results presentation and script - ultra electronics...results presentation and script 3 march 2014...

Ultra Electronics Holdings plc Preliminary results for the year ending 31 December 2013

Results presentation and scriptRakesh Sharma, Chief ExecutiveMary Waldner, Group Finance Director

3 March 2014

making a difference

Cautionary statement

This document contains forward looking statements that are subject to risk factors associated with, amongst other things, the economicand business circumstances occurring from time to time in the countries and sectors in which the Group operates. It is believed that theexpectations reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actualresults to differ materially from those currently anticipated.

Ultra Electronics Holdings plcResults presentation and script 3 March 2014

Ultra Electronics is a Group of businesses which manage aportfolio of specialist capabilities, generating highlydifferentiated solutions and products in the defence &aerospace, security & cyber, transport and energy markets…

…by applying electronic and software technologies indemanding and critical environments to meet customer needs

DEFENCE & AEROSPACE

SECURITY & CYBER

TRANSPORT ENERGY

Ultra Electronics Holdings plc 01Results presentation and script 3 March 2014

Mary Waldner, Group Finance Director,presented the review of Ultra’s financialperformance for 2013.

Good morning to you all. We will follow ournormal format and the scripts and presentationwill be available on our website later today.

2013 was a year of sustained performance in theface of challenging US defence market conditions.

The order book at year end was £781m, down14% on last year. This includes the negativeimpact of currency translation, trading on theOman contract and the timing of receipt of a£30m US Sonobuoy order, which has been delayedinto 2014 as part of the five-year IDIQ negotiation.

Excluding these factors, the order book decline is6%, reflecting both defence contract awards delaysand changes in our sources of revenue, somethingthat Rakesh will be discussing later. Opening ordercover for 2014 relative to the consensus forecast is57%, broadly in-line with last year.

Revenue was just over £745m which is down 2%on 2012. This comprised 0.6% contribution frompositive currency translation; and 1.7% fromacquisitions offset by a 4.4% organic decline.

Operating profit was little changed at £121.7mand the margin was maintained at 16.3%,reflecting the proactive cost management actionsbeing taken throughout the year.

Profit before tax benefited from a slightly reducedfinance charge. The 1.3% increase in earnings pershare also reflected a reduction in the tax ratefrom 25.3%% to 24.3% and a reduction inOman minority interest.

The total dividend is covered 3 times in line withour policy and is a 5.5% increase on the prior yearreflecting confidence in medium term prospects.

Despite delays in payment approvals followingthe US shutdown, together with other workingcapital movements we delivered a operating cashflow of £79m a cash conversion of 65%, takingour five-year average cash conversion to 91%.

Preliminary Results 2013 SLIDE 2

© 2014 Ultra Electronics: Proprietary Data

Key metrics

*before amortisation of intangibles arising on acquisition, impairment of goodwill and adjustments to deferred consideration net of acquisition costs. IFRS operating profit £57.4m (2012, as restated: £88.3m).

** before amortisation of intangibles arising on acquisition, impairment of goodwill, fair value movements on derivatives, unwinding of discount on provisions, defined benefits pension interest charges and adjustments to deferred consideration net of acquisition costs. Basic EPS 54.8p (2012, as restated: 88.1p). † the 2012 profit and loss account has been restated to reflect the adoption of IAS19 (revised) ‘Employee Benefits’.

£m 2013 2012 Growth Order book 781.2 905.0 -13.7% Revenue 745.2 760.8 -2.1% Operating profit*† 121.7 121.8 -0.1% Operating margin*† 16.3% 16.0% Profit before tax**† 116.8 116.5 +0.3% Earnings per share**† 127.1p 125.5p +1.3% Dividend per share 42.2p 40.0p +5.5% Operating cash flow 79.0 89.6 -11.8% Cash conversion 65% 74%

02 Ultra Electronics Holdings plc Results presentation and script 3 March 2014

Moving to the revenue progression.

Starting at the top left of the slide, currencytranslation added £5.0m – Sterling was onaverage 1% weaker than the US Dollar at 1.564compared to 1.585 for 2012.

Acquisitions added nearly £13m, with RFI,GigaSat and BeMac, all acquired in 2012contributing around £3m pounds each and thebalance from Varisys and Wood & Douglas whichwere acquired in 2013.

The organic revenue decline was £33.4m or4.4%. Compared to last year, two big factorsimpacted revenues. These were the continuingUS budget uncertainty and in particular thesixteen day federal shutdown in October as wellas the considerably reduced volumes of radiossold by our Montreal business TCS. Performancevaried significantly between divisions withInformation & Power and Tactical & SonarSystems both showing organic revenue decline,while Aircraft & Vehicle Systems grew.

Turning to the lower half of the slide, this showsthe progression in the operating profit from 2012to the £121.7m that we have reported for 2013.

Currency translation added £0.6m, whileacquisitions added a further £3.5m.

The organic volume decline was £9.9m being the effect of the lower level of sales at last yearsgross margin.

Allowing for exchange, the effect of acquisitionsand the reduced volumes, the underlying netprofit improved by £5.7m. This reflected theconsistent pressure on the cost base, in the faceof market challenges over the last 2 years andincluded savings in R&D. It also included theoffset of a negative foreign exchange transactionimpact of £3.5m as the average US dollar hedgedrate was 6.2% worse at 1.56 compared to 1.47in 2012.



Revenue & profit progression

+£0.6m

+£5.0m

2012 Revenue £760.8m

+£12.8m -£33.4m

2013 Revenue £745.2m

2012 Underlying operating profit *†

£121.8m

+£3.5m -£9.9m

+£5.7m 2013 Underlying operating

profit* £121.7m

Currency translation

Acquisitions

Currency translation

Increased net margin

Acquisitions

Organic decline

Revenue progression

Operating profit progression

Organic decline

*before amortisation of intangibles arising on acquisition, impairment of goodwill and adjustments to deferred consideration net of acquisition costs. IFRS operating profit £57.4m (2012, as restated: £88.3m). † the 2012 profit and loss account has been restated to reflect the adoption of IAS19 (revised) ‘Employee Benefits’.


Turning now to our continuing investmentprogramme to underpin future growth. Even indifficult markets Ultra has always investedwhether it be in in-house R&D or in theacquisition of businesses. Remember too that allof our acquisitions have been funded through ourown cash and facilities. Investment in 2013totalled £153m.

On the right hand side of this slide, you can seethe businesses that we have acquired this year.In cash terms, these acquisitions were relativelymodest with up front costs of just over £22m.You will have seen the details of Varisys andWood & Douglas. Essentially they are bothclassic bolt-ins adding valuable capabilities toour portfolio.

This does not include the acquisition of 3 PhoenixInc. for US $70m, announced a couple of weeksago. I will cover the impact of this later.

Moving to internal investment, total R&Dexpenditure was £130.4m, of which £87.1m wascustomer funded. Over time we expectcustomer-funded engineering to reduce givenmarket dynamics.

Total company funded R&D continued to remain ata good level, especially when compared with manysector companies, and at £43.3m represented5.8% of 2013 revenue.

R&D expensed reduced from £48.6m to £37mreflecting the near completion of a number ofR&D projects ahead of the planned ramp up innew sonar technology R&D.

As we discussed at the Interim Results inAugust, there was capitalisation of £6.3m ofdevelopment costs relating to threeprogrammes, Remote Crypto MonitoringSystems, Proximity Sensing Equipment and theMMR radio. As a result of this, total capitaliseddevelopment costs on the balance sheet standat £9m. Going forward as we see more upfrontdevelopment requirements in civil aerospace weexpect that there will be capitalisation of costsrelating to future programmes.



R&D balance sheet

Capitalised development costs

£9.0m (2012: £3.5m)

P&L

P&L charge £37.6m

(2012: £49.4m)

Development costs amortised

£0.6m

(2012: £0.8m)

R&D capitalised £6.3m

(2012: £0.6m)

Customer funded £87.1m

(2012: £97.9m)

R&D cash £130.4m

(2012: £147.1m)

Ultra funded £43.3m (2012: £49.2m) R&D expensed

£37.0m (2012: £48.6m)

Maintaining investment to underpin growth

Total cash investments

Acquisitions £152.5m

(2012: £180.2m)

Varisys £16.2m

Wood & Douglas £5.9m

£22.1m (2012: £33.1m)

Before we leave the profit and loss account, it isworth just having a quick look at a couple ofimportant features.

At £229m, manpower costs represents over30% of sales. As markets have tightened(particularly in the US), Ultra has maintained itscustomary vigilance around cost control. Duringthe year we have had over 400 redundancies ata cost of £4.6m and a benefit in year of £10m;the annualised benefit is estimated to bearound £20m. This follows on from 2012 whenaround 280 roles were made redundant.However, we have also been investing resourcesin those businesses that are growing quickly –notably the nuclear, civil aerospace, powermanagement and crypto businesses in the UK,where we are creating over 100 new high valueengineering jobs.

Headcount at year end was 4,591, down 116from the prior year and notably, average indirectheadcount during the year was down even moreby 182 or nearly 20% from the prior year.

The redundancies impacted all divisions but themajor impacts have taken place in Tactical & Sonar Systems, where we have right-sized TCS,and in Information & Power Systems, where theProLogic business was restructured in response tothe challenging market conditions.

In addition, we have looked to maximiseefficiency by consolidating businesses whereappropriate. The year saw the successfulintegration of the Criticom and 3eTI businesses,together with the relocation of the Precision Air & Land Systems business on to one site inCheltenham. During the next three months, wewill be merging our MSI and AMI businesses inthe US under one president.

All of these allow technological convergence aswell as the removal of duplicated overhead.

We are continuing with our annual “plan-on-a-page” process where all businesses will showhow they will minimise their cost base in the year.For some this implies immediate cuts; for others,it means preparing to act if anticipated orders donot materialise.

There are also a few pointers with regard tofuture trends as far as the results are concerned.

On pension finance costs, as discussed at theinterims, we have in the year adopted the revisedIAS 19. In light of the change and consistent withour peer group, we have removed pension financecosts from the calculation of headline profit beforetax. The 2013 charge was £3.4m.



2013 Income statement - observations

£m 2013 Revenue 745.2 Manpower costs (229.0) Non-manpower costs (394.5) Operating profit*† 121.7 Bank interest costs (4.9) Profit before tax** 116.8 Tax (28.3) Minority interest 0.0 Profit for headline EPS 88.5 Memo: Non-headline impairment charge

(44.2)

Redundancies impact

To increase with Ithra

Change of treatment

Rate declining



04 Ultra Electronics Holdings plcResults presentation and script 3 March 2014


On tax we have declared a headline rate todayof 24.3% down from 25.3% in the prior year.We would expect the rate to be maintainedaround 24% reflecting the reduction in the UKcorporation tax rate.

On minority interest, 30% of the profits earned inOman relating to the airport project belong toour Omani partner. This needs to be taken intoaccount in calculating our earnings per share.This year, given the prolongation of the contract,the profit recognised on the overall project hasbeen in our UK Airport Systems business, leavingan immaterial minority interest charge. Goingforward we expect it to return to around £0.4mper year.

Finally, the impairment of ProLogic. As we firsthighlighted in November, this is a one-off non-headline non-cash charge of £44.2mresulting from the annual accounting review ofgoodwill. The business case for the acquisitionremains sound – our strategy was to acquire theProLogic product capability in particular theremote crypto key that was critical to our securingthe ECU contract. Our intention was to run theservices business alongside whilst we exploitedthe products – the weakness on services hasresulted in our accelerating the restructuring ofthe services business element whilst continuing todevelop the crypto products in collaboration withother Ultra businesses in particular AEP and CIS.



2013 Income statement - observations

£m 2013 Revenue 745.2 Manpower costs (229.0) Non-manpower costs (394.5) Operating profit*† 121.7 Bank interest costs (4.9) Profit before tax** 116.8 Tax (28.3) Minority interest 0.0 Profit for headline EPS 88.5 Memo: Non-headline impairment charge

(44.2)

Redundancies impact

To increase with Ithra

Change of treatment

Rate declining




Turning now to cash. Cash conversion wasmodest at 65% compared to last year. The mainreason for the movement was a working capitaloutflow reflecting the more challenging market .

Capital expenditure was lower than 2012 as theprior year included building refurbishments at ourGreenford businesses and at the Arle Court facilityat Cheltenham. However during 2013 wecontinued to invest in facilities, in particular thenew Neutron Flux Detector facility at Wimbornethat some of you were able to visit in November,as well as our cyber facility and the move of thePALS business to Cheltenham.

The intangible capital expenditure reflects thedevelopment projects we have discussed previously.

As far as working capital is concerned, therewere outflows across inventories, and receivablesand an inflow on payables. In the case of theinventories, the largest increase was atCheltenham as part of the site move and at ourCEMS business to support specific customerrequirements. Debtors suffered as a result ofdelays in payment approvals relating to theshutdown and changes in customer behaviours,particularly the primes. There was also anincrease in debt relating to the prolongation ofthe airport IT project in Oman, which waspartially offset by an increase in payments due to subcontractors on the project.

The pensions item primarily reflected the deficitpayment of £7.2m. In December we completedthe triennial actuarial funding review based onthe March 2013 valuation. The resulting deficitwas £99.8m, up by over £36m from the previousvaluation. We worked constructively with thetrustees and have agreed a deficit recovery planthat sees the deficit payments increasing by lessthan £1m to £8m in 2014, £8.5m the followingyear and then £9m for the remaining 8.5 years.There will also be additional service contributionsof around £1m per annum.

The associate inflow reflects a dividend receivedfrom Al Shaheen, and all other items are in line.



Operating cash flow

£m 2013 2012 Operating profit*† 121.7 121.8 Depreciation and disposals 12.8 11.1 Tangible capital expenditure (13.9) (20.5) Net intangible capital expenditure (4.8) (1.5) Working capital increase (34.0) (13.8) Pensions (6.1) (6.8) Associate 1.4 (2.7) Other 1.9 2.0 Operating cash flow 79.0 89.6

Cash conversion

65%

74%



We have included this slide to demonstrate theUltra historic cash conversion track record. Asyou can see, neither the high of 2011 nor therelative low of 2013 are outside the ‘normalrange’. The rolling five year average cashconversion is indicated in blue on the slide.



Operating cash flow

Key

Annual cash conversion

5 year rolling average cash conversion


Turning now to net debt.

Cash tax was in-line with last year, but net interestwas slightly down reflecting lower rates on theRevolving Credit Facility renewed early in 2013.

Acquisition spend has already been discussed andwas clearly lower than last year and ‘other’consisted primarily of the issuing of shares tomeet share options.

Overall we closed the year with net debt of£42.2m. We also had considerable headroom inboth our committed facilities with our relationshipbanks and with our uncommitted bilateral loannote arrangement with Pricoa.



Net debt

£m 2013 2012 Opening net debt (43.0) (46.1)

Operating cash flow 79.0 89.6 Interest and tax (29.4) (30.0)

Dividends (28.1) (26.9)

Acquisition costs (24.7) (37.0)

Currency 0.2 2.2

Other 3.8 5.2

Closing net debt (42.2) (43.0)

Headroom (current facilities)

Borrowing £163.0m

Pricoa £48.4m


With the recent weakness of the US dollar, Ithought it worth updating you on the impacts offoreign exchange on Ultra. This slide summarisesthe impact on 2013 as discussed earlier.

In common with all Groups with businessesoperating in the US, we are exposed to theimpact of translation of the results of thosebusinesses. With approximately 40% of ourrevenue from US businesses, for each 1 centweakening in the US dollar we see a £2.4mdecline in revenues and around a £0.3m declinein profit.

The majority of sales made by Ultra’s businessesare in local currency, thus avoiding any transactionrisk. However this risk does arise when our UKbusinesses make sales in US dollars, currentlyaround 10% of revenue. To reduce the net profitexposure the Group’s policy is to hedge forward.The expected flows are reviewed on a regularbasis and additional layers of cover are taken out.Therefore at year end, 100% of the expectedexposure for 2014 was covered at 1.57, 64% of2015 at 1.53 and 30% of 2016 at 1.52.

Year on year this movement in hedged rates flowsthrough into our underlying profits. In 2013, theaverage hedged rate was 1.56 compared to 1.47in 2012, leading to a £3.2m profit reduction. In2014 our average hedged rate is 1.57 which willlead to a £0.5m headwind.



Currency effects

US$:£ % covered

2014 1.57 100%

2015 1.53 64%

2016 1.52 30%

Future hedge rates

* Other includes CAD, OMR and AUD translation effects

Foreign Exchange

US$ 80.0m @1.56

US$31.3m @1.01

Profit Impact Transaction Translation US$ into CAD -1.6% -£0.3m n/a

US$ into £ -6.2% -£3.2m +1.3% +£0.8m

Other* into £ n/a n/a -£0.2m

Total profit impact -£2.9m (-2%) Revenue translation impact +£5.0m (+1%)


For completeness I have included the revenuepie charts we normally show. They reflect therevenue highlights I have already covered.



Sector Destination

Transport and energy £149.1m 20% (2012: £149.0m 20%)

Defence £424.5m 57% (2012: £428.1m 56%)

UK £243.7m 33% (2012: £225.7m 30%)

North America £330.5m 44% (2012: £368.1m 48%)

Mainland Europe

£61.8m 8% (2012: £55.8m 7%)

Rest of the World £109.2m 15% (2012: £111.2m 15%)

Revenue

Security and cyber £171.6m 23% (2012: £183.7m 24%)

Moving now to the detail by division, I will startwith Aircraft & Vehicle Systems.

Revenues were up 5.8% at £156m. The divisionsaw increased sales of its specialist ice protectionsystems on the Joint Strike Fighter and 787 andthere was also additional revenue resulting fromthe component design and manufacture of anUrgent Operational Requirement radio contractfor the British Army. In the second half of theyear the delayed Lockheed Martin Warriorcontract was awarded and contributed to sales.Finally the acquisition of Varisys also made apositive impact in the year.

Profits were up 5.9% to £32.4m reflecting a goodcontribution from the UOR, ice protection salesand the A400M NIM6 cargo handling system, aswell as operational efficiencies from the site move.Profits were negatively impacted by theunderrecovery of labour and overheads from thefuel cell business due to delays in UAV orders.

Operating margin remained strong and in linewith the previous year, due to lower R&D costsat this point in the development cycle.

The order book at £166m was up by 1.5%benefitting from the receipt of the delayedWarrior contract. This was partially offset by therephasing of 787 orders and lower order intakein the period as a result of the delays in the USdefence procurement process.



Aircraft & Vehicle Systems PERFORMANCE DRIVERS IN PERIOD

Performance drivers in 2013

Increased sales of specialist ice protection systems for aircraft Strong sales from British Army UOR radio contract and from the A400M NIM6 cargo handling system

Positive contribution from Varisys acquisition Receipt of order for UK armoured fighting vehicle upgrade programme

Financial results 2013 2012

Revenue £155.5m £147.0m +5.8%

Profit*† £32.4m £30.6m +5.9%

Order book £166.0m £163.6m +1.5%

Operating margin* 20.8% 20.8%

21% of Group sales

27% of Group OP Revenue by

sector**


**Colour coded as slide 10


In Information and Power systems revenue wasdown by 3.4% to £305m.

This division was the one most impacted by theunexpected US government shutdown andfurlough impositions with the financial impact ofthese being particularly damaging to ProLogic.Here we saw a significant reduction in placementof services contracts. This was partially offset bysales from the Indonesian Fatahillah corvette refitand strong demand for specialist electrical powermanagement equipment for the US and UKsubmarine programmes.

Profit in the division is down by 8.2% to just over£41m reflecting the impact of the US governmentshutdown on revenue. In particular the sharpdecline at ProLogic led to an under-recovery ofoverheads. The Oman contract, where annual saleswere similar to those in 2012, continued to trade ata lower margin than the division as a whole andthese factors resulted in the divisional marginreducing to 13.5% from 14.2%.

The order book decreased to £330m. This primarilyreflects the trading of the Oman IT contract, andUS order intake delays with the balance largelydue to foreign exchange translation.

Let me update you on Oman. The prolongationof the contract has led to revenue being deferredinto future years. We now expect the project tobe complete by mid 2016 with revenuesestimated at this point of around £40m for 2014.As the original project end date was April 2014,we are in active discussions with the customer toagree a formal extension of time and costrecovery to ensure that we are not commerciallyimpacted by the delays.



Information & Power Systems PERFORMANCE DRIVERS IN PERIOD


Revenue £305.0m £315.8m -3.4%

Profit *† £41.2m £44.9m -8.2%

Order book £330.1m £391.4m -15.7%


41% of Group sales


sector**

Performance drivers in 2013

Prolongation of the Oman contract has deferred revenue

US Government shutdown impacted order placement, especially in the software services business

Strong demand for specialist electrical power equipment for UK and US submarines

Receipt of the Indonesian Fatahillah corvette upgrade order, which also contributed to revenue


† the 2012 profit and loss account has been restated to reflect the adoption of IAS19 (revised) ‘Employee Benefits’.



And finally we have Tactical & Sonar Systems.

Revenue here fell by 4.5% to £285m. Foreignexchange translation added 0.5% and acquisitions2.5% but there was an organic decline of 7.5%.The principal reason for the reduction was thecontinuing decline in radio sales at TCS both to thedomestic and export markets.

Elsewhere, there were also impacts from thecontinuing uncertainty in the US market and thefederal shutdown. However, there were alsostrong performances in other businesses. The USanti-submarine warfare business rose by 7%,reflecting the “pivot to the Pacific”, the UKcrypto business grew as it delivered ECU andthere were further sales of surveillance systemsin both the UK and the US.

Overall, profits were up by 3.9% to just over£48m. The strong profit was driven by theperformance on the UK ECU contract with risksretired as the programme is delivered. Sales ofLitening pods in the UK together with US ASWalso contributed. As a result, the marginincreased to 16.9%.

The order book was down by 19% to £285m.This reflects the timing of the £30 million poundUS Sonobuoy order, foreign exchange, the tradingof the ECU contract and once again delays as aresult of the US government shutdown.

An update on tactical radios. Overall the numberof radios sold fell from more than 2,000 in 2010to just 52 this year. We have now reached thelow point of the cycle for this product .Theimpact of the decline in radio sales wasmitigated by the tough actions taken to addressthe issues. The numbers employed on radios atTCS have reduced from 282 at the end ofDecember 2010 to just 90 today, with alloperations consolidated at the Montreal facility.The business has been pared down, but theexpertise to develop the next generation ofradios has been retained. As a reminder, theradio programme has been part-funded by theCanadian government who have invested a totalof $20m Canadian dollars alongside ourinvestment. As flagged at the Wimborne event,we have made good progress on our nextgeneration radio for the Win-T programme. Theinitial radios sold are due for trial in the secondquarter of 2014 ahead of the next phase ofproduction expected to begin towards the endof the year.



Tactical & Sonar Systems PERFORMANCE DRIVERS IN PERIOD


Revenue £284.7m £298.0m -4.5%

Profit *† £48.1m £46.3m +3.9%

Order book £285.1m £350.0m -18.5%


38% of Group sales


sector**

Performance drivers in 2013 Reduced demand for tactical communications equipment Continued demand in US for ASW as the US maintains its “pivot to the Pacific”

US sonobuoy order delayed to 2014 and is now part of a 5-year IDIQ Delayed orders following US Government shutdown



Profit boosted as ECU RP retires risk


Finally, a few words on this year’s outlook. Weare cautiously optimistic that we can achieveprogress in this year, although as we havediscussed, we are working with the headwind ofthe weak US dollar.

As you see in the preliminary statement weexpect that it will be later in the year that thebenefit of a US defence market improvement willflow through into some of the Group’s niches.We therefore expect the usual Half 1/Half 2weighting to be particularly marked this year.

The acquisition of 3 Phoenix Inc., announcedtwo weeks ago, will deliver significant synergieswith our Naval Systems division. In order to fullyexploit and realise the benefits of thesesynergies, both internally and externally, it isexpected that the integration of 3 Phoenix Inc.will be extended beyond Ultra’s normaltimeframe, with the acquisition becoming fullyearnings-accretive in 2015.

Finally, on cash. I have talked about the changesin customer cash management behaviours, andRakesh will discuss the trends we are seeing inorder timing. Owing to these factors and theincreased pension payments I have discussed weexpect our medium term rolling five-year cashconversion to be around 80%.

Thank you, I will now hand over to Rakesh todiscuss future prospects.



Outlook


Rakesh Sharma, Ultra’s Chief Executive,continued by explaining how Ultra willmaintain business performance in the short-term whilst continuing to positionto achieve medium and long-term growth.

Thank you Mary.

Good morning everyone. It’s good to see you all.

This presentation is an update rather thancontaining anything dramatically new. Themajority of what I reported at the Interims remainsexactly the same today. However, I am going tosingle out the US defence market and the order-book for a more detailed explanation.

The overall theme of this presentation is cautiousoptimism. With the emphasis on cautious. I amoptimistic that the opportunities that we havepreviously discussed are firming up. But, I amcautious for Ultra until I start to see contracts andmoney flowing again.

So, let’s start with the US defence market.



Strategies for growth



As you will all recall, I have consistently said thatit is not the US budget cuts that have caused usdifficulty but the uncertainty that has stoppedcontracts from flowing. Well, now that we have atwo-year budget deal, some of the forecastingfog has evaporated. But, before we start firing offparty poppers and celebrating, remember thephrase for 2014 continues to be – cautiousoptimism. Even though the Bill has been signed,it takes time for the money to be allocated to theright programme buckets. Consequently, the firsthalf of 2014 will continue to be difficult withnormality returning in the second half.

As a confidence builder, we have seen someencouraging signs in our companies that dealdirectly with the DoD. Requirements are startingto be issued for submission of proposals. A goodexample of this is the sonobuoy IDIQ for whichwe are in final negotiations. Those of ourcompanies that contract through the majorprimes will not see an immediate flow down offunds, until almost the third quarter, as thePrimes first secure their own funds.

Now, let’s look at some of the detail:• We have not witnessed the meltdown infunding levels that some pundits werepredicting. At $487b the base budget is higherthan in 2008.

• The base budget indicates fewer new platformsand more upgrades, generally of electronic andsoftware systems – Ultra’s sweet spot.

• The OCO budget has been increased by $5babove the President’s request, crucially inequipment procurement, despite thedrawdown from Afghanistan. My interpretationis that it has been done to soften the blow ofbase budget cuts to the army. The US Army hassecured an extra $1b to support procurement of aircraft and missiles.

• The army’s Ground Combat Vehicle iseffectively dead. It has suffered an 80% cut toits budget request.

• WIN-T received $200m less than requested but,at $789m it still remains a substantialprogramme. Since the Army is going to cut itsheadcount it doesn’t need as many of thelarger communication nodes and perhaps thisis why the reduction was included.

continued on next page



Market update US DEFENCE DEVELOPMENTS SINCE AUG 2013

Programmes of note to Ultra: – Virginia class submarine – Littoral Combat Ship – F-35 Joint Strike Fighter

– WIN-T – ‘Pivot to the Pacific’ – information assurance & cyber

FY14 Appropriations Bill signed in Jan 2014 Base defence budget agreed at $487bn – $29bn less than President’s request Overseas Contingency Operations (OCO) - $85bn – this includes $6bn for procurement

US defence conditions improving, although it will take time to see the impact

93

160 63

129

42

Base defence budget $bn

Procurement

O&M

RDT&E

Personnel

Other

General observations – all services are facing hard decisions about programmes and priorities – the major naval and aircraft programmes obtained the required funding – US Army’s Ground Combat Vehicle program is essentially dead


continued from previous page

• The US Navy has done particularly well withsupport of the naval shipbuilding programme.Indeed, the Virginia Class Submarine hassecured an extra $950m more than wasrequested. This is yet more evidence of the“Pivot to the Pacific”.

• The US Air Force has been kept relativelyunscathed. The A-10 Warthog, which wasrumoured to be a candidate for retirement,has been kept alive in the short-term only tobe sacrificed along with the U-2 fleet in 2016and beyond.

• Although the JSF programme has beenstretched, thereby appearing as an in year cut,the numbers have been maintained. Myspeculation is, that this is so that the recentlyreported reliability defects can be addressed.

What does all this mean to Ultra?First, let me remind you that of the four services,the US Navy is our largest customer and that theUS Army is our smallest. Second, we have alwaysestimated the in year JSF numbers on theprudent side. The lengthening of the programmeshould not effect our planning assumptions.

However, Lockheed Martin’s estimate of thevalue of the Engine Ice Protection System, overthe life of the programme, of $500m remainsunaffected and is larger than our currentprogramme planning assumption.

The indications are, that the programmes thatUltra has an interest in, continue to receive a highpriority in the allocation of funds. This is aconsequence of Ultra’s strategy of positioning inthe areas of the customers’ preferential spend.

Moving on to the next slide.



Market update US DEFENCE DEVELOPMENTS SINCE AUG 2013

Programmes of note to Ultra: – Virginia class submarine – Littoral Combat Ship – F-35 Joint Strike Fighter

– WIN-T – ‘Pivot to the Pacific’ – information assurance & cyber

FY14 Appropriations Bill signed in Jan 2014 Base defence budget agreed at $487bn – $29bn less than President’s request Overseas Contingency Operations (OCO) - $85bn – this includes $6bn for procurement

US defence conditions improving, although it will take time to see the impact

93

160 63

129

42

Base defence budget $bn

Procurement

O&M

RDT&E

Personnel

Other

General observations – all services are facing hard decisions about programmes and priorities – the major naval and aircraft programmes obtained the required funding – US Army’s Ground Combat Vehicle program is essentially dead




Market update OTHER MARKET SECTOR DEVELOPMENT SINCE AUGUST 2013

Defence (non US) Increasing tensions and insurgency Budgetary pressures continue Procurement process dislocated

Security & Cyber Growing awareness of threat Increasing priority for business & Govt Security and intelligence budgets rising


Transport Growth driven by increased demand Infrastructure investment increasing Significant global opportunities

Energy Potential UK ‘electrical energy gap’ Worldwide concern for security of energy More life extension and upgrade progs

China India

Indonesia Brazil

Making progress, with further good opportunities evolving

Continue to position Good opportunities

Ultra is well positioned

Good opportunities

Geographic Middle East Australia

In the non-US Defence Market, budgetarypressures continue in the west, where financialausterity coupled with process and organisationchange, continue to delay requirements andprocurements. Several militaries are in the positionof returning unspent monies to their treasuries.

An opportunity in the UK is the reset marketpost-Afghanistan as materiel is returned to theUK. A good example of this is our down-selectionfor the Mastiff upgrade where Ultra is in a three-way teaming arrangement with MorganAdvanced Materials and Ricardo.

Demand for capability is increasing in the Asia-Pacific where tensions continue at a highlevel. Remember Ultra does better when tensionsare high rather than when there is a conflict.

In Security and Cyber, initiatives by the UK and USGovernments to educate industry about the cyberthreat, is helping with the cross-over of technologyfrom the military to the commercial sector. I am alsopleased to report that the Ultra Cyber ProtectionGroup, in which we have invested £1.5m is nowup and running and has been formally acceptedinto the UK’s Defence Cyber ProtectionPartnership (DCPP). All bang on schedule I mayadd. As well as protecting our own networks weare now able to help other organisations.However, the first task is to exploit synergies in;Computer, Information, Transmission and

Communication Security, Electronics Intelligenceand Communications Intelligence. Ultra is theonly company in the UK that has a presence in allof these sectors.

The Snowden leaks have had a detrimental effectto our export legal intercept market. To managethe consequences, the team at Sotech in the UShave re-positioned the product through the lawenforcement channel as opposed to counter-narcotics. Reassuringly as a result, we are receivingstrong interest from several countries in Centraland South America. The Middle East marketremains interested, but as we know in that region,interest takes time to turn into contract award. Inour planning, we have only included one exportopportunity for legal intercept in 2014.

In our transport market, if we were not to win anyfurther contracts in the Commercial Aerospacesector, that business would still double in revenuefrom £40m to £80m, over the next five years. Thisis indicative not just of the growth in the marketbut also Ultra securing a larger market share withnew innovative offerings that disrupt theincumbents. I should also add that these are long-term positions. Every new aircraft position bringswith it 20-25 years of OEM revenue with a further20-25 years of spares and repair revenue.




The UK railway sector is beginning to plateau afterseveral years of rising investment. Attention isturning to HS2, although there is talk of a Crossrail2 Project, which would extend the growth in theUK commuter rail market which is of interest toUltra. The export rail market continues to grow,especially in the Far East and Australia.

The Nuclear Energy market is growing at a steadyrate in both the new build and legacy sectors.Again Ultra has supplemented this marketgrowth with winning increased market share.With products that have US, UK and Frenchaccreditation we are now able to supply to all ofthe major nuclear reactor constructors. Chinaremains the largest new build market and we arein discussions with the Chinese agencies; CNPTCand CNNC, to become part of their direct supplychain, in preparation for their intendedinvestment in the UK nuclear market.

An exciting new development is the embryonicSmart Grid sector. Appliances are going to getsmarter, determining when they draw energydepending on availability and price. Thisenvisaged network is going to require cyberprotection. Our early work in this area, helpingwith standards and protocol, is a good exampleof Collaborative Autonomy at work. Companiesfrom our Cyber cluster are working ‘hand in

glove’ with those from the Power Managementcluster to enter an emerging market, that neitherone could have addressed individually.

The broadening of our geographic reachprogresses at our intended prudent rate. Theexport markets detailed in this slide, and moregenerally, are notorious for delays and revisionsto requirements. It is important that theinvestment in time and money is tailored torunning a marathon rather than a 100m dash. Ihave seen many companies peak too early andthen not have the stamina to complete the race.Our interests in the indicated markets have notbeen affected by the recent emerging marketjitters. Again we are positioning in areas ofpreferential spend which are enduring beyondany short term concerns.



Market update OTHER MARKET SECTOR DEVELOPMENT SINCE AUGUST 2013

Defence (non US) Increasing tensions and insurgency Budgetary pressures continue Procurement process dislocated

Security & Cyber Growing awareness of threat Increasing priority for business & Govt Security and intelligence budgets rising


Transport Growth driven by increased demand Infrastructure investment increasing Significant global opportunities

Energy Potential UK ‘electrical energy gap’ Worldwide concern for security of energy More life extension and upgrade progs

China India

Indonesia Brazil

Making progress, with further good opportunities evolving

Continue to position Good opportunities

Ultra is well positioned

Good opportunities

Geographic Middle East Australia


We have seen a change in the types of revenueand when we can recognize these in our orderbook. There are six factors that I would now liketo explain.

1. A change in DoD contracting behaviourThe US has always funded programmesannually, but over the last two years we haveseen a slow shift to implementing IDIQ contractvehicles. This will help the contracting officersovercome future budget uncertainties. Justbecause we have a two year budget deal, doesnot mean that the politicians won’t use thebudget as a proxy war again. This has beenrecently commented on by the CEO of Boeing.Although the immediate consequence appearsnegative, as it takes longer to negotiate thesecontracts, the medium term effect is verypositive. These contract vehicles will providesome immunity to future uncertainty. A goodexample of this trend is our radio business inMontreal. TCS has successfully negotiated toinclude their new Multi Mission Radio, theOrion, onto their existing IDIQ for the previousgeneration of radio. The original value of thisIDIQ was $650m and there remains $520m stillto be spent. None of this value is reflected inour order-book.

2. Growth in commercial aerospaceCustomers in this market have tended to awardan initial contract covering prototype quantities.Order cover for production is then placed on anannual basis. In some cases we can bereasonably confident about the value of ordersexpected and their timing even though they arenot in our order book. Clearly if this part of ourrevenue is growing faster than the rest then theprofile of our orders is going to become moreskewed towards annual quantities.

3. Recent acquisitionsRecent acquisitions in the commercial market,like Varisys and Wood & Douglas, tend to havea typical order cover of four months. As wecontinue to invest in this sector the effect onthe order book is going to be exacerbated.

4. Salami slicingI have commented over the last three years thatcustomers, especially the UK MoD, haveresorted to phasing contracts to control theirexposure to programme failure. The phases are:• Feasibility assessment• Full scale engineering and development• Limited rate initial production and finally• Full scale production

Clearly this salami slicing will shorten the orderbook as we only book firm orders.




5. Export marketsOwing to the extended procurement process inthe export market, remember Fatahillah 1 tookfour years from bid to contract award, theexport order-book can be a bit lumpy. Fatahillah2 for instance has been changed from anelectronics prime to a shipyard prime delayingthe award into 2014. This is not a bad thing andactually represents a reduced risk as the secondship in the class is in a worse state and needsmore extensive structural refurbishment. But thishas clearly resulted in a delay of an order.

6. Larger contractsFinally, as the Collaborative Autonomy initiativebears fruit and we are able to bid for largeropportunities, they are naturally more difficultto predict the exact date of contract placement.

So for Ultra, historically we spoke of ordercover of 60% with further revenue of 15%from spares and repairs and 15% from annualorder quantities, as indicated by the left-handside of the graph.

The right-hand side of the graph shows you asnapshot of our order book as of 31stDecember 2013. In particular, as well as theliquidation of the order book, I have includedthe positions that we have already won such

as commercial aerospace and IDIQ contracts.Obviously, the further to the right you go, theless deterministic it becomes as to the exactsources of future revenue. I see this as apermanent change to our order book profile. Idon’t wish to appear complacent but I amconfident of being able to identify futureopportunities to fill the gap.

Which brings us to the next slide.


At the Interims I presented this slide detailingsome of the larger opportunities that we arefollowing. I have included some of the progressthat’s been made in the last 6-7 months. I wouldalso like to remind you that only a few of thesehave been included in our five year plan.Additionally the conversion time from interest tocontract is difficult to predict as theseopportunities are open to Governmentintervention and requirement scope change. So,now let me describe one from each market.

As anticipated the UK Cipher programme hasbeen cancelled and another one, addressing thenear term concerns called Crypto CapabilityProgramme (CCP), has been started. It is still in itsearly definition phase but we are positioning tobe the lead architect. Our ECU(RP) contract,Remote ReKey capability from Prologic and therecent acquisitions of AEP and Barron McCannhave served us well.

In the defence area we have made good progressin all four opportunities. The US MMR trial is dueto commence in April as part of the national NIEtrial. These trials are run to ensure interoperabilitybetween new and legacy systems and is a result oflessons learned in Afghanistan. Since a large partof the legacy radios are our HCR radio, we are verywell positioned to exit this trial successfully.

Concerning the fuel cell opportunity, while wecontinue to support Lockheed Martin’s StalkerUAV, we believe there is a larger available marketas a secondary power source for safety criticalsituations. We have made good progress on twotrials in the commercial sector. In 2013 we had areal emergency in Houston. Our fuel cells hadbeen fitted to several traffic lights along the city’sevacuation route. When a tornado took downthe power grid, the traffic lights continued tofunction, allowing an effective evacuation ofcivilians without the creation of gridlock – a firstas was commented on by the city police.

Finally, in the transport sector, we successfullycompleted a Fuel Tank Inerting feasibility studyfor Comac. The results were presented toComac’s Chief Engineer in December last year.Not only were we able to demonstrate that ourtechnology solves their problem, we are also ableto save Comac substantial amounts of money.We have now submitted a proposal for full scaledevelopment and production and await thecustomer’s assessment and potential call toattend negotiations.



Security & cyber – potential of £500m over 5+ years – UK Government cyber 5 years £300m UK Govt reviewing – US Government cyber 5 years £80m bid in end Mar 14 – global lawful intercept & cyber security operations centre 10 years $200m ‘Snowden’ impact – Industrial SCADA cyber protection 5 years $50m agreement signed

Larger revenue opportunities UPDATE SINCE AUGUST 2013

Defence – potential of £890m over 5 years – IDIQ sonobuoy 5 years $600m in negotiation – Asia-Pacific torpedo defence 5 years £100m trials in 2014 – Asia-Pacific high capacity radios 5 years $120m trials in 2014 – US multi mission radio 5 years £350m trails in 2014

Transport – potential of £220m over 5+ years – Asia-Pacific fuel tank inerting 5 years £25m contract for study – Middle East airport infrastructure – new build and upgrades 10 years $200m – global landing gear control units 5 years £75m

Energy – potential of £250m over 5+ years Asia-Pacific nuclear sensors 5 years £20m won*

— US Naval energy management 5 years $180m won* — US signalling and secondary power source 5 years $60m trials in Houston — UK/US nuclear power plants - life extension and new builds 10 years £85m

*programmes now funded on an annual or incremental basis


Our acquisition strategy remains disciplined andconstant. Our modelling has confirmed that wehave the firepower to spend £150m per annumover the next five years and still stay below 2 x NetDebt/EBITDA. Over the last five years we havespent over £220m on acquisitions, all funded fromour facilities and free cash flow. Because of this weconsider our acquisition strategy as a special formof organic growth. Our planning assumption isthat we will continue to acquire using our freecash flow.

Despite this fire power, we are not going to gointo the marketplace and fritter it away. Thetarget must be right for Ultra in all respects:• Market access• Acquisition of a key capability• Meets our disciplined financial parameters

An important lesson that we have learnt, over thelast year is that, the greater the synergy withexisting capabilities, the more time that should betaken to fully integrate the target – from thebeginning. Hence we decided to take anappropriate amount of time, to integrate BarronMcCann into AEP and thus the reason why weanticipate that the integration of 3 Phoenix willtake approximately 12 months. 3 Phoenix bringswith it not just market access but, it also has acapability in large deck torpedo defence – carriersfor the layman. Not only are there internal

synergies, component supply and transfer oftechnology to 3 Phoenix to attack the Cruiser/Destroyer (CRU/DES) market, but also externalsynergies in shared customers. It fundamentallysupports the Sonar cluster and the US Navy’s‘Pivot to the Pacific’.

The implementation of Collaborative Autonomy,together with other internal initiatives to becomehunter-killers, has identified 9 clusters that haveformed out of the 180 areas of specialistcapability. This has helped us to clearly identify,both internally and externally, sectors ofacquisition interest. Over the last two years ourdisciplined approach has meant that we haven'tmade many acquisitions, as high quality targetswere few and far to find. However, recently wehave noticed that better targets are coming tomarket from the investment banking community.This allied with the targets that have beengenerated internally, mean that we have morethan a full pipeline. This in turn gives meconfidence that we are on track to getting backto our historic pattern of growth, in the mediumterm, of half organic and half acquisition.



Remain focused in core market sectors – defence & aero, security & cyber, transport and energy

Maintain acquisition rationale

3 Phoenix Inc acquisition – provides market access – delivers complementary technologies and capabilities Developing a greater acquisition pipeline –more opportunities in the market – taking a more outward looking stance –more internal sources

Acquisition strategy

Target areas remain: Sonar & Naval Systems

Aircraft Systems

Land Vehicle Systems

Nuclear Control & Sensors

Power Management

Communications

Security

Surveillance

Transport Infrastructure

£220m + Total acquisition spend over last 5

years (2009-2013 inclusive) Funded from free cash flow


On the next slide, as usual, I give you someexamples of near term opportunities. Thisshould help you see, (along with the order cover,annual orders and spares and repairs), how2014 is underpinned.

As always these near term opportunities comewith a health warning. They are still subject tocompetitive pressures. Having said that though,we have not lost any that were included in thelast Interims presentation. Any opportunities thathave been won, in the meantime, have beenremoved and new ones added.

Since I have made a point of growth in thecommercial aerospace market, let me brieflydiscuss the Electric Ground Door Opening System,EGDO for short, for the Airbus 350 XWB. If weare successful the system has the potential to befitted to other aircraft types in the Airbus fleet.

So what is it?The ground maintenance crew currently use acumbersome hydraulic system to get access tothe landing gear. This system is extremely heavyand being hydraulic requires regular scheduledmaintenance. The EGDO is a computer controlledelectrical system which dramatically reduces theweight, increasing fuel efficiency, and reducesmaintenance costs – a double whammy. We arecurrently in negotiations having been down-selected along with another competitor.

Moving on to the Summary and Outlook.



Aircraft & Vehicle Systems Fuel tank inerting for regional aircraft 2014 £12m per annum EGDO Airbus 2014 £65m Boeing 737 PSC 2014 £10m initial XAC LGCU et al 2014+ £10m initial

Near term contract opportunities 2014/2015

Information & Power Systems Future airport opportunities in Oman 2014+ £50m UK EDF sensors 2014+ £30m UK submarine power & control 2014+ £35m Cryptographic key configuration 2014 £10m

Tactical & Sonar Systems US Navy secure energy management 2014 $15m per annum Fatahillah MLM ship 2 2014+ £20m International sonobuoys 2014 $10m per annum WIN-T increment 1 extension 2014+ $40m


So to summarise.• Ultra’s performance in 2013 was solid, given theUS defence market conditions.

• I remain cautiously optimistic about the short tomedium term. Hopefully, the presentation todayhas helped you to understand why.

• Ultra continues to position for medium termorganic growth, through:– managing the cost base;– investing in R&D to fuel future organic growth;– maintaining our financial and managerial discipline.

• Ultra continues to position and benefit from,areas of preferential spend, as has been seen bythe outcome of the recent US budget deal.

• We continue to broaden the geographic reachto capture growing markets in the AsiaPacific.

• Making focused acquisitions, to support our 9 clusters. The strength of the balance sheetsupports firepower of £150m per annum for the next five years.

I am confident that the Group can achieveprogress in 2014, with accelerating growth inthe medium term.

Thank you. We will now take questions.

** before amortisation of intangibles arising on acquisition,impairment of goodwill and adjustments to deferredconsideration net of acquisition costs. IFRS operating profit£57.4m (2012, as restated: £88.3m).

** before amortisation of intangibles arising on acquisition,impairment of goodwill, fair value movements on derivatives,unwinding of discount on provisions, defined benefits pensioninterest charges and adjustments to deferred consideration netof acquisition costs. Basic EPS 54.8p (2012, as restated: 88.1p).

*† the 2012 profit and loss account has been restated to reflect theadoption of IAS19 (revised) ‘Employee Benefits’.

Note: Title and appendix slides omitted from this document.



Summary and outlook

Solid performance in 2013

Progress expected in 2014, accelerating during 2015 Sustained focus on positioning for growth –continuing cost management

– investments in technology and acquisitions

– leveraging the portfolio

Continuing to position –areas of preferential spend

–geographic expansion

Protecting today whilst positioning for tomorrow

Registered Office:

Ultra Electronics Holdings plc417 Bridport Road

Greenford

Middlesex UB6 8UA

England

Tel: +44 (0) 20 8813 4321

Fax: +44 (0) 20 8813 4322

www.ultra-electronics.com

[email protected] Design: HAT Associates+44 (0)1242 253112

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