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RNS

Interim results

Released 07:00 07-Aug-2019

RNS Number : 1561I
Ultra Electronics Holdings PLC
07 August 2019
 

                                                         

Embargoed until 0700                                                                                                         7 August 2019

 

 

 

Ultra Electronics Holdings plc

("Ultra" or "the Group")

 

Interim Results for the six months to 30 June 2019

 

Making progress

 

   

    £'m

6 months to 30 June 2019

 

6 months to 30 June 2018

 

        Change %

Reported

Organic(2)

Order book

1,014.1

969.2

+4.6

+6.6

Revenue

387.1

350.5

+10.4

+8.3

Underlying(1)

 

 

 

 

Operating profit

52.9

47.9

+10.4

+7.7

Profit before tax

46.5

43.6

+6.7

 

EPS (p)

52.5

45.1

+16.4

 

Statutory

 

 

 

 

Operating profit

41.0

30.4

+34.9

 

Profit before tax

37.9

20.0

+89.5

 

EPS (p) 

43.3

20.0

+116.5

 

Interim dividend per share (p)

15.0

14.6

+2.7

 

Net debt to EBITDA(3)

1.32x

1.39x

 

 

 

·    A solid start to the year

o Benefitting from strong markets

o Good order book development

o Continued organic revenue growth

o Delivering as anticipated

·    Focus; Fix; Grow

o Ongoing strategic evolution and cultural change

o Increased investment in R&D and IT

o Progress on 'Fix' improvement initiatives

o Identifying additional future improvement and growth potential

·    Long term opportunities

o Key positions on new programmes

 

Simon Pryce, Chief Executive Officer, commented: 

"It has been a solid start to the year. Ultra is benefitting from strong US defence spend and increased demand on existing programmes. This helped us to deliver good order book and revenue growth and an improved financial performance in the first half. We are also making encouraging progress in changing Ultra's culture and on our strategic journey to become a more collaborative and value focussed application-engineered defence, critical detection and control solutions provider.

 

We have positive momentum into the second half and remain confident that 2019 will be a year of good progress for Ultra. Importantly, we have won good positions on a number of key new programmes which have significant long term potential. Together with our Focus; Fix; Grow initiatives, which are beginning to have an impact, this gives us confidence in the longer term improvement and growth opportunities for Ultra."

 

 

Webcast

Ultra Electronics will host a presentation to analysts on 7 August 2019 at 9.15am (BST) at Investec, 30 Gresham Street, EC2V 7QP. An audio webcast will be broadcast live via the following link http://bit.ly/ULE_H1webinar

 

Alternatively, a listen-only conference call will also be available on +44(0)330 221 0088; access code 787-558-277. An archive version of the presentation will be accessible on Ultra's website later today.

 

 

Notes:

(1)      Underlying profit, cash flow and earnings per share (EPS) are used to measure the trading performance of the Group as set out in notes 4 and 9. Underlying operating margin is the underlying operating profit as a percentage of revenue. Operating cash conversion is underlying operating cash flow as a percentage of underlying operating profit.

(2)      Organic movements are the change in revenue, profit and order book at constant currencies when compared to the prior period results as adjusted for any acquisitions or disposals to reflect the comparable period of ownership, and as if IFRS 16 had applied in the prior period.

(3)      Net debt to EBITDA: as IFRS 16 became effective half-way through the rolling 12 month period ended 30 June 2019, net debt and EBITDA for the current period is being calculated on a consistent basis to prior periods i.e. excluding the impact of IFRS 16. EBITDA is the underlying operating profit for the twelve months preceding the period end, before depreciation charges and before amortisation arising on internally generated intangible assets and on other non-acquired intangible assets, and adjusted to eliminate the impact of IFRS 16. The figure is adjusted to remove the EBITDA generated by businesses up to the date of their disposal in the period.  Net debt comprises borrowings excluding IFRS 16 finance lease liabilities, less cash and cash equivalents.  This treatment is consistent with Ultra's financial covenants which are also calculated excluding the impact of IFRS 16.

(4)      Underlying tax is the tax charge on underlying profit before tax. The underlying tax rate is underlying tax expressed as a percentage of underlying profit before tax.

(5)      Finance charges exclude fair value movements on derivatives and, prior to 31 December 2018, excluded defined benefit pension finance charges.

(6)      Bank interest cover is the ratio of underlying operating profit to finance charges associated with borrowings.

 

 

Enquiries:

 

Ultra Electronics Holdings plc

investor.relations@ultra-electronics.com

Simon Pryce, Chief Executive

Amitabh Sharma, Group Finance Director

020 8813 4307

Gabby Clinkard, Head of Investor Relations

07891 206239

 

 

MHP Communications

 

Tim Rowntree/Ollie Hoare/Luke Briggs

020 3128 8771

 

About Ultra:

Ultra is a specialist international application-engineered defence solutions provider. The Group operates predominantly in defence and other highly regulated markets with particular expertise in the maritime, and Intelligence & Communication domains. Ultra is a sub-system and systems provider, focused on providing mission specific, bespoke solutions for its customers. 

 

 

 

 

 

 

CEO REVIEW

 

Overview

As anticipated, we have made a solid start to the year. We are benefitting from good growth in our major markets, particularly North American defence spend, and have won positions on a number of important new "programs of record". The order book grew by another 6.6% organically despite a significant sonobuoy order that would normally have been received in H1 not being placed until after the period end. We entered H2 with 93% order cover for the remainder of the year.

 

We achieved organic revenue growth in all three of our divisions and gross and net profit were both well ahead of H1 2018. As anticipated, gross margin was weaker than H1 2018 (when excluding the H1 2018 impact of cost over-runs at Herley), mainly due to mix issues. However, this was marginally worse than anticipated in our Aerospace & Infrastructure division (due to challenges in our Energy business from delayed customer orders and the impact of trade disputes impacting sales to China) and our Maritime & Land division (due to additional lower margin development work) but partially offset by mix benefits in Communications & Security.

 

Underlying operating margin was lower than the prior period (when excluding the H1 2018 impact of over-run costs at Herley), which mainly reflected the planned increases in investment in R&D, IT and "Fix" related projects (which will accelerate in H2), long term incentive accrual and the lack of the one-off gain on forex exposure recognised in 2018, which (as previously announced) is now hedged.

 

Although revenue growth in 2019 is first half weighted, we expect underlying operating margins to recover to more normal levels in H2.

 

Focus; Fix; Grow

We have made good progress on our Focus; Fix; Grow change agenda. We have appointed a Transformation Director to help to oversee and coordinate the Group wide business transformation initiatives to ensure programme management discipline, effective oversight and interdependency management. Our key priorities are:

 

Focus

Strategically, we intend to migrate, over time, from an aggregation of broadly autonomous site based businesses to a focused, application-engineered defence solutions provider, specialising in Maritime, Intelligence and Communication.

 

We will also continue to own and invest in our other critical detection and control businesses (specialist nuclear, forensics and aerospace) where we can see good opportunities for value creation.

 

We will pursue economies of scale and scope and deliver above market growth in our defence businesses through:

·     closer collaboration and coordination in technology and know-how;

·     more efficient utilisation of core competences and physical capabilities;

·     sharing and standardising best process and practice in key areas such as programme management, systems engineering, and commercial;

·     closer customer intimacy; and

·     more effective strategic relationship building, marketing and cross-selling.

 

We will also pursue economies of scale from more effective use of shared services. This includes further standardisation and centralisation of administrative processes and taking better advantage of shared support functions, such as IT, procurement, management and human resources.

 

We are in the process of developing detailed plans to support execution of this strategy and to identify the growth opportunity and performance improvement potential it will deliver.

 

We have also continued to align our portfolio to support this strategy and divested both our Airport Systems and Corvid Paygate businesses in the first half for a combined total consideration of £22.8m.

 

Fix

In parallel with the strategy development work, we have made good progress in the first half in four key areas in on our broader change agenda:

1)    Culture and Talent - we have continued to strengthen our business and functional leadership and the governance and oversight environment. We have made good progress in developing the Group's vision, mission and values and we have refreshed our Group wide ethics policy and code of conduct; 

2)    Organisational Design - we are reviewing the Group's organisational model to determine how best to structure the Group to deliver our strategy. Whilst this is unlikely to lead to wholesale changes, it will lead to changes in roles, responsibilities and the allocation of corporate, divisional and local resources;  

3)    Process and Practice  - we are making some progress in improving a number of our core processes, particularly in the areas of commercial management, programme management and technology investment, although there is much more to do;

4)    Infrastructure - we have delivered significant improvements in our underlying IT capability as planned, launching a collaborative intranet across the Group, and investment will accelerate into H2 as we further improve our group wide IT functions.

 

We have also made good progress on changing inefficient working capital management practices to optimise working capital throughout the year. Average rolling 12 month working capital turn improved to 6.8x at the end of June 2019 versus 6.4x at the end of June 2018.

                                             

Grow

In the first half we have won positions on a number of important new "programs of record" that will secure our growth for a number of years ahead, including two large sole-source IDIQ awards in our Communications & Security division and Maritime & Land division. We are already seeing the benefits of a more collaborative culture, using expertise and capability from across the Group to bid on new programmes. This enables us to de-risk solutions for our customers, which will increase our win rate over time.

 

Outlook for H2

Our major markets are continuing to grow and our strong technology base positions us well to meet our customers' needs. 

 

We have a strong order book and positive momentum into the second half and remain confident that 2019 will be a year of progress for Ultra. Importantly, with a number of key new programme wins having significant long term potential and as our Focus; Fix; Grow programme begins to take effect, we see exciting long term future growth and improvement opportunities for Ultra.

 

FINANCIAL REVIEW

 

Orders                                                     

The order book increased organically by 6.6% to £1,014.1m (2018: £969.2m) compared to the prior period and showed 6.3% organic growth from the 31 December 2018 position of £983.9m, reflecting improving defence budgets, notably in the US, and some key wins on new and existing programmes. Order intake in the period grew organically by 12.4% to £449.9m (2018: £391.6m) and represents a book to bill ratio of 1.16 (2018: 1.12). The opening order cover for the second half is 93%.

 

Revenue

£m

% impact

Six months to June 2018

350.5

 

Currency translation

13.7

+3.9

Disposals

(6.7)

-1.9

Six months to June 2018 (for organic measure)

357.5

 

Organic growth

29.6

+8.3

Six months to June 2019

387.1

+10.4

 

Revenue grew by 10.4% to £387.1m compared to the prior period. This represents organic(2) growth of 8.3%, reflecting improved conditions in our US market. Specific programmes include revenue from the recently won Next Generation Surface Search Radar development contract, military aircraft platforms and tactical command and control systems. Sterling weakened during the period, increasing reported revenue by 3.9%. The average US dollar rate in the six months to 30 June 2019 was $1.29 compared to $1.38 in the prior period. The disposal of the Airport Systems business early in the year reduced revenue by 1.9% compared to the prior period.

 

Underlying operating profit and margins(1)

£m

% impact

Six months to June 2018

47.9

 

Currency translation

1.5

+3.1

Impact of IFRS 16 adoption

0.6

+1.3

Disposals

(0.9)

-1.9

Six months to June 2018 (for organic measure)

49.1

 

Organic growth

3.8

+7.7

Six months to June 2019

52.9

+10.4

 

Underlying operating profit was £52.9m (2018: £47.9m), an increase of 10.4% on the prior period. The underlying operating margin(1) was 13.7% (2018: 13.7%). Excluding the over-run costs at Herley in the prior period, H1 2019 underlying operating margin declined, as expected, due to:

·    mix, predominantly sonobuoys and reduced radio sales in H1;

·    increased investment in R&D, IT and other "Fix" programmes;

·    delayed orders and challenges selling into China in our Energy business;

·    additional lower margin development work;

·    increased incentive accrual; and

·    lack of the £1.2m one off gain on forex exposure gained in 2018, which is now hedged. 

 

Ultra continued its programme of R&D, with total spend in the period of £70.0m (2018: £72.8m). Company funded investment increased to £13.0m (2018: £12.6m), while customer funding decreased to £57.0m (2018: £60.2m).  The overall level of R&D investment in the period was 18.1% (2018: 20.8%). The rate of company funded investment is expected to increase further in the second half of the year.

 

Finance charges

Net financing charges(5) increased by £2.2m to £6.5m (2018: £4.3m). £0.7m of the increase is due to the adoption of the new leasing standard, IFRS 16, from 1 January 2019. £0.9m of the increase is due to the previously announced change to the Group's allocation of pension finance charges; these were previously classified as non-underlying items and from 1 January 2019 are included within our underlying finance charges. The remaining £0.6m increase reflects the higher average net debt compared to H1 2018, due to the share buy-back that was completed in January 2019, as well as higher US interest rates. The interest on bank debt was covered 11 times (2018: 11 times) by underlying operating profit.

 

Profit before tax

Underlying profit before tax(1) was £46.5m (2018: £43.6m). IFRS profit before tax increased to £37.9m (2018: £20.0m), as set out below:

£m

2019 H1 

2018 H1

Underlying profit before tax(1)

46.5

43.6

 

 

 

 Amortisation of intangibles arising on acquisition

(10.6)

(14.0)

 Acquisition and disposal related costs

(0.7)

(2.1)

 Gain on disposals

0.8

-

 Gain/(loss) on derivatives

2.6

(5.2)

 Significant legal charges and expenses

(0.7)

(0.9)

 Net finance charge on defined benefit pensions*

-

 (1.0)

 S3 programme

-

(0.4)

IFRS profit before tax

 

37.9

20.0

* as set out in the Finance charges section above, the pension finance charge is included within underlying finance costs from
1 January 2019.

 

 

Reported IFRS profit before tax

As expected, there are fewer non-underlying items than the prior period and detail is provided as follows:

·    acquisition and disposal related costs in the period were £0.7m (2018: £2.1m).

·    a £0.8m gain arose upon disposing of our Airport Systems business from the Aerospace & Land division in February 2019 and our Corvid Paygate business from the Communications & Security division in June 2019.

·    the net gain on forward foreign exchange contracts and interest rate swap was £2.6m (2018: £5.2m loss).

·    legal charges and expenses include £0.5m of conduct of business investigation costs.

 

Tax, EPS and dividends

The Group's underlying tax rate(4) in the period decreased to 20.0% (2018: 21.5%), which is consistent with the 2018 underlying tax rate for the full year. The statutory tax rate on IFRS profit before tax is 19.2% (2018: 19.0%). 

 

Underlying earnings per share(1) increased 16.4% to 52.5p (2018: 45.1p), reflecting the increase in profit and reduced number of shares in issue compared to the prior period. The weighted average number of shares in issue was 70.9m (2018: 76.0m). Basic earnings per share increased to 43.3p (2018: 20.0p). During the period, the Group spent £8.6m to re-purchase 0.6m ordinary shares at an average of £13.41 per share. At 30 June 2019 the number of shares in issue was 70,835,807.  

 

An interim dividend of 15.0p (2018: 14.6p) is proposed, representing growth of 2.7% on the prior year, with the interim dividend being covered 3.5 times (2018: 3.1 times) by underlying earnings per share. The dividend will be paid on 20 September 2019 to shareholders on the register at 30 August 2019.

 

Operating cash flow and working capital

Cash generated by operations was £25.8m (2018: £13.1m), as a result of increases in working capital. Underlying operating cash flow(1) was £13.4m (2018: £6.5m) resulting in underlying operating cash conversion of 25% (2018: 14%). Capital expenditure, including continuing Enterprise Resource Planning ('ERP') systems implementation, increased to £8.4m (2018: £8.1m). The ERP programme remains on track with three more implementations successfully going live so far during 2019 and more projects expected to commence later in the year. Working capital increased by £32.6m principally due to reduced payables and increased receivables reflecting the previously announced working capital normalisation. Increases in inventory reflect revenue growth in the period, as well as purchases required to supply orders in the second half of the year. 

 

Net debt

Ultra's net debt(3), excluding finance leases, at the end of the period was £171.0m (2018: £170.1m) and net debt/EBITDA was 1.32 times (2018: 1.39 times). The net debt figure including finance leases, which have been brought onto the balance sheet following the adoption of IFRS 16 from 1 January 2019, was £208.2m and net debt/EBITDA calculated on this IFRS 16 basis was 1.50 times.  

 

£8.6m was spent in the period to re-purchase 0.6m ordinary shares. In total, Ultra has bought back and cancelled c.£100m of Ultra shares at an average cost of £14.42, and (as previously announced) the buyback has now ceased. Initial proceeds of £21m were received in the period from the disposals of the Airport Systems and Corvid Paygate businesses. 

 

New unsecured loan notes of US$70m were issued by Prudential Investment Management Inc ("Pricoa") in January 2019, which expire in January 2026 and January 2029. On the same date, $60m of expiring Pricoa debt was repaid.  £62m of our Term Loan was repaid during the period with the balance (£67m) repaid on 31 July 2019. Consequently, the Group's committed facilities now comprise the £300m revolving credit facility, which has a maturity to November 2023 (and can be extended to November 2024 subject to lender consent) as well as Pricoa loan notes: £50m with an expiry date of October 2025 and $70m with expiry dates as noted above.

 

Conduct of business investigations update

As previously announced, the SFO is continuing to investigate a conduct of business issue in Algeria by Ultra Electronics Holdings plc ('Ultra'), its subsidiaries, employees and associated persons. The investigation commenced in April 2018 following a voluntary self-report made by Ultra to the SFO. In addition, Ultra is investigating another conduct of business issue associated with the Philippines and is keeping the relevant authorities informed.

 

Updates to technical guidance

·    As disclosed in note 11 of our 2018 Annual Report, the Group is monitoring developments relating to the European Commission decision that the UK CFC rules are partial State Aid. The UK Government has appealed the decision and requested certain information from recipients including Ultra but not yet provided details of how it will quantify and seek to recover State Aid. Our potential exposure is between £0m - £20m. We do not currently expect this exposure to be resolved in the near term;

·    Tax guidance remains unchanged at 20% for 2019;

·    We have made significant progress implementing a more rigorous assessment of investment and return analysis in R&D. Total investment in our own R&D has increased in the period and is likely to be 3.5% - 4% of revenue in 2019 (2018: 3.7%). The impact on margins of this lower than originally guided R&D spend in 2019 will likely be offset by a greater proportion of development contracts, some of which are sole source, versus 2018. Long term guidance for R&D spend remains at 4-5% of revenue;

·    Increased radio sales, improving Energy performance and a better sonobuoy mix are expected to improve underlying operating margins in H2; and

·    Total capital expenditure is expected to be in the range of £20m - 25m in 2019 (2018 £18.3m). 

 

 

OPERATIONAL AND DIVISIONAL REVIEW

 

Aerospace & Infrastructure (26% of Group revenue for the 6 months ended 30 June 2019)

 

Specialist provider of products, sub-systems and solutions delivering critical detection, instrumentation and control capability for aerospace and energy applications.

 

£m

2019 H1

as stated

2018 H1

as stated

2018 H1

for organic measure

Growth

%

Organic(2)  growth %

 

 

 

 

 

 

Order book

300.2

319.1

287.4

-5.9

+4.5

Revenue

100.5

91.9

88.6

+9.4

+13.4

Underlying operating profit(1)

11.3

14.8

14.0

-23.6

-19.3

Underlying operating margin(1)

11.2%

16.1%

15.8%

 

 

 

Markets

The defence aerospace market is showing strong signs of growth, driven by increased US defence spending and the ramp up of the F-35 Joint Strike Fighter programme. Additionally, forecast growth in platforms on which Ultra has secure positions are driving growth. The civil aerospace market also continues to grow, particularly in developing nations where there is an increasing need to meet growing air passenger traffic. Ultra remains well-positioned on a wide range of long term military and civil aerospace platforms, including the F-35 programme and several Airbus and Boeing commercial aircraft.

 

Performance

Revenue grew, despite the disposal of the Airport Systems business early in the year, reflecting organic revenue growth in the period. The growth was primarily due to increased activity on military aircraft platforms including the build rate of our high pressure pure air generating (HiPPAG) units for the F-35, although this growth was at lower than group average margins. Underlying operating profits declined in the first half due to:

·    In H1 2018 this division benefited from £1.2m of foreign exchange gains; these were not repeated in 2019 following the previously announced adoption of the revised hedging strategy to reduce income statement volatility.

·    Restructuring costs and higher spend on R&D, as we invest in programmes to support future growth.

·    Product mix in our Energy business with some higher margin activity delayed into the second half of the year and increasing competition in the Chinese nuclear market.

 

As a result, the H1 underlying operating margin was 11.2% vs 16.1% last year.

 

The division's order book grew organically, but decreased £33.5m since December 2018 due to the £36.4m Airport Systems order book removal upon disposal. The larger orders won in the period were:

1)   A £17m low-rate/initial-production three-year contract by Pratt & Whitney to provide equipment for ice protection for the F135 military engine.

2)   Multiple awards from Boeing totaling over £10m to provide wing ice protection controllers and harnesses on the B787 commercial aircraft.


Communications & Security (30% of Group revenue for the 6 months ended 30 June 2019)

Specialist provider of mission-critical solutions for C3, cyber, encryption and electronic warfare applications.

 

£m

2019 H1

as stated

2018 H1

as stated

2018 H1

for organic measure

Growth

%

Organic(2)  growth %

 

 

 

 

 

 

Order book

259.5

282.6

287.5

-8.2

-9.7

Revenue

117.8

110.2

114.5

+6.9

+2.9

Underlying operating profit(1)

12.0

7.9

8.3

+51.9

+44.6

Underlying operating margin(1)

10.2%

7.2%

7.2%

 

 

 

Markets

Growing US investment and rising regional tensions in the Pacific have led to a significant increase in the adoption of Communications & Security systems and equipment. The Communications & Security and cyber market is expected to grow considerably over the next five years. This growth is driven by growing demand for military communications infrastructure, cybersecurity functionality and application of new technologies. Ultra is well-positioned on a broad range of C3 and cyber applications and remains well-placed to deliver solutions that already encompass future market technologies.

 

Performance

This division's revenue grew organically, benefitting from strong sales of ADSI (Air Defence Systems Integrator) tactical command and control systems, and greater demand for electronic warfare and microwave products.

 

Underlying operating profit grew 44.6% in the period, however, when the cost overrun impact at Herley in H1 2018 is excluded, operating profit declined by 18.9% versus H1 2018. This was predominantly due to lower international forensic product system shipments, and the reduced radio sales of the ORION radio systems in H1 for the US Army's Network Modernisation programme.

 

The division won a number of contracts during the period including two larger ones that are noted below. The order book reduced versus H1 2018 reflecting a strong prior year comparator. The order book however still grew by £29.3m versus 31 December 18. The larger orders won in the period were:

1)   A $497m indefinite-delivery/indefinite-quantity (IDIQ) contract to provide the US Army with Orion radio systems with an initial order of $16.5m.

2)   A five-year framework contract from the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), valued at over US$85 million for the provision of hardware, software, support and training services to ATF's National Integrated Ballistic Information Network (NIBIN).

 

Maritime & Land (44% of Group revenue for the 6 months ended 30 June 2019)

Specialist provider of high-integrity systems and solutions for a broad range of predominantly military maritime and land-based requirements.

 

£m

2019 H1

as stated

2018 H1

as stated

2018 H1

for organic measure

Growth

%

Organic(2)  growth %

 

 

 

 

 

 

Order book

454.4

367.5

376.3

+23.6

+20.8

Revenue

168.8

148.4

154.4

+13.7

+9.3

Underlying operating profit(1)

29.6

25.2

26.8

+17.5

+10.4

Underlying operating margin(1)

17.5%

17.0%

17.4%

 

 

 

Markets

Global maritime budgets remain strong as geopolitical disputes endure. Rising tensions in Asia-Pacific in particular, have led to increased investment in naval platforms and underwater warfare systems, elsewhere, the US is expected to have a strong pipeline of new-build surface ship and submarine platforms. Ultra is well positioned to benefit from the projected growth in the maritime market in the coming years, with world-class products, capabilities and strong positions on a broad range of long term programmes.

 

 

 

 

Performance

This division's revenue also grew organically, driven by the recently won Next Generation Surface Search Radar (NGSSR) development contract and maritime propulsion system activity. Demand also remains positive for Ultra's US sonobuoys. Shortly after the period end, the ERAPSCO JV was awarded a five year $1bn IDIQ for sonobuoys to the US Navy. Whilst operating margins remained similar to last year, this division has an increasing volume of cost-plus type contracts.

 

The division's order book increased £34.4m since December 2018, owing in part to the orders noted below:

1)   The signing of a significant contract with Lockheed Martin Canada as the Underwater Warfare Integrated Product Team lead for the Canadian Surface Ship Combatant (CSC) programme.  As part of Canada's Combat Ship Team, Ultra will provide a Towed Low-Frequency Active Sonar as well as its latest hull-mounted sonar; Ultra will also lead the integration of these sensors with sonobuoys and other Underwater Warfare capabilities to provide wide-area underwater battlespace surveillance.

2)   Ultra was awarded an initial $5.5m contract for the US Navy NGSSR Production Programme. This development and qualification contract has a potential total value of over $34m and will provide navigation and general surface search radar functionality on all US Navy ships.

3)   The award of a ten-year contract with the UK Ministry of Defence for support of its fleet of 16 Surface Ship Torpedo Defence Systems.

 

DIVIDEND

 

The Board has implemented a progressive dividend policy with a through cycle target of circa two times normalised cash and earnings cover, signalling confidence in the Group's future prospects. The 2019 proposed interim dividend is 15.0p. The dividend will be paid on 20 September 2019 to shareholders on the register at 30 August 2019.

 

 

 

 

 

Ultra Electronics Holdings plc

Results for the Six Months Ended 30 June 2019

Consolidated Unaudited Income Statement

 

 

 

Six months

 

Six months

 

Year to

 

 

to 30 June

 

to 30 June

 

31 December

 

 

2019

 

2018

 

2018

 

Note

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

3

387,126

 

350,510

 

766,745

Cost of sales

 

(282,678)

 

(254,804)

 

(544,649)

Gross profit

 

104,448

 

95,706

 

222,096

 

 

 

 

 

 

 

Other operating income

 

449

 

1,598

 

3,195

Distribution costs

 

(442)

 

(459)

 

(1,573)

Administrative expenses

 

(58,563)

 

(64,054)

 

(138,721)

Other operating expenses

 

(4,209)

 

(1,092)

 

(3,275)

Significant legal charges and expenses

3

(669)

 

(934)

 

(2,292)

S3 programme

 

-

 

(395)

 

(6,503)

Impairment charges

 

-

 

-

 

(7,589)

Operating profit

3

41,014

 

30,370

 

65,338

Gain/(loss) on disposal

16

752

 

-

 

(729)

Retirement benefit scheme GMP equalisation

 

-

 

-

 

(3,150)

Investment revenue

5

2,761

 

6,213

 

6,193

Finance costs

6

(6,586)

 

(16,575)

 

(25,097)

Profit before tax

 

37,941

 

20,008

 

42,555

Tax

7

(7,298)

 

(4,849)

 

(10,205)

Profit for the period

 

30,643

 

15,159

 

32,350

Attributable to:

 

 

 

 

 

 

   Owners of the Company

 

30,712

 

15,179

 

32,381

   Non-controlling interests

 

(69)

 

(20)

 

(31)

 

 

 

 

 

 

 

Earnings per ordinary share (pence)

 

 

 

 

 

 

 

 

 

 

 

 

 

                        - basic

9

43.3

 

20.0

 

43.6

                        - diluted

9

43.3

 

20.0

 

43.6

 

 

 

All results are derived from continuing operations.

 

 

 

 

Ultra Electronics Holdings plc

Results for the Six Months Ended 30 June 2019

Consolidated Unaudited Statement of Comprehensive Income

 

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Profit for the period

30,643

 

15,159

 

32,350

 

 

 

 

 

 

Items that will not be reclassified to profit or loss:

 

 

 

 

 

Actuarial profit on defined benefit pension schemes

-

 

-

 

4,588

Tax relating to items that will not be reclassified

-

 

-

 

(713)

Total items that will not be reclassified to profit or loss

-

 

-

 

3,875

 

 

 

 

 

 

Items that may be reclassified to profit or loss:

 

 

 

 

 

Exchange differences on translation of foreign operations

8,588

 

8,625

 

21,100

Transfer (to)/from profit and loss on cash flow hedge

(254)

 

(170)

 

435

Loss on loans used in net investment hedges

(752)

 

(4,930)

 

(11,521)

(Loss)/profit on cash flow hedge

(11)

 

253

 

(604)

Tax relating to items that may be reclassified

-

 

-

 

29

Total items that may be reclassified to profit or loss

7,571

 

3,778

 

9,439

 

 

 

 

 

 

Other comprehensive income for the period

7,571

 

3,778

 

13,314

 

 

 

 

 

 

Total comprehensive income for the period

38,214

 

18,937

 

45,664

Attributable to:

 

 

 

 

 

  Owners of the Company

38,283

 

18,957

 

45,695

  Non-controlling interests

(69)

 

(20)

 

(31)

 

 

 

 

 

Ultra Electronics Holdings plc

Results for the Six Months Ended 30 June 2019

Consolidated Unaudited Balance Sheet

 

 

 

        At 30 June

 

         At 30 June

 

At 31 December

 

 

2019

 

2018

 

2018

 

Note

£'000

 

£'000

 

£'000

Non-current assets

 

 

 

 

 

 

Goodwill

 

379,684

 

398,929

 

377,761

Other intangible assets

 

108,769

 

125,432

 

113,889

Property, plant and equipment

10

61,176

 

61,232

 

62,597

Leased assets

2

34,277

 

-

 

-

Deferred tax assets

 

18,134

 

18,863

 

18,692

Derivative financial instruments

18

267

 

963

 

113

Trade and other receivables

11

19,967

 

24,222

 

22,639

 

 

622,274

 

629,641

 

595,691

Current assets

 

 

 

 

 

 

Inventories

 

99,600

 

91,917

 

88,551

Trade and other receivables

11

216,827

 

203,336

 

205,184

Tax assets

 

6,937

 

10,209

 

8,108

Cash and cash equivalents

 

92,943

 

124,351

 

96,319

Derivative financial instruments

18

270

 

581

 

301

Assets classified as held for sale

 

-

 

-

 

30,575

 

 

416,577

 

430,394

 

429,038

 

 

 

 

 

 

 

Total assets

3

1,038,851

 

1,060,035

 

1,024,729

Current liabilities

 

 

 

 

 

 

Trade and other payables

12

(191,529)

 

(190,910)

 

(212,247)

Tax liabilities

 

-

 

-

 

(5,032)

Derivative financial instruments

18

(3,348)

 

(4,359)

 

(5,534)

Borrowings

 

(74,471)

 

(53,054)

 

(175,759)

Liabilities classified as held for sale

 

-

 

-

 

(8,575)

Short-term provisions

13

(12,162)

 

(9,576)

 

(13,326)

 

 

(281,510)

 

(257,899)

 

(420,473)

Non-current liabilities

 

 

 

 

 

 

Retirement benefit obligations

 

(68,531)

 

(78,434)

 

(72,970)

Other payables

12

(19,058)

 

(16,214)

 

(14,878)

Deferred tax liabilities

 

(12,009)

 

(14,147)

 

(10,454)

Derivative financial instruments

18

(944)

 

(2,581)

 

(1,000)

Borrowings

 

(226,669)

 

(241,372)

 

(77,964)

Long-term provisions

13

(5,908)

 

(5,254)

 

(6,200)

 

 

(333,119)

 

(358,002)

 

(183,466)

 

 

 

 

 

 

 

Total liabilities

3

(614,629)

 

(615,901)

 

(603,939)

Net assets

 

424,222

 

444,134

 

420,790

Equity

 

 

 

 

 

 

Share capital

14

3,542

 

3,711

 

3,574

Share premium account

 

201,045

 

201,026

 

201,033

Capital redemption reserve

 

346

 

177

 

314

Own shares

 

(2,581)

 

(2,581)

 

(2,581)

Hedging reserve

 

(60,737)

 

(52,906)

 

(52,720)

Translation reserve

 

125,091

 

104,028

 

116,503

Retained earnings

 

157,439

 

190,660

 

161,659

Equity attributable to owners of the company

 

424,145

 

444,115

 

420,782

Non-controlling interest

 

77

 

19

 

8

 

 

 

 

 

 

 

Total equity

 

424,222

 

444,134

 

420,790

 

 

Ultra Electronics Holdings plc

Results for the Six Months Ended 30 June 2019

Consolidated Unaudited Cash Flow Statement

 

 

 

Six months

 

Six months

 

Year to

 

 

to 30 June

 

to 30 June

 

31 December

 

 

2019

 

2018

 

2018

 

Note

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

Net cash inflow from operating activities

15

13,991

 

4,880

 

86,712

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Interest received

 

131

 

264

 

715

Purchase of property, plant and equipment

 

(3,988)

 

(5,852)

 

(12,953)

Proceeds from disposal of property, plant and equipment

 

 

5

 

 

19

 

 

134

Expenditure on product development and other intangibles

 

 

(5,192)

 

 

(3,267)

 

 

(7,029)

Disposal of subsidiary undertakings

 

20,544

 

-

 

225

Net cash from/(used in) investing activities

 

11,500

 

(8,836)

 

(18,908)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Issue of share capital

 

12

 

116

 

123

Share buy-back (including transaction costs)

 

(8,612)

 

(49,739)

 

(91,902)

Dividends paid

 

(26,122)

 

(26,269)

 

(36,883)

Loan syndication costs

 

(26)

 

-

 

(657)

Repayments of borrowings

 

(108,678)

 

(25,000)

 

(181,297)

Proceeds from borrowings

 

117,716

 

89,996

 

198,961

Finance lease payments

 

(4,461)

 

-

 

-

Cash out-flow on closing out foreign currency hedging contracts

 

 

-

 

 

(11,104)

 

 

(11,104)

Net cash used in financing activities

 

(30,171)

 

(22,000)

 

(122,759)

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(4,680)

 

(25,956)

 

(54,955)

Cash and cash equivalents at beginning of period

 

96,319

 

149,522

 

149,522

Effect of foreign exchange rate changes

 

1,304

 

785

 

1,752

Cash and cash equivalents at end of period

 

92,943

 

124,351

 

96,319

 

 

 

 

Ultra Electronics Holdings plc

Results for the Six Months Ended 30 June 2019

Consolidated Unaudited Statement of Changes in Equity

 

Equity attributable to equity holders of the parent

 

Share

capital

£'000

 

Share premium account

£'000

 

Capital redemption

reserve

£'000

Reserve for own shares

£'000

 

 

 

Hedging reserve

£'000

Translation reserve

£'000

Retained earnings

£'000

Non-controlling interest

£'000

 

 

 

Total

equity

£'000

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2018 as originally presented

3,574

201,033

314

(2,581)

(59,720)

116,503

161,659

8

420,790

Adoption of IFRS 16

-

-

-

-

-

-

(1,284)

-

(1,284)

Restated total equity at 1 January 2019

3,574

201,033

314

(2,581)

(59,720)

116,503

160,375

8

419,506

 

 

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

-

30,574

69

30,643

Other comprehensive income for the period

-

-

-

-

(1,017)

8,588

-

-

7,571

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

-

-

-

-

(1,017)

8,588

30,574

69

38,214

 

 

 

 

 

 

 

 

 

 

Equity-settled employee share schemes

-

12

-

-

-

-

1,224

-

1,236

Shares purchased in buy-back

(32)

-

32

-

-

-

(8,612)

-

(8,612)

Dividend to shareholders

-

-

-

-

-

-

(26,122)

-

(26,122)

 

 

 

 

 

 

 

 

 

 

Balance at 30 June 2019

3,542

201,045

346

(2,581)

(60,737)

125,091

157,439

77

424,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra Electronics Holdings plc

Results for the Six Months Ended 30 June 2018

Consolidated Unaudited Statement of Changes in Equity

 

Equity attributable to equity holders of the parent

 

Share

capital

£'000

 

Share premium account

£'000

 

Capital redemption

reserve

£'000

Reserve for own shares

£'000

 

 

 

Hedging reserve

£'000

Translation reserve

£'000

Retained earnings

£'000

Non-controlling interest

£'000

 

 

 

Total

equity

£'000

 

 

 

 

 

 

 

 

 

 

Balance at 31 December 2017 as originally presented

3,887

200,911

-

(2,581)

(48,059)

95,403

262,611

39

512,211

Adoption of IFRS 15

-

-

-

-

-

-

(11,393)

-

(11,393)

Restated total equity at 1 January 2018

3,887

200,911

-

(2,581)

(48,059)

95,403

251,218

39

500,818

 

 

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

-

15,179

(20)

15,159

Other comprehensive income for the period

-

-

-

-

(4,847)

8,625

-

-

3,778

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period

-

-

-

-

(4,847)

8,625

15,179

(20)

18,937

 

 

 

 

 

 

 

 

 

 

Equity-settled employee share schemes

1

115

-

-

-

-

271

-

387

Shares purchased in buy-back

(177)

-

177

-

-

-

(49,739)

-

(49,739)

Dividend to shareholders

-

-

-

-

-

-

(26,269)

-

(26,269)

 

 

 

 

 

 

 

 

 

 

Balance at 30 June 2018

3,711

201,026

177

(2,581)

(52,906)

104,028

190,660

19

444,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra Electronics Holdings plc

Results for the Twelve Months Ended 31 December 2018

Consolidated Statement of Changes in Equity

 

 

Equity attributable to equity holders of the parent

 

 

Share capital

£'000

 

Share premium account

£'000

Capital redemption reserve

£'000

Reserve for own shares

£'000

Hedging reserve

£'000

 

 

Translation reserve

£'000

 

 

Retained earnings £'000

Non- controlling interest £'000

Total equity

£'000

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2018

3,887

200,911

-

(2,581)

(48,059)

95,403

262,611

39

512,211

Adoption of IFRS 15

-

-

-

-

-

-

(12,156)

-

(12,156)

Tax adjustment of adoption of IFRS 15

-

-

-

-

-

-

2,240

-

2,240

Restated total equity at 1 January 2018

3,887

200,911

-

(2,581)

(48,059)

95,403

252,695

39

502,295

Profit for the year

-

-

-

-

-

-

32,381

(31)

32,350

Other comprehensive income for the year

-

-

-

-

(11,661)

21,100

3,875

-

13,314

Total comprehensive income for the year

-

-

-

-

(11,661)

21,100

36,256

(31)

45,664

 

 

 

 

 

 

 

 

 

 

Equity-settled employee share schemes

1

122

-

-

-

-

1,493

-

1,616

Shares purchased in buy-back

(314)

-

314

-

-

-

(91,902)

-

(91,902)

Dividend to shareholders

-

-

-

-

-

-

(36,883)

-

(36,883)

Balance at 31 December 2018

3,574

201,033

314

(2,581)

(59,720)

116,503

161,659

8

420,790

 

 

 

Ultra Electronics Holdings plc

Results for the Six Months Ended 30 June 2019

Notes to the Consolidated Unaudited Interim Financial Statements

 

1.            General information

 

The information for the year ended 31 December 2018 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

 

These interim financial statements, which were approved by the Board of Directors on 7 August 2019, have not been audited or reviewed by the Auditor.

 

2.            Accounting policies

 

The annual financial statements of Ultra Electronics Holdings plc are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union.

 

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements. The following Standards and interpretations were adopted as at 1 January 2019:

·    IFRS 16 - Leases

 

IFRS 16

 

Background

 

IFRS 16 Leases came into effect on 1 January 2019 and replaced IAS 17 and IFRIC 4. IFRS 16 requires that all leases and the related rights and obligations should be recognised on the lessee's Balance Sheet, unless the lease is less than one year in length or is for a low value asset. Leases that do not meet these criteria are expensed on a straight-line basis.

 

For each lease, a liability for lease obligations to be incurred in the future must be recognised. Correspondingly, a right-of-use asset is capitalised. The asset and liability are initially measured at the present value of all future lease payments plus directly attributable costs.

 

Under IFRS 16, previous lease charges (recognised in gross profit or indirect costs) are replaced with depreciation on the right-of-use asset and interest on the lease liability in the consolidated income statement. In addition, the cash impact of the lease is split between the principal and interest, with net cash flow remaining unchanged to pre-IFRS 16 cash flow.

 

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease.

 

Therefore, the definition of a lease in accordance with IAS 17 and IFRIC 4 continues to apply to those leases entered or modified before 1 January 2019. For leases entered into or modified on or after 1 January 2019, a contract will be determined as a lease if the Group has control of the leased asset, as defined by IFRS 16. The following practical expedients, permitted by IFRS 16, have also been utilised:

·     The application of a single discount rate to a portfolio of similar characteristic leases;

·     Reliance on prior IAS 37 assessments of onerous leases as an alternative to performing an impairment review on transition;

 

 

·     The use of hindsight: for property leases with historical extension option exercise dates, hindsight was applied such that the initial lease period also includes the extension period. Similarly, if the exercise date for a termination option had already passed by the transition date, it was assumed that the termination option was not exercised.

 

For the measurement of the right-of-use assets at the date of transition, initial direct costs were not taken into account. Additionally, the Group had one sublet that was determined as a finance lease and therefore the opening lease liability and right-of-use asset were adjusted for the sublease income for this property as required under IFRS 16. For the measurement of the lease liabilities at the date of first time application the value was adjusted for any prepaid or accrued lease payments.

 

Initial recognition

 

The Group has adopted the modified retrospective approach and has recognised the cumulative effect of applying IFRS 16 at the 1 January 2019 transitional date. The prior period has not been restated; the adjustment to opening retained earnings of £1.3m (£1.7m before tax) at 1 January 2019 is reflected in the Consolidated Statement of Changes in Equity.

 

The Group's impacted leases relate to real estate, vehicles, printers & copiers and other equipment. The Group therefore chose to split the leases between the following categories: Property and Non-property. The table below sets out the 1 January 2019 opening balance sheet impact arising from the adoption of IFRS 16:

 

 

31 December 2018

£m

Property leases adjustment

£m

Non-property leases adjustment £m

Tax

£m

1 January
2019
 £m

 

 

 

 

 

 

Leased assets - Right-of-use asset

-

35.3

1.4

-

36.7

Lease liability

-

(38.1)

(1.4)

-

(39.5)

Lease accruals

(0.2)

0.2

-

-

-

Onerous lease provisions

(0.9)

0.9

-

-

-

Tax liabilities

(15.5)

-

-

0.4

(15.1)

 

 

 

 

 

 

Net assets

420.8

(1.7)

-

0.4

419.5

 

 

 

 

 

 

Retained earnings

161.7

(1.7)

-

0.4

160.4

 

 

 

 

 

 

 

 

 

 

 

 

 

The following reconciliation to the opening balance for the lease liabilities as at 1 January 2019 is based upon the operating lease obligations disclosed in the Group annual report as at 31 December 2018:

 

 

Property leases

£'000

Non-property leases

£'000

Total

 £'000

 

 

 

 

Operating lease commitment at 31 December 2018

35,468

1,441

36,909

Discounted at 1 January 2019

31,650

1,331

32,981

 

 

 

 

Recognition exemption for:

 

 

 

Short term leases

(69)

(9)

(78)

Leases of low-value assets

-

(1)

(1)

Removal of service charges / utilities

(2,820)

(9)

(2,829)

Reduction for subletting

(233)

-

(233)

Change in lease length assumption

8,889

18

8,907

Change in lease cost increase assumption

(70)

(27)

(97)

Change due to phasing of payments

(93)

(30)

(123)

Other adjustments

838

116

954

 

 

 

 

Lease liabilities recognised at 1 January 2019

38,092

1,389

39,481

 

 

 

 

 

The lease liabilities were discounted as at 1 January 2019; the weighted average discount rate was 3.7% for property leases and 2.7% for non-property leases. The Group's property leases range from one year to 25 years in length and are based primarily in the UK, North America and Canada. The Group's non-property leases range from one year to seven years.

 

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The asset and liability are initially measured at the present value of all future lease payments plus directly attributable costs. Payments made before the commencement date and incentives received from the lessor are also included in the carrying amount of the right-of-use asset. The asset is then amortised over the useful life of the lease on a straight-line basis. Further details on the valuation of the right-of-use asset and the lease liability and the discount rate applied in calculating the present value are discussed below.

 

During the six months ended 30 June 2019, in relation to leases under IFRS 16, the Group recognised depreciation of £4.6m and an interest expense of £0.7m.

 

Short term leases and leases of low value assets

 

The Group has elected not to recognise leases that are less than one year in length or are for a low value asset (<£3.5k) on the balance sheet. These leases are expensed on a straight-line basis as short term leases or leases of low value assets.

 

Valuation of lease liabilities and right-of-use assets

 

IFRS 16 requires the Group to make judgments that impact the initial valuation of the lease liabilities and the right-of-use assets. These judgments include: determining what contracts are in scope of IFRS 16, determining the lease contract term and determining the interest rate used for discounting future cash flows.

 

 

The lease term is the non-cancellable period of the lease contract. It can also be impacted by periods covered by an option to extend the lease if the Group is reasonably certain that it will exercise that option. For lease contracts with an indefinite term the Group estimates the length of the contract to be equal to the economic useful life of the asset or typical market contract term. The lease term is used to determine the depreciation rate of right-of-use assets.

 

For property leases, the Group has assumed that for leases that are due to expire within three years of the transition date that these will be renewed for the same length of time as the initial lease term, except where lease specific non-renewal information was already known at the transition date.

 

The lease liability is measured at amortised cost using the effective interest method. The present value of the lease payment is determined using the discount rate. The Group has used two discount rates for each country the lease is based in; one for property and one for non-property leases. The discount rate is determined based on: 1) the risk free rate on government bonds in the location and currency of the lease over a similar term as the lease; 2) the Group's borrowing rate; and 3) an asset specific premium. Discount rates remain the same throughout the lease unless the lease term or renewal assumptions change and range between 0.5% and 11.9%.

 

Onerous lease provisions are offset against the right-of-use asset and replaced by an annual assessment of impairment on the right-of-use assets in accordance with IAS 36. Additionally, under IFRS 16, lease incentives (e.g. rent free periods) will be recognised as part of the measurement of the right-of-use asset and lease liability, rather than recognised as a separate liability as under IAS 17.

 

The lease liability and right-of-use asset are remeasured when there is a change in the future lease payments arising from a change in the expected lease term, or a change in the estimated total cost of the lease.

 

Subletting

 

The Group sublets some property space to third parties. For these sublets, the Group first determines if the sublet lease is an operating or finance lease. This is determined as a finance lease if substantially all of the risks and rewards of the property are transferred to the lessee through the lease, otherwise it is classified as an operating lease.

 

When the sublease is considered as a finance lease,  the discounted value of the cash income from the sublet is deducted from the right-of-use asset and liability of the Group's lease ("head lease") for that property unless the head lease is a short lease or a low value asset lease.

 

If the sublease is considered an operating lease, then the payments received from the lease are recognised as income on a straight-line basis.

 

 

 

3.            Segment information

 

                (i)            Revenue by segment

 

Six months to 30 June 2019

Six months to 30 June 2018

 

External revenue

£'000

Internal revenue

£'000

 

Total

£'000

External revenue

£'000

Internal revenue

£'000

 

Total

£'000

Revenue

 

 

 

 

 

 

Aerospace & Infrastructure

100,479

3,646

104,125

91,889

3,566

95,455

Communications & Security

117,792

1,405

119,197

110,240

2,159

112,399

Maritime & Land

168,855

7,622

176,477

148,381

5,771

154,152

Eliminations

-

(12,673)

(12,673)

-

(11,496)

(11,496)

Consolidated revenue

387,126

-

387,126

350,510

-

350,510

 

 

                (ii)           Profit by segment

 

Aerospace & Infrastructure

£'000

Communications

& Security

£'000

Maritime

& Land

£'000

 

 

 

 

Unallocated £'000

Six months

to 30 June

2019

Total

£'000

Underlying operating profit

11,298

12,032

29,588

-

52,918

Amortisation of intangibles arising on acquisition

(679)

(5,822)

(4,072)

-

(10,573)

Significant legal charges and expenses

(206)

-

-

(463)

(669)

Acquisition & disposal related costs net of adjustments to contingent consideration

(207)

(376)

(79)

 

 

-

(662)

Operating profit/(loss)

10,206

5,834

25,437

(463)

41,014

 

 

 

 

 

 

Gain on disposal

 

 

 

 

752

Investment revenue

 

 

 

 

2,761

Finance costs

 

 

 

 

(6,586)

Profit before tax

 

 

 

 

37,941

Tax

 

 

 

 

(7,298)

Profit after tax

 

 

 

 

30,643

 

 

Significant legal charges and expenses include £463,000 (2018: £934,000) of anti-bribery and corruption investigation costs and £206,000 (2018: nil) on legal charges relating to the Ithra contract. Unallocated items are specific corporate level costs that cannot be allocated to a specific division.
 

 

 

Aerospace & Infrastructure

£'000

Communications

& Security

£'000

Maritime

& Land

£'000

 

 

 

Unallocated £'000

Six months

to 30 June

2018

Total

£'000

Underlying operating profit

14,790

7,890

25,171

-

47,851

Amortisation of intangibles arising on acquisition

(648)

(7,312)

(6,078)

 

-

(14,038)

Significant legal charges and expenses

-

-

-

 

(934)

(934)

Acquisition & disposal related costs net of adjustments to contingent consideration

(301)

(235)

(1,578)

 

 

-

(2,114)

S3 programme

(99)

(152)

(144)

-

(395)

Operating profit/(loss)

13,742

191

17,371

(934)

30,370

 

 

 

 

 

 

Investment revenue

 

 

 

 

6,213

Finance costs

 

 

 

 

(16,575)

Profit before tax

 

 

 

 

20,008

Tax

 

 

 

 

(4,849)

Profit after tax

 

 

 

 

15,159

 

 

 

Aerospace & Infrastructure

£'000

Communications

& Security

£'000

Maritime

& Land

£'000

 

 

 

Unallocated £'000

Year to 31 December

2018

Total

£'000

Underlying operating profit

29,966

29,953

52,807

-

112,726

Amortisation of intangibles arising on acquisition

(1,357)

(14,437)

(12,466)

-

(28,260)

Impairment charge

(6,550)

-

(1,039)

-

(7,589)

Significant legal charges and expenses

-

-

-

(2,292)

(2,292)

Acquisition & disposal related costs net of adjustments to contingent consideration

(560)

(465)

(1,719)

-

(2,744)

S3 programme

(457)

(1,484)

(4,562)

-

(6,503)

Operating profit/(loss)

21,042

13,567

33,021

(2,292)

65,338

 

 

 

 

 

 

Loss on disposal

 

 

 

 

(729)

Retirement benefit scheme GMP equalisation

 

 

 

 

(3,150)

Investment revenue

 

 

 

 

6,193

Finance costs

 

 

 

 

(25,097)

Profit before tax

 

 

 

 

42,555

Tax

 

 

 

 

(10,205)

Profit after tax

 

 

 

 

32,350

 

 

 (iii)          Total assets by segment

 

 

 

 

 

At 30 June

2019

 

 

At 30 June

2018

 

At 31 December 2018

 

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

Aerospace & Infrastructure

 

202,603

 

223,058

 

224,523

Communications & Security

 

438,634

 

424,504

 

429,451

Maritime & Land

 

279,061

 

257,506

 

247,222

 

 

920,298

 

905,068

 

901,196

Unallocated

 

118,553

 

154,967

 

123,533

Consolidated total assets

 

1,038,851

 

1,060,035

 

1,024,729

               

 

 

Unallocated assets represent current and deferred tax assets, derivatives at fair value, cash and cash equivalents.

 

(iv)          Total liabilities by segment

 

 

 

At 30 June  2019

 

 

At 30 June  2018

 

At 31 December 2018

 

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

Aerospace & Infrastructure

 

43,530

 

50,940

 

51,573

Communications & Security

 

110,098

 

91,629

 

87,479

Maritime & Land

 

120,626

 

87,430

 

104,848

 

 

274,254

 

229,999

 

243,900

Unallocated

 

340,375

 

385,902

 

360,039

Consolidated total liabilities

 

614,629

 

615,901

 

603,939

 

Unallocated liabilities represent derivatives at fair value, current and deferred tax liabilities, retirement benefit obligations, bank loans and loan notes.

 

                (v)           Revenue by destination

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

United Kingdom

84,281

 

80,573

 

171,511

Continental Europe

23,579

 

29,527

 

62,870

Canada

15,823

 

10,012

 

22,825

USA

221,001

 

180,026

 

416,495

Rest of World

42,442

 

50,372

 

93,044

 

387,126

 

350,510

 

766,745

               

 

 

 

4.            Additional performance measures

 

To present the underlying profitability of the Group on a consistent basis, year-on-year, additional performance indicators have been used.  These are calculated as follows:

 

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Operating profit

41,014

 

30,370

 

65,338

Amortisation of intangibles arising on acquisition

10,573

 

14,039

 

28,260

Significant legal charges and expenses

669

 

934

 

2,292

Acquisition and disposal related costs net of adjustments to contingent consideration

662

 

2,114

 

2,744

S3 programme

-

 

395

 

6,503

Impairment charges

-

 

-

 

7,589

Underlying operating profit

52,918

 

47,852

 

112,726

 

 

 

 

 

 

Profit before tax

37,941

 

20,008

 

42,555

Amortisation of intangibles arising on acquisition

10,573

 

14,039

 

28,260

Acquisition and disposal related costs net of adjustments to contingent consideration

662

 

2,114

 

2,744

Profit on fair value movements on derivatives

(2,630)

 

(5,949)

 

(5,476)

(Gain)/Loss on disposal

(752)

 

-

 

729

Significant legal charges and expenses

669

 

934

 

2,292

Loss on closing out foreign currency derivative contract

-

 

11,104

 

11,104

Net interest charge on defined benefit pensions*

-

 

1,000

 

1,929

S3 programme

-

 

395

 

6,503

Retirement benefit scheme GMP equalisation

-

 

-

 

3,150

Impairment charges

-

 

-

 

7,589

Underlying profit before tax

46,463

 

43,645

 

101,379

 

 

 

 

 

 

Cash generated by operations

25,802

 

13,124

 

102,446

Principal payments on finance leases

(4,461)

 

-

 

-

Purchase of property, plant and equipment 

(3,988)

 

(5,852)

 

(12,953)

Proceeds on disposal of property, plant and equipment

5

 

19

 

134

Expenditure on product development and other intangibles

(5,192)

 

(3,267)

 

(7,029)

Significant legal charges and expenses

918

 

-

 

1,532

S3 programme

-

 

1,377

 

2,600

Acquisition and disposal related payments

356

 

1,116

 

2,523

Underlying operating cash flow

13,440

 

6,517

 

89,253


* the pension finance charge is included within underlying finance costs from 1 January 2019.

 

 

 

 

 

The above analysis of the Group's operating results and cash flows is presented to provide readers with additional performance indicators that are prepared on a non-statutory basis. This presentation is regularly reviewed by management to identify items that are unusual and other items relevant to an understanding of the Group's performance and long-term trends with reference to their materiality and nature. This additional information is not uniformly defined by all Companies and may not be comparable with similarly titled measures and disclosures by other organisations. The non-statutory disclosures should not be viewed in isolation or as an alternative to the equivalent statutory measure. Information for separate presentation is considered below:

•     Contract losses arising in the ordinary course of trading are not separately presented; however, losses (and subsequent reversals) are separately disclosed in situations of a material dispute which are expected to lead to arbitration or legal proceedings. Significant legal charges and expenses are also separately disclosed; these are the charges arising from investigations and settlement of litigation that are not in the normal course of business.

•     One-off GMP Equalisation charge arising on defined benefit pension scheme.

•     Material costs or reversals arising from a significant restructuring of the Group's operations, such as the S3 programme, and costs of closure of product lines, businesses or facilities, are presented separately.

•     Disposals of businesses or investments in associates or joint ventures, or impairments of related assets are presented separately.

•     The amortisation of intangible assets arising on acquisitions and impairment of goodwill or intangible assets are presented separately.

•     Other matters arising due to the Group's acquisitions such as adjustments to contingent consideration, payment of retention bonuses, acquisition and disposal related costs and fair value adjustments for acquired inventory made in accordance with IFRS 13 are separately disclosed in aggregate.

•     Furthermore, IAS 37 requires the Group to discount provisions using a pre-tax discount rate that reflects the current assessment of the time value of money and the risks specific to the liability. This discount unwind is presented separately when the provision relates to acquisition contingent consideration.

•     Derivative instruments used to manage the Group's foreign exchange exposures are "fair valued" in accordance with IFRS 9. This creates volatility in the valuation of the outstanding instruments as exchange rates move over time. This has minimal impact on profit over the full term of the instruments, but can cause significant volatility on particular balance sheet dates. Consequently, the gain or loss is presented separately.

•     The defined benefit pension net interest charge arising in accordance with IAS 19 was presented separately for periods up until 31 December 2018. From 1 January 2019 this cost is included within underlying finance charges.

 

                The related tax effects of the above items are reflected when determining underlying earnings per share, as set out in note 9.

 

The Group is cash-generative and reinvests funds to support the continuing growth of the business. It seeks to use an accurate and appropriate measure of the funds generated internally while sustaining this growth. For this, the Group uses operating cash flow, rather than cash generated by operations, as its preferred indicator of cash generated and available to cover non-operating expenses such as tax and interest payments. Management believes that using cash generated by operations, with the exclusion of net expenditure on property, plant and equipment and outflows for capitalised product development and other intangibles, would result in an under-reporting of the true cash cost of sustaining a growing business.

 

 

 

 

5.            Investment revenue

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

 

2019

 

2018

 

2018

 

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

Bank interest

 

131

 

264

 

717

Fair value movement on derivatives

 

2,630

 

5,949

 

5,476

 

 

2,761

 

6,213

 

6,193

 

6.            Finance costs

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Amortisation of finance costs of debt

452

 

401

 

825

Interest payable on bank loans, overdrafts and other loans

4,490

 

4,070

 

11,239

Interest payable on leases

706

 

-

 

-

Total borrowing costs

5,648

 

4,471

 

12,064

Retirement benefit scheme finance cost

938

 

1,000

 

1,929

Loss on closing out foreign currency derivative contract

-

 

11,104

 

11,104

 

6,586

 

16,575

 

25,097

                               

 

 

 

7.            Tax

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

Current tax

 

 

 

 

 

United Kingdom

1,529

 

1,879

 

5,118

Overseas

3,618

 

3,444

 

7,119

 

5,147

 

5,323

 

12,237

 

 

 

 

 

 

Deferred tax

2,151

 

(474)

 

(2,032)

 

 

 

 

 

 

Total tax charge

7,298

 

4,849

 

10,205

 

The main rate of UK corporation tax was 19% at 1 April 2019.

 

8.            Ordinary dividends

 

Six months

 

Six months

 

to 30 June

 

to 30 June

 

2019

 

2018

 

£'000

 

£'000

 

 

 

 

Final dividend for the year ended 31 December 2018 of 37.0p (2017: 35.0p) per share

26,122

 

26,269

 

 

 

 

Proposed interim dividend for the year ended 31 December 2019 of  15.0p (2018: 14.6p) per share

10,591

 

10,614

 

 

The interim 2019 dividend of 15.0 pence per share will be paid on 20 September 2019 to shareholders on the register at 30 August 2019. It was approved by the Board after 30 June 2019 and has not been included as a liability as at 30 June 2019.

 

9.            Earnings per share

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

 

2018

 

Pence

 

Pence

 

Pence

From continuing operations

 

 

 

 

 

Basic underlying (see below)

52.5

 

45.1

 

109.5

Diluted underlying (see below)

52.5

 

45.1

 

109.5

Basic

43.3

 

20.0

 

43.6

Diluted

43.3

 

20.0

 

43.6

 

 

 

The calculation of the basic, underlying and diluted earnings per share is based on the following data:

 

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

Earnings

 

 

 

 

 

Earnings for the purposes of earnings per share being profit for the period

30,712

 

15,179

 

32,381

 

 

 

 

 

 

Underlying earnings

 

 

 

 

 

Profit for the period

30,712

 

15,179

 

32,381

Amortisation of intangibles arising on acquisition (net of tax)

8,194

 

10,849

 

21,968

Acquisition and disposal related costs net of contingent consideration (net of tax)

662

 

2,114

 

2,744

Profit on fair value movements on derivatives (net of tax)

(2,181)

 

(4,938)

 

(6,433)

Disposals (net of tax)

(752)

 

-

 

729

Significant legal charges and expenses (net of tax)

544

 

934

 

2,292

Net interest charge on defined benefit pensions (net of tax) *

-

 

830

 

1,929

S3 programme (net of tax)

-

 

298

 

5,059

Loss on closing out foreign currency derivative contracts (net of tax)

-

 

8,994

 

11,104

Impairment charges (net of tax)

-

 

-

 

7,342

Retirement benefit scheme GMP equalisation (net of tax)

-

 

-

 

2,300

Earnings for the purposes of underlying earnings per share

37,179

 

34,260

 

81,415


* the pension finance charge is included within underlying finance costs from 1 January 2019.

 

The adjustments to profit are explained in note 4.

 

 

The weighted average number of shares is given below:
 

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

 

 

 

 

 

Number of shares used for basic earnings per share

70,870,331

 

75,993,564

 

74,350,521

Effect of dilutive potential ordinary shares - share options

5,078

 

792

 

831

Number of shares used for fully diluted earnings per share

70,875,409

 

75,994,356

 

74,351,352

 

 

 

 

 

 

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Underlying profit before tax

46,463

 

43,645

 

 

101,379

Tax rate applied for the purposes of underlying earnings per share

20.0%

 

21.5%

 

19.7%

 

During the first six months of 2019, the company purchased and cancelled 634,996 shares. In 2018, the company purchased and cancelled 3,534,494 shares in the first six months, and purchased and cancelled 6,288,127 shares in the full year. See note 14.

 

 

10.          Property, plant and equipment

 

During the period, the Group spent £4.0m on the acquisition of property, plant and equipment. The Group did not make any significant disposals during the period.

 

 

11.          Trade and other receivables

 

 

 

At 30 June

 

 

At 30 June

 

At 31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

Non-current:

 

 

 

 

 

Amounts receivable from over time contract customers

19,967

 

24,222

 

22,639

 

19,967

 

24,222

 

22,639

 

 

 

At 30 June

 

 

At 30 June

 

At 31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

Current:

 

 

 

 

 

Trade receivables

100,870

 

95,351

 

109,176

Provisions against receivables

(3,472)

 

(2,376)

 

(3,910)

Net trade receivables

97,398

 

92,975

 

105,266

Amounts receivable from over time contract customers

97,039

 

87,111

 

81,026

Prepayments and other receivables

22,390

 

23,250

 

18,892

 

216,827

 

203,336

 

205,184

 

 

 

 

12.          Trade and other payables

 

 

 

At 30 June

 

 

At 30 June

 

At 31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

Amounts included in current liabilities:

 

 

 

 

 

Trade payables

54,945

 

65,451

 

78,742

Amounts due to over time contract customers

63,541

 

59,063

 

52,442

Other payables

73,043

 

66,396

 

81,063

 

191,529

 

190,910

 

212,247

 

 

 

 

 

 

Amounts included in non-current liabilities:

 

 

 

 

 

Amounts due to over time contract customers

14,235

 

8,567

 

11,061

Other payables

4,823

 

7,647

 

3,817

 

19,058

 

16,214

 

14,878

 

 

 

 

 

 

 

13.          Provisions

 

 

 

Warranties

 

 

Contract related provisions

 

 

Other

 

 

Total

 

£'000

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

 

At 30 June 2018

5,898

 

2,994

 

5,938

 

14,830

 

 

 

 

 

 

 

 

At 31 December 2018

6,267

 

6,522

 

6,737

 

19,526

 

 

 

 

 

 

 

 

At 30 June 2019

6,023

 

5,721

 

6,326

 

18,070

 

 

 

 

 

 

 

 

Included in current liabilities

2,713

 

5,083

 

4,366

 

12,162

Included in non-current liabilities

3,310

 

638

 

1,960

 

5,908

 

6,023

 

5,721

 

6,326

 

18,070

 

Warranty provisions are based on an assessment of future claims with reference to past experience. Such costs are generally incurred within two years after delivery. Contract related provisions, for example including provisions for agent fees, are utilised over the period as stated in the contract to which the specific provision relates. Other provisions include re-organisation costs, deferred consideration and dilapidation costs. Dilapidations will be payable at the end of the contracted life, which is up to fifteen years. Contingent consideration is payable when earnings targets are met.

 

 

 

14.          Share capital

 

3,738 shares, with a nominal value of £187 have been allotted in the first six months of 2019 under the terms of the Group's various share option schemes. The aggregate consideration received by the Company was £12,000. 

 

During the first six months of 2019 the company purchased and cancelled 634,996 shares. The shares were acquired at an average price of £13.41 per share, with prices ranging from £12.80 to £14.02. The total cost of £8,612,000, including fees and stamp duty of £92,000, has been transferred to retained earnings.  The total reduction in paid up capital was £32,000 for the period. 

 

15.          Cash flow information

 

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Operating profit

41,014

 

30,370

 

65,338

Adjustments for:

 

 

 

 

 

Depreciation of property, plant and equipment

4,604

 

4,291

 

8,933

Amortisation of intangible assets

12,366

 

15,831

 

32,366

Amortisation of leased assets

4,590

 

-

 

-

Impairment charges

-

 

-

 

7,589

Cost of equity-settled employee share schemes

1,224

 

271

 

1,493

Adjustment for pension funding

(5,377)

 

(5,298)

 

(10,301)

(Profit)/loss on disposal of property, plant and equipment

(35)

 

25

 

53

(Decrease)/increase in provisions

(1,492)

 

348

 

4,948

Operating cash flow before movements in working capital

56,894

 

45,838

 

 

110,419

 

 

 

 

 

 

Increase in inventories

(9,369)

 

(12,956)

 

(10,198)

(Increase)/decrease in receivables

(4,755)

 

2,640

 

(1,808)

(Decrease)/increase in payables

(16,968)

 

(22,398)

 

4,033

Cash generated by operations

25,802

 

13,124

 

102,446

 

 

 

 

 

 

Income taxes paid

(6,876)

 

(3,747)

 

(4,640)

Interest paid

(4,229)

 

(4,497)

 

(11,094)

Finance lease interest paid

(706)

 

-

 

-

Net cash inflow from operating activities

13,991

 

4,880

 

86,712

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net movement in cash and cash equivalents to movement in net debt:

 

 

Six months

 

Six months

 

Year to

 

to 30 June

 

to 30 June

 

31 December

 

2019

 

2018

 

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Net decrease in cash and cash equivalents

(4,680)

 

(25,956)

 

(54,955)

Cash inflow from decrease in debt

(9,038)

 

(64,996)

 

(17,664)

Change in net debt arising from cash flows

(13,718)

 

(90,952)

 

(72,619)

Loan syndication costs

26

 

-

 

657

Lease liability

(37,200)

 

-

 

-

Amortisation of finance costs of debt

(420)

 

(366)

 

(761)

Translation differences

519

 

(4,300)

 

(10,224)

Movement in net debt in the  period

(50,793)

 

(95,618)

 

(82,947)

Net debt at start of period

(157,404)

 

(74,457)

 

(74,457)

Net debt at end of period

(208,197)

 

(170,075)

 

(157,404)

 

 

 

 

 

 

 

 

 

 

 

 

Net debt comprised the following:

 

At 30 June

2019

 

 

At 30 June

2018

 

At 31 December

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Cash and cash equivalents

92,943

 

124,351

 

96,319

Borrowings

(301,140)

 

(294,426)

 

(253,723)

 

(208,197)

 

(170,075)

 

(157,404)

 

Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

 

Reconciliation of changes in financing liabilities:

 

 

 

At 30 June

2019

 

 

At 30 June

2018

 

At 31 December

2018

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

Borrowings at start of period

(253,723)

 

(223,979)

 

(223,979)

Repayments of borrowings

108,678

 

25,000

 

181,297

Proceeds from borrowings

(117,716)

 

(89,996)

 

(198,961)

Loan syndication costs

26

 

-

 

657

Amortisation of finance costs of debt

(420)

 

(366)

 

(761)

Lease liability recognition

(37,200)

 

-

 

-

Translation differences

(785)

 

(5,085)

 

(11,976)

 Borrowings at end of period

(301,140)

 

(294,426)

 

(253,723)

 

 

 

16.          Disposals

 

The Aerospace and Infrastructure division disposed of the Airport Systems business in February 2019 to ADB SAFEGATE. The Communications and Security division disposed of Corvid Paygate Limited in June 2019 to Jonas Computing (UK) Limited. Final cash proceeds remain deferred until the novation of certain contracts is completed. The gain on disposal calculation is provisional and subject to final working capital adjustments.

 

    

 

Six months to 30 June 2019

 

 

£'000

Goodwill and intangible fixed assets

 

22,073

Property, plant and equipment

 

1,494

Leased assets

 

1,484

Inventories

 

625

Trade and other receivables

 

8,597

Trade and other payables

 

(10,715)

Lease liability

 

(1,510)

 Total

 

22,048

Proceeds (cash in 2019 and deferred)

 

(22,800)

Gain on disposal

 

(752)

 

17.         Going concern

 

The Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing these condensed consolidated half year financial statements.

 

18.          Financial instruments

 

Exposure to currency and interest rate risks arises in the normal course of the Group's business. Derivative financial instruments are used to hedge exposure to all significant fluctuations in foreign exchange rates and interest rates. All of the Group's financial instruments have been assessed as Level 2 or Level 3 and comprise foreign exchange forward contracts and interest rate swaps as Level 2 and the Strategic Aerospace and Defence Initiative ("SADI") loan as Level 3.

 

The directors consider that the carrying amount of all financial assets and liabilities approximates to their fair value.

 

Fair value measurements as at 30 June 2019 are set out in the table below. These forward exchange contracts have been fair valued using forward exchange rates that are quoted in an active market.

 

 

 

 

 

 

At 30 June

2019

 

 

At 30 June

2018

 

At 31 December

2018

 

£'000

 

£'000

 

£'000

Financial assets:

 

 

 

 

 

Foreign exchange derivative financial instruments (through profit and loss)

 

537

 

 

1,027

 

 

149

Interest rate swap

-

 

517

 

265

Total

537

 

1,544

 

414

 

Financial liabilities:

 

 

 

 

 

Foreign exchange derivative financial instruments (through profit and loss)

 

4,292

 

 

6,940

 

 

6,534

SADI loan

8,398

 

8,047

 

10,382

Total

12,690

 

14,987

 

16,916

 

19.          Other matters

 

Seasonality

 

The Group's financial results have not historically been subject to significant seasonal trends.

 

Related party transactions

 

There were no significant related party transactions, other than the remuneration of key management personnel during the period.

               

Organic performance measures

 

The Divisional management teams, the Executive Team and the Board review and compare current and prior period divisional and group order book, revenue and underlying operating profit at constant exchange rates and adjusted for any acquisitions or disposals to reflect the comparable period of ownership from the organic performance measures. The constant exchange comparison retranslates the prior period results from the prior period's average exchange rates into the current period's average exchange rates. The operating profit comparatives have also been adjusted as if IFRS 16 had applied in 2018.

 

 

RISKS AND UNCERTAINTIES

 

The Group faces a number of potential risks and uncertainties that may have a material impact on its performance in the remainder of 2019 (and beyond), and, as a consequence of which, 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 is available for download at https://www.ultra-electronics.com/investor-centre/results-centre.

 

In the defence sector, which contributes around 72% of Ultra's revenue, US defence budgets have now been agreed but time is still required for this to flow down into contract action. In addition, UK defence budgets remain under pressure. Nevertheless, the overall size of defence budgets worldwide, relative to the Group's revenue, provides sufficient headroom to support Ultra's growth potential.

 

There is a risk of programme delays or cancellations but this has always been a feature of the Group's markets.

 

Movements in foreign currency exchange rates result in both transaction and translation effects on the Group's results. Ultra's projected net transaction exposure is mitigated by the use of forward hedging contracts. From 1 January 2019 the Group revised its hedging strategy under IFRS 9 to reduce income statement volatility from re-valuation of US dollar assets and liabilities held on the UK balance sheet.  By their nature, other currency translation risks cannot be mitigated.

 

Preparing for Brexit is a challenge due to the different possible scenarios. Ultra has continued working to establish Brexit plans within the supply chain during the first half of 2019 and continues to work with our suppliers to proactively manage Brexit interruption risk. The impact is currently difficult to estimate with the combination of different scenarios that could occur. This risk is included within the Group's supply chain risk and the Board continues to monitor this as Brexit approaches.

 

Risks are identified, collated, assessed and managed at the most appropriate level of the business (Board, Executive or Business level). Risks are reviewed to ensure judgements and assumptions are unchanged, that appropriate mitigations are in place and that emerging risks are captured. Key risks identified by the Board include:

 

·     Growth (including contract delivery)

·     Delivering change

·     People and culture

·     Information management and security

·     Supply chain (including Brexit)

·     Governance and internal controls

·     Pensions

·     Legislation/regulation

·     Health, safety and environment

 

As previously announced, the SFO is continuing to investigate the conduct of business in Algeria by Ultra Electronics Holdings plc, its subsidiaries, employees and associated persons. The investigation commenced in April 2018 following a voluntary self-report made by Ultra to the SFO. In addition Ultra is investigating another conduct of business issue associated with the Philippines and is keeping the relevant authorities informed.

 

As disclosed in note 11 of our 2018 Annual Report, the Group is monitoring developments relating to the European Commission decision that the UK CFC rules are partial State Aid. The UK Government has appealed the decision and requested certain information from recipients including Ultra but not yet provided details of how it will quantify and seek to recover State Aid. Our potential exposure is between £0m - £20m. We do not currently expect this exposure to be resolved in the near term.

 

 

 

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.

 

RESPONSIBILITY STATEMENT

 

We confirm that to the best of our knowledge:

(a)   these condensed financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting";

(b)   this half year report includes a fair review of the information required by Disclosure and Transparency Rule (DTR) 4.2.7R (indication of important events during the period and description of principal risks and uncertainties for the remainder of the financial year); and

(c)   this half year report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

 

By order of the Board

 

Simon Pryce                                                                                         Amitabh Sharma

Chief Executive Officer                                                                      Group Finance Director

7 August 2019

 


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Interim results - RNS