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UPDATE 2-Engineering group Meggitt axes dividend as profit slumps

* Suspends 2020 interim dividend

* Overall sales drop 14%, but defence sales grows 7%

* Expects to be free cash flow neutral for full year

* Shares down about 3% after having earlier risen 5% (Adds analyst comment, details on defence business)

Sept 8 (Reuters) - British engineering company Meggitt cancelled its interim dividend on Tuesday as it posted a 37% drop in first-half profit after the coronavirus crisis hit its business supplying parts to aerospace manufacturers.

The COVID-19 pandemic, which dragged the airline industry to a standstill, led to a 27% drop in sales at Meggitt’s civil aerospace business, which counts planemakers Airbus and Boeing as customers.

However the company’s defence business, which accounted for 43% of group sales, saw a 7% organic growth in sales on strong demand for aeroplane and helicopter parts to customers in the United States.

Meggitt, which paid an interim dividend of 5.55 pence last year, said the decision to scrap the current payout would help it retain cash, manage its debt and preserve flexibility.

Its shares, which have more than halved in value this year, were down 2.9% at 291.1 pence at 0828 GMT, having risen as much as 5% earlier.

“While it’s too early to precisely predict the trajectory of the return to prior levels of activity in civil aerospace, we continue to focus on ensuring that the business is well positioned to benefit from the recovery,” Chief Executive Officer Tony Wood said.

Meggitt, which supplies jet parts such as braking systems, sensors and fuel systems, and provides follow-on services, has been on a cost-cutting drive early this year. It said in April it would axe about 1,800 jobs.

On Tuesday, it said the job cuts were “substantially” completed, adding that it still expected to deliver cash savings of 400-450 million pounds ($524-590 million) this year.

However, the Coventry-based company said it expects to be free cash flow neutral for the full year as some of its equipment would remain unsold into early 2021.

“We regard the inventory reduction slipping into FY21 largely as a matter of timing. A possible long-term negative is a potential increase in pension-deficit funding,” Jefferies analysts said.

Meggitt’s underlying operating profit fell to 102 million pounds in the six months to June, while overall revenue dropped 14% to 917 million pounds.

($1 = 0.7631 pounds)

Reporting by Pushkala Aripaka in Bengaluru; Editing by Subhranshu Sahu and Pravin Char

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