TT Electronics plc (LON:TTG) has today announced its results for the year ended 31 December 2019.
£ million unless otherwise stated
| Underlying1 | Statutory | |||||
| 2019 | 2018* | Change | Change constant fx | 2019 | 2018* | |
| Continuing Operations | ||||||
| Revenue | 478.2 | 429.5 | 11% | 9% | 478.2 | 429.5 |
| Operating profit | 40 | 33.4 | 20% | 17% | 18.8 | 16.5 |
| Operating profit margin (%) | 8.40% | 7.80% | 60bps | 60bps | ||
| Profit before tax | 36.3 | 31.5 | 15% | 12% | 15.1 | 14.6 |
| Earnings per share (pence) | 18.7p | 16.2p | 15% | 13% | 8.5p | 8.0p |
| Return on invested capital2 | 11.30% | 11.50% | ||||
| Cash conversion3 | 98% | 88% | ||||
| Total Operations | ||||||
| Earnings per share (pence) | 10.6p | 8.3p | ||||
| Free cash flow4 | 9.7 | 8.5 | ||||
| Net debt | -69.1 | -41.7 | ||||
| Net debt exc. IFRS 16 | -51.5 | |||||
| Net debt to EBITDA5 | 0.9x | 0.9x | ||||
| Dividend per share (pence) | 7.0p | 6.5p |
*FY 2018 not re-stated for IFRS 16 impacts
Strategic highlights
· Strategy continues to drive growth, enhance margin and improve quality of business
· Aerospace, defence and medical revenues up 22% organically now 47% of Group revenues
· New customer wins with multi-year recurring revenues; improved order book visibility for the third year in succession
· New self-help programme launched to underpin further margin progression, improved efficiency and reduced carbon footprint;
· Successful capital deployment: core technology acquisitions with cross-selling success and continued R&D investment
Financial headlines
· 4% organic revenue growth; 9% growth at constant currency
· Underlying operating profit and PBT both materially increased; underlying EPS CAGR of 21% since 2015
· 8.4% underlying operating margin, +60 basis points
· ROIC of 11.3%; up 10 basis points to 11.6% before the impact of IFRS 16
· Strong cash conversion of 98% and ongoing investment for growth
· UK pension scheme triennial valuation completed – fully funded on an actuarial basis
· Full year dividend up 8% to 7.0p
Richard Tyson, Chief Executive Officer, said:
“Our performance in 2019 is the latest evidence of the significant business transformation we have achieved over the last five years. We have delivered a strong performance with another year of good revenue growth, double-digit profit improvement and further margin enhancement despite the macro challenges in some of our markets.
TT is continuing its path to a higher-quality, better-balanced business as a result of our investment in aerospace, defence and medical markets. Our power, sensing and connectivity solutions help to enable a more sustainable world. We have added to our technology and capabilities with the US acquisitions of Power Partners and the Covina power supply business.
We are well placed to make progress in 2020 and beyond. However, the duration and impact of the coronavirus remains uncertain, and based on the current situation we anticipate that it could impact underlying operating profit by up to £3 million in 2020. We are focused on making further strategic progress, and our new self-help programme underpins the journey to double-digit margins.”
1. Excluding the effect of restructuring and other non-recurring costs and acquisition related costs
2. Rolling 12 month underlying operating profit return on average invested capital. Excluding IFRS16, ROIC is 11.6%, up 10 bps
3. Underlying operating cash flow (underlying EBITDA less net capital expenditure excluding property disposals, capitalised development expenditure, working capital and non-cash movements) divided by underlying operating profit
4. Net cash flow from operating activities less net cash flow from investing activities and leases less interest paid. Please see note 7 for more information
5. Net debt at average exchange rates excluding leases previously recognised as operating leases divided by underlying operating profit excluding the impact of IFRS 16. including full-year pro-forma effect for acquisitions. Measure used for our banking covenants
2019: ANOTHER YEAR OF STRONG FINANCIAL PERFORMANCE
TT has again delivered a strong financial performance in 2019, with good revenue growth, profit improvement and margin enhancement as well as good cash conversion, despite more mixed market conditions. We are demonstrating that the transformation of the business to focus on markets with structural growth drivers has led to a higher-margin and better-balanced business capable of sustaining a strong financial performance.
Group revenue for 2019 was £478.2 million (2019: £429.5 million), up 4 per cent organically. Acquisitions contributed revenue of £25.8 million and there was a favourable £7.6 million foreign exchange impact. We saw good growth from our aerospace, defence and medical customers and revenues from these customers grew 22 per cent organically, now representing 47 per cent of our business. The Group’s order book is strong, with an increased proportion of recurring revenues, and order visibility has improved for the third year in succession.
Underlying operating profit increased by 17 per cent at constant currency to £40.0 million (2018: £33.4 million). Acquisitions contributed £1.9 million. Statutory operating profit was £18.8 million (2018: £16.5 million), an increase of 14 per cent due to the improved trading performance, partially offset by increased restructuring costs. Statutory profit before tax was £15.1 million (2018: £14.6 million), up 3 per cent. The Group’s profit improvement was driven by the Power and Connectivity and Global Manufacturing Solutions divisions which more than offset the impact of softer markets in the primarily industrial facing Sensors and Specialist Components division. Decisive cost action taken in the first half has helped to protect margins in this division. The synergy actions arising from the 2018 acquisition of Stadium have now been completed with further run rate benefits expected in 2020.
Underlying operating profit margin for the Group has improved by 60 basis points at constant currency to 8.4 per cent (2018: 7.8 per cent). Return on invested capital was 11.3 per cent, and 11.6 per cent before the impact of IFRS 16, an increase of 10 basis points on a like-for-like basis (2018: 11.5 per cent). We delivered another year of good cash conversion of 98 per cent (2018: 88 per cent) and free cash flow of £9.7 million (2018: £8.5 million).
SOLVING ELECTRONIC CHALLENGES FOR A SUSTAINABLE WORLD
OUR STRATEGY
We create sustainable value by:
· Positioning ourselves in structural growth markets
· Creating differentiated capabilities
· Working with our customers to solve their toughest electronic challenges
The trend for “electronics everywhere” represents a structural growth dynamic in our global markets. In industrial markets, automation and robotics have become commonplace; in medical markets, technology is taking medical surgery to a new level; in aerospace and defence, new aircraft platforms are launching with electronics at the heart of the drive for fuel efficiency; and in transportation, in the rail infrastructure market electronic solutions are being used to help improve efficiency and deliver preventative maintenance programmes. TT provides solutions to address our customers’ challenges in all these markets. Our technology and products are used in a huge range of applications from smart infrastructure to medical scanners and the latest generation fighter jets.
Results of our strategy
Since 2015, the Group has undergone a significant transformation and is now a fundamentally different and improved business with a sustainable future. TT is continuing on the path to becoming a higher quality, better balanced Group with increasing exposure to the structural growth markets of aerospace, defence and medical.
· Portfolio development – moved from 25% aerospace, defence and medical in 2015 to 47% in 2019
· M&A – Disposal of the automotive focused transportation division. Six acquisitions since 2015 with aggregate consideration of £137 million. Further financial firepower remaining
· Organic revenue growth – moved from a 3% decline in 2015 to 4% growth in 2019
· Margin enhancement – almost doubled from 4.3% in 2015 to 8.4% in 2019
· ROIC improvement – moved from 9.0% in 2015 to 11.6%* in 2019
· Employee engagement – TT rated by employees as a 1 star great place to work†
* Before the impact of IFRS 16
† Benchmarked by Best Companies Ltd
Our strategy is designed to grow TT and create value for our stakeholders including customers, employees, the communities in which we operate and shareholders. Fundamental to the success of our business is the engagement of our employees and we are committed to making TT a great place to work.
We have identified five strategic priorities to best focus the Group and enable us to fulfil our potential.
Business development
Our targeted business development activities identify customers with whom we can build strategic partnerships. We have identified key customer accounts where we have the greatest opportunity to expand our relationships, including introducing teams from other TT divisions. We have a sales council which helps ensure we go to market as ‘One TT’ and we have reorganised our marketing function to support this approach. We have also developed lead coaches across the Group to support members of our sales community and ensure we approach new sales opportunities in a way that maximises our chances of success. This has resulted in new customer wins, increased sales to existing customers and cross-selling successes.
Our success is reflected in the very strong growth we have delivered in our Global Manufacturing Solutions division, where we first developed this approach. Across the Group, our top three medical customers grew 18 per cent in the year and we won four new customers in our focus markets of aerospace, defence and medical. We successfully qualified a power supply from our newly acquired Power Partners business onto a medical product for one of our largest customers in Global Manufacturing Solutions, demonstrating early cross-selling success between these businesses. Aerospace and defence customer wins include a contract awarded by L3 Harris Technologies to support a substantial electronics manufacturing programme for a key military platform where we are preparing for contract volumes to ramp up through 2020 and 2021.
R&D and value-added product solutions
During the year, we increased our R&D spend to £13.5 million, up 6 per cent at constant currency. Investment is focused on three areas where we see the greatest opportunity for growth:
· Power solutions for aerospace and medical applications
· Connectivity for the industrial internet of things
· Specialist sensing capabilities
In June 2019 we launched a new prototype power convertor for aerospace applications at the Paris Airshow, demonstrating our product solution capabilities and the ability to move up the value chain. We have been balancing our near-term customer new product introduction priorities with engineering efforts that focus on longer term initiatives and during the year we secured funding to develop next generation power technology for the aerospace market. We are working alongside Innovate UK and a global engine manufacturer to help develop technology that can be used in more sustainable aircraft travel of the future, contributing to cleaner, quieter air travel.
Operational excellence
We strive to deliver operational excellence at each of our sites, wanting our customers to recognise TT for outstanding service. Following the successful transformation of some of our lowest performing sites in 2018, we continued to deploy our resources in sites where operational performance has been below TT benchmark levels, particularly in the UK. We see more opportunity to improve our operational performance and drive excellence through our cross divisional operations, supply chain and health and safety councils.
We have worked on optimising our cost base and our environmental impact, by reducing our footprint. In the year, we closed four sites, consolidating operations into our existing manufacturing footprint, so improving the efficiency of the Group.
We have initiated a new self-help programme to underpin the journey to double-digit margins, reducing the fixed cost base of the business, as well as improving the Group’s environmental impact. The total cash cost of these projects is expected to be circa £14 million, comprising restructuring costs and capital expenditure, with full year run-rate benefits of £5-6 million in 2022.
We operate a zero-harm strategy and remain determined to continuously improve our safety performance. In 2019, we reduced the number of three-day lost time accidents from 17 to 4 following analysis of issues, shared experiences and a re-doubling of efforts. We have also increased our efforts around near miss reporting, preventative measures and behaviour-based safety training.
Value-enhancing acquisitions
We announced two acquisitions in the year, extending our power supply capabilities in the US across our core markets of aerospace, defence and medical. We acquired Power Partners, a small power supply provider in March 2019. The acquisition extends our technology roadmap for power products while improving our medical market access. We have already had a power supply designed by Power Partners approved for use with one of Global Manufacturing Solution’s largest medical customers for use in pharmaceutical lab equipment.
In November 2019, we announced the acquisition of the aerospace and defence power supply business of Excelitas Technologies Corp based in Covina, California. The acquisition completed on 3 January 2020. The business expands our capabilities in power conversion while giving us enhanced access to the large and attractive US aerospace and defence market.
We are focused on opportunities that will extend our existing capabilities in our core markets of aerospace, defence and medical. We continue to develop our acquisition pipeline and review acquisition opportunities that will add complementary capabilities, customers and market access.
Building a sustainable business
TT engineers advanced electronics that benefit our planet and people for future generations. We do this by designing, manufacturing and working in a way that is cleaner, smarter and improves wellbeing. Our focus on engineering electronics that work reliably in challenging and performance critical environments helps our customers bring advances that benefit our planet and its people. We apply these principles to ourselves, in the way that we work and interact with our communities and through our innovative products and services for customers. The result is long-term sustainable value for our customers, our people and our local communities.
Our People, Social, Environment and Ethics Committee has an expanded remit, replacing our long-standing Corporate Social Responsibility Committee, which is chaired by the CEO and attended by a Non-executive director. The Committee drives TT’s sustainability strategy in the best interests of our employee, community, customer and investor stakeholders.
We engineer and manufacture power, sensing and connectivity solutions to enable a more sustainable world and we are working towards sensible sustainability targets to incorporate into our key performance indicators to better measure our performance.
We are actively reviewing our operational footprint to improve the efficiency of the Group by optimising our cost base and our environmental impact. Our environmental strategy is focused around the areas we have assessed to have the greatest environmental impact, namely energy usage, waste management and water usage.
· Energy usage: Electricity is the largest component of our energy usage. Our target is to become carbon neutral on scope 1 and 2 emissions by 2035. As part of this, we are looking to switch our sites to green energy electricity tariffs, in geographies where they are available, as our energy contracts come up for renewal.
· Waste management: Our current waste management focus is around reducing our direct and indirect single plastic usage. During the year TT sites signed a “pledge on plastic” to reduce single use plastic. This pledge was endorsed by the Executive Management Board. We are looking at our waste to landfill and recycled waste and are targeting to reduce our waste to landfill and increase what we recycle.
· Water usage: We are conscious of the water we use during our production processes and are working to reduce this where possible. Examples include using wastewater generated by facilities for irrigation.
We are leading designers and manufacturers of products which help to minimise environmental impacts. Our power control solutions for aerospace and defence applications contribute to lighter and more environmentally friendly aircraft. As a result of the “Clean Sky” initiative, and the associated economic benefits from increased fuel efficiency, demand for our products has been increasing. We also produce power management devices for smart metering technology, which is driving a greater awareness of and subsequent reduction in energy usage in the business and home environments.
DIVISIONAL REVIEWS
POWER AND CONNECTIVITY
The Power and Connectivity division develops and manufactures power application products and connectivity devices which enable the capture and wireless transfer of data. We collaborate with our customers to develop innovative solutions to optimise their electronic systems.
| 2019 | 2018 | Change | Change constant fx | |
| Revenue | £138.2m | £115.5m | 20% | 18% |
| Underlying operating profit1 | £16.5m | £11.2m | 47% | 45% |
| Operating profit margin1 | 11.9% | 9.7% | 220bps | 210bps |
1. Excluding the effect of restructuring and other non-recurring costs and acquisition related costs
Note: Prior period restated for the transfer of the Malaysian Magnetics business to the Power and Connectivity division.
In 2018 the Malaysian Magnetics business generated revenue of £17.5 million and underlying operating profit of £2.8 million.
The Power and Connectivity division performed strongly, with good growth and significant margin enhancement in the year. Revenues were up 2 per cent organically to £138.2 million (2018: £115.5 million). There was a £1.2 million favourable foreign exchange impact. The growth was driven by increased revenue from existing customers in aerospace, defence and medical. These markets now account for over 50 per cent of the division and grew 14 per cent organically. Acquisitions made a £19.5 million contribution to revenue.
Underlying operating profit was £16.5 million (2018: £11.2 million), up 45 per cent at constant currency. There was a £2.0 million profit contribution from acquisitions. Underlying operating profit margin improved to 11.9 per cent (2018: 9.7 per cent). The growth in underlying operating profit was driven by operational leverage from increased revenues and efficiency improvements, including the closure of three sites associated with the 2018 acquisitions of Stadium and Precision. Delivery of the synergy plan for the Stadium acquisition is now complete and combined with synergies from the acquisition of Precision delivered £2 million of cost savings in 2019.
The division continues to benefit from the structural growth drivers associated with the increasing electrification of aircraft and we won two new aerospace and defence customers in the period. Following a continued focus on key account management, we grew our revenues with three of our largest aerospace and defence customers by 36 per cent. We have targeted our R&D investment on the next generation of power solutions working across components, sub-assemblies and complete products. During the year we launched our first prototype power conversion unit at the Paris Airshow, following investment in 2018. We are actively working on several industry, government and customer funded projects focused on new technology for the next generation of more sustainable aircraft, developing electrical solutions that will contribute to cleaner, greener and quieter aircraft of the future alongside our key aerospace and defence customers.
We made progress with our connectivity offerings, including tracking devices for assets in the construction industry and medical wearable devices for use in European care homes. We also secured a cross-selling win with a Global Manufacturing Solutions customer for human machine interface solutions for a high-end, British automotive customer.
We have bolstered our power supply capabilities with two acquisitions. We acquired Power Partners in March 2019, a small US based power supply provider, which accelerates our technology roadmap for power products while improving our US medical market access. We are already pursuing revenue synergy opportunities with power solutions for existing TT customers. In November 2019, we announced the acquisition of the aerospace and defence power supply business of Excelitas Technologies Corp based in Covina, California. This acquisition completed on 3 January 2020 and expands our capabilities in power conversion, while giving us enhanced access to the large and attractive US aerospace and defence market.
At the start of the year we transferred our Malaysian Magnetics business from the Sensors and Specialist Components division to the Power and Connectivity division bringing together all our electromagnetics design and manufacturing capabilities in one division. This has enabled a joined-up approach for their routes to market and the optimisation of our manufacturing footprint strategy. This follows the accreditation of our Malaysian facility for aerospace and defence work, and the transfer of some of our product lines from our facility in North Devon, UK to Malaysia to create the capacity required for future growth.
GLOBAL MANUFACTURING SOLUTIONS
The Global Manufacturing Solutions division provides manufacturing services and engineering solutions for our product divisions and to customers that often require a lower volume and higher mix of different products. We manufacture complex integrated product assemblies for our customers and provide engineering services including designing testing solutions and value-engineering.
| 2019 | 2018 | Change | Change constant fx | |
| Revenue | £213.2m | £181.8m | 17% | 16% |
| Underlying operating profit1 | £15.4m | £11.3m | 36% | 34% |
| Operating profit margin1 | 7.2% | 6.2% | 100bps | 90bps |
1 Excluding the effect of restructuring and other non-recurring costs and acquisition related costs
Global Manufacturing Solutions delivered very strong revenue growth coupled with improved order visibility, reflecting the value our customers place on our manufacturing and engineering capabilities. Revenues were up by 12 per cent organically to £213.2 million (2018: £181.8million), driven by growth with customers in aerospace, defence and medical markets following our business development success in these markets over the last two years. There was a £2.2 million favourable foreign exchange impact. Acquisitions made a £6.3 million contribution to revenue in the division.
Underlying operating profit increased to £15.4 million from £11.3 million in 2018, up 34% at constant currency. There was a £0.1 million loss from acquisitions. Underlying operating profit primarily grew as a result of operational leverage on increased revenues and continued operational improvement, particularly in our UK operations. Underlying operating margins improved by 100 basis points to 7.2 per cent (2018: 6.2 per cent). The sustained step up in the margin of the division is a result of the transformation of the business from a manufacturing focus on printed circuit board assemblies to increasingly providing value-added services to our customers. We have invested in engineering teams to enable the manufacture of complex assemblies and to provide more sophisticated testing and engineering services, which account for 55% of revenues. By providing value-added services that benefit our customers, we are developing deeper and longer-term customer relationships and reducing churn in the revenue stream.
The strong growth is a result of investments made in strategic business development where we have been focused on targeting the right customers in the right markets. We have identified customers that have good structural growth drivers in their own markets and that value the complex engineering services we provide. During the year, we saw particularly strong growth from an aerospace and defence braking systems customer on a single aisle commercial aircraft, following our contract win in 2017.
Our top medical customers grew 18 per cent in the year and we won two new aerospace, defence and medical customers with multi-year, multi-million pound revenue streams. Customer wins include a contract awarded by L3 Harris Technologies to support a substantial electronics manufacturing programme for a key military platform, where we are preparing for the contract to ramp up in 2020 and 2021.
We have seen good cross-divisional collaboration, including with Power Partners, acquired this year. We have had a power supply designed by Power Partners approved by one of Global Manufacturing Solution’s largest medical customers for use in pharmaceutical laboratory equipment. We see further opportunity from integrating products from our Power and Connectivity division, particularly in aerospace, defence and medical markets.
SENSORS AND SPECIALIST COMPONENTS
The Sensors and Specialist Components division works with customers to develop standard and customised solutions, including sensors and power management devices. Our solutions improve the precision, speed and reliability of critical aspects of our customers’ applications.
| 2019 | 2018 | Change | Change constant fx | |
| Revenue | £126.8m | £132.2m | (4)% | (7)% |
| Underlying operating profit1 | £15.3m | £18.5m | (17)% | (19)% |
| Operating profit margin1 | 12.1% | 14.0% | (190)bps | (180)bps |
1 Excluding the effect of restructuring and other non-recurring costs and acquisition related costs
Note: Prior period restated for the transfer of the Malaysian Magnetics business to the Power and Connectivity division.
In 2018 the Malaysian Magnetics business generated revenue of £17.5 million and underlying operating profit of £2.8 million.
During the year, the Sensors and Specialist Components division was impacted by softer market conditions and inventory de-stocking across its markets. Consequently, revenues were £126.8 million (2018: £132.2 million), down 7 per cent on an organic basis. There was also a favourable £4.2 million foreign exchange impact. This follows very strong mid-to-high single digit organic revenue growth in 2017 and in 2018.
Underlying operating profit was £15.3 million (2018: £18.5 million), down 19 per cent at constant currency. The underlying operating profit margin was 12.1 per cent (2018: 14.0 per cent). The reduction largely reflected the lower revenues and cost headwinds. We accelerated actions to improve the efficiency of our cost base including optimising our footprint and fixed labour costs. We have closed one facility and a further facility is in the process of being closed, with production being consolidated within the existing footprint. The total cash cost of this programme is expected to be circa £3.5 million. These actions realised circa £2 million of savings in the year. The underlying operating profit margin was 12.5 per cent in the second half, following the decisive cost action taken in the first half. We continue to review the range of self-help actions that are open to us in the business.
As a result of the weaker market conditions for sensing and power management devices we have taken the decision to put on hold the planned joint venture with Uniroyal. Uniroyal remain a key supply partner and we are focused on developing our existing relationship.
Although there has been short term market softening, the long term structural growth drivers for sensing and power management devices in applications such as robotic automation, energy, smart devices and infrastructure remain attractive. We have refocused our R&D investments around these core growth areas. De-stocking in the supply chain continues, and once completed we expect demand to return to more normal levels.
We have seen good growth in the period with a global industrial customer for our sensors which provide solutions for accurate information sensing for cash and card transactions. In the year we have won positions with new and existing customers, including a contract with a US defence prime to provide a custom sensor used in power management for a precision guidance mechanism. This arose from a cross-selling opportunity identified following the acquisition of Precision in 2018. New contracts were also won with aerospace and defence customers, primarily for avionic and engine controls on aircraft.
OTHER FINANCIAL INFORMATION
Corporate costs were £7.2 million (2018: £7.6 million).
The net interest expense of £3.7 million (2018: £1.9 million) increased by £1.8 million, in part reflecting higher average net debt associated with the acquisitions of Stadium and Precision and increased levels of working capital during the year as well as a £1.0 million increase due to the adoption of IFRS 16. Underlying profit before tax increased by 12% at constant currency to £36.3 million (2018: £31.5 million).
There was a tax charge in the period of £1.2 million (2018: £1.6 million) with an underlying tax charge of £5.8 million (2018: £5.3 million) and a credit on items excluded from underlying profit of £4.6 million. This resulted in an effective underlying tax rate of 16.0 per cent (2018: 16.8 per cent). Basic underlying earnings per share increased by 15 per cent to 18.7 pence (2018: 16.2 pence) and by 13 per cent at constant currency.
Profit from continuing operations in the year increased by 7 per cent to £13.9 million (2018: £13.0 million) after a charge for items excluded from underlying profit of £21.2 million (2018: £16.9 million). This comprised restructuring and other costs of £13.2 million (2018: £4.9 million) primarily related to headcount reduction and footprint rationalisation in the Sensors and Specialist Components division, as well as to support delivery of the Stadium synergy plan. There was also £1.0 million related to pension projects. In addition, acquisition and disposal costs were £8.0 million (2018: £12.0 million), including £3.1 million of cash costs related to the acquisitions made in the year, integration costs and costs associated with aborted M&A activities. Non-cash acquisition costs totalled £4.9 million, including £4.5 million of amortisation of acquired intangibles. Profit from discontinued operations was £3.4 million (2018: £0.4 million), primarily relating to the release of tax provisions due to the resolution of tax risks and expiry of warranties.
Full year cash conversion was 98% (2018: 88%). Within this, capital and development expenditure payments totalled £18.2 million (2018: £18.9 million), equivalent to 1.3 times (2018: 1.4 times) owned asset depreciation and amortisation. There was a working capital outflow of £3.1 million (2018: £2.1 million), with working capital levels adversely impacted by Brexit-related buffer inventory through the year, as well as additional inventory to support growth and contract wins. Net interest and taxation payments were £7.7 million (2018: £8.4 million).
The Group implemented IFRS 16, Leases with effect from 1 January 2019. On adoption of the new standard, the Group recognised £18.0 million of right-of-use assets and £21.3 million of lease liabilities. The impact on the income statement in the year has been to increase underlying operating profit by £0.8 million, with a broadly offsetting increase in the interest expense of £1.0 million. Prior year comparative information has not been restated.
Closing net debt at the year-end was £69.1 million (2018: £41.7 million), including £17.6 million of IFRS 16 lease liabilities. As a result, net debt to underlying EBITDA at 31 December 2019 on a bank covenant basis† was 0.9 times (2018: 0.9 times).
The net accounting surplus under the Group’s defined benefit pension schemes was £16.6 million (2018: £16.5 million). Total deficit contribution payments made in the year were £8.6 million. The Stadium Group Retirement Benefits Plan (1974) pension scheme was merged into the TT Group scheme in March 2019, with the deficit contributions in the year including a payment of £3.4 million to align the schemes’ funding levels.
The triennial valuation of the TT UK defined benefit scheme was completed during the year. As at April 2019, the scheme was fully funded (£0.3 million surplus) on an actuarial basis. This compares with a deficit of £46.0 million in April 2016. This significant improvement in the funding position has arisen from the combination of strong asset returns, planned deficit contributions and proactive liability management exercises such as the 2018 Pensions Increase Exchange. The Company has committed to continue its deficit contribution plan to target self-sufficiency and intends to undertake further de-risking in the future. Future planned contributions are £5.3 million, £5.5 million, £5.7 million and £4.4 million to be paid in 2020 to 2023 respectively.
† Bank covenant basis is pre-IFRS 16, proforma for acquisitions
DIVIDEND
The Board is proposing a final dividend of 4.9 pence per share. This, with the interim dividend of 2.1 pence per share, gives an increased dividend of 7.0 pence per share for the full year (2018: 6.5 pence per share), an increase of 8 per cent. Payment of the dividend will be made on 15 May 2020 to shareholders on the register on 24 April 2020.
UPDATE ON THE IMPACT OF COVID-19 (CORONAVIRUS)
TT operates two manufacturing facilities in China. One in Suzhou with circa 650 employees and one in Dongguan with circa 200 employees. In addition, we have two small support facilities in Shenzhen and Hong Kong. In 2019, these facilities accounted for 25 per cent of the Group’s revenues.
Following the coronavirus outbreak around the turn of the year, our primary concern has been the well-being of our employees and managing their safe return to work following the lunar holiday. Both of our facilities closed for the lunar new year holiday as normal and were mostly closed for normal production until 10 February, as directed by the Chinese authorities. During this period, our global business continuity and crisis management plans operated very effectively, and we responded daily to local authority guidance.
Our Suzhou facility was given special permission to continue production throughout the extended lunar holiday to supply some critically needed medical diagnostic products for use in combating the virus. At this time, under strict government control, we operated at circa 20 per cent capacity instead of being shut completely. The Suzhou and Dongguan facilities re-opened on 10 February and have experienced a slower than normal capacity ramp-up but are now operating at circa 95 per cent capacity. We continue to prioritise actions and precautions to ensure the safety and well-being of our employees returning to work in the facilities.
We are carefully monitoring our supply chain of around 900 suppliers in China. At this time, to the best of our knowledge, 99 per cent of our suppliers have recommenced operations but with varying degrees of capacity.
The duration and impact of this issue on our business is uncertain, however based on slower than normal capacity ramp-up in both our own operations and the supply chain, lost or delayed sales and cost base inefficiencies we currently anticipate that it could impact underlying operating profit by up to £3 million. The possible impact of an extended supply chain disruption is uncertain. We currently expect the impact of these events to be restricted to 2020.
Our employees and local leadership have been exemplary during this difficult period. The outstanding efforts of our teams have enabled the business to continue to operate, deliver critical equipment and be returning to normality at the earliest possible time. Our thoughts remain with our employees and their families and those directly impacted by this situation.
OUTLOOK
Our performance in 2019 is the latest evidence of the significant business transformation we have achieved over the last five years. We have delivered a strong performance with another year of good revenue growth, double-digit profit improvement and further margin enhancement despite the macro challenges in some of our markets.
TT is continuing its path to a higher-quality better-balanced business as a result of our investment in aerospace, defence and medical markets. Our power, sensing and connectivity solutions help to enable a more sustainable world. We have added to our technology and capabilities with the US acquisitions of Power Partners and the Covina power supply business.
We are well placed to make progress in 2020 and beyond. However, the duration and impact of the coronavirus remains uncertain, and based on the current situation we anticipate that it could impact underlying operating profit by up to £3 million in 2020. We are focused on making further strategic progress, and our new self-help programme underpins the journey to double-digit margins.
GOING CONCERN
The Directors have reviewed the budgets for 2020 and the projections for 2021 developed during the 2019 annual strategic planning cycle. They have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities. They have also assessed the potential impact on the Group’s trading arising from Brexit, which is not anticipated to be significant in the context of the Group’s operations. Based on this, the Directors are satisfied that the Group has adequate resources to continue in operational existence for at least 12 months from the date of approval of the financial statements. For this reason, they confirm that it is appropriate to adopt the going concern basis in preparing the financial statements.
RESPONSIBILITY OF THE DIRECTORS
We confirm that to the best of our knowledge:
- The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
- The Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.
By order of the Board
Richard Tyson Mark Hoad
Chief Executive Officer Chief Financial Officer
3 March 2020 3 March 2020
