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Stadium is trading ahead of expectations set by management at the time of its purchase. Acquired in April 2018 in a £46m deal, it sits higher up the value chain than TT, but operates in the same markets. Its industrial IoT offering is of particular interest. Manufacturers are currently rushing to equip facilities with sensors and networks in a bid to find efficiencies. In 2018, consultancy Bain predicted that there would be 20bn devices connected by IoT by 2020, while the industrial IoT market would double to $200bn (£153bn) by 2021. As a result of the acquisition, TT can now harness IoT to help factories by integrating its sensing technologies, and it has its eye on the logistics sector. The electronics engineer has established a dedicated IoT facility in China, while TT has introduced Stadium, which had harboured North American ambitions prior to the deal, to its customer base there, thereby cutting its subsidiary's expansion costs. And, so far, the deal is paying off. In eight months of ownership until TT’s 2018 year-end, Stadium contributed £42.8m and underlying operating profit of £4.3m; an operating profit margin of 10 per cent. 

Where Stadium targets revolution, Precision offers evolution for TT. Acquired in June for an initial $23.5m, it will mainly bolster the medical product offering, although TT has identified new opportunities in integrating electromagnetics into its aerospace and defence activities. Precision generated revenue of £10.2m in the seven months to the end of 2018, with underlying operating profit of £1.1m and an operating profit margin of 10.8 per cent. The impact of TT’s two acquisitions has therefore been profound. Despite neither giving a full-year contribution to 2018 results, they accounted for £36.4m of TT’s power and connectivity division’s full-year revenues, which came to £97.9m and 12 per cent of overall revenue.

The acquisitions will help the group to continue to raise returns, and have contributed to solid earnings forecast upgrades over the past 12 months. Over recent months, the company has focused on removing costs while fostering closer "strategic" relationships with clients. Working more closely with customers has helped it make smarter decisions about product development at the same time as it has increased research and development (R&D) spending – R&D rose to 5.6 per cent of turnover last year, compared with 4.6 per cent in 2017. Profits have also benefited from the group increasing sales from its relatively fixed cost base (so-called operational gearing) with organic sales growth of 6 per cent last year. The benefit of all this has been reflected in a rise in underlying operating margins to 7.8 per cent in 2018 from 4.3 per cent three years earlier. Meanwhile, the underlying return on invested capital of 11.5 per cent last year is marching towards TT's 2020 target of 12 per cent (see chart).

Following £116m of cash inflows in 2017 from the disposal of its transportation business, acquisition spending in 2018 saw the group swing from a £47m net cash position to net debt of £41.7m. Restructuring charges and one-off costs have weighed on reported numbers. There will be more costs, as broker Numis forecasts that TT will need to pay a one-off circa £9m towards Stadium’s pension scheme, along with around £5m in rationalisation payments, while new lease accounting rules are expected to deepen reported net debt by £20m. But comfort can be taken from TT's strong order book and solid cash conversion of 88 per cent last year – ahead of its 80 per cent target.