (AAVM) was selected for all new warning indicators and air data computers Boeing 737 next generation aircraft, the to the fi rst of the United States’ Joint division maintained its leading position in Cargo Aircraft—the twin-engine, mid- engine vibration monitoring technology. It range, medium-lift turboprop cargo plane went on to win the digital monitoring and known as the C-27J Spartan.

24 Business review Meggitt PLC Report and accounts 2008 ENERGY MARKETING POWERING UP IN INDIA

As a boy, I loved the old engineering of Bombay – Babcock and Wilcox boilers and Parsons Marine Steam Company turbines. Today, India has some of the world’s most modern power plants. Even so, demand is outstripping supply. To prevent breakdown and brown-out, operators must manage maintenance economically. That’s where Meggitt’s advanced engine health management systems come in. From our new facility in Bangalore, we’re selling them direct to customers, giving them exactly what they need and addressing market change ﬁ rst and fast. As we control our supply chain – raw materials, process electronics, control algorithms and support equipment – we can control cost and quality in a market where value and speed are fundamental to growth. Every time I go to India, there’s something new – roads, buildings and sophisticated shopping malls. In the next 15 years, she will be a very different country and the opportunity for all Meggitt’s energy products – ignition, heat management and control systems among them – will have grown exponentially. HITESH SHAH Director Business Development (Energy), Meggitt Sensing Systems

Increasingly tough operational, economic launched its innovative fuel gauging While market conditions are tough, and environmental constraints continued technology based on time domain MSS continues to be active in providing to drive demand for smart engineering refl ectometry. Primarily used in the sensors for the consumer goods and solutions from the energy sector. Siemens process control industries, this smart fuel other specialist diverse markets. adopted Meggitt Sensing Systems’ VM600 probe with integral self-diagnostic tools is During the year, Meggitt Sensing Systems monitoring systems for large-scale steam the fi rst to have been applied successfully committed £1 million, with Boeing, BAE and gas turbine operations. This included in civil aerospace. Systems and Rolls-Royce, to Cranfi eld Irsching 4, the test power plant for the An agreement between the division’s University’s condition-monitoring research world’s most powerful gas turbine. The facility in California and Boeing centre for integrated vehicle health division remains a major supplier to Commercial Airplane Group is enabling management. The centre aims to advance energy markets. Sales of sensors, which it to market its non-invasive pressure existing concepts of vehicle maintenance, are used to detect the onset of mechanical sensors for composite wing and airframe repair and overhaul, offering a total health failure, were particularly strong in the testing across the aerospace industry. check for high-tech, high value vehicles wind power generation sector. They are currently being used for testing such as aircraft, ships, high-speed trains The year proved productive for new products on the composite wings of the Boeing 787 and high-performance cars. and new markets. Meggitt Sensing Systems and other Boeing models. provided the advanced engine vibration Meggitt Sensing Systems’ latest acquisition, monitor for the Sukhoi commercial Ferroperm, continued its cutting-edge Superjet 100’s maiden fl ight and engine developments in high temperature vibration monitoring and engine interface ceramic sensor material that can function control units were qualifi ed on the ARJ21, close to aero-engine hot sections and the new Chinese commercial aircraft. The deliver the data needed to optimise engine monitoring units for the Boeing 787/ performance and control emissions. Its GEnx engine and the engine vibration piezoceramic thick fi lm, the only product monitoring units for the Boeing 777/GE90 of its kind that can be produced on an engine were certifi ed. The division also industrial scale, is being integrated with developed its new InSight® software, which the division’s microelectronic mechanical upgrades the content management system systems (MEMS). This should lead to a new on the VM600 condition monitor and now generation of miniaturised integrated covers applications in oil and gas and sensors and distributed sensor networks. hydro-electric power. Meggitt Sensing Systems’ French operation Meggitt Sensing Systems’ sensor and worked with Meggitt Avionics to develop ignition package for Rolls-Royce’s BR725 new generation inertial monitoring units engine for the Gulfstream G650 business based on smaller, cost-effective MEMS jet met the programme requirements with technology, extending the market for all units ready on time for the fi rst engine Meggitt’s new integrated compact test. From its facility in New Hampshire, secondary fl ight displays. USA, Meggitt Sensing Systems formally

Business review 25 Meggitt PLC Report and accounts 2008 DEFENCE SYSTEMS

An international training and combat systems business positioned to meet the challenges of modern conﬂ ict.

ABRAMS TANK Meggitt’s thermal management systems protect the crew and sensitive electronics in armoured vehicles such as the M1A2 SEP Abrams tank from heat overload. The Abrams also carries Meggitt’s precision- engineered ammunition autoloaders. PERCENTAGE OF REVENUE UNDERLYING OPERATING PROFIT GROUP REVENUE £ MILLIONS £ MILLIONS 131.1 19.1

MARKETS CAPABILITIES 11.3 • Military aircraft and ground vehicles • Integrated training systems • Armed forces, law enforcement and • Precision-mechanical combat systems security organisations DEFENCE SYSTEMS CONTINUED

FINANCIAL HIGHLIGHTS GROWTH STRATEGY

• Be the preferred supplier worldwide • Be the preferred supplier worldwide for integrated and networked live and for precision-mechanical systems for 14.6% virtual training packages combat platforms, sustaining leading RETURN ON SALES – supporting the lead systems positions in electronics cooling and integrators implementing armed ammunition-handling and selected forces training doctrine and providing specialist technologies deployable systems direct to users • Build systems, combining the division’s – fulﬁ lling the training needs of police core electrical, mechanical, controls forces and security organisations and software capabilities, to pursue – responding to homeland security larger contracts in our chosen markets 16.0% requirements ORDER INTAKE UP

KEY POINTS Divisional overview Meggitt’s UK facility now supplies contract logistics support for simulation systems Meggitt Defence Systems represents Total revenues up 15% to for the UK MoD and has received various around 29% of Meggitt’s overall military £131.1 million (6% organic) contracts to increase capability for the revenues and derives most of its revenues Dismounted Close Combat Trainer (DCCT), from the OE market (83%) and retrofi t Underlying operating profi t the British Army standard for small arms contracts. of £19.1 million, up 15% and combined arms training. Following the weak start to 2008 as (4% organic) During the year, Meggitt Training Systems anticipated, the division returned to growth Canada sold its 1,000th avionics unit to Return on sales, 14.6% in the second half, a pattern we expect to EADS defence and security division after (2007: 14.5%) repeat in 2009. Meggitt Defence Systems six years sole supply of fl ight and ground has also undergone considerable control systems for this customer’s Order intake up 16% on 2007 consolidation in the last two years, advanced jet drones. It also secured rationalising seven facilities to three to an order from the Canadian Navy for reduce cost and improve competitiveness. Hammerhead, a brand-new naval target With Lockheed Martin, Meggitt Training that can form part of a swarm threat Systems won the follow-on contract for simulation of up to 16 vehicles and the Reconfi gurable Vehicle System (RVS) replicate asymmetric small-boat attacks which is funded through to 2011. This US on ships. 2009 will see the introduction Army standard for virtual convoy training of more new products including a can simulate up to six military ground helicopter drone. vehicles and is a leadership development Development of Meggitt’s low-cost and team-building tool designed to instil supersonic sea skimming target, the a set of procedural responses to events second phase of which was completed in trainees, honing reactions to ambush, in 2008, continues with Meggitt taking IEDs and other convoy situations. the lead role in this three-phase, multi- Meggitt Training Systems in the UK national effort. delivered over 380 free-fl ying aerial As Meggitt Training Systems is the Banshee targets—a record—and provided premier weapons training systems a customised model for the UK Ministry provider in the United States, the United of Defence’s Combined Aerial Target Kingdom, Canada, Australia and New Service (CATS). The CATS programme Zealand, it aims to use this position as also received fi rst deliveries of Meggitt’s a platform for international growth in 2009. high-speed Voodoo aerial target, together with an attack helicopter target from our Meggitt Training Systems combined its Canadian facility and the Microdops live-fi re and simulated weapons training scoring system from our US-based combat facilities onto one newly constructed site support arm in California. near Atlanta, Georgia, positioning it for the

28 Business review Meggitt PLC Report and accounts 2008 INTEGRATION TRANSFORMING LAW ENFORCEMENT PRODUCTS

There is nothing better for a sales guy than products everybody wants. Now Meggitt Training Systems has united its live-fi re and virtual capability under one roof, I’ve got ground-breaking products to sell, like our new portable fi rearms training simulator. It goes in the trunk of a police cruiser and its low-cost laser insert fi ts into the barrel of a personal weapon in minutes. With 42,000 police offi cers in New York City alone, you can see why a low-cost, high performance plug-and-play trainer hits the spot. Our wireless live-fi re target system is another pioneering fi rst. It delivers exceptional accuracy and timing to the movement and presentation of targets. It’s more reliable than conventional systems and creates a superior training challenge. The right mix of virtual and live-fi re training develops the highest standards of marksmanship and judgement. We cover both, backed by one team of subject matter experts and engineers and common operating procedures. DAVID O’MEARA Director of Law Enforcement Sales, Meggitt Training Systems

development of integrated live and virtual It received a multi-year contract for the In 2008, Meggitt Defence Systems opened training packages. thermal management system on the M1A2 an offi ce in Abu Dhabi to support existing SEP Abrams tank from General Dynamics, and new business development across In December, it launched two new lines won the thermal management system for the United Arab Emirates and the wider targeting the law enforcement market. Its the long-range Infrared Search and Track Middle East region. advanced virtual trainer is a portable system (IRST) system for the F/A-18E/F fi ghter and that fi ts in the trunk of a police cruiser and was awarded the development contract with supports a wide range of fi rearms training. potential follow-on production for the The low-cost, high performance, plug-and- integrated thermal management system play system is seen as a convenient and for the US Army’s Multifunction Utility, and cost-effective way to train large municipal Logistics Equipment (MULE) unmanned police forces in the United States and has ground vehicle. As our thermal management international applications. systems for military ground vehicles are the Meggitt Training Systems’ pioneering only ones proven in combat, Meggitt Defense wireless live-fi re target system for indoor Systems is in a strong position to win ranges delivers exceptional accuracy and contracts on new platforms. timing to the presentation of targets while Meggitt Defense Systems’ automatic eliminating pulleys and cabling that are ammunition handling systems continue to prone to bullet damage. The product is lead the market, winning the development highly reliable and creates a superior contract for the 35 mm feed system for training solution to conventional systems. Krauss-Maffei Wegmann; successfully Both developments, supported by one team demonstrating the new Future Combat of subject matter experts and engineers System 120 mm autoloader; and test fi ring with common operating procedures, meet the new Cobra helicopter gun feed system. the law enforcement and security industry’s General Dynamics awarded Meggitt an growing interest in creating the optimal $18 million order for Stryker Mobile mix of virtual and live-fi re training. Gun System replenishers. Meggitt Defense Systems’ combat support The surface target vector scorer launched systems facility in California is similarly from the combat support side of Meggitt positioned for success, with a strong Defence Systems in 2008 was tested portfolio of contracts for development successfully at the Naval Surface Warfare programmes that could lead to healthy Centre at Dahlgren, Virginia. This tracks the production runs and retrofi t work for the trajectory of projectiles over a large area US Army’s fl eet modernisation programme. during weapons test and evaluation. In particular, the division’s mission-critical electronics cooling and automatic ammunition handling businesses continued to grow.

Business review 29 Meggitt PLC Report and accounts 2008 CORPORATE RESPONSIBILITY

MEGGITT IS COMMITTED TO:

• Upholding sound corporate • Supporting our local governance principles communities

• Providing a supportive, • Minimising the environmental rewarding and safe work impact of products and environment processes

• Conducting business • Acting as a responsible relationships in an supplier and encouraging our ethical manner contractors and suppliers to meet our standards

At Meggitt we recognise our Governance and compliance planning to achieve accreditation by 2010 responsibility to shareholders, In 2007, Meggitt’s Board approved a employees, customers, suppliers corporate responsibility (CR) policy setting • Meggitt is signatory to the Sustainable and the wider community. We out the values underpinning the way we Aviation Strategy of the Society of will comply with all relevant manage social, ethical and environmental British Aerospace Companies and issues. In 2008, it approved a Group policy is represented on its Environmental national laws and regulations encompassing our commitments to health Working Group and aim for continual and safety. This, with the Group In January 2008, Meggitt appointed its fi rst improvement of our fi nancial, environmental policy adopted in 2006, is Group Health, Safety & Environmental being championed by our recently appointed social and environmental Manager to bring a new strategic impetus Group Health, Safety & Environmental performance. to our performance on health, safety and Manager. These policies are published the environment. Meggitt already has on our website, www.meggitt.com. programmes in place at business unit level At Meggitt, effective governance and but we must ensure they are conducted compliance are key business enablers. in a Group context and comply with laws We devote signifi cant resources to ensuring and regulations that can have an impact our business units comply with our CR beyond individual business boundaries. policy. This is supported by a rolling Standardising and enhancing our programme of independent export environmental and health and safety compliance, environmental and health and management systems, policies and safety audits which identify and manage procedures will enable us to improve our compliance issues across all units. products, processes and performance, strengthening links in the chain that form Our Group Corporate Affairs Director our commitment to achieve the best oversees our CR programme and managing environmental, health and safety directors, presidents and general managers performance possible. are responsible for local implementation. In 2008, we convened intra-group health, Corporate responsibility in action safety and environment conferences to Health, safety and the environment help coordinate business unit preparation • 35% of sites audited by external for forthcoming legislation and share environmental consultants in 2008 best practice. This was supported by a new global health, safety and environment • 28% of sites audited by external health intranet site to increase information- and safety consultants in 2008 gathering and sharing. In 2009, we will • 69% of sites certifi ed for environmental pilot new all-employee health and safety management standard ISO14001 by the training in the UK, before launching a year-end with the remaining sites global standard for the whole Group.

30 Corporate responsibility Meggitt PLC Report and accounts 2008 GOVERNANCE DYNAMIC PROGRAMMES IN A GLOBAL CONTEXT

I know what it takes to run a plant safely. My fi rst US Navy role was to ensure our ship’s steam turbines were always ready and to design safety operating procedures in line with the United States’ fi rst OSHA regulations. Later, a career in environmental and maritime law showed me how companies get into trouble and the penalties that go with it. Some 20 years on, I went in-house to help an acquisitive corporation establish sustainable health, safety and environment programmes across the group. At Meggitt, dynamic programmes are less about reducing liability than ensuring the safest operations for our employees, raising morale and improving product quality and effi ciency. Now we have a Group strategy, we will be enlisting the skills and practices of our best people to deliver uniformly high environmental, health and safety standards within a global context. Our boundaries extend beyond individual sites. There must be no weak links in the chain in our quest for the best performance possible. GEORGE MARKULIS Group Health, Safety & Environmental Manager

Meggitt business units continued to practices more effi cient, reduced costs Meggitt is committed to maintaining full implement initiatives to reduce environmental and embodies a more holistic approach compliance with the laws and regulations impact and improve health and safety. to managing business risk. governing export control in all the jurisdictions in which it operates. The • Meggitt Fluid Controls, UK exceeded We are committed to working with all our Board formally adopted Meggitt’s export its target of reducing trichloroethylene businesses to develop a long-term strategy control policy in 2005 and appointed a consumption by 75% to less than one to minimise our environmental impacts Group Export Compliance Manager to tonne per year, aided by new automated and improve health and safety performance, oversee its implementation. In 2007, we aqueous cleaning plants with wash aided by the data we have collected from updated the policy, appointing an export water recycling systems. Group business units since 2006. Since the compliance manager for Europe and acquisition of K & F Industries Holdings • Meggitt Sensing Systems in New Asia and, in 2009, an export compliance in 2007, utilities consumption and waste Hampshire, US, installed a compactor manager for North America. generation has risen on an absolute for corrugated paper products which basis. In 2008, however, we reduced our Meggitt’s company-wide programme is should double recycling volumes and environmental impacts relative to rising based on the globally accepted model of completed a project to reduce liquid production (see Fig. 1). excellence outlined in the Nunn-Wolfowitz nitrogen consumption by 50%, recouping Task Force Report of 2000—the infl uential the investment in one year. In line with the development of the Group survey of export compliance best practice health, safety and environment function, • Meggitt Aircraft Braking Systems, UK —and incorporates the elements data collection and verifi cation processes replaced solvent paint strippers with identifi ed in guidance published by the are being improved. Some of our aqueous water re-circulating systems, US Government on effective compliance engineering processes cannot be reducing solvent use since 2007 by programmes. We achieve multiple levels substituted for those with less 60%. Its waste heat recovery system of accountability using fi ve key process environmental impact because of the should save around £21,000 per year. tools—assessment, compliance extreme environments in which our New paint spray booths are reducing improvement, verifi cation, corrective products are designed to operate. potential exposure to spray and action and audit—which are applied in a Our products’ reputation for safety and lowering noise levels. continuum. Plans arising from the review reliability is key to sales, so appropriate elements enable 16 sub-processes for • Meggitt Defense Systems, US achieved environmental targets will be set within 39 businesses to be tracked by managers ISO 14001 certifi cation for its this context. at all levels, including the executive environmental management systems Export compliance leadership team. In turn, Meggitt’s export in September 2008, a substantial • 60% of main sites completed control teams receive training and access achievement following the consolidation implementation of our export to key subject matter experts inside the of three Meggitt businesses into a compliance programme Group and from global trade compliance single operation. advisors, JP Morgan Trade Management • 34% of main sites audited by external • Our compact heat exchanger operation Consulting. Meggitt’s own export export compliance consultants in 2008 in Poole, UK implemented an integrated compliance website, a customised management system for health and • Quarterly North America and Europe database of training modules, forms, safety, environment and quality. The and Asia export compliance councils templates, regulations, editorial and combined system has made working convened company policy and procedures, is

Corporate responsibility 31 Meggitt PLC Report and accounts 2008 CORPORATE RESPONSIBILITY CONTINUED

FIG 1 KEY ENVIRONMENTAL METRICS FOR 2008 Full corporate responsibility dataset available on www.meggitt.com

2008 2007 Carbon dioxide emitted tonnes/£’000 revenue 0.10 0.12 Tonnes 111,165 107,389 Volatile organic compounds emitted tonnes/£’000 revenue 0.0002 0.0003 Tonnes 222 255 Water purchased and abstracted m3/£’000 revenue 0.76 0.94 m3 879,700 826,280 Non-hazardous waste recycled Tonnes/£’000 revenue 0.0023 0.0027 Tonnes 2,724 2,379 Hazardous waste generated Tonnes/£’000 revenue 0.0013 0.0014 Tonnes 1,560 1,193

comprehensive and well-respected by and we continue to receive commendations FIG 2 experts in the fi eld. and performance awards. EMPLOYEES BY LENGTH OF SERVICE (YEARS) Ethics • Meggitt Defence Systems Canada won 97.5% of employees have completed our an Exporter of the Year award from the 3,886 Less than 5 Code of Conduct training and during 2008 Economic Development Alliance of 1,340 5-10 we conducted a refresher course, Southeast Alberta, Canada. 829 10-15 supported by six “Ethical Moments” 458 15-20 • A Meggitt Sensing Systems facility in training fi lms on topics including 474 20-25 France was voted Best Quality Supplier confi dential information and bullying. 1,156 Over 25 of the Year from Turbomeca for the 8,143 The US-based Ethisphere Institute, which “world-class manufacture of sensors is dedicated to researching, creating and for severe environments”. sharing best practice in business ethics, • Meggitt Aircraft Braking Systems EMPLOYEES BY REGION compliance, sustainability, corporate continues to set new standards in governance and citizenship, surveyed performance, reliability and service, 2,341 UK 1,000 companies worldwide doing business earning Gulfstream Supplier of the Year 4,371 North America with the US government. It ranked Meggitt awards two years running. Meggitt 1,179 Mainland Europe second of the “Five Best Foreign Company Aircraft Braking Systems was also 252 Rest of world Ethics Programmes” and number one recognised by Embraer for “outstanding 8,143 in Europe. performance” supporting operators and In July 2008, Meggitt launched a policy and developing wheels and brakes for the protocols to strengthen the management Phenom 300, a new light executive jet. of sales representatives and intermediaries. • Meggitt Sensing Systems in Switzerland This places Meggitt at the forefront of EMPLOYEES BY DIVISION was voted Outstanding Supplier on the anti-corruption thinking and reinforces ARJ21 programme from the People’s the standards set by international treaties 4,892 Aerospace Republic of China AVIC I Commercial and national legislation. equipment Aircraft Company for the timely roll-out 850 Defence Customers and suppliers of engine monitoring and control equipment. systems Supplying safe, mission-critical products 2,319 Sensing • A Meggitt Fluid Controls operation in systems requires the highest standards of California and Meggitt Sensing Systems 82 Group performance, delivery and quality if we in New Hampshire were Defense Supply 8,143 are to sustain and win new business. Center Richmond Best Value Medallists. We promote a robust quality ethos and are Meggitt Fluid Controls won its tenth committed to encouraging our contractors consecutive gold medal and Meggitt and suppliers to adopt and implement Sensing Systems its fi fth silver. Both this approach. medals are awarded for scores of at Our relationships with aerospace and least 99 out of 100. defence customers are well established

32 Corporate responsibility Meggitt PLC Report and accounts 2008 VALUES SATISFYING EMPLOYEES

Over the year, I will have had a cup of tea with all our employees. I want to know how they feel about working at Meggitt and I want to improve that experience. It’s my job to foster and promote the values that make a business successful but everyone has to be engaged with their teams. We embrace lean manufacturing and continuous improvement initiatives on the shop ﬂ oor but this approach should pervade every function. That’s why every manager has an employee engagement action plan. Our formal annual appraisals are simply one of the conversations taking place each week between managers and teams on how best to get things done. It’s about solving problems with people, not for people. Our next employee survey will show whether the approach is working but I know already that sales, attendance and productivity are up. And the business feels better. No one is going to persuade me that an unhappy person is more productive than a happy one. BERNIE STEVENS General Manager, Meggitt Avionics

• Meggitt Safety Systems won the assessed using data collected from Meggitt Sensing Systems’ operation in Westinghouse Nuclear Services management profi ling. This combination California gave its employees and their Certifi ed Supplier Award. of on-line psychometrics and aptitude tests families free access to over 80 online is designed to identify appropriate roles courses ranging from supervisory training Business continuity and opportunities for existing staff and help to personal fi nance management. • 76% of Group sites have implemented select external candidates. During 2008, and embedded business continuity Local communities and many of Meggitt’s senior managers were plans with the remainder in the training charitable donations assessed and appointments made using stages of the programme Meggitt makes an important economic this process. The same management contribution to local communities. Its Recent acquisitions increased the model forms the basis of the review facility in Poole UK was recognised by percentage of sites in the training phase of process for all professional staff. the South West of England Regional our business continuity programme. The During the year, Meggitt’s fi rst leadership Development Agency as a ”Beacon” remainder of Meggitt’s sites have implemented programme was delivered to senior company signalling its status as a forward plans and are progressing through the managers over three week-long events, run thinking and ambitious business. The award more advanced stages of the programme. by Oxford University’s Saïd Business School is given only to those who can demonstrate

FIG 3 and supported by Meggitt’s management outstanding achievement across a range board. Content mirrored the primary of criteria. Meggitt scored highly on THE MEGGITT MANAGEMENT MODEL elements of the management model— innovative approaches to business STRATEGIC THINKING strategy, operations and the interpersonal processes and design and the use of dimension—and resulted in signifi cant human behavioural analysis for all staff. STRATEGY project plans being approved for execution Each business is responsible for by the Board. In 2009, a second leadership undertaking local charitable initiatives. programme will take place. Participants PLANNING AND CREATING The Meggitt Group supports charities and ORGANISING ALIGNMENT will be selected to achieve a balance of organisations relevant to our people and styles from different divisions, functions, our businesses. These include local hospitals, levels and geographic locations. LEADERSHIP hospices, schools and funding of the Many businesses have implemented Meggitt Trust, which is administered by DELIVERING ADAPTABILITY modern manufacturing processes. This the Community Foundation in Dorset, UK. RESULTS TEAM WORKING includes the business improvement team In 2008, we continued our sponsorship at Meggitt Fluid Controls, UK. It delivered under the Arkwright Scholarship Trust, lean manufacturing awareness training which encourages high calibre students OPERATIONAL INTERPERSONAL throughout the factory and worked with into engineering careers by awarding CAPABILITY SKILLS Coventry University to provide accredited scholarships over the A-level/Scottish Training and development academic modules. Higher academic years. There are In 2008, Meggitt launched a leadership numerous examples worldwide of We use E-learning tools to deliver training development programme. Working with signifi cant funding for health care and across the Group on topics such as ethics business psychologists, we developed research raised through the efforts of and business conduct and export control a model of management attributes (see dedicated Meggitt volunteers. and at business unit level on subjects Figure 3) against which individuals are relevant to specifi c site requirements. Corporate responsibility 33 Meggitt PLC Report and accounts 2008 BOARD OF DIRECTORS

SIR COLIN TERRY KBE CB TERRY TWIGGER PHILIP GREEN STEPHEN YOUNG FREng DL Chief Executive + Group Corporate Group Finance Director Non-Executive Chairman + Affairs Director

Sir Colin was appointed to Terry joined Meggitt in 1993 Philip joined Meggitt in 1994 Stephen was appointed to the Board in February 2003, and was appointed to the and was appointed to the the Board in January 2004. becoming Non-Executive Board as Group Finance Board in January 2001, He has held a number of senior Chairman on 1 July 2004. Director in 1995, becoming responsible for legal and ﬁ nancial positions including, He spent 37 years in the Royal Chief Executive in January compliance matters. He most recently, Group Finance Air Force, where he reached 2001. Before joining Meggitt, relinquished the role of Director of Thistle Hotels plc. the rank of Air Marshal. Since he spent 15 years at Lucas Company Secretary during Stephen also held the position retiring, he has held the Aerospace. He is a Chartered 2006. Previously, Philip spent of Group Finance Director of positions of Group Managing Accountant. 14 years at British Aerospace. the Automobile Association Director of Inﬂ ite Engineering He is a Fellow of the Institute and Group Financial Controller Services, Chairman of the of Chartered Secretaries and of Thorn EMI plc. He is a Engineering Council (UK), Administrators. Chartered Management President of the Royal Accountant. Aeronautical Society and the Council of European Aerospace Societies. He is President of the Soldiers, Sailors, Airmen and Families Association in MEMBERSHIP OF COMMITTEES Buckinghamshire where he is * Audit also a Deputy Lieutenant. He is + Nominations a Chartered Engineer. ø Remuneration

34 Board of directors Meggitt PLC Report and accounts 2008 SIR ALAN COX CBE PETER HILL CBE DAVID WILLIAMS DAVID ROBINS Non-Executive Director + Non-Executive Director * + ø Non-Executive Director * + ø Non-Executive Director * + ø

Sir Alan was appointed to the Peter was appointed to the David was appointed to the David was appointed to the Board in May 1996. He was Board in January 2004. He is Board on 13 December 2006. Board in January 2002 and previously Chief Executive Chief Executive of Laird PLC. He has held a number of became Senior Independent of ASW Holdings PLC and He previously held senior senior ﬁ nancial positions and Director on 1 March 2007. director of The Morgan management positions with in 1991 joined distribution and He was, until December 2000, Crucible Company plc from Invensys plc and BTR plc. outsourcing group Bunzl plc Chairman and Chief Executive 1995 until April 2004. Until Peter is a non-executive board as Finance Director where he of ING Barings, before which his resignation in July 2008, member of UK Trade & worked until retirement in he spent 18 years at Phillips he was Chairman of The Investment (UKTI) and was January 2006. He is currently & Drew and UBS, becoming Mountview Academy of a non-executive director of serving as Senior Independent Executive Vice President and Performing Arts. A member Oxford Instruments plc from Director at Taylor Wimpey Plc Regional Head of UBS Europe. of the Financial Reporting 1999 until May 2004. He is a and Mondi plc. He is also a He is Chairman of Henderson Council from 1995 to 1999, Chartered Engineer and holds non-executive director of TR Paciﬁ c Investment Trust Sir Alan is a Chartered an MBA. Tullow Oil plc and DP World PLC and Oriel Securities Ltd, Accountant and Chartered Limited, chairing the audit a director of two venture Management Accountant. committee at both. David is capital-backed companies and a Chartered Accountant. chairman of three charities.

Board of directors 35 Meggitt PLC Report and accounts 2008 FINANCIAL STATEMENTS 2008

37-50 CORPORATE GOVERNANCE 51-102 FINANCIAL STATEMENTS 103-105 INVESTOR INFORMATION

Statutory financial statements including the Financial calendar and supplementary independent auditors’ report information

37-40 Report of the directors 51 Independent auditors’ report 103 Five-year record to the members of Meggitt PLC 41-43 Directors’ statement on 104 Supplementary information corporate governance 52-94 Group accounts 105 Financial calendar and advisors 52 Consolidated income statement 44-50 Remuneration report 53 Consolidated balance sheet 54 Consolidated cash ﬂ ow statement 55 Consolidated statement of recognised income and expense 56-94 Notes to the ﬁ nancial statements

95-102 Company accounts 95 Independent auditors’ report to the members of Meggitt PLC 96 Company balance sheet 97-102 Notes to the ﬁ nancial statements of the Company

36 Financial statements Meggitt PLC Report and accounts 2008 REPORT OF THE DIRECTORS

The directors submit their annual report and the audited financial ACQUISITIONS AND DISPOSALS statements for the year ended 31 December 2008. The Group financial statements have been prepared in accordance with EU endorsed On 3 January 2008, Meggitt completed the disposal of S-TEC Inc. International Financial Reporting Standards (IFRSs), IFRIC interpretations (‘S-TEC’) to Cobham plc for a net consideration of £17.2 million. S-TEC and the Companies Acts 1985 and 2006 applicable to companies reporting designs, certifies and manufactures general aviation autopilots, supplying under IFRS. The Company financial statements have been prepared in original equipment manufacturers and the aftermarket. The business accordance with UK Generally Accepted Accounting Practice (UK GAAP). was no longer considered core to Meggitt’s current operations. On 7 January 2008 Meggitt acquired 100% of the share capital of PRINCIPAL ACTIVITIES AND BUSINESS REVIEW Ferroperm Piezoceramics A/S (‘Ferroperm’) for up to £9.8 million. Ferroperm is located in Kvistgaard, Denmark and is a world leader in Meggitt PLC is a public limited company, listed on the London Stock the manufacture of advanced piezo-ceramic materials for a range of Exchange, incorporated in England and Wales with registered number specialist sensor applications, such as vibration, dynamic pressure, 432989 and its registered office at Atlantic House, Aviation Park West, underwater acoustics and medical ultrasound. Bournemouth International Airport, Christchurch, Dorset, BH23 6EW. Meggitt PLC is the parent company of a Group whose principal activities SHARE CAPITAL AND CONTROL during the year were the design and manufacture of high technology products and systems for the aerospace, defence and other specialist The authorised share capital of the Company as at 31 December 2008 markets including energy, medical, industrial, test and automotive. together with details of shares issued during the financial year is shown in note 37 on page 86. The information contained in the following sections of the 2008 Report and Accounts is incorporated into this directors’ report by reference, to the extent As at 31 December 2008 there were 665,597,284 ordinary shares in issue. that it meets the requirements of Section 417 of the Companies Act 2006: (i) A further 6,126 ordinary shares have been issued between 31 December Business Review and Market Review (pages 6 to 29) outlining the Group’s 2008 and 27 February 2009 as a result of the exercise of a share option. activities and future plans in more detail and its key risks and uncertainties; The ordinary shares are listed on the London Stock Exchange. and (ii) the Corporate Responsibility Report (pages 30 to 33), which includes The rights and obligations attaching to the Company’s ordinary shares are information about environmental matters, the Group’s employees and social set out in the Company’s Articles of Association. A copy of the Articles of and community issues, including information about the policies the Group Association is available for inspection at the registered office. The holders has adopted in these areas. of ordinary shares are entitled to receive the Company’s report and accounts; to attend and speak at General Meetings of the Company; GROUP RESULTS to appoint proxies and to exercise full voting rights. Profit before taxation amounted to £119.3 million (2007: £105.4 million). There are no restrictions on transfer, or limitations on the holding of The profit attributable to ordinary shareholders amounted to £99.1 million ordinary shares and no requirements for prior approval of any transfers. (2007: £89.3 million) which after dividends of £55.8 million (2007: £42.2 There are no known arrangements under which financial rights are held million) resulted in a retained profit for the financial year of £43.3 million by a person other than the holder of the shares and no known agreements (2007: £47.1 million). on restrictions on share transfers or on voting rights. Shares acquired through Company share schemes and plans rank pari DIVIDENDS passu with the shares in issue and have no special rights. The directors recommend the payment of a final dividend of 5.75p net per ordinary 5p share (2007: 5.75p) to be paid on 8 May 2009 to those members on the register at close of business on 13 March 2009. An interim dividend of 2.70p (2007: 2.45p) was paid on 3 October 2008. If the final dividend as recommended is approved the total ordinary dividend for the year will amount to 8.45p net per share (2007: 8.20p). Dividends are paid to shareholders net of a non-refundable tax credit of 10%. Shareholders liable to higher rate income tax will have additional tax to pay. Shareholders will be offered a scrip dividend alternative under the share dividend plan in respect of the proposed final dividend. During 2008 the Company made available the Meggitt PLC share dividend plan in respect of the dividends paid in July 2008 (being the final dividend for 2007) and in October 2008 (being the interim dividend for 2008). The amount of cash dividend necessary to give an entitlement to one new ordinary share was fixed at 263.45p and 223.90p respectively.

Financial statements 37 Meggitt PLC Report and accounts 2008 REPORT OF THE DIRECTORS Continued

SHARE CAPITAL AND CONTROL CONTINUED SUBSTANTIAL SHAREHOLDINGS The Company has disclosed significant direct or indirect holdings and this As at 27 February 2009 the Company had been notified under the information is published on a Regulatory Information Service and on the Disclosure and Transparency Rules of the Financial Services Authority Company’s website. (“FSA”) of the following substantial interests in the issued ordinary shares of the Company requiring disclosure: Rules about the appointment and replacement of directors of the Percentage of Company are contained in the Articles of Association and changes total voting rights to the Articles of Association must be submitted to the shareholders attaching to the issued ordinary for approval. The powers of directors are as set out in the Memorandum Direct voting Indirect voting share capital of and Articles of Association of the Company and are governed by applicable rights* rights* the Company legislation in force from time to time. At each Annual General Meeting Prudential plc 61,579,428 - 9.25 of the Company, the shareholders are requested to renew the directors’ Bailie Gifford & Co - 34,138,890 5.13 powers to allot securities in the Company up to a specified value and also Legal & General Group plc 25,966,967 - 3.90 to renew the directors’ powers to allot securities without the application Standard Life Investments Ltd 22,153,694 3,769,560 3.89 of pre-emption rights up to a specified value in accordance with Article 4 of the Articles of Association. The Company may, as and when required, * One voting right per ordinary share. seek authority from the shareholders at the Annual General Meeting to purchase its own shares. SHARE INCENTIVE PLAN The Group has the following significant facility agreements that include The Trustee of the Share Incentive Plan has been allocated £0.7 million change of control provisions which, in the event of a change in ownership from 2008 profits to acquire ordinary shares in Meggitt PLC for eligible of the Company, could result in renegotiation or withdrawal of these employees (2007: £0.8 million). facilities: a USD 680m revolving credit agreement dated July 2004, a USD 1,420m revolving credit agreement dated March 2007 and a USD 500m DIRECTORS AND THEIR INTERESTS revolving credit agreement dated July 2008. There are a number of other long-term commercial agreements that may alter or terminate upon a The directors who served during the year were: Sir Colin Terry, change of control of the Company following a takeover bid. None is Mr T Twigger, Sir Alan Cox, Mr P E Green, Mr P J Hill, Mr D A Robins, considered to be significant in terms of their potential impact on the Mr D M Williams and Mr S G Young. business of the Group as a whole. In accordance with Article 75 of the Company’s Articles of Association, The service contracts for the executive directors state that if at any time Mr P E Green, Mr P J Hill and Mr S G Young retire by rotation at the during their employment there is a change of control in the Company, forthcoming Annual General Meeting and being eligible offer themselves the executive director may elect to terminate their employment within for re-election. Sir Alan Cox retires at the forthcoming Annual General 6 months of that change of control and will be entitled to receive Meeting in compliance with A.7.2 of the Combined Code (2006), by reason compensation for loss of office from the Company. The compensation of his having served as a director for more than 9 years, and being eligible, would be the annual remuneration plus the value of benefits for the offers himself for re-election. unexpired notice period less 5%. Details of directors’ contracts and their interests in the ordinary shares The Company does not have any agreements with the non executive of the Company are as shown in the Remuneration Report on page 44. directors or any other employees that would provide compensation None of the directors has or has had at any time during the financial year for loss of office or employment resulting from a takeover except that a beneficial interest in any material contract relating to the business of provisions of the Company’s share schemes and plans may cause options the Group other than service contracts. and awards granted to employees under such schemes and plans to vest The directors have the benefit of “qualifying third party indemnity on a takeover. provisions” for the purposes of section 236 of the Companies Act 2006 Following the amendment of the Company’s Articles of Association by pursuant to the Company’s Articles of Association. A copy of the Articles of a special resolution passed at the Company’s 2008 AGM, the Company Association is available for inspection at the Company’s registered office. adopted a new procedure for the disclosure, review, authorisation and management of directors’ conflicts of interest and potential conflicts of CORPORATE RESPONSIBILITY interest in accordance with the provisions of the Companies Act 2006 with effect from 1 October 2008. The new procedure was summarised in the The Board takes regular account of the significance of social, environmental explanatory notes to the Notice of the Company’s 2008 AGM, is included and ethical matters and a report giving a full update on activities and in the Company’s Articles of Association and has been adhered to by the achievements during 2008 can be found on pages 30 to 33. The following Board since 1 October 2008. In deciding whether to authorise a conflict specific matters fall under the broad definition of corporate responsibility: or potential conflict 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, may be reviewed at any time and will be reviewed formally by the Board on an annual basis.

38 Financial statements Meggitt PLC Report and accounts 2008 REPORT OF THE DIRECTORS Continued

People Ethics and business conduct The Company is aware of the importance of two-way communication with The Group has an Ethics and Business Conduct Policy and a Code of employees. Its business units communicate and consult at site level using Conduct, which were revised in September 2007. All employees have the best methods as determined by local needs and industry practice. received a copy of the Code of Conduct and follow up training, which is In addition employees receive copies of the Meggitt Review, a magazine refreshed on a regular basis. Ethics and business conduct is reviewed providing details of notable events and achievements in all companies of regularly by a committee of the Board. the Group. Senior Group executives meet together regularly and additionally meet both formally and informally with members of the management Community relations and charitable donations teams of other Group business units. Charitable donations made during the year ended 31 December 2008 The directors believe that employees should be encouraged to amounted to £0.1 million (2007: £0.1 million). In addition, Meggitt PLC become shareholders in order to enable their active participation in gave financial assistance to local organisations amounting to £14,000 and commitment to the Group’s success. This policy has been pursued (2007: £20,000). There are also many examples throughout the Group for all UK employees through the Share Incentive Plan and the of non-financial assistance being provided to local organisations. Sharesave Scheme. Payment policy It is estimated that, when the current year’s allocation has been made by the Trustee under the Share Incentive Plan, approximately 2,000 UK The Company’s policy is to seek to comply with the terms of payment employees will hold shares in the Company. The number of employees agreed with a supplier and where terms are not negotiated, the Company contributing to the Sharesave Scheme at 31 December 2008 was 1,017. endeavours to adhere to the supplier’s standard terms. The Company’s creditor days at 31 December 2008 were 27 days (2007: 30 days). Senior executives are also granted awards under the Executive Share Option Scheme and the Equity Participation Plan, both of which operate Political contributions throughout the Group, details of which can be found in the Remuneration Report on page 44. In accordance with the Group’s policy, no contributions were made to EU political parties or EU political organisations (2007: £Nil) and no Health and safety at work EU political expenditure exceeding £200 was incurred in the year by the Company or any of its subsidiaries (2007: none above £200). The Company continues to carry out its responsibility for securing the health, safety and welfare at work of employees of the Company and its A contribution to a non-EU organisation with political objectives of subsidiaries and for protecting other persons against risks to health and £15,300 (2007: £Nil) was made by a non-EU business during the year safety arising out of, or in connection with, the activities at work of those (2007: Nil) and in accordance with the Group’s policy on non-EU employees. Every reasonable effort is made to provide safe working political contributions, was approved by a Committee of the Board. conditions and in addition, protective equipment is provided when necessary and safety training is made available. In January 2008 the Board approved a new Group Health and Safety Policy, and a Group Health, Safety and Environmental Manager was appointed.

Equal opportunities The Group has a policy supporting the principle of equal opportunities in employment and opposing all forms of unlawful or unfair discrimination.

Disabled employees It is Group policy to give full and fair consideration to applications made by disabled people, to continue wherever possible the employment of staff who become disabled and to provide opportunities for the training, career development and promotion of disabled employees.

Financial statements 39 Meggitt PLC Report and accounts 2008 REPORT OF THE DIRECTORS Continued

RESEARCH AND DEVELOPMENT STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Group recognises the importance of investing in research and The directors are responsible for preparing the Annual Report, the development programmes which bring innovative improvements to the Directors’ Remuneration Report and the Group’s and the Company’s Group both in the products supplied to the consumer and in production financial statements in accordance with applicable law and regulations. techniques. Including amounts funded by customers, expenditure on Company law requires the directors to prepare financial statements for research and development amounted to £78.8 million (2007: £70.0 each financial year. Under that law the directors have prepared the million). Excluding amounts funded by customers, expenditure on Group’s financial statements in accordance with IFRSs and the Company’s research and development amounted to £59.4 million (2007: £52.9 financial statements and the Directors’ Remuneration Report in million), of which £23.7 million (2007: £22.4 million) was capitalised in accordance with applicable law and with UK GAAP. The Group’s and accordance with the Group’s accounting policy (see note 2 of the Group’s Company’s financial statements are required by law to give a true and fair financial statements). view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year. FINANCIAL RISK MANAGEMENT In preparing those financial statements, the directors are required to: The Group’s policies on financial risk management are set out in note 3 of the Group’s financial statements. • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; DETAILS OF RESOLUTIONS TO BE PROPOSED AT THE • state that the Group’s financial statements comply with IFRSs, and with regard to the Company’s financial statements that applicable ANNUAL GENERAL MEETING UK Accounting Standards have been followed, subject to any material Details of the Annual General Meeting to be held on 23 April 2009, and departures disclosed and explained in the financial statements. explanations of the resolutions to be proposed, appear in the separate The directors are responsible for keeping proper accounting records that Notice of Annual General Meeting enclosed with this report. In addition disclose with reasonable accuracy at any time the financial position of to the ordinary business of the meeting, shareholders’ consent will the Group and the Company and enable them to ensure that the Group’s be sought to: (i) approve the Remuneration Report; (ii) increase the financial statements comply with the Companies Acts 1985 and 2006 and authorised share capital and renew the authority of the directors to issue Article 4 of the IAS Regulation and the Company’s financial statements shares under Article 4 of the Company’s Articles of Association in and the Directors’ Remuneration Report comply with the Companies Act accordance with latest guidance from the Association of British Insurers; 1985. They are also responsible for safeguarding the assets of the Group (iii) approve payments to organisations of no more than £60,000 in total, and the Company and hence for taking reasonable steps for the which might inadvertently be interpreted as donations to political prevention and detection of fraud and other irregularities. organisations under the Political Parties, Elections and Referendums Act 2000 (as amended by the Electoral Administration Act 2006), although it is The directors are responsible for the maintenance and integrity of the not the policy of the Company to make donations to political parties and company’s website. Legislation in the United Kingdom governing the the directors have no intention of changing that policy, neither do they preparation and dissemination of financial statements may differ from intend to make any such donations; (iv) approve the convening of general legislation in other jurisdictions. meetings on 14 clear days notice in accordance with the Company’s Each of the directors, whose names and functions are listed in the Board Articles of Association, notwithstanding the anticipated implementation of directors on pages 34 and 35 confirms that, to the best of their in the UK of the EU Shareholders’ Rights Directive; and (v) amend the knowledge: Meggitt 2005 Executive Share Option Scheme. • the Group financial statements, which have been prepared in AUDITORS accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and PricewaterhouseCoopers LLP have expressed their willingness to • the Directors’ report, Business review on pages 10 to 29, including continue in office as auditors and a resolution to reappoint them will be Risks and uncertainties on pages 15 to 17 include a fair review of the proposed at the forthcoming Annual General Meeting. development and performance of the business and the position of the Group, together with a description of the principal risks and DISCLOSURE OF INFORMATION TO AUDITORS uncertainties that it faces. As at the date of this report, as far as each director is aware, there is no By order of the Board relevant audit information of which the Company’s auditors are unaware, and each director has taken all the steps that ought to have been taken as a director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

M L Young Company Secretary 2 March 2009

40 Financial statements Meggitt PLC Report and accounts 2008 DIRECTORS’ STATEMENT ON CORPORATE GOVERNANCE

STATEMENT OF APPLIANCE OF THE PRINCIPLES IN The Nominations Committee consists of Sir Colin Terry (Chairman), THE COMBINED CODE Sir Alan Cox, Mr P J Hill, Mr D A Robins, Mr D M Williams and Mr T Twigger. The Committee considers any new appointments to The Company has applied the Principles of Good Governance set out the Board but all directors are consulted and the decision to appoint is in Section 1 of the Combined Code on Corporate Governance (issued in taken by the Board as a whole. All directors are subject to election by 2006) as reported in the Statement of Compliance on page 43. Further shareholders at the first Annual General Meeting after their appointment explanation of how the principles have been applied is set out below and, and to re-election thereafter at intervals of no more than three years. in connection with Directors’ remuneration policies, and total packages, In compliance with Combined Code requirements, Sir Alan Cox will be are contained in the Remuneration Report on page 44. subject to annual re-election in 2009 and each subsequent year. The Board has approved written terms of reference for the Committee BOARD COMPOSITION which are available on the Company’s website. The Board considers it has a good balance of executive and non executive directors, is of a size and includes the skills and experience appropriate THE BOARD, ITS COMMITTEES AND PROCEEDINGS for the requirements of the business. The Board comprises a non The full Board met on eight occasions during the year and these meetings executive Chairman, Sir Colin Terry, a Chief Executive, Mr T Twigger, were attended by all directors, except that Mr D M Williams was excused two other executive directors and four non executive directors. from one meeting. The Board regularly receives reports from the Chief The senior independent non executive director is Mr D A Robins. Executive on the Group’s activities, from the Group Finance Director on The senior independent non executive director is available to shareholders financial performance and treasury matters and from the Group Corporate if they have concerns which contact through the normal channels Affairs Director on legal and compliance issues. has failed to resolve or for which such contact is inappropriate. Strategic issues and other items (including such matters as capital The independent non executive directors are considered by the Board structure, financial reporting and controls) are considered in line with to be Mr P J Hill, Mr D A Robins and Mr D M Williams. a schedule of matters reserved for the decision of the Board. If a decision Sir Alan Cox, is not judged to be independent under the Combined Code is not reserved for the Board then authority lies, in accordance with an by virtue of his having been appointed for longer than nine years. Whilst authorisation policy, with one of the Finance Committee of the Board, Sir Alan Cox is no longer regarded as independent, the Board considers the Chief Executive, an executive director or the managing directors of that his extensive experience in industry and other organisations makes the individual business units. There were no circumstances arising during him a valuable member of the Board. Biographical and other relevant the year where it was necessary to record unresolved concerns in the information on directors submitted for re-election is provided in the Board’s minutes. Notice of Annual General Meeting. The Chairman talks with and holds meetings on an informal basis with The roles of the Chairman and Chief Executive are separate and there is the other non executive directors without the executives present. a clear division of responsibilities which has been approved and agreed Committee membership, number of formal meetings held during 2008 in writing by the Board. Sir Colin Terry met the independence criteria and attendance is shown in the following table: on appointment as Chairman on 1 July 2004. No. of The Board of Directors retains full and effective control of the Group and meetings No. of during meetings is collectively responsible for the Group’s success through its leadership. year attended It sets the strategy, ensures appropriate resources are in place and Audit reviews performance on a regular basis. The Board is responsible for Mr D M Williams (Chairman) 3 3 setting the Group’s values and standards and for ensuring its obligations Mr P J Hill 3 3 to shareholders, employees and others are met. Mr D A Robins 3 3 The Chairman is responsible for leading the Board and for ensuring Remuneration its effectiveness. Accurate, timely and clear information is provided to Mr D A Robins (Chairman) 5 5 all directors and the Chairman is satisfied that effective communication, Mr P J Hill 5 5 principally by the Chief Executive and Group Finance Director, is undertaken Mr D M Williams 5 4 with the shareholders. The Chairman facilitates the contribution of non executive directors and the relationship between them and the executive Nominations directors. The non executive directors play a full part by constructively Sir Colin Terry (Chairman) 1 1 challenging and contributing to the development of strategy. Sir Alan Cox 1 1 Mr P J Hill 1 1 The performance of management is monitored, as is the integrity of Mr D A Robins 1 1 financial information and effectiveness of financial controls and risk Mr D M Williams 1 1 management systems. The non executive directors are responsible Mr T Twigger 1 1 for determining appropriate levels of remuneration for the executive directors and have an important role in the appointment of new directors. The terms and conditions of appointment of non executive directors are available for inspection. Their letters of appointment set out the expected time commitment required and, on appointment, their other significant commitments were disclosed along with the time involved.

Financial statements 41 Meggitt PLC Report and accounts 2008 DIRECTORS’ STATEMENT ON CORPORATE GOVERNANCE Continued

INFORMATION AND PROFESSIONAL DEVELOPMENT In order that the Board can review the effectiveness of the system of internal control, the following procedures are in place: The Board is supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. 1. The Board receives regular reports at Board Meetings on the state of the business from the Chief Executive and the Group Finance Director On joining the Board new directors receive an appropriate induction to and regularly receives a report on legal and compliance activities from the business. Major shareholders have the opportunity to meet new the Group Corporate Affairs Director. non executive directors should they wish to do so. 2. The Audit Committee meets regularly and reviews the effectiveness Directors are encouraged to update their skills regularly and their of the internal control environment of the Group. At these meetings knowledge and familiarity with the Group is facilitated by access to senior it receives reports from the external auditors and the internal audit management, receiving reports on the business and visits to the Group’s department. Internal audit visits to operating units are planned using operating facilities. Resources are available to directors for developing a risk model. and updating their knowledge and capabilities. 3. The Board has an Ethics and Export Compliance Committee which The Board of Directors has established a procedure for all directors to reviews these areas of compliance on a quarterly basis. take independent professional advice at the Company’s expense where they judge it necessary. Committees are provided with sufficient resources 4. Annually a review of the risk environment and the Group’s key risks to undertake their duties. All directors have access to the advice and is presented to the Board for their consideration. services of the Company Secretary who is responsible to the Board for 5. Every month, each business submits detailed operating and financial ensuring that Board procedures are complied with and that there is a reports covering all aspects of their performance. These are reviewed good information flow within the Board. The appointment and removal and, subject to materiality, issues are communicated to the of the Company Secretary is a matter for the Board as a whole. The Management Board and the Board. Company maintains appropriate Directors’ and Officers’ insurance. 6. On an annual basis, the managing director of each business provides PERFORMANCE EVALUATION written confirmation that the business for which he is responsible has been in compliance with the Group Procedures Manual. In January 2009 the Board conducted a self-evaluation assessment. 7. Annually, the Board receives a report on the insurance coverage in The Chairman led a review and discussion to consider the Board’s place and the risks which remain uninsured. performance against some high level objectives and its own terms of reference and its performance against these. The Board was satisfied The process for identifying, evaluating and managing the significant risks with its effectiveness. The Audit and Remuneration Committees have also faced by the Group is as follows: considered their own performance during the year. The performance of 1. Following a series of risk workshops facilitated by risk professionals individual directors has been considered by the Chairman and Chief at business, divisional and Group level to identify and analyse the key Executive in discussion with other non executive directors. The non risks faced by the Group, the Board reviewed the list of those risks executive directors have considered the performance of the Chairman, and the mitigation plans. These risks are regularly reviewed by the taking into account the views of the executive directors. individual operating businesses, by divisional management and then, by exception, by the Management Board. FINANCIAL REPORTING 2. There is a regular review of the performance of each business These financial statements contain an explanation of the directors’ undertaken by the executive directors and senior Group management. responsibility for the preparation of the accounts and a statement by the auditors concerning their responsibilities. The directors also report 3. There is a Group Procedures Manual, the purpose of which is to that the business is a going concern. establish appropriate authority levels throughout the Group to cover certain items of expenditure, financial commitments and other INTERNAL CONTROL matters, which are regarded as essential in order to ensure that overall financial control is maintained throughout the Group. The Board maintains a sound system of internal control to safeguard The Group Procedures Manual is subject to regular review and update. shareholders’ investment and the Group’s assets. The system is designed to manage rather than eliminate the risk of failure to achieve business 4. There is a comprehensive insurance programme. objectives, and can only provide reasonable assurance against material 5. There are programmes for business continuity, health and safety, misstatement or loss. The Board confirms full implementation of the environment, export compliance and ethics. Financial Reporting Council’s updated Turnbull guidance on Internal Control (2005). 6. There is an on-going programme of assurance activities including internal audit, external audit, external tax compliance review, environmental audits, health and safety audits, property risk reviews and buildings surveys and export regulation compliance reviews.

42 Financial statements Meggitt PLC Report and accounts 2008 DIRECTORS’ STATEMENT ON CORPORATE GOVERNANCE Continued

The Board confirms that this process was in place for the year under The views of shareholders are reported to the Board by the Chief Executive. review and up to the date of approval of the financial statements. The Chairman and other non executive directors are available to attend meetings with shareholders if they are requested to do so. In addition to the The Board considers that there is considerable comfort in the fact that Chief Executive’s regular reports, directors may develop an understanding the Group’s cash inflow from operating activities represented 100% of of the views of major shareholders from regular reports by the Company’s underlying operating profit in 2008. brokers to the Board and attendance at analysts’ briefings as required. Analysts’ notes on the Company are made available to all directors. AUDIT COMMITTEE AND AUDITORS The Audit Committee is appointed by the Board. The Committee has CONSTRUCTIVE USE OF THE ANNUAL GENERAL three members, all of whom are considered to be independent. The MEETING Chairman of the Committee is Mr D M Williams. The Board is satisfied that amongst the Committee’s members there is recent and relevant The Board uses the Annual General Meeting as an occasion for financial experience. The Board has approved written terms of reference communication with its shareholders. Proxy appointment forms for each for the Committee which were updated in January 2009 and are available resolution provide shareholders with the option to direct their proxy to on the Company’s website. vote either for or against the resolution or to withhold their vote. All proxy votes for, against and withheld are counted by the Company’s Registrars During 2008 the Committee met on three occasions. The external auditors and the level of voting for, against and withheld on each resolution is attended these meetings to discuss the scope and the final results of made available at the end of the meeting and on the Company’s website. the 2007 audit in detail (which included the main risks facing the Group), The proxy form and the announcement of the results of a vote make it the strategy for the 2008 audit, the “hard close” results of the 2008 audit clear that a vote withheld is not a vote in law and will not be counted in along with any other items which the auditors or the non executive the calculation of the proportion of votes for and against the resolution. directors wished to discuss. The Audit Committee also reviewed the Separate resolutions are proposed at the Annual General Meeting on internal control environment of the Group and received reports from substantially separate issues and there is a resolution relating to the internal audit as described above. The Committee reviews at each financial statements. meeting the activities of the internal audit function and regularly reviews its effectiveness. In addition the audit committee monitors the integrity The respective Chairmen of the Audit, Remuneration and Nominations of the financial statements of the Group, formal announcements relating Committees are available at the Annual General Meeting to respond to to the Group’s financial performance and reviews significant financial questions and it is usual for all other directors to attend. reporting judgements contained in them. It is the intention of the Board that notice of the Annual General Meeting The Committee has primary responsibility for recommending the and related papers should be sent to shareholders at least 20 working appointment, reappointment and removal of the external auditors. days before the meeting. The Company places great importance on the independence of its auditors and, together with them, is careful to ensure their objectivity STATEMENT OF COMPLIANCE WITH THE PROVISIONS is not compromised. The Committee is responsible for agreeing the fees OF THE COMBINED CODE to be paid to external auditors in respect of their services as auditors. The Board confirms that throughout the year ended 31 December 2008 The Company’s general policy in respect of other non-audit fees is: the Company has complied with the provisions set out in Section 1 of • audit related services: the external auditors would be invited to the 2006 Combined Code on Corporate Governance with the following undertake those services which they are required to, and most suited exceptions: to, perform; a) A.3.2 At least half of the Board, excluding the Chairman, does not • taxation: the Company’s principal tax advisor is Deloitte & Touche comprise independent non executive directors. Whilst Sir Alan Cox is LLP; and no longer regarded as independent owing to his appointment as a non • consulting: the Company’s policy is not to employ its external auditors executive director for more than nine years, the Board considers that for general consulting work where this could impair their his extensive experience in industry and other organisations makes him independence or objectivity. a valuable member of the Board. The Audit Committee is required to approve any fees to the external b) A.4.1 A majority of members of the Nominations Committee should auditors in excess of £0.1 million. be independent non executive directors and this was not the case during An Ethics Line exists which enables employees to raise any concerns 2008. Sir Alan Cox is no longer regarded as independent owing to his about possible improprieties in matters of financial reporting or appointment as a non executive director for more than nine years. As a otherwise. These arrangements allow for proportionate and independent result, the Committee is made up of six members, of whom three are investigation and for appropriate follow-up action. independent non executive directors. The Board considers that Sir Alan Cox’s extensive experience in industry and other organisations makes him DIALOGUE WITH INSTITUTIONAL SHAREHOLDERS a valuable member of the Committee. The Company values its dialogue with both institutional and private investors. Effective communication with fund managers, institutional GOING CONCERN investors and analysts is promoted by way of meetings involving the Chief After making enquiries, the directors have formed a judgement, at the Executive and Group Finance Director. This encompasses such issues as time of approving the financial statements, that there is a reasonable strategy, performance and policy. During the year the Company appointed expectation that the Company has adequate resources to continue in a Group Head of Corporate Communications and Investor Relations to operational existence for the foreseeable future. For this reason, the enhance communications with investors. directors continue to adopt the going concern basis in preparing the financial statements. This statement of going concern also constitutes part of the Business Review on pages 10 to 29.

Financial statements 43 Meggitt PLC Report and accounts 2008 REMUNERATION REPORT

This report has been prepared in accordance with the Directors’ • benefits which include membership of the Executive Pension Plan and Remuneration Report Regulations 2002 (“the Regulations”). It also meets a pensions allowance, a fully expensed car and free medical insurance the relevant requirements of the Listing Rules of the FSA and describes how for the individual and their immediate family. the Board has applied the 2006 Combined Code on Corporate Governance The share schemes include a significant proportion of management relating to directors’ remuneration. As required by the Regulations, a co-investment under the Meggitt Equity Participation Plan 2005. They are resolution to approve the report will be proposed at the Annual General intended to: Meeting of the Company at which the financial statements will be considered. • reward and incentivise growth; The Regulations require the auditors to report to the Company’s members • provide a strong link to performance; and on the audited information of the Directors’ Remuneration Report and to • take account of and, as far as possible, to follow corporate governance state whether in their opinion that part of the report has been properly best practice. prepared in accordance with the Companies Act 1985 (as amended by the Regulations). The report has therefore been divided into separate sections In 2008, Towers Perrin conducted a comprehensive review of executive for Unaudited and Audited Information. remuneration, including the operation of the existing long-term incentive plans. Recommendations for the incentive plans in 2009 are intended to UNAUDITED INFORMATION be appropriate to current market conditions and sensitive to guidelines issued by institutional investors’ representative organisations in recent Remuneration Committee months on executive pay. Changes to the operation of the share schemes are noted in the relevant sections. The Remuneration Committee is appointed by the Board. It is responsible for setting remuneration packages, including pension arrangements, The policy of the Remuneration Committee is to offer executive directors for all executive directors and senior management and for agreeing the contracts requiring one year’s notice from the Company. Should the fees for the Chairman. All new long-term share schemes are submitted Company terminate the contracts in breach of the contract terms then to shareholders for approval. The Finance Committee of the Board is damages would be due which are equivalent to remuneration for the responsible for setting the fees of the non executive directors within the unexpired period of notice less 5%. limits set in the Articles of Association. No director is involved in deciding his own remuneration. Basic salary The Committee consists of three non executive directors: Mr D A Robins An individual’s basic salary is reviewed by the Committee to take (Committee Chairman), Mr P J Hill and Mr D M Williams, all of whom are effect from 1 January of each year and on any significant change of considered to be independent. None of the Committee has or has had any responsibility. In deciding levels of salary the Committee takes into personal financial interests, conflicts of interests arising from cross- account advice from Towers Perrin, data from appropriate third party directorships or day-to-day involvement in running the business. surveys, general market conditions, as well as salary increases elsewhere in the Group. Generally, salaries should be around the The Committee follows schedule A of the Combined Code, “Provisions median level for appropriate benchmark companies. on the design of performance related remuneration”. The Committee consults with the Chief Executive and has access to external professional Market conditions for 2009 are challenging. Therefore it was advice. In 2004 Towers Perrin were appointed as advisors to the recommended to the Remuneration Committee that executive directors’ Committee. Their advice on long-term incentives is also used below base salaries be frozen at 2008 levels. The recommendation was accepted Board level. As far as the Committee is aware Towers Perrin has and the Company extended the measure to the majority of the top 200 no other relationship with the Company. The Committee carried out executives. At 1 January 2009, the basic salaries of the executive directors a formal review of Towers Perrin in 2008 and agreed to retain them as remain as follows: advisors, subject to regular review going forward. T Twigger £600,000 The Board has approved written terms of reference for the Committee P E Green £275,000 which are available on the Company’s website. S G Young £360,000

Remuneration policy for executive directors Annual bonus payments The Committee ensures that executive remuneration packages are The annual bonus payments for Mr T Twigger, Mr P E Green and Mr S G designed to attract, motivate and retain directors of a high calibre, Young are awarded following consideration of both the performance of the to recognise the international and decentralised nature of the Group’s Group and the individual’s contribution to that performance. The maximum business and to reward them for enhancing value to shareholders. bonus which can be earned by any executive director is 150% of basic The performance measurement of the executive directors and the salary, other than in truly exceptional circumstances. Achievement of determination of their annual remuneration package is undertaken Group profit and cash targets with reference to the Group budget, together by the Committee with advice from Towers Perrin. with the individual’s personal performance and contribution, are the criteria for awards. The level of bonus payments awarded to the executive The remuneration package for executive directors and senior directors for 2008 was 135% of basic salary at 31 December 2008. management targets median levels of fixed pay, whilst operating incentive schemes that provide management with the ability to earn more for true This cash bonus reflects the results achieved in 2008. The Group delivered out-performance. Incentives include cash bonus and share schemes. outstanding financial performance, growth and development, as shown by the 36% improvement in underlying profit, the 20% increase in Key features of the remuneration plan for 2009 include: underlying earnings per share, the 3% increase in annual dividend, the • basic annual salary, frozen at 2008 levels; continuing strong underlying cash flow from operations at 100% of • bonus payments in respect of performance of both the individual underlying operating profit and the successful integration of acquisitions and the Group calculated as a percentage of basic salary; where synergy benefits for the year are 25% ahead of target. It also • eligibility for an award of shares under the Company’s Equity indicates the Committee’s confidence in this team’s experience and its Participation Plan, awards of which will be scaled down from 2008 ability to manage the business successfully through current, very difficult, levels as a percentage of salary; market conditions. • eligibility for a grant of options under the Company’s Executive Share Option Scheme under which options are granted at market value; and

44 Financial statements Meggitt PLC Report and accounts 2008 REMUNERATION REPORT Continued

For 2009, bonus payments will continue to be based on the achievement No shares will vest if the Group’s TSR performance is below the 50th of Group profit and cash targets, together with the individual’s personal percentile. At the 50th percentile, 30% of the award will vest, rising on performance and contribution. a straight-line basis to 100% vesting at the 75th percentile and above. Notwithstanding the Group’s relative TSR performance, shares will Policy on share schemes only become eligible for release to the extent that the Remuneration Committee is satisfied that it is justified by the underlying financial The Company’s Equity Participation Plan and Executive Share Option performance of the Group over the measurement period. Shares subject Scheme are designed to encourage executive directors to contribute to awards will not normally be released until the third anniversary of the towards the continuing growth in, and performance of, the Company by award date. Shares subject to the 2005 award vested at 44% and were participating in the Company’s success along with other shareholders. released in October 2008. An award is made under the Equity Participation Plan on an annual basis and grants are considered under the Executive Share Option Scheme Changes to the Performance Condition were made for the 2008 award. In subject to regulatory and scheme limits. The Equity Participation Plan line with what is now common market practice, 50% of the awards vesting 2005 and Executive Share Option Scheme 2005 were introduced during will be based on TSR, and 50% on the EPS condition used for the ESOS 2005 following shareholder approval. award (details of which are set out in the section below): this change was made to counteract the volatility which is an unavoidable feature of TSR. It is the Company’s policy that directors and senior executives, who have The Committee recognises that TSR is an important performance received an allocation of shares under the Equity Participation Plan or measure. The Committee plans to maintain this more balanced a grant of options under the Executive Share Option Scheme, should performance measure for 2009 awards. retain an investment in the Company’s shares once the options have been exercised or shares transferred to the individual amounting to at least Other changes are planned for 2009 as follows: one year’s salary. • Maximum award levels to US participants will be reduced in line Under different economic circumstances, the Committee would have with awards to all other participants; proposed increases in 2009 to the quantum of awards under the ESOS • EPS targets will be set at levels which are appropriately stretching and the EPP, as levels have fallen behind its desired positioning relative in current economic conditions (see section below); to the market. However, the Committee has reviewed the points raised • The TSR comparator group will be amended to be as relevant in the Association of British Insurers’ letter to Remuneration Committee as possible; and Chairmen in September 2008 and after giving them due consideration, • Ensuring that the Remuneration Committee has sufficient discretion has decided that such increases would not be appropriate in the current to be able to modify levels of vesting to ensure that it fairly reflects climate. In addition, maximum award levels to US participants will be underlying performance. reduced in line with awards to all other participants. Meggitt Executive Share Option Scheme 2005 Meggitt Equity Participation Plan 2005 An annual grant of options will be made to executive directors. The aggregate An annual basic award of shares may be made under the Meggitt Equity market value of shares put under option each year may be up to three times Participation Plan (the “Plan”) to executive directors of up to 125% of basic salary. In 2008, awards were made of two times basic salary. The price basic salary (“basic award”). The number of shares which are the subject payable for each share under option will be the mid-market value of the of the award is calculated by dividing the value of the award by the average share on the first dealing day prior to the grant date. middle market quotations of ordinary shares on the London Stock For awards made up to and including 2008, the performance condition for the Exchange over the 30 dealing days prior to the date of the award. A basic grant of options to executive directors is linked to the aggregate increase in award made to executive directors under the plan was made at 125% of earnings per share (“EPS”) over the three year period following the financial basic salary during 2008. This will be reduced to 75% in 2009. year ending immediately before the date of grant. An option can be exercised Executive directors may also invest an amount, not to exceed 25% of net in respect of 30% of the shares subject to the option if the aggregate growth basic salary, in ordinary shares. In that event, an executive director can in EPS is at least equal to the increase in the Retail Prices Index (“RPI”) plus receive a further award of up to 50% of basic salary (“matching award”) 5% per annum. The option can be exercised in respect of all the shares if the director makes the maximum investment permitted under the Plan. subject to the option if the aggregate growth in EPS is at least equal to the increase in RPI plus 8% per annum. For growth in EPS between RPI plus The proportion of both awards, if any, that an executive director will 5% per annum and RPI plus 8% per annum, the option can be exercised in ultimately receive, depends on Group performance during a three year respect of between 30% and 100% of the shares under option determined period commencing at the beginning of the financial year in which the on a straight-line basis between these points. There is no retesting of the award is made (the “measurement period”). For awards made in 2007 and performance condition. The Remuneration Committee has considered the prior years, performance is measured by comparing the Total Shareholder impact of changes to accounting standards and will endeavour to compare Return (“TSR”) achieved by the Group with that of other companies in EPS on a consistent basis. a comparator group chosen by the Remuneration Committee. The comparator group comprises the following companies which are in similar The Company’s EPS performance during the last five years is shown on sectors and are of a relevant size and international spread to the Group: page 103. BAE Systems Rotork The Remuneration Committee plans to continue to use its discretion from Bodycote International Senior performance cycle to performance cycle to ensure that EPS ranges are Cobham Smiths Group appropriately demanding, within the wider economic environment. The Halma Spectris Committee considers that an absolute EPS range is more appropriate IMI Spirax-Sarco Engineering rather than one expressed relative to RPI both for the EPP and the ESOS, Invensys Spirent considering RPI’s limited relevance to Meggitt’s revenues and costs. Melrose* Tomkins The Committee will rigorously examine the range and ensure that the Morgan Crucible Company (The) Ultra Electronics Holdings targets are both appropriate and sufficiently challenging and stretching Renishaw VT Group given the prevailing economic environment. For the cycle beginning 2009, Rolls-Royce Group Weir Group it is likely that the EPS targets will be low relative to the previous target. * Following its acquisition in 2008, FKI was replaced in the comparator To be clear, we are not proposing any retrospective changes to existing group by Melrose PLC. EPS growth targets.

Financial statements 45 Meggitt PLC Report and accounts 2008 REMUNERATION REPORT Continued

TSR five-year performance Meggitt PLC Share Incentive Plan Growth in the value of a hypothetical £100 holding from 1 January to The directors agree an amount of money annually to be set aside from 31 December in each of the five years: Group profits for the purchase of shares by the Trustee of the Share Incentive Plan under the provisions of the Finance Act 2000. These shares £ Meggitt are allocated to eligible UK employees, including executive directors, on the Custom Comparator Group (20 companies) basis of total earnings in the year, and are transferred for no consideration. 250 FTSE mid-250

200 Directors’ share interests The beneficial interests of the directors in the ordinary shares of the 150 Company at 31 December were as follows:

Shareholding 100 Ordinary shares of 5p each 2008 2007

50 Sir Colin Terry 10,011 6,426 T Twigger 820,856 676,358 0 Sir Alan Cox 20,000 20,000 P E Green 442,148 344,395 Year 2003 2004 2005 2006 2007 2008 P J Hill 9,000 9,000 D A Robins 61,753 59,714 The FTSE 250 and custom comparator group have been chosen as being D M Williams 5,000 5,000 the most relevant to the industry in which the Company operates. S G Young 210,270 78,263

The Group’s share price has been adversely affected by market Each of the executive directors were allocated 1,071 shares at an initial participants focusing on three key factors: market value of 278.85p under the Share Incentive Plan during 2008. • Perceived level of gearing on the balance sheet; These shares have been included in the share interests shown in the table • Exposure to civil aerospace; and above. Details of directors’ share options are shown on pages 48 to 50. • Institutional investors’ preference for FTSE 100 stocks in current conditions. Directors’ contracts The Board believes that the company has delivered excellent results, and Mr T Twigger and Mr P E Green have rolling service contracts dated that it is in a position to weather the current conditions well and come out 26 February 2001 and Mr S G Young has a rolling service contract dated of the downturn in robust shape. 27 February 2004. The notice period required from the Company is twelve months and they are required to give the Company notice of six months. Directors’ pension arrangements Under the contracts for Mr T Twigger, Mr P E Green and Mr S G Young The executive directors are members of the Meggitt Executive Pension the Company would pay compensation if it were to terminate the contract Plan (the “MEPP”) which is separate to the Company’s main pension in breach of the terms of the contract. The compensation would be the scheme. Their dependants are eligible for dependants’ pensions and annual remuneration plus the value of benefits for the unexpired notice the payment of a lump sum in the event of death in service. The pension period less 5%. arrangements provide for a pension on retirement of up to 2/3 final pensionable salary. The executive directors’ pensions are restricted by Remuneration policy for non executive directors a Scheme Cap which replaced the HM Revenue and Customs ’pensions The remuneration of the non executive directors is determined by the cap’ from 6 April 2006. Finance Committee of the Board and the remuneration of the Chairman As the executive directors’ benefits from, and contributions to, the MEPP is determined by the Remuneration Committee of the Board within are restricted, additional contributions are made by means of a pensions the limits set out in the Articles of Association. The Finance and allowance paid instead to the executive directors in order that they might Remuneration Committees set the level of fees for non executive directors make their own arrangements for retirement savings. The pensions to reflect the time commitment and responsibilities of the role after allowance is calculated as 50% of the amount by which the executive consulting independent surveys of such fees. Fees paid to non executive director’s basic salary exceeds the MEPP Scheme Cap of £123,750. directors during 2008 are shown on page 47. The cap increases annually in line with the lifetime allowance, which Non executive directors are appointed for a term of no longer than three is the total capital value of all pension arrangements, excluding the years, do not have a contract of service, are not eligible to join the state pension, which can be built up without paying extra tax. Company’s pension schemes and cannot participate in any of the The pension contribution for the executive directors and all UK employees Company’s share schemes. (after taking into account the employee contribution) is set following the receipt of actuarial advice from Mercer Human Resource Consulting. Policy on external appointments Details of any changes in pension entitlements arising in 2008 are shown on It is the Company’s policy to allow the executive directors to hold external page 47. Bonus payments to executive directors are not pensionable. There appointments and to receive payment provided such appointments are are no unfunded pension promises or similar arrangements for directors. agreed by the Board or Committee in advance, that there is no conflict of interests and the appointment does not lead to a deterioration in the individual’s performance. During 2008 no executive director was a director of another public company.

46 Financial statements Meggitt PLC Report and accounts 2008 REMUNERATION REPORT Continued

AUDITED INFORMATION

Details of directors’ remuneration Total emoluments Basic Bonus excluding pension salary Fees Benefits payments Other* 2008 2008 2008 2008 2008 2008 2007 £ £ £ £ £ £ £

Executive directors T Twigger 600,000 – 30,411 810,000 238,594 1,679,005 1,544,965 P E Green 275,000 – 17,255 370,000 76,094 738,349 652,444 S G Young 360,000 – 21,658 485,000 118,594 985,252 868,308 Non executive directors Sir Colin Terry – 150,000 – – – 150,000 120,000 Sir Alan Cox – 63,000 5,536 – – 68,536 63,298 P J Hill – 45,000 – – – 45,000 41,000 D A Robins – 52,000 – – – 52,000 47,000 D M Williams – 52,000 – – – 52,000 45,667 Total 1,235,000 362,000 74,860 1,665,000 433,282 3,770,142 3,382,682

* With effect from 6 April 2006 no further contributions were made to the funded unapproved retirement and death benefits scheme. Instead, an allowance was paid to the executive directors in order that they might make their own arrangements for retirement savings.

Directors’ pension benefits Directors’ membership of the various pension schemes is shown on page 46.

T Twigger P E Green S G Young £ £ £

Meggitt Executive Pension Plan Accumulated total accrued pension at 31 December 2007 37,500 50,400 15,000 Real increase in accrued pension in year excluding inflation 6,507 8,590 5,483 Total increase in accrued pension in year 6,863 9,069 5,625 Accumulated total accrued pension at 31 December 2008 44,363 59,469 20,625 Transfer value (GN11 basis) at 31 December 2007 614,500 623,400 201,500 Increase in transfer value excluding directors’ contributions 307,665 307,590 124,222 Directors’ contributions 8,600 8,600 8,600 Transfer value (GN11 basis) at 31 December 2008 930,765 939,590 334,322

Transfer values do not represent a sum payable to the individual director, but represent a potential liability of the pension scheme.

Directors’ share scheme participation The directors’ interests in the Meggitt Equity Participation Scheme 1996 and movements therein during the year are set out below:

Number of shares Market price Date of Date of Value of at 1 Jan Transferred at 31 Dec at actual date allocation Transfer allocation £ 2008 to directors 2008 of transfer

T Twigger 09.03.05 10.03.08 150,000 64,043 64,043 – 272.50p P E Green 09.03.05 10.03.08 70,000 29,887 29,887 – 272.50p S G Young 09.03.05 10.03.08 92,000 39,279 39,279 – 272.50p

Financial statements 47 Meggitt PLC Report and accounts 2008 REMUNERATION REPORT Continued

Directors’ share scheme participation continued The directors’ interests in the Meggitt Equity Participation Plan 2005 and movements therein during the year are set out below: Number of shares Market price First date for Date of Value of at 1 Jan Awarded/ at 31 Dec at actual date transfer to award award £ 2008 (transferred) Lapsed 2008 of transfer director

T Twigger Basic Award 10.10.05 337,500 123,801 (54,472) (69,329) – 155.50p 10.10.08 Basic Award 04.04.06 361,500 117,540 – – 117,540 – 04.04.09 Basic Award 17.08.07 374,997 118,252 – – 118,252 – 17.08.10 Basic Award 07.08.08 750,000 – 389,388 – 389,388 – 07.08.11 Matching Award 10.10.05 225,000 81,120 (35,693) (45,427) – 155.50p 10.10.08 Matching Award 04.04.06 241,000 80,205 – – 80,205 – 04.04.09 Matching Award 04.09.07 252,374 79,114 – – 79,114 – 04.09.10 Matching Award 18.08.08 300,000 – 133,038 – 133,038 – 18.08.11 P E Green Basic Award 10.10.05 150,000 55,022 (24,210) (30,812) – 155.50p 10.10.08 Basic Award 04.04.06 160,500 52,185 – – 52,185 – 04.04.09 Basic Award 17.08.07 166,125 52,386 – – 52,386 – 17.08.10 Basic Award 07.08.08 343,749 – 178,469 – 178,469 – 07.08.11 Matching Award 10.10.05 100,000 36,053 (15,863) (20,190) – 155.50p 10.10.08 Matching Award 04.04.06 107,000 35,609 – – 35,609 – 04.04.09 Matching Award 04.09.07 111,800 35,047 – – 35,047 – 04.09.10 Matching Award 18.08.08 137,500 – 60,976 – 60,976 – 18.08.11 S G Young Basic Award 10.10.05 195,000 71,529 (31,473) (40,056) – 155.50p 10.10.08 Basic Award 04.04.06 208,500 67,793 – – 67,793 – 04.04.09 Basic Award 17.08.07 215,998 68,113 – – 68,113 – 17.08.10 Basic Award 07.08.08 450,000 – 233,633 – 233,633 – 07.08.11 Matching Award 10.10.05 130,000 46,869 (20,622) (26,247) – 155.50p 10.10.08 Matching Award 04.04.06 139,000 46,259 – – 46,259 – 04.04.09 Matching Award 04.09.07 145,368 45,570 – – 45,570 – 04.09.10 Matching Award 18.08.08 180,000 – 79,823 – 79,823 – 18.08.11

The directors’ interests in options over the ordinary share capital of the Company and movements therein during the year are set out below and on page 49:

Number of options

Market price Date at 1 Jan Granted/ at 31 Dec Exercise at date of exercisable Expiry Date of grant 2008 (exercised) 2008 price exercise from date

T Twigger 1996 No 1 20.04.98 23,173 (23,173) – 129.45p 266.00p 20.04.01 19.04.08 1996 No 2 17.10.02 201,074 – 201,074 136.76p – 17.10.05 16.10.09 02.10.03 172,950 – 172,950 179.24p – 02.10.06 01.10.10 06.10.04 178,070 – 178,070 210.59p – 06.10.07 05.10.11 2005, Part B 10.10.05 322,987 – 322,987 278.65p – 10.10.08 09.10.15 27.09.06 365,613 – 365,613 263.67p – 27.09.09 26.09.16 29.03.07 334,448 – 334,448 299.00p – 29.03.10 28.03.17 25.03.08 – 475,248 475,248 252.50p – 25.03.11 24.03.18 Sharesave 07.04.05 3,011 (3,011) – 188.76p 255.00p 01.06.08 30.11.08 05.10.06 3,222 – 3,222 203.18p – 01.12.11 31.05.12 04.09.08 – 3,290 3,290 171.40p – 01.11.11 01.05.12 1,604,548 452,354 2,056,902

48 Financial statements Meggitt PLC Report and accounts 2008 REMUNERATION REPORT Continued

Directors’ share scheme participation continued

Number of options Market price Date at 1 Jan Granted/ at 31 Dec Exercise at date of exercisable Expiry Date of grant 2008 (exercised) 2008 price exercise from date

P E Green 1996 No 1 20.04.98 16,800 (16,800) – 129.45p 266.00p 20.04.01 19.04.08 1996 No 2 27.09.01 109,621 (109,621) – 114.03p 216.25p 27.09.04 26.09.08 17.10.02 91,396 – 91,396 136.76p – 17.10.05 16.10.09 02.10.03 83,685 – 83,685 179.24p – 02.10.06 01.10.10 06.10.04 83,099 – 83,099 210.59p – 06.10.07 05.10.11 2005, Part A 29.03.07 2,759 – 2,759 299.00p – 29.03.10 28.03.17 2005, Part B 10.10.05 143,549 – 143,549 278.65p – 10.10.08 09.10.15 27.09.06 162,326 – 162,326 263.67p – 27.09.09 26.09.16 29.03.07 145,402 – 145,402 299.00p – 29.03.10 28.03.17 25.03.08 – 217,822 217,822 252.50p – 25.03.11 24.03.18 Sharesave 22.10.02 5,996 (5,996) – 109.56p 324.25p 01.01.08 30.06.08 07.04.05 1,749 – 1,749 188.76p – 01.06.10 30.11.10 05.10.06 3,222 – 3,222 203.18p – 01.12.11 31.05.12 04.09.08 – 3,798 3,798 171.40p – 01.11.13 01.05.14 849,604 89,203 938,807

Number of options Market price Date at 1 Jan Granted/ at 31 Dec Exercise at date of exercisable Expiry Date of grant 2008 (exercised) 2008 price exercise from date

S G Young 1996 No1 01.04.04 17,200 – 17,200 174.40p – 01.04.07 31.03.14 1996 No2 01.04.04 246,564 – 246,564 174.40p – 01.04.07 31.03.11 2005, Part B 10.10.05 186,615 – 186,615 278.65p – 10.10.08 09.10.15 27.09.06 210,871 – 210,871 263.67p – 27.09.09 26.09.16 29.03.07 192,642 – 192,642 299.00p – 29.03.10 28.03.17 25.03.08 – 285,149 285,149 252.50p – 25.03.11 24.03.18 Sharesave 07.04.05 9,468 – 9,468 188.76p – 01.06.12 30.11.12 863,360 285,149 1,148,509

None of the non executive directors held options over the Company’s shares at any time during the relevant periods. Between 1 January 2009 and 27 February 2009 (the latest date for which it was practical to obtain the information) the following changes occurred in the directors’ interests shown above: Mr T Twigger – acquired 160 shares through the Meggitt PLC Share Incentive Plan. Mr P E Green – acquired 160 shares through the Meggitt PLC Share Incentive Plan. Mr S G Young – acquired 159 shares through the Meggitt PLC Share Incentive Plan.

Financial statements 49 Meggitt PLC Report and accounts 2008 REMUNERATION REPORT Continued

Directors’ share scheme participation continued The market price of the shares at 31 December 2008 was 159.75p and the range during the year was 115.75p to 324.25p. Options may, in certain circumstances, be exercised or lapse earlier than the dates shown on pages 48 and 49. Gains made on exercise of directors’ share options

Gain Gain Exercise Options 2008 2007 Option date exercised £’000 £’000

T Twigger 1996 No 2 Executive Share Option Scheme 13.12.07 6,894 – 9 1996 No 1 Executive Share Option Scheme 15.04.08 23,173 32 – Sharesave 03.06.08 3,011 2 – P E Green 1996 No 1 Executive Share Option Scheme 15.03.07 8,125 – 15 1996 No 1 Executive Share Option Scheme 15.04.08 16,800 23 – 1996 No 2 Executive Share Option Scheme 21.08.08 109,621 112 – Sharesave 02.01.08 5,996 13 – 182 24

Gains in 2008 were made on options granted under the rules of the 1996 Number 2 Executive Share Option Scheme and the 1996 Number 1 Executive Share Option Scheme and the Sharesave Scheme, as detailed in directors’ share interests above. There are currently no other schemes to benefit directors by enabling them to acquire shares in or debentures of the Company or any other company. By order of the Board

D A Robins Chairman, Remuneration Committee 2 March 2009

50 Financial statements Meggitt PLC Report and accounts 2008 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF MEGGITT PLC

We have audited the group financial statements of Meggitt PLC for the BASIS OF AUDIT OPINION year ended 31 December 2008 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow We conducted our audit in accordance with International Standards on Statement, the Consolidated Statement of Recognised Income and Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit Expense and the related notes. These group financial statements have includes examination, on a test basis, of evidence relevant to the amounts been prepared under the accounting policies set out therein. and disclosures in the group financial statements. It also includes an assessment of the significant estimates and judgments made by the We have reported separately on the parent company financial statements directors in the preparation of the group financial statements, and of of Meggitt PLC for the year ended 31 December 2008 and on the whether the accounting policies are appropriate to the group’s information in the Directors’ Remuneration Report that is described as circumstances, consistently applied and adequately disclosed. having been audited. We planned and performed our audit so as to obtain all the information RESPECTIVE RESPONSIBILITIES OF DIRECTORS and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the group AND AUDITORS financial statements are free from material misstatement, whether The directors’ responsibilities for preparing the Annual Report and the caused by fraud or other irregularity or error. In forming our opinion we group financial statements in accordance with applicable law and also evaluated the overall adequacy of the presentation of information International Financial Reporting Standards (IFRSs) as adopted by the in the group financial statements. European Union are set out in the Statement of Directors’ Responsibilities. OPINION Our responsibility is to audit the group financial statements in accordance In our opinion: with relevant legal and regulatory requirements and International • the group financial statements give a true and fair view, in accordance Standards on Auditing (UK and Ireland). This report, including the opinion, with IFRSs as adopted by the European Union, of the state of the has been prepared for and only for the company’s members as a body in group’s affairs as at 31 December 2008 and of its profit and cash flows accordance with Section 235 of the Companies Act 1985 and for no other for the year then ended; purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown • the group financial statements have been properly prepared in or into whose hands it may come save where expressly agreed by our accordance with the Companies Act 1985 and Article 4 of the IAS prior consent in writing. Regulation; and We report to you our opinion as to whether the group financial statements • the information given in the Directors’ Report is consistent with the give a true and fair view and whether the group financial statements have group financial statements. been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the group financial statements. The information given in the Directors’ Report includes specific information cross referenced from the Principal Activities and Business Review section of the Directors’ Report to the PricewaterhouseCoopers LLP Business Review. Chartered Accountants and Registered Auditors Reading In addition we report to you if, in our opinion, we have not received all the 2 March 2009 information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the Combined Code 2006 specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the audited group financial statements. The other information comprises Meggitt at a Glance, Financial Highlights, Overview, Chairman’s Statement, Group Strategic Objectives, Strategy Implementation, Market Review, Business Review, Risks and Uncertainties, Aerospace Equipment, Sensing Systems, Defence Systems, Corporate Responsibility, Board of Directors, Report of the Directors, Directors’ Statement on Corporate Governance, the unaudited part of the Remuneration Report and the other information listed in the contents to the Annual Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the group financial statements. Our responsibilities do not extend to any other information.

Financial statements 51 Meggitt PLC Report and accounts 2008 CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2008

2008 2007 Notes £’m £’m

Continuing operations

Revenue 5 1,162.6 878.2 Cost of sales 7 (637.8) (493.4)

Gross profit 524.8 384.8

Net operating costs 7 (352.4) (242.1)

Operating profit* 6 172.4 142.7

Finance income 12 33.9 32.7 Finance costs 13 (87.0) (70.0) Net finance costs (53.1) (37.3)

Profit before tax from continuing operations** 119.3 105.4

Tax 14 (20.2) (16.1)

Profit for the year from continuing operations attributable to equity holders 40 99.1 89.3

Earnings per share – basic 16 15.0p 14.6p Earnings per share – diluted 16 15.0p 14.5p

* Underlying operating profit 10 296.4 216.3 ** Underlying profit before tax 10 243.3 179.0

52 Financial statements Meggitt PLC Report and accounts 2008 CONSOLIDATED BALANCE SHEET As at 31 December 2008

2008 2007 Restated Notes £’m £’m

Non–current assets Goodwill 19 1,382.7 1,067.8 Development costs 20 97.8 57.7 Programme participation costs 20 180.4 121.8 Other intangible assets 21 901.6 741.7 Property, plant and equipment 22 245.2 191.2 Trade and other receivables 25 19.3 14.4 Derivative financial instruments 32 1.6 – Deferred tax assets 34 112.4 41.4 Assets held for sale 23 – 14.5 2,941.0 2,250.5 Current assets Inventories 24 273.1 204.6 Trade and other receivables 25 286.9 214.6 Derivative financial instruments 32 1.0 3.6 Current tax recoverable 0.7 7.8 Cash and cash equivalents 26 67.3 64.9 629.0 495.5 Total assets 3,570.0 2,746.0

Current liabilities Trade and other payables 27 (314.6) (227.1) Derivative financial instruments 32 (26.4) (0.9) Current tax liabilities (37.1) (44.2) Obligations under finance leases 29 (1.0) (0.5) Bank and other borrowings 30 (13.5) (16.7) Provisions 33 (45.3) (18.0) (437.9) (307.4) Net current assets 191.1 188.1

Non–current liabilities Trade and other payables 28 (9.3) (7.0) Derivative financial instruments 32 (70.6) (10.7) Deferred tax liabilities 34 (359.9) (265.5) Obligations under finance leases 29 (6.2) (5.0) Bank and other borrowings 30 (1,094.5) (858.1) Provisions 33 (64.0) (74.0) Retirement benefit obligations 35 (241.2) (153.3) Liabilities directly associated with assets classified as held for sale 23 – (1.6) (1,845.7) (1,375.2) Total liabilities (2,283.6) (1,682.6) Net assets 1,286.4 1,063.4

Equity Share capital 37 33.3 32.9 Share premium 40 798.8 781.6 Other reserves 40 14.1 14.1 Hedging and translation reserves 40 195.7 (6.8) Retained earnings 40 244.5 241.6 Total equity attributable to equity holders 40 1,286.4 1,063.4

The financial statements were approved by the Board of Directors on 2 March 2009 and signed on its behalf by:

T Twigger S G Young Director Director

Financial statements 53 Meggitt PLC Report and accounts 2008 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2008

2008 2007 Notes £’m £’m

Cash inflow from operations before exceptional operating costs 295.4 214.3 Cash outflow from exceptional operating costs 11 (16.5) (4.2)

Cash inflow from operations 42 278.9 210.1 Interest received 1.6 5.0 Interest paid (47.8) (34.8) Tax paid (30.3) (23.4) Cash inflow from operating activities 202.4 156.9

Purchase of subsidiaries 44 (9.2) (563.6) Net cash acquired with subsidiaries – 11.5 Proceeds from disposal of subsidiaries 19.9 – Capitalised internal development costs 20 (23.7) (22.4) Capitalised programme participation costs 20 (35.7) (20.1) Purchase of other intangible assets 21 (5.8) (3.3) Purchase of property, plant and equipment (35.1) (40.5) Proceeds from disposal of property, plant and equipment 0.4 2.6 Cash outflow from investing activities (89.2) (635.8)

Dividends paid to Company’s shareholders 17 (40.3) (35.6) Issue of equity share capital 40 2.1 439.8 Expenses of issue of equity share capital 40 – (9.8) Proceeds from borrowings 10.2 520.7 Debt issue costs (2.1) (3.6) Repayments of borrowings (82.1) (406.0) Cash (outflow)/inflow from financing activities (112.2) 505.5

Net increase in cash and cash equivalents 1.0 26.6 Cash and cash equivalents at start of year 64.9 43.6 Exchange gains/(losses) on cash and cash equivalents 1.4 (5.3) Cash and cash equivalents at end of year 26 67.3 64.9

54 Financial statements Meggitt PLC Report and accounts 2008 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2008

2008 2007 Notes £’m £’m

Currency translation gains/(losses) 200.2 (0.5) Currency translation loss transferred to income statement 45 1.0 – Taxation recognised on currency translation movements – current 14 15.6 7.2 Taxation recognised on currency translation movements – deferred 14 (1.0) – Actuarial (losses)/gains 35 (60.9) 24.8 Taxation recognised on actuarial movements – deferred 14 18.7 (8.2) Losses on cash flow hedges (18.5) (10.2) Taxation recognised on cash flow hedge movements – deferred 14 5.2 2.9 Net income recorded directly in equity 40 160.3 16.0

Profit for the year 40 99.1 89.3 Total recognised income for the year 259.4 105.3

Financial statements 55 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS

1 BASIS OF PREPARATION Foreign subsidiaries The results of foreign subsidiaries are translated at the average rates The consolidated financial statements of the Group have been prepared of exchange for the period. Assets and liabilities of foreign subsidiaries in accordance with EU endorsed International Financial Reporting are translated at the exchange rates prevailing at the balance sheet Standards (IFRSs), IFRIC interpretations and the Companies Act 1985 date. Exchange differences arising from the translation of the results of and 2006 applicable to companies reporting under IFRSs. The foreign subsidiaries and their opening net assets are recognised as a consolidated financial statements have been prepared under the separate component of equity. Exchange differences on borrowings and historical cost convention, as modified by the revaluation of land and other currency instruments designated as a net investment hedge of buildings, available for sale financial assets, and financial assets and foreign subsidiaries are also taken to equity. financial liabilities (including derivative instruments) at fair value. Certain comparatives have been restated as described in note 46. When a foreign subsidiary is sold the cumulative exchange differences relating to the retranslation of the net investment in that foreign subsidiary are recognised in the income statement as part of the gain 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES or loss on disposal. This applies only to exchange differences recorded in equity after 1 January 2004. Exchange differences arising prior to 1 The principal accounting policies adopted by the Group in the January 2004 remain in equity on disposal as permitted by IFRS 1(“First preparation of the consolidated financial statements are set out below. time Adoption of International Financial Reporting Standards”). These policies have been applied consistently to all periods presented unless stated otherwise. Goodwill and fair value adjustments arising from the acquisition of a foreign subsidiary are treated as assets and liabilities of that subsidiary Basis of consolidation and are retranslated at the rates of exchange prevailing at the balance sheet date. The Group financial statements consolidate the financial statements of the Company and all of its subsidiaries. A subsidiary is an entity over Revenue recognition which the Group has the power to govern the financial and operating policies. The existence and nature of potential voting rights that are Revenue represents the fair value of the consideration received or currently available to the Group are considered when determining receivable in respect of the sale of goods and services provided in the whether the entity is a subsidiary. The results of subsidiaries acquired normal course of business, net of trade discounts, VAT and other sales are consolidated from the date on which control passes to the Group. related taxes. The results of disposed subsidiaries are consolidated up to the date on Revenue is recognised when the significant risks and rewards of which control passes from the Group. ownership have been transferred to the customer which occurs when Acquisitions are accounted for using the purchase method. The cost the products are delivered to the customer or the services have been of an acquisition is measured as the fair value at the date of exchange provided to the customer, title and risk of loss have been transferred of the consideration provided plus costs directly attributable to the and collection of related receivables is probable. An appropriate acquisition. Identifiable assets and liabilities of the acquired business proportion of total long-term contract value, based on the fair value that meet the conditions for recognition under IFRS 3 (“Business of work performed, is included in revenue and an appropriate level Combinations”) are recognised at their fair value at the date of of profit is taken based on the estimated percentage completion of acquisition. To the extent that the cost of an acquisition exceeds the fair contractual obligations provided the final outcome can be reliably value of net assets acquired the difference is recorded as goodwill. assessed. Where the fair value of the net assets acquired exceeds the cost of an acquisition the difference is recorded directly in the income statement. Segment reporting Transactions between, and balances with, Group companies are A business segment is a group of businesses engaged in providing eliminated together with unrealised gains on inter-group transactions. products and services that are subject to similar risks and returns Unrealised losses are eliminated to the extent that the asset and whose risks and returns differ from other business segments. transferred is not impaired. The accounting policies of acquired A geographical segment is a group of businesses which operate in businesses are changed where necessary to be consistent with those economic environments that are subject to similar risks and returns of the Group. and whose risks and returns differ from other geographical segments.

Foreign currencies Exceptional operating items Functional and presentational currency Items which are significant by virtue of their size or nature and which The Group’s consolidated financial statements are presented in pounds are considered non-recurring are classified as exceptional operating sterling, the functional currency of the Group, being the currency of the items. Such items, which include for instance the costs of integrating primary economic environment in which the Group operates. Items significant acquisitions, significant restructuring costs and profits included in the financial statements of each of the Group’s subsidiaries or losses made on the disposal of businesses, are included within are measured using the functional currency of the primary economic the appropriate consolidated income statement category but are environment in which the subsidiary operates. highlighted separately in the notes to the financial statements. Exceptional operating items are excluded from the underlying profit Transactions and balances measures used by the Board to monitor and measure the underlying Transactions in foreign currencies are recorded at the rates of performance of the Group (see note 10). exchange at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are reported at the rates of Intangible assets exchange prevailing at the balance sheet date. Exchange differences on retranslating monetary assets and liabilities are recognised in the Goodwill income statement except where they relate to qualifying cash flow or Goodwill represents the excess of the cost of an acquisition over net investment hedges in which case the exchange differences are the fair value of the Group’s share of the net assets of the acquired deferred in equity. business. Goodwill is no longer amortised but is tested annually for impairment. Goodwill is carried at cost less amortisation charged prior

56 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

to 1 January 2004 less accumulated impairment losses. In the event The assets’ residual values and useful lives are reviewed annually and that the business to which goodwill relates is disposed of, the adjusted if appropriate. attributable goodwill is included in the determination of the gain or loss on disposal. Non-current assets (or disposal groups) held for sale Research and development Non-current assets (or disposal groups) are classified as assets held Research expenditure is recognised as an expense in the income for sale and stated at the lower of carrying amount and fair value less statement as incurred. Costs incurred on development projects that are costs of disposal if their carrying amount is to be recovered principally undertaken where the related expenditure is separately identifiable, through a sale transaction rather than through continuing use. measurable and management are satisfied as to the ultimate technical and commercial viability of the project based on all relevant available Taxation information are recognised as an intangible asset. Capitalised Tax payable is based on the taxable profit for the year calculated using development costs are amortised on a straight-line basis over the tax rates that have been enacted or substantially enacted at the periods expected to benefit, typically up to 10 years, commencing with balance sheet date. the launch of the product. Development costs not meeting the criteria for capitalisation are expensed as incurred. Deferred tax is provided in full using the liability method on temporary differences between the tax bases of assets and liabilities and their Programme participation costs corresponding book values as recorded in the Group’s financial Programme participation costs consist of incentives given to Original statements. Deferred tax is provided on unremitted earnings of foreign Equipment Manufacturers (“OEMs”) in connection with their selection subsidiaries except where the Group can control the remittance and it of the Group’s products for installation onto new aircraft where the is probable that the earnings will not be remitted in the foreseeable Group has obtained principal supplier status. These incentives future. Deferred tax assets are recognised only to the extent that it is comprise cash payments and/or the supply of initial manufactured probable that taxable profits will be available against which deductible parts on a free of charge or deeply discounted basis. Programme temporary differences can be utilised. Where deferred tax arises on participation costs are amortised on a straight-line basis over the the initial recognition of an asset or liability other than in a business periods expected to benefit (typically through the sale of replacement combination and the recognition gives rise to no impact on taxable parts) from receiving the status of “principal supplier”, generally over profit or loss then deferred tax is not provided. Deferred tax is calculated terms ranging up to 15 years. using tax rates that have been enacted or are substantially enacted at Other intangible assets the balance sheet date. a) Licences, trademarks, patents and software Purchased licences, trademarks, patents and software are included at Impairment of non-current non-financial assets cost and are amortised on a straight-line basis over their estimated Assets that have indefinite lives are tested for impairment annually. useful economic life, typically over periods up to 5 years. Assets that are subject to amortisation or depreciation are reviewed b) Intangible assets acquired as part of a business combination for impairment whenever events or changes in circumstances indicate For acquisitions of businesses after 1 January 2004, the Group that the carrying value may not be recoverable. To the extent that the recognises intangible assets separately from goodwill provided they are carrying value exceeds the recoverable amount an impairment loss is separable or arise from contractual or other legal rights and their fair recorded for the difference as an expense in the income statement. value can be measured reliably. The intangible assets recognised are The recoverable amount used for impairment testing is the higher recorded at fair value. Where the intangible assets recognised have of the value in use and its fair value less costs of disposal. For the finite lives their fair value is amortised on a straight-line basis over purpose of impairment testing, assets are grouped at the lowest levels those lives. The nature of those intangibles recognised and their for which there are separately identifiable cash flows (Cash Generating estimated useful lives are as follows: Units or “CGUs”). Customer relationships Up to 25 years Inventories Technology Up to 25 years Order backlogs Over period of backlog Where a business is acquired, inventory of the acquired business is recorded at fair value in the Group’s balance sheet. Finished goods are Amortisation of intangible assets acquired as part of a business valued at estimated selling price less the costs of disposal and a combination is excluded from the underlying profit measures used by reasonable profit allowance for the selling effort. Work in progress is the Board to monitor and measure the underlying performance of the valued at estimated selling price less the costs to complete, the costs of Group (see note 10). disposal and a reasonable profit allowance for the work still to be carried out. When this inventory is subsequently disposed of post acquisition the Property, plant and equipment fair value is charged to the income statement. The difference between Property, plant and equipment is recorded at cost less subsequent the fair value of the inventory consumed and its cost is excluded from the depreciation and impairment except for land which is shown at cost underlying profit measures used by the Board to monitor and measure less any impairment. Cost includes expenditure that is directly the underlying performance of the Group (see note 10). attributable to the acquisition of the asset. The Group has taken All other inventories are recorded at the lower of cost and net realisable advantage of the exemption under IFRS 1 (“First-time Adoption of value. Cost represents materials, direct labour, other direct costs and International Financial Reporting Standards”) not to restate property related production overheads (based on normal operating capacity) and previously revalued under UK GAAP and to treat these earlier is determined using the first-in first-out (FIFO) method. Net realisable revaluations as deemed cost. Depreciation is calculated on a straight- value is based on estimated selling price, less further costs expected line basis over the estimated useful lives of the assets as follows: to be incurred to completion and disposal. Freehold buildings 40 to 50 years In all cases provision is made for obsolete, slow moving or defective Long and short leasehold property Over period of lease items where appropriate and for unrealised profits on items of Plant and machinery 3 to 10 years intra-group manufacture. Provision is made for the full amount Furnaces Up to 20 years of foreseeable losses on contracts. Fixtures and fittings 3 to 10 years Motor vehicles 4 to 5 years

Financial statements 57 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

2 SUMMARY OF SIGNIFICANT ACCOUNTING obligation and the amount can be reliably estimated. Provisions are POLICIES CONTINUED discounted to present value where the impact is significant, using a AAA bond rate, and the difference recognised as finance costs. Trade receivables Retirement benefit schemes Trade receivables are stated initially at fair value then measured For defined benefit schemes, pension costs and the costs of providing at amortised cost less provisions for impairment. Provisions for other post-retirement benefits (principally healthcare) are charged to impairment are recognised when there is objective evidence that the income statement in accordance with the advice of qualified the Group will not be able to collect all amounts due according to independent actuaries. Past service costs are recognised immediately the original terms of the receivables. The impairment recorded is in the income statement unless the changes are dependent on the the difference between the carrying value of the receivables and employees remaining in service for a particular period in which case the estimated future cashflows discounted where appropriate. the costs are recognised on a straight-line basis over that period. Any impairment required is recorded in the income statement. The retirement benefit obligations recognised on the balance sheet Cash and cash equivalents represent for each scheme the difference between the fair value of the schemes’ assets and the present value of the schemes’ defined benefit Cash and cash equivalents include cash in hand, deposits held at obligations measured at the balance sheet date. The defined benefit call with banks and bank overdrafts. Bank overdrafts are disclosed obligation is calculated annually by independent actuaries using the as current liabilities except where the Group participates in offset projected unit credit method. The present value of the defined benefit arrangements with certain banks whereby cash and overdraft obligation is determined by discounting the defined benefit obligations amounts are offset against each other. using interest rates of high quality corporate bonds denominated in the Trade payables currency in which the benefits will be paid and with terms to maturity comparable with the terms of the related defined benefit obligations. Trade payables are not interest bearing and are stated at their Cumulative actuarial gains and losses are recognised in the period in nominal value. which they arise in the statement of recognised income and expense. Leases For defined contribution schemes, payments are recognised in the income statement when they fall due. Leases where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are Share-based compensation capitalised at the lease’s commencement at the lower of the fair value of the leased asset and the present value of the minimum lease The Group operates a number of equity settled and cash settled payments. Each lease payment is allocated between the liability and share-based compensation schemes. For each scheme the fair value finance charges so as to achieve a constant rate on the finance balance of the services received from employees is recognised as an expense outstanding. The corresponding rental obligations, net of finance charges, in the income statement over the period for which services are received are included in liabilities. The interest element of the finance cost is (vesting period). charged to the income statement over the lease period so as to produce a For equity settled share-based schemes the total amount recognised constant periodic rate of interest on the remaining balance of the liability is based on the fair value of the equity instrument measured at the date for each period. The assets acquired under finance leases are depreciated the award is made. Assumptions are made as to the total number of over the shorter of the useful life of the asset or the lease term. equity instruments that will vest and these assumptions are reviewed Leases in which a significant portion of the risks and rewards of at each balance sheet date. The impact of any revision to vesting ownership are retained by the lessor are classified as operating leases. estimates is recognised in the income statement over the vesting Payments made under operating leases (net of any incentives received period, with a corresponding adjustment to equity. Proceeds received, from the lessor) are charged to the income statement on a straight-line net of any directly attributable transaction costs, are credited to share basis over the period of the lease. capital and share premium.

Dividends For cash settled share-based schemes the total amount recognised is based on the fair value of the liability incurred. The fair value of Interim dividends are recognised when they are paid. Final dividends the liability is remeasured at each balance sheet date with changes are recognised when they are approved by the shareholders. in the fair value recognised in the income statement for the period.

Borrowings Derivative financial instruments and hedging Borrowings are initially recognised at fair value being proceeds received The Group uses derivative financial instruments to hedge its exposure less directly attributable transaction costs incurred. Borrowings are to interest rate and foreign currency transactional risk. Derivative subsequently measured at amortised cost with any transaction costs financial instruments are recognised at fair value on the date the amortised to the income statement over the period of the borrowings derivative contract is entered into and are subsequently remeasured using the effective interest method. Any related interest accruals are at fair value at each balance sheet date. included within borrowings. Borrowings are classified as current The method by which any gain or loss arising from remeasurement liabilities unless the Group has an unconditional right to defer settlement is recognised depends on whether the instrument is designated as of the liability for at least 12 months after the balance sheet date. a hedging instrument and if so the nature of the item being hedged. Provisions The Group recognises an instrument as a hedging instrument by documenting at the inception of the instrument the relationship Provision is made for environmental, legal and regulatory liabilities, between the instrument and the hedged item and the objectives and onerous contracts and for product warranty claims when the Group strategy for undertaking the hedging transaction. To be designated has a present obligation as a result of past events, it is more likely than as a hedging instrument, an instrument must also be assessed, not that an outflow of economic benefits will be required to settle the at inception and on an on-going basis, to be highly effective in offsetting changes in fair values or cash flows of hedged items.

58 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

To the extent that the maturity of the financial instrument is more than Adoption of new and revised accounting interpretations 12 months from the balance sheet date the fair value is reported as a The following accounting interpretations became effective during the non-current asset or non-current liability. All other derivative financial current year, but have had no impact on the Group’s financial statements. instruments are reported as current assets or current liabilities. • IFRIC 12, ‘Service concession arrangements’ (effective from Fair value hedges 1 January 2008). Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges are recognised in the Recent accounting developments income statement together with changes in the fair value of the hedged The following amendments to existing standards, new standards and item. The Group currently only applies fair value hedge accounting interpretations have been published and are mandatory for the Group’s for hedging fixed interest rate risk on borrowings. future accounting periods. They have not been early adopted in these financial statements, but may have an impact on future financial Cash flow hedges statements when adopted: Changes in the fair value of the effective portion of derivative financial instruments that are designated and qualify as cash flow hedges are • IFRS 3 (Revised), ‘Business combinations’ and consequential initially recorded in equity. Changes in the fair value of the ineffective amendments to IAS 27 ‘Consolidated and separate financial portion are recognised immediately in the income statement. To the extent statements’, IAS 28, ‘Investments in associates’ and IAS 31 that changes in the fair value are recorded in equity they are recycled to ‘Interests in joint ventures’. The amendment to the standard is still the income statement in the periods in which the hedged item affects subject to endorsement by the European Union. The revision to IFRS the income statement. The Group currently only applies cash flow value 3 will require the Group to recorded contingent consideration at fair hedge accounting for hedging floating interest rate risk on borrowings. value at the acquisition date and in subsequent periods remeasure such consideration at fair value through the income statement. The If the forecast transaction to which the cash flow hedge relates is Group will also be required to expense certain transaction costs no longer expected to occur, the cumulative gain or loss previously rather than include them as part of the consideration paid. The recognised in equity is transferred to the income statement immediately. standard is applicable to business combinations occurring in If the hedging instrument is sold, expires or no longer meets the criteria accounting periods beginning on or after 1 July 2009. for hedge accounting the cumulative gains and losses previously recognised in equity are transferred to the income statement when • IFRS 8, ‘Operating segments’ (effective from 1 January 2009). IFRS 8 the forecast transaction is recognised in the income statement. replaces IAS 14 and requires a ‘management approach’, under which segment information is presented on the same basis as that Net investment hedges used for internal reporting purposes. The Group will apply IFRS 8 Gains and losses on net investments of foreign subsidiaries are from 1 January 2009. The expected impact is still being assessed in accounted for in a similar way to cash flow hedges. Gains and losses detail by management. relating to the effective portion of any hedge are recognised in equity. Changes in the fair value of any ineffective portion are recognised in the The following amendments to existing standards, new standards and income statement. Cumulative gains and losses previously recognised interpretations have been published and are mandatory for the Group’s in equity are transferred to the income statement if the foreign future accounting periods. They have not been early adopted in these subsidiary to which they relate is disposed of. financial statements and are not expected to have a significant impact on future financial statements when adopted: Derivatives that do not meet the criteria for hedge accounting Where derivatives do not meet the criteria for hedge accounting, • IFRS 1 (Amendment), ‘First time adoption of IFRS’ (effective for changes in fair value are recognised immediately in the income annual periods beginning on or after 1 January 2009); statement. Gains and losses arising from measuring the contracts • IFRS 2 (Amendment), ‘Share-based payment’ (Effective for annual at fair value are excluded from the underlying profit measures used periods beginning on or after 1 January 2009); by the Board to monitor and measure the underlying performance • IAS 1 (Amendment), ‘Presentation of financial statements’ (effective of the Group (see note 10). The Group, for instance, utilises a number for annual periods beginning on or after 1 January 2009); of foreign currency forward contracts to mitigate against currency • IAS 23 (Amendment), ‘Borrowing costs’ (Effective for annual periods fluctuations. The Group has determined that the additional costs of beginning on or after 1 January 2009); meeting the extensive documentation requirements for the Group’s • IAS 27 (Revised), ‘Consolidated and separate financial statements’ large number of foreign currency forward contracts are not merited. (Effective for annual periods beginning on or after 1 July 2009); • IAS 32 (Amendment), ‘Financial instruments: Presentation’ Share capital (Effective for annual periods beginning on or after 1 January 2009); • IAS 39 (Amendment), ‘Financial instruments: Recognition and Ordinary shares are classified as equity. Incremental costs directly measurement’ (Effective for annual periods beginning on or after attributable to the issue of new shares or options are deducted from 1 July 2008); the proceeds recorded in equity. • IAS 39 (Amendment), ‘Financial instruments: Recognition and Own shares represent shares in the Company that are held by an measurement on eligible hedged items’ (Effective for annual independently managed Employee Share Ownership Plan. The periods beginning on or after 1 July 2009); consideration paid for own shares including any incremental directly • IFRIC 13, ‘Customer loyalty programmes’ (Effective for annual attributable costs is recorded as a deduction from shareholders’ equity. periods beginning on or after 1 July 2008); When such shares are sold any consideration received, net of any • IFRIC 14, ‘IAS 19 - The limit on a defined benefit asset, minimum directly attributable costs, is recorded within shareholders’ equity. funding requirements and their interaction’ (Effective for annual periods beginning on or after 1 January 2009); Restatement of prior periods for finalisation of fair values • IFRIC 15, ‘Agreements for construction of real estates (Effective for arising on acquisitions annual periods beginning on or after 1 January 2009); • IFRIC 16, ‘Hedges of a net investment in a foreign operation’ (Effective Where businesses are acquired fair values of the net assets of the for annual periods beginning on or after 1 October 2008). acquired business are finalised within 12 months of the acquisition date, with the exception of certain deferred tax balances. All fair value adjustments are recorded with effect from the date of acquisition and consequently may result in the restatement of previously reported financial results (see note 46). Financial statements 59 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

3 FINANCIAL RISK MANAGEMENT

Financial risk factors The Group’s operations expose it to a number of financial risks including foreign exchange risk, credit risk, interest rate risk and liquidity risk. These risks are managed by a centralised treasury department, in accordance with Board approved objectives, policies and authorities. Regular reports monitor exposures and assist in managing the associated risks. Foreign exchange risk The Group operates internationally and is subject to foreign exchange risks on future commercial transactions and net investments in foreign subsidiaries. The principal exposures arise 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 exposures based on historical experience and projections. The Group hedges at least 70% of the next 12 months anticipated exposure and can hedge up to five years ahead. The Group uses borrowings denominated in the relevant currencies to hedge its investment in foreign subsidiaries. Details of the hedges in place can be found in note 32. Credit risk The Group is not subject to significant concentration of credit risk with exposure spread across a large number of companies across the world. In addition, many of the Group’s principal customers are either government departments or large multinationals. 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 instruments which it controls through only dealing with highly rated counterparties and netting transactions on settlement wherever possible. 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 floating rate borrowings expose the Group to cash flow interest rate risk. The Group’s policy is to maintain at least 25% of its net debt at fixed rates. The Group mitigates interest rate risks through swaps which have the economic effect of converting fixed rate borrowings into floating rate borrowings and floating rate borrowings into fixed rate borrowings. Details of the hedges in place can be found in note 32. 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 table analyses the Group’s financial liabilities and derivative assets and liabilities as at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows:

2008

Less than 1-2 years 2-5 years Greater than Total 1 year 5 years £’m £’m £’m £’m £’m

Trade and other payables 314.6 3.4 5.9 – 323.9 Bank and other borrowings 8.7 1.5 1,051.3 50.0 1,111.5 Interest payments on borrowings 16.4 9.4 24.8 4.0 54.6 Obligations under finance leases (see note 29) 1.0 1.6 4.6 – 7.2

Derivative financial instruments: Inflows* (0.8) – – – (0.8) Outflows* 21.2 18.0 11.2 – 50.4 Total 361.1 33.9 1,097.8 54.0 1,546.8

2007

Less than 1-2 years 2-5 years Greater than Total 1 year 5 years £’m £’m £’m £’m £’m

Trade and other payables 227.1 1.7 5.3 – 234.1 Bank and other borrowings 6.5 1.1 733.5 127.4 868.5 Interest payments on borrowings 13.8 6.8 20.3 9.4 50.3 Obligations under finance leases (see note 29) 0.5 0.5 1.8 2.7 5.5

Derivative financial instruments: Inflows* (0.5) – – – (0.5) Outflows* 0.5 0.5 1.5 – 2.5 Total 247.9 10.6 762.4 139.5 1,160.4

* Assumes no change in interest rates from those prevailing at year end.

60 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

3 FINANCIAL RISK MANAGEMENT CONTINUED

Sensitivity analysis The Group’s principal exposures 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 as 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 the relative dates and assuming no hedge ineffectiveness.

2008 2007

Income Equity Income Equity statement statement £’m £’m £’m £’m

USD/GBP exchange rate +/– 5% 13.9 48.4 3.0 35.8 US yield curve +/– 1% 7.2 13.4 2.0 12.2

Of the impact on equity from movements in the exchange rate, £50.0 million (2007: £38.7 million) relates to net US dollar debt. However, as all US dollar debt is designated as a net investment hedge, the impact is entirely offset by the retranslation of overseas operations.

Capital risk management The Group’s objective when managing its capital structure is to minimise the cost of capital while maintaining adequate capital to protect against volatility in earnings and net asset values. The strategy is designed to maximise shareholder return over the long term. The relative proportion of debt to equity will be adjusted over the medium term depending on the cost of debt compared to equity and the level of uncertainty facing the industry and the Group. The capital structure of the Group at the balance sheet date is as follows:

2008 2007 £’m £’m

Obligations under finance leases – current (see note 29) 1.0 0.5 Bank and other borrowings – current (see note 30) 13.5 16.7 Obligations under finance leases – non-current (see note 29) 6.2 5.0 Bank and other borrowings – non-current (see note 30) 1,094.5 858.1 Less cash and cash equivalents (see note 26) (67.3) (64.9) Total net debt 1,047.9 815.4 Total equity 1,286.4 1,063.4 Debt/equity % 81% 77%

4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS In applying the Group’s accounting policies set out in note 2 management is required to make certain estimates and judgements concerning the future. These estimates and judgements are regularly reviewed and updated as necessary. The estimates and judgements that have the most significant effect on the amounts included in these consolidated financial statements are as follows:

Goodwill Each year the Group carries out impairment tests of its goodwill balances which requires estimates to be made of the value in use of its cash generating units (CGUs). These value in use calculations are dependent on estimates of the future cash flows and long-term growth rates of the CGUs. Further details on these estimates are provided in note 19.

Development costs and programme participation costs The Group capitalises development costs and programme participation costs provided they meet certain criteria as set out in note 2. Costs are only capitalised where management are satisfied as to the ultimate commercial viability of the project based on available information. Projects typically involve long-term relationships on aircraft platforms and in assessing commercial viability, estimates need to be made of future revenues, margins and cashflows which are dependent on a number of factors including the size, utilisation and life of the aircraft fleet to which the capitalised costs relate.

Fair value of intangible assets acquired in a business combination On the acquisition of a business it is necessary to attribute fair values to any intangible assets acquired (provided they meet the criteria to be recognised). The fair values of these intangible assets are dependent on estimates of attributable future revenues, margins and cashflows.

Income taxes In determining the Group’s provisions for income tax and deferred tax it is necessary to consider transactions in a small number of key tax jurisdictions for which the ultimate tax determination is uncertain. To the extent that the final outcome differs from the tax that has been provided, adjustments will be made to income tax and deferred tax provisions held in the period the determination is made.

Financial statements 61 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS CONTINUED

Environmental matters The Group is involved in the investigation and remediation of certain sites for which we have been identified as a potentially responsible party under US law. Advice is received by the Group from its environmental consultants and legal advisors to assist in the determination of the timing and estimation of the costs that the Group may incur in respect of such claims and an appropriate provision is made. To the extent that these estimates change as more information becomes available adjustments are made to the carrying value of the provision. The Group has extensive insurance arrangements in place to mitigate the impact of historical environmental events on the Group.

Legal and regulatory The Group is subject to legal proceedings and other claims arising in the ordinary course of business. The Group is required to assess the likelihood of any adverse judgements or outcomes, as well as potential ranges of probable losses. A determination of the amount of reserves required for these matters is based on a careful analysis of each individual issue with the assistance of outside legal counsel. However, actual claims incurred could differ from the original 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, healthcare cost increases and the rate at which liabilities are discounted. Any change in these assumptions would impact the retirement benefit obligations recognised. Further details on these estimates are provided in note 35.

5 REVENUE An analysis of the Group’s revenue is as follows:

2008 2007 £’m £’m

Sale of goods 1,034.0 789.6 Contract accounting revenue 59.8 38.8 Revenue from services 49.4 32.8 Revenue from funded research and development 19.4 17.0 Total 1,162.6 878.2

6 SEGMENTAL ANALYSIS

Primary reporting format – business segments The Group’s primary segments are its business segments. The Group manages its businesses under the key segments of Aerospace Equipment, Sensing Systems and Defence Systems. Year ended 31 December 2008 Aerospace Sensing Defence Equipment Systems Systems Total £’m £’m £’m £’m

Revenue 763.7 267.8 131.1 1,162.6

Underlying operating profit (see note 10) 230.6 46.7 19.1 296.4 Exceptional operating costs (see note 11) (12.8) (0.1) (2.9) (15.8) Amortisation of intangibles acquired in business combinations (see note 21) (52.7) (1.0) (8.1) (61.8) Disposal of inventory revalued in business combinations (see note 10) – (0.3) – (0.3) Financial instruments (see note 10) (37.9) (8.2) – (46.1) Operating profit 127.2 37.1 8.1 172.4 Net finance costs (53.1) Profit before tax 119.3 Tax (20.2) Profit for the year 99.1

Depreciation (see note 22) 17.5 7.7 1.4 26.6 Amortisation of intangible assets* (see notes 20 and 21) 69.8 3.7 8.7 82.2 Capital expenditure** 78.3 17.7 5.1 101.1

* Of the total amortisation in the year £20.4 million has been charged to underlying profit as defined in note 10. ** Capital expenditure includes internal development costs capitalised of £23.7 million (see note 20), capitalised programme participation costs of £35.7 million (see note 20), other purchased intangibles of £5.8 million (see note 21) and property, plant and equipment of £35.9 million (see note 22) but excludes additions arising from the acquisition of businesses which are shown separately in note 44.

62 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

6 SEGMENTAL ANALYSIS CONTINUED As at 31 December 2008 Segment Segment assets liabilities £’m £’m

Aerospace Equipment 2,810.9 (304.8) Sensing Systems 365.9 (104.3) Defence Systems 205.8 (32.8) Unallocated 7.0 (15.7) Total 3,389.6 (457.6)

Segment assets and liabilities exclude net debt, taxation, retirement benefit obligations, interest rate derivatives and assets and liabilities classified as held for sale. Year ended 31 December 2007 Aerospace Sensing Defence Equipment Systems Systems Total £’m £’m £’m £’m

Revenue 528.1 235.9 114.2 878.2

Underlying operating profit (see note 10) 158.2 41.5 16.6 216.3 Exceptional operating costs (see note 11) (4.7) – (0.7) (5.4) Amortisation of intangibles acquired in business combinations (see note 21) (30.5) (0.4) (7.5) (38.4) Disposal of inventory revalued in business combinations (see note 10) (21.3) – – (21.3) Financial instruments (see note 10) (4.2) (1.1) – (5.3) Goodwill adjustment arising from recognition of tax losses (see note 10) (3.2) – – (3.2) Operating profit 94.3 40.0 8.4 142.7 Net finance costs (37.3) Profit before tax 105.4 Tax (16.1) Profit for the year 89.3

Depreciation (see note 22) 11.8 6.1 0.9 18.8 Amortisation of intangible assets* (see notes 20 and 21) 40.8 3.9 8.3 53.0 Capital expenditure** 57.0 24.8 5.0 86.8

* Of the total amortisation in the year £14.6 million has been charged to underlying profit as defined in note 10. ** Capital expenditure includes internal development costs capitalised of £22.4 million (see note 20), capitalised programme participation costs of £20.1 million (see note 20), other purchased intangibles of £3.3 million (see note 21) and property, plant and equipment of £41.0 million (see note 22) but excludes additions arising from the acquisition of businesses. As at 31 December 2007 Segment Segment assets liabilities Restated Restated £’m £’m

Aerospace Equipment 2,186.1 (218.8) Sensing Systems 270.1 (70.4) Defence Systems 157.7 (25.0) Unallocated 3.4 (12.8) Total 2,617.3 (327.0)

Segment assets and liabilities exclude net debt, taxation, retirement benefit obligations, interest rate derivatives and assets and liabilities classified as held for sale.

Financial statements 63 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

6 SEGMENTAL ANALYSIS CONTINUED

Secondary reporting format – geographical segments The Group’s secondary segments are its geographical segments.

2008 2007 £’m £’m

Revenue UK 149.8 121.3 Rest of Europe 260.9 212.2 North America 599.9 428.3 Rest of World 152.0 116.4 Total 1,162.6 878.2

Revenues are based on the location of the customer.

2008 2007 Restated £’m £’m

Total segment assets UK 805.2 734.9 Rest of Europe 177.3 101.5 North America 2,397.1 1,775.6 Rest of World 10.0 5.3 Total 3,389.6 2,617.3

Total segment assets are based on the location of the assets. Total segment assets exclude cash, taxation, interest rate derivatives and assets classified as held for sale.

2008 2007 £’m £’m

Capital expenditure UK 29.8 29.6 Rest of Europe 11.0 14.5 North America 59.7 42.6 Rest of World 0.6 0.1 Total 101.1 86.8

Capital expenditure is based on the location of the assets, and includes capitalised internal development costs, capitalised programme participation costs, other purchased intangibles and property plant and equipment but excludes additions arising from the acquisition of businesses which are shown separately in note 44.

64 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

7 EXPENSES BY NATURE 2008 2007 £’m £’m

Raw materials and consumables used 344.6 254.6 Changes in inventories of finished goods and work in progress (35.8) (31.2) Disposal of inventory revalued in business combinations (see note 10) 0.3 21.3 Employee costs (see note 9) 352.5 290.7 Depreciation of property, plant & equipment (see note 22) 26.6 18.8 Research and development costs 35.7 30.5 Amortisation of development costs (see note 20) 3.5 3.8 Amortisation of programme participation costs (see note 20) 14.1 7.8 Amortisation of other purchased intangible assets (see note 21) 2.8 3.0 Amortisation of intangibles acquired in business combinations (see note 10) 61.8 38.4 Net foreign exchange gains (6.9) (2.8) Operating lease rentals – land and buildings 9.3 7.7 Operating lease rentals – plant, equipment and vehicles 0.8 1.1 Exceptional operating costs (see note 11) 15.8 5.4 Financial instruments (see note 10) 46.1 5.3 Goodwill adjustment arising from recognition of tax losses (see note 14) – 3.2 Other administration costs 121.1 78.7 992.3 736.3 Other operating income (2.1) (0.8) Total 990.2 735.5

Analysed in the income statement: Cost of sales 637.8 493.4 Net operating costs 352.4 242.1 Total 990.2 735.5

8 AUDITOR REMUNERATION 2008 2007 £’m £’m

Payable to PricewaterhouseCoopers LLP and network firms:

Audit services : Fees payable for the audit of parent company and consolidated financial statements 0.2 0.2

Non-audit services : Fees payable for the audit of the Company’s subsidiaries pursuant to legislation 1.1 1.4 : Fees payable for other services supplied pursuant to legislation – 1.4 : Services relating to corporate finance transactions – 0.1 : All other services 0.9 1.3 Total 2.2 4.4

“Fees payable for other services pursuant to legislation” of £Nil (2007: £1.4 million) relate to costs capitalised within acquisition costs of businesses acquired during the year. “All other services” primarily relates to fees in respect of cost saving advice on procurement. In addition to the above services, the Group’s auditor acted as auditor to the Meggitt Group 1990 Pension Plan (1990 Plan) and the Meggitt Executive Pension Plan (MEPP). The appointment of auditors to these Group pension schemes and the fees paid in respect of those audits are agreed by the trustees of each scheme, who act independently from the management of the Group. The aggregate fees paid to the Group’s auditor for audit services to these pension schemes during the year was £27,000 (2007: £27,000). The Group engages PricewaterhouseCoopers LLP to undertake those non-audit related activities which they are required to, and most suited to, perform. Further details on the Group’s policy in respect of non-audit fees is contained in the Directors’ statement on corporate governance on page 43.

Financial statements 65 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

9 EMPLOYEE COSTS 2008 2007 £’m £’m

Employee costs during the year including executive directors: Wages and salaries 285.0 232.0 Social security costs 40.7 33.0 Pension costs – defined contribution schemes (see note 35) 9.9 8.4 Pension costs – defined benefit schemes (see note 35) 12.3 11.6 Other post-retirement costs – healthcare schemes (see note 35) 1.0 0.5 Share-based payment (see note 38) 3.6 5.2 Total 352.5 290.7

2008 2007 No. No.

Average monthly number of persons employed including executive directors: Production 6,802 6,023 Selling and distribution 619 611 Administration 790 726 Total 8,211 7,360

Details of directors’ remuneration can be found in the Remuneration Report on page 44, which constitutes part of these financial statements.

10 RECONCILIATIONS BETWEEN PROFIT AND UNDERLYING PROFIT Underlying profit is used by the Board to measure and monitor the underlying trading performance of the Group. It excludes certain items as shown below:

2008 2007 Note £’m £’m

Operating profit 172.4 142.7

Exceptional operating costs (see note 11) 15.8 5.4 Amortisation of intangibles acquired in business combinations a 61.8 38.4 Disposal of inventory revalued in business combinations b 0.3 21.3 Financial instruments c 46.1 5.3 Goodwill adjustment arising from recognition of tax losses d – 3.2 Adjustments to operating profit 124.0 73.6 Underlying operating profit 296.4 216.3

Profit before tax 119.3 105.4

Adjustments to operating profit per above 124.0 73.6 Exceptional finance costs (see note 11) – 2.0 Exceptional finance income (see note 11) – (2.0) Adjustments to profit before tax 124.0 73.6 Underlying profit before tax 243.3 179.0

Profit for the year 99.1 89.3

Adjustments to profit before tax per above 124.0 73.6 Tax effect of adjustments to operating profit (47.9) (33.1) Adjustments to profit for the year 76.1 40.5 Underlying profit for the year 175.2 129.8 a. The Group excludes from its underlying profit figures the amortisation of intangibles acquired in business combinations. 2008 2007 £’m £’m

Amortisation of other intangible assets (see note 21) 64.6 41.4 Less amortisation of purchased intangible assets (see note 21) (2.8) (3.0) Amortisation of intangibles acquired in business combinations 61.8 38.4

66 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

10 RECONCILIATIONS BETWEEN PROFIT AND UNDERLYING PROFIT CONTINUED b. IFRS 3 requires finished goods acquired through a business combination to be valued at estimated selling price less costs of disposal and a reasonable profit allowance for the selling effort. Work in progress acquired in a business combination is valued at estimated selling price less costs to complete, costs of disposal and a reasonable profit allowance for the work not yet completed. The fair value of acquired inventory is thus significantly higher than the same items built post acquisition, the value of which includes no profit element. This increase arising from the revalued inventory is charged to the income statement as the inventory is consumed and is excluded from the Group’s underlying profit figures. c. 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 required to be able to apply hedge accounting under IAS 39 (“Financial Instruments: Recognition and Measurement”) are not merited. The Group’s underlying profit figures exclude amounts which would not have been recorded if hedge accounting had been applied. Where interest rate derivatives do not qualify to be hedge accounted, movements in the fair value of those derivatives are excluded from underlying profit. Where interest rate derivatives do qualify to be accounted for as fair value hedges, any difference between the movement in the fair values of the derivatives and in the fair value of fixed rate borrowings is excluded from underlying profit. Any gains or losses arising from the requirement to continue to measure fixed rate borrowings at fair value after the associated interest rate derivatives have matured or have been cancelled are also excluded from underlying profit.

2008 2007 £’m £’m

Movement in the fair value of foreign currency forward contracts (see note 32) 49.6 5.8 Impact of retranslating net foreign currency assets and liabilities at spot rate (4.2) (0.7) Movement in the fair value of interest rate derivatives not hedge accounted 2.9 0.2 Movement in the fair value of fixed rate borrowings (2.2) – Financial instruments – loss 46.1 5.3 d. The goodwill adjustment arises from the recognition of tax losses during the year in respect of businesses acquired in earlier years. These tax losses existed when the businesses were acquired but a deferred tax asset was not recognised at the time as the recoverability of those losses was not probable at the time the fair values were finalised. IFRS requires that goodwill is adjusted in the year the recoverability becomes probable with a corresponding charge recorded in profit before tax (see note 14).

11 EXCEPTIONAL ITEMS 2008 2007 Note £’m £’m

Integration of K&F Industries Holdings, Inc. (“K&F”) a 10.2 4.7 Integration of Firearms Training Systems Inc. (“FATS”) b 2.9 0.7 Integration of other businesses c 4.6 – Profit on sale of S-Tec Corporation (see note 45) d (1.9) – Exceptional operating costs 15.8 5.4

2008 2007 Note £’m £’m

Rights issue – Interest on bank deposits e – (2.0) Rights issue – Reduced interest payable net of costs of new facilities e – (1.6) Redemption of K&F 7.75% senior subordinated notes f – 3.6 Exceptional net finance costs – –

Analysed as: Exceptional finance income – (2.0) Exceptional finance costs – 2.0 Exceptional net finance costs – – a. Costs incurred during the year include the rationalisation of repair and overhaul centres with the relocation of the Slough and Liege facilities to Coventry in the UK and the relocation of the Atlanta facility to Akron in the US. Costs were also incurred in rationalising and restructuring R&D and engineering capabilities and in moving steel brake and structural manufacturing from Akron to Mexico. Further exceptional operating costs of £14.1m are expected to arise over the next two years as the integration is completed. b. During the year the relocation of Caswell and FATS US to a new site in Atlanta was completed. c. During the year other business integration costs were also incurred, principally the integration of the Avery Hardoll business into other businesses in the Group. Cash expenditure on all exceptional operating costs above was £16.5 million (2007: £4.2 million), including £9.5 million in respect of K&F (2007: £1.9 million) and £3.3 million (2007: £1.3 million) in respect of FATS. The tax credit in respect of the exceptional operating costs was £4.0 million (2007: £1.7 million).

Financial statements 67 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

11 EXCEPTIONAL ITEMS CONTINUED d. In January 2008 the Group completed the disposal of S-Tec Corporation and recorded a profit of £1.9 million which has been treated as an exceptional operating item. e. The Group announced on 6 March 2007 the proposed acquisition of K&F for an enterprise value of USD 1.8 billion funded in part by a rights issue with the balance financed by a new debt facility. The reduction in net finance costs arising from the cash raised by the rights issue and finance costs associated with the new debt facilities was treated as exceptional net finance income in respect of the period between the completion of the rights issue on 18 April 2007 and the completion of the acquisition on 22 June 2007. f. Following the acquisition of K&F, the Group commenced a cash tender offer for K&F’s USD 315 million aggregate principal amount of 7.75% senior subordinated notes which were due in 2014. This tender offer successfully completed on 3 August 2007. The premium payable on redemption, being the difference between the total consideration paid and the book value of the notes at the date the offer completed, was treated as exceptional finance costs.

12 FINANCE INCOME 2008 2007 £’m £’m

Interest on bank deposits 0.6 3.6 Unwinding of interest on other receivables 1.0 0.9 Expected return on retirement benefit scheme assets (see note 35) 31.3 27.0 Other finance income 1.0 1.2 Finance income 33.9 32.7

13 FINANCE COSTS 2008 2007 £’m £’m

Interest on bank borrowings 39.0 27.1 Interest on USD 250 million senior notes 7.4 6.7 Interest on 7.75% senior subordinated notes – 1.7 Premium payable on redemption of 7.75% senior subordinated notes (see note 11) – 3.6 Interest on finance lease obligations 0.3 0.2 Unwinding of interest on provisions (see note 33) 1.9 1.1 Unwinding of interest on retirement benefit scheme liabilities (see note 35) 36.0 28.2 Other finance costs 2.4 1.4 Finance costs 87.0 70.0

14 TAX 2008 2007 £’m £’m

Current tax – current year 40.9 36.4 Current tax – adjustment in respect of prior years 2.0 (2.9) Deferred tax – current year (15.0) (8.5) Deferred tax – adjustment in respect of prior years (7.7) (5.7) Deferred tax – adjustments to goodwill on recognition of tax assets (see note 10) – (3.2) Total taxation 20.2 16.1

Reconciliation of the total tax charge A reconciliation of the notional tax charge based on average standard rates of tax (weighted in proportion to accounting profits) to the actual tax charge is as follows: 2008 2007 £’m £’m

Profit on ordinary activities before taxation at weighted average standard tax rate of 29.0%* (2007: 34.9%) 34.6 36.8 Effects of: Permanent differences (1.2) (4.8) Timing differences (0.8) (1.8) Tax credits and incentives (6.7) (2.3) Prior year credit (5.7) (8.6) Deferred tax – adjustments to goodwill on recognition of tax assets (see note 10) – (3.2) Total taxation 20.2 16.1

68 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

14 TAX CONTINUED Tax (credit)/charge on items recorded directly in equity

2008 2007 £’m £’m

Current tax on exchange movements (15.6) (7.2) Deferred tax on exchange movements 1.0 – Deferred tax on actuarial movements (18.7) 8.2 Deferred tax on share based payment 1.9 (0.6) Deferred tax on cash flow hedge movements (5.2) (2.9) Total taxation recorded in equity (36.6) (2.5)

* 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 2008 to increase or reduce respectively by approximately £1 million.

15 PROFIT OF PARENT COMPANY The profit attributable to the shareholders of Meggitt PLC includes a profit, after dividends received, of £104.6 million (2007: £40.8 million) which has been dealt with in the accounts of that Company. Meggitt PLC, which prepares its accounts in accordance with UK GAAP, has taken advantage of the legal dispensation contained in Section 230 of the Companies Act 1985 allowing it not to publish a separate profit and loss account.

16 EARNINGS PER ORDINARY SHARE Earnings per ordinary share (“EPS”) is calculated by dividing the profit attributable to equity shareholders by the weighted average number of shares in issue during the year. The weighted average number of shares used excludes any shares bought by the Group and held as own shares (see note 39). The calculation of diluted earnings per share 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 options in issue are exercised.

2008 2008 2008 2007 2007 2007 £’m No. ’m Pence £’m No. ’m Pence

Profit attributable to equity shareholders 99.1 661.9 15.0 89.3 612.7 14.6 Own shares (see note 39) – – – – (0.1) – Basic EPS 99.1 661.9 15.0 89.3 612.6 14.6 Potential effect of dilutive ordinary shares – options – 1.1 – – 3.3 (0.1) Diluted EPS 99.1 663.0 15.0 89.3 615.9 14.5

Underlying earnings per share is based on underlying profit (see note 10) and is calculated below:

2008 2007 Pence Pence

Basic EPS 15.0 14.6 Add back effects of: Exceptional operating costs 1.8 0.6 Amortisation of intangibles acquired in business combinations 4.7 3.3 Disposal of inventory revalued in business combinations – 2.1 Financial instruments 5.0 0.6 Exceptional finance income – (0.5) Exceptional finance costs – 0.4 Rights issue* – 1.0 Underlying EPS 26.5 22.1

* As referred to in note 11 the Group excluded exceptional net finance income arising from the rights issue for the period from when the rights issue proceeds were received on 18 April 2007 to 22 June 2007, the date when the acquisition of K&F was completed. For the purposes of underlying EPS for 2007 the Group also adjusted the weighted average number of shares used to exclude the effect of the new shares for this same period. The weighted average number of shares used for underlying EPS in 2007 was 586.9 million.

Financial statements 69 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

17 DIVIDENDS 2008 2007 £’m £’m

In respect of earlier years – 26.2 In respect of 2007: Interim of 2.45p per share – 16.0 Final of 5.75p per share 37.9 – In respect of 2008: Interim of 2.70p per share 17.9 – Dividends paid 55.8 42.2 Less paid as scrip dividend (see note 43) (15.5) (6.6) Dividends paid in cash 40.3 35.6

A final dividend in respect of 2008 of 5.75p per share (2007: 5.75p), amounting to a total final dividend of £38.3 million (2007: £37.9 million) is to be proposed at the Annual General Meeting on 23 April 2009. This dividend is not reflected in these financial statements as it is not approved at the balance sheet date.

18 RELATED PARTY TRANSACTIONS Transactions between the Company and its subsidiaries have been eliminated on consolidation. The remuneration of the key management personnel of the Group including executive directors is set out below:

2008 2007 £’m £’m

Wages and salaries 7.3 6.7 Social security costs 1.2 0.9 Pension costs – defined contribution schemes – 0.1 Pension costs – defined benefit schemes 0.3 0.3 Share based payment 2.1 2.0 Total 10.9 10.0

Interests of key management personnel in share schemes operated by the Group at the balance sheet date are set out below:

2008 2008 2007 2007 Average No. Average No. exercise outstanding exercise outstanding price price pence ‘m pence ‘m

Share options 252.69 6.5 249.34 5.0 Share appreciation rights 271.09 1.1 281.95 0.7 Equity Participation Plan shares N/A 4.2 N/A 1.6

Full details of all elements in the remuneration package of each director together with directors’ share interests and share options are given in the Remuneration Report on page 44 which constitutes part of these financial statements.

19 GOODWILL Total £’m

At 1 January 2007 Cost 563.4

Year ended 31 December 2007 Opening cost 563.4 Exchange rate adjustments (0.8) Businesses acquired as restated 516.9 Transfer to assets classified as held for sale (see note 23) (8.5) Adjustment arising from recognition of tax losses (see note 10) (3.2) Closing cost – restated (see note 46) 1,067.8

Year ended 31 December 2008 Opening cost 1,067.8 Exchange rate adjustments 309.3 Businesses acquired (see note 44) 5.6 Closing cost 1,382.7

70 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

19 GOODWILL CONTINUED Goodwill is tested for impairment annually or more frequently if there is any indication of impairment. No impairment charge was required in the year (2007: £Nil) and the cumulative impairment charge recognised to date is £Nil (2007: £Nil).

For the purposes of testing goodwill for impairment, goodwill is allocated to the Group’s cash generating units (CGUs) which principally comprise its individual business operations. The allocation of goodwill to CGU’s is initially carried out in the year a business is acquired according to those CGUs which are expected to benefit from the acquisition. Subsequent adjustments are made to this allocation to the extent that operations to which goodwill relates are transferred between CGUs or disposed of outside the Group. An analysis of goodwill by principal CGU is shown below:

2008 2007 Restated £’m £’m

Meggitt Aircraft Braking Systems (“MABS”) 749.6 575.1 Whittaker Controls Inc 183.3 132.4 Engineering Fabrics Corporation (“EFC”) 79.0 57.4 Meggitt Training Systems Inc 72.5 52.4 Other 298.3 250.5 Total 1,382.7 1,067.8

For each CGU 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 approved by management in December 2008 for the next three years. Cash flows for periods beyond three years are extrapolated using estimated growth rates. The resultant cash flows are discounted using a pre-tax discount rate appropriate for the relevant CGU. The key assumptions for the value in use calculations are shown below: • Sales volumes, selling prices and cost increases over the five years covered by management’s detailed plans. Sales volumes are based on industry forecasts and/or management estimates for the businesses in which each CGU operates including forecasts for OEM deliveries of large jets, regional aircraft and business jets; air traffic growth and military spending by the US DOD and other major governments. Sales prices and cost increases are based on past experience and management expectations of future changes in the market. A cautious approach to volume levels, selling prices and cost increases has been taken given the current global economic uncertainty. The extent to which these assumptions affect each CGU with a significant level of goodwill are described below. MABS and Whittaker Controls Inc are broadly spread across both civil aerospace and military platforms with Whittaker Controls Inc also operating in the energy sector. Within the civil aerospace sector MABS is a world leader in the supply of brake systems for regional aircraft and business jets, whilst the Whittaker Controls business, which designs and manufactures fluid control devices and systems, has a higher content on large jets. Both businesses have significant OEM and aftermarket revenues with the latter representing the greater proportion of revenues. In civil aerospace external forecasts suggest air traffic, measured in available seat kilometres (ASKs), will decline by 3% to 5% in 2009 and remain flat or increase slightly in 2010. This will translate into reduced use of existing aircraft and, combined with adverse conditions in credit markets, lower sales of new aircraft. Sales and usage of business jets will also see the declines. In military markets, the US DoD base budget is predicted to grow by around 3% in 2009 and, with market share gains, the Group’s energy business are also forecast to grow; these markets are forecast to remain robust over the coming years. EFC and Meggitt Training Systems Inc both operate in the military sectors. The principal customer of EFC is the US DOD to whom EFC are a leading supplier of flexible fuel tanks. Meggitt Training Systems Inc supplies integrated live and virtual training packages for armed forces and law enforcement agencies across the world. The forecasts used for military markets are as outlined above; • Growth rates used for periods beyond those covered by management’s detailed budgets and plans. Growth rates are derived based on managements estimates which take into account the long-term nature of the industry in which each CGU operates, external industry forecasts of long-term growth in the aerospace and defence sectors, the extent to which a CGU has sole source position on platforms where it is able to share in a continuing stream of highly profitable aftermarket revenues, the maturity of the platforms supplied by the CGU and the technological content of the CGU’s 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 countries in which the CGU operates (UK: 2.4%, US: 2.9%), the latter has been used; and • Discount rates applied to future cash flows. The Group’s pre-tax weighted average cost of capital (WACC) was used as the foundation for determining the discount rates to be applied. The Group WACC was then adjusted to reflect risks specific to the CGU that are not already reflected in the future cash flows for that CGU. The discount rates used were as follows: MABS 11.8%, Whittaker Controls Inc, 12.0%, EFC 12.3%, and Meggitt Training Systems Inc 12.6%. The Group has carried out a sensitivity analysis on the impairment testing on the CGU’s carrying values. In performing the sensitivity analysis the Group has considered the potential impacts of the current economic uncertainty affecting the civil aerospace markets in particular. The Group has examined the effects of other past shock events on air traffic growth both in the short term and the medium/long term. These included the effects of the 1973 and 1979 oil crises, the first Gulf War in 1991 and impact of 9/11, SARS and the second Gulf War in 2001. Past experience has shown that these events only had a short term negative impact on air traffic growth. Accordingly, and given the sole source position that both MABS and Whittaker Controls Inc have on civil platforms with lives of up to thirty years and the exposure to military markets, with typically larger platform lives, that all four CGU’s have, management has concluded that no reasonably foreseeable change in the key assumptions used in the impairment model would result in a significant impairment charge being recorded in the financial statements.

Financial statements 71 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

20 DEVELOPMENT COSTS AND PROGRAMME PARTICIPATION COSTS Development Programme costs participation costs £’m £’m

At 1 January 2007 Cost 44.3 54.6 Accumulated amortisation (12.4) (20.7) Net book amount 31.9 33.9

Year ended 31 December 2007 Opening net book amount 31.9 33.9 Exchange rate adjustments 1.2 0.4 Businesses acquired 7.0 75.2 Additions 22.4 20.1 Transfer to assets classified as held for sale (see note 23) (1.0) – Amortisation charge (3.8) (7.8) Closing net book amount 57.7 121.8

At 31 December 2007 Cost 74.0 150.4 Accumulated amortisation (16.3) (28.6) Net book amount 57.7 121.8

Year ended 31 December 2008 Opening net book amount 57.7 121.8 Exchange rate adjustments 19.9 37.0 Additions 23.7 35.7 Amortisation charge (3.5) (14.1) Closing net book amount 97.8 180.4

At 31 December 2008 Cost 120.7 227.3 Accumulated amortisation (22.9) (46.9) Net book amount 97.8 180.4

72 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

21 OTHER INTANGIBLE ASSETS Customer Technology Order Other Other Total relationships backlogs purchased (*) (*) (*) (*) £’m £’m £’m £’m £’m £’m

At 1 January 2007 Cost 154.2 63.2 8.1 15.4 12.8 253.7 Accumulated amortisation (15.6) (4.9) (5.9) (0.7) (7.6) (34.7) Net book amount 138.6 58.3 2.2 14.7 5.2 219.0

Year ended 31 December 2007 Opening net book amount 138.6 58.3 2.2 14.7 5.2 219.0 Exchange rate adjustments 1.7 – – (0.1) (0.1) 1.5 Businesses acquired as restated 447.6 94.3 10.1 6.9 0.5 559.4 Additions – – – – 3.3 3.3 Transfer to assets classified as held for sale (see note 23) – – – – (0.1) (0.1) Amortisation charge (21.9) (9.5) (3.6) (3.4) (3.0) (41.4) Closing net book amount – restated (see note 46) 566.0 143.1 8.7 18.1 5.8 741.7

At 31 December 2007 Cost 603.8 157.6 18.3 22.2 15.0 816.9 Accumulated amortisation (37.8) (14.5) (9.6) (4.1) (9.2) (75.2) Net book amount** – restated (see note 46) 566.0 143.1 8.7 18.1 5.8 741.7

Year ended 31 December 2008 Opening net book amount 566.0 143.1 8.7 18.1 5.8 741.7 Exchange rate adjustments 166.1 40.5 2.0 4.8 1.4 214.8 Businesses acquired (see note 44) 2.4 1.3 0.3 0.2 0.1 4.3 Additions – – – – 5.8 5.8 Disposals – – – – (0.4) (0.4) Amortisation charge (38.7) (13.6) (5.1) (4.4) (2.8) (64.6) Closing net book amount 695.8 171.3 5.9 18.7 9.9 901.6

At 31 December 2008 Cost 788.1 206.2 23.3 28.2 24.7 1,070.5 Accumulated amortisation (92.3) (34.9) (17.4) (9.5) (14.8) (168.9) Net book amount** 695.8 171.3 5.9 18.7 9.9 901.6

* Acquired in a business combination. The amortisation of these items are excluded from the Group’s underlying profit figures (see note 10). ** Includes £4.4 million (2007: £3.2 million) of assets currently not subject to amortisation.

Financial statements 73 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

22 PROPERTY, PLANT AND EQUIPMENT Plant, Land and equipment buildings and vehicles Total £’m £’m £’m

At 1 January 2007 Cost 95.5 232.2 327.7 Accumulated depreciation (22.2) (177.9) (200.1) Closing net book amount 73.3 54.3 127.6

Year ended 31 December 2007 Opening net book amount 73.3 54.3 127.6 Exchange rate adjustments 0.5 1.1 1.6 Businesses acquired as restated 10.0 33.1 43.1 Additions 15.6 25.4 41.0 Transfer to assets classified as held for sale (see note 23) (0.5) (0.7) (1.2) Disposals (1.8) (0.3) (2.1) Depreciation charge (3.2) (15.6) (18.8) Closing net book amount – restated (see note 46) 93.9 97.3 191.2

At 31 December 2007 Cost 118.1 293.5 411.6 Accumulated depreciation (24.2) (196.2) (220.4) Closing net book amount – restated (see note 46) 93.9 97.3 191.2

Year ended 31 December 2008 Opening net book amount 93.9 97.3 191.2 Exchange rate adjustments 19.6 25.3 44.9 Businesses acquired (see note 44) 0.5 0.2 0.7 Additions 11.1 24.8 35.9 Disposals (0.1) (0.8) (0.9) Depreciation charge (4.9) (21.7) (26.6) Closing net book amount 120.1 125.1 245.2

At 31 December 2008 Cost 154.8 349.1 503.9 Accumulated depreciation (34.7) (224.0) (258.7) Net book amount 120.1 125.1 245.2

The Group’s obligations under finance leases (see note 29) are secured by the lessors’ title to the leased assets, which have a carrying amount of £6.1 million (2007: £5.2 million) and are included within plant, equipment and vehicles.

74 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

23 NON-CURRENT ASSETS AND LIABILITIES HELD FOR SALE The disposal of S-Tec Corporation (part of the Sensing Systems segment) was announced on 21 November 2007 subject to certain regulatory clearances being obtained. The related assets were classified as a disposal group held for sale and were presented separately as at 31 December 2007 together with directly associated liabilities. The disposal was subsequently completed on 3 January 2008 (see note 45).

2008 2007 £’m £’m

Goodwill (see note 19) – 8.5 Development costs (see note 20) – 1.0 Other intangible assets (see note 21) – 0.1 Property, plant and equipment (see note 22) – 1.2 Inventory – 2.0 Trade and other receivables – 1.7 Assets held for sale – 14.5

2008 2007 £’m £’m

Trade and other payables – 1.4 Provisions – 0.2 Liabilities directly associated with assets classified as held for sale – 1.6

24 INVENTORIES 2008 2007 £’m £’m

Contract costs incurred 10.2 14.1 Less progress billings (5.8) (10.1) 4.4 4.0 Raw materials and bought-in components 115.5 82.8 Manufacturing work in progress 105.4 72.7 Finished goods and goods for resale 47.8 45.1 Total 273.1 204.6

The cost of inventories recognised as an expense and included in cost of sales amounted to £309.1 million (2007: £244.7 million).

Financial statements 75 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

25 TRADE AND OTHER RECEIVABLES 2008 2007 £’m £’m

Trade receivables 223.6 158.3 Amounts recoverable on contracts 12.7 10.9 Prepayments and accrued income 7.8 5.7 Other receivables 62.1 54.1 Total 306.2 229.0 Less non-current portion: Other receivables 19.3 14.4 Non-current portion 19.3 14.4 Current portion 286.9 214.6

Other receivables includes £22.6 million (2007: £17.5 million) in respect of insurance receivables arising on environmental issues pertaining to businesses sold by Whittaker Corporation prior to its acquisition by the Group (see note 33) of which £5.5 million (2007: £4.0 million) is shown as current. The Group’s trade receivables are stated after a provision for impairment of £5.3 million (2007: £2.9 million). Other balances within trade and other receivables do not contain impaired assets. The provision for impairment against trade receivables is based on a specific risk assessment taking into account past default experience and is analysed as follows:

2008 2007 £’m £’m

At 1 January 2.9 3.4 Exchange movements 0.8 – Charge/(credit) to income statement 1.6 (0.5) At 31 December 5.3 2.9

The charge/(credit) to income statement for impaired receivables has been included in ‘net operating costs’. As of 31 December 2008, trade receivables of £45.6 million (2007: £36.0 million) were 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:

2008 2007 £’m £’m

Up to 3 months 41.6 33.1 Over 3 months 4.0 2.9 Total 45.6 36.0

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:

2008 2007 £’m £’m

Sterling 77.4 83.9 US dollar 187.0 124.7 Euro 34.6 15.3 Other currencies 7.2 5.1 Total 306.2 229.0

76 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

26 CASH AND CASH EQUIVALENTS 2008 2007 £’m £’m

Cash at bank and in hand 67.3 64.9 Total 67.3 64.9

Cash and cash equivalents are subject to interest at floating rates. The credit quality of cash and cash equivalents is as follows:

2008 2007 £’m £’m

S&P rating: AAA 0.9 1.4 AA 35.8 53.7 A 30.6 9.8 Total 67.3 64.9

27 TRADE AND OTHER PAYABLES – CURRENT 2008 2007 Restated £’m £’m

Payments received on account 53.0 44.2 Trade payables 101.9 79.7 Social security and other taxes 5.4 6.9 Accrued expenses 39.2 22.9 Deferred consideration relating to acquired businesses 5.4 3.5 Other payables 109.7 69.9 Total 314.6 227.1

28 TRADE AND OTHER PAYABLES – NON-CURRENT 2008 2007 £’m £’m

Other payables 9.3 7.0 Total 9.3 7.0

29 OBLIGATIONS UNDER FINANCE LEASES Present value Minimum of minimum lease payments lease payments

2008 2007 2008 2007 £’m £’m £’m £’m

Amounts payable under finance leases: Within one year 1.7 0.9 1.0 0.5 In the second to fifth years inclusive 8.0 3.2 6.2 2.3 After five years – 2.8 – 2.7 Total 9.7 6.9 7.2 5.5 Less: future finance charges (2.5) (1.4) Present value of lease obligations 7.2 5.5 Non-current portion 6.2 5.0 Current portion 1.0 0.5

The underlying currency of obligations under finance leases is Sterling £0.4 million (2007: £0.2 million) and US dollars £6.8 million (2007: £5.3 million). The weighted average period to maturity for these finance leases is 4.8 years (2007: 6.0 years) and the weighted average interest rate is 5.9% (2007: 5.6%).

Financial statements 77 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

30 BANK AND OTHER BORROWINGS 2008 2007 £’m £’m

Current Bank loans 8.9 15.2 Other loans 4.6 1.5 Total current 13.5 16.7

Non-current Bank loans 918.6 727.0 Other loans 175.9 131.1 Total non-current 1,094.5 858.1

Total borrowings 1,108.0 874.8

Analysis of borrowings repayable: In one year or less 13.5 16.7 In more than one year but not more than two years 1.4 3.1 In more than two years but not more than five years 1,043.7 729.2 In more than five years 49.4 125.8 Total 1,108.0 874.8

Borrowings are stated after deduction of unamortised debt issue costs. Debt issue costs are being written off over the period of the facility to which they relate. Secured borrowings amounted to £0.7 million (2007: £0.7 million). The Group has the following committed facilities:

2008 2007

Drawn Undrawn Total Drawn Undrawn Total £’m £’m £’m £’m £’m £’m

Senior notes (USD 250.0 million) 173.9 – 173.9 125.6 – 125.6 Syndicated credit facility (USD 680.0 million) 314.0 159.0 473.0 229.1 112.5 341.6 Syndicated credit facility (USD 1,170.0 million) 608.6 205.1 813.7 494.6 93.1 587.7 Total 1,096.5 364.1 1,460.6 849.3 205.6 1,054.9

The Group issued USD 250.0 million of loan notes to private investors in 2003. These were all drawn at 31 December 2008 and the sterling equivalent was £173.9 million. Of these, USD 180.0 million carry an interest rate of 5.36% and are due for repayment in 2013, and the balance of USD 70.0 million carry an interest rate of 5.46% and are due for repayment in 2015. The Group negotiated a USD 500.0 million, five year, unsecured multi-currency revolving credit facility during 2008 available to be drawn down on maturity or early cancellation of our existing USD 680.0 million facility. At 31 December 2008 the amounts drawn under our revolving credit facilities were £922.6 million (2007: £723.7 million) represented by borrowings denominated in US dollars of £838.1 million (USD 1,205.0 million), in Euros of £24.8 million (Euros 25.6 million), and in Swiss francs of £59.7 million (Swiss francs 91.3 million). Borrowings under the facilities are subject to interest at floating rates. The Group also has various uncommitted facilities with its relationship banks. The committed facilities outstanding as at 31 December 2008 and 31 December 2007 expire as follows:

2008 2007

Drawn Undrawn Total Drawn Undrawn Total £’m £’m £’m £’m £’m £’m

Within one to two years – 125.2 125.2 – – – In more than two years 1,096.5 238.9 1,335.4 849.3 205.6 1,054.9 Total 1,096.5 364.1 1,460.6 849.3 205.6 1,054.9

78 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

30 BANK AND OTHER BORROWINGS CONTINUED The fair value of the Group borrowings is as follows:

2008 2007

Book value Fair value Book value Fair value £’m £’m £’m £’m

Current 13.5 13.5 16.7 16.7 Non-current 1,094.5 1,080.5 858.1 855.9 Total 1,108.0 1,094.0 874.8 872.6

After taking account of the financial derivatives that alter the interest and currency basis of the financial liabilities entered into by the Group, the interest rate exposure on gross borrowings is: As at 31 December 2008: Fixed rate borrowings

Weighted average Weighted period Non-interest average for which Floating Fixed bearing Total interest rate rate is fixed £’m £’m £’m £’m % years

US dollar 285.0 730.3 – 1,015.3 5.4 3.0 Swiss franc 59.7 – – 59.7 Euro 24.8 0.7 7.0 32.5 5.9 2.5 Other 5.3 – – 5.3 Gross borrowings 374.8 731.0 7.0 1,112.8 Less unamortised debt issue costs (4.5) (0.3) – (4.8) Book value of borrowings 370.3 730.7 7.0 1,108.0

As at 31 December 2007: Fixed rate borrowings

Weighted average Weighted period Non-interest average for which Floating Fixed bearing Total interest rate rate is fixed £’m £’m £’m £’m % years

US dollar 272.3 527.5 – 799.8 5.5 4.0 Swiss franc 58.0 – – 58.0 Euro 10.0 0.7 5.9 16.6 5.7 2.9 Other 4.4 – – 4.4 Gross borrowings 344.7 528.2 5.9 878.8 Less unamortised debt issue costs (3.6) (0.4) – (4.0) Book value of borrowings 341.1 527.8 5.9 874.8

The weighted average period to maturity for non-interest bearing borrowings is 2.8 years (2007: 5.1 years).

31 FINANCIAL INSTRUMENTS For cash, receivables and short-term borrowings the fair value of the financial instruments approximates to their book value due to the short maturity periods of these financial instruments. On receivables, allowances are made within the book value for credit risk. For other borrowings and financial liabilities, the fair value is based on market values or, where not available, on discounting future cash flows at prevailing market rates and by applying year end exchange rates. Market rates have been used to determine the fair values of the interest rate and foreign exchange derivatives.

Financial statements 79 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

31 FINANCIAL INSTRUMENTS CONTINUED The book values and fair values of financial instruments are set out below:

Fair Value Amortised Cost

2008 2008 2008 2008 2008 2008 Through Derivatives Loans & Other Total Total profit used receivables liabilities book fair & loss as hedges value value £’m £’m £’m £’m £’m £’m

Financial assets Non-current: Trade and other receivables (see note 25) – – 19.3 – 19.3 19.3 Derivative financial instruments (see note 32) 1.6 – – – 1.6 1.6

Current: Trade and other receivables (see note 25) – – 286.9 – 286.9 286.9 Derivative financial instruments (see note 32) 1.0 – – – 1.0 1.0 Cash and cash equivalents (see note 26) – – 67.3 – 67.3 67.3 2.6 – 373.5 – 376.1 376.1 Financial liabilities Current: Trade and other payables (see note 27) – – – (314.6) (314.6) (314.6) Derivative financial instruments (see note 32) (26.4) – – – (26.4) (26.4) Obligations under finance leases (see note 29) – – – (1.0) (1.0) (1.0) Bank and other borrowings (see note 30) – – – (13.5) (13.5) (13.5)

Non-current: Trade and other payables (see note 27) – – – (9.3) (9.3) (9.3) Derivative financial instruments (see note 32) (30.7) (39.9) – – (70.6) (70.6) Obligations under finance leases (see note 29) – – – (6.2) (6.2) (6.2) Bank and other borrowings (see note 30) (35.6) – – (1,058.9) (1,094.5) (1,080.5) (92.7) (39.9) – (1,403.5) (1,536.1) (1,522.1) Total (90.1) (39.9) 373.5 (1,403.5) (1,160.0) (1,146.0)

Fair Value Amortised Cost

2007 2007 2007 2007 2007 2007 Through Derivatives Loans & Other Total Total profit used receivables liabilities book fair & loss as hedges value value £’m £’m £’m £’m £’m £’m

Financial assets Non-current: Trade and other receivables (see note 25) – – 14.4 – 14.4 14.4

Current: Trade and other receivables (see note 25) – – 214.6 – 214.6 214.6 Derivative financial instruments (see note 32) 3.5 0.1 – – 3.6 3.6 Cash and cash equivalents (see note 26) – – 64.9 – 64.9 64.9 3.5 0.1 293.9 – 297.5 297.5 Financial liabilities Current: Trade and other payables (see note 27) – – – (227.1) (227.1) (227.1) Derivative financial instruments (see note 32) (0.9) – – – (0.9) (0.9) Obligations under finance leases (see note 29) – – – (0.5) (0.5) (0.5) Bank and other borrowings (see note 30) – – – (16.7) (16.7) (16.7)

Non-current: Trade and other payables (see note 27) – – – (7.0) (7.0) (7.0) Derivative financial instruments (see note 32) – (10.7) – – (10.7) (10.7) Obligations under finance leases (see note 29) – – – (5.0) (5.0) (5.0) Bank and other borrowings (see note 30) (27.3) – – (830.8) (858.1) (855.9) (28.2) (10.7) – (1,087.1) (1,126.0) (1,123.8) Total (24.7) (10.6) 293.9 (1,087.1) (828.5) (826.3)

The above tables exclude non-current assets and liabilities held for sale (see note 23).

80 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

32 DERIVATIVE FINANCIAL INSTRUMENTS Contract or underlying principal amount Fair value

2008 2008 2008 2008 Assets Liabilities Assets Liabilities £’m £’m £’m £’m

Interest rate swaps – (556.4) – (47.4) Foreign currency forward contracts 40.3 (291.1) 2.6 (49.6) Total 40.3 (847.5) 2.6 (97.0) Less non-current portion: Interest rate swaps – (556.4) – (39.9) Foreign currency forward contracts 21.1 (174.6) 1.6 (30.7) Non-current portion 21.1 (731.0) 1.6 (70.6) Current portion 19.2 (116.5) 1.0 (26.4)

Contract or underlying principal amount Fair value

2007 2007 2007 2007 Assets Liabilities Assets Liabilities £’m £’m £’m £’m

Interest rate swaps 59.4 (401.9) 0.1 (10.7) Foreign currency forward contracts 59.6 (35.1) 3.5 (0.9) Total 119.0 (437.0) 3.6 (11.6) Less non-current portion: Interest rate swaps – (401.9) – (10.7) Non-current portion – (401.9) – (10.7) Current portion 119.0 (35.1) 3.6 (0.9)

Interest rate swaps The notional principal amount of the outstanding interest rate swap contracts at 31 December 2008 is £556.4 million (USD 800.0 million). The swaps have the economic effect of converting floating rate US dollar borrowings into fixed rate US dollar borrowings and are accounted for as cash flow hedges. The notional principal amount of the outstanding interest rate swap contracts at 31 December 2007 was £461.3 million (USD 918.2 million).

Foreign currency forward contracts 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 required to be able to apply hedge accounting under IAS 39 (“Financial Instruments: Recognition and Measurement”) are not merited.

2008 2008 2007 2007 Assets Liabilities Assets Liabilities £’m £’m £’m £’m

Fair value: US dollar forward sales (USD/£) 0.6 (49.0) 2.6 (0.5) Forward sales denominated in other currencies 2.0 (0.6) 0.9 (0.4) Total 2.6 (49.6) 3.5 (0.9)

The credit quality of derivative financial assets is as follows:

2008 2007 £’m £’m

AA 2.6 3.5 A – 0.1 Total 2.6 3.6

Financial statements 81 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

33 PROVISIONS Environmental Onerous Warranty legal & regulatory contracts costs (a) (b) (c) Total £’m £’m £’m £’m

At 1 January 2008 as previously reported 61.2 10.3 19.0 90.5 Restatement following finalisation of fair values (see note 46) 1.5 – – 1.5 At 1 January 2008 as restated 62.7 10.3 19.0 92.0 Exchange rate adjustments 20.5 1.4 3.8 25.7 Businesses acquired (see note 44) – – 0.1 0.1 Transfer from/(to) trade and other payables – current – 4.3 (4.6) (0.3) Charge/(credit) to income statement – net operating costs 15.2 (1.5) 2.7 16.4 Charge to income statement – net finance costs (see note 13) 1.4 0.5 – 1.9 Utilised (18.8) (2.1) (5.6) (26.5) At 31 December 2008 81.0 12.9 15.4 109.3

2008 2007 Restated £’m £’m

Current 45.3 18.0 Non-current 64.0 74.0 At 31 December 2008 109.3 92.0 a) Provision has been made for known exposures arising from environmental, health and safety, product liability matters, legal proceedings and contractual disputes in a number of businesses. Meggitt’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 sites based on information currently available and a receivable established to the extent these costs are recoverable under the Group’s environmental insurance policies. 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 for claims which cannot be recovered from insurers. In 2000, the US Government started to investigate alleged violations of US export control laws by a US subsidiary of the Group and is also investigating alleged breaches by three other subsidiaries, one of which is in the UK. These investigations are likely to lead to financial penalties for which provision has been made. The provisions are expected to be mainly utilised over the next ten years and are discounted, where appropriate, using a discount rate relevant to each provision. b) Onerous contracts include lease obligations and trading contracts. Provision has been set up for the estimated rental shortfall in respect of properties with onerous lease obligations and will be utilised over the lease terms typically up to ten years and are discounted using a discount rate appropriate to each provision. Provision has also been set up for the estimated losses to be made under certain trading contracts. These are expected to be utilised over the next five years. c) Provision has been made for product warranty claims. These provisions are expected to be utilised over the next three years.

34 DEFERRED TAX Movement on deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Deferred tax assets Tax Retirement Other Total losses benefit obligations £’m £’m £’m £’m

At 1 January 2007 6.7 30.8 13.4 50.9 Exchange rate adjustments – 0.2 0.4 0.6 Businesses acquired as restated – 32.2 (20.7) 11.5 Reclassifications – – (8.4) (8.4) (Charged)/credited to income statement (see note 14) (4.0) (2.2) 11.9 5.7 (Charged)/credited to equity (see note 14) – (8.2) 3.5 (4.7) At 31 December 2007 – restated 2.7 52.8 0.1 55.6 Exchange rate adjustments – 16.5 0.1 16.6 (Charged)/credited to income statement (see note 14) (2.7) (5.6) 9.8 1.5 Credited to equity (see note 14) – 18.7 3.3 22.0 At 31 December 2008 – 82.4 13.3 95.7

82 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

34 DEFERRED TAX CONTINUED Deferred tax liabilities Accelerated Intangible tax assets depreciation (*) Other Total £’m £’m £’m £’m

At 1 January 2007 (12.0) (75.8) (0.1) (87.9) Exchange rate adjustments – (2.2) – (2.2) Businesses acquired as restated (3.8) (205.9) – (209.7) Reclassifications 8.5 (0.2) 0.1 8.4 (Charged)/credited to income statement (see note 14) (0.1) 11.8 – 11.7 At 31 December 2007 – restated (7.4) (272.3) – (279.7) Exchange rate adjustments (1.8) (79.9) – (81.7) Businesses acquired (see note 44) – (1.1) – (1.1) Reclassifications – (0.9) – (0.9) (Charged)/credited to income statement (see note 14) (1.6) 22.8 – 21.2 Charged to equity (see note 14) – (1.0) – (1.0) At 31 December 2008 (10.8) (332.4) – (343.2)

* Acquired in business combinations 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:

2008 2007 Restated £’m £’m

Deferred tax assets 112.4 41.4 Deferred tax liabilities (359.9) (265.5) Net balance at 31 December (247.5) (224.1)

Deferred tax assets are analysed as follows: 2008 2007 £’m £’m

To be recovered within 12 months 10.1 23.0 To be recovered after more than 12 months 102.3 18.4 Total 112.4 41.4

Deferred tax liabilities are analysed as follows:

2008 2007 Restated £’m £’m

To be recovered within 12 months (25.9) (22.7) To be recovered after more than 12 months (334.0) (242.8) Total (359.9) (265.5)

The Group has unrecognised deferred tax assets of £11.8 million (2007: £7.5 million). The majority relate to the Group’s operations in the USA and unutilised losses. Deferred tax assets have not been recognised in respect of these items, 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 that they reverse and suitable taxable profits are available. No provision has been made for taxation that would arise in the event of foreign subsidiaries distributing their reserves as these amounts are retained for investment in the businesses. The aggregate unrecognised deferred tax liability in respect of such unremitted earnings is £36.0 million (2007: £21.0 million).

35 RETIREMENT BENEFIT OBLIGATIONS Pension schemes In the UK, the Group operates three defined benefit schemes all of which are closed to new members. In the USA, the Group operates five defined benefit schemes, two of which are closed to new members. The US schemes are a mixture of funded and unfunded plans. In Switzerland the Group operates a defined benefit scheme which is a funded scheme. The assets of all of the defined benefit schemes are held in trust funds separate from the Group’s finances. The Group also operates a number of defined contribution schemes. Healthcare schemes The Group has two principal other post-retirement benefit schemes providing medical and life assurance benefits, both of which arose on the acquisition of K&F. These schemes are unfunded.

Financial statements 83 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

35 RETIREMENT BENEFIT OBLIGATIONS CONTINUED

Amounts recognised in the income statement 2008 2007 £’m £’m

In respect of: Defined contribution schemes (see note 9) 9.9 8.4 Defined benefit schemes Service cost (see note 9) 12.3 11.6 Expected return on scheme assets (see note 12) (31.3) (27.0) Interest cost (see note 13) 32.6 26.6 Total cost of defined benefit schemes 13.6 11.2 Healthcare schemes Service cost (see note 9) 1.0 0.5 Interest cost (see note 13) 3.4 1.6 Total cost of healthcare schemes 4.4 2.1 Total charge 27.9 21.7

Of the total charge £10.8 million (2007: £9.8 million) has been included in cost of sales, £12.4 million (2007: £10.7 million) in net operating expenses and £4.7 million (2007: £1.2 million) in net finance costs.

Amounts recognised in the balance sheet 2008

UK Overseas Overseas Total pension pension healthcare schemes schemes schemes £’m £’m £’m £’m

Fair value of scheme assets 283.7 168.2 – 451.9 Present value of scheme liabilities (354.8) (269.1) (69.2) (693.1) Retirement benefit obligations (71.1) (100.9) (69.2) (241.2)

Of the total deficit of £241.2 million, £80.3 million is in respect of unfunded schemes.

2007

UK Overseas Overseas Total pension pension healthcare schemes schemes schemes £’m £’m £’m £’m

Fair value of scheme assets 334.2 137.2 – 471.4 Present value of scheme liabilities (387.4) (186.1) (51.2) (624.7) Retirement benefit obligations (53.2) (48.9) (51.2) (153.3)

Of the total deficit of £153.3 million, £58.6 million is in respect of unfunded schemes.

Analysis of scheme assets 2008

UK pension schemes Overseas pension schemes Total

Expected Expected £’m % return % £’m % return % £’m %

Equities 165.6 58.4 7.75 69.9 41.6 9.50 235.5 52.1 Government bonds 74.0 26.1 3.75 34.0 20.2 5.70 108.0 23.9 Corporate bonds 28.6 10.1 6.30 47.0 27.9 6.50 75.6 16.7 Property – – N/A 7.6 4.5 7.50 7.6 1.7 Other assets 15.5 5.4 4.00 9.7 5.8 1.00 25.2 5.6 Total 283.7 100.0 6.36 168.2 100.0 7.31 451.9 100.0

2007

UK pension schemes Overseas pension schemes Total

Expected Expected £’m % return % £’m % return % £’m %

Equities 187.3 56.0 7.50 62.5 45.6 9.50 249.8 53.0 Government bonds 69.5 20.8 4.50 19.5 14.2 5.70 89.0 18.9 Corporate bonds 52.6 15.7 5.65 46.8 34.1 6.40 99.4 21.1 Property 19.5 5.8 7.50 3.8 2.8 7.50 23.3 4.9 Other assets 5.3 1.7 4.00 4.6 3.3 1.00 9.9 2.1

Total 334.2 100.0 6.53 137.2 100.0 7.56 471.4 100.0

84 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

35 RETIREMENT BENEFIT OBLIGATIONS CONTINUED The schemes have no investments in the Group’s occupied properties or any other assets of the Group. To develop the expected long-term rate of return on assets assumption, the Group considered the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.

Changes in the fair value of scheme assets

2008 2007 £’m £’m

Fair value of scheme assets at 1 January 471.4 395.8 Exchange rate adjustments 51.0 1.2 Businesses acquired – 58.0 Expected return on scheme assets 31.3 27.0 Contributions – Group 35.8 14.5 Contributions – Members 5.6 4.6 Benefits paid (28.2) (21.0) Actuarial losses (115.0) (8.7) Fair value of scheme assets at 31 December 451.9 471.4

Financial assumptions used to calculate scheme liabilities

2008 2007

UK Overseas Overseas UK Overseas Overseas pension pension healthcare pension pension healthcare schemes schemes schemes schemes schemes schemes

Discount rate 6.30% 6.50% 6.50% 5.65% 6.40% 6.40% Inflation rate 3.00% N/A N/A 3.25% N/A N/A

Increase to deferred benefits during deferment* 3.00% N/A N/A 3.25% N/A N/A Increases to pensions in payment* 3.00% N/A N/A 3.25% N/A N/A

Salary increases 4.00% 4.00% N/A 4.25% 4.00% N/A Healthcare cost increases N/A N/A ** N/A N/A **

* To the extent not overridden by specific scheme rules. ** Healthcare cost increases are assumed to be 8.5% for 2009 trending down to 5.0% by 2016. (2007: 9.5% for 2008 trending down to 5.0% by 2013). In determining pension 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 are based on the PA92 medium cohort (year of birth) mortality tables for the UK schemes and the RP2000 IRS RPA tables for the US schemes. The life expectancies reflected in the mortality assumptions used are as follows:

2008 2007

UK Overseas UK Overseas schemes schemes schemes schemes years years years years

Member age 45 (life expectancy at age 65) – male 21.2-22.8 19.2 21.2-22.8 19.2 Member age 45 (life expectancy at age 65) – female 24.0-25.6 21.1 24.0-25.6 21.1 Member age 65 (current life expectancy) – male 20.1-21.5 18.8 20.1-21.5 18.8 Member age 65 (current life expectancy) – female 23.0-24.4 20.8 23.0-24.4 20.8

Details on the sensitivity of scheme liabilities to changes in discount rates and inflation rates are provided below: • The impact of a 10 basis point reduction in discount rate would cause scheme liabilities at 31 December 2008 to increase by approximately £9.8 million; • The impact of a 10 basis point reduction in inflation rate would cause scheme liabilities at 31 December 2008 to reduce by approximately £5.4 million; • The impact of a 10 basis point increase in medical trend rates would cause scheme liabilities at 31 December 2008 to increase by approximately £0.3 million; • The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2008 to increase by approximately £14.3 million.

Financial statements 85 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

35 RETIREMENT BENEFIT OBLIGATIONS CONTINUED

Changes in the present value of scheme liabilities 2008 2007 £’m £’m Present value of scheme liabilities at 1 January 624.7 493.0 Exchange rate adjustments 95.8 1.3 Businesses acquired – 140.0 Service cost 13.3 12.1 Interest cost – unwinding of discount on liabilities 36.0 28.2 Contributions – Members 5.6 4.6 Benefits paid (28.2) (21.0) Actuarial gains (54.1) (33.5) Present value of scheme liabilities at 31 December 693.1 624.7

Cumulative (losses)/gains recognised in equity 2008 2007 £’m £’m

As at 1 January 3.9 (12.7)

Actuarial (losses)/gains (60.9) 24.8 Deferred tax credit/(charge) 18.7 (8.2) Net actuarial (losses)/gains (42.2) 16.6 As at 31 December (38.3) 3.9

The actual return on scheme assets was a loss of £83.7 million (2007: Gain of £18.3 million).

History of experience gains and losses and retirement benefit obligations 2008 2007 2006 2005 2004 £’m £’m £’m £’m £’m

Experience adjustments on scheme assets: (Loss)/gain (115.0) (8.7) 5.3 25.7 12.1 Percentage of scheme assets (25.4%) (1.8%) 1.3% 7.4% 4.1% Experience adjustments on scheme liabilities: (Loss)/gain (4.9) 22.1 (7.1) (13.4) (20.5) Percentage of scheme liabilities (0.7%) 3.5% (1.4%) (3.0%) (5.5%) Fair value of scheme assets 451.9 471.4 395.8 349.1 298.2 Present value of scheme liabilities 693.1 624.7 493.0 447.3 373.2 Scheme deficits 241.2 153.3 97.2 98.2 75.0

The estimated amounts of contributions expected to be paid to the schemes during 2009 is £36.8 million.

36 CONTINGENT LIABILITIES The Company has given guarantees in respect of uncommitted credit facilities for certain of its subsidiaries, some property leases, other leasing arrangements and the performance by some current and former subsidiaries of certain contracts. Also, there are similar guarantees given by certain of the management companies. The fair value of these guarantees is not considered to be significant. 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.

37 SHARE CAPITAL 2008 2007 £’m £’m

Ordinary shares of 5p each Authorised: 885.0 million shares (2007: 885.0 million) 44.3 44.3

Nominal Net No. of shares value consideration ‘m £’m £’m

Allotted and fully paid: At 1 January 2008 658.3 32.9 Issued on exercise of executive share options 0.3 – 0.5 Issued on exercise of sharesave options 1.0 0.1 1.6 Scrip dividends 6.0 0.3 15.5 At 31 December 2008 665.6 33.3

86 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

37 SHARE CAPITAL CONTINUED

Sharesave and Share Option Schemes

No. of Exercise Exercise period ordinary shares price Year of grant under option per share From To i) Meggitt 1998 Sharesave Scheme: 2002 29,148 109.56p 01.01.10 30.06.10 2005 7,025 188.76p 01.06.08 30.11.08* 2005 608,803 188.76p 01.06.10 30.11.10 2005 204,494 188.76p 01.06.12 30.11.12 2007 352,661 203.18p 01.12.09 31.05.10 2007 337,982 203.18p 01.12.11 31.05.12 2007 62,773 203.18p 01.12.13 31.05.14 ii) Meggitt 2008 Sharesave Scheme: 2008 1,185,999 171.40p 01.11.11 30.04.12 2008 720,839 171.40p 01.11.13 30.04.14 2008 107,700 171.40p 01.11.15 30.04.16 iii) Meggitt 1996 No 1 Executive Share Option Scheme: 1999 32,237 134.90p 01.10.02 30.09.09 2000 3,512 162.10p 14.12.03 13.12.10 2002 6,963 136.76p 17.10.05 16.10.12 2003 26,029 179.24p 02.10.06 01.10.13 2004 17,200 174.40p 01.04.07 31.03.14 2004 14,245 210.59p 06.10.07 05.10.14 iv) Meggitt 1996 No 2 Executive Share Option Scheme: 2002 507,134 136.76p 17.10.05 16.10.09 2003 587,402 179.24p 02.10.06 01.10.10 2004 246,564 174.40p 01.04.07 31.03.11 2004 1,173,845 210.59p 06.10.07 05.10.11 v) Meggitt Executive Share Option Scheme 2005 Part A: 2005 485,519 278.65p 10.10.08 09.10.15 2006 105,876 263.67p 27.09.09 26.09.16 2006 11,141 269.23p 09.10.09 08.10.16 2007 89,790 299.00p 29.03.10 28.03.17 2007 10,152 295.50p 16.04.10 15.04.17 2007 10,389 288.75p 17.08.10 16.08.17 2008 121,989 252.50p 25.03.11 24.03.18 2008 10,695 280.50p 08.04.11 07.04.18 2008 14,705 204.00p 07.08.11 06.08.18 vi) Meggitt Executive Share Option Scheme 2005 Part B: 2005 1,572,845 278.65p 10.10.08 09.10.15 2006 2,325,299 263.67p 27.09.09 26.09.16 2006 61,108 269.23p 09.10.09 08.10.16 2007 2,321,006 299.00p 29.03.10 28.03.17 2007 35,533 295.50p 16.04.10 15.04.17 2007 5,152 288.75p 17.08.10 16.08.17 2008 3,176,492 252.50p 25.03.11 24.03.18 2008 7,130 280.50p 08.04.11 07.04.18 2008 1,156,456 204.00p 07.08.11 06.08.18

* Share options outstanding after their expiry date relate to participants with deferred payments. All the above options which were granted for nil consideration, may in certain circumstances, be exercised earlier than the dates given. The average remaining contractual life of outstanding options is 6.4 years (2007: 6.1 years).

Financial statements 87 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

38 SHARE-BASED PAYMENT The Group operates a number of share schemes for the benefit of its employees. The total expense recorded in the income statement for the year in respect of such schemes was £3.6 million (2007: £5.2 million). The nature of each scheme which has a significant impact on the expense recorded in the income statement is set out below.

1996 No 1 & No 2 Executive Share Option Schemes and Executive Share Option Scheme 2005 Share options are granted to certain senior executives at an exercise price equal to the market price of the shares on the date the grant is made. The options are exercisable at the earliest three years after the grant is made. Options can only be exercised if the Group meets an earnings per share performance condition. The Group has no obligation, legal or constructive, to settle the options in cash. An expense of £2.1 million (2007: £1.8 million) was recorded in the year. Movements in the number of outstanding share options and their related weighted average exercise prices are as follows:

2008 2008 2007 2007 Average No. of Average No. of exercise options exercise options price outstanding price outstanding pence ‘m pence ‘m

At 1 January 250.28 10.1 223.75 9.8 Granted 240.01 4.5 298.87 2.5 Lapsed 275.35 (0.1) 265.13 (0.2) Exercised 149.55 (0.4) 180.22 (2.0) At 31 December 249.75 14.1 250.28 10.1

The fair value of the options was determined using the Black-Scholes option pricing model. The fair value of options granted during the year was 52.7 pence for the award in March and 48.0 pence for the award in August (September 2007: 68.9 pence). The significant assumptions used in the model were:

2008 2008 2007 Award in Award in Award in August March September

Share price at date of grant (pence) 204.00 252.50 299.00 Exercise price (pence) 204.00 252.50 299.00 Vesting period (years) 3 3 3 Expected volatility 27% 24% 25% Expected life of option (years) 5 5 5 Risk free rate 4.40% 4.00% 5.10% Expected dividend yield 2.60% 2.60% 2.85%

Expected volatility figures are based on historical volatility over the last five years measured using a statistical analysis of daily share prices. The share options may be exercised at any point up to ten years after the date the award was made.

Share Appreciation Rights (SARs) Under the terms of the Meggitt Executive Share Option Scheme 2005 the Group may grant SARs to certain overseas employees. The Group is required to pay the intrinsic value of the SAR to the employee at the date of exercise. A credit of £1.4 million (2007: Expense of £1.2 million) was recorded in the year. The Group has recorded a liability at the balance sheet date of £0.1 million (2007: £1.6 million). The total intrinsic value at the balance sheet date was £Nil (2007: £2.9 million). Movements in the number of outstanding SARs and their related weighted average exercise prices are as follows:

2008 2008 2007 2007 Average No. of Average No. of exercise SARs exercise SARs price outstanding price outstanding pence ‘m pence ‘m

At 1 January 281.55 5.2 270.68 3.5 Granted 234.29 4.3 296.07 2.3 Lapsed 276.11 (0.7) 275.67 (0.5) Exercised – – 276.04 (0.1) At 31 December 258.72 8.8 281.55 5.2

The fair value of each SAR is determined using the Black-Scholes model. The initial fair value at the date of award reflects the same assumptions used for share options and are disclosed in the table above. As a cash settled award the fair value of outstanding SARs is reassessed at each balance sheet date.

88 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

38 SHARE-BASED PAYMENT CONTINUED

1996 Meggitt Equity Participation Scheme and Meggitt Equity Participation Plan 2005 Under the 1996 Meggitt Equity Participation Scheme the number of shares, if any, that an executive would ultimately have received was dependent on the Group’s performance during a one year period commencing at the beginning of the financial year preceding that in which the award was made (the “measurement period”). Performance was measured by comparing the Total Shareholder Return (“TSR”) achieved by Meggitt with that of other companies in a comparator group chosen by the Remuneration Committee. The Meggitt Equity Participation Scheme was replaced during 2005 by the Meggitt Equity Participation Plan 2005. Under the Meggitt Equity Participation Plan 2005 an annual award of shares may be made to certain senior executives. The number of shares if any, that an executive will ultimately receive, will depend on the Group’s performance during a three year period commencing at the beginning of the financial year in which the award is made (the “measurement period”). Performance is measured by comparing the Total Shareholder Return (“TSR”) achieved by the Group with that of other companies in a comparator group chosen by the Remuneration Committee. Changes to the performance condition were made for the 2008 award. In line with what is now common market practice, 50% of the awards vesting will be based on TSR performance, and 50% on an earnings per share condition. An expense of £2.4 million (2007: £1.9 million) was recorded in the year. Movements in the number of outstanding shares that may potentially be released to employees are as follows:

2008 2007 No. of shares No. of shares under award under award outstanding outstanding ’m ’m

At 1 January 5.5 4.0 Awarded 2.5 2.0 Lapsed (1.1) (0.4) Released to employees (1.0) (0.1) At 31 December 5.9 5.5

The fair value of the award is measured using a Monte Carlo model. The fair value of awards during the year was 120.8 pence (2007: 180.8 pence). The significant assumptions used in the model were:

2008 2007 Award in Award in September March

Share price at date of award (pence) 200.98 317.12 Vesting period (years) 3 3 Expected volatility 30% 23% Expected life of award (years) 3 3 Risk free rate 4.62% 5.26% Expected dividend yield 2.96% 2.47%

Expected volatility figures are based on historic volatility over the last three years measured using a statistical analysis of weekly share prices.

39 OWN SHARES Own shares represent shares in the Company that are held by an independently managed Employee Share Ownership Plan which was formed to purchase shares to be used to meet certain of the Company’s future obligations in respect of employee share schemes as described in the Remuneration Report on page 44. At 31 December 2008 the trust held 25,453 ordinary shares (2007: 104,773 shares) of which none were allocated to the Meggitt 1996 Executive Share Option Schemes (2007: 7,274 shares) and 25,453 were unallocated (2007: 97,499) being retained by the trust for future use. The shares were purchased in prior years and have a cost of £0.0 million at 31 December 2008 (2007: £0.1 million). The market value of the shares at 31 December 2008 was £0.0 million (2007: £0.3 million) representing 0.00% of the issued share capital of the Company (2007: 0.02%). The Group retains the full benefit of these shares until such time as participating employees exercise their options.

Financial statements 89 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

40 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share Share Other Hedging and Retained Total capital premium reserves translation earnings equity reserves* £’m £’m £’m £’m £’m £’m

At 1 January 2007 21.8 356.1 14.1 (6.2) 173.6 559.4 Actuarial gains – – – – 16.6 16.6 Currency translation differences arising in the year – – – 6.7 – 6.7 Losses on cash flow hedges: Movement in fair value – – – (7.1) – (7.1) Transferred to income statement – – – (0.2) – (0.2) Net (expense)/income recognised directly in equity – – – (0.6) 16.6 16.0

Profit for the year – – – – 89.3 89.3 Rights issue 10.9 415.7 – – – 426.6 Employee share option schemes: Value of services provided – – – – 4.3 4.3 Proceeds from shares issued 0.1 3.3 – – – 3.4 Dividends 0.1 6.5 – – (42.2) (35.6) At 31 December 2007 32.9 781.6 14.1 (6.8) 241.6 1,063.4

Actuarial losses – – – – (42.2) (42.2) Currency translation differences: Arising in the year – – – 214.8 – 214.8 Transferred to income statement – – – 1.0 – 1.0 Losses on cash flow hedges: Movement in fair value – – – (17.2) – (17.2) Transferred to income statement – – – 3.9 – 3.9 Net income/(expense) recognised directly in equity – – – 202.5 (42.2) 160.3

Profit for the year – – – – 99.1 99.1 Employee share option schemes: Value of services provided – – – – 3.1 3.1 Own shares purchased – – – – (1.3) (1.3) Proceeds from shares issued 0.1 2.0 – – – 2.1 Dividends 0.3 15.2 – – (55.8) (40.3) At 31 December 2008 33.3 798.8 14.1 195.7 244.5 1,286.4

* The hedging and translation reserves at 31 December 2008 were made up of a credit balance on the translation reserve of £216.3 million (2007: £0.5 million) and a debit balance on the hedging reserve of £20.6 million (2007: £7.3 million). The amounts recycled from the hedging reserves to the income statement have affected net operating expenses in the case of currency translation differences and net finance costs in the case of cash flow hedges. In 2007 transaction costs of £9.8 million arising in relation to the rights issue were charged against the share premium account.

41 CONTRACTUAL COMMITMENTS

Capital commitments

2008 2007 £’m £’m

Contracted for but not incurred – property, plant & equipment 6.4 20.3

Operating lease commitments The Group leases various factories, warehouses and offices under non-cancellable operating leases. These leases have various lease periods, escalation clauses and renewal rights. Additionally the Group also leases various items of plant and machinery under cancellable operating leases. The expenditure on operating leases is charged to the income statement as incurred and is disclosed in note 7. The future aggregate minimum lease payments under non–cancellable operating leases are as follows:

2008 2007 £’m £’m

Not later than one year 11.8 9.0 Later than one year and not later than five years 36.6 29.9 Later than five years 20.5 17.7 Total 68.9 56.6

90 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

41 CONTRACTUAL COMMITMENTS CONTINUED

Other financial commitments The Group enters into long-term arrangements with Aircraft and/or 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/solution and the ultimate commercial viability over a period which can extend over 40 years. The directors are satisfied that, at this time, there are no significant unprovided contingent liabilities arising from these commitments.

42 CASH INFLOW FROM OPERATIONS 2008 2007 £’m £’m

Profit for the year 99.1 89.3 Adjustments for: Tax 20.2 16.1 Depreciation (see note 22) 26.6 18.8 Amortisation (see notes 20 and 21) 82.2 53.0 Loss/(profit) on disposal of property, plant & equipment 0.5 (0.5) Loss on disposal of intangibles 0.4 – Profit on disposal of subsidiaries (see note 45) (1.9) – Finance income (see note 12) (33.9) (32.7) Finance costs (see note 13) 87.0 70.0 Financial instruments (see note 10) 46.1 5.3 Adjustment to goodwill on recognition of tax losses (see note 10) – 3.2 Changes in working capital: Inventories (9.6) 14.7 Trade and other receivables (18.3) (11.7) Trade and other payables 15.7 (9.5) Retirement benefit obligation deficit payments (22.5) (2.4) Provisions (12.7) (3.5) Cash inflow from operations 278.9 210.1

43 MAJOR NON-CASH TRANSACTIONS During the year Meggitt PLC issued 6.0 million shares worth £15.5 million in respect of scrip dividends (2007: 2.1 million shares worth £6.6 million).

44 BUSINESS COMBINATIONS Total consideration paid in respect of acquisitions is as follows:

2008 2007 £’m £’m

Businesses acquired in 2008 7.8 – Businesses acquired in 2007 0.3 563.6 Businesses acquired in earlier years 1.1 – Total consideration paid 9.2 563.6

Total goodwill arising in respect of acquisitions is as follows:

2008 2007 Restated £’m £’m

Businesses acquired in 2008 5.6 – Businesses acquired in 2007 – 516.4 Businesses acquired in earlier years* – 0.5 Total goodwill arising 5.6 516.9

* Relates to consideration recognised in 2007 in respect of acquisitions in earlier years.

Financial statements 91 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

44 BUSINESS COMBINATIONS CONTINUED

Acquisitions made in 2008 On 7 January 2008 Meggitt acquired 100% of the share capital of Ferroperm Piezoceramics A/S for £9.8 million. The acquired business is located in Kvistgaard, Denmark and is a world leader in the manufacture of advanced piezo-electric ceramic materials for a range of specialist sensor applications, such as vibration, dynamic pressure, underwater acoustics and medical ultrasound. The acquisition has been accounted for using the purchase method of accounting. The assets and liabilities arising from the acquisitions are as follows:

Book value Fair value £’m £’m

Goodwill (see note 19) – 5.6 Development costs 0.3 – Other intangible assets (see note 21) – 4.3 Property, plant and equipment (see note 22) 0.7 0.7 Inventories 0.9 1.1 Trade and other receivables – current 0.6 0.7 Trade and other payables – current (0.3) (0.4) Current tax liabilities (0.2) (0.2) Bank and other borrowings – current (0.8) (0.8) Provisions – current (see note 33) (0.1) (0.1) Deferred tax liabilities (see note 34) – (1.1) Total 1.1 9.8

Consideration satisfied in cash (including costs) 7.8 Deferred consideration 2.0 Total consideration payable 9.8

Goodwill is attributable to the profitability of the acquired businesses and expected future synergies arising following the acquisition. The impact of the acquired business on the results of the Group for the period since acquisition is not significant. Analysis of the net outflow of cash in respect of the acquisition of Ferroperm:

2008 £’m

Cash consideration 7.7 Directly attributable costs 0.1 Net outflow of cash and cash equivalents for acquisitions 7.8

Acquisitions made in 2007 – amendment of provisional fair values On 22 June 2007 the Group completed the acquisition of 100% of the issued share capital of K&F Industries Holdings, Inc (K&F). At 31 December 2007 the Group had allocated provisional fair values to the net assets acquired as a result of this acquisition. The Group finalised these fair values in 2008. In accordance with IFRS 3 these amendments have been recorded as though they were made in 2007. The impact on net assets and the income statement arising from the finalisation of fair values is shown in note 46.

92 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

45 DISPOSALS On 3 January 2008, Meggitt completed the disposal of S-TEC Inc. (‘S-TEC’) for a net consideration of £17.2 million. S-TEC designs, certifies and manufactures general aviation autopilots, supplying original equipment manufacturers and the aftermarket. The business was no longer considered core to the Group’s current operations. The assets and liabilities disposed are summarised below:

2008 £’m

Goodwill 9.2 Development costs 1.1 Other intangible assets 0.2 Property, plant and equipment 1.3 Inventory 2.2 Trade and other receivables – current 1.8 Trade and other payables – non-current (1.3) Provisions – current (0.2) Net assets disposed 14.3 Currency translation loss transferred from equity 1.0 Total 15.3 Net consideration 17.2 Profit on disposal (see note 11) 1.9

46 RESTATEMENT OF PRIOR YEAR COMPARATIVES IFRS 3 requires fair values of assets and liabilities acquired to be finalised within 12 months of the acquisition date with the exception of certain deferred tax balances (see note 10). All fair value adjustments are required to be recorded with effect from the date of acquisition and consequently result in the restatement of previously reported financial results. During 2008 the Group finalised the fair values of K&F completed in 2007 and this resulted in adjustments to the balance sheet at that date. These amendments primarily relate to revisions to the fair value of property and recognition of future tax benefits. Further details are provided in note 44. The impact of the restatements is shown below:

2007 2007 2007 As Fair value As reported adjustments restated £’m £’m £’m

Goodwill (see note 19) 1,071.2 (3.4) 1,067.8 Other intangible assets (see note 21) 742.2 (0.5) 741.7 Property, plant and equipment (see note 22) 195.4 (4.2) 191.2 Trade and other payables – current (226.8) (0.3) (227.1) Current tax liabilities (43.1) (1.1) (44.2) Deferred tax liabilities – non-current (276.5) 11.0 (265.5) Provisions – non-current (see note 33) (72.5) (1.5) (74.0) Other net liabilities – not affected by restatement (326.5) – (326.5) Net assets 1,063.4 – 1,063.4

The finalisation of fair value adjustments had no impact on the 2007 income statement.

Financial statements 93 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS Continued

47 GROUP COMPANIES The following information is not a complete listing of all subsidiary companies at 31 December 2008 and relates only to those subsidiaries principally affecting the profits or assets of the Group.

United Kingdom Dunlop Limited ‡ Dunlop Holdings Limited ‡ Dunlop Aerospace (UK) Limited ‡ Dunlop Aerospace Group Limited ‡ Dunlop Aerospace Holdings Limited ‡ Dunlop Aerospace Overseas Limited ‡ Meggitt Aerospace Limited Meggitt Defence Systems Limited Meggitt International Limited*‡ Meggitt Properties PLC*‡ Meggitt (UK) Limited

Continental Europe Navarra de Componentes Electronicos SA – Spain Sensorex SAS – France Vibro-Meter SAS – France Vibro-Meter SA – Switzerland

North America Endevco Corporation – USA Engineered Fabrics Corporation – USA Keith Products LLP – USA Meggitt Aircraft Braking Systems Corporation – USA Meggitt Defense Systems, Inc – USA Meggitt GP Inc – USA ‡ Meggitt Holdings (California) Inc – USA ‡ Meggitt Holdings (USA) Inc – USA ‡ Meggitt Oregon, Inc – USA Meggitt Safety Systems Inc – USA Meggitt Thermal Systems, Inc – USA Meggitt Training Systems Inc – USA ‡ Meggitt-USA, Inc – USA ‡ NASCO Aircraft Brake Inc – USA Stewart Warner South Wind Corporation – USA Vibro-Meter Inc – USA Whittaker Controls Inc – USA Whittaker Corporation – USA ‡ Wilcoxon Research Inc – USA

Rest of World Meggitt Aerospace Asia Pacific Pte Ltd – Singapore Meggitt (Xiamen) Sensors & Controls Co Ltd – China i) United Kingdom companies listed above are incorporated and registered in England and Wales. Other companies listed above are incorporated in the country named. ii) The ordinary shares of all subsidiaries were 100% owned by Meggitt PLC either directly or indirectly at 31 December 2008. iii) All companies are included in the consolidation. iv) Companies marked * are direct subsidiaries of Meggitt PLC. v) Companies marked ‡ are management companies. Otherwise all companies are operating companies engaged in the Group’s principal activities as described in the Report of the Directors on page 37. A full list of subsidiary companies will be annexed to the next annual return to the Registrar of Companies.

94 Financial statements Meggitt PLC Report and accounts 2008 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF MEGGITT PLC

We have audited the parent company financial statements of Meggitt PLC BASIS OF AUDIT OPINION for the year ended 31 December 2008 which comprise the Balance Sheet and the related notes. These parent company financial statements have We conducted our audit in accordance with International Standards on been prepared under the accounting policies set out therein. We have also Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit audited the information in the Directors’ Remuneration Report that is includes examination, on a test basis, of evidence relevant to the amounts described as having been audited. and disclosures in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an We have reported separately on the group financial statements of Meggitt assessment of the significant estimates and judgments made by the PLC for the year ended 31 December 2008. directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the company’s RESPECTIVE RESPONSIBILITIES OF DIRECTORS circumstances, consistently applied and adequately disclosed. AND AUDITORS

The directors’ responsibilities for preparing the Annual Report, the We planned and performed our audit so as to obtain all the information Directors’ Remuneration Report and the parent company financial and explanations which we considered necessary in order to provide us statements in accordance with applicable law and United Kingdom with sufficient evidence to give reasonable assurance that the parent Accounting Standards (United Kingdom Generally Accepted Accounting company financial statements and the part of the Directors’ Remuneration Practice) are set out in the Statement of Directors’ Responsibilities. Report to be audited are free from material misstatement, whether Our responsibility is to audit the parent company financial statements caused by fraud or other irregularity or error. In forming our opinion we and the part of the Directors’ Remuneration Report to be audited in also evaluated the overall adequacy of the presentation of information in accordance with relevant legal and regulatory requirements and the parent company financial statements and the part of the Directors’ International Standards on Auditing (UK and Ireland). This report, Remuneration Report to be audited. including the opinion, has been prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies Act OPINION 1985 and for no other purpose. We do not, in giving this opinion, accept In our opinion: 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 • the parent company financial statements give a true and fair view, expressly agreed by our prior consent in writing. in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the company’s affairs as at 31 December 2008; We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company • the parent company financial statements and the part of the Directors’ financial statements and the part of the Directors’ Remuneration Report Remuneration Report to be audited have been properly prepared in to be audited have been properly prepared in accordance with the accordance with the Companies Act 1985; and Companies Act 1985. We also report to you whether in our opinion the • the information given in the Directors’ Report is consistent with the information given in the Directors’ Report is consistent with the parent parent company financial statements. company financial statements. The information given in the Directors’ Report includes specific information cross referenced from the Principal Activities and Business Review section of the Directors’ Report to the Business Review. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and PricewaterhouseCoopers LLP explanations we require for our audit, or if information specified by law Chartered Accountants and Registered Auditors regarding directors’ remuneration and other transactions is not disclosed. Reading 2 March 2009 We read other information contained in the Annual Report and consider whether it is consistent with the audited parent company financial statements. The other information comprises Meggitt at a Glance, Financial Highlights, Overview, Chairman’s Statement, Group Strategic Objectives, Strategy Implementation, Market Review, Business Review, Risks and Uncertainties, Aerospace Equipment, Sensing Systems, Defence Systems, Corporate Responsibility, Board of Directors, Report of the Directors, Directors’ Statement on Corporate Governance, the unaudited part of the Remuneration Report and the other information listed in the contents to the Annual Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information.

Financial statements 95 Meggitt PLC Report and accounts 2008 COMPANY BALANCE SHEET As at 31 December 2008

2008 2007 Notes £’m £’m

Fixed assets Tangible fixed assets 4 4.7 1.8 Derivative financial instruments 10 32.3 – Investments 5 172.5 171.2 209.5 173.0 Current assets Debtors 6 2,480.4 2,220.2 Derivative financial instruments 10 19.9 – Cash at bank and in hand 26.8 7.2 2,527.1 2,227.4 Creditors – amounts falling due within one year 7 (570.5) (605.7) Derivative financial instruments 10 (27.4) (0.1) Net current assets 1,929.2 1,621.6

Total assets less current liabilities 2,138.7 1,794.6

Creditors – amounts falling due after more than one year 8 (1,088.9) (851.4) Provision for liabilities and charges 9 (0.2) (0.2) Derivative financial instruments 10 (72.2) (10.7) Net assets 977.4 932.3

Capital and reserves Called up share capital 13 33.3 32.9 Share premium account 15 798.8 781.6 Other reserves 15 17.5 17.5 Profit and loss reserve 14 127.8 100.3 Total shareholders’ funds 15 977.4 932.3

The financial statements were approved by the Board of Directors on 2 March 2009 and signed on its behalf by:

T Twigger S G Young Director Director

96 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY

1 BASIS OF PREPARATION Loans These financial statements have been prepared under the historical Loans are initially recognised at fair value being proceeds received less cost accounting convention, as modified to include the revaluation of directly attributable transaction costs incurred. Loans are subsequently certain assets, in accordance with the Companies Act 1985. The Company measured at amortised cost with any transaction costs amortised to the continues to prepare its annual financial statements in accordance with profit and loss account over the period of the loans. Loans are classified UK Generally Accepted Accounting Practice (UK GAAP). 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. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Foreign currencies Investments Local currency Investment in subsidiaries are stated at cost less provision for impairment The Company’s financial statements are presented in pounds sterling in value except for investments acquired before 1 January 1988 where being the currency of the primary economic environment in which the Section 131 merger relief has been taken when investments are stated at Company operates. the nominal value of the shares issued in consideration. Transactions and balances Tangible fixed assets Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated Tangible fixed assets are stated at cost or valuation, net of depreciation and in foreign currencies at the balance sheet date are reported at the rates any provision for impairment. Depreciation is not provided on freehold land. of exchange prevailing at that date. Exchange differences on retranslating On other assets it is provided on cost or revalued amounts in equal annual monetary assets and liabilities are recognised in the profit and loss instalments over the estimated useful lives of the assets as follows: account except where they relate to qualifying cash flow or investment Freehold buildings 40 to 50 years hedges in which case the exchange differences are deferred in equity. Long and short leasehold property over period of lease Fixtures and fittings 3 to 10 years Pension scheme arrangements Motor vehicles 4 to 5 years The Company operates three defined benefit schemes, the Meggitt 1990 Plan, the Meggitt Executive Pension Plan (MEPP) and the Dunlop Aerospace Operating leases Limited UK Pension Scheme. As the Company is unable to identify its Rental costs under operating leases are charged to the profit and loss share of the underlying assets and liabilities of the schemes on a consistent account on a straight-line basis over the lease term, even if the payments and reasonable basis the Company accounts for all schemes as though they are not made on such a basis. were defined contribution schemes. Accordingly the amount charged to the profit and loss account is the contribution payable in the period. Differences Taxation between contributions payable in the period and contributions actually paid are shown as accruals or prepayments in the balance sheet. The charge for taxation is based on the profit for the period and takes into account taxation deferred because of timing differences between the Share-based payment treatment of certain items for taxation and accounting purposes. The fair value of the services received from employees is recognised as an Deferred taxation is provided in full, without discounting, on timing expense in the profit and loss account over the period for which services differences that result in an obligation at the balance sheet date to pay are received (vesting period). more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Deferred For equity settled share-based payment transactions the total amount taxation assets are recognised to the extent that it is regarded as more recognised is based on the fair value of the equity instrument measured likely than not that they will be recovered. at the date the award is made. Assumptions are made as to the total number of equity instruments that will vest and this assumption is Deferred taxation is not provided on timing differences arising from the reviewed at each balance sheet date. The impact of any revision to vesting sale or revaluation of fixed assets unless, at the balance sheet date, a estimates is recognised in the profit and loss account over the vesting binding commitment to sell the asset has been entered into and it is period. Proceeds received, net of any directly attributable transaction unlikely that any gain will qualify for rollover relief. costs, are credited to share capital and share premium.

Provision for liabilities and charges For cash settled share-based payment transactions the total amount recognised is based on the fair value of the liability incurred. The fair value In accordance with FRS 12 provision is made for onerous property leases. of the liability is remeasured at each balance sheet date with changes in Provisions are discounted where appropriate to reflect the time value the fair value recognised in the profit and loss account for the period. of money. Shares in the company are held by an independently managed Employee Share Ownership Trust (‘ESOP Trust’), to meet future obligations in respect of the Company’s employee share schemes. The cost of own shares held by the ESOP Trust is deducted from shareholders’ funds.

Financial statements 97 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY Continued

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Capital instruments CONTINUED Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are deducted from Derivative financial instruments and hedging the proceeds recorded in equity. Other instruments are classified as Derivative financial instruments are recognised at fair value on the date liabilities if they contain an obligation to transfer economic benefits the derivative contract is entered into and are subsequently remeasured and otherwise are included in shareholders’ funds. The finance cost at fair value at each balance sheet date. To the extent that the maturity of recognised in the profit and loss account in respect of capital instruments the financial instrument is more than 12 months from the balance sheet other than equity shares is allocated to periods over the term of the date the fair value is reported as a non-current asset or liability. Derivative instrument at a constant rate of charge based on the carrying amount. financial instruments with maturities of less than 12 months from the balance sheet are shown as current assets or liabilities. The method by Dividends which any gain or loss is recognised depends on the designation of the Interim dividends are recognised when they are paid. Final dividends derivative financial instrument: are recognised when they are approved by the Company’s shareholders. Fair value hedges Fair value hedges are hedges of the fair value of recognised assets or Profit and recognised gains and losses of the Company liabilities or a firm commitment. Interest rate swaps that change fixed The Company has taken advantage of the legal dispensation contained rate interest to variable rate interest are an example of an instrument in Section 230 of the Companies Act 1985 allowing it not to publish that would be treated as a fair value hedge assuming it meets the hedge a separate profit and loss account and related notes (see Meggitt PLC criteria. Changes in the fair value of derivative financial instruments that Group accounts note 15). The Company has taken advantage of the legal are designated as fair value hedges are recognised in the profit and loss dispensation contained in Section 230 of the Companies Act 1985 allowing account together with changes in the fair value of the hedged item. it not to publish a separate statement of recognised gains and losses. Cash flow hedges Cash flow hedges are hedges of highly probable forecast transactions. Cash flow statement Interest rate swaps that change variable rate interest to fixed rate interest The Company has taken advantage of the exemption under the terms are an example of an instrument that would be treated as a cash flow of FRS 1 (revised 1996) from the requirement to produce a cash flow hedge assuming it meets the hedge criteria. Changes in the fair value statement. A consolidated cash flow statement is included in the Meggitt of the effective portion of derivative financial instruments that are PLC Group accounts. designated as cash flow hedges are initially recorded in a separate reserve within equity. To the extent that changes in fair value are recorded Related party transactions in equity they are recycled to the profit and loss account in the periods in which the hedged item affects the profit and loss account. However, The Company has taken advantage of the exemption contained in when the transaction to which the hedge relates results in the recognition FRS 8 from the requirement to disclose related party transactions within of a non-monetary asset or a liability then gains and losses previously the Group. recognised in equity are included in the initial measurement of the cost of the non-monetary asset or liability. If the forecast transaction to which the cash flow hedge relates is no longer expected to occur the cumulative gain or loss previously recognised in equity is transferred to the profit and loss account immediately. If the hedging instrument is sold, expires or no longer meets the criteria for hedge accounting the cumulative gains and losses previously recognised in equity are transferred to the profit and loss account when the forecast transaction is recognised in the profit and loss account. Net investment hedge Gains and losses on net investments of foreign subsidiaries are accounted for in a similar way to cash flow hedges. Gains and losses relating to the effective portion of any hedge are recognised in equity. Changes in the fair value of any ineffective portion are recognised in the profit and loss account. Cumulative gains and losses previously recognised in equity are transferred to the profit and loss account if the foreign business to which they relate is disposed of. Derivatives that do not meet the criteria for hedge accounting Where derivatives do not meet the criteria for hedge accounting changes in fair value are recognised immediately in the profit and loss account. The Company utilises a 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 for the Company’s large number of foreign currency contracts is not merited. Accordingly gains and losses arising from measuring the contracts at fair value are recorded immediately in the profit and loss account.

98 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY Continued

3 EMPLOYEE COSTS 2008 2007 £’m £’m

Employee costs during the year including executive directors: Wages and salaries 8.8 7.1 Social security costs 1.2 1.3 Other pension costs 0.7 0.6 Share-based payment (see note 15) 1.9 1.4 Total 12.6 10.4

Details of the Group’s employee share schemes are included in note 38 of the Meggitt PLC Group accounts.

2008 2007 No. No.

Average monthly number of persons employed including executive directors: Administration 42 38 Total 42 38

4 TANGIBLE FIXED ASSETS Plant, Land and equipment buildings and vehicles Total £’m £’m £’m

Cost at 1 January 2008 0.8 2.0 2.8 Additions – 3.4 3.4 Cost at 31 December 2008 0.8 5.4 6.2 Accumulated depreciation at 1 January 2008 0.2 0.8 1.0 Charge for year 0.1 0.4 0.5 Accumulated depreciation at 31 December 2008 0.3 1.2 1.5

Net book amount at 31 December 2008 0.5 4.2 4.7

Net book amount at 31 December 2007 0.6 1.2 1.8

2008 2007 £’m £’m

Net book amount of land and buildings Freehold 0.1 0.1 Short leasehold 0.4 0.5 Total 0.5 0.6

5 INVESTMENTS 2008 2007 £’m £’m

Shares in subsidiaries: At 1 January 171.2 167.3 Additions – capital contribution arising from share-based payments (see note 15) 1.7 3.9 Provision for impairment in value (0.4) – At 31 December 172.5 171.2

A list of principal subsidiaries is included in note 47 of the Meggitt PLC Group accounts.

Financial statements 99 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY Continued

6 DEBTORS 2008 2007 £’m £’m

Amounts owed by Group undertakings 2,469.3 2,215.5 Other debtors – 0.7 Prepayments and accrued income 0.5 0.4 Deferred tax assets 10.6 3.6 Total 2,480.4 2,220.2

Deferred tax assets include £10.6 million (2007: £2.9 million) due after one year. All other amounts fall due within one year.

7 CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR 2008 2007 £’m £’m

Bank loans and overdrafts 3.4 8.8 Other loans 0.5 0.4 Trade creditors 1.4 1.8 Amounts owed to Group undertakings 551.8 579.0 UK corporation tax payable 5.4 9.2 Taxation and social security 1.0 1.6 Other creditors 1.9 0.7 Accruals 5.1 4.2 Total 570.5 605.7

8 CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 2008 2007 £’m £’m

Bank loans 918.1 726.5 Other loans 170.8 124.9 Total 1,088.9 851.4

2008 2007 £’m £’m

Analysis of bank loans and overdrafts repayable: In one year or less 3.4 8.8 In more than two years but not more than five years 918.1 726.5 Total 921.5 735.3

2008 2007 £’m £’m

Analysis of other loans repayable: In one year or less 0.5 0.4 In more than two years but not more than five years 122.3 – In more than five years 48.5 124.9 Total 171.3 125.3

9 PROVISIONS FOR LIABILITIES AND CHARGES 2008 2007 £’m £’m

Onerous lease costs 0.2 0.2 Total 0.2 0.2

Provision has been set up for the estimated rental shortfall in respect of properties with onerous lease obligations and will be utilised over the lease terms typically up to ten years.

100 Financial statements Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY Continued

10 DERIVATIVE FINANCIAL INSTRUMENTS 2008 2008 2007 2007 Assets Liabilities Assets Liabilities £’m £’m £’m £’m

Interest rate swaps – (47.4) – (10.8) Forward foreign exchange contracts 52.2 (52.2) – – Total 52.2 (99.6) – (10.8) Less non-current portion: Interest rate swaps – (39.9) – (10.7) Forward foreign exchange contracts 32.3 (32.3) – – Non-current portion 32.3 (72.2) – (10.7) Current portion 19.9 (27.4) – (0.1)

The Company is exempt from the FRS 29 disclosures as the consolidated financial statements of Meggitt PLC give the disclosures required by IAS 32 (see Meggitt PLC Group accounts notes 31 and 32).

11 PENSIONS The Directors do not believe that the FRS 17 deficit for the schemes in which the Company participates is significantly different from the IAS 19 deficits reported in note 35 to the Meggitt PLC Group accounts.

12 COMMITMENTS

Capital commitments

2008 2007 £’m £’m

Contracted for but not incurred – plant, equipment and vehicles 0.1 –

Operating lease commitments The future aggregate minimum lease payments under non-cancellable operating leases are as follows: 2008 2007 £’m £’m

Not later than one year 0.1 0.2 Later than one year and not later than five years 0.5 0.7 Later than five years 1.2 1.6 Total 1.8 2.5

13 SHARE CAPITAL 2008 2007 £’m £’m

Ordinary shares of 5p each Authorised: 885.0 million shares (2007: 885.0 million) 44.3 44.3

Net No. of shares Nominal value consideration ‘m £’m £’m

Allotted and fully paid: Balance at 1 January 2008 658.3 32.9 Issued on exercise of executive share options 0.3 – 0.5 Issued on exercise of sharesave options 1.0 0.1 1.6 Scrip dividends 6.0 0.3 15.5 Balance at 31 December 2008 665.6 33.3

Financial statements 101 Meggitt PLC Report and accounts 2008 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY Continued

14 PROFIT AND LOSS RESERVE £’m

Balance at 1 January 2008 100.3 Profit for the financial year 104.6 Dividends (see note 17 to Group financial statements) (55.8) Losses on cash flow hedges (13.3) Currency translation differences (10.3) Employee share option schemes: Value of subsidiary employee services (see note 5) 1.7 Value of services provided (see note 3) 1.9 Own shares purchased (1.3) Balance at 31 December 2008 127.8

15 RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ FUNDS Profit and Share Share Other loss Total Total capital premium reserves reserve 2008 2007 £’m £’m £’m £’m £’m £’m

Balance at 1 January 2008 32.9 781.6 17.5 100.3 932.3 499.1 Profit for the financial year – – – 104.6 104.6 40.8 Dividends (see note 17 to Group financial statements) – – – (55.8) (55.8) (42.2) Losses on cash flow hedges – – – (13.3) (13.3) (7.3) Currency translation differences – – – (10.3) (10.3) – Employee share option schemes: Value of subsidiary employee services (see note 5) – – – 1.7 1.7 3.9 Value of services provided (see note 3) – – – 1.9 1.9 1.4 Own shares purchased – – – (1.3) (1.3) – Rights issue – – – – – 426.6 Issued on exercise of sharesave and executive share options 0.1 2.0 – – 2.1 3.4 Scrip dividends 0.3 15.2 – – 15.5 6.6 Balance at 31 December 2008 33.3 798.8 17.5 127.8 977.4 932.3

Details of the Group’s employee share schemes are included in note 38 of the Meggitt PLC Group accounts.

102 Financial statements Meggitt PLC Report and accounts 2008 FIVE-YEAR RECORD

2008 2007 2006 2005 2004 £’m £’m £’m £’m £’m Revenue and profit Revenue 1,162.6 878.2 670.3 616.3 476.6 Underlying profit before taxation 243.3 179.0 132.7 116.3 90.3 Exceptional operating costs (15.8) (5.4) (1.5) (7.0) (7.9) Amortisation of intangibles acquired in business combinations (61.8) (38.4) (12.9) (11.2) (3.2) Disposal of inventory revalued in business combinations (0.3) (21.3) (1.3) (0.9) (8.5) Financial instruments (46.1) (5.3) 12.1 (10.1) – Goodwill adjustment arising from recognition of tax losses – (3.2) (2.4) – – Profit before taxation 119.3 105.4 126.7 87.1 70.7 Earnings and dividends Earnings per share – basic 15.0p 14.6p 18.6p 13.0p 11.9p Earnings per share – underlying 26.5p 22.1p 19.1p 17.1p 14.9p Dividends per ordinary share (paid or proposed in respect of the year) 8.45p 8.20p 7.36p 6.59p 5.99p Gearing ratio Year end net cash/borrowings as a percentage of capital employed 81.5% 76.7% 63.0% 63.3% 71.2%

Profit figures have been restated for the effects of finalising the fair values of acquired businesses in subsequent financial periods. The figures for 2004 have been restated following the group’s transition to IFRS. All comparative data for earnings and dividends for 2004, 2005 and 2006 has been adjusted for the bonus element of the rights issue approved by shareholders in 2007.

Financial statements 103 Meggitt PLC Report and accounts 2008 INVESTOR INFORMATION

SHAREHOLDER INFORMATION

Analysis of share register at 31 December 2008

No of % of total No of % of total shareholders shares shareholders shares Size of holdings Types of shareholder 1–999 5,831 0.21 Individuals 8,180 2.32 1,000–9,999 3,193 1.51 Banks and nominees 1,658 96.73 10,000–99,999 572 2.44 Investment and insurance companies 32 0.03 100,000–249,999 126 3.06 Other 103 0.92 250,000–499,999 85 4.59 500,000–999,999 48 5.14 1,000,000 and over 118 83.05 9,973 100.00 9,973 100.00

SUPPLEMENTARY INFORMATION further details on how and when to vote and holidays, on telephone number 0870 703 0084. further information for Crest members. Shareholders should have their shareholder Dividends reference number (SRN) ready when making The proposed 2008 final dividend of 5.75 pence We provide annual reports and other documents the call. The SRN appears on share certificates. per share, if approved, will be paid on 8 May to shareholders in their elected format under A bank debit card will be required for purchases. 2009 to shareholders on the register on the electronic communications provisions Detailed terms and conditions are available on 13 March 2009. The expected dividend approved by the shareholders at the 2007 Annual request by telephoning 0870 702 0000. payment date for the 2009 interim dividend General Meeting. The Companies Act 2006 is 2 October 2009. recognises the growing importance of electronic This is not a recommendation to buy, sell or communication and contains provisions that hold shares in Meggitt PLC. Shareholders who Shareholder enquiries allow companies to communicate with are unsure of what action to take should obtain Enquiries about the following administrative shareholders electronically unless they elect to independent financial advice. Share values matters should be addressed to Meggitt PLC’s continue to receive paper documents. The Board may go down as well as up which may result registrar: Computershare Investor Services also wishes to protect the environment by in shareholders receiving less than they PLC, The Pavilions, Bridgwater Road, Bristol reducing the volume of documents produced. originally invested. BS99 6ZZ, telephone 0870 703 6210 or e-mail: Electronic copies of the Annual Report and [email protected] Insofar as this statement constitutes a financial Accounts 2008 and the Notice of Annual General promotion for the share dealing service provided • Change of address notification Meeting will be posted on our website, where by Computershare Investor Services PLC, it has • Lost share certificates Meggitt PLC’s announcements to the Stock been approved by Computershare Investor • Dividend payment enquiries Exchange and press releases are also published. Services PLC for the purpose of Section 21 (2) (b) • Dividend mandate instructions. Shareholders Share dealing services of the Financial Services and Markets Act 2000 may have their dividends paid directly into We have established share dealing services with only. Computershare Investor Services PLC is their bank or building society accounts by the company’s registrar, Computershare authorised and regulated by the Financial completing a dividend mandate form. Tax Investor Services PLC to provide shareholders Services Authority. Where this has been received vouchers are sent directly to shareholders’ with an easy way to buy or sell Meggitt PLC in a country where providing such a service registered addresses ordinary shares on the London Stock Exchange. would be contrary to local laws or regulations, • Amalgamation of shareholdings. We invite this should be treated as information only. shareholders who receive more than one The internet share dealing service commission copy of the annual report to amalgamate is 0.5%, subject to a minimum charge of £25. ShareGift their accounts on the share register. Stamp duty, currently 0.5%, is payable on If you only have a small number of shares which purchases. There is no need to open an account would cost more for you to sell than they are Shareholders can check their shareholdings to deal. Real-time dealing is available during worth, you may wish to consider donating them at www.computershare.com. A shareholder market hours. There is a facility to place orders to the charity ShareGift (registered charity reference number, which can be found on share outside market hours. Up to 90-day limit orders 1052686), which specialises in accepting such certificates and recent dividend tax vouchers, are available for sales. To access the service, shares as donations. Further information about is needed for site registration. The website shareholders should note their shareholder ShareGift may be obtained on 0207 930 3737 or includes information on recent trends in reference number (SRN) and log onto from www.ShareGift.org. Meggitt’s share price. www.computershare.com/dealing/uk. The SRN Electronic communications appears on share certificates. A bank debit card Meggitt encourages shareholders to vote at will be required for purchases. the Annual General Meeting and provides an The telephone share dealing service commission electronic proxy voting facility. Shareholders is 1%, subject to a minimum charge of £25. who are not Crest members can vote online on Stamp duty, currently 0.5%, is payable on resolutions proposed at the Annual General purchases. The service is available from 8 a.m. Meeting via our website. Proxy cards contain to 4.30 p.m. Monday to Friday, excluding bank

104 Financial statements Meggitt PLC Report and accounts 2008 KEY DATES CONTACT US

3 March 2009 Preliminary results 01202 597 597 23 April 2009 Andy Mann, Head of Communications & Investor Relations AGM and interim [email protected] management statement 4 August 2009 www.meggitt.com Interim results Latest Meggitt share price with a 25-minute time delay 30 October 2009 Interim management statement

FINANCIAL CALENDAR ADVISORS Design SAS sasdesign.co.uk Print St. Ives Westerham Press Year-end 31 December Principal clearing bankers Paper This report is printed on paper that Interim management statement 30 October HSBC Bank plc meets international environmental standards, Interim dividend payment 2 October Barclays Bank PLC contains elemental chlorine-free virgin pulp, Interim scrip dividend Bank of America obtained from sustainably managed forests elections by 18 September Merchant bankers Images: Eurofighter Typhoon courtesy of BAE Interim dividend record date 14 August N M Rothschild & Sons Limited Systems. Irsching 4 test power plant courtesy Interim dividend ex-dividend 12 August of Siemens. Gulfstream G650 courtesy of Interim results 4 August Auditors Gulfstream Aerospace Corporation. Abrams Interim period end 30 June PricewaterhouseCoopers LLP tank courtesy of General Dynamics. Final dividend payment 8 May Solicitors AGM 23 April Clifford Chance LLP Interim management statement 23 April Final scrip dividend elections by 21 April Brokers 2008 annual report published End March Merrill Lynch International Final dividend record date 13 March Registrars Final dividend ex-dividend 11 March Computershare Investor Services PLC Preliminary results for year ended 31 December 2008 3 March

Company registered number 432989

Financial statements 105 Meggitt PLC Report and accounts 2008 01_RUNNING HEADER FINANCIAL HIGHLIGHTS MEGGITT PLC ANNUAL REPORT AND ACCOUNTS 2008 02_Intro Paragraph Overall revenues increased by 32% to £1,162.6 million (2007: £878.2 million) refl ecting strong organic1 REGISTERED OFFICE EUROFIGHTER TYPHOON MEGGITT PLC growth of 10%, favourable currency movements and the inclusion of a full year of the K&F businesses. Meggitt PLC Eurofi ghter Typhoon, the world’s most advanced Atlantic House swing-role combat aircraft, is fl own by the air The Board’s preferred measure of the trading performance of the Group is underlying profi t. Underlying Aviation Park West forces of Britain, Germany, Italy, Spain and operating profi t for the year was up 37% at £296.4 million (2007: £216.3 million) and underlying return on Bournemouth International Airport Austria and has been ordered by the Kingdom ANNUAL REPORT sales increased to 25.5% (2007: 24.6%). On an organic basis, underlying operating profi t increased by10%. Christchurch of Saudi Arabia. The aircraft carries Meggitt Underlying profi t before tax increased by 36% to £243.3 million (2007: £179.0 million). Dorset BH23 6EW sensors, seals, ducts and connectors, engine United Kingdom fi re detectors and pneumatics, air data AND ACCOUNTS Cash fl ow from operations before exceptional operating costs was 100% of underlying operating profi t at transducers, crash survivable memory unit and T +44 (0) 1202 597 597 £295.4 million (2007: 99% at £214.3 million). wheels and carbon brakes. Meggitt integrated F +44 (0) 1202 597 555 2008 the aircraft landing gear sub-systems, including After tax at 28.0% (2007: 27.5 %), underlying earnings per share increased 20% to 26.5 pence (2007: 22.1 pence). control and comprehensive monitoring. On a statutory basis, profi t before tax increased by 13% to £119.3 million (2007: £105.4 million) and earnings per share increased by 3% to 15.0 pence (2007: 14.6 pence). The recommended fi nal dividend of 5.75 pence (2007: 5.75 pence) represents a total dividend for the year of 8.45 pence (2007: 8.20 pence), an increase of 3%.

1,162.6 243.3 295.4 REVENUE (£ MILLIONS) UNDERLYING PROFIT BEFORE TAX (£ MILLIONS) CASH INFLOW FROM OPERATIONS BEFORE EXCEPTIONAL OPERATING COSTS (£ MILLIONS)

04 476.6 04 90.3 04 111.0 05 616.3 05 116.3 05 138.4 06 670.3 06 132.7 06 140.3 07 878.2 07 179.0 07 214.3 08 1,162.6 08 243.3 08 295.4

MEGGITT AT A GLANCE OVERLEAF