Delivering Excellence Through
Innovation & Technology
Ricardo plc
Annual Report
& Accounts 2018
II Ricardo plc Annual Report & Accounts 2018
Group overview
1 Introduction
4 Order intake at a glance
5 Financial highlights
Strategic report
8 Chairman’s statement
10 Chief Executive’s statement
13 Our strategy and strategic objectives
14 Market overview
16 Strategic performance
18 Technical Consulting
24 Performance Products
26 Research and Development
28 Financial review
32 Our people
34 Corporate responsibility and sustainability
40 Risk management and internal control
41 Principal risks and uncertainties
43 Viability statement
Case studies
46 Creating sustainable airports
50 Software innovation for a resilient and secure
water supply
54 Towards zero-emissions freight in California
58 Safety, assurance and interoperability
62 An advanced transmission for the ultimate
super sports car
Corporate governance
68 Board of Directors
70 Corporate governance statement
76 Nomination committee report
77 Audit committee report
82 Directors’ remuneration report
104 Directors’ report
107 Statement of Directors’ responsibilities
Financial statements
110 Independent auditors’ report
116 Consolidated income statement
116 Consolidated statement of comprehensive
income
117 Consolidated and parent company statements
of financial position
118 Consolidated and parent company statements
of changes in equity
119 Consolidated and parent company statements
of cash flow
120 Notes to the financial statements
Additional information
162 Corporate information
163 Global emissions legislation
Who we are
Ricardo is a global engineering, technical,
environmental and strategic consultancy
business. We also manufacture and assemble
low-volume, high-quality and high-performance
products. Our ambition is to be the world’s
pre-eminent organisation focused on the
development and application of solutions to
meet the challenges within the markets of
Transport & Security, Energy and Scarce Natural
Resources & Waste.
Drawing on over 100 years of commitment to
research and development, Ricardo’s team of
over 3,000 engineers, consultants, scientists and
support staff, delivers innovative and class-leading
products and services for the benefit of a broad
client base.
Our clients include the world’s major
transportation original equipment manufacturers
and operators, energy companies, financial
institutions, and government agencies.
The delivery of our products and services is
made possible by our people, who are at the
heart of our business and who are the bedrock
of our success. Ricardo cultivates the talent and
the engineering and scientific excellence of its
professionals and invests in their development for
the benefit of the individual, for our organisation,
and for our stakeholders. At Ricardo, our
community is bound together by a simple desire
for developing solutions to complex problems,
and is driven by our corporate values of Respect,
Integrity, Innovation, and Passion.
This year
Waste
We are working on a high-
profile waste policy review
for the Environmental
Services Association ('ESA') –
the trade body representing
the UK’s resource and waste
management industry.
Active Response
Our new energy innovation
project, Active Response, is
trialling an electricity network
that automatically reconfigures
itself, moving spare capacity
to meet demand. This has the
potential to reduce carbon
emissions by 448,000 tonnes
by 2030 in the UK.
Emissions
Ricardo’s vehicle emissions
team deploys the latest
remote sensing technology
to measure the emissions
from over 300,000 vehicles.
Automotive
battery systems
Ricardo delivers its first
battery manufacturing
concept programme for
a prestigious electric
sports car.
JAC HyBoost 48V
Hybrid M4 MPV
Ricardo completes
multi-year development
programme to deliver
JAC’s first 48V enabled
vehicle.
Scarce natural
resources
Notable wins have been
secured under the Circular
Economy Business Support
Framework, which assists
SMEs to realise the benefits
of adopting circular economy
approaches to their processes,
products
and services.
Cyber security
Our Centenary Innovation
Centre hosts the 2017
HackTrain event, with teams
of software developers and
designers taking on various
coding challenges set by the
UK rail industry.
Winter Olympics
Ricardo Rail plays a key
role in readying South
Korea's latest high-speed
railway in time to serve the
venues of the 2018 Winter
Olympic Games.
Delivering Excellence Through
Innovation & Technology
5%
5
1%
3%
4
3
28%
2
£380.0m
Revenue
1. Cost of sales: £241.1m
2. Administrative expenses net of
other income: £108.2m
3. Net finance costs: £2.2m
4. Taxation: £9.6m
5. Profit for the year: £18.9m
1
63%
Celsius
The Celsius project, which
investigates factors
affecting the temperature
of transformers and cables
in electricity sub-stations,
has collected 130 million
measurements.
Defence
Acquisition and integration
of Control Point Corporation
– now known as Ricardo
Defense, Inc. – into the
Group’s existing Ricardo
Defense business in the US.
Maglev
Ricardo Rail helps
ensure that Beijing's
first magnetic levitation
rail system is ready for
operation.
Battery
development
Ricardo is awarded a multi-
million Euro programme
from a premium German
automaker for full
service battery test and
development.
High-performance
engine assembly
Ricardo's production
exceeds 120 engines per
week as advanced end-of-
line test capabilities go live.
Bugatti Chiron
Successful first year of
transmission production
for the groundbreaking
1,500 hp Bugatti Chiron.
Eurostar
Ricardo Certification helps
pave the way for Eurostar's
first-ever direct London-
Amsterdam service.
Railway Challenge
winners
Our UK graduates collect
first prize in the annual
IMechE contest to design
and build a miniature
locomotive.
Delivering Excellence Through Innovation & Technology 1
Where we are
3,000+ dedicated and talented people in our global team of experts situated in
key locations around the world.
Offices
Technical Centres
Our people
3,000+ people
85 nationalities 48 sites 21
countries
Engineers
Consultants
Scientists
2 Ricardo plc Annual Report & Accounts 2018
What we do
Technical Consulting
Automotive
systems
Rail
consulting
Environmental
consulting
Strategic
consulting
Independent
assurance
We provide engineering, technical, environmental and strategic consultancy services to clients across a range of market sectors.
We also provide accreditation and independent assurance services to clients in the rail sector.
Performance Products
Niche
manufacturing
Computer-aided
engineering software
Simulation
software
We manufacture and assemble high-quality prototypes and niche volumes of complex engine, transmission and vehicle
products. We also develop advanced virtual engineering tools, such as computer-aided engineering and simulation software
for conventional and electrified powertrains, as well as complex physical systems such as water networks.
Who we work with
Original
equipment
manufacturers
Energy
companies
Financial
institutions
Government
agencies
Delivering Excellence Through Innovation & Technology 3
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Order intake at a glance
Order intake for the year ended 30 June 2018 of £413m split by:
Our operating segments
Our businesses aggregate into two distinct reportable
operating segments.
Ricardo plc External Order Intake
Ricardo plc External Order Intake
22%
2
Ricardo plc External Order Intake
Ricardo plc External Order Intake
Our market sectors
Our strategy of diversification into adjacent market sectors has
continued to provide balance to our order intake.
Ricardo plc External Order Intake by Market Sector
Ricardo plc External Order Intake by Market Sector
3%
6
12%
5
Ricardo plc External Order Intake by Market Sector
Ricardo plc External Order Intake by Market Sector
35%
1
Ricardo plc External Order Intake by Product Group
Ricardo plc External Order Intake by Product Group
Ricardo plc External Order Intake by Product Group
Ricardo plc External Order Intake by Product Group
20%
4
1
78%
3
21%
2
9%
1. Technical Consulting
2. Performance Products
Ricardo plc External Order Intake by Geography
Ricardo plc External Order Intake by Geography
1. Automotive
2. Off-Highway & Commercial Vehicles
3. High-Performance Vehicles & Motorsport
4. Rail
5. Energy & Environment
6. Defence
Ricardo plc External Order Intake by Customer
Ricardo plc External Order Intake by Customer
Our geographies
The operations of the business in our selected market sectors
span many different regions of the world.
Ricardo plc External Order Intake by Geography
Ricardo plc External Order Intake by Geography
1%
7
7%
6
7%
5
34%
1
Our customers
Our order intake arises from a customer list that includes the world’s
Ricardo plc External Order Intake by Customer
major transportation original equipment manufacturers and operators,
energy companies, financial institutions and government agencies.
Ricardo plc External Order Intake by Customer
1%
15
13%
14
16%
1
8%
13
12
17%
4%
2
4%
3
4
4%
5
4%
6
3%
3%
7
8
2%
2%
2
27%
9
10
2%
11
17%
1-10. Top 10
11. UK
12. Mainland Europe
13. North America
14. Asia
15. Rest of the World
12%
4
3
12%
1. UK
2. Mainland Europe
3. North America
4. China
5. Japan
6. Rest of Asia
7. Rest of the World
4 Ricardo plc Annual Report & Accounts 2018
Financial highlights
Order book
Order intake
£288m
+16%
£413m
+13%
Revenue
£380.0m
+8%
2018
2017
2016
2015
2014
288
2018
413
2018
380.0
248
231
2017
2016
2015
2014
140
142
£ million
366
361
252
259
2017
2016
2015
2014
352.1
332.4
257.5
236.2
£ million
£ million
Underlying(1) profit
before tax
£39.0m
+2%
Underlying(1)(2) basic
earnings per share
57.3p
+3%
Dividend per share
(paid and proposed)
20.46p
+6%
2018
2017
2016
2015
2014
39.0
2018
57.3
2018
38.3
37.7
2017
2016
2015
2014
26.8
24.6
55.7
55.2
2017
2016
2015
2014
42.4
38.7
20.46
19.3
18.1
16.6
15.2
£ million
pence per share
pence per share
Statutory profit
before tax
£28.5m
-11%
Statutory basic
earnings per share
35.2p
-25%
Net (debt)/funds
£(26.1)m
+31%
2018
2017
2016
2015
2014
28.5
32.2
33.0
22.9
23.5
2018
2017
2016
2015
2014
35.2
2018
(26.1)
46.8
2017
(37.9)
48.6
(34.4)
2016
2015
2014
35.6
36.9
14.3
12.6
£ million
pence per share
£ million
(1) Underlying measures exclude the impact on statutory measures of specific adjusting items, comprised of amortisation of acquired intangible assets of £4.3m (2017: £4.0m), acquisition-related
expenditure of £1.4m (2017: £1.7m) and reorganisation costs of £4.8m (2017: £0.4m). Underlying measures are considered to provide a more useful indication of underlying performance and trends
over time and can be found, together with a reconciliation to equivalent statutory measures, on the Consolidated Income Statement in the financial statements on page 116.
(2) Underlying earnings also exclude the tax impact on statutory earnings of specific adjusting items of £(0.9)m (2017: £(1.4)m), together with the impact of non-recurring tax charges of £2.2m for the
derecognition of net deferred tax assets as a result of the reorganisation activities during the year.
Further detail on specific adjusting items is given in Note 4 to the financial statements on page 130.
Delivering Excellence Through Innovation & Technology 5
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Strategic
report
8 Chairman’s statement
10 Chief Executive’s statement
13 Our strategy and strategic objectives
14 Market overview
16 Strategic performance
18 Technical Consulting
24 Performance Products
26 Research and Development
28 Financial review
32 Our people
34 Corporate responsibility and sustainability
40 Risk management and internal control
41 Principal risks and uncertainties
43 Viability statement
Delivering Excellence Through Innovation & Technology 7
Chairman’s statement
The Group has delivered growth
in revenue and profit before tax
in the face of some challenging
market conditions, particularly in UK
Automotive. This demonstrates the
success of the Group’s diversification
strategy and strong performance
from its recent acquisitions.
expectations. The successful sale of
test assets in the US and Germany has
streamlined the operations in those
countries, making the Group more
efficient and aligned to customer
demands.
The Group’s performance against its
strategic objectives is outlined on pages
16 and 17. We also continued to invest in
research and development (as described
on pages 26 and 27), in our people and in
our facilities.
People
I would like to thank all of our employees
for their hard work and professionalism
over the last year. As set out on pages 32
and 33, Ricardo is a people business and
our employees underpin everything that
the Group achieves.
Notable achievements during the
year have included Ricardo Strategic
Consulting being named by Forbes as
among America’s leading management
consultants, for the third consecutive
year. Ricardo was also recognised by
the Ford Motor Company with a Gold
World Excellence Award for exceeding
expectations and achieving the highest
levels of excellence in quality, delivery,
value and innovation.
Ricardo Energy & Environment was
recognised by the United Nations’
Task Force on Emission Inventories and
Projection (‘TFEIP’) for compiling the
most complete emissions inventory: in
addition, it was acknowledged by the
Financial Times as one of the UK’s leading
management consultants for 2018.
In January 2018 I was delighted to
present the Ricardo Young Engineer/
Scientist of the Year Award to Anas Obaid
for his work in our Ricardo Rail business.
Anas is based in our Dubai office and
has demonstrated a high level of
responsibility: he has had a significant
level of client interface in a challenging
growth region for Ricardo, even though
he is still early in his career.
I would also like to congratulate
all those other individuals and team
members who have won awards under
Sir Terry Morgan CBE – Chairman
Results
For the year ended 30 June 2018, the
Group delivered revenue of £380.0m and
underlying profit before tax of £39.0m,
together with an underlying basic
earnings per share of 57.3 pence.
As set out in more detail in the Chief
Executive’s Statement on pages 10 to 12
and the Financial Review on pages 28
to 31, the Group achieved good overall
order intake and increased revenue, with
modest growth in underlying profit
before tax and earnings per share.
Challenging conditions in certain
markets have resulted in mixed
performance across the divisions,
but overall the Group has delivered
underlying profit growth, demonstrating
its resilience and the success of its
diversification strategy.
The Group has continued to build on
its strategic objectives through carefully
targeted acquisitions and disposals. The
acquisition of Control Point Corporation
has had an instant positive impact,
delivering performance in line with
8 Ricardo plc Annual Report & Accounts 2018
Chairman’s statement
Ricardo Rail's Anas Obaid (centre) receives the Ricardo Young Engineer/Scientist of the Year Award
the various Ricardo recognition
programmes during the year, together
with those members of staff who have
gained academic success or peer-group
recognition in their chosen career paths.
Corporate governance
The Board firmly believes that
robust corporate governance and
risk management are essential to
maintain the stability of the Group
and its financial health. I am reporting
separately on Corporate Governance on
pages 70 to 75 of this Annual Report.
I am delighted that the FTSE4Good
Index Series has confirmed Ricardo’s
continued inclusion for demonstrating
strong Environmental, Social and
Governance (‘ESG’) practices. This
continued
achievement
bears testament
to our
commitment
to the highest
standards of
corporate governance, which ultimately
produces a better business and
supports long-term performance.
The Board
Ian Lee retired from the Board following
the close of the AGM on 8 November
2017 and we thank him again for his
contribution to the Board and guidance
as Chair of the Audit Committee. Ian was
succeeded by Bill Spencer from this date.
Bill has already overseen the audit tender
process, following which the Board will
be recommending KPMG LLP as Ricardo’s
external auditors for shareholder
approval at our AGM in November 2018.
Details of the audit tender process are
set out on page 80 of this Annual Report.
I would like to take this opportunity to
thank PricewaterhouseCoopers LLP for
all their years of service as auditors to
Ricardo plc.
There have been no further changes
to the Board and I would like to thank
each of our Non-Executive Directors for
their counsel during the year.
Dividend
The Board has declared a final dividend
of 14.71 pence per share to give a total
dividend of 20.46 pence, an increase of
6% on the prior year. This is in line with
the Board’s policy to pay progressive
dividends and reflects its continued
confidence in the prospects of the Group.
Outlook
The Ricardo strategy is underpinned by
trends which will affect an ever-increasing
number of people around the globe, with
a growing population, mass urbanisation,
poorer air quality, climate change,
stringent emissions legislation and natural
resource scarcity.
We enter the new financial year
with renewed confidence and despite
an uncertain political and economic
climate in the year ahead, Ricardo is well
positioned for future growth with another
record year-end order book and a strong
pipeline of opportunities across all our
sectors.
Sir Terry Morgan CBE
Chairman
Delivering Excellence Through Innovation & Technology 9
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Chief Executive’s statement
In this financial year, Ricardo saw solid revenue growth
and an increase in the order book to record year-end
levels. We also successfully acquired and integrated
Control Point Corporation. Our global presence and
strategy of sector diversification helped the business to
mitigate the continued impact of uncertainty currently
in the UK market. Our growing order intake, particularly
in Asia, reflects our clients’ continued demand for our
high-quality products and services.
Our test facilities in Chicago and Southern Germany
were sold during the year to ensure we continue to
move with the trend towards electrification. Actions
were taken in our UK Automotive business to respond
to issues relating to a disrupted flow of orders in
the second half of the year and a small number of
challenging projects relating to the new WLTP
emissions legislation.
We enter the new financial year with a more agile
business and a confident and positive outlook. Ricardo’s
global capabilities and presence in a number of growing
markets, together with its strong order book, all provide
a solid foundation for continued growth.
Dave Shemmans – Chief Executive Officer
Strategy
Ricardo has developed into a diversified
consultancy, manufacturing and product
assembly business, primarily serving
the automotive, rail, and environmental
markets, and with a balanced portfolio of
short- and long-term programmes.
We have expanded and adapted
the business through organic and
acquisitive actions and our engineering
and consulting businesses are all
linked by common long-term trends –
urbanisation, the management of scarce
natural resources, emissions control, and
climate change. These are the drivers
of growth in the markets we serve.
Our consulting businesses also share
common strategic, engineering and
technical competencies, which allow
us to deliver value-enhancing services
and products to our clients, pulling in
expertise from across the Group.
and assurance contracts in countries such
as South Korea, China and Taiwan.
Reduction in CO2 remains a top global
priority and we have seen increased
emphasis on air quality driven by the
public debate on NO2 emissions. In the
transportation sector, this supported
the continued increase in demand for
both the electrification of vehicles and
improved efficiency of the combustion
engine, as well as innovative and more
efficient methods of vehicle operation,
such as autonomous vehicle technology.
Also in this year, the global debate on
waste management, sustainability and
a circular economy has put particular
emphasis on the use of plastic and plastic
waste, with a number of countries and
international organisations developing
strategies to reduce the use of plastic and
increase the recyclability of plastic waste
to reduce pollution.
This year the increase in infrastructure
Ricardo has the strategic and
spending continued unabated in Asia
and benefited our Rail business, which
won a number of consulting, certification
technological competencies to support
clients all over the world to develop
innovative solutions that address these
global issues. Our Automotive business
has helped its clients address the
challenges of electrification, through
the application of Ricardo’s technology
and experience in electrified vehicle
development. Our Energy & Environment
business has worked with cities and
international organisations around the
world to establish long-term and cost-
effective strategies and solutions to bring
about significant improvements in local
air quality and the management of water
as a scarce natural resource, as well as
minimising the environmental impact of
plastic and increasing its reuse.
Our people are critical to the delivery
of our strategy, so ensuring that they
have the right skills, technologies and
assets is key to the agility and adaptability
of our business. We invest in our people
through apprenticeship programmes,
graduate recruitment, and industry
hires and we invest in the research and
development of new technologies, both
internally and through technological
partnerships.
10 Ricardo plc Annual Report & Accounts 2018
Chief Executive’s statement
Further information on the execution
of our strategy can be found on pages 16
and 17.
Highlights from the year
We closed the year with good order
intake of £413m and a record year-
end order book of £288m. A strong
contribution to the growth in order intake
came from our Rail and Automotive
Technical Consulting businesses in Asia,
and our Performance Products business,
within which we were also pleased to
receive the first orders for the High-
Mobility Multipurpose Wheeled Vehicle
(‘HMMWV’) brake kit programme in
the US. We also saw strong order intake
relating to electric vehicles. The Group
saw growth in revenue of 8% to £380.0m
(2017: £352.1m) and in underlying profit
before tax of 2% to £39.0m (2017: £38.3m).
Further details on the results for the year
are provided in the Financial Review on
pages 28 and 31.
Despite the good overall order intake
and revenue growth for the Group,
the underlying operating profit did
not grow at the same rate. Although
our Automotive business in the US
ended the year with a loss that was
a considerable improvement on the
prior year, this was offset by the impact
of a challenging year in our European
Automotive business. This was caused
Ricardo Software is able to apply its automotive simulation and analysis tools to the water industry
(see case study 'Software innovation for a resilient and secure water supply' on pages 50 to 53)
by both a reduced level of orders in
the UK driven by market uncertainty,
together with reduced margins on the
delivery of a small number of challenging
projects in the year, including the
calibration of engines to be compliant
with latest European emission standards.
Towards the end of the financial year
we welcomed the return of order intake
in the European Automotive business
to more normal levels. In addition, our
Energy & Environment business increased
its headcount in anticipation of growth
beyond that which was achieved, leading
to performance that was lower than
expectation.
This year we have undertaken a
number of activities to increase the
operational efficiency and agility of our
Automotive businesses across the globe,
which impacted performance in the year.
We have completed the reorganisation
of our operations in Germany, with the
sale of our test operation in Schechingen,
while in the US we have sold our Chicago
Technical Center and upgraded and
refocused our test capability at our
Detroit Technical Center.
Earlier in the year we completed the
acquisition of Control Point Corporation,
subsequently renamed Ricardo Defense,
Inc. The business brings additional
Ricardo assisted with the design,
development, and now the
manufacture of the transmission for the
1,500 hp Bugatti Chiron (see case study
'An advanced transmission for the ultimate
super sports car' on pages 62 to 65)
Delivering Excellence Through Innovation & Technology 11
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Chief Executive’s statement
highways of California – a part of
the world that is at the forefront of
reducing emissions.
• Safety, assurance and
interoperability: Ricardo Rail serves
the international rail industry with a
comprehensive portfolio of technical
competencies to support some of
the most challenging aspects of
rail system engineering. In addition,
Ricardo Certification provides
independent assurance services to the
rail industry. In South Korea, Ricardo
is proud to have played its part in the
preparations for the Pyeongchang
2018 Winter Olympics by performing
the independent safety assessments of
the Automatic Train Protection (‘ATP’)
system on the 60km Pyeongchang-
Gangneung section of the new build.
In parallel, Ricardo was also appointed
as the Independent Safety Assessor
for the signalling technology of the
new Beijing S1 ‘maglev’ line – the first
in the Chinese capital to operate with
magnetic levitation.
• An advanced transmission for the
ultimate super sports car: Building
on its longstanding relationship with
Bugatti, Ricardo has assisted with
the design, development, and now
the manufacture of the advanced
transmission for the ground-breaking
1,500 hp Bugatti Chiron. Ricardo
applied technical solutions from
its Formula 1 activities, as well as
techniques, advanced materials and
innovative manufacturing processes
derived from the aerospace sector.
Outlook
We enter the new financial year with
a more agile business and a confident
and positive outlook. Ricardo’s global
capabilities and presence in a number of
growing markets, together with its strong
order book, all provide a solid foundation
for continued growth.
Dave Shemmans
Chief Executive Officer
Supporting the sustainability of airports (see case study 'Creating sustainable airports' on pages 46 to 49)
clients and expertise in programme
management, software development
and cyber security, and enhances our
ability to provide clients in the classified
US defence sector with a more extensive
range of products and services. The new
business has performed strongly and
its integration into our existing Defence
business is progressing well.
The continued increase in digitalisation
and connectivity technologies makes
cyber security critical for governments
and businesses across many industries.
We have signed two agreements with
Roke to drive towards improved cyber
resilience and deliver world-class and
trusted cyber assurance solutions for
clients within the transportation sector,
and in critical commercial and national
infrastructure sectors. These solutions will
help our clients to protect their products,
systems and businesses from cyber risks.
Ricardo’s success is a result of our
people, their skills and their technical
expertise, innovation and motivation.
Examples of how Ricardo’s community
has delivered excellence and created
value for its clients across the world are
summarised below and presented in the
Case Studies section between pages 44
and 65.
• Creating sustainable airports:
Ricardo’s Energy & Environment
infrastructure team advises airport
operators on how to meet the
challenge of managing demand for
12 Ricardo plc Annual Report & Accounts 2018
rapid growth in air transportation
while minimising the environmental
impact of airport operations. Ricardo
assists airports in the UK and across the
world in a number of areas critical to
the sustainability of their operations,
including air quality, noise and
greenhouse gas (‘GHG’) emissions and
water treatment strategy.
• Software innovation for a resilient
and secure water supply: Ricardo’s
Software business, together with
the water practice of our Energy &
Environment business, is working
with Southern Water on a research
and development project to adapt
Ricardo’s IGNITE software – an
advanced form of complex system
design and optimisation software
– and apply it in the water sector
to enable the simulation of water
distribution networks across cities
and wider regions. Southern Water
intends to use the new water system
simulation package as a strategic tool
to guide future capital investment
decisions to deliver security of supply
and quality of service to its clients in
the future.
• Towards zero-emissions freight
in California: Experts from Ricardo
are helping regulators, technology
developers and truck manufacturers
in programmes to put zero- and
near-zero-emissions trucks onto the
Our strategy
Our mission is to be the world’s leading organisation for engineering, technical
and environmental consultancy within the markets of Transport & Security,
Energy, and Scarce Natural Resources & Waste.
Rapid
Urbanisation
Air Quality and
Climate Change
G o v e r n m e
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Policy
Global Engineering &
Environmental Consultancy
Consulting
I
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Engineering
Transport
& Security
Energy
Scarce Natural
Resources & Waste
Strategy | Advice | Assurance | Engineering | Product
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Our People
elivering Excellence Through In n o v a t
Product
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e
i o n & T
See pages 10 and 11 for further information.
Energy Security
and Sustainability
y
r
t
s
u
d
n
I
Connectivity
and Intelligent
Devices
Natural
Resource Scarcity
Strategic objectives
2 Risk
1 Performance
3 World-class
growth
Profitable growth
delivered by
focusing on future
market demands
driven by technology
change, client needs,
and prevailing or
impending policies
and regulation
mitigation
Reducing risk through
the avoidance of
business cyclicality
and external
dependency, whether
geographic, technical,
industry sector or
client-related
talent
Ensuring an
environment which
attracts, develops
and motivates a
diverse, world-class
team and fosters
industry thought
leadership
4 Operational
excellence
Maintenance of an
optimised cost base
through an efficient
global operation and
the development
of leading-edge
tools, processes
and capabilities to
maximise value from
our resources
5 Added value
for clients
Provision of in-
demand products
and services through
our commitment
to market-
leading research,
development
and innovation to
provide maximum
and enduring
benefits to our
customers
See pages 16 and 17 for further information.
Delivering Excellence Through Innovation & Technology 13
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Market overview
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Rapid
urbanisation
Air quality and
climate change
Energy security
and sustainability
• Growth in international high-speed
rail alongside increased expenditure
in urban mass-transit systems;
• Increasing demand for autonomous
and intelligent transport
technologies;
• Development of smart cities; and
• Increasing demand for solutions
which improve energy efficiency
and reduce carbon emissions, while
promoting resilience of both the
security of supply and the price of
energy.
• Air quality identified as a key global
• Government and consumer focus
health concern;
• Increasingly challenging long-term
greenhouse gas emissions targets set
as part of Paris Agreement;
• Increasing number of cities around
the world banning diesel and petrol
vehicles over the next 10 to 20 years
to reduce pollution;
• Continued interest in alternative
fuels, hybrid technologies and
electrification; and
• Stricter fuel economy and CO2
regulations in most developed
countries.
on renewable energy options (wind,
tidal, solar, and geothermal);
• Consumer demand shifting to a
greater reliance on electrified end
uses as electric vehicles and heat
pumps become alternatives to
petroleum-fuelled vehicles and
natural gas heating; and
• Focus on decarbonisation of the
energy sector and development of
active carbon capture systems.
o
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a
c
i
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• Working with cities across the world
on policy, optimisation, validation
and integration of smart city
systems;
• Recognised industry solutions
provider for vehicle electrification
and autonomous vehicle systems;
• Technology leadership in vehicle
fuel economy, engines, drivelines,
lightweight materials, powertrain
electrification and battery electric
vehicles;
• Respected international authority on
urban air quality;
• Provider of consulting and
• Longest established specialist air
engineering assurance services for
the rail sector; and
• Ricardo web-based urban roadmap
tool helps city authorities develop
urban transport roadmaps
that address the most pressing
environmental, social and economic
issues faced by their transportation
systems.
quality team in the world;
• World-leading experience in helping
the public and private sectors to
address climate change;
• Cutting-edge technology for the
measurement and monitoring of
vehicle and industrial emissions; and
• World leader in vehicle emissions
reduction and aftertreatment
technology.
• Leading capability in power sector
investment planning, renewable
electricity and heat transmission
and distribution, smart grids,
international electricity markets and
industry regulation;
• World-leading experts with deep
understanding of technical and
economic challenges of developing
intelligent networks in urban energy
systems and in rural and off-grid
settings;
• Supporting governments and
public sector organisations to
define energy and electric vehicle
strategies and policy; and
• Ricardo’s comprehensive
approach to electrified vehicle
development, R-Intelect (‘Integrated
Electrification’), combines a focus
on functional system engineering
with the application of an integrated
model-based development toolset.
14 Ricardo plc Annual Report & Accounts 2018
Market overview
Competitive landscape
Ricardo serves customers across a
number of industries and markets, all of
which are highly competitive.
Our customers include governments,
government organisations, public
authorities and inter-governmental and
international financial organisations,
together with publicly and privately-
owned businesses of different sizes.
Ricardo’s Technical Consulting
businesses, which primarily operate
in the Automotive, Rail and Energy &
Environment sectors, serve all the major
transportation OEMs – including the
increasing number of new entrants into
the electric vehicles and autonomous
segments of the market. It also serves the
major Tier 1 suppliers, niche component
suppliers and some of the world's largest
rail administrations, as well as other
public and private sector clients around
the world.
We compete in international markets
against a small number of large
consultancies and a larger number of
small, specialised consultancies present
in national and local markets. These
competitors include engineering,
environmental and strategy
consultancies, as well as providers of
certification and assurance services.
Our Performance Products business
competes with divisions of large
automotive OEMs and niche volume
manufacturers in a number of high-
performance markets. We also compete
with a range of software developers
active within our chosen markets.
Ricardo’s key differentiators are its
leading engineering, scientific, technical,
and strategic capabilities, harnessed
through its investment in research
and development. Ricardo also has a
long and proven track record in the
development of advanced niche volume
production solutions in the automotive
and other high-performance markets.
Our dedicated and talented people
are recognised for their expertise to
deliver class-leading and innovative
products and services within the
industries we serve.
Connectivity and
intelligent devices
Natural resource
scarcity
• Increasing focus in the rail sector
on ‘intelligent and digital railway’,
advanced signalling solutions and
‘big data’ for increased safety and
efficiency;
• Development of autonomous driving
technologies;
• Data resilience has become a systemic
challenge and private and public
organisations must contribute to the
reliability of the digital environment;
and
• Next-generation technologies
including cyber, intelligence gathering
and defence electronics, critical to the
modernisation of defence platforms.
• Water scarcity is impacting industries
and countries;
• Biodiversity, oceans and forests are
under increasing stress;
• Growth of the circular economy as
momentum develops for the shift
from a linear to a more sustainable
economic model that promotes the
regenerative use of materials; and
• Increasing emphasis on waste
reduction in all sectors of the
economy.
• Expertise in commercial vehicle
platooning technology and
participation in demonstration
projects in Europe, Asia and North
America;
• Ricardo and Roke collaboration
is delivering strategic-level cyber
security support, services and
tools to protect customers in the
automation and transportation
sectors;
• Industry-leading data optimisation
and analytics capabilities for the
rail sector and other sectors which
Ricardo operates in;
• Developer of advanced predictive
maintenance systems for rolling
stock and rail infrastructure; and
• Near real-time remote monitoring
technology for international
air quality, marine emissions
and energy grid distribution
performance.
• Development and application
of complex system optimisation
technology and processes drawn
from automotive and other
industries to reduce energy
consumption;
• Helping governments (including the
Scottish Government, a global leader
in circular economy implementation)
and public and private sector
organisations to develop and apply
circular economy strategies; and
• Ricardo’s extensive research in waste
treatment technologies, including
its processes, suppliers, advantages
and limitations, supports customers
in the categorisation of different
technologies in terms of capacity,
suitable feedstock, outputs, and
energy recovery efficiency.
Delivering Excellence Through Innovation & Technology 15
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Strategic performance
The Board monitors performance indicators related to our strategic objectives
1 Performance growth: profitable growth delivered by focusing on future market
demands driven by technology change, client needs, and prevailing or impending
policies and regulation
Performance indicator
Commentary
Revenue
£m
2018
2017
2016
Order book
£m
2018
2017
2016
Net debt
£m
2018
2017
2016
380.0
352.1
332.4
288
248
231
(26.1)
(37.9)
(34.4)
The 8% increase in revenue is primarily due to higher volumes of
engine and transmission sales in the Performance Products business,
together with increased Technical Consulting activity in the Rail
business across Asia. Technical Consulting revenue includes £10.3m
from the Control Point Corporation business acquired during the year.
More details of this are described in the Financial Review section on
pages 28 to 31, and also in the Technical Consulting and Performance
Products sections on pages 18 to 23 and 24 to 25, respectively.
We closed the year with another record year-end order book of £288m,
up 16% on prior year. This includes the first orders for the Humvee
brake kit programme in the US and £5m from the Control Point
Corporation business acquired during the year.
Strong growth in order intake came from our Rail and Automotive
businesses in Asia, as well as Performance Products. We also saw strong
order intake relating to electric vehicles. Although market uncertainty
reduced the level of second half orders in the UK Automotive business,
order intake returned to more normal levels in the last month of the
financial year.
The Group has generated net cash of £11.8m in the year. This
includes £4.6m spent on acquisitions net of cash acquired, £1.7m
of acquisition-related payments, and a net £2.3m cash inflow from
restructuring activities. This also includes £4.4m of payments in
respect of the defined benefit pension scheme.
The Group’s continued focus on the management of working
capital has driven a reduction in overall net debt in the year,
despite the increase in revenue.
More detail on these principal
risks together with how they
are mitigated is presented on
pages 41 and 42
Principal risks
Contracts
Customers and markets
Customers and markets
Contracts
Financing
Defined benefit pension
scheme
2 Risk mitigation: reducing risk through the avoidance of business cyclicality and external dependency, whether
geographic, technical, industry sector or client-related
Performance indicator
Commentary
Sector diversity
Number of sectors exceeding 10% of revenue
2018
2017
2016
4
Customer dependency
Number of customers exceeding 5% of revenue
2018
2017
2016
2
2
5
5
3
Four of our six sectors exceeded 10% of revenue, demonstrating
that the Group remains well diversified across its critical market
sectors.
Revenue in our Off-Highway & Commercial Vehicles sector was
10.7% in the prior year but dropped below 10% in the current
year. This was due to the mix of workable multi-year orders in this
sector.
The number of customers from whom revenue was generated that
exceeded 5% of total revenue has stabilised over the last three years
and remains consistently low.
Revenues from one customer represent £61.4m (16%) of total
revenue.
Whilst we retain a small number of key client relationships, we
continue to have a diverse customer base.
Principal risks
Customers and markets
Technology
Customers and markets
16 Ricardo plc Annual Report & Accounts 2018
Strategic performance
3 World-class talent: ensuring an environment which attracts, develops and motivates a diverse, world-class team
and fosters industry thought leadership
Performance indicator
Commentary
Principal risks
Employee and knowledge retention
Voluntary employee turnover % per annum
2018
2017
2016
15
14
10
The voluntary attrition rate of 15% continues to be at a relatively
high level, but remains similar to the prior year and is consistent with
current expectations.
People
This was primarily due to very active employment markets for our
engineers and scientists around the world. In some cases, competitors
directly and aggressively target our employees.
In addition, the level of attrition was impacted by some significant
changes to organisational structures within our Automotive business.
4 Operational excellence: maintenance of an optimised cost base through an efficient global operation and the
development of leading-edge tools, processes and capabilities to maximise value from our resources
Performance indicator
Commentary
Underlying(1) operating profit margin
%
2018
2017
2016
10.8
11.6
11.9(2)
Environment
tCO2e per employee for scope 1 and scope 2 emissions
2018
2017
2016
6.0
6.7
8.4
The reduction in the Group’s underlying(1) operating profit margin is
principally driven by the Technical Consulting segment where the
impact of uncertainty in the UK Automotive market led to depressed
order intake, particularly in the second half, combined with the impact
of a small number of difficult and complex projects in the year.
In addition, our Energy & Environment business recruited ahead of
anticipated growth that was lower than expected, leading to a decline
in profitability compared to the prior year.
Further details are described in the Financial Review on pages 28 to 31.
(1) excluding specific adjusting items as described on page 5.
(2) 2016 has been restated to include the impact of income from RDEC
claims on a like-for-like basis with the subsequent years presented.
Scope 1 emissions vary based on project mix. We encourage
improvements to reduce underlying emissions and improve effective
use of resources on projects.
Our emissions per employee decreased again this year, partly due to the
reduction in tonnes of carbon dioxide equivalent ('tCO2e') per kWh in
UK electricity generation. This is due to the continued reduction in the
UK’s dependency on coal, together with a growing proportion of the
UK’s electricity being generated from renewable sources.
Principal risks
Contracts
Customers and markets
Laws and regulations
5 Added value for clients: provision of in-demand products and services through our commitment to market-
leading research, development and innovation to provide maximum and enduring benefits to our customers
Performance indicator
Commentary
Research and development spend
£m
2018
2017
2016
9.4
Customer satisfaction
Ratings out of 10 across a range of measures
2018
2017
2016
9.5
9.5
8.7
8.7
8.6
R&D spend was consistent with prior years. The reported spend
includes amounts capitalised in respect of development costs around
the Group and reflects our investment in developers of our software
products, together with new technology, tools and processes in our
European Automotive and Energy & Environment businesses.
Further details of active projects are described on pages 26 and 27.
Principal risks
Technology
Customers and markets
Customer satisfaction remains consistently strong at over 8 out of
10 over the past three years.
Contracts
Customers and markets
Delivering Excellence Through Innovation & Technology 17
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Technical Consulting
Performance
Ricardo’s Technical Consulting business
generates around 80% of the Group's
revenue and underlying operating profit
from its global sectors including Rail,
Automotive, Off-Highway & Commercial
Vehicles, Energy & Environment, and
Defence.
Order intake in the year stood at
£324m (2017: £288m) and there has been
a good balance of new orders within
Technical Consulting across all core
regions, with good levels of diversification
across different market sectors. Highlights
can be found on pages 20 to 23. As set
out in Note 2 to the financial statements,
revenue has grown by 3% to £288.3m
(2017: £280.5m) and underlying operating
profit decreased by 3% to £31.9m
(2017: £32.8m). The underlying operating
profit margin decreased to 11.1%
(2017: 11.7%) due to the mix of orders, an
increase in the level of material content
and some disruption in the flow of orders
into our UK Automotive operation, which
led to operational inefficiency. In
addition, the delivery of a small number
18 Ricardo plc Annual Report & Accounts 2018
of challenging, complex projects
impacted margins.
Our Rail business delivered another
year of strong performance and won one
of its largest ever assurance projects in
Taiwan. The global rail market continues
to show positive growth trends, driven
by infrastructure investment to support
urban and inter-urban mobility –
particularly in Asia and the Middle East.
The rail industry is striving to exploit new
digital technology to improve operational
efficiency, availability and overall cost,
and to help meet the demand for more
efficient public transport. Ricardo Rail,
with its extensive engineering consulting
and assurance service offering, is well
positioned to benefit from these drivers
and enjoy access to out-of-sector
expertise – in fields such as cyber
resilience and autonomous technology
– through our other Technical Consulting
businesses.
The Automotive sector is undergoing
significant change, driven firstly by the
move towards increased electrification
to deliver the global requirement for
CO2 reduction, and secondly by the
continued focus on cutting tailpipe
emissions to improve quality of life in
urban centres. New European emissions
legislation has resulted in more extensive
engine calibration requirements, the
scope and complexity of which is proving
challenging for the industry as a whole.
These parallel changes, together with
the opportunity for new entrants to
move into the electrified market without
the traditional OEMs’ burden of historic
capital invested in combustion engine
technology, have created a very unsettled
backdrop to the automotive sector. Our
strategic consulting business has had a
busy year assisting its automotive clients
within this changeable market.
We are seeing a strong market in Asia,
particularly in China and Japan. In the
year we have acquired new customers
on the west coast of the US: these
customers are new to the automotive
market and are focused on rapid product
development. We have also worked
with traditional customers in new areas
such as electric and hybrid vehicle
Technical Consulting
development, battery development and
systems integration. We have however,
also seen some disruption of order flows
from some traditional customers who are
looking to navigate the industry change.
This was particularly noticeable in the UK
during the second half of the financial
year, when the effects of the reduction in
sales of diesel vehicles were magnified by
the continued uncertainty around Brexit.
This disruption in UK order flows,
together with the project challenges
discussed on the previous page, led to
inefficiency and some over-capacity in
our UK operations, which had an adverse
impact on margins. We were pleased
to see a return to more normal levels of
orders towards the end of the year and
into the start of the new financial year.
The US Automotive business improved
markedly in the year with a significantly
reduced loss which offset the weakness in
the UK business. The business broke even
in the second half of the year.
Our Automotive business based
in China performed well, driven by a
doubling of order intake from China
Visualisation of NO2 in London, modelled by
Ricardo's RapidAir® air quality modelling system
and South East Asia, much of which
was related to electrification and
hybridisation.
Consistent with the general industry
direction towards increased electrification,
we followed our strategy of reducing
international combustion-focused test
facilities to create a more flexible cost
base, disposing of our test facilities in
Chicago and Southern Germany.
Ricardo Energy & Environment
continued its focus on international
CO2 reduction and the future impacts
of climate change, and on climate
mitigation plans. Projects included the
preparation of plans for rising sea and
river level defence systems and the
protection of residential properties and
ecologies in the UK, as well as applying
our strategic consulting expertise to assist
a high-profile wind turbine manufacturer
with production planning and their
business improvement plans.
High on the agendas of our
governmental, local authority and
industrial clients were real-world
emissions monitoring and air quality
simulations in cities and for shipping.
Also important were future regulations
and policies on emissions and the
electrification of transport, which
includes the readiness of the electricity
network for the roll-out of vehicle
charging infrastructures.
We have also seen an increased focus
on waste and recycling, with plastics and
the reduction of their use becoming a
very productive area of business. Our
water consulting activity benefited from
the current Asset Management Planning
(‘AMP’) cycle in the UK, which ensures
water supply and resilience for coming
decades against rising populations and
temperatures, and from the 2019 Price
Review (‘PR19’), driven by the focus of the
UK Water Services Regulation Authority
on innovation around leakage reduction
and the resilience of the water network.
We have been exploiting our cross-
sector expertise to benefit our clients in
the water sector. One noticeable piece
Delivering Excellence Through Innovation & Technology 19
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Technical Consulting
of work is the application of our complex
automotive system modelling software,
IGNITE, to the modelling of Southern
Water’s network in the Brighton region in
the UK, to assist with capital investment
planning. We believe that this is an
innovative piece of software that can be
applied across the water industry and
beyond.
Overall order intake for Energy &
Environment was similar to last year,
although performance was impacted by
recruitment for higher levels of growth
than actually achieved.
Ricardo Defense, a business which
now combines the capabilities of our
existing defence business in the US
with those of Control Point Corporation
acquired during the year, has won a
number of new contracts across the
globe in land defence and in the marine
sector, both surface and sub-surface.
Business model
Ricardo’s Technical Consulting
business provides innovation-
focused engineering, technical and
environmental consulting services to
private and public sector customers,
primarily in the automotive, rail and
environmental markets, together with
accreditation and independent safety
assurance services in the rail sector. Our
services are delivered for a scope of
work which is specific to our customers’
needs and tend to have a fixed price.
Our projects range in length from a few
weeks or months to programmes that
extend over several years.
Management of projects, resources
and customer relationships are key
skills to enable efficient delivery of
our services. Those services are based
on the application of intellectual
property, know-how and knowledge
developed through our investment
in research and development (‘R&D’)
and our participation in collaborative
R&D programmes in several industries
and geographies, as well as on the
expertise of our staff. Our capabilities
are complemented by a wide range of
design, test and development tools and
equipment.
People are at the heart of Ricardo’s
business and our teams consist of
20 Ricardo plc Annual Report & Accounts 2018
Ricardo has opened its new power electronics laboratory at the Santa Clara Technical Center
experienced professional engineers,
scientists and economists – many of
whom are regarded as among the best
in the world within their chosen field –
together with a thriving graduate and
apprenticeship recruitment programme.
Our global infrastructure helps us to
meet the needs of our customers in the
different industries and sectors we serve.
Ricardo now has 48 sites in 21 countries,
with technical centres in the US, the UK,
the Netherlands, Italy, the Czech Republic
and China, supported by offices where a
local presence is needed to service our
customers. Engineers from the technical
centres are deployed on projects across
the globe using common engineering
processes.
Market sector highlights
Rail
Ricardo Rail delivered a strong
performance for the year with some
significant project wins amongst its
order intake. The appointment to
provide assurance services for a new
metro system serving suburban Taipei in
November 2017, for example, was one of
the largest single contracts the business
has ever secured and means Ricardo’s
expertise will be utilised in the system’s
construction through to 2025.
Other notable assignments during
the year included providing technical
support for the introduction of bi-mode
Hitachi rolling stock to the UK network,
system integration testing of a new
tram system for the city of Utrecht in the
Netherlands, and the approvals for a new
rail freight service across Saudi Arabia.
The professionalism of our teams was
also evident in our support for a new high-
speed rail link in South Korea that was
commissioned to serve the 2018 Winter
Olympics venues around Pyeongchang.
Despite the strict deadlines of this high-
profile national project, our assessors
skilfully conducted on-site audits to ensure
the signalling technology was compliant
with relevant standards, allowing the
line to open on schedule and ahead of
the start of the Games in February 2018.
See our Case Study on pages 58 to 61 for
further information.
Ricardo Certification, a separate and
independent business of Ricardo Rail,
successfully maintained its multiple
accreditations and appointments, and
over the course of the year expanded its
accredited activities into Dubai and Qatar.
A significant number of projects have
been approved during the financial year
including:
• More than 60 (2017: 30) Safety
Assessment Reports as an Assessment
Body under the EU Common Safety
Method Risk Assessment and
Evaluation Regulations, principally from
the UK, the Netherlands, Denmark and
Spain;
• Over 360 (2017: 80) certificates as a
Notified Body or Designated Body
Technical Consulting
programmes in vehicle systems, hybrid
and electric systems and advanced
drivelines, and in the core powertrain
areas of our business, focused on both
new and existing product upgrades. This
year we saw an increase in order intake
in connection with vehicle electrification
programmes which accounted for 26%
(2017: 15%) of order intake for Technical
Consulting and 21% (2017: 17%) of total
Group order intake.
R-Intelect is our integrated approach
to electrified vehicle development and
it forms the basis of our differentiated
solution approach for electrified vehicles.
We continue to invest in advanced
combustion and transmission solutions
and other key technologies in areas
related to improvements in overall
vehicle system efficiency, such as
lightweighting, intelligent drivelines and
vehicle electrification. In addition to
these areas, the Ricardo collaboration
with Roke to develop cyber security
solutions for vehicles is attracting
much interest from new and existing
customers. The collaborative capabilities
of both organisations are also leading to
further opportunities in both the rail and
energy sectors.
Ricardo Motorcycle, which delivers
complete development of motorcycles,
Ricardo Motorcycle’s annual conference in Milan is now an established
fixture on the calendar of the international motorcycle industry
P
h
o
t
o
:
L
e
i
f
J
ø
r
g
e
n
s
e
n
Ricardo Certification was the Independent Safety Assessor for the recently opened Phase 2 of the light rail
project connecting the cities of Aarhus and Odder in Denmark
under national regulations that
satisfy the requirements of the EU
Interoperability Directive, principally
from the UK, the Netherlands,
Denmark and Spain;
• More than 60 (2017: 50) Accredited
Independent Safety Assessment (‘ISA’)
reports, principally from Spain and
China; and
• Over 60 (2017: 50) Railway Product
Automotive
During the year, while CO2 reduction
remained a top global priority for the
sector, the public debate shifted the
focus of consumers and governments
onto air quality and, in particular NO2
emissions. This resulted in a continued
increase in the demand for all aspects of
vehicle electrification, from mild hybrids
to full battery electric vehicles (‘BEVs’).
Certifications, all from China.
We have secured a range of
Delivering Excellence Through Innovation & Technology 21
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Technical Consulting
Ricardo provided technical assistance to Toyota’s Project Portal fuel cell truck project, including areas of design, vehicle build, testing and development, and is
currently supporting vehicle trials
scooters and urban mobility vehicles,
including their powertrains, has seen
growth driven by tightening emissions
legislation, increased consumer demand
for higher capacity motorcycles in
developing markets, and growing interest
in electric motorcycles.
Off-Highway & Commercial Vehicles
Growth continued in the medium- and
heavy-duty sectors, particularly in Asia,
and we have secured several large engine
and transmission projects across both
sectors. Our order book and pipeline of
opportunities across Europe and Asia
includes a broad mix of largely engine
and transmission programmes. In the US,
there was continued focus on powertrain
and trailer efficiency, emissions control
and the use of hydrogen fuel cells, driven
by tighter standards for the emission of
greenhouse gases and nitrogen oxides.
In the medium-duty market, compliance
requirements for in-service On-Board
Diagnostics (‘OBD’) has driven increased
engine test activity.
Commercial vehicle platooning
remains an important growth market and
Ricardo has developed a class-leading
capability for control strategy and safety
case development.
In the off-highway market, Asia is
showing renewed growth – especially in
transmissions and drivelines – and activity
is increasing in Europe. In the medium-
term we expect solid customer demand
for our services to meet EU, US and Asian
emissions regulations and 2020 emissions
targets. Our focus in the medium- and
long-term is on assisting customers with
the introduction of new technologies
22 Ricardo plc Annual Report & Accounts 2018
for efficiency improvements such as
electrification and autonomy.
Ricardo provides the power
generation and marine markets with
services in failure analysis, investigation,
and specialist design and development.
In these markets we see increasing
demand for high-speed diesel generator
sets and main propulsion systems for
marine vessels, and for the conversion of
engines for gas or dual-fuel operation.
Energy & Environment
This year our Energy & Environment
business has seen a broadening of
its client base and service offerings.
The surge of interest in plastic and its
impact on the environment has created
new demand from customers and we
have been working with organisations
across the supply chain to ensure that
where plastic needs to be used, the
environmental impact is minimised, and
at the end of its life the plastic is captured
and reused or recycled.
We have won a number of projects
in the UK to support leading national
organisations in the development and
evaluation of resources efficiency and
waste management policies and systems.
Our UK experience has resonated well
and our work on waste and resources has
seen growing interest from around the
world, especially in Australia where we
have already secured a number of projects.
We continue to support customers
across the globe with our air quality
services and products. In China, we are
providing support to a number of cities
to establish long-term, cost-effective
air quality action plans to bring about
significant improvements in air quality and
health whilst maximising co-benefits such
as reductions in greenhouse gas emissions.
A key project, commissioned by the Asian
Development Bank (‘ADB’), is providing
detailed evaluation of policy options using
Ricardo’s RapidAir® air quality modelling
system and is designed to support the
billion-dollar investments being made by
ADB in north-eastern China.
Africa is urbanising faster than any
other region in the world and by 2050
more than 20% of the world’s total urban
Ricardo is working to ensure the environmental impact of plastic waste is minimised
Ricardo's NCEC has
expanded beyond
the chemicals sector
to report different
types of incidents
– for example, fires,
floods, explosions and
break-ins
population is expected to live in cities in
sub-Saharan Africa. The region contains
some of the lowest greenhouse gas
emitting countries in the world, but many
are investing in infrastructure to support
population growth and economic
development. There is a narrow window
of opportunity to avoid high carbon
‘lock-in’ and to support climate-resilient
development by factoring climate
change into long-term investments and
planning decisions. Ricardo is working
with nine cities in six countries in sub-
Saharan Africa, on behalf of the C40
Cities Climate Leadership Group, to build
capacity within local government and
develop common tools and frameworks.
This will enable action planning for
transformational, long-term and low-
carbon development, consistent with
limiting the rise in global temperatures
to 1.5 degrees Celsius and achieving
sustainable development goals.
In the UK we have seen high demand
for our services in air quality: much of
this demand comes through our support
of UK cities, which are under intense
pressure to accelerate the delivery of
cleaner air to achieve compliance with
air quality standards and consequent
improvements to public health. Our
work, in close partnership with local
government leaders, is shaping the
design of ‘Clean Air Zones’ through the
identification of targeted options, tailored
to local circumstances, that cut air
pollution and public exposure through
locally deliverable action.
We have also seen a steep increase
in our work on water resource
management, attributable to the
statutory plans that the UK’s water
Technical Consulting
companies are required to produce
every five years. These plans set out the
strategy for securing reliable, sustainable
water supplies over the next 25 years
and beyond. We have provided strategic
environmental assessment and planning
for the delivery of those plans for 12 water
companies, ensuring that they met the
stringent requirements for environmental
assessment, including resilience of the
water supply system and ecosystem
services assessments.
Our National Chemical Emergency
Centre (‘NCEC’) has further broadened its
offering by using its complementary skills
and capabilities as the world’s leading
chemical emergency response centre to
create a service for businesses outside of
the chemicals sector to report different
types of incidents – for example, fires,
floods, explosions and break-ins. The
business also offers planning and training
on crisis and business continuity. The
new offering has been successful and the
business has seen increasing customer
demand for these new services.
Defence
In the US, our existing Ricardo Defense
Systems entity completed the acquisition
of Control Point Corporation, now known
as Ricardo Defense, Inc., which has
delivered a strong performance in the
year. The integration of the acquisition
is progressing well, and the combined
Ricardo Defense business has won a
number of new contracts and offers an
expanding range of services to improve
safety, reduce costs, and minimise risk for
defence forces on land and at sea.
In the UK, we are delivering contracts
to develop new engine and transmission
designs for land vehicles for an overseas
customer.
Outlook
We have a good order book across all
regions and sectors and we saw orders
for the Automotive business in the UK
recover at the end of the second half of
the year. The good order book and our
balanced portfolio of businesses within
the markets of Transport & Security,
Energy, and Scarce Natural Resources &
Waste give us confidence in the growth
of future revenue and underlying profit.
Delivering Excellence Through Innovation & Technology 23
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Performance Products
Performance
The Performance Products business
accounts for around 20% of the Group's
revenue and underlying operating
profit. A large proportion of the revenue
is generated through the supply of
products and services to a single
customer.
As described in Note 2 to the financial
statements, revenue increased by 28%
to £91.7m (2017: £71.6m) and underlying
operating profit increased by 16% to
£9.3m (2017: £8.0m). Operating profit
margins reduced to 10.1% (2017: 11.2%).
Profit was higher than the prior year,
primarily due to increased volumes in
respect of the engine supply contract
for McLaren, a full year of production of
transmissions for the Bugatti Chiron and
an increased demand for Porsche Cup
transmissions. Order intake in the year
increased by 14% to £89m (2017: £78m),
with the Aston Martin order received in
the prior year being more than offset by
the increased demand in this financial
year from McLaren, Bugatti and Porsche.
The business continues to focus on
the development of long-term strategic
relationships with customers, and the
consistent achievement of high-quality
and on-time delivery of our products in
order to win new and large contracts.
Further details of activities within the
year can be found within the market
sector highlights on page 25.
Business model
Ricardo’s Performance Products business
manufactures and assembles high-
quality prototypes and niche volumes
of complex engine, transmission and
vehicle products.
These products are designed either by
our motorsport products design team,
Ricardo’s Technical Consulting business
or by our customers. We manage the
complete supply chain and earn revenue
either for the products that we supply
or for the manufacturing or assembly
services that we provide.
Our programmes typically extend
over many years and several of them
include agreements for the supply of
spare parts and other support services.
At the heart of our technology
is our people and their skills and
capabilities in product design and
development, production and
operations management, supply
chain management and industrial
engineering.
Our operations include a highly
flexible transmissions manufacturing
facility at our Midlands Technical Centre,
and our engine assembly facility at
our Shoreham Technical Centre, backed
up by Ricardo’s global support network
with technical and engineering centres
in the US, the UK, the Netherlands, Italy,
the Czech Republic and China.
The Performance Products
business also includes the activities
of Ricardo Software, which develops
advanced virtual engineering tools
for conventional and electrified
powertrains, as well as complex physical
systems such as water networks. Our
computer-aided engineering (‘CAE’)
software and technical support services
are provided to both long-established
and new-entry customers from around
The DS E-Tense FE 19
Season 5 Formula E car:
its transmission was
designed collaboratively
by Ricardo and Groupe PSA
24 Ricardo plc Annual Report & Accounts 2018
the world across the automotive,
rail, motorcycle, off-highway and
commercial vehicles, defence, energy
and environmental sectors.
Our proprietary leading-edge
simulation software
enables users
to quickly and
accurately
design, analyse
and optimise
new products.
Through technology
exploration and
process innovation we
enable customers to reduce their
development costs and bring
products to market faster and with
greater confidence.
Market sector highlights
High-Performance Vehicles &
Motorsport
Demand for the production of
McLaren engines continues to grow
in line with expectations: this year we
delivered over 4,300 engines across an
increased number of engine variants,
including the McLaren 540C, 570S
Coupé, 570GT, 570S Spider, 720S and
the Senna.
We manufacture and assemble the
world’s most advanced transmissions
and we made good progress in the
preparations for the supply contract
for the Aston Martin Red Bull Valkyrie
hypercar transmission. We also
continued to support Bugatti with
the supply of the complete driveline
system for the Chiron, together with
the supply of transmissions for the
Porsche 991 Cup race cars.
Ricardo remains a key supplier
to the motorsport sector. This year
the Performance Products business
developed the transmission for the
M-Sport Bentley GT customer racing
programme and continued to support
key manufacturers within the Formula
E Championship for the second
consecutive season.
We continue to manufacture for
Formula One, the Japanese Super
Formula Championship, Indy Lights and
the World Series Formula V8 3.5. We also
operate supply programmes of Ricardo-
designed transmissions for BMW, the
Multimatic-built Ford GT3, the M-Sport
World Rally Championship Ford Fiesta
and the Hyundai R5 Rally car.
Ricardo Defense has received its first orders and started production of its bespoke anti-lock brake
and electronic stability control system for the US military’s Humvee
Performance Products
In partnership
with Aston Martin,
Ricardo Performance
Products is creating
the seven-speed
transmission for the
Aston Martin Red
Bull Valkyrie
Defence
In the UK, Ricardo supports the British
Army’s fleet of Cougar and Weapons
Mount Installation Kit (‘WMIK’) vehicles
with the supply of spare parts.
In the US, Ricardo Defense has received
its first orders and started production
of our bespoke anti-lock brake and
electronic stability control system
for the High-Mobility Multipurpose
Wheeled Vehicle (‘HMMWV’, or Humvee).
The system is proven to be effective
at reducing loss of control and the
occurrence of single-vehicle crashes,
saving the lives of its occupants as a
result. We continue to work closely with
both the U.S. Army and major suppliers
to deliver this important technology onto
the vehicles.
Outlook
We have a strong order book and
pipeline of new opportunities in a range
of market sectors and geographies –
and that, together with the aftermarket
opportunities of many of our
programmes, gives us confidence in the
continued growth of the Performance
Products business.
Delivering Excellence Through Innovation & Technology 25
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Research and Development
Sustained investment in R&D continues
to power our diverse business. Our
focus is on developing technology that
is both beneficial to our customers and
aligned with the long-term market
drivers that influence their demands.
Through our client relationships we can
understand their needs and provide
the most valued support. This allows
us to identify potential opportunities
for multi-sector innovation and
create opportunities through the
establishment of new business models.
Mark Garrett – Chief Operating Officer
Ricardo Innovations is a division
that leads the development of new
technology and innovative solutions
that help our clients to meet the global
challenges of urbanisation, energy
security and efficiency, increased
environmental and emissions regulations
and rising demand for scarce natural
resources.
Ricardo’s Technical Consulting
business operates across the automotive,
environmental and rail sectors, all of
which require R&D. To support our
wide-ranging portfolio of R&D projects,
we segment our portfolio by customer
needs and our strategic areas of
R&D, which are: core capability and
consulting services, multi-sector
innovations, and new business models.
Our research portfolio and R&D
projects are shown below:
Low carbon
solutions
Improving
air quality
Improving
transport safety
Managing scarce
natural resources
Imperium
HDGAS
Thomson
HIFI-Elements
Core capability and
consulting services
Alliance
ULTRAN
PaREGEn
Hybrid Synthesis
DIEPER
CAV Comfort
EcoChamps
REWARD
Batt Sense
Low Mass Gear
Powerdrive
DownToTen
Multi-sector
innovations
Future Radar
5StarS
New business models
AMRC
Metal Joining
Dolphin N2 – CryoPower
Ricardo – Roke
Cyber Security
Water Initiative
No Dig Pipe Fixer
OWDIn
TorqueLife MultiLife
SensorLife
26 Ricardo plc Annual Report & Accounts 2018
Research and Development
The following sections highlight
the key technical achievements of our
existing portfolio.
Core capability and consulting
services
Connected road and traffic
preview data for reduction in real-
world CO2 emissions
Integrating road and traffic preview data
and predictive models into powertrain
control algorithms has improved fuel
consumption in long-haul trucks by
7%. Ricardo’s technology simulates
and assesses the performance and
behaviour of the vehicle, along with the
impact of interactions with traffic. This
demonstrates the benefit of integrating
data concerning traffic, topology and
the environment, to improve Ricardo’s
powertrain control strategies and to
reduce CO2 emissions.
Cost-effective, next-generation
hybrid technologies
Our new 48V electric motor and inverter
represents the very latest thinking in
cost-effective electric motor design
for volume passenger car applications
and contributes towards a 20% increase
in overall powertrain fuel efficiency.
The new e-machines achieved a 50%
increase in power density compared to
the baseline design.
Managing thermal performance
of e-machines efficiently is a real
challenge. Ricardo has developed a
new thermoelectric generator and
multi-temperature cooling circuit, which
further raised fuel economy by 1%.
Integrated toolchain for optimised
hybrid vehicle powertrains
Our improved Integrated Model-Based
Development (‘IMBD’) capability can
deliver technology vehicle demonstrator
projects up to 15% faster and at reduced
cost by minimising physical testing
and calibration time. This results in
rapid hardware evaluation of different
configurations and the speeding up of
the selection of an optimum solution, all
within specified design constraints and
whilst minimising CO2 emissions.
By assessing multiple performance
parameters in parallel, our IMBD
capability enables OEMs to reduce
the number of hardware validation
cycles required to arrive at an optimum
solution.
Efficient lean gasoline engine with
ultra-fine particulate control
Ricardo’s lean combustion advanced
gasoline engine technology is being
demonstrated on a Jaguar XE vehicle.
Gasoline engine configurations continue
to play an important role in passenger
car fleets. The new engine technology
will improve emissions performance by
50% compared to current Euro 6d levels;
it will reduce CO2 emissions by 15% and
provide enhanced control of ultra-fine
particulates down to 10 nanometres.
The Jaguar XE demonstrator vehicle
will be available for evaluation in 2019.
Multi-sector innovations
Digital resilience
Leading the drive towards improved
cyber security, Ricardo and Roke signed
an agreement to deliver world-class
and trusted cyber-assurance solutions
for transportation, commercial and
critical national infrastructure clients.
Cyber resilience is a boardroom concern
in organisations across all of Ricardo’s
markets, so the unique combination of
Ricardo’s leading technical and assurance
domain capability, teamed with
Roke’s understanding of cyber threats,
provides a unique value proposition.
The programme has also expanded into
customer applications of Ricardo’s Rail
and Energy & Environment businesses.
This joint capability complements the
UK Government’s funded programme
to develop a cyber assurance framework
for the automotive sector and develop a
‘five-star’ rating system equivalent to that
of the European New Car Assessment
Programme (‘NCAP’).
New business models
Dolphin N2
Dolphin N2, an independent entity to
Ricardo, has been created to further
develop a novel engine technology
concept, CryoPower, whose initial
development has been handled by
Ricardo over the last 10 years. This
revolutionary split-cycle engine reduces
CO2 output by 30% and potentially
eliminates NOx and soot emissions
altogether. The CryoPower engine
achieves this by injecting liquid nitrogen
during the combustion process,
achieving superior thermodynamic
performance.
As well as providing a breakthrough
in environmental performance for heavy-
duty engines and decentralised power
generation, the technology reduces
operating costs by 20%.
Delivering Excellence Through Innovation & Technology 27
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Financial review
Ian Gibson – Chief Financial Officer
The Group has delivered revenue growth of
8% in the financial year and underlying profit
before tax has increased by 2%, against a
backdrop of market uncertainty. Reduced
performance in our UK Automotive and Energy
& Environment businesses has adversely
impacted underlying operating profit, but
this has been offset by growth in our other
Technical Consulting businesses, together
with a strong performance from Control Point
Corporation, which was acquired during the
financial year. The sale of Automotive test assets
in the US and Germany makes us more agile
for the future. We have also seen good levels
of growth within Performance Products. Our
cash performance has been excellent, with the
Group’s net debt reducing year-on-year, driven
by a strong working capital performance. We
enter the next financial year with another
record year-end order book of £288m.
GROUP RESULTS
The Group’s headline financials are
presented on page 5. The Group
increased its order intake to £413m
during the year, an increase of £47m on
the prior year. Order intake increased
across both Technical Consulting and
Performance Products. Within Technical
Consulting, there was a good mix of
orders across all market sectors, albeit UK
Automotive declined compared to the
prior year. The financial year ended with
another record year-end order book of
£288m (2017: £248m), a 16% increase on
the prior year. The order book includes
£5m from Control Point Corporation
(‘CPC’), a US-based defence engineering,
software development and fleet
management organisation, which was
acquired in September 2017.
Total Group revenues grew to
£380.0m, representing an 8% increase on
the prior year (2017: £352.1m). Underlying
operating profit, which excludes specific
adjusting items as set out in more detail
in Note 4 to the financial statements, has
increased by 1% to £41.2m (2017: £40.8m),
with the margin reducing from 11.6% to
Headline Group performance
FY 2017/18 (£m)
Less performance of acquisitions:
Control Point Corporation (£m)
Organic FY 2017/18 (£m)
FY 2016/17 (£m)
Growth (%)
Organic growth (%)
Constant currency organic growth (%)
28 Ricardo plc Annual Report & Accounts 2018
Underlying
Reported
revenue
380.0
Operating
profit
41.2
Profit
before tax
39.0
(10.3)
369.7
352.1
8
5
6
(1.0)
40.2
40.8
1
(1)
(1)
(1.0)
38.0
38.3
2
(1)
-
10.8%. Underlying profit before tax
increased by 2% to £39.0m (2017: £38.3m).
Underlying operating profit and profit
before tax both include £1.0m from
CPC. On an organic basis, underlying
operating profit and profit before tax
both reduced by 1% compared to the
prior year. The performance of CPC
has been reported in the Technical
Consulting segment.
We have experienced some mixed
performance across the Group. We have
seen particularly good results within
Performance Products. Within Technical
Consulting, reduced performance
in our UK Automotive and Energy &
Environment businesses has been
offset by growth in our other Technical
Consulting businesses, together with a
strong performance from CPC.
Reported profit before tax for the year
decreased by 11% to £28.5m (2017: £32.2m).
The decrease is primarily as a result of
£4.8m of reorganisation costs, incurred as
a result of the restructuring of the
Automotive businesses in the US and
Germany. This was partially offset by a
net increase in income from claims
under the Research & Development
Expenditure Credit (‘RDEC’) scheme of
£1.4m. Net acquisition-related
expenditure in the year was £1.4m
(2017: £1.7m).
Closing net debt reduced to £26.1m
from £37.9m in the prior year. This
included £6.3m of consideration paid
in respect of CPC (£4.6m net of cash
acquired), £1.7m of acquisition-related
payments and a £2.3m net cash inflow
from restructuring activities. The strong
cash performance was driven by the
continued focus on working capital
across the Group.
SEGMENTAL RESULTS
The segmental results for the Group’s
operating segments (above, right) are
as follows:
Technical Consulting results
Segmental operating results for
Technical Consulting are discussed on
pages 18 to 20. Technical Consulting
had revenues and underlying operating
profits of £288.3m (2017: £280.5m) and
£31.9m (2017: £32.8m), respectively.
Excluding CPC, organic operating profit
was £30.9m.
Our Automotive and Off-Highway
& Commercial Vehicles businesses
in Europe experienced a decline in
profitability as a result of both the
uncertainty in the market, which
depressed order intake, particularly in
the UK in the second half of the year, and
the delivery of a number of challenging
projects in the year, which impacted
margins. We have seen orders recover to
a more normal level in June and July,
and we have taken action to improve
project delivery in the future. In June
2018 we sold our Schechingen Technical
Centre (‘SchTC’) in Germany and
significantly reduced the footprint of
our other German site in Schwäbisch
Gmünd. These actions took fixed cost
out of the business, making us more
agile for the future.
Similarly, we completed the sale of
our Chicago Technical Center (‘CTC’)
in April 2018, with a positive impact
on the results of the Automotive and
Off-Highway & Commercial Vehicles
Segmental results
Reported revenue
FY 2017/18 (£m)
Less performance of acquisitions (£m)
Organic FY 2017/18 (£m)
FY 2016/17 (£m)
Growth (%)
Organic growth (%)
Underlying operating profit
FY 2017/18 (£m)
Less performance of acquisitions (£m)
Organic FY 2017/18 (£m)
FY 2016/17 (£m)
Growth (%)
Organic growth (%)
businesses in the US, which ended the
year with a significantly reduced loss
compared to prior year. The business
was break-even for the second half of
the year. We are also working on an
increased number of projects in the
area of electrification, highlighting the
success of our efforts to reposition the
US business.
We have continued to see an increase
in order intake in Automotive in Asia,
which has led to further revenue and
profit growth in the year. The order
book and pipeline of opportunities
remains strong.
Asia has also been a key growth
market for our Rail business, which has
had another strong year, securing a
number of multi-year contracts with a
number of Asia’s key rolling stock OEMs
and rail operators.
The Energy & Environment business
has seen a similar level of order intake
compared to the prior year, although
profitability has been impacted by
recruitment for higher levels of growth
than achieved.
CPC has performed well since it was
acquired in September 2017.
Performance Products results
Segmental operating results for
Performance Products are discussed on
page 24. Performance Products had a
strong year, as revenues increased on
the prior year by 28% to £91.7m
Financial review
Technical
Consulting
288.3
(10.3)
278.0
280.5
3
(1)
Performance
Products
91.7
-
91.7
71.6
28
28
Technical
Consulting
31.9
(1.0)
30.9
32.8
(3)
(6)
Performance
Products
9.3
-
9.3
8.0
16
16
Total
380.0
(10.3)
369.7
352.1
8
5
Total
41.2
(1.0)
40.2
40.8
1
(1)
(2017: £71.6m) and underlying operating
profits increased on the prior year by
16% to £9.3m (2017: £8.0m).
The current year performance was
driven by increased volumes of engines
for McLaren and transmissions for both
Bugatti and Porsche, as well as growth in
new software licence sales in Asia.
Basis of preparation
The financial statements have
been prepared in accordance with
International Financial Reporting
Standards (‘IFRS’) and International
Financial Reporting Standards
Interpretations Committee (‘IFRS IC’)
interpretations adopted by the European
Union (‘EU’) and the Companies Act 2006
applicable to companies reporting under
IFRS. The Group’s principal accounting
policies are detailed in Note 1 to the
financial statements on pages 120 to
127. Those accounting policies that have
been identified as being particularly
sensitive to complex or subjective
judgements or estimates are disclosed in
Note 1(c) to the financial statements on
pages 120 and 121.
We have completed our work to
assess the potential impact of both
IFRS 9 ‘Financial instruments’ and IFRS 15
‘Revenue from contracts with customers’,
both of which become effective to the
Group for the year commencing
1 July 2018. As set out in more detail in
Note 1(x) to the financial statements,
Delivering Excellence Through Innovation & Technology 29
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Financial review
the expected transitional impact from
the retrospective application of IFRS 15
is a reduction to opening reserves as at
1 July 2017 of £5.5m. This adjustment
reflects the requirement of IFRS 15 to
recognise revenue on performance
obligations, either in combination or
separately, dependent upon whether
those obligations are distinct from one
another in the context of the contract
with the customer. The expected
transitional impact from the application
of IFRS 9 is a reduction to opening
reserves as at 1 July 2018 of £1.8m.
Acquisitions and acquisition-
related intangible assets
As set out in more detail in Note 12 to
the financial statements, the Group
acquired the entire issued share capital
of CPC on 8 September 2017, for a total
consideration, including expected earn
out payments, of £8.0m ($10.5m). This
investment added goodwill of £3.4m
($4.4m) to a new Ricardo Defense cash-
generating unit. Acquisition-related
intangible assets were identified, with
a net book value at year-end of
£1.9m ($2.5m).
The Group incurred net acquisition-
related expenditure of £1.4m
(2017: £1.7m) during the year, £0.8m
of which was in respect of CPC, with the
remainder primarily relating to fees
incurred on an aborted acquisition and
integration costs in respect of prior
acquisitions. The acquisition-related
expenditure and amortisation of
acquisition-related intangible assets
have been charged to the Consolidated
Income Statement as specific
adjusting items.
Restructuring activities
During the year the Group completed
the sale of CTC and SchTC and
significantly reduced its footprint in
Schwäbisch Gmünd.
The sale of CTC was completed on
2 April 2018 for a consideration of £4.1m
($5.5m), generating a profit on sale of the
assets of £1.4m ($1.9m). In addition, £0.7m
($0.9m) of professional fees, contractor
costs and redundancy costs were
incurred as a result of the asset sale and
wider restructuring process in the US.
30 Ricardo plc Annual Report & Accounts 2018
The sale of SchTC was completed
by year-end for a total consideration of
£4.4m (€5.0m), generating a profit on
disposal of £0.2m (€0.2m). Of the total
proceeds, £2.5m (€2.8m) for the land and
buildings was held in escrow at year-end
and received post year-end following
approval from the German land
registry. Redundancy costs of £0.3m
were also incurred.
Redundancy costs of £2.7m
(€3.0m) were incurred in relation to
the downsizing of our footprint in
Schwäbisch Gmünd, of which £1.8m
(€2.0m), in addition to the SchTC
redundancy costs, remained unpaid
as at 30 June 2018, as these were paid
during or at the end of notice periods.
Professional fees and other costs of
£1.8m (€2.0m) were incurred due to the
activities in Germany.
Certain back-office functions were
migrated from the Shoreham Technical
Centre (‘STC’) to the newly set up Prague
shared service centre. Redundancy,
contractor and other transition costs of
£0.5m were incurred. Redundancy costs
of £0.4m were also incurred in the UK
for members of the senior management
team as a result of the restructuring of
the business.
The combined cost of these activities
was £4.8m in the year, with a net cash
inflow of £2.3m.
Research and Development
The Group continues to invest in R&D
and spent £9.5m (2017: £9.5m) before
government grant income of £1.6m
(2017: £2.4m). Costs capitalised this year
in accordance with IFRS were £5.1m
(2017: £3.1m) and reflect the impact of
investment in developers in our Software
business, and new technology, tools and
processes in our European Automotive
and Energy & Environment businesses.
An overview of current R&D activities is
presented on pages 26 and 27.
The total Research and Development
Expenditure Credit (‘RDEC’) recognised
in the current year is £8.0m (2017: £6.6m).
This comprises an estimated RDEC
credit in respect of the current year of
£6.9m (2017: £5.2m), together with £1.1m
(2017: £1.4m) arising from the routine
amendment of open applications as a
result of further analysis of the qualifying
expenditure incurred.
Net finance costs
Finance income was £0.4m (2017: £0.2m).
Finance costs were broadly in line with
the prior year at £2.6m (2017: £2.7m),
giving net finance costs of £2.2m
(2017: £2.5m).
Taxation
The total tax charge for the year was
£9.6m (2017: £7.4m), with the total
effective rate of tax being 33.7%
(2017: 23.0%). The increase reflects the
impact of improved performance in
our US operations, combined with the
derecognition of a net deferred tax asset
of £2.2m (€2.5m) (2017: £1.5m (€1.7m))
relating to historic losses in Germany, due
to the restructuring activities completed
in the year.
Ricardo 's Performance
Products engine assembly
plant at the Shoreham
Technical Centre
The underlying effective tax rate
was 21.3% (2017: 23.0%), with the
decrease on the prior year driven by a
change in the mix of profits across the
territories in which the Group operates
and a reduction in tax rates in certain
territories, including the UK.
A deferred tax asset of £5.5m
($7.2m) (2017: £5.9m ($7.7m)) relating
to R&D tax credits in the US continues
to be recognised. The Directors have
considered the recoverability of this
asset and remain satisfied that it is
probable that sufficient taxable profits
will be generated in the foreseeable
future, against which the recognised
assets can be utilised.
Earnings per share
Basic earnings per share decreased by
25% to 35.2p (2017: 46.8p). The Directors
consider that an underlying earnings
per share provides a more useful
indication of underlying performance
and trends over time. Underlying
basic earnings per share for the year
increased by 3% to 57.3p (2017: 55.7p).
Basic earnings per share, with a
reconciliation to an underlying basic
earnings per share, which excludes the
net-of-tax impact of specific adjusting
items, is disclosed in Note 10 to the
financial statements on page 134.
Dividend
The total (paid and proposed) dividend
for the year has increased by 6% to
20.46p per ordinary share
(2017: 19.3p) and amounts to £10.9m
(2017: £10.3m). The proposed final
dividend of 14.71p (2017: 13.88p) will
be paid on 23 November 2018 to
shareholders who are on the register of
members at the close of business on
9 November 2018, subject to approval
at the Annual General Meeting on
15 November 2018.
Capital investment
Cash expenditure on property, plant
and equipment was £7.7m (2017: £6.3m)
as we continue to invest in our business
operations. This expenditure included
new and upgraded test cell equipment
and IT hardware.
Net debt
Closing net debt was £26.1m
(2017: £37.9m). The Group had a net
cash inflow of £11.8m (2017: £3.5m), after
£4.6m (2017: £1.9m) of consideration paid
in respect of acquisitions, net of cash
acquired, £1.7m of acquisition-related
payments (2017: £4.4m), and a £2.3m net
cash inflow (2017: £0.4m outflow) from
restructuring activities. The composition
of net debt is defined in Note 34 to the
financial statements on page 156.
The Group’s focus on the
management of working capital has
driven the reduction in net debt in the
year. Significant progress has been made
across the Group in ensuring timely
billing and cash collection throughout
the year.
Banking facilities
At the end of the financial year, the
Group held total facilities of £90.9m
(2017: £91.1m), which included
committed facilities of £75.0m
(2017: £75.0m). Of the committed
facilities, a £35.0m facility is available until
September 2019 and £40.0m is available
until April 2020. In addition, the Group
has uncommitted facilities including
overdrafts of £15.9m (2017: £16.1m), which
mature throughout the next financial
year and are renewable annually.
Committed facilities of £49.8m
(2017: £59.7m) net of direct issue
costs were drawn primarily to fund
acquisitions. These are denominated in
Pounds Sterling and have variable rates
of interest dependent upon the Group’s
adjusted leverage, which range from
1.6% to 2.6% above LIBOR and
are repayable in the year ending
30 June 2020.
After the year-end on 20 July 2018,
the Group completed a refinance of
its banking facilities, entering into a
new £150m Revolving Credit Facility
(‘RCF’) which provides the Group with
committed funding for the next five
years through to July 2023 primarily for
acquisitions and strategic investments.
This multi-currency facility has a variable
interest rate which ranges from 1.4%
to 2.2% above LIBOR and is dependent
upon the Group’s adjusted leverage.
Financial review
Foreign exchange
On consolidation, income and expense
items are translated at the average
exchange rates for the period. The Group
is exposed to movements in the Pound
Sterling exchange rate, principally from
work carried out with customers that
transact in Euros, US Dollars and Chinese
Renminbi. Compared to the previous
financial year, the average value of
Pound Sterling strengthened against the
US Dollar (6.3%) and Chinese Renminbi
(1.5%). The marginal negative impact on
profit from this was partially offset by
Sterling weakening against the
Euro (3.0%).
Had the current year results been
stated at constant exchange rates,
revenue would have been £3.1m higher
and underlying profit before tax would
have been £0.3m higher. Reported
profit before tax would have been
£0.4m higher.
Pensions
The Group’s defined benefit pension
scheme operates within the UK. The
accounting deficit measured in
accordance with IAS 19 ‘Employee
Benefits’ was £4.6m before tax
(2017: £22.2m), or £3.8m after tax
(2017: £18.1m).
The £17.6m reduction in the pre-tax
pension deficit since the prior year was
due to the positive return on plan assets
of £2.1m, and the effect of using updated
census data giving a gain of £7.0m,
together with £4.3m of cash
contributions paid to the scheme during
the financial year. There was also a
further favourable movement of £7.7m
primarily from an increase in the discount
rate assumption to 2.85% (2017: 2.60%),
offset by £3.0m from the use of an
updated set of mortality assumptions
and £0.5m of net interest cost on the
scheme. The value of the scheme’s assets
at year-end was £131.0m, in line with the
prior year (2017: £131.0m).
Ricardo has committed to continue
to pay £4.3m throughout the next
financial year to fund the pension deficit,
increasing to £4.6m per annum from
July 2019 until September 2022.
Delivering Excellence Through Innovation & Technology 31
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Our people
The Power of You was the title of the
leadership event held at our Shoreham
Technical Centre in July 2017 and it set
the scene for this financial year. One
hundred managers from all divisions
and regions of Ricardo came together
to be inspired by an exploration of
themes around leadership and personal
empowerment to contribute, to add
value and to do the best possible jobs for
our customers as well as to take charge of
their own development.
True to this theme of empowerment,
Ricardo strives to provide every
employee with the opportunity to be
their best and play to their strengths
every day at work. With that goal
in mind, we promote a diverse and
inclusive culture and endeavour to
offer the right career opportunities for
all – women and men, engineers and
support staff – and to value a specialist
contribution as much as a management
role. From the beginning, we encourage
our employees to actively engage
in their own career development by
stretching their wings, broadening their
horizons and experience, and deepening
OUR PEOPLE
Sujith Kollamthodi
Practice Director – Policy, Strategy & Economics
Ricardo Energy & Environment
I’ve been a Practice Director at Ricardo for the last six years, originally
focusing just on sustainable transport issues, but more recently my role has
expanded to cover our policy-related work in the fields of transport, climate
change, air quality, industrial emissions, energy regulation and carbon
markets.
The key megatrends affecting my work relate to climate change, air
pollution and urbanisation, and the ways in which all of these factors
will affect the whole economy in the very near future. For example, I am
currently looking at the impacts of future mass electrification of the vehicle
fleet on emissions, air quality, electricity demand, infrastructure needs and
consumer costs, amongst other issues. It’s a fascinating time to be working
in this field.
32 Ricardo plc Annual Report & Accounts 2018
their knowledge. In addition to any
formal training, this might be through
taking part in one of our various internal
strategic or improvement-oriented
projects, working on a customer project
at a different technical centre or on-
site at a customer, or by going on an
international assignment.
Finding and retaining the right people
to support our growth strategy remains
a key task. We are proud to be able to
attract a significant number of graduates,
young professionals and acknowledged
industry experts every year into all
divisions and regions of our organisation,
which confirms that we are an employer
of choice. We are very conscious of our
responsibilities as an employer and we
make sure that our new employees
have the best possible experience in
joining Ricardo and throughout their
employment with us – in terms of
both personal development as well as
competitive remuneration and benefits
packages.
As we are particularly keen to
grow our young engineering talent
base, continued effort goes into the
enhancement of our apprentice
and graduate schemes. In Ricardo
Automotive and Ricardo Rail, our
established international graduate
schemes give our graduates an exciting
mix of learning on-the-job as part of
real-life customer projects, classroom
training for technical and interpersonal
skills, and international exposure through
our graduate exchange programmes.
In the UK, we have also introduced
additional apprenticeship programmes
across all divisions: this mirrors the UK
Government’s push for more apprentice
positions through the apprenticeship
levy introduced in April 2017. In
close collaboration with the relevant
universities, new courses are about to
be implemented to support the further
development of our young engineers
under the umbrella of the levy.
In line with our vision of a Ricardo
culture that not only promotes excellence
but also diversity and inclusion, we have
continued to concentrate our efforts on
promoting female career advancement
in general and especially in science
and engineering roles. This includes
Our people
hiring female apprentices, graduates
and professionals and reviewing our
internal promotion processes to exclude
any implicit gender bias. We have also
amended our employer branding to be
more appealing to women and have
modified our on-boarding process
for female technical staff, including a
mentoring programme and inclusion
training for managers.
Going forward, we will continue
driving along the path we have started
out on, with an overall increase in female
representation across the Group of 3
percentage points over the last two
financial years. The publication of our
Gender Pay Gap in our UK entities with
over 250 employees revealed that we are
well within the industry average. Details
can be found in our public Gender Pay
Gap Report on www.ricardo.com.
To demonstrate our commitment
to diversity at the highest echelons of
the organisation, our Chairman, Sir Terry
Morgan, and Chief Executive Officer,
Dave Shemmans, have joined the 30%
Club. This is a cross-sector initiative of
business leaders with the mission to
support gender diversity on all levels of
an organisation from entry level to board
positions, and with a target to achieve
30% female representation across its
members. The philosophy of reaching
that target through collaborative,
concerted business-led efforts and
the implementation of unbiased work
environments, policies and cultures
rather than enforced quotas fits exactly
with our own philosophy. We will now
use that branding to promote our
OUR PEOPLE
Najla Knidiri
Senior Consultant
Ricardo Certification, Denmark
At Ricardo Certification in Denmark, we work as a team together with
our colleagues in the Netherlands, the UK and Spain, delivering a range
of certification and assurance services to international rail clients. One of
my main responsibilities is as Project Manager for the Danish Signalling
Programme, one of the largest projects of its kind in the European rail
industry.
I enjoy the opportunity to work with very skilled people all over the world.
Having lived in five countries and three continents, I really appreciate the
multicultural character and international reach of Ricardo. This brings
opportunities for ongoing learning and development, not just in terms of the
technical facets of the job, but also the human and strategic aspects as well.
Together with the support of the worldwide Ricardo organisation, all of this
helps us to provide excellent service to our clients.
diversity objectives in job advertisements
and social media.
Our business is built on having the
best talent in the world and this mission
is at the heart of what we do. Our
strategy is to contribute to safety and
sustainability in mobility and energy
generation while protecting scarce
natural resources. Our people make this
happen. A little bit more, every day.
Board members
Senior leadership
All employees
13%
6
46
Divisional senior
leaders
21%
603
6
67%
Female
Male
40
87%
Female
Male
2,852
Employees
2,249
79%
33%
3*
9
Board members*
Female
Male
* Includes Company Secretary
Delivering Excellence Through Innovation & Technology 33
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Corporate responsibility and sustainability
Why it matters to Ricardo
Ricardo has a proactive and engaged
approach to corporate responsibility
and sustainability. The environment
is a key driver for our strategy and is
seen in many of our activities, where
Delivering Excellence Through Innovation
& Technology provides the central focus
for all of our teams. This is embedded
in what we do and the solutions we
deliver:
• Helping governments and cities
address climate change, emissions, air
quality, energy and waste challenges;
• Providing policy and technical advice
across the public and private sector
to improve the environmental, social
and economic performance of the
transport sector;
• Developing new combustion systems
and engineering solutions to meet
the next steps in vehicle emissions
regulations;
Improving vehicle fuel economy
and energy efficiency through
engine developments, lightweight
vehicle structures and transmissions,
hybrid vehicle systems and vehicle
•
•
electrification, renewable energy and
rail operating efficiency;
Improving rail safety through the
provision of safety audit services,
innovative safety products and
the assurance activities of Ricardo
Certification, providing third party
independent oversight on new
railways, rolling stock and safety-
critical technologies (see pages 58 to
61); and
• Providing chemical emergency
response advice to emergency
services and industry through our
National Chemical Emergency
Centre (‘NCEC’).
We rely on innovation, talent, skills and
customer care from our employees,
in whom we invest and develop for
the benefit of all our stakeholders.
Our values and policies are designed
to ensure that we and our suppliers
operate ethically and honestly, and
meet human rights obligations.
Ricardo’s employees are engaged as
active members of the communities
where most of our larger sites operate,
with a strong focus on working
to promote Science, Technology,
Engineering and Maths (‘STEM’)
subjects in schools and colleges, as this
links directly to the next generation of
engineers and scientists who will be
the core of our future value chain.
As a responsible employer, we seek
to protect and care for our employees
by providing a safe and healthy work
environment and by minimising
the environmental impact of our
operations.
The environment – a strategic
driver in action
The environment is at the heart of what
we do and is embedded in our strategy,
shown on page 13:
• Transport & Security activities are
driven by worldwide trends in
climate change, emissions and fuel
economy legislation;
• Energy activities are similarly driven
by the need to provide more
sustainable and efficient solutions for
power generation from renewable
and clean energy sources; and
34 Ricardo plc Annual Report & Accounts 2018
Corporate responsibility and sustainability
Based on our experience and expertise
in EVs, Ricardo has delivered thought
leadership through white papers – for
example, Driving automotive electrification
– which was downloaded by more than
900 people. In November 2017, Ricardo
delivered the first in its series of thought-
leadership webinars focused on fleet
electrification, which was presented to over
200 attendees from around the world.
Ricardo’s sustainable transport experts
have been supporting Heathrow Airport
with its clean vehicle partnership, helping
the airport's fleet operators to support
Heathrow's sustainability goals outlined
in Heathrow 2.0 – the airport’s plan for
sustainable growth.
Environmental benefits
Ricardo delivers many positive
environmental outcomes which are the
result of the work we undertake in the
Technical Consulting business. These can
be categorised as:
• Ricardo-funded and customer-funded
engineering projects to develop
low-emission and high-efficiency
technologies for incorporation into
products around the world;
of a broad range of national and
international bodies, through to speaking
at events, running webinars and providing
practical information on our website.
This support is directly aimed at
helping governments and organisations
to reduce their environmental impact
and stem the effects of climate change:
the aim is to position Ricardo as a ‘go-to
expert’ in the relevant markets.
Throughout this financial year, Ricardo
• Lower carbon usage through the
has been supporting organisations
seeking to develop strategic approaches
to the effective adoption and
implementation of electric vehicles
(‘EVs’). This includes supporting the
European Commission with developing
EV and autonomous vehicle policy and
developing fleet electrification strategies
for a number of organisations, including
an organisation with one of the largest EV
fleets in the UK.
delivery of engineering projects which
lead to more efficient consumer
products being manufactured by our
customers;
• Environmental consultancy, largely
undertaken by Ricardo Energy &
Environment; and
Improvements in operating
efficiency carried out by Ricardo Rail
for rail operators and rolling stock
manufacturers.
•
• Scarce Natural Resources & Waste
activities provide solutions to improve
air quality, reduce environmental
impact and improve efficiency in the
use of natural resources and waste
management.
We support these markets with research
and development activities to enhance
our capabilities. This is described on
pages 26 and 27.
Environmental thought
leadership
As an organisation, Ricardo is renowned
for providing strategic consultancy
on a wide range of technical and
environmental issues. As a result, we
regularly provide key thought leadership
through many different forms. These
range from attending and co-chairing
the technical working group meetings
Ricardo Energy & Environment has been working with the C40 Cities Climate Leadership Group as an implementation partner for a project supporting nine of
Africa’s largest cities in their efforts to tackle climate change
Delivering Excellence Through Innovation & Technology 35
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Corporate responsibility and sustainability
These products and services will have an
impact on the future levels of emissions,
waste, energy usage, water consumption
and noise across the sectors we serve.
The cumulative benefits of projects we
complete each year saves many multiples
of our operational carbon footprint over
the life of the products we engineer.
The very nature of Ricardo
Energy & Environment’s consultancy
work provides a further significant
environmental benefit: we work
with businesses, governments and
international organisations to help find
solutions to some of the most pressing
environmental challenges.
We have a comprehensive
environmental consulting capability
which provides:
• Excellence in thought leadership
around economic, societal and
environmental interactions;
• Extensive understanding of
the climate change challenges
facing organisations, including
scarcity of natural resources,
strategic sustainability and energy
management;
36 Ricardo plc Annual Report & Accounts 2018
• Deep understanding of policy
drivers, environmental strategy, and
economics, providing insight and
project delivery for business and
industry; and
• Modelling and data management
to identify and realise value for
organisations.
Operational environmental
impact and greenhouse gas
emissions
Ricardo is committed to keeping the
environmental impact of the Group’s
facilities and activities to a minimum, as
well as ensuring that our services have
positive impacts on society. The Board’s
commitment to this is embodied in our
environmental policy, which is available
through our intranet and to the public
through our website, www.ricardo.com.
The drivers for this policy are as follows:
• Delivering services that enable
strategic improvements for our
customers and the end users of their
products and services;
• The need for continuous
improvement; and
• The desire to be responsible members
of the local communities in which
Ricardo operates.
The impact of our operations, particularly
testing and manufacturing, are the
largest contributors to our operational
carbon footprint and greenhouse
gas (‘GHG’) emissions. Our testing for
customer and research programmes
primarily uses fuels and electrical
energy, in addition to that required for
heating some of our buildings. The full
effect of the sale of our Chicago and
Schechingen test facilities on the Group’s
emissions will be experienced next
year. Our manufacturing energy use is
predominantly power for machine tools
and assembly facilities and gas used in
our heat treatment plant. Our Scope 2
use is all electricity. We do not currently
measure our Scope 3 emissions.
We comply with the Companies Act
2006 (Strategic and Directors’ Report)
Regulations 2013 on GHG emissions and
have stated our comparative history in
our Strategic Performance on page 17. As
this requires the inclusion of fuels used
in engine and vehicle testing, variability
in results year-on-year can be expected
due to the varied mix in types of test and
engine size.
Projects to reduce energy
consumption and manage waste
responsibly are actively encouraged
and have become more important as
unit fuel costs increase; waste streams
have also become more significant
as the manufacturing activities of our
Performance Products business have
grown.
We focus our operational carbon
footprint improvements on underlying
energy efficiency prior to the use of fuels
for testing. We continue to use tonnes of
carbon dioxide equivalent (‘tCO2e’) per
employee as an intensity measure.
This year we continued to calculate
our market-based Scope 2 emissions
in the UK, as well as our location-based
emissions, which have been reported
below using UK Government and
International Energy Agency (‘IEA’)
factors in accordance with the GHG
Protocol’s Scope 2 guidance. Our UK
operations are our biggest consumer
of electricity. The supply we procure
includes some coal and natural gas,
but over 50% is from renewable or
zero-emissions sources. This means that
when using the market-based approach,
our Scope 2 emissions are reduced
by around 45%. Even so, we still strive
to continually reduce our underlying
consumption.
Other environmental impacts include
waste streams, which are monitored
to identify potential improvement
opportunities and to ensure legislative
compliance. Higher risk areas of our
facilities, such as fuel storage and
distribution systems, have containment
tCO2e per employee
tCO2e ('000s)
Scope 1*
Scope 2
Total tCO2e ('000s)
tCO2e per employee
Corporate responsibility and sustainability
HRH The Duke of Kent visits the engine assembly facility at Ricardo's Shoreham Technical Centre
and inspection regimes which meet
local legislative requirements.
Many of Ricardo’s customers require
certification for their key suppliers
in respect of the environmental
management system standard,
ISO 14001. We are accredited to
this standard in the majority of our
locations. The achievement of the
standard is defined by appropriate
policies, processes and procedures as
part of the management system in
each division. Many of these are closely
linked to both quality and health and
safety procedures.
The suite of ISO certifications and
the supporting internal and external
audit programmes are used to check
policy effectiveness, share best practice,
identify improvement opportunities
and ensure compliance. Staff training
in health and safety and environmental
matters is a priority and is reviewed
annually as part of normal appraisal
processes.
2018
8.6
8.9
17.5
6.0
2017
8.1
10.2
18.3
6.7
2016
11.4
10.9
22.3
8.4
Governance – corporate
responsibility
The Board reviews the key elements of
corporate responsibility on an annual
basis. To underline the importance of
integrity in all relationships between
employees and stakeholders, we
have ethics, fraud prevention and
whistleblowing policies which are
communicated to all employees. A
summary of these is communicated
externally through our Code of Conduct,
which includes the policy elements to
meet our human rights obligations.
Under our ethics policy we do
not permit bribery, anti-competitive
or corrupt business practices in any
dealings. Under our fraud prevention
policy, we do not allow intentional acts
by one or more individuals within the
business to use deception or theft to
gain unjust or illegal advantage. Under
our whistleblowing policy, we provide a
procedure for any employee to raise any
malpractice concerns in an appropriate
manner, with protection to the
whistleblower. Ethics and whistleblowing
policies and reports are reviewed
annually by the Audit Committee.
Modern slavery
We implemented the requirements of
the Modern Slavery Act 2015 and have
published an updated statement for
this financial year on our website. This
subject is reviewed annually by the Audit
Committee.
Delivering Excellence Through Innovation & Technology 37
(*) The operational control test is applied to determine if an emission is within Scope 1.
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Corporate responsibility and sustainability
Ricardo's Chief Operating Officer, Mark Garrett (rear, centre), with fellow volunteers on a mission of the eyesight charity, See Kenya, which works to reduce
blindness and provide specialist eye care services to marginalised communities in Kenya
Human rights
The Group firmly believes in the
principles behind the Universal
Declaration of Human Rights. We
support this by having a strong
commitment to compliance with laws
and regulations in the regions in which
we operate, and by expecting the
same from our suppliers. We articulate
this through our Values and Code of
Conduct, the relevant policy elements of
which are:
• Being honest, ethical and above
reproach with each other and with
our stakeholders in all our business
dealings;
• Treating all others as we would like to
be treated ourselves;
• Not engaging in activity that can be
considered as trafficking in persons,
including the use of forced labour,
child labour or procurement of
immoral services for the performance
of contracts;
• Not harassing or discriminating
against any employee or job
applicant, either directly or indirectly;
38 Ricardo plc Annual Report & Accounts 2018
• Encouraging all our employees to
take an active role against all forms of
discrimination and harassment; and
• Employing or contracting with staff
who are appropriately vetted and
have the proven right to work in the
country of employment for the type
of work being undertaken.
The Group’s position on human rights is
supported through a number of ethics
and employment policies which are
designed to ensure we conduct business
in a legal and ethical manner at all times.
Health and safety
Ricardo is committed to compliance
with local health and safety legislation,
to a safe working environment and to a
very low level of reportable accidents.
We support training in health and safety
awareness, impending changes in
relevant legislation and other specialist
health and safety subjects. Health and
safety activities are verified by regular
internal audits and inspections and
certification to OHSAS 18001 in our
technical centres and larger offices in
the US, the UK, the Netherlands,
Germany, Italy and the Czech Republic.
Our health and safety policy is available
through our intranet and to the public
through our website.
We recognise the level of reportable
accidents as a primary performance
indicator. The number of reportable
accidents increased in this financial year,
but the overall level is still low and shows
the continued success of our health and
safety policies. We continue to focus on
reducing accidents and near-misses as
part of our commitment to continuous
improvement and loss prevention.
Health and safety
Reportable accidents*
2018
2017
2016
2
1
3
(* ) Based on current definitions of the Reporting of
Injuries, Diseases and Dangerous Occurrences
Regulations (‘RIDDOR’)
Corporate responsibility and sustainability
Ricardo engineers enthusing school and college students at STEM events and visits to Ricardo
Suppliers
Relations with our suppliers are essential
in achieving client and shareholder
satisfaction. Our policy is that key
suppliers should be certified to ISO
9001 and ISO 14001 standards, and all
suppliers are encouraged to obtain these
certifications. Local suppliers are used
where commercially practical. There are
no significant supply contracts which are
essential to the business of the whole
Group, and we are not reliant upon any
suppliers that would jeopardise the
independence of the business.
Initiatives are managed by our Head
of Global Procurement and savings are
delivered by consolidating the supply
base and reducing the total cost of
doing business. We strongly encourage
our suppliers to comply with our Code of
Conduct or their own equivalent policies.
Local communities
It is our policy and objective to
make a positive contribution to all
regions and communities in which
we operate, particularly in education
in areas local to our main sites. Many
of the larger Ricardo offices support
local community activity and give
charitable donations, particularly where
employees participate in community
or charitable fundraising activities.
The focus is on creating sustainable
links and on improving the image
and understanding of the business
and the engineering profession in the
community.
Community engagement in
promoting Science, Technology,
Engineering and Maths (‘STEM’)
subjects and diversity has been a key
part of our employee involvement.
A wide range of activities have been
undertaken, including:
• Close partnerships with secondary
schools near to our larger UK sites,
supporting curriculum delivery and
teacher engagement in STEM;
• Many of our UK graduates are
automatically enrolled as STEM
ambassadors when they join the
business;
• Sponsorship of regional ‘Big Bang’
STEM events where over 11,000
students attended to experience
opportunities from many employers;
and
• Ricardo Software supports university
teaching with its products in 200
locations across approximately 40
countries.
We also work with our local communities
to provide business input on economic
regeneration, and we actively engage in
local partnerships, particularly in the area
where our Shoreham Technical Centre is
located, where we are the largest private
sector employer.
Donations
We often match staff donations to
charitable activities, particularly where
there is active staff participation in
events. Financial contributions to
charities in the year to 30 June 2018
were £36,237 (2017: £35,652). The
effectiveness of these policies is
informally measured by community
feedback.
Delivering Excellence Through Innovation & Technology 39
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Risk management and internal control
The Board has overall accountability for
ensuring that risk is effectively managed
across the Group. We consider that
effective risk management is critical to
the achievement of Ricardo’s strategic
objectives and the long-term sustainable
growth of our business. Such systems
are designed to manage, rather than
eliminate, the risk of failure to achieve
Ricardo’s objectives and can only provide
reasonable assurance against material
misstatement or loss.
Risks are reviewed by all business
areas on a half-yearly basis and measured
against a defined set of likelihood and
impact criteria. Risks are measured both
before and after the mitigating effect
of the application of compensating
controls. This is captured and reported
consistently, enabling the risk information
to be consolidated and ranked. The key
risks are then summarised in the Group’s
risk profile and submitted to the Board for
review and approval.
As part of the bi-annual risk
management process, Directors and
senior managers are required to certify
that they have established effective
controls to manage risk and to comply
with legislation, as well as with the
Group’s policies and procedures.
Ricardo’s internal control and
monitoring procedures include:
• Clear and understood responsibilities
by both line and financial
management for the maintenance
of good financial controls and the
production of accurate and timely
management information;
• Requirement for divisional Finance
Directors to confirm on a monthly basis
that appropriate controls are in place
and to identify any exceptions, with the
outcome being reviewed by the Group
Financial Controller and Group Risk
Manager & Head of Internal Audit;
• Divisional Finance Directors have
line management responsibility to
their Managing Directors, but with
an independent reporting line to the
Chief Financial Officer;
• Control of key financial risks through
clearly set authorisation levels and
appropriate segregation of
accounting duties;
40 Ricardo plc Annual Report & Accounts 2018
• Control of key project risks through
project delivery and review systems;
• Control of other key business risks
through a number of processes and
activities recorded in the Group’s
risk register;
• Detailed monthly forecasting and
reporting of trading results, financial
position and cash flow, with regular
review by management of variances
from budget and forecast;
• Review and reporting by the
internal audit function on divisional
compliance with internal procedures
and financial controls; and
• Review and implementation of
recommendations in reports on
internal control by external auditors.
To ensure our risk process drives
continuous improvement across the
business, we monitor the ongoing status
and progress of key action plans against
each risk on a half-yearly basis. Risk is a
key consideration in all strategic decisions
made at Board level. In the June 2018
risk review cycle, risks associated with
our customers, suppliers, employees
and finances included the continued
consideration of the potential impact of
Brexit. Where these affect our principal
risks, the approach to mitigation is
discussed on pages 41 and 42.
The Group has risk management
processes in place for projects and other
business risks. Contract risks are managed
through a project management process
which is closely linked to measurement
of financial performance. The majority
of active Technical Consulting projects
are reviewed on a monthly basis within
divisions. In addition, the highest risk
category projects are independently
reviewed by the Group either on a
quarterly basis or once significant
milestones are deemed to have been
achieved. Non-contract risks are owned
by the Group functions and divisional
Managing Directors. These non-contract
risks are analysed and reviewed regularly
and are recorded in the Group’s risk
register in liaison with the Group Risk
Manager & Head of Internal Audit, who
has an independent reporting line to the
Chairman of the Audit Committee. The
Group’s approach to risk management is
to identify key risks early and to remove,
control or minimise the impact of them
before they occur.
Risk transfer is managed through
insurances by the Group Risk Manager
under the direction of the Chief Financial
Officer. The insurance programme is
reviewed annually by the Board to ensure
that it continues to meet business needs
as the risk profile changes.
Risk appetite is managed through a
number of internal controls, authority
limits and insurance excesses. The Group’s
risk appetite was reviewed during the year
as part of the Board’s review of risks and
stated as an internal policy document.
The Group’s internal audit function
provides assurances on divisional systems
of internal control, risk management and
compliance with applicable legislation
and regulations. This is complemented
by internal audits required as part of
maintaining certifications to international
standards for management systems. The
effectiveness of these risk management
and internal audit processes are reviewed
annually by the Audit Committee.
Financial risks faced by the Group
comprise capital risk, liquidity risk, credit
risk and market risk (comprising interest
rate risk and foreign exchange risk). The
Group’s objectives, policies and strategies
in respect of these risks are set out in Note
24 to the financial statements on pages
144 to 148.
The Company complies with the
UK Corporate Governance Code by
ensuring that:
• Risks are either classified as strategic or
operational and as either internally or
externally driven;
• Risks are evaluated on a gross and net
risk basis; and
• The Chief Executive Officer reviews
the higher-rated risks on the Group’s
risk register with the Audit Committee
twice each year, in the presence of
the other Executive Directors and
the Chairman.
Principal risks and uncertainties
In common with all businesses, the Group faces risks and
uncertainties on a daily basis. It is the effective management of
these risks that places us in a better position to be able to achieve
our strategic objectives and to embrace opportunities as they arise.
Set out below and on the following page are the details of the
Group’s principal risks, the mitigating activities in place to address
them, and the additional actions implemented to further reduce
the net risk to the Group. It is recognised that the Group is exposed
to a number of additional risks and uncertainties beyond those
listed which may also have an adverse effect on the business,
but these are currently deemed to be less material or are not
presently known to management. The mitigation of these
principal risks is within the Group’s risk appetite, which is reviewed
annually by the Audit Committee.
Movement in risk
Reduced risk
No change
Increased risk
Principal risk
Impact
Mitigation
Customers and
markets
The Group is largely dependent
on a dynamic, increasingly diverse
and politically volatile marketplace,
particularly in Automotive, which is
exposed to many external political and
economic pressures. These include
the reducing sales of diesel vehicles,
impacted by the continued uncertainty
around Brexit, as well as competition
and structural change caused by
concerns over the global economy, our
capacity and cost base, environmental
climate change, and technology.
This could cause changes or
uncertainty in the product plans of
major customers or government
policy, leading to delays in the
placement of new orders or insourcing
of activity, the redirection, deferral
or curtailment of existing contracts,
slippage in payments or variations in
demand for resources, and availability
of R&D funding. The precise timing
of the receipt of orders and the
utilisation of our resources to generate
revenue and profit may give some
volatility in our ability to forecast future
performance.
Contracts
The majority of the Group’s revenue
arises from fixed price contracts for
engineering, technical, environmental
and strategic consultancy services,
together with accreditation and
independent assurance services, with
an increasingly broad range of projects,
customers and geographies. There is a
risk that the obligation to complete the
agreed scope of these contracts may
be carried out by Ricardo in a longer
timescale or in a less cost-efficient
manner than initially estimated, thus
reducing profit margins. In product
supply contracts, there is a risk of
product liability, recall or warranty
claims and dependency on specialist
suppliers. Contracts denominated in
foreign currencies can be subject to
exchange rate risk.
People
Ricardo is a diverse business that is
knowledge-driven and people-led,
with a focus on attracting and retaining
the best talent. Recruiting, developing
and retaining knowledge and talent in
the right locations is essential.
Failure to perform on contracts
within estimated cost and delivery
timescales could impact profitability.
Faulty products or the infringement of
the rights of others, could potentially
subject the business to increased
costs, a claim from a customer,
reputational damage or reduced
opportunity for repeat business.
Failure of production processes or
product validation could lead to
warranty or recall claims. Failure or
poor performance of a supplier could
disrupt delivery to customers and
increase operating costs. Unmanaged
adverse foreign exchange rate
movements on contracts could also
affect profitability.
The failure to recruit, develop or retain
the very best talent would restrict
growth and the execution of our
strategy, and would have an impact on
delivery and customer relationships.
These risks are mitigated by the strategy of diversifying the business to
reduce exposure to any one specific customer, territory or market sector.
The result is that challenges currently being faced in the UK Automotive
business are mitigated by high levels of activity in other parts of the Group,
such as Rail and Performance Products. The success of this strategy is
measured by the key performance indicators for customer dependency
and sector diversity shown on page 16 and by the geographic spread of
revenue, as disclosed in Note 3(b) to the financial statements.
In the event of a sudden downturn in a market sector or the wider
economy, contingency plans are quickly deployed to minimise the impact
on short-term performance and to preserve cash whilst protecting the
long-term needs of the Group’s stakeholders. The impact of insolvency
risk is mitigated by robust working capital management and the use of
credit insurance where this is economically available. The potential impact
of Brexit continues to be closely monitored and is one of many economic
uncertainties which the Group faces. The Group’s UK businesses have
mitigated some risks by trading with European customers through its
existing European entities, and we await clarity from UK Government on
the impact of customs and tax matters on our supply chain for goods and
services.
These risks are proactively managed by clearly defined lead qualification,
bidding, contracting and project management processes, whereby
projects are initially categorised according to their risk level and their
performance is continually assessed throughout the life of the project,
which in turn dictates the level of approval or review required. Internal
procedures are in place to ensure that the technical content of our output
is of high quality and meets customer requirements without infringing the
rights of others, and within time and cost estimates.
Led by the Chief Operating Officer, we remain focused on the
continuous improvement of the processes related to project leadership,
which is a competency that is core to our strategy. Procurement processes
are in place to assess critical suppliers and selections are often made with
the involvement of the customer. In product supply contracts, there are
rigorous quality assurance processes in place to reduce the risk of product
liability, warranty and recall claims.
Significant contracts in foreign currencies are hedged to protect against
volatility in exchange rates.
The Group is focused on a model of ‘bringing in and bringing on’ the
best talent. We aim to ensure that we actively develop and manage
staff to encourage their optimum contribution, we foster mobility and
professional development, and we provide appropriate remuneration and
working conditions. We are monitoring the potential impact of Brexit on
employee mobility and our ability to recruit EU nationals for UK roles and
to place UK nationals in EU roles. We believe that our range of geographic
locations in Europe will continue to make us an employer of choice. Our IT
infrastructure enables us to share work and mitigates mobility issues. Our
people as stakeholders are discussed further on pages 32 and 33.
Delivering Excellence Through Innovation & Technology 41
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Principal risks and uncertainties
Principal risk
Impact
Mitigation
Technology
The business is driven by changes
in technology to meet the needs of
markets, sectors and regulators on
varying time scales.
If the Group invests in the wrong
technologies, it could lose marketplace
advantage and levels of business
activity could reduce. If there are
movements in the implementation
of new regulations, which in turn
accelerate or delay customer
programmes dependent on new
technology, the time taken to deliver
returns from our R&D programmes
may also increase.
Laws and
regulations
The Group’s operations are subject to
an increasingly wide range of evolving
domestic and international laws and
regulations, including restrictions,
standards and tax legislation.
Non-compliance with, or changes
to, laws and regulations including
restrictions, standards and tax
legislation could expose the Group
to fines, penalties or reputational
damage, or result in trading restrictions
which could have a materially adverse
impact on the business, or impede
the Group’s ability to recover certain
available tax-related credits.
Defined benefit
pension scheme
The Group has a UK defined benefit
pension scheme which currently has
a funding deficit. The uncertainty of
Brexit continues to have the potential
to increase volatility.
Any decline in the value of the pension
fund assets, improvement in mortality
assumptions, long periods of high
inflation or future decreases in interest
rates could increase the funding
deficit and require additional funding
contributions in excess of those
currently expected.
Financing
The Group is in a net debt position,
having drawn on available facilities
primarily to fund acquisitions.
There is a risk of the Group being
unable to secure sufficient funds or
the cost of funds and facilities being
high.
Information security
Ricardo has valuable intellectual assets
comprised of propriety, customer, and
supplier data.
The theft or loss of intellectual assets
could result in reputational damage,
loss of competitive advantage,
business disruption and financial
penalties.
42 Ricardo plc Annual Report & Accounts 2018
Our R&D programmes are developed through a mixture of customer
consultation, long-range forecasting, thought leadership and deep
technology roadmap development. Many of our programmes are
collaboratively developed and delivered with customers, partners,
governments and suppliers, which creates strong links to the market and
ensures the output is relevant and credible. The programmes are approved
and delivered by Ricardo Innovations, a division which operates within
Ricardo as a global R&D organisation, singularly focused on the delivery and
exploitation of approved R&D programmes. This enables staff and facilities
across multiple geographies to be dedicated to relevant programmes,
which accelerates the delivery of our innovative products and services
to the market and promotes the exploitation of developed intellectual
property and know-how. Further details of a selection of our current R&D
programmes are given on pages 26 and 27.
To mitigate these risks, the Group has a number of defined policies and
operating procedures in place, and takes professional advice where
considered necessary, to ensure that the Group acts upon the latest
advice available based on current and expected changes in legislation.
Our Code of Conduct, which is published on www.ricardo.com to increase
awareness and to make it available to external stakeholders, ensures that
employees and others act with the highest ethical standards and within
local legal and regulatory requirements. In addition, the Group’s internal
audit programme includes within its remit the review of compliance with
applicable legislation and regulations, and awareness of key Group policies
and procedures. These policies and procedures are updated as regulations
change and as a result of our continuous drive to adopt best practice. We
aim to anticipate the effects of working in new countries and new sectors,
particularly within our Rail business which operates in a growing list of
territories and cultures, each with its own regulations, standards and laws
with which we need to comply. Unsettled tax credits claimed within a
financial year are recognised to an appropriate level at which management
is highly confident of full recovery, and in a manner that is consistent
with both current legislation and professional advice. We have updated a
number of processes and policies to address the General Data Protection
Regulation (‘GDPR’) and have provided online training to all staff.
The current UK funding plan was agreed on the basis of a valuation
undertaken at 5 April 2017 and anticipates deficit recovery contributions
being made until September 2022. The Group closed the pension fund
to future accrual on 28 February 2010. In addition, the Group regularly
monitors the performance of the pension fund.
This risk is managed by robust cash and working capital management,
regular improvement initiatives, monitoring actual cash flows to budgets
and forecasts, maintaining good relationships with the Group’s bankers and
ensuring sufficient borrowing facilities are in place at all times to support
the Group’s funding requirements to deliver on its growth strategy, with
additional headroom available to meet possible downside scenarios. The
Group has ample headroom in its facilities and covenants and renewed its
borrowing facilities in July 2018, increasing the committed facility to further
support the Group’s growth strategy and extending the term to 2023.
Further details of the Group’s borrowing facilities and other financial risks
can be found in Notes 22 and 24 to the financial statements, respectively.
Ricardo has adopted an information governance framework based on the
ISO 27001 information security standards. Dedicated information security
resources monitor and manage our threat profile. Information security
risks are discussed by our IT function on a monthly basis and are formally
reviewed by the Group IT Director each quarter. External penetration tests
are conducted to augment our control regime. The outputs from the
information security risk register are integrated with the Group’s enterprise
risk management process. The Group IT Director is ultimately accountable
for managing information security resilience, which includes cyber risk, and
bi-annual briefings are made to the Audit Committee.
Viability statement
The 2018 UK Corporate Governance Code
was published in July 2018, but it is not due to
take effect for Ricardo until 1 July 2019.
On that basis, the Directors have assessed
the prospects of the Group in accordance
with provision C.2.2 of the 2016 UK Corporate
Governance Code for this year ended
30 June 2018. We will consider any changes
to be made to our governance processes
in respect of the viability statement prior to
when the 2018 Code becomes effective.
The context supporting the
assessment
The Group’s prospects are underpinned
by its business model and strategy, which
can be found on pages 10 to 25. The Group
continues to follow a balanced approach
to its strategy, which is subject to ongoing
monitoring and development as described
herein. The underlying operating profit of the
Group has grown on average by 10% over
the last five years and the Group has a closing
year-end order book of £288m, of which
36% is expected to be workable beyond
12 months from the year-end. Our order
book comprises the value of all unworked
purchase orders received.
The Group continues to be focused on
global engineering, technical, environmental
and strategic consultancy, together with
the development of longer-term, multi-year
contracts and relationships, underpinned
by global macro trends. The Board has
considered the risk appetite and profile of the
Group in this context, and has determined
that this remains appropriate for the Group
as a whole.
Assessing the Group's prospects
The Group’s prospects are assessed primarily
through its annual strategy review and
business planning processes, which cover
a five-year period and a three-year period,
respectively, and are both led by the Chief
Executive Officer.
The strategy review is a forward-looking
process and is undertaken by the divisions,
with full participation by members of the
Board, which results in a five-year strategic
plan. Part of the Board’s role is to review
the performance of the Group in the last
financial year and to consider whether the
strategic plan remains appropriate. This
includes an assessment of changes in the
market and competitive environment,
together with macroeconomic, political,
social and technological changes. Actions
are implemented as necessary to continue
to support the strategic plan.
Detailed business plans are also prepared
during the last quarter of each financial year
by all divisions, and relevant functions are
involved, including Finance and Treasury,
which are then reviewed and approved
by the Board. The first year of the business
plan forms the Group’s annual operating
budget. This is subject to a re-forecast on
a monthly basis. The second and third
years are based on the overall content of
the year one business plan together with
the strategic plan, having been flexed for
known or anticipated events.
Assessment of viability
The three-year business plan reflects the
best estimate of the future prospects of the
Group and has been stress-tested for the
following scenarios:
• 20% reduction in revenue, offset by
associated cost savings;
• 5% increase in LIBOR interest rates; and
• A further scenario combining both of
the above.
The impact of each of these scenarios on
the Group’s detailed financial plan has
been quantified and presented to the
Board as part of the approval process.
These scenarios, which are based on
aspects of the Group’s principal risks and
uncertainties, including customers and
markets, contracts, and financing as set out
on pages 41 and 42, represent severe but
plausible circumstances that the Group
could experience.
The results of our stress testing showed
that the Group would be able to withstand
the impact of these scenarios occurring
over the period of the plan, by making
adjustments to its operating activities
within the normal course of business.
The Group also performed reverse stress
testing on its financial plan using these
scenarios to identify the point at which its
banking covenants would be breached,
as this would represent a serious threat to
the Group’s liquidity. None of the scenarios
required were considered to be plausible,
and more severe actions would be taken to
preserve the liquidity of the Group.
Viability statement
The Directors have assessed the prospects
of the Group over the three-year period
to 30 June 2021 and confirm that their
assessment of the principal risks and
uncertainties facing the Group was robust.
A three-year period was selected for the
following reasons:
• This period reflects the detailed business
planning cycle;
• Customer lead times and typical
engineering programmes are no longer
than three years; and
• Although the strategic plan covers a
five-year period, the Group’s order book
and pipeline of opportunities does not
extend significantly beyond three years.
Whilst the Directors have no reason to
believe the Group will not be viable
over a longer period, given the inherent
uncertainty involved, the stress testing
scenarios considered as part of the three-
year business plan, together with the
reasons outlined herein, a three-year period
is deemed most appropriate.
Based on their assessment of prospects
and viability, the Directors confirm that they
have a reasonable expectation that the
Group will be able to continue in operation
and meet its liabilities as they fall due over
the three-year period ending 30 June 2021.
Going concern
Given the viability statement provided
above, the Directors therefore considered
it appropriate to prepare the financial
statements on a going concern basis,
as explained in Note 1(a) to the financial
statements on page 120.
Our 2018 Strategic Report, from page 6 to page 43, has
been reviewed and approved by the Board of Directors on
12 September 2018
Dave Shemmans, Chief Executive Officer
Delivering Excellence Through Innovation & Technology 43
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Case
studies
Software innovation for a resilient and secure water supply
46 Creating sustainable airports
50
54 Towards zero-emissions freight in California
58 Safety, assurance and interoperability
62
An advanced transmission for the ultimate super sports car
Delivering Excellence Through Innovation & Technology 45
46 Ricardo plc Annual Report & Accounts 2018
Creating
sustainable
airports
With global air passenger numbers
predicted to double by 2036, Ricardo
is helping airport operators meet
the dual challenges of managing
demand for rapid growth while
minimising the environmental impact
of their operations.
Delivering Excellence Through Innovation & Technology 47
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies 48 Ricardo plc Annual Report & Accounts 2018
According to the International Air Transport
Association’s (‘IATA’) forecast published in late
2017, global passenger numbers are expected to
increase to 7.8 billion by 2036, a near doubling
of the 4 billion today. Perhaps even more
surprisingly, the UK is expected to remain one
of the world’s top five markets for air travel
(measured in terms of passengers travelling to,
from and within), behind China, the United States, India
and Indonesia.
The UK is a densely populated and well-developed part of
Europe, so environmental concerns are understandable with
any new infrastructure development. Planning regulations and
government targets place strict limits on the allowable levels
of noise, emissions and the carbon intensity of the commercial
operation of each airport. As such, there is a clear business
incentive to make operations as sustainable as possible, to
enable any desired expansion or development to proceed
within these limits.
While Ricardo provides services to airports in many parts of
the world, the UK is currently its largest market. With demand
growing, almost all UK airports have ambitions to expand and
develop their operations, and this is an area in which Ricardo
Energy & Environment’s infrastructure team is ideally placed
to assist. This team combines the technical expertise across
Ricardo’s specialist practices – including air quality, water,
waste and recycling, and energy – in order to serve a common
customer base in airports and other major areas
of infrastructure.
Air quality, emissions and sustainability
Key themes that cut across many of the other specialist areas
of airport consultancy are those of air quality, noise and
greenhouse gas (‘GHG’) emissions. The level of focus on air
quality can depend heavily on the topography of the area:
with some urban airport locations this can be a significant
issue, while others are sited in comparatively remote locations
where pollution can disperse quickly. Noise and GHG emissions,
however, are an almost universal focus for airport operators.
Ricardo assists in addressing all of these emissions concerns –
air quality in particular. The team has been actively engaged in
the monitoring of air quality at UK airports for almost
30 years, collecting and monitoring data, undertaking
modelling, performing assessments and managing inventories.
Ground transportation is a significant element of the
GHG emissions of an airport, and one of the key drivers for
sustainability tends to be reducing emissions through managing
the flow of people, services, and cargo to, from and within the
airport. At London Heathrow airport, Ricardo co-ordinates and
delivers the Clean Vehicle Partnership – an initiative which aims
to promote best practice in sustainable fleet management
by providing free advice, guidance and training to reduce
emissions, and facilitating collaborative working and sharing
of information amongst Heathrow’s fleet operators. Initiatives
recognised under this scheme have been the replacement of
escort vehicles and ancillary fleets under 3.5 tonnes with electric
Creating sustainable airports
vehicles, and the adoption of zero-emission aircraft push-back
tugs for short-haul operations.
For the aircraft too, a similar target for emissions reduction
through electrification can be achieved through the
avoidance of running the auxiliary power unit (‘APU’). One
solution is the provision of grid power hook-ups while on stand:
these can deliver benefits in terms of reducing noise as well as
exhaust emissions.
Water treatment
For much of the year, the water that falls onto the buildings and
hard surfaces of an airport will be essentially clean except for
dust, and it can be discharged without treatment. For the water
falling on the buildings, there is the opportunity to develop grey
water systems to allow the offset of potable water supplies: for
example, for use in toilet flushing systems. However, surface
water run-off presents a greater challenge during the winter
months due to widespread contamination with aircraft and
runway de-icing chemicals.
Again, Ricardo’s expert advice in this highly specialist area can
pay dividends for customers. In a recently completed project,
an airport that had previously discharged untreated run-off
water all year round into a local stream needed to move on from
this approach to ensure environmental protection compliance.
The airport had been quoted several million pounds for a
treatment plant installation, a solution that would additionally
consume considerable energy and chemicals on an ongoing
basis. Instead, Ricardo evaluated a range of alternative options,
and was able to demonstrate that with the local soil structure,
a soakaway-based system with appropriate treatment would
be significantly more cost effective and would deliver all of the
required environmental benefits. Ricardo went on to complete
the necessary risk assessments and help the airport obtain the
required permits for the scheme, which yielded multi-million
pound cost savings. As a result of this project, Ricardo has
received a number of enquiries from other operators to assist
with their water treatment strategies.
The Ricardo advantage
The combined skills and expertise of the Ricardo Energy
& Environment infrastructure team, together with the
organisation’s impartiality and objectivity, provide significant
added value for airport operators. With expertise across
a very wide range of disciplines, the team can bring in
additional specialists in all areas from advanced power systems
technologies to public transport, with the latter spanning
everything from electric vehicles to buses, and from trams to
high-speed rail. As Ricardo is completely independent of any
particular product, technology or construction solution, the
team can offer completely impartial recommendations, ensuring
that fully objective advice is provided for both commercial and
environmental sustainability.
Delivering Excellence Through Innovation & Technology 49
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies 50 Ricardo plc Annual Report & Accounts 2018
Software
innovation for
a resilient and
secure water
supply
A research and development collaboration between
Ricardo and Southern Water shows that advanced
automotive technology can help the water industry
in strategic planning for future resilience against the
challenges of urban development, population growth
and climate change.
Delivering Excellence Through Innovation & Technology 51
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies 52 Ricardo plc Annual Report & Accounts 2018
Software innovation for a resilient and secure water supply
Water is essential to almost every aspect
of life in our towns and cities. For
everywhere from housing, schools
and hospitals, to offices, retail and
commerce, a clean and reliable supply
of water is both fundamental for health
and a crucial enabler for a wide range
of manufacturing operations. But with
increasing urbanisation and rising populations, the water
sources and supply infrastructure of many urban centres
are becoming increasingly stressed; the situation is being
exacerbated by the escalating impact of climate change in
the form of the increased frequency of severe weather events
such as flash flooding and prolonged periods of drought. For
the operators of urban water systems, it is therefore a major
objective to gain access to innovations that can improve the
resilience of existing distribution assets and enable the most
resource-efficient planning of networks against future needs.
Southern Water is a utility company that knows these
challenges well. Operating across an area of southern England
extending through Kent, Sussex, Hampshire and the Isle of
Wight, it supplies almost 530 million litres of drinking water from
94 water supply works to almost 2.4 million people each day.
Keen to explore new avenues for innovation in its operations,
Southern Water – which is headquartered in Worthing, West
Sussex, UK – is collaborating with Ricardo’s engineers at the
nearby Shoreham Technical Centre on an R&D project that
could shape the future of strategic planning of water
distribution networks.
Automotive software toolchains
– an opportunity for water
The idea behind the research – the brainchild of experts from
Ricardo Software and the water practice of Ricardo Energy &
Environment, together with colleagues at Southern Water – is
to adapt an advanced form of complex system design and
optimisation software and apply it in the water sector. At first
sight, the challenges of the strategic planning of water supplies
might appear very different to those of designing and optimising
complex automotive systems. The automotive industry makes
intensive use of simulation software to optimise complex
control, thermal, electrical, and thermodynamics-based systems
and their interactions. The application of advanced simulation
software allows interactive optimisation of these systems as their
complexity increases. The thinking behind the project is that
although the water distribution network of a town, city or region
exists on a different scale, it still obeys the same laws of physics
as other vehicle systems and, therefore, similar system analysis
and optimisation processes can be adapted to the water sector.
The collaboration has seen Ricardo and Southern Water
engineers working to adapt Ricardo’s IGNITE software to enable
the simulation of city and regional water distribution networks.
This includes the development of new building-block models
into a library of water system ‘components’ including
reservoirs, pumping stations, abstraction points, treatment
works and metered areas, built around a web-based
technology infrastructure.
The first phase of the current R&D project will model the
water distribution network of the city of Brighton & Hove, UK.
This city is projected to have a significant increase in population
over the coming years but is currently heavily reliant upon
ground water abstraction, with obvious risks to supplies if
overused. Once this first city has been modelled, the partners
intend to extend modelling to include other zones within its
distribution area. If the project is successful, Southern Water
intends to use the new water system simulation package as a
strategic tool to guide future capital investment decisions – such
as how and where they will need to replace assets within the
network, and where they will secure future water supplies from,
enabling the organisation to deliver supply security and service
quality to customers in the future.
Extending to other utilities
Beyond the area covered by Southern Water, Ricardo will seek
to apply this new water system simulation tool for the benefit
of other utilities within the UK as well as elsewhere in the world.
The new tool will be the first such Ricardo Software product
to arise from the cross-sector synergies between Ricardo
Software and Ricardo Energy & Environment. As the project
with Southern Water is demonstrating, simulation, optimisation,
advanced sensors, prognostics and control system technologies
are common to both the automotive and utility industries and
enable Ricardo to deploy automotive-derived knowledge and
techniques with great benefits to the water sector.
Ricardo is investing heavily in cross-sector technology transfer
and software product development in response to significant
demand for advanced virtualisation tools. By drawing on its
expertise across the market sectors in which the Technical
Consulting business primarily operates, including automotive,
rail, energy and environment, and defence, Ricardo is exploring
novel approaches to deliver innovative solutions and greater
value to its global customers.
Delivering Excellence Through Innovation & Technology 53
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies 54 Ricardo plc Annual Report & Accounts 2018
Towards zero-
emissions
freight in
California
Experts from Ricardo are helping regulators,
technology developers and truck manufacturers in
programmes to put zero- and near-zero-emissions
trucks onto the highways of California.
Delivering Excellence Through Innovation & Technology 55
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies helping to pull forward zero-emissions vehicle technology in the
commercial vehicle and bus transportation sectors.
In each case, Ricardo is comparing new technologies with
those of current conventionally fuelled vehicles, assessing
their economic viability and commercialisation readiness for
wider adoption within the industry. The work involves the
monitoring and analysis of over 140 advanced technology
demonstrator vehicles. Some of these are based on battery-
electric powertrains, while others will feature technologies
such as hydrogen fuel cells, compressed or liquefied natural
gas (‘CNG’ or ’LNG’) range extenders, diesel plug-in hybrids, and
co-operative intelligent transportation systems across truck, bus
and off-road applications. In carrying out this work, Ricardo is
using its proprietary Total Cost of Ownership (‘TCO’) model as
well as its model for quantitative adoption rates, to assess the
competitive positioning of the technologies and the key steps
required for their large-scale commercialisation. The Ricardo
TCO model comprises a detailed build-up of capital
expenditures and operating costs incurred over the ownership
period of the vehicle, and includes benchmarked vehicle prices,
duty-cycle based miles per gallon, itemised scheduled and
unscheduled maintenance costs, future fuel prices and required
infrastructure investment.
A commercial zero-emission vehicle roadmap for
Southern California
Alongside its work for CARB, Ricardo is also working with
the South Coast Air Quality Management District and the
National Renewable Energy Laboratory to develop a detailed
technology- and economics-based adoption forecast for
Towards zero-emissions freight in California
This urbanisation, coupled with the enclosed topography of
The State of California has for many decades set its
own goals to reduce air pollution and greenhouse
gas (‘GHG’) emissions. This arrangement recognises
the unique circumstances affecting Southern
California in particular, where the region surrounding
Los Angeles is home to around half of the state’s
population and represents the second most
populated urban area within the United States.
the air basin of Southern California and its warm climate and
long hours of sunshine, makes the region highly susceptible
to smog. For these reasons California often finds itself at the
forefront of the nation’s emission-reduction efforts and, in
setting its goals for the future, it has prioritised the reduction of
street-level ozone and the avoidance of potential carcinogens:
its vision is to reduce GHG emissions to 80% of 1990 levels by
2050. These goals represent two very significant challenges for
the heavy transportation sector. Firstly, it will need to develop
zero- or near-zero-emissions technologies to meet short-term
air quality targets and, secondly, it will also need to provide a
pathway to deep well-to-wheels GHG emissions reductions in
the longer term.
Evaluating heavy-duty zero-emission vehicle
projects for CARB
Ricardo is working with the California Air Resources Board
(‘CARB’) to quantify the emission-reduction benefits and
performance of a wide range of advanced technology
demonstration vehicles. These are vehicles that have been
developed under recent CARB investment initiatives aimed at
56 Ricardo plc Annual Report & Accounts 2018
Ricardo provided technical
assistance to Toyota’s Project
Portal fuel cell truck project,
including areas of design,
vehicle build, testing and
development, and is currently
supporting vehicle trials
future low-emissions heavy transportation. The project is
considering a wide range of technologies, including ultra-low-
NOx CNG and diesel combustion engines, as well as
zero tailpipe emissions technologies such as fuel cell and
battery-electric.
Given the extremely wide range of heavy vehicle types
and duty cycles found on Southern California’s highways, it is
recognised that there will not be a single zero- or near-zero-
emissions technology solution that would be universally
appropriate. For these reasons, the Commercial Zero Emission
Vehicle (‘ComZEV’) roadmap project is focusing on identifying
the barriers and opportunities so that it can match advanced
technology options to key commercial medium- and heavy-
duty vehicle applications. By assessing those applications that
present the most attractive commercial case, it is intended
to identify the most likely early adopters for a given scenario,
with a view to modelling the resulting impacts upon fleet
emissions over time.
Helping pave the way for fuel cell trucks
The California Fuel Cell Partnership (‘CaFCP’) is an industry-
government collaboration that aims to accelerate market
introduction of fuel cell electric vehicles to help create a
cleaner, more energy-diverse future. Ricardo is collaborating
with the CaFCP to provide economic modelling tools that
will enable the assessment of the total cost of ownership of
future fuel cell trucks, and the hydrogen stations necessary to
support commercial operation.
Crucially for the work with the CaFCP, the Ricardo TCO
toolset is supplemented with economic models of refuelling
facilities that convey insights on capital and operational
expenses incurred when installing and operating new
infrastructure. The insights provided will therefore help the
CaFCP in assessing the likely future requirements for a hydrogen
refuelling infrastructure for heavy-duty fuel cell fleets.
Assisting Toyota in its fuel cell truck application
Toyota’s ‘Project Portal’ has designed and demonstrated a
heavy-duty hydrogen fuel cell system for Class 8 truck use at
the Ports of Los Angeles and Long Beach. Ricardo provided
technical assistance to the project across a wide range of
engineering functions, including systems integration and
packaging of the fuel cells, power electronics, hydrogen tanks,
cooling systems, batteries, electric motors and transmissions.
The Project Portal platform is designed to provide the target
performance required to support port drayage operations.
The truck generates more than 670 hp and almost 1,800 Nm of
torque from two Mirai fuel cell stacks and a 12 kWh battery – a
relatively small battery to support Class 8 load operations. The
concept’s gross combined weight capacity is 36 tonnes, and
its estimated driving range is more than 320 km per fill under
normal drayage operation.
Informed strategic foresight
Ricardo’s expertise in zero- and near-zero-emissions
technologies such as battery-electric and hybrid powertrains,
combined with its leadership in CNG, LNG and other low-
emissions combustion systems, makes its objective strategic
advice extremely valuable to those tackling the challenges faced
by transportation in California. Now with a presence
firmly established in the Golden State, Ricardo is fast becoming
the technology and strategic management consultant of
choice in helping California towards a zero-emissions future
for freight transport.
Delivering Excellence Through Innovation & Technology 57
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Ricardo was
appointed as the
Independent
Safety Assessor
for the signalling
technology of the
new Beijing S1
maglev line
58 Ricardo plc Annual Report & Accounts 2018
Safety,
assurance and
interoperability
Regulatory compliance is crucial for the many
interrelated participants in the railway system.
Everyone, from the manufacturers of rolling stock,
signalling systems and station and trackside
equipment, to service operators, network
authorities and governments, needs to be on the
same page – and here, Ricardo leads the world in
supporting a global client base.
Delivering Excellence Through Innovation & Technology 59
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Ricardo was proud to
have played its part in
the preparations for the
Pyeongchang 2018 Winter
Olympics, helping to ensure
the new Gangneung KTX
high-speed line
Safety is universally a critical consideration on the
world’s railways, a fact that is reflected in the highly
regulated nature of all aspects of the industry in
almost all international jurisdictions. Beyond safety,
the need for interoperability imposes an additional
layer of necessary regulation. Operators must be able
to provide cross-border services, and equipment
and vehicle manufacturers need to be able to supply
overseas markets safe in the knowledge that their products will
operate as intended. Ensuring compliance with this complex
multi-layered, multi-jurisdiction regulation is thus a major
role and highly important for the Ricardo Rail and Ricardo
Certification businesses around the world.
Olympic achievement
In South Korea, Ricardo was proud to have played its part in
the preparations for the Pyeongchang 2018 Winter Olympics,
helping to ensure the new Gangneung KTX high-speed line
opened on schedule and ahead of the Games. The new route
provides a coast-to-coast link across the north of the country,
from Incheon airport on the west coast to the north-east port
city of Gangneung, passing through both Seoul and the Games
venues in Pyeongchang.
60 Ricardo plc Annual Report & Accounts 2018
Ricardo was proud to have
played its part in the preparations
for the Pyeongchang 2018
Winter Olympics
Construction of the line was a central component of South
Korea’s infrastructure commitments included in its bid to host
the 2018 Games. The route introduces direct rail services from
Seoul to Pyeongchang for the first time, its high-speed services
taking around one hour and providing an alternative to road
connections that can take up to three hours. The route was
completed on schedule in December 2017.
Ricardo performed the independent safety assessments
of the Automatic Train Protection (‘ATP’) system on the 60 km
Pyeongchang-Gangneung section of the new build, ensuring
the signalling technology was fully compliant with required
technical standards. Through on-site audits and in-depth
document reviews, Ricardo’s Seoul-based team verified the
quality management systems for the design, manufacture,
Safety, assurance and interoperability
installation, testing and commissioning of the ATP system,
verifying that the requirements of international technical
standards had been met.
Beijing Maglev
In parallel with the new line in South Korea, Ricardo was also
appointed as the Independent Safety Assessor for the signalling
technology of the new Beijing S1 maglev line, the first in the
Chinese capital to operate with magnetic levitation and serving a
10 km route through the western districts of Shijingshan
and Mentougou.
Ricardo Rail’s Beijing team has been closely involved
throughout the final stages of the project, making every effort to
assure the new line’s safety through a series of assessments and
on-site audits. Under particular scrutiny have been the design,
installation, testing and documentation of the system-critical
safety components such as the automatic train supervision
and protection, automatic train operation, and the computer
interlocking subsystem.
The unique characteristics of maglev technology – for
example, the special track and switch layout, as well as axle
counter configurations – require specialist consideration.
As such, the Ricardo team has hosted workshops with
stakeholders to apply a risk-based approach, ensuring potential
challenges were identified and resolved as the project moved
towards completion.
Preliminary services commenced in late 2017, with services
operating with an initial fleet of ten locally manufactured
six-car maglev trains, each with the capacity for around 1,000
passengers and capable of operating at speeds of up to 80 km/h.
Great Western
While customers celebrated new lines, rolling stock and signalling
projects completed with Ricardo’s support in China, South Korea
and many other nations, a major milestone was reached in the
UK in late 2017 with the launch of the first passenger services by
Great Western Rail using the bi-mode Class 800 Intercity Express
Train built by Hitachi Rail Europe. This new fleet now operates
between London, South Wales and Bristol, and will soon extend
to services across the south west peninsula.
Ricardo was appointed by Hitachi Rail Europe to provide
technical support throughout the development of the
new trains, including safety case and risk assessment, and
infrastructure compatibility. In addition, Ricardo also provided
support with reliability, availability and maintainability
assessment, electromagnetic compatibility consultancy, human
factors and fire safety evaluation.
A comprehensive and growing service portfolio
Ricardo Rail is one of very few service partners that can offer the
international rail industry both a comprehensive portfolio of
technical competencies to support some of the most challenging
aspects of rail system engineering, as well as independent
assurance services provided by Ricardo Certification.
Synergies with other parts of the Ricardo organisation are
also being explored, with a view to bringing new services to
rail and enabling other sectors to benefit from rail expertise.
As an example, Ricardo Rail and Ricardo Certification experts
are collaborating with Ricardo Automotive on autonomous
vehicle safety assurance. There are also potential opportunities
with Ricardo Energy & Environment, where some markets are
currently not regulated but may move towards an independent
assessment model in the future.
In these circumstances, the existing accreditations that form
the basis of certification work in rail will serve to demonstrate to
prospective customers that Ricardo has the requisite expertise
and competence to carry out a range of assessments that can
be applied to these emerging and innovative areas.
Ricardo was appointed by Hitachi Rail Europe to provide technical
support throughout the development of the bi-mode Class 800
Intercity Express for use by Great Western Rail, including safety
case and risk assessment, and infrastructure compatibility
Delivering Excellence Through Innovation & Technology 61
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies 62 Ricardo plc Annual Report & Accounts 2018
An advanced
transmission
for the ultimate
super sports car
Building on its longstanding relationship with
Bugatti, Ricardo has assisted with the design and
development and is now manufacturing the
advanced transmission for the groundbreaking
1,500 horsepower Bugatti Chiron, the most
remarkable super sports car ever to be marketed.
Delivering Excellence Through Innovation & Technology 63
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies 64 Ricardo plc Annual Report & Accounts 2018
An advanced transmission for the ultimate super sports car
No other production car is as powerful or as
astonishingly fast as a Bugatti. The 16-cylinder, quad-
turbo Veyron debuted in 2005 with the promise of
bringing unrivalled performance to the public road
– at the same time as delivering the sophistication
to arrive in style and luxury at La Scala or The Ritz.
Ricardo was proud to have been an important part
of the Veyron programme, designing, developing
and manufacturing the 400+ km/h machine’s highly advanced
dual-clutch gearbox and all-wheel drive transmission system.
Now, with the Veyron’s successor in production at Bugatti’s
Atelier in Molsheim, France, the elite marque has reaffirmed its
faith in Ricardo with a contract to supply a further evolution of the
pioneering Veyron transmission. Yet this is no simple repeat order.
For the new Chiron two-seater super sports car the stakes are
raised still further: with outputs of 1,500 hp and torque of
1,600 Nm the new Bugatti is by a wide margin the most
powerful and luxurious road car ever to be marketed. And for the
transmission manufactured by Ricardo, these figures offer a major
challenge in dealing with immense stresses and the sudden
bursts of power generated – which can go beyond those found
in the highest performing racing cars.
Named after Louis Chiron, the multiple Grand Prix winner for
Bugatti in the 1920s and 30s and the marque’s most successful
driver, the ultra-exclusive Chiron builds upon the reputation of the
Veyron and is expected to signal a high-water mark in extreme
sports cars powered by pure combustion engines. The task facing
Ricardo’s world-class transmission experts was a double-edged
one. Not only did the new Chiron transmission have to handle
almost 30% more torque right through the W16 engine’s rev
range, but it had to sustain this remarkable performance all the
way through to the car’s top speed of 420 km/h.
For the transmission engineer the combination of massive
torque and high rotational speeds is a daunting challenge,
especially if the vehicle is to maintain the supreme refinement
and composure required of an elite model priced at a seven-
figure sum. The task was further compounded by the need for
strict control of the transmission’s weight and package size; this
came in spite of the move to a larger dual-clutch module in order
to cope with the much higher and even more unrelenting loads
being channelled through the system.
Close co-operation on engineering
The engineering development phase, with Ricardo working very
closely with Bugatti, resulted in a final design that was scarcely
any heavier than the original transmission, and whose casing
was just 10 mm longer. Though much of the additional weight
was due to increased sizing on the highly stressed components,
the net increase was kept to an absolute minimum thanks to
the selection of advanced lightweight materials and the very
latest techniques for machining and finishing of the gearbox’s
high-precision shafts, gears and other internal components. In
particular, and again in close collaboration with Bugatti, Europe
was combed for highly specialised subcontractors to handle
some of the unique and complex operations involved in such a
power-dense transmission.
The driveline on a super-high performance all-wheel drive
sports car such as this Bugatti does of course consist of much
more than just the gearbox, advanced though that already is. For
the Chiron application, Bugatti updated the design of the rear axle
to provide enhanced oil flow to keep temperatures down during
intense driving; the front axle, by contrast, required minimal design
changes as its torque throughput is deliberately restricted by the
centre differential and protective clutch arrangement in the same
way as its predecessor, the Veyron.
Technologies from aerospace and Formula 1
To combine these extremes of performance in a design that is
both user friendly and reliable in everyday service, Ricardo turned
to technical solutions from its extensive Formula 1 activities,
as well as to techniques, advanced materials and innovative
manufacturing processes more familiar to aerospace engineers.
Many of the suppliers selected by Ricardo and Bugatti come from
those exalted sectors too, yet with Bugatti being a member of
the extensive Volkswagen Group network there was also access
to leading mainstream suppliers where their components and
processes were able to meet the very demanding specifications
laid down by the supercar manufacturer.
The quick ramp-up of production at Ricardo’s globally
recognised advanced transmissions facility in the UK enabled a
smooth commercial launch of the new car, and by February 2018
manufacturing output of the Chiron dual-clutch transmission
(‘DCT’) had already exceeded previous records set by Ricardo
during the 10 years of Veyron production. This was achieved
through continued investment in Ricardo’s world-class
machining centre that provides many of the Chiron’s transmission
sub-components and by leading a number of continuous
improvement initiatives through the Chiron’s global supply chain.
Ricardo and Bugatti have been partners since 2000, and with
the 500-unit production run of the Chiron transmission set to
continue for a further five years, the co-operation between the
two organisations will have spanned over two full decades – a
convincing demonstration to their shared values of innovation,
engineering integrity, and top-quality precision manufacturing.
Delivering Excellence Through Innovation & Technology 65
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Corporate
governance
68 Board of Directors
70 Corporate governance statement
76 Nomination committee report
77 Audit committee report
82 Directors’ remuneration report
104 Directors’ report
107 Statement of Directors’ responsibilities
Delivering Excellence Through Innovation & Technology 67
Corporate governance Board of Directors
Mark Garrett CEng, FIMechE, FREng
Chief Operating Officer
Mark Garrett joined Ricardo in 1998 and was appointed Chief Operating
Officer in 2010. Prior to joining Ricardo, Mark spent 14 years in various
powertrain-related roles in the Rover Group, including at the BMW
Engineering Centre in Munich. He is a Chartered Engineer and a Fellow
of both the Institution of Mechanical Engineers and the Royal Academy
of Engineering. Mark was also appointed as non-executive chairman of
Secured By Design Limited on 25 November 2016.
Dave Shemmans BEng
Chief Executive Officer
Dave Shemmans joined Ricardo in 1999. He was appointed to the
Board as Chief Executive Officer Designate in February 2005 and
became the Chief Executive Officer on 4 November 2005. Prior to
joining Ricardo, he was managing director of a subsidiary of Powergen
plc. He has also gained consulting experience in both listed and private
companies. He is a graduate of the Harvard Business School. Dave was
appointed non-executive director of Sutton and East Surrey Water plc
on 1 September 2014.
Ian Gibson BSc, ACA
Chief Financial Officer
Ian Gibson was appointed Chief Financial Officer on 1 July 2013. A member
of the Institute of Chartered Accountants in England and Wales, Ian is a
finance professional with more than 30 years of commercial experience.
He was previously chief financial officer of Cable & Wireless Worldwide
plc, where he spent a total of 17 years in a number of senior financial
management positions. Prior to this, Ian spent 12 years at Deloitte where he
worked in both the London and Toronto offices.
Patricia Ryan LLB (Hons)
Group General Counsel and Company Secretary
Patricia Ryan is a qualified solicitor. She joined Ricardo's legal department
in 2002 and was appointed Group General Counsel in 2005 and Company
Secretary in November 2008. Patricia holds an honours degree in law from
the University of Westminster. Patricia achieved the Certificate of Investor
Relations from the Investor Relations Society in February 2017.
Sir Terry Morgan CBE, FREng
Non-Executive Director and Chairman
Sir Terry Morgan was appointed Non-Executive Director on 2 January 2014
and Chairman on 29 October 2014. He is currently non-executive chairman
of Crossrail Limited, High Speed Two (HS2) Limited and London City
Airport. He was previously non-executive chairman of The Manufacturing
Technology Centre Limited, and NSARE Limited (the National Skills
Academy for Railway Engineering). Sir Terry was also previously a non-
executive director of Boxwood Limited and the Department of Energy &
Climate Change.
68 Ricardo plc Annual Report & Accounts 2018
Malin Persson MSc
Non-Executive Director
Malin Persson was appointed Non-Executive Director on 4 January 2016.
Malin held a number of senior executive roles during her employment by
the Volvo Group between 1995 and 2012. She is an elected member of
the Royal Swedish Academy of Engineering Sciences and has an MSc in
Industrial Engineering and Management from the Chalmers University of
Technology in Gothenburg.
Laurie Bowen BSc, MBA
Non-Executive Director
Laurie Bowen was appointed Non-Executive Director on 1 July 2015. Laurie
has over 30 years of international leadership experience at IBM, British
Telecom, Tata Group and Cable & Wireless Communications. She now
serves as CEO for the Americas division of Telecom Italia Sparkle and is
based in Miami, Florida. Laurie has an MBA, a BSc in Electrical Engineering
and a BSc in Computer Science from Washington University in St. Louis,
Missouri.
Board of Directors
Peter Gilchrist CB
Non-Executive Director, Senior Independent Director and
Chairman of the Remuneration Committee
Peter Gilchrist was appointed Non-Executive Director on 1 December
2010, Chairman of the Remuneration Committee on 14 November 2013
and Senior Independent Director on 1 July 2015. Peter’s military career
in the British Army spanned almost four decades and he has previously
been Master-General of the Ordnance and an executive director in the
Defence Procurement Agency. Peter is currently non-executive chairman
of Enterprise Control Systems Limited and is a non-executive director of
Orcogen Limited.
Bill Spencer BSc, FCMA, MCT
Non-Executive Director and Chairman of the Audit Committee
Bill was appointed Non-Executive Director on 24 April 2017 and Chairman
of the Audit Committee at the close of the AGM on 8 November 2017. For
15 years until 2010, he was the CFO of Intertek Group plc and has since held
audit committee chair roles at UK Mail plc and Exova Group plc. Currently
Bill is the senior independent director and audit and risk committee
chairman of Northgate plc. He is a Chartered Management Accountant
and Corporate Treasurer and has a BSc in Management Sciences from the
University of Manchester.
Ian Lee BA, CA, CPA
Former Non-Executive Director and Chairman of the Audit
Committee
Ian Lee was appointed Non-Executive Director and Chairman of the Audit
Committee in 2008. He was a former audit partner of Ernst & Young and
a member of their UK Governing Council. Ian was also a non-executive
director and chairman of the audit committee of Clyde Process Solutions plc.
Ian Lee stepped down from the Board at the close of the AGM on
8 November 2017.
Delivering Excellence Through Innovation & Technology 69
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Corporate governance statement
Sir Terry Morgan CBE – Chairman
CHAIRMAN’S OVERVIEW
I am pleased to introduce the Corporate Governance
Statement for the year ended 30 June 2018. Governance
is an important contributor to the success of Ricardo and
the Board is committed to ensuring that appropriate
standards of governance are maintained throughout
the Group.
This report sets out the ways in which we comply with
good corporate governance principles. It describes
how the Board and its committees work, and also our
approach to risk management and internal control.
The Board recognises the importance of considering
the Company’s responsibilities and duties to both its
shareholders and broader stakeholder group, and this
UK CORPORATE GOVERNANCE CODE
The Board confirms that the Company has complied with the
provisions of the UK Corporate Governance Code 2016 (‘the
Code’) throughout the year ended 30 June 2018.
This report describes how the Company has applied the
principles and standards set out in the Code during the year and
sets out our activities relating to the main sections of the Code:
A. Leadership;
B. Effectiveness;
C. Accountability;
D. Remuneration; and
E. Relations with shareholders.
The Code and associated guidance are publicly available
on the Corporate Governance and Stewardship page of the
Financial Reporting Council’s website, www.frc.org.uk/directors/
corporate-governance-and-stewardship.
70 Ricardo plc Annual Report & Accounts 2018
has been at the heart of our culture and decision-making
process for many years. The Directors’ duties under
section 172 of the Companies Act 2006, to promote the
success of the Company, help to underpin the good
governance which is at the centre of what we do, and the
Board receives regular briefings and updates on corporate
governance at its Board and Committee meetings.
The Board has been briefed on the recently published
2018 UK Corporate Governance Code which is due to
take effect for Ricardo from 1 July 2019. We will further
review this and decide what changes need to be made
to our governance processes.
Sir Terry Morgan CBE
SECTION A: LEADERSHIP
A1: The Role of Ricardo’s Board
Our role is to provide entrepreneurial leadership and we
recognise that we are collectively responsible for the long-term
success of the Group.
We set strategy and oversee its implementation by the
executive team. We assess business opportunities and seek
to ensure that appropriate controls are in place to assess and
manage risk. We are responsible for reviewing the executive
team’s performance and we oversee senior-level succession
planning within the Group.
We agree the Company’s values and standards and ensure
that the Company’s obligations to its shareholders are met.
We have a formal schedule of matters reserved for our
approval which are not delegated to the executive team.
Corporate governance statement
These include:
• Strategy;
• Acquisitions and disposals (above a certain size);
• Annual budgets;
• Capital expenditure (above a certain amount);
• Financial results;
• Overseeing systems of internal control, governance and risk
management;
• Dividends; and
• Appointment and removal of Directors and the Company
Secretary.
Our Board has Nomination, Audit and Remuneration
Committees and we delegate certain responsibilities to them.
These committees comprise our independent Non-Executive
Directors (save for the Nomination Committee, which includes
the Chief Executive Officer) and all play a key role in supporting
the Board. The full schedule of matters reserved for the Board,
together with the written terms of reference for each
committee which are reviewed annually, are available on
our website, www.ricardo.com or on request from the
Company Secretary.
The Board in financial year 2017/18
There are seven scheduled Board meetings per year, and
otherwise as required. Details of attendance at scheduled Board
and Committee meetings are shown in the table below.
If any Director is unable to attend a meeting, they discuss
their views and comments with the relevant Chairman in
advance, so that their position can be represented at the
meeting. In Sir Terry Morgan’s absence at the June 2018 Board
meeting, Peter Gilchrist, as Senior Independent Director, chaired
that meeting.
Board meetings focus on driving Ricardo's strategy,
developing strong leadership, succession planning, reviewing
financial business performance, monitoring risks and protecting
the strength of our relationships with clients, employees and
other stakeholders. Our agendas allow time for debate and
long-term strategic discussion. Our forward planner gives Board
members visibility of what is on future agendas for
their consideration.
A number of the key matters considered by the Board during
the year under review are set out in the table below:
Meeting in
FY 2017/18
July 2017
Significant matters under review
• FY 2017/18 budget approval;
• Risk management and internal control; and
• Matters reserved for the Board and
Committees’ terms of reference
September
2017
• Preliminary results and Annual Report;
• Final dividend; and
• Annual General Meeting ('AGM')
November
2017
• Strategy review; and
• Review of Board objectives
January
2018
February
2018
• Annual review of insurance, health, safety
and environment
Interim results and Interim Report;
Interim dividend;
•
•
• Key performance indicators; and
• Human resources
April 2018
• Treasury review
June 2018
• FY 2018/19 divisional budget presentations
In each meeting the Board receives reports from the Chief
Executive Officer and the Chief Financial Officer together with
reports and updates on health and safety as well as potential
acquisition and disposal activities.
Board and Committee meeting attendance
Board
meetings
Committee meetings
Audit Remuneration
Nomination
Number of scheduled meetings in the year
Number attended by each member:
Dave Shemmans
Ian Gibson
Mark Garrett
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Ian Lee*
(*) Ian Lee resigned on 8 November 2017.
7
7
7
6
6
7
6
7
6
3
3
-
-
-
-
3
3
3
3
2
4
-
-
-
4
4
4
4
4
2
1
1
-
-
1
1
1
1
1
-
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Board objectives
The Company is confident that the Board and the wider
leadership team have the experience and track record to meet the
Company’s aims of delivering long-term growth and successfully
managing the challenges of an expanding international group.
The Board sets its specific future objectives at the end of each
financial year and these reflect the particular focus of the
Company in the year ahead. Progress against each objective
is tracked by the Company Secretary and reviewed with the
Chairman and the Board at the mid-year point.
Induction
There is a written framework for the full, formal and tailored
induction of new directors, which includes site visits, meetings
with senior management and advisors, and the provision of
corporate documentation to facilitate their understanding of our
business, its operations, key markets and risks.
A2: Division of responsibilities
There is a clear division of responsibilities between the Chairman
and the Chief Executive Officer, which is documented, clearly
understood and approved by the Board.
Sir Terry is primarily responsible for leading the Board
and ensuring its effectiveness. Dave Shemmans has direct
responsibility for the Group on a day-to-day basis and is
accountable to the Board for the financial and operational
performance of the Group.
Dave Shemmans chairs the Executive Committee, which meets
formally at least three times a year. The Executive Committee
is primarily responsible for developing and implementing our
corporate strategy and policies.
The responsibilities of the Senior Independent Director are also
documented and include the provision of an additional channel
of communication between our Chairman and the Non-Executive
Directors. The Senior Independent Director also provides an
additional point of contact for our shareholders should they have
concerns that communication through normal channels has failed
to resolve or where these contacts are inappropriate.
A3: The Chairman
Sir Terry sets the Board agenda in consultation with the Chief
Executive, other Board members and the Company Secretary. On
appointment as Chairman in October 2014, the Board considered
Sir Terry to be independent in accordance with the Code provisions.
A4: Non-Executive Directors
Peter Gilchrist has been the Senior Independent Director
throughout the year under review. Bill Spencer became Chairman
of the Audit Committee on 8 November 2017. All current Non-
Executive Directors held office throughout the year under review.
On a number of occasions during the year, the Chairman met
the other Non-Executive Directors without the attendance of the
Executive Directors. There were several other occasions during the
year when discussions between various Directors took place on an
informal basis. In addition to formal Board meetings, the Chairman
maintains regular contact with the other Directors to discuss
specific issues.
72 Ricardo plc Annual Report & Accounts 2018
SECTION B: EFFECTIVENESS
B1: Board composition and independence
As at 30 June 2018, our Board comprised five Non-Executive
Directors and three Executive Directors as follows:
Dave Shemmans
Chief Executive Officer
Ian Gibson
Mark Garrett
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Chief Financial Officer
Chief Operating Officer
Non-Executive Chairman
(independent at time of
appointment)
Independent Non-Executive
Director, Senior Independent
Director and Chairman of the
Remuneration Committee
Independent Non-Executive
Director
Independent Non-Executive
Director
Independent Non-Executive
Director and Chairman of the
Audit Committee
Biographies of Directors, giving brief details of their experience
and other commitments are set out on pages 68 and 69. The
wide-ranging experience and backgrounds of the Non-
Executive Directors enable them to debate and constructively
challenge management in relation to the strategy and
performance of the Group.
The Board has concluded that Sir Terry Morgan, Peter
Gilchrist, Laurie Bowen, Malin Persson and Bill Spencer are
independent in character and judgement. Sir Terry Morgan
is also the non-executive chairman of Crossrail Limited and
High Speed Two (HS2) Limited. Crossrail Limited is a current
customer of the Group and therefore a related party, as
disclosed in Note 37 to the financial statements. High Speed
Two (HS2) Limited is a potential customer of the Group in the
future. As part of the Board’s conclusion on the independence
of its members, these relationships have been considered and
determined to be immaterial to this assessment.
The Company has procedures in place to ensure that the
Board’s power to authorise conflicts of interest are operated
effectively and that such procedures have been followed
during the year under review.
B2: Appointments to the Board
At the close of the AGM on 8 November 2017, Ian Lee
resigned from the Board and following Bill Spencer’s election
as a Non-Executive Director, he was appointed Chairman of
the Audit Committee.
Our Board has continued to discuss matters relating to
succession planning and talent management for leadership
succession.
There is a rigorous and transparent procedure for
appointments that is described in the Nomination Committee
report on page 76.
Non-Executive Directors are appointed for specified terms of
three years, which can be extended by agreement provided that
the individual’s performance continues to be effective.
Diversity
Our Board and Committee is committed to promoting equality
of opportunity for all employees and job applicants, free from
all forms of discrimination. Ricardo is an inclusive employer
and values diversity of skills, knowledge, background, industry,
international experience and gender in its employees and aims
to recruit the best person for the role in all its positions across
the Group.
Our Committee appreciates that a diverse range of
backgrounds is an important part of succession planning at all
levels in the Group. Our Committee continually monitors tenure
profile and is very conscious of the need to continue to promote
diversity at Board level and throughout the Group. Upon
engagement of external search consultants, our Board requires
that full account of all aspects of diversity are considered in
preparing candidate lists.
Details of female representation elsewhere within the Group
is set out on page 33.
B3: Commitment
The Chairman and the Non-Executive Directors have provided
assurances to the Board that they remain fully committed to
their respective roles and can dedicate the necessary amount of
time to attend to the Company’s affairs.
During the year, Malin Persson reduced her non-executive
roles and now holds six other appointments.
Both Malin and the Board are aware of the concerns
expressed by some shareholders and proxy voting companies
about the number of non-executive positions held by her.
Under the Code there is no limit to the number of external
non-executive director positions a director may hold.
We would like to reiterate that, before appointment, Malin
assured the Board that she could devote sufficient time to her
role as Non-Executive Director. Since appointment, Malin has
attended every Board and Committee meeting. Malin is
always well briefed and actively engages in all Board and
Committee meetings, providing constructive challenge, insight
and guidance.
Outside of the Board and Committee schedule, Malin always
makes herself available to the Company when called upon to
do so and continually seeks to increase her understanding of
Ricardo by meeting senior executives and visits to different sites.
Malin has demonstrated, and continues to demonstrate, her
commitment and availability to the Company. The Board will
keep this matter under review.
The Board is satisfied that each of the Non-Executive
Directors is able to devote sufficient time to the Company, and
its affairs, to effectively discharge their duties.
Corporate governance statement
Letters of appointment for the Non-Executive Directors are
available for inspection by shareholders at each AGM and during
normal business hours at the Company’s registered office.
Executive Directors must obtain the prior consent of the
Board before accepting a non-executive directorship in any
other company. Executive Directors may retain the fees from any
such directorship. Two Executive Directors, Dave Shemmans and
Mark Garrett, held non-executive directorships during the year
under review.
B4: Professional development
The Board and its Committees are kept informed of corporate
governance and relevant regulatory developments as they arise
through the Company Secretary.
In addition, we keep ourselves informed about the Group’s
activities through a structured programme of presentations
from each of the businesses within the Group and from a
number of Group functional leaders. During the year under
review we received presentations from the Group HR Director
and the Group Risk Manager & Head of Internal Audit, together
with specific presentations on key projects for the business.
There are regular presentations to the Board from employees
of the Group who have been identified by their peers and
managers as potential high achievers.
Directors are updated continually on the Group’s business
with information on monthly financial performance and
by means of additional presentations on matters including
insurance, treasury, health and safety, and environmental
risk management.
The Audit Committee is routinely briefed on accounting
and technical matters by senior management and by the
external auditors.
The Remuneration Committee receives updates on
remuneration trends and market practices as part of its
regularly scheduled business, and during the year under
review FIT Remuneration Consultants LLP provided updates
on the proposals and reporting requirements for executive
remuneration.
Training for Directors is available as required and is provided
mainly by way of external courses. A register of the training
that individual Directors have undertaken is maintained by
the Company Secretary and is reviewed by the Chairman
individually with each Director as part of the Board
evaluation process.
The Board considers that it is the primary responsibility
of each Director to identify the individual training and
development needs that he or she requires.
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B5: Information and support
The Chairman is responsible for ensuring the Directors receive
accurate, timely and clear information, with Board and
Committee papers being circulated sufficiently in advance
of meetings.
All Directors have access to the advice and services of the
Company Secretary and each Director has been informed
that, in the furtherance of his or her duties, they are entitled to
seek independent professional advice at the expense of the
Company. The Company arranges appropriate insurance cover
in respect of legal actions against its Directors. In addition, the
Company has entered into indemnities with its Directors as
described on page 104.
B6: Board evaluation
The Board undertakes a formal review of its performance and
that of its Committees each year. The externally facilitated
review conducted in the 2016/17 financial year concluded
that the Board was strong and effective, with each Director
actively contributing to the effectiveness of the Board and the
Committees of which he or she was a member during that year.
Following the external review, the Board set itself
improvement actions and objectives. In 2017, the Board
reviewed the evaluation findings, agreed improvement actions
and noted progress had been made in all areas. The Board also
recognised that succession planning is an area that continues to
require focus.
Additionally, Ricardo’s external auditors and remuneration
consultants provide an evaluation of the performance of our
Audit and Remuneration Committees, respectively.
It is proposed that a further externally facilitated review will
be conducted in 2019.
B7: Re-election
In accordance with the Company’s Articles of Association and
the Code, all Directors will retire at the AGM in November
2018 and, being eligible, will offer themselves for re-election.
The Board recommends that each of the Directors should be
re-elected by the shareholders because each continues to be
effective and demonstrates commitment to the role that each of
them performs.
SECTION C: ACCOUNTABILITY
This Report provides shareholders with a clear assessment of the
Group’s position and prospects, supplemented, as required, by
other periodic financial and trading statements.
C1: Financial and business reporting
The Statement of Directors’ Responsibilities for preparing the
Annual Report, the Directors’ Remuneration Report and the
financial statements in accordance with applicable law and
regulations is set out on page 107.
The Group’s business model is set out within the Strategic
Report on pages 20 and 24.
The Directors statement relating to going concern and the
Viability Statement are set out on pages 120 and 43, respectively.
C2: Risk management and internal control
Each year, the Board undertakes a comprehensive review of the
principal risks and uncertainties facing the Group and how those
risks may impact the Group’s prospects.
Overall responsibility for systems of internal control rests with
the Board. The Board’s arrangements for the application of risk
management and internal control principles are detailed on
pages 40 to 42.
C3: Audit committee and auditors
The Board has delegated oversight of the relationship with
the Group’s and the Company’s external auditors to the Audit
Committee. Their work is outlined in the Audit Committee report
on pages 77 to 81.
SECTION D: REMUNERATION
Please refer to the Directors’ Remuneration Report on pages 82 to
103 for further information, and in particular:
D1: Level and components of remuneration
Please refer to pages 84 to 95.
D2: Procedure
Please refer to pages 96 to 103.
The Non-Executive Directors have never been employees of
the Company, nor have they participated in any of the Company’s
share schemes, pension schemes or bonus arrangements.
The Non-Executive Directors receive no remuneration from
the Company other than the Directors’ fees disclosed, and travel
expenses. Their fees are determined by the Board as a whole on
the recommendation of the Chief Executive Officer.
No Director is involved in deciding their own fees.
74 Ricardo plc Annual Report & Accounts 2018
Corporate governance statement
SECTION E: RELATIONS WITH SHAREHOLDERS
E1: Shareholder dialogue
The Chief Executive Officer and the Chief Financial Officer
regularly meet with institutional shareholders to foster a mutual
understanding of objectives, answer their questions and to keep
them updated on our performance and plans.
These meetings range from one-to-one discussions to group
presentations and investor conference calls following our results
announcements. Any presentations provided in these meetings
are uploaded to our website and comments are fed back to us.
In 2017, the Chairman of the Remuneration Committee
engaged with shareholders, accounting for over half of the
issued share capital, to consult on the Directors’ remuneration
policy, resulting in a 93.98% vote in favour of the policy at the
2017 AGM.
The Chairman is always available to meet with key
shareholders and met the Company’s largest shareholder in
July 2018 to discuss various corporate governance matters. No
significant issues were raised or actions required.
In addition, the Senior Independent Director and the
Chairman of the Audit Committee are available for discussions
with major shareholders, if required.
The Chairman also looks to shareholder groups' annual voting
guidelines to better understand their policies on governance
and voting.
For an independent view, Investec and Liberum, the capital
markets advisory firms, provide us with regular reviews of major
investors’ views on company management and performance.
Surveys of shareholder opinion are normally carried out following
announcements of results and are circulated to the Board.
As required by the Code, the Board considers that its Non-
Executive Directors, including the Senior Independent Director,
have a good level of understanding of the issues and concerns of
major shareholders.
E2: Ricardo’s Annual General Meeting
The Company’s Annual General Meeting is an opportunity
to meet private investors. It is intended that all Directors of
the Company will be available to answer questions at the
2018 AGM.
The Notice of Meeting sets out the resolutions being
proposed at the AGM on 15 November 2018 at 10:00am.
Shareholders can vote separately on each proposal.
Last year, apart from the resolution re-electing Malin
Persson, which received 76.39% of the vote, all resolutions
were passed with votes ranging from 94.04% to 99.99%.
Shareholders unable to attend the AGM are encouraged to
vote in advance of the meeting.
The AGM in November 2017 was attended by all Directors
in office at the time of the meeting. The Directors encourage
the participation of all shareholders, including private
investors, at the AGM and as a matter of policy the level of
proxy votes (for, against and vote withheld) lodged on each
resolution is declared at the meeting and displayed on the
Company’s website.
Ricardo’s website, www.ricardo.com, contains a wealth of
information, including:
• Latest Ricardo news, stock exchange announcements and
press releases; and
• Annual report and investor presentations.
The Corporate Governance Statement was approved by the
Board of Directors on 12 September 2018 and signed on its
behalf by:
Sir Terry Morgan CBE
Chairman
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Before such recommendations are made, descriptions of the
roles and skills required in fulfilling these roles are prepared
for particular appointments. To attract suitable candidates,
appropriate external advice is taken and interviews conducted
by at least two members of the Nomination Committee to
ensure a balanced view.
When an appointment of a non-executive director is made,
a formal letter is sent clearly setting out what is expected
regarding time commitment, committee membership and
involvement outside of Board meetings. The chosen candidate
is required to disclose to the Board any other significant
commitments before the appointment can be ratified.
No additional appointments to the Board were made during
the year under review.
The Chairman of the Committee is the Chairman of the
Board, Sir Terry Morgan, except when a new Chairman of the
Board is being sought, in which case it is the Senior
Independent Director.
Non-Executive Directors, including the Chairman, are subject
to rigorous review when they continue to serve on the Board for
any term beyond six years.
SUCCESSION PLANNING
Board member
Date of appointment
Tenure (years)
Dave Shemmans
Ian Gibson
Mark Garrett
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Ian Lee*
April 2005
July 2013
July 2008
January 2014
December 2010
July 2015
January 2016
April 2017
August 2008
13
5
10
4
7
3
2
1
10
(*) Ian Lee retired from the Board on 8 November 2017.
Following our review of Laurie Bowen’s performance during
her three-year tenure and determining her continued
independence as a Non-Executive Director, the Committee
unanimously recommended to the Board the renewal of
her appointment. The Board approved this renewal at the
appropriate time.
The Committee has spent time looking at succession
planning for the Executive Directors as well as for the Board over
the medium term. We have also discussed talent management
and succession planning for the top-performing senior
managers within the business.
Sir Terry Morgan CBE – Chairman of the Nomination Committee
CHAIRMAN’S OVERVIEW
The primary objectives of the Committee are to
support the Board in fulfilling its responsibilities to
ensure that firstly, there are formal, rigorous and
transparent processes in place for the appointment
of new Directors, both to the Board and to senior
management positions, and secondly, that there
are effective, deliverable and well thought-through
succession and contingency planning processes in
place across the Group for all key positions.
In the forthcoming year we will continue to focus
on talent management and succession planning for
management below Board level.
Sir Terry Morgan CBE
COMPOSITION
The Nomination Committee, which is chaired by Sir Terry
Morgan, comprises the independent Non-Executive Directors,
Peter Gilchrist, Ian Lee (until his retirement on 8 November
2017), Laurie Bowen, Malin Persson and Bill Spencer (since
his appointment on 24 April 2017), together with the Chief
Executive Officer, Dave Shemmans. The Committee has one
scheduled meeting per year, which is supplemented by ad hoc
meetings as necessary and informal meetings between the
Committee members.
RESPONSIBILITIES
The Committee:
• evaluates the balance of skills, knowledge and experience of
•
the Board;
monitors the leadership needs and succession planning of
the Company;
• considers the training needs of the executive and non-
executive members;
• regularly reviews the structure, size and composition of the
Board; and
• makes recommendations to the Board for executive and non-
executive appointments.
Sir Terry Morgan CBE
Chairman of the Nomination Committee
76 Ricardo plc Annual Report & Accounts 2018
Audit committee report
meetings. In addition, the Committee meets our external
auditors and the Head of Internal Audit without management
being present at least once a year. The Committee has three
scheduled meetings per year and ad hoc meetings as required.
As set out on page 74, the performance of the Audit Committee
has been evaluated and is considered to be effective.
RESPONSIBILITIES
The Committee is established by, and is responsible to, the
Board. Its main responsibilities are to:
• Monitor and be satisfied with the truth and fairness of
both the Group's consolidated and the Company's
standalone financial statements before submission to the
Board for approval;
• Review the Group’s risk profile and the effectiveness of the
Group’s risk management processes, internal controls
and systems;
• Review the effectiveness of the internal audit function and to
ensure that it is appropriately resourced;
• Make recommendations to the Board in relation to the
appointment and re-appointment of the external auditors
and their remuneration, before appointment or
re-appointment by the shareholders in general meeting;
• Review the scope and planning of the external audit and be
satisfied with the auditors’ independence, objectivity and
effectiveness on an ongoing basis;
• Review the content of the Annual Report & Accounts and
advise the Board on whether, when taken as a whole, it is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Group's position and
performance, business model and strategy;
• Oversee the annual process that executive management uses
to enable the Board to re-confirm the continued operational
and financial viability of the Group;
• Establish and oversee the Group’s arrangements for
employee disclosure and fraud and bribery prevention
arrangements within the Group; and
• Determine the policy relating to any non-audit services
performed by the external auditors.
The Audit Committee is authorised by the Board to seek
and obtain any information it requires from any officer or
employee of the Company and to obtain external legal or other
independent professional advice as is deemed necessary by it.
The topics covered by the Committee during the financial
year included:
• Reviewed significant financial reporting matters, judgements
and estimates, and changes in accounting policies applicable
in the preparation of the consolidated interim and year-end
financial statements;
Bill Spencer – Chairman of the Audit Committee
CHAIRMAN’S OVERVIEW
I took over as Chairman of the Audit Committee on
Ian Lee’s retirement at the AGM in November 2017.
It was a smooth transition and on behalf of the Audit
Committee, I would like to thank Ian for all his support
and guidance during this process.
As in previous years, the Audit Committee has taken
an active role in discussing and evaluating risk, as
delegated by the Board, to ensure that appropriate
challenge and guidance is provided to management.
This year the Committee also led a rigorous external
audit tender process and the Board will recommend
the appointment of KPMG as the external auditors for
the year ending June 2019 at the 2018 AGM. Details of
the audit tender process are provided on page 80.
I hope that you will find this report useful and I would
welcome any comments.
Bill Spencer
COMPOSITION
The Audit Committee, which is chaired by myself, Bill Spencer,
comprises the independent Non-Executive Directors; Peter
Gilchrist, Laurie Bowen and Malin Persson. Until his retirement as
a Non-Executive Director and Chairman of the Audit Committee
at the close of the AGM on 8 November 2017, Ian Lee attended
the July and September 2017 Committee meetings in
anticipation of his planned succession. The competence and
experience of the members of the Audit Committee is set out
on pages 68 and 69 and is considered to be relevant to the
sectors in which Ricardo operates.
As the Committee’s Chairman, I have recent and relevant
• Considered reports prepared by the Chief Financial
financial experience and a professional accountancy qualification,
which is considered desirable by the Financial Reporting
Council’s Guidance on Audit Committees, issued in April 2016.
The Chairman, Executive Directors and the Company’s external
auditors have standing invitations to attend all Committee
Officer and external auditors, on the results of the interim
review procedures and annual audit, including internal
control matters;
• Evaluated processes in place to assure the integrity of
the Annual Report & Accounts, and that the information
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presented, when taken as a whole, is fair, balanced and
understandable and contains the information necessary
for shareholders to assess the Group’s position and
performance, business model and strategy.
• Considered significant matters raised by the internal audit
function arising from internal audits performed during the
year, including the scope of the internal audit plan for the
following year;
• Evaluated the Group’s risk profile, risk appetite and the
effectiveness of internal control systems, together with risk
management, ethics and whistleblowing processes, on
which no significant failings or weaknesses were identified;
• Assessed the results of the application of agreed
assumptions to assess and re-confirm the continued
operational and financial viability of the Group for a period of
three years from the date of this report;
• Evaluated the external auditors’ independence and
effectiveness, including compliance with the Group’s policy
in respect of the provision of non-audit services;
• Led an external audit tender process and recommended the
successful firm’s appointment to the Board; and
• Reviewed the terms of reference of the Committee.
Significant financial reporting matters
considered by the Audit Committee
The Committee receives and considers reports from the
Chief Financial Officer and senior management in relation to
the critical accounting judgements and the key sources of
estimation uncertainty, as well as the proposed disclosure of
these as set out in Note 1(c) to the financial statements on page
120 and 121, together with the outcome of the interim review
and annual external audit in respect of these matters.
The Committee supports PricewaterhouseCoopers LLP
(‘PwC’) in displaying the necessary professional scepticism their
role requires. Following discussions with management and
the external auditor, the Committee approved the proposed
disclosure of critical accounting judgements and key sources of
estimation uncertainty.
The Committee considered the following significant financial
reporting matters, judgements and estimates in approving the
financial statements for the year ended 30 June 2018:
Revenue recognition on fixed price contracts
The Group derives a significant proportion of its revenue within
the Technical Consulting business from fixed price contracts
that may extend for a substantial period of time and span
a number of reporting periods. All contracts are based on
detailed proposals issued to customers which are approved in
accordance with the Group’s authority limits and may require
Board approval where contract values dictate. Revenue and
margin performance are measured based on costs incurred
to date as a percentage of total expected costs. Management
judgement and experience is required to determine the
completeness of those forecasts, the recoverability of the costs
incurred and the extent to which revenue is recognised on
contracts in progress. Unforeseen future events may adversely
78 Ricardo plc Annual Report & Accounts 2018
impact the accuracy of those forecasts and judgements on
recoverability.
Project risk is assessed and determined at the proposal
stage of a contract and is refreshed throughout the life of
a contract on a regular basis. The risk rating of a contract is
initially categorised into five levels based upon its value, with
one being the lowest and five being the highest. The risk
category of a contract in progress is then determined from
the application of quantitative and qualitative criteria. As a
contract progresses the project is allocated a ‘red’, ‘amber’ or
‘green’ rating to categorise its performance against a number
of factors, including cost, cash and working capital, schedule,
customer satisfaction, technical quality, and resource capability
and availability.
High-risk and high-value ('Category 4 and 5') contracts which
experience significant challenges are categorised internally as
‘red’ contracts; these are monitored and controlled by senior
management and reported as appropriate to the Board as part
of the monthly performance review. Net Group project over
and underspends are also monitored and reported to the Board
on a monthly basis.
As at 30 June 2018, 11 Technical Consulting contracts with
a net exposure of £2.9m for recoveries against additional costs
incurred were categorised as 'Red Category 4 and 5', out of a
portfolio in excess of 3,000 contracts and with a value in excess
of £750m.
A summary of the specific facts and circumstances of each
'Red Category 4 and 5' contract is presented bi-annually by
senior management to the Committee at the February and
September meetings each year. The significant judgements
taken by senior management to assess the extent to which
receivable balances on such contracts are recoverable from
customers is considered and challenged by the Committee.
Following these meetings, the Committee satisfied itself with
these judgements taken by management with regards to the
Red Category 4 and 5 contracts. In addition, these contracts
were subjected to a more focused level of audit work during
the external audit process.
Recoverability of capitalised development costs
Certain directly attributable costs incurred in the development
of an intangible asset are capitalised. These costs are
recognised as an asset once the Group has determined that
it has the intention and the necessary resources to complete
the relevant project, that it is probable the resulting asset
will generate economic benefits for the Group and that the
attributable expenditure can be measured reliably. Determining
whether it is probable that the resulting asset will generate
economic benefit requires management judgement.
During the year ended 30 June 2018, £5.1m of development
costs were capitalised and amortisation of £2.9m was charged.
The net book value of development assets as at 30 June 2018
after reclassification adjustments and foreign exchange of
£0.2m was £10.4m.
The Committee received reports from senior management
detailing their analysis and the assumptions used when
assessing whether the costs incurred during the year met
the requirements for capitalisation under IFRS. The reports
also assessed whether future economic benefits support
the recoverability of all development assets. The Committee
reviewed, challenged and evaluated the significant
judgements taken and was satisfied that both the level of
capitalisation during the year and the year-end carrying value of
development assets were appropriate. In addition, this matter
was a key focus for the external audit.
Taxation
The Group holds a £5.5m ($7.2m) deferred tax asset, primarily
in relation to R&D tax credits in the US. A key management
judgement is the extent to which deferred tax should be
recognised in respect of these R&D tax credits and recovered
against future profits generated by our tax group in the US.
Management’s judgement also included the derecognition
of a net deferred tax asset of £2.2m (€2.5m), of which £2.4m
(€2.7m) related to the deferred tax asset on historic losses in
Germany. The asset was derecognised due to the significant
restructuring activities undertaken in Germany as part of the
reorganisation of the Automotive business. It is considered
unlikely that the remaining operation can generate sufficient
profits in the foreseeable future against which the asset can
be utilised.
In addition, the Group operates in an increasing number of
territories around the world where legislation related to taxation
is complex and open to interpretation, and its impact on the
Group is inherently uncertain. In preparing the Group’s financial
statements management made judgements on the existence
of risks in respect of permanent establishment and transfer
pricing, and where appropriate, provisions are established and
maintained on the basis of amounts expected to be paid to the
relevant tax authorities.
The Committee received reports and detailed analysis from
senior management which included the assumptions used and
judgements made when assessing the recoverability of the
deferred tax asset in the US. The Committee critically evaluated
and challenged the appropriateness of management’s
business plans and expectations which underpin future
taxable profits in the US. The Committee was satisfied that
the carrying value of the deferred tax asset in the US was
appropriate. The Committee also considered and was satisfied
with the judgements made by management in respect of
the derecognition of the deferred tax asset in Germany, and
the provision for uncertain tax positions across the Group. In
addition, these matters were a key focus of the external audit.
Impact of new accounting standards
During the year the Group has completed its impact
assessment of IFRS 9 ‘Financial instruments’ and IFRS 15 ‘Revenue
from contracts with customers’, both of which became effective
to the Group from 1 July 2018. The expected transitional impact
of IFRS 9 and IFRS 15 is a reduction to retained earnings of
£1.8m and £5.5m, respectively. Further detail is given in Note
1(x) to the financial statements on pages 126 and 127.
Audit committee report
Internal audit
As set out in the Strategic Report on page 40, internal audit is
considered by the Committee to be a key function for effective
risk management. Internal audit and risk comprises both
the Group risk and internal audit function. Whilst the Group
risk function facilitates and manages the risk process that is
ultimately owned by the Board, internal audit is accountable to
the Audit Committee.
Internal audit is centrally managed and is led and resourced
by suitably skilled and experienced staff from head office or
parts of the Group independent from the business or function
being audited.
Where relevant, external specialists are used to supplement
internal resources when specialist knowledge is required. This
approach not only ensures independence in the process but
also the relevance of the recommendations and the sharing of
best practice around the Group.
The following examples illustrate how internal audit work
supports Group risk management whilst driving improvements
to our control environment and adding value in core
business areas:
• Project reviews look at a range of risk and process control
areas across different divisions: these reviews identify best-
practice techniques and ensure that findings identified and
lessons learned have been applied and shared across the
Group;
• Selected in-depth process reviews to evaluate control risks
and efficiency, leading to re-evaluation of risks during the risk
review processes; and
• Testing of controls and process awareness in our fraud and
bribery risk assessment.
Management actions from all of our internal audits are tracked
to completion and the status of these actions is reported to
the Audit Committee to ensure that the risks identified are
appropriately addressed.
As part of the annual process the Committee’s review of the
effectiveness of the internal audit function includes:
• The internal audit process, the audit plan and resources;
• The internal audit reports and management’s response to the
findings and recommendations; and
• Meetings with the Head of Internal Audit without
management being present; additionally, the Head of Internal
Audit is invited to attend audit committees where considered
appropriate.
The Audit Committee considers that the internal audit process
is an effective tool in the overall context of the Group’s risk
management system.
Delivering Excellence Through Innovation & Technology 79
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Whistleblowing, ethics and fraud prevention
Internal audit scope includes a review of compliance with
Group policies and procedures, including those established for
whistleblowing, ethics, bribery and fraud prevention policies.
The whistleblowing policy is designed to deal with concerns,
which must be raised without malice, in relation to specific
malpractice issues that fall outside the scope of other company
policies and procedures. The whistleblowing policy is promoted
through the staff briefing process and the Company’s intranet
site. The whistleblowing policy is overseen by the Chairman of
the Audit Committee and has been reviewed during the year.
External audit
The external auditors are required to give the Committee
information about policies and processes for maintaining their
independence and compliance with requirements regarding
the rotation of audit partners and staff.
Both the Board and the external auditors have for many years
had safeguards in place to avoid the possibility that the auditors’
objectivity and independence could be compromised.
The Audit Committee confirms that during the year it
has maintained formal and transparent arrangements for
considering corporate reporting, risk management and internal
control and for maintaining an appropriate relationship with the
external auditors.
The year ended 30 June 2018 coincided with the conclusion
of the five-year rotation cycle of the incumbent audit partner,
Andrew Paynter. EU Regulation and the Competition & Markets
Authority’s Order would limit PwC’s future tenure to no more
than two years. As set out in last year’s Audit Committee report,
the external audit services contract was put out to tender during
the year.
PwC were appointed as our external auditors in 1990 and
no formal tender for audit services had ever been undertaken
since their appointment. Given the length of PwC’s tenure as
the Group’s external auditors, PwC was not invited to take part
in the audit tender process. I would like to take this opportunity
to thank PwC, Andrew Paynter, and his team, for all their many
years of dedicated service as external auditors to the Group,
providing valued challenge and a robust approach to the audit.
Subsequent to a detailed audit tender process outlined in
the following table, the Board recommended the appointment
of KPMG LLP (‘KPMG’) as the Group’s external auditors for the
year ending 30 June 2019 and a resolution to approve this
recommendation will be put to shareholders at the AGM on
15 November 2018.
80 Ricardo plc Annual Report & Accounts 2018
Audit tender process
BDO LLP, Deloitte LLP, Ernst & Young LLP and KPMG LLP were
invited to tender and all firms decided to participate. Grant
Thornton LLP were not invited to tender because they currently
provide tax compliance and advisory services across the Group.
The audit tender process undertaken by the Audit Committee
during the year was in accordance with best practice and the
Committee’s terms of reference, and is set out below:
October
2017
• Process commenced and considered suitable
firms to determine their capability, experience,
international reach and local presence.
November
2017
• Selection panel appointed: Bill Spencer, Peter
Gilchrist, Laurie Bowen, the Chief Financial
Officer and Financial Reporting Manager; and
• Each firm confirmed its participation and that
no conflicts of interest will exist by 1 July 2018.
December
2017
•
Evaluation criteria and ranking methodology
agreed; and
• Online data room populated and Request For
Proposal (‘RFP’) drafted.
February
2018
March
2018
April
2018
• RFP issued and access provided to online data
room;
• Each firm held meetings with senior leadership
and key Group functions; and
• Proposals submitted by each firm, including
responses to technical challenges.
• Proposals reviewed by, and presentations given
to, the selection panel;
• Two firms selected by ranking against agreed
evaluation criteria; and
• Lead partners from two preferred firms
presented to the Board.
May
2018
• Board recommended appointment of preferred
firm for shareholder approval at 2018 AGM.
The key areas covered by the agreed evaluation criteria were:
audit quality and approach; competency and experience;
cultural fit and behaviour; use of technology; relevance of
proposal; focus of presentation; understanding of the business;
and value for money. The selection panel determined that
KPMG and Deloitte best met these criteria and both firms were
put forward to present to the Board. After due consideration,
the Board recommended the appointment of KPMG, subject to
shareholder approval at the AGM in November 2018.
In anticipation of shareholder approval of the proposed
appointment of KPMG, management and the Committee have
been working with KPMG and PwC to ensure that there will be
a seamless transition between auditors. KPMG attended the
Committee meeting in September 2018.
Audit committee report
Non-audit services
The Board has agreed upon a policy that is compliant with
both EU Audit Regulation and the FRC’s Ethical Standard for the
provision of non-audit services from which the external auditors
are prohibited, together with the provision of permissible non-
audit services.
The external auditors are prohibited from the provision of
many types of non-audit service, including any of the following:
• Preparation of accounting records, financial statements or tax
computations;
• Design and implementation of internal controls and risk
management procedures;
• Services to the legal, treasury, internal audit, payroll or human
Other business relationships
There are instances where our Energy & Environment business
enters into business relationships or joint arrangements with the
external auditors to pursue commercial opportunities, either as a
prime contractor, sub-contractor or as part of a consortium, with
either party or a third party being the project manager.
These business relationships are considered acceptable to
the extent that the resulting relationships remain immaterial
to both organisations and do not compromise the auditors’
independence. In addition, the following arrangements would
lead to a conclusion that the relationship with the auditor is
material, and hence they are not permitted:
• Co-branding, profit-sharing or other joint sharing of economic
resources functions;
benefit; or
• Actuarial or litigative valuations;
• Promoting, dealing in, or underwriting shares;
• Secondments to decision-making managerial positions; or
• Any other service which is prohibited by UK ethical guidance.
The policy for the provision of permissible non-audit services,
which are otherwise not included in the above list of prohibited
non-audit services, is as follows:
• Approval of any permissible non-audit service which
the external auditor must or is best placed to undertake
(including audit-related services such as fees payable in
respect of an interim review) where the cost is estimated
to exceed £50,000 is delegated to the Audit Committee
Chairman and Chief Financial Officer;
• All other permissible non-audit services not estimated to
exceed £50,000 are pre-approved and delegated to the Chief
Financial Officer on the basis that the cost and nature of those
services is not considered to be significant; and
• The external auditors are prohibited from providing further
permissible non-audit services in any financial year if the total
of non-audit services incurred would exceed a cap
calculated as 70% of the average agreed external audit fees
for the preceding three-year period with the same external
audit firm.
Fees for non-audit services paid to the external auditors during
the year were 29% (2017: 66%) of the audit fee. The split and ratio
between audit and non-audit fees for the year ended
30 June 2018 and information on the nature of non-audit fees
are disclosed in Note 6, ‘Auditors’ remuneration’, to the
financial statements.
Based on our annual review of the nature and scale of the
services provided by the external auditors and discussion with
the lead audit partner, we concluded that these services did not
cause any concerns regarding the objectivity or independence
of the external auditors.
• Any member of the audit firm’s audit engagement team
having client-facing involvement.
All bids must be structured to ensure that no commonality of
interest exists, or could be perceived to exist, between the two
parties, and all bids have to be approved both within the audit
firm’s senior management and within Group Finance. Bids
over £100,000 also require the approval of the Audit
Committee Chairman.
Independent auditors’ effectiveness
The independent auditors’ quality and effectiveness is assessed
on its own merits on an annual basis after the completion of
each audit. The Committee carries out a formal effectiveness
assessment of the external auditors, including:
• The continuity and objectivity of the audit partner and audit
team;
• Effectiveness of audit planning, execution and reporting;
• The role of management in ensuring an effective audit; and
• Communication with and support of the Audit Committee.
The assessment was completed with input from an internal
questionnaire completed by senior management and relevant
finance personnel. The Committee also considered the external
auditors’ annual transparency report on its own internal quality
control procedures.
Appointment of independent auditors
Subsequent to a detailed audit tender process, the Board
has recommended the appointment of KPMG LLP as the
Group’s external auditors for the year ending 30 June 2019.
A resolution to approve the Board’s recommendation will be
proposed to shareholders at the Annual General Meeting
on 15 November 2018.
Bill Spencer
Chairman of the Audit Committee
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Peter Gilchrist CB – Chairman of the Remuneration Committee
PART 1 – CHAIRMAN’S OVERVIEW
Dear Shareholder,
Ricardo’s approach to managing the business is
based on ensuring long-term, sustainable results.
Dave Shemmans, supported by his leadership team
and over 3,000 committed and talented employees,
has continued to implement a clear strategy of
diversification in terms of our business activities
and international coverage, cost management and
efficiency improvement. In the last year, this has
included the acquisition of Control Point Corporation
and the divestment of our testing businesses in
Chicago and Southern Germany.
Nevertheless, the business environment remains
challenging. Ricardo’s order book is strong and is up
16% on last year. Demand is solid in Asia and orders
relating to electric and hybrid vehicles have grown
as a proportion of the total. In the UK, orders from
Automotive customers declined in the second half
of the financial year as a result of market uncertainty.
Total Group revenue grew by 8% but underlying profit
before tax ('PBT') was £39.0m which was just above the
threshold performance standard set by the Committee
for the purposes of the annual bonus.
The importance of project delivery and good
working capital management to Ricardo’s long-term
success and financial performance also reinforces
the significance of the personal objectives which the
Committee sets for each of the Executive Directors.
82 Ricardo plc Annual Report & Accounts 2018
Decisions made in 2017/18 and pay outcomes
Throughout the course of the year, the Committee has
been mindful that Ricardo’s total shareholder return
('TSR') has grown by 171.5% over the last five financial
years. This compares with 78.7% for the FTSE Small Cap
Index (excluding investment trusts). The TSR chart on
page 87 shows Ricardo’s TSR performance over the
last nine years on a relative basis. In short, Ricardo has
delivered and continues to deliver strong returns to
shareholders.
During the year, the Committee increased the base
salaries of the Executive Directors by 4% from 1
January 2018. This was in line with the average for UK
employees approved by the Board.
The determination of the annual bonus for the year has
been an important decision. Annual bonus payments
ranged from 32% to 46% of maximum for the financial
year. An element of bonus was paid in respect of profit
before tax performance and maximum bonus was
paid in relation to the net debt target. Each Executive
Director received an element of bonus based on the
achievement of their personal objectives and the level
of achievement varied by individual (see page 89). Half
of the bonus will be deferred into shares for three years
in order for each Executive Director to be awarded
any bonus-linked shares. You may recall that last year
no bonuses were paid even though the Executive
Directors had performed well against their personal
objectives and hence no bonus-linked shares were
awarded. The details of the targets and how
we assessed personal performance are shown on
pages 88 and 89.
Directors' remuneration report
Long-term incentive awards
Role
Chief Executive Officer ('CEO')
Chief Finance Officer ('CFO')
Chief Operating Officer ('COO')
LTIP shares
Bonus-linked shares
Total award
(% of salary)
100%
55%
55%
27%
23%
16%
127%
78%
71%
In October 2017, based on Ricardo’s earnings per share
('EPS') growth and relative TSR performance over the
three-year performance period, 74% of the long-term
incentive plan ('LTIP') and the bonus-linked shares
awarded in 2014 vested.
The Committee has reflected upon the EPS target
range for the LTIP and bonus-linked shares which will
be awarded in October 2018. We have agreed the EPS
target range for the shares under award linked to EPS as
60 pence to 69 pence. This is based on careful analysis
of the forecasts implied by Ricardo’s three-year business
plan, the long-term strategy and analysts’ expectations.
The Committee has always taken the view that the
target range should be very stretching at the top end
of the range and achievable at the bottom end,
provided that Ricardo delivers a level of performance
which meets or is near to the three-year budget. We
have also taken account of the range of previous
vesting outcomes (see page 87) – 35% to 100% over
the last nine years – which the Committee believes
reflects both the quality of Ricardo’s longer-term
performance and the robustness of the targets set
historically.
Based on the decisions on annual bonus, the long-
term share-based awards to be made in October 2018
to each of the Executive Directors, as a percentage of
salary, will be as per the table above.
The Committee also increased the Chairman’s fee – see
page 90 for details.
Conclusion
Last year our Directors’ Remuneration Policy and the
Annual Report on Remuneration both received over
90% of votes in favour at the Annual General Meeting
held on 8 November 2017 and I am grateful for this
support. Part 2 of this Directors' Remuneration Report
contains the Annual Report on Remuneration and, for
reference, Part 3 contains the Directors' Remuneration
Policy. If you have any questions, feel free to contact me
through Ricardo’s Group Legal Counsel and Company
Secretary, Patricia Ryan, at patricia.ryan@ricardo.com.
Peter Gilchrist CB
Chairman of the Remuneration Committee
Delivering Excellence Through Innovation & Technology 83
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Directors' remuneration report
SUMMARY OF THE KEY ELEMENTS OF EXECUTIVE DIRECTORS’ PAY IN 2017/2018
Base salary
(effective 01/01/2018)
Other benefits
Pension
Annual bonus with deferral
of half of any bonus earned
Long-term incentive shares
(A) Bonus-linked shares(2)
(B) Long-term incentive plan(3)
Total maximum annual
award of shares (A + B)
Share ownership and
retention policy
Dave Shemmans
CEO
£500,032
Ian Gibson
CFO
£321,896
Mark Garrett
COO
£280,927
• Company car allowance: £17,500;
• Private fuel;
• Private medical insurance; and
• Life assurance.
• Company car allowance: £12,000;
• Private fuel;
• Private medical insurance; and
• Life assurance.
• Company car allowance: £12,000;
• Private fuel;
• Private medical insurance; and
• Life assurance.
21.2%(1) of salary
(over Lower Earnings Limit)
• Maximum opportunity of 125% of
20% of salary
(over Lower Earnings Limit)
• Maximum opportunity of 100% of
20% of salary
(over Lower Earnings Limit)
• Maximum opportunity of 100% of
salary;
salary;
salary;
• Based on PBT (60%),
net debt (15%) and
personal targets (25%); and
• Based on PBT (60%),
net debt (20%) and
personal targets (20%); and
• 50% of any bonus to be deferred
• 50% of any bonus to be deferred
into shares for three years.
into shares for three years.
• Based on PBT (15%), global
Automotive profit (45%),
net debt (20%) and
personal targets (20%); and
• 50% of any bonus to be deferred
into shares for three years.
62.5% of salary
100% of salary
162.5% of salary
50% of salary
55% of salary
105% of salary
50% of salary
55% of salary
105% of salary
• A minimum of 100% of base salary;
• Net value of all vested shares to be
retained until holding met; and
• Year-end holding is 194% of base
• A minimum of 100% of base salary;
• Net value of all vested shares to be
retained until holding met; and
• Year-end holding is 93% of base
• A minimum of 100% of base salary;
• Net value of all vested shares to be
retained until holding met; and
• Year-end holding is 455% of base
salary.
salary.
salary.
(1) This reflects legacy pension arrangements.
(2) Maximum award on grant of bonus-linked shares:
• An award of shares with a value on grant of half the gross equivalent of any annual bonus declared;
• Vests approximately four years from the start of the bonus performance period if executive still in service and additional performance criteria are met over a three-year
period: 50% EPS growth, 50% TSR vs. FTSE Small Cap Index (excluding financial services companies and investment trusts); and
• Net value of all vested shares to be retained until share ownership requirement met.
(3) Face vaue of annual award of long-term incentive plan shares:
• Subject to three-year performance conditions: 50% EPS growth, 50% TSR vs. FTSE Small Cap Index; and
• Net value of vested shares to be retained until share ownership requirement met.
84 Ricardo plc Annual Report & Accounts 2018
Directors' remuneration report
PART 2 – ANNUAL REPORT ON REMUNERATION
This section of the report explains how Ricardo’s 2017
remuneration policy has been implemented during the
financial year ended 30 June 2018. The paragraphs in this Annual
Report on Remuneration that have been audited are indicated
as such herein.
The Remuneration Committee
During the year under review the Committee was chaired by
Peter Gilchrist. The Committee also comprised Sir Terry Morgan,
Laurie Bowen, Malin Persson, Bill Spencer and Ian Lee (who retired
from the Board and the Committee on 8 November 2017).
The Non-Executive Directors serving on the Committee have
no personal financial interest (other than as shareholders) in
matters to be decided, no potential conflicts of interest arising
from cross-directorships and no day-to-day involvement in
running the business. Biographical details of the members of the
Committee are shown on pages 68 and 69; details of attendance
at the meetings of the Committee during the year ended
30 June 2018 are shown on page 71.
Advisors to the Remuneration Committee
The Committee is supported by the Group HR Director
(Timothy Hargreaves), the Group Head of Remuneration and
Pensions (Mark Jarvis) and the Company Secretary (Patricia Ryan).
The Chief Executive Officer (Dave Shemmans) may attend the
Committee’s meetings by invitation and is consulted in respect
of certain proposals. The Chief Financial Officer (Ian Gibson)
may be invited to attend meetings to address specific matters.
Neither the Chief Executive Officer nor the Chief Financial Officer
is consulted or involved in any discussions in respect of their
own remuneration.
During the year, FIT Remuneration Consultants LLP and
Shepherd and Wedderburn LLP (who have been jointly
appointed by the Committee following a competitive tender
process) provided independent advice on matters under
consideration by the Committee and updates on legislative
requirements and market practice.
FIT Remuneration Consultants’ fees for this work amounted
to £33,015 (calculated based on a mixture of fixed fees and
time spent). Shepherd and Wedderburn’s fees for advising the
Committee amounted to £31,710 (also calculated based on a
mixture of fixed fees and time spent). Shepherd and Wedderburn
also advises Ricardo on the design, implementation and
operation of its various share incentive plans.
FIT Remuneration Consultants are members of the Remuneration
Consultants Group and their work is governed by its Code of
Conduct. Shepherd and Wedderburn is a law firm and is
regulated accordingly. Having carefully considered all relevant
factors and using its judgement, the Committee is satisfied that
the advice provided on executive remuneration is objective and
independent and that no conflict of interest arises.
Voting outcome at AGM
The AGM for the financial year ended 30 June 2017 was held on
8 November 2017. The result of the vote on the remuneration
report is set out below. The remuneration policy in operation
during the year was also approved by shareholders at the 2017
AGM; details of this approval are also set out in the table below.
Votes(1)
For, including discretion
Against
Total votes cast
Withheld(1)
Annual Report on Remuneration
approved at 2017 AGM
Directors' Remuneration Policy
approved at 2017 AGM
%
99.6
0.4
100.0
Number
36,791,869
150,347
36,942,216
2,261,883
%
94.0
6.0
100.0
Number
35,127,967
2,224,774
37,352,741
1,851,358
(1) Excludes withheld votes. A vote withheld is not a vote in law and so is not counted for the purposes of the calculation of the proportion of votes ‘for’ and ‘against’ a resolution.
Performance at a glance in FY 2017/2018
Bonus performance measures
Long-term incentive performance outcomes in respect of awards vested in October 2017
PBT (adjusted)
£38.8m
(FY 2017/2018)
£38.1m
(FY 2016/2017)
Net debt (adjusted)
£(19.1)m
(FY 2017/2018)
£(34.8)m
(FY 2016/2017)
3-year EPS growth
RPI +11.0% p.a.
(overall 42.9% to 30 June 2017)
RPI +14.6% p.a.
(overall 56.0% to 30 June 2016)
3-year TSR growth
31.4%
(between median and upper quartile to October 2017)
89.2%
(above upper quartile to October 2016)
The closing mid-market price of the Company’s shares on 30 June 2018 was 960.0 pence (2017: 777.0 pence). The highest closing price
during the year was 1,075.0 pence and the lowest closing price during the year was 696.5 pence.
Delivering Excellence Through Innovation & Technology 85
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Directors' remuneration report
Pay at a glance in FY 2017/2018
s
n
a
m
m
e
h
S
e
v
a
D
n
o
s
b
G
n
a
i
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E
C
O
F
C
O
O
C
t
t
e
r
r
a
G
k
r
a
M
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
615
591
266
404
126
1,411
627
394
1,612
394
381
340
330
146
153
48
741
151
95
627
90
133
41
604
223
140
693
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Fixed remuneration (salary, benefits and pension)
Bonus
Face value at grant of vested long-term incentives
Share price growth above face value of vested long-term incentives
Single total figure (£’000)
2,500
Single total figure table (audited)
The table below sets out the remuneration received by the Executive Directors and Non-Executive Directors during the year. This
should be considered in conjunction with the TSR performance graph on page 87.
2,000
1,500
Financial
year
EXECUTIVE DIRECTORS
2,065
Fixed remuneration
Short-term variable
remuneration in respect of 17/18
Long-term variable remuneration –
performance periods ending 17/18
Base
salary
40%
and fees Benefits(1)
£’000
£’000
Bonus
(cash
element)(2)
£’000
Bonus
(deferred
element)
£’000
Pension
£'000
Bonus-
linked
shares(3)
£’000
Total
£’000
LTIPs(4)
£’000
Total
£’000
Total
£’000
’
)
0
0
0
£
(
e
m
o
c
t
u
o
n
o
i
t
a
r
e
n
u
m
e
R
1,139
15%
30%
55%
627
500
1,000
Minimum
Ian Gibson
Mark Garrett
Dave
Shemmans
Peter
Gilchrist CB
Sir Terry
Morgan CBE
-
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
NON-EXECUTIVE DIRECTORS
100%
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
Bill Spencer(7)
400
Malin Persson
500
Laurie Bowen(6)
600
Ian Lee(5)
Total
300
)
£
(
)
’
R
S
T
’
(
n
r
u
t
e
R
r
e
d
o
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e
r
a
h
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l
)
0
0
1
£
o
t
d
e
s
a
b
e
r
(
On-target
Chief Executive Officer
Minimum
On-target
Chief Operating Officer
490
474
316
305
276
266
30%
30%
22
22
16
16
10
14
103
95
62
60
54
50
401
133
-
73
-
645
10%
45
27%
-
1,061
32%
30%
133
-
73
-
45
-
266
-
146
-
90
-
103
325
50
-
42
148
346
427
696
151
246
558
132
10%
215
28%
Maximum
147
141
62
59
Fixed elements
19
53
47
45
47
45
51
10
1,455
1,398
-
1
2
2
3
3
47
66
6
8
1
-
107
132
Short-term variable element
100%
Minimum
-
-
-
-
-
-
-
-
-
-
-
-
219
205
100%
63%
-
-
On-target
-
Chief Financial Officer
-
-
-
-
-
-
-
-
-
251
-
38%
-
-
Maximum
-
-
Long-term variable element
-
-
-
-
-
-
-
-
251
-
-
-
-
-
-
-
-
-
-
-
-
-
502
-
-
-
-
-
-
-
-
-
-
-
-
-
195
473
62%
-
-
-
-
-
-
-
-
-
-
-
-
710
1,157
530
1,021
201
246
174
363
922
32%
30%
1,411
1,612
741
627
604
693
Maximum
38%
-
-
-
-
-
-
-
-
-
-
-
-
905
1,630
147
142
64
61
22
56
94
111
53
53
52
10
3,188
3,365
(1) Further information on benefits for the Executive Directors can be found on page 88. The benefits for Non-Executive Directors represent reimbursement of expenses incurred
(including any associated personal tax charges) while travelling for business and committee meetings.
200
l
a
t
o
T
(2) Further details of the annual bonus can be found on page 88.
(3) Further details of the bonus-linked share award vestings in the year can be found on page 93.
(4) Further details of the LTIP award vestings in the year can be found on page 92.
(5) Ian Lee retired as a Director on 8 November 2017.
(6) Laurie Bowen’s benefits largely consist of travel expenditure to and from the United States.
2011
(7) Bill Spencer was appointed as a Director on 24 April 2017.
2009
2010
2013
2012
100
At 30 June
2014
2015
2016
2017
2018
Following the year-end, the Committee considered whether there were any circumstances that could or should result in the recovery
or withholding of any sums pursuant to the Company’s clawback arrangements. The conclusion reached by the Committee was that it
was not aware of any such circumstances.
Source: Thomson Reuters Datastream
FTSE Small Cap (Excl. Investment Trusts) TSR
FTSE All Share Support Services TSR
Ricardo TSR
86 Ricardo plc Annual Report & Accounts 2018
615
591
266
404
126
1,411
627
394
1,612
394
381
340
330
146
153
48
741
151
95
627
90
133
41
604
223
140
693
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Fixed remuneration (salary, benefits and pension)
Bonus
Face value at grant of vested long-term incentives
Share price growth above face value of vested long-term incentives
Single total figure (£’000)
s
n
a
m
m
e
h
S
e
v
a
D
n
o
s
b
i
G
n
a
I
O
E
C
O
F
C
O
O
C
t
t
e
r
r
a
G
k
r
a
M
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
2,500
2,000
1,500
1,000
500
-
)
0
0
0
’
£
(
e
m
o
c
t
u
o
n
o
i
t
a
r
e
n
u
m
e
R
2,065
40%
30%
1,139
15%
30%
627
100%
55%
30%
645
10%
27%
63%
401
100%
1,061
32%
30%
38%
346
100%
Directors' remuneration report
62%
38%
922
32%
558
10%
30%
28%
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Pay for performance – TSR performance graph and CEO pay history
TSR for the years from 30 June 2009 to 30 June 2018
Short-term variable element
Fixed elements
Long-term variable element
600
500
400
300
200
100
2009
)
£
(
)
’
R
S
T
’
(
n
r
u
t
e
R
r
e
d
o
h
e
r
a
h
S
l
l
a
t
o
T
)
0
0
1
£
o
t
d
e
s
a
b
e
r
(
2010
2011
2012
2013
2014
2015
2016
2017
2018
Ricardo TSR
FTSE Small Cap (Excl. Investment Trusts) TSR
FTSE All Share Support Services TSR
At 30 June
Source: Thomson Reuters Datastream
The chart above shows Ricardo’s TSR performance for the past nine years against the FTSE Small Cap index (excluding investment
trusts). In the Committee’s opinion, the FTSE Small Cap index (excluding investment trusts) represents an appropriate index against
which the Company should be compared when considering the Company’s size. The FTSE All Share Support Services index is also
shown for information. The remuneration of the CEO, Dave Shemmans, for the same period is represented in the table below.
Financial year
2017/2018
2016/2017
2015/2016
2014/2015
2013/2014
2012/2013
2011/2012
2010/2011
2009/2010
Single figure of CEO's
total remuneration
£’000
Annual variable element award rates
against maximum opportunity
%
Long-term incentive vesting rates
against maximum opportunity
%
1,411
1,612
2,291
1,367
760
1,546
979
1,116
708
43
-
63
59
38
75
58
97
19
74
100
100
67
N/A(1)
77
35
46
36
(1) The performance period for awards made in November 2011 ended in October 2014 and so its vesting rate is included in the 2014/2015 row of the table above. The vesting rate is
not applicable for the 2013/2014 row because the performance period for awards made in October 2010 ended in June 2013 and so the applicable vesting rate is included in the
2012/2013 row of the table above.
CEO remuneration compared to employees
The table below compares the percentage change in the CEO’s remuneration and the percentage change in employees’ remuneration
between FY 2016/2017 and FY 2017/2018. The average bonus paid to all employees across the Group also increased year-on-year. The
change in the employees’ annual bonus represents the average percentage change in bonuses for employees across the Group as a
whole, with individual performance against target varying between divisions.
Base salary
Benefits
Annual bonus
CEO
%
4
-
See note (1) below
All employees
%
4
-
56
(1) The year-on-year change in CEO bonus cannot be shown as no annual bonus was paid to the CEO in respect of the 2016/2017 financial year.
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Relative importance of pay spend
The following table sets out the total amounts spent on
remuneration for all employees, the dividends declared and
other significant distributions to shareholders in FY 2016/2017
and FY 2017/2018.
Total remuneration
spend (£m)
Key management
remuneration as
a percentage of
total remuneration
spend(1) (%)
R&D expenditure(2)
(£m)
Distribution to
shareholders(3) (£m)
FY 2016/2017 FY 2017/2018
% change
166.5
175.0
5.1%
3
9.5
10.3
3
9.5
10.9
-%
-%
5.8%
(1) The key management personnel are the Board of Directors, together with the
Managing Directors who have the authority and responsibility for planning,
directing and controlling the Group’s activities and resources within the market
sectors in which the Group operates. Further details on key management
remuneration can be found on page 132. This measure was chosen in order to give
greater context for the scale of key management remuneration within Ricardo.
(2) Further details on R&D expenditure can be found on pages 17 and 30. This measure
was chosen because of the importance to Ricardo’s business of developing its R&D
portfolio.
(3) The only distributions made by the Company over these years were in the form of
dividends.
Detailed breakdown of pay in FY 2017/2018
Base salary
Base salaries were reviewed with effect from January 2018. As
described in the policy section on page 97, a number of factors
are taken into account when salaries are reviewed, principally:
market levels of total pay for comparable roles in companies of
a similar size, complexity and sector; the individual’s experience,
scope of responsibilities and performance; and the salary
increases for employees across the Group. The increase for each
Executive Director (and the Group-wide average approved in
FY 2017/2018) was 4%.
Current salary levels from 1 January 2018 are:
• Dave Shemmans: £500,032
•
Ian Gibson: £321,896
• Mark Garrett: £280,927
Other benefits (audited)
The Company provides other cash benefits and benefits in kind
to its Executive Directors. These include a company car or cash
alternative, private fuel, private medical insurance, life assurance
and permanent health or disability insurance. The car allowance
levels remain unchanged and set at £17,500 p.a. for Dave
Shemmans and at £12,000 p.a. for Ian Gibson and Mark Garrett.
Non-Executive Directors can recover travel and
accommodation expenses for carrying out their duties and
do not receive any other benefits. If tax is payable by a Non-
Executive Director on expenses received, these may be paid
gross of tax.
88 Ricardo plc Annual Report & Accounts 2018
Pension (audited)
(a) The defined benefit scheme is closed and there are no
active members. During the year ended 30 June 2018, the
transfer value in respect of the Chief Executive Officer has
increased by £23,000 on the prior year to £625,000.
The CEO’s Normal Retirement Date (‘NRD’) is 16 June
2031, at which point he will receive his pension at the date
of leaving the fund, increased for the period in deferment
until his NRD. If he decides to retire early, he will receive an
immediate pension calculated as for retirement at NRD but
reduced for early payment.
(b) With respect to defined contribution pension schemes:
Employer
contributions payable
in the year
£’000
5
-
3
Dave Shemmans
Ian Gibson
Mark Garrett
Cash
in lieu
£’000
98
62
51
Annual performance-related bonus (audited)
For the year ended 30 June 2018, the maximum annual
performance-related bonus opportunity was 125% of salary for
the Chief Executive Officer and 100% of the salary for the other
Executive Directors. To determine the amount of bonus payable
for the year, the Committee assessed the level of achievement
against the financial measures and targets set in respect of:
• Group profit before tax (60% for both the CEO and CFO, and
15% for the COO);
• global Automotive profit (45% for the COO);
• Group net debt at year-end (15% for the CEO and 20% for the
other Executive Directors); and
• the achievement of specified individual objectives (25% for
the CEO and 20% for the other Executive Directors).
The choice of these measures, and their respective weightings
for each individual, reflected the Committee’s belief that any
incentive compensation should be tied both to the overall
performance of the Group and to those areas of the business
that the relevant individual can directly influence.
The targets set by the Committee take into account several
factors such as the business plan, management’s expectations
and brokers’ forecasts.
A sliding scale of targets for each financial measure of the
Group was set at the start of the 2017/2018 financial year:
Performance achieved
Element payable
Threshold
On-target
Maximum
-
50%
100%
Between any two points
Straight-line percentage
Directors' remuneration report
The personal objectives of the Executive Directors were
different for each individual and were ascribed different
weightings. Examples of the areas of focus and types of personal
objectives that were set include:
•
• Developing management succession planning to ensure
Identifying value-creating opportunities for inorganic growth;
•
Group-wide diversity;
Identifying and managing the perceived opportunities and
risks of Brexit;
• Simplifying and improving management and corporate
reporting;
• Career development across functions or areas of the business;
• Budgeting for and commercial application of R&D; and
• Continuous improvement of project delivery.
The Committee, supported by the Chairman of the Board in the
case of Dave Shemmans, and supported by Dave Shemmans
in the case of the other Executive Directors and members of
the leadership team, sets the personal objectives at the start
of the year. The Committee usually identifies strategic areas
which each Executive Director is asked to focus on and seeks to
ensure that all personal objectives are specific, measurable and
are indirect drivers of financial performance and value creation.
They usually set five objectives and weight them in accordance
with their relative importance. At the end of the year, based on a
formal and qualitative assessment of performance against each
objective, the Committee decides how well each individual has
performed overall. Across the senior leadership group including
the Executive Directors, the assessment of performance ranged
from 50% to 90% in respect of the personal objectives. The
appraisal of performance against the personal objectives was
80% for the CEO, 90% for the CFO and 50% for the COO.
The following table sets out the financial targets and the
performance outcomes in respect of the Executive Directors’
bonus scheme for the 2017/2018 financial year.
Weighting
(% of maximum
opportunity)
Performance
required (£m)
Actual performance (£m)
(adjusted)(1)
Measure
CEO
CFO
COO Threshold On-target Maximum
Profit before tax(2)
Group net debt balance
Personal objectives
60
15
25
60
20
20
60
20
20
38.3
(34.0)
0%
40.3
(30.0)
75%
42.3
(28.0)
100%
CEO
38.8
(19.1)
80%
CFO
38.8
COO
38.8
(19.1)
(19.1)
90%
50%
Total pay-out (% of maximum opportunity) = (a)
Maximum opportunity (% of base salary) = (b)
Pay-out
(% of maximum
opportunity)
CEO
CFO
COO
1.875
20
10
7.5
20
18
45.5
31.875
100
100
7.5
15
20
42.5
125
(1) The actual underlying profit before tax of £39.0m was adjusted by £0.2m to £38.8m for acquisition-related expenditure. The actual net debt balance of £(26.1)m was adjusted by
£7.0m to £(19.1)m for unbudgeted Control Point Corporation net consideration, acquisition-related expenditure and reorganisation costs.
(2) The profit element of the COO's bonus was further split between the Group profit before tax target described above (25%) and a global Automotive profit target (75%). Global
Automotive profits were below the threshold standard required for any payout to be made, therefore the pay-out shown above for the profit element solely relates to the Group
profit before tax target.
Total pay-out (% of base salary) = (a) x (b)
53.125
45.5
31.875
The performance of the Group over the year included a 2%
increase in underlying profit before tax to £39.0m (2017: £38.3m)
and a year-end net debt of £(26.1)m (2017: £(37.9)m).
The adjusted underlying Group profit before tax was £38.8m,
which resulted in the Group profit target being achieved at
a level of 12.5%. The adjusted net debt of £(19.1)m was above
the maximum target and therefore the maximum bonus is
payable. For the avoidance of doubt this performance would
have exceeded the maximum target regardless of whether
or not the net debt adjustments were made. The Committee
reviewed the adjustments to both profit before tax and net debt
in light of its bonus principles, which take account of materiality
and the need for consistency. The achievement of the cash
target was also reviewed by the Audit Committee. Finally, the
Remuneration Committee also considered whether the outturn
from the assessment of the specific bonus targets reflected
the overall performance of the Group during the year and was
satisfied that this was the case.
One half of any bonus paid to an Executive Director is subject
to a policy of compulsory deferral into ordinary shares, via
the deferred share bonus plan ('DBP'), the release of which is
dependent on continued employment for a three-year period
from the award date.
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Long-term incentive awards vesting during the financial year (audited)
Awards under the LTIP made in October 2014 vested in October 2017 on the basis of EPS and TSR performance over performance
periods, the last of which ended in October 2017. The performance conditions applicable to these awards are summarised below:
Relative TSR portion (50%)
EPS growth portion (50%)
Relative TSR performance against the FTSE
Small Cap (excluding financial services
companies and investment trusts)
Below median
Median
Upper quartile (or above)
Vesting level
EPS growth performance
Vesting level
-
Less than RPI + 3% p.a.
25%
RPI + 3% p.a.
100%
RPI + 10% p.a.
-
25%
100%
Between median and upper quartile
Straight-line basis
Between RPI + 3% and RPI + 10% p.a.
Straight-line basis
Over the three-year performance period, Ricardo was ranked between the median and the upper-quartile of the TSR comparator
group, giving a vesting level for this portion of 48.1%. Ricardo’s TSR over the period was 31.4% against a median of 21.0% and an upper
quartile of 62.1%. The EPS figure for the year resulted from growth of 36.6% in real terms, which represented compound growth of RPI
+ 11.0% p.a., compared to the base year, with the result that the EPS target was achieved to a level of 100%. The overall vesting level
for this award was 74.05%. The number and value of shares which vested in October 2017 in respect of awards granted to each of the
Executive Directors in October 2014 are set out on pages 92 and 93 of this report. The Committee was satisfied that there had been a
sustained improvement in the overall performance of the Group over the three years in question.
Non-Executive Directors’ fees
Current Non-Executive Directors’ fees as of 1 January 2018 are as follows:
Chairman’s total fees
Other Non-Executive Director's fees:
Basic fee
Additional fee for Audit and Remuneration Committee Chairs
Additional fee for the Senior Independent Director
£’000
150
48
8
8
The above table reflects a 4.8% increase in the Chairman’s total fees and a 4% increase in the basic fee for Non-Executive Directors,
Committee Chair fees and Senior Independent Director’s fee, relative to the prior year.
Payments to past directors and in respect of loss of office (audited)
No payments have been made to past directors of the Company or in respect of loss of office in the financial year.
Long-term incentive awards granted during the financial year (audited)
Awards were made to the Executive Directors under the LTIP in November 2017. No bonus-linked share awards were made under the
DBP rules because no bonuses were paid to Executive Directors in respect of the 2016/2017 financial year.
90 Ricardo plc Annual Report & Accounts 2018
Directors' remuneration report
Long-term incentive plan ('LTIP')
Type awarded
Basis for award (% of base salary)
Date of award
Number of shares
Share price(2) (£)
Face value of award (£)
% which would vest for the achievement of threshold performance
Chief Executive
Officer
David Shemmans
Chief Financial
Officer
Ian Gibson
Chief Operating
Officer
Mark Garrett
100
57,927
8.30
480,794
25
Performance shares(1)
55
8 November 2017
20,510
8.30
170,233
25
55
17,899
8.30
148,562
25
End of performance period
35 days after release of preliminary results announcement in respect of the
2019/2020 financial year (expected to be October 2020)
(1) As the LTIP awards are granted in the form of performance share awards, no ‘exercise price’ is payable in order to receive any vested shares.
(2) Average of the share prices over the five days up to and including 7 November 2017.
The vesting of these awards will be based on Ricardo’s three-year relative TSR (50%) and EPS growth (50%) performance summarised
in the table below. The relative TSR measure was chosen by the Committee to link the remuneration of Executive Directors to the
performance experienced by shareholders and further align their interests. The EPS measure was chosen to reward sustained profit
growth and align with one of our key performance indicators. In addition, no part of an award will vest unless the Committee is
satisfied that the achievement against the TSR and EPS performance condition is a genuine reflection of the underlying performance
of the Group over the performance period.
Relative TSR portion (50%)
Relative TSR performance against the FTSE
Small Cap (excluding financial services
companies and investment trusts)
Below median
Median
EPS growth portion (50%)
Vesting level
Adjusted EPS for the final year in the
performance period (2019/2020)
-
Less than 65p
25%
65p
Upper quartile (or above)
100%
Equal to or greater than 75p
Vesting level
-
25%
100%
Between median and upper quartile
Straight-line basis
Between 65p and 75p
Straight-line basis
Performance target setting and those applying to outstanding awards
As shown in previous Directors’ Remuneration Reports, the Committee has a track record of setting stretching EPS targets which are
carefully calibrated to outperform the business plan and market expectations. Similarly, the TSR measure only awards full vesting where
our performance is in the upper quartile of the FTSE Small Cap Index (excluding financial services companies and investment trusts).
The performance targets applicable to outstanding LTIP and bonus-linked share awards are as follows: For awards in years ended
30 June 2015, 2016 and 2017, maximum vesting of the EPS portion required growth of RPI + 10% per annum. The EPS target to achieve
threshold vesting for awards granted in the years ended 30 June 2015, 2016 and 2017 require performance in excess of RPI + 3% per
annum. As explained in last year’s Directors’ Remuneration Report, for awards in the year ended 30 June 2018, the Committee decided
to move away from expressing our targets as growth percentages in excess of RPI. The reason for this change was to simplify and
enhance the ‘line of sight’ for participants, and also to recognise the international scope of Ricardo.
The performance condition applicable to the TSR portion of awards has remained constant through this period and is the same as
set out above for awards granted in the year ended 30 June 2018. The number and value of shares which were awarded to each of the
Executive Directors in the year ended 30 June 2018 are set out in the table above.
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Directors’ interests in shares provisionally awarded under the LTIP (audited)
The following chart sets out in graphical form how the LTIP operates:
Targets set for 3-year period
Grant of share awards
Shares released subject to performance criteria
Performance period
After tax shares continue to be held pursuant
to the share retention policy at least until
minimum shareholding is achieved
Year 1
Year 2
Year 3
Year 4 and ongoing
For details of the share retention policy, see page 94.
The Directors’ interests in shares provisionally awarded under the LTIP are as follows:
3-year cycle
ending Award date(1)
Share price at
award date in
pence
At 1 July
2017
Number of provisional shares
Dave
Shemmans
Ian
Gibson
Mark
Garrett
2017
2018
2019
2020
2017
2018
2019
2020
2017
2018
2019
2020
Oct 14
Oct 15
Oct 16
Nov 17(2)
Oct 14
Oct 15
Oct 16
Nov 17(2)
Oct 14
Oct 15
Oct 16
Nov 17(2)
635.20
904.80
954.30
830.00
635.20
904.80
954.30
830.00
635.20
904.80
954.30
830.00
69,269
50,088
48,915
Awarded
-
-
-
-
57,927
24,525
17,734
17,318
-
-
-
-
20,510
21,404
15,477
15,114
-
-
-
-
17,899
Lapsed
(17,976)
Vested
(51,293)
-
-
-
-
-
-
At 30 June
2018(3) Vesting date
-
30/10/2017
50,088
19/10/2018
48,915
25/10/2019
57,927
08/11/2020
(6,365)
(18,160)
-
30/10/2017
-
-
-
-
-
-
17,734
19/10/2018
17,318
25/10/2019
20,510
08/11/2020
(5,555)
(15,849)
-
30/10/2017
-
-
-
-
-
-
15,477
19/10/2018
15,114
25/10/2019
17,899
08/11/2020
(1) Awards made under the rules of the Ricardo plc 2014 Long Term Incentive Plan: performance conditions as outlined on page 91.
(2) The face value at the date of grant of the awards made in November 2017 was £480,794 for Dave Shemmans; £170,233 for Ian Gibson; and £148,562 for Mark Garrett.
(3) The mid-market closing price of the Company’s shares on 30 June 2018 was 960.0p (2017: 777.0p).
The value of the October 2014 award vesting was £427,209 for Dave Shemmans; £151,251 for Ian Gibson; and £132,003 for Mark Garrett,
inclusive of an additional compensatory cash payment (£7,119 for Dave Shemmans; £2,521 for Ian Gibson; and £2,200 for Mark Garrett)
that was made because these awards did not receive any benefit from the November 2017 final dividend, due to a technical timing
issue. The market price per share of these shares that vested on 30 October 2017 was 819.0p.
92 Ricardo plc Annual Report & Accounts 2018
Directors' remuneration report
Directors’ interests in shares provisionally awarded under the DBP (audited)
The following chart sets out in graphical form how the DBP operates:
Targets set for 3-year performance period applicable to bonus-linked shares
Bonus paid 50% cash and 50% in deferred shares and bonus-linked shares granted
Bonus targets set for year
Performance period in respect of bonus-linked shares
Annual bonus
performance year
Deferred shares held
Deferred shares released and bonus-linked
shares released subject to performance criteria
After tax shares continue to
be held pursuant to the share
retention policy at least until
minimum shareholding is
achieved
Year 1
Year 2
Year 3
Year 4
Year 5 and ongoing
For details of the share retention policy, see page 94.
The Directors’ interests in shares provisionally awarded under the DBP are as follows:
Award
date
Deferral/
performance
period
Share
price at
award
date in
pence
At 1 July
2017 Awarded
Dividend
shares(1)
Number of provisional shares
Dave
Shemmans
Ian
Gibson
Mark
Garrett
Type of Award
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Deferred
Bonus-linked shares(2)
Oct 14
Oct 14
Oct 15
Oct 15
Oct 16
Oct 16
Oct 14
Oct 14
Oct 15
Oct 15
Oct 16
Oct 16
Oct 14
Oct 14
Oct 15
Oct 15
Oct 16
Oct 16
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
635.20
635.20
904.80
904.80
954.30
954.30
635.20
635.20
904.80
904.80
954.30
954.30
635.20
635.20
904.80
904.80
954.30
954.30
17,719
16,640
19,262
18,509
19,730
19,336
8,605
8,082
9,812
9,431
9,799
9,604
7,301
6,859
8,271
7,949
8,411
8,244
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
298
280
423
-
433
-
145
136
215
-
215
-
123
115
181
-
184
-
Lapsed
-
(4,391)
Vested
(18,017)
(12,529)
-
-
-
-
-
(2,133)
-
-
-
-
-
(1,810)
-
-
-
-
-
-
-
-
(8,750)
(6,085)
-
-
-
-
(7,424)
(5,164)
-
-
-
-
At 30 June
2018(3)
-
-
19,685
18,509
20,163
19,336
-
-
10,027
9,431
10,014
9,604
-
-
8,452
7,949
8,595
8,244
(1) Amounts allocated include shares equivalent to dividends on provisional deferred award shares and vested bonus-linked shares.
(2) Bonus-linked shares awarded under the rules of the Ricardo plc 2011 Deferred Bonus Plan: performance conditions as outlined on page 91.
(3) The mid-market closing price of the Company’s shares on 30 June 2018 was 960.0p (2017: 777.0p).
The value of the October 2014 Deferred award vesting was £147,559 for Dave Shemmans; £71,663 for Ian Gibson; and £60,803 for Mark
Garrett. The market price per share of these shares that vested on 30 October 2017 was 819.0p.
The value of the October 2014 Bonus-linked shares vesting was £102,613 for Dave Shemmans; £49,836 for Ian Gibson; and £42,293 for
Mark Garrett. The market price per share of these shares that vested on 30 October 2017 was 819.0p.
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Directors’ shareholdings (audited)
The interests of Directors and their connected persons in ordinary shares as at 30 June 2018, including any interests in share options
and shares provisionally awarded under the LTIP and DBP are presented in the table below.
At 12 September 2018, the interests in shares of the Directors who were still in office were unchanged from those at 30 June 2018.
EXECUTIVE DIRECTORS
Dave Shemmans
Ian Gibson
Mark Garrett
NON-EXECUTIVE DIRECTORS
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Ian Lee(3)
Shareholding as at 30 June 2018
Not subject to
performance
conditions
Subject to
performance
conditions
No. of shares
% of base salary(1)
Deferred awards(2)
Long-term incentives (Bonus-
linked shares and LTIP awards)(2)
101,085
31,256
133,223
15,000
4,970
4,000
1,500
8,000
13,876
194
93
455
N/A
N/A
N/A
N/A
N/A
N/A
39,848
20,041
17,047
-
-
-
-
-
-
194,775
74,597
64,683
-
-
-
-
-
-
(1) For Executive Directors only (i.e. those who are subject to the share retention policy). Percentages calculated by reference to the mid-market closing price of the Company’s
shares on 30 June 2018 which was 960.0p (2017: 777p).
(2) Deferred awards and bonus-linked shares were granted pursuant to the rules of the Ricardo plc 2011 Deferred Bonus Plan and LTIP awards were granted pursuant to the rules of
the Ricardo plc 2014 Long Term Incentive Plan.
(3) As at 8 November 2017, the date that Ian Lee retired as a Director.
Share retention policy
In order to foster greater alignment between our Executive
Directors and our shareholders, the Board operates a share
retention policy for the Executive Directors with the intention
that each Executive Director will own shares in the Company
with a value at least equal to one times annual base salary.
Unvested awards granted under the Company’s employee
share schemes do not count towards this target. As at 30 June
2018, Dave Shemmans and Mark Garrett met this shareholding
requirement. Although Ian Gibson has made clear strides
towards the required minimum shareholding level during the
year, having joined the Company on 1 July 2013, he has not yet
met this level and will be expected to retain all vested shares net
of tax from the LTIP and DBP until the minimum shareholding
has been achieved.
Dilution limits
The number of shares that may be issued under all Ricardo
employee share plans in any ten-year rolling period will be
restricted to 10% of the issued ordinary share capital of the
Company and 5% of the issued ordinary share capital of the
Company for discretionary employee share plans.
At the end of the year under review, the Company’s overall
dilution was 4.79%, of which 4.35% related to discretionary
employee share plans. The Company operates an employee
benefit trust (‘EBT’) which has principally been used to facilitate
the operation of the LTIP and DBP arrangements. Any new
shares issued to the trust are, however, included in the dilution
limits noted above.
94 Ricardo plc Annual Report & Accounts 2018
Executive Director Board positions with other
companies during FY 2017/2018
Executive Directors may, with the prior consent of the Board,
hold a non-executive directorship with another company.
On 1 September 2014, the Company’s Chief Executive Officer
was appointed as a non-executive director of Sutton and East
Surrey Water plc. He is permitted to retain the associated fees
which, for the year from 1 July 2017 to 30 June 2018 (inclusive),
amounted to £34,313.
On 25 November 2016, the Company’s Chief Operating
Officer was appointed as the non-executive chairman of
Secured By Design Limited. He is permitted to retain the
associated fees which, for the year from 1 July 2017 to 30 June
2018 (inclusive), amounted to £20,000.
Implementation of remuneration policy in the
following year
The Committee anticipates the implementation of the 2017
Policy in FY 2018/2019 to be similar to that of FY 2017/2018.
The Committee will:
• Review base salary levels for the Executive Directors with
effect from 1 January 2019;
• Set and review the performance targets for the FY 2018/2019
annual bonus and the LTIP awards to be made in 2018 to
ensure continued alignment to strategy;
• Make awards under the LTIP; and
• Make awards under the DBP, where necessary.
Directors' remuneration report
The Committee has so far considered the target range to apply
to the EPS portion of performance awards to be made under
the Company’s long-term incentive arrangements later on in
FY 2018/2019. In order to ensure that the target range remains
challenging in light of market expectations of the Company’s
EPS performance to the year ending 30 June 2021, the
Committee has determined that:
• No part of the EPS portion of these awards will vest if the
Company’s EPS for the final year in the performance period is
lower than 60p;
• 25% of this portion will vest where the final year EPS is 60p;
• 100% of this portion will vest where the final year EPS is
greater than or equal to 69p; and
The Committee believes that TSR and EPS are appropriate
measures for the LTIP as they are strongly aligned to shareholder
value creation. In particular, the normalised EPS performance
targets are considered by the Committee to be suitably
stretching and will reward the leadership team only if they
perform very well. When calibrating performance targets,
the Committee takes into account the economic and market
outlook, the business plan and investor expectations at the time
of each award. Shareholders should also note that the long-term
incentive awards to be granted in October 2018 will be higher
than those made in 2017 because no bonuses were paid to
Executive Directors for the 2017/2018 financial year and therefore
no bonus-linked shares were awarded.
• Vesting will take place on a straight-line basis between 60p
The Directors’ Remuneration Report, comprising the
and 69p.
The target range has been set on the basis of Ricardo's business
plan, recognising the international nature of the business, and
also reflects our long-term strategy and consensus forecasts.
Where the EPS performance period ends before 30 June
2021 (the final year of the performance period), the Committee
retains the discretion to amend these targets and the
corresponding vesting levels accordingly.
The targets applicable to the TSR portion of these awards will
be the same as those which applied to awards granted last year.
Threshold performance (for which 25% of this portion
will vest) is generally intended to align to the anticipated
performance of the relevant market and our competitors. If the
maximum performance is achieved, we would expect
to have significantly outperformed the relevant market and
our competitors.
Chairman's Overview in Part 1, the Annual Report on
Remuneration in Part 2 and the Directors' Remuneration Policy
in Part 3 was approved by the Board on 12 September 2018 and
signed on its behalf by:
Peter Gilchrist CB
Chairman of the Remuneration Committee
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PART 3 – DIRECTORS’ REMUNERATION POLICY
Introduction
This Directors’ Remuneration Policy provides an overview of the Company’s policy on Directors’ pay that is designed to align with, and
support, Ricardo’s strategic plan and operates over the three years from the AGM held on 8 November 2017 (the ‘2017 AGM’) until the
AGM to be held in 2020. This policy permits the execution of remuneration arrangements that were agreed when the previous policy
was in effect. There have been no changes of substance to the text of the policy that was approved at the 2017 AGM. A copy of the
originally approved text is in the 2017 Annual Report & Accounts, which is available on our website at: www.ricardo.com. We have,
however, updated the ‘remuneration outcomes’ chart on page 101 and the page references, for ease of use.
In accordance with the requirements of Companies Act 2006, the policy contained in this part was subject to a binding vote at the
2017 AGM and took effect immediately upon receipt of such approval from shareholders.
The Remuneration Committee – what we do
The Committee’s primary purpose is to make recommendations to the Board on the Group’s framework or broad policy for executive remuneration.
The Board has also delegated responsibility to the Committee for determining the remuneration, benefits and contractual arrangements of the
Chairman and the Executive Directors. No individual is involved in deciding his or her remuneration.
The Committee has written terms of reference, which are available at www.ricardo.com, and its responsibilities include:
• determining and agreeing with the Board the policy for executive remuneration and monitoring and considering the policy for, and structure
of, senior management remuneration taking into account that the ultimate decision-making responsibility for the remuneration of the senior
management team (other than the Executive Directors) lies with the Chief Executive Officer;
• agreeing the terms and conditions of employment for Executive Directors, including their individual annual remuneration and pension
arrangements, and reviewing such provisions for senior management;
• agreeing the measures and targets for any performance-related bonus and share schemes;
• agreeing the remuneration of the Chairman of the Board;
• ensuring that, on termination, contractual terms and payments made are fair, both to the Company and the individual, so that failure is not
rewarded and the duty to mitigate loss is recognised wherever possible; and
• agreeing the terms of reference of any remuneration advisors it appoints.
Taking shareholders’ views into account
When considering Ricardo’s remuneration policy and its implementation,
the Committee is always keen to ensure that it takes into account the
views and opinions of all the relevant stakeholders in the business. In
particular, when preparing its policy for approval at the 2017 AGM, the
Committee undertook a programme of engagement with the Company’s
largest institutional investors and their representative bodies in order to
better understand their perspective on our previous pay practices and
the proposed policy for 2017-2020. Shareholders were given an early
opportunity to raise any questions and in finalising the proposals a number
of questions were raised and answered: for example, on the use of the same
performance measures in respect of the deferred bonus matching shares
and the change in nomenclature to the bonus-linked shares. Both are
designed to simplify Ricardo’s long-term incentive arrangements.
In the spirit of continuous improvement and in order to ensure that our
remuneration policy continues fully to support achievement of business
objectives and delivery of value to shareholders, the Committee will
continue to review our policy periodically in the context of the changing
business environment. Any material future changes to policy will be
discussed with shareholders in advance.
Consideration of employment conditions
elsewhere in the Company
While Ricardo does not consult directly with employees on the
subject of Directors’ remuneration, the remuneration packages for
each Executive Director and their fixed and variable elements are
reviewed annually. This process takes into account a number of
factors, including the following:
•
individual and business performance;
• pay arrangements for similar roles in other companies and
consultancy organisations of Ricardo’s size, complexity and
international reach;
• risk management; and
• pay and employment conditions of employees of the Group.
The Remuneration Committee also looks at the differential between
the CEO’s pay and Ricardo’s average employee earnings over time.
Overview of Ricardo’s remuneration policy for 2017-2020
The objective of Ricardo’s executive remuneration policy is to support the business strategy and timescales of an international
consultancy business by not only rewarding the standard of performance and the outcomes that our shareholders require, but also
encouraging share ownership and fostering alignment of interest between the Executive Directors and shareholders. We do this by
setting base levels of salary that are competitive, compared with companies of similar size and complexity to Ricardo, and providing
other remuneration package elements, namely the short-term annual bonus plan and long-term incentive arrangement, that only
pay for performance. Taken together, our two variable pay platforms focus on growing the profitability of the business, its resilience,
the achievement of discrete non-financial targets and linking executive outcomes with the shareholder experience both by delivering
rewards in the form of Ricardo shares and also by using a relative total shareholder return performance measure over the longer term.
The remuneration policy that was approved by shareholders at the 2017 AGM is:
• simple and straightforward;
• well-understood, both internally and externally;
• competitive but fair; and
• aligned to performance.
96 Ricardo plc Annual Report & Accounts 2018
Directors' remuneration report
THE STRUCTURE OF OUR DIRECTORS’ REMUNERATION PACKAGE – THE POLICY TABLE
Maximum
Operation
Framework for assessing performance
Pay element and
link to strategy
Base salary
To provide a core
level of remuneration
to enable the
Company to
attract and retain
skilled, high-calibre
executives to deliver
its strategy.
Base salary increases
will not ordinarily
be more than 10%
p.a. with exceptional
increases over the
normal maximum
limit capped at 25%
p.a.
However, generally
speaking, increases
will be in line with
salary increases for
employees across
the Group.
Other benefits
To provide market-
competitive benefits.
The total value of
benefits will not
exceed 10% of
base salary p.a.,
save in the case of
relocation.
Pension
To offer market-
competitive
retirement benefits.
For the Chief
Executive Officer,
the pension
contribution is
21.2% of salary
over the Lower
Earnings Limit due
to legacy pension
arrangements.
For all other
Executive Directors,
the pension
contribution is 20%
of salary over the
Lower Earnings
Limit.
Salary levels are reviewed annually in January each
year.
None
None
None
Pay is set by considering market levels of total pay
for comparable roles in companies of similar size,
complexity and sector, as well as each individual
Director’s experience, scope of responsibilities and
performance and the salary increases for employees
across the Group.
Ricardo places a strong emphasis on internal
succession planning. This emphasis may mean that
talented individuals are promoted rapidly. In such
circumstances, the Committee’s policy is to set a
relatively low base salary initially and then increase
this to a market competitive level for the role over
time. This may mean relatively high annual salary
increases as the individual gains experience in the
new role. We will notify shareholders where this is
the case.
The Company provides other cash benefits and
benefits in kind to Executive Directors in line with
market practice. These include a company car or
cash alternative, private fuel, private medical
insurance, life assurance and permanent health and
disability insurance. The benefits arrangements are
reviewed on an annual basis.
The Committee reserves the right to provide further
benefits where this is appropriate in the individual’s
particular circumstances (for example, costs
associated with relocation as a result of the Director’s
role with the Company).
Certain other employees are eligible for the same or
similar benefits described above depending on their
role, seniority and geographical location.
The Company operates a defined contribution
scheme, the Ricardo International Pension Scheme
(‘RIPS’). The policy for Executive Directors (save for
the CEO’s legacy pension arrangements described
opposite) continues to be a pension contribution
of 20% of base salary only over the Lower Earnings
Limit. Contributions are made up to the adjusted
annual allowance limit and the rest is paid as cash in
lieu of pension.
Executive Directors may only choose to opt out of the
RIPS where they are close to, or have exceeded, the
pension lifetime allowance and have applied for fixed
protection from HMRC. Under such circumstances,
Executive Directors will receive a cash payment in lieu
of pension.
On death in service, all Executive Directors, subject to
the medical requirements of the insurance company,
are entitled to a lump sum of four times annual salary
at date of death.
Early retirement is available with the consent of the
Company and the pension scheme trustees if the
individual is over 55 or retiring due to ill health.
The same policy approach applies to all employees
although contribution levels vary by seniority.
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Pay element and
link to strategy
Pay for
performance:
Annual bonus
To reward the annual
delivery of financial
and operational
targets.
Maximum
Operation
Framework for assessing performance
The measures and targets applicable to the annual
bonus scheme (and the different weightings ascribed
to them) are set annually by the Committee in order
to ensure they are relevant to participants and take
account of the most up-to-date business plan and
strategy.
A significant majority (at least 50%) of the bonus
opportunity will normally be determined by
reference to performance against Group key
performance indicators such as:
• profit before tax; and
• net debt.
Any remaining part of a Director’s bonus will
normally be based on the achievement of personal
objectives which relate to delivery of the business
strategy. Examples include the development and
efficient execution of the strategic plan, developing
the business in emerging markets, identifying
opportunities for inorganic growth and succession
planning.
A payment scale for different levels of achievement
against each performance target is specified by the
Committee at the outset of each year – this ranges
from 0% for performance below threshold, up to
100% for full satisfaction of the relevant target.
Maximum
opportunity of 125%
of base salary for
the CEO and 100%
of salary for other
Executive Directors.
Bonuses are awarded by reference to
performance against specific targets measured
over a single financial year.
One half of any bonus paid to an Executive Director
will be paid out shortly after the assessment of
the performance targets has been completed. The
remainder of the bonus will be compulsorily deferred
into ordinary shares, the vesting of which is normally
subject to continued employment for a three-year
period from the award date. The cash element of the
bonus is not payable unless the individual remains in
employment at the payment date.
The principal purpose of this bonus deferral
mechanism is to:
• provide for further alignment of executives’ and
shareholders’ interests;
• provide an additional retention element; and
• encourage Executive Directors to build up a
shareholding in accordance with our share
retention policy.
Dividends and dividend equivalents for each deferral
period may also be paid in respect of shares under
award to the extent that shares have vested in
participants.
Bonus arrangements exist for certain other
employees throughout the Group on terms that are
applicable to their role, seniority and geographical
location, although typically at lower levels of
maximum opportunity to reflect that a greater
proportion of Executive Directors’ remuneration is
performance based.
Malus and clawback: Annual bonuses (including
any element deferred into shares) may be subject to
malus and/or clawback provisions if certain events
occur in the period of three years from the end of
the financial year to which they relate. These events
include the Committee becoming aware of:
• a material misstatement of the Company’s financial
results;
• an error in the calculation of performance
conditions; and/or
• an act committed by the relevant participant
that could have resulted in summary dismissal by
reason of gross misconduct or which has caused
significant reputational damage to the Group.
The mechanism through which malus and clawback
can be implemented enables the Committee to take
various actions including:
• reducing outstanding incentive awards; and
• requiring a cash payment to be made by
participants.
98 Ricardo plc Annual Report & Accounts 2018
Directors' remuneration report
Framework for assessing performance
In addition to the initial performance period to
determine whether bonus-linked share awards
are made, the vesting of all long-term incentives
is subject to both continued employment and the
extent to which performance conditions measured
over a further specified three-year period are met.
The measures and targets applicable to the long-
term incentive awards will consist of challenging
shareholder return, financial and/or strategic
measures.
The particular measures and targets to apply (and
the different weightings ascribed to them) will be set
annually by the Committee in order to ensure they
are relevant to participants, challenging to achieve
and take account of the most up-to-date business
plan and strategy. The current weightings between
the two long-term incentive measures that we use
are equal; however our policy is simply for financial
and/or shareholder return targets to make up at least
50% of awards.
25% of each element of an award will vest for
achieving the threshold performance target with
100% of the awards being earned for maximum
performance (with straight-line vesting between
these points).
Further details of the performance conditions
applicable to awards to be made in FY 2018/2019 are
set out on pages 94 and 95.
Pay element and
link to strategy
Pay for
performance:
Long-term
incentives
Bonus-linked shares
To link short-term
and long-term
performance.
Performance shares
under the long-
term incentive plan
(‘LTIP’) and bonus-
linked shares
To focus motivation
on the long-term
performance of the
Group and reward
shareholder value
creation.
To encourage share
ownership and
alignment with
shareholders.
Maximum
Operation
Maximum
opportunity in
aggregate of 162.5%
of salary for the CEO
and 105% of salary
for other Executive
Directors.
Bonus-linked shares – performance measured
over an aggregate four-year period:
Assuming that a satisfactory level of performance is
achieved over the financial year in which the annual
bonus is assessed (the first year in the four-year
aggregate performance period) which results in a
bonus being paid, Executive Directors will be granted
a bonus-linked share award over further shares (up
to a maximum of 1 for 1) in relation to the deferred
element of the bonus. Consequently, in a year
when there is no annual bonus, no bonus-linked
share award will be made, thus providing a well-
understood and automatic mechanism for reducing
the overall quantum of awards in the year where
performance targets have not been met in full.
Bonus-linked share awards will be granted pursuant
to the rules of the Ricardo plc 2011 Deferred Bonus
Plan (the 'DBP'), for which shareholder approval was
given at the 2011 Annual General Meeting.
LTIP – performance measured over a three-year
period:
Performance share awards under the LTIP are made
on an annual basis to the Executive Directors and a
small group of other senior executives.
Dividends and equivalents
Dividends and dividend equivalents for each
performance period may also be paid in respect of
shares under award to the extent that shares have
vested in participants.
Malus and clawback: Long-term incentive awards
may be subject to malus and/or clawback provisions
if certain events occur after their grant but before the
expiry of the period of two years from the end of the
relevant performance period. These events include
the Committee becoming aware of:
• a material misstatement of the Company’s financial
results;
• an error in the calculation of performance
conditions; and/or
• an act committed by the relevant participant
that could have resulted in summary dismissal by
reason of gross misconduct or which has caused
significant reputational damage to the Group.
The mechanism through which malus and clawback
can be implemented enables the Committee to take
various actions including:
• reducing outstanding incentive awards; and
• requiring a cash payment to be made by
participants.
Finally, where the vesting of a deferred bonus share
award is reduced, the vesting of any associated
bonus-linked share award will accordingly be
reduced.
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Pay element and
link to strategy
Chairman and
other Non-
Executive
Directors
Helps recruit and
retain high-quality
experienced
individuals.
Reflects time
commitment and
role.
Maximum
Operation
Framework for assessing performance
Company’s Articles
of Association
place a limit on the
aggregate annual
level of Non-
Executive Directors’
and Chairman’s fees
(currently £500,000).
None
The fees for Non-Executive Directors are set in line
with prevailing market conditions and at a level that
will attract individuals with the necessary experience
and ability to make a significant contribution to the
Group’s affairs.
Non-Executive Directors receive an annual basic fee
plus an additional fee for acting as the Chairman of
the Audit or Remuneration Committee or the Senior
Independent Director. An additional fee may be
paid for membership of the Technical Exploitation
Board (‘TEB’). No Non-Executive Director is currently
a member of the TEB. The Chairman of the Board
receives an annual fee payable monthly with no
additional fees for chairing Board committees. They
also receive reimbursement for travel and incidental
costs (including any associated personal tax charges)
incurred in furtherance of company business.
Notes to the policy table:
1. The changes to the 2014 Directors’ Remuneration Policy consisted of:
a. ceilings on the elements of our policy which were not capped,
namely base salary and benefits;
b. simplifying our long-term incentive arrangements so that the so-
called deferred bonus matching shares became the bonus-linked
shares; and
c. aligning and extending the malus and clawback provisions which
already applied to certain of our share plans across the LTIP, the
annual cash bonus, deferred bonus shares and bonus-linked shares.
2. Where maximum amounts for elements of remuneration have been
set within the Policy, these will operate simply as caps and are not
indicative of any aspiration.
3. A description of how the Company intends to implement the Policy
set out in the tables on pages 97 to 100 during the financial year to
30 June 2019 is provided on pages 94 and 95.
4. The Committee reserves the right to make any remuneration payments
and/or payments for loss of office (including exercising any discretions
available to it in connection with such payments) notwithstanding that
they are not in line with the Policy (as set out on pages 97 to 100) where
the terms of the payment were agreed:
(i) before 29 October 2014 (the date the Company’s first shareholder-
approved Directors’ Remuneration Policy came into effect);
(ii) before the Policy came into effect, provided that the terms of the
payment were consistent with the shareholder-approved Directors’
Remuneration Policy in force at the time they were agreed; or
(iii) at a time when the relevant individual was not a Director of the
Company and, in the opinion of the Committee, the payment was
not in consideration for the individual becoming a Director of the
Company. For these purposes payments include the Committee
satisfying awards of variable remuneration and, in relation to an
award over shares, the terms of the payment are agreed at the time
the award is granted.
All-employee share plans
5. Ricardo’s variable pay may have any performance conditions applicable
to the relevant element amended or substituted by the Committee
if an event occurs which causes the Committee to determine that
an amended or substituted performance condition would be more
appropriate and not materially less difficult to satisfy. The Committee
may make adjustments, where these are fair and reasonable, to
measures or targets to take account of, for example, the implications of
acquisitions and disposals.
6. Long-term incentive awards can be granted in a variety of forms such
as performance shares, nil-cost options or forfeitable shares and the
Committee reserves the right to grant long-term incentive awards with
the same economic effect but in any of these different contractual
forms (including in cash). Long-term incentive awards can also be
adjusted in the event of any variation of the Company’s share capital or
any demerger, delisting, special dividend or other event that may affect
the Company’s share price.
7. Under the terms of long-term incentive award performance conditions,
where any company becomes unsuitable as a member of the
comparator group as a result of, for example, a change of control or
delisting, the Committee has the discretion to treat that company
in such manner as it deems appropriate (including replacing it with
another organisation).
8. In the event of a change of control, long-term incentive awards will
normally vest at that time, taking into account the extent to which any
performance criteria have been met (over the shortened performance
periods) and the time elapsed since grant.
For its UK employees the Company operates from time to time tax-advantaged share plans. These are a Share Incentive Plan (‘SIP’) and Save As You
Earn share option (‘SAYE’) scheme and they are intended to encourage share ownership and wider interest in the performance of the Company’s
shares. Executive Directors are eligible to participate in these arrangements up to the applicable statutory limits. The SIP provides for partnership,
matching, free and dividend shares. Equivalent arrangements operate from time to time for non-UK employees.
100 Ricardo plc Annual Report & Accounts 2018
615
591
266
404
126
1,411
627
394
1,612
s
n
a
m
m
e
h
S
e
v
a
D
n
o
s
b
G
n
a
i
I
O
E
C
O
F
C
O
O
C
t
t
e
r
r
a
G
k
r
a
M
2017/2018
2016/2017
2017/2018
2016/2017
2017/2018
2016/2017
394
381
340
330
146
153
48
741
151
95
627
90
133
41
604
223
140
693
Directors' remuneration report
0
Illustrative remuneration outcomes at different performance levels
Ricardo’s pay policy seeks to ensure the long-term interests of Executive Directors are aligned with those of shareholders. The
remuneration packages for each Executive Director and their fixed and variable elements are reviewed annually. The scenario chart
Share price growth above face value of vested long-term incentives
below presents remuneration outcomes for the current Policy under minimum, on-target and maximum scenarios.
Face value at grant of vested long-term incentives
Fixed remuneration (salary, benefits and pension)
Single total figure (£’000)
Bonus
1,400
1,000
1,600
1,200
800
600
200
400
1,800
2,500
2,000
1,500
1,000
500
-
’
)
0
0
0
£
(
e
m
o
c
t
u
o
n
o
i
t
a
r
e
n
u
m
e
R
2,065
40%
30%
1,139
15%
30%
627
100%
55%
30%
645
10%
27%
63%
401
100%
1,061
32%
30%
38%
558
10%
28%
62%
346
100%
922
32%
30%
38%
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Fixed elements
Short-term variable element
Long-term variable element
500
600
The target scenario broadly illustrates the remuneration level
when budgeted performance is achieved. The disclosures in the
chart above reflect the 2017/2018 financial year data on the basis
of the assumptions set out below.
• Fixed elements comprise current base salary, pension and
other benefits. For example, for the CEO, fixed elements
comprise base salary of £500,032, pension (pension
contribution and cash in lieu) of 21.2% of base salary above the
Lower Earnings Limit and benefits equal to those received in
the 2017/2018 financial year;
)
0
0
1
£
o
t
d
e
s
a
b
e
r
(
400
300
)
£
(
• For minimum performance, Executive Directors receive only
l
200
)
’
R
S
T
’
(
n
r
u
t
e
R
r
e
d
o
h
e
r
a
h
S
l
a
t
o
T
• For target performance, an assumption of 55% of bonus
pay-out and threshold vesting (25%) in respect of long-term
incentives has been applied;
• For maximum performance, an assumption of maximum
bonus pay-out and maximum vesting in respect of long-term
incentives has been applied; and
• No share price increase has been assumed and this means
that the single total figure in any year may be higher than the
maximum shown above.
the fixed elements of pay;
100
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Ricardo TSR
FTSE Small Cap (Excl. Investment Trusts) TSR
FTSE All Share Support Services TSR
At 30 June
Source: Thomson Reuters Datastream
Delivering Excellence Through Innovation & Technology 101
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Directors' remuneration report
Recruitment remuneration policy
New Executive Directors will be appointed on remuneration packages
with the same structure and elements as described in the policy table
starting on page 97. Annual bonus and long-term incentive awards will be
within the limits described in the policy table.
For external appointments, although we have no plans to offer additional
benefits on recruitment (and indeed did not do so for our last Executive
Director appointment) the Committee reserves the right to offer such
benefits when it considers this to be in the best interests of the Company
and shareholders and in order to protect a new Director against additional
costs. The Committee may agree that the Company will meet certain
relocation expenses as appropriate.
The Company may make an award to compensate a new recruit for
the value of any remuneration relinquished when leaving a former
employer. Any such award would reflect the nature, timescales and
performance requirements attaching to that relinquished remuneration.
The Listing Rules exemption 9.4.2 may be used for the purpose of such
an award. Shareholders will be informed of any such payments as soon as
practicable following the appointment.
For an internal appointment, any variable pay element awarded in
respect of the prior role may be allowed to pay out according to its
terms, adjusted as relevant to take into account the appointment. In
addition, any other ongoing remuneration obligations existing prior to
appointment may continue, and will be disclosed to shareholders at the
earliest opportunity.
On the appointment of a new Chairman or Non-Executive Director,
fees will be set taking into account the experience and calibre of the
individual. Where specific cash or share arrangements are delivered to
Non-Executive Directors, these will not include share options or other
performance-related elements.
The Board’s policy on setting notice periods for Directors is that these
should not exceed one year. It recognises, however, that it may be
necessary in the case of new executive appointments to offer an initial
longer notice period, which would subsequently reduce to one year after
the expiry of that period. All future appointments to the Board will comply
with this requirement.
Termination remuneration policy
The contractual termination provision is payment in lieu of notice equal
to one year’s base salary or, if termination is part way through the notice
period, the amount of base salary relating to any unexpired notice to
the date of termination.(1) There is an obligation on Directors to mitigate
any loss which they may suffer if the Company terminates their service
contract. The Committee will take such mitigation obligation into
account when determining the amount and timing of any compensation
payable to any departing Director. No compensation is paid for summary
dismissal, save for any statutory entitlements.
The cash element of the bonus is not payable unless the individual
remains in employment at the payment date.
Share-based awards will lapse unless the individual concerned leaves
for one of a number of specified ‘good leaver’ reasons which are: death;
injury, illness or disability; redundancy; or retirement. The Committee
retains the discretion to prevent awards from lapsing depending on the
circumstances of the departure and the best interests of the Company.
Awards which do not lapse on cessation of employment may vest on their
originally anticipated vesting date (although the Committee retains the
discretion to allow vesting at cessation, depending on the circumstances
under the applicable rules). These awards will also usually be subject
to a time pro-rating reduction to reflect the unexpired portion of the
performance or deferral period concerned, although the Committee will
retain the discretion to disapply this pro-rating. Awards that are subject
to performance conditions will usually only vest to the extent that these
conditions are satisfied.
Executive Directors will also be entitled to a payment in respect of any
accrued but untaken holiday and statutory entitlements on termination.
In the event that any payment is made in relation to termination for an
Executive Director, this will be fully disclosed.
(1) For Ian Gibson the contractual termination provision is payment in lieu of notice
equal to one year’s base salary, car allowance and pension allowance, to the extent
that these benefits are paid in cash.
102 Ricardo plc Annual Report & Accounts 2018
Directors' remuneration report
Executive Directors’ service contracts
The current Executive Directors’ service contracts contain the key terms shown in the table below:
Provision
Remuneration
Notice period
Termination payment
Restrictive covenants
Detailed terms
• Salary, pension and benefits;
• Company car or cash allowance;
• Private health insurance for Director and dependants;
• Life assurance and death in-service benefits;
• Permanent health and disability insurance;
• Director’s liability insurance;
• 30 days’ paid annual leave;
• Participation in annual bonus plan, subject to plan rules and at the discretion of the Committee; and
• Eligible to participate in share plans, subject to plan rules and at the discretion of the Committee.
• 6 months’ notice by the Director and 12 months’ notice by the Company.
• See separate disclosure on page 102.
• During employment and for 6 months after leaving.(1)
(1) Except for Ian Gibson who is restricted for 12 months after leaving.
The Executive Directors’ service contracts are available for inspection, on request, at the Company’s registered office.
Non-Executive Directors – fees and letters of appointment
The Committee determines the Chairman’s fees. The Chairman and the Executive Directors determine the fees to other Non-Executive
Directors. No Director is present for any discussion or decision about his or her own remuneration. The fees are reviewed each January.
The Non-Executive Directors do not participate in any of the Company’s share incentive schemes, pension schemes or bonus
arrangements, nor do they have service agreements. They are appointed for a period of three years by letter of appointment and are
entitled to one month’s notice of early termination for which no compensation is payable. The unexpired term of the Non-Executive
Directors’ appointments as at 30 June 2018, are:
Non-Executive Director
Sir Terry Morgan CBE
Peter Gilchrist CB
Laurie Bowen
Malin Persson
Bill Spencer
Unexpired term of appointment
18 months
16 months
1 month
6 months
22 months
Delivering Excellence Through Innovation & Technology 103
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Directors’ report
Patricia Ryan – Group General Counsel and Company Secretary
The Directors present their report and the audited
consolidated financial statements of Ricardo plc for the year
ended 30 June 2018.
Dividends
The Directors recommend the payment of a final ordinary share
dividend of 14.71 pence per ordinary share on 23 November
2018 to shareholders who are on the register of members at the
close of business on 9 November 2018, which together with
the interim dividend paid on 6 April 2018 makes a total of 20.46
pence per ordinary share for the year (2017: 19.3 pence).
Acquisitions and disposals
The acquisition of Control Point Corporation was completed
on 8 September 2017 and has subsequently been renamed
Ricardo Defense, Inc., a wholly-owned subsidiary of Ricardo
Defense Systems LLC.
The disposals of our test facilities in Chicago, Illinois,
United States and Schechingen, Germany, were completed on
2 April 2018 and 30 June 2018 respectively.
Events after the reporting date
The refinancing of the Group’s banking facilities to increase its
debt capacity to £150m was completed after the reporting date
on 20 July 2018.
Research and Development
The Group continues to devote effort and resources to the
research and development of new technologies. Costs of £9.5m
have been incurred, of which £5.1m has been capitalised and
£4.4m has been charged to the Consolidated Income Statement
during the year.
Board of Directors
The current Directors of the Company at the date of this report
appear on pages 68 and 69. At the close of the Annual General
Meeting on 8 November 2017, Ian Lee retired from the Board
and, following his election, Bill Spencer was appointed as
Chairman of the Audit Committee.
All other Directors held office through the financial year
under review.
Directors' interests in shares
Directors’ interests in shares and share options are contained on
pages 92 to 94 of the Directors’ Remuneration Report.
Directors’ indemnities
The Company has entered into deeds of indemnity in favour
of each of its Directors under which the Company agrees to
indemnify each Director against liabilities incurred by that
Director in respect of acts or omissions arising in the course of
their office or otherwise by virtue of their office.
Where such deeds are for the benefit of Directors, they
are qualifying third party indemnity provisions as defined by
section 309B of the Companies Act 1985 or section 234 of the
Companies Act 2006, as applicable. At the date of this report,
these indemnities are therefore in force for the benefit of all the
current Directors of the Company.
On 30 June 2014, Ricardo UK Limited and Ricardo-AEA
Limited, subsidiaries of the Group, entered into qualifying third
party indemnity provisions as defined by section 234 of the
Companies Act 2006 in favour of their Directors, under which
each Director is indemnified against liabilities incurred by that
Director in respect of acts or omissions arising in the course
of their office or otherwise by virtue of their office and such
provisions remain in force as at the date of this report.
104 Ricardo plc Annual Report & Accounts 2018
Employee information
The Company provides employees with various opportunities
to obtain information on matters of concern to them and to
improve awareness of the financial and economic factors that
affect the performance of the Company. These include bi-
annual presentations to all members of staff, department and
team briefings and meetings with employee representatives
that take place throughout the year.
All companies within the Group strive to operate fairly at all
times and this includes not permitting discrimination against
any employee or applicant for employment on the basis of
race, religion or belief, colour, gender, disability, national origin,
age, military service, veteran status, sexual orientation or marital
status. This includes giving full and fair consideration to suitable
applications for employment from disabled persons and making
appropriate accommodations so that if existing employees
become disabled they can continue to be employed, wherever
practicable, in the same job or, if this is not practicable, making
every effort to find suitable alternative employment and to
provide relevant training.
Change of control provisions
There are a number of agreements that take effect, alter or
terminate upon a change of control of the Company following
a takeover bid, such as commercial contracts, bank facility
agreements, property lease arrangements and employees’ share
plans. None of these are considered to be significant in terms of
their likely impact on the business of the Group as a whole.
Management report
The management report required by the provisions of the
Disclosure and Transparency Rules is included within the
Strategic Report and has been prepared in consultation
with management.
Share capital
As at 31 August 2018, the Company’s share capital is divided
solely into 53,406,250 ordinary shares of 25 pence each, all
of which are fully paid. The ordinary shares are listed on the
London Stock Exchange.
All ordinary shares rank equally for all dividends and
distributions that may be declared on such shares. At general
meetings of the Company, each member who is present (in
person, by proxy or by representative) is entitled to one vote on
a show of hands and, on a poll, to one vote per share.
With respect to shares held on behalf of participants in the
all-employee Share Incentive Plan, the trustees are required to
vote as the participants direct them to do so in respect of their
plan shares. There are no restrictions on voting rights and no
securities carry special voting rights with regard to the control of
the Company.
Directors’ report
dilution limits recommended by the Investment Association.
Based on the Company’s issued share capital as at 30 June 2018,
the overall dilution was 4.79% (i.e. under the 10% limit for all
plans in any rolling 10-year period) and 4.35% for discretionary
employee share plans (i.e. under the 5% limit for discretionary
employee share plans in any rolling 10-year period).
The Company was given authority to purchase up to 15% of
its existing ordinary share capital at the 2017 AGM. That authority
will expire at the conclusion of the 2018 AGM unless renewed.
Accordingly, a special resolution to renew the authority will be
proposed at the forthcoming AGM.
The existing authority for Directors to allot ordinary shares
will expire at the conclusion of the 2018 AGM. Accordingly, an
ordinary resolution to renew this authority will be proposed
at the forthcoming AGM. In addition, it will be proposed to
give the Directors further authority for a period of one year to
allot ordinary shares in connection with a rights issue in favour
of ordinary shareholders. This is in accordance with guidance
issued by the Association of British Insurers. If the Directors were
to use further authority in the year following the 2018 AGM, all
Directors wishing to remain in office would stand for re-election
at the 2019 AGM.
Details of these resolutions are included with the Notice of
AGM enclosed with this report.
Resolutions at the Annual General Meeting
The Company’s AGM will be held on 15 November 2018.
Accompanying this report is the Notice of AGM which sets out
the resolutions to be considered and approved at the meeting,
together with some explanatory notes. The resolutions cover
such routine matters as the renewal of authority to allot shares,
to disapply pre-emption rights and to purchase own shares.
Substantial shareholdings
The Company has been notified, as at 31 August 2018, of the
following material interests in the voting rights of the Company
under the provisions of the Disclosure and Transparency Rules.
Shareholders
Standard Life Aberdeen plc
Hargreave Hale
JP Morgan Asset Management
Aviva Investors
Royal London Asset Management
Invesco Asset Management
Baillie Gifford & Co. Limited
NN Investment Partners B.V.
Columbia Threadneedle Investments (UK)
Schroder Investment Management
Number of
shares
% of issued
share capital
5,833,216
3,258,476
2,794,503
2,664,176
2,621,367
2,308,136
2,153,387
2,116,794
2,031,263
1,835,114
1,645,862
10.92
6.10
5.23
4.99
4.91
4.32
4.03
3.96
3.80
3.44
3.08
Delivering Excellence Through Innovation & Technology 105
Awards granted under the Company’s share plans are
Charles Stanley & Co. Limited
satisfied either by shares held in the employee benefit trust or
by the issue of new shares when awards vest. The Remuneration
Committee monitors the number of awards made under the
various share plans and their potential impact on the relevant
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Directors’ report
Donations
During the year the Group made various charitable donations
which are summarised in the Corporate Responsibility and
Sustainability Report on page 39. The Group made no political
donations during the year to 30 June 2018.
Independent auditors
Following a tender process for external audit services, a
resolution to appoint KPMG LLP as independent auditors of the
Group and Company will be proposed at the AGM.
Going concern
Having assessed the principal risks and the other matters
discussed in connection with the Viability Statement on page
43, the Directors considered it appropriate to adopt
the going concern basis of accounting in preparing the
financial statements.
Branches outside the UK
The Company has no overseas branches outside the UK. A
number of the Group’s subsidiaries have overseas branches
outside the UK, which are disclosed in their local statutory
financial statements.
Additional information
Certain information that is required to be included in the
Directors’ Report can be found elsewhere in this document
as referred to below, each of which is incorporated into the
Directors’ Report by cross-reference:
• An indication of the likely future developments in the Group’s
business can found in the Strategic Report, on pages 9, 12, 23
and 25;
Information on greenhouse gas emissions can be found on
pages 36 and 37;
•
• The Group’s statement on corporate governance can be
found in the Corporate Governance Statement on pages 70
to 75; and
• The Group’s financial risk management objectives and
policies in relation to its use of financial instruments and its
exposure to capital, liquidity, credit and market risk, to the
extent they are material, are set out in Note 24 to the financial
statements on pages 144 to 148.
The Directors’ Report was approved by order of the Board on
12 September 2018 and signed on its behalf by:
Patricia Ryan
Group General Counsel and Company Secretary
106 Ricardo plc Annual Report & Accounts 2018
Statement of Directors’ responsibilities
in respect of the financial statements
The Directors are responsible for preparing the Annual
Report, the Directors’ Remuneration Report and the audited
consolidated financial statements in accordance with applicable
law and regulation.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the Group and Parent Company financial
statements in accordance with International Financial Reporting
Standards (‘IFRS’) as adopted by the European Union. Under
company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Parent Company
and of the profit or loss of the Group and Parent Company for
that period. In preparing the financial statements, the Directors
are required to:
• select suitable accounting policies and then apply them
consistently;
• state whether applicable IFRS as adopted by the European
Union have been followed for the Group and Parent
Company financial statements, subject to any material
departures disclosed and explained in the financial
statements;
• make judgements and accounting estimates that are
reasonable and prudent; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and
Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Parent Company’s transactions and disclose with reasonable
accuracy at any time the financial position of the Group and
Parent Company and enable them to ensure that the financial
statements and the Directors’ Remuneration Report comply
with the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the
assets of the Group and Parent Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are responsible for the maintenance and
integrity of the Parent Company’s website. Legislation in
the United Kingdom governing the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.
The Directors consider that the Annual Report and
financial statements, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the Group and Parent Company’s
position and performance, business model and strategy.
Responsibility statement of the Directors in
respect of the Annual Report
Each of the Directors, whose names and functions are listed in
the Board of Directors section of the Annual Report on pages
68 and 69, confirm that, to the best of their knowledge:
• the Group and Parent Company financial statements, which
have been prepared in accordance with IFRS as adopted by
the European Union, give a true and fair view of the assets,
liabilities, financial position and profit of the Group and
Parent Company; and
• the Strategic Report includes a fair review of the
development and performance of the business and the
position of the Group and Parent Company, together
with a description of the principal risks and uncertainties
that it faces.
Disclosure of information to the auditors
In accordance with Section 418 of the Companies Act 2006,
each Director in office at the date of approval of the Directors’
Report confirms that:
• so far as the Director is aware, there is no relevant audit
information of which the Group and Parent Company’s
auditors are unaware; and
• they have taken all the steps that they ought to have taken
as a Director in order to make themselves aware of any
relevant audit information and to establish that the Group
and Parent Company’s auditors are aware of
that information.
Dave Shemmans
Chief Executive Officer
12 September 2018
Ian Gibson
Chief Financial Officer
Delivering Excellence Through Innovation & Technology 107
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Financial
statements
Independent auditors’ report
110
116 Consolidated income statement
116 Consolidated statement of comprehensive income
Consolidated and parent company statements of
117
financial position
Consolidated and parent company statements of
changes in equity
Consolidated and parent company statements of
cash flow
119
118
120 Notes to the financial statements
Delivering Excellence Through Innovation & Technology 109
Independent auditors’ report
to the members of Ricardo plc
REPORT ON THE AUDIT OF THE
FINANCIAL STATEMENTS
Opinion
In our opinion, Ricardo plc’s Group financial statements and
Parent Company financial statements (the ‘financial statements’):
• give a true and fair view of the state of the Group’s and of the
Parent Company’s affairs as at 30 June 2018 and of the Group’s
profit and the Group’s and the Parent Company’s cash flows for
the year then ended;
• have been properly prepared in accordance with International
Financial Reporting Standards (‘IFRS’) as adopted by the
European Union and, as regards the Parent Company’s financial
statements, as applied in accordance with the provisions of the
Companies Act 2006; and
• have been prepared in accordance with the requirements of
the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the
Annual Report & Accounts (the ‘Annual Report’), which comprise:
the Consolidated and Parent Company Statements of Financial
Position as at 30 June 2018, the Consolidated Income Statement
and the Consolidated Statement of Comprehensive Income, the
Consolidated and Parent Company Statements of Changes in
Equity, and the Consolidated and Parent Company Statements
of Cash Flow for the year then ended; and the notes to the
financial statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities
under ISAs (UK) are further described in the 'Auditors’
responsibilities for the audit of the financial statements' section of
our report. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard,
as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with
these requirements.
To the best of our knowledge and belief, we declare that non-
audit services prohibited by the FRC’s Ethical Standard were not
provided to the Group or the Parent Company.
Other than those disclosed in Note 6 to the financial statements,
we have provided no non-audit services to the Group or the Parent
Company in the period from 1 July 2017 to 30 June 2018.
110 Ricardo plc Annual Report & Accounts 2018
Our audit approach
Overview
Materiality
Audit scope
Key audit
matters
• Overall Group materiality: £1,950,000
(2017: £1,900,000), based on 5% of profit
before tax and specific adjusting items;
and
• Overall Parent Company materiality:
£1,852,500 (2017: £1,805,000), based
on 1% of total assets capped at a level
below the overall Group financial
statement materiality level.
• We audited the complete financial
information of five reporting units
(2017: five), with procedures on specific
balances at five further reporting units
(2017: six); and
• As a result, audit procedures have
been conducted at reporting units
representing 70% of the Group's profit
before tax and specific adjusting items,
and 77% of revenue.
• Revenue recognition on fixed price
contracts in the Technical Consulting
business (Group);
• Recoverability of capitalised
development costs (Group); and
• Taxation (Group).
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the Directors
made subjective judgements, for example in respect of
significant accounting estimates that involved making
assumptions and considering future events that are
inherently uncertain.
We gained an understanding of the legal and regulatory
framework applicable to the Group and the industries in which
it operates, and considered the risk of acts by the Group which
were contrary to applicable laws and regulations, including
fraud. We designed audit procedures at Group and significant
component level to respond to the risk, recognising that the
risk of not detecting a material misstatement due to fraud
is higher than the risk of not detecting one resulting from
error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through
collusion. We focused on laws and regulations that could
give rise to a material misstatement in the Group and Parent
Company financial statements, including, but not limited to,
the Companies Act 2006, the Listing Rules, pensions legislation,
UK tax legislation and equivalent local laws and regulations
applicable to significant component teams. Our tests included,
Independent auditors’ report
but were not limited to, inquiries with legal counsel, sending
legal confirmations, and reviewing legal expenses incurred
throughout the year. There are inherent limitations in these
audit procedures and the further removed non-compliance
with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely we would
become aware of it.
We did not identify any key audit matters relating to
irregularities, including fraud. As in all of our audits we also
addressed the risk of management override of internal controls,
including testing journals and evaluating whether there was
evidence of bias by the Directors that represented a risk of
material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had
the greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement
team. These matters, and any comments we make on the results of
our procedures thereon, were addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters. This is not a complete list of all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Revenue recognition on fixed price contracts in the
Technical Consulting business (Group)
Refer to page 78 (‘Revenue recognition on fixed price contracts’ within
the Audit Committee Report), Notes 1(c), 1(e) and 20 to the financial
statements for the Directors’ disclosures of the related accounting
policies, judgements and estimates for further information.
Contract accounting is used in the Group’s Technical
Consulting businesses, which contributes the majority of the
Group’s revenue, at £288.3m (2017: £280.5m). The contracts
are inherently complex and may span a number of reporting
periods. They therefore require judgements by management
related to the stage that the contract has reached and estimates
of the costs to complete the work, that could lead to an under or
overstatement of revenue and profit, either intentionally or
in error.
In contract accounting the amounts recorded in the
Consolidated Statement of Financial Position depend on the
relationship between the work done and forecast costs to come,
the invoicing schedule agreed with the customer and the cash
payments received.
The Consolidated Statement of Financial Position at 30 June
2018 showed amounts recoverable on contracts (‘AROC’) of
£52.6m, net trade receivables of £64.4m and payments received
in advance on contracts of £25.3m primarily in respect of the
Technical Consulting business. We carried out procedures on
each of these balances in the course of our work as described
opposite.
AROC represents work done that has not yet been invoiced
and we focused on the risk that it, or the trade receivables for
work that had been invoiced prior to the year-end, would not
be recoverable in full. Management assesses the contract-
related AROC and trade receivable balances to ensure sufficient
confidence over the likely recoverability of these balances.
We tested the key controls over contract accounting in the
Technical Consulting business, including the controls over recording
work done, invoicing and cash receipts. We also obtained the
position paper prepared by management and attended the
‘Red CAT4’ (high-risk and underperforming contracts) review
meetings in January and July 2018 with the Chief Financial Officer
and the divisional Managing and Finance Directors, at which the
performance of these contracts was discussed. We were satisfied
that a robust process had been undertaken in the contract reviews
and that the outcomes were reflected in the year-end positions in
the financial statements.
We also tested a sample of contracts by meeting with the
relevant project managers and engineers to analyse the contracts
in detail. These meetings included discussion and evaluation of
the key project risks and adherence to billing schedules, together
with the key estimates used in the long-term contract accounting
calculations such as costs to complete and contingencies held,
which were all reconciled to the project records.
Where appropriate, we obtained the relevant contracts and
other supporting information and validated the data included
in the calculations and management’s assumptions for costs to
complete based on the contractual requirements. We found that
management was able to provide reasonable explanations and
appropriate supporting evidence for the various judgements taken.
We discussed significant AROC and trade receivable positions
with management and performed testing to assess the
recoverability of these. We were able to confirm that the positions
were consistent with the relevant invoicing schedules and payment
plans. We also considered recent communications with customers
and traced amounts to subsequent cash receipt where possible.
We also considered whether payments received in advance were
recognised where the related work had not yet been done. No
material issues were identified in our testing.
We considered the appropriateness and completeness of
judgemental contract provisions and obtained and challenged
the evidence provided in support of these, which included
reading correspondence with third parties. No material issues were
identified in our testing.
We also tested manual journal entries with a material impact on
revenue and found that all manual journal entries tested relating to
contract accounting were properly supported.
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Key audit matter
How our audit addressed the key audit matter
Recoverability of capitalised development costs
(Group)
Refer to page 78 (‘Recoverability of capitalised development costs’
within the Audit Committee Report), and Notes 1(c), 1(o) and 14 to
the financial statements for the Directors’ disclosures of the related
accounting policies, judgements and estimates for
further information.
The Group has continued to focus on research and
development activities, targeted on areas that can maximise
future benefit. During the year £5.1m of development spend
was capitalised in respect of development projects, resulting in
a total of £10.4m held in the Consolidated Statement of Financial
Position at 30 June 2018.
The capitalised costs must comply with the criteria set out in
IAS 38 ‘Intangible Assets’. In particular, management must only
capitalise costs that are directly attributable to the development
projects and, until signed sales orders exist, there is a risk that
such projects will not generate sufficient economic benefit in the
future to support the current carrying value.
We obtained the position paper prepared by management
and tested the development costs to ensure that they were
capitalised in accordance with the requirements of the
accounting framework and were properly attributable to the
relevant projects by obtaining supporting documentation such
as invoices and time records, and checking the nature of each
cost incurred.
We found that the costs on these projects had been
capitalised in accordance with the criteria set out in IAS 38.
We obtained project plans for a sample of the larger projects
and met with the Project Directors to understand progress to
date, the potential opportunity and management’s assessment
of the future returns that will be generated. We challenged
management on the specific opportunities identified and found
that a number of these have started to realise future economic
benefit. In other cases, we were able to obtain appropriate
evidence and explanations for the future value.
Taxation (Group)
Refer to page 79 (‘Taxation’ within the Audit Committee Report), and
Notes 1(c), 1(l), 9 and 26 to the financial statements for the Directors’
disclosures of the related accounting policies, judgements and
estimates for further information.
The Group claims significant R&D credits in the US and
also has potential liabilities around the Group for permanent
establishment risks and transfer pricing, for which it maintains
provisions.
We obtained the tax calculations, including those for R&D credits,
and the position papers prepared by management to understand
and test the tax charge and deferred tax position for the Group.
We considered the processes and procedures undertaken by
management to understand their risks arising from permanent
establishments and transfer pricing. We formed our own view on
these judgements and concluded that the judgements
taken by management in establishing provisions for these risks
were reasonable.
The US tax group has £5.5m of recognised deferred tax assets
We evaluated the Group’s forecasts for the US tax group and
in the Consolidated Statement of Financial Position, but the
performance of these businesses in the past few years has been
variable, leading to doubt over the likely realisation of the assets.
the process by which they were prepared in considering the
forecast utilisation of the relevant deferred tax assets.
We noted that the profitability of the US tax group has
improved in the current year and continues to utilise the deferred
tax asset recognised.
We determined that there were no key audit matters applicable to the Parent Company to communicate in our report.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
Group and the Parent Company, the accounting processes and
controls, and the industry in which they operate.
The Group is structured by division, with significant reporting
units in the UK and Europe, and further smaller reporting units
in locations across the US, Middle East, Asia and the rest of
Europe. The Group financial statements are a consolidation of 49
reporting units, comprising the Group’s operating businesses
and centralised functions.
For each reporting unit, we determined whether we required
an audit of the complete financial information or whether
alternative procedures would be sufficient. Our principal
measure for these scoping decisions was revenue, as in the
Group this is a reasonable indicator of the scale of activities
of an individual reporting unit. Based on this measure the full
scope components were Automotive Europe and Performance
Products, as each reporting unit made up more than 15% of the
Group’s revenue.
We included Energy & Environment, Rail UK and Rail
Netherlands as full scope for Group reporting given the scale
of the operations in these reporting units and the requirement
for UK and Netherlands statutory audits to be performed for
the related legal entities. Automotive US and Software are the
other more significant trading businesses within the Group.
As these have no local statutory requirement, we performed
112 Ricardo plc Annual Report & Accounts 2018
specified procedures for Group reporting and performed risk-
focused testing over key contracts and the associated balances.
In addition, we performed procedures over specific balances
in Ricardo plc, Ricardo Investments Limited and Automotive
China, along with higher level risk-focused procedures with
respect to the remaining reporting units and procedures over
consolidation entries.
The Group audit team was responsible for all the work carried
out in the UK and the specified procedures work over Automotive
US and Software. PwC Netherlands performed work over Rail
Netherlands under our instruction. Discussions were held with
the PwC Netherlands team at both planning and completion to
discuss the scope of their procedures and their findings.
Taken together, our audit work in the UK and the US, along
with work performed by PwC Netherlands, addressed 70% of
the Group’s profit before tax and specific adjusting items, and
77% of revenue. This gave us the evidence we needed for our
opinion on the Group financial statements as a whole.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us
to determine the scope of our audit and the nature, timing
and extent of our audit procedures on the individual financial
statement line items and disclosures and in evaluating the effect
of misstatements, both individually and in aggregate on the
financial statements as a whole.
Based on our professional judgement, we determined
materiality for the financial statements as a whole as follows:
Overall
materiality
How we
determined it
Rationale for
benchmark
applied
Group financial
statements
Parent Company
financial
statements
£1,950,000
(2017: £1,900,000).
£1,852,500
(2017: £1,805,000).
1% of total assets
capped at a
level below the
overall Group
financial statement
materiality level.
We chose this
because the Parent
Company's primary
purpose is that of a
holding company
for the Group.
5% of profit before
tax and specific
adjusting items.
We chose this
because we
consider this to
be the principal
measure used
by shareholders
to assess the
Group's underlying
performance.
For each component in the scope of our group audit, we
allocated a materiality that is less than our overall group
materiality. The range of materiality allocated across
Independent auditors’ report
components was between £267,000 and £1,852,500. Certain
components were audited to a local statutory audit materiality
that was also less than our overall group materiality.
We agreed with the Audit Committee that we would report
to them misstatements identified during our audit above
£100,000 (Group audit) (2017: £95,000) and £100,000 (Parent
Company audit) (2017: £90,000) as well as misstatements below
those amounts that, in our view, warranted reporting for
qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We have nothing material
to add or to draw attention
to. However, because not all
future events or conditions can
be predicted, this statement
is not a guarantee as to the
Group’s and Parent Company’s
ability to continue as a going
concern.
We have nothing to report.
We are required to report if we
have anything material to add
or draw attention to in respect
of the Directors’ statement
in the financial statements
about whether the Directors
considered it appropriate to
adopt the going concern basis
of accounting in preparing
the financial statements and
the Directors’ identification
of any material uncertainties
to the Group’s and the Parent
Company’s ability to continue
as a going concern over a
period of at least twelve
months from the date of
approval of the financial
statements.
We are required to report if the
Directors’ statement relating to
going concern in accordance
with Listing Rule 9.8.6R(3) is
materially inconsistent with our
knowledge obtained in the
audit.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our
auditors’ report thereon. The Directors are responsible for the
other information. Our opinion on the financial statements
does not cover the other information and, accordingly, we do
not express an audit opinion or, except to the extent otherwise
explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements,
our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or
Delivering Excellence Through Innovation & Technology 113
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
The Directors’ assessment of the prospects of the
Group and of the principal risks that would threaten
the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
• The Directors’ confirmation on page 43 of the Annual
Report that they have carried out a robust assessment of the
principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity;
• The disclosures on pages 41 and 42 of the Annual Report
that describe those risks and explain how they are being
managed or mitigated; and
• The Directors’ explanation on page 43 of the Annual Report
as to how they have assessed the prospects of the Group,
over what period they have done so and why they consider
that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as
they fall due over the period of their assessment, including
any related disclosures drawing attention to any necessary
qualifications or assumptions.
We have nothing to report having performed a review of
the Directors’ statement that they have carried out a robust
assessment of the principal risks facing the Group and
statement in relation to the longer-term viability of the Group.
Our review was substantially less in scope than an audit
and only consisted of making inquiries and considering the
Directors’ process supporting their statements; checking that
the statements are in alignment with the relevant provisions
of the UK Corporate Governance Code (the ‘Code’); and
considering whether the statements are consistent with the
knowledge and understanding of the Group and Parent
Company and their environment obtained in the course of the
audit. (Listing Rules)
Independent auditors’ report
material misstatement, we are required to perform procedures
to conclude whether there is a material misstatement of the
financial statements or a material misstatement of the other
information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have
nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report,
we also considered whether the disclosures required by the UK
Companies Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006
(‘CA06’), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (‘FCA’) require us also to report certain opinions
and matters as described below (required by ISAs (UK) unless
otherwise stated).
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course
of the audit, the information given in the Strategic Report and
Directors’ Report for the year ended 30 June 2018 is consistent
with the financial statements and has been prepared in
accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group
and Parent Company and their environment obtained in
the course of the audit, we did not identify any material
misstatements in the Strategic Report and Directors’ Report.
(CA06)
Corporate governance statement
In our opinion, based on the work undertaken in the course of
the audit, the information given in the Corporate Governance
Statement (pages 70 to 75 of the Annual Report) about internal
controls and risk management systems in relation to financial
reporting processes and about share capital structures in
compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance
and Transparency Rules sourcebook of the FCA (‘DTR’) is
consistent with the financial statements and has been prepared
in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group
and Parent Company and their environment obtained in
the course of the audit, we did not identify any material
misstatements in this information. (CA06)
In our opinion, based on the work undertaken in the course
of the audit, the information given in the Corporate Governance
Statement (on pages 70 to 75) with respect to the Parent
Company’s corporate governance code and practices and
about its administrative, management and supervisory bodies
and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of
the DTR. (CA06)
We have nothing to report arising from our responsibility
to report if a corporate governance statement has not been
prepared by the Parent Company. (CA06)
114 Ricardo plc Annual Report & Accounts 2018
Other Code provisions
We have nothing to report in respect of our responsibility to
report when:
• The statement given by the Directors, on page 107, that
they consider the Annual Report taken as a whole to be fair,
balanced and understandable, and provides the information
necessary for the members to assess the Group’s and Parent
Company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of
the Group and Parent Company obtained in the course of
performing our audit;
• The section of the Annual Report on page 77 and 81
describing the work of the Audit Committee does not
appropriately address matters communicated by us to the
Audit Committee; and
• The Directors’ statement relating to the Parent Company’s
compliance with the Code does not properly disclose a
departure from a relevant provision of the Code specified,
under the Listing Rules, for review by the auditors.
Directors’ remuneration
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006. (CA06)
Responsibilities for the financial statements and
the audit
Responsibilities of the Directors for the financial
statements
As explained more fully in the Statement of Directors'
Responsibilities set out on page 107, the Directors are
responsible for the preparation of the financial statements
in accordance with the applicable framework and for being
satisfied that they give a true and fair view. The Directors are
also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud
or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group’s and the Parent Company’s
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going
concern basis of accounting unless the Directors either intend
to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue an auditors’ report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists. Misstatements
Independent auditors’ report
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of these financial statements.
A further description of our responsibilities for the audit
of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for
and only for the Parent Company’s members as a body in
accordance with Chapter 3 of Part 16 of the Companies Act
2006 and for no other purpose. We do not, in giving these
opinions, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our
prior consent in writing.
OTHER REQUIRED REPORTING
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to
you if, in our opinion:
• we have not received all the information and explanations
we require for our audit; or
• adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
• certain disclosures of Directors’ remuneration specified by
law are not made; or
• the Parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we
were appointed by the members on 24 September 1990 to
audit the financial statements for the year ended 30 June
1991 and subsequent financial periods. The period of total
uninterrupted engagement is 28 years, covering the years
ended 30 June 1991 to 30 June 2018.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Gatwick
12 September 2018
Delivering Excellence Through Innovation & Technology 115
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Consolidated income statement
for the year ended 30 June 2018
Year ended 30 June 2018
Year ended 30 June 2017
Revenue
Cost of sales
Gross profit
Administrative expenses
Other income
Operating profit
Finance income
Finance costs
Net finance costs
Profit before taxation
Taxation
Profit for the year
Profit attributable to:
- Owners of the parent
- Non-controlling interests
Note
2 & 3
5
8
8
8
9
38
Underlying
£m
380.0
(241.1)
138.9
(98.4)
0.7
41.2
0.4
(2.6)
(2.2)
39.0
(8.3)
30.7
30.6
0.1
30.7
Specific
adjusting
items(1)
£m
-
-
-
(10.5)
-
(10.5)
-
-
-
(10.5)
(1.3)
(11.8)
(11.8)
-
(11.8)
Earnings per ordinary share attributable to owners of the parent during the year
(22.1)p
Basic
(22.0)p
Diluted
57.3p
57.1p
10
10
Total
£m
380.0
(241.1)
138.9
(108.9)
0.7
30.7
0.4
(2.6)
(2.2)
28.5
(9.6)
18.9
18.8
0.1
18.9
35.2p
35.1p
Underlying
£m
352.1
(219.2)
132.9
(92.6)
0.5
40.8
0.2
(2.7)
(2.5)
38.3
(8.8)
29.5
29.5
-
29.5
55.7p
55.2p
Specific
adjusting
items(1)
£m
-
-
-
(6.1)
-
(6.1)
-
-
-
(6.1)
1.4
(4.7)
(4.7)
-
(4.7)
(8.9)p
(8.8)p
Total
£m
352.1
(219.2)
132.9
(98.7)
0.5
34.7
0.2
(2.7)
(2.5)
32.2
(7.4)
24.8
24.8
-
24.8
46.8p
46.4p
(1) Specific adjusting items comprise amortisation of acquired intangible assets, acquisition-related expenditure, reorganisation costs and derecognition of related net deferred tax
assets. Further details are given in Note 4.
The Company has not presented its own Income Statement and Statement of Comprehensive Income as permitted by Section 408 of the Companies Act 2006.
Consolidated statement of comprehensive income
for the year ended 30 June 2018
Note
25
26
31
Year ended
30 June 2018
Year ended
30 June 2017
£m
18.9
13.8
(2.7)
11.1
0.1
0.1
11.2
30.1
30.0
0.1
30.1
£m
24.8
(4.4)
0.8
(3.6)
3.0
3.0
(0.6)
24.2
24.2
-
24.2
Profit for the year
Items that will not be reclassified to profit or loss:
Remeasurements of the defined benefit pension scheme
Deferred tax on remeasurements of the defined benefit scheme
Total items that will not be reclassified to profit or loss
Items that may be subsequently reclassified to profit or loss:
Currency translation on foreign currency net investments
Total items that may be subsequently reclassified to profit or loss
Total other comprehensive income/(loss) for the year (net of tax)
Total comprehensive income for the year
Attributable to:
- Owners of the parent
- Non-controlling interests
116 Ricardo plc Annual Report & Accounts 2018
Consolidated and parent company statements of financial position
as at 30 June 2018
Group
Company
Note
30 June 2018
£m
30 June 2017 30 June 2018
£m
£m
30 June 2017
£m
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investments
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Derivative financial assets
Current tax assets
Cash and cash equivalents
Non-current assets held for sale
Total assets
Liabilities
Current liabilities
Borrowings
Trade and other payables
Current tax liabilities
Derivative financial liabilities
Provisions
Net current assets
Non-current liabilities
Borrowings
Retirement benefit obligations
Deferred tax liabilities
Provisions
Total liabilities
Net assets
Equity
Share capital
Share premium
Other reserves
Retained earnings
At 1 July
Profit for the year attributable to owners of the parent
Other changes in retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Total equity
13
14
15
16
26
17
18
23
34
19
22
21
23
27
22
25
26
27
28
29
31
32
38
65.5
31.7
45.3
-
7.6
150.1
13.3
141.8
0.1
1.3
33.1
189.6
-
189.6
339.7
(9.4)
(82.5)
(6.3)
(1.0)
(2.8)
(102.0)
87.6
(49.8)
(4.6)
(3.9)
(2.9)
(61.2)
(163.2)
176.5
13.4
14.3
15.7
112.2
18.8
1.7
132.7
176.1
0.4
176.5
62.0
32.4
48.0
-
14.3
156.7
13.9
137.6
0.9
0.6
27.9
180.9
2.8
183.7
340.4
(6.0)
(82.1)
(6.3)
(0.7)
(1.3)
(96.4)
87.3
(59.8)
(22.2)
(5.0)
(1.3)
(88.3)
(184.7)
155.7
13.3
14.3
15.6
99.4
24.8
(12.0)
112.2
155.4
0.3
155.7
-
1.6
4.5
103.1
1.7
110.9
-
89.6
0.1
0.2
0.3
90.2
-
90.2
201.1
(8.6)
(70.3)
-
(1.0)
-
(79.9)
10.3
(6.8)
(4.6)
(0.6)
-
(12.0)
(91.9)
109.2
13.4
14.3
-
79.6
0.2
1.7
81.5
109.2
-
109.2
-
2.7
4.7
103.1
4.8
115.3
-
105.2
0.9
0.4
0.9
107.4
-
107.4
222.7
(6.0)
(66.7)
-
(0.7)
-
(73.4)
34.0
(19.8)
(22.2)
(0.1)
-
(42.1)
(115.5)
107.2
13.3
14.3
-
89.4
1.9
(11.7)
79.6
107.2
-
107.2
The notes on pages 120 to 159 form an integral part of these financial statements.
The financial statements of Ricardo plc (registered number 222915) on pages 116 to 159 were approved by the Board of Directors on 12 September 2018 and
signed on its behalf by:
Dave Shemmans
Chief Executive Officer
Ian Gibson
Chief Financial Officer
Delivering Excellence Through Innovation & Technology 117
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Consolidated and parent company statements of changes in equity
for the year ended 30 June 2018
Group
At 1 July 2017
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Equity-settled transactions
Tax credit relating to share option schemes
Proceeds from shares issued
Ordinary share dividends
At 30 June 2018
At 1 July 2016
Profit for the year
Other comprehensive income/(loss) for the year
Total comprehensive income for the year
Reclassification of non-controlling interests
Equity-settled transactions
Tax credit relating to share option schemes
Proceeds from shares issued
Ordinary share dividends
At 30 June 2017
Company
At 1 July 2017
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Equity-settled transactions
Tax credit relating to share option schemes
Proceeds from shares issued
Ordinary share dividends
At 30 June 2018
At 1 July 2016
Profit for the year
Other comprehensive loss for the year
Total comprehensive loss for the year
Equity-settled transactions
Tax credit relating to share option schemes
Proceeds from shares issued
Ordinary share dividends
At 30 June 2017
Note
30
32
28
11
32
30
32
28
11
Note
30
32
28
11
30
32
28
11
Attributable to owners of the parent
Share
capital
£m
13.3
-
-
-
-
-
0.1
-
13.4
Share
premium
£m
14.3
-
-
-
-
-
-
-
14.3
Other
reserves
£m
15.6
-
0.1
0.1
-
-
-
-
15.7
Retained
earnings
£m
112.2
18.8
11.1
29.9
1.0
0.1
-
(10.5)
132.7
13.2
-
-
-
-
-
-
0.1
-
13.3
14.3
-
-
-
-
-
-
-
-
14.3
12.6
-
3.0
3.0
-
-
-
-
-
15.6
99.4
24.8
(3.6)
21.2
(0.3)
1.6
0.1
-
(9.8)
112.2
Attributable to owners of the parent
Share
capital
£m
13.3
-
-
-
-
-
0.1
-
13.4
Share
premium
£m
14.3
-
-
-
-
-
-
-
14.3
Other
reserves
£m
-
-
-
-
-
-
-
-
-
Retained
earnings
£m
79.6
0.2
11.1
11.3
1.0
0.1
-
(10.5)
81.5
13.2
-
-
-
-
-
0.1
-
13.3
14.3
-
-
-
-
-
-
-
14.3
-
-
-
-
-
-
-
-
-
89.4
1.9
(3.6)
(1.7)
1.6
0.1
-
(9.8)
79.6
Non-
controlling
interests
£m
0.3
0.1
-
0.1
-
-
-
-
0.4
-
-
-
-
0.3
-
-
-
-
0.3
Non-
controlling
interests
£m
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
£m
155.4
18.8
11.2
30.0
1.0
0.1
0.1
(10.5)
176.1
139.5
24.8
(0.6)
24.2
(0.3)
1.6
0.1
0.1
(9.8)
155.4
Total
£m
107.2
0.2
11.1
11.3
1.0
0.1
0.1
(10.5)
109.2
116.9
1.9
(3.6)
(1.7)
1.6
0.1
0.1
(9.8)
107.2
Total
equity
£m
155.7
18.9
11.2
30.1
1.0
0.1
0.1
(10.5)
176.5
139.5
24.8
(0.6)
24.2
-
1.6
0.1
0.1
(9.8)
155.7
Total
equity
£m
107.2
0.2
11.1
11.3
1.0
0.1
0.1
(10.5)
109.2
116.9
1.9
(3.6)
(1.7)
1.6
0.1
0.1
(9.8)
107.2
118 Ricardo plc Annual Report & Accounts 2018
Consolidated and parent company statements of cash flow
for the year ended 30 June 2018
Cash flows from operating activities
Cash generated from/(used in) operations
Net finance (costs)/income
Tax (paid)/received
Net cash generated from/(used in) operating activities
Cash flows from investing activities
Acquisitions of subsidiaries, net of cash acquired
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchases of intangible assets
Net cash (used in)/generated from investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Proceeds from borrowings
Repayments of borrowings
Dividends paid to shareholders
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Net cash and cash equivalents at 1 July
Net cash and cash equivalents at 30 June
At 1 July
Cash and cash equivalents
Bank overdrafts
At 30 June
Cash and cash equivalents
Bank overdrafts
Net cash and cash equivalents at 30 June
Note
33
12
28
34
34
11
34
34
Group
Company
Year ended
30 June 2018
£m
Year ended
30 June 2017
£m
Year ended
30 June 2018
£m
Year ended
30 June 2017
£m
44.2
(2.1)
(7.7)
34.4
(4.6)
(7.7)
6.4
(6.5)
(12.4)
0.1
15.0
(25.0)
(10.5)
(20.4)
0.2
1.8
22.0
23.8
27.9
(5.9)
22.0
33.1
(9.3)
23.8
24.3
(1.4)
(7.6)
15.3
(1.9)
(6.3)
4.0
(5.6)
(9.8)
0.1
31.5
(26.4)
(9.8)
(4.6)
0.7
1.6
20.4
22.0
23.7
(3.3)
20.4
27.9
(5.9)
22.0
19.6
-
0.7
20.3
-
(0.1)
-
-
(0.1)
0.1
10.0
(23.0)
(10.5)
(23.4)
-
(3.2)
(5.0)
(8.2)
0.9
(5.9)
(5.0)
0.3
(8.5)
(8.2)
(1.7)
0.7
-
(1.0)
-
-
4.0
(0.2)
3.8
0.1
26.5
(21.4)
(9.8)
(4.6)
-
(1.8)
(3.2)
(5.0)
0.1
(3.3)
(3.2)
0.9
(5.9)
(5.0)
Delivering Excellence Through Innovation & Technology 119
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Notes to the financial statements
1 Accounting policies
Ricardo plc (the 'Company') and its subsidiaries (together, the
'Group') provide engineering, technical, environmental and strategic
consultancy services, together with accreditation and independent
assurance services. The Group also manufactures and assembles
high-quality prototypes and niche volumes of complex engine,
transmission and vehicle products, together with advanced virtual
engineering tools, such as computer-aided engineering and
simulation software for conventional and electrified powertrains, as
well as complex physical systems such as water networks. The Group
sells its products and services to customers in the UK, the rest of
Europe, the Middle East, Asia and North America.
Ricardo plc is a public limited company, limited by shares, which is
listed on the London Stock Exchange and incorporated and
domiciled in the United Kingdom. The address of its registered office
is Shoreham Technical Centre, Shoreham-by-Sea, West Sussex,
BN43 5FG, England, United Kingdom and its registered number
is 222915.
The principal accounting policies applied in the preparation of these
financial statements are set out below. These policies have been
consistently applied to the years ended 30 June 2017 and
30 June 2018.
(a) Basis of preparation
These financial statements of Ricardo plc have been prepared in
accordance with International Financial Reporting Standards ('IFRS'),
IFRS Interpretations Committee ('IFRS IC') interpretations adopted by
the European Union ('EU') and the Companies Act 2006 applicable to
companies reporting under IFRS.
The financial statements have been prepared on a going concern
basis under the historical cost convention, as modified by financial
assets and financial liabilities (including derivative instruments) which
are measured at fair value through profit or loss.
Having assessed the principal risks and the other matters discussed
in connection with the Viability Statement on page 43, the Directors
considered it appropriate to adopt the going concern basis of
accounting in preparing the financial statements.
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a higher
degree of judgement or complexity, or areas where assumptions and
estimates are significant to the financial statements are disclosed
in Note 1(c).
Changes in accounting policies
The following amendments and interpretations to published
standards have been adopted by the Group, where relevant, for the
first time for the financial year ended 30 June 2018:
Effective date
(periods
Issued standards and amendments
effective for this financial year
commencing)
Amendments to International Financial Reporting Standards
1 Jan 2017
IAS 7 'Statement of Cash Flows': Disclosure
Initiative
IAS 12 'Income Taxes': Recognition of
Deferred Tax Assets for Unrealised
Losses
Annual Improvements to IFRS Standards
2014-2016 Cycle: IFRS 12 'Disclosure of
Interests in Other Entities'
1 Jan 2017
1 Jan 2017
Endorsed
by EU
Yes
Yes
Yes
None of these amendments to published standards have had, or are
expected to have, any significant impact on these financial statements.
120 Ricardo plc Annual Report & Accounts 2018
New, revised or amended standards and interpretations that are not
yet effective have not been early adopted. Where these standards and
interpretations are expected to have a material impact on the financial
statements, this is disclosed in Note 1(x).
(b) Basis of consolidation
The consolidated financial statements comprise the financial
statements of the Company and all of its subsidiaries (together the
'Group') prepared to the end of the financial year. Subsidiaries are
all entities (including structured entities) over which the Group has
control. The Group controls an entity when the Group is exposed to,
or has rights to, variable returns from its involvement with the entity
and has the ability to affect those returns through its power over the
entity. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group and are deconsolidated from the
date that control ceases. Intercompany transactions and balances are
eliminated on consolidation.
The Group applies the acquisition method of accounting to account
for business combinations. The consideration transferred for an
acquisition is the fair value of the assets acquired and the liabilities
assumed. The consideration transferred includes the fair value of
any asset or liability resulting from a contingent consideration
arrangement. Contingent consideration dependent upon the
employment or retention of specific individuals is expensed over
the specified period and included within specific adjusting items.
Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at their
fair values at the acquisition date. Acquisition-related expenditure is
expensed as incurred.
(c) Management judgements and key accounting estimates
The preparation of financial statements under IFRS requires the
Group’s management to make judgments, assumptions and estimates
that affect the application of accounting policies and the reported
amounts of assets, liabilities, income and expense.
These judgements and estimates are continually evaluated and
are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances.
Critical judgements in applying the Group’s accounting policies
The following are the critical judgements, apart from those involving
estimations (which are dealt with separately on the following page),
that the Directors have made in the process of applying the Group’s
accounting policies and that have the most significant effect on the
amounts recognised in the financial statements:
Recoverability of capitalised development costs
The Group is required to make judgements as to when development
costs meet the criteria to be recognised as intangible assets.
The majority of capitalised development costs relate to product
development projects, benchmarking projects and software
products. These costs are recognised as an asset once the Group
has determined that the attributable expenditure can be measured
reliably, that it has the intention and the necessary resources to
complete the relevant project and that it is considered probable that
the resulting asset will generate future economic benefits for the
Group. Determining whether it is probable that the resulting asset
will generate sufficient economic benefits in the future requires
management judgement. Further details are given in Note 14.
1 Accounting policies (continued)
(c) Management judgements and key accounting estimates
(continued)
Critical judgements in applying the Group’s accounting policies
(continued)
Current taxation
Legislation related to taxation is complex and elements of the Group's
taxation charge, as set out in Note 9, may be uncertain. In preparing
the Group’s financial statements management makes judgements on
the existence of risks, primarily in respect of permanent establishment
and transfer pricing, having taken appropriate professional advice.
Although uncertainty of estimates made on individual risks is not
considered to be significant, determination of an agreed amount of
taxation payable may take several years, and the final amount paid
may differ from the liabilities recorded in these financial statements.
Deferred taxation
The recognition of assets and liabilities related to deferred taxation
requires management to exercise judgement, in particular the extent
to which assets should be recognised. Further details are given in
Note 26.
Sources of estimation uncertainty
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised if the revision affects only that period,
or in the period of the revision and future periods if the revision affects
both current and future periods. The areas involving significant risk of
resulting in a material adjustment to the carrying amounts of assets
and liabilities within the next financial year are as follows:
Revenue recognition on fixed price contracts
A significant proportion of revenue recognised within the Technical
Consulting operating segment relates to the supply of professional
services under fixed price contracts, where revenue is measured on a
percentage of completion basis.
Percentage of completion is determined by actual costs incurred as a
proportion of total forecast contract costs to complete. This method
places importance on accurate estimation of total costs to complete,
contract risks, including technical risks, and other assumptions in order
to estimate revenue. Changes in these estimates and assumptions
may lead to an increase or decrease in revenue recognised at the
reporting date with the in-year revenue recognition appropriately
adjusted as required.
Where contracts extend beyond the timetable originally agreed with
the client, or where costs to complete are forecast to increase over
and above the original budget, judgement is required to determine
the extent to which revenue should be recognised.
The actual outcome of contracts which are not complete at year-
end will differ to the estimate made at that point in time and it is
reasonably possible that outcomes on these contracts within the
next financial year could be different (adversely or favourably) in
aggregate to those estimated. It is not possible to fully quantify the
expected impact of this, but the estimated costs to complete reflect
management’s best estimate at that point in time and no individual
estimate or judgement is expected to have a materially different
outcome.
As set out further on pages 41 and 78, management undertakes a
process to assess, monitor and review the risk and performance of
all contracts within the Technical Consulting operating segment on
inception and as they progress to completion. The highest risk and
most technically complex and challenging contracts to deliver, as
measured against a number of quantitative and qualitative factors, are
categorised as ‘Red Category 4 and 5’ contracts.
Notes to the financial statements
As at 30 June 2018, the number of live contracts within the Technical
Consulting portfolio was in excess of 3,000, with a total value in excess
of £750m. Of this portfolio of contracts, 11 contracts were categorised
as Red Category 4 and 5. At 30 June 2018, £3.9m of recoveries against
additional costs incurred on these contracts were under negotiation
with the client and had been recognised within revenue and amounts
recoverable on contracts. Provisions of £1.0m were recognised against
these recoveries, resulting in a net exposure of £2.9m.
Retirement benefit obligations
The Group operates a defined benefit pension scheme that provides
benefits to a number of current and former employees. This scheme
is closed to new entrants and the accrual of future benefits for active
members ceased at the end of February 2010. The value of the
deficit is particularly sensitive to the market value of the scheme’s
assets, discount rates and actuarial assumptions related to mortality.
The sensitivity of the defined benefit obligation to changes in the
principle assumptions is set out in Note 25.
Impairment testing of goodwill
Goodwill is assessed annually for impairment, usually at the year-end,
or more frequently if indicators of impairment exist. The assessments
require estimates to be made of the value in use of its cash generating
units (‘CGUs’) or groups of CGUs. These value in use calculations are
dependent on estimates of future cash flows, long-term growth rates
and appropriate discount rates to be applied to future cash flows.
Further details on these estimates and sensitivities of the carrying
value of goodwill to these estimates are provided in Note 13.
(d) Segmental reporting
Operating segments are reported in a manner consistent with
the discrete financial information that is internally reported and
provided to the Chief Operating Decision Maker, who is responsible
for allocating resources and assessing performance of the operating
segments. Further details are given in Note 2.
(e) Revenue
The Group principally earns revenue through the supply of
professional services and products to customers. Revenue is stated
net of value added and other sales taxes.
Technical Consulting
The majority of the Group's revenue is earned from Technical
Consulting contracts for professional services.
Technical Consulting contracts are typically awarded on a fixed price
basis. Where the outcome can be estimated reliably, contract revenue
is recognised to the extent that the services have been performed.
Performance is measured based on costs incurred to date as a
percentage of total expected costs.
Profit is not recognised on a contract, and revenue is not recognised
in excess of recoverable costs, unless its outcome can be estimated
reliably. It is deemed possible to reliably estimate the outcome
of a contract when the Group is in possession of documentation
from a customer that is on terms and conditions acceptable to the
Group and, subject to the successful execution of the contract, can
be invoiced against and paid for. A loss on a fixed price contract is
recognised immediately when it becomes probable that the contract
cost will exceed the total contract revenue. Monthly reviews of
contracts by local management, in conjunction with reviews by senior
management of contracts deemed to be of higher risk, ensure that
the Group identifies and recognises expected losses on fixed price
contracts immediately.
Delivering Excellence Through Innovation & Technology 121
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Notes to the financial statements
1 Accounting policies (continued)
(e) Revenue (continued)
Revenue from contract variations closely linked to underlying fixed
price contracts is recognised based on performance under the
contract as a whole, but only to the extent that it can be reliably
measured and it is probable that the customer will approve both
the variation and the amount of additional revenue. Contract
variations not closely linked to underlying fixed price contracts are
treated as separate contracts. Groups of separate legal contracts
or supplementary contracts received in addition to pre-existing
contracts are combined and accounted for as a single contract to
the extent that they are negotiated as a single package, performed
concurrently or in a continuous sequence and are so closely
interrelated that they are, in substance, part of a single project with an
overall profit margin.
Assets arising from the recognition of revenue are recorded in trade
and other receivables, initially as amounts recoverable on contracts
and transferred to trade receivables when invoiced. Amounts received
from customers for services not yet recognised as revenue are initially
classified as payments received in advance on contracts within trade
and other payables.
Certain contracts may be awarded on a time and materials basis. For
these contracts, revenue recognition is based on the expected sales
value of the time worked and costs incurred to date.
Other contracts relate to the supply of annual subscription services,
for which revenue from renewals is recognised on a straight-line basis
over the period of subscription. Where significant administrative effort
is required for new and upgrading customers to set up the services
to be provided, revenue is recognised based on the fair value of the
initial work performed. The remainder is recognised on a straight-line
basis over the period of subscription.
Royalty income is recognised on an accruals basis in accordance with
the substance of the relevant agreements.
Performance Products
Within Performance Products, Group revenue is principally derived
from the sale of high-performance products produced from
assembly operations.
Revenue from the sale of goods is measured at the fair value of the
consideration and is recognised when the Group has transferred the
significant risks and rewards of ownership of the goods to the buyer,
when the amount of revenue can be measured reliably and when it
is probable that the economic benefits associated with the
transaction will flow to the Group. This is typically on delivery of
goods to the customer.
Bill-and-hold sales occur where all performance obligations have
been satisfied but the customer requests that the goods are held by
the Group until such times as delivery or collection of the goods is
required by the customer. Revenue is recognised and billed under
usual payment terms when the customer formally agrees to accept
the risks of legal title and specifically acknowledges their deferred
delivery instructions, provided that the goods have been identified,
set aside and made available for delivery to the customer at the time
the sale is recognised and it is considered probable that delivery will
be made.
Performance Products also includes revenues derived from the sale
of software licences. The Group’s software products are standard
version controlled products available for general sale. Normally there
are no substantive obligations to fulfil following sale and revenue is
recognised on delivery. Revenue derived from the supply of software-
related services is recognised on a straight-line basis over the period
during which the service is supplied.
122 Ricardo plc Annual Report & Accounts 2018
(f) Research and development expenditure
Research and development expenditure is recognised as an expense
in the Consolidated Income Statement in the year in which it is
incurred as disclosed in Note 5, other than where the activity is
performed for customers, in which case it is included within the
contract accounting, or when development expenditure meets the
criteria for recognition as an intangible asset as described in Note 1(o),
and includes all directly attributable costs.
(g) Government grants
The Group receives income-related grants from various national and
supranational government agencies, principally for credits in respect
of qualifying research and development expenditure, together with
funding of research and development and capital projects. A grant is
not recognised in the Consolidated Income Statement until there is
reasonable assurance that the Group will comply with its conditions
and that the grant will be received. Grants are presented in the
Consolidated Income Statement as a deduction from the related
expenses. Grants contributing to the cost of an asset are deducted
from the asset's cost and reflected in the depreciation throughout the
useful life of the asset.
Grants are not normally received until after qualification conditions
have been met and the related expenditure has been incurred. Where
this is not the case, they are recorded within trade and other payables
either as a payment received in advance on contracts or as accruals
and deferred income.
(h) Retirement benefit costs
The Group operates one defined benefit and several defined
contribution retirement benefit schemes. The defined retirement
benefit scheme is closed to new entrants and the accrual of future
benefits for active members ceased at the end of February 2010.
Payments to defined contribution schemes are charged as an expense
as they fall due. Differences between contributions payable in the
year and contributions actually paid are shown as either accruals
or prepayments in the Statement of Financial Position. Payments
to state-managed schemes are dealt with as payments to defined
contribution schemes as the Group’s obligations under the schemes
are similar in nature.
For the defined benefit retirement scheme, the cost of providing
benefits is determined using the projected unit credit method,
with actuarial valuations being carried out at each reporting date.
Remeasurements are recognised in the Consolidated Statement of
Comprehensive Income except where they result from settlements
or curtailments, in which case they are reported in the Consolidated
Income Statement.
Where necessary, past service costs are recognised immediately in
the Consolidated Income Statement at the earlier of when the plan
amendment or curtailment occurs and when the related restructuring
costs or termination benefits are recognised. The retirement
benefit obligation recognised in the Statement of Financial Position
represents the present value of the defined benefit obligation, and is
reduced by the fair value of scheme assets. Any asset resulting from
this calculation is limited to past service cost, plus the present value of
available refunds and reductions in future contributions to the plan.
The net interest cost on the net defined benefit liability for the year
is determined by applying the discount rate used to measure the
defined benefit obligation at the beginning of the year to the net
defined benefit liability and is included in finance costs.
1 Accounting policies (continued)
(i) Share-based payments
Equity-settled share-based payments are measured at fair value at the
date of grant. The fair value determined at the grant date is expensed
on a straight-line basis over the vesting period. The amount expensed
is adjusted over the vesting period for changes in the estimate of the
number of shares that will eventually vest, save for changes resulting
from any market-related performance conditions.
Cash-settled share-based payments are measured at fair value at the
date of grant and expensed over the vesting period until the vesting
date with the recognition of a corresponding liability. The liability is
remeasured to fair value at each reporting date up to and including
the settlement date, with changes in fair value recognised in the
Consolidated Income Statement for the year. The amount expensed
is adjusted over the vesting period for changes in the estimate of the
number of shares that will eventually vest.
Fair value is measured by using the Monte Carlo and Black Scholes
models as explained in Note 30. The expected life used in the
models are adjusted for the effects of exercise restrictions and
behavioural considerations.
(j) Leases
The costs of operating leases and amortisation of operating lease
incentives are charged to the Consolidated Income Statement on a
straight-line basis over the period of the lease.
(k) Foreign currency
Transactions
The functional currency of the Company and the presentation
currency of the Group is Pounds Sterling. The functional currency of
each subsidiary is the currency of the primary economic environment
in which the entity operates. Transactions in currencies other than the
functional currency are recorded at prevailing exchange rates. At each
reporting date, monetary assets and liabilities denominated in foreign
currencies are retranslated at the rates prevailing on the reporting
date. Non-monetary assets and liabilities denominated in foreign
currencies are translated at the rates prevailing at the date when the
transaction occurred. Gains and losses arising on retranslation and
settlements are included in the Consolidated Income Statement for
the year.
Consolidation
On consolidation, the assets and liabilities of foreign operations,
including goodwill and fair value adjustments are translated into
the presentation currency at exchange rates prevailing on the
reporting date. Income and expense items are translated at the
average exchange rates of the year unless exchange rates fluctuate
significantly. All resulting exchange differences are recognised in
the Consolidated Statement of Comprehensive Income. Exchange
differences arising from 1 July 2004, the date of transition to IFRS,
are classified as equity and recognised in the translation reserve.
Exchange differences arising before that date are not separately
reported. On disposal of an operation, or part thereof, the related
cumulative translation differences are recognised in the
Consolidated Income Statement as a component of the gain or
loss arising on disposal.
Notes to the financial statements
(l) Taxation
The tax expense for the year comprises current and deferred tax.
Tax is recognised in the Consolidated Income Statement, except to
the extent that it relates to items recognised in the Consolidated
Statement of Comprehensive Income or directly in equity. In this
case, the tax is also recognised in the Consolidated Statement of
Comprehensive Income or directly in equity, respectively.
The current tax charge is the expected tax payable on taxable
income for the year, calculated using the average rate applicable
for the year on the basis of the tax laws enacted or substantively
enacted at the reporting date in the countries where the Group
operates and generates taxable income. The current tax charge also
includes any adjustment to tax payable in respect of previous years.
Management periodically evaluates positions taken in tax returns
with respect to situations in which applicable tax regulation is subject
to interpretation and is therefore inherently uncertain. It establishes
provisions where appropriate on the basis of amounts expected to be
paid to the relevant tax authorities.
The Group submits annual claims in respect of the UK Government's
Research and Development Expenditure Credit ('RDEC') scheme. RDEC
is taxable income and is a form of government grant that effectively
gives corporation tax relief on qualifying research and development
('R&D') expenditure. In accordance with IAS 20 'Accounting for
Government Grants and Disclosure of Government Assistance', credits
receivable under the RDEC scheme are offset against the associated
qualifying R&D expenditure incurred, both of which are included
within underlying profit before tax.
Deferred tax is recognised on temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. However,
deferred tax liabilities are not recognised if they arise from the initial
recognition of goodwill; deferred tax is not accounted for if it arises
from the initial recognition of an asset or liability in a transaction
other than a business combination that at the time of the transaction
affects neither accounting nor taxable profit and differences relating
to investments in subsidiaries to the extent that it is not probable that
they will reverse in the foreseeable future. The amount of deferred
tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using tax
rates enacted or substantively enacted at the reporting date.
Deferred tax assets are recognised only to the extent that it is
probable that taxable profits will be available in the foreseeable
future against which the asset can be utilised. Deferred tax assets are
reduced to the extent that it is no longer probable that the related tax
benefit will be realised within the foreseeable future.
(m) Dividends
Dividends are recognised as a liability in the year in which they are
fully authorised. Interim dividends are recognised when paid.
Delivering Excellence Through Innovation & Technology 123
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Notes to the financial statements
1 Accounting policies (continued)
Amortisation
(n) Goodwill
Goodwill arises on the acquisition of subsidiaries and represents
the excess of the consideration transferred over the fair value of the
identifiable assets acquired and liabilities assumed. As permitted by
IFRS, goodwill arising on acquisitions prior to the date of transition
to IFRS of 1 July 2004 has not been restated, but is retranslated using
exchange rates prevailing at each reporting date.
Goodwill is recognised as an asset and is carried at cost less
accumulated impairment losses. It is not subject to amortisation,
but is reviewed for impairment annually, or more frequently if events
or changes in circumstances indicate a potential impairment. For
the purpose of impairment testing, goodwill acquired in a business
combination is allocated to each of the cash-generating units ('CGUs'),
or groups of CGUs, that is expected to benefit from that business
combination. Each CGU or group of CGUs to which goodwill is
allocated represents the lowest level at which goodwill is monitored
for internal management purposes.
The Group’s impairment review compares the carrying value of the
goodwill to the recoverable amount of the CGU to which the goodwill
has been allocated. The recoverable amount is the higher of the value
in use or the fair value less costs of disposal. Estimating the value in
use requires the Directors to perform an assessment of the discounted
future cash flows that the CGU is able to generate. An impairment is
deemed to have occurred where the recoverable amount of a CGU is
less than the carrying value of the allocated goodwill. Any impairment
is recognised immediately in the Consolidated Income Statement
and is not subsequently reversed. On disposal of an operation, the
attributable amount of goodwill is included in the determination of
the gain or loss on disposal.
(o) Other intangible assets
Acquisition-related intangible assets
Acquisition-related intangible assets that are either separable or
arising from contractual rights are recognised at fair value at the date
of acquisition, and subsequently at amortised cost. Such intangible
assets include customer contracts and relationships, trademarks,
technology and acquired software. The fair value of acquired
intangible assets is determined by use of appropriate valuation
techniques, including the excess earnings and royalty
relief method.
Software
Purchased software is capitalised on the basis of the purchase
price of the software product plus any external and internal costs
subsequently incurred that are directly attributable to bring the
software product to the condition necessary for it to be capable of
operating in the manner intended.
Development costs
Certain directly attributable costs which are incurred in the
development of certain products are capitalised. These costs are
recognised as an asset once the Group has determined that it has
the intention and the necessary resources to complete the relevant
project, it is probable that the resulting asset will generate economic
benefits for the Group and the attributable expenditure can be
measured reliably. Development costs are capitalised where these
criteria have been met and amortised over their finite useful lives.
Amortisation is calculated using the straight-line method to
allocate the cost of intangible assets over their estimated useful lives,
as follows:
• Acquisition-related intangible assets:
- Customer contracts and relationships
Between 3 and 9 years
- Software and technology
• Software
• Development costs
Between 5 and 7 years
Between 2 and 10 years
Between 3 and 5 years
(p) Property, plant and equipment
Property, plant and equipment is stated at historical cost less
depreciation. The gross cost of an item of property, plant and
equipment is the purchase price and any costs directly attributable to
bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended. Grants contributing to
the cost of an asset are deducted from the asset's cost and reflected in
the depreciation throughout the useful life of the asset.
Depreciation is calculated using the straight-line method to allocate
their cost to their residual values over their estimated useful lives,
as follows:
• Freehold land
Not depreciated
• Freehold buildings including fixed plant
Between 25 and 50 years
• Leasehold property including fixed plant
Over the term of the lease
• Plant and machinery
Between 4 and 10 years
• Fixtures, fittings and equipment
Between 2 and 10 years
The assets' residual values and useful lives are reviewed, and adjusted
if appropriate, at the end of each reporting period.
Assets under construction are carried at cost, less any impairment in
value, and are included in the relevant asset category. Depreciation
of these assets commences when they are available for their
intended use.
(q) Non-current assets held for sale
Non-current assets are classified as held for sale when their carrying
amount is to be recovered principally through a sale transaction,
rather than through continuing use, and a sale is considered highly
probable. They are stated at the lower of their carrying amount and
fair value less costs to sell. An impairment loss is recognised in the
Consolidated Income Statement for any initial or subsequent write-
down of the asset to fair value less costs to sell. A gain is recognised
in the Consolidated Income Statement for any subsequent increases
in fair value less costs to sell of an asset, but not in excess of any
cumulative impairment loss previously recognised.
A gain or loss not previously recognised by the date of the sale of
the non-current asset is recognised in the Consolidated Income
Statement at the date of derecognition. Non-current assets are not
depreciated or amortised while they are classified as held for sale and
are presented separately from the other assets in the Consolidated
Statement of Financial Position.
(r) Investments
Investments in subsidiaries are stated at cost less any impairment
in value.
124 Ricardo plc Annual Report & Accounts 2018
Notes to the financial statements
1 Accounting policies (continued)
Derivative financial instruments
(s) Impairment of non-financial assets
Intangible assets that have an indefinite useful life or intangible assets
that are not available for use are not subject to amortisation and are
tested annually for impairment. Other intangible assets and items of
property, plant and equipment with finite useful lives are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which the asset's
carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset's fair value less costs to sell and value
in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and
the risks specific to the asset for which the estimates of future cash
flows have not been adjusted. Where assets do not generate cash
flows independently from other assets, the Group estimates the
recoverable amount of the cash-generating unit to which the
asset belongs.
If the recoverable amount of an asset or cash-generating unit is
estimated to be less than its carrying amount, the carrying amount
of the asset or cash-generating unit is reduced to its recoverable
amount. Prior impairments of non-financial assets (other than
goodwill) are reviewed for possible reversal at each reporting date.
(t) Inventories
Inventories are stated at the lower of cost, including attributable
overheads, and net realisable value. Cost is calculated using the
weighted average method in Technical Consulting and using the
first-in, first-out method in Performance Products. Work in progress is
stated at cost, including attributable overheads, less any foreseeable
losses and progress payments received and receivable.
(u) Financial instruments
Non-derivative financial instruments
The Group’s non-derivative financial instruments comprise
trade receivables, trade payables, cash and cash equivalents
and borrowings. In the Statements of Cash Flow, cash and cash
equivalents comprise cash balances and bank overdrafts repayable
on demand. In the Statements of Financial Position, bank overdrafts
are shown within borrowings in current liabilities and bank loans are
shown within borrowings in either current liabilities or non-current
liabilities depending on the repayment date.
Trade receivables and payables are measured initially at fair value,
and subsequently at amortised cost. Trade receivables are stated net
of allowances for irrecoverable amounts. Evidence of impairment of
trade receivables include indications that customers are experiencing
significant financial difficulty or have significantly overdue balances.
Borrowings are recognised initially at fair value net of direct issue
costs and subsequently at amortised cost. Differences between initial
value and redemption value are recorded in the Consolidated Income
Statement over the period of the loan.
The fair values of all non-derivative financial instruments including
borrowings due for repayment after more than one year are
approximately equal to their carrying values in the Statement of
Financial Position. The fair value of borrowings due for repayment after
more than one year approximates to the carrying value as they are
primarily floating rate loans where payments are reset to market rates
at regular short-term intervals.
Derivative financial instruments are initially recognised and
measured at fair value on the date a derivative contract is entered
into and subsequently measured at fair value and the gain or loss on
remeasurement is taken to the Consolidated Income Statement.
The Group employs derivative financial instruments, including foreign
exchange contracts, to mitigate currency exposures on trading
transactions. The Group does not hedge forecast transactions that will
result in the recognition of a non-financial asset or liability. Fair values
of derivative financial instruments are based on the market values of
similar instruments at the reporting date.
(v) Provisions
A provision is required for restructuring costs and employee-related
benefits when the Group has a present legal or constructive
obligation at the reporting date as a result of a past event and it is
probable that settlement will be required of an amount that can be
reliably estimated. Provisions for warranty costs are recognised at the
date of sale of the relevant products, at the Directors’ best estimate of
the expenditure required to settle the Group’s liability.
Provisions for dilapidations reflects the Directors' best estimate of
future obligations relating to the maintenance of leasehold properties
arising from past events such as lease renewals or terminations.
These estimates are reviewed each year and updated as necessary.
(w) Specific adjusting items
Specific adjusting items are disclosed separately in the financial
statements where it is necessary to do so to provide further
understanding of the financial performance of the Group and due
to the significance of their nature or amount. These items comprise
amortisation of acquired intangible assets, acquisition-related
expenditure, reorganisation costs and derecognition of net deferred
tax assets. Acquisition-related expenditure is incurred by the Group
to effect a business combination, including the costs associated
with the integration of acquired businesses, together with any
dual-running costs incurred during a transitional services period.
Reorganisation costs relate to non-recurring expenditure incurred as
part of fundamental restructuring activities. The derecognition of net
deferred tax assets is as a direct consequence of these restructuring
activities. Further information is provided in Note 4.
Delivering Excellence Through Innovation & Technology 125
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
IFRS 9 ‘Financial Instruments’
IFRS 9 ‘Financial Instruments’ replaces IAS 39 'Financial Instruments:
Recognition and Measurement'. The Standard includes requirements
for the recognition and measurement, impairment and
derecognition of financial assets and liabilities, together with
general hedge accounting.
The primary area of change is the way in which financial assets are
assessed for impairment using the 'expected credit loss' model, which
assumes that every receivable at the point of origination carries with
it some risk of default, which increases over time until the receivable is
paid. This model is based upon the application of 'default rates', which
consider both our limited past experience with customers of credit
losses, together with the scenarios and probability that credit losses
might be incurred in the future. IFRS 9 establishes several approaches
for measuring and recognising expected credit losses. The Group will
use the 'simplified approach' of IFRS 9 to provide for losses on trade
receivables. The 'general approach' of IFRS 9 will be used for other
financial assets.
The Standard becomes effective for the Group for the financial year
ending 30 June 2019. The hedge accounting component of IFRS 9 will
be applied prospectively. The remaining requirements of IFRS 9 will
be applied retrospectively, but the Group will not restate comparative
information in the year ending 30 June 2019. Instead, an adjustment
for the transitional impact will be made to opening retained earnings
for the year ending 30 June 2019.
The expected impact to the Group on transition to IFRS 9 as at
1 July 2018 is as follows:
Provision for impairment of trade receivables as at 1 July 2018
As reported
Expected impact
Restated under IFRS 9 (estimate)
£m
1.1
1.8
2.9
Hedge accounting
The Group is currently not applying hedge accounting under IAS
39 and therefore no impact on transition will be experienced in this
respect. From 1 July 2018, the Group has elected to follow IFRS 9
hedge accounting requirements for any new derivative contracts
entered into on or after this date. As a result, the Group expects to see
a lower degree of volatility arising from foreign exchange movements
in its Consolidated Income Statement, as such movements on
effective hedges will instead recognised in the Consolidated
Statement of Comprehensive Income.
Notes to the financial statements
1 Accounting policies (continued)
(x) New standards and interpretations
At 30 June 2018, the International Accounting Standards Board ('IASB')
and IFRS IC had issued the standards and amendments, shown below,
that subject to adoption by the EU, are effective after the current year-
end and have not been early adopted by the Group.
Amendments to International Financial Reporting Standards
IAS 19 'Employee Benefits': Plan
Amendment, Curtailment or Settlement
1 Jan 2019
Issued standards and amendments not yet
effective
International Financial Reporting Standards
IFRS 9 'Financial Instruments'
IFRS 15 'Revenue from Contracts with
Customers' including amendments and
clarifications
IFRS 16 'Leases'
IFRS 17 'Insurance Contracts'
IFRIC 23 'Uncertainty over Income Tax
Treatments'
IAS 28 'Investments in Associates and
Joint Ventures': Long-term Interests in
Associates and Joint Ventures
IAS 40 'Investment Property': Transfers of
Investment Property
IFRS 2 'Share-based Payment': Classification
and Measurement of Share-based
Payment Transactions
IFRS 9 'Financial Instruments': Prepayment
Features with Negative Compensation
IFRS 4 'Insurance Contracts': Applying IFRS
9 'Financial Instruments' with IFRS 4
'Insurance Contracts'
IFRIC 22 'Foreign Currency Transactions and
Advance Consideration'
Amendments to References to the
Conceptual Framework in IFRS
Standards
Annual Improvements to IFRS Standards
2014-2016 Cycle: IFRS 1 'First-time
Adoption of International Financial
Reporting Standards' and IAS 28
'Investments in Associates and Joint
Ventures'
Annual Improvements to IFRS Standards
2015-2017 Cycle
Effective date
(periods
commencing)
Endorsed
by EU
1 Jan 2018
Yes
1 Jan 2018
1 Jan 2019
1 Jan 2021
1 Jan 2019
1 Jan 2019
1 Jan 2018
1 Jan 2018
1 Jan 2019
1 Jan 2018
1 Jan 2018
Yes
Yes
No
No
No
No
Yes
Yes
Yes
Yes
Yes
1 Jan 2020
No
1 Jan 2018
1 Jan 2019
Yes
No
It is not expected that the adoption of the standards and
amendments listed above will have a significant impact on the
financial statements of the Group in future periods, with the
exception of the following standards as set out in further detail
below. In addition, the impact of IFRIC 23 'Uncertainty over Income Tax
Treatments' has not yet been assessed in order to provide a reasonable
estimate as to its potential impact.
126 Ricardo plc Annual Report & Accounts 2018
Notes to the financial statements
1 Accounting policies (continued)
An assessment of the expected impact of IFRS 15 is shown below:
(x) New standards and interpretations (continued)
IFRS 15 ‘Revenue from contracts with customers’
IFRS 15 ‘Revenue from contracts with customers’ establishes principles
for reporting the nature, amount and timing of revenue arising from
an entity’s contracts with customers. The Standard becomes effective
for the Group for the financial year ending 30 June 2019 and the
Group’s intention is to apply the full retrospective approach upon
adoption of IFRS 15. This approach requires all open contracts with
customers that are presented in the financial statements for the year
ending 30 June 2019 to be transitioned under the new Standard.
Comparative financial information for the financial year ending
30 June 2018 will be restated, together with a cumulative adjustment
to equity as at 1 July 2017. The Group has performed a detailed
analysis in order to quantify the impact of IFRS 15. The principal areas
impacted include:
Separation of distinct performance obligations:
Under IAS 11, the Group recognised revenue over time on individual
contracts for a programme of services to be performed over a number
of years. The programme of services were proposed as a package
and were not subject to separate negotiation. Under IFRS 15, these
services are deemed to be separate performance obligations that are
distinct from one another within the context of the contract.
Revenue will continue to be recognised on a percentage of
completion basis, but based upon these separate and distinct
performance obligations.
Combination of indistinct performance obligations:
On a number of Technical Consulting contracts, revenue was
recognised separately for services such as sales commission and
up-front fees to compensate for costs incurred in obtaining and
setting up a contract or other administrative costs. Under IFRS 15,
these activities are not deemed to represent the transfer of services
to a customer and therefore do not satisfy distinct performance
obligations in the context of the overall contract upon which revenue
can be recognised separately. Under IFRS 15, revenue is recognised
over time as distinct performance obligations are satisfied. Revenue
is measured through the consistent use of reliable input methods
as a measure of progress towards completion and which depict
performance in transferring control of the service to the customer.
Retained earnings as at 1 July 2017
As reported
Expected impact:
Separation of distinct performance obligations
Combination of indistinct performance obligations
Restated under IFRS 15 (estimate)
Revenue for the year ended 30 June 2018
As reported
Expected impact:
Separation of distinct performance obligations
Combination of indistinct performance obligations
Restated under IFRS 15 (estimate)
Operating profit for the year ended 30 June 2018
As reported
Expected impact:
Separation of distinct performance obligations
Combination of indistinct performance obligations
Restated under IFRS 15 (estimate)
£m
112.2
(2.3)
(3.2)
106.7
£m
380.0
(0.3)
(0.8)
378.9
£m
30.7
(0.3)
(0.8)
29.6
The estimated impact on reported net assets at 30 June 2018 under
IFRS 15 is a reduction of £1.1m.
IFRS 16 ‘Leases’
IFRS 16 'Leases' provides a single model for lessees which recognises
a right of use asset and associated lease liability for all leased assets
for periods longer than one year or which are not classified as low
value. The most significant impact of IFRS 16 will be that the Group’s
relatively low number of leased properties, which are currently
classified as operating leases, will be recognised as a lease liability,
with a corresponding asset in the Statement of Financial Position. The
Group will adopt the modified retrospective approach to transition,
with the option being taken to recalculate the value of certain assets
while recognising the majority of assets at an amount equal to the
liability on transition.
This Standard becomes effective to the Group for the financial year
ending 30 June 2020. As a result of our initial assessment of the
potential impact, based on a sample including all of the Group's
property leases, we expect the impact on non-current assets to be
an increase of approximately £50m with the associated liabilities
increasing by an amount which is immaterially higher than this. Given
the profile of our property leases, we would also expect the impact on
earnings in the year of transition to be insignificant.
Delivering Excellence Through Innovation & Technology 127
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Notes to the financial statements
2 Operating segments
The Group's operating segments are being reported based on the financial information provided to the Chief Operating Decision Maker who is the
Chief Executive Officer. The reportable segments are Technical Consulting and Performance Products. These were identified by evaluating the Group's
products and services, processes, types of customers and delivery methods.
Technical Consulting
Technical Consulting generates income from the delivery of engineering programmes and technology projects, together with environmental and
management consultancy services. This segment comprises consulting businesses in Automotive, Rail, Environmental, Strategy and Defence.
These businesses have similar economic characteristics, as they each:
• provide a similar nature of services, with each segment providing professional and engineering consultancy services, with their respective cost bases
being predominantly direct and indirect staff costs;
• provide their services across a number of different geographies and market sectors;
• have diverse client bases, from small to large companies, as well as a mixture of private and government-backed organisations; and
• have similar distribution channels and operate across markets requiring adherence to similar-in-nature regulatory frameworks.
We have therefore deemed it appropriate to aggregate the results of these consulting businesses into one Technical Consulting operating segment.
Performance Products
Performance Products generates income from the production of low volume high-performance products and services, including bespoke engines,
transmissions, and niche software products. This segment comprises the Performance Products and Software businesses.
These businesses have been aggregated on the basis that they involve the manufacture and development of specific products and opposed to
technical consulting services. Both face similar financial and competitive risks. We manage the complete supply chain for our clients and earn revenue
for either the products that we supply or for the manufacturing or assembly services that we provide.
Measurement of performance
Management monitors the results of its operating segments separately for the purpose of making decisions about allocating resources and assessing
performance. Segment performance is measured based on operating profit, as this measure provides management with an overall view of how the
different operating segments are managing their total cost base (primarily direct and indirect staff costs) against the revenue generated from their
portfolio of contracts. Included within the Head Office column in the following tables are functions managed by a central division, including the costs
of running the public limited company, which are recharged to the other operating segments.
Inter-segment revenue is eliminated on consolidation. Transactions are entered into on an arm's length basis in a manner similar to transactions with
third parties.
Year ended 30 June 2018
Total segment revenue
Inter-segment revenue
Revenue from external customers
Underlying operating profit
Specific adjusting items
Operating profit
Net finance costs
Profit before taxation
Total assets per financial statements
Total liabilities per financial statements
Depreciation and amortisation
Capital expenditure - other intangible assets
Capital expenditure - property, plant and equipment
Technical
Consulting
£m
288.6
(0.3)
288.3
Performance
Products
£m
95.8
(4.1)
91.7
Head Office
£m
-
-
-
31.9
(9.9)
22.0
-
22.0
285.2
(80.5)
12.2
3.9
7.5
9.3
-
9.3
-
9.3
41.8
(14.4)
2.1
2.2
0.6
-
(0.6)
(0.6)
(2.2)
(2.8)
12.7
(68.3)
1.6
0.4
0.1
Total
£m
384.4
(4.4)
380.0
41.2
(10.5)
30.7
(2.2)
28.5
339.7
(163.2)
15.9
6.5
8.2
Revenues from one customer represent approximately £61.4m of the Group's external revenue, of which £57.8m is reported in the Performance Products
segment and £3.6m is reported in the Technical Consulting segment.
Underlying operating profit for the year ended 30 June 2018 includes £8.0m of income in respect of RDEC, which has been allocated between Technical
Consulting for £7.1m and Performance Products for £0.9m on a basis that is consistent with the segment in which the qualifying expenditure is incurred.
128 Ricardo plc Annual Report & Accounts 2018
2 Operating segments (continued)
Year ended 30 June 2017
Total segment revenue
Inter-segment revenue
Revenue from external customers
Underlying operating profit
Specific adjusting items
Operating profit
Net finance costs
Profit before taxation
Total assets per financial statements
Total liabilities per financial statements
Depreciation and amortisation
Capital expenditure - other intangible assets
Capital expenditure - property, plant and equipment
Notes to the financial statements
Technical
Consulting
£m
280.6
(0.1)
280.5
Performance
Products
£m
73.3
(1.7)
71.6
Head Office
£m
-
-
-
32.8
(5.0)
27.8
-
27.8
280.6
68.9
12.2
2.9
5.9
8.0
-
8.0
-
8.0
42.7
18.5
2.2
1.6
0.2
-
(1.1)
(1.1)
(2.5)
(3.6)
17.1
97.3
1.9
1.1
0.2
Total
£m
353.9
(1.8)
352.1
40.8
(6.1)
34.7
(2.5)
32.2
340.4
184.7
16.3
5.6
6.3
Revenues from one customer represent approximately £48.2m of the Group's external revenue, of which £43.9m is reported in the Performance
Products segment and £4.3m is reported in the Technical Consulting segment.
Underlying operating profit for the year ended 30 June 2017 includes £6.6m of income in respect of RDEC, which has been allocated between
Technical Consulting for £5.9m and Performance Products for £0.7m on a basis that is consistent with the segment in which the qualifying expenditure
is incurred.
Non-current assets by geographical location (excluding deferred tax assets)
Asset location
United Kingdom
Netherlands
Germany
North America
Rest of the World
Total
2018
£m
83.3
21.0
14.1
16.2
7.9
142.5
2017
£m
80.7
22.0
18.8
9.6
11.3
142.4
Delivering Excellence Through Innovation & Technology 129
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Notes to the financial statements
3 Revenue
(a) Revenue by category
Rendering of services
Sale of goods
Total
(b) Revenue by customer location
United Kingdom
Germany
Netherlands
Rest of Europe
Europe total
North America
China
Japan
Rest of Asia
Asia total
Rest of the World
Total
4 Specific adjusting items
Amortisation of acquisition-related intangible assets (Note 14)
Acquisition-related expenditure(1)
Reorganisation costs(2)
Total before tax
Derecognition of net deferred tax assets(3)
Tax impact of specific adjusting items(4)
Total after tax
2018
£m
299.1
80.9
380.0
2018
£m
144.9
23.5
21.0
54.8
244.2
47.6
39.3
25.7
15.9
80.9
7.3
380.0
2018
£m
4.3
1.4
4.8
10.5
2.2
(0.9)
11.8
2017
£m
294.9
57.2
352.1
2017
£m
144.5
27.6
21.8
43.9
237.8
38.6
32.7
16.3
17.9
66.9
8.8
352.1
2017
£m
4.0
1.7
0.4
6.1
-
(1.4)
4.7
(1) Acquisition-related expenditure in the current year comprised £0.1m (2017: £0.3m) of costs incurred for services rendered to, and consumed by, the Group to effect the
Control Point Corporation acquisition (see Note 12), together with £0.2m on its subsequent integration into the Ricardo Group and £0.5m of associated employee retention
arrangements. Costs of £0.4m (2017: £0.5m) were also incurred to finalise the integration of the LR Rail and Motorcycle Engineering Italia (Exnovo) businesses into the Ricardo
Group, together with £0.2m of professional fees incurred in relation to due diligence of a subsequently aborted acquisition process. The prior year also included £0.2m of
professional fees and £0.7m of employee retention costs in relation to acquisitions completed previously.
(2) Reorganisation costs relate to non-recurring expenditure incurred as part of a fundamental restructuring of the Group’s Automotive businesses across Europe and North
America. These costs included:
• The sale of the test assets at the Chicago Technical Center (‘CTC’) in the US was completed on 2 April 2018 for cash consideration of £4.1m ($5.5m), which generated a profit
on disposal of £1.4m ($1.9m). In addition, £0.7m ($0.9m) (2017: £0.2m ($0.2m)) of professional fees, contractor costs, and redundancy costs were incurred as a result of the
asset sale and wider restructuring process;
• The sale of the Schechingen Technical Centre (‘SchTC’) in Germany was completed on 30 June 2018 for cash consideration of £4.4m (€5.0m), which generated a profit on
disposal of £0.2m (€0.2m). Redundancy costs of £0.3m were also incurred;
• Redundancy costs of £2.7m (€3.0m) in relation to the downsizing of our footprint in Schwäbisch Gmünd, Germany;
• Additional costs of £1.8m (€2.0m) were incurred as a result of our downsizing activities in Germany, including professional fees, contractors, and the recognition of an
onerous lease provision for the Schwäbisch Gmünd premises;
• Costs incurred of £0.5m (2017: £0.2m) in relation to the set-up of our new Shared Service Centre in Prague, Czech Republic, including dual-running costs for the transition of
the transactional finance team from our Shoreham Technical Centre, together with associated costs for travel, and severance payments for staff made redundant following
the transition, and contractor costs to backfill the roles of employees that managed the transition; and
• UK senior management redundancy payments of £0.4m, as a result of the restructuring activities.
(3) A net deferred tax asset of £2.2m (€2.5m) which primarily comprised £2.4m (€2.7m) of historical losses incurred in the consolidated tax group controlled by Ricardo GmbH,
partially offset by £0.2m (€0.2m) of deferred tax liabilities, was brought forward from the prior year. Due to the various restructuring actions taken in Germany during the
year, the Directors now consider it unlikely that sufficient relevant future taxable profits will be available in the foreseeable future, against which the carrying value of the
brought forward deferred tax asset can be utilised. Consequently, this brought forward deferred tax asset was derecognised during the year.
(4) The tax impact on amortisation of acquisition-related intangible assets, acquisition-related expenditure and reorganisation costs.
130 Ricardo plc Annual Report & Accounts 2018
Notes to the financial statements
5 Operating profit
The following items have been charged/(credited) in arriving at operating profit:
Amortisation of other intangible assets (Note 14)
Depreciation of property, plant and equipment (Note 15)
Cost of inventories recognised as expense
Research and Development Expenditure Credits ('RDEC')
Operating lease rentals payable
Repairs and maintenance on property, plant and equipment
Redundancy and termination costs
Profit on disposal of non-current assets held for sale (Note 19)
Profit on sale and leaseback of property (Note 15)
Net impairment (reversals)/losses on trade receivables (Note 18)
With respect to the Group's research and development activities, the following items have been charged/(credited)
in arriving at operating profit:
Research and development expenditure in the year
Government grant income received in respect of part of this expenditure
Total
6 Auditors' remuneration
During the year the Group obtained the following services from the Parent Company's auditors and its associates:
Fees payable for the statutory audit of the Parent Company and consolidated financial statements(1)
Fees payable for the statutory audit of the Parent Company's subsidiaries and financial statements(2)
Total audit fees
Fees payable for audit-related assurance services(3)
Fees payable for other non-audit services(4)
Total non-audit fees
2018
£m
9.5
6.4
50.4
(8.0)
8.7
4.9
4.0
(1.6)
-
(0.6)
2018
£m
4.4
(1.6)
2.8
2018
£m
0.3
0.2
0.5
0.1
0.1
0.2
2017
£m
9.1
7.2
34.6
(6.6)
8.0
4.1
0.6
-
(0.7)
0.2
2017
£m
6.4
(2.4)
4.0
2017
£m
0.2
0.2
0.4
0.1
0.2
0.3
(1) Fees payable during the year to the Parent Company's auditors and its associates for the statutory audit of the Parent Company and consolidated financial statements were
£274,000 (2017: £246,000).
(2) Fees payable during the year to the Parent Company's auditors and its associates for the statutory audit of the Parent Company's subsidiaries and financial statements were
£212,000 (2017: £204,000).
(3) Fees payable during the year to the Parent Company's auditors and its associates for audit-related assurance services were £59,000 (2017: £78,000) and comprised of
£44,000 (2017: £43,000) pursuant to the interim review and £15,000 (2017: £35,000) to support the Group with its project to assess the impact from the implementation of
IFRS 15 'Revenue from contracts with customers'. Our conclusion arising from this assessment is described in Note 1(x).
(4) Fees payable during the year to the Parent Company's auditors and its associates for other non-audit services were £80,000 (2017: £217,000) and comprised of £75,000
(2017: £212,000) for services in respect of completed and proposed acquisitions and disposals, together with £5,000 (2017: £5,000) for other services.
Total non-audit fees payable to the external auditors for audit-related assurance services and other non-audit services for the financial year were 29%
(2017: 66%) of total audit fees. These non-audit fees primarily comprised of the Group's interim review, together with services provided in respect of
due diligence on targets for acquisition and assistance with disposals of assets. It was considered to be in the interests of the Group to purchase these
services from the external auditors due to their in-depth knowledge of the Group.
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Notes to the financial statements
7 Employees
Staff costs
Wages and salaries (including redundancy and termination costs)
Social security costs
Pension costs – defined contribution schemes (Note 25)
Share-based payments (Note 30)
Total employee benefit expense
Average monthly number of employees (including executive directors) during the year
Technical Consulting
Performance Products
Head Office
Total average headcount
Key management compensation
Short-term employee benefits
Share-based payments
Post-employment benefits
Termination benefits
Total key management compensation
2018
£m
147.3
17.1
9.6
1.0
175.0
2018
Number
2,525
323
48
2,896
2018
£m
4.4
0.8
0.1
0.1
5.4
2017
£m
140.1
15.7
9.1
1.6
166.5
2017
Number
2,343
316
51
2,710
2017
£m
3.7
1.2
0.2
-
5.1
The key management personnel are the Board of Directors, together with the Managing Directors who have the authority and responsibility for
planning, directing and controlling the Group’s activities and resources within the market sectors in which the Group operates.
The remuneration received by all Executive and Non-Executive Directors during the year is disclosed in the Directors' Remuneration Report on page 86.
8 Net finance costs
Finance income:
Bank interest receivable
Total finance income
Finance costs:
Interest payable on bank borrowings
Defined benefit pension financing costs (Note 25)
Total finance costs
Net finance costs
2018
£m
0.4
0.4
(2.1)
(0.5)
(2.6)
(2.2)
2017
£m
0.2
0.2
(2.1)
(0.6)
(2.7)
(2.5)
132 Ricardo plc Annual Report & Accounts 2018
9 Taxation
Current income tax:
UK corporation tax
Adjustments in respect of prior years
Total UK tax
Foreign corporation tax
Adjustments in respect of prior years
Total foreign tax
Total current tax
Deferred tax:
Charge for year relating to temporary differences(1)
Adjustments in respect of prior years
Total deferred tax
Total taxation
Tax on items recognised in other comprehensive income
Tax on items recognised directly in equity
Notes to the financial statements
2018
£m
2017
£m
3.6
0.2
3.8
2.7
0.5
3.2
7.0
3.1
(0.5)
2.6
9.6
2.7
(0.1)
5.2
(0.2)
5.0
1.1
0.1
1.2
6.2
1.8
(0.6)
1.2
7.4
(0.8)
(0.1)
(1) Included within the Group’s deferred tax charge for the year of £3.1m, is the derecognition of a net deferred tax asset brought forward of £2.2m, as set out in further detail
in Footnote 3 of Note 4.
Tax on items recognised in other comprehensive income relate to the tax impact of remeasurements of the defined benefit scheme. Tax on items
recognised directly in equity relate to equity-settled share-based payment transactions.
Changes to the UK corporation tax rates were enacted on 15 September 2016 as part of the Finance Act 2016. These include reductions to the main
rate to 19% from 1 April 2017 and to 17% from 1 April 2020. Deferred taxes at the reporting date have been measured and reflected in these financial
statements by using the enacted rate within each jurisdiction. For UK entities, the tax rate of 17% has been used (2017: 17% and 19% according to the
rate at which the relevant assets or liabilities were expected to unwind).
The tax charge for the year is higher (2017: higher) than the standard rate of corporation tax in the UK. The differences are set out below:
Profit for the year before tax
Profit for the year multiplied by the average enacted rate of corporation tax in the UK of 19.00% (2017: 19.75%)
Effects of:
Losses not recognised
Expenses not deductible for tax purposes/(non-taxable income)
Government tax incentives(2)
Other overseas taxes(3)
Adjustments in respect of prior years
Changes in corporation tax rates
Derecognition of deferred taxes
Total taxation
(2) Primarily relates to R&D tax credits.
(3) Primarily relates to withholding taxes.
2018
£m
28.5
5.4
0.8
0.7
(0.2)
0.3
0.2
0.2
2.2
9.6
2017
£m
32.2
6.4
0.8
(0.7)
(0.1)
0.2
(0.7)
-
1.5
7.4
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Notes to the financial statements
10 Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of shares
outstanding during the year, excluding those held by an employee benefit trust for the Long-Term Incentive Plan ('LTIP') and by the Share Incentive Plan
('SIP') for the free share scheme which are treated as cancelled for the purposes of the calculation.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential
ordinary shares. These include potential awards of LTIP shares and options granted to employees. The assumed proceeds from these is regarded as
having been received at the average market price of ordinary shares during the year.
Reconciliations of the earnings and the weighted average number of shares used in the calculations are set out below. Underlying earnings per share is
also shown because the Directors consider that this provides a more useful indication of underlying performance and trends over time.
Earnings attributable to owners of the parent
Add back amortisation of acquisition-related intangible assets (net of tax)
Add back acquisition-related expenditure (net of tax)
Add back reorganisation costs (net of tax)
Add back derecognition of net deferred tax assets
Underlying earnings attributable to owners of the parent
Basic weighted average number of shares in issue
Effect of dilutive potential shares
Diluted weighted average number of shares in issue
Earnings per share
Basic
Diluted
Underlying earnings per share
Basic
Diluted
11 Dividends
Final dividend for the year ended 30 June 2017 of 13.88p (2016: 13.03p) per share
Interim dividend for the year ended 30 June 2018 of 5.75p (2017: 5.42p) per share
Equity dividends paid
2018
£m
18.8
3.5
1.4
4.7
2.2
30.6
2017
£m
24.8
3.1
1.3
0.3
-
29.5
2018
Number of
shares
millions
53.4
0.2
53.6
2017
Number of
shares
millions
53.0
0.4
53.4
2018
pence
35.2
35.1
2018
pence
57.3
57.1
2018
£m
7.4
3.1
10.5
2017
pence
46.8
46.4
2017
pence
55.7
55.2
2017
£m
6.9
2.9
9.8
The Directors are proposing a final dividend in respect of the financial year ended 30 June 2018 of 14.71p per share which will utilise £7.8m of retained
earnings. It will be paid on 23 November 2018 to shareholders who are on the register of members at the close of business on 9 November 2018, subject
to approval at the Annual General Meeting on 15 November 2018.
134 Ricardo plc Annual Report & Accounts 2018
Notes to the financial statements
12 Acquisitions
Control Point Corporation
The Group acquired the entire issued share capital of Control Point Corporation (‘CPC’), which was subsequently renamed Ricardo Defense, Inc. on
8 September 2017 for initial cash consideration of £6.3m ($8.3m) and contingent cash consideration of £1.7m ($2.2m), based upon CPC achieving
certain financial performance targets. The acquisition of CPC expands upon the Group’s vehicle engineering capabilities in the US defense sector and
adds expertise in distributed software-based systems and fleet management technologies.
The following table sets out the cash consideration payable to acquire CPC, together with the fair value of the assets acquired and liabilities assumed:
Initial cash consideration
Contingent cash consideration
Total cash consideration
Fair value of identifiable assets acquired and liabilities assumed
Customer contracts and relationships
Software and technology
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Deferred tax liabilities
Total fair value of identifiable net assets
Goodwill
Total
£m
6.3
1.7
8.0
2.0
0.3
0.1
2.1
1.7
(0.8)
(0.4)
(0.4)
4.6
3.4
8.0
All of the initial cash consideration of £6.3m ($8.3m) was paid in the year, net of cash acquired of £1.7m ($2.2m).
Adjustments have been made to identifiable assets and liabilities on acquisition to reflect their fair value. These include the recognition of customer-
related intangible assets amounting to £2.0m ($2.6m) and software and technology assets of £0.3m ($0.4m). The fair values of net assets acquired were
identified following a valuation exercise in accordance with the requirements of IFRS 3 'Business Combinations'.
The goodwill arising on acquisition can be ascribed to the existence of a skilled, active workforce, developed expertise and processes and the
opportunities to obtain new contracts and develop the business. None of these meet the criteria for recognition as intangible assets separable from
goodwill. The goodwill recognised is expected to be deductible for tax purposes.
The fair value of trade and other receivables of £2.1m ($2.8m) includes net trade receivables of £2.0m ($2.6m) and amounts recoverable on contracts of
£0.1m ($0.1m), all of which is expected to be collectible.
Acquisition-related expenditure of £0.8m has been charged to the Consolidated Income Statement for the year ended 30 June 2018 and is included as
a specific adjusting item in Note 4.
The revenue included in the Consolidated Income Statement in relation to the acquired business was £10.3m. The underlying operating profit over the
same period was £1.0m. This is reported in the Technical Consulting segment in Note 2.
Had CPC been acquired and consolidated from 1 July 2017, revenue and underlying operating profit in the Consolidated Income Statement would be
£2.2m and £0.2m higher, respectively, based on available information for the period from 1 July 2017 to the acquisition date.
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Notes to the financial statements
13 Goodwill
Group
At 1 July 2016
Acquisition of business
Completion of fair value exercise(1)
Exchange adjustments
At 30 June 2017
Acquisition of business (Note 12)
Exchange adjustments
At 30 June 2018
£m
57.0
3.2
0.2
1.6
62.0
3.4
0.1
65.5
(1) The fair value assessment of the Chinese Rail operations that were acquired from Lloyd's Register on 1 March 2016 was completed in the prior year and resulted in an
addition of £0.2m to the Ricardo Rail cash generating unit.
The recoverable amount of each cash-generating unit ('CGU') is calculated by assessing its value in use, which is determined by performing discounted
future pre-tax cash flow calculations for a five-year period and projected into perpetuity. The five-year cash flow forecasts are based on the budget for
the following year (year one), the business plans for years two and three (the three-year plan), and operating profit projections for years four and five,
with a 70% operating cash flow conversion rate.
The three-year plan is prepared by management, and is reviewed and approved by the Board. The three-year plan reflects past experience,
management’s assessment of the current contract portfolio, contract wins, contract retention, price increases, gross margin, as well as future expected
market trends. Operating profit projections for years four and five, and cash flows beyond year five are projected into perpetuity using a long-term
growth rate, which is determined as being the lower of the planned compound annual growth rate in the CGU's three-year plan and external third
party forecasts of the prevailing inflation and economic growth rates for each of the territories in which the CGU primarily operates.
Apart from operating cash flows and long-term growth rates, the other key assumption is the pre-tax discount rate, which is derived from externally
sourced data and reflects the current market assessment of the Group’s time value of money and risks specific to each CGU.
The carrying value of goodwill and key assumptions used in determining the recoverable amount of each CGU are as follows:
Group
Technical Consulting:
Ricardo Rail
Ricardo Automotive Europe
Ricardo Energy & Environment
Ricardo Defense(2)
Technical Consulting total
Performance Products:
Ricardo Performance Products
At 30 June
Carrying value
2018
£m
27.6
20.1
13.3
3.4
64.4
1.1
65.5
2017
£m
27.6
20.0
13.3
-
60.9
1.1
62.0
Pre-tax discount rate
2017
2018
%
%
Long-term growth rate
2017
2018
%
%
8.1
7.6
7.6
9.2
7.6
10.1
8.6
8.7
n/a
8.7
4.8
4.1
4.1
3.7
4.1
4.9
4.2
4.2
n/a
4.2
(2) As set out in further detail in Note 12, the Group acquired Control Point Corporation (‘CPC’) on 8 September 2017, adding goodwill of £3.4m to a new Ricardo Defense CGU.
The acquisition of CPC expands upon the Group’s vehicle engineering capabilities in the US defense sector and adds expertise in distributed software-based systems and
fleet management technologies.
The three-year plan and discounted cash flow calculations thereon provide a value in use which supports the carrying value of the goodwill allocated
to each CGU at 30 June 2018, resulting in no impairment for the year (2017: £Nil). In considering sensitivities, no reasonable change in any of the above
key assumptions would cause the value in use of the CGUs to fall below the carrying value of the allocated goodwill. The sensitivities assessed include a
10% reduction in planned operating profit, a 20% reduction in the planned operating cash flow conversion rate, and a 1% increase in both the pre-tax
discount rate and long-term growth rate, together with a further scenario whereby all sensitivities were combined together.
136 Ricardo plc Annual Report & Accounts 2018
14 Other intangible assets
Group
Cost
At 1 July 2016
Acquisition of business
Additions
Reclassifications
Exchange rate adjustments
At 30 June 2017
Acquisition of business (Note 12)
Additions
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2018
Accumulated amortisation
At 1 July 2016
Charge for the year
Reclassifications
Exchange rate adjustments
At 30 June 2017
Charge for the year
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2018
Net book value
At 30 June 2018
At 30 June 2017
At 30 June 2016
Notes to the financial statements
Acquisition-related
intangible assets
Customer
contracts and
relationships
£m
Software and
technology
£m
Software
£m
Development
costs
£m
24.9
0.2
-
-
0.4
25.5
2.0
-
-
-
0.1
27.6
6.5
3.7
(0.2)
0.2
10.2
3.9
-
-
(0.1)
14.0
13.6
15.3
18.4
1.8
-
-
-
0.1
1.9
0.3
-
-
-
-
2.2
0.2
0.3
0.2
0.1
0.8
0.4
-
-
-
1.2
1.0
1.1
1.6
22.5
0.1
2.5
0.1
0.2
24.7
-
1.4
(1.4)
0.2
(0.1)
24.8
15.6
2.1
-
0.1
17.1
2.3
(1.4)
0.1
-
18.1
6.7
7.6
6.9
12.5
-
3.1
(0.1)
-
15.5
-
5.1
-
(0.2)
(0.1)
20.3
4.1
3.0
-
-
7.1
2.9
-
(0.1)
-
9.9
10.4
8.4
8.4
Total
£m
61.7
0.3
5.6
-
0.7
67.6
2.3
6.5
(1.4)
-
(0.1)
74.9
26.4
9.1
-
0.4
35.2
9.5
(1.4)
-
(0.1)
43.2
31.7
32.4
35.3
Customer contracts and relationships were primarily identified as part of the previous acquisitions of AEA and LR Rail. The assets specific to these acquisitions
have carrying values of £2.6m (2017: £3.7m) and £9.3m (2017: £11.3m) and have remaining amortisation periods of two and five years, respectively.
Software which is not acquisition-related primarily comprises costs that have been capitalised in respect of an internally developed ERP system. The
ERP system has a carrying value of £2.8m (2017: £3.9m) and has a remaining amortisation period of five years. Software includes £0.9m (2017: £0.4m) in
respect of assets under construction which are not being amortised until the assets are made available for use.
Development costs include costs incurred to develop and regularly update a suite of simulation and analysis software tools used in the Automotive
sector but also with applications in other sectors. The suite of assets have a carrying value of £3.6m (2017: £2.7m) and a remaining amortisation period
of three years, which is also applied to each update when released. Development costs also include £5.8m (2017: £3.1m) in respect of assets under
construction which are not being amortised until the assets are made available for use. Development costs under construction include costs incurred
to develop a patented system that combines anti-lock braking and electronic stability control to mitigate rollover fatalities commonly associated with
specific military vehicles, such as the High Mobility Multipurpose Wheeled Vehicle ('HMMWV' or ‘Humvee’). The asset has a carrying value of £2.0m
(2017: £1.8m) and will commence amortisation in July 2018.
The amortisation charge of £9.5m (2017: £9.1m) is comprised of £1.8m (2017: £1.4m) included within cost of sales and £7.7m (2017: £7.7m) included
within administrative expenses in the Consolidated Income Statement, of which £4.3m (2017: £4.0m) is acquisition-related and presented within
specific adjusting items. Further details are given in Note 4.
Delivering Excellence Through Innovation & Technology 137
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Notes to the financial statements
14 Other intangible assets (continued)
Company
Cost
At 1 July 2016
Additions
At 30 June 2017 and 30 June 2018
Accumulated amortisation
At 1 July 2016
Charge for the year
At 30 June 2017
Charge for the year
At 30 June 2018
Net book value
At 30 June 2018
At 30 June 2017
At 30 June 2016
Software
£m
8.6
0.2
8.8
4.8
1.3
6.1
1.1
7.2
1.6
2.7
3.8
Software primarily comprises costs that have been capitalised in respect of an internally developed ERP system. The ERP system has a carrying value of
£0.9m (2017: £1.6m) and a remaining amortisation period of two years. Software includes £0.3m (2017: £0.3m) in respect of assets under construction
which are not being amortised until the assets are made available for use.
15 Property, plant and equipment
Group
Cost
At 1 July 2016
Additions
Disposals
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2017
Acquisition of business (Note 12)
Additions
Disposals
Assets classified as held for sale (Note 19)
Exchange rate adjustments
At 30 June 2018
Accumulated depreciation
At 1 July 2016
Charge for the year
Disposals
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2017
Charge for the year
Disposals
Assets classified as held for sale (Note 19)
Exchange rate adjustments
At 30 June 2018
Net book value
At 30 June 2018
At 30 June 2017
At 30 June 2016
Freehold
land and
buildings
£m
Leasehold
property
£m
Plant and
machinery
£m
Fixtures,
fittings and
equipment
£m
22.9
1.0
-
-
-
0.2
24.1
-
0.5
(0.3)
(3.8)
-
20.5
4.8
0.5
-
-
-
0.1
5.4
0.6
(0.1)
(1.5)
0.1
4.5
16.0
18.7
18.1
9.4
0.4
(5.0)
(0.8)
-
-
4.0
-
0.6
-
-
(0.1)
4.5
5.1
0.5
(2.8)
(0.6)
-
-
2.2
0.3
-
-
(0.1)
2.4
2.1
1.8
4.3
117.2
2.4
(0.9)
(11.3)
0.8
1.6
109.8
0.1
4.4
(0.5)
(13.8)
(0.7)
99.3
91.2
4.0
(0.9)
(8.7)
0.4
1.4
87.4
3.4
(0.5)
(12.0)
(0.5)
77.8
21.5
22.4
26.0
22.8
2.5
(0.5)
(0.2)
(0.8)
0.4
24.2
-
2.7
(0.5)
(2.7)
-
23.7
17.6
2.2
(0.5)
(0.2)
(0.4)
0.4
19.1
2.1
(0.5)
(2.6)
(0.1)
18.0
5.7
5.1
5.2
Total
£m
172.3
6.3
(6.4)
(12.3)
-
2.2
162.1
0.1
8.2
(1.3)
(20.3)
(0.8)
148.0
118.7
7.2
(4.2)
(9.5)
-
1.9
114.1
6.4
(1.1)
(16.1)
(0.6)
102.7
45.3
48.0
53.6
The carrying value of assets under construction included in property, plant and equipment amounts to £4.4m (2017: £1.0m).
At 30 June 2018, contracts had been placed for future capital expenditure, which have not been provided for in the financial statements, amounting to
£1.3m (2017: £1.5m).
138 Ricardo plc Annual Report & Accounts 2018
15 Property, plant and equipment (continued)
Company
Cost
At 1 July 2016
Disposals
At 30 June 2017
Additions
At 30 June 2018
Accumulated depreciation
At 1 July 2016
Charge for the year
Disposals
At 30 June 2017
Charge for the year
At 30 June 2018
Net book value
At 30 June 2018
At 30 June 2017
At 30 June 2016
Notes to the financial statements
Freehold
Land and
buildings
£m
Leasehold
property
£m
Fixtures,
fittings and
equipment
£m
5.7
-
5.7
-
5.7
1.9
0.1
-
2.0
0.1
2.1
3.6
3.7
3.8
6.0
(4.9)
1.1
-
1.1
3.1
0.2
(2.8)
0.5
-
0.5
0.6
0.6
2.9
1.0
-
1.0
0.1
1.1
0.4
0.2
-
0.6
0.2
0.8
0.3
0.4
0.6
Total
£m
12.7
(4.9)
7.8
0.1
7.9
5.4
0.5
(2.8)
3.1
0.3
3.4
4.5
4.7
7.3
In the prior year, an agreement was reached to sell a property for £4.0m that had been built on rented premises under an operating lease agreement
in exchange for committing to a £0.3m increase in the annual rent charges over an extended lease term. The profit on disposal of the property after
£0.1m of transaction costs was £1.8m. The depreciation charged on the property until the point of sale was included within administrative expenses
in the Consolidated Income Statement.
In accordance with IAS 17 'Leases', management's view was that the sale price was not at fair value, as the transaction bundled together an
unspecified profit on disposal from both the sale and leaseback of the building on existing lease terms, together with an incentive for extending the
lease term. A discounted cash flow was used to ascertain a fair value of both elements to the bundled transaction and the proceeds received were
allocated accordingly.
As a result, £1.1m of the £1.8m profit on disposal after transaction costs was allocated to the extended lease term element of the transaction and
deferred onto the Statement of Financial Position. The release of this amount to offset the increase in annual rent charges over the remaining term
of the extended lease has commenced in the current year. The remaining £0.7m was allocated to the sale and leaseback of the building on existing
terms and recognised within underlying profit before tax in the prior year Consolidated Income Statement. Consistent with the definition of specific
adjusting items in Note 1(w), this transaction was not considered to be significant in nature or amount and was therefore not included within prior
year specific adjusting items as set out in Note 4.
A contingent liability of up to £2.8m which is associated with a guarantee provided to the Ricardo Group Pension Fund in July 2013 is secured on
specific land and buildings. Further detail is given in Note 36.
16 Investments
Company
At 1 July 2016
Additions
Disposals
At 30 June 2017 and 30 June 2018
Shares in
subsidiaries
£m
73.9
29.3
(0.1)
103.1
The addition in the prior year related to an intercompany receivable held with an indirectly owned subsidiary, which was novated to a directly owned
subsidiary as a contribution to its capital. The disposal in the prior year related to the investments held in dormant entities which were liquidated during
the prior year.
Details of the Company's subsidiaries are disclosed in Note 38.
The Directors consider that the fair value of investments is not less than the carrying value.
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Notes to the financial statements
17 Inventories
Group
Raw materials and consumables
Work in progress
Finished goods
At 30 June
2018
£m
8.4
3.9
1.0
13.3
During the year £0.5m (2017: £0.2m) of inventory was written down and included in cost of sales in the Consolidated Income Statement.
18 Trade and other receivables
Trade receivables
Less provision for impairment of trade receivables
Trade receivables - net
Amounts recoverable on contracts (Note 20)
Amounts owed by Group undertakings
Prepayments and accrued income
Other receivables
At 30 June
Group
Company
2018
£m
65.5
(1.1)
64.4
52.6
-
11.4
13.4
141.8
2017
£m
60.6
(1.8)
58.8
59.0
-
9.7
10.1
137.6
2018
£m
-
-
-
-
88.5
1.1
-
89.6
2017
£m
9.2
3.8
0.9
13.9
2017
£m
-
-
-
-
104.1
1.0
0.1
105.2
All trade and other receivables are due within the next 12 months.
In respect of the Company, £8.8m (2017: £10.4m) of the amounts owed by Group undertakings are due for repayment within the next 12 months and
the remaining £79.7m (2017: £93.7m) has no fixed repayment date. £67.6m (2017: £82.7m) of the amounts owed by Group undertakings carry interest
at rates between 2.4% and 5.0% (2017: 2.3% and 5.0%) with the remaining £20.9m (2017: £21.4m) being interest-free. All amounts owed by Group
undertakings are unsecured.
Group provision for impairment of trade receivables
At 1 July
Income statement credit/(charge)
Amounts utilised
At 30 June
2018
£m
(1.8)
0.6
0.1
(1.1)
2017
£m
(2.1)
(0.2)
0.5
(1.8)
The provision for impairment of trade receivables has been calculated based on past experience and is in relation to specific customers.
140 Ricardo plc Annual Report & Accounts 2018
Trade receivables
Less provision for impairment of trade receivables
Trade receivables - net
Amounts recoverable on contracts (Note 20)
Amounts owed by Group undertakings
Prepayments and accrued income
Other receivables
At 30 June
Group
Company
2018
£m
65.5
(1.1)
64.4
52.6
-
11.4
13.4
2017
£m
60.6
(1.8)
58.8
59.0
-
9.7
10.1
141.8
137.6
2018
£m
-
-
-
-
-
88.5
1.1
89.6
2017
£m
-
-
-
-
104.1
1.0
0.1
105.2
19 Non-current assets held for sale
Group
Property, plant and equipment (Note 15)
At 30 June
Notes to the financial statements
2018
£m
-
-
2017
£m
2.8
2.8
In order to reduce the Group's fixed cost base and improve efficiency of international test operations, the Group sold its test assets situated at the
Chicago Technical Center and Schechingen Technical Centre during the financial year. The assets situated at the Chicago Technical Center were
held for sale as at 30 June 2017. The profit on disposal of these assets held for sale are set out below:
Chicago Technical Center disposal
Cash consideration
Carrying value of leasehold property
Carrying value of plant and machinery
Exchange rate adjustments
Profit on disposal before income tax
On 2 April 2018, the Group completed the sale of its test assets situated at its Chicago Technical Center for £4.1m ($5.5m) to Power Solutions
International (‘PSI’), a US manufacturer of engines and power systems. The proceeds were received during the year. The profit on disposal has been
included within specific adjusting items. Further details are given in Note 4.
Schechingen Technical Centre disposal
Cash consideration
Carrying value of freehold land and buildings
Carrying value of plant and machinery
Carrying value of fixtures, fittings and equipment
Profit on disposal before income tax
£m
4.1
(0.2)
(2.6)
0.1
1.4
£m
4.4
(2.3)
(1.8)
(0.1)
0.2
On 30 June 2018, the Group completed the sale of its test assets and its Schechingen Technical Centre for £4.4m (€5.0m) to a subsidiary of IAVF
Antriebstechnik GmbH ('IAVF'), a German developer and test operator of engines. The first tranche of sales proceeds of £1.9m (€2.2m) was received
in June 2018 and the remaining £2.5m (€2.8m) was received in July 2018. The profit on disposal has been included within specific adjusting items.
Further details are given in Note 4.
20 Contracts in progress
Group
Amounts due from contract customers:
Amounts expected to be recovered within 12 months (Note 18)
Amounts due to contract customers:
Amounts expected to be settled within 12 months (Note 21)
Net amounts due from contract customers at 30 June
Analysed as:
Contract costs incurred plus recognised profits less recognised losses to date
Less progress billings
Contracts in progress at 30 June
2018
£m
52.6
(25.3)
27.3
485.0
(457.7)
27.3
2017
£m
59.0
(24.1)
34.9
529.4
(494.5)
34.9
IAS 11 contract revenue
285.2
262.2
Retentions related to contracts in progress included within trade and other receivables (Note 18) or trade and other payables (Note 21) are considered
to be immaterial.
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Notes to the financial statements
21 Trade and other payables
Trade payables
Tax and social security payable
Amounts owed to Group undertakings
Accruals and deferred income
Payments received in advance on contracts (Note 20)
Other payables
At 30 June
Group
Company
2018
£m
15.0
7.5
-
30.0
25.3
4.7
82.5
2017
£m
18.3
9.1
-
25.8
24.1
4.8
82.1
2018
£m
0.6
0.1
64.4
4.0
-
1.2
70.3
2017
£m
0.7
1.6
60.8
2.3
-
1.3
66.7
In respect of the Company, £8.1m (2017: £7.7m) of the amounts owed to Group undertakings are due for repayment within the next 12 months and
the remaining £56.3m (2017: £53.1m) has no fixed repayment date. £51.3m (2017: £53.1m) of the amounts owed to Group undertakings carry interest
at rates between 2.4% and 3.1% (2017: 2.4% and 3.1%) with the remaining £13.1m (2017: £7.7m) being interest-free. All amounts owed to Group
undertakings are unsecured.
22 Borrowings
Current borrowings:
Bank overdrafts
Other loans
Total current borrowings
Non-current borrowings:*
Bank loans
Other loans
Total non-current borrowings
At 30 June
Group
Company
2018
£m
9.3
0.1
9.4
49.8
-
49.8
59.2
2017
£m
5.9
0.1
6.0
59.7
0.1
59.8
65.8
2018
£m
8.5
0.1
8.6
6.8
-
6.8
15.4
2017
£m
5.9
0.1
6.0
19.7
0.1
19.8
25.8
(*) Non-current borrowings in the prior year have been restated to present other loans separately from bank loans.
The non-current bank loans are repayable in the year ending 30 June 2020 and are denominated in Pounds Sterling. The non-current bank loans have
variable rates of interest which are dependent upon the leverage of the Group and range from 1.6% to 2.6% above LIBOR. Leverage is defined as being
net debt as a proportion of EBITDA. EBITDA is defined as being operating profit before interest, tax, depreciation and amortisation. At the reporting
date, the Group was paying interest at the lowest rate of LIBOR + 1.6%.
The Group has banking facilities for its UK companies which together have a net overdraft limit. The balances are shown gross in the financial
statements as cash and cash equivalents and borrowings.
After the reporting date, the Group completed a refinance of its banking facilities. Further detail is given in Note 39.
142 Ricardo plc Annual Report & Accounts 2018
23 Fair value of financial assets and liabilities
Assets as per Statements of Financial Position
Loans and receivables:
Trade and other receivables*(1) (Note 18)
Amounts owed by Group undertakings (Note 18)
Cash and cash equivalents (Note 34)
Assets at fair value through profit and loss:
Derivative financial assets
At 30 June
Liabilities as per Statements of Financial Position
Other financial liabilities at amortised cost:
Borrowings (Note 22)
Trade and other payables*(2) (Note 21)
Amounts owed to Group undertakings (Note 21)
Liabilities at fair value through profit and loss:
Derivative financial liabilities
At 30 June
Notes to the financial statements
Group
Company
2017
£m
68.9
-
27.9
0.9
97.7
65.8
23.1
-
0.7
89.6
2018
£m
-
88.5
0.3
0.1
88.9
15.4
1.8
64.4
1.0
82.6
2017
£m
0.1
104.1
0.9
0.9
106.0
25.8
2.0
60.8
0.7
89.3
2018
£m
77.8
-
33.1
0.1
111.0
59.2
19.7
-
1.0
79.9
(*) Loans and receivables in the prior year have been restated to exclude amounts recoverable on contracts for the Group from trade and other receivables as these are
non-financial assets. Other financial liabilities at amortised cost in the prior year have also been restated to exclude accruals and deferred income for both the Group and
Company, and payments received in advance on contracts for the Group from trade and other payables as these are non-financial liabilities.
(1) Excludes non-financial assets of amounts recoverable on contracts of £52.6m (2017: £59.0m) for the Group, and prepayments and accrued income of £11.4m (2017: £9.7m)
for the Group and £1.1m (2017: £1.0m) for the Company.
(2) Excludes non-financial liabilities of tax and social security payable of £7.5m (2017: £9.1m) for the Group and £0.1m (2017: £1.6m) for the Company, accruals and deferred
income of £30.0m (2017: £25.8m) for the Group and £4.0m (2017: £2.3m) for the Company, and payments received in advance on contracts of £25.3m (2017: £24.1m) for
the Group.
Net derivative financial liabilities of £0.9m (2017: net derivative financial assets of £0.2m) relate to foreign exchange contracts.
Summary of methods and assumptions
Short-term borrowings and deposits:
The fair value of short-term deposits, loans and overdrafts approximates to the carrying amount because of the short maturity of these instruments.
Long-term borrowings:
The fair value of borrowings approximates to the carrying value in the Statement of Financial Position as they are primarily floating rate loans where
payments are reset to market rates at regular intervals.
Derivatives:
Derivative financial instruments are initially recognised and measured at fair value on the date a derivative contract is entered into and subsequently
measured at fair value. Fair value is estimated by discounting expected future contractual cash flows using prevailing interest rate curves. Amounts
denominated in foreign currencies are valued at the exchange rate prevailing at the reporting date (Level 2 under the IFRS 13 fair value hierarchy).
During the year the following foreign exchange differences arising from financial assets and liabilities measured at fair value through profit or loss
('FVTPL') were (charged)/credited to the Consolidated Income Statement:
Group
Financial assets at FVTPL:
Fair value losses
Fair value gains
Financial liabilities at FVTPL:
Fair value losses
Fair value gains
Foreign exchange forward contracts:
Net foreign exchange (losses)/gains
At 30 June
Group
On loans and receivables
On other financial assets and liabilities
At 30 June
2018
£m
(0.9)
0.7
(0.8)
0.1
(0.1)
(1.0)
2018
£m
1.1
-
1.1
2017
£m
(0.7)
2.3
(0.4)
0.8
0.2
2.2
2017
£m
(0.3)
2.2
1.9
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Notes to the financial statements
24 Financial risks
(a) Objectives, policies and strategies
The financial risks faced by the Group and the Company comprise capital risk, liquidity risk, credit risk and market risk (comprising interest rate risk and
foreign exchange risk). The Board reviews and agrees policies for managing each of these risks. The Group and the Company have no material exposure
to commodity price fluctuations and this situation is not expected to change in the foreseeable future.
The Group's financial instruments comprise floating rate borrowings, the main purpose of which is to raise finance for the Group's operations, and
foreign exchange contracts used to manage currency risks. The Company's financial instruments comprise floating rate borrowings.
(b) Capital risk
The objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders, benefits
for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
Capital is monitored on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as borrowings
less cash and cash equivalents. Total capital is calculated as equity, as shown in the Statement of Financial Position, plus net debt.
Gearing ratio
Net debt (Note 34)
Total equity
Total capital
At 30 June
(c) Liquidity risk
Group
Company
2018
£m
26.1
176.5
202.6
12.9%
2017
£m
37.9
155.7
193.6
19.6%
2018
£m
15.1
109.2
124.3
12.1%
2017
£m
24.9
107.2
132.1
18.8%
The Group's policy towards managing its liquidity risks is to maintain a mix of short- and medium-term borrowing facilities with its bankers. Short-term
flexibility is provided by bank overdraft facilities. In addition, the Group maintains medium-term borrowing facilities in order to provide the appropriate
level of finance to support current and future working capital requirements. As the cash profile on large contracts can vary significantly, the Group
seeks committed facilities that provide substantial headroom against forecast requirements to mitigate its exposure.
At the year-end, the Group held total facilities of £90.9m (2017: £91.1m). This included committed facilities of £75.0m (2017: £75.0m), of which £49.8m
(2017: £59.7m) was drawn, net of direct issue costs. Committed facilities were primarily drawn to fund acquisitions. Of the committed facilities available
at year-end, a £35.0m facility was available for the period to September 2019 and a £40.0m facility was available until April 2020. In addition, the
Group had uncommitted facilities including overdrafts of £15.9m (2017: £16.1m), which mature throughout the next financial year and are renewable
annually. After the reporting date, the Group completed a refinance of its banking facilities. Further detail is given in Note 39.
The table below analyses the Group's external non-derivative financial liabilities into relevant maturity groupings, based on the remaining period at the
reporting date to the contractual maturity date. All amounts disclosed in the tables below are the contractual undiscounted cash flows. These amounts
approximate to their carrying values in the Statement of Financial Position as the impact of discounting on trade payables that mature after more
than one year is insignificant and borrowings that mature after more than one year are primarily floating rate bank loans where payments are reset to
market rates at regular short-term intervals.
Not included within the tables below are the following financial liabilities:
• Derivative financial liabilities as their contractual maturities are not considered to be essential for an understanding of the timing of the cash flows;
• Other payables as these amounts primarily relate to the obligation to perform pre-paid services for customers, the phasing of which is not
contractually defined; and
• Amounts owed to Group undertakings by the Company as the maturity of these liabilities is provided in Note 21.
Maturity of trade payables
Maturing:
Within 1 month
After 1 month and within 3 months
After 3 months and within 12 months
After more than 12 months
At 30 June
Maturity of borrowings
Overdrafts repayable on demand
Maturing:
After 1 month and within 3 months
After 12 months and within 5 years
At 30 June
144 Ricardo plc Annual Report & Accounts 2018
Group
Company
2018
£m
12.2
2.7
0.1
-
15.0
2018
£m
9.3
0.1
49.8
59.2
Group
2017
£m
8.7
9.0
0.5
0.1
18.3
2017
£m
5.9
0.1
59.8
65.8
2018
£m
0.6
-
-
-
0.6
2018
£m
8.5
0.1
6.8
15.4
Company
2017
£m
0.5
-
0.2
-
0.7
2017
£m
5.9
0.1
19.8
25.8
Notes to the financial statements
24 Financial risks (continued)
(d) Credit risk
The Group is exposed to credit risk in respect of its trade receivables, which are stated net of provision for impairment. Exposure to this risk is mitigated
by careful evaluation of the granting of credit and the use of credit insurance where practicable.
Concentrations of credit risk with respect to trade receivables are limited due to the Group's customer base being large and unrelated.
Ageing of net trade receivables
Not overdue
Overdue:
0 - 90 days overdue
91 - 180 days overdue
Over 180 days overdue
At 30 June
2018
£m
51.9
8.9
2.0
1.6
64.4
2017
£m
44.0
11.6
0.6
2.6
58.8
The Group's customers include the world's major transportation original equipment manufacturers, energy companies, financial institutions and government
agencies. Revenue by customer location is disclosed within Note 3(b) and trade receivables are derived from these customer groups and locations.
We have limited experience of bad debts with any of these customers. Of the total net trade receivables balance of £64.4m as at 30 June 2018, £30.2m was
received in July 2018. Due to these factors, the Directors are of the opinion that there is no further credit risk provision required in excess of any existing
provision for impairment.
An analysis of net trade receivables by currency is as follows:
Net trade receivables by currency
Pounds Sterling
Euros
US Dollars
Chinese Renminbi
Other currencies
At 30 June
The geographic analysis of the location of trade receivables before provision for impairment across the Group is as follows:
Trade receivables that are neither past due nor impaired
United Kingdom
Rest of Europe
North America
Asia
Rest of the World
At 30 June
Trade receivables that are not past due but impaired
United Kingdom
At 30 June
Trade receivables that are overdue but not impaired
United Kingdom
Rest of Europe
North America
Asia
Rest of the World
At 30 June
Trade receivables that are overdue and impaired
United Kingdom
Rest of Europe
North America
Asia
At 30 June
2018
£m
34.2
8.5
7.9
7.7
6.1
64.4
2018
£m
34.2
3.3
4.8
6.4
2.0
50.7
2018
£m
1.2
1.2
2018
£m
4.1
0.9
2.1
3.8
0.5
11.4
2018
£m
0.6
0.1
1.4
0.1
2.2
2017
£m
32.8
11.5
5.9
3.2
5.4
58.8
2017
£m
33.7
1.9
4.0
2.9
1.5
44.0
2017
£m
-
-
2017
£m
6.3
1.1
3.8
1.5
1.8
14.5
2017
£m
0.8
0.1
0.6
0.6
2.1
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Notes to the financial statements
24 Financial risks (continued)
(d) Credit risk (continued)
The individually impaired trade receivables primarily relate to customers which are in unexpectedly difficult economic situations. It was assessed that a
portion of these trade receivables are expected to be recovered.
Impaired financial assets
Trade receivables
Provision for impairment
At 30 June
2018
£m
3.4
(1.1)
2.3
2017
£m
2.1
(1.8)
0.3
Trade receivables that are overdue but not impaired relate to customers for whom there is no recent history of default. The ageing analysis of overdue
trade receivables is as follows:
Trade receivables that are overdue but not impaired
0 - 90 days overdue
91 - 180 days overdue
Over 180 days overdue
At 30 June
Trade receivables that are overdue and impaired
Over 180 days overdue
At 30 June
2018
£m
8.9
2.0
0.5
11.4
2018
£m
2.2
2.2
2017
£m
11.6
0.7
2.2
14.5
2017
£m
2.1
2.1
The Group and Company is exposed to bank credit risk in respect of money held on deposit and certain derivative transactions entered into with banks.
Exposure to this form of risk is mitigated as material transactions are only undertaken with bank counterparties that have high credit ratings assigned by
international credit-rating agencies. The Group and Company further limits risk in this area by setting an overall credit limit for all transactions with each
bank counterparty in accordance with the institution's credit standing.
Group
Company
Maximum exposure to bank counterparty risk
Cash and cash equivalents
Derivative financial assets
At 30 June
2018
£m
33.1
0.1
33.2
2017
£m
27.9
0.9
28.8
Analysis of the Group's cash and cash equivalents by geographic location
United Kingdom
Rest of Europe
North America
Asia
Rest of the World
At 30 June
2018
£m
0.3
0.1
0.4
2018
£m
8.0
4.0
1.7
17.7
1.7
33.1
2017
£m
0.9
0.9
1.8
2017
£m
9.0
4.3
1.2
12.9
0.5
27.9
146 Ricardo plc Annual Report & Accounts 2018
Notes to the financial statements
24 Financial risks (continued)
(e) Market risk
Interest rate risk
The Group and Company borrowings and cash balances held at floating interest rates are exposed to cash flow interest rate risk. As set out in further
detail in Note 22, the exposure to interest rate movements is not currently hedged as the variable rates of interest are largely dependent upon the
leverage of the Group, which is currently attracting the lowest possible rate of interest. The effect of any foreseen changes in the LIBOR remain
unhedged, although the policy is reviewed on an ongoing basis.
Financial assets and liabilities by interest type
Fixed rate financial assets
Floating rate financial assets
No interest financial assets
Fixed rate financial liabilities
Floating rate financial liabilities
No interest financial liabilities
Net financial assets at 30 June
Group
Company
2018
£m
-
28.4
82.6
-
(59.1)
(20.8)
31.1
*2017
£m
-
23.2
74.5
-
(65.6)
(24.0)
8.1
2018
£m
67.6
-
21.3
(51.3)
(15.3)
(16.0)
6.3
*2017
£m
82.7
0.9
22.4
(53.1)
(25.6)
(10.6)
16.7
(*) The comparative information for the prior year has been represented for the following reasons:
• As set out in further detail in Note 23, certain assets within trade and other receivables and certain liabilities within trade and other payables are non-
financial in nature and are no longer included;
• Cash and cash equivalents for the Group of £10.3m and for the Company of £0.9m have now been presented as floating rate financial assets, having
previously been presented as no interest financial assets;
• Overdraft balances for the Group and Company of £5.9m have now been presented as floating rate financial liabilities, having previously been
presented as no interest financial liabilities;
• Other loans for the Group and Company of £0.1m have now been presented as no interest financial liabilities, having previously been presented as
floating rate financial liabilities;
• Amounts for the Company owed to and from fellow Group undertakings of £53.1m and £82.7m, respectively, have now been presented as fixed rate
financial assets or liabilities, having previously been presented as floating rate financial assets or liabilities, to more fairly reflect the terms of the loan
agreements with counterparties;
• No interest financial liabilities for the Company of £3.6m have also been reclassified to offset against related no interest financial assets.
Foreign exchange risk
The Group faces currency exposures on trading transactions undertaken by its subsidiaries in foreign currencies and balances arising therefrom, and on
the translation of profits earned in, and net assets of, overseas subsidiaries primarily in the US, Europe and China.
The carrying amounts of the Group's foreign currency denominated monetary assets and liabilities are:
US Dollar
Euro
Chinese Renminbi
Assets
Liabilities
2018
£m
10.7
15.6
22.3
2017
£m
13.3
13.2
13.3
2018
£m
(2.4)
(6.6)
(0.3)
2017
£m
(1.3)
(11.6)
(0.4)
It is the Group's policy not to undertake any speculative currency transactions.
The Group uses derivatives to manage transactional exposures relating to its foreign currency exposures on contracts by taking out foreign exchange
contracts or other derivative financial instruments.
The Company uses derivatives to manage currency risk on its US Dollar, Euro, Chinese Renminbi, Japanese Yen and Hong Kong Dollar denominated
receivables from related parties.
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Notes to the financial statements
24 Financial risks (continued)
(f) Analysis of sensitivity of financial instruments to market risk
Exchange rate sensitivity
The Group has financial instruments in assets and liabilities in foreign currencies, principally in US Dollars, Euros and Chinese Renminbi, where the
financial instruments are not in the functional currency of the entity that holds them. A 20% change in the value of the US Dollar, Euro or Chinese
Renminbi would have an immaterial impact on the value of financial instruments at the year-end. Given the relative strengthening of the Group's
principal foreign currencies against the Pound Sterling since the UK referendum vote to leave the EU, a 20% sensitivity in these exchange rates is
deemed to be appropriate.
Interest rate sensitivity
A 1% change in either the US Dollar, Euro, Chinese Renminbi or Sterling interest rates would have an insignificant impact on the value of the Group's
floating rate financial instruments at the year-end. A 1% sensitivity is deemed to be appropriate as loans are based on LIBOR and so are unlikely to be
subjected to significant fluctuations in interest rates in the foreseeable future.
(g) Cash flow derivatives
The Group uses foreign currency contracts designated as cash flow derivatives to manage the exposure arising from orders in foreign currencies that
could affect the Consolidated Income Statement. The principal risk being hedged is the Euro/Sterling, US Dollar/Sterling and Chinese Renminbi/
Sterling spot and interest rate differential exchange rate risk arising from orders in foreign currencies. The spot and interest rate differential component
of the contracts taken out is designed to manage the change in fair value of the cash flows on the firm orders in foreign currencies that are attributable
to movements in the Euro/Sterling, US Dollar/Sterling and Chinese Renminbi/Sterling spot and interest rates. Since the Group does not hedge account,
any change in the fair value of the instrument is recognised directly in the Consolidated Income Statement.
Cash flows expected to occur and affect the Consolidated Income Statement
Within 3 months
After 3 months and within 12 months
After 12 months and within 3 years
Total
25 Retirement benefit obligations
Group and Company
Defined contribution and defined benefit schemes
2018
£m
54.3
2.3
2.2
58.8
2017
£m
47.9
0.1
-
48.0
The Group operates various defined contribution pension schemes, the assets of which are held in separately administered funds. The Group
also operates a defined benefit pension scheme, the Ricardo Group Pension Fund ('RGPF'), which closed to future accrual on 28 February 2010.
Responsibility for the governance of the RGPF lies with the Board of Trustees. The Board of Trustees must be comprised of representatives of the
Group and RGPF participants in accordance with the RGPF's regulations.
The last triennial valuation of the RGPF was completed with an effective date of 5 April 2017 and is awaiting imminent final approval. At that date,
the assets of the RGPF had a market value of £134.0m and were sufficient to cover 86% of the benefits that had accrued to members when assessed
on the Trustees' prudent funding basis. Annual contributions due to the RGPF during the year ending 30 June 2019 will be £4.3m. The Company has
agreed with the Trustees that annual contributions will increase to £4.6m from 1 July 2019 and will continue until 31 July 2022, in order to eliminate
the Trustees' funding deficit revealed at the 5 April 2017 valuation. The next triennial valuation will be on 5 April 2020, and this process is expected
to complete in the year ending 30 June 2021. The results of the 2020 triennial valuation will determine whether the Group's current contribution
commitment remains appropriate.
The IAS 19 'Employee Benefits' valuation was completed as at 30 June 2018. The pension costs relating to the RGPF were assessed using the projected
unit credit method and the model used to determine pension increase assumptions has been changed from the Black Scholes model to the Jarrow-
Yildrim model, in accordance with the advice of Mercer, qualified actuaries.
From June 2016, the Company and Trustees decided to introduce a ‘retirement flexibility’ option to the RGPF, which allows members to transfer out
their benefits at retirement. No allowance continues to have been made within the defined benefit obligation as at 30 June 2018 for members who
may elect to transfer out their benefits at retirement. This assumption will be reviewed on an ongoing basis and may change in future as experience
emerges as to the level of members who elect to transfer out their benefits at retirement.
The post-retirement mortality assumptions for the current year have been reviewed and use morality tables known as the SAPS 'Series 2' tables, with
an 85% (2017: 98%) multiplier for males, applicable to the 'light' version of the table, and a 93% (2017: 95%) multiplier for females, applicable to the
'standard' version of the table. The future improvements component has been updated to be in line with the Continuous Mortality Investigation ('CMI')
2017 projection model (2017: CMI 2016). The latest available CMI model will be used at each year-end to provide the most accurate representation of
the defined benefit obligation. The use of a 1.25% long-term trend is consistent with the prior year.
148 Ricardo plc Annual Report & Accounts 2018
Notes to the financial statements
25 Retirement benefit obligations (continued)
Under these mortality assumptions the expected future life expectancy from age 65 is as follows:
2018
2017
Age
65 now
65 in 20 years
The other significant assumptions made were:
Males
24.3
25.6
Females
24.4
25.9
Discount rate
Rate of RPI inflation
Rate of increase in pensions in payment:
Pre 1 July 2002 accrual
Post 1 July 2002 accrual
Rate of increase in pension in deferment
Percentage of pension to be commuted for a lump sum at retirement
Scheme assets are comprised as follows:
Males
23.4
24.7
2018
%
2.85
3.10
3.60
2.95
2.10
25.00
Equities
Bonds
Cash and other
Property
Diversified growth funds
At 30 June
Quoted
£m
34.4
66.8
-
-
21.1
122.3
2018
Unquoted
£m
-
-
1.0
7.7
-
8.7
Total
£m
34.4
66.8
1.0
7.7
21.1
131.0
Quoted
£m
33.6
56.9
-
-
20.2
110.7
2017
Unquoted
£m
-
-
13.3
7.0
-
20.3
Movements in the fair value of scheme assets and present value of defined benefit obligations were as follows:
At 1 July
Interest income/(expense) in the income statement
Return on plan assets, excluding amounts included in
interest income
(Loss)/gain from change in demographic assumptions
Gain/(loss) from change in financial assumptions
Experience gains
Total remeasurements in other comprehensive income
Contributions from sponsoring companies
Benefits paid
Total movements
At 30 June
2018
Present
value of
obligation
£m
(153.2)
(3.9)
Fair value of
plan assets
£m
131.0
3.4
Net total
£m
(22.2)
(0.5)
Fair value of
plan assets
£m
122.8
3.6
2.1
-
-
-
2.1
4.3
(9.8)
-
131.0
-
(3.0)
7.7
7.0
11.7
-
9.8
17.6
(135.6)
2.1
(3.0)
7.7
7.0
13.8
4.3
-
17.6
(4.6)
6.9
-
-
-
6.9
4.3
(6.6)
8.2
131.0
2017
Present
value of
obligation
£m
(144.3)
(4.2)
-
4.5
(15.8)
-
(11.3)
-
6.6
(8.9)
(153.2)
Females
24.6
26.1
2017
%
2.60
3.20
3.60
3.15
2.20
25.00
Total
£m
33.6
56.9
13.3
7.0
20.2
131.0
Net total
£m
(21.5)
(0.6)
6.9
4.5
(15.8)
-
(4.4)
4.3
-
(0.7)
(22.2)
The sensitivity of the defined benefit obligation to changes in the principal assumptions is:
Decrease in discount rate
Increase in inflation rate
Increase in life expectancy
Change in assumption
0.25%
0.25%
1 year
Impact on defined
benefit obligation
Increase by £5.9m
Increase by £2.6m
Increase by £4.6m
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice this is unlikely to occur
and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial
assumptions, the same method has been applied as when calculating the pension liability recognised within the Statement of Financial Position. The
methods and types of assumptions used in preparing the sensitivity analysis did not change when compared to the previous year.
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Notes to the financial statements
25 Retirement benefit obligations (continued)
The Group is exposed to a number of risks from the RGPF, the most significant of which are described below:
Asset volatility:
Changes in corporate bond yields:
Inflation risk:
Life expectancy:
The RGPF liabilities are calculated using a discount rate set with reference to corporate bond yields. If the
RGPF assets underperform this yield, the deficit will increase. The RGPF holds a significant proportion of
equities and diversified growth funds, which are expected to outperform corporate bonds in the long-
term while providing volatility and risk in the short-term. The Directors are of the view that due to the
long-term nature of the RGPF liabilities and the strength of the supporting Group, this is an appropriate
strategy to manage the RGPF efficiently.
A decrease in corporate bond yields will increase RGPF liabilities, although this will be partially offset by
an increase in the value of the RGPF's bond holdings. The UK referendum vote to leave the EU in 2016 has
caused volatility in the market which has, and may continue to adversely affect corporate bond yields,
with a corresponding impact on discount rates as described above.
Although there are some caps in place to protect the RGPF against extreme inflation, increases in the level
of inflation will lead to higher liabilities.
The RGPF provides benefits for the life of the members, therefore increases in the life expectancy will
result in an increase in the RGPF's liabilities.
The weighted average duration of the defined benefit obligation is 16.9 years (2017: 18.1).
Expected maturity analysis of undiscounted pension benefits:
Less than a year
Between 1-2 years
Between 2-5 years
Next 5 years
Amounts charged in the income statement in respect of pensions
In respect of defined contribution schemes (Note 7)
In respect of defined benefit schemes (Note 8)
Total
2018
£m
4.1
4.2
13.5
25.5
2018
£m
9.6
0.5
10.1
2017
£m
4.0
4.2
13.4
25.4
2017
£m
9.1
0.6
9.7
150 Ricardo plc Annual Report & Accounts 2018
26 Deferred tax
(a) Deferred tax analysis by category
Non-current deferred tax assets
Non-current deferred tax liabilities
Net deferred tax asset at 30 June
(b) Movements in net deferred tax assets and liabilities
Notes to the financial statements
Group
Company
2018
£m
7.6
(3.9)
3.7
2017
£m
14.3
(5.0)
9.3
2018
£m
1.7
(0.6)
1.1
Other
£m
0.2
(0.1)
0.7
-
0.1
-
0.9
(0.4)
0.5
-
0.1
1.1
2017
£m
4.8
(0.1)
4.7
Total
£m
9.4
(0.1)
(1.2)
0.8
0.1
0.3
9.3
(0.4)
(2.6)
(2.7)
0.1
3.7
Group
At 1 July 2016
Arising on acquisition
Credited/(charged) to the income statement
Credited to statement of comprehensive income
Credited directly to equity
Exchange rate adjustments
At 30 June 2017
Arising on acquisition
Credited/(charged) to the income statement
Charged to statement of comprehensive income
Credited directly to equity
At 30 June 2018
Accelerated
capital
allowances
£m
(4.7)
-
0.2
-
-
(0.1)
(4.6)
-
1.1
-
-
(3.5)
Retirement
benefit
obligations
£m
4.0
-
(0.7)
0.8
-
-
4.1
-
(0.7)
(2.7)
-
0.7
Tax
losses and
credits
£m
10.4
-
(1.5)
-
-
0.4
9.3
-
(3.5)
-
-
5.8
Unrealised
capital
gains
£m
(0.5)
-
0.1
-
-
-
(0.4)
-
-
-
-
(0.4)
At 30 June 2018 and 30 June 2017 there were no temporary differences associated with undistributed earnings of subsidiaries for which deferred tax
liabilities have been recognised. No liability would be recognised in respect of these differences because the Group is in a position to control the timing of
the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.
A net deferred tax asset of £2.2m (€2.5m) which primarily comprised £2.4m (€2.7m) of historical losses incurred in the consolidated tax group controlled by
Ricardo GmbH, partially offset by £0.2m (€0.2m) of deferred tax liabilities, was brought forward from the prior year. As set out in Footnote 3 of Note 4, this
net deferred tax asset was derecognised during the year. A deferred tax asset has not been recognised for tax losses arising in the current year of £2.9m
(€3.3m), which includes £4.0m (€4.5m) of the specific adjusting items described in Footnote 2 of Note 4. The deferred tax asset not recognised in respect of
losses incurred in the consolidated tax group controlled by Ricardo GmbH at 30 June 2018 amounts to £10.7m (€12.2m) (2017: £7.6m (€8.7m)).
A deferred tax asset continues to be recognised within the consolidated tax group controlled by Ricardo, Inc. in respect of historic research and
development claims ('R&D credits') that can be utilised against future taxable profits. These R&D credits carry a 20-year statute of limitation and must be
utilised within that period. The carrying value of the R&D credits recognised at 30 June 2018 is £5.5m ($7.2m) (2017: £5.9m ($7.7m)).
The Directors have performed an assessment and consider that it is probable that future taxable profits will be available within the consolidated tax group
controlled by Ricardo, Inc. against which the carrying value of the recognised deferred tax asset can be utilised in the foreseeable future. This assessment
was based on a review of the projected annual profit before tax of the individual components of the Ricardo, Inc. tax group, based upon the latest Board-
approved budgets and business plans for the next three years, together with long-term growth assumptions based on prevailing inflation and economic
growth rates. Based on the ‘base case’ assumptions, the entire deferred tax asset is forecast to be utilised by 30 June 2022, with each individual R&D credit
being utilised in no less than four years before the expiry of its 20-year statute of limitation period. The assessment was subject to stress testing, the results
of which did not change management’s view of the recoverability of the asset.
Company
At 1 July 2016
Charged to the income statement
Credited to statement of comprehensive income
Credited directly to equity
At 30 June 2017
Charged to the income statement
Charged to statement of comprehensive income
Credited directly to equity
At 30 June 2018
Accelerated
capital
allowances
£m
-
-
-
-
-
(0.1)
-
-
(0.1)
Retirement
benefit
obligations
£m
4.0
(0.7)
0.8
-
4.1
(0.7)
(2.7)
-
0.7
Tax
losses and
credits
£m
0.2
-
-
-
0.2
-
-
-
0.2
Unrealised
capital
gains
£m
(0.5)
-
-
-
(0.5)
-
-
-
(0.5)
Other
£m
1.5
(0.7)
-
0.1
0.9
(0.2)
-
0.1
0.8
Total
£m
5.2
(1.4)
0.8
0.1
4.7
(1.0)
(2.7)
0.1
1.1
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Notes to the financial statements
27 Provisions
Group
At 1 July 2016
Arising on acquisition
Charged to income statement
Utilised in year
Released in year
At 30 June 2017
Arising on acquisition
Charged to income statement
Utilised in year
Released in year
At 30 June 2018
Warranty
£m
1.3
-
1.0
(0.6)
(0.1)
1.6
-
1.5
(0.8)
(0.3)
2.0
Restructuring
costs
£m
0.2
-
-
-
(0.1)
0.1
-
2.4
(0.1)
-
2.4
Employment-
related
benefits
£m
0.6
0.1
0.1
-
(0.3)
0.5
-
0.6
-
(0.1)
1.0
Other
£m
0.7
-
0.2
(0.2)
(0.3)
0.4
0.4
-
(0.4)
(0.1)
0.3
Total
£m
2.8
0.1
1.3
(0.8)
(0.8)
2.6
0.4
4.5
(1.3)
(0.5)
5.7
The warranty provision reflects the Directors' best estimate of the cost needed to fulfil the Group's warranty obligations within a number of contracts.
Subsequent to their initial recognition, warranty provisions unwind over the periods of the warranty obligations, which are expected to be less than
five years.
The provision for restructuring costs includes amounts payable to staff who have been made redundant as part of the reorganisation of our
global Automotive businesses within Technical Consulting, as set out in further detail in Note 4. The provision also includes associated onerous
lease obligations. The element of the provision relating to redundancy costs is expected to be utilised in less than one year and the onerous lease
obligations will unwind over the duration of the lease, which is predominantly expected to be less than five years.
Employment-related benefits are statutory provisions which include long-service awards and termination indemnity schemes. The timing of the cash
outflows is dependent upon the retirement or attrition of staff, but is predominantly expected to be more than five years.
Other provisions comprise expected costs of legal claims, litigation and dilapidation. The associated cash outflows for legal claims and litigation
are predominantly expected to be less than one year. Dilapidation costs reflects the Directors' best estimate of future obligations relating to the
maintenance of leasehold properties arising from past events such as entering into new lease agreements, extensions or terminations. The timing of
the cash outflows is dependent upon the remaining term of the associated lease.
Analysis of total Group provisions
Current
Non-current
At 30 June
28 Share capital
Group and Company
Allotted, called-up and fully paid ordinary shares of 25p each
At 1 July
Allotted under share option schemes
Allotted under the LTIP scheme
Allotted under the DBP scheme
Unallocated shares remaining in EBT
At 30 June
2018
Number
2017
Number
53,163,423
2,827
136,140
69,834
34,026
53,406,250
52,854,823
-
186,779
121,788
33
53,163,423
2018
£m
2.8
2.9
5.7
2018
£m
13.3
-
0.1
-
-
13.4
2017
£m
1.3
1.3
2.6
2017
£m
13.2
-
0.1
-
-
13.3
The consideration received for shares allotted under the share option schemes, Long-Term Incentive Plan ('LTIP') and Deferred Share Bonus Plan ('DBP')
during the year ended 30 June 2018 was £0.1m (2017: £0.1m).
Dividends were paid at the reduced rate of nil pence per share (2017: 0.01p) for interim and final dividends in respect of shares held by an Employee
Benefit Trust ('EBT') in relation to the LTIP. There were 36,839 such shares at 30 June 2018 (2017: 2,813 shares).
29 Share premium
Group and Company
At 1 July 2016, 30 June 2017 and 30 June 2018
152 Ricardo plc Annual Report & Accounts 2018
£m
14.3
Notes to the financial statements
30 Share-based payments
The Group operates the following share-based payment schemes: 2004 Ricardo plc Executive Share Option Plan (the '2004 Plan'); equity-settled and
cash-settled Long-Term Incentive Plan ('LTIP'); Deferred Share Bonus Plan ('DBP') and equity-settled all-employee Share Incentive Plan ('SIP').
The general terms and conditions, including vesting requirements and performance conditions for the 2004 Plan, equity-settled LTIP, DBP and equity-
settled SIP are described in the Directors' Remuneration Report.
The 2004 Plan, LTIP, DBP and SIP require shareholder approval for the issue of shares. There were no awards outstanding in relation to the SIP at the
year-end.
50% of awards granted under the LTIP and DBP Matching Awards are dependent on a Total Shareholder Return (‘TSR’) performance condition. As
relative TSR is defined as a market condition under IFRS 2 'Share-based Payment', this requires that the valuation model used takes into account the
anticipated performance outcome. The TSR element of the charge to the Consolidated Income Statement has been calculated using the Monte Carlo
model and the earnings per share ('EPS') element has been calculated using the Black Scholes model. The following assumptions are used for the plan
cycles commencing in these years:
Weighted average share price at date of award
Expected volatility
Expected life
Risk-free rate
Dividend yield
Possibility of ceasing employment before vesting
Weighted average fair value per LTIP as a percentage of a share at date of award
2018
860p
24.4%
3 yrs
0.5%
2.2%
10%
77.0%
2017
929p
25.4%
3 yrs
0.2%
2.0%
10%
74.8%
Expected volatility was determined by calculating the historical volatility of the Company's share price over the three financial years preceding the date
of award.
The share-based payments charge of £1.0m (2017: £1.6m) disclosed in Note 7 comprised £1.0m (2017: £1.6m) in respect of equity-settled schemes and
£Nil (2017: £Nil) in respect of cash-settled schemes.
Equity-settled Executive Share Option Plan
Outstanding at 1 July
Exercised
Outstanding at 30 June
Exercisable at the end of the year
2018
Weighted
average share
price
305p
305p
-
-
Number
2,827
(2,827)
-
-
2017
Weighted
average share
price
305p
305p
305p
305p
Number
2,827
-
2,827
2,827
The outstanding options had no contractual life remaining (2017: 1.3 years). The are no remaining options (2017: exercisable at 305p).
Equity-settled Long-Term Incentive Plan
The current LTIP is described in the Directors' Remuneration Report. Awards are forfeited if the employee leaves the Group before the awards vest,
unless they are considered 'good leavers'.
Outstanding at 1 July
Awarded
Lapsed
Vested
Outstanding at 30 June
(1) Shares allocated excludes dividend roll-up.
2018
Shares
allocated(1)
595,759
213,230
(104,247)
(136,140)
568,602
2017
Shares
allocated(1)
586,232
226,591
(30,285)
(186,779)
595,759
The outstanding LTIP awards had a weighted average contractual life of 1.4 years (2017: 1.4 years). The weighted average exercise price in both 2018
and 2017 was £Nil.
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Notes to the financial statements
30 Share-based payments (continued)
Cash-settled Long-Term Incentive Plan
The cash-settled LTIP has the same performance conditions as the equity-settled LTIP but the award is settled in cash rather than share issue.
Outstanding at 1 July
Awarded
Outstanding at 30 June
(1) Shares allocated excludes dividend roll-up.
2018
Shares
allocated(1)
10,759
-
10,759
2017
Shares
allocated(1)
4,759
6,000
10,759
The outstanding LTIP awards had a weighted average contractual life of 0.9 years (2017: 1.9 years). The weighted average exercise price in both 2018
and 2017 was £Nil.
Deferred Share Bonus Plan
The Deferred Share Bonus Plan is described in the Directors' Remuneration Report.
Outstanding at 1 July
Awarded
Forfeited
Dividend shares awarded in the year
Vested
Outstanding at 30 June
2018
Number of
deferred
shares
230,471
-
(9,228)
2,841
(69,834)
154,250
2017
Number of
deferred
shares
260,116
90,784
(1,134)
2,493
(121,788)
230,471
The outstanding DBP awards had a weighted average contractual life of 0.8 years (2017: 1.3 years). The weighted average exercise price in both 2018
and 2017 was £Nil.
31 Other reserves
Group
At 1 July 2016
Exchange rate adjustments
At 30 June 2017
Exchange rate adjustments
At 30 June 2018
Merger
reserve
£m
1.0
-
1.0
-
1.0
Translation
reserve
£m
11.6
3.0
14.6
0.1
14.7
Total
£m
12.6
3.0
15.6
0.1
15.7
The merger reserve represents the amount by which the fair value of the shares issued as consideration for acquisitions exceeded their nominal value,
offset by the goodwill on these acquisitions.
The translation reserve comprises cumulative foreign currency differences arising from the translation of financial statements of foreign operations.
154 Ricardo plc Annual Report & Accounts 2018
32 Retained earnings
At 1 July 2016
Profit for the year
Remeasurements of the defined benefit pension scheme
Tax on remeasurements of the defined benefit pension scheme
Dividends paid
Equity-settled transactions
Tax credit relating to share option schemes
Reclassification of non-controlling interests
At 30 June 2017
Profit for the year
Remeasurements of the defined benefit pension scheme
Tax on remeasurements of the defined benefit pension scheme
Dividends paid
Equity-settled transactions
Tax credit relating to share option schemes
At 30 June 2018
Notes to the financial statements
Group
£m
99.4
24.8
(4.4)
0.8
(9.8)
1.6
0.1
(0.3)
112.2
18.8
13.8
(2.7)
(10.5)
1.0
0.1
132.7
Company
£m
89.4
1.9
(4.4)
0.8
(9.8)
1.6
0.1
-
79.6
0.2
13.8
(2.7)
(10.5)
1.0
0.1
81.5
33 Cash generated from/(used in) operations
Group
Company
Profit before taxation
Adjustments for:
Share-based payments
Cash flow hedges
Profit on disposal of property, plant and equipment
Net finance costs
Depreciation and amortisation
Operating cash flows before movements in working capital
Decrease/(increase) in inventories
Decrease/(increase) in trade and other receivables
Decrease in intercompany balances
Decrease in trade and other payables
Increase/(decrease) in provisions
Defined benefit payments
Cash generated from/(used in) operations
2018
£m
28.5
1.0
1.1
(1.6)
2.2
15.9
47.1
0.6
2.9
-
(5.1)
3.1
(4.4)
44.2
2017
£m
32.2
1.6
(3.2)
(0.7)
2.5
16.3
48.7
(2.9)
(15.5)
-
(1.1)
(0.5)
(4.4)
24.3
2018
£m
0.7
1.0
1.1
-
0.5
1.4
4.7
-
(0.7)
22.5
(2.5)
-
(4.4)
19.6
2017
£m
2.7
1.6
(3.2)
(0.7)
-
1.8
2.2
-
0.6
3.1
(3.2)
-
(4.4)
(1.7)
Delivering Excellence Through Innovation & Technology 155
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies Notes to the financial statements
34 Net debt
Net debt is defined by the Group as net cash and cash equivalents less borrowings.
Analysis of net debt
Cash and cash equivalents (current assets)
Bank overdrafts (current liabilities – borrowings)(1)
Net cash and cash equivalents
Loans maturing maturing within one year (current liabilities – borrowings)(1)
Loans maturing after one year (non-current liabilities – borrowings)
At 30 June
Group
Company
2018
£m
33.1
(9.3)
23.8
(0.1)
(49.8)
(26.1)
2017
£m
27.9
(5.9)
22.0
(0.1)
(59.8)
(37.9)
2018
£m
0.3
(8.5)
(8.2)
(0.1)
(6.8)
(15.1)
(1) Bank overdrafts and loans maturing within one year are combined within the Statement of Financial Position and classified as borrowings within current liabilities.
Movement in net debt
Net debt at start of year
Net increase/(decrease) in cash and cash equivalents
Proceeds from borrowings
Repayments of borrowings
At 30 June
Group
Company
2018
£m
(37.9)
1.8
(15.0)
25.0
(26.1)
2017
£m
(34.4)
1.6
(31.5)
26.4
(37.9)
2018
£m
(24.9)
(3.2)
(10.0)
23.0
(15.1)
35 Operating lease commitments
Future aggregate minimum lease payments under non-cancellable operating leases are as follows:
By due date of commitments
Within one year
Between one and five years
After five years
At 30 June
By nature of commitments
Land and buildings
Other
At 30 June
36
Contingent liabilities
Group
Company
2018
£m
8.7
24.8
30.8
64.3
2018
£m
63.3
1.0
64.3
2017
£m
7.1
21.7
27.1
55.9
2017
£m
54.7
1.2
55.9
2018
£m
0.8
3.2
7.4
11.4
2018
£m
11.4
-
11.4
2017
£m
0.9
(5.9)
(5.0)
(0.1)
(19.8)
(24.9)
2017
£m
(18.0)
(1.8)
(26.5)
21.4
(24.9)
2017
£m
0.5
2.0
5.1
7.6
2017
£m
7.6
-
7.6
In the ordinary course of business, the Group has £8.2m (2017: £7.8m) of guarantees and counter-indemnities in respect of bonds relating to
performance under contracts. The Group is also involved in commercial disputes and litigation with some customers, which is also in the normal course
of business. Whilst the result of such disputes cannot be predicted with certainty, the Directors of the Company believe that the ultimate resolution of
these disputes will not have a material effect on the Group's financial position or results.
In July 2013, a guarantee was provided to the Ricardo Group Pension Fund of £2.8m in respect of certain contingent liabilities that may arise, which
have been secured on specific land and buildings (see Note 15). In the Directors' opinion, after taking appropriate legal advice, the outcome of this
matter is not expected to give rise to any material cost to the Group.
156 Ricardo plc Annual Report & Accounts 2018
37 Related party transactions
Transactions between the Company and Group undertakings
Sale of services
Finance income
Finance costs
Year-end balances between the Company and Group undertakings
Amounts owed by Group undertakings
Amounts owed to Group undertakings
Notes to the financial statements
2018
£m
16.7
2.4
(1.5)
2018
£m
88.5
(64.4)
2017
£m
15.7
2.3
(0.8)
2017
£m
104.1
(60.8)
All of these transactions with Group undertakings, which are disclosed in Note 38, and with other related parties as disclosed below, occurred on an
arm's length basis.
The Chairman of Ricardo plc, Sir Terry Morgan, is also a statutory director of Crossrail Limited, which is deemed to be a related party that is external to
the Ricardo Group.
Transactions between the Group and Crossrail Limited
Sale of services
Year-end balances between the Group and Crossrail Limited
Trade receivables
The Group and Company transactions with the Ricardo Group Pension Fund are disclosed in Note 25.
2018
£m
2.3
2018
£m
0.2
2017
£m
1.6
2017
£m
0.1
Delivering Excellence Through Innovation & Technology 157
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Notes to the financial statements
38 Subsidiaries and related undertakings
The Company owns, directly(*) or indirectly, 100% of the issued share capital, unless otherwise noted, of the following subsidiaries and related
undertakings at 30 June 2018. All subsidiaries and related undertakings are deemed to be controlled by the Group and are therefore consolidated
within these financial statements:
Subsidiary or related undertaking
Ricardo Investments Limited*
Registered office
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Ricardo UK Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Principal activities
Holding Company and
Management Services
Automotive Consulting,
Strategic Consulting and
Performance Products
Ricardo Asia Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Automotive Consulting, Rail Consulting
West Sussex, BN43 5FG, United Kingdom†
and Business Development
Ricardo Japan K.K.
18th Floor, Shin Yokohama Square Building, 2-3-12 Shin Yokohama,
Automotive Consulting, Rail Consulting
Kohoku-ku, Yokohama-shi, Kanagawa, 222-0033, Japan
and Business Development
Ricardo Shanghai Company Limited*
Floor 17, Phoenix Building, No. 1515 Gumei Road, Xuhui District,
Automotive Consulting, Rail Consulting
Ricardo Prague s.r.o.
Ricardo GmbH
Palác Karlín, Thámova 11-13, 186 00 Praha 8, Czech Republic
Güglingstraße 66-70, 73529, Schwäbisch Gmünd, Germany
Shanghai, 200233, PR China
Ricardo Italia s.r.l.
Piazza Solferino 20, 10121, Torino, Italy
and Business Development
Automotive Consulting and Software
Automotive Consulting and
Business Development
Automotive Consulting and
Business Development
Ricardo Motorcycle Italia s.r.l.
Ricardo, Inc.
Via Giovanni Pascoli 47, 47853, Cerasolo, Coriano, Rimini, Italy
Detroit Technical Center, 40000 Ricardo Drive, Van Buren Township,
Automotive Consulting
Automotive Consulting, Strategic
Detroit, Michigan, 48111-1641, United States
Consulting and Software
Ricardo India Private Limited*(1)
Ricardo Strategic Consulting GmbH
Ricardo Defense Systems LLC
6th Floor, M6 Plaza, Jasola District Centre, New Delhi 110076, India
Lenbach Garten, Luisenstraße 14, 80333, München, Germany
Suite 200, Detroit Technical Center, 40000 Ricardo Drive, Van Buren
Township, Detroit, Michigan, 48111-1641, United States
Business Development
Strategic Consulting
Defence Consulting and
Performance Products
Ricardo Defense, Inc. (formerly
Control Point Corporation)
C2D Joint Venture (33%)(2)
Ricardo-AEA Limited
110 Castilian Drive, Suite 200, Goleta, California 93117
Defence Consulting
110 Castilian Drive, Suite 200, Goleta, California 93117
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Defence Consulting
Environmental Consulting
West Sussex, BN43 5FG, United Kingdom†
Cascade Consulting
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Environmental Consulting
(Environment & Planning) Limited
West Sussex, BN43 5FG, United Kingdom†
Power Planning Associates Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Environmental Consulting
West Sussex, BN43 5FG, United Kingdom†
PPA Energy (Pty) Limited
No 1 Eastgate Lane, Bedfordview, Johannesburg, Gauteng, 2007,
Environmental Consulting
South Africa
Ricardo Rail Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Rail Consulting
West Sussex, BN43 5FG, United Kingdom†
Ricardo Nederland B.V.
Ricardo Singapore Pte Limited
Ricardo Australia Pty Ltd
Ricardo (Thailand) Ltd(3)
Ricardo Hong Kong Limited
Utrecht Technical Centre, Radboudtoren (5th and 6th floor),
Catharijnesingel 33, 3511 GC, Utrecht, The Netherlands
141 Middle Road, 5 - 6 GSM Building, 188976, Singapore
Level 17, 383 Kent Street, Sydney, NSW, 2000, Australia
140/36 ITF Tower, 17th Floor, Silom Road, Bangkra, Bangkok
Units 3211-18, 32/F Shui On Centre, 6-8 Harbour Road, Wanchai,
Rail Consulting
Rail Consulting
Rail Consulting
Rail Consulting
Rail Consulting
Hong Kong
Ricardo Beijing Company Limited
Suite 709-710, CCS Mansion, 9 Dongzhimen Nan Street, Beijing,
Rail Consulting
100007, PR China
Ricardo Technical Consultancy LLC
Palm Tower, Block B, 15th Floor, P.O. Box 26600, West Bay,
Rail Consulting
(49%)(4)
Doha, Qatar
Ricardo Gulf Technical Consultancy LLC
11th Floor, Office 8, MSMAK Building, Corniche Street, Abu Dhabi,
Rail Consulting
(49%)(5)
United Arab Emirates
Chongqing Transportation Railway
No. 2 Yangliu Road, Huangshan Avenue, New North District,
Rail Consulting
Safety Assessment Center Limited
(60%)(6)
Chongqing, 401123, PR China
Ricardo Certification Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Independent Assurance
West Sussex, BN43 5FG, United Kingdom†
Ricardo Certification B.V.
Ricardo Certification Denmark ApS
Radboudkwartier 227, 3511 GJ, Utrecht, The Netherlands
Nørre Farimagsgade 11, 2th, 1364 Kobenhavn K, Copenhagen,
Independent Assurance
Independent Assurance
Denmark
Ricardo Certification Iberia SL
Calle de Agustín de Foxá 29, 9ºB, 28036, Madrid, Spain
Independent Assurance
158 Ricardo plc Annual Report & Accounts 2018
Notes to the financial statements
38 Subsidiaries and related undertakings (continued)
Subsidiary or related undertaking
Cascade Consulting Holdings Limited Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Registered office
Principal activities
Dormant
CDQ Joint Venture (50%)(7)
Ricardo Software Limited
(formerly Ricardo Russia Limited)
Ricardo Certificacion SL
Ricardo Environment Arabia LLC(8)
West Sussex, BN43 5FG, United Kingdom†
110 Castilian Drive, Suite 200, Goleta, California 93117
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Calle de Agustín de Foxá 29, 9ºB, 28036, Madrid, Spain
C/O Clyde and Co, The Business Gate, Building 14, Office Level 1,
Qurtubah District, Airport Road, PO Box 16743, Riyadh 11474,
Kingdom of Saudi Arabia
Dormant
Dormant
Dormant
Dormant
Ricardo EMEA Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Vepro Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Consulting Engineers Limited Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Technology Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Transmissions Limited
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
West Sussex, BN43 5FG, United Kingdom†
Ricardo Pension Scheme (Trustees)
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
Limited
West Sussex, BN43 5FG, United Kingdom†
Ricardo Mayfly Limited
Ricardo Deutschland GmbH
Nanjing Delta Win Transportation
Intertrust, 44 Esplanade, St Helier, JE4 9WG, Bailiwick of Jersey
Güglingstraße 66-70, 73529, Schwäbisch Gmünd, Germany
Room 1101, No. 301, Zhongmen Street, Gulou District, Nanjing,
Dormant
Liquidation
Liquidation
Technical Services Limited (65%)(9)
Jiangsu Province, PR China
† Registered in England and Wales.
(1) 99% owned by Ricardo plc and 1% owned by Ricardo UK Limited.
(2) 33% of share capital and 98% of retained earnings owned by Ricardo Defense, Inc., 33% of share capital and 1% of retained earnings owned by DG Technologies, and 3% of
share capital and 1% of retained earnings owned by Claxton Logistics Services, LLC.
(3) 49% of share capital and 100% of retained earnings is owned by Ricardo Hong Kong Limited, with 51% of the share capital and 0% of retained earning owned by First Asia
Industries Limited.
(4) 49% of share capital and 97% of retained earnings owned by Ricardo Rail Limited and 51% of share capital and 3% of retained earnings owned by Pro-Partnership LLC.
(5) 49% of share capital and 80% of retained earnings owned by Ricardo Rail Limited and 51% of share capital and 20% of retained earnings owned by SSD Commercial Investment
(6) 60% owned by Ricardo Beijing Company Limited and 40% owned by Chongqing Science & Technology Testing Center Limited.
(7) 50% of share capital and 50% of retained earnings owned by Ricardo Defense, Inc. and 50% of share capital and 50% of retained earnings owned by DG Technologies.
(8) 15% owned by Ricardo plc and 85% owned by Ricardo-AEA Limited.
(9) 40% owned by Ricardo Beijing Company Limited, 25% owned by Ricardo Hong Kong Limited and 35% owned by Jiangsu Urban Mass Transit Research & Design Institute
Company Limited.
In the opinion of the Directors, the comprehensive income for the year and equity at the reporting date which is attributable to non-controlling
interests is not considered to be material. Non-controlling interests are set out above in footnotes (2) to (7), and (9).
39 Events after the reporting date
On 20 July 2018, the Group completed a refinance of its banking facilities, entering into a new £150.0m committed multi-currency Revolving Credit
Facility ('RCF'). The banking facilities were used to repay and cancel the previous bi-lateral committed RCFs provided by HSBC (£35.0m) and Lloyds
(£40.0m). The refinanced banking facilities will provide the Group with sufficient funding for the next five years through to July 2023 to support future
acquisitions, strategic investments and new projects, and will also be used for general corporate purposes. The interest rate of the facility ranges from
1.4% to 2.2% above LIBOR and is dependent upon the Group’s adjusted leverage.
Delivering Excellence Through Innovation & Technology 159
Corporate governanceFinancial statementsAdditional informationStrategic reportGroup overviewCase studies
Additional
information
162 Corporate information
163 Global emissions legislation
Delivering Excellence Through Innovation & Technology 161
Corporate information
Group General Counsel and Company Secretary
Patricia Ryan
Website: www.ricardo.com
A PDF version of this Annual Report & Accounts can be
downloaded from the Investors page of our website.
Key dates
Final dividend record date
Annual General Meeting
9 November 2018
15 November 2018
Final dividend payment date
23 November 2018
Shareholder services
Link Asset Services provide a share portal service, which allows
shareholders to access a variety of services online, including
viewing shareholdings, buying and selling shares online,
registering change of address details and bank mandates
to have dividends paid directly into your bank account. Any
shareholder who wishes to register with Link Asset Services to
take advantage of this service should visit www.linkassetservices.
com/shareholders.
Shareholder enquiries
Tel: 0870 162 3131 (from the UK)
Tel: +44 20 8639 3131 (for non-UK callers)
Principal bankers
Lloyds Bank plc
55 Corn Street
Bristol
BS99 7LE
HSBC Bank plc
Global House
High Street
Crawley
West Sussex
RH10 1DL
Financial advisors
NM Rothschild & Sons
New Court
St Swithin’s Lane
London
EC4P 4DU
Registered office
Ricardo plc
Shoreham Technical Centre
Shoreham-by-Sea
West Sussex
BN43 5FG
Ricardo plc registered company number
222915
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Independent auditors
PricewaterhouseCoopers LLP
The Portland Building
25 High Street
Crawley
West Sussex
RH10 1BG
Stockbrokers
Investec Investment Banking
2 Gresham Street
London
EC2V 7QP
Tel: 020 7597 5000
Liberum Capital Limited
Ropemaker Place
25 Ropemaker Street
London
EC2Y 9LY
Tel: 020 3100 2000
162 Ricardo plc Annual Report & Accounts 2018
Group overview
Strategic report
Case studies
Corporate governance
Financial statements
Additional information
Global emissions legislation
Global tailpipe and CO2 emissions legislation adherence are 'must haves' in the development budget of many of our clients
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Pollutant Emissions Legislation
Fuel Economy or CO2 Emissions Legislation
Glossary
CEV
CO2
EPA
Construction Equipment Vehicles
Carbon dioxide
Environmental Protection Agency (United States)
Light Commercial Vehicle
Real Driving Emissions
LCV
RDE
WLTP Worldwide harmonized Light vehicles Test Procedure
WMTC Worldwide Motorcycle Test Cycle
Vehicle Region201020122013201420152016201720182019202020212022202320242025Euro 5Euro 6a Euro 6bEuro 6d-TEMP - WLTP & RDEEuro 6d - WLTP & RDEPassenger cars: 130 gCO2/kmPassenger cars: 95 gCO2/km15% reduction 2021 target (proposed)Tier 2Tier 32012-2016 standards2017-2025 standards - proposed amended standards for 2021-2026LEV IILEV III LEV II standards (2009-2016)LEV III (2017-2025, consistent with EPA standards)China IV (Euro 4)China 5 (Euro 5)China 6a - WLTP & RDEChina 6b - WLTP & RDEPhase 2Phase 3 Phase 4 (Passenger Cars; new standards for LCVs from 2018)Bharat Stage IV (Euro 4 equivalent)Bharat Stage VI (Euro 6 equivalent) 2017 standards2022 standardsPost New Long TermWLTP based standards 2010 standards2015 standards2020 standardsEUEuro 3Euro 4Euro 5US (49 States)Tier 2 for Class III; Tier 1 for classes I and II (harmonised with California)CaliforniaCalifornia Motorcycle limits: Tier 2 for Class III; Tier 1 for classes I and II ChinaChina IIIChina IV - WMTCIndiaBharat Stage IIIBharat Stage IVBharat Stage VI Japan2010 standardsEuro 4 based standardsEuro VEuro VIMonitoring and reporting CO2 emissions15% reduction 2019 value (proposed)EPA 10Phase 1 federal standardsPhase 2 (2018-2027) federal standardsEPA 10Compliance of older vehicles to EPA 10 - Optional low NOx limitsPhase 1 federal standardsPhase 2 (2018-2027) federal standardsChina IVChina V China VI Phase 1 standardsPhase 2 standardsPhase 3 standardsBharat Stage IVBharat Stage VIPhase 1 standardsPhase 2 standardsPost New Long Term2016 standards2015 standards2025 standards (proposed) EUStage IIIBStage IVStage VUSTier 4 InterimTier 4 FinalChinaStage IIStage III (Nationwide) Stage IV (Beijing)Stage IV Nationwide (proposed)IndiaBharat Stage III - Tractors and CEVBharat Stage IV - Tractors and CEVBharat Stage V - Tractors and CEVJapan2006 Non-road standards2011 Non-road standards2014 Non-road standardsEUStage IIIAStage IIIBStage V (Locomotives and railcars)USTier 2Tier 3Tier 4 Switch & line locomotivesIndiaNot yet regulatedProposed standards under considerationAustraliaNot yet regulatedStudies ongoing to adopt US legislation201120122013201420162017201820192021202220232024Off-HighwayRailCommercial Vehicles (Medium- & Heavy-Duty Trucks)US (49 States)ChinaJapanIndiaCaliforniaEUMotorcycle & Personal TransportationAutomotive & LCVEUUS (49 States)CaliforniaChinaJapanIndia
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