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TT Electronics Q&A: Increasing US market exposure with Torotel acquisition (LON:TTG)

TT Electronics plc (LON:TTG) Chief Executive Officer Richard Tyson and Chief Financial Officer Mark Hoad caught up with DirectorsTalk for an exclusive interview to discuss the acquisition of Torotel and how it fits in with the company’s strategy and future evolution.

Q1: Now, you’ve recently announced the acquisition of Torotel Inc. Richard, can you tell us more about the business that you’ve agreed to buy?

A1: Well, we’re delighted to have been able to announce the acquisition of Torotel, a deal that should close in Q4, I’m sure we’ll come on to that.

Torotel is an excellent fit for the business, they design and manufacture high reliability power electronics and electromagnetic assemblies so that’s very much moving up the value chain in the sort of products that TT Electronics do.

The price of the business is going to be $43.4 million worth of EV and the business itself is very much a US market defence-focused busines so the next 12 months of revenues should be around 85% defence, 12% commercial aerospace and the balance into other industrial markets.

The business itself has largely sole source positions, set in the US defence market which is the largest defence market in the world so we are delighted to get the opportunity to press TT’s business into that market area. They have program-related multi-year revenues on programs like the Patriot missile defence system and the F35 joint strike fighter bringing new customers into TT like Lockheed Martin and Raytheon and expanding our presence in Collins Aerospace and Northrop Grumman.

So, clearly, commercial aerospace has come down recently and we’ve factored that into the future because your revenue streams and the projections of the business but we do anticipate good growth and I guess, upside potential from the acquisition in four to five years’ time when commercial aerospace starts growing again.

The business itself is based in Kansas and that’s the main site, they have about 170 employees in another site in Pennsylvania and they’ve got really good strong track record of organic growth over the last few years so double digit organic growth track record. The business itself is just super complimentary to our existing business, giving us a real foothold into the North American market to press on with.

Q2: Mark, what’s the financial impact from this acquisition and why did you decide to fund the acquisition partly with equity and partly from debt?

A2: Today, Torotel is a low double-digit EBIT margin business, under our ownership, we expect margins to move into the mid to higher teams. As Richard says, it has also got multi-year program positions so that gives us good visibility of recurring revenues and it’s a business that’s highly cash generative.

We expect revenues to be flat in 2021 but to grow thereafter and a combination of the growth plus cost synergy benefits and revenue synergies that we expect to be able to deliver means that we expect Torotel  to exceed our 11% pre-tax return on capital hurdle in year three of our ownership.

As Richard said, the acquisition price is $43.4 million so roughly £34 million and we funded that partly through a placing so the placing raised £20 million and that’s a placing of 6.1% of our equity, the £14 million balance coming out of our existing debt facilities. We took that approach to funding so that we could maintain a prudent balance sheet position so post-completion, the transaction leverage will move to around 1.8 times on a proforma basis and as I say, that just prudent balance sheet position and means we can continue to invest in the rest of the business.

Taking account of the placing, the acquisition is modestly earnings accretive from the first full year of ownership.

Q3: Richard, how does it the acquisition of Torotel progress TT Electronics strategy and the future evolution of the TT Group?

A3: As we’ve spoken over the last few years, TT’s strategy is very much since the disposal of the automotive division has been to deploy our capital and organic growth investment into more attractive target markets that can give us a better chance of long term organic growth, increasing our differentiation higher value added product solutions as well, moving up the value chain and we’ve always been looking to increase our US market exposure.

So, over the last few years, we’ve been looking to build our position in medical and aerospace and defence and so, from our perspective, bringing in Torotel providing an opportunity to deliver high reliability engineered products to the US defence market is really exciting. Selling into a US blue chip customer base and adding some real scale to our engineering and operational capability in North America that we can share with our UK businesses too.

So, we anticipate some really exciting cross selling opportunities between customers, the sharing of technology, leveraging that to accelerate our product roadmap. For us, that just really means we anticipate an exciting time for growth going forward and to be able to do that in that in a post-COVID environment has been really, really good for the team to get onto the front foot and looking to progress the strategy for going forward.

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