Creating a
world fit for
the future
Ricardo plc
Annual Report & Accounts 2019/20
Contents
Strategic report
1 Our mission and vision
2 Where we are
3 Our markets
4 Ricardo’s business model
5 Our strategic objectives
6 Financial highlights
7 Operational highlights
8 Chair’s statement
10 Chief Executive’s statement
14 Strategic performance
16 Engaging with stakeholders
18 Innovation
21 Selected global and regional regulations
22 Our people
26 Environmental, Social and Governance (‘ESG’)
34 COVID-19
36 Risk management and internal control
37 Principal risks and uncertainties
40 Viability statement
42 Financial review
47 Segments review
Case studies
62 Improving sustainability in the farmed and wild landscape
66 Helping UK water towards zero carbon
70 Supporting Europe’s largest ever rail re-signalling project
74 Enabling high-capacity electric vehicle charging
78 Ending range anxiety for electric-vehicle drivers
82 New model army
Corporate governance
88 Board of Directors
90 Corporate governance statement
96 Nomination Committee report
98 Audit Committee report
102 Directors’ remuneration report
128 Directors’ report
131 Statement of Directors’ responsibilities
Financial statements
134 Independent auditor’s report
142 Group financial statements
192 Company financial statements
Additional information
200 Corporate information
201 Glossary
Our core activities:
Supported by Group-wide strategic enablers:
Access to clean air and water
...is critical to address the global challenges of population growth, mass
urbanisation and rural development. We provide policy and strategic
advice, tools and solutions that are underpinned by multi-sector
knowledge – solutions that enable access to clean air and water, and
that maximise health and equity outcomes. By drawing on our world-
class technical expertise in air quality modelling we are able to provide
governments, local authorities and multinational organisations with the
air quality decision-support tools to understand impacts and develop
improvement plans.
Digitalised products and services
...are being developed around the three pillars of customer experience,
operational excellence and new digital offerings. With the accelerated journey
into a “digital-first” world, the ability to provide seamless engagement
through integrated systems enables clients to access Ricardo’s services
and solutions through digital channels. Similarly, the digital tools already
developed for the product creation process are being supplemented by
greater intelligence and data analytics to bring faster, more cost-effective and
higher quality solutions to our clients.
Strategic report
Our mission and vision
Decarbonised and clean
transport solutions
...address applications across multiple mobility sectors. We provide class-
leading decarbonised and clean transport solutions that are supported
by innovative technology. Thanks to our deep understanding of the
transportation sector’s demands and our expertise in policy development
at both governmental and regional levels, we can deliver end-to-end
engineered solutions tailor-made to meet our clients’ objectives.
Our skilled, diverse and agile workforce
...is the catalyst to deliver our mission and to achieve customer excellence and
revenue growth. We aim to develop a highly motivated workforce where staff
play to their strengths and are actively engaged. Our working practices are
constantly evolving to meet changing employee expectations and ensure
we deliver maximum business performance. We recognise the strengths
that cultural diversity brings in terms of creativity, skills and insights. Regular
interactions with our leaders give our teams the opportunity to maximise their
engagement and performance. Our people are empowered to work on what
they do best, and through regular feedback mechanisms we give staff a voice
in the activities of the business.
Net Zero and carbon neutral solutions
...for energy and industry help combat climate change, reduce waste
and support sustainable business operations. We create end-to-end
value-chain solutions by combining long-range forecasting capability,
life cycle analysis, system modelling, asset optimisation, supply-chain
management and product innovation. Through the use of our life
cycle assessment capabilities we can support governments in policy
development and assist industries in the implementation of these policies
at the levels of both infrastructure and product.
Our customer-centric organisation
...allows us to attract top-tier clients and to adapt our strategies to match their
needs. Client retention leads to growth of new business and also helps reduce
the cost of sales. Robust long-term business performance is underpinned
through enduring strategic client relationships supported by focused and
responsive organisational changes to meet changing client requirements.
Because our clients face significant disruption of their markets and
environments, Ricardo will always ensure that it is in a position to understand
their needs and has the agility to offer solutions across a range of rapidly
changing requirements.
Secure, connected mobility solutions
...provide communities and businesses with the ability to remain mobile
and productive in every environment. Across a range of transport modes
we provide strategic advice, tools and solutions that enable clients to
develop, integrate and optimise their mobility businesses. These are
supported with digital resilience system solutions, signalling system
capabilities and full certification services.
Systems engineering and optimisation
...mobilises an understanding of complex integration tasks for optimal performance.
Through the use of virtual modelling of complex systems, Ricardo offers solutions
that improve system performance, lower costs and deliver incremental end-user
experiences. Our world is evolving into more and more complex systems as more
aspects of our surroundings become connected, and such connectivity provides
data that can be harnessed for the benefit of users. Feature-driven virtual product
development toolchains will eventually be supported by a full digital data backbone;
the application of this digital-twin technology will form the platform from which
engineering solutions will be delivered. In the meantime, components of the data
backbone have already been implemented in several of the markets that we serve.
Protected, secure defence solutions
...are designed to protect those who protect us and ensure security
and stability in unpredictable times. We offer software, services and
products that promote safe and secure defence mobility and operational
performance. We deliver full systems integration and tailored in-service
support programmes. These skills are complemented by operational
decision-support tools and asset-optimisation software to allow complex
real-world scenarios to be robustly managed.
Partnership & collaboration
...along with mergers and acquisitions, will deliver profitable growth through
geographic, sector and capability expansion. Our strategy aims to develop
partnerships, acquisitions and disposals that accelerate the growth of the
organisation and to support the delivery of the mission by taking a holistic
corporate perspective that maximises the returns from capital deployed. With
the requirement to remain agile and to access critical skills and technology in
adjacent market sectors, we are already actively engaged with several partners
to offer end-to-end solutions. Ricardo also remains focused on using mergers
and acquisitions as one of several tools to drive growth, sector diversification
and stakeholder value.
This has been a year of unprecedented change across the globe, and we have seen everything
from protests demanding action on climate change, to the damaging effects on life and
livelihood presented by the COVID-19 pandemic. As the world grapples with the economic,
psychological and social impact of the coronavirus, it is encouraging to see many governments
launching “green recovery” plans which promise a positive impact on climate change and that
can also be seen as economically beneficial - especially when it comes to creating jobs.
In delivering our mission, which we believe will help realise our vision to
Create a world fit for the future, we are focusing on five core activities which align
with a number of the UN Sustainable Development Goals.
More detail on Sustainable
Development Goals is
presented on page 27.
Creating a world fit for the future 1
PassionIntegrityRespectCreativityCustomer-CentricityPartnership and CollaborationSystems EngineeringDefence SolutionsSecure MobilityAccess to Clean Air and WaterNet Zero Energy and IndustryDecarbonised TransportDigitalised SolutionsAgile WorkforceTo create a world fit for the futureWe create and deliver innovative cross-sector sustainable, efficient and secure energy, environmental and mobility solutionsVisionMissionRapid UrbanisationConnectivity and Intelligent DevicesNatural Resource ScarcityEnergy Security and SustainabilityGlobal StabilityAir Quality and Climate ChangeCore ActivitiesStrategic EnablersMarket SectorsIndustryGeographiesGovernments Strategic report
Where we are
Three thousand dedicated and talented people in our global team of experts situated
in key locations around the world.
3,003
employees
21
countries
55
sites
More detail on Our People is presented on pages 22 to 25.
Revenue by geography
Our operations in selected market sectors span many
different regions of the world:
FY 2019/20 (%)
3
FY 2018/19 (%)
3
8
6
6
9
8
16
17
25
23
36
40
UK
Mainland Europe
North America
China
Austrailia
Rest of Asia
Rest of the World
2 Ricardo plc Annual Report & Accounts 2019/20
Order intake by customer
Our order intake arises from a global customer list that
includes the world’s major transportation original equipment
manufacturers and operators; tier 1 suppliers; energy companies;
and government agencies:
FY 2019/20 (%)
15 16
2
3
1
13
14
8
13
12
15
12
3
4
5
6
5
2
4
4
3
3
7
2
8
1
1
2
9
10
1-10. Top 10
11. UK
12. Mainland Europe
13. North America
14. Asia
15. Rest of the World
16. Austrailia
22
11
Order intake by segment is
presented in the segments
review on pages 47 to 59.
Ricardo plc External Order Intake by Market SectorRicardo plc External Order IntakeSegmentsEEAIRailDefenceRSC=SWPPRicardo plc External Order Intake by GeographyRicardo plc External Order Intake by Customer05101520253035Ricardo plc External Order Intake by Market SectorRicardo plc External Order IntakeSegmentsEEAIRailDefenceRSC=SWPPRicardo plc External Order Intake by GeographyRicardo plc External Order Intake by Customer05101520253035ChinaRest of AsiaRest of the WorldAustrailiaNorth AmericaMainland EuropeUnited KingdomTechnical CentresOffices Strategic report
Our markets
We bring the best of our diverse expertise to
create novel and differentiated solutions for a
number of market sectors.
Off-highway
vehicles
Passenger
vehicles
Commercial
vehicles
Automotive
Motorsport
Motorcycle
Rail
Energy
Environmental
and planning
Resource
management
Water
Waste
Defence
Creating a world fit for the future 3
Strategic report
Ricardo’s business model
Ricardo creates value for our stakeholders by developing and delivering innovative cross-
sector sustainable, efficient and secure energy, environmental and mobility solutions and
products.
Ricardo expert
staff – engineers,
economists, scientists,
technical experts,
and management
consultants – bring
the best of their
diverse expertise to
create innovative
and differentiating
solutions to our clients’
challenges.
We invest in physical
and digital assets that
support toolchain
validation, final product
certification and real-
world data capture.
We are committed to
invest in R&D to address
the environmental,
mobility and
sustainability challenges
of the future.
Through our advanced capabilities we
support clients at each stage of the life cycle
Our activities are underpinned by
Values
Passion, Integrity, Respect and Creativity drive us forward as
an organisation and bind us together as a community.
Efficient and sustainable operations
We take a proactive and engaged approach to maintain safe,
efficient and sustainable operations.
Governance
We recognise the importance of the Company’s responsibilities and
duties to both its shareholders and broader stakeholder group. This
has been at the heart of our culture and decision-making process
for many years. Our commitment is underpinned by Ricardo’s
Governance framework and Code of Conduct.
4 Ricardo plc Annual Report & Accounts 2019/20
Environmental services, climate risk & resource management Engineering & designSupply chain, assembly & manufacturingDecision support & deployment automationTesting, assurance & certificationSustainability, transport and energy policy & strategy developmentStrategic ConsultingTechnical advice, asset optimisation & benchmarkting CustomerDigital developmentData exploitationVirtual product developmentComplex system integration Strategic report
Our strategic
objectives
1
2
3
4
5
Sustainable business
growth
We deliver profitable and sustainable growth
with a clear focus on future trends and
market demands, driven by client needs,
technology change and the outlook for
future policies and regulations, which helps
to create a cleaner, healthier and safer world.
Risk mitigation
We mitigate business cyclicality and aim
to avoid external dependency, whether
this is related to any particular geography,
technology, industry, sector or client.
Added value for clients
We deploy our know-how, experience and
application expertise within a given sector
and draw on our cross-sector capabilities to
provide greater insights and synergies. We
employ research and development to provide
class-leading technology to our clients.
World-class talent
We promote and sustain a high-performance
culture that attracts, develops and motivates
a highly skilled, diverse, agile and motivated
workforce to deliver on our mission.
Operational excellence
We maintain efficient and sustainable global
operations that are digitally enabled to
allow us to leverage data and bring existing
processes and practices into a virtual
environment. This improves productivity
and reduces the environmental impact of
the business.
Creating a world fit for the future 5
We create value for our clients,
staff and shareholders, the
communities in which we
operate, and our suppliers
Clients
Our clients include privately and publicly
owned businesses of different sizes;
major transportation original equipment
manufacturers (‘OEMs’) and operators;
governments; public authorities; and
intergovernmental and international
agencies. We help them address key
challenges, supporting their business
growth and increasing the efficiency of
their operations.
Staff
Ricardo is a diverse, close-knit
community of differing backgrounds,
practices and thinking. We promote
diversity and inclusion and offer flexible
working practices.
Shareholders
With its strong capabilities, our
diversified business is well positioned to
continue to deliver sustainable growth
and value for our shareholders.
Community/Social value
We contribute to the communities in
which our business operates and our
staff live, and we support initiatives that
are aligned to our values and expertise.
We aim to create commercial success
while recognising and mitigating
our impact on communities and the
environment.
Suppliers
We work in close partnership with our
suppliers to ensure that our supply chain
is effective, efficient, ethically transparent
and sustainable.
Strategic report
Financial highlights
Order book
0%
FY
2019/20
2018/19
2017/18
2016/17
2015/16
Order intake
-4%
Revenue
-8%
£m
FY
£m
FY
£m
314.0
314.0
294.6
248.5
230.9
2019/20
2018/19
2017/18
2016/17
2015/16
368.7
386.0
413.4
365.8
360.6
2019/20
2018/19
2017/18
2016/17
2015/16
352.0
384.4
378.5
352.1
332.4
Underlying(1) profit
before tax
-58%
Underlying(1) basic
earnings per share
-60%
Dividend per share
(paid and proposed)
-71%
£m
FY
pence
FY
15.6
FY
2019/20
2018/19
2017/18
2016/17
2015/16
21.3
2019/20
2018/19
2017/18
2016/17
2015/16
37.0
37.5
38.3
37.7
53.7
55.1
55.7
55.2
pence
21.28
20.46
19.30
18.10
Statutory (loss)/profit
before tax
-120%
Statutory basic (loss)/
earnings per share
-133%
(5.3)
FY
2019/20
2018/19
2017/18
2016/17
2015/16
pence
FY
pence
FY
£m
26.5
27.0
32.2
33.0
2019/20
2018/19
2017/18
2016/17
2015/16
(12.2)
37.1
33.0
46.8
48.6
(73.4)
(47.4)
2019/20
2018/19
2017/18
2016/17
2015/16
(26.1)
(37.9)
(34.4)
Underlying(1) cash
conversion(1)
+27pp
Cash conversion(1)
+39pp
Headcount(1)
+1%
FY
2019/20
2018/19
2017/18
2016/17
2015/16
%
FY
£m
FY
102.1
75.3
95.3
50.5
72.5
2019/20
2018/19
2017/18
2016/17
2015/16
112.9
74.4
95.1
47.6
59.4
2019/20
2018/19
2017/18
2016/17
2015/16
Number
3,003
2,981
3,061
2,927
2,905
(1) Please see the glossary on page 201 for a definition of the above terms.
Comparative Alternative Performance Measures (‘APM’) have not been updated to reflect the adoption of IFRS 16. In the year ended 30 June 2019, an IAS 17 charge of £8.5m was incurred.
6 Ricardo plc Annual Report & Accounts 2019/20
6.24
2019/20
2018/19
2017/18
2016/17
2015/16
Net debt(1)
-55%
Strategic report
Operational highlights
Coronavirus (‘COVID-19’)
From the beginning of the COVID-19 crisis, Ricardo focused on supporting its employees, clients and
suppliers. Ricardo took swift action to ensure that staff could work from home with the minimum of
disruption to the business, and acted to increase liquidity and headroom on its banking facilities. Ricardo
donated and distributed approximately 15,000 face shields to communities around its UK and US locations.
‘Digital-first’ is still the core strategy for client and supplier communication. By the end of the year, all
Ricardo’s manufacturing and testing facilities were fully staffed and delivering client requirements with
appropriate safety measures in place, and Ricardo’s offices are open for employees who wish to return to
work there.
Virtual vehicle certification
Ricardo’s ‘digital-first’ strategy enabled the Group’s advanced emissions test
and certification facilities to offer a continued service to clients during the
COVID-19 lockdown period. It did so by enabling the witnessing body and
client representatives to participate fully in the test and certification via a
secure connection, thus removing the need to travel. The client arranges
shipping of the vehicle to the Ricardo test facility and all other interactions
throughout the test and certification process are conducted remotely.
South Korea Great Train eXpress project
Ricardo has been appointed by SG Rail Ltd – the special purpose company that
will finance, design and build the GTX-A railway – to provide multidisciplinary
engineering and assessment services during the development of Line A of the
Great Train eXpress (GTX), the new higher-speed commuter network for Seoul
and its surrounding commuter region.
Acquisition of PLC Consulting
Ricardo expanded its presence in Australia through the acquisition of PLC
Consulting Pty Ltd – since renamed Ricardo Energy, Environment and Planning,
or ‘REEP’ – which brings a strong technical advisory capability in the full
infrastructure and environment planning life cycle. The services complement
and extend Ricardo’s existing energy and environment capabilities. Ricardo’s
investment in the environmental sector aligns with the increasing awareness
of the risks associated with climate change and public pressure for more
ambitious action on reductions in greenhouse gas emissions.
CryoPower / Dolphin N2
Dolphin N2 was set up as a spin-out company in order to commercialise
Ricardo’s CryoPower intellectual property and assets. The CryoPower process
presents a cryogenic route to electrification of heavy-duty applications such
as trucks and power generation that negates the need for batteries. Following
the successful spin-out in 2018, FPT Industrial S.p.A. acquired Dolphin N2 in
December 2019. Ricardo will continue to apply the know-how arising from its
research in advanced cold combustion concepts to other areas.
Creating a world fit for the future 7
Strategic report
Chair’s
statement
Sir Terry Morgan CBE
Chair
“This has been an unprecedented year and the volatility caused by the COVID-19 pandemic
has proved the resilience of our business and reaffirms our strategy of diversification in our
geographies and in our sectors. I am pleased to say that our two acquisitions in Australia
have performed well during their first year under Ricardo ownership.
Our people have performed admirably during the year and I would like to thank them and
their families for their commitment and support in these challenging times.”
Results
For the year ended 30 June 2020, the Group delivered revenue
of £352.0m, together with underlying profit before tax
of £15.6m and underlying basic earnings per share
of 21.3 pence. On a reported basis, the Group
delivered a loss before tax of £5.3m and basic
loss per share was 12.2 pence.
As set out in more detail in the Chief
Executive’s Statement on pages 10 to 13
and the Financial Review on pages 42
to 46, the Group has been resilient in the
face of challenging trading conditions,
with continuing pressures in the automotive
sector exacerbated by the onset of the
COVID-19 pandemic in the second half of the year.
Throughout the year, the Group continued focus on
its strategic objectives of geographic and sector diversification
through carefully targeted acquisitions and disposals.
The acquisition of Australian environmental consultancy,
PLC Consulting Pty Limited – now Ricardo Energy, Environment
and Planning, (‘REEP’) – was completed on 31 July 2019 and the
business has quickly settled to life under Ricardo ownership,
delivering results in line with expectations, as has Transport
Engineering Pty Limited– now Ricardo Rail Australia (‘RRA’) –
which was acquired at the end of the previous financial year. The
Group completed the divestment of its first technology spin-out,
Dolphin N2 on 19 December 2019. In addition, the Group sold its
engine testing business in Detroit to a non-competitive strategic
partner on 3 June 2020.
8 Ricardo plc Annual Report & Accounts 2019/20
The Group’s performance against its strategic objectives is
outlined on pages 14 and 15. We also continued to invest in
innovation, as described on pages 18 to 20, and in our
people and our facilities.
People
I would particularly like to thank all of
our employees for their hard work and
professionalism during a difficult year, and
I appreciate their flexibility in transitioning
to home working. I would also like to
express my thanks to those employees
who continued to work on our sites during
lockdown for those services deemed essential
by the government. Furthermore, special thanks
go to our employee volunteers who came to work to
make face masks for the NHS and local care homes. As set out in
the Our People section on pages 22 to 25, Ricardo is a people-
centred business and our employees underpin everything that
the Group achieves.
It was with great sadness that, in April 2020, we lost one of
our colleagues, Paul Manning, following his valiant fight against
COVID-19. Paul first joined Ricardo in 2000 and was a highly
skilled and respected technician working in the milling/prismatic
section of Performance Products at our UK Midlands site. The
Board’s condolences and continued thoughts are with his family
and friends.
Prominent achievements during the year have included
Ricardo Strategic Consulting being named by Forbes as one
Strategic report
Chair’s statement
of America’s leading management consultants, for the fifth
consecutive year – from among more than 50,000 firms active
within the US market.
In its third annual rating of the UK’s top management
consultancies, the Financial Times has again identified Ricardo
Energy & Environment as a leader in the area of Sustainability in
its listing of the UK’s Leading Management Consultants 2020.
In the Made in the South East Awards, Performance Products
was singled out as Manufacturer of the Year and Andrew
Kershaw, an apprentice in Performance Products, was named
Apprentice of the Year.
My congratulations go to all of those involved as well as to all
the other individuals and team members who have won awards
under 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 report separately on Corporate
Governance on pages 90 to 95 of this Annual Report.
Once again, I am proud 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
On 6 September 2019, we announced the retirement of
Peter Gilchrist CB from the Board following the close of the
AGM in November 2019. On 5 September 2019, Ricardo
appointed two additional Non-Executive Directors, Russell
King and Jack Boyer OBE. At the close of the AGM, Russell
King was appointed Chair of the Remuneration Committee
and Malin Persson was appointed Senior Independent
Director. Following my decision to stand down as Chair of the
Nomination Committee, Laurie Bowen was appointed to this
role. On 12 May 2020, we announced the resignation of Mark
Garrett, Chief Strategy Officer. Mark left the business on 31
July 2020 and the Board and Ricardo would like to thank him
for his contribution over many years with the Group. I would
also like to thank each of our Non-Executive Directors for their
counsel during the year.
Dividend
The dividend has grown by an average of 7% each year over
the last decade. On 25 February 2020 the Board declared a 4%
increase in the interim dividend to 6.24p per share
(Half Year 2018/19: 6.00p). The interim dividend was paid to
shareholders on 6 April 2020. Due to the reduced performance
experienced by the Company in the second half of the year,
after careful consideration, the Board have decided not to
recommend a final dividend for the year. This difficult decision
has been taken to protect the Company’s financial position. The
board recognises the importance of dividends to shareholders
and intends to resume dividend payments as soon as it is
appropriate to do so.
Outlook
More than ever, Ricardo’s strategy is underpinned by trends
which will affect an ever-increasing number of people around
the globe: growing populations, mass urbanisation, declining air
quality, climate change, more stringent emissions legislation and
growing scarcity of natural resources.
Despite this turbulent background, we continue to deliver
services and products to help build a cleaner, safer and more
sustainable world. We remain confident that demand for our
innovative solutions will continue and increase when economic
activity returns to normal.
Sir Terry Morgan CBE
Chair
Creating a world fit for the future 9
Strategic report
Chief
Executive’s
statement
Dave Shemmans
Chief Executive Officer
“The pandemic has made this a time of extreme global volatility. The resilience of our
business has helped us weather the storm well - thanks to the agility and passion of our team
and the underpinning strategy to be active in diverse geographies and sectors. I couldn’t be
prouder of our team as they transitioned to home working and focused on finding solutions
in a “new normal” to deliver products and services to our global clients.
We continue to see good opportunities in the markets that we serve and we are well
positioned to help clients address the major challenges of today: cleaner air and water;
decarbonised and clean transport; carbon-neutral energy and industries; secure and
connected mobility, and global security and stability.”
Strategy
In this financial year we have continued to execute our strategy
against a backdrop of increasing demand for action to combat
climate change and protect the environment; high volatility
in the automotive sector, driven by trade policy actions; the
Brexit debate in the United Kingdom; a changing technological
landscape; and the exceptional uncertainty created by the
COVID-19 pandemic. This year has been one of constant
change, but the underlying global environmental challenges
and demand for progress remain - and will prevail after the
immediate focus on the pandemic has passed.
Ricardo’s financial performance in the first half year was largely
on track with our plans and expectations. However, the second
half of the year was affected by the lockdown measures put in
place to slow the spread of COVID-19. These measures impacted
not only our operations but also those of our clients. Access to
client sites became limited and in some cases production lines
halted completely: in a few instances this meant we were unable
to deliver our products.
On the positive side, the structural drivers of growth in the
markets in which we operate remain intact. The geographic
and sector diversification of the group has made us resilient:
particularly important has been our good mix of businesses
serving governments and public agencies, such as defence, rail
and environmental consulting. These tend to be more robust in
volatile times than those businesses that serve industries such
10 Ricardo plc Annual Report & Accounts 2019/20
as automotive, which rely more on consumer spending. Our
resilience and the structural demand for environmental change
position us well for growth when economic activity returns to a
normal level in countries around the world.
Our clients require innovative services and solutions to address
the challenges facing us today: access to cleaner air and water;
decarbonised and clean transport; carbon-neutral energy and
industries; secure and connected mobility; and global security
and stability.
Ricardo’s cross-sector strategic, environmental, engineering,
technical and manufacturing competencies, together with our
assurance and certification capabilities, uniquely position us
to assist clients in all phases of a project or product life cycle.
Integral to this is our commitment to market-leading research,
development and innovation to provide enduring benefits and
value to our clients.
We continue to invest in digitalisation and sustainability,
developing new services and tools for clients and executing
our strategic objective of operational excellence. Our global
operations are becoming more digitally enabled and a number
of processes and practices are being brought into a virtual
environment to increase overall efficiency, flexibility and
sustainability.
Further information on the execution of our strategy can be
found on pages 14 and 15.
Strategic report
Chief Executive’s statement
Highlights from the year
We closed the year with a good order intake of £368.7m and a
year-end order book of £314.0m. The Group delivered revenue of
£352.0m (FY 2018/19: £384.4m), 8% lower than in previous year,
along with underlying profit before tax of £15.6m, 58% lower
than in the previous year (FY 2018/19: £37.0m), and a reported
operating loss of £0.9m (FY 2018/19: profit of £29.1m). Further
details on the results for the year are provided in the Financial
Review on pages 42 to 46.
In this financial year, two of our segments – Energy &
Environment, and Defense – performed particularly strongly,
with growth in revenue and underlying profit compared to the
previous year. Our Rail segment also saw an increase in revenue.
Its profitability was marginally up on the previous year as the
business sought to refocus part of its UK operations and clients
delayed projects, particularly in Asia, because of COVID-19.
The Automotive & Industrial segment, whose performance
in the first part of the year had been affected by the continued
pressure in the automotive sector, continued to experience
downward pressures on revenue and underlying profit in the
second half of the year. This extended across all geographies
as economic activity slowed down or in some cases came to a
stop, due to the response to the COVID-19 pandemic.
The Strategic Consulting & Software businesses are heavily
weighted towards an automotive customer base, and was
equally affected by the lockdown measures implemented
globally, seeing a decrease in revenue and underlying profits
compared to the prior year. Our Performance Products segment
performed well through the year until the last quarter, as
production lines at McLaren and some other clients were closed,
meaning that they were temporarily unable to accept our engine
and transmission products. Our customers’ production lines are
now all up and running.
Given the unprecedented public health and economic
challenges that countries and companies have faced globally,
The UK water industry aims for Net Zero carbon by
2030 - with Ricardo assistance (see pages 66 to 69)
I am pleased with the resilience of our diversified business.
Resilience has been at the heart of our growth and risk
mitigation strategy over many years, with a philosophy of no
dependence on any single geography, sector or client. Having
a mix of government- and consumer-supported industries
increases the resilience through economic cycles, too.
The efficiency and flexibility of our operations, supported
by our investment in digitalisation and the commitment and
dedication of our staff, have allowed Ricardo to continue to
operate without interruptions and to offer business as usual to
our customers during the disruption created by the COVID-19
The Great Western upgrade was a major rail infrastructure project for which Ricardo Certification played a key role
Creating a world fit for the future 11
Strategic report
Chief Executive’s statement
The U.S. government paves way for orders for Ricardo’s innovative ABS/
ESC safety system for the HMMWV or ‘Humvee’ (see pages 82 to 85)
pandemic. And thanks to an increase in committed funding
available, the Group ended the year in a solid position in respect
of financing facilities and liquidity.
Lessons were learnt within the Group from the early stages of
the pandemic – especially from our operations in China, the first
country to be put into lockdown. These lessons were applied
when the virus reached Europe and the US. We moved rapidly
to a remote-working environment and already had the tools
and management processes in place to continue to execute
our business, not only in terms of new business development
and programme delivery, but also of corporate governance and
control. We were pleased to see our Chinese operations return
to normal business practice and increased financial performance
in the last quarter. The majority of our staff in the US and Europe
continued to work from home up to and beyond our June
year-end, and throughout we have continued to receive good
levels of new business wins, though there was some slowdown
in deliveries.
This year we continued the expansion of Rail and Energy &
Environment in Australia. It has been two years since Ricardo
entered the Australian market and our customer base and
service offering has been expanding steadily, with our two
businesses delivering year-on-year growth in revenue and profit,
driven by strong performances from RRA and REEP in their first
year since being acquired.
The year also saw the first sale of technology arising from
Ricardo advanced research and development efforts. On 19
December 2019, Ricardo completed the sale of its CryoPower
intellectual property to FPT Industrial S.p.A and will continue
to assist with their development of this innovative and high-
efficiency combustion engine.
We continue to implement the strategy of moving towards an
‘asset-light’ business model; accordingly, the testing facilities are
being reshaped to make our operations more agile and digitally
enabled. At the end of the financial year we completed the sale
of our test assets in Detroit and we continue to invest in remote
testing capabilities in the UK. With the success of home working
we will be addressing our office footprint moving forward, to
12 Ricardo plc Annual Report & Accounts 2019/20
.
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Ricardo is helping to demonstrate the use of local DC
network technology to support increased availability of
urban high capacity EV charging (see pages 74 to 77)
further increase agility and reduce costs.
Our focus on digital solutions rather than fixed asset
investment has enabled us to offer virtual vehicle certification
and testing services to our global customer base. During the
lockdown period this digital-first approach has allowed us to
protect our workforce as well as those of the customer and
independent witnessing body, at the same time enabling
emissions testing and certification to continue efficiently
and effectively.
Our long-standing commitment to operate a sustainable
business over the years has resulted in a number of actions
and initiatives. Starting in FY 2019/20, in order to give our
employees, customers, investors, suppliers and the local
communities transparency in our approach, we have committed
to implementing enhanced operational reporting and increased
disclosures related to the Environmental, Social and Governance
(‘ESG’) aspects of our operations and services, building on the
best-practice work Ricardo’s environmental consultants are
delivering with clients around the world.
We strive to create a culture of innovation and learning, and to
attract, motivate and retain a highly skilled, diverse and inclusive
workforce. Our global experts are crucial to the success of our
.
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Strategic report
Chief Executive’s statement
We completed our face shield programme in May, having
donated and distributed approximately 10,000 face shields
to communities around our Midlands, Shoreham, Derby and
Harwell locations in the UK, and another 5,000 in the US.
Colleagues in other locations also donated face shields using our
rapid prototyping capabilities as well as personal equipment.
By the end of the year, all of our manufacturing and testing
facilities were operating and delivering client requirements with
appropriate social distancing controls to meet the guidance of
governments. Our offices are all open for employees who wish
to return to work there and can do so safely. We are encouraging
return for those who can and supporting those that cannot
yet return so they can fully contribute to the business. Our IT
resources continue to support the business across a mix of
home-based and office-based working.
‘Digital-first’ is still the core strategy for client and supplier
communication. Our business travel has been very limited in
recent months. Some travel within Europe, China and US has
commenced. There has been little long-haul travel and we
expect that situation to continue in the coming months.
Brexit
Across the Group, we have prepared for a range of possibilities
for the outcome of trade negotiations between the UK and
the EU and any disruption that may arise. Where possible we
are now contracting with customers directly through our
European-based subsidiaries and we have secured a European
accreditation route for our Rail business to supplement our
existing UKAS accreditation, which will allow us to continue to
offer our services across Europe. We have also assessed inventory
holding patterns for our McLaren production line and have
appropriate plans in place to mitigate any short-term disruption
to the supply chain.
Outlook
Ricardo’s diversified business creates and delivers cross-sector
solutions, tools and products which help our clients address
some of the most pressing issues in the areas of decarbonised
and secure transport, clean air and the sustainability of scarce
resources. We enter the new financial year with a good order
book and we secured over £70m of new orders in July and
August 2020. We have an agile business that has proven its
resilience in a highly uncertain environment.
We continue to see good opportunities for Ricardo in the
markets that we serve, and through the execution of our
strategy we are well positioned to continue to grow our
Group as a sustainable business that delivers value for all of
our stakeholders.
Ricardo’s agriculture team helps farmers, land managers
and food manufacturers with the latest thinking for both
the farmed and the wild landscape (see pages 62 to 65)
business and we invest in the development of the skills and
competencies of our staff, providing equal opportunities for all.
Examples of how Ricardo’s world-class teams have created
value for clients across the world by delivering innovative
solutions to create a cleaner and more sustainable future are
summarised below – and are presented in detail in the Case
Studies section on pages 62 to 85:
• Energy & Environment: Improving sustainability in the
farmed and wild landscape
• Energy & Environment: Helping UK water towards zero
carbon
• Rail: Supporting Europe’s largest ever rail re-signalling project
• Energy & Environment: Enabling high-capacity electric
vehicle charging
• Automotive & Industrial: Ending range anxiety for electric-
vehicle drivers
• Defense: New model army
Coronavirus (‘COVID-19’)
COVID-19 initially started impacting the business in China in
late January with the closure of our offices in China, as well as
those of the majority of our customers. The impact spread to
Europe and the US in March and April, resulting in a slow down
in order intake and the progress of ongoing projects, due to
the inefficiencies caused by customer staff and our own staff
working remotely.
From the beginning of the crisis, we set out a “Healthy
People, Healthy Business” agenda. This focused on supporting
our employees and their families together with the health and
wellbeing of our clients, suppliers and the communities in which
we operate.
We took swift action to ensure that an appropriate IT
infrastructure was in place to allow staff to work from home
and as efficiently as possible, with the minimum of disruption
to the business.
We also acted quickly, with the support of our banks, to
increase liquidity and headroom on our banking facilities.
Dave Shemmans
Chief Executive Officer
Creating a world fit for the future 13
Order book
£m
2019/20
2018/19
2017/18
Revenue
£m
2019/20
2018/19
2017/18
314.0
314.0
294.6
352.0
384.4
378.5
Strategic report
Strategic performance
The Board monitors performance indicators related to our strategic objectives.
1 Sustainable business growth: we deliver profitable and sustainable growth with clear focus on future trends
and market demands, driven by client needs, technology change and the outlook for future policies and
regulations, which helps to create a cleaner, healthier and safer world.
Performance indicator
Commentary
We closed the year with an order book of £314.0m, which is in line with the prior
year. The Group’s order intake reduced by 4% to £368.7m in the year reflecting
challenging trading conditions, with delays in orders being placed in the initial
stages of the COVID-19 pandemic. A discussion of the performance of each
segment is included on pages 47 to 59.
Principal risks
Customers and markets
Brexit
COVID-19
Reported Group revenue reduced by 8% to £352.0m. Revenue was 12% lower
on an organic basis (after normalising the prior year result for the impact of RRA
and REEP).
The Energy & Environment, Defense and Rail segments saw increases in revenue
from prior year. Automotive & Industrial, Performance Products and Strategic
Consulting & Software segments saw revenue reductions.
More details of this are described in the Financial Review section on pages 42 to
46, and in the operating segments review on pages 47 to 59.
Contracts
Customers and markets
Brexit
COVID-19
Net debt
£m
2019/20
(73.4)
2018/19
2017/18
(47.4)
(26.1)
The Group had an increase in net debt of £26.0m in the year. This includes
£5.1m of acquisitions, net of cash acquired, and acquisition-related payments;
the net position on the purchase of the Detroit Technology Campus and
the sale of the Detroit engine test business of £11.4m; and a net £1.5m cash
outflow from restructuring activities. Contributions of £4.6m were also paid to
the defined benefit pension scheme.
Contracts
Financing
Defined benefit
pension scheme
2 Risk mitigation: we mitigate business cyclicality and aim to avoid external dependency, whether this is related
to any particular geography, technology, industry, sector or client.
Performance indicator
Commentary
Principal risks
Segment diversity
Number of segments exceeding 10%
of revenue
2019/20
2018/19
2017/18
4
4
4
Four of our six operating segments exceeded 10% of revenue, demonstrating
that the Group remains well diversified across its segments. The four segments
which are above 10% of revenue in all three years are: Energy & Environment,
Rail, Automotive & Industrial and Performance Products. Performance by
segment is discussed on pages 47 to 59.
Segment diversity for FY 2017/18 has been estimated as Ricardo began
reporting the current segmental split in the current financial year, with
comparatives for FY 2018/19.
Customers and markets
Technology
Customer dependency
Number of customers exceeding 5%
of revenue
1
2019/20
2018/19
2017/18
2
2
The number of customers with whom revenue was generated that exceeded
5% of total revenue has remained consistently low over the last three years.
Revenues from one customer represent approximately £46.1m (13%) of the
Group’s revenue.
Whilst we retain a small number of key client relationships, we continue to
have a diverse customer base.
Customers and markets
Brexit
COVID-19
14 Ricardo plc Annual Report & Accounts 2019/20
Strategic report
Strategic performance
3 Added value for clients: we deploy our know-how, experience and application expertise within a given sector
and draw on our cross-sector capabilities to provide greater insights and synergies. We employ research and
development to provide class-leading technology to our clients.
Performance indicator
Commentary
Research and development
spend
£m
2019/20
2018/19
2017/18
12.5
13.4
9.5
R&D spend decreased due to a number of long running Horizon 2020 projects
finishing and the challenging automotive marketplace.
Our R&D spend focused on research on innovative engineering activities, the
development of new technology, tools and processes, particularly in Automotive
& Industrial and Energy and Environment, together with continued investment in
developers of our software products.
Further details of active R&D projects are given on pages 18 to 20.
Principal risks
Technology
Customers and markets
Customer satisfaction %
Ratings using the net promoter
method
Customer satisfaction has improved over the past three years. The net promoter
method, which we implemented three years ago, gives us greater insight into the
feedback and has improved the number of scores received.
Contracts
Customers and markets
2019/20
2018/19
2017/18
68
60
53
4 World-class talent: we promote and sustain a high-performance culture that attracts, develops and
motivates a highly skilled, diverse, agile and motivated workforce to deliver on our mission.
Performance indicator
Commentary
Principal risks
Employee and
knowledge retention
Voluntary employee turnover %
per annum
The level of voluntary attrition has reduced and is consistent with current
expectations, as the economic situation impacts the global labour market.
We continue to see high demand from around the world for our experienced
consultants, engineers and scientists who are experts in their respective fields.
People
Brexit
COVID-19
2019/20
2018/19
2017/18
11
15
15
5 Operational excellence: we maintain efficient and sustainable global operations that are digitally enabled to
allow us to leverage data and bring existing processes and practices into a virtual environment. This improves
productivity and reduces the environmental impact of the business.
Performance indicator
Commentary
The decrease in the Group’s underlying(1) operating profit margin reflects
inefficiencies from the slow-down in project delivery in the second half of the
year.
Further details are described in the Financial Review on pages 42 to 46.
Principal risks
Contracts
Customers and markets
COVID-19
Underlying(1) operating
profit margin
%
2019/20
2018/19
2017/18
5.7
10.3
10.5
Environment
tCO2e per employee for scope 1(1)
and scope 2(1) emissions
2019/20
2018/19
2017/18
3.1
3.8
6.0
(1) See Glossary on page 201.
Scope 1 emissions(1) vary based on project mix. We encourage improvements
to reduce underlying emissions and to improve effective use of resources on
projects.
Our emissions per employee decreased this year, primarily due to the impact of
COVID-19 on operational activity. Electricity is our largest single energy use; 74%
of electricity consumed is from renewable sources.
Laws and regulations
Creating a world fit for the future 15
Strategic report
Engaging with
stakeholders
Culture, underpinned by our values, plays a fundamental role in the way that we do business
and deliver our strategic goals and KPIs. The Board recognises that having robust governance
structures in place is vital to decision-making. The Board spends a lot of time listening to and
understanding the views of its key stakeholders. When discussing matters at Board meetings
these views form an integral part of the decision-making process.
In support of the requirements of section 172 of the Companies Act 2006, we set out below how the Board has considered the key
issues of the Group’s stakeholders and how we have engaged with these stakeholders on these issues. As required by the UK Corporate
Governance Code 2018, 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.
Our stakeholders
Clients
Clients are at the heart of what
we do – every decision we take
is to ensure we deliver great
service to our clients
Staff
The experience and expertise
of our staff is essential for
the delivery of our strategic
objectives – we operate
within a culture of openness
to ensure that each of our
staff is focused on delivering
great service
See Our People section on
pages 22 to 25
Stakeholder issues
• Operational strength
of the Group and the
ability to meet customer
requirements
• Ability to provide high-
quality services, technical
expertise and products
• Culture and values
• Wellbeing and flexibility
• Ethical standards
• Progression and personal
development
• Remuneration
• Diversity and inclusion
• Workforce engagement
• Health and safety
How we have engaged
• The Board receives regular feedback from Voice of the Client
reports completed by our clients
• Focus on “Healthy People, Healthy Business” with the emphasis
on physical and mental wellbeing, of major importance during
the COVID-19 pandemic
• Fast and efficient move to more flexible working practices,
including home working
• Group-wide employee engagement survey
• Annual Senior Leadership Talent Programme, which pulls
together senior talent from across the divisions and regions
• Annual Global “Business Leader Programme” to nurture
internal talent
• Promotion of Women in Engineering via a variety of
programmes worldwide
• Group Code of Ethics, whistle-blowing hotline, regular training
• Annual performance review and development process
16 Ricardo plc Annual Report & Accounts 2019/20
Our stakeholders
Shareholders
A key objective of the Board is
to create value for shareholders
and deliver long-term,
sustainable growth
Strategic report
Engaging with stakeholders
Stakeholder issues
• Financial performance
How we have engaged
• Annual General Meeting
• Strategy
• Long-term viability
• ESG objectives
• Annual Report and Accounts, including enhanced
ESG disclosure
• Results statements, trading updates and press releases
• Regular interaction between the Chief Executive Officer, the
Chief Financial Officer and institutional shareholders to foster a
mutual understanding of objectives, answer questions and to
keep them updated on our performance and plans (one-to-
one meetings or group presentations and investor conference
calls following our results announcements)
• The Senior Independent Director, the Chair of the
Remuneration Committee, and the Chair of the Audit
Committee are available for discussions with major
shareholders, if required
• The Chair also looks to shareholder groups’ annual voting
guidelines to better understand their policies on governance
and voting
• Regular reviews of major investors’ views on company
management and performance; 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 following announcements
of results
Community/Social
Value
The Board is committed to
improving sustainability and
helping communities thrive by
positively contributing both
socially and economically
See the Environmental, Social
and Governance section on
pages 26 to 33
Suppliers
Building trusted partnerships
with our suppliers is important
in enabling us to provide the
best service to our clients and
provides a great platform for
our suppliers to grow
See the Environmental, Social
and Governance section
on pages 26 to 33 and the
Innovation section on
pages 18 to 20
• Economic and operational
• Enhanced ESG reporting within our Annual Report and
impact of Group businesses
on local communities
• Environmental impact of
operations, both directly
and indirectly
• Being able to demonstrate
clear ESG policies and how
these are measured
• Sustainable procurement
• Potential disruption of the
supply chain
• Competitiveness
• Single sourcing decisions
made with clients
• Financial performance
• Investment in research
and development
Accounts
• Focus on providing services and products which positively
impact the environment
• Delivery of approximately 15,000 face masks to local
communities during the COVID-19 pandemic across the UK
and US
• Promotion of STEM in schools and colleges
• Working with local communities and partnerships to provide
business input on economic regeneration
• Supporting charitable fund raising activities across the globe
• We expect our suppliers to operate according to our Code of
Conduct, and other policies, and to behave responsibly. This is
embedded in our terms and conditions
• Our Procurement Policy was published in January 2020
• For key manufacturing suppliers, we have active supplier
quality assurance teams
• We expect our suppliers to operate to ISO9001, ISO14001,
ISO27001 and ISO45001 or equivalent professional standards to
assure good performance
• We encourage landlords and other key suppliers to maximise
use of renewable energy
Creating a world fit for the future 17
Strategic report
Innovation
“Ongoing R&D investment supports Ricardo’s strategy for growth and business
diversification. We evaluate the benefit to our clients of our latest innovations, focusing on
delivering technology aligned with those enduring market drivers that bring value in volatile
market conditions. We understand the needs of our clients and provide solutions both to
create opportunities and to help those customers succeed in a world where the megatrends
of today are shaping the global economy of tomorrow.”
Mike Bell
Group Strategy and Transformation Director
In line with Ricardo’s vision and mission, our R&D portfolio
extends across a range of market sectors. As the mobility
sector moves towards a zero-emissions future, the breadth of
Ricardo’s operating businesses offers symbiotic opportunities.
The interdependencies between energy, environment, scarce
resources, waste, security and mobility are increasing. New roles
and responsibilities, collaboration and new digital entrants are
changing the landscape to open up new opportunities for
technological developments that will create a world fit for the
future.
Our R&D investment is focused on enhancing our
competitiveness and delivering innovative market-leading
services, solutions and software within the context of a
sustainable, global marketplace. The impact of digitisation across
our market sectors is reflected in our current portfolio with a
wider range of applications planned with particular focus on the
changes being brought as a result of the COVID-19 pandemic.
Software and data are now playing a critical role in our research
projects — whether in the context of virtual engineering,
modelling, cyber security or artificial intelligence. The largest
two areas of R&D are focused on Environmental Impact and
Virtual Engineering, with a smaller number of projects in the
areas of Cyber Security and Operational Excellence.
c
t r ification
E l e
Projects
C
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i
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r
a
ti
o
n
Cyber Security
a
M
n
a g e & Optimise
Helping customers
manage impacts and
optimising technologies
Virtual
Engineering
R&D
Portfolio
s
ol
Contr
Operational Excellence
Environmental
Impact
R
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Environmental
Impact
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Avoid further damage by
adopting new technologies
A bate
t
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m
Sustainable Mobility
Environmental Sustainability
The following sections highlight key R&D projects which strive
to provide cost-effective solutions to the most pressing issues
facing our clients across our operating sectors.
Environmental Impact: Manage & Optimise
Air Quality
RapidAIR was developed to fill the gap in the market for a
cost-effective, operational, city-scale dispersion model with
convenient run-times. When using current modelling tools, run-
times in the order of several days or weeks can be expected for
city-scale Gaussian models with only a few hundred thousand
receptor locations, which are then often interpolated to provide
continuous pollution surfaces. In contrast, the RapidAIR model
computes concentrations at more than 100 million discrete
receptors in less than 10 minutes. This technology enables
policy options to be developed, tested and refined with more
speed and responsiveness than ever before. RapidAIR provides
an increasingly important decision-support tool for urban
planners and authorities as cities attempt to improve air quality
using zero- and low-emission zones linked to active traffic
management.
Vehicle Emissions
The Real-world driving emissions project uses remote
sensing technology to accurately and instantaneously measure
the emissions from vehicles on the roads in real time as these
18 Ricardo plc Annual Report & Accounts 2019/20
Strategic report
Innovation
emissions are released into the atmosphere. Remote sensing and
modelling support the design and development of effective
evidence-based clean-air strategies and low-emission zones
to mitigate air pollution problems. In addition, local air quality
emissions inventories and air-pollutant concentration modelling
can be improved through the use of real-world emissions data
from remote sensing. Ricardo now has one of the largest real-
world emissions databases for the UK.
Environmental Impact: Abatement
Electrification
The BattSense project set out to measure the reversible
and irreversible changes relating to battery cells by using
other Ricardo IP and know-how for low-energy ultrasonic
measurements. This technology was previously employed
to measure the thin films associated with bearing lubrication
and the change of the speed of sound in materials under load
applied in wind turbine bearings. An informed definition of
usable battery capacity will reduce pack size, and hence cost, by
approximately 7%.
Validation testing of BattSense technology has found accurate
state-of-charge tracking even under the extremes of high
charge rates and sustained dormancy. Further work is underway
applying machine learning to determine the relationships
between measurements, chemical phenomena and state of
health/charge. The real-time measurements for the ultrasonic
devices will then be integrated as a primary measurement within
our Battery Management Systems (‘BMS’) to provide tangible
improvements for both cost and durability.
i-CoBat is a collaborative project, co-funded by Innovate UK,
which aims to address the application challenges relating to heat
rejection and the need for constant temperature control within
battery cells by using a synthetic ester specifically developed
as a dielectric and efficient coolant, and an optimised battery
pack. The main customer benefits of i-CoBat include charging
times improved by 40-50% versus a conventional liquid-cooled
battery pack; power density output increased by 20-30%; and
cell longevity improved by 5-10%. Work packages delivered to
date have already helped secure projects with industrial, oil and
lubricant clients, together with a commercial deployment in
motorsports.
Electrification Infrastructure
Active Response is a joint project with UK Power Networks,
an electricity distribution network operator (‘DNO’). Ricardo has
developed an innovative solution to make better use of existing
network assets. The solution employs power electronic devices
and advanced automation and optimisation algorithms to move
spare capacity around the network as demand changes. Active
Response optimises power flows without disrupting the supply
of power to customers.
Renewable energy – Wind
Ultrasonic Bearing Measurement (‘UBM’) is a project
to develop a bearing instrumentation system that enables
measurement of total roller load and load distribution on a roller-
by-roller basis, both key inputs for a new bearing-life model.
Both systems have been active in a large energy supplier’s trial
turbine. The retrofit sensor system will be capable of surviving
the harsh conditions faced by offshore wind turbines and can be
integrated with existing Condition Monitoring Systems (‘CMS’)
to enable straightforward deployment across new and existing
Creating a world fit for the future 19
Strategic report
Innovation
wind farms worldwide. In conjunction with existing CMS data,
Ricardo’s UBM solution will offer in-field measurement of wind
turbine bearing load conditions and enable operators to spot
the conditions that will lead to an early failure.
Managing Energy Storage
The TransPower project explores vehicle-to-grid (‘V2G’) as one
of several smart technologies to benefit distribution networks,
helping reduce network reinforcement costs to cope with
the increase in electric vehicles (‘EVs’). TransPower intends to
encompass the necessary work
to understand the value of
energy storage and further
prepare for sources
of network flexibility
such as V2G. A greater
understanding and
use of mobile battery assets (vehicles) have the potential to
defer network reinforcement and support network resilience,
facilitating the connection of additional loads and low-carbon
technologies. It is estimated that the benefits of V2G could
deliver a customer benefit in the order of £450 per vehicle
annually.
Virtual Engineering
The Virtual Transmission System Calibration project has
developed a virtual transmission system calibration process
which offers the chance to shift left (i.e. to reduce the overall
programme timing of) the calibration in order to mitigate
project overruns due to dependencies. Typically, transmission
development projects suffer delays arising from late changes (for
example, packaging constraints). The process leverages Ricardo’s
FAST-R (‘Flexible Advanced Software for Transmission control’)
and Ricardo Objective Assessment and Monitoring (‘R-OAM’)
software in combination with a new simulation model.
Operational Excellence
InfraMon was developed to provide continuous information
on the condition of railway tracks, using sensors and data-
loggers installed on board in-service trains. Data is reported to
maintenance teams via customised dashboards, allowing
preventative action to be planned before track faults
cause serious disruption to services. InfraMon combines
cellular communication, Global Navigation
Satellite Systems (‘GNSS’) positioning, and
sensor technologies coupled with a central
data processing server to deliver analytics and
operational dashboards for track geometry,
railhead defects and ride comfort.
20 Ricardo plc Annual Report & Accounts 2019/20
Strategic report
Selected global and regional regulations
Global
Paris Climate Agreement:
Keep global temperature rise
below 2°C above pre-industrial
levels and pursue efforts to limit
the rise to 1.5°C
Reduce the total annual GHG
emissions by at least 50% by
2050 compared to 2008 levels
Carbon Offsetting and
Reduction Scheme for
International Aviation (‘CORSIA’)
US
UK
EU
26-28% reduction by 2025
compared to 2005 levels prior
to withdrawal from Paris Climate
Agreement2
PM2.5 12 μg/m3 1yr average
NO2 100 μg/m3 1yr average
Federal Water Pollution Control
Act
57% reduction by 2030
compared to 1990 levels
Net Zero by 2050
As for EU
Transposition of the EU’s Water
Framework Directive3
40% reduction by 2030
compared to 1990 levels1
80-95% reduction by 20501
PM2.5 25 μg/m3 1yr average
NO2 40 μg/m3 1yr average
Water Framework Directive
India
China
Japan
33-35% below 2005 emissions
intensity of GDP by 2030
PM2.5 40 μg/m3 1yr average
NO2 40 μg/m3 1yr average (30
μg/m3 in ecologically sensitive
areas
Water (Prevention & Control of
Pollution) Act
Peak CO2 emissions
by 2030
PM2.5 35 μg/m3 in Class 1 areas, 70
μg/m3 in Class 2 areas 1yr average
NO2 40 μg/m3 in Class 1 areas, 80
μg/m3 in Class 2 areas 1yr average
Water Law of the People’s
Republic of China
26% reduction 2013 levels by
2030
PM2.5 40 μg/m3 1yr average
NO2 daily limit value 75 - 113 μg/
m3, no annual limit value
Water Pollution Control Law
1. The EU is currently proposing revised targets of 50-55% reduction by 2030 compared to 1990 and Net Zero emissions by 2050 – these have not yet been enshrined in legislation
2. The US expressed its Paris Climate Agreement target for 2025 compared to 2005 levels. This is equivalent to a 10-17% reduction against 1990 levels by 2025. The US has now withdrawn from the Paris
Climate Agreement, so these figures may not stand
3. The EU’s Water Framework Directive has been transposed for the UK into (i) The Water Environment (Water Framework Directive) (England and Wales) Regulations 2017, (ii) The Water Environment and
Water Services Scotland) Act 2003 and (iii) The Water Environment (Water Framework Directive) Regulations (Northern Ireland) 2017
Shipping
Aviation
Greenhouse Gas (‘GHG’)
Air
Water
Creating a world fit for the future 21
Strategic report
Our people
Board members
Senior leadership
All employees
30%
3
10
Board
members(1)
7
70%
17%
12
69
Senior
leadership
22%
636
2,886
All employees(2)
57
83%
2,250
78%
(1) Includes Company Secretary
Male
Female
(2) Excludes contractors
Who would have thought that the strapline of “Healthy People,
Healthy Business” would take on such a literal meaning this year?
Clearly the COVID-19 crisis is having an impact not only on the
financials of our business, but even more so on our people.
The pandemic has dramatically accelerated the already
ongoing trend towards more flexible working, in terms of both
place and time. The lockdown regulations in nearly all of the
countries in which we operate have forced most staff to work
from home; this, along with the closure of schools and the need
to factor in childcare requirements, has made a more flexible
distribution of working hours necessary.
It is remarkable how seamlessly our teams have embraced
these changes, and it is heart-warming to see how much our
employees have been looking out for each other in these
difficult times. There has been impressive creativity around
setting up provisional workspaces as well as in coming up
with team activities in spite of social distancing: the anecdotal
evidence of a lot of our colleagues still finding time to volunteer
in their local communities proves once more that, as our CEO
maintains, “good, good people” are the heart of our business.
Despite the COVID-19 crisis taking a lot of management time
and attention, we have not lost focus on our ambitions as an
employer. We want all our employees to be happy and engaged
throughout their time with us – not just in terms of the culture of
the organisation and their ongoing personal development, but
also when it comes to competitive remuneration and benefits
packages. The reduction in our voluntary attrition rate from
15% in FY 2018/19 to 11% in FY 2019/20 (which is in line with an
expected and healthy attrition level for a consultancy) shows
that our hard work is paying off.
To further assess the effectiveness of these efforts, we have
conducted a Group-wide Employee Engagement Survey, based
on the Gallup 12 questionnaire. The results are generally positive,
with an overall average score of 3.8 out of a possible 5 and a
Ksenija Jelic
Head of the Shared Services Centre, Ricardo Prague
The Shared Services Centre in Prague is an administrative and financial
hub for Ricardo Automotive & Industrial’s EMEA business. I have a team of
thirty based in Prague and the UK, including experts in fields ranging from
accounts payable, project and general accounting, purchasing, to travel
planning and banking. Our mission and our passion are to deliver cost-
effective, customer-oriented, expert financial and administrative support
to the business.
With a Masters in Finance Management, I have 22 years’ experience
in finance, procurement and business support, in sectors including
public services and energy. I joined Ricardo in 2017 to develop the Shared
Services Centre and find it to be the most exciting company that I have
worked for. I know that Ricardo is making a really positive impact on
the way society will work, travel and live in the future. I also enjoy the
company’s supportive, positive and open-minded corporate culture, which
values professionalism and excellence. At Ricardo I feel that I am in the
right place.
22 Ricardo plc Annual Report & Accounts 2019/20
Strategic report
Our people
Marques McCammon
President/Managing Director Ricardo, Inc
Coming to Ricardo is an exciting move for me. I have known Ricardo for
nearly as long as I have been in the auto business, having contracted
work to the US team when I was at Chrysler, consulted with them when
I was in the Board of Advisors for the Automotive Xprize, and partnered
with them while at Intel/Wind River. My hope is that I can bring a critical
outside-in view of the business that will help to guide our positioning, as
well as an appreciation for the market challenges and opportunities that
are unique to the North American market.
Since joining the business in October 2019, my focus has been on
establishing a mindset of growth within the US operation, challenging
every employee to think big but stay focused. We want to blend the
discipline of scale and process that is inherent in Detroit’s automotive
complex, with the agility and rapid innovation that is indicative of
California’s Silicon Valley.
70% response rate, with slight variations between the divisions.
The survey will continue on a regular basis. Recent restructuring
activities, which were necessary to right-size the teams in some
divisions, have clearly impacted the results.
Analysis of the survey data shows that across all divisions our
people value their colleagues’ commitment to quality work
and the overarching culture of excellence that Ricardo stands
for. We also score highly on clarity of responsibilities and the
expectations of individual job roles, something that has been
an area of focus in recent years. It was also confirmed that there
is a sense of genuine care displayed by managers throughout
the business, which for us is reassurance that our management
training as well as our promotion and selection processes are
succeeding in putting the right people into leadership roles and
supporting them well. Of course, there are also areas that we
would wish to further improve. Individual personal development
The team based at Ricardo Shanghai
Creating a world fit for the future 23
Strategic report
Our people
The Ricardo Knowledge team responsible for the
launch of the new RiCKTM online research product
is complemented by
our global “Business
Leader Programme”
which focuses on the
business skills necessary
for SLT or executive level
positions. These leadership
development activities
aim to further increase
the bench strength and
successor readiness as part
of our Senior Leadership
Team and Executive
Succession planning. This
is an exercise we take very
seriously, not only from
the perspective of risk
management but also
to nurture our internal
talent and provide career
perspectives up to the
highest levels in the
and recognition seem to be topics we need to pay even more
attention to. It will now be a great opportunity for the divisions
to share their best practices and to address joint issues together.
The importance of ongoing feedback and recognition
is highlighted in our Senior Leadership Talent Programme,
which started in 2018 and which we are running for the third
time in 2020. The programme pulls together senior talent
from across the divisions and regions to work together on
improving leadership skills and building a solid network around
the business. It consists of a mixture of classroom training and
workshops with various executives of the business and is aimed
at the elite of our-up-and-coming leaders. The programme
organisation. We are very keen to strike the best possible balance
between internal succession and a necessary influx of diverse
external talent, bringing different industry experience and
viewpoints to the table.
In more general terms, our people activities revolve around
seeing employees as individuals rather than “resources”. Our
main focus has continued to be our apprentice, graduate and
young professionals’ schemes: the recruitment of the best
people who excel technically and are also a good fit with
our cultural values of Respect, Integrity, Passion, Creativity &
Innovation. In addition, a redesigned on-boarding process makes
new employees feel welcome and part of the team from the
Andrea Suppa,
Manager, Systems, Controls and Virtual Engineering,
Ricardo Shanghai
I joined Ricardo nearly five years ago from an Italian automaker, and
initially worked in the UK on hybrid control systems before moving to
Ricardo China in 2017.
The Chinese market is very dynamic, challenging and continuously
changing. Both as an organisation and at an individual level it is important
to keep adapting and improving how we work, given global market
conditions and increasing customer expectations.
I’m not a nine -to-five kind of person, and the environment in Shanghai
– which challenges me every day with new and diverse tasks – is one that
inspires me and helps me to do my job with passion. At Ricardo China I
feel free to express my ideas and develop them, always looking at what
I’m doing as if it was my own company – and motivating others to think
strategically about everything they do.
24 Ricardo plc Annual Report & Accounts 2019/20
Strategic report
Our people
Kimberly Matenchuk,
Managing Director of Ricardo Software
I joined Ricardo early in 2020 from GE Digital where I had grown the
business substantially across the automotive, food and beverage,
consumer packaged goods, chemical, and life sciences sectors.
Digitalisation is of crucial importance to the future of Ricardo and will
affect almost every aspect of the Group’s future business, from data
analytics to virtual product development and virtual consulting. It has
been great to join Ricardo at this point in its history and help shape the
future direction of the commercial software business.
I have a great team at Ricardo Software and together we are developing
the enabling simulation for the next generation of electrified and ultra-
low and zero-emissions vehicles. More than just helping define the future
of mobility, we are also seeking opportunities in adjacent industrial
sectors to broaden the market for our products and technology, while
also supporting the virtual engineering and consulting work of the wider
Ricardo Group.
day they sign their contract with us. We are providing training
and development to allow employees to give the best possible
performance based on their strengths, and we continuously
review and adjust our policies and processes as well as our
remuneration structure.
The focus on “Healthy People, Healthy Business” last year
provided a special emphasis on employee wellbeing. The
increased provision around physical and mental health gave
us a great head start to effectively respond to the COVID-19
situation. In fact, quite a few employees from our teams in Asia,
which was right at the peak of the crisis when the Gallup 12
Employee Survey took place, commented on how well they
thought Ricardo had managed the situation, showing great
flexibility and supporting staff on a personal level throughout.
Once we have left the acute phase of this pandemic behind us
there will be opportunity to look more closely at practices such
as large-scale home working – which could potentially reduce
fixed office costs, as well as broaden flexible working practices
to take forward into the “new normal” business environment. In
that sense, the crisis has fast-forwarded a development which
would have taken us years to achieve to the same level under
“old-normal” conditions.
The excellence of our people is not only supported by our
wellbeing programmes: it also has its roots in our culture of
diversity and inclusion. We celebrate different cultures and
viewpoints and believe that our diverse workforce is the key to
our success. The promotion of Women in Engineering is a cause
that is particularly close to our heart, and we promote it with
a variety of programmes across the globe. In terms of gender
diversity, good progress was made during the year: particularly
positive is the increase in women in senior leadership positions
from 11% to 17%.
If the last year has taught us one thing, it is that the power
of nature will still outweigh any efforts of technology. It has
emphasised more clearly and more convincingly than ever
before the importance of our vision of Creating a world fit for
the future – and it has shown us that Healthy People do indeed
make a Healthy Business.
Creating a world fit for the future 25
Strategic report
Environmental, Social and Governance (‘ESG’)
Our approach to managing Environmental, Social
and Governance (‘ESG’) matters
We understand the increasing importance of recognising and
mitigating our impact on communities and the environment.
Our vision Creating a world fit for the future is realised through
a mission which integrates the economic, environmental and
social aspects of sustainable development into our strategy,
operating model and significantly, into the work which
we undertake on behalf our customers. We recognise that
effective management of ESG issues is an integral part of
robust governance and business strategy with a link to financial
performance and long-term business model resilience. We
are increasing our use of ESG KPIs to aid transparency and
measure our progress quantitatively, especially relating to
environmental impact.
Ricardo has a proactive and engaged approach to ESG, which
is an essential part of our social value and the delivery of our
strategic objectives outlined on page 5. The environment is at
the heart of our strategy and is embedded in both what we do
and the solutions we deliver, as shown on page 1:
• Our core activities of access to clean air and water; decarbonised
and clean transport; and Net Zero energy and industry;
• Our enablers all provide the capability to deliver on our
ESG agenda
We support these core activities with research and development
to enhance our capabilities. These are described on pages 18 to
20. We rely on the innovation, the talent and the technical and
communication skills of our employees, and we invest in their
development 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 that we meet our human
rights obligations.
We have a strong connection with many of the United
Nations’ Sustainable Development Goals (‘UN SDGs’),
published on www.un.org/sustainabledevelopment. These
connections link to our core activities, our internal operations
and our stakeholders, particularly the communities within which
we operate.
Opposite, we set out the UN SDGs which we strongly
connect with and outline how our core activities respond to
each of the challenges.
Key ESG topics
The table below details a number of key ESG topics and highlights our activities in the area.
ESG topics
Highlights
Company
Governance and management of ESG
matters
Compliance with the provisions of UK Corporate Governance Code 2018
Board oversight of ESG topics
Continued inclusion in FTSE4Good index
Environmental stewardship and addressing
climate change
Implemented our Task Force on Climate-related Financial Disclosures (TCFD)
recommendations
Climate Standards Disclosure Board published a case study on Ricardo’s scenario planning
Managing our environmental footprint
Certification to ISO 14001 for 35 sites (95% of employees)
Reporting of GHG emissions (externally verified in accordance with ISO14064–3:2006).
Strategy to achieve Net Zero GHG status by 2030
Managing ESG-related risks
TCFD activities have identified a number of climate-related risks
Climate-related risks are subject to a bi-annual board review
Customer
Climate change/environmental projects
Employee
“Healthy People, Healthy Business”
Human Rights
Diversity
Health & Safety
Suppliers
Sustainable procurement
Society
COVID-19 contribution
Local communities
27% of our revenue is strongly driven by climate change or the environment
56% of our revenue is driven by climate change or the environment to some degree
Focus on employee well-being – increased since COVID-19
Improving employee engagement – survey based on Gallup 12 (score 3.8/5)
Support for Universal Declaration of Human Rights
Diversity – increase in women in senior leadership positions from 11% to 17%.
Certification to ISO 45001 for 35 sites (95% of employees)
Low reportable accident levels
Introduction of sustainable procurement policy (January 2020) and sustainable procurement
policy targeted for September 2020
Design and manufacture of 10,000 protective face shields for NHS workers, and another 5,000
in the US
Active in communities working to promote Science, Technology, Engineering and Maths
(STEM) in schools and colleges
26 Ricardo plc Annual Report & Accounts 2019/20
Strategic report
Environmental, Social and Governance (‘ESG’)
Sustainable
Development
Goal
Core activities
The way we operate
Stakeholders
• Decarbonised and clean
transport solutions
• Access to clean air
• Secure, connected mobility
solutions
• Provision of a safe working
environment, well-being
programmes and employee
benefits
• Governments and local
communities, employees and
their families
• Access to clean water
• Monitoring water use on larger
• Clients, governments and local
sites
communities
• Net Zero and carbon-neutral
solutions
• Decarbonised and clean
transport solutions
• Reducing energy consumption
and maximising renewable
energy sourcing
• Clients, governments and local
communities
• Decarbonised and clean
transport solutions
• Net Zero and carbon-neutral
solutions
• Working in partnerships with
local communities around our
larger sites to reduce collective
energy use
• Clients, governments and local
communities, employees and
their families
• Net Zero and carbon-neutral
solutions
• Decarbonised and clean
transport solutions
• Net Zero plan and targets which
will reduce energy and resource
use
• Clients, businesses, governments
and local communities
• Decarbonisation of transport
• Climate change risk management
• Access to clean air
• Net Zero plan and targets
• Clients, governments and local
• Net Zero and carbon-neutral
• GHG reporting and reducing
solutions
carbon footprint
communities
• Access to clean air and water
• Active management of waste
• Clients, businesses, governments
streams on our sites
and local communities
• Access to clean air and water
• Active management of waste
streams on our sites
• Clients, businesses, governments
• Encouraging low carbon travel
and local communities
to work
United Nations Sustainable Development Goals web site:: https://www.un.org/sustainabledevelopment/
Creating a world fit for the future 27
Strategic report
Environmental, Social and Governance (‘ESG’)
Governance and management of ESG matters
The Board is committed to ensuring that the highest standards
of governance are maintained throughout the Group. The Board
reviews key elements of ESG on an annual basis. Wider aspects
of corporate governance including how we comply with the
provisions of the UK Corporate Governance Code 2018 are
described on pages 90 to 96. In January 2020 we refreshed many
of our policies that cover the ESG agenda. They were all made
public via our website and are referenced in this report. This
gives our stakeholders increased transparency as regards our
commitments and the ownership for delivery within
the business.
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 required 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 and ethics policies, which cover
anti-corruption matters, we do not allow intentional acts by
one or more individuals within the business to use deception,
bribery 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. We have an ongoing programme of training for
new employees as part of induction and refreshers for
existing employees.
Modern slavery
We continue to adhere to 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. Our procurement policy
requires our suppliers to be compliant.
Environmental stewardship and addressing
climate change
Clear scientific consensus exists that the Earth’s climate is
changing, and that greenhouse gas (‘GHG’) emissions from
human activities are a principal cause. For financial markets,
climate change is accepted as a non-diversifiable, principal risk.
At Ricardo, we understand that the implications of unchecked
emissions and the consequent global warming will be severe.
Climate change is pivotal to our ESG thinking, and to the
Group’s strategy.
In common with many organisations, Ricardo already
measures and discloses elements of its impact on the
environment, in particular via GHG emissions reporting (page 31).
We have chosen to start the process of disclosing the impact of
climate change on our business.
28 Ricardo plc Annual Report & Accounts 2019/20
Taskforce on Climate-related Financial Disclosures
The Task Force on Climate-related Financial Disclosures (‘TCFD’)
recommendations are a global framework. The project was
initiated by the Financial Stability Board (‘FSB’), designed to
enable publicly listed companies to better understand and
disclose the impacts of climate change on their businesses.
The TCFD recommends that businesses consider both the
opportunities and the risks associated with climate change.
The TCFD recommendations aim to improve the disclosure of
information to allow investors, regulators and other stakeholders
to better assess and manage the risks and opportunities
resulting from climate change. Whilst the recommendations
are currently voluntary, Ricardo believes the recommendations
align strongly with our vision and mission and aims to become a
leader in best practice in the sectors we operate in.
TCFD progress to date
In November 2019 we initiated a Group-wide programme based
on official TCFD recommendations. The overall aims of our
exercise were:
• To build on the climate-related features of our existing long-
term strategy;
• To fully explore our climate-related opportunities and risks, in
line with the TCFD ethos; and
• To develop class-leading capabilities, enabling us to support
our clients’ own TCFD journeys.
Our programme included an exploration of future climate-
related scenarios, prioritisation of key risks and opportunities,
assessment of potential business impacts, and systematic
distillation of recommendations. This complex undertaking was
achieved using the Group’s diverse skill-sets – climate specialists,
scenario-planning experts and management consultants. Using
external climate scenarios and impact assessments as inputs,
we developed four bespoke scenario narratives, each describing
a different hypothetical world around Ricardo in 2035. Brief
summaries of these scenarios follow:
• Creative Scavengers. The world is on a 4ºC temperature-
rise trajectory through 2100, resulting in significant acute
and physical risks. This scenario assumes a lack of cohesive
international policy intervention, and sporadic technological
progress;
• Digitopolis. The world is on a 2-3ºC temperature-rise trajectory
through 2100, with commensurate acute and chronic
physical risks. This scenario assumes some international policy
intervention, progress in energy efficiency, and a reduction in
travel enabled by digital technologies;
• Technopolis. Similarly, the world is on a 2-3ºC temperature-
rise trajectory through 2100, with commensurate acute and
chronic physical risks. This scenario assumes little international
co-operation on policy interventions. Instead, major
breakthroughs in renewable energy technologies enable
some climate change mitigation; and
• Ecopolis. The world is on a less than 2ºC temperature-rise
trajectory through 2100. Chronic physical risks are being
addressed, although some extreme weather events remain
inevitable. This scenario assumes cohesive international policy
interventions and significant deployment of a broad suite of
effective renewable energy solutions.
The Climate Standards Disclosure Board has published a Ricardo
case study about the challenges of scenario planning for this
application. It can be found on the TCFD website (see https://
www.tcfdhub.org/case-study/). Our work has resulted in a clear
set of recommendations, which we have aligned to the four
official TCFD recommended disclosure themes.
TCFD Theme
Governance
Progress to date
• The inclusion of a climate change section in the
annual report represents the start of Ricardo’s
disclosure journey.
• Climate opportunities are reviewed at Board level on
an annual basis as part of our strategy review and
budget setting processes.
• Climate-related risks are reviewed at Board level as
part of our bi-annual risk review process.
Strategy
• Ricardo’s ESG agenda is aligned to our vision and
Risk
management
Metrics and
targets
mission.
• Ricardo’s strategy includes specific themes that relate
to climate change and its mitigation: Digitalisation,
decarbonising transportation, and cross-divisional
solutions (see below).
• Our TCFD activities have enabled us to assess
and overlay further climate-related risks onto our
enterprise risk register
• To supplement the Group’s existing GHG metrics and
Net Zero strategy, we have committed to sharing an
additional climate change metric with stakeholders.
In order to provide increased insight on climate
change as a driver for the business, we have analysed
Ricardo’s own revenue stream and split this revenue
according to the extent to which each component
aims to address an environmental or climate-change
issue. The results of this analysis are shown below.
Opportunities to enable a world fit for the future
We conducted TCFD activities in parallel with a long-term
strategic planning project for the Ricardo Group. Indeed, both
activities used common future scenarios. Our TCFD journey
highlighted six key areas of opportunity for the Group, including
focusing on the power and energy sectors, leveraging our
understanding of global regulatory frameworks, and providing
solutions outside the transportation sector. Importantly, the
remaining three opportunity areas show clear overlap with our
strategy (set out on page 1):
• Digitalisation of products and services. Our strategy includes a
strong digitalisation focus. Not only will this drive technical
innovation, it will also enable Ricardo and its stakeholders to
reduce overall emissions.
Strategic report
Environmental, Social and Governance (‘ESG’)
• Decarbonising transportation. Projects focused on reducing
the environmental impacts of transportation have been
a cornerstone of the Ricardo business for decades. The
development of mobility solutions with reduced life cycle
GHG emissions is a critical feature of Ricardo’s strategy; and
• Cross-divisional solutions. Ricardo’s operating segments
operate in market sectors with increasing synergies. Joining
up these capabilities to enable systems thinking, as well as
comprehensive technical delivery across complex client
programmes, is an essential part of our future strategy.
Managing ESG-related risks
Ricardo’s TCFD activities resulted in the identification a number
of climate-related risks, including the following:
• Physical risks to our facilities. The growing severity of climate
change and variability causing physical disruption (for
instance, flooding) to business;
• Climate liability risks. Risks associated with either increases
in client litigation, a reduction in consulting budgets, or an
increase in litigation on Ricardo itself. Ricardo’s existing risk
register includes an assessment of risks to our business from
litigation;
• Reputational risks. As investors and stakeholders place more
focus on climate change, a perceived lack of action could
result in reputational damage;
• Changes in client requirements driven by climate change. Climate
change could result in changing demand for certain products
and services. Our strategy includes a strong decarbonisation
focus; and
• Changes in regulations relating to climate change. As
environmental and emissions regulations tighten, the risk
of penalties for non-compliance increases. As a provider of
services relating to changes in global emissions standards
and environmental legislation, we are in a strong position to
anticipate and respond to emerging regulatory risks.
We have actioned the mitigation of these risks via our existing
enterprise risk management processes. At present, none of
the identified items are considered principal risks. Further
information on our risk management and principal risks to the
business is shown on pages 36 to 39.
Climate change and environmental revenue
Ricardo delivers many positive environmental outcomes as a
result of the work we undertake. These include:
• Ricardo- and customer-funded engineering projects to
develop low-emission and high-efficiency technologies for
incorporation into products around the world;
• Lower carbon usage through the delivery of engineering
projects that lead to more efficient consumer products being
manufactured by our customers;
• Environmental consultancy, largely undertaken by Ricardo
Energy & Environment, which includes: excellence in thought
leadership around economic, societal and environmental
interactions; extensive understanding of the climate change
challenges facing organisations, including scarcity of natural
Creating a world fit for the future 29
Strategic report
Environmental, Social and Governance (‘ESG’)
resources, strategic sustainability and energy management;
deep understanding of policy drivers, environmental strategy
and economics, which provides insight and project delivery
for business and industry; and modelling and
data management to identify and realise value for
organisations; and
• Improvements in operating efficiency carried out by Ricardo
Rail for rail operators and rolling stock manufacturers.
These products and services will have an impact on future levels
of emissions, waste, energy usage, water consumption and noise
across many of the markets we serve. The cumulative benefits
of projects we complete each year save many multiples of our
operational carbon footprint over the service life of the products
we engineer and the service we provide to our clients.
In addition to the climate change/environmental impact, we
also categorise the revenue relating to safety as this has societal
benefits. For instance, Ricardo Rail’s expertise and activities in
functional safety have significant societal benefits.
Ricardo’s revenue streams have been analysed to assess how
strongly they are driven by climate change and the environment.
For each item of revenue, we have applied one of the following
classifications:
• Revenue generated which is specifically intended to address
climate change;
• Revenue generated which is driven by a significant
environmental issue;
• Revenue generated which has environmental benefit as one
of its drivers;
• Revenue generated which relates to safety in terms of both
assurance and mobility improvements; and
• None of the above
This analysis shows:
• 27% of our revenue is strongly driven by climate change or
the environment;
• 56% of our revenue is driven by climate change or the
environment, to some degree;
• 10% of our revenue relates to the societal benefits associated
safety; and
• Our business activities are well aligned to our vision: Creating a
world fit for the future
Climate change and
environmental revenue
contribution
FY
2019/20
%
34
Driven by climate change
Driven by an environmental issue
Has environmental benefits
Relates to safety
None of the above
12
15
Sediment and water quality sampling as
part of an investigation at Heathrow
Managing our environmental footprint
We are committed to managing our environment footprint and
reducing it to a minimum, as well as ensuring that our services
have a positive impact on society and the communities where
we are based. The Board’s commitment to this is embodied
in our environmental policy (available internally and via our
website) which covers:
• Relevant UN Sustainable Development Goals;
• 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 GHG emissions. Our testing for customer-
and research-funded programmes primarily uses fuels and
electrical energy; in addition, there is energy required for
heating some of our sites. Our manufacturing energy use is
predominantly power for machine tools and assembly facilities
and gas used in our heat treatment plant. Our Scope 21 use is
mainly electricity. We have measured our Scope 31 emissions
10
29
1 See glossary on page 201
30 Ricardo plc Annual Report & Accounts 2019/20
from air travel. All our Scope 3 conclusions this year have had
to be drawn from first-half data due to the distortion caused by
COVID-19 driven travel bans.
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 15. We comply with Streamlined Energy and Carbon
Reporting (‘SECR’) via our disclosures below under the
Greenhouse Gas Protocol. 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.
Greenhouse gas emissions
Emissions - tCO2e ('000s)
Scope 1
Scope 2 – Location based
Scope 2 – Market based
Scope 3 – Air travel
Total – Location based (Scopes 1 and 2)
Total – Market based (Scopes 1 and 2)
Total – Location based (Scopes 1,2,3)
Total - Market based (Scopes 1,2,3)
Scope 3 - Air travel base line
Intensity Measures
(tCO2e per employee)
Scope 1(1)
Scope 2 – Location based
Scope 2 – Market based
Scope 3 - Air travel
Total – Location based (Scopes 1 and 2)
Total – Market based (Scopes 1 and 2)
Total – Location based (Scopes 1,2,3)
Total - Market based (Scopes 1,2,3)
Electricity consumption MWh
Electricity consumed (all sources)
Renewable energy consumed
Percentage of renewable electricity used
Strategic report
Environmental, Social and Governance (‘ESG’)
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 division have grown.
We focus our operational carbon footprint improvements on
underlying energy efficiency prior to the use of fuels for testing,
which varies based on client requirements. We continue to use
tonnes of carbon dioxide equivalent (‘tCO2e’) per employee as
an intensity measure.
FY 2019/20
FY 2018/19
FY 2017/18
Scope 1 and scope 2
baseline
4,343
4,981
2,016
3,967
9,324
6,359
13,291
10,326
6,015
1.42
1.63
0.66
1.30
3.05
2.08
4.36
3.38
17.455
12.973
74%
4,914
6,187
2,635
No data
11,101
7,549
N/A
N/A
N/A
1.66
2.09
0.89
No data
3.76
2.55
N/A
N/A
20,395
14,579
71%
8,638
8,221
4,175
No data
16,859
12,813
N/A
N/A
N/A
2.78
2.65
1.35
No data
5.43
4.13
N/A
N/A
24,113
16,174
67%
• The operational control test is applied to determine if an emission is within Scope.
• The inventory has been compiled according to the GHG Protocol and internal procedures with the exception that individual gases are not reported. Our GHG emissions for FY19/20 have been verified by
Lloyds Register in accordance with ISO 14064–3:2006, ‘Specification with guidance for validation and verification of greenhouse gas assertions’.
• As this is the first year of reporting base year data is not currently being included. Where necessary previous year data has been restated to improve quality. Some data includes estimates, which may be
updated at a later time when more accurate data is available.
• Emission factors used for fuels and UK location-based electricity are based on UK BEIS/DEFRA conversion factors for 2020. Electricity emissions factors used for location-based calculations are the most
recent IEA factors for the country. Electricity emissions factors used for market-based calculations where renewable electricity is not supplied are the most recent year GWP residual mix factors from aib-
net.org for countries in Europe and UK and location based for other countries
• Air travel emissions are calculated by Susterra using bespoke factors that take account of route, class of travel, airline and aircraft type.
• Some de minimis data has not been included; this includes very small sites, bottled gases and refrigerants used to top up cooling and air conditioning plants, fire extinguishants other than FM200 and
sulphur hexafluoride (SF6) associated with switchgear.
• Our UK operations are our biggest consumer of electricity, where we directly procure electricity from renewable sources for our largest sites.
• The sale of the DTC1 test facility had no material impact on this year’s emissions due to the timing of the sale.
1 See glossary on page 201
Creating a world fit for the future 31
Strategic report
Environmental, Social and Governance (‘ESG’)
Net Zero strategy
Ricardo intends to achieve Net Zero GHG emissions from its
operations by 2030, through the following methods:
1. Maximising use of renewable energy sourcing;
2. Reducing the size of our properties as more flexible office
working is implemented;
3. Maximising ‘digital-first’ to optimise our travel needs;
4. Using high speed trains in place of short haul air travel where
practical;
5. Using the most fuel-efficient aircraft for long haul travel;
6. Implementing energy efficiency improvements focusing on
our high energy use sites; and
7. Making use of verified offsetting schemes to offset residual
emissions
We will implement independently verified science-based targets
during FY 2020/21.
Possible trends in energy usage
It should be expected that FY 2020/21 data in some measures
will be above FY 2019/20 values due to low operational and
travel activity caused by COVID-19. The most significant positive
impact will result from the full-year effect of the sale of the Detroit
Technology Campus (‘DTC’) test facilities, which will significantly
reduce US electricity and test fuel use and therefore increase
the proportion of renewable electricity consumed. Some of the
countries in which we operate have no energy market, and it is
therefore not possible to buy renewables in those locations.
We believe that our test business will evolve over the course
of the Net Zero journey period to use less conventional fossil
fuel due a combination of electrification and an increased use
of biofuel and e-fuels. This is a natural consequence of the
decarbonisation of transport in the marketplace.
Environmental management
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.
Many of Ricardo’s customers require certification for their key
32 Ricardo plc Annual Report & Accounts 2019/20
suppliers in respect of the environmental management system
standard, ISO 14001. Our certification directly covers 35 sites
and 95% of our employees. The remaining employees and sites
are managed via the ISO 14001 processes. 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.
Other environmental impacts arise from 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 and inspection regimes that meet
local legislative requirements.
The suite of ISO certifications and the supporting internal
and external audit programmes are used to check policy
effectiveness, to 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. We have not had
any enforcement action, fines or penalties this year.
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. In January 2020 we published our Human Rights
Policy, enhancing and clearly stating our commitments in the
public domain. We specifically include statements on children’s
rights and child labour. We have no known incident of human
rights policy breaches during the year.
In our Human Resources Policy, we protect freedom
of expression, freedom of association and freedom from
harassment, bullying and discrimination. We promote diversity
and clear lines of responsibility, and we are a Living Wage
Employer. We focus on our employees taking ownership of their
work-life balance to provide a flexible working environment. In
South Africa we have very few employees and we do not need
to comply with B-BBEE legislation1. We have no known incident
of labour standards breaches during the year.
Health and safety
Ricardo is committed to compliance with local health and safety
legislation, to a safe working environment and to a minimal level
of reportable accidents. We support training in health and safety
internal audits and inspections, and we are now certified to ISO
45001 in our technical centres and larger offices in the US, the
UK, the Netherlands, Italy, the Czech Republic and China. Our
certification directly covers 35 sites and 95% of our employees.
The remaining employees and sites are managed via the ISO
45001 processes. Our Health and Safety Policy is available
through our intranet and to the public through our website. Risk
assessment is an integral part of our processes, both on a project
1 See Glossary on page 201
1234567Maximise renewable energy sourcingReduce our property footprintOptimise travel ”digital-first”High speed trains vs short haul air travelFuel-efficient aircraft for long haul travelEnergy efficiency site improvementsVerified offsetting schemes for residual emissionsNet Zero2030 Strategic report
Environmental, Social and Governance (‘ESG’)
certifications 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.
Investing in our communities
It is our policy and objective to make a positive contribution
to all regions and communities in which we operate. Many of
the larger Ricardo offices support local community activity
and give charitable donations, especially where employees
participate in community or charitable fundraising activities. The
focus is on creating sustainable links to the community, and on
improving the image and understanding of the business, and
the engineering and scientific professions, in the community.
Our policy is published here: Engaging and supporting local
communities (www.ricardo.com/policies/engaging-and-
supporting-local-communities).
Community engagement in promoting Science, Technology,
Engineering and Maths (‘STEM’) subjects and diversity has been
a key part of our employee involvement. We responded to the
COVID-19 crisis by focusing on ‘digital-first’ for our engagement
and look forward to resuming normal activities as social
distancing rules are relaxed.
A wide range of activities have been undertaken, namely:
• Partnerships with schools near our larger sites , supporting
curriculum delivery and teacher engagement in STEM;
• The automatic enrolment of many of our UK graduates as
STEM ambassadors when they join the business;
• Working with universities and colleges to give opportunities
for work experience and internships;
• Support for university teaching from Ricardo Software with its
products; and
• Support for employees and their families who were not in
school during the COVID-19 pandemic, for whom we set up a
range of “STEMCasts” on a wide range of topics delivered by
employees across the Group. Each event had an activity and
offered prizes for the best solution to a challenge. Subjects
included “how planes fly”; “cloud in a jar” and “steam engines”.
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 financial year were
£17,484 (FY 2018/19: £43,710). The external cost of the COVID-19
face shield project was £1,505: this is charitable in its nature.
The effectiveness of these policies is informally measured by
community feedback.
Creating a world fit for the future 33
Ricardo’s Dipak Mistry volunteers with the See Kenya
eyesight charity, which works to reduce blindness
and provide specialist eyesight care in Kenya
basis for specific hazard management and more generally in the
way manage risk on our sites and in travel.
Our health and safety, HR and site management teams
and occupational health providers have played a key part in
our COVID-19 response. They have been actively supporting
employees with concerns, delivering safe work environments
and ensuring the business can operate with rapidly changing
regulations across our sites around the world.
We recognise the level of reportable accidents as a measure
of performance in health and safety. The number of reportable
accidents decreased in this financial year. 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. All accidents and non-injury incidents
are investigated and reported to divisional managements and
employee consultation forums.
Reportable accidents*
2019/20
2018/19
2017/18
1
2
3
(* ) Based on current definitions of the Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations (‘RIDDOR’)
Sustainable procurement
We published our Procurement Policy in January 2020 as part of
a range of commitments to our stakeholders.
Relations with our suppliers are essential in achieving client
and shareholder satisfaction. Our policy is that key suppliers
should be certified to ISO 9001, ISO 14001 and ISO 45001
standards, and all suppliers are encouraged to obtain these
Strategic report
COVID-19
As part of the international effort to supply Personal Protective Equipment (‘PPE’) required
by those working to combat the COVID-19 pandemic, our purpose-designed protective face
shields were used by front line healthcare workers in Michigan, US and across the Midlands
and the south of England.
face shields, partnering with Operation Face Shield Ann Arbor
to create face shields. Ricardo North America leaders were so
proud of his work, they pledged to provide printing materials
and financing.
The results of these activities were that in the US an additional
5,000 masks were created for Michigan residents, while in the
UK 10,000 protective face shields which we designed, tooled
and assembled were delivered to front line NHS and healthcare
workers in just over 100 NHS hospital trusts, care homes, nursing
homes, GP surgeries and hospices across the Midlands and
south of England.
Around the middle of March when the COVID-19 pandemic
began to escalate, we all felt that we could be applying our
engineering, design or manufacturing capability to help
alleviate some of the biggest technical or product challenges
which were emerging. The need for PPE for frontline
healthcare workers was clearly urgent.
From concept of the face shields to assembly took just three
weeks, leveraging our experience in engineering design in
Prague and the UK, high value rapid response assembly, and
supply chain management. In that three-week period our
team, which was headed by Programme Lead Phil Mortimer,
created a bespoke design for the face shields, working with
local NHS doctors to test the PPE for enhanced comfort and
wearability over extended periods. Secondly, Performance
Products’ Head of Procurement Ian Morris and our
procurement teams sourced a manufacturer in longstanding
supply chain partner Stephens Plastic Mouldings, using tooling
co-funded jointly with us. Thirdly, the team worked with the
industry-leading test provider SATRA to secure fast-tracked
testing of its protective face shield to EN166 – crucially, testing
that enabled the PPE to be NHS approved for COVID-19
emergency use.
To ensure that the face shields could reach care home and
NHS workers as quickly as possible, facilities were repurposed
at the Shoreham and Midlands Technical Centres as assembly
lines and logistics centres.
This effort was matched in the US where Ricardo North
America project engineer Patrick Jones also put his skills, and
3D printer, to good use by helping with the creation of PPE
34 Ricardo plc Annual Report & Accounts 2019/20
Strategic report
COVID-19
As part of the national effort
to supply Personal Protective
Equipment (‘PPE’) required by
those working to combat the
COVID-19 pandemic, Ricardo’s
purpose-designed protective
face shields were delivered to
front line healthcare workers
in care homes and NHS sites
across the Midlands and the
south of England
Creating a world fit for the future 35
Strategic report
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;
• Control of key project risks through project delivery and
review systems;
COVID-19; we now report the latter as an additional principal risk.
Progress on managing the impacts of COVID-19 was reported
to the Board on a weekly basis from end January 2020. Our
principal risks and the approach to their mitigation are discussed
on pages 37 to 39.
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
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,
regularly reviewed and 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 Chair 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 is 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 is reviewed annually by the Audit
Committee and is set out on pages 98 to 101.
• Control of other key business risks through a number of
Financial risks faced by the Group comprise capital risk,
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
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 27 to
the Group financial statements.
divisional compliance with internal procedures and financial
controls; and
• Review and implementation of recommendations in reports
The Company complies with the 2018 UK Corporate Governance
Code by ensuring that:
• Risks are either classified as strategic or operational and as
on internal control by external auditors.
either internally or externally driven;
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 2020 risk review cycle, we considered
risks associated with our customers, suppliers, employees,
finances and climate change, the potential impact of Brexit and
36 Ricardo plc Annual Report & Accounts 2019/20
• 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 Chair.
We also ensure that emergent risks are considered as part of the
Board’s existing half-yearly reviews of risk and annual review of
strategy.
Principal risks and uncertainties
Strategic report
In common with all businesses, the Group faces risks
and uncertainties on an ongoing basis. It is the effective
management of these risks that places us in a strong position
to be able to achieve our strategic objectives and to embrace
opportunities as they arise.
The following table details 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.
The mitigation of the principal risks is within the Group’s risk
Principal risk
Customers and
markets
The Group operates in a dynamic,
diverse and politically volatile
marketplace, which is exposed to
many legislative and economic
pressures. These include pressures
to improve urban air quality, reduce
greenhouse gas emissions, provide
independent emissions testing and
to navigate the impact of Brexit and
global trade tensions.
Impact
Changes in the market 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
project funding. Unpredictability in the
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. COVID-19 is an example of
one of many factors.
COVID-19
(Pandemic disease)
The Group operates in many
countries and is subject to their
public health controls including
the control of diseases that can
be classified as pandemics. The
consequences of this can be
significant disruption to our people
and their health, to our operations,
ability to travel and those of clients
and suppliers.
COVID-19 has been the first pandemic
to impact the business. The effects have
included: lockdowns for many weeks in
most territories where clients, suppliers
and Ricardo operate; working from
home or limited staff activity; delays in
supplies; client force-majeure notices;
significant limitations on commuting
and business travel; increased sickness;
new and rapidly changing government
requirements and so forth. All these
slowed revenue generation and, in some
cases, orders and payments.
Brexit
Brexit is a source of political,
regulatory and economic instability,
which could have a significant
impact on the Group for an
uncertain period of time. The Group
has assessed the risk and taken
appropriate action, and continues
to monitor the situation in readiness
to change and implement further
plans as more information becomes
available.
The main areas of potential impact
are these: trade tariffs, exchange rates
and supply-chain disruption within
Performance Products, the need for
additional certifications in the EU for Rail,
the ability to recruit staff, the mobility
of people to work within the EU and
the UK, and the ability to contract with
customers between the EU and the UK.
appetite, which is reviewed annually by the Audit Committee.
It is also recognised that the Group is exposed to a number of
emergent risks that are currently deemed to be less material,
together with additional risks and uncertainties beyond those
listed that are presently not known to management and which
may also have an adverse effect on the business.
Movement in risk
Reduced risk
No change
Increased risk
Mitigation
These risks are mitigated by the strategy of diversifying the Group to
reduce exposure to any one specific customer, territory or segment.
Challenges currently being faced by our automotive businesses across the
globe can be mitigated by other segments. The success of this strategy is
measured by the key performance indicators for customer dependency
and segment diversity shown on page 14 and by the geographic spread
of revenue, as disclosed in Note 6 to the Group financial statements.
In the event of a sudden downturn in a segment 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.
This risk was mitigated by a series of actions managed via our Crisis
Management plan which was activated in early February using some
mitigations from our pandemic disease planning and some from our
customers and markets risks. We quickly set up a command structure
support by a team of senior Group staff reporting to the CEO. When
lockdown in Europe was inevitable, we increased our remote IT capability
without reduction in IT security controls and transitioned about 2,000
employees to home-based working in less than a week, with minimal
disruption. We made limited use of appropriate government schemes to
support businesses.
As we move to a “new normal” which is likely to last until the pandemic
is under control, we have evolved our operating model to be less
dependent on fixed office locations. We have become more agile in the
way our office-based staff work and will need less space in some locations
over time, employing an employee-focused “Healthy People, Healthy
Business” approach. Our client and supplier facing teams have successfully
adopted ‘digital-first’ as we sell and deliver. We have reduced our cost
based to make the business more resilient.
In Performance Products we have ensured all documentation is in place
to continue to export to key clients in the EU. We have considered the
potential impact of tariffs, exchange rate movements and logistics
disruption on our EU supply chains. Arrangements are in place to increase
inventory levels.
Our Rail Notified Body (‘NoBo’) accreditation in the UK is no longer valid
in the EU after Brexit, so we have obtained NoBo status from the Danish
and Dutch certification authorities so that we can maintain access to the
EU market.
To reduce the risk of loss of contracts with the European Commission,
we added capability in the Netherlands to contract with the European
Commission and provide them with ongoing support.
We are monitoring the potential impact of the implications of ongoing
trade negotiations on employee mobility and our ability to recruit
EU nationals for UK roles and vice versa. We believe that our range of
geographic locations across Europe will continue to make us an employer
of choice.
Creating a world fit for the future 37
Strategic report
Principal risks and uncertainties
Principal risk
Contracts
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 over a longer timescale
or in a less cost-efficient manner
than initially estimated, 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.
Technology
The business is enabled through
the development of new
technology to meet the needs of
market sectors, customers, and
regulators on varying time scales.
Impact
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. Unhedged adverse
foreign exchange rate movements on
contracts could also affect profitability.
Mitigation
Project leadership and management are the Group’s core competencies.
Led by the Group Engineering and Programmes Director, the Group
remains focused on the continuous improvement of these functions.
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.
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 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.
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. Our IT infrastructure enables us to share work and
mitigates mobility issues. Our people as stakeholders are discussed further
on pages 22 to 25.
If the Group invests in technologies
that later prove to be unsuitable, it
could lose marketplace advantage
and revenue could reduce. If there are
disruptions 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.
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 within the divisions, with
a small number of programmes managed at a Group level through a
disruptive innovations team. Staff and facilities are shared across multiple
geographies to deliver innovative solutions and services to the market and
capitalise on our internally developed intellectual property and know-
how. Further details of a selection of our current R&D programmes are
given on pages 18 to 20.
38 Ricardo plc Annual Report & Accounts 2019/20
Principal risk
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.
Impact
Failure to comply with, or failure to adapt
to changes in, laws and regulations
including restrictions, standards and
tax legislation could expose the Group
to increased compliance costs, 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.
Strategic report
Principal risks and uncertainties
Mitigation
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 current
and anticipated changes in legislation. Our Code of Conduct, which is
published on www.ricardo.com, ensures that employees and others act
with the highest ethical standards and within local legal and regulatory
requirements.
In January 2020 we refreshed several policies and published them on
www.ricardo.com to provide greater transparency to our commitments to
many areas of the ESG agenda.
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 are updated as regulations
change and as a result of our continuous drive to adopt best practice. We
aim to anticipate the impact 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.
Defined benefit
pension scheme
The Group has a UK defined benefit
pension scheme which currently
has a funding deficit. The economic
uncertainty caused by both
COVID-19 and Brexit has increased
the volatility in the assets and
liabilities of the scheme.
Any decline in the value of the pension
fund assets, increase in life expectancy,
long periods of high inflation or
decreases in interest rates would
increase the funding deficit and require
additional funding contributions in
excess of those currently expected.
The Group closed the pension fund to future accrual in 2010. The current
funding plan was agreed on the basis of a valuation undertaken as at 5
April 2017 and anticipates deficit recovery contributions being made until
July 2022. In addition, the Group regularly monitors the performance of
the pension fund.
Further details of the Group’s defined benefit pension scheme can be
found in Note 33 to the Group financial statements.
Financing
The Group is in a net debt position,
having drawn on available facilities
primarily to fund acquisitions and
for general corporate purposes.
There is a risk of the Group being
unable to secure sufficient financing at
reasonable cost in order to carry out its
strategic objectives.
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.
This risk is mitigated by robust cash and working capital management,
regular process improvement initiatives, monitoring actual cash flows to
budgets and forecasts, maintaining good relationships with the Group’s
bankers and ensuring that 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.
As at 30 June 2020, the Group has sufficient headroom in its facilities and
covenants. During September 2020 the covenants for the December 2020
and June 2021 tests were amended, providing further headroom. The
Group increased its borrowing facilities in May 2020, raising the committed
facility to protect against downside scenarios and support the Group’s
growth strategy to 2023.
Further details of the Group’s borrowing facilities and other financial risks
can be found in Note 25 and Note 27 to the Group financial statements,
respectively.
Ricardo has implemented a global Information Security Management
System (‘ISMS’) and achieved certification to ISO 27001 “Information
Security Management” at our main facilities.
The Group IT Director is accountable for managing information security
resilience, which includes cyber risk. Dedicated information security
resources monitor and manage our threat profile. External penetration
tests are conducted to augment our control regime.
Information security risks are reviewed by the Group IT Director each
quarter and integrated with the Group’s enterprise risk management
process. Bi-annual briefings on information security are made to the
Audit Committee.
Creating a world fit for the future 39
Strategic report
Viability statement
The Directors have assessed the prospects of the Group
in accordance with provision 31 of the 2018 UK Corporate
Governance Code.
The context supporting the assessment
The Group’s prospects are underpinned by its business
model and strategy, which can be found on pages 4 to
5. 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 7%
each year over the last five years. However, COVID-19 has
negatively impacted operating profit in the current year,
with underlying operating profit reducing from £39.6m in
FY 2018/19 to £20.0m in FY 2019/20. The reported operating
loss was £0.9m in FY 2019/20. The Group has a year-end order
book of £314.0m, of which 35% is expected to be workable
beyond 12 months from the year-end. The year-end order
book comprises the value of all unworked purchase orders
and contracts received from customers.
The strategy of the Group is to develop and deliver
innovative, cross-sector sustainable, efficient and secure
energy, environmental and mobility solutions and products.
The Group’s businesses focus on 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 prospects of the Group
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 Group’s constituent 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, societal 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 the Group’s constituent
divisions, with the involvement of relevant functions
including Finance and Treasury; these plans 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.
40 Ricardo plc Annual Report & Accounts 2019/20
Assessment of viability
The three-year business plan reflects the best estimate of
the prospects of the Group. This has been stress-tested
to consider the impact of the COVID-19 outbreak on the
Group’s results, operations and financial position in a range
of scenarios, including a severe but plausible downside
scenario, with more detailed cash flow forecasts prepared
which cover the period to June 2022. The scenario includes:
• Group revenue continuing at H2 FY 2019/20 COVID-19
impacted run-rates for the whole of FY 2020/21. Relative
to FY 2019/20, the scenario assumes a 15% reduction
in annual A&I revenue and a 20% reduction in annual
Performance Products revenue. In addition, specific
sensitivities have also been included to model the
potential impact of slippage in contracts and lower
volumes in segments including Defense, Rail, and RSC
& Software. Given the current market and pipeline of
opportunities, no sensitivities have been applied to Energy
& Environment. FY 2021/22 Group revenue is projected to
increase by 9% on the sensitised FY 2020/21 levels, broadly
in line with FY 2019/20 revenue, largely driven by increased
volumes in Defense and Performance Products; and
• An increase in the Group’s working capital days of ten, to
model the potential impact of a continuation of the slow-
down in project delivery, combined with delayed receipts
from customers.
This scenario incorporates appropriate mitigating actions and
cost saving measures which are within the Group’s control.
The impact of this scenario on the Group’s business plan has
been quantified and presented to the Board as part of the
approval process. The scenario, which is based on aspects
of the Group’s principal risks and uncertainties, including
customers and markets, COVID-19, contracts, and financing,
as set out on pages 37 to 39, represents 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 the scenario
occurring over the period of the plan, by making adjustments
to its operating activities within the normal course of
business. The severe but plausible downside scenario does
not present a significant threat to Group’s liquidity. Although
headroom under the Group’s banking covenants is reduced
under the scenario, no banking covenants are breached.
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. In the
event of such scenarios materialising, more severe cost
actions would be taken to ensure covenant compliance.
Strategic report
Viability statement
Viability statement
The Directors have assessed the prospects of the Group over
the three-year period to 30 June 2023 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;
• Lead times on customer contracts 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 beyond the three-year period of this
assessment, a three-year period is deemed most appropriate
given the inherent uncertainty involved and the stress-
testing scenarios considered as part of the three-year
business plan, together with the reasons outlined herein.
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 2023.
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 Group financial statements.
The Ricardo ConnectHEV
demonstrator vehicle showcases
connected technologies which are
helping to accelerate the adoption of
electric and hybrid vehicles
Creating a world fit for the future 41
Strategic report
Financial review
Ian Gibson
Chief Financial Officer
“The Group delivered revenue of £352.0m and underlying profit before tax of £15.6m in the
year, a reduction of 8% and 58% on the prior year, respectively. The Group made a reported loss
before tax of £5.3m. The results reflect a backdrop of automotive market challenges and, in the
second half of the year, COVID-19, which had a significant adverse impact on the Group. The
closing order book was in line with the prior year at £314.0m.
The Group has taken positive steps to restructure and create a more agile and asset-light
business, including the sale of our test facilities in Detroit in June 2020. Our cash performance
has been good, particularly in the second half of the year, where net debt was flat, driven by a
continued focus on working capital. In May 2020, we negotiated an amendment to our banking
facilities, thereby increasing liquidity and near-term funding, with an additional amendment
agreed in September 2020, providing further headroom.”
Group results
The Group’s headline financial results are presented on page 6.
Compared to the prior year, the Group’s performance reflects
market challenges in our automotive-related businesses and the
COVID-19 outbreak, which had a negative impact on trading in
the second half of the year.
Energy & Environment (‘EE’) and Defense delivered increases
in profits in the year. Both benefited from buoyant markets and
a largely public-sector customer base, which helped to maintain
performance during the COVID-19 crisis. Our Defense operations
are deemed essential by the US Government. The Australian
acquisition in EE performed in line with plan..
Rail delivered an increase in profits, driven by the performance
of its recent acquisition in Australia, which has performed strongly
since its acquisition. This was offset by challenges in the UK
and Asia, with reduced volumes and delays to major projects.
Restructuring actions were completed during the year to realign
the business to match demand.
Our automotive-related businesses were impacted by
continuing challenging market conditions and the COVID-19
crisis. COVID-19 resulted in a slow-down in project delivery, due
to customers either closing down their operations or working
remotely due to various lockdown restrictions. This first impacted
our China operations in late January 2020, before spreading to the
US and Europe in March 2020. Action has been taken to address
42 Ricardo plc Annual Report & Accounts 2019/20
these challenges through the restructuring of our automotive-
related activities including the disposal of test facilities and
reductions in the cost base, creating a more agile business, as set
out in the comments on specific adjusting items below.
Performance Products (‘PP’) delivered a lower volume of high-
performance engines and transmissions than the prior year due
to the closure of some of our customers’ production lines as a
result of COVID-19 in the final quarter of the financial year. Our
customers have since returned to production.
The segmental results are discussed in more detail on pages 47
to 59.
Order intake down 4% on FY 2018/19 with closing
order book at £314.0m.
The Group’s overall order intake reduced by 4% to £368.7m in the
year, reflecting the challenging trading conditions, with delays
in orders being placed during the COVID-19 pandemic. Order
intake averaged £27m per month in the second half of the year,
compared to £35m in the first half. The closing order book was
£314.0m (FY 2018/19: £314.0m), demonstrating that the Group
continues to win work during these challenging conditions.
Order intake includes £16.3m in respect of Transport Engineering
(renamed Ricardo Rail Australia, or ‘RRA’) and PLC Consulting
(renamed Ricardo Energy, Environment and Planning, or ‘REEP’)
which were acquired on 31 May 2019 and 31 July 2019, respectively.
Strategic report
Financial review
Headline trading performance
FY 2019/20 (£m)
FY 2018/19 (£m)
Add performance of acquisitions(2) (£m)
Organic FY 2018/19(2) (£m)
Decline (%)
Organic decline(3) (%)
Constant currency organic decline(4) (%)
Underlying(1)
Reported
Revenue
Operating
profit
Profit before
tax
Operating
loss/(profit)
(Loss)/profit
before tax
352.0
384.4
16.1
400.5
(8)
(12)
(12)
20.0
39.6
4.0
43.6
(49)
(54)
(53)
15.6
37.0
3.6
40.6
(58)
(62)
(61)
(0.9)
29.1
4.0
33.1
(103)
(103)
(102)
(5.3)
26.5
3.6
30.1
(120)
(118)
(117)
(1) Underlying measures exclude the impact on statutory measures of specific adjusting items as set out in Notes 3 and Note 7 to the Group financial statements. Underlying measures are considered to
provide a more useful indication of underlying performance and trends over time.
(2) See Note 3 to the Group financial statements.
(3) Organic growth/decline is calculated as the decline in the result for the current year compared to the prior year, after adjusting for the performance of acquisitions or disposals, to include the results of
those acquisitions for an equivalent period in each financial year (see Note 3 to the Group financial statements).
(4) The Group generates revenues and profits in various territories and currencies because of its international footprint. Those results are translated on consolidation at the foreign exchange rates
prevailing at the time. Constant currency organic growth/decline is calculated by translating the result for the current year using foreign currency exchange rates applicable to the prior year. This
provides an indication of the growth/decline of the business, excluding the impact of foreign exchange (see Note 3 to the Group financial statements).
Revenue down 8% on FY 2018/19
Against what was a challenging market backdrop, reported
Group revenue reduced by 8% to £352.0m (FY 2018/19: £384.4m).
Revenue was 12% lower on an organic basis, after normalising the
prior year result for the impact of RRA and REEP.
Underlying operating profit down 49% on FY 2018/19,
with a reported operating loss of £0.9m (FY 2018/19:
profit of £29.1m)
Underlying operating profit, which excludes net finance costs and
specific adjusting items, as set out in Note 7 to the Group financial
statements, decreased by 49% to £20.0m (FY 2018/19: £39.6m).
Underlying operating profit margin decreased to 5.7% (FY 2018/19:
10.3%), reflecting the lower order intake and inefficiencies from
the slow-down in project delivery in the second half of the year.
EE, Defense and Rail delivered increased operating profit.
Rail’s result reflects a strong performance from RRA since its
acquisition. Operating profit declined in the Automotive &
Industrial (‘A&I’), Performance Products and Strategic Consulting
& Software segments. On an organic basis, underlying operating
profit declined by 54%. The FY 2019/20 reported operating loss
was £0.9m (FY 2018/19: £29.1m), with the reduction driven by an
increase in specific adjusting items, as set out below.
Underlying profit before tax down 58% on FY 2018/19,
with a reported loss before tax of £5.3m (FY 2018/19:
profit of £26.5m)
Underlying profit before tax decreased by 58% to £15.6m (FY
2018/19: £37.0m). On an organic underlying basis, profit before tax
declined by 62%.
FY 2019/20 reported profit before tax includes £20.9m of
costs relating to specific adjusting items (FY 2018/19: £10.5m).
FY 2019/20 specific adjusting items include £11.9m (FY 2018/19:
£3.4m) of reorganisation costs, which reflect actions taken to
restructure the Group and right-size the cost base in the wake of
the challenging market conditions and the economic downturn.
It also included the sale of our engine test business in Detroit in
June 2020, for an initial cash consideration of £2.8m and loss on
disposal of £2.1m. These are discussed in more detail below.
Net debt up 55% to £73.4m
Closing net debt was £73.4m (FY 2018/19: £47.4m). The increase in
net debt in the year (£26.0m), was driven by the purchase of the
Detroit Technology Campus (‘DTC’) facility (comprising north and
south buildings) in August 2019 for a consideration of £14.2m (see
further details below), the purchase of REEP (£3.8m, net of cash
acquired), £1.3m of other acquisition-related cash costs, and £1.5m
of net restructuring cash costs (net of the £2.8m of initial cash
consideration received in relation to the sale of the Detroit engine
test business). The net cash inflow from working capital, excluding
specific adjusting items, was £4.5m in the period, reflecting a
strong focus on cash collections combined with lower levels of
trading in the second half of the year. The composition of net
debt is defined in Note 25 to the Group financial statements.
Details of the Group’s banking facilities are set out on page 46.
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 Group
financial statements. 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 Group
financial statements.
Creating a world fit for the future 43
Strategic report
Financial review
New accounting standards
The Group adopted IFRS 16 Leases as of 1 July 2019. The Group
adopted the modified retrospective approach to transition.
Under this approach, the Group has not restated comparative
financial information, which remains presented under IAS 17. As
set out in more detail in Note 2 to the Group financial statements,
the transitional impact from the application of IFRS 16 was a
reduction to opening reserves as at 1 July 2019 of £3.7m after tax.
The impact of IFRS 16 on the Group’s underlying operating profit
was an increase of £0.9m and there was a £0.2m negative impact
on the Group’s underlying profit before tax for the year ended
30 June 2020. The impact of IFRS 16 on the Group’s reported
operating profit was an increase of £4.8m and there was a £3.7m
increase in the Group’s reported profit before tax for the year
ended 30 June 2020.
Acquisitions and acquired intangibles
As set out in more detail in Note 14 to the Group financial
statements, the Group acquired the entire issued share capital of
PLC Consulting Pty Ltd ( renamed Ricardo Energy, Environment and
Planning, or ‘REEP’ ) on 31 July 2019 for an initial cash consideration
of £4.2m (AUD 7.4m), which included an adjustment of £0.3m (AUD
0.4m) for cash and normalised levels of net working capital, paid
in November 2019. The maximum contingent cash consideration
payable is £1.5m (AUD 2.6m), based on a combination of the
achievement of certain performance targets over a two-year
period and the continuing employment of sellers in the business.
£0.7m (AUD 1.3m), representing an accrual for the fair value of the
expected year-one earn-out payment, has been recognised in the
income statement within specific adjusting items.
This investment added goodwill of £2.6m (AUD 4.6m) to the
Ricardo EE cash-generating unit and acquired intangible assets
of £1.3m (AUD 2.4m), which have a net book value at year-end of
£0.9m (AUD 1.7m). Amortisation of £0.4m (AUD 0.7m) has been
charged to the income statement as a specific adjusting item in
the period since acquisition, together with £0.2m (AUD 0.4m) of
expenditure incurred in relation to the post-deal integration of
the business.
In the prior year, the Group acquired the entire share capital
of Transport Engineering Pty Ltd (renamed Ricardo Rail Australia,
or ‘RRA’) for an initial cash consideration of £21.7m (AUD 39.5m),
including an adjustment for cash and normalised net working
capital of £0.5m (AUD 0.9m), which was paid in August 2019,
together with the accrued provisional fair value of contingent
cash consideration payable of £5.1m (AUD 9.4m).
The maximum contingent cash consideration payable is £8.1m
(AUD 15.0m), based on the achievement of annual performance
targets across a two-year earn-out period. £2.1m (AUD 3.8m) has
been accrued within specific adjusting items (see Note 7 to the
Group financial statements) in the current year, reflecting the
increase in the fair value of contingent consideration payable
based on RRA’s results for the year to 30 June 2020.
Amortisation of £1.9m (AUD 3.6m) on acquired intangibles has
been charged to the income statement as a specific adjusting
item in the financial year, together with £0.2m of expenditure
incurred in relation to the post-deal integration of the business.
44 Ricardo plc Annual Report & Accounts 2019/20
Specific adjusting items
As set out in more detail in Note 3 and Note 7 to the Group
financial statements, the Group’s underlying profit before tax for
the year excludes costs incurred during the year that have been
charged to the income statement as specific adjusting items of
£20.9m (FY 2018/19: £10.5m).
Reconciliation of underlying profit before tax to
reported (loss)/profit before tax
£m
FY 2019/20
FY 2018/19
Underlying profit before tax
Amortisation of acquired intangibles
Acquisition-related expenditure
A&I US - DTC purchase and
impairment
A&I US - Test business loss on disposal
A&I US - exit of SCTC and other
reorganisation costs
Other reorganisation costs
GMP equalisation
Reported (loss)/profit before tax
15.6
(6.0)
(3.0)
(3.6)
(2.1)
(0.9)
(5.3)
-
(5.3)
37.0
(4.0)
(1.8)
-
-
-
(3.4)
(1.3)
26.5
£6.0m of amortisation on acquired intangibles was charged in FY
2019/20. In addition to amortisation in respect of RRA and REEP,
£3.7m was charged in respect of acquisitions made in prior years.
Acquisition-related expenditure of £3.0m was incurred in FY
2019/20 (FY 2018/19: £1.8m). FY 2019/20 costs include £2.8m of
accrued earn-out payments for RRA and REEP. A total of £1.3m
was recognised in respect of external transaction fees, acquisition
and post-deal integration costs. In addition, a £1.1m gain was
recognised from the settlement of a foreign exchange option
contract, which was taken out to finance an aborted overseas
acquisition. FY 2018/19 costs included £0.4m of accrued earn out
costs and £1.4m of external deal fees and acquisition costs.
Reorganisation costs include £6.6m of costs in relation to
the major restructuring of our US A&I business, in line with our
strategy of realigning its cost base in order to make it a more
operationally efficient business. These costs have been included
as specific adjusting items since they are significant in quantum
and would distort the underlying trading performance if
included. In August 2019, we purchased the freehold property
at DTC (comprising the north test buildings and south office
building) for £14.2m (USD 17.3m), thereby removing the US A&I
business from its long-term lease commitment on the property.
We immediately marketed it for sale, together with our DTC test
assets, which were held for sale at the end of the prior financial
year, and recognised a £6.7m impairment charge to write down
the value of the facility to its fair value. This was partially offset by
the release of a £3.1m lease liability on its purchase.
In June 2020, we sold our test operations in DTC (test assets
together with the DTC north building) for an initial cash
consideration of £2.8m (USD 3.5m), which could increase to
£4.4m (USD 5.5m) depending on the volume of testing work
placed into the facility by Ricardo over the next two years. A
loss of £2.1m was recognised on the sale. In addition, we also
Strategic report
Financial review
Ricardo’s VR-based vehicle styling review app was demonstrated to attendees of the Ricardo Motorcycle conference
exited the aftertreatment business at our Santa Clara Technical
Centre (‘SCTC’), incurring £0.4m of exit costs and the write-off of
equipment. £0.5m of redundancy and incremental contractor
costs were incurred in the year in connection with these actions.
The DTC south building continues to be marketed and remains
held for sale.
£4.0m of redundancy costs were incurred in FY 2019/20 across
the Group’s automotive-related businesses (A&I in Europe,
Performance Products and RSC & Software, totalling £2.6m) and
Rail (£1.4m). In our automotive-related businesses, these actions
were taken as a result of major restructuring required to right-size
the cost base in these businesses in response to the challenging
trading conditions.
The Rail costs represent the completion of a restructuring
process which commenced in the prior year to realign the
business to market demand. As part of these restructuring actions,
a charge of £0.6m was recognised in respect of the vacant portion
of the Cambridge Technical Centre (‘CaTC’). £0.4m of professional
fees and £0.3m of incremental contractor costs were incurred
in relation to the restructuring initiatives in FY 2019/20. The total
costs of these restructuring actions have been included as specific
adjusting items since, together, they are significant in quantum
and would distort the underlying trading performance if included.
In the prior year, £2.4m of redundancy costs were incurred in
A&I Europe and Rail, together with £0.7m of costs in relation
to onerous contracts and £0.3m of contractor costs. The FY
2018/19 A&I restructuring costs were not linked to the FY 2019/20
restructuring programme.
Research and Development (‘R&D’) and capital
investment
The Group continues to invest in R&D and spent £12.5m (FY
2018/19: £13.4m) before government grant income of £1.1m
(FY 2018/19: £2.2m). Costs capitalised in the year were £8.0m
(FY 2018/19: £7.6m), reflecting our continued investment in
our Software segment, together with new technology, tools
and processes in our A&I and EE segments. During the year,
we successfully completed the sale of the Group’s CryoPower
intellectual property to FPT Industrial S.p.A. An overview of current
R&D activities is presented on pages 18 to 20.
Additions to property, plant and equipment, excluding right-
of-use assets, were £22.0m (FY 2018/19: £7.6m). Excluding the
DTC facility purchase, additions were £7.8m, reflecting continued
investment in our business operations, including new and
upgraded test-cell equipment, machinery and IT equipment.
The total Research and Development Expenditure Credit
(‘RDEC’) recognised in the year was £7.7m (FY 2018/19: £7.1m).
This comprised an estimated RDEC credit in respect of the
current year of £6.7m (FY 2018/19: £6.9m), together with £1.0m
(FY 2018/19: £0.2m) 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 (FY 2018/19: £0.5m) and finance costs
were £4.8m (FY 2018/19: £3.1m) for the year, giving net finance
costs of £4.4m (FY 2018/19: £2.6m). The increase was primarily
due to the adoption of IFRS 16 Leases, which resulted in the
recognition of £1.2m of interest costs in relation to leases brought
on to the financial position.
Taxation
The total tax charge for the year was £1.1m (FY 2018/19: £6.6m)
and the total effective tax rate was negative at (20.8)% (FY 2018/19:
positive 24.9%). The underlying effective tax rate for the year was
26.3% (FY 2018/19: 22.2%), with the increase reflecting the impact
on deferred tax as a result of the UK Government’s decision not to
implement a reduction in the tax rate from 19% to 17%.
Deferred tax assets of £9.4m (FY 2018/19: £6.7m) include £5.1m
(USD 6.3m) (FY 2018/19: £4.9m (USD 6.3m)) of R&D tax credits
in the US which continue to be recognised and have been
partially utilised during the year. The Directors have considered
Creating a world fit for the future 45
Strategic report
Financial review
Ricardo supports Scotch Whisky industry with journey to Net Zero
the recoverability of these assets 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 loss per share was 12.2p (FY 2018/19: earnings per share
37.1p). The Directors consider that underlying earnings per share
provides a more useful indication of performance and trends over
time. Underlying basic earnings per share for the year decreased
to 21.3p (FY 2018/19: 53.7p).
Basic loss per share is disclosed in Note 8 to the Group financial
statements, alongside a reconciliation to underlying basic
earnings per share, which excludes the net-of-tax impact of
specific adjusting items.
Dividend
The Group paid its FY 2019/20 interim dividend of 6.24 pence per
share (£3.3m) on 6 April 2020. The Group paid a total dividend
of 21.28 pence per share (£11.5m) in relation to FY 2018/19
performance. Due to the reduced performance experience by the
Group in the second half of FY 2019/20, after careful consideration,
the Board have decided not to recommend a final dividend
for the year. This difficult decision has been taken to protect
Group’s financial position. The board recognises the importance
of dividends to shareholders and intends to resume dividend
payments as soon as it is appropriate to do so.
Banking facilities
On 5 May 2020, the Group exercised £50m of the accordion
option of its banking facilities, thereby increasing the Revolving
Credit Facility (‘RCF’) to £200m and increasing the amount
46 Ricardo plc Annual Report & Accounts 2019/20
undrawn and available to £70m. This provides the Group with
increased committed funding available for the remaining term
through to July 2023.
In addition to the increased committed funding available, the
Adjusted Leverage (defined as net debt over underlying EBITDA)
covenant was increased from 3.0x to 3.75x for the next two test
dates of 30 June 2020 and 31 December 2020. Following the
year end, on 9 September 2020, the definition of the Adjusted
Leverage covenant for the December 2020 covenant test date
was amended to be based on two times the six months’ EBITDA
to December 2020. In addition, the June 2021 covenant was
increased to 3.75. The only other financial covenant is Interest
Cover. This remains at 4.0x for each test date, but with the
December 2020 test based on two times the six months’ EBITDA
to December 2020.
Net debt of £73.4m at 30 June 2020 comprised cash and cash
equivalents of £66.3m and borrowing and overdrafts of £139.7m
excluding finance leases. Total facilities before borrowings are
£216.6m. This provides total cash and liquidity of £143.1m as at 30
June 2020.
The Group’s committed facilities are denominated in Pounds
Sterling and have variable rates of interest dependent upon the
Group’s adjusted leverage, which range from 1.4% to 2.2% (FY
2018/19: 1.4% to 2.2%) above LIBOR.
The group continues to have good access to liquidity and
the Board remains focused on ensuring that the Group has
the appropriate capital structure to ensure its ability to trade
resiliently in these uncertain times as well as having the ability
to successfully pursue its growth strategy. Further details are
provided in Note 25 to the Group financial statements.
Foreign exchange
On consolidation, revenue and costs are translated at the
average exchange rates for the year. 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 prior year, the
average value of the Pound Sterling weakened by 3% against the
US Dollar, and strengthened marginally against the Euro and the
Chinese Renminbi. On a constant currency basis, underlying and
underlying profit before tax on an organic basis would both have
been £0.2m higher.
Pensions
The Group’s defined benefit pension scheme operates within the
UK. The fair value of the scheme’s assets at the end of the year was
£150.4m (FY 2018/19: £137.5m). The accounting deficit measured in
accordance with IAS 19 Employee Benefits was £6.7m before tax
(FY 2018/19: £8.5m).
The £1.8m decrease in the pre-tax pension accounting deficit
during the year was due a positive return on plan assets, offset by
a reduction in the discount rate. £4.6m of cash contributions were
paid to the scheme. Ricardo continues to fund the pension at
£4.6m per annum until 31 July 2022.
Segments review
Strategic report
Overview
From 1 July 2019, the Group has reported the following reportable operating segments: Energy & Environment (‘EE’), Rail, Automotive
and Industrial (‘A&I’), Defense, and Performance Products (‘PP’). There is also an ‘all other segments’ segment, which comprises the
results of Ricardo Strategic Consulting & Software, combined due to their size. Neither of these met the quantitative thresholds
for reportable segments in FY 2019/20 or FY 2018/19. This change was driven by successful acquisitions in Rail and EE, increasing
the prominence of these businesses within the Group, combined with the wish to provide more granularity into the key drivers of
performance within the Group.
For the year ended 30 June
Energy & Environment ('EE')
Rail
Automotive & Industrial ('A&I')
Defense
Performance Products ('PP')
Strategic Consulting & Software ('Other')
Operating segments total
Plc costs
Total
(1) Defined in the glossary of term on page 201.
Revenue
Underlying(1)
operating profit
Underlying(1) operating
profit margin
2020
£m
50.8
75.3
105.9
32.8
69.0
18.2
352.0
-
352.0
2019
£m
44.6
67.4
129.3
25.2
95.4
22.5
384.4
-
384.4
2020
£m
6.3
5.8
0.5
5.1
5.0
0.1
22.8
(2.8)
20.0
2019
£m
5.0
5.2
16.1
3.2
9.9
3.9
43.3
(3.7)
39.6
2020
%
12.4
7.7
0.5
15.5
7.2
0.5
6.5
-
5.7
2019
%
11.2
7.7
12.5
12.7
10.4
17.3
11.3
-
10.3
EE, Rail, A&I, Defense (excluding the anti-lock braking system/electronic stability control (‘ABS/ESC’) product), and Strategic Consulting
were previously reported within the Technical Consulting operating segment. PP, the ABS/ESC product, and Software were previously
reported within the Performance Products operating segment. Plc costs include the costs of running the public limited company.
FY 2018/19 segmental analysis has been reported on a consistent basis to aid comparability.
Energy &
Environment
See page 48
Rail
See page 50
Automotive &
Industrial
See page 52
Defense
See page 54
Performance
Products
See page 56
Strategic
Consulting &
Software
See page 58
Creating a world fit for the future 47
Strategic report
Operating Segments
Energy & Environment (‘EE’)
Business model
Ricardo Energy & Environment (‘EE’) works with clients to solve some of the world’s most complex environmental challenges, and
provides governments, public agencies and businesses with industry-leading analysis, advice and data.
EE works across the value chain from gathering and evaluating evidence, setting policy measures, and working with its
customers, partners and stakeholders to support the implementation of a wide range of solutions. For example, EE assesses the
information impacting air quality within a city, works with stakeholders and leaders to derive policy options to improve air quality,
and then supports the delivery of measures such as vehicle charging zones, bus retrofits or electric charging infrastructure. EE has
over 500 expert consultants, including engineers, scientists, economists and data specialists operating in over 75 countries.
In FY 2019/20, EE’s revenue grew by 14% to £50.8m (FY 2018/19:
£44.6m) and underlying operating profit grew by 26% to £6.3m
(FY 2018/19: £5.0m). FY 2019/20 was a successful year for EE,
with the growth in revenue and operating profit reflecting a
combination of organic growth and the successful acquisition,
on 31 July 2019, of PLC Consulting Pty Ltd (renamed Ricardo
Energy, Environment and Planning, or ‘REEP’), which focuses
on the waste and planning sectors in Victoria, Australia. On
an organic basis, after normalising for the impact of the REEP
acquisition, revenue and underlying operating profit grew by
£4.0m (9%) and £0.5m (9%), respectively. Underlying operating
profit margin increased from 11.2% in FY 2018/19 to 12.4% in FY
2019/20, driven by increased utilisation of staff and leverage of
the cost base.
Order intake for FY 2019/20 was £56.0m (FY 2018/19: £46.1m),
growth of 21%. At 30 June 2020, EE’s order book was £41.7m (FY
2018/19: £35.6m). Of this, £0.8m relates to REEP.
International projects have expanded significantly, due
to three principal factors: the acquisition of REEP; increased
demand for our air quality and waste services in the Middle
East; and growth in Europe; driven by economic and policy
studies for the European Commission. EE has also won new
projects in previously untapped territories, including a major air
quality project in Lima, Peru, and a series of sustainable energy
opportunities in the Caribbean.
EE has continued to see steady growth in work with UK public-
sector customers, with increasing demand driven by the climate
emergency and Net Zero agenda, as local authorities seek to
48 Ricardo plc Annual Report & Accounts 2019/20
EE
Financial and operational highlights
Order intake
60
50
40
30
+21%
Organic(1) +12%
FY
20
2019/20
10
2018/19
0
Revenue
+14%
Organic(1)+ 9%
FY
2019/20
2018/19
Order book
50
+17%
40
Organic(1) +13%
30
£m
56.0
46.1
FY
2019/20
2018/19
20
10
0
£m
41.7
35.6
Underlying(1) operating
profit
+26%
Organic(1) +9%
£m
50.8
44.6
FY
2019/20
2018/19
£m
6.3
5.0
Underlying(1) operating
profit margin
+1.2pp
Organic(1) 0%
Headcount(1)
+17%
Organic(1) +13%
FY
2019/20
2018/19
%
12.4
11.2
FY
2019/20
2018/19
Number
571
487
(1) References in superscript are defined in the glossary of terms on page 201.
take action in cities and counties across the UK. This has added
to EE’s 40-plus year track record in operating a wide range of air
quality/greenhouse gas modelling, inventory and monitoring
projects, delivered on behalf of the UK Government. EE has also
won a four-year extension to the Resource Efficiency Scotland
programme, supporting small businesses in implementing
energy and resource efficiency actions across Scotland.
EE has continued to see growth in UK private-sector work,
where its principal clients are in the water and energy sectors.
2020 has seen the commencement of the new five-year
UK Water Sector Asset Management Planning (‘AMP’) cycle.
Although there had been a slight decrease in demand for EE’s
strategic water resource planning skills at the conclusion of the
previous AMP cycle, EE has secured a range of new framework
contracts, to run for the next five year AMP cycle with many of
the largest water companies – including Southern Water, United
Utilities, Yorkshire Water and Thames Water – to support them in
planning the long-term future for sustainable water resources.
In the UK Energy sector, EE has won a major innovation
project with Western Power Distribution (‘WPD’) and Electricity
North West Limited (‘ENWL’) to trial a novel solution that enables
increased numbers of high-power electric vehicle chargers to be
connected to the electricity network at lower cost.
EE also supports the chemicals sector in the UK, including a
relationship with the UK emergency services that goes
Strategic report
Energy & Environment (‘EE’)
Climate change and
environmental revenue
contribution
FY
2019/20
%
19
1
Driven by climate change
Driven by an environmental issue
Has environmental benefits
Relates to safety
None of the above
30
£50.3m
of revenue directly
linked to tackling
climate change
50
Around 80% of EE’s FY 2019/20 revenue was directly driven by climate
change or other environmental challenges such as air quality, water
quality or waste management. Climate change driven projects
include greenhouse gas inventory support, renewable energy
projects, life cycle assessment, climate change policy studies and
energy efficiency advice to businesses. The vast majority of EE’s
other revenues also provide environmental benefits. For example,
power sector planning projects improve energy access and help
decarbonise the electricity grid while chemical risk advice saves lives
and reduces the environmental impacts of chemicals.
back 45 years; the practice also has international relationships
with over 600 global chemical clients. This part of the business
has seen revenue grow in this financial year as it sought to
broaden its services to include a wider range of chemical
regulatory consultancy, and work on Poison Centre notifications.
EE was not significantly disrupted by COVID-19, as the business
found innovative solutions by working closely with our clients
to ensure that we could maintain our services during a period of
highly restricted travel. In order to continue to support its clients,
the business adapted quickly to the challenges presented by
remote working and the suspension of international travel.
Outlook
EE ended the financial year with an order book and secured
revenue that were both ahead of the prior year. Although the full
extent of COVID-19 recovery plans and financing mechanisms
are not yet known, EE is confident that economic stimuli will
have a positive impact on its markets in FY 2020/21 and create
opportunities, in particular the potential for re-alignment of UK
and global economies to create a “clean and green” recovery.
EE expects continuing growth across sectors, with recovery-led
infrastructure projects driving the requirement for specialist
input and support across EE disciplines.
Brexit preparedness has continued throughout the year with
additional recruitment into European locations and continued
close working with Ricardo colleagues operating within the EU.
EE’s focus for FY 2020/21 will be on enhancing activity across
EE’s spectrum of services, from evidence and policy work
through to supporting implementation solutions for clients.
EE plans to continue to grow its air quality and greenhouse
gases evidence expertise as well as developing its policy
offerings to include new environmental topics and additional
sectors. EE is already seeing strong demand in Europe with the
implementation of the “Green New Deal” and expects to see
stronger growth in the private sector, particularly in the UK
water sector.
Creating a world fit for the future 49
Strategic report
Operating Segments
Rail
Business model
Ricardo Rail (‘Rail’) serves the global rail market through two separate operations: a consultancy unit that provides technical advice
and engineering services, and a separate, independent entity, Ricardo Certification, that performs accredited assurance services.
Both have a similar geographic footprint across Europe, Asia-Pacific and the Middle East, and support a client base that
includes rail operators, infrastructure managers, regulatory bodies and industry suppliers. Ricardo Rail employs 623 rail engineers,
technicians, auditors and support staff, with key hubs in the UK, the Netherlands, China and Australia.
In FY 2019/20, Rail’s revenue grew by 12% to £75.3m (FY 2018/19:
£67.4m) and underlying operating profit grew by 12% to £5.8m
(FY 2018/19: £5.2m). Underlying operating profit margin was
stable at 7.7%. The growth in revenue and underlying operating
profit was driven by the performance of Ricardo Rail Australia
(‘RRA’), which was acquired on 31 May 2019, and delivered a very
strong set of results in the current year, in line with plan. The
performance of RRA was offset by challenges in other areas of the
business, in particular the UK, with reduced volumes on major UK
certification projects, and Asia, with delayed mobilisation on
large infrastructure projects. On an organic basis, after
normalising for the impact of the RRA acquisition, revenue and
underlying operating profit declined by £6.0m (7%) and £2.6m
(31%), respectively.
FY 2019/20 order intake was £80.7m (an increase of £19.7m on FY
2018/19). £14.0m of the FY 2019/20 order intake was generated by
RRA. The closing order book was £110.7m (FY 2018/19: £109.1m), of
which £26.7m related to RRA (FY 2018/19: £30.1m).
The performance of RRA in its first full year under Ricardo
ownership reflects the success of its established, long-term
relationships with clients such as Transport for New South
Wales, for which it has provided technical support throughout
the introduction of new fleets onto the rail networks. RRA was
50 Ricardo plc Annual Report & Accounts 2019/20
successfully integrated into the wider Rail business. Synergies from
complementary skills have been realised. RRA has supported Rail’s
Middle East business, and UK Rail personnel have been actively
involved in supporting major bids for RRA.
The Dutch consultancy team won several major assignments
with Nederlandse Spoorwegen (‘NS’), the principal passenger
railway operator in the Netherlands, underlining the team’s
position as the pre-eminent engineering consultancy in Dutch
rolling stock.
The UK consulting team had a challenging year with reduced
volumes and personnel changes. COVID-19 also had some impact
in the last quarter. Restructuring actions were completed during
the year to align the business to market demand.
Performance in Asia was also mixed. This was the first region
to be widely affected by the COVID-19 pandemic, with the Hong
Kong operations already having experienced significant disruption
as the office had been forced to close on several occasions during
the autumn 2019 demonstrations. By way of a positive contrast, in
Taiwan and Korea, the technical teams were engaged in some of
the largest systems engineering projects of recent years.
The performance of Ricardo Certification remained resolute.
The China team has a strong order book; the Middle East
team secured notable wins in Qatar; whilst in Europe the team
RAIL
Financial and operational highlights
Order intake
Order book
100
80
+32%
Organic(7) -2%
FY
2019/20
2018/19
60
40
20
0
Revenue
+12%
Organic(7) -7%
FY
2019/20
2018/19
+1%
Organic(7) +1%
FY
2019/20
2018/19
120
100
80
60
40
20
0
£m
80.7
61.0
£m
110.7
109.1
Underlying(1) operating
profit
+12%
Organic(7) -31%
£m
75.3
67.4
FY
2019/20
2018/19
Underlying(1) operating
profit margin
0pp
Organic(7) -2.6pp
FY
2019/20
2018/19
%
7.7
7.7
Headcount(1)
-2%
Organic(7) -2%
FY
2019/20
2018/19
(1) References in superscript are defined in the glossary of terms on page 201.
£m
5.8
5.2
Number
623
636
Strategic report
Rail
Climate change and
environmental revenue
contribution
FY
2019/20
%
2
14
Driven by climate change
Driven by an environmental issue
Has environmental benefits
Relates to safety
None of the above
£11.9m
of revenue directly
linked to tackling
climate change
59
25
Railways represent the mode of transport that has the lowest impact
on the environment and the majority of railways in the markets Rail
serves are already fully electrified. Rail supports the procurement of
upgrades to infrastructure and rolling stock that are being introduced
for reasons that do not have a direct additional environmental
benefit. In many cases, Rail provides the system safety engineering
and certification of the upgrades to ensure the railway is safe for
passengers to use and workers to operate and maintain. Ricardo
Certification assesses and accredits railways to ensure they comply
with the strict standards for use and provide the assurance required
to operate the railway to design requirements.
Core to Rail’s strategy is meeting the key industry challenges of
carbon, cost, capacity and customer experience. Revenue streams
which have environmental benefit as their key driver include projects
which improve rail systems to optimise the use of assets by (a)
reducing the quantity of rolling stock and spares by making trains
more reliable and available; and (b) increased use of sustainable
materials for fuels and components.
Rail is increasingly focusing on securing projects that deliver
electrification and solutions that decarbonise railways, such as
hybridisation and battery electric trains, together with projects that
deliver energy efficiency improvements as railway systems look to
reduce the consumption of energy and increase the use of energy
from renewable sources.
continues to support London’s Crossrail and the re-signalling of
the Danish rail network, and awaits the commencement of several
rolling stock projects.
accreditations in Denmark and the Netherlands, Ricardo Rail is well
positioned to continue consulting projects and certification work
in the EU without disruption after Brexit.
Outlook
Looking ahead, the Rail segment has a healthy and varied
portfolio of projects. These include projects in new areas such as
digital resilience and vehicle decarbonisation, as well as traditional
assurance projects such as Seoul’s Great Train eXpress and Beijing
Metro Line 17. As a result, Rail enters FY 2020/21 with one of its
largest ever order books.
Due to its presence in a number of European Union
countries and having moved quickly to organise the necessary
Whilst there is no doubt that the COVID-19 pandemic will
continue to impact travel habits over the short and medium term,
there is little to suggest any serious long-term ramifications for the
rail sector. Rail, whether in the form of rapid transport systems in
major city centres or as national networks of high-speed routes,
remains an essential component of sustainable travel policies. As
well as new builds to support growing urban centres, we expect
to see continued investment in the modernisation of mature
networks to seek continued improvement in safety, efficiency
and performance.
Creating a world fit for the future 51
Strategic report
Operating Segments
Automotive & Industrial (‘A&I’)
Ricardo A&I played a crucial role in
the development of JCB’s Fastrac
tractor, which Guy Martin powered
to a Guinness World Records speed
record of 135.191 mph
Business model
Ricardo Automotive & Industrial (‘A&I’) serves as a trusted global engineering design and development partner for the provision of
clean, efficient, integrated propulsion and energy solutions across the areas of hybrid and electric systems, electrification, engines,
driveline and transmissions, testing, and vehicle engineering. Customers span the transportation and industrial markets, including
automotive, aerospace, defence, energy, off-highway and commercial, marine, motorcycle and light-personal transport, and rail.
A&I has 1,154 staff, operating from engineering centres and sales offices within the UK, Europe, US, and Asia (primarily in China).
A&I was impacted by continuing challenging economic and
political conditions during the year. China’s slowing economic
growth, trade tensions between the US and China, reduced credit
availability in India, Brexit and the UK General Election all had an
impact on customer activity and orders. This was compounded
by the impact of COVID-19 in the second half of the year, initially
within China and then Europe and the US. With populations in
lockdown, customers responded by temporarily shutting down
their operations, implementing part-time working, mothballing
manufacturing facilities, and implementing significant cost-
reduction measures.
Order intake held up relatively well, reducing by 7% from
£123.6m in FY 2018/19 to £115.3m in FY 2019/20. The economic
circumstances had a more significant impact on revenue and
operational efficiency as a number of customers delayed non-
business critical projects. Revenue decreased from £129.3m in
FY 2018/19 to £105.9m in FY 2019/20, and underlying operating
profit decreased from £16.1m in FY 2018/19 to £0.5m in FY 2019/20,
with underlying operating margin decreasing from 12.5% to 0.5%.
Within this, the business in Europe remained profitable. The US
business continued to be loss-making and has taken significant
steps to restructure its operations, as set out below. The China
business ended the year with a small loss.
New Managing Directors joined A&I’s European and US
operations during the year. Both have had, and continue to have, a
52 Ricardo plc Annual Report & Accounts 2019/20
focus on strategy and business development, whilst continuing to
ensure that the resources within the engineering teams are suitably
matched with client needs and market opportunities.
A&I has continued with its strategy to create a more flexible cost
base and become an operationally efficient consultancy. In August
2019, the Detroit Technology Campus (‘DTC’), comprising its engine
testing and office buildings, was purchased in order to extricate
the business from a long-term lease on the property. In June
2020, the Detroit engine testing business (together with the DTC
engine testing building) was sold to a non-competitive strategic
partner for an initial cash consideration of £2.8m (USD 3.5m), with
up to £1.6m (USD 2.0m) deferred, reducing A&I’s fixed cost base
and allowing A&I to continue to offer test services locally in its
overall offering to customers. The DTC office building is currently
being marketed and is held-for-sale on the June 2020 statement
of financial position. In June 2020, we also exited our Santa Clara
Technical Centre (‘SCTC’) and aftertreatment business and set up
new premises in Southern California, in order to develop new
market opportunities aligned with the business’ strategic goals.
Subsequent to the opening of the Southern California site, A&I
strengthened the US team with a senior appointment to lead the
transformation of engineering operations, particularly in the areas
of electrification and software. The team in Southern California
recently secured a £3.2m win with the US Department of Energy
to advance the development of high efficiency silicon carbide
AUTOMOT
Strategic report
Automotive & Industrial (‘A&I’)
Financial and operational highlights
Order intake
Order book
150
120
-7%
90
FY
2019/20
60
2018/19
30
0
Revenue
-18%
FY
2019/20
2018/19
+3%
£m
FY
115.3
123.6
2019/20
2018/19
80
70
60
50
40
30
20
10
0
Underlying(1) operating
profit
-97%
£m
FY
105.9
2019/20
0.5
129.3
2018/19
£m
16.1
Underlying(1) operating
profit margin
-12pp
Headcount(1)
-5%
FY
2019/20
0.5
2018/19
%
FY
2019/20
2018/19
12.5
Number
1,154
1,218
(1) References in superscript are defined in the glossary of terms on page 201.
inverters for electric vehicle applications.
As the COVID-19 pandemic developed and lockdown hit the
various parts of the business, A&I responded immediately. Almost
overnight, those who could work from home did, whilst those
who were not able to work from home continued supporting the
business and client projects on site, with the business ensuring
staff were able to work safely by amending working practices in
line with safety guidelines. A&I also re-evaluated its strategy and
made the difficult decisions required to quickly reduce the cost
base and help protect our employees, including some use of local
furlough schemes.
Over the course of the year, A&I secured and delivered a range
of successful customer programmes across the transportation
and industrial markets, which included: supporting CNH Industrial
with the development of a biomethane-powered tractor; selling
its CryoPower clean engine intellectual property to FPT Industrial
S.p.A whilst continuing to assist in their development of this
innovative and high-efficiency combustion engine; delivering
a highly versatile and cost-effective vehicle demonstrator for
general service defence purposes, adapted from Ford’s iconic
Ranger series, Europe’s best-selling pick-up truck; partnering with
Nexperia to produce a technology demonstrator for an EV inverter
based gallium nitride technology; and delivering safety-critical
transmission control software for China Euro Vehicle Technology
AB for a 7-speed dual clutch transmission in a compact luxury
crossover SUV. In addition, A&I also played a crucial role in the
development of JCB’s Fastrac tractor, in which Guy Martin set a
Climate change and
environmental revenue
contribution
FY
2019/20
%
30
Driven by climate change
Driven by an environmental issue
Has environmental benefits
Relates to safety
None of the above
£m
77.5
75.2
22
£74.9m
of revenue directly
linked to tackling
climate change
22
26
Approximately 70% of A&I revenue comes from activities generating a
positive environmental impact with over 20% specifically intended to
address the challenge of climate change. A&I’s contributions consist
of cutting-edge propulsion system developments, which reduce
carbon emissions where internal combustion engines remain the
most appropriate technology, through to next generation electrical
energy storage systems, which power the growth in electrified
propulsion. A&I’s continued contributions to the automotive and
industrial transportation markets, as well as its focus on the growing
sectors of clean aviation and alternative fuels, reinforce A&I’s mission
to deliver environmentally sustainable technological innovation.
new Guinness World Records’ speed record, as shown on the
Channel 4 documentary, Guy Martin: The World’s Fastest Tractor.
During the COVID-19 lockdown period, A&I has focused on how
to support its customers in innovative ways. A&I implemented
a ‘world first’ in virtual vehicle certification, whereby customers
and certification bodies could observe tests via a secure, live
3-way feed to the automation and data management systems
of A&I’s advanced UK test facilities. Reflecting the needs of global
customers working from home, but still wanting to access our
thought leadership and interact with our technical experts,
A&I prioritised digital engagement. A&I subject matter experts
delivered 14 webinars (3 with Automotive World, 11 own label
Ricardo Technology Webinars) which saw A&I engage with just
over 6,000 contacts on key industry challenges where A&I offer
world-leading technical solutions such as preparing for Euro 7, fuel
cells for heavy duty trucks, off-highway electrification, xEV holistic
thermal management, and the road to zero carbon. As part of
its digital-first strategy, A&I also focused on LinkedIn as a primary
engagement channel for customers, and broader audiences across
industry, media, government, academia and communities across
the world. The A&I corporate presence on LinkedIn attracted
particularly strong engagement in relation to content posts about
its design, assembly and delivery of PPE, and grew its community
of followers to just over 50,000.
Outlook
Carbon dioxide (‘CO2’) emissions targets continue to drive
the global agenda, with industry increasing its investment in
electrification and alternative energy propulsion, together with
its digitalisation of processes and products. Whilst COVID-19
may affect some markets in the coming year, the global agenda
still continues to provide a significant longer-term pipeline of
opportunities to A&I for the provision of innovative clean, efficient,
integrated propulsion and energy solutions for customers within
our transportation and industrial markets.
Creating a world fit for the future 53
Strategic report
Operating Segments
Defense
The US Army awarded GM Defense
and its strategic partner, Ricardo
Defense, a USD 214.3M contract to
build, field, and sustain the Army’s
new Infantry Squad Vehicle (See
case study on pages 82 to 85)
Business model
Ricardo Defense (‘Defense’) is focused on the delivery of services, software and products that protect life and reduce defence
programme costs and waste. Defense delivers wide-ranging engineering programmes across light and heavy land and sea
theatres of operation, supporting clients to improve processes to streamline the fielding, modification, maintenance and
support of complex systems used in operational planning. This includes providing enterprise software to enable the electronic
distribution of technical data, ensuring data integrity and cyber security across disrupted communication environments. Defense
also provides anti-lock braking system/electronic stability control (‘ABS/ESC’) systems for all new production High Mobility
Multipurpose Wheeled Vehicles (‘HMMWV’ or ‘Humvee’) for the US Army and National Guard.
Defense’s staff of 162 technical professionals and support staff is based across the US, including major centres in Michigan and
California.
Defense delivered strong growth in FY 2019/20, with revenue
increasing by 30% to £32.8m (FY 2018/19: £25.2m) and
underlying operating profit increasing by 59% to £5.1m
(FY 2018/19: £3.2m). Underlying operating profit margin
increased from 12.7% in FY 2018/19 to 15.5% in FY 2019/20.
Growth was driven by increased activity in the engineering
services business and sales of the ABS/ESC product. The
underlying operating profit margin was low in the prior period
as costs were increased in preparation for the delivery of
ABS/ESC units.
Order intake reduced by 26% to £29.0m (FY 2018/19:
£39.0m): this reflects the timing of ABS/ESC orders,
with Defense having secured a large order from the US
Government in the prior year, delivering these units in FY
2019/20. The FY 2019/20 closing order book was £15.6m (FY
2018/19: £20.3m), with the reduction reflecting the timing of
ABS/ESC orders.
Defense designed, developed and integrated the ABS/ESC
kit to address an ongoing HMMWV rollover issue. The system
has been proven by the US Army to mitigate vehicle rollover
and loss-of-control accidents. Defense delivered 2,464 ABS/ESC
kits for new HMMWVs production vehicles in FY 2019/20 (FY
2018/19: 1,650). This includes the first shipments of retrofit kits
to a non-US country to upgrade the safety, performance, and
reliability of their HMMWVs.
Underpinning its commitment to quality, Defense
again achieved Capability Maturity Model Integration
(‘CMMI’) Level 3 certification for its systems and software
development processes. Defense is supporting the US Army
and Marine Corps in the integration of a wireless, dismounted
communication system solution for ground support vehicles;
the system enhances the safety and situational awareness for
combat personnel conducting dismounted operations on or
around vehicle platforms. Through operational user testing,
54 Ricardo plc Annual Report & Accounts 2019/20
DEFENSE
Strategic report
Defense
Financial and operational highlights
Order intake
Order book
Climate change and
environmental revenue
contribution
FY
2019/20
%
5
Driven by climate change
Driven by an environmental issue
44
£m
Has environmental benefits
15.6
20.3
Relates to safety
None of the above
£1.7m
of revenue directly
linked to tackling
climate change
51
-26%
FY
2019/20
2018/19
40
35
30
25
20
15
10
5
0
Revenue
+30%
FY
2019/20
2018/19
-23%
£m
FY
29.0
39.0
2019/20
2018/19
25
20
15
10
5
0
Underlying(1) operating
profit
+59%
£m
32.8
25.2
FY
2019/20
2018/19
£m
5.1
3.2
Underlying(1) operating
profit margin
+2.8pp
Headcount(1)
+17%
FY
2019/20
2018/19
%
15.5
12.7
FY
2019/20
2018/19
Number
162
138
(1) References in superscript are defined in the glossary of terms on page 201.
integration and sustainment planning, and cyber security
strategy, Ricardo Defense uses commercial off-the-shelf
solutions to provide mission-ready, cost-effective solutions
that protect lives and enhance communication in a rapid and
efficient manner.
As the US Department of Defense seeks more agile
development and deployment of enhanced technologies,
Defense is providing solutions for designing, acquiring,
integrating and sustaining future systems through
model-based system engineering methodologies. These
methodologies enable rapid and robust analysis, configuration,
change management, and integration of emerging disruptive
technologies. By creating “digital twins” of vehicle systems,
Defense supports the US
military in developing,
fielding, maintaining and
effectively using the most
capable equipment in
order to maximise the
safety of serving personnel.
COVID-19 has not had
a significant impact on
Defense, which has been
designated by the US
Government as critical to
US infrastructure. During
the COVID-19 pandemic,
By developing and integrating new processes, technologies and
software, Defense provides customers with enhancements in
organisational performance while also realising associated benefits
to the environment. A particular area of focus is on the development
of products and services that support Ricardo’s digitalisation
strategy, reducing the need for prototype manufacturing through
simulation and automation, eliminating the material waste
associated with sample vehicle builds. A significant portion of
the Defense business is targeted toward protecting human life
by improving the safety of vehicles used by US and international
service-members around the globe.
the majority of Defense’s employees continued delivering
programmes safely and securely through remote work-from-
home during the US “Stay Safe, Stay at Home” mandate.
Outlook
The market outlook for our Defense business is positive. The
US President’s FY21 Defense Budget reflects funding priorities
of USD 740 billion for national defence. The proposed budget
includes a mix of funding for the procurement and deployment
of the ABS/ESC retrofit kit and additional new production
kit orders. Accordingly, Defense has expanded its ABS/ESC
operations to meet anticipated demand for the coming year.
In addition, Defense expects growth in its software business
as well as significant growth in its established capability areas
of system life cycle management, field support services,
and condition-based maintenance. Ricardo Defense is firmly
embedded in nearly every end-to-end architecture node of
the U.S. Army’s fielding strategy. Defense’s systems engineers,
software developers, and logisticians provide integrated
life cycle support services that will improve the operational
readiness of US and allied assets worldwide.
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Creating a world fit for the future 55
Ricardo Defense is providing software that improves the management of
fuel and other consumable commodities across an enterprise
Strategic report
Operating Segments
Performance Products (‘PP’)
Bentley Continental GT3 on its
way to victory at the “Liqui-Moly
Bathurst 12 hour” with a Ricardo
designed and manufactured
transmission.
Business model
Ricardo Performance Products (‘PP’) manufactures and assembles niche high-quality components, prototypes and complex
products, including engines, transmissions and other precision and performance-critical products. PP also provides
manufacturing and supply-chain services to enable products to move from concept to production for customers around the
globe. PP manages the complete process, from establishing a robust supply chain, to the efficient delivery of the tested end-
product to its prestigious customer base. These products are either designed by the motorsport products design team, other
Ricardo divisions or by PP customers themselves. PP serves customers manufacturing low-volume, high-performance products in
markets such as motorsport, automotive, aerospace, defence and rail.
PP employs 311 staff, with specialist capabilities in product design and development, production and operations management,
supply-chain development, industrial engineering and skilled production, all based in the UK. PP is backed by Ricardo’s global
support network with technical and engineering centres around the world.
In FY 2019/20, PP’s revenue reduced by 28% to £69.0m (FY
2018/19: £95.4m) and underlying operating profit declined
by 49% to £5.0m (FY 2018/19: £9.9m). Underlying operating
profit margin decreased from 10.4% in FY 2018/19 to 7.2% in FY
2019/20. Order intake was £71.1m in FY 2019/20, a reduction of
£25.1m compared to order intake of £96.2m in FY 2018/19. As at
30 June 2020, the order book was £62.8m (FY 2018/19: £66.5m).
The reductions across the key metrics were primarily due to
a reduced volume of engines supplied to McLaren. In the first
half of the financial year, engine output was lower than the
previous six months, in line with an agreed production plan. In
the second half of the year, output was significantly disrupted
due to the effects of the COVID-19 lockdown, with McLaren
suspending vehicle production from March onwards. The
volume of engines delivered in FY 2019/20 was approximately
40% lower than the prior year. Over this period, two new
engine variants entered production, including the latest vehicle
in McLaren’s Ultimate Series, the “Speedtail”. The engine for
this vehicle, code-named P23, sits at the heart of an advanced
hybrid powertrain and powers the car to over 250mph (400
km/h), making this the fastest McLaren ever produced. FY
2019/20 also saw the completion of significant pre-production
activities in readiness for the new engine variant to be launched
in FY 2020/21.
FY 2019/20’s results were also impacted by the scheduled end
of the Porsche 991 Cup transmission programme in FY 2018/19.
During the year, PP was successful in securing a replacement
programme of an equivalent size and duration (which is
reflected in the FY 2019/20 order intake). Deliveries to this
programme are on track to start in the first half of FY 2020/21.
56 Ricardo plc Annual Report & Accounts 2019/20
PP
Financial and operational highlights
Order intake
Order book
100
80
-26%
60
FY
2019/20
40
2018/19
20
0
Revenue
-28%
FY
2019/20
2018/19
-6%
£m
FY
71.1
96.2
2019/20
2018/19
80
70
60
50
40
30
20
10
£m
62.8
66.5
0
Underlying(1) operating
profit
-49%
£m
FY
69.0
95.4
2019/20
2018/19
5.0
£m
9.9
Underlying(1) operating
profit margin
-3.2pp
Headcount(1)
+1%
FY
2019/20
2018/19
%
FY
7.2
10.4
2019/20
2018/19
Number
311
307
(1) References in superscript are defined in the glossary of terms on page 201.
A programme to supply transmissions for the Aston Martin
Valkyrie, which was expected to go into production in 2020, is
now confirmed for the FY 2020/21 business year. A significant
number of prototypes for this programme were delivered in
FY 2019/20 to support the successful testing and validation of
this advanced hybrid hypercar. PP continues to support Bugatti
with the supply of the complete driveline system for the Chiron
hypercar. Demand for Bugatti transmissions continued in line
with expectations.
PP’s contract with the Ministry of Defence, to refurbish
gearboxes for their Combat Vehicle Reconnaissance (Tracked)
(‘CVR(T)’) vehicle, successfully started in FY 2019/20 and remains
on track to be completed ahead of customer expectations in
December 2020.
PP remains a key supplier into the motorsport sector,
with effective cost of ownership solutions for the customer
racing market and the ability to adapt to the ever-changing
regulations in all forms of factory racing to deliver a competitive
advantage to customers. PP remains ever present at the top
tier of world motorsport and has manufactured transmissions
components to teams competing in Formula One, Formula E,
GT3, R5, Super Formula and Indy Lights. PP’s customers have
secured world championships and key victories in Formula E,
WRC and GTE. During the year, PP extended its collaboration
with DS Performance, building on an incredible 2019 season,
in which PP designed and supplied transmissions for the team
which won both the drivers’ and teams’ championships.
Strategic report
Performance Products (‘PP’)
FY
2019/20
%
35
Climate change and
environmental revenue
contribution
Driven by climate change
Driven by an environmental issue
Has environmental benefits
Relates to safety
None of the above
11
£44.7m
of revenue directly
linked to tackling
climate change
63
Whilst PP may not have direct involvement in supporting the
environmental driver on customer projects, PP is directly involved in
actions to improve the overall efficiency and performance of engine
and transmissions, thereby lowering, or at least maintaining their
environmental impact.
A small amount of PP’s revenue is generated through projects that
directly address climate change or other environmental challenges.
PP supports programmes that include the development and
manufacture of transmissions for use in electric vehicles, such as
Formula E, together with the manufacture of hybrid engines and
hybrid transmission systems
Outlook
McLaren engine production resumed in July 2020, with a
planned gradual ramp-up of output through the year as
part of its plans to initially focus on limited-series models
(predominately the ‘Ultimate’ and ‘Super Sports’ series of cars).
Although PP’s transmission manufacturing capabilities were
not significantly impacted by COVID-19 during FY 2019/20, and
production continued throughout the outbreak under carefully
controlled manufacturing conditions, the pandemic has created
delays and cancellations of multiple races and championships,
with the potential to impact some of PP’s motorsport clients.
PP will continue to focus its efforts on established markets
such as high-performance automotive, motorsport and
aerospace; additional focus will be applied to both the defence
and the rail markets, where significant contract opportunities
exist. These opportunities are enhanced by PP’s ability to
utilise the in-depth design capabilities of Ricardo’s engineering
consulting divisions, providing a comprehensive set of solutions
across all PP’s targeted markets.
With both customers and suppliers in the EU, PP has
established processes and procedures to address a variety
of potential Brexit scenarios. These capabilities were
successfully deployed in both 2018 and 2019 in readiness for
possible hard exits from the European Union and remain in
place for 2020 onwards.
Creating a world fit for the future 57
Strategic report
Operating Segments
Strategic Consulting & Software
Business model
Ricardo Strategic Consulting (‘RSC’) is a leading management consultancy dedicated to serving the automotive, transportation,
and mobility industries. It offers a comprehensive portfolio of services, advising global leaders on high-impact strategic issues
and resolving operational challenges. RSC provides both corporate and strategic business advice which spans the full product
life cycle, including product development, manufacturing and supply chain management, procurement, sales, marketing and
distribution, and integrated cost reduction.
Software helps customers solve problems through technology exploration and process innovation. It also delivers advanced
virtual engineering tools and solutions, supported by a team of technical experts, to global customers across the automotive,
rail, motorcycle, off-highway, defence, energy and environment industries. Software’s leading-edge simulation software provides
customer solutions to reduce cost, resources and time to market, while efficiently managing complexity and safety.
Combined, RSC and Software employ 182 staff, based across the UK, continental Europe, the US, China and India.
Strategic Consulting & Software revenue reduced to £18.2m in
FY 2019/20 from £22.5m in FY 2018/19. Underlying operating
profit reduced from £3.9m to £0.1m in the same period.
Underlying operating profit margin fell to 0.5% from 17.3%.
The declines seen over the period reflect a combination of
challenging trading conditions in the automotive market
and the impact of customers reducing spending during the
COVID-19 pandemic in the second half of FY 2019/20.
During FY 2019/20, RSC delivered growth in order intake
in Europe and Asia following the investment in its regional
sales teams. However, in the second half of the year there was
a reduction in orders across the business, as long-running
programmes came to an end and new order intake became
challenging. RSC was immediately impacted by COVID-19, with
the pandemic leading to the postponement of certain projects
and delays in client decisions.
A softening in the US market has impacted profits, but the
strong relationship with Ford has continued. In addition to long-
running integrated cost reduction programmes, RSC supported
them in managing distressed supplier scenarios, which has
become a key area of growth.
In FY 2019/20, Software order intake was below the prior year,
driven by lower one-off perpetual licence sales, particularly in
China, due to the slowdown in the Chinese automotive market
and impact of COVID-19. The pandemic led to some delays in
new business wins, due to travel restrictions and the closure of
some customer sites. Licence renewals were also below the prior
year driven by some customers reducing the number of licence
seats they hold. There has been good growth in order intake
for application engineering and solutions in the year, which has
58 Ricardo plc Annual Report & Accounts 2019/20
RSC
Financial and operational highlights
Order intake
Order book
25
20
-18%
15
FY
2019/20
10
2018/19
5
0
Revenue
-19%
FY
2019/20
2018/19
-20%
£m
FY
16.6
20.2
2019/20
2018/19
8
7
6
5
4
3
2
1
0
Underlying(1) operating
profit
-97%
£m
FY
18.2
2019/20
0.1
22.5
2018/19
£m
3.9
Underlying(1) operating
profit margin
-16.8pp
Headcount(1)
-7%
FY
2019/20
0.5
2018/19
%
FY
2019/20
2018/19
17.3
Number
182
195
(1) References in superscript are defined in the glossary of terms on page 201.
partially offset the reduced order intake from one-off perpetual
licence sales and renewals.
Outlook
Strategic Consulting & Software’s core automotive markets
are expected to remain challenging over the next financial
year. RSC is focusing on diversification into new sectors and
service lines, which has progressed with the development of
the TRNTY online consulting platform and Ricardo Knowledge
(RSC’s digital channel) products. These products provide an
efficient route to market to commercialise Ricardo’s expertise.
The investment made in the year in these new product offerings
will begin to deliver revenue growth in the new financial year.
In addition, RSC, in partnership with Ricardo EE, have combined
environmental expertise with strategic advice to offer a unique
external Taskforce on Climate-related Financial Disclosures
(‘TCFD’) service offering, aimed at improving business resilience
in the face of climate change.
Strategic report
Strategic Consulting & Software
Climate change and
environmental revenue
contribution
FY
2019/20
%
Driven by climate change
Driven by an environmental issue
Has environmental benefits
Relates to safety
None of the above
5.7
£m
7.1
24
22
£13.8m
of revenue directly
linked to tackling
climate change
12
42
RSC supports a variety of projects which are positively impacting
climate change and the environment, including providing on-site
support to all-electric vehicle suppliers, supporting the increase in
production of wind turbine blades, supporting the development
of battery packs for electric vehicles, and providing bill of material
and cost analysis for battery packs, fuel cells systems, and electric
marine engines. RSC has also provided support to clients in mapping
environmentally focussed regulations, policies and initiatives.
Ricardo’s Software products have historically been used by clients to
improve fuel consumption and engine performance, reduce weight,
and improve emissions. Software is seeing a demand for its products
to perform hybrid vehicle transmission and is actively growing its
capabilities in battery analysis.
Software’s strategy is focused on building an integrated
market-leading portfolio of products and solutions that work
across different engineering domains to provide value to
customers. In the year ahead, this will include a move to offering
web- and consumption-based licensing models to complement
its traditional on-premise annual lease and perpetual licence
business. As travel restrictions are expected to persist, Software
will maximise local regional resources and digital technology to
win new business.
Our 2019/20 Strategic Report, from page
1 to page 59, has been reviewed and
approved by the Board of Directors on
9 September 2020
Dave Shemmans,
Chief Executive Officer
Creating a world fit for the future 59
60 Ricardo plc Annual Report & Accounts 2019/20
Case studies
62 Improving sustainability in the farmed and
wild landscape
66 Helping UK water towards zero carbon
70 Supporting Europe’s largest ever rail re-
signalling project
74 Enabling high-capacity electric vehicle
charging
78 Ending range anxiety for electric-vehicle
drivers
82 New model army
Creating a world fit for the future 61
Case studies
Improving sustainability
in the farmed and wild
landscape
The way that land is managed can have a significant
impact not only on the immediate greenhouse gas
balance of agricultural systems, but also on their longer-
term environmental sustainability. The Ricardo Energy &
Environment agriculture team is helping farmers, land
managers and food manufacturers apply the latest thinking
for both the farmed and the wild landscape.
62 Ricardo plc Annual Report & Accounts 2019/20
Case studies
Improving sustainability in the farmed and wild landscape
A
griculture is much like any other industry when
it comes to the evaluation of its greenhouse
gas (‘GHG’) emissions. The carbon footprint of
agricultural business operations and the value
chain of food products from farm to fork can be
calculated using a broadly similar approach to that used for any
other commercial activity or industry: each process, from tilling
the soil ready for planting, through to harvest, together with the
downstream supply chain of storage, processing, distribution
and marketing, will be associated with a range of inputs and
outputs. Seen in GHG terms, these correspond to emissions to
the atmosphere and removals from the atmosphere. The cycle
of livestock husbandry can be treated in much the same manner.
Most conventional industries will typically involve only
emissions of GHGs. Agricultural processes, by contrast, can also
give rise to ‘removals’ of carbon from the atmosphere; carbon
that is then stored in a stable and non-gaseous form. Perhaps
the best known of these processes is photosynthesis, through
which plants and trees absorb carbon dioxide to create the
starches, sugars and structural materials that they need to grow.
Agricultural GHG emissions are dominated by methane and
nitrous oxide, with carbon dioxide forming a smaller contribution
within day-to-day operations but a much greater one in terms of
carbon emitted from, or removed into stored organic carbon in
soil or woody plants.
Terrestrial carbon stores
Although atmospheric carbon dioxide emissions have been
Creating a world fit for the future 63
Case studies
Improving sustainability in the farmed and wild landscape
brands this might involve groups of farms which need to be
assessed in terms of multiple inputs and outputs, including crops
and their rotations, as well as details of livestock enterprises.
Strategic advice is also often required in terms of farmland
management, including the assessment of non-productive areas
of land such as hedgerows, field margins and unmanaged farm
woodlands.
In addition to the agricultural incentives that are available
to farmers for particular initiatives – for example to improve
biodiversity and availability of natural pollinators – this form of
analysis is important in helping farms move towards Net Zero
emissions, and by extension to improve the carbon footprint of
food products manufactured from their produce and livestock.
Ricardo provides advice and a holistic approach not only
when it comes to the farmed and managed environment but
also to other major non-farming landowners and to non-
agricultural businesses conducted by farms. For example, water
and energy companies are businesses that are tasked with
transitioning their operations towards a Net Zero future, but at
the same time they are also responsible for the management of
significant land holdings. Similarly, many farm-based businesses
are finding direct incentives from favourable electrical feed-
building up over the 260 years since the start of the industrial
revolution, soils contain approximately twice as much carbon as
is present in the air. So, in addition to ensuring that agriculture
is as efficient as possible in its day-to-day GHG emissions, the
effective stewardship of these terrestrial carbon stores is of
crucial importance.
For example, in arable cropland there is likely to be a net
emission over each year as carbon is lost from the soil by
oxidation, and little of the plants’ root systems will remain within
the soil in the long term. Conversely, in grassland there is likely
to be a net removal of carbon from the atmosphere as the
plants are perennial and there is little or no soil cultivation. In
commercial forestry the carbon removal into wood may remain
locked up long after the tree is felled if, for example, the timber is
used in building materials. But if the felled wood is used to create
biomass pellets for combustion, the removed carbon is emitted
back to the atmosphere.
When land use changes, and a forest or a production system
that is removing atmospheric carbon turns into a system that
begins emitting stored carbon, large and rapid GHG emissions
can result. These can dwarf the usual annual emissions of
methane and nitrous oxide associated with agricultural
production. Conversely, land-use change from a system
that is emitting stored carbon to a system that is removing
atmospheric carbon has the opposite effect, but the removals
tend to build slowly over many years.
Ricardo agriculture team expertise
Estimating the overall net GHG emissions and removals from
farms and farmland, and taking account of carbon stock
change in and on land, is a particular specialism of the Ricardo
agriculture team. The requirement to investigate may come
from a large food manufacturer that wishes to ascribe a carbon
footprint to its products as they reach the consumer. For larger
64 Ricardo plc Annual Report & Accounts 2019/20
Case studies
Improving sustainability in the farmed and wild landscape
Ricardo’s advice can be crucial in improving
the environmental footprint of agriculture at
the same time as maintaining our precious
terrestrial carbon stocks
in tariffs to pursue micro-generation enterprises such as the
production of renewable power from biomethane derived
from anaerobic digestion. For consulting engagements such
as these, the Ricardo agriculture teams often collaborate with
colleagues serving the utilities and power sectors, to ensure that
an informed and holistic approach can be considered.
Protecting natural carbon repositories
In the context of a noted wild landscape, the Ricardo agriculture
team was awarded a contract by World Wide Fund for Nature
(‘WWF’) Scotland to investigate the aftermath of a May 2019
peatland wildfire that occurred in the internationally important
blanket peat bog of the ‘Flow Country’ of north-east Sutherland
in Scotland’s Highland region.
Two complementary approaches were used. In the first,
satellite images were employed to estimate the extent of the
burned area, alongside a literature review to determine typical
carbon losses due to peatland fire, focusing on studies of fires
and terrains as similar as possible to those of the Flow Country.
The second approach involved the application of methods used
in inventory calculations, published by the Intergovernmental
Panel on Climate Change (‘IPCC’). Both approaches provided a
broad level of agreement.
Illustrating the significance of carbon dioxide emissions
from this type of peat wildfire, the study provided a low-range
estimate of 174,000 tonnes of carbon lost from the peatland
into the atmosphere during the six days that the fire burned. To
put this into perspective, this carbon release to the atmosphere
is equivalent to the average greenhouse gas emissions of the
entire nation of Scotland for nearly a week.
Helping to ensure future sustainability
Whether it is for the protection of natural carbon repositories
or for the optimisation of farming operations for maximum
efficiency and minimum environmental impact, the holistic
approach of the Ricardo agriculture team provides valuable
guidance in moving towards true sustainability. Until recently,
the usual focus for the environmental assessment of the carbon
footprint of food products has been the analysis of the field from
which the crop is grown and the net emissions of downstream
production activities. Increasingly, however, governments, food
manufacturers, supermarkets and farmers are beginning to
recognise the need to look more holistically at GHG emissions
across the farm and to reward the protection of carbon stocks,
including grasslands, woods, wetlands and peat. The advice that
Ricardo can offer is therefore increasingly crucial in improving
the environmental footprint of agriculture at the same time as
maintaining our precious terrestrial carbon stocks.
Creating a world fit for the future 65
Case studies
Helping UK water
towards zero carbon
Aided by Ricardo expertise and consulting support,
UK water companies have set an ambitious target of
achieving Net Zero carbon emissions by 2030 – while
also delivering on medium-term goals of improved
customer service and affordability, long-term planning,
and operational resilience.
66 Ricardo plc Annual Report & Accounts 2019/20
Case studies
Helping UK water towards zero carbon
to triple the rate of leakage reduction; to improve household
affordability of water and sewage services; to prevent 4 bn
plastic bottles ending up as waste by 2030; and to be the first
industrial sector to achieve a full commitment to the social
mobility pledge.
In pursuing its Net Zero carbon ambition, Water UK is working
with consultants to develop a comprehensive action plan
detailing the measures that the industry needs to deploy over
the next decade. Those consultants include Ricardo and UK
Water Industry Research, the body responsible for facilitating the
shaping of the water industry’s research agenda.
In the first phase of the project, which ran from December
2019 to March 2020, Ricardo focused on the development of a
scoping exercise to define the baseline and parameters of the
Creating a world fit for the future 67
ith its many and varied processes from
capture and storage to purification,
distribution and treatment, the water
industry is a significant consumer of
energy. According to industry body Water
W
UK, the industry is the country’s fourth most energy intensive,
responsible for around five million tonnes of greenhouse gas
(‘GHG’) emissions annually.
Despite this significant consumption of energy, water is the
first industrial sector in the UK (and one of the first major sectors
globally) to commit to a Net Zero carbon future by 2030. The
goal forms part of the industry’s Public Interest Commitment
document released earlier this year. It is one of a suite of pledges
that stretch the sector’s social and environmental ambitions:
Case studies
Helping UK water towards zero carbon
study and to make projections as to how the water industry in
the UK could deliver on its 2030 Net Zero carbon ambition.
The project has now moved into its second phase, in which
the Ricardo team is building a set of tools and methodologies
to help water companies design and test their own route-
maps that will enable the transition towards Net Zero carbon
emissions. This will enable each water company – and the
industry as a whole – to create, model and evaluate different
potential pathways towards the achievement of this goal.
The initial focus for the route-maps will be on improvements
within the existing water systems and infrastructure, with the
aim of reducing and optimising demand. After this, the project
will consider the potential application of new technologies
and evaluate the impact those could have. An analysis and
assessment of costs and benefits will also be included.
By making use of a framework that can be used to assess
a range of alternative strategies, the industry will be able to
evaluate the alternative pathways that look the most promising
Ricardo support key stakeholders from across the water sector with
Net Zero workshop
68 Ricardo plc Annual Report & Accounts 2019/20
in attaining its 2030 Net Zero carbon emissions target. Water UK
will thus be able to develop a strategy for the industry to meet
this challenge, and intends to share the lessons it learns from this
research. In this way, other major energy-consuming industries
will be helped by the efforts of Ricardo and its research partners
in delivering on their own sectors’ Net Zero ambitions.
Medium-term strategic resilience
In addition to assisting Water UK with strategic modelling and
planning for its 2030 Net Zero ambition, Ricardo is also assisting
a number of other water companies with medium-term
resilience initiatives.
The strategic agenda for the water industry in England and
Wales is defined by the economic regulator, Ofwat, in its five-
year asset management plan (‘AMP’) control periods. In advance
of each AMP period, and based on the strategic priorities set by
government, Ofwat sets out the methodology to be applied in
reviewing and evaluating each water company’s investment and
operational business plans.
Key criteria for each control period are defined, and the
extent to which each company is able to deliver on these is
reflected in the so-called ‘K’ factor percentage they are allocated.
This forms part of the ‘price review’ which takes place a year
ahead of the start of the control period; the review defines the
allowable annual price increase to be charged to the company’s
consumers as ‘K’ plus the Retail Price Index. For this reason,
delivery of the goals of the AMP is commercially critical for the
water companies.
For the seventh control period (‘AMP7’), which runs from
2020 to 2025, key themes of focus include customer service
and affordability, long-term financial, corporate and operational
Case studies
Helping UK water towards zero carbon
Ricardo water experts participating in practical safety training
Ricardo water specialists conducting site based analysis
resilience, and innovation. Ensuring companies can meet future
water demands is a key area of investment, with almost £470m
allocated in England alone for planning of future strategic
integration of resources between regions. In addition, there is
funding for schemes within each water company region.
Since December 2019 Ricardo has secured framework
agreements with many of the largest water companies to
support them in planning the long-term future for sustainable
water resources. Under the terms of these flexible agreements,
the water companies can draw upon a wide range of Ricardo
services, technologies and expertise as they strive to deliver the
outcomes agreed with Ofwat under AMP7. Water companies
signed up include Southern Water, United Utilities, Dŵr Cymru/
Welsh Water, Yorkshire Water, Thames Water and Bristol Water.
Ricardo’s expertise in delivering services under these framework
agreements focuses on initiatives and projects such as strategic
environmental assessments,
terrestrial and aquatic
ecology surveys, habitats
regulations assessments and
water framework directive
assessments.
Ricardo has already
begun work across a
number of the new
framework agreements.
Even under the lockdown
conditions following the
outbreak of the COVID-19
pandemic in the first half of
2020, the company’s experts
were able to provide
support to maintain critical
water infrastructure resilience, including ensuring the continued
progress of a decade-long infrastructure project.
Delivering today’s goals and tomorrow’s
strategic ambition
Ricardo’s water practice is increasingly recognised for its
expertise in planning and overseeing the most complex and
sensitive water and environmental projects, whether for the
five-year cycles of the UK AMP periods or in pursuit of the
longer-term ambitions of the industry over the coming decade.
The Ricardo team’s skills are being called upon by an increasing
number and range of clients within the public and private
sectors, including industry bodies, central and local government,
water companies, developers, infrastructure operators and other
commercial organisations, in the UK and internationally.
Creating a world fit for the future 69
Case studies
Supporting Europe’s
largest ever rail
re-signalling project
Over the past decade, and with the support of
Ricardo in crucial certification roles, Denmark has
been engaged in an ambitious country-wide rail re-
signalling programme. Its mission: to eliminate the
frustration to operators and the travelling public that
patchwork upgrades can cause.
70 Ricardo plc Annual Report & Accounts 2019/20
Case studies
Supporting Europe’s largest ever rail re-signalling project
Supporting Europe’s
largest ever rail
re-signalling project
T
he Danish nationwide railway re-signalling
programme is the largest of its kind that Europe has
ever seen. Initiated in 2008, the project is seeing the
replacement of a traditional lineside signal system
which dates back over 50 years and includes some
assets that are in excess of 100 years old. Banedanmark, the
state-owned company under the Danish Ministry of Transport
with responsibility for the maintenance and traffic control for
much of the national network, put forward a compelling case to
the national government showing how the optimum long-term
solution was not the traditional ‘patch-up and fix’ approach
used by many existing railways across the world, but instead the
replacement of the entire system in one programme.
On behalf of Banedanmark, Ricardo Certification is performing
assurance roles on the migration to both ERTMS and CBTC
systems, including Assessment Body (‘AsBo’) and Notified
Body (‘NoBo’) services, as well as acting as the Independent
Safety Assessor (‘ISA’). In the role of AsBo Ricardo acts as an
independent party appointed to assess the safety risk process
applied during a project, determining compliance with the
‘Common Safety Method on risk evaluation and assessment’
(‘CSM’) regulations; secondly, as the project’s NoBo, Ricardo
provides conformity assessments of products and subsystems
against the relevant requirements of the European Directive on
the Interoperability of the Rail System.
And finally, as the ISA, Ricardo can assure its customer that
their project is meeting recognised industry, legal and regulatory
standards. The process also demonstrates that the assessed
Creating a world fit for the future 71
Case studies
Supporting Europe’s largest ever rail re-signalling project
business is committed to operating in a safe, sustainable and
efficient manner, sending a reassuring message of transparency
to passengers, regulators, investors and employees.
Nationwide integration
The new nationwide signalling system is being installed
to enable the European Train Control System (‘ETCS’), the
signalling and control component of the European Rail Traffic
Management System (‘ERTMS’). It will take in more than 3,000
km of mainline routes. ERTMS is a system based on direct radio
communications between in-cab driver displays and a central
traffic control centre. It is a standard backed by the European
Union so that the industry can harmonise systems and practices
across EU mainline routes, and ultimately establish a single, open
European rail network.
A key difference between ERTMS and traditional systems
is that by using control centres to monitor and instruct the
movements of individual trains, ERTMS allows for the removal of
some of the trackside signalling equipment that is a major cause
of maintenance costs and operational delays. Another benefit
is that trains will be able to operate across borders without the
array of on-board train protection systems, radios and signalling
equipment required today. By incorporating technology similar
to GPS, ERTMS will begin to enable control centres to monitor
with pinpoint accuracy each train’s location, allowing trains
to run closer together, and even bi-directionally along certain
routes, thus increasing capacity.
All new mainline projects in the EU must now apply ERTMS
signalling, and Denmark is the first member state that has
committed to ERTMS on a national scale in a single programme.
This is a decision that offers a number of advantages. Firstly,
it provides a wider choice, and thus increased competition,
between signalling technology suppliers all working to the same
technical specifications. Equipment and interface problems
between components are also likely to be reduced, because
a single supplier can be tasked with delivering a full signalling
package. Costs will be further reduced, too, as only a single
safety approval is necessary per contract. Finally, design and
development costs will now represent a comparatively low
proportion of the investment. The operational benefits will be
a network that can offer increased line speeds, improved safety,
72 Ricardo plc Annual Report & Accounts 2019/20
better reliability and higher traffic levels on key routes.
In addition to the use of ERTMS signalling on the country’s
mainline routes, the metro-based Communications-Based Train
Control (‘CBTC’) system is being introduced on Copenhagen’s
170 km suburban network: this is a technology standard
designed for the stop-start nature of urban metro systems
and allows services to operate at greater speeds and increased
frequencies, and with reduced energy costs.
Parallel electrification
Despite the delays to be expected on such a major project –
no other railway has attempted such a wholesale transition
before – the programme has now hit its stride. The challenge
has been compounded by the complication that the
nationwide re-signalling project has also had to progress
alongside Denmark’s plans to electrify its mainline routes,
requiring the procurement of new electric rolling stock, too.
The multiple interfaces that are affected when migrating from
diesel to electric vehicles, as well as to new a signalling system,
have only added to this complexity.
However, feedback from the early deployment lines has been
positive, with performance generally exceeding expectations.
The team of assessors based in Ricardo Certification’s
Copenhagen office are confident that the experience
accumulated during the commissioning of early deployment
lines means that the rollout of remaining routes will progress
smoothly. Two such early deployment lines entered service
in 2019, followed in early 2020 by the first rollout line for the
western region. An additional rollout line in the east is due to
Case studies
Supporting Europe’s largest ever rail re-signalling project
Ricardo’s selection as the
partner to carry out the
crucial roles of assessment
of safety, interoperability and
certification demonstrates
the extremely high regard in
which the company is held
within the industry
commission shortly, and further routes are scheduled to open at
six-month intervals.
When supporting a programme that will eventually last
more than two decades, a level of continuity in terms of
both approach and personnel is essential. As such, Ricardo
Certification has sought to provide a consistent team of assessors
working to a clear methodology. Each of Ricardo’s lead assessors
is supported by a pool of assessors based in Denmark, and also
by colleagues in Sweden, the UK, Spain and the Netherlands,
ensuring access to the right expertise whenever required.
Regular meetings between the approvals teams enable
the project leads to compare notes, discuss issues under
investigation and ensure consistency. Lead assessors also
liaise closely with the project safety managers to anticipate
upcoming assessment priorities. The use of online tools such
as Microsoft Teams was embraced at an early stage to help
participants operate as an integrated team across many locations
– something that has been particularly helpful during the
COVID-19 lockdown.
A network for the future
Both the re-signalling and electrification works are expected
to be complete by 2028 to 2030. At that point Denmark will
boast a network to rival any new-build: cleaner, more efficient
and better able to support higher speeds, with shorter times
between trains, reduced service delays and improved safety
standards. It will also ensure full interoperability in accordance
with European standards.
This project, with its unprecedented national scale, represents
a world-class challenge for the railway industry, integrating
the latest signalling, control and safety technologies for metro,
regional and high-speed lines. With both the international
railway industry and city authorities and governments investing
in ambitious world-class infrastructure projects that promise
to have a transformative and highly beneficial effect on
the conurbations that they serve, Ricardo’s selection as the
partner to carry out the crucial roles of assessment of safety,
interoperability and certification demonstrates the extremely
high regard in which the company is held within the industry.
Creating a world fit for the future 73
Case studies
Enabling high-capacity
electric vehicle charging
Ricardo is participating in a research project, DC Share, that will
demonstrate the use of local DC networks to leverage spare capacity
across existing AC electricity distribution substations and enable
the connection of increased numbers of high-power electric vehicle
charging points – all without the need for significant and costly
distribution network reinforcement.
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Case studies
Enabling high-capacity electric vehicle charging
by itself, home-based charging cannot possibly match the
convenience enjoyed by today’s petrol and diesel drivers, who can
refuel their vehicles at will in a matter of a few minutes at multiple
filling station locations. More chargers are needed if range anxiety
is to be dispelled and drivers encouraged to switch to an EV;
likewise, for EVs to offer practical solutions for the operators of
vehicle fleets such as delivery vans and taxis, a much greater
provision of rapid charging facilities will be required. These will
need to be in short-stay destinations such as town centres, as well
as at taxi ranks and in commercial vehicle and car-club charging
hubs. Moreover, significant additional provision will be needed for
on-street charging for the approximately 40 percent of people in
the UK lacking access to home-based charging because they do
not have off-street parking.
Creating a world fit for the future 75
T
he ability of power distribution networks to
accommodate a significant growth in demand
arising from the need to recharge electric
vehicles (‘EVs’) is likely to be a key enabler for the
decarbonisation of transport, a stated aspiration of
governments around the world.
In the UK, for example, regulations have already been put in
place that will end the sale of new conventional gasoline and
diesel-powered cars and vans by the year 2040 or earlier. As a
means of facilitating this transition, the UK Government’s Clean
Growth Strategy sets out the importance of accelerating the
shift to low-carbon transport: one of its key stated objectives is
to “develop one of the best EV charging networks in the world.”
The significance of this aim is underscored by the fact that,
Case studies
Enabling high-capacity electric vehicle charging
Distribution network capacity
constraints
Arguably the biggest challenge for the power industry in
accommodating an increasingly electrified vehicle parc lies in
the capacity constraints of the medium voltage (up to 36 kV)
and low voltage (up to 1 kV) distribution networks. Whereas
at grid scale additional capacity can be provided through
focused investments such as new power stations and renewable
schemes like offshore wind farms, the low-voltage distribution
networks represent a highly complex and geographically
dispersed mix of infrastructure installed over many decades.
Previous research has shown that within the UK, the low-
voltage distribution network should be able to accommodate
large-scale EV charging at up to 7 kW through the use of
managed charging solutions, such as focusing vehicle
recharging demand throughout the night and during off-peak
hours. A more fundamental challenge occurs, however, if more
rapid 50-150 kW charging (which would give users the flexibility
to recharge in minutes rather than hours) is to be considered at
any scale in urban environments.
The level of power required for one such rapid charger uses
a large percentage of both a typical secondary transformer and
AC cable load capacity. As such, while any given distribution
substation might be able to connect one or two rapid chargers,
as soon as such facilities are required at any scale, reinforcement
of the low-voltage network is likely to be necessary.
The wholesale upgrade of this infrastructure to accommodate
the required change in vehicle use is neither commercially
feasible nor practical as a solution. Moreover, capacity is not likely
to be constrained universally across the network and will tend
to vary dramatically over time with the patterns of the day and
working week. Enabling the rapid charging of EVs within the
constraints of existing infrastructure is the challenge that the DC
Share project, in which Ricardo is partnering with Western Power
Distribution and Electricity North West Limited, seeks to address.
This approach enables uncertainty in
demand to be managed more effectively,
optimizing power flows in real time to
react as needed
76 Ricardo plc Annual Report & Accounts 2019/20
Case studies
Enabling high-capacity electric vehicle charging
DC Share – a radically new approach
With funding awarded by the UK energy market regulator
Ofgem (the Office of Gas and Electricity Markets) through
the Network Innovation Competition Project, DC Share will
demonstrate the use of latent capacity in distribution network:
capacity which is difficult to access using traditional means. The
project will adopt a novel approach to supplying rapid charging
hubs, using power electronics to channel power from existing
substations and distributing this to rapid EV charge points via a
new high-capacity DC cable network.
Using this approach, transformers experiencing heavy
demand can receive support from those that are more lightly
loaded, thus enabling uncertainty in demand to be managed
more effectively and optimising power flows in real time to react
as needed. Enabled via fibre-optic communication infrastructure
installed with the DC cables, the DC Share solution provides a
means of sharing system capacity across secondary substations
with different load profiles. The demonstration will comprise
four such substations to which around 20 rapid EV chargers can
be connected.
In addition to the promise of improved distribution network
capacity utilisation, the approach envisaged by DC Share will
leave spare capacity on existing low-voltage AC feeder cables to
customers’ premises. This is important to provide for likely future
demand growth associated with the existing connections – for
example, to supply further off-street EV charging or for domestic
heat pumps.
Since the DC Share project commenced in January 2020,
Ricardo and its partners have researched and identified a
suitable site to accommodate the technology demonstration
and are addressing technical issues and concluding designs
prior to defining the necessary procurement packages.
Discussions are also being progressed with commercial charge-
point operators with a view to the possible integration of
the DC Share project rapid chargers into a viable commercial
network following project completion. Despite the effects
of the COVID-19 pandemic, the DC Share project remains on
track for the demonstration site to be commissioned by June
2022, with the results of testing then being evaluated over the
subsequent year.
A holistic perspective of the power
system
The DC Share project demonstrates the urgent need for
innovation in the power network to work alongside the other
incentives that will deliver new electrified vehicles to market.
The car drivers and light-vehicle fleet operators of the future will
need to know that when switching to EVs they can experience
a convenience of transportation that is at least as flexible as that
offered by the conventional vehicles of today. The widespread
and public availability of destination-based rapid charging is
thus an essential element of the future low-carbon transport
ecosystem, and this can only be realised through a fresh
perspective on the distribution network. With its unique insights
into both the automotive and power industries, the DC Share
project is a further demonstration of the crucial role that Ricardo
is able to play in making this low-carbon future a reality.
Creating a world fit for the future 77
Case studies
Ending range anxiety for
electric-vehicle drivers
Maximising range is the top priority for developers of electric vehicles,
and demands the best possible powertrain efficiency from battery
to wheels. Ricardo engineers are achieving significant efficiency
gains through an integrated approach to electric powertrain design,
including a focus on the highly complex subject of electrified vehicle
thermal management.
78 Ricardo plc Annual Report & Accounts 2019/20
Case studies
Ending range anxiety for electric-vehicle drivers
predictability of the increased range. This last point is important
because range anxiety and the difficulty of predicting available
driving distance over different routes and in different weather
conditions is still a big concern for many potential EV buyers.
Ricardo’s Integrated Thermal Management approach to the
design of xEV systems focuses not just on the powertrain, but
on the whole vehicle system including the cabin. The key to
this is the Ricardo Integrated Model-based Development
Framework (‘IMBD’) which takes into account all onboard
systems and the impact they have as a whole on the vehicle’s
total energy resources.
How the process works
Under the IMBD umbrella and using a number of tools including
Creating a world fit for the future 79
ith electric vehicle (‘EV’) buyers becoming
more cash conscious, the recipe for
greater range is no longer just to add
bigger, heavier and costlier battery packs.
Instead, EV buyers will now be able to
W
get the range they need by choosing models with higher
powertrain efficiency to help make the most of every kilowatt-
hour in the battery.
A key factor here is the efficient thermal management of
the whole suite of xEV systems – ‘x’ standing for all types of
electrified vehicle, from pure battery electric vehicles to plug-in
hybrids and range-extended EVs. As well as boosting range,
good thermal management can significantly improve passenger
comfort, charging performance, battery durability and the
Case studies
Ending range anxiety for electric-vehicle drivers
Ricardo’s IGNITE software, the powertrain (motor,
power electronics and battery), and HVAC
(cabin and heating and cooling systems) are
first defined as a model sub-system and their
parameters established.
The next step is to create a 1D base model of the
thermal system model including the powertrain
and vehicle. Known as a plant model, it includes the
cooling circuits, HVAC and cabin, and the battery and electrical
system. Stage three is to generate a manageable Reduced
Order Model (‘ROM’) for the simulation and analysis of driving
scenarios. Finally, the ROM is optimised to make it capable
of running in, or faster than, real time when integrated into a
physical control unit.
Evaluating different alternatives quickly
This approach makes it possible to evaluate the many different
technical alternatives that might be used for a particular task.
For example, battery cooling can be accomplished in a number
of different ways. Air cooling is one, liquid cooling with cold
plates is another, and further options are refrigerant cooling or
immersion cooling where electronic components (battery
cells/bus bars, MOSFETs, IGBTs, electric motor end windings or
stator slots) come into direct contact with a dielectric (non-
conductive) coolant.
With the introduction of super-fast chargers now bringing
rates of up to 350 kW, the thermal management of
batteries is becoming increasingly demanding. By
using a non-electrically conductive fluid, the
coolant can be in direct contact with
cell connection tabs and bus bars,
massively improving the cooling
capacity and making it possible to charge at much
faster rates than would otherwise be possible
without risking permanent damage.
Typical fluids used for this purpose are gearbox
transmission oils or cooling oils used in transformers.
Although the thermal conductivity of these fluids
is lower than that of water-based cooling fluids,
the overall cooling benefit is much greater than
the conventional cold plates approach with ethylene-glycol
water. Ricardo is collaborating with the manufacturer M&I on
the development of these new fluids as part of an Innovate
UK-funded project called I-CoBAT (Immersion-cooled Battery),
which started in June 2019 and will finish at the end of 2020.
Taking into account all improvements to the powertrain and
cabin heating and cooling systems, Ricardo estimates IMBD
can deliver a remarkable 10 to 15% gain in the overall energy
efficiency of the vehicle. What is more, work in this area is already
moving beyond the automotive sector and expanding into
marine, rail and aviation applications.
Integrated electric drive units
Combining an EV’s electric motor with the transmission and
power electronics to make a single unit is an effective way
to improve efficiency and reduce cost. Concepts of this type
could be used by EV manufacturers across a range of EV classes
– and an optimum solution that has emerged from Ricardo’s
work is a multi-speed Electric Drive Unit (EDU). This unit
incorporates a three-speed dual clutch transmission,
The all-electric DS E-TENSE FE20 from DS Techeetah with an output of 250kW or 338hp and a Ricardo
transmission secured victory in both the drivers and constructors ABB Formula E championship
80 Ricardo plc Annual Report & Accounts 2019/20
80 Ricardo plc Annual Report & Accounts 2019/20
Case studies
Ending range anxiety for electric-vehicle drivers
bearing drag and other parasitic losses to develop the most
efficient transmission possible. The software is so accurate that it
is possible to predict differences smaller than 0.1% – and because
there is a direct correlation between overall driveline efficiency
and lap time, any reduction of losses in the driveline improves the
performance of the car. The very important lessons learned in this
demanding field are expected to contribute directly to road car
development.
Electric future
Ricardo is continuing its research into producing high-efficiency
and cost-effective electric powertrains capable of underpinning
future xEV products as well as fuel cell electric vehicles. What is
clear from the work so far is that treating the powertrain as single
system rather than a collection of separate components, and
optimising thermal as well as mechanical systems in an integrated
manner, gives significant efficiency gains. And the
best thing is that there are many more gains
still to come.
The software is so accurate
that it is possible to predict
differences smaller than 0.1%
an electric machine, a final drive and an inverter, and is intended
for application in a mid-sized, two-wheel drive SUV.
This technology is scalable, too, with the number of
transmission speeds chosen for a given application depending
on factors such as efficiency, cost, packaging, and inverter,
motor and other vehicle attributes. In most applications the
decision will be driven by the cost versus efficiency balance – for
example, the fact that cost can be taken out of the battery by
increasing range through driveline efficiency.
Formula E racing
In competitive electrified motorsport, Ricardo has many years’
experience working with world-leading Formula E teams
including DS Performance. The DS Techeetah racing team
won both the manufacturers’ and drivers’ championships in
the 2018-2019 season and was leading the 2019-2020 season
before the competition was paused due to the COVID-19
pandemic. In Formula E, grid regulations require
that much of each car is common. Significant
competitive advantage can be gained
with a highly efficient powertrain,
however, and the transmission
plays a vital part in this. In this
case, the transmission was
designed by Ricardo and DS
Performance in partnership.
Using software it had
developed in house, Ricardo
was able to predict the overall
efficiency of the transmission,
minimising oil churn, seal drag,
Creating a world fit for the future 81
Creating a world fit for the future 81
Case studies
New
model
army
Ricardo’s engineers are at the forefront of delivering safe,
flexible, robust and cost-efficient defence vehicle technology
– everything from reimagining Europe’s best-selling
commercial pick-up as a general service vehicle concept,
to assisting General Motors (‘GM’) with integrated product
support for prototypes of the U.S. Army’s future Infantry Squad
Vehicle, and delivering crucial safety technology for the
workhorse HMMWV ‘Hummvee’.
82 Ricardo plc Annual Report & Accounts 2019/20
Case studies
New model army
The US Army awarded GM Defense
and its strategic partner, Ricardo
Defense, a USD 214.3M contract to
build, field, and sustain the Army’s
new Infantry Squad Vehicle
cost-effective modern military vehicle design, a heritage that
stretches back almost three decades.
The Ricardo Ranger concept is set to be available with a range
of powertrain options, including Ford’s strong and refined 213
hp 2.0-litre EcoBlue bi-turbo diesel, which produces 500 Nm
of torque for excellent load-hauling capability. This is mated to
an advanced new 10-speed automatic transmission for easy,
economical driving.
Key features of the adaptation designed by Ricardo include
options for a rollover protection system similar to that used
in the highly successful WMIK vehicle developed by Ricardo
for the British Army; an armoured ballistic underfloor and
armoured glass; lightweight but heavy-duty front and rear
bumpers; skid plates for the radiator, powertrain and fuel
Creating a world fit for the future 83
anufactured in Ford’s South African facility and
sold globally, the Ranger is a common sight
on the highways of Europe. A vital tool of the
trade in sectors ranging from construction
to agriculture and forestry, the Ranger is the
M
continent’s best-selling pick-up and is also valued for its versatility,
durability and high towing capacity in leisure applications.
However, while the model is familiar in many differing roles,
it has not – until now, at least – been seen as a candidate for
military service. In response to a request from Ford, Ricardo
engineers created a Ranger military general service vehicle
concept. Building on the wealth of experience of the company’s
special vehicles team, this latest commercial platform adaptation
is the most recent embodiment of the Ricardo approach to
was GM Defense, which teamed with Ricardo Defense to
provide integrated product support. Ricardo’s support includes
vehicle technical manual and training material development
for operators and maintenance personnel. The ISV developed
by GM Defense is based on the Chevrolet Colorado ZR2
architecture, which leverages 70% commercial off-the-shelf parts
in a flexible, light, all-terrain vehicle.
Case studies
New model army
tank; rock sliders and improved wading/fording protection;
NATO IRR paint/camouflage, and four-point seat harnesses. In
addition, the 24V electrical system is enhanced to provide the
power requirements and EMC protection expected of modern
defence vehicle applications, and the chassis can be equipped
with upgraded springs, dampers, brakes, heavy-duty wheels
and all-terrain tyres, which combine to offer greater ride height
and more versatile towing capacity. In delivering this project,
Ricardo has worked closely with Polaris Government and
Defense, in particular for support in the areas of onboard power
management and C4i (command, control, communications,
computers and intelligence) integration.
Advanced concept support for GM
While the Ricardo-developed Ford Ranger general service
vehicle is an example of a very modern platform-adapted
concept closely based on a series production vehicle, the U.S.
Army’s Infantry Squad Vehicle (‘ISV’) is intended as a more
extreme adaptation suitable for more frontline use. The ISV is
aimed in particular at providing tactical mobility for airborne
troops. Its specification requires it to be sufficiently light in
weight that it can be sling-loaded from a UH-60 Blackhawk
helicopter, as well as compact enough to fit within a CH-47
Chinook. It needs to be versatile as a ground vehicle, too – able
to carry up to nine troops together with their kit, and with a
payload capacity of 5,000 lbs (1,866 kg).
In order to fast-track the entry into service of this all-terrain,
highly transportable vehicle, the U.S. Army selected three
suppliers to develop ISV prototypes for evaluation by service
personnel, with the intention of awarding a production and
deployment contract later in 2020. One of the chosen suppliers
The Ricardo Ranger general service
vehicle concept is based on Ford’s
highly successful commercial
platform
84 Ricardo plc Annual Report & Accounts 2019/20
Ricardo has already provided a total
of over 4,000 ABS/ESC systems for the
U.S. Army’s HMMWVs, and has begun
shipments directly to allied foreign
countries that also use the vehicle
Case studies
New model army
.
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Enhanced safety for the ‘Humvee’
The High Mobility Multipurpose Wheeled Vehicle (‘HMMWV’) or
‘Humvee’ is a core element of the U.S. Army’s vehicle fleet and one
that is planned to remain in service well into the 2030s. In order
to improve the safety, serviceability and agility of this important
military vehicle, Ricardo embarked on a project in 2014 to modify
a fleet of ten HMMWVs belonging to the Michigan National
Guard, installing a Ricardo-engineered ABS and ESC system that
would significantly improve occupant safety.
The Ricardo system was developed, in part, in response to a
National Highway Traffic Safety Administration (‘NHTSA’) report
conducted in 2014 that discovered a 74% reduction in vehicle
rollovers for similar light trucks and vehicles if ABS/ESC had been
fitted. In 2011 NHTSA mandated ABS and ESC systems on all
passenger vehicles sold in the US. The Ricardo system is the first
of its kind to uniquely adapt the same commercial automotive
components cited in the NHSTA report to improve HMMWV
handling and vehicle stability. Moreover, the system also
provides shorter, safer stopping distances, a significant reduction
in the wear and replacement cost of brake system components,
and increased reliability and hence operational readiness. The
inclusion by the US Congress of the ‘HMMWV Rollover Mitigation
program’ as a priority in the 2021 defence budget validates
the important contribution to vehicle safety that this Ricardo-
engineered system offers.
The complete package developed and tested by Ricardo
for the HMMWV includes anti-lock braking, electronic stability
control, active rollover protection, traction control, and improved
brake calipers, pads and rotors. The entire system leverages
proven components in a package that Ricardo engineered
specifically for the arduous requirements of the military
environment; the whole programme was designed for ease of
retrofit upgrade to the existing fleet.
A significant milestone in the take-up of the Ricardo ABS/
ESC kit was the assignment of a National Stock Number, which
enables the US government, its agencies and the Army to place
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direct orders for the Ricardo retrofit system. To date, a total
of over 4,000 Ricardo ABS/ESC systems have been provided,
improving the safety and manoeuvrability of this staple vehicle
of the U.S. Army.
In addition to supplying the ABS/ESC retrofit kit to the U.S.
Army, Ricardo has also begun shipments directly to allied foreign
countries that deploy the HMMWV as part of their ground force
operations. To support the increasing supply chain requirements
that result from this success, Ricardo Defense has expanded
its kit production facility to include a new location in Sterling
Heights, Michigan.
Global technology partner
The programmes described above build upon Ricardo’s long-
standing and well-deserved reputation for the delivery of
high-quality, cost-effective vehicles and technology integration
for the world’s armed forces. In previous years Ricardo has
been responsible for programmes such as the design and
construction of a fleet of WMIK light-reconnaissance multi-role
Land Rovers and the crew-protected Foxhound vehicle, both of
which are in successful ongoing use by the British Army. Today,
Ricardo’s capabilities extend well beyond mobility, with the
company increasingly seen as the partner of choice for a wide
range of software, technical services and practical solutions
that help to protect lives, reduce costs, and minimise waste, both
for the forces of NATO countries and for other allied
nations worldwide.
Creating a world fit for the future 85
86 Ricardo plc Annual Report & Accounts 2019/20
Corporate
governance
88 Board of Directors
90 Corporate governance statement
96 Nomination Committee report
98 Audit Committee report
102 Directors’ remuneration report
128 Directors’ report
131 Statement of Directors’ responsibilities
Creating a world fit for the future 87
Dave Shemmans
Sir Terry Morgan
Ian Gibson
Mark Garrett
Board of Directors
as at 30 June 2020
Patricia Ryan
Dave Shemmans
BEng
Chief Executive Officer
Dave Shemmans joined
Ricardo in 1999 and was
appointed 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.
Sir Terry Morgan
CBE, FREng
Non-Executive Director and
Chair of the Board
Sir Terry Morgan was
appointed Non-Executive
Director on 2 January 2014
and Chair on 29 October
2014. He was previously
non-executive Chair of
Crossrail Limited, High
Speed Two (HS2) Limited,
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.
Ian Gibson
BSc, ACA
Chief Financial Officer
Mark Garrett
CEng, FIMechE, FREng
Chief Strategy Officer
Mark Garrett joined Ricardo
in 1998 and resigned on 31
July 2020.
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. She achieved
the Certificate of Investor
Relations from the Investor
Relations Society in
February 2017.
88 Ricardo plc Annual Report & Accounts 2019/20
Laurie Bowen
Jack Boyer OBE
Russell King
Malin Persson
Bill Spencer
Laurie Bowen
BSc, MBA
Non-Executive Director, Chair
of Nomination Committee
Laurie Bowen was appointed
Non-Executive Director on
1 July 2015. She has over
30 years of international
leadership experience
at IBM, British Telecom,
Tata Group, Telecom Italia
Sparkle and Cable & Wireless
Communications. She was
appointed non-executive
director of Chemring Group
plc on 1 August 2019. Laurie
has an MBA, a BSc in Electrical
Engineering and a BSc in
Computer Science from
Washington University in St.
Louis, Missouri.
Jack Boyer OBE
OBE, BA (Hons), MSc, MBA
Non-Executive Director
Jack Boyer OBE was appointed
Non-Executive Director on
5 September 2019. Jack is
a non-executive director
and Senior Independent
Director of TT Electronics plc
where he is a member of the
Audit, Remuneration and
Nominations committees. He
chairs the Board of Trustees
of the University of Bristol and
is a non-executive director
of the Henry Royce Institute
for Advanced Materials. He
recently chaired AIM listed
company Seeing Machines
and was previously a non-
executive director at FTSE
250 companies Mitie plc and
Laird plc after a background in
engineering and biosciences.
He was until recently a board
member of the Engineering
and Physical Sciences Research
Council and co-chaired the
Advanced Materials Leadership
Council at the department for
Business, Energy and Industrial
Strategy. Jack was awarded
an OBE in 2015 for services to
Science and Engineering.
Russell King
Non-Executive Director,
Chair of the Remuneration
Committee
Malin Persson
MSc
Non-Executive Director, Senior
Independent Director
Bill Spencer
BSc, FCMA, MCT
Non-Executive Director and
Chair of the Audit Committee
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.
Bill Spencer was appointed
Non-Executive Director on
24 April 2017 and Chair of
the Audit Committee 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. Bill has also
been the interim Chair, senior
independent director and
audit and risk committee
Chair of Northgate plc. Bill is
non-executive director of The
Royal Mint. He is a Chartered
Management Accountant
and Corporate Treasurer and
has a BSc in Management
Sciences from the University
of Manchester.
Russell King was appointed
Non-Executive Director on
5 September 2019. Russell
is Chair of Hummingbird
Resources plc, and an
independent non-executive
director of BDO LLP. Russell
served as Chief Strategy
Officer at Anglo American
plc where he had global
responsibility for strategy,
business development,
government relations,
safety and sustainable
development. He was also
a member of its executive
committee for eight
years. Additionally, Russell
was senior independent
director and remuneration
committee chair of Spectris
plc from 2010 to 2020 senior
independent non-executive
director and remuneration
committee chair of Aggreko
plc, from 2007 to 2017.
Creating a world fit for the future 89
Corporate governance
Corporate
governance
statement
Sir Terry Morgan
Chair
CHAIR’S OVERVIEW
The Board is committed to ensuring that the highest 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 outlines 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 its
broader stakeholder group, and this has been at the heart of our culture and decision-making process for many years.
The Board spends time listening to and understanding the views of its key stakeholders. When discussing matters at Board
meetings these views form an integral part of its decision-making. In support of the requirements of section 172 of the
Companies Act 2006, we set out on pages 16 to 17 together with page 95, how the Board has considered the material issues
of the Group’s stakeholders and how we have engaged with these stakeholders on these issues. 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.
Sir Terry Morgan CBE
UK Corporate Governance Code
The Board confirms that the Company has complied with the
provisions of the UK Corporate Governance Code 2018 (“the Code”)
throughout the year ended 30 June 2020.
This report described how the Company has applied the
principles and provisions set out in the Code during the year and
sets out our activities relating to the main sections of the Code:
1. Board Leadership and Company Purpose
2. Division of Responsibilities
3. Composition, Succession and Evaluation
4. Audit, Risk and Internal Control
5. Remuneration
The Code and associated guidance are publicly available on the
Corporate Governance and Stewardship page of the Financial
Reporting Council’s website, https://www.frc.org.uk/directors/
corporate-governance-and-stewardship.
ensuring that the Group is appropriately managed and achieves its
objectives in a way that is supported by the right culture and behaviours.
Our values underpin our purpose and are recognised across the
Group as the basis of our culture. The Board sets the strategy for the
Group to align with our purpose. It oversees the implementation of
that strategy to ensure that the Group is suitably resourced to deliver
on its strategic objectives.
The Board holds an annual strategic planning session to support
the long-term direction of the Group. At the session, held every
November, senior managers present on each of our global
business areas to better understand market trends, technology
developments, innovation and people strategies as well as culture,
diversity and inclusion.
Throughout the year, the Board receives regular updates on these
areas to ensure the delivery of strategy in line with our purpose.
We have a formal schedule of matters reserved for our approval
which are not delegated to the executive team. These include:
SECTION 1:
Board Leadership and Company Purpose
The role of the Board is to provide entrepreneurial leadership and
we recognise that we are collectively responsible for the long-term
success of the Group.
Our values and leadership behaviours are a vital part of our
culture to ensure that through our conduct and decision-making
we do the right thing for the business and our stakeholders.
The Board recognises that it is accountable to stakeholders for
• Strategy;
• Acquisitions and disposals of businesses (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.
90 Ricardo plc Annual Report & Accounts 2019/20
Number of scheduled meetings in the year
Number attended by each member:
Dave Shemmans
Ian Gibson
Mark Garrett*
Sir Terry Morgan CBE
Jack Boyer OBE**
Bill Spencer
Laurie Bowen
Malin Persson
Russell King**
Peter Gilchrist***
*Mark Garrett resigned from the Board and the Company on 31 July 2020.
**Jack Boyer OBE and Russell King joined the Board on 5 September 2019.
***Peter Gilchrist retired from the Board on 14 November 2019.
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 our 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, are available on
our website, www.ricardo.com or on request from the
Company Secretary.
Our Code of Conduct, which defines the standards and
behaviours expected of colleagues, is a fundamental part of
our culture and supports our values. The Code of Conduct is
supported by Group policies and mandatory training, which
includes anti-bribery and corruption, whistleblowing and
data protection.
In addition, an independent and confidential whistleblowing
telephone hotline allows colleagues to raise concerns regarding
misconduct and any breaches of the Code of Conduct. The
Audit Committee routinely receives reports of any matters raised
through the whistleblowing hotline. Updates on any investigations
undertaken and any corrective actions are provided to the Board.
The Board in financial year 2019/20
There are seven scheduled Board meetings per year, and otherwise
as required. Details of attendance by Board and Committee
members at scheduled meetings are shown in the table above.
If any Director is unable to attend a meeting, they discuss their
views and comments with the relevant Chair in advance, so that
their position can be represented at the 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. The Board has a detailed programme that ensures
operational and financial performance, risk, governance, strategy,
culture and stakeholder engagement are discussed at the
appropriate time.
Our forward planner gives Board members visibility of what is
on future agendas for their consideration. A number of the key
Corporate governance
Corporate governance statement
Board
meetings
7
Committee meetings
Remuneration
4
Audit
3
Nomination
1
7
7
6
7
5
7
7
7
6
3
-
-
-
-
3
3
3
3
3
2
-
-
-
4
4
4
4
4
4
3
1
-
-
1
1
1
1
1
1
-
matters considered by the Board during the year under review are
set out in the table below:
Meeting in FY 2019/20
July 2019
September 2019
November 2019
February 2020
April 2020
May 2020
June 2020
Significant matters under review
• FY 2019/20 budget approval;
• Risk management and internal control; and
• Matters reserved for the Board and
Committees’ terms of reference
• Preliminary results and Annual Report;
• Final dividend; and
• Annual General Meeting (‘AGM’)
• Strategy; and
• Board objectives
•
•
• Key performance indicators; and
• Health, safety and environment (‘HSE’)
• Treasury and Financing Facilities
• Human resources and Employee Survey
Interim results and Interim Report;
Interim dividend;
results
• FY 2020/21 divisional budget presentations
•
Insurance
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. The Board challenges
management to ensure that the flow and quality of information to
the Board is of a high standard.
At the beginning of the second half of the year, the Board
recognised the potential impact to its global operations of the
outbreak of the COVID-19 pandemic and immediately scheduled
additional board meetings to enable it to regularly monitor the
impact on operations and the actions being taken to protect the
health and well-being of employees.
In addition, the Board reviewed the Group’s financial facilities
and approved the extension of a revolving credit facility with
the Group’s banks to ensure the liquidity of the business. Since
February 2020 the Board has received weekly briefings on the
operational status of each of its global businesses, together with an
update on health, safety and wellbeing of employees.
Creating a world fit for the future 91
Corporate governance
Corporate governance statement
SECTION 2:
Division of Responsibilities
The Board is collectively responsible for the long-term success of
the Group, ensuring that it operates within a framework of effective
controls.
The operations of the Board are underpinned by the collective
experience of the Directors and the diverse skills and experience
which they possess. This experience ensures that leadership and
decision-making are focused and balanced, and approached with
independent thought and judgement. Accordingly, decisions
are taken for the benefit of the Company as a whole, with due
consideration for all stakeholders who may be affected.
There is a clear division of responsibilities between the Chair
and the Chief Executive Officer, which is documented, clearly
understood and approved by the Board.
The Chair
Sir Terry Morgan is primarily responsible for leading the Board
and ensuring its effectiveness. Sir Terry sets the Board agenda in
consultation with the Chief Executive, other Board members and
the Company Secretary. Sir Terry promotes effective communication
between the Executive and Non-Executive Directors and ensures all
Directors effectively contribute to discussions and feel comfortable
in engaging in healthy debate and constructive challenge.
Sir Terry ensures all Directors receive accurate, timely and clear
information to assist them to make their decisions and ensures
appropriately tailored induction programmes are delivered for new
Directors.
Chief Executive Officer
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. He plays a key role in
devising and reviewing Group strategies for discussion and approval
by the Board. Dave is tasked with providing regular operational
updates to the Board on all matters of significance relating to
the Group’s business or reputation and for ensuring effective
communication with shareholders and other key stakeholders.
Dave Shemmans chairs the Executive Committee, which meets
regularly throughout the year. The Executive Committee is primarily
responsible for developing and implementing our corporate
strategy and policies.
Senior Independent Director
The responsibilities of the Senior Independent Director are also
documented and include the provision of an additional channel
of communication between our Chair 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 such contacts are inappropriate.
The Senior Independent Director meets with the Non-Executive
Directors at least annually when leading the Non-Executive Directors
appraisal of the performance of the Chair.
Malin Persson was appointed Senior Independent Director at the
close of the AGM in November 2020.
92 Ricardo plc Annual Report & Accounts 2019/20
Non-Executive Directors
On 5 September 2019 Jack Boyer OBE and Russell King were
appointed to the Board as Non-Executive Directors.
Peter Gilchrist was Chair of the Remuneration Committee and
Senior Independent Director until his retirement in November 2019.
Russell King was appointed Chair of the Remuneration Committee
at the close of the AGM in November 2019.
Bill Spencer has been the Chair of the Audit Committee
throughout the year under review.
At the close of the AGM in November 2019, Sir Terry Morgan stood
down as Chair of the Nomination Committee and Laurie Bowen was
appointed in his place.
On a number of occasions during the year, the Chair 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 Chair
maintains regular contact with the other Directors to discuss specific
issues.
The Non-Executive Directors bring insight and experience to
the Board. They have responsibility for constructively challenging
the strategies proposed by the Executive Directors, scrutinising
the performance of management in achieving agreed goals and
objectives and play leading roles in the functioning of the Board
Committees, bringing an independent view to the discussion. They
meet with the Senior Independent Director to review the Chair’s
performance and other matters.
Workforce Engagement Director
Malin Persson was designated as the Non-Executive Director
responsible for overseeing Workforce Engagement during the
year under review. Ricardo has a structured engagement plan
with its employees, including Pulse presentations, Town Halls,
Works Councils and biennial Group employee surveys together
with divisional surveys on a more regular basis. Before COVID-19.
Ricardo had designated a number of senior executives who travel
extensively and regularly, consulting with employees whilst in
overseas territories and providing feedback. However, due to the
restrictions imposed by the pandemic, this practice is under review
with a view to providing Malin with direct access to employees
through the use of video-conferencing facilities and other means of
technology.
Company Secretary
Patricia Ryan is secretary to the Board. Her responsibilities include
ensuring the Board has the information, time and resources it
needs in order to discharge its duties and function effectively and
efficiently.
The Company Secretary advises the Board on all governance
matters and facilitates induction programmes for new Directors
and provides briefings and guidance on governance, legal and
regulatory matters. The appointment and removal of the Company
Secretary is a matter reserved for the Board as a whole.
Time commitment
Regular Board and Committee meetings are scheduled throughout
Corporate governance
Corporate governance statement
the year, ensuring that Directors allocate sufficient time to
discharge their duties effectively. During the year, the Board held
seven scheduled meetings and additional strategy days, which
included presentations by senior management on each of the
business areas.
In addition to scheduled meetings, the Board held additional
meetings to consider the impact of the COVID-19 pandemic on its
global operations,
Directors are expected to attend all Board and relevant
Committee meetings. The table on page 91 shows the record of
attendance at the scheduled Board and Committee meetings.
The nature of the Non-Executive Director role makes it
impossible to be specific about the maximum time commitment.
However, it is anticipated that at least 20 days per annum after the
induction phase are required, plus additional time to devote to
preparation ahead of each meeting.
It is recognised that at certain times it may be necessary to
convene additional Board, Committee or shareholder meetings.
Prior to appointment, the Nomination Committee assesses
the commitments of a proposed candidate, including other
directorships, to ensure they have sufficient time to devote to
the role.
Conflicts of interest
Directors are required to report actual or potential conflicts
of interest to the Board for consideration and, if appropriate,
authorisation. If such conflicts exist, Directors excuse themselves
from consideration of the relevant matter. The Company
maintains a register of authorised conflicts of interest, which is
reviewed annually.
Details of the Directors’ service contracts and terms of
appointment, together with their interests in the Company’s
shares, are shown in the Directors’ remuneration report on pages
102 to 127. If Directors have concerns about the Company or a
proposed action which cannot be resolved, it is recorded in the
Board minutes.
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 Nomination 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.
The Board recognised that the appointment of our two
additional Non-Executive Directors during the year under review
had diluted female gender diversity. Careful consideration of
this impact was undertaken by the Nomination Committee and
the Board before appointment and it was determined that in
accordance with our aim to recruit the best person for the role,
it was appropriate to appoint Russell King and Jack Boyer OBE
as Non-Executive Directors. As part of its determination, the
Nomination Committee considered that these appointments
should be viewed in relation to its overall responsibility for
succession planning of the Board. In addition, the Nomination
Committee recommended to the Board that Laurie Bowen
and Malin Persson should be appointed to the roles of Chair of
the Nomination Committee and Senior Independent Director,
respectively, to reflect their contributions and status on the
Board. Since the departure of Mark Garrett on 31 July 2020, the
composition of the Board has returned to 25%
female representation.
The Board remains committed to promotion of diversity at
all levels within the Group and will report on this further in
future years.
Details of female representation elsewhere within the Group are
set out on page 22.
All Directors have access to the advice of the Company Secretary
As set out in their biographies on pages 88 to 89, each member
and, in appropriate circumstances, may obtain independent
professional advice at the Company’s expense. No such requests
were made in FY 2019/20. A Directors’ and Officers’ Liability
Insurance policy is maintained for all Directors and each Director
has the benefit of a Deed of Indemnity.
SECTION 3:
Composition, Succession and Evaluation
Diversity and inclusion
Our Board sets the tone for inclusion and diversity across the
Group and believes it is important to have an appropriate balance
of skills, knowledge, experience and diversity on the Board and at
senior management level to ensure good decision-making. The
Board recognises the need to create conditions that foster talent
and encourage all colleagues to achieve their full potential. The
Board and Nomination Committee receive regular updates on the
progress of diversity initiatives across the Group.
Our Board and Committees are committed to promoting
equality of opportunity for all employees and job applicants, free
of the Board offers a range of core skills and experience that is
relevant to the successful operation of the Group, providing a
strong independent element to the Board and a solid foundation
for good corporate governance, as well as fulfilling the vital role
of corporate accountability. The oversight each of the Directors
provides is balanced with individuals contributing a broad range
of skills, diverse experience and knowledge, demonstrating
independence and constructive challenge.
Non-executive Directors’ independence.
The Nomination Committee considers whether each of the
Non-Executive Directors is continuing to maintain his or her
independence of character and judgement in line with the
definition set out in the Code. The Non-Executive Directors met
with the Chair without the Executive Directors being present on
a number of occasions and, at least annually, Directors meet with
the Senior Independent Director to review the Chair’s performance
and other matters.
Creating a world fit for the future 93
Corporate governance
Corporate governance statement
Appointment, induction and development
Non-Executive Directors are initially appointed for a three-year
term, with an expectation that they will continue for at least a
further three years. Directors are nominated by the Nomination
Committee and are subsequently approved by the Board for
election or re-election annually by shareholders at the Company’s
AGM. After three years’ service the performance of a Non-
Executive Director is rigorously assessed by the Nomination
Committee. Any development needs identified are discussed by
the Chair with the Non-Executive Director.
All Directors will submit themselves for re-election at the
forthcoming AGM in November 2020. Upon appointment, all
new Directors receive a comprehensive induction programme
over a number of months, which is designed to facilitate their
understanding of the business and is tailored to their individual
needs. The Chair and the Company Secretary are responsible for
delivering the programme covering the Company’s core purpose
and values, strategy, key areas of the business and corporate
governance. The New Director induction programme is delivered
through meetings with senior managers across the Group as well
as via a number of advisors, attendance at Committee meetings,
site visits and access to a library of reference materials. In support
of the ongoing development of Directors, technical updates
are provided at Board and Committee meetings to ensure that
Directors remain up to date with key developments in the
business environment.
Directors are encouraged to attend training sessions to ensure
their knowledge is up to date on relevant legal, regulatory
and financial developments or changes. The Board receives
presentations on each of the business areas to understand the
market conditions and challenges in the different countries the
Group operates in. Directors have spent time individually and
collectively exploring specific operational activities in detail
through presentations, meetings and site visits, giving them
the opportunity to meet with local senior management to
gain an insight of the business operations. The Board visits our
overseas business functions on a regular basis to gain a greater
understanding of the market conditions that the business operates
in and to understand the challenges they face. This provides
in-depth knowledge for the Directors, enabling them to share
their own experiences and challenge the business. Unfortunately,
due to the outbreak of COVID-19, the planned Board visit to our
operations in the US had to be cancelled during the year
under review.
Board evaluation
The Board undertakes a formal review of its own performance and
that of its Committees each year. Following the recommendation
of the Nomination Committee, an externally facilitated review
was commissioned during the year under consideration and the
evaluation was reported back to the Board towards the latter
part of the year. Condign Consulting undertook the review and
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 the year.
Following the external review, the Board set itself improvement
94 Ricardo plc Annual Report & Accounts 2019/20
actions and objectives, including, amongst other things, gaining
a deeper insight into shareholder views and seeking additional
engagement; review of the board schedule and agenda planning;
further review of diversity goals and workforce engagement;
review of strategic priorities and succession planning. The
outcome of these improvement actions will be reported in the
next annual report.
SECTION 4:
Audit, Risk and Internal Control
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.
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 98 to 101.
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 36 to 39.
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 are set out on pages 102 to 127, and pages 134 to 199
respectively..
The Group’s business model is set out within the Strategic
Report on pages 4 to 5.
The Directors’ statement relating to going concern and
the Viability Statement are set out on pages 130 and 40 to 41,
respectively.
SECTION 5:
REMUNERATION
Please refer to the Directors’ Remuneration Report on pages 102 to
127 for further information, and in particular:
Level and components of remuneration
Please refer to pages 103 to 118.
Corporate governance
Corporate governance statement
Procedure
Please refer to pages 119 to 127.
of the Audit Committee are available for discussions with major
shareholders, if required.
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 Chair also looks to shareholder groups’ annual voting
guidelines to better understand their policies on governance
and voting.
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.
Stakeholders
Culture, underpinned by our values, plays a fundamental role in the
way that we do business and deliver our strategic goals and KPIs.
The Board recognises that having robust governance structures
in place is vital to decision-making. The Board spends a lot of time
listening to and understanding the views of its key stakeholders.
When discussing matters at Board meetings these views form an
integral part of its decision-making.
Clients
Clients are at the heart of what we do. Every decision we take is to
ensure we deliver great service to our clients. The Board receives
regular feedback from Voice of the Client reports completed by
our Clients.
Staff
The experience and expertise of our colleagues is essential for the
delivery of our strategic objectives. Operating within a culture of
openness and inclusivity ensures that each of our colleagues is
focused on delivering great service.
Suppliers
Building trusted partnerships with our suppliers is important in
enabling us to provide the best service to our clients and provides
a great platform for our suppliers to grow.
Community
The Board is committed to improving sustainability and helping
communities thrive by positively contributing both socially and
economically. A key consideration of the Board in making its
decisions is to balance the sometimes-conflicting needs of our
stakeholders to ensure they are all treated consistently and fairly.
Shareholders
A key objective of the Board is to create value for shareholders and
deliver long-term, sustainable growth.
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 addition, the Senior Independent Director and the Chair
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.
Directors’ duty under section 172 of Companies
Act 2006
In discharging our section 172 duties, Directors are required to
have regard, amongst other matters, to: the likely consequences
of any decisions in the long term; the interests of the company’s
employees; the need to foster the company’s business
relationships with suppliers, customers and others; the impact of
the company’s operations on the community and environment;
the desirability of the company maintaining a reputation for
high standards of business conduct; and the need to act fairly as
between members of the company. In addition to the above, we
also have regard to other factors which we consider relevant to
the decision being made. Those factors include the interests and
views of Ricardo’s pensioners and our relationship with regulators.
The Board acknowledges that every decision it makes will not
necessarily result in a positive outcome for all of the Group’s
stakeholders. By considering the Company’s purpose and values,
together with its strategic priorities and having a process in place
for decision-making the Board does, however, aim to make sure
that its decisions are consistent and predictable. Details on how
the Board operates and the way in which it reaches decisions
(including the matters discussed and debated during the year,
the key stakeholder considerations that were central to those
discussions and the way in which it has had regard to the need
to foster the Company’s business relationship with customers,
suppliers and other stakeholders), are set out on pages 16 to 17.
Ricardo’s Annual General Meeting
The Company’s Annual General Meeting is an opportunity
to meet private investors. However, due to the outbreak of
COVID-19, and the continued uncertainty about its containment
and the changing public health guidance and legislation, the
Board of Directors have decided to implement changes to
safeguard the health of our shareholders and employees.
The Company’s Annual General Meeting will be held
at our registered office, Shoreham Technical Centre,
Shoreham by Sea, West Sussex, BN43 5FG on Thursday 12
November 2020 starting at 10.00am.
THE AGM WILL BE RUN AS A CLOSED MEETING.
SHAREHOLDERS WILL NOT BE ABLE TO ATTEND IN PERSON.
Creating a world fit for the future 95
Corporate governance
Corporate governance statement
We will make arrangements such that the legal requirements
to hold the meeting can be satisfied through the attendance of a
minimum number of people. The format of the meeting will be
purely functional. Details will be provided on our website, in
due course.
You should cast your vote on the resolutions via the Form of
Proxy. Given the current restrictions, we suggest that you appoint
the chair of the meeting as your proxy, rather than a named
person who will not be permitted to attend the meeting. Once
completed, the Form of Proxy should be submitted to Link Asset
Services as soon as possible, and no later than 10.00 am on
10 November 2020.
The Notice of Meeting sets out the resolutions being proposed
at the AGM on 12 November 2020 at 10:00am and shareholders
can vote separately on each proposal.
Last year, all resolutions were passed with votes ranging from
in office at the time of the meeting. 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, interim reports and investor presentations.
The Corporate Governance Statement was approved by the Board
of Directors on 9 September 2020 and signed on its behalf by:
83.96% to 99.95%.
The AGM in November 2019 was attended by all Directors
Sir Terry Morgan CBE
Chair
Nomination
Committee
report
Laurie Bowen
Chair of the Nomination Committee
Chair’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.
This year has been particularly busy for the Nomination Committee. Key focus areas included:
• The on-boarding of two new Non-Executive Directors. Details of the selection process were provided in the 2019 Annual
Report.
• Reassignment of responsibilities for the Chairs of the Nomination Committee, Remuneration Committee and Senior
Independent Director
• Malin Persson assigned as Non-Executive Director responsible for Workforce Engagement.
In the forthcoming year we will be updating talent management and succession planning for Board and senior management
positions.
Laurie Bowen
96 Ricardo plc Annual Report & Accounts 2019/20
Composition
On 14 November 2019 I was appointed Chair of the Nomination
Committee, and during the year under review the Nomination
Committee comprised the independent Non-Executive
Directors Sir Terry Morgan, Peter Gilchrist, Malin Persson, Bill
Spencer and, subsequent to their appointment on 5 September
2019, Russell King and Jack Boyer, 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.
Before such recommendations are made, descriptions of the
roles and skills required to fulfil each role are prepared for each
appointment. 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.
After careful consideration and as announced on 6
September 2019, the Nomination Committee recommended
the appointments of Russell King and Jack Boyer OBE as Non-
Executive Directors.
As a result of the changing composition of the Board, the
Nomination Committee took the opportunity to review the
responsibilities of Non-Executive Directors and, with effect from
the close of the AGM on 14 November 2019, Russell King was
appointed Chair of the Remuneration Committee and Malin
Persson was appointed Senior Independent Director.
The search for new Non-Executive Directors during the year
was managed with the assistance of recruitment consultants, the
Inzito Partnership, who have signed up to the voluntary Code
of Conduct for executive search firms. Both new Non-Executive
Directors undertook an extensive induction programme to
ensure a rounded understanding of the business and our
ambitions. The Inzito Partnership has no other connection with
the Company.
When an appointment of a Non-Executive Director is made,
a formal letter is sent clearly setting out the expected time
commitments for the board, committee membership and
involvement outside of board meetings. Chosen candidates
are required to disclose to the Board any other significant
commitments before appointments can be ratified.
Non-Executive Directors, including the Chair, are subject to
Corporate governance
Nomination Committee report
rigorous review when they continue to serve on the Board for
any term beyond six years.
Date of Appointment
Tenure (years)
Succession Planning
Name
Dave Shemmans
Ian Gibson
Mark Garrett
Sir Terry Morgan CBE
April 2005
July 2013
resigned July 2020
January 2014
Peter Gilchrist CB
retired 14 November 2019
Laurie Bowen
Malin Persson
Bill Spencer
Jack Boyer OBE
Russell King
July 2015
January 2016
April 2017
September 2019
September 2019
15
7
12
6
5
4
3
-
-
Following completion of Sir Terry Morgan’s second three
years of service, the Committee, in his absence, conducted a
rigorous review of his performance and confirmed his continued
independence as a Non-Executive Director. Accordingly, the
Committee unanimously recommended to the Board the
renewal of his appointment as Chair of the Board. In addition, Bill
Spencer completed his first three years of service and, following
review by the Committee, in his absence, the Committee were
satisfied of his continued independence as a Non-Executive
Director and unanimously recommended the renewal of his
appointment to the Board. The Board approved both these
renewals at the appropriate time.
The Committee spent time looking at succession planning for
the Executive Directors as well as for the Board over the medium
term. Following Mark Garrett’s resignation, the Committee
reviewed executive director appointments to the Board, and
concluded that no further executive appointment should be
made to the Board at the current time. We also discussed talent
management and succession planning for the top-performing
senior managers within the business.
Creating a world fit for the future 97
Corporate governance
Audit
Committee
Report
Bill Spencer
Chair of the Audit Committee
Chair’s Overview
As Chair of the Audit Committee, I am pleased to present to you my report for the year ended 30 June 2020.
On behalf of the Board, the Audit Committee has been actively engaged in risk management to provide appropriate challenge
and guidance throughout the year. Particular attention has been given to the impact of the COVID-19 pandemic on the trading
performance, viability, operations and internal control environment of the Group.
The Committee has also evaluated the effectiveness of the internal control environment to ensure the integrity of the Group’s
financial reporting. This has included enhancing our internal audit resources with the appointment of PricewaterhouseCoopers
LLP (‘PwC’) to undertake certain internal audit assignments during the year.
I hope that you will find this report useful and I would welcome any comments.
Bill Spencer
Composition
I chair the Audit Committee, which during the year under review
also comprised the independent Non-Executive Directors, Laurie
Bowen, Malin Persson, Jack Boyer and Russell King. This is the
first year that Jack Boyer and Russell King have sat on the Audit
Committee, both having joined the Committee on 5 September
2019. The competence and experience of all the members of the
Audit Committee is set out on pages 88 and 89.
As the Committee’s Chair and as is considered desirable by the
Financial Reporting Council’s Guidance on Audit Committees, I
have recent and relevant financial experience and a professional
accountancy qualification.
As set out on page 94, the performance of the Audit
Committee has been evaluated and is considered to be effective.
The Committee convenes at three scheduled meetings
each year and other ad hoc meetings, as required. Details of
attendance at meetings held during the financial year are set
out on page 91. The Chair, Executive Directors, the Group’s Head
of Internal Audit and the Company’s external auditors all have
standing invitations to attend all Committee meetings.
98 Ricardo plc Annual Report & Accounts 2019/20
Responsibilities
The Committee is established by, and is responsible to, the
Board. As authorised by the Board, the Committee has
obtained all necessary documentation and information it
required from officers or employees of the Company, as
well as external professional advice. In order to carry out its
responsibilities during the year, the Committee undertook the
following activities:
• Assessed the Group’s risk profile, as well as its appetite for risk
on behalf of the Board, and evaluated the effectiveness of
the Group’s risk management and internal control systems,
together with the policies and procedures in relation to ethics,
whistleblowing, fraud and bribery prevention;
• Monitored the key risks to the Group in respect of data and
cyber security and evaluated the effectiveness of its control
environment;
• Considered significant matters arising from internal audits
performed during the year, evaluated the effectiveness of the
internal audit function, and reviewed the scope and available
resource for the internal audit plan in the following year to
ensure that it is appropriate;
• Reviewed the scope and planning of the external audit, and
evaluated the external auditors’ remuneration, effectiveness,
independence and objectivity, including consideration of the
provision of non-audit services;
Corporate governance
Audit Committee Report
• Considered separate reports prepared by the Chief Financial
Officer and external auditors on financial reporting and
internal control matters as part of the interim review and
annual audit processes;
• Assessed the results, on behalf of the Board, of the application
of agreed assumptions to re-confirm the continued
operational and financial viability of the Group for a period of
three years from the date of this report;
• Reviewed the significant financial reporting matters,
judgements and estimates, and changes in accounting
policies applicable in the preparation of both the Group’s
interim and year-end consolidated financial statements, which
included the transition to IFRS 16 Leases, prior to submission to
the Board for approval; and
• Evaluated the content of the Annual Report & Accounts as
a whole and assessed the processes in place to assure its
integrity, to advise the Board on whether the information
presented is fair, balanced and understandable, and whether
it contains the information necessary for shareholders to
assess the Group’s position and performance, business model
and strategy.
Risk management
The Committee has monitored the Group’s risk management
processes and internal control systems as part of its role on
behalf of the Board to oversee the Group’s approach to risk
management and with due consideration to the principal risks
and uncertainties facing the Group.
The Committee reviews the Group’s policies and procedures
in relation to ethics, whistleblowing, and the prevention of fraud
and bribery.
Significant financial reporting matters
The Committee received and considered reports from the Chief
Financial Officer in relation to the critical accounting judgements
and key sources of estimation uncertainty. Following discussions
with senior management and the external auditors, the
Committee approved the disclosure as set out in Note 1(c) to the
Group financial statements.
The Committee considered the following significant financial
reporting matters, judgements and estimates in approving the
Group financial statements for the year ended 30 June 2020:
Considerations of the risk and impact of COVID -19
Management’s perception of the risks associated with COVID-19
has been considered as part of the Committee’s bi-annual
risk profile review. The risks, their potential impacts and the
mitigating actions taken are set out in the Group’s Principal Risks
and Uncertainties on pages 37 to 39. The committee reviewed
the impact of COVID-19 on the internal controls and internal
audit programme and noted that the core internal control
elements of all planned internal audits were undertaken, and
that the timing of lockdown did not impact these elements of
the test methods of the larger audits. The committee noted that
management had maintained all elements of its internal control
environment during the lock down and restart periods.
Although the potential impacts of the perceived risks
of COVID-19 are inherently uncertain and the full range of
identifiable risks and possible outcomes cannot be known,
severe but plausible downside scenarios to reflect the impact of
a continuation of low levels of trading have been factored into
the assessment of the Group’s continued viability. In addition,
the actuarial assumptions used to value the Group’s retirement
benefit obligations at the year-end reflect the level of economic
uncertainty of COVID-19 as at the reporting date. While no
business can fully prepare for, or mitigate against, the potential
impacts of COVID-19, the Committee is satisfied that appropriate
considerations of the perceived risks associated with COVID-19
have been made, together with reasonable actions taken to
mitigate those risks, where possible.
Considerations of the risk and impact of Brexit
Management’s perception of the risks associated with exit of
the UK from the European Union has been considered as part
of the Committee’s bi-annual risk profile review. The risks, their
potential impacts and the mitigating actions taken are set out in
the Group’s Principal Risks and Uncertainties on page 37.
The potential impacts of the perceived risks of Brexit are
uncertain. The Committee is satisfied that the severe but
plausible downsides in respect of COVID-19, which have been
factored into the assessment of the Group’s continued viability
as stated above, are sufficiently severe as to also encompass the
risks to trading from Brexit.
Creating a world fit for the future 99
Corporate governance
Audit Committee Report
Revenue recognition on fixed-price contracts
The Group recognises a significant proportion of its consulting
revenue from the supply of services under fixed -price
contracts, which may span a number of reporting periods. The
identification and separate accounting of distinct performance
obligations within the context of a contract is a critical
judgement in recognising revenue, as set out in more detail in
Note 1(c) to the Group financial statements.
A summary of the judgements and estimates taken by
management to assess the extent to which these contract assets
are recoverable was reviewed by the Committee at the February
and September meetings and the positions taken are considered
to be appropriate.
The Committee is satisfied that the Group’s policies and
procedures have been followed to reflect management’s best
estimate of revenue recognised at the reporting date and that
no individual judgement or estimate is expected to have a
materially different outcome.
Changes in these estimates may impact revenue recognition
and the actual outcome may differ to the estimate made at the
reporting date.
Defined benefit obligation
The Company operates the defined benefit Ricardo Group
Pension Fund (‘RGPF’). The accounting basis of the RGPF is
exposed to changes in the value of its assets and liabilities.
The economic uncertainty caused by the COVID-19 pandemic,
together with continuing uncertainties around trade
negotiations between the UK and European Union, has resulted
in a period of significant short-term volatility in markets and
therefore in the value of the scheme’s assets and liabilities. The
liabilities of the RGPF are also sensitive to changes in actuarial
assumptions, on which management takes professional advice.
Further detail is set out in the financial statements in Note 1(c)
and Note 33 to the Group financial statements.
The Committee is satisfied that the assumptions were
reviewed by senior management and that the value of the
RGPF’s liability reflects the best estimate at the reporting date.
Impact of new accounting standards
IFRS 16 Leases became effective for the Group from 1 July
2019. The transitional impact of this standard and the changes
required to accounting policies have been reviewed by the
Committee and are considered appropriate. Further detail is set
out in Note 1, Note 2, Note 3 and Note 18 to the Group financial
statements.
100 Ricardo plc Annual Report & Accounts 2019/20
Change in operating segments
In September 2019, the Group announced its intention to
report its results for the financial year ending 30 June 2020
using the following reportable operating segments: Energy &
Environment (‘EE’), Rail, Automotive & Industrial (‘A&I’), Defense,
and Performance Products. There is also an ‘all other segments’
segment, comprising the results of Ricardo Strategic Consulting
and Software, combined due to their size. This change was
driven by successful acquisitions in the Rail and EE segments,
in May 2019 and July 2019 respectively, which increased the
prominence of these businesses within the Group, combined
with a wish to provide more granularity into the key drivers of
performance within the Group. Segmental information was
provided on this basis in the Group’s interim results for the six
months to 31 December 2019, which was made available on the
Group’s website. The Committee considered the presentation
of the segmental information and the new segmental reporting
structure and concluded these appropriately reflected the
management and decision-making structure adopted by the
Group from 1 July 2019.
Internal audit
The internal audit function is accountable to the Committee, and
is considered to be a key function for effective risk management.
Historically, internal audit has been led and resourced by
suitably skilled and experienced staff from the Group’s head
office or parts of the Group independent from the business
or function being audited. In agreement with the Committee,
for the year ended 30 June 2020, a number of divisional
internal audits were conducted by PwC. The engagement of
PwC has given the Group access to specialist internal audit
staff for deployment on higher risk and more complex audits.
Responsibility for the internal audit process and setting the
internal audit plan has remained with the Group’s Head of
Internal Audit, who has independently reviewed and scrutinised
the work performed by PwC. This co-source approach ensures
independence in the internal audit process and the identification
of relevant findings and recommendations, and combines
external experience with the sharing of best practice around the
Group.
All internal audit reports submitted during the year were
reviewed by the Committee, and the status of each remedial
action is tracked to completion to ensure appropriate resolution.
Meetings are held with the Group’s Head of Internal Audit
without the presence of management.
The Committee also monitored the effectiveness of the
Group’s internal audit function including the approval of the
scope and resources required to carry out work to be performed,
and received an external perspective on internal audit
development from PwC.
Corporate governance
Audit Committee Report
Independence and effectiveness
Both the Board and KPMG have safeguards in place to ensure
the auditors’ objectivity and independence cannot be
compromised. The Committee supports KPMG in having the
necessary professional scepticism in its role. KPMG also provides
the Committee with information about policies and processes
for maintaining its independence.
The 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 KPMG.
During the year, the Committee carried out its annual
effectiveness review of the external auditor, which primarily
focused on the 2020 audit. This assessment was completed at
the end of the 2020 audit and was based upon KPMG’s audit
findings and responses to questions from the Committee,
together with input from senior management and finance
personnel. The Committee also met with the audit partner
without management being present. There were no significant
findings following the review and it was concluded that the
audit process was effective. The Committee recommended
to the Board that their re-appointment be proposed to
shareholders at the 2020 AGM.
External audit
KPMG LLP were first appointed the Group’s external auditors for
the year ended 30 June 2019, following an audit tender process.
KPMG were reappointed for the audit of the Group’s results to 30
June 2020 at the Group’s AGM on 14 November 2019.
Non-audit services
The Board’s policy is that the provision of permissible non-
audit services may only be undertaken by KPMG in limited
circumstances and is subject to a cumulative cap. In order
to remove the possibility of a perceived conflict of auditor
objectivity and independence, KPMG has agreed with the
Committee that no permissible non-audit services will be
provided to Ricardo other than those closely related to the audit
of the Group, such as the interim review.
Fees for non-audit services paid to the external auditors
during the year were 5% of KPMG’s audit fee (FY 2018/19: 9%).
The ratio of audit and non-audit fees and the nature of non-audit
fees are disclosed in Note 11 to the Group financial statements.
Given the nature and scale of the services provided by KPMG,
the Committee concluded that these services did not cause any
concerns regarding KPMG’s objectivity or independence.
There are limited instances where Ricardo enters into business
relationships or joint arrangements with KPMG 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 they remain
immaterial to both organisations and do not compromise the
auditors’ independence.
Creating a world fit for the future 101
Corporate governance
Directors’
remuneration
report
Russell King
Chair of the Remuneration Committee
PART 1 – CHAIR’S OVERVIEW AND ANNUAL
STATEMENT
Dear Shareholder,
This is my first report since becoming Chair of the Remuneration
Committee (the ‘Committee’) in November 2019, taking over from
Peter Gilchrist. On behalf of the Board I would like to thank Peter
for his hard work and effectiveness in the role.
As reported elsewhere in this Annual Report, the lockdown
measures put in place to control the spread of COVID-19 had a
negative impact on Ricardo’s performance in the second half
of the year. Our automotive-related businesses have been most
affected, and underlying profit before tax is significantly lower
than the prior year. Our Energy & Environment, Defense and Rail
businesses have been impacted less and all delivered an increase
in profits on the prior year.
The Committee considered carefully how to treat our
executives’ pay in the light of COVID-19 and whether any
reduction to salaries should be made. In reaching the conclusion
that no reduction was necessary, several factors influenced our
decision. These included that salaries have not been reduced
for our workforce; we have not and do not expect to access any
UK Government loan scheme; and the Company’s use of the UK
Government’s furlough scheme has been limited. Naturally, we
keep these matters under close and ongoing review but
consider our response appropriate in the context of the treatment
of the wider workforce and properly aligned with the interests of
other stakeholders.
New Directors’ Remuneration Policy and
Implementation
At the 2020 AGM we will be submitting our Directors’
Remuneration Policy for renewal by our shareholders. After a
thorough review of the current directors’ remuneration policy
during FY 2019/20, the Committee has concluded there are
several changes to the policy that will better align with Ricardo’s
strategy at this stage of its development. As part of the process
we have consulted with our major shareholders on the proposed
policy. I would like to thank those shareholders who participated
for their feedback and guidance, which resulted in changes to the
original proposal.
102 Ricardo plc Annual Report & Accounts 2019/20
The directors’ remuneration policy we are proposing is:
• simpler and more straightforward;
• better aligned with practice internally and externally;
• competitive and fair; and
• remains focused on performance.
The policy not only rewards the high performance that our
shareholders require but also encourages share ownership and
fosters alignment of interest between the Executive Directors and
shareholders.
In short, we think that the policy shareholders are being asked
to approve at the 2020 AGM will work well for Ricardo in light of:
• our medium term business plans;
• our continued longer-term diversification approach;
• our growth plans, both organic and through carefully
considered acquisitions;
• the time horizons of an international consultancy business;
• shareholders’ views on executive pay; and
• the requirements of the new Corporate Governance Code.
The principal modifications we are proposing are:
Pension provision
• The pension of incumbent Executive Directors will be aligned
to the pension provision levels of the UK workforce (currently
7% of salary) by 1 January 2022 (in addition to any new
appointees being set at this level from the date of joining).
• For the Chief Executive Officer and Chief Financial Officer this
will be 7% of salary. However, the Chief Executive Officer will
receive a further 1.2% in line with all other employees who
were previously members of the former Ricardo group defined
benefit plan.
Annual bonus
• A cash conversion measure replaces net debt and the
weightings of measures are being harmonised across all the
Executive Directors.
• A third of any bonus paid will be deferred into shares for three
years. This is in line with FTSE SmallCap norms and the three-
year deferral is at the upper end of market practice.
Long-term incentives
• To simplify our incentive arrangements, the bonus-linked shares are
being removed and therefore going forward long-term incentive
awards will only be made under the new 2020 LTIP (see below).
• A two-year holding period under the 2020 LTIP is being
introduced for future grants to Executive Directors once any
shares have vested.
As it has been a number of years since the current LTIP was
adopted the introduction of a new 2020 Long Term Incentive Plan
(‘LTIP’) will also be proposed alongside the new policy. The 2020
LTIP will be similar in structure to the current plan but will reflect the
terms of our proposed policy as well as current developments in
market practice and legislative changes.
We are also proposing to take the opportunity to align the award
levels for the Chief Financial Officer more closely to the market.
The table below shows the maximum long-term incentive award
levels under the current and proposed policies.
The proposed LTIP maximum going forward results in a small
reduction compared with the current arrangements for the Chief
Executive Officer. For the Chief Financial Officer, the maximum
award level increases by 25% of salary. The Committee has set these
award levels considering appropriate levels of internal relativities
and is aware that the proposed level is not out of line with award
levels in similar sized companies. For the avoidance of doubt, we
regard market practice as one input only of several but when
we look at the competitiveness of pay, we look at total target,
maximum and realised remuneration.
Share ownership guidelines
• A 200% share ownership guideline for all Executive Directors
is introduced with a requirement that 50% of any gains from
any share awards (vesting of LTIP or deferred bonus awards) be
retained until the increased level is met.
• The increased share ownership guideline (from 100% to 200%) is
to be extended for two years post-cessation with 200% of salary
(or actual holding if lower) to be held for an initial 12-month
period and half of this level to be held for the second 12-month
period. LTIP and deferred bonus grants made following the
shareholder approval of the new policy will be subject to these
post-cessation restrictions.
The Committee thinks the suggested approach to these post-cessation
requirements is appropriate for Ricardo as it is being introduced at the
same time as the in-post shareholding guideline is being increased.
The guideline level for the second-year post-cessation will therefore be
equal to the current in-post level of 100% of salary.
The post-cessation restrictions are to apply to any LTIP and
deferred bonus awards granted following approval of the new policy
in order to avoid changing the terms of currently outstanding awards.
Pay outcomes and performance for FY 2019/20
Basic salaries for the Executive Directors were increased from 1
January 2020 by 3% against a Group-wide average increase of 3%.
The negative impact of COVID-19 on profitability resulted in the
Group’s underlying profit before tax for the year, as adjusted for
bonus purposes (on which 60% of the Executive Directors’ total
bonus opportunity is based) being £15.3m, which was below the
threshold we set for bonus purposes. Performance against the
net debt measure was also below the threshold target. Using its
overarching discretion, the Committee determined that, despite
very impressive leadership of the business during exceptionally
difficult times, no bonuses would be payable in respect of FY
2019/20, notwithstanding that the Executive Directors achieved
part of their non-financial objectives for the year.
In October 2019, awards under the LTIP granted in October
2016, and the bonus-linked shares that were granted at the same
time, lapsed on the basis of underlying EPS and TSR performance
over the relevant performance periods.
The Committee is satisfied that the current remuneration
policy has operated as intended during FY 2019/20 and incentive
outcomes are in line with Company performance. In short,
Executive Directors received no variable remuneration in respect
of FY 2019/20.
Remuneration for FY 2020/21
The first award under the new 2020 LTIP will be made in
November 2020 shortly following the AGM. The Committee has
been considering the most appropriate performance targets
to be attached to the first award under the new plan. The
intention is to continue to use a mix of EPS and TSR measures.
Due to the current high level of uncertainty surrounding setting
suitably stretching EPS targets, the EPS targets are yet to be
finalised and will be confirmed by the Committee in due course
and, in accordance with recent guidance from the Investment
Association, no later than six months following grant. Full details
of the targets will be set out in an RNS announcement issued
immediately after the LTIP award is granted or subsequently if
they are determined later.
The Committee will also determine the appropriate size of
award at the time of grant reflecting various considerations such
as the share price around the grant date. As confirmed in the
new policy, the Committee has the ability to adjust the formulaic
outcomes from performance conditions where appropriate and
the Committee will ensure that outcomes reflect Company and
executive performance as well as the experience of shareholders
and other stakeholders. The Committee will also use its discretion
to reduce vesting outcomes where it determines that windfall
gains have been received.
Executive Director
CEO
CFO
2017 Directors’ Remuneration Policy
Bonus-Linked Shares
Maximum
62.5%
50%
LTIP Maximum
100%
55%
Total
162.5%
105%
2020 Policy
LTIP Maximum
150%
130%
Creating a world fit for the future 103
Corporate governance Directors’ remuneration report Ricardo’s employees across the Group
Our employees are global experts and are crucial to the delivery of
our strategy and to the success of our business. We strive to recruit
the best talent and to retain a diverse and inclusive workforce
through apprenticeships, graduate recruitment and industry
hire programmes. We invest in the development of the skills and
competencies of our staff, providing equal opportunities for all.
From the beginning of the COVID-19 crisis, we set out a “Healthy
people, healthy business” agenda. This focused on supporting our
employees and their families together with the health and wellbeing
of our clients, suppliers and the communities in which we operate.
The Committee receives regular updates on overall pay and
conditions in the Company and this report includes for the first time
our CEO to employee pay ratio which the Committee has reviewed.
In making decisions on executive pay, the Committee considers
wider workforce remuneration and conditions and is satisfied that
the overall executive remuneration structure remains appropriate.
AGM
We trust that you find this Report to be informative and transparent,
and we hope to receive your support for the three remuneration-
related resolutions at the AGM on 12 November 2020:
• Approval of the 2020 Directors’ Remuneration Policy;
• Approval of the FY 2019/20 Directors’ Annual Report on
Remuneration; and
• Approval of the 2020 LTIP, as summarised in the Notice of AGM.
If you have any questions or comments on the Directors’
Remuneration Report please do contact me through Patricia
Ryan, Ricardo’s Group Legal Counsel and Company Secretary, at
patricia.ryan@ricardo.com.
Russell King
Chair of the Remuneration Committee
SUMMARY OF THE KEY ELEMENTS OF EXECUTIVE DIRECTORS’ PAY IN FY 2019/20
Base salary
(effective 01/01/2020)
Other benefits
Dave Shemmans
CEO
£530,484
Ian Gibson
CFO
£344,816
Mark Garrett
CSO
£296,589
• 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.
Pension
21.2%(1) of salary
20%(1) of salary
20%(1) of salary
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
(over Lower Earnings Limit)
• Maximum opportunity of 125% of
(over Lower Earnings Limit)
• Maximum opportunity of 100% of
(over Lower Earnings Limit)
• Maximum opportunity of 100% of
salary;
salary;
salary;
• Based on underlying PBT (60%), net
• Based on underlying PBT (60%), net
• Based on underlying PBT (60%), net
debt (15%) and
personal targets (25%); and
debt (20%) and
personal targets (20%); and
debt (20%) and
personal targets (20%); and
• 50% of any bonus to be deferred
• 50% of any bonus to be deferred
• 50% of any bonus to be deferred
into shares for three years.
into shares for three years.
into shares for three years.
62.5% of salary
100% of salary
50% of salary
55% of salary
50% of salary
55% of salary
162.5% of salary
105% 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 80% 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 58% 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 84% of base
salary.(4)
salary.(4)
salary.(4)
(1) This reflects legacy pension arrangements. Arrangements for any new Executive Directors are shown on page 121. In line with payments given to all employees who were previous members of the old
defined benefit scheme operated by the Company, the current Chief Executive Officer is entitled to an additional 1.2% of salary pension contribution bringing the total to 21.2%.
(2) Maximum award on grant of bonus-linked shares:
a. An award of shares with a value on grant of half the gross equivalent of any annual bonus declared;
b. 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: based on a mix of
underlying EPS growth and TSR vs. FTSE Small Cap Index (excluding financial services companies and investment trusts);
c. Net value of all vested shares to be retained until share ownership requirement met; and
d. The value of the bonus-linked shares granted in 2019 (which related to the annual bonus payable in respect of the FY 2018/19) was 16%, 13% and 11% of salary for the CEO, CFO and CSO respectively.
(3) Face value of award of long-term incentive plan shares granted in October 2019 was 100%, 55% and 55% of salary for the CEO, CFO and CSO respectively:
a. Subject to three-year performance conditions: two-thirds underlying EPS growth, one-third TSR vs. FTSE Small Cap Index (excluding financial services companies and investment trusts); and
b. Net value of all vested shares to be retained until share ownership requirement met.
(4) Calculated by reference to the number of beneficially owned shares, a share price of 419.0p per share (2019: 760.0p) and salaries as at 30 June 2020.
104 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report
PART 2 – ANNUAL REPORT ON REMUNERATION
This section of the report explains how Ricardo’s Directors’
Remuneration Policy, which was last approved in 2017, has been
implemented during the financial year ended 30 June 2020. The
paragraphs in this Annual Report on Remuneration that have
been audited are indicated.
The Remuneration Committee
During the year under review, the Committee was chaired by
Peter Gilchrist (until he retired from the Board on 14 November
2019), and Russell King (from 14 November 2019 – Russell
became a member of the Committee on appointment on
5 September 2019). The Committee also comprised Sir Terry
Morgan, Laurie Bowen, Malin Persson, Bill Spencer and Jack
Boyer (from 5 September 2019).
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 88 and 89; details of attendance
at the meetings of the Committee during the year ended 30
June 2020 are shown on page 91. Prior to his appointment
as Chair of the Committee, Russell King had served on a
remuneration committee for at least 12 months.
Advisors to the Remuneration Committee
The Committee is supported by the Group HR Director (Timothy
Hargreaves), the Group Head of Remuneration (Mark Jarvis)
and the Company Secretary (Patricia Ryan). The Chief Executive
Officer (Dave Shemmans) attends 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 and Shepherd
and Wedderburn (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 £47,657 (calculated based on a mixture of fixed fees and
time spent). Shepherd and Wedderburn’s fees for advising
the Committee amounted to £38,593 (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 2019 was held on
14 November 2019. The result of the vote on the remuneration
report is set out below. The remuneration policy in operation
during the year was 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 2019 AGM
Directors' Remuneration Policy
approved at 2017 AGM
%
91.48
8.52
100.00
Number
35,718,805
3,327,990
39,046,795
2,775
%
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 2019/20 compared with FY 2018/19
Bonus performance outcomes
Long-term incentive performance outcomes in respect of awards vested in 2019
Underlying PBT
(adjusted)
£15.3m
(FY 2019/20)
£36.7m
(FY 2018/19)
Net debt (adjusted)
£(58)m
(FY 2019/20)
£(26.2)m
(FY 2018/19)
3-year underlying EPS growth in excess of RPI
Overall (12.4)% to 30 June 2019
(below threshold vesting level)
Overall 26.9% to 30 June 2018.
(between threshold and maximum vesting levels)
3-year TSR growth
(31.2)%
(below median to October 2019)
(2.8)%
(below median to October 2018)
The closing mid-market price of the Company’s shares on 30 June 2020 was 419.0p per share (2019: 760.0p). The highest closing price
during the year was 820.0p per share and the lowest closing price during the year was 316.0p per share.
Creating a world fit for the future 105
Corporate governance Directors’ remuneration report Pay at a glance in FY 2019/20
e
v
a
D
O
E
C
s
n
a
m
m
e
h
S
O
F
C
n
o
s
b
G
n
a
i
I
k
r
a
M
O
S
C
t
t
e
r
r
a
G
2019/20
2018/19
2019/20
2018/19
2019/2020
2018/19
656
637
656
162
199
998
424
409
361
352
424
86
78
573
361
62
68
482
0
200
400
600
Single total figure (£'000)
800
1,000
1,200
Face value at grant of vested long-term incentives
Fixed remuneration (salary, benefits and pension)
Bonus
Share price growth above face value of vested long-term incentives
(1) No annual bonuses were awarded to the Executive Directors in respect of FY 2019/20.
(2) The long-term incentive awards granted in FY 2016/17 lapsed in full in FY 2019/20. As a result, the face value at grant of these awards and any share price appreciation has not been shown in the above table.
(3) As the share price decreased over the life of the long-term incentive awards that vested in FY 2018/19, the face value at grant of these awards has been adjusted accordingly and no share price appreciation
is shown.
Single total figure table (audited)
The table below sets out the remuneration received by the Executive Directors and Non-Executive Directors during the year.
Fixed remuneration
Short-term variable
remuneration
Long-term variable
remuneration: 3- year
performance periods
Totals
Base
salary
and fees Benefits(1) Pension
£'000
£’000
£’000
Bonus
(cash
element)(2)
£’000
Bonus
(deferred
element)
£’000
Bonus-
linked
shares(3)
£’000
Total
£’000
LTIP(4)
£’000
Total Total
£’000
£’000
Total Fixed
Remuneration
Total Variable
Remuneration
£’000
£’000
Financial
year
EXECUTIVE DIRECTORS
Dave
2019/20
2018/19
Shemmans
2019/20
2018/19
2019/20
2018/19
Ian
Gibson
Mark
Garrett
NON-EXECUTIVE DIRECTORS
523
508
340
328
292
284
Sir Terry
Morgan CBE
Peter
Gilchrist CB (5)
Russell
King(6)
Laurie
Bowen(7)
Malin
Persson
Bill
Spencer
Jack
Boyer(8)
Total
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
157
152
25
65
46
-
50
49
55
49
59
57
42
-
1,589
1,492
23
23
17
17
12
12
1
1
1
1
1
-
35
57
4
8
1
1
1
-
96
120
110
106
67
64
57
56
-
-
-
-
-
-
-
-
-
-
-
-
-
234
226
-
81
-
43
-
31
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
155
-
81
-
43
-
31
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
155
-
162
-
86
-
62
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
310
-
54
-
27
-
23
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
104
-
145
-
51
-
45
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
241
-
199
-
78
-
68
656
998
424
573
361
482
158
-
153
-
26
-
66
-
47
-
-
-
85
-
106
-
59
-
57
-
60
-
58
-
43
-
-
-
- 1,919
2,493
345
656
637
424
409
361
352
158
153
26
66
47
-
85
106
59
57
60
58
43
-
1,919
1,838
-
361
-
164
-
130
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
655
(1) Further information on benefits for the Executive Directors can be found on page 109. The benefits for Non-Executive Directors represent reimbursement of expenses incurred (including any associated
personal tax charges) while travelling for business and Committee meetings.
(2) Further details of the annual bonus can be found from page 109.
(3) Further details of the lapse of the bonus-linked shares in FY 2019/20 can be found on page 115. As no bonus-linked shares vested in the year, share price appreciation had no impact on the relevant figure
included in the above table.
(4) Further details of the lapse of the LTIP awards in FY 2019/20 can be found on page 114. As no LTIP shares vested in the year, share price appreciation had no impact on the relevant figure included in the above table.
(5) Peter Gilchrist retired as a Director on 14 November 2019.
(6) Russell King was appointed as a Director on 5 September 2019 and Chair of the Remuneration Committee on 14 November 2019.
(7) Laurie Bowen’s benefits largely consist of travel expenditure to and from the United States.
(8) Jack Boyer was appointed as a Director on 5 September 2019.
106 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report
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.
Pay for performance – TSR performance graph and CEO pay history
TSR for the ten years to 30 June 2020
£600
£500
£400
£300
£200
£100
)
0
0
1
£
o
t
d
e
s
a
b
e
r
(
n
r
u
t
e
R
r
e
d
o
h
e
r
a
h
S
l
l
a
t
o
T
£0
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
At 30 June each year
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
RICARDO TSR
FTSE SMALL CAP (EX INV.TRUSTS) TSR
FTSE ALL SHARE SUPPORT SVS TSR
Source: Thomson Reuters Datastream
The chart above shows Ricardo’s TSR performance for the past ten 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 Chief Executive Officer, Dave Shemmans, for the same period is shown in the table below.
Financial year
2019/20
2018/19
2017/18
2016/17
2015/16
2014/15
2013/14
2012/13
2011/12
2010/11
Single figure of CEO's
total remuneration
£’000
Annual variable element award rates
against maximum opportunity
%
Long-term incentive vesting rates
against maximum opportunity
%
656
998
1,411
1,612
2,291
1,367
760
1,546
979
1,116
-
25
43
-
63
59
38
75
58
97
-
40
74
100
100
67
N/A(1)
77
35
46
(1) The performance period for awards made in November 2011 ended in October 2014 and so their vesting rate is included in the 2014/15 row of the table above. The vesting rate is ‘N/A’ for the 2013/14
row because the performance period for awards made in October 2010 ended in June 2013 and so the applicable vesting rate for those grants is included in the 2012/13 row of the table above.
Creating a world fit for the future 107
Corporate governance Directors’ remuneration report
Directors’ remuneration compared to employees
The table below compares the percentage change in the Directors’ remuneration, and the percentage change in the remuneration of
all employees (on a full time equivalent basis), between FY 2018/19 and FY 2019/20. The year-on-year change in annual bonus of (100)%
shown in the final column for both “All Employees” and the Executive Directors reflects the fact that no annual bonus is payable in
respect of FY 2019/20.
All Employees
EXECUTIVE DIRECTORS
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (CSO)(1)
NON-EXECUTIVE DIRECTORS
Sir Terry Morgan CBE
Peter Gilchrist CB(2)
Russell King(3)
Laurie Bowen(4)
Malin Persson(4)(5)
Bill Spencer
Jack Boyer(6)
% change in base salary and fees
3
% change in taxable benefits
-
% change in annual bonus
(100)
3
3
3
3
(62)
N/A
3
14
3
N/A
-
-
-
-
-
N/A
(39)
(52)
-
N/A
(100)
(100)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) As Mark Garrett resigned as an Executive Director, he was not eligible to receive any bonus that may have been declared for FY 2019/20.
(2) Peter Gilchrist retired as a Director and Chair of the Remuneration Committee on 14 November 2019.
(3) Russell King was appointed as a Director on 5 September 2019 and Chair of the Remuneration Committee on 14 November 2019.
(4) The reduction in taxable benefits for Laurie Bowen and Malin Persson reflects a lower level of travel and associated costs compared to the prior year.
(5) The higher percentage change in Malin Persson’s fees reflects her appointment as Senior Independent Director on 14 November 2019.
(6) Jack Boyer was appointed as a Director on 5 September 2019.
(7) The Non-Executive Directors are not eligible to participate in the bonus scheme.
Pay ratio information in relation to Chief Executive’s remuneration
Year
2020
Method of calculation
adopted
Option A
25th percentile pay ratio
(CEO : UK employees)
19 : 1
Median pay ratio
(CEO : UK employees)
14 : 1
75th percentile pay ratio
(CEO : UK employees)
10 : 1
Pay data for the Chief Executive Officer is taken from the total single figure of remuneration table on page 106. The median, 25th
percentile and 75th percentile figures used to determine the above ratios were calculated by reference to the full-time equivalent
annualised remuneration (comprising salary, benefits, pension, annual bonus and long term incentives) of all UK based employees of
the Group as at 30 June 2020 (i.e. “Option A” under the applicable regulations). The Committee selected this calculation methodology
as it was felt to produce the most statistically accurate result available to it.
The Committee considers that the median pay ratio for 2020 that is disclosed in the above table is consistent with the pay, reward
and progression policies for the Company’s UK employees taken as a whole. Consistent with practice elsewhere, executives have a
greater proportion of their overall pay subject to performance than other staff. Accordingly, the ratio may prove volatile from year to
year. The Committee has considered the wider workforce context in terms of alignment of total reward for the Executive Directors, with
the pension changes in the proposed new policy being one such example.
Pay details (on a full-time equivalent annualised basis where appropriate) for the individuals whose FY 2019/20 remuneration is at the
median, 25th percentile and 75th percentile amongst UK based employees are as follows:
Salary
Total pay and benefits
25th percentile
£31,515
£33,621
Median
£41,992
£45,251
75th percentile
£61,761
£65,271
108 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report 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 2018/19 and
FY 2019/20.
Total remuneration
spend (£m)
Key management
remuneration as
a percentage of
total remuneration
spend(1) (%)
R&D expenditure(2)
(£m)
Distributions to
shareholders(3) (£m)
FY 2019/20
FY 2018/19
% change
188.5
179.9
4.8
2.7
12.5
3.3
2.7
13.4
11.5
-
(6.7)
(71.3)
(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 183. All shares that
were vested during the year were also exercised for their price of nil. 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 15 and 45. 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 2019/20
Base salary
Base salaries were reviewed with effect from January 2020. As
described in the policy section on page 121, 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 current salary
levels from 1 January 2020 for the Executive Directors are shown
in the table below which reflect a 3% salary increase. The Group-
wide average increase approved in FY 2019/20 was 3%.
Executive Director
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (CSO)
Salary from 1 January 2020
£530,484
£344,816
£296,589
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 are 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.
Pension (audited)
(a) The defined benefit scheme is closed and there are no active
members. During the year ended 30 June 2020, the transfer
value in respect of the Chief Executive Officer has increased.
The transfer value at 30 June 2020 was £721,595, an increase
of £81,002 from the prior year. The Chief Executive Officer’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
4
-
2
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (CSO)
Cash
in lieu
£’000
106
67
55
Annual performance-related bonus (audited)
Introduction
For the year ended 30 June 2020, the maximum annual
performance-related bonus opportunity was 125% of salary
for the Chief Executive Officer and 100% of salary for any other
Executive Director. 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 underlying profit before tax (60% for each of the
Executive Directors);
• 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.
Details of financial targets
The financial targets for the 2019/20 financial year (details
of which are provided in the following table along with
confirmation of their respective weightings) were set by the
Committee after taking into account several factors such as
the business plan, management’s expectations and brokers’
forecasts.
Creating a world fit for the future 109
Corporate governance Directors’ remuneration report Detailed breakdown of pay in FY 2019/20 (continued)
Annual performance-related bonus (audited) (continued)
Measure
Underlying profit before tax
Group net debt balance
Weighting
(% of maximum opportunity)
CSO
60
20
CFO
60
20
CEO
60
15
Performance
required (£m)
On-target
42.0
(47.4)
Threshold
40.0
(51.4)
Maximum
44.0
(45.4)
A sliding scale of targets for each financial measure of the Group
was set at the start of the 2019/20 financial year:
Performance achieved
Threshold
On-target
Maximum
Between any two
performance levels
Element payable
-
50%
100%
Sliding scale between
the above percentages
Details of personal objectives
The personal objectives of the Executive Directors were different for
each individual and were ascribed different weightings. The Committee,
supported by the Chair 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 (at half year and full year), the
Committee decides how well each individual has performed overall.
The targets set by the Committee take into account a number of issues
shown in the table below but also include an assessment against other
strategic and business critical issues which are planned, or occur during the
year, but are not declared as they are business sensitive.
The targets set by the Committee for the Chief Strategy Officer have
not been included in the table below as, following his resignation, he is not
eligible for a performance-related bonus for FY 2019/20.
Overall
achievement
(%)
86.5%
85%
Dave
Shemmans
(CEO)
Personal objectives
FY 2019/20
• Focus on on-boarding and embedding new Managing
Directors to strengthen the Company’s executive committee.
Enable the executive committee to deliver a more commercial
culture throughout the business and inter-divisional
collaboration. Develop and strengthen management
succession planning and increase diversity.
• Continue to focus and deliver on a strategy of acquisitive
growth with a view to building sustainable revenue and aim to
maintain business balance.
• Maintain turn around delivery of the US business in line with
budget and meet targets for order book levels.
• Maintain the high level of time dedicated to strategic
relationships and support of corporate objectives.
• Continue to deliver the strategy and reinforce the broader
based business in the minds of stakeholders and internal teams.
Aim to increase the rating of the business by increasing the
promotion and communication of higher value added parts
of the business. Continue to develop employee engagement
around the ‘Creating a world fit for the future’ mission.
• Manage risks and opportunities created by Brexit and ensure
the FY 2019/20 budget and sustainable operational strategy is
in place to respond to the changes.
Ian
Gibson
(CFO)
• Lead work with divisional finance management to ensure profit
and cash delivery and drive process improvements to support
forecasting.
• Deliver robust audit design so as to be target-driven and compliant.
• Continue to evolve and improve the management and
corporate reporting to meet governance, best practice and
simplicity requirements.
• In support of strong divisional business models, lead regular
reviews of pricing, fees and utilisation with financial directors
across the Group.
• Progress the finance team development and create career
progression and ensure retention and diversity.
110 Ricardo plc Annual Report & Accounts 2019/20
Examples of performance outcomes against
personal objectives
• Increased diversity with new recruits during the year at
and below board level. Successfully embedding and on-
boarding all new Managing Directors which has strengthened
the Company’s executive committee.
• The acquisitions completed at the start of the year have been
integrated and are performing well.
• Increased time spent with shareholders, analysts and the team.
However, customer interaction in the second half of FY 2019/20
was difficult due to customer closures during lockdown.
• Managed the business through a high impact COVID-19 Phase,
strengthened the financial liquidity and continued profitable
delivery with the minimum of government support as a
philosophy.
• Maintained high levels of transparency and communications
with all stakeholders and led through a digital-first/virtual work
from home mode with minimal disruption to the business.
• Business strategy has been developed and divisional alignment
documented and agreed. Increased communication with
employees including a survey which has yielded positive
results, particularly in relation to morale and culture.
• Effective management of the unpredictable nature of Brexit in
first half of FY 2019/20 with the focus on managing the impact
of COVID-19 in the second– including the design and free
provision of 10,000 face masks to care homes and the NHS.
• In light of the COVID-19, there was a focus on extreme cash
management and liquidity and ensuring that the financial
directors across the Group were focussed on the same topic.
Cash performance outperformed COVID-19 expectations.
• Rolled out new segmentation and increased transparency and
granularity of segmental reporting, in line with FCA guidance.
Further improvement planned with external Investor Relations
support however this was put on hold to manage the impact
of COVID-19.
• Effectively managed movements and maternity leave in his
team and has developed a high performing and high work
ethic professional team.
Corporate governance Directors’ remuneration report Detailed breakdown of pay in FY 2019/20 (continued)
Annual performance-related bonus (audited) (continued)
Committee’s assessment of achievement levels and determination of bonuses payable
The performance of the Group over the year included a 58% decrease in underlying profit before tax to £15.6m (2019: £37.0m) and a
year-end net debt of £(73.4)m (2019: £(47.4)m).
The Group underlying profit before tax of £15.6m was adjusted by £0.3m for acquisition-related expenditure. The adjusted profit
performance at £15.3m is below the lower threshold of £40.0m and therefore no bonus is payable in respect of Group underlying profit
before tax. The Group net debt of £(73.4)m was adjusted by £15.4m for unbudgeted PLC Consulting consideration and exceptional cash
items. The adjusted net debt performance at £(58.0)m is below the lower threshold of £(51.4)m and therefore no bonus is payable in
respect of Group net debt.
The Committee carried out a detailed and rigorous review of the achievement of personal objectives and determined that these
had been achieved at a level of 86.5% for the Chief Executive Officer and 85% for the Chief Financial Officer. Achievement against
the targets set by the Committee for the Chief Strategy Officer were not reviewed as, following his resignation, he is not eligible for a
performance-related bonus for FY 2019/20.
Notwithstanding the above high level of achievement against the personal objectives by the Chief Executive Officer and the Chief
Financial Officer, the Committee decided that:
• in light of the failure to achieve threshold levels of performance against both the profit and net debt measures; and
• after taking into account the overall performance of the Group during the year and the ongoing impact of the COVID-19 crisis,
no bonuses would be paid to the Executive Directors in respect of FY 2019/20.
Given the above decision, no deferred bonus awards will be made under the Deferred Bonus Plan (‘DBP’) in respect of the year to 30
June 2020.
Long-term incentive awards vesting during the financial year (audited)
Awards under the LTIP and bonus-linked awards under the DBP made in October 2016 lapsed in October 2019 on the basis of
underlying EPS and TSR performance measured over specified periods, the last of which ended in October 2019. For the avoidance of
doubt, the Committee did not exercise any discretions in relation to these awards.
The performance conditions applicable to these awards are summarised below:
Relative TSR portion (50%)
Relative TSR performance against the FTSE
Small Cap (exc. financial services companies and
investment trusts)
Below median
Median
Upper quartile (or above)
Between median and upper quartile
Vesting level (%)
-
25
100
Sliding scale between
the above percentages
Underlying EPS growth portion (50%)
Underlying EPS growth performance
Less than RPI + 3% p.a.
RPI + 3% p.a.
RPI + 10% p.a.
Between RPI + 3% and RPI + 10% p.a.
Vesting level (%)
-
25
100
Sliding scale between
the above percentages
Over the three-year performance period, Ricardo was ranked below the median of the TSR comparator group, giving a zero vesting
level for this portion of the award. Ricardo’s TSR over the period was (31.2)% against a median of 7.2%. The underlying EPS figure for the
year resulted from growth of (12.4)% in real terms with the result that the underlying EPS target was not achieved. Therefore, the overall
vesting level for this award was zero and the shares under the awards lapsed in full.
The number of shares which lapsed in October 2019 in respect of awards granted to each of the Executive Directors in October 2016
are set out on pages 114 and 115 of this report.
Creating a world fit for the future 111
Corporate governance Directors’ remuneration report
Detailed breakdown of pay in FY 2019/20 (continued)
The Chair’s and the Non-Executive Directors’ fees
The Chair’s and the Non-Executive Directors’ fees as of 1 January 2020 are as follows:
Chair’s fee
Non-Executive Directors’ fees:
Basic fee
Additional fee for Audit and Remuneration Committee Chairs
Additional fee for the Senior Independent Director
£’000
159
51
9
8
The above table reflects a 3% increase in the Chair’s fee and a 3% increase in the basic fee for Non-Executive Directors, Committee
Chair fee and Senior Independent Director 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 DBP (bonus-linked shares) and LTIP in October 2019. The awards granted to
each Executive Director were as follows:
Deferred Bonus Plan
Type awarded
Basis for award
Date of award
Number of shares
Share price(2) (£)
Face value of award (£)
Vesting level for achievement of threshold performance (%)
End of performance period
CSO
Mark Garrett
CEO
David Shemmans
CFO
Ian Gibson
Performance shares (bonus-linked shares)(1)
1:1 match for corresponding Deferred Award
24 October 2019
6,844
6.236
42,679
25
35 days after release of preliminary results announcement for FY 2021/22
(expected to be October 2022)
12,969
6.236
80,875
25
4,963
6.236
30,949
25
(1) As the bonus-linked shares are granted in the form of performance share awards, no ‘exercise price’ is payable in order to receive any vested shares. This position has not changed since the awards
were granted.
(2) Average of the share prices over the five days up to and including 23 October 2019.
Long Term Incentive Plan
Type awarded
Basis for award (% of base salary)
Date of award
Number of shares
Share price(2) (£)
Face value of award (£)
Vesting level for achievement of threshold performance (%)
End of performance period
CEO
David Shemmans
100
CFO
Ian Gibson
Performance shares(1)
55
CSO
Mark Garrett
55
82,590
6.236
515,031
25
24 October 2019
29,526
6.236
184,124
25
35 days after release of preliminary results announcement for FY 2021/22
(expected to be October 2022)
25,396
6.236
158,369
25
(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. This position has not changed since the awards were
granted.
(2) Average of the share prices over the five days up to and including 23 October 2019.
112 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report Detailed breakdown of pay in FY 2019/20 (continued)
Long-term incentive awards granted during the financial year (audited) (continued)
The vesting of these awards will be based on Ricardo’s underlying EPS growth (two-thirds) and three-year relative TSR (one-third)
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 underlying 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 underlying EPS performance conditions is a genuine
reflection of the underlying performance of the Group over the performance period.
The Committee decided to tilt the balance away from an equal weighting between TSR and underlying EPS growth to signal the
importance of increasing Ricardo’s profitability as measured by underlying EPS and to give the management team a stronger incentive
to drive profitable performance which should in turn lead to increased shareholder value.
Relative TSR portion (one-third)
Relative TSR performance against the FTSE
Small Cap (excl. financial services companies
and investment trusts)
Below median
Median
Upper quartile (or above)
Between median and upper quartile
Vesting level (%)
-
25
100
Sliding scale between
the above percentages
Underlying EPS growth portion (two-thirds)
Adjusted underlying EPS for the final year in
the performance period (FY 2021/22)
Less than 60.1p
60.1p
Equal to or greater than 69.1p
Between 60.1p and 69.1p
Vesting level (%)
-
25
100
Sliding scale between
the above percentages
Performance target setting and those applying to awards outstanding during FY 2019/20
As shown in previous Directors’ Remuneration Reports, the Committee has a track record of setting stretching underlying EPS targets
which are carefully calibrated to deliver maximum pay-outs only where Ricardo has outperformed the business plan and market
expectations. Full vesting of the shares linked to relative TSR performance only occurs where Ricardo’s 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 the year ended
30 June 2017, maximum vesting of the underlying EPS portion required growth of RPI + 10% per annum. The underlying EPS target to
achieve threshold vesting for awards granted in the year ended 30 June 2017 required performance in excess of RPI + 3% per annum.
As explained in the Directors’ Remuneration Report in the Annual Report and Accounts 2017, for awards granted 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 underlying EPS target to achieve threshold vesting for awards granted in the year ended 30 June 2018 required underlying EPS of
at least 65 pence and maximum vesting required underlying EPS of at least 75 pence. The underlying EPS target to achieve threshold
vesting for awards granted in the year ended 30 June 2019 required underlying EPS of at least 60 pence and maximum vesting required
underlying EPS of at least 69 pence.
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 2020. The number and value of shares which were awarded to each of the
Executive Directors in the year ended 30 June 2020 are set out in the tables on page 112.
Creating a world fit for the future 113
Corporate governance Directors’ remuneration report
Directors’ interests in shares provisionally awarded under the LTIP (audited)
The following chart sets out in graphical form how the Company’s LTIP was operated in FY 2019/20 and earlier years:
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 116.
As at 30 June 2020, the Directors’ interests in shares provisionally awarded under the LTIP were as follows:
Dave
Shemmans
(CEO)
Ian
Gibson
(CFO)
Mark
Garrett(4)
(CSO)
3-year cycle
ending
2019
2020
2021
2022
2019
2020
2021
2022
2019
2020
2021
2022
Award
date(1)
Oct 16
Nov 17
Oct 18
Oct 19
Oct 16
Nov 17
Oct 18
Oct 19
Oct 16
Nov 17
Oct 18
Oct 19
Share price at
award date in
pence
954.30
830.00
756.00
623.60
954.30
830.00
756.00
623.60
954.30
830.00
756.00
623.60
At 1 July
2019
48,915
57,927
66,141
-
17,318
20,510
23,418
-
15,114
17,899
20,437
-
Awarded(2)
-
-
-
82,590
-
-
-
29,526
-
-
-
25,396
Number of provisional shares
At 30 June
Lapsed
(48,915)
-
-
-
(17,318)
-
-
-
(15,114)
-
-
-
Vested
-
-
-
-
-
-
-
-
-
-
-
-
2020(3) Vesting date
25/10/2019
08/11/2020
25/10/2021
24/10/2022
25/10/2019
08/11/2020
25/10/2021
24/10/2022
25/10/2019
08/11/2020
25/10/2021
24/10/2022
-
57,927
66,141
82,590
-
20,510
23,418
29,526
-
17,899
20,437
25,396
(1) Awards made under the rules of the Ricardo plc 2014 Long Term Incentive Plan: performance conditions as outlined on page 113.
(2) The face value at the date of grant of the awards made in October 2019 was £515,031 for Dave Shemmans; £184,124 for Ian Gibson; and £158,369 for Mark Garrett.
(3) The mid-market closing price of the Company’s shares on 30 June 2020 was 419.0p per share (2019: 760.0p).
(4) All LTIP awards held by Mark Garrett subsequently lapsed in full on 31 July 2020, being the date he ceased employment with the Group.
The October 2016 awards that were due to vest in October 2019 lapsed in full because the performance conditions as set out on page
113 were not satisfied.
114 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report Directors’ interests in shares provisionally awarded under the DBP (audited)
The following chart sets out in graphical form how the DBP was operated in FY 2019/20 and earlier years:
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 116.
As at 30 June 2020, the Directors’ interests in shares provisionally awarded under the DBP were as follows:
Dave
Shemmans
(CEO)
Ian
Gibson
(CFO)
Mark
Garrett(5)
(CSO)
Type of Award
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferred
Bonus-linked shares(4)
Deferral /
performance
period
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
Share price
at award
date in
pence
954.30
954.30
756.00
756.00
623.60
623.60
954.30
954.30
756.00
756.00
623.60
623.60
954.30
954.30
756.00
756.00
623.60
623.60
Award
date
Oct 16
Oct 16
Oct 18
Oct 18
Oct 19
Oct 19
Oct 16
Oct 16
Oct 18
Oct 18
Oct 19
Oct 19
Oct 16
Oct 16
Oct 18
Oct 18
Oct 19
Oct 19
Number of provisional shares
At 1 July
2019 Awarded(1)
-
20,762
-
19,336
-
18,090
-
17,568
12,969
-
12,969
-
-
10,311
-
9,604
-
9,974
-
9,686
6,844
-
6,844
-
-
8,850
-
8,244
-
6,097
-
5,922
4,963
-
4,963
-
Dividend
shares(2)
-
-
731
-
523
-
-
-
403
-
276
-
-
-
245
-
200
-
Lapsed
-
(19,336)
-
-
-
-
-
(9,604)
-
-
-
-
-
(8,244)
-
-
-
-
Vested
(20,762)
-
-
-
-
-
(10,311)
-
-
-
-
-
(8,850)
-
-
-
-
-
At 30 June
2020(3)
-
-
18,821
17,568
13,492
12,969
-
-
10,377
9,686
7,120
6,844
-
-
6,342
5,922
5,163
4,963
(1) The face values at the date of grant of awards made in October 2019 were Dave Shemmans: £80,875; Ian Gibson: £42,679; Mark Garrett: £30,949.
(2) Amounts allocated include shares equivalent to dividends on provisional deferred award shares and vested bonus-linked shares.
(3) The mid-market closing price of the Company’s shares on 30 June 2020 was 419.0p (2019: 760.0p).
(4) Bonus-linked shares awarded under the rules of the Ricardo plc 2011 Deferred Bonus Plan: performance conditions as outlined on page 113
(5) All DBP awards held by Mark Garrett subsequently lapsed in full on 31 July 2020, being the date he ceased employment with the Group.
The values of the October 2016 Deferred awards vesting were £134,953 for Dave Shemmans; £67,022 for Ian Gibson; and £57,525 for
Mark Garrett. The market price per share of the shares that vested on 25 October 2019 was 650.0p.
The October 2016 bonus-linked shares that were due to vest in October 2019 lapsed in full because the performance conditions set
out on page 113 were not satisfied.
Creating a world fit for the future 115
Corporate governance Directors’ remuneration report
Future policy – post-cessation
The above new retention requirement will continue post-
cessation of employment with shares worth two times annual
base salary (or, if lower, the shareholding as at the date of
cessation) to be held for the initial 12 month period and half
of this amount required to be held for the second 12 month
period. This will apply to share plan awards granted after the
new policy has been approved by shareholders. The Committee
thinks the suggested approach is appropriate for Ricardo as it is
being introduced at the same time as the in-post shareholding
guideline is being increased. The guideline level for the second-
year post-cessation will therefore be equal to the current in-post
level of one times salary.
Directors’ shareholdings (audited)
The interests of Directors and their connected persons in
ordinary shares as at 30 June 2020, including any shares
provisionally awarded under the LTIP and DBP are presented
in the table below. At 9 September 2020, the interests in shares
of the Directors who were still in office were unchanged from
those at 30 June 2020.
Share retention policy
Current policy
In order to foster greater alignment between our Executive
Directors and our shareholders, the Board currently 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 with a requirement that vested incentive awards (net
of tax) are held until this is met. While each of the Executive
Directors met this target during the year, the impact of COVID-19
on UK share prices has meant that the requirement was not met
as at 30 June 2020, as shown in the table below.
Future policy – in post
As part of the package of changes to the Directors’
Remuneration Policy proposed for adoption by shareholders at
the 2020 AGM, the Committee has reviewed the above share
retention policy and proposes to revise this as soon as the new
policy comes into force. In particular, the holding requirement
will be increased from one times annual base salary to two times
annual base salary. Until such increased holding requirement
has been reached Executive Directors will be required to
retain at least 50% of any vested shares (net of tax) from the
Company’s discretionary share plans. In line with the Investment
Association’s Principles of Remuneration 2019, vested shares
subject to a holding period (i.e. vested LTIP awards under the
new 2020 LTIP) and unvested shares that are not subject to
performance conditions (i.e. DBP awards) will count towards this
shareholding requirement on a net-of-tax basis.
No. of shares
held
Share awards not subject to
performance conditions(1)
Share awards subject to
performance conditions2)
Shareholding
(% of base salary)(3)
EXECUTIVE DIRECTORS
Dave Shemmans (CEO)
Ian Gibson (CFO)
Mark Garrett (CSO)(4)
NON-EXECUTIVE DIRECTORS
Sir Terry Morgan CBE
Russell King(5)
Laurie Bowen
Malin Persson
Bill Spencer
Jack Boyer(6)
Peter Gilchrist(7)
101,085
47,827
59,723
15,000
-
6,000
1,500
8,000
-
4,970
32,313
17,497
11,505
-
-
-
-
-
-
-
237,195
89,984
74,617
-
-
-
-
-
-
-
80
58
84
-
-
-
-
-
-
-
(1) Deferred awards granted pursuant to the rules of the Ricardo plc 2011 Deferred Bonus Plan.
(2) Bonus-linked awards granted pursuant to the rules of the Ricardo plc 2011 Deferred Bonus Plan and LTIP awards granted pursuant to the rules of the Ricardo plc 2014 Long Term Incentive Plan.
(3) For Executive Directors only (i.e. those who are subject to the share retention policy). Calculated by reference to the number of beneficially owned shares, a share price of 419.0p per share (2019: 760.0p)
and salaries as at 30 June 2020.
(4) All DBP and LTIP awards held by Mark Garrett lapsed in full on 31 July 2020, being the date he ceased employment with the Group.
(5) Russell King was appointed as a Director on 5 September 2019.
(6) Jack Boyer was appointed as a Director on 5 September 2019.
(7) Shareholding as at 14 November 2019, being the date that Peter Gilchrist retired as Director.
116 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report Annual Bonus
For the FY 2020/21 annual bonus, a cash conversion measure
replaces net debt and the weightings of measures are being
harmonised across all the Executive Directors. The maximum
annual performance-related bonus opportunity will be 125% of
salary for the Chief Executive Officer and 100% of the salary for
any other Executive Director.
To determine the amount of bonus payable for the year, the
Committee will assess the level of achievement against the
financial measures and targets set in respect of:
• Group underlying profit before tax (60%);
• Cash conversion (20%); and
• The achievement of specified individual objectives (20%).
The cash conversion measure is being introduced as it is
regarded as a key and more effective indicator of ongoing
operational cash efficiency.
The proposal for the cash measure for bonus purposes in
respect of the year ending 30 June 2021 is a cash conversion
percentage. Cash conversion is defined as underlying cash
generated from operations (excluding defined benefit pension
scheme payments) divided by underlying EBITDA. “Underlying”
excludes specific adjusting items, which comprise amortisation
of acquired intangible assets, acquisition-related expenditure
and reorganisation costs.
On-target performance (50% pay-out) will be set at the
budgeted cash conversion, i.e. budgeted underlying cash
from operations ÷ budgeted underlying EBITDA. The current
intention is for cash conversion to be calculated from budgeted
performance calculated to give the threshold and maximum
cash conversions.
Owing to concerns about commercial sensitivity, we do not
believe it is in shareholders’ interests to disclose any further
details of these targets on a prospective basis. However, the
Company is committed to adhering to principles of transparency
and will, provided disclosure of targets is not deemed to be
commercially sensitive, make appropriate and relevant levels
of disclosure of bonus targets and performance against these
targets for the FY 2020/21 bonus in next year’s report.
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 4.56%, of which 4.12% related to discretionary
employee share plans. The Company operates an employee
benefit trust 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.
Executive Directors and their Board positions
with other companies during FY 2019/20
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 2019 to 30 June 2020 (inclusive),
amounted to £35,444.
On 25 November 2016, the Company’s Chief Strategy Officer
was appointed as the non-executive Chair of Secured By Design
Limited. He is permitted to retain the associated fees which, for
the year from 1 July 2019 to 30 June 2020 (inclusive), amounted
to £21,000.
Implementation of Directors’ Remuneration
Policy in FY 2020/21
It is anticipated that the implementation of the 2020 Directors
Remuneration Policy (the ‘2020 Policy’) will be similar to the
implementation of the applicable policy in FY 2019/20.
The Committee will:
• Review base salary levels for the Executive Directors with
effect from 1 January 2021;
• Set and review the performance targets for the FY 2020/21
annual bonus and the LTIP awards to be made in 2020 to
ensure continued alignment to strategy; and
• Make awards under the new Ricardo plc 2020 Long Term
Incentive Plan (the ‘2020 LTIP’), subject to shareholders’
approval at the 2020 AGM.
As no bonus was payable to employees across the Group in
FY 2019/20, including to the Chief Executive Officer and Chief
Financial Officer, the Committee will not make any awards under
the DBP during the year.
Creating a world fit for the future 117
Corporate governance Directors’ remuneration report As noted in the Chair’s Overview, the Committee has
concluded that, in light of the current uncertainty created by
the COVID-19 crisis, it would be inappropriate to set the specific
targets for the EPS portion of the FY 2020/21 awards until such
time as there is greater clarity around the long-term impact
of the pandemic on the Company’s business and the various
markets in which it operates. As a result, the Committee intends
to finalise these targets no later than six months after the date on
which the awards are granted. Once it has done so, full details of
the selected measures will be set out in an RNS announcement
released to the market.
It should also be noted that, in terms of the 2020 Policy, the
Committee will have the ability to adjust the formulaic outcomes
from performance conditions where appropriate and the
Committee will ensure that outcomes reflect Company and
executive performance as well as the experience of shareholders
and other stakeholders. The Committee will also use its
discretion to reduce vesting outcomes where it determines that
windfall gains have been received.
Other points
The Committee considered, and will continue to consider,
the impact on the Company’s incentive arrangements of the
introduction of IFRS 15 Revenue from Contracts with Customers
on 1 July 2018 and IFRS 16 Leases on 1 July 2019. It will make
any adjustments when assessing the performance outcomes
to outstanding long-term incentive awards to ensure that
performance measurements are carried out on a like for like basis
and are fair to both shareholders and plan participants.
2020 LTIP Awards
Introduction
Subject to receipt of the necessary shareholder approvals, it is
anticipated that awards will be granted under the new 2020
LTIP shortly after the conclusion of the 2020 AGM. The 2020
LTIP is substantially the same as the existing arrangement that
was adopted in 2014, with any changes mainly intended to
ensure alignment with the 2020 Policy and current best practice
requirements. In particular, the 2020 LTIP includes a new two
year holding period that will apply following the vesting of
awards and incorporates an increase to the maximum levels of
award (to 150% of base salary for the Chief Executive Officer and
130% of base salary for any other Executive Director).
Quantum of awards
The quantum of the initial awards under the 2020 LTIP will
be determined by the Committee at or around the time they
are granted. Any such determination will be subject to the
maximum award limits described above and will also take into
account a range of other factors including the Company’s share
price at the time of grant and the overall performance of the
business.
Performance measures and targets
The Committee believes that TSR and underlying EPS continue
to be appropriate measures for the Company’s long-term
incentive arrangements as they are strongly aligned to
shareholder value creation. In FY 2019/20, the Committee moved
away from an equal weighting of these measures in order to
provide additional focus on Ricardo’s profitable performance
and determined that:
• one-third of the relevant shares will be subject to the relative
TSR measure; and
• the remaining two-thirds of the relevant shares will be subject
to the underlying EPS measure.
The Committee has determined that these weightings should
also apply to the LTIP awards to be granted in FY 2020/21.
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 (i.e. median ranking in the comparator
group, 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 (i.e. upper quartile ranking in the comparator group),
we would expect to have significantly outperformed the
relevant market and our competitors.
118 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report PART 3 – DIRECTORS’ REMUNERATION POLICY
Introduction
This part of the Directors’ Remuneration Report provides an
overview of the Company’s policy on Directors’ pay that is
designed to align with and support Ricardo’s strategic plan and
will operate over the three years from the AGM to be held on
12 November 2020 (the ‘2020 AGM’) until the AGM to be held in
2023 (the ‘2020 Policy’). The previous policy that was approved
by shareholders at the AGM held on 8 November 2017 (the ‘2017
Policy’) will continue to operate until the 2020 AGM and indeed
the new policy will permit the execution of remuneration
arrangements that were agreed when the 2017 Policy was in
effect. The 2017 Policy applied throughout the financial year
ended 30 June 2020 and was most recently reproduced in the
Annual Report and Accounts 2019 with the originally approved
text being included in the Annual Report and Accounts 2017, both
of which are available on our website at: www.ricardo.com.
In accordance with the requirements of the Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 (as amended) (the ‘Regulations’), the 2020
Policy will be subject to a binding vote at the 2020 AGM and
will take effect immediately upon receipt of such approval from
shareholders.
As discussed in the Chair’s Overview, following a thorough
and careful review of the structure of the 2017 Policy, its
operation in our business (including in the context of the
pay and employment conditions of employees (other than
Directors)) and the views of our largest shareholders, their
industry bodies and other corporate governance commentators,
the Committee concluded that a number of changes should be
made to the 2017 Policy in order to improve its ability to support
Ricardo at this stage of our development. Details of the changes
to the 2017 Policy are set out on page 120.
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 Chair 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 employee share plans;
• Agreeing the remuneration of the Chair 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
2020 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 2020-2023.
Shareholders were given an early opportunity to provide feedback and in finalising the
proposals this was taken into account. As a result of the feedback received through this
consultation programme:
• Incumbent Executive Directors will be aligned to the pension provision levels of the UK
workforce by 1 January 2022 (in addition to any new appointees being capped at this level
from the date of joining) – further details are included in the 2020 Policy table on page 121;
• One-third of any bonus paid will be deferred into shares for three years; and
• Extension of share ownership guideline to two years’ post-cessation of employment
(reducing from two times salary in the first year to one times salary in the second year).
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 (and the setting of the revised
remuneration policy as a whole) 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 Committee also looks at the differential between
the Chief Executive Officer’s pay and Ricardo average
employee earnings over time.
Creating a world fit for the future 119
Corporate governance Directors’ remuneration report Overview of Ricardo’s remuneration policy for 2020 – 2023
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 salaries 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.
Changes to the 2017 Directors’ Remuneration Policy
The changes to the 2017 Directors’ Remuneration Policy are as follows:
• Pension provision for new joiners and incumbents alike will be aligned with the UK
workforce;
• One third of any bonus will be deferred into shares and ordinarily delivered at the
expiry of a three year period from grant;
• To simplify our long-term incentive arrangements, the ability to receive bonus-
linked shares is being removed and the limits under the LTIP are being increased in
order to compensate;
• A two-year post vesting holding period under the LTIP is being introduced for
future grants to Executive Directors; and
• A 200% share ownership requirement for all Executive Directors is being
introduced with a requirement that 50% of any gains from any share awards
(vesting of LTIP or deferred bonus) be retained until the increased level is met.
This will continue post-cessation of employment for two years (with the holding
requirement reducing by 50% for the second year).
Overview of the decision making process
that was followed for the determination
of the new policy
As explained in the Chair’s introduction on page 102, the new
2020 Policy which shareholders are being asked to approve
at the 2020 AGM was developed by the Remuneration
Committee following a thorough review of the existing
executive remuneration arrangements; it also involved the
Committee undertaking a consultation exercise with our
major shareholders and the Chief Executive Officer and Chief
Financial Officer.
In its deliberations, the Committee received support and
advice from FIT Remuneration Consultants and Shepherd and
Wedderburn, its independent external advisors (see page 105
for details).
Although the Executive Directors provided the Committee
with a level of input in relation to the formulation of the new
policy, the final decisions around its structure were taken by
the Committee alone in order to avoid any conflicts of interest
arising.
Corporate Governance
When determining the 2020 Policy, the Committee was mindful of its obligations under Provision 40 of the Corporate Governance Code to ensure
that the policy and other remuneration practices were clear, simple, predictable, proportionate, safeguarded the reputation of the Company and were
aligned to Company culture and strategy. Set out below are examples of how the Committee addressed these factors:
Clarity
• Remuneration policy and arrangements are clearly disclosed each year in the Annual Report.
• The Company invited its principal shareholders and shareholder representative groups to consult on the updated remuneration policy and received
good feedback. Changes were made to the proposals following input from this process.
• The Committee is regularly updated on workforce pay and benefits across the Group during the course of its activity.
Simplicity
• Our remuneration structure is comprised of fixed and variable remuneration, with the performance conditions for variable elements clearly
communicated to, and understood by, participants in order to ensure they are effective.
• The proposed 2020 Policy has received positive feedback from stakeholders in relation to its simplicity. The bonus-linked shares have been removed to
result in a simpler structure.
Risk
• The rules of the 2020 LTIP provide discretion to the Committee to reduce award levels and awards are subject to malus and clawback provisions.
• The total pay of the Executive Directors is considered by the Committee as well as pay ratios with the wider workforce and shareholder returns.
Predictability
• The range of possible rewards for the Executive Directors is considered in the scenario chart on page 125.
• The Committee has a range of discretions in relation to variable pay awards, new joiner and leavers which are identified and explained in the
Remuneration Policy section.
Proportionality
• As shown in the scenario chart on page 125, variable performance-related elements represent a significant proportion of the total remuneration
opportunity for our Executive Directors.
• The Committee considers the appropriate financial and personal performance measures each year to ensure that there is a clear link to strategy. For
example, for FY 2020/21 the cash conversion measure is being introduced under the annual bonus.
• Discretions are available to the Committee to reduce awards if necessary to ensure that outcomes do not reward poor performance.
Alignment to culture
• The Committee remain confident that the incentive schemes operated under the Remuneration Policy are aligned with the Company’s purpose,
values and strategy.
• The use of metrics in both the annual bonus and LTIP measure how we perform against our financial and non-financial KPIs.
120 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance 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.
Salary levels are reviewed annually in January each year.
Pay is set by considering:
• Market levels of total pay for comparable roles in companies of
None
similar size, complexity and sector;
• 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.
None
None
Pension
To offer market-
competitive
retirement benefits.
Until 31 December
2021 the maximum
pension contribution
is 20% of salary over
the Lower Earnings
Limit. From 1 January
2022 this reduces to
match the pension
provision level of
the UK workforce
from time to time
(currently 7%).
In addition, in line
with payments given
to all employees
who were previous
members of the
old defined benefit
scheme operated
by the Company,
the current Chief
Executive Officer
is entitled to an
additional 1.2%
of salary pension
contribution. This will
continue throughout
the 2020 Policy
period.
The Company operates a defined contribution scheme, the
Ricardo International Pension Scheme (‘RIPS’). The policy for
Executive Directors (save for the Chief Executive Officer’s
legacy pension arrangements described opposite) continues
to be a pension contribution of 20% of base salary over the
Lower Earnings Limit. From 1 January 2022 (again, save for the
Chief Executive Officer’s additional 1.2% legacy entitlement),
this will be aligned with the pension provision levels of the UK
workforce from time to time (currently 7%). To the extent that any
contributions have used up the adjusted annual allowance limit,
any additional payment will be 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.
All UK employees are entitled to receive Company pension
contributions. While levels vary, the majority of UK employees
receive a 7% of salary employer pension contribution into the
RIPS.
For new Executive Director appointments regardless of
appointment date, pension contribution will be aligned with the
contribution available to the wider workforce.
Creating a world fit for the future 121
Corporate governance Directors’ remuneration report
THE STRUCTURE OF OUR DIRECTORS’ REMUNERATION PACKAGE – THE POLICY TABLE (continued)
Pay element and
link to strategy
Pay for
performance:
Annual bonus
To reward the
annual delivery
of financial and
operational targets.
Maximum
Operation
Maximum
opportunity of 125%
of base salary for
the Chief Executive
Officer and 100% of
base salary for other
Executive Directors.
Bonuses are awarded by reference to performance against
specific targets measured over a single financial year.
Two thirds of any bonus paid to an Executive Director will be
paid out in cash shortly after the assessment of the performance
targets has been completed. The remaining one third 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 the relevant 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 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; 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.
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 KPIs such as:
• Underlying Profit Before Tax; and
• Cash conversion.
Any remaining part of an Executive
Director’s bonus will normally be based on
the achievement of personal objectives
which relate to delivery of the business
strategy. See page 110 for examples.
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
zero for below-threshold performance up
to 100% for full satisfaction of the relevant
target.
Bonus payments will also be subject to
the Committee considering whether the
proposed awards, calculated by reference
to performance against the targets,
appropriately reflect the Company’s
overall performance and shareholders’
experience. If the Committee does not
believe this to be the case, it retains the
discretion to adjust the bonus outturn
accordingly.
122 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report THE STRUCTURE OF OUR DIRECTORS’ REMUNERATION PACKAGE – THE POLICY TABLE (continued)
Pay element and
link to strategy
Pay for
performance:
Long-term
incentives
Performance shares
under the Long-
Term Incentive
Plan (‘LTIP’)
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 of 150%
of base salary for
the Chief Executive
Officer, 130% for
other Executive
Directors.
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
managers.
From time to time a number of employees below board level
are granted non-performance based share awards to reflect
exceptional performance.
Holding Period
Vesting of awards will generally take place on the third anniversary
of grant or, if later, the date on which the performance conditions
are assessed by the Committee.
Executive Directors’ awards that vest will normally be subject to
a holding period in terms of which the relevant shares will only
be released after a further period of at least two years has expired
from the vesting date.
Dividends and equivalents
Dividends and dividend equivalents for each performance /
holding period may also be paid in respect of shares under award
to the extent that shares have vested in the relevant 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; or
• An act committed by the relevant participant that has (or
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.
Framework for assessing performance
The vesting of long-term incentive awards
is subject to both continued employment
and the extent to which performance
conditions measured over a 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 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 initial weightings between the two
long-term incentive measures that we
intend to use for the initial awards after the
2020 AGM are 67% EPS performance and
33% TSR performance; however our policy
is simply for financial and 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 2020/21 are set out on
page 118.
Formulaic outcome of all LTIP
performance measures will also be
subject to the Committee considering
whether the proposed vesting levels,
calculated by reference to performance
against the targets, appropriately reflect
the Company’s overall performance
and shareholders’ experience. If the
Committee does not believe this to be the
case, it retains the discretion to adjust the
LTIP outturn accordingly.
Company’s Articles
of Association
place a limit on the
aggregate annual
level of Non-
Executive Directors’
and Chair’s fees
(currently £500,000).
Chair and other
Non-Executive
Directors
Helps recruit and
retain high-quality
experienced
individuals.
Reflects time
commitment and
role.
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 Chair 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 Chair 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.
Creating a world fit for the future 123
Corporate governance Directors’ remuneration report Notes to the 2020 Policy table:
1. Where maximum amounts for elements of remuneration have been
set within the 2020 Policy, these will operate simply as caps and are not
indicative of any aspiration.
2. A description of how the Company intends to implement the 2020
Policy set out in the tables on pages 121 to 123 during the financial year
to 30 June 2021 is provided on pages 117 and 118.
3. A general overview of how each remuneration element applies to other
employees of the Group is included under the relevant section of the
policy table.
4. The Committee reserves the right to make any remuneration payments
and 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 2020 Policy (as set out on pages 121 to 123)
where the terms of the payment were agreed:
a. before 29 October 2014 (the date the Company’s first shareholder-
approved Directors’ Remuneration Policy came into effect);
b. before the 2020 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
c. 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. The ‘framework for assessing performance’ column of the tables on
pages 121 to 123 provide information on choosing the particular
performance measures and target setting in relation to them.
6. 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.
7. 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.
8. 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).
9. In the event of a change of control, long-term incentive awards will
normally vest at that time, taking into account, amongst other things,
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 a Save As You
Earn share option plan 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.
124 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report 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
below presents remuneration outcomes for the 2020 Policy under minimum, on-target, maximum and maximum with share price
appreciation scenarios.
3,000
2,500
2,000
1,500
1,000
'
)
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
r
l
a
t
o
T
500
0
2,521
48%
2,123
38%
31%
26%
1,228
16%
30%
664
100%
54%
31%
26%
1,447
46%
1,222
37%
28%
24%
35%
30%
731
15%
26%
59%
429
100%
Minimum
On-target
Maximum
Maximum with
share price
appreciation
Minimum
On-target
Maximum
Maximum with
share price
appreciation
Chief Executive Officer
Chief Financial Officer
Fixed elements
Short-term variable element
Long-term variable element
The target scenario broadly illustrates the remuneration level
when budgeted performance is achieved. A further column
has also been included which illustrates the impact on the
figures contained in the maximum scenario of an assumed share
price appreciation for the LTIP award of 50% over the relevant
performance period. The disclosures in the chart above reflect FY
2020/21 data on the basis of the assumptions set out below.
• Fixed elements comprise current base salary, pension and other
benefits. For example, for the Chief Executive Officer, fixed
elements comprise base salary of £530,484, 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 2019/20 financial year;
• For minimum performance, Executive Directors receive only
the fixed elements of pay;
• 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;
• Save for the “maximum with share price appreciation column”,
no share price increase has been assumed for the above and
this means that the single total figure in any year may be higher
than the maximum shown above; and
• For maximum with share price growth performance, share
price appreciation of 50% over the relevant performance
period has been assumed for the LTIP awards.
Creating a world fit for the future 125
Corporate governance 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 121. Annual bonus and long-term incentive awards
will be within the limits described in the policy table for the particular
role. The limits for any new Executive Director roles will be set by the
Committee taking into account the particular responsibilities of the role,
but will not exceed those that apply to the current Chief Executive Officer.
Pension contribution levels will be aligned to those applicable to the
wider workforce.
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.
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 Chair 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.
The cash element of the bonus is not payable unless the individual
remains in employment at the payment date.
Unvested 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 such 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 will vest on
their originally anticipated vesting date with the new holding period
also continuing to apply (although the Committee retains the discretion
to allow vesting and/or release from the holding period 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.
126 Ricardo plc Annual Report & Accounts 2019/20
Corporate governance Directors’ remuneration report Executive Directors’ service contracts
The current Executive Directors’ service contracts contain the key terms shown in the table below:
Provision
Remuneration
Duration
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.
• Indefinite subject to termination by either party in certain circumstances including serving notice as set out
below.
• 6 months’ notice by the Director and 12 months’ notice by the Company.
• See separate disclosure on page 126.
• 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 Chair’s fees. The Chair 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 employee share plans, 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 terms of the Non-Executive
Directors’ appointments, as at 30 June 2020, are:
Non-Executive Director
Sir Terry Morgan CBE
Russell King
Laurie Bowen
Malin Persson
Bill Spencer
Jack Boyer
Unexpired terms of appointment (months)
30
26
12
18
34
26
The Directors’ Remuneration Report, comprising the Chair’s Overview and Annual Statement 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 9 September 2020 and signed
on its behalf by:
Russell King
Chair of the Remuneration Committee
Creating a world fit for the future 127
Corporate governance Directors’ remuneration report
Corporate governance
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 2020.
Dividends
On 6 April 2020 an interim dividend of 6.24p (HY 2018/19: 6.00p)
was paid to shareholders. Due to the reduced performance
experienced by the Group in the second half of the year and,
after careful consideration, the Board have decided not to
recommend a final dividend for the year. This difficult decision
has been taken to protect the Group’s financial position. The
board recognises the importance of dividends to shareholders
and intends to resume dividend payments as soon as it is
appropriate to do so.
Acquisitions and disposals
The acquisition of PLC Consulting Pty Ltd was completed on
31 July 2019 and the entity was subsequently renamed Ricardo
Energy, Environment and Planning Pty Ltd, a wholly-owned
subsidiary of Ricardo Australia Pty Ltd.
Ricardo Real Estate LLC purchased the freehold title to
the campus occupied by its fellow subsidiary, Ricardo, Inc. in
Detroit, Michigan on 21 August 2019, on which Ricardo, Inc. was
previously committed as a leasehold tenant until October 2037.
Ricardo Real Estate LLC and Ricardo Inc sold the business,
assets and freehold title to the real estate of the testing business
conducted at its campus in Detroit, Michigan on 3 June 2020.
Ricardo sold the business and intellectual property right in
Dolphin N2 Limited to FPT Industrial S.p.A. on 19 December 2019.
Events after the reporting date
On 9 September 2020, the definition of the Adjusted Leverage
covenant for the December 2020 covenant test date was
amended to be based on two times the six months’ EBITDA
to December 2020. In addition, the June 2021 covenant was
increased to 3.75. The Interest Cover covenant remains at 4.0x,
with the December 2020 test based on two times the six
months’ EBITDA to December 2020.
128 Ricardo plc Annual Report & Accounts 2019/20
Research and Development
The Group continues to devote effort and resources to the
research and development of new technologies. Costs of
£12.5m have been incurred, of which £8.0m has been
capitalised and £4.5m has been charged to the income
statement during the year.
Board of Directors
The current Directors of the Company at the date of this report
appear on pages 88 and 89. Russell King and Jack Boyer OBE
were appointed to the Board on 5 September 2019. Peter
Gilchrist CB retired from the Board on 14 November 2019 and
on 12 May 2020, Mark Garrett announced his intention to resign
from the Board with effect from 31 July 2020.
Directors’ interests in shares
Directors’ interests in shares and share options are detailed on
pages 114 to 116 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.
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 19 August 2020, 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.
Awards granted under the Company’s share plans are 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 governance
Directors’ report
dilution limits recommended by the Investment Association.
Based on the Company’s issued share capital as at 30 June
2020, the overall dilution was 4.56% (i.e. below the 10% limit for
all plans in any rolling 10-year period) and 4.12% for discretionary
employee share plans (i.e. below 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 2019 AGM. That authority
will expire at the conclusion of the 2020 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 2020 AGM unless renewed.
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
2020 AGM, all Directors wishing to remain in office would stand
for re-election at the 2021 AGM.
Details of these resolutions are included with the Notice
of AGM.
Resolutions at the Annual General Meeting
The Company’s AGM will be held on 12 November 2020. The
Notice of AGM 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
As at 19 August 2020, the Company has been notified of the
following material interests in the voting rights of the Company
under the provisions of the Disclosure and Transparency Rules.
Shareholders
Aberdeen Standard Investments
(Standard Life)
Aviva Investors
Invesco Asset Management
Impax Asset Management
Royal London Asset Management
Canaccord Genuity Wealth Mgt
JO Hambro Capital Mgt
Number of
shares
% of issued
share
capital
3,845,543
3,557,855
2,931,849
2,792,457
2,723,324
2,700,000
2,283,836
7.20
6.66
5.49
5.23
5.10
5.06
4.28
Donations
During the year the Group made various charitable donations,
which are summarised in the Environmental, Social and
Governance Report on page 33. The Group made no political
donations during the year to 30 June 2020.
Creating a world fit for the future 129
Corporate governance
Directors’ report
Independent auditors
Following shareholder approval at the 2019 AGM, KPMG LLP
were appointed as independent auditors of the Group and
Company for the year ended 30 June 2020.
A resolution to re-appoint KPMG LLP as independent auditors
of the Group and Company will be proposed at the 2020 AGM.
Going concern
Having assessed the principal risks and the other matters
discussed in connection with the Viability Statement on
pages 40 and 41, 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, where required.
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, 13, 49,
51, 53, 55, 57 and 59;
• Information on greenhouse gas emissions can be found on
page 31;
• The Group’s statement on corporate governance can be
found in the Corporate Governance Statement on pages 90 to
96; 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 27 to the Group financial
statements.
The Directors’ Report was approved by order of the Board on
9 September 2020 and signed on its behalf by:
Patricia Ryan
Group General Counsel and Company Secretary
130 Ricardo plc Annual Report & Accounts 2019/20
Statement of Directors’
responsibilities
in respect of the Annual Report and the financial statements
Corporate governance
The directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare Group and
parent Company financial statements for each financial year.
Under that law they are required to prepare the Group financial
statements in accordance with International Financial Reporting
Standards as adopted by the European Union (IFRSs as adopted
by the EU) and applicable law and have elected to prepare the
parent Company financial statements in accordance with UK
accounting standards, including FRS 101 Reduced Disclosure
Framework.
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 their profit or loss for that period. In preparing
each of the Group and parent Company financial statements,
the directors are required to:
• Select suitable accounting policies and then apply them
consistently;
• Make judgements and estimates that are reasonable, relevant,
reliable and prudent;
• For the Group financial statements, state whether they have
been prepared in accordance with IFRSs as adopted by the EU;
• For the parent Company financial statements, state whether
applicable UK accounting standards have been followed,
subject to any material departures disclosed and explained in
the parent company financial statements;
• Assess the Group and parent Company’s ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
• Use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to
cease operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the parent Company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They are 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, and have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that complies with that law and those regulations.
The directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement of the directors in
respect of the annual financial report
We confirm that to the best of our knowledge:
• The financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the company and the undertakings included in the
consolidation taken as a whole; and
• The strategic report includes a fair review of the development
and performance of the business and the position of the issuer
and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face.
We consider the annual report and accounts, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for shareholders to assess the group’s position and
performance, business model and strategy.
Dave Shemmans
Chief Executive Officer
Ian Gibson
Chief Financial Officer
9 September 2020
Creating a world fit for the future 131
132 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
174 Working capital
22. Inventories
23. Trade, contract and other receivables
24. Trade, contract and other payables
176 Net debt and financial risk management
25. Net debt and borrowings
26. Fair value of financial assets and liabilities
27. Financial risk management
182 Equity
28. Share capital and share premium
29. Other reserves
30. Retained earnings
31. Non-controlling interests
183 Employees
32. Employee number and costs
33. Retirement benefits
34. Share-based payments
188 Unrecognised Items and uncertain events
35. Commitments
36. Contingent liabilities
189 Other
37. Related undertakings of the Group
38. Related parties’ transactions
39. Events after the reporting date
192 Company financial statements
134 Independent auditor’s report
142 Group primary statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated cash flow statement
146 Notes to the Group financial statements
146 Principal accounting policies
1. Principal accounting policies
2. Changes in significant accounting policies
3. Alternative performance measures
157 Financial performance
4. Operating profit
5. Financial performance by segment
6. Revenue
7. Specific adjusting items
8. Earnings per share
9. Dividends
10. Net finance costs
11. Auditor’s remuneration
12. Tax expense
164 Capital base
13. Non-current assets by geographical location (excluding
deferred tax assets)
14. Acquisitions
15. Goodwill
16. Other intangible assets
17. Property, plant and equipment
18. Right-of-use assets, lease liabilities and lease receivables
19. Non-current assets held for sale
20. Provisions for liabilities and charges
21. Deferred tax
Creating a world fit for the future 133
Financial statements
Independent auditor’s report
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities are described below. We believe that the audit
evidence we have obtained is a sufficient and appropriate basis
for our opinion. Our audit opinion is consistent with our report to
the audit committee.
We were first appointed as auditor by the shareholders on 15
November 2018. The period of total uninterrupted engagement
is for the two financial years ended 30 June 2020. We have
fulfilled our ethical responsibilities under, and we remain
independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to
listed public interest entities. No non-audit services prohibited by
that standard were provided.
Overview
Materiality:
group financial
statements as a whole
Coverage
£1.3m (2019:£1.6m)
5.0% (2019: 4.8%) of normalised profits and
losses that make up Group profit before tax
82% (2019:67%) of normalised profits and losses
that make up Group profit before tax
Key audit matters vs 2019
Emergence of
COVID-19
Recurring risks
New: Going Concern
Revenue recognition of fixed priced
contracts
Valuation of defined benefit pension
obligation
▲
◄►
◄►
to the members of Ricardo plc
1. Our opinion is unmodified
We have audited the financial statements of Ricardo Plc (“the
Company”) for the year ended 30 June 2020 which comprise
the Consolidated income statement, Consolidated statement
of comprehensive income, Consolidated statement of financial
position, Consolidated statement of changes in equity,
Consolidated cash flow statement, Company statement of
financial position, Company statement of changes in equity, and
the related notes, including the accounting policies in Note 1.
In our opinion:
• 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
2020 and of the Group’s loss for the year then ended;
• the Group financial statements have been properly prepared
in accordance with International Financial Reporting Standards
as adopted by the European Union (IFRSs as adopted by the
EU);
• the parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and
as applied in accordance with the provisions of the Companies
Act 2006; and the financial statements 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.
134 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Independent auditor’s report
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements
and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, 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. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion
above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from
those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for
the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to
that opinion, and we do not provide a separate opinion on these matters.
Going Concern
The risk
Disclosure quality:
The financial statements explain how the
Board has formed a judgement that it is
appropriate to adopt the going concern
basis of preparation for the Group and
parent Company.
That judgement is based on an
evaluation of the inherent risks to the
Group’s and parent Company’s business
model and how those risks might affect
the Group’s and parent Company’s
financial resources or ability to continue
operations over a period of at least a year
from the date of approval of the financial
statements.
The risks most likely to adversely affect the
Group’s and parent Company’s available
financial resources over this period is the
impact of the global pandemic caused
by the emergence of a novel coronavirus,
COVID-19.
The risk for our audit was whether or not
those risks were such that they amounted
to a material uncertainty that may have
cast significant doubt about the ability
to continue as a going concern. Had they
been such, then that fact would have
been required to have been disclosed.
Our response
Our procedures included:
• Funding assessment: Obtained direct confirmation from the lender
of the committed facilities available to the Group and any related
covenants;
• Historical comparisons: Assessed the directors’ historical forecasting
accuracy by comparing previous forecasts with the actual cashflows
achieved in the respective periods;
• Key dependency assessment: Identified the critical factors in
determining whether there is a risk of failure by identifying the key
drivers behind the cashflows, being the timing of delivering on
contracts, that are most exposed to the economic uncertainty that
COVID-19 presents;
• Sensitivity analysis: Considered sensitivities over the level of
available financial resources indicated by the Group’s financial
forecasts taking account of reasonably possible (but not unrealistic)
adverse effects that could arise from these risks individually and
collectively;
• Challenged the directors’ assessment of forecasts with, particular focus
on revenue as this is considered to be the key driver in the forecasts;
• Evaluating directors’ intent: Evaluated the achievability of the
actions the Directors consider they would take to improve the
position should the risks materialise;
• We critically assessed the mitigating actions identified, for example
the reduction of discretionary spend and obtained an understanding
of their potential impact on the Group should they need to be
implemented.
• Assessing transparency: Assessed the completeness and accuracy
of the matters covered in the going concern disclosure by comparing
it to our knowledge obtained during the course of our audit.
Our results
• We found the going concern disclosure without any material
uncertainty to be acceptable.
Creating a world fit for the future 135
Financial statements
Independent auditor’s report
2. Key audit matters: our assessment of risks of material misstatement (continued)
Revenue recognition on fixed
price contracts (£189.5 million;
2019: £210.7m)
Refer to page 100 (Audit Committee
Report), page 148 (accounting policy)
and page 157 (financial disclosures).
The risk
Subjective estimate:
For fixed price contracts the Group
recognises the majority of revenue
and profit on the stage of completion
based on the proportion of contract
costs incurred for the work performed
to the balance sheet date, relative to
the estimated total forecast costs of the
contract at completion.
The highest value, highest risk, most
technically complex and financially
challenging contracts to deliver are
categorised as ‘Red CAT 4’ contracts,
which are subject to more frequent and
senior levels of management review.
The key judgments impacting the
recognition of revenue include:
• The identification of distinct
performance obligations.
• Assessment of stage of completion
and costs to complete
• The recognition of variations.
The most significant estimate impacting
the recognition of revenue is costs to
complete.
The effect of these matters is that, as part
of our risk assessment, we determined
that amount of revenue recognised on
fixed price contracts has a high degree of
estimation uncertainty, with a potential
range of reasonable outcomes greater
than our materiality for the financial
statements as a whole, and possibly
many times that amount. The financial
statements (note 1c) disclose the range
estimated by the Group.
Our response
Our procedures included:
• Control reperformance: Our planned procedures initially included
testing key controls over recording work done through timesheet
approvals and invoicing through invoice approval. Our testing over
the IT control environment identified weaknesses and as a result we
expanded the extent of our detailed procedures over and above that
originally planned.
The following procedures reflect our expanded testing:
• Control observation: We attended the ‘Red CAT 4’ review meetings
in January and July 2020 at which performance of these contracts was
discussed with the Chief Financial Officer and divisional Managing
and Finance Directors;
• Test of detail: We selected a sample of costs incurred in the year and
agreed to supporting documentation which included, for example;
invoices and timesheets;
• We inspected a sample of correspondence with customers and
instances where contractual variations had arisen to inform our
assessment of the revenue and costs recorded up to the balance
sheet date. We also agreed the variations to relevant invoicing
schedules and payment plans and the subsequent cash receipts,
where possible.
• Historical comparisons: We assessed the reasonableness of the
Group’s forecasts by comparing with the comparative year forecasts
and the financial performance.
• Independent reperformance: We recalculated the stage of
completion on the basis of actual costs and the Group’s latest forecast
to inform our assessment of the appropriate amount of revenue and
profit to recognise and compared this to the amounts recorded by
the Group.
• Assessing transparency: We considered the adequacy of the Group’s
disclosures about the degree of estimates involved in estimating the
stage of completion for determining the revenue amounts for fixed
price contracts.
Our results
We found revenue recognition on fixed price contracts to be acceptable.
(2019: acceptable)
136 Ricardo plc Annual Report & Accounts 2019/20
2. Key audit matters: our assessment of risks of material misstatement (continued)
2. Key audit matters: our assessment of risks of material misstatement (continued)
Financial statements
Independent auditor’s report
Group and parent Company:
Valuation of defined benefit
pension obligation
(£157.1m; 2019: £146.0m)
Refer to page 100 (Audit Committee
Report), page 153 (accounting policy)
and page 183 (financial disclosures).
The risk
Subjective estimate:
Significant estimates, including the
discount rate, inflation rate and mortality
rate, are made in valuing the Group’s
and parent Company’s defined benefit
obligation (before deducting the
schemes’ assets). Small changes in the
assumptions and estimates would have
a significant effect on the Group’s and
parent Company’s net deficit.
The effect of these matters is that, as part
of our risk assessment, we determined
that the valuation of the defined benefit
obligation has a high degree of estimation
uncertainty, with a potential range of
reasonable outcomes greater than our
materiality for the financial statements
as a whole, and possibly many times that
amount. The financial statements (Note
33) disclose the sensitivity estimated by
the Group and Parent Company.
Our response
Our procedures included:
• Benchmarking assumptions: We challenged key assumptions
applied (discount rate, inflation rate, and mortality rate) with the
support of our own actuarial specialists, including a comparison of key
assumptions against external market data;
• Assessing transparency: We considered the adequacy of the Group
and Company’s disclosures in respect of the sensitivity of the deficit to
changes in key assumptions.
Our results
We found the valuation of the defined benefit pension obligation to be
acceptable. (2019: acceptable)
We continue to perform procedures over the impact of uncertainties due to the UK exiting the European Union on our audit. However,
following the business having established a clearer understanding of the risks posed and also the emergence of more severe risks such
as the COVID-19 pandemic, we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is
not separately identified in our report this year.
Creating a world fit for the future 137
Financial statements
Independent auditor’s report
3. Our application of materiality and an overview of
the scope of our audit
Materiality for the group financial statements as a whole was set
at £1.3m (2019: £1.6m), determined with reference to a benchmark
of Group profit before tax, normalised to exclude exceptional
acquisition related expenditure, asset purchases and disposals and
other reorganisation costs as disclosed in note 6 and by averaging
over the last three years due to the impact of the COVID-19
pandemic on the results of the Group, of which it represents 5.0%
(2019: 4.8%).
Materiality for the parent company financial statements as a
whole was set at £0.5m (2019:£1.5m), determined with reference
to a benchmark of company total assets, of which it represents
0.2% (2019: 1.5%). We agreed to report to the Audit Committee
any corrected or uncorrected identified misstatements exceeding
£0.07m (2019: £0.08m), in addition to other identified misstatements
that warranted reporting on qualitative grounds.
Of the group’s 60 (2019: 63) reporting components, we subjected
10 (2019: 12) to full scope audits for group purposes and 9 (2019:
4) to specified risk- focused audit procedures. The latter were not
individually financially significant enough to require a full scope audit
for group purposes, but did present specific individual risks that
needed to be addressed. We have changed the way that we have
assessed the number of components in the current year and have
restated the prior year comparative to be aligned. We subjected 9
(2019: 4) components to specified risk-focused audit procedures over
revenue and journal entries.
The group team performed procedures on the items excluded
from normalised group profit before tax.
The components within the scope of our work accounted for the
percentages illustrated opposite. The remaining 10% (2019: 18%) of
total group revenue, 17% (2019: 33%) of group profit before tax and
10% (2019: 18%) of total group assets is represented by 41 (2019: 47)
reporting components, none of which individually represented more
than 6.5% (2019: 5.5%) of any of total group revenue, group profit
before tax or total group assets. For these residual components,
we performed analysis at an aggregated group level to re-examine
our assessment that there were no significant risks of material
misstatement within these.
The Group team instructed component auditors as to the
significant areas to be covered, including the relevant risks detailed
above and the information to be reported back.
The Group team approved the component materialities, which
ranged from £0.3m to £1.0m (2019: £0.5m to £1.5m) , having regard to
the mix of size and risk profile of the Group across the components.
The work on 7 of the 19 components (2019: 3 of the 16 components)
was performed by component auditors and the rest, including the
audit of the parent company, was performed by the Group team.
The Group visited 0 (2019:3) component auditors in 3 (2019: 2)
locations to assess the audit risk and strategy. No sites were visited
by the Group team in the current year due to travel restrictions
caused by the COVID-19 pandemic and instead video and telephone
conference calls were held with all component auditors. At these
meetings, the findings reported to the Group team were discussed
in more detail, and any further work required by the Group team was
then performed by the component auditor
138 Ricardo plc Annual Report & Accounts 2019/20
Normalised Group profit
before tax
£26.6m (2019: £33.0m)
Group Materiality
£1.3m (2019: £1.6m)
£1.3m
Whole financial
statements materiality
(2019: £1.6m)
£1.0m
Range of materiality at 14
components (£0.3m -£1.0m)
(2019: £0.5m to £1.5m)
Normalised Group profit
before tax
Group materiality
£0.07m
Misstatements reported to the
audit committee (2019:
£0.08m)
Group revenue
Group profit before tax
21
18
90%
(2019 82% )
64
69
27
83%
(2019 67%)
49
56
18
Group total assets
16
17
90%
(2019 82%)
65
74
Key:
Full scope for group audit purposes 2020
Specified risk-focused audit procedures 2020
Full scope for group audit purposes 2019
Specified risk-focused audit procedures 2019
Residual components
4. We have nothing to report on going concern
The Directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the
Company or the Group or to cease their operations, and as they
have concluded that the Company’s and the Group’s financial
position means that this is realistic. They have also concluded that
there are no material uncertainties that could have cast significant
doubt over their ability to continue as a going concern for at least
a year from the date of approval of the financial statements (“the
going concern period”).
Our responsibility is to conclude on the appropriateness of the
Directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this
audit report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes
that are inconsistent with judgements that were reasonable at
the time they were made, the absence of reference to a material
uncertainty in this auditor's report is not a guarantee that the
Group and the Company will continue in operation.
We identified going concern as a key audit matter (see section
2 of this report). Based on the work described in our response to
that key audit matter, we are required to report to you if:
• we have anything material to add or draw attention to
in relation to the directors’ statement in Note 1 to the
financial statements on the use of the going concern basis
of accounting with no material uncertainties that may cast
significant doubt over the Group and Company’s use of that
basis for a period of at least twelve months from the date of
approval of the financial statements; or
• the related statement under the Listing Rules set out on page
131 is materially inconsistent with our audit knowledge.
We have nothing to report in these respects.
Financial statements
Independent auditor’s report
5. We have nothing to report on the other
information in the Annual Report
The directors are responsible for the other information presented
in the Annual Report together with the financial statements.
Our opinion on the financial statements does not cover the
other information and, accordingly, we do not express an audit
opinion or, except as explicitly stated below, any form of assurance
conclusion thereon.
Our responsibility is to read the other information and, in doing
so, consider whether, based on our financial statements audit work,
the information therein is materially misstated or inconsistent with
the financial statements or our audit knowledge. Based solely on
that work we have not identified material misstatements in the
other information.
Strategic report and directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the strategic
report and the directors’ report;
• in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
• in our opinion those reports have been prepared in accordance
with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Disclosures of emerging and principal risks and
longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:
• the directors’ confirmation within the Viability statement
page 40 that they have carried out a robust assessment of the
emerging and principal risks facing the Group, including those
that would threaten its business model, future performance,
solvency and liquidity;
• the Principal Risks disclosures describing these risks and
explaining how they are being managed and mitigated; and
• the directors’ explanation in the Viability statement of how
they have assessed the prospects of the Group, over what
period they have done so and why they considered 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.
Creating a world fit for the future 139
Financial statements
Independent auditor’s report
5. We have nothing to report on the other
information in the Annual Report (continued)
Under the Listing Rules we are required to review the Viability
statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context
of only the knowledge acquired during our financial statements
audit. As we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent
with judgments that were reasonable at the time they were
made, the absence of anything to report on these statements is
not a guarantee as to the Group’s and Company’s longer-term
viability.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the
knowledge we acquired during our financial statements
audit and the directors’ statement that they 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’s position and
performance, business model and strategy; or
• the section of the annual report describing the work of the
Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the
provisions of the UK Corporate Governance Code specified by the
Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the other
matters on which we are required to report by
exception
Under the Companies Act 2006, we are required to report to you
if, in our opinion:
• 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
• 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; or
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 131,
the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and
fair view; 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; assessing
the Group and 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
they either intend to liquidate the Group or the parent Company
or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
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 other irregularities (see
below), or error, and to issue our opinion in an auditor’s report.
Reasonable assurance is a high level of assurance, but does not
guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud, other irregularities or error
and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably
be expected to have a material effect on the financial statements
from our general commercial and sector experience and
through discussion with the directors and other management
(as required by auditing standards), and from inspection of the
group’s regulatory and legal correspondence and discussed
with the directors and other management the policies and
procedures regarding compliance with laws and regulations. We
communicated identified laws and regulations throughout our
team and remained alert to any indications of non-compliance
throughout the audit. This included communication from the
group to component audit teams of relevant laws and regulations
identified at group level.
The potential effect of these laws and regulations on the
financial statements varies considerably.
• certain disclosures of directors’ remuneration specified by law
Firstly, the group is subject to laws and regulations that directly
are not made; or
• we have not received all the information and explanations we
require for our audit.
We have nothing to report in these respects.
affect the financial statements including financial reporting
legislation (including related companies legislation), distributable
profits legislation and taxation legislation and we assessed the
extent of compliance with these laws and regulations as part of
our procedures on the related financial statement items.
140 Ricardo plc Annual Report & Accounts 2019/20
7. Respective responsibilities (continued)
Secondly, the group is subject to many other laws and
regulations where the consequences of non-compliance could
have a material effect on amounts or disclosures in the financial
statements, for instance through the imposition of fines or
litigation. We identified the following areas as those most likely to
have such an effect: health and safety, anti-bribery, employment
law, pension regulations, regulatory capital and liquidity and
certain aspects of company legislation recognising the nature of
the group’s activities. Auditing standards limit the required audit
procedures to identify non-compliance with these laws and
regulations to enquiry of the directors and other management
and inspection of regulatory and legal correspondence, if any.
These limited procedures did not identify actual or suspected
non- compliance
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some material
misstatements in the financial statements, even though we have
properly planned and performed our audit in accordance with
auditing standards. For example, the further removed non-
compliance with laws and regulations (irregularities) is from the
events and transactions reflected in the financial statements,
the less likely the inherently limited procedures required by
auditing standards would identify it. In addition, as with any audit,
there remained a higher risk of non-detection of irregularities,
as these may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. We are
not responsible for preventing non-compliance and cannot be
expected to detect non-compliance with all laws and regulations.
Financial statements
Independent auditor’s report
8. The purpose of our audit work and to whom
we owe our responsibilities
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the
Company’s members, as a body, for our audit work, for this report,
or for the opinions we have formed.
Michael Harper
(Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square London E14 5GL
9 September 2020
Creating a world fit for the future 141
Financial statements
Group primary statements
Consolidated income statement
for the year ended 30 June
Revenue
Cost of sales
Gross profit
Administrative expenses
Other income
Operating profit/(loss)
Finance income
Finance costs
Net finance costs
Profit/(loss) before taxation
Tax expense
Profit/(loss) for the year
Profit/(loss) attributable to:
- Owners of the parent
- Non-controlling interests
Note
5 & 6
4 & 5
10
10
10
12
31
2020
Specific
adjusting
items(1)
£m
-
-
-
(20.9)
-
(20.9)
-
-
-
(20.9)
3.0
(17.9)
(17.9)
-
(17.9)
Underlying
£m
352.0
(236.9)
115.1
(96.4)
1.3
20.0
0.4
(4.8)
(4.4)
15.6
(4.1)
11.5
11.4
0.1
11.5
Total
£m
352.0
(236.9)
115.1
(117.3)
1.3
(0.9)
0.4
(4.8)
(4.4)
(5.3)
(1.1)
(6.4)
(6.5)
0.1
(6.4)
Underlying
£m
384.4
(249.5)
134.9
(96.3)
1.0
39.6
0.5
(3.1)
(2.6)
37.0
(8.2)
28.8
28.7
0.1
28.8
2019
Specific
adjusting
items(1)
£m
-
-
-
(10.5)
-
(10.5)
-
-
-
(10.5)
1.6
(8.9)
(8.9)
-
(8.9)
(Loss)/earnings per ordinary share attributable to owners of the parent during the year
Basic
Diluted
8
8
(12.2)p
(12.2)p
Total
£m
384.4
(249.5)
134.9
(106.8)
1.0
29.1
0.5
(3.1)
(2.6)
26.5
(6.6)
19.9
19.8
0.1
19.9
37.1p
36.9p
(1) 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. Further details are given in
Note 3 and Note 7.
Consolidated statement of comprehensive income
for the year ended 30 June
(Loss)/profit for the year
Other comprehensive (expense)/income
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 pension 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
Fair value gains on foreign currency cash flow hedges
Total items that may be subsequently reclassified to profit or loss
Total other comprehensive expense for the year (net of tax)
Total comprehensive (expense)/income for the year
(Expense)/income attributable to:
- Owners of the parent
- Non-controlling interests
The notes on pages 146 to 191 form an integral part of these Group financial statements.
Note
33
21
29
26
31
2020
£m
(6.4)
(2.7)
1.1
(1.6)
0.5
(0.1)
0.4
(1.2)
(7.6)
(7.7)
0.1
(7.6)
2019
£m
19.9
(7.9)
1.4
(6.5)
1.2
0.1
1.3
(5.2)
14.7
14.6
0.1
14.7
142 Ricardo plc Annual Report & Accounts 2019/20
Consolidated statement of financial position
as at 30 June
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right-of-use assets
Other receivables
Deferred tax assets
Current assets
Inventories
Trade, contract 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
Lease liabilities
Trade, contract and other payables
Current tax liabilities
Derivative financial liabilities
Provisions
Net current assets
Non-current liabilities
Borrowings
Lease liabilities
Trade, contract and other payables
Retirement benefit obligations
Deferred tax liabilities
Provisions
Total liabilities
Net assets
Equity
Share capital
Share premium
Other reserves
Retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Total equity
Financial statements
Group primary statements
Note
15
16
17
18
23
21
22
23
26
25
19
25
18
24
26
20
25
18
24
33
21
20
28
28
29
30
31
2020
£m
87.8
39.9
45.4
23.9
3.2
9.4
209.6
20.1
115.6
3.9
5.7
66.3
211.6
5.3
216.9
426.5
(10.6)
(6.7)
(72.0)
(7.5)
(6.5)
(3.2)
(106.5)
110.4
(129.1)
(22.6)
(3.6)
(6.7)
(5.6)
(3.3)
(170.9)
(277.4)
149.1
13.4
14.3
17.4
103.5
148.6
0.5
149.1
2019
£m
84.2
41.0
44.6
-
-
6.7
176.5
14.5
141.4
0.3
-
36.3
192.5
2.9
195.4
371.9
(4.0)
-
(84.8)
(3.5)
(1.2)
(2.2)
(95.7)
99.7
(79.7)
-
(5.1)
(8.5)
(7.3)
(3.7)
(104.3)
(200.0)
171.9
13.4
14.3
16.9
126.8
171.4
0.5
171.9
The notes on pages 146 to 191 form an integral part of these Group financial statements.
Approved by the Board of Ricardo plc on 9 September 2020 and signed on its behalf by:
Dave Shemmans
Chief Executive Officer
Ian Gibson
Chief Financial Officer
Creating a world fit for the future 143
Financial statements
Group primary statements
Consolidated statement of changes in equity
for the year ended 30 June
At 1 July 2018
Profit for the year
Other comprehensive income/(expense) for
the year
Total comprehensive income for the year
Equity-settled transactions
Purchases of own shares to settle awards
Ordinary share dividends
At 30 June 2019
Adoption of IFRS 16 (net of tax)
At 1 July 2019 (adjusted)
Loss for the year
Other comprehensive income/(expense) for
the year
Total comprehensive income/(expense) for the
year
Equity-settled transactions
Purchases of own shares to settle awards
Ordinary share dividends
At 30 June 2020
Note
34
30
9
2
34
30
9
Attributable to owners of the parent
Share
capital
£m
13.4
-
Share
premium
£m
14.3
-
Other
reserves
£m
15.7
-
Retained
earnings
£m
124.3
19.8
-
-
-
-
-
13.4
-
13.4
-
-
-
-
-
-
13.4
-
-
-
-
-
14.3
-
14.3
-
-
-
-
-
-
14.3
1.2
1.2
-
-
-
16.9
-
16.9
-
0.5
0.5
-
-
-
17.4
Total
£m
167.7
19.8
(5.2)
14.6
1.0
(0.9)
(11.0)
171.4
(3.7)
167.7
(6.5)
Non-
controlling
interests
£m
0.4
0.1
-
0.1
-
-
-
0.5
-
0.5
0.1
-
0.1
-
-
(0.1)
0.5
Total
equity
£m
168.1
19.9
(5.2)
14.7
1.0
(0.9)
(11.0)
171.9
(3.7)
168.2
(6.4)
(1.2)
(7.6)
0.6
(0.5)
(11.6)
149.1
(6.4)
13.4
1.0
(0.9)
(11.0)
126.8
(3.7)
123.1
(6.5)
(1.7)
(1.2)
(8.2)
0.6
(0.5)
(11.5)
103.5
(7.7)
0.6
(0.5)
(11.5)
148.6
The notes on pages 146 to 191 form an integral part of these Group financial statements.
144 Ricardo plc Annual Report & Accounts 2019/20
Consolidated cash flow statement
for the year ended 30 June
Cash flows from operating activities
(Loss)/profit before tax
Adjustments for:
Share-based payments
Fair value losses/(gains) on derivative financial instruments
Loss on disposal of property, plant and equipment
Net finance costs
Depreciation, amortisation and impairment
Operating cash flows before movements in working capital
Increase in inventories
Decrease/(increase) in trade, contract and other receivables
Decrease in trade, contract and other payables
Increase in provisions
Defined benefit pension scheme payments in excess of past service costs
Cash generated from operations
Net finance costs
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Acquisitions of subsidiaries, net of cash acquired
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Purchases of intangible assets and capitalised development costs
Net cash used in investing activities
Cash flows from financing activities
Purchases of own shares to settle awards
Principal element of lease payments
Principal element of lease receivables
Proceeds from borrowings
Repayment of borrowings
Dividends paid to shareholders
Net cash generated from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase 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
Net cash and cash equivalents at 1 July
At 30 June
Cash and cash equivalents
Bank overdrafts
Net cash and cash equivalents at 30 June
The notes on pages 146 to 191 form an integral part of these Group financial statements.
Financial statements
Group primary statements
Note
34
26
4
10
16, 17 & 18
33
14
17
16
25
25
9
25
25
25
2020
£m
(5.3)
0.6
0.3
(1.0)
4.4
30.3
29.3
(5.6)
25.4
(12.3)
1.0
(4.6)
33.2
(4.2)
(5.3)
23.7
(4.3)
(22.0)
2.8
(9.2)
(32.7)
(0.6)
(5.6)
0.2
140.3
(90.7)
(11.6)
32.0
0.4
23.4
32.4
55.8
36.3
(3.9)
32.4
66.3
(10.5)
55.8
2019
£m
26.5
1.0
(0.8)
(0.7)
2.6
15.4
44.0
(1.2)
(5.2)
(1.1)
0.2
(4.3)
32.4
(2.3)
(4.9)
25.2
(18.9)
(7.6)
0.7
(9.1)
(34.9)
(0.9)
-
-
64.7
(34.8)
(11.0)
18.0
0.3
8.6
23.8
32.4
33.1
(9.3)
23.8
36.3
(3.9)
32.4
Creating a world fit for the future 145
Financial statements
Notes to the Group financial statements
1. Principal accounting policies
This section describes the critical accounting judgements and estimates that management has identified
as having a potentially material impact on the Group’s consolidated financial statements and sets out our
significant accounting policies. Where an accounting policy is generally applicable to a specific note to
the financial statements, the policy is cross referenced. We have also detailed below the new accounting
pronouncements that we will adopt in future years and our current view of the impact they will have on our
financial reporting.
Ricardo plc, a public company limited by shares, 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.
a) Basis of preparation
These consolidated financial statements of the Ricardo plc Group
(‘Group’) have been prepared in accordance with International Financial
Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’), IFRS
Interpretations Committee (‘IFRS IC’) interpretations adopted by the 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 which are measured at fair value through profit
or loss. Derivative instruments are measured at fair value through other
comprehensive income for the effective element of the hedge, with the
ineffective element being charged to the profit or loss.
The principal accounting policies applied in the preparation of these
financial statements have been consistently applied to the years ended
30 June 2019 and 30 June 2020, except for the Group’s accounting policy
for leases as disclosed in Note 1(n). Under the transition method chosen,
comparative information has not been restated for IFRS 16 Leases, which
was adopted as at 1 July 2019. Comparative information complies with the
Group’s accounting policy for leases under IAS 17 Leases, the changes from
which are also disclosed in Note 1(n).
In the context of the current COVID-19 outbreak, the Board of Ricardo plc
has undertaken an assessment of the ability of the Group and Company
to continue in operation and meet its liabilities as they fall due over
the period of its assessment. In doing so, the Board considered events
throughout the period of their assessment, including the availability
and maturity profile of the Group’s financing facilities and covenant
compliance. These financial statements have been prepared on the going
concern basis which the directors consider appropriate for the reasons set
out below.
The Group funds its operations through cash generated by the Group and
has access to a £200m Revolving Credit Facility (“RCF”) which is linked to
two covenants. These covenants are tested at 30 June and 31 December
each year until the debt matures in July 2023.
On 5 May 2020 the Group exercised £50m of the accordion option of
its banking facilities, thereby increasing the Revolving Credit Facility
to £200m. At the same time, the Directors successfully negotiated a
relaxation of one of the related covenants, the Adjusted Leverage (defined
as net debt over underlying EBITDA), by increasing the threshold from 3.0x
to 3.75x for the next test date, being 31 December 2020. On 9 September
2020 this covenant was further relaxed as the calculation was amended to
be based on two times the six- month EBITDA to December 2020. It was
also agreed that the June 2021 covenant would be relaxed to 3.75x. The
other financial covenant linked to the Revolving Credit Facility is Interest
Cover which remains at 4.0x for each test date.
As at the date of approval of these financial statements, the amount of
RCF undrawn and available to the Group was c.£70m with total borrowing,
including overdrafts, of c.£137m and cash and cash equivalents of c.£58m.
The Directors have prepared a cash flow forecast which covers the period
from the date of approval of these financial statements to June 2022. In
this forecast, the directors have considered the impact of the COVID-19
outbreak on the Group’s results, operations and financial position in a
severe but plausible downside scenario, which included the following key
assumptions:
146 Ricardo plc Annual Report & Accounts 2019/20
• Revenue continues at H2 FY 2019/20 COVID-19 impacted run-rates
for the whole of the FY 2020/21 to model the expected prolonged
economic downturn due to the COVID-19 pandemic. Relative to actual
results reported for the FY 2019/20, the downside scenario assumes a
15% reduction in annual A&I revenue and a 20% reduction in annual
Performance Products revenue. Specific sensitivities have also been
applied to model the potential impact of a delay in delivering on key
contracts and lower contract volumes in segments including Defense,
Rail, and RSC & Software. Given the current market and pipeline of
opportunities secured, no sensitivities have been applied to the Energy
& Environment revenue. Revenue for the year ended 30 June 2022 is
projected to increase by 9% on the sensitised June 2021 levels, which
is largely driven by increased volumes in Defense and Performance
Products.
• An increase in the Group’s working capital days of ten, to model the
potential impact of a continuation of the slow-down in project delivery,
combined with delayed receipts from customers.
• The non-payment of the FY 2019/20 final dividend in November 2020.
The modelled scenario incorporates mitigating actions which are within
the control of the Group, such as the non-payment of discretionary
bonuses, discretionary cost saving measures (including travel and
professional fees), a temporary freeze on recruitment, and a reduction in
non-essential capital expenditure.
Although headroom under the Group’s banking covenants is reduced
under this downside scenario, the group and company is expected to
operate within its committed facilities and covenant requirements during
the forecast period.
Consequently, the directors are confident that the Group and company
will have sufficient funds to continue to meet its liabilities as they fall due
for at least 12 months from the date of approval of the financial
statements and therefore have prepared the financial statements on a
going concern basis.
b) Basis of consolidation
The financial statements of the Group consolidate the results of the
Company and its subsidiary entities, and include its share of its joint
ventures’ results accounted for under the equity method. 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 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. Changes in fair value of
contingent consideration are included within specific adjusting items.
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, together with
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 and recognised within specific
adjusting items.
Financial statements
Notes to the Group financial statements
1. Principal accounting policies (continued)
Key sources of estimation uncertainty
c) Management judgements and key accounting
estimates
The preparation of financial statements under IFRS requires the Group’s
management to make judgements and estimates that affect the
application of accounting policies and the reported amounts of assets,
liabilities, revenues and costs. 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 below), 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:
Specific adjusting items: Reorganisation costs – Note 3 and Note 7
Reorganisation costs relate to non-recurring expenditure incurred as
part of fundamental restructuring activities, significant impairments of
property, plant and equipment, and other items deemed to be one-off
in nature. These costs are presented within specific adjusting items in
the income statement. The classification and presentation of these items
require significant judgement to determine the nature and intention of the
transaction. Details of the Group’s alternative performance measures and
specific adjusting items are included in Note 3 and Note 7.
Carrying value of Goodwill: CGUs – Note 15
Significant judgement is applied in order to allocate goodwill to cash-
generating units (‘CGU’s), or a group of CGUs, as a change in the allocation
of goodwill would impact the result of the impairment review. As set out
in Note 1(k), for the purpose of impairment testing, goodwill acquired in a
business combination is allocated to each of the CGUs, or groups of CGUs,
that is expected to benefit from that business combination, at the lowest
level at which goodwill is monitored for internal management purposes.
The Rail segment comprises several CGUs which have been grouped for
impairment testing purposes as they are expected to benefit from the
synergies of the relevant combinations.
Recoverability of capitalised development costs – Note 16
Judgement is required as to when development costs meet the criteria
to be recognised as intangible assets. The majority of capitalised
development costs relate to the development of software, products and
other technology, tools and processes. These costs are recognised as
an asset once it has been determined that the attributable expenditure
can be measured reliably, that there is an intention and the necessary
resources to complete development 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.
Impairment of fi nancial assets – Note 23
Management has applied judgement to rebut the presumption of IFRS
9 Financial Instruments that default does not occur later than a financial
asset is 90 days past due. This is based upon the Group’s customer profile
and limited experience of bad debts, which demonstrates that although
debts can become significantly overdue, they are rarely irrecoverable.
The default rate used for each overdue period is reassessed annually and
is based upon the Group’s historic ageing profile, adjusted for forward
looking information.
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 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 - Note 6
The majority of the Group’s revenue in is earned from contracts for the
provision of consultancy services that are typically awarded on a fixed
price basis. A small number of similar contracts are also entered into by
Performance Products to design and set up production lines and supply
chains. Services provided under a fixed price contract generally have
a single distinct performance obligation, or a single distinct series of
performance obligations, which is satisfied over time. For each distinct
performance obligation recognised over time, revenue is recognised using
an input method, based on total costs incurred to date as a percentage of
total estimated costs to satisfy each performance obligation.
The identification of and separate accounting for distinct performance
obligations within the context of a contract is considered to be a critical
judgement. Fixed price contracts often have multiple performance
obligations that are indistinct from one another within the context of
the contract. This is due to a homogeneous pattern of transfer of control
to the customer who is unable to benefit from the performance of less
than all of the promises set out in the contract. This is particularly the case
where any intellectual property created is stipulated as not being owned
by the customer until the full transaction price has been paid.
The percentage of completion basis of revenue recognition is determined
as actual costs incurred as a proportion of total forecast contract costs to
complete. This method places importance on the accuracy of uncertain
estimates, including total costs to complete, the outcome of contract
and technical risks, as well as the extent to which variation requests
are recognised for proposed changes to the agreed schedule, price or
scope of a contract under negotiation with a customer at the reporting
date. Changes in these estimates may impact revenue recognised at
the reporting date with the revenue recognition in the reporting period
appropriately adjusted as required.
The actual outcome of wholly or partially unsatisfied performance
obligations may differ to the estimate made at a reporting date and it is
reasonably possible that outcomes on these contracts within the next
reporting period could differ, 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 is expected to
have a materially different outcome.
As set out further on pages 38 and 100, management undertakes a
process to assess the risks on inception of all fixed price contracts, then
monitors and reviews the risks and performance of contracts as they
progress to completion. The highest value, highest risk, most technically
complex and financially challenging contracts to deliver, as measured
against a number of quantitative and qualitative factors, are categorised as
‘Red Category 4’ contracts, which are subject to more frequent and senior
levels of management review.
As at 30 June 2020, the number of live contracts within the portfolio
was in excess of 2,400 (2019: 3,000), with a total value in excess of £750m
(2019: £700m). Of this portfolio of contracts, 6 contracts (2019: 7) were
categorised as Red Category 4. At 30 June 2020, £7.8m (2019: £3.9m) of
revenue had been recognised in respect of work performed on these
contracts which was under negotiation with the customer. Management
has made a specific judgement over the ability to recover each of the
amounts under negotiation and has recognised provisions of £2.9m
(2019: £1.7m) against this revenue, resulting in a net exposure of £4.9m
(2019: £2.2m). The possible financial outcomes from these negotiations
range from an upside of £2.9m, if management recovers the full £7.8m
of revenue, to a downside of £4.9m, if management is unsuccessful in
recovering any of the £7.8m.
Creating a world fit for the future 147
Financial statements
Notes to the Group financial statements
1. Principal accounting policies (continued)
c) Management judgements and key accounting
estimates (continued)
Acquisition accounting - Note 14(b)
The fair value of contingent consideration payable for post-acquisition
financial performance of acquired businesses against agreed targets
during an earn-out period, as defined by a sale and purchase agreement,
requires judgement and is based on a probability-weighted and
discounted assessment as at the acquisition date and recognised at the
reporting date as goodwill. The difference between goodwill recognised
and earn-out payments made, together with any arrangement that is
wholly or partially contingent on the continuing employment of specific
individuals, is charged to the income statement as a specific adjusting item
as incurred on a pro rata basis, as set out in Note 7. The use of different
assumptions could change the fair value of contingent consideration
recognised as goodwill and the amounts chargeable to the income
statement. Any changes in fair value are recognised within specific
adjusting items.
Other intangible assets include acquired intangible assets which primarily
relate to customer contracts and relationships arising from business
combinations. The significance of these assets relative to the Group’s
financial position requires critical judgements to be exercised in their
identification, initial recognition and subsequent measurement. The
identification of these assets separable from goodwill and their expected
useful lives are considered as part of pre-acquisition due diligence
processes and post-acquisition activities carried out with management
of acquired businesses. The fair value of identified acquired intangible
assets is determined through the use of appropriate valuation techniques,
including the excess earnings method, for which an expectation of
discounted future cash flows is derived from a combination of due
diligence reports and post-acquisition management forecasts and
business plans, together with other readily available sources of financial
information. The subsequent amortisation of acquired intangible assets is
charged to the income statement as a specific adjusting item, as set out in
Note 7. The use of different assumptions could change the fair value used
in the initial recognition of acquired intangible assets and the amounts
chargeable to the income statement within specific adjusting items.
The fair value of contingent consideration in relation to the acquisition of
Transport Engineering (see Note 14(b)) is dependent on the performance
of the acquired business compared to agreed targets. If the business
does not achieve these agreed targets the impact on the future periods
would be a reversal of an expense of £2.7m. If the business does achieve
these targets the impact on the future periods would be an additional
expense of £1.2m. These adjustments would be recognised in the income
statement within specific adjusting items.
Carrying value of Goodwill – Note 15
In performing the impairment assessment of the carrying amount of
goodwill, the recoverable amounts of the CGUs, or groups of CGUs, to
which goodwill has been allocated are determined using value-in-use
(‘VIU’) calculations (see Note 1(k)).
The recoverable amount of each CGU, or group of CGUs, is calculated by
assessing its value in use, which is determined by performing discounted
future pre-tax cash flow calculations for a three-year period and projected
into perpetuity. Significant judgements are used to estimate the operating
profit, cash-conversion rate, growth rates and pre-tax discount rates
applied in computing the recoverable amounts of different CGUs, or
groups of CGUs. The sensitivity of estimates used to calculate the value-in-
use of each CGU, or group of CGUs, are discussed in Note 15.
De fined benefi t obligation –Note 33
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 discount rates and actuarial
assumptions related to mortality. The sensitivity of the defined benefit
obligation to changes in the principal assumptions is set out in Note 33.
148 Ricardo plc Annual Report & Accounts 2019/20
d) Research and development expenditure – Note 4
Research and development expenditure is recognised as an administrative
expense in the income statement in the year in which it is incurred. Where
the activity is performed for customers the cost is recognised as a cost of
sale. Directly attributable development expenditure that meets the criteria
for recognition as an intangible asset is described in Note 16.
e) Government grants – Note 4
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. The Group also receives
employment-related grants. A grant is recognised in the income statement
when there is reasonable assurance that the Group will comply with its
conditions and that the grant will be received. Grants are presented in the
income statement as a deduction from the related expenses.
Grants contributing to the cost of an asset are deducted from the cost of
the asset and reflected in depreciation throughout its useful life.
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, contract and other
payables either as payments received in advance on contracts or as
deferred revenue.
f) Revenue – Note 6
Principle approach
The Group principally earns revenue through the provision of consultancy
services and bespoke products and recognises revenue based on the
satisfaction of performance obligations in contracts with its customers.
The core principle is that revenue is recognised in a manner that depicts
the transfer of promised goods and services to customers in an amount
that reflects the consideration to which the Group expects to be entitled
in exchange for those goods and services.
A contract with a customer is considered to exist when the Group is in
possession of documentation to provide an agreed scope of goods or
services on mutually understood terms and conditions that are acceptable
to the Group which, subject to the successful execution of the contract,
is expected to be invoiced against and paid for by the customer. Each
contract with a customer is assessed to identify the promises to transfer
distinct goods or services, or a series of distinct goods or services, that
are substantially the same and have the same pattern of transfer to the
customer. Goods and services are distinct and accounted for as separate
performance obligations if they are separately identifiable in the contract
and if the customer can benefit from them, either on their own or
together with other readily available resources.
The total transaction price for a contract is estimated as the amount of
consideration to which the Group expects to be entitled in exchange for
transferring the promised goods or services to the customer, excluding
sales taxes. Where multiple distinct performance obligations are identified
within a contract with a customer, the total transaction price is allocated
to each of the distinct performance obligations in proportion to their
relative stand-alone selling prices. Given the bespoke nature of many of
the Group’s products and services, which are designed or manufactured
under contract to the customer’s individual scope and specifications, there
are typically no observable stand-alone selling prices. Instead, stand-
alone selling prices are typically estimated based on expected costs plus
contract margin.
Costs of fulfilling performance obligations on existing contracts with
customers are expensed as incurred. Costs incurred in advance of
obtaining a new contract or an anticipated contract that directly relate to
the fulfilment of specific performance obligations are initially recognised
as an asset and subsequently expensed once the new contract is obtained
or obtaining the contract is no longer anticipated. Incremental costs
incurred to obtain new contracts with customers are recognised as an
asset and amortised consistently with the recognition of revenue over
the contract term, providing: the contract term is greater than one year;
the costs are only incurred as a direct result of the new contract being
obtained; and the costs do not directly relate to the fulfilment of specific
performance obligations. Costs incurred to obtain new contracts with
1. Principal accounting policies (continued)
f) Revenue – Note 6 (continued)
Principle approach (continued)
customers are expensed when those costs are incurred irrespective of
whether a contract is obtained from a customer.
Revenue is recognised as distinct performance obligations are satisfied,
and as control of the goods or services is transferred to the customer.
For each distinct performance obligation within a contract, the Group
determines whether they are satisfied over time or at a point in time.
Performance obligations are considered to be satisfied over time if the
goods or services provided have no alternative use to the Group and there
is an enforceable right to payment for performance completed to date, or
the customer simultaneously receives and consumes the goods or services
as the Group provides them.
Services provided under fixed price contracts
The majority of the Group’s revenue is earned from contracts for the
provision of consultancy services that are typically awarded on a fixed
price basis. A small number of similar contracts are also awarded to
Performance Products to design and set up production lines and supply
chains. Services provided under a fixed price contract generally have
a single distinct performance obligation, or a single distinct series of
performance obligations, which is satisfied over time. For each distinct
performance obligation recognised over time, revenue is recognised using
an input method, based on total costs incurred to date as a percentage of
total estimated costs to satisfy each performance obligation.
Revenue and attributable margin are calculated by reference to reliable
estimates of transaction price and total expected costs, after making
suitable allowances for technical and other risks. Revenue and associated
margin are therefore recognised progressively as costs are incurred, and
estimated costs to complete are updated regularly as anticipated risks are
mitigated or unanticipated risks materialise. The Group has determined
that this method faithfully depicts the Group’s performance in transferring
control of the services to the customer.
The transaction price generally does not include consideration resulting
from contract modifications of distinct performance obligations, such
as variation orders, until they have been approved by the customer.
Variable consideration, such as for the achievement of performance
targets or variation requests under negotiation with the customer at the
reporting date, can be included in the transaction price together with the
estimated costs to perform the associated obligations. These estimates
of the expected value or most likely amount are recognised to the extent
that it is highly probable that there will not be a significant reversal in the
amount of cumulative revenue recognised in a future reporting period.
Changes in transaction price from contract modifications that do not
create separate distinct performance obligations are added to the
transaction price of pre-existing performance obligations to which the
modification relates. Contract modifications for goods or services that
do create separate distinct performance obligations are accounted for
separately from pre-existing performance obligations, together with the
expected costs to satisfy those separate distinct performance obligations.
Contract assets arising from the recognition of revenue as and when
performance obligations are satisfied are initially recognised as accrued
revenue or amounts recoverable on contracts (‘AROC’) within trade,
contract and other receivables, and transferred to trade receivables when
invoiced. Contract liabilities arising from amounts received from customers
for services not yet performed are initially recognised as deferred revenue
or payments received in advance on contracts (‘POA’) within trade,
contract and other payables, and transferred to revenue as and when
performance obligations are satisfied.
A loss on a distinct performance obligation is recognised immediately
when it becomes probable that the total estimated directly attributable
costs to satisfy the distinct performance obligation will exceed the
transaction price allocated to that distinct performance obligation.
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 immediately recognises expected
losses on fixed price performance obligations within a contract.
Financial statements
Notes to the Group financial statements
Services provided under time and materials contracts
Certain contracts for the provision of consultancy services may be
awarded on a time and materials basis. Services provided under a time
and materials basis typically have a single distinct performance obligation
to provide a variable amount of labour to the customer at an agreed set
of time-based labour rates, which represents the sales value. Revenue is
therefore recognised over time based upon the agreed sales value of the
time worked and costs incurred to date, as the customer simultaneously
receives and consumes these services as the Group provides them.
Services provided under subscription and software support
contracts
Other contracts primarily relate to annual subscriptions by customers to
emergency response and support services for chemical incidents and crisis
management. Subscription services are considered to be a single distinct
performance obligation for which revenue is recognised at the agreed
transaction price on a straight-line basis over the period of subscription.
Software maintenance and support services revenue is recognised
separately from the supply of software products on a straight-line basis
over the period of maintenance and support. Revenue derived from
the supply of ad hoc software-related services, such as training and
application engineering, is recognised at the agreed transaction price on a
straight-line basis over a typically short period during which the obligation
is performed.
Supply of manufactured or assembled products
The majority of the Group’s revenue in Performance Products and
Defense is earned from the supply of manufactured or assembled high-
performance products, some of which are supplied with assurance-type
warranties. Revenue for the supply of these products is measured at the
agreed transaction price per unit that is expected to flow to the Group,
and is recognised at the point in time that the Group has transferred
control of the products to the customer, which is typically on delivery or
collection. The point in time at which revenue is recognised can
vary based on the specific intercompany terms present in a contract with
a customer.
Revenue recognised from bill-and-hold arrangements occurs when all
performance obligations have been satisfied and there is a substantive
reason for the arrangement, which is typically that the customer has
requested the products to be held by the Group until such times as
delivery or collection is required by the customer. Revenue is recognised
and billed under usual payment terms when the customer formally agrees
to accept control of the bespoke products which cannot be sold to
another customer and provided that the products have been separately
identified and made available for delivery or collection.
Supply of software products
The Group’s software products are standard version-controlled computer
aided design, engineering and analysis tools, available for general sale and
are primarily sold through Performance Products. The majority of revenue
is derived from new and renewed licences of these software products,
for which the customer has the right to access the product during the
licence period, including rolling releases of the latest functionality. A new
or renewed licence is considered to be a single distinct performance
obligation for which revenue is recognised at the agreed transaction price
on a straight-line basis over the licence period.
Perpetual licence sales provide the customer with an indefinite right to use
the product, excluding rolling releases of the latest functionality. Rolling
releases are provided through the separate provision of maintenance and
support services. The transaction price of these two distinct performance
obligations are separately identifiable within a contract. Revenue is
recognised for perpetual licence sales when the performance obligation is
satisfied, being the point of delivery of the licence key to the customer.
Creating a world fit for the future 149
Financial statements
Notes to the Group financial statements
1. Principal accounting policies (continued)
g) Specific adjusting items – Note 7
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. These items comprise the
amortisation of acquired intangible assets, acquisition-related expenditure,
reorganisation costs and other non-recurring items that are included
due to the significance of their nature or amount. Acquisition-related
expenditure includes the costs of acquisitions, deferred and contingent
consideration fair value adjustments (including the unwinding of discount
factors), transaction-related fees and expenses, and post-deal integration
costs. Reorganisation costs include costs arising from major restructuring
activities, profits or losses on the disposal of businesses, and significant
impairments of property, plant and equipment.
h) Dividends – Note 9
Dividends are recognised as a liability in the year in which they are fully
authorised. Interim dividends are recognised when paid.
i) Net finance costs – Note 10
Finance income and finance costs are recognised in the income statement
in the period in which they are incurred using the effective interest
method.
j) Income tax expense – Note 12
The tax expense for the year comprises current and deferred tax. Tax is
recognised in the income statement, except to the extent that it relates to
items recognised in other comprehensive income or directly in equity. 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. The current tax charge also
includes any adjustment to tax payable in respect of previous years.
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 operating profit.
The Group have provided for uncertain positions taken in the tax returns
with respect to situations in which applicable tax regulation is subject to
interpretation and establishes provisions where appropriate on the basis
of amounts expected to be paid to the relevant tax authorities. IFRIC 23
Uncertainty over Income Tax Treatments, which provides further guidance
on the measurement and provision of uncertain tax positions, became
effective for the group from 1 January 2019. IFRIC 23 has been applied
retrospectively, although the adoption has not had a transitional impact
on reserves as the measurement of the uncertain tax provision included
in the prior year accounts is not deemed to be materially different under
IFRIC 23.
Uncertain tax positions relate primarily to risks around transfer pricing
and on-going tax audits. The Group’s provision is based on experience of
dealing with Tax Authorities in certain jurisdictions in which it operates
and an estimate of the most likely outcomes in each territory.
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 CGUs, or group 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 and is not larger than an
operating segment before aggregation.
The Group’s impairment review compares the carrying value of the
goodwill to the recoverable amount of the CGU, or group of CGUs, 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, or group of CGUs, is able to
generate. See Note 1 (c) for discussion of the critical estimates involved in
this assessment.
An impairment is deemed to have occurred where the recoverable
amount of a CGU, or group of CGUs, is less than the carrying value of the
allocated goodwill. Any impairment is recognised immediately in the
income statement within specific adjusting items 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.
l) Other intangible assets – see Note 16
Acquired intangible assets
Acquired 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, together with acquired software
and technology. The fair value of acquired intangible assets is determined
by use of appropriate valuation techniques.
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
Directly attributable costs which are incurred in the development of
certain assets are capitalised and amortised over their finite useful
lives 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 benefi ts for the Group and the
attributable expenditure can be reliably measured.
Amortisation
Amortisation is typically 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
Between 5 and 7 years
• Software
• Development costs
Between 2 and 10 years
Between 3 and 5 years
k) Goodwill – Note 15
Goodwill arises on the acquisition of subsidiaries and represents the
excess of the consideration transferred and the fair value of contingent
consideration, over the fair value of the identifiable assets acquired and
liabilities assumed. Goodwill arising on acquisitions denominated in
foreign currencies is retranslated using exchange rates prevailing at each
reporting date.
For certain assets classifi ed as development costs in the Group’s Defense
operating segment, amortisation is charged on a units of production
basis, as this is considered to more accurately reflect the expected pattern
of consumption of the future economic benefi ts embodied in the assets.
Assets under construction are carried at cost less any impairment in value,
and are included in the relevant asset category. Amortisation of these
assets commences when they are available for their intended use or sale.
150 Ricardo plc Annual Report & Accounts 2019/20
1. Principal accounting policies (continued)
m) Property, plant and equipment – see Note 17
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 bring the asset to the location
and condition necessary for it to be capable of operating in the manner
intended.
Depreciation is typically calculated using the straight-line method to
allocate the cost of items of property, plant and equipment less any
residual value, over their estimated useful lives, as follows:
• Freehold land
• Freehold buildings including
Not depreciated
improvements
• Leasehold property improvements
• Plant and machinery
• Fixtures, fittings and equipment
Between 25 and 50 years
Over the term of the lease
Between 4 and 25 years
Between 2 and 10 years
The residual values and useful lives of assets are reviewed, and adjusted if
appropriate, at the end of each reporting period. For certain assets classifi-
ed as plant and machinery in the Group’s Defense operating segment,
depreciation is charged on a units of production basis, as this is considered
to more accurately reflect the expected pattern of consumption of the
future economic benefi ts embodied in the assets.
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 or sale.
Government Grants
Grants contributing to the cost of an asset are deducted from the cost of
the asset and reflected in its depreciation throughout its useful life.
n) Leases – see Note 18
The Group’s accounting policy for leases under IAS 17 Leases was disclosed
in Note 1(j) to the financial statements in the Annual Report & Accounts
2018/19.
The Group’s policy for leases as of 1 July 2019 under IFRS 16 Leases, is as
follows:
Definition of a lease
Under IFRS 16, a contract is, or contains, a lease if the contract conveys
a right to control the use of an identified asset for a period of time in
exchange for consideration.
Lessee accounting
At the lease commencement date, a right-of-use asset is recognised for
the leased item with a corresponding lease liability for any payments due.
The right-of-use asset is initially measured at cost, being the present value
of the lease payments paid or payable (net of any incentives received from
the lessor), plus any initial direct costs and/or restoration costs.
Right-of-use assets are depreciated on a straight-line basis from the
commencement date of the lease to the earlier of the end of the asset’s
useful life or the end of the lease term. The lease term is the non-
cancellable period of the lease plus any periods for which the Group is
‘reasonably certain’ to exercise any extension options. If right-of-use assets
are considered to be impaired, the carrying value is reduced accordingly.
For assets where the lessor transfers ownership of the underlying asset
to the Group by the end of the lease term, or where the lease contains
a purchase option at a nominal/notional value, then these assets will be
initially classified as property, plant and equipment, and subsequently
follow the depreciation rules set out in Note 1(m) to the financial
statements in the Annual Report & Accounts 2018/19).
The lease liability is initially measured at the value of future lease
payments, discounted using the interest rate implicit in the lease. Where
Financial statements
Notes to the Group financial statements
this rate is not determinable, the Group’s incremental borrowing rate is
used, which is then adjusted to reflect an estimate of the interest rate the
Group would have to pay to borrow the amount necessary to obtain an
asset of similar value, in a similar economic environment, and with similar
terms and conditions.
After initial recognition, the lease liability is recorded at amortised cost
using the effective interest method. It is remeasured when there is a
change in future lease payments arising from a change in an index or rate
(e.g. an inflation related increase) or if the Group’s assessment of the lease
term changes. Any change in the lease liability as a result of these changes
also results in a corresponding change in the recorded right-of-use asset.
Payments in respect of short-term and/or low-value leases continue to
be charged to the income statement on a straight-line basis over the
lease term.
Lessor accounting
The Group determines at inception of the lease whether the lease is a
finance or an operating lease. When a lease transfers substantially all the
risks and rewards of ownership of the underlying asset to the lessee then
the lease is classified as a finance lease; otherwise, the lease is classified as
an operating lease. Where the Group is an intermediate lessor, the interest
in the head lease and the sub-lease is accounted for separately and the
lease classification of a sub-lease (finance or operating) is determined by
reference to the right-of-use asset arising from the head lease, not with
reference to the underlying asset. This is the only substantive change for
lessor accounting from IAS 17 to IFRS 16.
This resulted in one significant operating lease being reclassified as a
finance lease. This is presented in other receivables and measured at fair
value on transition to IFRS 16. The other sub-leased assets are all classified
as operating leases, where payments received (net of any incentives
granted by the Group) are recognised in the income statement on a
straight-line basis over the lease term.
o) Non-current assets classifi ed as held for sale – see
Note 19
Non-current assets are classifi ed 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
within twelve months of their classi fication as held for sale. They are stated
at the lower of their carrying amount and fair value less costs to sell. An
impairment loss is recognised in the income statement for any initial or
subsequent write-down of the assets to fair value less costs to sell. A gain
is recognised in the income statement for any subsequent increases in
fair value less costs to sell an asset, but not in excess of any cumulative
impairment losses previously recognised.
A gain or loss not previously recognised by the date of the sale of the
non-current assets is recognised in the income statement at the date of
derecognition. Non-current assets are not depreciated or amortised while
they are classi fied as held for sale and are presented separately from other
non-current assets.
p) Provisions for liabilities and charges – see Note 20
Provisions are required for restructuring costs and employment-related
benefi ts 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 probable liability.
Other provisions reflect the Directors’ best estimate of future obligations
relating to legal claims and litigation, together with dilapidation costs for
the maintenance of leasehold properties arising from past events such
as lease renewals or terminations. These estimates are reviewed at the
reporting date and updated as necessary.
Creating a world fit for the future 151
Financial statements
Notes to the financial statements
1. Principal accounting policies (continued)
q) Deferred tax – Note 21
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. 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 pro fit 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 profi ts 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 benefi t will be realised within
the foreseeable future.
r) Inventories – Note 22
Inventories are stated at the lower of cost, including attributable
overheads allocated on the basis of normal operating capacity, and net
realisable value. Cost is calculated using the ‘weighted average’ method
across the Group apart from Performance Products and Defense which are
on a ‘fi rst-in, fi rst-out’ method.
s) Trade, contract and other receivables – Note 23
Trade receivables are stated net of impairment and for the purposes
of impairment testing includes the non-financial contract assets of
amounts recoverable on contracts (‘AROC’) and accrued revenue. These
assets are assessed for impairment using the ‘simplified approach’ to the
‘expected credit loss’ (‘ECL’) model, which applies a ‘default rate’ at the
point of origination that increases as the unpaid asset ages. The ‘simplified
approach’ of IFRS 9 applies a ‘default rate’ to trade receivables and contract
assets, which considers both past experience and future expectations of
credit losses. Although past experience of significant credit losses on these
assets has been negligible, the impairment assessment considers both
past experience and future expectations of credit losses. As a result of
this assessment, the Group considers the risk of expected credit losses on
contract assets to be immaterial.
For the requiring an assessment of the ECL over the lifetime of the asset
using a historical provision matrix to create a group wide ‘default rate’
which together with past events is also adjusted for current conditions
and forecasts of future economic conditions. To calculate the Group
default rates a weighted average default rate for each division was taken.
It is the Group’s judgement that it is appropriate for Ricardo to use one
set of default rates across the Group as our international credit rating and
geographical profile is sufficiently similar across the globe. The customer
base across the Group is sufficiently homogenous as each division’s
customers are primarily comprised of large corporations and historical
provision matrixes are sufficiently homogenous.
Trade receivables and contract assets are provided in full and subsequently
written off when there is no reasonable expectation of recovery. Indicators
that there may be no reasonable expectation of recovery could include,
amongst others, evidence that the customer has entered administration
or liquidation proceedings, or the persistent failure of a customer to enter
into or adhere to a repayment plan. The ‘general approach’ is applied to
the impairment of other fi nancial assets, the amount of which is based on
whether there has been a signi ficant deterioration in the credit risk of a
financial asset.
t) Trade, contract and other payables – Note 24
Trade payables are not interest-bearing and are stated at their
nominal value.
152 Ricardo plc Annual Report & Accounts 2019/20
u) Net debt and borrowings – Note 25
Cash and cash equivalents comprise cash balances and bank overdrafts
repayable on demand. Bank overdrafts are shown within borrowings in
current liabilities and bank loans and finance leases are shown within
borrowings in either current liabilities or noncurrent liabilities depending
on the maturity date.
Financial liabilities are classified as either amortised cost or fair value
through profit and loss. 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 income
statement over the period of the loan. 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
v) Fair value of financial assets and liabilities – Note 26
The Group uses derivative fi nancial instruments, including foreign
exchange contracts, to mitigate currency exposures on trading
transactions. Fair values of derivative fi nancial instruments are based on
the market values of similar instruments at the reporting date.
The Group designates the fair value of foreign currency swap contracts
on intercompany loans as hedging instruments. The initial fair value is
determined with reference to the relevant spot market exchange rate.
The differential between the contracted strike rate and the discounted
spot market exchange rate is defi ned as the movement in fair value.
The effective element of the hedge’s fair value gains and losses on
the remeasurement of cash flow derivatives are hedge accounted and
recognised in retained earnings through other comprehensive income.
The ineffective element of the hedge’s fair value gains and losses on
the remeasurement of cash flow derivatives are recognised in retained
earnings through the income statement.
The Group hedges the entire carrying value of all intercompany loans
denominated in foreign currencies, on which credit risk is considered to
be immaterial. Therefore, only when the economic relationship fails or
ceases to exist would the Group recognise the net fi nancial impact of the
hedging instrument and the hedged item as ineffective in the income
statement. Changes in fair value of foreign currency forward and option
contracts that relate to hedged items are recognised in retained earnings
through the income statement, together with the change in the fair value
of the related hedge at the reporting date.
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 amount 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 on the reporting date. 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 of the fair value hierarchy within IFRS 13 Fair Value Measurement).
Measurement of all derivative fi nancial instruments was taken to the
income statement.
1. Principal accounting policies (continued)
w) Retirement benefits – Note 33
The Group operates one defined benefit and several defined contribution
pension schemes, the assets of which are held in separately administered
funds. The defined benefit pension scheme is closed to new entrants
and the accrual of future benefit for active members ceased at the end
of February 2010. Payments to defined contribution pension schemes are
charged as an expense as they fall due. Differences between contributions
payable in the year and contributions actually paid are included in either
accruals or prepayments. Payments to state-managed pension schemes
are dealt with as payments to defined contribution pension schemes as
the Group’s obligations under the schemes are similar in nature.
For the defined benefit pension scheme, the cost of providing benefit is
determined using the projected unit credit method, with actuarial valuations
being carried out at each reporting date. Remeasurements are recognised in
other comprehensive income except where they result from settlements or
curtailments, in which case they are reported in the income statement.
Where necessary, past service costs are recognised immediately in
the income statement at the earlier of when the plan amendment
or curtailment occurs and when the related restructuring costs or
termination benefi t are recognised. The defined benefit obligation
recognised represents the present value of the pension scheme
liabilities net of 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 interest cost on the net defined benefit obligation for the year is
determined by applying the discount rate used to measure the de fined
benefit obligation at the beginning of the year to the net defined benefit
obligation at the end of the year, and is included in finance costs.
x) Share-based payments – Note 34
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 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. The
expected life used in the models are adjusted for the effects of exercise
restrictions and behavioural considerations.
y) 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 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. Revenues
and costs are translated at the average exchange rates of the year unless
Financial statements
Notes to the Group financial statements
exchange rates fluctuate significantly. All resulting exchange differences
are recognised in other comprehensive income and the translation reserve
within equity. On disposal of an operation, or part thereof, the related
cumulative translation differences are recognised in the income statement
as a component of the gain or loss arising on disposal.
z) Recent accounting developments
Adopted by the group
IFRS 16 Leases became effective for the Group from 1 July 2019. The impact
of adoption is set out in Note 2.
The following other standards, interpretations and amendments to
existing standards became effective on 1 January 2019 and have not had a
material impact on the Group:
Effective date
(period
commencing)
Endorsed
by EU
Amendments and Interpretations
to IFRS
- IFRIC 23 Uncertainty over Income
Tax Treatments
- IFRS 9 Financial Instruments:
Prepayment Features with
Negative Compensation
- IAS 28 Investment in Associates
and Joint Ventures:
Long-term Interests in Associates
and Joint Ventures
- IAS 19 Employee Benefits:
Plan Amendment, Curtailment or
Settlement
- Annual Improvements to IFRS
Standards 2015-2017 Cycle:
IFRS 3 Business Combinations, IFRS
11 Joint Arrangements,
IAS 12 Income Taxes and IAS 23
Borrowing Costs.
1 Jan 2019
1 Jan 2019
1 Jan 2019
1 Jan 2019
Yes
Yes
Yes
Yes
1 Jan 2019
Yes
Issued standards, amendments and interpretations not yet effective
The following other standards, interpretations and amendments to
existing standards have been issued but were not mandatory for
accounting periods beginning on 1 January 2020 and are not expected to
have a material impact on the Group:
Issued IFRS
- IFRS 17 Insurance Contracts
Amendments and Interpretations
to IFRS
- IFRS 3 Business Combinations:
Definition of a business
- IFRS 9 Financial Instruments,
IAS 39 Financial Instruments:
Recognition and Measurement and
IFRS 17 Insurance Contracts: Interest
Rate Benchmark Reform
- IAS 1 Presentation of Financial
Statements and IAS 8 Accounting
Policies, Changes in Accounting
Estimates and Errors: Definition of
Material
- Amendments to References to
the Conceptual Framework in IFRS
Standards
- IAS 1 Presentation of Financial
Statements: Classification of
Liabilities as Current or Non-
Current
Effective date
(period
commencing)
1 Jan 2021
1 Jan 2020
Endorsed
by EU
No
Yes
1 Jan 2020
Yes
1 Jan 2020
1 Jan 2020
1 Jan 2022
Yes
Yes
No
Creating a world fit for the future 153
Financial statements
Notes to the Group financial statements
2. Changes in significant accounting policies
IFRS 16 Leases
Transition method
The Group adopted the modified retrospective approach to transition, with the option being taken to recalculate the value of eight materially significant
leased property assets while recognising the remaining leased assets at an amount equal to the liability on transition, adjusted for any prepaid or accrued
lease expenses. Under this approach the Group has not restated comparative financial information, which remains presented under IAS 17. For the eight
leased property assets which have been recalculated, the Group has elected to measure the right-of-use asset as if IFRS 16 had been applied since the
start of the lease, but using the incremental borrowing rate at 1 July 2019, with the difference between the right-of-use asset and the lease liability taken to
retained earnings on transition.
The Group has elected to adopt the following practical expedients on transition:
• not to capitalise a right-of-use lease asset or related lease liability where the lease expires before 30 June 2020;
• not to reassess contracts to determine if the contract contains a lease nor to separate lease and non-lease components;
• to use hindsight in determining the lease term;
• to exclude initial direct costs from the measurement of the right-of-use asset; and
• to apply the portfolio approach where a group of leases has similar characteristics.
The weighted average lessee’s incremental borrowing rate applied to lease liabilities recognised at the date of initial application are the same as described
in Note 18.
As at 1 July 2019
Assets
Non-current assets
Right-of-use assets
Other receivables
Deferred tax assets
Total non-current assets
Current assets
Trade, contract and other receivables
Total current assets
Total current assets and non-current assets held for sale
Total assets
Liabilities
Current liabilities
Lease liabilities
Trade, contract and other payables
Total current liabilities
Net current assets
Non-current liabilities
Lease liabilities
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Retained earnings
Equity attributable to owners of the parent
Total equity
Reconciliation between operating lease commitments and lease liabilities
Previously
reported
£m
IFRS 16
transitional
adjustment
£m
Adjusted
under IFRS 16
£m
Notes
18
18
21
18
18
20
30
-
-
6.7
176.5
141.4
192.5
195.4
371.9
-
(84.8)
(95.7)
99.7
-
(3.7)
(104.3)
(200.0)
171.9
126.8
171.4
171.9
37.1
2.3
1.1
40.5
(0.5)
(0.5)
(0.5)
40.0
(4.7)
1.4
(3.3)
(3.8)
(40.9)
0.5
(40.4)
(43.7)
(3.7)
(3.7)
(3.7)
(3.7)
37.1
2.3
7.8
217.0
140.9
192.0
194.9
411.9
(4.7)
(83.4)
(99.0)
95.9
(40.9)
(3.2)
(144.7)
(243.7)
168.2
123.1
167.7
168.2
The following table explains the differences between the operating lease commitments disclosed applying IAS 17 at 30 June 2019 and the lease liabilities
recognised on transition to IFRS 16 on 1 July 2019.
Total operating lease commitments under IAS 17 at 30 June 2019
Discounting
Exempt lease payments
Non-lease component payments
Lease liabilities recognised on transition to IFRS 16 at 1 July 2019
£m
61.2
(12.9)
(0.8)
(1.9)
45.6
Exempt lease payments are short term or low value leases which per the Group’s lease policy are not included within the lease liability recognised on the
statement of financial position. Non-lease component payments are service charges which were built into the lease and included within the operating lease
commitment as at 30 June 2019. These are not included within the lease liability under the Group’s lease policy.
154 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
3. Alternative performance measures
Throughout this document the Group presents various alternative performance measures (‘APMs’) in addition to those reported under IFRS. The measures
presented are those adopted by the Chief Operating Decision Maker (‘CODM’, deemed to be the Chief Executive Officer), together with the main Board,
and analysts who follow us in assessing the performance of the business. Explanations of how they are calculated and how they are reconciled to an IFRS
statutory measure are set out below.
a) Group profit and earnings measures
Underlying profit before tax (‘PBT’) and underlying operating profit: These measures are used by the Board to monitor and measure the trading
performance of the Group. They exclude certain items which the Board believes distort the trading performance of the Group. These include the
amortisation of acquired intangibles, acquisition-related expenditure, reorganisation costs, and other specific adjusting items.
The Group’s strategy includes geographic and sector diversification, including targeted acquisitions and disposals. By excluding acquisition-related
expenditure from underlying PBT and underlying operating profit, the Board has a clearer view of the performance of the Group and is able to make better
operational decisions to support its strategy.
Acquisition-related expenditure includes the costs of acquisitions, deferred and contingent consideration fair value adjustments (including the unwinding
of discount factors), transaction-related fees and expenses, and post-deal integration costs.
Reorganisation costs arising from major restructuring activities, profits or losses on the disposal of businesses, and significant impairments of property, plant
and equipment, are excluded from underlying PBT and underlying operating profit as they are not reflective of the Group’s trading performance in the year,
as are any other specific adjusting items deemed to be one-off in nature.
The related tax effects on the above and other tax items which do not form part of the underlying tax rate are also taken into account. Items are treated
consistently year-on-year, and these adjustments are also consistent with the way that performance is measured under the Group’s incentive plans and its
banking covenants. A reconciliation is shown below. Further details of the nature of the specific adjusting items are given in Note 7.
Reconciliation of underlying profit before tax to reported (loss)/profit before tax
Revenue
Cost of sales
Gross profit
Administrative expenses and other income
Amortisation of acquired intangibles
Acquisition-related expenditure
Reorganisation costs
GMP equalisation
Operating profit/(loss)
Net finance costs
Profit/(loss) before tax taxation
Tax expense
Profit/(loss) for the year
2020
Specific
adjusting
items
£m
-
-
-
-
(6.0)
(3.0)
(11.9)
-
(20.9)
-
(20.9)
3.0
(17.9)
Underlying
£m
352.0
(236.9)
115.1
(95.1)
-
-
-
-
20.0
(4.4)
15.6
(4.1)
11.5
Total
£m
352.0
(236.9)
115.1
(95.1)
(6.0)
(3.0)
(11.9)
-
(0.9)
(4.4)
(5.3)
(1.1)
(6.4)
Underlying
£m
384.4
(249.5)
134.9
(95.3)
-
-
-
-
39.6
(2.6)
37.0
(8.2)
28.8
2019
Specific
adjusting
items
£m
-
-
-
-
(4.0)
(1.8)
(3.4)
(1.3)
(10.5)
-
(10.5)
1.6
(8.9)
Total
£m
384.4
(249.5)
134.9
(95.3)
(4.0)
(1.8)
(3.4)
(1.3)
29.1
(2.6)
26.5
(6.6)
19.9
The FY 2019/20 results include the impact of IFRS 16 Leases, which was adopted on 1 July 2019. The impact of IFRS 16 on the Group’s underlying operating
profit was an increase of £0.9m and there was a £0.2m negative impact on the Group’s underlying profit before tax for the year ended 30 June 2020. The
impact of IFRS 16 on the Group’s reported operating profit was an increase of £4.8m and there was a £3.7m increase in the Group’s reported profit before
tax for the year ended 30 June 2020. Comparative APMs have not been updated to reflect the adoption of IFRS 16. In the year ended 30 June 2019, an IAS 17
charge of £8.5m was incurred.
Underlying earnings attributable to the owners of the parent: The Group uses underlying earnings attributable to the owners of the parent as the
input to its adjusted EPS measure. This profit measure excludes the amortisation of acquired intangibles, acquisition-related expenditure, reorganisation
costs and other specific adjusting items, but is an after-tax measure. The Board considers underlying EPS to be more reflective of the Group's trading
performance in the year. A reconciliation between earnings attributable to the owners of the parent and underlying earnings attributable to the owners of
the parent is shown in Note 8.
Organic growth/decline: Organic growth/decline is calculated as the growth/decline in the result for the current year compared to the prior year, after
adjusting for the performance of acquisitions or disposals, to include the results of those acquisitions for an equivalent period in each financial year.
Constant currency organic growth/decline: The Group generates revenues and profits in various territories and currencies because of its international
footprint. Those results are translated on consolidation at the foreign exchange rates prevailing at the time. Constant currency organic growth/decline is
calculated by translating the result for the current year using foreign currency exchange rates applicable to the prior year. This provides an indication of the
growth/decline of the business, excluding the impact of foreign exchange.
Creating a world fit for the future 155
Financial statements
Notes to the Group financial statements
3. Alternative performance measures (continued)
Headline trading performance
Underlying
Reported
FY 2019/20 (£m)
FY 2018/19 (£m)
Add performance of acquisitions (£m)
Organic FY 2018/19 (£m)
Decline (%)
Organic decline (%)
Constant currency organic decline (%)
Revenue
352.0
384.4
16.1
400.5
(8)
(12)
(12)
Operating
profit
20.0
39.6
4.0
43.6
(49)
(54)
(53)
Profit before
tax
15.6
37.0
3.6
40.6
(58)
(62)
(61)
Operating
(loss)/ profit
(0.9)
29.1
4.0
33.1
(103)
(103)
(102)
(Loss)/ profit
before tax
(5.3)
26.5
3.6
30.1
(120)
(118)
(117)
Transport Engineering (now Ricardo Rail Australia, or ‘RRA’) was acquired on 31 May 2019. Had RRA been acquired and consolidated from 1 July 2018 such
that results for FY 2018/19 included RRA for an equivalent period to FY 2019/20, revenue for FY 2018/19 would have been £14.0m higher. Operating profit
for FY 2018/19 would have been £3.2m higher and profit before tax for FY 2018/19 would have been £2.9m higher. PLC Consulting (now Ricardo Energy,
Environment and Planning, or ‘REEP’) was acquired on 31 July 2019. Had REEP been acquired and consolidated from 31 July 2018 such that results for FY
2018/19 included REEP for an equivalent period to with FY 2019/20, revenue for FY 2018/19 would have been £2.1m higher. Operating profit for FY 2018/19
would have been £0.8m higher and profit before tax would have been £0.7m higher.
Segmental underlying operating profit: This is presented in our segmental disclosures and reflects the underlying trading of each segment, as assessed
by the main Board. This excludes segment-specific amortisation of acquired intangibles, acquisition-related expenditure and other specific adjusting items,
such as reorganisation costs. It also excludes unallocated Plc costs, which represent the costs of running the public limited company and specific adjusting
items which are outside of the control of segment management. A reconciliation between segment underlying operating profit, the Group’s underlying
operating profit and operating profit is presented in Note 5.
b) Cash flow measures
Cash conversion: A key measure of the Group’s cash generation is the conversion of profit into cash. This is the reported cash generated from operations
(defined as operating cash flow, less movements in net working capital and defined benefit pension deficit contributions) divided by earnings before
interest, tax, depreciation and amortisation (‘EBITDA’), expressed as a percentage.
Underlying cash conversion: This is underlying cash generated from operations (defined as reported cash generated from operations, adjusted for the
cash impact of specific adjusting items) divided by underlying EBITDA (defined as reported EBITDA, adjusted for the impact of specific adjusting items). A
reconciliation between the two is shown below.
Cash conversion
Operating profit/(loss)
Depreciation and amortisation
Amortisation of acquired intangibles
EBITDA
Movement in working capital
Pension deficit payments
Loss/(profit) on disposal of assets
Share based payments
Fair value losses/(gains) on derivative financial
instruments
Cash generated from/(used in) operations
Cash conversion
Underlying
£m
20.0
17.6
-
37.6
4.5
(4.6)
-
0.6
0.3
38.4
102.1%
2020
Specific
adjusting
items
£m
(20.9)
6.7
6.0
(8.2)
4.0
-
(1.0)
-
-
(5.2)
2019
Specific
adjusting
items
£m
(10.5)
-
4.0
(6.5)
0.5
-
0.7
-
-
(5.3)
Total
£m
(0.9)
24.3
6.0
29.4
8.5
(4.6)
(1.0)
0.6
0.3
33.2
112.9%
Underlying
£m
39.6
11.4
-
51.0
(7.8)
(4.3)
(0.7)
1.0
(0.8)
38.4
75.3%
Total
£m
29.1
11.4
4.0
44.5
(7.3)
(4.3)
-
1.0
(0.8)
33.1
74.4%
Net debt: is defined as current and non-current borrowings less cash and cash equivalents, including hire purchase agreements, but excluding any impact
of IFRS 16 lease liabilities. The transitional impact of the adoption of IFRS 16 Leases is set out in Note 2. Management believes this definition is the most
appropriate for monitoring the indebtedness of the Group and is consistent with the treatment in the Group’s banking agreements.
c) Tax measures
Underlying effective tax rate (‘ETR’): We report one adjusted tax measure, which is the tax rate on underlying profit before tax. This is the tax charge
applicable to underlying profit before tax expressed as a percentage of underlying profit before tax.
156 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
Financial performance
The Group delivered revenue of £352.0m and underlying profit before tax of £15.6m (reported
loss before tax £5.3m) in the year, a reduction of 8% and 58% (reported 120%) on the prior
year, respectively.
The following disclosures provide further information about the drivers of the Group’s financial performance in the
year. This includes analysis of the respective contribution of the Group’s reportable segments along with information
about its operating cost base, net finance costs and tax. In addition, disclosure on earnings per share and the
dividend is provided.
4. Operating profit
Research and development expenditure accounting policy – Note 1(d)
Government grants accounting policy – Note 1(e)
Revenue
Operating (costs)/income
Employee costs
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Depreciation of right-of-use assets
Impairment of right-of-use assets
Amortisation of other intangible assets
Impairment on held for sale assets
Cost of inventories recognised as expense
Operating lease rentals payable
Repairs and maintenance on property, plant and equipment
Net (impairment)/reversals on trade receivables
Rental income
Profit on disposal of property, plant and equipment
Research and Development Expenditure Credits ('RDEC')
Research and development
Other cost of sales
Other operating charges
Operating (loss)/profit
Specific adjusting items
Underlying operating profit
Note
6
32
17
17
18
18
16
19
22
7
2020
£m
352.0
(188.5)
(5.7)
(5.6)
(5.4)
(0.5)
(12.0)
(1.1)
(51.5)
(1.4)
(12.9)
(1.3)
1.1
(1.0)
7.7
(3.5)
(37.9)
(33.4)
(0.9)
20.9
20.0
2019
£m
384.4
(179.9)
(5.6)
-
-
-
(9.8)
-
(70.9)
(8.5)
(12.2)
0.6
0.9
0.7
7.1
(3.6)
(41.2)
(32.9)
29.1
10.5
39.6
5. Financial performance by segment
The segmental analysis helps explain the business in the way that it is monitored by management.
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 information reported includes financial performance but does not include the financial position of assets
and liabilities. The operating segments were identified by evaluating the Group’s products and services, processes, types of customers and
delivery methods.
From 1 July 2019, the Group has reported the following reportable
operating segments: Energy & Environment (‘EE’), Rail, Automotive and
Industrial (‘A&I’), Defense, and Performance Products. There is also an ‘all
other segments’ segment, which comprises the results of Ricardo Strategic
Consulting and Software, combined due to their size. Neither of these
met the quantitative thresholds for reportable segments in FY 2019/20
or FY 2018/19. This change was driven by successful acquisitions in Rail
and EE, increasing the prominence of these businesses within the Group,
combined with the wish to provide more granularity into the key drivers of
performance within the Group.
The following summarises the operations in each of the Group’s
reportable segments:
• Energy & Environment (‘EE’) – EE generates revenue from the provision
of environmental consultancy services to customers across the
world. Customers include governments, public agencies and private
businesses;
• Rail – Rail generates revenue from through two separate operations:
a consultancy unit that provides technical advice and engineering
services; and a separate, independent entity, Ricardo Certification, that
performs accredited assurance services;
Creating a world fit for the future 157
Financial statements
Notes to the Group financial statements
5. Financial performance by segment (continued)
• Automotive & Industrial (‘A&I’) – A&I generates revenue through the
provision of engineering, design, development and testing services,
focused on hybrid and electric systems, electrification, engines,
driveline and transmissions, testing, and vehicle engineering. Customers
include including businesses in the automotive, aerospace, defence,
energy, off-highway and commercial, marine, motorcycle and light-
personal transport, and rail markets;
• Defense – Defense provides engineering services, software and
products to customers in the US defence market, aimed and protecting
life and improving the operation, maintenance and support of complex
systems; and
• Performance Products (‘PP’) – PP manufactures and assembles niche
high-quality components, prototypes and complex products, including
engines, transmissions and other precision and performance-critical
products. Its customers manufacture low-volume, high-performance
products in markets such as motorsport, automotive, aerospace,
defence and rail.
The operations of the Group have been categorised into these segments
due to the nature of their services, market sectors, client bases and
distribution channels and operating across markets requiring adherence to
regulatory frameworks that are similar in nature.
Measurement of performance
Management monitors the financial results of its operating segments
separately for the purpose of making decisions about allocating resources
and assessing performance. Segmental performance is measured based on
underlying operating profit, as this measure provides management with
an overall view of how the different operating segments are managing
their total cost base against the revenue generated from their portfolio of
contracts.
There are varying levels of integration between the segments. The
segments use EE for their specialist environmental knowledge. A&I and PP
have various shared projects. There are also shared service costs between
the segments. Inter-segment transactions are eliminated on consolidation.
Inter
segment pricing is determined on an arm’s length basis in a manner
similar to transactions with third parties.
‑
Included within Plc costs in the following tables are costs arising from a
central Group function, including the costs of running the public limited
company, which are not recharged to the other operating segments.
Comparative figures for the year ended 30 June 2019 have been restated,
reflecting the impact of the changes the Group made to its operating
segments during the year ended 30 June 2020. The operating segment
section of this Annual Report provides further detail on the segments’
performance (see page 47 to 59).
For the year ended
30 June 2020
Total segment revenue
Inter-segment revenue
Revenue from external customers
Segment underlying operating profit
Plc costs
Underlying operating profit
Specific adjusting items(*)
Operating profit/(loss)
Net finance costs
Loss before taxation
Depreciation and amortisation
Capital expenditure:
- Other intangible assets
- Property, plant and equipment
- Right-of-use assets
For the year ended
30 June 2019
Total segment revenue
Inter-segment revenue
Revenue from external customers
Segment underlying operating profit
Plc costs
Underlying operating profit
Specific adjusting items(*)
Operating profit
Net finance costs
Profit before taxation
Depreciation and amortisation
Capital expenditure:
- Other intangible assets
- Property, plant and equipment
* See Note 7
EE
£m
51.7
(0.9)
50.8
6.3
-
6.3
(1.7)
4.6
3.7
0.9
0.3
-
EE
£m
45.1
(0.5)
44.6
5.0
-
5.0
(1.1)
3.9
2.0
1.3
0.2
Rail
£m
75.4
(0.1)
75.3
5.8
-
5.8
(5.5)
0.3
6.5
0.1
0.2
0.1
Rail
£m
67.5
(0.1)
67.4
5.2
-
5.2
(2.9)
2.3
3.3
0.2
0.5
A&I
£m
108.8
(2.9)
105.9
0.5
-
0.5
(10.1)
(9.6)
14.0
3.5
19.8
4.5
A&I
£m
131.7
(2.4)
129.3
16.1
-
16.1
(2.9)
13.2
5.3
3.3
5.0
Defense
£m
32.8
-
32.8
5.1
-
5.1
(0.5)
4.6
1.4
0.5
0.3
0.4
Defense
£m
25.5
(0.3)
25.2
3.2
-
3.2
(0.5)
2.7
0.8
0.8
0.4
All other
segments
£m
19.1
(0.9)
18.2
0.1
-
0.1
(0.5)
(0.4)
2.4
3.4
0.1
-
All other
segments
£m
23.7
(1.2)
22.5
3.9
-
3.9
-
3.9
1.8
3.0
0.1
PP
£m
70.7
(1.7)
69.0
5.0
-
5.0
(0.1)
4.9
1.0
0.1
0.9
0.1
PP
£m
99.3
(3.9)
95.4
9.9
-
9.9
-
9.9
0.8
0.1
1.2
Plc
£m
-
-
-
-
(2.8)
(2.8)
(2.5)
(5.3)
1.3
0.7
0.4
-
Plc
£m
-
-
-
(3.7)
(3.7)
(3.1)
(6.8)
1.4
0.3
0.2
Total
£m
358.5
(6.5)
352.0
22.8
(2.8)
20.0
(20.9)
(0.9)
(4.4)
(5.3)
30.3
9.2
22.0
5.1
Total
£m
392.8
(8.4)
384.4
43.3
(3.7)
39.6
(10.5)
29.1
(2.6)
26.5
15.4
9.0
7.6
Revenue from one customer represented approximately 13% (2019: 19%) of the Group’s external revenue, which is primarily reported in the PP segment.
158 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
6. Revenue
This note explains how the Group derives its revenue.
Revenue accounting policy – Note 1(f)
Key sources of estimation uncertainty: Revenue on fixed price contracts – Note 1(c)
Disaggregation of revenue for the year ended 30 June:
a) Revenue stream
Services provided under:
- fixed price contracts
- time and materials contracts
- subscription and software support contracts
Goods supplied:
- manufactured or assembled products
- software products
Intellectual property
Total
b) Customer location
United Kingdom
Europe
North America
China
Rest of Asia
Australia
Rest of the World
Total
(c) Timing of recognition
Over time
At a point in time
Total
2020
£m
189.5
73.3
6.7
74.3
7.2
1.0
352.0
124.6
80.4
59.9
22.6
31.4
21.4
11.7
352.0
276.4
75.6
352.0
2019
£m
210.5
53.9
6.5
105.5
8.0
-
384.4
152.4
96.4
61.3
30.9
30.8
2.9
9.7
384.4
277.7
106.7
384.4
See Note 23 for further information on the Group’s revenue including disclose of impairment losses recognised on receivables and contract assets arising
from the Group’s contracts with customers. Note 23 also provides an opening and closing balances of receivables and contract assets, together with the
Group’s order book which comprises the value of all unworked purchase orders and contracts received from customers at the reporting date and provides
an indication of revenue that has been secured and will be recognised in future accounting periods.
See Note 24 for the opening and closing balances of contract liabilities from contracts with customers.
Creating a world fit for the future 159
Financial statements
Notes to the Group financial statements
7. 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. These items comprise the amortisation of
acquired intangible assets, acquisition-related expenditure, reorganisation costs and other non-recurring items that
are included due to the significance of their nature or amount. Acquisition-related expenditure is incurred by the
Group to effect a business combination, including the costs associated with the integration of acquired businesses.
Reorganisation costs relate to non-recurring expenditure incurred as part of fundamental restructuring activities,
significant impairments of property, plant and equipment, and other items deemed to be one-off in nature.
Specific adjusting items accounting policy - Note 1(g)
Critical judgement on specific adjusting items: Reorganisation costs – Note 1(c)
Amortisation of acquired intangible assets
Acquisition-related expenditure
Reorganisation costs
- Purchases and disposals
- Other reorganisation costs
Guaranteed Minimum Pensions ('GMP') equalisation
Total before tax
Tax credit on specific adjusting items
Tax charge on prior year specific adjusting item
Total after tax
Amortisation of acquired intangible assets
On acquisition of a business, the purchase price is allocated to assets such
as customer contracts and relationships. Amortisation occurs on a straight-
line basis over its useful economic life, which is between 3 and 9 years.
The increase in the year is due to the acquisition of Transport Engineering
Pty Ltd on 31 May 2019 (see Note 14(b)) and PLC Consulting Pty Ltd on 31
July 2019 (see Note 14(a)). For further information please see the intangible
assets Note 16.
Acquisition-related expenditure
The current year charge comprises £2.8m of earn out and employee
retention costs, accrued in relation to the two acquisitions detailed in
Note 14). In addition, £0.4m of costs were incurred in relation to the
post-deal integration of these businesses. £0.8m of costs were incurred
on acquisition processes in the year (including the acquisition of PLC
Consulting Pty Ltd and other aborted processes), comprising external
professional fees and the costs of running an internal acquisitions
department to effect acquisition processes.
Partially offsetting these, £1.1m of income was recognised in relation to
a gain on the settlement of a foreign exchange option contract, which
was taken out to hedge an aborted overseas acquisition. This has been
classified as a specific adjusting item due to the non-recurring nature and
significance of the amount. The prior year charge included £0.4m of earn-
out costs and £1.4m of acquisition-related fees and costs.
Reorganisation costs
Purchases and disposals
Major restructuring actions were taken in the year to address performance
issues in the A&I US business and realign the cost base to make it more
operationally efficient. The charge in the current year comprises £6.7m
(£5.6m in Note 17 and £1.1m in Note 19) of impairments and £3.1m of
income from the release of a lease liability following the acquisition of the
freehold property of the Detroit Technology Campus (‘DTC’) on 21 August
2019, in order to remove the business from a long term lease commitment
on the property. In addition, the current year charge includes a loss on
disposal of £2.1m in relation to the sale of Ricardo’s Detroit test cell assets
on 3 June 2020. These items have been included as specific adjusting
items as they are significant in quantum and would distort the underlying
160 Ricardo plc Annual Report & Accounts 2019/20
2020
£m
6.0
3.0
5.7
6.2
-
20.9
(3.3)
0.3
17.9
2019
£m
4.0
1.8
-
3.4
1.3
10.5
(1.6)
-
8.9
trading performance if included. See Note 17 for further details on the
disposal of the test cell assets.
Other reorganisation costs
In addition to the actions taken above, as part of the A&I US major
restructuring actions in FY 2019/20, Ricardo exited the aftertreatment
business at our Santa Clara Technical Centre (‘SCTC’), incurring £0.4m of
exit costs and the write off of equipment. £0.3m of redundancy costs
and £0.2m of incremental contractor costs were incurred in the year in
connection with the management of these restructuring actions. These
contractors are incremental to the business and non-revenue generating.
£2.6m of redundancy costs were incurred in FY 2019/20 across the
Group’s automotive-related businesses (A&I in Europe, Performance
Products, RSC & Software). These actions were taken as a result of major
restructuring required to right-size the cost base in these businesses
in response to the unforeseen challenging trading conditions and
customer plant shut-downs in the second half of the financial year. As
part of these restructuring actions, a charge of £0.6m was recognised in
respect of the vacant portion of the Cambridge Technical Centre (‘CaTC’)
due to a reduction in headcount at this site as a result of restructuring
actions taken. £0.5m of professional fees and £0.1m of contractor costs
were incurred. These fees and contractor costs were incremental to the
business and directly related to the restructuring actions taken, being
a combination of professional advice taken and management of the
restructuring process.
In the prior year, £2.4m of redundancy costs, together with £0.7m of costs
in relation to onerous contracts and £0.3m of incremental contractor costs,
were incurred in A&I Europe in relation to the completion of a programme
to re-set the global automotive business in response to a fundamental
shift in market dynamics. The FY 2019/20 actions were not linked to those
taken in FY 2018/19.
£1.4m of redundancy costs were incurred in Rail in FY 2019/20. The
Rail costs represent the completion of a restructuring process which
commenced in the prior year to realign the business to market demand.
£0.5m of redundancy costs were incurred in the prior year in relation to
this process, which straddled the prior year end.
The total costs of these restructuring actions have been included as
specific adjusting items since, together, they are significant in quantum
and would distort the underlying trading performance if included.
Financial statements
Notes to the Group financial statements
7. Specific adjusting items (continued)
Guaranteed Minimum Pensions (‘GMP’) equalisation
In October 2018, the High Court issued a judgement confirming that
pension schemes are required to equalise male and female members’
benefits for the effect of Guaranteed Minimum Pensions (‘GMP’). The past
service cost due to GMP equalisation is considered to be non-recurring in
nature and significant in its amount.
Tax charge on prior year specific adjusting items
During FY 2019/20, a tax charge was recognised in relation to adjustments
to the prior year tax charge arising on the sale of the Germany test
business in June 2018.
8. 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
For the year ended 30 June
(Loss)/ earnings attributable to owners of the parent
Add back the net-of-tax impact of:
- Amortisation of acquired intangible assets
- Acquisition-related expenditure
- Asset purchases and disposals
- Other reorganisation costs
- Guaranteed Minimum Pensions ('GMP') equalisation
- Tax charge on prior year specific adjusting item
Underlying earnings attributable to owners of the parent
For the year ended 30 June
Basic weighted average number of shares in issue
Effect of dilutive potential shares
Diluted weighted average number of shares in issue
(Loss)/earnings per share
Basic
Diluted
Underlying earnings per share
Basic
Diluted
2020
£m
(6.5)
4.5
2.9
4.8
5.4
-
0.3
11.4
2019
£m
19.8
3.4
1.2
-
3.0
1.3
-
28.7
2020
Number of
shares millions
53.4
-
53.4
2019
Number of
shares millions
53.4
0.2
53.6
2020
pence
(12.2)
(12.2)
2020
pence
21.3
21.3
2019
pence
37.1
36.9
2019
pence
53.7
53.5
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.
Creating a world fit for the future 161
Financial statements
Notes to the Group financial statements
9. Dividends
Dividends are one type of shareholder return, historically paid to our shareholders in April and November.
Dividend accounting policy – see Note 1(h)
Final dividend for the year ended 30 June 2019 of 15.28p (2018: 14.71p) per share
Interim dividend for the year ended 30 June 2020 of 6.24p (2019: 6.00p) per share
Equity dividends paid
A dividend of £0.1m was issued during the year by a subsidiary of the Group to a non-controlling party of that subsidiary.
10. Net finance costs
Net finance costs accounting policy – see Note 1(i)
Finance income:
Bank interest receivable
Interest income on finance lease receivables (Note 18)
Total finance income
Finance costs:
Bank interest payable on borrowings
Interest expense on lease liabilities (Note 18)
Defined benefit pension financing costs (Note 33)
Total finance costs
Net finance costs
2020
£m
8.2
3.3
11.5
2020
£m
0.3
0.1
0.4
(3.5)
(1.2)
(0.1)
(4.8)
(4.4)
2019
£m
7.8
3.2
11.0
2019
£m
0.5
-
0.5
(3.0)
-
(0.1)
(3.1)
(2.6)
11. Auditor’s remuneration
This note includes all amounts paid to the Group’s auditors, KPMG, whether in relation to their audit of the Group
or otherwise. During the year the Group (including its subsidiaries) obtained the following services from the Group
auditors and its associates:
Fees payable for services provided by the Company's auditors and its associates
Statutory audit of the Company and its consolidated financial statements(1)
Statutory audit of the Company's subsidiaries and their financial statements(2)
Total audit fees
Audit-related assurance services(3)
Total non-audit fees
2020
£m
0.3
0.4
0.7
0.1
0.1
2019
£m
0.2
0.3
0.5
0.1
0.1
(1) Fees payable during the year to the Company's auditors and its associates for the statutory audit of the Company and its consolidated financial statements were £353,000 (2019: £195,000).
(2) Fees payable during the year to the Company's auditors and its associates for the statutory audit of the Company's subsidiaries and their financial statements were £372,900 (2019: £351,000).
(3) Fees payable during the year to the Company's auditors and its associates for audit-related assurance services were £42,000 (2019: £50,000) and comprised £42,000 (2019: £42,000) pursuant to the
interim review and £nil (2019: £8,000) for independent reviews, agreed-upon procedures and other services closely related to the audit of the Company and its subsidiaries.
Total non-audit fees payable to the external auditors for audit-related assurance services and other non-audit services for the financial year
were 7% (2019: 9%) of total audit fees. These non-audit services comprised the Group’s interim review and other audit-related assurance services.
162 Ricardo plc Annual Report & Accounts 2019/20
12. Tax expense
This note explains how our Group current tax charge arises.
Tax expense accounting policy – Note 1(j)
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 the year
- Adjustments in respect of prior years
Total deferred tax
Total taxation
Tax on items recognised in other comprehensive income
Financial statements
Notes to the Group financial statements
2020
£m
0.4
(0.3)
0.1
2.8
0.6
3.4
3.5
(2.3)
(0.1)
(2.4)
1.1
(1.1)
2019
£m
1.6
(0.8)
0.8
1.7
0.1
1.8
2.6
3.0
1.0
4.0
6.6
1.4
Tax on items recognised in other comprehensive income relate to the tax impact of remeasurements of the defined benefit pension scheme and changes
in tax rate. Tax on items recognised directly in equity relate to equity-settled share-based payment transactions.
The main rate of UK corporation tax for the year ending 30 June 2020 is 19%. The Finance Act 2020 reversed the decision to reduce the main rate from 19%
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. The tax charge for the year is higher (2019: higher) than the standard rate of corporation tax in the UK. The differences are set out
below:
Profit for the year before tax
Multiplied by the standard rate of corporation tax in the UK of 19% (2019: 19%)
Effects of:
Losses not recognised
Expenses not deductible for tax purposes
Government tax incentives(1)
Other overseas taxes(2)
Adjustments in respect of prior years
Changes in corporation tax rates
Total taxation
(1) Primarily relates to R&D tax credits.
(2) Primarily relates to withholding taxes.
2020
£m
(5.3)
(1.0)
-
1.2
(0.3)
0.5
0.3
0.4
1.1
2019
£m
26.5
5.0
0.1
0.5
(0.2)
0.5
0.3
0.4
6.6
The Group operates in a number of countries, and is subject to taxation in numerous jurisdictions. Legislation related to taxation is complex and
Management is required to make judgements based on appropriate professional advice, and amounts provided are accrued based on Management’s
interpretation of country-specific tax laws. In particular, Management applies judgement in respect of ongoing tax audits around the Group, which can
take a significant amount of time to be agreed with Tax Authorities. The Group estimates and accrues taxes that will ultimately be payable when reviews or
audits by Tax Authorities of tax returns are completed. These estimates include judgements about the position expected to be taken by each Tax Authority.
Management judgement has also been required to ensure that appropriate transfer pricing is applied on all intra-group transactions, and in determining
the amounts that would be undertaken on an arm’s length basis. As a result, actual liabilities could differ from the amounts provided which could have a
consequent impact on the results and net position of the Group.
None of the amounts are individually material and therefore there is not a significant risk of material differences in future periods.
Creating a world fit for the future 163
Financial statements
Notes to the Group financial statements
Capital base
The Group has taken positive steps to restructure in order to create a more agile and asset-
light business. This includes the sale of the test facilities in Detroit in June 2020. Non-current
assets increased this year on adoption of IFRS 16 with the Group’s leases being added to the
statement of financial position from the 1 July 2019.
13. Non-current assets by geographical location (excluding deferred tax assets)
Asset location
United Kingdom
Netherlands
North America
Australia
Rest of the World
Total
Goodwill
Other intangible assets
Property, plant and equipment
Right-of-use assets
Lease receivable
Total
14. Acquisitions
Note
15
16
17
18
18
2020
£m
115.0
20.1
20.1
29.6
14.5
199.3
87.8
39.9
45.4
23.9
2.3
199.3
2019
£m
97.2
20.3
15.8
27.7
8.8
169.8
84.2
41.0
44.6
-
-
169.8
Key sources of estimate uncertainty: acquisition accounting - see Note 1(c)
(a) Acquisitions in the current period - PLC Consulting
On 31 July 2019, the Group acquired the entire issued share capital of PLC Consulting Pty Ltd (‘PLC Consulting’) for initial cash consideration of £4.2m (AUD
7.4m), which includes an adjustment for cash and normalised net working capital of £0.3m (AUD 0.4m), paid in November 2019.
PLC Consulting is an Australian firm with a strong technical advisory capability across the project life cycle in infrastructure, environment and planning,
including supporting the environmental requirements of master-planning, business cases, procurement, design, construction and operation. PLC
Consulting was renamed Ricardo Energy Environment and Planning (‘REEP’) on 5 August 2019. The following tables set out the fair value of cash
consideration payable to acquire PLC Consulting, together with the fair value of net assets acquired.
Fair value of cash consideration
Initial cash consideration
Total fair value of cash consideration
Fair value of identifiable net assets acquired
Customer contracts and relationships
Trade, contract and other receivables
Cash and cash equivalents
Trade, contract and other payables
Deferred tax liabilities
Fair value of identifiable net assets acquired
Goodwill
Total fair value of cash consideration
Note
16
21
15
£m
4.2
4.2
£m
1.3
0.5
0.4
(0.2)
(0.4)
1.6
2.6
4.2
The maximum contingent cash payable is £1.4m (AUD 2.5m). The amounts payable will be based on the achievement of a range of annual performance
targets measured against the earnings before interest, tax, depreciation and amortisation of PLC Consulting across a two-year earn-out period. These
payments are dependent upon the continuing employment of the sellers in the business and are not considered to be consideration. £0.7m (AUD 1.3m),
representing an accrual for the fair value of the expected year one payment, has been accrued within specific adjusting items (see Note 7).
Adjustments have been made for the recognition of customer-related intangible assets separable from goodwill amounting to £1.3m (AUD 2.4m). The
fair value of the contingent cash consideration and identifiable net assets acquired were identified in accordance with the requirements of IFRS 3 Business
Combinations and the sale and purchase agreement.
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. None of the
goodwill recognised on consolidation is expected to be deductible for tax purposes.
164 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
14. Acquisitions (continued)
(a) Acquisitions in the current period - PLC Consulting (continued)
The net assets acquired of £1.6m (AUD 3.0m) includes trade receivables of £0.5m (AUD 0.9m), all of which have been collected.
Acquisition-related expenditure of £0.2m representing costs incurred to integrate the business post-acquisition, together with £0.4m of amortisation on
acquired intangibles, has been charged to the income statement for the year ended 30 June 2020 and is included as a specific adjusting item in Note 7.
The revenue included in the income statement in relation to the acquired business was £3.0m. The underlying operating profit over the same period was
£0.9m. This is reported in the EE segment in Note 5.
Had PLC Consulting been acquired and consolidated from 1 August 2018, revenue and operating profit in the prior period income statement would have
been £2.1m and £0.8m higher, respectively.
(b) Acquisitions in the prior year - Transport Engineering
On 31 May 2019, the Group acquired the entire issued share capital of Transport Engineering Pty Ltd (‘Transport Engineering’) for initial cash consideration
payable of £21.7m (AUD 39.5m) which includes an adjustment for cash and normalised net working capital of £0.5m (AUD 0.9m) paid in August 2019,
together with the accrued fair value of contingent cash consideration payable of £5.1m (AUD 9.4m). Transport Engineering is a leading rail technical services
consultancy based in Australia. It expands the Group’s existing capabilities within the growing Asia-Pacific rail market and provides a footprint for other
Ricardo businesses in Australia. Transport Engineering was renamed Ricardo Rail Australia (‘RRA’) on 11 June 2019. The following tables set out the fair value
of cash consideration payable to acquire Transport Engineering, together with the assessment of the fair value of net assets acquired.
Fair value of cash consideration
Initial cash consideration
Fair value of contingent cash consideration
Total fair value of cash consideration
Fair value of identifiable net assets acquired
Customer contracts and relationships
Property, plant and equipment
Trade, contract and other receivables
Cash and cash equivalents
Trade, contract and other payables
Current tax liabilities
Deferred tax liabilities
Fair value of identifiable net assets acquired
Goodwill
Total fair value of cash consideration
Note
16
17
21
15
£m
21.7
5.1
26.8
£m
9.7
0.1
2.3
2.3
(1.7)
(0.9)
(2.9)
8.9
17.9
26.8
The Group also acquired all of Transport Engineering’s shareholding in its associate, Wamarragu Transport Services Pty Ltd, the financial results of which are
immaterial to the Group. The cash impact of the acquisition in the prior year was £18.9m (AUD 34.4m), being the initial cash consideration of £21.2m (AUD
38.6m) paid on completion, less cash acquired of £2.3m (AUD 4.2m). £0.5m (AUD 0.9m) was paid for cash and normalised net working capital in the current
year. The maximum contingent cash consideration payable is £8.1m (AUD 15.0m). The fair value of the contingent cash consideration is considered to be
Level 3 of the fair value hierarchy within IFRS 13 Fair Value Measurement. The fair value is valued based on a financial forecast using the Group’s own data,
with a probability applied for the likely outcome. Significant unobservable inputs are order intake, pipeline of opportunities and historical performance. The
stronger these inputs, the higher the estimated fair value. The amounts payable will be based on the achievement of annual performance targets measured
against the profit before tax of Transport Engineering across a two-year earn-out period. Each earn-out is only payable in full if the performance target
is achieved. £2.1m (AUD 3.8m) (2019: £0.2m – AUD 0.4m) has been accrued within specific adjusting items (see Note 7) in the current year, reflecting the
increase in the fair value of contingent consideration payable based on RRA’s results for the year ended 30 June 2020, together with the associated unwind
in the discount rate. This is included within non-current liabilities as the amount is not due to be paid until after 30 June 2021.
Adjustments have been made to identifiable net assets acquired to reflect their fair value. These include the recognition of customer-related intangible
assets separable from goodwill amounting to £9.7m (AUD 17.8m). The fair value of the contingent cash consideration and identifi able net assets acquired
were identi fied in accordance with the requirements of IFRS 3 Business Combinations and the sale and purchase agreement.
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. None of the
goodwill recognised on consolidation is expected to be deductible for tax purposes.
The fair value of trade, contract and other receivables acquired of £2.3m (AUD 4.2m) included trade receivables of £0.3m (AUD 0.6m) and amounts
recoverable on contracts of £1.8m (AUD 3.2m), all of which have been collected. Had Transport Engineering been acquired and consolidated from 1 July
2018, revenue and underlying operating profit in the income statement in the prior period would be £14.0m and £3.1m higher, respectively.
Acquisition-related expenditure of £0.2m (2019: £0.5m) representing costs incurred to integrate the business post-acquisition, together with £1.9m (2019:
£0.2m) of amortisation on acquired intangibles, has been charged to the income statement for the year ended 30 June 2020 and is included as a specific
adjusting item in Note 7. This is reported in the Rail segment in Note 5.
Creating a world fit for the future 165
Financial statements
Notes to the Group financial statements
15. Goodwill
Goodwill, which arises when we acquire a business and pay a higher amount than the fair value of its net assets
primarily due to the synergies we expect to create, is not amortised but is subject to annual impairment reviews.
Goodwill accounting policy – Note 1(k)
Critical judgement on carrying value of Goodwill: CGUs – Note 1(c)
Key sources of estimation uncertainty on carrying value of Goodwill – Note 1(c)
Movement in goodwill
At 1 July
Acquisition of business (Note 14)
Exchange adjustments
At 30 June
2020
£m
84.2
2.6
1.0
87.8
2019
£m
65.5
17.9
0.8
84.2
The carrying value of goodwill and key assumptions used in determining the recoverable amount of each CGU, or group of CGUs, are as follows:
Goodwill by operating segment
Energy & Environment ('EE')(1)
Rail(2)
Automotive & Industrial ('A&I')
Defense
Performance Products ('PP')
At 30 June
Carrying value
2020
£m
15.9
46.6
20.6
3.6
1.1
87.8
2019
£m
13.3
46.0
20.3
3.5
1.1
84.2
Pre-tax discount rate
2020
%
13.1
12.8
11.9
13.1
11.9
2019
%
7.1
8.0
8.1
8.4
7.1
Long-term growth rate
2019
2020
%
%
3.5
1.7
4.8
3.8
3.2
3.1
3.5
3.9
3.5
1.5
(1) As set out in further detail in Note 14(a), the Group acquired PLC Consulting Pty Ltd on 31 July 2019, adding goodwill of £2.6m to the EE CGU. PLC Consulting is an Australian firm with a strong technical
advisory capability across the project life cycle in infrastructure, environment and planning, including supporting the environmental requirements of master-planning, business cases, procurement,
design, construction and operation.
(2) As set out in further detail in Note 14(b), the Group acquired Transport Engineering Pty Ltd (‘Transport Engineering’) on 31 May 2019, adding goodwill of £17.9m to the Rail group of CGUs. This
Acquisition provides an active presence for Ricardo Rail in Australia, a strategically important, sizeable and growing market. Transport Engineering was renamed Ricardo Rail Australia on 11 June 2019
and forms a core part of the Group’s Rail business, adding breadth and depth to Ricardo Rail’s existing capabilities.
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, or group of CGUs, at 30 June 2020, resulting in no impairment for the year (2019: £Nil). The three-year cashflow forecasts are based on the budget
for the following year (year one) and the business plans for years two and three (the three-year plan), with a 75% operating cashflow 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
(including the impact of COVID-19).
Cash flows beyond year three 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 each CGU, or group of 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 each CGU, or group of CGUs, 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. Specific estimates for long-term growth
rates and pre-tax discount rates are shown in Note 15. The value-in-use calculations were are assessed for sensitivity to reasonably possible changes to these
estimates. The sensitivities assessed include a 10% reduction in planned operating pro fit, a 10% reduction in the planned operating cash flow conversion
rate, a 1% increase in the pre-tax discount rate and a 1% decrease in the long-term growth rate, together with a further scenario whereby all sensitivities
were combined together.
For goodwill allocated to the Rail group of CGUs:
• If operating profit levels used in the value-in-use calculation had been 10% lower than management’s estimates, the Group would have recognised an
impairment charge of £2.8m
• If the operating cash flow conversion rate used in the value-in-use calculation had been 10% lower than management’s estimates, the Group would have
recognised an impairment charge of £9.6m
• If the long-term rate applied to the cash flows in the value-in-use calculation had been 1% lower than management’s estimates, the Group would have
recognised an impairment charge of £5.2m
• If the pre-tax discount rate applied to the discounted cash flows in the value-in-use calculation had been 1% higher than management’s estimates, the
Group would have recognised an impairment charge of £4.3m
For the remaining goodwill balances, the change in the estimated recoverable amount from any reasonably possible change in the key estimates does not
cause the recoverable amount to be materially lower than their carrying amount.
166 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
16. Other intangible assets
Other intangible assets accounting policy – Note 1(l)
Critical judgement: Recoverability of capitalised development costs – Note 1(c)
Cost
At 1 July 2018
Acquisition of business (Note 14(b))
Additions
Disposals
Exchange rate adjustments
At 30 June 2019
Acquisition of business (Note 14(a))
Additions
Disposals
Reclassifications
Exchange rate adjustments
At 30 June 2020
Accumulated amortisation
At 1 July 2018
Charge for the year
Assets classified as held for sale (Note 19)
Exchange rate adjustments
At 30 June 2019
Charge for the year
Disposals
Reclassifications
Exchange rate adjustments
At 30 June 2020
Net book value
At 30 June 2020
At 30 June 2019
At 30 June 2018
Acquired intangible assets
Customer
contracts and
relationships
£m
Software and
technology
£m
Software
£m
Development
costs
£m
27.6
9.7
-
-
0.3
37.6
1.3
-
-
-
0.3
39.2
14.0
3.6
-
0.1
17.7
5.5
-
-
0.3
23.5
15.7
19.9
13.6
2.2
-
-
-
-
2.2
-
-
-
-
-
2.2
1.2
0.4
-
0.1
1.7
0.4
-
-
-
2.1
0.1
0.5
1.0
24.8
-
1.5
(0.5)
0.1
25.9
-
1.2
(2.8)
(0.6)
0.2
23.9
18.1
2.3
(0.5)
0.1
20.0
1.9
(2.8)
(0.5)
-
18.6
5.3
5.9
6.7
20.3
-
7.6
(0.2)
0.4
28.1
-
8.0
(0.1)
0.6
0.6
37.2
9.9
3.5
(0.2)
0.2
13.4
4.2
-
0.5
0.3
18.4
18.8
14.7
10.4
Total
£m
74.9
9.7
9.1
(0.7)
0.8
93.8
1.3
9.2
(2.9)
-
1.1
102.5
43.2
9.8
(0.7)
0.5
52.8
12.0
(2.8)
-
0.6
62.6
39.9
41.0
31.7
Customer contracts and relationships were primarily identifi ed as part of the previous acquisitions of LR Rail and Transport Engineering (see Note 14(b)). The
assets specifi c to these acquisitions have carrying values of £5.6m (2019: £7.4m) and £7.8m (2019: £9.5m) and have remaining amortisation periods of three
and four years, respectively. Customer contracts and relationships were also identi fied as part of the acquisition in the current year of PLC Consulting (see
Note 14(a)) which have a carrying value of £0.9m and a remaining amortisation period of two years.
Software which is not acquired through business combinations primarily comprises costs that have been capitalised in respect of an internally developed
ERP system. The ERP system has a carrying value of £1.4m (2019: £1.9m) and has a remaining amortisation period of three years. Software includes £1.6m
(2019: £0.9m) in respect of assets under construction which are not being amortised until the assets are made available for use.
Development costs are 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 £6.2m (2019: £5.0m) and an amortisation period of three years is applied to
each annual update when released. Development costs also include a patented system that combines anti-lock braking and electronic stability control
(‘ABS/ESC’) to mitigate rollover fatalities commonly associated with the High Mobility Multipurpose Wheeled Vehicle (‘HMMWV’ or ‘Humvee’). The asset
has a carrying value of £2.6m (2019: £2.4m). £0.4m of additional development expenditure was added to the asset during the year for the development
of variance of the ABS brake kit to be fitted on other versions of the HMMWV. Development costs also include £1.3m (2019: £0.3m) for a plug-in hybrid
demonstration vehicle which highlights the latest technology to vehicle manufactures.
In addition, development costs include £3.9m (2019: £5.3m) in respect of assets under construction which are not being amortised until the assets are made
available for use. Development costs under construction include assets such as engineering software updates under development, together with new
technology, tools and processes in the A&I and EE segments.
The amortisation charge of £12.0m (2019: £9.8m) is comprised of £3.3m (2019: £2.4m) included within cost of sales and £8.7m (2019: £7.4m) included within
administrative expenses in the income statement, of which £6.0m (2019: £4.0m) relates to acquired intangible assets and is presented within specific
adjusting items, as set out in Note 7.
Creating a world fit for the future 167
Financial statements
Notes to the Group financial statements
17. Property, plant and equipment
Property, plant and equipment accounting policy – Note 1(m)
Cost
At 1 July 2018
Acquisition of business (Note 14(b))
Additions
Disposals
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2019
Additions
Disposals
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2020
Accumulated amortisation
At 1 July 2018
Charge for the year
Disposals
Assets classified as held for sale (Note 19)
Exchange rate adjustments
At 30 June 2019
Charge for the year
Impairment loss
Disposals
Assets classified as held for sale (Note 19)
Reclassifications
Exchange rate adjustments
At 30 June 2020
Net book value
At 30 June 2020
At 30 June 2019
At 30 June 2018
Freehold land
and buildings
£m
Leasehold
properties
£m
Plant and
machinery
£m
Fixtures,
fittings and
equipment
£m
20.5
-
0.5
-
-
(0.6)
-
20.4
14.6
-
(14.2)
0.3
-
21.1
4.5
0.4
(0.3)
-
-
4.6
0.5
5.6
-
(5.6)
(0.2)
-
4.9
16.2
15.8
16.0
4.5
-
0.5
-
-
0.6
0.1
5.7
0.1
(1.6)
-
0.2
-
4.4
2.4
0.4
0.3
-
-
3.1
0.3
-
(1.4)
-
0.1
0.1
2.2
2.2
2.6
2.1
99.3
0.1
4.6
(5.0)
(19.5)
0.6
0.6
80.7
5.4
(1.7)
(1.1)
(1.2)
0.2
82.3
77.8
2.8
(5.0)
(16.6)
0.7
59.7
2.9
-
(1.8)
-
-
0.2
61.0
21.3
21.0
21.5
23.7
-
2.0
(1.9)
-
(0.6)
0.2
23.4
1.9
(1.7)
-
0.7
0.1
24.4
18.0
2.0
(1.9)
-
0.1
18.2
2.0
-
(1.7)
-
0.1
0.1
18.7
5.7
5.2
5.7
Total
£m
148.0
0.1
7.6
(6.9)
(19.5)
-
0.9
130.2
22.0
(5.0)
(15.3)
-
0.3
132.2
102.7
5.6
(6.9)
(16.6)
0.8
85.6
5.7
5.6
(4.9)
(5.6)
-
0.4
86.8
45.4
44.6
45.3
The carrying value of assets under construction included in property, plant and equipment amounts to £8.4m (2019: £5.0m). Property, plant and equipment
under construction includes a hybrid powertrain rig within plant and machinery with a carrying value of £4.4m (2019: £1.8m). Amortisation is expected to
commence in the next financial year.
At 30 June 2020, the Group had plant and machinery financed through a hire-purchase agreement and secured on the asset (see Note 25) with a carrying
value of £0.6m (2019: £0.7m). As disclosed in Note 36, a guarantee was provided to the Ricardo Group Pension Fund (‘RGPF’) of £2.8m in respect of certain
contingent liabilities that may arise, which have been secured on freehold land and buildings with a carrying value of £16.2m (2019 £15.8m).
At 30 June 2020, contracts had been placed for future capital expenditure, which have not been provided for in the financial statements, amounting to
£1.2m (2019: £1.7m).
As explained in Note 7, on 21 August 2019, the Group purchased the freehold property of DTC, comprising the north building, which housed the test cell
assets, and the south office building, for £14.2m (USD 17.3m), which is included in freehold land and buildings above. Subsequently, the Group commenced
a process to market the newly acquired freehold property, together with the DTC test cell assets. The freehold property was immediately written down to
£8.6m (USD 10.5m) as part of being classified as held for sale (see Note 19), as the purchase price was predicated on Ricardo’s long-term tenancy, crystallising
an impairment charge of £5.6m as disclosed in the table above. The net book value of £8.6m was transferred to non-current assets held for sale. The
impairment charge was partially offset by the write-off of a £3.1m (USD 4.0m) net lease liability under IFRS 16. Whilst being treated as held for sale, a further
£1.1m (USD 1.3m) impairment as recognised, as disclosed in Note 19. Due to the nature and significance of the amount the impairment charge (together
with the balance of the lease liability) have been recognised in the income statement within specific adjusting items. They are included within the A&I
segment and within administrative expenses in the reported result.
168 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
18. Right-of-use assets, lease liabilities and lease receivables
Leases accounting policy – Note 1(n)
(a) Leasing activities as lessee
The Group leases various office premises and technical centres, vehicles and other equipment.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.
Property lease terms range from three months to 21 years, with an average of five years, and may have extension or termination options. The impact of
exercising these options, where not currently considered reasonably certain, is quantified below. There are several property subleases within the group - see
Note 18(b) below.
Other lease terms range from one to 12 years, with an average of four years.
The lease agreements do not impose any covenants. Leased assets may not be used as security for borrowing purposes.
Where leases are short- term and/or leases of low-value items, the Group has elected not to recognise right-of-use assets and lease liabilities for these leases.
Until the 2019/20 financial year, all leases were classified as operating leases under IAS 17. From 1 July 2019, leases are recognised as a right-of-use asset and a
corresponding liability at the date at which the leased asset is available for use by the group.
Information about leases for which the Group is a lessee is presented below.
(i) Right-of-use assets
Cost
At 30 June 2019
Adoption of IFRS 16 (Note 2)
At 1 July 2019
Additions
Disposals
Remeasurements
Exchange rate adjustments
At 30 June 2020
Accumulated depreciation and impairment
At 30 June 2019
Adoption of IFRS 16 (Note 2)
At 1 July 2019
Charge for the period
Impairment
Disposals
Exchange rate adjustments
At 30 June 2020
Net book value
At 30 June 2020
At 1 July 2019
At 30 June 2019
Property
£m
Plant and
machinery
£m
Fixtures,
fittings and
equipment
£m
-
52.4
52.4
5.3
(10.3)
(13.3)
0.5
34.6
-
16.3
16.3
4.9
0.5
(10.3)
0.2
11.6
23.0
36.1
-
-
0.6
0.6
0.4
-
-
-
1.0
-
-
-
0.4
-
-
-
0.4
0.6
0.6
-
-
0.4
0.4
-
-
-
-
0.4
-
-
-
0.1
-
-
-
0.1
0.3
0.4
-
Total
£m
-
53.4
53.4
5.7
(10.3)
(13.3)
0.5
36.0
-
16.3
16.3
5.4
0.5
(10.3)
0.2
12.1
23.9
37.1
-
An impairment charge of £0.3m was recognised in respect of the vacant portion of the Cambridge Technical Centre and an impairment charge of £0.2m
related to the exit of the Santa Clara Technical Centre (Note 7).
The purchase of the freehold of the Detroit Technology Campus, previously leased by the Group, resulted in remeasurements which reduced the lease
liability and the right-of-use asset by £14.2m and £11.1m respectively. The £3.1m excess of the lease liability over the carrying value of the right-of-use assets
is recognised as income within administrative expenses, and included in “Reorganisation costs: Purchases and disposals” within specific adjusting items
(Note 7).
Other reassessments of lease terms resulted in a remeasurements which increased both the right-of-use asset and the lease liability by £2.4m
The net book value of Property above is shown net of £1.0m (2019: £1.1m) in respect of consideration received as part of a historical sale and leaseback
transaction, deemed to be an incentive for extending the lease term.
The lessee's incremental borrowing rate applied to lease liabilities recognised in the statement of financial position at the date of initial application vary due
to length and geographical location and are as follows:
• Property – 1.8% to 4.8%
• Plant and machinery – 2% to 4.2%
• Fixtures, fittings and equipment - 2% to 4.2%
Creating a world fit for the future 169
Financial statements
Notes to the Group financial statements
18. Right-of-use assets, lease liabilities and lease receivables (continued)
18. Right-of-use assets, lease liabilities and lease receivables (continued)
The following amounts are included in the income statement relating to short-term and low value leases:
Expense relating leases not capitalised, and expensed to the income statement
Short-term leases
Low-value leases (not including short-term leases above)
Total
2020
£m
1.2
0.1
1.3
An impairment charge of £0.3m was recognised to reflect the fact that part of the Cambridge Technical Centre (CaTC) was vacant at the end of the year
and is expected to remain so. This is recognised within administrative expenses, and included in “Reorganisation costs: Other reorganisation costs” within
specific adjusting items (Note 7).
As at 30 June 2020, potential future cash outflows of £9.8m (undiscounted) have not been included in the lease liability because it is not reasonably certain
that the leases will be extended (or not terminated).
(ii) Right-of-use – lease liabilities
Movement in lease liability
Adoption of IFRS 16
New leases
Interest
Payments
Disposals
Remeasurements
Exchange rate adjustments
At 30 June 2020
Lease liability
Current liabilities - maturing within one year
Non-current liabilities -maturing after one year
At 30 June 2020
The maturity analysis of this liability is shown Note 27(c).
(b) Leasing activities as lessor
Note
2
10
£m
45.6
5.7
1.2
(6.8)
(13.6)
(3.0)
0.2
29.3
£m
6.7
22.6
29.3
The Group subleases out several parts of its leased property. All subleases are classified as operating leases from a lessor perspective with the exception of
one sub-lease, which the Group has classified as a finance sublease. Information about leases for which the Group is a lessor is presented below.
(i) Finance Lease
During the year, the Group recognised finance income of £0.1m relating to its lease receivable.
The following table sets out the movements in the lease receivable balance during the year.
Lease receivable
Adoption of IFRS 16
Interest
Receipts
Exchange rate adjustments
At 30 June 2020
Note
2
10
23
The following table sets out a maturity analysis of lease receivable, showing the undiscounted lease payments to be received after the reporting date:
Maturity of lease receivable
Less than one year
One to two years
Two to three years
Three to four years
Four to five years
More than five years
Total undiscounted lease receivable
Unearned finance income
Net investment in the lease
This is a back-to-back lease with a right-of-use asset. As a finance lease this is included in other receivables. See Note 23.
170 Ricardo plc Annual Report & Accounts 2019/20
£m
2.3
0.1
(0.2)
0.1
2.3
2020
£m
0.2
0.2
0.2
0.2
0.2
2.2
3.2
(0.9)
2.3
Financial statements
Notes to the Group financial statements
18. Right-of-use assets, lease liabilities and lease receivables (continued)
(ii) Operating lease
During the year, the Group recognised rental income of £1.1m (2019: £0.9m) relating to operating leases.
The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be received after the reporting date.
Maturity of lease payments
Less than one year
One to two years
Two to three years
Three to four years
Four to five years
More than five years
Total
19. Non-current assets held for sale
Non-current assets held for sale accounting policy – Note 1(o)
Movement in held for sale
At 30 June 2019
Transferred from property, plant and equipment
Disposals
Impairment loss
Exchange rate adjustments
At 30 June
Note
17
Freehold land
and buildings
£m
-
8.6
(2.1)
(1.1)
(0.1)
5.3
Plant and
machinery
£m
2.9
1.1
(4.0)
-
-
-
2020
£m
1.7
1.2
0.7
0.7
0.6
0.3
5.2
Total
£m
2.9
9.7
(6.1)
(1.1)
(0.1)
5.3
In January 2019, the Directors made a decision to commence a process to market actively its test cell assets at DTC for sale, which had a net book value of
£2.9m (USD 3.7m) at 1 July 2019. During the year, the Group continued to invest in these assets to improve their desirability, increasing the held for sale net
book value to £4.0m (USD 4.9m). These assets were sold on 3 June 2020, as discussed below.
As explained in Note 7, on 21 August 2019, the Group purchased the freehold property of DTC, comprising the north building, which housed the test
cell assets, and the south office building, for £14.2m (USD 17.3m). Subsequently, the Group commenced a process to market the newly acquired freehold
property, together with the DTC test cell assets. The freehold property was immediately written down to £8.6m (USD 10.5m) as part of being classified as
held for sale, as the purchase price was predicated on Ricardo’s long-term tenancy, crystallising an impairment charge of £5.6m. The impairment charge
was partially offset by the write-off of a £3.1m (USD 4.0m) net lease liability under IFRS 16. The DTC north building was sold on 3 June 2020, as discussed
below. The DTC south building is still being marketed and remains held for sale at a value of £5.3m (USD 6.5m), as a further impairment charge of £1.1m
(USD 1.3m) was recognised to reflect current market conditions. Due to the nature and significance of the amount the impairment charge (together with
the balance of the lease liability) have been recognised in the income statement within specific adjusting items. They are included within the A&I segment
and within administrative expenses in the reported result.
Detroit test cell business and north building of Detroit Technology Campus
Fair value of cash consideration
Initial cash consideration
Provisional fair value of contingent cash consideration:
- Less than one year
- More than one year
Total fair value of cash consideration
Carrying value of property, plant and equipment disposed
- Leasehold property
- Plant and machinery
Total carrying value of property, plant and equipment disposed
Loss on disposal before tax
£m
2.8
0.5
0.7
4.0
(2.1)
(4.0)
(6.1)
(2.1)
Creating a world fit for the future 171
Financial statements
Notes to the Group financial statements
19. Non-current assets held for sale (continued)
In June 2020, the Group sold the test cell assets and the DTC north building to a non-competitive strategic partner for an initial cash consideration of
£2.8m (USD 3.5m), which could increase to a maximum of £4.4m (USD 5.5m), depending on the volume of testing work placed into the facility by Ricardo
over the next two years. The total fair value of cash consideration is £4.0m (USD 4.9m), which includes the accrued provisional fair value of contingent cash
consideration payable of £1.2m (USD 1.5m). A loss of £2.1m (USD 2.6m) was recognised on the sale. Due to the nature and significance of the amount, the
loss on disposal was recognised in the income statement within specific adjusting items.
20. Provisions for liabilities and charges
Provisions for liabilities and charges accounting policy – Note 1(p)
At 30 June 2018
Charged to the income statement
Utilised in the year
Released in the year
At 30 June 2019
Adoption of IFRS 16 (Note 2)
At 1 July 2019 (adjusted)
Charged to the income statement
Utilised in the year
Released in the year
At 30 June 2020
Current
Non-current
At 30 June
Warranty
£m
2.0
1.8
(0.6)
(0.3)
2.9
-
2.9
1.3
(1.0)
(0.4)
2.8
Restructuring
costs
£m
2.4
0.2
(1.3)
(0.1)
1.2
(0.5)
0.7
1.5
(0.5)
-
1.7
Employment-
related
benefits
£m
1.0
0.4
-
-
1.4
-
1.4
0.4
(0.1)
(0.1)
1.6
Other
£m
0.3
0.1
-
-
0.4
-
0.4
-
-
-
0.4
2020
£m
3.2
3.3
6.5
Total
£m
5.7
2.5
(1.9)
(0.4)
5.9
(0.5)
5.4
3.2
(1.6)
(0.5)
6.5
2019
£m
2.2
3.7
5.9
The warranty provision reflects the Directors’ best estimate of the cost required to ful l the Group’s assurance-type warranty obligations within a number of
contracts. Subsequent to their initial recognition, warranty provisions are utilised or released over the periods of the various warranty obligations, which are
expected to be less than five years.
The provision for restructuring costs included amounts payable to former employees who have been made redundant, primarily as part of the
reorganisation of our A&I and Rail segments, as set out in further detail in Note 7. The element of the provision relating to redundancy costs was partially
utilised during the year with the remaining balance expected to be utilised in less than one year. Provisions for onerous lease obligations were also included
in the prior year. On adoption of IFRS 16, these onerous lease balances were transferred against the right-of-use asset from provisions (see Note 2). A
provision still remains for a proportion of the service charge costs of the remaining lease period.
Employment-related benefi ts 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 employees, but is predominantly expected to be more than fi ve years.
Other provisions comprise expected costs of legal claims and litigation, together with dilapidation and restoration costs for leasehold property. The
associated cash outflows for legal claims and litigation are predominantly expected to be less than one year. Dilapidation and restoration costs reflects
the Directors’ best estimate of future obligations relating to the maintenance and restoration of leasehold properties arising from past contractual
commitments to new, extended or terminated lease agreements. Restoration costs expected at the commencement of the lease are included within
the right-of-use asset value (see Note 18(a)). The timing of the cash outflows is dependent upon the remaining term of the associated leases and are subject
to negotiation.
172 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
21. Deferred tax
This note explains how our Group deferred tax charge arises and also provides information on our expected future
tax charges and sets out the tax assets held across the Group together with our view on whether or not we expect
to be able to make use of these in the future.
Deferred tax accounting policy – Note 1(q)
Non-current
Assets
Liabilities
At 30 June
At 1 July 2018
Arising on acquisition (Note 14(b))
Charged to the income statement
Charged to other comprehensive income
Exchange rate adjustments
At 30 June 2019
Adoption of IFRS 16 (see Note 2)
At 1 July 2019 (adjusted)
Arising on acquisition (Note 14(a))
Credited/(charged) to the income statement
Credited to other comprehensive income
Exchange rate adjustments
Net (liabilities)/assets at 30 June 2020
Accelerated
capital
allowances
£m
(3.5)
-
(1.3)
-
-
(4.8)
-
(4.8)
-
0.2
-
-
(4.6)
Defined
benefit
obligation
£m
0.7
-
(0.7)
1.4
-
1.4
-
1.4
-
(1.2)
1.0
-
1.2
Tax losses and
credits
£m
5.8
-
(0.1)
-
(0.1)
5.6
-
5.6
-
2.0
-
7.6
Unrealised
capital gains
£m
(0.4)
-
-
-
-
(0.4)
-
(0.4)
-
-
-
-
(0.4)
2020
£m
9.4
(5.6)
3.8
Other
£m
2.1
(2.9)
(1.9)
-
0.3
(2.4)
1.1
(1.3)
(0.4)
1.4
0.1
0.2
-
2019
£m
6.7
(7.3)
(0.6)
Total
£m
4.7
(2.9)
(4.0)
1.4
0.2
(0.6)
1.1
0.5
(0.4)
2.4
1.1
0.2
3.8
At 30 June 2020 and 30 June 2019 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 deferred tax asset continues
to be recognised in the United States as at 30 June 2020 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 2020 is £4.8m (USD 6.3m) (2019: £4.9m (USD 6.3m)). A deferred tax asset of £2.2m (USD 2.7m) is also recognised in the United States on
current year trading losses. These losses can be carried back against the previous five years of taxable profit or carried forward against future taxable profits.
The deferred tax asset not recognised in respect of losses incurred in Germany as at 30 June 2020 amounts to £10.7m (EUR 11.9m) (2019: £10.9m (EUR 12.2m)).
Due to the restructuring in Germany and the reduction in activity in Germany in recent years, the Directors consider it unlikely that sufficient future taxable
profits will be available in Germany in the foreseeable future against which the carrying value of the brought forward deferred tax asset can be utilised.
The Directors have performed an assessment and consider that it is probable that future taxable profits will be available in the United States 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 consolidated tax group in the United States, 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 predominantly utilised by 30 June 2022, with each individual R&D credit being utilised in no less than three
years before the expiry of its 20-year statute of limitation period. The assessment was subject to reverse-stress testing, the results of which did not change
management’s view of the recoverability of the asset.
Creating a world fit for the future 173
Financial statements
Notes to the Group financial statements
Working capital
The net cash inflow from working capital was £8.5m in the year (£4.5m excluding the impact
of specific adjusting items). This is due to a strong focus on working capital management
combined with lower levels of trading in the year.
22. Inventories
Inventories accounting policy – Note 1(r)
Raw materials and consumables
Work in progress
Finished goods
At 30 June
2020
£m
13.6
4.6
1.9
20.1
2019
£m
9.5
3.9
1.1
14.5
Inventories of £51.5m (2019: £70.9m) were recognised as an expense during the year and included in cost of sales. During the year £0.3m (2019: £0.4m) of inventory
was written down and also included in cost of sales.
23. Trade, contract and other receivables
Trade, contract and other receivables mainly consist of amounts owed to us by customers and amounts that we pay
to our suppliers in advance. The note also includes contract assets, which represent an asset for accrued revenue in
respect of goods or services delivered to customers for which a trade receivable does not yet exist.
Trade, contract and other receivables accounting policy – Note 1(s)
Critical judgements: Impairment of financial assets – Note 1(c)
Trade receivables
Less provision for impairment of trade receivables
Trade receivables – net
Contract assets:
- Amounts recoverable on contracts ('AROC')
- Accrued revenue
Prepayments
Lease receivable (Note 18(bi))
Other receivables
At 30 June
Current
Non-current
At 30 June
2020
£m
43.8
(3.8)
40.0
53.3
0.7
10.7
2.3
11.8
118.8
115.6
3.2
118.8
2019
£m
65.3
(2.8)
62.5
54.1
1.4
11.0
-
12.4
141.4
141.4
-
141.4
The carrying amount at year-end is presented net of a provision for impairment of contract assets of £4.0m (2019: £1.1m). Contract assets are transferred to trade
receivables when an invoice is issued to the customer. Payment terms typically range from immediate payment to 90 days after the invoice date and standard
payment terms are usually 30 days after the invoice date. The net revenue recognised in the year from wholly or partially satisfi ed distinct performance obligations
in previous years is £21.9m (2019: £25.9m). This is primarily due to the net impact of variation orders and cancellations for changes in scope and transaction price on
contracts. Information about the Group’s exposure of its trade receivables to credit and market risk is included in Notes 27(d) and 27(e).
Included within prepayments are £2.0m (2019: £2.3m) of assets recognised from the costs to obtain or fulfil an expected contract with a customer. No revenue
has been recognised on these costs. An asset has been recognised because the costs directly related to an anticipated contract, they will be used in satisfying
performance obligations in the future and the cost are expected to be recoverable.
The £3.2m non-current asset relates to other receivables. £2.3m of this relates to the IFRS 16 lease receivable as disclosed in Note 18. £0.7m is included within
prepayments and is the non-current deferred consideration on the disposal of the DTC test asset business as disclosed in Note 19. £0.2m relates to other receivables.
Group provision for impairment of trade receivables
At 1 July
Transitional IFRS 9 adjustment to opening retained earnings
Net impairment/(reversals) to the income statement (Note 4)
Amounts utilised
At 30 June
174 Ricardo plc Annual Report & Accounts 2019/20
2020
£m
(2.8)
-
(1.3)
0.3
(3.8)
2019
£m
(1.1)
(2.4)
0.6
0.1
(2.8)
Financial statements
Notes to the Group financial statements
23. Trade, contract and other receivables (continued)
Order book
Order book comprises the value of all unworked purchase orders and contracts received from customers at the reporting date and provides an indication of
the amount of revenue that has been secured and will be recognised in future accounting periods. Order book represents the transaction price allocated to
wholly and partially unsatisfi ed distinct performance obligations, as defi ned by IFRS 15 Revenue from Contracts with Customers. The periods from 30 June in
which the distinct performance obligations are expected to be satisfi ed are as follows:
Less than 6 months
6 to 12 months
Over 12 months
At 30 June
2020
£m
125.8
76.9
111.3
314.0
2019
£m
145.7
66.8
101.5
314.0
24. Trade, contract and other payables
Trade, contract and other payables mainly consist of amounts owed to suppliers that have been invoiced or are
accrued and contract liabilities relating to consideration received from customers in advance. They also include taxes
and social security amounts due in relation to the Group’s role as an employer.
Trade, contract and other payables accounting policy – Note 1(t)
Trade payables
Contract liabilities:
- Payments received in advance on contracts ('POA')
- Deferred revenue
Tax and social security payable
Accruals
Other payables
At 30 June
Current
Non-current
At 30 June
2020
£m
9.6
22.0
6.8
9.5
27.3
0.4
75.6
72.0
3.6
75.6
2019
£m
21.3
24.5
6.2
7.7
27.2
3.0
89.9
84.8
5.1
89.9
Revenue recognised in the year from contract liabilities at the beginning of the year was £22.5m (2019: £24.9m). Contract liabilities primarily relate to the
Group’s obligation to perform services, which are paid by customers in advance of those services being provided. Contract liabilities have decreased due to
changes in the mix of contracts containing upfront payment terms. Non-current amounts include accruals for the provisional fair value of contingent cash
consideration payable for Transport Engineering of £2.1m (AUD 3.8m) (2019: £5.1m (AUD 9.4m)), as set out in Note 14(b), which is conditional on performance
for the year to 30 June 2021.
Creating a world fit for the future 175
Financial statements
Notes to the Group financial statements
Net debt and financial risk management
Closing net debt was £73.4m (FY 2018/19: £47.4m), with the increase due to the purchase of
the DTC facility, the acquisition of PLC Consulting (Note 14(a)) and net restructuring costs.
25. Net debt and borrowings
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, which is calculated as net debt
divided by total capital.
The majority of the Group’s cash is held in bank deposits. The Group’s sources of borrowing for funding and
liquidity purposes come from the Group’s £200.0m multi-currency revolving credit facility and through short-term
overdraft facilities.
Net debt and borrowings accounting policy – Note 1(u)
The disclosures in this note include certain Alternative Performance Measures (APMs). For more information on the APMs used by the Group, including
definitions, please refer to Note 3.
(a) Gearing ratio
Net debt
Total equity
Total capital
At 30 June
(b) Net debt
Analysis of net debt
Current assets - cash and cash equivalents:
- Cash and cash equivalents
Total cash and cash equivalents
Current liabilities - borrowings:
- Bank overdrafts repayable on demand
- Hire purchase liabilities maturing within one year
Total current borrowings
Non-current liabilities - borrowings:
- Hire purchase liabilities maturing after one year
- Bank loans maturing after one year
Total non-current borrowings
At 30 June
Total cash and cash equivalents at 30 June
Total borrowings at 30 June
Total net debt at 30 June
Movement in net debt
Net debt at beginning of year
Increase in cash and cash equivalents, and bank overdrafts
Repayments of/(proceeds from) hire purchase
Proceeds from bank loans
Repayments of bank loans
At 30 June
176 Ricardo plc Annual Report & Accounts 2019/20
2020
£m
73.4
149.1
222.5
33.0%
2020
£m
66.3
66.3
(10.5)
(0.1)
(10.6)
(0.4)
(128.7)
(129.1)
(73.4)
66.3
(139.7)
(73.4)
2020
£m
(47.4)
23.4
0.2
(140.3)
90.7
(73.4)
2019
£m
47.4
171.9
219.3
21.6%
2019
£m
36.3
36.3
(3.9)
(0.1)
(4.0)
(0.6)
(79.1)
(79.7)
(47.4)
36.3
(83.7)
(47.4)
2019
£m
(26.1)
8.6
(0.7)
(64.0)
34.8
(47.4)
Financial statements
Notes to the Group financial statements
25. Net debt and borrowings (continued)
At the year-end, the Group had current hire-purchase liabilities of £0.1m and non-current fi nance lease liabilities of £0.4m. This hire-purchase agreement has
an implicit rate of interest of 2.4%. The future undiscounted minimum lease payments due within one year is £0.1m and due after one year is £0.6m.
At the year-end, the Group held total banking facilities of £216.6m (2019: £166.4m), which included committed facilities of £200.0m (2019: £150.0m). The
committed facility consists of a £200m multi-currency Revolving Credit Facility (‘RCF’) which provides the Group with committed funding through to July
2023. In addition, the Group has uncommitted facilities including overdrafts of £16.6m (2019: £16.4m), which mature throughout this and the next fi nancial
year and are renewable annually.
Non-current bank loans comprise committed facilities of £128.7m (2019: £79.1m), net of direct issue costs, which were drawn primarily to fund acquisitions
and general corporate purposes. These are denominated in Pounds Sterling and have variable rates of interest dependent upon the Group’s adjusted
leverage, which range from 1.4% to 2.2% (2019: 1.4% to 2.2%) above LIBOR. Adjusted leverage is defined in the Group’s banking documents as being the
ratio of total net debt to adjusted EBITDA. Adjusted EBITDA is further defined as being operating profit before interest, tax, depreciation and amortisation,
adjusted for any one-off, non-recurring, exceptional costs and acquisitions or disposals during the relevant period. At the reporting date, the Group has
an adjusted leverage which attracts the lowest rate of interest, being LIBOR plus 1.4% (2019: LIBOR plus 1.4%). The Group has banking facilities for its UK
companies which together have a net overdraft limit, but the balances are presented on a gross basis in the financial statements. After the reporting date,
the Group completed an amendment of its banking facilities. Further detail is given in Note 39.
26. Fair value of financial assets and liabilities
Fair value of financial assets and liabilities accounting policy – Note 1(v)
There are no differences between the fair value of financial assets and liabilities and their carrying value. The Group holds the following fi nancial
instruments:
Financial assets
Amortised cost:
- Trade receivables – net (Note 23)
- Lease receivable (Note 23)
- Other receivables (Note 23)
- Cash and cash equivalents (Note 25)
Fair value through other comprehensive income ('FVOCI'):
- Fair value hedging instruments
At 30 June
Financial liabilities
Amortised cost:
- Borrowings (Note 25)
- Lease payables (Note 18)
- Trade payables (Note 24)
- Other payables (Note 24)
Fair value through other comprehensive income ('FVOCI'):
- Fair value hedging instruments
Fair value through profit or loss ('FVTPL'):
- Derivative financial liabilities
At 30 June
Net derivative financial expense of £0.5m (2019: £0.9m) relate to foreign exchange contracts.
2020
£m
40.0
2.3
11.8
66.3
3.9
124.3
139.7
29.3
9.6
0.4
(7.1)
0.6
172.5
2019
£m
62.5
-
12.4
36.3
0.3
111.5
83.7
-
21.3
3.0
1.1
0.1
109.2
Creating a world fit for the future 177
Financial statements
Notes to the Group financial statements
26. Fair value of financial assets and liabilities (continued)
2020
£m
2019
£m
Measured at FVTPL
Foreign exchange swap contract assets:
- Fair value gains
Foreign exchange forward contract liabilities:
- Fair value losses
At 30 June
Measured at FVOCI
Foreign exchange swap contract assets:
- Fair value losses
- Fair value gains
Foreign exchange swap contract liabilities:
- Fair value losses
- Fair value gains
At 30 June
Reconciliation of movements of liabilities to cash flows arising from financing activities
-
0.6
0.6
(7.9)
5.7
(0.2)
2.3
(0.1)
Note
10
2
18(aii)
18(aii)
18(aii)
18(aii)
10
Borrowings
Note 25
£m
59.2
Lease
liabilities
Note 18(aii)
£m
-
64.7
(34.8)
(5.4)
24.5
(2.6)
2.6
-
83.7
-
83.7
140.3
(90.7)
6.6
-
56.2
-
-
-
-
3.2
(3.4)
(0.2)
139.7
-
-
-
-
-
-
-
-
45.6
45.6
-
-
-
(5.6)
(5.6)
0.2
5.7
(13.6)
(3.0)
1.2
(1.2)
(10.9)
29.3
At 1 July 2018
Changes from financing cash flows (see cash flow statement)
- Proceeds from loans and borrowings
- Repayment of borrowings
- Movement in bank overdraft
Total changes from financing cash flows
Other changes
- Interest expense
- Interest paid
Total other changes
At 30 June 2019
Adoption of IFRS 16
At 1 July 2019
Changes from financing cash flows (see cash flow statement):
- Proceeds from loans and borrowings
- Repayment of borrowings
- Movement in bank overdraft
- Proceeds from lease liabilities
Total changes from financing cash flows
The effect of changes in foreign exchange rates
Other changes
Liability-related
- New leases
- Disposals
- Remeasurements
- Interest expense
- Interest paid
Total other changes
At 30 June 2020
178 Ricardo plc Annual Report & Accounts 2019/20
0.9
(0.1)
0.8
(1.1)
1.1
(0.2)
0.3
0.1
Total
£m
59.2
64.7
(34.8)
(5.4)
24.5
(2.6)
2.6
-
83.7
45.6
129.3
140.3
(90.7)
6.6
(5.6)
50.6
0.2
5.7
(13.6)
(3.0)
4.4
(4.6)
(11.1)
169.0
Financial statements
Notes to the Group financial statements
27. Financial risk management
The 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 Board reviews and agrees policies for managing each of these risks.
The Group have no material exposure to commodity price fluctuations and this situation is not expected to change
in the foreseeable future.
The financial instruments of the Group 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.
(a) Objectives, policies and strategies
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.
(b) Capital risk
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, plus net debt. Please see Note 25.
(c) Liquidity risk
The Group's policy towards managing its liquidity risks is to maintain a mix of short- and medium-term borrowing facilities. 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 fi nance to
support current and future working capital requirements. As the cash pro file on large contracts can vary signifi cantly, the Group seeks committed facilities
that provide sufficient headroom against forecast requirements to mitigate its exposure.
The tables below analyse 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 amount as the impact of discounting on trade payables that mature after more than one year is insignifi cant 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 fi nancial liabilities as their contractual maturities are not considered to be essential for an understanding of the timing of the cash flows; and
• Other payables as the phasing of these liabilities is not contractually de fined.
Maturity of trade payables
Within 1 month
After 1 month and within 3 months
After 3 months and within 12 months
At 30 June
Maturity of borrowings
Overdrafts repayable on demand
Within 12 months:
- Hire purchase liabilities
After 12 months and within 5 years:
- Hire purchase liabilities
- Bank loans
At 30 June
Maturity of undiscounted lease liability
Within one year
Between one and five years
After five years
Finance portion of net liability
At 30 June
(d) Credit risk
2020
£m
7.6
2.0
-
9.6
2020
£m
10.5
0.1
0.4
128.7
139.7
2020
£m
7.0
16.3
11.1
(5.1)
29.3
2019
£m
12.7
8.2
0.4
21.3
2019
£m
3.9
0.1
0.6
79.1
83.7
2019
£m
-
-
-
-
-
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.
Creating a world fit for the future 179
Financial statements
Notes to the Group financial statements
27. Financial risk management (continued)
(d) Credit risk (continued)
Ageing of net trade receivables
Not overdue and not impaired
Overdue but not impaired:
Less than 90 days overdue
91 to 180 days overdue
Over 180 days overdue
At 30 June
2020
£m
28.0
8.9
1.2
1.9
40.0
2019
£m
50.5
10.5
0.8
0.7
62.5
The Group's customers include the world's major transportation original equipment manufacturers, tier 1 suppliers, energy companies and government
agencies. Revenue by customer location is disclosed within Note 4(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 as at 30 June 2020 of £40.0m (2019: £62.5m)
£20.6m was received in July 2020 (2019: £36.6m).
An analysis of net trade receivables by currency is as follows:
Group net trade receivables by currency
Pounds Sterling
Euros
US Dollars
Chinese Renminbi
Australian Dollars
Other currencies
At 30 June
2020
£m
15.9
6.8
7.3
5.2
1.1
3.7
40.0
2019
£m
31.1
8.7
12.9
5.8
-
4.0
62.5
The Group 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 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.
Maximum exposure to bank counterparty risk
Cash and cash equivalents
Derivative financial assets
At 30 June
Analysis of cash and cash equivalents by geographic location
United Kingdom
Mainland Europe
North America
Asia
Australia
Rest of the World
At 30 June
(e) Market risk
Interest rate risk
2020
£m
66.3
3.9
70.2
2020
£m
37.9
7.2
4.5
8.9
3.5
4.3
66.3
2019
£m
36.3
0.3
36.6
2019
£m
10.5
4.3
3.4
13.2
3.4
1.5
36.3
The Group’s 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 25,
the exposure to interest rate movements is not currently hedged as the variable rates of interest are largely dependent upon the adjusted 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
Financial assets:
- Fixed rate
- Floating rate
- Interest-free
Financial liabilities:
- Fixed rate
- Floating rate
- Interest-free
At 30 June
180 Ricardo plc Annual Report & Accounts 2019/20
2020
£m
2019
£m
2.3
27.8
94.2
(29.9)
(136.1)
(6.5)
(48.2)
-
19.6
91.9
(0.7)
(83.0)
(25.5)
2.3
Financial statements
Notes to the Group financial statements
27. Financial risk management (continued)
(e) Market risk (continued)
Foreign exchange risk
The Group faces currency exposures on trading transactions undertaken by its subsidiaries in foreign currencies and balances arising there from, and on the
translation of pro fits 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:
Assets
Liabilities
Maturity of borrowings
US Dollar
Euro
Chinese Renminbi
2020
£m
14.4
13.3
11.0
2019
£m
19.5
15.1
15.1
The following foreign exchange differences were (charged)/credited to the income statement for the Group:
Financial assets and liabilities by interest type
Derivative contracts measured at FVTPL (Note 26):
- Foreign exchange contract assets
- Foreign exchange contract liabilities
Other financial assets
Other financial liabilities
At 30 June
2020
£m
(2.7)
(5.4)
(1.2)
2020
£m
-
(2.2)
1.1
(0.5)
(1.6)
2019
£m
(2.5)
(6.8)
(0.4)
2019
£m
0.9
(0.1)
(1.0)
0.1
(0.1)
The Group does not to undertake any speculative currency transactions. The Group use derivative fi nancial instruments primarily to manage currency
risk on its US Dollar, Euro, Chinese Renminbi, Japanese Yen and Hong Kong Dollar denominated receivables from its subsidiaries, in addition to managing
transactional exposures relating to customer contracts denominated in foreign currencies.
(f) Sensitivity analysis of financial instruments to market risk
Exchange rate sensitivity
The Group has fi nancial assets and liabilities denominated in foreign currencies, principally in US Dollars, Euros and Chinese Renminbi, which 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 these fi nancial 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% increase in interest rates would have an insigni ficant 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 signi ficant fluctuations in interest rates in the
foreseeable future.
(g) Cash flow derivatives
The Group employs derivative fi nancial instruments, including foreign exchange contracts, to mitigate currency exposures on trading transactions that
could affect the income statement. Any change in the fair value of derivative foreign exchange forward and option contracts are recognised in the income
statement. Changes in the fair value of effective derivative foreign exchange swap contracts are hedge accounted and recognised in other comprehensive
income, with any ineffective amount recognised in the income statement.
Cash flows expected to occur from derivative financial instruments used by the Group for hedging purposes are set out below, which will be largely offset
by cash flows expected to occur from hedged items:
Affecting the income statement
Within 3 months
After 3 months and within 12 months
At 30 June
Affecting other comprehensive income
Within 3 months
After 3 months and within 12 months
At 30 June
2020
£m
2.3
-
2.3
2020
£m
78.2
13.3
91.5
2019
£m
0.9
1.3
2.2
2019
£m
42.0
11.2
53.2
Creating a world fit for the future 181
Financial statements
Financial statements
Notes to the Group financial statements
Notes to the Group financial statements
Equity
Equity represents the capital of the Group attributable to Company shareholders and
non-controlling interests, and includes share capital, share premium and reserves. Equity
decreased in the year reflecting the Group’s financial performance.
28. Share capital and share premium
Allotted, called-up and fully paid
53,406,250 (2019: 53,406,250) ordinary shares of 25p each
At 30 June
2020
£m
13.4
13.4
2019
£m
13.4
13.4
No dividends were paid for interim and fi nal dividends in respect of shares held by an Employee Bene t Trust ('EBT') in relation to the LTIP. There were 41,193
such shares at 30 June 2020 (2019: 40,631 shares).
Share premium has remained £14.3m since 1 July 2018.
29. Other reserves
The merger reserve represents the amount by which the fair value of the shares issued as consideration for historic
acquisitions exceeded their nominal value, offset by the goodwill on these acquisitions. The translation reserve
comprises cumulative foreign exchange differences arising from the translation of financial statements of foreign
operations on consolidation.
At 30 June 2018
Exchange rate adjustments
At 30 June 2019
Exchange rate adjustments
At 30 June 2020
30. Retained earnings
At 1 July 2018
Profit for the year
Remeasurements of the defined benefit pension scheme
Deferred tax on remeasurements of the defined benefit pension scheme
Fair value gains on foreign currency cash flow hedges
Dividends paid
Purchases of own shares to settle awards
Equity-settled transactions
At 30 June 2019 (previously reported)
Adoption of IFRS 16 (net of tax)
At 1 July 2019 (adjusted)
Loss for the year
Remeasurements of the defined benefit pension scheme
Deferred tax on remeasurements of the defined benefit pension scheme
Fair value gains on foreign currency cash flow hedges
Dividends paid
Purchases of own shares to settle awards
Equity-settled transactions
At 30 June 2020
31. Non-controlling interests
Merger
reserve
£m
1.0
-
1.0
-
1.0
Translation
reserve
£m
14.7
1.2
15.9
0.5
16.4
Note
33
21
26
9
34
2
33
21
26
9
34
Total
£m
15.7
1.2
16.9
0.5
17.4
£m
124.3
19.8
(7.9)
1.4
0.1
(11.0)
(0.9)
1.0
126.8
(3.7)
123.1
(6.5)
(2.7)
1.1
(0.1)
(11.5)
(0.5)
0.6
103.5
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 is as follows:
• C2D Joint Venture is 33.3% owned by Ricardo Defense, Inc.; 33.3% owned by DG Technologies; 33.3% owned by Claxton Logistics Services LLC.
• CDQ Joint Venture is 50% owned by Ricardo Defense, Inc.; 50% owned by DG Technologies
• Nanjing Delta Win Transportation Technical Services Limited is 40% owned by Ricardo Beijing Company Limited; 25% owned by Ricardo Hong Kong
Limited; 35% owned by Jiangsu Urban Mass Transit Research & Design Institute Company Limited.
For their registered office and principal activities please see Note 37.
182 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
Employees
This section contains information about the Group’s current and former employees as well as
the associated cost of employment and post-employment benefits incurred by the Group.
32. Employee number and costs
Staff costs
Wages and salaries (including redundancy and termination costs)
Social security costs
Pension costs – defined contribution schemes
Share-based payments (Note 34)
Total staff costs
Average monthly number of employees (including Executive Directors)
EE
Rail
A&I
Defense
PP
Other
Plc and Board
Total average number of employees
Key management compensation
Short-term employee benefits
Share-based payments
Post-employment benefits
Termination benefits
Total key management compensation
2020
£m
162.3
15.6
10.0
0.6
188.5
2020
Number
554
629
1,165
147
311
189
55
3,050
2020
£m
4.0
0.5
0.4
0.1
5.0
2019
£m
153.6
15.8
9.5
1.0
179.9
2019
Number
476
566
1,232
128
317
180
56
2,955
2019
£m
4.1
0.5
0.3
-
4.9
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 106.
33. Retirement benefits
Retirement benefits accounting policy – Note 1(w)
Key sources of estimation uncertainty: Defined benefit obligations – Note 1(c)
The Group 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 - including investment decisions and contribution schedules - lies with the Board of Trustees, with the
assets held in the fund governed by local regulations and practice in the United Kingdom. The Board of Trustees must be comprised of representatives
of the Group and RGPF participants in accordance with the RGPF’s regulations. The last approved triennial valuation of the RGPF was completed with an
effective date of 5 April 2017 and was approved on 24 September 2018. At the effective date, the assets of the RGPF had a market value of £134.0m and
were sufficient to cover 86% of the benefi t 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 2021 will be £4.6m and the Group has agreed with the Trustees that this will continue until 31 July 2022, in
order to eliminate the Trustees’ funding defi cit revealed at the 5 April 2017 valuation. The latest triennial valuation with an effective date of 5 April 2020 has
commenced, 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 Benefi ts valuation was completed as at 30 June 2020. The pension
costs relating to the RGPF were assessed using the projected unit credit method, in accordance with the advice of Mercer, quali fied actuaries.
From June 2016, the Group and Trustees decided to introduce a ‘retirement flexibility’ option to the RGPF, which allows members to transfer out their
benefi t at retirement. The Group continues to make no allowance within the defined benefi t obligation as at 30 June 2020 for members who may elect to
transfer out their benefi ts 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 benefi ts at retirement.
Creating a world fit for the future 183
Financial statements
Notes to the Group financial statements
33. Retirement benefits (continued)
The assumption for Consumer Price Index (‘CPI’) inflation was revised to allow for a smaller expected future average gap between the Retail Price Index
(‘RPI’) and CPI measures of inflation after consideration of proposals to amend the measurement of RPI to align it with the CPI including owner occupiers’
housing costs (‘CPIH’) from between 2025 and 2030. The change in methodology relating to CPI from RPI minus 1% to RPI minus 0.7% resulted in a
£2.0m impact.
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 83% (2019: 83%) multiplier for males and a 91% (2019: 91%) multiplier for females, both 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’) 2019 projection model with an ‘S-kappa’
smoothing parameter of 7.5 and no initial smoothing adjustment (2019: CMI 2018 with ‘S-kappa’ smoothing parameter of 7.5 and no initial smoothing
adjustment). The latest available CMI model will be used at each year-end to provide the most accurate representation of the de fined benefit obligation.
The use of a 1.25% long-term trend is consistent with the prior year. Under these principal mortality assumptions, the expected future life expectancy from
age 65 is as follows:
2020
2019
Age
65 now
65 in 20 years
Other principal assumptions
Discount rate
RPI inflation rate
Other assumptions
Rate of increase in pensions in payment accrued:
- Pre 1 July 2002
- Post 1 July 2002
- Post 88 GMP
Rate of increase in deferred pension revaluation
Percentage of pension to be commuted for a lump sum at retirement
Males
23.2
24.6
Females
24.4
26.0
Males
23.2
24.6
2020
%
1.60
2.90
2020
%
3.50
2.80
1.85
2.20
15.00
Scheme assets
Equities
Debt
Cash and other
Property fund
Investment funds
At 30 June
2020
Quoted
£m
32.9
80.4
-
-
29.0
142.3
Unquoted
£m
-
-
0.5
7.6
-
8.1
Total
£m
32.9
80.4
0.5
7.6
29.0
150.4
2019
Quoted
£m
33.1
74.1
-
-
21.8
129.0
Unquoted
£m
-
-
0.6
7.9
-
8.5
Females
24.4
25.9
2019
%
2.25
3.25
2019
%
3.60
3.05
1.90
2.25
15.00
Total
£m
33.1
74.1
0.6
7.9
21.8
137.5
The property fund relates a share of the BlackRock UK Property Fund (“Fund”). Real property is valued either on the basis of the open market value or under
the premise of a forced sale. Property fund investments are valued by reference to the underlying value of assets or the latest available net asset value.
184 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
33. Retirement benefits (continued)
Movements in the fair value of scheme assets and present value of the de fined benefi t obligation were as follows:
At 1 July
Past service costs(1)
Gains on settlements
Finance income/(costs)
Total credit/(charge) to the income statement
Return on plan assets excluding finance income
Loss from change in demographic assumptions
Loss from change in financial assumptions
Experience gains
Total remeasurements in other comprehensive income
Contributions from sponsoring companies
Settlement payments from plan assets
Benefit payments from plan assets
Total cash flows
Total movements
At 30 June
Fair value
of plan
assets
£m
137.5
-
-
3.1
3.1
11.2
-
-
-
11.2
4.6
-
(6.0)
(1.4)
12.9
150.4
2020
Present
value of
obligation
£m
(146.0)
-
-
(3.2)
(3.2)
-
0.4
(15.3)
1.0
(13.9)
-
-
6.0
6.0
(11.1)
(157.1)
Net total
£m
(8.5)
-
-
(0.1)
(0.1)
11.2
0.4
(15.3)
1.0
(2.7)
4.6
-
-
4.6
1.8
(6.7)
Fair value
of plan
assets
£m
131.0
-
-
3.7
3.7
7.9
-
-
-
7.9
4.3
(3.1)
(6.3)
(5.1)
6.5
137.5
2019
Present
value of
obligation
£m
(135.6)
(0.5)
0.3
(3.8)
(4.0)
-
(0.1)
(15.7)
-
(15.8)
-
3.1
6.3
9.4
(10.4)
(146.0)
Net total
£m
(4.6)
(0.5)
0.3
(0.1)
(0.3)
7.9
(0.1)
(15.7)
-
(7.9)
4.3
-
-
4.3
(3.9)
(8.5)
(1) Past service costs for the prior year comprised £1.3m cost of Guaranteed Minimum Pension (‘GMP’) equalisation as described Note 7, offset by a £0.8m credit from plan amendments.
The sensitivity of the defined benefit obligation to changes in principal assumptions:
Discount rate
Inflation rate
Post-retirement mortality assumptions
Change in assumption
- 0.25%
+ 0.25%
- 1 year
Impact on present
value of obligation
Increase by £7.7m
Increase by £4.2m
Increase by £6.5m
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 de fined benefi t obligation to signifi cant actuarial
assumptions, the same method has been applied as when calculating the pension liability recognised within non-current liabilities. The methods and types
of assumptions used in preparing the sensitivity analysis did not change when compared to the previous year. Exposure to signifi cant risks from the RGPF
are as follows:
Risks
Asset volatility
Corporate bond yields
Inflation
Post-retirement mortality
assumptions
Impact
The RGPF liabilities are calculated using a discount rate set with reference to corporate bond yields. If the RGPF assets
underperform this yield, the de ficit will increase. The RGPF holds a signi ficant proportion of equities and diversifi ed
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. Brexit and COVID-19 have caused volatility in the market, which 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 benefi ts for the life of the members, therefore increases in post-retirement mortality assumptions
will result in an increase in the RGPF's liabilities.
Creating a world fit for the future 185
Financial statements
Notes to the Group financial statements
33. Retirement benefits (continued)
The weighted average duration of the defined benefit obligation is 18.0 (2019: 17.5) years.
Expected maturity analysis of undiscounted pension benefits
Less than 1 year
Between 1 and 2 years
Between 2 and 5 years
Beyond 5 years
Amounts charged/(credited) to the income statement in respect of the defined benefit obligation
Past service costs for:
- GMP equalisation (Note 7)
- Plan amendments
Gains on settlements
Net financing costs (Note 10)
Total
2020
£m
4.5
4.6
14.8
27.8
2020
£m
-
-
-
0.1
0.1
2019
£m
4.3
4.4
14.2
26.7
2019
£m
1.3
(0.8)
(0.3)
0.1
0.3
34. Share-based payments
Share-based payments accounting policy – Note 1(x)
The Group operates the following share-based payment schemes: an equity-settled Executive Share Option Plan (the '2004 Plan'); an equity-settled and a
cash-settled Long-Term Incentive Plan ('LTIP'); a Deferred Share Bonus Plan ('DBP') and an equity-settled all-employee Share Incentive Plan ('SIP'). The general
terms and conditions, including vesting requirements and performance conditions for the 2004 Plan, the equity-settled LTIP, the DBP and the 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.
One third (2019: 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 the valuation model used to take into account
the anticipated performance outcome. The TSR element of the charge to the 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
2020
640p
32.0%
3 yrs
0.4%
3.3%
10.0%
74.4%
2019
720p
27.0%
3 yrs
0.8%
2.8%
10.0%
72.2%
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 £0.6m (2019: £1.0m) disclosed in Note 32 was all in respect of equity-settled schemes.
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'.
186 Ricardo plc Annual Report & Accounts 2019/20
34. Share-based payments (continued)
Outstanding
At 1 July
Awarded
Lapsed
Vested
Transferred to cash-settled
At 30 June
(1) Shares allocated excludes dividend roll-up.
Financial statements
Notes to the Group financial statements
2020
Shares
allocated(1)
565,478
358,135
(130,830)
(94,987)
(4,000)
693,796
2019
Shares
allocated(1)
568,602
247,187
(180,640)
(69,671)
-
565,478
The outstanding LTIP awards had a weighted average contractual life of 1.6 years (2019: 1.4 years). The weighted average exercise price in both 2020 and
2019 was £Nil. During the year, the Group cash purchased shares in order to settle vested awards. All shares that were vested during the year were also
exercised for their price of nil.
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 by share issue.
Outstanding
At 1 July
Awarded
Forfeited
Vested
Transferred to cash-settled
At 30 June
(1) Shares allocated excludes dividend roll-up.
2020
Shares
allocated(1)
8,000
5,199
(1,500)
(4,000)
4,000
11,699
2019
Shares
allocated(1)
10,759
3,000
(3,184)
(2,575)
-
8,000
The outstanding LTIP awards had a weighted average contractual life of 2.0 years (2019: 1.2 years). The weighted average exercise price in both 2020 and
2019 was £Nil. During the year, the Group cash purchased shares in order to settle vested awards. The carrying value of the cash settled share based
payments is nil (2019: £0.1m). All shares that were vested during the year were also exercised for their price of 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
At 30 June
(1) Shares allocated excludes dividend roll-up.
2020
Shares
allocated(1)
169,874
78,765
(22,390)
3,738
(97,713)
132,274
2019
Shares
allocated(1)
154,250
96,297
(28,975)
3,029
(54,727)
169,874
The outstanding DBP awards had a weighted average contractual life of 1.5 years (2019: 1.2 years). The weighted average exercise price in both 2020 and
2019 was £Nil. During the year, the Group cash purchased shares in order to settle vested awards. All shares that were vested during the year were also
exercised for their price of nil.
Creating a world fit for the future 187
Financial statements
Notes to the Group financial statements
Unrecognised items and uncertain events
This section includes disclosure of items and transactions that are not reflected in the Group’s
results because they are uncertain or have been incurred after the end of the year. These
disclosures are considered relevant to an understanding of the Group’s financial position and
the effect of expected or possible future events.
35. Commitments
At 30 June 2019 the Group’s future aggregate undiscounted minimum lease payments under non-cancellable operating leases not recognised on the
consolidated statement of financial position are as follows.
Lease liability
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
2019
£m
8.6
22.8
29.8
61.2
2019
£m
60.3
0.9
61.2
From 1 July 2019, the Group has recognised right-of-use assets for these leases, except for short-term and low-value leases, see Note 2 and Note 18 for
further information.
36. Contingent liabilities
In the ordinary course of business, the Group has £9.4m (2019: £7.3m) of possible obligations for bonds, guarantees and counter-indemnities placed with our
banking and other financial institutions and primarily relating to performance under contracts with customers. These possible obligations are contingent on
the outcome of uncertain future events which are considered unlikely to occur. 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 ultimate resolution of
these disputes is not expected to 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 ('RGPF') of £2.8m in respect of certain contingent liabilities that may arise, which
have been secured on specific land and buildings (see Note 17). The outcome of this matter is not expected to give rise to any material cost to the Group. In
October 2018, a further guarantee was provided to the RGPF for an amount that shall not exceed the employers' liability were a debt to arise under Section
75 of the Pensions Act 1995. The guarantee will terminate on 5 April 2023. The outcome of this matter is not expected to give rise to any material cost to the
Group on the basis that the Group continues as a going concern.
188 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
Other
This section includes the Group’s list of related undertakings and related party transactions.
37. Related undertakings of the Group
Subsidiary or related undertaking
Registered office
Ricardo Investments Limited(*)
Ricardo US Holdings, Inc.
Power Planning Associates Limited(∞)
Ricardo EMEA Limited(∞)
Ricardo Real Estate LLC
Ricardo UK Limited
Ricardo Asia Limited
Ricardo Japan K.K.
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
40600 Ann Arbor Road East, Suite 201, Plymouth, Michigan, 48170,
United States
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
40600 Ann Arbor Road East, Suite 201, Plymouth, Michigan, 48170,
United States
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
18th Floor, Shin Yokohama Square Building, 2-3-12 Shin Yokohama,
Kohoku-ku, Yokohama-shi, Kanagawa, 222-0033, Japan
Ricardo Shanghai Company Limited(*)
Floor 17, Phoenix Building, No. 1515 Gumei Road, Xuhui District,
Shanghai, 200233, PR China
Ricardo Prague s.r.o.
Palác Karlín, Thámova 11-13, 186 00 Praha 8, Czech Republic
Ricardo GmbH
Güglingstraße 66, 73529, Schwäbisch Gmünd, Germany
Ricardo Motorcycle Italia s.r.l.
Ricardo, Inc.
Ricardo India Private Limited(*)(1)
Ricardo Strategic Consulting GmbH
Ricardo Defense Systems LLC
Ricardo Defense, Inc.
C2D Joint Venture (33.3%)(2)
Ricardo-AEA Limited
Cascade Consulting
(Environment & Planning) Limited(∞)
Ricardo South Africa (Pty) Ltd
(formerly PPA Energy (Pty) Ltd)
Ricardo Gulf Technical Consultancy LLC
(49%)(3)
Ricardo Energy Environment and Planning
Pty Ltd
Via Giovanni Pascoli 47, 47853, Cerasolo, Coriano, Rimini, Italy
Detroit Technology Campus, 40000 Ricardo Drive, Van Buren Township,
Detroit, Michigan, 48111-1641, United States
6th Floor, M6 Plaza, Jasola District Centre, New Delhi 110076, India
4th Floor, Kreuzstraße 16, 80331, Munich, Germany
Detroit Technology Campus, 40000 Ricardo Drive, Van Buren Township,
Detroit, Michigan, 48111-1641, United States
175 Cremona Drive, Suite 140, Goleta, California, 93117, United States
175 Cremona Drive, Suite 140, Goleta, California, 93117, United States
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
111 Pretoria Road, Rynfield, Benoni, 1501, South Africa
11th Floor, Office 8, MSMAK Building, Corniche Street, Abu Dhabi,
United Arab Emirates
Level 20, 181 William Street, Melbourne, Victoria, 3000, Australia
Principal activities
Holding Company and
Management Services
Holding Company
Holding Company
Holding Company and
Management Services
Property Investment Company
Automotive & Industrial Consulting,
Strategic Consulting, Defence
Consulting and
Performance Products
Automotive & Industrial Consulting,
Rail Consulting and
Business Development
Automotive & Industrial Consulting,
Rail Consulting and Business
Development
Automotive & Industrial Consulting,
Rail Consulting and Business
Development
Automotive & Industrial Consulting
and Software
Automotive & Industrial Consulting
and Business Development
Automotive & Industrial Consulting
Automotive & Industrial Consulting,
Strategic Consulting and Software
Business Development
Strategic Consulting
Performance Products
Defence Consulting
Defence Consulting
Energy & Environmental Consulting
Energy & Environmental Consulting
Energy & Environmental Consulting
Energy & Environmental Consulting
Energy & Environmental Consulting
Ricardo Australia Pty Ltd
Level 7, 151 Clarence Street, Sydney, New South Wales, 2000, Australia
Energy & Environmental Consulting
Ricardo Rail Limited
Ricardo Nederland B.V.
Ricardo Rail Australia Pty Ltd
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Catharijnesingel 33 J, 3511 GC, Utrecht, Netherlands
Suite 2.01, Level 2, Tower B, The Zenith, 821 Pacific Highway, Chatswood,
New South Wales, 2067, Australia
and Rail Consulting
Rail Consulting
Rail Consulting
Rail Consulting
Creating a world fit for the future 189
Financial statements
Notes to the Group financial statements
37. Related undertakings of the Group (continued)
Subsidiary or related undertaking
Registered office
Principal activities
Ricardo Singapore Pte Limited
Ricardo (Thailand) Ltd (49%)(4)
141 Middle Road, 5-6 GSM Building, 188976, Singapore
140/36 ITF Tower 17th Floor, Silom Road, Kwang Surawong, Khet bangrak,
Rail Consulting
Rail Consulting
Ricardo Hong Kong Limited
Ricardo Technical Consultancy LLC (49%)(5)
Chongqing Transportation Railway Safety
Assessment Center Limited (60%)(6)
Wamarragu Transport Services Pty Ltd
(45%)(7)
Ricardo Beijing Company Limited
Ricardo Certification Limited(∞)
Ricardo Certification B.V.
Ricardo Certification Denmark ApS
Ricardo Certification Iberia SL
Ricardo Software, Inc.
Ricardo Innovations Limited
CDQ Joint Venture (50%)(8)
Ricardo Software Limited
Ricardo Certificación SL
Ricardo Environment Arabia LLC(9)
Ricardo Strategic Consulting Limited
Ricardo Consulting Engineers Limited
Ricardo Technology Limited
Ricardo Technology Limited
Ricardo Transmissions Limited
Bangkok, 10500, Thailand
Units 3210-18, 32/F Shui On Centre, 6-8 Harbour Road, Wanchai,
Hong Kong
Palm Tower, Block B, 15th Floor, P.O. Box 26600, West Bay, Doha, Qatar
No. 2 Yangliu Road, Mid Huangshan Street, New North District,
Chongqing, 401123, PR China
Suite 2.01, Level 2, Tower B, The Zenith, 821 Pacific Highway, Chatswood,
New South Wales, 2067, Australia
1301-1302, Shun Tak Centre, No.1 Xiangheyuan Road, Dongcheng
District, Beijing, 100004, PR China
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Catharijnesingel 33 J, 3511 GC, Utrecht, Netherlands
Nørre Farimagsgade 11, 1364 Copenhagen K, Copenhagen, Denmark
Agustín de Foxá 29, 9th Floor, 28036, Madrid, Spain
Detroit Technology Campus, 40000 Ricardo Drive, Van Buren Township,
Detroit, Michigan, 48111-1641, United States
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
175 Cremona Drive, Suite 140, Goleta, California, 93117, United States
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Agustín de Foxá 29, 9th Floor, 28036, Madrid, Spain
Bahrain Tower, Building Number 8953, 2393, King Fahd Road, Olaya,
12214, Kingdom of Saudi Arabia
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
West Sussex, BN43 5FG, United Kingdom†
Rail Consulting
Rail Consulting
Rail Consulting
Rail Consulting
Independent Assurance
Independent Assurance
Independent Assurance
Independent Assurance
Independent Assurance
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Ricardo Pension Scheme (Trustees) Limited Shoreham Technical Centre, Old Shoreham Road, Shoreham-by-Sea,
Dormant
Ricardo Deutschland GmbH
Nanjing Delta Win Transportation
Technical Services Limited (65%)(10)
West Sussex, BN43 5FG, United Kingdom†
Güglingstraße 66, 73529, Schwäbisch Gmünd, Germany
Room 1101, No. 301, Zhongmen Street, Gulou District, Nanjing, Jiangsu
Province, PR China
In Liquidation
In Liquidation
† Registered in England and Wales
∞ These companies have claimed exemption from audit per 479A of the Companies Act 2006.
(1) 99% owned by Ricardo plc; 1% owned by Ricardo UK Limited.
(2) 33.3% owned by Ricardo Defense, Inc.; 33.3% owned by DG Technologies; 33.3% owned by Claxton Logistics Services LLC.
(3) 49% of share capital and 80% of retained earnings owned by Ricardo Rail Limited; 51% of share capital and 20% of retained earnings owned by SSD Commercial Investment
(4) 49% of share capital and 92.5% of retained earnings owned by Ricardo Hong Kong Limited; 51% of share capital and 7.5% of retained earning owned by First Asia Industries Limited.
(5) 49% of share capital and 97% of retained earnings owned by Ricardo Rail Limited; 51% of share capital and 3% of retained earnings owned by Pro-Partnership LLC.
(6) 60% owned by Ricardo Beijing Company Limited; 40% owned by Chongqing Science & Technology Testing Center Limited.
(7) 45% owned by Ricardo Rail Australia Pty Ltd; 55% owned by Justin Brooker Nominees Pty Ltd. This associate undertaking is immaterial to the Group.
(8) 50% owned by Ricardo Defense, Inc.; 50% owned by DG Technologies.
(9) 15% owned by Ricardo plc; 85% owned by Ricardo-AEA Limited.
(10) 40% owned by Ricardo Beijing Company Limited; 25% owned by Ricardo Hong Kong Limited; 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 (8), and (10).
190 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Notes to the Group financial statements
38. Related parties’ transactions
The Chair of Ricardo plc, Sir Terry Morgan, was also a statutory director of Crossrail Limited until 5 December 2018, which was deemed to be a related party
that is external to the Ricardo Group up to that date.
Transactions between the Group and Crossrail Limited
Sale of services
2020
£m
-
2019
£m
0.7
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. This is set out in Note 32.
The remuneration received by all Executive and Non-Executive Directors during the year is disclosed in the Directors' Remuneration Report on page 102.
The Ricardo Pension Scheme (Trustees) Limited is a related party to the Group. The amounts paid to the Group’s retirement scheme is set out in Note 33.
39. Events after the reporting date
On 5th May 2020, the Group exercised £50m of the accordion option of its banking facilities, thereby increasing the Revolving Credit Facility to £200m
and increasing the amount undrawn and available to £70m. This provides the Group with increased committed funding available for the remaining term
through to July 2023. In addition to the increased committed funding available, the Adjusted Leverage (defined as net debt over underlying EBITDA)
covenant was increased from 3.0x to 3.75x for the next two test dates of 30 June 2020 and 31 December 2020. Following the year-end, on
9 September 2020, the definition of the Adjusted Leverage covenant for the December 2020 covenant test date was amended to be based on two times
the six months’ EBITDA to December 2020. In addition, the June 2021 covenant was increased to 3.75. The only other financial covenant is Interest Cover.
This remains at 4.0x for each test date, but with the December 2020 test based on two times the six months’ EBITDA to December 2020. For further details
on the Group’s current banking facilities please see Note 25.
Creating a world fit for the future 191
Financial statements
Company primary statements
Company statement of financial position of Ricardo plc
as at 30 June
Assets
Non-current assets
Intangible assets
Property, plant and equipment
Right-of-use assets
Investments
Deferred tax assets
Current assets
Trade and other receivables
Derivative financial assets
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Borrowings
Lease liabilities
Trade and other payables
Current tax liabilities
Derivative financial liabilities
Provisions
Net current assets
Non-current liabilities
Borrowings
Lease liabilities
Retirement benefit obligations
Deferred tax liabilities
Provisions
Total liabilities
Net assets
Equity
Share capital
Share premium
Retained earnings
Total equity
Note
30 June 2020
£m
30 June 2019
£m
3
4
5
6
7
8
13g
9
10
11
13g
13d
9
10
13c
7
13d
13e
13e
1.1
4.7
6.1
103.1
2.1
117.1
127.3
3.9
20.3
151.5
268.6
(0.7)
(0.8)
(97.0)
(0.9)
(6.5)
(0.1)
(106.0)
45.5
(47.7)
(6.6)
(6.7)
(0.7)
-
(61.7)
(167.7)
100.9
13.4
14.3
73.2
100.9
0.9
4.5
-
103.1
2.1
110.6
91.8
0.3
1.7
93.8
204.4
(0.1)
-
(76.0)
(1.3)
(1.2)
-
(78.6)
15.2
(14.1)
-
(8.5)
(0.5)
(0.1)
(23.2)
(101.8)
102.6
13.4
14.3
74.9
102.6
The Ricardo plc company statement of financial position has been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework (‘FRS 101’). The notes on pages 193 to 197 form an integral part of these financial statements.
The Company has not presented its own Income Statement and Statement of Comprehensive Income as permitted by Section 408 of the Companies Act
2006. The Company's profit for the year was £11.8m (2019: £10.7m). The financial statements of Ricardo plc (registered number 222915) on pages 192 to 197
were approved by the Board of Directors on 9 September 2020 and signed on its behalf by:
Dave Shemmans
Chief Executive Officer
Ian Gibson
Chief Financial Officer
192 Ricardo plc Annual Report & Accounts 2019/20
Financial statements
Company notes to the financial statements
Company statement of changes in equity of Ricardo plc
for the year ended 30 June
At 1 July 2018
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Equity-settled transactions
Purchases of own shares to settle awards
Ordinary share dividends
At 30 June 2019
Adoption of IFRS 16 (net of tax) (Note 2)
At 1 July 2019 (adjusted)
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Equity-settled transactions
Purchases of own shares to settle awards
Ordinary share dividends
At 30 June 2020
Share capital
£m
13.4
-
-
-
-
-
-
13.4
-
13.4
-
-
-
-
-
-
13.4
Share premium
£m
14.3
-
-
-
-
-
-
14.3
-
14.3
-
-
-
-
-
-
14.3
Retained
earnings
£m
81.5
10.7
(6.4)
4.3
1.0
(0.9)
(11.0)
74.9
(0.3)
74.6
11.8
(1.7)
10.1
0.6
(0.6)
(11.5)
73.2
Total
£m
109.2
10.7
(6.4)
4.3
1.0
(0.9)
(11.0)
102.6
(0.3)
102.3
11.8
(1.7)
10.1
0.6
(0.6)
(11.5)
100.9
Company notes to the financial
statements of Ricardo plc
1. Principal accounting policies
Basis of preparation
The financial statements of Ricardo plc have been prepared on a going
concern basis, as discussed in the viability statement on pages 40 and
41, and in accordance with the UK Companies Act 2006 and FRS 101. The
Company has transitioned from EU adopted IFRS to FRS 101, which has had
no affect on either the financial position nor the financial performance of
the Company. The accounting policies set out below have been applied
consistently to all periods presented in these financial statements. The
following exemptions available under FRS 101 have been applied:
• Paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based Payment (details of
the number and weighted average exercise prices of share options and
how the fair value of goods and services received was determined).
• IFRS 7 Financial Instruments: Disclosures.
• Paragraphs 91 to 99 of IFRS 13 Fair Value Measurement (disclosure of
valuation techniques and inputs used for fair value measurement of
assets and liabilities).
• Paragraph 38 of IAS 1 Presentation of Financial Statements to present
comparative information in respect of:
- paragraph 73(e) of IAS 16 Property, Plant and Equipment; and
- paragraph 118(e) of IAS 38 Intangible Assets.
• The following paragraphs of IAS 1 Presentation of financial statements:
- 10(d) (statement of cash flows);
- 16 (statement of compliance with all IFRS);
- 38(a) (requirement for minimum of two primary statements, including
cash flow statements);
- 38(b)-(d) (additional comparative information);
- 111 (cash flow statement information); and
- 134-136 (capital management disclosures).
• IAS 7 Statement of Cash Flows (The Company has not published its
individual cash flow statement as its liquidity, solvency and
financial adaptability are dependent on the Group rather than its own
cash flows).
• Paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors (requirement for the disclosure of information when
an entity has not applied a new IFRS that has been issued and is not yet
effective).
• Paragraph 17 of IAS 24 Related Party Disclosures (key management
compensation) and the requirements of IAS 24 Related Party Disclosures
to disclose related party transactions entered into between two or
more members of the Group, provided that any subsidiary which is
party to the transaction is wholly-owned by such a member.
Creating a world fit for the future 193
Financial statements
Company notes to the financial statements
1. Principal accounting policies (continued)
Significant accounting policies
The significant accounting policies applied in the preparation of these
individual financial statements are set out below. These policies have been
applied consistently to all the years presented, unless otherwise stated.
Investments
Investments in subsidiaries are stated at cost less any impairment in value.
The Company evaluates the carrying value of investments at the end of
each financial year to determine if there has been an impairment in value,
which would result in the inability to recover the carrying amount. When it
is determined that the carrying value exceeds the recoverable amount, the
excess is written-off to comprehensive income.
Amounts owed by subsidiary undertakings
The majority of the Company’s financial assets are amounts owed by
subsidiary undertakings. These are measured initially at fair value, and
subsequently at amortised cost. The general approach is applied to the
impairment of financial assets, recognising a loss allowance for expected
credit losses (‘ECL’). Where the credit risk has not increased significantly
since initial recognition the loss allowance are measured as 12-month ECL.
For balances repayable on demand, or where the credit risk has increased
significantly since initial recognition, a lifetime ECL is measured. ECLs are a
probability-weighted estimate of credit losses. Credit losses are measured
as the present value of all cash shortfalls (i.e. the difference between the
cash flows due to the entity in accordance with the contract and the cash
flows that the company expects to receive, therefore considering future
expectations). ECLs are discounted at the effective interest rate of the
financial asset.
When determining whether the credit risk of a financial asset has
increased significantly since initial recognition and when estimating ECL,
the Company considers the available cash and cash equivalents within
the subsidiary, the net current assets of the undertaking and future cash
generation.
Assets are provided in full and subsequently written off when there is
no reasonable expectation of recovery. Indicators that there may be
no reasonable expectation of recovery could include, amongst others,
evidence that the subsidiary has entered liquidation proceedings, or no
reasonable expectation that sufficient future cash generation to repay the
loan will occur in the subsidiary undertaking.
Other significant accounting policies
Other significant accounting policies are consistent with the Group
financial statements.
Judgements in applying accounting policies and key sources of
estimation uncertainties
The preparation of financial statements under FRS 101 requires the
Company’s management to make judgements and estimates that affect
the application of accounting policies and the reported amounts of
assets, liabilities, revenues and costs. 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. The key area of judgment that has
the most significant effect on the amounts recognised in the financial
statements is the review of financial assets for impairment. Management
has applied judgement when determining the credit risk of fellow Group
undertakings and their ability to repay loans.
An area involving significant risk of a material adjustment to the carrying
amounts of assets and liabilities due to estimate uncertainty within the
next financial year is the Company’s defined benefit obligation. This
risk is the same as that of the Group and is explained in Note 1(c) to the
Group financial statements. Another area of estimation uncertainty
is management’s assessment of the Company’s investments to
determine whether an indicator of impairment exists. Where applicable,
management then evaluates the carrying value of investments against
their value-in-use to determine whether if there has been an impairment
in value, which would result in the inability to recover the carrying amount.
194 Ricardo plc Annual Report & Accounts 2019/20
The value-in-use is estimated using a discounted cash flow valuation. A
pre-tax discount rate is used to discount the cash flows, which are derived
from externally sourced data reflecting the current market assessment of
these investments.
The basis for the projected cash flows is the Group’s three-year plan,
which is prepared by management and reviewed and approved by the
Board. The plan reflects past experience and management’s assessment
of the current contract portfolio, contract wins, contract retention, price
increases, and gross margin, as well as future expected market trends.
Cash flows after the three-year plan are projected into perpetuity using
a growth rate based on inflation and an average long-term economic
growth rate for the territory.
Changes in accounting policies
IFRS 16 Leases became effective on 1 July 2019 as described in Note
1(n) and Note 2 to the Group financial statements. The impact on the
Company accounts is disclosed in Note 2 below. Several other standards,
interpretations and amendments to existing standards became effective
on 1 January 2019, as detailed in Note 1(z) to the Group accounts, none of
which had a material impact on the Company.
2. Changes in significant accounting policy
The Company followed the Group accounting policy regarding IFRS 16
Leases. Please see Note 1(n) to the Group financial statements for the
transition method. The transition impact is shown below:
Adoption of IFRS 16
as at 1 July 2019
Assets
Non-current assets
Right-of-use assets
Deferred tax assets
Total non-current assets
Current assets
Trade and other receivables
Total current assets
Total assets
Liabilities
Current liabilities
Lease liabilities
Trade and other payables
Total current liabilities
Net current assets
Non-current liabilities
Lease liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Retained earnings
Total equity
Previously
reported
£m
IFRS 16
transitional
adjustment
£m
Adjusted
under
IFRS 16
£m
-
2.1
110.6
91.8
93.8
204.4
-
(76.0)
(78.6)
15.2
-
(23.2)
(101.8)
102.6
74.9
102.6
6.6
0.1
6.7
(0.2)
(0.2)
6.5
(0.8)
1.1
0.3
0.3
(7.1)
(7.1)
(6.8)
(0.3)
(0.3)
(0.3)
6.6
2.2
117.3
91.6
93.6
210.9
(0.8)
(74.9)
(78.3)
15.5
(7.1)
(30.3)
(108.6)
102.3
74.6
102.3
The lessee’s incremental borrowing rate applied to lease liabilities
recognised in the statement of financial position at the date of initial
application is 4.6% for property.
Financial statements
Company notes to the financial statements
2. Changes in significant accounting policy (continued)
Reconciliation between operating lease commitments and lease
liabilities
The following table explains the differences between the operating lease
commitments disclosed applying IAS 17 at 30 June 2019 and the lease
liabilities recognised on transition to IFRS 16 on 1 July 2019.
5. Leases
(a) As a lessee
The company leases one office premises and technical centre, with a
remaining lease term of 13 years. The lease agreement does not impose
any covenants. The leased asset may not be used as security for borrowing
purposes.
Total operating lease commitments under
IAS 17 at 30 June 2019
Discounting
Lease liabilities recognised on transition to
IFRS 16 at 1 July 2019
3. Intangible assets
Cost
At 1 July 2019
Additions
At 30 June 2020
Accumulated amortisation
At 1 July 2019
Charge for the year
At 30 June 2020
Net book value
At 30 June 2020
At 30 June 2019
£m
10.6
(2.8)
7.8
Software
£m
8.9
0.6
9.5
8.0
0.4
8.4
1.1
0.9
Software includes £0.7m (2019: £0.4m) in respect of assets under
construction which are not being amortised until the assets are made
available for use.
4. Property, plant and equipment
Right-of-use assets
Cost
At 30 June 2019
Adoption of IFRS 16 (Note 2)
At 1 July 2019
At 30 June 2020
Accumulated depreciation
At 30 June 2019
Adoption of IFRS 16 (Note 2)
At 1 July 2019
Charge for the period
At 30 June 2020
Net book value
At 30 June 2020
At 30 June 2019
Property
£m
-
7.6
7.6
7.6
-
1.0
1.0
0.5
1.5
6.1
-
See Note 10 for details of the associated lease liabilities.
(b) As a lessor
The Company subleases part of its right of use property with a remaining
term of six years. This lease is classified as an operating lease.
During the year the Company recognised rental income of £0.2m (2019:
£nil) on these subleases.
The following table sets out a maturity analysis of lease payments,
showing the undiscounted lease payments to be received after the
reporting date.
Land and
property
£m
Fixture,
fittings and
equipment
£m
6.7
-
6.7
2.7
0.1
2.8
3.9
4.0
1.0
0.4
1.4
0.5
0.1
0.6
0.8
0.5
Total
£m
7.7
0.4
8.1
3.2
0.2
3.4
4.7
4.5
Lease commitments
By due date of commitments
Within one year
Between one and five years
After five years
At 30 June
6. Investments
At 1 July 2019 and 30 June 2020
Cost
At 1 July 2019
Additions
At 30 June 2020
Accumulated amortisation
At 1 July 2019
Charge for the year
At 30 June 2020
Net book value
At 30 June 2020
At 30 June 2019
2020
£m
0.4
1.6
0.3
2.3
Shares in
subsidiaries
£m
103.1
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 to the Group
financial statements. Fixture, fittings and equipment includes £0.6m
(2019: £0.3m) in respect of assets under construction which are not being
depreciated until the assets are made available for use.
The Directors consider that the fair value of investments is not less than
the carrying value. Details of the Company’s subsidiaries and related
undertakings are shown in Note 37 to the Group financial statements.
Creating a world fit for the future 195
Financial statements
Company notes to the financial statements
7. Deferred tax
Recognised deferred tax assets/(liabilities)
At 1 July (previously reported)
Adoption of IFRS 16 (Note 2)
At 1 July (restated)
Charged to the income statement
Credited to other comprehensive income
At 30 June
Deferred tax assets/(liabilities) comprise
Accelerated capital allowances
Defined benefit obligation
Tax losses and credits
Unrealised capital gains
Other
At 30 June
Non-current
Assets
Liabilities
At 30 June
8. Trade and other receivables
Trade receivables
Amounts owed by subsidiaries
Prepayments
Other receivables
At 30 June
2020
£m
1.6
0.1
1.7
(1.4)
1.1
1.4
2020
£m
(0.2)
1.3
0.1
(0.5)
0.7
1.4
2020
£m
2.1
(0.7)
1.4
2020
£m
0.1
124.8
1.2
1.2
127.3
10. Lease liabilities
Movement in lease liability
At 30 June 2019
Adoption of IFRS 16 (Note 2)
At 1 July 2019
Interest
Payments
At 30 June 2020
Lease liability
Current liabilities - maturing within one year
Non-current liabilities - maturing after one year
At 30 June 2020
Maturity of undiscounted lease liability
Within one year
Between one and five years
After five years
Finance portion of net liability
At 30 June 2020
11. Trade and other payables
Trade payables
Tax and social security payable
Amounts owed to subsidiaries
Accruals
Other payables
At 30 June
2019
£m
1.1
-
1.1
(0.9)
1.4
1.6
2019
£m
(0.1)
1.4
0.2
(0.5)
0.6
1.6
2019
£m
2.1
(0.5)
1.6
2019
£m
-
90.0
0.9
0.9
91.8
Total
£m
-
7.9
7.9
0.3
(0.8)
7.4
£m
0.8
6.6
7.4
£m
0.8
3.2
5.6
(2.2)
7.4
2019
£m
0.4
0.3
71.1
3.0
1.2
76.0
2020
£m
0.6
0.2
95.2
-
1.0
97.0
All trade and other receivables are due within the next 12 months. £11.1m
(2019: £8.2m) of the amounts owed by subsidiaries are due for repayment
within the next 12 months and the remaining £113.9m (2019: £81.8m) have
no fixed repayment date. £102.7m (2019: £70.5m) of the amounts owed
by subsidiaries carry interest at rates between 2.0% and 5.0% (2019: 2.3%
and 5.0%) with the remaining £22.3m (2019: £19.5m) being interest-free. All
amounts owed by subsidiaries are unsecured.
9. Borrowings
Current liabilities - borrowings:
- Bank overdrafts repayable on demand
Total
Non-current liabilities - borrowings:
- Bank loans maturing after one year
Total
At 30 June
2020
£m
0.7
0.7
47.7
47.7
48.4
2019
£m
0.1
0.1
14.1
14.1
14.2
All amounts owed to Group undertakings are unsecured. £86.9m (2019:
£64.4m) of the amounts owed to subsidiaries carry interest at rates
between 2.0% and 3.1% (2019: 2.4% and 2.5%) and has no fixed repayment
date. £8.2m (2019: £6.7m) of the amounts owed to subsidiaries are interest-
free and due for repayment within the next 12 months.
12. Lease commitments
At 30 June 2019 the Group’s future aggregate undiscounted minimum
lease payments under non-cancellable operating leases not recognised on
the consolidated statement of financial position are as follows:
Lease commitments
By due date of commitments
Within one year
Between one and five years
After five years
At 30 June
2019
£m
0.8
3.2
6.6
10.6
The Company has the same banking facilities as the Group. Please see
Note 25 to the Group financial statements.
From 1 July 2019, the group has recognised right-of-use assets for these
leases. See Note 2 for details.
196 Ricardo plc Annual Report & Accounts 2019/20
13. Other information
a) Company audit fee
Fees payable to the Company’s auditor for the audit of the Company’s
annual accounts totalled £0.3m (2019: £0.2m). Fees payable to KPMG LLP
and its associates for non-audit services to the Company are not required
to be disclosed because the Group accounts disclose such fees on a
consolidated basis (see Note 11 to the Group financial statements).
b) Director’s emoluments
The remuneration received by all Executive and Non-Executive Directors
during the year is disclosed in the Directors’ Remuneration Report on page
102. The Directors are remunerated by the Company for their services to
the Group as a whole. No remuneration was paid to them specifically in
respect of their services to Ricardo Plc for either year.
c) Employees and defined benefit obligation
During the year the company employed an average of 51 (2019: 47)
employees.
The Company operates a defined benefit pension scheme, the Ricardo
Group Pension Fund (‘RGPF’). This is disclosed in Note 33 to the Group
financial statements, together with the accounting policy and key
accounting estimates.
d) Provisions
The Company has a provision within current liabilities for expected costs
of legal claims and litigation of £0.1m (2019: non-current liabilities of £0.1m).
Financial statements
Company notes to the financial statements
e) Share capital and share premium
Since 1 July 2018, the number of allocated, called-up and fully paid
ordinary shares of 25p each remained at 53,406,250, being £13.4m. Share
premium has remained £14.3m over the same period.
f) Contingent liabilities
Contingent liabilities exist in the form of guarantees provided in the
ordinary course of business to certain subsidiaries to give assurance of
their contractual and financial commitments. None of these arrangements
are expected to give rise to any material cost to the Company.
In July 2013, a guarantee was provided to the Ricardo Group Pension Fund
(‘RGPF’) of £2.8m in respect of certain contingent liabilities that may arise,
which have been secured on specific land and buildings. The outcome of
this matter is not expected to give rise to any material cost to the Group.
In October 2018, a further guarantee was provided to the RGPF for an
amount that shall not exceed the employers’ liability were a debt to arise
under Section 75 of the Pensions Act 1995. The guarantee will terminate
on 5 April 2023. The outcome of this matter is not expected to give rise to
any material cost to the Group on the basis that the Group continues as a
going concern.
g) Derivative financial assets and liabilities
The Company has the same derivative financial assets and liabilities as the
Group. These are disclosed in Note 26 to the Group financial statements.
h) Related party transactions
The Company has taken the exception under FRS 101 not to disclose
related party transactions entered into between two or more members
of the Group, nor to disclose key management compensation. Directors
emoluments are detailed in Note 13(b).
Creating a world fit for the future 197
198 Ricardo plc Annual Report & Accounts 2019/20
Additional
information
200 Corporate Information
201 Glossary
Creating a world fit for the future 199
Group overviewxx Additional information
Corporate Information
Corporate Information
Corporate Information
Group General Counsel and Company Secretary
Patricia Ryan
Key dates
Annual General Meeting: 12 November 2020
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: +44 208 639 3131 (from outside the UK)
Principal bankers
Lloyds Bank plc
3rd Floor
10 Gresham Street
London
EC2V 7AE
HSBC Bank plc
First Point
Buckingham Gate
London Gatwick Airport
West Sussex
RH16 0NT
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
Registered company number
222915
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Independent auditors
KPMG LLP
15 Canada Square
London
E14 5GL
Stockbrokers
Investec Investment Banking
2 Gresham Street
London
EC2V 7QP
Tel: 0207 597 5000
Liberum Capital Limited
Ropemaker Place
25 Ropemaker Street
London
EC2Y 9LY
Tel: 0203 100 2000
Website: www.ricardo.com
A PDF version of this Annual Report & Accounts can be
downloaded from the Investors page of our website.
200 Ricardo plc Annual Report & Accounts 2019/20
Additional information
Glossary
Glossary
Glossary
Term
B-BBEE legislation
South African employment legislation – Broad-based Black Economic Empowerment
Cash conversion
Statutory cash conversion is calculated as cash generated from operations divided by earnings before
interest, tax, depreciation and amortisation (‘EBITDA’).
Constant currency organic
growth/decline
The Group generates revenues and profits in various territories and currencies because of its
international footprint. Those results are translated on consolidation at the foreign exchange rates
prevailing at the time. Constant currency organic growth/decline is calculated by translating the
result for the current year using foreign currency exchange rates applicable to the prior year. This
provides an indication of the growth/decline of the business, excluding the impact of foreign
exchange.
DTC
EBITDA
ESG
FY
GHG
Headcount
ISO 9001
ISO 14001
ISO 27001
ISO 45001
Net debt
Detroit Technology Campus
Earnings before interest, tax, depreciation and amoritisation
Environmental, Social and Governance
Financial Year
Greenhouse gases
Headcount is calculated as the number of employees on the payroll at the reporting date and
includes subcontractors on a full-time equivalent basis.
International standard for Quality Management Systems
International standard for Environmental Management Systems
International standard for Information Security Management Systems
International standard for Occupational Health and Safety Management Systems
Net debt is defined as current and non-current borrowings less cash and cash equivalents, including
hire purchase agreements, but excluding IFRS 16 lease liabilities. Management believes this definition
is the most appropriate for monitoring the indebtedness of the Group and is consistent with the
treatment in the Group’s banking agreements.
Organic growth/decline
Organic growth/decline is calculated as the decline in the result for the current year compared to the
prior year, after adjusting for the performance of acquisitions or disposals, to include the results of
those acquisitions for an equivalent period in each financial year.
Organic result
REEP
RRA
The organic result for the prior year includes the performance of acquisitions for an equivalent period
to FY 2019/20.
Ricardo Energy, Environment and Planning, formerly PLC Consulting Pty Ltd, acquired 31 July 2019
Ricardo Rail Australia, formerly Transport Engineering Pty Ltd, acquired 31 May 2019
Scope 1 Emissions
Direct emissions from owned or controlled sources
Scope 2 Emissions
Indirect emissions from the generation of purchased energy.
Scope 3 Emissions
All indirect emissions (not included in scope 2) that occur in the value chain, including both upstream
and downstream emissions.
TCFD
Underlying
Task Force on Climate-Related Financial Disclosures: An organization of 31 members aiming to
develop guidelines for voluntary climate-centered financial disclosures across industries
Underlying measures exclude the impact on statutory measures of specific adjusting items.
Underlying measures are considered to provide a more useful indication of underlying performance
and trends over time.
Underlying cash conversion
Underlying cash conversion is calculated as cash generated from operations, adjusted for the impact
of specific adjusting items on operating cash, divided by EBITDA, adjusted for the cash impact of
specific adjusting items.
Creating a world fit for the future 201
Creating a world fit for the future
www.ricardo.com