Ultra Electronics Holdings plc Annual Report 2016

FY2016 Annual Report · Ultra Electronics Holdings plc

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Ultra Electronics Holdings plc
Annual Report and Accounts 2016

Why Ultra?
We enjoy solving tough
problems, beating our
competitors and making
a difference for our
customers, shareholders
and employees.

Financial highlights

Revenue

Underlying proﬁt before tax*

£785.8m +8.2%

£120.1m +6.8%

(2015: £726.3m)

(2015: £112.4m)

> KPI

Dividend per share

Underlying earnings per share*

47.8p +3.7%

134.6p +8.6%

(2015: 46.1p)

(2015: 123.9p)

> KPI

Underlying operating proﬁt*

IFRS operating proﬁt

£131.1m +9.3%

£89.7m +35.1%

(2015: £120.0m)

(2015: £66.4m)

Group order book

£799.3m +6.0%

(2015: £753.8m)

Dividend
The proposed ﬁnal dividend is 33.6p,
bringing the total dividend for the year to
47.8p (2015: 46.1p). This represents an
annual increase of 3.7%, with the dividend
being covered 2.8 times (2015: 2.7 times) by
underlying earnings per share. If approved at
the Annual General Meeting, the dividend
will be paid on 4 May 2017 to shareholders
on the register on 7 April 2017.

Operational highlights
• The award of an $18m contract to provide Electronic

Warfare equipment to a NATO country for use in unmanned
surveillance aircraft.

• Securing a £16m programme for the continued support of our
world-leading software-deﬁned encryption device (ECU RP) for
the UK Ministry of Defence (MoD).

• A $34.6m award for the critical infrastructure protection and

cyber security for US naval bases.

• Securing a $27m contract with Lockheed Martin for development
and production of an acoustic nose array for the US Navy Mark 48
(MK 48) torpedo programme.

• Successful delivery of a ship reﬁt and modernisation upgrade of
a Fatahillah-class corvette for the Indonesian Navy, and award of
a contract for the restoration and sustainment of two Philippines
Jacinto-class patrol vessels.

• A multi-year agreement for supply of Canadian sonobuoys to the

South Korean P-3C maritime patrol aircraft, worth Canadian $14.9m.

For more information:
www.ultra-electronics.com/
investors/irhome.php

1. Introduction

Group at a glance 02

2. Strategic report

Chief Executive’s review
Rakesh Sharma, Chief Executive 04

Business model 08

Strategies for growth 10

Standardisation & Shared Services 12

Market-facing segments 14

Financial review
Amitabh Sharma, Group Finance Director 22

Key Performance Indicators 28

Aerospace & Infrastructure 30

Communications & Security 32

Maritime & Land 34

Risk management 36

Making a difference 44

Developing Ultra’s people 46

Corporate and social responsibility 51

3. Governance

Board of Directors 54

Chairman’s governance statement
Douglas Caster, Chairman 56

Corporate Governance Report 57

Nomination Committee Report 67

Audit Committee Report 69

Remuneration Report 74

Directors’ Report 89

Executives and advisors 91

4. Group ﬁnancials

Independent auditor’s report 92

Group highlights 98

Consolidated income statement 99

Consolidated statement of
comprehensive income 99

Consolidated balance sheet 100

Consolidated cash ﬂow statement 101

Consolidated statement of changes in equity 102

Notes to accounts 103

Statement of accounting policies in respect of
the Group’s consolidated ﬁnancial statements 131

5. Company ﬁnancials

Company balance sheet 138

Company statement of changes in equity 138

Notes to accounts 139

Statement of accounting policies
for the Company accounts 142

6. Five-year review

Five-year review 143

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 144

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

What is Ultra?
The Ultra Electronics Group manages a wide range of specialist capabilities,
generating highly-differentiated solutions and products in the Defence & Aerospace,
Security & Cyber, Transport and Energy markets. We meet customer needs by applying electronic
and software technologies in demanding environments and meeting critical requirements.

Our vision
Why?
We enjoy solving tough problems, beating our competitors and
making a difference for our customers, shareholders and employees.

How?
We innovate to disrupt market dynamics.

What?
We offer superior solutions in regulated markets.

Our business model
The value we create through our business model
enables us to achieve our strategic objective.

Ultra has developed its vision using
the Simon Sinek Inc. “Golden Circle”.

e s 4

People a

d c

stainability See p a g

u
S

Portfolio
strength
See pages 4-21

t S

e pages 36-43

Focus on
customer need
See pages 4-21

1
9
-
4

e r n a nce See pages 5

d g

G o o

Objective
Outperform the
market in terms of
annual increases in
shareholder return

Operational
excellence

See pages 22-35

See full details of Ultra’s business
model on pages 8 and 9

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Group at a glance. How and where Ultra operates

How and where Ultra operates

2016 saw the embedding of Ultra’s three new Divisions; Aerospace & Infrastructure,
Communications & Security and Maritime & Land, through which it delivers and reports
its performance. Ultra’s Divisions deliver specialist capabilities to our key end markets of
Defence & Aerospace, Security & Cyber, Transport and Energy. The Group addresses
these end markets through eight distinct market segments, discussed on pages 14 to 21.

Ultra’s place
in the market

Where Ultra
operates

Ultra’s
customers

1 Defence &
Aerospace
2 Security &

Cyber

3 Transport &

Energy

1 United Kingdom 24
2 North America
52
3 Mainland Europe 10
4 Rest of the world 14

% of Group revenue by market

% of Group revenue by region

Ultra’s core markets remain North America
and the United Kingdom. In mainland
Europe the Group generally supplies
technologies that are unavailable from
indigenous suppliers, for example,
sonobuoys. Given this relatively low exposure
to mainland Europe, the UK decision to exit
the EU (BREXIT) has not had a signiﬁcant
speciﬁc impact on the Group, global
macroeconomic impacts aside. Elsewhere in
the world, the Group has developed strategic
positions in its target regions of Australia,
the Middle East, India, and (for non-defence
products) China, while continuing to pursue
individual opportunities and business
relationships in many other nations. Looking
ahead, Japan is considered a promising
market for Ultra. These core markets and
target regions allow Ultra to access the
largest addressable defence and security
budgets in the world, positioning for long-
term growth through well-considered
partnerships and government relationships.

Ultra continues to focus on its main markets
of Defence & Aerospace, Security & Cyber,
Transport and Energy. To explain its wide
portfolio of capabilities more effectively, the
Group uses market segmentation. Each of
the eight segments generate highly-
differentiated, cost-effective and proven
technologies at the system, sub-system and
component level. These technologies are often
fundamental to the performance, safety or
mission success of the platforms in which they
are incorporated, making Ultra a critical supplier
on many complex platforms, enjoying long-
term positions.

The segment structure allows Ultra to harness
the capabilities of its 19 businesses together,
providing technical expertise and domain
knowledge to deliver the adaptable,
comprehensive and cost-effective solutions
customers demand. Where required, the Group
will seek partners with best-of-breed suppliers
to offer a more complete solution and will
seamlessly “lead or follow” as a non-
threatening mid-tier company in order to satisfy
customer needs. Equally, individual businesses
continue to develop and supply the speciﬁc
high-end technologies for which they are well
known, providing the agility and responsiveness
of a smaller, autonomous business unit. To
maintain its position, the Group harnesses both
internal and customer-funded research and
development, tailoring its solutions to changing
customer needs and budgets. This sustains the
Group’s reputation as an innovative supplier of
enabling technology.

US DoD

UK MoD

Lockheed Martin

BAE Systems

Boeing

Australian DoD

Northrop Grumman

US Alcohol, Tobacco & Firearms
Raytheon

EDF Energy

Thales

Rolls Royce

Level 3 for US Navy

Airbus
UTC

This market position, together with Ultra’s
independence, allows the Group to work
closely with the world’s prime contractors in
our chosen markets. The chart above shows
Ultra’s major customers, including the US
Department of Defense (DoD), the UK
Ministry of Defence (MoD) and Lockheed
Martin. The Group supplies to a wide range
of project ofﬁces, integrated project teams
and platform teams, having a larger number
of different partners and customers than the
chart might at ﬁrst suggest, and executing
against tens of thousands of contracts and
production orders on an annual basis.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

See Ultra’s business model
on pages 8 and 9

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group at a glance. How and where Ultra operates

Aerospace
& Infrastructure

Communications
& Security

Maritime
& Land

2
3

26%

25%

33%

7 8

30%

41%

45%

% of Group revenue

% of Group profit*

% of Group revenue

% of Group profit*

% of Group revenue

% of Group profit*

Market segments

1. Aerospace

2. Infrastructure

3. Nuclear

4. Communications

5. C2ISR+

6. Underwater warfare

7. Maritime

8. Land

Revenue

£204.7m +6.0%

£259.0m +8.2%

£322.1m +9.6%

2015: £193.2m

2015: £239.3m

2015: £293.8m

Underlying operating profit*

£32.4m +12.9%

2015: £28.7m

Order book

£39.7m

2015: £40.4m

Order book

-1.7%

£59.0m +15.9%

2015: £50.9m

Order book

£267.8m +0.9%

£227.0m +6.2%

£304.5m +10.8%

2015: £265.4m

2015: £213.7m

2015: £274.7m

+ Command & Control, Intelligence,
Surveillance and Reconnaissance
Ultra’s Cyber capabilities sit primarily in C2ISR and
Communications, but run across all eight segments

For more information on Ultra’s
Divisions see pages 30-35

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Chief Executive’s review

Chief Executive’s review

“

We are well
prepared to exploit
the challenges and
opportunities in our
market and return
Ultra to growth.

”

Rakesh Sharma
Chief Executive

A year of surprises
and opportunities
2016 will be remembered as a year of shocks
and surprises. The UK electorate’s surprise
decision to exit the European Union (BREXIT)
was a result that continues to cause UK
businesses uncertainty. Despite having a less
immediate impact on the national economy,
concerns remain regarding long-term UK
inﬂation and currency instability as the details
of withdrawal emerge. Ultra is largely
insulated from the direct impacts of BREXIT,
with exports from the UK to mainland Europe
contributing just 7% of Group revenue, and
minimal dependency on the free movement
of skilled staff. Indeed, our much greater
exposure to the US should provide
reassurance to our investors during a period
of such uncertainty.

The US election provided the second major
shock of the year with the full implications
yet to be realised. However, there is now a
strong expectation in the market of a return
to growth of about 3% in the defence sector,
fuelled by increased US defence spending.
This will need to be enabled by the expected
early repeal of the Budget Control Act and
action to achieve an agreed defence budget
for FY17. President Trump is also insistent
that those allies living under a US defence
umbrella “pay their way”, implying increased
defence expenditure in those nations. Initial
signs of the new Administration’s
commitment to closer working with the UK,
on both trade and defence, are also positive
indicators for Ultra given that they represent
Ultra’s two largest markets.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Chief Executive’s review

Portfolio strength focused on customer need

Group order book +6.0%

£799.3m (2015: £753.8m)

2016

2015

2014

2013

2012

799.3

753.8

787.3

781.2

905.0

Underlying earnings per share* +8.6%

134.6p (2015: 123.9p)

2016

2015

2014

2013

2012

Dividend per share +3.7%

47.8p (2015: 46.1p)

2016

2015

2014

2013

2012

> KPI

134.6

123.9

123.1

127.1

125.5

47.8

46.1

44.3

42.2

40.0

In the UK, major programmes are on a
sounder footing after the comprehensive
Strategic Defence and Security Review (SDSR)
2016, but budgets remain taut. This
budgetary pressure can translate into cash
ﬂow constraints at the mid-tier of the supply
chain as the Government and primes attempt
to control spending. We have seen a growing
trend of limited funding approvals and delays
in programmes. That being said, our key
positions on major platforms, such
as the Joint Strike Fighter (JSF) and the
“Dreadnought” submarine, underpin our
longer-term performance.

Globally, the range of conﬂicts and tensions
in Asia, Eastern Europe and the Middle East
are expected to result in increased defence
spending in these regions; more so as oil
prices recover. Many nations are already
upgrading their military and security
capabilities, providing opportunities for Ultra
in our areas of strength: communications,
ISTAR** and cyber protection. Competition in
these markets is ﬁerce and procurement
processes extended, so contract awards are
less predictable than in our core markets.
Extensive delays in order intake are not
unusual and can disrupt short-term
performance. To mitigate this uncertainty our
efforts remain focused, selecting target
programmes and in-country partners with
great care. Currently, we see India, Australia,
Japan, the Middle East, and (for non-defence
products) China as important regions to
prioritise marketing efforts.

Increasing efﬁciency
There is a general consensus that the
commercial aerospace market has peaked in
orders and is approaching a manufacturing
highpoint. Ultra has already responded to this
expected change by signiﬁcantly reducing its
investment in development of new
capabilities, choosing instead to focus
resources on production efﬁciency. Strong
positions on many aircraft types, now
stepping up production rates to meet existing
orders, will underpin performance for several
years. Where we are able to readily adapt our
existing technologies for new opportunities,
we will do so. China will become an
increasingly important market for commercial
aviation and our long-established joint
venture partnership with Top-Scientiﬁc Inc.
will allow us good access to these large
commercial opportunities. The year saw some
important decisions made on the future of
the UK nuclear electricity generation
programme: we continue to work with the
UK Government and major industrial
participants to demonstrate how Ultra can
provide a signiﬁcant, UK-based contribution
to these long-term projects. Our relationship
with EDF remains excellent, culminating in the
award of EDF Energy’s “UK Supplier of the
Year” award. I am also very pleased by our
partnership with NuScale, which will see Ultra
responsible for developing the safety and
sensor suites for the ﬁrst Small Modular
Reactors (SMRs) to seek regulatory approval.

“

Our relationship

with EDF remains
excellent, culminating
in the award of EDF
Energy’s “UK Supplier
of the Year”award.

”

**Intelligence, Surveillance, Target
**Acquisition and Reconnaissance

**see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Chief Executive’s review

Chief Executive’s review (continued)

“

We will continue

to retain a core of
capability at Tiers 3
and 4, with most Ultra
businesses reﬂecting
this focus.

”

Delivering excellence
During our annual Business Leaders
Conference, I sought my senior team's view
on the core question of why we do what do,
as more important than who we are and
what we do. The “Why” we developed from
our own discussions is set out on the front
cover of this report and neatly captures
Ultra’s fundamental culture (see also page 1).
We are disruptors in the marketplace. Simply
put, this means that Ultra is always looking
for a new approach or a new method that
utilises our technology to displace the
incumbent supplier, through innovative and
adaptive solutions.

Achieving this still depends upon the
innovation and agility of our businesses, which
stems from their autonomy. Ultra businesses
retain great freedom to make decisions and
react quickly to market opportunities, while
meeting their budget goals. Over the past two
years, we have enhanced this responsiveness
by restructuring into three Divisions (pages 30-
35) which reﬂect the eight market segments
we face. This structure has increased the level
of collaboration across the Group, improving
shared understanding of Ultra’s capabilities
and the market as a whole, resulting in greater
opportunities to provide well-matched
solutions to customer needs. This approach
has led to some further consolidation, from
24 businesses in 2015 to the current 19,
where businesses face a similar customer
set and have complementary capabilities.
An additional beneﬁt to these selective
consolidations is the generation of a small
number of larger businesses that are capable
of taking on larger opportunities at a Tier 2
level (deﬁned on page 8), with the greater
depth, experience and skill set that a
larger-scale business allows us to attract
into our management teams. We will
continue to retain a core of capability at
Tiers 3 and 4, with most Ultra businesses
reﬂecting this focus.

In 2016 we made our ﬁrst signiﬁcant
disposal, with the sale of the ID Card
business for £22m. This important exercise
of discipline demonstrates the greater
attention we are paying to the development
of our capability portfolio across the Group,
as we reposition to achieve long-term
growth. Acceleration of the integration of
Herley and an excellent cash conversion rate
has quickly reduced the Group’s leverage to
a point where we can actively consider our
next signiﬁcant acquisition.

Our Standardisation & Shared Services (S3)
workstreams continue to make good progress
(see pages 12-13). Importantly, this
programme does not reduce business
autonomy but instead brings together non-
differentiating activities (including HR, ﬁnance
and IT) into a single hub and service provider.
Individual businesses retain expert roles in
order to support managerial decisions and to
be “demanding customers” for S3 services.

In 2016 I was delighted to welcome the return
of Amitabh Sharma to the Head Ofﬁce, where
he succeeded Mary Waldner as Group Finance
Director. When he was with Ultra previously,
Amitabh was formative in the development of
many of Ultra’s ﬁnancial control systems, so his
transition into the lead ﬁnancial role has been
very swift. He brings an important insight,
rigour and discipline to our ﬁnancial processes
and is leading the S3 programme.

In 2016 we made our ﬁrst signiﬁcant disposal.

”

“

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Chief Executive’s review

Portfolio strength focused on customer need

Operational highlights
• The award of an $18m contract to

provide Electronic Warfare equipment
to a NATO country for use in
unmanned surveillance aircraft.

• Securing a £16m programme for the

continued support of our world-leading
software-deﬁned encryption device
(ECU RP) for the UK Ministry of
Defence (MoD).

• A $34.6m award for the critical

infrastructure protection and cyber
security for US naval bases.

• Securing a $27m contract with Lockheed

Martin for the development and
production of an acoustic nose array for
the US Navy MK 48 torpedo programme.

• Successful delivery of a ship reﬁt and

modernisation upgrade of a Fatahillah-
class corvette for the Indonesian Navy,
and award of a contract for the
restoration and sustainment of two
Philippines Jacinto-class Patrol Vessels.

• A multi-year agreement for supply of
Canadian sonobuoys to the South
Korean P-3C maritime patrol aircraft,
worth Canadian $14.9m.

Return to growth
In such a turbulent year in terms of global
surprises, I am pleased to report these sound
results which reﬂect the disciplined approach
we have taken to the restructuring of the
Group and control of our costs. Through our
focused approach to the market, continuing
investment in developing highly-differentiated
technology capabilities and further reﬁnement
of our portfolio, we are well prepared to
exploit the challenges and opportunities in
our markets and return Ultra to growth. In the
prevailing markets the Executive Team will
maintain a careful balance between
performance during the year and investing
and positioning for longer-term growth. Our
recent restructuring provides us with a much
better framework within which to make these
judgements, while the S3 programme and
continuing discipline within businesses
ensures we control our costs effectively.

None of this happens without immense effort
from across the entire workforce. 2016 has
been another challenging year for all our
businesses and the positive results reﬂect a
huge amount of hard work and commitment
by every one of the Group’s 4,466 employees.
In all the disciplines of the Group –
management, engineering, production,
marketing, HR and ﬁnance – people continue
to improvise, adapt and overcome. No one is
standing still or taking their revenue or market
for granted. It is that strength in people that
gives me the conﬁdence that we will return to
growth and ensure the Group’s continuing
success for the future.

Rakesh Sharma
Chief Executive

Ultra’s track record of delivering
above-average shareholder returns (pence)

250

200

150

100

Ultra Electronics Holdings plc
FTSE all share price index
FTSE 100 price index
FTSE 250 price index
FTSE all share aerospace/defence

KPI

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

KPI

= Key Performance Indicator,
see pages 28-29 for details

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Business model

Business model

The value Ultra creates through its business model enables it to
achieve its primary objective: to outperform the market in terms
of annual increases in shareholder return.

Ultra faces the market
with portfolio strength

Eight distinct and wide-ranging
market segments

Ultra constantly innovates
to meet customer needs

Focus on Tiers 2-4

Ultra has no strategic intent to be a Tier 1,
top-level platform provider. Therefore, the
Group is non-threatening to the Tier 1
prime contractors, for example, BAE Systems
or Boeing, and so counts them amongst its
key customers. As such, Tier 1 contractors
can rely on Ultra to provide the specialist
capabilities at which the Group is expert,
rather than regarding us as a competitor.

Ultra’s specialist capabilities are mainly at
Tiers 3 and 4, supplying equipment and
components to support Tiers 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 where it understands the
detailed Tier 3 interfaces and so is able to
manage the risk inherent in system
integration activities.

Tier 1

Tier 2

Tier 3

Tier 4

Clearly defined market segments allow Ultra
to provide more complex offerings from
across the full range of the Group’s
capabilities, rather than only supplying
individual products from single businesses.
This approach establishes a framework that
aligns resources to greater effect across each
market-facing segment and utilises the most
effective customer relationship. In turn, this
supports the development of coherent
strategies against particular end markets,
based upon collective market research and
opportunity capture. The market segment
approach provides the Group with improved
analysis at an appropriate level of
complexity, thus allowing Ultra to better
manage and prioritise the Group’s
investments, including Research and
Development (R&D) alignment and
acquisition strategy.

Acquisition and divestment to
position in growth markets

Ultra invests in targeted acquisitions to
further strengthen its portfolio and will
dispose of capabilities that no longer ﬁt
within the portfolio. The Group invests in
acquisitions that develop and apply domain
expertise, capabilities and technical
synergies in common end markets. Ultra’s
deep understanding of the users’ domain,
its enduring customer relationships, and its
outward-facing nature inform the Group’s
investment decisions.

Innovative solutions focused
on customer need

Ultra creates value by generating innovative
solutions from across its portfolio and by
becoming a key partner in its customers’
design process ensuring their needs are met.

Ultra businesses innovate constantly to
create solutions for customers – often
through highly specialised, disruptive
technological innovation – which are
different from, and better than, those of the
Group’s competitors.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

staina bilit y

u
S

Portfolio
strength

People a

Customer
need

Objective

Operational
excellence

d g o vernanc

G o

ent

Ultra aims to invest 5% of revenue in
R&D to develop new offerings and its
customers typically invest a further 15%

Ultra aims to maintain investment at 5% or
more of its revenue on innovation, new
products and business development. In
addition, over 14% of Group revenue is
customer-funded product development. In
total over 18% of revenue spend is focused
on enhancing the portfolio of capabilities
and programme positions which underpin
further growth.

Funded by:
(cid:1) Group

(cid:1) Customer

23%
77%

Where the Group has
complementary capabilities, it
can combine these to offer more
comprehensive and innovative
solutions. This means that Ultra’s
products, capabilities and the
associated domain expertise
uniquely position the Group to
be able to meet more complex
and demanding system and sub-
system requirements.

Tier 1. Platform provider
Responsible for being the prime contractor
of the platform in question, examples being
a naval ship or a terminal at an airport.

Tier 2. Sub-system integrator
Responsible for integrating equipment or
components that will make up a functional
element of the platform. Examples of
system integration completed by Ultra
include the 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 sonobuoys.

Tier 4. Component supplier
Ultra also provides a broad range of smaller
components for many programmes worldwide,
including sensors for measuring the
performance of a nuclear reactor and joysticks
to control unmanned aerial vehicles (UAVs).

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Business model

Portfolio strength focused on customer need

Form external partnerships to develop
the best solutions for customers

Ultra has an established capability to partner
and team (both internally and externally) in
order to offer the best-of-breed technologies
which meet its customers’ requirements as
closely as possible. The Group is agnostic as
to the source of technology which is required
to deliver these solutions. Where proven
technology exists outside the Group that
meets customers’ requirements, Ultra will
readily form external teaming partnerships to
access it. Ultra sees these teaming
arrangements as a source of competitive
advantage, allowing it to deliver
differentiated solutions which meet customer
needs efficiently. By working together, Ultra
businesses are able to win opportunities
which would not be possible in isolation.

Ultra is continually evolving its approach
in response to:
• changing customer demands
• anticipating the direction of travel of

the markets

• striving to be the first to bring new

solutions to market.

In its specialist capability areas, a key
differentiator for the Group is its
understanding of the:
• customers’ domains
• demanding operational environments
• projected capability gaps which
customers would like addressed.

In short, Ultra’s understanding of the
customers’ needs allows it to develop effective
and innovative solutions.

Customer
“problem
statement”

Ultra’s
solution

3rd-party
technology

Maintaining Ultra’s
operational excellence

Agility through a devolved organisation

A key differentiator for Ultra is the agility
that businesses in the Group exhibit in their
customer relationships.

The Board delivers effective leadership
and direction in achieving the key corporate
objective of reliable and consistent growth
in shareholder value. At an operational
level, the Executive Team is responsible for
running the Group, for the delivery of
strategy, for financial performance and for
team development.

To ensure it provides the exceptionally agile
and responsive support to customers and
partners that is normally associated with a
smaller business, Ultra’s individual
businesses have a high degree of
operational autonomy. The agility of the
individual businesses is enhanced by access
to wider and complementary technologies
and expertise that lie elsewhere in the
Group (collaborative autonomy) and by
Ultra’s strong financial position.

Ultra’s businesses are focused on
helping customers identify their true
needs while developing long-term
relationships. This enables the Group
to be an excellent and strategic supplier
to its customers.

Ultra’s LAUNCH is a set of behaviours
developed by the Group to facilitate customer
engagement and relationship building.

LAUNCH is a way for Ultra’s businesses to
generate long-term customer relationships
which lead to a better pipeline of
opportunities and ultimately, enables
growth. This approach ensures Ultra
understands the real needs of its customers
and encourages a long-term strategic
relationship where Ultra businesses become
part of the customers’ extended enterprises,
to mutual benefit.

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

19
AUTONOMOUS
BUSINESSES

RESPONSIBLE FOR:

MANAGING THE INDIVIDUAL BUSINESS
DEVELOPING AND IMPLEMENTING
COMPETITIVE STRATEGIES
WINNING AND EXECUTING BUSINESS
DEVELOPING PEOPLE
WORKING IN PARTNERSHIP

Achieving operational efﬁciency
through engaged competent people
with domain expertise

Ultra believes that the right people, who
embrace and sustain Ultra’s culture and
who have the domain expertise, are its
most important asset in successfully
enabling the Group to deliver value to
its stakeholders.

Ultra’s business model is underpinned by:

Sustainability. Pages 44-45

Ultra’s people
and culture. Pages 46-53

Risk management. Pages 36-43

Find out more about LEAP
and LAUNCH on page 47

Good governance. Pages 54-91

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Strategies for growth

Ultra’s four strategies for growth

Ultra’s objective is to add long-term shareholder value, as measured
by market capitalisation and the Group’s ranking in the FTSE index,
more rapidly than other companies in order to outperform the
market. This will be 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.

1
Increase the Group’s portfolio
of specialist capability areas

• Concentrate on providing customers

with capabilities and systems

• Offer electronic and software solutions

in niche markets

• Focus on developing specialist

capabilities with demanding and critical
requirements

• Provide specialist solutions, often for

demanding environments

2
Increase the number of long-term
platforms and programmes on
which Ultra’s specialist capabilities
are speciﬁed

• Identify new platforms and

programmes to apply Ultra capabilities

• Platform lives are typically 30 to

50 years which provides a long-term
“ﬂywheel” effect

• Enables resilient ﬁnancial performance

despite market ﬂuctuation

3
Broaden customer base

• Independence allows portfolio
to be sold to a broad range of
customers globally

• Supply to different project ofﬁces,
teams and platform teams within
wider customer relationships

• Build on largest customers,

including: US DoD, UK MoD,
Lockheed Martin, BAE Systems,
Boeing and Australian DoD

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

4
Widen geographic footprint

• Increased access to two of the

largest addressable defence budgets
in the world

• The US still spends more on

defence each year than other
nations combined

• Undertaken the majority of

acquisitions in North America to
achieve transatlantic capability

• Focus now is to gain competitive
advantage through measured
expansion into Australia, the Middle
East, India and Asia-Paciﬁc

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Strategies for growth

Portfolio strength focused on customer need

Examples of how the Group is performing
in each strategy can be found below:

• Precision Control Systems (PCS) received

an order from the US DoD for
CombatConnect, a new electronic soldier
architecture Ultra had developed for the
UK Army. This breakthrough order could
lead to a significant opportunity utilising
cutting-edge technology.

• Ultra Electronics signed a strategic

memorandum of agreement with Northrop
Grumman (NG) Corporation to deliver new
Maritime Domain Awareness (MDA) and
Anti-Submarine Warfare (ASW) capabilities
for NG’s family of autonomous vehicles and
systems. This expands Ultra’s specialist
capability areas to include unmanned
autonomous platforms to supplement our
existing position on manned ASW platforms.

• 3eTI was contracted by the US Department
of the Navy to continue providing cyber-
secure critical infrastructure solutions. The
contract will see 3eTI work with the Navy to
design, develop, integrate and install a
variety of cyber-secure systems for critical
infrastructure control and monitoring.

• PCS has secured a position on the Saab
Gripen NG aircraft for the supply of the
HiPPAG stores management solution. This is
the first time a dual-purpose HiPPAG
system has been fielded, capable of
providing stores ejection and seeker head
cooling from the same unit. The Gripen
aircraft is enjoying strong sales and has a
long service future ahead of it. Production is
expected to start ramping up in 2019 and
continue for at least a decade.

• The US WIN-T Increment 1 Signal

Modernization – Terrestrial Transmission
Program was established as a DoD Program
of Record enabling funding to be applied
to the long-term procurement of TCS’
Orion radios.

• Ocean Systems was contracted by Lockheed

Martin to provide fully integrated Array
Nose Assemblies to increase the US Navy’s
inventory of MK 48 torpedoes. This contract
will provide Ultra with access to additional
platforms because the MK 48 is used by all
classes of US Navy submarines as well as by
many western navies as their primary ASW
and anti-surface warfare (ASuW) weapon.
In addition, Ocean Systems plans to expand
its acoustic sensor capability to include the
MK 54 acoustic nose assemblies. The MK 54
is the primary ASW weapon for the
airborne and seagoing ASW assets of many
western navies.

• Following on from its success upgrading

the first Indonesian Navy’s Fatahillah Class
corvette, Ultra continues to expand its
geographic footprint as its Command &
Sonar Systems business was awarded a
contract from the Philippine Government
for the restoration of their Jacinto Class
Patrol Vessels. This two-year contract will
include replacement of the electro-optic fire
control system and navigation sensors and
overhaul of the 25mm and 76mm guns on
two ships of the Jacinto Class.

• Ultra’s CIS business expanded its footprint

in the Middle East region with the award of
a major contract to provide an integrated
security system to protect naval ports from
underwater threats.

• In 2016, Flightline Electronics was

successful in working with Airbus to secure
development and production funding to
implement Ultra’s aircraft Health and Usage
Monitoring System (HUMS) into the US
Army’s fleet of UH-72 Lakota light utility
helicopters. Ultra’s HUMS product is gaining
global attention as the Aviation Industry

Corporation of China (AVIC) has requested
a demonstration prior to negotiating a
supply agreement with Ultra, and the US
State Department is interested in using this
technology to upgrade its UH-1, CH-46 and
UH-60 rotorcraft platforms.

• PCS is entering into a partnership with

Nanjing Engineering Institute of
Aircraft Systems (NEIAS) to supply the
Nose Wheel Steering System for the
MA700. This is Ultra’s first partnership
with a Chinese company for the provision
of aerospace systems.

• NCS’s acquisition Lab Impex is now fully
integrated into the business and has
facilitated engagement with new customers
across markets that were previously not
accessible, offering access to a much wider
customer base and enabling totally new
business to be won in 2016 at the Sequoia
reactor in the US and EDF Heysham II
reactor in UK.

• Herley was awarded a contract by a major

US prime contractor to supply next-
generation RF assemblies for the Surface
Electronic Warfare Improvement Program
(SEWIP), a substantial and long-term
programme focused on electronic support
capability improvements on US navy ships.

• Following a successful Integrated Ballistic
Identification System (IBIS) trial installation
in Beijing, Ultra’s Forensic Technology
business anticipates its first IBIS order from
China in early 2017.

• Ultra successfully delivered the first of three
Air Warfare Destroyer Integrated Sonar
Suites to the Royal Australian Navy.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Standardisation & Shared Services

Standardisation & Shared Services (S3)

Challenging markets and a deﬂationary economy demand increasing
efﬁciency. Ultra’s move over the past two years to a Divisional
structure aligned around eight key market segments is enabling
its businesses to collaborate more easily in the marketplace, and
address customer needs more efﬁciently.

As Ultra has grown as a Group, through
acquisition and organic success, each
autonomous business has maintained its own
enabling functions including ﬁnance, IT, HR,
sourcing and property. After 20 years of
growth, mergers and acquisitions, and the
recent restructuring of market segments, the
Group now has the size and infrastructure to
streamline these functions thereby increasing
efﬁciency and realising savings. The
Standardisation & Shared Services
programme, known as S3 and established in
late 2015, is focused on bringing together
these enabling activities from across all the
businesses under a Global Business Service
(GBS) function. By adopting common, best
practice solutions, Ultra will deliver these
services to the businesses in more effective
and efﬁcient ways. An internal roadshow by
the Chief Executive and the S3 Managing
Director is helping to explain and promote
the initiative, and ensure each business
understands the beneﬁts S3 will deliver to
them and the Group as a whole.

For 2016, the S3 programme was in a cost-
neutral position realising savings of £6.9m. It
is expected that by 2019, recurring annual
savings from S3 will total in excess of £20m.
Ultra’s continued commitment to realising
savings is matched by its commitment to
preserving and encouraging each individual
business’s autonomy, thereby allowing them
to strive for excellence on a daily basis
without being hampered by out-of-date or
inefﬁcient processes.

ICT

06
Facilities
Management

08
Global
Business
Service

Property

a n a gementO

gram m e

o
r
P

Managem e n t

ERP

ffi

(

)

))

O
M
ce(P

ffi

O
O

02
Indirect
Sourcing

03
Direct
Sourcing

The S3 programme is structured around eight
individual workstreams, illustrated in the diagram.
These are the key functional areas for S3 to focus
on redeﬁning.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Standardisation & Shared Services

Portfolio strength focused on customer need

Global Property Footprint (ft2)

End of 2015. 100%

End of 2016. 94%

End of 2017. 79%

£6.9m

The S3 programme generated
savings of £6.9m in 2016.

21%

0.5M

1.0M

1.5M

2.0M

2.5M

3.0M

3.5M

Some S3 Highlights to date:
Global Business Services (GBS)
The ﬁrst stage of the S3 programme centred
around understanding the requirements
of the individual businesses and ensuring
that any changes did not detract from a
business’s autonomy or restrict their ability
to outperform the market. Having identiﬁed
potential areas to increase efﬁciency, the
programme has now reached its second
phase and is actively managing the
implementation of the appropriate changes
necessary to bring the service functions
together. A key requirement for the
programme is the setting up of two shared
service centres, one in the UK and one in
the US.

UK GBS, based in Dorset, opened on 1 June
2016 with the direct and indirect sourcing
teams being the ﬁrst functions on site.
Following the successful pilot tests of GBS
systems and processes, services will, business by
business, be migrated into GBS. This includes
payroll management, facilities management,
and expenses processing and payment.

Continuous improvement techniques will be
put in place within GBS to develop these
services going forward. In most cases, this
will involve the implementation and adoption
of new systems and best practice processes.
In turn, this will lead to Ultra businesses
enjoying the beneﬁts of an integral service
partner and the efﬁciencies gained from
consistent service and product contracts
negotiated at a Group level as opposed to an
individual business level.

7.1%

Price reduction through
consolidation of wire suppliers.

An announcement made in February 2017
conﬁrmed that the second GBS, supporting
the US businesses, will be located in
Rochester, New York and will mirror the same
approach and services as the UK GBS centre.

Property
Greater attention is being paid to Ultra’s
property portfolio. By the end of 2016, the
property footprint had reduced by 6%, a
total of 218,967ft2. A further 587,017ft2 has
been identiﬁed for 2017, to be achieved
through a combination of exiting, subleasing
and general consolidation of the estate.
This represents a further 15% reduction.
Following the development of a central
database, managed by GBS, work is already
underway to rigorously assess the future
property requirements across the Ultra Group
targeting a total reduction of 21% by the
end of 2017.

Sourcing
With a forecast to achieve £7.6m of total
savings from indirect and direct sourcing,
work on increasing efﬁciencies has already
helped to realise £0.5m of savings by the end
of 2016 through changes to indirect
sourcing, procurement and payment. The
implementation of the Coupa system as the
single Group-wide online system for sourcing,
procurement and expenses is underway, with
all UK businesses due to adopt the system in
the ﬁrst half of 2017. Similarly, changes in
direct sourcing have delivered savings on a
number of items by increased collaboration
across the Group and new supplier sourcing
as indicated in the following examples:

• By combining the requirements of three

Ultra businesses, negotiations with a wire
supplier resulted in an average combined
price reduction of 7.1%

• Expanding an existing relationship with a

freight supplier to cover more Ultra
businesses for their truck freight service is
forecast to realise full year savings of $230k

• Sourcing from lower-cost regions will see a
reduction of 60% against costs on the
industrial Thermowell line at NSPI.

Elsewhere in the Group, workshops have been
held in collaboration with distributors. As a
result new supply chain solutions are being
established with the aim of tailoring the supply
chain to better meet Ultra’s needs. In one case,
a forecast-driven “Reduced Lead Time”
programme to decrease costs is now being
piloted for a major project. It is expected that
this pilot will also reduce working capital costs
and supply chain risk, and improve overall
operational excellence.

ERP
Additionally, some key S3 enablers are being
progressed, including a new ERP strategy
which will deliver signiﬁcant operational
efﬁciencies over the next three years and
transform businesses’ ability to report and
extract data in ways they have not been able
to before. This will lead to efﬁciencies wider
reaching than ﬁnance, providing transparency
and agility in manufacturing and projects too,
through automation and elimination of
duplicate processes.

IT
The appointment of a Chief Information
Ofﬁcer in February 2017 is helping to
streamline and encourage IT efﬁciency and
compatibility across the Group. By building
an internal capability through a specialised
team, continuous improvement will be
enabled across the Group, reducing IT
support costs, and greatly improving long-
term system robustness and alignment with
best practice models.

“

It is expected that by

2019, recurring annual
savings from S3 will total
in excess of £20m.

”

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Market-facing segments

Aerospace

Across the civil and military aerospace sectors, demand for innovative
technologies to reduce cost, improve efficiency and increase safety
play well to Ultra’s established strengths in controls systems and
niche aviation technologies. This has allowed the Group to establish
positions on a number of long-term aerospace programmes now
ramping up production.

Revenue by segment
Aerospace

17%

Market outlook
In the civil aerospace sector the twin-aisle
market continues to grow, and will remain
dominated by Airbus and Boeing for the
foreseeable future. Ultra provides unique
electrical wing ice protection systems and
position sensing electronics to the Boeing 787
as well as providing specialist harnessing,
landing gear service panels and a new
electrical ground door opening system to the
new Airbus A350. The single-aisle market is
also in growth and, while currently dominated
by Boeing and Airbus, is seeing new entrants
from China and Canada. The regional aircraft
market is highly competitive. Nonetheless,
Ultra has secured content on the Japanese
Mitsubishi Regional Jet and the new Chinese
MA700 regional turboprop. Growth in the
business jet market is focused on larger
aircraft, where Ultra has secured business on
the new Gulfstream G650, G600 and G500
as well as the Cessna Citation Longitude. In
the rotary wing market the large reduction in
energy prices is reducing orders from the oil
and gas rig servicing businesses and key
requirements in this market are minimising
aircraft through-life costs. Ultra’s new Health
and Usage Monitoring System (HUMS)
specifically targets these requirements. In the
military aerospace sector, the fixed wing
combat aircraft market will be dominated for
the next 20 years by the increasing build rate
and entry-into-service of the F-35 Joint Strike
Fighter and its F-135 engine. Ultra provides
significant content to this aircraft/engine
combination including precision pneumatics
(HiPPAG) for weapons ejection and the engine
inlet ice protection system controller. The air
transport market is seeing a number of
competitors looking to fill the niches left by
C-17 and C-130. In this sector Ultra has
secured positions on the Embraer KC-390 and
on the Airbus A400M. The UAV market
remains an attractive but crowded sector.

Ultra’s portfolio strength
Ultra’s CORE capabilities include:

• Ice protection and detection

• Position sensing and control

• Active noise and vibration control

• Health and Usage Monitoring (HUMS)

• Fuel system solutions

• Ground handling equipment

• Pilot controls

• Data and power transfer

• Stores and gas management

Market overview
Commercial aerospace remains a vibrant
sector with predictions of worldwide
passenger growth doubling over the next
15 years. Large aircraft manufacturers are
buoyed by record order backlogs that exceed
13,000 aircraft, although new orders have
probably reached a peak. This growth in
platform numbers is driven by the demand for
new aircraft in developing regions, while the
more established markets need new aircraft
to replace ageing fleets as well as to capture
the greater efficiencies in fuel, emissions and
system reliability. The military aerospace
market continues to see growth driven
predominantly by the production ramp-up of
the existing major military aircraft
programmes. There are few new military
aircraft programmes, with the market focused
on technology insertion and capability
upgrades of existing airframes.

Strategy in action
In 2016, Ultra’s Flightline business in
Victor, NY collaborated with Curtiss-
Wright to provide a new compact and
lightweight Cockpit Voice and Flight Data
Recorder with integral HUMS capability
designed for use on rotorcraft platforms.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Market-facing segments

Portfolio strength focused on customer need

Infrastructure

Ultra is a trusted international provider and integrator of critical
systems and software needed to operate and secure today’s and
tomorrow’s transport and energy infrastructure.

Revenue by segment
Infrastructure

Ultra’s portfolio strength
Ultra’s CORE capabilities include:

• Broad suite of integrated

infrastructure offerings spanning
airports, rail and energy

• Secure localised network

communications for measurement
and control

• Protection of critical energy and
transport information systems

• Power management and control

• Compact power solutions

• Flexible delivery models; outstanding

service reputation

• Integration and domain expertise at

both technological and programme level

Market overview
Transportation, including airport and rail
systems, remains an area of strong
investment worldwide. The increase in global
air traffic and national prestige projects is
driving investment in airport infrastructure,
although competition in this sector is
increasing. Globally, rail infrastructure is also
growing rapidly as a key commercial and
national enabler in both established and
emerging economies. 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 and build national capacity.
Increasing global demand for energy has led
to increased investment in power generation,
power distribution, secure power
management and the renewables markets.
Energy dominates the global trend in smart
infrastructure, with Smart Grid and secure
energy management lying at the heart of
Smart Cities and Critical National
Infrastructure. Whilst global infrastructure
demand is largely being driven by China,
India and the Middle East and North Africa
regions, at least 50% of the global market
for smart solutions lies in Europe and the US.

Strategy in action
In response to the growing need for
compact, power-dense solutions, Ultra
supplied the London Underground Jubilee
Line Upgrade project with compact
transformer rectifier equipment.

Market outlook
In the airport sector, the market for Airport
Master Systems Integration continues to
experience growth, especially in the demand
for Tier 2 airport capabilities. This is particularly
so in South America, the Middle East and Asia,
where there are a number of key capital
projects. The airport and airline information
management market is also forecast to see
investment grow, although many of the
operational systems are becoming increasingly
commoditised. There is growing polarisation
between global offerings and those with more
localised niche expertise, so Ultra has
continued to focus upon market intimacy,
customer relationships and comprehensive
solutions over individual products. The rail
transit power conversion and control market is
also anticipated to see significant growth.
However, with the exception of the rail control
sector and the drive towards smart digital
solutions, the market is becoming increasingly
price-sensitive. In the power management and
renewables sector, the growing need for
compact, power-dense solutions plays to
Ultra’s capabilities with power resilience,
energy storage and fast switching all being
key drivers for growth. The secure energy
management sector is forecast to see
substantial investment, particularly in areas
related to secure monitoring, analysis and
control. The emergent Smart Grid market
relies on the ability to securely identify each
connected device. In 2015, Ultra launched a
cyber-hardened critical infrastructure
management system to improve site
management and performance without the
need to replace legacy equipment. This is now
being fielded. Opportunities in the Smart Grid
market are likely to remain fragmented until
the appropriate regulatory frameworks are
established. However, Ultra’s broader secure
communication and data portfolio places it in
a strong position with the Group able to offer
the highest level of assurance that can be
gained for the storage of unique digital keys
and identifiers of devices.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Market-facing segments

Nuclear

Through its established relationships with Original Equipment
Manufacturers (OEMs), the domain knowledge of its Suitably
Qualified and Experienced Personnel (SQEP), and its broad range
of qualified safety systems and sensors, Ultra is well positioned to
support the growing market in the licensing, delivery and safe
operation of reactors and associated systems via a full “defence
in depth” approach.

Revenue by segment
Nuclear

Market outlook
Although the nuclear market is a long-cycle
one, with plants taking several years to come
to completion, the outlook is positive. Much
of the current global fleet of plants will need
life extensions and upgrades. These plants
are largely older analogue Instrumentation
and Control (I&C) designs, with the biggest
market by far being the US. The new build,
digital I&C market, which is currently
dominated by China, India and Russia, is of
a similar magnitude. Ultra has invested
significantly in new facilities for the testing,
development and manufacture of sensors.
This has shown its value through further
contract wins with EDF for the provision of
specialist sensors and, with the Strategic
Partnership announcement with NuScale,
to develop a suite of reactor and plant I&C
systems for their Small Modular Reactor
(SMR). The Group currently provides
equipment to over 190 reactors across 16
countries, plus another 32 reactors currently
under construction. Furthermore, Ultra is
uniquely qualified on eight new types (as well
as many legacy plants), meaning that it is
well positioned for the future.

Growth in the nuclear emergency
management market continues, prompted
by the Fukushima accident which caused a
global reassessment of post-accident
response and support needs. Plant safety is
now increasingly reliant on secure data and,
as such, cyber security is a key part of
meeting the formal safety requirements.
Security concerns around the proliferation of
nuclear and the threat of terrorism are also
driving the growth in new deployable security
and surveillance systems for nuclear plants
and enhanced border security. Ultra’s domain
knowledge, through its SQEP, coupled with
its extensive security and surveillance
capabilities (as described on page 18),
position Ultra well in this sector.

Ultra’s portfolio strength
Ultra’s CORE capabilities include:
• Extensive pool of Suitably Qualified

Experienced Personnel (SQEP)

• Nuclear safety system expertise

• Qualified reactor instrumentation

and control

• Radiation detection sensors

• Nuclear energy management systems

• Nuclear operational support

• Nuclear rod control for submarines

Market overview
There are over 430 commercial nuclear power
reactors operating in 31 countries worldwide.
They provide over 11% of the world’s
electricity as continuous, reliable, base-load
power and remain an important part of the
low carbon energy mix. In addition, 56
countries operate around 240 civil research
reactors, with many of these in developing
countries. Globally there are over 70 new
reactors under construction. Many of the new
builds are being developed within emerging
economies and in those countries where there
is substantial state backing. However, the
emphasis in established Western markets has
largely shifted to a shorter-term focus on
safety system upgrades, life extensions,
emergency management and plant
sustainment programmes. In addition to this,
the UK is proceeding with a new commercial
model it has pioneered in support of new
nuclear build ambitions. The nuclear market is
generally very conservative and supported
through large multinational organisations;
however, there remain several complex niches
served by smaller specialist companies. It is a
highly regulated market, with high barriers to
entry, and as such is dominated by a number
of well-established global players. The
qualification of sensors and products across
multiple standards and platforms is extremely
expensive and offers further barriers to entry
once established.

Strategy in action
EDF’s ageing fleet of AGR reactors are
undergoing life extension reviews to
ensure their continued operational
availability to end of station life. In 2016,
NCS was awarded a £7.3m contract
spanning 10 years to maintain design
integrity and equipment reliability across
the fleet via a structured management
and risk-mitigation approach.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Market-facing segments

Portfolio strength focused on customer need

Communications

Ultra is well positioned as one of the most trusted and respected
providers of secure communication capabilities in the world offering
advanced, interoperable solutions that are scalable and low-risk.

Revenue by segment
Communications

Ultra’s portfolio strength
Ultra’s CORE capabilities include:

• Encryption and key management

solutions

• Data link systems

• High-performance, high-reliability

radio and wireless systems

• Secure voice, video and data
communication platforms

• Secure wireless mesh networking

• Fixed, mobile and transportable

satellite earth stations

• Identification and autonomous

guidance products

• Airborne communication exchange

• Personal protective gear

communications

• Acoustic hailing devices

• “Through the earth” communications

Market overview
The communications market includes
shipborne, ground-based, underwater, air-to-
ground and airborne communications, and
encompasses a wide and diverse range of
capabilities. Within the military and security
sector, there is continued demand for greater
bandwidth and broader connectivity, coupled
with a growing need for interoperability. The
emphasis today on secure networked
communications is spreading to all nations
seeking to modernise their systems. The
ability to deliver real-time voice and data with
ad hoc mesh capabilities was becoming
essential. This is driving investment in a
market where proven designs, which can be
integrated with existing equipment and are
interoperable with allies, are preferred.
Additionally, this is where commercial “off the
shelf” technology is increasingly being applied
to reduce costs and improve performance. In
particular, there is a shift towards software-
defined solutions that enable fast-cycle
upgrades of capability and the use of open
and commercial standards. Outside the
military and security market, there is a
growing reliance on Machine-to-Machine
(M2M) communications and, with the rising
prevalence of connected devices, increasing
emphasis on the “Internet of Things” (IoT).

Strategy in action
In November, Ultra’s TCS business was
awarded a substantial contract to supply
Ultra Orion radios, through a strategic
collaboration with a major systems
integrator for a large military
communications programme in the
Middle East.

15%

Market outlook
The trend towards greater connectivity and
networking will persist, driving significant
further investment in military
communications. The emphasis will be on
resilient networked communication
capabilities enabling people to be connected
anywhere, anytime, all the time. On the
battlefield, this will drive the requirement for
high-performance tactical communication
systems such as the Ultra Orion multi-mission
software-defined radio, one of the most
versatile and advanced radios available today.
It will also see military satellite systems
moving towards higher frequency Ka band
solutions and smaller, more portable earth
stations that deliver higher bandwidth;
developments that Ultra, in collaboration with
a number of partners, is positioned to exploit.
Similarly, in the data link market, in which
Ultra remains well placed with its wide range
of advanced data link and airborne gateway
solutions, the demand for secure tactical and
full-motion video links will continue to grow.

In the encryption market, the move to smaller
form factor products and from link to Internet
Protocol (IP)-based cryptographic solutions will
continue. Additionally, there is a shift from
paper-based key to electronic key distribution
and management systems. Ultra has proven
next-generation end-to-end cryptographic
products and a strong position in both UK
and US cryptographic programmes. This,
allied to the Group's electronic key
distribution and management solutions,
ensures Ultra remains well positioned in this
sector to pursue a variety of opportunities.
Finally, with the increasing awareness of the
vulnerabilities of M2M communications, and
a growing recognition of the need for
solutions to secure such systems, the secure
M2M market will continue to grow. Ultra’s
proven certified security solutions, which are
tailored to meet critical national infrastructure
and industrial needs, position the Group well
in this arena and have led to partnerships with
OEMs in the building automation,
energy/utilities, and oil and gas markets.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Market-facing segments

C2ISR*

As a trusted supplier of innovative surveillance and security
solutions to government and commercial customers, Ultra is well
positioned to exploit this growing market.

Revenue by segment
C2ISR

Market overview
C2ISR remains a priority capability within
global defence budgets due, primarily, to the
increased importance of these systems in
modern warfare. C2ISR applications are used
across a variety of platforms with air power,
as the principal mechanism for early or
urgent delivery of military effect, driving the
demand for intelligence, surveillance, target
acquisition and reconnaissance (ISTAR). Here,
the growth in platforms, particularly
unmanned platforms, fulfilling these roles
continues unabated. The challenge, as ever,
being the timely and secure dissemination of
the associated data, typically video, around
the battlespace. In the face of terrorism,
organised crime, drug trafficking and illegal
immigration, C2ISR capabilities are also
growing in importance in the wider border
security and Critical National Infrastructure
(CNI) protection markets. Overall, there
continues to be an increasing demand for
interoperable and mobile networks that
deliver a single integrated picture for timely
situational awareness. With a growing
number of devices capable of collecting
sensor data operating across multiple
communication networks, the complexity
and scale of integrated surveillance systems
also continues to increase. Solutions need
to be tailored to customers’ needs,
comprehensive and able to draw on
“best-of-breed”, established and clearly
differentiated technologies.

21%

Market outlook
Global spending on C2ISR systems is
expected to remain robust. In the military
arena, there will be a continued emphasis on
intelligence and surveillance assets, as well as
the ability to fuse or correlate these data
streams into a single real-time integrated
picture that can be disseminated down to the
lowest level. This will drive growth in real-
time ISTAR (for both manned and unmanned
platforms) and the connectivity between
assets in the battlespace. Ultra’s leading data
fusion, situational awareness and
visualisation systems play well to this growing
need. Electronic Warfare (EW) is also gaining
in prominence. The global EW market is
forecast to grow significantly over the next
few years driven by the increasing emphasis
placed on information superiority and
situational awareness. Ultra bolstered its
capability in this area with the acquisition of
Herley in 2015 and continues to grow its
share of the EW market.

The border security and CNI protection
markets are also projected to grow. The
illegal movement of arms, narcotics and
people will continue to drive growth, while
the shift from labour-intensive security to
high-tech networked solutions will continue.
Ultra has all the necessary elements to deliver
multiple applications into these markets and
is focused on those opportunities where
there is a growing need, the political impetus
and the necessary funding. Growth in the
CNI physical protection market will continue
to be underpinned by the increasing
adoption of video surveillance and wireless
technologies for perimeter security. The rising
awareness of cyber threats and government
mandates will drive similar growth in the
protection of industrial control systems.
Drawing on its advanced secure
communications and surveillance capabilities,
Ultra remains well-positioned to provide
complete cyber-physical security solutions to
this growing market.

Ultra’s portfolio strength
Ultra’s CORE capabilities include:

• Surveillance solutions for critical

national infrastructure, coastal and
border security needs

• Covert surveillance solutions

• Command and control systems

• Airborne surveillance and targeting

• Electronic Warfare solutions,

Electronic Warfare simulators and
radar test systems

• Document examination systems

• Ballistics and crime scene analysis

Strategy in action
In 2016, 3eTI was awarded a $34.6m
contract by the US Navy to continue
providing critical infrastructure protection
solutions. Initial tasks of $13.9m are due
to be completed by September 2017.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

*Command & Control, Intelligence, Surveillance and Reconnaissance

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Market-facing segments

Portfolio strength focused on customer need

Underwater warfare

Ultra’s world-leading domain knowledge, acoustic technical expertise
and ability to provide leading technology in Anti-Submarine Warfare
(ASW) performance through rapidly delivered, modular, affordable
and reliable solutions means that it is well positioned to exploit this
large and growing market.

Revenue by segment
Underwater warfare

25%

Market outlook
The US continues its strategic rebalancing of
military assets and capability between the
Atlantic and Pacific theatres. As a result,
despite the wider US government funding
pressures, ASW and submarines remain areas
of preferential spend with increased budget
allocation. Specifically, the US continues to
build two Virginia Class SSNs per year, and
has delivered more than 30 P-8A maritime
patrol aircraft to the US Navy, as well as
awarding contracts to upgrade both light and
heavyweight torpedoes. Future funding is
earmarked to further bolster the US Navy’s
ASW capability through the award of next
generation torpedo countermeasures and
torpedo defence systems. Elsewhere, several
of the major Commonwealth countries have
embarked on a major recapitalisation of their
ASW frigates; the steel on the Royal Navy’s
first T-26 Global Combat Ship is due to be cut
during the summer of 2017. Activity is well
underway on Canada’s Common Surface
Combatant fleet with the initial contracts due
to be released in 2018. Similarly, Australia’s
SEA5000 programme has started the
competitive evaluation process and should go
to contract in 2020. In all, more than 30
vessels will be constructed with a mission
emphasis on ASW. More broadly in the
addressable Asia-Pacific market, spend
related to ASW systems, including towed
torpedo defence solutions, is projected to rise
to almost £0.5bn. Specifically, India intends
to award three major ASW related
programmes totalling in excess of £100m
over the next five years. Ultra is well placed
to address these needs based on its
continued investment in integrated sonar
systems and surface ship torpedo defence
system technologies.

Ultra’s portfolio strength
Ultra’s CORE capabilities include:

• Expert knowledge of acoustic

performance in the maritime domain

• Design and manufacture of air-

deployable sonobuoys

• Sonar transducer and towed array

design and manufacture

• Acoustic countermeasure techniques

for torpedo defence

• Sonar processing, display, and

decision aids

• Recognised integrator of complex sonar
systems both towed and hull-mounted

Strategy in action
The Royal Netherlands Navy received its
second Multistatic Active Passive Sonar
(MAPS) system from Ultra in 2016. It was
installed and underwent successful
harbour acceptance tests in October whilst
the first system completed its operational
evaluation trial with the Dutch Navy in
November. The trials were so successful
that the commander of the Dutch Navy
tweeted “the MAPS system was a
quantum leap in ASW capability”. Lastly
Ultra, through its joint venture ERAPSCO,
commenced production of the next
generation of High Altitude Anti-
Submarine Warfare (HAASW) sonobuoys.
These sensors have been designed to be
deployed from P-8A Poseidon aircraft and
will provide extended detection ranges on
enemy submarines due to their coherent
multistatic active capability.

Market overview
Submarines are strategic assets, able to fulfil a
variety of missions from covert surveillance
through to anti-surface warfare, stand-off land
attack and ultimately, strategic deterrence.
This multi-mission capability, combined with
their innate characteristics of stealth and
endurance, has made submarines highly
attractive to nations wishing to exercise cost-
effective power projection. Submarines pose
more than just a military threat. These
platforms can easily and effectively disrupt the
sea lines of trade that sustain the global
economy. As a consequence, there has been
a substantial investment in submarine
technology by Russia, China, North Korea, and
Iran. Moreover, many smaller nations in Asia-
Pacific are rapidly procuring submarines in an
effort to protect their national interests. This
growth in submarine capability is no longer
offset by traditional western underwater
technological superiority, which has eroded
through years of neglect. Therefore,
investment in ASW has become a top priority
for nations.

Global financial pressures, coupled with
increased capital platform costs, mean that
nations can typically no longer afford
platforms dedicated to a specific role. Instead,
they are generally moving to the use of
increased, smaller multi-role platforms, of
frigate or offshore patrol vessel size. As a
result, ASW solutions now need to be modular
with reduced footprints to fit on these smaller
vessels. Another key factor in this growing
ASW market is the desire for increasingly short
development times, requiring investment in
advance of contract awards. Ultra has
positioned itself well in both of these areas,
with continued investment in ASW
technologies including multistatic active
systems and sonobuoys for use with
Unmanned Aerial Vehicles (UAV). A key export
market driver is the increasing requirement for
indigenous technology transfer to overseas
customers, another area where Ultra has a
strong pedigree with recent export contracts.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Market-facing segments

Maritime

Combining its expertise in power electronics and open architecture
design, Ultra provides innovative, scalable and affordable solutions
to meet customer needs in signature management, power-dense
motors and command and control systems for maritime platforms.

Revenue by segment
Maritime

Ultra’s portfolio strength
Ultra’s CORE capabilities include:

• Magnetic and electric signature

management for ships and submarines

• Specialist motor drives and power

converters

• Power conversion and control

management

• Nuclear rod control for submarines

• Stable positioning for precise electro-

optic (EO) tracking on moving platforms

• Customised command, control and
navigation systems for small ships

Market overview
Post the Afghanistan and Iraq land-based
conflicts, many nations are now looking to
rebalance their force structure and have a
renewed focus on the procurement of
maritime and air domain equipment. As a
result, national military shipbuilding strategies
are being developed by several Western
nations with the objective to stimulate long-
term, sustained new ship construction. In the
US and the UK, the construction of new
strategic deterrent submarine fleets has been
approved and is now underway. In other
parts of the world the requirement for
increased maritime capability is clear, but
fiscal constraints are driving life extensions of
existing platforms through cost-effective
capability upgrades. Consequently, the
demand for system/sensor upgrades and
technology insertion programmes on existing
hulls is growing, particularly for navies in
emerging nations. For the export market in
general, maritime platform programmes are
often dominated by the industrial politics of
the nation concerned, especially if they have
indigenous capabilities. As a result,
technology transfer is an increasingly
important factor enabling business in the
export market.

Strategy in action
Ultra Command & Sonar Systems was
awarded a contract in September for the
upgrade of the electro-optic fire control
systems, navigation and gun systems on
two Philippine Navy patrol vessels. This
award leverages Ultra’s established position
on ship modernisation as highlighted
through the Indonesian Fatahillah-class
upgrade which underwent successful
at-sea acceptance in December.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Market outlook
The power products segment in the US
market remains stable. The Virginia Class
Submarine (VCS) production is well protected
with manufacturing steady at two hulls per
year for the foreseeable future. Longer-term
growth opportunities for Ultra specialist
power products will come with the new
Columbia Class SSBN, projected to provide
12 new hulls beginning in 2021. The use of
common sub-systems with VCS will help
lower the cost-growth risk that currently
exists on the Ohio Replacement Programme.
The US Navy is investing in a technical refresh
of Arleigh Burke Class guided missile
destroyers (DDG-51), landing platform docks
(LX-R) and replenishment naval vessels (T-AOX)
which will provide further opportunities for
growth of the Group’s advanced power and
signature management products.

The incumbent position on the UK
Dreadnought SSBN development and
qualification programme will ensure a high
probability of production follow on for main
static converters, electric cruise propulsion and
signature management. Clean Power
requirements of the US DoD and aerospace
specifications will continue to drive the need
for Ultra’s speciality components such as
power filters and multi-phase transformers.
The Group’s specialist signature management
capabilities will see growth opportunities in
the next five years through the US Navy’s
Columbia Class SSBN Programme,
replacement auxiliary vessels, ongoing Littoral
Combat Ship production and DDG-51
upgrades. There is also increased focus on
electric field signature management due to the
growing awareness of Influence mine threat.

With the protection of maritime resources
rising in importance in areas such as the South
China Sea, there are increasing requirements
for submarines with extended patrol times.
The advent of air-independent propulsion
capability is expected to increase demand for
power conversion and degaussing products.

More broadly, the continuing demand for
surface platform system and sensor upgrades
plays well to Ultra’s strengths in naval combat
systems and electro-optics and the Group’s
pedigree in partnering with local industry.

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Market-facing segments

Portfolio strength focused on customer need

Land

Ultra is primed to exploit the growing market for capabilities and
products that conform to the Open Architecture Standards. Niche
electronic products enable Ultra to gain a foot in the door of most
significant programmes. The land segment product range includes
innovative, affordable and reliable solutions which meet current
customer needs in power and electronics.

Revenue by segment
Land

Ultra’s portfolio strength
Ultra’s CORE capabilities include:

• Power systems

• Information systems

• Control systems

• Mission systems

• Electronic architectures

• Soldier systems

• Operating base solutions

• Vehicle systems

• Fire control and weapon systems

Market overview
The market for armoured vehicles is stable
although showing a slight decline in new
vehicle programmes in Ultra’s established
markets. Asia-Pacific is predicted to be the
area of major growth over the next ten years.
Afghanistan, Australia, China, India,
Malaysia, New Zealand, Pakistan, the
Philippines, Singapore, South Korea, Taiwan
and Thailand all have major armoured vehicle
procurement programmes underway or in a
planning phase.

There is a significant growth in the number of
major capability enhancements and life-
extension programmes for land platforms
playing to Ultra’s strengths in electronic
vehicle architectures. Land platforms are now
increasingly complex, with multiple sensors,
weapons and communication systems; this
suits our core product range. These complex
electronics are driving the increased electrical
generation capacity and management within
the platform.

The dismounted soldier opportunities
continue to grow and our offerings are
generating significant interest.

Strategy in action
Building on its expertise in land vehicle
architecture systems, Ultra has developed
technology to solve the problems of man-
to-platform interface by providing a
seamless power and data transfer. This
expansion into soldier-wearable
technology has positioned Ultra to
participate in the UK Dismounted Soldier
Awareness programme as well as the US
Army’s Nett Warrior system. Ultra’s soldier-
wearable technology is also of interest to
paramilitary organisations and was
successfully trialled with the Police Services
of Northern Ireland in 2016.

Market outlook
In the UK and European markets, the
reduction in the number of new vehicle
programmes has been partially offset by a
significant increase in the number of platform
life-extension and technical insertion
programmes. There is also an increase in
upgrade programmes as a number of
platforms, procured to meet urgent
operational requirements over the last decade
of operations, are now being absorbed back
into core services. Ultra, as a provider of
specialist capabilities, is well positioned to be
able to support such upgrade programmes. In
the UK, the Group has teamed with Morgan
Advanced Materials to provide through life
support to the Mastiff platforms.

In the US, despite the budgetary pressures
that led to the cancellation of several large
new vehicle programmes, the DoD has
funds for a number of platform upgrades
that present Ultra with new opportunities
due to the Group’s capabilities. More broadly,
the export marketplace is growing with a
number of prospective new vehicle and
upgrade programmes being initiated. This
includes the established markets of India
and Australia and the emerging markets in
the Middle and Far East. In the Middle East,
Ultra is working in partnership with an
indigenous platform provider to support the
upgrade of the existing vehicle fleet.
Combined, these potential programmes
offer significant opportunities.

Military forces are looking at how they can
integrate soldiers, and their associated
systems, into the wider land battlespace and
there are several active programmes in this
area. Ultra has won several demonstration
contracts in this area which apply technology
to the soldier.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Financial review

Financial review

The Group’s businesses sustained their focus on costs, delivering an
underlying operating margin* of 16.7% (2015: 16.5%).

“

Order intake for
the year was £778.3m…
the underlying increase
was 10.4%.

”

Revenue +8.2%

£785.8m (2015: £726.3m)

KPI

785.8

2016

2015

2014

2013

2012

726.3

713.7

745.2

760.8

Amitabh Sharma
Group Finance Director

Ultra’s 2016 results
Order intake for the year was £778.3m, a
22% increase over the £638.1m achieved in
2015. After adjusting for foreign exchange,
acquisitions and disposals, the underlying
increase was 10.4%. At the end of 2016 the
order book was 6.0% higher at £799.3m
(2015: £753.8m). Foreign exchange
contributed 7.3% to this increase whilst
orders from acquisitions reduced by 1.7%.
The underlying order book was unchanged.
Order cover for 2017 is at its customary levels.

Revenue
Revenues of £785.8m represented an
increase of 8.2%, or £59.5m, on the prior
year (2015: £726.3m). Acquisitions
contributed 5.8% to the increase, offset by
an organic decline of 4.1% arising from
delayed export opportunities, including the
India torpedo defence contract, and the
completion of the End Cryptographic Unit
Replacement Programme (ECU RP). The
weakening of Sterling during the year meant
there was a positive impact of 7.5% from the
translation of overseas revenues. The average
US Dollar rate in 2016 was $1.35 compared
to $1.53 in 2015. The disposal of the ID
business in August 2016 resulted in a year on
year revenue reduction of 1.0% as it was
only included within the Group results for
eight months.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

*see footnote on page 144

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Financial review

Operational excellence

Underlying operating proﬁt* +9.3%

£131.1m (2015: £120.0m)

Underlying proﬁt before tax* +6.9%

£120.1m (2015: £112.4m)

KPI

2016

2015

2014

2013

2012

131.1

120.0

118.1

121.7

121.8

2016

2015

2014

2013

2012

120.1

112.4

112.0

116.8

116.5

4.3% of Group turnover in 2016. The lower
spend in 2016 reﬂects the end of a period of
investment in our aerospace segment and the
timing of our investment in the underwater
warfare segment. Customer-funding for new
product development was £112.8m (2015:
£110.6m).

The Group’s S3 programme is on track with
the UK Global Business Service (GBS) centre
now open. A number of the activities of the
Group’s UK businesses, including indirect
sourcing, have started to be transferred across
to GBS. The location of the second GBS centre
will be in the US co-located with the Group’s
Flightline business in Rochester, New York. The
Group’s ERP strategy was determined in 2016
and Ultra companies will standardise onto four
ERP systems over the next ﬁve to seven years.
This will happen when they are next due to
upgrade their ERP system. In respect of other
workstreams, the S3 project continues to
deliver savings, with property closures,
consolidations and procurement delivering
£6.9m in 2016, £8m cumulatively.

Aerospace & Infrastructure revenues (see
pages 30-31) beneﬁted from growth in
licence sales of propeller electronic controllers
at the Precision Control Systems business, as
well as greater demand for nuclear sensor
products at Nuclear Control Systems and a
full year of revenues from Furnace Parts,
which was acquired in 2015. These gains
were offset by customer delays to a number
of land vehicle programmes and the timing
of the JSF programme. The civil aerospace
industry is largely denominated in US Dollars,
so the weakening of Sterling provided much
of the growth for this Division. The order
book was broadly ﬂat compared to the end
of 2015 when adjusting for acquisitions and
foreign exchange.

Communications & Security’s results (see
pages 32-33) included a full year of revenues
from Herley and a part-year for the ID
business. The Division was impacted by the
timing of overseas export orders, which
caused revenue declines at GigaSat and the
legal intercept business. As the ECU RP
programme reached completion, revenue
reduced signiﬁcantly as expected, although
this was partially offset by the follow-on End
Cryptographic Unit Contracts Logistic
Support (ECU CLS) contract. TCS, our military
radio and Electronic Warfare (EW) business
based in Canada, grew in 2016 as a result of
its activity on the Electronic Intelligence
(ELINT) contract won during the year.

Encouragingly, the Division’s order book
increased on an underlying basis to £227.0m.
This was due to a number of contract wins,
notably the ECU CLS contract and the TCS
ELINT contract.

The Maritime & Land Division (see pages 34-
35) achieved growth, driven by an increase in
sales of US and international sonobuoys. This
reﬂects the continued global focus on
underwater warfare, particularly in the US.
Increased sales of sonobuoy receivers at
Flightline on the MH-60 programme and data
switching products also contributed to this
year’s growth. This was partially offset by
Astute-related programmes coming to an end
at our PMES business, and a slight decline in
revenues at Ocean Systems relative to a
particularly strong 2015. The order book was
largely ﬂat at constant currencies.

Operating proﬁt and margins*
Underlying operating proﬁt* was £131.1m
(2015: £120.0m), an increase of 9.3%.
Acquisition growth contributed 4.4% and
foreign exchange 6.2%, whilst the disposal
of the ID business in August resulted in a
proﬁt reduction of 1.5% relative to a full
year’s contribution from that business in
2015. Organic growth was therefore
positive at 0.2%. A number of factors
contributed to the increased underlying
operating margin* of 16.7% (2015: 16.5%),
notably the continued focus by the Group’s
businesses on restructuring their cost bases
and the strong margin performance in the
Maritime & Land Division.

Aerospace & Infrastructure margins improved
by 0.9%, to 15.8% from 14.9% in 2015. This
was helped by the increased revenues from
higher margin sales in the period and an
improved operational performance at CEMS
arising from the site rationalisation plan in
early 2016.

In Communications & Security, the divisional
margin was 15.3% compared to 16.9% in
2015. A strong performance from Herley,
particularly over the last quarter, was offset by
the ECU RP programme completion and the
sale of the ID business.

Within Maritime & Land, margins improved
to 18.3%, from 17.3% in 2015, owing to
increased revenues and the production
phase of a number of US sonobuoy
contracts, although this was partly offset by
the completion of some Astute-related
programmes at PMES.

Acquisitions contributed an additional £5.3m
to proﬁt, primarily in Communications &
Security, with Herley (acquired in 2015) being
the largest proportion.

The integration of Herley is ahead of schedule
with $2.3m of the cost synergies already
realised in 2016, $1.5m ahead of the $0.8m
planned for 2016 in the acquisition case.

Ultra continued its programme of investment
to position for medium-to-long-term growth,
with total spending in 2016 of £39.9m (2015:
£215.1m), comprising £5.8m (2015: £179.1m)
on acquisitions and £34.1m (2015: £36.0m)
on new capabilities, the latter representing

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Financial review

Financial review (continued)

IFRS proﬁt before tax +94.3%

£67.6m (2015: £34.8m)

2016

2015

2014

2013

2012

67.6

34.8

21.5

49.3

79.8

Interest and proﬁt before tax*
Net ﬁnancing charges* were £11.0m (2015:
£7.6m). The increase reﬂects a full year of
interest charges on the Herley-related debt.
The interest on bank debt was covered 12
times (2015: 16 times) by underlying
operating proﬁt*.

Underlying proﬁt before tax* was £120.1m
(2015: £112.4m).

Underlying proﬁt before tax

Amortisation of intangibles arising on acquisition

Net interest charge on deﬁned beneﬁt pensions

Loss on fair value movements on derivatives

Unwinding of discount on provisions

Acquisition and disposal related costs and adjustments

Disposal loss (after intangible and goodwill eliminations)

Deemed disposal of Ithra

S3 programme

Pension scheme curtailment gain

Impairment charges

Reported proﬁt before tax

2016
£m

120.1

(32.7)

(3.0)

(19.1)

(0.4)

(2.2)

(4.1)

(6.5)

15.5

67.6

2015
£m

112.4

(30.8)

(3.0)

(4.0)

(0.6)

(9.4)

(16.5)

(4.9)

(8.4)

34.8

92%

Underlying cash conversion for
the year was 92%.

IFRS proﬁt before tax
Ultra’s IFRS proﬁt before tax almost doubled,
increasing from £34.8m in 2015 to £67.6m.
The Group’s UK deﬁned beneﬁt pension
scheme was closed to future accrual on 5 April
2016. This resulted in a one-off curtailment
gain of £15.5m, which was recognised during
the year.

The loss on the mark-to-market valuation of
our forward foreign exchange contracts and
interest rate swaps was £19.1m in 2016. This
was primarily caused by the signiﬁcant
weakening of Sterling against the US Dollar
and compared to a £4.0m loss in 2015.

The cost of the S3 programme totalled
£6.5m (2015: £4.9m), and includes property
lease write-offs and associated costs relating
to facility consolidations. Other costs included
are business consolidation costs, project
management costs, set-up costs of the GBS
centre and costs incurred on the initial phases
of developing an ERP implementation plan.

The £4.1m disposal loss represents the legal
intercept assets disposed of in December
2016, offset by the gain on the divestment of
the ID business.

In the prior year, the deemed disposal of Ithra
resulted in a non-cash, non-underlying IFRS
accounting charge of £16.5m and 2015 also
included £8.4m of impairment charges
arising on intangible assets, and from the sale
of Ultra’s minority shareholding in the Al
Shaheen joint venture.

Acquisition and disposal related costs have
reduced to £2.2m (2015: £9.4m). Last year
included costs relating to the acquisition
of Herley.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

*see footnote on page 144

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Financial review

Operational excellence

47.8p

Full year dividend of 47.8p.

The balance of the reduction in creditors was
largely due to lower trade creditors.

The other outﬂow primarily represents the
pension deﬁcit reduction payments of £9.0m
(2015: £8.5m) agreed with the trustees.

Non-operating cash ﬂow
The underlying operating cash ﬂow* of
£120.4m (2015: £81.3m) funded the Group’s
various non-operating items and as a result net
debt improved to £256.7m (2015: £295.6m).
The main non-operating cash items were:

• cash tax of £9.0m (2015: £17.3m)

• a disposal inﬂow of £22.0m (2015: nil); this
represents disposal proceeds (see below)

• an £8.2m outﬂow related to the calling of
a performance bond associated with the
Oman Airport IT contract

• a £2.0m third-party investment receipt for

our Corvid business

• dividend payments of £32.6m (2015:

£31.3m).

Effect of acquisitions and disposals
The disposals made in the year, ID and the
legal intercept assets, resulted in cash
proceeds received of £22.0m. £5.2m was
spent on the ﬁnal acquisition payments in
respect of Herley and Forensic Technology.
A further £1.7m was expended on disposal
costs and various acquisition-related items.

“

Underlying operating cash ﬂow* was
£120.4m. This represents the highest cash
inﬂow and cash conversion percentage
since 2011.

”

Tax, EPS and dividends
The Group’s underlying tax rate* in the year
improved to 21.1% (2015: 22.8%) owing to
the full year tax beneﬁt from the acquisition
of Herley and patent box claims. Underlying
earnings per share* increased as a result to
134.6p (2015: 123.9p).

A ﬁnal dividend of 33.6p (2015: 32.3p) is
proposed. If this is approved at the Annual
General Meeting, this will give a full year
dividend of 47.8p (2015: 46.1p) and will
be covered 2.8 times by underlying earnings
per share*.

Operating cash ﬂow
Underlying operating cash ﬂow* was
£120.4m (2015: £81.3m) and the ratio of
cash to underlying operating proﬁt* increased
signiﬁcantly to 92% (2015: 68%). This
represents the highest cash inﬂow and cash
conversion percentage achieved since 2011.

The divestment of the ID business generated
£22m, whilst earn-out payments relating to
previous acquisitions were £5.8m. A non-
underlying operating cash outﬂow of £8.2m,
relating to a one-off calling of the
performance bond associated with the Oman
Airport IT contract, was incurred in 2016.

Capital expenditure, including on systems,
was similar to last year, at £4.6m (2015:
£4.6m).

Working capital increased by £11.1m (2015:
increase £40.0m), reﬂecting a reduction in
inventories and a decrease in creditors.

The ongoing Company-wide initiative
targeting working capital led to a further
reduction in inventories, which reduced by
£8.3m over 2016 (2015: £6.6m). The
reduction in inventories was offset by a
£19.0m reduction in creditors. £9.5m of this
was due to the unwind of a number of
advanced payment balances, some of which
related to the timing of sonar programmes.

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Financial review

Financial review (continued)

£87.0m

The total borrowings drawn
from the revolving facilities were
£87.0m (2015: £140.2m).

Interest rate management
Much of the Group’s current ﬁnancing has
been taken out to fund acquisitions in North
America. To reduce the risks associated with
interest rate ﬂuctuations and the associated
volatility in reported earnings, Ultra issued a
total of $70m of ﬁxed-rates, seven-year loan
notes to Pricoa in 2011 and 2012. The
amount of ﬁxed-term debt and the
associated interest rate policy is kept under
regular review. During 2015, interest rate
hedging was put in place lasting to mid 2019
to ensure that between 40% and 60% of
forecast debt was at a ﬁxed rate of interest at
each year end.

Pensions
Ultra offers Company-funded retirement
beneﬁts to all employees in its major countries
of operation. In the UK, the Ultra Electronics
Limited deﬁned beneﬁt scheme was closed to
new entrants in 2003 and, following the end
of consultation and discussion with the
Trustees, closed to future beneﬁt accrual from
5 April 2016. All staff who joined Ultra in the
UK since the deﬁned beneﬁt scheme was
closed to new entrants 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.

The Ultra Electronics Limited deﬁned beneﬁt
scheme was a contributory scheme in which
the Company made the largest element of
the payments, which were topped up by
employee contributions up until the closure of
the scheme to future accrual. The scheme
was actuarially assessed using the projected
unit method in 31 December 2016 when the
net scheme deﬁcit, calculated in accordance
with IAS19, was £92.1m (2015: £68.1m). The
present value of the liabilities rose by £74.7m
to £382.4m in 2016 primarily due to the
decrease in discount rate relative to December
2015, partially offset by a curtailment beneﬁt
of £15.5m arising on closure of the scheme to
future accrual. The increase in the scheme
liabilities was offset by a £46.7m increase in
the value of the scheme assets to £271.2m.

Banking facilities
Ultra’s current banking facilities amount to
£482.9m in total, together with a £15.0m
overdraft. They are provided by a small club
of banks, led by the Royal Bank of Scotland,
and comprise three tranches, all of which are
due to expire in August 2019. The ﬁrst two
tranches comprise £200m and £100m
revolving credit facilities that can be drawn
down in any major currency. The third
tranche is a $225m term loan which was put
in place at the time of the Herley acquisition
in 2015. The covenants match the revolving
credit facilities.

The Group also has loan notes in issue to
Prudential Investment Management Inc.
(“Pricoa”). At the 2016 year end, $70m
(2015: $70m) of loan notes, which mature in
2018 and 2019, had been issued.

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 £87.0m
(2015: £140.2m), giving headroom of
£213.0m (2015: £159.8m) in addition to the
£15m overdraft, £56.9m (2015: £47.2m) of
Pricoa loan notes had been issued. The
Group also held £74.6m of cash, which was
held for working capital purposes and to
fund acquisitions.

The Group’s balance sheet has strengthened
with net debt /EBITDA improving to 1.76 times
(2015: 2.19 times), and net interest payable
on borrowings was covered around 12x by
underlying operating proﬁt*.

The Group’s main ﬁnancial covenants are that
the ratio of net consolidated total borrowings/
EBITDA is less than three, and that the net
interest payable on borrowings is covered at
least three times by EBITA.

“

All staff who joined
Ultra in the UK since the
deﬁned beneﬁt scheme
was closed to new
entrants have been
invited to become
members of the Ultra
Electronics Group
Personal Pension Plan.

”

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

*see footnote on page 144

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Financial review

Operational excellence

100%

Foreign exchange risks: 100%
of expected exposure for 2017
is covered.

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 products 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 2017, 100% of the
expected exposure is covered, reducing to
79% of the exposure for 2018, increasing to
97% for 2019 and then reducing to 25% for
2020. Exposure to other currencies is hedged
as it arises on speciﬁc contracts.

Amitabh Sharma
Group Finance Director

A full actuarial assessment was carried out
as of April 2016; the result of which was a
funding deﬁcit of £114.4m representing an
increase of £14.6m from the previous
funding deﬁcit of £99.8m in April 2013.
Following the completion of the assessment,
Ultra reached an agreement with the pension
scheme trustee board to eliminate the deﬁcit
through additional deﬁcit payments over
the period to March 2025 with £9.5m
payable in 2017, £10.0m in 2018, £10.5m
in 2019 then £11.0m per annum for the
remaining period. The next valuation will take
place as of April 2019.

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.

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 (2015: £0.6m). 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
participate in a number of deﬁned
contribution pension plans. Certain employees
at the Swiss subsidiary of Forensic Technology,
Projectina, also participate in a deﬁned beneﬁt
pension scheme. The scheme had an IAS19
net deﬁcit of £1.0m at 31 December 2016
(2015: £0.7m).

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.

Net debt/EBITDA

“

has improved to
1.76 times.

”

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Key Performance Indicators

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.

Revenue
growth

Underlying proﬁt
before tax* growth

Growth in underlying
earnings per share*

Operating
cash conversion

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.

Description
Net cash from operating
activities and dividends from
associates, less net capital
expenditure, R&D, LTIP share
purchases and excluding the
cash outﬂows from the S3
programme, acquisition and
disposal related payments and
the Oman performance bond,
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.

+8.2%

+6.9%

+2%

92%

2016

2015

2014

2013

2012

+8.2%

+1.8%

-4.2%

-2.1%

+4.0%

2016

2015

2014

2013

2012

+6.9%

+0.4%

-4.1%

+0.3%

+0.1%

2016

2015

2014

2013

2012

+2%

+1%

+5%

+9%

2016

2015

2014

2013

2012

92%

68%

70%

65%

74%

Comment
Revenues increased by 8.2% or
£59.5m to £785.8m. A 5.8%
increase reﬂecting the impact of
acquisitions together with a
7.5% beneﬁt from the positive
impact on overseas revenues
was partially offset by an organic
decline of 4.1% and 1% for the
disposal of the ID business.

Comment
Underlying proﬁt before tax*
was £120.1m (2015: £112.4m).
This contributed to the increased
underlying operating margin* of
16.7% (2015: 16.5%).

Comment
Underlying earnings per share*
increased to 134.6p (2015:
123.9p). A ﬁnal dividend of
33.6p (2015: 32.3p) is
proposed. If this is approved at
the Annual General Meeting,
this will give a full year dividend
of 47.8p (2015: 46.1p) and will
be covered 2.8 times by
underlying earnings per share*.

Comment
Underlying operating cash
ﬂow* was £120.4m (2015:
£81.3m) and the ratio of cash
to underlying operating proﬁt
increased signiﬁcantly to 92%
(2015: 68%). This represents
the highest cash inﬂow and
cash conversion percentage
achieved since 2011.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

*see footnote on page 144

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Key Performance Indicators

Operational excellence

Total shareholder
return

Health and
safety

YOURviews employee
engagement survey

Description
Annual total shareholder return
(capital growth plus dividends
paid, assuming dividends
reinvested) over a rolling ﬁve-
year period.

Description
The number of externally
reportable accidents per 100
employees.

Description
Ultra’s internal employee
satisfaction survey, YOURviews,
provides an employee
engagement rating for each
individual business within Ultra
and is completed every one to
two years. Answers to various
questions are combined to give
the overall employee
engagement scores.

+8.0%

0.7

82%

2016

2015

2014

2013

2012

+8.0%

+6.0%

+8.0%

+14.0%

+6.0%

2016

2015

2014

2013

2012

0.5

0.4

0.7

0.8

2016

2015

2014

2013

2012

82%

81%

Comment
Annual total shareholder return
over the 5-year period from
2012 to 2016 is 8%.

Comment
The number of externally
reportable accidents increased
slightly in 2016. Ultra continues
its efforts to drive a health and
safety aware culture.

Comment
The level of employee
engagement has remained
stable in 2016. Drawing on best
practice examples, businesses
develop an action plan to
ensure that employee
engagement continues to rise
against both internal and
relevant external benchmarks.

see pages 46-50
for details

Additional non-ﬁnancial
performance indicators
Ultra’s four strategies for growth
are described on pages 10 and
11 of this report. Performance
indicators relating to the Group’s
success in these four dimensions
are shown on those pages. The
Group’s right people are its most
important asset. Performance
indicators that relate to the
recruitment, retention and
development of Ultra’s staff
are included on pages 48-50 of
this report.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Aerospace & Infrastructure

Aerospace
& Infrastructure

This Division is responsible
for the following segments:

Aerospace

Infrastructure

Nuclear

Aerospace & Infrastructure revenues
beneﬁted from growth in licence sales of
propeller electronic controllers at Precision
Controls Systems (PCS), as well as greater
demand for nuclear sensor products at
Nuclear Control Systems (NCS) and a full year
of revenues from Furnace Parts acquired in
2015. These gains were offset by customer
delays to a number of land vehicle
programmes and the timing of the JSF
programme. The civil aerospace industry is
largely denominated in US Dollars, so the
weakening of Sterling provided much of the
growth for this Division.

The Division’s margins improved to 15.8%
(2015: 14.9%). This was helped by the
increased revenues from higher margin sales
in the period and an improved operational
performance at CEMS arising from site
rationalisation in early 2016.

The order book was broadly ﬂat compared to
the end of 2015, when adjusting for
acquisitions and foreign exchange.

Features of the Division’s
performance in the year
that will underpin future
performance include:

• Entering into a partnership with Nanjing
Engineering Institute of Aircraft Systems
(NEIAS) to supply the Nose Wheel
Steering System for the MA700.
This is Ultra’s ﬁrst partnership with a
Chinese company for the provision of
aerospace systems.

• Securing orders for cockpit, lighting

and HiPPAG equipment on the
Typhoon aircraft amounting to
£12.3m, largely due to the new export
order for 28 aircraft for Kuwait.

• Continuing strategic partnership with

NuScale to provide a suite of
instrumentation in support of their
Small Modular Reactor (SMR).

For further information on Ultra’s
strategies see pages 10-11

Ultra Electronics Holdings plc. Annual Report & Accounts 2016
Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Aerospace & Infrastructure

Operational excellence

Revenue

Profit*

£204.7m +6.0%

£32.4m +12.9%

Order book

Number of employees

£267.8m +0.9%

1,205

Delivering
our vision
What?
We offer superior
solutions in
regulated markets.
Ultra provides the innovative HiPPAG
solution for the F-35 aircraft which
jettisons external stores and also cools
the weapon seekers. Traditionally, aircraft
use either compressed gas storage
bottles or pyrotechnic charges to jettison
external stores. Both of these methods
present problems; compressed gas bottles
need to be stored, ﬁlled and replaced on
the aircraft, which presents a signiﬁcant
logistical burden; pyrotechnics are dirty
and require cleaning of the pylons after
use, and the heat generated by the
pyrotechnic creates a thermal signature
that can be used to locate the aircraft and
is a problem for the aircraft’s internal
weapon bay required for stealthy aircraft.

How?
We innovate to disrupt
market dynamics.
Ultra’s HiPPAG solution takes air from the
atmosphere, compresses, cleans and
dries it, and then provides it as required
removing logistical and other problems.
It ﬁts in the same volume that would
have been needed for a compressed gas
bottle. The system is also capable of
providing cryogenic cooling for weapon
seekers, which is something no other
system can do.

The system was developed from existing
high-pressure gas products to solve
problems in a way never before seen in
the market. The Ultra solution is
technically superior to all competitor
products and has now been ﬁtted to
many aircraft types including the F-35.

Why?
We enjoy solving
tough problems!

Strategy in action
PCS was awarded a $751k contract from Boeing to provide HiPPAG compressors for
the New Zealand Navy’s P-3 Orion aircraft. This win is the first application of a HiPPAG
for the purposes of sonobuoy ejection, representing the first step in a strategy to
exploit the technology to provide sonobuoy launchers for unmanned air vehicles,
lightweight maritime patrol aircraft and helicopters. PCS has a longer-term strategic
goal to be able to provide an integrated solution using Ultra’s sonobuoy technology.

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016
Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Communications & Security

Communications
& Security

This Division is responsible
for the following segments:

Communications

C2ISR

The divisional margin was 15.3% compared
to 16.9% in 2015. A strong performance
from Herley, particularly over the last quarter,
was offset by the ECU RP programme
completion and the sale of the ID business.

Communications & Security’s results included
a full year of revenues from Herley and a part
year for the ID business. The Division was
impacted by timing of overseas export orders,
which caused revenue declines at GigaSat
and the legal intercept business. As the ECU
RP programme reached completion, revenue
reduced signiﬁcantly as expected, although
this was partially offset by the follow-on End
Cryptographic Unit Contracts Logistic
Support (ECU CLS) contract. TCS, our military
radio and Electronic Warfare (EW) business
based in Canada, grew in 2016 as a result of
its activity on the Electronic Intelligence
(ELINT) contract won during the year.

Encouragingly, the Division’s order book
increased on an underlying basis to £227.0m.
This was due to a number of contract wins,
notably the ECU CLS contract and the TCS
ELINT contract.

Features of the Division’s
performance in the year
that will underpin future
performance include:

• Securing a £16m programme for the

continued support of our world-leading
software deﬁned crypto device (ECU RP)
for the UK MoD.

• Awarded a $34.6m contract by the US

DoD to continue providing critical
infrastructure protection solutions.

• A substantial contract to supply Ultra
Orion radios, through a strategic
collaboration with a major systems
integrator, for a large military
communications programme in the
Middle East.

For further information on Ultra’s
strategies see pages 10-11

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Communications & Security

Operational excellence

Revenue

Profit*

£259.0m +8.2%

£39.7m -1.7%

Order book

Number of employees

£227.0m +6.2%

1,506

Delivering
our vision
What?
We offer superior
solutions in
regulated markets.
Over the past four years, Ultra TCS,
which has provided three generations of
high-capacity radio systems for the US
Army’s Tactical C2 Network, has worked
closely with the customer to position the
ORION X-500 radio as the Line of Sight
and Mesh solution for the Army’s Signal
Modernisation Tactical Network
Transmission (TNT) Programme.

How?
We innovate to disrupt
market dynamics.
ORION was speciﬁcally designed to meet
the requirements of the programme and
is interoperable with in-service High
Capacity Line of Sight systems. It has been
thoroughly tested and proven to meet
programme requirements. The US trial
team referred to it as “the magic radio”.
Following the assignment of Department
of Defense nomenclature (AN/GRC-262)
in December 2016, TCS was awarded its
ﬁrst contract for the programme and is
anticipating a further award early in 2017
prior to Limited Rate and Full Rate
production awards later in the year.

Why?
We enjoy delighting
our customers!

Strategy in action
In May 2016, Ultra TCS was awarded a contract valued at Canadian $18.4m for a
customer in a NATO country with options for after-sales support. This significant
award was to provide Electronic Warfare equipment and engineering support for the
delivery of UAV platforms that will be used in surveillance missions.

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

This Division is responsible
for the following segments:

Underwater Warfare

Maritime

Land

Strategic report. Maritime & Land

Maritime
& Land

The Maritime & Land Division achieved
growth driven by an increase in sales of US
and international sonobuoys. This reﬂects the
continued global focus on underwater
warfare, particularly in the US. Increased sales
of sonobuoy receivers at Flightline on the
MH-60 programme and data switching
products also contributed to this year’s
growth. This was partially offset by Astute
Class Submarine-related programmes coming
to an end at our PMES business, and a slight
decline in revenues at Ocean Systems relative
to a particularly strong 2015. The order book
was largely ﬂat at constant currencies.

Within Maritime & Land, margins improved
to 18.3% (2015: 17.3%) owing to increased
revenues and the production phase of a
number of US sonobuoy contracts, although
this was partly offset by the completion of
some Astute Class Submarine programmes
at PMES.

Features of the Division’s
performance in the year
that will underpin future
performance include:

• Successful delivery of the ﬁrst of

three Air Warfare Destroyer (AWD)
integrated sonar suites (ISS) to the
Royal Australian Navy.

• The provision of seamless power and
data transfer technology to solve the
problems of soldier-to-platform
interfacing. This expansion in capability
into soldier wearable technology has
positioned Ultra to participate in the
UK Dismounted Soldier Awareness
programme as well as the US Army’s
Nett Warrior system.

• A strategic memorandum of

agreement with Northrop Grumman
(NG) Corporation to deliver new
Maritime Domain Awareness (MDA)
and Anti-Submarine Warfare (ASW)
capabilities for NG’s family of
autonomous vehicles and systems.

For further information on Ultra’s
strategies see pages 10-11

Ultra products are featured on a range
of submarine platforms including:

Trafalgar (UK)

Astute (UK)

Vanguard (UK)

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Maritime & Land

Operational excellence

Revenue

Profit*

£322.1m +9.6%

£59.0m +15.9%

Order book

Number of employees

£304.5m +10.8%

1,755

Delivering
our vision
What?
We offer superior
solutions in
regulated markets.
To meet the anti-submarine warfare
requirements for Australia’s Air Warfare
Destroyer programme, Ultra has
conceived a novel solution that runs
counter to traditional naval sonar
implementations, developing the world’s
ﬁrst truly integrated sonar solution.
Whereas previous ship sonar ﬁtments
operate as discrete and independent
systems, Ultra’s Integrated Sonar Suite
(ISS) employs a holistic, capability-led
anti-submarine warfare methodology.

For the Royal Australian Navy’s new
Hobart Class destroyer, Ultra’s ISS
underwent extensive development,
sub-system design proving, and dry land
integration before the sonar was deemed
ready for in-water testing. This process
has resulted in a “best-in-class” sonar
solution whose on-going sustainment
will be undertaken in-country.

How?
We innovate to disrupt
market dynamics.
Recognising that the primary purpose of
the Royal Australian Navy’s new Hobart
Class destroyer is anti-aircraft warfare,
Ultra has devised an innovative solution to
provide the platform with an effective
Anti-Submarine Warfare (ASW) system
with a view to minimising any impact to
the warship’s primary role. Ultra’s ISS is the
world's ﬁrst single-tow active-passive sonar
that is fully integrated with the ship’s
hull-mounted sonar. Employing an industry
ﬁrst dual-frequency towed horizontal
projector array in combination with a
quadrature receive array. Ultra’s ISS only
requires one winch, instead of the two
normally required for a traditional active-
passive sonar system.

Why?
We enjoy beating
our competitors!

Use of a single-winch system signiﬁcantly
reduces the weight and volume dedicated
to the sonar suite and enables the
operator to focus acoustic energy on
underwater targets of interest and rapidly
pinpoint their position. This, coupled with
Ultra’s Ping Wizard, which utilises
knowledge of the environment and
reduces operator workload, has enabled
the development of integrated acoustic
displays in its ISS solution, reducing both
operator training and ship’s personnel
requirements as one operator can operate
both sensors from a single station.

Virginia (US)

Strategy in action
Ultra Electronics USSI significantly broadened its acoustic hailing and indoor/outdoor
mass notification customer base with the development of the HS-10 portable
loudspeaker. Based on the same HyperSpike® technology employed in military and
life safety applications, the HS-10 was chosen by the University of Notre Dame,
Singapore Interior Police, and numerous law enforcement agencies due to its
capability to broadcast intelligible voice commands at great distances with
exceptional clarity. This commercial success was leveraged highly from voice of the
customer design and cost targeting that was disruptive to the marketplace. USSI
created a new online e-commerce system that is resulting in orders from previously
unknown customers and will continue to introduce new products to the market
utilising this 21st-century business model.

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Risk management

Analysing and managing uncertainty

The analysis and management of risk is a fundamental aspect of Ultra’s operating, ﬁnancial and
governance activities. Analysing the risks the Group faces, understanding the effectiveness of its
responding control environment and early consideration of emerging risks will help Ultra deliver on
its commitments, improve long-term performance and enhance its reputation in its markets.

Profitable growth cannot be achieved without
some degree of considered risk. Our objective
to outperform the market in terms of the
annual increase in shareholder value is
reflected in our appetite for risk. We have a
low risk appetite in situations where our
culture, reputation or financial standing may
be adversely affected; however, we do
consider taking higher risks where the
opportunity is seen to outweigh the risks,
provided appropriate levels of mitigating
controls are put in place.

Risk management and internal control
The Board has overall responsibility for
establishing, monitoring and maintaining an
effective system of risk management. The
responsibility for risk oversight is principally
delegated to the Audit Committee and a
continuous review and challenge of risks is
provided by the Executive Team.

The approach to risk management across the
Group has continued to develop and “Risk
Champions” are now an integral part of each
Division’s identiﬁcation, assessment and
management of risk. The work of the Risk
Champions is supported by the following
enhancements which have been
implemented during the reporting period
covered by this Report:

• An internal Group Risk Manager was
appointed to provide continuous
development and co-ordination of the risk
management framework and to
consolidate, challenge and report on all
risk management information

• “Deep dive”reviews were performed in
respect to contract win/delivery and the
Company’s acquisition process in order to
support the management of the “growth”
principal risk (see case study outlining the
actions resulting from the contract win/
delivery “deep dive” and case study on the
integration of the Herley acquisition on
page 37)

• The Risk Appetite metrics were reviewed

• An assessment of the Group’s aggregate

risks was undertaken by the Board.

The evolution of our risk management maturity
will continue in 2017 with particular focus on:

The Risk Management Framework facilitates
the following objectives:

• Identiﬁcation, measurement, control and
reporting of risk that can undermine the
business model, future performance,
solvency or liquidity of the Group

• Better allocation of resources for the

management of principal and emerging risks

• Assurance from management that all

risks are owned by a “risk lead” being an
individual best positioned to control and
mitigate the risks

• Driving business improvements and

provision of enhanced intelligence for key
decision-making

• Support and developed of our reputation as
a well-governed and trusted organisation.

• The embedding of the Risk Management
Framework at business level to ensure
consistency in the reporting and escalation
of risk awareness across the Group and
further embed a risk management culture

• The implementation of a risk management
software tool to capture all risk registers
and to provide live updates and better
management information for the “risk leads”

• The performance of a “deep dive” into the

“delivering change” principal risk.

Risk management
The Risk Management Framework governs
the approach we take while the LEAP culture
and behaviours inherent within Ultra (see
page 47) ensure risk consideration is
embedded into the way we operate.

The risk management process

Board and Committees

Executive Team

Divisions

• Aerospace & Infrastructure
• Communications & Security
• Maritime & Land

First Line
Risk and control
processes as part of
‘business as usual’

• Group Operating Manual
(setting out policies &
processes)
• Training and development
• Regulatory and compliance
requirements
• Risk registers

*provided by Deloitte

Third Line
Independent challenge
to the levels of assurance
provided by management
on the effectiveness of
governance, risk
management and internal
controls

• Internal Audit
(provided by PwC)
• Other independent assurance
activities e.g. health, safety
and environment audits

R
e
g
u
a
t
o
r
s

E
x
t
e
r
n
a

A
u
d
i
t
*

Second Line
Group and
Divisional oversight

• Group Board & Committees’
oversight and challenge
• Executive Team oversight
and challenge
• Divisional business
performance reviews
• Divisional Control Review
meetings
• Six-monthly Compliance
Reports
• Review of monthly Business
Performance Reports (including
Financial Performance)
• Co-ordination of the
implementation of the Risk
Management Framework

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Risk management

2016 Principal risks and uncertainties

The key components of the Risk Management
Framework are:

OVERSIGHT STRUCTURE AND
ACCOUNTABILITY
The risk management oversight structure has
been developed using the principles of the
“three lines of defence” ensuring risk is
considered from both a top-down and a
bottom-up perspective with risk information
captured at strategic, Divisional and
individual business levels.

PROCESS
The risk management process is focused on risk
identiﬁcation (using cause and effect analysis),
inherent (pre controls) and residual (post
controls) assessment, control identiﬁcation
and the development and implementation of
further mitigation strategies.

ESCALATION, MONITORING
AND REPORTING
Changes to risk exposure are notiﬁed
through the governance structure as risks
emerge and are identiﬁed. Risk leads are
identiﬁed for all risks and they have the
responsibility for monitoring the effectiveness
of current controls and the progress against
the implementation of further mitigating
actions. The risk reporting ﬂow is based on a
combination of annual, biannual, quarterly
and monthly reporting to the Board, Audit
Committee, Executive Team and Divisional/
individual business management teams. A
risk management software tool which is
being introduced will facilitate this process.

The principal risks and uncertainties which
could have a material impact on the Group’s
performance have not changed signiﬁcantly
from those set out in the Group’s 2015 Annual
Report and Accounts. However, following a
review by the Board during 2016, the number
of principal risks has been reduced and some
risks have been reclassiﬁed to improve scrutiny,
management and reporting. Each principal risk
continues to have an Executive Team risk
owner allocated to them who is responsible for
risk mitigation, management and reporting.

During the last year the Board considered the
impact on the Group of the EU referendum
and considered that the decision for the UK
to exit the EU does not pose a signiﬁcant risk
for Ultra.

Case study
“Deep dive”
The “deep dive” risk review focused on the
challenges and areas of concern associated
with the conversion of pipeline opportunities
into contract wins and the delivery of
contracted customer commitments (on
budget, on time and to the agreed quality
and specification).

The current risk exposure was identified,
mitigation measures were assessed, lessons
learnt were documented and actions to
enhance the existing controls were
allocated. The risk appetite statements and
supporting metrics were also reviewed and
updated. A key action resulting from the
review was to update the Group’s bid
management and contract management
policies to ensure, amongst other things,

Case study
Herley acquisition
In August 2015 Ultra completed its largest
ever acquisition when the Electronic
Products Division of Kratos Defense &
Security Solutions was purchased for $258m
(now Ultra Electronics Herley). This
acquisition provided Ultra with an established
major presence in the Electronic Warfare
market. However, it brought about other
challenges which, had they not been
managed effectively, could have had a
material impact on the Group’s performance.
This case study outlines the steps taken by
Ultra to mitigate the Herley integration risk.

INTEGRATION
Following a series of welcome presentations
by the Chief Executive to all Herley employees
the Divisional MD relocated to Herley’s
Woburn facility to manage the integration
activities. A baseline integration plan was
formed, responsibilities were assigned and
fortnightly progress meetings were scheduled
to ensure key objectives were met.

Within six months of the acquisition a
YOURviews survey was conducted to
measure employee engagement. Key metrics
showed that 86% of all Herley employees
thought the transition to Ultra was handled
well and 90% enjoyed working at Herley.

that the risk appetite gate reviews for all
major bids and contracts are aligned with
the approved bid terms.

Other key controls introduced in the new
policies include:

• An improved bid approval process

• The use of risk registers at a project level
aligned with the Group methodology

• The reporting of significant project risks by

the businesses to their Division on a
monthly basis

• Ensuring only individuals with the

appropriate competences are engaged to
undertake the contract and project
management roles.

TRAINING
External training was provided to the senior
management team, focusing on the key
vision for the business and its strategic goals
together with blockers which had the
potential to slow progress. The senior
management team also attended Ultra’s
Maximising Leadership Impact (MLI) course.

24 employees were selected from across
the sites to attend two separate “Making a
Difference” (MAD) workshops. The themes
for the workshops included operational
efficiency, YOURviews action plans and
creating a “One Herley” culture.

COLLABORATIVE WORKING
A cross-site Operations Council was
established to exploit the gross margin
efficiency savings assumed in the
business case.

Within 12 months of the acquisition
Herley was fully engaged in the S3
programme including:

• involvement in meetings around the

consolidation of all US purchasing, and

• evaluating options to maximise the sale
value of unused land in Lancaster.

BOARD FOCUS AND CONTROL
During 2016, the Board received quarterly
reports on the Ultra Electronics Herley
integration plan to ensure the integration
risk was being managed effectively and
appropriate controls had been established.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Risk management

Principal risks

The Group’s reclassiﬁed principal
risks are set out opposite, along
with the principal risks reported
in 2015 which they have
replaced, and on the following
pages, together with details of
their potential impacts, examples
of the current controls and
mitigation actions taken to
manage the risk and an
indication of whether the risk
exposure is increasing,
decreasing or largely unchanged.

2016 Principal Risks

2015 Principal Risks

Risk 1. Growth*

Strategy and market environment
Contract win/delivery
Innovation and development
Acquisitions

Decreased risk

Risk 2. Delivering change

No change

Risk 3. People and culture*

People
Culture

Increased risk

No signiﬁcant change

Risk 4.

Information management
and security*

Cyber
Intellectual property/information security

No signiﬁcant change

Risk 5. Supply chain

Risk 6. Governance and
internal controls

Risk 7. Pensions

No change

Risk 8. Legislation/regulation

No change

Risk 9. Health, safety

No change

and environment

No signiﬁcant change

Decreased risk

No signiﬁcant change

*newly reclassiﬁed risk.
*Note: the “Treasury and Tax“ risk reported in 2015 is no longer considered a principal risk.

Risk 1. Growth

Trend: Decreased risk

Changes during 2016
Whilst the defence market has been challenging in recent years there are now strong indications of a
return to growth, particularly in the USA. Export markets remain problematic but these constitute only
about 15% of revenue. The Company’s focus in the year on its market-facing segment strategies,
successfully integrating Ultra Electronics Herley and improving its bid and contract management policies,
leaves us well placed to exploit this upturn. The overall level of risk has reduced from the prior year.

Description
Ultra’s strategic objective for year on year
growth requires: the ability to respond to
changing market dynamics; the capacity to
win new business and deliver successfully
against contracted customer requirements;
the development of highly differentiated
solutions to address customer needs; and the
ability to select, execute and integrate
acquisitions effectively.

Potential impact of failure:
• Poor investment decisions leading to

inadequate returns

• Reduced business opportunity and loss of

reputation, customers, market share, revenue
and proﬁt

• Specialist capabilities eroded through

commoditisation

• Reduction in anticipated acquisition value
through overpayment, non-delivery of
synergies and/or economies of scale and senior
management focus diverted away from
delivering “business as usual”.

See our market section
on page 2

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Mitigations (examples):
• Challenges in the UK defence market offset by

expansion into targeted overseas regions
exhibiting long-term growth characteristics
• The market-facing segment strategies enable
Ultra to utilise the capabilities of its businesses
more effectively to deliver enhanced solutions
to its customers

• The LAUNCH approach to customer

engagement ensures Ultra understands the
real needs of its customers

• Following an audit conducted by PwC on
Ultra’s bid process and long-term project
management, the Group has revised its
internal bid and contract management policies
to ensure that bids are submitted and won at
acceptable margin levels and risk tolerances
and contracts are effectively executed
• The Board conducts a rigorous review of

acquisition opportunities including
commissioning third-party market reports and
due diligence. Post-acquisition reviews are
performed on all acquisitions comprising
integration effectiveness, operational
performance compared to expectation and
lessons learned. In 2016, the Board received
quarterly reports on the Ultra Electronics
Herley integration plan.

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Risk management

2016 Principal risks and uncertainties

Risk 2. Delivering change

Trend: Increased risk

Changes during 2016
The scale and complexity of change has increased as S3 initiatives and business consolidations
take effect.

Description
Effective delivery of major change programmes
with minimal effect on business as usual is a
key component of Ultra’s continual drive for
operational improvement.

Potential impact of failure:
• Expected beneﬁts of change not realised
• Signiﬁcant increase in change programme costs
• Senior management distraction from business

as usual

• Reduction in employee morale
• Disruption to business performance.

See pages 12-13
for information on S3

Mitigations (examples):
• A “deep dive” review of this principal risk

in 2017

• An Executive Team sponsor is allocated to all
major change programmes, which are also
monitored on a monthly basis by the Board
• In 2016, PwC undertook a risk review of S3.
The recommendations from this review are
being considered for implementation

• An S3 steering committee, chaired by the
Chief Executive, meets monthly to track
progress against the plan

• An S3 communications manager is being

recruited with responsibility for implementing
the communications strategy approved by the
S3 steering committee.

Risk 3. People and culture

Trend: No signiﬁcant change

Changes during 2016
Talent and succession planning has been a focus for the Board and Executive Team in 2016.
The Board considers there is more work to do in this area and it remains a focus in 2017.

Description
Preserving Ultra’s culture (innovation, agility and
accountability) and attracting, developing and
retaining the right people who have the domain
expertise and who embrace Ultra’s culture is
critical to the Group’s strategic objective.

Potential impact of failure:
• Not recruiting and retaining the right

employees in the right roles would result in
Ultra being unable to fulﬁl its contractual
obligations and lead to operational
inefﬁciencies and loss of productivity

• Staff morale could be impaired resulting in a

rise of employee related issues (e.g. grievances
and sickness)

• Not maintaining a strong ethical culture would
increase the Group’s exposure to legal and
regulatory breaches.

See developing Ultra’s people on
pages 46-50

Mitigations (examples):
• Ultra is engaged in a number of initiatives

with local schools, colleges and universities
which provide access to the best people for its
apprenticeship and graduate recruitment
programmes. Employee development needs
are identiﬁed during the performance and
development reviews and future development
is aligned with these speciﬁc needs
• The annual Organisation, Succession &

Development Plan (OSDP) results in high-
potential employees being identiﬁed and their
development monitored. The establishment of
the “Chief Executive’s Mentoring Club” has
enhanced this process.

• Employee engagement and morale is

measured through YOURviews surveys. The
survey identiﬁes any areas of concern which
are then addressed by the businesses’
leadership teams

• Talent and succession planning has been, and
will continue to be, a focus for the Board (see
page 50).

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Risk management

Principal risks (continued)

Risk 4.

Information management and security

Trend: No signiﬁcant change

Changes during 2016
CORVID Protect and Ultra’s approach to security provide a high level of assurance. However, the global
increase in the frequency and sophistication of cyber security crime means this risk continues to be a
priority for the Company.

Description
The incidence and sophistication of cyber
security crime continues to rise. The effective
management and protection of information and
Ultra’s IT systems is necessary to prevent loss of
data/data integrity and disruption to operations.

Potential impact of failure:
• Reduced product differentiation caused by loss

of intellectual property

• 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
programmes

• Disruption to business activity as systems are

cleansed and restored.

Mitigations (examples):
• Continued investment in Ultra’s Cyber Protection
Group (CPG) (now part of CORVID Protect),
which provides Group-wide monitoring, incident
response and continued enhancement of Ultra’s
IT systems and processes

• Board is kept updated on CPG’s developments

on protecting Ultra’s network, including
protecting Ultra from phishing attacks

• The Group’s Information Security Policy has

been updated

• Protection of intellectual property was

addressed in the bid and contract management
review (see page 38)

• Security clearance processes in place for all

employees

• Established physical security processes

implemented at all sites.

Risk 5. Supply chain

Trend: No signiﬁcant change

Changes during 2016
We do not consider that the level of risk has changed in the year.

Description
The Group relies upon suppliers and
subcontractors to deliver upon its customer
commitments. Ultra’s supply chain needs to
be efﬁcient to maintain margins and be
compliant with legislation.

The Group’s manufacturing facilities are
exposed to natural catastrophe risks and the
Group is exposed to social, economic,
regulatory and political conditions in the
countries in which it operates.

Potential impact of failure:
• Failure to deliver against customer

commitments

• Reduced proﬁt margins and increased
contractual disputes and litigation

• Loss of reputation and investor conﬁdence.

See S3 work on improving the
supply chain on pages 12 and 13

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Mitigations (examples):
• The Bid Management Policy has been updated
to ensure any major supplier issues and risks
(including single-source arrangements) are
highlighted and mitigated against, prior to
customer contracts being accepted

• The Board has adopted an Anti-Slavery and
Human Trafﬁcking Statement in compliance
with the Modern Slavery Act 2015
(www.ultra-electronics.com/investors/anti-
slavery-and-human-trafﬁcking-policy.aspx)

• Pre-contract audits of key suppliers and sub-
contractors and continuing review of their
performance

• Business continuity and IT disaster recovery

plans are in place

• S3 improvements to the supply chain process
• Business interruption, property damage,

professional indemnity and product liability
insurance.

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Risk management

2016 Principal risks and uncertainties

Risk 6. Governance and internal controls

Trend: No signiﬁcant change

Changes during 2016
We do not consider that the level of risk has changed in the year.

Description
Maintaining corporate governance standards
as well as an effective risk management and
internal control system is critical to supporting
the delivery of the Group’s strategy.

Potential impact of failure:
• Signiﬁcant ﬁnancial loss (e.g. fraud, theft,

material errors)

• Loss of reputation and investor conﬁdence
• Loss of business opportunity with removal of
government approval to work on classiﬁed
programmes.

Read more about accountability
on page 64

Mitigations (examples):
• The Group Operating Manual and Risk
Management Framework provides clear
instructions on the Group’s internal
governance and controls

• The businesses provide year end disclosures
on the effectiveness of their accounting and
internal control systems

• Internal Audit conducts an audit of the

Group's internal control system

• The terms of reference for the Board and

committees are reviewed and updated annually.

Risk 7. Pensions

Trend: Decreased risk

Changes during 2016
We consider this risk to have reduced due to the closure of the UK pension scheme to future
accrual, the completion of the 2016 triennial valuation and the increase in hedging of the pension
scheme liabilities.

Potential impact of failure:
• Any increase in the deﬁcit may require

additional cash contributions and therefore
reduce the available cash for the Group.

Description
The Group’s UK deﬁned beneﬁt pension
scheme needs to be managed to ensure it
does not become a serious liability for the
Group. There are a number of factors including
investment returns, long-term interest rate and
price inﬂation expectations, and anticipated
members’ longevity that can increase the
liabilities of the scheme.

Read more about the Group’s UK
defined benefit pension scheme
on pages 26-27

Mitigations (examples):
• Group’s UK deﬁned beneﬁt pension scheme
was closed to future accrual with effect from
5 April 2016

• The Company agreed the pension triennial

valuation in 2016

• The Pension Trustees and Company actively

consider pension risk reduction activities such
as liability matching, dynamic de-risking,
pension increase exchange and retirement
transfer options

• The Pension Trustees and Company agreed

to increased hedging of the scheme’s liabilities
in 2016

• The Board undertakes regular Pension

Strategy Reviews.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Risk management

Principal risks (continued)

Risk 8. Legislation/regulation

Trend: No signiﬁcant change

Changes during 2016
We do not consider that the level of risk has changed in the year. The Company continues to take
compliance very seriously and the Board and Executive Team strive to reinforce an ethical culture.

Description
The Group operates in a highly regulated
environment across many jurisdictions and is
subject to regulatory and legislative
requirements. There is a risk that the Group
may not always be in complete compliance
with laws, regulations or permits.

Export restrictions could become more
arduous and factors outside of Ultra’s control
could result in the Group being unable to
obtain or maintain necessary export licences.

Potential impact of failure:
• Failure to comply with legislation and

regulations could result in ﬁnes and penalties
and/or the debarment of the Group from
government contracts

• Reduced access to export markets could have a
material adverse effect on the Group’s future
revenue and proﬁt

• Loss of reputation and investor conﬁdence.

Read more about Ultra’s approach
to ethics on page 51

Mitigations (examples):
• The Group Operating Manual has well-

established and regularly updated policies and
procedures covering legislative and regulatory
requirements and compliance training. Individual
businesses are required to provide compliance
statements as part of their monthly business
performance reports

• The Ethics Overview Committee provides
independent advice and scrutiny of Ultra’s
business activity and provides assurance that the
Group’s current and planned undertakings are
transparent and conducted in a manner
consistent with the legislative environment

• Employees have access to a Group-wide

conﬁdential hotline to report anonymously any
concerns they may have about possible
improprieties and other compliance issues
• The Company has taken steps to ensure it is
compliant with the Modern Slavery Act 2015

• The Board receives regular updates and

presentations on the Company’s legal and
regulatory requirements

• A working group has been established to
evaluate the impact of the General Data
Protection Regulation and to ensure Ultra is
compliant with its obligations.

Risk 9. Health, safety and environment

Trend: No signiﬁcant change

Changes during 2016
Ultra has strong health, safety and environment (HS&E) processes and procedures. The Board has a
zero appetite for HS&E reportable incidents and has elected to report health and safety as one of its
KPIs (see page 29). The externally reportable accident rate per 100 employees and the number of lost
time accidents per 1000 employees increased slightly in 2016. Investigations of these accidents were
undertaken and appropriate risk mitigations were implemented. The Company does not consider the
HS&E risk proﬁle of the Group to have changed from last year.

Description
Ensuring high standards of health and safety of
employees and visitors and maintaining our
commitment to minimise the environmental
impact of our activities is of paramount
importance to the Company.

Potential impact of failure:
• Incidents may occur which could result in
harm to employees and/or visitors, the
temporary shutdown of facilities or other
business disruption

• The Group may be exposed to regulatory

action and ﬁnancial loss

• Loss of reputation and investor conﬁdence.

Read more about Ultra’s approach
to HS&E on page 52

Mitigations (examples):
• The Board has a low appetite for HS&E risk

and is committed to ensuring that the Group’s
leadership see this as a top priority. Any
material incidents are reported to the Board
along with a correction/mitigation plan
• The Board undertakes an annual review of

HS&E and the Executive Team reviews HS&E
on a quarterly basis. Each business conducts
an annual HS&E self-assessment in addition to
a biannual external audit.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Risk management

2016 Principal risks and uncertainties

Statement of going concern
Ultra’s committed banking facilities amount
to £482.9m in total, together with a
£15.0m overdraft. They were established
in three tranches.

The ﬁrst tranche comprises £100m of
revolving credit, denominated in Sterling, US
Dollars, Canadian Dollars, Australian Dollars
or Euros. This facility was signed in December
2012, amended and extended in July 2015
and expires in August 2019. The facility is
provided by a group of ﬁve banks.

The second tranche provides a further £200m
of revolving credit in the same currencies. This
was signed in August 2014 with seven banks
and expires in August 2019. Both facilities
have the same covenants.

The third tranche, agreed in May 2015, is a
$225m term loan with a group of banks from
our lending group. This loan, denominated in
US Dollars, was drawn in full in August 2015
to complete the Herley acquisition, and expires
in August 2019. The covenants match the
revolving credit facilities.

The Group also has loan notes in issue to
Pricoa; at the year end, $70m (2015: $70m)
of loan notes, which mature in 2018 and
2019, had been issued.

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.
Details of how Ultra manages its liquidity risk
can be found in note 23 – Financial
Instruments and Financial Risk Management.

Although global macroeconomic 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 the Group has adequate resources for a
period of at least 12 months from the date of
approval of the ﬁnancial statements and have
therefore assessed that the going concern
basis of accounting is appropriate in preparing
the ﬁnancial statements and that there are no
material uncertainties to disclose.

Long-term viability statement
In accordance with provision C.2.2 of the
2014 revision of the Code, the Directors have
assessed the viability of the Company over a
longer period than the 12 months required
by the going concern basis of accounting.
The Board conducted this review for a period
of three years to December 2019, to coincide
with its review of the Group’s ﬁnancial
budgets and medium-term forecasts from its
Strategic Plan. The certainty is lower in later
years due to the inherent uncertainties in
forecasting future performance. The Strategic
Plan is underpinned by the regular Executive
Team reviews of business unit performance,
market opportunities and associated risks.
The assessment has taken into account the
Group’s current position and the potential
impact of the principal risks documented in
the Strategic Report. Based on this
assessment, the Directors have a reasonable
expectation that the Company will be able to
continue in operation and meet its liabilities
as they fall due over the period to December
2019. In making this statement, the Directors
have considered the resilience of the Group,
taking account of its current position, the
principal risks facing the business in severe
but reasonable scenarios and the
effectiveness of any mitigating actions. This
assessment has considered the potential
impacts of these risks on the business model,
future performance, solvency and liquidity
over the period. The Directors have
determined that the three-year period to
December 2019 is an appropriate period to
provide its viability statement. In making their
assessment, the Directors have taken account
of the Group’s robust balance sheet, its
ﬁnancial covenant headroom, its ability to
raise new ﬁnance in different ﬁnancial market
conditions and its key potential mitigating
action of restricting dividend payments.

This conclusion is based on a review of the
resources available to the Group, taking
account of the Group’s ﬁnancial projections
together with available cash and committed
borrowings, ﬁnancial covenants and any
material uncertainties. In reaching this
conclusion, the Board has considered the
magnitude of potential impacts resulting
from uncertain future events or changes in
conditions, the likelihood of their occurrence
and the likely effectiveness of mitigating actions
that the Directors would consider undertaking.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Making a difference

Sustainability

Making a difference
Ultra recognises that the
success and sustainability of
the business is enhanced by
positive relationships with
stakeholders and continues to
focus on value creation for all:
shareholders, customers,
employees, the environment,
local communities and suppliers.

In the community:
Ultra’s businesses continue to be active in
their local communities, building positive
links by engaging with local people and
local issues. Many businesses form special
relationships with educational
establishments in the surrounding
communities offering work placements and
visits to businesses as part of AS level
courses, as well as providing interview
practice sessions, supporting lessons, careers
events and school science fairs. Ultra is
involved in the nationwide initiatives on
STEM* education and also offers Arkwright
scholarships: a scholarship that sponsors
A-level students looking to pursue a career
in engineering through their education.
Ensuring a long-term supply of talent to the
business is essential and Ultra commits itself
to developing the talent pipeline in schools
and higher education institutions. This was
exempliﬁed at the Dorset Business Awards
where NCS was a ﬁnalist in the Best
Engagement with Education award. Each
business manages its own charitable
budget, which it uses to maintain and grow
connections with local communities.

*STEM: Science, Technology, Engineering and Mathematics

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Fundraising and voluntary work in the local
community or at a national level is
something the Group is keen to encourage.
It actively supports employees who
undertake voluntary activities. Some
noteworthy examples in 2016 include:

• Ultra has created “Charity Champions”

within each Ultra UK business to promote
the Group’s partnership with Macmillan
Cancer Support to raise enough money to
fund a Macmillan nurse for a whole year.
The initiative began with the World’s
Biggest Coffee Morning on 30 September
and continues until April 2018.

• ATS has received the Distinguished

Partnership Award from the Del Valle
independent school district in Texas for
a third year in a row for outstanding
contributions throughout the year to
Smith Elementary School. This is a
neighbouring elementary school which
ATS has “adopted”.

• CIS worked in collaboration with SPEAR
Group, an organisation dedicated to
helping young people who ﬁnd it difﬁcult
to gain employment to become more
employable. Together they have run CV
workshops and introduced participants to
various professionals, sharing career
knowledge and success stories.

For more about securing the
talent pipeline, see page 48

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Making a difference

Sustainability, people and culture

Shareholders:
The Group’s primary objective is to
outperform the market by delivering above-
average increases in total shareholder return,
which it has a long track record of doing,
and by communicating effectively with
shareholders and the ﬁnancial community.

Customers:
Ultra aims to be an excellent strategic
supplier to its customers. To enable this,
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. Ultra’s businesses aim to build
long-term, mutually beneﬁcial relationships
with their customers and become part of the
customers’ extended enterprise.

Examples from 2016 that highlight Ultra’s
commitment to its broad customer base are:

• NCS was named EDF’s “Supplier of the

Year” at the EDF Energy Generation’s 5th
Annual Performance and Innovation
Awards ceremony. This is in recognition of
the Neutron Flux Detector programme.

• Herley, which was acquired by the Group in

2015, received Raytheon’s Operational
Excellence Award. In addition to this,
Lockheed Martin and the US Navy presented
Certiﬁcates of Recognition to employees
who went above and beyond in service on
the Trident Fleet Ballistic Missile programme.

• EMS received special recognition as a

critical supplier of the hand controllers
used in the Boeing Commercial Crew
Transportation System (CCTS) for NASA.

Employees:
Ultra believes that the right people are its
most important asset; the capabilities of its
employees allow the Group to innovate
continually and meet customer needs. Ultra
has a strong commitment to developing
people and securing the talent pipeline,
details of which can be found in the section
“Developing Ultra's people”. The Group
believes that, to ensure its continuing growth
and success, these initiatives for talent
development and employee retention are
essential. However, ultimate responsibility for
individual talent development and employee
retention resides within each of Ultra’s
businesses, a number of which have launched
unique initiatives to ensure continuing
employee development and engagement.

Examples include:

• In 2016 a “Chief Executive’s Mentoring

Club” was established across the Group.
This aims to help high-potential people
develop their careers and realise their
full potential by being mentored by the
Chief Executive.

• Airport Systems was a ﬁnalist in the national
award for the best employee engagement
initiative by the professional HR body CIPD,
following the turnaround of business
morale, engagement levels and YOURviews
feedback over the past three years.

• For the second year in a row Ultra

Electronics US was presented with the Gold
Wellness Award by the Business Council of
Fairﬁeld County, Connecticut. This
recognises the UltraFit programme and
Ultra as a leading company in promoting a
healthy workplace for its employees.

The environment:
Ultra is committed to implementing and
enforcing effective measures to minimise the
environmental impact of its activities. All
businesses are audited at least biennially.

Ultra continues its commitment to investing in
manufacturing facilities to offer increased
efﬁciencies and reduce energy consumption,
while improving productivity across the
Company. The Group also looks for its
suppliers to reduce their environmental impact.

Initiatives that have taken place within the
Group include:

• 3eTI continued to promote its “Go Green

Campaign” with the addition of the
“Paper Reduction Campaign” which
supplements the on-going paper recycling
initiative.

• CIS held a waste and recycling awareness

day to improve the awareness and visibility
of waste management for all employees.

• Flightline hosted the New York State

Department for a voluntary audit of the
facility. This is a proactive effort to keep
employees safe and ensure compliance.

• A two-day external Achilles Audit at NCS

resulted in the Environmental Management
system gaining a 100% score.

Suppliers:
Ultra views its suppliers as an extension of
the Ultra enterprise as many businesses rely
on these suppliers for delivery of their
products and services. These are safety or
performance critical in their end markets so
working together is crucial. Partnership with
suppliers and customers generates innovative
and differentiated solutions which are at the
core of Ultra’s business model. Many Ultra
businesses work with their suppliers to
enable them to operate more efﬁciently.

To read more about Ultra’s
customers, see page 2

To read more about Ultra’s people,
see pages 46-50

To read more about the
environment, see pages 52-53

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Developing Ultra’s people

Developing Ultra’s people

Ultra would not be able to deliver value to customers without the
innovative and entrepreneurial spirit of its people.

The right people
Most companies state that their people are the
company’s most important asset. Ultra varies
this slightly: the right people are the Group’s
most important asset. It is generally recognised
that Ultra is successful in innovating to meet
customers’ needs due to the broad range of
skills and capabilities of the Group’s
employees. Therefore, people and their
development are key initiatives for the Group
as it strives to achieve an efﬁcient organisation
with engaged and committed people.

Domain expertise
Ultra maintains its domain expertise by
ensuring that employees maintain continuing
professional development and close links with
customers and end-users of Ultra’s products.

The key factors in delivering innovative
solutions to meet customers’ needs are Ultra’s
deep understanding of its specialist capability
areas combined with knowledge of the users’
environments. Ultra maintains its domain
expertise by ensuring that employees maintain
continuing professional development and
close links with customers and end-users of
Ultra’s products. The Group ensures it has the
right people to work with customers to
support their needs by understanding their
problems and creating winning solutions.

“

I have enjoyed
working at Ultra
immensely! The highly
varied work that Ultra
gives me has provided
me with a challenging,
but highly enjoyable,
working environment.
Nicholas Roberts Graduate Engineer,
Precision Control Systems

”

How Ultra manages its people
Ultra values the autonomy of its businesses
and believes a high degree of operational
autonomy enables businesses to focus on
delivering agile and responsive solutions to
its customers.

The Managing Directors and Presidents of
Ultra’s individual businesses and their
management teams are given as much
authority and responsibility as possible. This
allows these teams to maintain the agility
and sharp focus that is typical of smaller
owner-managed businesses.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

People in action
Nicholas Roberts (above left) is a
Graduate Engineer at Precision Control
Systems, having joined Ultra through an
Arkwright Scholarship.

Why did you choose Ultra?
I chose to go with Ultra as my full time
employer as, over the years, I had gained
fantastic working relationships with many
of my co-workers. During my many work
experience placements, I had seen the
progression of several projects and was
excited to be involved in them and
everything Ultra does.

What is your role at Ultra?
I currently work within the Systems
department. My role includes creating,
maintaining and supporting the use of an
increasing number of business tools
throughout Ultra’s different departments,
while gaining valuable experience of how
the business functions.

How long have you been here?
Overall I’ve worked with Ultra for just over
seven years. I started as an A-level student
(through an Arkwright Scholarship at the
end of my GCSEs), coming to Ultra for
work experience and help with school
projects. I then continued my work
experience with Ultra every holiday
throughout my university course, where
my group and individual dissertation
projects were supplied by Ultra. Once I
graduated from university, I joined Ultra
full time as a graduate engineer and have
currently completed over half of the two-
year course.

What have you enjoyed most
about this role?
I have enjoyed working at Ultra
immensely! The highly varied work that
Ultra gives me has provided me with a
challenging, but highly enjoyable, working
environment. Ultra has given me the
opportunity to improve, expand and utilise
my skill set. I have been able to follow
along my own career path knowing that
the direction I am taking has all been of
my own decision.

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Developing Ultra’s people

Sustainability, people and culture

Ultra is committed to securing the talent pipeline and developing people to ensure the continued
growth and success of the Group. Focus is placed on ensuring that the right people are in the right
roles. Furthermore businesses are responsible for and encouraged to develop their teams and
individuals continuously, which will enable people to grow with the business and not become a
constraint on the development of the Group.

Leadership: Good leadership is essential
to Ultra and a number of models of
leadership are incorporated in the
development and training programmes
that 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 our competitors. Ultra’s
entrepreneurial culture seeks to maximise
the capability to generate exceptional
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 people on maximising their knowledge
of the competitive landscape, by
constantly asking questions of the
Group’s individual businesses, customers,
teaming partners and suppliers.

Culture
The Group believes its culture is what drives
Ultra’s success and that this includes aspects
such as values, role models, processes and the
behaviours of its employees. As the Group
expands through organic growth, natural staff
turnover and acquisitions, Ultra is committed
to keeping its culture strong. The Group’s
culture, values and behaviours are shaped by
the guiding principles, in particular the call for
“an efﬁcient organisation with engaged and
committed people”.

To achieve this, Ultra has identiﬁed four
cultural behaviours of its people that are
highly valued and encouraged. These are:
Leadership, Entrepreneurship, Audacity and
Paranoia. Together, they are known within
the Group as LEAP.

What people mean to Ultra
Ultra’s aim of delivering an efﬁcient
organisation, with engaged and committed
people to meet the Group’s business
commitments, is a goal all managers work
towards and is a measure of their success.
The broad range of skills and capabilities of
Ultra’s employees support the Group’s
success in innovating to meet customer
needs. The quality of Ultra’s leadership teams
is constantly reviewed and improved as this is
essential to the continuing growth and
success of the Group.

Growth through engagement
LAUNCH is a set of behaviours which the
Group has developed to facilitate customer
engagement and relationship building.

L Listen to customers

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?

This approach ensures Ultra understands the
real needs of its customers; in addition,
LAUNCH is a way for Ultra’s businesses to
generate long-term customer relationships,
which leads to a better pipeline of
opportunities and enables growth. LAUNCH
is aligned with the Group’s approach to
systems engineering and project management.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Strategic report. Developing Ultra’s people

Developing Ultra’s people (continued)

Securing the talent pipeline
Ultra has been committed to developing
people ever since it was formed in 1993.
There are 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.

SCHOOLS
Ultra businesses engage with schools in the
local community. Relationships with schools
and colleges take a variety of forms, including
work experience, longer work placements,
visits as part of AS-level courses interview
practice sessions, careers events, and Ultra
employees supporting both lessons and after
school clubs. Examples include:

• CIS has a STEM* ambassador supporting

local schools and a senior manager serves as
a Local Area Board Member for the “Career
Ready” initiative at another local school.

• The EDT Engineering Education Scheme
for Sixth Form students, which runs for
nine months of the year, has been
adopted by Precision Controls Systems
(PCS). This year the students worked with
employees to research and build a
prototype model for recovering electrical
energy on military vehicles.

• NCS undertakes many activities with local
schools, including hosting pupils for site
visits, attending “next steps” careers
evenings and careers fairs, and presenting
the Post 16 conference, which is attended
by Heads of Sixth Form, careers advisors
and local authority.

Ultra’s focus is mainly engineering but extends
to include other STEM* subjects, as well as
ﬁnance and commercial disciplines. The Group
also sponsors students through their last years
at school via the Arkwright Scholarship. This
provides students with support and mentoring
during their studies and has led to more
students electing to undertake STEM* degree
courses. Ultra is recognised as a major sponsor
of the scheme and currently has eight
scholars, many of whom were recognised at
this year’s awards ceremonies.

APPRENTICESHIPS
Many Ultra businesses have well-established
and successful apprenticeship programmes,
which have also historically provided the
Group with engineering leaders. The Group
runs apprenticeship schemes at most of its UK
businesses and currently has 42 apprentices in
training in the UK.

There have been a number of notable successes:

• NCS has celebrated the graduation of its
ﬁrst group of apprentices after four years
of hard work. The four apprentices
completed their Advanced Apprenticeship
in Engineering Manufacturing and will
now successfully continue on to the next
stage of their Ultra career. The success of
the 2012 intake has demonstrated the
value of apprenticeships to both learners
and the business.

• Three Advanced Apprentices at PCS are
continuing their academic qualiﬁcations
and enrolled in degree courses at the
University of West England; their Advanced
Apprenticeships mean they are able to start
at the 2.2 level rather than entry level.

• At the Engineering Trust awards, three

apprentices were recognised for ﬁrst-year
achievements and endeavour, two for
third-year achievements and endeavour
and one was Electrical Student of the Year.
In addition to this, two apprentices have
been shortlisted for the prestigious
National Skills Academy for Nuclear
Apprentice of the Year Awards.

UNIVERSITIES AND COLLEGES
In addition to traditional career fairs, Ultra
actively engages with lecturers and faculties
during degree courses as part of the excellent
links the Group maintains with universities
around the world. This allows Ultra access to
leading research and enables the Group to
form relationships with students well before
graduation. The Group beneﬁts from working
with universities as it can collaborate on
innovation and recruit students who can
make a difference. Ultra is currently
sponsoring 17 university students and also
provides a number of work placements as
part of degree courses (23 in the UK and US
in the last year).

Ultra businesses provide opportunities for
students to work on real projects via work
placements, co-operative programmes and
internship schemes; all internships are paid
for, to promote access to all. The Group also
works with SEPnet to provide summer work
placements to students to help advance and
sustain physics as a strategically important
subject for the UK economy.

SUCCESS STORIES
• Ultra PCS has formed relationships with
several universities resulting in seven
offers of employment to undergraduates
this year alone.

• Maritime Systems has received an award
for the “Best Co-op Student Employer” in
Nova Scotia.

• 3 Phoenix is currently working with ten interns
from their partner Universities and Colleges.

• Command & Sonar Systems received a
certiﬁcate in recognition of working in
partnership with Birmingham City University
as well as being an Uxbridge College
Employer Champion.

INSTITUTIONS
Ultra’s UK businesses are members of
Engineering UK, Cyber Challenge UK and
other bodies that research and develop new
ways to attract people into engineering
careers, as well as helping to forecast future
trends in the sector. Ultra businesses
worldwide have a variety of links with their
local business forums and chambers of
commerce members, helping to encourage
STEM* activities.

*STEM: Science, Technology, Engineering and Mathematics

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Strategic report. Developing Ultra’s people

Sustainability, people and culture

UK data
Employees

Apprentices

University placement students

Category

Unit trusts

Pension funds

Other managed funds

Mutual fund

Custodians

Trading position

Insurance companies

Private investor

Sovereign wealth

Investment trust

Exchange-traded fund

Local authority

Charity

Other

Holding

35,125,147

10,631,140

5,413,730

5,025,552

2,279,103

1,798,672

1,765,263

1,549,694

1,487,287

1,286,737

867,860

362,738

21,583

2,848,586

49.85

15.09

7.68

7.13

3.23

2.55

2.51

2.20

2.11

1.83

1.23

0.51

0.03

4.05

Total issued share capital

70,463,092

100.00

Shareholder analysis by size of shareholding as at 31 December 2016

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

22 March 2017

6 April 2017

7 April 2017

28 April 2017

4 May 2017

7 August 2017

21 September 2017

Total number

of holdings % of holders
8.26
6.21
22.12
13.80
13.80
16.94
2.89
4.16
2.65
9.17

137
103
367
229
229
281
48
69
44
152

Total number
of shares
2,966
8,433
66,817
84,166
162,776
596,031
332,346
1,151,294
1,532,735
66,525,528

%
issued capital
0.00
0.01
0.09
0.12
0.23
0.85
0.47
1.63
2.18
94.42

1,659

100.00

70,463,092

100.00

Annual Report &
Accounts published

Ex-dividend date

Record date

Annual General
Meeting

Final dividend
payment date

Interim results
announced

Interim dividend
payment date

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Corporate Governance Report

Corporate Governance Report (continued)

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 the Group’s website
(www.ultra-electronics.com). Legislation in the
United Kingdom governing the preparation and
dissemination of financial statements may differ
from legislation in other jurisdictions.

We confirm that to the best of our 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 the Company and the undertakings
included in the consolidation taken as a whole

• The Strategic Report includes a fair review of
the development and performance of the
business and the position of the Company and
the undertakings included in the consolidation,
together with a description of the principal
risks and uncertainties that they face

• The Annual Report and financial statements,

taken as a whole, are fair, balanced and
understandable and provide the information
necessary for shareholders to assess the
Company’s performance, business model
and strategy.

The Annual Report (including the Strategic Report
and Directors’ responsibilities statement) on
pages 4 to 91 was approved by the Board on
3 March 2017 and signed on its behalf by:

Rakesh Sharma, Chief Executive
Amitabh Sharma, Group Finance Director

Directors’ responsibilities statement
The Directors are responsible for preparing the
Annual Report and the financial statements in
accordance with applicable law and regulations.

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 IFRSs as adopted by the
European Union and Article 4 of the
International Accounting Standards Regulation
(IAS) and have elected to prepare the Company’s
financial statements in accordance with United
Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards
and applicable law) including FRS 101. 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
and of the profit or loss of the Company, as well
as the undertakings included in the
consolidation for that period.

In preparing the Company’s financial statements,
the Directors are required to:

• Select suitable accounting policies and then

apply them consistently

• Make judgements 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 IFRS 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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

“

The Directors are
responsible for preparing
the Annual Report and
the ﬁnancial statements
in accordance with
applicable law and
regulations.

”

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Nomination Committee Report

Nomination Committee Report

“

I am pleased to present the
Nomination Committee Report
which summarises our work during
the year.
Douglas Caster, Chairman of the Nomination Committee

”

Dear Shareholder
Talented people are critical to the delivery of the
Group’s strategy. The Nomination Committee
met three times in 2016. Its focus was on
ensuring a robust selection and recruitment
process for the Group Finance Director;
reviewing the succession planning and career
progression of senior employees; and reviewing
the recruitment and development of talent
across the Group.

The Committee considers that the Board
continues to have the appropriate mix of skills
and experience to operate effectively.
Collectively, the Directors bring a range of
expertise and experiences to Board deliberations
which help to ensure constructive and
challenging debate around the boardroom table.
The Board’s skills are illustrated on page 62.

The Committee has written terms of reference,
which include all matters recommended by the
Code. These terms of reference are reviewed
and approved annually and are available from
the Investors’ section of the Group’s website
(www.ultra-electronics.com/investors).

Douglas Caster,
Chairman of the Nomination Committee

How the Nomination Committee spent its time in 2016

Board composition

Regularly review the structure, size
and composition (including the skills,
knowledge, experience and diversity)
of the Board in line with the Code’s
requirements.

• The Committee considered the composition of the Board. Sir Robert’s tenure as Non-Executive

Director exceeds six years. In line with the Code, the Committee considered his performance and
ability to continue to contribute to the Board. Sir Robert is actively involved in the defence market
and the Committee considers that he continues to bring relevant knowledge, skills and experience
to the Board.

Succession planning

Consider succession planning for Directors
and senior executives below Board level.

Board pipeline

Identify and nominate suitable
candidates for appointment to the
Board, including chairmanship of the
Board and its Committees, against a
specification for the role and capabilities
required for the position.

Board evaluation

Consider the results of the annual
Board evaluation.

• Succession planning was a particular area of focus for the Committee during 2016. The Committee

received a report explaining the annual Organisation, Succession & Development Plan (OSDP)
process, the output from which is reviewed annually by the Executive Team. The aim is to have a
successor identiﬁed for all senior positions. Where a permanent successor has not been identiﬁed,
key roles would be covered by colleagues on an interim basis whilst external recruitment is
undertaken. The success of the OSDP process is evidenced by the balance between internal and
external appointments at senior levels. For MD/President appointments, approximately 80% of
appointments have been internal over recent years. Individuals with the potential to ﬁll more
senior roles over the medium and long term are also identiﬁed through this process.

• A number of actions were taken in the year to strengthen the succession pipeline, including:

– The establishment of a “Chief Executive’s Mentoring Club”
– Addressing the demographic imbalances that exist in some businesses
– Taking advantage of the larger pool of talent below MD/President level as a result of

business consolidations and providing employees with increased scope to broaden their
experience within the business.

• The Board appointment of Amitabh Sharma was agreed with effect from 4 May 2016.

• The results of the Board performance evaluation process were considered.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Nomination Committee Report

Nomination Committee Report (continued)

The Committee’s focus for 2017
In 2017, the focus of the Nomination
Committee will be to:

• review the developments made by the

Company in talent management

• consider the Board’s diversity policy in light of

changes to the Transparency Rules

• review succession planning for Non-Executive

Directors.

Diversity
Ultra continues to follow its overriding policy of
appointing the best person for a particular role,
regardless of age, disability, gender re-assignment,
marriage or civil partnership, pregnancy or
maternity, race, religion or belief, sex or sexual
orientation. 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 objective.
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”
approach. You can read more about Ultra’s
initiatives to improve diversity across the Group,
including information on the gender split across
the Board, Executive Team and the Group as a
whole, in the Sustainability section of our
Strategic Report on page 52.

With the departure of Mary Waldner in March
2016, the Board does not currently have a
female Director. With the appointment of
Amitabh Sharma, two of the Directors on the
Board are from an ethnic minority background.
In line with our diversity policy, the paramount
consideration is to maintain the right mix of
skills, knowledge, independence and experience
on the Board. For that reason, appointments are
always based on merit.

“

Ultra continues to follow its overriding
policy of appointing the best person for a
particular role, regardless of age, disability,
gender re-assignment, marriage or civil
partnership, pregnancy or maternity, race,
religion or belief, sex or sexual orientation.

”

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Audit Committee Report

Audit Committee Report

“

As Chairman of the Audit
Committee, I am pleased to present
our Audit Committee Report for the
year ended December 2016.
John Hirst, Chairman of the Audit Committee

”

Dear Shareholder
Throughout the year, the Committee continued
to focus on the integrity of financial reporting,
internal controls and risk management processes.
The Board’s report on the systems of internal
control and their effectiveness can be found in
the Corporate Governance Report on pages 64.
An assessment of the Group’s principal risks and
uncertainties can be found on pages 36-43 and
the going concern and long-term viability
statements can be found on page 43.

As we indicated in the 2015 Report, in 2016,
the Committee reviewed the Company’s bid
process, project management of long-term
contracts and business continuity and IT disaster
recovery practices. In addition, the Committee
oversaw the embedding of the Company’s Risk
Management Framework. You can read more
about the Committee’s work in these areas on
page 36-43. The Committee’s areas of focus for
2017 are set out on page 71.

In 2016, the Committee ensured a smooth
handover to Alex Butterworth as lead partner of
our External Auditor Deloitte LLP (Deloitte). The
Committee undertook a review of the External
Auditor’s independence and effectiveness (as
described on page 72), following which the
Committee has made a recommendation to the
Board that the External Auditor be reappointed
for the year ending 31 December 2017. In
addition, the Company appointed an internal
Group risk manager to support the monitoring
and effectiveness review of the Group’s risk
management systems.

John Hirst, Chairman of the Audit Committee

“

Ultra is committed to
ensuring it has robust and
effective risk management
and control processes.

”

COMPOSITION
The composition of the Committee is set out on
page 54. The Chairman of the Committee has
the recent and relevant financial and accounting
experience required by the Code. He is
supported in his role by the other members of
the Committee who have a wide range of
business experience and expertise, as reported in
their biographies on page 55.

MEETINGS AND ATTENDANCE
The Committee met four times during the year
under review. In addition to the members of the
Committee, regular attendees were: the
Chairman of the Board, the Chief Executive, the
Group Finance Director and the Group
Marketing Director. The Company Secretary &
General Counsel is the Secretary to the
Committee. Deloitte is the Group’s External
Auditor. To ensure full and open communication,
Deloitte was represented at all scheduled
Committee meetings, and the lead director from
PwC attended those meetings at which key
findings from Internal Audit reports were
reviewed by the Committee.

During 2016, the Chairman of the Committee
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, where
Deloitte reported on its views of the Group’s
financial management process and any matters
that they thought should be brought to the
attention of the Committee. The Committee has
written terms of reference which include all
matters recommended by the Code. These
terms of reference are reviewed and approved
by the Board annually and are available from the
Investors’ section of the Group’s website
(www.ultra-electronics.com/investors).

The Board is kept fully informed of the
Committee’s work and the minutes of each
Committee meeting are circulated to Board
members.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Audit Committee Report

Audit Committee Report (continued)

How the Audit Committee spent its time in 2016

Financial statements
and accounting policies

Review management’s significant issues
and judgements, the Group’s financial
statements and the formal announcement
on the Group’s financial performance.
Review the Group’s going concern and
long-term viability statement assumptions.

Internal controls, including the financial
reporting control framework and financial
reporting developments

Assess the effectiveness of the Group’s
system of internal control and risk
management.

Internal audit

Review the effectiveness of the Internal
Audit function and discuss control issues
identified by Internal Audit.

External audit, auditor engagement
and policy

Review the scope and effectiveness of the
External Audit process; including
negotiating the terms of the External
Auditor’s appointment, scope, fees and
independence and supervising any audit
tender process.

• The Committee considered and recommended to the Board for approval the annual and interim

ﬁnancial statements and related results announcements.

• The Committee discussed the key accounting policies and practices adopted by the Group. In
addition, it reviewed the key accounting judgements and matters that required the exercise of
signiﬁcant management judgement.

• The Committee agreed the going concern statement and long-term viability statement.

• The Committee considered reports on the internal control environment and risk management

and their effectiveness.

• The Committee considered compliance by the business units with the Group’s Business Continuity

and IT Disaster Recovery Policies.

• The Committee discussed the Internal Controls Improvement Status Report which summarised

the results from the six-monthly Divisional control review meetings.

• The Committee reviewed the principal risks, the Group’s risk appetite and risk metrics and

considered their alignment to the achievement of Ultra’s strategic objectives.

• An assessment was undertaken of the key controls in place and future planned management

actions to address the risks.

• A risk “deep dive” was conducted into acquisitions (see page 37) and improvements in the

process were actioned by the Company.

• The Committee reviewed Internal Audit reports on the process for evaluating and managing

bids and long-term contracts.

• The Committee considered reports on known or suspected fraud.

• The Committee approved an updated Information Security Policy.

Further details of the approach to risk management can be found on pages 36-43.

• The Committee agreed the Internal Audit plan for the year.

• The Committee considered summary reports from the risk-based and rotational reviews and

progress reports on the implementation of remedial actions.

• The Committee considered reports from the External Auditor on the outcomes of their

audit process and the External Audit plan for the year.

• The Committee reviewed the External Auditor’s engagement policy, independence and

effectiveness, and audit and non-audit fees.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Audit Committee Report

Update on the actions reported in the 2015 Annual Report & Accounts

Areas of focus

Bid process

Actions taken

Internal Audit undertook a bid process review and its recommendations were implemented.

Project management of long-term contracts

Internal Audit undertook a long-term project management review and its recommendations
were implemented.

Business continuity planning and IT disaster
recovery

The Internal Audit plan includes a review of whether business continuity and IT disaster recovery
testing has been conducted by businesses within the Group.

The embedding of the Risk Management
Framework

Good progress has been made in embedding the Risk Management Framework (see page 36).

The Committee’s focus for 2017
In addition to the annual routine matters for
consideration, the main areas of focus for the
Committee for 2017 will be:

• Conducting a “deep dive” into the
“delivering change” principal risk.

• Reviewing Ultra’s tax strategy statement

in line with the Finance Act 2016.

• Considering the impact of the April 2016 version

of the Code on the Committee’s work.

Significant financial judgements and
financial reporting for 2016

How the Committee addressed these judgements

Valuation of and impairment testing of
goodwill and intangible assets

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.

Valuation of Oman Airport IT Contract
termination and Ithra liquidation provisions

Defined benefit pension scheme valuation

The Committee considered the level of the provisions for this matter.

The Committee reviewed the main assumptions used in determining the defined benefit post-
retirement obligations.

Long-term contract accounting

The Committee considered the judgements taken into the forecast cost to complete estimates for
significant contracts.

Financial control
The Group has in place internal control and risk
management arrangements in relation to the
Group’s financial reporting processes and the
preparation of its consolidated accounts. The
arrangements include procedures to ensure the
maintenance of records which accurately and fairly
reflect transactions to enable the preparation of
financial statements in accordance with
International Financial Reporting Standards. They
also require reported data to be reviewed and
reconciled, with appropriate monitoring internally
and by the Audit Committee.

Business Performance Reports (comparing actuals,
budget, forecasts and prior year) are prepared for
all businesses on a monthly basis and reviewed,
where relevant, by the Divisional Finance Directors,
the Group Finance Director, members of the
Executive Team and the Board.

When preparing and reviewing financial
information, the businesses do not work to a
materiality threshold. All variances judged to be
significant are investigated and explained.

Summary results from these reviews are included
in the Internal Controls Improvement Status
Report, which is presented to the Audit
Committee biannually.

Operational controls
The Group Operating Manual sets out the
mandatory Group policies and procedures to
be followed and is communicated widely across
the Group.

The Managing Directors and Presidents, the
Finance Directors and the Vice Presidents of
Finance of each business are required to give a
formal written representation to the Board each
year. This representation confirms that they
accept responsibility for maintaining effective
responsibility for maintaining effective internal
controls in line with the Group Operating Manual
and that they have disclosed full details of any
fraud or suspected fraud within their business.

In addition, there is a Group-wide process
specifically for monitoring financial controls and
risks. Management have delegated control
ownership to each of the businesses and
established a framework for reporting whether the
controls are designed and operating effectively.
Every six months, Divisional Control Review (DCR)
meetings are attended by the Group Finance
Director, the Divisional Finance Director and by
Internal Audit.

At the DCR meetings, the internal controls
processes and issues for each business are
discussed. These include:

• Results from the Senior Accounting

Officer review

• Self-assessment against the Group

Operating Manual

• Outstanding Internal and External Audit

recommendations

• Compliance with the Group’s Information

Security Policy.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Audit Committee Report

Audit Committee Report (continued)

Internal audit
PwC are appointed by Ultra as its internal
auditor. The use of an experienced external firm
provides independent assurance on the
effectiveness of the system of internal control.
A risk and rotational based approach is taken by
the Company in determining its Internal Audit
plan, thereby ensuring the plan is clearly linked
to the Company’s strategy and is flexible enough
to highlight and address emerging risks. The
Internal Audit plan and resources are considered
and monitored by the Committee, together with
all internal control findings and remedial actions.

All newly acquired, individually operating
businesses are audited within a year of their
acquisition date. Where required, additional
audits are identified during the year in response
to changing priorities and requirements. In 2016,
an advisory review on information security across
the Group was undertaken by PwC.

The lead director of PwC reports directly to the
Chairman of the Committee and presents the
findings to the Committee biannually. 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 effectiveness of Internal Audit is assessed by
the review of Internal Audit reports, meetings
with the Chairman of the Committee without
management being present and views from senior
management and the Group Finance Director.

External auditor
The performance, effectiveness and
independence of the Company’s External
Auditor, Deloitte, are reviewed annually by the
Committee. The Committee received a briefing
by Deloitte on the firm’s policies on these
matters and noted that such policies are subject
to external monitoring by the Audit Quality
Review Team, which is a part of the FRC’s
Conduct Division. The FRC’s Audit Quality Review
team selected to review the audit of Ultra’s 2015
Annual Report as part of their 2016 annual
inspection of audit firms. The focus of the review
and their reporting is on identifying areas where
improvements are required rather than
highlighting areas performing to or above the
expected level. The Chairman of the Audit
Committee received a full copy of the findings of
the Audit Quality Review team and discussed
these with Deloitte. The Audit Committee
confirms that there were no significant areas for
improvement identified within the report, or any
material issues in relation to the financial
statements. The Audit Committee is also satisfied
that there is nothing within the report that might
have a bearing on the audit appointment.

In addition, 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 independence.

The effectiveness of the External Audit process is
assessed by the Committee, which meets
regularly throughout the year with the senior
audit partner and senior audit managers. Key to
the overall effectiveness of the process is that
both the Company and the auditor make the
other aware of accounting and financial
reporting issues as and when they arise, and this
exchange is not limited to the period in which
formal audit and review engagements take place.

This general approach is supported by a formal
feedback process whereby each of the businesses
in the Group are requested to feedback comments
on the audit process, the performance of the
auditor and any recommendations for the audit
process going forward.

The Committee believes that sufficient and
appropriate information is obtained from the
feedback to form an overall judgement on the
effectiveness of the external audit process.

The Committee concluded that Deloitte had
been sufficiently transparent and incisive and
the audits had been effective. In addition, the
Committee concluded that Deloitte was both
independent and objective and that the re-
appointment of Deloitte as external auditor
should be recommended to the shareholders.
Accordingly, a resolution to reappoint Deloitte
will be put to shareholders at the 2017 Annual
General Meeting.

The senior audit partner employed by Deloitte
on the Group’s 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. Deloitte was appointed in 2002.
A new partner was appointed in 2016. 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. The Committee
considers it would be appropriate to conduct an
External Audit tender by no later than 2023 at
which point Deloitte would be precluded from
being Ultra’s external auditor. The Company is in
compliance with the requirements of the Statutory
Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive
Tender Processes and Audit Committee
Responsibilities) Order 2014 and the Code.

There are no contractual obligations that restrict
the Committee’s choice of external auditor.

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 services undertaken by
Deloitte, Ultra has a policy to ensure that the
provision of such services do not impair Deloitte’s
independence or objectivity.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

It is the policy of the Group that non-audit
services provided by Ultra’s External Auditor are
restricted to regulatory reporting, consultancy
services associated with financial restructuring,
responding to new reporting requirements, due
diligence assessments of potential acquisitions
and consultancy work. In connection with due
diligence work and consultancy, the Board
believes that the External Auditor’s familiarity
with Ultra’s accounting practices and the
techniques that are involved in Ultra’s long-term
contracting activities serves them well in
carrying out such work.

The Group Finance Director has authority to
commission the External Auditor 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 auditor is satisfied
that there is no issue regarding independence
and objectivity and other potential providers are
adequately considered. In addition, 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
auditor must certify to the Company that they
are acting independently. In providing a non-
audit service, the external auditor should not:
audit their own work; make management
decisions for the Company; create a mutuality of
interest; or find themselves in the role of
advocate for Ultra.

For the year commencing 1 January 2017 Ultra is
subject to restrictions on non-audit fees arising
from EU audit legislation. From 2020 the
maximum non-audit fees that the statutory
auditor can bill in any one year is set at 70% of
the average of the audit fees billed over the
preceding three years. All non-audit services
provided by Deloitte in the year will be tracked
relative to this cap.

The fees paid to Deloitte in respect of audit and
non-audit services are shown on page 106 of the
Financial Statements.

The Group has a policy on employment of
former employees of the external auditor. 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 appointments
require approval by a combination of the Group
Finance Director, Audit Committee and Board,
depending on the seniority of the appointment.

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Audit Committee Report

Fraud
The Internal Audit process, carried out by PwC,
described on page 72, 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 Group Finance Director
and Group Chief Operating Officer review the
performance of the businesses with the
Divisional team monthly and directly with the
businesses at least biannually. Significant
differences between forecast and reported
financial results are highlighted and require
explanation by the business unit concerned.
The Chief Executive and Group Marketing
Director also attend such Divisional/business
reviews as the case requires. 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
higher risk areas. There is a fraud reporting
process in place. All cases of fraud would be
immediately investigated and the situation
reported to the Committee and the Board.

Whistleblowing
An independently hosted Employee Hotline
(EthicsPoint) is used to provide a process for
reporting ethical concerns. Such concerns can
be filed anonymously. 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). Employee concerns are forwarded
to the Senior Independent Director 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 2016, no reports were
submitted (13 in 2015). In 2015, activities were
undertaken to republicise EthicsPoint, in order to
increase awareness. The intention is to
undertake a similar activity in 2017.

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 it. Within one week of joining Ultra, all
Directors and employees undertake anti-bribery
training. Additional anti-bribery training is given
as appropriate. Compliance with the code of
conduct on anti-bribery is mandatory and
monitored. The Group intranet contains a
statement from the Chief Executive regarding
compliance with Ultra’s anti-bribery policies.

The Audit Committee Report was approved by
the Board on 3 March 2017 and signed on its
behalf by:

John Hirst, Chairman of the Audit Committee

“

An independently hosted Employee
Hotline (EthicsPoint) is used to provide a
process for reporting ethical concerns.
Such concerns can be ﬁled anonymously.

”

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report

“

As the Chairman of the Remuneration

Committee, I am pleased to present the
Remuneration Report for the financial
year ended 31 December 2016.
Martin Broadhurst, Chairman of the Remuneration Committee

”

1. ANNUAL STATEMENT
Dear Shareholder
As the Chairman of the Remuneration
Committee, I am pleased to present the
Remuneration Report, as prepared by the
Remuneration Committee (the Committee) and
approved by the Board, for the financial year
ended 31 December 2016. 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 and has been divided into the
following three sections:

1. this ANNUAL STATEMENT, which

summarises the major decisions on, and any
substantial changes to, Directors’ remuneration;

2. the proposed DIRECTORS’ REMUNERATION
POLICY, which sets out Ultra’s policy on the
remuneration of Executive and Non-Executive
Directors; and

3. the ANNUAL REPORT ON REMUNERATION,
which discloses how the existing Remuneration
Policy was implemented in the financial year
ended 31 December 2016 and how the new
Remuneration Policy will be implemented in
the financial year ending 31 December 2017.

As Ultra’s Remuneration Policy was last put to a
shareholder vote in 2014, shareholders are being
asked to support Ultra’s policy at the 2017 AGM
where a binding Policy vote will be tabled. In
preparation for this vote, the Committee has
undertaken a thorough review of the
remuneration structures in place for the Executive
Directors. The Committee remains committed to
ensuring that the Policy is aligned with the
strategic aims of the Group in adding to
shareholder value and supporting the long-term
success of the Company, and has undertaken an
extensive consultation with major shareholders
on the proposed changes.

Amendments to the Remuneration Policy
The maximum annual bonus opportunity has
remained unchanged for the last eight years
and is relatively low for a company of Ultra’s size
and complexity. The Committee proposes to
increase the maximum annual bonus level in the
Policy from 100% to 125% of base salary.
Bonus deferral will be introduced for all
Executive Directors with 20% of the total bonus
awarded being deferred into Ultra shares for
three years. The deferred amount will be subject
to malus and clawback. Furthermore, Executive
Directors will be required to retain at least 50%
of post-tax shares received under the annual
bonus deferral, in addition to the existing
requirement to retain at least 50% of vested
Long-Term Incentive Plan (“LTIP”) awards, until
such time as the Directors’ shareholding
guidelines have been met.

The maximum annual award under the LTIP has
also remained unchanged for the last 17 years,
other than for the Chief Executive which has
remained unchanged for the last four years and
is also relatively low for a company of Ultra’s
size and complexity. The Committee proposes to
increase the LTIP maximum opportunity from
150% to 175% of base salary. However, the
Committee will use the LTIP capacity prudently;
for 2017, the maximum LTIP grant levels would
be set below the proposed new maximum
(Chief Executive LTIP award of 150% and other
Executive Directors LTIP award of 125% of base
salary, an increase from the existing normal
limits of 125% and 100% of base salary
respectively) and it is intended for the maximum
to be used only in exceptional circumstances.
The Committee would consult with
shareholders before further increasing the
normal level of LTIP award. Last year, the
existing shareholder-approved Remuneration
Policy was enhanced by the introduction of a
two-year post-vesting holding period which was
applied to LTIP awards granted to Executive
Directors from 2016 onwards, taking the
combined performance and holding period to
five years. The Remuneration Policy is updated to
include this change. In recognition of the
proposed increases in variable pay quantum, the
Executive Director shareholding requirement will
increase to 200% of base salary, from the current
level of 125% (Chief Executive) and 100% (other
Executive Directors) of base salary.

As highlighted in last year’s report, the
Committee determined that the salary review
date should be deferred from 1 January to 1 April
to better align with the Group’s financial results.
The Remuneration Policy has been updated to
reflect this change.

As was also highlighted in last year’s report, the
Committee has revised the Remuneration Policy in
respect of the Chief Executive not being permitted
to accept an outside appointment as a non-
executive director. Consequently, Rakesh Sharma
will be given permission to seek one external
non-executive director (non-chairman) role.

ANNUAL BONUS PERFORMANCE METRICS
Whilst the Policy remains unchanged and there
is no intention to change the existing measures,
currently, in order for a bonus to be payable,
both the profit and cash bonus criteria are
required to be met. The Committee has
reviewed this approach and has concluded that
this additional hurdle was unduly onerous and
the pay-out of the profit measure should not be
dependent upon the outcome of the operating
cash flow. Therefore, the Committee has
decided to remove this underpin for future
awards. The portion subject to operating cash
flow will continue to be paid only if the profit
element is payable (which is calculated after
taking bonus payments into account).

LTIP PERFORMANCE METRICS
For a number of years the vesting of the LTIP has
been subject to relative Total Shareholder Return
(TSR) performance with a “hard” Earnings Per
Share (EPS) underpin. As part of the review, the
Committee considered the extent to which this
approach adequately ensured that the LTIP
vesting aligned with the Company’s overall
business strategy and, in particular, with the
Company’s key performance indicators. The
Committee decided that the underpin should be
removed. Taking into account the above, market
practice across the sector and the wider market,
the Committee considered a wide range of
metrics and has determined that awards in the
future may be subject to up to four different
performance metrics. It is intended that relative
TSR will be retained as one of these measures.
However, the Committee will retain discretion to
reduce the portion of the awards that vest that
relate to TSR and revenue targets as appropriate
in the event of poor EPS performance.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Remuneration Report

For 2017 awards, it is intended that the
following measures and weightings will apply:

• Total Shareholder Return – measured against
the constituents of the FTSE 250 (excluding
investment trusts): 25%

• Return on Invested Capital (ROIC): 25%

• Annual growth in organic underlying

operating profit: 25%

• Annual growth in organic revenue: 25%

Each of these measures are considered to
provide the best overall indication of the Group’s
long-term success in improving its FTSE ranking
by outperforming the market.

PENSION PROVISION
Finally, as we committed to in last year’s
Directors’ Remuneration Report, a review of the
pension provision has been carried out following
the closure of the defined benefit scheme in
April 2016. Rakesh Sharma ceased accruing a
direct benefit from the defined benefit scheme
on 6 April 2014 and his pension provision has
been determined on an annual basis by the
scheme actuary such that it is equivalent in value
to the value of defined benefits formerly
accrued. The Committee has decided to fix
Rakesh Sharma’s pension provision at the
existing rate rather than continuing with an
annual calculation by the scheme actuary, which
the Committee would expect to increase over
the medium to long term. This will prevent any
further increases to Rakesh Sharma’s pension
contribution and is consistent with the closure of
the scheme to future accrual for the wider
workforce. The Committee did consider reducing
the provision but believes the proposed
approach is consistent with that taken for other
senior managers who were in the defined
benefit scheme and is therefore appropriate.

Long-Term Incentive Plan 2007
The rules of the Long-Term Incentive Plan 2007
expire in April 2017 after ten years in operation
and shareholders will be asked to approve a
new set of rules at the AGM.

Performance and reward during 2016
The continuing uncertainty in the core defence
market led Ultra to adopt a prudent view of
annual performance against which it has
delivered. In 2016, revenue and underlying
operating profit* were £785.8m (2015:
£726.3m) and £131.1m (2015: £120.0m)
respectively; underlying earnings per share* were
134.6p (2015: 123.9p); operating cash flow was
£120.4m (2015: £81.3m); and total shareholder
return was 8% (2015: 6%). Reflecting this, the
Executive Directors earned an annual bonus for
2016 (see page 82). The 2014 LTIP awards,
which had been due to crystallise in 2017 based
on three-year TSR and EPS performance to
31 December 2016, will not vest as a result of
performance targets not being met.

Board change
As highlighted in last year’s report, Mary Waldner
tendered her resignation from the Group in
November 2015 and left on 16 March 2016.
Amitabh Sharma was appointed Group Finance
Director with effect from 4 May 2016. During the
year the Committee considered his remuneration
arrangements which are in line with the
Remuneration Policy in place at the time.

Shareholder engagement
I am pleased to say that our voting result at the
2016 AGM was 99.60% in favour of the Annual
Report on Remuneration.

In conclusion, the Board firmly considers that
the Directors’ Remuneration Policy continues to
be aligned with the strategic aims of the Group
in adding to shareholder value and supporting
the long-term success of the Company.

Martin Broadhurst,
Chairman of the Remuneration Committee

Revenue
£785.8m
2015: £726.3m

+8.2%

Underlying operating profit*

£131.1m

2015: £120.0m

+9.3%

Underlying earnings per share*
134.6p
2015: 123.9p

+8.6%

+48.1%

Operating cash flow
£120.4m
2015: £81.3m

Total shareholder return
+8%
2015: 6%

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report (continued)

2. DIRECTORS’ REMUNERATION POLICY

The Policy described in this section, which will be put to a binding vote at the 2017 AGM, includes the amendments described in the Chairman’s letter. If
approved, this Policy will take effect immediately following the AGM.

Policy overview
The Group’s Remuneration Policy is to reward senior management competitively, enabling Ultra to recruit, motivate and retain executives of a high calibre,
whilst avoiding making excessive remuneration payments. The remuneration of Executive Directors and senior managers is aligned with the Group’s
objectives and the interests of shareholders.

Future policy
The following information summarises the Directors’ Remuneration Policy:

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

Operation of the element

Maximum potential

Performance targets

Normally reviewed annually,
effective 1 April

Paid in cash on a monthly basis;
pensionable

Is benchmarked against
companies with similar
characteristics and sector
comparators

Targeted at or below median

Reviewed in the context of the
salary increase budget across
the Group

None

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:
• Underlying performance of

the individual

• Underlying performance of

the business

• Underlying annual salary increases

within the overall Group

• Any changes to the scope of the
role in terms of size or complexity

• Underlying salary increases for

similar industry roles

It is recognised that annual
salary increases may also include
a “catch-up” element in addition
to 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
UK-based Company 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

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Remuneration Report

How the element supports
our strategy

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

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

To provide competitive, yet
cost-effective retirement benefits

OTHER BENEFITS

To provide benefits consistent
with role

Operation of the element

Maximum potential

Performance targets

Payable in cash

Non-pensionable

20% of bonus awarded is
deferred into Ultra shares for
three years

Dividend equivalents will accrue
in favour of participants during
the three year deferral period
and will be received with any
shares that vest after the
applicable deferral period

Executive Directors are required
to retain at least 50% of the
post-tax shares received upon
vesting of the deferred bonus
until shareholding guidelines
are met

Malus and clawback
provisions apply

Share plan to be approved by
shareholders at the 2017 AGM

Discretionary annual grant of
nil cost options or conditional
share awards

Two-year post-vesting holding
period for vested awards granted
in 2016 onwards. Executive
Directors are required to retain at
least 50% of the post-tax shares
received upon vesting until
shareholding guidelines are met

Malus and clawback
provisions apply

Defined contribution and/or
salary supplements paid on a
cash neutral basis

Benefits include: private medical
cover; life insurance; critical care
insurance; permanent health
insurance; car and fuel allowance;
relocation and expatriation
expense; and other benefits
payable where applicable

At least 75% of bonus potential
based on financial measures (e.g.
underlying profit before tax; and
operating cash flow). 0% of the
maximum bonus is payable at
threshold performance

No more than 25% based on
non-financial strategic/personal
targets

Performance measured over
three years

Up to four performance measures
which are set by the Committee
before each grant

20% of award vests at threshold
performance

125% of salary p.a.

Normal limit:
• 150% of salary p.a. for the

Chief Executive

• 125% of salary p.a. for other

Executive Directors

Exceptional limit:
• 175% of salary p.a., e.g.

recruitment or retention of
an employee

Dividend equivalents may be payable
on LTIP awards, in cash or shares, to
the extent that awards vest

n/a

Defined contribution/salary
supplement rates of 36.4% of base
salary for the current Chief
Executive, and up to a maximum
of 20% of base salary for all other
Executive Directors

No prescribed limit is set. However,
the total value will not exceed the
amount the Committee considers
reasonable

n/a

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report (continued)

2. DIRECTORS’ REMUNERATION POLICY (CONTINUED)

How the element supports
our strategy

SHARE OWNERSHIP GUIDELINES

To provide alignment of
interests between Executive
Directors and shareholders

Operation of the element

Maximum potential

Performance targets

n/a

Executive Directors are required
to build and maintain a
shareholding equivalent to two
years’ base salary through the
retention of at least 50% of the
post-tax shares received on the
vesting of LTIP awards and at
least 50% of the post-tax
shares received upon vesting of
the deferred bonus

Aim to hold a shareholding equal
to 200% of base salary for all
Executive Directors

Under the AESOP, up to the
prevailing HMRC limits, or any
lower limit set by Ultra, per annum
from pre-tax salary

n/a

Under the Savings Related Share
Option Scheme, up to the
prevailing HMRC limits, or any
lower limit set by Ultra, per
annum from post-tax salary

Aggregate annual limit imposed
by the Articles of Association

n/a

ALL-EMPLOYEE SHARE PLANS

The Executive Directors are
eligible to participate in the
Company’s UK tax-advantaged
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 similar sized
companies to ensure the Company
attracts Non-Executive Directors of
the right calibre and background to
support our strategy

The Chairman’s remuneration is
set by the Remuneration
Committee which meets without
him to agree this. The remaining
Non-Executive Directors’ fees are
proposed by a sub-committee of
the Executive Directors and
approved by the Board

Under the AESOP, UK employees
are offered the opportunity to
buy shares at market value from
pre-tax salary. Shares are
normally held in trust until the
maturity date or until
employment with Ultra ends

Under the Savings Related Share
Option Scheme, employees are
entitled to save from post-tax pay
for the purchase of Ultra shares
at a discount of up to 20%

Cash fee paid monthly

Fees are normally reviewed on
an annual basis

Fixed twelve-month contracts
with no notice periods

An additional fee is paid to the
Chairman of the Audit,
Remuneration and Nomination
Committees and to the Senior
Independent Director

Any reasonable business related
expenses (including tax thereon)
which are determined to be a
taxable benefit can be reimbursed

Notes to Directors’ Remuneration Policy table:
(1) A description of how the Company intends to
implement the Policy in 2017 is set out in the
Annual Report on Remuneration.

(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 operate 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.

Group. The performance conditions applicable
to the LTIP 2017 awards were selected by the
Committee on the basis that:
• TSR, one of the Group’s Key Performance

Indicators, aligns the performance objectives
of the Executive Directors more closely with
the interests of the Shareholders;
• Organic revenue growth provides an

indication of the rate at which the Group’s
business activity is expanding;
• Organic operating profit growth

demonstrates that the additional revenue is
being gained without profit margins being
compromised; and

• ROIC is felt to be an appropriate measure for
the Company to focus on over the medium
to long term and an appropriate measure of
how well the Company is performing and
being managed.

(4) None of the employee share plans operate

(3) The choice of the performance metrics

performance conditions.

applicable to the annual bonus scheme reflect
the Committee’s view that any incentive
compensation should be appropriately
challenging and largely tied to financial
performance. Operating cash flow and profit
are both Key Performance Indicators of the

(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 200% of base salary. Details
of the extent to which the Executive Directors
had complied with the policy in place as at 31
December 2016 are set out on page 86.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

(6) For the avoidance of doubt, in approving this
amended 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.

(7) Key changes to the policy:

The Committee proposes to:
a. Increase the bonus level in the Policy from

100% to 125% of base salary.

b. Increase the LTIP maximum opportunity from
150% to 175% of base salary. However, the
Committee will use the LTIP capacity
prudently; for 2017, the maximum LTIP
grant levels would be set below the
proposed new maximum (Chief Executive
LTIP award of 150% and other Executive
Directors LTIP award of 125%, an increase
from the existing normal limits of 125% and
100% of base salary respectively) and it is
intended for the maximum to be used only
in exceptional circumstances.

c. Introduce bonus deferral for all Executive
Directors with 20% of the total bonus
awarded being deferred into Ultra shares
for three years. The deferred amount will be
subject to malus and clawback. In addition,
Executive Directors will be required to retain
at least 50% of post-tax shares received
under the annual bonus deferral, in
addition to the existing requirement to
retain at least 50% of vested LTIP awards
until such time as the shareholding
guidelines have been met.

d. Formally include in the Policy the

introduction of a two-year post-vesting
holding period which was applied to LTIP
awards granted to Executive Directors from
2016 onwards, taking the combined
performance and holding period to five years.
e. Executive Director shareholding requirement

increased to 200% of base salary.

f. Defer salary review date from 1 January to
1 April to better align with the Group’s
financial results.

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Remuneration Report

Remuneration scenarios for
Executive Directors
The charts below 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. The charts show the proportion
of the total package comprised of each element.

Chief Executive
Remuneration composition levels (%)

Max

Target

Min

2,293

14 21

1,619

780

£’000 0

500

1,000

1,500

2,000

2,500

Group Finance Director
Remuneration composition levels (%)

Max

Target

Min

1,193

833

393

£’000 0

240

480

720

960

1,200

Group Marketing Director
Remuneration composition levels (%)

Max

Target

Min

984

10 24

691

332

£’000 0

200

400

600

800

1,000

(cid:2) Long-term share awards
(cid:2) Annual bonus

(cid:2) Pensions/benefits
(cid:2) Salary

Notes to remuneration scenarios:
(1) Base salary levels are based on those applying from

1 April 2017.

(2) Benefit values for 2017 have been based on 2016 actual values.
(3) Annual bonus outturn is assumed to be 50% of maximum at

target level. For maximum, outturn assumes a maximum bonus
award level of 125% of salary.

(4) LTIP Awards assume an LTIP grant policy of 150% of salary for
the Chief Executive and 125% 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.

Director recruitment policy
The Nomination Committee typically 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. Their salary would then be
increased to an industry competitive level as they
gain experience. 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 INCENTIVES
Short-term incentives are offered in line with
those paid to other Executive Directors.
Maximum opportunities will be in line with
current plan maximums for existing Executive
Directors (i.e. 125% of salary p.a.). The
Company may also apply different performance
measures if it feels these appropriately meet the
strategic objectives and aims of the Company
whilst incentivising the new appointment.

LONG-TERM INCENTIVES
Long-term incentives are offered in line with those
paid to other Executive Directors. Maximum
opportunities will be subject to the maximum
levels described in the Policy table.

OTHER BENEFITS
Other benefits are offered in line with those
paid to other Executive Directors.

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, having
considered existing Non-Executive Directors’ fee
levels, market levels and expected time
commitment. In deciding whether to accept any
fee increase the Non-Executive Directors consider
Company performance.

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 Executive Director’s service contract:

Name

R. Sharma
A. Sharma*
M. Anderson

Original date
of contract

Notice
period

21 Apr 2011 12 months
4 May 2016 12 months
11 Apr 2012 12 months

* Amitabh Sharma joined Ultra in January 2016

and became Group Finance Director with effect
from 4 May 2016.

No Executive Directors have provisions in their
contracts for compensation on early termination
other than for the notice period.

External appointments of Executive Directors
Executive Directors, including the Chief
Executive, may accept no more than one
external appointment as a Non-Executive
Director (excluding chairman). 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.

“

The Nomination
Committee typically
considers both internal
and external candidates
before any new
appointment is made.

”

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report (continued)

2. DIRECTORS’ REMUNERATION POLICY (CONTINUED)

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. If an employee gains employment
during the notice period, where payments are
phased, they 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.

The treatment of awards under the Group’s
share plans is determined in accordance with
the plan rules (some of which allow the exercise
of discretion).

The default under the 2007 LTIP, and the
proposed 2017 LTIP, is that awards lapse on
ceasing employment. However, if a participant
leaves because of death or for any other reason
at the discretion of the Committee, awards vest
either when they would normally have vested
had the participant not left or on leaving. Any
performance condition is applied at vesting and a
pro-rata reduction is made to reflect the reduced
award term relative to the normal three-year
vesting period (although the Committee can
decide not to pro-rate a particular award if it
regards it as inappropriate).

Under the Savings Related Share Option Scheme,
options lapse on leaving employment except in
certain specified good leaver circumstances. In
such event, options may be exercised in a short
period of time after leaving.

Shares acquired by Executive Directors under the
All-Employee Share Ownership Plan are
purchased from pre-tax pay or with dividends
paid on shares previously acquired under the
plan. Accordingly, they are not subject to
forfeiture on leaving employment.

Non-Executive Director appointment letters
The Non-Executive Directors have appointment
letters fixed for 12 months with no notice
period. Details of their appointment letters are
in the table below:

Name
D. Caster
M. Broadhurst
J. Hirst
Sir Robert Walmsley

Date of
renewal
22 Apr 2016
3 Jul 2016
1 Jan 2017
31 Jan 2017

Notice
period
Nil
Nil
Nil
Nil

There are no provisions in their appointment
letters 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
operating businesses. In all cases there are two
levels of approval. The 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 during the year. In shaping the
Remuneration Policy, the Committee carried out
extensive consultation with major shareholders,
with the vast majority expressing support for the
proposed changes. Minor amendments were
made to reflect views expressed by some
shareholders. At the 2016 Annual General
Meeting, 99.60% of our shareholders voted in
favour of the Annual Report on Remuneration.

Malus and clawback policy
Consistent with best practice, Ultra operates
malus (i.e. the ability to reclaim deferred
remuneration prior to payment/vesting) and
clawback (i.e. the ability to reclaim amounts
paid) provisions in respect of the annual bonus
(including bonus deferral) and LTIP. The triggers
that may result in the malus and/or clawback
provisions being invoked cover misstatement,
error in respect of the calculation of a payment
where an individual has (or would have) been
dismissed for gross misconduct, and where
there has been an exceptional negative event.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

99.60%

Our voting result at the 2016
Annual General Meeting was
99.60% in favour of the Annual
Report on Remuneration.

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Remuneration Report

3. ANNUAL REPORT ON REMUNERATION

Implementation of the Directors’ Remuneration Policy in 2017
A summary of how the Directors’ Remuneration Policy will be applied for the year ending 31 December 2017 is set out below.

Salaries
Current Executive Director salary levels, and increases effective in April 2017, are as follows:

R. Sharma
A. Sharma1
M. Anderson

2017
Salary
£’000

550
320
261

2016
Salary
£’000

535
290
254

Increase
awarded from
1 April 2017
%

2.8
10.3
2.5

1 Amitabh Sharma was appointed Group Finance Director with effect from 4 May 2016.

Rakesh Sharma and Mark Anderson will receive an inflationary base salary increase of 2.8% and 2.5% respectively from 1 April 2017, in line with the
average increase awarded to the workforce as a whole. In line with the Remuneration Policy, Amitabh Sharma was appointed with a salary below competitive
levels and his salary will be increased to an industry competitive level as he gains experience in the role. From 1 April 2017, Amitabh Sharma’s salary will
increase by 10.3%.

Directors’ pension entitlements
As we committed to in last year’s Directors’ Remuneration Report, a review of the pension provision has been carried out. The Committee proposes to fix
Rakesh Sharma’s pension provision at the existing rate of 36.4% (down from 37.3% last year), rather than continuing with an annual calculation by the
scheme actuary, which the Committee would expect to increase over the medium to long term. This will prevent any further increases to Rakesh Sharma’s
pension contribution and is consistent with the ending of the scheme for the wider workforce.

Amitabh Sharma and Mark Anderson are eligible to participate in the defined contribution scheme, receiving annual company contributions of 18% of salary.
They can elect to receive cash supplements in lieu of pension contributions on a cash-neutral basis where they have exceeded the annual allowance or the
lifetime allowance.

Non-Executive Directors’ fees
The Chairman’s fee will increase by 2.5% and other Non-Executive Directors’ fees will increase by 2.7% from 1 April 2017 in line with the Remuneration Policy.

Annual bonus for 2017
Subject to the approval of the Remuneration Policy by shareholders, the maximum bonus for Executive Directors in 2017 will be 125% of base salary;
20% of the bonus paid will be deferred into Ultra shares for three years.

Up to 22.5% of maximum will be payable for the achievement of an agreed profit target, up to 67.5% payable for achievement of an agreed operating
cash flow target, and up to 10% of maximum will be payable for the achievement of strategic personal measures. For the financial measure, 0% of the
maximum will be payable for threshold performance. For the profit target, vesting occurs on a straight line basis from threshold to maximum. For the
operating cash target, vesting occurs on a straight line basis from threshold to target and on a straight line basis from target to maximum.

No bonus will be paid in respect of the non-financial element of the bonus if the Committee considers the Company’s financial performance to be
unsatisfactory or there is an exceptional negative event during (or just after) the relevant financial year. As the Committee considers that commercial
sensitivities restrict the disclosure of forward-looking annual bonus targets, retrospective disclosure of the targets will be provided in next year’s Annual
Report on Remuneration.

Long-term awards to be granted in 2017
Consistent with the amended Directors’ Remuneration Policy, the Committee intends to grant annual LTIP awards to Executive Directors in the form of shares
worth 150% of salary for the Chief Executive and 125% of salary for other Executive Directors during 2017.

For 2017, it is intended that the following measures and weightings will apply:

• Total Shareholder Return – measured against the constituents of the FTSE 250 (excluding investment trusts): 25%

• Return on Invested Capital (ROIC): 25%

• Annual growth in organic underlying operating profit: 25%

• Annual growth in organic revenue: 25%

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report (continued)

3. ANNUAL REPORT ON REMUNERATION (CONTINUED)

Long-term awards to be granted in 2017 (continued)

Performance measure

Targets

Vesting 0%

TSR ranking of the Company against the Comparator Group

Total Shareholder Return (TSR)1

Below threshold

Below median

Threshold

Stretch

Median

Upper quartile or above

Return On Invested Capital

ROIC 2

Below threshold

< 15.0%

Threshold

Stretch

15.00%

25.00%

Organic Operating Profit Growth 3

Below threshold

< 2.0%

Annual growth in organic operating profit

Threshold

Stretch

2.00%

5.00%

Annual growth in organic revenue

Organic Revenue Growth 3

Below threshold

< 2.0%

Threshold

Stretch

2.00%

5.00%

25%

1 Measured against the constituents of the FTSE 250 (excluding investment trusts). Awards vest on a straight line basis between threshold and stretch.
2 The ROIC measure will be the average ROIC calculated on an annual basis over the three-year performance period where ROIC is defined for the Group

as underlying operating profit* expressed as a percentage of average invested capital (calculated as an average of the opening and closing balance
sheets). Average invested capital will be calculated as net assets (after adjusting for exchange rate fluctuations) adjusted for amortisation and
impairment charges arising on acquired intangible assets and goodwill, and the add-back of other non-underlying performance items, such as tax and
fair value movements on derivatives, impacting the balance sheet. Awards vest on a straight line basis between threshold and stretch.

3 Growth targets are expressed as annual growth rates and averaged over the three-year period. These will be (i) based on a fixed foreign exchange rate

and (ii) exclude the impact of acquisitions for the first 12 months. Awards vest on a straight line basis between threshold and stretch.

Single total figure of remuneration – Audited
Directors’ emoluments are detailed below:

Benefits 3

Pension4

Subtotal

Annual
performance
bonus

LTIP 5

Subtotal

£’000

2016
Executive Directors
R. Sharma
A. Sharma1
M. Anderson
M. Waldner 2

Non-Executive Directors
D. Caster
M. Broadhurst
J. Hirst
Sir Robert Walmsley

Basic
salary/
fees

£’000

532
192
253
65

196
56
56
56

30
10
25
3

-
-
-
-

195
35
45
12

-
-
-
-

757
237
323
80

196
56
56
56

437
156
196
-

-
-
-
-

Total

£’000

1,194
393
519
80

196
56
56
56

437
156
196
-

-
-
-
-

Total

1,406

287

1,761

789

2,550

1 Amitabh Sharma was appointed Group Finance Director with effect from 4 May 2016 on an annual salary of £290,000 and is eligible to receive benefits

and pension and participate in the incentive plans in line with the prevailing policy.

2 Mary Waldner left the group on 16 March 2016, and therefore was not eligible for a bonus in respect of 2016 performance.
3 Benefits comprise: taxable car benefit (in respect of Rakesh Sharma, Amitabh Sharma and Mark Anderson), car allowance (in respect of Mary Waldner),

taxable fuel benefit/fuel allowance (excluding Mary Waldner and Amitabh Sharma), life assurance and private medical insurance.

4 Pensions: Rakesh Sharma’s pension is calculated in accordance with the rules of the defined benefit scheme. Amitabh Sharma and Mark Anderson, who
are eligible members (and Mary Waldner, who was an eligible member) of the defined contribution scheme, received pension contributions of 18% of
basic salary. They can also elect to receive cash supplements given in lieu of pension contributions on a cash-neutral basis where they have exceeded the
annual allowance or the lifetime allowance.

5 The 2014 LTIP awards which were due to crystallise in 2017 will not vest, in accordance with performance relative to the performance conditions as

described on page 84, and the aggregate gain made by the Directors under the LTIP during the year was £nil.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

*see footnote on page 144

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Remuneration Report

Single total figure of remuneration – Audited (continued)

Benefits1

Pension2

Subtotal

Annual
performance
bonus

LTIP 3

Subtotal

£’000

2015
Executive Directors
R. Sharma
M. Waldner
M. Anderson

Non-Executive Directors
D. Caster
C. Bailey
M. Broadhurst
J. Hirst
Sir Robert Walmsley

Basic
salary/
fees

£’000

522
317
248

192
20
55
55
53

26
15
19

-
-
-
-
-

189
57
45

-
-
-
-
-

737
389
312

192
20
55
55
53

460
279
201

-
-
-
-
-

Total

£’000

1,197
668
513

192
20
55
55
53

460
279
201

-
-
-
-
-

-
-
-

-
-
-
-
-

Total

1,462

291

1,813

940

2,753

1 Benefits comprise: taxable car benefit (in respect of Rakesh Sharma only), company car allowance (in respect of Mary Waldner and Mark Anderson),

taxable fuel benefit/fuel allowance (excluding Mary Waldner), life assurance and private medical insurance.

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 71.
Mary Waldner and Mark Anderson were eligible to participate in the defined contribution scheme, receiving pension contributions of up to 18% of
basic salary. They could elect to receive cash supplements in lieu of pension contributions on a cash-neutral basis where they have exceeded the annual
allowance or the lifetime allowance.

3 The 2013 LTIP awards which had been due to crystallise in 2016 will not vest and the aggregate gain made by the Directors under the LTIP during the

year was £nil.

Annual bonus for year under review – Audited
Annual bonuses in relation to 2016 were based upon the achievement of a sliding scale of underlying profit before tax and operating cash flow targets,
as well as individual strategic objectives. Financial targets were derived from the annual budgets approved by the Board. They were adjusted where
appropriate to provide a suitable 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 page 28 for details.

The bonus targets set by the Committee for 2016 were: a maximum of 20% of salary (subject to the achievement of £117.2m* underlying profit before
tax); and a maximum of 60% of salary (subject to achieving an underlying operating cash flow of £118.5m* and the Committee exercising its discretion
on movements in working capital to ensure working capital management throughout the financial year was in the short and long-term interests of the
Company). The remaining 20% of the bonus potential reflected strategic goals.

The Committee assessed the achievement of performance against each target as follows:

Underlying profit before tax

Operating cash flow

Threshold**
£’000

105,480

66,346

Maximum
£’000

117,200

118,500

Actual
achieved
£’000

120,059

120,434

Bonus
payable
%

20%

42.2%

** These figures reflect amendments to the original targets following the disposal of the ID business in August 2016.
** Both threshold profit and operating cash flow targets needed to be exceeded for any payment to be made.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report (continued)

3. ANNUAL REPORT ON REMUNERATION (CONTINUED)

Annual bonus for year under review – Audited (continued)
In addition, the Committee assessed performance against the strategic goals which were based on the following:

Director

Rakesh Sharma

Strategic goals

• Integration of Herley in accordance with acquisition case proceeding successfully

• Organic underlying operational profit growth in 2016

• Successfully manage the finalisation of the Oman Airport IT contract

• Reduction of indirect costs from 2016 to 2017 of £5m

• Implementation of Shared Services centre for S3 fully functional by the end of 2016

Amitabh Sharma

• Successful implementation of pilot ERP programme

• Reduction of indirect costs from 2016 to 2017 of £5m

• Manage investor relations to foster a positive view of the Group and city expectations

• Develop and launch a Treasury Strategy

Mark Anderson

• Achieve a book to bill of 1.08 (excluding acquisitions and divestments)

• Complete game plan workshops across the Group and all major and medium opportunities

to have a game plan

• Reduction of indirect costs from 2016 to 2017 of £5m

• All 2016 strategy plans to be supported by a robust market analysis

The Committee determined that bonuses of 19.5%, 18.8% and 15.0% of salary (max 20%) should be payable to Rakesh Sharma, Amitabh Sharma and
Mark Anderson respectively.

In assessing the strategic goals, the Committee retained discretion not to make a payment if it considered that Ultra’s financial performance was
unsatisfactory or there was an exceptional negative event during (or just after) the relevant financial year.

LTIP vesting for year under review – Audited
The LTIP awards granted in 2014 were based on performance to the year ended 31 December 2016. As disclosed in previous Annual Reports, the
performance condition for this award was as follows:

Metric

Performance condition

Total
Shareholder
Return (TSR)

TSR against constituents of the FTSE 250 Index (excluding
investment trusts). 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

Earnings Per
Share Underpin

In addition to the main TSR condition, an “underpin”
requires total growth of 15% over the three-year
performance period. In the event that this underpin is not
met, the level of vesting falls to zero

Total

Threshold
target

Stretch
target

Actual

%
Vesting

Median ranking

Upper quartile
ranking

< Median

15%

n/a

2014: (3.1%)
2015: 0.6%
2016: 8.6%

n/a

The award details for those Executive Directors granted 2014 LTIP awards are therefore as follows:

Number
of shares
at grant

Number
of shares
to vest

Number
of shares
to lapse

Total

Estimated
value

£’000

32,234

16,430

12,240

32,234

16,430

12,240

Executive

R. Sharma

M. Waldner1

M. Anderson

1 Grant made to Mary Waldner lapsed on her departure.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Remuneration Report

Share awards granted during the year – Audited

R. Sharma 1

M. Anderson1

Scheme

Date of
grant

Basis of
award

LTIP*

14 March
2016

125% of
salary

Face value

£
652,487

Vesting at
threshold

Vesting at
maximum

Performance
period

20%

100%

LTIP*

14 March
2016

100% of
salary

247,992

20%

100%

3 years to
31 December
2018

*Structured as a conditional award
1 In addition, Rakesh Sharma purchased 99 partnership shares, Amitabh Sharma purchased 50 partnership shares and Mark Anderson purchased 99 partnership

shares under the AESOP during 2016.

For awards presented above, 20% of award 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 total growth of
underlying EPS* of 15% 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 2015 to 2016, and compares that to the
average remuneration of employees of the Group, excluding the Chief Executive in the UK, who were employed on 1 January 2015 and 1 January 2016.
This group best reflects the remuneration environment of the Chief Executive.

Salary
Taxable benefits
Bonus

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 3
Statutory profit before tax 3

Chief
Executive
% change

All UK
employees
% change

2.8
4.7
-5.0

2015
£m

240.2
32.3
726.3
34.8

3.2
3.3
9.6

Change
%

6.2
3.7
8.2
94.3

2016
£m

255.0
33.5
785.8
67.6

1 £2.2m (2015: £2.4m) 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.
3 Although not required, revenue and statutory profit before tax have also been provided as this disclosure is considered to add further context to the

annual spend on pay number.

Total defined benefit pension entitlements – Audited
The defined benefit scheme closed to future accrual on 5 April 2016. Under the scheme, a pension equal to two-thirds of pensionable 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
pensionable 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 up to a
maximum 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 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. This is 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.

No Executives accrued direct benefits under defined benefit schemes during the year. As Rakesh Sharma ceased accruing a direct benefit from 6 April 2014,
his pension provision was determined on an annual basis by the scheme actuary such that it is equivalent in value to the value of defined benefits formerly
accrued. As explained earlier in this Report, Rakesh Sharma’s pension provision is fixed at the rate of 36.4% as from 1 April 2016.

Payments to past Directors – Audited
Mary Waldner tendered her resignation in November 2015 and left on 16 March 2016. She was paid up to that date and no further payments were or
are due to her. As explained elsewhere in this Report, she was not eligible for a 2016 bonus payment and was not granted an LTIP award in 2016.

Loss of office payments – Audited
There were no loss of office payments made to Directors during 2016.

*see footnote on page 144

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report (continued)

3. ANNUAL REPORT ON REMUNERATION (CONTINUED)

Statement of Directors’ shareholdings – Audited

Legally owned

LTIP
awards 1

AESOP

SAYE

2016

2015

Unvested

Restricted2 Unrestricted

Under option

Exercised

Total

% Share
ownership
guidelines

Share
ownership
met
Y/N

Executive
Directors
R. Sharma
A. Sharma
M. Waldner
M. Anderson

Non-Executive
Directors
D. Caster
M. Broadhurst
J. Hirst
Sir Robert Walmsley

41,688
4,966
-
546

41,510
-
57
442

106,406
-
-
40,431

3,100
50
-
276

300,000 300,000
1,000
2,000
1,600

1,000
2,000
1,600

-
-
-
-

830
794
-
610

-
-
-
-

152,024
5,810
-
41,863

300,000
1,000
2,000
1,600

152%
33%
n/a%
4%

-
-
-
-

Y
N
n/a
N

-
-
-
-

1 There were no vested LTIP share awards within the period. In addition, the interest in LTIP awards as at 31 December 2016 includes the 2014 award
(32,234 shares under award for Rakesh Sharma and 12,240 shares under award for Mark Anderson) which, as a result of not meeting performance
conditions to 31 December 2016, will lapse in 2017. All of Mary Waldner’s outstanding LTIP awards lapsed on her departure, including 16,430 shares
under the 2014 award.

2 The restricted shares under the AESOP are held in the Ultra Electronics Holdings plc Employee Benefit Trust.

Total shareholder return 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 eight years. The graph shows the value at the
end of 2016 of £100 invested at the start of the evaluation period, in Ultra and in the Index. The Committee considers the FTSE 250 to be 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

)
£
(

e
u
l
a
V

400

350

300

250

200

150

100

31 Dec 08

31 Dec 09

31 Dec 10

31 Dec 11

31 Dec 12

31 Dec 13

31 Dec 14

31 Dec 15

31 Dec 16

Ultra Electronics

FTSE 250 Index

The table below presents single-figure remuneration for the Chief Executive over the past eight years, together with past annual bonus payouts and
relevant LTIP vesting figures.

Year ended

Total
remuneration

Annual bonus

LTIP

£’000 % max. payout % max. payout

31 December 2016
31 December 2015
31 December 2014
31 December 2013
31 December 2012
31 December 2011
31 December 2011
31 December 2010
31 December 2009

1,194
1,197
680
612
597
722
141
1,068
1,512

82
88
-
-
-
76
-
46
67

-
-
-
-
-
-
-
81
100

R. Sharma
R. Sharma
R. Sharma
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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Remuneration Report

Shareholder voting at the last AGM
At the 2016 Annual General Meeting, the 2015 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)

Total number
of votes

59,758,222
242,295
60,000,517
4,249,816
64,250,333

At the 2015 Annual General Meeting, the 2014 Director’s Remuneration Policy 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

Total number
of votes

58,779,001
1,802,054
60,581,055
10,353
60,591,408

% of
votes cast

99.60
0.40
100

% of
votes cast

97.03
2.97
100

2013 March award
2013 August award
2014 award
2015 award

Interests at 1 January 2016
2013 award lapsed during the year
2014 award lapsed during the year
2015 award lapsed during the year
2016 award

Interests at 31 December 2016

M. Anderson

R. Sharma

A. Sharma M. Waldner

11,908
-
12,240
14,207

38,355
(11,908)
-
-
13,984

26,722
5,909
32,234
37,379

102,244
(32,631)
-
-
36,793

40,4311

106,4061

-
-
-
-

-
-
-
-
-

-
11,775
16,430
18,159

46,364
(11,775)
(16,430)
(18,159)
-

-1

Market
price
of shares
granted

Crystallising
dates of
outstanding
awards

£17.21 March 2016
£19.46 March 2016
£18.38 March 2017
£17.45 March 2018

£17.73 March 2019

1 This interest in LTIP awards as at 31 December 2016 includes the 2014 award (32,234 shares under award for Rakesh Sharma 12,240 shares under award

for Mark Anderson) which, as a result of not meeting performance conditions to 31 December 2016, will lapse in 2017. All of Mary Waldner’s
outstanding LTIP awards lapsed on her departure.

The 2013 award lapsed during the year as a result of the performance targets not being met. Ultra’s share price on 30 December 2016 was £19.52. The
range during 2016 was £15.73 to £20.49.

Directors’ interests under the All-Employee arrangements

Name of Director

R. Sharma
A. Sharma
M. Waldner
M. Anderson

Interests as
at 1 January
2016

Shares acquired
during year

Interests as
at 31 December
2016

Shares
acquired from
1 January 2017 to
3 March 2017

2,922
-
57
172

178
50
12
104

3,100
50
-
276

24
23
-
24

Interests as at
3 March 2017

3,124
73
-
300

During the year, the Share Ownership Plan Trust, established and operated in connection with the AESOP, purchased 30,648 (2015: 33,691) Ultra Electronics
Holdings plc shares, with a nominal value of £1,532 (2015: £1,685) for £594,895 (2015: £593,178). Mary Waldner, after her departure, sold 69 AESOP
shares in the year.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Remuneration Report

Remuneration Report (continued)

3. 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 from the Investors’ section of the Group’s website (www.ultra-electronics.com/investors).

COMPOSITION
Martin Broadhurst was Chairman of the Committee and Sir Robert Walmsley and John Hirst were members throughout the year. Sharon Harris continued
to act as Secretary to the Committee. Although not Committee members, the Chairman, Chief Executive and Group HR Director normally attend
Committee meetings by invitation, except where matters directly relating to their own remuneration are discussed.

ADVICE
Wholly independent advice on executive remuneration and share schemes is received from New Bridge Street, part of Aon plc. New Bridge Street is a member
of the Remuneration Consultants Group and is a signatory to its Code of Conduct. New Bridge Street was appointed by the Committee after a tender process
and, during the year, provided the Group with advice on the review of Ultra's remuneration policy (including an update on market and best practice), the
operation of Ultra’s LTIP and other share schemes, remuneration benchmarking services and below board remuneration schemes. During 2016, 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. Fees charged by New Bridge Street for advice provided to the Committee for 2016 amounted to £58,696
(excluding VAT). Pension advisory services were provided to the Committee and the Group by Towers Watson. Fees charged by Towers Watson for advice
provided to the Committee for 2016 amounted to £51,435 (excluding VAT), of which 8% was related to the closure of the defined benefit pension scheme
(see page 26). 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.

THE 2017 ANNUAL GENERAL MEETING
The Committee is of the view that the revised Directors’ Remuneration Policy is fair and balanced between employees and shareholders and that there is
strong alignment to the Group’s strategy. As such, the Committee encourages shareholders to vote in favour of the Remuneration Policy and Directors’
Remuneration Report resolutions at the 2017 AGM. The Remuneration Policy and Directors’ Remuneration Report were approved by the Board on 3 March
2017 and signed on its behalf by:

Martin Broadhurst, Chairman of the Remuneration Committee

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Directors’ Report

Directors’ Report
For the year ended 31 December 2016

“

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 2016.
Sharon Harris, Company Secretary & General Counsel

”

Ultra Electronics Holdings plc is the Group holding company and it is incorporated in the United Kingdom under the Companies Act 1985.

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 2016. 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 44-53 of the Strategic Report. The Corporate Governance Report on pages 57-66 forms part of this report,
and the financial risk management objectives and policies can be found on pages 36-43.

Strategic Report
In accordance with the Companies Act 2006 (the Act), 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 fair review of the Group’s business and 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 36-43.

Results and dividends
The Group results and dividends are as follows:

Balance on retained earnings, beginning of year
Total comprehensive income for the year
Dividends: 2015 final paid of 32.3p per share

2016 interim paid of 14.2p per share

Equity-settled employee share schemes
Non-controlling interest’s investment made in subsidiary

Balance on retained earnings, end of year

2016
£’000

238,728
18,933
(22,631)
(9,952)
1,027
1,929

228,034

The final 2016 dividend of 33.6p per share is proposed to be paid on 4 May 2017 to shareholders on the register of members on 7 April 2017. The interim
dividend was paid on 23 September 2016, making a total of 47.8p (2015: 46.1p) per share 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 4-7.

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 £146.9 million (2015: £146.6 million) was spent on engineering and business development of which
£112.8 million (2015: £110.6 million) was funded by customers and £34.1 million (2015: £36.0 million) by the Group.

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 2016 were 65 days (2015: 60 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 that is recruited from the widest possible talent pool
(see page 50).

Political expenditure
Neither the Company nor any of its subsidiaries have made any political donations during the year (2015: £nil).

Appointment and replacement of Directors
All the Directors will stand for re-election at the Annual General Meeting on 28 April 2017.

Directors and their interests
The Directors who served throughout the year and to the date of signing these financial statements (see biographies on page 55), and their interests in
the shares and share options of Ultra at 3 March 2017 are shown in the Annual Report on Remuneration (see pages 81-88).

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Governance. Directors’ Report

Directors’ Report (continued)

Directors and their interests (continued)
The Company has in place procedures for managing conflicts and potential conflicts of interest. The Company’s Articles of Association also contain
provisions to allow the Directors to authorise conflicts or potential conflicts of interest so that a Director is not in breach of his or her duty under UK
company law. If Directors become aware of a conflict or potential conflict of interest they should notify in accordance with the Company’s Articles of
Association. Directors have a continuing duty to update any changes to their conflicts of interest. Directors are excluded from the quorum and vote in
respect of any matters in which they have a conflict of interest. No material conflicts were reported by Directors in 2016.

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.

Branches
The Company and its subsidiaries have established branches, where appropriate, in a number of countries outside the UK. Their results are, however, not
material to the Group’s financial results.

Contractual arrangements
The Group contracts with a large number of customers in order to sell its wide portfolio of specialist capabilities to a broad range of customers around
the world. The Group’s largest customers are the US Department of Defense and UK Ministry of Defence. A wide range of separate contracts are entered
into with these customers by different Ultra businesses through different project offices and project teams. The Group also contracts with numerous
suppliers across the world and manages these arrangements to ensure that it is not over-dependent on a single supplier. This is normally achieved through
dual sourcing specialist components.

Purchase of own shares
During the year Ultra purchased no (2015: nil) ordinary shares and no (2015: nil) ordinary shares were distributed following vesting of awards under the
Ultra Electronics Long-Term Incentive Plan. At 31 December 2016, the Group held 235,247 ordinary shares under the Ultra Electronics Long-Term Incentive
Plan (representing 0.3% of the ordinary shares in issue as at 31 December 2016).

Substantial shareholdings
As at 3 March 2017, Ultra had been notified, in accordance with Chapter 5 of the Disclosure and Transparency rules, of the following voting rights as
shareholders of Ultra:

Royal London Asset Management Limited
BlackRock, Inc.
Aberdeen Asset Managers Limited
Artemis Investment Management LLP
FIL Limited
Kames Capital Plc
J O Hambro Capital Management Limited
Ameriprise Financial, Inc.

Nature of holding

Direct
Direct & Indirect
Direct
Direct
Direct
Direct & Indirect
Direct
Direct

Percentage
of ordinary
share capital

Number of 5p
ordinary shares

Date of
announcement

3.08
5.74
9.98
4.69
9.49
3.07
5.02
4.56

2,171,768
4,049,319
7,026,920
3,299,530
6,672,460
2,162,080
3,528,628
3,192,374

28 February 2017
10 February 2017
12 December 2016
9 August 2016
4 July 2016
17 March 2016
11 March 2016
30 June 2015

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 and 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
Company’s 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 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 Act and
related legislation. The Articles of Association themselves may be amended by special resolution of the shareholders. The powers of Directors are described
in the “Terms of Reference for the Board”, which is available from the Investors’ section on the Group website (www.ultra-electronics.com/investors).

Annual General Meeting
The next Annual General Meeting of Ultra will be held at 10.00 a.m. on 28 April 2017 at 417 Bridport Road, Greenford, Middlesex UB6 8UA. 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 auditor is unaware; and
(2) The Director has taken all the steps that he/she ought to have taken as a Director to make himself/herself aware of any relevant audit information and

to establish that Ultra’s auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Act.

The Directors’ Report was approved by the Board on 3 March 2017 and signed on its behalf by:

Sharon Harris, Company Secretary & General Counsel
Registered Office: 417 Bridport Road, Greenford, Middlesex UB6 8UA
Registered Number: 2830397

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Governance. Executives and advisors

Executives and advisors

Executive Team members

Business MDs and Presidents

Rakesh Sharma
Chief Executive

Amitabh Sharma
Group Finance Director

Mark Anderson
Group Marketing Director

Sharon Harris
Company Secretary & General Counsel

Keith Thomson
Group Human Resources Director

Carlos Santiago
Chief Operating Ofﬁcer

Graeme Stacey
Divisional Managing Director
Aerospace & Infrastructure

Mike Baptist
Divisional Managing Director
Communications & Security

William Terry
Divisional Managing Director
Maritime & Land

Olugbenga Erinle
President
3eTI

Bob Judd
President
3 Phoenix

Tim Stanley
Interim President
Advanced Tactical Systems

Sebastien Jodeau
Managing Director
Airport Systems

Doug Burd
Managing Director
Avalon Systems
& Ultra Electronics, Australia

Mike Williams
Managing Director
Command & Sonar Systems

Gavin Newport
Managing Director
Communication & Integrated Systems

Pete Crawford
President
EMS

Paul Fardellone
President
Flightline Systems

René Bélanger
President
Forensic Technology

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

Baker & McKenzie LLP
100 New Bridge Street
London EC4V 6JA

Dentons US LLP
303 Peachtree Street, NE
Suite 5300
Atlanta, GA 30308
USA

Howard Eckstein
President
Herley

Leo Gaessler
Acting President
Maritime Systems

Nick Gaines
Managing Director
Nuclear Control Systems

Dan Upp
President
Nuclear Sensors & Process Instrumentation

Rochelle Borden
President
Ocean Systems

Mike Hawkins
Managing Director
PMES

Mike Clayton
Managing Director
Precision Control 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

Investec Bank plc
26 Gresham Street
London EC2V 7QP

Registrars

Equiniti
Aspect House
Spencer Road, Lancing
West Sussex BN99 6DA

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Group ﬁnancials. 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 and the Directors’ assessment
of the principal risks that would threaten
the solvency or liquidity of the Group

In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the Parent
Company’s affairs as at 31 December 2016 and of 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, including FRS 101 “Reduced Disclosure
Framework”; 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 that we have audited 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 Statements of Changes in Equity;

• the Statement of Accounting Policies; and

• the related notes 1 to 47.

The financial reporting framework that has been applied in the preparation of the Group financial
statements is applicable law and IFRS 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), including FRS 101 “Reduced Disclosure Framework”.

Summary of our audit approach

Key risks

The key risks that we identified in the current year were:

• Revenue recognition;

• Ithra related provisions;

• Goodwill and other intangible assets; and

• Defined benefit pension scheme liabilities valuation.

These risks are in line with the risks we reported in the prior year.
There was also an additional risk in the prior year relating to an
acquisition that occurred that year.

The materiality that we used in the current year was £6 million
which was determined on the basis of 7% of adjusted underlying
profit before taxation. We have determined adjusted underlying
profit before tax to be underlying profit before tax less
amortisation of acquired intangible assets.

We focused our Group audit scope primarily on the audit work at
20 locations, 12 of these were subject to full audit, whilst the
remaining 8 were subject to specified audit procedures where the
extent of our testing was based on our assessment of the risks of
material misstatement. These 20 locations accounted for 87% of
Group revenue and 94% of group underlying profit before tax.

Materiality

Scoping

Significant changes
in our approach

The acquisition accounting risk has not been included in our
audit scope in the current year given there were no acquisitions
made in 2016.

As required by the Listing Rules we have reviewed the Directors’ statement regarding the appropriateness
of the going concern basis of accounting in the statement of accounting policies on page 131 and
the Directors’ statement on the longer-term viability of the Group contained within the strategic
report on page 43 of the Annual Report.

We are required to state whether we have anything material to add or draw attention to in relation to:

• the directors’ confirmation on page 43 that they have carried out a robust assessment of the

principal risks facing the Group, including those that would threaten its business model, future
performance, solvency or liquidity;

• the disclosures on pages 36 to 42 that describe those risks and explain how they are being

managed or mitigated.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Independent auditor’s report

Going concern and the Directors’ assessment
of the principal risks that would threaten
the solvency or liquidity of the group
(continued)

Independence

Our assessment of risks
of material misstatement

• the Directors’ statement in the statement of accounting policies on page 131 of the financial
statements about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them and their identification of any material uncertainties to the Group’s
ability to continue to do so over a period of at least twelve months from the date of approval of
the financial statements; and

• the Directors’ explanation on page 43 as to how they have assessed the prospects of the Group,
over what period they have done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.

We confirm that we have nothing material to add or draw attention to in respect of these matters.

We agreed with the Directors’ adoption of the going concern basis of accounting and we did not
identify any such material uncertainties. 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.

We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and
confirm that we are independent of the Group and we have fulfilled our other ethical
responsibilities in accordance with those standards.

We confirm that we are independent of the Group and we have fulfilled our other ethical
responsibilities in accordance with those standards. We also confirm we have not provided any of
the prohibited non-audit services referred to in those standards.

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.

The acquisition accounting risk has not been included in our audit report in the current year given
there were no acquisitions made in 2016. Excluding this risk, the risks referred to in our audit report
remain in line with prior year.

Risk description

How the scope of our audit responded
to the risk

Revenue recognition
Refer to page 137 (critical accounting
judgements and key sources of estimation
uncertainty – assessment of contract
accounting); and page 133 (accounting policies
– revenue recognition).

The Group recognised revenue of £785.8m in
2016 (2015: £726.3m) of which £443.5m
(2015: £371.6m) related to revenue recognised
on long-term contracts accounted for under IAS
11. There is a risk that revenue and profit is
recognised incorrectly based on judgements
within the cost to complete estimate for
significant long-term contracts. Given the
bespoke nature and the length of time to
develop and manufacture some of Ultra’s
products, the contracts between Ultra and its
customers can contain complex terms or
contract variations and therefore there is also a
risk that revenue is not recognised in accordance
with such terms.

Our audit work assessed the adequacy of the
design and implementation of controls over
long-term contract accounting.

To confirm that revenue and profit recognised to
date are based on the current best estimate of the
degree of work performed under the contract, for
the sample of significant contracts we reviewed
the evidence for the progress made against the
contract, such as milestone completion, and
reviewed the contract risk registers to provide
evidence over the judgement taken when
providing for the cost of mitigating technical risks
and meeting future milestones. We also sought to
verify the costs to complete the contract by
agreeing to evidence of committed spend,
budgeted rates or actual costs incurred to date
when compared to the remaining work to be
performed under the contract.

We understood and challenged management’s
judgements 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 addition to testing a sample of
billings and costs incurred to date.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Group ﬁnancials. Independent auditor’s report

Our assessment of risks of material
misstatement (continued)

Risk description

How the scope of our audit responded
to the risk

Ithra related provisions
Refer to page 137 (critical accounting
judgements and key sources of estimation
uncertainty – assessment of Ithra related
provisions); and page 69 (Audit Committee
report – significant judgements considered).

In 2015 the Oman Airport IT Contract was
terminated and subsequently Ithra (a jointly
owned subsidiary in Oman) was placed into
voluntary liquidation. Significant provisions to
cover estimated claims, settlement costs and
legal fees were recorded in respect of this event.
The provisions in place at the beginning of 2016
of £17.1m were largely utilised in the year
leaving a provision as at 31 December 2016 of
£3.5m. The liquidator appointed for Ithra is
pursuing claims against the customer on behalf
of interested parties, consequently there
remains significant uncertainty regarding the
likely outcome of the negotiations.

The material and uncertain nature of these
balances means that we consider the accuracy
of these estimated values to be a key audit risk.

Goodwill and other intangible assets
Refer to page 137 (critical accounting
judgements and key sources of estimation
uncertainty – goodwill impairment); page 134
(accounting policies – intangible assets); page 69
(Audit Committee report – significant judgements
considered); and page 110 and 111 (note 14 and
15 of the Financial Statements).

The Group held £415.6m of goodwill arising on
its acquisitions made and £173.6m of acquired
intangibles as at 31 December 2016. There is a
risk that inappropriate judgements relating to
future cashflow forecasts and discount rates are
used which lead to the overstatement of the
value of these assets, which would have
otherwise resulted in an impairment being
required. This is particularly relevant given the
volatility and uncertainty in defence spending in
both new and traditional markets. As a result of
the lower level of headroom and significant
future cashflow forecast growth assumed we
have focused this risk on the following goodwill
and acquired intangible asset balances:

• goodwill attributable to the Infrastructure cash

generating unit

• the government customer relationship

acquired intangible asset held at GigaSat

Our audit work assessed the adequacy of the
design and implementation of controls over the
accuracy of Ithra related provisions.

To challenge management’s judgements we
have reviewed correspondence with the
liquidator appointed for Ithra together with
legal correspondence between the Group and
its external legal counsel.

We have obtained third-party evidence for all
known costs to be incurred including specific
legal and supplier liabilities.

For costs incurred during the year, we have traced
a sample back to supporting third-party evidence,
and used these actual costs incurred to challenge
the accuracy of anticipated costs to come.

We have continued to assess the recoverability
of contract balances and associated costs of
recovering these contract balances through our
review of correspondence relating to the
negotiations and the likely timing of any receipt
or agreed settlement process.

Our audit work assessed the adequacy of the
design and implementation of controls over
monitoring the carrying value of goodwill and
acquired intangibles.

We challenged the assumptions used by
management in their impairment assessment by
using valuation specialists within the audit team
to benchmark the discount rate against
independently available data, together with
peer group analysis, our understanding of the
secured orders underpinning the Group’s
cashflow forecasts, and the historical
performance of the businesses.

Having audited the assumptions, we checked
that the impairment model had been prepared
on the basis of management’s assumptions
and was arithmetically accurate. We challenged
the appropriateness of management’s
sensitivities based on our work performed on
the key assumptions, and recalculated these
sensitised scenarios.

With regards to the disclosures within the Annual
Report, we assessed whether they appropriately
reflect the facts and circumstances within
management’s assessment of impairment over
goodwill and acquired intangibles and specifically
on the disclosure relating to the Infrastructure
cash generating unit under a sensitised scenario.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Independent auditor’s report

Our assessment of risks of material
misstatement (continued)

Risk description

How the scope of our audit responded
to the risk

Our audit work assessed the adequacy of the
design and implementation of controls over the
accounting for defined benefit pension scheme.

We included a pension specialist within our
audit team to assess the appropriateness of the
assumptions through benchmarking to industry
data, and accepted methodology used to value
the defined benefit pension scheme obligation.
We also assessed whether the £15.5m
curtailment gain recognised in the year, was
appropriately calculated and presented within
the financial statements.

Defined benefit pension scheme
liabilities valuation
Refer to page 137 (critical accounting
judgements and key sources of estimation
uncertainty – pensions); page 137 (accounting
policies – pensions); and page 69 (Audit
Committee report – significant issues considered).

The Group operates defined benefit pension
schemes in the UK, Switzerland and Canada. At
31 December 2016 the defined benefit pension
scheme obligation was £400.5m which resulted
in a net IAS 19 “Employment Benefits” deficit of
£113.2m. The UK scheme accounted for 98% of
this net deficit. The scheme closed to future
accrual in 2016, and a £15.5m curtailment gain
was recognised in respect of this closure.

There is a risk that the assumptions used in
determining the defined benefit obligation for the
UK scheme are not appropriate resulting in an
inappropriate pension valuation which would
have a material impact on the financial
statements. The key assumptions that impact the
obligation valuation are the discount rate,
inflation rates and life expectancy rates.

These matters were addressed in the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We define materiality as the magnitude of misstatement in the financial statements that makes it
probable that the economic decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our audit work and in evaluating the
results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a
whole as follows:

Group materiality

£6,000,000 (2015: £5,700,000)

Basis for
determining
materiality

Rationale for the
benchmark applied

We have used 7% (2015: 7%) of adjusted underlying profit as
the basis for determining materiality.

Underlying pre-tax profit is a key performance measure for the
Group and it is therefore an appropriate basis on which to
determine materiality. However we do adjust underlying pre-tax
profit as presented by management, by deducting amortisation of
acquired intangible assets. The Group has established a track record
of making acquisitions and hence we consider amortisation of
acquired intangibles to be relevant when considering our basis for
determining materiality.

Underlying pre-tax profit is reconciled to statutory pre-tax profit in
note 2 of the financial statements.

We agreed with the Audit Committee that we would report to the Committee all audit differences
in excess of £300,000 (2015: £114,000), as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds. The increase in our reporting threshold to the
Committee reflects a reassessment of market practice and the low levels of prior year
misstatements. We also report to the Audit Committee on disclosure matters that we identified
when assessing the overall presentation of the financial statements.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Our application of materiality

Adjusted Underlying PBT

Group materiality

Component materiality

Audit Committee
reporting threshold

£87m

£6m

£3m

£0.3m

Group ﬁnancials. Independent auditor’s report

Independent auditor’s report
to the members of Ultra Electronics Holdings plc (continued)

An overview of the scope of our audit

Revenue %

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 work at 20
(2015: 24) locations, 12 (2015: 14) of these were subject to a full audit, whilst the remaining 8
(2015: 10) were subject to either an audit of specified account balances or specified audit procedures
where the extent of our testing was based on our assessment of the risks of material misstatement
and of the materiality of the Group’s operations at those locations. The decrease in the number of
locations visited reflects the disposal of the ID business as well as the merger of certain business
units in the period.

Full audit scope

Speciﬁed audit procedures

Review at Group level

These 20 (2015: 24) locations, which are largely located in the UK and USA, represent the principal
business units and account for 87% (2015: 90%) of the Group’s revenue and 94% (2015: 85%) of
the Group’s profit before tax. They also provided an appropriate basis for undertaking audit work to
address the risks of material misstatement identified above. Our audit work at the 20 (2015: 24)
units was executed at levels of materiality applicable to each individual entity which did not exceed
50% of Group materiality (£3m).

72%

15%

13%

PBT %

Full audit scope

Speciﬁed audit procedures

Review at Group level

86%

Opinion on other matters prescribed by the
Companies Act 2006

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. In 2016, a senior member of the Group audit team visited all of the UK components as
well as the following overseas components: USSI, ATS, NSPI, 3 Phoenix and Herley Lancaster.

In our opinion, based on the work undertaken in the course of the audit:

• the part of the Directors’ Remuneration Report to be audited has been properly prepared in

accordance with the Companies Act 2006;

• 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; and

• the Strategic Report and the Directors’ Report have been prepared in accordance with applicable

legal requirements.

In the light of the knowledge and understanding of the company and its environment obtained in
the course of the audit, we have not identified any material misstatements in the Strategic Report
and the Directors’ Report.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Independent auditor’s report

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 part of the Corporate Governance Statement
relating to the company’s compliance with certain 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.

We confirm that we have not identified any such inconsistencies or misleading statements.

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.

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). We also comply with International
Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our
quality control procedures are effective, understood and applied. Our quality controls and systems include
our dedicated professional standards review team and independent partner reviews.

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.

Alexander Butterworth FCA, Senior statutory auditor
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Reading, United Kingdom
3 March 2017

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Respective responsibilities of Directors
and auditor

Scope of the audit of the financial statements

Group ﬁnancials. Group highlights

Group highlights
for the year ended 31 December 2016

Revenue
Underlying operating profit*
Operating profit
Underlying profit before tax*
Profit before tax

Underlying earnings per share*
Basic earnings per share
Dividend per share

2016
£’000

785,764
131,134
89,725
120,059
67,621

2016
pence

134.6
82.8
47.8

2015
£’000

726,286
119,972
66,425
112,425
34,761

2015
pence

123.9
35.7
46.1

Change
%

+8.2
+9.3
+35.1
+6.8
+94.5

Change
%

+8.6
+131.9
+3.7

* Ultra uses underlying figures as key performance indicators. Underlying figures are stated before the Oman contract termination and liquidation related

costs, amortisation charges relating to acquired intangibles, the S3 programme, impairment charges, adjustments to deferred consideration net of
acquisition and disposal related costs, defined benefit pension curtailment gain and 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 13.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Consolidated income statement/Consolidated statement of comprehensive income

Consolidated income statement
for the year ended 31 December 2016

Revenue
Cost of sales

Gross profit
Other operating income
Distribution costs
Administrative expenses
Share of loss from associate
Other operating expenses
Contingent consideration charge
Impairment charges
S3 programme

Operating profit
Loss on disposals (net)
Deemed disposal of Ithra
Retirement benefit scheme curtailment gain
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

Note
3

17
5

6
2

6
32
7
31
9
10

13
13

2016
£’000
785,764
(536,561)

249,203
1,770
(1,081)
(144,893)
-
(8,777)
-
-
(6,497)

89,725
(4,076)
-
15,500
197
(33,725)

67,621
(9,363)

58,258

58,260
(2)

2015
£’000
726,286
(499,510)

226,776
2,198
(1,604)
(143,007)
(581)
(2,931)
(1,101)
(8,462)
(4,863)

66,425
-
(16,447)
-
190
(15,407)

34,761
(9,772)

24,989

24,989
-

82.8
82.8

35.7
35.6

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 2016

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
Reclassification of exchange differences on disposals
Loss on loans used in 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

31
11

32 / 7

2016
£’000

2015
£’000

58,258

24,989

(49,343)
9,973

(39,370)

99,349
(1,895)
(43,078)
43

54,419

15,049

73,307

73,309
(2)

(2,530)
478

(2,052)

11,995
2,696
(12,578)
12

2,125

25,062

25,190
(128)

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

100 Group ﬁnancials. Consolidated balance sheet

Consolidated balance sheet
31 December 2016

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
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
Assets classified as held for sale

Total assets

Current liabilities
Trade and other payables
Tax liabilities
Derivative financial instruments
Liabilities classified as held for sale
Short-term provisions

Non-current liabilities
Retirement benefit obligations
Other payables
Deferred tax liabilities
Derivative financial instruments
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 owners of the company
Non-controlling interest

Total equity

Note

2016
£’000

2015
£’000

14
15
16
25
23
20

18
20

23
32

23
32
26

31
21
25
23
22
26

27
28
28
28
28
28

415,593
173,637
66,195
21,377
3
16,352

375,885
193,123
68,183
5,935
426
15,239

693,157

658,791

78,177
215,731
9,444
74,625
251
-

81,816
197,387
9,169
45,474
921
8,795

378,228

343,562

1,071,385

1,002,353

(193,243)
(7,339)
(12,507)
-
(16,633)

(199,942)
(7,149)
(3,530)
(3,011)
(24,363)

(229,722)

(237,995)

(113,177)
(9,972)
(6,555)
(11,594)
(331,325)
(5,469)

(84,819)
(6,996)
(7,168)
(2,561)
(341,046)
(4,925)

(478,092)

(447,515)

(707,814)

(685,510)

363,571

316,843

3,523
64,020
(2,581)
(68,986)
139,492
228,034

363,502
69

3,514
61,052
(2,581)
(25,908)
42,038
238,728

316,843
-

363,571

316,843

The financial statements of Ultra Electronics Holdings plc, registered number 2830397, were approved by the Board of Directors and authorised for
issue on 3 March 2017.

On behalf of the Board
R. Sharma, Chief Executive
A. Sharma, Group Finance Director

The accompanying notes are an integral part of this consolidated balance sheet.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Consolidated cash ﬂow statement

101

Consolidated cash flow statement
for the year ended 31 December 2016

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
Disposal of subsidiary undertakings
Acquisition of subsidiary undertakings
Net cash acquired with subsidiary undertakings

Net cash from/(used in) investing activities

Financing activities
Issue of share capital
Dividends paid
Loan syndication costs
Repayments of borrowings
Proceeds from borrowings
Minority investment

Net cash (used in)/from financing activities

Net increase 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

The accompanying notes are an integral part of this consolidated cash flow statement.

Note

2016
£’000

2015
£’000

92,834

47,778

197
-
(4,645)
293
(2,728)
22,040
(5,199)
-

190
5,343
(4,597)
1,466
(1,761)
-
(172,539)
724

9,958

(171,174)

2,976
(32,583)
-
(114,419)
60,000
2,000

4,937
(31,332)
(1,347)
(160,532)
317,586
-

(82,026)

129,312

20,766
45,474
8,385

74,625

5,916
41,259
(1,701)

45,474

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

(128)
13,751

25,062
13,751

-
-

-
(2)

(2)

-
-

5,904
(31,332)

316,843

316,843
58,258

15,049

73,307

2,000

3,961
(32,583)

102 Group ﬁnancials. Consolidated statement of changes in equity

Consolidated statement of changes in equity
for the year ended 31 December 2016

Equity attributable to equity holders of the parent

Balance at 1 January 2015
Profit for the year
Other comprehensive
income for the year

Total comprehensive

income for the year
Deemed disposal of Ithra
Equity-settled employee

share schemes

Dividend to shareholders
Tax on share-based

payment transactions

Share
capital
£’000

3,498
-

-
-

16
-

Share
premium
account
£’000

56,131
-

-
-

4,921
-

Reserve for
own shares
£’000

(2,581)
-

Hedging
reserve
£’000

(13,330)
-

Translation
reserve
£’000

27,219
-

Retained
earnings
£’000

246,132
24,989

Non
controlling
interest
£’000

Total equity
£’000

(13,623)
-

303,446
24,989

(12,578)

14,819

(2,040)

(128)

-
-

(12,578)
-

14,819
-

-
-

22,949
-

967
(31,332)

Balance at 31 December 2015

3,514

61,052

(2,581)

(25,908)

42,038

238,728

Balance at 1 January 2016
Profit for the year
Other comprehensive
income for the year

Total comprehensive

income for the year
Non-controlling interest’s

investment made in subsidiary

Equity-settled employee

share schemes

Dividend to shareholders
Tax on share-based

payment transactions

3,514
-

61,052
-

(2,581)
-

(25,908)
-

42,038
-

238,728
58,260

9
-

2,968
-

-
-

(43,078)

97,454

(39,327)

(43,078)

97,454

18,933

-
-

1,929

984
(32,583)

Balance at 31 December 2016

3,523

64,020

(2,581)

(68,986)

139,492

228,034

363,571

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

103

Notes to accounts – Group
31 December 2016

1 Segment information

For management purposes, the Group is organised into three operating segments – Aerospace & Infrastructure, Communications & Security and
Maritime & Land. 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
Aerospace & Infrastructure
Communications & Security
Maritime & Land
Eliminations

Consolidated revenue

All inter-segment trading is at arm’s length.

External
revenue
£’000

204,685
258,975
322,104
-

785,764

Inter
segment
£’000

8,114
2,807
21,869
(32,790)

2016

Total
£’000

212,799
261,782
343,973
(32,790)

External
revenue
£’000

193,224
239,261
293,801
-

Inter
segment
£’000

8,880
5,692
21,351
(35,923)

2015

Total
£’000

202,104
244,953
315,152
(35,923)

785,764

726,286

Underlying operating profit
Amortisation of intangibles arising on acquisition
Adjustments to contingent consideration net of acquisition and disposal related costs
S3 programme

Operating profit
Loss on disposals (net)
Retirement benefit scheme curtailment gain
Investment revenue
Finance costs

Profit before tax
Tax

Profit after tax

The S3 programme is the Group’s Standardisation & Shared Services programme.

Underlying operating profit
Amortisation of intangibles arising on acquisition
Adjustments to contingent consideration net of acquisition and disposal related costs
S3 programme
Impairment charges (see note 6)

Operating profit/(loss)
Deemed disposal of Ithra (see note 7)
Investment revenue
Finance costs

Profit before tax
Tax

Profit after tax

Aerospace Communications
& Security
£’000

& Infrastructure
£’000

32,378
(1,604)
(337)
(2,594)

27,843

39,703
(26,964)
(1,457)
(2,406)

8,876

Maritime
& Land
£’000

59,053
(4,087)
(463)
(1,497)

53,006

Aerospace Communications
& Security
£’000

& Infrastructure
£’000

28,641
(3,129)
(91)
(460)
(2,693)

22,268

40,424
(22,130)
(9,306)
(3,895)
(5,769)

(676)

Maritime
& Land
£’000

50,907
(5,547)
(19)
(508)
-

44,833

2016

Total
£’000

131,134
(32,655)
(2,257)
(6,497)

89,725
(4,076)
15,500
197
(33,725)

67,621
(9,363)

58,258

2015

Total
£’000

119,972
(30,806)
(9,416)
(4,863)
(8,462)

66,425
(16,447)
190
(15,407)

34,761
(9,772)

24,989

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

104 Group ﬁnancials. Notes to accounts – Group

1 Segment information (continued)

Capital expenditure, additions to intangibles, depreciation and amortisation

Aerospace & Infrastructure
Communications & Security
Maritime & Land

Total

Capital expenditure and
additions to intangibles
(excluding goodwill and
acquired intangibles)

2016
£’000

1,647
3,460
2,266

7,373

2015
£’000

2,498
1,915
1,945

6,358

Depreciation
and amortisation

2016
£’000

5,894
34,127
9,512

49,533

2015
£’000

7,074
27,815
10,697

45,586

The 2016 depreciation and amortisation expense includes £38,034,000 of amortisation charges (2015: £34,627,000) and £11,499,000 of
property, plant and equipment depreciation charges (2015: £10,959,000).

Total assets by segment

Aerospace & Infrastructure
Communications & Security
Maritime & Land

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

Aerospace & Infrastructure
Communications & Security
Maritime & Land

Unallocated

Consolidated total liabilities

2016
£’000

233,110
463,713
268,862

965,685
105,700

2015
£’000

233,949
460,980
245,499

940,428
61,925

1,071,385

1,002,353

2016
£’000

55,751
71,832
104,042

231,625
476,189

2015
£’000

79,791
71,162
92,573

243,526
441,984

707,814

685,510

Unallocated liabilities represent derivatives at fair value, current and 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

2016
£’000

185,135
82,818
18,617
391,754
107,440

2015
£’000

211,641
74,592
16,690
323,883
99,480

785,764

726,286

During the year there was one direct customer (2015: two) that individually accounted for greater than 10% of the Group’s total turnover. Sales to
this customer in 2016 were £141.9m (2015: £134.0m and £80.6m) across all segments.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

105

1 Segment information (continued)

Other information (by geographic location)

United Kingdom
USA
Canada
Rest of World

Unallocated

Non-current assets

Total assets

2016
£’000

205,253
362,313
96,449
7,762

671,777
21,380

2015
£’000

223,076
341,943
84,238
3,173

652,430
6,361

2016
£’000

344,157
478,083
126,995
16,450

965,685
105,700

2015
£’000

373,408
453,780
105,755
7,485

940,428
61,925

693,157

658,791

1,071,385

1,002,353

Additions to property,
plant & equipment
and intangible assets
(excluding acquisitions)

2016
£’000

3,213
3,356
767
37

7,373
-

7,373

2015
£’000

4,031
1,834
413
80

6,358
-

6,358

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 (see note 15)
Impairment charges (see note 6)
Adjustments to contingent consideration net of acquisition and disposal related costs
S3 programme

Underlying operating profit

Profit before tax
Amortisation of intangibles arising on acquisition (see note 15)
Impairment charges (see note 6)
Adjustments to contingent consideration net of acquisition and disposal related costs
Unwinding of discount on provisions (see note 10)
Loss on fair value movements of derivatives (see note 23)
Net interest charge on defined benefit pensions (see note 10)
S3 programme
Loss on disposals (net) (see note 32)
Deemed disposal of Ithra (see note 7)
Retirement benefit scheme curtailment gain (see note 31)

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
Ithra performance bond
S3 programme
Acquisition and disposal related payments

Underlying operating cash flow

2016
£’000

89,725
32,655
-
2,257
6,497

2015
£’000

66,425
30,806
8,462
9,416
4,863

131,134

119,972

67,621
32,655
-
2,257
367
19,103
2,983
6,497
4,076
-
(15,500)

34,761
30,806
8,462
9,416
641
3,988
3,041
4,863
-
16,447
-

120,059

112,425

112,002
(4,645)
293
(2,728)
-
8,230
5,613
1,669

120,434

71,339
(4,597)
1,466
(1,761)
5,343
-
2,233
7,291

81,314

The above analysis of the Group’s operating results, earnings per share and cash flows, 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 unusual and other
items relevant to an understanding of the Group’s performance and long-term trends 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. See page 136 for further details.

3 Revenue

An analysis of the Group’s revenue is as follows:

Sales of goods
Revenue from long-term contracts

2016
£’000

342,284
443,480

2015
£’000

354,719
371,567

785,764

726,286

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

106 Group ﬁnancials. Notes to accounts – Group

4 Other operating income

Amounts included in other operating income were as follows:

Foreign exchange gains

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 8)
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 acquired intangible assets (see note 15)
Impairment of loan to associate (see note 17)
Government grant income (see note 24)
Net foreign exchange gain
Loss/(profit) 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 (2015: £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
Corporate finance services – due diligence
Other advisory

Total for non-audit services

2016
£’000

1,770

2016
£’000

2,876
5,901

8,777

2016
£’000

201,221
254,956
11,499
2,876
35,158
-
-
(1,663)
(6,634)
291

1,269
13,022
32,639
893

2016
£’000

204
689

893

13
4
107
330

454

2015
£’000

2,198

2015
£’000

1,220
1,711

2,931

2015
£’000

220,379
240,243
10,959
1,220
33,407
5,769
2,693
(3,714)
(2,509)
(559)

1,518
12,139
35,126
915

2015
£’000

206
709

915

24
3
360
-

387

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

107

7 Deemed disposal of Ithra

In the prior year ‘Ithra’ (“Ultra Electronics in collaboration with Oman Investment Corporation LLC”), the legal entity established with the sole
purpose of delivering the Oman Airport IT contract, was placed into voluntary liquidation. A liquidator was appointed and is pursuing claims against
the customer on behalf of the interested parties. Ithra, upon liquidation, no longer met the IFRS 10 criteria for consolidation as a subsidiary of the
Group and was a deemed disposal as at 4 March 2015.

Non-controlling interest elimination
Release of translation reserve

Oman termination-related costs

8 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

2016
£’000

-
-

2015
£’000

13,751
2,696

16,447

2016
£’000

223,823
21,099
10,034

2015
£’000

209,228
19,796
11,219

254,956

240,243

2016
Number

1,917
1,579
300
670

4,466

2015
Number

2,149
1,746
322
626

4,843

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.

9 Investment revenue

Bank interest

10 Finance costs

Amortisation of finance costs of debt
Interest payable on bank loans, overdrafts and other loans

Total borrowing costs
Retirement benefit scheme finance cost
Unwinding of discount on provisions
Fair value movement on derivatives

2016
£’000

197

2016
£’000

848
10,424

11,272
2,983
367
19,103

33,725

2015
£’000

190

2015
£’000

649
7,088

7,737
3,041
641
3,988

15,407

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

108 Group ﬁnancials. Notes to accounts – Group

11 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
Derecognition of deferred tax assets
UK tax rate change

Total deferred tax credit

Total tax charge

2016
£’000

2015
£’000

5,549
(1,848)

3,701

10,879
326

11,205

14,906

(7,124)
1,576
5

(5,543)

9,363

6,555
(2,245)

4,310

9,435
(620)

8,815

13,125

(6,505)
1,799
1,353

(3,353)

9,772

Corporation tax in the UK is calculated at 20.0% (2015: 20.25%) of the estimated assessable profit for the year.

The Finance (No.2) Act 2015 and Finance Act 2016 provide for reductions in the main rate of corporation tax from 20% to 19% for the
financial year beginning 1 April 2017 and to 17% for the financial year beginning 1 April 2020. UK deferred tax at the balance sheet date has
been calculated at 17%. Deferred tax in other territories has been calculated at enacted tax rates that are expected to apply to the period
when assets are realised or liabilities are settled.

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:

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

2016
£’000

2015
£’000

9,973

478

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

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 20.0% (2015: 20.25%)
Tax effects of:
Income/expenses that are not taxable/allowable in determining taxable profits
Effect of change in UK tax rate
Losses for which no deferred tax asset recognised
Change in unrecognised deferred tax assets
Different tax rates of subsidiaries operating in other jurisdictions
CFC exemption
Non-taxable gain on disposal
Patent Box
Adjustments in respect of prior years

Tax expense for the year

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

2016
£’000

(124)

167

2016
£’000

67,621

13,524

2,405
5
1,576
-
2,683
(4,327)
(1,835)
(813)
(3,855)

9,363

2015
£’000

34,761

7,039

3,360
1,353
1,237
1,799
528
(2,763)
-
-
(2,781)

9,772

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

109

11 Tax (continued)

Included within the tax reconciliation are a number of non-recurring items, principally the non-taxable gain on the disposal of the ID business and
the non-recognition of deferred tax assets for certain UK expenses. In addition, a deferred tax asset was not recognised for certain expenses in our
Canadian business and this will continue to be assessed annually. The differences attributable to the UK CFC exemption, Patent Box and higher
overseas tax rates are expected to recur in the future.

Prior year adjustments arise in all the major territories where the Group operates and for a variety of reasons. Factors contributing to the increased
prior year tax credit in 2016 include the identification of additional tax deductions and new claims for reliefs in the UK, the release of provisions
against expiring uncertain tax positions and adjustments to deferred tax balances.

12 Dividends

Amounts recognised as distributions to equity holders in the year:

Final dividend for the year ended 31 December 2015 of 32.3p (2014: 31.1p) per share
Interim dividend for the year ended 31 December 2016 of 14.2p (2015: 13.8p) per share

Proposed final dividend for the year ended 31 December 2016 of 33.6p (2015: 32.3p) per share

2016
£’000

22,631
9,952

32,583

23,597

2015
£’000

21,695
9,637

31,332

22,625

The 2016 proposed final dividend of 33.6p per share is planned to be paid on 4 May 2017 to shareholders on the register at 7 April 2017. It was
approved by the Board after 31 December 2016 and has not been included as a liability as at 31 December 2016.

13 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
Loss 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 and disposal related costs net of contingent consideration (net of tax)
Net interest charge on defined benefit pensions (net of tax)
Retirement benefit scheme curtailment gain (net of tax)
Impairment charges (net of tax)
S3 programme (net of tax)
Deemed disposal of Ithra (net of tax)
Disposals (net of tax)

Earnings for the purposes of underlying earnings per share

The adjustments to profit are explained in note 2.

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

2016
pence

134.6

134.5

82.8

2016
£’000

2015
pence

123.9

123.8

35.7

35.6

2015
£’000

58,260

24,989

58,260
16,008
22,419
367
2,100
2,386
(12,400)
-
5,503
-
48

94,691

24,989
3,180
21,195
641
8,403
2,425
-
6,270
3,281
16,447
-

86,831

2016
Number of
shares

2015
Number of
shares

70,330,384
73,320

70,056,025
89,021

70,403,704

70,145,046

2016
£’000
120,059

2015
£’000
112,425

21.13%

22.77%

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

110 Group ﬁnancials. Notes to accounts – Group

14 Goodwill

Cost
At 1 January
Exchange differences
Recognised on acquisition of subsidiaries
Derecognised on disposal (see note 32)
Other changes

At 31 December

Accumulated impairment losses
At 1 January
Exchange differences

Carrying amount at 31 December

2016
£’000

2015
£’000

428,166
55,577
-
(8,305)
3,127

348,598
8,627
70,579
-
362

478,565

428,166

(52,281)
(10,691)

(49,638)
(2,643)

415,593

375,885

Other changes in 2016 and 2015 relate to the re-assessment of initial fair values. In 2016 this relates to Herley adjustments predominantly to
inventory and provisions and to Furnace Parts adjustments to deferred tax balances.

The Group’s market-facing-segments, which represent Cash Generating Unit (CGU) groupings, are; Aerospace, Infrastructure, Nuclear,
Communications, C2ISR, Maritime, Land and Underwater Warfare. These represent the lowest level at which the goodwill is monitored for internal
management purposes. Goodwill is allocated to CGU groupings as set out below:

Aerospace
Infrastructure
Nuclear

Aerospace & Infrastructure

Communications
C2ISR

Communications & Security

Maritime
Underwater Warfare

Maritime & Land

Total – Ultra Electronics

2016
Discount rate
%
10.1
10.1
10.1

2015
Discount rate
%
10.4
10.4
10.4

2016
£’000
32,784
28,159
19,411

80,354

2015
£’000
32,310
28,971
17,305

78,586

10.1 10.4 to 12.9
10.1 10.4 to 12.9

93,182
124,926

87,393
107,524

218,108

194,917

10.1
10.4
10.1 10.4 to 12.9

36,025
81,106

31,690
70,692

117,131

102,382

415,593

375,885

Goodwill is initially allocated, in the year a business is acquired, to the CGU group expected to benefit from the acquisition. Subsequent adjustments
are made to this allocation to the extent operations, to which goodwill relates, are transferred between CGU groups. The size of a CGU group varies
but is never larger than a reportable operating segment.

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 plan, 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, forecast gross
margins and underlying operating profit*. 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 2016 was 10.1% (2015: 10.4% to 12.9%). 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 historic 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-2021 growth assumption from 2.5% to nil;
(ii) apply a 20% reduction to forecast operating profits in each year of the modelled cash inflows; and
(iii) consider specific market factors as noted above.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

*see footnote on page 144

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

111

14 Goodwill (continued)

Certain of these sensitivity scenarios give rise to a potential impairment in Infrastructure. Headroom, which represents the value derived from the key
growth assumptions in the Infrastructure value-in-use calculations, is £5.2m. Sensitivity (ii) results in a £1.5m impairment in Infrastructure; the CGU
grouping is sensitive to the ability of the remaining operations to win sufficient new customers over the medium term.

For all other CGUs, the value-in-use calculations exceed the CGU carrying values in the sensitivity scenarios.

15 Other intangible assets

Acquired intangibles

Customer
relationships
£’000

Intellectual
property
£’000

Profit in
order book
£’000

Other
acquired
£’000

Internally
generated
capitalised
development
costs
£’000

Software,
patents and
trademarks
£’000

Total
£’000

Cost
At 1 January 2015
Foreign exchange differences
Acquired on acquisition of
subsidiary undertakings

Additions
Reclassified as held for sale
Disposals

202,154
5,893

42,789
-
-
-

91,468
2,741

19,115
-
-
-

26,941
621

3,321
-
-
-

At 1 January 2016

250,836

113,324

30,883

Foreign exchange differences
Fair value adjustment
Additions
Disposals

37,707
-
-
(66,084)

16,849
-
-
(12,585)

4,074
-
-
-

At 31 December 2016

222,459

117,588

34,957

Accumulated amortisation
At 1 January 2015
Foreign exchange differences
Reclassified as held for sale
Impairment charges
Disposals
Charge

(112,788)
(3,691)
-
(5,769)
-
(19,710)

(46,356)
(1,577)
-
-
-
(8,828)

(25,961)
(442)
-
-
-
(1,460)

At 1 January 2016

(141,958)

(56,761)

(27,863)

Foreign exchange differences
Disposals
Charge

(22,195)
58,396
(19,935)

(8,880)
9,971
(9,719)

(3,687)
-
(1,872)

At 31 December 2016

(125,692)

(65,389)

(33,422)

4,847
(33)

30,120
632

25,572
532

381,102
10,386

2,832
-
-
-

7,646

1,119
-
-
-

8,765

(1,650)
(47)
-
-
-
(808)

(2,505)

(390)
-
(1,129)

(4,024)

-
939
(5,264)
(3,192)

-
822
-
(397)

68,057
1,761
(5,264)
(3,589)

23,235

26,529

452,453

2,271
-
1,949
(466)

3,164
(123)
779
(327)

65,184
(123)
2,728
(79,462)

26,989

30,022

440,780

(15,105)
(270)
2,338
-
3,192
(1,220)

(16,730)
(244)
-
-
397
(2,601)

(218,590)
(6,271)
2,338
(5,769)
3,589
(34,627)

(11,065)

(19,178)

(259,330)

(1,096)
49
(2,876)

(2,267)
320
(2,503)

(38,515)
68,736
(38,034)

(14,988)

(23,628)

(267,143)

Carrying amount
At 31 December 2016

At 31 December 2015

96,767

108,878

52,199

56,563

1,535

3,020

4,741

5,141

12,001

12,170

6,394

7,351

173,637

193,123

Of the £6,394,000 (2015: £7,351,000) net book value within the software, patents and trademarks category, £417,000 (2015: £448,000) 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 21 years

5 to 10 years

1 to 3 years

1 to 5 years

2 to 10 years

3 to 5 years

10 to 20 years

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

112 Group ﬁnancials. Notes to accounts – Group

16 Property, plant and equipment

Cost
At 1 January 2015
Foreign exchange differences
Acquisitions
Additions
Reclassified as held for sale
Disposals

At 1 January 2016

Foreign exchange differences
Fair value adjustments
Additions
Disposals

At 31 December 2016

Accumulated depreciation
At 1 January 2015
Foreign exchange differences
Charge
Reclassified as held for sale
Disposals

At 1 January 2016

Foreign exchange differences
Charge
Disposals

At 31 December 2016

Carrying amount
At 31 December 2016

At 31 December 2015

Land and buildings

Freehold
£’000

Short
leasehold
£’000

Plant and
machinery
£’000

Total
£’000

155,861
2,312
12,666
4,597
(1,751)
(5,223)

21,220
531
376
1,408
-
(43)

100,225
2,056
7,144
3,055
(1,751)
(2,782)

23,492

107,947

168,462

2,301
-
447
(331)

11,527
(764)
3,890
(7,760)

18,096
(764)
4,645
(8,129)

34,416
(275)
5,146
134
-
(2,398)

37,023

4,268
-
308
(38)

41,561

25,909

114,840

182,310

(6,727)
246
(1,623)
-
1,891

(10,000)
(305)
(2,037)
-
(1)

(76,565)
(1,361)
(7,299)
827
2,675

(93,292)
(1,420)
(10,959)
827
4,565

(6,213)

(12,343)

(81,723)

(100,279)

(1,192)
(1,022)
38

(1,569)
(2,393)
295

(8,910)
(8,084)
7,001

(11,671)
(11,499)
7,334

(8,389)

(16,010)

(91,716)

(116,115)

33,172

30,810

9,899

11,149

23,124

26,224

66,195

68,183

Freehold land amounting to £7,070,000 (2015: £6,464,000) has not been depreciated. Included within Land and Buildings is £nil (2015: £nil) of assets
in the course of construction.

17 Interest in associate

Total revenue of associate
Group’s share of loss recognised

2016
£’000

-
-

2015
£’000

3,511
(581)

The Group’s interest in associate was represented by its 49% holding of ordinary shares in Al Shaheen Adventure LLC (“ASA”), a company
incorporated in the UAE. The Group had significant influence over the entity but did not control it, consequently ASA was accounted for using the
equity method of accounting. On 30 December 2015, the Group reached agreement to transfer the whole of its 49% equity interest in ASA to
Emirates Advanced Investments Group (“EAI”). During 2015 Ultra received an interim cash dividend of £5,343,000 and received a further final
dividend of £3,111,000 in January 2017 which will be accounted for in 2017.

A non-underlying impairment charge of £2,693,000 was recorded in 2015 as disclosed in note 6.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

113

18 Inventories

Raw materials and consumables
Work in progress
Finished goods and goods for resale

2016
£’000

48,147
21,452
8,578

78,177

2015
£’000

51,561
19,598
10,657

81,816

The amount of any write-down of inventory recognised as an expense in the year was £4,912,000 (2015: £3,168,000).

19 Long-term contract balances

Contracts in progress at the balance sheet date:
Amounts receivable 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 £48,378,000 (2015: £56,643,000).

20 Trade and other receivables

Non-current

Amounts receivable from contract customers

Current
Trade receivables
Provisions against receivables

Net trade receivables
Amounts receivable from contract customers
Other receivables
Prepayments and accrued income

2016
£’000

2015
£’000

112,271
(52,456)

96,856
(59,729)

59,815

37,127

1,480,046

1,568,778

2016
£’000

16,352

2016
£’000

98,977
(1,307)

97,670
95,919
11,891
10,251

2015
£’000

15,239

2015
£’000

93,016
(959)

92,057
81,617
9,328
14,385

215,731

197,387

Trade receivables do not carry interest. The average credit period on sale of goods is 36 days (2015: 28 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

2016
£’000

15,765
1,968
434
1,666

19,833

Related
provision
£’000

(157)
(56)
(72)
(1,022)

(1,307)

Total
£’000

15,608
1,912
362
644

18,526

2015
£’000

20,039
1,067
591
292

21,989

Related
provision
£’000

(315)
(76)
(276)
(292)

(959)

Total
£’000

19,724
991
315
-

21,030

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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

114 Group ﬁnancials. Notes to accounts – Group

20 Trade and other receivables (continued)

Movement in the provision for trade receivables was as follows:

Current

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

Non-current

Balance at beginning of year
Decrease in provision for trade receivables regarded as potentially uncollectable

Balance at end of year

2016
£’000

959
105
633
(390)

1,307

2016
£’000

-
-

2015
£’000

1,043
(24)
217
(277)

959

2015
£’000

6,884
(6,884)

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.

21 Trade and other payables

Amounts included in current liabilities:
Trade payables
Amounts due to contract customers (note 19)
Other payables
Accruals and deferred income

Amounts included in non current liabilities:
Amounts due to contract customers (note 19)
Other payables
Accruals and deferred income

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

22 Borrowings

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

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

2016
£’000

68,341
46,310
30,207
48,385

2015
£’000

70,701
58,104
27,157
43,980

193,243

199,942

6,146
243
3,583

9,972

1,625
570
4,801

6,996

2016
£’000

2015
£’000

268,120
56,897
6,308

289,521
47,236
4,289

331,325

341,046

-
331,325

-
341,046

331,325

341,046

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

115

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.

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)

Level 2
£’000

2016
Total
£’000

254

24,101

Level 2
£’000

2015
Total
£’000

1,347

6,091

Current assets/(liabilities) Non-current assets/(liabilities)
2015
£’000

2016
£’000

2015
£’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:

(12,507)

(3,530)

(11,594)

(2,561)

251

921

426

Cash and cash equivalents
Currency derivatives used for hedging
Amounts receivable from contract customers
Other receivables
Trade receivables
Prepayments and accrual income

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
Bank loans and overdrafts
Loan notes
Government loans
Trade payables
Amounts due to contract customers
Deferred consideration
Other payables
Accruals

2016
£’000

74,625
254
112,271
11,891
97,670
10,251

2016
£’000

24,101
268,120
56,897
6,308
68,341
52,456
3,956
30,450
33,595

2015
£’000

45,474
1,347
96,856
9,328
92,057
14,385

2015
£’000

6,091
289,521
47,236
4,289
70,701
59,729
4,676
27,727
29,153

The Directors consider that the carrying amount for all financial liabilities approximates to their fair value.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

116 Group ﬁnancials. Notes to accounts – Group

23 Financial instruments and financial risk management (continued)

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 three facilities in
place. The first provides £100 million of revolving credit and expires in August 2019. The second facility, which was put in place in August 2014,
provides £200 million of revolving credit which expires in August 2019. Both facilities are denominated in Sterling, US Dollars, Canadian Dollars,
Australian Dollars and Euros and are used for balance sheet and operational needs. A US$225m term loan facility, which expires in August 2019, was
put in place at the time of the Herley acquisition. The same covenants are in place across the three facilities.

A further £15 million overdraft is available for short-term working capital funding.

All bank loans are unsecured. Interest was predominantly charged at 1.35% (2015: 1.00%) over base or contracted rate.

At 31 December 2016, the Group had available £213,000,000 (2015: £159,756,000) 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.

The Group has a private shelf agreement with Prudential Investment Management, Inc. US$10m of loan notes were issued in 2011 with a maturity
date of July 2018 and a further US$60m of loan notes were issued in January 2012 with a maturity date of January 2019.

The following table details the Group’s remaining contractual maturity for its financial liabilities:

2016
Bank loans and overdrafts
Loan notes
Government loans
Trade payables
Currency derivatives used for hedging
Deferred consideration
Accruals

2015
Bank loans and overdrafts
Loan notes
Government loans
Trade payables
Currency derivatives used for hedging
Deferred consideration
Accruals

Within
1 year
£’000

5,645
2,049
-
68,341
12,506
51
31,132

4,923
1,701
-
70,701
3,530
869
27,178

1 to
2 years
£’000

53,923
10,022
-
-
6,355
1,196
1,038

4,242
1,701
-
-
1,634
3,221
842

2 to
5 years
£’000

225,933
48,881
-
-
5,216
2,709
1,100

299,095
48,902
-
-
927
586
860

Over
5 years
£’000

-
-
6,308
-
24
-
325

-
-
4,289
-
-
-
273

Total
£’000

285,501
60,952
6,308
68,341
24,101
3,956
33,595

308,260
52,304
4,289
70,701
6,091
4,676
29,153

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, 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 2016, the net fair value of the Group’s currency derivatives is estimated to be a liability of approximately £23,847,000
(2015: liability £4,744,000), comprising £254,000 assets (2015: £1,347,000) and £24,101,000 liabilities (2015: £6,091,000). The loss on derivative
financial instruments included in the Group’s consolidated income statement for the period was £19,103,000 (2015: loss £3,988,000).

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

117

23 Financial instruments and financial risk management (continued)

The net notional, or net contracted, amounts of foreign currency related forward sales contracts, classified by year of maturity are shown below.

2016
US Dollars/Sterling

Euro/other currencies

Total

2015
US Dollars/Sterling

Euro/other currencies

Total

Not
exceeding
1 year
£’000

Between
1 year and
5 years
£’000

58,196

3,553

61,749

49,682

4,590

54,272

80,510

5,198

85,708

73,379

7,745

81,124

Over
5 years
£’000

Total
£’000

138,706

872

9,623

148,329

123,061

1,740

14,075

137,136

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. The value of the net investment hedge was US$295m (2015: US$325m).

Interest rate risk
The Group holds interest rate swaps to manage its exposure to interest rate movements on its bank borrowings. The interest rate swaps, denominated
in US dollars, have been entered into to achieve an appropriate mix of fixed and floating rate exposure reflecting the Group’s policy. The swaps mature
in July 2019 and have a fixed swap rate, including the bank margin, of 1.232%. The floating rates are US Dollar LIBOR. At the year end the nominal
amounts of the interest rate swaps were US$120m (2015: US$120m). The hedging contracts fix US$120m of borrowings to 30 December 2016,
reducing to US$90m by December 2017, US$60m by December 2018 and US$45m by July 2019.

The interest rate swaps were designated effective cash flow hedges and the change in fair value is charged to equity. At 31 December 2016,
the net fair value of interest rate swaps was £315,000 (2015: £198,000). The amount recycled from the income statement during the year was
£495,000 and has been charged to interest cost in the year (2015: £nil).

The fair value will be realised in the income statement on a quarterly basis over the next 2.5 years. The Group also has US$70m of fixed rate
debt with Pricoa at an interest rate of 3.60%, due for repayment in July 2018 and January 2019.

The interest rate swaps and fixed rate Pricoa debt were 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:

2016
Cash and cash equivalents
Loan notes
Unsecured bank loans
Government loans

2015
Cash and cash equivalents
Loan notes
Unsecured bank loans
Government loans

Effective
interest
rate

0.36%
3.60%
2.09%
4.43%

0.43%
3.60%
1.69%
4.43%

Total
£’000

74,625
56,897
268,120
6,308

45,474
47,236
289,521
4,289

Within
1 year
£’000

74,625
-
-
-

45,474
-
-
-

1 to 2 years
£’000

2 to 5 years
£’000

5+ years
£’000

-
8,128
48,769
-

-
-
-
-

-
48,769
219,351
-

-
47,236
289,521
-

-
-
-
6,308

-
-
-
4,289

Market risk sensitivity analysis
Interest rate risk
During 2016 the Group’s net borrowings were predominantly at floating 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 2016. There is no significant difference between the
amount recharged to the income statement and equity in the year.

2016
Interest rate sensitivity

2015
Interest rate sensitivity

Profit
before tax
£’000

1% change

(2,455)

(1,870)

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

118 Group ﬁnancials. Notes to accounts – Group

23 Financial instruments and financial risk management (continued)

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% weakening of GBP

10% strengthening of GBP

25% weakening of GBP

25% strengthening of GBP

Profit
before
tax
£’000

Equity
£’000

2016
Transaction
P&L translation
Foreign exchange derivatives

6,355
1,177
(15,822)

6,355
1,091
(15,822)

Profit
before
tax
£’000

(6,355)
(1,177)
15,475

Equity
£’000

(6,355)
(1,091)
15,475

Profit
before
tax
£’000

Equity
£’000

Profit
before
tax
£’000

Equity
£’000

15,888
2,943
(44,843)

15,888
2,728
(44,843)

(15,888)
(2,943)
37,759

(15,888)
(2,728)
37,759

Total foreign exchange

(8,290)

(8,376)

7,943

8,029

(26,012)

(26,227)

18,928

19,143

2015
Transaction
P&L translation
Foreign exchange derivatives

5,792
1,734
(12,825)

5,792
415
(12,825)

(5,792)
(1,734)
11,307

(5,792)
(415)
11,307

14,481
4,334
(36,043)

14,481
1,037
(36,043)

(14,481)
(4,334)
27,665

(14,481)
(1,037)
27,665

Total foreign exchange

(5,299)

(6,618)

3,781

5,100

(17,228)

(20,525)

8,850

12,147

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. 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 has been calculated using a market interest rate for a similar instrument. Following
delays on some of the UETCS programme, a two-year extension of the project competition date to December 2017 and related repayments to 2032
has been agreed with Industry Canada. The revised repayment profile and reassessment of the discount rate resulted in a reduction of the loan
element and an increase in the grant element during 2015 and a reduction in capitalised development in 2015.

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
Reassessment as grant income
Reduction in capitalised development
Interest charged to finance costs
Foreign exchange differences

Fair value of SADI loan carried forward

Government grants credited to profit in the year

SADI
Other†

†Ultra Electronics Limited received a £163,000 grant from the Technology Strategy Board in 2015.

2016
£’000

4,289
262
-
-
837
920

6,308

2016
£’000

1,663
-

1,663

2015
£’000

5,728
662
(2,249)
(784)
953
(21)

4,289

2015
£’000

3,551
163

3,714

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

119

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.

Accelerated†
tax
depreciation
£’000

Employee
share
options
costs
£’000

Derivatives
£’000

Retirement
benefit
obligations
£’000

At 1 January 2015
Credit/(charge) to income
Credit to other comprehensive income
Credit direct to equity
Exchange differences
Arising on acquisition

At 1 January 2016

Credit/(charge) to income
Credit to other comprehensive income
Credit direct to equity
Exchange differences
Effect of change in tax rate
Arising on acquisition

At 31 December 2016

Non-current assets
Non-current liabilities

(21,737)
9,595
-
-
499
(3,416)

(15,059)

10,977
-
-
(703)
1,189
-

(3,596)

419
140
-
12
-
-

571

(134)
-
167
-
(15)
-

589

151
808
-
-
-
-

959

3,238
-
-
-
(143)
-

4,054

Goodwill
£’000

(1,736)
(5,452)
-
-
(380)
(167)

(7,735)

(5,715)
-
-
(1,373)
42
2,152

17,607
(2,715)
478
-
-
-

15,370

(4,037)
9,973
-
-
(1,789)
-

19,517

(12,629)

Other
£’000

3,598
1,063
-
-
-
-

4,661

1,214
-
-
313
699
-

6,887

2016
£’000

21,377
(6,555)

14,822

Total
£’000

(1,698)
3,439
478
12
119
(3,583)

(1,233)

5,543
9,973
167
(1,763)
(17)
2,152

14,822

2015
£’000

5,935
(7,168)

(1,233)

†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.

Unrecognised deferred tax assets
Deferred tax assets, in excess of offsetting deferred tax liabilities, are recognised for tax loss carry forwards and deductible temporary differences to the
extent that utilisation against future taxable profits is probable. UK deferred tax assets of £1.4m and Canadian deferred tax assets of £12.0m have not
been recognised (2015: £11.3m) because their recovery is uncertain. The absence of any consolidated or group basis of taxation in Canada contributes
significantly to the uncertainty over the recovery of the Canadian deferred tax asset.

26 Provisions

At 1 January 2016
Created
Reversed
Utilised
Unwinding of discount
Exchange differences

At 31 December 2016

Included in current liabilities
Included in non-current liabilities

Warranties
£’000

Contract
related
provisions
£’000

3,785
2,012
(467)
(1,229)
-
343

4,444

2,325
2,119

4,444

2,349
5,779
(22)
(1,780)
-
413

6,739

6,046
693

6,739

Other
£’000

23,154
3,457
-
(17,252)
367
1,193

10,919

8,262
2,657

10,919

Total
£’000

29,288
11,248
(489)
(20,261)
367
1,949

22,102

16,633
5,469

22,102

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. Other
provisions include re-organisation costs, contingent consideration, dilapidation costs and provisions associated with the Oman Airport IT contract
termination. 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: £1,598,000 of the provision was utilised in the year when the final Forensic Technology earn-out target was met.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

120 Group ﬁnancials. Notes to accounts – Group

27 Share capital and share options

Authorised:
5p ordinary shares

Allotted, called-up and fully paid:
5p ordinary shares

No.

2016

£’000

No.

2015

£’000

90,000,000

4,500

90,000,000

4,500

70,463,092

3,523

70,281,146

3,514

181,946 ordinary shares having a nominal value of £9,097 were allotted during the year under the terms of the Group’s various share option schemes.
The aggregate consideration received was £2,977,000.

Share options
During the year to 31 December 2016, 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 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 2016, share options outstanding under the Savings-Related Share Option Schemes were as follows:

Options granted

2013 – US scheme

2014 – US scheme

2015 – US scheme

2016 – US scheme

2012 – Canadian scheme

2013 – Canadian scheme

2014 – Canadian scheme

2015 – Canadian scheme

2016 – Canadian scheme

2010 – UK 5 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

2014 – UK 3 year scheme

2014 – UK 5 year scheme

2015 – UK 3 year scheme

2015 – UK 5 year scheme

2016 – UK 3 year scheme

2016 – UK 5 year scheme

Number of shares
2015

2016

Option
price (£)

Exercise
dates

19,156

44,306

48,843

41,145

34,611

45,195

15,196

2,723

7,195

2,918

8,649

10,884

11,684

8,047

3,831

24,613

9,456

13,267

13,217

8,517

13,551

7,025

64,479

38,415

2,777

15,685

4,849

28,159

22,418

15,657

15,915

11,320

15,303

7,936

17.16

15.94

14.85

15.98

13.79

16.80

16.13

16.12

15.98

15.54

13.33

13.85

16.80

16.13

16.12

15.10

September 2015 - December 2015

September 2016 - December 2016

September 2017 - December 2017

September 2018 - December 2018

September 2015 - March 2016

October 2016 - April 2017

October 2017 - April 2018

December 2018 - June 2019

December 2019 - June 2020

December 2015 - June 2016

December 2016 - June 2017

December 2015 - June 2016

December 2017 - June 2018

December 2016 - June 2017

December 2018 - June 2019

December 2017 - June 2018

December 2019 - June 2020

December 2018 - June 2019

December 2020 - June 2021

December 2019 - June 2020

December 2021 - June 2022

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

121

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 2016, share options outstanding under the Company Share Option Plan were as follows:

Options granted

Number of shares
2015

2016

Option
price (£)

2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

-
-
-
-
3,054
5,902
5,042
20,621
23,546
14,674
30,623

968
3,858
2,261
2,564
9,386
13,902
12,237
45,095
29,289
16,070
-

10.32
12.07
12.00
11.90
14.83
16.97
17.10
17.18
18.29
17.31
17.90

Exercise
dates

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
March 2017 - March 2024
March 2018 - March 2025
March 2019 - March 2026

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 2016, share options outstanding under the Executive Share Option Scheme were as follows:

Options granted

2009
2010
2011
2012
2013
2014
2015
2016

Number of shares
2015

2016

Option
price (£)

-
11,037
33,880
46,209
82,431
129,536
126,657
130,448

21,759
40,555
76,160
112,255
141,767
176,015
152,819
-

11.90
14.83
16.97
17.10
17.18
18.29
17.31
17.90

Exercise
dates

March 2012 - March 2016
March 2013 - March 2017
March 2014 - March 2018
March 2015 - March 2019
March 2016 - March 2020
March 2017 - March 2021
March 2018 - March 2022
March 2019 - March 2023

4. Long-Term Incentive Plan
Details in relation to the Ultra Electronics Long-Term Incentive Plan 2007 awards to Executive Directors are included in the Directors’ Remuneration
report on pages 74 to 88. In April 2016 LTIPs were awarded to nominated employees. The awards will vest in March 2019 upon achievement of
certain performance targets and are conditional upon continued employment.

5. All Share Based Payment Arrangements
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 (£)

2016

12.45
10.53
12.57
9.56
16.27

Number
of options

2016

1,553,412
524,772
(260,477)
(188,553)
(178,609)

Weighted
average
exercise
price (£)

2015

13.10
9.21
7.38
15.62
14.89

Number
of options

2015

1,573,266
467,218
(232,588)
(94,066)
(160,418)

11.64

1,450,545

12.45

1,553,412

16.82

243,342

16.11

359,872

The Group recognised total expenses of £984,000 (2015: £967,000) in relation to equity-settled share-based payment transactions. Expected
volatility was determined by calculating the historical 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 £18.07. The fair value of
options granted during the year that are expected to vest was £2,969,796 (2015: £2,878,631).

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

122 Group ﬁnancials. Notes to accounts – Group

27 Share capital and share options (continued)

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 2013, 2014, 2015 and 2016 March 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 %

Share save*

CSOP*

ESOS*

LTIP*†

17.25
15.51
21.3
3.6
0.7
2.5

17.34
17.39
23.3
6
1.5
2.4

16.99
16.96
24.4
5
1.7
2.3

2016

17.56
n/a
18.4
3
0.6
0.0

Share save*

CSOP*

ESOS*

LTIP*

17.04
15.89
22.4
3.5
0.8
2.4

17.40
17.36
25.0
6
1.6
1.8

17.41
17.38
24.2
5
1.2
2.3

2015

17.10
n/a
18.7
3
0.7
0.0

*Figures in the above table show an average across the invested schemes at year end.
†April 2016 LTIP.

For the 2013, 2014, 2015 and 2016 March 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 %
Risk-free interest rate %

Figures in the above table show an average across the schemes.

The weighted average fair value of options granted during the year was £6.81 (2015: £6.57).

The weighted average remaining contractual life of share options was 4.6 years (2015: 3.6 years).

28 Equity

Balance at 1 January 2015
Total comprehensive

income for the year
Deemed disposal of Ithra
Equity-settled employee

share scheme

Dividends to shareholders

Share
capital
£’000

3,498

-
-

16
-

Share
premium
account
£’000

56,131

-
-

4,921
-

Reserve
for own
shares
£’000

Hedging
reserve
£’000

Translation
reserve
£’000

(2,581)

(13,330)

27,219

(12,578)
-

14,819
-

-
-

979
(31,332)

Balance at 1 January 2016

3,514

61,052

(2,581)

(25,908)

42,038

238,728

Total comprehensive

income for the year
Non-controlling interest’s

investment made in subsidiary

Equity-settled employee

share scheme

Dividends to shareholders

9
-

2,968
-

-
-

1,929

1,027
(32,583)

Balance at 31 December 2016

3,523

64,020

(2,581)

(68,986)

139,492

228,034

The share premium account represents the premium arising on the issue of equity shares.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

2016

n/a
17.63
3.0
20.5
0.6

2015

n/a
17.79
3.0
21.9
0.7

Retained
earnings
£’000

246,132

22,949
-

Non
controlling
interests
£’000

Total
equity
£’000

(13,623)

303,446

(128)
13,751

25,062
13,751

-
-

5,916
(31,332)

316,843

-
-

2,000

4,004
(32,583)

363,571

(43,078)

97,454

18,933

(2)

73,307

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

123

28 Equity (continued)

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 2016, the number of own
shares held was 235,245 (2015: 235,245).

29 Notes to the cash flow statement

Operating profit
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment charges
Cost of equity-settled employee share schemes
Adjustment for pension funding
Profit on disposal of property, plant and equipment
Share of loss from associate
Decrease in provisions

Operating cash flow before movements in working capital
Decrease in inventories
Increase in receivables
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 in cash and cash equivalents
Cash inflow from movement in debt and finance leasing

Change in net debt arising from cash flows
Loan syndication costs
Amortisation of finance costs of debt
Other non-cash movements
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

2016
£’000

2015
£’000

89,725

66,425

11,499
38,034
-
984
(8,468)
291
-
(8,975)

123,090
8,295
(339)
(19,044)

10,959
34,627
8,462
967
(8,015)
(559)
581
(2,073)

111,374
6,607
(2,261)
(44,381)

112,002

71,339

(9,012)
(10,156)

(17,252)
(6,309)

92,834

47,778

2016
£’000

20,766
54,419

75,185
-
(848)
-
(35,465)

38,872
(295,572)

2015
£’000

5,916
(157,054)

(151,138)
1,347
(649)
(872)
(14,765)

(166,077)
(129,495)

(256,700)

(295,572)

2016
£’000

2015
£’000

74,625
(331,325)

45,474
(341,046)

(256,700)

(295,572)

Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

124 Group ﬁnancials. Notes to accounts – Group

30 Other financial commitments

a) Capital commitments
At the end of the year capital commitments were:

Contracted but not provided

2016
£’000

430

2015
£’000

515

b) Lease commitments
At 31 December 2016, 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

31 Retirement benefit schemes

2016
£’000

13,360
34,154
10,576

58,090

2015
£’000

12,475
35,001
10,096

57,572

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 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 2016. Following a consultation period and discussions with
the Trustee, the UK defined benefit scheme was closed to future benefit accrual from 5 April 2016. 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 and the Swiss business of the Forensic Technology group has a defined benefit scheme.

Defined contribution schemes
The total cost charged to income in respect of the defined contribution schemes was £8,837,000 (2015: £7,610,000).

Defined benefit schemes
All the defined benefit schemes were actuarially assessed at 31 December 2016 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 and 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 last actuarial valuation of the scheme
was at 6 April 2016. This valuation has been finalised and will result in an increase in the additional deficit payment required to £9.5m in
2017, £10.0m in 2018, £10.5m in 2019 and £11.0m per annum for the following five years. The next actuarial valuation is due to be carried
out with an effective date of 6 April 2019. 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 2016 valuation have been projected to 31 December 2016 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
2016

2.55%
3.30%
2.30%
n/a
3.05%
1.95%

Canada
2016

Switzerland
2016

3.50%
3.30%
2.30%
3.55%
n/a
n/a

0.35%
0.80%
0.80%
1.00%
n/a
n/a

UK
2015

3.75%
3.05%
2.05%
3.30%
2.85%
1.90%

Canada
2015

3.75%
3.05%
2.05%
3.30%
n/a
n/a

Switzerland
2015

0.80%
0.80%
0.80%
1.00%
n/a
n/a

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

125

31 Retirement benefit schemes (continued)

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% increase in the inflation assumption to 3.40% and a 0.1% decrease in the discount rate to
2.45% would increase the scheme’s liabilities by 1.8% and 2.0% respectively. If the members’ life expectancy were to increase by 1 year, the scheme
liabilities would increase by 3.9%. The average duration of the scheme liabilities is 20 years (2015: 20 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

100% SAPS S2PMA_L/84% SAPS S2PFA_L c2007 CMI 2015 1.25% imps from 2007 (UK only)
100% SAPS S2PMA_L/84% SAPS S2PFA_L c2007 CMI 2015 1.25% imps from 2007 (UK only)

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

2016

2015

23 years
26 years
25 years
28 years

22 years
24 years
24 years
26 years

Amounts recognised in the income statement in respect of the Group’s defined benefit schemes were as follows:

Current service cost
Administration expenses
Interest on pension scheme liabilities
Curtailment gain
Expected return on pension

scheme assets

Charge/(credit)

UK
2016
£m

1.3
0.6
11.4
(15.5)

(8.4)

(10.6)

Canada
2016
£m

Switzerland
2016
£m

0.1
0.2
0.3
-

(0.4)

0.2

0.2
-
0.1
-

0.3

Total
2016
£m

1.6
0.8
11.8
(15.5)

(8.8)

(10.1)

UK
2015
£m

4.9
0.5
11.2
-

(8.2)

8.4

Canada
2015
£m

Switzerland
2015
£m

0.1
0.1
0.3
-

(0.3)

0.2

0.3
-
0.1
-

(0.1)

0.3

Total
2015
£m

5.3
0.6
11.6
-

(8.6)

8.9

Of the current service cost for the year, £1.0 million (2015: £3.9 million) has been included in cost of sales, and £0.6 million (2015: £1.4 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:

Fair value of scheme assets
Present value of scheme liabilities

Scheme deficit
Related deferred tax asset

Net pension liability

UK
2016
£m

271.2
(382.4)

(111.2)
19.1

(92.1)

Canada
2016
£m

Switzerland
2016
£m

10.4
(11.1)

(0.7)
0.1

(0.6)

5.7
(7.0)

(1.3)
0.3

(1.0)

Total
2016
£m

287.3
(400.5)

(113.2)
19.5

(93.7)

Movements in the present value of defined benefit obligations during the year were as follows:

UK
2016
£m

Canada
2016
£m

Switzerland
2016
£m

Present value of obligation

at 1 January
Current service cost
Interest cost
Actuarial gains and losses
Exchange difference
Curtailment gain
Benefits paid

Present value of obligation

(307.7)
(1.3)
(11.4)
(89.2)
-
15.5
11.7

(9.3)
(0.1)
(0.3)
(0.3)
(2.2)
-
1.1

(5.4)
(0.2)
(0.1)
(0.5)
(1.0)
-
0.2

Total
2016
£m

(322.4)
(1.6)
(11.8)
(90.0)
(3.2)
15.5
13.0

UK
2015
£m

224.5
(307.7)

(83.2)
15.1

(68.1)

UK
2015
£m

(306.5)
(4.9)
(11.2)
5.9
-
-
9.0

Canada
2015
£m

Switzerland
2015
£m

8.6
(9.3)

(0.7)
0.1

(0.6)

4.5
(5.4)

(0.9)
0.2

(0.7)

Canada
2015
£m

Switzerland
2015
£m

(11.1)
(0.1)
(0.3)
0.1
1.3
-
0.8

(4.1)
(0.3)
(0.1)
(0.6)
(0.3)
-
-

Total
2015
£m

237.6
(322.4)

(84.8)
15.4

(69.4)

Total
2015
£m

(321.7)
(5.3)
(11.6)
5.4
1.0
-
9.8

at 31 December

(382.4)

(11.1)

(7.0)

(400.5)

(307.7)

(9.3)

(5.4)

(322.4)

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

126 Group ﬁnancials. Notes to accounts – Group

31 Retirement benefit schemes (continued)

Movements in the fair value of scheme assets during the year were as follows:

Fair value at 1 January
Expected return on
scheme assets

Actuarial gains and losses
Exchange differences
Employer contributions
Administration expenses
Benefits paid

UK
2016
£m

224.5

8.4
40.3
-
10.3
(0.6)
(11.7)

Fair value at 31 December

271.2

Scheme assets were as follows:

Canada
2016
£m

Switzerland
2016
£m

8.6

0.4
0.2
2.0
0.5
(0.2)
(1.1)

10.4

4.5

-
0.2
0.8
0.4
-
(0.2)

5.7

Fair value:
Equities
Bonds
Property
Other assets
Other investment funds

UK
2016
£m

87.0
-
16.4
38.4
129.4

271.2

Canada
2016
£m

Switzerland
2016
£m

3.4
6.4
-
0.5
0.1

10.4

1.8
2.4
0.6
0.9
-

5.7

Total
2016
£m

237.6

8.8
40.7
2.8
11.2
(0.8)
(13.0)

UK
2015
£m

220.8

8.2
(8.0)
-
13.0
(0.5)
(9.0)

287.3

224.5

Total
2016
£m

92.2
8.8
17.0
39.8
129.5

287.3

UK
2015
£m

74.3
-
14.0
0.4
135.8

224.5

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
2016
£m

40.3

4.0

(93.2)

(48.9)

Canada
2016
£m

Switzerland
2016
£m

0.2

(0.5)

(0.1)

0.2

(0.2)

(0.3)

Total
2016
£m

40.7

4.0

(94.0)

(49.3)

UK
2015
£m

(8.0)

0.2

5.7

(2.1)

Canada
2015
£m

9.9

0.3
-
(1.3)
0.5
-
(0.8)

8.6

Switzerland
2015
£m

3.7

0.1
0.1
0.3
0.3
-
-

4.5

Canada
2015
£m

Switzerland
2015
£m

3.5
4.5
-
0.6
-

8.6

1.3
2.2
0.5
0.5
-

4.5

Canada
2015
£m

Switzerland
2015
£m

(0.1)

0.2

0.1

(0.1)

(0.5)

Total
2015
£m

234.4

8.6
(7.9)
(1.0)
13.8
(0.5)
(9.8)

237.6

Total
2015
£m

79.1
6.7
14.5
1.5
135.8

237.6

Total
2015
£m

(7.9)

5.4

(2.5)

Cumulative actuarial losses, net of deferred tax, recognised in the consolidated statement of comprehensive income at 31 December 2016 were
£93.5 million (2015: £54.1 million).

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

2016
£m

(400.5)
287.3

(113.2)

(4.0)
1.0%

40.7
14.2%

2015
£m

(322.4)
237.6

(84.8)

-
-
(7.9)
(3.3%)

2014
£m

(321.7)
234.4

(87.3)

(2.5)
0.8%

21.8

9.3%

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%

The amount of contributions expected to be paid to defined benefit schemes during the 2017 financial year is £10.4m. For the UK scheme this
includes an additional deficit payment of £9.5m agreed with the Trustee. This will be followed by £10.0m in 2018, £10.5m in 2019 and £11.0m per
annum for the following five years.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

127

32 Acquisitions and disposals

Acquisitions
In aggregate, cash consideration of £5.2m was paid in respect of final payments and deferred consideration for acquisitions made in prior years.

Fair value adjustments, with respect to prior year acquisitions, totalling net £3.1m have been debited to goodwill. The prior year acquisition fair
values are now final.

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

Disposals
The Communications & Security division disposed of its ID business in August 2016 and its remaining legal intercept assets, from the former
SOTECH business, in December 2016; both were in the C2ISR CGU group. Cash proceeds of £22m were received in the year. Further proceeds could
be received over the following 24 months based on agreed targets; any such proceeds will be accounted for in the year of receipt. The net loss on
disposal is £4,076,000.

Intangible assets
Property, plant and equipment
Inventories
Receivables
Payables

Total

Gain on disposal before disposal of attributable goodwill
Less attributable goodwill
Release of translation reserve

Gain on disposal

Satisfied by:
Cash

Net cash flow arising on disposal:
Consideration received in cash

Less: cash and cash equivalents disposed of

Legal intercept

Intangible assets
Property, plant and equipment, inventories and receivables

Total

Loss on disposal

Satisfied by:
Cash

Net cash flow arising on disposal:
Consideration received in cash

Less: cash and cash equivalents disposed of

2016

£’000

3,384
722
2,020
3,875
(2,797)

7,204

14,796
(8,305)
1,895

8,386

22,000

2016

£’000

10,303
2,199

12,502

(12,462)

Assets classified as held for sale in prior year
The major classes of assets and liabilities, comprising the operations classified as held for sale relating to the ID business on the 31 December 2015
balance sheet, were as follows:

Intangible fixed assets
Property, plant and equipment
Inventories
Trade and other receivables

Total assets classified as held for sale

Trade and other payables
Provisions

Total liabilities classified as held for sale

Net assets of disposal group

2015
£’000

2,926
924
1,374
3,571

8,795

(2,784)
(227)

(3,011)

5,784

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

128 Group ﬁnancials. Notes to accounts – Group

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 74 to 88.

Short-term employee benefits
Post-employment benefits
Share-based payments

34 Non-controlling interests

2016
£’000

4,628
410
1,042

6,080

2015
£’000

4,927
422
1,016

6,365

In November 2016 the Group sold a 5% share of its recently established Corvid Holdings Limited subsidiary for cash consideration of £2,000,000.
Before any intra-group eliminations the consolidated revenue of the subsidiary in the period was £1,214,000, the loss was £40,000 and the net
assets at 31 December 2016 were £3,466,000. Sales to Group companies were £496,000.

The following table summarises the information, before any intra-group eliminations, relating to the Group’s former subsidiary “Ultra Electronics in
Collaboration with Oman Investment Corporation”, incorporated in the Sultanate of Oman, that had a material non-controlling interest held by
Oman Investment Corporation (’OIC’). On 4 March 2015 the entity was placed into voluntary liquidation and no longer meets the IFRS 10 criteria for
consolidation as a subsidiary of the Group (see note 7).

Ithra

Non-controlling interest percentage

Profit allocated to non-controlling interest
Loss incurred by Ultra upon deemed disposal of Ithra
Other comprehensive income allocated to non-controlling interest

35 Contingent liabilities

2016
£’000

-
-
-

2015
£’000

-
13,751
(128)

The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business totalling £40.3m
(2015: £70.6m).

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 addition, the Group is, from time to time, party to legal proceedings and claims which arise in the ordinary course of business. In
particular, as set out in note 7, the Oman Airport IT contract was terminated in February 2015. This has given rise to significant uncertainty regarding
the likely outcome of proceedings in respect of this termination event, and it is not possible to reliably estimate the outcome.

36 Additional information as required by Listing Rules Requirement 9.8.4

• Long-term incentive schemes – see Directors’ remuneration report
• Allocation of equity securities for cash – see note 27
• Election of independent directors – see Corporate Governance Report on page 62
• Contractual arrangements – see Directors’ Report on page 90
• Details of independent directors – see Corporate Governance Report on page 55
• Substantial shareholders – see Directors’ Report on page 90

No profit forecasts are issued by the Group and no Directors have waived any current or future emoluments. No shareholders have waived or
agreed to waive dividends. None of the shareholders is considered to be a Controlling Shareholder (as defined in Listing Rules 6.1.2A).

37 Related undertakings

The Company owns either directly or indirectly the ordinary share capital of the following undertakings:

Company name
3 Phoenix Inc.

3e Technologies International Inc.

Aardvark Electronic Components Limited

AEP Networks Asia Pacific SDN BHD

AEP Networks Australia Pty Ltd

AEP Networks Inc.

AEP Networks Limited

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Country
incorporated
United States

United States

United Kingdom

Malaysia

Australia

United States

Ireland

United Kingdom

%
owned
100%

100%

Direct/Indirect
(Group interest)
Indirect (Group interest)

Indirect (Group interest)

Direct

Indirect (Group interest)

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Notes to accounts – Group

129

37 Related undertakings (continued)

Company name
Audiosoft Limited

Blue Sky Group (International) Limited

CORVID Holdings Limited

CORVID Paygate Limited

CORVID Protect Holdings Limited

Dascam Consulting Limited

DF Group Limited

EMS Development Corporation

ERAPSCO

EW Simulation Technology Limited

Extec Integrated Systems Limited

Flightline Electronics Inc.

Forensic Technology (Europe) Limited

Forensic Technology AEC Thailand Ltd

Forensic Technology Inc.

Forensic Technology Mexico S. de RL. de C.V

Forensic Technology-Tecnologia Forense Ltda

Furnace Parts LLC

Giga Communications Limited

GIGASAT, INC.

Gigasat. Asia Pacific Pty Ltd

Herley Industries Inc.

Herley-CTI Inc.

Power Magnetics and Electronic Systems Limited

Projectina AG

Prologic Inc.

Special Operations Technology Inc (SOTECH)

Transmag Power Transformers Limited

UE Dormant One

Ultra Electronics (Qatar) LLC

Ultra Electronics (USA) Group Inc

Ultra Electronics Advanced Tactical Systems Inc.

Ultra Electronics Airport Systems (South Africa) (Proprietary) Limited

Ultra Electronics Airport Systems Inc.

Ultra Electronics Australia Pty Limited

Ultra Electronics Avalon Systems Pty Limited

Ultra Electronics Canada Inc.

Ultra Electronics Connecticut LLC

Ultra Electronics Defense Inc.

Ultra Electronics DNE Technologies Inc.

Ultra Electronics Enterprises (USA) LLC

Country
incorporated
United Kingdom

United Kingdom

%
owned
100%

100%

Guernsey

Cyprus

United Kingdom

United States

United Kingdom

United States

Ireland

Thailand

United States

Mexico

Brazil

United States

United Kingdom

United States

Australia

United States

United Kingdom

Switzerland

United States

United Kingdom

Qatar

United States

South Africa

United States

Australia

Canada

United States

Direct/Indirect
(Group interest)
Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

95%

100%

50%

100%

49%

100%

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Ultra Electronics Forensic Technology Inc./Les Technologies Ultra Electronics Forensic Inc.

Canada

Ultra Electronics Hong Kong Holdings Limited 傲創電子香港控股有限公司

Ultra Electronics ICE, Inc.

Hong Kong

United States

130 Group ﬁnancials. Notes to accounts – Group

37 Related undertakings (continued)

Company name
Ultra Electronics in collaboration with Oman Investment Corporation LLC

Ultra Electronics Inc.

Ultra Electronics Investments (USA) LLC

Ultra Electronics Limited

Ultra Electronics Maritime Systems Inc

Ultra Electronics Measurement Systems Inc.

Ultra Electronics Netherlands (CAD) B.V.

Ultra Electronics Netherlands B.V.

Ultra Electronics Netherlands Finance Coöperatief W.A.

Ultra Electronics Ocean Systems Inc.

Ultra Electronics Pension Trustee Company Limited

Ultra Electronics Precision Air and Land Systems Inc.

Ultra Electronics Secure Intelligence Systems Inc.

Ultra Electronics Swiss Holdings Company Limited

Ultra Electronics TCS Inc.

Ultra Electronics Technology (Beijing) Co Ltd.

Ultra Electronics Tisys

Ultra Electronics TopScientific Aerospace Limited

UnderSea Sensor Systems Inc.

Vados Systems Limited

Weed Instrument Company Inc.

Country
incorporated
Oman

United States

United Kingdom

Canada

United States

Netherlands

United States

United Kingdom

United States

United Kingdom

Canada

China

France

Hong Kong

United States

United Kingdom

United States

%
owned
70%

100%

50%

100%

Direct/Indirect
(Group interest)
Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

Direct

Indirect (Group interest)

The principal activity of the trading subsidiary undertakings is the design, development and manufacture of electronic systems for the
international defence and aerospace markets.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Statement of accounting policies

131

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, is 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:
• Annual Improvements to IFRS: 2012-2014 cycle

The following standards were also adopted in the current year and have had the impact as set out below.
• None

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 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 15 Revenue from contracts with customers
• IFRS 16 Leases

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 15 Revenue from contracts with customers – the standard is effective from 1 January 2018 and is expected to revise the timing of revenue

recognised on some of the Group’s contracts. There will be no impact to the timing of cash flows. The Group has an on-going project to assess the
impact to its financial statements. This project has involved reviews of the Group’s key contracts and the use of questionnaires and detailed contract
discussions with finance and commercial teams to identify the most likely areas of change across the Group’s business units and differing revenue
streams. From the work performed to date, it is expected that the most significant changes relative to current accounting treatments will arise in the
following areas:
(i)

the accounting for multiple elements of long-term contracts approved at different times, for example contracts involving product design, followed
by subsequent production orders;

(ii) allocation of the contract price to performance obligations for long-term contracts containing multiple deliverables;
(iii) the accounting for certain transactions currently accounted for as sales of goods; and
(iv) the accounting for long-term support arrangements or maintenance contracts.

The following areas are also expected to result in some, potentially less significant, change in approach: (i) the treatment of contract penalties which
are currently booked to costs of sales, (ii) the treatment of warranties and (iii) licenses of software. Other areas of change could be identified as the
project continues and as more detailed work is undertaken to quantify the financial impact on individual contracts.

At the current time it is not possible to quantify the impact of IFRS 15 on the Group’s future revenues and profits. The next stage of the project will
develop new internal revenue recognition accounting policies and guidance, roll out further training across the Group, and undertake further detailed
contract reviews and analysis to allow the impact of the transition to IFRS 15 to be quantified.

• IFRS 16 Leases – The new standard requires all leases to be recognised on the balance sheet with the exception of short-term and immaterial leases.

The Group is assessing the impact of the new standard on its financial statements. IFRS 16 is effective from 1 January 2019.

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 Strategic Report on page 43.

Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries)
made up to 31 December each year. Control is achieved when the Company:
• has the power over the investee;
• is exposed, or has rights, to variable returns from its involvement with the investee; and
• has the ability to use its power to affect its returns.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three
elements of control listed above.

Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the
subsidiary. Specifically, income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statements of profit
or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests.
Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the
non-controlling interests having a deficit balance.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

132 Group ﬁnancials. Statement of accounting policies

Basis of consolidation (continued)
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.

All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in
full on consolidation.

Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of
the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference
between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in
equity and attributed to owners of the company.

When the Group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of
the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and
liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary
are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant
assets or liabilities were disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the
fair value on initial recognition for subsequent accounting under FRS 39 Financial Instruments: Recognition and Measurement or, when applicable, the
cost on initial recognition of an investment in an associate or jointly controlled entity.

Proxy Board
Certain Group companies in the US undertake work of importance to US national security; consequently activities are conducted under foreign
ownership regulations which require operation under a Proxy Agreement. The regulations are intended to insulate these activities from undue foreign
influence as a result of foreign ownership. The entities that are operated under the management of a Proxy Board are ProLogic Inc. (“ProLogic”) and
Ultra Electronics Advanced Tactical Systems Inc. (“ATS”).

The Directors consider that the Group has control over the operating and financial policies and results of these entities and therefore they are
consolidated in the Group consolidated accounts in accordance with IFRS 10 Consolidated Financial Statements.

Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business combination is
measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group
to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition-related costs are
recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that:
• deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with

IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; and

• assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

are measured in accordance with that standard.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair
value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities
assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the
acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

When the consideration transferred by the Group in a business combination includes an asset or liability resulting from a contingent consideration
arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a
business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted
retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional
information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that
existed at the acquisition date.

The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends
on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and
its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent
reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain
or loss being recognised in profit or loss.

When a business combination is achieved in stages, the Group’s previously held interests in the acquired entity is remeasured to its acquisition date fair
value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that
have previously been recognised in other comprehensive income are reclassified to profit or loss, where such treatment would be appropriate if that
interest were disposed of.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports
provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see
above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the
acquisition date that, if known, would have affected the amounts recognised as of that date.

Goodwill
Goodwill is initially recognised and measured as set out above. Goodwill is not amortised but is reviewed for impairment at least annually. Any impairment is
recognised immediately in the income statement and is not subsequently reversed.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Statement of accounting policies

133

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 or groups of 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 and that is neither a subsidiary nor an interest in a joint
venture. 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 below).

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.

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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

134 Group ﬁnancials. Statement of accounting policies

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

40 to 50 years

over remaining period of lease

3 to 20 years

Freehold land and assets under construction are not depreciated.

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.

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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Statement of accounting policies

135

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.

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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

136 Group ﬁnancials. Statement of accounting policies

Taxation (continued)
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.

Exceptional items
When items of income or expense are material and they are relevant to an understanding of the entity’s financial performance, they are disclosed
separately within the financial statements. Such exceptional items include material costs or reversals arising from a restructuring of the Group’s operations,
material creation or reversals of provisions, and material litigation settlements.

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
unusual and other items relevant to an understanding of the Group’s performance and long-term trends 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. Information for
separate presentation is considered as follows:
• Contract losses arising in the ordinary course of trading are not separately presented; however, losses (and subsequent reversals) are separately disclosed

in situations of a material dispute which are expected to lead to arbitration or legal proceedings.

• One-off curtailment gain arising on closure of defined benefit pension scheme.
• Material costs or reversals arising from a significant restructuring of the Group’s operations, such as the S3 programme, are presented separately.
• Disposals of entities or investments in associates or joint ventures, or impairments of related assets are presented separately.
• The amortisation of intangible assets arising on acquisitions and impairment of goodwill or intangible assets are presented separately.
• Other matters arising due to the Group’s acquisitions such as adjustments to contingent consideration, payment of retention bonuses, acquisition and

disposal costs and fair value adjustments for acquired inventory made in accordance with IFRS 13 are separately disclosed in aggregate.

• Furthermore, 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, this discount unwind is presented separately when the provision relates to acquisition contingent consideration.
• Derivative instruments used to manage the Group’s foreign exchange exposures are “fair valued” in accordance with IAS 39. This creates volatility in the
valuation of the outstanding instruments as exchange rates move over time. This has minimal impact on profit over the full term of the instruments, but
can cause significant volatility on particular balance sheet dates, consequently the gain or loss is presented separately.

• The defined benefit pension net interest charge arising in accordance with IAS 19 is presented separately.
• 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, the Group 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. Management 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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Group ﬁnancials. Statement of accounting policies

137

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. When the contract outcome cannot be
reliably estimated, revenue is recognised to match costs until such time as this can be reliably estimated. Expected costs are calculated after taking
account of the perceived contract risks related to performance not yet proven.

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 2016 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 (CGUs). These value-in-use calculations are dependent on estimates of future cash flows and long-term growth rates of the CGUs. Further details
on these estimates are provided in note 14.

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.

OMAN AIRPORT IT CONTRACT TERMINATION AND DEEMED DISPOSAL OF ITHRA
The Oman Airport IT contract was terminated in February 2015.

As set out in note 7, on 4 March 2015, ‘Ithra’ (“Ultra Electronics in collaboration with Oman Investment Corporation LLC”), the legal entity established
with the sole purpose of delivering the Oman Airport IT contract, was placed into voluntary liquidation. A liquidator was appointed and is pursuing
claims against the customer on behalf of the interested parties. Ithra, upon liquidation, no longer met the IFRS 10 criteria for consolidation as a
subsidiary of the Group and was, consequently, a deemed disposal as at 4 March 2015.

There remains significant uncertainty regarding the likely outcome of proceedings with the Sultanate of Oman, Ministry of Transport & Communications.

The Group continues to provide for all known remaining liabilities as at 31 December 2016. Material items have been disclosed separately within the
financial statements. Disclosure is provided on the consolidated income statement and in note 7 regarding the 2015 deemed disposal of Ithra.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

138 Company ﬁnancials. Company balance sheet/Company statement of changes in equity

Company balance sheet
31 December 2016

Fixed assets
Property, plant and equipment
Investments

Current assets
Debtors: Amounts falling due within one year

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
Share capital
Share premium account
Profit and loss account
Own shares

Shareholders’ funds

Note

38
39

2016
£’000

2015
£’000

1,038
939,943

571
865,336

940,981

865,907

16,678

21,858

(180,722)

(111,453)

(164,044)

(89,595)

776,937
(325,017)

776,312
(336,757)

451,920

439,555

3,523
64,020
386,958
(2,581)

3,514
61,052
377,570
(2,581)

451,920

439,555

45
46
46
46

The financial statements of Ultra Electronics Holdings plc, registered number 02830397, were approved by the Board of Directors and authorised for
issue on 3 March 2017.

On behalf of the Board
R. Sharma, Chief Executive
A. Sharma, Group Finance Director

The accompanying notes are an integral part of this balance sheet.

Company statement of changes in equity
31 December 2016

Balance at 1 January 2015
Retained profit for the year

Total comprehensive income for the year
Dividends paid
Issue of new shares
Share-based payments

Balance at 31 December 2015

Balance at 1 January 2016
Retained profit for the year

Total comprehensive income for the year
Dividends paid
Issue of new shares
Share-based payments

Balance at 31 December 2016

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Share
capital
£’000

3,498
-

-
-
16
-

3,514

3,514
-

-
-
9
-

Share
premium
account
£’000

56,131
-

-
-
4,921
-

Profit
and loss
account
£’000

366,548
41,387

41,387
(31,332)
-
967

Own
shares
£’000

(2,581)
-

-
-
-
-

Total
£’000

423,596
41,387

41,387
(31,332)
4,937
967

61,052

377,570

(2,581)

439,555

61,052
-

-
-
2,968
-

377,570
40,987

40,987
(32,583)
-
984

(2,581)
-

-
-
-
-

439,555
40,987

40,987
(32,583)
2,977
984

3,523

64,020

386,958

(2,581)

451,920

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Company ﬁnancials. Notes to accounts – Company

139

Notes to accounts – Company
31 December 2016

38 Property, plant and equipment

Cost
At 1 January 2015
Additions

At 1 January 2016
Additions

At 31 December 2016

Accumulated depreciation
At 1 January 2015
Charge

At 1 January 2016
Charge

At 31 December 2016

Net book value
At 31 December 2016

At 31 December 2015

39 Investments

Plant and
machinery
£’000

2,034
5

2,039
534

2,573

1,323
145

1,468
67

1,535

1,038

571

a) Principal subsidiary undertakings
The Company owns either directly or indirectly 100% of the ordinary share capital of a number of subsidiary undertakings as set out in note 37.

b) Investment in subsidiary undertakings

At 1 January 2016
Additions
Disposals
Impairments

At 31 December 2016

Total
£’000

865,336
646,740
(539,635)
(32,498)

939,943

The additions and disposals in the year related to transactions with intermediate holding companies. The impairments arose at the same time, following
review of the recoverability of investments within the corporate Company structure.

40 Debtors

Amounts falling due within one year:
Amounts due from subsidiary undertakings
Deferred tax assets
Other receivables
Prepayments and accrued income

2016
£’000

15,199
30
1,146
303

16,678

2015
£’000

20,906
37
694
221

21,858

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

140 Company ﬁnancials. Notes to accounts – Company

41 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 (2015: nil).

42 Creditors: amounts falling due within one year

Bank loans and overdraft
Amounts owed to subsidiary undertakings
Other payables
Accruals and deferred income

2016
£’000

37
(7)

2016
£’000

2015
£’000

43
(6)

2015
£’000

2016
£’000

52,025
119,116
4,062
5,519

2015
£’000

33,844
64,579
9,980
3,050

180,722

111,453

The bank loans are unsecured. Interest was predominantly charged at 1.35% (2015: 1.00%) over base or contracted rate.

43 Creditors: amounts falling due after more than one year

Borrowings

2016
£’000

2015
£’000

325,017

336,757

325,017

336,757

The financial risk management objectives and policies of the Company are managed at a Group level; further information is set out in note 23.

44 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

2016
£’000

52,025

2015
£’000

33,844

(52,025)

(33,844)

268,120
56,897

289,521
47,236

325,017

336,757

The loan notes are unsecured and due for repayment in 2018 and 2019. Interest was charged at 3.60% (2015: 3.60%).

45 Called-up share capital

The movements are disclosed in note 27.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Company ﬁnancials. Notes to accounts – Company

141

46 Equity reserve

The profit and loss account includes £175,157,000 (2015: £179,642,000) which is not distributable. A net foreign exchange gain of £58,513,000
was taken to reserves in the year. Further details in respect of dividends are presented in note 12 and share-based payments in note 27.

The Company holds 235,245 own shares (2015: 235,245).

47 Related parties

Transactions with Corvid Holdings Limited and “Ultra Electronics in collaboration with Oman Investment Corporation” are set out in note 34.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

142 Company ﬁnancials. Statement of accounting policies

Statement of accounting policies
for the Company accounts

A summary of the Company’s principal accounting policies, 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 FRS 101 Reduced Disclosure Framework. No profit
and loss account is presented for the Company, as permitted by section 408 of the Companies Act 2006. As permitted by FRS 101, the Company has taken
advantage of the disclosure exemptions available under that standard in relation to share-based payments, financial instruments, capital management,
presentation of a cash-flow statement and certain related party transactions. The Company’s retained profit for the year is disclosed in note 46.

Fixed assets and depreciation
Property, plant and equipment 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 participates in a defined benefit plan that shares risks between entities under common control. The details of this UK scheme, for which
Ultra Electronics Limited is the sponsoring employer, are set out in note 31. There is no contractual agreement or stated policy for charging the net
benefit cost to Ultra Electronics Holdings plc.

Investments
Fixed asset investments are shown at cost less provision for impairment. Assessment of impairments requires estimates to be made of the value-in-use of
the underlying investments. These value in use calculations are dependent on estimates of future cash flows and long-term growth rates. The criteria
used in this assessment are consistent with those set out in note 14.

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. Further disclosure in relation to share-based payments is given in note 27.

Related parties
Remuneration of the Directors, who are considered to be the key management personnel of the Company, is disclosed in the audited part of the
Directors’ Remuneration Report on pages 82 to 87.

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.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Introduction

Five-year review

143

Five-year review

Financial highlights

Revenue
Aerospace & Infrastructure
Communications & Security
Maritime & Land

Total revenue

Underlying operating profit1
Aerospace & Infrastructure
Communications & Security
Maritime & Land

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 at year-end 4

Underlying earnings per share (p) 5
Dividend per share (p)

2012
£m

226.6
268.9
265.3

760.8

45.1
32.9
43.8

2013
£m

230.4
237.7
277.1

745.2

46.2
27.5
48.0

2014
£m

198.6
224.4
290.7

713.7

29.6
37.0
51.5

2015
£m

193.2
239.3
293.8

726.3

28.7
40.4
50.9

2016
£m

204.7
259.0
322.1

785.8

32.4
39.7
59.0

121.8

121.7

118.1

120.0

131.1

16.0%

16.3%

16.5%

16.7%

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

21.5
6.5

83.1
51.2
(129.5)

123.1
44.3

34.8
25.0

81.3
43.1
(295.6)

123.9
46.1

67.6
58.3

120.4
86.0
(256.7)

134.6
47.8

Average employee numbers

4,430

4,274

4,787

4,843

4,466

1 Before adjustments to contingent consideration net of acquisition and disposal related costs, amortisation of intangibles arising on acquisition,

the S3 programme, impairment charges and Oman contract termination and liquidation related costs.

2 Cash generated by operations and dividends from associates, less net capital expenditure, R&D, LTIP share purchases and excluding cash outflows

from the S3 programme, acquisition and disposal related payments and the Oman performance bond.

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 adjustments to contingent consideration net of acquisition and disposal related costs, amortisation of intangibles arising on acquisition,
the S3 programme, impairment charges, fair value movement on derivative financial instruments, defined benefit pension interest charges and
unwinding of discount on provisions.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

144

Footnote
underlying operating proﬁt before Oman liquidation
related costs, amortisation of intangibles arising on
acquisition, impairment of goodwill and adjustments to
contingent consideration net of acquisition and disposal
related costs. IFRS operating proﬁt was £89.7m (2015:
£66.4m).

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 Oman liquidation
related costs, 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
curtailment gain and adjustments to contingent
consideration net of acquisition and disposal related
costs. Basic EPS 82.8p (2015: 35.7p).

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, LTIP share purchases and
excluding the cash outﬂows from the S3 programme,
acquisition and disposal related payments and the
Oman performance bond.

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.

underlying order book growth excludes the impact of
foreign exchange and the order book arising on acquisition.

underlying order intake includes orders from
acquisitions since acquisition date.

underlying earnings per share is before
acquisition and disposal related costs, amortisation of
intangibles arising on acquisition, the S3 programme,
impairment charges, fair value movement on derivative
financial instruments, defined benefit pension interest
charges and curtailment gain and unwinding of discount
on provisions.

Ultra Electronics Holdings plc. Annual Report & Accounts 2016

Business addresses

Aerospace & Infrastructure
Airport Systems
The Oaks
Crewe Road
Wythenshawe, Manchester M23 9SS
England
Tel: +44 (0) 161 946 3600
www.ultra-as.com

Communications & Security
3eTI
9715 Key West Avenue
Suite 500
Rockville, Maryland 20850
USA
Tel: +1 301 670 6779
www.ultra-3eti.com

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

Precision Control Systems
Arle Court
Cheltenham, Gloucestershire GL51 6PN
England
Tel: +44 (0) 1242 221166
www.ultra-pals.com

Advanced Tactical Systems
4101 Smith School Road
Building IV, Suite 100
Austin, Texas 78744
USA
Tel: +1 512 327 6795
www.ultra-ats.com

Communication &
Integrated Systems
419 Bridport Road
Greenford, Middlesex UB6 8UA
England
Tel: +44 (0) 20 8813 4567
www.ultra-cis.com

Forensic Technology inc.
5757 Cavendish Blvd.
Suite 200
Cote St-Luc, Québec H4W 2W8
Canada
Tel: +1 514 4894 247
www.ultra-forensictechnology.com

Herley
10 Sonar Drive
Woburn, Massachusetts 01801
USA
Tel: +1 781 729 9450
www.ultra-herley.com

TCS
5990 Côte de Liesse
Montreal, Québec H4T 1V7
Canada
Tel: +1 514 855 6363
www.ultra-tcs.com

Maritime & Land
3 Phoenix Inc.
14585 Avion Parkway #200
Chantilly, Virginia 20151
USA
Tel: +1 703 956 6480
www.ultra-3pi.com

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

Command & Sonar Systems
Knaves Beech Business Centre
Loudwater, High Wycombe
Buckinghamshire HP10 9UT
England
Tel: +44 (0) 1628 530000
www.ultra-ccs.com

EMS Development Corporation
95 Horseblock Road, Unit 2
Yaphank, New York 11980
USA
Tel: +1 631 345 6200
www.ultra-ems.com

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

PMES
Towers Business Park
Wheelhouse Road
Rugeley, Staffordshire WS15 1UZ
England
Tel: +44 (0) 1889 503300
www.ultra-pmes.com

USSI
4578 East Park 30 Drive
Columbia City, Indiana 46725-8861
USA
Tel: +1 260 248 3500
www.ultra-ussi.com

Photography
BOARD OF DIRECTORS AND THROUGHOUT:
Molyneux Associates

PLATFORMS/END APPLICATIONS COURTESY OF:
Avic, AWD Alliance, BAE Systems, Royal Australian
Navy, UK MoD and US DoD.

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

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