Melrose Industries delivers 23% profit growth, stronger margins and a cash flow inflection
Melrose Industries has posted a strong set of 2025 numbers. Revenue rose 8% to £3,589 million, adjusted operating profit jumped 23% to £647 million, and margins expanded 240bps to 18.0%. Free cash flow swung to a £125 million inflow (after interest and tax) – a clear turning point for the Group.
Shareholders get rewarded too: the final dividend is lifted 20% to 4.8p, taking the full-year payout to 7.2p, and a new £175 million 12‑month buyback has been announced. Net debt finished at £1,407 million with leverage at 1.8x, comfortably inside the 1.5-2.0x target range.
My take: why these results matter
- Margins are doing the heavy lifting. An 18.0% adjusted operating margin shows the multi‑year transformation is feeding through.
- Cash generation has turned positive despite a tough supply chain backdrop and tariff noise earlier in the year. That supports the higher dividend and continued buybacks.
- Engines is the star performer with 31.9% margins and strong aftermarket – the higher quality earnings mix investors typically prize.
- Airframes is improving, led by Defence, but civil OE variability and one underperforming Dutch site tempered margin progress. There’s a plan to fix it in 2026.
Key numbers at a glance
| Metric | 2025 | 2024 |
|---|---|---|
| Revenue | £3,589 million | £3,468 million |
| Adjusted operating profit | £647 million | £540 million |
| Adjusted operating margin | 18.0% | 15.6% |
| Adjusted diluted EPS | 32.1p | 26.4p |
| Free cash flow (after interest and tax) | £125 million | £(74) million |
| Dividend per share | 7.2p | 6.0p |
| Net debt | £1,407 million | £1,321 million |
| Leverage | 1.8x | 1.9x |
Engines: high-margin growth, aftermarket strength
The Engines division delivered 15% revenue growth to £1,632 million and a 27% rise in adjusted operating profit to £520 million. Margins stepped up 300bps to 31.9%, helped by both OE and aftermarket, plus variable consideration from RRSP contracts of £324 million (in line with guidance).
Operationally, Melrose advanced its proprietary additive fabrication capability. The Fan Case Mount Ring for the PW1500G reached 100% serial production, and capacity is being added in Newington (Connecticut), Norway and Sweden. Repairs also accelerated in H2, with new and extended contracts across Rolls‑Royce, Pratt & Whitney and Boeing, and the San Diego facility is now fully operational.
On Defence, the business deepened ties with Sweden’s FMV, including work on the RM16 and a c.£12 million contract to develop a clean‑sheet UAV demonstrator. A watch item is the PW1100G powder metal issue: total cash cost is still expected to be around £200 million, with c.£50 million in 2026.
Airframes: Defence outperforms; civil still choppy
Previously “Structures”, the Airframes division grew revenue 3% like‑for‑like to £1,957 million and lifted adjusted operating profit 10% to £156 million. Margins nudged up 80bps to 8.0%. Defence rose 15% after decisive commercial actions – over 90% of the portfolio is now sustainably priced – while civil was marginally lower amid OE rate variability and supply chain challenges.
There’s a clear improvement plan for a lower‑productivity site in the Netherlands. Commercially, the division signed multi‑year contracts with BAE Systems (Typhoon canopies) and Lockheed Martin (C‑130J nacelles), expanded its partnership with Archer on the Midnight electric aircraft, and teamed up with Anduril UK on future Defence UAV capabilities.
Cash, balance sheet and shareholder returns
Free cash flow of £125 million marks an important “inflection point” after two years of heavy restructuring and investment. Inventory remains high, but management is targeting working capital release in 2026 under its “Brilliant Basics” lean programme.
Net debt stands at £1,407 million and leverage at 1.8x. Interest cover is 6.9x. Capital allocation remains clear: invest for growth, grow the ordinary dividend, and return surplus via buybacks. With £192 million completed of the current £250 million buyback by year‑end 2025, Melrose has now announced a fresh £175 million programme to March 2027.
2026 guidance: more growth, second-half weighted
- Group revenue: £3.75 billion to £3.95 billion (c.10% LFL growth at the mid‑point).
- Adjusted operating profit: £700 million to £750 million (c.19% margin at the mid‑point).
- Free cash flow: £150 million to £200 million (after interest and tax).
- Variable consideration: £340 million to £380 million, mainly dependent on OE build rates of key engine programmes.
- Seasonality: profit and cash second‑half weighted. Guidance assumes US$1.37/£.
By division, Engines guidance is revenue of £1,700‑£1,800 million and adjusted operating profit of £565‑£595 million; Airframes is £2,050‑£2,150 million revenue and £170‑£190 million profit. Engines margins are expected to be higher in the first half, in line with usual phasing.
Strategic context: defence upshift and aftermarket tailwinds
Melrose sits in structural growth markets. Defence budgets are rising, and the company has content on major platforms including F‑35, Gripen and C‑130. In civil, order books remain deep, even as the supply chain stays fragile. The resolution of US/UK and US/EU zero‑tariff arrangements for civil aerospace in 2025 should help stability.
The aftermarket backdrop is favourable: 2025 flight hours rose 4.8%, with >6% CAGR expected 2025‑2030, and shop visit demand remains strong. That supports Melrose’s high‑margin repair and RRSP portfolios.
What I’m watching in 2026
- Execution on OE ramp‑ups and the pace of working capital release, especially inventory.
- Delivery of variable consideration within the £340‑£380 million range as build rates step up.
- Progress on the Netherlands Airframes site productivity plan.
- PW1100G powder metal cash costs of c.£50 million in 2026 – still within the c.£200 million total.
- Supply chain resilience and any fresh trade restrictions (not assumed in guidance).
Longer-term targets and outlook
Management reiterated 2029 targets of £5 billion revenue, £1.2+ billion adjusted operating profit and £600 million free cash flow (at US$1.25/£). With transformation largely complete and strong positions across Engines and Airframes, the path is now about execution – production ramp‑ups, aftermarket expansion, and continued margin progress.
Overall, this is a confident update. Engines is firing, Defence is driving Airframes, cash generation has turned, and shareholder returns are stepping up. The operational to‑do list is clear, but the momentum into 2026 looks solid.
