Melrose Industries (LON:MRO) reported double-digit revenue and operating-profit growth for the first half of 2026, supported by demand in civil aerospace and defense, while an incident at its Garden Grove facility in California created uncertainty around production timing, exceptional costs and shareholder returns.
Group revenue rose 10% on a constant-currency basis, while operating profit increased 16% to nearly £350 million. CFO Ross McCluskey said the company generated positive free cash flow of £13 million, a £67 million improvement from the prior-year period, despite a £50 million net cash outflow related to factoring.
Garden Grove disruption weighs on outlook
The company’s results were affected by a thermal incident at its Garden Grove aerospace acrylic facility at the end of May. The issue occurred in a storage tank containing methyl methacrylate, or MMA, a chemical used in acrylic production.
Melrose said production was halted immediately and nearby residents and businesses were evacuated. The company said there were no reported injuries, contamination or leaks. About 500 employees have returned to work on the manufacturing side of the site, producing aerospace transparencies using existing materials and third-party acrylic supplies, while the company works with regulators to restart base-acrylic production.
Garden Grove produces aerospace transparencies, including fighter-jet canopies and passenger-cabin windows. Melrose said the site has proprietary acrylic-production technology and has received support from the U.S. government, including a $150 million expansion intended to double F-35 output.
The incident reduced first-half group revenue by £16 million and operating profit by £9 million, McCluskey said. Excluding Garden Grove, the company said revenue would have increased 11% and operating profit would have risen 19%.
For the second half, Melrose expects the site to operate at about 50% of its normal monthly revenue level until full acrylic production resumes. It estimated a resulting revenue, profit and cash impact of about £6 million per month, reflecting higher costs for bought-in acrylic and a shift in business mix toward repairs.
The company recorded £13 million of exceptional profit-and-loss costs related to the incident in the first half, including £5 million paid in cash. It expects a further £25 million to £30 million of exceptional costs in the second half, excluding potential legal, regulatory, compensation-program and insurance effects.
McCluskey said all of the expected second-half exceptional costs were cash costs, although some payment terms could extend into 2027. Melrose is also considering compensation for disruption caused by the evacuation and is addressing legal cases related to the incident.
Given the remaining uncertainty, the company paused its current £175 million share-buyback program after spending £12 million under that authorization. Melrose returned about £130 million to shareholders during the first half, including £60 million in dividends and the remainder through buybacks.
Engines leads first-half growth
The Engines division delivered revenue growth of 19%, with original-equipment revenue increasing 23% and aftermarket revenue continuing at mid-teen rates. Operating profit in the division rose 21%, while margin expanded 40 basis points, or 100 basis points excluding variable consideration.
Civil risk-and-revenue-sharing programs, or RRSPs, grew 18%, with growth on the GTF, GEnx and V2500 platforms. Variable consideration reached £206 million in the first half, in line with Melrose’s full-year expectation of £340 million to £380 million.
Government partnership revenue increased 29%, driven primarily by work on the RM12 engine for the Gripen fighter, including delivery of the first upgraded engine to the Swedish Armed Forces under the enhanced performance program. Repairs revenue grew 27%, aided by higher fan-blade volumes.
Melrose said it recently expanded its GTF scope through an agreement with Pratt & Whitney covering low-pressure compressor vanes on the 1500 and 1900 engine platforms. The company also cited multi-year repair agreements with Rolls-Royce and Pratt & Whitney and investments in blade-manufacturing capacity in North Charleston.
Airframes growth affected by Garden Grove
Airframes revenue rose 4% on a reported basis, while profit declined 1%. Excluding Garden Grove, revenue growth would have been 6% and profit growth 13%, according to the company.
Defense revenue in Airframes increased 14%, led by F-35, C-130 and NH90 work, as well as pricing actions. Civil revenue was down marginally, primarily because of lower customer inventory on the Airbus A320 platform. Revenue from wide-body aircraft benefited from momentum on the A350, while business-jet revenue remained solid despite supply-chain constraints.
Melrose said underlying Airframes margin improved 50 basis points excluding Garden Grove. The business achieved a 3-percentage-point productivity improvement and a 12% reduction in the cost of poor quality during the first half.
The company said Airbus and Boeing recorded more than 1,300 new orders combined in the first half and both manufacturers posted double-digit delivery increases, which Melrose said pointed to a gradual easing of broader supply-chain constraints.
Guidance maintained before Garden Grove effects
Melrose reiterated its 2026 guidance excluding the impact of Garden Grove. It expects revenue of £3.75 billion to £3.95 billion, pre-Garden Grove operating profit of £700 million to £750 million, and underlying free cash flow of £150 million to £200 million.
Chief Executive Peter Dilnot said the company continues to see strong structural demand in civil aerospace and defense, with industry supply rather than demand representing the main challenge. He said roughly 90% of expected value creation through the next several years is expected to come from existing platform positions, with targeted new opportunities such as additive fabrication accounting for about 10% of the company’s financial plan to 2029.
Melrose maintained its confidence in reaching £600 million of free cash flow in 2029. Dilnot said the key drivers are rising operating profit, growing cash generation from the company’s RRSP portfolio and the GTF program becoming cash positive in 2028.
About Melrose Industries (LON:MRO)
Melrose Industries PLC, together with its subsidiaries, provides aerospace components and systems to civil and defence markets in the United Kingdom, rest of Europe, North America, and internationally. The company operates through two segments, Engines and Structures. The Engines segment offers structural engineered components; parts repair; and commercial and aftermarket contracts to engines original equipment manufacturers. The Structures segment provides civil and defence air frames, including lightweight composite and metallic structures; and electrical distribution systems and components to airframe original equipment manufacturers.
