Ultra Electronics Holdings plc Annual Report and Accounts 2013 positioned for growth through portfolio strength focused on customer need 3 1 0 2 s t n u o c c A d n a t r o p e R i l a u n n A c l p s g n d o H s c i n o r t c e E l l a r t l U making a difference Registered Office: Ultra Electronics Holdings plc 417 Bridport Road Greenford Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4321 Fax: +44 (0) 20 8813 4322 www.ultra-electronics.com information@ultra-electronics.com 2 1 1 3 5 2 2 4 2 1 ) 0 ( 4 4 + s e t a i c o s s A T A H : n g i s e D Ultra Electronics Holdings plc Annual Report and Accounts 2013 Financial highlights Revenue £745.2m KPI -2.1% (2012: £760.8m) Underlying earnings per share* 1. Introduction Group at a glance 7 1 0 . 0 7 3 1 . 7 7 6 0 . 8 7 4 5 . 2 6 5 1 . 0 127.1p KPI 1 2 5 . 5 1 2 7 . 1 1 2 1 . 1 1 0 8 . 5 9 6 . 7 2. Strategic report Chief Executive’s review Rakesh Sharma, Chief Executive +1.3% (2012: 125.5p) Business model Strategic tenets Ultra’s enablers Strategic objectives 09 10 11 12 13 09 10 11 12 13 Key Performance Indicators 02 04 06 12 14 16 18 23 28 30 32 34 38 40 44 48 50 52 60 63 75 77 78 82 83 83 84 85 Market analysis Financial review Mary Waldner, Group Finance Director Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Risk management Making a difference Developing Ultra’s people Sustainability 3. Governance Chairman’s statement Douglas Caster, Chairman Board of Directors Corporate Governance Report Audit Committee Report Remuneration Report Directors’ Report Executives and advisors 4. Group financials Independent auditor’s report Group highlights Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated cash flow statement Consolidated statement of changes in equity 86 Notes to accounts 87 Statement of accounting policies in respect of the Group’s consolidated financial statements 114 5. Company financials Company balance sheet Notes to accounts Statement of accounting policies for the Company accounts 6. Five-year review Five-year review 120 121 124 125 Dividend per share Underlying profit before tax* 42.2p +5.5% (2012: 40.0p) 4 2 . 2 4 0 . 0 3 8 . 53 4 . 6 3 1 . 2 £116.8m KPI 1 1 6 . 5 1 1 6 . 5 1 1 6 . 8 1 0 5 . 2 9 2 . 0 +0.3% (2012: £116.5m) 09 10 11 12 13 09 10 11 12 13 Underlying operating profit* £121.7m 1 1 0 . 0 9 6 . 9 Group order book £781.2m 1 2 1 . 7 1 2 1 . 8 1 2 1 . 7 9 5 0 . 38 1 7 . 9 9 0 5 . 0 7 8 1 . 2 7 6 1 . 8 -0.1% (2012: £121.8m) -13.7% (2012: £905.0m) 09 10 11 12 13 09 10 11 12 13 KPI = Key Performance Indicator, pages 16 and 17 for details Dividend The proposed final dividend is 29.5p, bringing the total dividend for the year to 42.2p (2012: 40.0p). This represents an annual increase of 5.5%, with the dividend being covered 3.0 times (2012: 3.1 times) by underlying earnings per share. If approved at the Annual General Meeting, the dividend will be paid on 2 May 2014 to shareholders on the register on 11 April 2014. Cautionary statement This document contains forward-looking statements which are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the countries and sectors in which the Group operates. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. *see footnote on page 1 For more information: www.ultra-electronics.com/ investors/irhome.php Business addresses Aircraft & Vehicle Systems Al Shaheen (49%) P.O. Box: 128630 Abu Dhabi United Arab Emirates Tel: +971 2 813 7444 www.alsa.ae AMI 5500 South State Street Ann Arbor, Michigan 48108 USA Tel: +1 734 302 7632 www.ultra-ami.com CEMS Waverley House Hampshire Road Weymouth, Dorset DT4 9XD England Tel: +44 (0) 1305 767100 www.ultra-cems.com Controls 417 Bridport Road Greenford, Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4444 www.ultra-controls.com ID Waverley House Hampshire Road Weymouth, Dorset DT4 9XD England Tel: +44 (0) 1305 767100 www.ultramagicard.com Measurement Systems Inc. 50 Barnes Park North Suite 102 Wallingford, Connecticut 06492 USA Tel: +1 203 949 3500 www.ultra-msi.com Precision Air & Land Systems Arle Court Cheltenham, Gloucestershire GL51 6PN England Tel: +44 (0) 1242 221166 www.ultra-pals.com Photography TEAM PHOTOGRAPH ON PAGES 28 & 30, BOARD OF DIRECTORS AND THROUGHOUT: Molyneux Associates TEAM PHOTOGRAPH ON PAGE 32: Alex MacAulay Photographers PLATFORMS/END APPLICATIONS COURTESY OF: BAE Systems, Boeing and US DoD Ultra Electronics Holdings plc Annual Report and Accounts 2013 Information & Power Systems AIRPORT & POWER SYSTEMS Airport Systems The Oaks Crewe Road Wythenshawe, Manchester M23 9SS England Tel: +44 (0) 161 946 3600 www.ultra-as.com EMS Development Corporation 95 Horseblock Road, Unit 2 Yaphank, New York 11980 USA Tel: +1 631 345 6200 www.ultra-ems.com Ithra (70%) PO Box 1162 PC111, Almattar CPO Al Seeb, Muscat Sultanate of Oman Tel: +968 2 434 3500 Nuclear Control Systems Innovation House Lancaster Road Ferndown Industrial Estate Wimborne, Dorset BH21 7SQ England Tel: +44 (0) 1202 850450 www.ultra-ncs.com Nuclear Sensors & Process Instrumentation 707 Jeffrey Way P.O. Box 300 Round Rock, Texas 78680-0300 USA Tel: +1 512 434 2800 www.ultra-nspi.com PMES Towers Business Park Wheelhouse Road Rugeley, Staffordshire WS15 1UZ England Tel: +44 (0) 1889 503300 www.ultra-pmes.com INFORMATION & INTELLIGENCE SYSTEMS Advanced Tactical Systems 4101 Smith School Road Building IV, Suite 100 Austin, Texas 78744 USA Tel: +1 512 327 6795 www.ultra-ats.com Command & Control Systems Knaves Beech Business Centre Loudwater High Wycombe, Buckinghamshire HP10 9UT England Tel: +44 (0) 1628 530000 www.ultra-ccs.com ProLogic 9400 Innovation Drive Manassas, Virginia 20110 USA Tel: +1 703 331 5922 www.ultra-prologic.com SOTECH 12011 Guilford Road Suite 111 Annapolis Junction, Maryland 20701 USA Tel: +1 301 470 7015 Tactical & Sonar Systems SONAR & UNDERSEA SYSTEMS Avalon Systems 12 Douglas Drive Technology Park Mawson Lakes Adelaide, South Australia 5095 Australia Tel: +61 (0) 8 8169 1200 www.ultra-avalon.com www.ultra-electronics.com.au Flightline Systems 7625 Omnitech Place Victor, New York 14564-9795 USA Tel: +1 585 924 4000 www.ultra-fei.com Maritime Systems 40 Atlantic Street Dartmouth, Nova Scotia B2Y 4N2 Canada Tel: +1 902 466 7491 www.ultra-ms.com Ocean Systems 115 Bay State Drive Braintree, Massachusetts 02184-5203 USA Tel: +1 781 848 3400 www.ultra-os.com Sonar Systems 419 Bridport Road Greenford, Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4567 www.ultra-sonar.com USSI 4868 East Park 30 Drive Columbia City, Indiana 46725-8861 USA Tel: +1 260 248 3500 www.ultra-ussi.com TACTICAL SYSTEMS 3eTI 9715 Key West Avenue Suite 500 Rockville, Maryland 20850 USA Tel: +1 301 670 6779 www.ultra-3eti.com AEP Knaves Beech Business Centre Loudwater High Wycombe, Buckinghamshire HP10 9UT England Tel: +44 (0) 1628 642600 www.ultra-aep.com Communication & Integrated Systems 419 Bridport Road Greenford, Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4567 www.ultra-cis.com GigaSat GigaSat Building Tring Business Centre Icknield Way Tring, Hertfordshire HP23 4JX England Tel: +44 (0) 1442 892000 TCS 5990 Côte de Liesse Montreal, Québec H4T 1V7 Canada Tel: +1 514 855 6363 www.ultra-tcs.com Ultra Electronics Holdings plc 01 Annual Report and Accounts 2013 What is Ultra? Ultra Electronics is a group of businesses which manages a portfolio of specialist capabilities, generating highly-differentiated solutions and products in the defence & aerospace, security & cyber, transport and energy markets, by applying electronic and software technologies in demanding and critical environments to meet customer needs The strategic framework, pictured below, is focused on ensuring that Ultra meets its prime objective. This is achieved through the strategies for growth which are described on pages 14 and 15, allied with the business model described on pages 6 to 11. Underpinning these are Ultra’s strategic tenets described on pages 12 and 13, which help to shape and define the values and behaviours embodied within Ultra’s culture. Ultra’s culture is described on pages 40 and 41. Good corporate governance is at the heart of Ultra’s compliance framework and is described on pages 48 and 52. Ultra’s strategic framework Objective Delivered through… Underpinned by… To outperform the market in terms of annual increases in shareholder return Robust business model N see page 06 Strategic objectives N see page 14 Ultra’s enablers N see page12 Our culture N see page 40 Good governance N see page 48 Footnote underlying operating profit before amortisation of intangibles arising on acquisition, impairment of goodwill and adjustments to contingent consideration net of acquisition costs. IFRS operating profit was £57.4m (2012, as restated: £88.3m). See Note 36 for reconciliation. organic growth (of revenue or profit) is the annual rate of increase in revenue or profit that was achieved, assuming that acquisitions made during the prior year were only included for the same proportion of the current year at constant currencies. underlying operating margin is the underlying operating profit as a percentage of revenue. finance charges exclude fair value movements on derivatives, defined benefit pension interest charges and discount on provisions. underlying profit before tax before amortisation of intangibles arising on acquisition, impairment of goodwill, fair value movements on derivatives, unwinding of discount on provisions, defined benefit pension interest charges and adjustments to contingent consideration net of acquisition costs. Basic EPS 54.8p (2012, as restated: 88.1p). See Note 36 for reconciliation. underlying tax is the tax charge on underlying profit before tax. The underlying tax rate is underlying tax expressed as a percentage of underlying profit before tax. underlying operating cash flow is cash generated by operations and dividends from associates, less net capital expenditure, R&D and LTIP share purchases. operating cash conversion is underlying operating cash flow as a percentage of underlying operating profit. net debt comprises loans and overdrafts less cash and cash equivalents. bank interest cover is the ratio of underlying operating profit to finance costs associated with borrowings. Note: the 2012 profit and loss account has been restated to reflect the adoption of IAS19 (revised 2011) ‘Employee Benefits’. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 02 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Group at a glance How Ultra operates The Group is organised into three divisions: Aircraft & Vehicle Systems, Information & Power Systems and Tactical & Sonar Systems. Ultra’s divisions deliver specialist solutions to the Defence & Aerospace, Security & Cyber, Transport and Energy markets. Aircraft & Vehicle Systems % 21 % 27 % of Group revenue % of Group profit* Number of employees 1,152 Information & Power Systems Revenue £155.5m 2012: £147.0m +5.8% Underlying operating profit* £32.4m 2012: £30.6m +5.9% Order book £166.0m 2012: £163.6m Revenue £305.0m 2012: £315.8m +1.5% -3.4% % 41 % 34 Underlying operating profit* £41.2m 2012: £44.9m -8.2% % of Group revenue % of Group profit* Number of employees 1,756 Tactical & Sonar Systems % 38 % 39 % of Group revenue % of Group profit* Number of employees 1,657 Order book £330.1m 2012: £391.4m Revenue £284.7m 2012: £298.0m -15.7% -4.5% Underlying operating profit* £48.1m 2012: £46.3m +3.9% Order book £285.1m 2012: £350.0m -18.5% *see footnote on page 1 Ultra Electronics Holdings plc 03 Annual Report and Accounts 2013 Capabilities Highlights in 2013 Major customers in 2013 Ultra specialises in high integrity, safety- critical, real-time control systems for aircraft and vehicle applications. These include airframe and engine ice protection, power distribution and control equipment and noise and vibration cancellation systems. The Group also supplies advanced human-machine interfaces and systems, including those to control unmanned ground and air vehicles. Ultra provides innovative small power sources, including miniature pneumatic systems, propane-powered fuel cells and multi-fuel UAV engines. • award of a contract by Lockheed Martin UK for the development of a new power distribution system for the British Army’s Warrior armoured fighting vehicle • Ultra’s teaming partner Raytheon winning the US Joint Miniature Munitions Bomb Release Unit (JMM BRU) • the award of an exclusive long-term supply agreement with Pratt & Whitney for the electronic control unit which manages the Electrical Ice Protection System (EIPS) on the Joint Strike Fighter’s F-135 engine • Boeing • Airbus • PA Consulting • General Electric • BAE Systems More information about Aircraft & Vehicle Systems can be found on pages 28 and 29 Ultra supplies advanced command and control systems for battlespace visualisation, surveillance systems, air defence and naval combat management. The Group provides: perimeter security solutions for critical infrastructure; crisis response planning and management software; secure networks. Ultra’s high-integrity sensors and control systems are used for civil and military nuclear reactors and a range of specialist, solid-state electrical power systems which are used for naval vessels and mass transit. Ultra is a world-leading integrator of airport and airline management & information systems. Ultra supplies advanced cyber security solutions, high-capacity communication systems, satellite communication equipment and tactical surveillance equipment to support network-enabled warfare. Specialist areas include data links, encryption for information assurance and electronic warfare. The Group also supplies world-leading ship, submarine and airborne sonar equipment and systems to meet the challenges of the underwater battlespace, including anti-submarine warfare and torpedo defence. Ultra has developed a range of highly efficient acoustic hailing devices. • a contract for the supply of specialist instrumentation to EDF Energy • a contract to supply specialist electrical power management equipment to a UK submarine programme • a contract with the Republic of Indonesia Ministry of Defence for the mid-life modernisation of the first of the Fatahillah Class corvettes • US DoD • Oman Ministry of Transport & Communication • BAE Systems • Rolls-Royce • Indonesian MoD More information about Information & Power Systems can be found on pages 30 and 31 • a contract extension to its End Cryptographic Unit Replacement Programme (ECU RP) for the integration & installation phase of the programme • a contract for the upgrade of the ANZAC Class Frigate electronic support system for the Royal Australian Navy • the US Navy issued a five-year IDIQ competitive tender for sonobuoys for which Ultra, through its JV, was the only bidder • US DoD • UK MoD • Raytheon • Thales • Australian DoD More information about Tactical & Sonar Systems can be found on pages 32 and 33 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 04 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Chief Executive’s review Rakesh Sharma Chief Executive In response to the changing market dynamics, Ultra continues to adapt its behaviours to maintain its agility and focus on customer need. Introduction Ultra’s increasingly wide portfolio of specialist capabilities allows it to offer highly-differentiated solutions into the defence & aerospace, security & cyber and transport and energy market sectors. This broad diversity gives significant resilience to Ultra’s financial performance and provides a solid platform for growth. Over the last 12 months the Group has weathered the uncertainty in the US government-funded market, where the lack of clarity has resulted in delays to expected orders, approvals and payments. The continued fiscal pressures in the broader government- funded markets, and changing market dynamics, have tested the Group’s business model. However, the Group’s sustained investment and constant focus on improving operational efficiencies, together with Ultra’s inherent agility has shown the model is robust and is positioning the Group for growth when normality returns. Dividend per share 42.2p +5.5% (2012: 40.0p) 4 2 . 2 4 0 . 0 3 8 . 53 4 . 6 3 1 . 2 09 10 11 12 13 Underlying earnings per share* 127.1p KPI +1.3% (2012: 125.5p) 1 2 5 . 5 1 2 7 . 1 1 2 1 . 1 1 0 8 . 5 9 6 . 7 09 10 11 12 13 *see footnote on page 1 Operational highlights Features of the Group’s accomplishments in the year which will underpin future performance included: • the award of an exclusive long-term supply agreement with Pratt & Whitney for the electronic control unit which manages the Electrical Ice Protection System (EIPS) on the US Joint Strike Fighter’s F-135 engine. The agreement is effective for the life of the engine programme, valued at over $500m • a £16.1m contract for the supply of specialist instrumentation to EDF Energy. Under this contract, Ultra will manufacture and support safety-critical nuclear reactor instrumentation for use in EDF Energy’s current UK nuclear power stations. This is the first contract to benefit from Ultra’s recent investment in a state-of-the-art nuclear instrumentation manufacturing facility • an increase in anti-submarine warfare (ASW) spend which reflects the US ‘Pivot to the Pacific’ policy. The US Navy has recently changed from issuing an annual sonobuoy tender and issued a five-year IDIQ competitive tender for which Ultra, through its JV, was the only bidder. Contract award is expected in the first quarter of 2014 Ultra’s track record of delivering above-average shareholder returns since flotation (pence) Ultra’s business model Ultra’s prime objective continues to be to outperform the market in terms of annual increases in shareholder value, by delivering above-average increases in earnings and by communicating effectively with shareholders and the financial community. The strategic framework, page 1, is focused on ensuring that Ultra meets its prime objective. This is achieved through the strategies for growth which are described on pages 14 and 15, allied with the business model described on pages 6 to 11. Underpinning these are Ultra’s strategic tenets described on pages 12 and 13, which help to shape and define the values and behaviours embedded within Ultra’s culture, which is further detailed on pages 40 to 43. Positioning for growth In response to the changing market dynamics, Ultra continues to adapt its behaviours to maintain its agility and focus on customer needs. To support this, the Group has successfully developed and rolled out a number of internal initiatives and tools which help it gain a better understanding of customers’ real needs. These improve its ability to offer differentiated and comprehensive solutions in areas of preferential spend across all its market sectors. These key initiatives include: LEAP, LAUNCH and Collaborative Autonomy (more information on these initiatives can be found on pages 7, 9 and 10). Ultra Electronics Holdings plc FTSE all share price index FTSE 100 price index FTSE all share aerospace/defence 2500 2000 1500 1000 500 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 KPI = Key Performance Indicator, see pages 16 and 17 for details The four main strategies for growth are: 1 Increase the Group’s portfolio of specialist capabilities 2 Increase the number of long-term platforms and programmes on which Ultra’s specialist capabilities are specified Ultra Electronics Holdings plc 05 Annual Report and Accounts 2013 Ultra’s strategic framework 3 4 Broaden the Group’s customer base Widen Ultra’ geographic footprint s Investment for growth – new capabilities To increase the breadth of the Group’s capabilities, Ultra continues to invest over 5% of revenue on internal development to generate new differentiated offerings. These offerings are aimed at niche market sectors where customers preferentially focus their expenditure. These investment activities are led by the businesses and are robustly reviewed by the Executive Team and the Board. In parallel, Ultra continues to invest in acquisitions, which bring complementary world-leading niche capabilities and market access to the Group’s portfolio. In June 2013, the Group acquired Varisys, a UK business which develops products for high-performance embedded computing applications. Its product portfolio includes bespoke solutions for customers operating in the aerospace, defence, telecommunications and industrial sectors. Varisys is now a part of Ultra’s Aircraft & Vehicle Systems division. In October 2013, Ultra acquired Wood & Douglas Limited (W&D). W&D provides bespoke wireless products, radio networks, video monitoring and wireless data platform capabilities. These are supplied to the defence, homeland security, transportation, emergency services, exploration, healthcare and utilities sectors in the UK and to over 30 countries worldwide. W&D has been integrated into Ultra’s Tactical & Sonar Systems division to form a centre of excellence for communication products and services. Investment for growth – new geographic markets The Group constantly strives to broaden its customer base and widen its geographic footprint. This not only provides growth, but increases the robustness of the business model. Ultra has made the strategic decision to prioritise on a number of regions and sectors with higher growth. The Group recognises that new markets and geographic sectors take time to enter and so these activities are carried out in a measured and controlled manner, with due consideration of risk. Ultra, as an independent, non-threatening partner, is able to support all of the main prime contractors and local industry partners. The Group is therefore well positioned to bring its specialised equipment, systems and services to new long-term platforms and programmes in new markets and regions. Further details on Ultra’s robust business model can be found on pages 6 to 11. Behaviours for growth The Group will continue to differentiate itself from its competitors through its technical innovation and high standards of ethical business conduct. Underpinning this cultural drive is a strong ethical policy which is mandatory for all employees across the entire Group. Ultra educates its employees on anti-bribery and corruption policies, including gifts and hospitality practices. In the period, Ultra decided not to pursue business in areas where it was not satisfied that its ethical standards would be maintained. Executing against the growth strategies, shown above, requires consistency of management focus and drive. The continuity of Ultra’s management team ensures that expertise and experience is retained to maintain growth momentum in the Group. Ultra’s management team has to balance dealing with the particularly challenging short-term market conditions, whilst also ensuring that it is fully addressing the need to continue positioning for medium- and long-term growth. The members of the Executive Team understand through experience, what makes Ultra different and how to focus the Group’s businesses on maintaining competitive advantage in the various specialist market sectors in which Ultra operates. Summary I am pleased to say that early recognition of current changes in market dynamics, allied with Ultra’s robust business model and inherent agility, has enabled the Group to position for future growth in these challenging times. I would like to finish by thanking all of Ultra’s employees for their continued hard work, dedication and enthusiasm. Ultra’s reputation as a global leader in electronics and software for defence, security, transport and energy applications is built on the endeavours of its exceptional employees and their ability to develop long-term value-adding relationships with customers. The ability to execute these strategies successfully is entirely reliant upon the engagement, commitment and passion of the Group’s employees. I am confident that Ultra is well placed to successfully execute the strategies and plans to meet its prime objective. Rakesh Sharma Chief Executive n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 06 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Business model Ultra’s business model is centred around the Group’s three core strengths: customer reach, people and capabilities • C o n t inuous investment s t a n d i n g the customer’s ‘problem state t o m e r e ngagement (LAUNCH) i n d ependence m • U r e d n s u • C • U l t s r a ’ Ultra’s customer reach Npage 7 e n t’ ) s e i t i l i b a p a c t y m o n o t u a e v ti a r o b cialis e • B ro ad portfolio of sp orp orate agility (colla • Fle xible partnerships • C Ultra’s people Npage 10 • • D • R o • i C g m M a u h l t t a i n Ultra’s capabilities Npages 8-9 u p n r e a e o e x g i n ( L E p le g it s A P ) p e o ple p ertise • Continuous invest m e n t Value generation • Value for the customer • Innovative solutions • Through-life support • Sustaining value • Balancing risk Npage 11 The Group will continue to differentiate itself from its competitors by: • technical innovation across its broad portfolio of capabilities • the endeavours of its exceptional employees • the ability to develop long-term value-adding relationships with customers Ultra’s customer reach Ultra strives to get to the heart of a customer’s requirements – it is this that helps Ultra build lasting customer relationships Ultra Electronics Holdings plc 07 Annual Report and Accounts 2013 Ultra’s strategic framework ” LAUNCH case study One of Ultra’s businesses began the process to encourage an existing customer to replace the competitor for the hand controllers for a helicopter weapon system. Using LAUNCH, it succeeded in winning the business by solving several problems experienced by the existing supplier. As a result, the business was able to move from supplying just the high-end electronic components, to supplying the entire fire control system and the helicopter flight control handles. Ultra focuses on developing innovative, highly-differentiated solutions which are delivered in close collaboration with customers, partners and suppliers. Ultra is continually evolving its approach to match the markets in which the Group operates. This evolution is in response to: • changing customer demands • anticipating the direction of travel of the markets • the Group striving to be the first to bring new solutions to market In its specialist capability areas, Ultra’s understanding of: • the customers’ domains • the demanding operational environments • the projected capability gaps which customers would like addressed Is a key differentiator for the Group. In short, Ultra’s understanding of the customer’s ‘problem statement’ allows it to get to the heart of the customer’s requirements and develop effective and innovative solutions. Putting the customer first Ultra’s businesses constantly innovate to create solutions to customer requirements which are different from, and better than, those of the Group’s competitors in a way which the customer values. In identifying differentiated solutions, prime consideration is given to what the customer needs, not to what Ultra would like to sell. This flexibility covers the technical attributes of the product or system and the commercial package, including the training and support in which the customer is interested. See Partnering on pages 9. Strategic supplier All Ultra businesses are expected to maximise their relationships with customers for the long-term, through: • developing a close understanding of customer needs • sustained on-time delivery of high-quality products and services • encouraging a long-term strategic relationship As a result, Ultra’s businesses can become part of the customers’ extended enterprises to mutual benefit. Ultra’s independence Ultra’s independence, together with its autonomous businesses and its position in the supply chain (see page 9) mean that it is able to work with all prime contractors. This allows the Group to sell its wide portfolio of specialist capabilities to a broad range of customers around the world. Engaging with customers Ultra’s LAUNCH is a behaviour which the Group has developed to facilitate customer engagement and relationship building. Listen to customers L A Ask the right questions U Understand what their ‘pain’ is N identify the customers’ Needs; and get their agreement C Create a relationship, opportunity and solution H Holistic. Examine the bigger picture; how can Ultra maximise the scope and value of the opportunity? LAUNCH is a way for Ultra’s businesses to generate long-term customer relationships which leads to a better pipeline of opportunities and so ultimately, enable growth. LAUNCH is aligned with the Group’s approach to systems engineering and project management. This approach ensures Ultra understands the real needs of its customers. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 08 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Ultra’s capabilities… Ultra has a broad portfolio of specialist capabilities which can be combined flexibly to generate highly-differentiated solutions for the customer Product and business development spend as a percentage of 2013 revenue Capabilities The Group has a broad portfolio of specialist capabilities which deliver highly- differentiated solutions to the following market sectors: Defence & Aerospace Security & Cyber Transport and Energy Revenue by capability Group-funded Customer-funded 5.8% 11.7% Ultra invests consistently over 5% of its revenue in new product and business development. In addition, over 10% of Group revenue is customer-funded product development. In total therefore, over 15% of revenue spend is focused on augmenting the portfolio of capabilities and programme positions which underpin further growth. Corporate agility A key differentiator for Ultra is the agility which businesses in the Group exhibit in their dealings with customers. The Board provides effective leadership and direction in delivering the key corporate objective of reliable and consistent growth in shareholder value. At the operational level, the Executive Team has responsibility for running the Group and for delivery of strategy, financial performance and team development. Ultra’s individual businesses have a high degree of operational autonomy, so that they provide the exceptionally agile and responsive support to customers and partners, normally associated with a smaller business. These benefits of customer focus and agility are augmented by the access to wider and complementary technologies and expertise which lie elsewhere in the Group (collaborative autonomy) or with partners and by Ultra’s strong financial position. Defence & Aerospace Security & Cyber Transport and Energy 57% 23% 20% The Group is constantly seeking to increase the number of specialist capabilities in its market niches and to increase the number of long-term platforms and programmes on which Ultra’s specialist capabilities are specified. The expansive spread of specialist capability areas mapped onto so many platforms and programmes: • provide resilience to Ultra’s financial performance • reduce the Group’s risk profile; and • drive the Group’s growth Investment The Group has a strategy to invest continuously to strengthen its capabilities across its specialist niche markets. Ultra’s deep understanding of the users’ domain, its enduring customer relationships and its outward-facing nature (encapsulated in LAUNCH and LEAP behaviours) inform the Group’s investment decisions. Ultra’s core management processes address four main areas. These are: Compliance • ensuring that the businesses comply fully with all laws and regulations of the countries in which they operate • maintaining high standards of integrity and ethical behaviour Strategy • agreeing and delivering five-year plans, focused on positioning for growth in target markets • development of innovative and highly- differentiated solutions to meet customer needs Financial performance • managing the key financial and business processes, so that the businesses meet or exceed the agreed financial budgets Developing people • for each business, developing the team and its individuals so that they grow with the business and do not limit the development of the Group BOARD RESPONSIBLE FOR: LEADERSHIP – doing the right thing GROWTH IN SHAREHOLDER VALUE REVIEWING GROUP STRATEGY RISK MANAGEMENT STANDARDS OF ETHICS AND BEHAVIOURS EXEC TEAM RESPONSIBLE FOR: MANAGEMENT – doing things right DEVELOPING GROUP STRATEGY FINANCIAL PERFORMANCE TEAM DEVELOPMENT 28 AUTONOMOUS BUSINESSES RESPONSIBLE FOR: MANAGING THE INDIVIDUAL BUSINESS DEVELOPING AND IMPLEMENTING COMPETITIVE STRATEGIES WINNING AND EXECUTING BUSINESS DEVELOPING PEOPLE WORKING IN PARTNERSHIP Ultra Electronics Holdings plc 09 Annual Report and Accounts 2013 Ultra’s strategic framework Ultra focuses on developing innovative solutions which are delivered in close collaboration with partners, suppliers and customers Collaborative autonomy One of Ultra’s eight strategic tenets is teaming. See page 13. Working collaboratively increases business opportunities, by allowing Ultra to offer capability from its wide portfolio to best meet the customers’ needs. It creates competitive advantage by accessing off-the-shelf technology at lower cost, enabling timely delivery, while avoiding expensive development costs and high project risk. ” Collaborative autonomy in action Fighting vehicle systems… In early 2013 Ultra’s PALS, MSI, AMI and EMS businesses formed a collaborative team to address jointly the armoured fighting vehicle (AFV) market. An initial review of the market identified a significant number of large programmes which might benefit from a joint approach, including upgrades to Warrior and Challenger in the UK and also new-buy programmes in India and Australia. It was clear at an early stage that Ultra’s combined AFV capability is wide-ranging and complementary. Partnerships Ultra has an established ability to externally partner and team to offer the proven technology which best meets customers’ requirements. The Group is agnostic as to the source of technology which is required to deliver solutions. Where proven technology that meets customers’ requirements exists outside the Group, Ultra is happy to form teaming partnerships to access it. Ultra sees these teaming arrangements as a source of competitive advantage, allowing Ultra to deliver differentiated solutions which meet customer needs efficiently, with lower development risk. It is important that these teaming arrangements are of benefit to all parties – by working together, the team members are able to win opportunities which would not be possible in isolation. Customer ‘problem statement’ Ultra’s solution 3rd party technology Supply chain Ultra has no strategic aim to be a tier 1, top-level platform provider. The Group is therefore, non-threatening to the tier 1 prime contractors such as BAE Systems or Rolls-Royce and counts them amongst its largest customers. They can rely on Ultra to provide the specialist capabilities at which the Group is expert. Concentrating on tiers 2, 3 and 4, rather than aiming to be a tier 1 platform provider, means that, with the exception of the Oman Airport IT programme, no single platform or programme typically accounts for more than 5% of Group revenue for the year. This means that the cancellation or curtailment of any single programme is unlikely to have a significant adverse impact on the Group. Tier 1 Tier 2 Tier 3 Tier 4 Platform provider System integrator Equipment supplier Component supplier Tier 1 Tier 2 Tier 3 Tier 4 Typical tier offerings Tier 1 (Platform provider) Responsible for being the prime contractor of the platform in question, examples being a naval vessel or a terminal at an airport. Tier 2 (System integrator) Responsible for integrating equipment or components which will make up a functional element of the platform. Examples of system integration which Ultra has completed include integrated sonar systems and wing ice protection systems. Tier 3 (Equipment supplier) Ultra has a large presence at this level of the supply chain, supplying equipment such as data links, cryptographic equipment and large electrical transformers. Tier 4 (Component supplier) Ultra also provides a broad range of smaller components onto many programmes worldwide, including sensors for measuring the performance of a nuclear reactor and joysticks to control UAVs. Position in the supply chain Ultra’s specialist capabilities are mainly at tiers 3 and 4, supplying equipment and components to support tier 1 and 2 systems and programmes. The Group does undertake tier 2 system integration, but does this mainly when integrating its own tier 3 offerings. Ultra therefore, understands the tier 3 detailed interfaces and so is able to manage the risk inherent in system integration activities. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 10 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Ultra’s people Ultra would not be able to deliver value to customers without the innovative and entrepreneurial spirit of its staff The right people The success which Ultra achieves in innovating to meet customer needs is based on the broad range of skills and capabilities of the Group’s employees. The Board understands this and recognises that the Group’s ‘right’ people are its most important asset (see page 13, Ultra’s strategic enablers). Ultra strives for an efficient organisation with engaged and competent people. More detail on Ultra’s people and their development can be found on pages 40 to 43. Domain expertise Ultra’s deep understanding of its specialist capability areas, combined with knowledge of the users’ environment, are key factors in delivering innovative solutions to meet customers’ needs. Ultra is continuously developing its domain expertise to ensure that it has the right people available who are best able to support customers in understanding and creating solutions which fulfil their needs. Culture and LEAP Ultra has identified four cultural behaviours of its people which are highly valued and encouraged. These are leadership, entrepreneurship, audacity and paranoia. Together they are known as LEAP… Leadership: Good leadership is extremely important to Ultra and a number of models of leadership are incorporated in the development and training programmes which are delivered around the Group. Entrepreneurship: Being entrepreneurial is a behaviour which underpins the Group’s strategy. All Ultra businesses seek to provide customers with solutions which are different from, and better than, those of competitors. Ultra’s entrepreneurial culture seeks to maximise the capability to generate excellent ideas and the business skills needed to bring them successfully to market. Audacity: Audacious thinking is the difference between incremental improvement and business transformation. It takes the idea of innovation, one of Ultra’s core values, and invites employees to think about issues in ways which are unconstrained by existing norms, making use of creative approaches in every aspect of the Group’s business. Paranoia: Paranoia, in the business sense, is a concern and fear about competitors and what they may do. It also relates to concerns and fears about things which can go wrong internally. For Ultra, paranoia is important in focusing its staff on maximising their knowledge of the competitive landscape, by constantly asking questions of the Group’s individual businesses, customers’, teaming partners and suppliers. How Ultra manages its people Ultra focuses on delivering agile and responsive support to customers through a high degree of operational autonomy. As much authority and responsibility as possible is devolved to the Managing Directors and Presidents of Ultra’s individual businesses and their management teams. The Group wants these teams to maintain the agility and sharp focus, that are typical of owner-managed businesses, on customers’ requirements. Developing people Ultra is committed to developing people and securing the talent pipeline to ensure the continued growth and success of the Group. Each business is responsible for continuously developing the team and its individuals, so that they grow with the business and do not become a constraint on the development of the Group. Great focus is placed on ensuring that the right people are in the right roles. More detail can be found on pages 40 to 43. ” People in action With a renewed focus on innovation, Ultra‘s MSI business ran the second year of its Innovation Initiative and has named its first ever Technology Achievement winner. The winner was a Lead Systems Engineer in MSI’s Human Systems Integration business unit. The award is for the work he did developing the new weapon management systems for MSI, in the form of a gun control unit and an armament control panel. Through collaboration with the customer, diligent collection of requirements and implementation of innovative design methods, he not only significantly improved product functionality, assembly and reliability, but he also paved the way for MSI to enter the weapon systems management market. As a result of these newly-developed capabilities, MSI can now extend its solution offering from the human-machine interface into the wider weapon systems control and management domain. Ultra’s value generation Ultra’s three strengths of customer reach, people and capabilities combine to enable Ultra to generate and sustain value Ultra value for the customers Ultra generates value by applying electronic and software technologies in demanding and critical environments to provide highly-differentiated solutions to meet customers’ needs. Ultra businesses constantly innovate to create solutions to customer requirements which are different from, and better than, those of the Group’s competitors. Solutions By applying these differentiated solutions to a wide range of international platforms and programmes, Ultra has built an exceptionally broad portfolio of specialist capability areas. Where the Group has a number of complementary capabilities, it can also combine these to offer broader solutions. In other words, Ultra’s products, capabilities and the associated domain expertise uniquely position the Group to be able to meet more complex sub-system and system requirements. Support Ultra offers support to customers of its products and systems through the design, delivery and support phases of a programme. Ultra’s deep understanding of its specialist capability areas and the users’ environment is a key factor in supplying innovative solutions to ensure the capabilities are delivered and sustained in-service and meet the customers’ through-life needs. Sustaining value In order for Ultra’s business model to deliver success over the long-term, it must be sustainable and it must manage any inherent risk well. Economic Ultra ensures that all of its businesses are well-managed, control costs and are cash-generative. This allows the Group to self-fund acquisitions which deliver positions in new markets or additional niche capabilities. Since the Group’s formation, Ultra has maintained a balance between organic and acquisition growth, having integrated 51 acquisitions since 1993. The Group pursues four parallel strategies for growth which are explained more fully on pages 14 and 15. Social Ultra understands that the long-term success of the Group will be enhanced through continuous focus on value creation for all its stakeholders. The Group encourages its businesses to support their local communities and environment, as well as discharging their responsibilities to contribute to the broader social well-being. To read how Ultra is making a difference, see pages 38 and 39. Environmental Ultra recognises that it is important, both for its employees and the communities in which it operates, that effective measures are in place to minimise the environmental impact of its activities, as this will help to secure the long-term future of the Group. Ultra has committed to substantial investments in manufacturing facilities which will, in addition to improving productivity, offer increased efficiencies and reduce energy consumption. Reducing risk to maintain value Ultra’s business model supports a stable and well-balanced business, with the aim of reducing risk and maintaining the generation of value. Ultra’s strategy is to constantly broaden its portfolio of products and services which are positioned on a large number of international platforms and programmes in the defence, security, transport and energy markets. Ultra Electronics Holdings plc 11 Annual Report and Accounts 2013 Ultra’s strategic framework The Group remains committed to its strategy of continued investment in its portfolio of differentiated specialist capabilities, to ensure that the business is well-positioned to meet future market demand. Ultra has an increasingly broad customer base worldwide, with sales outside the UK now representing over 65% of Group revenue. Ultra is constantly repositioning itself in growth sectors within its main defence, security, transport and energy markets. The above factors, together with Ultra’s market agility and organisational flexibility, generate further robustness and resilience in the Group’s financial profile and mitigates risk. More detail on Ultra’s approach to risk management and specific risks can be found on pages 34 to 37. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 12 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Strategic tenets… Ultra’s enablers Ultra’s growth momentum has been sustained by successfully pursuing its strategies for growth. See pages 14 and 15. Underpinning these strategies, are eight core strategic tenets. They have been used consistently by the Group over many years. They help shape the culture, defined as values and behaviours which drive results, which is encouraged in Ultra. Focus on defence, security, transport and energy The Group’s core competencies, domain knowledge and market positions give it particular credibility in these four sectors worldwide. Core competencies include: market positioning through an understanding of customer needs, enabling responses to complex invitations to tender or requests for proposals; managing complex development programmes, where risks need careful identification and control; manufacturing and aftermarket support over long timescales and the discipline to meet the Group’s commitments. The strategy is to enhance the capability of the Group such that adjacent market sectors, which exhibit growth, can be served. Through-life product and services portfolio The Group values any position within the supply chain which is held by any particular niche. Frequently, more attractive margins can be generated by providing components, than by supplying entire systems. Where the Group has a number of complementary niches, it does combine these to offer sub-systems, systems and through-life management solutions to satisfy customer requirements. Generally, however, Ultra prefers to retain a leading niche position, rather than pursue the supply of systems for its own end. The scope of Ultra’s offering is determined after a rigorous strategic review. Ultra’s analysis of the defence, security, transport and energy markets can be found on pages 20 to 22. Further information on Ultra’s place in the supply chain and its approach to through- life support can be found on pages 9 to 11. Niche player Within the Group’s businesses, there is a broad portfolio of specialist capabilities, where the aim is to sustain competitive advantage. These niche capabilities enable Ultra to achieve world-leading positions and result in the potential for superior financial performance. This broad spread gives the Group low dependency on any single contract and provides resilience in the face of technological changes or funding cut-backs. Growth Ultra businesses are expected to contribute to the organic growth of the Group, as well as identifying well-matched acquisition targets. To ensure that an appropriate rate of organic growth is maintained, businesses produce annual five-year strategic plans which target specific opportunities. The focus on cash generation is a key driver to the affordability of suitable acquisitions to augment the Group’s growth rate. The Group’s acquisition strategy is summarised as being the pursuit of ‘bolt-on’ and ‘bolt-in’ acquisitions which enable Ultra to successfully pursue its four main strategies for growth. The normal size of acquisitions, as measured by annual revenue, is currently about £30m to £150m for ‘bolt-ons’ and up to £30m for ‘bolt-ins’. Larger acquisitions will be considered where the case is compelling. Further information on Ultra’s strategy for developing specialist capabilities can be found on page 8 and 9. Further information on Ultra’s Strategies for Growth can be found on pages 14 and 15. Ultra Electronics Holdings plc 13 Annual Report and Accounts 2013 Ultra’s strategic framework n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Efficiency and competence Ultra seeks to maximise efficiency throughout its organisation. The levels of commitment and competency of business management teams is continuously assessed through strategic, budget, organisation, succession and regular business performance reviews. The Group places a high degree of trust in, and has high expectations of, its senior staff and supports their development and improvement activities. Ultra empowers management teams to run their respective businesses to deliver agreed strategies, meet budgets and continuously develop their people. The Group constantly develops its people and structure through a rigorous annual organisation, succession and development planning process. Teaming Teaming, internally within the Group or externally with other companies, broadens offerings by combining niche products or linking domain knowledge. Teaming attains competitive advantage by accessing off-the-shelf technology at lower cost, allowing timely delivery, while avoiding expensive development costs and high project risk. Increasingly, Ultra teams with international, world-class partners to access ‘best of breed’ technology and undertakes specialist system and sub-system design and integration, ensuring customers’ sovereign operational independence where required. Further information on Ultra’s approach to having an efficient and competent workforce can be found on pages 38 to 41. Further details on Ultra’s approach to partnering and teaming can be found on page 9. Meeting commitments Ultra has built a reputation for meeting its commitments. This reputation is not only based on businesses meeting their obligations, but also by establishing a culture within the Group, which is based on this principle. Ultra believes that this reputation is one of its defining and most valuable characteristics. Behaving in this way fosters long-term relationships. Strategic supplier Ultra businesses are expected to maximise their relationships with customers for the long term, through a close understanding of customer needs, leading to sustained on-time delivery of high-quality products and services. Many of the Group’s niche offerings involve the design and supply of complex products and services, which are typically safety- or performance-critical in their application. This creates a shared dependency from the customers’ perspectives and encourages a long-term strategic relationship where Ultra’s businesses become part of the customers’ extended enterprises, to mutual benefit. Further details on how Ultra drives long- term relationships can be found on pages 6 to 11. More information on Ultra’s commitment to developing sustainable and long-term business can be found on page 44. 14 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Strategic objectives Ultra’s four strategies for growth Ultra must add long-term shareholder value, as measured by market capitalisation and the Group’s ranking in the FTSE index, more rapidly than other companies to outperform the market. This is facilitated by an above-average rate of revenue growth. Ultra constantly strives to increase its share of the high-growth sectors of the markets in which it has positioned itself. The four main strategic objectives which support this target growth are: 1 2 3 4 1 2 3 4 Increase the Group’s portfolio of specialist capability areas Ultra concentrates on providing its customers with capabilities and systems, using the Group’s electronic and software solutions for niche markets in defence & aerospace, security & cyber, transport and energy. Within these market sectors, Ultra focuses on developing specialist capabilities which provide differentiated solutions to customers’ requirements, often in demanding and critical environments. Increase the number of long-term platforms and programmes on which Ultra’s specialist capabilities are specified Ultra positions these specialist capabilities on a long list of international platforms and programmes. This breadth of platform and programme coverage creates a flywheel effect which drives Ultra’s performance year after year, despite market fluctuations. Ultra is positioned on very many such platforms and programmes. In 2013… Ultra added 12 new specialist capability areas to its portfolio. In 2013… the Group’s specialist capabilities were specified on 9 new platforms and programmes. Strategies in action… The acquisition of Wood & Douglas Limited (W&D) brings to Ultra’s portfolio of specialist capabilities: • Bespoke wireless products • Radio networks • Video monitoring • Wireless data platforms W&D’s capabilities are provided to defence, homeland security, transportation, emergency services, exploration, healthcare and utilities sectors in the UK and to over 30 countries worldwide. W&D has been integrated into Ultra’s CIS business, to form a centre of excellence for communication products and services. Strategies in action… Ultra’s CIS business secured a contract extension to its End Cryptographic Unit Replacement Programme (ECU RP) for the integration & installation phase of the programme. This will see Ultra manage the roll-out and deployment of this critical capability across a multitude of airborne and maritime platforms. Ultra Electronics Holdings plc 15 Annual Report and Accounts 2013 Ultra’s strategic framework 1 Increase the Group’s portfolio of specialist capabilities 2 Increase the number of long-term platforms and programmes on which Ultra’s specialist capabilities are specified 3 4 Broaden the Group’s customer base Widen Ultra’ geographic footprint s 1 2 3 4 1 2 3 4 Broaden the Group’s customer base Ultra’s independence allows it to sell its wide portfolio of specialist capabilities to a broad range of customers around the world. Ultra supplies to a wide range of different project offices, integrated project teams and platform teams within its customers, the largest of which include; US DoD, UK MoD, MOTC Oman, Rolls-Royce, BAE Systems, Lockheed Martin, Raytheon and Boeing. Widen Ultra’s geographic footprint Ultra has pursued a strategy of gaining access to the two largest addressable defence budgets in the world. Despite the recent budget reductions, the US still spends more on defence each year than the rest of the nations combined. The majority of Ultra’s acquisitions have been in North America and the point has now been reached where the Group has a transatlantic capability and derives more of its revenue from the US and Canada than it does from the UK. Ultra’s revenue from the Middle East and Asia Pacific regions is capable of expansion. The Group’s growing presence in Australia and the Middle East regions indicates Ultra’s intent in this regard. In 2013… Ultra won significant* business with 7 new customers. In 2013… the Group was successful in 62 countries outside of the Group’s core markets**. Strategies in action… Ultra’s CCS business was awarded a contract with the Republic of Indonesia Ministry of Defence for the mid-life modernisation of the first of the Fatahillah Class corvettes, including the development, installation and integration of the combat management system. Strategies in action… Ultra’s Airport Systems business was awarded a contract to provide a comprehensive suite of Airport Operations and Information Systems at Viracopos International Airport in Campinas, Brazil. This airport is undergoing significant expansion in preparation for the 2014 FIFA World Cup and the 2016 Summer Olympic games and will soon become the largest airport in South America. Ultra’s work commences immediately under a subcontract with Johnson Controls to deploy, integrate and commission a full suite of Airport Operational Systems. The new systems will improve customer service and accommodate the rapid growth in air transport services being experienced throughout Brazil. *Equivalent to 1% or greater of revenue **Core markets are defined as Australia, Canada, Oman, UK and USA n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 16 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Strategic objectives KPIs charting growth The indicators shown below have been identified by the Board as giving the best overall indication of the Group’s long-term success in improving its FTSE ranking by outperforming the market. KPI 1 Revenue growth -2% 2012: 4% 2011: 3% KPI 2 KPI 3 Underlying profit before tax growth* Growth in underlying earnings per share* over a three-year period +0.3% 2012: 0% 2011: 10.7% +5% 2012: 9% 2011: 15% Description Growth in total Group revenue, compared to the prior year, providing a quantified indication of the rate at which the Group’s business activity is expanding. Description Growth in Group underlying profit before tax*, compared to the prior year, confirming that additional revenue is being gained without profit margins being compromised, or that profits from new acquisitions are not being diluted. Description Annual growth in underlying earnings per share*, calculated over a rolling three-year period, indicating progress towards the Board’s primary objective. Comment Revenue declined by 2% to £745.2m. The positive effects of both foreign exchange on translation of overseas revenues and the incremental benefit of self-funded acquisitions were outweighed by a decline in underlying constant currency revenues of 4.4%. Comment Underlying profit before tax increased slightly to £116.8m and the underlying operating margin increased slightly to 16.3%. The additional contribution from acquisitions and favourable foreign currency translation was partly offset by an adverse organic performance, mainly owing to a challenging defence market in 2013. Comment Underlying earnings per share in the year were 127.1p (2012: 125.5p), an increase of 1.3%. A final dividend of 29.5p (2012: 27.8p) is proposed. If this is approved at the Annual General Meeting, this will give a full-year dividend of 42.2p (2012: 40.0p) and will be covered 3.0 times by profits. *see footnote on page 1 Ultra Electronics Holdings plc 17 Annual Report and Accounts 2013 Ultra’s strategic framework n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 KPI 4 KPI 5 Operating cash conversion* Total shareholder return KPI 6 YOURviews employee engagement survey benchmark for all businesses 65% 2012: 74% 2011: 110% Description Net cash from operating activities, less net purchases of property, plant and equipment, less expenditure on product development and LTIP purchases, expressed as a percentage of underlying operating profit*. Operating cash conversion* is a simple, yet reliable, measure of cash generation, which represents the major element of the Group’s short-term incentive bonus scheme. Comment Underlying operating cash flow* was £79.0m and the ratio of cash to underlying operating profit was 65%. The cash to operating profit ratio over a rolling five-year period is 91%, despite sustained investment in facilities and R&D over the period. +14%per annum 2012: +6%per annum 2011: +9%per annum Description Annual total shareholder return (capital growth plus dividends paid, assuming dividends reinvested) over a rolling five-year period. Comment Annual total shareholder return over the 5 year period from 2009 to 2013 is 14%. 81% 2012: 81% 2011: 79% Description Ultra’s internal employee satisfaction survey, YOURviews, provides an employee engagement rating for each individual business within Ultra and is completed every 1 to 2 years. Answers to various questions are combined to give the overall employee engagement scores. Comment Internal engagement in 2013 has been maintained. Drawing on best practice examples, an action plan can be formulated to ensure that employee engagement continues to rise both internally and also against external benchmarks. In 2012 and prior years, Ultra used a KPI relating to interest cover. This is not included in 2013 as it is becoming less useful measure for the Group. Instead recognising the Group’s ‘right people’ are its most important asset, a non financial KPI relating to the engagement of employees was considered to be a more valuable measure. Other performance indicators Ultra’s four strategies for growth are described on pages 14 and 15 of this report. Performance indicators, relating to the Group’s success in these four dimensions, are shown on those pages. Performance indicators which relate to the recruitment, retention and development of Ultra’s staff are included on page 41 of this report. *see footnote on page 1 18 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Market analysis Ultra’s place in the market Ultra presents the market with a very wide portfolio of highly-differentiated, specialist capabilities and innovative technologies, applicable across the Defence & Aerospace, Security & Cyber, Transport and Energy domains. In often challenging markets, as government customers wrestle with fiscal uncertainties, Ultra works across the Group and with partners, to offer cost-effective, mature, proven and comprehensive solutions which can best match customer needs and budgets, rather than presenting a standard product. Through this approach, the Group is increasing market access and pursuing areas of customers’ preferential spend. Ultra’s customers Ultra’s independence allows it to work with the world’s major prime contractors in its markets and to sell its wide portfolio of specialist capabilities to a broad range of customers around the world. The graphic to the right shows the major customers for the Group’s 2013 revenue. Within Ultra’s top customers, such as the US Department of Defense (DoD), the UK Ministry of Defence (MoD) and BAE Systems, the Group actually supplies to a wide range of different project offices, integrated project teams and platform teams. Therefore, Ultra deals with a larger number of different partners and customers than the graphic might, at first, suggest. US DoD UK MoD MOTC Oman BAE Systems Rolls-Royce Boeing Lockheed Martin THALES Raytheon General Dynamics Indonesian MoD EDF Energy Airbus PA Consulting Australian DoD % 5 10 15 20 25 30 Ultra focuses on constantly and continuously positioning itself in areas of preferential customer spend within its main markets Markets – where we operate Ultra is always evolving within its main Defence & Aerospace, Security & Cyber, Transport and Energy markets to sustain growth. Through its proven strategic review process, the Group has demonstrated a long track record of identifying future growth sectors within its core markets. Ultra then invests to create differentiated positions in these sectors. Ultra continues to focus on maximising revenue from the largest addressable defence budgets in the world. The Group has a significant transatlantic capability and derives around half its revenue from North America, where the Group continues to follow a strategy of identifying and pursuing areas of preferential funding. The Middle East and Asia Pacific regions are capable of being larger markets for Ultra. A full analysis of the Group’s markets is on the following pages. Revenue by region United Kingdom North America Mainland Europe Rest of the world 33% 44% 8% 15% Geographic reach A key strategic objective is to broaden the Group’s geographic footprint, see page 15 for more detail. This is carried out in a measured and controlled manner as Ultra continues to focus its resources on a limited number of regions and sectors, where it is seeing growth. Over the last two decades, Ultra has expanded and developed its international footprint and now has significant business in Europe, North America, the Middle East and the Asia Pacific. Ultra has operations based in the countries shaded light blue on the map above and conducts business in the countries shaded in dark blue. Ultra’s view of the market Ultra Electronics Holdings plc 19 Annual Report and Accounts 2013 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Defence Revenue by capability Defence Security & Cyber Transport and Energy 57% 23% 20% Defence business by domain Maritime Air Land 66% 24% 10% Within the Group’s established markets, defence priorities are shifting from prolonged, land-focused “hold and build” operations back toward the focused intervention and forward presence capabilities which favour maritime, air and special forces. Defence budgets remain under pressure, yet the demand for military readiness or response remains high, in the face of threats from terrorism, piracy, insurgency and regional tensions. Emerging doctrine places a significant emphasis on intelligence and surveillance assets, together with the secure, wideband connectivity to move data globally and within theatre, down to individual units for improved situational awareness. Cyber protection of this critical data stream, at all levels, remains a high priority. Forward operations in high-risk areas continues to place an emphasis on perimeter surveillance, defensive and counter-measure systems in all war fighting domains. Budget constraints 1 2 3 4 are leading to more life extension projects, phased contract awards and greater reliance upon established, proven solutions, tailored to specific needs. These demands are well matched by the strengths of Ultra’s defence portfolio. USA The US Government’s Bipartisan Budget Act of December 2013 moderated threatened sequester cuts to the total defence budget in FY14 and FY15. Nevertheless an 8% and 2% reduction in the defence investment budget over these two years will need to be found. The subsequent appropriations bills saw policy reflected in sustained, or even increased budgets for intelligence, surveillance and reconnaissance (ISR), maritime and air programmes and cuts in land forces (for example, the Virginia class submarine programme saw a 20% increase in funding, while the US Army’s ground combat vehicle project was reduced to a demonstration programme). ISR capabilities will be prioritised, along with capabilities which counter anti-access and area denial systems, designed to counter US maritime and air presence. After a year of budget uncertainty, including the impacts of furloughed staff, threatened staff reductions and even government shutdown, this greater clarity is welcome. Nevertheless, it will take several months for budgets to flow down into contract action and for detailed areas of reduction to become clear. Ultra remains well positioned in the areas of evident programme spend, including increased investment in anti-submarine warfare, intelligence data analysis and secure, high data rate communications. Strategy in action… In 2013, Ultra’s Flightline business received further contracts for its world-leading wideband sonobuoy receivers relating to the US Navy P-8A programme. ” The demand for military readiness or response remains high 20 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Defence UK The UK defence budget remains anchored upon a core programme with substantial financial contingency, as reiterated in the Defence Equipment Plan, published in January 2014, – a process which has won some much needed headroom. In 2015 the MoD will undertake a Strategic Defence and Security Review (SDSR) in the aftermath of a General Election. Fiscal pressures will undoubtedly remain while other cost pressures, such as the rising cost of manpower, will squeeze the equipment programme, making the choices made in the 2015 SDSR capability debate even more critical. Changes to the MoD equipment customer roles and in the DE&S structure are still hampering some programmes. Ultra has benefited from the improved stability in procurement, most evident in the nuclear submarine programme and is well positioned to deliver capability in priority areas, such as ISTAR, data links, force protection and crypto management. 1 2 3 4 Strategy in action… In 2013, Ultra’s PMES business won a further contract to supply specialist electrical power management equipment to the UK Royal Navy’s submarine programme. ” Rest of the world Australia remains an exciting market for Ultra. Following the election in Australia, the government committed to lift defence spending back to 2% of GDP within a decade. A new defence white paper is expected in mid-2015, which will provide much-needed clarity, but Ultra remains well positioned in likely areas of spend including ASW and secure communications. India’s comprehensive and ambitious defence modernisation programme provides opportunity, but progress is hampered by a taut procurement regime and the impact of GDP fluctuations on defence funding. Ultra has built strong partnerships with major Indian primes in areas of technological strength, such as high-capacity radios and ASW, that will facilitate access to this growing market. Turkey remains a strong market, despite increasing pressures to favour its growing indigenous defence industry. Ultra continues to partner with Turkish industry to develop the next generation of torpedo defence in a programme which demonstrates its long- term commitment to the region and its willingness to transfer technology. This approach has opened up discussions across the remainder of Ultra’s capability portfolio. The Middle East remains a valuable market, primarily through US foreign military sales and through primes, yet Ultra is also seeing emerging, direct opportunities in ASW, vehicle electronics and communications. 1 2 3 4 Strategy in action… Ultra’s GigaSat business won a contract with the New Zealand MoD for the supply of Wideband Global SatCom (WGS) certified fly-away satellite terminals for use as part of the NZDF Strategic Bearer Network. ” Ultra Electronics Holdings plc 21 Annual Report and Accounts 2013 reference capability which can be applied to third parties. While the Snowden leaks have suppressed some opportunities, the demand for intelligence surveillance in sensitive areas (e.g. borders, global event sites, critical infrastructures) remains high. 1 2 3 4 Strategy in action… In 2013 Ultra joined the Defence Cyber Protection Partnership: a partnership between the UK government and a group of Britain’s leading defence and security companies, working together to bolster the UK’s cyber security. ” n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Security & Cyber Revenue by capability Defence Security & Cyber Transport and Energy 57% 23% 20% 1 2 3 4 Strategy in action… In 2013 Ultra’s 3eTI business signed a strategic agreement with Johnson Controls for the provision of Ultra’s cyber security technology for use in their industrial control systems. ” At 23% of Group revenue, security & cyber is an important and exciting market for Ultra. Strong investment in the Group’s capability portfolio in this area positions Ultra well to access this area of strong budget growth and protected spend. Budgets for security remain ring-fenced, or are growing substantially, in the face of terrorism, organised crime, drug trafficking and cyber threats. Border security and critical national infrastructure protection opportunities are increasing. Solutions need to be tailored to customer need, comprehensive and fully integrated, drawing upon “best of breed”, established and clearly differentiated technologies. Ultra’s portfolio approach and access to well-established partners makes the Group highly attractive in this space, both in established markets and other areas of significant interest, such as the Middle East and Central America. Opportunities continue to emerge in this rapidly developing market. For example, an increasing understanding of the vulnerability of internet protocol controlled industrial systems in critical infrastructure is bringing the Group’s cyber protection products into new commercial markets, with access through established original equipment manufacturers. Government, commercial and internet communications and data are increasingly vulnerable to cyber-attack, leading to a developing and diverse marketplace with strong funding. Ultra’s investment in this area, strong relationships with national agencies and ability to team with trusted partners, positions it well for opportunities in a number of allied countries. While the commercial market continues to develop, Ultra is investing substantially in its own protection, providing a well-regarded 22 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Transport and Energy Growing populations, shifts in global financial strength, proliferation of low-cost airlines and a demand for fuel efficiency are driving investment in civil aviation. Increased global air traffic and shifting financial power is driving investment in airport infrastructure. Rail infrastructure, globally, is growing even more rapidly as a key commercial and national enabler in both established and emerging economies. Nuclear energy remains an important part of a low-carbon energy mix in the face of growing energy demand. Commercial aerospace remains a growing market, with predictions of 6% year-on- year growth in global air traffic in 2014. Growth is very strong in emerging markets (China and the Middle East), but much weaker in the mature markets of US and Europe. Drivers for this sustained demand include air traffic growth and aircraft replacement to introduce improved fuel efficiency, supported by low interest rates. Both Boeing and Airbus secured unprecedented deliveries in 2013, exceeding 2,000 aircraft for the fifth year and they enjoy record back-logs which, combined, exceed 10,000 large aircraft orders. Across the sector, demands for innovative technologies to improve efficiency and increase safety, play well to Ultra’s established strengths in control systems and niche aviation technologies, allowing inclusion in a growing number of positions on long-term aerospace programmes. Airport systems and rail remain areas of strong investment in response to the continuing growth in global air traffic. In established economies, infrastructure investment is focused on upgrading existing capabilities and driving economic recovery. In emerging economies, such investment is being used to secure growth, build national capacity and deliver prestigious projects. With an established master systems integrator capability and regional support hub in the Middle East, Ultra is looking for further opportunities in the region over the next five years. The nuclear energy market continues with steady growth, despite the setbacks following the Fukushima disaster. As national programmes are delayed, there are increased opportunities in life extension and safety system improvements. Meanwhile, the energy debate is driven by growing capacity demands and low-carbon footprint, which makes nuclear an important part of the mix for many countries. Ultra’s established position in specialist nuclear sensors, qualified for most major platform designs and the Group’s wide-based safety justification and system experience, makes this a growing market for the Group. Smart energy is a potential new market for Ultra, applying its secure communications and database-handling to government and commercial energy management. Revenue by capability Defence Security & Cyber Transport and Energy 57% 23% 20% 1 2 3 4 Strategy in action… In 2013 Ultra’s NSPI business was awarded its first contract for nuclear sensors in a non-safety-related application at two US plants, providing access to a broader scope of applications beyond the “reactor island” on the global fleet of Westinghouse nuclear power stations. ” Ultra Electronics Holdings plc 23 Annual Report and Accounts 2013 Financial review Mary Waldner Group Finance Director 1.3% Underlying earnings per share* up 1.3% (2012: 3.6%) Aircraft & Vehicle Systems saw continuing strong margins, in line with the previous year… Ultra’s 2013 results The order book at the end of 2013 was £781.2m compared with £905.0m (£895.6m at constant currencies) at the end of 2012. Within the order book total, opening firm order cover for 2014, compared with analysts’ consensus revenue forecasts, was 57% (2013: 58%). Revenue The revenue of £745.2m represented a decline of 2.1%, or £15.6m from the prior year (2012: £760.8m). The positive effects of foreign exchange on translation of overseas revenues and the incremental benefit of acquisitions were outweighed by a decline in underlying constant currency revenues of 4.4%. With approximately 50% of revenues sold in US dollars, Ultra benefited from a slight decline in the US dollar rate to 1.56 (2012: 1.59) which increased revenues by 0.6%. Acquisitions contributed a further 1.7% to revenue, reflecting the full-year effects of GigaSat, Barron McCann and RFI, which were acquired in 2012, as well as Varisys and Wood & Douglas, which were purchased in 2013. The organic revenue decline of 4.4% comprised reductions in two divisions, Information & Power Systems and Tactical & Sonar Systems and an increase in Aircraft & Vehicle Systems. Reductions in Information & Power Systems reflected primarily the impact on the Group’s US businesses of the unexpected federal Government shutdown in October, which impacted the US procurement process, delaying expected orders and approvals. In addition, the reduction in placement of federal service contracts particularly impacted ProLogic’s business. Sales from the Indonesian Fatahillah corvette upgrade and strong demand for specialist electrical power management equipment for submarine programmes, in both the UK and US, helped offset revenue reductions in the division. Tactical & Sonar Systems was a mixed picture. Sales into the UK crypto programme, in ASW and surveillance systems in the US were robust. However, this was overshadowed by a significant reduction in sales of tactical radios, both to the export and particularly, the domestic US market. This division was also impacted by the US federal shutdown in October, together with US budget cuts and contract delays. Aircraft & Vehicle Systems sales increased due to the component design and manufacture of an Urgent Operational Requirement (UOR) radio contract for the British Army, together with an increase in sales of Ultra’s specialist aircraft ice protection systems. Operating profit and margins* Underlying operating profit reduced slightly to £121.7m, with the margin increasing slightly by 0.3pts to 16.3%. The additional contribution from acquisitions and favourable foreign currency translation was offset by an adverse organic performance. Aircraft & Vehicle Systems saw continuing strong margins, in line with the previous year, reflecting lower engineering costs in the commercial aircraft business and improved business mix. Tactical & Sonar Systems saw margins increase from the previous year, as the decline in the radios business was offset by significant cost reductions in this area, together with the strong performance in US ASW and also the contribution from Litening pods and cryptos in the UK. Information & Power Systems margins reduced as a result of the revenue pressures with, in particular, the sharp decline in software services at ProLogic leading to an under-recovery of overheads. In addition, the Oman IT contract continued to trade at a lower margin than the division as a whole. Ultra continues to invest in research and development to support future opportunities; this investment, at £43.3m, represented 5.8% of group turnover. Acquisitions contributed an additional £3.5m, primarily reflecting the acquisition of Varisys in June 2013. Revenue £745.2m KPI 7 1 0 . 0 7 3 1 . 7 7 6 0 . 8 7 4 5 . 2 6 5 1 . 0 -2.1% (2012: £760.8m) 09 10 11 12 13 Acquisitions contributed an additional £3.5m, primarily reflecting the acquisition of Varisys in June 2013 *see footnote on page 1 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 24 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Financial review (continued) Underlying profit before tax† Amortisation of intangibles arising on acquisition Net interest charge on defined benefit pensions Profit on fair value movements on derivatives Acquisition-related costs and adjustments Unwinding of discount on provisions Impairment of goodwill Reported profit before tax 2013 £m 116.8 (29.1) (3.4) 1.5 9.0 (1.3) (44.2) 49.3 2012† £m 116.5 (32.1) (3.9) 1.4 (1.5) (0.6) - 79.8 The table above reconciles the underlying and the reported number. † the 2012 profit and loss account has been restated to reflect the adoption of IAS19 (revised 2011) ‘Employee Benefits’. Underlying operating profit* £121.7m 1 1 0 . 0 9 6 . 9 1 2 1 . 7 1 2 1 . 8 1 2 1 . 7 -0.1% (2012: £121.8m) 09 10 11 12 13 *see footnote on page 1 Interest and profit before tax* Net financing charges*, excluding the unwinding of discounts on provisions, fair value movement on derivatives and the net interest charge on defined benefit pensions, were £4.9m (2012: £5.3m). The reduction reflected lower rates following the renewal of the revolving credit facility in early 2013. The interest on bank debt was covered 25 times (2012: 23 times) by underlying operating profit*. Underlying profit before tax was £116.8m (2012: £116.5m). IFRS profit before tax Ultra’s IFRS profit before tax fell from £79.8m (2012) to £49.3m. The principal reason for the reduction was the £44.2m impairment of the acquired goodwill relating to ProLogic. A severely constrained budget environment and reduction in placement of US service contracts, exacerbated by the federal shutdown in October, has impacted ProLogic’s software services business. The services element of the ProLogic business has now been restructured and ProLogic’s products remain a critical element of Ultra’s crypto capabilities. The £9m of acquisition related adjustments included the release of a £9.4m provision relating to the GigaSat earn out agreement for which the 2013 target was not met. Tax, EPS and dividends The underlying tax rate* reduced to 24.3% (2012: 25.3%) due to a combination of lower UK rates and the release of provisions, following the close of certain tax enquiries around the world. Underlying earnings per share* were 127.1p (2012: 125.5p), an increase of 1.3%. A final dividend of 29.5p (2012: 27.8p) is proposed. If this is approved at the Annual General Meeting, this will give a full-year dividend of 42.2p (2012: 40.0p) and will be covered 3.0 times. Operating cash flow Underlying operating cash flow* was £79.0m and the ratio of cash to underlying operating profit was 65%. This represented a reduction from the £89.6m (74% conversion) recorded in 2012, due predominantly to the phasing of working capital movements. The cash to operating profit ratio over a rolling five-year period is 91%, despite sustained investment in facilities and R&D. Capital expenditure on property, plant and equipment was £13.9m, down from £20.5m in the previous year. The major expenditure in the year related to: the acquisition of new facilities for the Precision Air & Land Systems (PALS) business in Cheltenham; the development of a Neutron Flux Detector facility to support long-term programmes at the Nuclear Controls Systems (NCS) business in Wimborne and the creation of Cyber Protection Facilities in Greenford and Cheltenham. Ultra Electronics Holdings plc 25 Annual Report and Accounts 2013 the £15m overdraft. £42.4m (2012: £43.3m) of Pricoa loan notes had been issued. The Group also held £30.6m of cash, which was held for working capital purposes and to fund acquisitions. Interest rate management Much of the Group’s current financing has been taken on to fund acquisitions in North America. To reduce the risks associated with interest rate fluctuations and the associated volatility in reported earnings, Ultra has issued a total of $70m of fixed-rate, seven-year, notes to Pricoa. Consequently, the Group has extended the term profile of its debt and has also fixed a substantial proportion of its interest for the same seven-year period. The amount of fixed-term debt and the associated interest rate policy is kept under regular review. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 91% The cash to operating profit ratio over a rolling five-year period is 91% (2012: 98%) Capital expenditure on intangible assets (not acquired through acquisitions) was £7.7m (2012: £4.7m), with the increase predominantly due to investment to support the next generation multi-mission radio, the Remote Crypto Monitoring System (RCMS) and development of proximity sensing systems for the Controls business. Amortisation of the same asset class was £2.9m (2012: £3.2m). There was a net outflow of working capital of £32.4m, compared to an outflow of £10.7m in 2012. There was an outflow of inventories of £4.2m (2012: £2.7m) across a range of businesses, notably in the Group’s PALS business, to support customer inspections following the site move, and in its other aerospace businesses also to support customer requirements. The outflow for receivables of £43.1m (2012: £6.0m) and an inflow of payables of £14.9m (2012: £2.0m outflow) includes the impact of an increased debt in Oman, relating to the prolongation of the Airport IT project, which was partially offset by an increase in payables on the project. Receivables were also impacted by a delay in payment approvals following the US shutdown and changes in customer cash management behaviours. Non-operating cash flow From the underlying operating cash flow* of £79.0m (2012: £89.6m), the Group funded various non-operating items with net debt reducing slightly to £42.2m (2012: £43.0m). The main non-operating items were: • cash tax of £25.6m in line with the previous year (2012: £25.6m) • acquisition spend of £24.7m (2012: £37.0m) including acquisition fees and retention payments, with the majority of the spend related to the two acquisitions completed in the year • dividend payments of £28.1m, (2012: £26.9m) *see footnote on page 1 Treasury and balance sheet matters Effect of acquisitions The two acquisitions made in the year (Varisys and Wood & Douglas) were made at a total purchase consideration of £26.7m, including acquisition fees of £0.3m. The purchase consideration includes cash acquired of £4.6m. Banking facilities Ultra’s current banking facilities amount to £190m in total, together with a £15m overdraft. They are provided by a small club of banks, led by the Royal Bank of Scotland, and comprise two tranches. The first tranche is a £90m revolving credit facility, which can be drawn down in any major currency and is due to expire in January 2016. The second tranche provides a further £100m of revolving credit, was signed in December 2012 and is due to expire in December 2017. This second tranche is effectively the renewal of the £120m facility which was due to expire in September 2013, but was refinanced early to ensure continuity of funding. Both facilities have the same covenants. The Group also has a ‘shelf’ facility with Prudential Investment Management Inc (‘Pricoa’). This agreement effectively gives the Group access to the US private placement market on a bilateral basis. The facility is non-committed, but is for up to $195m. At 31 December 2013, $70m of loan notes had been issued, which will mature in 2018 and 2019. By using the Pricoa facility, Ultra has been able to extend the term profile of its debt at a competitive rate and reduce its current liabilities. As well as being used to fund acquisitions, the financing facilities are also used for other balance sheet and operational needs, including funding day-to-day working capital requirements. The US dollar borrowings also represent natural hedges against assets denominated in that currency. At the year-end, the total borrowings drawn from the revolving facilities were £27.0m (2012: £29.2m), giving headroom of £163.0m (2012: £180.8m) in addition to 26 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Financial review (continued) 100% Foreign Exchange risks: 100% of the expected exposure for 2014 is covered participate in a number of defined contribution pension plans. In the US, Ultra offers a defined contribution 401(k) retirement benefit plan to all full-time employees. Under this plan, Ultra provides participating and contributing employees with matching contributions, subject to plan and US Internal Revenue Service limitations. Foreign exchange risks Ultra’s results are affected by both the translation and transaction effects of foreign currency movements. By their nature, currency translation risks cannot be mitigated, but the transaction position is actively managed. The majority of sales made by Ultra’s businesses are made in local currency, thus avoiding any transaction risk. However, this risk does arise when businesses make sales and purchases which are denominated in foreign currencies, most often in US dollars. To reduce the potential volatility, Ultra attempts to source, in US dollars, a high proportion of the product sold in US dollars. For the remaining net expense, the Group’s policy is to hedge forward the foreign currency trading exposure in order to increase certainty. The expected flows are reviewed on a regular basis and additional layers of cover are taken out so that, for 2014, 100% of the expected exposure is covered, reducing to 30% of the exposure for 2016. Exposure to other currencies is hedged as it arises on specific contracts. Mary Waldner Group Finance Director Ultra offers company-funded retirement benefits to all employees in its major countries of operation Pensions Ultra offers company-funded retirement benefits to all employees in its major countries of operation. Many UK staff with longer service still participate in the Ultra Electronics Limited defined benefit scheme, which was closed to new entrants in 2003. This is a contributory scheme in which the company makes the largest element of the payments, which are topped up by employee contributions. The scheme was actuarially assessed, using the projected unit method at 31 December 2013, when the net scheme deficit, calculated in accordance with IAS19, was £68.2m, compared to £63.2m in 2012. The present value of the liabilities rose by £34.8m in 2013, mainly because of the lower discount rate, driven by the lower yield on corporate bonds. The increase in the scheme liabilities was partially offset by a £31.6m increase in the value of the scheme assets. There was a full actuarial assessment carried out as of April 2013, the result of which was a funding deficit relating to past service of £99.8m before tax, representing an increase of £36.2m from the previous funding deficit. Following the completion of the assessment, Ultra reached agreement with the pension scheme trustee board to eliminate the deficit through additional deficit payments over a 10.5 year period; £8.0m in 2014, rising to £8.5m in 2015 and £9.0m for the following 8.5 years. The next valuation will take place as of April 2016. The scheme has a statement of investment principles which includes a specific declaration on socially responsible investment. This is delegated to the investment managers. Pension management and governance is undertaken by the pension trustees on behalf of the members. The trustees include both company-nominated and employee-elected representatives. All staff who have joined Ultra in the UK since the defined benefit scheme was closed in 2003, have been invited to become members of the Ultra Electronics Group Personal Pension Plan and since April 2011, the Ultra Electronics Group Flexible Retirement Plan. Under the terms of this defined contribution scheme, company payments are supplemented by contributions from employees. Certain employees at TCS in Canada participate in a defined benefit scheme. This scheme is closed to new employees and had an IAS19 net deficit of £0.6m at the end of the year (2012: £0.7m). Regular payments continue to be made, with both company and employees making contributions, so as to maintain a satisfactory funding position. The Group’s remaining Canadian employees Financial review (continued) Ultra’s three divisions… Ultra Electronics Holdings plc 27 Annual Report and Accounts 2013 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 28 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Financial review (continued) Aircraft & Vehicle Systems In September 2013, Ultra’s Precision Air & Land Systems business was awarded a study contract to propose a flammability reduction system for the fuel system of a new passenger aircraft in development. The study helps the client address the changing FAA regulations to meet the stricter new fleet-wide flammability design requirements, as part of a continual drive to improve flight safety. Ultra’s solution addresses regulatory and safety requirements and at the same time, satisfies manufacturers’ and airlines’ needs for lighter, fuel-efficient and cost-effective aircraft sub-systems. Innovative solutions… Ultra provides innovative solutions for safety critical and high integrity applications. Products range from in-cockpit equipment and safety critical control systems to fuel tank inerting systems. ” Ultra Electronics Holdings plc 29 Annual Report and Accounts 2013 Revenue £155.5m 2012: £147.0m +5.8% Underlying operating profit* £32.4m 2012: £30.6m +5.9% Order book £166.0m 2012: £163.6m +1.5% The division specialises in high integrity, safety-critical, real-time control systems for aircraft and vehicle applications. These include airframe and engine ice protection, power distribution and control equipment and noise and vibration cancellation systems. The Group also supplies advanced human-machine interfaces and systems, including those to control unmanned ground and air vehicles. Ultra provides innovative small power sources, including miniature pneumatic systems, propane-powered fuel cells and multi-fuel UAV engines. Revenue in the period was lifted by increased sales in Ultra’s specialist ice protection systems business and by a short- term UOR radio contract for the British Army, as a well as a positive contribution from the Varisys acquisition. Underlying operating profit reflected a good contribution from the UOR, ice protection sales and the Airbus A400M cargo handling system, as well as operational efficiencies from the site move by Ultra’s Precision Air & Land Systems business. These factors more than offset the negative impacts of the under-recovery of overheads and labour from the fuel cell business as a result of delayed UAV orders. These factors, together with lower R&D costs at this point in the division’s development cycle, enabled the operating margin to be sustained at 20.8% (2012: 20.8%*). The increase in the order book reflected the receipt of the delayed Lockheed Martin Warrior contract in the second half of the year. Highlights of activities in the year which will underpin the division’s future performance included: • a £26.3m contract awarded by Lockheed Martin UK under the Warrior Capability Sustainment Programme for the development of a new power distribution system for the British Army’s Warrior armoured fighting vehicle • Ultra’s teaming partner Raytheon winning the US Joint Miniature Munitions Bomb Release Unit. Ultra’s work share will include the provision of the complete stored energy system. Contract award is expected in the first quarter of 2014 • the award of an exclusive long-term supply agreement with Pratt & Whitney for the electronic control unit which manages the Electrical Ice Protection System on the Joint Strike Fighter’s F-135 engine. The agreement is effective for the life of the engine programme Strategy in action… Ultra’s AMI business is working with partners across the United States to develop innovative power solutions which provide critical power backup to traffic intersections. First responders are often trapped in the traffic jams, caused by the power outages, and the signal crews are often left trapped themselves, unable to reach the signal to restore power or reset the signal. In 2013 during trials in Houston, the city experienced a major storm, which resulted in power outages across the city. Those traffic intersections fitted with Ultra’s fuel cell as a backup power source, remained operational throughout this period, minimising the time first responders were delayed in traffic jams and maintaining the safety and integrity of the transportation system. 1 2 3 4 ▲ Pictured, L to R: Vassilis Moraris, Performance Analysis Engineer; Brendon Barrett, ILS Manager; Nick Metcalfe, Lead Engineer; Richard Mabbett, Lead Engineer; Keith Scivier, Business Development Manager; Martin Carpenter, Engineering Director; Andy Chilton, New Products Manager; Mike Taylor, Chief Engineer. *see footnote on page 1 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 30 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Financial review (continued) Information & Power Systems In June 2013, Ultra’s Nuclear Control Systems business was awarded a £16.1m contract for the supply of specialist instrumentation by EDF Energy. Under this contract, Ultra will manufacture and support safety-critical nuclear reactor instrumentation for use in EDF Energy’s current UK nuclear power stations. This is the first contract to benefit from Ultra’s recent investment in a new state-of-the-art nuclear instrumentation manufacturing facility. Ultra is a supplier of nuclear-qualified instrumentation and control systems to key nuclear plant manufacturers and operators around the world. It currently supplies safety-based equipment to 186 reactors in 16 countries. Nuclear qualified products… Ultra is at the forefront in the development and manufacture of sensors for critical measurements within the nuclear power plant. Ultra Electronics Holdings plc 31 Annual Report and Accounts 2013 Revenue £305.0m 2012: £315.8m -3.4% Underlying operating profit* £41.2m 2012: £44.9m -8.2% Order book £330.1m 2012: £391.4m -15.7% The division supplies advanced command and control systems for battlespace visualisation, surveillance systems, air defence and naval combat management. The Group provides: perimeter security solutions for critical infrastructure; crisis response planning and management software and secure networks. Ultra’s high- integrity sensors and control systems are used for civil and military nuclear reactors and a range of specialist, solid-state electrical power systems which are used for naval vessels and mass transit. Ultra is a world-leading integrator of airport and airline management & information systems. Revenue in this division was reduced by delays in the federal procurement process, impacting expected orders, milestone approvals and payments and further exacerbated by the unexpected US Government shutdown. The reduction in the placement of US service contracts particularly impacted ProLogic’s business. Sales from the Indonesian Fatahillah corvette upgrade and strong demand for specialist electrical power management equipment for submarine programmes in both the UK and US helped offset revenue reductions in the division. The underlying operating profit reduction largely reflects revenue pressures. In particular the sharp decline in software services at ProLogic led to an under-recovery of overheads. The divisional margin reduced to 13.5% (2012: 14.2%*) with the Oman airport IT contract continuing to trade at a lower margin than the division as a whole. The order book reduced at the end of the period reflecting the trading of the Oman Airport IT contract, US order intake delays and foreign exchange translation. Highlights of activities in the year which will underpin the division’s future performance included: • a £16.1m contract for the supply of specialist instrumentation to EDF Energy. Under this contract Ultra will manufacture and support safety-critical nuclear reactor instrumentation for use in EDF Energy’s current UK nuclear power stations • a contract to supply specialist electrical power management systems and equipment to the UK Royal Navy’s submarine programme • a contract worth £32m with the Republic of Indonesia Ministry of Defence for the mid-life modernisation of the first of the Fatahillah Class corvettes, including the development, installation and integration of the combat system Strategy in action… Ultra’s Airport Systems business, following a five-year contract renewal in 2013, has upgraded its successful UltraTrak Baggage Management System, hosted in Johannesburg, South Africa. The renewal until 2018 guarantees enhanced airline security and improved business performance through UltraTrak’s powerful reconciliation, tracking and reporting capabilities. UltraTrak has been used in South Africa since 2008, having originally been deployed in Johannesburg, with hosted operations via WAN at Durban, Cape Town and Port Elizabeth airports. The operational efficiency benefits it delivered drove expansion of the system into 3 further airports: Bloemfontein, George and East London. UltraTrak results in improvement to the service offered to customers by the airlines and reduced delays for the airlines. 1 2 3 4 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 ▲ Pictured, Back row, L to R: Nick Kyprianou, Programmes Manager; Jefferson Ridgway, Physicist; Robert Heath, Instrumentation Team Leader; Kevin Pilley, Nucleonics Test Engineer; Paul Kent, Nucleonics Team Leader; Jonathan Hughes, Supply Chain Development Manager. Middle row, L to R: Rikki Douglas, Sales Manager; Charlotte Massey, Project Physicist; Kevin Steele, Mechanical Assembly Operator. Front: Andy Russell, Director, Sensors & Radiation Monitoring. *see footnote on page 1 32 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Financial review (continued) Tactical & Sonar Systems In September 2013, Ultra’s Maritime Systems business announced the award of funding from Industry Canada’s Strategic Aerospace and Defence Initiative (SADI). This long-term funding allowed Maritime Systems to kick off a six-year $27.4m internal R&D project which will enable it to leapfrog its international competitors in the fast-growing military towed low-frequency active-passive sonar market. The products developed under this project will introduce next-generation acoustic sensing, data transport, and acoustic projector technologies, culminating with an in-field demonstration capability which Ultra can use to showcase this Canadian technology to its international customers. Undersea surveillance… Ultra provides unique engineering, development, testing, evaluation, and management capabilities to develop and deliver technologically advanced underwater battlespace systems. Ultra Electronics Holdings plc 33 Annual Report and Accounts 2013 Revenue £284.7m 2012: £298.0m -4.5% Underlying operating profit* £48.1m 2012: £46.3m +3.9% Order book £285.1m 2012: £350.0m -18.5% The division supplies advanced cyber security solutions, high-capacity communication systems, satellite communication equipment and tactical surveillance equipment to support network- enabled warfare. Specialist areas include data links, encryption for information assurance and electronic warfare. The Group also supplies world-leading ship, submarine and airborne sonar equipment and systems to meet the challenges of the underwater battlespace, including anti- submarine warfare and torpedo defence. Ultra has developed a range of highly efficient acoustic hailing devices. The period saw good sales in the US for ASW, a strong performance on a UK crypto programme and further sales of surveillance systems in both the UK and US, which partially offset the continued lower sales of tactical radios and the impact of US budget cuts and contract delays. The increase in underlying operating profit was driven by the performance of the UK cryptographic programme with development and production risks being retired as the programme is delivered. This, together with good contributions from the sales of Litening pods in the UK and ASW sales in the US, resulted in the division’s underlying operating margin increasing to 16.9% (2012: 15.5%*). The order book reduction reflected the trading of the End Cryptographic Unit Replacement Programme (ECU RP) contract and US order intake delays, with the balance largely due to foreign exchange translation. This division also saw increased use by customers of IDIQs and annual ‘call-off’ contract awards which are not reflected in the order book. Highlights of activities in the year which will underpin the division’s future performance included: • a £14m contract extension to its End Cryptographic Unit Replacement Programme (ECU RP) for the integration & installation phase of the programme • a A$15m contract for the upgrade of the ANZAC Class Electronic Support System for the Royal Australian Navy • an increase in ASW spend reflecting the US ‘Pivot to the Pacific’ policy. The US Navy has recently issued a five-year IDIQ competitive tender, for which Ultra, through its JV, was the only bidder. Contract award is expected in the first quarter of 2014 Strategy in action… Ultra’s Tactical Communications Systems business has won an order to supply a number of next generation high-capacity radios, for “proof of concept” trials with the US Army, as a precursor to additional WIN-T contracts. This new multi-mission radio (MMR) is the culmination of Ultra’s considerable investment and delivers a radio which combines high-bandwidth throughput, performance and operational flexibility within a small form-factor and provides multi-channel high-capacity connectivity across networks. In addition to trials with the US Army, the radio has also been successfully down-selected to compete in trials for a number of major overseas customers. 1 2 3 4 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 ▲ Pictured, back row L to R: Jeff Vienneau, Software Developer; John Caldwell, In-Line Source Program Manager; Drew McDade, AUSS Project Director; Mike Murphy, Test Engineer; Middle row left to right: Dr. James Crawford, Senior Transducer Designer; Andrew Keast, Principal Electrical Engineer; Dr. Jeff Bates, Towed Array Mechanical Designer; Front row left to right: Curtis Somers, Senior Software Developer; Mike Morris, Sonar Systems Engineer; Christian Baribeau, Senior Software Engineer *see footnote on page 1 34 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Risk management Risk is identified, collated, assessed and managed at the most appropriate level of the business (Board, Executive or Business level) as part of the annual strategic planning round. Resulting risks are reviewed regularly to ensure that appropriate mitigations are in place. Ultra encourages its businesses to challenge the market through innovation and to exhibit audacity. Profitable growth is not achieved without considered risk, so review of business activity and the management of resultant risk has become an integral part of Ultra’s processes. Risks are considered and managed as business decisions are made, so that the Group’s collective exposure is well understood and controlled. This table illustrates the business activities that are routinely reviewed. The table is illustrative, not exhaustive: Business activity Typical review points Strategy (competitive) Vision; market analysis; competitor analysis; differentiation; innovation roadmap; teaming plans Strategy (corporate) Objectives; culture; strategic moves; acquisition strategy; available financing Acquisitions Bids Specialist capabilities; customers and programmes; synergies; financial performance; financial projections Plan-to-win, customer understanding; maturity of solution; competitive position; embedded risk (technical and engineering); resources available; cash profile; contract conditions y b d e w e i v e R d r a o B m a e t e v i t u c e x E n o i s i v i D s s e n i s u B p u o r g r e e p l a n r e t n I t i d u a l a n r e t n I Contract execution Progress against plan and milestones; costs incurred/to complete/at completion; risk register Business performance Orders, sales, profit and cash; month, year-to-date, forecasts; variances to budget and forecast; marketing pursuits; projects under development; compliance matrix Team development Business processes Organisation review; succession planning; training plans; management and team development activities; performance vs. potential review Quality systems; segregation of duties; disaster recovery; health, safety & environmental management; IT penetration testing Regulatory and compliance Compliance with: local laws and regulations, export regulations, security requirements Risk management of cyber Status of the Group’s cyber security protection capability against known and anticipated threats reviewed as normal practice major only, in accordance with delegated authorities by exception Annually, businesses identify risks to the successful delivery of their strategic plan and these are assessed at the divisional level. Risks which are corporate in nature or which span Ultra businesses, are elevated to the Executive Team for management. Resulting strategic risks (shown below and over the page) are assessed and reviewed at Board level. Risk 1. Cyber-attack (Probability – High) Description There is now substantial evidence that active efforts are being made to penetrate Ultra’s secure networks, in order to gain access to classified information, steal intellectual property or disrupt business activity. There is a security and business risk if Ultra fails to secure its systems. Potential impact • Reputational damage to Ultra as a highly- regarded provider of secure data systems • Loss of business opportunity with removal of government approval to work on classified equipment development and manufacture • Reduced product differentiation with loss of intellectual property • Disruption to business activity as systems are cleansed and restored Risk 2. Changing market environment (Probability – High) Description Ultra’s core markets are changing as government budgets come under fiscal pressures, placing significant pressure on sales and orders. Contract awards are more heavily scrutinised and are more dependent on a close understanding of the customer need. Potential impact • Reduced business opportunity through an inability to respond quickly enough to changes in the market environment, by adapting our offerings and approach • Inability to match the full range of a customer’s requirements • Inability to maintain growth in declining defence markets Risk 3. Sustaining product differentiation (Probability – High) Description Ultra’s product development and innovation does not sustain sufficient differentiation in the market place, compared with commercial-off-the- shelf (COTS) products, or as a result of a disruptive technology, or because of a significant change in customer preference. Potential impact • Research and development (R&D) activity does not keep pace with technological development, losing product differentiation compared with competitors • Ultra’s portfolio of specialist capabilities is eroded through commoditisation • Business is lost through increasing competition Risk 4. Material legal/regulatory breach (Probability – Low) Description People or process failures lead to a breach of regulatory or legal requirements. Potential impact • Damage to reputation • Director disqualification • Damages and fines • Contract debarment Ultra Electronics Holdings plc 35 Annual Report and Accounts 2013 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Mitigation • Implementation of a comprehensive Group Information Security Policy and significant further investment in the hardening of all Ultra’s IT systems, enforced through internal audit • Development of the Group’s ability to monitor systems and detect intrusion attempts will continue through 2014 Trend È Increasing Trend È Increasing Mitigation • Introduction of LAUNCH behaviours (see page 7) to improve understanding of customer need • Present a capability portfolio which can be applied to meet customer need, complemented by a structure and culture which promotes agility, innovation and speed of response • Develop and strengthen the marketing teams within each business • Collaborate across the full Ultra capability portfolio and/or partner, to present comprehensive solutions which match customer needs Trend Ë Unchanged Mitigation • Maintain Ultra’s cultural focus on understanding customer need and delivering innovation • Based upon comprehensive market and competitor analysis, generate technology and product roadmaps which bring differentiated products to market to meet sales opportunities • Better co-ordinate R&D investment across the Group to avoid duplication and maximise advantage • Employ strategy reviews and game- planning to ensure R&D tracks plans and budgets Mitigation • Culture of accountability and compliance Trend • Ethics Overview Committee • Effective whistle-blowing procedures (EthicsPoint) • Policies and training on material compliance issues UnchangedË 36 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Risk management (continued) Risk 5. Business control (Probability – Low) Description Ultra has elected to cede some control of certain businesses (e.g. US Proxy Board and joint enterprises) to enhance market position in key markets. Changes in local regulation, or other cause, leads to an adverse impact on the Group. Potential impact • Inability to exercise management control could lead to an adverse impact on the Group Risk 6: Pensions (Probability – Medium) Description The Group’s UK-defined benefit pension scheme deficit becomes a serious liability for the Group. Potential impact • Increasing pension liabilities make a material impact on shareholder value Trend Í Decreasing Mitigation • Ultra works hard to ensure that its joint venture partners and the members of the Group’s security and proxy boards accord with the Group’s corporate culture and way of doing business • Ultra benefits from the expertise which the members of its JVs and boards bring to the Group • Ensure relationships continue to be mutually beneficial • Monitor the business environment for regulatory or political change • Bring the Proxy Division (SIS) under a US national director with the appropriate clearances Mitigation • The Board will remain focused on this key issue and holds formal reviews of the Group’s pension strategy annually • Manage the issue through annual accounting and triennial valuation processes, in order to highlight issues to the Board as they emerge • Retain an external pension strategy advisor and hold regular, formal Board strategy reviews Trend Ë Unchanged Risk 7: Execution of contracts (Probability – Medium) Description Ultra is bidding for and delivering an increasing number of large and complex contracts. Potential Impact • Ultra could underestimate the required resource or project complexity and so, make a loss Mitigation • The Group Operating Manual has been updated to enhance the rigour and oversight of major bids • Ultra could fail to apply the appropriate programme management skills to such large products, impacting on profitability and reputation • Ultra has conducted rigorous ‘lessons learned’ processes across recent large programmes • Where the complexity of the programme demands, Ultra will recruit or team to bring in the specialist skills required to manage large projects • Introduction of specific project team- based system engineering and project management training • Review of win strategies and bids by experienced executives independent of the bidding business Trend È Increasing Risk 8. Ultra culture (Probability – Medium) Description As the Group grows, it fails to manage the organisation in such a manner as to preserve the Ultra culture of innovation, agility and accountability. Potential impact • Ultra generates a level of hierarchy and bureaucracy which constrains innovation and entrepreneurship • Ultra loses the key staff which are important to sustaining the portfolio of specialist capabilities and so, loses business Risk 9. New markets (Probability – Medium) Description Entry into new markets is necessary to maintain growth, but they often have very different, unfamiliar procurement processes and constraints. These are also more likely to require mature products, delivered as packaged capabilities rather than individual products. Potential impact • Ultra fails to fully understand the commercial practices and market dynamics of the new regions it is entering, so loses business opportunities while expending resource on presence Risk 10: Staff retention (Probability – Medium) Description The Group’s businesses are capital-light, but specialist knowledge-intensive. Ultra fails to attract, develop and retain people with the required specialist competences. Potential impact • Ultra could lose key staff or capabilities, so that the Group cannot fulfill its contractual obligations, or is forced to outsource work, thereby reducing margins For more information on Ultra’s human resources initiatives, see pages 40 to 43. Ultra Electronics Holdings plc 37 Annual Report and Accounts 2013 Trend n o i t c u d o r t n I . DecreasingÍ 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Trend Ë Unchanged Trend Ë Unchanged Mitigation • Sustain a lean head office structure and empower individual businesses to remain autonomous and agile, while encouraging collaboration where appropriate • Develop the organisation structure in a way which preserves the autonomy and agility of the businesses • Reinforce the LEAP and LAUNCH behaviours which embody the Group’s culture and select by Lominger criteria • Integrate acquisitions in order to embed Ultra culture and practices • Use surveys (YOURviews and Best Companies) to measure culture and improve Mitigation • Engage closely with UKTI and Embassies to improve local knowledge • Access consultants, local legal expertise and research to better understand target regions • Use of Regional Marketing Managers • Develop sound regional partnerships in developing markets to meet offset needs, while maintaining product differentiation and profitability • Develop lessons learnt from Turkey, Oman, Australia and brief to the wider Group Mitigation • Continue the Group’s strong emphasis on recruiting, retaining and developing high-quality individuals to work in Ultra teams. This is delivered through the annual OSDP (Organisation, Succession and Development Planning) process • Fast-track high-potential candidates and exploit opportunities for secondments and inter-business transfers • Ensure all key staff have a nominated successor • Ensure poor performance is addressed • Monitor and review salary and benefits surveys • Engage with potential recruits at an early stage, through links with schools and universities and offer apprenticeships, work placements and graduate training 38 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Making a difference Ultra recognises that the long-term success of the Group will be enhanced through continuous focus on value creation for ALL its stakeholders: shareholders, customers, employees, local communities, the environment and suppliers. Making a difference… to Shareholders: Ultra aims to extend its long track record of delivering above-average shareholder returns. The Group’s primary objective is to continue to outperform the market by delivering above-average increases in earnings and by communicating effectively with shareholders and the financial community. • Engineers from Ultra’s Sonar Systems business supported three major Royal Navy exercises in the Gulf in 2013. Sonar Systems received letters of commendation from the Royal Navy for its support of these exercises, as well as other initiatives during the year • Ultra’s GigaSat business, a global provider of mobile and fly-away satellite stations, has customers in 70 countries. To support these customers, GigaSat has instituted a “follow the sun” policy, offering global customers 24/7 access to technical support, with calls being routed to support teams in the US, UK, Australia and the Phillippines. The backstop for the system is GigaSat’s Technical Director, to whom calls are routed to ensure that customer questions are answered. GigaSat received the Queen’s Award for Enterprise for creating local employment • Ultra’s Airport Systems and Ithra businesses, between them, support more than 180 airports around the globe. Airport Systems’ and Ithra’s customers include private companies, as well as governments, which have vested interests in generating local employment. In 2013, Airport Systems hired local team members in Brazil, Oman and China, facilitating local skills transfer to Customers: Ultra aims to be an excellent strategic supplier to its customers. To do so, Ultra’s businesses are focused on helping customers identify their true needs whilst, developing long-term relationships, based on performance excellence and meeting its commitments. As evidence of this approach, today, Ultra’s businesses have built long-term, mutually beneficial relationships with their customers and have become part of the customers’ extended enterprises. Examples from 2013 highlight Ultra’s commitments to its broad customer base: to Employees: Ultra’s ability to innovate to meet customer needs is based on the skills and capabilities of its employees. Ultra believes that the right people are its most important asset. Ultra is committed to developing people and securing the talent pipeline to ensure the Group’s continuing growth and success. Group initiatives for talent development and retention are detailed in the section on Developing Ultra’s People on pages 40 to 43. However, ultimate responsibility for individual talent development resides within Ultra’s businesses, a number of which have launched unique initiatives to ensure continuing employee development. A few examples include: • Ultra’s 3eTI business held an Engineering Challenge in 2013 to identify new product opportunities. Structured as a competitive challenge, the initiative enabled employees to creatively develop new technology concepts. One product was identified to be taken to market. The employee received a commendation for his efforts. This same business runs “3eTI University”, which provides consistent training to its employees on subjects ranging from project management to finance and accounting • Ultra’s Advanced Tactical Systems (ATS) business is known throughout the Ultra Group for its purpose-driven leadership. ATS has the following to say about its unique operational model: “We believe that employee engagement is driven largely by a sense of purpose. As such, our most important value is to ‘Put the warfighter first’. Our employees understand that what we do really matters to our customers. Along with a sense of purpose, we strive to give the employees as much autonomy as possible.” • Ultra’s PMES business periodically presents its “Above & Beyond Awards” to employees who have exceeded expectations. This employee recognition has served to create a cohesive community within the business Ultra Electronics Holdings plc 39 Annual Report and Accounts 2013 Ultra has committed to substantial investments in manufacturing facilities which will offer increased efficiencies and reduce energy consumption, while improving productivity across the business. to Suppliers: Ultra considers its suppliers to be part of the extended Ultra enterprise. Ultra’s businesses are reliant on their suppliers to help to deliver the complex products and services, many of which are safety- or performance-critical in their end markets. Ultra is focused on delivering innovative and differentiated solutions which can only be generated through working in partnership with suppliers and customers. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Kids, Cancer Research, Marie Curie Cancer Care, Help for Heroes, Children in Need and The Princes Trust. Events have included: Climbing Mt Everest, the Palace to Palace Cycle Ride, the London Marathon, Keswick to Barrow Walk, as well as various raffles, sales, quizzes and events • Ultra’s AMI business, located in Ann Arbor, Michigan, is well known in that University town for its contributions to the local entrepreneurial community. AMI supports the University of Michigan Center for Entrepreneurships and participates in AA Spark, an organisation dedicated to the economic prosperity of the greater Ann Arbor region to the environment… Ultra is cogniscent of its environmental responsibilities. Here, life-expired sonobuoys are being dismantled for recycling and re-use of components. ” to the Environment: Ultra recognises that effective measures need to be taken to minimise the environmental impact of its activities. In 2013, Ultra launched a pilot programme with the Carbon Trust, to assess the environmental impact of its Loudwater, UK operating businesses. The study identified opportunities for reducing the environmental performance of the Loudwater site, while identifying material cost-savings which will benefit shareholders. On the back of this pilot programme, Ultra will survey additional sites in 2014. in the Community: Ultra’s businesses are active and engaged corporate stewards in their local communities. In 2013, Ultra’s businesses collectively raised in excess of £100,000 for non-profit organisations around the globe. Many of the businesses have formed special relationships with education institutes in their surrounding communities: hosting company visits, offering graduate training programmes, helping with school science fairs and taking part in the broader dialogue on STEM* education. Each operating business has its own locally- managed charitable budget, which it directs to maintain and grow connections with its local community. The Group encourages and supports employees who undertake voluntary work in the local community or at national levels. Some noteworthy examples in 2013 include: • Ultra’s Maritime Systems business, based in Nova Scotia, Canada focuses its charitable efforts on the “Feeding Others Of Dartmouth” non-profit organisation. Maritime Systems conducted numerous fund-raising activities throughout the year to support this charity and contributed approximately C$5,000 in 2013. The business also fund-raises for prostate and breast cancer, Salvation Army Christmas and Military Families Fund, which yielded another C$5,000 in charitable donations • Ultra’s PMES business raised over £17,000 in 2013 for charitable causes. Local causes include St Giles Hospice, St Joseph’s & Etheldreda Church in Rugeley and Birmingham Children’s Hospital. National causes include Whizz *STEM (Science, Technology, Engineering & Maths) 40 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Developing Ultra’s people The success Ultra achieves in innovating to meet customer needs, is based on the broad range of skills and capabilities of the Group’s employees. Ultra recognises this and is committed to having an efficient organisation, with engaged and competent people. Culture Ultra defines its culture as the values, role models, processes, procedures and behaviours of its employees which drive the Group’s success. Many individuals join the Ultra team each year, through organic growth, natural staff turnover and acquisitions. Ultra is committed to ensuring that its culture is not diluted as the Group grows. The Group’s culture, values and behaviours are shaped by the strategic tenets, described on pages 12 and 13, with the fifth tenet calling for “an efficient organisation with engaged and competent people”. To achieve this, Ultra has identified four cultural behaviours of its people which are highly valued and encouraged. These are leadership, entrepreneurship, audacity and paranoia. Together, they are known within the Group as LEAP. Further information on LEAP can be found on page 10. Ultra is committed to ensuring that its culture is not diluted as the Group grows Continuing to ensure that Ultra has positively engaged people, is a key factor in driving forward the performance of the Group… What people mean to Ultra The success Ultra achieves in innovating to meet customer needs, is based on the broad range of skills and capabilities of its employees. All managers in Ultra work towards the aim of delivering an efficient organisation, with engaged and committed people to meet the Group’s business commitments. It is vital to the continuing growth and success of Ultra that the quality of the leadership teams is constantly improved. Many companies state that their people are the company’s most important asset. Ultra varies this slightly: the Group’s ‘right people’ are its most important asset. Growth through engagement An additional complementary set of behaviours, called LAUNCH, was introduced. These behaviours are designed specifically to support improved customer relationship building. LAUNCH is a way for Ultra’s businesses to generate more opportunities and ultimately, to deliver increased growth through enhanced customer engagement. Further information on LAUNCH can be found on page 7. Continuing to ensure that Ultra has positively engaged people, is a key factor in driving the performance of the Group forward and Ultra businesses provide a diverse range of opportunities for their employees to become involved with the local community. See page 39 (in the community). Retention of ‘high-performers’ 100 80 60 40 20 0 9 6 % 9 5 % 9 5 % 9 7 % 9 7 % Year 09 10 11 12 13 Internal appointments at Executive Team, divisional and MD/President level (%) 100 80 60 40 20 0 8 6 % 8 1 % 8 0 % 7 5 % 7 1 % Year 09 10 11 12 13 Ultra Electronics Holdings plc 41 Annual Report and Accounts 2013 Ultra’s strategic framework n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Businesses must also make sure that the talent pool is deep enough to cope with these internal appointments. Therefore, as well as the people listed as successors, each business also identifies people with high potential. The combined list represents Ultra’s ‘high-flyer’ talent pool and is used regularly to find the right people to fill internal vacancies, via the Group’s online Talent & Succession system. In a typical year, Ultra recruits over 600 new employees. Over and above this, acquisitions bring new people into the Ultra team. Ultra businesses attend a large number of graduate and undergraduate fairs, utilising current graduates as the Group’s ambassadors. Attendance has seen applications for graduate schemes increase and this in turn, helps to ensure that there is a future supply of engineers for the Group. Ultra has a number of programmes which help the Group to attract the best people, as well as encouraging students to develop careers in engineering or business Succession planning and retention To ensure that Ultra has the right people in the right place in the organisation, each of Ultra’s businesses prepares an annual ‘organisation, succession and development plan’. In this, individuals are assessed against their performance in their current role and their potential to perform a larger role in the short or longer term. This assessment is recorded in Ultra’s Talent & Succession system and gives a ‘performance versus potential’ rating for each employee. It recognises that any role within Ultra may become more challenging as the business grows and so, the business needs to ensure a supply of suitable talent is available when required. Equal attention is given to enhancing the performance and retention of those individuals throughout the organisation, who meet and exceed standard performance levels and to addressing the challenges of the people who fall into the ‘partially meet’ or ‘does not meet’ categories for performance. This does not always mean that those individuals must leave Ultra; it often means that they need to be placed in a role, more suited to their talents and in which they can start to perform to the expected standards of the business. Ultra has achieved high retention rates of those individuals on the business senior management teams, who are continually meeting or exceeding expectations in terms of their performance, or who are high-potential and still developing in their new role. By developing and retaining the identified high potential individuals, the Group is creating its next generation of business leaders, who will be able to take up the challenge of continuing the growth and expansion of Ultra. The succession planning element of the process aims to ensure that there are suitable successors for all the management team roles across each business and for other senior level roles. Ultra has, as a result, been able to appoint a high proportion of its leaders at Board, divisional and business levels, through internal promotion. 42 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Developing Ultra’s people (continued) ” Engineering Education Schemes case study A four-strong student team, with the support of Ultra’s staff, was set the task of making and testing a dynamic pneumatic hinge. The students were challenged to design a joint which could be dynamic at -40˚C and achieve 250,000 cycles, extending and contracting through an angular motion of 90 degrees, while containing dry air at a pressure of 350bar. The students completed a design for the joint, which included looking at electrical and hydraulic connections across the hinge. They then used Computer Aided Design tools to model its components and to create animation of the joint moving dynamically. The design was then partially prototyped, through use of 3D printing. With the support of Ultra’s recent graduate engineers, a bespoke rig was developed and built, allowing the students to complete the testing of the design ahead of issuing their final report. Training and development Ultra actively supports and invests in training and development, linked to business needs. Each business is responsible for identifying the training needs of its employees and managing its own training budget. This typically takes place through individual employee performance and development reviews, which are held at least annually. Ultra has its Learning Academy, an online portal, available to all of the Group’s businesses, which enables the scheduling of training, hosts online courses and retains the training records of Ultra’s employees. Specific training programmes are provided for individuals as necessary. In 2013, over 25 different in-house training courses were run in the UK and in North America. Many of these are courses tailored to the specific requirements of Ultra and the trainers have an intimate knowledge of how the Group operates across all its businesses. These training events include programmes on leadership and management, along with workshops on Ultra’s successful competitive strategy, strategic selling, programme management and systems engineering. The Group’s employees in Oman partnered with Oman Sail, to take part in a three-day leadership and development course. Although based around sailing, the course focused on the strategic, physical and The Group’s employees in Oman partnered with Oman Sail, to take part in a three-day leadership and development course *STEM (Science, Technology, Engineering & Maths) mental activities, critical to the development of leadership and proved extremely valuable to both the employees and the business. Ultra’s businesses have developed corporate partnerships with engineering institutions, including the Institution of Engineering and Technology, in order to support and encourage employees to pursue professional recognition (in the form of CEng, IEng, or EngTech status) for both their current and previous work and academic achievements. Opportunity to participate in national schemes, such as the Engineering Education Scheme (run by the Engineering Development Trust) and competitions promoting STEM* careers, gives students access to real-life current work challenges and enables Ultra employees to develop their management and leadership skills. Securing the talent pipeline Ultra has been committed to developing people ever since it was formed in 1993 and has a number of programmes which help the Group to attract the best people, as well as encouraging students to develop careers in engineering or business. Examples of how Ultra businesses do this are: • Ultra businesses have formed special relationships with schools in their surrounding communities, hosting company visits, helping with school science fairs and providing work experience opportunities. Success stories have seen school work experience students return to Ultra for paid vacation work, be sponsored through their university degree, complete their undergraduate placement year and then begin work as a graduate for the Group • Ultra has sponsored students through their last years at school. This provides students with support and mentoring during their studies and has led to students electing to undertake STEM degree courses • Many Ultra businesses have well established and successful apprenticeship programmes, which have gone on to provide the Group with engineering leaders Ultra Electronics Holdings plc 43 Annual Report and Accounts 2013 Ultra’s strategic framework n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Ultra has worked with SEPnet to provide summer work placements to students to help advance and sustain physics as a strategically important subject for the UK economy Ultra has worked with local schools, helping to encourage and support girls in pursuing careers in engineering Many Ultra businesses have well-established, successful apprenticeship programmes, which have gone on to provide the Group with engineering leaders for its future • Ultra businesses also provide opportunities for students to work on real projects through work placements, co-operative programmes and paid internship schemes • Ultra has excellent links with universities around the world. It allows the Group access to leading research and to develop relationships with students who may ultimately join Ultra. The Group sees benefit in working with universities to collaborate on innovation and to recruit students who can make a difference • Ultra has worked with SEPnet to provide summer work placements to students to help advance and sustain physics as a strategically important subject for the UK economy • Ultra businesses worldwide have a variety of links with their local business forums and chamber of commerce members in their local areas, helping to encourage STEM* activities. In Indiana (USA), this has included supporting the IPFW Society of Women Engineers and hosting local high school teachers to help influence career choices and retain talent within the region • Ultra’s businesses are members of Engineering UK, Cyber Challenge UK and other bodies which research and develop new ways to attract people into engineering careers, as well as helping to forecast future trends in the sector *STEM (Science, Technology, Engineering & Maths) 44 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Sustainability Ultra believes that a successful and sustainable business is built on more than just financial results. Ultra has a long, consistent track record of development and growth and has built a reputation for meeting its commitments. This reputation is based on Ultra’s businesses meeting their obligations and on the manner in which they do so. Ultra is committed to maintaining high standards of business ethics. The Group’s corporate responsibility initiatives are focused in the following key areas: • Human rights • Diversity and inclusion • Ethical business conduct • Health and safety • Environment Human rights Ultra acknowledges the UN Guiding Principles on Business and Human Rights and adheres to all relevant government guidelines, designed to ensure that its products are not incorporated into weapons or other equipment used for the purposes of terrorism, internal repression or the abuse of human rights. Ultra’s Board requires that the Group should, at all times, be a responsible corporate citizen and, as such, the Group complies with all applicable legislation in the countries in which it operates. Diversity and inclusion Ultra is committed to maintaining a work environment which provides equal opportunities for all employees, regardless of nationality, gender, ethnic background, sexual orientation, religious beliefs, marital status, disability or age. The Group complies with all applicable employment rights and legislation in the countries in which it operates. Ultra uses rigorous recruiting practices to ensure the best candidate is selected, based on objective requirements and assessments. Ultra monitors gender and age diversity. Ethical business conduct Ultra is committed to ethical business conduct. In this regard, the Group: • complies with legal and ethical standards in all countries in which it operates • provides guidance and training to employees • has the benefit of an independent Ethics Overview Committee which offers advice and guidance Meeting legal and ethical standards Ultra requires all employees, businesses and third parties, who act on Ultra’s behalf, to comply fully with the Group’s standards of business ethics and with the applicable laws and regulations of the countries in which it does business. Ultra is committed to operating in accordance with all legislative requirements, including those pertaining to anti-bribery and corruption practices, relevant national export control regulations and competition and anti-trust laws. Ultra has a corporate ethics policy, which encompasses a gifts and hospitality policy. All the Ultra’s businesses are required to report on compliance with the corporate ethics policy monthly. Diversity – Board of Directors Diversity – Senior management Diversity – All of Ultra Electronics Female Male 14% 86% Female Male 13% 87% Female Male 28% 72% Ultra Electronics Holdings plc 45 Annual Report and Accounts 2013 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 In addition, the Board reviews compliance with the corporate ethics policy twice a year. Providing guidance and training to employees The Group has continued to strengthen its policies, processes and training to ensure employees have the clear guidance they need in identifying and managing ethical matters. A Group-wide independent, confidential web- and telephone-based hotline anonymously enables all employees to report concerns about possible improprieties and other compliance issues. Reports made to the hotline are compiled by the independent operator and forwarded to the Chairman of the Audit Committee (or for US businesses, forwarded to the Directors of the Special Security Arrangement Board or Proxy Board as appropriate) for action. Any employee found to be in breach of the ethics policy is subject to appropriate disciplinary action. Independent Ethics Overview Committee An independent Ethics Overview Committee provides independent guidance, advice to, and scrutiny of Ultra’s businesses. The Committee provides assurance that Ultra’s business is being conducted in line with the Group’s policies, processes and in accordance with relevant legislation. It does this through discussions with senior managers, receiving reports and visits to Ultra businesses. The Committee comprises six permanent members, three of whom, including the Chairman, are independent. To maintain the highest degree of impartiality, the independent members of the Committee are self-selecting. The appointment of the Chairman is also exclusively within the remit of the independent members. Health and safety Ultra’s commitment to the safety and well-being of the Group’s employees and visitors is a key priority. A healthy, committed workforce, working in a safe environment, is necessary to achieve superior business results. Across the Group, the businesses manage a wide range of safety risks. These range from office employees, manufacturing employees and employees providing services at customer sites, including military bases and platforms. The safety of the products and services provided to users and customers is also of key importance to Ultra. The individual operating businesses ensure that the appropriate legal and ethical levels of safety are met across a product’s life cycle, with particular emphasis on the manufacturing, in-service and disposal phases. The Chief Executive is the Board member with overall health and safety responsibility. All Ultra operating businesses are required to have a written health and safety policy. Each Managing Director or President is responsible for the management of health and safety within their business and for providing adequate resource to meet the requirements of the health and safety policy. Compliance is assessed through independent external audits which take place bi-annually. Each operating business is required to submit a separate annual report on health and safety performance which, along with the result of the audits, is reviewed by the Board. The reportable/recordable accident rate has been maintained over recent years and is shown in figure 1. Lost time accident data per 200,000 hours has been recorded for the whole Group since 2010 and is shown in figure 2. The reportable/recordable accident rate per employee for 2013, fell from 1.06% to 0.77%. Ultra’s continuous safety improvement activities are focused on ensuring that the Group’s facilities, infrastructure, processes, products and services are as safe as reasonably practical for Ultra’s employees, visitors, customers and users. Figure 1 Reportable/recordable accidents per employee (%) 1.5 1.2 0.9 0.6 0.3 0.0 1 . 3 0 % 1 . 2 4 % 1 . 1 4 % 1 . 0 6 % 0 . 7 7 % Year 09 10 11 12 13 Figure 2 Lost time accidents per 200,000 hours 0.60 0.50 0.40 0.30 0.20 0.10 0 . 5 5 0 . 5 6 0 . 4 5 0 . 3 4 Year 10 11 12 13 46 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Sustainability (continued) Environment Ultra recognises that it is important, both for its employees and the communities, in which it operates, that effective measures are in place to minimise the environmental impact of its activities, as this will help to secure the long-term future of the Group. These measures include both the operational business environment and the products and services which the Group provides. Products The processes and practices in the individual operating businesses ensure that environmental considerations are taken into account throughout a product’s life cycle, from concept through to disposal. The individual operating businesses work with their suppliers to reduce the impact of their products and to maximise the use of environmentally- acceptable components. Ultra ensures the full co-operation of all employees to minimise environmental impact and maximise the conservation of materials. Operational The Chief Executive is the main Board member with overall environmental responsibility. The Managing Directors and Presidents of the operating businesses are responsible for the implementation of the policy. Where appropriate, individual businesses have ISO14001 accreditation. Ultra has a formal environmental policy which addresses compliance with environmental legislation, conformity with standards for air, waste disposal and noise, the economical use of materials and the establishment of appropriate environmental performance standards. Progress is monitored through annual reporting and a bi-annual external audit process, the most recent of which took place in 2013. Compliance with environmental requirements is planned and managed by each site and the processes for the storage, handling and disposal of hazardous or pollutant materials are reviewed on a continuous basis. Ultra has caused no contamination of land in 2013, continuing the excellent track record of the previous four years. In the UK, Ultra measures and reports on its packaging waste annually and this is shown in the chart below. Businesses are encouraged and incentivised to reduce the net amount of waste they produce. Energy consumption is measured annually and the data compared with previous years. The Group is increasing its efforts to address energy conservation and emissions. Ultra in the UK, is registered with the Environment Agency as part of the Carbon Reduction Commitment programme. The Group’s compliance emissions grew from 6,511 tonnes (2011/12) to 8,912 tonnes (2012/13) of CO2, an increase of 37%. Analysis shows that this rise is due to the increased number of operating sites (following several recent acquisitions) and a colder winter when compared to 2011/12. Ultra’s position in the 2012/13 CRC Performance League Table (PLT) is available on the Environment Agency’s website. Packaging Waste (t/£m sales) in UK businesses 0.250 0.200 0.150 0.100 0.050 0.000 0 . 2 0 0 0 . 1 6 5 0 . 1 6 0 0 . 1 9 2 0 . 1 5 5 Year 09 10 11 12 13 Ultra Electronics Holdings plc 47 Annual Report and Accounts 2013 Additional environmental initiatives In 2013, in addition to tracking its carbon emissions, Ultra partnered with the Carbon Trust to conduct a holistic Energy Review of Ultra’s Command & Control Systems (CCS) business, headquartered in Loudwater, UK. The CCS survey captured the facility’s grid- imported electricity, natural gas and specific annual energy performance. The study identified savings opportunities of approximately £50,000 per annum, which could be realised with £175,000 of upfront investment in energy-saving technologies. In 2014, the Carbon Trust survey will be conducted at several other Ultra businesses. Greenhouse gas emissions Ultra is committed to the systematic reduction of greenhouse gas emissions and to becoming a good steward for the environment. In compliance with the 2013 Greenhouse Gas Emissions Regulations, Ultra has collected and consolidated information on carbon dioxide (CO2) emissions from across its portfolio of 28 businesses; 2013 will serve as a baseline year, from which progress against reduction targets will be tracked. Methodology In 2013, each business reported on the appropriate greenhouse gas metrics. These metrics were aggregated to produce the figures reported below to which standard DEFRA conversion factors were applied. Ultra’s Greenhouse gas emissions – tonnes of CO2 (tCO2) Total tCO2 emitted by all Ultra businesses Total tCO2 from Ultra’s business activities (scope 1) Total tCO2 purchased by Ultra (scope 2) Ultra’s annual emissions in relation to Ultra’s business activities shown as tCO2 per £m of revenue 19,097 6,285 12,812 25.63 Total tonnes of CO2 emitted by all Ultra businesses Total tCO2 (scope 1) Total tCO2 (scope 2) 33% 67% Ultra is committed to the systematic reduction of greenhouse gas emissions n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 48 Ultra Electronics Holdings plc Corporate Governance Report Governance Chairman’s Governance Statement Ultra is committed to effective corporate governance. Having the right people, doing the right things and in the right way, is at the core of Ultra’s compliance framework. Ultra Electronics Holdings plc 49 Corporate Governance Report Ultra’s strategic framework n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Ultra is committed to effective corporate governance. Having the right people, doing the right things and in the right way, is at the core of Ultra’s compliance framework. The Board sets the tone for ethical standards across the Group. High standards of integrity and ethical behaviour are expected from every employee. Ultra’s values of responsibility, authority and accountability and an established commitment of ‘delivering on our promises’, promote and endorse this behaviour. During the year, the Board has been engaged in ensuring the Group’s governance framework meets the changes introduced by the September 2012 edition of the UK Corporate Governance Code (the Code) and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations). The strength of our embedded governance framework and our underlying processes mean, in the main, only changes in how we report the Board’s activities within the Annual Report and Accounts, are required. These changes can been seen in our Audit Committee Report on page 60, our Directors’ Remuneration Report on page 63 and the Strategic Report on pages 4 to 47. Our additional reporting includes the statement, made by the Directors on pages 58 and 59, that they consider the Annual Report and Accounts, taken as a whole, to be fair, balanced and understandable and providing the information necessary for shareholders to assess the Group’s performance, business model and strategy. The processes which underpin and support the Directors’ confidence in making this statement (which are explained in this Corporate Governance Report) are long-established and fully embedded in Ultra’s governance framework. Having the right people in the right roles extends to Ultra’s Board, which is composed of individuals from a wide range of professional and sector experience. This ensures that we have a truly balanced Board, with the right skills and experience to contribute to, and challenge, decision- making. During the year, Mary Waldner joined the Board as the Group Finance Director. Mary has a broad range of experience in a number of sectors and an excellent track record of achievement. Last year, I wrote to Ultra’s major shareholders advising them that, in view of the change of Financial Director and internal auditors in the year, the Board had decided to extend Mr Chris Bailey’s tenure, as Non-Executive Director, into a tenth year. He will continue as Chair of the Remuneration, Audit and Nominations Committees. Chris is a highly-experienced, former large plc Finance Director, who brings vital specialist and general management expertise to Ultra’s Board. He will provide continuity and risk reduction of the finance function during this period. The Board expects to appoint a replacement finance specialist Non-Executive Director to seek election at the Annual General Meeting in the spring of 2015. Douglas Caster CBE, Chairman 28 February 2014 50 Ultra Electronics Holdings plc Corporate Governance Report Governance Board of Directors For the year ended 31 December 2013 Douglas Caster CBE BSc MIET Rakesh Sharma BSc MBA MInstP CPhys Chairman Time with Ultra: 20 years 2 months Time in position: 2 years 8 months Chief Executive Time with Ultra: 20 years 2 months Time in position: 2 years 8 months Douglas Caster is a highly-experienced engineer and manager of electronics businesses. He has a long track record of driving growth through effective acquisition and superior financial performance in the companies he has led. Douglas Caster started his career as an electronics design engineer with the Racal Electronics Group in 1975, before moving to Schlumberger in 1986 and then to Dowty as Engineering Director of Sonar & Communication Systems in 1988. In 1992, he became Managing Director of that business and, after participating in the management buy-out which formed Ultra Electronics, joined the Board in October 1993. In April 2000, he was promoted to the position of Managing Director of Ultra’s Information & Power Systems division. In April 2004, he was appointed Chief Operating Officer and became Chief Executive in April 2005. He was appointed deputy Chairman in April 2010 and became Chairman of Ultra in April 2011. Rakesh Sharma has managed businesses and divisions across the full range of Ultra’s wide portfolio, with consistent success in driving growth in the Group. Combining business and technical insight, he ensures Ultra businesses maintain a competitive advantage in the Group’s specialist market sectors, while delivering superior financial performance. Rakesh Sharma started his career as an electronic design engineer at Marconi in 1983, before moving to Dowty as Chief Engineer of Sonar & Communication Systems in 1989. He was appointed Marketing Director of that business in 1993, when Ultra Electronics was formed. From 1997 to 1999, he worked in the US as Ultra’s Operations Director, North America. After returning to the UK, he was Managing Director of PMES and then of Sonar & Communication Systems, before taking his first divisional role in 2005 as Managing Director, Tactical & Sonar Systems. In 2008, he moved to run the Group’s Information & Power Systems division, before being appointed Chief Operating Officer in January 2010. He was appointed to the Board in April 2010 and became Chief Executive in April 2011. Chris Bailey* FCA MCT Martin Broadhurst* OBE MA C.Dir FIoD FRAeS Non-Executive Director Non-Executive Director Time in position: 8 years 11 months Time in position: 1 year 5 months Chris Bailey is a highly-experienced, former large plc Finance Director, who brings valuable specialist and general management expertise to Ultra’s Board. He has knowledge and expertise in the organisation of operations in all of Ultra’s main geographic markets. Chris Bailey was appointed to the Board in January 2005. He was Group Finance Director of Aggregate Industries plc until 2004. Before this, he was the Finance Director of the precursor companies of Aggregate Industries from 1984 until its formation in 1997. He is a Fellow of the Institute of Chartered Accountants of England & Wales and is also a Member of the Association of Corporate Treasurers. Martin Broadhurst has a wealth of valuable experience in the defence and aerospace markets, having run a large engineering organisation within the sector for fifteen years. He has demonstrable expertise and skill in growing international business and in expanding capabilities. Martin Broadhurst was appointed to the Ultra Board in July 2012. He joined Marshall Aerospace as a management trainee in 1975 and, following a number of roles with the company, including Production Director and Director of Programmes, was appointed as Chief Executive in February 1996. During his time as Chief Executive, he served on the Group Holdings Board and was Chairman of a number of subsidiary companies. *Audit, Remuneration and Nominations Committee member *NOTE: All details correct as at 31 December 2013 (cid:1) Executive Director (cid:1) Non-Executive Director (cid:1) Company Secretary & General Counsel Ultra Electronics Holdings plc 51 Corporate Governance Report Ultra’s strategic framework Mary Waldner MA ACMA Mark Anderson CB BSc Finance Director Time with Ultra: 6 months Time in position: 6 months Group Marketing Director Time with Ultra: 2 years 7 months Time in position: 1 year 8 months Mary has a broad range of experience in a variety of sectors and an excellent track record of delivery throughout a number of senior financial roles with major public limited companies. After graduating from Oxford University with an MA in Physics, Mary started her career at Coopers & Lybrand Management Consultancy Services, before working for Vauxhall Motors Ltd. From 1998 to 2008, she held a number of senior roles at British Airways plc, including Financial Controller (Commercial) and Manager, Corporate Planning and Reporting. Following this, she then moved to 3i Group plc, where she was Group Financial Controller. In 2011, Mary joined QinetiQ Group plc as Director, Group Finance. She joined Ultra Electronics as Group Finance Director and was appointed to the Board in July 2013. Mark Anderson brings a broad customer perspective, operational experience from recent conflicts and collaboration with close allies. His oversight of Ultra’s strategic process will benefit from this broad understanding of the customer need. Mark Anderson joined the Royal Navy in 1974 as a weapon system engineer, before switching career path to achieve both nuclear submarine and ship command. His MoD staff appointments include policy roles in two Strategic Defence Reviews and equipment customer responsibility for all underwater programmes. He has worked closely with the US throughout his career, including sensitive roles within the US Joint Staff. Promoted to Rear Admiral, he commanded all Fleet Operations and headed the UK submarine service up to the end of his 36 years’ service in June 2011. He then joined Ultra in a divisional strategy role, before being selected to join the Board in April 2012. Sir Robert Walmsley* KCB, FREng Sharon Harris LLB Non-Executive Director Time in position: 4 years 11 months Company Secretary & General Counsel Time with Ultra: 2 years 1 month Time in position: 1 year 8 months Sir Robert Walmsley brings to Ultra’s Board, solid experience in the defence, security, energy and transport sectors. He has a deep knowledge of all of Ultra’s main geographic markets and a substantial experience of government procurement. Sharon Harris brings corporate legal expertise to the Board role, together with plc experience in corporate governance, with a strong knowledge of the management and protection of intellectual property. Sir Robert Walmsley was most recently Chief of Defence Procurement at the UK Ministry of Defence (MoD), a post which he held from 1996 until his retirement from public service in 2003. Prior to his MoD appointment, Sir Robert had a distinguished career in the Royal Navy, where he rose to the rank of Vice Admiral in 1994 and served for two years as Controller of the Navy. Sir Robert Walmsley is a Non-Executive Director of Cohort plc and of the General Dynamics Corporation. He was appointed to the Board in January 2009. Sharon Harris graduated from Kings College, London with a Law degree. She started her career at Norton Rose and has international plc experience gained in the FMCG, pharmaceutical, media and electronics sectors. She joined Ultra in November 2011 and was appointed Company Secretary in April 2012. *Audit, Remuneration and Nominations Committee member *NOTE: All details correct as at 31 December 2013 (cid:1) Executive Director (cid:1) Non-Executive Director (cid:1) Company Secretary & General Counsel n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 52 Ultra Electronics Holdings plc Corporate Governance Report Governance Corporate Governance Report Compliance statement Throughout the financial year ended 31 December 2013, the Board considers that it and the Group have complied with the provisions set out in the September 2012 edition of the UK Corporate Governance Code (the Code). The Code is issued by the Financial Reporting Council and is publicly available on their website (www.frc.org.uk). This corporate governance section of the Annual Report & Accounts describes how the Board has applied the main principles of the Code. Role of the Board The role of the Board is to provide effective leadership and direction in delivering the key corporate objective of adding long-term shareholder value, as measured by market capitalisation and the Group’s ranking in the FTSE index, more rapidly than other companies to outperform the market. The Executive Directors set the Group strategy which is subject to challenge before final agreement by the full Board. The Board also ensures that adequate controls are in place, including calibrating risk appetite and maintaining oversight of Ultra’s risk management processes. The Board receives regular compliance reports from the Group’s divisions and businesses. The Board requires the Group’s businesses to behave ethically and properly at all times and engenders a culture of fairness to customers, suppliers and employees. It is the function of the Group’s management, through the Chief Executive Rakesh Sharma and his Executive Team, to run the operations of the Group. The members of the Executive Team are listed on page 77. The Board is responsible for major investment decisions such as acquisitions of companies, the allocation of the Group’s R&D expenditure, major new projects and approval of large customer contracts. To this end, in addition to the ten scheduled Board meetings, the Board held five unscheduled Board meetings in the year. The Board conducts regular reviews of the major projects being undertaken by the operating businesses. A summary of some of the Board’s key responsibilities and activities is set out opposite and the full range of Board responsibilities are detailed in the document entitled ‘Matters reserved for the Board’ which is available from the Investors section of the Group website. Board matters At every Board meeting, standing agenda items include: • The Chief Executive’s Report which covers the Group’s operational performance, particular performance issues in each division, the overall outlook for the Group and health and safety performance • The Group Finance Director’s Report which covers financial forecasts for the half and full year, review of cash performance to date and future forecasts, review of banking covenants, review of analysts’ views of the Group, major shareholdings and major share buyers and sellers • Major project reports • Group Marketing Director’s report • Human Resources report • Review of current acquisition activity and approval of any offers for proposed acquisitions • Business presentation by a Managing Director/President Other important topics which are covered on a routine basis during the year are: • Approval of annual and interim financial statements and accompanying regulatory announcements • Review and approval of the annual budget • Approval of the Group’s dividend policy, the payment of the interim dividend and the recommendation of the final dividend • Receiving reports from the Board’s Committees, including recommendations from the Audit Committee in respect of: the effectiveness of the Company’s risk management and internal control statement; the adoption of the going concern statement; impairment and reappointment of the Auditors and the subsequent agreement to such recommendations • Review and approval of major capital investment projects and bids • A full day Board meeting devoted wholly to the review of the five-year strategic plan, with presentations given by the Executive Team and discussions held on significant matters identified in the proposed plan • Six-monthly review of compliance reports prepared by Divisional Managing Directors/Presidents • Annual reviews of health & safety and environmental reports summarising the position across all Ultra businesses • Approval of any changes to the rules of operation of the Group’s employee share plans • Review of the risk register • Post acquisition reviews • Tax planning • Board evaluation • Consideration of Non-Executive Directors’ fees • Review of the terms of reference of the main Board and the Board Committees • Corporate governance updates Other significant matters addressed by the Board in 2013 included: • Consideration and agreement of the Pension Scheme Revaluation and the Deficit Reduction Plan for the Ultra Electronics Defined Benefit Pension Scheme • Structure, policies and procedures to address cyber-security risk and cyber-security offerings • Review of progress made across the Group on mandatory carbon reporting • Consideration and update of the Group’s share dealing code • Setting out clearly defined and written roles for the Chairman, Chief Executive and Senior Independent Director Ultra Electronics Holdings plc 53 Corporate Governance Report (continued) Ultra’s strategic framework Board meetings Comprehensive briefing papers are circulated to the Directors in advance of each Board meeting to enable an informed debate to take place. Acquisition opportunities are presented to the Board by the appropriate Divisional Managing Director/President. This enables a full discussion of the merits and risks of any acquisition proposal to take place at an early stage. Other significant matters that require formal Board approval which are routinely presented by the appropriate business include major bids, updates on key strategic initiatives and major capital and private venture development expenditure proposals. The scheduled Board meetings are rotated around the sites of the operating businesses. During 2013, the Board visited six operating businesses in the UK. In addition, the Board held one meeting at a North American business, following a tour by the Non-Executive Directors of some of the North American operations. During Board meetings at Ultra’s operating units, presentations detailing recent performance, key opportunities and future forecasts are given by the senior managers of the host business. Product demonstrations and site tours also take place. This gives the Non- Executive Directors a good practical insight into the operating businesses. The Non-Executive Directors also conduct individual visits to businesses. The Directors meet frequently with the Executive Team members who make presentations to the Board on any significant investment proposals, including proposed acquisitions, and to give progress reports on any particular strategic initiatives which the Board may have requested. The Executive Team as a whole meets the Board annually to present the proposed Strategic Plan for the next five years. This is then debated with the Directors, changes agreed and a final plan is approved. In addition, Product demonstrations and site tours take place. This gives the Non-Executive Directors a good practical insight into operating businesses. The Non-Executive Directors also conduct individual visits to businesses in line with the areas of focus from the 2012 Board evaluation (see page 55), the Non-Executive Directors met with the Divisional Managing Directors/Presidents on an additional two occasions in the year. unexpected commitments, they received and read papers for consideration at the meeting, relayed their comments in advance and, where necessary, followed up with the Chairman on the decisions made. Meeting attendance 2013 The table below shows attendance by Directors at the Board and Committee meetings. To the extent Directors were unable to attend meetings, because unscheduled meetings were called at short notice or because of prior or Actual (inclusive of unscheduled Board meetings ) Chairman Douglas Caster Chief Executive Rakesh Sharma Executive Directors Mark Anderson1 Paul Dean2 Mary Waldner3 Non-Executive Directors Chris Bailey 4 Martin Broadhurst Sir Robert Walmsley 15 15 12 4 7 13 15 15 Main Board Audit Committee Remuneration Committee Nominations Committee Maximum possible Actual Maximum possible Actual Maximum possible Actual Maximum possible 15 15 15 4 7 15 15 15 4* 4* 4* 2* 2* 4 4 4 4* 4* 4* 2* 2* 4 4 4 5* 6* - - - 7 7 7 7* 7* - - - 7 7 7 1* 1* - - - 1 1 1 1* 1* - - - 1 1 1 1 Mark Anderson was unable to attend the Board meetings in October and November and an unscheduled Board meeting in November 2013 2 Paul Dean resigned on 31 March 2013 3 Mary Waldner was appointed on 1 July 2013 4 Chris Bailey was unable to attend unscheduled Board meetings in June and November 2013 *By invitation n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 54 Ultra Electronics Holdings plc Corporate Governance Report (continued) Governance Corporate Governance Report (continued) Board composition Current Board of Directors Chairman Executive Directors Non-Executive Directors 1 3 3 In 2013, Paul Dean, the Group Finance Director resigned and was replaced by Mary Waldner. Throughout 2013, the Board structure was in line with the Code. Diversity Ultra continues to follow its overriding policy of appointing the best person for a particular role, regardless of sex, race, nationality, disability, sexual orientation, age, marital status, religion or beliefs. The Board contends that a board composed of the right balance of skills, experience and diversity of views is best placed to support a company in its strategic objectives. The Board has considered in detail the requirements of the Code regarding gender diversity. In selecting the best person for a role, the Board gives active consideration to the benefits of diversity, including gender diversity. However, setting diversity target aspirations, especially by specific dates, can distort the selection process and conflict with its preferred, diversity-aware ‘best person for the role’(cid:0)approach. Board gender Split Male Female 6 1 Engineering is a sector of relatively low female participation, especially in senior management positions. This poses a challenge for the Group in terms of achieving gender diversity with the appropriate knowledge and understanding of the risks associated with the Group’s technologies and offerings. Nevertheless, Ultra will continue in its diversity aware ‘best person for the role’ approach to recruiting. A summary of the gender split across the Board, Executive Team and the Group as a whole is set out on page 44. Board-tenure and independence Tenure years Independence Experience on other plc boards Chairman Douglas Caster Non-Executive Directors Chris Bailey Martin Broadhurst Sir Robert Walmsley Executive Directors Rakesh Sharma Mary Waldner Mark Anderson Board skills and experience The Board has a balance of skills, understanding, perspectives and experience relevant to the Group’s activities. The Board collectively possesses a deep understanding of the Group’s core defence, security, transport and energy markets. This is complemented by its members’(cid:0) experience and expertise in other industries and other disciplines including procurement, accountancy, financial management and growing international businesses. There is knowledge of best practice in other companies and other industries, and the Board seeks to adopt new methodologies when these are seen to be in the best interests of the Group. This range of skills and experience informs the Board’s decision-making and enables it to provide effective leadership. The particular skills and experience that each Director brings to the Board are described in their biographical details on pages 50 and 51 and are summarised opposite. The Group has a policy whereby Executive Directors, but not the Chief Executive, may accept one appointment as a non-executive director in another listed company. Executive Directors are permitted to retain any fees from such external appointments. No Yes No Yes No No No 6 5 6 No Yes Yes Yes No No No 7 6 3 9 1.5 5 3 0.5 2 7 4 6 4 5 6 Number of Directors with skills and experience described Defence and Security Transport Energy Engineering Production Project management Finance Procurement Marketing Management Cross border trade Ultra Electronics Holdings plc 55 Corporate Governance Report (continued) Ultra’s strategic framework Board roles There is a clear division of responsibilities between the Chairman, the Chief Executive and the Senior Independent Director, such that no one individual has unfettered powers of decision making. This division of responsibilities, which is in writing, has been agreed by the Board and is summarized in the table below. Role of the Chairman Role of the Chief Executive Role of the Senior Independent Director Douglas Caster is responsible for: Rakesh Sharma is responsible for: Chris Bailey is responsible for: Effective running of the Board Ensuring that the Board as a whole plays a full and constructive part in the development and determination of the Group’s strategy and overall commercial objectives The Board’s decision making process Setting the agenda for the Board, taking into account the important issues facing the Group. All Directors are able to add items to Board agendas Ensuring the Board receives accurate, timely and clear information Ensuring effective communication between the Company and its shareholders Ensuring the performance of the Board, its Committees and individual Directors is formally and rigorously evaluated Running the Group’s business and operations with the aid of the Executive Team Proposing and developing the Group’s strategy and overall commercial objectives Being available to shareholders if they have concerns which contact through the normal channels of Chairman, Chief Executive or other Executive Directors has failed to resolve or for which such contact is inappropriate Ensuring, with the Executive Team, the implementation of the decisions of the Board and its Committees Providing input to the Board’s agenda from himself and other members of the Executive Team Ensuring the Executive Team give appropriate priority to providing reports to the Board which contain accurate, timely and clear information Leading the communication programme with shareholders Ensuring that performance reviews are carried out at least once a year for each of the Executive Directors, providing input to the wider Board evaluation process Attending meetings with major shareholders and financial analysts to obtain a balanced understanding of their issues and concerns Meeting with the Non-Executive Directors at least once a year to appraise the Chairman’s performance and on such other occasions as are deemed appropriate Chairing the Nominations Committee and, in that role, initiating change and succession planning in Board appointments to retain and build an effective and complementary Board, and to facilitate the appointment of effective and suitable members and Chairmen of Board Committees. The Board as a whole determines the chairmanship and membership of Board Committees Non-Executive Directors Chris Bailey, Sir Robert Walmsley and Martin Broadhurst are the Group’s independent Non- Executive Directors. The Board considers them to be independent. In assessing independence, the Board considers that they are independent of management and free from business and other relationships which could interfere with the exercise of independent judgment now and in the future. The Board believes that any shareholdings of the Chairman and Non- Executive Directors serve to align their interests with those of all shareholders. The Non-Executive Directors have wide experience of working in a variety of different government and industry roles with exposure to international business. The key role of the Non-Executive Directors, along with the Chairman, is to provide an appropriate level of challenge and constructive criticism to the plans of the Executive Directors. The Non-Executive Directors met without the Chairman or Executive Directors being present on several occasions during the year to discuss aspects relating to the Board and the Group and appropriate feedback was given. On behalf of the Group, the Non-Executive Directors are active in developing relationships at a senior level with Ultra’s key suppliers, customers and business partners. Insurance The Group maintains an appropriate level of Directors and Officers Liability insurance cover in respect of legal action against its Directors. Board appointments – the process In making appointments to the Board, the Board, through the Nominations Committee, is careful to identify the skills, knowledge and experience needed for each role and to complement the existing skills mix provided by other Board members. To ensure selection from the widest possible talent pool, it is Ultra’s normal practice to engage the services of independent, external search consultants in recruiting new Directors. The recruitment process for the appointment of Mary Waldner as Group Finance Director was set out in the 2012 Annual Report. Directors’ induction and training All new appointments to the Board receive a comprehensive induction to the Group. This covers its corporate structure, the products and services of the Group’s businesses, the key markets in which the businesses operate and the key risks which the Group faces, together with the actions and plans which are in place to mitigate against these. On appointment, each Director receives a full induction pack explaining Ultra’s governance framework, policies and procedures and a briefing from the Company Secretary & General Counsel on the legal, governance and control framework. Programmes of visits to Group businesses are arranged. It is important for these to encompass as many businesses as possible, since no two Ultra businesses are alike. New Directors are encouraged to meet business and divisional management teams to gain a feel for the Group’s style and culture. Mary Waldner joined Ultra as Group Finance Director on 1 July 2013. In addition to receiving a full induction pack, she undertook an induction program consisting of visits to various businesses across the Group and meeting with the management teams of these businesses. The Company Secretary & General Counsel annually presents to the Board on corporate governance. The Board is briefed on significant changes in the law or governance codes affecting their duties as Directors. Experts present to the Board on specialist areas, such as pensions and tax. Specific training is arranged for Directors as and when appropriate. The Directors are able to call on independent professional advice at anytime should this be necessary in order for them to carry out their duties. Board evaluation The Chairman commissions externally-facilitated annual Board evaluations. Board evaluations run on a two year cycle. One year, the effectiveness of the Board and its Committees is evaluated. The next year, individual Director’s performance is evaluated. Following an evaluation of the effectiveness of the Board and its Committees in 2012, the 2012 Annual Report and Accounts set out the areas of focus going forward. An update on progress made on these actions is set out in the table on the next page. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 56 Ultra Electronics Holdings plc Corporate Governance Report (continued) Governance Corporate Governance Report (continued) Update on actions from the 2012 Board evaluation Focus Actions Progress Given the Group’s operations in the US, it was concluded that a North American representative on the Board would contribute to the Board’s insight and experience of the US market The level of Board interaction with the Divisional Managing Directors/Presidents would be increased Risk management reporting would continue to be developed Board evaluation (continued) In 2013, Mr Jack Telfer facilitated a review of individual Director’s performance. All Directors completed a detailed questionnaire requiring them to give feedback on their fellow Board members’ contribution. The objective of this process was to encourage the improved performance and effectiveness of the Board. A report of the results was given to the Chairman of the Board, detailing any significant points pertaining to individual Directors and broader issues regarding the combined strengths and weaknesses of the Board. Mr Telfer reviewed the report with the Chairman to discuss possible actions arising and the feedback to be provided to individual Directors. The review concluded that each Director contributes effectively and demonstrates commitment to the role. There is an appropriate balance of skills, experience, independence, diversity and knowledge of the Company to enable the Directors to discharge their respective duties and responsibilities effectively. Commitment of time by all Directors for Board and Committee meetings and other duties was also considered sufficient for the effective discharge of their responsibilities. Mr. Telfer has considerable experience of working at board level. He was the Human Resources Director of the Group up until June 2004 (when he left Ultra to set up his own consultancy) and so was able to facilitate the evaluation from a position of having a good understanding of the Group and its culture. He provides a valuable insight into the Group’s challenges and needs and is able to assess the Board and its Committees in the context of the Group’s development. The Board agreed that when appointing a new non-executive director this requirement would be taken into account This observation would be taken into account as part of the Board’s succession planning In addition to presenting the Strategic Plan annually, the Divisional Managing Directors/ Presidents would meet with the Board part way through the year to give an update on actions arising from the Strategic Plan. The Non- Executive Directors would aim to meet with the Divisional Managing Directors/ Presidents three times a year It was agreed that: • The strategic risks as set out in the 2012 Annual Report would be reviewed by the Board twice annually • An enhanced unified reporting format for major project risks would be implemented • An issue tracking tool would be used to record control issues identified by internal audit along with agreed actions and timeframes for their remediation Annual re-election of Directors All the Directors will stand for re-election at the Annual General Meeting on 30 April 2014. Under normal circumstances, the Board would have sought to replace Chris Bailey as he has served for a period of nine years. However in view of the significant changes in the year to the Group’s financial function referred to on page 49, the Board will seek to extend Chris Bailey’s appointment for a further year. The Board expects to appoint a new finance specialist non-executive director to seek election at the Annual General Meeting in the spring of 2015. The Board considers that Chris Bailey will continue to exercise his independence. Conflicts of interest The Group has in place procedures for managing conflicts of interest. Ultra’s Articles of Association also contain provisions to allow the Directors to authorise potential conflicts of interest so that a Director is not in breach of his or her duty under company law. If Directors become aware that they have an interest, directly or indirectly, in an existing or proposed transaction with Ultra, they should notify the Board in line with the Articles of Association. Directors have a continuing duty to update any changes to their conflicts of interest. Internal controls The Directors carry out an annual review of the effectiveness of the Group’s internal control systems. This covers the ways in which identified strategic, operational and financial risks are managed. Particular attention in the year was paid to the security of the Group’s IT systems and cyber security, and generally on improving information security management. Cyber security has been identified as the In addition to the Group strategy day and project presentations to the Board, the Non-Executive Directors met with the Divisional Managing Directors/Presidents twice in the year • The strategic risks as set out on pages 34 to 37 are reviewed by the Board twice annually • A review of the reporting format for major project risks was conducted and an improved format adopted • An issue tracking tool has been adopted to record control issues identified by internal audit along with agreed actions and timeframes for their remediation Company’s number 1 risk (see page 35). During the year under review, an Information Security Policy was put in place for the Group and all businesses were required to sign up to this policy. This policy highlights the guiding principles necessary to safeguard the security of the Group’s information systems. It provides guidance on the management of information, documented or otherwise, and the processes to be followed should there be an incident which occurs, such as breakdown of communication or network failure. Ultra’s internal controls are designed, and have evolved over time, to meet the Group’s particular needs and the risks to which it is exposed. However, no controls can provide absolute assurance against material errors, losses or fraud. The key features of the internal control system that operated during the year are described in the Audit Committee Report on page 61. Risk management Risk assessment and management is not treated as a separate function within Ultra. It is assessed and managed as an integral part of all of the Group’s management and control processes. The key features of the risk management system are described in the Audit Committee Report on page 61. Financial reporting systems The Group has a well-established process for collecting financial information from operating businesses and for consolidating this at divisional and Group level. Financial results for operating businesses, each division and the whole Group are provided to the Board monthly and presented at every scheduled Board meeting. Ten scheduled Board meetings are held each year. When a scheduled Ultra Electronics Holdings plc 57 Corporate Governance Report (continued) Ultra’s strategic framework of the financial community to exhibitions, such as the Farnborough Airshow and the Defence & Security Equipment International exhibition. Members of the Executive Team also take part in investor briefings organised by third parties. All shareholders are invited to attend the Annual General Meeting where they have the opportunity to meet with Directors and to ask questions. Voting at the Annual General Meeting is conducted by way of a show of hands. Proxy votes lodged for each Annual General Meeting are announced at the meeting and published on Ultra’s website. Electronic communication with shareholders is preferred wherever possible since this is both more efficient and environmentally friendly. However, shareholders may opt to receive hard copy communication if they wish. Shareholder analysis The majority of Ultra’s shares are held by institutional shareholders. The Chairman, Chief Executive and other members of Ultra’s Executive Team have holdings in Ultra, many of whom have retained shares awarded via share option or long term incentive schemes. Shareholder analysis by size of holding as at 31 December 2013 Shareholder analysis by category of shareholder as at 31 December 2013 Fund Unit trusts Holding % 39,216,481 56.18 Pension funds 10,187,917 14.59 Other managed funds Sovereign wealth Insurance companies Private investor Mutual fund Investment trust Custodians Hedge fund Exchange-traded fund Employee share scheme trustees Charity Local authority Other Total issued share capital 3,934,498 3,529,974 3,386,993 2,825,641 823,987 709,706 652,641 595,404 5.64 5.06 4.85 4.05 1.18 1.02 0.93 0.85 500,081 0.72 235,247 152,057 123,086 2,931,171 0.34 0.22 0.18 4.19 69,804,884 100.0 Size of shareholding 1-50 51-100 101-250 251-500 501-1,000 1,001-5,000 5,001-10,000 10,001-25,000 25,001-50,000 Over 50,000 Total Financial calendar 26 March 2014 9 April 2014 11 April 2014 30 April 2014 2 May 2014 4 August 2014 26 September 2014 Total number of holdings % of holders 7.81 5.13 21.72 15.01 14.83 17.14 3.17 4.39 2.87 7.93 128 84 356 246 243 281 52 72 47 130 Total number of shares 2,811 6,918 65,305 91,606 172,005 589,443 367,650 1,101,845 1,649,559 65,757,742 % issued capital 0.00 0.01 0.09 0.13 0.25 0.85 0.53 1.58 2.36 94.20 1,639 100.00 69,804,884 100.00 Annual Report and Accounts published Ex-dividend date Record date Annual General Meeting Final dividend payment date Interim results announced Interim dividend payment date n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Board Meeting is not held in the month, the Directors receive the following information: a summary financial report for the Group comprising consolidated financial information and business financial information; summary financial reports from each of the businesses; and a shareholder analysis summary report on Ultra. The Chief Executive and Group Finance Director explain the significance of any major impacts on the financial performance and draw the Board’s attention to any significant trends or deviations from budget revealed by forecasts of future performance. Shareholder communication The Group is committed to ensuring effective communication with its shareholders and encourages an open dialogue with shareholders to promote a mutual understanding of objectives and expectations. Throughout the year, Ultra initiates tailored events and responds to meeting requests with current and prospective investors and financial analysts. In line with Ultra’s commitment to clear and open communication with shareholders, in September 2013, the Chairman on behalf of the Board wrote to Ultra’s major shareholders advising them of the Board’s intention to extend Chris Bailey’s appointment by a further one year (see explanation on page 49). No major issues were raised by those shareholders. Meetings are held with institutional investors and financial analysts after the release of the interim and full year financial results, at which detailed briefings are given. These briefings can also be found on the Investors section of the Group’s website, together with copies of all regulatory announcements, press releases and copies of the published full year and interim accounts and reports. The Chief Executive, Chairman, Group Finance Director and Marketing Director regularly meet institutional shareholders or potential shareholders either individually or as part of group meetings. The Board is regularly updated by Ultra’s stock broker on analysts’ and major shareholders’ views on the Group. The Chairman and Non- Executive Directors are always available to meet with shareholders should they have any concerns or questions that they wish to raise. Each year, Ultra organises focused events and/or site visits to provide greater insight into the strengths and potential of its extensive portfolio of specialist capabilities. These range from introductory briefings on the Group as a whole to presentations on specific areas of capability. Visits and presentations in the year included a visit to Ultra’s Wimborne site which comprised a review of Ultra’s nuclear sensors and instrumentation capability, and discussion on how this applies to the current and future nuclear energy market. The briefing also covered overviews of Ultra’s technology relating to cryptography, aerospace controls, radios, vehicle electronic architectures and rail power management. Ultra invites investors and members 58 Ultra Electronics Holdings plc Corporate Governance Report (continued) Governance Corporate Governance Report (continued) Board Committees Ultra has established three Committees of the Board being: the Audit; Remuneration; and Nominations Committees, to which certain key responsibilities have been delegated. The detailed terms of reference of each Committee are available from the Investors section of the Group website. The responsibilities of each Committee are in line with the recommendations of the Code. The membership of the Audit and Remuneration Committees comprises the three independent Non-Executive Directors – Chris Bailey, Sir Robert Walmsley and Martin Broadhurst, with Chris Bailey, Senior Independent Director, as Chairman of both Committees. The membership of the Nominations Committee comprises the three independent Non-Executive Directors and Douglas Caster, with Chris Bailey as Chairman of the Committee. Summaries of the key activities of each Committee are given below. Audit Committee The Committee met four times during the year. It is responsible for overseeing the Group’s internal financial controls and risk management; recommending the half and full year financial results to the Board; and monitoring the integrity of all formal reports and announcements relating to the Group’s financial performance. Full details of the activities of the Audit Committee during 2013 are given on page 60. Remuneration Committee Role The Committee met seven times during the year. It is responsible for formulating and recommending to the Board the remuneration policy for Executive Directors and Chairman of the Board. Full details of the activities of the Remuneration Committee during 2013 are given in the Directors’ Remuneration Report on page 63, comprising the Directors’ Remuneration Policy Report and the Annual Report on Remuneration. Both sections of the report will be presented for approval by the shareholders at the Annual General Meeting. Nominations Committee Role The function of the Nominations Committee is to keep under review the structure, size and composition of the Board, and to make proposals to the Board regarding the appointment of new directors and Board Committee chairmen. The terms of reference are available on Ultra’s website (www.ultra-electronics.com). During 2013 the Committee met once. The purpose of this meeting was threefold: • To review and endorse the Group’s diversity policy (see page 54) • To recommend to the Board that Douglas Caster be appointed as a member of the Committee • To consider the tenure of Chris Bailey, the Senior Independent Director. Chris Bailey left the meeting when this item was under consideration Ultra operates a well-established succession planning process. This is described in detail on page 41. Statement of going concern* Ultra’s banking facilities amount to £190m in total, plus a £15m overdraft. They were established in two tranches. The first tranche comprises £90m of revolving credit, denominated in Sterling, US dollars, Canadian dollars, Australian dollars or Euros. This facility was signed in January 2011 and expires in January 2016. The facility is provided by a group of six banks. The second tranche provides a further £100m of revolving credit in the same currencies. This was signed in December 2012 with five banks and expires in December 2017. Both facilities have the same covenants. The Group has a ‘shelf’ facility with Prudential Investment Management Inc. This agreement gives the Group access to the US private placement market on a bilateral basis. The facility is non-committed but is for up to $195m. At the year-end, $70m of loan notes had been issued, which will mature in 2018 and 2019. As well as being used to fund acquisitions, the financing facilities are also used for other balance sheet and operational needs, including the funding of day-to-day working capital requirements. The US dollar borrowings also represent natural hedges against assets denominated in that currency. The Group’s banking covenants have all been met during the past year with a comfortable margin. The approved Group budget for 2014 and strategic plan for later years give confidence that the Group will continue to meet these covenants. Details of how Ultra manages its liquidity risk can be found in note 23 – Financial Instruments and Financial Risk Management. Though global macro-economic conditions remain uncertain, the long-term nature of Ultra’s business and its positioning in attractive sectors of its markets, taken together with the Group’s forward order book, provide a satisfactory level of confidence in respect of trading in the year to come. The Directors have a reasonable expectation that Ultra has adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt a going concern basis of accounting in preparing the annual financial statements. Directors’ responsibilities statement* The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. *All references in these sections to ‘Company’ mean Ultra Electronics Holdings plc Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the International Accounting Standards Regulation (“IAS”) and have elected to prepare the Parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the Parent Company financial statements, the Directors are required to: • Select suitable accounting policies and then apply them consistently • Make judgments and accounting estimates that are reasonable and prudent • State whether applicable UK Accounting Standards have been followed subject to any material departures disclosed and explained in the financial statements • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. In preparing the Group financial statements, International Accounting Standard 1 requires that Directors: • Properly select and apply accounting policies • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information • Provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance • Make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on Ultra’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors confirm that to the best of their knowledge, taken as a whole: • the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of Ultra and the undertakings included in the consolidation; • the Annual Report and Accounts is fair, balanced and understandable and provides the information necessary for shareholders to assess the Ultra’s performance, business model and strategy; and • the management report, which is incorporated into the Directors’ Report, includes a fair review of the development and performance of the business and the position of Ultra and the undertakings included in the consolidation, together with a description of the principal risks and uncertainties that they face. In accordance with Section 418 of the Companies Act 2006, each Director in office at the date the Directors’ Report is approved, confirms that: • so far as the Director is aware, there is no relevant audit information of which Ultra’s auditors are unaware; and • he/she has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that Ultra’s auditors are aware of that information. The Annual Report on pages 1 to 77 was approved by the Board of Directors and authorised for issue on 28 February 2014 and signed on behalf of the Board by: Rakesh Sharma, Chief Executive Mary Waldner, Group Finance Director Ultra Electronics Holdings plc 59 Corporate Governance Report (continued) Ultra’s strategic framework n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 60 Ultra Electronics Holdings plc Audit Committee Report Governance Audit Committee Report ...as Chairman of the Audit Committee, I am pleased to present our report detailing the role and responsibilities of the Committee and its activities during the year. Ultra is committed to ensuring that it has robust and effective risk management and financial control processes. As Chairman of the Audit Committee, I am pleased to present our report detailing the role and responsibilities of the Committee in this regard. The Board’s report on the systems of internal control and their effectiveness, together with the going concern statement, can be found in the Corporate Governance Report on pages 52 to 59. During the year, the Committee continued to review the appropriateness of the Group’s system of risk management and internal controls, the robustness and integrity of the Group’s financial reporting, along with both the internal and external audit processes. The Group outsources its internal audit function and at the beginning of the year, the Group changed its internal auditors to PricewaterhouseCoopers (“PwC”). In producing the 2013 internal audit plan, PwC adopted a risk based approach, ensuring the plan is clearly linked to the Group’s strategy and flexible enough to highlight and address emerging risks. Composition The composition of the Committee is set out on page 58. The members of the Committee have the relevant financial and accounting experience required by the Code. The Chairman of the Committee is supported in his role by the other members of the Committee who have a wide range of business experience and expertise, as evidenced in their biographies on pages 50 to 51. Meetings and attendance The Committee met four times during the year under review. In addition to the Committee members, regular attendees are: the Chairman of the Board, the Chief Executive, the Group Finance Director and the Marketing Director. The Company Secretary & General Counsel acts as Secretary to the Committee. Deloitte LLP are the Group’s external auditor. To ensure full and open communication, the Deloitte Audit Partner attended all Committee meetings, and the lead partner from PwC attended those meetings at which summary Internal Audit Reports were reviewed by the Committee. During 2013, the Committee Chairman met with Deloitte and PwC in the absence of Executive and Non-Executive Directors. In addition, the Committee met with Deloitte without Executive Directors present, at which Deloitte satisfactorily reported on the findings of their audit work and any matters that they thought should be brought to the Committee. Role The Committee’s main responsibilities include the following: • Scrutinising the Group’s annual and interim financial statements and accounts and reporting to the Board on the significant financial reporting issues and judgements made • Reviewing the content of the Annual Report and Accounts and advising the Board whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy • Reviewing the scope and effectiveness of the external audit process, including the external auditors’ appointment, fees and independence • Reviewing the effectiveness of the internal audit function and the Group’s system of internal control, including financial reporting and the processes for monitoring and evaluating the risks facing the Group. The Committee has written terms of reference which includes all matters indicated by the Code. These terms of reference are reviewed and approved by the Board annually. The terms of reference are available on Ultra’s website (www.ultra-electronics.com). The Board is kept fully informed of the Committee’s work and the minutes of each Committee meeting are circulated to Board members. Activities of the Committee during the year Topic Financial reporting Internal controls Key risk mitigation Audit plans Whistleblowing External auditor Governance What was considered Annual and interim financial statements and related results announcements Reports from the external auditor on the outcome of their audit process Key accounting policies and practices adopted by the Group, key accounting judgments (see page 61) and matters that required the exercise of significant management judgment (see page 61) The going concern statement (see page 58) Reports on the internal control environment and risk management and their effectiveness Progress reports on work undertaken to strengthen controls around the Group’s main risks (see pages 61) Internal and external audit plans for the year Reports of calls to the Group’s external Employee Hotline and how they have been investigated and dealt with The external auditors’ engagement policy, independence, effectiveness and audit and non-audit fees Changes to IFRS, financial reporting and UK Corporate Governance Code The Committee’s terms of reference 2013 Corporate Governance Report. Ultra Electronics Holdings plc 61 Audit Committee Report (continued) Ultra’s strategic framework independence and concluded that Deloitte had been sufficiently transparent and incisive and the audits had been effective. The Committee concluded that Deloitte was both independent and objective and that the reappointment of Deloitte as external auditor should be recommended to the shareholders. Accordingly, a resolution to reappoint Deloitte will be put to shareholders at the Annual General Meeting. The senior audit partner employed by Deloitte on the Ultra audit is subject to a strict policy of regular rotation such that there is a change in this role at least once every five years. This is in accordance with professional practice guidelines. The current senior audit partner’s tenure commenced in 2011. Deloitte were appointed in 2002. The Committee considered the audit tendering provisions in the Code which provide that FTSE 350 companies should put the external audit contract out to tender at least every ten years. The Committee considers that for an organisation of the size and complexity of Ultra, the tendering of external audit must be well planned to ensure that the Group complies with best practice corporate governance as well as ensuring the Group receives a high quality, efficient and effective external audit service. On this basis, the Committee considers it would be appropriate to retender the external auditors at the end of the current senior audit partner’s tenure. There are no contractual obligations that restrict the Committee’s choice of external auditors. The auditor’s engagement letter and the scope of the year’s annual audit cycle is discussed in advance by the Committee, ensuring that any changes in circumstances arising since the previous year are taken into account. With respect to non-audit assignments undertaken by Deloitte, Ultra has a policy to ensure that the provision of such services do not impair Deloitte’s independence or objectivity. The policy is that: • Non-audit services are restricted to regulatory reporting, consultancy services associated with financial restructuring, responding to new reporting requirements, due diligence assessments of potential acquisitions and minor consultancy work. In connection with acquisition due diligence work and certain consultancy work, it is the Board’s view that the auditor’s familiarity with the Group’s accounting practices and the techniques that are involved in Ultra’s long-term contracting activities serves them well in carrying out such work • When considering the use of the external auditors to undertake non-audit work, consideration must be given to the provisions of the Financial Reporting Council Guidance on Audit Committees with regard to the preservation of independence and objectivity • The external auditors must certify to Ultra that they are acting independently n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 After discussions with both management and the external auditor, the Committee determined that the key risk of misstatement to the Group’s financial statements relate to: Significant financial issues and financial reporting for 2013 How the Committee addressed these issues Revenue and profit recognition on the largest long-term contracts in the Group Defined benefit pension scheme asset valuation Valuation of goodwill and intangibles Internal controls and risk management The Committee reviews: the Group’s systems of internal controls and risk management; their effectiveness; improvements to these systems; and resolution of any control issues identified. Clear terms of reference set out the duties of the Board and the Board Committees, with delegation of operating responsibility to management clearly described in the Group Operating Manual. Financial reporting systems are comprehensive and include monthly reporting cycles. Monthly finance reports are prepared by all businesses containing actual financial performance measures for the most recent month and year to date. These are compared with budget, forecasts and the prior year. These monthly reports are reviewed by the relevant Divisional Finance Director, Group Finance Director and the Board. Financial information is uploaded monthly by all businesses to BPC, the Group’s consolidation and reporting system, which is collated by the Head Office finance team and reconciled to the businesses’ monthly report. When preparing and reviewing financial information, the businesses do not work to a materiality threshold. All variances judged to be significant in relation to a specific balance are investigated and explained. Every 6 months, each Divisional Finance Director meets with the Group Finance Director and discusses the internal controls processes and issues for each business in their division. This includes: • Results from the Senior Accounting Officer review and any tax audits • Self-assessment against the Group Operating Manual • Outstanding internal and external audits • Segregation of duties and IT access audits • Compliance with the Group’s Information Security Policy Summary results from these reviews are included in the Internal Controls Improvement Status Report, which is presented to the Committee twice a year. The Committee assessed the risk control processes and approval practices adopted when determining profit recognition The costs, assets and liabilities of the Group’s defined benefit pension scheme were reviewed. Advice was taken from independent actuaries on the appropriateness of the assumptions used and discussions were held with the external auditors The Committee reviewed the methodology and assumptions used to determine the balance sheet values. The Committee also considered reports from, and held discussions with, the external auditors The Board maintains an internal audit process, carried out by PwC, to review financial and information systems control procedures throughout the Group. All significant business units are audited by the outsourced internal audit function at least once every 2 years, while other businesses are audited on a 3 year cycle. In addition, all newly acquired free-standing businesses are audited within a year of their acquisition date. The lead partner of PwC reports directly to the Chairman of the Committee and presents the findings of his team twice annually to the Committee. Progress reports on follow-up remedial actions are reported regularly to the Committee. PwC confirms whether appropriate action has been taken to address the risks when they next visit the business concerned. The Managing Directors/Presidents, Finance Directors and Vice Presidents of Finance of each business are required to give a formal written representation to the Board each year confirming that they accept responsibility for maintaining effective internal controls and that they have disclosed full details of any fraud or suspected fraud within their business. The Board accepts overall responsibility for reviewing the operation and effectiveness of the Group’s internal controls at least annually and has performed a specific assessment for the purposes of this Annual Report. With the assistance of the Committee, all significant aspects of internal control for 2013 have been reviewed and internal procedures amended where necessary. External auditors The performance, effectiveness and independence of Ultra’s auditors, Deloitte, is reviewed annually by the Committee. The Committee considered the questions contained in a questionnaire issued by the Institute of Chartered Accountants of Scotland in October 2007 to assess performance, effectiveness and 62 Ultra Electronics Holdings plc Audit Committee Report (continued) Governance Audit Committee Report (continued) External auditors (continued) • In providing a non-audit service, the external auditors should not: – audit their own work – make management decisions for the Group – create a mutuality of interest – find themselves in the role of advocate for the Group • The Group Finance Director has authority to commission the external auditors to undertake non-audit work where there is a specific project with a cost that is not expected to exceed £50,000. Any individual assignments with an estimated fee in excess of £50,000 must be referred in advance to the Chairman of the Committee for his approval. The non-audit work has to be reported to the Committee at its next meeting. • Before commissioning non-audit services, the Group Finance Director or the Chairman of the Committee, as appropriate, must ensure that the external auditors are satisfied that there is no issue as regards independence and objectivity and other potential providers are adequately considered. The fees paid to Deloitte in respect of audit and approved non-audit services are shown in note 6 to the Financial Statements. The Group has a policy on employment of former employees of external auditors. This requires that any such employment is considered on a case by case basis and takes into account the Auditing Practices Board’s Ethical Standards on such appointments. Such appointment requires approval by a combination of the Group Finance Director, Audit Committee and the Board, depending on the seniority of the appointment. Fraud The internal audit process carried out by PwC, described on page 61, and the Group’s internal control framework help to protect the Group against fraud. Regular business reviews take place at all businesses, in which detailed balance sheet and cash flow reviews are carried out by the relevant Divisional Managing and Financial Directors. In addition, the Chief Executive and Group Finance Director review the performance of the businesses with the Divisional team monthly and directly with the businesses at least twice a year. Significant differences between forecast and reported financial results are highlighted and require explanation by the business unit concerned. The internal control framework that is in place is supplemented by the external audit process which represents a second independent review of controls and procedures, with selective transaction testing of high risk areas. There is a fraud reporting process in place. Any reports of fraud would immediately be investigated and the situation reported at the next Board meeting. Whistleblowing An independently hosted Employee Hotline is used to provide a process for reporting ethical concerns. Employees are informed of this process through posters (which are translated into local languages) and through the Group intranet (which is accessible by all employees). Employees can report ethical dilemmas or other similar concerns they may have via this external Employee Hotline and can remain anonymous if they wish. Employee concerns are forwarded directly to the Chairman of the Audit Committee or, in the case of issues covered by US security legislation, to the Chairman of the Security Committee of either Ultra’s Special Security Agreement company or Ultra’s Proxy Board company, as appropriate. During 2013, no reports were submitted (two in 2012). Anti-bribery Ultra has robust anti-bribery policies and procedures in place. All Directors and employees are required to sign Ultra’s code of conduct on anti-bribery and commit to act in accordance with the code. Within 1 week of joining Ultra, Directors and employees undertake anti-bribery training. Further anti-bribery training is given to targeted groups throughout the year. The Group intranet contains a statement from the Chief Executive regarding compliance with Ultra’s anti-bribery policies. Compliance with the code of conduct on anti-bribery is closely monitored by a requirement for Ultra businesses to submit monthly business performance reports confirming compliance with the code and reporting any breaches. Chris Bailey, Chairman of the Audit Committee 28 February 2014 The members of the Committee have the relevant financial and accounting experience required by the Code. The Chairman of the Committee is supported in his role by the other members of the Committee who have a wide range of business experience and expertise... Governance Remuneration Report Chris Bailey Chairman of the Remuneration Committee In respect of the 2013 grant of LTIP awards, Paul Dean (who left the Company in March 2013) was not included in the awards. Mary Waldner (who joined the Company on 1 July 2013) received a pro-rated LTIP award representing 2.5 years of the 3 year LTIP award. In line with the LTIP rules (see table on page 73) the Committee decided to treat Paul Dean’s LTIP awards from 2011 and 2012 as lapsed. The Committee considered the shareholding requirements of the Chief Executive and agreed it should be increased from 100% to 125% of salary in line with the increase in percentage grant of annual LTIP awards that was approved by shareholders at the last AGM held on 26 April 2013. Shareholder engagement The Committee continues to take an active interest in shareholder views on our Executive remuneration policy and is mindful of the concerns of shareholders and other stakeholders. Our voting result at the 2013 AGM was 99.7% in favour of the Directors’ Remuneration Report. In conclusion, the Board firmly considers that the remuneration policy continues to be aligned with the strategic goal of the Group in adding to shareholder value and supporting the long term success of the Company. Chris Bailey, Chairman, Remuneration Committee 28 February 2014 99.7% Our voting result at the 2013 AGM was 99.7% in favour of the Directors’ Remuneration Report ANNUAL STATEMENT Dear shareholder This report, prepared by the Remuneration Committee (the “Committee”) and approved by the Board for the financial year ended 31 December 2013, sets out the remuneration policy for the Executive and Non-Executive Directors of Ultra Electronics Holdings plc. It has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008 as amended in August 2013. In response to the UK Government’s new legislation regarding the reporting of directors’ pay, this report has been divided into the following two sections: • A Directors’ Remuneration Policy Report, which sets out Ultra’s policy on the remuneration of Executive and Non-Executive Directors; and • An Annual Report on Remuneration, which discloses how the remuneration policy will be implemented in the year ending 31 December 2014 and how it was implemented in the year ended 31 December 2013. A binding vote on the Directors’ Remuneration Policy Report and an advisory vote on the Annual Report on Remuneration will be tabled at the forthcoming 2014 AGM. The Committee intends to put the Directors’ Remuneration Policy Report to a binding vote every three years, while shareholders will be asked to vote on the Annual Report on Remuneration in an advisory capacity annually. Remuneration policy for 2014 The Committee considers the Group’s policy on the remuneration of Executive and Non-Executive Directors to: be closely aligned with the Group’s strategy; support and drive the achievement of Ultra’s business objectives and therefore is aligned with shareholders’ interests; and be appropriately stretching. The EPS underpin on long-term incentive awards remains amongst the toughest in the FTSE 250. Performance and reward during 2013 2013 was a challenging year: revenue and underlying profit were £745.2m (2012: £760.8m) and £121.7m (2012, as restated: £121.8m) respectively; underlying earnings per share were 127.1p (2012, as restated: 125.5p); operating cash flow was £79.0m (2012, as restated: £89.6m); and total shareholder return was 14% (2012: 6%). Reflecting on this, no annual bonus was payable for 2013 (no bonus was paid for 2012) and the 2011 LTIP awards which were due to crystallise in 2014 based on three year TSR and EPS performance to 31 December 2013 will not vest as a result of performance targets not being met. Ultra Electronics Holdings plc 63 Remuneration Report Ultra’s strategic framework n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 64 Ultra Electronics Holdings plc Remuneration Report (continued) Remuneration Report Directors’ Remuneration Policy The policy described in this section is intended to apply for the three years beginning on the date of the 2014 AGM, subject to shareholder approval. The Group’s forward-looking policy is the same policy that was applied for the 2013 financial year. Policy overview The Group’s remuneration policy is to reward senior management competitively, enabling Ultra to recruit, motivate and retain executives of high calibre, whilst avoiding making excessive remuneration payments. The remuneration of Executive Directors and senior managers is aligned with corporate objectives and the interests of shareholders. The linkages between each element of the Executive Directors’ remuneration packages with the Group’s objectives and the interests of shareholders are set out in the following information. Future policy The following information summarises the Directors remuneration policy: Operation of the element Maximum potential Performance targets Future policy table How the element supports our strategy SALARY Reflects the value of the individual and their role and responsibilities Reflects underlying performance of the individual Provides an appropriate level of basic fixed income avoiding excessive risk arising from over reliance on variable income Normally reviewed annually, effective 1 January Paid in cash on a monthly basis; pensionable Is compared with companies with similar characteristics and sector comparators Targeted at or below median Reviewed in the context of the salary increase budget across the Group While there is no defined maximum salary, it is the Committee’s policy to set pay for Executive Directors at industry competitive levels taking market capitalisation and annual sales into account. Annual salary increases take into account: (i) underlying performance of the individual; (ii) underlying performance of the business; (iii) underlying annual salary increases within the overall Group; (iv) any changes to the scope of the role in terms of size or complexity; and (v) underlying salary increases for similar industry roles It is recognised that annual salary increases may also include a ‘catch up’ element over and above the factors listed above to increase the salary towards or to a competitive industry level where the Executive Director was appointed with a salary significantly below the competitive level Annual salary increases for Executive Directors will not normally exceed the average increase awarded to other Group UK based employees although increases may be above this if there is an increase in: (i) the scale, scope or responsibility of the role; and/or (ii) the experience of the incumbent where this has a positive impact on Group performance 100% of salary p.a. None Sliding scale targets based on financial measures The metrics operated are: • Headline profit before tax; and • Operating cash flow ANNUAL BONUS Provides focus on delivering/ exceeding annual budget Rewards and helps retain key executives and is aligned to the Group’s risk profile Maximum bonus only payable for achieving demanding targets Payable in cash Non-pensionable Claw back provisions apply (see page 68) Ultra Electronics Holdings plc 65 Remuneration Report (continued) Ultra’s strategic framework Future policy table (continued) How the element supports our strategy LONG TERM INCENTIVE PLAN Aligned to main strategic objective of delivering long-term value creation Aligns Executive Directors’ interests with those of shareholders Rewards and helps retain key executives and is aligned to the Group’s risk profile PENSION Provide competitive, yet cost-effective retirement benefits OTHER BENEFITS To provide benefits consistent with role SHARE OWNERSHIP GUIDELINES To provide alignment of interests between Executive Directors and shareholders Operation of the element Maximum potential Performance targets Share plan approved (as amended) by shareholders in April 2013 Discretionary annual grant of nil cost options or conditional share awards Normal Limit: • 125% of salary p.a. for the Chief Executive • 100% of salary p.a. for other Executive Directors Exceptional Limit: • 150% of salary p.a. e.g. recruitment or retention of an employee Performance measured over three years Relative Total Shareholder Return (TSR) targets with an absolute EPS underpin 20% of award vests at threshold performance None The Defined Benefit Scheme (which is closed to new employees) provides a benefit of two thirds of a members Final Pensionable Earnings if they have completed over twenty years’ Pensionable Service at Normal Retirement Date. If Pensionable Service at Normal Retirement Date is less than this it will be calculated as 1/30th of Final Pensionable Earnings for each year of service Defined contribution rates up to a maximum of 20% of base salary n/a n/a Defined benefit provision, defined contribution and/or salary supplement paid on a cash neutral basis Benefits may include: private medical cover; health screening; life insurance; critical care insurance; permanent health insurance; car and fuel allowance; relocation and expatriation expense; and other benefits payable where applicable n/a Executive Directors are required to build and maintain a shareholding equivalent to one year’s base salary (125% of base salary for the Chief Executive) through the retention of at least 50% of the post-tax shares received on the vesting of LTIP awards Aim to hold a shareholding equal to 100% of base salary (125% for the Chief Executive) n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 66 Ultra Electronics Holdings plc Remuneration Report (continued) Remuneration Report Directors’ Remuneration Policy (continued) Future policy table (continued) How the element supports our strategy ALL EMPLOYEE SHARE PLANS The Executive Directors are eligible to participate in the Company’s HMRC approved All-Employee Share Ownership Plan (“AESOP”) and the Savings Related Share Option Scheme on the same terms as other employees To encourage employee share ownership and increase alignment with shareholders NON-EXECUTIVE DIRECTOR FEES Reflects time commitments and responsibilities of each role Reflects fees paid by similarly sized companies Chairman’s remuneration is set by the Committee which meets without him. The remaining Non-Executive Directors’ fees are proposed by a sub-committee of the Executive Directors and approved by the Board Operation of the element Maximum potential Performance targets n/a n/a Under the AESOP, UK employees are offered the opportunity to buy shares up to the prevailing HMRC limits per annum from pre-tax salary. Shares are then held in trust until the maturity date or until they leave Ultra Under the Savings Related Share Option Scheme, employees are entitled to save up to the prevailing HMRC limits or the lower limit set by Ultra per annum from net pay towards the purchase of options to buy Ultra shares Cash fee paid monthly n/a n/a Fees are reviewed on an annual basis Fixed 12 month contracts with no notice periods An additional fee is paid to the Chairman of the Audit, Remuneration and Nominations Committees No additional fees are payable for any other duties to Non-Executive Directors Notes to future policy table: (1) A description of how the Company intends to implement the policy in 2014 is set out in the Annual Report on Remuneration on page 69. (2) The remuneration policy described above provides an overview of the structure that operates for the most senior executives in the Group. Lower levels of incentive operates for employees below executive level, with remuneration driven by market comparators and the impact of the role. Long-term incentives are reserved for those anticipated as having the greatest potential to influence the Group’s earnings growth and share price performance, although as the Committee is aware of the benefits which wider employee share ownership can generate, all employees are encouraged to participate in the AESOP and Savings Related Share Option Scheme in the countries in which they are offered. (3) The choice of the performance metrics applicable to the annual bonus scheme reflect the Committee’s view that any incentive compensation should be appropriately challenging and tied to financial performance. The TSR and EPS performance conditions applicable to the LTIP (further details of which are provided on page 69) were selected by the Committee on the basis that: • TSR aligns the performance objectives of the Executive Directors (TSR is one of the Group’s Key Performance Indicators) more closely with the interests of the shareholders; • TSR is an entirely objective measure of relative performance; • The use of TSR and EPS reflects the metrics most commonly used by other quoted companies; • TSR reduces the complexity and cost of calculating the vesting result; and • The EPS underpin ensures an appropriate level of profit growth is maintained by the Group. (4) All employee share plans do not operate performance conditions. (5) As highlighted above, Ultra has a share ownership policy which requires the Executive Directors to build up and maintain a target holding equal to 100% of base salary (125% for the Chief Executive). Details of the extent to which the Executive Directors had complied with this policy as at 31 December 2013 are set out on page 72. (6) For the avoidance of doubt, in approving this Directors’ Remuneration Policy, authority is given to Ultra to honour any commitments entered into with current or former Directors (such as, but not limited to, the payment of a pension or the vesting/exercise of past share awards) that have been disclosed to and approved by shareholders in previous remuneration reports. Details of any payments to former Directors will be set out in the Annual Report on Remuneration as they arise. Remuneration scenarios for Executive Directors for 2014 The charts opposite show how the composition of the Executive Directors’ remuneration packages varies at three performance levels, namely, at minimum (i.e. fixed pay including pensions and taxable benefits), target and maximum levels, under the policy set out in the table overleaf. The charts show the proportion of the total package comprised of each element. Ultra Electronics Holdings plc 67 Remuneration Report (continued) Ultra’s strategic framework Director recruitment policy The Nominations Committee normally considers both internal and external candidates before any new appointment is made. New executive directors are provided with remuneration consisting of base salary, short-term incentive, long-term incentive and other benefits. Salary Ultra’s policy is to set pay for executive directors at industry competitive levels taking market capitalisation and annual sales into account. It is recognised that a new appointee may not have as much experience as someone at a competitive level and may therefore be offered a salary below competitive levels but at a level that is sufficient to attract the person. (See base salary policy on page 64). In exceptional circumstances, the Committee may exercise its discretion to offer an above industry competitive level salary in order to attract the best person. Short-term incentive Short-term incentives are offered in line with those paid to other Executive Directors described on page 64. Maximum opportunities will be in line with current plan maximums for existing Directors (i.e. 100% of salary p.a.). Long-term incentive Long-term incentives are offered in line with those paid to other Executive Directors described on page 65. Maximum opportunities will be in line with current plan maximum for existing Directors (i.e. up to 125% of salary p.a. or 150% of salary p.a. in exceptional circumstances). Other benefits Other benefits are offered in line with those paid to other Executive Directors which are described on page 65. Buy outs To facilitate recruitment, the Committee may make an award to buy-out incentive arrangements forfeited on leaving a previous employer. In doing so, the Committee will take account of all relevant factors including any performance conditions attached to these awards and the time over which they would have vested or been paid. Ultra may make use of the flexibility provided in the Listing Rules (LR 9.4.2) to make awards if appropriate. Where possible, incentives will be bought out on a like-for-like basis with respect to vesting/payment dates, currency (i.e. cash versus shares) and the use of performance targets. Non-Executive Directors The approach to the recruitment of non-executive directors is to pay an annual fixed fee. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Chief Executive remuneration composition levels (%) 1,800 1,500 1,200 900 600 300 0 £’000 1,693 1,219 3 0 1 9 1 2 3 9 3 5 2 8 9 2 8 626 2 4 7 6 Min Target Max Group Finance Director remuneration composition levels (%) 1,000 800 600 400 200 0 £’000 972 3 1 3 1 7 3 1 701 2 6 2 2 9 4 3 368 1 8 8 2 Min Target Max Group Marketing Director remuneration composition levels (%) 1,000 800 600 400 200 0 £’000 725 3 1 3 1 7 3 1 523 2 5 2 2 1 0 4 3 275 1 8 8 2 Min Target Max (cid:0) Long-term share awards (cid:0) Annual bonus (cid:0) Pensions/benefits (cid:0) Salary Notes to remuneration scenarios (1) Base salary levels are based on those applying from 1 January 2014. (2) Benefit and pension value for 2014 has been estimated. (3) Annual Bonus outturn is assumed to be 50% of salary at target level. For maximum, outturn assumes a maximum bonus award level of 100% of salary. (4) Long-Term Incentive Share Awards assume a grant policy of 125% of salary for the CEO and 100% of salary for the other Executive Directors which vests in full at maximum performance, while 20% is assumed to vest at target level of performance. No share price appreciation has been included. 68 Ultra Electronics Holdings plc Remuneration Report (continued) Remuneration Report Directors’ Remuneration Policy (continued) Executive Director service contracts The Group’s policy is to ensure that the Executive Directors’ service contracts have a notice period of one year, which the Committee considers appropriately reflects both current market practice and the balance between the interests of the Group and each Executive Director. The following table provides more information on each Director’s service contract: Name M. Anderson R. Sharma M. Waldner Date of contract Notice period 1 Apr 2012 12 months 21 Apr 2011 12 months 1 Jul 2013 12 months No Executive Directors have provisions in their contracts for compensation on early termination other than for the notice period. External appointments of Executive Directors The Chief Executive is not permitted to accept any external appointment as a non-executive director. Other Executive Directors may accept not more than one external appointment as a non-executive director. Up to 50% of any time spent undertaking such external duties can be taken as additional unpaid leave with the remainder being treated as annual holiday. Executive Director exit policy Ultra may terminate an Executive Director’s contract early with contractual notice or by way of a payment in lieu of notice, at its discretion. Neither notice nor a payment in lieu of notice will be given in the event of gross misconduct. Payments in lieu of notice will equate to the basic salary and benefits payable during the notice period or, if notice has already been given, the remainder of the notice period. Payment in lieu of notice will be made by way of a lump sum or by phased instalments over the notice period. Where payments are phased, if an employee gains employment during the notice period, payments would be reduced. There is no contractual entitlement to annual incentive payments in respect of the notice period. An annual bonus may be payable with respect to the period of the financial year served although it will be pro-rated for time and paid at the normal payment date as defined by the bonus scheme rules. Any share-based entitlements granted to an Executive Director under the Group’s share plans will be determined based on the relevant plan rules. The default treatment under the 2007 LTIP is that any outstanding awards lapse on cessation of employment. However, if a participant ceases to hold office or employment because of death or for any other circumstance, at the discretion of the Committee, ‘good leaver’ status may be applied. For good leavers, the Committee can decide that awards will vest on the date they would normally have vested had the participant not ceased to hold office or employment. Alternatively, the Committee can decide that awards will vest on cessation. In both cases, the award will vest subject to the satisfaction of the relevant performance conditions at that time and a pro rata reduction to reflect the period of time from the date of grant of the award to the date of cessation relative to the normal three year vesting period. However, the Committee can decide not to apply a pro rata reduction if it regards it as inappropriate to do so in any particular case. Non-Executive Director service contracts The Non-Executive Directors have fixed twelve- month contracts with no notice period. Details of their service contracts are in the table below: Date of contract Name 31 Jan 2014 C. Bailey 2 Jul 2013 M. Broadhurst D. Caster 21 Apr 2013 Sir Robert Walmsley 31 Jan 2014 Notice period Nil Nil Nil Nil There are no provisions in their contracts for compensation on early termination. How employment conditions elsewhere in the Group are considered Base salary increases take into account a number of factors including the underlying base salary increases within the overall Group. Pay is only set centrally for Executive Directors, Executive Team members, Divisional staff, Business Managing Directors/Presidents, UK Directors and Head Office staff. All other salaries are set within the individual operating businesses. In all cases there are two levels of approval. The Remuneration Committee does not consult with employees when setting the remuneration of Executive Directors. It uses independent comparison metrics to benchmark remuneration with other companies. How shareholders’ views are taken into account The Committee considers shareholder feedback received in relation to the AGM each year. This, and any other feedback received during the year, is then considered as part of the Group’s annual review of remuneration policy. At the 2013 AGM, 99.76% of our shareholders who voted, voted in favour of the Directors' Remuneration Report. Claw back policy A bonus claw back policy has been adopted. If a bonus had been paid and the Group subsequently has to restate its audited accounts, the bonus may be clawed back from future bonus, LTIP and Executive Share Option Scheme awards. Remuneration Report Annual Report on Remuneration Summary of how the remuneration policy will be implemented in 2014 Ultra Electronics Holdings plc 69 Remuneration Report (continued) Ultra’s strategic framework A summary of how the Directors’ Remuneration Policy will be applied for the year ending 31 December 2014 is set out below. Salaries The Executive Directors’ salaries have been reviewed by the Committee which has determined that the following levels should be implemented with effect from 1st January 2014: Chief Executive Group Finance Director2 Group Marketing Director2 2014 Salary £’000 474 302 225 2013 Salary £’000 460 2751 205 % Increase2 % 3.0 9.8 10.0 1 This amount relates to the annual salary of the incumbent Group Finance Director, Mary Waldner, who joined Ultra on 1 July 2013. Her predecessor, Paul Dean, was the Group Finance Director up until his resignation on 31 March 2013. Paul Dean’s annual salary until his resignation was £305,000. 2 The Group Finance Director’s salary was brought in line with median salary levels for that role. The Group Marketing Director’s salary was increased to bring it towards median levels, although the Committee recognises that the Group Marketing Director’s salary is still below median levels and will address this going forward in line with the Directors’ Remuneration Policy. Directors’ pension entitlements The Group will continue to operate a defined benefit pension scheme for Rakesh Sharma. As Mary Waldner and Mark Anderson joined Ultra after the defined benefit scheme was closed to new entrants, they will participate in a defined contribution scheme and receive annual company contributions of 18% of their salary. Annual bonus for 2014 The maximum bonus for Executive Directors in 2014 will continue to be 100% of base salary with a maximum of 25% of salary payable for the achievement of an agreed profit target and a maximum of 75% payable for achievement of an agreed operating cash flow target. While the Committee believes that commercial sensitivities restrict the disclosure of forward looking annual bonus targets, full retrospective disclosure of the financial targets will be made in the 2014 Annual Report on Remuneration. Long term awards to be granted in 2014 Consistent with the Directors’ Remuneration Policy, the Committee intends to grant annual LTIP awards to Executive Directors in the form of shares worth 125% of salary for the Chief Executive and 100% of salary for other Executive Directors during 2014. For this grant, 20% of awards will vest at median TSR ranking, increasing to 100% vesting for an upper quartile TSR ranking, measured against the constituents of the FTSE 250 (excluding investment trusts). In addition to the TSR target, there is an underpin requiring an average annual growth of EPS (after adjustments to exclude gains or losses on financial instruments and the amortisation of intangibles arising on acquisition) of 5% p.a. over the three year performance period. Single total figure of remuneration – Audited Directors’ emoluments are detailed below: 2013 Executive Directors M. Anderson P. Dean5 R. Sharma M. Waldner6 Non-Executive Directors C. Bailey M. Broadhurst D. Caster Sir Robert Walmsley Former Directors Basic salary /fees £’000 205 77 460 138 58 46 188 46 - Benefits1 Pension2 Subtotal Annual performance bonus3 LTIP4 Subtotal £’000 £’000 £’000 £’000 £’000 £’000 12 5 22 82 - - - - - 18 12 130 21 - - - - - 235 94 612 241 58 46 188 46 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,218 121 181 1,520 Total £’000 235 94 612 241 58 46 188 46 - 1,520 1 Benefits comprise: taxable car benefit (in respect of Rakesh Sharma and Paul Dean only), car allowance (in respect of Mary Waldner and Mark Anderson), taxable fuel benefit/fuel allowance (excluding Mary Waldner), life assurance, and private medical insurance. Mary Waldner received a one-off relocation allowance of £75,000. 2 Pensions: Rakesh Sharma’s pension is calculated in accordance with the rules of the defined benefit scheme as set out in the policy table on page 65; Mary Waldner and Mark Anderson, who are members of the defined contribution scheme, received pension contributions equivalent to 18% and 10% (respectively) of their basic salary. Included within pensions are cash supplements given in lieu of pension contributions where the latter have exceeded the annual allowance or lifetime allowance for the individual director under the relevant pension scheme. 3 Annual performance bonus was £nil. 4 The 2011 LTIP award which was due to crystallise in 2014 will not vest and the aggregate gain made by the Directors under the LTIP during the year was £nil. 5 Paul Dean stepped down from the Board with effect from 31 March 2013. 6 From 1 July 2013. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 70 Ultra Electronics Holdings plc Remuneration Report (continued) Remuneration Report Annual Report on Remuneration (continued) Single total figure of remuneration – Audited (continued) Directors’ emoluments are detailed below: Basic salary /fees £’000 135 305 420 56 23 182 45 87 1,253 Fixed Variable Benefits £’000 Pension £’000 Subtotal £’000 Annual performance bonus £’000 LTIP £’000 Subtotal £’000 Total £’000 10 22 21 - - 11 - 4 68 14 57 156 - - - - 12 239 159 384 597 56 23 193 45 103 1,560 - - - - - - - - - - - - - - - - - - - - - - - - - - - 159 384 597 56 23 193 45 103 1,560 2012 Executive Directors M. Anderson P. Dean R. Sharma Non-Executive Directors C. Bailey M. Broadhurst1 D. Caster Sir Robert Walmsley Former Directors 1 Joined in July 2012. Annual bonus for year under review Annual bonuses in relation to 2013 were based upon the achievement of a sliding scale of underlying profit before tax and operating cash flow targets. These targets were derived from the annual budgets approved by the Board. They were adjusted where appropriate to provide an appropriate degree of “stretch” challenge and incentive to outperform. Profit and cash are two of the Key Performance Indicators by which the Group is measured. Please refer to pages 16 and 17 for details. The bonus targets set by the Committee for 2013 were a maximum of 25% of salary (subject to the achievement of £120.8m profit before tax and loss on fair value movements on derivatives and amortisation of intangibles on acquisition), and a maximum of 75% of salary (subject to achieving an operating cash flow of £138.1m after capitalised development costs, capital expenditure, purchase of long-term incentive plan shares and taking account of movements in working capital). The Committee assessed the achievement of performance against each target as follows: Underlying profit before tax Operating cash flow Threshold £’000 108,720 73,125 Maximum £’000 120,800 138,125 Actual Achieved £’000 116,806 79,040 Bonus Payable1 % 0 0 1 No bonus was payable in 2013 because in accordance with the bonus scheme rules, the operating cash flow was negatively adjusted to reflect working capital performance throughout the year. In order for a bonus to be payable both profit and cash bonus criteria are required to be met. LTIP vesting for year under review The LTIP award granted on 14 March 2011 was based on performance to the year ended 31 December 2013. As disclosed in previous annual reports, the performance condition for this award was as follows: Metric Performance condition Total Shareholder Return TSR against the constituents of a comparator group*. 20% vesting for median performance increasing pro rata to 100% vesting for upper quartile performance or above. TSR measured over three financial years with a three month average at the start and end of the performance period Threshold target Stretch target Actual % Vesting Median Upper quartile < Median 0% Earnings Per Share Underpin In addition to the main TSR condition, an “underpin” requires average annual growth in headline EPS growth of 7% p.a. over the performance period. In the event that this underpin is not met, the level of vesting falls to zero 7% EPS growth in each of the qualifying years n/a Total EPS growth: 2011: 11.6% 2012: 3.6% 2013: 1.3% n/a 0% *The comparator group comprised the following companies: Arm Holdings; Oxford Instruments; Babcock Intnl; Dialight; Senior; Spectris; Rolls-Royce Holdings; Atkins (WS); QinetiQ Group; Laird; Halma; Rotork; Spirax-Sarco; Meggitt; Renishaw; BAE Systems; Cobham; Domino Printing Sciences; Vitec Group; Smiths Group; TT Electronics; Serco Group; Spirent Communications; and Chemring Group. The following companies were also part of the comparator group but were delisted during the performance period for the 2011 awards: Chloride Group; Umeco; VT Group; Charter International; Psion; Logica; and Hampson Industries. Ultra Electronics Holdings plc 71 Remuneration Report (continued) Ultra’s strategic framework The award details for the Executive Directors are therefore as follows: Executive R. Sharma D. Caster1 Number of shares at grant Number of shares to vest Number of shares to lapse 16,513 15,923 - - 16,513 15,923 Total - - Estimated value2 £’000 - - 1 Granted when Douglas Caster was Chief Executive 2 The estimated value of the vested shares is based on the average share price during the 3 months to 31 December 2013. Share awards granted during the year R. Sharma 1 M. Waldner2 M. Anderson Scheme Date of grant Basis of award LTIP* 18 March 2013 100% of salary LTIP* 19 August 2013 LTIP* 19 August 2013 25% of salary 83% of salary Vesting at threshold Vesting at maximum Performance period Face value £ 460,000 20% 100% 115,000 20% 100% 229,167 20% 100% LTIP* 18 March 2013 100% of salary 205,000 20% 100% 3 years to 31 December 2015 3 years to 31 December 2015 3 years to 31 December 2015 3 years to 31 December 2015 *Structured as a conditional award 1 In addition, Rakesh Sharma purchased 144 partnership shares under the AESOP during 2013. 2 Joined on 1 July 2013 and LTIP award pro-rated to represent 2.5 years of 3 year award. For awards presented above, 20% of awards will vest for a median TSR ranking, increasing to 100% vesting for an upper quartile TSR ranking, measured against the constituents of the FTSE 250 (excluding investment trusts). In addition to the TSR target, there is an underpin requiring an average annual growth of EPS (after adjustments to exclude gains or losses on financial instruments and the amortisation of intangibles arising on acquisition) of 5% p.a. over the three year performance period. Change in Chief Executive’s remuneration The following table illustrates the change (as a percentage) in elements of the Chief Executive’s remuneration from 2012 to 2013, and compares that to the average remuneration of employees of the Group in the UK, who were employed in November 2012 and November 2013. Such group best reflects the remuneration environment of the Chief Executive. Salary Taxable benefits Bonus 1 1 Based on the average bonus paid to employees of the Group in the UK for 2012 and 2013. Relative importance of spend on pay The following table shows the Group’s actual spend on pay (for all employees) relative to other financial indicators: Staff costs1 Dividends2 Revenue Statutory profit before tax Chief Executive % change All UK Employees % change 9.50 0.80 - 3.95 2.90 (2.63) 2013 £m 229.0 29.3 745.2 49.3 2012 £m 227.0 27.7 760.8 79.8 Change % 0.9 5.8 (2.1) (38.2) 1 £1.4m of the staff costs figures relate to pay for the Executive Directors. 2 The dividends figures relate to amounts payable in respect of the relevant financial year. Total defined benefit pension entitlements – Audited Under the defined benefit scheme, a pension equal to two-thirds of salary at retirement is provided at the normal retirement age of 63 years. Where pensionable service is less than 20 years, the pension is calculated at one-thirtieth of the retirement salary for each year of service. With the Group’s consent, Executive Directors may retire from age 55. After age 58, Group consent to early retirement is not required. The pension is reduced in the event of early retirement. In the event of death-in-service, a spouse’s pension of 33% of pensionable earnings is payable, together with an allowance for dependent children up to a maximum of 33% of pensionable earnings where relevant. On the death of a retired Executive Director, a spouse’s pension of n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 72 Ultra Electronics Holdings plc Remuneration Report (continued) Remuneration Report Annual Report on Remuneration (continued) Total defined benefit pension entitlements – Audited (continued) 50% of the Executive Director’s pension is payable. Once the pension is in payment, the part of the Executive Director’s pension above the Guaranteed Minimum Pension will be increased each year in line with the increase in the retail price index, capped at 7.5% for service prior to 1 April 2008 and at 5% thereafter, above which increases are at the Trustees’ and the Group’s discretion. The table below sets out the pension benefits earned by Executive Directors for the year ended 31 December 2013: Age at year-end Employee contributions during 2013 Accrued benefit at beginning of year Increase in value in period (net of indexation contributions) Increase in 2013 net of Accrued benefit at end of period1 £ £ £ £ £ R. Sharma 52 39,100 66,327 3,125 23,400 70,911 1 The accrued benefit at the end of the period has been restricted so that Rakesh Sharma does not exceed his annual allowance. Payments to past directors – Audited There were no payments made to past Directors during 2013. Loss of office payments – Audited There were no loss of office payments made to Directors during 2013. Paul Dean stepped down as Finance Director on 31 March 2013. No loss of office payments were made to him and his unvested LTIP awards lapsed upon his resignation from office. Statement of Directors’ shareholdings Legally owned LTIP awards 1 AESOP SAYE 2013 2012 Unvested Restricted2 Unrestricted3 Under option Exercised Total Executive Directors M. Anderson P. Dean4 R. Sharma M. Waldner5 Non-Executive Directors C. Bailey M. Broadhurst D. Caster Sir Robert Walmsley - 768 41,193 - - 754 41,072 - 19,181 - 57,265 11,775 2,500 1,000 2,500 - 751,188 751,188 1,600 1,600 - - - - - - 2,605 - - - - - - 452 - - - - - - 270 - 433 - - - - - - - - - - - - - - 768 41,193 - 2,500 1,000 751,188 1,600 % Share ownership guidelines 0% - 173% 0% - - - - 1 There were no vested LTIP share awards within the period. 2 The restricted shares under the AESOP are held in the Ultra Electronics Holdings plc Employee Benefit Trust. 3 The unrestricted shares under the AESOP have been released from the Ultra Electronics Holdings plc Employee Benefit Trust. 4 Paul Dean stepped down from the Board with effect from 31 March 2013. 5 From 1 July 2013. Total shareholder return performance graph and single figure remuneration table The graph below shows the TSR performance of Ultra in comparison with the FTSE 250 Index over the past five years. The graph shows the value at the end of 2013 of £100 invested at the start of the evaluation period, in Ultra and in the Index. The Committee considers the FTSE 250 a relevant index for the TSR comparison as Ultra is a member of the index and because together the index members represent a broad range of UK quoted Companies. Total shareholder return – compared to FTSE 250 Index Source: Thomson Reuters Datastream 300 280 260 240 220 200 180 160 140 120 100 80 ) £ ( e u l a V 31 December 09 31 December 10 31 December 11 31 December 12 31 December 13 Ultra Electronics FTSE 250 Index Ultra Electronics Holdings plc 73 Remuneration Report (continued) Ultra’s strategic framework Total shareholder return performance graph and single figure remuneration table (continued) The table below presents single figure remuneration for the Chief Executive over the past five years, together with past annual bonus payouts and relevant LTIP vestings. R. Sharma R. Sharma R. Sharma1 D. Caster 2 D. Caster D. Caster 1 Chief Executive from 21 April 2011 2 Chief Executive to 21 April 2011 Year ended Total remuneration Annual bonus LTIP £’000 % max. payout % max. payout 31 December 2013 31 December 2012 31 December 2011 31 December 2011 31 December 2010 31 December 2009 612 597 722 141 1,068 1,512 - - 76 - 46 67 - - - - 81 100 Shareholder voting at the last AGM At the 2013 AGM the Directors’ Remuneration Report received the following votes from shareholders: Votes for Votes against Total votes cast (for and against) Votes withheld Total votes cast (including withheld votes) Directors’ interests under Long-Term Incentive Plans Details of the Directors’ interests in these arrangements are given below: Interests under the Ultra Electronics Long-Term Incentive Plan 2007 2010 award 2011 award 2012 award Interests at 1 January 2013 2010 award lapsed during the year 2011 award lapsed during the year 2012 award lapsed during the year 2013 award (18 March) 2013 award (19 August) Interests at 31 December 2013 M. Anderson D. Caster P. Dean1 R. Sharma M. Waldner - - 7,273 7,273 - - - 11,908 - 19,181 22,816 15,923 - 38,739 18,322 16,395 17,889 52,606 14,658 16,513 24,634 55,805 (22,816) (18,322) (14,658) - - - - (16,395) (17,889) - - - - 26,722 5,909 15,9232 - 73,7783 - - - - - - - - 11,775 11,775 Total number of votes % of votes cast 58,823,364 141,886 58,965,250 352,932 59,318,182 99.76 0.24 100 Market price of shares granted Crystallising dates of outstanding awards £14.46 March 2013 £16.96 March 2014 £17.05 March 2015 £17.21 March 2016 £19.46 August 2016 1 Paul Dean resigned as a Director on 31 March 2013 and his unvested LTIP awards for 2011 and 2012 lapsed. 2 This interest in LTIP awards represents the 2011 award which as a result of not meeting performance conditions will lapse in 2014. This will leave Douglas Caster with no outstanding LTIP awards. 3 This interest in LTIP awards includes the 2011 award of 16,513 which as a result of not meeting performance conditions will lapse in 2014. This will leave Rakesh Sharma with outstanding LTIP awards of 57,265. The 2010 award lapsed during the year as detailed above as a result of the performance targets not being met. The actual date of the award was 14 March 2010. The market price of the shares when granted was £14.46. The aggregate gain made by the Directors under the LTIP during the year was £nil (2012: £nil). Ultra’s share price on 31 December 2013 was £19.28. The range during 2013 was £15.71 to £19.81. Directors’ interests under the All-Employee arrangements Name of Director P. Dean1 R. Sharma Interests as at 1 January 2013 415 2,461 Shares acquired during year Interests as at 31 December 2013 Partnership shares acquired from 1 January 2014 to 28 February 2014 Interests as at 28 February 2014 37 144 452 2,605 - 13 452 2,618 1 The interests as at 31 December 2013 and interests as at 28 February 2014 reflect the period from 1 January 2013 to 31 March 2013 (date of resignation). Mark Anderson and Mary Waldner were not participants in the AESOP during 2013. During the year, the Share Ownership Plan Trust, established and operated in connection with the AESOP, purchased 30,206 (2012: 31,215) Ultra Electronics Holdings plc. shares, with a nominal value of £1,510 (2012: £1,560) for £497,205 (2012: £507,304). n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 74 Ultra Electronics Holdings plc Remuneration Report (continued) Remuneration Report Annual Report on Remuneration (continued) The role and composition of the Remuneration Committee Role The role of the Committee is to: determine and agree with the Board the framework and broad policy for the remuneration of the Executive Directors, Chairman of the Board, and senior management reporting to the Executive Directors (the “Executive Team”); ensure that the Executive Directors are fairly rewarded for their individual contributions to the Group’s overall performance with due regard to the interests of shareholders and to the financial and commercial health of the Group; and ensure that contractual arrangements, including the termination of Executive Directors, are fair both to the individuals concerned and to the Group. The Committee’s terms of reference include all matters indicated by the Code and are approved and reviewed by the Board annually. The terms of reference are available on Ultra’s website (www.ultra-electronics.com). Composition Chris Bailey continued as Chairman of the Remuneration Committee, and Sir Robert Walmsley and Martin Broadhurst, both independent Non-Executive Directors, continued as the other Committee members during 2013. Sharon Harris continued to act as Secretary to the Committee. The Chairman, Chief Executive and Group HR Director also normally attend Committee meetings by invitation, except where matters directly relating to their own remuneration are discussed, although they are not Committee members. Advice Wholly independent advice on executive remuneration and share schemes is received from New Bridge Street, an Aon plc company. New Bridge Street was appointed by the Committee after a tender process and, during the year, provided to the Group with advice on the operation of Ultra’s LTIP and other share schemes, remuneration benchmarking services and an annual update on market and best practice. During 2013, insurance broking services were also provided to the Group by other subsidiaries of Aon plc which the Committee considers in no way prejudices New Bridge Street’s position as the Committee’s independent advisers. Pension advisory services were provided to the Committee and the Group by Towers Watson. Fees charged by New Bridge Street for advice provided to the Committee for 2013 amounted to £81,926 (excluding VAT). Fees charged by Towers Watson for advice provided to the Committee for 2013 amounted to £100,565 (excluding VAT). In addition, the Committee consults the Chief Executive with regard to the remuneration and benefits packages offered to Executive Directors (other than in relation to his own remuneration and benefits package) and members of the Executive Team. We strongly encourage shareholders to vote in favour of our policies which underpin our alignment between business strategy and remuneration and are designed to be fair and balanced as between employees and shareholders. This Report was approved by the Board of Directors on 28 February 2014 and signed on its behalf by: Chris Bailey, Chairman of the Remuneration Committee Directors’ Report For the year ended 31 December 2013 Ultra Electronics Holdings plc 75 Directors’ Report Ultra’s strategic framework Ultra Electronics Holdings plc is the Group holding company and it is incorporated in the United Kingdom under the Companies Act 2006. The Directors present their annual report on the affairs of the Group, together with the accounts and independent auditor’s report, for the year ended 31 December 2013. Details in relation to health and safety, the environment and greenhouse gas emissions, business ethics and employment practices are included in the Sustainability section on pages 44 to 47 of the Strategic Report. The Corporate Governance statement on pages 49 to 62 forms part of this report, and the financial risk management objectives and policies can be found in note 23. Strategic Report In accordance with the Companies Act 2006 Ultra is required to set out information which helps the shareholders assess how the Directors have performed their duty to promote the success of the Group, together with a description of the principal risks and uncertainties facing the Group. The information that satisfies these requirements can be found in the Strategic Report on pages 4 to 47. Results and dividends Group results and dividends are as follows: Balance on retained earnings, beginning of year Total comprehensive income for the year Dividends: 2012 final paid of 27.8p per share 2013 interim paid of 12.7p per share Equity-settled employee share schemes Balance on retained earnings, end of year 2013 £’000 252,745 31,907 (19,259) (8,812) 2,028 258,609 The final 2013 dividend of 29.5p per share is proposed to be paid on 2 May 2014 to shareholders on the register on 11 April 2014. The interim dividend was paid on 27 September 2013, making a total of 42.2p (2012: 40.0p) per share paid in the year. Future developments A review of the activities and future developments of the Group is contained in the Chief Executive’s review on pages 4 and 5. Research and development The Directors are committed to maintaining a significant level of research and development expenditure in order to expand the Group’s range of proprietary products. During the year a total of £130.4 million (2012: £147.1 million) was spent on engineering and business development of which £87.1 million (2012: £97.9 million) was funded by customers and £43.3 million (2012: £49.2 million) by the Group. Purchase of own shares During the year Ultra purchased no (2012: nil) ordinary shares and no (2012: nil) ordinary shares were distributed following vesting of awards under the Ultra Electronics Long-Term Incentive Plan. At 31 December 2013, the Group held 235,245 ordinary shares under the Ultra Electronics Long-Term Incentive Plan (representing 0.3% of the ordinary shares in issue as at 31 December 2013). Supplier payment policy Individual operating businesses are responsible for agreeing the terms and conditions under which they conduct business transactions with their suppliers. It is Group policy that payments to suppliers are made in accordance with those terms, provided that the supplier is also complying with all relevant terms and conditions. Trade payable days of the Group for the year ended 31 December 2013 were 59 days (2012: 50 days) based on the ratio of Group trade payables at the end of the year to the amounts invoiced during the year by suppliers. Employment policy It is the policy of Ultra to create a working environment in which there is no discrimination and all employment decisions are based entirely on merit and the ability of people to perform their intended roles. Ultra aims to continue to build a workforce which is recruited from the widest possible talent pool. Directors and their interests The Directors who served throughout the year and to the date of signing these financial statements, and their interests in the shares and share options of Ultra at 28 February 2014 are listed on page 72. Directors’ indemnities The Group has made qualifying third party indemnity provisions for the benefit of its Directors which were made during the year and remain in force at the date of this report. Substantial shareholdings As at 28 February 2014, Ultra had been notified, in accordance with Chapter 5 of the Disclosure and Transparency rules, of the following voting rights as shareholders of Ultra: Schroders plc Artemis Investment Management LLP Ameriprise Financial Inc BlackRock Inc Norges Bank Nature of holding Indirect Direct & indirect Direct & indirect Indirect Direct Percentage of ordinary share capital Number of 5p ordinary shares Date of announcement 6.5 5.07 5.0 4.2 3.95 4,501,053 3,535,035 3,494,321 2,910,296 2,757,470 22 January 2007 23 October 2013 17 October 2013 15 April 2010 19 November 2013 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 76 Ultra Electronics Holdings plc Directors’ Report (continued) Capital structure Details of the authorised and issued share capital, together with details of the movements in Ultra’s issued share capital during the year are shown in note 27. Ultra has one class of ordinary shares which carry no right to fixed income. Each share carries the right to one vote at general meetings of Ultra. There are no specific restrictions either on the size of a holding or on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. Details of employee share schemes are set out in note 27. No person has any special rights of control over the Ultra’s share capital and all issued shares are fully paid. With regard to the appointment and replacement of Directors, Ultra is governed by its Articles of Association, the UK Corporate Governance Code, the Companies Acts and related legislation. The Articles themselves may be amended by special resolution of the shareholders. The powers of Directors are described in the ‘Matters to be reserved to the Board’ which is available from the Investors section of the Group website. Annual General Meeting The next Annual General Meeting of Ultra will be held on 30 April 2014 at 417 Bridport Road, Greenford, Middlesex UB6 8UA at 10 am. A separate circular providing details of the Annual General Meeting has been sent to shareholders with the Annual Report and Accounts. Auditor Each of the Directors at the date of approval of this report confirms that: (1) So far as the Director is aware, there is no relevant audit information of which Ultra’s auditors are unaware; and (2) The Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that Ultra’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of The Companies Act 2006. By order of the Board, Sharon Harris, Company Secretary & General Counsel 28 February 2014 Registered Office: 417 Bridport Road, Greenford, Middlesex UB6 8UA Registered Number: 02830397 Executives and advisors Executive Team members Business MDs and Presidents Rakesh Sharma Chief Executive Mary Waldner Group Finance Director Mark Anderson Group Marketing Director Mike Clayton Managing Director Tactical Systems Chris Gane Managing Director Aircraft & Vehicle Systems Sharon Harris Company Secretary & General Counsel John Robusto President Secure Intelligence Systems Carlos Santiago President Naval Systems Graeme Stacey Managing Director Infrastructure & Power Keith Thomson Group Human Resources Director Olugbenga Erinle President 3eTI John McAlonan President Advanced Tactical Systems Sonia Freed Acting Managing Director AEP Networks Paul Owen Managing Director Airport Systems Mark Doyle Chief Executive Officer Al Shaheen (49%) Bill King President AMI Doug Burd Managing Director Avalon Systems & Ultra Electronics, Australia Andy Wycherley Director & General Manager CEMS Mike Williams Acting Managing Director Command & Control Systems Mike Baptist Managing Director Communication & Integrated Systems Rob McDonald Managing Director Controls Pete Crawford President EMS Paul Fardellone President Flightline Systems Tom Cross Managing Director GigaSat External auditor Deloitte LLP Abbots House Abbey Street Reading RG1 3BD Principal bankers The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR Solicitors Slaughter & May One Bunhill Row London EC1Y 8YY Osborne Clarke 2 Temple Back East Temple Quay Bristol BS1 6EG Ultra Electronics Holdings plc 77 Annual Report & Accounts 2013 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Andy Matko Director & General Manager ID Omar Al Ismaili Managing Director Ithra (70%) Ken Walker President Maritime Systems Ken Tasch President Measurement Systems Inc. Nick Gaines Managing Director Nuclear Control Systems Dan Upp President Nuclear Sensors & Process Instrumentation Bill Terry President Ocean Systems Jon Everett Managing Director PMES Andy Yates Managing Director Precision Air & Land Systems Michael Spencer General Manager ProLogic Ross Parsell Managing Director Sonar Systems Michael Phipps President SOTECH Mark Darvill Managing Director Surveillance & Security Systems Iwan Jemczyk President TCS Joe Peters President USSI Financial advisors Moelis & Company First Floor, Condor House 10 St. Paul’s Churchyard London EC4M 8AL JPMorgan Cazenove Limited 25 Bank Street, Canary Wharf London E14 5JP Stockbrokers JPMorgan Cazenove Limited 25 Bank Street, Canary Wharf London E14 5JP Registrars Equiniti Aspect House Spencer Road, Lancing West Sussex BN99 6DA 78 Ultra Electronics Holdings plc Independent auditor’s report Independent auditor’s report To the members of Ultra Electronics Holdings plc Opinion on financial statements of Ultra Electronics Holdings plc Going concern In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the Parent Company’s affairs as at 31 December 2013 and the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; 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. The financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and the related notes 1 to 49. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). As required by the Listing Rules we have reviewed the Directors’ statement contained within the Directors’ Report on page 58 that the Group is a going concern. We confirm that: • we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and • we have not identified any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Risk Revenue recognition Revenue recognition has been deemed a risk area, specifically in relation to: • Significant long-term contracts, due to the financial effects of judgements, including future milestone success, associated with determining the percentage of contract completion at the balance sheet date and risks associated with completing the contract; and • Delivery of goods, due to the complex contractual terms with regards to the transfer of risk and reward that arise within the Aerospace and Defence industry and therefore the appropriate point at which revenue should be recognised. How the scope of our audit responded to the risk Our audit work assessed the adequacy of the design and implementation of controls over long-term contract accounting. We reviewed the contract risk registers and evidence for the progress made against the contract such as milestone completion, to confirm that revenue and profit recognised to date are based on the current best estimate of the degree of contract completion. We understood and challenged management’s assumptions by referring to evidence including signed contract terms and latest project status reports, and discussed contract progress and future risks with contract engineers. We also assessed the reliability of management estimates through consideration of the historical accuracy of prior period management estimates. For each contract selected for testing, we made enquiries as to any unusual contract terms or side agreements separate to the original contract. In response to the risk of inappropriate revenue recognition arising from complex contractual terms, we reviewed contractual evidence to understand how the specific terms in respect of the transfer or risk and reward had been met. We then performed a sample test of sales recognised either side of the year end to assess whether the appropriate terms of the relevant contracts had been satisfied and that the risks and rewards associated with the contract had passed to the customer. We used external evidence, such as shipping documentation or evidence of client acceptance, to confirm that revenue had been recognised in the appropriate period. Our assessment of risks of material misstatement (continued) Risk Goodwill and other intangible assets There is a risk regarding potential impairment over the valuation of goodwill and intangible assets arising on historical acquisitions. In management’s impairment assessment there are a number of key judgements in determining the recoverable amount, including identification of cash generating units, growth rates in future cashflow forecasts and discount rates applied to these forecasts. Provisions There is judgement required in respect of potential provisions required on long-term support arrangements and warranties, and complex mission critical product manufacturing. Consequently we have deemed the appropriateness and completeness of provisions made by management in respect of product warranties and other provisions to be a risk. Ultra Electronics Holdings plc 79 Independent auditor’s report (continued) How the scope of our audit responded to the risk We challenged the assumptions used by management within their annual impairment assessment through benchmarking the short and long term growth rates to independently available data, peer group analysis, our understanding of the secured orders underpinning the Group’s cashflow forecasts, and historical performance of the business. In addition, valuation specialists within the audit team provided additional challenge over the discount rate applied to these cashflows through the use of external confirmation and benchmarking. We independently identified the cash generating units within the Group based on a review of the cashflows internally reported by management, and our understanding of the Group structure. Having audited the assumptions within management’s annual impairment assessment, we checked the arithmetical accuracy of the impairment model using these assumptions. We recalculated and assessed management’s estimates for the provisions in conjunction with our understanding of the potential liability as set out in contract terms. In respect of warranties, we assessed the level of provisioning by verifying the actual failure costs incurred to date and the products in circulation subject to a warranty. We used external evidence to evaluate this further, including sales data and contract terms together with any correspondence with third parties in respect of product failures and claims. In response to other provisions, we circularised the Group’s external legal advisors and reviewed legal costs incurred in the year to confirm the completeness of legal cases to which the Group is party. Through external evidence including submitted legal advice and discussion with management, we sought to corroborate the basis for the Group’s expections over likely outcomes and their subsequent quantification of the related provisions. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 80 Ultra Electronics Holdings plc Independent auditor’s report (continued) Our assessment of risks of material misstatement (continued) Risk Pensions The Group operates four defined benefit pension schemes, for which there is judgement in determining the IAS 19 valuation as recorded at the balance sheet date. The valuation is based on a number of assumptions on both a micro and a macro-economic level as disclosed in the notes to the accounts. How the scope of our audit responded to the risk We included pension specialists within our audit team to assess the appropriateness of the assumptions and methodology used to value the defined benefit pension schemes at the balance sheet date. In addition, we circularised the independent actuary and investment managers responsible for managing the pension fund to confirm the source inputs into the pension valuation. This confirmed the completeness of the pension assets and the valuation for which we further agreed a sample to publically available asset valuations. Our application of materiality An overview of the scope of our audit The Audit Committee’s consideration of these risks is set out on pages 60 to 62. Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters. We determined materiality for the Group to be £8 million, which represents 7% of underlying pre-tax profit, and 2% of equity. Underlying pre-tax profit was identified as being the main indicator of trading business performance, and represents statutory pre-tax profit adding back impairment of goodwill, amortisation of acquired intangible assets, adjustments to deferred consideration net of acquisition costs, defined benefit pension interest charges, unwinding of discounts on provisions and the revaluation of financial instruments based on their fair values. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £160,000 as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope primarily on the audit at fifteen of the Group’s twenty principal business units, all of which were subject to full audit. In addition the remaining five business units were subject to an audit of specific account transactions and account balances where the extent of our testing was focused on our Group audit risks and our assessment of the risk of material misstatement. The twenty locations represent the principal business units within the Group’s reportable segments and account for 87% of the Group’s net assets, 91% of the Group’s revenue and 93% of the Group’s underlying operating profit. They also provided an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our audit work at the twenty units was executed at levels of materiality applicable to each individual entity, all of which were lower than Group materiality. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances. The Group audit team follows a programme of planned visits that has been designed so that the Senior Statutory Auditor or another senior member of the Group audit team visits each of the significant overseas components locations at least once every three years. Every year, regardless of whether we have visited or not, we include the component audit partner and other senior members of the component audit team in our team briefing, direct the scope of their work for the purposes of our Group audit, discuss their risk assessment and review documentation of the findings from their work. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Ultra Electronics Holdings plc 81 Independent auditor’s report (continued) Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters. Corporate Governance Statement Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the Company’s compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report arising from our review. Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements. As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. 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. An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 Kerr Mitchell FCA, Senior Statutory Auditor for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Reading, United Kingdom 28 February 2014 Respective responsibilities of directors and auditor Scope of the audit of the financial statements Notes: An audit does not provide assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular on whether any changes may have occurred to the financial statements since first published. These matters are the responsibility of the Directors but no control procedures can provide absolute assurance in this area. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. 82 Ultra Electronics Holdings plc Group highlights Group highlights For the year ended 31 December 2013 Revenue Underlying operating profit* Operating profit Underlying profit before tax* Profit before tax Underlying earnings per share* Basic earnings per share Dividend per share 2013 £’000 2012 £’000 As restated† 745,154 121,717 57,398 116,806 49,281 2013 pence 127.1 54.8 42.2 760,826 121,844 88,271 116,502 79,818 2012 pence 125.5 88.1 40.0 Change % (2.1) (0.1) (35.0) 0.3 (38.2) Change % 1.3 (37.8) 5.5 * Ultra uses underlying figures as key performance indicators. Underlying figures are stated before amortisation charges relating to acquired intangibles, impairment of goodwill, adjustments to deferred consideration net of acquisition costs, defined benefit pension interest charges, unwinding of discounts on provisions and the revaluation of financial instruments based on their fair values. A reconciliation between operating profit and underlying operating profit, and between profit before tax and underlying profit before tax is shown in note 2 to the accounts. A reconciliation between basic earnings per share and underlying earnings per share is shown in note 12. † 2012 comparatives have been restated following the introduction of IAS19 (revised 2011). A reconciliation of the impact is set out in note 36. ?? Ultra Electronics Holdings plc Consolidated income statement For the year ended 31 December 2013 Ultra Electronics Holdings plc 83 Consolidated income statement/Consolidated statement of comprehensive income Revenue Cost of sales Gross profit Other operating income Distribution costs Administrative expenses Share of profit from associate Other operating expenses Contingent consideration release Impairment of goodwill Operating profit Investment revenue Finance costs Profit before tax Tax Profit for the year Attributable to: Owners of the Company Non-controlling interests Earnings per ordinary share (pence) Basic Diluted 3 4 16 5 1 13 6 8 9 10 12 12 Note 2013 £’000 2012 £’000 As restated* 760,826 (534,622) 226,204 2,008 (1,264) (140,509) 3,487 (1,655) - - 88,271 1,583 (10,036) 79,818 (18,552) 745,154 (523,687) 221,467 497 (1,883) (126,371) 1,424 (2,860) 9,363 (44,239) 57,398 1,606 (9,723) 49,281 (11,124) 38,157 61,266 38,157 - 60,957 309 54.8 54.7 88.1 87.9 The accompanying notes are an integral part of this consolidated income statement. All results are derived from continuing operations. Consolidated statement of comprehensive income For the year ended 31 December 2013 Profit for the year Items that will not be reclassified to profit or loss: Actuarial loss on defined benefit pension schemes Tax relating to items that will not be reclassified Total items that will not be reclassified to profit or loss Items that may be reclassified to profit or loss: Exchange differences on translation of foreign operations Gain on net investment hedges Tax relating to items that may be reclassified Total items that may be reclassified to profit or loss Other comprehensive income for the year Total comprehensive income for the year Attributable to: Owners of the Company Non-controlling interests The accompanying notes are an integral part of this consolidated statement of comprehensive income. Note 2013 £’000 2012 £’000 As restated* 38,157 61,266 (5,677) (1,321) (6,998) (4,896) 810 748 (3,338) (3,110) (797) (3,907) (12,803) 4,044 77 (8,682) 10 (10,336) (12,589) 28 27,821 48,677 27,821 - 48,368 309 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 *See note 36 Ultra Electronics Holdings plc ?? 84 Ultra Electronics Holdings plc Consolidated balance sheet Consolidated balance sheet 31 December 2013 Non-current assets Goodwill Other intangible assets Property, plant and equipment Interest in associate Deferred tax assets Derivative financial instruments Trade and other receivables Current assets Inventories Trade and other receivables Tax assets Cash and cash equivalents Derivative financial instruments Total assets Current liabilities Trade and other payables Tax liabilities Derivative financial instruments Obligations under finance leases Borrowings Short-term provisions Non-current liabilities Retirement benefit obligations Other payables Deferred tax liabilities Derivative financial instruments Obligations under finance leases Borrowings Long-term provisions Total liabilities Net assets Equity Share capital Share premium account Own shares Hedging reserve Translation reserve Retained earnings Equity attributable to equity holders of the company Non-controlling interest Total equity Note 2013 £’000 2012 £’000 13 14 15 16 25 23 19 17 19 23 20 23 21 22 26 31 20 25 23 21 22 26 27 28 28 28 28 28 252,115 125,445 59,146 7,317 5,147 4,226 9,622 291,824 139,160 57,756 8,989 1,138 3,152 4,133 463,018 506,152 57,774 239,916 2,454 30,570 3,307 52,185 201,039 - 30,840 2,454 334,021 286,518 797,039 792,670 (269,907) (16,927) (777) (44) - (18,140) (242,858) (13,428) (490) (37) (27,544) (22,474) (305,795) (306,831) (86,078) (4,773) (222) (269) (19) (72,664) (6,040) (83,096) (20,987) (7,079) (99) (50) (46,209) (14,094) (170,065) (171,614) (475,860) (478,445) 321,179 314,225 3,490 53,908 (2,581) (9,169) 16,240 258,609 320,497 682 3,470 48,752 (2,581) (9,979) 21,119 252,745 313,526 699 321,179 314,225 The financial statements of Ultra Electronics Holdings plc, registered number 02830397, were approved by the Board of Directors and authorised for issue on 28 February 2014. On behalf of the Board R. Sharma, Chief Executive M. Waldner, Finance Director The accompanying notes are an integral part of this consolidated balance sheet. Consolidated cash flow statement For the year ended 31 December 2013 Net cash flow from operating activities Investing activities Interest received Dividends received from equity accounted investments Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Expenditure on product development and other intangibles Acquisition of subsidiary undertakings Net cash acquired with subsidiary undertakings Net cash used in investing activities Financing activities Issue of share capital Dividends paid Funding from government loans Loan syndication costs Decrease in borrowings Decrease in loan to associate Repayment of obligations under finance leases Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year Ultra Electronics Holdings plc 85 Consolidated cash flow statement Note 2013 £’000 2012 £’000 As restated* 29 63,932 82,243 136 2,825 (13,857) 1,280 (7,657) (26,374) 4,623 193 765 (20,470) 67 (4,659) (40,904) 5,445 (39,024) (59,563) 5,176 (28,071) 1,282 (181) (2,317) - (24) 4,911 (26,877) 1,298 (722) (10,145) 577 (52) (24,135) (31,010) 773 30,840 (1,043) 30,570 (8,330) 41,051 (1,881) 30,840 32 32 29 The accompanying notes are an integral part of this consolidated cash flow statement. * 2012 comparatives have been restated to include acquisition costs of £1,494,000 within net cash flow from operating activities. See note 29. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 86 Ultra Electronics Holdings plc Consolidated statement of changes in equity Consolidated statement of changes in equity For the year ended 31 December 2013 Equity attributable to equity holders of the parent Balance at 1 January 2013 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Equity-settled employee share schemes Dividend to shareholders Tax on share-based payment transactions Share capital £’000 3,470 - - - 20 - - Share premium account £’000 48,752 - - - 5,156 - - Reserve for own shares £’000 Hedging reserve £’000 Translation reserve £’000 (2,581) - (9,979) - 21,119 - Retained earnings £’000 252,745 38,157 Non controlling interest £’000 Total equity £’000 699 - 314,225 38,157 - - - - - 810 810 - - - (4,879) (6,250) (17) (10,336) (4,879) 31,907 (17) 27,821 - - - 1,859 (28,071) 169 - - - 682 414 309 7,035 (28,071) 169 321,179 285,168 61,266 Balance at 31 December 2013 3,490 53,908 (2,581) (9,169) 16,240 258,609 3,449 - 43,862 - (2,581) - (14,023) - 33,898 - 220,149 60,957 Balance at 1 January 2012 Profit for the year – restated Other comprehensive income for the year – restated Total comprehensive income for the year Equity-settled employee share schemes Dividend to shareholders Tax on share-based payment transactions - - 21 - - - - 4,890 - - - - - - - 4,044 (12,779) (3,830) (24) (12,589) 4,044 (12,779) 57,127 285 48,677 - - - - - - 1,974 (26,877) 372 - - - 6,885 (26,877) 372 Balance at 31 December 2012 3,470 48,752 (2,581) (9,979) 21,119 252,745 699 314,225 Ultra Electronics Holdings plc 87 Notes to accounts – Group Notes to accounts – Group 31 December 2013 1 Segment information For management purposes, the Group is organised into three operating segments – Aircraft & Vehicle Systems, Information & Power Systems and Tactical & Sonar Systems. These segments are consistent with the internal reporting as reviewed by the Chief Executive. Each segment includes businesses with similar operating and market characteristics. Revenue Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Eliminations Consolidated revenue All inter-segment trading is at arm’s length. External revenue £’000 155,481 304,976 284,697 - 745,154 Inter segment £’000 19,409 8,928 18,824 (47,161) 2013 Total £’000 174,890 313,904 303,521 (47,161) External revenue £’000 147,017 315,835 297,974 - Inter segment £’000 18,440 13,815 20,261 (52,516) 2012 Total £’000 165,457 329,650 318,235 (52,516) - 745,154 760,826 - 760,826 Underlying operating profit Amortisation of intangibles arising on acquisition Adjustments to deferred consideration net of acquisition costs† Impairment of goodwill (see note 13) Operating profit/(loss) Investment revenue Finance costs Profit before tax Tax Profit after tax Aircraft & Vehicle Systems £’000 Information & Power Systems £’000 32,400 (4,586) 364 - 41,205 (9,375) (36) (44,239) Tactical & Sonar Systems £’000 48,112 (15,122) 8,675 - 28,178 (12,445) 41,665 2013 Total £’000 121,717 (29,083) 9,003 (44,239) 57,398 1,606 (9,723) 49,281 (11,124) 38,157 † A provision of £9,363,000 was released relating to the GigaSat earn-out agreement for which the 2013 target was not met. GigaSat is in the Tactical & Sonar Systems division. Underlying operating profit Amortisation of intangibles arising on acquisition Adjustments to deferred consideration net of acquisition costs Operating profit Investment revenue Finance costs Profit before tax Tax Profit after tax Capital expenditure, additions to intangibles, depreciation and amortisation Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Total Aircraft & Vehicle Systems £’000 30,645 (3,571) (315) 26,759 Information & Power Systems £’000 44,905 (14,005) (518) Tactical & Sonar Systems £’000 46,294 (14,503) (661) 30,382 31,130 2012 As restated* Total £’000 121,844 (32,079) (1,494) 88,271 1,583 (10,036) 79,818 (18,552) 61,266 Capital expenditure and additions to intangibles (excluding goodwill and acquired intangibles) 2013 £’000 10,356 5,434 5,724 21,514 2012 £’000 7,511 7,088 10,530 25,129 Depreciation and amortisation 2013 £’000 7,182 15,037 21,113 43,332 2012 £’000 6,784 18,770 20,570 46,124 The 2013 depreciation and amortisation expense includes £31,967,000 of amortisation charges (2012: £35,242,000) and £11,365,000 of property, plant and equipment depreciation charges (2012: £10,882,000). *See note 36 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 88 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 1 Segment information (continued) Total assets by segment Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Unallocated Consolidated total assets Unallocated assets represent current and deferred tax assets, derivatives at fair value and cash and cash equivalents. Total liabilities by segment Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Unallocated Consolidated total liabilities 2013 £’000 180,941 276,097 294,297 751,335 45,704 2012 £’000 146,872 296,411 311,803 755,086 37,584 797,039 792,670 2013 £’000 39,755 145,802 117,702 303,259 172,601 2012 £’000 42,594 121,273 139,547 303,414 175,031 475,860 478,445 Unallocated liabilities represent derivatives at fair value, tax payables, deferred tax liabilities, retirement benefit obligations, bank loans and loan notes. Revenue by destination The following table provides an analysis of the Group’s sales by geographical market: United Kingdom Continental Europe Canada USA Rest of World 2013 £’000 243,650 61,860 17,130 313,352 109,162 2012 £’000 225,671 55,769 19,038 349,145 111,203 745,154 760,826 During the year there was one direct customer (2012: one), that individually accounted for greater than 10% of the Group’s total turnover. Sales to this customer in 2013 were £164.8m (2012: £189.3m) across all segments. Other information (by geographic location) United Kingdom USA Canada Rest of World Unallocated Non current assets Total assets 2013 £’000 221,362 159,927 47,960 24,396 453,645 9,373 2012 £’000 200,453 216,746 55,831 28,831 501,861 4,291 2013 £’000 375,315 229,563 62,983 83,474 751,335 45,704 2012 £’000 339,855 292,022 71,191 69,477 772,545 20,125 463,018 506,152 797,039 792,670 Additions to Property, Plant & Equipment and intangible assets (excluding acquisitions) 2013 £’000 14,607 3,852 2,719 336 21,514 - 21,514 2012 £’000 16,404 4,227 2,795 1,703 25,129 - 25,129 Ultra Electronics Holdings plc 89 Notes to accounts – Group (continued) 2 Additional non-statutory performance measures To present the underlying trading of the Group on a consistent basis year-on-year, additional non-statutory performance indicators have been used. These are calculated as follows: Operating profit Amortisation of intangibles arising on acquisition Impairment of goodwill (see note 13) Adjustments to contingent consideration net of acquisition costs Underlying operating profit Profit before tax Amortisation of intangibles arising on acquisition Impairment of goodwill (see note 13) Adjustments to contingent consideration net of acquisition costs Unwinding of discount on provisions (see note 26) Profit on fair value movements of derivatives Net interest charge on defined benefit pensions Underlying profit before tax Cash generated by operations (see note 29) Purchase of property, plant and equipment Proceeds on disposal of property, plant and equipment Expenditure on product development and other intangibles Dividend from equity accounted investment Acquisition related payments Underlying operating cash flow 2013 £’000 2012 £’000 As restated* 57,398 29,083 44,239 (9,003) 88,271 32,079 - 1,494 121,717 121,844 49,281 29,083 44,239 (9,003) 1,268 (1,470) 3,408 79,818 32,079 - 1,494 577 (1,390) 3,924 116,806 116,502 93,476 (13,857) 1,280 (7,657) 2,825 2,973 112,387 (20,470) 67 (4,659) 765 1,494 79,040 89,584 Underlying operating profit has been shown before adjustments to contingent consideration net of acquisition related costs, the amortisation of intangible assets arising on acquisitions and impairment of goodwill. To maintain a consistent presentation of financial performance over the longer term, these charges have been excluded from underlying operating profit. Underlying profit before tax and underlying earnings per share (see note 12) are also presented before these adjustments. IAS 37 requires the Group to discount provisions using a pre-tax discount rate that reflects the current assessment of the time value of money and the risks specific to the liability. In the case of the provision relating to the acquisition contingent consideration, to maintain a consistent presentation of financial performance over the longer term, underlying profit before tax and underlying earnings per share (see note 12) are stated before the unwinding of discount on the provision. IAS 39 requires the Group to ‘fair value’ the derivative instruments used to manage Ultra’s foreign exchange exposures. This creates volatility in the valuation of the outstanding instruments as exchange rates move over time. This will have minimal impact on profit over the full term of the instruments, but can cause significant volatility on particular balance sheet dates. Underlying profit before tax and underlying earnings per share (see note 12) are stated before changes in the valuation of foreign currency derivative instruments. Following the adoption of IAS 19 (revised 2011), the Group has decided to present underlying profit before tax and underlying earnings per share (see note 12) before the net interest charge on defined benefit pensions in order that the underlying operating performance of the Group can be seen more clearly. The comparatives for the year ended 31 December 2012 have been restated as set out in note 36. The Group is cash-generative and reinvests funds to support the continuing growth of the business. It seeks to use an accurate and appropriate measure of the funds generated internally while sustaining this growth. For this, Ultra uses operating cash flow, rather than cash generated by operations, as its preferred indicator of cash generated and available to cover non-operating expenses such as tax and interest payments. The Group believes that using cash generated by operations, with the exclusion of net expenditure on property, plant and equipment and outflows for capitalised product development and other intangibles, would result in an under-reporting of the true cash cost of sustaining a growing business. 3 Revenue An analysis of the Group’s revenue is as follows: Sales of goods Revenue from long term contracts 4 Other operating income Amounts included in other operating income were as follows: Foreign exchange gains *See note 36 2013 £’000 331,598 413,556 2012 £’000 343,981 416,845 745,154 760,826 2013 £’000 497 497 2012 £’000 2,008 2,008 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 90 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 5 Other operating expenses Amounts included in other operating expenses were as follows: Amortisation of development costs Foreign exchange losses 6 Operating profit Operating profit is stated after charging/(crediting): Raw materials and other bought in inventories expensed in the year Staff costs (see note 7) Depreciation and amounts written off property, plant and equipment Amortisation of internally generated intangible assets Amortisation of acquired intangible assets (and other intangibles) Impairment of goodwill (see note 13) Government grant income (see note 24) Net foreign exchange loss Loss on disposal of property, plant and equipment Operating lease rentals – plant and machinery – other Research and development costs Auditor’s remuneration for statutory audit work (including expenses) The Company only audit fee included in the Group audit fee shown above was £20,000 (2012: £20,000). Analysis of auditor’s remuneration Fees payable for the audit of the annual accounts Fees payable for the audit of subsidiaries Total for statutory Group audit services Analysis of non-audit services: Audit related services Tax compliance Other tax advisory services Corporate finance services – due diligence Other services Total for non-audit services 7 Staff costs Particulars of employees (including Executive Directors) are shown below. Employee costs during the year amounted to: Wages and salaries Social security costs Pension costs The average monthly number of persons employed by the Group during the year was as follows: Production Engineering Selling Support services 2013 £’000 608 2,252 2,860 2012 £’000 830 825 1,655 2013 £’000 226,096 228,994 11,365 608 31,359 44,239 (1,819) 2,771 130 1,590 10,043 36,952 705 2012 £’000 233,279 226,995 10,882 830 34,412 - (2,628) 1,905 137 1,398 9,481 48,597 685 2013 £’000 179 526 705 27 7 3 341 13 391 2012 £’000 166 519 685 - 5 14 50 125 194 2013 £’000 198,369 19,595 11,030 2012 £’000 197,098 18,573 11,324 228,994 226,995 2013 Number 1,698 1,725 262 589 4,274 2012 Number 1,616 1,781 308 725 4,430 Information on Directors’ remuneration is given in the section of the Remuneration Report described as having been audited and those elements required by the Companies Act 2006 and the Financial Conduct Authority form part of these accounts. 8 Investment revenue Bank interest Fair value movement on derivatives 9 Finance costs Amortisation of finance costs of debt Interest payable on bank loans, overdrafts and other loans Interest payable on finance leases Total borrowing costs Retirement benefit scheme finance cost Unwinding of discount on provisions 10 Tax UK taxes Corporation tax Adjustment in respect of prior years Overseas taxes Current taxation Adjustment in respect of prior years Total current tax Deferred tax Origination and reversal of temporary differences: UK deferred tax Overseas deferred tax Total deferred tax credit Total tax charge Ultra Electronics Holdings plc 91 Notes to accounts – Group (continued) 2013 £’000 136 1,470 1,606 2013 £’000 616 4,430 1 5,047 3,408 1,268 9,723 2012 £’000 193 1,390 1,583 2012 £’000 As restated* 591 4,943 1 5,535 3,924 577 10,036 2013 £’000 2012 £’000 As restated* 15,453 1,853 17,306 7,238 414 7,652 24,958 (3,711) (10,123) (13,834) 12,854 169 13,023 10,043 (138) 9,905 22,928 (8) (4,368) (4,376) 11,124 18,552 Corporation tax in the UK is calculated at 23.25% (2012: 24.5%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. In addition to the amount charged to the income statement, the following amounts relating to tax have been recognised directly in other comprehensive income: Current tax Net investment hedges Deferred tax Arising on income and expenses recognised in other comprehensive income: Actuarial loss on defined benefit pension schemes Total income tax charge recognised directly in other comprehensive income 2013 £’000 2012 £’000 As restated* 748 77 (1,321) (573) (797) (720) In addition to the amount charged to the income statement and other comprehensive income, the following amounts relating to tax have been recognised directly in equity: Current tax Excess tax deductions related to share based payments on exercised options Deferred tax Change in estimated excess tax deductions related to share-based payments Total income tax recognised directly in equity *See note 36 2013 £’000 117 52 169 2012 £’000 263 109 372 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 92 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 10 Tax (continued) The difference between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows: Group profit before tax Tax on Group profit at standard UK corporation tax rate of 23.25% (2012: 24.5%) Tax effects of: Income/expenses that are not taxable/allowable in determining taxable profits Effect of change in UK tax rate Tax effect of utilisation of tax losses not previously recognised Different tax rates of subsidiaries operating in other jurisdictions Adjustments in respect of prior years Tax expense for the year 11 Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 December 2012 of 27.8p (2011: 26.8p) per share Interim dividend for the year ended 31 December 2013 of 12.7p (2012: 12.2p) per share Proposed final dividend for the year ended 31 December 2013 of 29.5p (2012: 27.8p) per share 2013 £’000 49,281 11,458 1,264 (2,049) - (324) 775 2012 £’000 As restated* 79,818 19,555 (897) (510) (248) 877 (225) 11,124 18,552 2013 £’000 19,259 8,812 28,071 20,523 2012 £’000 18,466 8,411 26,877 19,230 The 2013 proposed final dividend of 29.5p per share is planned to be paid on 2 May 2014 to shareholders on the register at 11 April 2014. It was approved by the Board after 31 December 2013 and has not been included as a liability as at 31 December 2013. 12 Earnings per share Basic underlying (see below) Diluted underlying (see below) Basic Diluted The calculation of the basic, underlying and diluted earnings per share is based on the following data: Earnings Earnings for the purposes of basic earnings per share being profit for the year Underlying earnings Profit for the year Profit on fair value movements on derivatives (net of tax) Amortisation of intangibles arising on acquisition (net of tax) Unwinding of discount on provisions (net of tax) Acquisition-related costs net of contingent consideration (net of tax) Net interest charge on defined benefit pensions (net of tax) Impairment of goodwill (net of tax) Earnings for the purposes of underlying earnings per share The adjustments to profit are explained in note 2. 2013 pence 127.1 126.7 54.8 54.7 2012 pence As restated* 125.5 125.1 88.1 87.9 2013 £’000 2012 £’000 As restated* 38,157 60,957 38,157 (1,322) 20,727 973 (9,061) 2,609 36,394 88,477 60,957 (1,155) 22,271 436 1,273 3,021 - 86,803 *See note 36 12 Earnings per share (continued) The weighted average number of shares is given below: Number of shares used for basic earnings per share Effect of dilutive potential ordinary shares – share options Number of shares used for fully diluted earnings per share Underlying profit before tax Tax rate applied for the purposes of underlying earnings per share 13 Goodwill Cost At 1 January Exchange differences Recognised on acquisition of subsidiaries Reclassifications Other changes At 31 December Accumulated impairment losses At 1 January Exchange differences Impairment of goodwill Carrying amount at 31 December Ultra Electronics Holdings plc 93 Notes to accounts – Group (continued) 2013 Number of shares 2012 Number of shares 69,588,526 218,397 69,165,099 215,138 69,806,923 69,380,237 2013 £’000 2012 £’000 As restated* 116,806 116,502 24.25% 25.28% 2013 £’000 2012 £’000 291,824 (3,670) 9,790 - (3,956) 278,125 (6,416) 19,478 372 265 293,988 291,824 - 2,366 (44,239) - - - 252,115 291,824 Other changes in 2013 relate to the release of an earn-out provision of £4,276,000 relating to a 2008 acquisition which was credited to goodwill, and other adjustments relating to the re-assessment of initial fair values. Other changes and reclassifications in 2012 relate to the re-assessment of initial fair values. Goodwill acquired in a business combination is allocated, at acquisition, to the Cash-Generating Units (CGUs) that are expected to benefit from that business combination. These consist of the Group’s operating businesses. Goodwill has been allocated to CGUs as set out below: Blue Sky Group Precision Air & Land Systems Adaptive Materials Inc Controls Other Aircraft & Vehicle Systems Airport Systems Command & Control Systems NSPI ProLogic SOTECH Other Information & Power Systems 3eTI AEP Flightline GigaSat Maritime Systems Tactical Communication Systems UnderSea Sensor Systems Inc Other Tactical & Sonar Systems Total – Ultra Electronics *See note 36 2013 Discount rate % 2012 Discount rate % 12.3 12.3 13.3 12.3 12.3 to 13.3 13.3 12.3 13.3 - 12.3 to 13.3 13.3 12.3 13.3 13.8 12.3 12.3 to 13.3 13.3 12.3 13.3 12.3 12.3 12.3 to 13.3 12.3 13.3 12.3 13.3 12.3 12.3 12.3 12.3 12.3 13.3 12.3 16.0 12.3 12.3 12.3 12.3 2013 £’000 7,333 10,317 6,235 7,876 13,074 44,835 28,064 15,587 10,518 - 8,652 13,813 76,634 18,817 24,908 9,519 9,544 1,615 36,054 18,252 11,937 2012 £’000 7,496 10,317 6,375 - 13,074 37,262 27,996 14,015 10,752 47,176 8,844 13,813 122,596 19,236 24,640 2,165 9,544 9,331 36,435 18,342 12,273 130,646 131,966 252,115 291,824 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 94 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 13 Goodwill (continued) The recoverable amounts of CGUs are determined from value-in-use calculations. In determining the value-in-use for each CGU, the Group prepares cash flows derived from the most recent financial budgets and strategic plans, representing the best estimate of future performance. These plans, which have been approved by the Board, include detailed financial forecasts and market analysis covering the expected development of each CGU over the next five years. The cash flows for the following ten years are also included and assume a growth rate of 2.5% per annum. Cash flows beyond that period are not included in the value-in-use calculation. The key assumptions used in the value-in-use calculations are those regarding the discount rate, future revenues, growth rates and forecast gross margins. Management estimates the discount rate using pre-tax rates that reflect current market assessments of the time value of money and risks specific to the Group, being the Weighted Average Cost of Capital (WACC). The WACC is then risk-adjusted to reflect risks specific to each business. The pre-tax discount rate used during 2013 varied between 12.3% and 13.8% (2012: 12.3% to 16.0%). Future revenues are based on orders already received, opportunities that are known and expected at the time of setting the budget and strategic plans and future growth rates. Budget and strategic plan growth rates are based on a combination of historical experience, available government spending data and management and industry expectations of the growth rates that are expected to apply in the major markets in which each CGU operates. Longer-term growth rates, applied for the ten year period after the end of the strategic planning period, are set at 2.5%. Ultra considers the long-term growth rate to be appropriate for the sectors in which it operates. Forecast gross margins reflect past experience, factor in expected efficiencies to counter inflationary pressures, and also reflect likely margins achievable in the shorter-term period of greater defence spending uncertainty. Within each of the strategic plans a number of assumptions are made about business growth opportunities, contract wins, product development and available markets. A key assumption is that there will be continued demand for Ultra’s products and expertise from a number of US government agencies and prime contractors during the strategic plan period. Sensitivity analysis has been performed on the value-in-use calculations to: (i) reduce the post-2018 growth assumption from 2.5% to nil. (ii) apply a 10% reduction to forecast operating profits in each year of the modelled cash inflows. (iii) consider specific market factors as noted above. Certain of these sensitivity scenarios give rise to potential impairments at GigaSat, Adaptive Materials Inc and Tactical Communications Systems. Headroom for these businesses, which represents the value derived from the key growth assumptions in the value-in-use calculations, is as follows: GigaSat £1.6m, Adaptive Materials Inc £5.1m and Tactical Communication Systems £23.2m. Sensitivity assumptions (i) and (ii) would result in a headroom shortfall at GigaSat of £0.3m and £1.3m respectively. Sensitivity (iii) is particularly relevant for Adaptive Materials Inc and accordingly if assumption (ii) was extended further, a 28% reduction to forecast operating profits, representing a key programme, would indicate impairment. Similarly, the Tactical Communication Systems CGU is also sensitive to specific market factors: a material delay in bringing a key programme to market, combined with failure to secure sufficient business with new and existing customers would result in impairment. The reduction in placement of US service contracts has particularly impacted the ProLogic business during 2013. The value-in-use of the ProLogic CGU was lower than the carrying value of the CGU’s net operating assets and consequently an impairment charge of £44.2m has been recorded in the year. The pre-tax discount rate used during this assessment was 13.8%. Following the impairment charge, the carrying value of goodwill for the ProLogic CGU as at 31 December 2013 is £nil. As set out in note 2, the £44.2m impairment charge has been included as part of the non-underlying operating results of the Group. ProLogic is within the Information & Power Systems operating segment. For all other CGUs, the value-in-use calculations comfortably exceed the CGU carrying values in the sensitivity scenarios. Ultra Electronics Holdings plc 95 Notes to accounts – Group (continued) 14 Other intangible assets Cost At 1 January 2012 Foreign exchange differences Acquired on acquistion of subsidiary undertakings Additions Reclassifications Disposals Acquired intangibles Customer relationships £’000 Intellectual property £’000 Profit in order book £’000 Other acquired £’000 Internally generated capitalised development costs £’000 Other intangibles £’000 Total £’000 139,358 (4,956) 65,983 (1,824) 22,511 (835) 1,146 (145) 16,826 (284) 16,567 (405) 262,391 (8,449) 22,884 - - - 9,061 - - - 860 - - - 694 - - - - 597 - - 148 4,062 (372) (525) 33,647 4,659 (372) (525) At 1 January 2013 157,286 73,220 22,536 1,695 17,139 19,475 291,351 Foreign exchange differences Acquired on acquistion of subsidiary undertakings Additions Disposals (3,234) (1,085) (557) (24) (331) (351) (5,582) 9,114 - - - - - 1,987 - - 715 - - - 6,312 - - 1,345 (232) 11,816 7,657 (232) At 31 December 2013 163,166 72,135 23,966 2,386 23,120 20,237 305,010 Accumulated amortisation At 1 January 2012 Disposals Foreign exchange differences Charge (57,050) - 2,344 (20,690) (20,454) - 848 (8,664) (20,765) - 795 (2,432) At 1 January 2013 (75,396) (28,270) (22,402) Foreign exchange differences Disposals Charge 2,660 - (18,921) 862 - (8,580) 557 - (1,169) (471) - 118 (293) (646) 21 - (413) (13,055) - 250 (830) (10,263) 513 241 (2,333) (122,058) 513 4,596 (35,242) (13,635) (11,842) (152,191) 139 - (608) 122 232 (2,276) 4,361 232 (31,967) At 31 December 2013 (91,657) (35,988) (23,014) (1,038) (14,104) (13,764) (179,565) Carrying amount At 31 December 2013 At 31 December 2012 71,509 81,890 36,147 44,950 952 134 1,348 1,049 9,016 3,504 6,473 7,633 125,445 139,160 ‘Other intangibles’ represents software, patents and trademarks. Of the £6,473,000 (2012: £7,633,000) net book value, £482,000 (2012: £540,000) related to patents and trademarks. The amortisation of intangible assets charge is included within administrative expenses. Intangible assets, other than goodwill, are amortised over their estimated useful lives, typically as follows: Customer relationships Intellectual property Profit in acquired order book Other acquired Development costs Other intangibles: Software Patents and trademarks 5 to 16 years 5 to 10 years 1 to 3 years 1 to 5 years 2 to 10 years 3 to 5 years 3 to 5 years 10 to 20 years n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 96 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 15 Property, plant and equipment Cost At 1 January 2012 Foreign exchange differences Acquisitions Additions Disposals At 1 January 2013 Foreign exchange differences Acquisitions Additions Disposals At 31 December 2013 Accumulated Depreciation At 1 January 2012 Foreign exchange differences Charge Disposals At 1 January 2013 Foreign exchange differences Charge Disposals At 31 December 2013 Carrying amount At 31 December 2013 At 31 December 2012 Land and Buildings Freehold £’000 Short leasehold £’000 Plant and machinery £’000 20,386 (361) - 7,920 - 27,945 (568) - 4,014 (1,080) 14,699 (352) 180 6,395 (1,128) 19,794 (199) 3 2,447 (1,268) Total £’000 126,234 (2,580) 1,240 20,470 (8,463) 91,149 (1,867) 1,060 6,155 (7,335) 89,162 136,901 (1,367) 858 7,396 (3,571) (2,134) 861 13,857 (5,919) 30,311 20,777 92,478 143,566 (3,833) 77 (874) - (4,630) 302 (1,407) 201 (5,534) (7,235) 147 (2,145) 1,115 (66,579) 1,012 (7,863) 7,033 (77,647) 1,236 (10,882) 8,148 (8,118) (66,397) (79,145) 118 (1,742) 1,070 1,161 (8,216) 3,238 1,581 (11,365) 4,509 (8,672) (70,214) (84,420) 24,777 23,315 12,105 11,676 22,264 22,765 59,146 57,756 Freehold land amounting to £3,502,000 (2012: £3,502,000) has not been depreciated. The net book value of plant and machinery held under finance leases was £48,000 (2012: £107,000). Depreciation charged in the year on assets held under finance leases was £65,000 (2012: £52,000). Included within Land and Buildings is £nil (2012: £5,137,000) of assets in the course of construction. 16 Interest in associate The value of the Group’s investment is made up as follows: Total assets Total liabilities Interest in associate Total revenue of associate Group’s share of profit recognised 2013 £’000 2012 £’000 13,894 (6,577) 7,317 2013 £’000 29,370 1,424 14,069 (5,080) 8,989 2012 £’000 38,859 3,487 The Group’s interest in associate is represented by its 49% shareholding in Al Shaheen Adventure LLC, a Company incorporated in the UAE. The associate’s year end is 31 December 2013. 17 Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 2013 £’000 36,888 13,774 7,112 57,774 2012 £’000 32,850 11,621 7,714 52,185 The amount of any write down of inventory recognised as an expense in the year was £2,727,000 (2012: £3,516,000). 18 Long-term contract balances Contracts in progress at the balance sheet date: Amounts due from contract customers included in trade and other receivables Amounts due to contract customers included in trade and other payables Contract costs incurred plus recognised profits less recognised losses to date Advances received from customers for contract work amounted to £81,585,000 (2012: £76,519,000). 19 Trade and other receivables Non-current Trade receivables Amounts due from contract customers (note 18) Current Trade receivables Provisions against receivables Net trade receivables Amounts due from contract customers (note 18) Other receivables Prepayments and accrued income Ultra Electronics Holdings plc 97 Notes to accounts – Group (continued) 2013 £’000 2012 £’000 133,368 (124,122) 87,727 (107,953) 9,246 (20,226) 1,375,409 1,270,263 2013 £’000 5,296 4,326 9,622 2013 £’000 87,174 (1,605) 85,569 129,042 17,150 8,155 2012 £’000 4,133 - 4,133 2012 £’000 96,355 (1,445) 94,910 87,727 11,402 7,000 239,916 201,039 Trade receivables do not carry interest. The average credit period on sale of goods is 34 days (2012: 34 days). The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. The ageing profile of unprovided overdue trade receivables was as follows: 1 to 3 months 4 to 6 months 7 to 9 months Over 9 months Total overdue 2013 £’000 12,698 2,123 791 740 16,352 Related provision £’000 (364) (358) (143) (740) (1,605) Total £’000 12,334 1,765 648 - 14,747 2012 £’000 18,510 2,886 670 907 22,973 Related provision £’000 (451) (306) (405) (283) (1,445) Total £’000 18,059 2,580 265 624 21,528 The Group provides against its trade receivables where there are serious doubts as to future recoverability based on prior experience, on assessment of the current economic climate and on the length of time that the receivable has been overdue. All trade receivables that have been overdue for more than a year are provided for in full. Movement in the provision for trade receivables was as follows: Balance at beginning of year Foreign exchange differences Increase in provision for trade receivables regarded as potentially uncollectable Decrease in provision for trade receivables recovered during the year Balance at end of year 2013 £’000 1,445 (8) 731 (563) 1,605 2012 £’000 1,743 (12) 412 (698) 1,445 Credit risk Credit risk is defined as the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group mitigates this risk of financial loss by only dealing with creditworthy counterparties. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. Whilst the Group has elements of concentration of credit risk, with exposure to a number of large counter parties and customers, the customers are mainly government agencies or multi-national organisations with whom the Group has long term business relationships. The Group has a small number of customers with individually significant amounts outstanding. These customers are considered to have low credit risk. Ongoing credit evaluation is performed on the financial condition of accounts receivable and when appropriate action is taken to minimise the Group’s credit risk. The carrying amount of financial assets recorded in the financial statements (see note 23) net of any allowances for losses represents the Group’s maximum exposure to credit risk. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 98 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 20 Trade and other payables Amounts included in current liabilities: Trade payables Amounts due to contract customers (note 18) Other payables Accruals and deferred income Amounts included in non current liabilities: Amounts due to contract customers (note 18) Other payables Accruals and deferred income The Directors consider that the carrying amount of trade and other payables approximates to their fair value. 21 Finance leases Minimum lease payments Amounts payable under finance leases: Within one year Between one and five years Less: future finance charges Present value of finance lease liabilities Present value of finance lease liabilities – payments due: Within one year Between one and five years 22 Borrowings Amounts due after less than one year: Bank loans Amounts due after more than one year: Bank loans Unsecured loan notes Loans from government Total borrowings: Amount due for settlement within 12 months Amount due for settlement after 12 months 2013 £’000 2012 £’000 85,709 122,856 19,505 41,837 75,773 96,620 22,943 47,522 269,907 242,858 1,266 1,174 2,333 4,773 11,333 5,578 4,076 20,987 2013 £’000 2012 £’000 48 24 72 (9) 63 44 19 63 41 57 98 (11) 87 37 50 87 2013 £’000 2012 £’000 - - 25,975 42,352 4,337 72,664 - 72,664 72,664 27,544 27,544 - 43,295 2,914 46,209 27,544 46,209 73,753 23 Financial instruments and financial risk management Derivative financial instruments Exposure to currency and interest rate risks arises in the normal course of the Group’s business. Derivative financial instruments are used to hedge exposure to all significant fluctuations in foreign exchange rates and interest rates. Fair value measurements recognised in the balance sheet The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: • Level 1 fair value measurements are those derived from quoted (unadjusted) active markets for identical assets or liabilities; • Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e as prices) or indirectly (i.e. derived from prices); and • Level 3 fair value measurements are those derived from valuation techniques that includes inputs for the asset or liability that are not based on observable market data (unobservable inputs). All of Ultra’s financial instruments have been assessed as Level 2. 23 Financial instruments and financial risk management (continued) Fair value measurements recognised in the balance sheet Financial assets at fair value Foreign exchange derivative financial instruments (through profit and loss) Financial liabilities at fair value Foreign exchange derivative financial instruments (through profit and loss) Financial assets at fair value Foreign exchange derivative financial instruments (through profit and loss) Financial liabilities at fair value Foreign exchange derivative financial instruments (through profit and loss) Ultra Electronics Holdings plc 99 Notes to accounts – Group (continued) Level 2 £’000 2013 Total £’000 7,533 7,533 1,046 Level 2 £’000 1,046 2012 Total £’000 5,606 5,606 589 589 Current assets/(liability) Non-current assets/(liability) 2012 £’000 2013 £’000 2013 £’000 2012 £’000 Financial assets/(liabilities) carried at fair value through profit or loss Foreign exchange currency liabilities Foreign exchange currency assets Financial assets The financial assets of the Group were as follows: (777) 3,307 (490) 2,454 (269) 4,226 (99) 3,152 Cash and cash equivalents Currency derivatives used for hedging Amounts due from contract customers Other receivables Trade receivables The Directors consider that the carrying amount for all financial assets approximates to their fair value. Financial liabilities The financial liabilities of the Group were as follows: Currency derivatives used for hedging Other financial liabilities: Bank loans and overdrafts Loan notes Finance leases Government loans Trade payables Amounts due to contract customers Deferred consideration Accruals 2013 £’000 30,570 7,533 133,368 17,150 90,865 2013 £’000 1,046 25,975 42,352 63 4,337 85,709 124,122 11,593 28,729 2012 £’000 30,840 5,606 87,727 11,402 99,043 2012 £’000 589 27,544 43,295 87 2,914 75,773 107,953 24,911 31,380 The Directors consider that the carrying amount for all financial liabilities approximates to their fair value. Liquidity risk The Group maintains committed banking facilities with core banks to provide prudent levels of borrowing headroom. The Group’s banking facilities are provided by a small group of banks, led by The Royal Bank of Scotland. During the year there were two facilities in place; one provides £90 million of revolving credit and expires in January 2016 and a second, which was put in place in January 2013 to replace the previous £120 million facility, provides £100 million of revolving credit which expires in December 2017. Both facilities are denominated in Sterling, US dollars, Canadian dollars, Australian dollars and Euros and are used for balance sheet and operational needs. A further £15 million overdraft is available for short-term working capital funding. All bank loans are unsecured. Interest was predominantly charged at 1.45% (2012: 1.50%) over base or contracted rate. At 31 December 2013, the Group had available £163,000,000 (2012: £180,815,000) of undrawn, committed borrowing facilities. The Group is strongly cash-generative and the funds generated by operating companies are managed regionally to fund short-term local working capital requirements. Where additional funding is required, this is provided centrally through the Group’s committed banking facilities. The Group, through its Canadian subsidiary Ultra Electronics Tactical Communication Systems (UETCS), participates in two Canadian programmes that provide government support in relation to the development of certain of its products. Further disclosure is provided in note 24. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 100 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 23 Financial instruments and financial risk management (continued) Liquidity risk (continued) In July 2011 the Group negotiated a private shelf agreement with Prudential Investment Management, Inc. which allowed the Group to issue loan notes up to a value of USD150 million and with a maturity date of up to 10 years. USD10 million of loan notes were issued in 2011 with a maturity date of July 2018 and a further USD60 million of loan notes were issued in January 2012 with a maturity date of January 2019. Consequently as at 31 December 2013 USD80 million remained available under the shelf agreement. On 2 January 2014 the Group agreed an amendment to extend the private shelf agreement for a three year period. Consequently loan notes can now be issued up until 2 January 2017. The amendment also increased the size of the shelf agreement so USD125 million of notes remain available for issue. The following table details the Group’s remaining contractual maturity for its financial liabilities: 2013 Bank loans and overdrafts Loan notes Government loans Finance leases Trade payables Currency derivatives used for hedging Deferred consideration Accruals 2012 Bank loans and overdrafts Loan notes Government loans Finance leases Trade payables Currency derivatives used for hedging Deferred consideration Accruals Within 1 year £’000 496 1,525 - 48 85,709 777 11,593 26,396 29,752 1,559 - 41 75,773 490 13,721 27,304 1 to 2 years £’000 496 1,525 - 23 - 169 - 1,262 - 1,559 - 34 - 96 11,190 2,197 2 to 5 years £’000 27,736 10,510 - 1 - 56 - 775 - 4,678 - 23 - 3 - 1,508 Over 5 years £’000 - 36,386 4,337 - - 44 - 296 - 44,822 2,914 - - - - 371 Total £’000 28,728 49,946 4,337 72 85,709 1,046 11,593 28,729 29,752 52,618 2,914 98 75,773 589 24,911 31,380 Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 22 to the Accounts, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Group Statement of Changes in Equity. The Group is not subject to externally imposed capital requirements. Currency risk The Group uses currency derivatives in the form of forward currency contracts to hedge its foreign currency transaction risk. The currencies giving rise to this risk are primarily US dollars and Canadian dollars. At 31 December 2013, the net fair value of the Group’s currency derivatives is estimated to be an asset of approximately £6,487,000 (2012: £5,017,000), comprising £7,533,000 assets (2012: £5,606,000) and £1,046,000 liabilities (2012: £589,000). The gain on derivative financial instruments included in the Group’s consolidated income statement for the period was £1,470,000 (2012: £1,390,000). The net notional, or net contracted amounts of foreign currency related forward sales contracts, classified by year of maturity are shown below. 2013 US dollars/Sterling US dollars/Canadian dollars Canadian dollars/Sterling Euro/other currencies Total 2012 US dollars/Sterling US dollars/Canadian dollars Canadian dollars/Sterling Euro/other currencies Total Not exceeding 1 year £’000 Between 1 year and 5 years £’000 50,873 55,614 6,333 3,173 1,724 62,103 49,749 20,620 5,693 3,834 - - 6,349 61,963 52,995 - 1,582 3,684 79,896 58,261 Over 5 years £’000 - - - 3,464 3,464 - - - 5,175 5,175 Total £’000 106,487 6,333 3,173 11,537 127,530 102,744 20,620 7,275 12,693 143,332 Ultra Electronics Holdings plc 101 Notes to accounts – Group (continued) 23 Financial instruments and financial risk management (continued) Net investment hedges At the year end the Group had net investments in US companies where the associated foreign currency translation risk is hedged by external borrowings in US dollars. The value of the borrowings does not exceed the net investments, meeting the conditions required to qualify as effective hedges. Interest rate risk The Group has USD70 million of long term fixed rate debt with an interest rate of 3.60%. This was entered into to achieve an appropriate mix of fixed and floating rate exposure reflecting the Group’s policy. The effective interest rates and repricing dates of the Group’s financial assets and liabilities were as follows: 2013 Cash and cash equivalents Loan notes Unsecured bank loans Government loans Finance lease liabilities 2012 Cash and cash equivalents Loan notes Unsecured bank loans Government loans Finance lease liabilities Effective interest rate 0.39% 3.60% 1.84% 4.43% 4.89% 0.36% 3.60% 1.94% 4.43% 4.89% Total £’000 30,570 42,352 25,975 4,337 63 30,840 43,295 27,544 2,914 87 Within 1 year £’000 30,570 - - - 44 30,840 - 27,544 - 37 1 to 2 years £’000 2 to 5 years £’000 5+ years £’000 - - - - 19 - - - - 30 - 6,050 25,975 - - - - - - 20 - 36,302 - 4,337 - - 43,295 - 2,914 - Market risk sensitivity analysis Interest rate risk During 2013 the Group’s net borrowings were predominantly at fixed interest rates, consequently the income statement is not particularly sensitive to a small change in interest rates. The Group has estimated the impact on the income statement of a 1% increase in market interest rates, from the average rates applicable during 2013. There is no significant difference between the amount recharged to the income statement and equity in the year. 2013 Interest rate sensitivity 2012 Interest rate sensitivity 1% change Profit before tax £’000 (229) (389) Currency risks The Group has estimated the impact on the income statement and equity of a 10% and 25% strengthening or weakening of average actual and transactional currency rates applicable during the year and a 10% and 25% change in the foreign exchange rates applicable for valuing foreign exchange derivative instruments. 10% strengthening 10% weakening 25% strengthening 25% weakening Profit before tax £’000 Equity £’000 2013 Transaction P&L translation Foreign exchange derivatives 7,089 1,680 (11,577) 7,089 2,831 (11,577) Total foreign exchange (2,808) (1,657) 2012 Transaction P&L translation Foreign exchange derivatives Total foreign exchange 6,343 1,866 (8,125) 84 6,343 1,857 (8,125) 75 Profit before tax £’000 (7,089) (1,680) 9,581 812 (6,343) (1,866) 8,953 744 Profit before tax £’000 Equity £’000 Profit before tax £’000 Equity £’000 17,723 4,199 (34,294) 17,723 7,078 (34,294) (17,723) (4,199) 21,208 (17,723) (7,078) 21,208 Equity £’000 (7,089) (2,831) 9,581 (339) (12,372) (9,493) (714) (3,593) (6,343) (1,857) 8,953 15,858 4,665 (22,261) 15,858 4,643 (22,261) (15,858) (4,665) 17,723 (15,858) (4,643) 17,723 753 (1,738) (1,760) (2,800) (2,778) n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 102 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 24 Government grants and loans The Group through its Canadian subsidiaries Ultra Electronics Tactical Communication Systems (UETCS) and Ultra Electronics Maritime Systems (UEMS) participates in three Canadian programmes that provide government support in relation to the development of certain of its products. Under the Strategic Aerospace and Defence Initiative (SADI), the Canadian Federal Government provides a long-term funding arrangement in respect of certain eligible research and development project costs. Under this arrangement, up to $32m will be provided to UETCS and reimbursed at favourable rates of interest over the period 2016 to 2030. Up to $8m will be provided to UEMS and reimbursed at favourable rates of interest over the period 2020 to 2033. The benefit of the below market rate of interest has been calculated as the difference between the proceeds received and the fair value of the loans and has been credited to profit in the year. The fair value of the loans have been calculated using a market interest rate for a similar instrument applicable at the time the agreements were signed. UETCS also participates in the Investissement Quebec (IQ) research and development programme, whereby IQ shares in the cost of research and development of certain specified new products. Under this arrangement IQ will finance up to $14m of eligible costs associated with these specified projects. This funding is repayable under a royalty arrangement over the period 2014 to 2021 if these products are successfully brought to market. Royalties only become payable when sales of these products are made. As there is no minimum repayment, funding received in respect of the IQ programme has been included in the income statement. Amounts recognised in the financial statements in respect of these programmes were as follows: Fair value of SADI loan brought forward Contributions Interest charged to finance costs Foreign exchange differences Fair value of SADI loan carried forward Government grants credited to profit in the year SADI IQ Other† 2013 £’000 2,914 1,282 539 (398) 4,337 2013 £’000 1,128 426 265 1,819 2012 £’000 1,680 970 327 (63) 2,914 2012 £’000 1,841 787 - 2,628 †Ultra Electronics Limited received a £265,000 grant from the Technology Strategy Board in the year. 25 Deferred tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period. Employee share options costs £’000 Derivatives £’000 Retirement benefit obligations £’000 As restated* Goodwill £’000 577 (41) - - 113 - (21) - (4) - 624 (915) 20,873 (8,569) (306) - - - - 71 - - - (727) - 701 - - (122) (1,498) - - (398) - - - 119 8 - - - Other £’000 5,615 (68) (2,583) - - (189) (89) - - 164 Total £’000 As restated* (31) 3,865 (2,583) 701 113 239 510 (1,498) (4) (7,253) (5,941) (1,150) 19,227 (8,840) 2,850 At 1 January 2012 Credit/(charge) to income Reclassification from tax liabilities Credit/(charge) to other comprehensive income Charge direct to equity Exchange differences Effect of change in tax rate – income statement – other comprehensive income – equity Arising on acquisition At 1 January 2013 Accelerated† tax depreciation £’000 (17,612) 5,405 - - - 309 663 - - (7,417) (18,652) *See note 36 Ultra Electronics Holdings plc 103 Notes to accounts – Group (continued) 25 Deferred tax (continued) At 1 January 2013 Credit/(charge) to income Credit/(charge) to other comprehensive income Charge direct to equity Exchange differences Effect of change in tax rate – income statement – other comprehensive income – equity Arising on acquisition At 31 December 2013 Non current assets Non current liabilities Accelerated† tax depreciation £’000 (18,652) 2,088 - - 669 1,922 - - (2,656) (16,629) Employee share options costs £’000 624 43 - 63 - (20) - (11) - 699 Derivatives £’000 (1,150) (300) - - - 152 - - - Retirement benefit obligations £’000 19,227 (550) 1,106 - - (32) (2,427) - - Goodwill £’000 (8,840) 7,631 - - 455 19 - - - Other £’000 2,850 2,874 - - (145) 8 - - (23) (1,298) 17,324 (735) 5,564 2013 £’000 5,147 (222) 4,925 Total £’000 (5,941) 11,786 1,106 63 979 2,049 (2,427) (11) (2,679) 4,925 2012 £’000 1,138 (7,079) (5,941) †Relates to property, plant and equipment and intangible assets. Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The Group has not recognised deferred tax assets of £3.47 million (2012: £3.40 million) relating to tax losses, due to uncertainty as to their recoverability. There are no temporary differences which arise in respect of undistributed earnings. The main rate of UK corporation tax will reduce from 23% to 21% from 1 April 2014 and to 20% from 1 April 2015. The rate of 20% has been used to calculate the deferred tax balances at 31 December 2013 as this rate reduction was enacted before the balance sheet date. 26 Provisions At 1 January 2013 Created Reversed Utilised Unwinding of discount Exchange differences At 31 December 2013 Included in current liabilities Included in non-current liabilities Warranties £’000 8,681 608 (1,852) (1,105) - (58) 6,274 3,773 2,501 6,274 Contract related provisions £’000 27,887 6,127 (11,870) (5,414) 1,268 (92) 17,906 14,367 3,539 17,906 Total £’000 36,568 6,735 (13,722) (6,519) 1,268 (150) 24,180 18,140 6,040 24,180 Warranty provisions are based on an assessment of future claims with reference to past experience. Such costs are generally incurred within two years after delivery. Contract related provisions will be utilised over the period as stated in the contract to which the specific provision relates. Contract related provisions also include contingent consideration and dilapidation costs. Dilapidations will be payable at the end of the contracted life which is up to fifteen years. Contingent consideration is payable when earnings targets are met: £9,363,000 of the provision was released in the year when the 2013 GigaSat earn-out target was not met. As at 31 December 2013 the remaining contingent consideration provision is £7,679,000 (2012: £15,774,000), payment of which is contingent on a GigaSat results target for the period ending 30 June 2014. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 *See note 36 104 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 27 Share capital and share options Authorised: 5p ordinary shares Allotted, called-up and fully paid: 5p ordinary shares No. 2013 £’000 No. 2012 £’000 90,000,000 4,500 90,000,000 4,500 69,804,884 3,490 69,403,659 3,470 401,225 ordinary shares having a nominal value of £20,061 were allotted during the year under the terms of the Group’s various Share Option Schemes. The aggregate consideration received was £5,176,000. Share options During the year to 31 December 2013, the Group operated the following equity-settled share option schemes: 1. Savings-Related Share Option Schemes A Savings-Related Share Option Scheme is open to all US employees and provides for a purchase price equal to the average of the daily average market price on the five days before the grant less 10%. The vesting period is two years. If the options remain unexercised after a period of three months from the date of maturity, the options expire. Options are forfeited if the employee leaves the Group before the options vest. A Savings-Related Share Option Scheme is open to all Canadian employees and provides for a purchase price equal to the daily average market price on the five days before the grant less 10%. The vesting period is three years. If the options remain unexercised after a period of six months from the date of maturity, the options expire. Options are forfeited if the employee leaves the Group before the options vest. A Savings-Related Share Option Scheme is open to all Abu Dhabi employees and provides for a purchase price equal to the daily average market price on the day before the grant less 10%. The vesting period is three years. If the options remain unexercised after a period of six months from the date of maturity, the options expire. Options are forfeited if the employee leaves the Group before the options vest. A Savings-Related Share Option Scheme is open to all UK employees and provides for a purchase price equal to the daily average market price on the day before grant less 10%. The vesting periods are three and five years. If the options remain unexercised after a period of six months from the date of maturity, the options expire. Options are forfeited if the employee leaves the Group before the options vest. At 31 December 2013, share options outstanding under the Savings Related Share Option Schemes were as follows: Options granted 2013 – US scheme 2012 – US scheme 2011 – US scheme 2013 – Canadian scheme 2012 – Canadian scheme 2011 – Canadian scheme 2010 – Canadian scheme 2009 – Canadian scheme 2009 – Abu Dhabi scheme 2007 – UK 5 year scheme 2008 – UK 5 year scheme 2009 – UK 3 year scheme 2009 – UK 5 year scheme 2010 – UK 3 year scheme 2010 – UK 5 year scheme 2011 – UK 3 year scheme 2011 – UK 5 year scheme 2012 – UK 3 year scheme 2012 – UK 5 year scheme 2013 – UK 3 year scheme 2013 – UK 5 year scheme Number of shares 2012 2013 Option price (£) Exercise dates 53,335 32,970 - 3,373 - 36,729 89,035 - 31,108 38,357 - - - - - 1,462 - 8,353 2,743 9,943 18,530 19,058 27,200 33,601 29,450 19,617 3,798 5,781 38,749 909 16,472 11,774 1,791 9,191 13,646 11,133 21,263 20,654 29,292 34,053 - - 17.16 13.79 12.72 16.80 13.79 12.72 14.62 11.27 11.48 10.39 12.00 11.48 11.48 15.54 15.54 13.33 13.33 13.85 13.85 16.80 16.80 September 2015 - December 2015 September 2014 - December 2014 September 2013 - December 2013 September 2016 - December 2016 September 2015 - March 2016 September 2014 - March 2015 September 2013 - March 2014 September 2012 - March 2013 December 2012 - June 2013 December 2012 - June 2013 December 2013 - June 2014 December 2012 - June 2013 December 2014 - June 2015 December 2013 - June 2014 December 2015 - June 2016 December 2014 - June 2015 December 2016 - June 2017 December 2015 - June 2016 December 2017 - June 2018 December 2016 - June 2017 December 2018 - June 2019 Ultra Electronics Holdings plc 105 Notes to accounts – Group (continued) 27 Share capital and share options (continued) 2. Company Share Option Plan The Company Share Option Plan provides share options for nominated employees in the UK. The purchase price is set at a mid-market price on the date of grant. This is an approved scheme and vesting is unconditional. Options vest after three years and lapse after ten years from the date of grant. At 31 December 2013, share options outstanding under the Company Share Option Plan were as follows: Options granted 2005 2006 2007 2008 2009 2010 2011 2012 2013 Number of shares 2012 2013 Option price (£) 4,395 2,355 5,172 2,261 6,417 14,680 26,829 29,484 59,369 4,395 4,018 13,039 8,449 11,828 22,671 27,903 31,191 - 7.28 10.32 12.07 12.00 11.90 14.83 16.97 17.10 17.18 Exercise dates March 2008 - March 2015 February 2009 - February 2016 May 2010 - May 2017 March 2011 - March 2018 March 2012 - March 2019 March 2013 - March 2020 March 2014 - March 2021 March 2015 - March 2022 March 2016 - March 2023 3. Executive Share Option Scheme The Executive Share Option Scheme provides share options for nominated employees in the UK, US and Canada. The purchase price is set at a mid-market price on the date of grant. This is an unapproved scheme and vesting is unconditional. Options vest after three years and lapse after seven years from the date of grant. At 31 December 2013, share options outstanding under the Executive Share Option Scheme were as follows: Options granted 2006 2007 2008 2009 2010 2011 2011 2012 2013 Number of shares 2012 2013 Option price (£) - 19,740 33,568 69,431 83,331 131,473 8,183 176,781 182,136 8,857 47,652 77,030 120,345 161,401 140,013 8,183 187,990 - 10.32 12.07 12.00 11.90 14.83 16.97 15.70 17.10 17.18 Exercise dates February 2009 - February 2013 May 2010 - May 2014 March 2011 - March 2015 March 2012 - March 2016 March 2013 - March 2017 March 2014 - March 2018 August 2014 - August 2018 March 2015 - March 2019 March 2016 - March 2020 4. Long-Term Incentive Plan Details in relation to the LTIP are included in the Directors’ Remuneration report on pages 63 to 75. The number and weighted average exercise price of share options for all share based payment arrangements (including LTIP) are as follows: Beginning of year Granted during the year Forfeited during the year Expired during the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average exercise price (£) 2013 11.40 13.24 14.59 5.18 13.08 Number of options 2013 1,575,958 454,025 (23,581) (194,727) (355,551) Weighted average exercise price (£) 2012 10.49 12.31 14.47 3.61 11.38 Number of options 2012 1,700,786 472,027 (50,366) (161,856) (384,633) 12.34 1,456,124 11.40 1,575,958 13.04 245,555 11.70 353,534 The Group recognised total expenses of £1,859,000 (2012: £1,974,000) in relation to equity-settled, share-based payment transactions. Expected volatility was determined by calculating the historic volatility of the Group’s share price. Share options were exercised on a regular basis throughout the year. The weighted average share price during the year was £17.65. The fair value of options granted during the year was £1,869,986 (2012: £1,912,376). The Group’s 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, based on the Group’s estimate of shares that will eventually vest. The fair value for all schemes other than the LTIP schemes are measured by use of the Black Scholes option pricing model using the following assumptions: Weighted average share price (£) Weighted average exercise price (£) Expected volatility % Expected option life (years) Risk-free interest rate % Expected dividends % *Figures in the above table show an average across the invested schemes at year end. Share save* CSOP* ESOS* 15.82 14.60 25.2 3.6 1.1 2.2 17.14 17.10 25.7 6 1.5 1.6 17.10 17.07 25.8 5 1.1 2.2 LTIP* 2013 n/a n/a n/a n/a n/a n/a n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 106 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 27 Share capital and share options (continued) Weighted average share price (£) Weighted average exercise price (£) Expected volatility % Expected option life (years) Risk-free interest rate % Expected dividends % Share save* CSOP* ESOS* 14.31 12.40 24.4 3.9 2.1 2.1 16.43 16.39 25.3 6.0 3.0 2.1 16.29 16.25 26.2 5.0 2.1 2.1 LTIP* 2012 n/a n/a n/a n/a n/a n/a *Figures in the above table show an average across the invested schemes at year end. For the 2011, 2012 and 2013 LTIP awards, the stochastic model has been used to calculate the fair value of the awards at grant date as this is the most accurate way of modelling the TSR performance condition. The fair value of these schemes has been calculated using the following assumptions: Exercise price (£) Share price at grant (£) Expected option life (years) Expected volatility % Expected dividend yield % Risk-free interest rate % 2013 n/a 17.22 3.0 24.2 0.0 0.7 2012 n/a 16.24 3.0 25.9 0.0 1.6 Figures in the above table show an average across the schemes. The weighted average fair value of options granted during the year was £4.51 (2012: £4.45). The weighted average remaining contractual life of share options was 3.8 years (2012: 3.4 years). 28 Equity Balance at 1 January 2012 Total comprehensive income for the year Equity-settled employee share scheme Dividends to shareholders Share capital £’000 3,449 - 21 - Share premium account £’000 43,862 - 4,890 - Reserve for own shares £’000 Hedging reserve £’000 Translation reserve £’000 (2,581) (14,023) 33,898 Retained earnings £’000 220,149 - - - 4,044 (12,779) 57,127 - - - - 2,346 (26,877) Non controlling interests £’000 414 285 - - Total equity £’000 285,168 48,677 7,257 (26,877) Balance at 1 January 2013 3,470 48,752 (2,581) (9,979) 21,119 252,745 699 314,225 Total comprehensive income for the year Equity-settled employee share scheme Dividends to shareholders - 20 - - 5,156 - - - - 810 (4,879) 31,907 (17) 27,821 - - - - 2,028 (28,071) - - 7,204 (28,071) Balance at 31 December 2013 3,490 53,908 (2,581) (9,169) 16,240 258,609 682 321,179 The share premium account represents the premium arising on the issue of equity shares. The ‘own shares reserve’ represents the cost of shares in Ultra Electronics Holdings plc purchased in the market and held by the Ultra Electronics Employee Trust to satisfy options under the Group’s Long-Term Incentive Plan (“LTIP”) share schemes. At 31 December 2013, the number of own shares held was 235,245 (2012: 235,245). 29 Notes to the cash flow statement Operating profit Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible assets Impairment of goodwill Cost of equity-settled employee share schemes Adjustment for pension funding Loss on disposal of property, plant and equipment Share of profit from associate Decrease in provisions Operating cash flow before movements in working capital Increase in inventories Increase in receivables Increase/(decrease) in payables Cash generated by operations Income taxes paid Interest paid Net cash from operating activities Reconciliation of net movement in cash and cash equivalents to movements in net debt. Net increase/(decrease) in cash and cash equivalents Cash outflow from decrease in debt and finance leasing Change in net debt arising from cash flows Loan syndication costs Amortisation of finance costs of debt Translation differences Movement in net debt in the year Net debt at start of year Net debt at end of year Net debt comprised the following: Cash and cash equivalents Borrowings Obligations under finance leases included in current liabilities Obligations under finance leases included in non-current liabilities Ultra Electronics Holdings plc 107 Notes to accounts – Group (continued) 2013 £’000 2012 £’000 As restated* 57,398 88,271 11,365 31,967 44,239 1,859 (6,103) 130 (1,424) (13,508) 125,923 (4,197) (43,144) 14,894 10,882 35,242 - 1,974 (6,809) 137 (3,487) (3,088) 123,122 (2,719) (5,969) (2,047) 93,476 112,387 (25,591) (3,953) (25,589) (4,555) 63,932 82,243 2013 £’000 773 521 1,294 - (616) 165 2012 £’000 (8,330) 8,898 568 903 (551) 2,228 843 (43,000) 3,148 (46,148) (42,157) (43,000) 2013 £’000 30,570 (72,664) (44) (19) 2012 £’000 30,840 (73,753) (37) (50) (42,157) (43,000) Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less. 30 Other financial commitments a) Capital commitments At the end of the year capital commitments were: Contracted but not provided 2013 £’000 2,688 2012 £’000 2,950 b) Lease commitments At 31 December 2013, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Within one year Between one and five years After five years *See note 36 2013 £’000 9,065 27,811 13,009 49,885 2012 £’000 9,861 30,340 18,189 58,390 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 108 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 31 Retirement benefit schemes Some UK employees of the Group are members of the Ultra Electronics Limited defined benefit scheme which was established on 1 March 1994. The scheme is a final salary scheme with the majority of members accruing 1/60th of their final pensionable earnings for each year of pensionable service. The scheme was closed to new members in 2003. A new defined contribution plan was introduced for other employees and new joiners in the UK. The latest full actuarial valuation of the defined benefit scheme was carried out as at 6 April 2013. The Group also operates two defined contribution schemes for overseas employees. In addition to these schemes, the Group’s Tactical Communication Systems business based in Montreal, Canada, has three defined benefit schemes. Defined contribution schemes The total cost charged to income in respect of the defined contribution schemes was £4,916,000 (2012: £5,889,000). Defined benefit schemes The UK defined benefit scheme was actuarially assessed at 31 December 2013 using the ‘projected unit’ method. The Canadian defined benefit schemes were actuarially assessed at 31 December 2013 using the ‘projected unit’ method. In the UK, Ultra Electronics Limited sponsors the Ultra Electronics Pension Scheme, a funded defined benefit pension scheme. The scheme is administered within a trust which is legally separate from the Company. Trustees are appointed by both the Company and the scheme’s membership and act in the interest of the scheme and all relevant stakeholders, including the members and the Company. The Trustees are also responsible for the investment of the scheme’s assets. This scheme provides pensions and lump sums to members on retirement and to their dependants on death. Members who leave service before retirement are entitled to a deferred pension. Active members of the scheme pay contributions via salary sacrifice and the Company pays the balance of the cost as determined by regular actuarial valuations. The Trustees are required to use prudent assumptions to value the liabilities and costs of the scheme whereas the accounting assumptions must be best estimates. Responsibility for making good any deficit within the scheme lies with the Company and this introduces a number of risks for the Company. The major risks are: interest rate risk; inflation risk; investment risk; longevity risk. The Company and Trustees are aware of these risks and manage them through appropriate investment and funding strategies. The Trustees manage governance and operational risks through a number of internal controls policies, including a risk register. The scheme is subject to regular actuarial valuations, which are usually carried out every three years. The actuarial valuation as at 6 April 2013 has been finalised and will result in an increase in the additional deficit payment required from £7.2m in 2013 to £8.0m in 2014, £8.5m in 2015 and £9.0m for the following 8.5 years. The next actuarial valuation is due to be carried out with an effective date of 6 April 2016. These actuarial valuations are carried out in accordance with the requirements of the Pensions Act 2004 and so include deliberate margins for prudence. This contrasts with these accounting disclosures, which are determined using best estimate assumptions. The results of the 6 April 2013 valuation have been projected to 31 December 2013 by a qualified independent actuary. The figures in the following disclosure were measured using the Projected Unit Method. Key financial assumptions used in the valuation of these schemes were as follows: Discount rate Inflation rate – RPI Inflation rate – CPI Expected rate of salary increases Future pension increases (pre 6/4/08) Future pension increases (post 6/4/08) UK 2013 4.45% 3.40% 2.40% 3.90% 3.10% 2.00% Canada 2013 4.45% 3.40% n/a 3.90% 3.40% n/a UK 2012 4.70% 2.85% 2.05% 3.35% 2.75% 1.85% Canada 2012 4.70% 2.85% n/a 3.35% 2.85% n/a For each of these assumptions there is a range of possible values. Relatively small changes in some of these variables can have a significant impact on the level of the total obligation. For the UK scheme, a 0.1% reduction in the inflation assumption to 3.3% and a 0.1% increase in the discount rate to 4.55% would decrease the scheme’s liabilities by 1.8% and 1.9% respectively. If the members’ life expectancy were to increase by 1 year, the scheme liabilities would increase by 2.9%. The average duration of the scheme liabilities is 19 years (2012: 22 years). The key demographic assumption used was in relation to the mortality rates of current and future pensioners. Due to the size of the scheme the mortality rates were based on standard tables, namely: Current pensioners Future pensioners 95% SAPS S1PMA/105% SAPS S1PFA c2002 MC1% imps from 2002 95% SAPS S1PMA/105% SAPS S1PFA c2002 MC1% imps from 2002 The mortality assumptions used in the valuation of the UK scheme make appropriate allowance for future improvements in longevity and are set out below: Current pensioners (at 65) – males Current pensioners (at 65) – females Future pensioners (at 65) – males Future pensioners (at 65) – females 2013 2012 22 years 24 years 24 years 26 years 22 years 24 years 24 years 25 years Ultra Electronics Holdings plc 109 Notes to accounts – Group (continued) 31 Retirement benefit schemes (continued) Amounts recognised in the income statement in respect of the Group’s defined benefit schemes were as follows: Past service cost Current service cost Administration expenses Interest on pension scheme liabilities Expected return on pension scheme assets Loss on settlements UK 2013 £m - 4.7 0.6 11.0 (7.7) - 8.6 Canada 2013 £m - 0.1 0.3 0.5 (0.4) 0.3 0.8 Total 2013 £m - 4.8 0.9 11.5 (8.1) 0.3 9.4 UK 2012 £m As restated* Canada 2012 £m Total 2012 £m As restated* - 5.2 0.4 11.1 (7.2) - 9.5 - 0.2 - 0.5 (0.5) - 0.2 - 5.4 0.4 11.6 (7.7) - 9.7 Of the current service cost for the year, £3.7 million (2012: £4.2 million) has been included in cost of sales, and £1.1 million (2012: £1.2 million) has been included in administrative expenses. Actuarial gains and losses have been reported in the statement of comprehensive income. The amount included in the balance sheet arising from the Group’s obligations in respect of its defined benefit retirement schemes is as follows: Total 2013 £m 194.3 (280.4) (86.1) 17.3 (68.8) Total 2013 £m (246.5) - (4.8) (11.5) (26.9) 0.9 0.9 7.5 (280.4) Total 2013 £m 163.4 8.1 21.2 (0.9) 12.1 (0.9) (1.2) (7.5) 194.3 UK 2012 £m 153.4 (235.4) (82.0) 18.8 (63.2) UK 2012 £m (220.5) - (5.2) (11.1) (5.6) - - 7.0 (235.4) Canada 2012 £m 10.0 (11.1) (1.1) 0.4 (0.7) Canada 2012 £m (11.5) - (0.2) (0.5) (0.3) 0.2 - 1.2 (11.1) Total 2012 £m 163.4 (246.5) (83.1) 19.2 (63.9) Total 2012 £m (232.0) - (5.4) (11.6) (5.9) 0.2 - 8.2 (246.5) UK 2012 £m As restated* Canada 2012 £m Total 2012 £m As restated* 139.5 7.2 2.4 - 11.7 (0.4) - (7.0) 153.4 9.6 0.5 0.4 (0.2) 0.9 - - (1.2) 10.0 149.1 7.7 2.8 (0.2) 12.6 (0.4) - (8.2) 163.4 Fair value of scheme assets Present value of scheme liabilities Scheme deficit Related deferred tax asset Net pension liability UK 2013 £m 185.0 (270.2) (85.2) 17.0 (68.2) Canada 2013 £m 9.3 (10.2) (0.9) 0.3 (0.6) Movements in the present value of defined benefit obligations during the year were as follows: Canada 2013 £m (11.1) - (0.1) (0.5) (0.9) 0.9 0.9 0.6 (10.2) Canada 2013 £m 10.0 0.4 1.2 (0.9) 0.7 (0.3) (1.2) (0.6) 9.3 Present value of obligation at 1 January Past service cost Current service cost Interest cost Actuarial gains and losses Exchange difference Liabilities extinguished on settlements Benefits paid Present value of obligation at 31 December UK 2013 £m (235.4) - (4.7) (11.0) (26.0) - - 6.9 (270.2) Movements in the fair value of scheme assets during the year were as follows: UK 2013 £m 153.4 7.7 20.0 - 11.4 (0.6) - (6.9) 185.0 Fair value at 1 January Expected return on scheme assets Actuarial gains and losses Exchange differences Employer contributions Administration expenses Assets distributed on settlements Benefits paid Fair value at 31 December *See note 36 n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 110 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 31 Retirement benefit schemes (continued) The expected rates of return are determined by reference to relevant published indices. The overall expected rate of return is calculated as a weighted average rate of return on each asset class. Scheme assets were as follows: Fair value: Equities Bonds Property Other assets Other investment funds UK 2013 £m 63.0 60.7 8.1 0.2 53.0 185.0 Canada 2013 £m 4.9 4.1 - 0.3 - 9.3 Total 2013 £m 67.9 64.8 8.1 0.5 53.0 UK 2012 £m 75.4 32.2 7.3 0.8 37.7 Canada 2012 £m 5.9 3.5 - 0.6 - Total 2012 £m 81.3 35.7 7.3 1.4 37.7 194.3 153.4 10.0 163.4 During 2013 the decision was taken to realign the investment strategy to more closely match the liability duration by reducing exposure to equities and increasing exposure to long dated bonds. The analysis of the actuarial loss in the consolidated statement of comprehensive income was as follows: Actual return less expected return on pension scheme assets Experience gains arising on scheme liabilities Changes in assumptions underlying the present value of the scheme liabilities UK 2013 £m 20.0 2.9 (28.9) (6.0) Canada 2013 £m 1.2 (0.6) (0.3) 0.3 Total 2013 £m 21.2 2.3 (29.2) (5.7) UK 2012 £m As restated* Canada 2012 £m Total 2012 £m As restated* 2.4 (2.8) (2.8) (3.2) 0.4 (0.3) - 0.1 2.8 (3.1) (2.8) (3.1) Cumulative actuarial losses, net of deferred tax, recognised in the consolidated statement of comprehensive income at 31 December 2013 were £47.7 million (2012: £40.7 million, restated). The five-year history of experience adjustments is as follows: Present value of defined benefit obligations Fair value of scheme assets Scheme deficit Experience adjustments on scheme liabilities Percentage of scheme liabilities Experience adjustment on scheme assets Percentage of scheme assets 2013 £m (280.4) 194.3 (86.1) 2.3 (0.8%) 21.2 10.9% 2012 £m (246.5) 163.4 (83.1) (3.1) 1.3% 2.8 1.7% 2011 £m (232.0) 149.1 (82.9) 0.4 (0.2%) (11.6) (7.8%) 2010 £m (221.6) 143.1 (78.5) 7.5 (3.4%) 6.1 4.3% 2009 £m (204.7) 127.2 (77.5) (0.5) 0.2% 16.0 12.6% The amount of contributions expected to be paid to defined benefit schemes during the 2014 financial year is £14.1m. For the UK scheme this includes an additional deficit payment of £8.0m agreed with the Trustee. This will be followed by £8.5m in 2015 and £9.0m for the following 8.5 years to fund the scheme deficit. 32 Acquisitions Acquisitions during the year In aggregate, consideration of £21.8m was paid in respect of acquisitions, all of which was discharged by means of cash and cash equivalents and was made up as follows. Cash outflow on subsidiaries acquired Cash acquired with subsidiaries Net cash outflow £’000 26,374 (4,623) 21,751 Aggregate assets and liabilities acquired comprised intangible assets of £11.8m property, plant and equipment of £0.9m, cash of £4.6m, inventories of £2.1m, net receivables of £4.5m and payables of £7.1m. If all the acquisitions had occurred on 1 January 2013 the revenue for the Group would have been £761.6m and operating profit would have been £63.4m. With respect to prior year acquisitions, fair value adjustments totalling net £4.0m have been credited to goodwill. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. Following a detailed review, a £44.2m impairment loss was recognised in the year. See note 13. *See note 36 Ultra Electronics Holdings plc 111 Notes to accounts – Group (continued) 32 Acquisitions (continued) Varisys On 6 June 2013, the Group acquired the entire share capital of Varisys Limited for cash consideration of £20.4m. Additional amounts of up to £2m will be payable to the vendors subject to performance and retention of the business founders over the next two years, and will be expensed to the profit and loss account as incurred. Varisys designs and manufactures products for high performance embedded computing applications. Its products and services portfolio include bespoke solutions for customers operating in the aerospace, defence, telecommunications, and industrial sectors. The acquisition gives Ultra an organic capability in this specialist, niche area, allowing Group businesses to meet customer requirements more quickly and cost-effectively. The provisional fair values of the net assets acquired are stated below: Book value Revaluations Provisional fair value Intangible assets Property, plant and equipment Cash and cash equivalents Inventories Receivables Payables Net assets acquired Goodwill arising on acquisition Purchase consideration £’000 - 48 4,385 933 3,023 (3,388) 5,001 £’000 9,741 - - - - (2,244) 7,497 £’000 9,741 48 4,385 933 3,023 (5,632) 12,498 7,876 20,374 The net revenue and profit contributions from Varisys were approximately £1.9m and £2.9m respectively in the period from the date of acquisition to 31 December 2013. The goodwill arising on the acquisition is attributable to the strategic premium to gain access to Varisys’ market relative to an organic entry and to the acquiree’s technology. Acquisition costs of £0.2m were charged to the income statement during the year. The total goodwill on this acquisition expected to be deductible for tax is £nil. Wood & Douglas On 28 October 2013, the Group acquired the entire share capital of Wood & Douglas Holdings Limited (W&D) for initial cash consideration of £6.0m. A further £0.2m was paid in February 2014 following the net asset valuation exercise. Additional payments of up to £1m will be made subject to earnings growth and retention of certain individuals over the next year, and will be expensed to the profit and loss account as incurred. W&D delivers OEM and bespoke wireless products and services, such as radio networks, video monitoring and wireless data platforms, to industry and governments. W&D customers are predominately active in the defence, homeland security, transportation, energy, emergency services, exploration, healthcare, and utilities sectors. The provisional fair values of the net assets acquired are stated below: Book value Revaluations Provisional fair value Intangible assets Property, plant and equipment Cash and cash equivalents Inventories Receivables Payables Net assets acquired Goodwill arising on acquisition Purchase consideration £’000 - 813 238 1,187 1,468 (1,065) 2,641 £’000 2,075 - - - - (439) 1,636 £’000 2,075 813 238 1,187 1,468 (1,504) 4,277 1,914 6,191 The net revenue and profit contributions from W&D were approximately £1.4m and £0.2m respectively in the period from the date of acquisition to 31 December 2013. The goodwill arising on the acquisition is attributable to the value of synergies arising from the acquisition, the acquiree’s technology and future profits arising from access to new markets. Acquisition costs of £0.1m were charged to the income statement during the year. The total goodwill on this acquisition expected to be deductible for tax is £nil. Both Varisys Limited and Wood & Douglas Holdings Limited are UK companies. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 112 Ultra Electronics Holdings plc Notes to accounts – Group (continued) 33 Related party transactions Remuneration of key management personnel The remuneration of key management personnel, which includes the Directors of the Group, is set out below in aggregate for each of the categories specified in IAS 24: Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the audited part of the Directors’ Remuneration Report on pages 69, 70 and 72: Short-term employee benefits Post-employment benefits Share-based payments 2013 £’000 2,837 395 900 4,132 2012 £’000 2,818 279 902 3,999 Transactions with associate At 31 December 2013, a loan of £643,200 (2012: £657,000) was due from Al Shaheen Adventure LLC (ASA), the Group’s 49% equity-accounted investment. A small amount of trading also occurs with ASA, in the normal course of business and on an arm’s length basis. Balances are settled on normal trade terms and the amounts outstanding at year end were insignificant. 34 Post balance sheet events On 2 January 2014 the Group agreed an amendment to extend the existing Prudential Investment Management, Inc (Pricoa) private shelf agreement for a three year period. Consequently loan notes can now be issued up until 2 January 2017. The amendment also increased the size of the shelf agreement so USD125 million of notes remain available for issue. Acquisition of 3 Phoenix Inc On 18 February 2014, the Group acquired the entire share capital of 3 Phoenix Inc (“3Pi”) headquartered in Chantilly, Virginia, for an initial cash consideration of USD70.0m. Additional payments of up to USD17.0m will be due subject to earnings growth over the next three years. 3Pi is a leading supplier of specialist sonar, radar, intelligence, surveillance and reconnaissance products and solutions. The company has a 10 year track record of delivering critical real-time sensor and processing systems, primarily to the US Navy, but also to commercial customers. 3Pi is a bolt-on acquisition to Ultra’s existing Tactical & Sonar Systems division, with which there are a significant number of internal and external synergies. The fair values of the net assets are currently being calculated and have not been finalised due to the proximity of the acquisition to the publication of the 2013 financial statements. The proximity to the financial statements publication also makes it impractical to disclose any further information with respect to this acquisition. Full disclosure will be made in the next published financial statements. 35 Contingent liabilities The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business totalling £62.6m (2012: £57.4m). Provision is made for any amounts that the Directors consider may become payable under such arrangements, the provision as at 31 December 2013 and 31 December 2012 was £nil. The nature of much of the contracting work performed by the Group means that there are occasional contractual issues, variations and renegotiations that arise in the ordinary course of business. The Group is, from time to time, party to legal proceedings and claims which arise in the ordinary course of business. The Directors do not anticipate that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position. 36 Prior period restatement IAS 19 (revised 2011) has impacted the accounting for the Group’s defined benefit pension scheme by (i) replacing the interest cost and expected return on plan assets with a net interest charge on the net defined benefit liability, and (ii) reclassifying administration costs of the defined benefit scheme from finance costs to administration expenses. There is no change to the net pension liability or to net assets as a result of the change. The comparative profit and loss account has been restated for the year ended 31 December 2012; the effect of adopting IAS 19 (revised 2011) is to reduce previously reported profit before tax by £3.0m. Subsequent to the adoption of IAS19 (revised 2011), the Group has also elected to disclose the finance expense on the net defined benefit pension liability as a specific adjusting item within the calculation of underlying profit before tax as set out in note 2. Consequently, the comparative figure has been restated for the year ended 31 December 2012 and previously reported underlying profit before tax has increased by £0.9m. 36 Prior period restatement (continued) The impact on the income statement is set out in the table below: Operating profit Investment revenue Finance costs Profit before tax Tax Profit after tax Profit attributable to owners of the company EPS – basic EPS – diluted The impact on the statement of comprehensive income is set out in the table below: Profit for the period Other comprehensive income for the period Total comprehensive income for the period Attributable to owners of the company The impact on underlying results (see note 2 and 12) is set out in the table below: Underlying operating profit Underlying profit before tax Underlying EPS – basic Underlying EPS – diluted 37 Subsidiaries Ultra Electronics Holdings plc 113 Notes to accounts – Group (continued) Year to 31 December 2012 As reported £’000 88,671 1,583 (7,448) 82,806 Adjusting item £’000 (400) - (2,588) (2,988) As restated £’000 88,271 1,583 (10,036) 79,818 (19,240) 688 (18,552) 63,566 63,257 91.5p 91.2p (2,300) (2,300) 61,266 60,957 (3.4)p (3.3)p 88.1p 87.9p Year to 31 December 2012 As reported £’000 63,566 (14,889) 48,677 48,368 Adjusting item £’000 (2,300) 2,300 - - As restated £’000 61,266 (12,589) 48,677 48,368 Year to 31 December 2012 As reported £’000 122,244 115,566 Adjusting item £’000 As restated £’000 (400) 121,844 936 116,502 124.5p 124.1p 1.0p 1.0p 125.5p 125.1p The Company owns either directly or indirectly 100% of the ordinary share capital of the following principal subsidiary undertakings: Name Ultra Electronics Limited Ultra Electronics USA Group Inc. Ultra Electronics Canada Inc. Place of registration or incorporation England and Wales USA Canada The principal activity of the subsidiary undertakings is the design, development and manufacture of electronic systems for the international defence and aerospace markets. A full list of subsidiary undertakings will be annexed to the Company’s next Annual Return filed with the Registrar of Companies. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 114 Ultra Electronics Holdings plc Statement of accounting policies in respect of the Group’s consolidated financial statements Statement of accounting policies In respect of the Group’s consolidated financial statements A summary of the Group’s principal accounting policies, all of which have been applied consistently across the Group throughout the current and preceding year, are set out below: Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”). The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore comply with Article 4 of the EU IAS regulations. Adoption of new and revised Standards The following IFRIC interpretations, amendments to existing standards and new standards have been adopted in the current year but have not impacted the reported results or the financial position: • IFRS 13 “Fair Value Measurement” The following standards were also adopted in the current year and have had the impact as set out below: • IAS 1 “Presentation of Items of Other Comprehensive Income” • IAS 19 (revised 2011) “Employee Benefits” The amendments to IAS 1 require items of other comprehensive income to be grouped by those items that will be reclassified subsequently to profit or loss and those that will never be reclassified, together with their associated income tax. The amendments have been applied retrospectively, and hence the presentation of items of comprehensive income has been restated to reflect the change. The amendment affected presentation only and had no impact on the Group’s financial position or performance. IAS 19 (revised 2011) has impacted the accounting for the Group’s defined benefit pension scheme by (i) replacing the interest cost and expected return on plan assets with a net interest charge on the net defined benefit liability, and (ii) reclassifying administration costs of the defined benefit scheme from finance costs to administration expenses. There is no change to the net pension liability or to net assets as a result of the change. The comparative profit and loss accounts have been restated. Further detail is set out in note 36. At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): • Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First Time Adopters • Amendments to IFRS 7 Financial Instruments: Disclosures: enhancing disclosures about the Transfers of Financial Assets, enhancing disclosures about offsetting of financial assets and financial liabilities and disclosures about the initial application of IFRS 9 • IFRS 9 Financial Instruments • IFRS 10 Consolidated Financial Statements • IFRS 11 Joint Arrangements • IFRS 12 Disclosure of Interests in Other Entities • IAS 27 (Revised) Separate Financial Statements • IAS 28 (Revised) Investments in Associates and Joint Ventures • Amendment to IAS 32 Financial Instruments: Presentation – Amendments to application guidance on the offsetting of financial assets and financial liabilities The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements of the Group, except for: • IFRS 9 Financial Instruments – This will introduce a number of changes in the presentation of financial instruments. • IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 (Revised) Separate Financial Statements and IAS 28 (Revised) Investments in Associates and Joint Ventures – This will introduce additional disclosures within the notes to the accounts. Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed. The consolidated financial information has been prepared on the historical cost basis except for derivatives and assets held for sale which are measured at fair value. Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate resources to continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the statement on Corporate Governance on page 58. Basis of consolidation The consolidated financial information includes the results, cash flows and assets and liabilities of Ultra Electronics Holdings plc (“the Company”) and its subsidiaries (together, “the Group”) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary that meet the conditions for recognition under IFRS 3 are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired is credited to the income statement in the period of acquisition. The results of subsidiaries acquired during the year are included in the consolidated income statement from the effective date of acquisition. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Ultra Electronics Holdings plc 115 Statement of accounting policies in respect of the Group’s consolidated financial statements (continued) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Goodwill arising on acquisitions before the date of transition to IFRSs has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and will not be included in determining any subsequent profit or loss on disposal. Investments in associates An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Revenue recognition Revenue from the sale of goods is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are normally recognised when goods are delivered and title has passed. Revenue from contracts to provide services is recognised by reference to the stage of completion of the contracts in the same way as for long-term contracts. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Revenue from long-term contracts is recognised in accordance with the Group’s accounting policy on long-term contracts (see accounting policy ‘Long-term contracts’). Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Long-term contracts Where the outcome of a long-term contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer, or when it is considered probable that the customer will approve the variation and the amount of revenue arising from the variation. Where the outcome of a long-term contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Foreign currency Transactions denominated in foreign currencies are recorded in the local currency at the actual exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the income statement. The trading results and cash flows of overseas undertakings are translated into sterling, which is the functional currency of the Company, using the average rates of exchange during the relevant financial period. The balance sheets of overseas subsidiary undertakings are translated into sterling at the rates ruling at the year-end. Exchange differences arising from the retranslation of the opening balance sheets and results are classified as equity and transferred to the Group’s translation reserve. Goodwill and fair value adjustments on the acquisition of foreign entities are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on acquisitions before the date of transition to IFRSs as sterling denominated assets and liabilities. Borrowing costs Borrowing costs are recognised in profit or loss in the period in which they are incurred, except where they relate to qualifying assets, in which case they are capitalised. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 116 Ultra Electronics Holdings plc Statement of accounting policies in respect of the Group’s consolidated financial statements (continued) Government grants Government grants are recognised in the income statement so as to match them with the expenditure towards which they are intended to contribute, to the extent that the conditions for receipt have been met and there is reasonable assurance that the grant will be received. Government assistance provided in the form of below market rate of interest loans are treated as government grants. The benefit of the below market rate of interest is calculated as the difference between the proceeds received and the fair value of the loan and is matched against the related expenditure. The fair value of the loan is calculated using prevailing market interest rates. Retirement benefit costs The Group provides pensions to its employees and Directors through defined benefit and defined contribution pension schemes. The schemes are funded and their assets are held independently of the Group by trustees. For defined benefit retirement schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. The actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement and presented in the statement of comprehensive income. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Payments to defined contribution retirement schemes are charged as an expense as they fall due. Research and development Expenditure on research activities is recognised as an expense in the period in which it is incurred. Any internally generated intangible asset arising from development activities is recognised only if an asset is created that can be identified, it is probable that the asset created will generate future economic benefit and the development cost of the asset can be measured reliably. Internally generated assets are amortised on a straight-line basis over their useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Other intangible assets Costs associated with producing or maintaining computer software programmes for sale are recognised as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Group, that will generate economic benefits exceeding costs beyond one year and that can be measured reliably, are recognised as intangible assets. Capitalised software development expenditure is stated at cost less accumulated amortisation and impairment losses. Amortisation is provided on a straight-line basis over the estimated useful life of the related asset. Acquired computer software licences for use within the Group are capitalised as intangible assets on the basis of the costs incurred to acquire and bring to use the specific software. Patents and trademarks are stated initially at historical cost. Patents and trademarks have definite useful lives and are carried at cost less accumulated amortisation and impairment losses. Intangible assets arising from a business combination whose fair value can be reliably measured are separated from goodwill and amortised over their remaining estimated useful lives. Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately, except for goodwill. Property, plant and equipment Property, plant and equipment is shown at original historical cost, net of depreciation and any provision for impairment. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life as follows: Freehold buildings Short leasehold improvements Plant and machinery Freehold land and assets under construction are not depreciated. 40 to 50 years over remaining period of lease 3 to 20 years Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Ultra Electronics Holdings plc 117 Statement of accounting policies in respect of the Group’s consolidated financial statements (continued) Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Rentals under operating leases, where the Group acts as either lessee or lessor, are charged on a straight line basis over the lease term, even if the payments are not made on such a basis. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Inventories Inventories are valued at the lower of cost (determined on a first-in, first-out basis and including an appropriate proportion of overheads incurred in bringing the inventories to their present location and condition) and net realisable value. Provision is made for any obsolete, slow moving or defective items. Trade receivables Trade receivables are measured at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. Cash and cash equivalents Cash and cash equivalents comprise cash in-hand, call deposits and bank overdrafts, where there is right of set off. Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances. Assets held for sale Assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Trade payables Trade payables are stated at their fair value. Loans and overdrafts Interest-bearing loans and overdrafts are recorded at the proceeds received, net of direct issue costs where there is a facility commitment. In these circumstances issue costs are deducted from the value of the loan and amortised over the life of the commitment. Where there is no facility commitment, issue costs are written-off as incurred. Finance charges including premiums payable on settlement or redemption are accounted for on an accruals basis in profit or loss using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Share-based payments The Group issues equity settled share-based payments to certain employees. 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, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market related conditions. Fair value is measured by use of a Black-Scholes model for the share option plans and a stochastic model for awards made under the 2007 Long-Term Incentive Plan. The credits in respect of equity-settled amounts are included in equity. Provisions Provisions, including property related provisions are recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and where it is probable that an outflow of economic benefits will be required to settle the obligation. Provision is made for the anticipated cost of repair and rectification of products under warranty, based on known exposures and historical occurrences. Provisions for restructuring costs are recognised when the Group has a detailed formal plan for the restructuring that has been communicated to affected parties. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Taxation The tax expense represents the sum of the current tax payable and deferred tax. The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 118 Ultra Electronics Holdings plc Statement of accounting policies in respect of the Group’s consolidated financial statements (continued) Taxation (continued) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities. Derivative financial instruments Ultra uses derivative financial instruments, principally forward foreign currency contracts and interest rate swaps, to reduce its exposure to exchange rate and interest rate movements. Ultra does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments are recognised as assets and liabilities and measured at their fair values at the balance sheet date. Changes in their fair values are recognised in the income statement and this is likely to cause volatility in situations where the carrying value of the hedged item is not adjusted to reflect fair value changes arising from the hedged risk. Provided the conditions specified by IAS 39 are met, hedge accounting may be used to mitigate this income statement volatility. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Hedge accounting will not generally be applied to transactional hedging relationships, such as hedges of forecast or committed transactions. However, hedge accounting will be applied to translational hedging relationships where it is permissible under IAS 39. When hedge accounting is used, the relevant hedging relationships will be classified as fair value hedges, cash flow hedges or net investment hedges. Where the hedging relationship is classified as a fair value hedge, the carrying amount of the hedged asset or liability will be adjusted by the increase or decrease in the fair value attributable to the hedged risk and the resulting gain or loss will be recognised in the income statement where, to the extent that the hedge is effective, it will be offset by the change in the fair value of the hedging instrument. Where the hedging relationship is classified as a cash flow hedge or as a net investment hedge, to the extent that the hedge is effective, changes in the fair value of the hedging instrument will be recognised directly in equity rather than in the income statement. Any gain or loss relating to the ineffective portion is recognised immediately in the income statement. For cash flow hedges of forecasted future transactions, when the hedged item is recognised in the financial statements, the accumulated gains and losses recognised in equity will be either recycled to the income statement or, if the hedged items result in a non-financial asset, will be recognised as adjustments to its initial carrying amount. Income statement Additional line items are disclosed in the consolidated income statement when such presentation is relevant to an understanding of the Group’s financial performance. Operating profit Operating profit is stated after charging restructuring costs and after the share of results of associates but before investment income and finance costs. Non-statutory performance measures In the analysis of the Group’s operating results, earnings per share and cash flows, information is presented to provide readers with additional performance indicators that are prepared on a non-statutory basis. This presentation is regularly reviewed by management to identify items that are relevant to an understanding of the Group’s performance with reference to their materiality and nature. This additional information is not uniformly defined by all Companies and may not be comparable with similarly titled measures and disclosures by other organisations. The non-statutory disclosures should not be viewed in isolation or as an alternative to the equivalent statutory measure. Critical accounting judgements and key sources of estimation uncertainty When applying the Group’s accounting policies, management must make a number of key judgements involving estimates and assumptions concerning the future. These estimates and judgements are based on factors considered to be relevant, including historical experience, that may differ significantly from the actual outcome. The key assumptions concerning the future and other key sources of estimation uncertainty at the Balance Sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year include: CONTRACT REVENUE AND PROFIT RECOGNITION A significant proportion of the Group’s activities are conducted under long term contract arrangements and are accounted for in accordance with IAS 11 Construction Contracts. Revenue and profit on such contracts are recognised according to the stage of completion of the contract activity at the balance sheet date of the particular contract and are calculated by reference to reliable estimates of contract revenue and expected costs. Expected costs are calculated after taking account of the perceived contract risks related to performance not yet proven. Ultra Electronics Holdings plc 119 Statement of accounting policies in respect of the Group’s consolidated financial statements (continued) Critical accounting judgements and key sources of estimation uncertainty (continued) CONTRACT REVENUE AND PROFIT RECOGNITION (CONTINUED) Owing to the complexity of some of the contracts undertaken by the Group the cost estimation process requires significant judgement and is carried out using the experience of the Group’s engineers, project managers and finance and commercial professionals. Because of the level of judgement required, cost estimates are reviewed and updated on a regular basis using the Group’s established project management processes. Some of the factors that will impact upon cost estimates include the availability of suitably qualified labour, the nature and complexity of the work to be performed, the availability of materials, the impact of change orders and the performance of sub-contractors. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense. Where services are rendered, sales are recognised when the stage of completion of the services and the related revenue and costs can be measured reliably. Where goods are delivered under arrangements not considered to fall under the scope of IAS 11 Construction Contracts, revenue is recognised when substantially all of the risks and rewards of ownership have transferred to the customer. RETIREMENT BENEFIT PLANS The Group accounts for its post-retirement pension plans in accordance with IAS 19 Employee Benefits. For defined benefit retirement plans, the cost of providing benefits is determined periodically by independent actuaries and charged to the income statement in the period in which those benefits have been earned by the employees. Actuarial gains and losses are recognised in full in the period in which they arise and are recognised in the statement of comprehensive income. The retirement benefit obligation recognised in the balance sheet represents the present value of the scheme liabilities as reduced by the fair value of the scheme assets. The main assumptions used in determining the defined benefit post retirement obligation include the discount rate used in discounting scheme liabilities, the inflation rate, the expected rate of salary inflation, the expected rate of future pension increases, expected returns on scheme assets and future mortality assumptions. For each of these assumptions, there is a range of possible values. Relatively small changes in some of these variables can have a significant impact on the level of the total obligation. The valuation of pension scheme assets and liabilities at a specific point of time rather than over a period of time can lead to significant annual movements in the pension scheme deficit as calculated under IAS 19, but has no impact on short-term cash contributions since these are based upon separate independent actuarial valuations. Details of the pension scheme assumptions and obligation at 31 December 2013 are provided in note 31. INTANGIBLE ASSETS IFRS 3 (revised) Business Combinations requires that goodwill arising on the acquisition of subsidiaries is capitalised and included in intangible assets. IFRS 3 (revised) also requires the identification of other intangible assets at acquisition. The assumptions involved in valuing these intangible assets requires the use of estimates and judgements, that may differ from the actual outcome. These estimates and judgements cover future growth rates, expected inflation rates and the discount rate used. GOODWILL Each year the Group carries out impairment tests of its goodwill balances which requires estimates to be made of the value in use of its cash generating units (CGU’s). These value in use calculations are dependent on estimates of future cash flows and long-term growth rates of the CGU’s. Further details on these estimates are provided in note 13. INCOME TAXES In determining the Group’s provisions for income tax and deferred tax it is necessary to consider transactions in a small number of key tax jurisdictions for which the ultimate tax determination is uncertain. To the extent that the final outcome differs from the tax that has been provided, adjustments will be made to income tax and deferred tax provisions held in the period the determination is made. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 120 Ultra Electronics Holdings plc Company balance sheet Company balance sheet 31 December 2013 Fixed assets Tangible assets Investments Current assets Debtors: Amounts falling due within one year Cash at bank and in hand Creditors: Amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: Amounts falling due after more than one year Net assets Capital and reserves Called-up share capital Share premium account Profit and loss account Own shares Shareholders’ funds Note 39 40 41 2013 £’000 2012 £’000 879 650,885 1,057 555,682 651,764 556,739 10,242 - 10,242 5,776 - 5,776 43 (124,334) (103,944) (114,092) (98,168) 537,672 (68,327) 458,571 (49,701) 469,345 408,870 3,490 53,908 414,528 (2,581) 3,470 48,752 359,229 (2,581) 469,345 408,870 44 46 47 47 47 The financial statements of Ultra Electronics Holdings plc, registered number 02830397, were approved by the Board of Directors and authorised for issue on 28 February 2014. On behalf of the Board R. Sharma, Chief Executive M. Waldner, Finance Director The accompanying notes are an integral part of this balance sheet. Notes to accounts – Company 31 December 2013 38 Staff costs Employee costs during the year amounted to: Wages and salaries Social security costs Other pension costs The average number of persons employed by the Company during the year was as follows: Support services 39 Tangible fixed assets Cost At 1 January 2012 Additions At 1 January 2013 Additions At 31 December 2013 Accumulated depreciation At 1 January 2012 Charge At 1 January 2013 Charge At 31 December 2013 Net book value At 31 December 2013 At 31 December 2012 40 Investments Ultra Electronics Holdings plc 121 Notes to accounts – Company 2013 £’000 3,615 353 7,724 2012 £’000 3,376 271 7,424 11,692 11,071 2013 number 21 2012 number 22 Plant and machinery £’000 1,946 80 2,026 - 2,026 767 202 969 178 1,147 879 1,057 a) Principal subsidiary undertakings The Company owns either directly or indirectly 100% of the ordinary share capital of the following principal subsidiary undertakings: Name Ultra Electronics Limited Ultra Electronics USA Group Inc. Ultra Electronics Canada Inc. Place of registration or incorporation England and Wales USA Canada The principal activity of the subsidiary undertakings is the design, development and manufacture of electronic systems for the international defence and aerospace markets. A full list of subsidiary undertakings will be annexed to the Company’s next Annual Return filed with the Registrar of Companies. b) Investment in subsidiary undertakings At 1 January 2013 Foreign exchange differences Additions At 31 December 2013 Total £’000 555,682 (2,870) 98,073 650,885 The additions in the year related to the acquisitions of the ordinary share capital of Varisys Limited and Wood & Douglas Holdings Limited, as set out in note 32 to the Group financial statements, and to a further investment in an intermediate Group holding company. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 122 Ultra Electronics Holdings plc Notes to accounts – Company (continued) 41 Debtors Amounts falling due within one year: Amounts due from subsidiary undertakings Deferred tax assets Other debtors Prepayments and accrued income VAT 42 Deferred tax Movements in the deferred tax asset were as follows: Beginning of year Charge to the profit and loss account End of year The deferred tax balances are analysed as follows: Other temporary differences relating to current assets and liabilities Deferred tax asset These balances are shown as follows: Debtors: Amounts falling due within one year At the balance sheet date the Company had nil unprovided deferred tax (2012: nil). 43 Creditors: amounts falling due within one year Bank loans and overdraft Amounts owed to subsidiary undertakings Other creditors: – VAT – social security and PAYE – other creditors Accruals and deferred income The bank loans are unsecured. Interest was predominantly charged at 1.45% (2012: 1.5%) over base or contracted rate. 44 Creditors: amounts falling due after more than one year Borrowings Other creditors 2013 £’000 6,979 308 2,729 193 33 10,242 2013 £’000 670 (362) 308 2013 £’000 308 308 2013 £’000 308 2012 £’000 4,001 670 920 179 6 5,776 2012 £’000 1,074 (404) 670 2012 £’000 670 670 2012 £’000 670 2013 £’000 36,877 71,657 - 337 11,310 4,153 2012 £’000 63,474 21,262 - 250 16,971 1,987 124,334 103,944 2013 £’000 68,327 - 68,327 2012 £’000 43,295 6,406 49,701 The financial risk management objectives and policies of the Company are managed at a Group level; further information is set out in the Group financial statements. 45 Borrowings Borrowings fall due as analysed below: Bank loans and overdraft In one year or less, or on demand Less: included in creditors: amounts falling due within one year Amounts due after more than one year Bank loans Unsecured loan notes Ultra Electronics Holdings plc 123 Notes to accounts – Company (continued) 2013 £’000 36,877 36,877 2012 £’000 63,474 63,474 (36,877) (63,474) 25,975 42,352 68,327 - 43,295 43,295 The loan notes are unsecured and due for repayment in 2018 and 2019. Interest was charged at 3.60% (2012: 3.60%). 46 Called-up share capital Authorised: 5p ordinary shares Allotted, called-up and fully paid: 5p ordinary shares No. 2013 £’000 No. 2012 £’000 90,000,000 4,500 90,000,000 4,500 69,804,884 3,490 69,403,659 3,470 401,225 ordinary shares having a nominal value of £20,061 were allotted during the year under the terms of the Group’s various Share Option Schemes. The aggregate consideration received by the Company was £5,176,000. 47 Reserves and reconciliation of movement in shareholders’ funds Balance at 1 January Share based payments Retained profit for the year Dividends paid Long-Term Incentive Plan – additions Issue of new shares Balance at 31 December Called up share capital £’000 3,470 - - - - 20 3,490 Share premium account £’000 48,752 - - - - 5,156 53,908 Profit and loss account £’000 359,229 1,859 81,511 (28,071) - - 414,528 Own shares £’000 (2,581) - - - - - 2013 £’000 408,870 1,859 81,511 (28,071) - 5,176 2012 £’000 224,346 1,974 204,516 (26,877) - 4,911 (2,581) 469,345 408,870 The profit and loss account includes £188,222,000 (2012: £190,957,000) which is not distributable. A net foreign exchange loss of £2,059,442 was taken to reserves in the year. Further details in respect of dividends are presented in note 11 to the Group financial statements and share based payments in note 27 to the Group financial statements. The Company holds 235,245 own shares (2012: 235,245). 48 Guarantees and other financial commitments Lease commitments The minimum rentals for the next 12 months are as follows: Operating lease rentals which expire – within one year – between two to five years 49 Post balance sheet events Plant and machinery 2013 £’000 Plant and machinery 2012 £’000 25 41 66 27 38 65 On 2 January 2014 the Group agreed an amendment to extend the existing Prudential Investment Management, Inc (Pricoa) private shelf agreement for a three year period. Consequently loan notes can now be issued up until 2 January 2017. The amendment also increased the size of the shelf agreement so USD125 million of notes remain available for issue. n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 124 Ultra Electronics Holdings plc Statement of accounting policies for the Company accounts Statement of accounting policies for the Company accounts A summary of the Company’s principal accounting policies, which has continued to apply United Kingdom accounting standards, all of which have been applied consistently throughout the year and preceding year in the separate financial information presented for the Company, are set out below: Basis of accounting The Company accounts have been prepared under the historical cost convention and in accordance with applicable United Kingdom accounting standards. No profit and loss account is presented for the Company, as permitted by section 408 of the Companies Act 2006. The Company’s retained profit for the year is disclosed in note 47. Fixed assets and depreciation Tangible fixed assets are shown at original historical cost, net of depreciation and any provision for impairment. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life as follows: Plant and machinery 3 to 20 years Taxation UK Corporation tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred at the balance sheet date. Temporary differences are differences between the Company’s taxable profits and its results as stated in the financial statements. These arise from including gains and losses in tax assessments in different periods from those recognised in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing difference can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is not discounted. Retirement benefit costs The Company provides pensions to its employees and Directors through defined benefit and defined contribution pension schemes. The schemes are funded and their assets are held independently of the Group by trustees. The amount charged to the profit and loss account for defined benefit schemes is the estimated regular cost of providing the benefits accrued in the period adjusted to reflect variations from the cost. The regular cost is calculated so that it represents a substantially level percentage of current and future pensionable payroll. Any difference between the amount charged to the profit and loss account and contributions paid to the pension scheme is shown as a separately identifiable liability or asset in the balance sheet. Certain employees and Directors participated in the UK defined benefit scheme operated by Ultra Electronics Limited. Paragraph 9(b) of FRS 17 allows for a defined benefit scheme to be accounted for as a defined contribution scheme where there are multi-employers and one employer is unable to identify its share of the underlying assets and liabilities on a consistent and reasonable basis. The Ultra Electronics Limited defined benefit scheme has been accounted for on this basis. The deficit in the scheme at 31 December 2013 was £85.2 million (2012: £82.0 million). Further disclosures in relation to this pension scheme are given in note 31 to the Group financial statements. Payments to defined contribution pension schemes are charged as an expense as they fall due. Investments Fixed asset investments are shown at cost less provision for impairment. Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate resources to continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the statement on Corporate Governance on page 58. Foreign currency Transactions denominated in foreign currencies are recorded in the local currency at the actual exchange rates at the date of the transactions (or, where appropriate, at the rate of exchange in a related forward exchange contract). Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date (or, where appropriate, at the rate of exchange in a related forward exchange contract). Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the profit and loss account. Share-based payments The Company issues equity settled share-based payments to certain employees. 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, based on the Company’s estimate of shares that will eventually vest. Fair value is measured by use of an option pricing model, using the assumptions disclosed within the Group accounts in note 27. Related parties The Company has taken the FRS 8 (revised) exemption from disclosure of transactions between wholly-owned subsidiaries. Remuneration of the Directors is provided in the audited part of the Directors’ Remuneration Report on pages 69, 70 and 72. Loans and overdrafts Interest-bearing loans and overdrafts are recorded at the proceeds received, net of direct issue costs where there is a facility commitment. In these circumstances issue costs are deducted from the value of the loan and amortised over the life of the commitment. Where there is no facility commitment, issue costs are written-off as incurred. Finance charges including premiums payable on settlement or redemption are accounted for on an accruals basis in profit or loss using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Five-year review Financial highlights As restated* Revenue Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Total revenue Underlying operating profit1 Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Total underlying operating profit1 Margin1 Profit before tax Profit after tax Operating cash flow 2 Free cash flow before dividends, acquisitions and financing3 Net (debt)/cash at year-end 4 Underlying earnings per share (p) 5 Dividend per share (p) Ultra Electronics Holdings plc 125 Five-year review 2009 £m 180.0 193.5 277.5 651.0 22.4 23.5 51.0 96.9 2010 £m 174.1 224.0 311.9 710.0 23.3 27.4 59.3 2011 £m 166.1 257.0 308.6 731.7 30.9 30.4 60.4 2012 £m 147.0 315.8 298.0 760.8 30.6 44.9 46.3 2013 £m 155.5 305.0 284.7 745.2 32.4 41.2 48.1 110.0 121.7 121.8 121.7 14.9% 15.5% 16.6% 16.0% 16.3% 107.1 77.9 111.6 93.3 (28.7) 96.7 31.2 89.8 65.2 106.4 83.4 17.8 108.5 34.6 89.1 64.6 133.7 100.1 (46.1) 121.1 38.5 79.8 61.3 89.6 57.4 (43.0) 125.5 40.0 49.3 38.2 79.0 43.8 (42.2) 127.1 42.2 Average employee numbers 3,961 4,006 4,206 4,430 4,274 1 Before acquisition-related costs and amortisation of intangibles arising on acquisition, impairment of goodwill and profit on disposal of property, plant and equipment net of property-related provisions. 2 Cash generated by operations, and dividends from associates less net capital expenditure, R&D and LTIP share purchases. 3 Free cash flow before dividends, acquisitions and financing has been adjusted to include the purchase of LTIP shares, which are included in financing activities. 4 Loans and overdrafts less cash and cash equivalents. 5 Before acquisition-related costs, amortisation of intangibles arising on acquisition, impairment of goodwill, fair value movement on derivative financial instruments, defined benefit pension interest charges, profit on disposal of property, plant and equipment net of property-related provisions, loss on closing out foreign currency hedging contracts and unwinding of discount on provisions. *Comparatives have been restated following the introduction of IAS 19 (revised 2011). n o i t c u d o r t n I . 1 t r o p e r c i g e t a r t S . 2 e c n a n r e v o G . 3 i s l a c n a n fi p u o r G . 4 i s l a c n a n fi y n a p m o C . 5 w e i v e r r a e y - e v i F . 6 126 Ultra Electronics Holdings plc Annual Report & Accounts 2012 Ultra Electronics Holdings plc Annual Report and Accounts 2013 Financial highlights Revenue £745.2m KPI -2.1% (2012: £760.8m) Underlying earnings per share* 1. Introduction Group at a glance 7 1 0 . 0 7 3 1 . 7 7 6 0 . 8 7 4 5 . 2 6 5 1 . 0 127.1p KPI 1 2 5 . 5 1 2 7 . 1 1 2 1 . 1 1 0 8 . 5 9 6 . 7 2. Strategic report Chief Executive’s review Rakesh Sharma, Chief Executive +1.3% (2012: 125.5p) Business model Strategic tenets Ultra’s enablers Strategic objectives 09 10 11 12 13 09 10 11 12 13 Key Performance Indicators 02 04 06 12 14 16 18 23 28 30 32 34 38 40 44 48 50 52 60 63 75 77 78 82 83 83 84 85 Market analysis Financial review Mary Waldner, Group Finance Director Aircraft & Vehicle Systems Information & Power Systems Tactical & Sonar Systems Risk management Making a difference Developing Ultra’s people Sustainability 3. Governance Chairman’s statement Douglas Caster, Chairman Board of Directors Corporate Governance Report Audit Committee Report Remuneration Report Directors’ Report Executives and advisors 4. Group financials Independent auditor’s report Group highlights Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated cash flow statement Consolidated statement of changes in equity 86 Notes to accounts 87 Statement of accounting policies in respect of the Group’s consolidated financial statements 114 5. Company financials Company balance sheet Notes to accounts Statement of accounting policies for the Company accounts 6. Five-year review Five-year review 120 121 124 125 Dividend per share Underlying profit before tax* 42.2p +5.5% (2012: 40.0p) 4 2 . 2 4 0 . 0 3 8 . 53 4 . 6 3 1 . 2 £116.8m KPI 1 1 6 . 5 1 1 6 . 5 1 1 6 . 8 1 0 5 . 2 9 2 . 0 +0.3% (2012: £116.5m) 09 10 11 12 13 09 10 11 12 13 Underlying operating profit* £121.7m 1 1 0 . 0 9 6 . 9 Group order book £781.2m 1 2 1 . 7 1 2 1 . 8 1 2 1 . 7 9 5 0 . 38 1 7 . 9 9 0 5 . 0 7 8 1 . 2 7 6 1 . 8 -0.1% (2012: £121.8m) -13.7% (2012: £905.0m) 09 10 11 12 13 09 10 11 12 13 KPI = Key Performance Indicator, pages 16 and 17 for details Dividend The proposed final dividend is 29.5p, bringing the total dividend for the year to 42.2p (2012: 40.0p). This represents an annual increase of 5.5%, with the dividend being covered 3.0 times (2012: 3.1 times) by underlying earnings per share. If approved at the Annual General Meeting, the dividend will be paid on 2 May 2014 to shareholders on the register on 11 April 2014. Cautionary statement This document contains forward-looking statements which are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the countries and sectors in which the Group operates. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. *see footnote on page 1 For more information: www.ultra-electronics.com/ investors/irhome.php Business addresses Aircraft & Vehicle Systems Al Shaheen (49%) P.O. Box: 128630 Abu Dhabi United Arab Emirates Tel: +971 2 813 7444 www.alsa.ae AMI 5500 South State Street Ann Arbor, Michigan 48108 USA Tel: +1 734 302 7632 www.ultra-ami.com CEMS Waverley House Hampshire Road Weymouth, Dorset DT4 9XD England Tel: +44 (0) 1305 767100 www.ultra-cems.com Controls 417 Bridport Road Greenford, Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4444 www.ultra-controls.com ID Waverley House Hampshire Road Weymouth, Dorset DT4 9XD England Tel: +44 (0) 1305 767100 www.ultramagicard.com Measurement Systems Inc. 50 Barnes Park North Suite 102 Wallingford, Connecticut 06492 USA Tel: +1 203 949 3500 www.ultra-msi.com Precision Air & Land Systems Arle Court Cheltenham, Gloucestershire GL51 6PN England Tel: +44 (0) 1242 221166 www.ultra-pals.com Photography TEAM PHOTOGRAPH ON PAGES 28 & 30, BOARD OF DIRECTORS AND THROUGHOUT: Molyneux Associates TEAM PHOTOGRAPH ON PAGE 32: Alex MacAulay Photographers PLATFORMS/END APPLICATIONS COURTESY OF: BAE Systems, Boeing and US DoD Ultra Electronics Holdings plc Annual Report and Accounts 2013 Information & Power Systems AIRPORT & POWER SYSTEMS Airport Systems The Oaks Crewe Road Wythenshawe, Manchester M23 9SS England Tel: +44 (0) 161 946 3600 www.ultra-as.com EMS Development Corporation 95 Horseblock Road, Unit 2 Yaphank, New York 11980 USA Tel: +1 631 345 6200 www.ultra-ems.com Ithra (70%) PO Box 1162 PC111, Almattar CPO Al Seeb, Muscat Sultanate of Oman Tel: +968 2 434 3500 Nuclear Control Systems Innovation House Lancaster Road Ferndown Industrial Estate Wimborne, Dorset BH21 7SQ England Tel: +44 (0) 1202 850450 www.ultra-ncs.com Nuclear Sensors & Process Instrumentation 707 Jeffrey Way P.O. Box 300 Round Rock, Texas 78680-0300 USA Tel: +1 512 434 2800 www.ultra-nspi.com PMES Towers Business Park Wheelhouse Road Rugeley, Staffordshire WS15 1UZ England Tel: +44 (0) 1889 503300 www.ultra-pmes.com INFORMATION & INTELLIGENCE SYSTEMS Advanced Tactical Systems 4101 Smith School Road Building IV, Suite 100 Austin, Texas 78744 USA Tel: +1 512 327 6795 www.ultra-ats.com Command & Control Systems Knaves Beech Business Centre Loudwater High Wycombe, Buckinghamshire HP10 9UT England Tel: +44 (0) 1628 530000 www.ultra-ccs.com ProLogic 9400 Innovation Drive Manassas, Virginia 20110 USA Tel: +1 703 331 5922 www.ultra-prologic.com SOTECH 12011 Guilford Road Suite 111 Annapolis Junction, Maryland 20701 USA Tel: +1 301 470 7015 Tactical & Sonar Systems SONAR & UNDERSEA SYSTEMS Avalon Systems 12 Douglas Drive Technology Park Mawson Lakes Adelaide, South Australia 5095 Australia Tel: +61 (0) 8 8169 1200 www.ultra-avalon.com www.ultra-electronics.com.au Flightline Systems 7625 Omnitech Place Victor, New York 14564-9795 USA Tel: +1 585 924 4000 www.ultra-fei.com Maritime Systems 40 Atlantic Street Dartmouth, Nova Scotia B2Y 4N2 Canada Tel: +1 902 466 7491 www.ultra-ms.com Ocean Systems 115 Bay State Drive Braintree, Massachusetts 02184-5203 USA Tel: +1 781 848 3400 www.ultra-os.com Sonar Systems 419 Bridport Road Greenford, Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4567 www.ultra-sonar.com USSI 4868 East Park 30 Drive Columbia City, Indiana 46725-8861 USA Tel: +1 260 248 3500 www.ultra-ussi.com TACTICAL SYSTEMS 3eTI 9715 Key West Avenue Suite 500 Rockville, Maryland 20850 USA Tel: +1 301 670 6779 www.ultra-3eti.com AEP Knaves Beech Business Centre Loudwater High Wycombe, Buckinghamshire HP10 9UT England Tel: +44 (0) 1628 642600 www.ultra-aep.com Communication & Integrated Systems 419 Bridport Road Greenford, Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4567 www.ultra-cis.com GigaSat GigaSat Building Tring Business Centre Icknield Way Tring, Hertfordshire HP23 4JX England Tel: +44 (0) 1442 892000 TCS 5990 Côte de Liesse Montreal, Québec H4T 1V7 Canada Tel: +1 514 855 6363 www.ultra-tcs.com Registered Office: Ultra Electronics Holdings plc 417 Bridport Road Greenford Middlesex UB6 8UA England Tel: +44 (0) 20 8813 4321 Fax: +44 (0) 20 8813 4322 www.ultra-electronics.com information@ultra-electronics.com 2 1 1 3 5 2 2 4 2 1 ) 0 ( 4 4 + s e t a i c o s s A T A H : n g i s e D