British defence contractor Ultra Electronics Holdings PLC (LON:ULE) reported a drop in 2017 profits and confirmed it was pulling out of plans to merge with Sparton Corp after the US Department of Justice raised competition concerns.
In reaction, shares in the maker of military electronics tanked 12% to 1,300p in morning trade.
READ: Ultra Electronics shares spike on brighter 2018 outlook
The company posted a 10.4% drop in pre-tax profit to £60.6mln in the year ended 31 December 2017.
The decline reflected a £12.8mln charge stemming from its failed Sparton acquisition, contract delays, £8mln in legal fees related to the termination of an Oman contract and a £1.6mln impairment of an intangible asset.
Ultra ends Sparton deal
Ultra said in July that it would buy Sparton, which makes anti-submarine warfare devices used by the US Navy, for US$234mln. But its plans to create a major supplier in underwater warfare have been terminated after the US DoJ raised anti-trust concerns and delayed its final decision on the deal.
“This decision means that the relationship between Ultra and Sparton continues for now as joint venture partners through the ERAPSCO JV,” said executive chairman Douglas Caster
“Ultra has supplied the US Navy with sonobuoys since the 1940s, whether through its predecessors, ERAPSCO or other affiliates.”
Utlra had raised £134mln to part fund the acquisition of Sparton but said it will now return the proceeds through a share buyback.
Ultra hit by Oman contract loss
In 2015 the company lost its contract to update the IT systems at Oman airport, resulting in legal fees last year as it pursued claims against the customer.
Excluding items, underlying pre-tax profit dropped 8.4% to £110mln as revenue fell 1.3% to £775.4mln.
The group had already warned that profits and revenues would be lower than the previous year in a November trading update, blaming “mounting” funding pressures in the UK’s defence budget as the Ministry of Defence delays and cancels numerous programmes. The same month Rakesh Sharma stepped down as chief executive officer after 28 years at the company.
"2017 was a challenging year in the group's core defence markets and, as previously reported, Ultra experienced delays to a number of programmes and contracts relatively late in the year,” said Caster.
Order book strong but Ultra cautious on outlook
However, the order intake jumped 15.8% to £901.4mln and the group improved its cash conversion to 97% from 92% in 2016.
Ultra ended the year with an order book of £897.4mln, up 12.3% on the previous year with growth across all its divisions including aerospace and infrastructure, communications and security and maritime and land.
The company said it started the new year with “good visibility” and an opening order book of £914mln, excluding more than £1.5bn of expected mid-term orders from long-term positions. It has an opening order cover on expected 2018 revenues of over 62%.
Ultra raised its total dividend by 3.8% to 49.6p.
But the group issued a cautious outlook on 2018, saying it expects a foreign exchange headwind and predicts revenue will be weighted towards the second half.
“As previously disclosed, the board's expectations remain for the group to make modest progress in underlying revenue and operating profit at constant currencies in 2018 after investing for the future through increased R&D and capital expenditure,” Carter said.
Liberum remains bullish
Liberum maintained its 'buy' rating on the stock, saying it expects a modest downgrade to consensus forecasts on 2018 earnings but is "encouraged by improving cash generation and orders."
"FY17 headline results were in-line with revised guidance given in November," it added.
UK defence spending review uncertainty
AJ Bell investment director, Russ Mould, said it was fair to say 2017 was an appalling year for Ultra.
"Last year saw Ultra experience weak cash generation and subsequent downgrade to revenue and profit guidance amid a tough UK Ministry of Defence spending environment," he said.
"Uncertainty is likely to hang over the business near-term until the previously delayed UK defence review is completed in the summer."