Proposed acquisition of Sparton Corporation and associated equity placing. 7 July 2017

Transcription

1 Proposed acquisition of Sparton Corporation and associated equity placing 7 July 2017

2 Overview SLIDE 2 Acquisition of Sparton Corporation for $23.50 per share for a total equity value of $234.8m FY2016 EV/EBITDA multiple of 7.6x adjusting for targeted cost savings Ultra has 50/50 Sonobuoy Joint Venture with Sparton s Engineered Components and Products division (ECP) Compelling strategic rationale The ECP division is an excellent strategic fit with Ultra s existing activities in a segment in which the Ultra Group has extensive experience and well established customers Enhances Ultra s continuing relationship with a major customer Increases exposure to the growing sonobuoy segment Attractive financial returns for Ultra Allows Ultra to secure an important revenue and earnings stream Potential to achieve $9m of cost savings ECP s 2016 pro forma operating margin was below Ultra s USSI equivalent Prudent financing structure, including 9.9% equity placing, with pro-forma FY 2016 expected leverage of 2.4x 1, targeting c1.5x by end 2018 Strategically and financially attractive acquisition that preserves the status quo 1 - Prior to disposal of MDS

3 Sparton and ECP division SLIDE 3 Sparton NYSE-listed Sparton is comprised of two divisions ECP Engineered Components & Products (ECP) Manufacturing & Design Services (MDS) Ultra is in advanced discussions with several interested parties to dispose of MDS by the end of Q Sparton's adjusted EBITDA was split 65% ECP and 35% MDS 2 Serves US DoD and allied foreign militaries, civil government agencies, prime contractors and tier 1 suppliers ERAPSCO has a long-standing position as a provider of all current production sonobuoys to the US Navy Sonobuoy revenues account for 76% of ECP s revenues in year-ended June 2016 Ruggedised displays and sensor sales accounted for the remainder Sales to the US Navy accounted for 61% of ECP s revenues in year-ended June 2016 Operates three facilities located across Eastern North America, including facility in De Leon Springs, Florida, with approximately 600 employees $500m $400m $300m $200m $100m $0m Sparton Revenue $246m $109m $264m $282m $136m $155m ECP MDS Sparton Adjusted EBITDA Geographical revenue split (yearended 3 July 2016) 12% Source: Sparton SEC filings $35m $34m $34m* $16m $29m ECP MDS Group Adjusted EBITDA * Includes $11m of corporate overhead Source: Sparton SEC filings US Revenue Non-US Revenue 2 Sparton SEC filing year-ended 3 July % Source: Sparton SEC filing

4 Ultra s position in the sonobuoy segment SLIDE 4 Sonobuoys are a critical part of the Anti-Submarine Warfare mission An expendable device used to detect, identify, localise and track submarines Typically air-launched from aircraft Significant barriers to entry to the sonobuoy segment Ultra is a frontrunner in the US, UK and Canadian sonobuoy segment Operating in the technology field for decades Sonobuoys are one of Ultra s largest capabilities and sit within Underwater Warfare segment which represents 25% of 2016 Group revenue ERAPSCO 50/50 JV between Ultra and ECP since 1998 Awarded a sole source five year IDIQ contract for US Navy sonobuoy production Purchase orders of $664m in first 4 years with $160m expected to be added in FY18 All current production US Navy sonobuoys are jointly produced by Ultra and ECP Works closely with the US Navy to value engineer the sonobuoy designs, a relationship not easily replicated Ultra s existing US sonobuoy activities have delivered material annual revenue growth over the three years to 31 December 2016

5 Compelling strategic rationale SLIDE 5 Excellent strategic fit with Ultra s existing activities in a segment in which the Ultra Group has extensive experience and well established customers Acquisition of ECP will enhance Ultra s core capability in the design, manufacture and sale of sonobuoys Given existing relationship, Ultra Board is confident about the integration of ECP Maintain all ECP manufacturing sites to ensure security of supply for US Navy Creation of a centre of design excellence following the Acquisition Enhances Ultra s continuing relationship with a major customer ERAPSCO JV provides extensive knowledge, experience and proven performance to its major customer, the US DoD The US Congress has expressed concerns over supply from a non-allied country; the acquisition of Sparton preserves the status quo for the US Navy and ensures delivery of critical assets is not interrupted

6 Compelling strategic rationale (contd) SLIDE 6 Increases exposure to the growing sonobuoy segment Growing demand for sonobuoys in response to rising global tensions The US Navy P-8 Maritime Patrol Aircraft (MPA) is being sold in increasing numbers to US allies, and is only compatible with US sonobuoys Potential international competitors face significant barriers to entry Ultra s current US operations have an addressable budget estimated at approximately $80m US Government Sonobuoy budget $210m Attractive financial returns for Ultra Expected to be earnings enhancing in year-ending 31 December 2018 Post-tax ROIC in excess of Ultra s cost of capital in year-ending 31 December 2019 $200m $190m $180m $174m $184m $191m $195m $199m Allows Ultra to secure an important revenue and earnings stream Supports Ultra s position in the Underwater Warfare segment $170m $160m 2018F 2019F 2020F 2021F 2022F Source: US President s budget 2017

7 Transaction highlights SLIDE 7 Deal structure Ultra to enter into conditional merger agreement to acquire Sparton US$23.50 per share, total equity value of US$234.8m Ultra intends disposing of Sparton s MDS division by the end of Q and is in advanced discussions with several interested parties Approvals, terms and timing Class 1 transaction for Group so Ultra shareholder approval (>50%) required. Circular to be posted in due course Sparton shareholder approval threshold >66.6% Completion of Acquisition is targeted by 1 January 2018 Obtain approvals from relevant regulators and antitrust authorities (incl. HSR, CFIUS) Ultra equity placing Ultra Class 1 circular published Ultra GM to approve acquisition Regulatory approvals (HSR, CFIUS) Sparton shareholder approval Completion targeted by 1 January 2018

8 Potential to achieve $9m of cost savings SLIDE 8 Total identified cost savings of c$9m by year-ending 31 December Category Cost Savings ($m) Headcount 3.4 Legal/professional fees 2.3 Facilities 0.8 Board related costs 0.5 Other costs 2.0 Total 9.0 $6m of cost savings to be achieved in 2018, rising to a total of $9m in cost savings by the end of 2019 Enable Ultra Directors to target operating margin for ECP above the Ultra Group s average margins One-off exceptional cost to achieve cost savings of approximately $4m Reporting into Maritime and Land Division, under leadership of its Divisional President 3 - This assumes Ultra disposes of MDS by the end of Q Should the disposal of MDS not occur, or take materially longer than expected, the level of anticipated costs savings will be lower in the year-ending 31 December The date of disposal of MDS is not expected to reduce the level of earnings accretion.

9 Financial impacts of acquisition of ECP SLIDE 9 ECP Targeting operating margin above the Ultra Group s average margin Targeting revenue growth in ECP of approximately 3% over the medium term Expected financial effects Combined impact of acquisition and subsequent disposal of MDS expected to be accretive to underlying earnings per share in year-ending 31 December 2018 Post-tax ROIC in excess of Ultra s WACC expected in year-ending 31 December 2019 Other financial information Increases in Ultra s capital expenditure, depreciation, research & development, and finance charge are expected to be 2m, 2m, 2m and 1m, respectively for the year-ending 31 December 2018 Combined Group effective tax rate expected to increase from 21.5% to 22.8% Cash generation Sparton has, on average, been cash generative in recent years Ultra s objective of returning to a through-cycle target of 85% cash conversion in the medium term unchanged Dividend policy 644m Subject to satisfactory trading prospects, future dividends will continue to be covered by between 2.5 to 3.0 times underlying earnings 142m

10 Funding SLIDE 10 Approximate 9.9% equity placing to raise approximately 133.7m net proceeds Equity funding Issuance of up to 7.0m new Ultra shares, to rank pari passu with existing ordinary shares Not conditional on Acquisition; if Acquisition of Sparton does not complete, the Board would consider whether appropriate to retain the funds for general corporate purposes or other capital investments, or to return to shareholders Debt funding Balance funded from Ultra s existing debt facilities $250m forward contract to be put in place. If Acquisition does not complete, use to repay part of Ultra s dollar borrowings or closed out Resultant leverage Targeting net debt / EBITDA of c1.5x by end 2018

11 Current trading SLIDE 11 Half-year trading in line with management expectations As previously stated, 2017 will be more heavily weighted H2 than normal Ultra No changes to foreign exchange assumptions Full year cash conversion in-line with previous guidance Positive order intake momentum book-to-bill ratio at 1.1x at end May 2017 ECP Improved trading performance in the 3rd Quarter ended 2 April 2017 Margin benefits of increased foreign sonobuoy sales offset by weaker performance in rugged electronics Sparton MDS Medical facilities continued to perform well Certain Mil/Aero and Industrial facilities experienced delays in a couple of customer programmes Sparton expects revenues for the 4 th quarter ended 30 June 2017 of between $97m and $101m at a gross margin of approximately 18% 4 4 Please refer to Appendix 4 of the Announcement detailing the basis of preparation of this statement

12 Summary SLIDE 12 Excellent strategic fit with Ultra's existing activities in a segment in which the Ultra Group has extensive experience and well established customers Strong strategic fit Enhances Ultra s continuing relationship with a major customer Increases exposure to the growing sonobuoy segment Allows Ultra to secure an important revenue and earnings stream Attractive financial returns Opportunity to deliver significant cost savings Accretive to underlying earnings per share in year-ending 31 December 2018 Post-tax ROIC in excess of Ultra s WACC expected in 2019 Sensibly financed Funded by approximate 133.7m equity placing and drawdown of existing debt facilities Targeting 2018 year-end net debt / EBITDA of c1.5x

13 Appendices SLIDE Geographic footprint 2. ECP products 3. Sparton financials 4. MDS overview

14 Geographic footprint SLIDE 14 Woodbridge, ON Segment ECP End Markets Ind Square Feet 21,000 1 WA Birdsboro, PA 2 Segment ECP End Markets Marine / Defence/Ind Square Feet 41,000 De Leon Springs, FL Segment 3 ECP End Markets Defense Square Feet 183,000 CA OR NV ID AZ UT MT WY CO NM ND SD NE KS OK MN IA MO AR WI Schaumburg, IL Headquarters 5 IL 4 IN TN MI KY OH WV 1 SC NC VA PA NY 2 MD VT NH NJ DE MA CT RI ME Columbia City, IN 4 MS AL GA Segment End Markets USSI Marine AK TX LA FL 3 Schaumburg, IL 5 Segment Headquarters Sparton HI Source: Sparton SEC Filings

15 ECP Products Undersea Warfare Solutions Rugged Electronics Precision Sensing & Measurement SLIDE 15 Example Products Sonobuoys and Undersea Warfare Products Rugged Electronics Inertial Sensors Brands Selected Customers Direct Foreign Sales

16 Sparton Group financials SLIDE $m $m $m Net Sales Cost of goods sold (339.2) (307.3) (271.6) Gross Profit Selling and administrative expenses (55.2) (47.0) (35.7) Internal research and development expenses (2.3) (1.5) (1.2) Amortisation of intangible assets (9.6) (6.6) (3.4) Restructuring charges (2.2) 0.0 (0.2) Reversal of accrued contingent consideration Impairment of goodwill (64.2) Legal settlement 0.0 (2.5) 0.0 Environmental rememediation (4.2) Operating (loss) income (51.8) Total other expense, net (3.7) (2.3) (0.6) (Loss) income before income taxes (55.5) Income taxes 17.2 (4.0) (6.6) Net (loss) income (38.3) Weighted average shares of common stock Basic 9,786,315 9,874,441 10,109,915 Diluted 9,786,315 9,885,961 10,141,395 $ $ $ Basic (3.91) Diluted (3.91) Other financial data Total assets Working capital Debt (including capital leases) Shareholders' equity Source: Sparton SEC Filings

17 MDS overview SLIDE 17 Vertically integrated manufacturing, engineering and design services partner focused on low volume, highly complex products Primarily serves OEM customer with highly regulated or demanding manufacturing requirements Operates in three core business areas Medical & Biotech, Military and Aerospace and Industrial Provides services across the entire EMS value-chain, often becoming embedded with OEM R&D departments at the initial concept development stage Nine facilities in the US and one in Vietnam $300m MDS Revenue growth $250m $200m $150m $208m $246m $264m $282m $100m $50m $0m Revenue Source: Sparton SEC filings

18 Important notice SLIDE 18 NOT FOR RELEASE, PRESENTATION, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES OF AMERICA, AUSTRALIA, NEW ZEALAND, CANADA, THE REPUBLIC OF SOUTH AFRICA, HONG KONG, SINGAPORE OR JAPAN OR ANY OTHER JURISDICTION WHERE TO DO SO MAY BE PROHIBITED OR UNLAWFUL. This document, any ancillary documents relating to it, any oral presentation and any question or answer session (together, the Materials ) have been prepared by Ultra Electronics plc ( Ultra") solely for informational purposes in connection with a presentation to be held in connection with the proposed acquisition by Ultra of Sparton Corporation ( Sparton ) by way of merger (the Acquisition ) and the associated proposed equity placing of new ordinary shares in the capital of Ultra (the "Offering"). 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19 Important notice SLIDE 19 The Materials are only addressed to, and are only directed at, persons: (a) in member states of the European Economic Area that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive 2003/71/EC ( Qualified Investors ); (b) in the United Kingdom that are (i) Qualified Investors and (ii) who have professional experience in matters relating to investments who fall within the definition of "investment professionals" in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") and/or to high net worth bodies corporate, unincorporated associations and partnerships and trustees of high value trusts as described in Article 49(2)(a) to (d) of the FPO and; (c) to those persons to whom it may otherwise be lawfully communicated (all such persons in (a), (b) and (c), together being referred to as Relevant Persons ). 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