Half Yearly Report

Embargoed until 0700 4 August 2014

Ultra Electronics Holdings plc

("Ultra" or "the Group")

Interim Results for the six months to 30 June 2014

FINANCIAL HIGHLIGHTS

· Order intake in first half of £408.2m increased order book by 13% (since December 2013 at constant currencies)

· Revenue and operating profit performance in line with expectations

· Underlying operating margin(1) of 15.5%

· Cash conversion at 80%

· Investment to drive future growth maintained

- over 5% of revenue reinvested by Ultra in new products and business development

- acquisition spend of £104.1m on four specialist business

· Balance sheet remains robust at 1x net debt/EBITDA; refinancing preserves investment capacity at advantageous rates

Rakesh Sharma, Chief Executive, commented:

"The interim results are in line with the Group's expectations. As indicated in March, Ultra's 2014 performance will be weighted towards the second half, principally reflecting constraints in the US defence procurement process at the start of the period. The Group has seen the positive effects of increasing stability in the US and UK defence markets, as evidenced by increased order placement towards the end of the first half. The security & cyber, transport and nuclear energy markets, now 43% of the Group's business, remain stable with good trading in the period.

Ultra continues to position for profitable growth. In addition to the four businesses acquired in the period, R&D investment in new products and business development has been maintained. Encouraging progress has been made across a number of projects such as the successful US Army field trials of Ultra's ground-breaking ORION radio. Ultra's businesses continue to optimise their size to match market conditions through cost management. The Group's order cover for the remainder of the year, together with IDIQs and annual contracts, is at normal levels, although a potential US Congress Continuing Resolution, in relation to defence appropriations, could constrain orders after October 2014. Subject to no further currency fluctuations, the Board is confident that this positioning will support performance in the second half and will enable expectations to be broadly met for the full year."

1) before amortisation of intangibles arising on acquisitions, impairment of goodwill and adjustments to deferred consideration net of acquisition costs. IFRS operating profit was £48.0m (2013: £52.6m). See Note 2 for reconciliation.(2) before amortisation of intangibles arising on acquisitions, impairment of goodwill, fair value movements on derivatives, unwinding of discount on provisions, defined benefit pension interest charges and adjustments to contingent consideration net of acquisition costs and, in the case of underlying earnings per share, before related taxation. Basic EPS 53.3p (2013: 46.5p). See Note 2 for reconciliation.* see notes on page 2

INTERIM MANAGEMENT REPORT

FINANCIAL RESULTS

* see notes below:

underlying operating profit before amortisation of intangibles arising on acquisition, impairment of goodwill and adjustments to contingent consideration net of acquisition costs. IFRS operating profit was £48.0m (2013: £52.6m).

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 amortisation of intangibles arising on acquisition, impairment of goodwill, fair value movements on derivatives, unwinding of discount on provisions, defined benefit pension interest charges and adjustments to contingent consideration net of acquisition costs. IFRS profit before tax was £45.8m (2013: £39.6m).

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, 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 30 June before finance costs, investment revenue, amortisation and depreciation, excluding adjustments to contingent consideration net of acquisition 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 was £341.0m (2013: £367.7m) reflecting the expected second half weighting for the year. Underlying revenue at constant currencies fell by 8.6% primarily owing to the difficult US defence market. Exchange rate movements further reduced revenue by 4.2%, while acquisitions contributed over 5%.

Underlying operating profit* was £53.0m (2013: £57.9m). Organic operating profit at constant currencies declined by 5.9% and there was a small contribution from acquisitions. Foreign exchange impacted profits by 3.0%. The resulting underlying operating margin* was 15.5% (2013: 15.7%).

Underlying profit before tax* decreased to £50.5m (2013: £55.4m), after net financing charges* of £2.5m (2013: £2.5m).

The Group's underlying tax* rate in the period was 23.8% (2013: 24.5%) and the decrease in underlying earnings per share was 6.9% to 55.4p (2013: 59.5p).

Reported (IFRS) profit before tax was £45.8m (2013: £39.6m) and reflected the combined effects of the elements detailed below:

Operating cash conversion* was 80% (2013: 81%) with an operating cash flow* of £42.4m (2013: £46.7m). At the end of the period Ultra had net debt* of £137.8m (2013: £46.7m), primarily reflecting net cash expenditure on acquisitions in the period of £104.1m (2013: £14.2m). The Group's balance sheet remains strong, with net debt/EBITDA* of 1x and net interest payable on borrowings covered around 21 times by underlying operating profit*.

Subsequent to the period end, Ultra's £90m revolving credit facility was replaced with a new £200m facility, which expires in 2019, with significantly improved interest terms.

The proposed interim dividend is 13.2p, an increase of 3.9%, with the dividend being covered 4.2 times (2013: 4.7 times) by underlying earnings per share. If approved, the dividend will be paid on 26 September 2014 to shareholders on the register on 29 August 2014.

The order book at the end of the period was held at £876.8m (2013: £877.2m), which at constant currencies reflects a 4% increase on the prior year. New orders came from a range of market segments, providing a book to bill ratio for the period of 1.2. Order book cover for 2014 remains strong at 82%. This does not include any second half orders from spares & repairs or from indefinite delivery indefinite quantity (IDIQ) contract vehicles.

INVESTING FOR GROWTH

Ultra continues to invest in new product and business development, sustaining spending at its customary high levels. Internal investment in the period was 5.8% of revenue at £19.8m (2013: £20.3m). Of this, £2.3m of investment was capitalised on specific long term programmes.

Ultra spent a total of £104.1m in the period on acquisitions:

· February 2014 - 3 Phoenix Inc (3Pi), based in the US is a leading supplier of specialist sonar, radar intelligence, surveillance and reconnaissance products and solutions. 3Pi forms part of Ultra's Tactical & Sonar division where there are many internal and external synergies. Since acquisition it has won over $21m in US Navy contracts.

· May 2014 - Forensic Technology (FT), headquartered in Canada, provides automated firearm ballistics identification and forensic analysis to law enforcement agencies in over 65 countries. FT is part of Ultra's Tactical & Sonar Systems division.

· May 2014 - ICE Corporation Inc (ICE), located in the US, designs, develops, manufactures and supports aerospace products including; motor control electronics, electrothermal ice protection controllers, pneumatic valve controls and engine control interface units. ICE will continue to operate from its own facilities but is part of the Controls business within Ultra's Aircraft & Vehicle Systems division.

· June 2014 - Lab Impex Systems Ltd (LIS), located in the UK & US, develops and supplies radiation measurement solutions and services within the nuclear industry. LIS provides systems engineering, installation and support of full environmental radiation monitoring and associated safety systems. LIS is part of Ultra's Nuclear Control Systems business within Ultra's Information & Power division.

OPERATIONAL REVIEW

Aircraft & Vehicle Systems

Revenue in Aircraft & Vehicle Systems decreased by 8.9% to £67.7m (2013: £74.3m) and underlying operating profit decreased by 26.3% to £11.8m (2013: £16.0m). The order book increased by 4.7% to £170.3m (2013: £162.6m).

The unfavourable comparison with the same period in 2013 reflects in part the award and delivery of an £8m urgent operational requirement in the first half of last year, which was at higher than average margins. Foreign exchange also impacted both revenues and profits.

Elsewhere, increased sales of specialist ice protection systems were offset by a reduction in revenues from US land systems. Following the securing of a number of new orders to develop products for the commercial aerospace sector, there has been increased R&D investment that also impacted the divisional profit. As a result the divisional margin was 17.4% (2013: 21.5%).

The order book increase reflected the award in the second half of 2013 of the Lockheed Martin Warrior contract and the increase in aerospace contracts.

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

· Selection by Airbus to design, develop, supply and support an electrical ground door opening system (eGDO) for its new A350 family of aircraft. The programme value is expected to be in excess of £60m.

· In China, Ultra has received a letter of intent and is in negotiations to supply various products, including fuel tank inerting systems and steering control systems, to the XAC MA 700 aircraft.

· Award from Airbus for a series of high integrity, safety critical modules on the Airbus A400M Transport Aircraft. The Ultra Network Interface Module (NIM) is an innovative system that will support increased capability whilst reducing the loading and unloading time of the A400M.

Information & Power Systems

Revenue in Information & Power Systems decreased by 19.4% to £124.8m (2013: £154.8m). Underlying operating profit decreased by 15.2% to £17.3m (2013: £20.4m). The order book at the end of the period was reduced by 21.5% to £318.6m (2013: £405.9m).

This division is the one most impacted by delays in the US defence and security contract placement process and its results are also reduced due to foreign exchange movements.

The division saw decreased sales from the Oman Airport IT programme following the prolongation of the contract and reduced US demand for both law enforcement & security products and communications systems. This was partially offset by increased revenues from the Virginia class submarine programme. There were also good contributions from both the Indonesian Fatahillah corvette upgrade contract and sales of nuclear sensors into the EDF detector management programme in the UK.

Overall, these factors resulted in a decline in profits, although the divisional margin increased slightly to 13.9% as a result of the reduced contribution from the lower-margin Oman Airport IT contract.

The order book decline reflected the lack of US contract placement over the last twelve months as well as the trading of both the Oman and Fatahillah contracts.

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

· Continuing Ultra's strategic relationship with EDF, another contract worth £12.9m was awarded for the supply and support of specialist instrumentation for use in the current UK nuclear power stations.

· Award of a multi-year contract, totalling over US$21m, from General Dynamics Electric Boat Corporation for the production of naval computer controlled power supply systems, with deliveries over the next five years.

· Contract award worth £8.4 million for the provision of the main-static converter for a number of UK Royal Navy submarines.

Tactical & Sonar Systems

Revenue in Tactical & Sonar Systems increased by 7.1% to £148.5m (2013: £138.6m). The division's underlying operating profit increased by 11.2% to £23.9m (2013: £21.5m). The order book was increased by 25.7% to £387.9m (2013: £308.7m).

This division is benefitting from the US 'pivot to the Pacific', although it has also been impacted by foreign exchange. In addition the two larger acquisitions made in 2014, 3Pi and FT, have been integrated into this division.

Revenue increased reflecting additional sales of sonobuoys in the US and Australia offset by reduced sales of Litening Pods. There was also a contribution from the acquisitions.

Profit and margin rose, reflecting increased volume and margins on sonobuoys, together with the positive impact of the prior year restructuring at Ultra's TCS radio business. The investment in the next generation sonar system at Ultra's Canadian maritime business has been re-phased to match the Canadian shipbuilding programme. This has been partially offset by the impact of integration costs relating to 3Pi.

The order book increase included the first year's order from the recent IDIQ sonobuoy award from the US Navy, as well as the Litening Pod CLS extension. This was supplemented by the acquisitions, which were partially offset by the impact of foreign exchange.

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

· A contract extension of £60.4m for the in-service support of the UK MoD's Litening Pods.

· Award of a $19m three-year contract from the US Navy for the production of the Naval Acoustic Electromechanical Beacon expendable countermeasure.

· Successful completion of the ORION radio trials during the U.S. Army Network Integration Evaluation.

· Order worth $166m awarded to Ultra's joint venture, ERAPSCO for the manufacture of the full range of sonobuoys for the US Navy.

MARKET ENVIRONMENT

In the US and UK, government spending budgets have stabilised but pressures remain evident. Within many of the market niches that Ultra targets, funding is being sustained and even increased, while long-term investment in new markets and directed investment is generating additional opportunities. Increasingly, focus is on life extension of equipment as much as new build, and customers are seeking mature, proven and comprehensive solutions that match their specific need and environment.

Defence (57% of Group revenue)

The two-year, cross-party agreement made in January this year has stabilised US defence funding and resulted in more normal contract placement towards the end of the first half. However, a Continuing Resolution is now more likely in the final months of 2014. Attention now focuses on the detail of major programmes within these budget limits and the impact of future reductions in contingency (OCO) funding. Defence priorities continue to reflect a shift from land-air operations toward maritime, air and special forces capabilities. Tensions and conflict in Eastern Europe and the Middle East highlight the increasing demand for intelligence, surveillance and reconnaissance (ISR) capabilities.

In the UK, defence strategy mirrors the US while procurement remains contained within a core programme with additional financial contingency. In 2015, the UK will conduct a Strategic Defence & Security Review and it is likely that budget pressures will remain. Restructuring of the procurement agencies provides greater input from the front line commands helping to direct spend to current capability gaps.

In other parts of the world, Australia's commitment to return defence spending back to 2% of GDP within a decade will take time to deliver. India's ambitious defence modernisation programme provides Ultra with significant opportunities, through partners, requiring long-term engagement. Turkey remains a valuable market but with a growing demand and capability for indigenous solutions. Middle East defence spending is increasing, partly in response to concerns about US realignment and in the face of regional tensions.

Security & Cyber (22% of Group revenue)

Border security, critical national infrastructure protection and cyber security concerns are evident in many regions. Ultra's portfolio approach, UK government endorsement and access to well-established partners make the Group attractive in this space. The demand for intelligence surveillance, while complicated by the Snowden leaks, remains strong but is shaped by government-to-government relationships.

Transport & Energy (21% of Group revenue)

Commercial passenger aircraft order books remain at record levels, providing revenue confidence in long-established positions. Developments to increase fuel efficiency or reduce weight are highly attractive. Investment in the UK transport infrastructure market is shifting from commuter lines to high speed rail. The export market remains strong and continues to grow. There are good opportunities in life extension and safety system improvements in the nuclear energy sector. The debate continues to be driven by growing capacity demands and low-carbon footprint, both of which make nuclear energy an important part of the energy diversity mix. 

RISKS AND UNCERTAINTIES

A number of potential risks and uncertainties exist which could have a material impact on the Group's performance in 2014 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 2013. 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.

The Group's security and cyber sectors remained steady. Within the defence sector, which contributes around 57% of Ultra's revenue, the overall size of defence budgets worldwide, relative to the Group's revenue, provides sufficient headroom to support Ultra's focus on positioning for growth.

There is a risk of programme delays or cancellations but this has always been a feature of the Group's markets. Excluding the Oman Airport IT project, no programme represents more than 5% of Ultra's revenue in any year, so the cancellation or curtailment of any single programme is unlikely to have a material impact on the Group.

Timely delivery of the Oman programme remains at risk owing to the delayed access to buildings. Should this prolongation continue, the Group would consider the need for further provision against final recovery of revenue under the agreed contractual arrangements covered by FIDIC rules.

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.

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 record of delivering high quality profits growth

- 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

The interim results are in line with the Group's expectations. As indicated in March, Ultra's 2014 performance will be weighted towards the second half, principally reflecting constraints in the US defence procurement process at the start of the period. The Group has seen the positive effects of increasing stability in the US and UK defence markets, as evidenced by increased order placement towards the end of the first half. The security & cyber, transport and nuclear energy markets, now 43% of the Group's business, remain stable with good trading in the period.

Ultra continues to position for profitable growth. In addition to the four businesses acquired in the period, R&D investment in new products and business development has been maintained. Encouraging progress has been made across a number of projects such as the successful US Army field trials of Ultra's ground-breaking ORION radio. Ultra's businesses continue to optimise their size to match market conditions through cost management. The Group's order cover for the remainder of the year, together with IDIQs and annual contracts, is at normal levels, although a potential US Congress Continuing Resolution, in relation to defence appropriations, could constrain orders after October 2014. Subject to no further currency fluctuations, the Board is confident that this positioning will support performance in the second half and will enable expectations to be broadly met for the full year.

- End -

Enquiries:

Ultra Electronics Holdings plc 020 8813 4307

Rakesh Sharma, Chief Executive www.ultra-electronics.com

Mary Waldner, Group Finance Director

Media enquiries:

Susan Ellis, Corporate Affairs Adviser 07836 522722

James White, MHP Communications 020 3128 8756

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, the major market sectors in which Ultra operates are:

Defence: Ultra supplies advanced electronic and electrical systems and equipment to coalition defence forces around the world. The Group innovates to provide battle-winning, specialist capabilities that are tailored to the customer's need and environment. Ultra has world-class capabilities in sonar systems, command & control, platform electrics, surveillance systems and network communications solutions.

Security: Ultra provides highly differentiated systems and capabilities to the broad security, intelligence and cyber market. Ultra has highly specialised capabilities in secure communications, networks and cryptographic equipment, key management systems and surveillance systems and intelligence gathering systems.

Transport: Ultra provides specialist software, systems and equipment for use in mass passenger transport systems. This includes high integrity real-time controls for civil aircraft, advanced IT solutions for modern airports and trackside power equipment for transit rail systems.

Energy: Ultra has a range of safety critical sensors and controls used in existing and new build nuclear reactors. The Group has innovative portable energy sources powered by readily available propane gas.

Ultra Electronics Holdings plc

Condensed Consolidated Income Statement

for the half-year ended 30 June 2014

All results are derived from continuing operations.

Ultra Electronics Holdings plc

Condensed Consolidated Statement of Comprehensive Income

for the half-year ended 30 June 2014

 Ultra Electronics Holdings plc

Condensed Consolidated Balance Sheet

as at 30 June 2014

Ultra Electronics Holdings plc

Condensed Consolidated Cash Flow Statement

for the half-year ended 30 June 2014

Ultra Electronics Holdings plc

Notes to the Condensed Consolidated Interim Financial Statements

for the half-year ended 30 June 2014

1. General information

The information for the year ended 31 December 2013 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

These interim Financial Statements, which were approved by the Board of Directors on 1 August 2014, have not been audited or reviewed by the Auditor.

2. Accounting policies

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

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements, except as described below.

The following Standards and interpretations were adopted as at 1 January 2014:

· IFRS 10 "Consolidated Financial Statements"  

· IFRS 11 "Joint Arrangements"  

· IFRS 12 "Disclosure of Interests in Other Entities"  

· IAS 27 "Separate Financial Statements"

· IAS 28 "Investments in Associates and Joint Ventures"

· IAS 32 "Offsetting Financial Assets and Financial Liabilities (Amendments)"

· IAS 36 "Recoverable Amounts (Amendments)"

The implementation of these standards has not impacted the Group's financial position or performance.

3. Segment information

^ A provision of £8,364,000 was released in the period (2013: £9,363,000) relating to the GigaSat earn-out agreement for which the final 2014 target was not met. GigaSat is in the Tactical & Sonar Systems division.

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

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