Annual Report and Accounts 2021

ENABLING THE

EXTRAORDINARY

TO FLY TO POWER TO LIVE

Annual Report and Accounts 2021

Performance

Contents

Revenue

£1,489m

2020: £1,684m

Net debt

£780m

2020: £773m

Underlying basic

earnings per share

15.4p

2020: 16.5p

Net debt: EBITDA

1.9×

2020: 2.2x

Underlying operating profit

£177m

2020: £191m

Free cash flow

£46m

2020: £32m

Liquidity

headroom

£573m

2020: £908m

Statutory profit before tax

£31m

2020: loss of £334m

> Supported our stakeholders

through another challenging

year of COVID-19 and supply

chain disruption

> Delivered good cash

performance with free cash

flow of £46m

> Global employee engagement

up 2% versus 2020 levels and

4% above high performing

benchmark

> Commissioned our new

manufacturing and engineering

COE and global headquarters

at Ansty Park, UK

> Delivered civil aftermarket

organic revenue growth of

7% for full year; up 51% in the

second half (vs. H2 2020)

> Committed to setting targets

under SBTi framework

> Added 11 SMARTSupport™

aftermarket contracts

Financial summary Highlights

Introduction

Our vision 02

At a glance 04

Chairman’s statement 06

Strategic Report

Chief Executive’s review 09

Business model 16

Market trends 20

Our strategy 24

Key performance indicators 26

Divisional reviews 34

Chief Financial Officer’s review 42

Risk management 48

Principal risks & uncertainties 50

Taskforce on Climate-related

Financial Disclosures

Corporate Responsibility 64

Section 172 statement 89

Stakeholder engagement 90

Directors’ Report

Chairman’s introduction to Governance 98

Board of Directors 100

Corporate Governance 104

Audit Committee report 114

Nominations Committee report 122

Directors’ remuneration report 126

Other statutory information 156

Financial Statements

Group Financial Statements

Independent auditors’ report

to the members of Meggitt PLC

160

Consolidated income statement 171

Consolidated statement

of comprehensive income

172

Consolidated balance sheet 173

Consolidated statement of

changes in equity

174

Consolidated cash flow statement 175

Notes to the consolidated

financial statements

176

Company Financial Statements

Company balance sheet 232

Company statement of changes

in equity

233

Notes to the financial statements

of the Company

234

Other Information

Five-year record 243

Investor information 244

Glossary 246

1 Underlying operating profit is reconciled to operating profit

in note 9 to the Group’s consolidated financial statements on

page 198.

2 Please see note 43 to the Group’s consolidated financial

statements on page 229.

3 Free cash flow is reconciled to cash from operating activities

in note 42 to the Group’s consolidated financial statements

on page 228.

4 Underlying earnings per share is reconciled to basic earnings

per share in note 14 to the Group’s consolidated financial

statements on page 201.

5 Liquidity headroom is the difference between the

Group’s committed credit facilities and its net borrowings

(excluding lease liabilities). Please see note 1 to the Group’s

consolidated financial statements on page 176.

6 As calculated in accordance with covenants in the Group’s

committed credit facilities as described on page 176.

Meggitt PLC Annual Report and Accounts 2021

We are Meggitt

We are innovators.

Customers worldwide rely on our

advanced technologies, products and

services in aerospace, defence and

selected energy markets to help make

the world a more efficient, sustainable

and safe environment.

Enabling a more

sustainable future

We work in amazing industries that underpin the

prosperity and wellbeing of our planet. As the world

looks to a net zero future, our technology and products

play a key role in enabling environmentally sustainable

flight and low-carbon power generation, enhancing

lives and making the world more secure.

Find out how we are creating a more sustainable future

in our Corporate Responsibility section on page 64

ENABLING THE

EXTRAORDINARY

TO FLY TO POWER TO LIVE

Meggitt PLC Annual Report and Accounts 2021

Introduction

Driven by our purpose,

vision and values

We are Meggitt

Introduction

Our purpose

At Meggitt we work closely with our customers to design and manufacture

systems and products for the aerospace, defence and selected energy markets to

deliver sustainable solutions for the most challenging environments by focusing on

engineering and operational excellence.

Our vision

ENABLING THE EXTRAORDINARY

We support each other working in

highly skilled passionate teams and

recognise outstanding contributions,

building great relationships with all

our stakeholders.

We do the right thing, in the

right way wherever we operate.

All our stakeholders can count on

us to act with integrity, honesty

and respect, with the highest

standards of ethical behaviour.

We’re good at what we do and

that’s why customers come back

to us. We deliver the most ambitious

technologies, products and services

safely, efficiently and cost-effectively

to our customers.

Our values

Our values reflect how we should strive together and

the behaviours that are integral to our drive for success.

EXCELLENCEINTEGRITYTEAMWORK

Expertise relied upon by customers

to enable safe, cost-effective and

environmentally responsible flight.

Products and services that

enable customers to operate

critical infrastructure reliably

and without disruption.

Innovative technologies

which enhance lives and make

the world more secure.

LIVE

POWER

FLY

Meggitt PLC Annual Report and Accounts 2021

Guided by our strategy

and business model

Our strategy and business model

Our sustainability pillars

Delivering for our stakeholders

Our strategy

Our strategy supports our vision to enable the

extraordinary and to deliver technologically differentiated

systems and products with high certification requirements

in aerospace, defence and selected energy markets.

Read more on page 17

Meggitt PLC Annual Report and Accounts 2021

Introduction

At a glance

We deliver technologically differentiated systems and

products, with high certification requirements, across the

civil aerospace, defence and selected energy markets.

Aerospace

Unique technologies

for aerospace

Civil aerospace accounts for 46% of

Group revenue, with products and

sub-systems installed on almost every jet

airliner, regional aircraft and business jet

in service today.

Group revenue

by end market

Energy and other

Keeping the lights on

We supply unique technology to enable

clean and efficient production and use

of natural gas and support nuclear,

hydro-electric and novel clean-energy

power generation.

Defence

Protecting defence

forces worldwide

Defence represents 42% of Group

revenue. We have equipment on an

installed base of around 22,000 fixed

wing and rotary aircraft and a significant

number of ground vehicles.

46%

Civil Aerospace

42%

Defence

12%

Energy and other

Our products are manufactured in our globally located facilities.

2,327

Europe

940

North America

4,644

Rest of World

1,359

9,270

Total Group employees

Meggitt PLC Annual Report and Accounts 2021

We work in close collaboration with our customers to

develop pioneering products, and go to market through

four customer-aligned business divisions.

Innovation is at the heart of what we do,

underpinning the safety, reliability,

and environmental performance

of our products.

Optical sensing offers significant advantages over piezoelectric

sensing technologies. For combustion dynamics monitoring,

it enables more accurate measurement over a larger range of

frequencies and allows gas turbines to operate more efficiently

with lower emissions. Smaller in size and able to operate at a

higher temperature, optical sensors can be positioned closer

to the measurement point without signal degradation caused

by electromagnetic perturbations or vibrations, making them

suitable for hazardous environments.

Airframe Systems

Market-leading industry

provider of braking systems

for commercial, business

and defence aircraft, fire

protection and safety systems,

power and motion, fuel

systems, avionics and sensors

and advanced polymer

seals for around 51,000

in-service civil and 22,000

defenceaircraft.

Read more on page 40

50%

of revenue

14%

of revenue

18%

of revenue

18%

of revenue

Meggitt PLC Annual Report and Accounts 2021

Introduction

Chairman’s statement

On behalf of the Board, I would like to thank

all employees for their resilience, dedication

and hard work in delivering the year.

Introduction

Having successfully navigated the

unprecedented reduction in global flight

activity in 2020 and the associated impact

on the civil aerospace sector and the

Group, 2021 has proved to be another

highly eventful year in the long and proud

history of Meggitt.

And, as in previous years, the Board’s

number one priority has been ensuring

the safety and wellbeing of our people

across the world as they continue to

deliver for our customers. While the

recovery has at times allowed for more

normal working patterns to resume, our

people and our sites have remained agile

and adapted to changing circumstances

throughout the year.

While we have been encouraged by

the impact of the vaccine rollout and

gradual recovery in civil aerospace during

the year, it is clear that activity levels

and consumer sentiment remain highly

sensitive to regional outbreaks and, as

we saw during 2021, the emergence of

new variants. We remain confident that

recovery will continue during 2022 albeit

its trajectory is likely to remain uneven.

The ongoing impact of global supply

chain disruption across many sectors as

economies have recovered and demand

has increased is well documented,

posing an additional challenge during

the year. I am extremely grateful to all our

employees for once again demonstrating

outstanding dedication and resilience

across our global sites which has been a

critical factor in enabling us to mitigate

these headwinds.

Alongside managing the recovery,

we have continued to invest in the

business across a number of areas:

through our ongoing commitment to

innovation and new technologies, we

continue to support our customers in

the development of more sustainable

solutions and applications across the

aerospace, defence and energy end

markets; under our People, Planet and

Technology framework, we are making

our ways of working and facilities

more sustainable; and finally, we have

continued to invest in our operational

capability through a number of projects

and initiatives, most notably the transition

to Ansty Park, our state-of-the-art facility

in the UK.

This investment will help ensure that our

people, technology and global footprint

will continue to thrive as the recovery

continues in 2022 and beyond.

2021 Performance

The Group has delivered the year against

a backdrop of continuing challenging

market conditions in civil aerospace,

where activity levels remain below

2019 levels despite recovering steadily

during the year. Our operations and

procurement teams have also worked

hard to mitigate the impact of disruption

in the supply chain at our sites as global

demand has increased.

The benefit of our diverse end-market

exposure and breadth of our civil

aerospace business can be seen in our

results, with civil aftermarket revenue

up on the prior year, with a strong

performance from business jets. Our

energy business has also performed well.

As in 2020, where possible, we have

continued to safeguard future growth

by protecting investment in new

technologies, completing key projects

such as Ansty Park and expanding

capacity to support our brakes business

as the recovery continues. Ansty Park and

the associated consolidation of five sites

in the UK, provides a modern, advanced

and sustainable facility fostering

enhanced interaction between a number

of product groups, as well as a number of

efficiency gains.

Meggitt PLC Annual Report and Accounts 2021

Maintaining a robust balance sheet and

managing cash flow remained key focus

areas for the Board and I am pleased

that our net debt levels were held in line

with the prior year. In accordance with

the terms of the proposed transaction

with Parker-Hannifin, the Board did not

reinstate the payment of dividends during

the year.

Proposed acquisition by

Parker-Hannifin

Meggitt is one of the world’s leading

aerospace, defence and selected energy

market businesses and over the last four

years, we have successfully delivered a

strategy that has fundamentally improved

our competitive position and standing

with customers, transitioning the business

through a programme of non-core

disposals, targeted investments and

building a High Performance Culture.

And the benefits of our independent

strategy were clear to see prior to

COVID-19, with the Group recording

seven consecutive quarters of revenue

growth, achieving record operating

profit and strong cash generation in

2019, and creating significant value

for shareholders. With the onset of

COVID-19 we took quick and decisive

action in the face of unprecedented

challenges, positioning the business to

remain competitive in that environment

and well positioned for the recovery.

As a result, the Group remains strongly

positioned, with a compelling strategy

which the Board believes can deliver

attractive value for shareholders over the

long term as our key markets, particularly

commercial aerospace, recover. At the

same time, however, there remains

significant uncertainty as to the precise

timing and speed of that recovery.

In that context, the Board decided that

the all-cash offer by Parker-Hannifin

would substantially accelerate and de-risk

the delivery of that value. In reaching this

decision, the Board carefully considered

the commitments offered by Parker-

Hannifin to safeguard the interests of

the Group’s wider stakeholders, the

alignment of respective business models,

cultures and the shared commitment to

invest in technology and sustainability.

Accordingly, following careful

consideration of both the financial

terms and Parker-Hannifin’s plans for

the Group under their ownership, the

Board recommended unanimously

the proposed acquisition which was

subsequently approved by shareholders

in September.

Board interaction/

developments

The Board has continued to operate

effectively through virtual and, where

possible, the resumption of face-to-

face meetings with UK-based Directors

with a number of additional meetings

being held over and above those that

werescheduled.

With no changes to the membershipof

the Board in 2021, as in 2020, thishas

provided important stability and continuity

for the Group, particularly in light of the

corporate activity in the summer months

culminating in the recommended offer in

August by Parker-Hannifin.

In addition to managing the Parker-

Hannifin transaction, the Board has

continued to focus on business as usual

activities with the main focus areas

being managing the Group through the

recovery, maintaining a robust balance

sheet and executing our strategy

including investment in technologies to

make aviation and energy generation

more sustainable.

I am also pleased to report that

Nancy Gioia, Chair of the Corporate

Responsibility Committee and Non-

Executive Director responsible for

employee engagement, was able to

continue her employee engagement

schedule alongside other Board Directors

during 2021.

In light of continued restrictions on travel

and free movement at the start of the

year, Executive Directors increased their

level of interaction using virtual meetings

with every site and involving all levels of

the business.

As in previous years, I held virtual

meetings with shareholders at various

points during 2021 discussing a range

oftopics.

People

We have no higher priority than

ensuring a safe and secure working

environment for all employees. As

well as the continued provision of

additional measures at each site to

protect our people and reduce the risk

of infection, I am also pleased to report

an improvement in our overall safety

performance with our Total Recordable

Incident Rate for the year reaching its

lowest level to date at 0.63 (2020: 0.71).

The Board is pleased that our work

on culture could continue during the

year, not only through monthly culture

briefings run for all of our leaders, but

also through our second annual Inclusion

Week in September, helping to connect

more of our employees across Meggitt

to our eight Employee Resource Groups,

membership of which has doubled to

reach over a thousand employees.

Navigating what has proved to be

another challenging year has required

strong leadership across the Group,

particularly our line managers and

operational leaders. On behalf of the

Board, I would like to thank all employees

for their resilience, dedication and

hardwork.

In particular, I’d like to thank again all

those that have continued to work at

our sites to deliver for our customers

throughout the year.

Looking ahead

Having put in place strong foundations

through the execution of our strategy

over the last four years, with the recovery

in civil aerospace underway and the

ongoing commitments made by Parker-

Hannifin, the Board is optimistic about

the opportunities that lie ahead for

the Group and for all our stakeholders

including employees, customers,

shareholders and pension plan members.

Sir Nigel Rudd

Chairman

Meggitt PLC Annual Report and Accounts 2021

Introduction

Strategic Report

STRATEGIC

REPORT

Chief Executive’s review 09

Strategy in action: Strategic portfolio 14

Business model 16

Strategy in action: Customers 18

Market trends 20

Our strategy 24

Key performance indicators 26

Strategy in action: Competitiveness 30

Strategy in action: Culture 32

Divisional reviews 34

Chief Financial Officer’s review 42

Risk management 48

Principal risks & uncertainties 50

Taskforce on Climate-related

Financial Disclosures

Corporate Responsibility 64

Section 172 statement 89

Stakeholder engagement 90

Meggitt PLC Annual Report and Accounts 2021

Chief Executive’s review

Our priority during the year has

continued to be the safety of our teams

while delivering for our customers as

the recovery continues.

Introduction

Our focus in 2021 and as we move

through 2022, continues to be ensuring

the safety and wellbeing of our people,

protecting our sites, serving our

customers and executing our strategy.

As in 2020, against the backdrop of

what continued to be challenging

market conditions as the recovery

in civil aerospace got underway, our

employees have once again remained

focused on delivering for our customers

and executing our strategy, and I want

to thank all of them for their continued

resilience and dedication throughout

the period.

While the recovery in civil aerospace is

encouraging, driven by the continued

rollout of vaccines and more of the

global fleet gradually returning to

service, as we have seen throughout the

year, its trajectory has been non-linear

and remains highly sensitive to the

reintroduction of local restrictions and

border controls.

The extent of the recovery has also

varied greatly, with domestic, cargo

and business jets leading the way, with

international activity levels held back

by the closure of borders. With strong

content across all parts of the civil fleet

including large, regional and business

jets, the diverse nature of our civil

aerospace business allows us to benefit

from those parts of the market recovering

more quickly.

Full year performance

Having moved fast to reposition the

business in 2020, a major priority for

the Group and our global teams in 2021

has been to ensure our sites continued

to deliver for our customers as civil

activity levels increased, while navigating

the additional challenge caused by

disruption in the global supply chain as

global demand across a number

of sectors returned.

The work we have done over the last

four years to strengthen the Group

through our investments in differentiated

technology and operations combined

with our focus on High Performance

Culture, have been pivotal in helping

the Group mitigate the impact of these

additional external pressures.

During the year, we have seen

encouraging signs of the recovery with

civil aftermarket organic revenue growth

of 7% including a strong performance

from brakes where revenue grew 22%,

reflecting increased utilisation in the

narrow body, regional aircraft and

business jet fleets. We also saw strong

civil aftermarket organic order intake

in the final quarter of the year providing

us with momentum as we entered 2022.

I am also pleased that we delivered

another year of positive free cash flow,

maintaining a robust balance sheet

while continuing to invest in our people,

operations and technology in line with

our strategy.

During the year, we secured a number

of significant customer wins across our

end markets and continued to build the

pipeline of new opportunities to underpin

future growth, leveraging our leading

market positions and strong technology.

As we look ahead to the remainder of

2022 and beyond, and notwithstanding

that the trajectory of the recovery

in civil aerospace is likely to remain

uneven in the short term, the long-term

fundamentals of civil aerospace and

our defence and energy end markets

remain strong.

As a result of the successful execution

of our strategy and the work we have

done to position the Group, I am

positive about the future for the Group

and the opportunities that lie ahead for

employees and all our other stakeholders.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Chief Executive’s review

continued

Enabling our sustainable future

At Meggitt, we work in partnership

with all of our stakeholders to enable a

sustainable future and have adopted a

framework to illustrate our approach and

ambition, focusing on three core pillars:

People, Planet and Technology. The

framework is aligned to our core business

strategy and also looks through the wider

ESG lens including the United Nations

Sustainability Development Goals and

our corporate responsibility objectives.

• People – through our core values of

Teamwork, Integrity and Excellence

and our High Performance Culture

we are committed to creating a

rewarding, safe and productive working

environment for our employees and

supporting our local communities.

During 2021, aligned with our purpose

of connecting our employees with the

communities we serve, we launched

our Community Heroes initiative, a

global volunteering programme giving

employees paid time off to volunteer

in their communities. We continued

the rollout of our leadership training

programmes, Spitfire and LeadX, to

develop our operational and high

potential leaders. We also significantly

expanded the number of ambassadors

supporting our eight Employee

Resource Groups and continued our

Extraordinary People recognition

scheme, recognising people and

teams across a number of categories:

Operational Excellence, Innovation,

Teamwork, Safety, Sustainability,

Customer Service and Community.

• Planet – our goal is to contribute

to a cleaner future by continuously

improving and adapting our

operational systems across our sites to

promote efficiencies and improvements

by harnessing green energy, driving

operational excellence and reducing

harmful emissions, where we have set a

target to reduce net carbon emissions

by 50% by 2025 relative to revenue.

In 2021, we joined the United Nations

Race to Zero campaign committing to

reduce absolute value chain emissions

in line with a trajectory compatible with

a 1.5 degree warming scenario, and

reaching Net Zero before 2050. We

have increased our dedicated resources

with the appointment of a Group

Director of Sustainability, a key role to

review and oversee our environmental

operational performance across

the Group. Earlier in the year, we

completed our transition in the UK to

source 100% of electricity from green

sources and are proud that Ansty Park

was recognised as being in the top

25% of international new construction

projects for sustainability. Additionally,

we adopted the use of the Science

Based Targets initiative (SBTi) to allow

us to accurately measure emissions in

line with the Paris Agreement goals.

• Technology – to support the evolving

needs of our global customers and

building on our rich heritage, we

continue to invest in innovative new

technologies to support and enable

sustainable aviation, such as advanced

thermal systems, optical sensing

and engine composites, that allow

engines to become more efficient

and technologies that improve the

environmental performance of aircraft,

including electrical power and storage

solutions and green fire protection.

We are also actively involved in the

industry’s exploration of alternative

fuels including sustainable aviation

fuels and hydrogen.

Strategy update

Portfolio

We focus investment in attractive markets

where we have, or can develop, a leading

position. This encompasses organic

investment in differentiated products and

manufacturing technologies; targeted,

value-enhancing acquisitions; and

selective non-core disposals resulting in

over 80% of Group revenue derived from

attractive markets where we have strong

market positions. With over 70% of Group

revenue generated from sole-source,

life-of-programme positions underpinned

by Meggitt-owned intellectual property,

the continued strengthening of our

technology portfolio remains a critical

priority of the Group.

In the year we successfully delivered

our technology programme milestones,

maintained our investment in

differentiated technology and continued

our commitment to invest two-thirds of

our innovation budget on technologies to

deliver the next generation of sustainable

aircraft. A summary of key highlights and

progress in 2021 are as follows:

• Next generation engines –

good progress has been made in

developing the new heat exchanger

technologies that will be needed to

meet the increased cooling of the next

generation of aircraft engines. This

has included expanding our additive-

manufacturing capabilities and working

with major engine companies and

industry research organisations to

develop and test solutions for new civil

and military engine designs.

• Green fire suppression –

work continues with aircraft OEMs

to qualify VERDAGENT®, Meggitt’s

proprietary “green” fire suppressant

agent to replace ozone depleting

Halon 1301. For cargo applications,

preparation is under way for an Airbus

flight test in 2022 and we were also

selected by Boeing to support their

2021 Eco Demonstrator programme

with an Alaskan Airlines sponsored 737-

9 aircraft equipped with our CF3I engine

fire suppressant delivery system. We

have also progressed the Minimum

Meggitt PLC Annual Report and Accounts 2021

Key highlights

SMARTSupport™ contracts with

an aggregate value of £223m

76%

Global engagement 2% above

2020 levels and 4% above high

performance benchmark

Performance Standard (MPS) testing

for engine applications of CF3I with

Boeing at the FAA Technical Centre

with cold testing to follow in 2022.

• Energy – in our Heatric business, we

continued to make good progress on

the application of its market-leading

PCHE technology in the field of super

critical CO

power cycles, including

the supply of a recuperator for an EU

sponsored collaboration demonstrator

project launched in 2021. We are

working with turbine OEMs to develop

hydrogen-capable valves and an

optical sensing solution for combustion

pressure monitoring, allowing better

control of emissions and efficiency.

A customer engine demonstration

is under way and industrialisation is

continuing in 2022.

• Optical sensing – we have delivered

our first high-temperature engine-

mounted optical pressure sensing

systems to support engine testing

with major aerospace customers. Our

dynamic pressure sensing system

continues its demonstration testing

in an energy gas turbine environment

and we are planning an evaluation

test of this technology in a hydrogen

combustion environment in 2022.

Working with major aerospace

customers we have also made good

progress in evaluating the use of

our optical bleed air leak detection

technology as an upgrade on high-

rateprogrammes.

• Engine data management –

we successfully developed a prototype

of a high-temperature engine-mounted

Data Acquisition and Transmission Unit

(DATU), which supports an innovative

modular distributed health monitoring

solution for engine and airframe OEMs,

enabling them to access end-to-end

data for next generation engines in

real time. This prototype was delivered

to its miniaturised specification and

has elicited a positive response

fromcustomers.

• Electric flight – with our major

urban air mobility customer, we

successfully delivered and tested our

technology meeting all expectations

for performance, stability and control.

On our second generation of lithium

ion batteries, we have focused on

industrialisation and continue to co-

define technology acceptance criteria

with certification authorities. The

3D-printed concept demonstrator was

shown at the NBAA exhibition. We

have also launched the development of

a HVDC energy buffer to complement

the primary electrical power source for

a customer’s greener future platform

architecture. We have matured our

technology for inertial sensing and

have received an award to develop a

tactical grade inertial measurement

unit for an eVTOL primary flight control

by a major airframe OEM.

We have also continued to leverage

advanced manufacturing technology

and processes across our sites:

• Additive manufacturing (AM) –

we have continued to increase the

use of additively manufactured tooling

to support production operations

across the Group and, through our

partnership with HiETA Technologies,

we have proven our capability to

provide AM heat exchangers, in less

than four weeks, to OEM customers for

ground-based tests. The work on the

ATI sponsored programme LAMDA has

launched, which sees our participation

in the development and evaluation of

a large format AM machine with our

partner Renishaw in Ansty Park.

• Digital manufacturing –

we have continued to deploy digital

manufacturing technologies into

production cells through the use of

digital work instructions, integration of

machining and inspection data systems

and the use of RFID real-time location

and augmented reality systems. The

technology has proven valuable both in

improving productivity and supporting

collaboration across our global teams

when, due to the pandemic, travel

was difficult.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Chief Executive’s review

continued

Customers

Our success in moving from a

transactional approach to building long-

term relationships through our customer-

aligned divisions, extends our visibility of

near-term customer requirements and has

enabled us to better support the demand

for original equipment and spare parts

and maintenance, repair and overhaul

(MRO) in the aftermarket.

We have continued to invest in capability

and capacity across our three global

Services & Support centres of excellence.

In our APAC hub in Singapore, we have

doubled our footprint and added over

100 new part numbers to our portfolio and

at our Americas hub in Miami, we have

consolidated a number of sites into the

facility and increased our footprint adding

significant capability across our product

portfolio. These investments, together with

our world-class facility at Ansty Park, provide

us with multi-product group MRO and

spares capability across all three regions.

During the year, we secured a number of

customer contracts across our three core

end markets of civil aerospace, defence

and energy, including:

• In civil aerospace, a $40m contract to

supply Wireless Emergency Lighting

Systems (WELS) to Boeing for the 787

and a £98m life of programme contract

for a civil airframe OEM for the supply

of rate gyrometer accelerometerunits.

• In defence, a $22m contract for the

supply and retrofit of RF cables for the

F-22 aircraft.

• In energy, a significant order with a major

US turbines manufacturer for the sole

source supply of next generation valves

and a multi-million pound contract with

Siemens Energy to supply PCHEs for the

Mero 3 Floating Production Storage and

Offloading vessel.

A number of facilities were recognised

for their excellence by our customers in

2021: our facility in Rockmart, US, which

manufactures self-sealing, crashworthy

fuel cells, received “Supplier of the

Year” from Bell, Boeing Defence and a

multi-service US military panel for the

development and production of new

ballistic-tolerant, crashworthy fuel cells for

the Osprey aircraft; our San Diego site,

which supplies high performance and

high-temperature advanced composites,

was presented with a Performance

Excellence Award for Product Quality

and On-Time Delivery; and our Fribourg

facility was nominated for an innovation

award for their novel optical sensing

technology, recognised as a breakthrough

in combustion monitoring for aircraft

engines and land-based gas turbines,

used in power generation.

In Services & Support, we saw continued

momentum with SMARTSupport™,

our long-term contract offering for

aftermarket customers, securing an

additional 11 agreements, taking the total

number to 55 with an aggregate value

of £223m, with a number of additional

opportunities in the pipeline. These long-

term contracts underpin our aftermarket

and market share growth in the future

and provide better insights into customer

requirements and order patterns. We

were also delighted that our partnership

with Lufthansa Technik Shenzhen

was approved by the Civil Aviation

Administration of China to perform repair

and overhaul services for our market-

leading fire detectors.

Competitiveness

We have no higher priority than ensuring

a safe and secure working environment for

all employees. As well as the continued

provision of additional measures at

each site to protect our people and

reduce the risk of infection, we delivered

an improvement in our overall safety

performance with our Total Recordable

Incident Rate for the year reaching its

lowest level to date at 0.63 (FY 2020: 0.71).

We have commissioned our Ansty

Park facility, our state-of-the-art UK

engineering and advanced manufacturing

centre of excellence and global

headquarters. The site is one of the

biggest investments in UK manufacturing

in a decade as well as being Meggitt’s

largest infrastructure investment in

its history. The transition included the

closure of five UK sites and the transfer

of over 1,000 employees and 1,700

separate pieces of equipment with the

site housing our Thermal and Braking

Systems product groups as well as our

European Services & Support hub for

MRO and spares. Having attained CAA

and BSI approvals, we are conducting

direct customer shipments from the site.

We are pleased with the operation of the

site in these early stages and supported

our customers well over the traditionally

busy final quarter. We look forward to

further productivity improvements as

the new ways of working at Ansty are

furtherembedded.

In line with our footprint reduction

strategy, we concluded the sale of our

Dunstable and Toulouse sites, with the

closure of a further two sites planned for

2021 moving into 2022. At the end of the

year we had a total of 36 manufacturing

locations, representing a 36% reduction

in our global footprint since 2016 and

remain on track with our target to reduce

footprint by 50% by the end of 2023.

We made good progress in Engine

Composites, following our investments in

engineering and process improvements

at our Erlanger and Saltillo sites and

have received further customer approvals

for direct shipment of our high-volume

products from our site in Saltillo, Mexico.

We deployed our High Performance

System (HPS), which replaces and builds

on the Meggitt Production System (MPS)

and is designed to measure and drive

efficiency across all Group functions and

Meggitt PLC Annual Report and Accounts 2021

sites. All sites have been assessed in line

with the framework and action plans have

been created to deliver improvements.

A key area of focus for the Group in 2021,

which we expect to continue in 2022,

has been managing the procurement of

materials into our sites against a backdrop

of global supply chain disruption as

demand levels in civil aerospace have

increased. We have deployed dedicated

resources and new tools to improve

access to critical materials, with the

main priority being to continue to satisfy

customer orders. We have also taken the

opportunity during the year to further

develop our supply chain function by:

continuing to enhance our processes;

upskilling our teams; rationalising our

supply base; and increasing the use of

analytics and automation.

Culture

Our work on culture continues to be a

key part of our overall Group strategy,

to accelerate our progress towards

becoming a truly integrated global

business and cultivating a culture of

high performance. In 2021, we focused

our efforts on protecting our people,

employee and leadership development,

diversity and inclusion and employee

engagement and recognition.

We continue to invest in talent

through our graduate and apprentice

programmes. Following nearly a decade

of success with our Engineering &

Operations Graduate programme,

we launched our Corporate Graduate

Programme to business functions in the

UK promoting professional development

opportunities across Finance, Corporate

Affairs and IT. Alongside this, the Ansty

Park facility welcomed its first degree

apprentices and across the Group

we now have over 100 graduates and

apprentices. We also participated in the

10,000 Black Interns programme in the

UK in anticipation of hiring a number of

interns in 2022.

In the first half we also launched two new

training programmes: Spitfire for our

Operations leaders and LeadX, which

embed and reinforce concepts from our

High Performance Culture work for our

future business leaders.

During 2021 we saw continued progress

with our work on High Performance

Culture despite extremely challenging

COVID-19 travel restrictions and

lockdowns. Nearly 70% of employees

have now attended training sessions.

We made excellent progress in the

number of employees engaged with

our Employee Resource Groups (ERG),

doubling membership to over 1,000. We

held our annual Diversity and Inclusion

week with 18 sites hosting events

along with virtual sessions focused on

introducing employees to our ERGs and

providing learning and development

opportunities on various topics.

We also hosted numerous events

throughout the year to increase awareness

and visibility including: celebrating

International Women’s Day and Women

in Engineering Day, Pride Week and

Black History month in the US and UK.

Employees also took part in the Steps

for Vet’s Challenge, Remembrance Day

Celebrations and joined talks on Latino

History. Additionally, in support of Suicide

prevention week, our SHINE ERG hosted

“Subject Matter Expert” talks at multiple

sites and provided Mental Health First

Responders training. We also launched

Community Heroes, our community

and charity outreach programme, which

enables employees to volunteer for local

good causes in their community.

Our progress on culture, throughout a

particularly challenging period for the

Group and our teams over the last two

years, has been reflected in our recent

employee survey, with engagement

levels increasing by 2% above 2020

levels and 4% above the global high

performingbenchmark.

Outlook

Building on the positive momentum

in 2021 and good order intake at the

end of the year, the outlook for our civil

aerospace business is encouraging.

However, with a number of countries still

experiencing high infection rates and with

travel restrictions in place, forecasting

the pace and trajectory of this recovery

remains difficult, particularly in the short

term. Theprospects for our energy and

defence end markets are expected to

remain solid.

Looking ahead, based on the significant

progress we have made to transform the

Group, our diverse end-market exposure

and leading market positions, we are well

placed to benefit from the recovery in

civil aerospace and to deliver long-term

profitable growth.

Since the Group is in an offer period

under the UK Takeover Code, we are not

providing financial guidance for 2022, nor

are we able to comment on expected

performance relative to any analyst

forecasts that may be available.

Tony Wood

Chief Executive Officer

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Strategy in action

IMAGES: A colleague demonstrates how

Meggitt are using augmented reality to

train operators without needing to travel.

Another colleague uses his Hololens to

run Visual Factory work instructions.

Digital and additive manufacturing technologies are being used across

Meggitt to make products in new and unique ways, to improve productivity

and to reduce waste.

Digital work instructions allow complex

parts to be assembled by skilled

technicians whilst efficiently collecting

all of the information that is needed in

aerospace’s highly regulated market.

Replacing the traditional paper-based

systems, that are still widely used in

the aerospace sector, has increased

productivity and allowed the operators

to focus on the critical aspects of

building the products.

Connecting machining and inspection

tools into the same ecosystem is

driving further improvements in

productivity and augmented reality

adds another dimension, enabling

operators to work with a digital overlay

to what they are seeing in the physical

world and to interact with colleagues

across our global factories.

Additive manufacturing is another

technology that has come of age in the

manufacturing environment where fittings

and tools can now be quickly designed

and printed to meet local needs.

There are many more opportunities

for us to integrate digital technologies

into our operations and processes, as

we continue to investigate possibilities

we are driving fundamental change,

both in how we operate and how we

deliver value to our customers.

12%

average efficiency gain in

teams adopting Visual Factory

c. 7,000

labour hours saved on one

pilot product line between

Jan 21 – Dec 21 compared

with 2020 baseline

At Meggitt we are developing both next generation products

and advanced manufacturing technologies to make them

efficiently and sustainably.

TECHNOLOGY.

Our strategic priorities are underpinned by

our three Corporate Responsibility pillars.

Read more about our Technology pillar on page 83

Meggitt PLC Annual Report and Accounts 2021

Delivering breakthrough performance

STRATEGIC

PORTFOLIO

Through focusing on engineering and operational excellence,

we build broad installed bases of equipment for which we

provide support throughout their lifecycle.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Business model

How we create value through the investment cycle

Strong partnerships

We seek strong, collaborative and

close relationships with our customers

and suppliers. Our business cycle is

multi-year, and we seek relationships

to support this.

Market-leading technology

We invest in market-leading technology

and robustly defend our intellectual

property rights. We hold leading

market positions across a number

of product lines.

Maintaining a

competitive

advantage

What we do

Innovation is at the heart of what we do

with safety, reliability, and operating and

environmental performance underpinning

our approach.

By investing in and developing

sustainable and differentiated

technologies for application in our

selected markets, including civil

aerospace, defence and energy,

we develop pioneering products in

collaboration with our customers.

Our products are manufactured in our

globally located facilities and we go

to market through our four customer-

aligned business divisions:

Differentiated

technology

We invest in differentiated

technologies for extreme

environments with deep

intellectual property.

As such, our products are

hard to replicate with

high barriers to entry.

Through-life

Services & Support

We provide aftermarket

services and support building

longer-term, more durable and

deep partnerships through

SMARTSupport™.

Strong content

and sole source

We maximise our content

on new-to-market platforms,

where possible securing sole-

source, life-of-programme

positions across a diverse fleet

of over 73,000 civil and

military aircraft.

Outstanding

operations

We value operational excellence

as a strategic imperative,

continuously striving to do things

better through investment in our

High Performance System and

initiatives such as our Operations

Academy and campus at

Ansty Park.

Meggitt PLC Annual Report and Accounts 2021

Diverse end markets

We have diverse end-market exposure

with our technology and products utilised

in a large fleet across civil, defence and

selected energy markets.

World-class services and support

Our customers demand high quality,

timely services and support to maximise

the value of our products through

their lifecycles.

Strong values

Our values underpin what we do and

are supported by HPC. Our people

collaborate to create value by combining

extensive technical capabilities and long-

standing sector knowledge.

How we

share value

Customers

We develop innovative and differentiated

technology for our customers, that

anticipates future market demand and

meets high certification requirements.

Equity and debt holders

Over the last five years we have returned

£373m to our shareholders through

dividends and paid £166m in interest to

our holders of debt.

Employees

We employ over 9,000 people and in

2021 paid over £568m in wages, salaries

and employee benefits.

Governments

We paid over £80m in social security

and corporation taxes to governments in

2021. The Group’s employees also paid

a share of their wages and salaries to

governments through income taxes.

Suppliers

Over the last five years, through our

central procurement function, we have

paid c.£4.5bn to our suppliers.

Aerospace, defence and aero-derived energy

We secure content across a broad range of platforms in civil aerospace,

defence and selected energy end markets, generating original equipment (OE)

revenue from day one and a growing aftermarket (AM) revenue stream as the fleet

grows over time.

Aftermarket annuity

Leveraging our long-term customer relationships, strong IP and differentiated

technology we have secured increased content on the latest generation of platforms.

Our business model is to grow and constantly refresh our aftermarket revenue

providing a strong annuity revenue stream for years to come.

Airframe Systems

Engine Systems

Energy & Equipment

Services & Support

Through our Services

& Support division and

SMARTSupport™ (our

brand name for a range

of tailored, longer-term,

aftermarket offerings),

weprovide a tailored

package of spare parts

and repair services to our

customers depending on

their requirements to fit

their operational model.

Aftermarket revenue (£)

Time

Legacy platforms Younger platforms New and future platforms

Illustrative

Annual revenue (£)

Entry in service

25 years

Fleet size/deliveries

Product

development

Revenue from aftermarket

grows over the life of the

programme

Revenue from original

equipment as OEMs

produce each new aircraft

Annual deliveries

Total fleet

Illustrative

Production Post Production

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Strategy in action

Enhancing lives by keeping

the lights on for our

CUSTOMERS

Connecting valuable components to new opportunities.

Meggitt PLC Annual Report and Accounts 2021

We repair through all stages of lifecycle, offering our global customers

a more cost-efficient, sustainable way to stay airborne for longer.

For airline operators, scheduled

maintenance is a way of life. Ensuring

passenger safety, reliability and

operational efficiency. An aircraft on

ground (AOG) due to component

failure not only results in lost

passenger and cargo revenue, but

there are also significant associated

costs. New for old is not the most

cost-efficient route and it isn’t the

mostsustainable either.

We harvest and refurbish Meggitt parts

from retired aircraft and offer them

to our customers as a convenient,

cost-efficient alternative to brand-new

spares. Known as Used Serviceable

Material (USM), this solution optimises

product lifecycle, giving high quality,

recertified parts a second chance to fly

as well as offering a more sustainable

alternative. For example, a USM fire

extinguishing bottle can be seen in the

image below.

End-of-life recycling is another

major part of our SMARTSupport™

valueproposition.

Global regional centres

of excellence in EMEA,

Asia and the Americas

It’s fair to say that when a Meggitt part enters service it’s in

it for the long haul.

IMAGES: Colleagues from the

SmartScoping team within Meggitt’s

Services & Support division take part

in a Daily Layered Accountability

meeting (DLA).

An electromechanical valve is repaired

at Ansty Park, UK.

PLANET.

Our strategic priorities are underpinned by

our three Corporate Responsibility pillars.

Read more about our Planet pillar on page 78

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Market trends

Revenue

£260m

Market segments

• Large jets >100 seats

• Regional jets <100 seats

• Business jets

• Civil helicopters

Revenue by platform category

Large jets

66%

Regional jets

Business jets

28%

Annual commercial deliveries

2021

2020

2019

2018

2017

2016

2015

1,372

693

918

1,196

1,474

1,422

125

126

224

1,586

235

262

290

287

Large jets

Regional jets

Annual business jet deliveries

2021

2020

609

560

710

625

643

6512016

2022 outlook

OEM production rates expected to

increase versus 2021 levels, as airframe

and engine manufacturers begin

to gradually increase supply as the

recovery continues and demand for

new aircraft increases.

Business jet deliveries are expected

to be slightly up on 2021 reflecting

the continued recovery and customer

demand in this segment.

Backlog for new aircraft remains

healthy reflecting expectations of

continued fleet renewal and strong

long-term fundamentals.

Over the medium term air traffic is

expected to return to pre-COVID

levels by 2023/24 and then continue

growing. This will then feed through to

increased deliveries of new aircraft.

Civil original equipment

2021 market trends

• Increase in new build rates by airframe

and engine OEMs as demand for new

aircraft continued to recover during

the year.

• Increase of 32% in combined deliveries

of large jets from Airbus and Boeing.

• Deliveries of regional aircraft in line

with 2020 with growth in business jets

of 9%.

• Continued approvals for the return to

service of the Boeing 737MAX with the

aircraft authorised in 180 countries.

Meggitt performance in 2021

• Civil OE revenue down 10% organically

with growth of 17% in the second half

(vs. H2 2020), reflecting the gradual

recovery in civil aerospace.

• In large jets, the largest component

of our civil OE revenue (66%), organic

revenue was down 13% driven by lower

wide body demand including the B787,

B777 and A350XWB.

• OE revenue from business jets (28%

of civil OE revenue) was down 4% on

an organic basis.

• OE revenue from regional jets (6%

of civil OE revenue) was 7% lower on

an organic basis.

1 Excludes military variants.

Meggitt PLC Annual Report and Accounts 2021

Revenue

£425m

Market segments

• Large jets >100 seats

• Regional jets <100 seats

• Business jets

• Civil helicopters

Revenue by platform category

Large jets

54%

Regional jets

20%

Business jets

26%

Average monthly

commercial active fleet

2021

2020

2019

2018

2017

2016

2015

74%

65%

90%

91%

90%

Average monthly

commercial ASKs (Mn)

2021

2020

2019

2018

446

848

794

745

693

2016

380

2022 outlook

The continued rollout of vaccines and

significant pent up demand to travel

expected to underpin the continued

recovery in civil aerospace.

Pace and trajectory of the recovery

in the short term expected to remain

sensitive to regional outbreaks and

local restrictions.

Domestic travel, business jets and

regional aircraft expected to continue

to lead the recovery.

Industry expectation that air traffic

activity will return to 2019 levels by

2023/24.

Beyond the recovery period, the

fundamental drivers supporting air

traffic growth over the long term

remain in place, with global passenger

growth of 3.3% (IATA) per annum

expected over the next 20 years.

Civil aftermarket

2021 market trends

• Continued recovery in flight activity

with global RPKs and ASKs for the

month of December 2021 up 80% and

46% versus December 2020.

• Active fleet up to 79% at the end of

2021 having started the year at 68%.

• Trajectory and pace of recovery

remained sensitive to regional

outbreaks of COVID-19 and associated

restrictions on travel.

• Recovery led by domestic travel, with

global domestic ASKs for the month

of December 2021 up 15% versus

December 2020, representing 85% of

2019 levels.

• Strong recovery in business jets with

activity levels up 48% for the full year,

with activity for the month of December

2021 at 123% of December 2019 levels.

Meggitt performance in 2021

• Group civil AM revenue up 7%

organically with large jets up 1%,

regional aircraft up 6% and business

jets up 21%.

• Strong civil AM growth of 51%

in the second half on an organic basis.

• Civil AM organic orders up 50% in the

year with growth of 119% in the second

half and book to bill of 1.11x.

• Good performance in brakes with

revenue up 22% organically, with

growth across all platform categories.

• On a regional basis in Services &

Support: revenue in Asia and the US

up 7% and 2% respectively with Europe

down 18%, all on an organicbasis.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Market trends

continued

Revenue

£620m

Market segments

• Military aircraft & helicopters

• Ground vehicles

• Naval

• Space

Group defence revenue

by platform category

Fighter/attack

36%

Light attack

Rotary wing

28%

Special mission

Transports

Ground/naval

20%

US DoD Spending ($bn)

1342022

2021

2020

2019

2018

Procurement

Research, Development, Test & Evaluation

Other

105

106

112

432

442

444

456

469

142

146

147

Group defence revenue

by geography

Rest of Europe

15%

Rest of the World

72%

2022 outlook

Defence expenditure in the US, our

most important defence market

representing 72% of total Group

defence revenue expected to

remainstable.

US defence budget for 2022 approved

at $715 billion representing an increase

of 2% on 2021.

While most major defence spending

nations are committed to maintaining

defence spending, an increasing

proportion is expected to be allocated

to cyber, autonomy, space, maritime

and weapon systems.

Defence

2021 market trends

• US Department of Defence outlays

in the US up 4% for fiscal year 2021.

• Outlays for Procurement and RDT&E

up 6% and 2% respectively.

• After a period of robust spending

between 2017-2019, inventory

destocking by the Defence Logistics

Agency (DLA) lowered demand

for aftermarket spares.

Meggitt performance in 2021

• After three years of strong growth,

Group defence revenue ended the

year11% lower on an organic basis.

• OE revenue down 7% and aftermarket

down 17% on an organic basis versus

the comparative period.

• Performance reflects inventory

destocking, lower orders by the US

Defence Logistics Agency in the

aftermarket and COVID-related

disruption at two of our US sites

in the year.

Meggitt PLC Annual Report and Accounts 2021

Revenue

£184m

Market segments

• Power generation

• Oil & Gas

• Renewables

Global investment in the power

sector by technology

Battery storage

Renewable power

Electricity network

Fossil fuel power 14%

Nuclear

45%

35%

Group energy revenue by

application

Oil

Other

Low carbon (vs. Oil) 70%

Zero carbon

10%

13%

2022 outlook

Medium-term growth expectations for

our energy businesses remain good.

We have differentiated technology

which plays a critical role in the

extraction of deep water offshore

gas reserves and good opportunities

in adjacent markets including LNG

and increasingly lower carbon and

renewable applications.

Our energy businesses benefit from

synergistic relationships across the

Group, e.g. thermal systems for the

aerospace market, as well as the long-

term demand for energy, particularly in

emerging markets.

Energy and other

2021 market trends

• Oil prices increased 76% from a low in

January reaching an in-year high of $85

per barrel in October, before ending

the year at $75 per barrel.

• Capital expenditure levels on energy

projects remained strong, particularly in

the renewables space where a number

of large projects were commissioned.

• Growth driven by increasing electricity

demand supplied by gas-fired

power plants and renewable power

generation systems.

• High gas prices have added to interest

in investment in LNG production

andtransport.

Meggitt performance in 2021

• Energy revenue was up 6% in the year

on an organic basis with 8% growth

in the second half.

• Organic revenue in our Heatric and

Energy Sensing & Controls businesses

up 5% and 12% respectively.

• Revenue from other markets was 8%

lower versus the comparative period

onan organic basis.

1 International Energy Agency (2021),

World Energy Investment 2021, IEA, Paris.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

STRATEGIC

PORTFOLIO

Focus areas

– Investment in sustainable and differentiated technologies.

– Increasing our exposure to attractive markets where

we have strong competitive positions.

2021 progress

– Sale of our ducting business and closure of our site

in Toulouse as part of our strategy to consolidate our

Power & Sensing capabilities.

– Successfully delivered all key technology

programmemilestones.

– Continued investment in differentiated technologies

to contribute to a Net Zero Future including those to

support our customers in the development of next

generation aviation and low-carbon energy applications.

– Intensified focus on returns across our product portfolio.

2022 priorities

– Continue to invest at least two-thirds of our Research

and Technology innovation budget in technologies for

sustainable aviation and low-carbon energy.

– Continue to progress technology and product

development programmes with our customers.

– Focus on opportunities to grow revenue in defence

and energy.

Key risks

Business model

Failure to respond to fundamental changes in our

aerospace business model.

CUSTOMERS

Focus areas

– Supporting customers through the civil aerospace

recovery as demand and production levels increased.

– Growing our market share in the aftermarket.

– Consolidating our customer-aligned organisation.

2021 progress

– Customer-aligned organisation key to managing the

recovery in both OE production and the aftermarket.

– Continued to win new customer orders across civil

aerospace, defence and energy.

– Customer awards for our Airframes Systems Rockmart

and Engine Systems San Diego sites in the US.

– 11 SMARTSupport™ deals signed in the year taking

total number of contracts to 55 with an aggregate

value of £223m.

– Investment to broaden our offering and capability

across our three aftermarket Centres of Excellence

in Singapore, UK and the US.

– Worked closely with customers on key sustainability

programs for aerospace and energy.

2022 priorities

– Continue to support our customers through the

recovery as activity levels continue to increase.

– Continue to focus on operational improvements to

drive customer satisfaction.

– Grow our market share in the aftermarket by securing

additional SMARTSupport™ agreements.

– Continue to support customers and their net

zeroambitions.

Key risks

Customer satisfaction

Failure to meet customers’ cost, quality and delivery

standards as preferred suppliers.

Our strategy

continued

As the recovery in civil aerospace continued during 2021, we remained focused on

operational execution and our four strategic priorities to accelerate growth, increase

cash flow and improve return on capital employed. These priorities are:

Strategic Portfolio, Customers, Competitiveness and Culture.

Meggitt PLC Annual Report and Accounts 2021

COMPETITIVENESS

Focus areas

– Ensuring readiness across our global sites as OE build

rates and aftermarket demand increases.

– Driving productivity improvements across all sites.

– Building a resilient and optimised supply chain

delivering further purchase cost savings.

– Optimising factory footprint.

2021 progress

– Completed commissioning of our Ansty Park, UK

facility including customer transitions.

– Deployment of Meggitt High Performance System

(HPS) to drive process maturity.

– Embedded Spitfire operational leadership programme.

– Good progress streamlining our UK Polymers and

Composites business.

– Further reduction in our global footprint with 36 sites

at the end of 2021, a 36% reduction compared with

our 2016 baseline.

– Implementation of greater automation and advanced

digital manufacturing at our sites.

– Further product transfers to low-cost manufacturing.

– Delivered improved safety performance recording

lowest ever TRIR of 0.63.

2022 priorities

– Continue to manage raw material and labour cost

inflation across global supply chain.

– Continue footprint consolidation to reach our goal of

50% reduction by end 2023.

– Drive environmental and sustainability improvements

across our sites.

– Roll out “Safety Star Program” to reinforce site safety.

Key risks

Project/programme management & inflation

Failure to meet new product programme milestones or

lower than expected production volumes.

Increase in raw material and input costs.

CULTURE

Focus areas

– Protecting our people.

– Recruiting, retaining, developing and engaging talent.

– Embedding a high performance, diverse and

inclusive culture.

– Supporting our local communities.

2021 progress

– Continued investment in talent through our graduate

and apprentice programmes.

– Continued commitment to High Performance

Culture with 70% of employees having attended

trainingsessions.

– Successfully launched “LeadX” leadership programme.

– Doubled membership of our eight Employee

Resource Groups to over 1,000 employees.

– Adoption of flexible working guidelines.

– Participated in 10,000 Black Interns programme.

– Increase of 2% in employee engagement versus 2020,

4% above high performance benchmark.

2022 priorities

– Continue to protect employees across our global sites.

– Complete rollout of HPC training across the Group

and reinforce HPC principles through our LeadX and

Spitfire leadership programmes.

– Continue to strengthen our approach to inclusion

and diversity.

– Encourage our people to engage with local

communities and charities through our Community

Heroes volunteering programme.

Key risks

People

Failure to attract, motivate and retain people due to lack

of opportunities and/or training.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Key performance indicators

Link to strategic priorities

Strategic Portfolio

Customers

Competitiveness

Culture

The Group uses a mix of financial and

non-financial key performance indicators

(KPIs) to measure execution against

our strategic objectives. To ensure we

deliver value to our shareholders over

the investment cycle, financial KPIs

balance short-term measures (underlying

operating profit and free cash flow in the

year) with longer-term measures (return

on capital employed and underlying

EPS growth). Non-financial KPIs focus

on investment in R&D to drive future

revenues, the health and safety of our

employees and raising standards of

operational performance to satisfy our

customers whilst also managing our

impact on our wider environment. The

Group adopted IFRS 15 and IFRS 16 with

effect from 1 January 2018, with prior

year comparatives for 2017 restated.

For 2017, EPS growth compared to

performance in 2016, is not fully restated,

though it does reflect the requirement

to expense free of charge manufactured

parts (FOC) as incurred under IFRS 15,

rather than initially recognising costs as

an intangible asset and then amortising

them over their useful lives. The Group’s

performance against climate change

objectives continues to be a focus. After

a trial during 2021, from 2022 onwards,

the Group will include measures

supporting the Group’s environmental

commitments in its KPI monitoring, and

also in the Group’s 2022 LTIP Award.

Meggitt PLC Annual Report and Accounts 2021

Underlying operating

profit (UOP)

Performance

£177.3m

Underlying operating profit

2021

2020

019

018

017

177.3

190.5

402.8

367.3

353.3

Definition and basis

of calculation

Underlying operating profit is defined

and reconciled to statutory measures

in note 9 to the Group’s consolidated

financial statements on page 197.

Read more on page 82

Directors’ incentive plans

Emissions intensity is being introduced

for the first time to the Group’s 2022 LTIP

Award. The overall Group target of a 50%

reduction by December 2025 will also

continue to be monitored by the Board.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Strategy in action

Enhancing lives through investing

in continuous improvement and

COMPETITIVENESS

We are committed to spending two-thirds

of investment in research and technology on

developing technologies that support industries

in the drive to become more sustainable.

Meggitt PLC Annual Report and Accounts 2021

TECHNOLOGY.

Our strategic priorities are underpinned by

our three Corporate Responsibility pillars.

Read more about our Technology pillar on page 83

The first ever commercial application of a MAN ETES heat pump system

in the Danish port of Esbjerg.

Developing technologies that provide real alternatives to fossil

fuel power plants.

This groundbreaking solution offers a

carbon-neutral alternative to traditional

fossil fuel power plants, harnessing

wind and seawater hydro power

to supply energy to approximately

100,000 local inhabitants.

The MAN ETES heat pump installation

is both the largest sea water heat

pump in Denmark and the largest

heat pump in the world to use CO

as a refrigerant.

Meggitt PCHEs (Printed CircuitHeat

Exchangers) are central to thesystem

and provide the thermal transfer

between the innovative CO

refrigerant

loop and the district heating network.

Gas turbines, fuelled with natural gas

or hydrogen, will remain an important

part of the world’s energy systems for

the coming decades and Meggitt is

partnering with some of the leading

suppliers to develop technologies that

continue to improve turbine efficiency

and performance.

100%

The ETES system achieves

complete decarbonisation

of the final energy demand

IMAGE: An example of

aMeggitt PCHE (Printed

Circuit Heat Exchanger).

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Strategy in action

Enhancing lives by building

an inclusive culture

CULTURE

Our people are at the centre of our

sustainable future. They are the ones who

enable our innovation, sustainable

technologies and success.

Meggitt PLC Annual Report and Accounts 2021

Our peer recognition scheme, “Extraordinary People”, gives each of us the

opportunity to reward colleagues who live and breathe the core Meggitt

values of Teamwork, Integrity and Excellence.

There are many things that go

into being a truly great company –

innovative technology and solutions,

operations and functions performing at

their best, and great relationships with

our customers and each other.

Our High Performance Culture and

great values are at the heart of how

we work at Meggitt. Colleagues that

demonstrate great Teamwork, always

acting with Integrity – doing the right

thing, in the right way, and staying

focused on Excellence for

our customers.

A culture of appreciation and

recognition is an important building

block for our values. Our new

employee recognition programme

“Extraordinary People” is a great

way of recognising the special

efforts and commitment of individual

colleagues and teams across the whole

ofMeggitt.

4,000+

Nominations of Extraordinary

People since the launch

Recognising our Extraordinary People.

PEOPLE.

Our strategic priorities are underpinned by

our three Corporate Responsibility pillars.

Read more about our People pillar on page 72

Sustainability

Safety

Customer Service

Innovation

Teamwork

Excellence

Community

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Divisional reviews

AIRFRAME

SYSTEMS

Providing core components for original equipment airframe

manufacturers and the Services & Support division across multiple

platforms, and specialising in products designed to operate in

demanding conditions across a diverse range of applications.

Meggitt PLC Annual Report and Accounts 2021

What does the division do

Provides Braking Systems, Fire Protection

& Safety Systems, Power & Motion, Fuel

Systems, Avionics & Sensors and Polymer

Seals for around 51,000 in-service civil and

22,000 defence aircraft. As well as increasing

our content on the new generation aircraft

by as much as 250%, we also have a strong

presence on all of the fastest growing and

hardest worked defence platforms.

As such, we have strong relationships

with all of the major OEMs, whether

commercial, defence or business jet; fixed

wing or rotorcraft; US, European or Rest

of World. The division represents 50%

of Group revenue, generating 52% of its

revenue from OE sales and 48% from the

aftermarket derived mainly from Braking

Systems, with the remaining aftermarket

revenue from other product groups

reported in Services & Support.

Highlights

• Progress on testing and certification

with OEMs to qualify VERDAGENT®,

Meggitt’s proprietary “green”fire

suppressant; we have also been

selected by Boeing to support their

ecoDemonstrator programme with

our CF3I engine fire suppressant

deliverysystem.

• Supporting more electric flight, launched

the development of an HVDC energy

buffer to complement the primary

electrical power source for a customer’s

greener future platform architecture.

• Transfer of products associated with

footprint consolidation with disposal of

Toulouse site and associated product

moves to sites in Europe and APAC.

• Significant investment in automation,

lean production, testing capability and

efficiency at our Rockmart facility in the US.

IMAGE: Swiss Airbus A320 pictured on take-off.

President: Chris Allen

Revenue

£737m

(2020: £793m)

Airframes

Civil OE

23%

Civil AM

27%

Defence OE

27%

Defence AM

20%

Energy & other

Divisional capabilities

– Wheels and brakes (including control

and monitoring systems)

– Aircraft fire protection and safety systems

– Electro-thermal ice protection

– Power generation, conversion and storage

– Avionics and air data systems

– High performance sensors

– Flexible fuel tanks for defence and

civilaircraft

– Sealing solutions

Markets

Civil aerospace

Fixed wing defence aircraft

Rotary wing defence aircraft

Unmanned aerial vehicles

• “Supplier of the Year 2021” award

received from Bell, Boeing Defence

atRockmart facility.

2021 Performance

Organic revenue was down 3% for the

year (H1: -15%; H2: +12%) with civil

aerospace revenue up 2% and defence

revenue down 5%.

Civil OE revenue was down 14% on an

organic basis with growth of 7% in the

second half reflecting the gradual recovery

in OEM build rates during the year. Large

jet and regional aircraft OE ended the

period down 20% driven by lower widebody

demand on the B787, B777 and A350XWB

partially offset by growth on the A320 and

A220 platforms. In regional aircraft, revenue

was down 12% with business jets flat versus

2020, outperforming large and regional jets

on a relative basis.

Civil aftermarket revenue grew by 20% on

an organic basis driven by the recovery

in demand in brakes with large, regional

and business jets up 19%, 18% and 23%

respectively. Brakes revenue increased by

22% organically with good growth across

a number of platforms including the A220

in large jets, CRJ and ERJ fleets within

regional aircraft and a number of business

jet platforms.

Defence revenue was down 5% on an

organic basis, with OE 1% higher. In the

defence aftermarket, revenue was 12% lower

than the prior year, reflecting general market

softness (including customer destocking)

seen during the period and COVID-related

disruption at one of our sites in the US.

Underlying operating profit was up 4%

on an organic basis with underlying

operating margin 110 basis points higher

than the comparative period at 16.3%

(FY2020: 15.2%).

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

ENGINE

SYSTEMS

Divisional reviews

continued

Providing core technologies for engine manufacturers across

a broad range of competencies including thermal management,

engine sensing and advanced composites.

Meggitt PLC Annual Report and Accounts 2021

What does the division do

Market-leading position in advanced

engine composites, thermal and safety

systems with a broad range of technologies

including vibration monitoring and engine

health management systems. This division

also provides aerospace engine flow control

and sensing solutions. Strong positions on

high-volume platforms mean we are well

positioned for growth in Engine Systems.

The division represents 14% of Group

revenue, generating 91% of its revenue

from OE and 9% from the aftermarket

as a result of its principal route to the

aftermarket being through the Services

&Support division.

Highlights

• Established our new thermals

headquarters at our Ansty Park facility.

• Good progress developing new

products in the engine core to displace

heat, increase efficiency, and reduce

fuel, particularly projects to support

next generation engine demonstrators.

• Transfer of high-volume engine

composite parts to Saltillo, Mexico

with customer approvals receivedfrom

Pratt & Whitney and Safran fordirect

shipment on GTF and LEAP programmes.

• MBDA “Performance Excellence

Award” at our site in San Diego.

• Completed sale of our ducting business

based in Dunstable (UK) in January2021.

IMAGE: A Meggitt colleague sets up a Mazak in our brand new thermal cell producing

commercial and defence heat exchangers at Ansty Park, UK.

President: Troy Peterson

Revenue

£208m

(2020: £253m)

Engines

Civil OE

43%

Civil AM

Defence OE

39%

Defence AM

Energy & other 9%

Divisional capabilities

– Complex high-temperature engine

composite components

– Control valves and sub-systems

– Engine sensors

– Thermal management

Markets

Civil aerospace

Fixed wing defence aircraft

Rotary wing defence aircraft

• Good progress with cost reduction,

operating margin expansion, yield

improvement and new technology

development using optical and

wirelesssystems.

2021 Performance

Revenue decreased by 10% (H1: -27%;

H2: +10%) on an organic basis largely

driven by defence where revenue ended

the year down 18% due to a large, one

-off order in the prior year and quality

issues experienced in the first half from

a key supplier which were subsequently

resolved. Civil OE revenue was down 2%

with growth of 41% in the second half

all on an organic basis. Civil revenue in

Engine Composites was flat year on year.

Engine Systems generated an underlying

operating loss of £16.5m (2020: loss of

£16.2m) resulting from lower revenue

and, as reported in our half year results,

lower productivity in in the first quarter

caused by COVID-related disruption at

our USsites.

We made good progress on our recovery

plan in Engine Composites, transferring

more production down to our low cost

facility in Saltillo, Mexico, as well as

introducing further process improvements

and increasing yields significantly on

certain parts. As volumes recover in both

civil and defence, we expect the financial

performance of this product group to

steadily improve with our ultimate target

of mid-teens operating margins.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Divisional reviews

continued

Providing innovative, aero-derivative technologies with

applications across the energy and defence sectors.

ENERGY &

EQUIPMENT

Meggitt PLC Annual Report and Accounts 2021

What does the division do

Energy & Equipment consists of our

energy product groups and defence

business that provide products directly

to defence customers. Energy Sensors

& Controls provides a range of valves,

actuators, sensor and condition

monitoring systems for oil and gas

applications. Heatric provides innovative

printed circuit heat exchanger technology

for offshore gas applications. Defence

Systems provides a series of complex

engineered products to defence agencies

in electronic cooling, ammunition

handling and scoring systems. Energy

& Equipment represents 18% of Group

revenue and generates 84% of its revenue

from OE and 16% from the aftermarket.

Highlights

• Supply by Heatric of its heat exchanger

technology on the first commercial

application of a MAN ETES (Electro-

Thermal Energy Storage) heat pump,

which harnesses wind and hydro power

to supply energy.

• Provision of our optical dynamic

pressure sensing technology on two

demonstrator power stations.

• Secured a significant customer order

with a major US turbines manufacturer

for the sole-source supply of next

generation valves.

• Continued progress on the transferof

high-volume parts to low-costcountries.

• Strong focus on operational

performance and procurement

initiatives to drive margin improvement.

IMAGE: Printed Circuit Heat Exchangers (PCHEs) being manufactured at our Heatric facility in

Poole, UK.

President: Paul Devaux

Revenue

£271m

(2020: £315m)

E&E

Defence

47%

Energy & other

53%

Divisional capabilities

– Combat support (ammunition handling,

electronics cooling and countermeasure

launch and recovery systems)

– Energy sensing and controls

– Vibration condition monitoring systems

for energy markets

– Heat transfer equipment for offshore

oil and gas

– Fuel handling

Markets

Defence ground vehicles

Defence and security

Energy and industrial

Ground fuelling

2021 Performance

Revenue for the year was flat on 2021

(H1: +4%; H2: -4%) on an organic basis

with a good performance from energy

offset by lower defence revenue.

In energy, revenue grew by 9%, with

Heatric revenue up 5% and sensing

and controls up 12%.

Defence revenue was 9% lower driven by

lower rotary wing orders into our Defence

Systems business.

Underlying operating profit was 7% lower

with operating margin at 15.6%, 120

basis points higher than the comparative

period (FY 2020: 14.4%).

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Divisional reviews

continued

Providing throughlife MRO and spares services

acrossour extensive installed base through

our three regional hubs.

SERVICES &

SUPPORT

Meggitt PLC Annual Report and Accounts 2021

What does the division do

Services & Support provides a full-service

aftermarket offering including spares

distribution and MRO to our commercial,

business jet and defence customer base

throughout the lifecycle of our products.

The division represents 18% of Group

revenue and generates 100% of its

revenue from the aftermarket.

Highlights

• Continued delivery of strategic

initiatives with consolidation of our

MRO capabilities and expansion of our

capacity in our three regional centres

of excellence: Ansty Park in the UK,

Singapore and Miami in the US.

• Enhanced maintenance forecasting

capabilities leveraging best-in-class

technologies to improve inventory

management, reduce lead times and

enhance customer service levels.

• Introduction of “Smart Scoping” in

our three regional hubs to leverage

engineering capabilities to increase

efficiency and reduce MRO costs.

• Launched Customer Experience

journey to streamline and improve

customer interactions.

• Addition of 11 SMARTSupport™

agreements.

IMAGE: A Meggitt colleague working on restraints at our Services & Support MRO Centre of

Excellence which is located within Ansty Park, UK.

President: Stewart Watson

Revenue

£274m

(2020: £322m)

S&S

Civil AM

80%

Defence AM

20%

Divisional capabilities

– Maintenance, Repair and Overhaul (MRO)

– Spares provisioning

– SMARTSupport™

Markets

Civil aftermarket

Fixed wing defence

aircraft AM

Energy and industrial

Rotary wing defence aircraft

2021 Performance

Divisional revenue was 11% lower for

the full year (H1: -27%; H2: +10%) on an

organic basis, with civil aftermarket down

3% and defence down 32%.

In civil aerospace, we saw good growth

in both organic revenue and order

intake in the second half up 31% and

58% respectively, reflecting the overall

recovery in the sector and book to bill of

1.09x providing good momentum as we

entered 2022.

The differing pace and trajectory of the

recovery across the world can be seen in

the disparities in regional performance

with our Asian and US businesses ending

the year with organic revenue up 7% and

2% respectively and Europe down 18%.

Large jet revenue, which represented

82% of Services & Support civil revenue,

was down 3% in the year, with regional

and business jets down 21% and up

12%respectively.

The softer performance in defence largely

reflects lower orders from the Defense

Logistics Agency in the US linked to the

burn down of inventory after several years

of robust spending to increase combat

readiness. In the second half, we saw

signs of an improving outlook with orders

up 4% and book to bill for defence for the

year at 1.14x.

Underlying operating profit was 23%

lower with underlying operating margin

120 basis points lower at 11.5% (FY

2020:12.7%).

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Chief Financial Officer’s review

We’ve remained focused on the continued

stewardship of the Group through a second

year of COVID-19, whilst protecting investment

to support growth and the recovery.

Against the backdrop of a second year

of COVID-19 and another challenging

year for the civil aerospace sector, we

remained focused on the continued

stewardship of the Group while

continuing to execute ourstrategy.

We navigated the Group safely through

2021, generating positive free cash flow,

maintaining a robust balance sheet

(net debt:EBITDA ratio of 1.9x) while

protecting investment in key projects that

will underpin the recovery and the return

to growth.

We also successfully refinanced the

Group with a new, three-year, $410m

revolving credit facility, which will

continue to provide solid financial

foundations as the recovery continues

in2022 and beyond.

Table 1 – Financial summary

2021

£’m

2020

£’m

Growth %

Reported Organic

Orders 1,525.8 1,547.1 (1) 9

Revenue 1,489.2 1,684.1 (12) (5)

Underlying

EBITDA

291.0 296.9 (2) 3

Operating profit 177.3 190.5 (7) (3)

Profit before tax 149.3 159.5 (6) (4)

Earnings per share (p) 15.4 16.5 (7)

Statutory

Operating profit/(loss) 63.4 (297.3) 121

Profit/(loss) before tax 31.3 (334.0) 109

Earnings/(loss) per share (p) 4.0 (40.4) 110

Free cash flow

45.7 31.9 43

Net cash flow

58.8 136.0 (57)

Net debt 779.5 773.0 1

1 Organic numbers exclude the impact of acquisitions, disposals and foreign exchange.

2 Underlying profit and EPS are used by the Board to measure the trading performance of the Group as set out in notes 9 and 14.

3 Underlying EBITDA represents underlying operating profit adjusted to add back depreciation, amortisation and impairment losses.

4 Free cash flow is used by the Board to measure the underlying trading cash performance of the Group as set out in note 42.

5 Net cash flow represents the movement in net debt in the year, adjusted to exclude new lease liabilities entered, exchange differences and other non-cash movements.

Meggitt PLC Annual Report and Accounts 2021

The work we have done in recent years

to make the Group more competitive,

including rationalising our global

footprint, and the cost reduction

measures taken in 2020 to resize the

Group, means we are well placed to drive

efficiency savings as volumes recover.

Our ability to realise some of these

benefits in 2021 has been held back by

input and labour cost inflation resulting

from disruption across the global supply

chain, and we expect some of this to

continue in 2022. While we will continue to

use a number of measures to offset these

cost headwinds, including pricing, the

long-term nature of some of our customer

and supplier contracts may constrain our

ability to do so in the short term.

Following completion of a consultation

process, we closed the UK defined

benefit scheme to future accrual in April

2021, bringing it in line with the Group’s

pension schemes in the US.

We have also started preparations

across the Group for the introduction of

a UK Sarbanes-Oxley regime, which will

reform the UK’s corporate governance,

audit andreporting regimes with

implementation expected to happen

towards the end of 2023.

Finally, I would like to thank the finance

team for their hard work and their

valuable contribution to what has been

another important year for the Group.

Group orders and revenue

While we have continued to see

encouraging signs of the recovery in

civil aerospace during 2021, with overall

activity levels rising, an increase in Group

civil aftermarket organic revenue and

sequential increases in quarterly civil

aerospace organic revenue, the Group’s

full year results reflect the ongoing

effects of COVID-19 and global supply

chain disruption on the Group and the

widersector.

Group and civil aerospace organic

revenue were 16% and 26% lower

respectively in the first half, reflecting the

continuation of low levels of civil activity

in 2021 and trading in the first quarter

of 2020 being relatively unaffected by

COVID-19. In the second half, Group

civil aerospace organic revenue was 37%

higher than the comparative period, with

OE up 17% (large jets +15%, regional

+42% and business jets +18%) and

civil aftermarket up 51% on an organic

basis (large jets +42%, regional +71%

and business jets +58%). We also saw

a continuation of the trend seen in the

second quarter, with good sequential

growth in civil aftermarket organic

revenue in the third and fourth quarters.

For the full year, Group orders were

up 9% on an organic basis with book

to bill of 1.01x. Our order book in civil

aerospace saw strong organic growth

with orders up 117% in the second half

versus the comparative period and book

to bill for the full year of 1.11x in both civil

OE and civil aftermarket.

Group revenue for the year was 5% lower

on an organic basis with solid growth in

energy and flat revenue in civil aerospace

more than offset by softer defence where

revenue was down 11% organically. In civil

aerospace, organic revenue from civil OE

and civil AM ended the year down 10%

and up 7% respectively. Energy revenue

increased by 6% on an organic basis.

Reported Group revenue of £1,489.2m

(FY 2020: £1,684.1m) was 12% lower as

analysed in table 3.

Profit and earnings per share

As in previous years, underlying profit

is used by the Board to measure the

underlying trading performance of

the Group and excludes certain items

including: amounts arising on the

acquisition, disposal and closure of

businesses; amortisation of intangible

assets acquired in business combinations;

movements in financial instruments;

and exceptional operating items. In

2021, given their significance and that

they relate to historic matters, certain

Whittaker environmental costs have been

recognised as an exceptional operating

item (see Note 10).

Group underlying operating profit on a

reported basis was 7% lower in the year

at £177.3m (FY 2020: £190.5m) as a result

of the lower revenue, additional costs

associated with COVID-19 and supply

chain disruption and adverse currency

movements. Underlying operating

margins for the full year increased by 60

basis points to 11.9% (FY 2020: 11.3%)

with operating margin recovering strongly

in the second half increasing 520 basis

points compared with the first half.

Underlying profit before tax decreased

by 6% on a reported basis to £149.3m (FY

2020: £159.5m) with underlying earnings

per share 7% lower at 15.4 pence (FY

2020: 16.5 pence).

Moving from underlying to statutory

measures, Group profit before tax was

£31.3m (FY 2020: loss of £334.0m) and

basic earnings per share was 4.0 pence

(FY 2020: loss per share of 40.4 pence),

with the prior year impacted by the non-

cash impairment of intangible assets and

other asset write-downs.

Divisional performance

The main focus areas across our four

divisions in 2021 has been protecting

Table 2 – Revenue growth

Revenue (£’m) Growth (%)

2021 2020 Reported Organic

Civil OE 260.2 306.0 (15) (10)

Civil AM 424.7 419.6 1 7

Total civil 684.9 725.6 (6) –

Defence 620.0 768.4 (19) (11)

Energy 135.0 131.1 3 6

Other 49.3 59.0 (16) (8)

TOTAL 1,489.2 1,684.1 (12) (5)

Table 3 – Organic growth

Revenue

Underlying operating profit

2021

£’m

2020

£’m Growth %

2021

£’m

2020

£’m

Growth %

1,489.2

(0.1)

72.3

1,684.1

(42.2)

(12)

Reported

Impact of M&A

Impact of currency

177.3

0.2

10.0

190.5

3.7

(7)

1,561.4 1,641.9 (5)

Organic

187.5 194.2 (3)

1 Excludes the results of businesses acquired and disposed during the current and prior year or classified

asheldfor sale.

2 Restates the current year using 2020 translation and transaction exchange rates.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Table 4 – Operational highlights

Revenue Underlying Operating Profit/(Loss)

2021

£’m

2020

£’m

% Growth

2021

£’m

2020

£’m

% Growth

Reported Organic Reported Organic

Airframe Systems 737.0 793.1 (7) (3) 120.2 120.5 – 4

Engine Systems 207.8 253.3 (18) (10) (16.5) (16.2) (2) (8)

Energy & Equipment 270.7 315.3 (14) – 42.1 45.4 (7) (5)

Services & Support 273.7 322.4 (15) (11) 31.5 40.8 (23) (18)

Total Group 1,489.2 1,684.1 (12) (5) 177.3 190.5 (7) (3)

Table 5 – Investing for the future

2021

£’m

2020

£’m

% Growth

Reported Organic

Total research and development (R&D) 70.7 97.9 (28) (21)

Less: Charged to cost of sales/WIP (14.5) (20.8) (30) (24)

Less: Capitalised (27.6) (41.4) (33) (26)

Add: Amortisation/Impairment 35.6 32.6 9 27

Charge to underlying net operating costs 64.2 68.3 (6) 4

Capital expenditure 69.7 89.7

Chief Financial Officer’s review

continued

our people, keeping our sites open

and delivering for our customers and

supporting our local communities. As a

result of the increase in global demand

as economies recovered in 2021, the

divisions have had to face an additional

challenge during the year of ramping

up production against the backdrop of

disruption across the global supply chain

and, at times, site-specific disruption

caused by COVID-19.

The financial performance of the

individual divisions is summarised in

table 4. Prior year figures have been

restated to reflect the transfer of a

number of product lines from the Energy

& Equipment division to the Engine

Systems division with effect from 1

January 2021. The restatement comprised

external revenue of £19.7m and

underlying operating profit of £3.0m.

Finance costs

Lower underlying net finance costs of

£28.0m (FY 2020: £31.0m) principally

reflects currency translation benefits and

lower overall levels of bank debt during

the year.

Taxation

The Group’s underlying tax rate for the

year was 19.3% (FY 2020: 19.7%).

As anticipated, the Group received

assessments from the UK tax authority in

2021 following the EU Commission ruling

that the UK CFC regime constituted

partial state aid. Theassessments

received amounted to £18.0m and were

fully covered by provisions held at 31

December 2020 and have been paid in

full in 2021. During the year the Group

has been in dialogue with HMRC and

continues to appeal against the ruling,

in parallel with the UK government’s own

appeal, to the European General Court.

We understand the European General

Court is due to issue its judgment in 2022.

Cash tax decreased in the year and was

lower than expected at £37.7m (FY 2020:

£42.1m) largely driven by the geographic

mix of profits and the phasing of tax

payments in 2020. Over the next few

years, we continue to expect the cash tax

rate to converge with the P&L tax rate as

historical tax reliefs and allowances come

to an end and tax relief on certain capital

expenditure is received over a longer

time period.

Dividends

In line with the terms of the previously

announced proposed transaction with

Parker-Hannifin, the Group is not paying a

final dividend for 2021.

Investing for the future

During the year, we continued to

invest in differentiated and sustainable

technologies to support new product

development and future growth

opportunities. Total R&D expenditure for

the full year of £70.7m which represented

4.7% of Group revenue was lower than

the comparative period (FY 2020: £97.9m,

representing 5.8% of Group revenue)

reflecting measures taken across the

Group in 2020 and 2021 to bring R&D

expenditure back in line with our target

of ~5% of Group revenue. The charge to

underlying net operating costs, including

amortisation and impairment, decreased

by 6% (increased by 4% on an organic

basis) to £64.2m (FY 2020: £68.3m).

Capital expenditure of £69.7m in 2021

was lower than the prior year (FY 2020:

£89.7m) and below our guidance of

around £80m issued in March 2021,

driven by the re-phasing of a proportion

of investment in carbon expansion and

a change in mix between operating and

capital expenditure on the completion of

Ansty Park.

Cash flow and net debt

We continued to maintain a disciplined

approach to managing our cash during

the year while continuing to invest in the

Group and, despite the continuation of

challenging market conditions, generated

another year of positive free cash flow of

£45.7m (FY 2020: £31.9m).

Investment in working capital generated

an outflow of £48.8m (FY 2020:

£8.1m inflow) as we responded to

the anticipated increase in customer

demand as the civil recovery continued.

Investment in capital expenditure was

£69.7m (FY 2020: £89.7m) with the Ansty

Park and carbon expansion projects

representing over half of this spend.

Deficit payments made in respect

of retirement benefit schemes were

Meggitt PLC Annual Report and Accounts 2021

£42.1m (FY 2020: £21.7m) in line with

the revised payment schedule agreed

with the pension trustees following the

deferral of some deficit contributions to

the UK scheme in 2020. Cash inflows of

£36.4m from the disposal of property,

plant and equipment primarily relates

to the proceeds generated by the sale

and leaseback of sites in the US and

UK as part of our ongoing footprint

optimisation strategy.

At the end of December 2021, net debt

of £779.5m (FY 2020: £773.0m) including

lease liabilities of £169.0m (FY 2020:

£144.3m), was broadly in line with the

prior year after taking into account

adverse currency movements of £27.1m

and we had ample headroom of £572.6m

on committed facilities of £1,183.1m.

Debt structure and financing

In November 2021, we extended the

duration of our debt by refinancing our

revolving credit facility with a three-year,

$410m multi-currency facility maturing in

November 2024 with options to extend

by another two years. We also reduced

the size of our three term loans from

$125m, £100m and £45m, to $50m, £50m

and £30m respectively, while extending

some maturities and increasing flexibility

to further extend, if required. At the year

end, £30m was drawn under these bank

facilities and with headroom of £573m on

committed facilities our liquidity remains

strong. In 2022, we have one maturity of

$125m, which represents the final tranche

of our 2010 private placement notes.

There are two main financial covenants

in our financing agreements. The net

debt:EBITDA ratio, which must not

exceed 3.5x, was at 1.9x at 31 December

2021 (December 2020: 2.2x) and interest

cover, which must be not less than 3.0x,

was 11.3x (December 2020: 9.8x). At the

end of 2021, the Group had significant

headroom against both key covenant

ratios, and net debt:EBITDA was within

our target range of 1.5x to 2.5x.

Post-retirement benefit

schemes

The Group’s principal defined benefit

schemes are in the UK and US. Following

completion of a consultation process, the

UK scheme was closed to future accrual

with effect from 6 April 2021. Allof

the Group’s US pension schemes have

previously been closed to future accrual.

Total scheme deficits in 2021 reduced

to £136.4m (FY 2020: £295.4m),

Table 6 – Cash flow

2021

£’m

2020

£’m

Underlying operating profit 177.3 190.5

Depreciation and amortisation 113.7 106.4

Working capital movements (48.8) 8.1

Net interest paid (28.2) (32.1)

Tax paid (37.7) (42.1)

Exceptional operating items paid (25.9) (49.3)

Purchase of property, plant and equipment and software assets (69.7) (89.7)

Proceeds from disposal of property, plant and equipment 36.4 1.3

Capitalised development costs/programme participation costs (29.3) (43.0)

Retirement benefit deficit reduction payments (42.1) (21.7)

Other – 3.5

Free cash flow 45.7 31.9

Net proceeds from disposal/acquisition of businesses 11.3 104.2

Issue of equity share capital 1.3 0.3

Other 0.5 (0.4)

Net cash generated 58.8 136.0

Lease liabilities entered (38.7) (11.4)

Lease liabilities disposed with businesses 0.1 5.6

Exchange differences (27.1) 7.6

Other movements 0.4 0.4

Net debt movements (6.5) 138.2

Net debt at 1 January (773.0) (911.2)

Net debt at 31 December (779.5) (773.0)

Table 7 – Post-retirement benefit scheme summary

2021

£’m

2020

£’m

Opening net deficit 295.4 267.9

Service cost 6.8 15.2

Group cash contributions (48.9) (36.9)

Deficit reduction payments (42.1) (21.7)

Other amounts charged to income statement

(1.6) 8.4

Remeasurement gains – schemes’ assets (47.4) (93.5)

Remeasurement (gains)/losses- schemes’ liabilities (77.3) 136.1

Remeasurement losses – asset ceiling 9.3 –

Currency movements 0.1 (1.8)

Closing net deficit

136.4 295.4

Liabilities 1,355.1 1,463.9

Less assets (1,228.0) (1,168.5)

Add impact of asset ceiling 9.3 –

Closing net deficit

136.4 295.4

Assets as percentage of liabilities 91% 80%

1 Comprises past service amounts, administration expenses borne directly by schemes, net interest expense

and, in 2021, a curtailment gain arising from closure of the UK scheme to future accrual.

2 Comprises £97.9m (2020: £248.7m) in respect of pension schemes and £38.5m (2020: £46.7m) in respect of US

healthcare schemes.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Chief Financial Officer’s review

continued

with the principal drivers of the net

reductionbeing:

– A reduction of £77.3m (FY 2020:

increase of £136.1m) relating to

re-measurement gains on scheme

liabilities. These principally arise from

an increase in AA corporate bond

yields in both the UK and US, reversing

the trend seen in recent years, which

more than offset increases in UK

inflation assumptions;

– A reduction of £47.4m (FY 2020:

reduction of £93.5m) due to re-

measurement gains on scheme

assets;and

– Deficit reduction payments of £42.1m

(FY 2020: £21.7m) of which £38.0m (FY

2020: £21.7m) was paid in respect of

the UKscheme.

In the UK, the Group continues to

make deficit payments in accordance

with a recovery plan agreed with the

trustees following the 2018 triennial

funding valuation, amended following

the four-month deferral of £9.6m of

deficit contributions originally due to be

made in 2020. This amended recovery

plan provides for the 2018 deficit to be

addressed by payments which gradually

increase over the period to August 2023.

Under the plan, the Group will make

deficit contributions of £40.2m in 2022

and £29.9m in the period to August 2023.

The UK 2021 triennial valuation is

substantially complete and is expected

to be finalised in H1 2022. The draft

valuation results indicate an additional

funding shortfall, not covered by the

deficit payments being made under

the existing amended recovery plan, of

approximately £60.0m. This additional

shortfall principally arises due to a

significant reduction in gilt rates between

the two valuation dates and is equivalent

to approximately 1.5 years of additional

deficit contributions, based on the

annual deficit payments being made

under the existing 2018 recovery plan.

Discussions with the trustees to agree

the timing of contributions to meet the

additional funding shortfall have not yet

beenconcluded.

In the US, the Group made deficit

payments in respect of its funded defined

benefit pension schemes of £4.1m (FY

2020: £1.7m). Under current legislation,

no further payments are expected to be

required until 2025.

Foreign exchange

The Group is exposed to both translation

and transaction risk due to changesin

foreign exchange rates. Theserisks

principally relate to the US dollar/sterling

rate, although exposure also existsin

relation to other currency pairs, principally

translation risk for the sterling/euro and

sterling/Swiss franc andtransaction risk

for the US dollar/euro and US dollar/

Swiss franc.

The results of foreign subsidiaries are

translated into sterling at weighted

average exchange rates. Over the year

as a whole, the average sterling rate

against the US dollar was $1.36 (FY2020:

$1.29) providing a negative impact

on our reported results for the year.

Compared to 2020, translation of results

from overseas businesses decreased

Group revenue by £60.4m and decreased

underlying profit before tax (PBT) by

£6.5m in the year.

The sensitivity of full-year revenue

and underlying PBT to exchange rate

translation movements against sterling,

when compared to the 2021 average

rates, is shown in table 9.

Transaction risk arises where revenues

and/or costs of our businesses are

denominated in a currency other than

their own. We hedge known, and

some anticipated transaction currency

exposures, based on historical experience

Table 8 – Exchange rates

2021 2020

Average translation rates against Sterling:

US dollar 1.36 1.29

Euro 1.17 1.14

Swiss franc 1.26 1.22

Average transaction rates:

US dollar/sterling 1.36 1.38

US dollar/euro 1.16 1.15

US dollar/Swiss franc 1.13 1.08

Year-end rates against Sterling:

US dollar

1.35 1.37

Euro

1.19 1.11

Swiss franc 1.23 1.20

Table 9 – Translation currency sensitivity

Average

rate

Revenue

£’m

Underlying

PBT

£’m

Impact of 10 cent movement*:

US dollar 1.36 75 7

Euro 1.17 7 1

Swiss franc 1.26 6 2

* As measured against 2021 actual full-year revenue and underlying PBT.

Table 10 – Transaction hedging

Hedging in

place

Average

transaction

rates

2022:

US dollar/sterling 100 1.34

US dollar/euro 100 1.19

US dollar/Swiss franc 46 1.12

2023 – 2025 inclusive:

US dollar/sterling 47 1.34

US dollar/euro 32 1.20

US dollar/Swiss franc – 1.15

1 Based on forecast transaction exposures, with unhedged exposures based on exchange rates at 31 December 2021.

Meggitt PLC Annual Report and Accounts 2021

and projections. Our policy is to hedge

at least 70% of the next 12 months’

anticipated exposure and to permit

the placing of cover up to five years

ahead. Compared to 2020, the Group’s

revenue and underlying profit before tax

were unfavourably impacted by £11.9m

and £2.3m respectively by currency

transactionmovements.

Each ten cent movement in the US

dollar against the average hedge

rates achieved in 2021 would affect

underlying PBT by approximately

£6.0m in respect of US dollar/sterling

exposure, £2.0m in respect of US dollar/

euro exposure and £2.0m in respect of

US dollar/Swiss franc exposure. Table 10

sets out the Group’s transaction hedging

currently in place.

Taking translation and transaction effects

into account, the impact of changes

in foreign exchange rates in FY 2021

compared with FY 2020 rates was to

decrease reported revenue by £72.3m

and underlying PBT by £8.8m.

Debt financing risks

The Group seeks to minimise debt

financing risk as follows:

a. Concentration of risk

We raise funds through private placement

issuances and committed bank facilities

to reduce reliance on any one market.

Bank financing is sourced from nine

international institutions spread across

North America, Europe and Asia.

Nosingle lender accounts for more

than 10% of the Group’s total credit

facilities and the credit rating of lenders

is monitored by our treasury department.

The Group’s largest lenders are Bank of

America, Bank of China, Barclays, BNP

Paribas, Crédit Industriel et Commercial,

Sumitomo Mitsui Banking Corporation

and Wells Fargo. We seek to maintain

at least £100m of undrawn committed

facilities, net of cash, as a buffer.

b. Set-off arrangements

The Group utilises set-off and netting

arrangements to reduce the potential

effect of counterparty defaults. All

treasury transactions are settled on a net

basis where possible and surplus cash

is generally deposited with our lenders

up to the level of their current exposure

tous.

c. Refinancing risk

We seek to ensure the maturity of our

facilities is staggered and any refinancing

is concluded in good time, typically more

than 12 months before expiry.

d. Currency risk

To ensure we mitigate headroom erosion

due to currency movements, over 90% of

our credit facilities are denominated in US

dollars, the currency in which the majority

of our borrowings are held.

e. Covenant risk

Our committed credit facilities contain

two financial ratio covenants – net debt:

EBITDA and interest cover. The covenant

calculations are drafted to protect us from

potential volatility caused by accounting

standard changes, sudden movements

in exchange rates and exceptional items.

This is achieved by measuring EBITDA

on a rolling 12-month (30 June and 31

December) and frozen GAAP basis,

retranslating net debt and EBITDA at

similar average exchange rates for the

year and excluding exceptional items

from the definition of EBITDA. At 31

December 2021, we have comfortable

headroom on both key financial

covenantmeasures.

Interest risk

The Group seeks to reduce volatility

caused by interest rate fluctuations on net

borrowings. Our US private placements

are subject to fixed interest rates,

whereas borrowings under our syndicated

and bilateral bank credit facilities are at

floating rates. To manage interest rate

volatility, we use interest rate derivatives

to either convert floating rate interest

into fixed rate or vice versa. Our policy is

to generally maintain at least 25% of net

borrowings at fixed rates with a weighted

average maturity of two years or more. At

31 December 2021, the percentage of net

borrowings at fixed rates was 109% (2020:

108%), and of gross borrowings was 83%

(2020: 84%) and the weighted average

period to maturity for the first 25% was

4.5 years (2020: 6.0 years). Ahigher

proportion of debt is held at fixed interest

rates, than the minimum required under

our policy, in anticipation of further

increases in market interest rates.

Non-financial information

Our non-financial informationstatement is

contained in the Corporateresponsibility

report on page 88.

Louisa Burdett

Chief Financial Officer

Table 11 – Net debt by drawn currency (£’m)

2021 2020

Sterling 34.3 39.2

US dollar 778.8 786.3

Euro (26.3) (32.4)

Swiss franc (6.3) (16.1)

Other (1.0) (4.0)

Net debt 779.5 773.0

Table 12 – Covenant ratios

Covenant 2021 2020

Net debt:EBITDA <3.5x

1.9x 2.2x

Interest cover >3.0x 11.3x 9.8x

1 A ratio of 4.0x applies in the two six-month reporting periods following a significant acquisition.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Risk management

Meggitt seeks to operate within a low risk appetite range

overall. Effective risk management is required to deliver this

while supporting the achievement of the Group’s strategic

and business objectives. Our risk management framework

is based on ISO 31000 and includes a formal process for

identifying, assessing and responding to risk.

Meggitt’s corporate strategy is designed

to optimise our business model and

take risk, with the required controls,

on an informed basis. See pages 16 to

17 for a full description of our business

model and pages 24 to 25 for our

strategy. To enable value to be created

for our shareholders, we set varying risk

tolerances and associated criteria. Risk

tolerance levels are flowed down to the

divisions and functions to embed in

operationalprocesses.

The Board approved an updated

Group risk appetite statement with

associated risk tolerances to ensure

Governance

Responsibility for risk management operates

at all levels throughout Meggitt:

The Board

The Board takes overall responsibility, determining the nature and extent of the

principal risks it is willing to take in achieving our strategic objectives, and overseeing

the Group’s risk governance structure and internal control framework. During 2021,

the Board carried out a robust assessment of the principal risks facing the Group,

including those emerging, that would threaten its business model, future performance,

solvency or liquidity. This report describes those risks andhow they are being

managed ormitigated.

Audit Committee

The Board has delegated responsibility for reviewing and ensuring the

effectiveness of the riskmanagement process to the Audit Committee.

Executive Committee

Divisional and functional leadership are responsible for the management

of risk and for compiling and maintaining their own risk registers,

which outline risks at business unit and programme levels.

The Executive Committee as a whole regularly reviews the Group’s

principal risks, while individual members own specific risks.

that identified risks are managed within

acceptablelimits.

The likely timeframe within which the impact

of these risks might be felt (risk velocity) and

how we prioritise risks is considered as part

of our risk management strategy and feeds

into our assessment of long-term viability.

Where appropriate, insurance is used to

manage risks and our risk management

procedures are shared with our insurers

when assessing any potential exposures.

Our insurers have provided funding

via bursaries to enable more detailed

reviews of certain risk areas to increase

understanding of the key drivers and

indicators which enables more efficient

action to address these, either through

mitigation or insurance. These reviews

have been well received by the risk

owners for improving their ability to

monitor and assess their risks and

by the insurers for providing a more

detailed analysis of the causes and their

respectiveimpacts.

Our process

During 2021 we continued to refine our

risk management approach as a result

ofthe ongoing pandemicimpacts.

Meggitt PLC Annual Report and Accounts 2021

Risk heat map

The heat map below shows the outcome of the risk identification and assessment

processes used to compile the Group Risk Register. This shows the relative

likelihood and impact of the principal risks identified. Risks rated as green or

those with a low expected impact are not considered principal risks of the Group

for inclusion in the Group Risk Register, although they may feature on divisional

or functional risk registers and be managed at that level.

Increasing likelihood

Increasing risk impact

Medium High Very high

Almost

certain

Highly

probable

Probable Unlikely

Very

unlikely

We were pleased to note the processes

described below continued tooperate

on a consistent basis with prior years,

providing dynamic risk assessments to

support decision-making for business unit,

functional and executivemanagement.

Our risk management processes require

identified risks throughout the Group

to be owned by a named individual.

They must review them regularly and

consider related emerging risks. Risk

identification is embedded within other

processes, including strategy, project and

programme management, bid approvals

and other operational activities.

Once identified, risks are reviewed at

a site level and aggregated for review

at divisional and functional levels on a

consistent basis, before being submitted

through the Group’s review process.

The resultant Group Risk Register is subject

to a detailed review and discussion by

the Executive Committee which includes

discussion of risks which may not have been

identified through the normal channels and

the interconnectivity of identified risks.

The Board assesses the outputs from this

process and takes comfort from the “three

lines of defence” risk assurance model.

The first line represents operational

management who own and manage risk

on a day-to-day basis, utilising effective

internal controls. Group functions and

divisions monitor and oversee these

activities, representing governance and

compliance at the second line. The third

line is the independent assurance over

these activities provided by internal and

external audits.

Comfort over the management of

these risks is demonstrated through the

updated Group risk assurance matrix

which summarises the assurance activities

taking place throughout the Group in

relation to the principal risks.

Strategic risks

Medium to low tolerance for risks

arising from poor business decisions

or sub-standard execution of

businessobjectives.

Business model

Industry changes

Climate change

Operational risks

Low to near-zero tolerance for risks

arising from business processes

including the technical, quality and

project management or organisational

risks associated with programmes

andproducts.

Quality escape/equipment failure

Business interruption

Project/programme management

Customer satisfaction

IT/system failure

Supply chain

Group change management

People

Corporate risks

Low to zero tolerance for compliance

and reputational risks including those

related to the law and regulations,

health, safety and the environment.

Legal and compliance

Financial risks

Medium to low tolerance for financial

risks including taxation, pension

funding, management failure to

provide adequate liquidity to meet our

obligations and managing currency,

interest rate and credit risks.

Pension funding

Liquidity

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

The Group’s strategic objectives can

only be achieved if certain risks are taken

and managed effectively. We have listed

below the most significant risks that may

affect our business, although there may

be other risks – of which the Group is

unaware or are considered less significant

– which may affect our performance. The

potential impacts of each of our principal

risks were considered as part of the

viability stress testing and considered to

be consistent with, analogous to or less

significant than the scenarios modelled.

Approach to COVID-19

Given the wide-ranging impact of

COVID-19 on the aviation industry we

have continued to assess the effect on

our existing risks and considered resultant

emerging risks rather than having a

single, standalone COVID-19 risk.

Strategic priorities

Strategic portfolio

Customers

Competitiveness

Culture

Change in risk

Increase

No change

Decrease

Risk velocity

High

Impact within 6 months of risk occurring

Medium

Impact between 6 and 36 months of risk

occurring

Low

Impact after more than 36 months of risk

occurring

KPIs

• Financial performance (underlying

operating profit, ROCE, underlying EPS

growth and free cash flow)

• R&D investment

• TRIR (total recordable incident rate)

• Inventory turns

• Emissions intensity

Principal risks & uncertainties

Strategic risks

Risk Description Impact How we manage it

Industry changes

KPIs:

• Financial performance

Significant variation in demand

for air travel and/or our products

due to aerospace and defence

business downcycles coinciding;

serious political, economic,

pandemic (including the ongoing

impacts of COVID-19) or terrorist

events; or industry consolidation

that materially changes the

competitivelandscape.

Volatility in revenue

and underlying

profitability.

• Demand is managed by monitoring external

economic and commercial environment and

long-lead indicators whilst maintaining focus

on balanced portfolio.

• Monitoring international political and tax

developments to assess implications of

future legislation.

Business model

KPIs:

• Financial performance

• R&D investment

Failure to respond to

fundamental changes in

our aerospace business

model, primarily the evolving

aftermarket. This includes

more durable parts requiring

less frequent replacement, a

growing supply of surplus parts,

OE customers seeking greater

control of their aftermarket

supply chain and accelerated

pace of new aircraft deliveries

leading to the earlier retirement

of older aircraft.

Decreased revenue

and profit.

• Alignment of Group, divisional and functional

strategy processes.

• Dedicated full-service aftermarket

organisation.

• Long-term customer agreements including

SMARTSupport™ packages to create

tailored solutions for customers throughout

the product lifecycle enabling more effective

performance monitoring and more

predictable pricing.

• Investment in research and development

tomaintain and enhance Meggitt’s

intellectual property.

Meggitt PLC Annual Report and Accounts 2021

Strategic risks

Risk Description Impact How we manage it

Climate change

KPIs:

• Financial performance

• R&D investment

• Emissions intensity

Failure to adapt to the transition

and physical impacts of climate

change, including:

• government legislation to limit

air travel;

• regulations limiting

greenhouse gas emissions

from aviation come into effect

faster than technical solutions;

• societal attitudes shifting

against air travel (e.g. “flight

shaming”);

• acute physical risks such as the

increased likelihood of

extreme weather events; and

• chronic physical risks such as

changing weather patterns

including rising temperatures

and sea levels.

Decreased revenue

and profit, damage

to operational

performance

andreputation.

• Continued dialogue with governments,

industry bodies and customers to maintain

awareness of evolving aviation sector

requirements.

• Continued focus on developing technologies

to support sustainable aviation and on

reducing the carbon intensity of our

production operations.

• Allocation of two-thirds of innovation budget

to sustainable solutions.

• Reduction in Group carbon footprint through

new facilities, more efficient production

processes and using green energy sources.

• Comprehensive business continuity plans

across the Group, supported by an insurance

programme subject to annual renewal.

• Long-term weather considerations as part of

site footprint strategy.

• These are considered further as part of the

TCFD disclosures on pages 58 to 63.

Operational risks

Risk Description Impact How we manage it

Quality escape/

equipment failure

KPIs:

• Financial performance

Defective product leading to

in-service failure, accidents,

the grounding of aircraft or

prolonged production shut-

downs for the Group and

itscustomers.

Decreased revenue

and profit, damage

to operational

performance

andreputation.

• System safety analysis, verification and

validation policy and processes, combined

with quality and customer audits and

industrycertifications.

• HPS implementation and maturity.

• Supplier quality assurance process.

Business interruption

KPIs:

• Financial performance

• R&D investment

A catastrophic event such as

natural disasters (including

earthquake – the Group has a

significant operational presence

in Southern California); civil

unrest, military conflict or

terrorist activity; or a pandemic

(including further impacts

from COVID-19) could lead to

infrastructure disruption and/or

property damage which prevents

the Group from fulfilling its

contractual obligations.

Decreased revenue

and profit, damage

to operational

performance

andreputation.

• Group-wide business continuity and crisis

management plans, subject to regular testing

and updated for lessons learned. These were

also invoked during 2021 in response to

COVID-19.

• Comprehensive insurance programme,

renewed annually and subject to property

risk assessment visits.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Principal risks & uncertainties

continued

Operational risks

Risk Description Impact How we manage it

Project/programme

management

KPIs:

• Financial performance

• R&D investment

Failure to meet new product

development programme

milestones and certification

requirements and successfully

transition new products into

manufacturing as production

rates increase. This also covers

lower than expected production

volumes, including programme

cancellations or delays.

Failure to deliver

financial returns

against investment

and/or significant

financial penalties

leading to decreased

profit and damage

toreputation.

• Rigorous commercial and technological

reviews of bids and contractual terms before

entering into programmes.

• Continuous review of programme

performance through the Programme

Lifecycle Management (PLM) process

including:

– regular monitoring of the end-market

performance of key OE programmes;

– internal review process, to stress-test

readiness to proceed at each stage of key

programmes; and

– regular monitoring of the financial health

of customers.

Customer

satisfaction

KPIs:

• Financial performance

• Inventory turns

Failure to meet customers’ cost,

quality and delivery standards or

qualify as preferred suppliers.

Failure to win future

programmes resulting

in decreased revenue

and profit.

• Creation of a customer-facing organisational

structure including a dedicated aftermarket

division.

• Regular monitoring of customer scorecards

and ensuring responsiveness to issues via

Voice of the Customer process.

• Functional excellence in operations, project

management and engineering.

• Increased utilisation of low-cost

manufacturing base.

IT/Systems failure

KPIs:

• Financial performance

A breach of IT security due to

increasingly more sophisticated

cyber crime/terrorism resulting

in intellectual property or other

sensitive information being lost,

made inaccessible, corrupted

or accessed by unauthorised

users. This also includes the

loss of critical systems such as

SAP due to poorly executed

implementation or change of

control; poor maintenance,

business continuity or back-up

procedures and the failure of

third parties to meet service

levelagreements.

Decreased revenue

and profit, damage

to operational

performance

andreputation.

• Information Security infrastructure, policies

and procedures supported by a Group-wide

security awareness programme.

• Intelligence sharing on threats with

government and security bodies including

the FBI, CPNI and NCSC.

• Management of third-party service providers

and risks, including resilience and disaster

recovery processes.

• Rolling programme of system upgrades

(including SAP implementation) to replace

legacy systems.

• Defined vulnerability management policy

with monitoring capability to ensure that

vulnerabilities are identified and

appropriately patched.

• Dedicated cyber-security protective

monitoring resources, employing industry-

leading technical controls and procedures.

Meggitt PLC Annual Report and Accounts 2021

Operational risks continued

Risk Description Impact How we manage it

Supply chain

KPIs:

• Financial performance

• Inventory turns

Failure or inability of critical

suppliers to supply unique

products, capabilities or services

preventing the Group from

satisfying customers or meeting

contractual requirements.

Decreased revenue

and profit, damage

to operational

performance

andreputation.

• Dynamic supplier risk assessment process

leveraging our data and using leading

indicators to help identify risks and trigger

containment and corrective actions.

• Local sourcing strategy to improve operational

efficiency and minimise potential impacts

and disruption from cross-border tariffs.

• Enhanced approach to supplier excellence

by supporting supplier audit activities.

• Improved supplier engagement on delivery

performance including the placing of

longer-term commitments, buffer stock

arrangements and issuing of performance

“report cards” to key suppliers.

Group change

management

KPIs:

• Financial performance

• Inventory turns

Failure to successfully,

simultaneously, deliver the

significant change programmes

currently in process and planned,

including site consolidation

activity such as Ansty Park and

investments in new carbon

manufacturing facilities in

theUSA.

Decreased revenue

and profit, increased

costs, damage

to operational

performance

andreputation.

• PMO oversight of large capital projects.

• Dedicated site consolidation and property

management teams for significant

transitionprojects.

• Regular monitoring by Executive Committee

through operational and project reviews.

• HPS implementation at new/expanded sites.

People

KPIs:

• Financial performance

• Inventory turns

Failure to attract, retain or

mobilise people due to factors

including industrial action,

workforce demographics, lack of

training, availability of talent and

inadequate compensation.

Decreased revenue

and profit, damage

to operational

performance.

• Embedding of High Performance Culture.

• Action plans to improve employee

engagement.

• Graduate and apprentice programmes in

partnership with schools and universities.

• Regular oversight by Executive Committee.

• Creation of Employee Resource Groups to

foster diversity, boost employee engagement

and enable global collaboration.

• Talent attraction and retention strategies

focusing on local market competitiveness

and career development frameworks.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Principal risks & uncertainties

continued

Corporate risks

Risk Description Impact How we manage it

Legal and

compliance

KPIs:

• Financial performance

• TRIR

Significant breach of increasingly

complex trade compliance,

bribery and corruption, USG

contracting, ethics, intellectual

property, data protection,

competition/anti-trust laws,

facilitation of tax evasion and

themarket abuse regime.

Damage to reputation,

loss of supplier

accreditations,

suspension of activity,

fines from civil and

criminal proceedings.

• Continuing investment in compliance

programmes including Board-approved

policies and rollout of training and

ITsolutions.

• Regular monitoring of ethics and anti-bribery

programme by Corporate Responsibility

Committee.

• Ongoing trade compliance programme

including third-party audits.

• Comprehensive ethics programme including

training, anti-corruption policy and “Speak

Up” Line.

• Third-party and internal audits including

HS&E and Anti-Bribery & Corruption.

• HPS implementation to enhance safety

measures, validated by third-party audits.

Financial risks

Risk Description Impact How we manage it

Pension funding

KPIs:

• Financial performance

The Group operates defined

benefit pensions schemes in

the UK, US and Switzerland. The

level of deficits in these schemes

may be affected adversely by

investment returns, interest

rates, increasing life expectancy

and changes in the regulatory

environment. The rates at which

deficits are funded is subject

to agreement with the trustees

in the UK and is dependent

on legislation in the US and

Switzerland.

Higher pension

scheme funding

contributions resulting

in decreased cash

andprofit.

• Triennial valuation process and deficit

funding agreement with UK Pension Trustees.

• Continued monitoring of asset allocations

and funding levels for all schemes.

• Closure of UK and US defined benefit

schemes to future accrual.

Liquidity

KPIs:

• Financial performance

Financial risk management is

considered in detail on pages

188 to 189.

Inability to access

financing on normal

commercial terms.

• Maintaining sufficient headroom in

committed credit facilities and against

covenants in those facilities.

• Arranging funding with maturities spread

over several years or the ability to terminate

early at little or no cost to the Group.

Meggitt PLC Annual Report and Accounts 2021

Oversight of risk and

internal control

The Board is responsible for risk

management and internal control and for

maintaining and reviewing its financial

and operational effectiveness. The Board

has taken into account the guidance

provided by the FRC on risk management

and internal control in carrying out its

duties. The system of internal control

is designed to manage, but not to

eliminate, the risk of failure to achieve

business objectives and to provide

reasonable, but not absolute, assurance

against material misstatement or loss.

The Group’s functions are responsible

for determining Group policies

and processes. The businesses are

responsible for implementing them,

with internal and/or external audits to

confirm business unit compliance. The

key features of the risk management and

internal control system are described

below, including those relating to the

financial reporting process, as required

under the Disclosure Guidance and

Transparency Rules (DGTR):

• Group policies – key policies are

approved by the Board and other

policies are approved by Group

functions;

• process controls – for example

financial controls including the Group

Finance Policies and Procedures

Manual, the bid approval process,

programme lifecycle management

reviews, IT security framework and risk

management; and

• the forecasting, budget and strategic

plan processes.

The Group’s programmes for insurance

and business continuity form part of our

risk management and internal control

framework.

The following features allow the Group

tomonitor the effective implementation

of policies and process controls by

business units:

• a business performance review process

(including financial, operational and

compliance performance);

• semi-annual business unit, product

group and divisional sign-off of

compliance with Group policies

andprocesses;

• compliance programmes and external

audits (including trade compliance,

ethics, anti-corruption, health, safety

and environmental);

• an effective internal audit function

which, primarily, performs business unit

reviews by rotation (including finance,

programme management, IT, HR,

ethics, anti-bribery & corruption and

business continuity); and

• a whistleblowing line to enable

employees to raise concerns.

To review the effectiveness of the

system of internal controls, the Board

and Audit Committee applied the

following processes and activities in 2021

and up to the date of approval of the

AnnualReport:

• reviews of the risk management

process, risk register and risk appetite

statement;

• written and verbal reports to the Audit

Committee from internal and external

audit on progress with internal control

activities, including:

– Reviews of business processes and

activities, including action plans

to address any identified control

weaknesses and recommendations

for improvements to controls or

processes;

– The results of internal audits;

– Internal control recommendations

made by the external auditors; and

– Follow-up actions from previous

internal control recommendations.

• regular compliance reports from the

Group General Counsel and Director,

Corporate Affairs;

• regular reports on the state of the

business from the Chief Executive and

Chief Financial Officer;

• presentation on IT security activities

and plans from the Chief Information

Officer and the Chief Information

Security Officer;

• strategy reviews, review of the five-year

financial plan and review and approval

of the 2022 budget;

• written reports to the Corporate

Responsibility Committee on the

effectiveness and outcomes of

whistleblowing procedures; and

• reports on insurance coverage and

uninsured risks.

The risk management and internal

control systems have been in place for

the year under review and up to the date

of approval of the Annual Report, and

are regularly reviewed by the Board. The

Board monitors executive management’s

action plans to implement improvements

in internal controls that have been

identified following the above mentioned

reviews and reports. The Board confirms

that it has not identified any significant

failings or weaknesses in the Group’s

systems of risk management or internal

control as a result of information provided

to the Board and resulting discussions.

Viability statement

In accordance with the provision 31 of the

2018 Code, as part of their assessment of

the Group’s viability, the Directors have

assessed the prospects of the Group and

its ability to meet its liabilities as they

falldue.

Response to COVID-19 and

impact on Meggitt’s viability

During 2020, in response to the

COVID-19 pandemic, the Group

executed a material reduction in its

structural cost base and held net debt

below £800m (December 2020: £773m).

The covenant ratio was 2.2x. The Group

secured a forward start on its RCF for

one year on $575m to September 2022

and issued $300m on an oversubscribed

private placement in November 2020.

The anticipated recovery in the civil

aerospace aftermarket has been slower

to materialise than was anticipated 12

months ago, extending the pressure

on profitability and therefore covenants

through 2021. Continued close

management of the Group’s cash position

and a focus on delivery through H1 2021

saw the Group’s covenant rise modestly

to 2.4x by June 2021 after more than

12 months of the pandemic, whilst also

protecting the business from further

significant cost reduction in anticipation

of a market recovery. Through H2 2021,

there was a focus on continuing to

refinance debt, with the Group closing a

new $410m RCF facility in Q4, alongside a

number of revisions to bilateral facilities.

By the end of 2021, the Group had

materially extended its maturity profile

and resized its gross debt burden, whilst

also delivering its strongest six months

of profit generation since the start of

thepandemic.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Principal risks & uncertainties

continued

By the end of 2021, the Group’s covenant

ratio has fallen to 1.9x with net debt at

£779.5m. With increased volumes of AM

orders now being placed, though the

COVID pandemic is not over, the Group’s

financial and debt position continues to

improve, moderating the threat posed to

its viability by COVID.

Climate change

Meggitt explicitly monitors the impact

of climate change on the Group as part

of its risk register. Meggitt has potential

exposures both on the demand side

(primarily transition risks) should flight

volumes be impacted by changes in the

tax regime or consumer flying habits

be moderated. In addition, there are

a number of supply side challenges

(primarily physical risks) from issues such

as extreme weather.

Whilst the Group does consider that it

has potentially material exposure to the

impact of climate change, the magnitude

of that impact within the current viability

assessment period is likely to be lower

than for some of the other risks faced

by the Group. Therefore, though it is

monitored, it is not formally part of this

viability assessment, given the magnitude

of the potential impacts from other risks.

Assessment of prospects

The Board believes that, despite the

impact of COVID-19 over the last years,

the prospects for both the aerospace

market and for the Group within it

continue to be favourable in the medium

to long term:

• We believe that the desire for

individuals to travel and to connect

with others remains and that air travel

will play a critical part in meeting

thatdemand;

• Growth in civil aerospace markets is

returning; Meggitt provides equipment

to all major new platforms entering

service in the near future;

• Meggitt has an installed base of over

73,000 in service aircraft, and with an

average aircraft lifespan of 25 years,

our aftermarket will be providing

meaningful revenues to the Group well

into the future;

• We are diversified by end market and

by customer;

• We supply into both civil (46% revenue)

and defence (42%) aircraft markets, and

into selected energy markets (9%);

• Our revenues are split broadly

evenly between equipment sales

andaftermarket;

• We work with a diverse group of

customers from across the globe. Our

top ten customers generate 45% of

ourrevenue;

• We invest for the long term and protect

our know-how;

• We invest in market-leading

technology. We continue to target

spending, on average, 5-7% of revenue

on R&D through the cycle;

• We grow, manage and defend our

intellectual property portfolio robustly;

• We continue to invest in next

generation technologies to support

a sustainable future for aviation and

power generation;

• We seek to attract and retain

colleagues who can enable

theextraordinary;

• We manufacture based on quality,

consistency and value;

• We manage our manufacturing facilities

using HPS, a tiered improvement

programme, providing a roadmap to

best-in-class manufacturing;

• We operate a globally distributed

manufacturing infrastructure, producing

both in the OECD and in lower

costlocations;

• We continue to have robust liquidity

and a strong financial base;

• The Group has reduced its levels of

debt over the last two years to £779.5m

in spite of the pressures from COVID.

The Group generated free cash flow in

both 2020 and 2021;

• Our gearing ratio at the end of 2021

was 1.9x (net debt/EBITDA) and

interest cover was 11.3x, both well

within our covenant limits; and

• We have just under £1.2bn of

committed facilities as at 31 December

2021, and a headroom of £573m.

Assessment period

The Board considered the Group’s

principal risks as detailed in our risk

likelihood and timeframe over which the

risks might crystallise. It also considered

over what timeframe certain business and

sector changes currently impacting the

Group would likely be resolved.

1. Market recovery: Industry observers

continue to see a recovery in the civil

aerospace market. The Group expects

revenue to recover to 2019 levels by

2024-25.

2. Meggitt evolution: The Group has a

number of material projects, including

the completion of the move into Ansty

Park and other footprint reduction

efforts, for which the benefits are

expected to accrue to Meggitt within

the next five years.

3. Programme investment: The Group

typically expects the investment

cycle of five years for engineering

development programmes.

4. Refinancing: The Group’s existing debt

base will typically be fully refinanced

over a five-year period.

Given the above, and the long cycle

nature of the Company’s activities, the

Board concluded that five years continues

to be the correct timeframe over which to

assess viability and risk impact.

Assessment of viability and risk

stress tests

The Group continues to model a

progressive recovery in activity in the

civil aerospace market on the back of

encouraging market data seen in late

2021. A number of outcomes continue

to be possible regarding COVID-19,

but the Group continues to believe

that a full recovery in civil aerospace

activity is likely to be by 2023-24. It is

against this recovery baseline that the

Group’s viability has been tested using

two scenarios against the output of

the Group’s annual long-term planning

process. More detail on the base

performance case can be seen in Note 1

of the consolidated financial statements.

1. Loss of a major customer

Other than with the profound ongoing

demand shock precipitated by COVID,

we test the scenario in which the Group

faces potential major customer loss risk.

The aviation sector is reliant on a well-

developed system of global regulations

and equipment qualifications. Security

of data is also critical when working

with both the private sector and with

governments. The Group has modelled

the impact of a significant loss of revenue

following a regulatory or compliance

failure at Meggitt. Censure for non-

compliance can be severe, whether

through fines or fleet grounding. This

Meggitt PLC Annual Report and Accounts 2021

scenario is modelled to unfold in parallel

with the recovery from COVID-19 but

over a 12-month period given the time

taken for customers to resource, which

allows the civil AM recovery to be well

underway in the underlying base case.

2. Major business disruption event

We model a supply-side shock, such as

manufacturing disruption in California

as a result of a natural disaster. Business

disruption continues to be one of the

highest impacting risks on the Group’s

financial performance, both around the

impact on major customers and suppliers.

Given the concentration of aerospace

assets in California, a natural disaster

here would have a significant impact.

As modelled, such a disaster takes two

years to rebuild from, and with material

production losses.

The Group has modelled the financial

impact of the risks articulated above,

together with mitigating actions.

Mitigating actions include a reduction

in investment both in PP&E and R&D

or curtailment of indirect expenditure

and headcount reduction. Levers such

as extended dividend suspension or

material reduction in discretionary spend

would also be open beyond current

COVID horizons. As in 2020, the Group

would find it challenging should a second

external shock occur before the recovery

from COVID-19 is well established.

However, particularly given the recent

strong data on AM orders, the Group

continues to believe that both the scale

of losses and of mitigating levers would

mean there was limited impact on the

Group’s viability.

Statement of viability

Based on the results of the analysis, the

Board has a reasonable expectation that

the Group will continue in operation

and be able to meet its liabilities as

they fall due over the five-year period

ofassessment.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Taskforce on Climate-related

Financial Disclosures (TCFD)

Recommendation Recommended disclosure

Further detail

available Current status Future priorities

1) Governance a) Describe the Board’s oversight of climate

related risks and opportunities

Section

1 below

• Climate change and

environmental sustainability is

a major consideration of our

business at all levels.

• Climate related risks and

opportunities are integrated

into our strategy and

businessmodel.

• All Board and management

committees review risks and

opportunities as part of their

areas of responsibility.

• Sustainability strategy will

continue to be reviewed

by the Board on an

annualbasis.

• Any future Board

appointments will take

into consideration climate

change/sustainability skills

and experience.

• Increased linkages between

sustainability performance

and LTIP/Remuneration

Committee considerations.

b) Describe management’s role in assessing

and managing climate related risks and

opportunities

Section

1 below

2) Strategy a) Describe the climate-related risks and

opportunities the organisation has

identified over the short, medium and

long term

Section

2 below

• Climate related risk and

opportunities have been

considered in the overall

strategic plan over three

timeframes, <3 years, 3-10

yearsand >10 years.

• Strategic planning is integrated

into financial planning.

• Greater level of scenario

modelling within the

reviewcycle.

• Continued commitments

on research and technology

investment into sustainable

technologies.

• Setting of science-based

targets and confirming

a clearly defined path to

reduce emissions.

b) Describe the impact of climate

related risks and opportunities on the

organisation’s businesses, strategy and

financial planning

Section

2 below

c) Describe the resilience of the

organisation’s strategy, taking into

consideration different climate related

scenarios, including a 2C or lower scenario

Section

2 below

3) Risk

Management

a) Describe the organisation’s processes for

identifying and assessing climate related

risks

Principal Risks

section and

section 3 below

• ISO 31000 aligned risk

management framework

incorporating climate-

relatedrisk.

• Climate change is viewed as

a principal strategic risk which

is continually reviewed across

thebusiness.

• Transition and physical

risks are evaluated through

demand side and supply side

scenarioplanning.

• Continued development of

risk assessment processes

to better identify emerging

climate related risks.

• Greater scenario planning

incorporating climate

related risks.

b) Describe the organisation’s processes for

managing climate related risks

Principal Risks

section and

section 3 below

c) Describe how processes for identifying,

assessing and managing climate related

risks are integrated into the organisation’s

overall risk management

Principal Risks

section and

section 3 below

4) Metrics &

Targets

a) Disclose the metrics used by the

organisation to assess climate related risks

and opportunities in line with its strategy

and risk management process

Section

4 below

• GHG emissions have been

reported since 2017 against a

target to reduce GHG by 50%

(relative to revenue) against the

2016 baseline.

• Market and location based

reporting is including in the

reporting regime.

• Disclosure of Scope 3 emissions

are in the planning and initial

screening phase.

• Set internal site targets to drive

a reduction in emissions.

• Scope 1 & 2 reduction measures

incorporated into LTIP.

• Complete and disclose

material scope 3 categories.

• Implement an internal

carbon price to ensure

cost of climate impact (all

scopes) is embedded in

business decisions – e.g.

capital expenditure within

ourfacilities.

• Lay out a roadmap to

achieve science based

targets, e.g. through

substitution of fossil-

fuel fired processes and

facilities and procurement

of renewable energy.

b) Disclose Scope 1, Scope 2 and if

appropriate Scope 3 greenhouse gas

(GHG) emissions, and the related risks

Section 4 below

and Planet

section of CR

report (page 82)

c) Describe the targets used by the

organisation to manage climate related

risks and opportunities and performance

against these targets

Section

4 below

We adopted TCFD reporting early in

2020 and have developed our reporting

process during 2021 towards compliance

with the disclosure requirements from

2021 onwards.

Many of the TCFD requirements were

already integrated into our strategy,

operations and culture and we have

strengthened our reporting in this Annual

Report to provide additional disclosures

in key areas.

As per Listing Rule 9.8.6(8)R, Meggitt

has adopted climate-related financial

disclosures consistent with the TCFD

recommendations and recommended

disclosures with the exception of Scope

3 data disclosure and improvements

planned for 2022 as detailed below.

Meggitt PLC Annual Report and Accounts 2021

Integrating Meggitt reporting

into the TCFD framework:

Risk

Management

Metrics

& Targets

Strategy

Governance

The Board of Directors is ultimately

responsible for developing the Group’s

strategy on climate change and

overseeing our progress in this area.

Day-to-day responsibility is delegated

to the Chief Executive, supported by the

Executive Committee. Below that there

are employee working groups working

on specific projects, overseen by the

Environmental Steering Committee.

1) Governance

Climate change, with the associated risks

and opportunities, has been identified by

the Board and Executive Committee as a

key strategic issue and is an integral part

of our business planning framework. Our

strategy includes how we can position the

business to offer products that will enable

the shift to sustainable aviation and low-

carbon energy production, how we can

reduce greenhouse gas emissions from

our operations, and how we can ensure

our facilities are resilient in the face of a

changing climate.

Summary of responsibilities Board

The Board is responsible for the Group’s

strategy on climate change, including

oversight of climate-related risks and

opportunities impacting the Group.

At a strategic level, the Board considers

the impacts of climate change on both

our markets and our operations.

The Board continually monitors our

performance and progress in these

areas, receiving regular updates on

international policies to decarbonise the

aviation sector, including market-based

measures, technological solutions and

demand management. The Board takes

these factors into consideration when

setting the Group’s policies and strategy.

The Board approves the Corporate

Responsibility & Sustainability Policy

and the Environmental Policy that sets

out the Group’s commitment to running

a sustainable business. These policies,

which are available on our website, are

reviewed by the Board on a regular

basis to ensure they are appropriate and

uptodate.

There has been an increased focus on

climate-related matters as the landscape

continues to evolve with further

regulatory developments and changes

in stakeholder expectations. A summary

of the primary climate change-related

activities undertaken by the Board

throughout 2021 and into 2022 are set

out below:

1. Reviewed and approved an updated

Environmental Policy;

2. Reviewed the performance on our

environmental sustainability metrics

and targets;

3. Reviewed and approved risk appetite

including appetite in respect of

climate change risk;

4. Reviewed and approved the Group

Risk Register to monitor Group

risks and how they are mitigated,

including climate change risk;

5. Received regular updates on climate

change risk and opportunities

from the Chief Executive, Group

Operations Director and Group

Director Engineering and Strategy;

6. Considered climate change risk and

opportunities when reviewing and

approving our strategic plan;

7. Received an update on the Group’s

sustainability strategy; and

8. Received an update on technology

with a primary focus on sustainable

aviation.

Audit Committee

The Audit Committee is responsible

for reviewing the content of the ARA,

including the TCFD disclosures, and

advising the Board if the ARA as a whole

is fair, balanced and understandable.

The Committee is also responsible for

reviewing the adequacy and effectiveness

of the Group’s risk management

processes including those relating to

climate change risk and the processes

to determine the Group’s overall risk

appetite, tolerance and strategy, and

advises the Board on the appropriateness

of those processes.

During the year the Committee discussed

the Group’s natural catastrophe business

interruption risk, including climate

related weather events using scenario

analysis to look at emerging risks,

common underlying drivers and potential

mitigating actions. The Committee

discussed severe climate-related weather

events, sought clarification on mitigating

actions and a report will be provided to

the Board on climate-related risk to our

operations in 2022.

Corporate Responsibility Committee

The Corporate Responsibility (CR)

Committee has independent oversight

of the implementation of the Group’s

environmental performance and receives

regular updates on environmental KPIs,

environmental audits.

The Corporate Responsibility Committee

reviews environmental reports twice

ayear.

Remuneration Committee

The Remuneration Committee is

responsible for setting the Group’s

remuneration policy, including how ESG

factors are considered when determining

executive pay.

In 2021, the Committee considered the

increasing importance of ESG-related

factors and agreed to incorporate a

new sustainability measure into the LTIP.

The 2021 goal is to direct two-thirds

of Meggitt’s research and technology

expenditure towards developing

sustainable technology. In this context

“sustainable technologies” are those

that will enable customers to operate

with lower greenhouse gas emissions and

more efficiently. Strategic measures under

the short-term incentive plan for the

Chief Executive also include sustainability

goals. The Committee further considered

ESG measures when looking at 2022 plan

measures and has incorporated a new

strategic measure on carbon emission

reduction (more detail can be found in

the Directors’ remuneration report on

page 126).

The Committee is satisfied that the

current and proposed incentive structures

for senior executives do not raise

ESG risks by inadvertently motivating

irresponsible behaviour.

The Remuneration Committee reviews

performance updates for the LTIP,

including ESG measures, three times

ayear.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Nominations Committee

The Nominations Committee ensures

the Board and senior management team

have the appropriate skills, knowledge

and experience to operate effectively and

to deliver the Group’s strategy.

In 2021, climate change/sustainability

expertise was added to our skills matrix.

Management level

Finance Committee

The Finance Committee has delegated

responsibility to approve investments and

certain corporate activities up to amounts

determined by the Board.

The Committee considers climate-related

risks and opportunities relating to proposals

submitted for approval.

CEO

The Chief Executive Officer is the

designated owner of the Group’s climate

change risk and is ultimately responsible

for managing the risk across the business.

Executive submit regular reports to the

Board on the Group’s climate change-

related risks and opportunities.

Executive Committee

The Executive Committee leads

the consistent implementation of

business and operational processes to

minimise the impact of the Group on

the environment and sets targets for

improving the Group’s environmental

performance. Functional responsibility

is delegated to the Group Director

of Engineering & Strategy (for our

response from a technology and

market perspective) and to our Group

Operations Director (for our response

from an operational perspective).

Divisions, product groups and sites

Our divisions, product groups and

sites are responsible for day-to-day

performance in these areas. Each

site is required to drive a number of

projects locally to support the reduction

of carbon emissions, electricity and

water consumption, and landfill wastes

disposals. Targets have been deployed

at each site and will be tracked as part of

the overall Strategy Deployment Process

at site and product group level.

Environmental Steering

Committee (ESC)

The ESC, comprised of the Group

Company Secretary, Group Director,

Engineering & Strategy, and Group

Operations Director deploys the Group’s

strategy into the business by providing

direction to the Environmental Working

Group on key business plans, such as

the procurement of clean electricity and

deployment of sitetargets.

Group Director, Sustainability

The Group Director, Sustainability

was appointed in 2021 (reporting to

the Group Operations Director) and

is driving Meggitt’s environmental

sustainability programme of change –

defining our increased ambition, and

launching projects directly reducing

our impact, as well as change initiatives

designed to embed progressively

sustainable considerations into our core

operatingmodel.

Environmental Senior Forum

Environmental Senior Forum includes

senior stakeholders and project sponsors

from Finance, Operations, Procurement,

Communications, Research and

Technology, Corporate Responsibility and

Facilities Management, reporting to the

ESC for strategic guidance.

2) Strategy

Overview of climate-related risks

and opportunities

Given the scale and immediacy of the

climate change challenge, the changing

expectations of our key stakeholders

present both risks and opportunities to

our business. A summary of these risks

and opportunities are presented in the

following table, as a complement and

expansion of the overall climate change

risk detailed on page 51. Potential impact

and mitigation of these risks are outlined

in the table at the bottom of page 62.

Taskforce on Climate-related

Financial Disclosures (TCFD)

continued

Meggitt PLC Annual Report and Accounts 2021

Short term (<3 yrs) Medium term (3-10 yrs) Long term (> 10yrs)

Opportunities Risks Opportunities Risks Opportunities Risks

Aerospace

markets

Increased utilisation

of more modern

and fuel-efficient

aircraft where

Meggitt has a

higher ship-set

content leading

to increased sales

of both original

equipment and

aftermarket

services.

Early reduced

demand for air

travel, driven by

evolving passenger

preference, or

increased prices

due to further

regulatory changes

(e.g. more

onerous CORSIA

requirements).

Upgrades of

existing aircraft

designs and launch

of new platforms

to improve fuel

efficiency where

Meggitt’s thermal,

sensing, composite,

electrical and

flow control

technologies are

well suited.

Material reduced

demand for air

travel, driven by

evolving passenger

preferences, or

increased prices

due to regulatory

changes (e.g.

introduction of

carbon taxes,

increase in fuel

costs due to SAF

mandates).

Continued demand

for Meggitt

technologies to

enable highly

efficient aircraft

and the emergence

of hydrogen-

powered aircraft.

Sustainable

aviation technology

transition is

not sufficiently

rapid to alleviate

environmental

concerns and

mitigate additional

regulatory costs,

further reducing

demand for air

travel.

Energy

markets

Accelerating

demand for energy

efficiency, natural

gas and energy

storage driving

strong demand

for Meggitt’s

industrial heat

exchangers and

gas-turbine control

technologies.

Initial assessment of

risks in this market

segment is limited

given Meggitt’s

exposure to both

natural gas and

renewable energy

markets.

Further accelerating

demand for low-

carbon energy

drive further

increased demand

for Meggitt’s key

clean energy

technologies.

Early, meaningful

transition away

from natural gas

reduces demand for

equipment in this

part of the market.

Increased demand

for energy

efficiency and

storage, hydrogen,

carbon capture,

offers significant

opportunities

for our heat

exchangers and

thermal systems

capabilities.

Long-term trends

away from fossil

fuels reduces

demand for

equipment in this

part of the market.

Production

operations

Substitution of

gas-fired processes,

modernising

our facilities and

improvement

of production

processes all reduce

Scope 1and 2

emissions.

Engagement

with suppliers

on low-carbon

expectations in

purchased goods

and services.

Increased input

costs due to

energy prices and

incremental cost of

renewable energy.

Move to renewable

electricity through

mix of on-site/

off-site generation,

provide long-

term price

stability/security

e.g. through

Power Purchase

Agreements.

Smaller number of

larger and more

efficient global

plants.

Further reductions

in embedded

carbon in material

inputs through

collaboration with

suppliers to reduce

emissions and

increase yields.

Increased input

costs due to carbon

taxes and higher

cost of low-carbon

raw materials and

services.

Additional capex

required to

substitute fossil fuel

fired processes to

meet internal GHG

reduction targets.

Physical disruption

to Meggitt facilities

and supply chains.

Sub-optimised

capacity due

to changes in

demand.

Changes to

production facilities

to provide key

technologies for

next generation

green propulsion

and energy sectors.

Increased input

costs due to carbon

taxes, voluntary

carbon removals

and higher cost

of low-carbon

raw materials and

services.

Additional capex

required to

substitute fossil fuel

fired processes to

meet internal GHG

reduction targets.

Physical disruption

to Meggitt facilities

and supply chains.

Impact of climate-related risks and

opportunities on our strategy

The world has a few short years to meet

the challenge of climate change in order

to avoid its worst effects. We are a key

supplier of technology to the critical

aviation, defence and energy markets and

as such we recognise the important role

we play in the ongoing carbon transition.

The opportunities and risks that climate

change pose are managed as an integral

part of our strategic plan for the business

(see page 62), in terms of how demand

will change for existing and new products

and how our operations will change in

terms of greenhouse gas emissions,

and resilience to changing climate. The

strategic planning process is integrated

with our financial planning processes

and includes climate change scenarios

with a focus on the evolution of air travel,

potential launches of new types of aircraft

and engines, and impact on our sites.

Our strategy is heavily influenced by

the risks and opportunities we have

identified, and consideration of these

are incorporated into our business and

financial planning processes. Innovation

is at the heart of everything we do,

and enabling a sustainable future is a

core element of our purpose, driving

our long-term strategy. Recognising

the opportunity in supporting our end

markets through the carbon transition,

in 2020 we committed that at least two-

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Scenario Scenario summary Main risks Main opportunities Impact Mitigation

~1.5-2 degree

warming

The global economy

de-carbonises

largely in line with

the commitments

made under the Paris

Agreement.

Primarily transition risks:

• Market – short-medium-

term reductionin

demand forflying as

consumer priorities

evolve, prior to

technological change

enabling low-carbon

commercial flight.

• Regulatory – reduced

margin due to

internalisation of carbon

cost through e.g.

carbontaxes.

Accelerated transition

to Net Zero in energy

and aviation stimulates

greater demand for

Meggitt’s sustainability-

focused and

low-carbon enabling

technology.

We’ve considered a

wide range of demand

and supply shocks,

including risk related

to climate change in

our overall viability

assessment. More

details can be found

on pages 55-57.

Full economic

modelling of balance

of risk and opportunity

in this scenario is

under review.

Market – Investment

targets for low-carbon

technologies to enable

systemic carbon

transition enable

continued growth

(seepage 84).

Regulatory – Progressive

investment in permanent

abatement to achieve

science-based targets to

minimise regulatory risk.

~3-4 degree

warming

The global economy

does not make

sufficient progress on

reducing emissions

to limit the average

temperature rise to

<2 degree over pre-

industrial levels.

Primarily physical risks:

• Disruption of global

supply chains.

• Increased severe

weather events

disrupting our

manufacturing facilities.

• Reduction in demand

forflying driven by

economic disruption.

Although, in this

scenario air travel

may continue to

grow, we do not see

opportunities related

specifically to climate

change.

We conduct physical

risk assessments of our

sites’ vulnerability to

natural events.

Full economic

modelling of balance

of risk and opportunity

in this scenario is

under review.

Work with insurers to

continually update

specific site risk and

mitigation measures.

Increased focus on

resilience in supply

chainstrategy.

thirds of our Research & Technology

investment would be into sustainable

technologies, outlined in more detail

on page 84. We work closely with our

customers to develop the next generation

of lighter, more efficient systems and

components, as well as the breakthrough

technology needed to reach Net Zero.

Our strategic planning process for

our operating businesses ensures that

climate-related risks and opportunities are

considered and incorporated in individual

business unit strategy. In addition, we

include material risks and opportunities,

including those related to climate, into

our investment cases.

We also understand the important

contribution of our own operations – we

have reduced net Scope 1 and 2 emissions

by 50% since 2015

, and in 2021 committed

to setting updated, science-based targets

in line with the 1.5 degree pathway of the

Paris Agreement. Our abatement plan

will also contribute to our customers’ and

suppliers’ Scope 3 reduction targets, and

we constantly look for opportunities to

collaborate to support the more efficient

decarbonisation of the full value chain (e.g.

through our membership of the International

Aerospace Environmental Group).

As part of our sustainability strategy,

in 2022 we will work to further embed

our climate impact into key business

decision-making processes – developing

common and consistent methodologies

for management to assess and quantify

environmental impact, and ensure that

decisions are consistent with our science-

based reduction targets.

Resilience of our strategy

In assessing scenarios affecting the

long-term viability of the Group, climate

change was considered as a potential

driver of both demand and supply

sideshocks.

In understanding how our business may

be impacted by climate-related risks and

opportunities based on our strategy,

we consider two high level scenarios

emerging by 2030, outlined below:

• 1.5-2 degrees

– In this scenario, the global response to

the threat of climate change is timely

and effective, and succeeds in limiting

global average temperatures to 1.5-2

degrees over pre-industrial levels.

The global business environment

is characterised by coordinated

government policy and regulation such

as carbon taxes, as well as consumer

behaviour favouring low-carbon

products and services. With regard

to our end markets – in civil aviation,

demand growth is dampened until

technological change enables low-

carbon commercial flight and growth

can re-start, and the energy market

accelerates its transition towards large-

scale renewables and away from fossil

fuel generation.

• 3-4 degree pathway

– In this scenario, there is less

coordinated and concerted effort,

change is slower and more piecemeal,

emissions remain at or close to 2021

levels and the world starts to feel

ever more effects of climate change

through the 2020s. The temperature

continues to climb on the trajectory

to hit 4 degrees, leading to significant

disruption in societies, economies and

supply chains across the world. In this

scenario, there is both demand and

supply side impact as the physical

manifestations of climate change

emerge in the shape of extreme

weather events, and biodiversity loss

and desertification leading to food

system disruption and mass migration.

Both scenarios present risk (and in some

cases opportunity) to our business, but

each has a greater or lesser degree of

transition and physical risks as outlined in

the table below (with linked mitigation)

1 Relative to revenue.

Taskforce on Climate-related

Financial Disclosures (TCFD)

continued

Meggitt PLC Annual Report and Accounts 2021

To further understand the physical risk

that climate change presents to our

business, we have undertaken a high

level assessment of the impact of natural

hazards, including those made more likely

by climate change (flood, wildfire and

wind storm).

A specialist third party analysed Meggitt’s

key manufacturing sites, utilising

desktop modelling for each location,

considering a variety of hazard zones. The

geographic concentration of sites within

the portfolio was mapped to understand

risk clusters. The number of high and

extreme risk assets within the portfolio

was identified, along with the peril types

driving exposure. A report was then

produced analysing which portfolios and

countries are most exposed to each peril,

determining key drivers, and aggregating

the information to understand where

resilience resources should be targeted.

We intend to conduct further risk analysis

in 2022, aligned with climate change

scenarios, to greater understand the

physical risks to the business prevalent in

the 3-4 degree warming scenario.

In summary, through our risk and

opportunity management process

and the mitigating actions we are

undertaking, we believe we are resilient

to the majority of risks presented by

climate change currently assessed, and

well positioned to take advantage of

the opportunities deriving from the Net

Zerotransition.

During 2022 we intend to further develop

our risk and opportunity assessment

framework, and continually review

mitigating actions based on scenario

modelling and analysis.

3) Risk Management

The Group maintains a robust risk

management framework based on ISO

31000, and includes a formal process for

identifying, assessing and responding

to risk, including climate-related risk.

Our risk management processes are

detailed on page 48, and includes

a series of Group-wide control and

actions to mitigate principal risks to

our business. Our published principal

risks have included a specific risk for

climate change since 2020 (consolidating

previous climate-related risks previously

incorporated into other risks) along with

potential impact and mitigation.

In addition, we model both demand

and supply side shocks to our business

in order to test ongoing viability, and

risk related to climate change is a

specificconsideration.

4) Metrics & Targets

We have a number of metrics and targets

which allow us to measure and reduce our

impact on the environment, summarised

on page 82. For our carbon emissions

specifically, we track Gross and Net

Scope 1 and 2 emissions (reported in line

with the Greenhouse Gas protocol), which

are measured by site and communicated

quarterly for Board and management

level reporting and management

actionpurposes.

Our existing Greenhouse Gas reduction

target is to reduce Scope 1 and 2

emissions, normalised for revenue, by

50% by 2025 (with a 2015 base year). We

are on track to achieve this reduction

early, and so have committed to update

this target by 2023, including a Scope 3

measure, in line with the requirements of

the Science Based Targets initiative (SBTi)

for the 1.5 degree pathway.

Throughout 2021 and for 2022 Meggitt

has and will continue to put in place

appropriate plan and incentives for

the businesses to invest in reducing

ourimpact by:

• Setting a clear direction by committing

to setting science-based targets,

illustrating the methodology and the

data throughout the business and

inreporting;

• Cascading site level in-year

environmental targets through our

strategy deployment process;

• Incorporating Scope 1 and 2 reduction

measures into our LTIP measure;

• Implementing an internal carbon

price to ensure cost of climate impact

is embedded in business decisions

– e.g. capital expenditure within our

facilities;and

• Laying out a roadmap to substitute

fossil fuel-fired processes and

facilities, including long-term capital

allocationplanning.

We have conducted initial screening

of our Scope 3 inventory to identify

the most material categories, and

are working to develop a consistent

calculation methodology in line with the

Greenhouse Gas Protocol. In calculating

our full Scope 3 inventory we will utilise

voluntary methodologies, tools and

standards appropriate to the aerospace,

defence and energy markets (such as

those developed by the International

Aerospace Environmental Group). In 2022

we will refine our initial Scope 3 baseline

and commence reporting of material

Scope 3 emissions by 2023, with a view

to progressively incorporating absolute

Scope 3 reduction measures into our

climate-related KPIs and targets as

outlined above, including those covered

by our forthcoming science-based

targets. These targets will be linked to

business decision-making processes as

outlined in Section 2 above.

To ensure we are positioned to meet

customers’ increasing demand for

enabling technologies for sustainable

aviation, we have set a target that two-

thirds of our Research & Technology

investment would be in sustainable

technologies (see page 84) – we continue

to track and actively manage this metric.

We constantly review our metrics and

targets to ensure that the data reported

is aligned with our strategy, targets, and

provides the information needed for

our business leaders to drive results. We

also review other relevant data, such as

market data and reports, as well as our

customers’ and suppliers’ commitments

and expectations, to provide an

indicator on the status of our climate

change-related risks and opportunities,

our stakeholder expectations in the

context of their own commitments, and

changes to our strategy and planning

processesrequired.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

ENABLING

A MORE

SUSTAINABLE

FUTURE

We are committed to working in partnership with

our employees, communities, customers, suppliers

and shareholders to protect our people and planet

and to develop technologies for the benefit

of future generations.

Corporate Responsibility

People Planet Technology

Meggitt PLC Annual Report and Accounts 2021

Our Corporate Responsibility and

Sustainability Policy supports our strategy

for a sustainable future by concentrating

on three core pillars: People, Planet

and Technology. Our strategy is tied to

four of the United Nations Sustainable

Development Goals, and allows us to

strengthen our relationships with all of

our stakeholder groups.

2021 saw Meggitt expand even further

the role of corporate responsibility

across the Group. Our work on our

strategic portfolio, our investment in

differentiated technologies, alongside

our commitment to manufacturing

efficiencies and our high performance

culture, values, and diversity and

inclusion all contribute to the sustainable

development of our business and is the

key to our continued long-term success.

Delivering on

our commitments

Focusing on our People, our Planet and our Technology

as the framework to enable a more sustainable future

and deliver on our commitments to our stakeholders.

Technology

To support the evolving needs of our

global customers we will continue to

invest in innovative new technologies

to enable sustainable aviation.

Read more on page 72

Our sustainability pillars

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Corporate Responsibility

continued

01 Strategy

and Approach

Our approach to Corporate

Responsibility and

Sustainability is a vital

thread across the whole

business which is integrated

into our strategy and

priorities. As we venture

into the future with all

our stakeholders we are

developing a business that

is innovative and conscious

of our responsibilities, from

reducing our emissions

and inequalities to driving

forward an ethical culture

and supply chain. We

continue to develop our

approach to sustainability

and reporting mechanisms

whilst understanding our

opportunities through our

sustainability framework

of People, Planet

andTechnology.

02 Corporate Responsibility

& Sustainability Policy

• Addresses our key stakeholders:

employees, customers, suppliers,

shareholders and the wider

community;

• upholding sound corporate

governance principles and applying

the UK Corporate Governance Code;

• supporting the Ten Principles of the

United Nations Global Compact,

relating to human rights, labour, the

environment and anti-corruption;

• upholding our employees’

human rights;

• encouraging dialogue with

employees through engagement

and our Speak Up Line;

• building a more diverse and inclusive

Meggitt, including meeting reporting

requirements such as gender pay

gap and gender ratios for executives

and the Board;

• minimising the environmental

impact of products and processes

and maintaining internationally

accredited environmental

management systems standard

ISO 14001;

• conducting business relationships

ethically and responsibly;

• complying with anti-slavery and

human-trafficking legislation;

• working with our suppliers to

build a sustainable and resilient

supplychain;

• acting as a responsible supplier and

encouraging all our counterparties

to do the same; and

• supporting our local communities.

03 Our focus areas and stakeholders

People

Health & Safety

Diversity &

Inclusion

Technology

Reducing

aerospace emissions

Supporting green

energy

EmployeesShareholders

Customers

& suppliers

Ethics and

business conduct

Anti-bribery

Speaking up

Planet

Using low-carbon

energy

Reducing our

waste

Local

communities

Stakeholders

Meggitt PLC Annual Report and Accounts 2021

04 Action

For our stakeholders

this means:

• committing to invest over two-

thirds of our innovation budget on

technologies for sustainable aviation

and energy;

• continuing to improve the

environmental sustainability and

resilience of our global sites;

• complying with relevant national

laws and regulations and

reportingrequirements;

• providing a supportive, rewarding

and safe working environment;

• embedding the employee

recognition scheme, “Extraordinary

People” into the way we work;

• delivering training for all employees

on our Code of Conduct, health

and safety, anti-harassment and

other areas;

• continuing to develop our approach

to employee communications and

improving our collaboration tools;

• maintaining modern, safe and

efficient operational practices;

• contributing to the social and

economic enrichment of local

communities, focusing particularly

on activities related to STEM,

and the work of our Employee

Resource Groups;

• having effective risk identification

and mitigation policies and

procedures across all areas

of the business;

• removing all sales agents from

our business and implementing a

continuous improvement plan for

all intermediaries;

• conducting audits and risk assurance

reviews in key compliance areas; and

• adopting robust internal and external

reporting and controls, and ensuring

financial probity.

05 Governance and Compliance

Ultimately, the Board

is responsible for the

implementation and

monitoring of our

Corporate Responsibility

and Sustainability

Policy (CR&S Policy).

Ongoing monitoring of corporate

responsibility (CR) activities has

been delegated by the Board to the

Corporate Responsibility Committee

(CR Committee). The CR Committee

maintains oversight of ethics and

business conduct, sustainability,

charitable and community activities.

The CR Committee also oversees the

Board’s approach to implementing

sections of the UK Corporate

Governance Code 2018 (the 2018

Code) and the UK Companies Act 2006

relevant to stakeholder engagement.

Nancy Gioia, the Chair of the CR

Committee also performs the role of

Non-Executive Director responsible for

Employee Engagement. The role and

activities undertaken by Nancy in 2021

are outlined on page 92.

In 2021, the Board of Directors

continued to receive updates on

diversity and inclusion activities across

the Group, including the significant

progress in 2021 with our Employee

Resource Groups and the Meggitt

Inclusion Week held in September.

Health and safety reporting is also

overseen directly by the Board

with regular reports from the Chief

Executive, and in 2021 the Board

reviewed current health, safety and

environmental performance with the VP

Health, Safety and Environment and the

Group Director of Operations.

Group support is provided to ensure

we fulfil the requirements outlined in

our CR&S Policy, and our divisional

presidents, product group leaders

and site directors take responsibility

for implementing Group policies

and procedures locally. Day-to-day

responsibilities of the Board and the

Chief Executive for overseeing the

CR&S Policy in 2021 were delegated

as follows:

• the Group Operations Director

had functional responsibility for

environment and sustainability and

health and safety, led by our Group

Director, Sustainability and VP Health,

Safety and Environment;

• the Group HR Director led initiatives

focused on culture, diversity, inclusion

and employee engagement; and

• the Group Company Secretary had

functional responsibility for ethics

and business conduct and charity and

community matters, working closely

with our Group General Counsel

& Director, Corporate Affairs, and

Group HR Director.

In 2021, health and safety (total

recordable incident rate) was a key

strategic non-financial KPI (see page

28). In 2021, we introduced carbon

emissions as another non-financial

KPI recognising the key strategic

importance of this area. Data in other

key areas, such as employees and other

environmental data are continually

monitored and assessed and our Group

progress is reported in this section. Our

non-financial information statement as

required by Sections 414CA and 414CB

of the Companies Act 2006 is set out on

page 88.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Corporate Responsibility

continued

Environmental, Social and

Governance (ESG) reporting

and guidance

During 2021, Meggitt built on the2020

review of environmental, social and

governance reporting, and further

embedded the sustainability framework

of “Enabling our sustainable future”

through the three pillars of People,

Planetand Technology.

This framework captures our commitment

to drive our business to be more sustainable.

Our framework covers the reporting

requirements under the Taskforce on

Climate-related Financial Disclosures (see

page 58) and is also linked to the United

Nations Sustainable DevelopmentGoals.

United Nations Sustainable

Development Goals

After aligning to four United Nations

Sustainable Development Goals in 2020

which integrate into the overall Meggitt

strategy, Meggitt has continued to develop

its corporate responsibility approach

(see pages 66 and 67). During 2021,

thefollowing progress has beenmade:

UN Sustainable

Development Goal

Our approach Our commitment What we

did in 2021

9 Industry, innovation

and infrastructure

Inclusive and sustainable

industrialisation, together with

innovation and infrastructure,

can unleash dynamic and

competitive economic forces

that generate employment

and income. They play a

key role in introducing and

promoting new technologies,

facilitating international trade

and enabling the efficient use

of resources.

Meggitt can contribute to this

goal by encouraging innovation

and continuing our commitment

to research and development

on sustainable technologies for

aviation and energy.

See our pillars on Planet

and Technology.

• Investing two-thirds of our Applied Research

& Technology spend in technologies and

products needed for sustainable aviation

andlow-carbon power generation;

• Membership of the UK Government’s

JetZero Council which is a partnership

between industry and Government in the

UKto bring together ministers and chief

executive officer-level stakeholders to

drivethe ambitious delivery of new

technologies and innovative ways to

cutaviation emissions;and

• Working with established and new

companies developing innovative low-

carbon solutions.

• See technology

case studies

throughout;

• Footprint

reduction;

• Reduced

emissions;

• Utilising Employee

Resource Groups

(ERGs) across the

business; and

• Joining the UN’s

Race to Zero and

committing to

setting targets

under the SBTi

framework.

UN Sustainability

Development Goal

Our approach Our commitment What we

did in 2021

10 Reduced

inequalities

Reducing inequalities and

ensuring no one is left

behind are integral to

achieving the Sustainable

Development Goals.

Meggitt can contribute to this goal

by empowering and promoting

the social, economic and political

inclusion of all, irrespective of

age, sex, disability, race, ethnicity,

origin, religion or economic or

other status.

See our pillar on People.

• Continuing commitment to our values and

our High Performance Culture (HPC) journey;

• Creating and supporting Employee Resource

Groups which sponsor, promote and

challenge our approach to diversity and

inclusion across Meggitt;

• Increased emphasis on our Speak Up culture;

• Commitment to Gender Pay Gap and other

diversity related data reporting; and

• Increased community-based charity support

connected to STEM and our Employee

Resource Groups.

• Inclusion Week

– multiple ERG

activities;

• Joined 10,000

black interns

programme;

• Launched

Community Heroes

programme

enabling

employees to

support local

goodcauses.

Meggitt PLC Annual Report and Accounts 2021

UN Sustainability

Development Goal

Our approach Our commitment What we

did in 2021

16 Peace, justice

and strong

institutions

Promote peaceful and

inclusive societies for

sustainable development.

Meggitt can contribute to this

goalby:

taking action to prevent modern

slavery within Meggitt and our

supply chain;

implementing policies, processes

and awareness training to prevent

bribery and corruption; and

ensuring effective and

accountablereporting.

See our section on Corporate

compliance and business conduct.

• Increased transparent reporting in the

environmental, social and governance space;

• Increased emphasis on creating a sound

Anti-Bribery & Corruption compliance

programme through our annual continuous

improvement plan;

• Driving ethical business conduct through

emphasis on our Speak Up culture;

• Creation and support for our Employee

Resource Groups;

• Continuing commitment to our High

Performance Culture journey; and

• All-employee yearly compliance training

in key areas including our Code of Conduct,

ethical business practices and health

and safety.

• Revised Financial

Crime policy;

• Revised Anti-

Corruption and

Ethical Business

Conduct Policy;

• Risk Assurance

reviews;

• Improved data

analysis for

ethics cases; and

• Launched ethics

investigation

standard process

and training.

UN Sustainability

Development Goal

Our approach Our commitment What we

did in 2021

12 Responsible

consumption and

production

Worldwide consumption

and production – a driving

force of the global economy

– rest on the use of the natural

environment and resources

in a way that continues to

have destructive impacts

on the planet.

Meggitt can contribute to this goal

by concentrating on:

achieving the environmentally

sound management of chemicals

and all wastes throughout their

lifecycle and significantly reducing

their release into air, water and soil

in order to minimise their adverse

impacts on human health and

theenvironment;

substantially reducing waste

generation through prevention,

reduction, recycling and reuse; and

adopting sustainable practices

and to integrate sustainability

information into our

reportingcycle.

See our pillar on Planet.

Reducing greenhouse gas emissions

and waste to landfill, which are being

managed by opportunities to maximise

operationalefficiencies:

• Setting science-based targets for GHG

reduction in line with 1.5 deg pathway;

• Sourcing renewable energy;

• Harmonising more sustainable practices

across our sites including waste recycling,

minimising plastics, electric car charging;

• Sites maintaining ISO 14001 certification;

• Site-level environmental performance

monitoring and reporting against targets;

• increased external reporting in the

environmental, social and governance space

including the Taskforce on Climate-related

Financial Disclosures.

• GHG reductions;

• Purchased

renewable energy;

• Reviewing waste

goals;

• Environmental

targets for each

site;

• Commenced TCFD

reporting; and

• Joined the UN’s

Race to Zero and

committing to

setting targets

under the SBTi

framework.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Corporate Responsibility

continued

Our behaviours with each other, our customers,

our suppliers and in our communities must be

exemplary and we must accept nothing less.

Corporate Responsibility

Committee

As Chair of the Corporate Responsibility

Committee, Nancy Gioia’s role is to

ensure that we oversee the Group’s

activities in the areas of ethics and

business conduct, environment and

charity and community.

Our values and commitments are set out

in our CR&S Policy to ensure it reflects

our strategic goal to conduct business

in a sustainable, long-term manner

while demonstrating a high degree of

social responsibility. Our approach and

performance in this area is monitored

closely by the CR Committee and

oversight is provided by the Board.

The CR Committee covers ethics and

business conduct, environmental

performance, charity and community

in detail. It also ensures that the Board

meets its responsibilities under the 2018

Code and UK Companies Act 2006 on

stakeholder engagement, and other

reportingrequirements.

The challenges created by the COVID-19

pandemic continued to bring all matters

related to corporate responsibility and

sustainability to the fore in 2021. During

2021, we received detailed progress

reports on environmental performance,

sustainability and ethics and business

conduct including trend analysis, detailed

Speak Up Line case reports, and updates

on all-employee training. We also

received reports on supplier engagement

and discussed feedback on employee

engagement activities. We also discussed

specifically the impact of COVID-19 on

our stakeholder groups to ensure our

approach was balanced.

Committee membership and

attendance in 2021

Mrs N L Gioia

(Committee Chairman)

Mr A Wood

Mrs L S Burdett

Mr G S Berruyer

Mr A Garard

x Scheduled meetings

Teamwork

In 2021 new training on our ethics

investigations process was rolled out

to relevant employees from different

functions including in Health & Safety,

Quality, Commercial, Legal and Human

Resources in order to standardise and

provide a consistent standard to all

ethics investigations. Best practice

was shared and a single approach was

adopted enabling all investigators to

work as a team globally.

Meggitt PLC Annual Report and Accounts 2021

2021 in numbers

0.9

ethics cases per 100

employees globally

+31,000

hours of training

delivered to all employees

trained ethics investigators

37%

reduction YoY in Scope 1 and 2

GHG emissions (market-based)

50%

of all energy consumed from

renewable sources

Customers

The Board discussed engagement

with customers at every meeting

during 2021. The Committee

determined that the regular

reports to the Board and customer

updates were appropriate and gave

the Board a good oversight and

understanding of customer views.

Our markets and key customer

activities are outlined in our Strategic

Report (page 24).

Suppliers

The Chief Procurement Officer

presented an update on the

implementation of our supply

chain strategy to the Board and

detailed written reports on supplier

engagement were provided direct

to the Committee in 2021. This

highlighted that Meggitt’s approach

to supply chain management is

evolving, with a targeted reduction

in the cost and complexity of our

supply chain, but a deeper level of

engagement with retained suppliers.

Employees

The Board reviewed reports from

executive management on employee

engagement and culture on a regular

basis. The Committee reviewed

the activities of the Non-Executive

Director for Employee Engagement

in detail. The results of the employee

engagement survey as well as the

whistleblowing hotline and ethics

programme were also reviewed by

the Board and CR Committee (see

pages 74 and 87).

• A focus on the impact of COVID-19 on

our stakeholder groups, particularly

in relation to actions taken by

management to control cost;

• Appointment of Group Director of

Sustainability to drive operational

improvements connected to

environmental sustainability across

theGroup;

• Expansion of the Ethics Management

Committee to provide direction on all

employee compliance training;

• Continuing to minimise sales agents in

our business;

• Refreshing our Financial Crime Policy

and also updating and consolidating

our Anti-Corruption and Ethical

Business Conduct policies;

• Improving data analysis in connection

with the independent Speak Up Line

to identify trends and shape training

requirements across the business;

• Launched our employee volunteering

programme “Community Heroes”

giving all employees time to volunteer

for worthy causes;

Shareholders

The Committee determined that

the regular reports to the Board

on shareholder engagement

during 2021, in addition to direct

engagement by the Chairman,

Executive Directors and Chair of

the Remuneration Committee

were appropriate and gave the

Board a good level of oversight

and understanding of shareholder

views. Our shareholder engagement

activities are described in more

detail on page 90.

• Implementing site-level key

performance indicators and targets

for environmental measures such as

energy and water consumption and

waste to landfill;

• Joined the United Nations Race to

Zero campaign – committing to reduce

absolute value chain emissions in line

with a trajectory compatible with a 1.5

degree Celsius warming scenario, and

reaching Net Zero before 2050;

• Joined the 10,000 Black interns

programme in the UK with anticipation

of hiring 13 interns from the programme;

• Continuing with the LeadX training

programme for high-potential leaders

across the Group and Spitfire Training

Programme for operations leaders;

• Grew the percentage of electricity

consumed from renewable sources

through a mix of on-site generation

and market-based measures; and

• Scope 2 emissions reporting to capture

both location-based and market-based

methodologies.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

PEOPLE

Meggitt continues to put our people first

through our values, our work towards a high

performing and inclusive and diverse culture,

as well as supporting our communities.

Corporate Responsibility

continued

Meggitt PLC Annual Report and Accounts 2021

EXCELLENCE

We enable the

extraordinary

at Meggitt.

We are good at what we do and

that’s why customers come back to

us. We are constantly working to

improve our processes and attention

to detail. As a result, we deliver

the most ambitious technologies,

products and services safely,

efficiently and cost-effectively to

ourcustomers.

INTEGRITY

At Meggitt we do the right

thing, in the right way

wherever we operate.

Our colleagues, customers and the

communities we are part of can

count on us to act with integrity,

honesty and respect. We form lasting

positive relationships built on open

communication, understanding,

fairness and impartiality. We conduct

ourselves with integrity and the

highest standards of ethical behaviour

across the business.

TEAMWORK

At Meggitt, we support

each other and recognise

outstanding contributions.

By working together, we bring

extraordinary technology to

our customers. We build great

relationships with all of our

stakeholders, providing the support

they need to succeed. We build highly

skilled teams passionate about what

we do and how we do it.

Living our values

and gain support for any culture-related

programmes.

High Performance

Culture (HPC)

68% of our total workforce have attended

unfreezing sessions (including 87% of

our leaders). Due to the challenges

we faced as a result of the COVID-19

pandemic, we were unable to support

the volume of in person training required

and therefore our goals to achieve higher

Our values and culture

To accelerate our progress towards

becoming a truly integrated global

business and cultivating a culture of high

performance, we focused our efforts on

employee and leadership development,

diversity and inclusion, employee

engagement, and recognition. Culture

forums were held across the organisation

on a bi-monthly basis. This forum is where

our site and product group leaders can

update progress on culture plans, share

ideas and best practices as well as reinforce

Our values reflect how we should work together and the behaviours that are

integral to our culture. Our work on culture continues to be a key part of our overall

Group strategy and supported by culture plans established in the business.

participation rates have been delayed

into 2022, however, in order to combat

these challenges some sessions have

been conducted virtually. Our target is to

ensure over 90% of our employees have

attended unfreezing sessions by the end

of 2022. We also launched content across

the workforce to reinforce HPC on a

daily basis in DLA meetings and through

intranet articles and videos.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Corporate Responsibility

continued

Diversity and Inclusion

Our Diversity and Inclusion Policy sets

out our commitments at Board-level to

making Meggitt a diverse and inclusive

organisation. The Policy reinforces that

we employ a diverse workforce that

reflects the diverse communities within

which we operate and that we always

foster an inclusive culture where people

are valued, respected and supported.

The Board, executive management and

leaders across the Group recognise that a

diverse and inclusive workforce is critical

to running a sustainable and successful

business. To reinforce our commitment

to creating a diverse and inclusive

environment, we have created divisional-

level diversity plans, and established a

Group-wide Diversity & Inclusion Council.

During 2021 we saw substantial progress

in the number of employees engaged

with our Employee Resource Groups

(ERG), from 400 ambassadors to over

1,100. We held our annual Diversity

& Inclusion Week event with 18 sites

hosting events along with virtual sessions

focused on learning more about our

ERGs. Employee Resource Group leaders

were trained in advanced concepts

relating to diversity and inclusion.

ERGs took the lead on many activities

throughout the year to raise awareness,

educate, and support the cultivation of

an environment where employees can

be at their best, including celebrating

International Women’s Day and Women

in Engineering Day, Pride Week and

Black History month in the US and UK.

Employees also took part in the Steps

for Vet’s Challenge, Remembrance Day

Celebrations and joined talks on Latino

History. Additionally, in support of Suicide

prevention week, our SHINE ERG hosted

“Subject Matter Expert” talks at multiple

sites and provided Mental Health First

Responders training. We also launched

Community Heroes, our community

and charity outreach programme which

enables employees to volunteer for local

good causes in their community.

Our UK gender pay gap reduced from

9.3% to 5.7% in 2021, with progress driven

by several senior executive changes

and our increased focus on diversity

and inclusion. Our full UK gender pay

gap statement will be available on our

website by April 2022. We are committed

to building a more diverse and inclusive

Meggitt and meeting reporting

requirements including gender pay gap

reporting and the FTSE Women Leaders

Review, as well as equal pay and fostering

a fair and transparent environment where

employees are rewarded based on their

position, competencies, performance

andcontribution.

Meggitt does not discriminate on the

grounds of age, colour, disability, ethnic

or national origin, gender, gender

expression, gender identity, marital

status, pregnancy, race, religion or belief,

or sexual orientation and new hires are

offered positions based on merit, taking

account of their specific skills, experience

and knowledge. All individuals are

supported during their employment

through training, career development

and awareness of diversity and inclusion

groups are promoted to all employees

through our Employee Resource Groups.

Employee recognition

A culture of appreciation and recognition is

an important building block for our values.

Our Extraordinary People programme is

a way of recognising the special efforts

and commitment of individual colleagues

and teams across the whole of Meggitt.

Open to all, this programme, together with

recognition schemes already running at

local sites, is motivational and rewarding,

helping to create a culture of customer

service and appreciation. Nominations

are accepted for individuals and teams in

seven categories: Operational Excellence,

Innovation, Teamwork, Safety, Sustainability,

Customer Service and Community.

The level of uptake of this recognition

scheme has been very well received

by staff, having received over 4,000

nominations in 2021.

Employee engagement

and feedback

We recognise that our future success

depends upon our shared sense of

purpose and it is important that we find

out from our employees what they think

about Meggitt and how they feel about

the work that they do.

Our work on culture, particularly

throughout a challenging period for

the Group and for our people over the

last two years, has been reflected in our

results for 2021 which show engagement

Group Board

56%

44%

Senior managers

82%

18%

Wider employees

6,490

70%

2,790

30%

* includes members of the Executive Committee, direct reports of the Executive Committee and,

as required by s414C of the Companies Act 2006, subsidiary directors.

Meggitt PLC Annual Report and Accounts 2021

levels rising 2% from 2020 (and 4%

above the global high performing

benchmark). Most improved areas are

ethical behaviours, team-working and

cooperation, challenging the status

quo and ongoing feedback. The area

most needing to improve is reducing

bureaucracy and efficiency of processes,

which is an area of ongoing focus.

Training and development

We invest time and energy into ensuring

we attract, develop and retain the best

talent to ensure people succeed based

on their skills, behaviours, knowledge and

experience. We have had great success

in the two programmes we launched in

2020, LeadX for high-potential leaders

completed two cohorts and launched two

additional cohorts in 2021.

Spitfire for operations leaders continued

with great success in 2021. Cohort 1 and

2 both graduated from the programme,

completing ten “Action Learning

Projects”, each with significant cost

savings to the business. Our current

Cohort 3 includes 26 participants across

the US and Mexico, with eight actively

progressing Action Learning Projects.

Several of our sites also launched

operator certification programmes

to upskill employees while improving

operational performance.

We continue to develop employees’

leadership capabilities and during the

year implemented formal programmes

to raise capability in functional teams,

including finance, engineering,

information technology, procurement,

project and programme management.

We also continue to build on our

graduate and apprenticeship

programmes with 41 graduates in the

programme and 61 apprentices. We

were also the first aerospace company

to participate in the 10,000 Black interns

programme in the UK, and we expect to

hire 13 new interns in 2022 as a result.

The market for talent acquisition

and labour shortages has presented

challenges in several of the regions

in which we operate. Despite the

challenges, our talent acquisition team

worked closely with our leaders to ensure

we could secure talent at pace.

In our efforts to improve processes related

to people, we created shared service teams

in the UK and US to manage employee

transactions more efficiently and enabling

better use of our technology for employee

self-service. AskHR and our intranet

supports employees and managers on

items related to HR policy and processes.

Communities and charities

The Sponsorship & Charitable Giving

Policy contains guidance about the

types of organisations (charitable and

non-charitable) that we will consider

funding, with criteria that are aligned to

our Values. It is the responsibility of our

Group Director of Ethics and Corporate

Responsibility to ensure the policy is

followed across the Group including

providing guidance on charitable giving,

and communicating this policy across

thebusiness.

Each site is ultimately responsible for

agreeing and administering its own

budget for charitable donations and

sponsorships to ensure they have a

positive impact on the local community

that they support and in which their

business operates. In 2021 Meggitt

donated to a number of charities aligned

to the goals set out by our Employee

Resource Groups and foodbanks in

the UK and US which are linked to our

local communities. Our plan for work

with charities in 2022 will continue to

Headcount by division

Number of employees

and contractors

Airframe Systems

4,406

Engine Systems

2,249

Energy & Equipment

1,215

Services & Support

551

Central

849

Legacy Businesses

–

Total

9,270

Headcount by region

Number of employees

and contractors

2,327

Rest of Europe

940

USA

4,644

Rest of World

1,359

Total

9,270

Headcount by length of service

Number of employees

and contractors

Less than 5 years

4,558

Between 5 and 10 years

1,640

Between 10 and 15 years

1,115

Between 15 and 20 years

749

Between 20 and 25 years

580

Over 25 years

628

Total

9,270

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

be aligned to our sites and their local

communities and the work our Employee

Resource Groups do.

In addition to charitable giving, Meggitt

launched a new volunteering scheme

called Community Heroes. In the spirit

of community and sustainability Meggitt

wants to celebrate our extraordinary

people who already contribute to their

local communities and charities and

give them an additional day’s paid leave

to spend within their communities, or

give others the opportunity to give back

through various initiatives run by our

sites and Employee Resource Groups.

Our colleagues have gone above and

beyond throughout the pandemic and

Meggitt will continue to support and

encourage this through our Community

Heroesprogramme.

Disability

Meggitt’s policy in relation to the

employment of disabled persons is to

give full consideration to job applications

received from disabled persons.

Candidates are selected and appointed

on the basis of their ability to perform the

duties of the job.

Where appropriate, special training is

given to facilitate engagement of the

disabled and modifications to the job

are considered. Where an employee

becomes disabled whilst in our

employment and is unable to perform

their existing role, arrangements will

be made where possible for retraining

in order that a different job may

beperformed.

Health & Safety

Our Health & Safety Policy sets outs

responsibilities at all levels of our

Company towards health and safety and

the prevention of injury to our employees,

visitors, contractors, customers and

others who may be affected by

ouractivities.

At Meggitt, we have continuously placed

the health and safety of our employees,

contractors, customers and visitors at

the forefront of everything we do. In

2021, we continued to take steps to

ensure that our workers were protected

against COVID-19 and strongly promoted

vaccinations for employees. We

continued to implement the COVID-19

pandemic risk mitigation measures such

as social distancing and mandatory

mask-wearing in accordance with national

and local government requirements,

and required sites to conduct COVID-19

pandemic risk assessments on a

frequent basis taking into account local

transmission rates, changes in national

and local guidelines and requirements

and information provided by applicable

health authorities. All of these actions

allowed our businesses to operate in the

COVID-19 pandemic as secure and safe

environments throughout 2021.

We continued to conduct daily safety

reviews and training through our HPS

DLA process by presenting health

and safety topics for discussion at the

beginning of every day for employees

at all levels of the Company. These

discussions also included safety stand

downs where we shared lessons learned

across all of our sites from incidents that

occurred. We also resumed our external

third-party HSE auditing programme

which was paused in 2020 due to the

COVID-19 pandemic and which ensures

our sites are maintaining compliance with

applicable health and safety regulations.

In 2021, we integrated health and

safety awareness training in our Spitfire

training programme, which included

detailed health and safety training for

members of our executive management

teams across the Group. This training

included an awareness training of health

and safety compliance obligations that

are applicable to our sites as well as a

behavioural based safety training which

focused on how employees’ individual

behaviours and actions can contribute to

incidents that occur in the workplace.

We continue to measure site health and

safety performance through our Safety

Star Programme. One key change that

was made to this Programme in 2021

was to incorporate our Safety Leadership

Index (SLI) as a mandatory metric that

all sites had to achieve in order to

achieve Platinum Star status. The SLI

incorporates the number of safety walks

that our site Senior Leadership teams

conduct on our production floors, the

number of Safety Stand Downs (site-

wide discussions on a specific subject

regarding health and safety) that sites

conduct, and the number of days in

which the sites’ safety champions are

conducting “safe observations” which

are dedicated to focusing on health and

safety behaviours and actions as opposed

to their normal production job. In 2021,

61% of sites achieved Platinum Star status

in our Safety Star Programme, which

represents the highest level of health

and safety excellence achievable within

theCompany.

In 2021, we continued to reduce our

Total Recordable Incident Rate (TRIR).

Our TRIR improved in 2021 to 0.6 (0.7

in 2020), representing a 0.9% reduction

year on year as a result of a decade of

continuous improvement activities. Our

lost time incident rate (LTIR) was at 0.24

which represents an excellent indicator

of preventing serious injuries within

theCompany.

We are targeting all of our sites to

obtain certification to ISO 45001 for

their occupational health and safety

management system by end of 2022.

In 2021, 60% of sites have achieved this

target. This will ensure that all of our

sites are maintaining a health and safety

management system that provides the

maximum achievable protection for all of

our employees.

Corporate Responsibility

continued

Meggitt PLC Annual Report and Accounts 2021

2021 saw Meggitt participate in the first year of

the 10,000 Black Interns programme which aims

to sustainably tackle Black underrepresentation

in the UK’s professional industries.

The scheme plans to cumulatively

hire 10,000 Black interns over a

five-year period to help shape career

trajectories and broaden horizons

through work experience. Companies

from numerous sectors pledged one

or more paid summer internship

positions to the scheme, to which

Black students who are studying at,

or recently graduated from a UK

university can apply. With over 700

companies participating in this first

year, Meggitt was the first aerospace

company of the seven participants in

the Engineering & Automotive sector.

All applicants are provided

with a wide range of training

opportunities, such as CV writing

and interview preparation as part

of the development aspect of the

programme, providing knowledge

that candidates will take with them

into their future careers.

In December, assessment centres

for the 2022 summer intake were

held at Ansty Park, and from a pool

of high calibre candidates, 13 roles

were offered in Engineering & Supply

Chain over 4 UK sites: Ansty Park,

Fareham, Loughborough and Poole.

The successful applicants ranged

from final year PhD candidates to

students at the beginning of their

undergraduate degree.

This programme which reinforces our

commitment to welcome Black talent

to the engineering industry, was

brought forward within Meggitt by

BE@M, an employee-led group which

exists to highlight and advocate for

people of colour within Meggitt.

10,000 Black Interns.

Roles were offered

in Engineering and

Supply Chain

UK sites participated:

Ansty Park, Fareham,

Loughborough and Poole

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

PLANET

Corporate Responsibility

continued

We take our responsibility towards the

environment seriously, setting ever higher

ambitions to reduce our impact, and ensuring we

have achievable plans that we will deliver upon.

Meggitt PLC Annual Report and Accounts 2021

Our commitment

At Meggitt we recognise that we have

an important role in preserving and

sustaining the finite resources and

natural capital of our planet for future

generations. The starting point for our

contribution to this critical imperative

for the planet is the impact of our own

operations, value chain and products.

In 2021 we renewed our focus on two

specific environmental areas – our

greenhouse gas emissions and our

use of material across our value chain

– which together provide our greatest

opportunity to reduce our impact on the

environment, and accelerate towards our

sustainable future.

Our Corporate Responsibility &

Sustainability (CR&S) Policy and

our Environmental Policy set out

our commitments to incorporate

environmental considerations,

sustainability and responsibility in all

aspects of our business by including

environmental protection, resource

conservation and waste reduction in

our strategic planning. Our policies

require all of our sites to comply

with relevant legislation, promote

environmental stewardship and achieve

recognised ISO14001 certification

of their environmental management

systems, and commits us to work with our

suppliers to minimise any adverse impact

of their products and operations on

theenvironment.

During 2021, Meggitt appointed its

first dedicated Group Director of

Sustainability to review the environmental

operational performance across the

Group, define our ambition and create

the programme to achieve our targets.

The position has been designed to work

with our health, safety and environmental

teams as well as other functional leaders

and in line with our sustainability, ESG

and corporate responsibility strategies. A

clear aim is to focus our innovation, which

is at the heart of what we do, to build a

sustainable business for the future, and

embed sustainability as a thread through

our whole business.

Greenhouse gas emissions

We recognise the responsibility that

we have to play an important role in

mitigating the most disruptive effects

of climate change on vulnerable

populations, by eliminating our net

greenhouse gas emissions across our

value chain in line with the goals of the

Paris Agreement. That’s why, in 2021,

we joined the United Nations Race to

Zero campaign – committing to reduce

absolute value chain emissions in line

with a trajectory compatible with a 1.5

degree warming scenario, and reaching

Net Zero before 2050.

We have committed, through the

Science Based Targets initiative (SBTi),

to setting science-based greenhouse

gas reduction targets. These will update

our existing target to reduce by 50% our

Scope 1 and 2 emissions (normalised for

revenue) by 2025 from a 2015 baseline,

and will incorporate Scope 3 emissions

for the first time. Our plan to achieve

these ambitious targets is prioritised

based on the materiality of our Scope

1, 2 and 3 emission categories, and the

important principle of focusing initially

on our own operations before expanding

progressively to encompass the

embedded carbon emissions elsewhere

in our value chain.

Our Planet, Our Home

We are gathering momentum towards a sustainable future, committing to

Net Zero across our value chain in line with a pathway that limits global

warming to 1.5 degrees Celsius and setting science-based targets to make

further meaningful reductions in our environmental impact in this decade.

Our approach

Our overall approach to meeting

our environmental commitments

was agreed in 2021 and is

summarised by the following

six points:

Set out a roadmap to reduce

materially our Scope 1 emissions

by progressively replacing Natural

Gas fired processes with low-

carbon alternatives.

Launch a project to reduce the

effect of the combustion of

effluent gas from our carbon

brake manufacturing process.

Increase our use of renewable

energy through a blend of on-site

renewable electricity generation,

and market-based mechanisms

such as 100% renewable contracts,

Power Purchase Agreements (PPAs)

and Renewable Energy Certificates.

Increase our energy efficiency

by putting in place measures to

improve consumption visibility

and management.

Better understand the carbon

emissions “embedded” in the

goods and services we purchase,

and work with our suppliers to set

and implement near-term science-

based reduction targets.

Progressively embed environmental

considerations into all our

business decisions, for example

through the use of an internal

“shadow“ carbon price.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Corporate Responsibility

continued

Performance

Overall, our electricity and natural

gas consumption fell by 8% and 15%

respectively (0% and 7% normalised

for revenue), reflecting primarily the

continued impact of the COVID-19

pandemic on our operations and the

consequent re-sizing of the business

since Q2 2020, and also continuing

energy efficiency programmes.

Scope 1 and Scope 2 emissions also fell

in absolute terms, driven, in addition

to continued lower levels of activity, by

the continued reduction in the carbon

intensity of the electricity grids in the

countries in which we operate. Our

growing on-site generation capacity also

contributed to gross Scope 2 reductions

– for example our solar roof at Ansty Park

generated 2GWh of renewable electricity

over the course of 2021, supplying 26%

of the site’s need over the course of the

year, and saving 440 tonnes of CO

Our site in Rockmart, US, completed a

major project in 2021 to replace two of

their large older boilers with five smaller

batch boilers which reduces natural gas

consumption when demands for steam

are low.

Our continued footprint consolidation

strategy has led to a smaller number of

larger more efficient sites. This activity has

also contributed to the reduction in our

GHG emissions.

For the first time, we report our Scope

2 emissions with both location-based

and market-based methodologies,

incorporating our long-standing contracts

for renewable energy in Switzerland

and Denmark, and the 100% renewable

contract in the UK which was introduced

in 2020. In the US we purchased

Renewable Energy Certificates (RECs)

equivalent to the non-renewable portion

of our consumption in Kentucky and

California, and have joined a community-

based solar PV project in the vicinity of

our Danville, Kentucky, facility. These

measures lead to a reduction of 50% in

our market-based Scope 2 emissions

when compared to the location-

basedfigure:

We are on track to meet our existing

GHG reduction target, of a 50% reduction

in Scope 1 and 2 emissions, normalised

for revenue, between 2015 and 2025.

The reduction to 2021 is 54% which is

already over the target threshold, albeit

driven in part by a reduction in volume

which will in some part reverse as the

world emerges from the pandemic. We

will replace this objective by 2023 with a

science-based target, in line with the 1.5

degree pathway, in order to continue our

GHG reduction trajectory through to 2030

and beyond.

With regard to our Scope 3 emissions,

we undertook a screening exercise

in 2021 to identify our most material

categories for more accurate baselining,

and incorporation into our science-

based targets. Our upstream supply

chain emissions will continue to be a

particular focus, and we have launched

projects to define and set near-term

science-based targets covering this

category, determining a meaningful and

actionable baseline, and set a strategy to

engage with suppliers and set a reduction

trajectory. We continue to work towards

making our initial Scope 3 emissions

disclosures for 2022.

Material use, waste

and recycling

In 2021 we renewed our focus on the

materials and consumables we utilise

over the lifecycle of our products.

Our target of reducing total waste to

landfill by 10% from 2016 levels expired

at the end of 2021. Although we did see

an improvement from 37% in 2016 to 32%

in 2021, we did not achieve the overall

target set.

We remain committed to eliminating

waste to landfill where technically

feasible, and learning the lessons

from previous initiatives. During 2022

a new target will be set renewing our

waste management targets based on

reviewing our waste streams in more

detail, in line with a hierarchical plan to

improve efficiency of material use across

ouroperations:

• Improve the waste management of our

existing waste streams – increasing the

recycling rate and setting site targets;

• Review how waste is generated

in our manufacturing operations

and look to reduce at source – e.g.

through use of re-usable packaging,

advanced machining and additive layer

manufacturing;

• Incorporate material re-usability into

our design processes, preserving the

value of the materials we use as far as

possible for re-use after de-commission

and disposal; and

• Maximise lifecycle utilisation of our

parts through our Services & Support

division – for example through “smart

scoping” in our Maintenance Repair

and Overhaul (MRO) processes to

extend the life of our parts and reduce

the need for replacement.

Meggitt PLC Annual Report and Accounts 2021

Some successes realised in 2021

include our Denmark site where the

site team identified an opportunity to

recycle a portion of a production water

wastestream.

Our Troy, US, site worked with their

vendors to identify many waste streams

that could be recycled instead of

landfilled. Our Irvine, US, site conducted

a waste audit involving a number of

site volunteers – to inspect general

waste streams, educate and improve

recyclingbehaviour.

Water usage

Overall our water usage has increased

by 11% (21% normalised for revenue)

between 2020 and 2021, and has also

increased by 20% since 2016, missing

our target of a 10% reduction between

2016 and 2021. The specific rise in 2021

was partially driven by the transition

to Ansty Park, with similar levels of

consumption seen at the legacy and new

sites as all were operating during the

transition period. This one-time effect is

expected to unwind in 2022; without this

one-off effect, the water consumption

15%

reduction YoY in Scope 1 & 2

emissions (location-based)

37%

reduction YoY in Scope 1 & 2

emissions (market-based)

54%

reduction in Scope 1 & 2 emissions

against 2015 baseline

Waste to landfill has decreased by 35% since 2016/percentage waste to landfill has reduced from 37% to 32%.

Water purchased (l)

per £1m revenue

2021

2020

019

018

2017

476

394

401

365

345

Waste to landfill as % total waste

2021

2020

019

018

2017

31.9%

34.6%

25.7%

37.7%

34.2%

Waste to landfill (haz vs. non-haz)

2021

2020

019

018

017

152 2,561

522 2,884

303

4,247

250 3,811

305 3,815

Non-hazardous waste to landfill

Hazardous waste to landfill

normalised for revenue would be largely

flat compared to 2020 and compared

to2016.

Unlike carbon emissions where a tonne

of GHG emitted anywhere has the same

effect, our impact on water supply is

highly dependent on the geographical

context. Learning the lessons from

previous water management targets,

our refreshed approach will concentrate

on regional regulations and reduction

targets in the areas of greatest water

scarcity and issue, to ensure tighter focus

on our areas of greatest impact.

Scope 1 & 2 GHG emissions

(location-based)

2021

2020

019

018

017

26,342

49,066

31,042 57,918

36,724 73,271

36,571 78,055

34,495

79,292

Scope 1 (tonnes CO

Scope 2 (tonnes CO

Scope 1 & 2 GHG emissions

(market-based)

2021

2020

019

018

017

26,342

28,668

31,042 57,918

36,724 73,271

36,571 78,055

34,495

79,292

Scope 1 (tonnes CO

Scope 2 (tonnes CO

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Corporate Responsibility

continued

Environmental metrics

(Table 1)

2021 Change 2020

Utilities

Purchased electricity – gWh 156 -8% 170

MWh per £m revenue 105 4% 101

Purchased natural gas – gWh 135 -15% 158

MWh per £m revenue 90 -4% 94

Greenhouse gas emissions (CO

e) (Scope 1 and 2, location-based reporting) – tonnes 75,408 -15% 88,959

Tonnes per £m revenue 50.6 -4% 52.8

Greenhouse gas emissions (CO

e) (Scope 1 and 2, market-based reporting

) – tonnes 55,010 -38% 88,959

Tonnes per £m revenue 36.9 -33% 52.8

Waste – tonnes 8,503 -14% 9,852

Tonnes per £m revenue 5.7 -2% 5.9

Water – cubic metres 708,786 11% 637,546

Cubic metres per £m revenue 476 26% 379

Targets (Table 2)

 Baseline year

Five year performance

period (financial years)

Target improvement over

performance period

Achieved

as at 31.12.2021

GHG emissions

1,2

–

relative to revenue 2015 To 31 December 2025 -50% -54%

Water consumption –

relative to revenue 2016 To 31 December 2021 -10% +20%

Waste to landfill – as a %

of total waste 2016 To 31 December 2021 -10% -5.4%

GHG emissions data

(Table 3)

2021 Tonnes of CO

e 2020 Tonnes of CO

Scope 1 – Combustion of fuel and operation of facilities 26,342 31,042

Scope 2

(market-based) – Electricity, heat, steam and cooling purchased for own use 28,668 57,917

Scope 2 (location-based) – Electricity, heat, steam and cooling purchased for own use 49,066 57,917

Total Scope 1 & Scope 2 (market-based) emissions 55,010 88,959

Intensity measurement:

Total Scope 1 and Scope 2 (market-based) emissions reported above, normalised to tonnes

per £m revenue 36.9 52.8

Proportion of emissions and energy usage for UK and offshore area sites (Table 4)

UK and offshore areas UK % of Group total

Electricity purchased (gWh) 37.3 24

Natural gas purchased (gWh) 44.4 33

Scope 1 and 2 (location-based) greenhouse gas emissions (CO

e, tonnes) 16,104 21

Proportion of Renewable Energy generated and purchased (Table 5)

2021

Total electricity consumed by all sites (gWh) 157

Renewable energy generated on-site (gWh) 2

Renewable energy purchased (gWh) 77

Percentage electricity from renewable sources 50%

1 Location-based Greenhouse gas emissions (GHG) are calculated using location-based conversion factors published in the 2020 and 2021 Guidelines to BEIS GHG Conversion Factors for

Company Reporting for UK locations. Emissions from overseas electricity are calculated using location-based conversion factors published in the IEA Emission factors 2021. Reported as per

requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008; Scope 1 emissions are conservatively calculated with total consumption of

natural gas, assuming all combusted – however, a proportion of carbon is captured in solid form within carbon brake discs.

2 Market-based Scope 2 emissions incorporate market-based reporting, taking into account 100% renewable energy contracts in the UK, Switzerland, Denmark, and the purchase of Renewable

Energy Certificates in California and Kentucky, US.

3 2020 Scope 1 emissions re-stated to include the consumption of propane gas in carbon brake manufacturing facilities. For clarity, propane gas is included in 2021 data.

4 Table 3 shows the GHG emissions data required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008; The companies for which the GHG data

is reported here are the same as those consolidated in the Group’s financial statements; Global GHG emissions were calculated using conversion factors published in the Guidelines to BEIS

GHG Conversion Factors for Company Reporting and the WRI/WBCSD Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard. Emissions from overseas electricity are

calculated using conversion factors published in the IEA Emission factors 2021.

Meggitt PLC Annual Report and Accounts 2021

TECHNOLOGY

Decarbonising how we fly is a

generational challenge that will need

both nearer-term evolutionary

developments and more radical

mid-term changes.

Corporate Responsibility

continued

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Enabling sustainable

aviation

Improve propulsion system

efficiency – burn less fuel per unit

ofthrust or power delivered

Reduce aircraft weight – less units

of thrust required to carry payload

Use of sustainable aviation fuels –

new fuels with lower greenhouse

gas emissions

Enabling sustainable

energy production

Enabling renewable

power generation

Enabling zero carbon

power generation

Enabling green hydrogen

production and/or operation

Reducing emissions through

improved gas turbine combustion

efficiency and/or turbine

performance optimisation

We believe that technology has a critical

role in making air travel sustainable and

in transitioning energy systems away

from fossil fuels. We have committed

to spend at least two-thirds of our

investment in innovation in sustainable

technologies annually. In 2021 actual

investment was at 81% and we have

also committed to reducing the

greenhouse gas emissions from our own

operations. In 2021 we made a net zero

commitment that includes developing

manufacturing technologies that improve

the environmental impact of our own

production processes.

Aerospace

Decarbonising how we fly is agenerational

challenge that will need both nearer-term

evolutionary developments and radical

mid-term changes.

In the near term we continue to see

opportunities in improving the efficiencies

of engines and reducing the weight and

drag of airframes. The current generation

of aircraft are already ~15% more efficient

than those that they are replacing and

replacement of the older aircraft, due

to fuel prices and the consequences of

the COVID-19 pandemic, continues to

accelerate. Meggitt already has a strong

position on the majority of the modern

and fuel-efficient aircraft and engine

programmes and, as they are further

developed, our intent is to continue

partnering with our customers to maintain

and grow our position.

In the next few years we expect that

increasing quantities of sustainable

aviation fuel (SAF) will be required in

jet-fuel. SAF will initially be produced

from biomass and municipal waste and,

in time, to transition to power-to-liquid

fuels formed from green hydrogen and

captured carbon. The speed at which

SAF production can be brought on-

stream and production costs reduced will

be critical to the long-term sustainable

growth of the aviation sector.

Innovating for a sustainable future

As communities, governments and markets around the world increasingly face the

need to decarbonise how we live, work and travel, Meggitt is committed to developing

technologies that will support the world’s net zero journey.

Meggitt PLC Annual Report and Accounts 2021

Innovation investment in sustainable technologies

Meggitt Technologies

Lighter, more

efficient aircraft

Next generation

engines

Sustainable aviation

fuels (e-fuels, hydrogen)

Thermal systems

  

Safety systems

 

Fuel systems

 

Optical sensing

  

Engine composites

  

Braking systems



High temperature systems

 

Electrical systems

 

Additive/digital manufacturing

  

Hydrogen-fuelled aircraft are being

explored in the industry and many of

the challenges are around the thermal

systems where Meggitt has considerable

capability. However, the challenges of

operating hydrogen fuel systems in an

aircraft are significant and we believe

that hydrogen-fuelled gas turbines may

offer the most viable solution, although

the challenges around cryogenic fuel

storage and the atmospheric impact

of the water emissions from the aircraft

still need to be resolved. Meggitt is

participating in the development of this

technology but we do not anticipate

this emerging technology having a

significant commercial impact in the

comingdecade.

Electric propulsion is being

commercialised for a new class of small

aircraft and Meggitt is playing an active

part in these programmes. We anticipate

the first of these new aircraft will enter

into service in the coming year or two

and it will be important to see how the

new airborne mobility sector develops.

However, limitations in battery power

density mean that battery-powered

aircraft will require a further breakthrough

in battery chemistry before they are

viable for longer distance air travel and

we see these new aircraft as developing

a potentially new mode of short-range

transport and not replacing existing types

of aircraft.

The aircraft and engine OEMs continue

to develop the next generation of

aircraft and propulsion systems and

Meggitt is developing technologies

to support these programmes.

Some of these technologies include

additively manufactured thermal system

components, lightweight composite

parts, optical and wireless sensing

solutions, high power density electric

machines and green fire-suppressants.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Additive Manufacturing ZEROe

Through our partnership with HiETA

Technologies Limited, we have

expanded our Additive Manufacturing

(AM) possibilities.

We use AM to improve the

performance of our heat exchangers.

This manufacturing process enables

us to produce more complex shapes

than ever before, while enhancing the

thermal performance by allowing us to

get more heat transfer surface within a

smaller volume.

Meggitt is contributing to the Airbus

ZEROe demonstrator programme, which

is developing zero emission aircraft. In

support of the programme the Meggitt

Applied Research & Technology team

and the HiETA engineering teams have

successfully designed and manufactured

a world-first additive manufactured heat

exchanger for the Airbus ZEROe ground

test rig in less than four weeks.

The team worked collaboratively

to produce a range of concepts,

incorporating novel heat transfer

surfaces, flow guide vanes and

optimised structural support. The

Airbus Design Review was completed

successfully and the Meggitt team

started the build the same day!

This project is testament to the market

changing dynamics that Additive

Manufacturing offers as it revolutionises

the way that products are conceived,

designed and manufactured. It also

offers an unrivalled benefit to sustainable

aviation in its greatly reduced weight

compared with conventional heat

exchanger technology thus reducing the

overall fuel consumption of an aircraft.

Corporate Responsibility

continued

“Additive Manufacturing is enabling smaller and lighter heat

exchangers than ever before. We are extremely proud to be

able to support Airbus’s ZEROe programme by producing

a one-of-a-kind heat exchanger. Developing technologies to

support sustainable aviation is at the heart of our AR&T strategy.

Additive Manufacturing is just one of the tools enabling future

generationsof aircraft such as the ZEROe programme.”

1st

climate neutral zero

emission aircraft

4 weeks

from design and manufacture

to test rig

Meggitt PLC Annual Report and Accounts 2021

Business conduct

Our CR&S Policy sets out our position in

relation to conducting all business in a

manner that achieves sustainable growth

whilst demonstrating a high degree of

social responsibility. It aims to balance

the interests of all our stakeholders

including shareholders, employees,

customers, suppliers and the wider

community in accordance with the law

and governance, ethics, diversity and the

environment. At Meggitt, we commit to

conducting business fairly, impartially,

and to complying with all applicable laws

and regulations. Our values of Teamwork,

Integrity and Excellence are at the heart

of how we do things and underpin our

policies which are reinforced by applying

our High Performance Culture concepts

throughout the working day.

After updating our Code of Conduct in

2020, Meggitt followed this with updates

to the Financial Crime Policy as well as

updating and consolidating the Anti-

Corruption and Ethical Business Conduct

policies. Our policies complement our value

of Integrity and accompany our standards

on conducting business fairly and ethically

under the remit of corporate compliance.

We operate an independently run Speak

Up Line that enables employees to raise

questions or concerns anonymously and

confidentially, 24 hours a day, 7 days a

week from anywhere in the world. In 2021

additional work has been conducted with

the service provider to compile greater

data analysis of calls enabling us to better

identify trends and training requirements.

Contact information for people who can

help employees if there are any concerns

is available on our intranet, in all of our

ethics policies and on posters at all of

our sites. Our programme continues to

have daily oversight through the Ethics

Management Committee, which reviews

cases to ensure consistent application

of the process and investigation quality.

The Committee reviewed trend analysis

data to ensure additional training

and coaching was being rolled out in

the required areas. The results of the

Committee’s findings were also reported

to the CR Committee and a process of

debriefing participants in larger cases

was included in 2021. Alongside this,

new training was rolled out in 2021 for

ethics investigators to ensure a consistent

approach. A total of 48 employees were

trained on this process during 2021.

The investigation process is available

on the intranet to all employees so that

they are aware of our procedures when

speaking up and how confidential ethics

cases and whistleblowing are dealt with.

All employees are entitled to a thorough

investigation of concerns raised and

receive feedback on whether the issues

are substantiated or not. Our values and

our High Performance Culture concepts

underpin our ethics programme with their

focus on how we treat each other (which

was the main area for calls received on

our Speak Up Line in 2021). Each Meggitt

site has a designated Ethics Champion

who is available to assist employees with

questions or concerns, and who also

attends virtual sessions to share best

practice, develop skills and identify issues

and the need for additional training at

their site. Alongside these practices

ethical behaviour is also drawn out in our

Employee Engagement surveys which are

monitored and impact future strategy.

Compliance training

In addition to the updated Ethical Business

Conduct Policy and Code of Conduct, we

continued to promote our ethical business

conduct through training issued to all

employees, targeted training delivered

at specific sites, video messaging to all

employees and briefings delivered to our

site-based Ethics Champions. Our training

reminds employees about ethical business

conduct, and we provide examples of

how to apply the principles laid out in our

policies in the training and reminders of

help, support and our responsibility in the

Code itself. In 2021, we provided training

to all employees on data privacy, health

and safety, our Code of Conduct, physical

security and anti-harassment.

Anti-bribery and corruption

Our Anti-Corruption Policy, which has now

been updated and consolidated with our

Ethical Business Conduct Policy, covers

bribery, gifts and entertainment, conflicts

of interest, competition and anti-trust,

operating with intermediaries such as sales

representatives and distributors, offset

contracting, political contributions and

lobbying activities, know your counterparty,

as well as breaches of the Ethical Business

Conduct Policy and reporting obligations.

In addition to the Anti-corruption Policy, we

also have a Financial Crime Policy covering

anti-money laundering, fraud prevention

and corporate tax evasion. Both policies

set out clear escalation procedures to raise

concerns through management or via the

independently run Speak Up hotline as well

as employee responsibilities.

Meggitt continued to treat our approach

to commercial intermediaries as

extremely important. During 2021 this

remit was broadened to review all types

of counterparties within our business

dealings and now is captured in a “know

your counterparty” process across the

business. Our continuous improvement

plan has strengthened our work with

independent organisations assessing

potential country corruption risk, leading

to enhanced due diligence and alerts in

our customer relationship management

tool, which is independently audited.

Human rights

Our CR&S Policy covers Human Rights,

setting out our position in relation to

conducting our business in the right way.

We recognise that as a large international

business, our business operations can

impact the lives and rights of other people

(not just our employees). As such, we

support the Ten Principles of the United

Nations Global Compact, relating to

human rights, labour, the environment

and anti-corruption. Our Code of Conduct

training also reinforces the behaviour that

we expect from our employees as well as

suppliers and contractors. We encourage

suppliers and contractors to be responsible

and adhere to our values and principles

to ensure our business relationships are

responsible and ethical. We are committed

to complying with anti-slavery and human-

trafficking legislation and we will continue

to work with our suppliers to engage on

this topic.

Corporate compliance

and business conduct

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Corporate Responsibility

continued

Modern slavery

As part of our commitment to acting

as a responsible supplier, we commit

to abstaining from practices such as

slavery, human trafficking, forced labour

and child labour and reduce offset

contracting. We also commit to take all

reasonable measures to ensure that our

suppliers and other entities acting on our

behalf do not engage in practices that

violate applicable laws and regulations

relating to slavery, human trafficking,

forced labour and child labour. We ask

our suppliers to comply with our Code

of Conduct or similar standards. Steps

that we are taking to combat modern

slavery and human trafficking in our

supply chain are set out in our Modern

Slavery Statement available on our

website. Meggitt has implemented a

framework to mitigate against the risk of

modern slavery and human trafficking in

our business and supply chain, including

annual confirmations of compliance

with Group policies and procedures,

strengthened recruitment processes and

high level engagement with our suppliers

incorporating clear communication of

our expectations and regular site visits.

Taking into account the output from our

diligence and assurance processes and

the absence of any concerns highlighted

in this area the Group considers the risk

of forced labour in its business and supply

chain to be low. In addition, during 2021

Meggitt combined modern slavery efforts

with the requirements of US legislation on

the Combatting of Trafficking in Persons

which has led to a rollout of employee

and Company obligations, responsibilities

and renewed ways of working. Further

information can be found in our Modern

Slavery Statement on our website.

Non-financial information

statement

The table below summarises where to

find non-financial information required

under Section 414C of the Companies

Act 2006. Our business model on page

16 summarises the key resources and

relationships we leverage to generate

and preserve value. Non-financial key

performance indicators on page 26

onwards, allow us to assess progress

against objectives and monitor the

development and performance of

specificareas of the business.

Further information on Group policies

can be found on our website.

Related Group policies

Related principal risks

(pages 50 to 54)

Environmental matters pages 78 to 82 Environmental Policy Industry Change

Climate Change

Business Interruption

Employees pages 72 to 77 Diversity & Inclusion Policy

Health & Safety Policy

People

Social matters pages 72 to 77 Group Sponsorship and

Charitable Giving Policy

Business Interruption

Industry Change

Human rights pages 87 to 88 Corporate Responsibility

and Sustainability Policy

People

Supply Chain

Anti-bribery and corruption page 87 Ethical Business Conduct and

Anti-Bribery & Corruption Policy

Legal & Compliance

Meggitt PLC Annual Report and Accounts 2021

Section 172 statement

In accordance with Section 172 of the

Companies Act 2006, our Directors must

act in good faith to promote the success

of the Company for the benefit of its

shareholders as a whole. In performing

this duty, they are required to have

regard, amongst other things, to the

interests of employees, the impact of

our operations on the communities in

which we operate and the environment,

and the need to foster relationships

with our suppliers, customers and other

key stakeholders in order to maintain a

reputation for high standards of business

conduct and enhance the sustainable

long-term success of the business.

The Directors give careful consideration

to these matters when discharging their

duties and are supported by.

• An induction programme and ongoing

briefings, visits and discussions to

ensure that they understand the

business including our markets, future

prospects, and environmental and

wider stakeholder impacts.

• A formalised procedure which

highlights the impact of important

decisions on key stakeholders to assist

the assessment of Section 172 impacts.

This formalised approach embeds the

consideration of stakeholder interests

during the decision-making process.

• Carefully planned agendas to ensure

the Board and its Committees have

sufficient time to consider and discuss

key matters.

Business conduct

As explained on page 105 the day-to-

day management of the business is

delegated to the executive management

team. The principles underpinning

Section 172 of the Companies Act are

not only considered at Board level

but are an integral part of our Group’s

culture. Our Corporate Responsibility and

Sustainability Policy requires our business

to be conducted in a manner that

achieves sustainable growth by balancing

the interests of all stakeholders. This

Policy prompts consideration of the

matters set out in Section 172 during the

decision-making process undertaken at

all levels of the business. Through this

Policy we ensure that the business is run

with regard to our stakeholders.

Our comprehensive ethics programme,

which includes an independently run

whistleblowing hotline, promotes high

standards of business conduct across the

Group. The programme is monitored by

the Board on a quarterly basis and by the

Corporate Responsibility Committee at a

more detailed level at each meeting. It is

reinforced through our policies, regular

ethics training and our values and High

Performance Culture programme. To

date, [6,315] of our current employees

have attended High Performance

Culture “unfreezing” sessions including

the Board who participated in sessions

in2019.

Our Group Environmental Policy sets

out our commitment to incorporate

environmental considerations in all

aspects of our business. See page 79

forfurther details.

Depending on the subject matter, the

relevance of each stakeholder group may

differ and decisions will not always result

in a positive outcome for all stakeholders.

But by having due regard to the interests

of our key stakeholders at each decision-

making level of the business we ensure

that key decisions taken promote

the long-term sustainable success of

theGroup.

Engagement and decision-making

How we engage with

our stakeholders

The Board has identified our key

stakeholders as: our workforce,

shareholders, customers, suppliers,

and the communities within which we

operate. Management conduct much

of the primary engagement activities

and present regular updates to the

Board, providing critical insights and

perspectives to shape Board decisions

and enable effective challenge of

decisions taken by management on

behalf of the Board.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Stakeholder How we engage at

Board level

Further engagement

activities

What matters

to them

Governance

in action

Workforce

Building a safe,

healthy and

happy work

environment

helps our

workforce reach

their full potential

and strengthens

our business.

Nancy Gioia, Chair of the

Corporate Responsibility

Committee and the Non-

Executive Director responsible

for employee engagement,

led a programme of employee

engagement activities

throughout the year. This

included the independent

Non-Executive Directors

mentoring a member of the

senior management team

and remotely participating in

various employee engagement

activities. Further details of

our employee engagement

programme during 2021 can be

found on page 92.

Early in 2021, our Chief

Executive conducted over 50

remote Town Halls with teams

across the globe, representing

a cross section of employees

from all levels of the business,

to obtain a direct pulse from

employees on key matters that

interest them. Themes from

these Town Halls were reported

back to the Board.

Annual employee

engagement surveys and

annual “pulse” surveys are

issued to employees with

the results reported to and

discussed by the Board.

Intranet updates and

leadership blogs provide

employees with key

information and achieve

a common awareness of

the financial and economic

factors affecting the Group’s

performance.

Members of senior

management participate

in Board and Committee

meetings.

An independently run

whistleblowing hotline is in

place with regular reports to

the Corporate Responsibility

Committee and the Board.

Interests relate to:

• Personal development,

progression opportunities

and pay reviews/rises.

• Retention of key talent.

• Employee wellbeing and

mental health.

• Clarity on future flexible

working arrangements.

• The impact of the proposed

acquisition by Parker-

Hannifin on the workforce.

• The future of flying/civil

aerospace especially bearing

in mind the impacts of

climate change.

• The future of defence

spending.

To sustain morale and retention

and respond to feedback from

our workforce we:

• Issued a global (but locally

variable %) pay rise in

October 2021.

• Committed to return to the

normal pay review process in

April 2022.

• Released a policy statement

and global guidelines on

flexible working.

• Released a new mental

health and wellbeing policy.

• Continued to update our

workforce on factors

affecting our business via

intranet updates and

leadership blogs.

• Communicated with

employees on the proposed

acquisition by Parker-

Hannifin, with

communications linked to

major milestones owing to

regulatory restrictions on

what we can say.

Shareholders

Securing our

shareholders’

trust through

continuous

engagement

ensures their

ongoing

investment and

support.

The Chief Executive and Chief

Financial Officer, together with

our VP Investor Relations meet

regularly with key shareholders

and report back to the Board.

The Chairman met with some

of our key shareholders during

the year on matters related to

governance.

In early 2021, the Chair of the

Remuneration Committee

continued engagement with

our major shareholders, and

proxy advisors, to discuss

and seek feedback on

remuneration proposals which

cumulated in the approval of

the Remuneration Policy at the

2021 Annual General Meeting.

The Chair of the Audit

Committee will seek

engagement with shareholders

on significant matters related

to the Committee’s area

of responsibility as and

whenapplicable.

The Company Secretary

and VP Investor Relations

engaged with our major

shareholders and proxy

advisors ahead of and after

the Annual General Meeting

to answer questions on the

resolutions and report key

themes back to the Board.

Last year’s Annual General

Meeting was held as a hybrid

meeting to facilitate greater

shareholder engagement

and participation by allowing

shareholders to attend, speak

and vote at the meeting

virtually.

The General Meeting

and Court Meeting for

shareholders to approve the

offer from Parker-Hannifin

were also held as hybrid

meetings to maximise

shareholder participation

andengagement.

Interests relate to:

• Strategy and performance,

financial returns and

dividends.

• Availability of our Non-

Executive Directors to

discharge their duties

effectively.

• Gender and ethnic

diversityat Board and

seniormanagement level.

• How effectively the

Company is managing risks

and pursuing opportunities

including in relation to

climate change.

• Directors’ remuneration.

• The Directors’ authority to

allot shares in the Company.

Our dividend decision-making

process balances the desire

of shareholders for immediate

returns, against the need to

maintain a robust balance

sheet and manage cash flow.

It is in this context, and the

subsequent offer from Parker-

Hannifin, that the Board did not

make or propose a dividend

in 2021.

We maintain robust processes to

monitor the time-commitments

of our Non-Executive Directors

and conduct annual evaluations

to ensure that they continue to

be effective and discharge their

duties properly. More information

is available on page 110.

We are mindful of the

increasing interest in climate

change and have focused on

improving our disclosures on

this topic so that shareholders

are better informed on how

we manage risk and pursue

opportunities in this area.

Further details can be found

onpages 58 to 63.

At the 2021 Annual General

Meeting we received more

than 20% of votes against

the resolutions to approve

the Remuneration Policy and

to authorise the Directors to

allot shares in the Company.

Further details can be found

onpage113.

Stakeholder engagement

Meggitt PLC Annual Report and Accounts 2021

Stakeholder How we engage at

Board level

Further engagement

activities

What matters

to them

Governance

in action

Customers

Understanding

our customers’

priorities is

imperative to

meeting their

needs.

Continuous engagement by our

CEO and divisional presidents

and product group teams

to discuss performance and

technologies.

The Board receives regular

reports on customers,

customer-related key

performance indicators,

and ongoing actions to

improveperformance.

The Group’s Services &

Support division is entirely

focused on civil and defence

aerospace aftermarket

customer service. The

Board receives regular

updates on the division’s

progress from the CEO and

an annual update from the

divisionalpresident.

Customers are invited for

site visits and to speak at

leadership conferences

to strengthen our

collaborativerelationships.

Interests relate to:

• Product value and quality.

• On time delivery.

• Excellent customer service

and support.

• Innovative and sustainable

technologies.

• Strong, collaborative

relationships.

• Sustainability.

• Ethical conduct and

behaviour with increased

focus on human trafficking

and modern slavery.

The Meggitt High Performance

System (HPS) provides

continuous improvement to our

manufacturing processes for

the benefit of our customers.

HPS measures are included

in the Long Term Incentive

Plan and progress with HPS is

discussed by the Board and

Remuneration Committee.

We hold monthly leadership

meetings with a consistent

focus on our customers and

performance. We also meet

with customers to discuss

technology road maps.

We share our customers’

commitment to sustainability

and have signed up to the

United Nations’ Race to Zero

campaign. Further details can

be found on page 79.

We are committed to

conducting our business in an

ethical manner. During 2021

we revised and merged our

Ethical Business Conduct and

Anti-Bribery and Corruption

policies and introduced a

new compliance plan to

combat human trafficking and

modernslavery.

We regularly monitor customer

scorecards and ensure

responsiveness to issues via the

Voice of the Customer process.

Suppliers

Strong

relationships

with our supply

base enhance our

effectiveness and

profitability.

The Corporate Responsibility

Committee receives

regular updates on supplier

engagement activities from

our Chief Procurement Officer,

which is reported back to

theBoard.

The Corporate Responsibility

Committee monitors the

communication channels

and relationships with our

suppliers to ensure that they

facilitate open discussion on

areas of concern and support

bestpractice.

Payment practices are

managed by the Chief Financial

Officer and Chief Procurement

Officer who monitor actions to

improve payments to suppliers.

The Board and Corporate

Responsibility Committee also

receive biannual updates on

payment practices.

Our requirements for

suppliers to demonstrate

compliance to industry-wide

policies regarding quality,

security and a wide range of

corporate social responsibility

matters including

environmental performance,

modern slavery and human

trafficking and conflict

minerals are documented

and made available to our

suppliers. The requirements

are included in our standard

terms and conditions.

Supplier risk assessments

are undertaken and we

engage with those suppliers

perceived to be higher

risk to seek confirmation

of compliance on certain

matters.

We also conduct site visits of

our suppliers’ facilities.

Interests relate to:

• Being treated fairly during

the sourcing stage.

• Solid two-way

communication channels.

• Timely financial payments.

• Strong, collaborative

relationships.

Our supplier development

process enables suppliers

to feed back comments and

if necessary seek our help

to resolve systemic issues.

Through this process we have

achieved an overall reduction

in total supplier responsible

quality escapes of more

than10%.

We have taken actions to

improve our Pay on Time

performance with increased

focus on addressing

bottlenecks and using metrics

to identify and address

underlying causes.

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

Stakeholder engagement

continued

Stakeholder How we engage at

Board level

Further engagement

activities

What matters

to them

Governance

in action

Local

communities

Our relationships

with the

communities close

to our sites are

vital; we build

trust through

local dialogue.

The Board approves

the Group’s Corporate

Responsibility and Sustainability

Policy which sets out our

commitment to encourage

employees to help community

organisations and charities,

provide financial or in-kind

resources to organisations and

projects with a community

benefit and support local

schools, colleges and

universities for the benefit of

our communities.

Our approach to local

communities, charities and

implementation of the Group’s

Sponsorship and Charitable

Giving Policy is discussed at

each Corporate Responsibility

Committee meeting.

The Board is kept up to date

with community projects

on a regular basis through

the CEO’s report and

updates from the Corporate

ResponsibilityCommittee.

We monitor the

environmental impact of our

facilities and agree targets on

greenhouse gas emissions,

water and waste.

Our site managers and their

teams engage with their

local communities to provide

support in line with our

Corporate Responsibility and

Sustainability Policy.

We maintain an active

external communications

programme through social

media to communicate

key messages and monitor

comments about the Group.

Regular social media updates

are provided to executive

management.

• Responsiveness to local

concerns.

• Ongoing open dialogue.

• Our impact on the local

environment.

• Local jobs.

• Local contributions (skills or

financial donations).

As part of Earth Day in April

2021, many of our sites across

the globe planted trees at their

facilities, or at a local school

or park as part of our efforts

to promote responsible use of

natural resources and to further

the advancement of sustainable

practices across the Group.

In July 2021 we launched our

Community Heroes scheme

which enables our colleagues

to give their time to worthy

causes. Further details can be

found on page 76.

Implementing site level key

performance indicators and

targets for environmental

measures such as energy and

water consumption and waste

to landfill.

Employee engagement

With the continuation of COVID-19

travel restrictions in 2021 and the impact

of a challenging trading backdrop,

my engagement strategy focused on

delivering to the best extent possible

a rounded view of what is top of mind

of Meggitt employees. Although in

person visits were not possible for the

majority of the year, video chats with

employees, either one-on-one or as a

small group, proved to be very effective.

Additionally, I was pleased that the use

of video enabled the continued and

expanded involvement of my Non-

Executive Director colleagues in the 2021

programme. This enabled us to cover

more ground and broadened board

exposure to direct employee feedback.

Key engagement undertaken in 2021 and

early 2022 include:

• Virtual engagements – supported by

my Non-Executive Director colleagues,

virtual engagements have been

conducted with our sites in Xiamen,

China and Stevenage, UK and with

individuals from different levels of the

following functions: Finance and IT,

Commercial and Corporate Affairs, HR,

Engineering and Operations. I also

conducted virtual engagement with the

ERG leads and HPC facilitators.

• Site visit – with the easing of lockdown

restrictions I was able to visit our

Airframe Systems site in Oregon where

I was able to meet and speak with the

local workforce.

• Ethical engagement – detailed

engagement with the Group

Company Secretary & EVP Ethics

and Communications and the Group

Director, Corporate Compliance,

Ethics & Corporate Responsibility,

in which we were able to discuss

specific ethicscases and themes, and

improvement work being undertaken

on the ethics programme.

• Graduate engagement – Colin Day and

I conducted virtual engagement with a

small group of graduates to get a feel

on the matters of importance to them.

• Mentoring – my Non-Executive

Director colleagues and I held one-

on-one discussions on careers and

personal development with selected

high potential employees.

• Career talks – Alison Goligher attended

a Women in Engineering event hosted

by our STEM/PAVE Employee Resource

Groups to speak about her career

in engineering, and Caroline Silver

attended our leadership conference

to discuss her background in finance

and how it supports her role as a Non-

Executive Director of the Company.

General feedback themes included: the

proposed acquisition by Parker-Hannifin;

the importance of the High Performance

Culture programme and the challenges

in embedding the programme during

the COVID-19 pandemic; the value

employees placed on inclusion activities

undertaken throughout the Group and

what more could be done to support

activities for shopfloor employees in

future; graduate retention; flexibility and

working from home arrangements; the

senior management team communicates

and listens well to employees.

Feedback from these activities was

provided to the Board in February 2022

and will help shape future decisions.

Nancy Gioia

Non-Executive Director responsible for

employee engagement

Meggitt PLC Annual Report and Accounts 2021

During the year, the Board and its

Committees made decisions to

strengthen our governance framework,

implement our strategy and generate

the best returns for our shareholders.

The different interests of our stakeholder

groups, and the impact of decisions

upon them, were considered during

the decision-making process. In some

cases, the interests of stakeholder

groups conflicted, and the Board and its

Committees had to assess these conflicts

and attempt to balance them in their

decision-making.

Key

Likely consequences of our

decisions in the long term

The interests of our workforce

The need to foster relationships

with our suppliers, customers

and others

Impact of our operations on the

community and environment

Maintaining a reputation for high

standards of business conduct

The need to act fairly between

our shareholders

Decision – Disposal of

the Airframe Systems

Toulouse business

Key considerations

• The Toulouse site was not achieving

its financial targets and had not been

prior to the COVID-19 pandemic.

Consideration was given to closing or

selling the site.

• The site’s financial performance had

led to a high level of uncertainty and

anxiety amongst the local workforce,

which was compounded by the

COVID-19 pandemic. The workforce

therefore sought clear direction for the

future of the site.

• Closing the site would make the

entire workforce redundant, with

poor prospects of employment

in other Meggitt sites due to the

physical location and hiring freeze

implemented in response to COVID-19.

The local labour market had also been

significantly impacted by COVID-19

meaning potentially poor prospects

for alternative employment elsewhere.

A site closure would therefore likely

have a significant impact on the local

community. Alternatively, a buyer

would retain a significant portion of

the workforce and Meggitt would offer

enhanced redundancy terms to those

who would not be retained.

• In the case of a site closure, the

manufacturing activity would transfer

to other Meggitt sites, carrying a high

level of risk for customers arising from

the loss of legacy knowledge of the

Toulouse employees. A sale of the

site would mean a smoother transition

for customers but would mean them

accepting a new supplier which would

carry continuity risk given that the

prospective buyers were smaller than

Meggitt and thus more susceptible

to economic pressure resulting from

COVID-19.

• External legal advice was sought to

ensure compliance with applicable

labour laws and maintain our

reputation for high standards of

business conduct.

Stakeholder engagement

• The workforce was informed of the

proposals and was updated regularly

on developments.

• Regular meetings with the employee

work council encouraged a high level

of trust and transparency despitethe

highly sensitive nature of the discussions.

• All affected customers had been

informed of the proposal and were

kept engaged by local management

throughout the process.

Outcome

• Significant effort was made in finding

a suitable buyer for the business.

Due diligence was conducted

on all potential buyers to ensure

the business was transferred to a

suitablecustodian.

• The business was sold to Domusa,

with final approval of the transaction

delegated to the Board’s Finance

Committee. The sale helped progress

the Group’s footprint consolidation

strategy and enable more efficient

use of shareholder investment to

maximise long-term returns.

• The high level of transparency with

the workforce and clarity as to the

site’s future alleviated workforce

anxiety and allowed those who

would not be retained to plan for

futureemployment.

• Transparency and engagement with

our customers helped maintain trust

and our reputation for high standards

of business conduct.

• The majority of roles were retained

by Domusa, minimising the number

of redundancies and the overall

impact on the local community.

Enhanced redundancy terms were

offered to those who lost their roles

as a result of the sale, maintaining

Meggitt’s reputation for treating its

workforcefairly.

Decision – Supporting and

recommending to shareholders

Parker-Hannifin’s offer of 800

pence per Meggitt share

Key considerations

• Meggitt had a compelling standalone

strategy which would deliver attractive

value for shareholders over time as

the Group’s key markets recovered

from the impact of COVID-19. At

the same time, there was significant

uncertainty as to the precise

timing and speed of recovery and

Parker-Hannifin’s cash offer would

substantially accelerate delivery of

value to shareholders at a substantial

premium to the then prevailing

market price of Meggitt shares.

Decision-making in practice

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

• The need to generate the best value for

shareholders while ensuring that other

stakeholder interests (including those of

the Group’s key customers) are protected.

• The need to comply with all applicable

laws, regulations and contractual

obligations to maintain our reputation

for high standards of business conduct.

• The need to incentivise and retain key

members of staff, especially those at

greater risk of being made redundant

or who would play key roles in

thetransaction.

• The combination of Meggitt and Parker-

Hannifin may give rise to operational

economies of scale which could result in

headcount reductions or the relocation of

Meggitt employees, particularly those in

central corporate functions.

• Parker-Hannifin’s highly regarded

reputation and acquisition experience

suggested that the Meggitt businesses

would continue to thrive within the

Parker-Hannifin Group.

• Parker-Hannifin’s enhanced access

to capital would enable it to invest in

Meggitt’s long-term programmes and

benefit from the sharing of technology.

The integration of the businesses

would likely benefit our customers by

creating scale and an ability to take

on more technical and commercial risk

in developing products and systems

especially relating to sustainable

technologies required for the future.

• Parker-Hannifin could leverage its

enhanced scale to negotiate more

favourable terms with suppliers

andcustomers.

• The importance of Meggitt’s rich UK

heritage and its customer relationship

with the UK Government, and the need

to secure binding commitments to

protect its interests.

• Parker-Hannifin’s reputation for

supporting its local communities and its

generous charitable giving campaigns

meant that Meggitt’s local communities

would likely be well supported

following the proposedacquisition.

• Parker-Hannifin’s commitment

to mitigating its impact on the

environment and implementing

creative solutions to reduce their

energy consumption and emissions

complemented Meggitt’s sustainable

aviation strategy. The scale of the

combined business would enable it to

take on greater risk and develop more

sustainable products at a faster pace.

Stakeholder engagement

• Meggitt provided Parker-Hannifin

with due diligence information and

held extensive discussions to secure

commitments to Meggitt’s business,

employees, pension schemes and the

UK Government.

• Meggitt undertook due diligence on

Parker-Hannifin to ensure that it would

be a good long-term owner of the

Group’s business.

• Meggitt continues to engage

extensively with advisors and relevant

regulators to obtain all required

approvals and ensure that all

applicable laws and regulations are

complied with.

• Meggitt held a hybrid Court and

General meeting to approve the

transaction. The hybrid nature of

the meetings facilitated greater

shareholder participation and

engagement by allowing shareholders

to attend, ask questions and vote at the

meeting either in person or virtually.

• Meggitt engaged on a constructive

basis with TransDigm and its advisors

in order to facilitate an offer by

TransDigm following its expression

of interest at 900 pence per share.

Meggitt provided TransDigm and

Parker -Hannifin with equivalent access

to both due diligence information and

management and in response to a

request from TransDigm, further due

diligence information was provided to

both TransDigm and Parker-Hannifin

after the announcement of Parker-

Hannifin’s cash offer.

• Communications were issued

after the announcement of Parker -

-Hannifin’s cash offer to inform Group

employees, the trustees of Meggitt’s

pension schemes and Meggitt’s

shareholders and share option holders.

Further communications were sent

to participants in the Group’s share

incentive schemes to explain how the

proposed acquisition would impact

them and the steps they would need

to take, if any, to realise value from

theirentitlements.

Outcome

• Shareholders approved the 800 pence

cash offer from Parker-Hannifin on

21 September 2021. The proposed

acquisition is currently subject to

various regulatory approvals and is

expected to complete in Q3 2022.

• Where possible, the new combined

Group will seek to reallocate staff

from discontinued roles arising from

the transaction to other appropriate

roles. Furthermore, Parker-Hannifin

has provided binding commitments to

the effect that assuming an ordinary

course of business environment, it

will maintain Meggitt’s existing R&D,

product engineering, and direct

manufacturing labour headcount in

the UK at no less than current levels

and will increase by at least 10% the

number of overall apprenticeship

opportunities currently offered by

Meggitt in the UK.

• Parker-Hannifin has also held

constructive discussions with the

trustee of the UK Meggitt Pension Plan

and has entered into a memorandum

of understanding to set out its intention

with respect to the future funding of

the Plan.

• Tailored incentive and retention

mechanisms have been deployed to

those in critical roles to ensure that

they do not leave the business before

the deal is completed and to maintain

talent in the business until a proper

evaluation can be undertaken by

Parker-Hannifin.

• Parker-Hannifin announced its intention

to safeguard the existing employment

rights of the management and

employees of the Combined Group

in accordance with applicable law and

confirmed that it does not envisage any

material change in their conditions of

employment.

Strategic Report

This Strategic Report comprising pages

08 to 94 has been approved by the Board

and is signed on its behalf by.

Tony Wood

Chief Executive Officer

Stakeholder engagement

continued

Meggitt PLC Annual Report and Accounts 2021

Strategic Report

DIRECTORS’

REPORT

Chairman’s introduction to Governance 98

Board of Directors 100

Corporate Governance 104

Audit Committee report 114

Nominations Committee report 122

Directors’ remuneration report 126

Other statutory information 156

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

Directors’ Report

Chairman’s introduction

We uphold the highest standards of corporate governance and

business conduct that underpin successful and sustainable long-

term businesses. We remain accountable to our shareholders, whilst

recognising the value of strong relationships with our workforce

and wider stakeholders built on a culture of openness and trust.

Governance highlights in 2021

• Ongoing oversight of the business

response to COVID-19.

• Leading the strategy and response

in respect of Parker-Hannifin’s and

TransDigm’s interest in Meggitt.

• Setting the Group’s strategy and plan.

• Additional Remuneration Committee

meetings to consider the impact of

the all-cash offer from Parker-Hannifin

on the Group’s outstanding share

schemes and incentives to mitigate the

increased retention risk arising from

the offer.

• We maintained a robust schedule of

employee engagement activities to

better understand and address key

issues raised by employees including

the impact of the all-cash offer from

Parker-Hannifin on the workforce.

More details on employee engagement

activities can be found on page 92.

• The appointment of Alison Goligher

as Senior Independent Director from

the date of the 2021 Annual General

Meeting and a review of Guy Berruyer’s

independence following the conclusion

of his third three-year term.

2021 Board attendance

Sir Nigel Rudd

Chairman

Mr A Wood

Chief Executive

Mr G S Berruyer

Non-Executive

Director

Mrs L S Burdett

Chief Financial

Officer

Mr C R Day

Non-Executive

Director

Mrs N L Gioia

Non-Executive

Director

Ms A J P Goligher

Non-Executive

Director

Mr G C Hachey

Non-Executive

Director

Mrs C L Silver

Non-Executive

Director

7 Scheduled meetings

18 Additional meetings

Meetings attended Non-attendance

1 Met the independence criteria on appointment as

Chairman on 23 April 2015.

2 Unable to attend additional meetings due to prior

commitments. Many additional meetings were

convened at short notice, where possible the

Chairman sought the views of Directors not able to

attend in advance of the meetings and fed these

back to the Board.

Meggitt PLC Annual Report and Accounts 2021

Dear Shareholder,

On behalf of the Board I am pleased

to present the Corporate governance

report for the year ended 31 December

2021. This report describes Meggitt’s

governance structures and procedures,

and summarises the work of the Board

and its Committees to illustrate how

we have discharged our responsibilities

this year.

The COVID-19 pandemic continued to

impact the way we worked throughout

the year with meetings conducted

remotely to accommodate attendance

during various lockdowns and periods of

travel restrictions, although I am pleased

that I and other Board members were

physically able to attend some meetings

during the year.

In addition to seven scheduled Board

meetings, we held 18 additional Board

meetings in 2021 to support and

guide senior management and give

due consideration to the all-cash offer

from Parker-Hannifin and TransDigm’s

expressed interest in the Group.

I am proud of the Board’s dynamic and

agile response to these events and I

thank my Board colleagues for their

flexibility and outstanding support

throughout the year, particularly as some

of the additional meetings were called at

short notice and at unsociable hours.

Board composition

Continuity of leadership has been a

key focus during the pandemic and will

continue to be so up to the anticipated

completion date of the proposed

acquisition by Parker-Hannifin. I believe

that the Board has the right balance

of skills and expertise to successfully

guide the Company through continued

challenges presented by COVID-19 and

the proposed acquisition by Parker-

Hannifin, and that changes to the Board

composition during the year would have

detracted from these critical focus areas.

Whilst regrettable that we were not able

to strengthen the diversity of our Board

during the year, I believe that our focus

on continuity has enabled the Group to

respond well to the challenges of the

pandemic and the all-cash offer from

Parker-Hannifin. Further details on the

Board’s skills and experience can be

found on page 123.

Purpose, values and culture

Our culture is important to us, it’s what

makes us who we are. We monitor our

culture to ensure that it remains aligned

with our purpose and values. Details of

how we monitor culture can be found on

page 107.

In addition to the financial terms of

Parker-Hannifin’s all-cash offer, we

carefully considered Parker-Hannifin’s

values, culture, plans for Meggitt’s

business and the impact of the proposed

acquisition on our key stakeholders.

Further details on the process the Board

followed and the matters it considered

when considering the Parker-Hannifin

offer can be found in the case study on

pages 93 and 94.

UK Corporate Governance

Code

This report explains how the Group

has applied the principles of the UK

Corporate Governance Code (the

2018 Code) and how our governance

framework supports delivery of our

strategy as set out on pages 24 and 25.

Sir Nigel Rudd

Chairman of the Board of Directors

2 March 2022

In this section

Board of Directors

This introduces our individual Board

members by providing details of the skills

and experience they bring to the Board

and the Committees on which they serve.

Page

100

Corporate governance report

The Corporate governance report

analyses the leadership provided by the

Board, the steps taken to ensure that the

Board is effective and the frameworks by

which the Board manages relationships

with shareholders.

Page

104

Audit Committee report

Introduced by its Chair, Colin Day, this

report describes the Audit Committee’s

work during the year by reference to

the principal responsibilities of the

Committee for financial reporting,

external audit, the risk management

process, internal controls and

internalaudit.

Page

114

Nominations Committee report

Introduced by its Chair, Sir Nigel Rudd,

this report outlines the Committee’s

philosophy on appointments and diversity

and describes the activities of the

Committee during the year.

Page

122

Directors’ remuneration report

Introduced by its Chair, Alison Goligher,

this report summarises the Committee’s

approach to remuneration and its link

with our strategy.

Page

126

Other statutory information

This section sets out other information

we are required to disclose in

accordance with Section 415

of the Companies Act 2006.

Page

156

Meggitt PLC Annual Report and Accounts 2021

Directors’ Report

Board of Directors

Sir Nigel Rudd DL

Non-Executive Chairman

Appointed: 2015

Nationality: British

Whilst Sir Nigel had confirmed his intention

to retire from the Board in 2019, which was

subsequently delayed owing to the significant

impact of COVID-19 on the Group, the Board

believes that there is significant benefit in

continuity of leadership as the proposed

acquisition by Parker-Hannifin progresses.

Skills and experience

Chartered accountant with extensive board

experience spanning multiple sectors including

aerospace, retail and financial services.

Sir Nigel plays a critical role in leading the

Board and the Nominations Committee

and brings decades of executive leadership

and chairmanship experience across many

industrial companies, including aerospace

and defence, and other complex sectors. His

commercial, financial and business acumen

and strong shareholder focus are extremely

valuable to the Board and have played a key

role during the acquisition process.

Current appointments

Non-Executive Chairman of Sappi Limited.

Appointments in unlisted companies

Director of iPulse Limited and iPulse

DirectLimited.

Previous appointments

Chairman of Signature Aviation plc and

Williams Holdings plc, Destiny Pharma PLC,

Kidde plc, Heathrow Airport Holdings Limited

(formerly BAA Limited), The Boots Company,

Pilkington PLC, Pendragon PLC, Invensys

plc, Aquarius Platinum Limited and BGF PLC.

Deputy Chairman of Barclays PLC and Non-

Executive Director of BAE Systems plc.

Committee membership

Tony Wood

Chief Executive

Appointed: 2016 (appointed as

CEO: 2018)

Nationality: British

Skills and experience

Extensive aerospace industry experience

gained with Rolls-Royce plc where he held

a number of senior management positions,

latterly as President, Aerospace. Previously

spent 16 years at Messier-Dowty, now part of

Safran Group.

Tony’s significant operational experience in

aerospace and defence and other industrial

sectors, strong customer relationships and

strategic oversight of the Group are critical

to the Board as the business benefits from

the recovery in the civil aerospace market.

His experience of leading cultural change in

previous roles has brought the Group’s culture

into focus and created a cooperative and

collaborative workforce to execute the Group’s

strategic objectives.

Current appointments

Non-Executive Director of National Grid plc

and member of the People & Governance and

Safety & Sustainability Committees.

Organisations

Director of ADS, the UK trade organisation

representing the aerospace, defence, security

and space sectors. Fellow of the Royal

Aeronautical Society and Association for

Project Management (APM).

Committee membership

Audit

Nominations

Remuneration

Corporate Responsibility

Finance

Disclosure

Denotes Chairman

Directors’ Report

Providing expert

skills and experience

to create and deliver

sustainable value

and promote the

long-term success

oftheGroup.

Meggitt PLC Annual Report and Accounts 2021

100

Guy Berruyer

Non-Executive Director

Appointed: 2012

Nationality: French

Guy reached the conclusion of his nine-year

term in October 2021. The Board reviewed

this position in 2021, and considered that it

was important both to ensure continuity on

the Board and to secure continued input from

a valued Board member, during a period of

ongoing uncertainty as a result of COVID-19

and the proposed acquisition by Parker-

Hannifin. The Board is satisfied that Guy

continues to be independent and proposes his

re-election as an independent Non-Executive

Director.

Skills and experience

Trained as an electrical engineer at the École

Polytechnique Fédérale de Lausanne and

holds a Harvard Business School MBA. Guy has

extensive international leadership experience

and as former Chief Executive of a FTSE 100

plc, he brings significant insight, challenge and

expertise to Board and Committee discussions.

Appointments in unlisted companies

Non-Executive Director of Civica Group.

Chairman of the Supervisory Committee of

DLSoftware.

Previous appointments

Group Chief Executive of The Sage Group

plc and Chief Executive of Sage Group plc’s

Europe and Asia division. Early career spent

with software and hardware vendors in French

and other European management roles.

Non-Executive Chairman of Brandwatch, a

digital consumer intelligence company. Non-

Executive Director of Berger Levrault, a French

software and services company.

Committee membership

Louisa Burdett

Chief Financial Officer

Appointed: 2019

Nationality: British

Skills and experience

Chartered accountant who has held senior

financial positions in industrial, manufacturing,

publishing and pharmaceutical companies.

Louisa brings solid financial, commercial and

M&A experience across a broad range of

sectors, including aerospace. This has been

key as the Group took decisive action to deal

with the effects of the COVID-19 pandemic

and in discussions regarding the proposed

acquisition by Parker-Hannifin.

Current appointments

Non-Executive Director and Chair of the Audit

Committee of Electrocomponents plc, a global

distributor of industrial and electronic products.

Organisations

Member of the Institute of Chartered

Accountants in England and Wales.

Previous appointments

Chief Financial Officer of Victrex plc. CFO roles

with Optos plc, the Financial Times Group,

GE Healthcare and Chep Europe. She also

spent time in various roles at GlaxoSmithKline,

including Finance Integration Director.

Committee membership

Colin Day

Non-Executive Director

Appointed: 2015

Nationality: British

Skills and experience

Chartered certified accountant who makes a

significant contribution as Chairman of the

Audit Committee, responsible for the interface

between the Committee and the auditors and

internal audit.

Colin has more than 25 years’ experience in

senior roles and non-executive positions at

blue-chip companies across a wide range

of industries, including engineering and

technology, pharmaceuticals, oil and gas and

aerospace. He brings significant commercial

and financial expertise to the Board.

Current appointments

Non-Executive Chairman of Premier Foods plc.

Non-Executive Director and Chairman of the

Audit Committee of Euromoney Institutional

Investor PLC.

Appointments in unlisted companies

Non-Executive Director and Chairman of the

Audit and Risk Assurance Committee of the UK

Government’s Department for Environment,

Food & Rural Affairs (DEFRA). Non-Executive

Director of FM Global Inc. and FM Insurance

Europe S.A. Non-Executive Chairman of

MK:ULimited.

Organisations

Independent member and member of

the Finance Committee of the Council of

CranfieldUniversity.

Previous appointments

Chief Executive of Essentra PLC, Chief Financial

Officer of Reckitt Benckiser Group plc, Group

Finance Director of Aegis Group plc, Non-

Executive Director of WPP plc, Easyjet plc,

Imperial Tobacco Group plc, Cadbury plc, FM

Global and Senior Independent Director of

Amec Foster Wheeler plc.

Committee membership

Meggitt PLC Annual Report and Accounts 2021

101

Directors’ Report

Gender Diversity

Female

44%

Male

56%

Independence

Independent

67%

Non-Independent

33%

1 Excluding the Chairman.

Board of Directors – Non-Executive

continued

Nancy Gioia

Non-Executive Director

Appointed: 2017

Nationality: American

Skills and experience

Electrical engineer who has held senior

engineering and operational roles and has

astrong background in manufacturing.

Nancy’s background in the fast-paced

automotive manufacturing area brings

important perspective to Board discussions

about strategic initiatives. Her prior roles mean

that she brings an understanding of the value

of culture and diversity and inclusion to her

role as Chair of the Corporate Responsibility

Committee and as the Non-Executive Director

responsible for employee engagement. She

also has a keen interest in cyber security.

Current appointments

Non-Executive Director of Brady Corporation,

Chair of the Management Development and

Compensation Committee and member of

the Technology Committee. Non-Executive

Director of Lucid Group Inc., member of the

Executive Committee, Member of the Board of

Advisors of KPIT Technologies Ltd.

Appointments in unlisted companies

Principal of Gioia Consulting Services, LLC,

astrategic business advisory company.

Organisations

Member of the University of Michigan-

Dearborn Electrical and Computer Engineering

Advisory Council and Engineering Dean’s

Advisory Board.

Previous appointments

Held several key executive positions at Ford

Motor Company during a 33-year career.

Non-Executive Director of Exelon Corporation,

former Chair of AutomotiveNEXT and Stanford

University Alliance for Integrated Manufacturing.

Other responsibilities

Appointed by the Board as the Non-Executive

Director responsible for employee engagement.

Committee membership

Alison Goligher OBE

Senior Independent Director

Appointed: 2014

Nationality: British

Skills and experience

Trained engineer and holds a MEng Petroleum

Engineering from Heriot-Watt University.

Alison brings important energy sector

experience and, with her strong operations

focus, makes an excellent contribution to

strategic discussions. During her seven years

on the Board she has built strong relationships

with other non-executives and executive

management and has a detailed knowledge of

the Group which makes her well qualified for

the role of Senior Independent Director which

she assumed in 2021.

Alison has chaired our Remuneration

Committee since 2019 and also chairs

Remuneration Committees on two other

boards, all of which provide her with

excellent experience of overseeing complex

remuneration matters and policy reviews.

Current appointments

Non-Executive Director of United Utilities

Group PLC and Chair of the Remuneration

Committee. Non-Executive Director of

Technip Energies N.V. and Chair of the

CompensationCommittee.

Appointments in unlisted companies

Part-time Executive Chair of Silixa Ltd,

a provider of distributed fibre optic

monitoringsolutions.

Organisations

Member of the Royal Society of Edinburgh, the

Institute of Directors, the Society of Petroleum

Engineers and the Society of Petrophysicists

and Well Log Analysts (SPWLA).

Previous appointments

Various roles at Royal Dutch Shell from 2006 to

2015, most recently as Executive Vice President,

Upstream International Unconventionals.

Previously spent 17 years at Schlumberger,

a supplier of technology, integrated project

management and information solutions to oil

and gas customers worldwide.

Committee membership

Audit

Nominations

Remuneration

Corporate Responsibility

Finance

Disclosure

Denotes Chairman

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

102

Non-Executive Director Tenure

0–2 years

14%

3–4 years

29%

5–6 years

29%

7–8 years

14%

9+ years

14%

Executive Director Tenure

0–2 years

3–4 years

50%

5–6 years

50%

7–8 years

9+ years

Guy Hachey

Non-Executive Director

Appointed: 2019

Nationality: Canadian

Skills and experience

Holds an MBA from Concordia University,

aB.Comm. from McGill University and has

over 30 years’ experience in senior roles

acrossaerospace and automotive industries.

Guy brings significant operational,

commercialand global experience to the

Board. During his career, Guy has played a

vital role in transforming product portfolios

and was recognised at Bombardier Aerospace

for having brought five new derivative aircraft

to market. His invaluable experience and

knowledge with company transformations

introduces a fresh perspective to discussions

atBoard and Committee meetings, and his

skill-set aligns well in supporting the Board

achieve its strategic priorities.

Current appointments

Non-Executive Director of Hexcel

Corporation and Chairman of the

CompensationCommittee.

Previous appointments

Guy served as President and Chief Operating

Officer of Bombardier Aerospace from May

2008 to July 2014. Prior to joining Bombardier,

he held numerous senior roles with Delphi

Corporation, including President Delphi

Powertrain Systems and President Delphi

Europe, Middle East and Africa. Guy began

his career with General Motors Corporation,

where he held senior operational roles in

Canada and the US.

Committee membership

Caroline Silver

Non-Executive Director

Appointed: 2019

Nationality: British

Skills and experience

Chartered accountant with significant global

investment banking experience specialising in

financial institutions, financial technology and

market infrastructure, and capital raising.

Caroline brings strong financial, investment and

audit skills to the Group gained from her broad

experience in different industry sectors. As Chair

of a listed company, she also brings experience of

leading international strategies and shareholder

dialogue and introduces a fresh perspective to

discussions at the Board and Committees owing

to her background in financial services.

Current appointments

Non-Executive Chair of consumer products

group PZ Cussons Plc and Chair of the

Nominations Committee. Non-Executive Director

of Intercontinental Exchange, Inc. (ICE) and Chair

of ICE Clear Europe Limited. Member of the

International Advisory Board of Adobe Inc.

Appointments in unlisted companies

Non-Executive Director of BUPA, Chair of the

Risk Committee and member of the Audit and

Remuneration Committees. Part-time advisory

partner at Moelis & Company. Mentor at JNA

Mentoring Partners.

Organisations

Trustee of the Victoria and Albert Museum and

Chair of the Finance and Investment Committees

and member of the Audit Committee.

Previous appointments

Caroline was Vice Chair of EMEA Investment

Banking at Bank of America Merrill Lynch and

spent 14 years at Morgan Stanley where she

held a number of senior positions including

Global Vice Chair of Investment Banking and

European Head of Financial Institutions. She

started her career as a chartered accountant

with PricewaterhouseCoopers. Previously on the

Board of the London Ambulance Service NHS

Trust and Chair of the Audit & Risk Committee.

Former Senior Independent Director of M&G

PLC and member of the Audit, Remuneration,

Risk and Nominations Committees.

Committee membership

Meggitt PLC Annual Report and Accounts 2021

103

Directors’ Report

Corporate Governance

Directors’ Report

Management

Committees

Board Committees

Remuneration

The Independent

Non-Executive Directors

Determines the reward strategy for

the Executive Directors and senior

management, taking into

consideration shareholder

interests and the

wider workforce.

Audit

The Independent

Non-Executive Directors

Monitors the integrity of the Group’s

financial statements, the effectiveness

of the external and internal auditors,

risk and internal control processes,

tax and treasury.

Corporate

Responsibility

Two Independent

Non-Executive Directors,

the Executive Directors and

Group General Counsel

Stakeholder engagement, including but

not limited to employees, and oversees

the implementation of the Group’s

strategy and programmes in the areas

of corporate responsibility, charity

and community, ethics and

business conduct (including

anti-corruption) and

environment.

Disclosure

Executive Directors,

Company Secretary, VP

Investor Relations and

Group General Counsel

Discusses and approves all

matters related to inside

information under the

market abuse regime.

Nominations

Chairman and Independent

Non-Executive Directors

Ensures the Board and senior

management team have the appropriate

skills, knowledge and experience to

operate effectively and to deliver

the Group’s strategy.

Finance

Executive Directors and

Group General Counsel &

Director, Corporate Affairs

Approves treasury related activity,

insurance and other matters

delegated by the Board.

Executive Committee

Chief Executive and his direct reports.

Responsible for overall management of the

Group, driving its vision and strategy and ensuring

the organisational culture leverages diversity,

industry knowledge, global perspective and

customer insight.

Commercial Committee

Executive Directors, Group General

Counsel and Director, Corporate Affairs,

Group Director, Engineering & Strategy

and Group Operations Director.

Reviews and approves bids and proposals of

Group significance and any other significant

commercial activity.

Technology Advisory Board

Group Director, Engineering &

Strategy, Chief Technology Officer,

between two and four external

members with backgrounds in

technology or academia, Meggitt

engineering fellows and other

appropriate employees.

Provides advice on the direction and pace of

technology road maps, increases awareness

of disruptive technologies, business models

or business trends and provides guidance on

new areas and opportunities.

Board of Directors

Membership: Sir Nigel Rudd (Chairman), Executive and Independent Non-Executive Directors

Creating and delivering sustainable value by:

• Collectively setting the strategy and directing the Group.

• Setting the Group’s values and standards.

• Ensuring obligations to shareholders, employees and other stakeholders are met.

Meggitt PLC Annual Report and Accounts 2021

104

Key matters reserved for the Board:

• Approval of the Group’s strategic aims, objectives, purpose and values.

• Approval of significant changes in accounting policies.

• Approval of the Group’s risk appetite statement.

• Approval of the viability statement.

• Approval of capital projects or treasury activities over pre-determined amounts.

• Appointment and removal of Board members.

• Approval of significant Group policies.

• Reviewing the Group’s culture and corporate governance arrangements.

• Appointment and removal of the Company Secretary.

Area of focus in 2021

Key matters

considered Outcome

Strategy The Group’s strategy

Acquisition

Disposals

The Board receives regular updates on business strategy throughout

the year and held a strategy session in October where it approved the

five-year strategic plan for the Group.

Reviewed and approved the terms of the proposed acquisition of the

Group by Parker-Hannifin.

Approved the sale of the high pressure metallic ducting and clamps

business in January 2021 and the sale and leaseback of the Group’s

Airframe Systems facility in Loughborough, UK in July 2021.

Culture Code of Conduct and

Group policies

The Board reviewed and re-approved our Code of Conduct which

reflects our commitment to ethical business conduct and to comply

with laws and regulations. The Code demonstrates the conduct that is

a fundamental part of our values and culture.

During the year the Board has also reviewed and approved Group

policies on the following matters: Diversity and Inclusion, Financial

Crime, Environmental, Treasury and a consolidated policy on Ethical

Business Conduct and Anti-Bribery and Corruption.

Monitor culture The Board receives numerous updates throughout the year to monitor

culture and how well policies have been embedded. Further details on

how we monitor culture can be found on page 107.

Leadership and purpose

Our purpose at Meggitt is to design and

manufacture world-class systems and

products for the aerospace, defence and

selected energy markets to enable the

extraordinary and deliver sustainable

solutions for the most challenging

environments by working closely with our

customers and focusing on engineering

and operational excellence.

The role of the Board

Our role as a Board is to promote

the long-term success of the Group.

We do this by establishing its purpose,

implementing and overseeing

frameworks for governance and risk

management and receiving regular

updates on governance, stakeholder

engagement activities, risk, strategy

and culture.

Whilst day-to-day responsibility for

the business lies with the executive

management team, we maintain a

schedule of matters reserved for the

Board which we review regularly and

against the latest guidance and best

practice to ensure that key decisions

which affect the Group and are of the

utmost importance to our shareholders

and wider stakeholders are taken by the

Board as a whole.

Meggitt PLC Annual Report and Accounts 2021

105

Directors’ Report

Corporate Governance

continued

Directors’ Report

Area of focus

in 2021

Key matters

considered Outcome

Risk Risk appetite and

principal risks

The Board:

– Conducted a robust assessment of the emerging and principal

risks facing the Group and determined the nature and extent of

the principal risks the Group is willing to take in order to achieve its

long-term strategic objectives.

– Approved an updated Risk Management Policy.

– Implemented a new risk oversight process (risk on a page).

– Received an update on the effectiveness of risk management from

the Audit Committee.

– Reviewed and approved the risk appetite statement and Group

Risk Register.

– Approved the long-term viability statement.

Long-term viability Reviewed models of a number of scenarios including climate change,

base case and severe but plausible downside scenario for both

planning and going concern purposes which underlie the long-term

viability of the Group.

Operational

performance

Performance of the

four divisions against

strategic objectives

The Chief Executive provided updates on divisional performance at

every meeting.

The divisional presidents attended Board meetings during the year to

provide detailed updates on divisional performance.

Financial

performance

Payment to

shareholders

In order to retain cash within the Group, manage net debt levels and

preserve flexibility the Board did not recommend a final dividend for

2020 or declare an interim dividend during 2021.

Financial statements Approved the 2020 financial statements and 2021 interim

financial statements.

Going concern The Board reviewed the models underlying the appropriateness of

adopting the going concern basis in the 2020 financial statements.

Budget The Board reviewed performance against 2021 budget.

Governance Stakeholder engagement The Board continued with its stakeholder engagement programmes

as detailed on pages 90 to 92 and took the interests of all stakeholders

into consideration when making its decisions through the review of

detailed stakeholder analysis provided with each Board proposal.

Governance framework The Board reviewed and updated the terms of reference for its

principal committees.

Effectiveness An internal evaluation was conducted at the end of 2021 for the

Board and its Committees to reflect on their own performance and

recommend areas for improvement.

Independence The Board gave careful consideration to whether Guy Berruyer

remained independent on conclusion of his third three-year term as

a Non-Executive Director of the Company, and concluded that he

remained independent.

Meggitt PLC Annual Report and Accounts 2021

106

Purpose, strategy and values

To perform our role effectively, it

is essential that we have a good

understanding of the views of our

shareholders and other key stakeholders.

Details of shareholder and other

stakeholder engagement activities can

be found on pages 90 to 92. Output from

these activities are reported to the Board

and its Committees to help shape the

decisions that we make.

We hold an annual strategy day where

we receive a detailed report on the

markets in which the Group operates,

agree the strategic objectives to achieve

our purpose and approve the financial

plan to implement them. We receive

updates from the businesses and

functions throughout the year to assess

performance against the strategy and

provide additional direction if needed.

Our values are supported by our High

Performance Culture initiative and

embedded in our Code of Conduct and

Group policies which we review and

approve on a rolling basis to ensure that

they remain appropriate and clearly

articulate the behaviours we expect from

employees and management.

The Remuneration and Nominations

Committees promote our values by

ensuring that we have the right people in

the organisation who respect our purpose

and values and structuring remuneration

schemes to reward the right behaviours as

well as strategic achievements.

The Audit Committee plays a key role in

ensuring that our values are embedded

in our financial reporting process

and risk management framework by

monitoring the integrity of the financial

statements and reviewing the adequacy

and effectiveness of the Group’s internal

controls, risk management systems and

processes. The Corporate Responsibility

Committee monitors culture by

overseeing the implementation of

the Group’s strategy and corporate

responsibility programmes. The Chair of

the Corporate Responsibility Committee

is also the Non-Executive Director

responsible for employee engagement

and undertakes a range of activities

alongside other Non-Executive Directors

each year to assess how well our values

are embedded within the organisation,

better understand the challenges faced

by our workforce, share feedback with

senior management and the Board, and

make recommendations based on the

output from the engagement.

How we monitor culture

1. Health and safety – Reports are provided to the Board at every meeting through the Chief Executive, with detailed

reports every six months and regular presentations from the Vice President of Health and Safety on our safety culture

and leading and lagging indicators.

2. Reports to the Board on culture, diversity and inclusion and engagement – There is regular commentary provided in

the Chief Executive’s Report at every meeting. We also have a standalone annual session with the Group HR Director

focused on our culture, diversity and inclusion and engagement.

3. Annual employee engagement survey feedback – A summary of the results of the annual engagement survey was

shared with the Board in February 2022, with a detailed review taking place with the Non-Executive Director for

employee engagement beforehand.

4. Employee engagement – Reports from the Non-Executive Director for employee engagement are provided to the

Board. See page 92 for further details on engagement activities and key themes in 2021.

5. Whistleblowing and ethics reports – Provided quarterly to the Board to monitor if there are any systemic issues and

how they are being addressed. More detailed reports are provided to the Corporate Responsibility Committee at each

meeting. The Corporate Responsibility Committee Chair has separate meetings with the Group Director, Corporate

Compliance, Ethics & Corporate Responsibility.

6. Internal audit reports – Provided to the Audit Committee at each meeting and identify areas of non-compliance to

help us assess the effectiveness of the policies and processes implemented to embed our values and shape our culture.

We also monitor management’s response to audit findings and time taken to address audit actions.

7. UK gender pay gap – Receive an update on the UK gender pay gap report, including an explanation of the factors that

have impacted the data and actions implemented to close the gap.

8. Modern slavery – Receive an update on the approach to modern slavery and approve the modern slavery statement.

This includes details of processes and activities that have been implemented to reduce the risk of slavery and human

trafficking in our organisation and supply chain.

9. Prompt payment reporting – Review performance on supplier payment practices and discuss improvements

to processes.

10. Training completion rates – Robust and regular training is essential to ensure our workforce understands our policies

and regulations that apply to them. During 2021, we continued to deliver virtual training on key governance and

regulatory matters and track completion rates. Employees without regular access to remote training undertake it in

a classroom environment. We maintain an annual schedule of mandatory training for both new starters and existing

employees with training completion rates reported to the Board and the Corporate Responsibility Committee.

Meggitt PLC Annual Report and Accounts 2021

107

Directors’ Report

Corporate Governance

continued

Directors’ Report

Shareholders and other stakeholders

Corporate

Responsibility

Committee

Remuneration

Committee

Board Audit

Committee

Nominations

Committee

Workforce/culture/performance

Ensure remuneration is fair

across the organisation

Attract and retain talent

Strategic objectives

Oversight financial reporting

and risk management

Business and functional

updates

Policies

Ensuring the right people

are in place

Oversight

of engagement

Engage

Reports

Engage

Reports

Engage

Reports

Engage

Oversight corporate

responsibility

Reports and KPIs

Assurance on integrity of

the financial statements

Promote and reward

right behaviours

How we ensure our culture aligns with our values and strategy

Meggitt PLC Annual Report and Accounts 2021

108

Board effectiveness

Composition

The composition of the Board is

closely monitored by the Nominations

Committee to ensure that it remains

appropriately balanced and is regularly

refreshed to safeguard its independence

and ensure that the skills, knowledge

and experience of Board members align

with those needed to deliver against the

business strategy.

Appointments, induction

and training

We have a formal, rigorous and

transparent procedure for the

appointment of new Directors.

On appointment, Directors are

provided with a comprehensive

induction programme tailored to their

needs based on their experience and

background and the requirements of

the role.

The Chairman agrees a personalised

approach to the training and

development of each Director and

reviews this regularly. The Company

Secretary assists with professional

development where required and

Directors are encouraged to update

their skills regularly. Training needs are

assessed as part of the Board evaluation

process described below. During 2021

an updated briefing was provided

by external lawyers to the Board and

members of the Executive Committee

with regard to inside information and

their obligations under the market

abuse regime.

The Non-Executive Directors’

knowledge and familiarity with the

Group is facilitated by access to senior

management, reports on the business

and site visits.

Resources are available to all Directors

to develop and update their knowledge

and capabilities.

Roles and responsibilities

Chairman

Sir Nigel Rudd

• Leads the Board and sets

the agenda.

• Promotes culture of openness

and debate.

• Ensures the Board is effective.

• Facilitates the contribution of Non-

Executive Directors and oversees

the relationship between them and

the Executive Directors.

• Ensures there is an effective

system for communication

with shareholders.

Senior Independent Director

Alison Goligher

• Makes herself available to

shareholders if they have concerns

which cannot be resolved through

the normal channels.

• Chair of the Nominations

Committee when it is

considering the Chairman of the

Board’s succession.

• Appraises the Chairman’s

performance annually with the

Non-Executive Directors.

• Acts, if necessary, as a focal

point and intermediary for the

other Directors.

Chief Executive

Tony Wood

• Leads the Executive Directors

and the senior executive team

in the day-to-day running of the

Group’s business.

• Ensures effective implementation

ofBoard decisions.

• Regularly reviews the strategic

direction and operational

performance of the

Group’s business.

• Keeps the Chairman informed on

allimportant matters.

Executive Directors

Tony Wood and Louisa Burdett

• Responsible for successful

delivery of the Group’s objectives

and strategy.

• Manage various functions and

operations across the Group.

Independent Non-Executive

Directors

Alison Goligher, Colin Day, Nancy

Gioia, Guy Hachey, Caroline

Silver and Guy Berruyer

• Constructively challenge

management and scrutinise

their performance.

• Contribute to the development of

the Group’s strategy.

• Monitor the Group’s performance.

• Satisfy themselves on the integrity

of financial information and the

effectiveness of financial controls

and risk management.

• Determine appropriate levels of

remuneration for the Executive

Directors and participate in the

selection and recruitment of new

Directors and succession planning.

Non-Executive Director for

employee engagement

Nancy Gioia

• Engages with employees

through a range of formal and

informal initiatives.

• Ensures that employee policies and

practices are in line with the Group’s

purpose and values and support the

desired culture.

• Regularly reviews Speak Up

Linereports.

Company Secretary

Marina Thomas

• Acts as secretary to the Board and

its Committees.

• Ensures compliance with Board

procedures and advises on

governance issues.

• Facilitates the induction process for

new Directors.

• Ensures good information flow

within the Board and between

Non-Executive Directors and

senior management.

Meggitt PLC Annual Report and Accounts 2021

109

Directors’ Report

Corporate Governance

continued

Conflicts

Our Directors hold appointments in

other listed and non-listed companies

as shown on pages 100 to 103.

We recognise the value derived from

these appointments particularly

with regard to Board discussions

and the sharing of best practice

where appropriate.

We maintain a register of all external

appointments and interests of our Board

members which is reviewed regularly

to ensure that it is accurate and up to

date. Directors notify the Board of any

actual or potential conflicts arising from

these external appointments or other

matters, which are duly considered by

the Board and, if thought appropriate,

approved together with relevant

conditions to ensure that the conflict is

appropriately managed.

As Meggitt’s business is diverse and

operates across multiple markets, a

list of our competitors by division is

included in our Group Strategy review

and assists Non-Executive Directors in

identifying actual or potential conflicts

arising out of current or prospective

external appointments.

Time commitment

The minimum time commitment

expected from the Non-Executive

Directors is set out in their letters

of appointment. We monitor the

external time commitments of our

Directors closely to ensure that they

have the capacity to discharge their

responsibilities to Meggitt effectively.

Prior to appointment, all existing

commitments are considered against

the overboarding guidance issued by

the institutional shareholder advisory

organisations, and all additional

appointments are subject to Board

approval following consideration of the

additional time commitment and the

overboarding risk.

In July 2021, Nancy Gioia was appointed

as a Non-Executive Director of Lucid

Group, a company incorporated in

the United States and listed on the

Nasdaq stock market. The Board

considered the appointment on its own

merit, taking into consideration the

nature, expectation and requisite time

commitment of the new role together

with a holistic view of Nancy’s existing

appointments and responsibilities and

her strong attendance at scheduled

and additional Board and Committee

meetings. Following such consideration

the Board was satisfied that Nancy

would continue to have sufficient time

to effectively discharge her duties to

Meggitt following the appointment.

The Board is mindful of the number of

external appointments held by Colin

Day and Caroline Silver. Both Colin and

Caroline have risen to the challenges

and extra time commitment demanded

of the Board and its Committees

over the past two years. Colin has

continued to meet with management

and the internal and external auditors

outside of scheduled Audit Committee

meetings to provide additional oversight

and guidance on risk management

and financial reporting matters.

Both Caroline and Colin have mentored

a member of senior management

and have been involved in the 2021

employee engagement programme

and Caroline presented at our 2021

leadership conference. The Board

continues to be satisfied that both Colin

and Caroline have time to discharge

their duties to Meggitt and is completely

satisfied with their performance.

Additionally, as part of the year-end

process, each Non-Executive Director

confirmed that, taking into consideration

all of their external appointments and

commitments, they continue to have the

capacity to effectively discharge their

duties to Meggitt effectively.

Information and support

The Chairman is responsible for ensuring

the Directors receive accurate, timely

and clear information.

The Company Secretary is responsible

for supplying the Board with the

information it needs to discharge its

duties and ensuring good information

flows within the Board and Committees

and between senior management and

the Non-Executive Directors. The Board

considers the quality of information it

receives and the effectiveness of the

annual Board schedule during the Board

evaluation process.

All Directors have had access to the

advice and services of the Company

Secretary, who is responsible

to the Board for advising on all

governance matters.

The Board allows all Directors to take

external independent professional

advice at the Group’s expense.

Board evaluation

The Board undertakes an annual

review of its own effectiveness using a

combination of independent externally

facilitated and internally run evaluations

over a three-year cycle. The last external

review was undertaken in 2019 by Clare

Chalmers Limited. An internal review was

undertaken in 2021 which focused on

key governance areas.

The Board reviewed the suggestions

made following the evaluation and

agreed the actions shown on page 112.

Mindful that Guy Berruyer’s nine-year

tenure on the Board could impair, or

appear to impair his independence

and impartiality towards executive

management, the Board carefully

considered his contribution to

Board and Committee meetings and

relationship with the management

team and unanimously agreed that Guy

continued to bring an objective view

to Board and Committee discussions,

offer constructive challenge to executive

management and hold them to account,

add value to the development of

the Group’s strategy and remained

independent and was not swayed by his

relationship with the executives.

Meggitt PLC Annual Report and Accounts 2021

110

2020 Evaluation results

Agreed actions Progress

Improving the quality of Board and

Committee papers with a focus

on enhancing readability, avoiding

duplication and making better use of

executive summaries.

Feedback has been delivered to executive management on: (i) the length of

papers; (ii) overlap in reports; (iii) more use of executive summaries; and (iv) the

importance of readability.

Recognising the cost and time saving

benefits of wholly-virtual meetings

given the international nature of the

Board, integrate some wholly-virtual

meetings into future Board schedules.

Wholly-virtual meetings continued in 2021 due to ongoing COVID-19

restrictions and the need for short notice meetings to consider and respond to

interest in the Group from TransDigm and Parker-Hannifin.

Some wholly-virtual meetings will be scheduled for 2022.

Schedule more virtual engagements

with senior executives in 2021.

Senior management engagement was hosted virtually in 2021. Further details

on engagement activities can be found on page 92.

Resume site visits and in person

Non-Executive Director events and

briefings as soon as possible.

Ongoing COVID-19 restrictions in 2021 impeded this action, however, the

Chairman and several Non-Executive Directors visited the new Ansty Park site

in 2021, and three Non-Executive Directors attended the senior leadership

conference in February 2022. Subject to COVID-19 restrictions, site visits and

other in person Non-Executive Director events will resume in 2022.

Board and Committee evaluation process

In order to evaluate its own

effectiveness, the Board undertakes

annual effectiveness reviews using

a combination of independent

externally facilitated and internally run

evaluations over a three-year cycle.

November 2021

Internal Board evaluation

planning by the Chairman

and Company Secretary.

December 2021

to January 2022

Questionnaires issued

to the Board, Committees

and other attendees.

The Board effectiveness questionnaire

posed questions in the following areas

ranked on a scale of 1 to 3 (with space

for comments):

• How well the Non-Executive

Directors support and challenge

executive management.

• How well the Non-Executive

Directors understand the Group’s

business and contribute to setting

the Group’s strategy.

• Whether the Board responded

well to the proposed acquisition

by Parker-Hannifin, gave due

consideration to all stakeholder

groups and achieved the

best outcome for the

Company’s shareholders.

• How well the Board understands

the impact of climate change on

Meggitt’s markets and operations.

• Whether the Board takes the

impact of climate change into

consideration when

setting the Group’s policies

and strategy.

• Whether the Board has a good

understanding of the interests of the

Company’s key stakeholders.

• To what extent Board meetings

are engaging with high quality

discussion and open debate

and whether all Board members

contribute to discussions and work

together well.

• Whether the skills and experience on

the Board are appropriate.

• Whether the Chairman’s leadership

style and tone is effective.

• Whether the Company Secretary is

supporting the Board as appropriate.

• Whether the Board schedule and

papers are appropriate.

• Whether risk management is

undertaken appropriately.

• Whether the Board has sufficient

oversight of the succession

planning process.

February 2022

A detailed discussion

is held by the Board on

their responses to the

questionnaire and resulting

actions are agreed.

The Senior Independent Director met

with the Non-Executive Directors

to assess the performance of the

Chairman and the Chairman held

remote meetings with the Non-

Executive Directors without the

Executive Directors present where the

performance of executive management

was discussed.

Meggitt PLC Annual Report and Accounts 2021

111

Directors’ Report

Corporate Governance

continued

Directors’ Report

2021 Evaluation

Another internally run evaluation was conducted via an online questionnaire at the end of 2021 and focused on the governance

areas set out on page 111. The Board has reviewed the output from the evaluation and has agreed the following:

Area Agreed action

Engagement with the senior

management team.

The continued impact of COVID-19 limited the frequency of interactions

between the senior management team and the Non-Executive Directors, as

a result additional engagement sessions between the senior management

team and the Non-Executive Directors will be incorporated into the 2022

engagement schedule.

Board composition. The proposed acquisition of the Group by Parker-Hannifin is expected to

complete in Q3 2022 and there is no appetite to change the Board composition

whilst the acquisition process is progressing. Should the proposed acquisition

not complete a detailed review of the Board’s composition will be conducted.

Whilst appointments will always be made on merit, strengthening the ethnic

diversity of the Board will be a key consideration in the recruitment process for

any new Director.

Board and Committee papers. Whilst recognising the improvements to Board and Committee papers over

the year, more work is needed to ensure the succinctness of presentations and

consistent use of executive summaries.

Meggitt PLC Annual Report and Accounts 2021

112

Shareholder documents

We provide annual reports and other

documents to shareholders in their

elected format. Electronic copies of this

Annual Report and Accounts and the

Notice of the Annual General Meeting

will be posted on our website, together

with announcements, press releases and

other investor information, including an

analysis of ordinary shareholders by size

of holdings and shareholder type.

General Meetings

2021 Annual General Meeting

We recognise the importance of

the Annual General Meeting for

shareholders and held a hybrid

meeting in 2021 to facilitate and

enhance shareholder engagement

and participation.

We received 24.34% of votes against

the resolution to approve the Directors’

Remuneration Policy and 22.82%

of votes against the resolution to

authorise the Directors to allot shares

up to the maximum nominal amount

of £26,042,444, representing the UK

Investment Association’s guideline

limit of approximately two-thirds of the

Company’s share capital.

Remuneration Policy

We recognise the importance

of stakeholder engagement on

remuneration, particularly in the

aftermath of and recovery from the

COVID-19 pandemic. Prior to the Annual

General Meeting and as reported in the

2020 Directors’ remuneration report, we

carried out an extensive consultation

with our largest shareholders,

representing a significant proportion

of the register. As a result of the initial

consultation stages we implemented

changes to the proposed Policy to take

account of feedback received. We were

pleased that the Policy was supported

by a wide range of our shareholders as

a result.

Whilst we will continue to consider any

feedback received as we implement the

Policy, we still believe that the hybrid

approach to our long-term incentives

adopted by the Policy, including both

performance and restricted share

awards, is completely appropriate

for Meggitt, allowing us to maintain

alignment between our shareholders

and motivating our leadership and

senior management team. We will

continue to assess the suitability of

the hybrid approach during the

Policy period.

Authority of Directors to

allot shares

We are aware that some institutional

investors, particularly outside the UK,

have specific policies against supporting

allotment authorities or allotment

authorities at the level sought. We also

note that this level of authority continues

to be supported by the majority of our

shareholders and is in line with the UK

Investment Association’s share capital

management guidelines and prevailing

voting guidelines of leading corporate

governance agencies applicable to UK

listed companies.

The Company has taken into

consideration shareholders’ views and

best practice in this area, and whilst

noting the stance of certain investors

on the matter, the Board considers it

appropriate to maintain the flexibility

these authorities provide to enable the

Company to respond quickly to market

developments and enable allotments

to take place to finance business

opportunities. The Directors confirm

that they have no current intention of

exercising this authority.

General and Court Meetings

In September 2021 the General and

Court Meetings for shareholders to

approve the offer from Parker-Hannifin

were held as hybrid meetings to

facilitate and encourage shareholder

participation and engagement.

The resolution put to the General

Meeting was passed by 99.79% of the

votes cast and the resolution put to the

Court Meeting was passed by 99.77% of

the votes cast.

2022 Annual General Meeting

Our 2022 Annual General Meeting

is scheduled on 29 June 2022 and

will be held as a hybrid meeting to

enhance shareholder engagement and

participation channels. Further detail are

included in the Notice of Meeting.

All Directors are subject to election by

shareholders at the first Annual General

Meeting after their appointment.

After that, all Directors are subject to

annual re-election to comply with the

2018 Code. All Directors in office at the

date of the Annual General Meeting will

be subject to re-election.

Statement of compliance

Throughout the financial year ended

31 December 2021 and to the date of

this Annual Report, we have complied

with the provisions set out in the

2018 Code published by the Financial

Reporting Council, with the exception

of Provision 38. Provision 38 requires

the alignment of Executive Director

pension contributions with the wider

workforce. We were planning a review

of the UK pension plans and pension

provision for Meggitt in the UK when the

2018 Code came into force. This review

was completed and as a result, our UK

defined benefit pension plan closed in

April 2021 and the UK workforce pension

contribution will be 10% by April 2022.

Mr Wood and Mrs Burdett received

pension allowances in 2021 of 18% and

17.5% of salary respectively. In 2022,

Mr Wood and Mrs Burdett’s pension

allowances are being reduced to 15% of

salary. It has been agreed that further

reductions will be reviewed by the

Remuneration Committee in 2022 should

the proposed acquisition by Parker-

Hannifin not proceed.

A copy of the 2018 Code can be found

on the Financial Reporting Council’s

website: https://www.frc.org.uk.

Details of how the Group has applied the

principles set out in the 2018 Code are

included in this report and in the Audit

Committee, Nominations Committee

and the Directors’ Remuneration

reports. The information required under

Rule 7.2.6 of the Disclosure Guidance

and Transparency Rules is disclosed in

the Directors’ report.

By order of the Board

M L Thomas

Company Secretary

2 March 2022

Meggitt PLC Annual Report and Accounts 2021

113

Directors’ Report

Audit Committee report

Protecting shareholders’ interests

through financial reporting and

internal control.

Chief Executive Officer of Essentra plc

and Chief Financial Officer of Reckitt

Benckiser Group plc, I can confirm that I,

together with Caroline Silver, a chartered

accountant with significant global

investment banking experience, bring

recent and relevant financial experience

to the Committee.

In addition to myself, Committee members

throughout 2021 were Guy Berruyer, Nancy

Gioia, Alison Goligher, Guy Hachey and

Caroline Silver. As a whole, we bring skills,

knowledge and experience relevant to the

aerospace, defence and selected energy

markets in which the Group operates.

Further details are included in our profiles

on pages 100 to 103.

By invitation, there were a number of

other regular attendees at meetings

throughout the year including the

Chairman of the Board, Chief Executive,

Chief Financial Officer, the Group

Financial Controller, and the internal

and external auditors. The Group Head

of Tax and a representative of Grant

Thornton, who provide co-sourced

audits for the internal audit function,

also attended meetings by invitation.

Responsibilities

The Committee’s key role is to protect

shareholders’ interests in relation to the

Group’s financial reporting and internal

control arrangements. The Committee

is responsible for ensuring the integrity

of the processes and procedures

relating to corporate reporting and the

effectiveness of the internal controls

and risk management systems. The

Board relies on the Committee to ensure

appropriate disclosures are made in the

financial reports and to oversee the work

of the internal and external auditors.

Specific responsibilities include:

Financial reporting:

• Focusing on accounting policies,

judgements and estimates,

challenging the decisions and

approach taken by management to

ensure appropriate disclosures and

compliance with relevant regulations.

• Challenging and scrutinising the work

taken to support the long-term viability

and going concern statements.

• Reviewing the content of the Annual

Report and Accounts and advising the

Board whether it is fair, balanced and

understandable.

Risk and control:

• Monitoring the effectiveness of risk

management and internal control

systems.

• Reviewing the effectiveness of the risk

management processes, including

those used to determine risk appetite,

tolerance and strategy and advising

the Board of the appropriateness of

those processes.

Committee membership and

attendance in 2021

Mr C R Day

Committee

Chairman

Mr G S Berruyer

Non-Executive

Director

Mrs N L Gioia

Non-Executive

Director

Ms A J P Goligher

Non-Executive

Director

Mr G C Hachey

Non-Executive

Director

Mrs C L Silver

Non-Executive

Director

Scheduled meetings

Non-attendance

1 Unable to attend due to prior external

commitments.

Meetings attended Non-attendance

Directors’ Report

Dear Shareholder

I am pleased to present the report of the

Audit Committee for 2021.

I chair the Audit Committee and as a

Fellow of the Association of Chartered

Certified Accountants, and previous

Meggitt PLC Annual Report and Accounts 2021

114

Internal audit:

• Reviewing the resources and scope

of the internal audit function and

approving the internal audit charter.

• Approving annual internal audit

plans and reviewing the results and

effectiveness of internal audits.

External audit:

• Monitoring independence and

effectiveness of the external

auditors and approving the terms of

engagement and audit fees.

• Recommending to the Board the

appointment, re-appointment or

removal of the auditors.

• Reviewing and approving the annual

external audit plan and ensuring that

it is consistent with the scope of the

audit engagement and coordinated

with the activities of internal audit.

Effectiveness

The Committee has a carefully planned

agenda of items of business to ensure

that high standards of financial governance

and risk management are maintained.

There were three scheduled meetings

during the year.

I have an open, constructive and

collaborative relationship with

management and meet with them

and the internal and external auditors

outside scheduled meetings to provide

guidance as appropriate. Prior to each

scheduled meeting, I meet with the

Chief Financial Officer, Group Financial

Controller, Head of Assurance & Risk and

the external auditors, to share views and

consider key issues, particularly regarding

significant estimates and judgements,

to be highlighted to the Committee for

discussion and ensure appropriate time is

allocated for each item.

The Committee reviewed its own

effectiveness via the process described

on pages 110 to 111. Overall the results

of the survey were very positive with

no improvement actions identified

and areas previously highlighted for

improvement in prior years scoring

highly. It was noted that the Committee

was effective at discussing the material

matters of importance and challenging

management appropriately.

Since the year end, the Committee has

discussed the external auditors’ final

audit clearance report for 2021, reviewed

the financial information contained in

the 2021 Annual Report and Accounts

and full year results announcement and

recommended them to the Board for

approval. The Committee also provided

advice to the Board that the 2021 Annual

Report and Accounts, taken as a whole,

is fair, balanced and understandable.

The Committee provided this advice

having reviewed management’s process

and confirmed its output, and provided

confirmation to the Board that this process

was effective. The Committee also

recommended that the Board approves

the viability and going concern statements.

Committee activities in 2021

Approved

• The 2021 external audit fees

• The internal audit plan for 2022

• The terms of engagement for the external auditors

• The 2022 Audit Committee Agenda

Reviewed

• The financial information contained in the 2020 Annual Report and Accounts, 2020 full year and 2021 interim results

announcements and recommended them to the Board for approval.

• Significant estimates and judgements in respect of the Group’s financial statements (pages 116 to 119).

• The independence and effectiveness of the external auditors, and agreed their terms of engagement; the Committee also

reviewed the process for the mandatory audit tender in light of the proposed acquisition by Parker-Hannifin.

• The adequacy and effectiveness of: (i) the systems of internal control; (ii) the risk management process; and (iii) the process

executive management used to enable the Board to make the viability statement.

• The effectiveness of the Committee and external audit using the process described on pages 110 to 111.

• The outcome of the internally facilitated internal audit review (see page 121).

• The external auditors’ strategy memorandum, including level of materiality applied by PwC, and interim audit clearance report for 2021.

• Terms of Reference for the Committee, which were recommended to the Board for approval.

• The reporting processes applied in the production of the 2020 Annual Report and Accounts and the output of these processes

to determine that the 2020 Annual Report and Accounts was fair, balanced and understandable and advised the Board as such.

• The basis of preparation of the financial statements as a going concern and scrutinised the work undertaken by management.

• Issues and findings of the internal audit function and satisfied itself that management had resolved or was in the process of

resolving any outstanding issues.

• The financial reporting consequences of TCFD and climate change.

• The implications of the BEIS consultation on “Restoring Trust in Audit and Corporate Governance”.

Updates and reports

• Received at every meeting from the Head of Assurance & Risk a report on findings from internal audits and progress with the

internal audit plan and internal controls across the Group.

• Received an update on the results of the viability statement stress testing scenarios.

• Received updates on the risk management process.

• Received an update from the Group Head of Tax.

• Received technical accounting and governance updates provided by the Group Financial Controller, Company Secretary

and the external auditors.

Meggitt PLC Annual Report and Accounts 2021

115

Directors’ Report

Audit Committee report

continued

Critical accounting estimates and judgements:

Area Action

Provision for environmental

matters relating to historic sites

and related insurance receivables

At each meeting in 2021, and also at the February 2022 meeting, the Committee

discussed the status of a claim from a third party that a former site operated

by Whittaker had contributed to environmental pollution for which it should be

responsible. These discussions included the status on a number of areas notably:

the third-party legal action; mediation between Whittaker and the third party;

mediation between Whittaker and its historic insurers and the ongoing litigation

brought by Whittaker against those insurers; and discussions with other third

parties over their responsibility for reimbursing Whittaker should it be found

responsible for any amounts.

At both the March 2021 meeting and the July 2021 meeting, the Committee

concluded that based on conditions at that date, including the nature and

amounts claimed by the third party, that neither a mediated settlement or, in

the event the matter went to court, an adverse trial outcome would result in a

material charge being recorded in the income statement in the next 12 months.

In their subsequent December 2021 and February 2022 meetings, the Committee

discussed the change in conditions since the July 2021 meeting and which

had led to the recognition by management of a £29.5m charge to the income

statement and were satisfied these could not have previously been considered

reasonably foreseeable.

In respect of the £29.5m liability recognised in the year, the Committee

discussed their expectations of potential outcomes. The Committee agreed with

management that a most likely amount approach should be used for estimating

the liability and that the amounts recorded reflected their best estimate of

that outcome based on conditions prevailing at the date of their February

meeting. Given the uncertainty over how the matter would be finally resolved,

the Committee concluded it was however appropriate to disclose that it was

reasonably foreseeable that material changes to the amounts recorded could be

recognised in the next 12 months.

At the February 2022 meeting, the Committee discussed with management its

assessment that it was not appropriate to recognise any amounts recoverable

from either historic insurers or third parties. The Committee concluded that whilst

it expected material amounts would be recovered, under the accounting policy it

had agreed with management that typically any insurance or third party recovery

in respect of environmental matters would only be considered virtually certain

when there was a signed binding agreement between the parties concerning

the nature and amounts to be reimbursed, no recoverable amounts should be

recognised as an asset at the balance sheet date. However, the Committee

agreed that given the likelihood that material amounts would meet the criteria to

be recognised within the next 12 months, this should be disclosed.

The Committee agreed that disclosing their estimate of any material adjustments

to the liability recognised or amounts that would be recognised as recoverable

from historic insurers or other third parties would be seriously prejudicial to the

outcome and accordingly should not be disclosed.

Significant estimates, judgements and disclosures relating to the financial statements

The table below summarises the significant estimates, judgements and disclosures reviewed by the Committee in respect of

the Group’s financial statements ensuring key personnel in the finance team have appropriate exposure to the Committee in the

virtual environment.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

116

Critical accounting estimates and judgements:

Area Action

Development costs

The Committee discussed a report from management analysing amounts

capitalised across different aircraft platforms and manufacturers, including a

sensitivity analysis for specific programmes.

In light of the tensions with Russia over Ukraine at the date of the February

Committee, which preceded the date on which Russian troops entered Ukraine,

the main area of focus was the Irkut MC-21 programme, on which the Group has

a capitalised value of £40.9m at 31 December 2021. The Committee discussed

management’s sensitivity analysis for the programme, which showed headroom

had increased during 2021; the extent to which fleet volumes would need to

fall from those modelled by the Group before a material impairment would be

required, noting this was significant; the existing reported order backlog for the

aircraft; and its planned entry into service (EIS) date in late 2022 or early 2023.

The Committee concluded that, management’s assumptions were appropriate

and agreed no impairment was required. However, the Committee agreed that

it was reasonably foreseeable that tensions over Ukraine may escalate further in

the future, and were these to lead to sanctions, trade embargoes and/or other

measures being imposed, this could result in significant delays to the aircraft’s

EIS and/or the ability of the Group to access the benefits it expects from the

programme. Were these events to happen in the next 12 months, the Committee

concluded there was a risk a material impairment loss would be required against

the capitalised value on the programme.

For the remaining platforms on which the Group had material capitalised

balances at 31 December 2021, the Committee concluded that assumptions made

by management were reasonable and the carrying values and estimated lives of

the programmes were appropriate. The Committee also discussed the risk of any

programme cancellations or OEM bankruptcies which would lead to a material

impairment and concluded that the risk of such an event in the next financial year

was not significant.

There was also a wider discussion about the potential impacts of climate

change on the expected life of aircraft/engines and the fleet volumes assumed

by management in their impairment testing, including input from the Group’s

Director, Engineering & Strategy. The Committee concluded that climate

change had been appropriately reflected in the impairment testing modelling

assumptions used by management.

Retirement benefit obligations

The Committee considered a report from management setting out the basis

on which assumptions on mortality, inflation and the rates at which scheme

liabilities are discounted had been determined; how the Group’s assumptions

used in its prior year 2020 financial statements benchmarked against those

disclosed by other large corporate entities in the UK and US; and the sensitivity

of amounts recorded in the balance sheet to changes in assumptions. The

Committee concluded that the assumptions used, which were supported by

third-party actuarial advice, were appropriate. Given the sensitivity of the deficit

recognised to reasonably foreseeable changes in assumptions in the next 12

months, the Committee agreed this should continue to be considered a critical

accountingestimate.

Meggitt PLC Annual Report and Accounts 2021

117

Directors’ Report

Other significant areas of Committee focus:

Area Action

Going concern

The Committee reviewed the work performed by management in assessing the

Group’s ability to continue as a going concern.

For the base case, the Committee considered the outputs from management’s

work, noting that in their role as members of the Board they had reviewed and

challenged the cash flow forecasts prepared by management that were used in

this scenario. The Committee also noted the level of committed credit facility

headroom that existed throughout the going concern assessment period and the

significant covenant headroom at the twice yearly testing dates of 30 June 2022

and 31 December 2022. The Committee agreed that given the Group is in an offer

period under the UK Takeover Code, it is not providing financial guidance for 2022

and accordingly the base case scenario assumptions should not be disclosed.

In considering the reverse stress scenario, the Committee discussed those

conditions under which the Group would be close to breaching its covenant ratios

during the going concern assessment period and the risk that these could occur.

The Committee noted that at each of the four covenant testing dates since the

COVID-19 outbreak, the Group had maintained comfortable headroom on its

covenant ratios with net debt/EBITDA remaining within the Board’s target range

of 1.5x to 2.5x. The Committee concluded that the likelihood of the conditions

modelled in the reverse stress scenario occurring was remote.

The Committee agreed in the event the proposed acquisition of the Group by

Parker-Hannifin was completed during the going concern assessment period,

that it believed Parker-Hannifin would be able to continue to operate the Group

as a going concern during that period and be able to finance the proposed

acquisition, including settlement of those liabilities becoming repayable on a

change of control.

The Committee concluded there was no material uncertainty around the Group’s

ability to continue as a going concern and that the disclosures in the Annual

Report were appropriate.

Goodwill

The Committee agreed with management that, in light of the proposed

acquisition of the Group by Parker-Hannifin, a reliable estimate of the fair

value less costs of disposal (FVLCOD) of the Group existed. In assessing how

to attribute the FVLCOD of the Group to the level of the CGUs and groups of

CGUs at which impairment testing was performed, there was a discussion with

management on various different methods that could be used. As the offer from

Parker-Hannifin was made during the period the Group was performing its annual

impairment testing using a value-in-use basis, consistent with prior years, the

Committee agreed with management’s view that they should use the results of

this value-in-use analysis as an appropriate basis for allocation.

At the December meeting, the Committee considered a report from

management setting out the assumptions made in its value-in-use modelling,

including the cash flows used, which as members of the Board they had

previously reviewed; how these cash flows had been probability weighted to

reflect a number of different scenarios; discount rates applied to the cash flows;

and long-term growth rates, including the extent to which they reflected the

potential impacts of climate change and other structural changes in the market.

They also discussed a sensitivity analysis prepared by management setting out

the impact reasonably foreseeable changes in these assumptions could have

on the value-in use of each CGU and group of CGUs and how this would impact

the determination of their FVLCOD. The Committee noted that in each of the

sensitivities modelled, there was significant headroom between the FVLCOD of

the CGUs and groups of CGUs and their carrying value.

The Committee therefore concluded that no reasonably foreseeable change in

assumptions would lead a material goodwill impairment in the next 12 months.

Audit Committee report

continued

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

118

Other significant areas of Committee focus:

Area Action

Liabilities for uncertain tax

positions

In assessing the appropriateness of the provision recognised in respect of

uncertain tax positions, the Committee considered a report from management

setting out the basis for the assumptions made for each significant area of tax

exposure. It discussed the assumptions in light of the current tax environment

and the status of tax audits in the main jurisdictions in which the Group operates.

A separate presentation from the Group’s Head of Tax on each of the major

areas of exposure was also received and discussed. The Committee noted

that the anticipated assessment in the year by HMRC of £16.9m tax in respect

of the European Commission’s decision that state aid partially applied to one

of the UK’s CFC exemptions utilised by the Group, had been fully provided

for at 31 December 2020. It agreed that the future recovery of any element of

the assessment was dependent on the occurrence of certain events which are

uncertain, including the European General Court overturning the European

Commission’s state aid ruling on appeal. Given these uncertainties, the

Committee agreed that it was not appropriate to recognise any receivable in

respect of the matter. The Committee further agreed there was not a significant

risk of any material adjustment to the estimates made in 2022.

Treatment of items excluded from

underlying profit measures

The Committee discussed the treatment and disclosure of amounts included

within exceptional operating items. The Committee agreed that it was

appropriate to treat the £29.5m costs relating to the Whittaker environmental

claim as exceptional given its size, nature and that it was considered non-

recurring, noting that it related to a former site sold by Whittaker, prior to its

acquisition by the Group in 1999.

It noted other items classified as exceptional operating items continued to

reflect the way in which they, as members of the Board, reviewed the underlying

performance of the Group, were treated consistently year on year and

disclosedappropriately.

The Committee agreed with management’s exclusion of costs incurred relating to

the proposed acquisition of the Group by Parker-Hannifin from underlying profit

measures and the disclosure of those costs contingent on the acquisition being

completed as a financial commitment.

Key areas of oversight

Financial reporting

The Committee’s role is to ensure that

disclosures in the financial statements

are appropriate given the data available

and, if not, challenge management to

explain and justify their interpretation

and, if necessary, update the disclosure.

Significant estimates and judgements

reviewed by the Committee in respect of

the 2021 financial statements are set out

on pages 116 to 119. When considering

these matters we sought the opinion of

the external auditors as to whether the

estimates and judgements made were

appropriate taking into consideration

information available and agreed

accounting practices.

The Committee reviews the content

of the Annual Report and Accounts

and advises the Board whether, taken

as a whole, it is fair, balanced and

understandable and provides the

information necessary for shareholders

to assess the Group’s performance,

business model and strategy. To assist

with this assessment, the Committee

seeks input from the Head of Assurance

& Risk and reviews questions completed

by management to illustrate the fair,

balanced and understandable aspects

of the Annual Report and Accounts and

a summary of the financial reporting

process. Following consideration of

these items together with the Annual

Report and Accounts, the Committee is

satisfied that the key events and issues

impacting the Group during the year,

both positive and negative, have been

adequately reflected and referenced in

the Annual Report and Accounts.

EU Single Electronic Format (ESEF)

Pursuant to Disclosure and Transparency

Rule (DTR) 4.1.14R, the Group’s 2021

Annual Report and Accounts has to be

prepared in XHTML, a form of computer

language used to create web pages, and

the data included in the consolidated

financial statements needs to be marked

up with XBRL tags. In December 2021,

the Committee reviewed the process

management would take to comply

with the new requirements, which

included: our publisher partnering with

Arkk Solutions, a firm specialising in

XBRL tagging since 2011 to deliver a

full service ESEF solution; preparing a

test ESEF filing using the 2020 Annual

Report and Accounts to pre-empt and

address any potential issues; and the

Group’s central finance team working

with our publisher and Arkk to agree the

tagging taxonomy. In February 2022, the

Committee received an update on the

ESEF process and was satisfied with the

approach taken.

External audit

The external auditors are

PricewaterhouseCoopers LLP (PwC) who

were first appointed for the financial

year commencing 1 January 2003 after

Meggitt PLC Annual Report and Accounts 2021

119

Directors’ Report

a competitive tender. The Committee

undertook a further competitive tender

in 2017 (described in our 2017 Audit

Committee report) as a result of which

it was agreed that PwC should be

re-appointed. There are no contractual

obligations restricting the Committee’s

choice of external auditors.

The mandatory rotation of auditors will

take place in 2023. Audit tenders include

a significant investment by the firms

chosen to tender, as well as additional

workload for the Group’s finance

team. In light of the high probability

that the proposed acquisition of the

Group by Parker-Hannifin will complete

before the end of PwC’s audit tenure,

the Committee confirmed support

for management’s proposal to pause

and re-commence the audit tender

project in Q2 2022 should it be

considerednecessary.

The Committee maintains oversight

of the Group’s relationship with the

external auditors, and is responsible

for reviewing the effectiveness of the

audit process, including an assessment

of the quality of audit, and assessing

annually their independence and

objectivity taking into account relevant

UK professional and regulatory

requirements and the Group’s

relationship with the auditors as a whole.

Quality

PwC presented the audit strategy for

the 2021 financial year at the meeting

in July 2021, including their application

of materiality and the scope to be

able to provide an opinion on the

Group financial statements as a whole.

Following discussion, the Committee

approved the scope of the audit and the

threshold for materiality. PwC reported

on the progress made against the audit

plan at subsequent meetings to enable

the Committee to monitor progress.

Access to management

and information

The Committee routinely meets

PwC without executive management

present to encourage open and honest

feedback. No concerns have been

raised by PwC who confirmed that they

had been able to offer rigorous and

constructive challenge to executive

management during the year.

Evaluation

During the year, all members of the

Committee, as well as key members

of the senior management team and

those who regularly provide input into

the Committee or have regular contact

with the external auditors, completed

a feedback questionnaire seeking

their views on the effectiveness of the

external audit. Views of the respondents

were sought in terms of:

• The independence and objectivity of

the external auditors.

• The external auditors understanding

of the business and risks material to

the audit including those resulting

from COVID-19.

• The robustness of the external audit

process and degree of challenge to

matters of significant audit risk and

areas of management subjectivity.

• Whether the scope of the audit and

the planning process were appropriate

for the delivery of an effective and

efficient audit.

• The expertise of the audit team

conducting the audit.

• The degree of professional scepticism

applied by the external auditors.

• The appropriateness of the

communication between the

Committee and the external auditors

in terms of technical issues.

• The quality of the audit and service

provided by the external auditors.

The feedback was collated and

presented to the meeting of the

Committee held in February 2022, at

which the conclusions were discussed.

The Committee is satisfied with

PwC’s performance and that PwC

have employed an appropriate level

of professional challenge in fulfilling

theirrole.

Independence

In assessing PwC’s independence, the

Committee takes into consideration

information and assurances provided by

the external auditors confirming that the

partner and staff involved in the audit

are independent of any connection to

Meggitt. PwC also confirmed to the

Board that its partner and staff complied

with their ethics and independence

policies and procedures which are

fully consistent with the 2019 FRC

Ethical Standard. PwC is also required

to provide written disclosure at the

planning stage of the audit about any

significant relationships and matters

that may reasonably be thought to

have an impact on its objectivity and

independence and that of the lead

partner and the audit team. The lead

audit partner must change every five

years and other senior audit staff rotate

at regular intervals. The lead audit

partner is Mr J Ellis whose appointment

in this role commenced with the

audit for the financial year ended 31

December 2018. Mr Ellis has had no

previous involvement with the Group in

anycapacity.

The Committee is responsible for the

development and implementation of

the non-audit services policy which

was reviewed and re-approved in 2021.

The policy reflects the 2019 FRC Ethical

Standard and caps non-audit services

at 70% of the average annual statutory

audit fee. The policy covers a short list

of permitted non-audit services and

applies a limit of £100,000 for individual

items that the Chief Financial Officer can

approve, with individual items in excess

of this amount requiring approval from

the Committee.

The Committee agrees fees paid to the

external auditors for their services as

auditors. Details of fees paid for audit

services, audit-related services and

non-audit services can be found in Note

6 to the Group’s consolidated financial

statements. Fees paid for non-audit

services in 2021 were less than £0.1

million (1.1% of the total audit fee) and

average fees paid for non-audit services

for the last three years to 2021 were

less than £0.1 million (1.0% of the total

audit fee over that period). Fees paid for

non-audit services related to services

permitted under the Group’s policy on

non-audit services.

The Committee is satisfied that the

overall levels of audit-related and non-

audit fees are not material to the PwC

office conducting the audit, or PwC as a

whole, and therefore the objectivity and

independence of the external auditors

was not compromised by the non-audit

services provided to the Group.

On the basis of the information above,

the Committee has determined that

the audit process is effective and that

PwC are appropriately objective and

independent and has recommended

that the Board submit the re-

appointment of PwC to shareholders for

approval at the Annual General Meeting

in 2022 for the 2022 financialyear.

Audit Committee report

continued

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

120

Internal audit

The internal audit function is led by

the Head of Assurance & Risk and is a

key element of the Group’s corporate

governance framework. Its role is to

provide independent and objective

assurance, advice and insight on

governance, risk management and

internal control to the Committee,

the Board and to senior management.

The internal audit function makes

recommendations to improve processes

and address key issues identified

through their audit programme.

The Committee agrees the annual

internal audit plan which is developed

according to a risk assessment process

and ensures adequate resources are

available to execute the plan. The risk

assessment process initially divides

our business units into three tiers

determined by financial measures.

Tier 1 businesses are visited annually,

with Tier 2 businesses visited every

other year and Tier 3 businesses

every third year. This is then subject

to a further discretionary risk-based

adjustment, if there are circumstances

which suggest a business unit should

have an audit accelerated. Reasons

for this can include adverse prior audit

findings, a change in IT system, site

location moves, substantiated issues

reported by whistleblowers, senior

leadership changes or operational

performanceissues.

The business unit audit programme’s

scope includes finance, tax, programme

management, HR/payroll, commercial

intermediaries, bid and proposal activity,

corporate compliance and business

continuity. In 2021, internal audits were

carried out for 30 Group locations

as part of the rotational audit cycle,

including shared service functions.

During the year, the Committee

monitored implementation of the plan

which was broadly delivered as originally

committed with remote audits being

conducted where necessary through the

use of technology, including utilisation

of applications such as WebEx and file

sharing and other innovative solutions

such as using cameras on factory floors

to validate tests.

The scope and responsibilities of internal

audit continue to expand and develop

with the business and are documented

in the Internal Audit Charter.

In addition to the site-based business

unit reviews, internal audit has a co-

source arrangement with Grant Thornton

UK LLP to assist with resourcing

specialist audits for areas such as IT,

treasury and complex legislation such

as the Criminal Finances Act 2017 and

Defense Federal Acquisition Relation

Supplement (DFARS). During the year,

Grant Thornton conducted audits on

cyber security, finance shared services,

ERP implementations and change

management and reported its findings

back to the Committee in December

2021. The approach for 2022 will

continue to rely on Grant Thornton’s

subject matter experts to deliver

specialist audits, including readiness

for cyber security model certification,

IT resilience, site and IT transformation

projects and finance shared services.

I regularly discuss the results of audits

with the Group Head of Assurance &

Risk between Committee meetings,

and at each meeting the Committee

receives a status update on the internal

audit programme, discusses and

challenges any significant issues arising

and monitors implementation by the

business of any recommendations made.

The Committee routinely meets with

the Group Head of Assurance & Risk

without executive management present.

No concerns have been raised and it

was confirmed that the internal auditors

had been able to carry out their work

and offer constructive challenge to

executive management during the

year. The Committee considered

the effectiveness of the internal

audit function in 2021, taking into

consideration its discussions with the

Group Head of Assurance & Risk without

management present, its assessment of

the internal audit plan and the delivery

against that plan, the reports it received

on the work of internal audit and the

role and effectiveness of the internal

audit function in the context of the

wider risk management system and was

satisfied that the quality, experience

and expertise of the function remained

appropriate for the size and complexity

of the Group.

Communications with the FRC

During the year there was no interaction

with the FRC’s Corporate Reporting

Review team.

Whistleblowing

To help us encourage the highest

standards of ethical behaviours,

corporate governance and

accountability in our business activities,

the Group operates an independent

and anonymous Speak Up Line which

is available 24 hours a day, seven days

a week. A summary of whistleblowing

activity, together with details of related

investigations, is provided to the

Corporate Responsibility Committee,

which is responsible for oversight and

review of the process for handling

allegations from whistleblowers. The

Board also reviews whistleblowing

reports on a quarterly basis and

routinely reviews the arrangements for

employees to raise concerns.

Compliance with Audit

Services Order

We comply with the Competition and

Market Authority Order 2014 relating

to audit tendering and the provision of

non-audit services, as discussed further

above.

On behalf of the Audit Committee

Colin Day

Chairman of the Audit Committee

2 March 2022

Meggitt PLC Annual Report and Accounts 2021

121

Directors’ Report

Nominations Committee report

Overseeing the composition of the Board

to ensure that it has the right balance of

skills, experience and expertise to deliver

on the Group’s strategic objectives.

Dear Shareholder,

The Nominations Committee plays a

leading role in assessing the balance

of skills, knowledge, experience

and diversity on the Board and its

Committees. It leads the process for

appointments, ensures plans are in place

for orderly succession to both the Board

and senior management positions, and

oversees the development of a diverse

pipeline for succession.

The Committee reviews the structure,

size and composition (including the

skills, knowledge, experience and

diversity) of the Board and makes

recommendations to the Board on

any proposed changes. Decisions on

Board changes are taken by the Board

as a whole taking into consideration

the Committee’s recommendations.

In performing its duties, the Committee

has access to the services of the Group

HR Director and the Company Secretary

and may seek external professional

advice at the Group’s expense.

The full terms of reference for the

Committee can be found on our website.

Committee effectiveness

In 2021, as a Committee we reviewed

our own effectiveness by way of a

questionnaire as set out on pages 110 to

111. Overall the evaluation was positive,

with the Committee satisfied with its

own effectiveness and no further actions

to take as a result.

Board composition and tenure

We consider a comprehensive skills

matrix that sets out the experience

and background of each Director and

review it against the Group’s strategic

objectives and principal risks to ensure

the Board comprises the skills and

capabilities required to meet the

demands of the business.

In February 2022 we expanded our skills

matrix to include details of Directors’

experience in respect of sustainability/

climate change in the sectors in which

we operate. This provides a clearer

picture of expertise in this area and will

assist in determining the requisite skill

set of future appointees.

Our skills matrix also includes the

tenure of myself and the Non-Executive

Directors to ensure that our succession

is regularly discussed and planned

accordingly in order to facilitate regular

refreshment of Board membership.

Guy Berruyer’s third three-year

term expired on 1 October 2021.

During the year, we carefully considered

his independence, taking into

Committee membership and

attendance in 2021

Sir Nigel Rudd

Committee Chairman

Mr G S Berruyer

Non-Executive Director

Mr C R Day

Non-Executive Director

Mrs N L Gioia

Non-Executive Director

Ms A J P Goligher

Non-Executive Director

Mr G C Hachey

Non-Executive Director

Mrs C L Silver

Non-Executive Director

Meetings attended Non-attendance

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

122

consideration his relationship with

executive management and the challenge

and support he provided at Board and

Committee meetings. We established that

he remained independent and provided

a key point of stability during a period of

significant change. We also determined

that Guy’s skills and experience remained

relevant, and his capabilities and

contribution at Board and Committee

meetings added great value to the

Company. Recognising the importance

of continuity whilst the proposed

acquisition of the Group by Parker-Hannifin

progresses, we recommended to the

Board that Guy continue to serve as an

independent Non-Executive Director.

The Board accepted this recommendation

and extended his service contract for a

further one-year term.

Colin Day’s second three-year term also

expired during the year. We recognised

the significant contribution he had made

during the year to Board and Committee

discussions, the additional time he

had dedicated to his Audit Committee

duties, including regular meetings with

management and the internal and external

auditors outside formal proceedings

and the time he haddedicated to the

employee engagement programme (see

page 92 for details) and were satisfied

that he was able to continue to discharge

his duties effectively notwithstanding his

external appointments. We recommended

that he remain on the Board as an

independent Non-Executive Director and

the Board accepted this recommendation

and extended his service contact for a

further three-year term.

Guy Hachey’s first three-year term

as a Non-Executive Director expired

on 31 December 2021. During this

first term Guy has brought significant

insight, challenge and expertise to

Board and Committee discussions

and has provided valuable support

to the employee engagement

programme. Following consideration

of Guy’s contribution to the Group

we recommended that he remain on

the Board as an independent Non-

Executive Director. The Board accepted

this recommendation and extended his

service contract for a further three-

year term.

In light of Guy Berruyer’s length of

service, we agreed in 2020 that Alison

Goligher should succeed Guy as Senior

Independent Director and she was

appointed to the role immediately

following the 2021 Annual General

Meeting. Alison has nearly seven years’

experience on the Board and has, as a

result, built good relationships with the

Non-Executive Directors and executive

management, has relevant experience

of Board dynamics, and has a detailed

understanding of the Group, which

makes her well qualified to succeed Guy

as Senior Independent Director.

As a Committee we are mindful of

Guy Berruyer’s tenure on the Board,

my announcement to retire from the

Board (which was postponed until

further notice during the COVID-19

pandemic) and that Alison Goligher’s

nine-year term is due to expire in 2023.

Whilst focus in 2020 and 2021 has been

on continuity to guide the Company

through the COVID-19 pandemic and

the proposed acquisition of the Group

by Parker-Hannifin we are aware that,

should the proposed acquisition not go

ahead, changes will need to be made

0 1 2 3 4 5 6 7 8 9

Listed Chair

CEO

AC Chair

RC Chair

SID

Operations

Financial

Risk/Legal/Regulatory

M&A

Information security (including cyber)

Climate change/Sustainability

Aerospace/Defence/Energy

Aerospace aftermarket/Customer Services

Industrial

Engineering

Europe (Inc UK)

N America

S America

Asia

Africa

Australia

Geographical MarketsSectorsCorporateBoard Experience

Listed Chair

CEO

AC Chair

RC Chair

SID

Operations

Financial

Risk/Legal/Regulatory

M&A

Information security (including cyber)

Climate change/Sustainability

Aerospace/Defence/Energy

Aerospace aftermarket/Customer Services

Industrial

Engineering

Europe (Inc UK)

N America

S America

Asia

Africa

Australia

Geographical MarketsSectorsCorporateBoard Experience

0 1 2 3 4 5 6 7 8 9

Board skills and experience

Meggitt PLC Annual Report and Accounts 2021

123

Directors’ Report

Nominations Committee report

continued

to ensure our Board is appropriately

refreshed. We have reviewed and

discussed the skills matrix and any future

appointments will focus on ensuring the

Board is appropriately diverse with the

right balance of skills and experience

to lead the Company in achieving its

strategic objectives.

Board effectiveness

In February 2022 we reviewed the

Board skills matrix and the output of the

Board evaluation process (described on

pages 110 to 111) and considered the

Board’s effectiveness. We paid particular

attention to the skillset each Director

brings to the Board, Guy Berruyer’s

independence, and to whether Colin

Day and Caroline Silver continued to

have sufficient time to discharge their

duties effectively in light of their external

appointments. On review, we were

satisfied that the Group has a strong,

dynamic and effective Board capable

of delivering the Group’s strategic

objectives and recommended to the

Board that all Directors be put forward

for re-election at the 2022 Annual

General Meeting.

Executive succession planning

The Group operates a succession

planning process which enables the

identification and development of

employees with the potential to fill key

business leadership positions.

The succession plans for the executive

team, including the Executive Directors

are reviewed by the Committee to

ensure that they are effective, based on

merit and objective criteria, promote a

diverse talent pool and take into account

the challenges and opportunities

facing the Group as well as the Group’s

strategic priorities. The plan identifies

emergency replacements, those who

are ready to fulfil leadership roles now,

those that will be ready in the short term

following further development and those

that will be ready in the longer term.

Diversity and inclusion

The Board places great emphasis on

ensuring that its own membership

reflects diversity in its broadest sense.

A combination of demographics,

skills, experience, race, age, gender,

educational and professional

background and other relevant personal

attributes on the Board is important

in providing a range of perspectives,

insights and challenge needed to

support good decision-making.

Whilst we do not currently have an ethnic

minority Director on our Board, the Board

remains diverse in terms of demographics,

skills, experience, age, gender and

professional background. Further details

on the diverse attributes of Board

members can be found in the pie charts on

pages 102 and 103 and in the Board skills

and experience chart above.

It is our policy that Board appointments

are made on merit, taking account

of the specific skills and experience,

independence and knowledge needed

to ensure a rounded Board and the

diversity benefits each candidate can

bring to the overall Board composition.

The policy aims for all appointments

to diversify and strengthen the

overall composition of the Board by

contributing something new to the

overall board dynamic, be it in terms of

experience, skills, perspective, interests

or other attributes.

Our Diversity and Inclusion Policy, which

is available on our website, is brought

to the attention of any executive search

firm used as part of the selection and

appointment process for a Board

position and we request that they be

proactive in marketing to a truly diverse

range of candidates.

On gender diversity, the Board currently

has four female Board members

representing 44% of the Board. This year,

Meggitt appeared 78th in the list of FTSE

100 companies on the FTSE Women

Leadership Review gender diversity

rankings. Our position is largely impacted

by the combined data for Executive

Committee members and their direct

reports which stands at 18.2% and shows

that we can improve further in this area.

Details of the work underway to strengthen

the diversity of our talent pipeline can be

found on page 74.

The Board has discussed the suggested

target set out in the Parker Review of

having “at least one Director of colour

on the Board by the end of 2021”

and was planning to take this into

account, alongside diversity of gender,

nationality, skills and experience, in

filling the next Board position. However,

due to the focus on managing the

Group’s response to and recovery from

the COVID-19 pandemic, the significant

cost and time commitment required

to identify and select suitable Board

candidates and the high probability that

the proposed acquisition of the Group

by Parker-Hannifin will complete in 2022,

the Committee determined that it would

not be practical to recruit an additional

Board member during the year. As such

there was no opportunity to strengthen

the ethnic diversity of our Board in 2021.

Whilst no appointments are currently

planned for 2022, should the proposed

acquisition of the Group by Parker-

Hannifin not complete, a detailed review

of the Board’s composition will be

conducted and whilst appointments will

always be made on merit, strengthening

the ethnic diversity of the Board will be

a key consideration in the recruitment

process for any new Director.

The Board, our executive leadership team,

and management at all levels recognise

that a diverse and inclusive workforce

is critical to running a sustainable and

successful business. Our Diversity and

Inclusion Policy, which was reviewed and

updated during the year, seeks to increase

and leverage diversity by employing

a diverse workforce that reflects the

communities within which we operate and

fostering an inclusive culture where people

are valued, respected and supported.

The Board and Executive Committee

remain focused on this area.

Candidate selection

When recruitment is undertaken,

an independent external search

consultancy is used for the appointment

of the Chairman and Non-Executive

Directors with guidance provided by

the Committee on the requisite skills,

knowledge and experience to fill any

gaps identified by the Board skills matrix

and complement those of existing Board

members. Instruction is also given to

provide long and short lists, with a

diverse range of candidates.

On behalf of the

Nominations Committee

Sir Nigel Rudd

Chairman of the

Nominations Committee

2 March 2022

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

124

Meggitt PLC Annual Report and Accounts 2021

125

Directors’ Report

Directors’ remuneration report

It has been a busy year during which we

have continued to engage with our wider

stakeholders during an exciting, interesting

and challenging period for the Group.

Chair’s introduction

and annual statement

Introduction

I am pleased to present the Directors’

remuneration report for the year ended

31 December 2021. In addition to this

introduction and annual statement, the

report includes: an “At a Glance” summary;

the Annual Report on Remuneration for

the year; and a copy of the Directors’

Remuneration Policy which was approved

by shareholders at the 2021 AGM.

Looking back… performance and

remuneration in 2021

Many of the challenges of 2020, driven

by the external environment, continued

to impact the civil aerospace industry in

2021, including the rise of the Omicron

COVID-19 variant in the latter part

of the year. Despite these ongoing

challenges, Meggitt has continued to

position itself well to benefit from the

recovery over time of the civil aerospace

sector, delivering robust performance

outcomes against its KPIs. This is

reflective of the significant ongoing

contribution of all our colleagues,

and the leadership of the Executive

Directors and the wider leadership team.

Significant time and effort was also

invested in the proposed acquisition of

the Group by Parker-Hannifin, to protect

the interests of all our stakeholders and,

if successful, significantly accelerate

and de-risk our plans to deliver value to

our shareholders.

It is this challenging, but exciting,

context that framed the Committee’s

decision-making in the year, and which

issummarised below.

Salary

The April 2021 annual merit based

increases were deferred for all employees

until October due to the continued

uncertainty for the industry. Additionally,

during the first half of 2021, in order to

manage cost and capacity with continued

volatility in civil aerospace markets, most

of our employees, including the Executive

Committee, took mandatory or voluntary

unpaid leave ranging from 8-13 days.

Our Board also volunteered a salary/fee

reduction of 10% during the same period.

In October 2021, a delayed increase

was awarded to all employees of 2.5%,

including Executive Directors, Executive

Committee and Non-Executive Directors.

STIP

2021 performance was above threshold

for underlying operating profit but below

threshold for the free cash flow element.

The Executive Directors’ performance

against the strategic objectives set at

Committee membership and

attendance in 2021

Ms A J P Goligher

Committee Chairperson

Mrs C L Silver

Non-Executive director

Mr C R Day

Non-Executive director

Mrs N L Gioia

Non-Executive director

Mr G C Hachey

Non-Executive director

Mr G S Berruyer

Non-Executive director

x Scheduled meetings

x Additional meetings

Meetings attended Non-attendance

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

126

the start of year, and in the context of

the evolving priorities of the Group

during the year, was rated as significantly

exceeding expectations, using the

same scoring methodology as for the

wider STIP population. This outcome

warranted full payout of this element,

resulting in an overall STIP outcome

of 46.7% of maximum. The Committee

is satisfied that the outcome is

warranted by underlying performance

and accordingly did not exercise any

discretion. 25% of the amount earned

will be deferred into shares for two years.

LTIP

Although our financial performance

in 2019 was strong, the outturn for the

financial metrics in the 2019 LTIP award

(based on three-year performance

to 31 December 2021) was below

the threshold vesting, against the

backdrop of the continuing impact of

COVID-19 on the civil aerospace market.

Progress against our long-term strategic

targets produced an overall vesting of

13.2%. The Committee considered this

outcome in the wider context of the

Group’s performance, recognising the

outturn was in line with the employee

and shareholder experience and no

adjustments were made.

The Committee is confident that

the 2021 remuneration outcome for

Executive Directors is appropriate

given the context of the internal and

external environment.

2021 AGM

Prior to the 2021 AGM, the Committee

carried out an extensive consultation

on proposed changes to the Policy with

our largest shareholders, representing

a significant proportion of the register.

As a result of the initial consultation, the

Committee implemented changes to its

proposals to take account of feedback

received, as detailed in last year’s

report. We were pleased that the Policy

was supported by a wide range of our

shareholders as a result, registering a

75.66% vote in favour.

In accordance with the UK Corporate

Governance Code, and reflecting that

the Policy resolution received less than

80% of votes in favour, the Committee

published an update on the 2021 AGM

vote via RNS during the year. As noted

in that market announcement, the

Committee was aware at the time

of the AGM that shareholders have

divergent views on the proposals,

mainly regarding the use of multiple

long-term incentive vehicles. However,

the Committee continues to believe

that the hybrid approach adopted by

the Policy, including both performance

and restricted share awards, is

appropriate for Meggitt, allowing

us to maintain alignment between

our shareholders and motivating our

leadership and senior management

team. Following shareholder approval

of the Remuneration Policy in 2021,

the Executive Directors received Long

Term Incentive Plan awards under the

performance share award (PSA) at 125%

of salary and restricted share awards

(RSA) at 62.5% of salary. However, we

will continue to assess the suitability

of the hybrid approach during the

Policy period.

2022 implementation of Policy

The Committee remains confident that

the Remuneration Policy continues to

effectively support Meggitt’s short-

and long-term strategic objectives

and promote management and

shareholder alignment.

The Committee took actions to apply

our Directors’ Remuneration Policy

appropriately and in shareholders’

best interests in the context of the

offer for the Company by Parker-

Hannifin, which was approved by our

shareholders in September 2021.

Remuneration arrangements relating to

the offer for the Company are detailed

in the Co-Operation Agreement for the

transaction. In the process with Parker-

Hannifin, we were supportive of the

treatments secured by management

to protect the interests of employees,

including the preservation of all terms

and conditions until the end of 2022,

and beneficial terms to compensate

participating employees for the closing

of our Sharesave schemes following

deal completion.

Fixed pay

Effective 1 April 2022, Executive Director

salaries will be increased by 3% in line

with the broader employee population.

In line with our commitment to reduce

Executive Director pensions over time,

pension allowances will be further

reduced; from 18% to 15% of salary in

respect of the CEO and from 17.5% to

15% of salary from 1 January 2022.

STIP

The STIP will operate on the same basis

as last year, with a maximum opportunity

of 150% of salary for both Executive

Directors and with performance

assessed against a small number of key

financial and strategic measures. If the

Parker-Hannifin proposed acquisition

completes, Meggitt will assess the

performance conditions for the period

up to the court sanction date and pay

out the relevant portion of the STIP at

that time, in accordance with the Co-

Operation Agreement.

Long-term incentives

As in 2021, Executive Directors will

receive LTIP awards in the form of both

performance share awards (PSA) and

restricted share awards (RSA).

PSAs will be granted at 125% of salary,

with vesting assessed against an equal

blend of EPS, ROCE and strategic

objectives measured over three years.

RSAs will be granted at 62.5% of salary,

with final vesting (at the end of a three-

year vesting period for 2022 RSAs)

subject to a Committee assessment of

a range of business factors and overall

Group performance.

If the Parker-Hannifin proposed

acquisition completes, the LTIP awards

will vest on completion, in accordance

with the Co- Operation Agreement.

Looking forward

The Committee considers that the

current remuneration structure is clear,

simple, and appropriately aligned with

the Group’s strategy, risk appetite

and culture, and that incentives are

appropriately capped.

Our Remuneration Policy and practice

is in line with the UK Corporate

Governance Code (with the exception of

Provision 38 on pension allowances).

I hope that you find this report a clear

account of the Committee’s decisions for

the year and would be happy to answer

any questions you may have at the AGM.

Alison Goligher

Chair of the Remuneration Committee

Meggitt PLC Annual Report and Accounts 2021

127

Directors’ Report

Directors’ remuneration report

continued

Remuneration at a glance

Remuneration principles

Our Remuneration Policy is designed to deliver against these key remuneration principles for the long-term growth of

the business:

Attract

an overall remuneration package that is competitive in the global markets where Meggitt competes

for talent;

Align

with investors: a significant proportion of remuneration is delivered in shares and subject to long-term

performance and holding periods; and between our Executive Directors and other senior managers who

work as one team towards the same goals;

Incentivise

short and long-term incentive plans provide an opportunity for management to meet and exceed targets

whilst outcomes are appropriately aligned with financial and operational performance; and

Retain

the remuneration structure and opportunity supports retention in an increasingly competitive

global setting.

Directors’ Report

2021 activity

Approved • The 2018 LTIP vesting outcome.

• The 2021 STIP and PSA performance targets.

• The 2021 PSA and RSA opportunity levels.

• The 2020 Directors’ remuneration report and revised Remuneration Policy (which were subsequently

approved by shareholders at the 2021 AGM).

• The key remuneration terms of the Co-Operation Agreement with Parker-Hannifin.

• Terms of Reference for the Committee (available on our website).

• Since the year end, we have approved the structure of the 2022 STIP and both the 2022 PSA and RSA

awards, and confirmed the vesting outcome of the 2021 STIP and 2019 LTIP awards.

Discretion

exercised

• After due consideration, no discretion was exercised by the Committee during the year.

Meggitt PLC Annual Report and Accounts 2021

128

Strategic Portfolio

Investing in differentiated technologies

Delivering sustainability goals

Enhancing our business portfolio

LTIP: Innovation targets and ROCE in the LTIP.

Sustainability targets in the LTIP.

STIP: Strategic objectives for Executive

Directors include portfolio-related

activity and sustainability goals.

Customers

Accelerate organic growth

Maximising our share of the aftermarket

LTIP: Quality and delivery and other operational targets

to facilitate business recovery are included in the LTIP.

STIP: Strategic objectives for Executive Directors

include improving customer satisfaction.

Culture

Attracting and developing diverse talent

High performance culture

STIP: Strategic objectives for Executive Directors

include measures to improve employee engagement

and embed our high performance culture.

Competitiveness

Outstanding operations and processes

LTIP: Quality and delivery targets, programme

management, ROCE and inventory improvement

targets are measures in the LTIP.

STIP: Strategic objectives for Executive Directors

include operational performance, footprint

consolidation and net purchasing costs.

Linking our remuneration to our strategy

KPIs

2019-2021 LTIP

Financial

Measures

Strategic Measures

Outturn 2021

72.4p

Earnings per share

(3-year cumulative)

Inventory 2.1

ROCE

(3-year average)

Prog Excellence 3.1

On time delivery 68%

Quality Escapes 681

1 Cost of Sales as used in the inventory

turns measure includes the impact of

exceptional items.

2021 STIP

Financial

Measures

Strategic

Measures

£184m

Underlying

Operating Profit

Culture −

Engagement

£119m

Free Cash Flow

Customer −

Operational

Improvements

1 As with previous years, the 2021 STIP

uses the Free Cash Flow measure

excluding the impact of interest

and taxation.

Strategic Portfolio

KPIs:

Growth

ROCE

Meggitt PLC Annual Report and Accounts 2021

129

Directors’ Report

Directors’ remuneration report

continued

2021 Outcomes

Outcomes versus pay scenarios

Directors’ Report

Single Figure 2021

Maximum

On-target

Minimum

Single Figure 2021

Maximum

On-target

Minimum

Mr A Wood (£’000)

78% 22%

36%

19%

31%

25%

27%

24% 10%

35%

31%

24% 10%

51% 5%

13%16%

£986

£2,170

£4,055

£1,737

44%

27%45%

78% 22%

19% 25%

16%

51% 5%

13%

£628

£1,378

£2,572

£1,103

Mrs L Burdett (£’000)

Salary and benefits Pension STIP LTIP RSA

Single Figure 2021

Maximum

On-target

Minimum

Single Figure 2021

Maximum

On-target

Minimum

Mr A Wood (£’000)

78% 22%

36%

19%

31%

25%

27%

24% 10%

35%

31%

24% 10%

51% 5%

13%16%

£986

£2,170

£4,055

£1,737

44% 27%45%

78% 22%

19% 25%

16%

51% 5%

13%

£628

£1,378

£2,572

£1,103

Mrs L Burdett (£’000)

Salary and benefits Pension STIP LTIP RSA

Outcome

Maximum

Strategic UOP FCF

Strategic EPS ROCE

2021 LTIP Outcome (% Vesting)

33.3%33.3%33.3%

EPS 0.0% ROCE 0.0%13.2%

Actual (CEO)

50.0% 20.1%

Actual (CFO)

50.0% 20.1%

Maximum

50.0% 50.0%

50.0%

Pay for performance history

Value of £100 invested on 31 December 2010

Group Chief Executive’s single total

remuneration figure £'000

Meggitt

Mr T Twigger Mr S G Young Mr A Wood

FTSE 100

120

150

180

210

240

270

300

1000

2000

3000

4000

5000

31/12/202131/12/202031/12/201931/12/201831/12/201731/12/201631/12/201531/12/201431/12/201331/12/2012

Incentive outcomes

2021 STIP Outcome

Mr A Wood (£’000) Mrs L Burdett (£’000)

Single Figure 2021

Maximum

On-target

Minimum

Single Figure 2021

Maximum

On-target

Minimum

Mr A Wood (£’000)

78% 22%

36%

19%

31%

25%

27%

24% 10%

35%

31%

24% 10%

51% 5%

13%16%

£986

£2,170

£4,055

£1,737

44%

27%45%

78% 22%

19% 25%

16%

51% 5%

13%

£628

£1,378

£2,572

£1,103

Mrs L Burdett (£’000)

Salary and benefits Pension STIP LTIP RSA

Meggitt PLC Annual Report and Accounts 2021

130

2022 Remuneration

The summaries and illustrations below do not include any impact of the Parker-Hannifin proposed acquisition and associated Co-

Operation Agreement. In the event that the proposed acquisition completes, the terms of the Co-Operation Agreement with Parker-

Hannifin will take effect.

Components of Executive Directors’ remuneration 2022

Base salary Set at a competitive level to attract and retain high calibre Directors in the relevant talent market.

Pension To provide post-retirement benefits for Executive Directors in a cost-efficient manner. New Directors are

eligible for a pension allowance at the same level as the wider workforce. Pension allowances for incumbent

Executive Directors are being reduced to 15% with effect from 1 January 2022.

Benefits Provides non-cash benefits which are competitive in the market where the Director is employed.

Annual

bonus (STIP)

Incentivises Executive Directors to deliver annual financial and strategic targets set at the start of each year.

There is a maximum award opportunity of up to 150% of salary, with 25% of any amount earned deferred in

Meggitt shares for two years.

LTIP (PSA

and RSA)

Aligns the interests of Executive Directors with shareholders in growing the value of the Group over the long term.

Awards vest after three years and are subject to a two-year holding period. Executive Directors are currently eligible for

Performance Share Awards of up to 125% of salary and Restricted Share Awards of up to 62.5% of salary. The Executive

Directors are subject to post-cessation shareholding requirements, along with malus and clawback provisions.

Sharesave

Scheme and

Share Incentive

Plan (SIP)

To align the interests of UK employees and shareholders by encouraging all UK employees to own Meggitt shares.

2022 remuneration time horizons

2022 Incentive Plans

2022 2023 2024 2025 2026 2027 2028

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

STIP

Performance

Period

Deferral Period

PSA

Performance Period Holding Period

RSA

Vesting Period Holding Period

1 STIP deferral of 25% of the outcome into shares for two years.

Long-Term Incentive Plan (LTIP) –

Performance Share Awards

Short-Term Incentive Plan

(STIP)

Underlying operating profit

33.3%

Free cash flow

33.3%

Strategic and financial objectives

33.3%

Total STIP

100.0%

Underlying EPS

33.3%

ROCE

33.3%

Strategic measures: HPS / Inventory /

Programmes / Sustainability

33.3%

Total PSA

100.0%

2022 pay scenario summaries

Max+50% SP

Maximum

On-target

Minimum

Max+50% SP

Maximum

On-target

Minimum

Mr A Wood (£’000)

57% 35%8%

33%

22%

32% 10% 20%

33% 27% 14%

34%27% 17%

£1,221

£2,114

£3,091

£3,729

19%

57%

35%

33%

23%

33%3%

32% 10% 20%

27% 14%

£779

£1,345

£1,964

£2,368

19%

3% 27% 34% 17%

Mrs L Burdett (£’000)

Salary and benefits Pension STIP PSA RSA

Max+50% SP

Maximum

On-target

Minimum

Max+50% SP

Maximum

On-target

Minimum

Mr A Wood (£’000)

57% 35%8%

33%

22%

32% 10% 20%

33% 27% 14%

34%27% 17%

£1,221

£2,114

£3,091

£3,729

19%

57%

35%

33%

23%

33%3%

32% 10% 20%

27% 14%

£779

£1,345

£1,964

£2,368

19%

3% 27% 34% 17%

Mrs L Burdett (£’000)

Salary and benefits Pension STIP PSA

RSA

Max+50% SP

Maximum

On-target

Minimum

Max+50% SP

Maximum

On-target

Minimum

Mr A Wood (£’000)

57% 35%8%

33%

22%

32% 10% 20%

33% 27% 14%

34%27% 17%

£1,221

£2,114

£3,091

£3,729

19%

57%

35%

33%

23%

33%3%

32% 10% 20%

27% 14%

£779

£1,345

£1,964

£2,368

19%

3% 27% 34% 17%

Mrs L Burdett (£’000)

Salary and benefits Pension STIP PSA RSA

Mr A Wood (£’000) Mrs L Burdett (£’000)

Meggitt PLC Annual Report and Accounts 2021

131

Directors’ Report

Directors’ remuneration report

continued

Annual report on remuneration

Executive Directors

Single total figure of remuneration for Executive Directors (audited)

The table below sets out a single figure for the total remuneration received by each Executive Director for the year ended

31 December 2021 and the prior year:

Mr A Wood Mrs L S Burdett

2021

£’000

2020

£’000

2021

£’000

2020

£’000

Salary

Taxable benefits

Pension Allowance

634

120

597

143

402

378

Total fixed

768 754 490 476

Annual bonus

Deferred bonus

LTIP

RSA

357

119

275

218

–

171

n/a

226

174

138

–

n/a

Total variable

969 171 613 –

Total remuneration

1,737 925 1,103 476

1 Salary for both Executive Directors is reported with a voluntary reduction of 10% in the first half of the year in exchange for unpaid leave, aligned with the wider workforce. For the

CEO the annual salary of £663k reduced by £33k from January to June 2021, and for the CFO the annual salary of £420k reduced by £21k from January to June 2021. Executive Director

salaries were increased by 2.5% with effect from the deferred salary review date of 1 October 2021, in line with the wider workforce.

2 Taxable benefits consist primarily of company car or car allowance, fuel allowance and private health care insurance. Mrs Burdett received a relocation allowance as part of the transition

of the head office to Ansty Park of £6,240 in 2021.

3 Pension allowances were calculated on the unreduced salary for 2021 at 18% of salary for the CEO and 17.5% for the CFO.

4 STIP paid for performance over the relevant financial year. 25% of the payout was deferred into shares. Further details of the 2021 STIP, including performance measures, actual

performance and bonus payouts, can be found on pages 132 to 133.

5 LTIP is calculated as the number of shares vesting based on certain performance measures and valued at the market value of the shares on the vesting date. The value includes

distribution payments. For 2021, the figure represents the actual vesting outcome of the 2019 award. Based on performance to 31 December 2021 the 2019 LTIP award will vest at 13.2%.

The market value of vested shares has been estimated using the average share price over the last quarter of 2021 of 742.80 pence. £80k and £51k of the value of the 2019 LTIP shown for

the CEO and CFO respectively is attributable to share price appreciation, with Meggitt’s share price increasing by 42% since the grant date. The value also includes accrued dividends

of £2k and £1k for the CEO and CFO respectively. This value will be trued up in next year’s report to reflect the actual share price on the vesting date. Further details on performance

criteria, achievement and resulting vesting levels can be found on page 134. For 2020, the figure represents the actual vesting of the 2018 award which has been trued up, compared to

that reported last year, to reflect the share price on the date of vesting. The value of the 2018 LTIP (for the CEO only, the CFO having joined Meggitt in 2019) vesting has been updated

from the 2020 report from £131k to £171k due to increase in share price owing to the proposed acquisition by Parker-Hannifin since the figures were estimated in February 2021.

6 RSA (Restricted Share Awards) were granted in 2021 as 3 separate tranches with a 1, 2 and 3-year vesting period. They are subject to a holding period, which when added to the vesting

period, will not be less than 5 years from date of grant and ends on the relevant expiry date. The 2021 figure represents full vesting of the 1-year tranche of awards granted in April 2021,

the Committee assessment period for which was substantially completed as at year end which is reported on page 135. The market value of vested shares has been estimated using

the share price over the last quarter of 2021 of 742.80 pence, with this value to be trued up in next year’s report. £79k and £50k of the value of the RSA shown for the CEO and CFO,

respectively, is attributable to share price appreciation, with Meggitt’s share price increasing by 58% since the grant date. See page 135 for further details.

Incentive outcomes for the year ended 31 December 2021 (audited)

STIP in respect of 2021 performance

The Board set stretching financial and strategic targets for the STIP at the start of the 2021 financial year. These targets, and the

performance against these, are summarised in the table below.

Executive Directors

Weighting

Measure

(as a percentage

of maximum)

Threshold

1/3 payout

Target

2/3 payout

Stretch

full payout Actual

Percentage of

element

Financial Underlying operating profit

33.3% £175.3m £219.1m £241.0m £184.2m 40.1%

Financial Free cash flow

33.3% £130.4m £163.0m £179.3m £118.6m 0%

Strategic See below

33.3%

See tables below

1 For the purpose of STIP, targets and actual performance for both underlying operating profit and free cash flow are measured on a constant currency basis, adjusted where appropriate

for any M&A activity and, in the case of free cash flow, excludes interest and tax. The STIP targets and actual performance for underlying operating profit are measured before

the impact of any share-based payment expense. Other adjustments are also made at the discretion of the Committee to ensure the outcome is a fair reflection of the underlying

performance of the Group for the year. These are described on page 133 of this report.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

132

A summary of the strategic objectives applying to each Executive Director and the outcome is provided below:

Tony Wood

Chief Executive

Strategy

Deliver sustainability goals and enhance portfolio to

underpin margin and earnings growth

Performance against objectives

• Implemented pricing review across all Product Groups.

Customer

Increase satisfaction levels and grow aftermarket

and defence

• Organic AM growth closed up 6.6% against a slower than

anticipated recovery in air travel globally. Quality Escapes –

significant improvement following Zero Defect Plan success

closing the year 48% lower than target, with DPPM also better

by 17%.

Competitiveness

Improve core business processes and efficiencies

• Successful transition of multiple business units to Ansty Park.

Culture

Improve employee engagement and embed high

performance culture programmes

• Engagement index achieved all-time best result at 76% with

a 73% response rate – a very good result in very challenging

circumstances for the business given the extended pandemic

and Parker-Hannifin deal impacts during the year.

• Lowest to date TRIR achieved at 0.63 and two key leadership

and operations leadership training programmes successfully

delivered and positively received by employees.

Louisa Burdett

Chief Financial Officer

Strategy

Provide liquidity for the Company

Performance against objectives

• Implemented necessary financial arrangements in place to

enable the business to operate safely through an extended

pandemic and to position it with sufficient flexibility to operate

successfully as civil aerospace recovers.

Customer

Support investors and MIS and FSSC as internal partners

• Managed investor messages during 2021 especially during

acquisition discussions and supported ESG disclosures.

Competitiveness

Improve Meggitt’s recurring cost base

• Significant de-risking in UK pension plan liabilities.

• Implemented new Investment Committee.

• Lead the acquisition of HiETA.

Culture

Drive incremental change to impact overall score

• Improvements and automation delivering significant

improvements in cash forecasting capability.

• Balance sheet reviews and an in-depth assessment of SOx

inreadiness for 2022 action.

The Committee sets the above stated objectives for the Executive Directors at the start of the year. In its adjudication of the

outcome under the personal element of the STIP opportunity, the Committee also considered it appropriate to reflect the

Executive Directors’ personal performance in the context of the evolution in short-term strategic priorities presented by the

approaches from Parker-Hannifin and TransDigm. The Committee’s adjudication therefore reflects not only the basket of

objectives outlined above, but also a qualitative overlay of the significant contribution made to protecting stakeholder interests

throughout the year. This includes the significant value created through the potential transaction with Parker-Hannifin, which was

strongly supported by shareholders, and the work undertaken to safeguard wider stakeholder interests, including employees,

pension plan members, customers and suppliers, through the transaction should it proceed. In this context, the Committee

assessed the performance of the Executive Directors to have significantly exceeded expectations. In line with the approach

adopted for the wider STIP population, this rating outcome corresponds to full payout of the strategic element.

CEO and CFO payout based on assessment of objectives (% of element): 100%

As a result, the following STIP awards were received by Executive Directors in respect of 2021 performance:

Executive

% salary £’000

Mr A Wood

70.1% 476

Mrs L S Burdett

70.1% 301

Meggitt PLC Annual Report and Accounts 2021

133

Directors’ Report

Directors’ remuneration report

continued

STIP – deferral into shares (audited)

As a result of the 2021 STIP outcome described above, and in line with the Remuneration Policy, 25% of the payout will be deferred

into shares and released (with no further performance conditions attached) after two years. Deferred STIP awards may lapse in

certain leaver circumstances.

Last year the Committee used its discretion to reduce the 2020 STIP vesting to zero. Accordingly, no deferred bonus share awards

were made under the Share Incentive and Retention Plan during the 2021 financial year.

LTIP 2019 outcome

The LTIP award granted in April 2019 was subject to performance measures comprising three-year cumulative underlying EPS,

three-year average ROCE and a scorecard of strategic measures. The outcome of the EPS measure has been adjusted for

disposals. Performance against each of these measures over the completed performance period is summarised in the table below:

Performance period Targets Actual % vesting

Element 2019 2020 2021 Weighting

Threshold

30%

Mid-point

65%

Stretch

100% Performance (of LTIP)

Underlying EPS (pence)

three-year aggregate

• • w

33.3% 108.9 115.5 122.3 72.4 0.0%

ROCE % average over three years

• • • 33.3% 12.1% 12.5% 12.9% 7.0% 0.0%

Strategic Measures

• • •

Programme excellence

• • • 11.1% 2.0 3.0 4.0 2019: 3.1

7.3%2020: 2.8

2021: 3.1

MPS

• • 7.4% 40% 50% 60%

2019: 50.0%

4.1%

2020: 44.6%

HPS (MPS) Quality

• 1.9% 1,225 1,192 1,165 681 1.8%

HPS Delivery

• 1.9% 74% 84% 94% 68% 0.0%

Inventory Turns

• • • 11.1% 3.0 3.2 3.4 2019: 2.7

0.0%2020: 2.1

2021: 2.1

Overall outcome

13.2%

1 Progress against the targets for all strategic measures are assessed annually and the final vesting outcome is based on the average warranted outcome for performance in each year

covered by the relevant measure. For example the score for MPS is the average vesting warranted by for delivering a score of 50% in 2019 and 44.6% in 2020 (being the two years of the

2019 LTIP for which MPS targets were set).

2 Performance score out of 5. Programme excellence is the combined score of programmes and AR&T programmes (previously “innovation”) weighted 50/50.

3 Vesting is based on the number of our sites that have progressed up one stage of HPS in the year.

4 HPS (Quality and Delivery) vesting is based on progress against specific targets in each of these areas. For each of these measures, vesting criteria were set at the start of the year and

assessed at the end of the year and reviewed by internal audit.

5 Cost of Sales as used in the inventory turns measure includes the impact of exceptional items.

Based on these performance outcomes, 13.2% of the 2019 LTIP award will vest. Details of the awards vesting for Executive

Directors are set out in the table below:

Executive

Interests

held

Vesting

Interests

vesting

Date

of vesting

Share price

at vesting

Value

£’000

Mr A Wood

278,443 13.2 36,754 08.04.2022 742.8p 275

Mrs L Burdett

176,389 13.2 23,283 08.04.2022 742.8p 174

1 The market value of vested stock is based on the average share price over the last quarter of 2021.

2 The value includes the accrued distribution payable on the shares that vest (equivalent to a dividend, paid as income) of £2k for Mr A Wood and £1k for Mrs L Burdett.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

134

LTIP – 2021 Restricted Share Award (RSA) Tranche 1

As set out in last year’s remuneration report, the 2021 RSA vests in equal instalments after 1, 2 and 3 years, subject to a

discretionary assessment by the Committee of Meggitt’s performance against a basket of measures. The Committee evaluated

a range of performance categories, including: balance sheet strength (management of interest cover to 2.4x, and safeguarding

the balance sheet through successful RCF refinancing during the year); employee engagement scores (which increased in 41 of 42

parameters); health & safety (our best TRIR results to date); customer measures (escapes and AM growth); and progress against

our sustainability roadmap (exceeding our target for R&D expenditure in sustainable technologies, and ensuring no reputational

incidents in the year). Following the Committee’s assessment of Meggitt’s overall performance against this range of categories in

2021 it is confirmed that 100% of the first tranche of the 2021 RSA will vest in full as set out below:

Executive

Interests

held

Vesting

Interests

vesting

Date

of vesting

Share price

at vesting

Value

£’000

Mr A Wood

29,292 100 29,292 29.04.2022 742.8p 218

Mrs L Burdett

18,556 100 18,556 29.04.2022 742.8p 138

1 The market value of vested stock is based on the average share price over the last quarter of 2021.

Scheme interests awarded in the year ended 31 December 2021 (audited)

LTIP – Performance Share Award (PSA)

Executive Directors were each granted PSA awards in 2021. Vesting is dependent on the achievement of three-year targets ending

on 31 December 2023. As disclosed in last year’s report, due to the impact of the continuing COVID-19 pandemic, the Committee

decided to delay setting the targets for the PSAs for 2021 until such time that it could finalise appropriate performance ranges.

Awards were granted on 29 April 2021 and the accompanying market announcement set out full details of the targets applying to

these awards, as below:

Weighting

Measure Threshold

Mid-point

Stretch

33.3% Underlying EPS (pence) three-year cumulative

57.4 67.6 77.7

33.3% ROCE average over three years

5.3% 6.8% 8.3%

Strategic measures:

11.1% Programme excellence (programme performance on NPI and

AR&T programme health, and progress with sustainable technology

programmes)

2.0 3.0 4.0

11.1% High Performance System Delivery Outcomes

Quality Outcomes

(outcomes are averaged based on our Company performance)

74%

1,225

84%

1,192

94%

1,165

11.1% Inventory Turns

2.3 2.8 3.3

1 Vesting is 25% at threshold, 62.5 at mid-point and 100% at stretch.

2021 PSA

Executive Form of award Date of award

Shares over which

awards granted Award price

Face value

End of Performance

Period£’000 % of salary

Mr A Wood Conditional Award

29.04.2021 175,753 471.54p 829 125% 31.12.23

Mrs L S Burdett Conditional Award

29.04.2021 111,337 471.54p 525 125% 31.12.23

1 The award price is the average close price for the five days prior to the award date. The face value has been calculated using the award price for each award.

2 Based on salary at the date of award.

Meggitt PLC Annual Report and Accounts 2021

135

Directors’ Report

Directors’ remuneration report

continued

LTIP – Restricted Share Award (RSA)

Following shareholder approval of the new Remuneration Policy, Executive Directors were each granted RSA awards in 2021.

Vesting of RSAs awards is subject to continued employment, but not any formal performance measures; however, the Committee

has assessed the vesting based on a basket of measures, as adjusting these measures to be appropriate for the position in the

recovery period. These measures have been disclosed on page 135. The balance and weighting of the factors may be adjusted as

priorities for the Group develop over time to align with the anticipated recovery, and the Committee will consider performance

in the round. The factors considered in the assessment will be fully disclosed in the relevant Annual Report. In order to address

immediate issues of incentive and retention during the recovery period, and as disclosed last year, vesting of this first grant of RSA

awards will occur on a phased basis over the three-year period, i.e. a third annually, but with release of the vested shares to remain

at five years following grant owing to the application of the normal holding period.

2021 RSA

Executive Form of award Date of award

Shares over which

awards granted Award price

Face value

Date of vesting£’000 % of salary

Mr A Wood Conditional Award

29.04.2021 87,876 471.54p 414 62.5% 29.04.2022-

29.04.2024

Mrs L S Burdett Conditional Award

29.04.2021 55,668 471.54p 262 62.5% 29.04.2022-

29.04.2024

1 The award price is the average close price for the five days prior to the award date. The face value has been calculated using the award price for each award.

2 Based on salary at date of grant.

Total pension entitlements (audited)

Mr Wood and Mrs Burdett received pensions allowances in 2021 of 18.0% and 17.5% of salary respectively. The pension allowance

payments made in 2021 are included in the single total figure of remuneration table. Consistent with all employees, the Executive

Directors received pension contributions and all other benefits based on their unreduced salary (and the data in the single total

figure of remuneration reflects this).

In 2022, Mr Wood and Mrs Burdett’s pension allowances are being reduced to 15% of salary. Neither Executive Director

participates in a defined benefit pension. Further reductions to their pension allowances will be reviewed by the Committee later

in 2022.

Share ownership guidelines (audited)

The minimum shareholding guideline for Executive Directors is 300% of base salary for the Chief Executive and 200% of base

salary for the Chief Financial Officer. There is no set time frame within which Executive Directors have to meet the guideline,

however, until they meet the guideline they are not permitted to sell more than 50% of the after-tax value of a vested share award.

Post-cessation shareholding guidelines of two years from vesting applies to the Executive Directors. Further information on their

progress towards meeting their shareholding guidelines is set out below. The Executive Directors have each executed a deed

under which they acknowledge and agree to the Company’s post-employment shareholding requirements and acknowledge

that Meggitt reserves the right to take action to enforce compliance with the requirements. In the event of a breach of the post-

employment shareholding obligations, Meggitt reserves the right to require the individual to revoke any assignment, transfer

or charge, or acquire shares to replace disposed shares. Meggitt may also apply malus against unvested awards. To date, no

Executive Directors have left office following the introduction of our post-employment shareholding requirements.

As at 31 December 2021, the Chief Executive’s shareholding was 252% of base salary and the Chief Financial Officer’s shareholding

was 32% of base salary.

Executive Director

Shareholding Guideline

(% 2021 salary) Shareholding

Current Shareholding

(% 2021 salary) Guideline Met?

Mr A Wood

300% 232,316 252% Building

Mrs L S Burdett

200% 18,413 32% Building

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

136

Executive Directors’ beneficial interests (audited)

The beneficial interests of the Executive Directors and their connected persons in the ordinary shares of the Group at

31 December 2021, as notified under the Disclosure Guidance and Transparency Rules (DTR) of the Financial Conduct Authority

(FCA) (including shares held beneficially in the SIP by Executive Directors), were as follows:

Shareholding

Ordinary shares of 5p each

Executive Director 2021 2020

Mr A Wood

123,348 43,291

Mrs L S Burdett

8,628 5,500

Between 1 January 2022 and 1 March 2022, the following changes to the interests of the Directors in the ordinary shares of the

Company took place: 1) Mr Wood acquired 40 shares through the Meggitt PLC Share Incentive Plan; and 2) Mr Wood and Mrs

Burdett retained 15,419 shares and 9,768 shares respectively following the vesting of their 2020 SIRP award on 28 February 2022.

Executive Directors’ shareholding requirements (audited)

Shares which are included within the shareholding requirement are:

Source of shares Description

LTIP (PSA and RSA) Shares awards that have vested but not been exercised on a net of tax basis and

share awards that have been exercised and retained

SIRP (Deferred Bonus) Share awards that have not vested on a net of tax basis and shares released after

the two-year deferral period

Ordinary shares Shares purchased directly in the market

Dividend reinvestment plan Shares acquired through the dividend reinvestment plan

SIP Shares acquired under the SIP (including those held in trust)

Sharesave Scheme Shares exercised and retained

Meggitt PLC Annual Report and Accounts 2021

137

Directors’ Report

Directors’ remuneration report

continued

Executive Directors’ interests in share schemes (audited)

All outstanding LTIP PSA awards have performance conditions attached (as detailed in the Directors’ remuneration report in

the year of grant and in this report for those awards made in 2021). The awards made up to and including 2018 have already

vested to the extent detailed in this and previous reports and the figures shown in the table below for those years are the

vested share award amounts. The awards made in 2019 and later years were unvested as at 31 December 2021. RSA awards (the

first grant of which took place in 2021) are not subject to a formal performance condition. Sharesave awards are not subject to

performance conditions.

Number of shares under award

Date of

award

At 1

January

2021 Awarded Exercised Lapsed

At 31

December

2021

Exercise

price

Market price

at date of

exercise

Date

exercisable

from

Expiry

Date

Mr A Wood

LTIP (2016)

1.12.16 112,506 0 -112,506 0 0 0 740.75p 1.12.19 1.12.21

LTIP (2017)

7.4.17 142,837 0 0 0 142,837 0 n/a 7.4.20 7.4.22

LTIP (2018)

3.4.18 332,852 0 0 -299,234 33,618 0 n/a 3.4.21 3.4.23

LTIP (2019)

8.4.19 278,443 0 0 0 278,443 0 n/a 8.4.22 8.4.24

LTIP (2020)

28.2.20 251,638 0 0 0 251,638 n/a n/a 28.2.23 n/a

LTIP (2021 – RSA)

294.21 0 29,292 0 0 29,292 n/a n/a 29.4.22 n/a

LTIP (2021 – RSA)

294.21 0 29,292 0 0 29,292 n/a n/a 29.4.23 n/a

LTIP (2021 – RSA)

294.21 0 29,292 0 0 29,292 n/a n/a 29.4.24 n/a

LTIP (2021 – PSA)

294.21 0 175,753 0 0 175,753 n/a n/a 29.4.24 n/a

SIRP 2019

8.4.19 38,155 0 -38,155 0 0 n/a n/a 8.4.21 n/a

SIRP 2020

28.2.20 29,146 0 0 0 29,146 n/a n/a 28.2.22 n/a

Sharesave 2018

13.9.18 847 0 0 0 847 425.02p n/a 1.11.21 1.5.22

Sharesave 2019

17.9.19 1,826 0 0 0 1,826 492.80p n/a 1.11.24 1.5.25

Total

1,188,250 263,629 -150,661 -299,234 1,001,984

1 Nil cost options – vested (unexercised).

2 Nil cost options – unvested.

3 Conditional award – unvested.

4 Options – vested (unexercised).

5 Options – unvested.

Number of shares under award

Date of

award

At 1

January

2021 Awarded Exercised Lapsed

At 31

December

2021

Exercise

price

Market price

at date of

exercise

Date

exercisable

from

Expiry

Date

Mrs L S Burdett

LTIP (2019)

8.4.19 176,389 0 0 0 176,389 n/a n/a 8.4.22 8.4.24

LTIP (2020)

28.2.20 159,409 0 0 0 159,409 n/a n/a 28.2.23 n/a

LTIP (2021 – RSA)

294.21 0 18,556 0 0 18,556 n/a n/a 294.22 n/a

LTIP (2021 – RSA)

294.21 0 18,556 0 0 18,556 n/a n/a 294.23 n/a

LTIP (2021 – RSA)

294.21 0 18,556 0 0 18,556 n/a n/a 294.24 n/a

LTIP (2021 – PSA)

294.21 0 111,337 0 0 111,337 n/a n/a 294.24 n/a

SIRP (2019)

8.4.19 5,913 0 -5,913 0 0 n/a n/a 8.4.21 n/a

SIRP (2020)

28.2.20 18,463 0 0 0 18,463 n/a n/a 28.2.22 n/a

Sharesave (2019)

17.9.19 1,826 0 0 0 1,826 492.80p – 1.11.24 1.5.25

Total

362,000 167,005 -5,913 0 523,092

1 Nil cost options – unvested.

2 Conditional award – unvested.

3 Options – unvested.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

138

External appointments held by Executive Directors as at 31 December 2021

Executive Director Company Role

Fees retained 2021

£’000

Mr A Wood National Grid plc Non-Executive Director

(from 1 September 2021)

Committee membership

Mrs L S Burdett Electrocomponents plc Non-Executive Director

Chair of Audit Committee

Total 75

Exit payments made in the year (audited)

No exit payments have been made in 2021.

Payments to past Directors (audited)

There were no payments to past Directors in 2021. A de minimis of £10,000 applies to all disclosures under this note.

Review of past performance

The remuneration package is structured to help ensure alignment with shareholders. However, there may be no direct correlation

between share price movement and the change in the value of the pay package in any one year (as the remuneration package

comprises several components, some fixed and others based on non-financial measures).

The graph below illustrates the Group’s performance compared to the FTSE 100 Index, which is considered an appropriate broad

equity market index against which the Group’s performance should be measured. Performance, as required by legislation, is

measured by TSR over the ten-year period from 31 December 2011 to 31 December 2021.

Value of £100 invested on 31 December 2010

Group Chief Executive’s single total

remuneration figure £'000

Meggitt

Mr T Twigger Mr S G Young Mr A Wood

FTSE 100

120

150

180

210

240

270

300

1000

2000

3000

4000

5000

31/12/202131/12/202031/12/201931/12/201831/12/201731/12/201631/12/201531/12/201431/12/201331/12/2012

Meggitt PLC Annual Report and Accounts 2021

139

Directors’ Report

Directors’ remuneration report

continued

Pay for performance history

The table below details the CEO’s single total figure of remuneration over the same period:

2012 2013 2 014 2015 2016 2017 2018 2019 2020 2021

Mr A Wood

Single total figure of remuneration

(£’000)

STIP outcome

LTIP vesting

2,334

82%

52.1%

1,949

68%

62.4%

925

10.1%

1,737

70%

13.2%

Mr S G Young

Single total figure of remuneration

(£’000)

STIP outcome

EPP vesting

ESOS vesting

LTIP vesting

1,296

39%

38%

76%

–

1,232

23%

–

1,347

31%

–

1,969

60%

N/A

17.3%

2,040

68%

N/A

18.9%

Mr T Twigger

Single total figure of remuneration

(£’000)

STIP outcome

EPP vesting

ESOS vesting

3,812

80%

88%

100%

1,845

35%

56%

98%

1 Figures are provided for Mr T Twigger for the period up to 1 May 2013, for Mr S G Young for the period up to 31 December 2017 and for Mr A Wood from his appointment as CEO on

1 January 2018.

2 The outcomes are for those awards which are included in the single figure of remuneration for that year. For 2021, this represents the outcome of the 2019 LTIP and the 2021 STIP.

Outcomes are expressed as a percentage of maximum.

Change in Executive Directors’ pay for the year in comparison to that of Meggitt employees

The table below shows the year-on-year percentage change in salary, benefits and annual bonus earned between the years ended

31 December 2019 to 31 December 2021 for all Executive Directors compared to the change in earnings for employees of Meggitt

PLC, and UK employees over the same periods.

Salary Benefits Annual Bonus

2020-2021 2019-2020 2020-2021 2019-2020 2020-2021

2019-2020

CEO

CFO

6.2%

6.3%

-9.5%

-10%

0.0%

n/a

-100%

Meggitt PLC Employees

UK Meggitt Employees

2.1%

0.4%

-3.2%

-0.5%

0.0%

n/a

-100%

1 Benefits changes for the PLC and All UK populations are based on value of entitlement, and exclude, for example, the change in Benefit in Kind value created by a change in

Company Car.

2 “n/a” for 2020-2021 reflects a nil bonus outcome for 2020 (the base year of the calculation).

3 The % increases to CEO/CFO salaries in 2020/2021, reflect the material voluntary reductions taken in 2020/2021. Excluding those voluntary reductions, the increases in salary earnt by

Executive Directors in 2020/2021 would have been in line with the Employee populations stated above.

A similar analysis is provided for the Non-Executive Directors on page 144.

CEO pay ratio

The lower quartile, median and upper quartile employees were determined using Calculation Method A, which involved calculating

the actual full-time equivalent remuneration for all UK employees for the year ending 31 December 2021. Where variable pay data was

available for the 2021 financial year outturn (to be paid in March 2022 in respect of executive and senior management annual bonus and

LTIP), actual amounts were used. Where the outturn of variable pay for 2021 was unknown at the date of calculation (for managerial,

professional and direct workforce), the amount to be paid in March 2022 was estimated.

From this analysis, three employees were then identified as representing the 25th, 50th and 75th percentile of the UK employee

population. The Committee chose this method as it is the preferred approach of the Government and that of institutional

shareholders, and Meggitt has the systems in place to undertake this method.

The three individuals identified were full-time employees during the year and did not receive any exceptional incentive award

which would otherwise inflate their pay figures. No adjustments or assumptions were made by the Committee, with the total

remuneration of these employees calculated in accordance with the methodology used to calculate the single figure of the Chief

Executive. The calculation was made as at 31 December 2021 and the Committee considered the median pay ratio to be reflective

of pay and progression policies, together in the context of the ratio reported in prior years as well as the figures produced by

sector comparators and across the FTSE more generally.

The CEO pay ratio is based on comparing the Chief Executive’s pay to that of the Group’s UK-based workforce, a large proportion of whom

are production workers. The Committee expects that the ratios will be largely driven by the Chief Executive’s incentive pay outcomes,

which will likely lead to greater variability in his pay than that observed at lower levels who, consistent with market practices, have a greater

proportion of their pay linked to fixed components. This expectation has been realised in the change between 2020 and 2021 ratios.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

140

The Committee takes into account these ratios when making decisions around the Executive Director pay packages, and the

Group takes the need to ensure competitive pay packages across the organisation seriously.

Lower quartile (25th percentile) Median Upper quartile (75th percentile)

(£) Method

Total Pay

& Benefits

Total

Salary

Total Pay

& Benefits

Total

Salary

Total Pay

& Benefits

Total

Salary

2021

A 35,376 33,637 44,570 40,016 60,952 52,206

2020

A 34,019 31,788 43,831 40,584 59,994 55,550

2019

A 32,879 27,986 42,861 41,317 58,479 52,776

(£) Method

Pay Ratio 25th Percentile Pay Ratio Median Pay Ratio 75th Percentile

2021 A

47:1 38:1 28:1

2020

26:1 20:1 15:1

2019 A

59:1 45:1 3 3:1

1 2020 Ratio has been updated due to the true up of the value at vesting of the 2018 LTIP. Prior reported ratio at median was 20:1.

Relative importance of spend on pay

The chart below shows shareholder distributions (i.e. dividends) and total employee expenditure for 2021 and the prior year, along

with the percentage change in both.

100

200

300

400

500

600

Dividends

£0.0m £0.0m

14.2%

£485.1m

£565.4m

Shareholder distributions

Employee costs

2021

2020

1 See Note 15 to the Group’s consolidated financial statements.

2 Comprises wages and salaries and retirement benefit costs. See Note 8 to the Group’s consolidated financial statements.

2021 Committee evaluation

The Committee reviewed its own effectiveness and the effectiveness of their advisors using a detailed questionnaire and follow

up discussion. Overall, the results of the review were positive, in what was another challenging year including the continued

significant impact of COVID-19 on the aerospace market, and the Parker-Hannifin proposed acquisition, both of which had

implications for remuneration, recruitment and retention across Meggitt. The response of the Committee was viewed as proactive

and appropriate in these circumstances.

Overall, the meetings were well run, with papers of the right length, and discussions being both well-informed and appropriately

robust. The Committee considered it important to consider proactive and pragmatic approaches to remuneration structures,

whilst also taking into account international aerospace and defence comparators.

Context for the Committee’s decisions in 2021

The Committee included regular updates from executive management on the experience of key stakeholders in Meggitt to

ensure that this context was front of mind as the Committee discussed executive pay, with regular updates on impacts on wider

stakeholders, including employees, shareholders, customers and suppliers. The Committee also considered reports from Ellason

on the views of investors and investor advisory bodies on remuneration.

Meggitt PLC Annual Report and Accounts 2021

141

Directors’ Report

Directors’ remuneration report

continued

2022 Policy implementation

Base salary, pension and benefits

With effect from 1 April 2022, the Executive Directors’ salaries will be increased by 3%, in line with the salary increases for the

wider employee population effective from that date.

The following table shows the base salaries for the Executive Directors:

From 1 April 2022

£’000

change

From 1 October 2021

£’000

Mr A Wood

700 +3% 680

Mrs L S Burdett

443 +3% 431

The Committee periodically benchmarks Executive Director salaries against other FTSE companies of similar size, as well as a

defined group of UK-listed industry comparators, comprising: BAE Systems, Halma, IMI, Melrose Industries, Rolls-Royce, Rotork,

Senior, Spectris, Spirax-Sarco, Ultra Electronics and Weir Group.

From 1 January 2022, the Committee agreed a reduced pensions allowance for the Chief Executive and Chief Financial Officer of

15% of salary. There are no other changes to benefit provisions for 2022.

2022 Incentive Opportunities

No changes are proposed to the implementation of the 2021 Policy in 2022. The maximum STIP opportunity for Executive

Directors will continue to be 150% of salary. Performance Share Awards (PSA) are expected to be granted with face values of 125%

of salary for the Executive Directors, alongside Restricted Share Awards (RSA) with face values of 62.5% of salary.

2022 Incentive Plan Measures

Targets for the 2022 STIP and 2022 PSAs have been set following the usual methodology.

For 2022, the Committee has considered the increasing importance of ESG-related factors and has incorporated a new

sustainability measure into the PSA scorecard. The 2022 goal is to reduce Meggitt’s gross Scope 1 & 2 carbon emissions

(normalised for revenue, excluding carbon brake manufacturing) by 3% from 2022 levels. Carbon brake manufacturing

emissions are excluded as they arise from the brake manufacturing process itself and specific projects are underway to review

and reduce emissions from brake manufacturing. Strategic measures under the STIP for the Executive Directors also include

sustainability goals.

STIP

STIP design for 2022 is unchanged from 2021, as follows:

• Underlying operating profit 33.3%

• Free cash flow 33.3%

• Strategic Objectives 33.3%

The STIP targets for 2022 are considered to be commercially sensitive, and will be disclosed, together with details of whether they

have been met, in the 2022 Directors’ remuneration report (subject to them being no longer considered sensitive).

LTIP – Performance Share Awards

The measures for the 2022 PSAs are earnings per share (weighted one-third), ROCE (weighted one-third) and four strategic

measures (weighted one-third in aggregate, and which include our High Performance System, programme excellence,

sustainability and inventory):

• HPS: site specific Quality and Delivery targets measure two of the key outputs of HPS.

• Programme excellence: this measure scores the health of all of the Group’s programmes, including specific

sustainability programmes.

• Sustainability: based on reducing gross Scope 1 & 2 carbon emissions (CO

e), normalised for revenue, excluding carbon

brake manufacturing.

• Inventory: based on inventory turns.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

142

Targets

Weight Threshold Mid-point

Stretch Financial

measures

EPS (3-year average)

33.33% 76.0p 89.4p 102.8p

ROCE (3-year average)

33.33% 7.1% 8.6% 10.1%

Strategic measures*

HPS – quality escapes

5.6% 666 646 626

HPS – on-time delivery

5.6% 74% 84% 94%

Programme excellence

5.6% 2.0 3.0 4.0

Sustainability

5.6% 2% 3% 4%

Inventory

11.1% 2.2 2.7 3.2

Total

100%

* The targets apply to year 1 of the 2022 PSA, and also apply to year 2 of the 2021 PSA and year 3 of the 2020 LTIP.

LTIP – Restricted Share Awards

Although not subject to any formal performance measures, the Committee will assess RSAs vesting based on a basket of

measures, adjusting these measures to be appropriate for Meggitt’s stage in the recovery period. A wide range of business

factors is expected to be considered including, free cash flow, balance sheet health, adherence to dividend policy and overall cash

returns to shareholders, customer service, health and safety performance, ESG performance and corporate culture. The balance

and weighting of the factors may be adjusted as priorities for the Group develop over time to align with the anticipated recovery,

and the Committee will consider performance in the round. The factors considered in the application of discretion used will be

fully disclosed in the relevant Annual Report.

Co-Operation Agreement with Parker-Hannifin

The Committee took actions to apply our Directors’ Remuneration Policy appropriately and in shareholders’ best interests

in the context of the proposed acquisition for the Company by Parker-Hannifin which was approved by our shareholders in

September 2021.

All incentive plan outcomes for executives in the context of the transaction will be appropriately assessed by the Committee

against the relevant performance conditions (and subject to time pro-rating) prior to completion of the transaction which is

anticipated in Q3 2022. Complete details of the remuneration arrangements agreed by Meggitt and Parker-Hannifin relating

to the offer for the Company are detailed in the Co-Operation Agreement for the transaction which is available to view at

www.meggittoffer.com.

Owing to the lengthy regulatory process prior to completion, and as set out in the Co-Operation Agreement, the Committee

intends to operate the STIP and LTIP as normal in 2022 up until the deal completes. Further information is included in the STIP/

LTIP sections in this report.

Meggitt PLC Annual Report and Accounts 2021

143

Directors’ Report

Directors’ remuneration report

continued

Non-Executive Directors

Chairman and Non-Executive Director fee structure for 2021 and 2022

In Q1 2021, it was agreed to continue to freeze fees at 2020 levels, and to apply a 10% fee reduction from 1 January 2021 to

30 June 2021, aligned with the 10% voluntary unpaid leave reduction for Executive Directors.

On 1 October 2021, the Chairman and Non-Executive Director fees were increased by 2.5% from 2020 levels, consistent with the

delayed increase awarded to the wider workforce.

The Committee has approved a 3% increase to the Chairman’s fee with effect from 1 April 2022, in line with the salary increases

for the wider employee population effective from that date. The Finance Committee approved the same increase to the Non-

Executive Director base fee from that date.

The fee structure and levels for the Chairman and Non-Executive Directors in 2022 and 2021 (not including COVID-19 reductions)

are as follows:

2022

£’000

2021

£’000

Chairman fee

366 364

Non-Executive Director base fee

61 60

Additional fee for chairing Audit or Remuneration Committee

11 11

Additional fee for chairing Corporate Responsibility Committee and

Non-Executive Director responsible for Employee Engagement

11 11

Additional fee for Senior Independent Director

11 11

1 Fees shown are effective for a year from 1 April.

2 Sir Nigel Rudd receives additional benefits of £20,000 per annum for secretarial and car services required for business purposes.

3 A fee of £4,000 is paid per meeting to non-UK Directors when travelling to meetings outside of their home continent.

Single total figure of remuneration Non-Executive Directors (audited)

The table below sets out a single figure for the total remuneration received by each Non-Executive Director in 2021 and 2022:

2021

£’000

2020

£’000

Sir Nigel Rudd

Mr G S Berruyer

Mr C R Day

Mrs N L Gioia

Ms A J P Goligher

Mr G Hachey

Mrs C L Silver

348

328

1 Includes fees to cover the cost of attendance at meetings that took place outside continent of residence.

Change in Non-Executive Directors’ pay for the year in comparison to that of Meggitt employees

The table below shows the year-on-year percentage change in fees earned between the years ended 31 December 2019 to

31 December 2021 for all Non-Executive Directors compared to the change in salary, benefits and annual bonus for Meggitt PLC

employees, and all Meggitt UK employees over the same periods.

Salary Benefits Annual Bonus

2020-2021 2019-2020 2020-2021 2019-2020 2020-2021 2019-2020

Sir Nigel Rudd

Mr G S Berruyer

Mr C R Day

Mrs N L Gioia

Ms A J P Goligher

Mr G Hachey

Mrs C L Silver

-6%

11%

17%

-2%

-9%

-4%

-8%

-26%

-4%

-34%

32%

–

Meggitt PLC employees

UK Meggitt employees

2.1%

0.4%

-3.2%

-0.5%

n/a

-100%

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

144

Non-Executive Directors’ beneficial interests (audited)

The beneficial interests of the Non-Executive Directors and their connected persons in the ordinary shares of the Group at

31 December 2021, as notified under the Disclosure Guidance and Transparency Rules (DTR) of the Financial Conduct Authority

(FCA), were as follows:

Shareholding

Ordinary shares of 5p each

2021 2020

Sir Nigel Rudd

Mr G S Berruyer

Mr C R Day

Mrs N L Gioia

Ms A J P Goligher

Mr G Hachey

Mrs C L Silver

250,000

38,000

76,937

3,188

6,000

3,000

5,000

250,000

38,000

76,937

3,188

6,000

3,000

5,000

Between 1 January 2022 and 28 February 2022, there were no changes in the beneficial interests of the Non-Executive Directors in

the ordinary shares of the Company.

Other disclosures

Advisors to the Committee

Ellason LLP was appointed as the independent remuneration advisor to the Committee effective 1 January 2021 as a result of

a competitive tender run by the Committee for remuneration advisory services in H2 2020. The Committee undertakes due

diligence periodically to ensure that Ellason is independent and that the advice provided is impartial and objective. During 2021,

Ellason provided independent advice including support on the review of the Remuneration Policy and consultation, remuneration

provisions as part of the proposed acquisition by Parker-Hannifin, updates on the external remuneration environment and

Directors’ remuneration report drafting support. Ellason reports directly to the Chair of the Remuneration Committee and does

not advise the Company on any other issues. Their total fees for the provision of remuneration services to the Committee in 2021

were £46,085 (2020: £81,117 to previous advisors, Mercer) on the basis of time and materials.

Ellason is member and signatory of the Code of Conduct for Remuneration Consultants, details of which can be found at

www.remunerationconsultantsgroup.com. None of the individual Directors have any direct personal connections with Ellason.

AGM voting

The following table shows the results of the advisory vote on the 2020 Directors’ remuneration report at the 2021 AGM:

Resolution text

Votes

for

% of votes

cast for

Votes

against

% of votes

cast against

Total

votes cast

Votes

withheld

(abstentions)

Approval of Directors’

remuneration report

603,974,822 95.82 26,349,305 4.18 630,324,127 5,384,782

1 A withheld vote is not a vote in law and is not counted in the calculation of the proportion of votes cast for and against a resolution.

The following table shows the results of the binding vote on the Directors’ Remuneration Policy at the 2021 AGM:

Resolution text

Votes

for

% of votes

cast for

Votes

against

% of votes

cast against

Total

votes cast

Votes

withheld

(abstentions)

Approval of Directors’

remuneration policy

477,572,623 75.66 153,628,927 24.34 631,201,550 4,507,829

1 A withheld vote is not a vote in law and is not counted in the calculation of the proportion of votes cast for and against a resolution.

Following the AGM, the Committee reviewed shareholder feedback in relation to the remuneration resolutions, as described in

the Chair’s introduction to this report. The Committee acknowledges the differing views of shareholders regarding the use of

multiple long-term incentive vehicles, but believes this to be appropriate in facilitating Meggitt’s ability to compete effectively in

its key talent markets to attract motivate and retain talent. We remain committed to keeping under review our approach during

the life of the Policy.

Remuneration Policy

The Policy that was approved by shareholders at the AGM on 29 April 2021 is reproduced in full below. The only change is the

update to the pay scenario charts to reflect 2022 remuneration and updating the pension allowance rates payable in 2022.

The Policy is effective for a period of up to three years from the date it was approved. In developing the 2021 Remuneration

Policy, the Committee took into account the provisions of the Code. The Policy is compliant with the Code, with the exception of

Provision 38 on pension allowances. We recap below our assessment of how we believe the current Policy complies with Provision

40 of the Code.

Meggitt PLC Annual Report and Accounts 2021

145

Directors’ Report

Directors’ remuneration report

continued

Clarity: Our approach to remuneration disclosure and decision-making is transparent and supported by clear rationale. We remain

committed to consulting shareholders on the Policy (and any changes to it), as well as our approach – and material revisions – to

how it is implemented.

Simplicity: The Remuneration Policy and our approach to implementation is logical and well understood internally, as well

as externally. The performance measures used in the STIP and LTIP are well aligned to the Group’s strategy, as illustrated on

page 129.

Risk: The Committee regularly reviews remuneration arrangements to ensure that these continue to drive an appropriate focus

on performance (through short- and long-term performance-based incentives), without encouraging and rewarding excessive

risk taking (for example, by having an element of longer-term variable remuneration – restricted shares – linked to continued

employment only). We set incentive targets to be stretching and achievable, while retaining appropriate discretion to adjust

formulaic bonus and LTIP outcomes to ensure that pay reflects underlying performance.

Predictability: Incentive opportunities are capped, with clearly defined payout schedules aiding participants’ understanding

of how incentives operate and the performance expectations attaching to these. The use of restricted share awards, further

enhances the predictability of pay outcomes.

Proportionality: Performance ranges are calibrated to ensure that incentive outcomes do not reward poor performance. The use

of sliding scales helps ensure that incremental performance is incentivised and rewarded by incremental reward, while discretion

helps safeguard against the possibility that pay outcomes are disproportionate to performance outcomes.

Culture: The Policy is consistent with Meggitt’s culture and strategy, and it reflects our approach to remuneration across the

Group more widely. This consistency of approach aligns the focus of our employees and drives collective behaviours that promote

the long-term success of the Company for the benefit of all stakeholders.

Remuneration Policy

Executive Directors’ Policy Table

Base salary

Function

To attract and retain talent by ensuring base salaries are competitive in the relevant

talent market.

Operation

Salary will be reviewed by the Committee annually, in February, with changes effective

from 1 April of that year. Salaries for the year under review are disclosed in the annual

report on remuneration.

In deciding salary levels, the Committee considers personal performance including

how the individual has helped to support the strategic objectives of the Group.

The Committee will also consider employment conditions and salary levels across the

Group, prevailing market conditions, and market data for FTSE companies in similar

industries and those with similar market capitalisation.

Salaries are paid to existing Executive Directors in GBP, however the Committee reserves

the right to pay future and existing Executive Directors in any other currency (converted

at the prevailing market rate when a change is agreed).

Opportunity

The percentage salary increases for Executive Directors will not exceed those of the

wider workforce over the life of this Remuneration Policy in the normal course of business.

Higher increases may be awarded (i.e. in excess of the wider employee population) in

instances where, for example, there is a material change in the responsibility, size or

complexity of the role, or if a new Executive Director was intentionally appointed on

a below-market salary. The Committee will provide the rationale for any such higher

increases in the relevant year’s annual report on remuneration.

Performance metrics

None explicitly, but salaries are independently benchmarked periodically against FTSE

companies in similar industries and those with similar market capitalisation.

Personal performance is also taken into account when considering salary increases.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

146

Pension

Function

To provide post-retirement benefits for executive directors in a cost-efficient manner.

Operation

The pension plans operated by the Group, of which Executive Directors are or could be

members, are:

• Meggitt Pension Plan (defined benefit pension plan, closed to new members).

• Meggitt Workplace Savings Plan (defined contribution personal pension scheme, open

to new members).

Salary is the only element of remuneration that is pensionable. There are no unfunded

pension promises or similar arrangements for Directors.

Opportunity

New directors are eligible for a pension allowance at the same level as the wider

workforce. In 2022, for incumbent Executive Directors, the pension allowance will be 15%

of salary.

Performance metrics

None.

Benefits

Function

To provide market-competitive benefits for Executive Directors.

Operation

The Group may provide benefits including, but not limited to, a company car or car

allowance, private medical insurance, permanent health insurance, life assurance, a fuel

allowance, a mobile phone, relocation costs and any other future benefits made available

either to all employees globally or all employees in the region in which the Executive

Director is employed.

Opportunity

Benefits vary by role and individual circumstances; eligibility and cost is reviewed

periodically. Benefits in respect of the year under review are disclosed in the annual report

on remuneration. It is not anticipated that the costs of benefits provided will increase

significantly in the financial years over which this Remuneration Policy will apply, although

the Committee retains discretion to approve a higher cost in exceptional circumstances

(e.g. to facilitate recruitment, relocation, expatriation, etc.) or in circumstances where

factors outside the Group’s control have changed materially (e.g. market increases in

insurance costs).

Performance metrics

None.

Meggitt PLC Annual Report and Accounts 2021

147

Directors’ Report

Directors’ remuneration report

continued

Annual bonus – Short-Term Incentive Plan (STIP)

Function

To incentivise Executive Directors to deliver annual financial and strategic objectives.

Operation

Performance measures, targets and weightings are set at the start of the year.

The performance period of the STIP is a financial year. After the end of the financial year,

to the extent that the performance criteria have been met, 75% of the STIP Award is paid

in cash to the Director (or at the discretion of the Committee, in shares). The remaining

25% of the award will be deferred into shares and released (with no further performance

conditions attached and no matching shares provided) after a further period of two years.

Under the STIP, the Committee may decide to apply malus and/or clawback to STIP Awards

and deferred STIP Awards to reduce the vesting of awards and/or require repayment of

awards in the event of:

(a) The participant leaves employment and facts emerge which, if known earlier, would have

caused the award to lapse or caused the Committee to exercise discretion differently.

(b) Any error in the assessment of a performance condition or vesting calculation

that resulted in an overpayment.

laws, rules or codes of conduct or the standards reasonably expected of it.

(d) A material failure of risk management for any period which caused serious harm to the

reputation of the Group and/or significant financial loss to the Group.

(e) A serious breach of health and safety which caused serious harm to the reputation of the

Group and/or significant financial loss to the Group.

(f) The Committee determines that the underlying financial health of the Group has

significantly deteriorated such that there are severe financial constraints on payment

of awards.

(g) The participant, after having left employment, is found to be in breach of any restrictive

covenant, non-solicitation, anti-disparagement or confidentiality undertakings.

Deferred STIP Awards may lapse in certain leaver circumstances.

Opportunity

The STIP provides for a maximum award opportunity of up to 150% of salary in normal

circumstances, with an on-target opportunity of 100% of salary and an opportunity of 50%

of salary at threshold performance.

The Committee has discretion to make a STIP award of up to 200% of salary in exceptional

circumstances (e.g. a substantial contract win which has a significant positive financial

impact in the long term but which has no, or negative, short-term financial impact).

Dividends accrue on unvested deferred STIP awards over the vesting period and are

released on the vesting date.

Performance metrics

STIP awards are based on the achievement of financial and strategic performance targets.

For Executive Directors, the STIP will be based on a combination of the financial performance

of the Group and strategic performance. The relative weightings of the financial and strategic

elements for any STIP period, and the measures used to assess financial and non-financial

performance, will be set by the Committee in its absolute discretion to align with the Group’s

operating and strategic priorities for that year. However, the weighting for strategic performance

will not exceed one-third of the maximum STIP opportunity in any year.

The award for performance under each element of the STIP will be calculated independently.

The Committee has discretion to review the consistency of the payout of the financial and

strategic elements and adjust the total up or down (within the levels specified above) if it does not

consider this to be a fair reflection of the underlying performance of the Group or the individual.

The strategic performance element will typically be based on three to five objectives,

both financial and strategic, relevant to the Executive Director’s role cascaded from the

Group’s strategy.

Details of the measures, weightings and targets applicable to the STIP for each year, including a

description of how they were chosen and whether they were met, will be disclosed retrospectively

in the annual report on remuneration for the following year (subject to commercial sensitivity).

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

148

Long-Term Incentive Plan (LTIP)

Function

To align the interests of Executive Directors with shareholders in growing the value of the

Group over the long term.

Operation

Under the LTIP, Executive Directors are eligible to receive annual awards over the

Company’s shares normally vesting after three years.

Two different types of awards can be granted:

1. Performance Share Awards (PSAs) which are subject to the achievement of stretching

performance targets.

2. Restricted Share Awards (RSAs) for which vesting levels are subject to a general

assessment by the Committee as to overall performance and any other wider

considerations. The Committee has discretion to apply additional conditions to some

or all of an RSA.

Under the LTIP rules, the Committee may decide to apply malus and/or clawback to

awards to reduce the vesting of awards and/or require repayment of awards in the

event of:

(a) The participant leaves employment and facts emerge which, if known earlier,

would have caused the award to lapse or caused the Committee to exercise

discretion differently.

(b) Any error in the assessment of a performance condition or vesting calculation that

resulted in an overpayment.

applicable laws, rules or codes of conduct or the standards reasonably expected of it.

(d) A material failure of risk management for any period which caused serious harm to the

reputation of the Group and/or significant financial loss to the Group.

(e) A serious breach of health and safety which caused serious harm to the reputation of

the Group and/or significant financial loss to the Group.

(f) The Committee determines that the underlying financial health of the Group has

significantly deteriorated such that there are severe financial constraints on payment

of awards.

(g) The participant, after having left employment, is found to be in breach

of any restrictive covenant, non-solicitation, anti-disparagement or

confidentiality undertakings.

PSAs and RSAs made to Executive Directors are subject to a holding period after the

vesting period, normally a two-year period after a three-year vesting period but, in any

case, the vesting plus holding period will always be no shorter than five years from grant.

Opportunity

Executive Directors will normally be eligible for annual LTIP awards of 250% of salary.

RSAs will be granted at a discount of 50% of the regular PSA, i.e. a regular award of 250%

value would be made up of 125% of salary PSA and 62.5% of salary RSA. Awards (PSA

and RSA combined) up to a maximum of 300% of salary may be granted in exceptional

circumstances (e.g. to support the recruitment of a key executive or to recognise

exceptional individual performance).

25% of a PSA will vest if performance against each performance condition is at threshold

and 100% if each is at maximum, with straight-line vesting in between.

Dividends accrue on unvested awards granted under the LTIP (i.e. PSA and RSA) over

the vesting period and are released, to the extent the award vests, on the vesting/

exercise date.

Meggitt PLC Annual Report and Accounts 2021

149

Directors’ Report

Directors’ remuneration report

continued

Long-Term Incentive Plan (LTIP) continued

Performance metrics

Vesting of PSAs is subject to continued employment and performance against corporate

measures, which are intended to be as follows for awards made over the life of the

Remuneration Policy but are subject to change at the discretion of the Committee:

• Earnings per Share (EPS).

• Return on Capital Employed (ROCE).

• Strategic goals (typically but not always to be based on strategic priorities around

execution, growth and innovation), which will be explained in the relevant annual report

on remuneration.

It is the intention that the weighting of the measures will be equal (e.g. one-third each

if three measures are used) but that the Committee will consider, and adjust if deemed

appropriate, the weighting at the start of each LTIP cycle.

PSAs made under the LTIP have a performance period of three financial years, starting

from 1 January of the year in which the award is made and ending on 31 December of the

third year. If conditions are not met at the end of the relevant performance period, awards

will lapse.

Vesting of the strategic objectives element will also be subject to a discretionary

assessment by the Committee of the extent to which achievement is consistent with the

Group’s underlying financial performance over the three-year period.

The measures and targets in operation for the PSAs, and which are not deemed

commercially sensitive, are normally disclosed in the annual report on remuneration for the

relevant year of grant. Any commercially sensitive information on measures, targets and

performance will be disclosed retrospectively.

Vesting of RSAs is subject to a general underpin allowing the Committee to adjust vesting

if business performance, individual performance or wider considerations mean, in its view,

that an adjustment is required. Any vesting is also subject to any other conditions set by the

Committee at grant.

Sharesave Scheme and Share Incentive Plan (SIP)

Function

To align the interests of employees and shareholders by encouraging all employees to

own the Company’s shares.

Operation

Sharesave Scheme – All-employee scheme under which all UK employees (including UK

Executive Directors) may save up to a maximum monthly savings limit over a period of

three or five years. Options under the Sharesave Scheme are granted up to a discount of

up to 20% to the market value of shares at the date of grant.

SIP – All-employee scheme under which: (i) all UK employees (including UK Executive

Directors) may contribute up to a monthly maximum to purchase shares monthly from

pre-tax pay; and (ii) all UK employees (including UK Executive Directors) may receive free

shares up to an annual maximum value.

Opportunity

Savings, contributions and free shares are capped at or below the legislative maximum for

tax-qualifying approved share plans at the time UK employees are invited to participate.

Performance metrics

None.

Notes to the Policy table

The Committee is satisfied that the above Remuneration Policy is in the best interests of shareholders and does not promote

excessive risk-taking. The Committee retains discretion to make minor, non-significant changes to the Policy without reverting

to shareholders.

Consideration of shareholder views

The Committee Chair is available to discuss remuneration matters with the Group’s major shareholders and is also regularly

updated on feedback on remuneration received by the Chairman of the Board and Executive Directors directly from shareholders.

The Committee Chair ensures the Committee is kept informed of shareholder views.

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

150

External appointments

In cases of hiring or appointing a new Executive Director from outside the Group, the Committee may make use of all existing

components of remuneration, as follows:

Component Approach

Maximum annual

grant value

Base salary The base salaries of new appointees will be determined based on the experience

and skills of the individual, internal comparisons, employment conditions and

salary levels across the Group and prevailing market conditions. Initial salaries may

be set below market conditions and consideration given to phasing any increases

over two or three years subject to development in the role.

N/A

Pension In line with the Remuneration Policy, new appointees will be entitled to become

members of the Meggitt Workplace Savings Plan (defined contribution plan) or

receive a cash pension allowance at the same level as the wider workforce in lieu

of salary.

N/A

Benefits/

Sharesave/SIP

New appointees will be eligible to receive benefits in line with the Remuneration

Policy and any applicable UK all-employee share plans.

N/A

STIP The structure described in the Remuneration Policy table will apply to new

appointees with the relevant maximum being pro-rated to reflect the proportion

of the year worked. Targets for the strategic element will be tailored to the

appointee.

150% of salary

(200% in exceptional

circumstances)

LTIP New appointees will be granted awards under the LTIP on similar terms as other

Executive Directors, as described in the Remuneration Policy table.

250% of salary (300%,

combined, in exceptional

circumstances)

In determining the appropriate remuneration structure and levels, the Committee will take into consideration all relevant factors

to ensure that arrangements are in the best interests of shareholders and employees. The Committee may make an award in

respect of a new appointment to “buy out” incentive arrangements forfeited on leaving a previous employer, i.e. over and above

the approach outlined in the table above. Any such compensatory awards will be made under the Group’s existing share plans,

where appropriate, and will be subject to the normal rules and performance conditions of those schemes.

The Committee may also consider it appropriate to structure “buy-out” awards differently to the structure described in the

Remuneration Policy table, exercising the discretion available under UKLA Listing Rule 9.4.2 R where necessary to make a one-off

award to an Executive Director in the context of recruitment. In doing so, the Committee will consider relevant factors including

any performance conditions attached to these awards, the likelihood of those conditions being met and the proportion of the

vesting period remaining. The value of any such “buy-out” will be fully disclosed.

Internal promotion

Where a new Executive Director is appointed by way of internal promotion, the Remuneration Policy will be consistent with that for

external appointees as detailed above. Any commitments made prior to an individual’s promotion will continue to be honoured

even if they would not otherwise be consistent with the Remuneration Policy prevailing when the commitment is fulfilled although

the Group may, where appropriate, seek to revise an individual’s existing service contract on promotion to ensure it aligns with

other Executive Directors and prevailing market best practice.

Disclosure of the remuneration structure of any new Executive Director, including details of any exceptional payments, will be

disclosed either in the RNS notification made at the time of appointment or in the annual report on remuneration for the year in

which the recruitment occurred.

Approach to performance measure selection and target setting

Performance measures have been selected to closely align with and reinforce our strategic priorities (see pages 24 to 25).

Targets applying to the STIP and PSAs are reviewed annually, based on a number of internal and external reference points, including the

Group’s strategic plan, analyst forecasts for the Group and its sector comparators, historical growth achieved by the Group and its

sector comparators, market practice and external expectations for growth in our markets.

STIP

The performance measures used in the STIP reflect financial targets for the year and non-financial performance objectives The

Remuneration Policy provides the Committee with flexibility to select appropriate measures on an annual basis. STIP performance

targets are set to be stretching but achievable, with regard to the particular strategic performance objectives and the economic

environment in a given year. For financial measures, “target” is based around the annual budget approved by the Board. Prior to

the start of the financial year, the Committee sets an appropriate performance range around target, which it considers provides an

appropriate degree of “stretch” challenge and an incentive to outperform.

Meggitt PLC Annual Report and Accounts 2021

151

Directors’ Report

Directors’ remuneration report

continued

Directors’ Report

STIP strategic measures are set each year under the themes of our four strategic blue chips: Strategy, Customer, Competitiveness

and Culture. Each year every Executive Director is assigned measures against these themes which will drive the long-term success

of the Group. These measures are then cascaded through the Executive Committee and beyond using a policy deployment

matrix to ensure alignment across the entire organisation to the Group’s strategic priorities. Strategic measures are disclosed

retrospectively when they are considered not to be commercially sensitive.

LTIP – PSA

It is intended that the vesting of PSAs made during the life of this Remuneration Policy will be linked to EPS, ROCE and the

achievement of long-term strategic goals, but may also include other measures to enable the PSA to reinforce appropriate

financial and non-financial objectives aligned with our strategy. EPS is considered by the Board to be the most important measure

of our financial performance. It is highly visible internally, is regularly monitored and reported and is strongly motivational for

participants. EPS targets will continue to be set on a nominal cumulative (pence) basis to incentivise consistent performance and

reflect the fact that our profits are generated to a large degree outside the UK and not significantly influenced by UK retail price

inflation. ROCE helps to balance the achievement of growth and returns. The Committee believes ROCE is a good proxy for total

shareholder return (TSR) which focuses executives on managing the balance sheet and the Group’s operational performance.

For Executive Directors, the use of ROCE targets reflects the fact that acquisition decisions come within the collective

responsibility of the Board.

The Committee believes that the strategic goals component helps reinforce the realisation of the Group’s strategy and the

achievement of key non-financial and strategic goals over long product cycles which drive long-term value for the Group.

This element will typically comprise a scorecard of three-year targets across a maximum of three core strategic areas for

the Group. The Committee believes that this approach enables it to reflect the Group’s long-term nature and shifting

strategic priorities in the PSA to ensure executives’ interests remain closely aligned with those of our shareholders over time.

Specific measures and targets for each area will be developed and clearly defined at the start of each three-year cycle to balance

leading and lagging indicators of performance. Vesting of this element is subject to a discretionary assessment by the Committee

of the extent to which achievement of the strategic objectives is consistent with the Group’s underlying financial performance over

the performance period.

LTIP – RSA

The vesting of the RSAs is subject to a discretionary assessment of “corporate health” by the Committee, taking into account a

wide range of business factors including, but not limited to, free cash flow, balance sheet health, adherence to dividend policy and

overall cash returns to shareholders, customer service, health and safety performance, ESG performance and corporate culture.

The balance and weighting of the factors may be adjusted as priorities for the Group develop over time, and the Committee will

consider performance in the round.

Pay-for-performance: scenario analysis

The charts below provide an estimate of the potential future reward opportunities for the Executive Directors and the potential

split between the different elements of remuneration under three different performance scenarios: “Minimum”, “On-target” and

“Maximum”. This chart also shows the effect of future share price increases on executive pay outcomes under The Companies

(Miscellaneous Reporting) Regulations 2018. Potential reward opportunities are based on the Policy, applied to 2022 base salaries.

Note that the awards granted under the LTIP in a year will not normally vest until the third anniversary of the date of grant and the

projected value excludes the impact of dividend accrual.

2022 pay scenario summaries

Max+50% SP

Maximum

On-target

Minimum

Max+50% SP

Maximum

On-target

Minimum

Mr A Wood (£’000)

57% 35%8%

33%

22%

32% 10% 20%

33% 27% 14%

34%27% 17%

£1,221

£2,114

£3,091

£3,729

19%

57%

35%

33%

23%

33%3%

32% 10% 20%

27% 14%

£779

£1,345

£1,964

£2,368

19%

3% 27% 34% 17%

Mrs L Burdett (£’000)

Salary and benefits Pension STIP PSA RSA

Max+50% SP

Maximum

On-target

Minimum

Max+50% SP

Maximum

On-target

Minimum

Mr A Wood (£’000)

57% 35%8%

33%

22%

32% 10% 20%

33% 27% 14%

34%27% 17%

£1,221

£2,114

£3,091

£3,729

19%

57%

35%

33%

23%

33%3%

32% 10% 20%

27% 14%

£779

£1,345

£1,964

£2,368

19%

3% 27% 34% 17%

Mrs L Burdett (£’000)

Salary and benefits Pension STIP PSA

RSA

Max+50% SP

Maximum

On-target

Minimum

Max+50% SP

Maximum

On-target

Minimum

Mr A Wood (£’000)

57% 35%8%

33%

22%

32% 10% 20%

33% 27% 14%

34%27% 17%

£1,221

£2,114

£3,091

£3,729

19%

57%

35%

33%

23%

33%3%

32% 10% 20%

27% 14%

£779

£1,345

£1,964

£2,368

19%

3% 27% 34% 17%

Mrs L Burdett (£’000)

Salary and benefits Pension STIP PSA RSA

Mr A Wood (£’000) Mrs L Burdett (£’000)

Meggitt PLC Annual Report and Accounts 2021

152

The following assumptions have been made in compiling the charts:

Scenario Minimum On-target Maximum

Maximum +50%

share price increase

Fixed pay Latest known base salary,

pension and value of

benefits

Latest known base salary,

pension and value of

benefits

Latest known base salary,

pension and value of

benefits

Latest known base

salary, pension and

value of benefits

STIP No STIP payable On-target STIP payable

(67% of maximum)

Maximum STIP payable Maximum STIP payable

LTIP PSA – Threshold not

achieved (0% vesting)

PSA – Performance

warrants threshold

vesting (25%)

PSA – Performance

warrants full vesting

(100%)

PSA and RSA warrants

full vesting plus 50%

share price appreciation

on all awards

RSA – it is assumed that

the Committee did not

exercise its discretion to

adjust vesting levels

RSA – it is assumed that

the Committee did not

exercise its discretion to

adjust vesting levels

RSA – it is assumed that

the Committee did not

exercise its discretion to

adjust vesting levels

Exercise of discretion

The Committee will operate the Group’s incentive plans according to their respective rules and the Remuneration Policy set out

above, and in accordance with the Listing Rules and HMRC rules, where relevant. The Group’s incentive plans enable the use

of discretionary override and the Directors to exercise independent judgement and discretion when authorising remuneration

outcomes, taking account of Group and individual performance, and wider circumstances. In line with common market practice,

the Committee retains discretion as to the operation and administration of these incentive plans, including routine administration

matters such as the participating employees, timing of awards and the manner in which they are settled. The Committee also

retains discretion over the choice of performance measures and targets in accordance with the Remuneration Policy set out above

and the rules of each plan and the measurement of performance in the event of a variation of share capital, change of control,

special dividend, distribution or any other corporate event which may affect the current or future value of an award.

The Committee also has discretion over determination of a “good leaver” (in addition to any specified categories) for incentive

plan purposes, based on the rules of each plan and the circumstances of the individual leaving and adjustments required in

certain circumstances (e.g. rights issues, share buybacks, special dividends, other corporate events, etc.).

Any use of the above discretion in relation to the Executive Directors would, where relevant, be explained in the annual report on

remuneration for the year in which the discretion was exercised. As appropriate, it might also be the subject of consultation with

the Group’s major shareholders.

Minor changes

The Committee may make minor amendments to the rules of the Group’s incentive plans (for regulatory, exchange control,

tax or administrative purposes or to take account of a change in legislation) without requiring prior shareholder approval for

that amendment.

Service contracts and exit payment policy

Executive Director service contracts, including arrangements for early termination, are carefully considered by the Committee and

are designed to recruit, retain and motivate Directors of the quality required to manage the Group.

The Committee’s policy is that Executive Directors’ service contracts should be terminable on no more than 12 months’ notice.

The Committee’s approach to payments in the event of termination of employment of an Executive Director is to take account of

the particular circumstances, including the reasons for termination, individual performance, contractual obligations and the rules

of the Group’s applicable incentive plans which apply to awards held by the Executive Directors:

• Compensation for loss of office in service contracts

Except as set out in the table below, under the terms of their service contracts, the Executive Directors may be required to work

during their notice period or may, if the Group decides, be paid in lieu of notice if not required to work the full notice period.

Payment in lieu of notice will be equal to base salary plus the cost to the Group of providing the contractual benefits (pensions

allowance, health insurance and company car or car allowance) that would otherwise have been paid or provided during the

notice period.

Payments will be in equal monthly instalments and will be subject to mitigation such that payments will either reduce, or stop

completely, if the Executive Director obtains alternative employment. An Executive Director’s employment can be terminated

by the Group without notice or payment in lieu of notice in specific circumstances including summary dismissal, bankruptcy

or resignation.

Meggitt PLC Annual Report and Accounts 2021

153

Directors’ Report

• Treatment of STIP

Executive directors have no automatic entitlement to any bonus on termination of employment under the STIP, but the Committee may

use its discretion to award a bonus (normally pro-rated). Where any bonus is deferred into shares, the award will normally lapse if an

Executive Director’s employment terminates unless the Executive Director leaves for specified reasons. The “good leaver” reasons are

death, redundancy, retirement, injury, disability, the business or company which employs the Executive Director ceasing to be part of the

Group or any other circumstances in which the Committee exercises discretion to treat the Executive Director as a “good leaver”. If the

Executive Director is a “good leaver”, their award will vest on the normal vesting date and will not be subject to pro-rating.

Awards normally vest early on a change of control of the Company.

• Treatment of long-term incentive plan awards

The treatment of awards under the LTIP (both PSA and RSA) is governed by the rules of the plan which have been approved by

shareholders and are described below. Awards will normally lapse if an Executive Director’s employment terminates, unless the

Executive Director leaves for specified “good leaver” reasons. The “good leaver” reasons are the same as described above. If the

Executive Director is a “good leaver”, awards will vest to the extent that the attached performance conditions are met, but on a

time pro-rated basis, with Committee discretion to allow early vesting. Under the LTIP, awards vest on the normal vesting date

subject to performance over the normal performance period, unless the Committee decides otherwise. Awards normally vest

early on a change of control of the Company, subject to performance conditions and time pro-rating.

A summary of the key terms of the Executive Directors’ service contracts on termination of employment or change of control is set

out below.

Name Position

Notice period

from employer

Notice period

from employee

Compensation payable on termination

of employment or change of control

Mr A Wood

Service contract dated

13 November 2017

Chief Executive

Officer

12 months 6 months As set out in the Remuneration Policy.

No change of control provisions

Mrs L S Burdett

Service contract dated

17 September 2018

Chief Financial

Officer

12 months 6 months As set out in the Remuneration Policy.

No change of control provisions

Remuneration policy for other employees and engagement

The Committee has ensured “workforce remuneration and related policies and the alignment of incentives and rewards with

culture” has been considered when making decisions regarding Executive Director remuneration in 2021.

In setting the Remuneration Policy, the Committee reviewed:

• Our Global Compensation Policy – it noted alignment between pay for performance provisions for Executive Directors and the

wider workforce, along with an alignment of historic average pay increases.

• Our incentive plans (STIP and LTIP) – it noted alignment between the plans for the top 200 senior managers and the Executive

Directors and that work is underway to align other short-term incentive plans lower down the organisation.

• Alignment of reward with culture, values and long-term success – it noted the successful implementation of our High

Performance Culture programme (which is linked to our culture strategic priority) which is embedded in performance and

talent processes across the Group. The success of our High Performance Culture programme is enhanced by the increase in

employee engagement.

A report will be provided each year to the Committee, ensuring it is updated on remuneration of the wider workforce and ensuring

context as it makes remuneration decisions related to the Executive Directors.

The Remuneration Committee primarily consults management to understand employee views on executive remuneration. The Board

also regularly invites Meggitt’s Non-Executive Director responsible for employee engagement, Nancy Gioia – who is a member of the

Committee – to report on feedback received through the Board’s very extensive engagement programme with the workforce (as outlined

elsewhere in this Annual Report). Therefore there is an effective two-way mechanism in place for employees’ views and feedback. As a

Board generally, we keep our approach to employee engagement (as set out on pages 90 and 92) under review and look forward to

evolving our approach further over time.

The Remuneration Policy for other employees is based on broadly consistent principles as that for Executive Directors.

Annual salary reviews take into account personal performance, Group performance, local pay and market conditions, and salary

levels for similar roles in comparable companies. Some employees below executive level are eligible to participate in annual bonus

schemes; opportunities and performance measures vary by organisational level, geographical region and an individual’s role.

Senior executives are eligible for LTIP (PSA and RSA) on similar terms to the Executive Directors (except some of the performance

conditions may vary), although award opportunities are lower and vary by organisational level. All UK employees are eligible to

participate in the Sharesave Scheme and SIP on identical terms.

Directors’ remuneration report

continued

Directors’ Report

Meggitt PLC Annual Report and Accounts 2021

154

Pay ratios and pay gaps

Conscious of the increasing focus on the context of the wider stakeholder experience, the Committee also kept front of mind

other remuneration metrics such as the CEO Pay Ratio and Gender Pay Gap. The Gender Pay Gap reduced from 9.3% to 5.7% in

2021. Our progress was driven by several senior executive changes and our increased focus on diversity and inclusion. The CEO

Pay Ratio increased from 20x to 38x, due to a increased incentive outcome for the CEO relative to the more fixed remuneration

packages for the UK workforce, a large proportion of whom are production workers.

Non-Executive Directors – Remuneration Policy table

Non-Executive Directors stand for re-election annually, do not have a contract of service and are not eligible to join the Group’s

pension or share schemes.

Fees

Function

To attract and retain Non-Executive Directors of the highest calibre with broad

commercial and other experience relevant to the Group.

Operation

Fee levels are reviewed annually, with any adjustments effective 1 April each year.

The fees paid to the Chairman of the Board are determined by the Committee, while

the fees for all other Non-Executive Directors are reviewed by a committee of the Board

formed of the Executive Directors. Fees for the year under review and for the current year

are disclosed in the annual report on remuneration.

Additional fees are paid to the Chair of the Remuneration Committee; Chair of the

Audit Committee; Chair of the Corporate Responsibility Committee and Non-Executive

Director responsible for employee engagement; and to the Senior Independent Director,

to reflect the additional time commitment of these roles. Additional fees may also be paid

to Non-Executive Directors to cover the cost of attendance at meetings which take place

outside their continent of residence. In addition, Non-Executive Directors are reimbursed

for reasonable business-related expenses. The Group may pay any tax due on these

expenses on behalf of Non-Executive Directors.

In deciding fee increases, the Committee considers external market benchmarks as well

as salary increases across the Group and prevailing market conditions. Currently, all fees

are paid in GBP, however the Committee reserves the right to pay future and existing

Non-Executive Directors in any other currency (converted at the prevailing market rate

when a change is agreed).

Opportunity

Fee increases will be applied taking into account the outcome of the annual review.

The maximum aggregate annual fee for all Non-Executive Directors (including the

Chairman) as provided in the Company’s Articles of Association is £1,000,000.

Performance metrics

None.

Non-Executive Director expenses

Non-Executive Directors are already reimbursed for reasonable business-related expenses. The Group may decide to pay any tax

that is due on such expenses on behalf of the Non-Executive Director.

Non-Executive Director recruitment

In recruiting a new Non-Executive Director, the Committee will use the Remuneration Policy as set out in the table above.

By order of the Board

Alison Goligher

Chair of the Remuneration Committee

2 March 2022

Meggitt PLC Annual Report and Accounts 2021

155

Directors’ Report

Other statutory information

Directors’ Report

The Directors present their report with the Group’s audited consolidated financial statements (prepared in accordance with UK-

adopted international accounting standards and the Companies Act 2006) and the Company’s audited financial statements (prepared

in accordance with Financial Reporting Standard 101, “Reduced Disclosure Framework” (FRS 101) and the Companies Act 2006) for

the year ended 31 December 2021.

Incorporation by reference

Certain laws and regulations require that specific information should be included in the Directors’ report. The table below shows the

items which are incorporated into our Directors’ report by reference:

Information incorporated into the Directors’ report by reference Location and page

Important events and likely future developments in the Group’s

business

Strategic report (pages 08 to 94)

Post balance sheet events N/A

Employee information

Employee engagement

Employment of disabled persons

Corporate responsibility report (pages 74 to 77)

Stakeholder engagement pages (90 and 92)

Corporate responsibility report (page 76)

Engagement with stakeholders Stakeholder engagement (pages 90 to 92)

Greenhouse gas emissions Corporate responsibility report (page 82)

Research and development Note 7 to the Group’s consolidated financial statements (page

196) and Chief Financial Officer’s review (page 44)

Policies on financial risk management, including the extent to

which financial instruments are utilised to mitigate any significant

risks to which the Group is exposed

Note 3 to the Group’s consolidated financial statements (pages

188 and 189)

Statement of the amount of interest capitalised by the Group

during the year with an indication of the amount and treatment

of any related tax relief

Note 18 to the Group’s consolidated financial statements (page

204)

Overseas branches Note 45 to the Group’s consolidated financial statements (pages

230 and 231)

Dividends

The Board recognises the importance of the dividend to the Company’s shareholders, but due to the financial impact of the

COVID-19 pandemic on the Group, the Board took the prudent decision not to recommend a final dividend per ordinary 5 pence

share for 2020 in order to retain cash within the Group, manage net debt levels and preserve flexibility. The Board also took the

decision not to pay an interim dividend in 2021 due to ongoing market conditions. Therefore no dividend was paid in 2021 (2020: nil).

In line with the terms of the previously announced proposed acquisition with Parker-Hannifin, the Group is not paying a final dividend

for 2021.

Dividend Reinvestment Plan

We operate a Dividend Reinvestment Plan (DRIP) which enables shareholders to buy the Company’s shares on the London Stock

Exchange with their cash dividend. Further information about the DRIP is available from Computershare, our Registrar. During 2021,

no dividends were paid.

Directors

The Directors of the Company in office during the year and up to the date of signing the financial statements were:

Sir Nigel Rudd (Chairman), Mr A Wood, Mr G S Berruyer, Mrs L S Burdett, Mr C R Day, Mrs N L Gioia, Ms A J P Goligher, Mr G C

Hachey and Mrs C L Silver.

All Directors listed above will be submitted for re-election at the Annual General Meeting (AGM).

Details of any unexpired terms of the Directors’ service contracts are in the Directors’ remuneration report. Membership of

Committees and biographical information is disclosed on pages 100 to 103 and in the AGM notice. Succession activities are

highlighted in the Nominations Committee report on pages 122 to 124.

The Directors benefit from qualifying third-party indemnity provisions for the purposes of Section 236 of the Companies Act

2006 pursuant to the Articles in effect throughout the financial year and up to the date of this Directors’ report. The Company

also purchased and maintained throughout the year Directors’ and Officers’ liability insurance. No indemnity is provided for the

Company’s auditors.

Meggitt PLC Annual Report and Accounts 2021

156

Conflicts of interest

We have a procedure for the disclosure, review, authorisation and management of Directors’ conflicts of interest and potential

conflicts of interest, in accordance with the provisions of the Companies Act 2006. In deciding whether to authorise a conflict 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 are regularly reviewed by the Board. Further details can be

found on page 110.

Political donations

Neither the Group nor the Company made any political donations or incurred any political expenditure during the year (2020: None).

Share capital and control

As at 31 December 2021, the Company held 9,859 treasury shares with a nominal value of 5 pence each and the Company’s issued

share capital (excluding shares held in treasury) consisted of 782,005,314 shares with a nominal value of 5 pence each. As at 1

March 2022, the Company held 9,859 treasury shares with a nominal value of 5 pence each and the Company’s issued share capital

(excluding shares held in treasury) consisted of 782,021,555 shares with a nominal value of 5 pence each. The issued share capital

of the Company at 31 December 2021 and details of shares issued during the financial year are shown in Note 37 to the Group’s

consolidated financial statements.

The ordinary shares are listed on the London Stock Exchange. The rights and obligations attaching to the Company’s ordinary shares

are set out in the Articles. A copy of the Articles is available for inspection at our registered office. The holders of ordinary shares are

entitled to receive a copy of our Annual Report and Accounts, to attend and speak at our General Meetings, to appoint proxies to

exercise full voting rights and to participate in any distribution of income or capital.

There are no restrictions on transfer, or limitations on holding ordinary shares, and no requirements for prior approval of any transfers.

There are no known arrangements under which financial rights are held by persons other than holders of the shares and no known

agreements or restrictions on share transfers or on voting rights. Shares acquired through Company share plans rank pari passu (on

an equal footing) with the shares in issue and have no special rights.

We operate an Employee Share Ownership Plan Trust (the “Trust”) that was formed to acquire shares to satisfy the vesting and

exercise of awards under the Group’s share-based incentive arrangements. The trustees do not exercise any voting rights on shares

held by the Trust and a dividend waiver operates in respect of these shares. Once shares are transferred from the Trust to participants

the participants are entitled to receive dividends and exercise voting rights attached to the shares.

Rules about the appointment and replacement of Directors are contained in the Articles which provide that a Director may be

appointed by ordinary resolution of the shareholders or by the existing Directors, either to fill a vacancy or as an additional Director.

Changes to the Articles must be submitted to the shareholders for approval by way of special resolution. The Directors may exercise

all the powers of the Company subject to the provisions of relevant legislation, the Articles and any directions given by the Company

in a General Meeting.

At the 2021 AGM, the Company was granted authority by shareholders to purchase up to 78,127,336 ordinary shares, being 10% of

the Company’s issued share capital, in accordance with the Articles. No shares were bought back under this authority during the year

ended 31 December 2021. Shares purchased under this authority would have been cancelled or held as treasury shares to be sold at

a later date or used to satisfy awards under the Company’s share plans as the Board saw fit.

The Directors were also granted authority by shareholders to allot securities in the Company up to a maximum nominal amount of

£26,042,444, of this amount £13,021,222 can only be allotted pursuant to a rights issue. The Directors were also authorised to allot

securities, without the application of pre-emption rights, up to a nominal amount of £1,953,183 and a further £1,953,183 in connection

with an acquisition or other capital investment of a kind contemplated by the Statement of Principles on Disapplying Pre-Emption

Rights. No such transaction is contemplated at present.

These authorities apply until the conclusion of the 2022 AGM or, if earlier, 30 June 2022. The Company will seek shareholder approval

to renew these authorities at the 2022 AGM. Detailed explanatory notes are set out in the AGM notice.

The Group has significant financing agreements which include change of control provisions which, should there be a change of ownership

of the Company, could result in renegotiation, withdrawal or early repayment of these financing agreements. These are a USD125m note

purchase agreement dated June 2010, a USD600m note purchase agreement dated May 2016, two term loan facility agreements in the

amounts of GBP30m and USD50m dated December 2019, a GBP50m term loan agreement dated June 2020, a USD300m note purchase

agreement dated November 2020 and a USD410m syndicated revolving credit agreement dated November 2021.

There are a number of other long-term commercial agreements that may alter or terminate upon a change of control of the Company

following a successful takeover bid. These arrangements are commercially sensitive and their disclosure could be seriously prejudicial

to the Company.

Meggitt PLC Annual Report and Accounts 2021

157

Directors’ Report

Other statutory information

continued

Directors’ Report

Agreements with the Company’s Directors or employees providing compensation in the event of a takeover bid:

Director Contractual entitlement

Mr A Wood None except that provisions in the Company’s share plans may cause options and/or awards granted

to employees under such plans to vest on a takeover.

Mrs L S Burdett None except that provisions in the Company’s share plans may cause options and/or awards granted

to employees under such plans to vest on a takeover.

Non-Executive Directors None.

All other employees There are no agreements that would provide compensation for loss of employment resulting from

a takeover except that provisions in the Company’s share plans may cause options and/or awards

granted to employees under such plans to vest on a takeover.

Substantial shareholdings

At 31 December 2021, the Company had been notified under the Disclosure Guidance and Transparency Rules (DTR) of the following

substantial interests in the issued ordinary shares of the Company requiring disclosure:

Direct

voting rights*

Indirect

voting rights*

Other financial

instruments with

voting rights*

Total

voting rights*

Percentage

of total

voting rights**

BlackRock Inc. – 33,087,041 60,961,162 94,048,203 12.02

JPMorgan Securities plc – 2,157,686 68,237,708 70,395,394 9.00

Societe Generale 50,995,659 – 95,500 51,091,159 6.53

Morgan Stanley – 47,052,874 183,169 47,236,043 6.04

FMR LLC (FIL Limited) – 38,024,107 1,430,060 39,454,167 5.05

The Capital Group Companies, Inc – 38,606,468 – 38,606,468 4.94

Harris Associates L.P. – 38,323,051 – 38,323,051 4.94

T. Rowe Price Associates, Inc – 37,789,977 – 37,789,977 4.84

Standard Life Investments Ltd 22,153,694 3,769,560 – 25,923,254 3.96

Legal & General Group plc 23,704,643 – – 23,704,643 3.01

* One voting right per ordinary share.

** Percentage of the Company’s issued share capital when the Company was notified of the change in holding.

In the period from 31 December 2021 to 1 March 2022 we received numerous notifications in accordance with DTR5 from Societe

Generale, Morgan Stanley, Barclays Bank plc, JP Morgan Securities plc and UBS AG London Branch. Details of all notifications were

published on a regulatory information service and are available on our website. The substantial interests notified to us as at 1 March

2022 are set out below:

Direct

voting rights*

Indirect

voting rights*

Other financial

instruments with

voting rights*

Total

voting rights*

Percentage

of total

voting rights**

BlackRock Inc. – 33,087,041 60,961,162 94,048,203 12.02

JPMorgan Securities plc – 2,764,678 68,955,589 71,720,267 9.17

Societe Generale 56,518,850 – 95,500 56,614,350 7.24

Barclays Bank plc 5,217,610 – 54,006,090 59,223,700 7.57

Morgan Stanley – 43,625,560 18,950,751 62,576,311 8.00

FMR LLC (FIL Limited) – 38,024,107 1,430,060 39,454,167 5.05

The Capital Group Companies, Inc – 38,606,468 – 38,606,468 4.94

Harris Associates L.P. – 38,323,051 – 38,323,051 4.94

T. Rowe Price Associates, Inc – 37,789,977 – 37,789,977 4.84

Standard Life Investments Ltd 22,153,694 3,769,560 – 25,923,254 3.96

Legal & General Group plc 23,704,643 – – 23,704,643 3.01

* One voting right per ordinary share.

** Percentage of the Company’s issued share capital when the Company was notified of the change in holding.

Statement of Directors’ responsibilities in respect of the financial statements

The Directors are responsible for preparing the Annual Report and Accounts and the financial statements in accordance with applicable law

and regulation.

Meggitt PLC Annual Report and Accounts 2021

158

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have

prepared the Group financial statements in accordance with UK-adopted international accounting standards and the Company

financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting

Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law).

Under company law, Directors must not approve the financial statements unless they are satisfied that they give a true and fair view

of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. In preparing the financial

statements, the Directors are required to:

• Select suitable accounting policies and then apply them consistently.

• State whether applicable UK- adopted international accounting standards have been followed for the Group financial statements

and United Kingdom Accounting Standards, comprising FRS 101 have been followed for the Company financial statements,

subject to any material departures disclosed and explained in the financial statements.

• Make judgements and accounting estimates that are reasonable and prudent.

• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will

continue in business.

The Directors are responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the

prevention and detection of fraud and other irregularities.

The Directors are also responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and

Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and

enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006.

The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom

governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors’ confirmations

Each of the Directors, whose names and functions are listed on pages 100 to 103, confirm that, to the best of their knowledge:

• The Group financial statements, which have been prepared in accordance with UK-adopted international accounting standards, give a true

and fair view of the assets, liabilities, financial position and profit of the Group.

• The Company financial statements, which have been prepared in accordance with United Kingdom Accounting Standards,

comprising FRS 101, give a true and fair view of the assets, liabilities and financial position of the Company.

• The Strategic Report and this Directors’ report include a fair review of the development and performance of the business and the

position of the Group and Company, together with a description of the principal risks and uncertainties that they face.

In the case of each Director in office at the date the Directors’ report is approved:

• So far as the Director is aware, there is no relevant audit information of which the Group’s and Company’s auditors are unaware.

• They have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit

information and to establish that the Group’s and Company’s auditors are aware of that information.

Fair, balanced and understandable

The Board of Directors as at the date of this report consider that the Annual Report and Accounts, taken as a whole, is fair, balanced

and understandable and provides the information necessary for shareholders to assess the Group’s and Company’s position,

performance, business model and strategy. The Board has made this assessment on the basis of a review of the accounts process, a

discussion on the content of the Annual Report assessing its fairness, balance and understandability, together with the confirmation

from executive management that the Annual Report is fair, balanced and understandable.

Going concern

The Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the

Group and the Company have adequate resources to continue in operational existence for a period of at least 12 months from the date of this

report. For this reason, the Directors continue to adopt the going concern basis in preparing the Group and Company financial statements.

Details on how the Directors reached this judgement are set out in Note 1 to the Group’s consolidated financial statements on pages 176

to177.

This Directors’ report, comprising pages 96 to 159, has been approved by the Board and is signed on its behalf by

M L Thomas

Company Secretary

2 March 2022

Meggitt PLC Annual Report and Accounts 2021

159

Directors’ Report

Report on the audit of the financial statements

Opinion

In our opinion:

• Meggitt PLC’s Group financial statements and Company financial statements (the financial statements) give a true and fair view of

the state of the Group’s and of the Company’s affairs as at 31 December 2021 and of the Group’s profit and the Group’s cash flows

for the year then ended;

• the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards;

• the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting

Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements, included within the Annual Report and Accounts 2021 (the Annual Report), which comprise: the

Consolidated and Company balance sheets as at 31 December 2021; the Consolidated income statement, the Consolidated statement of

comprehensive income, the Consolidated cash flow statement, and the Consolidated and Company statements of changes in equity for

the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities

under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial

statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have

fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided.

Other than those disclosed in note 6 to the Group financial statements, we have provided no non-audit services to the Company

or its controlled undertakings in the period under audit.

Our audit approach

Overview

Audit scope

• We identified 12 reporting units which, in our view, required a full scope audit based on their size or risk. In addition, we

determined that specified audit procedures were required at a further two reporting units to address specific risk characteristics

and provide sufficient overall Group coverage of particular revenue streams. We used component teams in five countries to

perform a combination of full scope audits and specified procedures at 14 reporting units.

• The Group team performed procedures over several different financial statement line items, including complex areas prepared

by the head office finance function, to provide sufficient overall Group coverage. The consolidation and financial statement

disclosures were audited by the Group team.

• Reporting units where we performed audit procedures accounted for 62% of Group profit before tax; 63% of Group underlying

profit before tax; and 79% of Group total assets. Our audit scope provided sufficient appropriate audit evidence as a basis for our

opinion on the Group financial statements as a whole. We considered the Group’s climate change risk assessment process and

this, together with involvement of our own climate change experts, provided us with an understanding of the potential impact of

climate change on the financial statements. See the ‘How we tailored the audit scope’ section below for further details.

Key audit matters

• Going concern (Group and Company)

• Goodwill impairment assessment (Group)

• Development costs impairment assessments (Group)

• Environmental provisions (Group)

• Retirement benefit obligation liabilities and complex pension scheme assets (Group and Company)

Materiality

• Overall Group materiality: £13.2m (2020: £15.2m) based on a five-year average of 5% of underlying profit before tax.

• Overall Company materiality: £35.0m (2020: £35.0m) based on 1% of total assets.

• Performance materiality: £9.9m (2020: £11.4m) (Group) and £26.25m (2020: £26.25m) (Company).

Financial Statements

Independent auditors’ report

to the members of Meggitt PLC

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160

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.

Key audit matters

Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the

financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not

due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation

of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on

the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in

forming our opinion thereon, and we do not provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

COVID-19, provisions for uncertain tax positions and Company’s investments in subsidiary undertakings impairment assessment,

which were key audit matters last year, are no longer included because of the relative level of assessed audit risk associated with

these matters having reduced in the current year. Otherwise, the key audit matters below are consistent with last year.

Key audit matter How our audit addressed the key audit matter

Going concern (Group and Company)

The Directors have formed a judgement, at the time

of approving the consolidated and Company financial

statements, that there is a reasonable expectation that the

Group and Company (hereinafter, the ‘Group’) have adequate

resources to continue in operational existence for a period of

at least 12 months from the date of approval. For this reason,

the Directors continue to adopt the going concern basis in

preparing these financial statements.

In making an assessment as to whether the going concern

principle should be adopted, the Directors have considered

the period to 31 March 2023 (the ‘assessment period’).

The Directors have concluded that there are no material

uncertainties around the Group’s ability to continue as a

going concern.

In forming this assessment the Directors considered

its liquidity requirements and compliance with its loan

covenants based upon its plans, as approved by the Board

in December 2021 and updated through to the date of

approval of these financial statements. Further the Directors

modelled a reverse stress test scenario under which the

Group would be close to breaching its net debt:EBITDA

covenant ratio and concluded that, the likelihood of such a

scenario occurring to be remote and significantly outside

any severe but plausible scenarios modelled.

The Directors also considered the proposed acquisition

of the Group by Parker-Hannifin Corporation (Parker).

The Directors concluded that Parker has the intention and

ability to: finance the equity purchase, repay liabilities

falling due on a change of control and continue to

operate the Group as a going concern throughout the

assessment period.

In light of the uncertainty that remains as to the precise

timing and speed of the recovery and the challenging

market conditions, particularly in civil aerospace, and the

proposed acquisition by Parker, our audit devoted a significant

amount of resources to evaluating the Directors’ going

concern assessment.

Refer also to note 1 of the consolidated financial statements

(pages 176 to 177).

For our audit response and conclusions in respect of going

concern, see the ‘Conclusions relating to going concern’

section below.

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161

Financial Statements

Independent auditors’ report

to the members of Meggitt PLC

continued

Key audit matter How our audit addressed the key audit matter

Goodwill impairment assessment (Group)

The Group holds significant amounts of goodwill (£1,531.8m)

on the balance sheet.

Management has performed their annual impairment

review as at 30 June 2021. No triggering events have

been identified during 2021 and therefore no additional

impairment reviews have been performed. No impairment

charge has been recorded against goodwill in the

current year.

The proposed acquisition by Parker provides a reliable

estimate of fair value less costs of disposal (FVLCOD) and

this has been used to determine the recoverable amount for

the impairment review.

The recoverable amount has been allocated to each cash-

generating unit (CGU) or group of CGUs using the relative

value-in-use of each CGU.

The value-in-use model includes the following estimates:

• The forecast cash flows in the five-year plan;

• The probability weighting factors applied to each of the

potential scenarios used to derive an expected value for

the cash flow projections;

• The growth rates applied to extrapolate forecasts beyond

the plan; and

• The discount rates applied to future cash flows.

Our audit focused on the risk that the carrying value of

goodwill could be overstated.

Refer also to note 17 of the consolidated financial

statements (pages 202 to 203).

We have performed the following procedures over the

FVLCOD used to determine the recoverable amount for the

impairment review:

• Recalculated FVLCOD using information from the Scheme

Document, including the offer price per ordinary share and

the estimated costs of disposal;

• Tested the mathematical accuracy of management’s

allocation of FVLCOD to each CGU or group of CGUs; and

• Compared management’s allocation of FVLCOD based on

value-in-use with alternative allocations based on revenue

and underlying profitability.

We did not identify any indication of management bias or any

material exceptions in these tests, with significant headroom

across all CGUs or groups of CGUs.

We have performed the following procedures over the value-

in-use model used to by management to allocate the FVLCOD

to each CGU or group of CGUs:

• Evaluated management’s future cash flow forecasts by

obtaining the scenarios modelled by management and:

– Tested the mathematical accuracy and integrity of

the models;

– Agreed the forecasts used to the five-year plan presented

to the Board;

– Identified the key assumptions applied, which we

determined to be revenue growth and margins.

We compared these assumptions against historical

actuals and management’s prior year value-in-use model;

and

– Assessed the appropriateness of the alternative scenarios

and whether the weighting applied to each scenario

was reasonable.

We did not identify any material exceptions in these tests.

• Compared the long-term growth rate used for each territory

to long term inflation projections for the countries in which

the CGUs operate. We did not identify any differences; and

• Tested the discount rates used in management’s impairment

assessment by comparing key inputs, where relevant,

to externally derived data or data for comparable listed

organisations. Our specialists reviewed the discount rates and

management’s estimates were within our expected range,

with one exception, which does not materially impact the

level of headroom.

We have not identified any impairment triggers which would

require an updated impairment assessment in the intervening

period to year end.

We have assessed the related disclosures in the consolidated

financial statements and consider them to be appropriate.

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

162

Key audit matter How our audit addressed the key audit matter

Development costs impairment assessments (Group)

The Group holds a significant amount of development

costs (£524.7m) on the balance sheet. These assets are

subject to impairment testing at the individual asset

(programme) level, at least annually. Where headroom is

limited, when comparing its value-in-use to its carrying

value, or if events or changes in circumstances indicate the

carrying value may not be recoverable, an impairment test

is performed more frequently.

An impairment charge of £3.7m has been recorded against

development costs in the current year.

This matter involves a high degree of estimation and

judgement which necessitated us devoting significant

time to this area. Our audit focused on the accuracy of the

impairment charge recorded, whilst also considering the

risk that the carrying value of development costs could be

overstated post the impairment being recorded.

We focused our audit procedures on those programmes

against which management holds an impairment provision,

those with limited headroom and those with a significant

carrying value. The key estimates and assumptions

assessed were:

• The estimated aircraft or engine volumes (fleet forecasts)

and the period over which future cash flows are forecast

(fleet lives);

• The sales price per part where a purchase price has not yet

been agreed;

• The cost per part where the programme is still in

development; and

• The discount rate applied to future cash flows.

The impact of climate change is specifically related to the

time that a platform (e.g. aircraft or aero engine on which

the Group has content) will remain in service and thus

generate revenue either through sales to the aircraft or

engine OEM or to the Operators and MRO companies in

the aftermarket. We considered the impact climate change

is anticipated to have on future cash flows and assessed

the appropriateness of how management had considered

these in programme impairment assessments. We also

considered management’s assessment of programme

useful economic lives in the context of risks posed by

climate change.

Refer also to note 4 and 18 of the consolidated financial

statements (pages 190 to 191 and page 204).

We have performed the following procedures over the

value-in-use models which support management’s

impairment assessment:

• Tested the mathematical integrity of the model;

• Tested the discount rates used in management’s impairment

assessment by comparing key inputs, where relevant,

to externally derived data or data for comparable listed

organisations. Our specialists reviewed the discount rates and

management’s estimates were within our expected range, with

two exceptions, which do not materially impact the level of

headroom; and

• Agreed fleet forecast data used in calculating the programme

forecast cash flow up to 2035 to external market forecasts

for all heightened risk programmes (defined below) and on

a sample basis over the remaining programme population.

We corroborated any significant deviations applied by

management to supporting evidence. We assessed fleet

forecasts used beyond the period covered by the external

market forecasts, considering average aircraft lives and

trend analysis and considered them to be supported by the

evidence we obtained.

We identified those programmes which we considered to be

of heightened risk based on their value or potential for the

carrying amount not being recovered. For these models we

performed the following additional audit procedures:

• Agreed the sales price per part to customer contract or

alternative supporting evidence;

• Agreed cost per part to inventory historic cost per unit,

including bill of materials, or alternative supporting evidence;

and

• Performed a sensitivity analysis over the discount rates and

fleet forecasts.

We did not identify any material exceptions in these tests.

We compared management’s assumptions to external industry

benchmarks and reports, including forecasts for OE fleet sizes

(fleet forecast data, see above) and civil aerospace passenger

traffic forecasts measured using RPKs. We also considered the

estimated weighted average remaining useful economic life

of the development costs and the average period over which

the carrying value will be recovered. The audit evidence that

we obtained supports management’s judgement that the fleet

lives of the aircraft to which the development costs relate are

not expected to reduce significantly. On this basis we have not

identified an additional impairment as a result of the impact

of climate change and consider the amortisation charge to be

materially accurate.

Based on the procedures described above, we consider the

impairment charge recognised to be materially accurate.

We evaluated and concluded that the assets, including

significant estimates and judgements, were appropriately

disclosed in the consolidated financial statements.

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163

Financial Statements

Key audit matter How our audit addressed the key audit matter

Environmental provisions (Group)

The Group has liabilities of £93.6m relating to

environmental matters.

The environmental matters primarily relate to known

exposures arising from environmental investigation and

remediation of certain sites in the US for which the Group

has been identified as a potentially responsible party

under US law. The liabilities are based on subjective

estimates of the level and timing of remediation costs,

including the period of operating and monitoring

activities required. Our audit procedures focused on the

risk that the provisions in relation to these matters could

be understated.

The Group has separately recognised insurance and

other receivables of £15.0m. We focused on the required

asset recognition criteria being met and recoverability of

these receivables.

Refer also to note 4 and 34 of the consolidated financial

statements (pages 190 to 191 and page 218).

Our work on the valuation of environmental liabilities

comprised the following:

• Confirmed that the Group’s external environmental

consultants and legal advisors have sufficient expertise,

are qualified and affiliated with the appropriate industry

bodies in the respective local territory, and are independent

of the Group. In addition, we have held discussions with

management’s external experts for the most significant sites

to further understand the cost estimates provided;

• Obtained the cost estimates and reports prepared by the

Group’s external environmental consultants and legal advisors

for the most significant sites. We assessed the consistency of

the cost estimates year on year and the level of costs incurred

compared to the prior year estimates to assess the historical

accuracy of the estimates and understand significant changes

to the scope of remediation plans. We confirmed that these

changes have been appropriately reflected in the provision;

• Reconciled the cost estimates and reports to the provision

recorded and gained an understanding of all significant

adjustments applied, such as differences in the period over

which operating and monitoring activities are conducted and

the application of additional provisions for incremental costs.

We assessed the reasonableness of these, including reviewing

historical data where appropriate and consider the provision

to be supported by reasonable assumptions;

• In respect of the matter set out in the ‘Environmental

provisions and associated recoveries from insurers and

other third parties’ section of note 4 of the consolidated

financial statements, we obtained a letter from the Group’s

external legal advisors and a copy of the jury verdict form.

The evidence obtained supported the amounts recorded in

the financial statements in respect of this matter; and

• We obtained evidence of the settlements and claims which

resulted in the recognition of receivables and found that the

evidence obtained supported asset recognition.

We evaluated and concluded that the liabilities, related

assets and potential exposures, including significant

estimates, were appropriately disclosed in the consolidated

financial statements.

Independent auditors’ report

to the members of Meggitt PLC

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

164

Key audit matter How our audit addressed the key audit matter

Retirement benefit obligation liabilities and complex

pension scheme assets (Group and Company)

The Group has retirement benefit obligations with gross

liabilities of £1,355.1m, of which £899.3m is recognised by

the Company. The liabilities are significant in the context of

the overall Group and Company balance sheets.

The valuation of retirement benefit obligations requires

significant levels of estimation and technical expertise,

including the use of actuarial experts to support

management in selecting appropriate assumptions.

Small changes in a number of the key financial and

demographic assumptions used to value the Group’s

and the Company’s retirement benefit obligation could

have a material impact on the calculation of the liability.

These include:

• Discount rates;

• Inflation rates; and

• Mortality.

Of the £1,228.0m of pension plan assets (of which £839.9m

is recognised by the Company), there is a significant

amount of complex pooled investment vehicles (PIVs).

This is as a result of complex issues such as an element

of the underlying investments being classified as level

2 or 3 of the fair value hierarchy, transfer restrictions,

infrequent pricing and/or investments in less regulated

markets. As the nature of these assets is more complex; the

valuation of these PIVs could have a material impact on the

valuation of the pension assets.

Our audit procedures focused on the risk that the

retirement benefit obligations could be understated.

Refer also to note 36 of the consolidated financial

statements (pages 221 to 226) and note 12 of the Company

financial statements (pages 241 to 242).

We evaluated the assumptions made in relation to the

valuation of the liabilities, with input from our actuarial experts.

In particular we:

• Confirmed that the Group’s external experts are qualified

and affiliated with the appropriate industry bodies in the

respective local territory and are independent of the Group.

In addition, we have held discussions with management’s

external expert for the UK, US and Swiss pension schemes to

further understand the key assumptions;

• Tested the completeness and accuracy of participant

employee data used by the actuary in the liability calculation

to underlying records;

• Tested the discount and inflation rate assumptions used by

comparing them to our internally developed benchmarks,

which are based on externally derived data, and to

comparable organisations. We observed the assumptions to

be within our expected range;

• Compared assumed mortality rates to national and

industry averages. From the evidence obtained we found

the assumptions to be within our expected range and

methodology used to be appropriate; and

• Considered the appropriateness of the methodology used

to update estimates from the latest actuarial valuation and

assessed changes in assumptions in aggregate from the

prior year to assess the consistency of approach overall.

From the evidence obtained we found the assumptions and

methodology used to be appropriate.

Our work on the valuation of complex pension assets

comprised the following:

• Obtained an understanding of the nature of the

complex assets;

• Obtained third party confirmations and Service Organisation

Control (SOC) reports from investment and fiduciary managers

and found that the evidence obtained supported the valuation

of the complex assets; and

• Considered the extent to which there was any evidence

available which might contradict the valuation. No such

contradictory evidence was identified.

We evaluated and concluded that the pension assets

and liabilities, including significant estimates, were

appropriately disclosed in the consolidated and Company

financial statements.

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial

statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls,

and the industry in which they operate.

The Group’s accounting process is structured around a local finance function in each of the Group’s reporting units.

These functions maintain their own accounting records and controls (although transactional processing and certain controls for

some reporting units are performed at the Group’s shared service centres) and report to the head office finance team through an

integrated consolidation system.

In establishing the overall Group audit strategy and plan, we determined the type of work that needed to be performed at the

reporting units by the Group engagement team and by component auditors from other PwC network firms. Where the work

was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those

reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion

on the Group financial statements as a whole.

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165

Financial Statements

For each reporting unit we determined whether we required an audit of their complete financial information (full scope) or

whether specified audit procedures addressing a specific risk characteristic or financial statement line item would be sufficient.

Those where a full scope audit was required included six reporting units considered to be individually financially significant

(Airframe Systems based in Akron (US), Fareham (UK) and Coventry (UK), Defense Systems based in Irvine (US), Airframe Systems

and Services & Support based in Ventura County (US) and Airframe Systems, Engine Systems, Energy & Equipment and Services

& Support based in Fribourg (Switzerland)). We performed a full scope audit at a further six reporting units selected by their

size or risk and reviewed certain working papers for those contributing material amounts to Group underlying profit before

tax. We determined that specified audit procedures were required at a further two reporting units to address specific risk

characteristics or to provide sufficient overall Group coverage of particular revenue streams.

In addition to the work performed at the in-scope reporting units, there is a substantial amount of work performed at head

office by the Group audit engagement team. The Group team performs audit procedures over the Company’s financial position

and results and several financial statement line items, including complex areas prepared by the head office finance function, to

provide sufficient overall Group coverage. These include goodwill, development costs, other intangible assets, investments,

derivative financial instruments and related hedge accounting, cash and cash equivalents, bank and other borrowings and

related finance costs, certain right-of-use assets and lease liabilities, environmental and other provisions and related receivables,

retirement benefit obligations, certain current tax charges, deferred tax, share-based payments and amounts arising on the

acquisition, disposal and closure of businesses. The Group team also performs procedures over the consolidation and financial

statement disclosures.

These audit procedures covered 62% of Group profit before tax; 63% of Group underlying profit before tax; and 79% of Group

total assets (key coverage metrics). As a result of its structure and size, the Group also has a large number of small reporting units

that, in aggregate, make up a material portion of the key coverage metrics. The Group engagement team perform analytical

review procedures over a significant proportion of these with the remaining population of reporting units contributing insignificant

underlying profit before tax individually and in aggregate. These procedures include an analysis of year-on-year movements, at a

level of disaggregation to enable a focus on higher risk balances and unusual movements. This gave us the evidence we needed

for our opinion on the financial statements as a whole.

We considered the Group’s climate change risk assessment and this, together with involvement of our own climate change

experts, provided us with an understanding of the potential impact of climate change on the financial statements. We assessed

that the key financial statement line items and estimates which are more likely to be materially impacted by climate risks are those

associated with future cash flows, given the more notable impacts of climate change on the business are expected to arise in

the medium to long term. These include the impairment assessments of the Group’s goodwill and development costs, including

the specific consideration of the impact of climate change on likely aircraft lives, and the related impact on annual amortisation

charges, and the Company’s investments in subsidiaries. For the impairment assessments of the Group’s goodwill and the

Company’s investments in subsidiaries, the proposed acquisition by Parker provided a reliable estimate of fair value less costs

of disposal (FVLCOD), and this has been used to determine the recoverable amount for the impairment review. This is a market

based measure and factors in the buyer’s assessment of climate change. Therefore our audit response for these areas did not

require additional climate change considerations. Our ‘development costs impairment assessments’ key audit matter further

explains how we evaluated the impact of climate change on the other risks identified.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality.

These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and

extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of

misstatements, both individually and in aggregate on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Financial statements – Group Financial statements – Company

Overall materiality £13.2m (2020: £15.2m) £35.0m (2020: £35.0m)

How we determined it A five-year average of 5% of underlying profit before tax 1% of total assets

Rationale for

benchmark applied

Based on the benchmarks used in the Annual Report,

underlying profit before tax is the primary measure used

by the shareholders in assessing the performance of the

Group. Further, we consider it appropriate to eliminate

volatility and to preserve the link between materiality and

the performance of the underlying business. As such, we

have used a five-year average benchmark, consistent with

the benchmark applied in 2020.

We believe that total assets is

the primary measure used by the

shareholders in assessing the

performance and position of the entity

and reflects the Company’s principal

activity as a holding company.

Independent auditors’ report

to the members of Meggitt PLC

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

166

For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality.

The range of materiality allocated across components was between £0.89m and £11.88m. Certain components were audited to a

local statutory audit materiality that was also less than our overall Group materiality.

We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and

undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope

of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example

in determining sample sizes. Our performance materiality was 75% (2020: 75%) of overall materiality, amounting to £9.9m

(2020: £11.4m) for the Group financial statements and £26.25m (2020: £26.25m) for the Company financial statements.

In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment

and aggregation risk and the effectiveness of controls – and concluded that an amount at the upper end of our normal range

was appropriate.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.66m

(Group audit) (2020: £0.8m) and £1.75m (Company audit) (2020: £1.75m) as well as misstatements below those amounts that, in our

view, warranted reporting for qualitative reasons.

Conclusions relating to going concern

Our evaluation of the directors’ assessment of the Group’s and the Company’s ability to continue to adopt the going concern

basis of accounting included:

• Testing the mathematical integrity of the cash flow forecasts and the models and reconciled these to Board-approved budgets;

• Identifying the key assumptions included in the Group’s base case scenario (as described in note 1 of the consolidated financial

statements), which we determined to be revenue growth and margins, particularly in civil aerospace, taking account of the impact

of COVID-19 and the pace of anticipated recovery. We evaluated these key assumptions by:

– Revenue – We compared these assumptions to external industry benchmarks, including forecasts for civil OE fleet sizes, civil

aerospace passenger traffic measured using RPKs, territory defence spend budgets and territory inflation projections; and

– Margin – We compared these assumptions to historical margins and considered the feasibility of margin improvements

throughout the assessment period.

• Reviewing the debt agreements to confirm the terms and conditions, including covenants. The covenants were consistent with

those used in management’s going concern assessment;

• Agreeing all borrowings as at 31 December 2021 to third-party confirmations and considered the Group’s available financing

and maturity profile. This supported the Directors’ conclusion that sufficient liquidity headroom remained throughout the

assessment period;

• Testing the mathematical accuracy of the covenant calculations, including confirming that the adjustments recorded to determine

underlying EBITDA agreed to the terms of the covenant. We concluded that covenant compliance remained throughout the

assessment period;

• Assessing management’s reverse stress test (as described in note 1 of the consolidated financial statements) and the extent to

which such a scenario is plausible, specifically to understand the change in forecast net debt or underlying EBITDA required to

breach the financial covenant ratio. We concurred with the Directors’ conclusion that the likelihood of such a set of circumstances

occurring to be remote and significantly outside any severe but plausible scenarios the Group has modelled;

• On 21 September 2021, the shareholders of the Group approved an all-cash offer of 800 pence per share for the Group by Parker.

In the event the acquisition by Parker is completed within the going concern assessment period, the directors considered the

impact on the Group’s going concern assessment. We have performed the following audit procedures on this scenario:

– Examining documentation regarding Parker’s ability to finance the proposed acquisition, including bridge credit and term

loan agreements and recent financial results published by Parker. We did not identify any evidence to suggest that Parker

could not finance the proposed acquisition, including the repayment of Meggitt liabilities falling due on a change of control;

and

– Examining intention statements outlined in the Scheme Document, including commitments by Parker to continue to run

the Meggitt business in line with how it currently operates. In addition, we held discussions with management at Parker

who, based on publicly available information, re-confirmed the intention statements and ability of Parker to finance the

proposed acquisition.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,

individually or collectively, may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern for

a period of at least twelve months from when the financial statements are authorised for issue.

In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the

preparation of the financial statements is appropriate.

Meggitt PLC Annual Report and Accounts 2021

167

Financial Statements

However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Group’s and

the Company’s ability to continue as a going concern.

In relation to the Directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to

add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors considered

it appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections

of this report.

Reporting on other information

The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’

report thereon. The Directors are responsible for the other information, which includes reporting based on the Task Force on climate-

related financial disclosures (TCFD) recommendations. Our opinion on the financial statements does not cover the other information

and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of

assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider

whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or

otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are

required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material

misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of

this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies

Act 2006 have been included.

Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and

matters as described below.

Strategic report and Directors’ report

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’

report for the year ended 31 December 2021 is consistent with the financial statements and has been prepared in accordance with

applicable legal requirements.

In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we

did not identify any material misstatements in the Strategic report and Directors’ report.

Directors’ Remuneration

In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the

Companies Act 2006.

Corporate governance statement

The Listing Rules require us to review the Directors’ statements in relation to going concern, longer-term viability and that part of

the corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance

Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other

information are described in the Reporting on other information section of this report.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate

governance statement, included within the Corporate governance report is materially consistent with the financial statements and

our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to:

• The Directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;

• The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and

an explanation of how these are being managed or mitigated;

• The Directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern

basis of accounting in preparing them, and their identification of any material uncertainties to the Group’s and Company’s ability to

continue to do so over a period of at least twelve months from the date of approval of the financial statements;

• The Directors’ explanation as to their assessment of the Group’s and Company’s prospects, the period this assessment covers and

why the period is appropriate; and

• The Directors’ statement as to whether they have a reasonable expectation that the Company will be able to continue in operation

and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any

necessary qualifications or assumptions.

Our review of the Directors’ statement regarding the longer-term viability of the Group was substantially less in scope than an

audit and only consisted of making inquiries and considering the Directors’ process supporting their statement; checking that

Independent auditors’ report

to the members of Meggitt PLC

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

168

the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the

statement is consistent with the financial statements and our knowledge and understanding of the Group and Company and their

environment obtained in the course of the audit.

In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate

governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:

• The Directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the

information necessary for the members to assess the Group’s and Company’s position, performance, business model and strategy;

• The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and

• The section of the Annual Report describing the work of the Audit Committee.

We have nothing to report in respect of our responsibility to report when the Directors’ statement relating to the Company’s

compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the

Listing Rules for review by the auditors.

Responsibilities for the financial statements and the audit

Responsibilities of the Directors for the financial statements

As explained more fully in the Statement of Directors’ responsibilities in respect of the financial statements, the Directors are

responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied

that they give a true and fair view. The Directors are also responsible for such internal control as they determine is necessary to

enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Company’s ability to

continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of

accounting unless the Directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic

alternative but to do so.

Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,

whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance,

but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be

expected to influence the economic decisions of users taken on the basis of these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our

responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which

our procedures are capable of detecting irregularities, including fraud, is detailed below.

Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and

regulations related to breaches of trade compliance legislation, bribery and corruption legislation, US Government contracting

regulations, US environmental regulations, aviation regulations including the Federal Aviation Agency and Civil Aviation Authority,

data protection legislation and competition/antitrust laws, and we considered the extent to which non-compliance might have

a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the

financial statements such as the Companies Act 2006 and international tax legislation. We evaluated management’s incentives and

opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined

that the principal risks were related to posting inappropriate journal entries and management bias in accounting estimates or

judgements to manipulate results. The Group engagement team shared this risk assessment with the component auditors so that

they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group

engagement team and/or component auditors included:

• Held discussions with Meggitt PLC’s Group management, Head of Internal Audit, legal and tax advisors, including consideration of

known or suspected instances of non-compliance with laws and regulation and fraud.

• Evaluated management’s controls designed to prevent and detect irregularities.

• Reviewed meeting minutes of the Board, Audit, Nominations, Remuneration, Corporate Responsibility and Finance Committees.

• Assessed matters reported on the Group’s Speak Up Line and the results of management’s investigation of such matters.

• Challenged assumptions and judgements made by management in their significant accounting estimates and judgements,

particularly in relation to the key audit matters above.

• Identified and tested journal entries based on our risk assessment and evaluated whether there was evidence of management bias

that represented a risk of material misstatement due to fraud.

• Incorporated elements of unpredictability into the audit procedures performed.

There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-

compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements.

Meggitt PLC Annual Report and Accounts 2021

169

Financial Statements

Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from

error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.

Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing

techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations.

We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit

sampling to enable us to draw a conclusion about the population from which the sample is selected.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:

www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.

Use of this report

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with

Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept 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 expressly agreed by our prior consent in writing.

Other required reporting

Companies Act 2006 exception reporting

Under the Companies Act 2006 we are required to report to you if, in our opinion:

• we have not obtained all the information and explanations we require for our audit; or

• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from

branches not visited by us; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the

accounting records and returns.

We have no exceptions to report arising from this responsibility.

Appointment

Following the recommendation of the Audit Committee, we were appointed by the Directors on 2 October 2003 to audit the

financial statements for the year ended 31 December 2003 and subsequent financial periods. The period of total uninterrupted

engagement is 19 years, covering the years ended 31 December 2003 to 31 December 2021.

Other matter

As required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements

form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct

Authority in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no assurance

over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.

John Ellis (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

Reading

2 March 2022

Independent auditors’ report

to the members of Meggitt PLC

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

170

Notes

2021

£’m

2020

£’m

Revenue 5 1, 4 8 9. 2 1, 6 8 4 .1

Non-GAAP measures

Exceptional impairment losses and other asset write-downs 10 – (8.6)

Other cost of sales (1, 0 16 . 8) (1,19 2 . 0)

Cost of sales 7 (1, 0 16 . 8) (1,200.6)

Gross profit 47 2 . 4 4 8 3.5

Non-GAAP measures

Exceptional impairment losses and other asset write-downs 10 – (3 65 .6)

Other operating costs (4 3 5 .7) (4 5 2 .7)

Operating costs 7 (4 3 5 .7) (818 . 3)

Operating income 7 26 .7 3 7. 5

Net operating costs (4 0 9. 0) (78 0.8)

Operating profit/(loss)

5,7 63.4 (2 9 7. 3)

Finance income 11 0.5 0.5

Finance costs 12 (32 . 6) (3 7. 2)

Net finance costs (3 2 .1) (3 6 .7)

Profit/(loss) before tax

31. 3 (3 3 4 .0)

Tax (charge)/credit 13 (0 .1) 1 9. 8

Profit/(loss) for the year attributable to equity owners of the Company 31. 2 (3 14 . 2)

Earnings/(loss) per share:

Basic

14 4.0p (4 0. 4)p

Diluted

14 4.0p (4 0. 4)p

Non-GAAP measures

Underlying operating profit 9 1 7 7. 3 19 0 . 5

Underlying profit before tax 9 14 9. 3 1 5 9. 5

Underlying basic earnings per share 14 15 . 4p 16 . 5p

Underlying diluted earnings per share 14 15. 4p 16 . 2p

Consolidated income statement

For the year ended 31 December 2021

Meggitt PLC Annual Report and Accounts 2021

171

Financial Statements

Notes

2021

£’m

2020

£’m

Profit/(loss) for the year attributable to equity owners of the Company 31. 2 (3 14 . 2)

Items that may be reclassified to the income statement in subsequent years:

Currency translation movements (6 .9) (7 9. 9)

Movements in fair value of financial liabilities arising from changes in credit risk (1. 3) 1.8

Tax effect 13 3.2 1. 6

(5. 0) (76 . 5)

Items that will not be reclassified to the income statement in subsequent years:

Remeasurement of retirement benefit obligations 36 11 5 . 4 (42 .6)

Tax effect 13 (21. 8) 10 . 8

93.6 (31. 8)

Other comprehensive income/(expense) for the year 88 .6 (1 0 8 . 3)

Total comprehensive income/(expense) for the year attributable to equity owners of the Company 11 9. 8 (4 22 .5)

Financial Statements

Consolidated statement of comprehensive income

For the year ended 31 December 2021

Meggitt PLC Annual Report and Accounts 2021

172

Notes

2021

£’m

2020

£’m

Non-current assets

Goodwill 17 1, 5 3 1. 8 1,5 19.5

Development costs 18 52 4 .7 5 31.9

Programme participation costs 18 19. 0 18 .7

Other intangible assets 19 306.6 4 0 1 .1

Property, plant and equipment 20 47 8. 6 458. 8

Investments 21 18 .7 20.8

Other receivables 24 18 . 8 16 . 5

Contract assets 25 55.8 5 9. 6

Derivative financial instruments 33 10 . 0 15 . 0

Deferred tax assets 35 – 19. 2

2, 9 64.0 3 , 0 61 .1

Current assets

Inventories 23 4 55.4 426.9

Trade and other receivables 24 2 94 .5 2 5 1 .1

Contract assets 25 5 3 .7 4 8.8

Derivative financial instruments 33 4.8 5.4

Current tax recoverable 8 .1 11 . 5

Cash and cash equivalents 26 19 0 . 8 17 8 . 6

Assets classified as held for sale 22 – 14 .7

1 ,007 .3 9 3 7. 0

Total assets 5 3 ,9 7 1. 3 3 , 9 9 8 .1

Current liabilities

Trade and other payables 27 (3 1 7.9) (2 96. 5)

Contract liabilities 28 (6 2 .7) (5 0. 8)

Derivative financial instruments 33 (3 . 2) (2 1. 6)

Current tax liabilities 29 (3 4 . 2) (5 6 .9)

Lease liabilities 30 (1 5 . 6) (14 .7)

Bank and other borrowings 31 (105.3) (10 . 5)

Provisions 34 (5 5. 8) (3 2.6)

Liabilities directly associated with assets classified as held for sale 22 – (3 .7)

(5 94 .7) (4 8 7. 3)

Net current assets 412 . 6 4 4 9. 7

Non-current liabilities

Other payables 27 (3 .7) (8.5)

Contract liabilities 28 (72.6) (7 3 .9)

Derivative financial instruments 33 (1. 3) (0. 3)

Deferred tax liabilities 35 (7 0 .9 ) (9 3 .4)

Lease liabilities 30 (15 3 . 4) (12 9. 6)

Bank and other borrowings 31 (696 . 0) (7 96 .8)

Provisions 34 (8 0. 3) (8 0. 3)

Retirement benefit obligations 36 (1 3 6 . 4) (295.4)

(1,214.6)

(1, 4 7 8 . 2)

Total liabilities (1 ,809 .3) (1,9 6 5 . 5)

Net assets 2, 1 62.0 2,0 32.6

Equity

Share capital 37 3 9 .1 3 9. 0

Share premium 1 , 2 2 7. 8 1,226.6

Other reserves 15 .7 15 .7

Hedging and translation reserves 3 4 3 .9 3 4 8 .9

Retained earnings 535.5 40 2.4

Total equity attributable to owners of the Company 2, 1 62.0 2,0 32.6

The financial statements on pages 171 to 231 were approved by the Board of Directors on 2 March 2022 and signed on its behalf by:

Consolidated balance sheet

At 31 December 2021

A Wood

Director

L Burdett

Director

Meggitt PLC Annual Report and Accounts 2021

173

Financial Statements

Equity attributable to owners of the Company

Notes

capital

£m

premium

£m

Other

reserves*

£m

Hedging and

translation

reserves**

£m

Retained

earnings

£m

Total

equity

£m

At 1 January 2020 38.8 1,226.5 15 . 7 425. 4 7 50.4 2,456.8

Loss for the year – – – – (3 14 . 2) (314 . 2)

Other comprehensive (expense)/income for the year:

Currency translation movements:

Arising in the year – – – (3 5 .9) – (3 5 .9)

Currency translation gain transferred from equity – – – (4 4. 0) – (4 4. 0)

Movements in fair value of financial liabilities arising

from changes in credit risk – – – 1. 8 – 1. 8

Remeasurement of retirement benefit obligations 36 – – – – (42 .6) (42 .6)

Other comprehensive expense before tax – – – (7 8 .1) (4 2. 6) (12 0 .7)

Tax 13 – – – 1. 6 10 . 8 12 . 4

Other comprehensive expense for the year – – – (76 . 5) (3 1. 8) (1 0 8 . 3)

Total comprehensive expense for the year – – – (76 . 5) (3 4 6. 0) (42 2.5)

Employee share schemes:

Value of services provided – – – – (1.7) (1.7)

Issue of equity share capital

0.2 0 .1 – – (0. 3) –

At 31 December 2020 3 9. 0 1,226.6 15 . 7 3 4 8 .9 402.4 2,032.6

Profit for the year – – – – 31. 2 3 1. 2

Other comprehensive (expense)/income for the

year:

Currency translation movements:

Arising in the year – – – (6 .9) – (6 .9)

Movements in fair value of financial liabilities arising

from changes in credit risk 32 – – – (1. 3) – (1. 3)

Remeasurement of retirement benefit obligations 36 – – – – 11 5 . 4 115 . 4

Other comprehensive (expense)/income before tax – – – (8.2) 11 5 . 4 1 07 .2

Tax 13 – – – 3.2 (2 1. 8) (18 . 6)

Other comprehensive (expense)/income for the

year – – – (5 .0) 93.6 88.6

Total comprehensive (expense)/income for the

year – – – (5 .0) 12 4 . 8 11 9. 8

Employee share schemes:

Value of services provided – – – – 9. 6 9. 6

Issue of equity share capital 0 .1 1. 2 – – (1. 3) –

At 31 December 2021 3 9 .1 1 , 2 2 7. 8 15 .7 3 4 3 .9 535.5 2, 1 62.0

* Other reserves relate to capital reserves of £14. 1m (2020: £14. 1m) arising on the acquisition of businesses in 1985 and 1986 where merger accounting was applied and

a capital redemption reserve of £1.6m (2020: £1.6m) created as aresult of the share buyback programme in 2014 and 2015.

** Hedging and translation reserves comprise a credit balance on the hedging reserve of £1.9m (2020: £2.9m) and a credit balance on the translation reserve of

£3 42 .0m (2020: £34 6 .0m).

Financial Statements

Consolidated statement of changes in equity

For the year ended 31 December 2021

Meggitt PLC Annual Report and Accounts 2021

174

Notes

2021

£’m

2020

£’m

Non-GAAP measures

Cash inflow from operations before business disposal expenses and exceptional operating items 200.6 2 8 2 .9

Cash outflow from business disposal expenses 44 (3 .5) (5 .2)

Cash outflow from exceptional operating items 10 (2 5 .9) (4 9. 3)

Cash inflow from operations 42 17 1. 2 228.4

Interest received 0.5 0 .1

Interest paid (2 8 .7) (32 .2)

Tax paid (3 7. 7) (4 2 .1)

Cash inflow from operating activities 105.3 15 4 . 2

Investment acquired 21 (0 .9) (7. 6)

Deferred consideration paid in respect of business acquired in prior year (1. 0) –

Businesses disposed 44 16. 7 117. 0

Capitalised development costs 18 (2 7. 6) (41 . 4)

Capitalised programme participation costs (1. 7) (1. 6)

Purchase of intangible assets (10 .7) (11 . 0)

Purchase of property, plant and equipment (66 . 4) (8 0.8)

Government grants received in respect of purchase of property, plant and equipment 20 7. 4 2 .1

Proceeds from disposal of property, plant and equipment 36. 4 1. 3

Cash outflow from investing activities (4 7. 8) (2 2. 0)

Issue of equity share capital 1. 3 0.3

Proceeds from bank and other borrowings 1. 2 618 . 6

Repayments of bank and other borrowings (3 0. 5 ) (705 .8)

Debt issue costs paid (1.9) (2.4)

Reverse lease premium received 42 – 3.5

Repayments of lease liabilities 30 (14 .9) (15 . 4)

Cash outflow from financing activities (4 4 .8) (10 1. 2)

Net increase in cash and cash equivalents 12 . 7 3 1. 0

Cash and cash equivalents at start of the year 17 8 . 6 15 5 . 3

Exchange losses on cash and cash equivalents (0. 5) (7. 7)

Cash and cash equivalents at end of the year 26 19 0 . 8 17 8 . 6

Consolidated cash flow statement

For the year ended 31 December 2021

Meggitt PLC Annual Report and Accounts 2021

175

Financial Statements

1. General information and basis of preparation

Meggitt PLC is a public limited company listed on the London Stock Exchange, domiciled and incorporated in the United

Kingdom with the registered number 432989. Its registered office is Pilot Way, Ansty Business Park, Coventry, England, CV7 9JU.

Meggitt PLC is the parent company of a Group whose principal activities during the year were the design and manufacture of

high performance components and sub-systems for aerospace, defence and other specialist markets, including energy, medical,

industrial and test.

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted

International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board.

The Group transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January

2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or

disclosure in the year reported as a result of the change in framework.

The consolidated financial statements of the Group have been prepared in accordance with UK-adopted International Accounting

Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards.

The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention,

as modified by the revaluation of certain financial assets and financial liabilities (including derivative financial instruments) at

fair value.

Going concern

The Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation

that the Group and Company have adequate resources to continue in operational existence for a period of at least 12 months from

the date of approval of the Annual Report. For this reason, the Directors continue to adopt the going concern basis in preparing

the Group’s consolidated financial statements and the Company’s financial statements.

In making a judgement as to whether the going concern principle should be adopted, the Directors have considered the period

starting with the date these financial statements were approved by the Board and ending on 31 March 2023. In reaching this

judgement, the Directors considered:

Existing financing

During 2021, the Group arranged a new USD410m revolving credit facility maturing in 2024, to replace a USD575m forward start

revolving credit facility which was due to mature in September 2022. Following this refinancing, the Group has committed credit

facilities with its relationship banks and private placement investors of £1,183.1m at the balance sheet date. With the exception of

one tranche of USD125m private placement debt, which is due for repayment in June 2022, no other facilities mature during the

going concern assessment period.

Current liquidity

At 31 December 2021, the Group had significant headroom against its committed credit facilities, as set out below, and no new

financing is required to meet the repayment of the USD125m private placement debt in June 2022.

Total

£’m

Committed credit facilities 1,183.1

Bank and other borrowings (see note 31) 801.3

Less: cash (see note 26) (190.8)

Net borrowings excluding lease liabilities 610.5

Headroom 572.6

Covenants

The Group’s committed credit facilities contain two financial ratio covenants – net debt/EBITDA and interest cover (EBITA/net

finance costs). The covenant calculations are drafted to protect the Group from potential volatility caused by accounting standard

changes, sudden movements in exchange rates and exceptional items. This is achieved by measuring each of EBITDA, net debt,

EBITA and net finance costs on a frozen GAAP basis; excluding exceptional operating items; and retranslating net debt and

EBITDA at similar average exchange rates. Covenant ratios are required to be measured on a trailing 12-month basis twice a year

(at 30 June and 31 December), with net debt/EBITDA not to exceed 3.5x and interest cover to be not less than 3.0x.

At 31 December 2021, net debt/EBITDA was 1.9x, well within the Group’s target range of 1.5x to 2.5x and only marginally

higher than that in the three years prior to the COVID-19 outbreak (2019: 1.5x, 2018: 1.8x and 2017: 1.9x). Interest cover at

31 December 2021 was 11.3x. No covenant waivers have ever been sought by the Group, including during the period since the

COVID-19 outbreak.

Financial Statements

Notes to the consolidated financial statements

Meggitt PLC Annual Report and Accounts 2021

176

1. General information and basis of preparation continued

Going concern continued

Base case scenario

The Group has developed a base case scenario, using its budget for 2022 and forecasts for Q1 2023. It assumes the recovery in

civil aerospace markets continues and the outlook for defence markets is stable. As the Group is under an offer period under the

UK Takeover Code, it is not providing financial guidance for 2022 and accordingly the base case scenario assumptions have not

been disclosed. However, under this scenario, the Group has significant headroom under its existing committed facilities to meet

its obligations as they fall due and does not breach either of its financial covenant ratios.

Reverse stress test scenario

The Group has performed a reverse stress test scenario to determine the conditions under which it would be close to breaching either of

its financial covenant ratios during the going concern assessment period. Under this stressed scenario, the following conditions (which are

stated on an organic basis i.e. excluding the impacts of currency and M&A) would all need to occur in the assessment period:

• Civil aerospace revenue in 2022 is flat compared to 2021, which would represent a 10% reduction compared to the Group’s

annualised H2 2021 revenue.

• Defence revenue reduces by approximately 20% compared to 2021, significantly greater in percentage terms than the 11%

decline seen in 2021, which was off a strong comparator in 2020.

• Direct material cost inflation of 15%.

• The Group takes no action to reduce its cost base from the levels assumed in the base case scenario, in response to the lower

revenues modelled in the stressed scenario; and.

• The Group takes no additional actions to preserve cash.

The Group considers the likelihood of such a set of circumstances occurring to be remote and significantly outside any severe but

plausible scenarios the Group has modelled.

Principal risks

The Group has also considered whether its principal risks (as described on pages 50 to 54 of the Strategic Report) have been

appropriately reflected in its going concern assessment. The Group has considered the likelihood of the risks taking place during

the going concern assessment period and, were they to occur, the extent to which the impacts would be experienced during

this period and the timing of mitigation actions available to the Group. The Board has regularly reviewed these risks throughout

the year and up to the date of the financial statements and maintains a risk appetite statement with associated risk tolerances to

ensure that identified risks are managed within acceptable limits. The Group has concluded that its going concern assessment has

been appropriately adjusted to reflect these risks.

Proposed acquisition of the Group by Parker-Hannifin Corporation (Parker-Hannifin)

On 21 September 2021, the shareholders of the Group approved an all-cash offer of 800 pence per share for the Group by Parker-

Hannifin. In the event the proposed acquisition by Parker-Hannifin is completed within the going concern assessment period, the

Directors considered the intention and ability of Parker-Hannifin to be able to:

• finance the equity purchase of the Group;

• repay those liabilities of the Group which would immediately become due on a change of control; and

• continue to operate the Group as a going concern for the remainder of the assessment period, post completion.

The Directors believe that Parker-Hannifin will be able to meet these obligations, having taken into account publicly available

information including:

• The Scheme Document, published on 16 August 2021, and approved by the Group’s shareholders on 21 September 2021,

which included:

– the binding commitments given by Parker-Hannifin to HM Government;

– the intentions of Parker-Hannifin regarding the Group’s business, employees, pension schemes, locations and research and

development; and

– a statement from Citibank Global Markets Limited, acting as financial advisor to Parker-Hannifin, that it was satisfied Parker-

Hannifin had sufficient resources to meet in full the cash consideration payable to the Group’s shareholders.

• Recent financial results published by Parker-Hannifin including its Annual Report (10K) for the year ended 30 June 2021 (published on

25 August 2021) and its Q2 results (10Q) for the six months ended 31 December 2021 (published on 4 February 2022), which include

disclosures regarding its profit and cash generation, existing committed financing facilities and headroom against those facilities.

Conclusion

Based on the above, the Directors have concluded there are no material uncertainties around the Group’s or Company’s ability to

continue as a going concern and it is appropriate to adopt the going concern principle in the financial statements.

Meggitt PLC Annual Report and Accounts 2021

177

Financial Statements

2. Summary of significant accounting policies

The principal accounting policies adopted by the Group in the preparation of the consolidated financial statements are set out

below. These policies have been applied consistently to all years presented unless stated otherwise.

Basis of consolidation

The Group’s consolidated financial statements consolidate the financial statements of the Company, all of its subsidiaries and the

Group’s share of the results of its joint ventures.

A subsidiary is an entity over which the Group has control. The Group has control over an entity where the Group is exposed to,

or has the rights to, variable returns from its involvement with the entity and has the power over the entity to affect those returns.

The results of subsidiaries acquired are consolidated from the date on which control transfers to the Group. The results of

subsidiaries disposed are consolidated up to the date on which control transfers from the Group. Transactions between, and

balances with, subsidiary companies are eliminated together with unrealised gains on intra-Group transactions. Unrealised losses

are eliminated to the extent the asset transferred is not impaired.

A joint venture is a contractual arrangement between the Group and one or more other parties, under which control is shared

between the parties and the Group and other parties have rights to the net assets of the arrangement. A joint venture is

accounted for using the equity method whereby the Group’s share of profits and losses of the joint venture is recognised in the

income statement within net operating costs and its share of net assets and goodwill of the joint venture is recognised as an

investment. Unrealised gains and losses on transactions with the joint ventures are eliminated to the extent of the Group’s interest

in the arrangements.

The cost of an acquisition is the fair value of consideration provided, including the fair value of contingent consideration,

measured at the acquisition date. Contingent consideration payable is measured at fair value at each subsequent balance sheet

date, with changes in fair value recorded in the income statement within net operating costs. Identifiable assets and liabilities of

an acquired business, meeting the conditions for recognition under IFRS 3, are recognised at fair value at the date of acquisition.

The extent to which the cost of an acquisition exceeds the fair value of net assets acquired is recorded as goodwill. Costs directly

attributable to an acquisition are recognised in the income statement within net operating costs as incurred.

When a business is acquired, the fair value of its identifiable assets and liabilities are finalised within 12 months of the acquisition

date. All fair value adjustments are recognised with effect from the date of acquisition and consequently may result in the

restatement of previously reported financial results. The accounting policies of acquired businesses are changed, where

necessary, to be consistent with those of theGroup.

When a business is disposed, the difference between the fair value of consideration receivable and the value at which the net

assets of the business were recognised, immediately prior to disposal, is recognised in the income statement within net operating

costs. Contingent consideration receivable is measured at fair value at the date of disposal in determining the gain or loss

recognised. It is subsequently measured at fair value at each balance sheet date, with any changes in fair value recognised in the

income statement within net operating costs.

When a foreign subsidiary is disposed, the cumulative exchange differences relating to the retranslation of the net investment

in the foreign subsidiary are recognised in the income statement as part of the gain or loss on disposal. This applies only to

exchange differences recognised in equity after 1 January 2004. Exchange differences arising prior to 1 January 2004 remain in

equity on disposal as permitted by IFRS 1 (First time Adoption of International Financial Reporting Standards).

Amounts arising on the acquisition, disposal and closure of businesses recognised in the income statement are excluded from

the underlying profit measures used by the Board to monitor and measure the underlying performance of the Group (see note

9). They comprise gains or losses made on the disposal or closure of businesses, adjustments to the fair value of contingent

consideration payable in respect of acquired businesses or receivable in respect of disposed businesses and costs directly

attributable to the acquisition or disposal of businesses. Additionally in 2021, they include amounts incurred in respect of the

proposed acquisition of the Group by Parker-Hannifin Corporation. Amounts arising on the acquisition, disposal and closure of

businesses are included within the appropriate consolidated income statement category, but are highlighted separately in the

notes to the consolidated financial statements.

Foreign currencies

Functional and presentational currency

The Group’s consolidated financial statements are presented in pounds sterling. Items included in the financial statements of

each of the Group’s subsidiaries are measured using the functional currency of the primary economic environment in which the

subsidiary operates.

Transactions and balances

Transactions in foreign currencies are recognised at exchange rates prevailing on the dates of the transactions. Monetary assets

and liabilities denominated in foreign currencies are reported at exchange rates prevailing at the balance sheet date.

Exchange differences on retranslating monetary assets and liabilities are recognised in the income statement within net operating

costs, except where they relate to qualifying net investment hedges in which case exchange differences are recognised in hedging

and translation reserves within other comprehensive income.

Financial Statements

Notes to the consolidated financial statements

continued

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178

2. Summary of significant accounting policies continued

Foreign currencies continued

Foreign subsidiaries

The results of foreign subsidiaries are translated at average exchange rates for the year. Assets and liabilities of foreign

subsidiaries are translated at exchange rates prevailing at the balance sheet date. Exchange differences arising from the

retranslation of the results and net assets of foreign subsidiaries are recognised in hedging and translation reserves within other

comprehensive income. Goodwill and fair value adjustments arising from the acquisition of foreign subsidiaries are treated as

assets and liabilities of those subsidiaries and retranslated at exchange rates prevailing at the balance sheet date.

Segment reporting

Operating segments are those segments for which results are reviewed by the Group’s Chief Operating Decision Maker (CODM)

to assess performance and make decisions about resources to be allocated. The CODM has been identified as the Board (see

page 104 of the Corporate governance report). The Group has determined that its segments for the year ended 31 December

2021, which are unchanged from the prior year, are: Airframe Systems, Engine Systems, Energy & Equipment and Services

&Support.

The principal profit measure reviewed by the CODM is “underlying operating profit” as defined in note 9. A segmental analysis of

underlying operating profit is accordingly provided in the notes to the consolidated financial statements (see note 5).

Segmental information on assets is provided in the notes to the consolidated financial statements in respect of “trading assets”,

which are defined to exclude from total assets, amounts which the CODM does not regularly review at a segmental level (see

note 5). Excluded assets comprise centrally managed trading assets, goodwill, other intangible assets (excluding software assets),

investments, derivative financial instruments, deferred tax assets, current tax recoverable, cash and cash equivalents and assets

classified as held for sale.

No segmental information on liabilities is provided in the notes to the consolidated financial statements, as no such measure is

reviewed by the CODM.

Revenue from external customers

Revenue is recognised when control of goods or services provided by the Group is transferred to the customer at an amount

reflecting the consideration the Group expects to receive from the customer in exchange for those goods and services.

There are no significant judgements required in either determining the Group’s performance obligations or, because the majority

of the Group’s revenue is recognised when goods or services are delivered to the customer, the timing of revenue recognition.

As revenue is typically recognised at amounts agreed in advance with customers, no significant estimates are required in

determining transaction prices.

Transfer of control – At a point in time

For the majority of goods and services provided by the Group, transfer of control occurs when delivery to the customer takes

place which, depending on the specific terms agreed with the customer, may be when goods are collected from the Group’s

facilities or when they are delivered either to the customer’s facilities or to a third-party transport agent. The more common

exceptions to this assessment for when control passes are:

• Bill and hold arrangements. Where, under the terms of a contract, a customer agrees to accept title to goods which remain at

the Group’s facility, and normal credit terms apply, transfer of control occurs when contractual terms have been met, which will

typically be when goods are completed, packaged and segregated at the Group’s facility.

• Goods and services are not distinct performance obligations. Where a contract involves the supply of multiple goods and

services, the Group has concluded that typically each good and service supplied is a distinct performance obligation. However,

contracts may require the Group to provide installation and other services specific to the goods but subsequent to their

delivery. Where installation and other services are specialised, significant and not capable of being performed by another party,

control of the goods transfers when installation and other services are completed by the Group and not when delivery of the

goods to the customer takes place.

• Goods are delivered subject to consignment arrangements. Where the Group delivers goods to a customer facility, such as

an airline operator, but retains control of the goods until they are used by the customer, control transfers when the Group is

notified by the customer of their use.

• Goods supplied subject to customer acceptance. Within the aerospace industry, goods are frequently subject to customer

acceptance testing on delivery, or at the Group’s facilities. Normally the Group is able, through its own testing procedures, to

predict with reasonable certainty that customer acceptance testing will be successful and accordingly customer acceptance

testing will not affect the determination of when control passes. However, where the Group cannot predict the outcome with

reasonable certainty, control is not considered to transfer until the goods have been accepted by the customer.

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Financial Statements

2. Summary of significant accounting policies continued

Revenue from external customers continued

Transfer of control – Over time

The principal circumstances in which control transfers over time are where the Group provides goods or services for which it has

no alternative use and has the enforceable right to payment, plus a reasonable profit margin, throughout the life of the contract.

An alternative use exists where there are multiple potential OEMs and/or aftermarket customers to whom the Group could

provide those goods or services.

Certain defence contracts include clauses entitling the Group to be awarded a reasonable profit margin in the event the customer

cancels for convenience. Where the Group considers such rights to be enforceable; is confident that a reasonable profit margin

would be awarded regardless of the stage of contract completion and would apply to all costs incurred by the Group; and the

goods and services have no alternative use, control will transfer over time.

Where a contract is structured such that non-refundable milestone payments are receivable from a customer in advance of work

being performed, and the Group is reasonably certain at contract inception that the cumulative value of such milestone payments

will exceed cumulative costs incurred throughout the duration of the contract, control will transfer over time.

Where control transfers over time, the Group considers costs incurred, as a proportion of total expected contract costs, to be the

most appropriate measure of contract completion. For power-by-the-hour and cost-per-brake-landing contracts this results in

revenue being recognised when maintenance events are performed. Estimates of total contract costs are required to determine

the extent to which revenue is recognised in a year. The Group does not consider that any reasonably foreseeable changes in

these estimates could give rise to a significant impact on revenue recognised in the current year.

Net transaction price

The majority of the Group’s contracts provide that consideration is receivable by the Group within a short period after control

of goods and services is transferred to the customer, typically up to three months, and accordingly no significant financing

component to the consideration receivable exists.

Where a contract includes variable consideration, the Group estimates the variable consideration to which it will be entitled at

contract inception and revises the estimate throughout the life of the contract. Estimates are constrained until it is highly probable

that the uncertainty affecting the level of variable consideration has been resolved and a significant reversal of cumulative revenue

recognised will not arise. For power-by-the-hour and cost-per-brake-landing contracts, this requires the Group to estimate the

number of aircraft flying hours or landings expected over the contract.

In certain instances the Group will receive contributions from customers during the development phase of an aerospace

programme, where the Group expects to retain the intellectual property of the developed technology throughout the programme

life. Such contributions, typically in the form of cash, are treated as customer consideration and initially recognised as a contract

liability when receivable. Contributions are subsequently included in the transaction price attributable to goods and services

provided to the customer during the production phase of the programme. Where the contribution is received more than

12 months in advance of goods and services being provided to the customer and the financing element of the contribution

is significant, it is separately identified and recognised within finance costs over the period beginning with receipt of the

contribution and ending when the goods and services are provided to the customer.

Where the Group makes contributions to customers to participate in aerospace programmes, typically in the form of cash, such

contributions are initially recognised within contract assets provided the Group has received, or it is highly probable that it will

receive, contracts from the same customer relating to the same aerospace programme (see Programme participation costs policy).

Where the contribution is made more than 12 months in advance of goods and services being provided to the customer and the

financing element of the contribution is significant, it is separately identified and recognised within finance income over the period

beginning with payment of the contribution and ending when the goods and services are provided to the customer. Other than

such contributions, the Group does not typically incur significant incremental costs to obtain contracts.

Financial Statements

Notes to the consolidated financial statements

continued

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180

2. Summary of significant accounting policies continued

Exceptional operating items

Items which are significant by virtue of their size or nature, are considered non-recurring, and which are excluded from the

underlying profit measures used by the Board to monitor and measure the underlying performance of the Group (see note 9),

are classified as exceptional operating items. They include, for instance, costs directly attributable to the integration of acquired

businesses; significant site consolidations and other restructuring costs; incremental income and expenditure directly attributable

to the COVID-19 pandemic; and in 2021, given their significance, costs in respect of historical environmental matters relating to

businesses disposed of by Whittaker Corporation prior to its acquisition by the Group in 1999. In 2020, given their significance,

impairment losses and other asset write-downs arising from the uncertainty facing the commercial aerospace industry were also

treated as exceptional operating items.

Exceptional operating items are presented separately on the face of the income statement, where the Group considers it relevant

to an understanding of the Group’s financial performance. This separate presentation was adopted in 2020 in respect of the

impairment losses and other asset write-downs as they were in aggregate of such a significance, that the Group considered

separate presentation to have been appropriate (see note 10). Exceptional operating items which are not presented separately

on the face of the income statement are included within the appropriate consolidated income statement category, but are

highlighted separately in the notes to the consolidated financial statements.

Intangible assets

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of identifiable assets acquired

and liabilities and contingent liabilities assumed. Goodwill is tested annually for impairment and also whenever events or changes

in circumstances indicate the carrying value may not be recoverable. Goodwill is held at cost less amortisation charged prior to

1January2004 and accumulated impairment losses.

In the event a business to which goodwill relates is disposed, its attributable goodwill is included in the determination of the

gain or loss on disposal. Where the Group restructures or reorganises its operations, goodwill relating to affected businesses is

reallocated using a relative fair value basis.

Research and development

Research expenditure is recognised as an expense in the income statement as incurred. Development costs incurred on

projects where the Group retains ownership of intellectual property; the related expenditure is separately identifiable and

measurable; and management are satisfied as to the ultimate technical and commercial viability of the project and that the

asset will generate future economic benefits based on all relevant available information, are recognised as an intangible

asset. Capitalised development costs are subsequently held at cost less accumulated amortisation and impairment losses.

Amortisation is charged to net operating costs over the periods expected to benefit, typically up to 15 years, commencing with

launch of the product. Development costs not meeting the criteria for capitalisation are expensed as incurred.

Programme participation costs

Programme participation costs are contributions made to OEMs, typically in the form of cash, in connection with their selection

of the Group’s products for installation onto new aircraft where the Group has obtained principal supplier status. The recognition

of programme participation costs depends on the contractual relationship between the Group and the third party to whom the

contribution is made:

• Where the contribution is made to a customer under a revenue contract (as defined by IFRS 15), or the award of future IFRS 15

revenue contracts on the same aerospace programme from the same customer is highly probable such that the Group expects

the contributions to be recovered, contributions are initially recognised within contract assets (see Revenue from external

customers policy). These amounts are amortised to revenue as a reduction in the transaction price of those IFRS 15 revenue

contracts over the period the relevant performance obligations are satisfied by the Group, typically up to 15 years.

• Where the contribution is made to a third party other than a customer, contributions are initially recognised as intangible assets

and subsequently held at cost less accumulated amortisation and impairment losses. Amortisation is charged to net operating

costs over periods expected to benefit from receiving the status of principal supplier, through the sale of replacement parts,

typically up to 15 years.

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Financial Statements

2. Summary of significant accounting policies continued

Intangible assets continued

Other intangible assets – Assets acquired as part of a business combination

The Group recognises intangible assets separately from goodwill provided they are separable or arise from contractual or

other legal rights and their fair value can be measured reliably. Intangible assets are initially recognised at fair value, which is

regarded as their cost. Intangible assets are subsequently held at cost less accumulated amortisation and impairment losses.

Amortisation is charged on a straight-line basis to net operating costs over the estimated useful economic lives of the assets.

The nature of intangible assets recognised and their estimated useful lives are as follows:

Customer relationships Up to 20 years

Technology Up to 20 years

Trade names and trademarks Up to 15 years

Amortisation of intangible assets acquired as part of a business combination is excluded from the underlying profit measures used

by the Board to monitor and measure the underlying performance of the Group (see note 9).

Other intangible assets – Software and other intangible assets

Software and purchased licences, trademarks and patents are held at cost less accumulated amortisation and impairment losses.

Amortisation is charged on a straight-line basis over the estimated useful economic lives of the assets, commencing with the date

the assets are available for use, typically over periods up to ten years. Residual values and useful lives are reviewed annually and

adjusted if appropriate.

Property, plant and equipment

Property, plant and equipment are held at cost less accumulated depreciation and impairment losses. Cost includes expenditure

directly attributable to the acquisition of the asset. For right-of-use assets, cost comprises an amount equal to the initial lease

liability recognised, adjusted to include any payments made for the right to use the asset, initial direct costs incurred and

estimated costs for dismantling, removing and restoring the asset at the end of the lease term. Depreciation is charged on a

straight-line basis over the estimated useful economic lives of the assets, commencing with the date the assets are available for

use, as follows:

Freehold buildings Up to 50 years

Right-of-use assets Shorter of the useful economic life of the asset and the lease term

Plant and machinery 3 to 10 years

Furnaces Up to 20 years

Fixtures and fittings 3 to 10 years

Motor vehicles 4 to 5 years

Residual values and useful lives are reviewed annually and adjusted if appropriate. When items of property, plant and equipment

are disposed, the difference between sale proceeds, net of related costs, and the carrying value of the asset is recognised in the

income statement. When items of property, plant and equipment are disposed of through a sale and leaseback transaction, the

Group retains a right-of-use asset following the transaction. In these situations, the amount recognised in the income statement

on disposal is reduced by the portion of the gain or loss related to those retained rights. The amount not recognised in the

income statement is recognised as an adjustment to the right-of-use asset.

Borrowing costs

Borrowing costs directly attributable to the construction or production of qualifying assets, are capitalised as part of the cost of

those assets until such time as the assets are substantially ready for their intended use. Qualifying assets are those that necessarily

take a substantial period of time to get ready for their intended use, typically at least 12 months. All other borrowing costs are

recognised in the income statement within finance costs as incurred.

Impairment of non-current non-financial assets

Assets are reviewed for impairment annually and also whenever events or changes in circumstances indicate their carrying value

may not be recoverable. To the extent the carrying value of an asset exceeds its recoverable amount, the difference is recognised

as an expense in the income statement. The recoverable amount used for impairment testing is the higher of value in use and fair

value less costs of disposal. For the purpose of impairment testing, assets are generally tested individually or at a CGU level which

represents the lowest level for which there are separately identifiable cash inflows which are largely independent of cash inflows

from other assets or groups of assets. Where it is not possible to allocate goodwill on a non-arbitrary basis to individual CGUs, it is

allocated to the group of CGUs which represent the lowest level within the Group at which goodwill is monitored by management.

At each balance sheet date, previously recognised impairment losses, other than any relating to goodwill, are reviewed and if no

longer required reversed with a corresponding credit to the income statement.

Financial Statements

Notes to the consolidated financial statements

continued

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182

2. Summary of significant accounting policies continued

Inventories

Inventories are recognised at the lower of cost and net realisable value. Cost comprises materials, direct labour, other direct

costs and related production overheads, based on normal operating capacity, and is determined using the first-in first-out (FIFO)

method. Production overheads relating to abnormal variations between actual volumes and normal operating capacity are

excluded from the costs of inventory. Net realisable value is based on estimated selling price, less further costs expected to be

incurred to completion and disposal. Provision is made for obsolete, slow moving or defective items where appropriate.

Trade and other receivables

Trade receivables are initially recognised at fair value and subsequently measured at amortised cost less any impairment losses.

To the extent outflows of economic benefits required to settle an obligation recognised as a provision are recoverable from an

insurer or other third party and their recovery is considered virtually certain, typically when a signed binding agreement exists,

an other receivable is recognised. Other receivables are discounted to present value where the impact is significant, using a

pre-tax rate. The discount rate used is based on current market assessments of the time value of money, adjusted to reflect any

risks specific to the receivable which have not been reflected in the undiscounted receivable. The impact of the unwinding of

discounting is recognised in the income statement within finance income.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at call with banks. Bank overdrafts are disclosed as current

liabilities, within bank and other borrowings, except where the Group participates in offset arrangements with certain banks

whereby cash and overdraft amounts are offset against each other.

Impairment of financial assets

The Group’s financial assets, which are subject to the expected credit loss (ECL) model, are:

• trade receivables;

• other receivables; and

• cash and cash equivalents.

For trade receivables, the simplified method has been applied whereby ECLs are measured using a lifetime expected loss

allowance. Expected loss rates are based on historical ageing of receivables adjusted for risk-based estimates of future losses.

The historical data is assessed over a period that reflects the current conditions and may change year on year.

For other receivables, which principally relate to amounts recoverable from insurers and other third parties in respect of

environmental matters, ECLs are measured using those expected to arise in the 12 months subsequent to the balance sheet date.

For cash and cash equivalents, the Group does not currently anticipate any future credit losses given the high quality credit rating

of the financial institutions with which balances are held.

Trade and other payables

Trade payables are initially recognised at fair value and subsequently measured at amortised cost. Trade payables are not

interest bearing.

The Group operates a supplier financing programme whereby suppliers can elect, on an invoice-by-invoice basis, to receive

discounted early payment from a bank, rather than being paid directly by the Group in line with agreed payment terms. In the

event the option for early payment is taken by a supplier, the amount payable by the Group remains unchanged but is assigned by

the supplier under the programme as payable by the Group to the bank. The Group assesses the programme against indicators to

assess if liabilities should be classified as other payables or borrowings. Under the Group’s current supplier financing programme,

contractual rights and obligations of the supplier and Group are not substantively modified when a supplier elects to participate

in the programme, credit terms agreed between the Group and the bank do not differ significantly from those agreed by the

Group with suppliers who do not participate in the programme; no additional security is provided by the Group to the bank;

and to the extent the Group has existing committed or uncommitted facility arrangements with the same bank, the amounts

due under the supplier financing programme are not considered by the bank to represent utilisation of those existing facilities.

Accordingly, provided amounts due to the bank do not exceed agreed credit terms, they are classified as other payables. If the

Group exceeds agreed credit terms, amounts that are overdue are classified as bank borrowings.

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Financial Statements

2. Summary of significant accounting policies continued

Taxation

Current tax is based on taxable profit for the year, calculated using tax rates enacted or substantively enacted at the balance

sheet date. Deferred tax is provided in full using the liability method on temporary differences between the tax bases of assets

and liabilities and their corresponding book values as recognised in the Group’s consolidated financial statements. It is calculated

using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax is provided on unremitted earnings of

foreign subsidiaries, except where the Group can control the remittance and it is probable that earnings will not be remitted in the

foreseeable future. Deferred tax assets are recognised only to the extent it is probable that taxable profits will be available against

which deductible temporary differences can be utilised. Current tax and deferred tax are recognised in the income statement,

other comprehensive income or directly in equity, depending on where the item to which they relate has been recognised.

Liabilities for uncertain tax positions are recognised when the Group has a present obligation as a result of past events, it is

probable an outflow of economic benefits will be required to settle the obligation and the amount can be reliably estimated.

The Group typically uses a weighted average of outcomes assessed as possible to determine the liabilities required, unless a

single best estimate of the outcome is considered to be more appropriate. Assessments are made at the level of an individual tax

uncertainty, unless uncertainties are considered to be related in which case they are grouped together. Liabilities, which are not

discounted given the short period over which they are expected to be utilised, are included within current tax liabilities, together

with any liability for penalties, which to date have not been significant. Any liability relating to interest on tax liabilities is included

within finance costs.

Bank and other borrowings

Bank and other borrowings are initially recognised at fair value, being proceeds received less directly attributable transaction

costs incurred. Borrowings are generally subsequently held at amortised cost at each balance sheet date, with any transaction costs

amortised to the income statement over the period of the borrowings using the effective interest method. Certain borrowings

are in a fair value hedge relationship with the Group’s interest rate swaps. Such borrowings are measured at amortised cost but

have a fair value adjustment recognised as a result of the fair value hedge relationship. Movements in fair value recognised in

net operating costs are excluded from the underlying profit measures used by the Board to monitor and measure the underlying

performance of the Group (see note 9).

Any related interest accruals are included within borrowings. Borrowings are classified as current liabilities unless the Group has an

unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Leases

The majority of the Group’s leases relate to property. A lease liability is recognised when the Group obtains control of the right-

of-use asset, that is the subject of the lease. The initial lease liability recognised represents the discounted value of payments

due under the lease less any incentives receivable. Where lease payments are variable, often because they are based on future

inflation rates or indices, they are initially measured using the inflation rate or index value at lease inception. Typically the

interest rate implicit in the Group’s leases cannot be easily determined and accordingly the Group’s incremental borrowing rate,

for borrowings of similar amounts and maturity periods, is used to discount amounts due under the lease. The lease liability is

subsequently measured using the effective interest method, with interest recognised within finance costs.

At inception, the Group evaluates whether it is reasonably certain that any option to extend a lease term will be exercised.

Typically, where the initial lease term for a property used for the Group’s manufacturing operations is for at least five years,

the option to extend the lease term is at market rates and the right-of-use asset is not considered specialised, the Group will

not assess the likelihood of the lease being extended at inception as reasonably certain. The Group continues to evaluate the

likelihood of exercising such options however throughout the initial lease term. When the Group is committed to extending

the lease, having considered the alternative options available and where appropriate lessor consent to the extension has been

obtained, the Group will consider the option to be reasonably certain to be exercised. When an option is reasonably certain to be

exercised, the right-of-use asset and lease liabilities recognised are adjusted to reflect the extended term.

Leases, which at inception have a term of less than 12 months or relate to low-value assets, are not recognised on the balance

sheet. Payments made under such leases are charged to the income statement on a straight-line basis over the period of the lease.

Financial Statements

Notes to the consolidated financial statements

continued

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184

2. Summary of significant accounting policies continued

Derivative financial instruments and hedging

The Group uses derivative financial instruments to hedge its exposure to interest rate risk and foreign currency transactional

risk. Derivative financial instruments are initially recognised at fair value on the date the derivative contract is entered into and

are subsequently held at fair value at each balance sheet date, using values determined indirectly from quoted prices that are

observable for the asset or liability.

The method by which any gain or loss arising from subsequent measurement at fair value is recognised, depends on whether the

instrument is designated as a hedging instrument and if so the nature of the item hedged. The Group recognises an instrument

as a hedging instrument by documenting, at its inception, the economic relationship between the instrument and the hedged

item and the objectives and strategy for undertaking the hedging transaction. To be designated as a hedging instrument, an

instrument must also be assessed, at inception and on an ongoing basis, to be effective in offsetting changes in fair values or cash

flows of hedged items as outlined in the objectives and strategy for undertaking the hedging transaction and any changes in fair

values must not be dominated by the effect of credit risk.

To the extent the maturity of the derivative financial instruments are more than 12 months from the balance sheet date, they are

classified as non-current assets or non-current liabilities. All other derivative financial instruments are classified as current assets or

current liabilities.

Fair value hedges

Changes in the fair value of derivative financial instruments, that are designated and qualify as fair value hedges, are recognised

in the income statement within net operating costs together with changes in fair value of the hedged item not attributable to

credit risk. Changes in the fair value of the hedged item attributable to credit risk are recognised in other comprehensive income.

Any difference recognised in the income statement between movements in the fair value of the derivative and the hedged item

is excluded from the underlying profit measures used by the Board to monitor and measure the underlying performance of the

Group (see note 9). The Group currently applies fair value hedge accounting to the hedging of fixed interest rate risk on bank and

other borrowings.

Net investment hedges

Changes in the fair value of the effective portion of any net investment hedge are recognised in other comprehensive

income. Changes in the fair value of any ineffective portion are recognised immediately in the income statement within net

operating costs.

Derivatives not meeting the criteria for hedge accounting

Where derivatives do not meet the criteria for hedge accounting, changes in fair value are recognised immediately in the income

statement within net operating costs. Gains and losses arising from measuring these derivatives at fair value are excluded from the

underlying profit measures used by the Board to monitor and measure the underlying performance of the Group (see note 9).

Provisions

Provision is made for environmental liabilities, onerous contracts, product warranty claims and other liabilities when the Group

has a present obligation as a result of past events, it is probable that an outflow of economic benefits will be required to settle

the obligation and the amount can be reliably estimated. In determining the estimated costs to fulfil a contract, the Group

includes only incremental direct costs (e.g. direct materials and direct labour). The Group typically uses a single most likely

outcome approach to determine the provision recognised unless, for instance in the case of product warranty claims, a weighted

average of all possible outcomes is considered more appropriate. Provisions are discounted to present value where the impact

is significant, using a pre-tax rate. The discount rate used is based on current market assessments of the time value of money,

adjusted to reflect any risks specific to the obligation which have not been reflected in the undiscounted provision. The impact of

the unwinding of discounting is recognised in the income statement within finance costs.

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Financial Statements

2. Summary of significant accounting policies continued

Retirement benefit schemes

For defined benefit schemes, pension costs and the costs of providing other post-retirement benefits, principally healthcare, are

charged to the income statement in accordance with the advice of qualified independent actuaries. Past service credits and costs

and curtailment gains and losses are recognised immediately in the income statement.

Retirement benefit obligations represent, for each scheme, the difference between the fair value of the schemes’ assets and the

present value of the schemes’ defined benefit obligations measured at the balance sheet date. The defined benefit obligation is

measured annually by independent actuaries using the projected unit credit method. The present value of the defined benefit

obligation is determined by discounting the defined benefit obligations using interest rates of high quality corporate bonds

denominated in the currency in which the benefits will be paid and with terms to maturity comparable with the terms of the

related defined benefit obligations. Where the assets of a scheme exceed its defined benefit obligations, a retirement benefit

asset is recognised equal to the lower of this surplus and the asset ceiling. The asset ceiling represents the present value of any

economic benefits available in the form of refunds from the scheme or reductions in future contributions to the scheme and

to which the Group has an unconditional right to. Changes in the asset ceiling are recognised in other comprehensive income,

except for any related interest which is recognised in finance costs. Where the Group has a statutory or contractual minimum

funding requirement to make contributions to a scheme in respect of past service and any such contributions are not available to

the Group once paid (as a reduction in future contributions, or as a refund to which the Group has an unconditional right either

during the life of the scheme or when the scheme liabilities are settled), an additional liability for such amounts isrecognised.

Remeasurement gains and losses are recognised in the year in which they arise in other comprehensive income.

For defined contribution schemes, payments are recognised in the income statement when they fall due. The Group has no

further obligations once the contributions have been paid.

Share-based compensation

The Group operates a number of share-based compensation schemes, which are subject to non-market-based vesting conditions

and are principally equity-settled. For equity-settled schemes, at the date of grant, the Group estimates the number of awards

expected to vest as a result of vesting conditions. The fair value of this estimated number of awards is recognised as an expense

in the income statement on a straight-line basis over the period for which services are received. At each balance sheet date, the

Group revises its estimate of the number of awards expected to vest and adjusts the amount recognised cumulatively in the

income statement to reflect the revised estimate. When awards are exercised and the Company issues new shares, the proceeds

received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are deducted from

the proceeds recognised in equity. Own shares represent shares in the Company that are held by an independently managed

Employee Share Ownership Plan. Consideration paid for own shares, including any incremental directly attributable costs, is

recognised as a deduction from retained earnings.

Dividends

Interim dividends are recognised when paid to shareholders. Final dividends are recognised when approved by the shareholders.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

186

2. Summary of significant accounting policies continued

Adoption of new and revised accounting standards

Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 for interest rate benchmark (IBOR) reform

The phase 2 amendments relating to interest rate benchmark reform address issues arising due to the replacement of one

benchmark rate with an alternative one. The following financial instruments held by the Group are impacted by IBOR reform:

Carrying value at 31 December 2021

Interest rate

benchmark impacted

Transitioned to

alternative rate

Assets

£’m

Liabilities

£’m

Bank and other borrowings (see note 31):

Syndicated credit facility (USD410m) – GBP borrowings GBP LIBOR SONIA* – –

Syndicated credit facility (USD410m) – USD borrowings USD LIBOR Not yet transitioned* – –

Bilateral facility: Caixabank (GBP30m) GBP LIBOR SONIA** – (30.0)

Bilateral facility: SMBC (GBP50m) GBP LIBOR SONIA** – –

Bilateral facility: Bank of America (USD50m) USD LIBOR SOFR** – –

Derivative financial instruments (see note 33):

Interest rate swaps (USD125m) USD LIBOR Not yet transitioned*** 1.7 –

Total financial instruments exposed to IBOR reform 1.7 (30.0)

* The Group refinanced its syndicated credit facility in November 2021; the facility was and remains undrawn. The updated facility amended the interest calculation

methodology from referencing GBP LIBOR to compounded SONIA in the first utilisation after execution and from USD LIBOR to SOFR on a future date to be

agreed (long-stop 30 June 2023); until this date, a USD drawing would continue to reference USD LIBOR.

** The Group refinanced its three bilateral facilities in December 2021 to adopt the same interest calculation methodology as that in the refinanced syndicated credit

facility. Only the Caixabank facility is drawn; the first rollover of the drawing subsequent to the refinancing will reference SONIA. The SMBC facility and the Bank of

America facility are undrawn. If and when amounts are drawn under these facilities they would reference SONIA and SOFR respectively.

*** The Group’s interest rate swaps are in a fair value hedge relationship with the Group’s USD fixed rate 2010 senior notes. Both the hedged items and hedging

instruments mature in June 2022, prior to when the referenced USD LIBOR interest rate is expected to cease being published.

There are no changes to the Group’s risk management strategy as a result of IBOR reform. Changes to IT systems, specifically

the treasury management system, are in progress to enable the new reference rates to be used in calculations of interest on

external borrowings.

No other accounting standards, amendments or revisions to existing standards, or interpretations have become effective which

had a significant impact on the Group’s consolidated financial statements.

Recent accounting developments

Amendments to IAS 37 “Onerous contracts – costs of fulfilling a contract”

Under IAS 37, a contract is onerous when the unavoidable costs of meeting the contractual obligations exceed the economic

benefits arising from the contract. Prior to the amendments to IAS 37, there was diversity in practice as to whether the costs of

meeting contractual obligations should comprise only incremental costs (e.g. direct materials and direct labour) or also include

an allocation of other direct costs (e.g. factory overheads) which would be incurred regardless of whether the contract was being

performed or not. Under the Group’s current accounting policy, it only includes incremental direct costs in measuring the costs

to fulfil a contract under IAS 37. The IAS 37 amendments clarify however, that the costs of fulfilling a contract should include an

allocation of other direct costs. The amendments are effective for accounting periods beginning on, or after, 1 January 2022 to

open contracts at that date, with any additional amounts required to be recognised as an adjustment to retained earnings at

that date. The Group is in the process of finalising the impact of these amendments, but currently estimates the amendments

will result in the recognition of new onerous contract provisions of approximately £20.0m (in respect of contracts which are

not onerous on an incremental direct cost basis), an increase in the measurement of existing onerous contract provisions of

approximately £5.0m and an increase in the measurement of existing product warranty claims of approximately £5.0m.

A number of other additional new standards and amendments and revisions to existing standards have been published and

are mandatory for the Group’s future accounting periods. These have not been early adopted and are not expected to have a

significant impact on the Group’s consolidated financial statements when they are adopted.

Meggitt PLC Annual Report and Accounts 2021

187

Financial Statements

3. Financial risk management

Financial risk factors

The Group’s operations expose it to a number of financial risks including market risk (principally foreign exchange risk and interest

rate risk), credit risk and liquidity risk. These risks are managed by a centralised treasury department, in accordance with Board-

approved objectives, policies and authorities (see also pages 45 and 47 of the Chief Financial Officer’s review). Regular reports

monitor exposures and assist in managing the associated risks.

Market risk

Foreign exchange risk

The Group operates internationally and is subject to foreign exchange risks on future commercial transactions and the

retranslation of the results of, and net investments in, foreign subsidiaries. The principal exposure arises 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 exposures and can hedge expected exposures up to five years. Details of hedges in place

are provided in note 33. The Group does not hedge exposure arising from the retranslation of the results of foreign subsidiaries.

The Group uses borrowings denominated in the relevant currencies to partially hedge its net investments in foreign subsidiaries.

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 borrowings issued at floating rates expose the Group to cash flow interest rate risk.

The Group’s principal exposure is to changes in US interest rates. The Group’s policy is to generally maintain at least 25% of its

net borrowings at fixed rates and mitigates interest rate risks through interest rate derivatives which have the economic effect of

converting fixed rate borrowings into floating rate borrowings and floating rate borrowings into fixed rate borrowings. Details of

hedges in place are provided in note 33.

Sensitivity analysis

The table below illustrates the sensitivity of the Group’s results to changes in the exchange rate between the US dollar and

pound sterling and to changes in US interest rates 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 those dates, assuming no

hedge ineffectiveness.

2021 2020

Income

statement

£’m

Equity

£’m

Income

statement

£’m

Equity

£’m

US dollar/sterling exchange rate +/- 10% 25.0 79.0 37.8 80.3

US yield curve +/- 1% 2.9 – 6.3 –

The impact on equity from movements in the exchange rate comprises £78.3m (2020: £78.3m) in respect of US dollar net

borrowings, and £0.7m (2020: £2.0m) in respect of other financial assets and liabilities. However, as all US dollar net borrowings

are designated as a net investment hedge, or are held by US subsidiaries, this element of the impact is entirely offset by the

retranslation of foreign subsidiaries. The impact of a 1% movement in the US yield curve includes the effect on the Group’s foreign

currency forward contracts and other financial assets and liabilities.

Credit risk

Concentration of credit risk on the Group’s trade and other receivables and contract assets is spread across a large number

of customers and third parties across the world. In addition, many of the Group’s principal customers are either government

departments or large multinationals. Note 32 details the Group’s credit risk exposures in relation to its customers. 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 assets and financial liabilities which it controls through only dealing with highly rated

counterparties and netting transactions on settlement wherever possible. The credit quality of the Group’s counterparties is set

out in notes 32 and 33.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

188

3. Financial risk management continued

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 tables analyse the Group’s derivative financial instruments and other non-derivative financial liabilities at the

balance sheet date. The amounts disclosed in the tables are the contractual undiscounted cash flows:

2021

Less

than

1 year

£’m

Between 1

and

5 years

£’m

Greater

than

5 years

£’m

Total

£’m

Trade and other payables* 305.5 2.9 0.8 309.2

Derivative financial instruments (Inflows)** (4.8) (1.5) – (6.3)

Lease liabilities 21.1 67.4 133.1 221.6

Bank and other borrowings (see note 31) 95.5 698.6 0.2 794.3

Interest payments on borrowings 24.6 55.0 0.2 79.8

Total 441.9 822.4 134.3 1,398.6

2020

Less

than

1 year

£’m

Between 1

and

5 years

£’m

Greater

than

5 years

£’m

Total

£’m

Trade and other payables* 285.8 7.7 0.8 294.3

Derivative financial instruments (Inflows)** (3.9) (1.7) – (5.6)

Lease liabilities 19.5 61.4 112.1 193.0

Bank and other borrowings (see note 31) 2.2 576.1 219.8 798.1

Interest payments on borrowings 26.7 71.0 7.9 105.6

Total 330.3 714.5 340.6 1,385.4

* Excludes social security and other taxes of £12.4m (2020: £10.7m) (see note 27).

** Assumes no change in interest rates from those prevailing at the balance sheet date.

Capital risk management

The Group’s objective when managing its capital structure is to minimise the cost of capital whilst maintaining adequate capital to

protect against volatility in earnings and net assets. The strategy is designed to maximise shareholder return over the long term.

The Group’s capital structure is as follows:

2021

£’m

2020

£’m

Net debt (see note 43) 779.5 773.0

Total equity 2,162.0 2,032.6

Debt/equity % 36.1% 38.0%

The Board believes that in maintaining an efficient balance sheet, a net debt:EBITDA ratio of between 1.5x and 2.5x is appropriate,

whilst retaining the flexibility to move outside the range if appropriate. Further details on the Group’s strategy for delivering net

debt:EBITDA in this range can be found on pages 45 and 47 of the Chief Financial Officer’s review, which includes details on how

the Group has complied with the two principal financial covenant requirements contained in its committed credit facilities.

Meggitt PLC Annual Report and Accounts 2021

189

Financial Statements

4. Critical accounting estimates and judgements

In applying the Group’s accounting policies set out in note 2, the Group is required to make certain estimates and judgements

concerning the future. These estimates and judgements are regularly reviewed and revised as necessary. The estimates and

judgements that have the most significant effect on the amounts included in the consolidated financial statements are described

below. Further consideration of these critical estimates and judgements can be found in the Audit Committee report on pages 114

to 121.

Critical accounting estimates

Environmental provisions and associated recoveries from insurers and other third parties

The Group is involved in the investigation and remediation of environmental contamination at certain sites for which it has been

identified as a potentially responsible party under US law. In determining the provision to be recognised, advice is received by

the Group from its environmental consultants and legal advisors to assist in the estimate of the level and timing of remediation

costs, including the period for which operations and monitoring (O&M) activities will be required. These estimates are revised

regularly as remediation activities progress and further information is obtained on the extent of activities for which the Group

is responsible.

During the latter part of 2021, a jury determined that Whittaker Corporation was responsible to a third party for certain material

amounts. These material amounts have been attributed by the jury to environmental pollution resulting from past operations at

one of Whittaker Corporation’s former sites, which it had sold prior to its acquisition by the Group in 1999. The adverse jury finding

has resulted in Whittaker concluding that, when the relevant court issues its final ruling, it is probable Whittaker will need to

contribute to the third-party costs, with the amounts recognised based on its best estimate of the most likely outcome, resulting

in a charge to the income statement in the year of £29.5m.

The liability, for which the Group may ultimately be responsible is however subject to a number of significant uncertainties, which

may be resolved through mediation or alternatively end up in a court appeal process. It is therefore reasonably foreseeable that

material adjustments (either increases to, or reductions in) the amounts recognised as a provision may be required in the next

12 months. The Group has not quantified its estimate of the adjustments that may be required as it could be seriously prejudicial

to the outcome.

The Group has insurance arrangements in place which, together with other agreements with third parties, mitigate the ongoing

impact of historical environmental events on the Group. A receivable has been established to the extent amounts are virtually

certain to be recoverable from these parties, typically when there is a signed binding agreement between the parties.

With regards to the matter for which the liability of £29.5m referred to above has been recognised in the year, the Group is

currently seeking recovery from a number of historic insurers and third parties, including litigation with the historic insurers.

The Group expects to receive material amounts in respect of these recoveries but, in the absence of signed binding settlement

agreements with the parties, has not recognised these as meeting the virtually certain threshold. It is reasonably foreseeable

however, that material amounts will meet this threshold for recognition within the next 12 months. The amounts the Group expects

to recover are not disclosed as it could be seriously prejudicial to the outcome.

The Group had not previously considered it to be reasonably foreseeable that there would be a material impact on the income

statement in 2021 arising from the specific matter referred to above, based on conditions that existed at that time. However,

subsequent to the date this assessment was last made, Whittaker received adverse pre-trial motions as to the nature of the costs it

could be considered liable for, a material increase in the amounts claimed by the third party, together with the adverse jury finding

described above.

Capitalised development costs: Irkut MC-21

The Group’s capitalised development costs include £40.9m (2020: £39.6m) relating to the Irkut MC-21 aircraft, which is due to

enter service in 2022. The capitalised amount is supported by an impairment test performed by the Group in Q4 2021, taking into

account third-party estimates of fleet volumes and utilisation.

During 2022, tensions between Russia and the West have escalated and, in the period immediately preceding the date of

this Annual Report, has seen Russian troops enter Ukraine with Western countries imposing a number of sanctions on Russia

in response. It is impracticable at the date of these consolidated financial statements to determine the possible effects this

escalation of the conflict will have on the future of the aircraft programme or the ability of the Group to access benefits from

it. However, it is reasonably foreseeable that a material impairment loss on the programme could be recognised in the next

12 months.

Retirement benefit obligations

The liability recognised in respect of retirement benefit obligations is dependent on a number of estimates, principally those

relating to mortality, inflation and the rate at which liabilities are discounted. External actuarial advice is taken with regard to the

most appropriate assumptions to use. Further details on these estimates and sensitivities of the retirement benefit obligations to

these estimates are provided in note 36.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

190

4. Critical accounting estimates and judgements continued

Critical accounting estimates continued

Area no longer considered a critical accounting estimate

The Group previously disclosed in its 2020 Annual Report, a critical accounting estimate relating to significant estimation

uncertainty in its forward-looking assessments of cash flows used in assessing goodwill for impairment, following the COVID-19

pandemic and the dramatic impact on the commercial aerospace industry. As set out in note 17, the Group no longer believes that

any reasonably foreseeable changes in estimates would result in a material impairment of goodwill in the next 12 months.

Critical accounting judgements

Capitalisation of development costs

The Group is required to make judgements as to when development costs meet the criteria to be recognised as intangible

assets. The majority of capitalised development costs relate to technology developed for aerospace programmes. In such cases,

costs are typically not capitalised until a contract to develop the technology is awarded by a customer as, prior to this date, it is

generally not possible to reliably estimate the point at which research activities conclude and development activities commence.

Absent a contract to develop the technology, the Group also does not believe there is generally sufficient certainty over the future

economic benefits that will be generated from the technology, to allow capitalisation of costs. Once such a contract is awarded,

the Group capitalises development costs provided it expects to retain the intellectual property in the technology throughout

substantially all of the life of the aircraft or engine and it is probable that future economic benefits will flow to the Group.

In making a judgement as to whether economic benefits will flow to the Group, it makes estimates of aircraft or engine volumes

(taking into account the extent to which the Group has a sole-source position); aftermarket revenues which are dependent on

aircraft utilisation, fleet lives and operator service routines; costs of manufacture; and costs to complete the development activity.

Estimates of aircraft or engine volumes reflect the Group’s judgement as to the extent to which the impacts of climate change

may impact the future OE and aftermarket revenues it will derive from the aerospace programme. This takes into account its

assessment of the likelihood that programme lives will be maintained by multiple technical upgrades over their lifetime, to boost

fuel efficiency and support the move to the use of growing fractions of Sustainable Aviation Fuel, rather than programme lives

being significantly shortened.

During 2021, the Group recognised £27.6m (2020: £41.4m) of development costs as an intangible asset (see note 18).

Area no longer considered a critical accounting judgement

The Group previously disclosed in its 2020 Annual Report, a critical accounting judgement relating to the Directors’ assessment

that the adoption of the going concern basis in the Group’s consolidated financial statements was appropriate. For the reasons set

out in note 1, this is no longer considered a critical judgment for the current year.

Meggitt PLC Annual Report and Accounts 2021

191

Financial Statements

5. Segmental analysis

Analysis by operating segment – current year

The Group manages its businesses under four customer-aligned divisions: Airframe Systems, Engine Systems, Energy &

Equipment and Services & Support. Details of the Group’s divisions can be found on pages 34 to 41 of the Strategic Report.

Transactions between divisions are reflected in the segmental information below, are measured at arm’s length and are eliminated

on consolidation.

Year ended 31 December 2021: Analysis of income statement items

The key performance measure reviewed by the CODM is underlying operating profit. A detailed reconciliation of operating profit

to underlying operating profit is provided in note 9.

Airframe

Systems

£’m

Engine

Systems

£’m

Energy &

Equipment

£’m

Services &

Support

£’m

Total

£’m

Gross segment revenue 863.6 289.6 281.4 278.8 1,713.4

Inter-segment revenue (126.6) (81.8) (10.7) (5.1) (224.2)

Revenue from external customers 737.0 207.8 270.7 273.7 1,489.2

At a point in time 696.1 202.8 119.7 268.7 1,287.3

Over time: Power by the hour/cost per brake landing 24.1 4.1 – 5.0 33.2

Over time: Other 16.8 0.9 151.0 – 168.7

Revenue from external customers by basis of recognition 737.0 207.8 270.7 273.7 1,489.2

Civil OE 170.8 89.4 – – 260.2

Civil aftermarket 201.8 3.4 – 219.5 424.7

Defence 343.5 96.6 126.5 53.4 620.0

Energy 11.6 1.7 121.4 0.3 135.0

Other 9.3 16.7 22.8 0.5 49.3

Revenue from external customers by end market 737.0 207.8 270.7 273.7 1,489.2

Underlying operating profit/(loss) (see note 9)* 120.2 (16.5) 42.1 31.5 177.3

Items not affecting underlying operating profit (see note 9) (113.9)

Operating profit (see note 9) 63.4

Finance income (see note 11) 0.5

Finance costs (see note 12) (32.6)

Net finance costs (32.1)

Profit before tax 31.3

Tax charge (see note 13) (0.1)

Profit for the year 31.2

Exceptional operating items** 2.7 10.8 1.3 (0.1) 14.7

Amortisation and impairment of intangible assets (see notes 18 and 19)*** 101.5 26.8 8.8 2.0 139.1

Depreciation (see note 20)**** 27.1 16.3 7.9 3.4 54.7

* Central costs are allocated using a variety of bases designed to reflect the beneficial relationship between costs and segments. Bases include headcount,

payroll costs, gross assets and revenue.

** Of the total exceptional operating items in the year of £43.2m (see note 10), central items of £28.5m were not included in segmental exceptional operating items

reviewed by the CODM.

*** Excludes impairment losses of £1.1m charged to exceptional operating items. Of the total amortisation and impairment in the year, £59.0m has been charged to

underlying operating profit as defined in note 9.

**** Excludes depreciation of £1.2m charged to exceptional operating items.

The Group’s largest customer accounts for 8.1% of revenue (£120.9m). Revenue from this customer arises across the Airframe

Systems, Engine Systems and Services & Support segments. Revenue recognised in the current year relating to performance

obligations satisfied or partially satisfied in the prior year was £3.6m.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

192

5. Segmental analysis continued

Year ended 31 December 2021: Analysis of additions to non-current assets

Airframe

Systems

£’m

Engine

Systems

£’m

Energy &

Equipment

£’m

Services &

Support

£’m

Total

£’m

Development costs (see note 18) 15.9 3.9 7.5 0.3 27.6

Programme participation costs (see note 18) 1.4 – – – 1.4

Other purchased intangible assets* 0.1 0.7 0.1 1.6 2.5

Property, plant and equipment* 38.4 16.5 6.5 4.5 65.9

Total 55.8 21.1 14.1 6.4 97.4

* Relate to those non-current assets included within segmental trading assets reviewed by the CODM.

At 31 December 2021: Analysis of segmental trading assets

Total

£’m

Airframe Systems 1,071.0

Engine Systems 384.0

Energy & Equipment 218.7

Services & Support 119.7

Total segmental trading assets 1,793.4

Centrally managed trading assets* 163.0

Goodwill (see note 17) 1,531.8

Other intangible assets excluding software assets 250.7

Investments (see note 21) 18.7

Derivative financial instruments – non-current (see note 33) 10.0

Derivative financial instruments – current (see note 33) 4.8

Current tax recoverable 8.1

Cash and cash equivalents (see note 26) 190.8

Total assets 3,971.3

* Centrally managed trading assets principally include amounts recoverable from insurers and other third parties in respect of environmental issues relating to

former sites, other receivables and property, plant and equipment of central companies, including the Group’s Ansty Park facility.

Analysis by geography

2021

£’m

2020

£’m

UK 110.0 129.7

Europe 255.0 270.8

United States of America 911.9 1,027.6

Rest of World 212.3 256.0

Revenue 1,489.2 1,684.1

Revenue is based on the location of the customer.

2021

£’m

2020

£’m

UK 610.2 617.6

Europe 166.5 184.0

United States of America 2,051.3 2,094.3

Rest of World 32.7 34.1

Non-current assets 2,860.7 2,930.0

Segmental non-current assets are based on the location of the assets. They exclude investments, other receivables, contract

assets and derivative financial instruments.

Meggitt PLC Annual Report and Accounts 2021

193

Financial Statements

5. Segmental analysis continued

Analysis by operating segment – prior year

Year ended 31 December 2020 (restated): Analysis of income statement items

The key performance measure reviewed by the CODM is underlying operating profit. A detailed reconciliation of operating

profit to underlying operating profit is provided in note 9. Prior year figures have been restated to reflect the transfer of a

number of product lines from the Energy & Equipment division to the Engine Systems division with effect from 1 January 2021.

The restatement comprised external revenue of £19.7m and underlying operating profit of £3.0m. In addition, gross segment

revenue and inter-segment revenue have both been reduced by £58.2m.

Airframe

Systems

£’m

Engine

Systems

£’m

Energy &

Equipment

£’m

Services &

Support

£’m

Total

£’m

Gross segment revenue 936.5 352.2 323.9 325.8 1,938.4

Inter-segment revenue (143.4) (98.9) (8.6) (3.4) (254.3)

Revenue from external customers 793.1 253.3 315.3 322.4 1,684.1

At a point in time 754.2 239.6 141.5 315.2 1,450.5

Over time: Power by the hour/cost per brake landing 22.2 4.4 – 7.2 33.8

Over time: Other 16.7 9.3 173.8 – 199.8

Revenue from external customers by basis of recognition 793.1 253.3 315.3 322.4 1,684.1

Civil OE 207.8 98.2 – – 306.0

Civil aftermarket 176.7 4.0 – 238.9 419.6

Defence 377.7 128.8 179.4 82.5 768.4

Energy 13.9 2.2 114.4 0.6 131.1

Other 17.0 20.1 21.5 0.4 59.0

Revenue from external customers by end market 793.1 253.3 315.3 322.4 1,684.1

Underlying operating profit/(loss) (see note 9)* 120.5 (16.2) 45.4 40.8 190.5

Items not affecting underlying operating profit (see note 9) (4 87.8)

Operating loss (see note 9) (297.3)

Finance income (see note 11) 0.5

Finance costs (see note 12) (37.2)

Net finance costs (36.7)

Loss before tax (334.0)

Tax credit (see note 13) 19.8

Loss for the year (314.2)

Impairment losses on goodwill and other intangible assets (see notes 17

and 18)** 145.5 201.1 14.7 – 361.3

Other exceptional operating items*** 27.3 22.3 4.0 3.4 57.0

Amortisation of intangible assets (see notes 18 and 19)**** 104.6 24.5 9.7 1.8 140.6

Depreciation (see note 20) 28.6 16.6 8.3 3.2 56.7

* Central costs are allocated using a variety of bases designed to reflect the beneficial relationship between costs and segments. Bases include headcount,

payroll costs, gross assets and revenue.

** Of the total impairment losses in the year, £1.1m relating to Engine Systems has been charged to underlying operating profit as defined in note 9, with the balance

of £360.2m charged to exceptional operating items (see note 10).

*** Comprises exceptional operating items other than those relating to impairment losses on goodwill and development costs. Of the total exceptional operating

items in the year of £428.7m (see note 10), central items of £11.5m were not included in segmental exceptional operating items reviewed by the CODM.

**** Of the total amortisation in the year, £52.4m has been charged to underlying operating profit as defined in note 9.

The Group’s largest customer accounts for 8.9% of revenue (£149.5m). Revenue from this customer arises across all segments.

Revenue recognised in the current year relating to performance obligations satisfied or partially satisfied in the prior year was £3.2m.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

194

5. Segmental analysis continued

Year ended 31 December 2020 (restated): Analysis of additions to non-current assets*

Airframe

Systems

£’m

Engine

Systems

£’m

Energy &

Equipment

£’m

Services &

Support

£’m

Total

£’m

Development costs (see note 18) 28.4 3.1 9.7 0.2 41.4

Programme participation costs (see note 18) 2.6 – – – 2.6

Other purchased intangible assets** 0.7 0.3 0.6 0.9 2.5

Property, plant and equipment** 36.9 23.6 6.1 3.5 70.1

Total 68.6 27.0 16.4 4.6 116.6

* Prior year figures have been restated to reflect the transfer of a number of product lines from the Energy & Equipment division to the Engine Systems division with

effect from 1 January 2021. The restatement comprised additions to non-current assets of £10.2m.

** Relates to those non-current assets included within segmental trading assets reviewed by the CODM.

At 31 December 2020 (restated): Analysis of segmental trading assets*

Total

£’m

Airframe Systems 1,036.5

Engine Systems 390.1

Energy & Equipment 200.4

Services & Support 90.4

Total segmental trading assets 1,717.4

Centrally managed trading assets** 167.4

Goodwill (see note 17) 1,519.5

Other intangible assets excluding software assets 328.6

Investments (see note 21) 20.8

Derivative financial instruments – non-current (see note 33) 15.0

Deferred tax assets (see note 35) 19.2

Derivative financial instruments – current (see note 33) 5.4

Current tax recoverable 11.5

Cash and cash equivalents (see note 26) 178.6

Assets classified as held for sale (see note 22) 14.7

Total assets 3,998.1

* Prior year figures have been restated to reflect the transfer of a number of product lines from the Energy & Equipment division to the Engine Systems division with

effect from 1 January 2021. The restatement comprised segmental trading assets of £33.9m.

** Centrally managed trading assets principally include amounts recoverable from insurers and other third parties in respect of environmental issues relating to

former sites, other receivables and property, plant and equipment of central companies, including the Group’s Ansty Park facility.

6. Auditors’ remuneration

Payable to PricewaterhouseCoopers LLP and its associates:

2021

£’m

2020

£’m

For the audit of the Company and consolidated financial statements in respect of the current year 2.2 2.2

For the audit of the accounts of any subsidiary of the Company in respect of the current year 0.7 0.6

Auditors’ remuneration 2.9 2.8

Non-audit fees payable to PricewaterhouseCoopers LLP were £0.1m (2020: £0.1m), consisting of other assurance services.

Meggitt PLC Annual Report and Accounts 2021

195

Financial Statements

Notes to the consolidated financial statements

continued

7. Operating profit/(loss)

Operating profit/(loss) is stated after charging/(crediting):

2021

£’m

2020

(restated)*

£’m

Raw materials and consumables used 443.8 457.1

Employee costs (see note 8) 568.2 659.3

Site related costs** 109.7 118.3

Change in inventories of finished goods and work in progress (20.9) 38.5

Capitalisation of development costs (see note 18) (27.6) (41.4)

Free of charge/deeply discounted manufactured parts 49.2 53.4

Amortisation and impairment of capitalised development costs (see note 18)*** 35.6 32.6

Amortisation of programme participation costs (see note 18) 1.2 1.2

Amortisation of intangible assets acquired in business combinations (see note 9) 80.1 88.2

Amortisation and impairment of software and other intangible assets (see note 19) 22.2 19.7

Depreciation (see note 20)*** 54.7 52.9

Loss on disposal of property, plant and equipment – 1.4

Exceptional operating items (see note 10) 43.2 428.7

Financial instruments – loss (see note 9) – 2.9

Net foreign exchange loss 5.4 8.1

Amounts arising on the acquisition, disposal and closure of businesses (see note 9)**** 3.3 –

Share of loss after tax of joint ventures (see note 21) 0.4 3.2

Other costs***** 84.0 94.8

Total 1,452.5 2,018.9

* Prior year figures have been restated on a comparable basis to 2021. As a result, prior year figures for raw materials and consumables used has reduced by £10.9m,

amortisation and impairment of capitalised development costs has increased by £1.1m, depreciation has reduced by £3.8m, net foreign exchange losses has

increased by £8.1m and other costs has increased by £5.5m.

** Site related costs comprise business insurance, energy, establishment and other factory costs.

*** Excludes amounts recorded as exceptional operating items.

**** Excludes £4.0m of costs related to the proposed acquisition of the Group by Parker-Hannifin Corporation which are included within employee costs.

***** Other costs principally comprise engineering materials of £22.4m (2020: £16.8m), freight costs of £20.5m (2020: £22.8m) and professional fees of £32.4m (2020: £27.7m).

Disclosed as:

2021

£’m

2020

£’m

Cost of sales 1,016.8 1,200.6

Operating costs 435.7 818.3

Total 1,452.5 2,018.9

Total research and development expenditure in the year is £70.7m (2020: £97.9m) of which £14.5m (2020: £20.8m) is charged to cost

of sales or manufacturing work in progress, £28.6m (2020: £35.7m) is charged to net operating costs and £27.6m (2020: £41.4m) is

capitalised as development costs (see note 18).

Operating profit/(loss) is stated after crediting:

2021

£’m

2020

£’m

Gain on disposal of property, plant and equipment 5.3 –

Amounts arising on the acquisition, disposal and closure of businesses (see note 9) – 32.0

Financial instruments – gain (see note 9) 16.7 –

Other income 4.7 5.5

Operating income 26.7 37.5

Meggitt PLC Annual Report and Accounts 2021

196

8. Employee information

2021

£’m

2020

£’m

Wages and salaries 460.0 530.2

Social security costs 42.8 53.0

Retirement benefit costs (see note 36) 25.1 35.2

Share-based payment expense/(credit) (see note 38) 5.5 (2.5)

Other benefits including US medical costs 34.8 43.4

Employee costs including Executive Directors 568.2 659.3

2021

Average

Monthly

Number

2020

Average

Monthly

Number

Airframe Systems 4,793 5,324

Engine Systems* 1,773 2,013

Energy & Equipment* 1,133 1,479

Services & Support 520 543

Corporate including shared services** 705 510

Total persons employed including Executive Directors 8,924 9,869

Other persons providing similar services 261 651

Total 9,185 10,520

* A number of product lines from the Energy & Equipment division were transferred to the Engine Systems division with effect from 1 January 2021. If this transfer was

reflected in 2020, it would result in an increase to Engine Systems average monthly headcount of 141, with a corresponding decrease to Energy & Equipment.

** Corporate headcount has increased as a result of further centralisation of activity previously performed at a divisional level.

9. Reconciliations between profit and underlying profit

Underlying profit is used by the Board to monitor and measure the underlying trading performance of the Group. Items excluded

from underlying profit measures are treated consistently with the way performance is measured under the Group’s short-term and

long-term incentive plans and with covenant requirements defined in the Group’s committed credit facilities.

Notes

2021

£’m

2020

£’m

Operating profit/(loss) 63.4 (297.3)

Amounts arising on the acquisition, disposal and closure of businesses a 7.3 (32.0)

Amortisation of intangible assets acquired in business combinations b 80.1 88.2

Financial instruments – (gain)/loss c (16.7) 2.9

Exceptional operating items (see note 10) 43.2 428.7

Adjustments to operating profit/(loss)* 113.9 4 87.8

Underlying operating profit 177.3 190.5

Profit/(loss) before tax 31.3 (334.0)

Adjustments to operating profit/(loss) per above 113.9 4 87.8

Net interest expense on retirement benefit obligations (see note 36)** 4.1 5.7

Adjustments to profit/(loss) before tax 118.0 493.5

Underlying profit before tax 149.3 159.5

Profit/(loss) for the year 31.2 (314.2)

Adjustments to profit/(loss) before tax per above 118.0 493.5

Tax effect of adjustments to profit before tax*** (28.7) (51.2)

Adjustments to profit/(loss) for the year 89.3 442.3

Underlying profit for the year 120.5 128.1

* Of the adjustments to operating profit/(loss), £9.2m (2020: £39.0m) relating to exceptional operating items has been charged to cost of sales, with the balance of

£104.7m (2020: £448.8m) included within net operating costs.

** The Board considers net interest expense on retirement benefit obligations to be a non-trading item and accordingly excludes it from underlying profit measures.

*** Of the tax effect of adjustments to profit/(loss) before tax, £10.4m (2020: £32.5m) relates to exceptional operating items (see note 10).

Meggitt PLC Annual Report and Accounts 2021

197

Financial Statements

9. Reconciliations between profit and underlying profit continued

a. Delivery of the Group’s strategy includes investment in acquisitions that enhance its technology portfolio. The exclusion of

significant items arising from M&A activity is designed by the Board to align short-term operational decisions with this longer-

term strategy. Accordingly amounts arising on the acquisition, disposal and closure of businesses are excluded from underlying

profit measures. These include gains or losses made on the disposal or closure of businesses, adjustments to the fair value of

contingent consideration payable in respect of acquired businesses or receivable in respect of disposed businesses and costs

directly attributable to the acquisition and disposal of businesses. Additionally in 2021, it includes amounts incurred in respect

of the proposed acquisition of the Group by Parker-Hannifin Corporation.

2021

£’m

2020

£’m

Loss/(gain) on disposal of businesses before disposal expenses 0.6 (37.1)

Costs related to disposal of businesses in the current year (see note 44) 1.8 3.8

Loss/(gain) on disposal of businesses in the current year (see note 44) 2.4 (33.3)

Costs related to the proposed acquisition of the Group by Parker-Hannifin Corporation 5.1 –

Amounts recognised in respect of disposals in prior years (0.2) 1.3

Amounts arising on the acquisition, disposal and closure of businesses 7.3 (32.0)

b. For the same reasons as described in note 9a, the Group also excludes from its underlying profit figures the amortisation of

intangible assets acquired in business combinations.

2021

£’m

2020

£’m

Amortisation of other intangible assets (see note 19) 100.3 107.9

Less: amortisation of software and other intangible assets (see note 19) (20.2) (19.7)

Amortisation of intangible assets acquired in business combinations 80.1 88.2

c. To ensure appropriate and timely commercial decisions are made as to when and how to mitigate the Group’s foreign currency

and interest rate exposures, gains and losses arising from the marking to market of financial instruments that are not hedge

accounted are excluded from underlying profit measures. The Group does not hedge account for foreign currency forward

contracts, cross-currency derivatives or treasury lock derivatives (see note 33 for further details).

When interest rate derivatives qualify to be hedge accounted, any difference recognised in the income statement as hedge

ineffectiveness between movements in fair value of the derivatives and fair value of fixed rate borrowings is excluded from

underlying profit measures.

2021

£’m

2020

£’m

Movement in fair value of foreign currency forward contracts 10.0 (15.9)

Impact of retranslating net foreign currency assets and liabilities at spot rate (1.8) 6.5

Movement in fair value of interest rate derivatives 3.4 1.6

Movement in fair value of fixed rate borrowings due to interest rate risk (see note 32) (3.3) (1.6)

Movement in fair value of cross-currency derivatives (24.5) 12.8

Movement in fair value of treasury lock derivative (0.5) (0.5)

Financial instruments – (gain)/loss (16.7) 2.9

Notes to the consolidated financial statements

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

198

10. Exceptional operating items

Delivery of the Group’s strategy includes the restructuring of its cost base to deliver operational improvements. The exclusion

from underlying profit measures of significant items arising from site consolidations, business restructuring and integration of

acquired businesses is designed by the Board to align short-term operational decisions with this longer-term strategy. In 2021,

given their significance and that they relate to historical environmental matters in respect of businesses disposed of by Whittaker

Corporation prior to its acquisition by the Group in 1999, costs recognised have been treated as operating exceptional items.

In 2020, the impact of the global COVID-19 pandemic, and the resulting uncertainty facing the commercial aerospace industry,

gave rise to significant non-recurring impairment losses and asset write-downs which were treated as exceptional operating items.

Note

Income statement Cash flow

2021

£’m

2020

£’m

2021

£’m

2020

£’m

(Reversals)/impairment losses and other asset write-downs a (3.8) 374.2 – –

COVID-19 incremental non-recurring costs net of income b 3.8 22.0 3.3 18.9

Site consolidations c 14.7 33.5 22.6 31.6

Environmental clean-up costs d 29.5 – – –

Business restructuring costs and other items e (1.0) (1.0) – (1.2)

Exceptional operating items 43.2 428.7 25.9 49.3

a. In 2020, the Group recognised material impairment losses and other reductions in asset values arising from the uncertainty

facing the commercial aerospace industry that arose during the COVID-19 pandemic as an exceptional operating item.

Given their significance, they were presented separately on the face of the income statement as the Group considered it relevant

to an understanding of the Group’s financial performance. In 2021, £3.8m of the impairment losses and other asset write-downs

originally recognised in 2020 were reversed. Given the reversals were not significant, they have not been separately presented

on the face of the income statement, but have been treated consistently with 2020 as an exceptional operating item. Of the

amounts classified as exceptional operating items, a £2.4m credit has been recognised within cost of sales, with the remaining

£1.4m credit recognised within other operating costs. The tax charge in respect of these items was £0.3m.

b. The Group continues to exclude incremental income and expenditure directly attributable to the global COVID-19 pandemic,

and which is not expected to recur in future years, from its underlying profit measures. In 2021, this principally relates to

additional cleaning costs; the purchase of personal protective equipment; and shift premiums and other associated costs

arising from social distancing measures. Of the amounts classified as exceptional operating items, £2.1m has been recognised

within cost of sales, with the balance of £1.7m recognised within other operating costs. The tax credit in respect of these items

was £0.7m.

c. Amounts principally relate to costs incurred in respect of the Group’s previously announced plans to reduce its footprint by the

end of 2021. This project was substantially complete at the end of 2021, but costs in respect of projects commenced in 2021

will be incurred in subsequent years as these projects are completed. Cumulative costs since the announcement are £111.9m.

In 2021, costs are principally in respect of the move to the new facility at Ansty Park in the West Midlands, UK which has enabled

the Group to consolidate a range of manufacturing, engineering and support operations into a single centre of excellence.

Of the amounts classified as exceptional operating items, £10.5m has been recognised within cost of sales with the balance of

£4.2m recognised within other operating costs. The tax credit in respect of these items was £3.6m.

d. During the year, the Group recognised a provision for £29.5m (2020: £nil) in respect of environmental matters relating to a

former site operated by Whittaker Corporation, prior to its acquisition by the Group in 1999. See note 4 for further details.

Amounts classified as exceptional operating items have been recognised within net operating costs. The tax credit in respect

of this item was £6.8m.

e. This principally relates to the reversal of amounts previously recognised as exceptional operating items. Amounts classified as

exceptional operating items have been recognised within cost of sales. The tax charge in respect of these items was £0.4m.

Meggitt PLC Annual Report and Accounts 2021

199

Financial Statements

11. Finance income

2021

£’m

2020

£’m

Interest on bank deposits – 0.1

Unwinding of interest on other receivables (see note 34) 0.2 0.2

Other finance income 0.3 0.2

Finance income 0.5 0.5

12. Finance costs

2021

£’m

2020

£’m

Interest on bank borrowings 0.6 1.3

Interest on senior notes 21.4 24.5

Interest on lease liabilities 5.7 6.0

Unwinding of discount on provisions (see note 34) 0.6 0.7

Net interest expense on retirement benefit obligations (see note 36) 4.1 5.7

Amortisation of debt issue costs 1.5 0.8

Less: amounts capitalised in the cost of qualifying assets (see note 18) (1.3) (1.8)

Finance costs 32.6 37.2

13. Tax

2021

£’m

2020

£’m

Current tax – current year 29.3 29.3

Current tax – adjustment in respect of prior years (5.2) (10.5)

Deferred tax – origination and reversal of temporary differences (26.3) (44.6)

Deferred tax – adjustment in respect of prior years 2 .3 6.0

Tax charge/(credit) 0.1 (19.8)

The Finance Act 2021 introduced legislation to increase the main rate of corporation tax in the UK from 19% to 25% from 1 April

2023. The legislation was substantively enacted in 2021 and has resulted in an additional current year tax charge of £5.7m, arising

from the impact of the change in tax rate on net deferred tax liabilities.

Reconciliation of tax charge/(credit)

A reconciliation based on the weighted average tax rate applicable to the profit/(loss) of the Group’s consolidated businesses is

as follows:

2021

£’m

2020

£’m

Profit/(loss) before tax at weighted average tax rate of 9.6%* (2020: 24.7%) 3.0 (82.4)

Effects of:

Impact of impairment losses on intangible assets – 67.9

Deferred tax – effects of changes in other statutory tax rates 1.8 0.3

Tax effect of share-based payments – 1.5

Non-taxable gain on disposal of businesses (0.5 ) (4.8)

Tax losses not recognised (1.0) 0.5

Tax credits and incentives (1.4) (2.7)

Provision for/(release of) uncertain tax positions (1.1) 1.3

Other permanent differences 2.2 3.1

Current tax – adjustment in respect of prior years (5.2) (10.5)

Deferred tax – adjustment in respect of prior years 2 .3 6.0

Tax charge/(credit) 0.1 (19.8)

* Calculated as the weighted average tax rate applicable to profits of the Group’s businesses in their respective countries in the year. Accordingly it does not reflect

any changes in tax rates that have been substantively enacted, but are not applicable until future years. The change in the weighted average applicable tax rate

is caused by changes to the geographical balance of the Group’s profits and losses due to the impact of the exceptional operating items. 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 2021 to

increase, or reduce respectively, by approximately £4.3m of which £3.2m arises from the impact of the change in tax rate on net deferred tax liabilities.

The tax reconciliation for 2021 includes £1.4m (2020: £2.7m) in respect of tax credit and incentives in the US for items such as

research and development and certain foreign derived income, and a release of £1.1m (2020: £1.3m charge) in respect of various

uncertain tax positions in the Group (see note 29).

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

200

13. Tax continued

Tax relating to components of other comprehensive income/(expense)

2021 2020

Before

tax

£’m

Tax

(charge)/

credit

£’m

After

tax

£’m

Before

tax

£’m

Tax

(charge)/

credit

£’m

After

tax

£’m

Current tax – currency translation movements (6.9) 2.9 (4.0) – – –

Current tax – movements in fair value of financial liabilities

arising from changes in credit risk (1.3) 0.3 (1.0) – – –

Deferred tax – currency translation movements – – – (79.9) 2.0 (77.9)

Deferred tax – movements in fair value of financial liabilities

arising from changes in credit risk – – – 1.8 (0.4) 1.4

Deferred tax – remeasurement of retirement benefit

obligations 115.4 (21.8) 93.6 (42.6) 10.8 (31.8)

Other comprehensive income/(expense) 107.2 (18.6) 88.6 (120.7) 12.4 (108.3)

Tax relating to items recognised directly in equity

2021

£’m

2020

£’m

Current tax relating to share-based payment expense 1.4 (0.2)

Deferred tax relating to share-based payment expense (see note 35) 1.3 (2.0)

Total credit/(charge) 2.7 (2.2)

14. Earnings/(loss) per share

Earnings per share (EPS) is calculated by dividing the profit attributable to owners of the Company by the weighted average

number of shares in issue during the year. The weighted average number of shares excludes treasury shares and any shares

bought by the Group and held during the year by an independently managed Employee Share Ownership Plan Trust (see note 39).

The weighted average number of own shares excluded is 2.3m shares (2020: 3.6m shares). The calculation of diluted EPS 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 awards in issue are exercised.

2021 2020

Profit*

£’m

Number ’m

EPS

Pence

Loss*

£’m

Number ’m

EPS

Pence

Basic EPS 31.2 780. 2 4.0 (314.2) 777.8 (40.4)

Potential effect of dilutive ordinary shares – 4.2 – – 11.6 –

Diluted EPS 31.2 784.4 4.0 (314.2) 789.4 (40.4)

* Profit/(loss) for the year attributable to equity owners of the Company.

Underlying EPS is based on underlying profit for the year (see note 9) and the same number of shares used in the calculation of

basic EPS. It is reconciled to basic EPS below:

2021

Pence

2020

Pence

Basic EPS 4.0 (40.4)

Adjust for effects of:

Amounts arising on the acquisition, disposal and closure of businesses 0.6 (4.2)

Amortisation of intangible assets acquired in business combinations 8.0 9.2

Financial instruments – (gain)/loss (1.8) 0.3

Exceptional operating items 4.2 51.0

Net interest expense on retirement benefit obligations 0.4 0.6

Underlying basic EPS 15.4 16.5

Diluted underlying EPS is based on underlying profit for the year (see note 9) and the same number of shares used in the

calculation of diluted EPS. Diluted underlying EPS for the year is 15.4 pence (2020: 16.2 pence).

Meggitt PLC Annual Report and Accounts 2021

201

Financial Statements

15. Dividends

The Directors did not recommend the payment of a dividend in respect of 2020. In line with the terms of the previously announced

proposed transaction with Parker-Hannifin, the Group is not paying a final dividend for 2021.

16. Related party transactions

During the year, the Group made sales to the joint ventures of £0.4m (2020: £0.7m) and purchases from the joint ventures of £1.0m

(2020: £0.6m). Transactions between the Company and its subsidiaries have been eliminated on consolidation.

The remuneration of key management personnel of the Group, which is defined for 2021 as members of the Board and the Group

Executive Committee, is set out below.

2021

£’m

2020

£’m

Salaries and other short-term employee benefits 7.6 4.7

Share-based payment expense/(credit) 1.3 (0.5)

Total 8.9 4.2

Full details of all elements in the remuneration package of each Director, together with Directors’ share interests and share

awards, are disclosed in the Directors’ remuneration report on pages 126 to 155 which forms part of these consolidated

financial statements.

17. Goodwill

2021

£’m

2020

£’m

At 1 January 1,519.5 1,966.6

Exchange rate adjustments 12.3 (22.9)

Businesses disposed – (84.8)

Transferred to assets classified as held for sale – (3.7)

Impairment losses – (335.7)

At 31 December 1,531.8 1,519.5

The net book amount at 31 December 2021 comprises cost of £1,856.5m (2020: £1,841.4m) and accumulated impairment losses of

£324.7m (2020: £321.9m).

An analysis of goodwill by CGU or group of CGUs is shown below:

2021

£’m

2020

£’m

Airframe Systems 1,115.0 1,105.3

Engine Systems* 130.5 115.3

Services & Support 207.7 206.6

Defence Systems 30.6 30.2

Other* 48.0 62.1

Total 1,531.8 1,519.5

* As a result of the transfer of a number of product lines from the Energy & Equipment division to the Engine Systems division on 1 January 2021, the related goodwill

of £13.9m has been reclassed from Other to the Engine Systems group of CGUs.

Impairment testing

Under the Group’s annual impairment testing cycle, goodwill is tested for impairment at 30 June each year. During 2021, the

Group did not identify any trigger events indicating the carrying value of goodwill attributable to any of the Group’s CGUs was

impaired and accordingly no additional impairment testing was performed.

No changes were made in 2021 to the level at which impairment testing was performed.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

202

17. Goodwill continued

Impairment testing continued

For the purpose of impairment testing, the Group historically used value-in-use calculations to determine recoverable amounts

as it had not considered there to be reliable estimates of fair value less costs of disposal (FVLCOD). However, following approval

by the Group’s shareholders on 21 September 2021 of the proposed acquisition of the Group by Parker-Hannifin Corporation,

FVLCOD has been determined to be £6,200.0m based on the all-cash offer of 800 pence per share and estimated costs of

disposal of £55.0m. This is higher than the Group’s calculation of its estimated value-in-use which, by restricting cash flows to a

five-year period and capping growth in subsequent periods to long-term inflation estimates, does not fully capture the extent of

the anticipated civil aerospace recovery. Accordingly, for the purposes of impairment testing recoverable value has been based

on FVLCOD.

FVLCOD for each CGU has been estimated by allocating the FVLCOD of the Group using the relative value-in-use of each CGU.

The key assumptions used in the value-in-use calculations were as follows:

Cash flows covered by management estimates

Estimates of cash flows prepared and approved by management covering a five-year period from the date of the impairment

testing were used. Cash flow estimates covering three potential scenarios were prepared and probability weighted to derive an

expected value for the cash flows to be used. The scenarios modelled reflected a range of assumptions as to the extent and pace

of recovery in the civil aerospace sector in particular, although the impacts on other markets of the economic uncertainty arising

from COVID-19 were also considered, together with different assumptions on the level of gross margin improvement over the five-

year period.

Growth rates used for periods beyond those covered by management’s detailed budgets and plans

The Group’s assumptions reflected a number of different inputs: its own estimates taking into account the long-term nature of the

industry in which the CGUs operate and their sole source positions; industry estimates where available; and the impacts of climate

change and other potential structural changes in markets. These different assumptions were probability weighted to derive an

expected growth rate and the lower of this value and the long-term inflation forecasts for the countries in which the CGUs operate

was used. The growth rates used were as follows:

2021

2020

Airframe Systems 2.2 2.0

Engine Systems 1.7 1.3

Services & Support 2.2 2.1

Defence Systems 2.3 2.2

Other 1.1-2.3 0.7-2.2

Discount rates applied to future cash flows

The Group’s post-tax weighted average cost of capital (WACC) was used as the foundation for determining the discount rates

to be applied. The WACC was adjusted to a pre-tax rate and to reflect risks specific to the CGU or group of CGUs not already

reflected in its future cash flows. The pre-tax discount rates used were as follows:

2021

2020

Airframe Systems 9.9 10.7

Engine Systems 8.5 9.1

Services & Support 9.5 10.4

Defence Systems 9.9 10.6

Other 7.3-10.2 8.1-11.0

As a result of the impairment test, no impairment of any CGU or group of CGUs was identified. With the exception of Airframe

Systems, headroom measured in percentage terms for each of the CGUs and groups of CGUs was greater than 100% of the

carrying value of the CGU’s assets, including goodwill. For Airframe Systems, headroom was £1,474.0m (71% of the carrying

value of the CGU’s assets, including goodwill). Having modelled a number of sensitivities, it was concluded that no reasonably

foreseeable change in key assumptions used in the impairment model would result in a significant impairment charge being

recognised in the consolidated financial statements.

Meggitt PLC Annual Report and Accounts 2021

203

Financial Statements

18. Development costs and programme participation costs

Development

costs

£’m

Programme

participation

costs

£’m

At 1 January 2020

Cost 814.4 38.4

Accumulated amortisation (238.5) (20.4)

Net book amount 575.9 18.0

Year ended 31 December 2020

Opening net book amount 575.9 18.0

Exchange rate adjustments (7.6) (0.7)

Additions – Internal development costs 41.4 –

– Cash payments – 2.6

Transfers to contract assets (1.8) –

Disposals (1.0) –

Interest capitalised (see note 12) 1.8 –

Businesses disposed (19.7) –

Impairment losses* (25.6) –

Amortisation – net operating costs (31.5) (1.2)

Net book amount 531.9 18.7

At 1 January 2021

Cost 800.0 39.6

Accumulated amortisation (268.1) (20.9)

Net book amount 531.9 18.7

Year ended 31 December 2021

Opening net book amount 531.9 18.7

Exchange rate adjustments 3.1 0.2

Additions – Internal development costs 27.6 –

– Cash payments – 1.4

Transfers to contract assets (2.5) (0.1)

Interest capitalised (see note 12) 1.3 –

Impairment losses* (3.7) –

Amortisation – net operating costs (33.0) (1.2)

Net book amount 524.7 19.0

At 31 December 2021

Cost 824.6 44.9

Accumulated amortisation (299.9) (25.9)

Net book amount 524.7 19.0

* Of the impairment losses, £1.1m (2020: £24.5m) has been charged to operating exceptional items (see note 10).

The net book amount of development costs includes £419.3m (2020: £423.3m) in respect of Airframe Systems which have an

estimated weighted average remaining life of 12.7 years (2020: 12.7 years). Interest has been capitalised using the average rate

payable on the Group’s floating rate borrowings of 0.9% (2020: 1.2%). Tax relief claimed on interest capitalised in the year is

£0.3m (2020: £0.3m).

The Group has individually material balances capitalised on the Airbus A220, Airbus A321NEO, Bombardier Global 7500/8000,

Embraer 450/500, Irkut MC-21, Gulfstream G500/G600, LEAP-X, Dassault Falcon 6X, Boeing 787 and Boeing 737 programmes.

These programmes have an aggregate net book amount of £333.4m (at 31 December 2020 these programmes had an aggregate

net book amount of £331.8m). Of this net book amount, £67.6m (2020: £59.0m) relates to aircraft programmes not yet in service.

In note 4, the Group discloses a critical accounting estimate in respect of the MC-21 programme. In respect of the other

programmes with individually material capitalised balances, the Group does not believe there is a significant risk of an OEM

bankruptcy, programme cancellation or other event in the next 12 months which would give rise to material loss in 2022.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

204

19. Other intangible assets

Acquired in business combinations*

Customer

relationships

£’m

Technology

£’m

Trade

names and

trademarks

£’m

Software

and other

assets

£’m

Total

£’m

At 1 January 2020

Cost 1,099.9 321.8 30.0 202.4 1,65 4.1

Accumulated amortisation (754.5) (245.6) (27.6) (122.8) (1,150.5)

Net book amount 345.4 76.2 2.4 79.6 503.6

Year ended 31 December 2020

Opening net book amount 345.4 76.2 2.4 79.6 503.6

Exchange rate adjustments (6.1) (1.1) – (0.1) (7.3)

Businesses disposed – – – (0.1) (0.1)

Additions – – – 13.2 13.2

Disposals – – – (0.4) (0.4)

Amortisation – net operating costs (67.0) (20.5) (0.7) (19.7) (107.9)

Net book amount 272.3 54.6 1.7 72.5 401.1

At 1 January 2021

Cost 1,056.9 282.5 21.7 212.2 1,573.3

Accumulated amortisation (784.6) (227.9) (20.0) (139.7) (1,172.2)

Net book amount 272.3 54.6 1.7 72.5 401.1

Year ended 31 December 2021

Opening net book amount 272.3 54.6 1.7 72.5 401.1

Exchange rate adjustments 1.8 0.4 – – 2.2

Additions – – – 9.5 9.5

Disposals – – – (3.9) (3.9)

Impairment losses – net operating costs – – – (2.0) (2.0)

Amortisation – net operating costs (63.6) (15.8) (0.7) (20.2) (100.3)

Net book amount 210.5 39.2 1.0 55.9 306.6

At 31 December 2021

Cost 1,067.2 284.6 21.7 217.2 1,590.7

Accumulated amortisation (856.7) (245.4) (20.7) (161.3) (1,28 4.1)

Net book amount 210.5 39.2 1.0 55.9 306.6

* Amortisation of these items is excluded from the Group’s underlying profit figures (see note 9).

The net book amount of customer relationships includes £129.8m (2020: £182.8m) in respect of Airframe Systems and £70.6m

(2020: £77.3m) in respect of Engine Systems. These have estimated weighted average remaining lives of 3.6 years (2020: 4.3 years)

and 11.2 years (2020: 12.0 years), respectively.

The net book amount of technology includes £20.0m (2020: £32.0m) in respect of Airframe Systems and £18.0m (2020: £20.6m)

in respect of Engine Systems. These have estimated weighted average remaining lives of 2.7 years (2020: 3.3 years) and 6.7 years

(2020: 7.7 years), respectively.

Meggitt PLC Annual Report and Accounts 2021

205

Financial Statements

20. Property, plant and equipment

Land and

buildings

£’m

Plant,

equipment

and

vehicles

£’m

Right-of-use

assets:

property

£’m

Right-of-use

assets:

other

£’m

Total

£’m

At 1 January 2020

Cost 221.7 570.3 203.8 4.6 1,000.4

Accumulated depreciation

(95.6) (363.0) (90.3) (2.1) (551.0)

Net book amount

126.1 207.3 113.5 2.5 449.4

Year ended 31 December 2020

Opening net book amount 126.1 207.3 113.5 2.5 449.4

Exchange rate adjustments (1.7) (3.4) (1.6) (0.1) (6.8)

Businesses disposed (0.4) (2.4) (4.0) – (6.8)

Additions 30.8 40.8 10.4 1.0 83.0

Transfer to assets classified as held for sale – (0.8) (0.9) – (1.7)

Disposals (0.2) (1.2) – (0.2) (1.6)

Transfers 1.9 (1.9) – – –

Depreciation* (8.3) (32.4) (14.8) (1.2) (56.7)

Net book amount 148.2 206.0 102.6 2.0 458.8

At 1 January 2021

Cost 233.2 567.5 188.2 5.0 993.9

Accumulated depreciation

(85.0) (361.5) (85.6) (3.0) (535.1)

Net book amount 148.2 206.0 102.6 2.0 458.8

Year ended 31 December 2021

Opening net book amount 148.2 206.0 102.6 2.0 458.8

Exchange rate adjustments 0.2 1.2 0.5 – 1.9

Businesses disposed (see note 44) – (0.3) (0.2) – (0.5)

Additions 25.8 35.1 25.8 0.8 87.5

Transfer from inventory** – 6.4 – – 6.4

Disposals (17.7) (1.6) (0.2) (0.1) (19.6)

Transfers 2.4 (2.4) – – –

Depreciation* (11.2) (30.3) (13.5) (0.9) (55.9)

Net book amount 147.7 214.1 115.0 1.8 478.6

At 31 December 2021

Cost 235.1 592.5 209.7 5.0 1,042.3

Accumulated depreciation (87.4) (378.4) (94.7) (3.2) (563.7)

Net book amount*** 147.7 214.1 115.0 1.8 478.6

* The depreciation charge includes £1.2m which has been charged to exceptional operating items (2020: £3.8m).

** Arises from the reclassification of amounts relating to rotable asset pools, which are used by the Group to improve turnaround times in relation to

aftermarket services.

*** Included within the net book amount are assets under construction of £12.6m (2020: £9.2m) relating to land and buildings and £42.1m (2020: £26.9m) relating to

plant, equipment and vehicles.

The Group received £7.4m (2020: £2.1m) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act from the US

Department of Defense to sustain critical industrial base capability for military grade fuel bladders at its Rockmart facility in

the US. These amounts have been recognised in property, plant and equipment as a reduction in the cost of the related capital

expenditure additions in the year.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

206

21. Investments

The Group’s investments in its joint ventures, Meggitt UTC Aerospace Systems, LLC (UTC Aero) and HiETA Technologies Limited

(HiETA) are accounted for using the equity method and are stated as follows:

2021

£’m

2020

£’m

At 1 January 20.8 14.1

Exchange rate adjustments 0.2 (0.5)

Additions – 10.4

Adjustment to contingent consideration* (1.9) –

Share of loss after tax (0.4) (3.2)

At 31 December 18.7 20.8

* During 2021, £0.9m in contingent consideration relating to HiETA was paid. The remaining contingent consideration payable of £1.9m was reassessed and

determined to no longer be required and was therefore adjusted against the investment value.

Summarised financial information for the joint ventures

The information below reflects amounts presented in the financial statements of the joint ventures adjusted to reflect the Group’s

accounting policies (and not the Group’s share of those amounts unless otherwise stated).

Summarised statement of comprehensive income

2021 2020

UTC Aero

£’m

HiETA

£’m

Total

£’m

UTC Aero

£’m

HiETA

£’m

Total

£’m

Revenue 12.6 2.4 15.0 10.6 2.4 13.0

Operating profit/(loss) 0.9 (2.3) (1.4) (2.9) (3.1) (6.0)

Finance costs (0.2) (0.2) (0.4) (0.2) (0.2) (0.4)

Profit/(loss) before tax 0.7 (2.5) (1.8) (3.1) (3.3) (6.4)

Tax charge (0.1) – (0.1) (0.1) – (0.1)

Profit/(loss) after tax 0.6 (2.5) (1.9) (3.2) (3.3) (6.5)

Total comprehensive income/(expense) 0.6 (2.5) (1.9) (3.1) (3.3) (6.4)

Summarised balance sheet

2021 2020

UTC Aero

£’m

HiETA

£’m

Total

£’m

UTC Aero

£’m

HiETA

£’m

Total

£’m

Property, plant and equipment 2.5 1.1 3.6 2.8 2.8 5.6

Cash and cash equivalents 2.7 0.2 2.9 4.3 0.3 4.6

Other current assets 6.8 0.3 7.1 7.3 0.6 7.9

Total assets 12.0 1.6 13.6 14.4 3.7 18.1

Financial liabilities (excluding trade payables) (4.0) (5.5) (9.5) (4.1) (6.6) (10.7)

Other liabilities (5.8) (1.6) (7.4) (8.7) (1.0) (9.7)

Total liabilities (9.8) (7.1) (16. 9) (12.8) (7.6) (20.4)

Net assets/(liabilities) 2.2 (5.5) (3.3 ) 1.6 (3.9) (2.3)

Reconciliation of summarised financial information

2021 2020

UTC Aero

£’m

HiETA

£’m

Total

£’m

UTC Aero

£’m

HiETA

£’m

Total

£’m

Net assets/(liabilities) at 1 January 1.6 (3.9) ( 2.3) 4.7 (0.6) 4.1

Total comprehensive income/(expense) 0.6 (2.5) (1.9) (3.1) (3.3) (6.4)

Adjustment to equity* – 0.9 0.9 – – –

Net assets/(liabilities) at 31 December 2.2 (5.5) (3.3) 1.6 (3.9) (2.3)

Group’s interest in joint venture 1.5 (1.8) (0.3) 1.1 (1.3) (0.2)

Goodwill 10.6 8.4 19.0 10.4 10.6 21.0

Group’s investment at 31 December 12.1 6.6 18.7 11.5 9.3 20.8

* Resulting from payment by the Group of contingent consideration relating to the acquisition of HiETA.

There are no contingent liabilities relating to the Group’s interest in the joint ventures.

Meggitt PLC Annual Report and Accounts 2021

207

Financial Statements

22. Assets classified as held for sale

On 30 January 2021, the Group completed the disposal of the Group’s aircraft ducting business, based in Dunstable UK, together

with a small product line from one of the Group’s other businesses, previously classified as held for sale (see note 44).

Assets

classified as

held for sale

£’m

Liabilities

directly

associated

with assets

classified as

held for sale

£’m

Total

£’m

At 1 January 2021 14.7 (3.7) 11.0

Change in carrying value up to date of disposal 0.6 0.1 0.7

Business disposed (see note 44) (15.3) 3.6 (11.7)

At 31 December 2021 – – –

23. Inventories

2021

£’m

2020

£’m

Raw materials and bought-in components 173.4 163.3

Manufacturing work in progress 183.5 160.3

Finished goods and goods for resale 98.5 103.3

Total 455.4 426.9

The cost of inventories recognised as an expense and included within cost of sales is £923.8m (2020: £1,080.9m). The cost of

inventories recognised as an expense includes £9.1m (2020: £13.4m) in respect of write-downs of inventory to net realisable value.

The cost of inventories recognised as an expense has been reduced by £4.1m (2020: £3.3m) in respect of the reversal of write-

downs of inventory to net realisable value made in previous years.

24. Trade and other receivables

2021

£’m

2020

£’m

Trade receivables 248.0 198.8

Prepayments 14.5 12.5

Other receivables 32.0 39.8

Current portion 294.5 251.1

Other receivables 18.8 16.5

Non-current portion 18.8 16.5

Total 313.3 267.6

As at 31 December 2021, £4.9m was due from one of the joint ventures (2020: £7.9m) and is included within trade receivables.

Other receivables include £15.0m (2020: £18.8m) in respect of amounts recoverable from insurers and other third parties,

principally relating to businesses sold by Whittaker Corporation prior to its acquisition by the Group, of which £2.8m (2020: £5.0m)

is shown as current (see note 34).

The Group does not hold any collateral as security. Trade and other receivables are denominated in the following currencies:

2021

£’m

2020

£’m

Sterling 39.1 46.1

US dollar 243.9 189.3

Euro 18.1 19.3

Other 12.2 12.9

Total 313.3 267.6

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

208

25. Contract assets

2021

£’m

2020

£’m

Conditional rights to consideration on over time contracts 50.6 45.7

Programme participation cash payments 3.1 3.1

Current portion 53.7 48.8

Conditional rights to consideration on over time contracts 22.3 24.6

Programme participation cash payments 33.5 35.0

Non-current portion 55.8 59.6

Total 109.5 108.4

Amortisation of programme participation cash payments of £3.1m (2020: £3.1m) has been recognised as a reduction in revenue in

the year. Cumulative catch-up adjustments to revenue recognised in a prior year, arising from changes in the current year in the

measure of progress or contract price on contract assets were £1.6m (2020: £0.4m).

Contract assets are also subject to the impairment requirements of IFRS 9, however the identified impairment loss was

not significant.

26. Cash and cash equivalents

2021

£’m

2020

£’m

Cash at bank and on hand 190.8 178.6

Total 190.8 178.6

Cash and cash equivalents are subject to interest at floating rates.

27. Trade and other payables

2021

£’m

2020

£’m

Trade payables 132.4 131.4

Social security and other taxes 12.4 10.7

Accrued expenses 64.3 58.5

Other payables 108.8 95.9

Current portion 31 7.9 296.5

Other payables 3.7 8.5

Non-current portion 3.7 8.5

Total 321.6 305.0

Other payables include £26.3m (2020: £23.5m) due to banks in respect of the Group’s supplier financing programme. No amounts

due under the programme met the requirements to be classified as bank borrowings (2020: £Nil).

Meggitt PLC Annual Report and Accounts 2021

209

Financial Statements

28. Contract liabilities

2021

£’m

2020

£’m

Contributions received from customers during development phase of programmes 2.4 1.7

Cost per brake landing/power by the hour contracts 7.9 4.9

Other consideration received in advance of performance 52.4 44.2

Current portion 62.7 50.8

Contributions received from customers during development phase of programmes 44.9 45.1

Cost per brake landing/power by the hour contracts 4.1 5.2

Other consideration received in advance of performance 23.6 23.6

Non-current portion 72.6 73.9

Total 135.3 124.7

Revenue recognised in the year relating to amounts recognised as a contract liability at the beginning of the year was £31.0m

(2020:£36.1m). Cumulative catch-up adjustments to revenue recognised in a prior year, arising from changes in the current year in

the measure of progress or contract price on contract liabilities were £2.2m (2020: £0.7m).

The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partly satisfied at

31 December 2021 is £369.1m (2020 (restated): £387.2m). Of this aggregate amount, the Group expects to recognise £130.6m

(2020 (restated): £174.0m) as revenue during 2022, with the balance recognised in more than one year but not more than five years.

Prior year figures have been restated to incorporate the full contract life of a number of power by the hour contracts resulting

in an increase in the aggregate amount of £178.6m and an increase in the amount expected to be recognised in 2021 of £12.6m.

The Group has taken the practical expedients available in IFRS 15 not to include amounts relating to contracts which have an

expected duration of less than 12 months when received, or amounts relating to contracts for which revenue is recognised using

amethod whereby the value to the customer corresponds to the right to invoice the customer.

29. Current tax liabilities

Note

2021

£’m

2020

£’m

UK Controlled Foreign Company (CFC) regime a 1.9 18.3

Other liabilities in respect of uncertain tax positions b 29.6 30.8

Other current tax liabilities 2.7 7.8

Current tax liabilities 34.2 56.9

a. In April 2019, the European Commission announced its decision that state aid partially applies to one of the UK’s CFC

exemptions that was utilised by the Group. This decision has been appealed by the UK Government and the Group has also

lodged its own separate appeal. There are a number of uncertainties that remain to be resolved, including the results of the

appeals processes and, should these be unsuccessful, the extent to which historical tax benefits received by the Group are

deemed to have derived from financing activities performed in the UK rather than overseas. In making an assessment of the

appropriate tax liability related to historical tax benefits received by the Group under the CFC regime, the Group has estimated

that the most likely outcome is that the appeals will not be successful and accordingly a liability for the Group’s estimated

exposure was held at 31 December 2020.

On 17 December 2020, the Taxation (Post-transition Period) Act 2020 received Royal Assent which gave the UK tax authorities

specific powers to recover amounts considered due from UK businesses. The Group received tax assessments during 2021

from the UK authority in this regard of £16.9m, for which a liability was held at 31 December 2020. The £16.9m was paid by the

Group in the year. Separately, the Group is in discussion with the UK tax authorities over the applicability of one of the UK’s

CFC exemptions utilised by the Group under UK domestic law and while this issue largely overlaps with the State Aid benefit

now repaid, a residual liability is held in this regard at 31 December 2021. The Group does not consider there to be a significant

risk of a material adjustment to the residual liability recognised within the next 12 months.

b. In determining the Group’s tax liabilities, it is also necessary to consider other transactions in key tax jurisdictions for which the

ultimate tax determination is uncertain. The Group’s tax liabilities for these matters reflect a number of estimates where the

amount of tax payable is either currently under audit by the tax authorities or relates to a period which has yet to be audited.

These areas include the deductibility of interest on certain borrowings used to finance acquisitions made by the Group and the

value at which goods and services are transferred between Group companies. The nature of the items, for which a liability is held,

is such that the final outcome could vary from the amounts recognised once a final tax determination is made, although currently

none of these exposures are considered individually material. To the extent the estimated final outcome differs from the tax that

has been provided, adjustments will be made to the liabilities held in the year the determination is made. The Group does not

consider there to be a significant risk of a material adjustment to the liabilities recognised within the next 12 months.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

210

30. Lease liabilities

The Group leases various factories, warehouses, offices, plant and equipment. The following amounts are included in the Group’s

consolidated financial statements in respect of its leases:

2021

£’m

2020

£’m

Depreciation charge for right-of-use assets (see note 20) 14.4 16.0

Additions to right-of-use assets (see note 20)* 26.6 11.4

Net book amount of right-of-use assets (see note 20) 116.8 104.6

Interest on lease liabilities (see note 12) 5.7 6.0

Expense related to short-term leases and low-value assets 1.0 0.6

Net cash outflow for leases** 20.6 17.9

* In 2021, this includes £6.8m relating to the sale and leaseback of the Group’s Engine Systems facility in North Hollywood, USA which has a lease term of 15 years and

£8.3m relating to a ten-year lease extension of the Group’s Airframe Systems facility in Portland, USA.

** Comprises capital payments of £14.9m (2020: £15.4m) and interest payments of £5.7m (2020: £6.0m), less a reverse lease premium received of £Nil (2020: £3.5m)

relating to the new Ansty Park site.

Analysis of lease liabilities

Present value

of minimum

lease payments

2021

£’m

2020

£’m

In one year or less 15.6 14.7

In more than one year but not more than five years 50.0 45.4

In more than five years 103.4 84.2

Present value of lease liabilities 169.0 144.3

Current portion 15.6 14.7

Non-current portion 153.4 129.6

31. Bank and other borrowings

2021

£’m

2020

£’m

Bank loans 2.8 2.2

Other loans 102.5 8.3

Current portion 105.3 10.5

Bank loans 28.2 43.7

Other loans 667.8 753.1

Non-current portion 696.0 796.8

Total 801.3 807.3

Analysis of bank and other borrowings repayable:

In one year or less 105.3 10.5

In more than one year but not more than five years 695.8 577.4

In more than five years 0.2 219.4

Total 801.3 807.3

Analysis of bank and other borrowings:

Drawn under committed facilities 791.6 795.9

Drawn under uncommitted facilities 2.7 2.2

Less unamortised debt issue costs (2.7) (2.4)

Fair value adjustment to fixed rate borrowings 1.2 3.3

Interest accruals 8.5 8.3

Total 801.3 807.3

Debt issue costs are amortised over the period of the facility to which they relate. The Group has no secured borrowings.

Meggitt PLC Annual Report and Accounts 2021

211

Financial Statements

31. Bank and other borrowings continued

Committed facilities

The Group has the following committed facilities at notional value:

2021 2020

Drawn

£’m

Undrawn

£’m

Total

£’m

Drawn

£’m

Undrawn

£’m

Total

£’m

2010 Senior notes : USD125.0m 92.8 – 92.8 91.6 – 91.6

2016 Senior notes: USD600.0m 445.4 – 445.4 439.5 – 439.5

2020 Senior notes: USD300.0m 222.7 – 222.7 219.8 – 219.8

Syndicated credit facilities: USD410.0m (2020: USD 750.0m) – 304.4 304.4 – 549.4 549.4

Bilateral facility: USD50.0m (2020: USD125.0m) – 37.1 37.1 – 91.5 91.5

Bilateral facility: GBP50.0m (2020: GBP100.0m) – 50.0 50.0 – 100.0 100.0

Bilateral facility: GBP30.0m (2020: GBP45.0m) 30.0 – 30.0 45.0 – 45.0

Other: EUR0.8m 0.7 – 0.7 – – –

Committed facilities 791.6 391.5 1,183.1 795.9 740.9 1,536.8

The Group issued USD400m of loan notes to private placement investors in 2010, of which USD125m remains outstanding.

The outstanding notes carry an interest rate of 5.12% and are due for repayment in June 2022. These loan notes are in a fair value

hedge relationship with the Group’s interest rate swaps.

The Group issued USD600m of loan notes to private placement investors in 2016. The notes comprise two tranches as follows:

USD300m carry an interest rate of 3.31% and are due for repayment in July 2023; and USD300m carry an interest rate of 3.60%

and are due for repayment in July 2026. These loan notes are designated as net investment hedges of the net assets of USD

denominated subsidiaries.

The Group issued USD300m of loan notes to private placement investors in 2020. The notes comprise two tranches as follows:

USD100m carry an interest rate of 2.78% and are due for repayment in November 2023; and USD200m carry an interest rate of

3.00% and are due for repayment in November 2025.

In November 2021, the Group secured a three-year USD410m syndicated multi-currency revolving credit facility maturing in

November 2024, which replaced the previous USD750m facility. At 31 December 2021, the amounts drawn under the facility

are £Nil (2020: £Nil). Borrowings under the new facility are subject to interest at floating rates which are linked to SONIA

(GBP), EURibor (EUR) and USD LIBOR (USD), until such future date to be agreed between the Group and the banks when USD

borrowingswill be linked to SOFR.

During 2021, the Group amended the three committed term loan bilateral facility agreements with its relationship banks.

They now comprise a USD50m facility with Bank of America, a GBP50m facility with Sumitomo Mitsui Banking Corporation

and a GBP30m facility with Caixabank. The USD facility now matures in December 2023 and the two GBP facilities mature in

January 2024. Borrowings under the USD and GBP facilities are subject to interest at floating rates which are linked to SOFR

andSONIA respectively.

Committed facilities expire as follows:

2021 2020

Drawn

£’m

Undrawn

£’m

Total

£’m

Drawn

£’m

Undrawn

£’m

Total

£’m

In one year or less 92.8 – 92.8 – 128.2 128.2

In more than one year but not more than five years 698.6 391.5 1,090.1 576.1 612.7 1,188.8

In more than five years 0.2 – 0.2 219.8 – 219.8

Committed facilities 791.6 391.5 1,183.1 795.9 740.9 1,536.8

The Group also has various uncommitted facilities with its relationship banks. At 31 December 2021, £2.7m (2020: £2.2m) was

drawn under these facilities.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

212

31. Bank and other borrowings continued

Interest rate exposure

After taking account of financial derivatives entered into by the Group that alter the interest basis of its financial liabilities, the

interest rate exposure on bank and other borrowings is:

At 31 December 2021:

Fixed rate borrowings

Floating

£’m

Fixed

£’m

Total

£’m

Weighted

average

interest

rate

Weighted

average

period

for which

rate is fixed

Years

US dollar 93.0 452.4 545.4

Swiss franc – 148.8 148.8

Euro – 79.8 79.8

Sterling 30.0 – 30.0

Gross bank and other borrowings 123.0 681.0 804.0 2.9 3.1

Less: unamortised debt issue costs (1.8) (0.9) (2.7)

Bank and other borrowings 121.2 680.1 801.3

At 31 December 2020:

Fixed rate borrowings

Floating

£’m

Fixed

£’m

Total

£’m

Weighted

average

interest

rate

Weighted

average

period

for which

rate is fixed

Years

US dollar* (133.1) 672.9 539.8

Swiss franc – 166.4 166.4

Euro – 58.5 58.5

Sterling 45.0 – 45.0

Gross bank and other borrowings (88.1) 897.8 809.7 2.4 3.1

Less: unamortised debt issue costs (1.4) (1.0) (2.4)

Bank and other borrowings (89.5) 896.8 807.3

* Part of the proceeds from the issue of USD300m senior notes at fixed interest rates in 2020, was used to reduce the level of gross USD borrowings held at floating

rates. Prior to this reduction, the Group had entered cross-currency derivatives, which matured during 2021, and which converted USD floating rate borrowings

into fixed rate borrowings denominated in Swiss francs and euros. At 31 December 2020, the notional amounts of these cross-currency swaps exceeded the gross

value of USD floating rate borrowings and accordingly a negative value is reported in the table above for floating rate USD borrowings after taking account of these

financial derivatives.

The weighted average interest rate reflects the relative impact of interest rates based on the principal amounts and the duration

of borrowings.

Hedges of net investments in foreign subsidiaries

The Group manages risks in respect of net operating assets held in foreign currencies by holding foreign currency

denominated loans.

2021

£’m

2020

£’m

Carrying value at 1 January 446.3 461.1

Loss/(gain) recognised in net finance costs due to movements in accrued interest and debt costs 0.3 (0.1)

Loss/(gain) recognised in other comprehensive income due to exchange rate movements 5.9 (14.7)

Carrying value at 31 December 452.5 446.3

Cumulative translation adjustments recognised in other comprehensive income in relation to continuing net investment hedge

loans are a gain of £9.9m (2020: £15.8m gain).

The Group also uses the notional principal from cross-currency swaps in its net investment hedge which resulted in a £14.1m loss

recognised in other comprehensive income.

Net investment hedges are considered effective unless the value of the hedging instrument exceeds the value of the hedged

item. No ineffectiveness arose in either 2021 or 2020.

Meggitt PLC Annual Report and Accounts 2021

213

Financial Statements

32. Financial instruments

At 31 December 2021:

Held at fair value Held at amortised cost

Through

profit

& loss

£’m

Derivatives

designated

for

hedging

£’m

Assets

£’m

Liabilities

£’m

Total

book

value

£’m

Total

fair

value

£’m

Non-current:

Other receivables (see note 24) – – 18.8 – 18.8 18.8

Derivative financial instruments (see note 33) 10.0 – – – 10.0 10.0

Current:

Trade and other receivables* – – 280.0 – 280.0 280.0

Derivative financial instruments (see note 33) 3.1 1.7 – – 4.8 4.8

Cash and cash equivalents (see note 26) – – 190.8 – 190.8 190.8

Financial assets 13.1 1.7 489.6 – 504.4 504.4

Current:

Trade and other payables** – – – (305.5) (305.5) (305.5)

Derivative financial instruments (see note 33) (3.2) – – – (3.2) (3.2)

Lease liabilities (see note 30) – – – (15.6) (15.6) (15.6)

Bank and other borrowings (see note 31)*** – – – (105.3) (105.3) (105.3)

Non-current:

Other payables (see note 27) – – – (3.7) (3.7) (3.7)

Derivative financial instruments (see note 33) (1.3) – – – (1.3) (1.3)

Lease liabilities (see note 30) – – – (153.4) (153.4) (153.4)

Bank and other borrowings (see note 31) – – – (696.0) (696.0) (692.6)

Financial liabilities (4.5) – – (1,279.5) (1,284.0) (1,280.6)

Total 8.6 1.7 489.6 (1,279.5) (779.6) (776.2)

* Excludes prepayments of £14.5m (see note 24).

** Excludes social security and other taxes of £12.4m (see note 27).

*** Current bank and other borrowings includes loan notes with a carrying amount of £94.2m which are designated as in a fair value hedge relationship (see note 31).

This carrying amount includes a fair value hedge adjustment of £1.2m.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

214

32. Financial instruments continued

At 31 December 2020:

Held at fair value Held at amortised cost

Through

profit

& loss

£’m

Derivatives

designated

for

hedging

£’m

Assets

£’m

Liabilities

£’m

Total

book

value

£’m

Total

fair

value

£’m

Non-current:

Other receivables (see note 24) – – 16.5 – 16.5 16.5

Derivative financial instruments (see note 33) 9.9 5.1 – – 15.0 15.0

Current:

Trade and other receivables* – – 238.6 – 238.6 238.6

Derivative financial instruments (see note 33) 5.4 – – – 5.4 5.4

Cash and cash equivalents (see note 26) – – 178.6 – 178.6 178.6

Financial assets 15.3 5.1 433.7 – 454.1 454.1

Current:

Trade and other payables** – – – (285.8) (285.8) (285.8)

Derivative financial instruments (see note 33) (21.6) – – – (21.6) (21.6)

Lease liabilities (see note 30) – – – (14.7) (14.7) (14.7)

Bank and other borrowings (see note 31) – – – (10.5) (10.5) (10.5)

Non-current:

Other payables (see note 27) – – – (8.5) (8.5) (8.5)

Derivative financial instruments (see note 33) (0.3) – – – (0.3) (0.3)

Lease liabilities (see note 30) – – – (129.6) (129.6) (129.6)

Bank and other borrowings (see note 31)*** – – – (796.8) (796.8) (813.1)

Financial liabilities (21.9) – – (1,245.9) (1,267.8) (1,284.1)

Total (6.6) 5.1 433.7 (1,245.9) (813.7) (830.0)

* Excludes prepayments of £12.5m (see note 24).

** Excludes social security and other taxes of £10.7m (see note 27).

*** Non-current bank and other borrowings includes loan notes with a carrying amount of £95.0m which are designated as in a fair value hedge relationship (see note

31). This carrying amount includes a fair value hedge adjustment of £3.3m.

Fair value measurement and hierarchy

For trade and other receivables, cash and cash equivalents, trade and other payables and floating rate bank and other borrowings,

fair values approximate to book values primarily due to the short maturity periods of these financial instruments. For trade and

other receivables, allowances are made within their book value for credit risk. Lease liabilities are outside the scope of IFRS 7

“Financial Instruments: Disclosures” with regards to fair value disclosures.

Derivative financial instruments measured at fair value, are classified as level 2 in the fair value measurement hierarchy, as they

have been determined using significant inputs based on observable market data. The fair values of interest rate derivatives have

been derived from forward interest rates based on yield curves observable at the balance sheet date and contractual interest

rates. The fair values of foreign currency forward contracts have been derived from forward exchange rates observable at the

balance sheet date and contractual forward rates. The fair values of cross-currency derivatives have been derived from forward

interest rates based on yield curves observable at the balance sheet date, forward exchange rates observable at the balance sheet

date and contractual interest and forward rates. Credit risk is not significant for these instruments.

The current and non-current elements of fixed rate bank and other borrowings measured at fair value, are classified as level 3 in

the fair value measurement hierarchy, as they have been determined using significant inputs which are a mixture of those based on

observable market data (interest rate risk) and those not based on observable market data (credit risk). The fair values attributable

to interest rate risk have been derived from forward interest rates based on yield curves observable at the balance sheet date and

contractual interest rates, with the credit risk margin kept constant. The fair values attributable to credit risk have been derived

from quotes from lenders for borrowings of similar amounts and maturity periods. The same methods of valuation have been

used to derive the fair values of the current and non-current elements of fixed rate bank and other borrowings which are held at

amortised cost, but for which fair values are provided in the tables above.

There were no transfers of assets or liabilities between levels of the fair value hierarchy in the year.

Meggitt PLC Annual Report and Accounts 2021

215

Financial Statements

32. Financial instruments continued

Impairment of financial assets

Trade receivables are stated after a loss allowance. Movements in the loss allowance during the year are as follows:

2021

£’m

2020

£’m

At 1 January 12.4 6.1

Exchange rate adjustments 0.1 (0.2)

Businesses disposed – (0.2)

Utilised (1.4) (1.1)

(Credit)/charge to income statement – net operating costs* (0.3) 7.8

At 31 December 10.8 12.4

* Includes £2.5m (2020: £5.4m charge) which has been credited to exceptional operating items (see note 10). This relates, in 2021, to a partial reversal of the additional

credit loss allowances recognised as an exceptional operating item in 2020 as a result of the uncertainty facing the commercial aerospace industry and a number of

airline operator bankruptcies subsequent to the COVID-19 outbreak.

The loss allowance is determined by reference to the ageing of gross balances which at 31 December 2021 isas follows:

2021

£’m

2020

£’m

Current 203.6 165.4

Up to 1 month past due 20.6 20.7

Up to 2 months past due 11.2 7.3

Up to 3 months past due 5.8 4.1

More than 3 months past due 17.6 13.7

Gross balances 258.8 211.2

Loss allowance (10.8) (12.4)

Total 248.0 198.8

Impairment of other financial assets

The maximum exposure to credit risk at the balance sheet date is the fair value of each class of financial asset reported above.

Other receivables and cash and cash equivalents are also subject to the impairment requirements of IFRS 9, however the identified

impairment loss was not significant. The credit quality of the financial institutions where cash and cash equivalents is held are

as follows:

2021

£’m

2020

£’m

Moody’s rating:

Aa 81.5 176.1

A 107.7 2.2

Baa 1.6 0.3

Total (see note 26) 190.8 178.6

33. Derivative financial instruments

At 31 December 2021:

Contract or underlying

principal amount

Fair value

Assets

£’m

Liabilities

£’m

Assets

£’m

Liabilities

£’m

Interest rate swaps – fair value hedges 92.8 – 1.7 –

Cross-currency swaps – not hedge accounted – (87.6) – ( 1.1)

Foreign currency forward contracts – not hedge accounted 89.6 (77.3) 3.1 (2.1)

Current portion 18 2.4 (164.9) 4.8 (3.2)

Cross-currency swaps – not hedge accounted 228.6 – 6.5 –

Foreign currency forward contracts – not hedge accounted 76.1 (50.6) 3.5 (1.3)

Non-current portion 304.7 (50.6) 10.0 (1.3)

Total 487.1 (215.5) 14.8 (4.5)

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

216

33. Derivative financial instruments continued

At 31 December 2020:

Contract or underlying

principal amount

Fair value

Assets

£’m

Liabilities

£’m

Assets

£’m

Liabilities

£’m

Cross-currency swaps – not hedge accounted – (299.5) – (20.0)

Foreign currency forward contracts – not hedge accounted 182.6 (40.3) 5.4 (1.6)

Current portion 182.6 (339.8) 5.4 (21.6)

Interest rate swaps – fair value hedges 91.6 – 5.1 –

Foreign currency forward contracts – not hedge accounted 172.0 (85.7) 9.9 (0.3)

Non-current portion 263.6 (85.7) 15.0 (0.3)

Total 446.2 (425.5) 20.4 (21.9)

Credit quality of derivative financial assets

The credit quality of derivative financial assets is as follows:

2021

£’m

2020

£’m

Moody’s rating:

Aa 9.0 8.1

A 5.8 12.3

Total 14.8 20.4

The maximum exposure to credit risk at the balance sheet date is the fair value of the derivative financial instruments.

Interest rate swaps

The Group currently holds fixed to floating interest rate swap contracts, denominated in US dollars, that have the economic effect

of converting fixed rate US dollar borrowings into floating rate US dollar borrowings. To the extent they continue to meet the

criteria for hedge accounting, the contracts are accounted for as fair value hedges.

The total notional principal amount of outstanding interest rate swap contracts at 31 December 2021 is USD125m (2020: USD125m)

which will expire in 2022. The weighted average floating rate payable on the swap contracts in 2021 was LIBOR +1.1% (2020: LIBOR

+1.1%). As the critical terms of the interest rate swaps match the underlying hedged loan, there is an expectation that the value

of the hedging instrument and the value of the hedged item will move in the opposite direction. The hedge ratio is therefore

expected to be 1:1.

Any difference recognised in the income statement between movements in the fair value of the interest rate swaps and the fixed

rate borrowings is considered to be hedge ineffectiveness. The fair value hedge ineffectiveness recognised in the year was a

£0.1m charge (2020: £Nil) (see note 9). Possible sources of ineffectiveness arise from changes in the credit risk of either party to the

derivative contract and timing differences on cash flows between the derivative and hedged item.

Cross-currency swaps

The cross-currency swap contracts are used to synthetically convert US dollar denominated floating borrowings into Swiss franc

and euro denominated fixed borrowings to commercially hedge against Swiss franc and euro denominated assets of foreign

subsidiaries. The contracts do not qualify to be hedge accounted.

Foreign currency forward contracts

Although the Group uses foreign currency forward contracts to hedge against foreign currency exposures, it has decided the

costs of meeting the extensive documentation requirements to be able to apply hedge accounting under IFRS 9 “Financial

Instruments” are not merited. Foreign currency forward contracts are analysed as follows:

2021 2020

Assets

£’m

Liabilities

£’m

Assets

£’m

Liabilities

£’m

Fair value:

US dollar/sterling forward sales 6.4 (2.6) 12.7 (1.7)

Forward sales denominated in other currencies 0.3 (0 .7) 2.6 (0.2)

Total 6.7 (3.3) 15.3 (1.9)

Meggitt PLC Annual Report and Accounts 2021

217

Financial Statements

34. Provisions

Provisions

Environmental

(a)

£’m

Onerous

contracts

(b)

£’m

Warranty

costs

(c)

£’m

Other

(d)

£’m

Total

£’m

Environmental

receivables

(a)

£’m

At 1 January 2021 72.7 13.0 16.0 11.2 112.9 (18.8)

Exchange rate adjustments 1.3 0.1 (0.1) (0.1) 1.2 (0.3)

Additional provisions* 29.5 8.2 8.9 3.7 50.3 –

Unused amounts reversed* (1.0) (4.3) (0.3) (5.8) (11.4) 1.0

Charge/(credit) to net finance costs (see notes 12 and

11 respectively) 0.6 – – – 0.6 (0.2)

Transfers from trade and other payables – 1.2 – 1.6 2.8 –

Amounts (utilised)/settled (9.5) (3.1) (5.3) (2.4) (20.3) 3.3

At 31 December 2021 93.6 15.1 19.2 8.2 136.1 (15.0)

2021

£’m

2020

£’m

Current 55.8 32.6

Non-current 80.3 80.3

At 31 December 136.1 112.9

* Amounts in respect of warranty costs, a £5.0m charge in respect of onerous contract provisions and a £2.3m credit in respect of other provisions have been

recognised in cost of sales. All other amounts have been recognised within net operating costs. Additional provisions of £29.5m in respect of environmental

matters have been charged to exceptional operating items (see note 10).

a. The Group’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. In determining the provision to be

recognised, advice is received by the Group from its environmental consultants and legal advisors to assist in the estimate of

the level and timing of remediation costs, including the period for which operations and monitoring (O&M) activities will be

required. These estimates are revised regularly as remediation activities progress and further information is obtained on the

extent of activities for which the Group is responsible. Note 4 describes the Group’s critical accounting estimate in respect of

the £29.5m recorded as a provision in the year.

Provisions are expected to be substantially utilised over the next 20 years and are discounted using an appropriate

discount rate.

The Group has insurance arrangements in place which, together with other agreements with third parties, partly mitigates the

ongoing impact of historical environmental events on the Group. A receivable has been established to the extent these costs

are virtually certain to be recoverable under the Group’s environmental insurance policies or from other parties, typically when

there is a binding signed agreement in place. Movements in the receivable are shown in the table above (see also note 24).

Note 4 describes the Group’s critical accounting estimate in respect of amounts recoverable from historic insurers and other

third parties relating to the matter for which £29.5m has been recorded as a provision in the year.

b. Provision has been made for estimated losses under certain trading contracts. Provisions are expected to be substantially

utilised over the next five years and are not discounted given the short period over which they will be utilised and accordingly

the impact would be immaterial.

c. Provision has been made for product warranty claims. Provisions are expected to be substantially utilised over the next

three years and are not discounted given the short period over which they will be utilised and accordingly the impact would

be immaterial.

d. 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, included within other provisions, for certain claims which cannot be recovered from

insurers. Provisions are expected to be substantially utilised over the next ten years and are discounted, where appropriate,

using a discount rate appropriate to each provision.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

218

35. Deferred tax

Movements in deferred tax assets and liabilities without taking into consideration the offsetting of balances, are analysed below:

Assets

£’m

Liabilities

£’m

Net

£’m

At 1 January 2020 124.2 (256.2) (132.0)

Exchange rate adjustments (3.1) 5.2 2.1

Businesses disposed (0.7) 7.4 6.7

Reclassifications (1.9) 1.9 –

Credit to income statement (see note 13) 6.7 31.9 38.6

Credit to other comprehensive income (see note 13) 12.4 – 12.4

Charge to equity (see note 13) (2.0) – (2.0)

At 31 December 2020 135.6 (209.8) (74.2)

Exchange rate adjustments 1.5 (1.6) (0.1)

Credit to income statement (see note 13) 4.3 19.7 24.0

Charge to other comprehensive income (see note 13) (21.8) – (21.8)

Credit to equity 1.2 – 1.2

At 31 December 2021 120.8 (191 .7) (70.9)

Movements in gross deferred tax assets are analysed as follows:

Assets

Provisions

£’m

Retirement

benefit

obligations

£’m

Contract

liabilities

£’m

Other

(*)

£’m

Total

£’m

At 1 January 2020 30.8 52.2 15.5 25.7 124.2

Exchange rate adjustments (1.1) (0.4) (2.0) 0.4 (3.1)

Businesses disposed (0.5) – (0.9) 0.7 (0.7)

Reclassifications – – – (1.9) (1.9)

Credit/(charge) to income statement 4.9 (1.7) 4.6 (1.1) 6.7

Credit to other comprehensive income – 12.4 – – 12.4

Charge to equity – (1.9) – (0.1) (2.0)

At 31 December 2020 34.1 60.6 17.2 23.7 135.6

Exchange rate adjustments 0.8 0.1 0.2 0.4 1.5

Credit/(charge) to income statement 5.9 (9.5) 0.9 7.0 4.3

Charge to other comprehensive income – (21.8) – – (21.8)

Credit to equity – – – 1.2 1.2

At 31 December 2021 40.8 29.4 18.3 32.3 120.8

* Includes balances arising from temporary differences in relation to accruals, share-based payments, finance costs and derivative financial instruments, none of

which are individually material at either balance sheet date or include any material movements during either year.

Meggitt PLC Annual Report and Accounts 2021

219

Financial Statements

35. Deferred tax continued

Movements in gross deferred tax liabilities are analysed as follows:

Liabilities

Intangible

assets

£’m

Contract

assets

£’m

Accelerated

tax

depreciation

£’m

Total

£’m

At 1 January 2020 (222.4) (10.9) (22.9) (256.2)

Exchange rate adjustments 4.2 0.4 0.6 5.2

Businesses disposed 7.3 – 0.1 7.4

Reclassifications 2.1 – (0.2) 1.9

Credit/(charge) to income statement 30.4 (1.1) 2.6 31.9

At 31 December 2020 (178.4) (11.6) (19.8) (209.8)

Exchange rate adjustments (1.4) (0.1) (0.1) (1.6)

Credit/(charge) to income statement 13.7 0.5 5.5 19.7

At 31 December 2021 (166.1) (11.2) (14.4) (191.7)

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:

2021

£’m

2020

£’m

Deferred tax assets – 19.2

Deferred tax liabilities (70.9) (93.4)

Net balance at 31 December (70.9) (74.2)

Deferred tax liabilities all fall due after more than one year. Deferred tax assets are analysed as follows:

2021

£’m

2020

£’m

To be recovered within one year – 4.4

To be recovered after more than one year – 14.8

Total – 19.2

The Group has unrecognised tax losses of £8.0m (2020: £8.0m) for which no deferred tax asset has been recognised. No asset

has been recognised in respect of these losses, as it is not regarded as probable they will be recovered. Deferred tax assets not

recognised would be recoverable in the event they reverse and suitable taxable profits are available. There are no unremitted

earnings in foreign subsidiaries that would give rise to a tax liability in the event of those subsidiaries remitting their earnings.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

220

36. Retirement benefit obligations

Pension schemes

The Group operates a number of pension schemes for the benefit of its employees. The nature of each scheme which has a

significant impact on the consolidated financial statements is detailed below:

• In the UK, the Group operates a funded defined benefit scheme. This scheme is closed to new members and, following

conclusion of a consultation process with active members of the scheme, the scheme was closed to future accrual for all

members with effect from 6 April 2021. It is a registered scheme and subject to the statutory scheme-specific funding

requirements outlined in UK legislation, including the payment of levies to the Pension Protection Fund. It is established under

trust and the responsibility for its governance lies with the trustees who also agree funding arrangements with the Group.

• In the US, the Group operates three principal defined benefit schemes, each of which is closed to future accrual for all members.

The schemes are tax-qualified pension schemes regulated by the US Internal Revenue Service and the Department of Labor,

and are insured by the Pension Benefit Guarantee Corporation up to certain limits. They are established under, and governed

by, the US Internal Revenue Code of 1986 and the Employee Retirement Income Security Act 1974, including the Pension

Protection Act of 2006. Meggitt is a named fiduciary and plan administrator with the authority to manage the operation of the

schemes. The Group also operates two small unfunded schemes.

• In Switzerland, the Group operates a funded defined benefit scheme which is open to new members and future accrual.

The scheme is a tax-qualified pension plan subject to the Swiss Federal Law on Occupational Retirement, Survivors’ and

Disability Plans which constitutes a legal framework setting out the minimum requirements for occupational pension plans.

Responsibility for its governance lies with a foundation, which is similar in nature to a UK trustee board.

The UK and US schemes provide benefits to members in the form of a guaranteed level of pension payable for life. The benefits

provided depend on a member’s length of service. For the UK scheme, benefits are dependent on salary at the date of closure

to future accrual or average salary over employment in the final years leading up to the date of closure to future accrual, together

with inflation linked to CPI for the period from closure to future accrual to retirement. In the US, the schemes either provide a

benefit linked to salary at the date they were closed to future accrual or provide a fixed benefit for each year of service. The Swiss

scheme has many of the characteristics of a defined contribution scheme, but provides for certain minimum benefits to be

guaranteed to members.

For all funded schemes, benefit payments are made from funds administered by third parties unrelated to the Group. The assets

of such schemes are held in trust funds, or their equivalent, separate from the Group’s finances. For all unfunded schemes, benefit

payments are made by the Group as obligations fall due.

The Group also operates a number of defined contribution schemes under which the Group has no further obligations once

contributions have been made.

Healthcare schemes

The Group has two principal other post-retirement benefit schemes providing medical and life assurance benefits to certain

employees and former employees of Meggitt Aircraft Braking Systems Corporation and Meggitt (Rockmart), Inc. These schemes

are unfunded and closed to new members.

Amounts recognised in the income statement

2021

£’m

2020

£’m

Total charge in respect of defined contribution pension schemes 26.5 19.9

Service cost 6.5 14.5

Past service (credit)/cost (0.2) 0.1

Curtailment gain (8.0) –

Administrative expenses borne directly by schemes 2.5 2.6

Net interest expense on retirement benefit obligations 3.2 4.3

Total charge in respect of defined benefit pension schemes 4.0 21.5

Service cost 0.3 0.7

Net interest expense on retirement benefit obligations 0.9 1.4

Total charge in respect of healthcare schemes 1.2 2.1

Total charge 31.7 43.5

Of the total charge, £25.1m (2020: £35.2m) is included in employee costs (see note 8), of which £14.8m (2020: £19.2m) has been

recognised in cost of sales and £10.3m (2020: £16.0m) in net operating costs. Of the remaining charge, £2.5m (2020: £2.6m) has

been recognised in net operating costs in respect of scheme administration expenses and £4.1m (2020: £5.7m) is recognised in

finance costs (see note 12).

Meggitt PLC Annual Report and Accounts 2021

221

Financial Statements

36. Retirement benefit obligations continued

Amounts recognised in the income statement continued

Following closure of the UK scheme to future accrual, a curtailment gain of £8.0m was recognised in the year (2020: £Nil), which

arises from the reduction in scheme liabilities as a result of breaking the salary and career average revalued earnings revaluation

link for members in service at the date of closure.

The Group has estimated, with the advice of its actuary, that the impact of the High Court ruling in 2020 in respect of the

requirement to provide uplifts to transfer values paid before 26 October 2018 to address inequalities in the calculation of

Guaranteed Minimum Pension obligations is not significant.

Amounts recognised on the balance sheet

2021 2020

pension

scheme

£’m

Overseas*

pension

schemes

£’m

healthcare

schemes

£’m

Total

£’m

pension

scheme

£’m

Overseas*

pension

schemes

£’m

healthcare

schemes

£’m

Total

£’m

Present value of liabilities 899.3 417.3 38.5 1,355.1 961.1 456.1 46.7 1,463.9

Fair value of assets (839.9) (388.1 ) – (1,228.0) (774.5) (394.0) – (1,168.5)

Effect of asset ceiling** – 9.3 – 9.3 – – – –

Retirement benefit obligations 59.4 38.5 38.5 136.4 186.6 62.1 46.7 295.4

* Includes £36.1m (2020: £46.8m) in respect of US schemes.

** The asset ceiling relates to surpluses in one of the Group’s US defined benefit schemes and its Swiss defined benefit scheme, which have not been recognised as

future economic benefits are not available to the Group in the form either of a reduction in contributions or a refund.

Of the total deficit of £136.4m (2020: £295.4m), £52.3m (2020: £61.7m) is in respect of unfunded schemes.

Changes in the present value of retirement benefit obligations

2021 2020

Liabilities

£’m

Assets

£’m

Asset

ceiling

£’m

Total

£’m

Liabilities

£’m

Assets

£’m

Total

£’m

At 1 January 1,463.9 (1,168.5) – 295.4 1,347.5 (1,079.6) 267.9

Exchange rate adjustments 0.8 (0.7) – 0.1 (4.0) 2.2 (1.8)

Service cost 6.8 – – 6.8 15.2 – 15.2

Past service (credit)/cost (0.2) – – (0.2) 0.1 – 0.1

Curtailment gain (8.0) – – (8.0) – – –

Net interest expense (see note 12) 24.6 (20.5) – 4.1 28.4 (22.7) 5.7

Contributions – Group – ( 48.9) – (48.9) – (36.9) (36.9)

Contributions – Members 2.8 (2.8) – – 2.5 (2.5) –

Benefits paid (58.3) 58.3 – – (60.8) 60.8 –

Settlements – – – – (1.1) 1.1 –

Administrative expenses borne directly by schemes – 2.5 – 2.5 – 2.6 2.6

Remeasurement of retirement benefit obligations:

Experience gain (9.4) – – (9.4) (7.8) – (7.8)

Gain from change in demographic assumptions (20.7) – – (20.7) (2.4) – (2.4)

(Gain)/loss from change in financial assumptions (47.2) – – (47.2) 146.3 – 146.3

Return on schemes’ assets excluding amounts

included in finance costs – (47.4) – (47.4) – (93.5) (93.5)

Change in the effect of asset ceiling – – 9.3 9.3 – – –

Total remeasurement (gain)/loss (77.3) (47.4) 9.3 (115.4) 136.1 (93.5) 42.6

At 31 December 1,355.1 (1,228.0) 9.3 136.4 1,463.9 (1,168.5) 295.4

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

222

36. Retirement benefit obligations continued

Analysis of pension scheme assets

2021 2020

Quoted

£’m

Unquoted

£’m

Total

£’m %

Quoted

£’m

Unquoted

£’m

Total

£’m %

Equities 199.1 – 199.1 23.7 208.5 – 208.5 26.9

Government bonds 371.9 – 371.9 44.3 314.5 – 314.5 40.6

Corporate bonds 85.5 0.3 85.8 10.2 102.4 0.5 102.9 13.3

Hedge funds – 41.6 41.6 4.9 – 54.3 54.3 7.0

Property funds – 47.7 47.7 5.7 – 41.6 41.6 5.4

Cash 42.0 – 42.0 5.0 24.4 – 24.4 3.1

Derivative assets/(liabilities) 15.9 23.7 39.6 4.7 8.1 (2.1) 6.0 0.8

Other assets* – 12.2 12.2 1.5 9.0 13.3 22.3 2.9

UK pension scheme 714.4 125.5 839.9 100.0 666.9 107.6 774.5 100.0

Equities 39.3 0.9 4 0.2 10.4 35.1 4.5 39.6 10.1

Government bonds 81.1 – 81.1 21.0 87.6 – 87.6 22.2

Corporate bonds 187.5 – 187.5 48.2 203.3 – 203.3 51.6

Property funds 31.2 2.8 34.0 8.8 28.6 3.7 32.3 8.2

Cash 18.0 – 18.0 4.6 9.0 – 9.0 2.3

Derivative assets 7.8 – 7.8 2.0 5.3 – 5.3 1.3

Other assets* 19.5 – 19.5 5.0 16.9 – 16.9 4.3

Overseas pension schemes 384.4 3.7 388.1 100.0 385.8 8.2 394.0 100.0

Equities 238.4 0.9 239.3 19.5 243.6 4.5 24 8.1 21.2

Government bonds 453.0 – 453.0 36.9 402.1 – 4 02.1 34.4

Corporate bonds 273.0 0.3 273.3 22.2 305.7 0.5 306.2 26.2

Hedge funds – 41.6 41.6 3.4 – 54.3 54.3 4.6

Property funds 31.2 50.5 81.7 6.6 28.6 45.3 73.9 6.3

Cash 60.0 – 60.0 4.9 33.4 – 33.4 2.9

Derivative assets/(liabilities) 23.7 23.7 47.4 3.9 13.4 (2.1) 11.3 1.0

Other assets* 19.5 12.2 31.7 2.6 25.9 13.3 39.2 3.4

Total pension schemes’ assets 1,098.8 129.2 1,228.0 100.0 1,052.7 115.8 1,168.5 100.0

* Other assets principally comprise annuities, mortgages and emerging market debt, no category of which is individually material.

The schemes have no investments in any assets of the Group.

Financial assumptions used to calculate scheme liabilities

2021 2020

pension

scheme

pension

schemes

healthcare

schemes

pension

scheme

pension

schemes

healthcare

schemes

Discount rate* 1.8 2.8 2.8 1.4 2.3 2.3

Inflation rate (RPI) 3.4 n/a n/a 3.0 n/a n/a

Increases to deferred benefits during deferment** 2.7 n/a n/a 2.3 n/a n/a

Increases to pensions in payment** 3.2 n/a n/a 2.9 n/a n/a

Salary increases*** n/a n/a n/a 2.8 n/a n/a

* The discount rate for the Swiss scheme was 0.34% (2020: 0.08%).

** To the extent not overridden by specific scheme rules.

*** No longer relevant following closure of the UK scheme to future accrual with effect from 6 April 2021.

In determining the fair value of scheme liabilities, the Group uses mortality assumptions which are based on published mortality

tables adjusted to reflect the characteristics of the scheme populations.

In the UK, mortality assumptions are based on the most recently published Continuous Mortality Investigation model (the

CMI_20 model) using the default model parameter that since the long-term impacts of COVID-19 on mortality improvements

are still largely unknown, no weighting is applied to actual mortality experience in 2020. Assumptions are adjusted to reflect the

profile of the membership of the scheme, which includes the results of a refreshed analysis of the scheme’s membership used

to support the 2021 triennial actuarial valuation. Allowance has been made for rates of mortality to continue to fall at the rate of

1.25% per annum.

Meggitt PLC Annual Report and Accounts 2021

223

Financial Statements

36. Retirement benefit obligations continued

Financial assumptions used to calculate scheme liabilities continued

In the US, mortality assumptions are based on the PriH-2012 headcount weighted table, for schemes where benefits are not salary-

linked, and the Pri-2012 table for other schemes, with both tables projecting rates of mortality to fall using the 2021 Social Security

Administration’s Intermediate-Cost Projections scale.

In Switzerland, mortality assumptions are based on the BVG/LPP 2020 (Generational) tables with an allowance for rates of mortality

to continue to fall at the rate of 1.25% per annum.

2021 2020

scheme

Years

schemes

Years

Swiss

scheme

Years

scheme

Years

schemes

Years

Swiss

scheme

Years

Member age 45 (life expectancy at age 65) – male 22.9-24.8 21.0-21.9 23.3 23.1-25.0 21.0-21.9 24.5

Member age 45 (life expectancy at age 65) – female 25.5-26.9 23.5-23.7 25.0 25.6-26.9 23.4-23.6 26.5

Member age 65 (current life expectancy) – male 21.6-23.4 19.8-20.7 22.8 21.7-23.6 19.7-20.6 22.7

Member age 65 (current life expectancy) – female 24.0-25.5 22.3-22.6 24.9 24.2-25.5 22.3-22.5 24.8

Details on the sensitivity of scheme liabilities to changes in key assumptions are provided below:

• The impact of either a 50 basis point reduction or increase in discount rate, the average annual movement in discount rates

observed over the last five years, would cause scheme liabilities at 31 December 2021 to either increase by approximately

£114.0m or decrease by approximately £101.0m respectively.

• The impact of a 50 basis point increase in inflation rates would cause scheme liabilities at 31 December 2021 to increase by

approximately £50.0m.

• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December

2021 to increase by approximately £51.0m.

The above sensitivities are based on a change in a single assumption while keeping all other assumptions constant. In practice,

this is unlikely to occur and changes in assumptions may be correlated. When calculating the sensitivity of the defined benefit

obligation to significant actuarial assumptions, the same method of calculating the defined benefit obligation has been used as

when calculating the retirement benefit obligations recognised on the balance sheet. The methods and types of assumptions

used in preparing the sensitivity analysis are consistent with the previous year. The sensitivity for inflation has been increased

from 10 basis points in 2020 to 50 basis points in 2021, given the increases experienced in the current year. No changes have been

considered necessary to any other sensitivity levels.

Risks

The Group is exposed to a number of risks arising from operating its defined benefit pension and healthcare schemes, the most

significant of which are detailed below. The Group has not changed the process used to manage defined benefit scheme risks

during the year unless otherwise stated.

Asset volatility

This risk is partly mitigated by funded schemes investing in matching corporate bonds, such that changes in asset values are

offset by similar changes in the value of scheme liabilities. However, the Group also invests in other asset classes such as equities,

property funds, hedge funds and derivatives where movements in asset values may be uncorrelated to movements in the yields

on high quality corporate bonds. The Group believes that, due to the long-term nature of its scheme liabilities, it is appropriate

to invest in assets which are expected to outperform corporate bonds over this timeframe. Scheme assets are well diversified,

such that the failure of any single investment would not have a material impact on the overall level of assets. Both the UK and US

schemes have purchased equity derivatives which enable the schemes to benefit from equity-like returns, subject to certain caps,

whilst providing an element of protection against falls in equity markets. These derivatives cover approximately 30% of the total

equities held by the schemes and have an average remaining life of 0.7 years at 31 December 2021. The Group actively monitors

how the duration and expected yield of scheme assets match the expected cash outflows arising from its pension obligations.

For each UK and US funded scheme, there is a “glide-path” in place which provides, to the extent the funding position improves,

for asset volatility to be reduced by reduced exposure to return seeking assets and increased investment in bonds with maturities

that match benefit payments as they fall due.

Interest risk

In both the UK and the US, schemes invest in government bonds and corporate bonds as part of their hedging strategy.

Additionally, in the UK, the scheme has invested in cash flow matching credit assets and interest rate derivatives to provide

additional hedging against interest risk exposures. At 31 December 2021, approximately 85% of the interest rate risk on the UK

scheme’s liabilities, measured on a funding basis, is hedged (2020: 80%). In the US, across the three funded schemes, hedging

levels range from 90% to 98% of scheme liabilities measured on a funding basis (2020: 80% to 90%).

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

224

36. Retirement benefit obligations continued

Risks continued

Inflation risk

Following closure of the UK scheme to future accrual with effect from 6 April 2021, it is no longer exposed to salary inflation risk.

Inflation risk in the UK in respect of deferred benefits and pensions in payment is mitigated by caps on the levels of inflation under

the scheme rules. Residual inflation risk (after scheme caps) is mitigated through investing in index linked gilts and inflation rate

derivatives. At 31 December 2021, these assets cover approximately 85% of liabilities measured on a funding basis (2020: 80%).

In the US, schemes do not provide benefits at retirement which are dependent on future salary increases and the impact for the

scheme in Switzerland of salary inflation is not significant. In both the US and Switzerland, schemes provide for no inflation to be

applied to benefits in deferment or retirement. Exposure to inflation on US healthcare costs has been mitigated by freezing Group

contributions to medical costs at 2011 cost levels.

Longevity risk

To the extent life expectancy exceeds the Group’s estimates, the retirement benefit obligations recognised in the consolidated

financial statements would increase. This risk is more significant in the UK scheme, where the average duration of its liabilities is

longer compared to the US schemes and inflationary increases more common, resulting in higher sensitivity to changes in life

expectancy. The Group currently does not use derivatives to mitigate this risk.

Other information

In the UK, the most recent triennial valuation was as at 5 April 2018 at which date the deficit was measured for funding purposes

at £171.8m. As part of this valuation, the Group agreed with the trustees that it would make deficit contributions, which would

increase by approximately 5% each year in the expectation that these payments, together with asset returns, would eliminate

the deficit by August 2023. Following the COVID-19 outbreak, the Group agreed with the trustees to defer four months’ deficit

contributions originally due to be made in 2020 amounting to £9.6m and which are being made over the remainder of the current

recovery plan to August 2023. Deficit contributions recommenced in Q3 of 2020. Under the amended recovery plan, the Group will

make deficit contributions of £40.2m in 2022 and £29.9m in the period to August 2023.

The 2021 triennial valuation at 5 April 2021 is substantially complete and is expected to be finalised in H1 2022. The draft valuation

results indicate an additional funding shortfall, not covered by the deficit payments being made under the existing amended

recovery plan, of approximately £60.0m. This additional shortfall principally arises due to a significant reduction in gilt rates

between the two valuation dates and is equivalent to approximately 1.5 years of additional deficit contributions, based on the

annual deficit payments being made under the existing 2018 recovery plan. Discussions with the trustees to agree the timing of

contributions to meet the additional funding shortfall have not yet been concluded.

The buy-out valuation at the 2018 valuation date was measured at £467.9m. The draft 2021 valuation results indicate an equivalent

buy-out valuation at the 2021 valuation date of approximately £380.0m. These buy-out valuations assume the Group were to

transfer responsibility of the scheme to an insurance company, the Group has no current plans to make such a transfer.

To the extent the present value of future deficit payments agreed as part of the actuarial valuation exceed the scheme accounting

deficit at the balance sheet date, such amounts would be recoverable by the Group under the scheme rules once the last member

has died and accordingly no additional minimum funding liability arises.

In the US, minimum deficit reduction payments are driven by regulations and provide for deficits to be eliminated over periods

up to 15 years. At 31 December 2021, the three funded schemes had funding levels of 81%, 93% and 98% respectively. Absent any

changes in legislation, no deficit contributions are currently expected to be required until 2025. Deficit contributions are expected

to be £0.8m in 2025 and £1.5m in 2026. The present value of deficit payments due under legislation does not exceed the schemes’

deficits at 31 December 2021 and accordingly no additional minimum funding liability arises.

The Swiss scheme has a surplus on a funding basis of £30.0m and no additional minimum funding liability arises.

Estimated total Group contributions expected to be paid to the schemes during 2022 are £47.2m.

The weighted average duration of the schemes’ defined benefit obligations are 18.7 years (UK scheme), 10.5 years (US schemes)

and 17.8 years (Swiss scheme).

Meggitt PLC Annual Report and Accounts 2021

225

Financial Statements

36. Retirement benefit obligations continued

Other information continued

The expected maturity of undiscounted pension and healthcare benefits at 31 December 2021 is as follows:

Pension

schemes

£’m

Healthcare

schemes

£’m

Total

£’m

To be made in 2022 49.3 2.9 52.2

To be made in 2023 50.1 2.8 52.9

To be made in 2024 to 2026 153.3 7.7 161.0

To be made in 2027 to 2031 269.3 10.8 280.1

To be made in 2032 to 2036 271.9 8.5 280.4

To be made in 2037 to 2041 253.4 6.4 259.8

To be made in 2042 to 2046 223.1 4.7 227.8

To be made from 2047 onwards 549.0 7.8 556.8

Total expected benefit payments 1,819.4 51.6 1,871.0

37. Share capital

Ordinary

shares of

5p each

Number ‘m

Nominal

value

£’m

Net

consideration

£’m

Allotted and fully paid:

At 1 January 2020 777.5 38.8

Issued on exercise of Sharesave awards 3.7 0.2 –

At 31 December 2020 781.2 39.0

Issued on exercise of Sharesave awards 0.8 0.1 –

At 31 December 2021 782.0 39.1

The Company does not have an authorised share capital.

38. Share-based payment

The Group operates a number of share schemes for the benefit of its employees. The total expense recognised in net operating

costs in respect of such schemes (see note 8) is analysed as follows:

2021

£’m

2020

£’m

Meggitt Long-Term Incentive Plan 2014 – Equity-settled 3.8 (3.0)

Meggitt Long-Term Incentive Plan 2014 – Cash-settled – (0.1)

Deferred Share Bonus Plan – Equity-settled 0.8 0.3

Deferred Share Bonus Plan – Cash-settled 0.2 –

Sharesave Plans – Equity-settled 0.7 0.3

Total expense/(credit) 5.5 (2.5)

Meggitt Long-Term Incentive Plan 2014: Equity-settled

Under this plan, an annual award of shares may be made to certain senior executives. Two different awards can be granted under

the Plan – Performance Share Awards (PSAs) and Restricted Share Awards (RSAs). The number of shares, if any, that an executive

ultimately receives in respect of a PSA, depends on three performance conditions:

• an earnings per share measure (33% of the award);

• a return on assets measure (33% of the award); and

• a strategic goals measure (33% of the award).

Each of the conditions is measured over a three-year performance period. For RSAs, vesting is subject to a general assessment

by the Remuneration Committee of overall Group performance, together with any wider considerations it considers appropriate.

For both PSAs and RSAs, an employee is generally entitled to a payment at the end of the vesting period, equivalent to dividends

that would have been paid during the vesting period, on any shares that vest. There is no exercise price payable by the employees.

The fair value of the awards made in 2021 has been estimated at the market price of the share on the date of grant, which was

433.2 pence (2020: 579.6 pence).

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

226

38. Share-based payment continued

Meggitt Long-Term Incentive Plan 2014: Equity-settled continued

Movements in the number of outstanding shares that may potentially be released to employees are as follows:

2021

Number of

under

award

outstanding

‘m

2020

Number of

under

award

outstanding

‘m

At 1 January 14.7 16.0

Awarded 3.6 4.1

Exercised (1.0) (2.4)

Lapsed (6.5) (3.0)

At 31 December 10.8 14.7

At 31 December 2021, there are 9.4m PSAs outstanding (2020: 14.7m) and 1.4m RSAs (2020: Nil). At 31 December 2021, 0.6m PSAs

are eligible for release. The remaining 10.2m shares under award have a weighted average life of 385 days until they are eligible

for release.

39. Own shares

Own shares represent shares in the Company that are held by an independently managed Employee Share Ownership Plan

Trust (the trust) formed to acquire shares to be used to satisfy share options and awards under the employee share schemes as

described in the Directors’ remuneration report on pages 126 to 155. At December 2021, the trust holds 2.0m ordinary shares

(2020: 3.8m ordinary shares) which are unallocated, being retained by the trust for future use. The shares are held for the benefit

of employees. Of the shares held at 31 December 2021, 0.8m were issued during 2021 and 1.2m were issued during 2020.

Their market value at 31 December 2021 is £14.4m (2020: £17.6m), representing 0.25% of the issued share capital of the Company

(2020: 0.48%).

40. Contractual commitments

Capital commitments

2021

£’m

2020

£’m

Contracted for but not incurred:

Intangible assets 0.8 3.8

Property, plant and equipment 6.8 24.0

Total 7.6 27.8

Other financial commitments

The Group enters into long-term arrangements with aircraft and original equipment manufacturers for the design and

development of products. 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 and the ultimate commercial viability over a

period which can extend over 35 years. The Directors are satisfied that, at this time, there are no significant contingent liabilities

arising from these commitments. The future estimated expenditure under contractual commitments to incur development costs

at 31 December 2021, is shown in the table below.

2021

£’m

2020

£’m

In one year or less 34.3 33.4

In more than one year but not more than five years 18.2 17.8

In more than five years 10.7 8.9

Total 63.2 60.1

As part of the Scheme Document issued by the Group on 16 August 2021 in connection with the proposed acquisition of the

Group by Parker-Hannifin Corporation, the Group estimated its aggregate fees relating to financial and corporate broking advice

would be £43.0m, which are dependent on whether the acquisition is completed. These amounts have not been recognised in the

consolidated financial statements, but represent a financial commitment of the Group in the event the acquisition is completed.

Meggitt PLC Annual Report and Accounts 2021

227

Financial Statements

41. Contingent liabilities

The Company has given guarantees in respect of credit facilities for certain of its subsidiaries, some property and other leases,

and the performance by some current and former subsidiaries of certain contracts. Also, there are similar guarantees given by

certain other Group companies. The Directors believe that the probability of an outflow of economic benefits arising from the

guarantees is remote.

The Company and various of its subsidiaries are, from time to time, parties to legal proceedings, regulatory investigations

and claims which arise in the ordinary course of business. The Directors do not anticipate that the outcome of these

proceedings, investigations and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s

financial position.

42. Cash inflow from operations

2021

£’m

2020

£’m

Profit/(loss) for the year 31.2 (314.2)

Adjustments for:

Finance income (see note 11) (0.5) (0.5)

Finance costs (see note 12) 32.6 37.2

Tax charge/(credit) (see note 13) 0.1 (19.8)

Depreciation (see note 20) 55.9 56.7

Amortisation (see notes 18 and 19) 134.5 140.6

Impairment losses (see notes 17, 18 and 19) 5.7 361.3

(Gain)/loss on disposal of property, plant and equipment (5.3) 1.4

Loss/(gain) on disposal of businesses (see note 9) 7.3 (32.0)

Costs arising on disposal of businesses (6.7) (3.8)

(Gain)/loss on financial instruments (see note 9) (16.7) 2.9

Impact of retranslating net foreign currency cash at spot rate 0.5 (0.4)

Share of loss after tax of joint venture (see note 21) 0.4 3.2

Retirement benefit obligation deficit payments (42.1) (21.7)

Share-based payment expense/(credit) (see note 38) 5.5 (2.5)

Changes in working capital:

Inventories (32.8) 39.8

Trade and other receivables (43.5) 115.0

Contract assets (2.7) (4.3)

Trade and other payables 16.4 (146.2)

Contract liabilities 12.6 1.7

Provisions 18.8 14.0

Cash inflow from operations 171.2 228.4

The Board uses free cash flow to monitor and measure the underlying trading cash performance of the Group. It excludes

amounts received and/or paid in respect of M&A activity for the reasons set out in note 9a. It is reconciled to cash from operating

activities below:

2021

£’m

2020

£’m

Cash inflow from operating activities 105.3 154.2

Add back cash outflow from business disposal expenses 3.5 5.2

Add back impact of retranslating net foreign currency cash at spot rate (0.5) 0.4

Capitalised development costs (see note 18) (27.6) (41.4)

Capitalised programme participation costs (1.7) (1.6)

Purchase of intangible assets (10. 7) (11.0)

Purchase of property, plant and equipment (net of grants received) (59.0) (78.7)

Proceeds from disposal of property, plant and equipment* 36.4 1.3

Reverse lease premium received – 3.5

Free cash inflow 45.7 31.9

* In 2021, includes £19.4m relating to proceeds from the sale and leaseback of the Group’s Engine Systems facility in North Hollywood, USA and £12.7m relating to

proceeds from the sale and leaseback of the Group’s Airframe Systems facility in Loughborough, UK.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

228

43. Movements in net debt

Bank and

other

borrowings:

Current

£’m

Bank and

other

borrowings:

Non-current

£’m

Lease

liabilities:

Current

£’m

Lease

liabilities:

Non-

current

£’m

Total

debt

£’m

Cash and

cash

equivalents

£’m

Net

debt

£’m

At 1 January 2020 219.4 694.5 16.4 136.2 1,066.5 (155.3) 911.2

Cash inflow from operating activities – – – – – (154.2) (154.2)

Cash outflow from investing activities – – – – – 22.0 22.0

Cash outflow from financing activities* (215.1) 125.5 (11.9) – (101.5) 101.2 (0.3)

Lease liabilities entered – – – 11.4 11.4 – 11.4

Businesses disposed or classified as held for sale – – (1.7) (3.9) (5.6) – (5.6)

Exchange rate adjustments 9.1 (22.2) (0.3) (1.9) (15.3) 7.7 (7.6)

Other movements (2.9) (1.0) 12.2 (12.2) (3.9) – (3.9)

At 31 December 2020 10.5 796.8 14.7 129.6 951.6 (178.6) 773.0

Cash inflow from operating activities – – – – – (105.3) (105.3)

Cash outflow from investing activities – – – – – 47.8 47.8

Cash outflow from financing activities* 0.4 (31.6) (14.9) – (46.1) 44.8 (1.3)

Lease liabilities entered – – 4.0 34.7 38.7 – 38.7

Businesses disposed – – (0.1) – (0.1) – (0.1)

Exchange rate adjustments 0.2 25.5 0.2 0.8 26.7 0.5 27.2

Other movements** 94.2 (94.7) 11.7 (11.7) (0.5) – (0.5)

At 31 December 2021 105.3 696.0 15.6 153.4 970.3 (190.8) 779.5

* Cash flows relating to bank and other borrowings are disclosed in the cash flow statement as proceeds from borrowings of £1.2m (2020: £618.6m), repayments of

borrowings of £30.5m (2020: £705.8m) and debt issue costs paid of £1.9m (2020: £2.4m).

** Other movements includes reclassification of bank and other borrowings from non-current to current of £92.8m, as their maturity date is now less than 12 months

from the balance sheet date.

44. Business disposals

During 2020, the Group agreed the disposal of the trade and assets of its aircraft ducting business, based in Dunstable, UK,

together with a small product line from one of the Group’s other businesses. The related assets were classified as a disposal group

held for sale at 31 December 2020, together with the directly associated liabilities. The disposal subsequently completed on

30 January 2021 for a consideration of £20.4m. Additionally, on 31 August 2021, the Group disposed of a number of product lines

from its power and sensing business based in Toulouse, France for a consideration of 1 euro. In addition, a commercial subsidy

payment by the Group of 9.8m euros was agreed to provide assistance to the buyer to integrate the business; this is payable by

the Group in instalments. The businesses disposed were not major lines of business or geographical areas of operation of the

Group. The net assets of the businesses at the date of disposal were as follows:

Dunstable

operations

£’m

Toulouse

product

lines

£’m

Total

£’m

Property, plant and equipment (see note 20) – 0.5 0.5

Inventories – 0.6 0.6

Lease liabilities – current – (0.1) (0.1)

Assets classified as held for sale (see note 22) 11.7 – 11.7

Net assets disposed 11.7 1.0 12.7

Consideration receivable/(payable) 20.4 (8.3) 12.1

Business disposal expenses payable (1.0) (0.8) (1.8)

Consideration receivable/(payable) net of business disposal expenses 19.4 (9.1) 10.3

Gain/(loss) on disposal 7.7 (10.1) (2.4)

Consideration receivable/(payable) 20.4 (8.3) 12.1

Less deferred consideration payable in future years – 4.6 4.6

Consideration received/(paid) in cash 20.4 (3.7) 16.7

Business disposal expenses paid (1.0) (0.8) (1.8)

Total cash inflow/(outflow) relating to disposals in the year 19.4 (4.5) 14.9

Expenses paid relating to the proposed acquisition of the Group by Parker-Hannifin Corporation (1.1)

Expenses paid relating to disposals in prior years (0.6)

Total cash inflow 13 .2

Meggitt PLC Annual Report and Accounts 2021

229

Financial Statements

Subsidiaries – directly owned

Dunlop Aerospace Limited

Integrated Target Services Limited

KDG Holdings Limited

Meggitt (Pamphill) Limited

Meggitt (Sand) Limited

Meggitt (Wimborne) Limited

Meggitt Engineering Limited

Meggitt International Holdings Limited

Meggitt Pension Trust Limited

Negretti & Zambra Limited

Negretti Limited

Phoenix Travel (Dorset) Limited

The Microsystems Group Limited

Subsidiaries – indirectly owned

Aero-Tech Composites de Mexico, S. de R.L.

de C.V. (Mexico)

Carretera a Zacatecas 5570-1, Parque Industrial Amistad

Sur, Saltillo, Coahuila, 25070

Aircraft Braking Systems Europe Limited

Aircraft Braking Systems Services Limited

Alston Properties, LLC (USA)

1955 N. Surveyor Ave., Simi Valley, California, 93063

Artus SAS (France)

Chemin du Champ des Martyrs, 49240 Avrillé

Atlantic House Pension Trustee Limited

BAJ Coatings Limited

Bells Engineering Limited

Bestobell Aviation Products Limited

Bestobell Engineering Products Limited

Bestobell Insulation Limited

Bestobell Meterflow Limited

Bestobell Mobrey Limited

Bestobell Service Co Limited

Bestobell Sparling Limited

Cavehurst Limited

Dunlop Aerospace Group Limited

Dunlop Aerospace Holdings Limited

Dunlop Aerospace Overseas

Investments Limited

Dunlop Aerospace Overseas Limited

Dunlop Holdings Limited

Dunlop Limited

Europeenne de Conception et d’Etudes

Technologiques SAS (France)

196 rue Louis Rustin, Archamps Technopole,

74160 Archamps

Evershed & Vignoles Limited

Heatric Limited

King Tool International Limited

Meggitt (Baltimore), Inc. (USA)

3310 Carlins Park Drive, Baltimore, Maryland 21215

Meggitt (Canford) Limited

Meggitt (Colehill) Limited

Meggitt (Erlanger), LLC (USA)

1400 Jamike Avenue, Erlanger, Kentucky, 41018

Meggitt (France) SAS (France)

196 rue Louis Rustin, Archamps Technopole,

74160 Archamps

Meggitt (Hurn) Limited

Meggitt (Korea) Limited

Meggitt (North Hollywood), Inc. (USA)

12838 Saticoy Street, North Hollywood,

California 91605

Meggitt (Orange County), Inc. (USA)

4 Marconi, Irvine, California 92618

Meggitt Overseas Limited

Meggitt (Rockmart), Inc. (USA)

669 Goodyear Street, Rockmart, Georgia 30153

Meggitt (San Diego), Inc. (USA)

6650 Top Gun Street, San Diego, California 92121

Meggitt (Sapphire) GmbH (Germany)

Kaiserleistraße 51, 63067 Offenbach

Meggitt (Sapphire) Limited

Meggitt (Sensorex) SAS (France)

196 rue Louis Rustin, Archamps Technopole,

74160 Archamps

Meggitt (Shapwick) Limited

Meggitt (Simi Valley), Inc. (USA)

1955 N. Surveyor Ave., Simi Valley, California, 93063

Meggitt (Tarrant) Limited

Meggitt (Troy), Inc. (USA)

3 Industrial Drive, Troy, Indiana 47588

Meggitt (UK) Limited

Meggitt (Vietnam) Co., Ltd (Vietnam)

#7 Road 16A. Bienhoa Industrial Zone 2

Meggitt (Xiamen) Sensors & Controls Co., Ltd.

(China)

No.230, South 5 Gaoqi Road, Huli District, Xiamen City,

Fujian Province

Meggitt A/S (Denmark)

Porthusvej 4, 3490 Kvistgaard

Meggitt Acquisition Limited

Meggitt Advanced Composites Limited

Meggitt Aerospace Asia Pacific Pte. Ltd.

(Singapore)

1A Seletar Aerospace Link, 797552

Meggitt Aerospace Holdings Limited

Meggitt Aerospace Limited

Meggitt Aircraft Braking Systems Corporation

(USA)

1204 Massillon Road, Akron, Ohio 44306

Meggitt Aircraft Braking Systems Kentucky

Corporation (USA)

190 Corporate Drive, Danville, Kentucky 40422

Meggitt Aircraft Braking Systems Queretaro

S. de R.L. de C.V. (Mexico)

Carretera Estatal 200 Queretaro-Tequisquiapan, Km 22 +

547 Interior A, Parque Aeroespacial, Queretaro, Colon,

Qro., C.P. 76270

Meggitt Asia Pacific Pte. Ltd. (Singapore)

1A Seletar Aerospace Link, 797552

Meggitt Brasil Solucoes de Engenharia Ltda.

(Brazil)

Avenida João Cabral de Mello Neto, No. 850, Suites 815

and 816, Barra da Tijuca, CEP 22.775-057, City and State

of Rio de Janeiro

Meggitt Canada Enterprises Inc. (Canada)

6140 boul. Henri-Bourassa O, Montréal (Québec) H4R3A6

Meggitt Defense Systems, Inc. (USA)

9801 Muirlands Boulevard, Irvine, California 92618

Meggitt Filtration & Transfer Limited

Meggitt Finance (Beta)

Meggitt Finance Limited

Meggitt GmbH (Germany)

Kaiserleistraße 51, 63067 Offenbach

Meggitt Holdings (France) SAS (France)

Chemin du Champ des Martyrs, 49240 Avrillé

Meggitt Holdings (USA) Inc. (USA)

1955 N. Surveyor Ave., Simi Valley, California 93063

Meggitt India Private Limited (India)

901, Brigade Rubix, No.20, HMT Main Road, HMT

Township, Bangalore 560022

Meggitt International Limited

Meggitt Investments Limited

Meggitt-Oregon, Inc. (USA)

2010 Lafayette Avenue, McMinnville, Oregon 97128

Meggitt Properties PLC

Meggitt Queretaro LLC (USA)

1204 Massillon Road, Akron, Ohio 44306

Meggitt SA (Switzerland)

Route de Moncor 4, 1752 Villars-sur-Glâne

Meggitt Safety Systems, Inc. (USA)

1785 Voyager Avenue, Simi Valley, California 93063

Meggitt-USA Services, Inc. (USA)

1955 Surveyor Avenue, Simi Valley, California 93063

Meggitt-USA, Inc. (USA)

1955 N. Surveyor Ave., Simi Valley, California 93063

Miller Insulation and Engineering Limited

(Scotland)

125 West Regent Street, Glasgow, Lanarkshire, G2 2SA

NASCO Aircraft Brake, Inc. (USA)

13300 Estrella Avenue, Gardena, California 90248

OECO, LLC (USA)

4607 SE International Way, Milwaukie, Oregon 97222

Pacific Scientific Company (USA)

1955 N. Surveyor Ave., Simi Valley, California 93063

Park Chemical Company (USA)

1955 Surveyor Avenue, Simi Valley, California 93063

Piher International Limited

Precision Engine Controls Corporation (USA)

11661 Sorrento Valley Road, San Diego,

California 92121

Securaplane Technologies, Inc. (USA)

12350 N. Vistoso Park Road, Oro Valley, Arizona 85755

Serck Aviation Limited

Target Technology Petrel Limited

Tri-scan Limited

Vibro-Meter Limited

Vibro-Meter S.a.r.l (Switzerland)

Route de Moncor 4, 1752 Villars-sur-Glâne

Wallaby Grip (NSW) Ltd (in liquidation) (Australia)

PKF, Level 8, 1 O’Connell Street, Sydney, New South

Wales 2000

Wallaby Grip Australia Pty Limited (in liquidation)

(Australia)

PKF, Level 8, 1 O’Connell Street, Sydney, New South

Wales 2000

Wallaby Grip B.A.E. Ltd (in liquidation) (Australia)

PKF, Level 8, 1 O’Connell Street, Sydney, New South

Wales 2000

45. Related undertakings

In accordance with Section 409 of the Companies Act 2006, a full list of related undertakings as at 31 December 2021 is disclosed

below. Unless otherwise stated, undertakings are incorporated in England & Wales, have their registered office at Pilot Way,

Ansty Business Park, Coventry, England, CV7 9JU, England, and have a single class of ordinary shares with 100% of the equity and

votings rights owned by the Group. No material subsidiaries have been excluded from the consolidation.

Financial Statements

Notes to the consolidated financial statements

continued

Meggitt PLC Annual Report and Accounts 2021

230

45. Related undertakings continued

Subsidiaries – indirectly owned

continued

Wallaby Grip Industries Australia Pty Ltd

(in liquidation) (Australia)

PKF, Level 8, 1 O’Connell Street, Sydney, New South

Wales 2000

Wallaby Grip Limited

Whittaker Aerospace

Whittaker Corporation (USA)

1955 Surveyor Avenue, Simi Valley, California 93063

Whittaker Development Co. (USA)

1955 Surveyor Avenue, Simi Valley, California 93063

Whittaker Ordnance, Inc. (USA)

1955 N. Surveyor Avenue, Simi Valley, California 93063

Whittaker Technical Products, Inc. (USA)

1955 Surveyor Avenue, Simi Valley, California 93063

Zambra Legal Pty Ltd (Australia)

Suite 2, Level 11, 60 Castlereagh Street, Sydney,

New South Wales 2000

Registered branches

Meggitt (Korea) Limited has a branch in

South Korea

Meggitt (Xiamen) Sensors & Controls Co., Ltd.

has a branch in Shanghai

Equity accounted investments

Meggitt UTC Aerospace Systems, LLC (USA)

1400 Jamike Avenue, Erlanger, Kentucky 41018

Parkway-Hamilton Sundstrand Mexico S.

de R.L. de C.V. (Mexico)

Carretera 54 a Zacatecas 5690, Parque Industrial

Amistad Sur Saltillo, Coahuila 25070

HiETA Technologies Limited

Entities not included in the

consolidation

Private company limited by

guarantee without share capital

Meggitt Pension Plan Trustees Limited

Registered charity

Evershed Ayrton Fund

Joint venture

Valley Association Corporation (USA)

1204 Massillon Road, Akron, Ohio 44306

Notes

1 Ownership held as ordinary B shares (50%).

2 Ownership held as quota interest (100%).

3 Entity has taken the audit exemption under Section

479A of the Companies Act 2006 for the financial year

ended 31 December 2021.

4 Ownership held as deferred shares (55.55%) and

ordinary shares (44.45%).

5 Ownership held as ordinary A shares (60%) and

ordinary B shares (40%).

6 Ownership held as common stock (100%).

7 Ownership held as membership interest (100%).

8 Ownership held as owner’s capital (100%).

9 Ownership held as registered capital (100%).

10 Ownership held as common stock (33.33%).

11 Ownership held as ordinary shares (33.33%).

12 Ownership held as class A common shares (100%).

13 Ownership held as membership interest (70%).

14 Subsidiary of Meggitt UTC Aerospace Systems which

holds a quota interest (99.97%).

Meggitt PLC Annual Report and Accounts 2021

231

Financial Statements

Notes

2021

£’m

2020

£’m

Non-current assets

Intangible assets 4 25.1 36.1

Property, plant and equipment 5 3.6 0.4

Investments 6 2,082.5 2,078.8

Derivative financial instruments 10 10.1 15.1

Deferred tax assets 11 20.3 37.8

2,141.6 2,168.2

Current assets

Other receivables 7 1,481.1 1,451.4

Derivative financial instruments 10 6.4 5.2

Current tax recoverable – 0.1

Cash and cash equivalents 57.2 27.7

1,544.7 1,484.4

Total assets 3,686.3 3,652.6

Current liabilities

Trade and other payables 8 (171.6) (99.0)

Derivative financial instruments 10 (5.4) (29.2)

Current tax liabilities (6.9) (8.4)

Lease liabilities (0.1) (0.5)

Bank and other borrowings 9 (7.5) (7.4)

(191.5) (144.5)

Net current assets 1,353.2 1,339.9

Non-current liabilities

Derivative financial instruments 10 (3.0) (6.2)

Lease liabilities (0.3) –

Bank and other borrowings 9 (444.1) (439.0)

Provisions – (0.2)

Retirement benefit obligations 12 (59.4) (186.6)

(506.8) (632.0)

Total liabilities (698.3) (776.5)

Net assets 2,988.0 2,876.1

Equity

Share capital 13 39.1 39.0

Share premium 1,227.8 1,226.6

Capital redemption reserve 1.6 1.6

Other reserves 17.5 17.5

Retained earnings:

At 1 January 1,591.4 1,460.3

Profit for the year attributable to owners of the Company 31.5 177.0

Other changes in retained earnings 79.1 (45.9)

Total equity attributable to owners of the Company 2,988.0 2,876.1

The financial statements on pages 232 to 242 were approved by the Board of Directors on 2 March 2022 and signed on its

behalf by:

A Wood L Burdett

Director Director

Financial Statements

Company balance sheet

At 31 December 2021

Meggitt PLC Annual Report and Accounts 2021

232

Notes

Equity attributable to owners of the Company

capital

£’m

premium

£’m

Capital

redemption

reserve

£’m

Other

reserves*

£’m

Retained

earnings

£’m

Total

equity

£’m

At 1 January 2020 38.8 1,226.5 1.6 17.5 1,460.3 2,744.7

Profit for the year – – – – 177.0 177.0

Other comprehensive expense for the year:

Remeasurement of retirement benefit obligations 12 – – – – (54.1) (54.1)

Other comprehensive expense before tax – – – – (54.1) (54.1)

Tax credit 11 – – – – 12.1 12.1

Other comprehensive expense for the year – – – – (42.0) (42.0)

Total comprehensive income for the year – – – – 135.0 135.0

Employee share schemes:

Value of subsidiary employee services – – – – (3.0) (3.0)

Value of services provided – – – – (0.6) (0.6)

Issue of equity share capital 0.2 0.1 – – (0.3) –

At 31 December 2020 39.0 1,226.6 1.6 17.5 1,591.4 2,876.1

Profit for the year – – – – 31.5 31.5

Other comprehensive income for the year:

Remeasurement of retirement benefit obligations 12 – – – – 84.3 84.3

Other comprehensive income before tax – – – – 84.3 84.3

Tax charge 11 – – – – (15.8) (15.8)

Other comprehensive income for the year – – – – 68.5 68.5

Total comprehensive income for the year – – – – 100.0 100.0

Employee share schemes:

Value of subsidiary employee services – – – – 10.0 10.0

Value of services provided – – – – 1.9 1.9

Issue of equity share capital 0.1 1.2 – – (1.3) –

At 31 December 2021 39.1 1,227.8 1.6 17.5 1,702.0 2,988.0

* Other reserves relate to the cancellation of the Company’s share premium account in 1988, which was transferred to a non-distributable capital reserve.

Company statement of changes in equity

For the year ended 31 December 2021

Meggitt PLC Annual Report and Accounts 2021

233

Financial Statements

1. Basis of preparation

The financial statements of the Company have been prepared in accordance with Financial Reporting Standard 101, “Reduced

Disclosure Framework” (FRS 101). In preparing these financial statements, the Company applies the recognition, measurement

and disclosure requirements of International Financial Reporting Standards as adopted by the UK (UK adopted international

accounting standards), but makes amendments where necessary in order to comply with the Companies Act 2006 and has taken

advantage of the following disclosure exemptions permitted by FRS 101:

• Paragraphs 10(d), 111 and 134–136 of IAS 1 “Presentation of financial statements”.

• IAS 7 “Statement of cash flows”.

• Paragraph 17 of IAS 24, “Related party disclosures”.

• The requirements in IAS 24 “Related party disclosures to disclose related party transactions entered into between two or more

members of a group”.

• Paragraphs 45(b) and 46–52 of IFRS 2, “Share-based payment”.

• IFRS 7 “Financial Instruments: Disclosures”.

The Company has taken advantage of the legal dispensation contained in Section 408 of the Companies Act 2006 allowing it not

to publish a separate income statement and related notes and not to publish a separate statement of comprehensive income.

These financial statements have been prepared under the historical cost convention, as modified by the revaluation of derivative

financial assets and liabilities measured at fair value through profit or loss, and in accordance with the Companies Act 2006.

In making a judgement as to whether the going concern principle should be adopted, the Directors have considered the period

starting with the date these financial statements were approved by the Board and ending on 31 March 2023. Further details on the

considerations made by the Directors are disclosed in note 1 to the Group’s consolidated financial statements on pages 176 to 177.

2. Summary of significant accounting policies

The principal accounting policies adopted by the Company in the preparation of the financial statements are set out below.

These policies have been applied consistently to all years presented unless stated otherwise.

Foreign currencies

The Company’s financial statements are presented in pounds sterling. Transactions in foreign currencies are recorded at exchange

rates prevailing at the dates of the transactions. Monetary assets and liabilities, denominated in foreign currencies are reported

at exchange rates prevailing at the balance sheet date. Exchange differences on retranslating monetary assets and liabilities are

recognised in the income statement.

Investments

Investments in subsidiaries are stated at cost less accumulated impairment losses, except for investments acquired before

1 January 1988 where Section 612 merger relief has been taken and investments are stated at the nominal value of the shares

issued in consideration, using the deemed cost exemption in IFRS 1 on transition to FRS 101.

Intangible assets

Intangible assets, which comprise software, are recorded at cost less accumulated amortisation and impairment losses.

Amortisation is charged on a straight-line basis over the estimated useful economic lives of the assets, commencing with the date

the assets are available for use, typically over periods up to five years. Residual values and useful lives are reviewed annually and

adjusted if appropriate.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation and impairment losses. Cost includes

expenditure directly attributable to the acquisition of the asset.

For right-of-use assets, cost comprises an amount equal to the initial lease liability recognised, adjusted to include any payments

made for the right to use the asset, initial direct costs incurred and estimated costs for dismantling, removing and restoring the

asset at the end of the lease term.

Depreciation is charged on astraight-line basis over the estimated useful economic lives of the assets, commencing with the date

the assets are available for use, as follows:

Right-of-use assets Shorter of the useful economic life of the asset and the lease term

Plant and equipment 3 to 5 years

Motor vehicles 5 years

Residual values and useful lives are reviewed annually and adjusted if appropriate. When items of property, plant and equipment

are disposed, the difference between sale proceeds, net of related costs, and the carrying value of the asset is recognised in the

income statement.

Financial Statements

Notes to the financial statements of the Company

Meggitt PLC Annual Report and Accounts 2021

234

2. Summary of significant accounting policies continued

Impairment of non-current, non-financial assets

At each balance sheet date, the Company reviews the carrying amounts of its non-current, non-financial assets to determine

whether there is any indication that those assets are impaired. If any such indication exists, the recoverable amount of the asset is

estimated in order to determine the extent of any impairment loss. Where it is not possible to estimate the recoverable amount of

an individual asset, the Company estimates the recoverable amount of the cash-generating unit (CGU) to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future

pre-tax cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of

the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or

CGU is reduced to its recoverable amount.

Any impairment loss is recognised immediately in the income statement. Where an impairment loss is no longer required, it is

reversed with a corresponding credit to the income statement.

Other receivables

Other receivables are initially recognised at fair value and subsequently measured at amortised cost less any impairment losses.

The Company applies the IFRS 9 simplified approach to measuring expected credit losses (ECLs), which uses a lifetime expected

loss allowance. To measure ECLs, other receivables have been grouped based on shared credit risk characteristics and their

ageing. For amounts owed by subsidiary undertakings, which are repayable on demand, ECLs are based on the assumption that

repayment is demanded at the balance sheet date. The subsidiary undertaking’s access to sufficient accessible highly liquid

assets in order to repay the amounts due if demanded at the balance sheet date is assessed. The expected manner of recovery is

considered when measuring ECLs.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at call with banks. Bank overdrafts are disclosed as current

liabilities, within bank and other borrowings, except where the Company participates in offset arrangements with certain banks

whereby cash and overdraft amounts are offset against each other.

Taxation

Current tax is based on taxable profit for the year, calculated using tax rates enacted or substantively enacted at the balance

sheet date.

Deferred tax is provided in full using the liability method on temporary differences between the tax bases of assets and liabilities

and their corresponding book values as recognised in the Company’s financial statements. It is calculated using tax rates enacted

or substantively enacted at the balance sheet date. Deferred tax assets are recognised only to the extent it is probable that

taxable profits will be available against which deductible temporary differences can be utilised.

Current tax and deferred tax are recognised in the income statement, other comprehensive income or directly in equity

depending on where the item to which they relate has been recognised.

Retirement benefit schemes

For the Company’s defined benefit scheme, pension costs are charged to the income statement in accordance with the advice of

qualified independent actuaries. Past service credits and costs and curtailment gains and losses are recognised immediately in

the income statement.

Retirement benefit obligations represent the difference between the fair value of the scheme assets and the present value

of the scheme defined benefit obligations measured at the balance sheet date. The defined benefit obligation is measured

annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation

is determined by discounting the defined benefit obligations using interest rates of high quality UK corporate bonds with terms

to maturity comparable with the terms of the related defined benefit obligations. Where the assets of a scheme exceed its

liabilities, the surplus recognised is restricted to the lower of this amount and the future economic benefits to which the Company

has an unconditional right to receive either in the form of reduced contributions or a cash refund. Where the Company has a

statutory or contractual minimum funding requirement to make contributions to a scheme in respect of past service and any

such contributions are not available to the Company once paid (as a reduction in future contributions or as a refund, to which the

Company has an unconditional right either during the life of the scheme or when the scheme liabilities are settled), an additional

liability for such amounts is recognised.

Remeasurement gains and losses are recognised in the year in which they arise in other comprehensive income.

For defined contribution schemes, payments are recognised in the income statement when they fall due. The Company has no

further obligations once the contributions have been paid.

Meggitt PLC Annual Report and Accounts 2021

235

Financial Statements

2. Summary of significant accounting policies continued

Share-based compensation

The Company operates a number of share-based compensation schemes, which are subject to non-market based vesting

conditions and are principally equity-settled.

For equity-settled schemes, at the date of grant, the Company estimates the number of awards expected to vest as a result of

vesting conditions and the fair value of this estimated number of awards is recognised as an expense in the income statement on

a straight-line basis over the period for which services are received. At each balance sheet date, the Company revises its estimate

of the number of awards expected to vest and adjusts the amount recognised cumulatively in the income statement to reflect

the revised estimate. When awards are exercised and the Company issues new shares, the proceeds received, net of any directly

attributable transaction costs, are credited to share capital (nominal value) and share premium.

The grant by the Company of options over its equity instruments to employees of subsidiary undertakings, is treated as a capital

contribution. The fair value of the awards made is recognised, over the vesting period, as an increase in investment in subsidiary

undertakings, with a corresponding credit to retained earnings.

Derivative financial instruments and hedging

Derivative financial instruments are initially recognised at fair value on the date the derivative contract is entered into and are

subsequently measured at fair value at each balance sheet date using values determined indirectly from quoted prices that are

observable for the asset or liability.

To the extent the maturity of the derivative financial instruments are more than 12months from the balance sheet date, they are

classified as non-current assets or non-current liabilities. All other derivative financial instruments are classified as current assets or

current liabilities.

The Company utilises a large 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 in order to apply hedge accounting under

IFRS 9 “Financial Instruments” are not merited. Therefore changes in fair value are recognised immediately in the income statement.

Borrowings

Borrowings are initially recognised at fair value, being proceeds received less directly attributable transaction costs incurred.

Borrowings are generally subsequently held at amortised cost at each balance sheet date with any transaction costs amortised to

the income statement over the period of the borrowings using the effective interest method.

Any related interest accruals are included within borrowings. Borrowings are classified 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.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are deducted from the

proceeds recorded in equity.

Own shares represent shares in the Company that are held by an independently managed Employee Share Ownership Plan.

Consideration paid for own shares, including any incremental directly attributable costs, is recorded as a deduction from retained

earnings. Details of own shares in the Company are disclosed in note 39 to the Group’s consolidated financial statements.

Dividends

Interim dividends are recognised when paid to shareholders. Final dividends are recognised when approved by the shareholders.

Details of dividends paid and proposed by the Company are disclosed in note 15 to the Group’s consolidated financial statements.

Adoption of new and revised accounting standards

Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 for interest rate benchmark (IBOR) reform became effective in the

year. The effect of these amendments on the Company’s committed syndicated credit facility and interest rate swaps is disclosed in

note 2 to the Group’s consolidated financial statements on page 187.

In addition, some of the Company’s intercompany loan agreements which are used to manage liquidity between the UK and

overseas subsidiaries referenced LIBORs at 31 December 2020. For GBP, CHF, EUR and USD loans, these have been amended

in the year to reference SONIA, SARON, EURIBOR and SOFR respectively. For GBP, CHF and EUR loans the rate switch date is

specified as 31 December 2021, for USD loans the rate switch date is to be a date to be agreed between the parties with a long

stop date of 30 June 2023.

No other accounting standards, amendments or revisions to existing standards, or interpretations have become effective or

have been published as mandatory for future accounting periods which had or will have a significant effect on the Company’s

financial statements.

Notes to the financial statements of the Company

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

236

3. Critical accounting estimates and judgements

In applying the Company’s accounting policies set out in note 2, the Company is required to make certain estimates and

judgements concerning the future. These estimates and judgements are regularly reviewed and revised as necessary.

The estimates and judgements that have the most significant effect on the amounts included in the financial statements are

described below.

Critical accounting 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 and the rate at which liabilities are discounted. External actuarial advice is taken with regard to the

most appropriate assumptions to use. Further details on these estimates, and sensitivities of the retirement benefit obligations to

these estimates, are disclosed in note 12.

Critical accounting judgements

There are no critical judgements for the current year. The Company previously disclosed in its 2020 Annual Report, a critical

accounting judgement relating to the Directors’ assessment that the adoption of the going concern basis in the financial statements

was appropriate. For the reasons set out in note 1, to the Group’s consolidated financial statements on pages 176 to 177, this is no

longer considered a critical judgment for the current year.

4. Intangible assets

Software

£’m

At 1 January 2020

Cost 89.4

Accumulated amortisation (46.0)

Net book amount 43.4

Year ended 31 December 2020

Opening net book amount 43.4

Additions 2.9

Disposals (0.3)

Amortisation (9.9)

Net book amount 36.1

At 1 January 2021

Cost 92.0

Accumulated amortisation (55.9)

Net book amount 36.1

Year ended 31 December 2021

Opening net book amount 36.1

Additions 3.6

Disposals (2.8)

Amortisation (9.8)

Impairment losses (2.0)

Net book amount 25.1

At 31 December 2021

Cost 95.1

Accumulated amortisation (70.0)

Net book amount 25.1

Meggitt PLC Annual Report and Accounts 2021

237

Financial Statements

5. Property, plant and equipment

2021 2020

Plant,

equipment

and vehicles

£’m

Other

£’m

Total

£’m

Plant,

equipment and

vehicles

£’m

Other

£’m

Total

£’m

Cost 9.5 1.5 11.0 6.2 1.9 8.1

Accumulated depreciation (6.3) (1.1) (7.4) (6.2) (1.5) (7.7)

Net book amount 3.2 0.4 3 .6 – 0.4 0.4

6. Investments

2021

£’m

2020

£’m

Shares in subsidiary undertakings:

At 1 January 2,078.8 2,082.7

Contributions to/(from) subsidiary undertakings 3.7 (3.9)

At 31 December 2,082.5 2,078.8

Each year, the Company carries out impairment tests of its investments which require estimates to be made of the value in use

of its CGUs and groups of CGUs. The value-in-use calculations are dependent on estimates of future cash flows, long-term

growth rates and appropriate discount rates to be applied to future cash flows. Having modelled a number of sensitivities, it

was 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.

A list of all subsidiary undertakings is disclosed in note 45 to the Group’s consolidated financial statements on pages 230 to 231.

7. Other receivables

2021

£’m

2020

£’m

Amounts owed by subsidiary undertakings 1,478.4 1,450.8

Prepayments 1.6 0.4

Other 1.1 0.2

Total 1,481.1 1,451.4

Amounts owed by subsidiary undertakings are unsecured and are stated net of amounts due to subsidiary undertakings, where a

right of set off exists. Within amounts owed by subsidiary undertakings are amounts totalling £1,401.2m (2020: £1,358.3m) which

are interest bearing, have no fixed date for repayment and are repayable on demand.

Amounts owed by subsidiary undertakings are stated net of a loss allowance of £1.7m (2020: £1.7m). Each year, the Company

performs an assessment of recoverability of amounts owed by subsidiary undertakings in accordance with IFRS 9 requirements.

The Company does not believe there is a significant risk of a material adjustment to the loss allowance recognised in respect of

these receivables in the next 12 months.

8. Trade and other payables – current

2021

£’m

2020

£’m

Trade payables 1.3 1.7

Amounts owed to subsidiary undertakings 157.2 90.6

Social security and other taxes 2.3 0.5

Accrued expenses 5.6 4.1

Other payables 5.2 2.1

Total 171.6 99.0

Amounts owed to subsidiary undertakings are unsecured, non-interest bearing, have no fixed date for repayment and are

repayable on demand.

Notes to the financial statements of the Company

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

238

9. Bank and other borrowings

2021

£’m

2020

£’m

Other loans – current 7.5 7.4

Bank loans – debt costs non-current (0.9) –

Other loans – non-current 445.0 439.0

Total 451.6 446.4

Analysis of bank and other borrowings repayable:

In one year or less 7.5 7.4

In more than one year but not more than five years 444.1 219.5

In more than five years – 219.5

Total 451.6 446.4

Analysis of bank and other borrowings:

Drawn under committed facilities 445.4 439.5

Less unamortised debt issue costs (1.3) (0.5)

Interest accruals 7.5 7.4

Total 451.6 446.4

Debt issue costs are amortised over the period of the facility to which they relate. The Company has no secured borrowings

(2020: £Nil).

The Company has the following committed facilities at notional value:

2021 2020 (restated)*

Drawn

£’m

Undrawn

£’m

Total

£’m

Drawn

£’m

Undrawn

£’m

Total

£’m

Syndicated credit facility: USD410.0m (2020: USD750.0m) – 304.4 304.4 – 549.4 549.4

2016 Senior notes: USD600.0m 445.4 – 445.4 439.5 – 439.5

Committed facilities 445.4 304.4 749.8 439.5 549.4 988.9

The committed facilities expire as follows:

In more than one year but not more than five years 445.4 304.4 749.8 219.8 549.4 769.2

In more than five years – – – 219.7 – 219.7

Committed facilities 445.4 304.4 749.8 439.5 549.4 988.9

* Prior year figures have been restated to incorporate the undrawn USD750.0m syndicated credit facility, under which the Company was an eligible borrower at

31 December 2020.

Further details of the committed facilities are disclosed in note 31 to the Group’s consolidated financial statements on pages 211

to 213.

The Company also has various uncommitted facilities with its relationship banks. No amounts had been drawn under these

facilities at 31 December 2021 (2020: £Nil).

The fair value of bank and other borrowings is as follows:

2021 2020

Book

value

£’m

Fair

value

£’m

Book

value

£’m

Fair

value

£’m

Current 7.5 7.5 7.4 7.4

Non-current 444.1 443.4 439.0 452.7

Total 451.6 450.9 446.4 460.1

Meggitt PLC Annual Report and Accounts 2021

239

Financial Statements

9. Bank and other borrowings continued

All borrowings are subject to interest at fixed rates. The interest rate exposure on bank and other borrowings is:

2021 2020

Total

£’m

Weighted

average

interest

rate

Weighted

average

period

for which

rate is fixed

Years

Total

£’m

Weighted

average

interest

rate

Weighted

average

period

for which

rate is fixed

Years

US dollar denominated other loans 452.9 3.5% 3.0 446.9 3.5 4.0

Less unamortised debt issue costs (1.3) (0.5)

Bank and other borrowings 451.6 446.4

The weighted average interest rate reflects the relative impact of interest rates based on the principal amounts and the duration

of borrowings.

10. Derivative financial instruments

2021 2020

Assets

£’m

Liabilities

£’m

Assets

£’m

Liabilities

£’m

Interest rate swaps 1.7 – – –

Cross-currency swaps – (1.1) – (20.0)

Foreign currency forward contracts 4.7 (4.3) 5.2 (9.2)

Current portion 6.4 (5.4) 5.2 (29.2)

Interest rate swaps – – 5.1 –

Cross-currency swaps 6.5 – – –

Foreign currency forward contracts 3.6 (3.0) 10.0 (6.2)

Non-current portion 10.1 (3.0) 15.1 (6.2)

Total 16.5 (8.4) 20.3 (35.4)

The Company does not use hedge accounting for any of its derivative financial instruments. It is exempt from certain FRS 101

disclosures as the Group’s consolidated financial statements provide the disclosures required by IFRS 7 (see note 33 to the Group’s

consolidated financial statements on pages 216 to 217).

The gain recorded in the income statement, recognised in net operating costs, arising from the measurement at fair value of

derivative financial instruments, is £23.0m (2020: loss £7.3m).

The contract or underlying principal amount of foreign currency forward contracts in respect of derivative financial assets is

£233.6m (2020: £443.1m) and in respect of derivative financial liabilities is £220.6m (2020: £362.1m).

The fair value of foreign currency forward contracts is analysed as follows:

2021 2020

Assets

£’m

Liabilities

£’m

Assets

£’m

Liabilities

£’m

US dollar forward sales and purchases (USD/£) 7.8 (6.2) 13.0 (11.2)

Forward sales and purchases denominated in other currencies 0.5 (0.9) 2.2 (4.2)

Fair value 8.3 (7.1) 15.2 (15.4)

11. Deferred tax

Deferred tax assets are analysed as follows:

2021

£’m

2020

£’m

To be recovered within one year 16.3 6.8

To be recovered after more than one year 4.0 31.0

Total 20.3 37.8

Notes to the financial statements of the Company

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

240

11. Deferred tax continued

Movements in deferred tax assets during the year are as follows:

Assets

Retirement

benefit

obligations

£’m

Other

£’m

Total

£’m

At 1 January 2020 25.8 1.6 27.4

Charge to income statement (2.4) (0.7) (3.1)

Credit to other comprehensive income 12.1 – 12.1

Credit to equity – 1.4 1.4

At 31 December 2020 35.5 2.3 37.8

(Charge)/credit to income statement (8.0) 5.0 (3.0)

Charge to other comprehensive income (15.8) – (15.8)

Credit to equity – 1.3 1.3

At 31 December 2021 11.7 8.6 20.3

There are no unremitted earnings in foreign subsidiaries that would give rise to a tax liability in the event of those subsidiaries

remitting theirearnings.

12. Retirement benefit obligations

The Company is the sponsoring employer of the Meggitt Pension Plan, a funded defined benefit plan. Each participating company

in the Meggitt Pension Plan bears employer contributions in respect of future service. No other amounts are recharged by the

Company to any other participating employer. The Company has recognised the total deficit in respect of the Meggitt Pension

Plan in these financial statements. Further details on the plan are disclosed in note 36 to the Group’s consolidated financial

statements on pages 221 to 226 in respect of the UK scheme.

The total charge to net operating expenses in respect of the defined contribution scheme in which employees of the Company

participate is £2.6m (2020: £2.0m).

Changes in the present value of retirement benefit obligations are as follows:

2021 2020

Liabilities*

£’m

Assets**

£’m

Total

£’m

Liabilities*

£’m

Assets**

£’m

Total

£’m

At 1 January 961.1 (774.5) 186.6 855.7 (705.1) 150.6

Service cost 1.9 – 1 .9 7.8 – 7.8

Past service cost – – – 0.1 – 0.1

Curtailment gain (8.0) – (8.0) – – –

Net interest cost 16.6 (14.4) 2.2 17.3 (14.6) 2.7

Contributions – Company – (39.9) (39.9) – (29.6) (29.6)

Benefits paid ( 30.9) 30.9 – (29.5) 29.5 –

Administrative expenses borne directly by scheme – 0.9 0.9 – 0.9 0.9

Remeasurement of retirement benefit obligations:

Experience gain (13.5) – (13.5) – – –

Gain from change in demographic assumptions (4.5) – (4.5) (1.6) – (1.6)

(Gain)/loss from change in financial assumptions (23.4) – (23.4) 111.3 – 111.3

Return on scheme assets excluding amounts included in

finance costs – (42.9) (42.9) – (55.6) (55.6)

Total remeasurement (gain)/loss (41.4) (42.9) (84.3) 109.7 (55.6) 54.1

At 31 December 899.3 (839.9) 59.4 961.1 (774.5) 186.6

* Present value of scheme liabilities.

** Fair value of scheme assets.

Details on the sensitivity of scheme liabilities to changes in assumptions are provided below:

• The impact of either a 50 basis point reduction or increase in discount rate would cause scheme liabilities at 31 December 2021

to either increase by approximately £86.0m or decrease by approximately £76.0m respectively.

• The impact of a 50 basis point increase in inflation rates would cause scheme liabilities at 31 December 2021 to increase by

approximately £48.0m.

• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December

2021 to increase by approximately £35.0m.

Meggitt PLC Annual Report and Accounts 2021

241

Financial Statements

12. Retirement benefit obligations continued

Sensitivity analyses are based on a change in a single assumption while keeping all other assumptions constant. In practice, this is

unlikely to occur, and changes in assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation

to significant actuarial assumptions, the same method of calculating the defined benefit obligation has been used as when

calculating the retirement benefit obligations recognised on the balance sheet. The methods and types of assumptions used in

preparing the sensitivity analysisare consistent with the previous year. The sensitivity for inflation has been increased from 10 basis

points in 2020 to 50 basis points in 2021, given the increases experienced in the current year. No changes have been considered

necessary to any other sensitivity levels.

The weighted average duration of the defined benefit obligation is 18.7 years. The expected maturity of undiscounted pension

benefits at 31 December 2021 is as follows:

Total

£’m

To be made in 2022 24.4

To be made in 2023 25.4

To be made in 2024 to 2026 82.6

To be made in 2027 to 2031 161.0

To be made in 2032 to 2036 180.0

To be made in 2037 to 2041 181.2

To be made in 2042 to 2046 170.2

To be made from 2047 onwards 4 58.0

Total 1,282.8

13. Share capital

Disclosures in respect of share capital of the Company are provided in note 37 to the Group’s consolidated financial statements on

page 226.

14. Share-based payment

Share awards have been granted to employees of the Company under various plans. Details of the general terms and conditions

of each share-based payment plan are provided in the Directors’ remuneration report on pages 126 to 155. Disclosure is also made

in the Group’s consolidated financial statements in note 38 on pages 226 to 227.

15. Commitments and contingencies

The Company has no capital commitments (2020: Nil). Details of contingent liabilities impacting the Company are disclosed in

note 41 to the Group’s consolidated financial statements on page 228.

16. Other information

Directors’ remuneration

Details of the remuneration paid to Directors of the Company are provided in the Directors’ remuneration report on pages 126

to 155.

Auditors’ remuneration

Remuneration payable to PricewaterhouseCoopers LLP for the audit of the Company was £29,800 (2020: £27,000).

Employee information

2021

£’m

2020

£’m

Wages and salaries 26.3 21.0

Social security costs 4.6 4.2

Retirement benefit (credit)/expense (3.5) 9.9

Share-based payment expense/(credit) 1.9 (0.6)

Employee costs including Executive Directors 29.3 34.5

The average number of persons employed by the Company in the year was 327 (2020: 278).

Notes to the financial statements of the Company

continued

Financial Statements

Meggitt PLC Annual Report and Accounts 2021

242

2021

£’m

2020

£’m

2019

£’m

2018

£’m

2017

£’m

Revenue and profit

Revenue 1,489.2 1,684.1 2,276.2 2,080.6 1,994.4

Underlying profit before tax 149.3 159.5 370.3 334.8 320.2

Amounts arising on the acquisition, disposal and closure of businesses (7.3) 32.0 23.5 25.1 25.3

Amortisation of intangible assets acquired in business combinations (80.1) (88.2) (89.8) (91.5) (93.5)

Financial instruments 16.7 (2.9) 15.0 (10.1) 60.7

Exceptional operating items (43.2) (428.7) (26.2) (34.2) (73.1)

Net interest expense on retirement benefit obligations (4.1) (5.7) (6.1) (8.0) (11.3)

(Loss)/profit before tax 31.3 (334.0) 286.7 216.1 228.3

Earnings and dividends

(Loss)/earnings per share – basic 4.0p (40.4)p 28.8p 23.2p 37.8p

Earnings per share – underlying 15.4p 16.5p 37.3p 34.2p 32.0p

Dividends per ordinary share in respect of the year – – 5.55p 16.65p 15.85p

Gearing ratio

Net debt as apercentage of total equity 36.1% 38.0% 37.1% 43.1% 45.9%

Five-year record

Meggitt PLC Annual Report and Accounts 2021

243

Other Information

Contacts

Investor relations

E: investors@meggitt.com

Information on Meggitt PLC, including the latest share price: www.meggitt.com

Shareholder enquiries

Registrar:

Computershare Investor

Services PLC

The Pavilions

Bridgwater Road

Bristol BS99 6ZZ

T: 0370 703 6210

W: www.investorcentre.co.uk/

contactus

Enquiries about the following matters should be addressed to Meggitt PLC’s registrar:

• Change of address notification.

• Lost share certificates.

• Dividend payment enquiries.

• Dividend mandate instructions. Shareholders may have their dividends paid directly

into their bank or building society accounts by completing a dividend mandate

form. Dividend confirmations are sent directly to shareholders’ registered addresses.

Quarterly statements will be available online at www.investorcentre.co.uk. Shareholders will

need their Shareholder Reference Number (SRN) and registered address details to get started.

Statements will be available from 30 April, 31 July, 31 October and 31 January each year.

• Amalgamation of shareholdings. Shareholders who receive more than one copy of the Annual

Report areinvited to amalgamate their accounts on the share register.

Shareholders can view and manage their shareholdings online at www.investorcentre.co.uk,

including updating address records, making dividend payment enquiries, updating dividend

mandates and viewing the latest share price. Shareholders will need their Shareholder Reference

Number, which can be found on their share certificate or arecent dividend tax voucher or dividend

confirmation, to access this site. Once signed up to Investor Centre, an activation code may be sent

to the shareholder’s registered address to enable the shareholder to manage their holding.

Other useful contacts Share dealing services are provided for shareholders by Computershare Investor Services PLC.

Theseservices are provided online, to access these services shareholdersshould have their SRN

and log onto www.computershare.com/dealing/uk.

ShareGift (www.sharegift.org, registered charity number 1052686): PO Box 72253, London, SW1P

9LQ (0207 930 3737). ShareGift, the independent share donation charity, is especially useful for

those who maywant to dispose of asmall number of shares which are uneconomic to sell on their

own. Shares whichhave been donated to ShareGift are aggregated and sold when practicable, with

the proceeds passedon to awide range of UK registered charities.

Other Information

Investor information

Meggitt PLC Annual Report and Accounts 2021

244

FAQs on the impact of the proposed acquisition of Meggitt by Parker-Hannifin

How will the proposed

acquisition affect the

ordinary shares I hold

in Meggitt?

On completion of the acquisition, all Meggitt share certificates will become invalid and should

be destroyed.

Shareholders will automatically receive payment for their shares, by cheque or direct into their

bank account if the distribution payment is £250,000 or more (bank details must be registered with

Computershare for direct payments).

Alternatively, shareholders who hold their shares in Crest will receive their payment electronically

directly through the Crest payment system.

I have lost my share

certificate, do I need to

get a new one before the

acquisition completes?

No. On completion shareholders will automatically receive payment for their Meggitt shares.

Shareholders only need to obtain a new share certificate if they are planning to sell or transfer the

shares to someone else before the acquisition completes.

When will payment

be made?

Completion is currently expected to occur in Q3 2022 and payment is expected approximately

14days from the effective date.

If shareholders do not receive payment within 14 days from completion they should contact

Computershare on 0370 703 6210.

Do I need to take

any action?

Yes.

1. Shareholders should ensure that their details registered with Computershare are accurate and

up-to-date.

– Shareholders can update their details online at www.investorcentre.co.uk. To access this site

shareholders will need their Shareholder Reference Number which can be found on their share

certificate or a recent dividend confirmation voucher. Alternatively they can call Computershare

on 0370 703 6210.

– Shareholders who will receive a distribution payment of £250,000 or more will need to provide

consent for Computershare to use their bank details to make the payment. Computershare will

contact affected shareholders separately to obtain consent.

2. Capital gains taxes could accrue in certain jurisdictions between the value of the shares when

originally purchased/exercised an award and the value of the shares when Parker-Hannifin buys

them. For capital gains purposes, shareholders should check their records of all transactions in

Meggitt shares to make sure they can calculate any capital gains tax due. This is a personal tax

liability and Meggitt cannot make this calculation for you.

Shareholders should seek independent financial advice if they are unsure as to their tax position.

Meggitt is not authorised to provide tax advice in any form.

I’m an overseas

shareholder, will I get

acheque in GBP?

Yes, shareholders will receive a cheque in GBP or payment direct into their bank account if

the distribution payment is £250,000 or more (and if their bank details have been registered

with Computershare).

Meggitt PLC Annual Report and Accounts 2021

245

Other Information

401(k) An employer-sponsored defined-

contribution pension in the

UnitedStates

ADS Aerospace, Defence, Security and

Space Organisation

Aftermarket (AM) Spares and repairs

AGM Annual General Meeting

AR&T Applied research and technology

ASK Available seat kilometres

AOG Aircraft on ground

BAME Black, Asian, and Minority Ethnic

Basis point One-hundredth of a percent

Board Board of Directors

Book to bill The ratio of orders received to revenue

recognised in a period

BSI British Standards Institution

Business jets Aircraft used for non-commercial

operations

CAA Civil Aviation Authority

CAGR Compound annual growth rate

Capability Expertise in technology and

manufacturing

CARES act Coronavirus Aid, Relief and Economic

Security act

CFC Controlled Foreign Company

CGU Cash-generating unit

CHF Swiss franc

CI Continuous improvement

CO2 Carbon dioxide

2018 Code UK Corporate Governance Code 2018

CODM Chief operating decision maker

Company Meggitt PLC

Condition-monitoring Monitoring the condition of aerospace

and land-based turbines and

supporting equipment to predict wear

and tear, promoting safety, up-time and

planned maintenance

Continuing Resolution Appropriations legislation restricting

modification from prior-year funding

patterns

CR Corporate Responsibility

CREST Certificateless Registry for Electronic

ShareTransfer

D&A Depreciation and amortisation

DECC Department of Energy & Climate

Change

DEFRA Department for Environment, Food &

RuralAffairs

DFARS (US) Defense Federal Acquisition

Relation Supplement

DLA Daily layered accountability, the

nervous systemof Meggitt’s High

Performance System, DLAis a

multi-layered structure of interlocking

meetings at the start of each working

day that flows fresh, accurate

performance and operational

information up and down the business

enabling problems to be solved quickly

by those best equipped to do so

DoD (United States) Department of Defense

DPPM Defective parts per million, ameasure

of quality

DRIP Dividend reinvestment plan

DGTR Disclosure Guidance and Transparency

Rules

EBITA Earnings Before Interest, Tax

andAmortisation

EBITDA Earnings Before Interest, Tax,

Depreciation andAmortisation

E&C Ethics & Compliance

ECR (US) Export Controls Reform

ECL Expected Credit Loss

EPS Earnings per Share

ERG Employee Resource Group

ESG Environment, Social & Governance

ETES Electro-thermal Energy Storage

EU European Union

eVTOL Electric vertical take-off and landing

Executive Committee Assists the Chief Executive to develop

and implement the Group’s strategy,

manage operations and discharge

responsibilities delegated by the Board

FCA Financial Conduct Authority

FIFO First-in first-out

FIRST For Inspiration and Recognition of

Science and Technology

FOC Free of charge

FVLCOD Fair Value Less Cost of Disposal

FRC Financial Reporting Council

FRS Financial Reporting Standard

FTSE Share index of companies listed on the

LondonStock Exchange

GAAP Generally Accepted Accounting

Practice

GBP British pound or pound sterling

GDP Gross domestic product

GDPR General Data Protection Regulation

GHG Greenhouse gas

Group Meggitt PLC and its subsidiaries

HMRC HM Revenue & Customs

HSE Health, Safety & Environment

HPC High Performance Culture (HPC) – our

chosen culture, with a particular focus

on diversity & inclusion and improved

employee engagement, to accelerate

execution of our strategy

HPS High Performance System (HPS) –

our new Emerging Stronger plan for

Outstanding Operations, which

replaced the Meggitt Production

System (MPS) in 2021

IAS International Accounting Standards

IATA The International Air Transport

Association

IBOR Inter Bank Offered Rate

IET Institution of Engineering and

Technology

IFBEC International Forum on Business Ethical

Conduct

Glossary

Meggitt PLC Annual Report and Accounts 2021

246

IFRS International Financial Reporting

Standards

Installed base The sum total of the Meggitt products

and sub-systems installed on

customers’ equipment

IR Investor Relations

IP Intellectual property

ISA International Standards on Auditing

Jet Zero Council (JZC) Partnership between industry and

government bringing together

ministers and chief executive officer-

level stakeholders to drive the

ambitious delivery of new technologies

and innovative ways to cut aviation

emissions

KPI Key performance indicator

Large jets Commercial aircraft with greater than

100 seats

Lean A method for the continual elimination

of waste within a manufacturing system

LIBOR London Inter-Bank Offered Rate

LNG Liquefied Natural Gas

LTIP Long-Term Incentive Plan

M&A Mergers and acquisitions

MPS Meggitt Production System (MPS) –

Replaced by our High Performance

System in 2021

Mix The impact on performance of

revenue streams with higher or lower

profitability growing at differing rates

MoD UK Ministry of Defence

MPP Meggitt Pension Plan

MRO Maintenance, repair and overhaul

NBAA National Business Aviation Association

Net borrowings Net debt adjusted to exclude lease

liabilities

NHS National health Service

NPI New product introduction

O&M Operations and monitoring

OE Original equipment

OECD Organisation for Economic

Cooperation and Development

OEM Original equipment manufacturer

Operations excellence A system of tools and processes that

embraces the way in which every

aspect of Meggitt is managed from the

factory floor to all functions and every

level of leadership from supervisors to

the Group Executive Committee

Organic growth Growth excluding the impact of

currency and acquisitions and disposals

of businesses

OSHA Occupational Safety and Health

Administration

OTD On-time delivery

PBT Profit before tax

PCHE Printed circuit heat exchanger – a block

of flat, diffusion bonded plates on to

which fluid flow channels have been

chemically milled

PFEP Plan for every part

Platform Aircraft or ground vehicle model

incorporating Meggitt products

PMO Project management office

PPC Programme Participation Cost

Programme The production and utilisation lifecycle

of an aircraft model or ground vehicle

PwC PricewaterhouseCoopers LLP

RDT&E Research Development Test and

Evaluation

R&D Research and development

RCF Revolving Credit Facility

REACH Registration, Evaluation and

Authorisation of Chemicals

RECs Renewable Energy Credits

Regional aircraft Commercial aircraft with fewer than

100 seats

Registrar Computershare Investor Services PLC

RIDDOR The Reporting of Injuries, Diseases and

Dangerous Occurrences Regulations

RMU Retrofit, modification and upgrade

RNS Regulatory News Service

announcement

ROCE Return on capital employed

ROTA Return on trading assets

RPH Retirement Plan Headcount

RPK Revenue Passenger Kilometers

SAP The Group’s selected enterprise

management system

SAF Sustainable Aviation Fuels

Sell-side Refers to the part of the financial

industry that is involved in the creation,

promotion, and sale of stocks, bonds,

foreign exchange, and other financial

instruments

Shipset Value of Meggitt’s content on

aircraft platforms

SIP Share Incentive Plan

SOC Service Organisation Control

SRN Shareholder Reference Number

STIP Short-Term Incentive Plan

TCFD Taskforce on Climate-related Financial

Disclosures

TRIR Total recordable injury rate

TSR Total shareholder return

UAV Unmanned aerial vehicle

UN SDG United Nations Sustainable

Development Goals

UKLA UK Listing Authority

USD United States dollar

Ventilator Challenge A consortium led rapid production of

ventilators to help patients hospitalised

with COVID-19

WACC Weighted average cost of capital

WBCSD World Business Council for Sustainable

Development

WIP Work in Progress

WRI World Resources Institute

Meggitt PLC Annual Report and Accounts 2021

247

Other Information

Notes

Meggitt PLC Annual Report and Accounts 2021

248

Designed and produced by Radley Yeldar www.ry.com

This annual report is printed on Chorus Silk. The manufacturers of Chorus Silk hold ISO 9001 & ISO 14001 certifications and

are also FSC & PEFC certified. This report is printed by Pureprint is a CarbonNeutral® company. Both manufacturing mill and

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Meggitt PLC

Ansty Business Park

Pilot Way

Coventry

CV7 9JU

United Kingdom

T +44 (0)24 7682 6900

www.meggitt.com

Registered in England and Wales

Company number 432989

Annual Report and Accounts 2021