TT Electronics plc
Results for the year ended 31 December 2020

1 General information

The information set out below, which does not constitute full financial statements, is extracted from the audited financial statements of the Group for the year ended 31 December 2020 which:

§ was approved by the Directors on 9 March 2021;

§ have been reported on by the Group's auditor; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006;

§ will be available to the shareholders and the public in April 2021; and

§ will be filed with the Registrar of Companies following the Annual General Meeting.

 

2 Basis of accounting

While the financial information included in this Preliminary Announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs") adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union in addition to IFRSs as issued by the IASB, this announcement does not itself contain sufficient information to comply with IFRSs.

Going Concern

Whilst the Group was negatively impacted by COVID-19 in the year with revenues down 9% on a constant currency basis, the Group's recovery is well underway. Following the impact of Covid-19 in the second quarter of 2020, the Group has been on an improving upward trend in both order intake and production capacity. This trend has been underpinned by strong order intake across the Group through the fourth quarter of the year and has continued into early 2021 across all divisions.  The order book at the end of February 2021 is at record levels.

 

The Group's financial position remains strong, at 31 December 2020 it had:

 

•       £237.3 million of total borrowing facilities available (comprising committed facilities of £198.1 million and uncommitted facilities of £39.2 million representing overdraft lines and an undrawn accordion facility of £30 million). The Group's primary source of finance is the £180 million committed revolving credit facility (RCF); at 31 December 2020 £136.8 million of this facility had been drawn down. The Group's RCF will mature in November 2023.

 

•       A leverage ratio of 1.6 times at 31 December 2020 compared to a covenant maximum of 3.0 times. Interest cover (pre-IFRS 16 and excluding pension interest) of 12.6 times compared to a covenant minimum of 4.0 times

 

The Group has prepared and reviewed cash flow forecasts across the business over the twelve-month period from the date of the approval of these financial statements, considering the Group's current financial position and the potential impact of our principal risks on divisions.

 

The Group's financial projections contain key assumptions surrounding revenue and operating profit recovery in 2021, these estimates position the Group remaining below pre-COVID 2019 levels throughout the twelve months from the date of signing these financial statements. Under the Group's base case financial projections, the Group retains significant liquidity and covenant headroom, with both metrics improving from the position as at 31 December 2020.

 

The Group's financial projections have been stress tested for "business as usual" risks (such as profit growth and working capital variances), and the impact of the following principal risks:  general revenue reductions, contractual risks, people and capability, supplier resilience and health and safety (occurring both individually and in unison). Principal risks which were not specifically modelled were either considered not likely to have an impact within the going concern period or their financial effect was covered within the overall downside economic risks implicit within the stress testing. Under the stress tested modelling, the liquidity headroom within the group remains significant. Financial covenants continue to be in compliance under the stress tested model and management have a number of mitigating actions which could be undertaken if required.

 

A "reverse" stress-test was also modelled to understand the conditions which could jeopardise the ability of the Group to continue as a going concern including assessing against covenant testing and facility headroom. The stress testing also considered mitigating actions which could be put in place. Mitigating actions included limiting capital expenditure and reducing controllable costs including items such as discretionary bonuses and pay rises.  The reverse stress test is deemed to have a remote likelihood and help inform the Directors' assessment that there are no material uncertainties in relation to going concern.

 

 

TT Electronics plc
Results for the year ended 31 December 2020

2 Basis of accounting continued

The Group's wide geographical and sector diversification helps minimise the risk of serious business interruption or catastrophic reputational damage. Furthermore, the business model is structured so that the Group is not overly reliant on any single customer, market or geography.

 

The Directors have assessed the future funding requirements of the Group with due regard to the risks and uncertainties to which the Group is exposed and compared them with the level of available borrowing facilities and are satisfied that the Group has adequate resources for at least twelve months from the date of signing. Accordingly, the financial statements have been prepared on a going concern basis.

 

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experiences and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.

 

Critical judgements

In the course of preparing the Financial Statements, a critical judgement within the scope of paragraph 122 of IAS 1: "Presentation of Financial Statements" is made during the process of applying the Group's accounting policies.

 

Adjusting Items

Judgements are required as to whether items are disclosed as adjusting, with consideration given to both quantitative and qualitative factors. Further information about the determination of adjusting items in the year ended 31 December 2020 is included in note 2 'Alternative performance measures'.

 

There are no other critical judgements other than those involving estimates, that have had a significant effect on the amounts recognised in the Financial Statements. Those involving estimates are set out below.

 

Key sources of estimation uncertainty

Assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

 

• Note 4 - Goodwill. The carrying amount of goodwill at 31 December 2020 was £156.9 million (2019: £136.1 million). Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units ("CGUs") to which the goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from CGUs and a suitable discount rate in order to calculate present value. The carrying amount of the IoT Solutions CGU's goodwill was £27.6 million (2019: £27.6 million). Due to the impact of COVID-19, as explained in note 4, IoT Solutions CGU shows headroom of £6.1 million and is sensitive to a reasonably possible change in assumptions; discount rate, long-term growth rate and operating cash flow. At 31 December 2020 and 31 December 2019, the Group recognised no impairment loss in respect of these assets. Further information, including a sensitivity analysis on the key assumptions, is provided in note 4.

 

• Note 5 - Acquisitions. The opening balance sheet for the recent acquisition of Torotel, Inc. has not yet been finalised and is preliminary. There is uncertainty whether a loan provided under a US Government COVID-19 support scheme of $1.9 million (£1.4 million) will be forgiven as described in more detail in Note 5.

 

 

 

TT Electronics plc
Results for the year ended 31 December 2020

2 Basis of accounting continued

• Note 8 - Taxation. Accruals for tax contingencies require management to make judgements and estimates in relation to tax audit issues and exposures. Amounts accrued are based on management's interpretation of country-specific tax law and the likelihood of settlement. Tax benefits are not recognised unless the tax positions are probable of being sustained. Once considered to be probable, management reviews each material tax benefit to assess whether a provision should be taken against full recognition of the benefit on the basis of potential settlement through negotiation and/or litigation. These amounts are expected to be utilised or to reverse as tax audits occur or as the statute of limitations is reached in the respective countries concerned. The Group's current tax liability at 31 December 2020 includes tax provisions of £6.4 million (2019: £7.3 million). The Group believes the range of reasonable possible outcomes in respect of these exposures is tax liabilities of up to £8.2 million (2019: £7.4 million).

 

• Note 12 - Defined benefit pension obligations. The defined benefit obligations in respect of the plans are discounted at rates set by reference to market yields on high quality corporate bonds. Significant estimation is required when setting the criteria for bonds to be included in the population from which the yield curve is derived. The most significant criteria considered for the selection of bonds to include are the issue size of the corporate bonds, quality of the bonds and the identification of outliers which are excluded. In addition, assumptions are made in determining mortality and inflation rates to be used when valuing the plan's defined benefit obligations. Whilst actual movements might be different to sensitivities shown, there is a reasonably possible change that could occur. At 31 December 2020, the retirement benefit plan was in a surplus of £30.5 million (31 December 2019: £16.6 million). Note 12 outlines the significant assumptions and associated sensitivities.

 

Restatements and representations

During the year, it was determined that the Group's cash and overdrafts within notional cash pooling arrangements did not meet the requirements for offsetting in accordance with IAS 32: 'Financial Instruments: Presentation' and cannot be presented net in the statement of financial position. For presentational purposes, amounts have therefore been restated for the preceding years ending 31 December 2019 and 31 December 2018 in accordance with IAS 8: 'Accounting Policies, Changes in Accounting Policies and Errors'. The impact of this change is to increase both cash and cash equivalents and overdrafts within current loans and other borrowings for the year ended 31 December 2019 by £9.6 million (31 December 2018: £4.1 million) in the Group's consolidated statement of financial position. The re-presentation has no impact on the Group's net debt, bank covenants or other commercial agreements.

Within the comparative periods the consolidated statement of comprehensive income and the consolidated statement of changes in equity have been re-presented to present the gain/(loss) upon retranslation of foreign currency denominated quasi equity loans within the line 'Exchange differences on translation of foreign operations' which were previously presented within the line 'Gain on hedge of net investment in foreign operations'. The value of the amounts re-presented was £2.7 million in the year to 31 December 2019. There was no impact on the Group consolidated statement of financial position or the Group consolidated statement of cash flows.

Within the comparative periods the consolidated statement of financial position has been represented to report certain balances held within accruals within current 'Trade and other payables' relating to warranty and property items into current 'Provisions' and non-current 'Provisions and other non-current liabilities'. The impact as at 31 December 2018 was to reduce 'Trade and other payables' by £2.5 million, increase 'Provisions' by £1.4 million and increase 'Provisions and other non-current liabilities' by £1.1 million. The impact as at 31 December 2019 was to reduce 'Trade and other payables' by £2.0 million, increase 'Provisions' by £1.2 million and increase 'Provisions and other non-current liabilities' by £0.8 million.

During the year it was determined that an adjustment was required to the initial deferred income recognised due to pricing concessions given to isolated customers on the adoption of IFRS 15: 'Revenue from Contracts with Customers'.  The impact of this restatement is to increase 'Retained earnings' and decrease deferred revenue (presented within 'Trade and other payables') for the year ending 31 December 2019 by £1.2 million (31 December 2018: £1.2 million) within the Global Manufacturing Solutions segment. There was no impact on the Group consolidated income statement, Group consolidated statement of cash flows or EPS.

During the year, it was determined certain overheads had been included in raw materials in a manner inconsistent with IAS 2: 'Inventories' at one site within the Global Manufacturing Solutions segment. The effect of restating the absorbed overheads as at 31 December 2018 was to decrease 'Inventories' by £0.8 million, increase 'Deferred tax assets' by £0.2 million and decrease equity by £0.6m. For the year ending 31 December 2019 the cumulative effect was to decrease 'Inventories' by £2.7 million, increase 'Deferred tax assets' by £0.6 million, decrease 'Operating profit' by £1.9 million and decrease the tax charge by £0.4 million.

 

TT Electronics plc
Results for the year ended 31 December 2020

2 Basis of accounting continued

Alternative performance measures

The Group presents Alternative Performance Measures ("APMs") in addition to the statutory results of the Group. These are presented in accordance with the guidelines on APMs issued by the European Securities and Markets Authority ("ESMA").

Adjusted operating profit has been defined as operating profit from continuing operations excluding the impacts of significant restructuring programmes, significant one-off items including property disposals, business acquisition, integration and divestment related activity; and the amortisation of intangible assets recognised on acquisition. Acquisition and disposal related items include the writing off of the pre-acquisition profit element of inventory written up on acquisition, other direct costs associated with business combinations and adjustments to contingent consideration related to acquired businesses. Restructuring includes significant changes in footprint (including movement of production facilities) and significant costs of management changes.

In addition to the items above, adjusting items impacting profit after tax include:

•               The net effect on tax of significant restructuring from strategy changes that are not considered by the Group to be part of the normal operating costs of the business; and

•               The tax effects of adjustments to profit before tax.

Costs associated with restructuring, acquisitions and disposals are uncertain with regard to their timing and size and therefore their inclusion within adjusted operating profit could mislead the reader of the accounts.

These financial statements include alternative performance measures that are not prepared in accordance with IFRS. These alternative performance measures have been selected by the Directors to assist them in making operating decisions because they represent the underlying operating performance of the Group and facilitate internal comparisons of performance over time.

The Directors consider the adjusted results to be an important measure used to monitor how the businesses are performing as this provides a meaningful reflection of how the businesses are managed and measured on a day-to-day basis and achieves consistency and comparability between reporting periods, when all businesses are held for a complete reporting period.

 

TT Electronics plc
Results for the year ended 31 December 2020

3 Segmental reporting

The Group is organised into three divisions, as shown below, according to the nature of the products and services provided. Each of these divisions represents an operating segment in accordance with IFRS 8 'Operating segments' and there is no aggregation of segments. The chief operating decision maker is the Board of Directors. The operating segments are:

·      Power and Connectivity - The Power and Connectivity division designs and manufactures power application products and connectivity devices which enable the capture and wireless transfer of data. We collaborate with our customers to develop innovative solutions to optimise their electronic systems;

·      Global Manufacturing Solutions - The Global Manufacturing Solutions division provides manufacturing services and engineering solutions for our product divisions and to customers that often require a lower volume and higher mix of different products. We manufacture complex integrated product assemblies for our customers and provide engineering services including designing testing solutions and value-engineering; and

·      Sensors and Specialist Components - The Sensors and Specialist Components division works with customers to develop standard and customised solutions including sensors and power management devices. Our solutions improve the precision, speed and reliability of critical aspects of our customers' applications.

The key performance measure of the operating segments is adjusted operating profit. Refer to note 7 for a definition of adjusted profit.

Corporate costs - Resources and costs of the head office managed centrally but deployed in support of the operating units are allocated to segments based on a combination of revenue and operating profit. Resources and costs of the head office which are not related to the operating activities of the trading units are not allocated to divisions and are separately disclosed, equivalent to the segment disclosure information, so that reporting is consistent with the format that is used for review by the chief operating decision maker. This gives greater transparency of the adjusted operating profits for each segment.

Group financing (including finance costs and finance income) and income taxes are managed on a Group basis and are not allocated to operating segments. Goodwill is allocated to the individual cash generating units which may be smaller than the segment which they are part of.

a)   Income statement information - continuing operations

 

						2020
£million	Power and Connectivity	Global Manufacturing Solutions	Sensors and Specialist Components	Total Operating Segments	Corporate	Total
Sales to external customers	125.1	197.5	109.2	431.8	-	431.8
Adjusted operating profit	10.3	15.0	9.4	34.7	(7.2)	27.5
Add back: adjustments made to operating profit (note 7)						(20.9)
Operating profit						6.6
Net finance costs						(3.7)
Profit before taxation						2.9

 

TT Electronics plc
Results for the year ended 31 December 2020

3 Segmental reporting continued

 

						2019
£million	Power and Connectivity	Global Manufacturing Solutions	Sensors and Specialist Components	Total Operating Segments	Corporate	Total Restated [1]
Sales to external customers	138.2	213.2	126.8	478.2	-	478.2
Adjusted operating profit	16.5	13.5	15.3	45.3	(7.2)	38.1
Add back: adjustments made to operating profit (note 7)						(21.2)
Operating profit						16.9
Net finance costs						(3.7)
Profit before taxation						13.2

1. Restated in the comparative period, further details provided in note 2.

There are no significant sales between segments.

b)   Geographic information

The Group operates on a global basis. Revenue from external customers by geographical destination is shown below. Management monitors and reviews revenue by region rather than by individual country given the significant number of countries where customers are based.

 

£million	2020	2019
United Kingdom	100.2	139.4
Rest of Europe	74.8	89.6
North America	164.2	141.7
Central and South America	0.7	0.6
Asia	88.8	103.1
Rest of the World	3.1	3.8
	431.8	478.2

 

c)   Market information

The Group operates in the following markets.

 

 

 

TT Electronics plc
Results for the year ended 31 December 2020

4 Goodwill

 

£million
Cost
At 1 January 2019		137.9
Additions		0.9
Net exchange adjustment		(2.7)
At 1 January 2020		136.1
Additions		23.7
Net exchange adjustment		(2.9)
At 31 December 2020		156.9

 

 

The goodwill generated as a result of acquisitions represents the premium paid in excess of the fair value of all net assets, including intangible assets, identified at the point of acquisition. The future improvements applied to the acquired businesses, achieved through a combination of revised strategic direction, operational improvements and investment are expected to result in improved profitability of the acquired businesses during the period of ownership. The combined value achieved from these improvements is expected to be in excess of the value of goodwill acquired.

Goodwill is attributed to the following cash-generating units in the divisions shown below:

 

£million	2020	2019
Power and Connectivity:
Power Solutions [1]	57.9	35.1
IoT Solutions	27.6	27.6
Global Manufacturing Solutions:
Global Manufacturing Solutions	18.2	18.6
Sensors and Specialist Components:
Resistors [2]	30.1	31.1
Optoelectronics	21.0	21.6
Roxspur	2.1	2.1
	156.9	136.1

1. Includes the newly acquired aerospace and defence power supply business of Excelitas Technologies Corp based in Covina, California, and Torotel, Inc.

2. In the prior year the Resistors CGU comprised of the Variable Components CGU and the Resistors CGU with respective goodwill of £28.9 million and £2.2 million.

 

The Group tests goodwill impairment annually or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and operating cash flow projections over a forecast period. The growth rate assumed after this forecast period is based on long-term GDP projections capped at long term growth rates (which are approximated as long term inflation rates) of the primary market for the CGU, in perpetuity. Long-term growth rates are based on long-term forecasts for growth in the sectors and geography in which the group of CGUs operates. Long-term growth rates are determined using long-term growth rate forecasts that take into account the international presence and the markets in which each business operates.

Management estimate discount rates using pre-tax rates that reflect current market assessments of the Group's time value of money and the risks specific to the CGU being measured.

In determining the cost of equity, the Capital Asset Pricing Model ("CAPM") has been used. Under CAPM, the cost of equity is determined by adding a risk premium, based on an industry adjustment ("Beta"), to the expected return of the equity market above the risk-free return. The relative risk adjustment reflects the risk inherent in each group of CGUs relative to all other sectors and geographies on average.

The cost of debt is determined using a risk-free rate based on the cost of government bonds, and an interest rate premium equivalent to a corporate bond with a similar credit rating to the Group.

TT Electronics plc
Results for the year ended 31 December 2020

4 Goodwill continued

The growth rates assume that demand for our products remains broadly in line with the underlying economic environment in the long-term future. Taking into account our expectation of future market conditions, we believe that the evolution of selling prices and cost measures put into place will lead to a sustained improvement in profitability.

Management has detailed plans in place reflecting the latest Budget and strategic growth plan. The pre-tax discount rates and periods of management approved forecasts are shown below:

 

1. In the prior year the Resistors CGU comprised of the Variable Components CGU and the Resistors CGU with respective long term growth rates of 1.6% and 1.6%, and pre-tax discount factors of 13.8% and 12.8%.

No impairment losses have been recognised in the current or prior year as recoverable amounts exceed the total carrying value of assets for all of the CGUs.

Assumptions in the value in use test is the projected performance of the CGUs based on sales growth rates, cash flow forecasts and discount rate. Forecast sales growth rates are based on past experience adjusted for the strategic direction and near-term investment priorities within each CGU. The key assumptions include externally obtained growth rates in the key markets disclosed in note 3 and customer demand for product lines. Cash flow forecasts are determined based on historic experience of operating margins, adjusted for the impact of changes in product mix and cost-saving initiatives, including the impact of our restructuring projects and cash conversion based on historical experience.

The recoverable amounts associated with the goodwill balances which are based on these performance projections and based on current forecast information do not indicate that any goodwill balance is impaired. If a company's actual performance does not meet these projections this could lead to an impairment of the goodwill in future periods. The COVID-19 pandemic is having a significant impact on global end markets in which certain of the Group's businesses operate which has resulted in reduced levels of headroom at the point of forecast, in particular the IoT Solutions CGU.

Sensitivity analysis has been performed on the key assumptions; operating cash flow projections and discount rate. Cash flows can be impacted by changes to sales projections, sales prices, direct costs and replacement capital expenditure; individually they are not significant assumptions.

The Directors have not identified changes in significant assumptions that would cause the carrying value of recognised goodwill to exceed its recoverable amount, with the exception of IoT Solutions CGU.

At 31 December 2020, due to reduced forecast revenues resulting from the COVID-19 pandemic, an indicator of impairment was identified in respect of goodwill allocated to all CGUs, with the most significant impact on IoT Solutions.

IoT Solutions operates in markets with strong growth fundamentals and the short term forecasts for the IoT Solutions CGU include revenue and margin growth from successful product launches in the short and medium term.  However, these forecasts exclude any potential benefits from the Virolens® rapid COVID-19 screening device given operational trials and validation testing are ongoing and the wide range of possible outcomes.

IoT Solutions CGU shows headroom of £6.1 million above the £60.2 million carrying amount, including £27.6m of goodwill. The growth rates assume that demand for our product remains broadly in line with the underlying economic environment in the long-term future. Taking into account our expectation of future market conditions, we believe that the evolution of selling prices and cost measures put into place will lead to a sustained improvement in profitability.

TT Electronics plc
Results for the year ended 31 December 2020

4 Goodwill continued

In accordance with IAS 36 'Impairment of Assets', the Group performed sensitivity analysis on the estimates of recoverable amounts and found that the excess of recoverable amount over the carrying amount of the IoT Solutions CGU would be reduced to £nil as a result of a reasonably possible change in assumptions.

Sensitivity analysis has been carried out and a reasonably possible change in the discount rate and long-term growth rate from 11.5% to 12.3% or from 1.8% to 0.5% respectively would reduce headroom to £nil. A reduction in operating cash flow of 9.2% would also reduce headroom to £nil. Management does not consider that the relevant change in these assumptions would have a consequential effect on other key assumptions.

5 Acquisitions

On 3 January 2020 the Group acquired the trade and assets of the aerospace and defence power supply business of Excelitas Technologies Corp based in Covina, California, for an initial cash consideration of $17.7 million (£13.5 million) and a further $0.9 million (£0.7 million) working capital adjustment paid in cash. In December 2019 $0.3 million (£0.2 million) was paid for a derivative financial instrument to hedge the consideration. Acquisition costs including integration costs are disclosed in note 7.

The fair value of the net assets acquired were £12.1 million, including intangible assets relating primarily to the business' customer relationships of £4.1 million, resulting in goodwill recognised on acquisition of £2.3 million (all of which may become deductible for tax purposes). From the date of acquisition to the period end the business generated revenue of £7.9 million, operating loss of £0.1 million, adjusted operating profit of £1.0 million and an adjusted operating cash inflow of £1.8 million.     

Had the acquisition been completed on 1 January, the Group's full year revenue, operating profit and adjusted operating profit would have been unchanged at £431.8 million, £6.6 million and £27.5 million respectively as reported.

The acquisition enhances the Group's presence in the large and growing US aerospace and defence market and extends the Group's power electronics capabilities to include power convertors, moving the Group up the value chain, in line with its strategy. This will also provide access to sole-sourced positions on growing defence programmes for the Group and new customer relationships with key US defence primes. The goodwill recognised on acquisition represents the Group's view of the future earnings growth potential and technical know-how in the acquired business.

On 10 November 2020 the Group acquired the entire equity share capital of Torotel Inc. for an initial cash consideration of $37.0 million (£27.9 million) and a further $1.0 million (£0.7 million) was paid for a derivative financial instrument to hedge the consideration. Acquisition costs including integration costs are disclosed in note 7. The enterprise value of the consideration was $43.4 million (£32.9 million) which consisted of the $37.0 million (£27.9 million) paid in cash and the assumption of net cash excluding PPP loans, cash paid out for fees and cash paid for bonuses which crystallised upon acquisition totalling $6.4 million (£4.8 million).

The fair value of the net assets acquired were £7.3 million, including intangible assets relating primarily to the business' customer relationships of £9.0 million, resulting in goodwill recognised on acquisition of £21.4 million. From the date of acquisition to the period end the business generated revenue of £2.4 million, operating loss of £0.2 million adjusted operating profit of £0.2 million and an adjusted operating cash inflow of £0.4 million.

Torotel is a Kansas, US-based designer and manufacturer of high-reliability power and electro-magnetic assemblies and components designed for harsh environments, primarily for defence markets.  The acquisition broadens TT's power electronics capabilities in the US, further increasing its scale in this important market.  It adds recurring revenue streams from largely sole source positions on multi-year growth programmes and brings attractive cross-selling opportunities.  The goodwill recognised on acquisition represents the Group's view of the future earnings growth potential and technical know-how in the acquired business.

Had the acquisition been completed on 1 January, the Group's full year revenue, operating profit and adjusted operating profit would have been £448.8 million, £8.1 million and £29.0 million respectively, compared to £431.8 million, £6.6 million and £27.5 million as reported.

 

TT Electronics plc
Results for the year ended 31 December 2020

5 Acquisitions continued

In August 2020 Torotel, Inc. applied for PPP loans, a US government COVID-19 support scheme, of $1.9 million (£1.4 million) to be forgiven. To date the Group has not received confirmation that the application was successful therefore the liability has been recognised in full in the provisional acquisition balance sheet. In the event the application is successful $1.9 million (£1.4 million) of acquired debt will be forgiven under the scheme and the provisional accounting will be updated.

The fair value and gross contractual value of the financial assets acquired with the aerospace and defence power supply business of Excelitas Technologies Corp and Torotel Inc. included receivables of £1.8 million and £1.8 million respectively. Management's best estimate of the cashflows which will be collected was £1.8 million for the aerospace and defence power supply business of Excelitas Technologies Corp and £1.7 million for Torotel, Inc. 

 

£million			The aerospace and defence power supply business of Excelitas Technologies Corp	Torotel, Inc. (Provisional)
Non-current assets
Right-of-use asset			-	2.0
Property, plant and equipment			5.4	1.8
Identifiable intangible assets			4.1	9.0
Deferred tax assets			-	0.2
Current assets / (liabilities)
Inventory			1.3	3.2
Trade and other receivables			1.8	1.8
Trade and other payables			(0.5)	(6.3)
Deferred tax liabilities			-	(0.8)
Lease liabilities			-	(2.0)
Cash and cash equivalents			-	1.4
Borrowings			-	(3.0)
			12.1	7.3
Consideration Paid
Cash consideration net of the impact of hedging			14.4	28.7
Goodwill			2.3	21.4

 

On 22 March 2019 the Group acquired the entire equity share capital of Power Partners Inc. for an initial $1.6 million (£1.2 million), an additional $0.7 million (£0.5 million) was paid in the period based on business performance. In 2020 a further $0.6 million (£0.5 million) was paid based on business performance. A further $0.5 million (£0.4 million) may still become payable.

The acquisition enhances our technology capabilities in power products and improves our medical market access accelerating our organic technology roadmap and US medical market presence. The goodwill recognised on acquisition represents the Group's view of the future earnings growth potential of the acquired businesses.

 

TT Electronics plc
Results for the year ended 31 December 2020

6 Finance costs and finance income

 

£million	2020	2019
Interest income	0.1	0.1
Interest income on pension surplus	0.5	0.8
Finance income	0.6	0.9
Interest expense	3.0	3.0
Interest on lease liabilities	0.8	1.0
Interest expense on pension liabilities	0.1	0.2
Amortisation of arrangement fees	0.4	0.4
Finance costs	4.3	4.6
Net finance costs	3.7	3.7

 

7 Adjusting items

Adjusted operating profit has been defined as operating profit from continuing operations excluding the impacts of significant restructuring programmes; significant one-off items including property disposals, business acquisition, integration and divestment related activity; and the amortisation of intangible assets recognised on acquisition. Acquisition and disposal related items include the writing off of the pre-acquisition profit element of inventory written up on acquisition, other direct costs associated with business combinations and adjustments to contingent consideration related to acquired businesses. Restructuring includes significant changes in footprint (including movement of production facilities) and significant costs of management changes.

Costs associated with restructuring, acquisitions and disposals are uncertain with regard to their timing and size and therefore their inclusion within adjusted operating profit could mislead the reader of the accounts.

 

1. Restated in the comparative period, further details provided in note 2.

  

TT Electronics plc
Results for the year ended 31 December 2020

7 Adjusting items continued

Restructuring and Other £14.5 million (2019: £13.2 million)

Restructuring costs charged in the period primarily relate to costs arising on the restructuring of the Group's footprint, product rationalisation and headcount reduction programme to reduce the Group's fixed costs. Within the costs above there was £6.3 million relating to severance costs and provisions, £3.4 million of intangible asset write downs, £2.0 million of right-of-use asset and plant, property and equipment write downs, £1.6 million relating to inventory write downs and £1.5 million of other costs primarily relating to project team costs and final costs of projects completed in 2020. Income from property disposals of £1.2 million (2019: £nil) relates to the sale of property in Lutterworth, UK. Pension costs of £0.9 million (2019: £1.0 million with £0.4 million relating to past service charge and £0.6 million relating to other pension restructuring costs) primarily relate to the pension past service charge as a result of UK pensions schemes having to equalise male and female members' benefits in respect of guaranteed minimum pensions ('GMP'). 2019's restructuring costs amounted to £12.2 million, primarily related to restructuring of the Group's footprint, and the support of the Stadium synergy plan.

 

Acquisition and disposal related costs £6.4 million (2019: £8.0 million)

Acquisition and disposal related costs charged in the period relate to amortisation of acquired intangible assets (£4.2 million), acquisition and integration costs of the aerospace and defence power supply business of Excelitas Technologies Corp based in Covina, California (£0.6 million acquisition costs, £0.7 million integration costs), acquisition and integration costs of Torotel, inc. (£1.2 million acquisition costs, £0.1 million integration costs) a credit related to the release of a product quality warranty claim provision relating to the disposal of the Transportation, Sensing, and Control Division in 2017, following a full and final settlement (£1.0 million), and other costs (£0.6 million). 2019's acquisition related costs amounted to £8.0 million and primarily related to amortisation of acquired intangible assets, the integration of Stadium Group and Precision Inc., and acquisition costs related to Power Partners Inc. the aerospace and defence power supply business of Excelitas Technologies Corp and Torotel, Inc.

8 Taxation

a) Analysis of the tax charge for the year

 

 

1. Restated in the comparative period, further details provided in note 2.

The enacted UK tax rate applicable from 1 April 2017 is 19% and due to changes in Government policy in the period this remains the UK rate as the enacted rate drop, originally legislated to occur from 1 April  2020 to 17%, has been reversed. The applicable tax rate for the period is based on the UK standard rate of corporation tax of 19% (2019:  19%). Overseas taxation is calculated at the rates prevailing in the respective jurisdictions. The Group's effective tax rate for the year was 55.2% (the adjusted tax rate was 18.1%).

On 3 March 2021 the UK Government announced changes to the UK corporate tax system and an increase in tax rate from the fiscal year 2023 to 25% from the currently enacted rate of 19%. The change in tax rate will result in a change to the level of deferred tax held in respect of the Group's UK operations and may impact the Group's effective tax rate in future years. The Group, to date, has not identified any other significant tax charges or credits arising from the proposed legislation.

TT Electronics plc
Results for the year ended 31 December 2020

8 Taxation (continued)

b) Reconciliation of the total tax charge for the year

1. Restated in the comparative period, further details provided in note 2.

The adjustment to current tax in respect of prior periods largely relates to the release of tax provisions in respect of concluded disputes and uncertainties.

The overall aim of the Group's tax strategy is to support business operations by ensuring a sustainable tax rate, mitigating tax risks in a timely and cost-efficient way and complying with tax legislation in the jurisdictions in which the Group operates. It is however inevitable that the Group will be subject to routine tax audits or is in ongoing disputes with tax authorities in the multiple jurisdictions it operates within. This is much more likely to arise in situations involving more than one tax jurisdiction.  Differences in interpretation of legislation, of global standards (e.g. OECD guidance) and of commercial transactions undertaken by the group between different tax authorities are one of the main causes of tax exposures and tax risks for the group.

In order to manage the risk to the Group an assessment is made of such tax exposures and provisions are created using the best estimate of the most likely amount to be incurred within a range of possible outcomes. The resolution of the Group's tax exposures can take a considerable period of time to conclude and, in some circumstances, it can be difficult to predict the final outcome.

The current tax liability at 31 December 2020 includes tax provisions of £6.4 million (2019: £7.3 million). The Group believes the range of reasonable possible outcomes in respect of these exposures is tax liabilities of up to £8.2 million (2019: £7.4 million).

9 Dividends

 

 

The Directors recommend a final dividend of 4.7 pence per share. The Group has a progressive dividend policy. The final dividend will be paid on 21 May 2021 to shareholders on the register on 29 April 2021.

TT Electronics plc
Results for the year ended 31 December 2020

10 Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of shares in issue during the year.

1. Restated in the comparative period, further details provided in note 2.

The numbers used in calculating adjusted, basic and diluted earnings per share are shown below.

Adjusted earnings per share is based on the adjusted profit after interest and tax.

Adjusted earnings per share:

£million	2020	2019 Restated [1]
Continuing operations
Profit for the year attributable to owners of the Company	1.3	12.4
Restructuring and other	14.5	13.2
Acquisition and disposal related costs	6.4	8.0
Tax effect of above items (see note 8)	(2.7)	(4.6)
Adjusted earnings	19.5	29.0
Adjusted earnings per share (pence)	11.7	17.8
Adjusted diluted earnings per share (pence)	11.6	17.4

1. Restated in the comparative period, further details provided in note 2.

The weighted average number of shares in issue is as follows:

 

 

TT Electronics plc
Results for the year ended 31 December 2020

11 Reconciliation of net cash flow to movement in net debt

Net cash of £69.0 million (2019: £60.2 million) comprises cash at bank and in hand of £70.2 million (2019: £69.8 million) and overdrafts of £1.2 million (2019: £9.6 million).

 

TT Electronics plc
Results for the year ended 31 December 2020

12 Retirement benefit schemes

 

Defined contribution schemes

The Group operates 401(k) plans in North America and defined contribution arrangements in the rest of the world. The assets of these schemes are held independently of the Group. The total contributions charged by continuing operations in respect of defined contribution schemes were £3.1 million (2019: £3.5 million).

Defined benefit schemes

At 31 December 2020 the Group operated two defined benefit schemes in the UK (the TT Group (1993) Pension Scheme and the Southern & Redfern Ltd Retirement Benefits Schemes) and overseas defined benefit schemes in the USA.  These schemes are closed to new members and the UK schemes are closed to future accrual.

In the year ended 31 December 2019, in order to improve governance of the UK pension schemes, as well as drive cost efficiency, the Stadium Group Retirement Benefits Plan (1974) was merged into the TT Group (1993) Pension Scheme (the TT Group scheme) with effect from 29 March 2019.

The total net accounting surplus under the Group's defined benefit schemes was £30.5 million (2019: £16.6 million surplus).  The main reason for this improvement is an increase in the fair value of assets due to investment performance, part of which relates to interest rate hedges which offset an increase in the Scheme's benefit obligation, mainly due to a fall in corporate bond yields. The surplus was also increased due to company contributions paid of £5.3m into the larger UK scheme, as the Group continues the contribution plan targeting self-sufficiency and further de-risking.

The triennial valuation of the TT Group scheme as at April 2019 showed a net surplus of £0.3 million against the Trustee's statutory funding objective. As the scheme was fully funded at the 2019 triennial valuation date, there is no requirement for the Company to pay deficit repair contributions. In addition to the statutory funding objective, the Trustee and Company agreed to move towards a 'self-sufficiency' funding target, under which once full funding is achieved the likelihood of the Trustee requiring subsequent contributions from the Company is significantly reduced. To support the scheme's long-term funding target of self-sufficiency the Company agreed to pay additional fixed contributions of £5.5 million, £5.7 million and £4.4 million in the years 2021 to 2023 respectively.

The amounts recognised in respect of the pension surplus in the consolidated balance sheet are:

 

£million	2020	2019
Fair value of assets	648.7	583.1
Defined benefit obligation	(618.2)	(566.5)
Net surplus	30.5	16.6
Represented by:
UK	35.4	21.2
USA	(4.9)	(4.6)
	30.5	16.6

 

 

TT Electronics plc
Results for the year ended 31 December 2020

12 Retirement benefit schemes continued

 

Amounts recognised in the consolidated income statement are:

 

 

Amounts recognised in the consolidated statement of comprehensive income are a gain of £8.6 million (2019: loss of £9.1 million) which comprises of; the actual return on scheme assets, a gain of £70.9 million (2019: gain of £51.8 million) and the remeasurement of the schemes obligations, an increase of £62.3 million (increase of £60.9 million).

 

13 Share Capital

 

£million	2020	2019
Issued and fully paid
174,580,743 (2019: 164,038,978) ordinary shares of 25p each	43.6	41.0

 

On the 22 September 2020 the Group issued 10,000,000 ordinary shares to fund the acquisition of Torotel. The consideration received was £19.5 million (after fees of £0.5 million which were recorded within share premium) which was represented by a £2.5 million increase in share capital and a £17.0 million increase in share premium.

During the period the Company issued 455,265 ordinary shares as a result of share options being exercised under the Sharesave scheme and Share Purchase plans.  The aggregate consideration received was £0.7 million, which was represented by a £0.1 million increase in share capital and a £0.6 million increase in share premium.

The performance conditions of the Long-term Incentive Plan awards issued in 2017 and Restricted Share Plan awards issued in 2018, 2019 and 2020 were met and shares were allocated to award holders from existing shares held by an Employee Benefit Trust for £nil consideration. 86,500 new shares were also issued at par value of 25 pence to settle the vesting of part of the 2017 scheme.

14 Related party transactions

Transactions between the Company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note.

No related party transactions have taken place in 2020 or 2019 that have affected the financial position or performance of the Group.

 

TT Electronics plc
Results for the year ended 31 December 2020

Reconciliation of KPIs and non IFRS measures

In accordance with the Guidelines on APMs issued by the European Securities and Markets Authority (ESMA), additional information is provided on the APMs used by the Group below.

To assist with the understanding of earnings trends, the Group has included within its financial statements APMs including adjusted operating profit and adjusted profit. The APMs used are not defined terms under IFRS and therefore may not be comparable to similar measures used by other companies. They are not intended to be a substitute for, or superior to, GAAP measures.

Management uses adjusted measures to assess the operating performance of the Group, having adjusted for specific items as detailed in note 7. They form the basis of internal management accounts and are used for decision making, including capital allocation, with a subset also forming the basis of internal incentive arrangements. By using adjusted measures in segmental reporting, this enables readers of the financial statements to recognise how incentive performance is targeted. Adjusted measures are also presented in this announcement because the Directors believe they provide additional useful information to shareholders on comparable trends over time. Finally, this presentation allows for separate disclosure and specific narrative to be included concerning the adjusting items; this helps to ensure performance in any one year can be more clearly understood by the user of the financial statements.

Income statement measures:

Alternative Performance Measure	Closest equivalent statutory measure	Note reference to reconciliation to statutory measure	Definition and purpose
Adjusted operating profit	Operating profit	Adjusting items as disclosed in note 7	Operating profit from continuing operations excluding the impacts of significant restructuring programmes; significant one-off items including property disposals, business acquisition and divestment related activity; and the amortisation of intangible assets recognised on acquisition. Business acquisition and divestment related items include the writing off of the pre-acquisition profit element of inventory written up on acquisition, other direct costs associated with business combinations and adjustments to contingent consideration related to acquired businesses. Costs arising from significant changes in footprint (including movement of production facilities) and significant costs of management changes are also excluded. To provide a measure of the operating profits excluding the impacts of significant items such as restructuring or acquisition related activity and other items such as amortisation of intangibles which may not be present in peer companies which have grown organically.
Adjusted operating margin	Operating profit margin	Adjusting items as disclosed in note 7	Adjusted operating profit as a percentage of revenue. To provide a measure of the operating profits excluding the impacts of significant items such as restructuring or acquisition related activity and other items such as amortisation of intangibles which may not be present in peer companies which  have grown organically.

 

TT Electronics plc
Results for the year ended 31 December 2020

Income statement measures continued

Alternative Performance Measure	Closest equivalent statutory measure	Note reference to reconciliation to statutory measure	Definition and purpose
Adjusted earnings per share	Earnings per share	See note 10 for the reconciliation and calculation of adjusted earnings per share	The profit for the year attributable to the owners of the Group adjusted to exclude the items not included within adjusted operating profit divided by the weighted average number of shares in issue during the year. To provide a measure of earnings per share excluding the impacts of significant items such as restructuring or acquisition related activity and other items such as amortisation of intangibles which may not be present in peer companies which have grown organically.
Adjusted diluted earnings per share	Diluted earnings per share	See note 10 for the reconciliation and calculation of adjusted diluted earnings per share	The profit for the year attributable to the owners of the Group adjusted to exclude the items not included within adjusted operating profit divided by the weighted average number of shares in issue during the year, adjusted for the effects of any potentially dilutive options. To provide a measure of earnings per share excluding the impacts of significant items such as restructuring or acquisition related activity and other items such as amortisation of intangibles which may not be present in peer companies which have grown organically.
Organic revenue	Revenue	See note APM 1	This is the percentage change in revenue from continuing operations in the current year compared to the prior year, excluding the effects of currency movements, acquisitions and disposals. This measures the underlying growth or decline of the business. To provide a comparable view of the revenue growth of the business from period to period excluding acquisition impacts.
Adjusted effective tax charge	Effective tax charge	See note APM 2	Tax charge adjusted to exclude tax on items not included within adjusted operating profit divided by adjusted profit before tax, which is also adjusted to exclude the items not included within adjusted operating profit. To provide a tax rate which excludes the impact of adjusting items such as restructuring or acquisition related activity and also other items such as amortisation of intangibles which may not be present in peer companies who have grown organically.

 

TT Electronics plc
Results for the year ended 31 December 2020

Income statement measures continued:

Alternative Performance Measure	Closest equivalent statutory measure	Note reference to reconciliation to statutory measure	Definition and purpose
Return on invested capital	None	See note APM 3	Adjusted operating profit for the year divided by average invested capital for the year. Average invested capital excludes pensions, provisions, tax balances, derivative financial assets and liabilities, cash and borrowings and is calculated at average rates taking 12 monthly balances. This measures how efficiently assets are utilised to generate returns with the target of exceeding the cost to hold the assets.

 

Statement of financial position measures:

Alternative Performance Measure	Closest equivalent statutory measure	Note reference to reconciliation to statutory measure	Definition and purpose
Net debt	Cash and cash equivalents less borrowings and lease liabilities	Reconciliation of net cash flow to   movement in net debt (note 11)	Net debt comprises cash and cash equivalents and borrowings including lease liabilities. This is additional information provided which may be helpful to the user in understanding the liquidity and financial structure of the business.
Leverage (bank covenant)	Cash and cash equivalents less borrowings	N/A	Leverage is the net debt defined as per the banking covenants (net debt (excluding lease liabilities) adjusted for certain terms as per the bank covenants) divided by EBITDA excluding items removed from adjusted profit and further adjusted for certain terms as per the bank covenants. Provides additional information over the Group's financial covenants to assist with assessing solvency and liquidity.
Net capital and development expenditure (net capex)	None	See note APM 4	Purchase of property, plant and equipment net of government grants (excluding property disposals), purchase of intangibles (excluding acquisition intangibles) and capitalised development. A measure of the Group's investments in capex and development to support longer term growth.
Dividend per share	Dividend per share	Not applicable	Amounts payable by dividend in terms of pence per share. Provides the dividend return per share to shareholders.