Melrose half-year results: Engines growth meets Garden Grove uncertainty

Melrose Industries PLC delivered a strong underlying performance in the first half of 2026, led by rapid growth in its Engines division and a welcome improvement in cash flow.

Revenue rose 10% at constant currency to £1,873 million, while adjusted operating profit increased 16% to £347 million. The adjusted operating margin also moved 50 basis points higher to 18.5%.

Those figures show continued momentum in the aerospace and defence business. However, the chemical tank incident at Melrose's Garden Grove facility has introduced significant uncertainty around full-year performance, legal costs and shareholder returns.

Melrose half-year results at a glance

Metric	H1 2026	H1 2025	Change
Revenue	£1,873 million	£1,720 million	10%
Adjusted operating profit	£347 million	£310 million	16%
Adjusted operating margin	18.5%	18.0%	50bps
Adjusted profit before tax	£282 million	£248 million	18%
Adjusted diluted EPS	17.7p	15.1p	22%
Free cash flow	£13 million	£(54) million	£67 million improvement
Interim dividend per share	2.7p	2.4p	13%

Adjusted figures exclude items that management considers significant, volatile or non-trading. Growth rates are stated at constant currency, which removes the effect of exchange-rate movements.

The interim dividend will increase 13% to 2.7p per share. It is due to be paid on 25 September 2026 to shareholders on the register at the close of business on 14 August 2026.

Investors can read the complete numbers in the original company announcement.

Engines remains the main growth driver

Engines was once again the standout division. Revenue increased 19% to £896 million, with original equipment sales up 23% and aftermarket revenue growing 15%.

Adjusted operating profit rose 21% to £303 million, while the margin improved from 33.4% to 33.8%.

Engines	H1 2026	H1 2025	Change
Revenue	£896 million	£781 million	19%
Adjusted operating profit	£303 million	£261 million	21%
Adjusted operating margin	33.8%	33.4%	40bps

Growth was spread across new engine production, repairs, governmental work and Melrose's risk and revenue sharing partnerships, known as RRSPs. Under these arrangements, the group shares certain programme risks and receives a proportion of future engine-related revenue.

Variable consideration from RRSP contracts increased to £206 million from £182 million. Melrose also signed multi-year fan blade repair agreements involving Rolls-Royce and Pratt & Whitney, while continuing to invest in capacity and additive fabrication technology.

This division matters because it combines exposure to new aircraft production with aftermarket demand generated as engines require maintenance and repair. Its 33.8% margin also remains substantially above the margin earned by Airframes.

Airframes growth was held back by Garden Grove

Airframes revenue increased 4% to £977 million. Defence revenue grew 14%, supported by demand across programmes including the F-35, C-130 and NH90, while Civil revenue declined 1%.

Adjusted operating profit slipped 1% to £62 million and the margin fell from 6.7% to 6.3%.

Airframes	H1 2026	H1 2025	Change
Revenue	£977 million	£939 million	4%
Adjusted operating profit	£62 million	£63 million	-1%
Adjusted operating margin	6.3%	6.7%	-40bps

The reported division-wide result does not tell the whole story. Excluding the Garden Grove impact, Airframes revenue growth would have been 6% and its operating margin would have increased to 7.2%.

Melrose also reported improving output and productivity at its Netherlands operations following production transfers. Its Brilliant Basics lean operating model contributed to better inventory management, with group days inventory outstanding down 5% year on year.

Garden Grove is the central risk

A thermal incident involving a chemical tank occurred at the US Garden Grove facility at the end of May. The site temporarily closed and the surrounding area was evacuated.

Partial production has resumed, but Melrose expects the facility to operate at around 50% of normal capacity until full production is authorised. The first-half impact was a £16 million reduction in revenue and a £9 million reduction in adjusted operating profit.

The group also recognised £13 million of exceptional response, recovery and advisory costs.

While production remains restricted, Melrose says monthly revenue, operating profit and cash will be reduced by approximately £6 million. It also expects additional exceptional costs of between £25 million and £30 million during the second half.

The wider financial exposure is not yet disclosed. Melrose is dealing with regulatory enquiries, investigations and more than 30 civil litigation actions. It is also assessing a potential compensation programme for local residents and businesses, while its insurance position remains under review.

That uncertainty explains why the current £175 million share buyback has been paused. By the end of June, Melrose had completed £70 million of buybacks during 2026, including £12 million under the current programme.

Cash flow improved, but net debt increased

Free cash flow moved from a £54 million outflow to a £13 million inflow. Before factoring, it improved by £113 million to an inflow of £28 million.

Factoring involves selling eligible customer invoices to bring cash receipts forward. Melrose's factoring balance declined from £396 million at the end of 2025 to £387 million.

Net debt nevertheless increased from £1,407 million to £1,530 million. This reflected £130 million returned to shareholders through dividends and buybacks, alongside £19 million of adverse foreign exchange and other non-cash movements.

Leverage remained at 1.8 times EBITDA, within management's target range of 1.5 to 2.0 times. The balance sheet therefore appears manageable based on the disclosed figures, but Garden Grove creates an additional call on cash that has not yet been fully quantified.

Why statutory profit fell sharply

Statutory operating profit dropped from £441 million to £154 million, while statutory diluted earnings per share fell from 22.2p to 6.0p.

The biggest reason was the treatment of derivative contracts used to manage foreign exchange exposure. Melrose recorded a £56 million loss on derivatives and associated financial items, compared with a £267 million gain in the previous period.

These movements can be volatile, which is why management excludes them from adjusted performance. Even so, the considerable gap between statutory and adjusted earnings is worth noting rather than simply looking past.

Guidance is unchanged, with an important exclusion

Full-year guidance remains unchanged only when the impact of Garden Grove is excluded.

Full-year 2026 guidance excluding Garden Grove	Range
Group revenue	£3,750 million to £3,950 million
Adjusted operating profit	£700 million to £750 million
Adjusted operating margin at midpoint	Approximately 19%
Variable consideration	£340 million to £380 million
Free cash flow	£150 million to £200 million

The assumptions include an average exchange rate of £1 to US$1.37. Factoring is expected to contribute a net cash inflow of £30 million to £50 million within the free cash flow target.

For comparison with the group's previous progress, see my article on Melrose's 2025 results, dividend increase and buyback.

Strong operations, but investors need Garden Grove clarity

The underlying first-half performance was encouraging. Engines delivered strong growth, group margins expanded and free cash flow improved materially. The dividend increase also indicates confidence in the core business.

Garden Grove is the clear negative. Reduced production is already affecting revenue and profit, further exceptional costs are coming, and the eventual regulatory, legal, compensation and insurance outcomes remain uncertain.

The next important update will therefore be less about whether aerospace demand remains supportive and more about the timetable for restoring full production, the total cash cost of the incident and whether Melrose can resume its paused buyback programme.