2022 Final Results, 8 March 2023

TT Electronics plc 

Results for the year ended 31 December 2022

For further information, please contact:

TT Electronics

Richard Tyson, Chief Executive Officer

Mark Hoad, Chief Financial Officer

Kate Moy, Head of Investor Relations and Communications                              Tel: +44 (0)1932 827 779

MHP Group

Tim Rowntree / Ollie Hoare                                                                                 Tel: +44 (0)20 3128 8100

A management presentation for analysts and investors will be held today at 0900hrs and can be accessed on https://stream.brrmedia.co.uk/broadcast/63d3e966777efd4a8b516f5b.

A recording of the presentation and Q&A session will be available on the website later in the day.

A PDF of this full year announcement is available for download from https://www.ttelectronics.com/investors/investor-highlights/reports-presentations-videos/.

Results for the year ended 31 December 2022

2022 performance ahead of expectations with strong momentum into 2023

Financial Highlights  

·    Record order intake in 2022 (book to bill of 118%) and strong revenue growth reflecting our successful positioning in structural growth markets and new project and customer wins

o  Full year revenue up 22% year-on-year at constant currency

o  Organic revenue growth of 20% (c.6% pass through, 3% price, 11% volume)

·    Adjusted operating profit up 19% at constant currency reflecting growth, self-help actions and recovery of cost inflation - much improved H2 performance as anticipated

o  Adjusted operating margin of 7.6%, 8.1% excluding impact of pass-through revenue

·    Statutory operating loss of £3.4m (including a one off, non-cash impairment charge of £23.1m and non-cash pension settlement charge of £11.8m), statutory basic EPS of (7.5)p

·    Free cash outflow reflects investment in working capital to support growth

·    Leverage back into target range and reduced by 0.4x from June 2022 as expected

·    Total dividend increase of 13% to 6.3p, reflecting strong performance and positive outlook

Operational Highlights

·    Excellent business development success, over 50 significant contract awards delivering over £125 million of multi-year revenues

·    Very strong growth from 40 largest key accounts

·    Cross-divisional collaboration driving new business wins

·    Self-help programme reaching conclusion and delivering benefits ahead of schedule

·    Margin enhancing Ferranti acquisition expanded technical capabilities and is performing ahead of plan

·    Pension buy-in completed saving £6m a year in ongoing cash contributions

·    Delivered a 54% reduction in Scope 1&2 emissions, meeting target a year ahead of plan², Net Zero Scope 1&2 by 2035.

Outlook

·    Continued order momentum through Q4 resulting in circa 90% of planned 2023 revenues covered at the end of December, including GMS fully booked

·    Strong free cash flows and a continued reduction in leverage expected in 2023

·    Disciplined approach to pricing of the order book, continued growth of the business and actions taken in 2022 underpin our confidence in further progress in 2023

Richard Tyson, Chief Executive Officer, commented:

"2022 was a year of strong operational and financial progress. We delivered excellent top line growth for the Group as we executed on our record order book, which reflected a significant number of new customer wins, incremental business opportunities with existing customers, and market share gains. Our teams across the Group have performed exceptionally well in a year characterised by significant volatility, ongoing supply chain issues and cost inflation. At the same time, we have completed our programme of site rationalisation and finalised the buy-in of our UK pension scheme.

TT is well-aligned with global mega trends, driving demand from high-growth markets. While we are mindful of the wider macro environment, we enter 2023 with good momentum underpinned by a strong order book. This unprecedented visibility, coupled with further benefits of our self-help programme, mean we are confident in our ability to deliver further progress in 2023."

About TT Electronics

TT Electronics is a global provider of engineered electronics for performance critical applications.

TT solves technology challenges for a sustainable world. TT benefits from enduring mega trends in structurally high-growth markets including healthcare, aerospace, defence, electrification and automation. TT invests in R&D to create designed-in products where reliability is mission critical. Products designed and manufactured include sensors, power management and connectivity solutions. TT has design and manufacturing facilities in the UK, North America, Sweden and Asia.

Notes

1.   Throughout this announcement we refer to a number of alternative performance measures which provide additional useful information.  The Directors have adopted these measures to provide additional information on the underlying trends, performance and position of the Group with further details set out on pages 19 to 21.  The adjusted measures used are set out in the 'Reconciliation of KPIs and non IFRS measures' section on pages 43 to 50.

2.   Against our 2019 baseline.

CHIEF EXECUTIVE OFFICER'S REVIEW

Introduction

2022 has been a year of excellent growth for TT. This reflects a significant number of new customer wins and incremental business opportunities with existing customers, alongside continued market share gains. The growth in revenue and the strong order intake also reflect multi-year programme wins and the positive structural trends evident in our end markets. Our teams across the Group have executed exceptionally well in the continuing challenging environment, given the significant supply chain and cost headwinds, to deliver a strong trading performance with very good profit growth, ahead of expectations.

With the strength in order intake our order book provides excellent levels of forward visibility. At the end of December, the order book gives us visibility over circa 90 per cent of planned 2023 revenues. This compares with 77% revenue visibility at the same time last year, and 59 per cent at December 2020.

The repositioning of TT is evident in our performance in 2022 as we continue to unlock the potential of the Group and benefit from the structural growth in our end markets. Our relationships with customers are longer term and more collaborative, resulting in new wins and a greater share of wallet. Our top 40 OEM customers now account for 58 per cent of our revenue (up from 56 per cent in 2021) and saw 27 per cent revenue growth in the year. We have also progressed efforts to build an environmentally sustainable business, which remains central to our strategic decision-making, particularly when we consider the opportunities presented by the move to a lower carbon world for our design-led technologies.

The Group's performance was led by outstanding results in our Sensors and Specialist Components (S&SC) and GMS businesses. While timing issues on some key aerospace and defence programmes in Power and Connectivity (P&C) in the first half depressed revenues (on a constant currency basis) and impacted our operational performance, there was a substantial recovery in the second half.

We expect to deliver £13-14 million of full run-rate benefits in 2023 from our investment in the self-help programme which contributed circa £4 million of benefits in 2022, ahead of plan, in addition to the £6 million delivered to 2021. We are pleased with the progress made so far to deliver this significant programme, which is an important component of our path to double-digit operating margins. 

During the year organic investment in the business totalled £22.7m; we have invested £11.0 million in research and development (R&D) and £11.7 million in capital expenditure to support growth and the development and enhancement of our pipeline of new products.

The integration of the Ferranti acquisition has progressed well and as planned; we will move production to a new facility in Greater Manchester in Q3.

Environmental, social and governance (ESG) principles are central to our purpose and deeply embedded in our business model and strategy. We have made further progress in 2022 to reduce our Scope 1 and Scope 2 carbon emissions. These have decreased by 23 per cent in the year to 12,166 tonnes and are down 54 per cent against our 2019 baseline, meaning we have achieved our near-term goal one year ahead of plan. In adjusting for revenue growth within the business, the intensity ratio improved from 55.7 in 2019 to 19.7 in 2022. This improvement has been achieved due to our energy efficiency actions and further switching to the use of electricity from renewable sources. During 2022 we completed an initial review of the resilience of our strategy to climate-related risks and opportunities using an external consultant.  We will undertake further work in this regard during 2023.

Our embedded values were central to our approach during the pandemic, leading to a series of actions to make our workplaces safe and secure and to protect and support employees whose dedication and commitment ensured delivery for our customers. Accordingly, during 2022 we supported our employees impacted by higher inflation on costs of living with appropriate regional responses, whilst continuing to manage the impact of COVID-19 on our employees in Asia. Given the increased cost of living, which has disproportionately impacted our lowest earners, we have supported them through a variety of pro-active regional actions including an additional cost of living support payment to eligible UK employees.

Results and operations

Revenue for the year was £617.0 million. This was 22 per cent higher than the prior year at constant currency and 20 per cent higher on an organic[1] basis, with a significant acceleration of growth in the second half of the year. Adjusted operating profit increased by 35 per cent and by 19 per cent on a constant currency basis compared to 2021, reflecting the benefits of volume growth and our self-help programme. A much improved second half performance was in part driven by the expected recovery in our P&C division. The business performance in GMS was ahead of expectations and S&SC produced outstanding results over the year.

We continue to experience supply chain challenges with extended lead times, component shortages and notable cost inflation. Through our collaboration with customers, our investment in inventory and our actions to source some components on an expedited basis, organic revenue growth accelerated to 31 per cent in the second half of 2022. We estimate that cost inflation in the year amounted to circa £40 million. This was fully recovered by re-pricing our offerings and working collaboratively with our customers. Of the increase circa £28 million was cost pass-through. This relates to materials where there has been very significant cost inflation which is being transparently passed on to customers with no margin mark-up. Even excluding these pass-through revenues, organic growth was still an excellent 14 per cent.

There has been exceptionally strong order intake across the Group, reflecting underlying growth in our markets and new customer wins, as well as customers committing earlier to secure capacity and give us greater visibility. Customer demand remains robust, but we are vigilant to any changes in demand. Order intake for 2022 was 118 per cent of revenues, which we grew 20 per cent organically. We secured over 50 significant contract wins that will deliver over £125 million of multi-year revenues. Our collaborative approach to deliver solutions based on our technical expertise has been a key factor in winning new orders. We are focused on leveraging expertise across the Group to pursue cross selling opportunities and deepening our relationships with our top customers. Much of this effort is led by the GMS division which is integral to converting these opportunities and increasingly showcases the capabilities of the P&C division.

Adjusted operating profit was £47.1 million, 19 per cent higher than the prior year at constant currency. The adjusted operating margin was 7.6 per cent. Excluding zero margin pass-through revenues, adjusted operating margin was 8.1 per cent. After the impact of adjusting items, including restructuring, pension, acquisition and disposal costs, and a non-cash asset impairment, the Group's full-year statutory operating loss was £3.4 million. The non-cash impairment of £23.1 million is shown within the Power and Connectivity division and is linked to an increase in discount rates, coupled with revised forecasts for the Connectivity business in the context of a weaker macro-economic environment and the impact of the evolution of the COVID pandemic on the potential demand for COVID testing. Cashflow impacting adjusting items totalled £11.1 million.

Adjusted EPS increased to 18.2 pence (2021: 14.5 pence), reflecting the improved adjusted operating profit in the period. Basic earnings per share (EPS) was a loss of 7.5 pence (2021: profit 7.3 pence). The increase in adjusted operating profit was more than offset by the increase in non-cash adjusting items set out below.

During the year we completed the cash spend on our self-help programme to support margin improvement. We also invested in inventory to support our high levels of growth, our increased customer order book and supply chain constraints on certain component parts. Cash conversion of 33 per cent (2021: 65 per cent) reflected this investment and included a working capital outflow totalling £38.8 million. The working capital outflow was mainly a result of investment in inventory to support the significant growth in order intake. This was exacerbated by material cost inflation and high value pass-through materials secured with customer agreement. We had anticipated a modest improvement in the second half, but this was adversely impacted by higher than anticipated receivables due to the exceptionally strong organic revenue growth as well as a small number of larger value receivables which arrived post year-end.

In 2022 we completed the buy-in of our UK defined benefit pension scheme. This buy-in secures pension benefits for circa 5,000 members and their dependents. The Scheme's circa £360 million of liabilities are now matched by an insurance policy, and TT no longer bears any investment, longevity, interest rate or inflation risk in respect of the Scheme. There was a benefit to the Group's 2022 free cash flow of £6 million and there is an equivalent annual improvement to free cash flow in future years.

On a statutory basis, cash flow from operating activity was £12.7 million (2021: £14.3 million). There was a free cash outflow of £13.1 million (2021: £1.3 million outflow). Dividend payments totalled £10.2 million (2021: £11.4 million). We ended the year with net debt of £138.4 million (2021: £102.5 million), including IFRS 16 lease liabilities of £23.1 million (2021: £22.6 million). 

At 31 December 2022 leverage was 2.0 times (2021: 1.7 times), within the Board's target leverage range of 1-2 times, and down 0.4 times from June 2022, as anticipated. We are confident this downward trajectory will continue as EBITDA increases and as we deliver a material step-up in free cash flow in 2023.

Our return on invested capital was 10.5 per cent in 2022, increasing by 140 basis points due to the growth in adjusted operating profit, even with the additional investment in working capital.

Dividend

Given our strong trading performance in 2022 and the positive outlook for 2023 and beyond, the Board is proposing a final dividend of 4.3 pence per share. The total cash cost of this dividend will be approximately £7.6 million. This, when combined with the interim dividend of 2.0 pence per share gives an increase of 13 per cent in the total dividend to 6.3 pence (2021: 5.6 pence per share).  Payment of the dividend will be made on 26 May 2023, to shareholders on the register at 28 April 2023.

Our strategy

We solve technology challenges for a sustainable world, creating solutions that enable our customers to make products that are cleaner, smarter and healthier and that will benefit our planet and people. We create value through supplying products and services that meet our customers' sustainability ambitions in our target markets of healthcare, aerospace & defence and automation & electrification.

We have positioned the Group in structurally growing, higher added value markets with long-term customer partnerships. The success of this strategy is reflected in the revenue growth in 2022 and order book strength into 2023. We believe the growth rates in our end markets have the potential to be higher than the combined 3-5 per cent we have previously cited. This, combined with our ability to outperform given our business development success with higher growth, blue-chip customers, means we now believe market growth of 4-6 per cent over the medium term is achievable, and that TT will exceed it. Our strategy is designed to generate optimum returns for all our stakeholders while maintaining strong capital discipline, delivering strong cash generation and careful use of the balance sheet to facilitate continued investment. 

Our markets

Healthcare (28 per cent of Group revenue)

In healthcare, we provide design and manufacturing solutions for a range of diagnostic, surgical and direct patient care devices critical to the identification, treatment and prevention of disease. Growth is driven by a combination of ageing populations, growing patient expectations and the importance of digitalisation; electronics plays a central role in advancing the progress of medical technology.

We have steadily increased our exposure to this attractive end market from 13 per cent of Group revenue in 2015. Our power, connectivity and sensor technologies span the modern surgical suite from patient monitoring and therapeutic devices to surgical navigation, diagnostic equipment and life sciences. By supporting our life sciences partners, we are collectively improving laboratory automation systems and enabling samples to be collected and analysed with minimal human intervention, the benefits of which are improved data reliability and accuracy, minimised wastage, and time-efficient procedures. By supporting the development of smaller, lighter, more precise surgical devices, we are enabling reduced size of incisions, shortened recovery times, and improved overall patient outcomes. In addition, by improving the portability and ease of use of diagnostics, we are increasing the availability of medical imaging to point-of-care facilities. This promotes earlier detection and better monitoring, hence supporting measures taken to address the rising prevalence of cancer, cardiac, neurological, and musculoskeletal disorders.

COVID-19 has accelerated trends in the digital transformation, automation and robotics of healthcare which can be served by TT specialisms including interventional healthcare devices, patient monitoring and laboratory equipment.

Pent-up demand, post pandemic, for deferred elective surgery and for large installations for hospital or life science applications are expected to be supportive of market growth over the next few years. 

Aerospace and Defence (15 per cent of Group revenue)

In aerospace and defence we provide solutions for high-reliability applications across a broad range of platforms operating on land, air and sea. Growth is driven by increasing electrification of these platforms, which supports fuel efficiency and safety. Throughout 2022 the commercial aerospace market has shown steady recovery from pandemic levels; with the gradual alleviation of travel restrictions and release of pent-up demandin China expected to support further growth in 2023. Fundamentally, the need for more efficient, safer, and environmentally friendly aircraft remains. This drives demand for increasingly advanced electronic systems and applications, complemented by demand from a growing, globalised middle-class population who exhibit greater propensity to travel.  

The defence electronics manufacturing market exhibits consistent, moderate expansion as governments invest to maintain state-of-the-art capabilities. However, in the aftermath of the Russian invasion of Ukraine and despite recessionary fears, heightened geopolitical tensions mean we are likely to see a pick-up in defence spending. In defence, our central focus is on next generation requirements for high-density power electronics and electrical machines collaborating with our customers on the development of technologies that reduce size, weight, power, and cost (SWaP-C), while simultaneously enhancing command, control, communications, computing, intelligence, surveillance, and reconnaissance (C4ISR) capabilities. We have been successful recently in providing more integrated, design-led solutions, demonstrating our ability to deliver SWaP-C improvements.

Automation and Electrification (37 per cent of Group revenue)

In automation and electrification markets, we are continuing to invest in developing capabilities to address the needs of sophisticated automation and connectivity applications. Customers rely on us to help solve their toughest automation and electrification challenges; streamlining their supply chains, increasing their efficiency and helping them bring smart, new products to the market. Growth is being driven by factors including demand for sustainable solutions to improve energy efficiency, the use of robotics to improve productivity and the increasing use of remote asset tracking.  Within electrification, our priority is in developing capabilities which will support increasing energy efficiency and connectivity. Core focus areas include complex systems integrations and AC and DC power conversion technologies. We are increasingly able to develop complete, high-value products and durable components featuring higher voltages. The positive long-term growth drivers in this market give us confidence that demand will increase for our power, sensing and connectivity solutions.

Distribution sales channel (20 per cent of Group revenue)

We grew our revenues through distributors again in 2022 and this area now represents 20 per cent of our overall sales. The demand from distributors comes from a very wide range of customers and end markets but is, in large part, driven by the same mega trends supporting our focus end markets including rapid technological change and digital transformation.

Creating value through technology and capital investment

We prioritise organic investment in technology and capital to support new project growth, this totalled £22.7 million in 2022. A key part in the step change in dialogue with our customers in recent years has been our focus on R&D. This has resulted in us becoming firmly embedded with our customers, enabling us to stay ahead of their needs and meet the challenges they set us. We are also investing in capital to support growth programmes for our customers. Our investment is focused on bringing higher growth, innovative, sustainable products to market. These typically yield higher returns and development is often undertaken in partnership with our customers. Our investment strategy includes leveraging acquired complementary capabilities targeted through mergers and acquisitions (M&A). 

Our R&D cash investment in the year was £11.0 million (2021: £11.4 million), representing 3.7 per cent (2021: 4.5 per cent) of the aggregate revenue of our product businesses, with the reduction mainly a result of the conclusion of the development phase of our encoder project which has now moved into the new product introduction phase. Capital expenditure totalled £11.7 million (2021: £14.9 million).

The pipeline of new products coming to market continues to grow, including in areas where we have extended our technical capabilities through acquisition. Examples include:

·    Our Power and Connectivity business has been working on an Aerospace Technology Institute (ATI) funded project developing high power DC/DC power conversion for increased electrification of military aerospace, commercial aerospace and hybrid electric and fully electric aircraft.

·    We continue to invest in the surgical navigation and robotics market. This segment is experiencing sustained double-digit growth and is driven by several emerging clinical applications that provide the physician with exceptionally accurate catheter placement, often eliminating the need for harmful radiation. The miniaturised and highly accurate characteristics of our technologies enable access to parts of the anatomy that in the past were difficult to navigate including the lung, brain and heart. Additionally, new applications for improved navigation needs have emerged to diagnose breast cancer.

·    We are currently investing in a combination of AC/DC and DC/DC power conversion technologies in direct response to demand from aerospace and defence customers, as well as ruggedised wire harness and magnetic capabilities. These investments build upon our existing capabilities and give us a wider platform to support major aerospace and defence customers, many of whom require power solutions that feature higher voltages and/or efficiency improvements from legacy designs.

Creating value through margin enhancement

The pursuit of higher margins through our self-help programme, organic and inorganic growth, remains core to the Group's strategy. In 2022 progress to delivering double-digit adjusted operating margins was impeded by pass-through revenue which is creating a temporary headwind to margin progression. Nevertheless, Group adjusted operating margin still improved from 7.3 per cent to 7.6 per cent overall. Excluding the impact of pass-through revenues, adjusted operating margin was 8.1 per cent. We anticipate pass-through revenues to become less pronounced by 2024.

Our significant self-help programme, designed to reduce our footprint and fixed cost base, is nearing completion. Spend on this programme was completed in 2022 as we consolidated  the Covina business into the Torotel site at Kansas City, which has created one power business in North America. Production at Covina ceased in December 2022 and the establishment of this new production in Kansas City will be completed in H1 2023. Our new facility in Plano, Texas is now up and running and the qualification is substantially complete, with the final qualifications determined by customer demand. Furthermore, in 2022 we established a new clean room at Bedlington to support the products transferred from Lutterworth. With the majority of qualification activities at both Bedlington and Plano completed in 2022, we expect to be operating at higher, and more efficient, levels of production in 2023.

The total cash spend for the self-help programme was £22.2 million with £8.5 million spent in 2022, comprising restructuring cash spend of £7.1 million and project capital expenditure of £1.4 million (2021 spend: £10.2 million, including £2.3 million of restructuring cash spend (net of £9.1 million after costs from property disposals) and £7.9 million of project capital expenditure). With the addition of the Covina transfer to the programme, the previously guided full run-rate benefits of £11-12 million increased to £13-14 million, which we expect to realise in 2023.

The gradual reversal of the pass-through margin impact, operational leverage on growth and the elimination of inefficiencies underpins our confidence in achieving double-digit margins.

Creating value from mergers & acquisitions

We are delighted with the Ferranti Power and Control (Ferranti) acquisition which completed in January 2022. In combining this business into our Power and Connectivity division, we utilised our well-defined integration model, which incorporates major business processes including operations, procurement, finance, legal, IT and human resources. The business is performing ahead of our expectations, has already secured new orders under our ownership and is also set to benefit from the extension of demand for programmes which had been expected to tail off over the next few years. Ferranti will move to new bespoke facilities in Greater Manchester, as planned, during 2023.

While leverage has reduced, we are mindful that it remains temporarily near the top end of our target range, reflecting the investment in inventory to execute our order book and support our high revenue growth. We continue to monitor an active pipeline of opportunities while we focus on free cash flow generation and leverage reduction to generate capacity for further M&A.

Environmental, social and governance (ESG)

Understanding and managing the impact of our business operations on the environment is an important part of the way we do business. Not only do we develop, design, engineer and manufacture products that enable reduced environmental impacts for our customers, but we are also optimising our own operations to reduce our environmental impact. We seek to have a wider positive impact on society by understanding and prioritising employee needs, doing business responsibly and reaching out to our local communities. Our products address resource scarcity, protect health, improve energy efficiency, support renewables and assist productivity and connectivity. We are positioned to benefit from mega trends that are driving sustainable growth.

We remain at the forefront of delivering technologies that meet the ever-increasing demand for cleaner energy, smart monitoring systems and home automation. Our products can be found in a range of applications including:

·    Renewable energy generation and smart grid metering

·    Power management and energy control systems

·    Water and wastewater measurement and monitoring

We are moving at pace to reduce our carbon emissions and have set ourselves a target to be Net Zero by 2035 for our Scope 1 & 2 emissions.

In 2022 we made excellent progress on our ESG milestones and have reduced our Scope 1 & 2 carbon emissions by 54 per cent from our baseline set in 2019, achieving our 2023 target of delivering a 50 per cent reduction a year ahead of plan. This has been accomplished by switching to renewable tariffs, further site rationalisation, transferring manufacturing capability and capacity to modern, green facilities and local site energy saving initiatives. Our 2022 emissions are a further 23 per cent lower than in 2021. Our intensity ratio, which measures our Scope 1 & 2 emissions against our revenue has reduced to 19.7, down from 55.7 in 2019. All our sites that are able to purchase electricity on renewable tariffs are now doing so.

As we look forward, further reductions in our carbon emissions will require other measures such as infrastructure and process projects to reduce electricity consumption and investment in solar power or other renewables and we will be ready to benefit from renewables gradually coming on stream in China. In 2022 we undertook feasibility studies for onsite solar projects and now the transition to solar panels, to provide a renewable source of energy, is underway. Our first solar project at Kuantan in Malaysia was installed in 2022 and commissioned early in 2023. Each of our manufacturing sites has its own energy efficiency plan to include further rolling out of LED lighting, eliminating waste electricity, replacing inefficient legacy equipment or reorganising space to save heating/lighting and managing shift patterns.

During the year we have progressed our assessment of our Scope 3 emissions, in particular areas of materiality for the Group to better understand our emissions. We have commenced measurement and internal reporting of six categories: transportation (upstream and downstream), purchased goods and services, business and employee travel and waste. Three categories have been set aside for further review after evaluation in 2022, these are capital goods, use of sold products and end of life treatment of sold products.

Using an external advisor, TT has recently undertaken high-level scenario analysis to test the resilience of our strategy to climate-related risks and opportunities identified across one physical and two transition scenarios and different time periods. This yielded valuable information on next steps and was a precursor to a more detailed Climate Related Scenario Analysis which we will undertake in 2023. TT has a corporate partnership with the Carbon Disclosure Project (CDP) Supply Chain Management team to help measure our supply chain emissions. The data gathered allows us to create a database, develop data gathering and measurement tools, assess the relevance and magnitude of each category, and put robust plans in place to reduce emissions. We will report on these plans once established.

Our continuing progress on ESG matters has been recognised externally, having received a rating of 'AA' in the latest MSCI ESG Ratings assessment and we have a 'C' rating from CDP.

ESG matters including culture, strategy, regulatory compliance, risk and internal controls are controlled as part of our overall governance and risk management frameworks, ultimately overseen by senior management and the Board. An update on key health, safety and environmental (including sustainability) metrics is provided at each Board meeting and in-depth reviews are undertaken on at least an annual basis. 

Our teams are passionate about finding solutions to the world's toughest technology challenges and delivering for customers. We champion knowledge, skills, innovation, problem solving and service in four key areas: power, connectivity, sensing and manufacturing & engineering. We set out to attract, promote and retain the best, diverse, talented people and we are focused on developing expertise at all levels of the organisation.

Engaging employees by continually building our culture, communicating, listening and supporting is an important part of what we do every day. The re-launch of our Group intranet, ConnecTT, has enhanced our employee ability to communicate, share resources and hosts a range of employee communities.

Our employees have continued to support their local communities and fundraise for local and national causes. We encourage our teams to take an active role in their local communities, whether fundraising and volunteering for chosen charities or committing time and resources to promoting STEM education and careers. The resilience, contribution, and dedication of our employees in all regions has been remarkable over this pro-longed period of uncertainty. We will continue to focus on supporting them as they are critical to the success of TT.

We undertake a Group-wide employee engagement survey every 12-18 months and use pulse surveys to get up to date feedback and an indication of progress. The results are reviewed by the Board and our Senior Independent Director, Jack Boyer, participates directly in people matters through membership of the People Social Environmental and Ethics Committee.

Outlook

2022 was a year of strong operational and financial progress. We delivered excellent top line growth for the Group as we executed on our record order book, which reflected a significant number of new customer wins, incremental business opportunities with existing customers, and market share gains. Our teams across the Group have performed exceptionally well in a year characterised by significant volatility, ongoing supply chain issues and cost inflation. At the same time, we have completed our programme of site rationalisation and finalised the buy-in of our UK pension scheme.

TT is well-aligned with global mega trends, driving demand from high-growth markets. While we are mindful of the wider macro environment, we enter 2023 with good momentum underpinned by a strong order book. This unprecedented visibility, coupled with further benefits of our self-help programme mean we are confident in our ability to deliver further progress in 2023.

FINANCIAL OVERVIEW

Group revenue was £617.0 million (2021: £476.2 million). This included a £7.9 million contribution from acquisitions and currency translation benefit of £31.5 million. Group revenue was 22 per cent higher than the prior year at constant currency and 20 per cent higher on an organic basis. Excluding the zero margin pass-through revenues, organic growth was still 14 per cent, split approximately 11 per cent volume growth and 3 per cent pricing. Sales volumes across our key markets have been buoyant and the strength of our order book, and the pipeline of new business opportunities, gives us confidence that growth will continue. Our order book reached record levels in the second half of 2022.

The Group's adjusted operating profit was £47.1 million (2021: £34.8 million) and statutory operating loss was £(3.4) million (2021: £19.3 million profit) after a charge for items excluded from adjusted operating profit of £50.5 million (2021: £15.5 million) including:  

·    Restructuring and other costs of £20.2 million (2021: £7.8 million) comprising:

·    Restructuring costs of £6.4 million (2021: £8.1 million) including £2.7 million relating to the restructure of the North America Resistors business (including pre-production costs at our new Plano facility), £2.0 million relating to the closure of our Lutterworth site, and £1.7 million relating to relocation of production facilities in the USA, as part of our self-help programme, and

·    Pension costs of £13.8 million (2021: £0.3 million credit) relating to pension projects which included £11.8 million non-cash settlement costs for an enhanced transfer value exercise and £2.0 million of cash costs associated with this exercise and the scheme buy-in project.

·    Acquisition and disposal costs totalled £7.2 million (2021: £7.7 million) comprising £1.2 million (2021: £2.6 million) of integration and acquisition costs relating primarily to the Ferranti acquisition, which completed early in 2022. Amortisation of intangible assets arising on business combinations was £6.0 million (2021: £5.1 million).

·    Non-cash impairment costs totalled £23.1 million (2021: £nil) being an impairment in respect of the IoT Technology Products business including £5.4 million of assets associated with the Virolens project. This impairment is shown within the Power and Connectivity division and is linked to an increase in discount rates, coupled with revised forecasts for the business in the context of a weaker macro-economic environment and impact of the evolution of the COVID pandemic on the potential demand for COVID testing.

The adjusted operating margin of 7.6 per cent (2021: 7.3 per cent) reflects the benefits of growth and our self-help programme. We successfully offset increases in input costs through price increases.

The net finance cost was £6.7 million (2021: £3.3 million) with the increase being mainly due to a combination of higher base rates and higher drawn debt levels.  The Group's overall tax charge was £3.1 million (2021: £3.2 million), including a £5.3 million credit (2021: £3.0 million credit) on items excluded from adjusted profit. The adjusted tax charge was £8.4 million (2021: £6.2 million), resulting in an effective adjusted tax rate of 20.8 per cent (2021: 19.6 per cent). 

Adjusted EPS increased to 18.2 pence (2021: 14.5 pence), reflecting the improved adjusted operating profit in the period. Basic earnings per share (EPS) was a loss of 7.5 pence (2021: profit 7.3 pence). The increase in adjusted operating profit was more than offset by the increase in non-cash adjusting items set out above.

Adjusted operating cash inflow after capex was £15.7 million (2021: £22.7 million inflow). Improved profitability was more than offset by a working capital outflow of £38.8 million (2021: £14.7 million outflow), including a £40.4 million investment in inventory to support the strong order book and impacted by supply chain constraints. Capital and development expenditure of £14.0 million (2021: £16.8 million) reflected investment to support growth and as part of the self-help programme. This resulted in adjusted operating cash conversion of 33 per cent (2021: 65 per cent). On a statutory basis, cash flow from operating activity was £12.7 million (2021: £14.3 million).

There was a free cash outflow of £13.1 million (2021: outflow £1.3 million), net of £11.1 million of restructuring and acquisition related costs (2021: £5.9 million), relating to the self-help programme and acquisition costs associated with the Ferranti acquisition. There were no pension contribution payments in the year (2021: £5.5 million) due to the buy-in of the UK scheme as detailed below.

Investments in acquisitions totalled £8.3 million (2021: £0.5 million) relating to the Ferranti Power and Control acquisition in January 2022. Dividend payments totalled £10.2 million (2021: £ 11.4 million).

At 31 December 2022, the Group's net debt was £138.4 million (31 December 2021: £102.5 million), including £23.1 million of lease liabilities (31 December 2021: £22.6 million). Leverage at 31 December 2022, consistent with the bank covenants, was 2.0 times (31 December 2021: 1.7 times).

Pension buy-in

In November 2022, the Trustee of the TT Electronics Pension Scheme (the "Scheme") purchased a bulk annuity insurance policy from Legal and General Assurance Society Limited, covering all liabilities required to pay all future defined benefit pensions for the Scheme's circa 5,000 members and any eligible dependents. The purchase of this insurance policy was the successful culmination of extensive work over the last few years by TT and the Scheme Trustees. The insurance policy was purchased using existing assets held within the Scheme, without the need for TT to make any additional contributions.

TT is not required to make any future contributions into the Scheme regarding defined benefit liabilities and the buy-in delivers greater security to the Scheme's members. The Scheme's circa £360 million of liabilities are now matched by the insurance policy, and TT no longer bears any investment, longevity, interest rate or inflation risk in respect of the Scheme. There was an immediate benefit to the Group's current year cash flow of £6 million in 2022 and there is an equivalent annual improvement to free cash flow in future years.

DIVISIONAL REVIEW

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.

¹ See note 1 on page 3 for an explanation of alternative performance measures.  Adjusting items are not allocated to divisions for reporting purposes.  For further discussion of these items please refer to the section titled 'Reconciliation of KPIs and non IFRS measures' on pages 43 to 50 of this document.

Revenue increased by £14.0 million to £154.2 million (2021: £140.2 million) and includes a £7.9 million revenue contribution from Ferranti Power & Control which we acquired in January 2022 and a currency benefit of £7.2 million. Organic revenue was 1 per cent lower dampened by the timing of programme revenues, the closure of the Akron, Ohio facility and the transfer of activity from Lutterworth to Bedlington.

Adjusted operating profit increased by £0.1 million to £7.9 million (2021: £7.8 million). Included within this was a profit contribution of £1.9 million from the Ferranti acquisition and there was a £0.9 million foreign exchange benefit. The organic reduction in operating profit was mainly driven by reduced revenues and site inefficiencies including the impact of COVID disruptions in the first half. The operating profit contribution from the division stepped up materially from £2.1 million in the first half to £5.8 million in the second half as anticipated. The adjusted operating margin was 5.1 per cent (2021: 5.6 per cent) for the full year and 6.8 per cent in the second half.

Order intake has been good in the year, running well ahead of revenues giving us confidence of a return to growth in 2023 which will support further margin improvement. With the consolidation of activities into the Kansas City site, following closure of the Covina site, combined with the transfer of activity from Lutterworth to Bedlington now completed, we are well placed to benefit from these operational efficiencies in 2023.

There have been some notable contract awards during the year, including:

·    We were awarded a contract from long-term partner Honeywell Aerospace to support the design of a new power supply for next-generation inertial navigation units. This partnership highlights TT's market responsiveness, innovation and long-standing expertise in demanding defence and military applications

·    Our work on the Boxer programme (the main UK army vehicle programme) has expanded with significant additional contracts wins. Following on from the power electronics assembly contract and the subsequent award for the design and development of electrical cable harness systems for the Challenger 3 upgrade project, we have recently cross sold our expertise into GMS. We are already contracted to provide complex, high reliability power electronics assemblies to the Boxer vehicles and will lead the design, production and delivery of the battery control units enabling increased efficiency of the vehicle power management system as well as the command display units providing signalling and communications functionality on every Boxer vehicle

·    Recent significant advances have allowed electromagnetic tracking to become an emerging technology of choice for new clinical applications. This adoption is leading to a dramatic upsurge in related procedure volume. Working with a new customer, a medical equipment manufacturer, on its electromagnetic (EM) tracking system, which incorporates TT's EM micro-coil sensors, we have taken the system from prototype to full launch and this tracking system is now used for diagnosing certain cancers

·    Environmental innovation from ZapCarbon in combination with our electronics technology and IoT powered monitoring expertise brought to the mass market the Healthy Homes Sensor. This sensor is designed for use in social housing as a means to combat fuel poverty and unhealthy living conditions. Our battery operated, cellular connected sensor can detect unsafe humidity conditions long before mould occurs thus improving the health for occupants of social housing and preventing the need for costly remediation work.

In January 2022 we completed the £8.3 million acquisition of Ferranti Power and Control, based in Greater Manchester, which designs and manufactures mission-critical complex power and control sub-assemblies for blue chip customers in high-reliability and high-performance end markets, primarily aerospace and defence. One of the principal benefits of the acquisition is that it brings the skills to provide full-service capabilities from design, assembly, manufacturing, and testing including environmental stress screening and inspection through to service.

Ferranti adds further technology capability, IP and scale to our Power business. It brings valuable long-term customer relationships and programmes with leading global aerospace, defence and industrial OEMs operating in highly regulated markets with significant barriers to entry through necessary industry accreditations and customer approvals.

Ferranti is a mid-teens operating margin business, and in this, our first year of ownership, the acquisition has generated a return on invested capital in excess of the Group's WACC. We expect to generate cost synergies of circa £0.4 million by year three.

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.

¹ See note 1 on page 3 for an explanation of alternative performance measures.  Adjusting items are not allocated to divisions for reporting purposes.  For further discussion of these items please refer to the section titled 'Reconciliation of KPIs and non IFRS measures' on pages 43 to 50 of this document.

Revenue increased by £102.9 million to £323.0 million (2021: £220.1 million) including a currency benefit of £15.4 million, with organic revenue 37 per cent higher. The organic revenue performance reflects strong growth from our existing customer base, particularly from our healthcare and automation & electrification end markets. There was strong growth in all geographic regions. Pass-through revenue was around £32 million which has created a technical head wind to margin progression. Excluding this pass-through revenue, the operating margin was 8.7 per cent.

This division has again performed incredibly well in 2022, as momentum built reflecting the targeted move towards customers who are winners in their own markets and provide opportunity to grow share of wallet. Work on positioning GMS as a partner to customers to win long-term incremental business is reflected in our order book growth. The addition of GMS capability to the Kuantan site in Malaysia, back in 2020, has added value through the expansion of our high-level assembly capabilities to a variety of key customers. The division's planned revenues for 2023 are fully covered and it has started to secure revenue for 2024. Given the significant increase in revenues in 2022, GMS will make incremental capital investment in 2023 to enhance capacity in existing facilities.

Adjusted operating profit increased by £6.9 million to £25.2 million (2021: £18.3 million), including a £2.2 million foreign exchange benefit. The constant currency increase reflects operational leverage on the organic growth and the full recovery of inflationary costs. The adjusted operating profit margin was 7.8 per cent (2021: 8.3 per cent), impacted by the pass-through revenues, without which margins would have been 8.7 per cent.

The order book growth has been underpinned by several multi-million-pound wins, a number of which extend beyond 12 months. We continue to see that our power customers require manufacturing capability and so our GMS and P&C divisions are partnering to provide this solution. Packages secured on the Boxer programme illustrate how we are able to expand our involvement in a programme from initial work within Power and Connectivity to providing PCBAs through GMS. We continue to improve our understanding of how to leverage these opportunities from the customer perspective.

In late December, TT was delighted to receive an award for best-in-class performance as one of AMI's top performing suppliers for outstanding technical and operational achievements in areas including quality, service, lead time, delivery, cost and responsiveness. We believe this award reinforces our reputation as a trusted partner across multiple geographies.

Overall, the GMS division is in excellent shape, the order pipeline is stronger than ever, and our enhanced customer relationships and business development initiatives are delivering revenue and order book growth. GMS has achieved a step change in its margin profile over recent years, reflecting the value of the service we bring to our customers, reliability, and the value engineering and testing capability we offer. We believe GMS margins can improve incrementally with growth.

In 2022, a key component of the revenue and order book growth reflected large, ongoing programmes with our blue-chip customers in healthcare and automation. In addition, there have been a number of significant new customer awards which will impact future years. Some examples include:

·    TT has been awarded a substantial five-year agreement with a leading systems integrator in commercial aerospace worth circa £50 million, for the manufacture of complex electronic assemblies for aircraft braking systems. This award further strengthens our longstanding collaboration with this customer and reflects its confidence in our expertise in demanding military and aerospace applications.  

·    Following several years of prototype development and supply chain support, TT has been selected as a strategic manufacturing partner to support multiple line replaceable units (LRUs) that comprise the Honeywell Anthem avionics suite. Unveiled in late 2021, the Honeywell Anthem flight deck is the industry's first cloud-connected cockpit system. Anthem is powered by a flexible software platform that can be customised for virtually every type of aircraft, including large passenger and cargo planes, business jets, helicopters, general aviation aircraft and the rapidly emerging class of advanced air-mobility (AAM) vehicles. TT will be providing engineering support, manufacturing, and full systems integration for this next-generation avionics programme over the next 12 years.

·    2022 saw strong revenue growth on a number of new projects for a world-leading life sciences customer. These included high level assemblies for a Gas Chromatography Mass Spectrometer. Such machines are used in spectrometry elemental isotope analysis to understand the chemistry and composition of materials and healthcare and life sciences. Other key projects with this customer include a DNA sequencer and high-end analytical instruments for radiation detection

SENSORS AND SPECIALIST COMPONENTS

The Sensors and Specialist Components division works with customers to develop high-specification 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.

¹ See note 1 on page 3 for an explanation of alternative performance measures.  Adjusting items are not allocated to divisions for reporting purposes.  For further discussion of these items please refer to the section titled 'Reconciliation of KPIs and non IFRS measures' on pages 43 to 50 of this document.

Revenue increased by £23.9 million to £139.8 million (2021: £115.9 million) including a currency benefit of £8.9 million. Organic revenue was 12 per cent higher, with strong growth through the division's distribution partners a key driver. This business is in the sweet spot of enabling our customers to reach their sustainability goals with components for smart energy & city infrastructure and factory automation.

Historically, order visibility has been very limited, but more recently the order book has increased significantly reflecting strong underlying demand and also, customers committing orders further ahead to protect their supply chains and responding to lead time extensions. We have been careful to adjust our commercial terms, where possible, to orders that are non-cancellable, non-refundable and in some cases, non-reschedulable.

Adjusted operating profit increased by £5.4 million to £21.8 million (2021: £16.4 million) with a currency benefit of £1.7 million. The constant currency operating profit growth reflects the benefits of our self-help programme and the strong operational leverage on our revenue growth. We have benefited from our agility in adapting our pricing strategies to offset material and freight cost increases.

At our new facility in Plano, Texas we have invested in capacity and having substantially completed qualification, are now improving yields which is enabling volumes to be produced at higher rates. We are very focused on improving our customer experience.

There were a number of favourable developments during the year which will benefit the business, including:

·    We secured repeat business with a major US defence prime, for a sole source, opto isolator used on power-up boards installed as safety critical, precision navigational aids, for guided defence systems

·    The U.S. team secured two different optical sensor opportunities with a medical device company, for use in a blood analyser. These sensors are used in the disposable test vessel cartridges designed for the Werfen GEM 5000 blood gas analyser. The sensors are critical to detect the proper loading of the cartridge as its alignment with the analyser optics, for spectral measurements, is essential for proper execution of the test.

·    Schneider Electric - We secured a contract to provide a thick-film resistor that met the high-reliability requirements of a Schneider Gas-insulated switchboard utilised in electricity distribution. The end customer for this product is France's main electricity distribution company which supplies 95 per cent of the market.

OTHER FINANCIAL INFORMATION

Summary of Adjusted results

To assist with the understanding of earnings trends, the Group has included within its non-GAAP alternative performance measures including adjusted operating profit and adjusted profit.  Further information is contained in the 'Reconciliation of KPIs and non IFRS measures' on pages 43 to 50. A reconciliation of statutory to adjusted profit numbers is set out on page 21.

A summary of the Group's adjusted results is set out below:

Cash flow, net debt and leverage

The table below sets out Group cash flows and net debt movement:

1      In 2021 Restructuring, acquisition and disposal related costs' comprises proceeds on surplus property disposals of £9.1m

At 31 December 2021 the Group's net debt was £138.4 million (31 December 2021: £102.5 million). Included within net debt was £23.1 million of lease liabilities (31 December 2021: £22.6 million).  

Consistent with the Group's borrowing agreements, which exclude the impact of IFRS 16 Leases, leverage ratio was 2.0 times at 31 December 2022 (31 December 2021: 1.7 times). Net interest cover was 7.4 times (31 December 2021: 13.5 times). The Group's debt covenants state that the leverage ratio must not exceed 3.0 times and that interest cover must be more than 4.0 times.

Reconciliation of Adjusted results

Details of the reasons for and uses of adjusted measures are included in the section titled 'Reconciliation of KPIs and non IFRS measures' on pages 43 to 50 of this announcement.

Cautionary statement

This report contains forward-looking statements. These have been made by the Directors in good faith based on the information available to them up to the time of their approval of this report. The Directors can give no assurance that these expectations will prove to have been correct. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. The Directors undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.