For Immediate Release                                                                                                                                 9 March 2021

 

Ultra Electronics Holdings plc

("Ultra" or "the Group")

Preliminary Results for the year to 31 December 2020

 

ONE Ultra, delivering

 

Simon Pryce, Chief Executive, commented: 

 

"2020 was a year which demonstrated the underlying strength of Ultra, and the capabilities and dedication of our outstanding people.

 

Through the extraordinary efforts of the whole Ultra team, we made good strategic progress and achieved our third consecutive year of strong organic growth. We made good progress on our ONE Ultra transformation and, as a result, we delivered or exceeded most of our stakeholder objectives. These would have been excellent outcomes in any year, but against a background of pandemic-driven disruption and turmoil, it was an exceptional performance.

 

 

Group performance:

 

£m	Year to 31 Dec 20	Year to 31 Dec 19	Change %
			Reported	Organic(2)
Order book	1,064.2	1,022.9	+4.0	+5.9
Revenue	859.8	825.4	+4.2	+5.2
Underlying(1)
Operating profit	126.1	118.2	+6.7	+6.2
Profit before tax	114.5	105.3	+8.7
EPS (p)	130.6	119.5	+9.3
Statutory
Operating profit	106.3	94.2	+12.8
Profit before tax	103.7	91.0	+14.0
EPS (p)	118.0	105.1	+12.3
Total dividend per share (p)(5)	56.9	54.2	+5.0
Net debt to EBITDA(3)	1.05x	1.58x
ROIC(4)	20.0%	17.8%

 

 

Further strategic progress

-      Key programme wins

 

 

Delivering growth

-    Third consecutive year of organic revenue growth

-    Strong order book development

-    Market outperformance

 

 

Robust performance

-    Solid execution, despite Covid-19

-    Margin progression and excellent ROIC

-    Increased dividend

 

 

Transformation on track

-    Good progress on Focus; Fix; Grow change programme

 

 

 Exciting Potential  

-    Record order book, good visibility

-    Stable markets with Ultra well positioned in growth segments

-    Targeted technology investment

-    Transformation benefits accelerating

 

 

Notes:

(4)       ROIC is calculated as underlying operating profit expressed as a percentage of invested capital (average of opening and closing balance sheets). Invested capital is defined as net assets of the Group, excluding net debt and lease liabilities, pension obligations, tax and derivatives. See note 2.

(5)       the 2019 total dividend per share of 54.2p quoted in this release is including the 2019 final dividend that was withdrawn as a precautionary measure due to the Covid-19 pandemic and paid on 18 September 2020 as an additional interim dividend.

Other terms used throughout this announcement are defined in note 23.

 

 

 

Enquiries:

Ultra Electronics Holdings plc
Simon Pryce, Chief Executive Jos Sclater, Chief Financial Officer	0208 813 4307
Gabby Colley, Head of Investor Relations	07891 206239 Investor.relations@ultra-electronics.com
MHP Communications	020 3128 8570
Tim Rowntree / James Bavister / Pete Lambie

 

About Ultra:

Ultra provides application-engineered solutions to customers' most difficult challenges in key elements of their mission critical and intelligent systems in the defence, security, critical detection & control markets.

 

www.ultra.group

 

 

STRATEGIC REVIEW

 

Financial summary

Ultra made good strategic progress during the year, winning new positions on key development and production programmes. These include:

·    a $145m 10-year IDIQ for a new application of our next generation ORION radios for the US Navy;

·    a $42m low-rate initial production contract for Next Generation Surface Search Radar (NGSSR);

·    a $24m ER-DIFAR Sonobuoy development contract (our first outside the ERAPSCO joint venture);

·    a new contract with the United States National Guard Bureau for Joint Interface Control Cell Extended Trainer solutions; and

·    a development and production award for NIXIE torpedo countermeasures, potentially worth over $250m. 

 

Defence spending in our core 'five-eyes' markets remained robust and Ultra continued to outperform, delivering 5.9% organic order book growth. This included new contract wins and orders under IDIQs on existing platforms such as a $31m order from the US Marines and $27m from the US Army for our next generation ORION radios, $162.8m of sonobuoy orders, and a $45m MK54 torpedo array order.  We finished the year with another record order book of £1.1bn and entered 2021 with strong order cover of 71% (2020: 71%). Order intake in Q1 2021 continues to be strong, including the annual US sonobuoy award worth $80m to Ultra at the beginning of March.

 

Revenue grew by 4.2% in the year and 5.2% organically. Maritime grew organically by 12.3% with strong demand for radar and sonar products, including sonobuoys. Intelligence & Communications revenue grew organically by 8.6%, driven by sales of ORION radios and ADSI (Air Defence System Integrator) systems.  This growth was partly offset by Covid-19 driven declines in our Critical Detection & Control Business Unit of 7.9%, with commercial aerospace orders down by nearly 20% and weak industrial sensor sales in our Energy business. We did however see resilient demand for forensic related support and maintenance services and strong demand in military aerospace, particularly on the F35 and Typhoon programmes. 

 

Group statutory operating profit increased by 12.8% to £106.3m. Group underlying operating profit increased 6.7% on the prior year to £126.1m.

·    In Maritime, underlying operating profit grew organically by 12.9%, underlying operating margins expanded slightly to 15.0% (2019: 14.9%), with the tailwind from the non-recurrence from last year's contract losses of £8.8m offset by increased investment in R&D and transformation, as well as some supply chain and engineering disruption. Statutory operating profit in Maritime grew by 27.3%, and statutory operating margin increased to 14.3% (2019: 12.4%). 

·    Underlying operating profit in Intelligence & Communications grew by 6.7% organically, reflecting increased sales in our Communications and C2I operating business units and good operational improvements particularly in Specialist RF. Underlying operating margins declined slightly to 13.9%, with improved productivity in several businesses, offset by increased investment in transformation and R&D. Statutory operating profit in Intelligence & Communications grew by 18.5%, and statutory operating margin increased to 9.8% (2019: 8.9%). 

·    Underlying operating profit declined organically by 4.0% in Critical Detection & Control due to the previously mentioned Covid-19 impact on sales. Underlying operating margins in this business unit however grew to 15.0% (2019: 14.4%), reflecting good cost control, favourable transactional FX and good sales mix in our Forensics business. Statutory operating profit in Critical Detection & Control declined by 4.8%, and statutory operating margin increased to 13.2% (2019: 12.7%).

 

Overall, statutory operating margin was 12.4% (2019: 11.4%). The group underlying operating margin of 14.7% was better than we expected. As planned, we increased transformation investments by over £5m to £8.2m and we increased our investment in internal research and development organically by £2.8m to 3.7% of sales (2019: 3.6%).  The cost increases in transformation and R&D were partly offset by lower-than-expected indirect costs due to Covid-19 related changes to travel and marketing spending. These costs are expected to normalise during 2021.

 

Underlying PBT increased by 8.7% to £114.5m.  We made a net gain on the disposal of two small non-core businesses, partly offset by a legacy provision relating to one of the businesses sold. Statutory PBT increased by 14% to £103.7m, reflecting the underlying performance as well as decreased amortisation charges. Underlying EPS increased by 9.3% to 130.6p (2019: 119.5p), reflecting the increase in underlying profit and a slight reduction in the underlying tax rate. Statutory EPS increased 12.3% to 118.0p.

 

Underlying cash conversion was excellent at 92% (2019: 73%). This was partially due to the increasing order book, which led to customer advances. In addition, collection of receivables was strong, unbilled receivables decreased and capital expenditure was lower than planned due to our new ERP strategy.

 

Ultra's underlying profit growth, the amortisation of intangibles and low capital intensity meant that ROIC increased to 20.0% in 2020 (2019: 17.8%).

 

Covid-19 impact

Ultra's flexibility and performance through the pandemic demonstrates the strength of the business model, and the exceptional commitment and resilience of our people addressing numerous customer, production, supply chain and other challenges to continue to deliver for all our stakeholders. Whilst most facilities experienced some disruption; all remained open and productive throughout the year.

We have not sought to benefit from any material local or national Covid-19 stimulus (such as furlough or tax deferral) and although we continue to monitor and adapt to the changing situation in all our markets, we do not anticipate doing so.

We also provided immediate and much needed support to our local communities most impacted by the pandemic through our ONE Ultra Covid-19 fund. To date we have donated over $200,000 to our local communities across the world.

 

Transformation progress

During 2020 we moved firmly into the execution phase of Ultra's transformation, with good progress throughout the year across all workstreams in our Focus; Fix; Grow change programme.

 

Workstream	Goals	Progress in 2020
Operating Model	Improved customer alignment   Better functional support   Relevant data, improved decision making, disciplined allocation of scarce resources	Our new strategy was launched at the beginning of 2020 and this now guides all prioritisation and resource allocation decisions.   The operating model design work to best support strategy execution was completed during the year. This included a new organisation structure which was launched on January 1 2021, completing our migration from an aggregation of individual site-based businesses to a collaborative Group.   We revised and relaunched delegated authorities and empowerment guidelines to improve the speed and quality of decision making whilst improving visibility and oversight.   We introduced and enhanced a suite of standard operational metrics to better focus on actions and outcomes, and to better measure and monitor progress against our stakeholder goals.   We also introduced a process for aligning individual and corporate objectives across the organisation, no longer just based on outcomes but also on how they are achieved, with behaviours measured against our ASPIRE values.
Site Excellence	Improved and optimised working environment   Increased sustainability   Better working practices	We made good progress in optimising our footprint, closing a production site in Rochester, New York, and beginning plant closures in Wake Forest, North Carolina and one of our facilities at Greenford in the UK.  We also approved plans to invest in two of our existing sites in Canada in 2021 to support future growth.   We introduced Group-wide changes in working practices to create greater agility and flexibility, whilst improving footprint utilisation, and ultimately efficiency, cost and our impact on the environment.   All sites have been updated to reflect the Group re-branding, and the launch of our vision, mission, and values. We have also invested in shop floor layout improvements, partly in response to the pandemic but also to upgrade and improve the working environment.
Operational and Functional Excellence	Improved utilisation, efficiency, productivity, and delivery   Better collaboration to improve customer outcomes   Global standards where there is a benefit from having them   Improved business partnering and decision support	We made excellent progress on projects focused on improving our HR, finance, IT, project management and sales processes.   We have reviewed our marketing and sales processes and identified material opportunities to improve through better use of the Group's extensive customer knowledge. We also further enhanced and improved risk assessment and management in our bid processes.   During the year, we piloted a standardised customer feedback process to get better, independent, and more immediate information on customer needs and support.     We completed the redesign and standardisation of our HR processes across the Group during the year.  We selected a new Global HRIS system to be implemented across the Group which will go live in Q2 2021.   We made good progress expanding and standardising our chart of accounts and replacing our financial consolidation system, which will enhance our data quality and fidelity, improve control and performance management. We are also improving several local finance administrative processes in advance of developing standard finance processes in 2021.
Procurement	More reliable supply chain Better scale benefits   Transparent data and standard procurement processes	A Group Head of Procurement was appointed and is creating a centralised procurement function, responsible for standardising procurement processes and practices and key category management.   In parallel, we have focused on aggregating demand in a small number of key categories to improve supplier collaboration and management as well as achieving economies of scale in 2021.   Our internal capability to build high complexity, low volume printed circuit boards is also being enhanced to optimise design for manufacture and to improve supply chain risk management.
ONE Ultra Culture	Investing in people   Innovation   Working environment   Continuous improvement	Our new common vision, mission and values were agreed, launched and embedded in 2020. A leadership capability assessment was also completed. Assessment tools, performance management processes and remuneration structures have now been aligned to our ONE Ultra strategy and values.     Leadership training programmes commenced in 2020 to support our new ONE Ultra behaviours. We were particularly pleased with the result of our all-employee engagement score which increased to 75.5%. We were able to use feedback from this engagement survey and as a response to the pandemic have introduced new ways of working to support more flexible and agile working across Ultra.    The new organisational structure has also created opportunities for us to enhance our bench strength and promote our best people. By the end of 2020, nearly 40% of Ultra's top talent were new or new in role. 1 in 3 of these are female, and women now make up over 25% of Ultra's top management.
Technology Enablement	Improved collaboration   More efficient IT infrastructure   Standard processes supported by standard applications	New foundational IT infrastructure was selected in 2020,  and is currently being implemented globally. These technologies support data standardisation initiatives and the widespread process improvements taking place across the Group. This will enable more effective information exchange and collaborative working   A group Chief Technology Officer was appointed during the year to monitor external technology trends, improve efficiency, and remove duplication from the Group's development efforts. We are already seeing better alignment of our internal R&D investments with our customers' future needs.

 

 

 

OPERATIONAL REVIEW

 

Maritime (46% of Group revenue)

A partner in the maritime defence domain, focusing on mission-centric equipment and systems primarily across the "five-eyes" nations. We specialise in maritime sonar, radar, acoustic expendables, signature management and power systems.

 

£m	2020 as stated	2019 as stated	2019 for organic measure	Growth %	Organic(2)  growth %
Order book	539.6	481.5	472.4	+12.1	+14.2
Revenue	391.8	353.0	348.9	+11.0	+12.3
Underlying operating profit(1)	58.6	52.5	51.9	+11.6	+12.9
Underlying operating margin(1)	15.0%	14.9%	14.9%
Statutory operating profit	55.9	43.9		+27.3
Statutory operating margin	14.3%	12.4%

 

Market trends

Heightened levels of global submarine activity are driving demand growth in both anti-submarine warfare systems and broader underwater systems infrastructure. Additionally, 'five-eyes' customers have announced a number of naval renewal and recapitalisation programmes, including enlarging the US fleet, introducing the Type 32 frigate into the UK Royal Navy and the acquisition of up to 15 new vessels in Canada as part of the Canadian Surface Combatant programme.  These, and other similar programmes, will continue to drive demand for anti-submarine warfare capabilities, sonar systems and sub-systems, signature management and power systems and surface radar technologies for the rest of this decade.

 

Maritime strategy developments

Ultra continues to win important positions in these growing markets, with notable recent successes including surface-ship anti-submarine warfare aboard the three variants of the UK Global Combat Ship: the UK RN Type 26, the Canadian Surface Combatant, and the Australian Hunter Class (SEA5000), with Ultra supporting each individual nation's unique requirements.  Complementing the anti-submarine warfare capabilities of these vessels, Ultra has also significantly expanded our surface ship self-defence offerings with the multi-year award of the US-based towed torpedo countermeasure system, NIXIE. This is complementary to our existing UK-based S2170 torpedo detection system and our family of expendable torpedo countermeasures for both the five-eyes and international markets.  

In addition to these successes in our domestic markets, Ultra is continuing to develop innovative capabilities in support of maritime missions for unmanned platforms, including in the application of artificial intelligence and machine learning for greater automation of functions such as sonar and radar signal detection and automation of winching operations.  Additionally, Ultra is investing in innovations for sub-systems that will counter near-peer threats and advanced mission technology equipment that will have to operate in increasingly denied and contested environments, broadening our presence with increased capability in the rapidly evolving underwater battlespace.   

Performance

Our Maritime Business Unit had a strong year, with the order book increasing 14.2% organically. This was driven by:

(i)            MK54 and MK48 hull mounted sonar torpedo array awards for the US DoD;

(ii)           initial production of the Next Generation Surface Search Radar (NGSSR) for the US Navy; and

(iii)          robust US domestic sonobuoy orders under the ERAPSCO joint venture and good international orders for sonobuoys (including the UK).

 

Organic revenue increased by 12.3% to £391.8m, reflecting strong sonobuoy sales, NGSSR production for the US Navy, electronic warfare systems sales in Australia and torpedo defence system sales to the Indian Navy.

 

Underlying operating profit was up 12.9% organically to £58.6m reflecting the increased sales.  Margins increased a little to 15.0% (2019: 14.9%), with increased investment into R&D and transformation and some pandemic driven supply chain and engineering disruption broadly offsetting the tailwind from the non-recurrence of 2019's contract losses of £8.8m.  

 

We made a good start improving operational performance in this business unit with improved on time delivery and employee engagement.

 

Intelligence & Communications (28% of Group revenue)

A defence supplier engineering world-class, mission-critical, multi-domain intelligence, communications,

command & control, cyber security and electronic warfare solutions.

 

£m	2020 as stated	2019 restated	2019 for organic measure	Growth %	Organic(2)  growth %
Order book	237.1	222.5	216.7	+6.6	+9.4
Revenue	241.0	224.8	222.0	+7.2	+8.6
Underlying operating profit(1)	33.5	30.2	31.4	+10.9	+6.7
Underlying operating margin(1)	13.9%	13.4%	14.1%
Statutory operating profit	23.7	20.0		+18.5
Statutory operating margin	9.8%	8.9%

 

Market trends

The changing threat environment over the last few years has given rise to a dramatically different vision for the battlespace of the future, consisting of multi-domain, hyper enabled systems linked by secure and seamless communication architecture. Robotics, cloud computing and new weapons payloads are disrupting traditional ecosystems, and drone technology is playing an increasingly vital role in combat operations. In addition to new platforms, rapidly changing software handling infrastructure, enabled by greater accessibility to cloud computing, is impacting the way data is managed.  

Investment by near-peer adversaries in technologically advanced threat capabilities are driving increased focus in a number of critical areas. These include rapid data acquisition, processing and communication systems that are capable supporting multi-domain warfare in denied and contested environments, ensuring an information advantage for the war-fighter. 

Intelligence & Communications strategy developments

Ultra's continued success in Intelligence and Communications markets are a testament to our robust strategy to deliver information advantage to the customer, through the provision of interoperable solutions and products that solve complex problems in areas where we have significant domain knowledge and differentiation.

Ultra's ORION radio, which is now into its fourth generation in US Army service in support of the TRILOS program of record, has also been selected by both the US Marine Corps and US Navy, highlighting the strength and capability of the platform and the importance of interoperability across the services.  Our customers' confidence in our ability to safely deliver information advantage to the war-fighter is further demonstrated by recent contract awards for tactical data links in support of the Joint Interface Control Cell Extended Trainer (JET) program, and high-integrity cryptographic management solutions enabling seamless and secure monitoring of crypto systems across the Alaskan air space.

Ultra continues to invest in innovative and disruptive technologies, in tandem with our customers, to ensure continued connectivity and security in a rapidly evolving battlespace. Our suite of capabilities is well suited to an environment where the prevalence of unmanned operations will increase and the importance of data processing and information delivery to the tactical edge will continue to grow.

Performance

Our Intelligence & Communications business unit won several new contracts and awards in 2020 with the order book increasing 9.4% organically to £237.1m. This was driven mostly by:

(i)            a $31m ORION radio contract with US Marines;

(ii)           a $28.6m ACTS ORION radio contract with the US Navy;

(iii)          a new contract with the United States National Guard Bureau for three JET systems (Joint Interface Control Cell Extended Trainer solution); and

(iv)         Airbus RSS8000 electronic warfare systems for German Defence.

 

Revenue grew organically by 8.6% to £241.0m, benefiting from strong sales from our Communications business and C2I ADSI (Air Defence Systems Integrator) tactical command and control systems to both from the US and Taiwan navies.

 

Underlying operating profit increased organically by 6.7% driven by improved productivity and strong execution. Like-for-like operating margins remained broadly flat at 13.9% vs 14.1% in 2019. Margin growth from improved operational gearing in our C2I and Communications businesses and improved operational efficiency in Specialist RF were offset by increased restructuring & transformation investments and accelerated strategic R&D programmes. R&D focused on advanced communication and networking, including artificial intelligence & machine learning, virtual ADSI and leveraging hardware to deploy specialised real-time C2 functionality.

 

Despite the pandemic, good strategic progress was also made in this business unit with a strengthened senior leadership team now in place and global sales and project management excellence projects gaining momentum.

 

Critical Detection & Control (26% of Group revenue)

 

Precision Control Systems (PCS) designs and supplies market-leading safety and mission-critical solutions, primarily to the military and commercial aerospace markets.

 

Forensic Technology is the world-leader in ballistic identification and forensic analysis solutions.

 

Energy, designs and supplies safety critical sensors and systems, and selected products for nuclear and industrial applications.

 

£m	2020 as stated	2019 restated	2019 for organic measure	Growth %	Organic(2)  growth %
Order book	287.5	318.9	316.2	-9.8	-9.1
Revenue	227.0	247.6	246.5	-8.3	-7.9
Underlying operating profit(1)	34.0	35.5	35.4	-4.2	-4.0
Underlying operating margin(1)	15.0%	14.3%	14.4%
Statutory operating profit	30.0	31.5		-4.8
Statutory operating margin	13.2%	12.7%

 

Aerospace market trends

Civil aerospace has been severely impacted by the Covid-19 pandemic.  However, long-term drivers of aerospace growth remain, with increasing global prosperity and globalisation driving greater demand for leisure and business travel.  While recovery to 2019 traffic levels will take some time, recent clinical developments will gradually increase demand for, and accessibility to, air travel from its current low level.  

The defence aerospace market continues to be robust, with ongoing fleet replacement programmes across a broad range of geographies continuing to drive growth for the foreseeable future.

The industry is moving towards more environmental, cost-effective solutions for both traditional and contemporary platforms, including urban air mobility, unmanned and electrified aircraft. These are areas where Ultra's focus on power efficiency and low size, weight and power is particularly compelling. 

Forensic Technology market trends

Ultra's pioneering approach to gun crime intelligence and our unique ability to provide a robust, networkable solution to our many customers around the world leaves us exceptionally well placed to continue on our growth path in response to growing demand for investigative leads and investigative conclusions that are admissible as evidence.  The market is transitioning from demanding a capital-intensive solution to a more remote, cloud-based software architecture.  Ultra is pioneering this shift to improve affordability and increase accessibility to a broader customer base, which will expand the addressable market.

 

Energy market trends

Ultra Energy provides critical safety systems and specialist detector capabilities to nuclear facilities and selected industrial customers around the world, safeguarding nuclear workers, critical and high value assets and the public. Ultra is positioned at the forefront of emerging technologies being developed for increased efficiency and decreased cost of nuclear power generation, such as advanced Small Modular Reactor technologies (SMRs), hydrogen production and hydrogen cells.  Medium-term market growth is underpinned by both baseload capacity growth requirements and the transition from fossil fuel powered facilities to cleaner alternatives.

 

Performance

Our Critical Detection & Control business unit suffered the most from the Covid-19 pandemic and as a result, order book declined organically by 9.1% to £287.5m. Commercial aerospace orders were impacted significantly, declining by nearly 20% due to the pandemic. Orders in our Forensic Technology business increased 35% year on year despite Covid-19 restricting our ability to visit customers, with a number of key contracts won in the year, for example, from the ATF (US Bureau of Alcohol, Tobacco, Firearms and Explosives) for additional IBIS (Integrated Ballistic Identification System) products and SafeGuard services. Our Energy business saw some Covid-19 related weakness in the market for industrial sensors, although made good strategic progress, adding more than 160 new customers in the year.

 

Revenues declined organically by 7.9% in the year due to:

(i)            commercial aerospace volumes falling by around 20% as a result of Covid-19 (Commercial sales: £41.0m in 2020 versus c.£65.0m in 2019);  

(ii)           negative Covid-19 impact on global sales in Forensic Technology with delayed orders primarily in Asia; and

(iii)          a challenging year in the nuclear and sensors markets for our Energy business. 

These declines were partially offset by continued strong growth in military aerospace for HIPPAG (high pressure pure air generator) products, engine ice protection system controllers and harnesses, in particular on the F-35 and Typhoon, and good demand for Forensic Technology's core IBIS product systems and related support and maintenance services.

 

Underlying operating profit only declined 4.0% organically to £34.0m. The impact of reduced sales in all three businesses was partially offset by:

(i)            lower indirect costs, mainly reduced travel during the Covid-19 pandemic;

(ii)           transactional FX tailwinds;

(iii)          good mix in our Forensics business with strong sales of support and maintenance services; and

(iv)         tight control on all discretionary spend and R&D plus benefits from previous years' cost reduction initiatives, delivering operational efficiencies.

As a result, underlying operating margins increased from 14.4% to 15.0%.

 

 

FINANCIAL REVIEW

 

Order book and revenue

Ultra's order book grew by 4.0% to £1,064.2m (2019: £1,022.9m); this represents organic growth of 5.9%. 

 

Revenue grew by 4.2% to £859.8m (2019: £825.4m). This represents organic growth of 5.2%, reflecting strong growth rates in Maritime and Intelligence & Communications, partly offset by organic decline in Critical Detection & Control.

 

	£m	% impact
2019	825.4
Currency translation	(4.1)	-0.5
Disposals	(3.9)	-0.5
2019 (for organic measure)	817.4
Organic growth	42.4	+5.2
2020	859.8	+4.2

 

Statutory operating profit and margin

£m	2020	2019
Statutory operating profit	106.3	94.2
Amortisation of intangibles arising on acquisition	12.6	21.7
Acquisition and disposal-related costs	1.1	0.9
Significant legal charges and expenses	3.3	1.4
Restructuring costs related to disposal	2.8	-
Underlying operating profit	126.1	118.2

 

Statutory operating profit increased by 12.8% to £106.3m (2019: £94.2m) and statutory operating margin increased to 12.4% (2019: 11.4%). This reflects the underlying operating performance, as described below, as well as reducing amortisation costs as assets created by historical acquisitions become fully amortised.

 

The restructuring costs of £2.8m and some of the legal charges and expenses of £3.3m followed the sale of our aircraft products business, described below.  As a result of the sale, we moved the remaining manufacturing from our site in Rochester, New York to Fort Wayne, Indiana and Manhattan, Kansas. 

 

Underlying operating profit and margins

Underlying operating profit	£m	% impact
2019	118.2
Currency translation	(0.6)	-0.5
Disposals	1.1	+0.9
2019 (for organic measure)	118.7
Organic growth	7.4	+6.2
2020	126.1	+6.7

 

Underlying operating profit was £126.1m (2019: £118.2m), an increase of 6.7% on the prior year. Organic profit growth was 6.2%, driven by the strong sales in Maritime and Intelligence & Communications and some margin expansion. 

 

Ultra continued its programme of R&D, with total spend (from customers and internal investment) in the year of £144.2m (2019: £145.6m*). Company-funded investment increased organically by £2.8m to £31.8m (2019: £29.6m*) which represents 3.7% of revenue (2019: 3.6%), while customer funding decreased to £112.4m (2019: £116.0m*). The overall level of R&D investment in the year was 16.8% of revenue (2019: 17.5%). The company-funded spend was more modest than originally envisaged as investments relating to the commercial aerospace sector were reduced.

 

* The 2019 R&D spend has been restated following re-analysis of the development spend.

 

 

Finance charges

Net financing charges decreased by £1.3m to £11.6m (2019: £12.9m) driven by reduced pension scheme financing charges, lower average borrowings, and a decline in interest rates on floating rate borrowings. The interest payable on borrowings was covered 14.7 times (2019: 12.4 times) by underlying operational profit.

 

Profit before tax

Statutory profit before tax increased 14.0% to £103.7m (2019: £91.0m). Underlying profit before tax was £114.5m (2019: £105.3m), as set out below:

 

£m	2020	2019
Statutory profit before tax	103.7	91.0
Amortisation of intangibles arising on acquisition	12.6	21.7
Acquisition and disposal related costs	1.1	0.9
(Gain)/loss on disposals net of related restructuring costs	(2.8)	0.9
(Gain) on derivatives	(3.4)	(10.6)
Significant legal charges and expenses	3.3	1.4
Underlying profit before tax	114.5	105.3

 

Amortisation costs declined from £21.7m to £12.6m as the customer relationship and technology assets created by historical acquisitions became fully amortised. Acquisition and disposal related costs in the year were £1.1m (2019: £0.9m). A net £2.8m gain arose from the divestment of certain non-core aircraft product lines from the former Flightline business in the Maritime SBU, net of related closure and relocation costs for the remainder of the business and production lines (see note 18).

 

The net gain on forward foreign exchange contracts was £3.4m (2019: £10.6m gain). Significant legal charges and expenses of £3.3m (2019: £1.4m) primarily relate to conduct of business-related costs.  

 

As in 2019, transformation costs are included in underlying profit.

 

Tax, EPS and dividends

The Group's underlying tax rate in the year decreased slightly to 19.0% (2019: 19.4%). The statutory tax rate applicable to profit before tax is 19.0% (2019: 19.0%).

 

Underlying EPS increased 9.3% to 130.6p (2019: 119.5p), reflecting the increase in underlying profit and slightly reduced underlying tax rate. The weighted average number of shares in issue was 71.0m (2019: 70.9m). Basic EPS increased to 118.0p (2019: 105.1p). At 31 December 2020 the number of shares in issue was 71.1m.

 

Ultra's dividend policy has a through-cycle target of circa two times normalised cash and earnings cover. The 2020 proposed final dividend of 41.5p (2019: 39.2p postponed final dividend paid in September 2020) per share is proposed to be paid on 14 May 2021 to shareholders on the register at 9 April 2021 subject to approval at the Annual General Meeting. This will result in a final full year dividend of 56.9p (2019: 54.2p), which will be covered 2.3 times by underlying EPS.

 

Operating cash flow and working capital

Statutory cash generated by operations was £142.6m (2019: £114.9m). Underlying operating cash flow was £116.1m (2019: £86.8m) resulting in underlying operating cash conversion of 92% (2019: 73%). Our focus on improving working capital turn has continued to be successful with the average working capital turn for the Group improving to 10.1x (December 2019: 7.3x). Working capital decreased by £4.2m, principally due to strong receivables collections and increases in advanced payments, partially offset by higher inventory levels. Capital expenditure was flat and lower than originally anticipated due to previously announced changes in ERP strategy, at £21.9m (2019: £21.8m).

 

Non-operating cash flow

The main non-operating and non-underlying cash items as set out in note 2 and in the statutory cash flow statement were:

·    net cash inflow of £5.3m relating to disposals (see note 18);

·    dividend payments of £38.7m (2019: £36.7m);

·    tax paid of £5.4m (2019: £9.5m);

·    a £1.5m (2019: £1.9m) outflow on significant legal charges and expenses, predominantly relating to legacy conduct of business matters

 

Various emergency Covid-19 tax reliefs were introduced around the world resulting in Ultra having to defer £6.1m of corporation tax and indirect tax payments and social security contributions. £5.6m of these deferrals had been paid at the balance sheet date. In addition, the US Coronavirus Aid, Relief, and Economic Security Act made temporary changes to the US Internal Revenue Code which allowed the Group to deduct previously deferred US interest expense resulting in a prior year tax credit of £3.7m.

 

Net debt

Ultra's net debt at the end of the year reduced to £85.8m (2019: £154.8m) including £37.7m (2019: £41.2m) of lease liability. Net debt/EBITDA when including pension obligations and lease liabilities was 1.05x (2019: 1.58x). On a covenant basis, which excludes pension obligations and lease liabilities, the figure is 0.34x (2019: 0.86x). Net interest payable on borrowings was covered 14.7x (2019: 12.4x) by underlying operating profit.

 

Conduct of business investigations

As previously announced, investigations associated with conduct of business issues in Algeria and the Philippines are ongoing, and Ultra continues to cooperate with the relevant authorities. See contingent liabilities note 19.

 

Capital allocation

We have implemented a more disciplined approach to capital allocation, which will support our future strategic delivery. We aim to maintain our asset light, high capital return business model which will, in turn, drive strong free cash flow. Our priorities for capital discipline are listed in order below:

1.    Organic investment for operational improvement and to deliver value-creative growth;

2.    Inorganic M&A investment to accelerate strategy delivery, if it is value creative on a risk adjusted basis;

3.    Sustainable through-cycle dividend growth. Our policy remains around 2x through cycle cash/earnings cover ratio; and

4.    Any excess, through-cycle capital to be returned to shareholders if it can't be deployed within Ultra in the medium term to generate strong returns.

 

We aim to support these priorities by maintaining through-cycle gearing between 1.5 - 2.5x net debt (including pension and lease liabilities) to EBITDA.

 

 

2021 FINANCIAL GUIDANCE

 

Based on our strong order book, and whilst we continue to monitor and adapt to the changing situation in all our markets, we are planning for continued revenue growth in 2021, although we do not expect to see any improvement in commercial aerospace revenue until at least 2023.

 

We expect operating margins to reduce in 2021 for the reasons described below:

-     We plan to accelerate our transformation investments to £11-13m, with increased investment in process efficiency, procurement category management and two major site consolidations. With the good progress made in 2020 and acceleration of certain projects into 2021, we now expect to begin to realise year-on-year benefits in 2022, a year ahead of plan.  We continue to expect the Focus; Fix; Grow transformation to be broadly complete by the end of 2023.

-     We intend to further increase internal R&D to between 3.8% and 4% of revenue in 2021, as we continue to invest in capabilities to support customer needs in pursuit of continued future growth.

-     Indirect costs such as travel and marketing are expected to begin normalising over the course of 2021, following a period of lower expenses due to Covid-19 restrictions.

 

Capital expenditure will increase to around £35m in 2021. This is to support facility expansion in our Sonar OBU ahead of Canadian Surface Combatant production and our Communications OBU to support production of ORION radio systems. As a result, cash conversion is expected to be 75-85%.

 

Underlying tax rate is expected to remain stable at a little below 20% (with the cash tax rate is expected to be less than 10%).

 

BOARD CHANGES

 

In accordance with Listing Rule 9.6.11 the Company notifies that Martin Broadhurst will step down as Independent Non-Executive Director on 1 July 2021 following a nine-year tenure on the Board. Martin has made a significant contribution to our Board and, in later years, as Chairman of the Company's Remuneration Committee. Our Independent Non-Executive Director Geeta Gopalan, who has extensive financial experience, will Chair the Remuneration Committee with effect from 1 July 2021.

 

Tony Rice, Chairman, Commented:

"Martin has been a valued Board member throughout his tenure, and we have been extremely grateful for his knowledge and expertise, in addition to his historic knowledge of Ultra. It is unfortunate that we will lose him as a Non-Executive Director but we will adhere to the UK Corporate Governance Code 2018 and bring on at least one new Non-Executive Director later this year."

 

SUMMARY & OUTLOOK

 

2020 was a year which demonstrated the underlying strength and capabilities of Ultra and the commitment and dedication of our exceptional people.

 

Through the extraordinary efforts of the whole of the Ultra team, we made good strategic progress and achieved our third consecutive year of strong organic growth. We made good progress on our ONE Ultra transformation and as a result we delivered or exceeded most of our stakeholder objectives. These would have been excellent outcomes in any year, but against a background of pandemic driven disruption and turmoil, it was an exceptional performance.

 

We enter 2021 with a record order book giving us strong visibility and are very well positioned in key growth areas and to support customers' evolving priorities. We continue to increase our technology investment, expanding the areas in which we can provide effective customer solutions. Our ONE Ultra transformation programme is having a positive impact on both growth opportunities and operational efficiency, and with strong 2020 delivery, we are confident enough to accelerate several of our transformation actions in 2021. This should see us begin to realise year-on-year benefits in 2022, a year ahead of plan.

 

This excellent performance gives us further confidence in Ultra's exciting potential and our ability to deliver exceptional value for all stakeholders over the longer term.

 

 

Simon Pryce                                                                                                                                                      

Chief Executive                                                                                                                                

 

9 March 2021

 

 

RISKS AND UNCERTAINTIES

 

The Group faces a number of potential risks and uncertainties which may have a material impact on performance in 2021 and beyond. Consequently, actual results may differ materially from expected and/or historical results. The Group's principal risks are listed below. These risks are managed by the Executive Team and are key matters for the Board. An explanation of these risks, and the business strategies that Ultra uses to manage and mitigate such risks, can be found in the annual report which will be available for download at https://www.ultra.group/investors/results-centre/

 

Risks are identified, collated, assessed and managed at the most appropriate level of the business (Board, Executive or business level). Risks are regularly reviewed to ensure judgements and assumptions are unchanged, that effective risk indicators and controls are in place and that emerging risks are properly captured, evaluated and managed.  Across our risk environment, Ultra places a high priority on compliance with all legislative and regulatory requirements and the maintenance of high ethical standards across the Group, which have been reflected in the development of our values framework in 2020 and its embedding into every aspect of how we work. 

 

Principal Risks 

In line with developing guidance on risk reporting, we have focused our statement on principal risks that are current and/or particular to Ultra, either through the nature of our sector or business model, or because factors or circumstances have elevated more generic risks in Ultra's current business environment.  In addition to the principal risks identified below, Ultra actively manages risks assessed as a lower, but not to say insignificant, level, which include risks often common to listed businesses.  These include risks which have been reported on externally in previous years such as business interruption risks (where in 2020 Ultra demonstrated very effective management of the Covid-19 outbreak), talent retention and recruitment risks (which has also been reducing for Ultra as our ONE Ultra HR programmes roll out) and Health, Safety and Environmental risks (which are seen as a priority for excellence rather than principal risk). 

 

Our Principal risks:

 

·    Defence sector cycle risk

·    Geopolitical risk

·    Bid and contract risks

·    Programme risk

·    Delivering change

·    Security and cyber risks

·    Governance, compliance, and internal controls

·    Pensions

 

Specific Risk Factors and Initiatives

Specific risk incidents and developments in 2020 include:

 

·    Covid-19.  Proactive management to ensure Covid-safe workplaces, optimise remote working and effective stakeholder engagement with our suppliers and customers enabled continuity of operations and delivery of objectives for Ultra throughout 2020.  We will continue to adapt and improve our approach to ensure we successfully manage the Covid challenge through 2021. 

·    Brexit.  Brexit risk for Ultra was predominantly a logistics disruption risk with limited potential impact and was managed through proactive supply chain management.  Actual impact was contained to very minor border delays which did not impair operations.

·    Regulatory Incidents (Governance, Compliance and Internal Controls).  As previously reported, Ultra is cooperating with authorities in relation to two conduct of business issues in Algeria and the Philippines. 

·    Climate Change.  Direct risks to Ultra from climate change are limited, given the low intensity nature of our operations, the locations of our sites and markets in which we operate.  In line with our values, we see climate change as an area of focus for positive change through our Corporate Social Responsibility Committee. 

 

CONFIRMATION OF GOING CONCERN

 

The Directors have a reasonable expectation that the Group has adequate resources for a period of at least 12 months from the date of approval of the financial statements and have therefore assessed that the going concern basis of accounting is appropriate in preparing the financial statements and that there are no material uncertainties to disclose.

 

Ultra's net debt at 31 December 2020 was £85.8m (2019: £154.8m) including £37.7m (2019: £41.2m) of lease liability. The Group's committed lending facilities amount to £401.2m in total and comprise loan notes in issue to Pricoa of £50m and $70m, and a Revolving Credit Facility (RCF) of £300m that is denominated in Sterling, US Dollars, Canadian Dollars, Australian Dollars or Euros. The RCF is provided by a group of eight international banks and, in certain acquisition scenarios, permits an additional £150m "accordion" which is uncommitted and subject to lender consent. The Group also has access to a £5.0m and $2.5m net overdrafts.  The financing facilities are used for balance sheet and operational needs, including the funding of day-to-day working capital requirements.  The maturity profile for the Group's committed lending facilities is as follows:

 

Facility	Expiry
RCF £50m	November 2023
RCF £250m	November 2024
Pricoa £50m	October 2025
Pricoa $40m	January 2026
Pricoa $30m	January 2029

 

Though global macro-economic conditions remain uncertain with continued uncertainty arising from impacts of the Covid-19 pandemic, the Group's ability to continue trading successfully in 2020 during the pandemic, the long-term nature of Ultra's business and its positioning in attractive sectors of its markets, taken together with the Group's forward order book, provide a satisfactory level of confidence in respect of trading in the year to come.

 

 

NATURE OF ANNOUNCEMENT

This announcement has been prepared solely to provide additional information to enable shareholders to assess Ultra's strategies and the potential for those strategies to be fulfilled. It should not be relied upon by any other party or for any other purpose.

 

This announcement contains certain forward-looking statements. Such statements are made by the Directors in good faith based on the information available to them at the time of their approval of this report, and they should be treated with caution due to the inherent uncertainties underlying such forward-looking information.

 

This announcement has been prepared for the Group as a whole and therefore gives greatest emphasis to those matters which are significant to Ultra when viewed as a complete entity.

 

 

 

 

 

 

Ultra Electronics Holdings plc

Results for the Year Ended 31 December 2020

Consolidated Income Statement

 

			2020	2019
		Note	£m	£m
Revenue		3	859.8	825.4
Cost of sales			(609.0)	(586.3)
Gross profit			250.8	239.1
Other operating income			0.9	1.0
Administrative expenses			(140.6)	(138.5)
Other operating expenses			(1.5)	(6.0)
Significant legal charges and expenses		2	(3.3)	(1.4)
Operating profit		1	106.3	94.2
Gain/(loss) on disposals		18	5.6	(0.9)
Investment income		4	3.7	11.3
Finance costs		5	(11.9)	(13.6)
Profit before tax		1	103.7	91.0
Tax		6	(19.9)	(16.4)
Profit for the year Attributable to:			83.8	74.6
Owners of the Company			83.8	74.5
Non-controlling interests			-	0.1
Earnings per ordinary share (pence)
	- basic	8	118.0	105.1
	- diluted	8	117.7	104.9
All results are derived from continuing operations.