Half-year Report

1 August 2016

Ultra Electronics Holdings plc

("Ultra" or "the Group")

Interim Results for the six months to 1 July 2016

FINANCIAL HIGHLIGHTS

· First half performance in line with expectations

· Organic revenue performance improved to -2.5% (2015: -11.9%)

· Underlying operating margin(1) of 15.7% (2015: 15.2%)

· Order book of £785.7m, up from £753.8m at start of 2016

· Cash conversion improved to 67% (2015: 31%)

· First disposal announced in period after Group portfolio review

· S3 initiative on track

· Herley acquisition performing well and integration ahead of schedule

Rakesh Sharma, Chief Executive, commented:

"Market conditions have remained largely unchanged since our last preliminary announcement. US defence outlays ended the period close to budget levels but with higher spending in the first quarter compared to the second. The order book has increased over 2016; further, we have been selected for some significant orders in export markets with contract award expected in the second half. Our latest acquisition, Herley, performed well in the period and its integration is ahead of schedule. The proceeds of the recently announced disposal of ID Systems will be used to reduce Group debt. We continue to explore options to further rationalise and improve Ultra's portfolio.

As in previous years, performance will be second half weighted and Ultra starts the remainder of the year with an 84% order cover. We expect further market and macro uncertainties. In the US an expected Continuing Resolution would delay new contract awards, while in the UK post-referendum economic factors may delay Government commitment to some major programmes. Nevertheless, the Group continues to capture and execute on a broad range of contracts and programmes and to position itself well for future revenue opportunities. Ultra will continue its focus on robust cost control which will help sustain Group margins while our current investment in S3 will deliver further demonstrable savings from 2018. Taking all these factors into account, the Board is confident that the Group is on track to meet full-year expectations".

(1) before Oman contract termination and liquidation related costs, amortisation of intangibles arising on acquisitions, impairment charges, the S3 programme and adjustments to deferred consideration net of acquisition and disposal related costs. IFRS operating profit was £38.8m (2015: £34.0m (restated)). See Note 4 for reconciliation.

(2) before Oman contract termination and liquidation related costs, amortisation of intangibles arising on acquisitions, impairment charges, the S3 programme, fair value movements on derivatives, unwinding of discount on provisions, defined benefit pension curtailment gain and interest charges and adjustments to deferred consideration net of acquisition and disposal related costs and, in the case of underlying earnings per share, before related taxation. Basic EPS 38.4p (2015: 11.9p). See Note 10 for reconciliation.

* see notes on page 2

INTERIM MANAGEMENT REPORT

FINANCIAL RESULTS

* see notes below:

underlying operating profit before Oman contract termination and liquidation related costs, amortisation of intangibles arising on acquisition, impairment charges, the S3 programme and adjustments to contingent consideration net of acquisition & disposal related costs.

organic growth (of revenue or profit) is the annual rate of increase in revenue or profit that was achieved, assuming that acquisitions made during the prior year were only included for the same proportion of the current year at constant currencies.

underlying operating margin is the underlying operating profit as a percentage of revenue.

finance charges exclude fair value movements on derivatives, defined benefit pension interest charges and discount on provisions.

underlying profit before tax before Oman contract termination and liquidation related costs, amortisation of intangibles arising on acquisition, impairment charges, the S3 programme, fair value movements on derivatives, unwinding of discount on provisions, defined benefit pension curtailment gain & interest charges and adjustments to contingent consideration net of acquisition & disposal related costs. IFRS profit before tax was £32.6m (2015: £14.8m).

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

underlying operating cash flow is cash generated by operations and dividends from associates, less net capital expenditure, acquisition & disposal related payments, S3 programme payments, Oman performance bond payment, R&D and LTIP share purchases.

operating cash conversion is underlying operating cash flow as a percentage of underlying operating profit.

EBITDA is the statutory profit before tax for the rolling 12 months ended 1 July before finance costs, investment revenue, amortisation and depreciation, excluding impairments charges, Oman contract termination and liquidation related costs and adjustments to contingent consideration net of acquisition & disposal related costs.

net debt comprises loans and overdrafts less cash and cash equivalents.

bank interest cover is the ratio of underlying operating profit to finance costs associated with borrowings.

Revenue in the period increased 10.5% to £366.6m (2015: £331.7m). Revenue decreased organically by 2.5%, primarily due to the ECU RP programme nearing the end of its production phase. Exchange rate movements increased revenue by 3.2%, while acquisitions contributed 9.8%.

Underlying operating profit* was £57.7m (2015: £50.4m). Profit decreased organically by 1.8%, offset by a 8.5% increase from acquisitions and a 2.0% contribution from foreign exchange arising from translating overseas subsidiary results. Operating profit also benefited from a 5.8% increase from translating US dollar assets held in the UK. This gain of £2.9m arose from the significant weakening in sterling against the US dollar following the EU referendum. The resulting underlying operating margin* was 15.7% (2015: 15.2%).

Underlying profit before tax* increased to £52.4m (2015: £47.4m), after net financing charges* of £5.3m (2015: £3.0m).

The Group's underlying tax* rate in the period was 22.0% (2015: 22.8%) and the increase in underlying earnings per share was 11.3% to 58.1p (2015: 52.2p).

Reported (IFRS) profit before tax was £32.6m (2015: £14.8m) and reflected the combined effects of the elements detailed below:

Operating cash conversion* improved to 67% (2015: 31%) with operating cash flow* of £38.5m (2015: £15.8m). At the end of the period Ultra had net debt* of £325.4m (2015: £149.9m), primarily reflecting the acquisition of Herley in the second half of 2015.

There was a non-operating cash flow item of £8.2m relating to the Oman Airport IT contract as previously advised. This related to the calling of a performance bond associated with this contract.

The S3 initiative, which started late in 2015, incurred costs of £2.8m in the period which included an onerous lease provision in relation to a facility consolidation.

The weakening of sterling against the US dollar after the EU referendum impacted gearing with the net debt/EBITDA* ratio rising by 0.10 to 2.29x over the final week of June. This was due to the increase in the sterling value of US dollar debt. Net interest payable on borrowings is covered around 11 times by underlying operating profit*. 

The proposed interim dividend is 14.2p, an increase of 2.9%, with the dividend being covered 4.1 times (2015: 3.8 times) by underlying earnings per share. The dividend will be paid on 23 September 2016 to shareholders on the register on 2 September 2016.

The order book at the end of the period was £785.7m (2015: £762.1m) up from £753.8m at 31 December 2015. Excluding the addition of Herley and the impact of exchange, the underlying reduction is 8.9%. However, we have been selected for some significant orders in export markets with contract award expected in the second half. After a strong order intake in the first quarter, benefiting from high USA defence outlays, the second quarter was lower resulting in a book to bill ratio for the period of 1.0. Order book cover for the remainder of 2016 remains in the same range as last year at 84.0% (2015: 83.3%). 

Taking all these factors into account, we narrow our organic revenue growth guidance range for 2016 from -2% to +3%, to -1% to +1%, with Herley contributing around 5% acquisition growth.

* see notes on page 2

INVESTMENT

Company funded investment in the period was 4.2% of revenue at £15.5m (2015: £18.8m). Of this, £0.7m of investment was capitalised on specific long-term programmes. This reduction in internal R&D reflects the end of a period of investment in some of our aerospace programmes. The headroom provided by reduced spending will be used to fuel growth in other sectors identified in the Group's annual strategy review. R&D is expected to be at our customary levels by the year end.

In May, Ultra announced that it had agreed to sell ID Systems to the private equity firm LDC for an initial cash consideration of £22m. Additional payments of up to £3m will be made subject to earnings growth over the next two years. The transaction is expected to complete in August. Proceeds will be used to reduce Group debt. We continue to explore options to further rationalise and improve Ultra's portfolio.

OPERATIONAL REVIEW

Aerospace & Infrastructure

Revenue in Aerospace & Infrastructure increased by 8.0% to £93.0m (2015: £86.1m) and underlying operating profit increased by 17.8% to £15.2m (2015: £12.9m). The order book increased by 5.1% to £255.4m (2015: £243.1m).

This division saw improved Aerospace sales with increased deliveries of propeller electronic controllers. Improved support revenues at the Group's Airport Systems business also contributed although these were offset by changing customer requirements on the Airbus NIM programme. The acquisition of Furnace Parts in the prior year also added to the division's revenues. 

This division benefited most from the currency translational impacts arising from the weakening of sterling against the US dollar, resulting in a divisional margin of 16.3% (2015: 15.0%).

Foreign exchange contributed to the increase in order book by £12.3m to £255.4m.

Highlights of activities in the period that will contribute to the division's future performance include:

· First production deliveries to Gulfstream G500 and G600 business jets worth £30m to the Group over the life of the programmes.

· First direct delivery of production HiPPAG units to Lockheed Martin for the F-35 Joint Strike Fighter worth $5.8m, with 90% of the expected programme still to follow.

· Being named EDF Energy Generation's Supplier of the Year for Ultra's work on Neutron Flux Detector (NFD) development and production during their 5th Annual Performance and Innovation Awards. A £5m award for NFD production was received in year.

Communications & Security

Revenue in Communications & Security increased by 16.1% to £119.8m (2015: £103.2m) and underlying operating profit increased by 11.3% to £15.8m (2015: £14.2m). The order book at the end of the period increased by 12.6% to £218.8m (2015: £194.4m).

Revenues benefited from the acquisition of Herley in the prior year. Against this there was a reduction in revenue and margins as the ECU RP programme largely completed its production phase. The divisional margin was 13.2% (2015: 13.8%).

Excluding Herley the order book was impacted by the UK Government changes to classification levels, which resulted in slower order intake for the Group's crypto products, and the trading of the ECU RP Crypto contract.

Highlights of activities in the period that will contribute to the division's future performance include:

· An $18.4m award for EW systems and engineering support for UAV surveillance platforms being supplied to a NATO country.

· A $9.3m contract with Raytheon Integrated Defense Systems for a network switching upgrade for the Patriot air and missile defence system.

· Project REMARSHAL (UK secure telephony) crypto development contract at £3.4m. This positions Ultra for future production orders.

Maritime & Land

Revenue in Maritime & Land increased by 8.0% to £153.8m (2015: £142.4m). The division's underlying operating profit increased by 14.6% to £26.7m (2015: £23.3m). The order book decreased by 4% to £311.5m (2015: £324.6m).

This division continues to benefit from the US Government's 'pivot to the Pacific', with increased sales from the Group's US maritime businesses. A development contract for a helicopter HUMS1 product together with increased demand for sonobuoy receivers also contributed.

Margins improved to 17.4% (2015: 16.4%) reflecting the production phase of a number of sonobuoy programmes.

The order book decline was due to continuing delays in the placement of overseas contracts, for which Ultra has been selected, an example being a £30m order for ship torpedo defence systems for India.

Highlights of activities in the period that will contribute to the division's future performance include:

· A £9.5m extension to the UK MOD Sonobuoy Capability contract to support the Merlin Maritime Patrol Helicopter force.

· A multi-year sonobuoy supply agreement to support Korean P3 Maritime Patrol Aircraft worth $11.6m.

MARKET ENVIRONMENT

Demands on defence forces remain high with broad political acceptance that the global security environment is as uncertain and unpredictable as at any time since the Cold War. However, budget pressures and uncertainties remain, not least in the UK after the EU referendum, while the recently published Chilcott Report may lead to some re-examination of UK defence spending priorities. In the US a political impasse over the setting of the appropriations bills ran into the election season, making a Continuing Resolution in the USA seem certain. Elsewhere falling oil & gas revenues has seen a reduction in spend in affected regions but spend on border security, critical infrastructure protection and cyber-security solutions remains a priority.

Aerospace (21% of 2016 H1 Group revenue) - In the large civil aircraft market, record backlogs at Airbus and Boeing will drive Ultra revenue growth through established positions on aircraft now delivering to market, supported by the continuing increase in passenger demand and lower fuel costs. The regional aircraft market is crowded and orders here will show more modest growth. Military aircraft will be dominated by the F-35 JSF programme and by medium size military transports, on which the Group is well established. The military rotorcraft market is declining but opportunities exist for specific capabilities such as HUMS1 and ice protection.

____________1 HUMS - Health Usage Monitoring Systems

Infrastructure (4% of 2016 H1 Group revenue) - Increased passenger demand is driving growth but airport passenger processing is increasingly commoditised. There is an emerging demand for more integrated systems and database management that covers the whole airport enterprise. The UK rail improvement programme is now primarily AC but sufficient DC opportunities remain in specific regional sectors. Programme cost pressures and delays remain likely.

Nuclear (7% of 2016 H1 Group revenue) - While funding challenges continue for the new-build, nuclear power plant programmes in the West, 65 new reactors are under construction worldwide, the majority in China. Ultra's specialist sensors are qualified for most major designs and our partnership in the Nuscale Small Modular Reactor (SMR) development opens up a new market. Life extension and extension of legacy safety justification of plants also plays well to the Group's nuclear capability strengths. Barriers to entry in this regulated market are high.

Communications (11% of 2016 H1 Group revenue) - In the UK and US defence encryption programmes are being redefined with greater reliance on commercial solutions at lower security levels. Tactical communications and data link demand is evident in a number of national programmes but funding and timing remain problematic. Light, mobile, high-bandwidth, low power, software-defined radios offering IP-solutions and comprehensive tactical data link systems will remain attractive.

C2ISR (22% of 2016 H1 Group revenue) - Increased global threat levels are driving demand for ISTAR, particularly systems suitable for unmanned platforms. There is a significant interest in border surveillance for long and remote land and maritime borders as well as for the protection of fixed critical infrastructures and utilities. Legal Intercept demand remains constrained in many markets post-Snowden. Command & Control (C2) solutions must interface with existing sensors and communication systems to compete effectively.

Underwater Warfare (26% of 2016 H1 Group revenue) - High global investment in modern, quiet conventional submarines has generated an increased demand for advanced Anti-Submarine Warfare (ASW) capabilities, including sonobuoys, torpedo defence, integrated, wide-area search capabilities, airborne ASW and shallow water systems for smaller vessels. Many of these opportunities are in new markets that present procurement process and export control obstacles.

Maritime (7% of 2016 H1 Group revenue) - Long-term submarine programmes in the US and UK provide the Group with a sound revenue platform. Surface ship programmes in these core markets are more vulnerable to cost pressures. Replacement escort programmes in Australia and Canada are opportunities for the Group. Small ship refits and capability upgrades in overseas markets are an increasingly attractive alternative source of orders.

Land (2% of 2016 H1 Group revenue) - Major new programmes in core markets are rare as Army budgets have reduced. However, there is opportunity in upgrade and life extension programmes and emerging markets are investing in Armoured Fighting Vehicles to meet security threats. Ultra's development of a soldier-worn electrical power architecture opens a new market.

BOARD CHANGES

Amitabh Sharma was appointed Group Finance Director with effect from 4 May 2016, following the departure of Mary Waldner in March 2016.

RISKS AND UNCERTAINTIES

A number of potential risks and uncertainties exist which could have a material impact on the Group's performance in 2016 and beyond and which could cause actual results to differ materially from expected and historical levels. The directors do not consider that the principal risks and uncertainties have changed substantially since the publication of the Group's Annual Report for 2015. An explanation of the risks detailed below, and the robust business strategies that Ultra uses to manage and mitigate those risks and uncertainties, can be found in the annual report which is available for download at www.ultra-electronics.com/investors/annual-reports.aspx.

In the defence sector, which contributes around 63% of Ultra's revenue, there is continuing pressure on US and UK defence budgets. In the US, there is concern over the timing and feasibility of the proposed US DoD budget, which exceeds the Budget Control Act. This could lead to a more prolonged Continuing Resolution into FY17. It is anticipated that this will increase the time taken to agree and allocate funding to programmes and hence for it to flow down into contract action. Nevertheless, the overall size of defence budgets worldwide, relative to the Group's revenue, provides sufficient headroom to support Ultra's growth potential. 

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

Movements in foreign currency exchange rates result in both transaction and translation effects on the Group's results. Ultra's projected net transaction exposure is mitigated by the use of forward hedging contracts. By their nature, currency translation risks cannot be mitigated

At the end of June, sterling weakened relative to the US dollar. If the current exchange rate continues throughout the rest of this financial year, the currency translation impact on the Group's results is expected to be positive. A one cent movement in the full-year average exchange rate changes the full year revenue by £3m and profit by £0.4m. The average exchange rate used to translate revenue and profit for the period ended 1 July 2016 was $1.43.

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

- Matching strategy to market dynamics

- Ability to win and deliver contracts

- Delivering major change programmes

- Selection and integration of acquisitions

- Protection of intellectual property and information security

- Innovation and development

- Attracting, developing and retaining the right people

- Preservation of Ultra's culture

- Effectiveness of supply chain

- Legislation and regulation compliance

- Maintaining governance and internal control

- Health, safety and the environment

- Pension management

- Treasury and tax

CONFIRMATION OF GOING CONCERN

The Directors have considered the guidance issued by the Financial Reporting Council and hereby confirm that the Group continues to adopt the 'going concern' basis in preparing its accounts.

The Board has made appropriate enquiries to support this view, looking forward for a period of at least twelve months. Salient points taken into consideration were:

- the Group's long-term record of delivering high quality profits

- the adequacy of Ultra's financing facilities

- Ultra's positions in growth sectors of its markets

- the long-term nature of Ultra's markets and contracts

- the Group's minimal exposure to trading denominated in the Euro

- the risks as discussed above

PERFORMANCE & PROSPECTS

Market conditions have remained largely unchanged since our last preliminary announcement. US defence outlays ended the period close to budget levels but with higher spending in the first quarter compared to the second. The order book has increased over 2016; further, we have been selected for some significant orders in export markets with contract award expected in the second half. Our latest acquisition, Herley, performed well in the period and its integration is ahead of schedule. The proceeds of the recently announced disposal of ID Systems will be used to reduce Group debt. We continue to explore options to further rationalise and improve Ultra's portfolio.

As in previous years, performance will be second half weighted and Ultra starts the remainder of the year with an 84% order cover. We expect further market and macro uncertainties. In the US an expected Continuing Resolution would delay new contract awards, while in the UK post-referendum economic factors may delay Government commitment to some major programmes. Nevertheless, the Group continues to capture and execute on a broad range of contracts and programmes and to position itself well for future revenue opportunities. Ultra will continue its focus on robust cost control which will help sustain Group margins while our current investment in S3 will deliver further demonstrable savings from 2018. Taking all these factors into account, the Board is confident that the Group is on track to meet full-year expectations.

- End -

Enquiries:

* see notes on page 2

NATURE OF ANNOUNCEMENT

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

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

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

Further information about Ultra:

Ultra Electronics is a group of businesses which manage a portfolio of specialist capabilities, generating highly differentiated solutions and products in the defence & aerospace, security & cyber, transport and energy markets by applying electronic and software technologies in demanding and critical environments to meet customer needs.

Ultra has world-leading positions in many of its specialist capabilities and, as an independent, non-threatening partner, is able to support all of the main prime contractors in its sectors. As a result of such positioning, Ultra's systems, equipment or services are often mission or safety-critical to the successful operation of the platform to which they contribute. In turn, this mission-criticality secures Ultra's positions for the long-term which underpins the superior financial performance of the Group.

Ultra offers support to its customers through the design, delivery and support phases of a programme. Ultra businesses have a high degree of operational autonomy where the local management teams are empowered to devise and implement competitive strategies that reflect their expertise in their specific niches. The Group has a small head office and executive team that provide to the individual businesses the same agile, responsive support that they provide to customers as well as formulating Ultra's overarching, corporate strategy.

Across the Group's three divisions, Ultra operates in the following eight market segments:

Ultra Electronics Holdings plc

Condensed Consolidated Income Statement

for the half-year ended 1 July 2016

* Operating profit for the period ended 30 June 2015 has been restated to £34,045,000 (previously stated as £17,598,000) to provide presentation consistent with the 31 December 2015 financial statements which included the loss on the deemed disposal of Ithra of £16,447,000 below operating profit.

Ultra Electronics Holdings plc

Condensed Consolidated Income Statement

for the half-year ended 1 July 2016

All results are derived from continuing operations.

* see note on page 10.

Ultra Electronics Holdings plc

Condensed Consolidated Statement of Comprehensive Income

for the half-year ended 1 July 2016

Ultra Electronics Holdings plc

Condensed Consolidated Balance Sheet

as at 1 July 2016

Ultra Electronics Holdings plc

Condensed Consolidated Cash Flow Statement

for the half-year ended 1 July 2016

Ultra Electronics Holdings plc

Condensed Consolidated Statement of Changes in Equity

for the half-year ended 1 July 2016

Ultra Electronics Holdings plc

Condensed Consolidated Statement of Changes in Equity (continued)

for the half-year ended 30 June 2015

Ultra Electronics Holdings plc

Condensed Consolidated Statement of Changes in Equity (continued)

for the year ended 31 December 2015

Ultra Electronics Holdings plc