Ultra Electronics Holdings plc Annual Report 2017

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Ultra_AR&A_2017_cover_AW_Layout 1 09/03/2018 11:21 Page 1

Ultra Electronics Annual Report & Accounts 2017
Focusing on
fundamentals…

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

Product printed on a

Carbon Neutral Press

www.heidelberg.com/CO2 . 210504

)

(

Ultra_AR&A_2017_cover_AW_Layout 1 09/03/2018 11:21 Page 2

Ultra Electronics Holdings plc Annual Report & Accounts 2017

5. Company ﬁnancials

Company balance sheet

Company statement of changes in equity

Notes to accounts

Statement of accounting policies
for the Company accounts

6. Five-year review

Five-year review

144

145

147

149

Business addresses

Aerospace & Infrastructure

Communications & Security

Maritime & Land

Wythenshawe, Manchester M23 9SS

Rockville, Maryland 20850

1. Overview

Operational highlights

How and where Ultra operates

2. Strategic report

Executive Chairman’s review
Douglas Caster

Business model

Strategies for growth

Financial review
Amitabh Sharma, Group Finance Director

Key Performance Indicators

Standardisation & Shared Services

Aerospace & Infrastructure

Communications & Security

Maritime & Land

Market-facing segments

2017 Principal Risks and Uncertainties

Making a difference

Developing Ultra’s people

Corporate and social responsibility

3. Governance

Board of Directors

Executive Chairman’s Governance Statement
Douglas Caster

Corporate Governance Report

Nomination Committee Report

Audit Committee Report

Remuneration Report

Directors’ Report

Executives and advisors

4. Group ﬁnancials

Independent auditor’s report

Group highlights

Consolidated income statement

Consolidated statement of
comprehensive income

Consolidated balance sheet

Consolidated cash ﬂow statement

Consolidated statement of changes in equity

Notes to accounts

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

104

105

106

107

108

109

137

Financial highlights

Revenue

KPI

Underlying earnings per share*

KPI

Statutory basic earnings per share*

£775.4m -1.3%
2016: £785.8m

116.7p
2016: 134.6p

-13.3%

66.2p
2016: 82.8p

-20.0%

Dividend per share

KPI

Underlying proﬁt before tax*

KPI

49.6p
2016: 47.8p

+3.8%

£110.0m -8.4%
2016: £120.1m

Underlying operating proﬁt*

IFRS operating proﬁt

£120.1m -8.4%
2016: £131.1m

£61.5m
2016: £89.7m

-31.5%

Group order book

£897.4m +12.3%
2016: £799.3m

Dividend
The proposed ﬁnal dividend is 35.0p,
bringing the total dividend for the year to
49.6p (2016: 47.8p). This represents an
annual increase of 3.8%, with the dividend
being covered 2.35 times (2016: 2.8 times)
by underlying earnings per share. If approved
at the Annual General Meeting, the dividend
will be paid on 3 May 2018 to shareholders
on the register on 6 April 2018.

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 150

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

Airport Systems

The Oaks

Crewe Road

England

Tel: +44 (0) 161 946 3600

www.ultra-as.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

England

Tel: +44 (0) 1242 221166

www.ultra-pcs.com

9713 Key West Avenue

Suite 500

3eTI

USA

Tel: +1 301 670 6779

www.ultra-3eti.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

5757 Cavendish Blvd.

Suite 200

Tel: +1 514 4894 247

www.ultra-forensictechnology.com

Herley

10 Sonar Drive

Tel: +1 781 729 9450

www.ultra-herley.com

USA

TCS

5990 Côte de Liesse

Montreal, Québec H4T 1V7

Canada

Tel: +1 514 855 6363

www.ultra-tcs.com

Cheltenham, Gloucestershire GL51 6PN

Canada

Cote St-Luc, Québec H4W 2W8

Victor, New York 14564-9795

Woburn, Massachusetts 01801

Dartmouth, Nova Scotia B2Y 4N2

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-css.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

USA

Tel: +1 585 924 4000

www.ultra-fei.com

Maritime Systems

40 Atlantic Street

Canada

Tel: +1 902 466 7491

www.ultra-ms.com

Ocean Systems

115 Bay State Drive

USA

Tel: +1 781 848 3400

www.ultra-os.com

PMES

Towers Business Park

Wheelhouse Road

Braintree, Massachusetts 02184-5203

Rugeley, Staffordshire WS15 1UZ

England

Tel: +44 (0) 1889 503300

www.ultra-pmes.com

4868 East Park 30 Drive

Columbia City, Indiana 46725-8861

USSI

USA

Tel: +1 260 248 3500

www.ultra-ussi.com

Photography

Molyneux Associates

BOARD OF DIRECTORS AND THROUGHOUT:

PLATFORMS/END APPLICATIONS COURTESY OF:

Australian DOD (Graham Robson-Parker – Land400

image), Indian Navy, NuScale Power,

UK MOD and US DOD.

Contains public sector information licensed under

the Open Government Licence v3.0

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 1

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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.

Ultra’s fundamental
strategic framework

The Group’s framework below is focused on ensuring its prime objective is met:

to generate long-term
shareholder value

Increase the Group’s
portfolio of specialist
capability areas

Portfolio
strength

Valu e c r e

t e d

Robust
business
model

P10-11

fit

reinvested

Operational
excellence

u
e

c
r
e
a
t
e
d

Focus on
customer
needs

Widen
geographic
footprint

Four
strategies
for growth

Increase the
number of
long-term
platforms &
programmes

P12-13

Broaden
customer base

People and
culture

P48-57

Good
governance

P58-94

Underpinning
enablers

Sustainability

P46-47

Risk
management

P38-45

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 2

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Operational highlights

Ultra has extensive intellectual property, strong market positions,
differentiated technologies and talented people. The Group’s core
strengths include world-leading positions in many of its specialist
capabilities. A number of operational highlights that will underpin
the Group’s future performance are outlined below.

The award of a government ISTAR*
contract to support the provision of
advanced surveillance capability
valued at £16.6m.

£16m

Securing the position on Saab’s new
Gripen ﬁghter aircraft, with an initial
production order valued at £9m, to
equip it with Ultra’s HiPPAG airborne
compressor system solution.

£9m

The supply of the F135 engine’s
Electrical Ice Protection System (EIPS)
for the life of the programme (or a
minimum of 30 years) valued at
approximately $500m.

$500m

P24-25
Aerospace & Infrastructure highlights

Securing an $8.5m contract with
options that could increase the value
to $18m for the production of MK 48
Torpedo Array Nose subassemblies.

$8m

*ISTAR: Intelligence, surveillance, target acquisition

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 3

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

The award of a £37m contract for
a maritime propulsion system.

£37m

An $18m contract for a major
surveillance and security system
and the provision of ﬁve years
of specialist support over the
course of the system’s use.

$18m

The production of two variants of the
Submarine Countermeasure Acoustic
Device (SCAD) valued at $10m.

$10m

P26-27
Communications & Security highlights

P28-29
Maritime & Land highlights

The award of a £30m contract to
provide 12 ship sets of torpedo defence
systems to the Indian Navy.

£30m

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Ultra Electronics Holdings plc Annual Report & Accounts 2017

How and where Ultra operates

Ultra operates through its three divisions: Aerospace & Infrastructure,
Communications & Security and Maritime & Land, delivering cost-
effective, specialist capability technologies at the system, sub-system and
component levels through eight distinct market-facing segments.

Ultra’s place
in the market

Where Ultra
operates

Ultra’s
customers

Defence
& Aerospace
Security
& Cyber
Transport
& Energy

North America
United Kingdom
Rest of the world
Mainland Europe

52
21
17
10

% of Group revenue by market

% of Group revenue by region

Ultra’s core markets remain North America,
the UK and Australia. 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.
The Group has limited exposure to mainland
Europe, supplying only technologies that are
unavailable from domestic suppliers, for
example, sonobuoys. The Group continues to
develop strategic positions in the Middle East,
India and South Korea, for which there is a
strong pipeline of growth opportunities across
its eight market-facing segments. Japan is
also a region of interest as opportunities
emerge following the reinterpretation of
Article 9 of its Constitution and the increase
in military and natural threats.

Ultra’s extensive portfolio of capabilities
serves eight market segments; Aerospace;
Infrastructure; Nuclear; Communications;
C2ISR+; Maritime; Land and Underwater
Warfare. Ultra enjoys long-term positions on
many complex platforms owing to its diverse
technologies, which are fundamental to the
performance, safety and mission success on
the platforms in which they are incorporated.
The segment structure allows Ultra to exploit
the specialist capabilities of its 18 businesses
simultaneously, allowing the businesses to
autonomously respond to changing customer
demands in an agile manner whilst
maintaining the beneﬁts of being part of a
larger Group. Additionally, Ultra seeks top-
class partners with the ability and specialist
capability to offer a more complete solution
and seamlessly “leads or follows” as a
nonthreatening mid-tier company in order to
satisfy customer needs. The Group harnesses
both own- and customer-funded research and
development, tailoring its solutions to meet
changing customer needs and budgets and
sustaining its reputation as an innovative
supplier of enabling technology.

US DOD

UK MOD

Lockheed Martin

Boeing

BAE Systems

Australia DOD

Raytheon

Airbus
EDF Energy

Thales

US Alcohol, Tobacco & Firearms

Integrated Procurement

Northrop Grumman

Rolls-Royce

Atlantic Diving Supply

This market position, together with Ultra’s
independence, allows the Group to work
closely with the world’s prime contractors in
chosen markets. The chart above shows
Ultra’s major customers, which includes
Tier 1 Primes such as Lockheed Martin,
Boeing, BAE Systems and international
government procurement ofﬁces.

P30-37
Market-facing segments

P10-11
Our business model

+ Command & Control, Intelligence, Surveillance and Reconnaissance

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Aerospace
& Infrastructure

Communications
& Security

Maritime
& Land

% of Group revenue

% of Group profit*

% of Group revenue

% of Group profit*

% of Group revenue

% of Group profit*

Revenue

£203.2m -0.7%
2016: £204.7m

£242.7m -6.3%
2016: £259.0m

£329.5m +2.3%
2016: £322.1m

Underlying operating profit*

£32.6m +0.6%
2016: £32.4m

£28.2m -29.0%
2016: £39.7m

£59.3m +0.5%
2016: £59.0m

Order book

£283.2m +5.8%
2016: £267.8m

£258.7m +14.0%
2016: £227.0m

£355.5m +16.7%
2016: £304.5m

Number of employees

1,244

1,295

1,633

Managing Director: Graeme Stacey

Managing Director: Mike Baptist

President: Bill Terry

P24-25
Aerospace & Infrastructure highlights

P26-27
Communications & Security highlights

P28-29
Maritime & Land highlights

*see footnote on page 150

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 6

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Executive Chairman’s review
Focusing on fundamentals

“

The Group is well
positioned in what we
expect to be growth
markets with strong
niche positions and
talented people.

”

Douglas Caster CBE BSc FIET
Executive Chairman

Despite the 8.4% decline, year-on-year, in
underlying operating proﬁt, Ultra continues to
be a fundamentally sound company with great
potential. The Group is well positioned in what
we expect to be growth markets with strong
niche positions and talented people providing
specialised technologies and capabilities that
our customers need to support their platforms
and programmes. This aligns with Ultra’s
strategy to generate long-term shareholder
value by gaining strong market positions
through being a niche supplier of electronic
systems, products and services in growing
sectors within the defence, aerospace, energy
and transportation markets.

2017 was a disappointing year for Ultra with
the Group’s ﬁnancial performance falling
short of expectations and the prior year. In the
main this was because expected order intake,
from which in-year revenue was planned, was
delayed until the second half of the year or
beyond. Additionally, in the UK, we
experienced a signiﬁcant downturn of
routine, short-term support activity late in the
second half year owing to customer funding
constraints. When the likely impact of this
was announced to the market on 10
November 2017, Ultra’s share price declined
signiﬁcantly but has recovered to some
extent. Overall, at £901.4 million, Group
order intake was good, but it was achieved
too late in the year to support the projected
2017 ﬁnancial performance.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Group order book +12.3%
£897.4m (2016: £799.3m)

Dividend per share +3.8%
49.6p (2016: 47.8)

2017

2016

2015

2014

2013

897.4

799.3

753.8

787.3

781.2

2017

2016

2015

2014

2013

KPI

49.6

47.8

46.1

44.3

42.2

Just prior to the end of the year, we saw the
departure of Rakesh Sharma as Chief
Executive. There is no doubt that for the six
years of Rakesh’s incumbency as Chief
Executive, market conditions have been
challenging for Ultra. Nevertheless, the
continued organic decline over that period
combined with the recognition, late in the
year, that the 2017 targets were not going to
be met caused the Non-Executive Directors to
conclude that the Board needed to seek new
leadership for Ultra. This decision was made
after a period of careful reﬂection, particularly
regarding how the Group’s culture had
evolved and how that had been a contributing
factor to declining performance. The Board’s
desire to embark on a process of cultural and
business renewal as quickly as possible was
the reason for implementing the Chief
Executive’s immediate departure. The Board
has embarked on an external search for an
industry-leading, high calibre candidate to
enable the company to achieve its growth
potential. This process is well underway. In
the meantime, in view of my previous
experience as Ultra’s Chief Executive from
2005 to 2011, the Board requested that I
should take over as Executive Chairman and
lead Ultra again until the successful candidate
is available to take over. This is a privilege
which I am happy to have.

Cash ﬂow at £116.5 million in the year was
good with an underlying proﬁt to cash
conversion of 97% and follows the 92%
conversion in 2016. This represents a return to
a consistent level of cash generation for which
Ultra was always noted. The Board is
recommending a ﬁnal dividend of 35.0p per
share. At this level, if approved, the dividend is
covered 2.35 times by underlying operating
proﬁts, which is a lower level of cover than is
usual for Ultra. It is the Board’s intention
therefore that future increases in dividend
should not exceed growth in earnings per
share so that, over time, dividend cover will be
restored to its traditional level of about 2.8 to
3 times. Net debt at the year end was £74.5
million which resulted in a net debt to EBITDA
gearing ratio of 0.56 times, well below the
banking covenant requirement of less than
three times. This low gearing has beneﬁtted
from the in-year cash ﬂow as well as the
£133.5 million net proceeds, after attributable
expenses, of the share placing that we
performed in July 2017. The purpose of the
share placing was to enable the Group to
acquire Sparton Corporation in the United
States. Sparton is the co-owner with Ultra of
the ERAPSCO joint venture that supplies
sonobuoys to the US Navy and the anti-
submarine forces of other nations. The fact
that ERAPSCO is the sole supplier of all current
production sonobuoys types to the US Navy
meant that the merger agreement to acquire
Sparton had to be reviewed by the United
States Department of Justice (‘DOJ’) under the
Hart, Scott Rodino antitrust legislation.
Following feedback from meetings with the
DOJ, Sparton and Ultra have mutually agreed to
terminate the merger as the DOJ advised they
would seek to block it (further details on page
19). It is now the Group’s intention to buy back
shares in order to return to shareholders the net
proceeds of the equity raise.

Underlying earnings per share* -13.3%
116.7p (2016: 134.6p)

KPI

2017

2016

2015

2014

2013

66.2

116.7

82.8

134.6

35.7

29.8

54.8

123.9

123.1

127.1

Statutory basic earnings per share -20.0%
66.2p (2016: 82.8p)

Group order
intake was good, but
it was achieved too

“
late in the year.”

*see footnote on page 150

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Ultra Electronics Holdings plc Annual Report & Accounts 2017

Executive Chairman’s review continued

8 strategic tenets
1. Core competencies
Focus on the Group’s core competencies
in defence, security, transport and energy
and expand into adjacent market sectors
of growth

2. Portfolio
Offer a range of products and
services including components, sub-
systems, systems and through-life
management solutions

3. Niche player
Be a niche and market-leading player
through technical advantage

4. Growth
Contribute to the organic growth of
the Group, as well as identifying well-
matched acquisition targets

5. Efﬁcient organisation
Have an efﬁcient organisation with
engaged competent people

6. Teaming
Gain competitive advantage by
internal and external teaming and
honing LEAP* behaviours

7. Excellent supplier
Be an excellent and strategic supplier
to our customers

8. Meet our commitments

The immediate priority for the Board is to
deliver shareholder value through a renewed
focus on organic performance. Improving
marketing and sales force effectiveness will
be key to this through reinvigorating the
innovative culture that has created offerings
that were highly-differentiated in the eyes of
customers and enabled Ultra to compete
successfully. Ultra’s eight strategic tenets
outlined (left), which have stood the test of
time, will be used to drive competitive
strategies. Emphasis on the behaviours valued
by Ultra that are encapsulated in “LEAP” and
“LAUNCH”, described on page 50, will also be
an important part of Ultra’s cultural renewal.

High-performing organisations are
characterised by a culture of openness and
learning where differences and diversity are
encouraged and respected. Ultra’s cultural
renewal will embrace these themes as well as
improving the way our people interact. It will
also extend to strategies to develop Ultra’s
organisation so that it continues to be ﬁt for
purpose as market conditions change. Ultra’s
management style of collaborative autonomy,
where the Group’s businesses share
technology and team internally, as well as
externally, to compete for market
opportunities that would have been
inaccessible to them individually, will continue
to be encouraged. Succession planning to
improve the breadth, depth and quality of the
bench strength of management below Board
level will also be undertaken.

Since my appointment as Executive Chairman
I have spoken with a number of Ultra’s
shareholders from which some consistent
themes emerged. Shareholders generally
expressed a desire for the Board to create the
conditions for delivering long-term value. To
this end, the Board intends to increase
investment in internally-funded R&D to
generate new intellectual property from
which competitive offerings will be derived.
Business efﬁciency will also be improved
through continued investment in the Group’s
Shared Services and Standardisation (S3)
programme including increased capital
expenditure to accelerate renewal of outdated
business systems.

P58-94
Good governance

“

The Board
intends to increase
investment in
internally funded
R&D to generate
new intellectual
property from which
competitive offerings
will be derived.

”

*LEAP: Leadership, Entrepreneurship, Audacity, Paranoia

P?? ??

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 9

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Ultra’s shareholder returns (pence)

300

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

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

“

The Board is
conﬁdent that Ultra
has sustainable
operating trading
momentum as we
go into 2018 and
beyond.

”

Mark Anderson stepped down as Group
Marketing Director and from the Board on
1 June 2017. The Board is pleased to
welcome our new Non-Executive Directors,
Geeta Gopalan and Victoria Hull. I am
conﬁdent that Geeta and Victoria will bring
diverse experience and thinking to the Board.

On behalf of the whole Board, I send our
thanks to Ultra’s employees. They consistently
show great commitment, fortitude and hard
work and this has been particularly so during
the challenging time of 2017. With orders
arriving so late in the year, they executed 23%
of the year’s revenue during November and
December; a real show of dedication and
commitment for which we thank them. The
talent and skills of our people combined with
the Group’s specialised capabilities and
technologies are what give Ultra such
tremendous potential.

Ultra has extensive intellectual property, strong
market positions, differentiated technologies,
talented people and a strong balance sheet.
The Group’s core strengths include world-
leading positions in many of its specialist
capabilities and a reputation for successful
programme execution. It has positions on a
broad number of long-term platforms and
programmes, signiﬁcant exposure to the
strengthening US defence budget, and to the
growing demand for advanced defence
technologies. The Group also has good
visibility through a strong order book, which
excludes contributions from a large volume of
IDIQs (US DOD Indeﬁnite Delivery Indeﬁnite
Quantity contracts) and other off order book
aerospace long-term supply agreements. We
have entered 2018 with an order book of
£897 million that provides opening order
cover against projected revenues for the year
of 62% (2017: 56%) which is higher than in
recent times. The Board is conﬁdent that Ultra
has sustainable operating trading momentum
as we go into 2018 and beyond.

Douglas Caster
Executive Chairman

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 10

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Ultra’s robust business model

Ultra’s business model enables it to achieve its primary
objective of generating long-term shareholder value.

Ultra provides the market
with portfolio strength
Eight distinct and highly-technical
market segments
Clearly defined market segments allow Ultra’s
businesses to combine and provide more
complex offerings to customers, leveraging
technology from across the full range of the
Group’s capabilities, rather than only supplying
individual products from single businesses
operating in siloes. 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 to position in growth markets
and divestment to maintain focus
Ultra invests in targeted acquisitions to
strategically grow and complement its
portfolio. The Group invests in acquisitions
that develop and apply domain expertise,
capabilities and technical synergies in common
end markets. The Group will dispose of
capabilities that are no longer considered core
to the strategic growth plan for the portfolio.

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 provides leadership and direction
in achieving its corporate objective of
generating long-term 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.

Ultra’s individual businesses have a high
degree of operational autonomy, which

enables the Group to provide an agile and
responsive level of support to customers and
partners that is normally associated with a
smaller business. The agility of the individual
businesses is enhanced by access to wider and
complementary technologies and expertise
that lie elsewhere in the Group through
collaborative autonomy.

Ultra’s businesses are focused on helping
customers identify their true needs while
developing long-term relationships. This
enables the Group to be a trusted 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.

BOARD

EXEC TEAM

RESPONSIBLE FOR:
LEADERSHIP – doing the right thing
GROWTH IN SHAREHOLDER VALUE
REVIEWING GROUP STRATEGY
RISK MANAGEMENT
STANDARDS OF ETHICS
AND BEHAVIOURS

RESPONSIBLE FOR:
MANAGEMENT – doing things right
DEVELOPING GROUP STRATEGY
FINANCIAL PERFORMANCE
TEAM DEVELOPMENT

18 AUTONOMOUS
BUSINESSES
RESPONSIBLE FOR:
MANAGING INDIVIDUAL BUSINESS
DEVELOPING AND IMPLEMENTING
COMPETITIVE STRATEGIES
WINNING & EXECUTING BUSINESS
DEVELOPING PEOPLE
WORKING IN PARTNERSHIP

P58-59
Ultra's Board of Directors

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 technological
innovation.

t e d

Valu e c r e

to generate long-term
shareholder value

u
e

c
r
e
a
t
e
d

fit

reinvested

LAUNCH is a way for Ultra’s
businesses to generate long-term
customer relationships which lead to
a better pipeline of opportunities and
ultimately, enable 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 customers’
extended enterprises, to mutual beneﬁt.

P50
More about LAUNCH

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.

P48-57
People and culture

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 11

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 a non-threatening partner to the Tier
1 prime contractors. As such, Tier 1 contractors
can rely on Ultra to provide the specialist
capabilities at which the Group is expert, rather
than regarding it as a competitor.

Ultra invested 4% (2016: 4%) of revenue
in R&D to develop new offerings in 2017.
Its customers invested a further 17%
(2016: 14%).

Funded by:
Group
Customer

19%
81%

This R&D spend is focused on enhancing
the portfolio of capabilities and programme
positions that underpin further growth.

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
subsystem requirements.

Tier 1

Tier 2

Tier 3

Tier 4

Ultra’s specialist capabilities are mainly at
Tiers 3 and 4, supplying equipment and
components to support Tier 1 and 2 systems
and programmes. The Group does undertake
Tier 2 system integration, but does this mainly
when integrating its own Tier 3 offerings
where it understands the detailed Tier 3
interfaces and so is able to manage the risk
inherent in system integration activities.

Tier deﬁnition
Tier 1. Platform provider
Responsible for being the prime contractor of
the platform in question, examples being a
naval ship or a fighter aircraft.

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
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).

Form external partnerships to develop
the best solutions for customers
Ultra has an established history of partnering
and teaming (both internally and externally) in
order to offer the best-of-breed technologies
that meet its customers’ requirements as
closely as possible. The Group is agnostic 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 that meet customer needs
efficiently. By working together, Ultra’s
businesses are able to win opportunities that
would not be possible in isolation.

Customer
“problem
statement”

Ultra’s
solution

3rd-party
technology

Ultra is continually evolving its approach
in response to:
• changing customer demands
• 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 that

customers would like addressed.

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

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 12

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Ultra’s four strategies for growth

Ultra’s strategy is to generate long-term shareholder value by gaining
strong market positions through being a niche supplier of electronic
systems, products and services in growing sectors within the Defence
& Aerospace, Security & Cyber, Transport and Energy markets.

Increase the Group’s
portfolio of specialist
capability areas

Widen
geographic
footprint

to generate
long-term
shareholder
value

Increase
number of
long-term
platforms &
programmes

Broaden
customer base

1. Increase the Group’s portfolio
of specialist capability areas
• Concentrate on the customers’ needs

• Invest in continually improving electronic
and software solutions in niche markets

• Focus on developing specialist capabilities
with demanding and critical requirements,
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 upgrade

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 Ultra 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.

4. Widen geographic footprint
• Increased access to two of the largest

addressable defence budgets in the world

• Focus on gaining competitive advantage
through measured expansion into the
Middle East, India and Asia-Paciﬁc.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 13

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Examples of how the Group is
performing in each strategy:

• NCS successfully conducted the

acceptance testing of the innovative
reactor and plant protection systems it has
developed for leading US technology
developer NuScale Power. The UK-developed
system will be critical to the operation of
NuScale’s innovative technology, which will
generate clean, reliable, affordable power in
>
both the US and the UK.

• Ultra signed a Memorandum of

Understanding with CGN of China that will
see both companies co-operate closely to
develop next generation instrumentation and
control (I&C) systems for civil nuclear power.
The I&C systems include reactor protection
and control, and will be used in China, the
UK and other international markets.

• Expanding its footprint in the US Navy

>
Maritime Patrol and Reconnaissance Aircraft
Programme Office, ATS was contracted to
support the design, documentation, and
development of the distributed data link
onboard the MQ-4C Triton Unmanned
Aerial System providing line of sight
communications through the Joint Tactical
Radio System.

• Ultra Electronics’ PCS business

received an order worth $36m from
Pratt & Whitney for equipment used on
the F135 engine used in the Lockheed
Martin F-35 jet fighter. PCS will supply
the engine’s Electrical Ice Protection System
(EIPS) as part of a long-term partnership
with Pratt & Whitney, effective for the life
of the programme, or the minimum of
30 years. Based on potential production
volumes, in-service spares, repairs and
additional through-life support, the
agreement is valued at approximately
$500m in total.

• Herley was contracted by Boeing for
the provision of American subsonic
air-launched cruise missile (ALCM) and
conventional air-launched cruise missile
(CALCM) test equipment micro-electronics.

• Forensic Technology continued to win

multiple new contracts for the supply and
installation of IBIS systems; including the
Philippines National Police and Thailand for
the Centre for Forensic Science.

• Ultra’s ERAPSCO joint venture with

Sparton Electronics also secured its first
commercial sale of sonobuoys to support
the Indian Navy’s P-8i fleet of aircraft with
a $10.7m multiyear order for both active
and passive sonobuoys.

• Ultra CSS was awarded a contract valued
at £10m to support the restoration of the
Philippine Navy’s Navy Jacinto Class Patrol
Vessels, contributing to Ultra’s continued
expansion into the Asia Pacific region.

• Ultra secured a $1.5m award from EOS

Australia for hand controls for integration
into Rheinmetall’s weapon systems. This
strategic award will help position Ultra
with the EOS team on Australia’s
LAND400 programme.

• Ultra Electronics USSI’s joint venture with
Sparton Corporation received an IDIQ
option exercise valued at $220m, enabling it
to extend continuous production for the US
Navy. This ensures continuous production
and will allow Ultra to deliver seamless
service to a major customer in the strategic
area of Anti-Submarine Warfare.

• Ultra Electronics PCS secured a position on
Saab’s new Gripen fighter aircraft, with an
initial production order valued at £9m, to
equip it with Ultra’s HiPPAG airborne
compressor system solution.

• Ultra Electronics USSI was successful

in expanding its life-safety market sector
by integrating its HyperSpike acoustic
array technology into life-safety platforms
of several primes, including Honeywell
and Siemens.

• Ultra EMS broadened its customer base by
securing a contract from Turkey’s Sedef
shipbuilding on the Turkish Navy’s Landing
Platform Dock vessel.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 14

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Financial review

The Group continued its focus on managing costs and efﬁciencies
within the businesses, which enabled good operating margins to
again be achieved.

“

Order intake for
the year was £901.4m,
a 15.8% increase on
2016. At the end of
2017, the order book
was 12.3% higher at
£897.4m.

”

Ultra’s 2017 results
Revenue
Revenues of £775.4m represented a decrease
of 1.3%, or £10.4m, on the prior year (2016:
£785.8m). The 2016 revenues included a
£13.3m contribution from the ID business,
which was disposed of in August 2016.
Revenues decreased organically by 3.3% due
to a slowdown in UK spending which
accelerated during the latter part of the
second half and a higher level of engineering
activity compared to the prior year, some of
which was unexpected due to the additional
Surface Electronic Warfare Improvement
Programme (SEWIP) module wins. The
weakening of Sterling during the year meant
there was a positive foreign exchange impact
of 3.7% from the translation of overseas
revenues. The average US dollar rate in 2017
was $1.29 compared to $1.35 in 2016.

Aerospace & Infrastructure revenues (see
pages 24-25) were broadly ﬂat. The PCS
business saw increased revenues through
development work on equipment for the
Mitsubishi Regional Jet and a ramp up in
production activity on certain armoured
vehicle programmes, offset by lower license
sales compared to 2016. The order book

Amitabh Sharma BSc FCA
Group Finance Director

increased compared to the end of 2016
owing to the two signiﬁcant orders: orders
for the US Air Force Joint Strike Fighter
electronic control unit, and an initial
production order to equip Saab’s new Gripen
ﬁghter aircraft with Ultra’s HiPPAG airborne
compressor system solution.

Communications & Security’s revenues (see
pages 26-27) in 2016 include a part-year
contribution from the ID business of £13.3m,
which was disposed of in August 2016.
Revenues in the division were impacted by the
slowdown in UK spending, with delays to a
number of crypto programmes, and by the
increase in a number of contracts in the
development phase at Herley in the US.
Forensic Technology, based in Canada,
increased revenues as a result of bullet
identiﬁcation product sales to customers in
South East Asia; and TCS, our Montreal-based
military radio business, continued to grow in
2017. The order book continued to increase,
ending the year at £258.7m (2016: £227.0m).
This was due to a good order intake year at
Herley, and some notable wins across the
division such as: securing a £16.6m programme
to support the provision of advanced
surveillance capability until 2019, a $16.2m

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 15

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Revenue -1.3%
£775.4m (2016: £785.8m)

KPI

Underlying operating proﬁt* -8.4%
£120.1m (2016: £131.1m)

Underlying proﬁt before tax* -8.4%
£110.0m (2016: £120.1m)

KPI

2017

2016

2015

2014

2013

775.4

785.8

726.3

713.7

745.2

2017

2016

2015

2014

2013

120.1

131.1

120.0

118.1

121.7

2017

2016

2015

2014

2013

110.0

120.1

112.4

112.0

116.8

Within Maritime & Land, underlying operating
margins* remained at a high level, ending the
year at 18.0% (2016: 18.3%) owing to the
production phase of a number of US
sonobuoy contracts.

Ultra continued its programme of R&D to
position for medium to long-term growth,
with total R&D spend in 2017 of £161.1m
(2016: £146.9m), the highest it has ever
been. This represents a 10% increase and
reﬂects a higher proportion of engineering
contracts. The funding required is dependent
on the type of engineering contracts
awarded; some require Ultra to fund the
development phase while others attract
customer funding. In 2017, company funded
investment was 3.9% of revenue at £29.9m
(2016: £34.1m – 4.3%), while customer
funding increased to 16.9% of revenue at
£131.2m (2016: £112.8m – 14.4%). The
Group’s three divisions are at different stages
of the investment cycle and this mix is reﬂected
in the total ﬁgure and will continue to vary as
our divisions move through the investment
cycle. The Group continues to progress a
wide-range of long-term growth opportunities
across all eight market segments.

contract awarded by the US Department of
the Navy to design, develop, integrate and
install a variety of cyber-secure systems for
critical infrastructure control and monitoring,
and the award of an $18m multi-layered
surveillance and security system to a
programme for the oil and gas industry.

The Maritime & Land Division revenues (see
pages 28-29) increased, driven by sales of US
and international sonobuoys, and there was a
positive FX impact. These helped offset the
slowdown in UK spending, where our CSS
business experienced delays to orders that
had been expected in the year. Increased
torpedo sales to the US Navy from our Ocean
Systems business compensated for strong
torpedo countermeasure sales to the
Australian Navy by Avalon Systems in 2016.
Revenues from the new Indian Navy contract
win also contributed this year. The order book
grew signiﬁcantly over last year due to the
Indian Navy contract win and the maritime
propulsion system order. Ocean Systems also
won a number of countermeasures contracts,
including a $10m order from the UK MOD.
Our US sonobuoy business, USSI, had a strong
order intake year, particularly from
international customers.

Orders
Order intake for the year was £901.4m, a
15.8% increase over £778.3m achieved in
2016. After adjusting for foreign exchange
and disposals, the underlying increase was
12.0%. At the end of 2017 the order book
was 12.3% higher at £897.4m (2016:
£799.3m). The underlying increase was
16.8%, partially offset by a decrease of 4.5%
arising from foreign exchange. Opening order
cover for 2018 is 62% (2017: 56%).

Underlying operating
proﬁt and margins
Underlying operating proﬁt* was £120.1m
(2016: £131.1m), a decrease of 8.4% on the
prior year. Foreign exchange increased proﬁt
by 0.5%, whilst the disposal of the ID business
(2016: operating proﬁt £2.3m) in 2016
resulted in a proﬁt reduction of 1.8%. Proﬁt
therefore declined organically by 7.1%. There
was a higher proportion of development
contracts in the Communications & Security
division which required increased investment
during the year and this, together with lower
sales to the UK and the end of the UK Crypto
production contract, contributed to the
decreased underlying operating margin of
15.5% (2016: 16.7%).

Aerospace & Infrastructure underlying
operating margins* improved to 16.0%
(2016: 15.8%). This was helped by the
increased revenues from higher margin sales
in the period and an improved operational
performance at our aerospace business,
which beneﬁtted from slightly lower R&D
expenditure and efﬁciencies deriving from
S3-related business consolidations and cost
reduction initiatives.

The Communications & Security division
currently has a greater proportion of
production contracts in the early
development phase. Consequently,
underlying operating margins* reduced to
11.6% compared to 15.3% in 2016. These
include the US Navy SEWIP module and an
electronic warfare contract for the F-15
aircraft platform, which together required
investment in excess of £6m in 2017. The
customer-requested pause in a UK Crypto
contract also reduced proﬁts in 2017.

*see footnote on page 150

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 16

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Financial review continued

IFRS proﬁt before tax -10.4%
£60.6m (2016: £67.6m)

60.6

67.6

2017

2016

2015

2014

2013

34.8

21.5

49.3

Interest and underlying
proﬁt before tax*
Net ﬁnancing charges* were £10.1m
(2016: £11.0m). The decrease reﬂects the
lower debt levels partially offset by higher
US interest rates. The interest on bank debt
was covered 12 times (2016: 12 times) by
underlying operating proﬁt*. The resulting
underlying proﬁt before tax* was £110.0m
(2016: £120.1m).

IFRS proﬁt before tax
As set out in the table below, Ultra’s IFRS
proﬁt before tax decreased to £60.6m (2016:
£67.6m). The gain on the mark-to-market
valuation of our forward foreign exchange
contracts and interest rate swap was £12.0m
in 2017 (2016: £19.1m loss). This was
primarily caused by the signiﬁcant
strengthening of sterling against the US
dollar as at 31 December 2017 compared to
31 December 2016.

Acquisition and disposal related costs of
£12.8m (2016: £2.2m) include those associated
with the proposed Sparton Corporation
acquisition and 3 Phoenix staff retention
payments which were put in place at the time
of acquisition of that business.

There was a £8.0m (2016: nil) charge for legal
fees relating to the Ithra (Oman) contract and
a £1.6m (2016: nil) impairment of an
intangible asset. 2016 beneﬁted from the
one-off curtailment gain of £15.5m when the
Group’s UK deﬁned beneﬁt pension scheme
was closed to future accrual on 5 April 2016.

Underlying proﬁt before tax

Amortisation of intangibles arising on acquisition

Impairment charges

S3 programme

Net interest charge on deﬁned beneﬁt pensions

Gain/(loss) on fair value movements on derivatives

Acquisition and disposal related adjustments

Oman contract termination related costs

Unwinding of discount on provisions

Disposal loss (after intangible and goodwill eliminations)

Pension scheme curtailment gain

Reported IFRS proﬁt before tax

2017
£m

110.0

(28.5)

(1.6)

(7.8)

(2.7)

12.0

(12.8)

(8.0)

60.6

2016
£m

120.1

(32.7)

(6.5)

(3.0)

(19.1)

(2.2)

(0.4)

(4.1)

15.5

67.6

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

The Group’s S3 programme remains on track.
S3 savings of £13.5m (2016: £6.9m) were
realised in the period whilst costs on the
programme increased to £7.8m (2016: £6.5m).
£2.5m of these costs (2016: £2.7m) related
to setting up our GBS capabilities in
Rochester, New York and Wimborne, Dorset.

Tax, EPS and dividends
The Group’s underlying tax rate* in the year
increased to 21.6% (2016: 21.1%) owing to
reduced credits for prior year adjustments,
offset by a recognition of previously
unrecognised deferred tax assets and a
reduction in higher overseas taxes. US tax
reform will signiﬁcantly reduce the US tax
charge but this beneﬁt will be largely offset
by the restriction of tax relief for US interest
expenses. The statutory tax rate on IFRS proﬁt
before tax was 19.25% (2016: 13.8%). The
factors affecting the statutory tax rate are
shown in the reconciliation in note 11. We do
not anticipate the US tax reforms to have a
material effect on the 2018 underlying Group
effective tax rate.

Underlying earnings per share decreased to
116.7p (2016: 134.6p). This decrease was in
part due to the dilutive impact of the share
placing undertaken in July 2017 (see below)
which increased the number of shares in
issue by 7.05m. Basic earnings per share
decreased to 66.2p (2016: 82.8p).

Underlying earnings per share* -13.3%
116.7p (2016: 134.6p)

KPI

2017

2016

2015

2014

2013

66.2

116.7

82.8

134.6

35.7

29.8

54.8

123.9

123.1

127.1

Statutory basic earnings per share -20.0%
66.2p (2016: 82.8p)

*see footnote on page 150

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 17

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

A ﬁnal dividend of 35.0p (2016: 33.6p) is
proposed. If it is approved at the Annual
General Meeting, this will give a full year
dividend of 49.6p (2016: 47.8p) and will be
covered 2.35 times by underlying earnings
per share*.

Operating cash ﬂow
Cash generated by operating activities was
£97.4m (2016: £112.0m). Underlying operating
cash ﬂow* was £116.5m (2016: £120.4m)
and the ratio of cash to underlying operating
proﬁt increased to 97% (2016: 92%). This
represents the highest cash conversion
percentage achieved since 2011.

Capital expenditure, including on software,
increased to £11.2m (2016: £5.4m). Ultra is
continuing a programme of IT investment in
conjunction with the S3 programme, with
two Ultra businesses undertaking IT system
(‘ERP’) implementations over the year and a
number of others in their planning phase. The
CSS business successfully went live in Q4
and the PCS business achieved its key
implementation dates, with its Cheltenham
site going live in August and the Greenford
site at the beginning of January 2018. The
ﬁnal PCS site will go live in H1 2018. A
further ﬁve businesses are starting ERP
implementations in 2018.

Working capital decreased by £7.0m
(2016: increase £11.1m), reﬂecting an increase
in receivables more than offset by an increase
in creditors. Inventories increased slightly in
the year.

The pension deﬁcit reduction payments in
the year on the UK and Canadian schemes
were £9.5m (2016: £9.0m), as agreed with
the trustees.

A ﬁnal dividend of 35.0p (2016: 33.6p)
is proposed. If it is approved at the
Annual General Meeting, this will give a
full year dividend of 49.6p (2016: 47.8p)
and will be covered 2.35 times by
underlying earnings per share*

49.6p

Non-operating cash ﬂow
The underlying operating cash ﬂow* of
£116.5m (2016: £120.4m) funded the
Group’s various non-operating items. The
main non-operating and non-underlying cash
items as set out in note 2 and in the statutory
cash ﬂow statement were:

• £133.5m was raised in a July 2017 share
placing, together with a further £3.4m in
exercised share options over the year. In
total, there was a £137.3m inﬂow from the
issue of share capital (2016: £3.0m)

• Dividend payments of £35.0m (2016:

£32.6m)

• Tax paid of £10.3m (2016: £9.0m)

• A £9.8m outﬂow representing Ithra (Oman)
related legal fees (2016: £8.2m outﬂow on
calling of a performance bond relating to
the same contract)

• £13.0m on acquisition and disposal related
costs (2016: £1.7m) which include expenses
relating to the proposed Sparton Corporation
acquisition and 3 Phoenix staff retention
payments which were put in place at the
time of acquisition of that business

• £8.9m on the S3 programme (2016: £5.6m).

Consequently, net debt improved to £74.5m
(2016: £256.7m).

Return on Invested Capital (ROIC)
ROIC was 17.2% (2016: 20.1%**) and is
calculated 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 is 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, fair value movements on
derivatives, the S3 programme, acquisition-
and disposal-related costs and the Ithra
(Oman) contract, impacting the balance sheet.

“

Underlying cash

conversion for the
year was 97%. This
represents the highest
cash conversion
percentage achieved
since 2011.

”

*see footnote on page 150

** The equity placing in July 2017 raised net proceeds
of £133.5m; for consistency of comparative, 2016 has
been calculated as if the equity proceeds also formed
part of 2016 net assets.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 18

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Financial review continued

Ultra’s net debt at 31 December 2017
was £74.5m (2016: £256.7m) and the
total borrowings drawn from the revolving
facilities were nil (2016: £87.0m).

£74.5m net debt

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.

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-rate, 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 closed to future
beneﬁt accrual in 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 2016 closure of the
scheme to future accrual. The scheme was
actuarially assessed using the projected unit
method in 31 December 2017 when the net
scheme deﬁcit, calculated in accordance with
IAS19, was £67.6m (2016: £92.1m). The
present value of the liabilities decreased by
£11.1m to £371.3m in 2017 primarily due to
changes in actuarial longevity assumptions.
There was also a £18.6m increase in scheme
assets, mainly driven by increases in investment
values in equities and property.

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 £10.0m payable 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. The scheme investment
strategy and the details of the risks to which
the scheme is exposed are set out in note 30.

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 £0.1m at the end of
the year (2016: £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 £0.9m at
31 December 2017 (2016: £1.0m).

In the US, Ultra offers a deﬁned contribution
401(k) retirement beneﬁt plan to all full-time
employees. Under this plan, Ultra provides
participating and contributing employees with
matching contributions, subject to plan and
US Internal Revenue Service limitations.

Foreign exchange risks
Ultra’s results are affected by both the
translation and transaction effects of foreign
currency movements. By their nature, currency
translation risks cannot be mitigated, but the
transaction position is actively managed.

Borrowing facilities
The Group’s committed banking facilities
amount to £466.3m in total, together with a
£5.0m and $10.0m overdraft. The Group’s
revolving credit facility of £300m is
denominated in Sterling, US Dollars, Canadian
Dollars, Australian Dollars or Euros. This facility
was signed in November 2017 and replaces
the previous £100m and £200m revolving
credit facilities. The facility is provided by a
group of six international banks and has a
committed maturity of ﬁve years to November
2022, and may be extended to a maximum of
seven years subject to lender consent. The
facility agreement permits an additional
£150m ‘accordion’ which is uncommitted and
subject to lender consent and can be used in
certain acquisition scenarios.

The Group also holds a $225m term loan,
which was established in May 2015. This
loan, denominated in US Dollars, was drawn
in full in August 2015 to complete the Herley
acquisition. $60m is repayable in late 2018
and the loan expires in August 2019. The
Group also has loan notes in issue to Pricoa,
which totalled $70m at 31 December 2017
(2016: $70m). $10m will be repaid on 14 July
2018 and the remaining $60m will be repaid
on 25 January 2019.

As well as being used to fund acquisitions,
the ﬁnancing facilities are also used for other
balance sheet and operational needs,
including the funding of day-to-day working
capital requirements. The US Dollar
borrowings also represent natural hedges
against assets denominated in that currency.

Ultra’s net debt at 31 December 2017 was
£74.5m (2016: £256.7m) and the total
borrowings drawn from the revolving
facilities were nil (2016: £87.0m), giving
headroom of £300.0m (2016: £213.0m) in
addition to the £5m and $10m overdrafts.
The Group held £149.5m (2016: £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 0.56
times (2016: 1.76 times), and net interest
payable on borrowings was covered around
12x by underlying operating proﬁt*.

*see footnote on page 150

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 19

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Foreign exchange risks: 100% of
expected exposure for 2018 is covered.

100%

Sparton
In April 2016, the Board of Sparton
Corporation (‘Sparton’) decided to seek a
buyer for the entire Sparton group. Given that
decision, Ultra considered the acquisition of
Sparton made sound strategic sense and
ultimately negotiated a merger agreement
with Sparton. On 7 July 2017 Ultra
announced its intention to merge its wholly-
owned subsidiary with Sparton subject, inter
alia, to the approval of the United States
Department of Justice (‘DOJ’) under the Hart-
Scott-Rodino Antitrust Improvements Act of
1976 (‘HSR’). Following recent discussions
with the DOJ, and competition concerns
raised by it, Ultra and Sparton have mutually
agreed to terminate the merger.

The US Navy has indicated that it is now
considering ways to increase competition
in the sonobuoy procurement process over
time, including between Ultra and Sparton.
Ultra anticipates that this will take place
over a number of years. The DOJ has stated
that it intends to take steps to open an
antitrust investigation into the ERAPSCO JV
and that its approach to the investigation will
depend on the US Navy’s assessment of
increased competition in the sonobuoy
procurement process.

In the meantime, Ultra will continue to fulﬁl its
obligations with Sparton under the ERAPSCO
JV, which has been supplying sonobuoys to the
US Navy under an Indeﬁnite Delivery Indeﬁnite
Quantity (‘IDIQ’) contract since 2014. The
current IDIQ period of performance will end in
2020 and the ERAPSCO JV submitted bids in
January 2018 for the next two concurrent IDIQ
contracts (for Fiscal years 2019-2023). Demand
for sonobuoys from the US Navy is growing
and sonobuoys continue to be a vital, strategic
capability of the utmost importance for the US
Navy and the ERAPSCO JV’s international
customers, which need reliable products and
continuity of supply. It is also likely that
sonobuoys will become more complex in their
design to counter the threats being faced
today and in the future.

Ultra has world leading technology and
expects to continue to play a signiﬁcant role in
this market. Sonobuoys are complex electro-
mechanical devices that are required to deploy
and function reliably in harsh maritime
operating environments after being launched

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 2018, 100% of the
expected exposure is covered, reducing to
75% of the exposure for 2019 and 22% of
the exposure for 2020. Exposure to other
currencies is hedged as it arises on speciﬁc
contracts. In addition, speciﬁc foreign
exchange forwards are in place with respect
to the proposed Sparton acquisition.

IFRS 15
A detailed project has been undertaken to
determine the impact of IFRS 15, the new
revenue recognition standard. The revenue for
the substantial majority of contracts that are
currently recognised using contract accounting
will continue to be accounted for over the life
of the contract, however the method by which
performance obligations are determined will
change on certain contracts including
identiﬁcation of material rights. A small
number of contracts no longer qualify to be
contract accounted and revenue will instead
be recorded at the point at which control of
the goods transfers to the customer. The
timing of revenue recognised on the
substantial majority of sale-of-goods contracts
is not signiﬁcantly affected with revenue
continuing to be recognised as control of
goods is passed to the customer.

If IFRS 15 had applied in 2017, revenues
would have been £7.1m lower and operating
proﬁt would have been £2.4m lower. The net
impact to the 1 January 2018 opening balance
sheet is a £11.4m reduction in net assets.
£10.5m of this is a reduction to ‘amounts
receivable from contract customers’ mainly
due to changes in the timing of the revenue
recognition on some of our development
contracts. The 1 January 2018 opening order
book increases by £17.0m to £914.4m.

from ASW platforms. As they are expendable
devices, there is considerable focus on
delivering the necessary capabilities at the
lowest unit cost. Ultra believes that it is pre-
eminent in knowing how to build the various
sonobuoy products required by the US Navy
and its international customers, and how to do
so at a low unit cost. Ultra and Sparton,
through the ERAPSCO JV, produce tens of
thousands of sonobuoys each year and they
are two of the very few defence manufacturers
of these large volume, high tech products. This
has required a culture of working together
with the cooperation of the US Navy to value
engineer sonobuoy designs. In the future, the
US Navy is likely to choose for any new devices
to be supplied by more than just the ERAPSCO
partners. Nevertheless, Ultra believes that a
considerable period of time will be needed by
any new entrants to design and produce
sonobuoys to meet the rigorous performance
standards of the customer.

In anticipation of the acquisition of Sparton,
in July 2017 the Group completed a placing of
new ordinary shares representing
approximately 9.9% of Ultra’s existing issued
share capital, raising net proceeds of
approximately £134m to part fund the
acquisition. The Group remains highly cash
generative with good balance sheet strength
and the Group remains comfortable with debt
levels of approximately 1.5x net debt to
EBITDA. The Group therefore intends to
undertake, over time, a share buy-back
through on-market purchases in order to
return the net proceeds of the earlier equity
issue to its shareholders. The existing buy-back
authority from the 2017 AGM allows for up to
7,047,169 shares to be bought back.
Additional authority will be sought at the
2018 AGM. Any shares bought back are
expected to be cancelled.

Amitabh Sharma
Group Finance Director

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 20

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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*

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.

Description
Underlying earnings per share*
calculated over a rolling three-
year period.

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
Oman related costs, 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.

-1.3%

-8.4%

-2%

97%

2017

2016

2015

2014

2013

-1.3%

+8.2%

+1.8%

-4.2%

-2.1%

2017

2016

2015

2014

2013

-8.4%

+6.9%

+0.4%

-4.1%

+0.3%

2017

2016

2015

2014

2013

-2%

+2%

+1%

+5%

2017

2016

2015

2014

2013

97%

92%

68%

70%

65%

Comment
Revenues decreased by 1.3%
or £10.4m to £775.4m. There was
a 3.7% beneﬁt from the positive
impact on translating overseas
revenues, offset by an organic
decline of 3.3% and the 1.7%
impact of the disposal of the
ID business.

Comment
Underlying proﬁt before tax*
was £110.0m (2016: £120.1m).
The underlying operating margin*
was 15.5% (2016: 16.7%). The
decline in underlying proﬁt before
tax* followed the disposal of the
ID business in August 2016, a
higher proportion of development
contracts in the Communications
& Security division which required
increased investment during the
year, lower sales to the UK, and
the end of the UK Crypto
production contract.

Comment
Underlying earnings per share*
decreased to 116.7p (2016:
134.6p). This decrease was in part
due to the dilutive impact of the
9.9% share placing undertaken in
July 2017 to part-fund the proposed
Sparton acquisition. On a pro-forma
basis, eliminating the impact of the
July 2017 share placing, the decline
would have been 0.2%. A ﬁnal
dividend of 35.0p (2016: 33.6p) is
proposed. If it is approved at the
Annual General Meeting, this will
give a full year dividend of 49.6p
(2016: 47.8p) and will be covered
2.35 times by underlying earnings
per share*.

Comment
Underlying operating cash ﬂow*
was £116.5m (2016: £120.4m)
and the ratio of cash to underlying
operating proﬁt increased to 97%
(2016: 92%). This represents the
highest cash inﬂow and cash
conversion percentage achieved
since 2011.

*see footnote on page 150

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 21

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Non-financial KPIs

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.

-2.0%

2017

2016

2015

2014

2013

0.7

2017

2016

2015

2014

2013

-2.0%

+8.0%

+6.0%

+8.0%

+14.0%

82%

0.7

2017

2016

2015

2014

2013

0.5

0.4

82%

81%

Comment
Annual total shareholder return
over the ﬁve year period from 2013
to 2017 is -2.0%.

Comment
The number of externally reportable
accidents remained constant in
2017. Ultra continues its efforts to
drive a health and safety aware
culture.

Comment
The level of employee engagement
has remained stable during a year
of change and business
consolidations. Each business
develops its own action plan, which
is focused on employee
engagement, taking into account
internal and external benchmarks.

Additional non-ﬁnancial
performance indicators
Ultra’s four strategies for growth
are described on pages 12 and
13 of this report. Performance
indicators relating to the Group’s
success in these four dimensions
are shown on those pages. The
Group’s people are its most
important asset. Performance
indicators that relate to the
recruitment, retention and
development of Ultra’s staff
are included on pages 51-53
of this report.

P?? ??

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 22

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Standardisation & Shared Services (S3)

The Standardisation & Shared Services programme (S3) was
established in 2015 with the goal of delivering £20m in enduring
cost savings by 2019. The programme ensures that it does not
detract from a business’s autonomy in its market place or restrict its
ability to deliver its in-year budget.

07
Facilities
Management

Finance

ICT

Property

Global
Business
Services

ERP

02
Indirect
Sourcing

03
Direct
Sourcing

S3 has identiﬁed areas to improve business
efﬁciency and is managing the implementation
of changes as individual projects.

The eight illustrated workstreams have
become functions of Ultra’s Global Business
Services (GBS). Two GBS shared service
centres opened in Wimborne, Dorset in June
2016 and in Rochester, New York in
December 2017. The S3 programme
management ofﬁce drives the portfolio of
projects that deliver business efﬁciencies and
realise the savings that have been targeted.
In 2017 £13.5m of enduring cost savings
were made.

Global Business Services
UK GBS is operational for Property
Management, Indirect Sourcing, Payroll,
Accounts Payable and Facilities Management
services. In the US, GBS has begun to deliver
Payroll and Sourcing services.

Continuous improvement techniques are in
place within GBS to develop the services
offered. Working in partnership, businesses
are recognising the value that comes from
collaboration, sharing best practices and
challenging historical norms. The GBS team
has developed a set of values to underpin its
culture of supporting the businesses to
achieve its shared target. These values are
shown below.

Empower & Develop
Continuing to create opportunities to
grow and develop talent across the
Group. Facilitating the bringing together
of great minds, recognising and rewarding
the value of problem solving together.

Stronger Together
Supporting Ultra businesses to focus on
customers, continually sharing ideas and
knowledge at every level and across every
area the businesses are touched.

Innovative & Trusted Service
Enabling the future growth of Ultra
Electronics. Proactively looking to
improve, innovate and surpass
expectations. Placing value in the mutual
respect and trust of Ultra’s stakeholders.

Integral Partner
Recognising the value that comes from
working together, learning about, and
sharing best practice, challenging the
norm, determining the best outcomes,
and taking ownership.

“

Working in

partnership,
businesses are
recognising the value
that comes from
collaboration, sharing
best practices
and challenging
historical norms.

”

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 23

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

06.

Finance
The implementation of a Target Operating
Model for the ﬁnance function across the
Group has commenced, with focus on
leveraging the shared services capabilities
possessed both in the UK and the US by
implementing standard processes and
removing duplicated efforts. For example, the
UK Payroll consolidation will result in a single
process which will remove activity in each of
the six UK operating businesses.

In addition to consolidating buying power,
the standardised Purchase-to-Payable
System implemented across 2016 and 2017
will support the delivery of streamlined
ﬁnance processes.

During 2018, the roll out of the Target
Operating Model will continue both through
the on-going implementation of the ERP
strategy and the continuing transfer of
certain ﬁnance activities into GBS.

07.

Facilities Management
The ﬁrst shared service to go live in the UK
was Facilities Management, in early 2017.
The service delivers all site maintenance &
repair services and meets the Health, Safety
& Environmental management needs of all
businesses. A Service Desk for the Facilities
Management function is accessible across the
UK via a web-based portal and allows for
standardised reporting to the businesses,
providing an electronic, auditable data trail.

01.

03.

Property
During 2017, through proactive portfolio
management, Ultra’s property footprint
reduced by a further 5%, a total of
164,626ft2. A further 89,048ft2 reduction
has been identiﬁed for 2018, through a
combination of exiting, subleasing and
general consolidation of the estate. This
represents a further 2% reduction in Ultra’s
property footprint. Through a central
database of all property leases, GBS has the
visibility to assess Group-wide future property
requirements. When S3 completes, the Group
expects to have achieved a total reduction in
its property estate of 13%.

02.

Indirect Sourcing
Indirect Procurement savings were achieved in
2017. By implementing a common indirect
procurement system across the UK businesses,
the Purchase-to-Pay process and expenses
reporting have been standardised.

With total visibility of all indirect expenditure,
GBS is now able to negotiate improved pricing
and supplier terms by consolidating Ultra’s
buying power, and offer a standard service
level to all employees for the reimbursement
of business expenditure. In 2017, the GBS
sourcing team has worked with business
representatives to deliver savings of over
£100k through the consolidation of UK mobile
telephony and savings of over 30% with a
leading freight provider.

In the US, implementation of Ultra’s indirect
procurement system began in the latter part
of 2017 and will complete in 2018. This
project will see the creation of a North
American Indirect Procurement function,
performing a mirror role to its peer
organisation in the UK.

Direct Sourcing
Each business is accountable for identifying
and delivering its own savings plans and
participates in a regional Procurement Council.
These forums provide visibility of opportunities
to consolidate spending across the Group and
allow businesses to decide which initiatives to
join depending on their business plans and
customer or regulatory constraints.

Procurement Councils track and report
savings, share best practices and target the
optimisation of Ultra’s supply chain.

04.

HR
Since May 2017, GBS has offered a
centralised Payroll service to all UK
businesses, the transition to which completes
in 2018. In the US, all employees are paid
through GBS where processes and
procedures in the administration of US payroll
and beneﬁts are well advanced.

A review of how Ultra recruits has reduced the
number of UK suppliers from 80 to a preferred
supplier list of 10. GBS now offers UK
businesses a consistent recruitment service and
leveraging the commercial scale of the Group.

A project is taking place in 2018 to move US
recruitment to GBS to deliver productivity
efﬁciencies via standardised and centralised
processes and shared resources.

05.

ERP
The Group is implementing an ERP strategy,
which will migrate businesses towards
standard technologies and processes. In the
last twelve months, two businesses (PCS and
CSS) have transitioned to a standard platform
and are realising the beneﬁts of optimised
operational processes, simpler cost and
project reporting and lower IT support costs.

Over the next 18 months and beyond, ERP
implementations will continue across the
Group, rolling out a standard technology and
process suite.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:27 Page 24

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Divisional Managing Director’s review
Aerospace & Infrastructure

Aerospace & Infrastructure revenues were broadly ﬂat. The Precision Control Systems business saw
increased revenues through development work on equipment for the Mitsubishi Regional Jet and a
ramp up in production activity on certain armoured vehicle programmes, offset by lower license sales
compared to 2016, and lower demand for industrial products elsewhere in the division.

The division’s order book
increased by 5.8% to £283.2m.

The division’s underlying operating margins*
improved to 16.0% (2016: 15.8%). This was
helped by the increased revenues from higher
margin sales in the period and an improved
operational performance at Ultra’s aerospace
business, which beneﬁtted from slightly lower
R&D expenditure as a number of large
programmes approached production.
Underlying operating margins* also beneﬁtted
from S3 related business consolidations and
cost reduction initiatives.

The division’s order book increased by 5.8%
to £283.2m (2016: £267.8m) owing in part to
the orders noted below.

Features of activities
in the period that will
underpin the division’s
future performance include:
• Orders for the electronic control unit which

manages the US Air Force Joint Strike
Fighter aircraft engine’s Electrical Ice
Protection System amounting to $36m

• Securing the position on Saab’s new Gripen
ﬁghter aircraft, with an initial production
order valued at £9m, to equip it with Ultra’s
HiPPAG airborne compressor system solution

• Partnering with NuScale Power in the US to
submit the ﬁrst-ever Small Modular Reactor
design certiﬁcation application to the US
Nuclear Regulatory Commission.

Businesses within this division
• Airport Systems
• Nuclear Sensors & Process Instrumentation
• Nuclear Control Systems
• Precision Control Systems

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 25

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Graeme Stacey
Divisional Managing Director,
Aerospace & Infrastructure

Graeme has been a Divisional Managing Director since 2010, operating across the defence, aerospace,
transport and energy sectors. He was, for seven years, Managing Director of Ultra’s Airport Systems
business and prior to that a software engineer and project manager from 1994 to 2003. Graeme has
developed growth strategies to access new markets in China, the Middle East and Africa and has led
the continued growth of Ultra’s market share in the transport and energy sectors.

This division is responsible for the following segments:

Aerospace

Infrastructure

Nuclear

Revenue by segment

Revenue

Underlying operating profit*

Aerospace
Infrastructure
Nuclear

17
4
8

% of Group revenue

£203.2m -0.7%

£32.6m +0.6%

Order book

Number of employees

£283.2m +5.8%

1,244

Strategy in action
PCS received an order worth over $36 million
for equipment used on the US Air Force
Joint Strike Fighter Aircraft F135 engine.
This order was issued under an existing
partnership with Pratt & Whitney which
sees PCS provide support for the F135 for
the life of the programme, or a minimum
of 30 years. Based upon the potential
production volumes, in-service spares,
repairs and additional through-life support,
the agreement is valued at approximately
$500 million. This signiﬁcant order
underpins Ultra’s established long-term
relationship with Pratt & Whitney and the
value of Ultra’s solutions which will be
provided over the life of the programme.

P12-13
Ultra’s strategies for growth

*see footnote on page 150

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 26

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Divisional Managing Director’s review
Communications & Security

Communications & Security’s 2016 results include a part-year contribution from the ID business, which
was disposed of in August 2016. Revenues in the division were impacted by the slowdown in UK
spending, with delays to a number of crypto programmes, and by the increase in a number of contracts
in the development phase at Herley in the US. Forensic Technology, based in Canada, increased revenues
as a result of bullet identiﬁcation product sales to customers in South East Asia; and TCS, Ultra’s
Montreal-based military radio business, continued to grow in 2017.

The Communications & Security division
currently has a greater proportion of contracts
in the early development phase. Consequently,
underlying operating margins* reduced to
11.6% compared to 15.3% in 2016. These
include the US Navy Surface Electronic
Warfare Improvement Programme and an
Electronic Warfare contract for the F-15
aircraft platform, which together required
investment in excess of £6m in 2017, some of
which was unexpected due to the additional
SEWIP module wins. The customer-requested
pause in a UK Crypto contract also reduced
proﬁts in 2017. 2018 margins are expected
to be higher than achieved this year.

The division’s order book continued to
increase, ending the year at £258.7m.

Features of activities
in the period that will
underpin the division’s
future performance include:
• The securing of a £16.6m programme
to support the provision of advanced
surveillance capability until 2019

• A $16.2m contract awarded by the

US Department of the Navy to design,
develop, integrate and install a variety
of cyber-secure systems for critical
infrastructure control and monitoring

• The award of an $18m multi-layered

surveillance and security system for the
oil and gas industry.

Businesses within this division
• 3eTI
• Advanced Tactical Systems
• Communication & Integrated Systems
• Forensic Technology
• Herley
• TCS

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 27

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Mike Baptist
Divisional Managing Director,
Communications & Security

Mike Baptist brings a wealth of systems engineering and business acumen developed within defence,
security and aerospace. He has a track record of major programme delivery, team development and
business growth, always seeking to innovate so as to deliver solutions to customers. Mike joined Ultra
in 1989 and was appointed Divisional Managing Director of the Communications & Security division
in August 2014.

This division is responsible for the following segments:

Communications

C2ISR+

Revenue by segment

Revenue

Underlying operating profit*

Communications 16
19
C2ISR

£242.7m -6.3%**

£28.2m -29.0%***

% of Group revenue

Order book

Number of employees

£258.7m +14.0%

1,295

The division’s order book continued to
increase, ending the year at £258.7m.

Strategy in action
In 2017 Ultra Electronics’ Communication
& Integrated Systems (CIS) business was
awarded a government ISTAR contract to
support the provision of advanced
surveillance capability, worth £16.6m over a
26-month period, along with the provision
of specialist support over the course of the
system’s use. Working closely with all
stakeholders involved, Ultra played a
signiﬁcant role in understanding the end
user’s requirements and the industrial supply
chain needed to deliver them. Ultra’s strong
partnership behaviours with the customer,
prime OEMs and the broader supply chain
were a key factor in the achievement of this
contract win.

P12-13
Ultra’s strategies for growth.

+ Command & Control, Intelligence, Surveillance and Reconnaissance

*see footnote on page 150

** -1.2% compared to 2016 revenue of £245.7m
when excluding ID

*** -24.6% compared to 2016 underlying operating

proﬁt of £37.4m when excluding ID

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 28

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Divisional President’s review
Maritime & Land

Revenues increased in the Maritime & Land division, driven by higher sales of US and international
sonobuoys, and there was a positive FX impact. These helped offset the slowdown in UK spending,
where the Command & Sonar Systems business experienced delays to orders that had been expected
in the year. Increased torpedo sales to the US Navy from Ultra’s Ocean Systems business compensated
for strong torpedo countermeasure sales to the Australian Navy by Avalon Systems in 2016. Revenues
from the new Indian Navy contract win also contributed this year.

The order book grew signiﬁcantly over the
previous year owing to an Indian Navy contract
win and a maritime propulsion system order.
Ocean Systems also won a number of
countermeasure contracts, including a $10m
order from the UK MOD. Ultra’s US sonobuoy
business, USSI, had a strong order intake year,
particularly from international customers.

Within Maritime & Land, underlying
operating margins* remained at a high level,
ending the year at 18.0% (2016: 18.3%),
largely owing to the production phase of a
number of US sonobuoy contracts.

Features of the division’s
performance in the year
that will underpin future
performance include:
• A £30m contact in partnership with

Mahindra for the supply of the ﬁrst batch
of Surface Ship Torpedo Defence Systems
to the Indian Navy

• A £37m programme for the ﬁnal

development and production of a
maritime propulsion system

• An initial $8.5m contract for the

production of MK48 Torpedo Nose
Array subassemblies with options to
extend the contract for a further three
years that could increase the value of
the contract to $18m.

Businesses within this division
• Avalon Systems
• Command & Sonar Systems
• EMS Development Corporation
• Flightline Systems
• Maritime Systems
• Ocean Systems
• PMES
• USSI

Underlying operating margins*
remained at a high level, ending
the year at 18.0%.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 29

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Bill Terry
Divisional President,
Maritime & Land

Bill Terry brings a system oriented perspective combined with strong business acumen, with over
30 years of professional experience predominantly in the maritime domain. Bill joined Ultra in 2011
as Vice President of Engineering before becoming President of Ocean Systems in 2012. In 2015, Bill
was appointed President of the Maritime & Land division.

This division is responsible for the following segments:

Underwater Warfare

Maritime

Land

Revenue by segment

Revenue

Underlying operating profit*

Underwater
warfare
Maritime
Land

25
8
3

% of Group revenue

£329.5m +2.3%

£59.3m +0.5%

Order book

Number of employees

£355.5m +16.7%

1,633

This award reinforces Ultra’s position as a
leading supplier of MK 48 Nose Array
subassemblies and underpins Ultra as a
leader in the Undersea Defensive Warfare
environment, through the provision of
highly complex acoustic products and
capabilities to both the US Navy and
international customers.

Strategy in action
In October 2017, Ocean Systems was
awarded an initial $8.5m contract from
Northrop Grumman for the production of
MK 48 Torpedo Array Nose subassemblies.

Under this new contract, Ultra will provide
Nose Array subassemblies which will
ultimately increase the US Navy’s inventory of
MK 48 torpedoes. The MK 48 is used by all
classes of US Navy submarines as their
primary anti-submarine warfare and anti-
surface warfare weapon. There is a potential
for production orders from the US Navy of
more than 180 MK 48 Array Nose Assemblies
to be delivered over the next three years.

*see footnote on page 150

P12-13
Ultra’s strategies for growth.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 30

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Market-facing segments
Aerospace

Manufacturers and operators across both the civil and military
aerospace sectors are driving to reduce acquisition and operating
costs for aircraft and helicopters. Ultra’s innovative solutions,
which increase efficiency, improve reliability and increase aircraft
availability, are well positioned to support these goals.

Revenue by segment
Aerospace

% of Group revenue

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

• Ice protection and detection

• Pneumatic systems and solutions

• Position sensing and control

• Active noise and vibration control

• Health and Usage Monitoring (HUMS)

• Ground handling equipment

• Pilot controls

• Data and power transfer

• Fuel system solutions.

Strategy in action
In 2017 Ultra secured several major
contracts for its HiPPAG stores ejection
systems. To further augment these
systems, Ultra has created an innovative
design for high pressure hoses. These
hoses allow the carriage of high pressure
gas whilst maintaining the ability to ﬂex.
This allows the hoses to work across a
moving joint, such as a bomb-bay door,
without reliability issues. This, coupled
with the latest design of HiPPAG, which is
able to provide seeker-head cooling and
pneumatic stores ejection from the same
unit, positions Ultra to provide high-
pressure gas solutions for the future
stores-management requirements of
advanced combat aircraft.

Market overview
Commercial aerospace is growing: major
manufacturers forecast the need for between
35,000 and 42,000 jet airliners over the next
20 years and order backlogs currently exceed
14,000 aircraft. This growth in platform
numbers is driven by the demand for new
aircraft in developing regions, while the more
established markets require new aircraft to
replace ageing ﬂeets as well as to capture
greater efﬁciencies in fuel, emissions and
system reliability.

Rising global tensions are leading to an
increasing demand for defence and military
products. South Korea, Japan, Qatar, the
United Arab Emirates (UAE), Saudi Arabia and
India have already started to increase budgets
for the purchase and development of next
generation military equipment.

These acquisitions and developments, along
with the ramp-up of the existing major military
aircraft programmes, and increased spending
in the US, are resulting in growth in this sector.

Market outlook
In the civil aerospace market, a forecast need
for over 8,000 wide-body aircraft by 2036 will
continue to provide signiﬁcant revenues for
the supply chain. In the wide-body market,
dominated by Airbus and Boeing, Ultra has a
number of positions on the Boeing 787,
Airbus A350 and the A330neo.

The single aisle market is forecast to require
nearly 30,000 aircraft by 2036. With new
entrants from China, Russia and Canada to
compete with the established Airbus and
Boeing offerings, it is expected that the
market will become increasingly competitive.

Ultra’s positions on the Japanese Mitsubishi
Regional Jet and the new Chinese MA700
regional turboprop, along with signiﬁcant
value on the Bombardier Q400 aircraft, give
good access to the regional aircraft market.

The business aircraft market is set to return
to growth in 2018 and will be sustained over
the foreseeable future. Ultra has secured
positions on business jet platforms, including
the Cessna Citation Jets, the Cessna Citation
Longitude, and the Gulfstream G500, G600
and G650.

The large helicopter market is dependent on
oil and gas rig servicing businesses and is
currently impacted by the low price of oil.
These businesses are looking to minimise the
through-life costs of their helicopters and 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 F135 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.

Many nations, including Japan, Turkey and
India, are now seeking to develop their own
aircraft. Ultra has secured several positions on
India’s FCA indigenous combat aircraft and will
continue to seek opportunities in these
emerging markets.

In the military transport and special missions
aircraft market, Ultra has secured positions on
the Embraer KC-390 and on the Airbus
A400M, as well as on the smaller Airbus
CN235. This market is stable and relatively
uncompetitive.

The UAV market remains a crowded sector
with many platforms vying for position. Ultra
remains interested in the UAV sector, and is
focusing its efforts on the larger, more
strategic platforms.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 31

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Market-facing segments
Infrastructure

Ultra is a trusted international provider and integrator of critical
systems and software needed to operate and secure 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
Air and rail transportation remains an area of
strong investment worldwide. The increase in
global air trafﬁc 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 growing
populations in developing countries, at least
50% of the global market for smart solutions
lies in Europe and the US.

Strategy in action
Ultra Electronics’ 3eTI continues to deliver
security solutions that mitigate both
physical and cyber threats, as reiterated
by the 2017 award of a US $16.2m
modiﬁcation to a previously awarded
cost-plus-ﬁxed-fee contract by the US
Department of the Navy. The contract
extends Ultra Electronics’ services providing
solutions to cyber-secure critical Navy
infrastructure. These solutions include the
cyber hardening of various industrial
control systems and electronic security
systems in mission essential environments.

% of Group revenue

Market outlook
In the airport sector, the market is still driven
by accommodating passenger growth and
aircraft deliveries planned for the next ten
years. This is achieved by building capacity in
North America and emerging countries such
as South America and Asia.

Passenger and baggage solutions continue to
be commoditised, while secure information
systems provide higher returns in
opportunities such as situational awareness
and data integration.

Ultra will continue to focus upon market
intimacy, customer relationships and
solutions that deliver value to airports over
individual products.

The rail transit power conversion and control
market is also anticipated to see signiﬁcant
growth. The commencement of UK Network
Rail’s Control Period 6 in 2019 and continued
investment in inner city tram and metro
systems both in the UK and overseas bodes
well for Ultra’s trackside direct current &
alternating current capabilities. 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. Ultra has now introduced
the cyber-hardened critical infrastructure
management system that is used to improve
site management and performance.
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_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 32

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Market-facing segments

Nuclear

Through its global experience with Original Equipment Manufacturers,
the domain knowledge of its Suitably Qualified and Experienced
Personnel, and its diverse portfolio of qualified safety systems and
sensors, Ultra is well-positioned to support the growing market in the
licensing, construction and safe operation of reactors and associated
research and full cycle markets via a full “defence in depth” approach.

Revenue by segment
Nuclear

% of Group revenue

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 were over 445 commercial nuclear
power reactors operating in 29 countries
worldwide at the end of 2017, providing over
11% of the world’s electricity as continuous,
reliable, base-load power and they 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 were 61
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.

Market outlook
Although the nuclear market is a long-cycle
one, 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, 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 17 countries, plus
another 28 reactors under construction. Ultra
is uniquely qualiﬁed on eight new types of
plants (as well as many legacy plants),
meaning that it is well positioned for the
future. Growth in the nuclear emergency
management market continues and is
prompted by the Fukushima accident, which
caused a global reassessment of post-
accident response and support needs. The
decommissioning and clean-up of legacy
reactors and fuel cycle plants, which utilises
qualiﬁed instrumentation and radiation
sensors, is also expected to see further
growth. Ultra’s experience with global
standards and various platforms positions the
Group well for these new opportunities.

Strategy in action
In 2017, NSPI was awarded a high priority
contract for one of Bechtel’s US sites
which included designing and delivering a
ﬁrst-of-a-kind sensor for a specialised
process control system. Ultra’s NCS and
NSPI businesses have been working with
Bechtel over a number of years for similar
projects and see future opportunities
with them in the nuclear and other
energy markets.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 33

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Market-facing segments

Communications

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

Revenue by segment
Communications

% of Group revenue

Software-deﬁned solutions such as the Ultra
ORION family of radio systems can provide
at-the-quick-halt and on-the-move
communications across multiple military
echelons. Being based on a software-deﬁned
radio platform allows the Ultra ORION to
maximise ﬂexibility to support various
missions while reducing training costs and
supporting logistics.

Similarly, in the data link communications
market, in which Ultra’s position remains
strong, its wide range of advanced air and
ground solutions answer the growing demand
for secure tactical and full-motion video links.

Securing communications has become a
necessity and Ultra’s ability to understand
how technology can best support this
market means the use of technical skills and
products from link to Internet Protocol (IP)-
based cryptographic solutions will continue
to grow. Following the market shift to
develop new electronic encryption key
distribution and management systems, Ultra
has a unique position with proven solutions
for both commercial and US and UK
government requirements.

The ‘Internet of Things’ (IoT) continues to
expand the amount of networked devices and,
as we control more of the physical world with
IT, the merge between cyber and physical
threats will continue to emphasise the need
for resilient solutions that securely connect
and communicate across them. Ultra’s proven
certiﬁed security portfolio is well placed to
deliver cyber defence across all
communication domains.

The trend towards greater connectivity and
networking continues to persist, driving
signiﬁcant further investment in military,
security, critical national infrastructure and
commercial 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 is broad and
spans: airborne, air-to-ground, ground-based,
underwater, and ship-borne communications,
each encompassing a wide and diverse range
of requirements and capabilities. There is
continued demand for increased bandwidth
and broader connectivity, coupled with a need
for multi-platform and multi-user
interoperability within both the military and
security sectors.

Security is a driving factor across networked
communications and is especially important
whilst nations seek to modernise their systems
using a combination of commercial and
bespoke solutions.

The ability to deliver security across real-time
voice and data with ad-hoc mesh capabilities
has become essential. This is driving
investment in a market where proven designs,
which can be integrated with existing
equipment and are secured from threat actors
yet interoperable with allies, are preferred.

Market outlook
The increased transfer of data and its
translation into useable information continues
to envelop all aspects of military, security and
commercial operations. The secure provision
of data that is available where and when it is
required, in a useable format, continues to
push the boundaries of technology. Ultra’s
communications portfolio supports this need
through a multitude of capabilities: satellite
systems, data link systems, encryption
solutions, radio communication systems and
specialist niche systems.

Strategy in action
Ultra’s Multi-Data Link Management
System (MDLMS) is a real-time tactical
data link interoperability system capable of
operating in a stand-alone or integrated
maritime environment. ATS was awarded
a contract to deliver the MDLMS to three
destroyers for the Republic of Korea Navy.
ATS’s offering provides the ability to
communicate tactical information over a
secure, jam-resistant data link using the
latest Link 16 radio terminals. This key,
regional, strategic win enables ATS to be
well positioned to provide more systems in
the next class of Korean destroyer planned
in 2019.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 34

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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

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 (C2)

• Airborne surveillance and targeting

• Electronic Warfare (EW) solutions,

EW simulators and radar test systems

• Document examination systems

• Ballistics and crime scene analysis.

Strategy in action
ATS was contracted to provide the
Programme Executive Ofﬁcer of the US
Land Systems Marine Corps with its
Virtual Air Defense System Integrator
(vADSI). These systems will provide the
Marine Corps with the ability to process
tactical data while automatically
correlated with air and ground targets,
thus enabling enhanced decision making
at tactical operations and intelligence
centres. ATS has worked closely to ensure
that the Air Defence C2 requirements
have been met through both reliable and
technical solutions and an understanding
of the importance and complex needs of
tactical air defence.

% of Group revenue

Market outlook
The increased transfer of data and its
translation into useable information
continues to envelop all aspects of military,
security and commercial operations. The
secure provision of data that is available
where and when it is required, in a useable
format, continues to push the boundaries of
technology. Ultra’s C2ISR portfolio supports
this need through a multitude of capabilities
for both military and civil applications,
providing the accurate and timely exchange
of voice, video and data to military,
government, law enforcement agencies,
industry and commercial customers in
support of the planning and execution of
complex and critical operations at all levels of
the command structure.

The ability to fuse or correlate data streams into
a single real-time integrated picture that can be
disseminated to the lowest level will drive
growth in real-time ISTAR solutions (for both
manned and unmanned platforms) and the
connectivity between assets in the battlespace.

Ultra’s leading data fusion, situational
awareness and visualisation systems will
continue to play well to this growing need.

Cyber Electromagnetic Activities (CEMA) is
growing the need to be able to understand and
accommodate both radio and IP data into
single operational views. Ultra’s portfolio spans
the development of sensors, communication
solutions, and data management techniques
that use proven software and artiﬁcial
intelligence (AI) solutions.

People and data will continue to move
throughout the world. Whether following
the economic and political boundaries or
cutting across them using interconnected
networks, the need to enforce the law and
mitigate illegal activities will continue to
grow. Ultra’s ability to understand this ever-
changing data-driven world helps it to
provide solutions that meet the growing
needs of government, critical national
infrastructure and commercial customers.

Market overview
As interconnected, networked data is
continuing to be collected from a burgeoning
amount of sensory equipment, the necessity
to receive, understand, ﬁlter and transmit this
data into timely, useable information is
paramount to government, security and
critical national infrastructure operations.

Within defence C2ISR remains a priority
capability within global budgets due,
primarily, to the increased importance and
investment in modern warfare systems. The
application of C2ISR solutions across a variety
of platforms as the principal mechanism for
early or urgent delivery of military effect
continues to drive the demand for
intelligence, surveillance, target acquisition
and reconnaissance (ISTAR).

The increased capability, and resulting data,
offered by sensor and communications
solutions means that the ability to collect
data is close to ubiquitous, so the market
increasingly shows a need to be able to
manage and represent this data in a
meaningful way as information.

Alongside operational defence needs, global
security threats and the interconnectivity of
networked physical and IT devices increases
the importance of C2ISR in the wider border
security and critical national infrastructure
(CNI) protection markets.

Interoperability, mobility and a single
integrated useable picture can deliver
timely situational awareness that makes a
real difference to combating threats and
saving lives.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 35

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Market-facing segments

Underwater warfare

Ultra is renowned for its world-leading domain knowledge, acoustic
technical expertise and ability to provide leading technology in
underwater warfare performance through rapidly delivered, modular,
affordable and reliable solutions.

Revenue by segment
Underwater
warfare

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

• Expert knowledge of acoustic system
performance in the maritime domain

• Design and manufacture of air

deployable sonobuoys

• Sonar transducer and towed array

design and manufacture

• Design and manufacture of acoustic

countermeasure for torpedo defence

• Sonar processing, display and

decision aids

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

Market overview
Western nations’ traditional adversaries,
Russia and China, have made rapid and large
scale submarine investment a cornerstone of
their strategy to project power. Numerous
smaller nations are also rapidly procuring
submarines in an effort to cost-effectively
protect their national interests. This growth in
submarine capability is no longer offset by
what was once western underwater warfare
technological superiority and investment in
anti-submarine warfare (ASW) has become a
top priority for many nations.

The underwater battlespace is complex and
the never ending improvements in stealth and
the increased submerged endurance of the
modern submarine has been a catalyst for the
development and procurement of a new
generation of airborne ASW sensors, warship
and submarine sonar systems and advanced
torpedoes to detect, track and defeat these
underwater antagonists. More emphasis is
being placed on countermeasure systems that
can be used to jam or decoy incoming
torpedoes as a last layer of defence for both
ships and submarines.

Underwater warfare is a key market for Ultra.
Ultra continues to invest substantially in ASW
technology and is already recognised as the
world’s pre-eminent supplier of expendable
sonobuoys and torpedo countermeasures.

Strategy in action
Ultra has a long history of providing
sonobuoys designed to be deployed from
large manned aircraft and helicopters. In
2017, Ultra began development of a new
class of miniature active and passive
sonobuoys. In parallel, work commenced
with Marshall Aerospace and Defence to
develop a lightweight ‘pod’ that could
not only carry the miniaturised
sonobuoys, but also the radios and
processor required to capture, analyse,
and transmit underwater target data to a
command and control centre. Ultra
ofﬁcially launched its miniature sonobuoy
and pod system for UAVs in September
2017 and has received widespread
interest. Development continues as ﬂight
trials have commenced with several major
UAV primes to help develop a concept of
operations for this new capability.

% of Group revenue

Market outlook
The end of the land-based conﬂicts in Iraq
and Afghanistan coupled with an aggressive
push by Russia and China to extend their
naval spheres of inﬂuence has signalled a
renewed focus on naval recapitalisation. It is
expected that the underwater warfare market
will continue to grow signiﬁcantly over the
next decade, driven by a strong demand for
new ASW-oriented surface combatants
globally. Nations are increasingly spending on
on-board complex electronics and off-board
sensor systems compared to the previous
generations of vessels.

US defence spending continues to dominate
the military marketplace and ASW and
submarines remain areas of preferential spend
with increased budget allocation. The US
continues to build two Virginia Class SSNs per
year and has taken delivery of more than 50 P-
8A maritime patrol aircraft to the US Navy as
well as awarding contracts to upgrade both
light and heavyweight torpedoes. Ultra is a
major sonobuoy supplier with annual revenues
exceeding £100m and a forecast steady
growth rate of 2 to 3% as new platforms
become operational.

Elsewhere, several countries have embarked
on a major recapitalisation of their ASW
frigates. In all, western navies will start
construction of more than 30 warships over
the next decade and all will be assembled
with a signiﬁcant emphasis on ASW. In the
addressable Asia-Paciﬁc market, spend related
to ASW systems, including towed torpedo
defence solutions, is projected to increase
from an estimated £400m in 2018 to over
£0.5bn in 2022. India alone intends to award
at least two major ASW-related programmes
totalling in excess of £100m over the next
three years.

Ultra continues to invest in new ASW
technology to meet the market needs.
Research and development is underway on
new active and passive transducers, thin-line
towed arrays, miniature sonobuoys and
launch mechanisms, enhanced
countermeasures, and improved target
detection and tracking algorithms.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 36

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 electronics, Electro-Optic (EO) tracking systems, surface
search radars and command, control and navigations systems for
maritime platforms.

Revenue by segment
Maritime

% of Group revenue

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

• Magnetic and electric signature
management for naval vessels
worldwide

• Specialist power dense motors

and drives

• Power conversion and control

management

• Nuclear rod control

• Stable positioning for precise

EO tracking on moving platforms

• Customised command, control and
navigation systems for small ships

• Next Generation Surface Search

Radar (NGSSR).

Strategy in action
In 2017, Ultra received a contract to use
High Temperature Superconducting
(HTSC) technology in support of the US
Navy’s Unmanned Inﬂuence Sweep
System (UISS), a mine countermeasure
system designed for use against magnetic
and acoustic mines. Ultra continues to
differentiate itself from its competitors
through the exploitation of HTSC
technology and is adapting HTSC for use
in shore-based deperming facilities. These
installations are used to reduce the
permanent magnetic ﬁeld properties of
warships and submarines and the use of
HTSC technology greatly reduces shore-
based power requirements. Furthermore,
the lightweight cabling enables the ship or
submarine to be prepared for deperming
much more quickly; thereby increasing
platform operational availability.

Market overview
World tensions continue to grow in the
maritime domain, as Russia, China, North
Korea and Iran are all challenging the
established sea lanes through their desire to
employ a naval presence to control strategic
areas of the world’s oceans. This has sparked
increased naval spending in the procurement
of new platforms and the extensive
modernisation and re-armament of existing
warships. The UK, Australia, and Canada have
recently adopted national shipbuilding
strategies with a view to stimulate long-term
new ship construction to meet evolving
threats. In the US, the Trump administration
has made a 355 ship navy an election promise
and requirements have been established for a
new frigate with speciﬁc focus on increased
lethality and survivability.

Submarine production has increased around
the globe. Australia has recently awarded a
contract to build new conventional
submarines and the US and the UK have both
commenced construction of their new
strategic deterrent submarine ﬂeets. In other
parts of the world the requirement for
increased maritime capability is clear, but
ﬁscal constraints are driving the desire for life
extensions to existing platforms through cost-
effective capability upgrades. Consequently,
the demand for system/sensor upgrades and
technology insertion programmes on existing
vessels is growing, particularly for navies in
emerging nations. There is ongoing pressure
to establish an indigenous capability as part of
any new production or modernisation
programme. Hence, technology transfer is
becoming an increasingly important factor to
win work in the export market.

Market outlook
The Maritime segment is a growing market
where Ultra has developed and maintains
certain highly differentiated technologies that
support niche applications. In the UK, Ultra
continues to provide in service support to the
Type-45 destroyers and Type-23 frigates. The
US Navy has several active warship
production programmes in its quest to reach
a 355 ship Navy and Ultra is well-positioned
on a number of these programmes, including
Flight III of the Arleigh Burke guided missile
destroyers (DDG-51) and replenishment naval
vessels (T-AOX). With the requirement
deﬁnition of the US Navy’s Future Frigate just
being completed, Ultra is well-positioned to
supply a myriad of unique power and
signature management equipment to this
new warship class. The US Navy has been
funding Ultra to develop the next generation
of surface ship radar for a number of years.
The recent spate of at sea collisions involving
US warships has been an impetus to
accelerate the technology development and
introduce an enhanced surface search radar
capability into service as soon as possible.

Elsewhere, Ultra is beginning the transition
from the design and qualiﬁcation of new
development technologies into the
production phase on a number of signiﬁcant
programmes such as the Virginia Class
Submarine (VCS), where long-term
production is well funded, and the new
Columbia Class SSBN, which is projected to
provide 12 new hulls beginning in 2021.

Ultra has followed up on its success in the
Indonesian Navy’s Fatahillah modernisation
programme by winning a number of
international tenders in Turkey, the
Philippines, Australia and Canada to support
both new construction and updates to
existing platforms, underpinning the
continuing demand for warship system and
sensor upgrades and this plays well to Ultra’s
strength of being able to partner with local
industries to provide cost effective and
differentiated naval solutions that meet the
customers’ needs.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 37

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Market-facing segments

Land

Ultra has specialised in-depth knowledge and experience of
implementing Land Open Systems Architecture which define the
integration of power, data and video for vehicles, soldiers and bases.

Revenue by segment
Land

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

• Vehicle systems

• Soldier systems

• Power systems

• Information systems

• Control systems

• Mission systems

• Electronic architectures

• Operating base solutions.

Strategy in action
In September 2017, Ultra launched the
innovative UltraLYNX soldier-worn
electronics system. Through in-depth
knowledge of the UK Generic Soldier
Architecture (GSA) standards, and by
listening carefully to customers
worldwide, Ultra has developed a
standard, capable and ﬂexible smart hub
and integrated connector system which
can be readily and quickly customised to
individual customer requirements.

The unique “smart hub” approach that
Ultra has taken with UltraLYNX has
resulted in intense interest from
customers worldwide, including ongoing
evaluations by the British and US Army,
US Marine Corps and British and US
Special Forces. Police and Fire Services are
also customising and evaluating
UltraLYNX for their speciﬁc use cases.

Market overview
Mounting instability and unpredictability in the
Philippines, Ukraine, North Korea, and Syria are
driving market demand for armoured vehicles.
Growing demand from western nations is
underpinned by the increased US defence
spending in conjunction with the call for NATO
members to increase their defence spending.

The rising likelihood of state-on-state warfare
has generated requirements for lighter tanks,
equipped with sophisticated weapon systems
so as to achieve increased lethality. There is an
increased demand for armoured personnel
carriers, mine-resistant ambush protected
(MRAP) vehicles and unmanned ground
vehicles, all with increased lethality, survivability,
interoperability and reliability. Improved
communications, situational awareness and
vehicle information integration are all
prominent requirements for interoperability for
both new and back-ﬁtted vehicles.

The concept of the dismounted soldier as an
effective electronics and weapons platform is
now widely accepted. Requirements have
been developed in several countries to
maximise dismounted situational awareness
and associated lethality. Ultra is also involved
in initiatives to improve soldier-machine
interfaces both when within the vehicle, as
well as when dismounted and remote from
the vehicle.

% of Group revenue

Market outlook
For military vehicles, Ultra has the full range of
skills and a proven track record, to act either
as an integrator of Vehicle Electronics
Architecture (VEA), or as an electronics sub-
system supplier to vehicle Primes. Ultra has a
wide product range of VEA subsystems and is
actively addressing the growing worldwide
market for high technology vehicle electronics
for existing vehicle upgrades and new vehicles.

As part of the “Army 2020 Reﬁne”
programme, the British Army is currently
undertaking work on many of its vehicles, all
within the next ﬁve-year period. This includes
upgrades and extension programmes on
existing platforms such as the Warrior
Capability Sustainment Programme (WCSP)
and the development and delivery of new
vehicles such as the Ajax development
programme. Ultra has positioned itself on both
platforms and is actively pursuing positions on
new vehicles in other high-growth markets
including Turkey, Saudi Arabia, UAE, India,
Poland, Ukraine and Australia.

The US military vehicle market continues to be
large with wide ranging requirements
including upgrades to the mature Abrams
Tank and Bradley vehicles, as well as new
research and development programmes such
as the Armored Reconnaissance Vehicle (ARV),
Mobile Protected Firepower (MPF), Next
Generation Combat Vehicle (NGCV) and
Maneuver Robotics and Autonomous Systems
(MRAS). Ultra is pursuing niche positions on all
of these platforms.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 38

Ultra Electronics Holdings plc Annual Report & Accounts 2017

2017 Principal risks and uncertainties
Analysing and managing uncertainty

Effective risk management is a fundamental aspect of Ultra Electronics’ operating, ﬁnancial and
governance activities. The Group continually analyses the risks it faces and assesses the effectiveness of
its response to these risks within the control environment. This means that Ultra is able to give early
consideration to emerging risks and this helps it to deliver on its commitments, improve long-term
performance and enhance its reputation in the market.

Profitable growth cannot be achieved without
some degree of considered risk and the Group’s
objective to generate long-term shareholder
value is reflected in Ultra’s appetite for risk.
Ultra’s principal risks reflect the high priority it
places on compliance with all legislative and
regulatory requirements and the maintenance
of high ethical standards across the Group, its
supply chain and in its dealings with its
customers. The Group’s strategies for growth
centre on delivering change programmes that
support the agility of Ultra’s businesses,
encouraging an entrepreneurial culture of
innovation in its people by having a diverse
range of skills and capabilities amongst the
Group’s employees. Ultra has a low-risk
appetite in situations where its culture,
reputation or financial standing may be
adversely affected. However, the Group does
consider taking higher risks where the
opportunity is seen to outweigh the potential
negatives, provided appropriate levels of
mitigating controls are in place. Where safety
may be compromised, Ultra has zero tolerance
to risk.

Risk management and internal control
The Board has overall responsibility for
establishing, monitoring and maintaining an
effective system of risk management,
governance and internal controls. The Board
reviews risk as part of its annual strategy review
process and risk management is a regular
feature on Board meeting agendas. This
provides the Board with an appreciation of the
key risks within the business and oversight of
how they are being managed. The responsibility
for risk oversight is principally delegated to the
Audit Committee with the ongoing review and
challenge of risk management information
provided by the Executive Team.

Risk management
The approach to risk management across the
Group is to focus on the early identiﬁcation of
key risks thereby reducing the likelihood of the
risk occurring and mitigating the effect of any
potential impacts. Over the past year, Ultra has
continued to develop the role of Risk
Champions at all levels of the business so that it
has early visibility of any emerging risks across
different market segments and business units.
The work of the Risk Champions is supported
by the following enhancements which have
commenced or been implemented during this
reporting period:

• An in-house Group Risk and Compliance

Manager was appointed to provide
ongoing development and coordination of
the risk management framework and to
consolidate, challenge and report on all
risk management information. Risk is a
standing agenda item at the Audit
Committee, and the culture of openness is
enabling emerging risks to be highlighted
at Board level

• Deep dive reviews were undertaken in

respect of information security, pensions
and delivering change. They included a
robust review of existing controls,
comparison to industry benchmarks,
consideration of any changes in internal
and external factors and the organisation’s
response to these changes. The output of
the reviews was an evaluation of the
mitigation measures, reassessment of the
risk and its impact on the organisation’s
strategic objectives

The risk management process

Board and Committees

• A watching brief is being maintained in
respect of the economic and political
uncertainties in Ultra’s key markets so that
it responds effectively to the new realities if
there are potential impacts to business

• The risk appetite metrics were reviewed
and updated to reﬂect measures that
provide the organisation with a clear view
on how much risk it is exposed to so that
risks are taken strategically

• An assessment of the Group’s aggregate

risks was undertaken by the Board.

The risk management focus in 2018 will be on:

• Embedding the Risk Management

Framework at business level to ensure
consistency in the reporting and escalation
of risk across the Group and to further
embed a risk culture

• Conducting deep dive reviews of
principal risks on a rolling basis.

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 & Committee
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_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 39

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

2017 principal risks and uncertainties

Risk management in operation
Cyber Security
Globally, the scale and pace of cyber security
incidents has seen a dramatic rise in 2017
with a significant increase in ransomware
attacks against organisations and
institutions. In addition, the introduction of
the General Data Protection Regulation
(GDPR) in May 2018 will increase the impact
resulting from a cyber breach of personal
information. To ensure that Ultra’s response
to the risk is adequate, internal and external
factors that could make the Group
vulnerable, including why it may be targeted
and how a successful attack might impact
the Group, were considered.

Understanding Exposure and Controls
The deep dive review focused on
understanding the type of data Ultra
manages, and why and where it holds the

data. The focus was not just within the
organisation but also across suppliers, cloud
service and critical data feeds. Ultra also
commissioned an independent review of the
effectiveness of its controls in relation to the
level of threat that it faces and its alignment
with industry practice.

Incident Preparedness
The review of preparedness to deal with
incidents considered the Group’s ﬂexibility
and responsiveness as well as dwell time for
malware containment. 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.

Overall risk exposure
Following the Cyber Security independent
review and deep dive, the overall severity of
the risk remains unchanged.

Delivering Change
Ultra Electronics is making significant
investments in new infrastructure to replace
legacy systems and standardise indirect
procurement activities. Other change
initiatives include the consolidation of some
of Ultra’s business units. Given the perceived
impressions that major change projects are
overly ambitious on their costs, time to
complete and achievable benefits, a deep
dive was conducted on this risk and S3 was
used as the basis for the case study.

Understanding controls and
validating beneﬁts
• S3 is an initiative set up to seek to identify

costs savings across Ultra from
standardising various back ofﬁce functions,
improving the buying power of the Group
whilst maintaining the autonomy and
agility of the Ultra businesses

• The deep dive review focused on the

challenges and areas of concern related to
the scale and complexity of the change
initiative, the Group’s ability to realise the
expected beneﬁts as well as its resilience

and readiness in maintaining ‘business as
usual’ during the transformation phase

• In addition to the deep dive, the
effectiveness of existing controls
was reviewed and independent external
assessment of the business beneﬁts
and robustness of the governance
process was undertaken. This included
feedback focus groups, Executive Team
governance over major change
programmes and the auditable and
consistent realisation of beneﬁts

• Improvements were recommended for

extending good practice on controls and
processes across major change
programmes. Business beneﬁts realised
to date were independently veriﬁed and
recommendations on improving the
collation and communication of business
beneﬁts were agreed.

Overall risk exposure
Following the deep dive review, it was
agreed that the overall severity of the risk
following the deep dive remains unchanged
as S3 initiatives are being delivered and
business consolidations take effect.

Risk Management Framework
The Risk Management Framework governs
the approach Ultra takes to managing risk
effectively. The cultures and behaviours
inherent within Ultra (see pages 48-53)
ensure risk consideration and commitment to
proactively managing risk is embedded into
the way it operates.

The Group’s risk management process is
set out in the Risk Management Framework
and facilitates the achievement of the
following objectives:

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

• Allocation of resources for the management

of principal and emerging risks

• Assurance from management that a

particular risk is owned by the individual
best positioned to control/mitigate that risk

• Driving business improvements and

provision of enhanced intelligence for key
decision making

• Support and development of Ultra’s

reputation as a well governed and trusted
organisation.

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’, which ensures 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 required. Risk
leads are identiﬁed for all risks and they have
responsibility for the ongoing monitoring of
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,
bi-annual, quarterly and monthly reporting to
the Board, Audit Committee, Executive Team
and divisional/individual businesses’
management teams.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 40

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Principal risks

Following the November proﬁt warning, the
Board and Executive Team have implemented
enhanced controls and procedures in certain
speciﬁc areas, including strategic planning
and forecasting. In addition, oversight and
management of risk has been further
strengthened with the appointment of an
in-house Group Risk & Compliance Manager.
The process of setting up a Risk Committee
(as a formal sub-committee of the Executive
Team), is underway and will be chaired by the
Executive Team. The Group’s robust response
to the events in 2017 means that the principal
risks and uncertainties which potentially
materially impact the Group’s performance
have not changed signiﬁcantly from those set
out in the Group’s 2016 Annual Report &
Accounts. Each principal risk continues to have
an Executive Team risk lead allocated to it.

In the year, the Board considered the impact of
political and economic uncertainties in its
major markets and the potential risks and

opportunities these may have for the Group.
These include: emerging risks and
opportunities arising as a result of the UK’s
decision to leave the EU; challenges to some of
the long-standing political and economic
conventions in the USA; and geopolitical
tensions and concerns in the former Soviet
Union, on the Korean Peninsula and
elsewhere. A working group which reports
into the Executive Team has been set up to
monitor the development of these external
factors in relation to Ultra’s principal risks. At
present, the Group’s risk exposure remains
largely unchanged by these factors.

The Group’s principal risks are set out below
and on the following pages 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.

No.

Principal risk

Trend

Risk 1. Growth

Risk 2. Delivering change

Risk 3. People & culture

Risk 4. Information management & security

Risk 5. Supply chain

Risk 6. Governance & internal controls

Risk 7. Pensions

Risk 8. Legislation/regulation

Risk 9. Health, safety & environment

Risk 1. Growth

Trend: No signiﬁcant change

Changes during 2017
Although the defence market has been challenging in recent years, there are strong indications of
a return to growth, particularly in the US, as indicated by the Group’s strong order book going into
2018. Political and economic circumstances in some of the Group’s key markets mean that it is
cautiously optimistic about any return to organic growth. The Company’s focus in the year continued
to be on its market-facing segment strategies, improving its planning for future political and
economic developments in its key markets, and exploiting the anticipated market upturn.

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”.

P10-13
Ultra’s business model
and strategies for growth

Mitigations (examples):
• The Group is offsetting challenges in the UK
defence market by expanding in targeted
overseas regions that exhibit long term
growth characteristics

• The market-facing segments enable Ultra to

remain competitive and use the capabilities of
its businesses to deliver enhanced solutions
more effectively to its customers

• Improving the capacity and capability of the
Group’s sales and marketing teams using the
LAUNCH approach and providing training
• Establishment and implementation of rigorous

gate reviews of risk appetite for major
opportunities so that acceptable margin levels
and risk tolerances are maintained

• 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

• A working group reporting to the Executive
Team has been established to evaluate the
impact of recent geo-political events on Ultra.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 41

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

2017 principal risks and uncertainties

Risk 2. Delivering change

Trend: No signiﬁcant change

Changes during 2017
The scale and complexity of change has increased as S3 initiatives and business consolidations
take effect. S3 has adopted a multi-faceted and proactive communication strategy and recruited
specialist skills to augment Group talent in key roles.

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 of business performance.

P22-23
Strategy for standardisation
and shared services (S3)

Mitigations (examples):
• An Executive Team sponsor is allocated to all
major change programmes which are also
monitored on a monthly basis by the Board
• Recommendations arising from the deep dive
review and external review conducted in 2017
are being considered for implementation
• An S3 steering committee, chaired by the
Group Finance Director, meets monthly to
track progress against the plan

• An S3 Communications Manager has been

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 2017
Ultra’s culture and how it is reﬂected across its businesses has been the subject of discussion at both
the Board and Executive levels, especially in the last quarter of 2017. Talent and succession planning
remained a focus for the Executive Team in 2017 and remains on the Board’s agenda as an area of
focus in 2018.

Description
Preserving Ultra’s culture (underpinned by
its behaviours of LEAP: leadership,
entrepreneurship, audacity and paranoia)
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 objectives.

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 would lead to operational
inefﬁciencies and loss of productivity

• Staff morale could be impaired resulting in a

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

• Failure to maintain a strong ethical culture

would increase the Group’s exposure to legal
and regulatory breaches.

P46-57
Sustainability, people and culture

P48-53
Developing Ultra’s people

Mitigations (examples):
• Ultra continues to engage in a number of
initiatives with local schools, colleges and
universities to gain access to the best people
for its apprenticeship and graduate
recruitment programmes. This enables Ultra to
grow a broad range of skills and capabilities
and to remain successful at innovating to
meet customers’ needs

• Ultra’s people and their development are
fundamental to Group success. Employee
development needs form part of performance
and development reviews and are aligned to
employees’ speciﬁc needs

• Employee engagement and morale is measured
through YOURviews surveys. The leadership
teams in the businesses use the survey to
address any areas of concern so that Ultra’s
people remain engaged and committed

• Talent and succession planning has been, and

will continue to be, a focus for the Board

• The annual Organisation, Succession &

Development Plan (OSDP) results in high-
potential employees being identiﬁed and their
development monitored.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 42

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Principal risks continued

Risk 4.

Information management and security

Trend: No signiﬁcant change

Changes during 2017
The CORVID Protect and Ultra approach to security provides a high level of assurance. The global increase
in the incidence and sophistication of cyber security crime means this risk continues to be a priority for the
Company. As such, this risk was the subject of a deep dive review in 2017.

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 the loss
of data and the disruption of 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 of business activity as systems are

cleansed and restored.

P39
Cyber security case study

Mitigations (examples):
• The Group’s information security is provided
through its continued investment in Ultra’s
Cyber Protection Group (part of CORVID
Protect). It provides Group-wide monitoring,
incident response and continued enhancement
of Ultra’s IT systems and processes

• The Board is kept updated on how CORVID
Protect secures Ultra’s network, including
protecting Ultra from phishing attacks

• The Group’s Information Security Policy is being

updated to reﬂect GDPR

• Recommendations arising from the deep dive

review have been implemented

• Intellectual property is addressed in the bid and
contract management process and protected
through information security

• Security clearance processes are in place for

all employees

• Established physical security processes are

implemented at all sites.

Risk 5. Supply chain

Trend: No signiﬁcant change

Changes during 2017
The level of risk remains unchanged 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 to 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.

P46-47
Sustainability

P22-23
Standardisation and Shared Services (S3)

Mitigations (examples):
• Using the visibility created by S3 deliverables to
consolidate the supply chain and to leverage
the commercial scale of the Group

• Building ongoing partnerships with strategic

suppliers and managing major supplier
risks and issues (including single source
arrangements) through the bid management
and contract management policies
• Establishment of regional procurement

councils to target the optimisation of Ultra’s
supply chain for Direct Procurement

• The Board’s commitment to compliance with
the Modern Slavery Act 2015 is contained in
the Anti-Slavery and Human Trafﬁcking
Statement (www.ultra-electronics.com/
investors/anti-slavery-and-human-
trafﬁcking-policy.aspx)

• Business continuity and disaster recovery plans

are in place

• The Group has business interruption, property
damage, professional indemnity and product
liability insurance.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

2017 principal risks and uncertainties

Risk 6. Governance and internal controls

Trend: No signiﬁcant change

Changes during 2017
Ultra does not consider that the level of risk has changed in the year even though the role of Chairman
and Chief Executive is being performed by the Group’s Executive Chairman until a new Chief Executive is
appointed. This is due to the effectiveness of existing controls, ongoing mitigations and the broader
perspective provided by the appointment of two new Non-Executive Directors in 2017.

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.

P61 and 68
Governance and accountability

Mitigations (examples):
• The Group Operating Manual (GOM) 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 2017
Following the closure of the pension scheme to future accrual in 2016, the pension scheme has
increased the hedging of its liabilities. This risk has therefore reduced.

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.

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

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

P18
The Group’s UK defined
benefit pension scheme

Mitigations (examples):
• Annual accounting and triennial pension

valuations are in place and any issues that
may arise are highlighted to the Board

• The pension scheme deﬁcit decreased during
2017 due to improved asset performance and
following the closure of the Group’s UK
deﬁned beneﬁt pension scheme to future
accrual in 2016

• The Pension Trustees and the 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 the Company agreed
to increased hedging of the scheme’s liabilities

• The Board undertakes regular Pension

Strategy Reviews

• Recommendations arising from the deep
dive review conducted in 2017 have been
implemented.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 44

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Principal risks continued

Risk 8. Legislation/regulation

Trend: Increased risk

Changes during 2017
The Company continues to take compliance very seriously and the Board and Executive Team strive to
reinforce an ethical culture. For example, the Group provided additional targeted training to certain
groups of employees on anti-bribery and managing agents. Ultra is proactively working towards GDPR
compliance and has employed legal advisers to help with achieving compliance in this and other
legislative and regulatory changes. The overall level of risk may increase due to various changes in
legislation and regulation.

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.

P73-77
Audit Committee Report

P55
Ultra’s approach to ethics

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

Mitigations (examples):
• The Group Operating Manual is well established

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

and policies and procedures are regularly
updated to reﬂect changing legislative and
regulatory requirements

• 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.

• Regular compliance training is undertaken as

part of Ultra’s commitment to an ethical culture
and individual businesses provide compliance
statements as part of monthly business
performance reporting

• The Ethics Overview Committee provides
independent advice and scrutiny of Ultra’s
business activity. It provides assurance to the
Board that the Group’s undertakings are
transparent and conducted ethically within 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 Board receives regular updates and

presentations on the Company’s legal and
regulatory requirements

• A project has been established to evaluate

the impact of the GDPR and to ensure that Ultra
is compliant with the regulation

• External advice has been sought on the impact

of recent changes to the US tax regime on Ultra.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

2017 principal risks and uncertainties

Risk 9. Health, safety and environment (HS&E)

Trend: No signiﬁcant change

Changes during 2017
Ultra has strong HS&E processes and procedures. The Board has zero appetite for HS&E reportable
incidents. The number of lost time accidents per 100,000 hours reduced in 2017 and the reportable/
recordable accident rate per employee remained unchanged.

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

Potential impact of failure:
• Incidents may occur which could result in

harm to employees and 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.

P56-57
Ultra’s approach to HS&E

Statement of going concern
Ultra’s net debt at 31 December 2017 was
£74.5m. The Group’s committed banking
facilities amount to £466.3m in total, together
with a £5.0m and $10.0m overdraft. The Group’s
revolving credit facility of £300m is denominated
in Sterling, US Dollars, Canadian Dollars,
Australian Dollars or Euros. This facility was
signed in November 2017, and replaces the
previous £100m and £200m revolving credit
facilities. The facility is provided by a group of six
international banks and has a committed
maturity of ﬁve years to November 2022, and
may be extended to a maximum of seven years
subject to lender consent. The facility agreement
permits an additional £150m ‘accordion’ which is
uncommitted and subject to lender consent and
can be used in certain acquisition scenarios.

The Group also holds a $225m term loan which
was established in May 2015. This loan,
denominated in US Dollars, was drawn in full in
August 2015 to complete the Herley acquisition.
$60m is repayable in late 2018 and the loan
expires in August 2019. The Group also has loan
notes in issue to Pricoa which totalled $70m at
31 December 2017 (2016: $70m). $10m will be
repaid on 14 July 2018 and the remaining $60m
will be repaid on 25 January 2019. As well as
being used to fund acquisitions, the ﬁnancing
facilities are also used for other balance sheet and
operational needs, including the funding of day-
to-day working capital requirements. The US
Dollar borrowings also represent natural hedges
against assets denominated in that currency.
Details of how Ultra manages its liquidity risk can
be found in note 22 – Financial Instruments and
Financial Risk Management.

Though global macro-economic conditions
remain uncertain, and there continues to be
uncertainty over the future landscape due to

Brexit, the long-term nature of Ultra’s business
and its positioning in attractive sectors of its
markets particularly in defence and aerospace
which are long-term in nature, 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 2020, to coincide with its review of
the Group’s ﬁnancial budgets and medium-term
forecasts from its Strategic Plan. The level of
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 2020. In making this
statement, the Directors have considered the
resilience of the Group, taking account of its

Mitigations (examples):
• The Board has zero appetite for HS&E risk and

the Group’s leadership is committed to
ensuring that this remains a top priority. Any
material incidents are reported to the Board
along with a correction or mitigation plan
• Near miss reporting has been introduced in
order for Ultra to be proactive in identifying
and taking action on early warning indicators
to prevent serious injury or fatality

• 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.

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 of the Group
over the period. Speciﬁc scenarios modelled (i) the
impact of a 10% year-on year organic revenue
and underlying operating proﬁt* decline during
each of the three years covered by the assessment
period and with operating cash conversion each
year of 70%, and (ii) the impact of no organic
revenue or underlying operating proﬁt* growth
during the three years covered by the assessment
period and with operating cash conversion each
year of 50%. In each scenario the Group remains
well within its permitted ﬁnancial covenants. The
Directors have determined that the three-year
period to December 2020 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 into
account of the Group’s ﬁnancial projections
together with available cash and committed
borrowings, ﬁnancial covenants and 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.

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Ultra Electronics Holdings plc Annual Report & Accounts 2017

Sustainability
Making a difference

Ultra recognises that the success and sustainability of the business is
enhanced by positive relationships built with stakeholders and
continues to focus on value creation for all: shareholders, customers,
employees, 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 relationships
with educational establishments in the
surrounding communities offering work
placements and visits to businesses as part of
school, college and university courses, as well
as providing interview practice, support for
lessons, careers events and school science
fairs. In the UK, Ultra is involved in nationwide
initiatives on STEM* education and also offers
Arkwright scholarships: a scholarship that
sponsors A-level students looking to pursue a
career in engineering. Ensuring a long-term
supply of talent to the business is essential
and Ultra commits itself to developing its
future talent pipeline in schools and higher
education institutions.

Fundraising and volunteer work in the local
community and at a national level is
something the Group is keen to encourage. It
actively supports employees who undertake
voluntary activities. Some noteworthy
examples in 2017 include:

• CIS continues to operate its “CIS in the
community” policy which provides time
and matches funding for employees’
charitable activities

• ATS received the Distinguished Partnership
Award from the Del Valle Independent
School District for the fourth consecutive
year for outstanding contributions
throughout the year to its neighbouring
Smith Elementary School

• TCS and École de technologie supérieure

were awarded the 2017 prize for
“Technology Partnership” from ADRIQ
(Association des directeurs de recherché
industrielle du Quebec).

P51-52
Securing the Talent pipeline

*STEM: Science, Technology, Engineering and Mathematics

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Sustainability, people and culture

Shareholders:
The Group’s primary objective is to deliver
long-term shareholder value.

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
commitments. Ultra’s businesses aim to build
long-term, mutually beneﬁcial relationships
with their customers and to become part of
the customers’ extended enterprise. Examples
from 2017 that highlight Ultra’s commitment
to its broad customer base are:

• Herley was presented with both the

“Raising the Bar” and “Return to Green”
coins by Lockheed Martin. This was for its
outstanding performance in support of the
Fleet Ballistic Missile programme
and for dedication and outstanding
support, respectively

• 43 employees from NCS were invited to
spend the day at the Tank Museum and
received thanks from EDF for their work
on the ﬁrst Ultra-manufactured Neutron
Flux Detector

• Airport Systems was awarded IT Company

of the Year by BUILD magazine.

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 solid 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
crucial. 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:

• Employees from NCS participated in a

‘Productivity through People’ workshop
which aims to increase productivity through
empowerment of the workforce

• Command & Sonar Systems launched
a “Make it Happen” management
development programme aimed at
developing managers in readiness for
promotion

• 3eTI implemented the “Walk the Wall”

exercise, enabling the Senior Management
Team to meet and discuss each employee’s
overall performance and goals. 3eTI has also
introduced quarterly recognition awards for
employees nominated by their peers or
managers for going “above and beyond”.

The environment:
Ultra is committed to implementing and
applying 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 to its
suppliers to reduce their environmental impact.

Initiatives that have taken place within the
Group include:

• Avalon installed solar panels on its facilities

in an initiative to reduce energy
consumption requirements

• 3eTI, NSPI and the Ocean Systems

Braintree facility scored 100% in their
Environmental Audit

• USSI was registered as a Conditionally

Exempt Waste Generator, which no longer
requires waste reporting, due to efforts in
reducing landﬁll waste.

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.

“

The Group believes that, to ensure its
continuing growth and success, its initiatives
for talent development and employee retention
are crucial.

”

P04
Ultra’s customers

P48-53
Ultra’s people

P57
The environment

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Ultra Electronics Holdings plc Annual Report & Accounts 2017

Our people and culture
Developing Ultra’s people

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

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Sustainability, people and culture

“

Taking over the
position as Towed
Array Project Manager
has been my biggest
challenge to date…

”

The right people
Ultra believes that having the right people is
the Group’s most important asset. Across the
Group, it is recognised that Ultra is successful
in innovating to meet customers’ needs due to
the broad range of skills and capabilities of its
employees. Therefore, people and their
development are fundamental to the Group as
it strives to achieve an efﬁcient organisation
with engaged and committed people.

Domain expertise
Ultra recognises that one of its commitments
to customers is to ensure that the Group’s
domain expertise is maintained. This is
achieved by ensuring that employees maintain
their 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. The Group ensures that it has
the right people to work with customers to
support their needs by understanding their
problems and creating winning solutions.

How Ultra manages its people
Ultra continues to value 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 actively invests in
and supports the training and
development of its employees.

”

People in action
Sarah-Lynn MacKenzie joined Ultra as
a Graduate Mechanical Engineer in 2014.
Over the last three years, Sarah-Lynn has
been involved in increasingly complex
design work and is now Towed Array
Project Manager at Maritime Systems.

What is your role within Ultra?
Within my role as Towed Array Project
Manager, I manage the scheduling of
towed array builds in order to meet
external deadlines. To do this I interface
with the production team to ensure
efﬁciency and teamwork, with the Senior
Management Team to provide various
forecasts and updates, and with the
customer to provide status reports and
array ship dates.

How has your role evolved during
your time with Ultra?
I started at Ultra three and a half years ago
as a Graduate Mechanical Engineer using
software to analyse the acoustic abilities
of our new projectors. As I became more
familiar with the towed array technology
at Ultra, I migrated into a mechanical
design role. This role grew to the point
where I was also creating numerous
design documents for internal and external
use that used cross-discipline knowledge
to capture electrical, mechanical, and
acoustic design. From there I was recently
promoted to my current position as
Towed Array Project Manager.

What have you enjoyed most about
your role?
I have enjoyed being exposed to various
ﬁelds of work within Ultra. This exposure
has allowed me to grow within the
company in a self-directed manner based
on my interests. Taking over the position
as Towed Array Project Manager has been
my biggest challenge to date, but has also
been the work from which I have derived
the most satisfaction.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 50

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Developing Ultra’s people continued

Ultra is committed to securing the talent pipeline and developing people to ensure the continued
growth and success of the Group. Resetting the Group’s focus on its people ensures that the right
people are in the right roles, with the right skills at the right time. Furthermore, businesses are
responsible for and are encouraged to develop their teams and individuals continuously, which will
enable people to grow with the business.

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

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.

LAUNCH
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?

LEAP
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.

What people mean to Ultra
Ultra’s aim of delivering an efﬁcient
organisation, with engaged and steadfast
people to meet the Group’s business
commitments, is a fundamental goal that 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.

Culture
The Group believes that 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. Ultra
recognises that maintaining a strong culture is
essential. 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.

Ultra_AR_2017_Narrative_AW_Layout 1 09/03/2018 11:28 Page 51

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Sustainability, people and culture

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, building relationships with
schools and colleges through various means.
These include offering work experience,
longer work placements or internships, visits
as part of AS-level courses, interview practice
sessions, careers events, and Ultra employees
supporting both lessons and after school
clubs. Examples include:

• Ultra became an Ofﬁcial Supporter of the

“Race for The Line” Classroom Project and
National Competition, an initiative set up
by The Learning Partnership (TLP) which
enables teachers to introduce STEM*
classroom projects for students in years 8
and 9, exploring concepts such as
aerodynamics, Newton’s Law of Motion,
maths and physics

UK data

Apprentices

University placement students

Category

Unit trusts

Mutual fund

Pension funds

Other managed funds

Investment trust

Custodians

Private investor

Exchange-traded fund

Insurance companies

Sovereign wealth

Charity

Hedge fund

Other

Total

Holding

34,832,078

12,680,977

11,106,771

5,269,826

3,024,314

3,019,085

2,696,731

1,815,747

1,284,689

1,009,560

550,233

440,020

1,193

44.81

16.31

14.29

6.78

3.89

3.88

3.47

2.34

1.65

1.30

0.71

0.57

0.00

77,731,224

100.00

Shareholder analysis by size of shareholding as at 31 December 2017

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

21 March 2018

5 April 2018

6 April 2018

27 April 2018

3 May 2018

6 August 2018

22 September 2018

Total number

of holdings % of holders
8.57
6.16
21.29
14.40
14.40
15.97
3.75
4.43
2.69
8.34

153
110
380
257
257
285
67
79
48
149

Total number
of shares
3,196
8,918
69,534
94,979
186,238
611,929
470,772
1,259,482
1,744,462
73,281,714

%
issued capital
0.00
0.01
0.09
0.12
0.24
0.79
0.61
1.62
2.24
94.28

1,785

100.00

77,731,224

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_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 13

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 6-94 was approved by the Board on
5 March 2018 and signed on its behalf by:

Douglas Caster, Executive Chairman
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.

“

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

”

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 14

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Nomination Committee Report

“

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

”

Dear Shareholder
The Nomination Committee met five times in
2017. At the start of the year, our focus was on
undertaking a rigorous review of the tenure of
long-serving Non-Executive Directors, and
succession planning to ensure a balance of skills,
experience and knowledge was maintained on
the Board and its Committees. We also reviewed
the succession planning and career progression
of senior employees, and the recruitment and
development of talent across the Group. After

Rakesh Sharma stepped down as Chief Executive
on 10 November 2017, our main focus has been
on ensuring a robust selection and recruitment
process for a new Chief Executive.

We currently believe that the Board and its
Committees continue to have the appropriate
mix of skills and experience to operate effectively,
but of course this is kept under regular review.
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 66.

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 2017

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.

Succession planning

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

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

Director was due to expire in April 2018, but he was asked by the Board to remain for a further year
as Senior Independent Director. 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, all of which was considered to be especially invaluable in a time of
signiﬁcant organisational change.

• Succession planning continued to be an area of focus for the Committee during 2017, and in

particular, the search for a new Chief Executive. The executive search ﬁrm Korn Ferry was engaged
to identify potential candidates for the position of Chief Executive after Rakesh Sharma stepped
down on 10 November 2017. The Company does not have any other connection with Korn Ferry.
The role speciﬁcation and selection criteria was determined by the Nomination Committee. The
curricula vitae of the candidates were considered by the Nomination Committee. A sub-committee
of the Committee is currently in the process of interviewing the short-listed candidates and will
select those candidates it considers should go through to ﬁnal interviews. Each member of the
Nomination Committee will be invited to attend the ﬁnal interviews. Following this process, the
Nomination Committee will meet to agree upon the successful candidate before any
recommendation is put to the Board.

• In consideration of Executive-level succession planning, 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 Managing Director/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:

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

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

Continued overleaf >

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 15

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Nomination Committee Report continued

How the Nomination Committee spent its time in 2017 continued

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.

The Committee’s focus for 2018
In 2018, the focus of the Nomination
Committee will be to:
• Appoint a new Chief Executive
• Identify a replacement for Sir Robert

Walmsley as Senior Independent Director

• Review and consider strengthening the

position of Executive Directors on the Board as
part of the Committee’s regular review of the
Board’s composition.

Diversity
Board Diversity Policy
The Board Diversity Policy was implemented with
effect from 29 July 2013. The key statement and
objectives of that policy are set out below.

Statement
A Board composed of the right balance of skills,
experience and diversity of views is best placed to
support a company in its strategic objectives. The
Board recognises the benefits of diversity. Diversity
of skills, background, knowledge, international
and industry experience, and gender, amongst
many other factors, will be taken into
consideration when seeking to appoint a new
Director to the Board and all Board
appointments will always be made on merit.

Objectives
The Board will ensure Directors have an
appropriate mix of skills and experience and
bring independent character and judgment.

• The Board appointments of Geeta Gopalan and Victoria Hull were agreed with effect from

28 April 2017.

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

The Board will
ensure Directors
have an appropriate
mix of skills and
experience and
bring independent
character and
judgment.

The Board believes that this is best achieved by
continuing its broad, diversity-aware “best person
for the role” approach to recruiting, regardless of
age, disability, gender re-assignment, marriage or
civil partnership, pregnancy or maternity, race,
religion or belief, sex or sexual orientation. For
this reason, the Board has chosen not to set any
specific objectives, but will instead continue to
maintain its practice of embracing diversity in all
its forms when compiling a shortlist of suitable
candidates and recommending any future Board
appointments.

Progress against the Board Diversity Policy
Following the appointment of Victoria Hull and
Geeta Gopalan with effect from 28 April 2017,
the proportion of female members of the Board
is currently at 29% (2/7 Directors). There were
no women on the Board from March 2016 until
the appointments of Geeta and Victoria. The
Board believes that these appointments not only
contribute to greater diversity at Board level, but
are also important in Ultra’s business sector,
which until recently has traditionally been
regarded as “male”, with a lower level of female
participation compared with other industries.

The Committee recognises that diversity is more
than just gender-based, and will continue to
ensure that it uses rigorous recruiting practices
to ensure the best candidates are nominated for
appointment to the Board, based on objective
requirements and assessments, whilst taking
into account diversity in its broadest sense.

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 55-56.

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 16

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Audit Committee Report

“

As the Chairman of the Audit

Committee, I am pleased to present our
Audit Committee Report for the year
ended December 2017.
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 page 68.
An assessment of the Group’s principal risks and
uncertainties can be found on pages 38-45 and
the going concern and long-term viability
statements can be found on page 45.

As we indicated in the 2016 Report, in 2017, the
Committee considered the impact of the April
2016 version of the Code on the Committee’s
work, conducted a “deep dive” into the
“delivering change” risk (amongst others, as
highlighted below), and reviewed Ultra’s tax
strategy statement in line with the Finance Act
2016. In addition, we oversaw the development
of the Company’s Risk Management Framework,
with a particular focus on business-level risks
(including approving the appointment of
Divisional and business-level “risk champions”
and reviewing business-level “deep dives”). The
GDPR was, and continues to be, a focus area for
the Committee.

In 2017, we also oversaw an external audit
undertaken by Deloitte (including reviewing the
matrix of coverage and ensuring that the audit
scope was in line with the scope of such reviews
undertaken by Ultra’s peers). The impact of IFRS
15 on the Group was assessed by KPMG, across
each of the 18 businesses in the Group, a process
that was designed and implemented, and its
results reviewed, by the Committee.

John Hirst, Chairman of the Audit Committee

Composition
The composition of the Committee is set out on
pages 58-59. 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 pages 58-59.

Meetings and attendance
The Committee met five times during the year
under review. In addition to the members of the
Committee, regular attendees included the
Executive Chairman and the Group Finance
Director. The Chief Executive and the Group
Marketing Director each also regularly attended
Committee meetings prior to their departure
from Ultra. The General Counsel & Company
Secretary 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 2017, 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 is committed to
ensuring it has robust
and effective risk
management and
control processes.

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 17

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Audit Committee Report continued

How the Audit Committee spent its time in 2017

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 businesses with the Group’s Business Continuity and

IT Disaster Recovery Policies.

• The Committee discussed the Internal Controls Status Report which summarised the results from

the six-monthly Divisional internal 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.

• Risk “deep dives” were conducted into the following areas: pension and pension strategy, cyber, and
“delivering change”, and improvements in the relevant processes were actioned by the Company.

• The Committee considered reports on known or suspected fraud.

Further details of the approach to risk management can be found on pages 38-45.

• Following its review of the adequacy of the internal control framework for the Group, 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, and considered the controls around
the S3 Programme rollout (with the follow-up report due in 2018), the Group’s bid review process
and month-end process.

• 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_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 18

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Update on the actions reported in the 2016 Annual Report & Accounts

Areas of focus

Actions taken

Considering the impact of the April 2016
version of the Code on the Committee’s work

Briefing papers in respect of the Committee's continued compliance with the Code were presented
to the Committee.

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

A “deep dive” into the “delivering change” risk was undertaken and the relevant processes
actioned by the Company.

Reviewing Ultra’s tax strategy statement in
line with the Finance Act 2016

Ultra’s tax strategy statement was reviewed in line with the Finance Act 2016 and recommended
changes were implemented.

The Committee’s focus for 2018
In addition to the annual routine matters for
consideration, the main areas of focus for the
Committee for 2018 will be:
• Focusing on the risks highlighted in the 2017
internal audit, including the S3 Programme
rollout, the bid review process and the
month-end process

• Conducting risk “deep dives” into the

following areas: “innovation and
development” and “supply chain”

• Overseeing the implementation of the GDPR

throughout the Group

Significant financial judgements and
financial reporting for 2017

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

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

IFRS 15

The Committee considered the impact of IFRS 15 on the Group.

Long-term contract accounting

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

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
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.

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.

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 Internal
Control Meeting (DICM) meetings are attended
by the Group Finance Director, the Divisional
Finance Director and by Internal Audit.

At the DICM 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.

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

Following the November proﬁt warning, the Board
and Executive Team have implemented enhanced
controls and procedures in certain speciﬁc areas,
including strategic planning and forecasting.

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 19

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 that 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.

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, is 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.

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.

The Committee believes that sufficient and
appropriate information is obtained 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
that the audits had been effective. In addition,
the Committee concluded that Deloitte was both
independent and objective and that the
reappointment of Deloitte as external auditor
should be recommended to the shareholders.
Accordingly, a resolution to reappoint Deloitte
will be put to shareholders at the 2018 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 that 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.

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 performance,

effectiveness and
independence of the
Company’s External
Auditor, Deloitte, is
reviewed annually by
the Committee.

”

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 20

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

“

The Internal Audit
process, carried out by
PwC, and the Group’s
internal control
framework help to
protect the Group
against fraud.

”

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 that other potential providers
are adequately considered. The fees in relation to
the proposed acquisition of the Sparton
Corporation were reviewed and agreed in line
with this process. 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 certified to the Company that it is acting
independently and that, after review, the
Company (through the Chairman of the Audit
Committee and the Group Finance Director) has
satisfied itself of the auditor’s independence. 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.

The EU audit legislation came into effect on
1 June 2016. For the year commencing
1 January 2018, 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 Committee considers that certain non-audit
services should be provided by the external
auditor, because its existing knowledge of the
business makes it the most efficient and effective
way for non-audit services to be carried out. The
majority of non-audit fees in 2017 were incurred
in respect of the work required on the class 1
proposed acquisition of the Sparton Corporation.
In awarding this non-audit work to Deloitte, the
Committee took account of Deloitte’s knowledge
of the Group as auditor, the benefits of Deloitte
reviewing the financial data in detail before
announcement, and considered Deloitte able to
provide an effective service.

The fees paid to Deloitte in respect of audit and
non-audit services are shown on page 112 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.

Fraud
The Internal Audit process, carried out by PwC,
described on page 76, 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 each 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 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 2017, six reports were filed
via this system (three in respect of conflicts of
interest, one alleging threatening behaviour, one
relating to perceived discrimination or
harassment, and one seeking information for a
different service). Each of these reports was
investigated fully at the relevant time, responses
were provided promptly via the system, and the
matters were subsequently closed.

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 regarding compliance with Ultra’s
anti-bribery policies. The Audit Committee Report
was approved by the Board on 5 March 2018
and signed on its behalf by:

John Hirst, Chairman of the Audit Committee

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 21

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Remuneration Report

“

As the Chairman of the Remuneration

Committee, I am pleased to present the
Remuneration Report for the financial
year ended 31 December 2017.
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 2017. 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 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 Remuneration Policy
was implemented in the financial year ended
31 December 2017 and how the
Remuneration Policy will be implemented in
the financial year ending 31 December 2018.

Ultra’s Remuneration Policy was put to a
shareholder vote at the last AGM, where it
received a 93.11% vote in favour. The
Committee is grateful for the support.

Board changes
During the year, the Committee had to consider
the leaver terms of Rakesh Sharma as Chief
Executive and Mark Anderson as Group Marketing
Director. The leaver terms, which can be found on
page 89 of this report, are in line with the
Remuneration Policy. The Committee also
considered the terms of Douglas Caster’s
appointment to the interim role of Executive
Chairman, which are also in line with the Policy.
The Committee noted Douglas’s two existing
Non-Executive roles, of which one is at a
non-listed company, and were comfortable that
he would have sufficient time available to fulfil
his role as Executive Chairman until a successor
to Rakesh Sharma could be found.

Performance and reward during 2017
In 2017, revenue and underlying operating profit*
were £775.4m (2016: £785.8m) and £120.1m
(2016: £131.1m) respectively; underlying earnings
per share* were 116.7p (2016: 134.6p); operating
cash flow was £116.5m (2016: £120.4m); and
total shareholder return was -2% (2016: 8%).

*see footnote on page 150

Bonuses for 2017 were based on financial and
strategic measures. The underlying profit before
tax threshold was not met and no bonus was
payable for this element. Although the operating
cash flow threshold was met, this is only paid if
the profit threshold is met. As a result of not
meeting threshold on the profit element, no
bonus is payable in relation to the financial
measures. Based on the strategic targets set at
the start of the year, the outturn for the Group
Finance Director, and for Mark Anderson (the
former Group Marketing Director who, in
accordance with his leaver terms, would be
entitled to a pro-rata bonus for the period
worked), was 10% of both their maximum
opportunity. The Committee has considered
whether an annual bonus payment, in the
context of the Company’s challenging year, was
appropriate. The Committee has determined that
no annual bonus will be paid to the Group
Finance Director or to Mark Anderson for the year
ended 31 December 2017. In accordance with his
respective leaver terms, Rakesh Sharma was not
eligible to be considered for a bonus. The 2015
LTIP awards, which had been due to crystallise in
2018 based on three-year TSR and EPS
performance to 31 December 2017, will not vest
as a result of performance targets not being met.

Key activities of the Committee during 2017
In addition to the board changes outlined
above, the Committee also oversaw activities
undertaken to implement the new share plans
as approved at the 2017 AGM and towards
compliance with gender pay gap reporting
requirements. The Committee reviewed the
salaries of the Chief Operating Officer and the
three Divisional Managing Directors. The
Committee also carried out a tendering exercise
leading to the reappointment of AON as
advisers to the Committee.

Implementation of the Policy for 2018
In line with the Remuneration Policy, the Group
Finance Director was appointed in 2016 with a
salary below competitive levels. Following a
10.3% increase in 2017 his salary will be
increased by 9.4% effective 1 April 2018 to an
industry competitive level of £350,000, reflecting
his performance to date and the fact that he has
gained further experience in the role. The annual
bonus opportunity for the Group Finance
Director remains 125% of base salary, with 20%
of any bonus deferred for three years. Metrics
and weightings will remain unchanged, with
25% of maximum payable based on a profit

target and 75% based on an operating cash
flow target. The Committee intends to grant a
Long-Term Incentive award of 125% to the
Group Finance Director, with metrics and
weightings unchanged. Once a suitable
candidate is identified, the Committee will
consider the terms for a new Chief Executive,
which will be in line with the Policy.

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

£775.4m -1.3%
2016: £785.8m

Underlying operating proﬁt*

£120.1m -8.4%
2016: £131.1m

Underlying earnings per share*

116.7p
2016: 134.6p

Operating cash ﬂow

-13.3%

£116.5m -3.2%
2016: £120.4m

Total shareholder return*

-2%

2016: 8%

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 22

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

2. DIRECTORS’ REMUNERATION POLICY

The Policy described in this section was approved by shareholders at the 2017 AGM on 28 April 2017. Minimal wording changes have been made to the Policy
below to reflect the approval of the Long-Term Incentive Plan (“LTIP”) at last year’s AGM and to remove the legacy pension arrangement for the former Chief
Executive. The full version of the Policy approved by shareholders can be found in last year's Annual Report available online at www.ultra-electronics.com.

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.

How the remuneration element
supports our strategy

Operation of the
remuneration element

Maximum potential

Performance targets

SALARY

Reflects the value of the
individual and their role and
responsibilities

Reflects underlying
performance of the individual

Provides an appropriate level of
basic fixed income avoiding
excessive risk arising from over-
reliance on variable income

Normally reviewed annually,
effective 1 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_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 23

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Remuneration Report continued

2. DIRECTORS’ REMUNERATION POLICY continued

How the remuneration element
supports our strategy

Operation of the
remuneration element

Maximum potential

Performance targets

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

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

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

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

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

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

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

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

Up to a maximum of 20% of base
salary for Executive Directors

n/a

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

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

n/a

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 24

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

How the remuneration element
supports our strategy

Operation of the
remuneration element

Maximum potential

Performance targets

SHARE OWNERSHIP GUIDELINES

To provide alignment of
interests between Executive
Directors and shareholders

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 that the
Company attracts Non-Executive
Directors of the highest calibre and
with the right skills, knowledge and
experience to support our strategy

The Chairman/Executive 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:

(3) The choice of the performance metrics

(1) A description of how the Company intends
to implement the Policy in 2018 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.

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
Group. The performance conditions
applicable to the LTIP 2018 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

performance conditions.

(5) As highlighted above, Ultra has a share

ownership policy which requires the Executive
Directors to build up and maintain a target
holding equal to 200% of base salary. Details
of the extent to which the Executive Directors
had complied with the policy are set out on
page 89.

(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.

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 25

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Remuneration Report continued

2. DIRECTORS’ REMUNERATION POLICY continued

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.

Executive Chairman
Remuneration composition levels (%)

Max

Target

Min

574

£’000 0

200

400

600

800

1,000

Group Finance Director
Remuneration composition levels (%)

Max

Target

Min

1,305

9 24

911

430

£’000 0

270

540

810

1,080

1,350

n Salary
n Pensions/benefits

n Annual bonus
n Long-term share awards

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

1 April 2018.

(2) Benefit values for 2018 have been based on 2017 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 125% of salary for
the Group Finance Director 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 right person for the job.
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
that 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 such 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
commitments. 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

D. Caster*
A. Sharma

Effective date
of contract

Notice
period

10 Nov 2017
3 months
2 May 2016 12 months

* As Executive Chairman.

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 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_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 26

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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.

Our voting result at the 2017 Annual
General Meeting was 99.33% in favour
of the Annual Report on Remuneration.

99.33%

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 relevant Executive
Director’s service contract may deviate from the
terms of the Ultra exit policy, and, as long as the
terms set out in such service contract are no more
beneficial for the relevant Executive Director than
the Ultra exit policy, the terms set out in the
relevant service contract will prevail.

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 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 1, 2
M. Broadhurst
G. Gopalan
J. Hirst
V. Hull
Sir Robert Walmsley

Date of
renewal
21 Apr 2017
2 Jul 2017
28 Apr 2017
1 Jan 2018
28 Apr 2017
31 Jan 2018

Notice
period
Nil
Nil
Nil
Nil
Nil
Nil

1 As Chairman.
2 D. Caster was appointed by the Company

as Non-Executive Director and Chairman on
21 April 2011 under a letter of appointment
dated the same date. As noted above,
D. Caster’s contract as Executive Chairman
is effective from 10 November 2017.

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 2017 Annual General
Meeting, 99.33% of our shareholders voted in
favour of the Annual Report on Remuneration
and 93.11% voted in favour of the
Remuneration Policy.

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 27

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Remuneration Report continued

3. ANNUAL REPORT ON REMUNERATION

Implementation of the Directors’ Remuneration Policy in 2018
A summary of how the Directors’ Remuneration Policy will be applied for the year ending 31 December 2018 is set out below.

Salaries
Current Executive Chairman and Executive Director salary levels, and increases effective in April 2018, are as follows:

D. Caster
A. Sharma

2018
Salary
£’000

550
350

2017
Salary
£’000

550
320

Increase
awarded from
1 April 2018
%

0.000
9.375

Reflecting the fact that his role of Executive Chairman is an interim appointment until a successor is appointed, Douglas Caster will not receive an increase.
Amitabh Sharma will receive a base salary of £350,000 from 1 April 2018. In line with the Remuneration Policy, Amitabh Sharma was appointed with a salary
below competitive levels and his salary has now been increased to an industry-competitive level following two increases.

Directors’ pension entitlements
Under the agreement entered into on becoming Executive Chairman, Douglas Caster is not entitled to become a member of the defined contribution
scheme and does not receive a cash supplement in lieu of pension.

Amitabh Sharma is eligible to participate in the defined contribution scheme, receiving annual company contributions of 18% of salary. He can elect to
receive cash supplements in lieu of pension contributions on a cash-neutral basis where he has exceeded the annual allowance or the lifetime allowance.

Non-Executive Directors’ fees
Non-Executive Directors’ fees will remain unchanged from 1 April 2018. The fee structure is as follows:

Chairman
Non-Executive Director
Committee Chair

Fees
£’000

202
53
5

Annual bonus for 2018
The maximum bonus for Executive Directors in 2018 will be 125% of base salary; 20% of the bonus paid will be deferred into Ultra shares for three
years. The Executive Chairman is not eligible for a bonus in respect of 2018.

Up to 25% of maximum will be payable for the achievement of an agreed profit target and up to 75% payable for the achievement of an agreed
operating cash flow target. 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 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 2018
Consistent with the Directors’ Remuneration Policy, the Committee intends to grant an annual LTIP award in the form of shares worth 125% to salary for the
Group Finance Director during 2018. The Committee will consider an award to the future Chief Executive on their recruitment and will ensure that any award is
in line with the remuneration policy. The Executive Chairman will not receive an LTIP award.

For 2018, 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_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 28

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Long-term awards to be granted in 2018 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:

2017
Executive Directors
D. Caster 1, 2
R. Sharma 4, 5
A. Sharma
M. Anderson 6

Non-Executive Directors
D. Caster 3
M. Broadhurst
G. Gopalan 7
J. Hirst
V. Hull 7
Sir Robert Walmsley

Basic
salary/
fees

£’000

78
546
312
215

184
58
35
58
35
58

Benefits 8

Pension9

Subtotal

£’000

bonus10

£’000

LTIP 11

Subtotal

£’000

Total

£’000

Annual
performance

3
20
17
22

-
-
-
-
-
-

-
199
56
39

-
-
-
-
-
-

81
765
385
276

184
58
35
58
35
58

-
-
-
-

-
-
-
-
-
-

-
-
-
-

-
-
-
-
-
-

-
-
-
-

-
-
-
-
-
-

81
765
385
276

184
58
35
58
35
58

1,935

Total

1,579

294

1,935

1 Douglas Caster transferred from Chairman to Executive Chairman on 10 November 2017.

Remuneration is shown in respect of his time as Executive Chairman.

7 Geeta Gopalan and Victoria Hull joined the board on 28 April 2017.
8 Benefits comprise: taxable car benefit, life assurance and private medical insurance

2 Douglas Caster is a Non-Executive Director of Morgan Advanced Materials and

(Douglas Caster does not receive private medical insurance).

Non-Executive Chairman of Metalysis. Since his appointment as Executive Chairman,
Douglas received fees of £23,976 in aggregate in relation to these roles.

3 Douglas Caster transferred from Chairman to Executive Chairman on 10 November 2017.

Remuneration is shown in respect of his time as Chairman.

4 Rakesh Sharma ceased to be a Director on 10 November 2017.
5 Rakesh Sharma is a Non-Executive Director of PayPoint. For his tenure as Chief Executive

during 2017, Rakesh received fees of £23,300 in relation to this role.

6 Mark Anderson ceased to be a Director on 1 June 2017 and left the Group on

31 October 2017. See page 89 for further details of Mark Anderson’s exit package.

9 Pensions: Rakesh Sharma received a cash supplement in lieu of pension contribution

of 36.4% of salary. Amitabh Sharma, who is an eligible member (and Mark Anderson,
who was an eligible member) of the defined contribution scheme, received pension
contributions of 18% of basic salary. Amitabh Sharma can also elect to receive cash
supplement given in lieu of pension contributions on a cash-neutral basis where he
has exceeded the annual allowance or the lifetime allowance.

10 20% of this bonus is deferred into shares for three years.
11No current Executive Directors have LTIP awards vesting in the year.

*see footnote on page 150

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 29

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Remuneration Report continued

3. ANNUAL REPORT ON REMUNERATION continued

Single total figure of remuneration – Audited continued

Benefits1

Pension2

Subtotal

Annual
performance
bonus

LTIP 3

Subtotal

£’000

2016
Executive Directors
R. Sharma
A. Sharma
M. Anderson
M. Waldner4

Non-Executive Directors
D. Caster
M. Broadhurst
G. Gopalan
J. Hirst
V. Hull
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 Benefits comprise: taxable car benefit, taxable fuel benefit/fuel allowance, life assurance and private medical insurance.
2 Pensions: Rakesh Sharma’s pension was calculated in accordance with the rules of the defined benefit scheme. Amitabh Sharma, who is an eligible

member (and Mark Anderson, who was an eligible member) of the defined contribution scheme, received pension contributions of 18% of basic salary.
Amitabh Sharma can also elect to receive cash supplements given in lieu of pension contributions on a cash-neutral basis where he has exceeded the
annual allowance or the lifetime allowance.

3 The 2014 LTIP awards which had been due to crystallise in 2017 did not vest. The aggregate gain made by the Directors under the LTIP during the year was £nil.
4 Mary Waldner left the group on 16 March 2016, and therefore was not eligible for a bonus in respect of 2016 performance.

Annual bonus for year under review – Audited
Annual bonuses in relation to 2017 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 20 for details.

The bonus targets set by the Committee for 2017 were: a maximum of 28.8% of salary (subject to the achievement of £123.0m* underlying profit
before tax); and a maximum of 86.2% of salary (subject to achieving an underlying operating cash flow of £120.9m* 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 10% 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

110,700

67,300

Maximum
£’000

123,000

120,900

Actual
achieved
£’000

110,002

116,507

Bonus
payable
%

** Operating cash flow is payable only if the profit element achieves threshold and therefore no bonus is payable for this element.

Director

Amitabh Sharma

Mark Anderson

Strategic goals

• Successful implementation of CSS and PCS ERP systems in accordance with S3 strategy

• Achieve a book to bill of £850.8m (excluding acquisitions and divestments)

In addition, the Committee assessed performance against the strategic goals which were based on the following:

The Committee determined that bonuses of 10% of salary (max 10%) would be payable to Amitabh Sharma. However, 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. The Committee has considered whether an annual bonus payment, in the context of the
Company’s challenging year is appropriate. The Committee has determined that no bonus will be paid to the Group Finance Director (or Mark Anderson
who was eligible for a bonus, pro-rata for the period worked).

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 30

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

LTIP vesting for year under review – Audited
No awards vested to Executive Directors in 2017.

Under his leaver terms, Rakesh Sharma’s existing awards under the LTIP will lapse. Under his leaver terms, Mark Anderson’s existing awards under the LTIP
shall vest at the normal time in accordance with the rules of the LTIP, pro-rated to reflect the proportion of each performance period completed. The
following provides the outcome of the performance conditions of these 2015 awards.

The LTIP awards granted in 2015 were based on performance to the year ended 31 December 2017. 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

2015: 0.6%
2016: 8.6%
2017: -13.3%

n/a

The awards for those former Executive Directors granted 2015 LTIP awards therefore lapsed.

Executive

A. Sharma (if applicable)

R. Sharma

M. Anderson

Number
of shares
at grant

Number
of shares
to vest

Number
of shares
to lapse

Total

Estimated
value1
£

37,379

14,207

n/a

37,379

14,207

1 The estimated value of the vested shares is based on the average share price during the 3 months to 31 December 2017.

Share awards granted during the year – Audited

R. Sharma 1, 2

A. Sharma 2

M. Anderson 2, 3

Scheme

Date of
grant

Basis of
award

LTIP*

9 March
2017

150% of
salary

9 March
2017

125% of
salary

9 March
2017

125% of
salary

Vesting at
threshold

Vesting at
maximum

Performance
period

Face value4

£
824,985.79

20%

100%

399,990.55

20%

100%

325,609.53

20%

100%

3 years to
31 December
2019

*Structured as a conditional award
1 Under his leaver arrangements these awards shall lapse.
2 In addition, Rakesh Sharma purchased 96 Partnership shares and 76 Dividend Shares, Amitabh Sharma purchased 96 partnership shares and 2 Dividend Shares

and Mark Anderson purchased 85 partnership shares and 8 Dividend Shares under the AESOP during 2017.

3 Under their leaver arrangements these awards shall vest at the normal time in accordance with the rules of the LTIP, pro-rated to reflect the proportion of the

performance period completed.

4 Face value of the award calculated at time of grant using the average of the five previous days’ mid-market price.

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 31

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Remuneration Report continued

3. ANNUAL REPORT ON REMUNERATION continued

Share awards granted during the year – Audited continued
For the awards presented above, four performance metrics apply:

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%

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.

Change in Chief Executive’s remuneration
The following table illustrates the change (as a percentage) in elements of the Chief Executive’s remuneration from 2016 to 2017, 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 2016 and 1 January 2017.
This group best reflects the remuneration environment of the Chief Executive. The Chief Executive combines the remuneration of R. Sharma up to his
departure, with that of D. Caster for his period as Executive Chairman.

Salary
Taxable benefits
Bonus

* Decreased from £437,000 to nil.

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
-1.5

3.4
3.8
10.4

2017
£m

259.0
38.4
775.4
60.6

2016
£m

255.0
33.5
785.8
67.6

Change
%

+1.6
+14.6
-1.3
-10.4

1 £1.5m (2016: £2.2m) 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.

*see footnote on page 150

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 32

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Total defined benefit pension entitlements – Audited
The defined benefit scheme closed to future accrual on 5 April 2016 and therefore no Executives accrued direct benefits under defined benefit schemes
during the year.

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. 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.

Payments for loss of office and payments to past Directors – Audited
Rakesh Sharma stepped down as a director of the company on 10 November 2017. He will receive monthly payments of his salary at the rate of £550,000 p.a.
during his 12 months’ notice period. He will also receive payments in respect of pension at the rate of £200,000 p.a. (equal to the Company contribution of
36.4% of base salary), and his other contractual benefits, with an annual value of £30,000, will continue in the normal way during this period. Payments are
subject to mitigation. He will not receive any bonus in respect of the Group’s financial year ending on 31 December 2017. Mr Sharma’s interest in awards under
the LTIP will lapse. The treatment of his Save As You Earn (“SAYE”) and AESOP entitlements will be in accordance with the rules of the respective schemes.

Mark Anderson stepped down from the board on 1 June 2017 and left the company on 31 October 2017. Mark received the sum of £186,694.43 as
payment in lieu of the balance of his contractual notice period. As disclosed on page 86 the Committee has determined that no bonus will be paid to Mark
Anderson. As Mark’s employment was terminated on the grounds of redundancy, he will be treated as a “Good Leaver” under the rules of the LTIP. His
existing awards under the LTIP shall vest at the normal time in accordance with the rules of the LTIP, prorated to reflect the proportion of each performance
period completed as at 31 October 2017. The treatment of his SAYE and AESOP entitlements will be in accordance with the rules of the schemes.

Statement of Directors’ shareholdings – Audited

Legally owned

LTIP
awards 1

AESOP

SAYE

2017

2016

Unvested

Restricted2 Unrestricted

Under option

Exercised

Total

% Share
ownership
guidelines

Share
ownership
met
Y/N

Executive
Directors
D. Caster
R. Sharma
A. Sharma
M. Anderson

Non-Executive
Directors
M. Broadhurst
G. Gopalan
J. Hirst
V. Hull
Sir Robert Walmsley

308,160 300,000
41,688
4,966
546

22,051
7,519
639

-
113,269
18,956
43,622

-
3,272
148
-

1,600
-
4,055
1,684
3,000

1,000
-
2,000
-
1,600

-
-
-
-
-

-
-
-
3693

-
-
-
-
-

-
1,192
794
610

-
-
-
-
-

-
-
-
-

-
-
-
-
-

308,160
139,784
27,319
45,240

1,600
-
4,055
1,684
3,000

n/a
n/a
200%
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 2017 includes the 2015 award
(37,379 shares under award for Rakesh Sharma and 14,207 shares under award for Mark Anderson). Under his leaver conditions, Rakesh Sharma’s
awards will lapse. Mark Anderson is eligible to receive these awards subject to the performance conditions and pro-rated to reflect the proportion of
each performance period completed on date of departure. As a result of not meeting performance conditions to 31 December 2017, the shares
awarded under the 2015 LTIP Grant will lapse in 2018.

2 The restricted shares under the AESOP are held in the Ultra Electronics Holdings plc Employee Benefit Trust.
3 The unrestricted shares under the AESOP have been released from the Ultra Electronics Holdings plc Employee Benefit Trust.

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 33

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Remuneration Report continued

3. ANNUAL REPORT ON REMUNERATION continued

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 nine years. The graph shows the value at the
end of 2017 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

450

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

31 Dec 17

Ultra Electronics

FTSE 250 Index

Total shareholder return graph and single figure remuneration table continued
The table below presents single-figure remuneration for the Chief Executive over the past nine years, together with past annual bonus payouts and
relevant LTIP vesting figures.

Year ended

Total
remuneration

Annual bonus

LTIP

£’000 % max. payout % max. payout

D. Caster 1
R. Sharma 2
R. Sharma
R. Sharma
R. Sharma
R. Sharma
R. Sharma
R. Sharma3
D. Caster 4
D. Caster
D. Caster

1 Executive Chairman from 10 November 2017.
2 Chief Executive to 10 November 2017.
3 Chief Executive from 21 April 2011.
4 Chief Executive to 21 April 2011.

31 December 2017
31 December 2017
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

81
765
1,194
1,197
680
612
597
722
141
1,068
1,512

-
-
82
88
-
-
-
76
-
46
67

Shareholder voting at the last AGM
At the 2017 Annual General Meeting, the 2016 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

59,669,864
402,746
60,072,610
656,074
60,728,684

At the 2016 Annual General Meeting, the 2015 Director’s 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

-
-
-
-
-
-
-
-
-
81
100

% of
votes cast

99.33
0.67
100

% of
votes cast

99.60
0.40
100

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 34

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 and the Ultra Electronics Long-Term Incentive Plan 2017

2014 award
2015 award
2016 award

Interests at 1 January 2017
2014 award lapsed during the year
2015 award lapsed during the year
2016 award lapsed during the year
2017 award

Interests at 31 December 2017

A. Sharma M. Anderson

R. Sharma

-
-
-

-
-
-
-
18,956

18,956

12,240
14,207
13,984

40,431
(12,240)
-
-
15,431

32,234
37,379
36,793

106,406
(32,234)
-
-
39,097

43,6221

113,2691

Market
price
of shares
granted

Crystallising
dates of
outstanding
awards

£18.38 March 2017
£17.45 March 2018
£17.73 March 2019

£21.10 March 2020

1 This interest in LTIP awards as at 31 December 2017 includes the 2015 award (37,379 shares under award for Rakesh Sharma and 14,207 shares under award

for Mark Anderson) which, in line with his leaver terms, will lapse for Rakesh Sharma. As a result of not meeting performance conditions to 31 December
2017, Mark Anderson’s will lapse in 2018.

The 2014 award lapsed during the year as a result of the performance targets not being met. Ultra’s share price on 29 December 2017 was £13.47.
The range during 2017 was £11.42 to £22.04.

Directors’ interests under the All-Employee arrangements

Name of Director

A. Sharma
R. Sharma
M. Anderson

1 Or as at date of departure

Interests as
at 1 January
2017

50
3,100
276

Shares acquired
during year

Interests as
at 31 December
2017

Shares
acquired from
1 January 2018 to
2 March 2018

98
172
93

148
3,272
3691

31
32
-

Interests as at
2 March 2018

179
3,304
-

During the year, the Share Ownership Plan Trust, established and operated in connection with the AESOP, purchased 27,018 (2016: 30,648) Ultra Electronics
Holdings plc shares, with a nominal value of £1,351 (2016: £1,532) for £515,711 (2016: £594,895).

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;

• 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. At the 2017 AGM Geeta
Gopalan and Victoria Hull became members of the Committee. The General Counsel & Company Secretary is Secretary to the Committee. Although not
Committee members, amongst others, the Chairman/Executive Chairman and Chief Executive attend Committee meetings by invitation, except where
matters directly relating to their own remuneration are discussed. The Executive Chairman will continue to attend by invitation in 2018.

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 operation of Ultra’s LTIP and other share schemes, remuneration benchmarking
services and an annual update on market and best practice. During 2017, 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 2017 amounted to £33,658 (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 2017 amounted to £88,415
(excluding VAT). In addition, the Committee consults the Executive Chairman 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 2018 Annual General Meeting
The Committee encourages shareholders to vote in favour of the Directors’ Remuneration Report resolution at the 2018 AGM. The Directors’ Remuneration
Report was approved by the Board on 5 March 2018 and signed on its behalf by:

Martin Broadhurst, Chairman of the Remuneration Committee

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 35

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Directors’ Report
For the year ended 31 December 2017

“

The Directors present their annual

report on the affairs of the Group,
together with the accounts and
independent auditor’s report.
Anant Prakash, General Counsel & Company Secretary

”

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 2017. 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 46-57 of the Strategic Report. The Corporate Governance Report on pages 61-70 forms part of this report,
and the financial risk management objectives and policies can be found on pages 38-45.

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 38-45.

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: 2016 final paid of 33.6p per share

2017 interim paid of 16.1p per share

Equity-settled employee share schemes

Balance on retained earnings, end of year

2017
£’000

228,034
68,978
(23,647)
(11,312)
558

262,611

The final 2017 dividend of 35.0p per share is proposed to be paid on 3 May 2018 to shareholders on the register of members on 6 April 2018. The interim
dividend was paid on 21 September 2017, making a total of 49.6p (2016: 47.8p) per share in the year.

Future developments
A review of the activities and future developments of the Group is contained in the Executive Chairman’s review on pages 6-9.

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 £161.1 million (2016: £146.9 million) was spent on engineering and business development of which
£131.2 million (2016: £112.8 million) was funded by customers and £29.9 million (2016: £34.1 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 2017 were 68 days (2016: 65 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 53).

Political expenditure
Neither the Company nor any of its subsidiaries have made any political donations during the year (2016: £nil).

Appointment and replacement of Directors
Martin Broadhurst, Douglas Caster, John Hirst, Amitabh Sharma and Sir Robert Walmsley will stand for re-election at the Annual General Meeting on
27 April 2018. Geeta Gopalan and Victoria Hull will stand for election.

Directors and their interests
The Directors who served throughout the year and to the date of signing these financial statements (see biographies on pages 58-59), and their interests
in the shares and share options of Ultra at 2 March 2018 are shown in the Annual Report on Remuneration (see pages 84-91).

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 36

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 2017.

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 (2016: nil) ordinary shares and no (2016: nil) ordinary shares were distributed following vesting of awards under the
Ultra Electronics Long-Term Incentive Plan. At 31 December 2017, 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 2017).

Substantial shareholdings
As at 2 March 2018, Ultra had been notified, in accordance with Chapter 5 of the Disclosure and Transparency rules, of the following voting rights as
shareholders of Ultra:

Heronbridge Investment Management
Invesco Ltd
Legal & General Investment Mgmt Ltd
FMR LLC
Standard Life Aberdeen
BlackRock Inc.
Royal London Asset Management Ltd
Artemis Investment Management LLP
Fidelity International Limited
J O Hambro Capital Management Ltd

Nature of holding

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

Percentage
of ordinary
share capital

Number of 5p
ordinary shares

Date of
announcement

5.06
5.47
5.44
9.99
6.61
5.69
3.08
4.69
9.49
5.02

3,933,407
4,252,702
4,232,528
7,770,603
5,139,768
4,419,740
2,171,768
3,299,530
6,672,460
3,528,628

17 November 2017
15 November 2017
15 November 2017
31 August 2017
16 August 2017
9 November 2017
28 February 2017
9 August 2016
4 July 2016
11 March 2016

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 26.
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 26. 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 27 April 2018 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 5 March 2018 and signed on its behalf by:

Anant Prakash, General Counsel & Company Secretary
Registered Office: 417 Bridport Road, Greenford, Middlesex UB6 8UA
Registered Number: 02830397

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 37

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Executives and advisors

Executive Team members

Business MDs and Presidents

Douglas Caster
Executive Chairman

Amitabh Sharma
Group Finance Director

Carlos Santiago
Chief Operating Ofﬁcer

Chris Binsley
Corporate Marketing Director

Anant Prakash
General Counsel & Company Secretary

Graeme Stacey
Divisional Managing Director
Aerospace & Infrastructure

Mike Baptist
Divisional Managing Director
Communications & Security

William Terry
Divisional President
Maritime & Land

Swami Iyer
President
3eTI

Tim Stanley
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

Craig Steger-Lewis
Managing Director
Corvid Paygate

Andrew Nanson
Managing Director
Corvid Protect Holdings

Pete Crawford
President
EMS

Paul Fardellone
President
Flightline Systems

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 and 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

Brian Sinnott
President
Forensic Technology

Dan Pikora
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

Thomas Link
President
USSI

Financial advisors

JPMorgan Cazenove Limited
25 Bank Street, Canary Wharf
London E14 5JP

Investec Bank plc
2 Gresham Street
London EC2V 7QP

Goldman Sachs
133 Fleet Street
London EC4A 2BB

Stockbrokers

JPMorgan Cazenove Limited
25 Bank Street, Canary Wharf
London E14 5JP

Investec Bank plc
2 Gresham Street
London EC2V 7QP

Registrars

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

Ultra_AR&A_2017_Governance_AW_Layout 1 09/03/2018 11:25 Page 38

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Group financials, Company financials
and five-year review

4. Group ﬁnancials

Independent auditor’s report

Group highlights

Consolidated income statement

Consolidated statement of
comprehensive income

Consolidated balance sheet

Consolidated cash ﬂow statement

Consolidated statement of changes in equity

Notes to accounts

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

5. Company ﬁnancials

Company balance sheet

Company statement of changes in equity

Notes to accounts

Statement of accounting policies
for the Company accounts

6. Five-year review

Five-year review

104

105

106

107

108

109

137

144

145

147

149

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 1

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Independent auditor’s report
to the members of Ultra Electronics Holdings plc

Opinion on financial
statements of
Ultra Electronics Holdings plc

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 2017 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.

We have audited the financial statements of Ultra Electronics Holdings plc (the Parent Company)
and its subsidiaries (the Group) which comprise:

• the Consolidated Income Statement;

• the Consolidated Statement of Comprehensive Income;

• the Consolidated and Parent Company Balance Sheets;

• the Consolidated and Parent Company Statements of Changes in Equity;

• the Consolidated Cash Flow Statement;

• the Consolidated and Parent Company Statements 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 IFRSs as adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the Parent Company financial statements is
applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure
Framework” (United Kingdom Generally Accepted Accounting Practice).

Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and

applicable law. Our responsibilities under those standards are further described in the auditor’s
responsibilities for the audit of the financial statements section of our report.

Within this report
key audit matters are identified
with the symbols below:

New for 2017

Same as prior year

We are independent of the Group and the Parent Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard
as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s
Ethical Standard were not provided to the Group or the Parent Company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.

Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:

Materiality

Scoping

Significant changes
in our approach

• Revenue and profit recognition

• Management override of controls

• Valuation of goodwill and intangible assets

• Defined benefit pension liabilities valuation.

The materiality that we used for the Group financial statements
was £5.5m which was determined on the basis of 5% of underlying
profit before tax.

We focused our Group audit scope primarily on the audit work at 20
(2016: 20) locations, 12 (2016: 12) of these were subject to a full
audit, whilst the remaining 8 (2016: 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 88% (2016: 87%) of Group revenue and 94%
(2016: 94%) of underlying profit before tax.

Due to the facts and circumstances which led to the trading statement
of revised full year expectations being issued in November 2017 we
consider there to be a heightened risk of management bias through
the override of internal controls. We have therefore performed
additional procedures in respect of the risk of management override of
controls and consider this to be a key audit matter as set out opposite.

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 2

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Conclusions relating to
going concern, principal
risks and viability statement

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

Going concern
We have reviewed the directors’ statement on page 45 to 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 and Company’s ability to continue
to do so over a period of at least twelve months from the date
of approval of the financial statements.

We are required to state whether we have anything material to
add or draw attention to in relation to that statement required
by Listing Rule 9.8.6R(3) and report if the statement is materially
inconsistent with our knowledge obtained in the audit.

Principal risks and viability statement
Based solely on reading the directors’ statements and
considering whether they were consistent with the knowledge
we obtained in the course of the audit, including the knowledge
obtained in the evaluation of the directors’ assessment of the
Group’s and the Company’s ability to continue as a going
concern, we are required to state whether we have anything
material to add or draw attention to in relation to:

• the disclosures on pages 40-45 that describe the principal risks

and explain how they are being managed or mitigated;

• the directors’ confirmation on pages 38-39 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; or

• the directors’ explanation on page 45 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 are also required to report whether the directors’ statement
relating to the prospects of the Group required by Listing Rule
9.8.6R(3) is materially inconsistent with our knowledge obtained
in the audit.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance
in our audit of the financial statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to fraud) that we identified. These
matters included those which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit; and directing the efforts of the engagement team.

These matters 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.

Further to the inclusion this year of the risk of management override of controls as noted above in
the summary of our audit approach, the valuation of Ithra-related provisions is no longer considered
to be a key audit matter. This is on the basis of the status of potential legal proceedings and
associated legal matters addressed during the year.

Key audit matter continued overleaf >

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Ultra Electronics Holdings plc Annual Report & Accounts 2017

Independent auditor’s report continued

Revenue and
profit recognition

Key audit matters continued

Key audit matter description
The Group recognised revenue of £775.4m in 2017 (2016: £785.8m) of which £467.0m (2016:
£443.5m) related to revenue recognised in respect of long-term contracts accounted for under IAS
11. There is a risk arising from either error or fraud, that revenue and profit is recognised incorrectly
based on judgements within the cost to complete estimate for significant long-term contracts. We
consider that those contracts with a design phase have a heightened risk of cost escalation due to
extended or unforeseen effort necessary to achieve contract milestones.

Further, given the bespoke nature and the length of time to develop and manufacture many of
Ultra’s products and solutions, 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.

Refer to page 138 (key sources of estimation uncertainty – contract revenue and profit recognition);
pages 139-140 (accounting policies – revenue recognition and long-term contracts); page 75 (Audit
Committee report – significant judgements considered).

How the scope of our audit responded to the key audit matter
Our audit work assessed the adequacy of the design and implementation of controls over long-term
contract accounting.

To confirm that revenue recognised to date is based on the current best estimate of the degree of
work performed under the contract, for a sample of contracts we reviewed the evidence for the
progress made against the contract, such as milestone completion.

To verify the margin achieved on the contracts, we sought to confirm the costs to complete, 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 reviewed the contract
risk registers to provide evidence of the judgement taken when providing for the cost of mitigating
technical risks and meeting future milestones.

We understood and challenged management’s judgements by referring to evidence including signed
contract terms and the 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 our sample of contracts, 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.

Key observations
We considered the costs to complete and therefore the revenue and margin recognised on the
sampled contracts to be appropriate, based on the assessment of the risks remaining in the
contracts and work performed to date.

Management
override of controls

Key audit matter description
We consider that the risk of error or fraud as a result of management override of controls is
heightened in relation to the facts and circumstances which led to the trading statement of revised
full year expectations being issued in November 2017.

There are a number of areas within the Group financial statements which contain accounting
estimates made by management or which have been determined as a result of management’s
judgements as set out on page 138 (key accounting judgements and key sources of estimation
uncertainty), in particular those areas of judgement and estimation uncertainty related to long-term
contract accounting, the valuation of goodwill and intangible assets, and the valuation of pension
liabilities. In addition, management also exercised judgement in the presentation of the Group’s
income statement, and the classification of items excluded from underlying profit measures, in
particular the S3 programme as set out in note 2 to the financial statements.

Accordingly, there is a risk that the Group’s results are influenced through management bias in
determining such estimates and judgements. This risk can manifest itself through the posting of
invalid journals, recorded to influence the financial statements, which circumvent the controls in
place to stop the recording of inappropriate journals.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Management
override of controls
continued

Valuation of goodwill
and intangible assets

How the scope of our audit responded to the key audit matter
Our audit work has assessed the design and implementation of controls which address the risk of
management override at both a business unit and on a Group basis.

We reviewed the areas of judgement and estimation uncertainty related to the areas noted above, to
determine whether any evidence existed of management bias. Further details of our audit response
are included in the other key audit matters.

We challenged the distinction between underlying and non-underlying items of income or expense,
particularly in relation to the classification of S3 programme costs. This was done based on a review
against the approved S3 programme plan, whether the costs were incremental to the ongoing
business, and the nature of the costs incurred. We reviewed the disclosure in note 2 to the financial
statements to assess whether it is consistent with our understanding.

We profiled the full year’s transactions listing to identify manual journals displaying characteristics of
potential fraud. For the journals identified together with the Group consolidation journals, we have
understood the business rationale and obtained appropriate audit evidence to support the journal.

Key observations
We did not identify any material matters or bias arising from management override of controls.

Key audit matter description
The Group held £394.5m (2016: £415.6m) of goodwill arising on its acquisitions made and
£118.4m (2016: £155.2m) of acquired intangibles as at 31 December 2017. There is a risk that
inappropriate judgements relating to future cash flow forecasts and discount rates are used which
lead to the overstatement of the value in use, being the recoverable amount of these assets. This
could therefore result 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 future cash flow forecast growth assumed we have
focused this key audit matter on the following goodwill and acquired intangible asset balances:

• goodwill attributable to the C2ISR and Infrastructure cash generating unit groups; and

• the acquired intangible assets associated with the Herley business.

Refer to page 138 (key sources of estimation uncertainty – impairment testing); page 140
(accounting policy – impairment of fixed assets); page 75 (Audit Committee report – significant
judgements considered); and page 116 and 117 (note 14 and 15 of the Financial Statements).

How the scope of our audit responded to the key audit matter
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 discount rate and cash flow assumptions used by management in their
impairment assessment. We used valuation specialists within the audit team to benchmark the
discount rate against independently available data, together with performing peer group analysis.
We obtained support for secured orders and used our understanding of these orders to underpin
the Group’s cash flow forecasts, considered external date on forecast market growth, and reviewed
the historical performance of the businesses.

Having challenged 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 group under a sensitised scenario.

Key observations
We are satisfied that headroom exists over the carrying value of the Infrastructure and C2ISR cash
generating unit groups, and the acquired intangible assets associated with the Herley business, and
therefore no impairment has been recognised.

We consider that the disclosure in note 14 of a goodwill impairment to the Infrastructure cash
generating unit group after a reasonable possible change in assumptions is appropriate.

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100 Ultra Electronics Holdings plc Annual Report & Accounts 2017

Independent auditor’s report continued

Key audit matters continued

Defined benefit
pension liabilities
valuation

Key audit matter description
The Group operates defined benefit pension schemes in the UK, Switzerland and Canada. At
31 December 2017 the defined benefit pension scheme obligation was £389.0m which resulted in a net
IAS 19 ‘Employment Benefits’ deficit of £82.7m. The UK scheme accounted for 99% of this net deficit.

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 most sensitive assumptions are the discount rate,
inflation rate and life expectancy.

Refer to page 138 (key sources of estimation uncertainty – retirement benefit costs);
and page 141 (accounting policies – pensions).

How the scope of our audit responded to the key audit matter
Our audit work assessed the adequacy of the design and implementation of controls over the
accounting for defined benefit pension schemes.

We included a pension specialist within our audit team to assess the appropriateness of the
assumptions through benchmarking to industry data and comparison with the peer group.

We reviewed the suitability of the methodology used to value the defined benefit pension
scheme obligation.

Key observations
Our assessment concluded that Ultra’s pension assumptions overall lie in the middle of our
acceptable range.

Our application
of materiality

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:

Materiality

£5.5m (2016: £6.0m)

£2.2m (2016: £3.0m)

Group financial statements

Parent company financial statements

Basis for determining materiality

5% of underlying profit before tax

Underlying profit before tax is reconciled to
statutory profit before tax in note 2 of the
financial statements.

In 2016, we determined materiality based on
7% of adjusted underlying profit before tax.
This was adjusted for amortisation of acquired
intangible assets.

Parent Company materiality represents less
than 1% of net assets, but is capped at 40%
(2016: 50%) of the Group materiality.

Rationale for the benchmark applied

Underlying profit before tax is a key
performance measure for the Group and it is
therefore an appropriate basis on which to
determine materiality.

The Parent Company is non-trading, and we
therefore consider that a balance sheet based
metric is most appropriate to determine
materiality.

We changed our benchmark as we consider
that management’s underlying profit before tax
is more relevant to the users of the financial
statements because it eliminates the impact of
acquisitions now and in the future.

The Parent Company is also a component of
the consolidated Group financial statements,
and so the determined materiality has been
capped by the level of materiality identified for
the component audits.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

101

Our application
of materiality
continued

We agreed with the Audit Committee that we would report to the Committee all audit differences
in excess of £275k (2016: £300k) for the Group and £100k (2016: £100k) for the Parent Company,
as well as differences below that threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.

An overview of the
scope of our audit

Underlying PBT
£110m

Group materiality

Group materiality
£5.5m

Component materiality range
£2.2m to £3.3m

Audit committee reporting threshold
£0.275m

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
(2016: 20) locations, 12 (2016: 12) of these were subject to a full audit, whilst the remaining 8
(2016: 8) 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.

These 20 locations, which are largely located in the UK and USA, represent the principal business
units and account for 88% (2016: 87%) of the Group’s revenue and 94% (2016: 94%) of the
Group’s underlying 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 units
was executed at levels of materiality applicable to each individual entity which did not exceed 60%
of Group materiality (£3.3m).

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 component 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 2017, a senior member of the Group audit team visited all of the UK components as
well as the following overseas components: USSI, EMS, Herley, 3eTI, Ocean Systems, TCS, and
Forensic Technologies.

Full audit scope
Speciﬁed audit
procedures
Review at
Group level

Revenue %

Underlying Profit Before Tax %

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102 Ultra Electronics Holdings plc Annual Report & Accounts 2017

Independent auditor’s report continued

Other information

The directors are responsible for the other information. The other
information comprises the information included in the annual
report including the titles of the other information, other than the
financial statements and our auditor’s report thereon.

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

Our opinion on the financial statements does not cover the
other information and, except to the extent otherwise explicitly
stated in our report, we do not express any form of assurance
conclusion thereon.

In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.

In this context, matters that we are specifically required to report
to you as uncorrected material misstatements of the other
information include where we conclude that:

• Fair, balanced and understandable – the statement given by the

directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group’s position and performance,
business model and strategy, is materially inconsistent with our
knowledge obtained in the audit; or

• Audit Committee reporting – the section describing the work of
the audit committee does not appropriately address matters
communicated by us to the Audit Committee; or

• Directors’ statement of compliance with the UK Corporate
Governance Code – the parts of the directors’ statement
required under the Listing Rules relating to the Company’s
compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with
Listing Rule 9.8.10R(2) do not properly disclose a departure from
a relevant provision of the UK Corporate Governance Code.

Responsibilities of directors

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, and for
such internal control as the directors determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group’s and the
Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to
going concern and using the going concern basis of accounting unless the directors either intend to
liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative
but to do so.

Auditor’s responsibilities
for the audit of the
financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the
Financial Reporting Council’s website (www.frc.org.uk/auditorsresponsibilities). This description
forms part of our auditor’s report.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

103

Use of our report

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.

Report on other legal and
regulatory requirements

Opinions on other matters
prescribed by the
Companies Act 2006

In our opinion, the part of the directors’ remuneration report to be audited has been properly
prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

• 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 Group and of the Parent Company and their
environment obtained in the course of the audit, we have not identified any material misstatements
in the strategic report or the directors’ 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 nothing to report in
respect of these matters.

• 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.

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 in
respect of these matters.

Other matters

Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Board of
directors on 17 April 2003 to audit the financial statements for the year ending 31 December 2003
and subsequent financial periods. The period of total uninterrupted engagement including previous
renewals and reappointments of the firm is 14 years, covering the years ending 31 December 2003
to 31 December 2017.

Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to
provide in accordance with ISAs (UK).

Alexander Butterworth ACA, Senior Statutory Auditor
for and on behalf of Deloitte LLP
Statutory Auditor
Reading, United Kingdom
5 March 2018

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104 Ultra Electronics Holdings plc Annual Report & Accounts 2017

Group highlights
for the year ended 31 December 2017

Revenue
Operating profit
Underlying operating profit*
Profit before tax
Underlying profit before tax*

Basic earnings per share
Underlying earnings per share*
Dividend per share

2017
£’000

775,400
61,484
120,136
60,592
110,002

2017
pence

66.2
116.7
49.6

2016
£’000

785,764
89,725
131,134
67,621
120,059

2016
pence

82.8
134.6
47.8

Change
%

-1.3
-31.5
-8.4
-10.4
-8.4

Change
%

-20.0
-13.3
+3.8

* Ultra uses underlying figures as key performance indicators. A reconciliation is set out in note 2 between operating proﬁt and underlying operating proﬁt, between proﬁt
before tax and underlying proﬁt before tax and between cash generated by operations and underlying operating cash ﬂow. The calculation for underlying earnings per
share is set out in note 13.

Underlying operating proﬁt is before the S3 programme, amortisation of intangibles arising on acquisition, impairment charges, Oman contract termination related costs
and adjustments to contingent consideration net of acquisition and disposal related costs.

Underlying proﬁt before tax is before the S3 programme, amortisation of intangibles arising on acquisition, impairment charges, Oman contract termination related costs,
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.

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.

Further detail on non-statutory performance measures is set out on page 143.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

105

Consolidated income statement
for the year ended 31 December 2017

Revenue
Cost of sales

Gross profit
Other operating income
Distribution costs
Administrative expenses
Other operating expenses
Oman contract termination costs
Impairment charge
S3 programme

Operating profit
Loss on disposals (net)
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

5
7
2
2

6
31
30
9
10

13
13

2017
£’000
775,400
(545,178)

230,222
249
(1,066)
(134,857)
(15,648)
(7,958)
(1,608)
(7,850)

61,484
-
-
12,439
(13,331)

60,592
(11,666)

48,926

48,956
(30)

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)

66.2
66.1

82.8
82.8

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 2017

Profit for the year

Items that will not be reclassified to profit or loss:
Actuarial profit/(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
Profit/(loss) on loans used in net investment hedges
Transfer from profit and loss on cash flow hedge
Profit on cash flow hedge
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

2017
£’000

2016
£’000

48,926

58,258

30
11

24,135
(4,113)

(49,343)
9,973

20,022

(39,370)

(44,089)
-
20,567
27
407
(74)

(23,162)

(3,140)

45,786

45,816
(30)

99,349
(1,895)
(43,078)
-
-
43

54,419

15,049

73,307

73,309
(2)

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106 Ultra Electronics Holdings plc Annual Report & Accounts 2017

Consolidated balance sheet
31 December 2017

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

Total assets

Current liabilities
Trade and other payables
Tax liabilities
Derivative financial instruments
Borrowings
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 interests

Total equity

Note

2017
£’000

2016
£’000

14
15
16
24
22
19

17
19

22
21
25

30
20
24
22
21
25

26
27
27
27
27
27

394,529
136,889
59,150
15,659
2,025
32,225

415,593
173,637
66,195
21,377
3
16,352

640,477

693,157

76,627
205,627
11,127
149,522
437

78,177
215,731
9,444
74,625
251

443,340

378,228

1,083,817

1,071,385

(215,080)
(2,255)
(11,203)
(51,752)
(8,665)

(193,243)
(7,339)
(12,507)
-
(16,633)

(288,955)

(229,722)

(82,732)
(8,114)
(11,337)
(2,688)
(172,227)
(5,553)

(113,177)
(9,972)
(6,555)
(11,594)
(331,325)
(5,469)

(282,651)

(478,092)

(571,606)

(707,814)

512,211

363,571

3,887
200,911
(2,581)
(48,059)
95,403
262,611

512,172
39

3,523
64,020
(2,581)
(68,986)
139,492
228,034

363,502
69

512,211

363,571

The financial statements of Ultra Electronics Holdings plc, registered number 02830397, were approved by the Board of Directors and authorised for
issue on 5 March 2018.

On behalf of the Board
D. Caster, Executive Chairman
A. Sharma, Group Finance Director

The accompanying notes are an integral part of this consolidated balance sheet.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

107

Consolidated cash flow statement
for the year ended 31 December 2017

Net cash flow from operating activities
Investing activities
Interest received
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 (used in)/from investing activities

Financing activities
Issue of share capital
Dividends paid
Loan syndication costs
Repayments of borrowings
Proceeds from borrowings
Minority investment

Net cash from/(used in) 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

2017
£’000

2016
£’000

77,565

92,834

31
31

455
(7,098)
102
(5,680)
-
-

197
(4,645)
293
(2,728)
22,040
(5,199)

(12,221)

9,958

137,255
(34,959)
(2,040)
(168,975)
83,493
-

2,976
(32,583)
-
(114,419)
60,000
2,000

14,774

(82,026)

80,118
74,625
(5,221)

149,522

20,766
45,474
8,385

74,625

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108 Ultra Electronics Holdings plc Annual Report & Accounts 2017

Consolidated statement of changes in equity
for the year ended 31 December 2017

Equity attributable to equity holders of the parent

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

Share
capital
£’000
3,514
-

Share
premium
account
£’000
61,052
-

Reserve for
own shares
£’000
(2,581)
-

Hedging
reserve
£’000
(25,908)
-

Translation
reserve
£’000
42,038
-

Retained
earnings
£’000
238,728
58,260

Non-
controlling
interest
£’000
-
(2)

Total equity
£’000
316,843
58,258

9
-

2,968
-

-
-

(43,078)

97,454

(39,327)

15,049

(43,078)

97,454

18,933

-
-

1,929

984
(32,583)

(2)

-
-

73,307

2,000

3,961
(32,583)

Balance at 31 December 2016

3,523

64,020

(2,581)

(68,986)

139,492

228,034

363,571

Balance at 1 January 2017
Profit for the year
Other comprehensive

income for the year

Total comprehensive

income for the year

Issue of share capital
Equity-settled employee
share schemes

Dividend to shareholders
Tax on share-based

payment transactions

3,523
-

64,020
-

(2,581)
-

(68,986)
-

139,492
-

228,034
48,956

69
(30)

363,571
48,926

-
352

12
-

-
133,195

3,696
-

-
-

20,927

(44,089)

20,022

(3,140)

20,927
-

(44,089)
-

68,978
-

(30)
-

45,786
133,547

-
-

682
(34,959)

(124)

-
-

4,390
(34,959)

(124)

Balance at 31 December 2017

3,887

200,911

(2,581)

(48,059)

95,403

262,611

512,211

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

109

Notes to accounts – Group
31 December 2017

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 Executive Chairman. 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

203,174
242,708
329,518
-

775,400

Inter-
segment
£’000

10,219
7,000
14,920
(32,139)

2017

Total
£’000

213,393
249,708
344,438
(32,139)

External
revenue
£’000

204,685
258,975
322,104
-

Inter-
segment
£’000

8,114
2,807
21,869
(32,790)

2016

Total
£’000

212,799
261,782
343,973
(32,790)

775,400

785,764

Underlying operating profit
Amortisation of intangibles arising on acquisition
Impairment charge
Oman contract termination costs
Adjustments to contingent consideration net of acquisition and disposal related costs
S3 programme

Operating profit
Investment revenue
Finance costs

Profit before tax
Tax

Profit after tax

Aerospace Communications
& Security
£’000

& Infrastructure
£’000

32,638
(1,136)
-
(7,958)
1,163
(1,085)

23,622

28,235
(20,070)
(1,608)
-
(366)
(3,446)

2,745

Maritime
& Land
£’000

59,263
(7,242)
-
-
(13,585)
(3,319)

35,117

2017

Total
£’000

120,136
(28,448)
(1,608)
(7,958)
(12,788)
(7,850)

61,484
12,439
(13,331)

60,592
(11,666)

48,926

The acquisition and disposal related costs of £12,788,000 include those associated with the proposed Sparton Corporation acquisition and 3 Phoenix
staff retention payments (see note 31) which were put in place at the time of the acquisition of that business.

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

Operating profit
Loss on disposals (net)
Retirement benefit scheme curtailment gain
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

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

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110 Ultra Electronics Holdings plc Annual Report & Accounts 2017

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)

2017
£’000

3,546
4,840
4,392

12,778

2016
£’000

1,647
3,460
2,266

7,373

Depreciation
and amortisation

2017
£’000

4,783
25,516
11,862

42,161

2016
£’000

5,894
34,127
9,512

49,533

The 2017 depreciation and amortisation expense includes £31,995,000 of amortisation charges (2016: £38,034,000) and £10,166,000 of
property, plant and equipment depreciation charges (2016: £11,499,000).

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

2017
£’000

227,932
428,884
248,231

905,047
178,770

2016
£’000

233,110
463,713
268,862

965,685
105,700

1,083,817

1,071,385

2017
£’000

61,376
81,443
102,085

244,904
326,702

2016
£’000

55,751
71,832
104,042

231,625
476,189

571,606

707,814

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

2017
£’000

161,293
78,199
22,844
384,330
128,734

2016
£’000

185,135
82,818
18,617
391,754
107,440

775,400

785,764

During the year, there was one direct customer (2016: one) that individually accounted for greater than 10% of the Group’s total turnover. Sales to
this customer in 2017 were £146.6m (2016: £141.9m) across all segments.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

111

1 Segment information (continued)

Other information (by geographic location)

United Kingdom
USA
Canada
Rest of World

Unallocated

Non-current assets

Total assets

2017
£’000

206,433
317,613
91,057
7,689

622,792
17,685

2016
£’000

205,253
362,313
96,449
7,762

671,777
21,380

2017
£’000

342,792
426,826
123,646
11,784

905,048
178,769

2016
£’000

344,157
478,083
126,995
16,450

965,685
105,700

640,477

693,157

1,083,817

1,071,385

Additions to property,
plant & equipment
and intangible assets
(excluding acquisitions)

2017
£’000

4,742
6,069
1,341
626

12,778
-

12,778

2016
£’000

3,213
3,356
767
37

7,373
-

7,373

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 charge (see note 15)
Oman contract termination related costs (see note 7)
Adjustments to contingent consideration net of acquisition and disposal related costs (see note 1)
S3 programme

Underlying operating profit

Profit before tax
Amortisation of intangibles arising on acquisition (see note 15)
Impairment charge (see note 15)
Adjustments to contingent consideration net of acquisition and disposal related costs (see note 1)
Unwinding of discount on provisions (see note 10)
(Gain)/loss on fair value movements of derivatives (see note 22)
Net interest charge on defined benefit pensions (see note 10)
S3 programme
Loss on disposals (net) (see note 31)
Oman contract termination related costs (see note 7)
Retirement benefit scheme curtailment gain (see note 30)

Underlying profit before tax

Cash generated by operations (see note 28)
Purchase of property, plant and equipment
Proceeds on disposal of property, plant and equipment
Expenditure on product development and other intangibles
Oman contract termination related costs/Oman performance bond
S3 programme
Acquisition and disposal related payments

Underlying operating cash flow

2017
£’000

61,484
28,448
1,608
7,958
12,788
7,850

2016
£’000

89,725
32,655
-
-
2,257
6,497

120,136

131,134

60,592
28,448
1,608
12,788
-
(11,983)
2,741
7,850
-
7,958
-

67,621
32,655
-
2,257
367
19,103
2,983
6,497
4,076
-
(15,500)

110,002

120,059

97,432
(7,098)
102
(5,680)
9,836
8,949
12,966

112,002
(4,645)
293
(2,728)
8,230
5,613
1,669

116,507

120,434

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 143 for further details.

3 Revenue

An analysis of the Group’s revenue is as follows:

Sales of goods
Revenue from long-term contracts

The determination of revenue from long-term contacts is a critical accounting estimate as set out on page 138.

2017
£’000

308,416
466,984

2016
£’000

342,284
443,480

775,400

785,764

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112 Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 internally generated 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 of property, plant and equipment
Amortisation of internally generated intangible assets
Amortisation of acquired intangible assets (and other intangibles)
Impairment of intangible assets (see note 15)
Contingent consideration release
Government grant income (see note 23)
Net foreign exchange loss/(gain)
Loss on disposal of property, plant and equipment
Operating lease rentals

– plant and machinery
– other

Research and development costs
Auditor’s remuneration for statutory audit work (including expenses)

The Company-only audit fee included in the Group audit fee shown above was £20,000 (2016: £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 and reporting accountant work
Other advisory

Total for non-audit services

2017
£’000

249

2017
£’000

1,197
14,451

15,648

2017
£’000

224,215
258,981
10,166
1,197
30,798
1,608
(1,194)
(2,029)
7,007
565

1,352
12,474
28,314
1,199

2017
£’000

348
851

1,199

-
5
1,498
8

1,511

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

During the year, the auditor provided due diligence and reporting accountant work principally relating to the Circular Announcement in relation to the
proposed Sparton acquisition. As set out on pages 76-77, the Audit Committee concluded that the auditor was best placed to perform these services.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

113

7 Oman contract termination costs

In 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 to pursue claims against the customer on
behalf of the interested parties. In 2017, £7,958,000 (2016: £nil) of legal costs associated with the Oman Airport IT contract termination were
charged to the income statement.

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

2017
£’000

228,270
20,616
10,095

2016
£’000

223,823
21,099
10,034

258,981

254,956

The wages and salaries figure for 2017 includes £6.5m in relation to 3 Phoenix staff retention arrangements which were put in place at the time
of the acquisition of that business.

The average monthly number of persons employed by the Group during the year was as follows:

Production
Engineering
Selling
Support services

2017
Number

1,729
1,457
227
759

4,172

2016
Number

1,917
1,579
300
670

4,466

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
Fair value movement on derivatives

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

2017
£’000
456
11,983

12,439

2017
£’000

1,281
9,309

10,590
2,741
-
-

13,331

2016
£’000
197
-

197

2016
£’000

848
10,424

11,272
2,983
367
19,103

33,725

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114 Ultra Electronics Holdings plc Annual Report & Accounts 2017

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
(Recognition)/derecognition of deferred tax assets
UK tax rate change
US tax rate change

Total deferred tax charge/(credit)

Total tax charge

2017
£’000

2,441
(122)

2,319

5,400
(1,690)

3,710

6,029

7,676
(2,077)
-
38

5,637

11,666

2016
£’000

5,549
(1,848)

3,701

10,879
326

11,205

14,906

(7,124)
1,576
5
-

(5,543)

9,363

Corporation tax in the UK is calculated at 19.25% (2016: 20.0%) 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. As a result of US tax reform, US deferred tax balances at 31 December 2017 have been calculated at 24% (2016: 38%).

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 (gain)/loss on defined benefit pension schemes
Revaluation of interest rate hedge

Total income tax charge recognised directly in other comprehensive income

2017
£’000

2016
£’000

(4,113)
(74)

(4,187)

9,973
-

9,973

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 19.25% (2016: 20.0%)
Tax effects of:
Income/expenses that are not taxable/allowable in determining taxable profits
Effect of change in UK tax rate
Effect of change in US tax rate
(Recognition)/derecognition of deferred tax assets
Expenses for which no deferred tax asset recognised
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

2017
£’000

2016
£’000

(124)

167

2017
£’000

60,592

11,664

5,113
-
38
(2,077)
1,000
1,238
(4,401)
-
(623)
(286)

11,666

2016
£’000

67,621

13,524

2,405
5
-
1,576
-
2,683
(4,327)
(1,835)
(813)
(3,855)

9,363

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

115

11 Tax (continued)

Included within the tax reconciliation are a number of non-recurring items, principally non-tax deductible one-off costs which fluctuate from year to year
and the recognition of Canadian deferred tax assets in 2017, which were not recognised in 2016. In addition, a deferred tax asset is not recognised for
certain expenses in our US business in 2017 and this will continue to be assessed annually. The differences attributable to the UK CFC (Controlled
Foreign Company) exemption, Patent Box and higher overseas tax rates are expected to recur in the future (the level of profits in overseas jurisdictions
and changes to the UK and overseas tax rates will affect the size of this difference in future.) The benefit of the CFC exemption is subject to an ongoing
EU State Aid investigation into the UK’s Controlled Foreign Company regime. In October 2017 the European Commission issued a preliminary finding
that the Group financing partial exemption is illegal State Aid. In common with other UK-based international companies whose arrangements are in line
with current UK CFC legislation we may be affected by the eventual outcome of the investigation and are monitoring developments. No provision for
this potential liability has been made in these financial statements as it is not clear what, if any, the eventual financial result will be.

12 Dividends

Amounts recognised as distributions to equity holders in the year:

Final dividend for the year ended 31 December 2016 of 33.6p (2015: 32.3p) per share
Interim dividend for the year ended 31 December 2017 of 14.6p (2016: 14.2p) per share

Proposed final dividend for the year ended 31 December 2017 of 35.0p (2016: 33.6p) per share

2017
£’000

23,647
11,312

34,959

27,124

2016
£’000

22,631
9,952

32,583

23,597

The 2017 proposed final dividend of 35.0p per share is planned to be paid on 3 May 2018 to shareholders on the register at 6 April 2018. It was
approved by the Board after 31 December 2017 and has not been included as a liability as at 31 December 2017.

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
(Profit)/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)
Oman contract termination costs (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 (see note 2)
Tax rate applied for the purposes of underlying earnings per share

2017
pence

116.7

116.5

66.2

66.1

2017
£’000

2016
pence

134.6

134.5

82.8

2016
£’000

48,956

58,260

48,956
(9,411)
20,005
-
10,394
2,275
-
997
5,983
7,097
-

86,296

58,260
16,008
22,419
367
2,100
2,386
(12,400)
-
5,503
-
48

94,691

2017
Number of
shares

2016
Number of
shares

73,959,565
86,340

70,330,384
73,320

74,045,905

70,403,704

2017
£’000
110,002

2016
£’000
120,059

21.58%

21.13%

On 7 July 2017, a total of 7,047,168 ordinary shares of 5 pence were placed, representing 9.9% of Ultra’s issued ordinary share capital prior to the placing.

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116 Ultra Electronics Holdings plc Annual Report & Accounts 2017

14 Goodwill

Cost
At 1 January
Exchange differences
Derecognised on disposal (see note 31)
Other changes

At 31 December

Accumulated impairment losses
At 1 January
Exchange differences

Carrying amount at 31 December

2017
£’000

2016
£’000

478,565
(26,758)
-
-

428,166
55,577
(8,305)
3,127

451,807

478,565

(62,972)
5,694

(52,281)
(10,691)

394,529

415,593

Other changes in 2016 related to the re-assessment of initial fair values at Herley, which predominantly related 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

2017
Discount rate
%
10.1
10.1
10.1

2016
Discount rate
%
10.1
10.1
10.1

10.1
10.1

2017
£’000
32,531
28,276
18,030

78,837

2016
£’000
32,784
28,159
19,411

80,354

90,894
115,135

93,182
124,926

206,029

218,108

33,716
75,947

36,025
81,106

109,663

117,131

394,529

415,593

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 that 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. There have been no changes in the year.

The recoverable amounts of CGUs are determined from value-in-use calculations. In determining the value-in-use for each CGU, the Group prepares
cash flows derived from the most recent financial budgets and strategic plans, representing the best estimate of future performance. These plans,
which have been approved by the Board, include detailed financial forecasts and market analysis covering the expected development of each CGU
over the next five years. The cash flows for the following ten years are also included and assume a growth rate of 2.5% (2016: 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, underlying operating profit* and operating cash conversion.* 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 2017 was 10.1% (2016: 10.1%). 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.

reduce the post-2022 growth assumption from 2.5% to nil;

Sensitivity analysis has been performed on the value-in-use calculations to:
(i)
(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.

*see footnote on page 150

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

117

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 £6.0m. Sensitivity (ii) results in a £0.9m 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

Cost
At 1 January 2016
Foreign exchange differences
Fair value adjustment
Additions
Disposals

250,836
37,707
-
-
(66,084)

113,324
16,849
-
-
(12,585)

At 1 January 2017

222,459

117,588

Foreign exchange differences
Additions
Reclassification from tangible fixed assets
Disposals

(12,574)
-
-
-

(7,114)
-
-
-

30,883
4,074
-
-
-

34,957

(1,882)
-
-
-

7,646
1,119
-
-
-

8,765

(388)
-
-
-

23,235
2,271
-
1,949
(466)

26,989

(1,264)
1,582
-
-

Total
£’000

452,453
65,184
(123)
2,728
(79,462)

26,529
3,164
(123)
779
(327)

30,022

440,780

(1,621)
4,098
418
(1,595)

(24,843)
5,680
418
(1,595)

At 31 December 2017

209,885

110,474

33,075

8,377

27,307

31,322

420,440

Accumulated amortisation
At 1 January 2016
Foreign exchange differences
Disposals
Charge

(141,958)
(22,195)
58,396
(19,935)

(56,761)
(8,880)
9,971
(9,719)

(27,863)
(3,687)
-
(1,872)

At 1 January 2017

(125,692)

(65,389)

(33,422)

Foreign exchange differences
Impairment charges
Disposals
Charge

7,373
-
-
(18,193)

4,223
-
-
(8,359)

1,789
-
-
(954)

(2,505)
(390)
-
(1,129)

(4,024)

217
-
-
(942)

(11,065)
(1,096)
49
(2,876)

(19,178)
(2,267)
320
(2,503)

(259,330)
(38,515)
68,736
(38,034)

(14,988)

(23,628)

(267,143)

783
(1,608)
-
(1,197)

1,222
-
1,588
(2,350)

15,607
(1,608)
1,588
(31,995)

At 31 December 2017

(136,512)

(69,525)

(32,587)

(4,749)

(17,010)

(23,168)

(283,551)

Carrying amount
At 31 December 2017

At 31 December 2016

73,373

96,767

40,949

52,199

488

1,535

3,628

4,741

10,297

12,001

8,154

6,394

136,889

173,637

Of the £8,154,000 (2016: £6,394,000) net book value within the software, patents and trademarks category, £291,000 (2016: £417,000) 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

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118 Ultra Electronics Holdings plc Annual Report & Accounts 2017

16 Property, plant and equipment

Cost
At 1 January 2016
Foreign exchange differences
Fair value adjustments
Additions
Disposals

At 1 January 2017

Foreign exchange differences
Additions
Disposals
Reclassified to software (see note 15)

At 31 December 2017

Accumulated depreciation
At 1 January 2016
Foreign exchange differences
Charge
Disposals

At 1 January 2017

Foreign exchange differences
Charge
Disposals

At 31 December 2017

Carrying amount
At 31 December 2017

At 31 December 2016

Land and buildings

Freehold
£’000

Short
leasehold
£’000

Plant and
machinery
£’000

Total
£’000

168,462
18,096
(764)
4,645
(8,129)

23,492
2,301
-
447
(331)

107,947
11,527
(764)
3,890
(7,760)

25,909

114,840

182,310

(1,076)
230
(2,911)
-

(5,073)
5,171
(19,786)
(418)

(7,789)
7,098
(22,708)
(418)

37,023
4,268
-
308
(38)

41,561

(1,640)
1,697
(11)
-

41,607

22,152

94,734

158,493

(6,213)
(1,192)
(1,022)
38

(12,343)
(1,569)
(2,393)
295

(81,723)
(8,910)
(8,084)
7,001

(100,279)
(11,671)
(11,499)
7,334

(8,389)

(16,010)

(91,716)

(116,115)

359
(1,148)
8

794
(2,040)
2,899

3,744
(6,978)
19,134

4,897
(10,166)
22,041

(9,170)

(14,357)

(75,816)

(99,343)

32,437

33,172

7,795

9,899

18,918

23,124

59,150

66,195

Freehold land amounting to £6,748,000 (2016: £7,070,000) has not been depreciated. Included within Land and Buildings is £nil (2016: £nil) of assets
in the course of construction.

17 Inventories

Raw materials and consumables
Work in progress
Finished goods and goods for resale

2017
£’000

48,965
18,787
8,875

76,627

2016
£’000

48,147
21,452
8,578

78,177

The amount of any write-down of inventory recognised as an expense in the year was £1,666,000 (2016: £4,912,000).

18 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 £55,817,000 (2016: £48,378,000).

2017
£’000

2016
£’000

116,732
(58,707)

112,271
(52,456)

58,025

59,815

1,429,148

1,480,046

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

119

19 Trade and other receivables

Non-current

Amounts receivable from contract customers (see note 18)

Current
Trade receivables
Provisions against receivables

Net trade receivables
Amounts receivable from contract customers (see note 18)
Other receivables
Prepayments and accrued income

2017
£’000

32,225

2017
£’000

102,934
(1,505)

101,429
84,507
12,897
6,794

2016
£’000

16,352

2016
£’000

98,977
(1,307)

97,670
95,919
11,891
10,251

205,627

215,731

Trade receivables do not carry interest. The average credit period on sale of goods is 32 days (2016: 36 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

2017
£’000

16,361
4,374
871
1,214

22,820

Related
provision
£’000

(112)
(480)
(71)
(842)

(1,505)

Total
£’000

16,249
3,894
800
372

21,315

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

The Group makes provisions against its trade receivables where there are serious doubts as to future recoverability based on prior experience, on
assessment of the current economic climate and on the length of time that the receivable has been overdue. All trade receivables that have been
overdue for more than a year are provided for in full.

Movement in the provision for trade receivables was as follows:

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

2017
£’000

1,307
(23)
617
(396)

1,505

2016
£’000

959
105
633
(390)

1,307

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 counterparties 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 22), net of any allowances for losses, represents the Group’s
maximum exposure to credit risk.

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120 Ultra Electronics Holdings plc Annual Report & Accounts 2017

20 Trade and other payables

Amounts included in current liabilities:
Trade payables
Amounts due to contract customers (note 18)
Other payables
Accruals and deferred income

Amounts included in non-current liabilities:
Amounts due to contract customers (note 18)
Other payables
Accruals and deferred income

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

21 Borrowings

Amounts due in less than one year:
Bank loans
Unsecured loan notes

Amounts due after more than one year:
Bank loans
Unsecured loan notes
Loans from government (see note 23)

Total borrowings:
Amount due for settlement within 12 months
Amount due for settlement after 12 months

2017
£’000

89,205
55,166
21,007
49,702

2016
£’000

68,341
46,310
30,207
48,385

215,080

193,243

3,541
12
4,561

8,114

6,146
243
3,583

9,972

2017
£’000

2016
£’000

44,359
7,393

51,752

-
-

120,375
44,359
7,493

268,120
56,897
6,308

172,227

331,325

51,752
172,227

-
331,325

223,979

331,325

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.

22 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 include 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 or Level 3. Further details on the SADI loan, which is classified as Level 3, are set
out in note 23.

Fair value measurements recognised in the balance sheet

Financial assets at fair value
Foreign exchange derivative financial instruments (through profit and loss)
Interest rate swap

Total

Financial liabilities at fair value
SADI loan (see note 23)
Foreign exchange derivative financial instruments (through profit and loss)

Total

Level 3
£’000

Level 2
£’000

-
-

7,493
-

7,493

2,028
434

2,462

-
13,891

13,891

2017
Total
£’000

2,028
434

2,462

7,493
13,891

21,384

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

121

22 Financial instruments and financial risk management (continued)

Financial assets at fair value
Foreign exchange derivative financial instruments (through profit and loss)

Financial liabilities at fair value
SADI loan (see note 23)
Foreign exchange derivative financial instruments (through profit and loss)

Total

Level 3
£’000

Level 2
£’000

2016
Total
£’000

254

6,308

-
24,101

24,101

6,308
24,101

30,409

Current assets/(liabilities) Non-current assets/(liabilities)
2016
£’000

2017
£’000

2016
£’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:

(11,203)

(12,507)

(2,688)

(11,594)

437

251

2,025

Cash and cash equivalents
Currency derivatives used for hedging
Amounts receivable from contract customers
Other receivables
Trade receivables
Prepayments and accrued 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
Accruals and other payables

2017
£’000

149,522
2,462
116,732
12,897
101,429
6,794

2017
£’000

13,891
164,734
51,752
7,493
89,205
58,707
2,302
65,615

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
64,045

The Directors consider that the carrying amount for all financial liabilities approximates to their fair value.

Liquidity risk
The Group maintains committed banking facilities with core banks to provide prudent levels of borrowing headroom.

The Group’s banking facilities are provided by a small group of banks, led by The Royal Bank of Scotland. For most of the year there were two revolving
credit facilities in place: the first facility, originally established in 2012 and amended in 2015, provided £100 million and was due to expire in August 2019
and the second facility, established in 2014, provided £200 million and was also due to expire in August 2019. On 7 November 2017 these facilities
were replaced with a new £300 million of revolving credit with an expiry date of November 2022. The facility has the option to be extended, subject to
lender consent, by a further two years to November 2024. The facility also incorporates an uncommitted £150 million accordion. The facility is
denominated in Sterling, US Dollars, Canadian Dollars, Australian Dollars and Euros and is used for balance sheet and operational needs. A US$225m
term-loan, which expires in August 2019, was put in place at the time of the Herley acquisition.

A £5 million overdraft, and US$10 million overdraft are available for short-term working capital funding.

All bank loans are unsecured. Interest was predominantly charged at 1.20% (2016: 1.35%) over base or contracted rate.

At 31 December 2017, the Group had available £300,000,000 (2016: £213,000,000) 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 (TCS), 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 23.

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.

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122 Ultra Electronics Holdings plc Annual Report & Accounts 2017

22 Financial instruments and financial risk management (continued)

Liquidity risk (continued)

The following table details the Group’s remaining contractual maturity for its financial liabilities:

2017
Bank loans and overdrafts
Loan notes
Government loans
Trade payables
Currency derivatives used for hedging
Deferred consideration
Accruals and other payables

2016
Bank loans and overdrafts
Loan notes
Government loans
Trade payables
Currency derivatives used for hedging
Deferred consideration
Accruals and other payables

Within
1 year
£’000

48,640
9,115
-
89,205
11,203
55
62,270

5,645
2,049
-
68,341
12,506
51
61,339

1 to
2 years
£’000

122,253
44,462
-
-
2,285
-
2,748

53,923
10,022
-
-
6,355
1,196
1,270

2 to
5 years
£’000

-
-
-
-
384
2,247
597

225,933
48,881
-
-
5,216
2,709
1,111

Over
5 years
£’000

-
-
7,493
-
19
-
-

-
-
6,308
-
24
-
325

Total
£’000

170,893
53,577
7,493
89,205
13,891
2,302
65,615

285,501
60,952
6,308
68,341
24,101
3,956
64,045

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 21, 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 2017, the net fair value of the Group’s currency derivatives is estimated to be a liability of approximately £11,863,000
(2016: liability £23,847,000), comprising £2,462,000 assets (2016: £254,000) and £13,891,000 liabilities (2016: £24,101,000). The gain on
derivative financial instruments included in the Group’s consolidated income statement for the period was £11,983,000 (2016: loss £19,103,000).

The net notional or net contracted amounts of foreign currency related forward sales contracts, classified by year of maturity are shown below.

2017
US Dollars/Sterling

Euro/other currencies

Total

2016
US Dollars/Sterling

Euro/other currencies

Total

Not
exceeding
1 year
£’000

Between
1 year and
5 years
£’000

Over
5 years
£’000

Total
£’000

(139,103)

57,182

(81,921)

1,407

(9,806)

(137,696)

47,376

(589)

(8,988)

(90,909)

58,196

3,553

61,749

80,510

5,198

85,708

138,706

872

9,623

148,329

In 2017, the Group’s foreign exchange derivatives included forward contracts to sell £191.9m and receive USD$250.0m in 2018 in connection
with the proposed Sparton Corporation acquisition. The table above includes these forwards.

Net investment hedges
At the year end, the Group had net investments in US companies where the associated foreign currency translation risk was 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$265m (2016: US$295m).

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$60m (2016: US$90m). The hedging contracts fix US$60m of borrowings to 30 December 2017, reducing
to US$45m by December 2018 and nil by July 2019.

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 28

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

123

22 Financial instruments and financial risk management (continued)

The interest rate swaps were designated effective cash flow hedges and the change in fair value is charged to equity. At 31 December 2017, the net
fair value of interest rate swaps was £434,000 (2016: £315,000). The amount recycled from the income statement during the year was £27,000 and
has been charged to interest cost in the year (2016: £495,000).

The fair value will be realised in the income statement on a quarterly basis over the next 1.5 years. The Group also has US$70m of fixed rate debt
with Pricoa at an interest rate of 3.60%, with US$10m due for repayment in July 2018 and the remainder due for repayment in 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:

2017
Cash and cash equivalents
Loan notes
Unsecured bank loans
Government loans

2016
Cash and cash equivalents
Loan notes
Unsecured bank loans
Government loans

Effective
interest
rate

0.55%
3.60%
2.56%
4.43%

0.36%
3.60%
2.09%
4.43%

Total
£’000

149,522
51,752
164,734
7,493

74,625
56,897
268,120
6,308

Within
1 year
£’000

149,522
7,393
44,359
-

74,625
-
-
-

1 to 2 years
£’000

2 to 5 years
£’000

5+ years
£’000

-
44,359
120,375
-

-
8,128
48,769
-

-
-
-
-

-
48,769
219,351
-

-
-
-
7,493

-
-
-
6,308

Market risk sensitivity analysis
Interest rate risk
During 2017 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 2017. There is no significant difference between the
amount recharged to the income statement and equity in the year.

2017
Interest rate sensitivity

2016
Interest rate sensitivity

Profit
before tax
£’000

1% change
(1,700)

(2,455)

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

6,689
5,177
10,885

22,751

Equity
£’000

6,689
4,686
10,885

22,260

Profit
before
tax
£’000

(6,689)
(5,177)
(9,294)

Equity
£’000

(6,689)
(4,685)
(9,294)

(21,160)

(20,668)

Profit
before
tax
£’000

20,067
12,942
32,948

65,957

Equity
£’000

20,067
11,713
32,948

64,728

Profit
before
tax
£’000

Equity
£’000

(20,067)
(12,942)
(20,245)

(20,067)
(11,713)
(20,245)

(53,254)

(52,025)

6,355
1,177
(15,822)

6,355
1,091
(15,822)

(6,355)
(1,177)
15,475

(6,355)
(1,091)
15,475

15,888
2,943
(44,843)

15,888
2,728
(44,843)

(15,888)
(2,943)
37,759

(15,888)
(2,728)
37,759

2017
Transaction
P&L translation
Foreign exchange derivatives

Total foreign exchange

2016
Transaction
P&L translation
Foreign exchange derivatives

Total foreign exchange

(8,290)

(8,376)

7,943

8,029

(26,012)

(26,227)

18,928

19,143

In 2017, the Group’s foreign exchange derivatives include forward contracts to sell £191.9m and receive USD$250.0m in 2018 in connection
with the proposed Sparton Corporation acquisition. The table above includes these forwards.

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 29

124 Ultra Electronics Holdings plc Annual Report & Accounts 2017

23 Government grants and loans

The Group through its Canadian subsidiaries Ultra Electronics Tactical Communication Systems (TCS) 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 C$32m will be provided to TCS and reimbursed at favourable
rates of interest. Up to C$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. Following delays on some of the TCS programme, a two-year extension of the project completion date to December 2017 and
related repayments to 2032 has been agreed with Industry Canada.

The fair value of the loans has been calculated using a market interest rate for a similar instrument. The valuation used the discounted cash flow method
and considered the value of expected payments using a risk-adjusted discount rate; the discount rate used was 18% for TCS and 15% for UEMS. For TCS,
the amount repayable depends on future revenue growth of the TCS business to 2032 and will be between zero and x1.5 of the amounts received up to a
maximum of C$47.6m. For UEMS, the amount repayable depends on future revenue growth of the UEMS business from 2020 to 2033 and will be between
x1.0 and x1.5 of the amounts received up until the end of the funding period in 2019. As at 31 December 2017, C$2.5m had been received by UEMS.

The significant unobservable inputs for this Level 3 financial instrument are (i) whether, and by how much, TCS/UEMS revenues will grow during the
periods to 2032/2033, and (ii) the specific years in which revenue will grow. There are significant inherent uncertainties in management’s ability to forecast
revenue over the following 16 years, particularly in later years. For TCS, if the compound annual revenue growth rate over the period from 2017 to 2032
was 2.5% higher than assumed in the valuation model, then the net present value of the liability as at 31 December 2017 would increase by C$2.3m
(£1.4m). If the forecast revenue growth occurs in earlier years than envisaged, then the net present value of the liability will increase; if the revenue growth
increases were to occur one year earlier than assumed in the valuation model, then the net present value of the liability as at 31 December 2017 would
increase by C$0.8m (£0.5m).

TCS 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 C$14m of eligible costs associated with these specified
projects. This funding is repayable under a royalty arrangement over the period 2014 to 2021, if these products are successfully brought to market.
Royalties only become payable when sales of these products are made. As there is no minimum repayment, funding received in respect of the IQ
programme has been included in the income statement.

Amounts recognised in the financial statements in respect of these programmes were as follows:

Fair value of SADI loan brought forward
Contributions
Interest charged to finance costs
Foreign exchange differences

Fair value of SADI loan carried forward

Government grants credited to profit in the year

SADI
Other†

2017
£’000

6,308
214
1,133
(162)

7,493

2017
£’000

2,010
19

2,029

2016
£’000

4,289
262
837
920

6,308

2016
£’000

1,663
-

1,663

†In 2017, Ultra Electronics Limited received a £13,000 grant from the UK Government and a £6,000 grant from the Technology Strategy Board.

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 30

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

125

24 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

At 1 January 2016
Credit/(charge) to income
Credit to other comprehensive income
Credit direct to equity
Exchange differences
Effect of change in UK tax rate
Arising on acquisition

At 1 January 2017

Credit/(charge) to income
Charge to other comprehensive income
Charge direct to equity
Exchange differences
Effect of change in US tax rate
Reclassification

At 31 December 2017

Non-current assets
Non-current liabilities

(15,059)
10,977
-
-
(703)
1,189
-

(3,596)

1,087
-
-
462
(2,285)
346

(3,986)

571
(134)
-
167
-
(15)
-

589

(470)
-
(124)
5
-
-

Retirement
benefit
obligations
£’000

15,370
(4,037)
9,973
-
-
(1,789)
-

Goodwill
£’000

(7,735)
(5,715)
-
-
(1,373)
42
2,152

19,517

(12,629)

(1,271)
(4,113)
-
-
-
-

(3,926)
-
-
(315)
5,268
-

959
3,238
-
-
-
(143)
-

4,054

(4,291)
-
-
-
-
-

(237)

14,133

(11,602)

Other
£’000

4,661
1,214
-
-
313
699
-

6,887

3,272
(74)
-
(704)
(3,021)
(346)

6,014

2017
£’000

15,659
(11,337)

4,322

Total
£’000

(1,233)
5,543
9,973
167
(1,763)
(17)
2,152

14,822

(5,599)
(4,187)
(124)
(552)
(38)
-

4,322

2016
£’000

21,377
(6,555)

14,822

†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 tax liabilities, are recognised for loss carry forwards and deductible temporary differences to the extent that
the utilisation against future taxable profits is probable. UK deferred tax assets of £1.2m and a US deferred tax asset of £0.7m (2016: Nil) have not been
recognised as their recovery is uncertain. Canadian deferred tax assets of £2.5m previously unrecognised (2016: £12.0m) have been recognised in this
accounting period as their recovery is now considered probable due to forecast profits for the future periods.

25 Provisions

At 1 January 2017
Created
Reversed
Utilised
Exchange differences

At 31 December 2017

Included in current liabilities
Included in non-current liabilities

Warranties
£’000

Contract
related
provisions
£’000

4,444
1,983
(300)
(1,300)
(161)

4,666

2,608
2,058

4,666

6,739
1,223
(1,471)
(3,192)
(168)

3,131

2,301
830

3,131

Other
£’000

10,919
815
(193)
(4,662)
(458)

6,421

3,756
2,665

6,421

Total
£’000

22,102
4,021
(1,964)
(9,154)
(787)

14,218

8,665
5,553

14,218

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, for example including provisions for liquidated damages or agent fees, are utilised over the period as
stated in the contract to which the specific provision relates. Other provisions include re-organisation costs, deferred consideration, dilapidation costs
and provisions associated with the Oman Airport IT contract termination which were fully utilised during 2017. 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.

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 31

126 Ultra Electronics Holdings plc Annual Report & Accounts 2017

26 Share capital and share options

Authorised:
5p ordinary shares

Allotted, called-up and fully paid:
5p ordinary shares

No.

2017

£’000

No.

2016

£’000

90,000,000

4,500

90,000,000

4,500

77,731,224

3,887

70,463,092

3,523

On 7 July 2017 a total of 7,047,168 ordinary shares of 5 pence were placed, representing 9.9% of Ultra’s issued ordinary share capital prior to the
placing. Net proceeds received, after attributable expenses, were £133.5m.

220,964 ordinary shares having a nominal value of £11,048 were allotted during the year under the terms of the Group’s various share option schemes.
The aggregate consideration received was £3,708,000.

Share options
During the year to 31 December 2017, 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 the 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 2017, share options outstanding under the Savings-Related Share Option Schemes were as follows:

Options granted

2014 – US scheme

2015 – US scheme

2016 – US scheme

2017 – US scheme

2013 – Canadian scheme

2014 – Canadian scheme

2015 – Canadian scheme

2016 – Canadian scheme

2017 – Canadian scheme

2011 – UK 5 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

2017 – UK 3 year scheme

2017 – UK 5 year scheme

Number of shares
2016

2017

Option
price (£)

Exercise
dates

45,528

46,381

6,526

9,971

6,905

8,659

20,826

11,323

10,515

5,924

11,879

6,189

55,431

34,764

31,273

14,682

19,156

44,306

48,843

2,723

7,195

10,884

8,047

3,831

24,613

9,456

13,267

13,217

8,517

13,551

7,025

64,479

38,415

15.94

14.85

15.98

15.89

16.80

16.13

16.12

15.98

16.55

13.33

13.85

16.80

16.13

16.12

15.10

16.55

September 2016 - December 2016

September 2017 - December 2017

September 2018 - December 2018

September 2019 - December 2019

October 2016 - April 2017

October 2017 - April 2018

December 2018 - June 2019

December 2019 - June 2020

December 2020 - June 2021

December 2016 - June 2017

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

December 2020 - June 2021

December 2022 - June 2023

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 32

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

127

26 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 the grant. This is an approved scheme and vesting is unconditional. Options vest after three years and lapse after ten years from the date of
the grant.

At 31 December 2017, share options outstanding under the Company Share Option Plan were as follows:

Options granted

2010
2011
2012
2013
2014
2015
2016
2017

Number of shares
2016

2017

Option
price (£)

3,054
3,673
4,022
10,715
13,108
10,758
27,206
18,674

3,054
5,902
5,042
20,621
23,546
14,674
30,623
-

14.83
16.97
17.10
17.18
18.29
17.31
17.90
21.91

Exercise
dates

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
March 2020 - March 2027

3. Executive Share Option Scheme
The Executive Share Option Scheme provides share options for nominated employees in the UK, the US and Canada. The purchase price is set at a
mid-market price on the date of the grant. This is an unapproved scheme and vesting is unconditional. Options vest after three years and lapse after
seven years from the date of the grant.

At 31 December 2017, share options outstanding under the Executive Share Option Scheme were as follows:

Options granted

2010
2011
2012
2013
2014
2015
2016
2017

Number of shares
2016

2017

Option
price (£)

-
16,276
22,549
41,186
61,942
101,014
111,662
109,420

11,037
33,880
46,209
82,431
129,536
126,657
130,448
-

14.83
16.97
17.10
17.18
18.29
17.31
17.90
21.91

Exercise
dates

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
March 2020 - March 2024

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 78-91. In April 2017, LTIPs were awarded to nominated employees. The awards will vest in March 2020 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 (£)

2017

11.64
10.40
15.91
7.79
17.39

Number
of options

2017

1,450,545
468,851
(83,566)
(176,792)
(205,868)

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)

10.65

1,453,170

11.64

1,450,545

17.10

214,392

16.82

243,342

The Group recognised total expenses of £682,000 (2016: £984,000) 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 £18.75. The fair value of
options granted during the year that are expected to vest was £4,283,912 (2016: £2,969,796).

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 33

128 Ultra Electronics Holdings plc Annual Report & Accounts 2017

26 Share capital and share options (continued)

5. All Share Based Payment Arrangements (continued)
The Group’s equity-settled share-based payments are measured at fair value at the date of the 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*†

17.49
15.71
20.4
3.8
0.6
2.6

17.61
17.66
23.2
6.0
1.4
2.4

17.47
17.46
23.9
5.0
1.5
2.3

2017

18.86
n/a
19.0
3.0
0.5
0.0

Share save*

CSOP*

ESOS*

LTIP*

17.25
15.51
21.3
3.6
0.7
2.5

17.34
17.39
23.3
6.0
1.5
2.4

16.99
16.96
24.4
5.0
1.7
2.3

2016

17.56
n/a
18.4
3.0
0.6
0.0

*Figures in the above table show an average across the invested schemes at year end.
†April 2017 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 the 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 %

2017

n/a
19.05
3.0
19.2
0.4

2016

n/a
17.63
3.0
20.5
0.6

Figures in the above table show an average across the schemes.

The weighted average fair value of options granted during the year was £11.88 (2016: £6.81).

The weighted average remaining contractual life of share options was 4.2 years (2016: 4.6 years).

27 Equity

Balance at 1 January 2016
Total comprehensive

income for the year
Non-controlling interest’s

investment made in subsidiary

Equity-settled employee

share scheme

Dividends to shareholders

Share
capital
£’000

3,514

9
-

Share
premium
account
£’000

61,052

2,968
-

Reserve
for own
shares
£’000

Hedging
reserve
£’000

Translation
reserve
£’000

(2,581)

(25,908)

42,038

Retained
earnings
£’000

238,728

-
-

(43,078)

97,454

18,933

-
-

1,929

1,027
(32,583)

Non
controlling
interests
£’000

(2)

-
-

Total
equity
£’000

316,843

73,307

2,000

4,004
(32,583)

Balance at 1 January 2017

3,523

64,020

(2,581)

(68,986)

139,492

228,034

363,571

Total comprehensive

income for the year

Issue of share capital
Equity-settled employee

share scheme

Tax on share based payments
Dividends to shareholders

-
352

12
-
-

-
133,195

3,696
-
-

-
-

-
-
-

20,927
-

(44,089)
-

68,978
-

(30)
-

45,786
133,547

-
-
-

682
(124)
(34,959)

-
-
-

4,390
(124)
(34,959)

Balance at 31 December 2017

3,887

200,911

(2,581)

(48,059)

95,403

262,611

512,211

The share premium account represents the premium arising on the issue of equity shares.

The “own shares reserve” represents the cost of shares in Ultra Electronics Holdings plc purchased in the market and held by the Ultra Electronics
Employee Trust to satisfy options under the Group’s Long-Term Incentive Plan (“LTIP”) share schemes. At 31 December 2017, the number of own
shares held was 235,245 (2016: 235,245).

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 34

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

129

28 Notes to the cash flow statement

Operating profit
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment charge of intangible assets
Cost of equity-settled employee share schemes
Adjustment for pension funding
Loss on disposal of property, plant and equipment
Decrease in provisions

Operating cash flow before movements in working capital
(Increase)/decrease in inventories
Increase in receivables
Increase/(decrease) in payables

Cash generated by operations

Income taxes paid
Interest paid

Net cash from operating activities

Reconciliation of net movement in cash and cash equivalents to movements in net debt.

Net increase 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
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

2017
£’000

2016
£’000

61,484

89,725

10,166
31,995
1,608
682
(8,964)
565
(7,086)

90,450
(2,093)
(15,367)
24,442

11,499
38,034
-
984
(8,468)
291
(8,975)

123,090
8,295
(339)
(19,044)

97,432

112,002

(10,324)
(9,543)

(9,012)
(10,156)

77,565

92,834

2017
£’000

80,118
85,482

165,600
2,040
(1,281)
15,884

2016
£’000

20,766
54,419

75,185
-
(848)
(35,465)

182,243
(256,700)

38,872
(295,572)

(74,457)

(256,700)

2017
£’000

2016
£’000

149,522
(223,979)

74,625
(331,325)

(74,457)

(256,700)

Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

Reconciliation of changes in financing liabilities.

Borrowings at start of year
Repayments of borrowings
Proceeds from borrowings
Loan syndication costs
Amortisation of finance costs of debt
Translation differences

Borrowings at end of year

2017
£’000

(331,325)
168,975
(83,493)
2,040
(1,281)
21,105

2016
£’000

(341,046)
114,419
(60,000)
-
(848)
(43,850)

(223,979)

(331,325)

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130 Ultra Electronics Holdings plc Annual Report & Accounts 2017

29 Other financial commitments

a) Capital commitments
At the end of the year capital commitments were:

Contracted but not provided

2017
£’000

696

2016
£’000

430

b) Lease commitments
At 31 December 2017, 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

30 Retirement benefit schemes

2017
£’000

11,557
24,402
5,961

41,920

2016
£’000

13,360
34,154
10,576

58,090

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 was closed to new members in 2003. 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, however the scheme was closed to future benefit accrual from 5 April 2016. 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. 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 £9,848,000 (2016: £8,837,000).

Defined benefit schemes
All the defined benefit schemes were actuarially assessed at 31 December 2017 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 interests 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.

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.

Investment Strategy
The investment strategy is set by the Trustee of the Scheme. The current strategy is broadly split into growth and matching portfolios. The growth
portfolio is primarily invested in equities, property, diversified growth funds, private equity and private credit. The matching portfolio is invested
primarily in bonds, through the “absolute return bonds” holding, and liability driven investment (“LDI”) funds. Part of the investment objective of the
Scheme is to minimise fluctuations in the Scheme’s funding levels due to changes in the value of the liabilities. This is primarily achieved through the
use of the LDI funds that aim to hedge movements in the liabilities due to changes in interest rate and inflation expectations. Currently, the Scheme
targets hedging of around 65% on the technical provisions funding measure to both interest rate and inflation expectation changes. LDI primarily
involves the use of government bonds and derivatives such as interest rate and inflation swaps. The main risk is that the investments held move
differently to the liability exposures; this risk is managed by the Trustee, its advisers and the Scheme’s LDI manager, who regularly assess the position.

The assets held are also well diversified, across asset classes and investment managers. This reduces the risk of drops in the value of individual
asset classes, or a particular manager underperforming its investment objectives, having a negative impact on the funding position of the
Scheme. The investment performance and liability experience are regularly reviewed by the Trustee, and the Trustee will consult with the
Company over any changes to the investment strategy.

Rather than holding the underlying assets directly, the Scheme invests in pooled investment vehicles managed by professional external
investment managers, whom the Trustee has appointed with the help of its investment advisors. The equity and diversified growth fund
valuations are based on quoted market prices, while the property, private equity, private credit, absolute return bonds and LDI are primarily
unquoted. All valuations are provided by the respective investment manager.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

131

30 Retirement benefit schemes (continued)

Valuation
The scheme is subject to regular actuarial valuations, which are usually carried out every three years. The last actuarial valuation of the scheme
was on 6 April 2016. 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 2017 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
2017

2.50%
3.20%
2.20%
n/a
2.95%
1.95%

Canada
2017

Switzerland
2017

3.50%
3.20%
2.20%
3.45%
n/a
n/a

0.65%
1.00%
1.00%
1.00%
n/a
n/a

UK
2016

2.55%
3.30%
2.30%
n/a
3.05%
1.95%

Canada
2016

3.50%
3.30%
2.30%
3.55%
n/a
n/a

Switzerland
2016

0.35%
0.80%
0.80%
1.00%
n/a
n/a

For each of these assumptions there is a range of possible values. Relatively small changes in some of these variables can have a significant impact on
the level of the total obligation. For the UK scheme, a 0.1% increase in the inflation assumption to 3.30% and a 0.1% decrease in the discount rate to
2.40% would increase the scheme’s liabilities by 1.6% and 1.9% respectively. If the members’ life expectancy were to increase by 1 year, the scheme
liabilities would increase by 4.0%. The average duration of the scheme liabilities is 19 years (2016: 20 years).

The assumptions used are provided by Willis Towers Watson as Company advisors, and also by reference to the Bank of England Gilt curve at a
duration appropriate to the Scheme’s liabilities of 19 years. At 31 December 2017 this was 1.8% and one month later it was 1.9%; this variation of
0.1% has been used in the sensitivity analysis presented above.

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 2016 1.25% imps from 2007 (UK only)
100% SAPS S2PMA_L/84% SAPS S2PFA_L c2007 CMI 2016 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

2017

2016

23 years
26 years
25 years
27 years

23 years
26 years
25 years
28 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
2017
£m

-
0.9
9.6
-

(7.0)

3.5

Canada
2017
£m

Switzerland
2017
£m

0.1
0.1
0.3
-

(0.3)

0.2

0.3
-
0.1
-

0.4

Total
2017
£m

0.4
1.0
10.0
-

(7.3)

4.1

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)

Of the current service cost for the year, £nil (2016: £1.0 million) has been included in cost of sales, and £0.4 million (2016: £0.6 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:

UK
2017
£m

Canada
2017
£m

Switzerland
2017
£m

Fair value of scheme assets
Present value of scheme liabilities

289.8
(371.3)

Scheme deficit
Related deferred tax asset

Net pension liability

(81.5)
13.9

(67.6)

10.6
(10.7)

(0.1)
-

(0.1)

5.9
(7.0)

(1.1)
0.2

(0.9)

Total
2017
£m

306.3
(389.0)

(82.7)
14.1

(68.6)

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)

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 37

132 Ultra Electronics Holdings plc Annual Report & Accounts 2017

30 Retirement benefit schemes (continued)

Movements in the present value of defined benefit obligations during the year were as follows:

UK
2017
£m

Canada
2017
£m

Switzerland
2017
£m

(382.4)
-
(9.6)
9.0
-
-
11.7

(11.1)
(0.1)
(0.3)
(0.2)
0.3
-
0.7

(7.0)
(0.3)
(0.1)
-
0.3
-
0.1

Total
2017
£m

(400.5)
(0.4)
(10.0)
8.8
0.6
-
12.5

UK
2016
£m

(307.7)
(1.3)
(11.4)
(89.2)
-
15.5
11.7

Canada
2016
£m

Switzerland
2016
£m

(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

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

at 31 December

(371.3)

(10.7)

(7.0)

(389.0)

(382.4)

(11.1)

(7.0)

(400.5)

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
2017
£m

271.2

7.0
14.7
0.1
9.4
(0.9)
(11.7)

Fair value at 31 December

289.8

Scheme assets were as follows:

Fair value:
Equities
Bonds
Property
Other assets
Other investment funds:
Absolute return
LDI
Multi-asset credit

UK
2017
£m

95.1
-
16.6
1.5

78.4
75.5
22.7

Canada
2017
£m

10.4

0.3
0.4
(0.3)
0.6
(0.1)
(0.7)

10.6

Switzerland
2017
£m

5.7

-
0.2
(0.3)
0.4
-
(0.1)

5.9

Canada
2017
£m

Switzerland
2017
£m

3.5
6.5
-
0.6

-
-
-

2.1
1.7
0.8
1.0

0.3
-
-

5.9

Total
2017
£m

287.3

7.3
15.3
(0.5)
10.4
(1.0)
(12.5)

UK
2016
£m

224.5

8.4
40.3
-
10.3
(0.6)
(11.7)

306.3

271.2

Total
2017
£m

100.7
8.2
17.4
3.1

78.7
75.5
22.7

UK
2016
£m

87.0
-
16.4
38.4

43.1
62.0
24.3

Canada
2016
£m

8.6

0.4
0.2
2.0
0.5
(0.2)
(1.1)

10.4

Switzerland
2016
£m

4.5

-
0.2
0.8
0.4
-
(0.2)

5.7

Canada
2016
£m

Switzerland
2016
£m

3.4
6.4
-
0.5

0.1
-
-

1.8
2.4
0.6
0.9

-
-
-

Total
2016
£m

237.6

8.8
40.7
2.8
11.2
(0.8)
(13.0)

287.3

Total
2016
£m

92.2
8.8
17.0
39.8

43.2
62.0
24.3

306.3

271.2

10.4

5.7

287.3

289.8

10.6

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
2017
£m

14.7

(0.3)

9.3

23.7

Canada
2017
£m

Switzerland
2017
£m

0.4

(0.2)

0.2

(0.3)

0.3

0.2

Total
2017
£m

15.3

(0.8)

9.6

24.1

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)

Cumulative actuarial losses, net of deferred tax, recognised in the consolidated statement of comprehensive income at 31 December 2017 were
£73.5 million (2016: £93.5 million).

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 38

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

133

30 Retirement benefit schemes (continued)

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

2017
£m

(389.0)
306.3

(82.7)

(0.8)
(0.2%)
15.3

5.0%

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%

The amount of contributions expected to be paid to defined benefit schemes during the 2018 financial year is £10.3m. For the UK scheme this
includes an additional deficit payment of £10.0m agreed with the Trustee. This will be followed by £10.5m in 2019 and £11.0m per annum for the
following five years.

31 Acquisitions and disposals

On 7 July 2017, Ultra announced that it had entered into a conditional agreement to acquire Sparton Corporation (“Sparton”), its 50/50 partner in
the long-standing ERAPSCO joint venture, which supplies sonobuoys to the US Navy. The transaction was subject to the approval of the United
States Department of Justice (‘DOJ’) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (‘HSR’). Following recent discussions with the
DOJ, and competition concerns raised by it, Ultra and Sparton mutually decided to terminate the merger agreement in March 2018. See page 19 for
further details.

Acquisitions
In aggregate, cash consideration of £6.5m was paid in respect of retention payments for the prior period 3 Phoenix acquisition (2016: £5.2m on
final payments and deferred consideration for acquisitions made in prior years).

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 2016. Further proceeds may be
received over the 24 month period after the disposal, based on agreed targets; any such proceeds will be accounted for in the year of receipt. The
net loss on disposal was £4,076,000.

32 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 78-91.

Short-term employee benefits
Post-employment benefits
Share-based payments

33 Non-controlling interests

2017
£’000

3,428
425
2,592

6,445

2016
£’000

4,628
410
1,042

6,080

In November 2016, the Group sold a 5% share of its Corvid Holdings Limited subsidiary for cash consideration of £2,000,000. Before any intra-
group eliminations, the consolidated revenue of the subsidiary in the year/prior period was £4,211,000 (2016: £1,214,000), the loss was £578,000
(2016: £40,000 loss) and the net assets were £2,892,000 (2016: £3,466,000). Sales to Group companies were £2,418,000 (2016: £496,000).

34 Contingent liabilities

The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business totalling £42.8m
(2016: £40.3m).

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, 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.

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134 Ultra Electronics Holdings plc Annual Report & Accounts 2017

35 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 26
• Election of independent directors – see Corporate Governance Report on page 66
• Contractual arrangements – see Directors’ Report on page 93
• Details of independent directors – see Corporate Governance Report on page 58
• Substantial shareholders – see Directors’ Report on page 93

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).

36 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.

AEP Networks Asia Pacific SDN BHD

AEP Networks Australia Pty Limited

AEP Networks Inc.

AEP Networks 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

Flightline Electronics Inc.

Forensic Technology (Europe) Limited

Forensic Technology AEC Thailand Limited

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 Limited

Herley Industries Inc.

Herley-CTI Inc.

Projectina AG

Prologic Inc.

Special Operations Technology Inc. (SOTECH)

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

Country
incorporated
United States

United States

Malaysia

Australia

United States

Ireland

United Kingdom

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

Switzerland

United States

South Africa

United States

Australia

%
owned
100%

100%

95%

100%

50%

100%

Direct/Indirect
(Group interest)
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)

Ultra_AR_2017_Financal_Ultra AR 2008 Financial copy .qxd 12/03/2018 09:00 Page 40

6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

135

36 Related undertakings (continued)

Company name
Ultra Electronics Canada Inc.

Ultra Electronics Connecticut LLC

Ultra Electronics Defense Inc.

Ultra Electronics DNE Technologies Inc.

Ultra Electronics Enterprises (USA) LLC

Ultra Electronics Finance Switzerland A.G.

Country
incorporated
Canada

United States

Switzerland

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

Ultra Electronics in collaboration with Oman Investment Corporation LLC (in liquidation)

Oman

Ultra Electronics Inc.

Ultra Electronics Investments (USA) LLC

Ultra Electronics Limited

Ultra Electronics Maritime Systems Inc.

Ultra Electronics Measurement Systems Inc.

Ultra Electronics (Netherlands) Limited

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 Limited

Ultra Electronics Tisys

Ultra Electronics TopScientific Aerospace Limited

UnderSea Sensor Systems Inc.

Vados Systems Limited

Weed Instrument Company Inc.

United States

United Kingdom

Canada

United States

United Kingdom

United States

United Kingdom

United States

United Kingdom

Canada

China

France

Hong Kong

United States

United Kingdom

United States

%
owned
100%

100%

70%

100%

50%

100%

Direct/Indirect
(Group interest)
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.

Registered Office: Ultra Electronics Holdings plc, 417 Bridport Road,Greenford, Middlesex UB6 8UA, England.

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136 Ultra Electronics Holdings plc Annual Report & Accounts 2017

37 IFRS 15 – Revenue from contracts with customers

IFRS 15 Revenue from contracts with customers – is effective from 1 January 2018. A detailed project has been undertaken to determine the impact
of IFRS 15. The project has assessed revenue and contract terms from across all the Group’s business units and contracting types. There is no impact
to the timing of the Group’s cash flows nor to the timing of revenue recognition on the majority of the Group’s contracts. The table below sets out
the impact to the 2017 income statement and balance sheet if IFRS 15 had been applied during the year:

Income Statement impact
Revenue
Cost of sales

Gross profit

Underlying operating profit
Statutory operating profit
Statutory profit before tax
Tax

Statutory profit after tax

Balance Sheet impact
Inventories
Amounts receivable from contract customers
Amounts due to contract customers
Tax liabilities

Net assets

Adjustment to retained earnings

2017 as
presented
£m

2017
if presented
Adjustment under IFRS 15
£m

£m

775.4
(545.2)

230.2

120.1
61.5
60.6
(11.7)

48.9

(7.1)
4.7

(2.4)

(2.4)
(2.4)
(2.4)
0.7

(1.7)

768.3
(540.5)

227.8

117.7
59.1
58.2
(11.0)

47.2

2017 as
presented
£m

2017
if presented
Adjustment under IFRS 15
£m

£m

76.6
116.7
(58.7)
(13.6)

512.2

262.6

1.2
(10.5)
(2.8)
0.7

(11.4)

77.8
106.2
(61.5)
(12.9)

500.8

251.2

The most significant changes relative to current accounting treatments 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 treated as long term contracts that may need to be treated as sales of goods; and
(iv) the accounting for certain licences that are determined to provide separately identifiable benefits to the customer.

The revenue for the substantial majority of contracts that are currently recognised using contract accounting will continue to be accounted for over
the life of the contract, however the method by which performance obligations are determined will change on certain contracts including the
identification of material rights. A small number of contracts no longer qualify to be contract-accounted and revenue will instead be recorded at the
point at which control of the goods transfers to the customer. The timing of revenue recognised on the substantial majority of sale-of-goods
contracts is not significantly affected with revenue continuing to be recognised as control of goods is passed to the customer.

The project determined that 2016 consolidated group revenue would have been £1.6m higher at £787.4m, and 2016 underlying operating profit
would have been £0.2m lower at £130.9m if IFRS 15 had been applied. As set out in the table above, 2017 consolidated group revenue would
have been £7.1m lower at £768.3m, and 2017 underlying operating profit would have been £2.4m lower at £117.7m if IFRS 15 had been applied.
The 1 January 2018 order book increases by £17.0m to £914.4m.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

137

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.

The consolidated financial information has been prepared on the historical cost basis except for certain assets and liabilities which are measured at fair
value, see note 23.

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:
• IAS 12 Income Taxes – Amendments regarding the recognition of deferred tax assets for unrealised losses.
• Annual Improvements to IFRS 2014-2016 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):
• 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 – is effective from 1 January 2018. A detailed project has been undertaken to determine the impact of
IFRS 15. The key findings and determination of impact are set out in note 37. The Group will recognise the cumulative effect of applying IFRS 15 at the
1 January 2018 transitional date. The prior period will not be restated.

• 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.

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 45.

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.

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 the 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 IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the
cost on initial recognition of an investment in an associate or jointly controlled entity.

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138 Ultra Electronics Holdings plc Annual Report & Accounts 2017

Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group’s accounting policies, the Directors are required to make judgements (other than those involving estimations) that have a
significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not
readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to
be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision
and future periods if the revision affects both current and future periods.

Critical judgements in applying the Group’s accounting policies
The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made
in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in financial statements.

OMAN AIRPORT IT CONTRACT
The Oman Airport IT contract was terminated in February 2015. 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 to pursue claims against the customer on behalf of the interested parties.

There remains significant uncertainty regarding the likely outcome of proceedings with the Sultanate of Oman, Ministry of Transport & Communications.
Material items have been disclosed separately within the financial statements. In accordance with IAS 37, it is management’s judgement that no provision
is required at the balance sheet date.

Critical accounting estimates and assumptions
The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period, that may have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

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. This revenue is derived from a large number of individual contracts across the Group.

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 is carried out using the experience of the Group’s
engineers, project managers and finance and commercial professionals. 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.

RETIREMENT BENEFIT PLANS
The Group accounts for its post-retirement pension plans in accordance with IAS 19 Employee Benefits.

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 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 in 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 it has no impact on short-term cash contributions since these are based upon separate
independent actuarial valuations.

Details of the pension scheme estimates, assumptions and obligations at 31 December 2017 are provided in note 30.

IMPAIRMENT TESTING
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, particularly with respect to the Infrastructure CGU grouping, 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.

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.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

139

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.

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.

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
substantially all of the risks and rewards of ownership have transferred to the customer.

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.

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140 Ultra Electronics Holdings plc Annual Report & Accounts 2017

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.

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 (see note 15).

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 of fixed assets
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.

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.

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.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

141

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 initially measured at fair value then subsequently remeasured at amortised cost less any impairment. 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.

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.

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.

Curtailment gains or losses are recognised immediately in the income statement.

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.

Trade payables
Trade payables are initially measured at fair value then subsequently remeasured at amortised cost.

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.

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142 Ultra Electronics Holdings plc Annual Report & Accounts 2017

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 and contract-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.

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.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

143

Operating profit
Operating profit is stated after charging restructuring costs 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 and underlying performance measures
In the analysis of the Group’s operating results, earnings per share and cash flows, information is presented to provide readers and stakeholders with
additional performance indicators that are prepared on a non-statutory basis. This ‘underlying’ 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. The non-statutory performance measures are consistent with how business performance is planned and reported within the
internal management reporting to the Divisional management teams, Executive Committee and to the Board. Some of the measures are used for setting
remuneration targets. The Group also uses ‘organic’ performance measures for the order book, order intake and the income statement. Explanations of
how they are determined, and how they reconcile to IFRS statutory measures are set out below. This additional non-statutory 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 related tax effects of the above items are reflected when determining underlying earnings per share, as set out in note 13.
• 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.

• EBITDA is the underlying operating profit before depreciation charges and before amortisation arising on internally-generated intangible assets and on

other, non-acquired, intangible assets. The figure is adjusted to remove the EBITDA generated by businesses up to the date of their disposal in the period.

• Net debt comprises loans and overdrafts less cash and cash equivalents. The determination of net debt is set out in note 28.
• Total shareholder return is annual shareholder return (capital growth plus dividends paid, assuming dividends reinvested) over a rolling five year period.

ORGANIC MEASURES:
The Divisional management teams, the Executive Team and the Board review and compare current and prior year group and divisional revenue and
underlying operating profit at constant exchange rates and exclude the impact of acquisitions and disposals from these organic performance measures. The
order intake and order book are also reviewed and compared in the same way.

The constant exchange comparison retranslates the prior year reported results from the prior year’s average exchange rates into the current year’s average
exchange rates, and in the case of underlying operating profit adjusts for the impact of exchange rate movements on prior year-end USD net assets held in
GBP functional currency entities.

The impact of business acquisitions is excluded for the first 12 months of ownership, from the date of completion of purchase. For disposals, comparative
figures are adjusted to reflect the comparable period of ownership. The ID business was disposed of in late August 2016; references to ‘organic’
performance, have excluded the revenue and underlying operating profit for those eight months of 2016 ownership.

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144 Ultra Electronics Holdings plc Annual Report & Accounts 2017

Company balance sheet
31 December 2017

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
Retained earnings brought forward
Profit and loss for year
Own shares

Shareholders’ funds

Note

38
39

2017
£’000

2016
£’000

511
815,144

1,038
939,943

815,655

940,981

11,352

16,678

(191,081)

(180,722)

(179,729)

(164,044)

635,926
(164,734)

776,937
(325,017)

471,192

451,920

3,887
200,911
352,681
(83,706)
(2,581)

3,523
64,020
345,971
40,987
(2,581)

471,192

451,920

45
46
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 5 March 2018.

On behalf of the Board
D. Caster, Executive Chairman
A. Sharma, Group Finance Director

The accompanying notes are an integral part of this balance sheet.

Company statement of changes in equity
31 December 2017

Balance at 1 January 2016
Retained profit for the year

Total comprehensive income for the year
Issue of share capital
Equity-settled employee share schemes
Dividends paid

Balance at 31 December 2016

Balance at 1 January 2017
Retained profit for the year

Total comprehensive income for the year
Issue of share capital
Equity-settled employee share schemes
Dividends paid

Balance at 31 December 2017

Share
capital
£’000

3,514
-

-
9
-
-

3,523

3,523
-

-
352
12
-

Share
premium
account
£’000

61,052
-

-
2,968
-
-

64,020

64,020
-

-
133,195
3,696
-

Profit
and loss
account
£’000

377,570
40,987

40,987
-
984
(32,583)

386,958

386,958
(83,706)

(83,706)
-
682
(34,959)

Own
shares
£’000

(2,581)
-

-
-
-
-

Total
£’000

439,555
40,987

40,987
2,977
984
(32,583)

(2,581)

451,920

(2,581)
-

-
-
-
-

451,920
(83,706)

(83,706)
133,547
4,390
(34,959)

3,887

200,911

268,975

(2,581)

471,192

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

145

Notes to accounts – Company
31 December 2017

38 Property, plant and equipment

Cost
At 1 January 2016
Additions

At 1 January 2017
Disposals

At 31 December 2017

Accumulated depreciation
At 1 January 2016
Charge

At 1 January 2017
Charge

At 31 December 2016

Net book value
At 31 December 2017

At 31 December 2016

39 Investments

Plant and
machinery
£’000

2,039
534

2,573
(518)

2,055

1,468
67

1,535
9

1,544

511

1,038

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 36.

b) Investment in subsidiary undertakings

At 1 January 2017
Impairments

At 31 December 2017

The impairments arose 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

41 Deferred tax

Movements in the deferred tax asset were as follows:

Beginning of year
Credit /(charge) to the profit and loss account

End of year

Total
£’000

939,943
(124,799)

815,144

2016
£’000

15,199
30
1,146
303

16,678

2016
£’000

37
(7)

2017
£’000

8,785
505
1,747
315

11,352

2017
£’000

30
475

505

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146 Ultra Electronics Holdings plc Annual Report & Accounts 2017

41 Deferred tax (continued)

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 (2016: nil).

42 Creditors: amounts falling due within one year

Bank loans and overdraft
Amounts owed to subsidiary undertakings
Other payables
Accruals and deferred income

2017
£’000

505

2017
£’000

505

2016
£’000

2017
£’000

72,283
112,208
1,089
5,501

2016
£’000

52,025
119,116
4,062
5,519

191,081

180,722

The bank loans are unsecured. Interest was predominantly charged at 1.20% (2016: 1.35%) over base or contracted rate.

43 Creditors: amounts falling due after more than one year

Borrowings

2017
£’000

2016
£’000

164,734

325,017

164,734

325,017

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

2017
£’000

72,283

2016
£’000

52,025

(72,283)

(52,025)

120,375
44,359

268,120
56,897

164,734

325,017

The loan notes are unsecured and due for repayment in 2018 and 2019. Interest was charged at 3.60% (2016: 3.60%).

45 Called-up share capital

The movements are disclosed in note 26.

46 Equity reserve

The profit and loss account includes £65,400,000 (2016: £175,157,000) which is not distributable. A net foreign exchange gain of £23,707,000 was
taken to reserves in the year. Further details in respect of dividends are presented in note 12 and in respect of share-based payments in note 26.

The Company holds 235,245 own shares (2016: 235,245).

47 Related parties

Transactions with Corvid Holdings Limited are set out in note 33.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

147

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 30. 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 and the critical accounting estimates and assumptions as set out below.

Foreign currency
Transactions denominated in foreign currencies are recorded in the local currency at the actual exchange rate at the date of the transaction (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 the 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 26.

Related parties
The 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 85-90.

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.

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Ultra Electronics Holdings plc Annual Report & Accounts 2017

Critical accounting judgements and key sources of estimation uncertainty
In the application of the Company’s accounting policies, the Directors are required to make judgements (other than those involving estimates) that have a
significant impact on the accounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not
readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to
be relevant. Actual results may differ from these estimates. The estimates and underlying assumption are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision
and future periods if the revision affects both current and future periods.

Critical accounting judgements in applying the Company’s accounting policies
There were no critical accounting judgements that would have a significant effect on the amounts recognised in the Parent Company financial statements.

Critical accounting estimation and assumptions
IMPAIRMENTS TO INVESTMENTS IN SUBSIDIARY UNDERTAKINGS
Following the review of the recoverability of investments within the corporate company structure, an impairment was identified due to the calculated
value-in-use being in excess of the book value of certain investments. The value-in-use is calculated by discounting the forecast cash flows of each investment
to present value. The Directors consider the investments in the US business and Giga Communications Limited to be most sensitive to the achievement of the
forecast cash flows and to the discount rate applied in calculating the present value of the future cash flows. A 0.1% increase in the discount rate would
increase the impairment charge by £4.3m, and a 1% reduction in forecast future cash flows would increase the impairment charge by £6.8m.

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6. Five-year review

5. Company ﬁnancials

4. Group ﬁnancials

3. Governance

2. Strategic report

1. Overview

Ultra Electronics Holdings plc Annual Report & Accounts 2017

149

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 dividend payments, acquisitions and financing3
Net debt at year-end 4

Underlying earnings per share (p) 5
Dividend per share (p)

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

2017
£m

203.2
242.7
329.5

775.4

32.6
28.2
59.3

121.7

118.1

120.0

131.1

120.1

16.3%

16.5%

16.7%

15.5%

49.3
38.2

79.0
46.7
(42.2)

127.1
42.2

21.5
6.5

83.1
52.8
(129.5)

123.1
44.3

34.8
25.0

81.3
48.4
(295.6)

123.9
46.1

67.6
58.3

120.4
86.0
(256.7)

134.6
47.8

60.6
49.4

116.5
65.3
(74.5)

116.7
49.6

Average employee numbers

4,274

4,787

4,843

4,466

4,172

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 related cash flow in 2016 and 2017.

3 Free cash flow before dividends paid, acquisitions and financing has been adjusted to include the purchase of LTIP shares, which are included in

financing activities. Prior periods have been re-stated to include dividend receipts from equity-accounted investments.

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.

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150

Ultra Electronics Holdings plc Annual Report & Accounts 2017

Footnote
A reconciliation is set out in note 2 between operating
proﬁt and underlying operating proﬁt, between proﬁt
before tax and underlying proﬁt before tax and
between cash generated by operations and underlying
operating cash ﬂow. The calculation for underlying
earnings per share is set out in note 13.

Further detail on non-statutory performance measures is
set out on page 143.

underlying operating proﬁt before the S3
programme, amortisation of intangibles arising on
acquisition, impairment charges, Oman contract
termination related costs and adjustments to contingent
consideration net of acquisition and disposal related
costs. IFRS operating proﬁt was £61.5m (2016: £89.7m).

organic growth (of revenue or proﬁt) is the annual
rate of increase in revenue or proﬁt that was achieved
at constant currencies, assuming that acquisitions made
during the prior year were only included for the same
proportion of the current year, and adjusted for
disposals made during the prior year to reﬂect the
comparable period of ownership.

net ﬁnance charges exclude fair value movements on
derivatives, deﬁned beneﬁt pension interest charges and
discount on provisions.

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

underlying proﬁt before tax before the S3
programme, amortisation of intangibles arising on
acquisition, impairment charges, Oman contract
termination related costs, 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 66.2p (2016: 82.8p).

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/contract termination related costs.

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.

underlying operating margin is the underlying
operating proﬁt as a percentage of revenue.

operating cash conversion is underlying operating
cash ﬂow as a percentage of underlying operating proﬁt.

Ultra_AR&A_2017_cover_AW_Layout 1 09/03/2018 11:21 Page 2

Ultra Electronics Holdings plc Annual Report & Accounts 2017

5. Company ﬁnancials

Company balance sheet

Notes to accounts

Statement of accounting policies

for the Company accounts

6. Five-year review

Five-year review

144

145

147

149

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
9713 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-pcs.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
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

How and where Ultra operates

Executive Chairman’s Governance Statement

Company statement of changes in equity

1. Overview

Operational highlights

2. Strategic report

Executive Chairman’s review

Douglas Caster

Business model

Strategies for growth

Financial review

Amitabh Sharma, Group Finance Director

Key Performance Indicators

Standardisation & Shared Services

Aerospace & Infrastructure

Communications & Security

Maritime & Land

Market-facing segments

2017 Principal Risks and Uncertainties

Making a difference

Developing Ultra’s people

3. Governance

Board of Directors

Douglas Caster

Corporate Governance Report

Nomination Committee Report

Audit Committee Report

Remuneration Report

Directors’ Report

Executives and advisors

4. Group ﬁnancials

Independent auditor’s report

Group highlights

Consolidated income statement

Consolidated statement of

comprehensive income

Consolidated balance sheet

Consolidated cash ﬂow statement

Consolidated statement of changes in equity

Statement of accounting policies in respect of

the Group’s consolidated ﬁnancial statements

104

105

106

107

108

109

137

Corporate and social responsibility

Notes to accounts

Financial highlights

Revenue

KPI

Underlying earnings per share*

KPI

Statutory basic earnings per share*

£775.4m -1.3%

116.7p

2016: £785.8m

2016: 134.6p

-13.3%

66.2p

2016: 82.8p

-20.0%

Dividend per share

KPI

Underlying proﬁt before tax*

KPI

49.6p

2016: 47.8p

+3.8%

£110.0m -8.4%

2016: £120.1m

Underlying operating proﬁt*

IFRS operating proﬁt

£120.1m -8.4%

£61.5m

2016: £131.1m

2016: £89.7m

-31.5%

Group order book

Dividend

£897.4m +12.3%

2016: £799.3m

The proposed ﬁnal dividend is 35.0p,

bringing the total dividend for the year to

49.6p (2016: 47.8p). This represents an

annual increase of 3.8%, with the dividend

being covered 2.35 times (2016: 2.8 times)

by underlying earnings per share. If approved

at the Annual General Meeting, the dividend

will be paid on 3 May 2018 to shareholders

on the register on 6 April 2018.

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 150

For more information:

www.ultra-electronics.com/

investors/irhome.php

Maritime & Land
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-css.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
4868 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:
Australian DOD (Graham Robson-Parker – Land400
image), Indian Navy, NuScale Power,
UK MOD and US DOD.

Contains public sector information licensed under
the Open Government Licence v3.0

Ultra_AR&A_2017_cover_AW_Layout 1 09/03/2018 11:21 Page 1

Ultra Electronics Annual Report & Accounts 2017

Focusing on

fundamentals…

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

Product printed on a
Carbon Neutral Press

www.heidelberg.com/CO2 . 210504

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