Ultra Electronics Holdings plc
Annual Report & Accounts
2018
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Overview
WHO WE ARE AND
WHAT WE DO
Ultra is a specialist international
electrical and electronics
engineering company. The
Group operates mainly, but
not solely, in defence and
other highly regulated markets
and is focused on providing
mission-specific, bespoke
solutions and capability.
HOW WE OPERATE
Ultra has historically reported through
three divisions:
AEROSPACE & INFRASTRUCTURE
COMMUNICATIONS & SECURITY
MARITIME & LAND
Ultra has a strong reputation with customers
for solving challenges and complex customer
problems and needs.
WHAT WE DO
The Group operates as a Tier 3
(sub-system) and occasionally a Tier 2
systems provider, with particular
expertise in the maritime, C3 (command,
communication, and control) and cyber,
military and commercial aerospace,
nuclear and industrial sensors markets.
The Group uses both own- and
customer-funded research and
development, tailoring its solutions
to meet changing customer needs
and budgets to maintain its reputation
as an innovative supplier of enabling
technology.
Defence (Air)
21%
Defence (Naval & Army) 48%
14%
C3
17%
Transport & Energy
% of Group revenue
BY MARKET
WHERE WE OPERATE
Ultra’s core markets are North America,
the UK and Australia. These core markets
plus a small number of targeted strategic
regions allow Ultra to access the largest
addressable security and defence
budgets in the world, positioning for
long-term growth through partnerships
and government relationships.
North America
United Kingdom
Rest of the world
Mainland Europe
58%
22%
12%
8%
% of Group revenue
BY REGION
OUR CUSTOMERS
Our market position, together with
Ultra’s independence, allows the Group
to work closely with the world’s prime
contractors. Ultra’s major customers
TOP CUSTOMERS
include Tier 1 primes such
as Boeing and Lockheed Martin as
well as international government
procurement offices.
US DoD 17%
UK MoD 7%
Boeing 5%
Lockheed Martin 5%
BAE Systems 4%
Atlantic Diving Supply 3%
Northrop Grumman 3%
Thales 2%
UTC 2%
Bureau of Alcohol, Tobacco, Firearms and Explosive 2%
General Dynamics Corporation 2%
Rolls Royce 2%
EDF 2%
Australian DoD 2%
Integrated procurement 1%
Ultra Electronics
Holdings plc
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Contents
Pgs 06–09 CEO Review
FOCUS FIX
GROW
Pgs 14–15 Divisional Review
COMMUNICATIONS
& SECURITY
Pgs 16–17 Divisional Review
MARITIME
& LAND
Pgs 12–13 Divisional Review
AEROSPACE &
INFRASTRUCTURE
Strategic report
Overview
2018 Year in review
2018 Highlights
Chair’s Statement
Chief Executive Officer's Review
How we measure success
Divisional Review
Our people and culture
Responsible business
Financial Review
2018 Principal risks and uncertainties
Governance report
Board of Directors and Company Secretary
Chair’s Governance Statement
Corporate Governance Report
Nomination Committee Report
Audit Committee Report
Directors’ Remuneration Report
Directors' Report
Financial statements
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 the accounts – Group
Statement of accounting policies
Company balance sheet
Company statement of changes in equity
Notes to the accounts – Company
Statement of accounting policies
Shareholder information
IFC–43
IFC
02
03
04
06
10
12
18
22
28
34
44–79
44
46
47
54
57
62
78
80–147
80
89
90
91
92
93
94
95
130
139
140
141
144
146
WHY INVEST IN ULTRA
Ultra has some great underlying strengths but
also a huge opportunity to optimise the Group of
individual businesses to an integrated, disciplined
and focused business.
Opportunity to make a good
business great
• Ultra is a good business that has lost its way in recent years.
The new management team are investing in people, innovation
and infrastructure to bring Ultra back to growth
World-leading technology and
intellectual property
• Pockets of fundamental knowledge excellence in areas such
as sensors and transducers, signal transmission, processing
and interpretation and specialist encryption and information
assurance
New management team to bring the
business back to growth
• “Focus, Fix, Grow” journey launched with further details
to be announced later in the year
Exceptionally bright people
• Ultra has a strong reputation with customers for applying its
fundamental knowledge to solving challenging and complex
customer problems and needs
Strong and stable margins
• Consistently delivering operating margins above 14%
Progressive dividend policy
• Final proposed dividend of 51.6p per share and dividend cover
of 2.12 times in 2018
Agile and flexible with 16 different
businesses
• Individual business structure gives the autonomy to be nimble
and work with customers to meet their demands
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2018 Year in review
JUNE
Ultra appoints Simon
Pryce as Chief Executive
Officer.
“ There is much
work to be done
as we enter Ultra’s
next phase of
development. The
Group has a solid
platform from
which to grow
and many exciting
opportunities to
take advantage of.”
SEPTEMBER
Ocean Systems awarded $42m contract to supply
US Navy with MK 54 torpedo arrays.
This contract includes options which, if exercised, would bring
the cumulative contract value to $336m.
NOVEMBER
Ultra announces the
divestment of its Airport
Systems business to
ADB SAFEGATE for
£22m.
Airport Systems provides
specialised IT software solutions
to improve the operational
performance of airports and
airlines. These solutions are
installed in approximately
150 airports and are in-service
with 100 airlines internationally.
DECEMBER
Ultra announces that
Tony Rice will succeed
Douglas Caster as
Chair of the Board.
OCTOBER
Maritime Systems awarded multi-million dollar
contract as part of the Royal Canadian Navy’s
Underwater Warfare Suite Upgrade.
This contract will see Maritime Systems team with prime contractor
General Dynamic Systems – Canada by supplying the new in-line
transmitter and receiver array.
“ I am excited to be joining the Board of
Ultra, and to be working with Simon,
his team and the Board to build the
business and deliver Ultra’s potential
for all our stakeholders.”
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2018 Highlights
AN ENCOURAGING
SET OF RESULTS
OPERATIONAL
PCS awarded multiple contracts worth
£60m to provide various subsystems to
both Tier 1 and 2 original equipment
manufacturers for the US Air Force
Joint Strike Fighter programme.
FINANCIAL
REVENUE
UNDERLYING OPERATING PROFIT
£766.7m
2017: £775.4m
-1.1%
£112.7m
2017: £120.1m
-6.2%
IFRS OPERATING PROFIT
UNDERLYING PROFIT BEFORE TAX
£65.3m
2017: £61.5m
+6.2%
£101.4m
2017: £110.0m
-7.8%
UNDERLYING EARNINGS
PER SHARE
STATUTORY BASIC EARNINGS
PER SHARE
109.5p
2017: 116.7p
-6.2%
43.6p
2017: 66.2p
-34.1%
DIVIDEND PER SHARE
CASH CONVERSION
79%
2017: 97%
-18%
51.6p
2017: 49.6p
+4.0%
GROUP ORDER BOOK
£983.9m
2017: £897.4m
+9.6%
£60m
ATS awarded $46m contract for US
Army Data Link Systems. This
Indefinite Delivery/Indefinite Quantity
(IDIQ) contract will provide
engineering, cybersecurity, and
logistics for the Air Defense Systems
Integrator (ADSI®). The ADSI has been
maintained and supported by Ultra for
the Army under contracts spanning
the past 14 years.
$46m
USSI awarded US Navy sonobuoy
contracts valued at $70m through
their joint venture ERAPSCO with
Sparton Corporation. The award is an
IDIQ contract release for sonobuoy
requirements under ERAPSCO’s
five-year contract.
$70m
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Chair’s Statement
THE NEXT PHASE OF
ULTRA’S JOURNEY
“ This is a very exciting time for Ultra,
but there is more we can do to deliver
the Group’s potential.”
TONY RICE
Chair
This is my first report as Chair
of Ultra Electronics after taking
over from Douglas Caster in
January 2019, and so I will be
commenting on the previous
year’s performance on his behalf.
Firstly, I would like to highlight Douglas’
significant contribution to Ultra over the past
31 years. Douglas has played a pivotal role in
the growth and development of Ultra into the
specialist international electrical and electronics
engineering company it is today. Douglas
was with the business from 1988 until his
retirement at the start of this year, and was
part of the original management buyout from
Dowty that formed Ultra Electronics in 1992.
He joined the Board in October 1993, and in
April 2000, was appointed Chief Operating
Officer, becoming Chief Executive in April
2005. He was appointed Deputy Chair in April
2010 and became Chair of Ultra in April 2011.
Without his tremendous personal commitment
and leadership, the Group would not be what
it is today. Douglas leaves the Group in good
shape and with an exciting future. On behalf
of all of Ultra’s stakeholders, I would like to
thank Douglas for all he has done for Ultra
and wish him the very best for the future.
I agreed to become Chair of Ultra because I think
this is a very exciting time for the Group. It is
clear to me that Ultra has a number of strengths,
including a remarkable engineering heritage,
exceptional IP and positions on a broad range of
programmes and platforms. However, as Simon
explains in his report, there is more we can do to
deliver Ultra’s potential in the next phase of the
Company’s development.
Realising that potential through our “Focus,
Fix, Grow” journey will be an accelerated
but evolutionary process that will take time
and some reinvestment. This builds on the
already strong Ultra platform, and we are
confident that Ultra can deliver above average
growth as well as strong and sustainable
value creation over the medium and long
term. I look forward to working with Simon
and the team to realise that potential.
2018 performance
The Group achieved a satisfactory financial
performance in 2018, and having taken account
of a number of legacy issues, it is particularly
pleasing to see a return to organic revenue
growth and a good number of material contract
wins that will be delivered in the years ahead.
The Group’s cash performance improved in the
closing stages of the year and resulted in a
better than expected outturn for underlying
operating cash conversion at 79% for 2018
(2017: 97%). The Group ended the year with a
strong order book of £984m and 2019 opening
order cover of 66%, which sets us up well for
the year ahead.
Shareholders will note a higher number of non-
underlying costs than in previous years. Some of
these relate to legacy issues, such as the self-
report made by Ultra to the SFO investigation,
where we continue to cooperate with the SFO,
the abandoned acquisition of Sparton, and
the final part of the S3 programme. Whilst we
don’t envisage future significant non-underlying
expenditure at this scale, the Board will ensure it
is transparent and open about any such issues.
Board changes and succession planning
Over a year ago the Board started the process
to recruit a new Chief Executive Officer, which
resulted in the appointment of Simon Pryce in
June 2018. Simon has a wealth of experience, a
proven track record and is well-placed to lead
Ultra through its next phase of development.
I am very encouraged by his initial impressions.
He has already taken steps to enhance the senior
management team (with the hire of a new Chief
Human Resources Officer and, a permanent
General Counsel and Company Secretary, as
well as a number of other appointments) and
they are already having an impact on the Group.
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Outlook
Ultra entered 2019 with good visibility and
an opening order cover of 66%. The Group
is well-positioned in growth markets with
significant exposure to the strengthening
US defence budget. We plan to build on this
momentum by increasing investment in the
Group’s own Research and Development
(R&D) and systems, as well as focusing
on improved execution and delivery.
We remain on track to achieve increased
organic revenue growth in 2019. There is a
lot of work to do as the “Focus, Fix, Grow”
journey is designed and implemented, and
there will be additional costs associated
with it in the short term. However, we are
confident that these improvements will benefit
the Group in the medium and long term.
I look forward to keeping you updated on
the progress we are making in due course.
TONY RICE
Chair
6 March 2019
Douglas Caster, who performed the role of
Executive Chair during the process of recruiting
the new CEO, stepped back to being Chair upon
Simon’s appointment. Reflecting Douglas’
length of service, and in accordance with the
Board’s succession planning process, the Board
commenced a search for a new Non-Executive
Director and Chair Designate, resulting in my
joining the Board in December 2018, and taking
over as Chair on 28 January 2019. Details of the
process by which I was appointed are set out in
the Report from the Chair of the Nomination
Committee set out on pages 54–56.
As announced on 6 March 2019, due to
his increasing other commitments and his
recent appointment as Chair of the British
Standards Institution, John Hirst has indicated
that he intends to step down as a Non-
Executive Director and Chair of the Audit
Committee later this year, once a suitable
replacement has been found. John will step
down from the Remuneration Committee
after the 2019 Annual General Meeting.
We thank him for his wise counsel and
support over the past five years and wish
him all the best for his future endeavours.
Sir Robert Walmsley’s term as a Non-Executive
Director was due to expire in April 2018. Given
the changes to the Board, on 10 November
2017, it was announced that the Board had
asked Sir Robert to remain on the Board for a
further year as Senior Independent Director to
provide non-executive continuity and leadership.
Following the further changes to the Board,
the Board has again requested Sir Robert to
continue as Senior Independent Director until,
at the latest, January 2020, to ensure a degree
of continuity and business knowledge. Further
details of these Board changes can be found
in my Governance statement on page 46.
Dividend and buy-back
The total dividend per share for 2018 increased
to 51.6p from 49.6p last year, an increase of
4.0%, and will be paid to shareholders on the
register as at 12 April 2019 on 9 May 2019. The
Board has stated its commitment to a
progressive dividend policy, signalling our
confidence in the future of the business.
In March 2018 we announced that, following
discussions with the US Department of Justice
and competition concerns raised by it, Ultra and
Sparton had mutually agreed to terminate the
merger, and that the Group therefore intended
to undertake, over time, a share buy-back
through on-market purchase in order to return
the £134m net proceeds of the earlier equity
issue to its shareholders.
To date we have bought back most of the
7,047,168 new ordinary shares issued under
the placing. We see good medium-term
opportunities to invest the remaining capital in
a value-creative way in the businesses as part of
our “Focus, Fix, Grow” journey. It is therefore our
intention to formally close the buy-back, whilst
retaining the opportunity to buy-back our shares
in the normal way should it make economic
sense to do so.
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Chief Executive Officer’s Review
FOCUS, FIX, GROW
“ Our goal is to deliver long-term, sustainable
value creation for all our stakeholders.”
SIMON PRYCE
Chief Executive Officer
I was appointed Chief Executive
Officer on 18 June 2018. I am
pleased that I am able to report
that I have very much enjoyed
my first few months at the
Company and am excited by
the opportunity I see at Ultra
for performance improvement,
growth and value creation over
the medium to long term.
2018 was a year of significant change at Ultra;
but before commenting on our satisfactory
2018 performance, my findings and our future
direction, I would like to add to the comments
made by the Chair and express my personal
thanks to Douglas for his extraordinary
commitment to Ultra over the last 31 years,
in sometimes difficult circumstances. He
has helped to create a Group with great
potential and whilst I only worked with him
for a short time, I have valued his insight and
continuing support and I wish him the very
best for the future. I am delighted that Tony
has joined the Group and look forward to
working with him. He is an extremely capable
businessman with successful executive careers
in the international engineering, aerospace
and technology businesses, a strong track
record and extensive Non-Executive and
Chair experience which will be of enormous
benefit to me and Ultra going forward.
Since I joined the Group in June 2018, I have
spent most of my time familiarising myself
with the Ultra businesses. My initial impressions
very much support the due diligence I did before
joining, and I have been impressed by the quality
of technology and the capabilities across
the Group.
2018 Highlights
Ultra achieved some notable successes in 2018
on new and existing programmes including
multiple contracts on the F-35 Joint Strike
Fighter programme, further awards from the
US Army for data links and tactical radios and a
range of large orders in the underwater warfare
segment from the UK MoD, Royal Canadian
Navy and the US Navy. Only the firm element of
these wins is reflected in our order book which
grew strongly and at the end of 2018 was
almost 10% higher than in 2017 at £983.9m
(2017: £897.4m).
Revenues of £766.7m (2017: £775.4m)
represented a welcome return to organic growth
for the first time since 2011 with organic sales
up 2.2% compared to a 3.3% decline in 2017.
This growth reflected better conditions in
defence markets, especially in the US, increases
in our US and international sonobuoy revenues
and demand for our radio and Air Defense
Systems Integrator (ADSI®) products by the US
military. Underlying operating profit declined
6.2% to £112.7m (2017: £120.1m), largely
reflecting the £6.3m impact of previously
disclosed development contract cost overruns
at our Herley business, which led to a decline
in operating margin to 14.7%. Cash generated
by operations was £102.4m (2017: £97.4m),
which represented an underlying operating cash
conversion of 79% (2017: 97%), a better than
expected performance.
The positive performance in 2018 could not have
been achieved without the exceptional efforts of
Ultra’s 4,100 employees who have worked hard
and effectively in delivering the 2018 outturn.
We are privileged to have a capable, often
long-serving and highly committed workforce,
who have performed diligently despite
challenging internal and external market
conditions over the last few years and I thank
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them for their continuing efforts. I am confident
that, with the right direction, investment and
support, we have the team to deliver positive
and collaborative change and realise Ultra’s
exciting future.
Business overview
Ultra is a specialist international electrical
and electronics engineering company. The
Group operates mainly, but not solely, in
defence and other highly regulated markets
with particular expertise in the maritime, and
C3 (command, communication, and control
including cyber) domains. Ultra is a Tier 3
equipment/sub-system and occasionally a
Tier 2 systems provider, focused on providing
mission specific, bespoke solutions.
Ultra’s strengths include:
• Good technology with pockets of excellence
in areas such as sensors and transducers,
signal transmission, processing and
interpretation, specialist encryption and
information assurance;
• A wide range of physical capabilities;
• Limited product, platform or customer
dependency with generally, although not
always, relatively small shipset values;
• Experience in designing products for
operation in extreme environments where
low size weight and/or power are important;
In recent years, against a back-drop of
challenging core markets and some poorly
performing businesses, a number of which were
acquired, the Group has also tended to behave
tactically rather than strategically. Whilst this has
not impacted core technology strengths, which
continued to benefit from customer-funded
development, it has led to a need to invest,
particularly in Ultra’s own R&D, processes,
systems, IT infrastructure and most notably its
highly capable and committed people.
• A strong reputation with customers for
solving challenging and complex customer
problems and needs; and
• Talented and committed people, who
have a close technical engagement with
their customers.
However, Ultra today is an aggregation of
different and independent companies and
business models which is reflected in the
Group operating model and its management
and governance. A lack of common
process, systems and infrastructure makes
collaboration and the sharing of knowledge
and best practice challenging. It also means
that some of the Group’s commercial
processes and practices are sub-optimal.
Most importantly, it also prevents Ultra
leveraging the Group’s combined strengths.
GROUP ORDER BOOK
DIVIDEND PER SHARE
£983.9m
+9.6%
51.6p
+4.0%
2018
2017
2016
2015
2014
983.9
897.4
799.3
753.8
787.3
2018
2017
2016
2015
2014
51.6
49.6
47.8
46.1
44.3
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Chief Executive Officer's Review continued
“FOCUS, FIX, GROW”
Ultra is fundamentally a good business but one that is not yet optimised. 2019 marks the start of our
evolutionary journey to realise improvement opportunities at Ultra through “Focus, Fix, Grow”.
Focus
Over time, we intend to migrate Ultra from
an aggregation of small, independent,
loosely associated companies to a collaborative
federation of connected businesses through:
• Focusing on the things we are good at;
• Collaborating better, particularly in
technologies, capabilities, strategic
positioning; and
• Better leveraging Group-wide capability.
Fix
To fully realise Ultra’s exciting potential, we
need to fix and strengthen our core processes
and better share best practice. We also need to
support our people to evolve our culture to
better support the next phase of our
development. We have the opportunity to
leverage the combined strengths of Ultra.
Areas of particular focus will be:
• Cultural evolution and investment in talent to:
– Recognise, support and reward the
behaviours needed to drive greater
coordination and collaboration; and
– Enhance, develop and empower the
considerable talent already in the
Group.
• Key process and practice:
– Programme management;
– Commercial: improve delivery on time,
to cost and at a price that reflects the
value of our products and services to
our customers; and
– Technology: better assess and price
contract and engineering risk.
• Operating model, structure and footprint
where there is significant opportunity for
Ultra to:
– Pool resources and realise synergies
Grow
Ultra is well positioned in key technology
with its major markets projected to deliver
good growth. Evolving defence delivery
practices as well as the need to support
our growth potential means we also
need to increase investment in our own
R&D. This is in part to meet the needs of
existing customers, and in part to ensure
we continue to maintain technology and
capability leadership to win key positions
on future platforms and programmes.
across businesses; and
– Increase the non-value-added process
standardisation and centralisation. This
was originally envisaged as part of the
Standardisation and Shared Services
(S3) programme. However, the cost
savings delivered were achieved
principally through restructuring,
onerous lease provisions and indirect
procurement in the UK.
• Connectivity and IT infrastructure enabling:
– Better collaboration and information
sharing across businesses and functions;
and
– The standardisation of selected tools
and processes across the Group.
This requires a targeted, disciplined and
Group-wide approach to innovation and
investment. There may well be opportunities in
the future to acquire technologies and
capabilities to support more rapid execution of
our strategy, but we will only consider these
once we have the right capabilities in place and
then only where it makes clear strategic,
commercial and financial sense.
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“ We intend to migrate
Ultra from an
aggregation of small,
independent, loosely
associated companies
to a collaborative
federation of connected
businesses.”
Immediate priorities
Focus – The team has already completed the
process of mapping and analysing our key
technologies, capabilities and identifying our
core competencies. We are well advanced in:
• Developing a revised corporate strategy,
reviewing our operating model and structure,
including footprint and capability; and
• Identifying and scaling the unrealised
parenting opportunities within Ultra from
greater collaboration, cooperation and focus.
During 2019, we will be finalising the corporate
strategy, developing long-term corporate goals,
developing detailed and value creative strategic
plans to support delivery of those objectives and
ensuring the Group operating model is fit for
purpose. We will also cease some unsatisfactory
working capital management practices that
were driven by focusing cash at period ends.
Summary
After a good second half and having addressed
a number of legacy issues, we delivered an
encouraging set of results in 2018. While
there is much work to be done in the next
phase of Ultra’s development, we now have
a solid platform from which to grow and
deliver against our goal of creating long-term,
sustainable value for all our stakeholders.
Ultra enters the current year well-positioned in
strong markets with significant exposure to US
defence spending. We have won good positions
on a number of major new programmes, our
order book is strong, improvement actions have
commenced and we are focused on delivery.
Significant additional potential exists in Ultra
through focusing the Group on where we add
value, improving core processes and better
leveraging the Group’s combined strengths and
capabilities. We anticipate that 2019 will be a
year of good underlying progress and we look
forward to an exciting future with confidence.
SIMON PRYCE
Chief Executive Officer
6 March 2019
Fix – We have already made progress with a
number of the areas we need to fix, including:
• Two new senior leadership roles have been
created including a Commercial & Corporate
Affairs Executive Vice President, to lead the
review and enhancement of our programme
management and commercial processes;
• Appointment of significant new external hires
at a senior level including Chair, CEO, General
Counsel and Company Secretary and Chief
HR Officer. Work is underway to upgrade the
performance management practices, systems
and other people processes and rewards
structures to support, develop, retain and
focus our talent;
• Increasing investment in 2019 and beyond in
IT infrastructure and our own R&D; and
• Ceasing inefficient working capital
management practices and optimising
working capital throughout the year to
improve business practices and culture.
We will keep you regularly informed and
updated as our ‘Focus, Fix, Grow’ journey
develops and we plan to provide additional KPIs
to measure our progress and success later this
year. However, we are confident that over time
and with effective execution of our strategic
and operational improvement plans, Ultra has
the potential to achieve strong long-term,
sustainable, value creation from organic growth
in excess of its major defence markets, with at
least mid-teens operating margins, 80–85%
cash conversion, a progressive dividend policy
and within a prudent capital structure.
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Annual Report & Accounts 2018
Strategic report
Governance report
Financial statements
Our ultimate goal is to deliver long-
term, sustainable, value creation for all
our stakeholders. There is much work
to be done as we enter into Ultra’s next
phase of development but there are
also many opportunities.
We are currently midway through a
review of the business and strategy, we
plan to provide additional KPIs to measure
our progress later in the year, and to link
these with our remuneration policies.
OUR KEY PERFORMANCE INDICATORS
THROUGH
OUR FOCUS
FINANCIAL
REVENUE GROWTH
DESCRIPTION
2018
2017
2016
2015
2014
UNDERLYING PROFIT
BEFORE TAX
2018
2017
2016
2015
2014
-1.1%
-1.3%
+8.2%
+1.8%
-4.2%
-7.8%
-8.4%
+6.9%
+0.4%
-4.1%
Growth in total Group revenue
compared to the prior year.
Revenue of £766.7m represented a
return to organic growth for the first
time since 2011. The organic revenue
growth of 2.2% was offset by a
negative foreign exchange impact of
2.4% from the translation of overseas
revenue, and a 0.9% reduction
arising from IFRS 15.
Growth in Group underlying profit
before tax* compared to the
prior year.
Underlying profit before tax declined
7.8% to £101.4m (2017: £110.0m),
reflecting the impact of development
cost overruns at our Herley business,
the impact of IFRS 15 and a slight
increase in financing charges
UNDERLYING EARNINGS
PER SHARE
2018
2017
2016
2015
2014
-6.2%
-2.0%
+2.0%
0%
+1.0%
Underlying earnings per share*
calculated over a rolling three-year
period.
Underlying earnings per share
decreased to 109.5p (2017: 116.7p),
reflecting the reduction in profit.
The weighted average number of
shares in issue was 74.4m
(2017: 74.0m).
UNDERLYING OPERATING CASH
CONVERSION
2018
2017
2016
2015
2014
79%
97%
92%
68%
70%
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.
The Group achieved a 79% cash
conversion. This result was better
than originally expected.
* See footnote on page 145.
HOW WE MANAGE RISK
Pgs 34–43
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OUR BUSINESS MODEL
HOW WE DELIVER VALUE
FOR OUR STAKEHOLDERS:
Defined market segments
Ultra operates mainly but not solely in defence and other
highly regulated markets, with particular expertise in the
maritime, and C3 (communications, command and control)
and cyber domains. The Group operates mainly as a Tier 3
sub-system and occasionally a Tier 2 systems provider,
focused on providing mission specific, bespoke solutions
and capability.
Understanding our customers
Ultra’s understanding of customer’s needs allows us to
develop effective and innovative solutions whilst creating
value through becoming a key partner in the customer’s
design process. We have an established history of partnering
and teaming in order to offer the best-of-breed technologies
that meet our customers’ requirements.
Innovative solutions
Ultra invested 3.7% of revenue in R&D to develop
new offerings in 2018. Our customers invested a further
15.3%. This R&D is focused on enhancing our portfolio of
capabilities that underpin further growth. Where the Group
has complementary capabilities, we can combine these to
offer more comprehensive and innovative solutions. This
positions us to meet more complex and demanding system
and subsystem requirements.
Agility
A key differentiator for Ultra is the agility that our businesses
exhibit in their customer relationships. The businesses retain
a level of autonomy which enables them to provide a nimble
and responsive level of support to customers and partners
that is normally associated with a smaller business. This
agility is enhanced through access to wider and complementary
technologies and sharing of best practices and technology
within the Group.
Unique Intellectual Property and talented people
Ultra has a solid commitment to developing people and
securing talent pipeline, employing a number of engineers
and graduates each year. This considerable talent and past
Intellectual Property is a key part of our success. During
2019 we plan to upgrade our performance management
system, rewards system and internal communications to
improve employee engagement and success.
TOTAL SHAREHOLDER
RETURN
DESCRIPTION
2018
2017
2016
2015
2014
Annual total shareholder return
(capital growth plus dividends paid,
assuming dividends reinvested) over
a rolling five year period.
-5.0%
-2.0%
+8.0%
+6.0%
+8.0%
NON-FINANCIAL
YOURVIEWS EMPLOYEE
ENGAGEMENT SURVEY
2018
2017
2016
2015
2014
82%
82%
82%
82%
81%
The level of engagement remains
strong at 82%. Results are analysed
and discussed at the local level from
which a number of actions are put in
place to either address any areas that
require improvement or to continue
to support areas of strength. Going
forward, in 2019 we have invested
in a new global platform for our
engagement surveys which will
enable us to generate more analytics
and to provide greater focus on
driving actions at the Group, Division
and local Business level to continue
to drive organisational health and
employee engagement. The new
platform will enable us to survey the
organisation at regular points in the
year through ‘pulse’ surveys whilst
also being used for on-boarding and
exit surveys to give us a more holistic
view of engagement.
HEALTH AND SAFETY
2018
2017
2016
2015
2014
0.6%
0.7%
0.7%
0.5%
0.4%
The number of reportable accidents
per 100 employees.
The number of externally reportable
accidents decreased in 2018. Ultra
continues its efforts to drive a health
and safety aware culture.
WE OPERATE RESPONSIBLY
Pgs 22–27
For more information
STRONG APPROACH TO GOVERNANCE
Pgs 46–53
For more information
Ultra Electronics
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Annual Report & Accounts 2018
Strategic report
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Financial statements
Divisional Review
GRAEME STACEY
Divisional Managing Director
Aerospace & Infrastructure
Covering aerospace and nuclear, this division provides
military and civil aerospace systems and sub-systems
as well as control systems and instrumentation that ensure
the safe operation of energy generating plants.
Divisional performance
This division’s revenue declined due to
lower demand for nuclear temperature
products and delayed orders in
information processing at Airport
Systems, which were partially offset by
an increase in the build rate of our high
pressure pure air generating (HiPPAG)
units. Profits declined due to lower
revenue as well as product mix, with
reduced high margin nuclear temperature
revenues. As a result, the underlying
operating margin was 15.3%.
The division’s order book increased
£39.1m since December 2017 (IFRS 15:
£294.6m) owing in part to the orders
noted below, which will underpin the
division’s future performance:
• Multiple contract awards of over
£60m to provide various subsystems
to both Tier 1 and 2 OEMs for the
Lockheed Martin F-35 Joint Strike
Fighter programme; and
• Orders received worth £18.1m to
provide B787 electro-thermal wing ice
protection systems (WIPS) to Boeing
as part of an ongoing long-term
agreement contract.
Markets
The defence aerospace market is
showing good signs of growth, with
North American, European, Middle
Eastern and Asian countries looking
to acquire new aircraft, upgrade
ageing fleets and develop indigenous
platforms. Civil aerospace also continues
to grow, particularly in developing
nations where there is a need to meet
growing air passenger traffic, as well
as in the demand for regional jets in
North America and Europe. Ultra’s
long-standing positions on both
military and a number of civil platforms
position us well for this growth.
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Case Study
US Air Force Order Wins
PCS received orders worth over
£60m in 2018 for subsystems
relating to the US Air Force Joint
Strike Fighter Aircraft. These
Low Rate Initial Production
(LRIP) contracts are bid on a
programme by programme
basis and see Ultra provide
capabilities including the
HiPPAG (high pressure pure air
generating units), engine ice
protection systems and harness
sets. These orders underpin
Ultra’s established position on
this aircraft and the value of
Ultra’s solutions which will be
provided over the life of the
programme.
REVENUE BY DIVISION
REVENUE
UNDERLYING OPERATING
PROFIT
26%
Group revenue
GROUP UNDERLYING
OPERATING PROFIT
27%
£196.2m
-3.4% (2017 IFRS 15*: -2.9%)
£30.0m
-8.0% (2017 IFRS 15*: -6.3%)
ORDER BOOK
NUMBER OF EMPLOYEES
£333.7m
+17.8% (2017 IFRS 15*: +13.3%)
1,245
+0.1%
BUSINESSES WITHIN THIS DIVISION
• Energy
• Precision Control Systems
* See footnote on page 145.
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Annual Report & Accounts 2018
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Divisional Review continued
MIKE BAPTIST
Divisional Managing Director
Commmunications & Security
The provision of mission critical solutions including secure
communications, encryption solutions as well as capabilities
related to command and control, security and surveillance
solutions and military electronic warfare (“EW”).
• A $46m five-year IDIQ support
contract to provide Ultra’s ADSI to the
US Army Data Link Systems; and
• The award of a $24m contract to
provide military tactical radios to the
US Department of Defense.
Markets
Increased demand for greater bandwidth
and broader connectivity, coupled with a
need for multi-platform and multi-user
interoperability across global defence
markets continues. The US continues to
be the largest spender in these markets,
however countries in Asia-Pacific and
European regions are ramping up their
investments as they continue to face
territorial disputes, domestic unrest and
terrorism. Growing border disputes also
call for higher critical infrastructure
protection, surveillance and border
control, particularly in the Asia-Pacific and
Middle East regions. Ultra remains well
positioned on a broad range of markets,
spanning defence applications, cyber
security, physical infrastructure & data
security, surveillance command & control
systems and forensic analysis markets.
Divisional performance
This division’s revenue grew, benefitting
from Orion radio systems for the US
Army's Network Modernisation
programme, as well as growth in airborne
platform sales and airborne EW and
strategic missile programmes. This
followed on from the strong order intake
at the end of 2017. In the UK, revenues
were impacted by continued uncertainty
and government contracting delays within
the secure comms and information
assurance markets. Our US cyber
solutions revenues also reduced as
discretionary US Naval funding was
allocated elsewhere. The overall revenue
growth more than offset the foreign
exchange reduction to the division’s
reported results.
Cost overruns incurred on specific
development contracts at our Herley
division resulted in an underlying
divisional margin of 11.8%. Margin
improvements were driven by increased
Air Defense Systems Integrator (ADSI®)
and Orion radio deliveries in the year.
The division won a number of contracts
during the year including two larger ones,
which are noted below. Relative to the
strong closing order book at the end of
2017, the division’s 2018 closing order
book was £27.9m lower at £230.2m
(2017 IFRS 15: £258.1m). The larger orders
won in the year were:
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REVENUE BY DIVISION
REVENUE
UNDERLYING OPERATING
PROFIT
33%
Group revenue
£252.6m
+4.1% (2017 IFRS 15*: +3.7%)
£29.9m
+6.0% (2017 IFRS 15*: +4.5%)
GROUP UNDERLYING
OPERATING PROFIT
26%
ORDER BOOK
NUMBER OF EMPLOYEES
£230.2m
-11.0% (2017 IFRS 15*: -10.8%)
1,295
+0%
BUSINESSES WITHIN THIS DIVISION
• 3eTI
• Advanced Tactical Systems (ATS)
• Communications & Integrated Systems (CIS)
* See footnote on page 145.
• Forensic Technology
• Herley
• TCS
Case Study
CIS Contract Win
Communications and Integrated
Systems (CIS) was awarded a
multi-million pound contract
to support the provision of
Strategic Deployable Terminals
to General Dynamics Mission
Systems, Canada. General
Dynamics will provide the
Canadian Armed Forces (CAF)
with the Strategic Deployable
Terminals (SDTs) to expand
its Mercury Global In-Service
Support as part of the final
stage of the Mercury Global
Project to deliver military
satellite communications
(SATCOM) wideband
capabilities. The terminals will
allow the CAF to deliver voice,
image and data between
deployed operations and
commanders back in Canada.
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Annual Report & Accounts 2018
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Divisional Review continued
THOMAS LINK
Interim Divisional President
Maritime & Land
Covering underwater warfare and maritime systems for
surface, sub-surface and unmanned platforms for military,
paramilitary and civil domains, as well as the provision of
modern military manned and unmanned vehicles.
• The award of a £24.5m order to
provide sonobuoys to the UK MoD
– the first multi-year sonobuoy order
received by Ultra from the UK.
Markets
Global underwater warfare budgets
continue to grow as geopolitical disputes
in Europe and Asia-Pacific have led to an
increased investment in naval platforms
and underwater warfare systems. The US,
UK, Australia and Canada have all
adopted national shipbuilding strategies
to stimulate long-term new ship
construction to meet evolving threats.
Ultra is strongly positioned in this area of
growth, securing a number of positions
on long-term programmes.
Divisional performance
This division’s revenue grew organically,
but declined overall due to the impact of
foreign exchange. Demand for Ultra’s
international and US sonobuoys remains
healthy and our ERAPSCO JV continues to
have a strong working relationship with
the US Navy. Revenues on the maritime
propulsion system order that was won in
2017 also contributed to revenue in the
year. However, there have been delays to
some programmes resulting in lower
revenue on receivers, as well as reduced
datacom and sonar shipments where a
number of projects completed in 2017.
Profits were impacted principally due to
additional costs on the Health and Usage
Monitoring System (HUMS) programme
and receiver development programmes
and this resulted in a reduction in the
division’s underlying operating margin
to 16.6%.
The division’s order book increased
£58.3m since December 2017 (IFRS 15:
£361.7m) owing in part to the orders
noted below:
• A $42m contract award to supply the
US Navy with MK 54 torpedo arrays;
• The award of a multi-million dollar
contract as part of the Royal
Canadian Navy’s Underwater warfare
suite upgrade; and
Ultra Electronics
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REVENUE BY DIVISION
REVENUE
41%
Group sales
£317.9m
-3.5% (2017 IFRS 15*: -1.5%)
UNDERLYING OPERATING
PROFIT
£52.8m
-11.0% (2017 IFRS 15*: -7.5%)
GROUP UNDERLYING
OPERATING PROFIT
47%
ORDER BOOK
NUMBER OF EMPLOYEES
£420.0m
+18.1% (2017 IFRS 15*: +16.1%)
1,579
-3.3%
BUSINESSES WITHIN THIS DIVISION
• Avalon Systems
• Command & Sonar Systems
• EMS
• Flightline Systems
* See footnote on page 145.
• Maritime Systems
• Ocean Systems
• PMES
• USSI
Case Study
UWSU Upgrade Win
Maritime Systems was awarded
a multi-million Canadian dollar
contract from the Royal
Canadian Navy (RCN) as part of
the RCN’s Halifax Class Frigate
Underwater Warfare Suite
Upgrade (UWSU) programme.
Teaming with General
Dynamics, UWSU will deliver an
integrated system that replaces
the current towed array sensor
and sonobuoy processing
system. Maritime Systems will
deliver a transmitter solution
that enables sound energy to
be steered only in the direction
of interest.
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Our people and culture
Attracting, developing, engaging and
retaining talent at Ultra is critically
important and fundamental to Ultra
being able to deliver sustainable value
to all of our stakeholders.
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“ Underpinning the success of our
employees is creating and maintaining
the right culture and work environment
where employees feel valued.“
Building the talent pipeline
To continue to build the talent pipeline to
meet today’s and future business needs, we
have a holistic approach to attracting talent
into the business. In the last 12 months,
we have significantly invested in creating
internal talent acquisition teams with the
right specialist recruitment backgrounds and
supported by the right systems and processes
to enhance our ability to bring in experienced
external professionals into the business. These
teams are working closely with the business to
directly source and hire candidates from the
external market. The talent pipeline is further
enhanced through our continued support for
and commitment to, a number of programmes
that not only bring talent into the organisation
but also encourage students to develop
careers in engineering and the wider business.
Partnering with schools
Ultra businesses engage and partner with schools
in the local communities within which we do
business and have office facilities. These
relationships encompass a multitude of different
initiatives but include offering work experience;
longer-term work placements or internships; visits
as part of AS-level courses; interview practice
sessions; and careers events. Many of Ultra’s
employees also volunteer time to support both
lessons and after school clubs. Examples include:
• PCS continued their relationship with
Balcarras School and attended interview
preparation sessions, whilst also giving
presentations to students on apprenticeships
and careers within engineering.
• CIS continue to support a number of STEM*
students at local secondary schools and in
2018 supported a “Year of Engineering”
STEM event.
Ultra’s main focus remains within the
engineering disciplines but extends also to
including other STEM subjects, as well as finance
and the commercial disciplines. The Group is
recognised as a major sponsor of students
through their A Levels via the Arkwright
Scholarship and currently Ultra has eight
scholars. This programme provides students with
support and mentoring during their studies and
has led to more and more students electing to
undertake STEM degree courses.
Partnering through apprenticeships
Many Ultra businesses have well-established and
successful apprenticeship programmes, which
has historically and continues to provide the
Group with engineering leaders. The Group
runs apprenticeship schemes at most of its UK
businesses and currently has 31 apprentices
in training in the UK.
There have been a number of notable successes:
• Energy (NCS) were finalists at the UK Nuclear
Skills Awards in the Business Support
Apprentice of the Year category; they were
also finalists for "Developing the next
generation" award from the British Energy
Coast Business Cluster.
• CIS continues to work closely with SEPnet by
sponsoring eight-week placements alongside
others funded internally.
Partnering with universities and
colleges
In addition to traditional career fairs, Ultra
actively engages with lecturers and faculties
during degree courses as part of the excellent
links the Group maintains with universities
around the world. These have created win-win
solutions in which Ultra is given access to
leading research and specialists in their fields
collaborating on programmes or innovation
whilst also enabling the Group to form early
relationships with students well before
graduation with a view to bringing these
students into the organisation. Ultra sponsors
university students and also provides a number
of work placements as part of degree courses.
Ultra businesses provide opportunities for
students to work on real projects via work
placements, co-operative programmes and
internship schemes; all internships are paid
for, to promote access to all. The Group also
works with SEPnet to provide summer work
placements to students to help advance and
sustain physics as a strategically important
subject for the UK economy.
* STEM: Science, Technology, Engineering & Mathematics.
The right people
Our focus as an organisation is on ensuring
that we have the right people, in the right
roles, with the right skills, doing the right
work, at the right time and to do all of this
within a supportive, rewarding and learning
culture. This starts at the top with the
commitment we have to hiring and developing
the right leaders for Ultra, leaders that can
set the direction, give the boundaries and
provide the right level of space and support
to enable our people to do what they do
best, which is delivering domain expertise to
help our customers solve problems or deliver
innovative, winning solutions. By investing
in the professional growth and development
of all of our existing employees and
supplementing this with hiring the best talent
into Ultra, we continue to ensure that we meet
customer needs via a deep understanding
of the specialist capability areas and a deep
knowledge of the user’s environments.
Culture
Underpinning the success of our employees,
and therefore our business, is creating and
maintaining the right culture and work
environment where employees feel valued,
know what is expected of them and feel
included and engaged so that they bring
their best contributions to work. The Group’s
values and behaviours are an essential
cornerstone to this and are focused around
four key areas: Leadership, Entrepreneurship,
Audacity and Paranoia. Together, they
are known within the Group as LEAP.
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Our people and culture continued
CULTURE
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.
SUCCESS STORIES
• Maritime Systems works with both Dalhousie
University and the Nova Scotia Community
College to whom they provide four-month
work placements on a continuous basis.
• Energy (NSPI) is on the Lancaster University
Industrial steering board and delivers lectures,
sponsored research and set MDc/BSc
projects.
Partnering with institutions
Ultra’s UK businesses are members of
Engineering UK and other bodies that research
and develop new ways to attract people into
engineering careers, as well as helping to
forecast future trends in the sector. Ultra
businesses worldwide have a variety of links with
their local business forums and chambers of
commerce members, helping to encourage
STEM activities.
Training and development
Ultra actively invests in, and supports, the
training and development of all its employees.
As a Group, Ultra has invested in its Learning
Academy, an online portal, which is available to
all of the Group’s businesses to support training.
Many of the courses in the Learning Academy
are tailored to the specific requirements of Ultra,
and include programmes on leadership and
management, in addition to core offerings in
areas like Ultra’s successful competitive strategy,
strategic selling, programme management
and systems engineering. Specific training
programmes are also provided for individuals
as necessary and according to individual
needs which are identified through personal
development conversations through the year.
To give students access to real-life current work
challenges, and to enable Ultra employees to
develop their management and leadership skills,
there are opportunities to participate in national
schemes, such as the Engineering Education
Scheme (run by the Engineering Development
Trust) and competitions promoting STEM
careers. Ultra’s businesses have also developed
corporate partnerships with engineering
institutions, including the Institution of
Engineering and Technology, in order to
support and encourage employees to pursue
professional recognition (in the form of CEng,
IEng or EngTech status) for both their current
and previous work and academic achievements.
Succession planning and retention
Each of Ultra’s businesses prepares an annual
“Organisation, Succession & Development Plan”
to ensure that Ultra has the right people in the
right place. The plan assesses individuals’
performance in their current role and their
potential to perform a larger role in the short
or longer term.
UK
Apprentices
University placement students
Sponsored university students
Arkwright scholars
US
Undergraduate interns
New graduates
Employees working on graduate-level degrees
Canada
Undergraduate interns
New graduates
Employees working on graduate-level degrees
Australia
Undergraduate interns
New graduates
Total 2018
Total 2017
31
13
6
8
39
6
8
23
4
2
2
2
45
7
1
11
21
6
15
16
1
1
–
–
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GROWTH THROUGH ENGAGEMENT
LAUNCH
In addition to these internal behaviours that
form the basis of our culture, we have a set
of behaviours that have been developed to
facilitate external customer engagement and
interactions. These help us to generate
sustainable long-term customer relationships
and have been an integral part of why we
continue to create a strong pipeline of
opportunities and programmes within the
business. These behaviours are known within
Ultra as LAUNCH:
LISTEN to customers
ASK the right questions
UNDERSTAND what their
“pain” is
identify the customers’ NEEDS
and get their agreement
CREATE a relationship,
opportunity and solution
HOLISTIC Examine the
bigger picture; how can
Ultra maximise the scope
and value of the opportunity?
Assessments are recorded in Ultra’s Talent &
Succession system and give a performance
versus potential rating for each employee. The
system is used by businesses to ensure a supply
of suitable talent is available and that succession
candidates are identified and developed to step
into new and/or bigger roles as required by the
business. Ultra maintains a strong retention rate
for those identified as high performers, with a
99% retention rate in 2018.
Identified top talent and high potential talent
are developed through critical experiences
on the job which is supplemented by
access to and participation in a number of
leadership programmes offered within the
Group. The Maximising Leadership Impact
(MLI) programme has been run for several
years across the organisation and is targeted
at senior managers whilst the Making a
Difference (MAD) programme is targeted
at middle managers and high potential
individuals. Both programmes cover skill builds
in Influencing styles, Emotional management,
Inspiring others (internally and externally),
High performance feedback and Negotiating
& resolving differences, Holding difficult
conversations, Leading change, Resilience: self
and teams, Developing others, and Coaching.
RETENTION OF HIGH PERFORMERS
99%
2018
2017
2016
2015
2014
99%
97%
80%
100%
60%
INTERNAL APPOINTMENTS AT
EXECUTIVE TEAM, DIVISIONAL
AND MD/PRESIDENT LEVEL
38%
2018
2017
2016
2015
2014
38%
60%
80%
100%
60%
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Responsible business
Ultra recognises that the success
and sustainability of the business is
enhanced by the positive relationships
built with stakeholders and continues
to focus on value creation for all:
shareholders, customers, employees,
the environment, local communities
and suppliers.
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“ Ultra believes that the
right people are its
most important asset;
the capabilities of its
employees allow the
Group to innovate
continually…“
Fundraising and volunteer work in the local
community or at a national level is something
the Group actively encourages. It supports
employees who undertake voluntary activities.
Some noteworthy examples in 2018 include:
• Energy (NSPI) raised over £9,000 for local
charities through activities such as a skydive,
cake sales and a “Truck by Truck Snack Box”.
• ATS received the Distinguished Partnership
Award from Del Valle Independent School
District for the fifth consecutive year for
outstanding contributions throughout the
year to Smith Elementary School.
Shareholders
Ultra’s goal is to deliver long-term, sustainable,
value creation for all our stakeholders.
Customers
Ultra aims to be an excellent strategic supplier to
its customers. To enable this, Ultra’s businesses
are focused on helping customers identify their
true needs whilst developing long-term
relationships based on performance excellence
and meeting its commitments. Ultra’s businesses
aim to build long-term, mutually beneficial
relationships with their customers and become
part of the customers’ extended enterprise.
Examples from 2018 that highlight Ultra’s
commitment to its broad customer base are:
• Maritime Systems was awarded a place on
the Canadian Combat Ship (CSC) Team led by
Lockheed Martin, on which Maritime Systems
won the Anti-Submarine Warfare lead role.
This success provides Ultra with a place on the
CSC "Board of Governors" alongside major
industry partners.
• ATS received an Exceptional rating on their
Contractor Performance Assessment report
for the US Marine Corp programme.
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 and as such, the Group
believes that, to ensure its continuing growth
and success, these initiatives for talent
development and employee retention are
crucial. A number of Ultra businesses launched
unique initiatives to ensure continuing employee
development and engagement in 2018.
Examples include:
• Energy (NCS and NSPI) held knowledge
transfer talks during lunch breaks throughout
the year on subjects including technology
skills and personal safety.
• ATS held a wellness day in November 2018 to
promote a healthy lifestyle for employees.
In the community
Ultra’s businesses continue to be active in their
local communities, building positive links by
engaging with local people and local issues.
Many businesses form special relationships with
educational establishments in the surrounding
communities offering work placements and
visits to businesses as part of School, College
and University courses, as well as providing
interview practice sessions, supporting lessons,
careers events and school science fairs. Ultra is
involved in the nationwide initiatives on STEM
education and in the UK also offers Arkwright
scholarships: a scholarship that sponsors A-level
students looking to pursue a career in
engineering through their education.
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Responsible business continued
Providing guidance and training
to employees
The Group continues to promote and strengthen
its policies, processes and training to ensure
employees have the clear guidance they need
in identifying and managing ethical matters.
Ultra uses EthicsPoint in all of its businesses.
EthicsPoint is a Group-wide independent,
confidential web- and telephone-based hotline,
which enables all employees to report concerns
anonymously about possible improprieties and
other compliance issues. All reports registered
through EthicsPoint are reviewed and responded
to in a timely and appropriate manner. The
responsibility for handling reports rests with
Ultra’s Senior Independent Non-Executive
Director (with the exception of US security-
related issues which are routed to the Chair of
the Security Committee of either Ultra’s Special
Security Agreement company or Ultra’s Proxy
Board company, as appropriate). No retaliatory
action is taken against employees for making
reports in good faith through EthicsPoint. Any
employee found to be in breach of the Policy
statement on Ethics and Business Conduct is
subject to appropriate disciplinary action.
Independent Ethics Overview Committee
The Ethics Overview Committee was formed to
provide independent advice and scrutiny of
Ultra’s business activity, giving assurance that
the Group’s current and planned undertakings
are conducted in a manner consistent with the
legislative environment and are transparent. The
Committee comprises four permanent
members, three of whom, including the Chair,
are independent.
To maintain the highest degree of impartiality,
the independent members of the Committee
are self-electing with the appointment of the
Chair exclusively within the remit of the
independent members. The Committee meets
regularly and provides assurance that Ultra’s
business is being conducted in line with the
Group’s policies, processes and any relevant
legislation. This is ascertained through
discussions with senior managers, receiving
reports and visiting Ultra’s businesses. During
these reviews, the Committee undertakes a
formal review of business activities and the
independent members provide advice and
guidance on the appropriateness of target
markets and customers and on potential
teaming partners. The Committee also considers
the reports that come through EthicsPoint. For
more information on the Ethics Overview
Committee see page 48.
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.
Corporate and social responsibility
Ultra recognises its commitments and its
reputation for meeting them, believing that a
successful and sustainable business is built on
more than just financial results.
Ultra is committed to maintaining high standards
of business ethics as part of being a responsible
business. The Group endeavours to uphold the
rights of its employees as well as creating an
honest and transparent business both internally
and externally. The Group’s corporate
responsibility initiatives are focused in the
following key areas:
Human rights
Ultra’s Board requires that the Group should, at
all times, be a responsible corporate citizen and,
as such, the Group complies with all applicable
legislation in the countries in which it operates.
Ultra recognises and respects the rights of its
employees, stakeholders and the communities in
which it operates. As such, Ultra adheres to all
relevant government guidelines, designed to
ensure that its products are not incorporated
into weapons or other equipment used for the
purposes of terrorism, internal repression or the
abuse of human rights. Key statements and
policies can be found on the Ultra website.
Ultra is committed to ethical business conduct.
Meeting legal and ethical standards
Ultra requires all employees, businesses and
third parties, who act on Ultra’s behalf, to
comply with the applicable laws and regulations
of the countries in which it does business.
Ultra is committed to operating in accordance
with all legislative requirements, including those
pertaining to anti-corruption and bribery
practices, competition and antitrust laws and
relevant national export control regulations.
Ultra has a corporate ethics code, which
encompasses a gifts and hospitality policy.
All Ultra businesses are required to report on
compliance with the corporate ethics code
monthly and the Board reviews compliance
with the code twice a year.
Ultra’s ethics code can be found within Ultra’s
Policy Statement on Ethics and Business Conduct
along with its policies on anti-corruption and
anti-bribery, competition compliance and gifts
and corporate hospitality. All of these policies
can be found on the Group website:
http://www.ultra-electronics.com/aboutus/
corporate-responsibility
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“ Ultra's values are
embedded into the
organisation to ensure
each business is truly
representative of the
environment in which
it operates.“
Diversity and inclusion
These values are embedded into the
organisation to ensure each business is truly
representative of the environment in which it
operates. It is essential to the Group that all
employees feel fairly treated and are not
discriminated against in any way. To enable this,
Ultra complies with all applicable employment
rights and legislation in the countries in which
it operates. In addition, the Group is strongly
committed to maintaining a work environment
which provides equal opportunities for all
employees, regardless of age, disability, gender
re-assignment, marriage or civil partnership,
pregnancy or maternity, race, religion or belief,
sex or sexual orientation.
Ultra uses rigorous recruiting practices to
ensure the best candidate is selected, based on
objective requirements and assessments. Ultra
monitors gender and age diversity.
Health and safety
One of Ultra's most important commitments is
to the health and well-being of its employees.
A healthy, committed and engaged workforce,
working in a safe environment, is necessary to
achieve superior business results. Ultra places
great emphasis on maintaining high standards
of health and safety, not just to employees but
also to visitors and local communities in which
the Group's businesses operate and engages in
continuous safety improvement activities. The
businesses manage a wide range of safety risks,
from office and manufacturing risks to providing
services at customer sites, including military
bases and platforms.
The safety of the products and services provided
to users and customers is a key priority for Ultra.
Each business ensures the appropriate legal and
ethical levels of safety are met across a product’s
life cycle, with particular emphasis on the
manufacturing, in-service and disposal phases.
All operating businesses are required to have
a written health and safety policy, which
is to be upheld at all times. Within each
business, Managing Directors/Presidents
are responsible for health and safety and
for providing adequate resources to meet
the requirements of the health and safety
policy. Independent external audits, which
take place biennially, assess compliance, with
the next audit taking place in 2019. Overall
health and safety responsibility at Board level
resides with the Chief Executive Officer.
FIGURE 1: LOST TIME ACCIDENTS
PER 1,000 EMPLOYEES
3.0
2018
2017
2016
2015
2014
3.0
2.8
3.6
3.4
2.5
FIGURE 2: EXTERNALLY REPORTABLE
ACCIDENTS PER 100 EMPLOYEES
Each business is required to submit an annual
report on health and safety performance which
is summarised and presented to the Board.
0.6
Ultra reports lost time accident rate (being
an accident resulting in half a day or more
off work) per 1,000 employees, see Figure 1
and externally reportable accidents per
100 employees, see Figure 2.
2018
2017
2016
2015
2014
0.6
0.7
0.7
0.5
0.4
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Responsible business continued
“ One of Ultra's most
important commitments
is to the health and
well-being of its
employees.“
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 for its suppliers to
reduce their environmental impact.
Initiatives that have taken place within the
Group include:
• PCS and PMES both achieved accreditation
to ISO14001:2015.
• USSI retained its registration as a Conditionally
Exempt Waste Generator, which no longer
requires waste reporting due to efforts in
reducing landfill waste.
Products
Environmental considerations are taken into
account throughout a product’s life cycle, from
concept through to disposal; each individual
business ensures its practices and processes
consider the environment. Businesses work
with their suppliers to reduce the impact of
their products and to maximise the use of
acceptable components.
Ultra ensures the full cooperation of all
employees to minimise environmental impact
and maximise the conservation of materials.
Implementation
The Chief Executive Officer is the main
Board member with overall environmental
responsibility and the Managing Directors and
Presidents of the operating businesses are
responsible for the implementation of the
environmental policy.
Ultra’s formal environmental policy addresses
compliance with environmental legislation,
conformity with standards for air, waste disposal
and noise, the economical use of materials and
the establishment of appropriate environmental
performance standards. Progress is monitored
through annual reporting and a biennial external
audit process; the last one took place in 2017
and the next will take place in 2019. Where
appropriate, individual businesses have ISO
14001 accreditation.
FIGURE 3: PACKAGING WASTE
(T/£M SALES) IN UK BUSINESSES
FIGURE 4A: TOTAL CRC EMISSIONS
(PER 1,000 CO2 TONNES) IN UK
BUSINESSES
FIGURE 4B: TOTAL CRC EMISSIONS
(T/£M) IN UK BUSINESSES
0.187
5,067
15.8
2018
2017
2016
2015
2014
0.187
0.098
0.097
0.162
0.164
2018
2017
2016
2015
2014
5,067
6,374
7,474
8,178
8,424
2018
2017
2016
2015
2014
15.8
19.2
21.0
21.9
23.6
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Each site plans and manages compliance
with environmental requirements and the
processes for the storage, handling and
disposal of hazardous or pollutant materials
are reviewed on a continuous basis. Ultra
caused no contamination of land in 2018,
continuing the excellent track record of
the previous five years. There were no
environmental incidents reported in the year.
Ultra measures and reports on its packaging
waste annually and this is shown in Figure 3.
In the UK, businesses are encouraged and
incentivised to reduce the net amount of
waste they produce.
The Group continues to address energy
conservation and emissions. Energy
consumption is measured annually and
the data compared with previous years.
We are registered under the UK Carbon
Reduction Commitment ('CRC'). We filed our
annual return in July 2018 and paid £90k, which
is 18.2% lower than in 2017 (£110k). The cost
per tonne of CO2 increased from £17.20 to
£17.70 (2.9%) but our actual UK emissions fell
from 6,374t to 5,067t (20.5% reduction).
As part of the CRC programme, Ultra, in the UK,
is registered with the Environment Agency. The
Group’s compliance emissions reported in our
annual return in July 2018 were 5,067t CO2,
a 20.5% reduction over the previous year.
Historical performance data is shown in
Figures 4a and 4b.
FIGURE 5: TOTAL TONNES OF CO2
EMITTED BY ALL ULTRA BUSINESSES
Greenhouse gas emissions
Ultra is committed to the systematic reduction
of greenhouse gas emissions. In compliance
with the 2013 Greenhouse Gas Emissions
Regulations, Ultra collects and consolidates
information on carbon dioxide (CO2) emissions
from across its portfolio of 16 businesses; 2013
was the first year this was undertaken and
serves as the baseline year.
Ultra’s Global Greenhouse gas emissions –
tonnes of CO2 (tCO2)
Total tCO2 emitted by all Ultra
businesses
Total tCO2 from Ultra business
activities (scope 1)
Total tCO2 purchased by Ultra
Ultra’s annual emissions shown as
tCO2 per £m of revenue
18,452
2,610
15,842
24.07
Methodology
In 2018, each UK business reported on the
appropriate greenhouse gas metrics. These
metrics were aggregated to produce the figures
reported above to which standard DEFRA
conversion factors were applied.
Energy Savings Opportunity Scheme
The Energy Savings Opportunity Scheme (ESOS)
is a relatively new piece of legislation introduced
by the UK Government that applies to Ultra. The
scheme is run by an Environment Agency (such
as CRC) and its focus is to reduce the demand
for energy. Ultra has successfully demonstrated
compliance with the requirements using
ESOS-compliant energy audits and notified its
compliance to the Environment Agency in
January 2016. The opportunities for energy
savings identified during the ESOS assessment
were reviewed and various changes were
implemented (e.g. installation of replacement
boilers and LED lights). A follow-up audit will
take place in 2019.
Additional environmental initiatives
All businesses are audited biennially. In the US in
2017, EMS, 3eTI, Flightline and NSPI all achieved
100% in the audit. Additionally, in the UK,
Energy, CSS, PMES and PCS all maintained the
ISO 14001 environmental standard. CIS gained
it during 2018.
LOUISE RUPPEL
General Counsel and Company Secretary
6 March 2019
Total CO2 (scope 1) 14%
Total CO2 (scope 2)
86%
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Ultra Electronics
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Financial Review
2018 RESULTS
“ Revenue of £766.7m represented a return to
organic growth for the first time since 2011.“
AMITABH SHARMA BSC FCA
Group Finance Director
Ultra’s 2018 results
Revenue
Revenue of £766.7m represented a return to
organic growth for the first time since 2011. The
2.2% organic growth reflected increases in our
US and international sonobuoy revenues and
demand for our radio and Air Defense Systems
Integrator (ADSI®) products by the US military.
Reported revenue declined 1.1% to £766.7m
compared to prior year revenue of £775.4m
(IFRS 15: £768.3m). This was due to the organic
revenue growth of 2.2% being offset by the
strengthening of sterling during the year,
causing a negative foreign exchange impact of
2.4% from the translation of overseas revenue,
and a 0.9% reduction arising from IFRS 15.
The average US dollar rate in 2018 was $1.34
compared to $1.29 in 2017.
Aerospace & Infrastructure's revenue (see pages
12–13) declined due to lower demand for
nuclear temperature products and delayed
orders in information processing at Airport
Systems, which were partially offset by an
increase in the build rate of our high pressure
pure air generating (HiPPAG) units.
Communications & Security’s revenue (see
pages 14–15) grew, benefiting from ORION
radio system sales for the US Army's Network
Modernisation programme, as well as growth
in airborne platform sales and airborne
EW and strategic missile programmes. This
followed on from the strong order intake at
the end of 2017. In the UK, revenues were
impacted by continued uncertainty and
government contracting delays within the
secure comms and information assurance
markets. Our US cyber solutions revenues also
reduced as discretionary US Naval funding
was allocated elsewhere. The overall revenue
growth more than offset the foreign exchange
reduction to the division’s reported results.
Maritime & Land's revenue (see pages 16–17)
grew organically, but declined overall due to the
impact of foreign exchange. Demand for Ultra’s
international and US sonobuoys remains healthy
and our ERAPSCO JV continues to have a strong
working relationship with the US Navy.
Revenues on the maritime propulsion system
order that was won in 2017 also contributed to
revenue in the year. However, there have been
delays to some programmes resulting in lower
revenue on receivers, as well as reduced
datacom and sonar shipments where a number
of projects completed in 2017.
Orders
At the end of 2018 the order book was 9.6%
higher at £983.9m (2017: £897.4m, IFRS 15:
£914.4m), reflecting improving defence
budgets, notably in the US, and some key wins
on new and existing programmes. The organic
increase was 5.2%, once the impact of foreign
exchange and IFRS 15 adoption have been
excluded. Opening order cover for 2019 is 66%
(2018: 66%).
Underlying operating profit and margins
Underlying operating profit was £112.7m (2017:
£120.1m, IFRS 15: £117.7m), a decrease of 6.2%
on the prior year. There was an organic decline
of 4.3%, due to the previously announced
£6.3m cost overruns at our Herley business on
specific development contracts, a 0.1% impact
of foreign exchange and IFRS 15 accounted for
Alternative Performance Measures
In the analysis of the Group’s operating results, earnings per share and cash flows, ’underlying’ information is presented to provide
readers and stakeholders with additional performance indicators that are prepared on a non-statutory basis. These non-statutory
performance measures are consistent with how business performance is reported within the internal management reporting. See
page 138 for further information. 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. The narrative includes two figures for 2017 revenue
and underlying operating profit to present the result as stated last year and the result as if presented under IFRS 15. Refer to note 37
for further information.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
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the remaining 2.0% reduction. The resulting
underlying operating margin was 14.7% (2017:
15.5%, IFRS 15: 15.3%). Underlying operating
profit also included a £2.9m gain in the period
arising from foreign exchange on US dollar
assets held in the UK. We have revised our
hedging strategy under IFRS 9, with effect from
1 January 2019, as outlined in the financial
guidance section on page 33, to reduce income
statement volatility from the re-valuation of US
dollar assets held on the UK balance sheet and a
gain of this nature will not happen in future years.
Aerospace & Infrastructure underlying operating
margin reduced to 15.3% (2017: 16.0%, IFRS
15: 15.8%) due to lower revenue as well as
product mix, with reduced high margin nuclear
temperature revenues.
Communications & Security underlying
operating margin improved slightly to 11.8%
(2017: 11.6%, IFRS 15: 11.7%). Cost overruns of
£6.3m were incurred on specific development
contracts at our Herley division, however,
despite this, there was a slight overall
improvement in divisional operating margin
driven by increased Air Defence Systems
Integrator (ADSI®) and Orion radio deliveries
in the year.
Maritime & Land underlying operating margin
declined to 16.6% (2017: 18.0%, IFRS 15:
17.7%) due to additional costs on the Health and
Usage Monitoring System (HUMS) program and
receiver development programmes.
Ultra continued its programme of R&D, with
total spend in 2018 of £145.8m (2017: £161.1m).
In 2018, company funded investment was 3.7%
of revenue at £28.1m (2017: £29.9m or 3.9%),
while customer funding decreased to 15.3% of
revenue at £117.7m (2017: £131.2m or 16.9%).
The funding required is dependent on the type
and timing of engineering contracts awarded,
as some require Ultra to fund the development
phase while others attract customer funding.
The overall level of R&D investment in the year
was 19.0% (2017: 20.8%).
Interest and underlying profit before tax
Net financing charges were £11.3m (2017:
£10.1m). The increase reflects higher US interest
rates and higher average borrowing, compared
to the prior year, following the share buyback.
The interest on bank debt was covered 10 times
(2017: 12 times) by underlying operating profit.
The resulting underlying profit before tax was
£101.4m (2017: £110.0m).
IFRS profit before tax
As set out in the table on the following page,
IFRS profit before tax decreased to £42.6m
(2017: £60.6m). There are a higher number of
non-underlying items than last year and detail is
provided for this as follows:
Acquisition and disposal related costs of £2.7m
(2017: £12.8m) include those remaining costs
associated with the Sparton Corporation
transaction that was terminated in March 2018.
The net loss on forward foreign exchange
contracts and interest rate swap was £5.6m
(2017: £12.0m gain). This includes £11.1m of
costs incurred closing out the foreign exchange
forward put in place as part of the Sparton
transaction. This was partially offset by a gain of
£5.5m from the mark-to-market revaluation of
the Group’s foreign exchange forward contracts.
REVENUE
UNDERLYING OPERATING PROFIT
UNDERLYING PROFIT BEFORE TAX
£766.7m
-1.1%
£112.7m
-6.2%
£101.4m
-7.8%
2018
2017
2016
2015
2014
766.7
775.4
785.8
726.3
713.7
2018
2017
2016
2015
2014
112.7
120.1
131.1
120.0
118.1
2018
2017
2016
2015
2014
101.4
110.0
120.1
112.4
112.0
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Financial Review continued
£m
Underlying profit before tax
Amortisation of intangibles arising on acquisition
Acquisition and disposal related costs
(Loss)/gain on derivatives
Significant legal charges and expenses
S3 programme
Loss on disposal
Impairment charges
Net finance charge on defined benefit pensions
Guaranteed Minimum Pensions (GMP) equalisation
Reported IFRS profit before tax
2018
101.4
(28.3)
(2.7)
(5.6)
(2.3)
(6.5)
(0.7)
(7.6)
(1.9)
(3.2)
42.6
2017
110.0
(28.5)
(12.8)
12.0
(8.0)
(7.8)
–
(1.6)
(2.7)
–
60.6
“ The 2018 proposed
final dividend of 37.0p
(2017: 35.0p) per share
is proposed to be paid
on 9 May 2019 to
shareholders on the
register at 12 April 2019
subject to approval at the
Annual General Meeting.“
IFRS PROFIT BEFORE TAX
£42.6m
-29.7%
2018
2017
2016
2015
2014
42.6
60.6
67.6
34.8
21.5
Significant legal charges and expenses include
£2.3m of anti-bribery and corruption
investigation costs. £8.0m was incurred in the
prior year on legal charges relating to the Ithra
(Oman) contract.
Savings from the Group’s S3 initiative of £19.7m
(2017: £13.5m) were realised in the period,
whilst costs on the programme were £6.5m
(2017: £7.8m). In 2018 costs were incurred
following the decision to close additional
facilities and non-core product lines. The S3
initiative has yielded tangible benefits in terms
of cost savings, although the operational
efficiencies originally envisaged have yet to be
fully realised. The below the line costs associated
with the S3 programme ceased at the end of
2018, but work remains to simplify our
transactional processes; this will continue and
there remain opportunities for further
operational improvements in the future.
A £0.7m loss on disposal was incurred disposing
of our non-core Fuel Cell business from the
Maritime & Land division.
Impairment charges of £7.6m (2017: £1.6m)
include a £6.6m impairment of the infrastructure
cash generating unit goodwill following the
previously disclosed agreement to dispose of the
Airport Systems business for £22.0m, and a
£1.0m impairment of an intangible asset relating
to a non-core product line that was closed in the
Maritime & Land division in the year.
A £3.2m charge was incurred in relation to
Guaranteed Minimum Pensions (“GMP”)
equalisation of the UK defined benefit pension
scheme benefits earned in the period
17 May 1990 to 5 April 1997. This was
following a High Court ruling in October 2018
against Lloyds Banking Group that impacts
many UK businesses.
Tax, EPS and dividends
The Group’s underlying tax rate in the year
decreased to 19.7% (2017: 21.6%) owing to
the reduction in the federal income tax rate
applicable to underlying US profits, offset by
the new restriction of tax relief for US interest
expenses, for which no deferred tax asset is
recognised. The statutory tax rate on IFRS profit
before tax was 19.0% (2017: 19.3%).
Underlying earnings per share decreased to
109.5p (2017: 116.7p), reflecting the reduction
in profit. The weighted average number of
shares in issue was 74.4m (2017: 74.0m). Basic
earnings per share decreased to 43.6p
(2017: 66.2p). During the period, the Group
spent £91.9m, to re-purchase 6.3m ordinary
shares at an average of £14.52 per share. At
31 December 2018 the number of shares in issue
was 71,470,065. As at 6 March 2019 the Group
spent £100m on the share buyback programme.
The Board has implemented a new progressive
dividend policy with a through cycle target of
circa two times normalised cash and earnings
cover. This progressive policy is a signal of
confidence in the future of Ultra. The 2018
proposed final dividend of 37.0p (2017: 35.0p)
per share is proposed to be paid on 9 May 2019
to shareholders on the register at 12 April 2019
subject to approval at the Annual General Meeting.
This will result in a final full year dividend of
51.6p (2017: 49.6p), which will be covered 2.12
times by underlying earnings per share.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
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Operating cash flow
Cash generated by operating activities was
£102.4m (2017: £97.4m), reflecting increases in
working capital. Underlying operating cash flow
was £89.3m (2017: £116.5m) resulting in
underlying operating cash conversion of 79%
(2017: 97%). Capital expenditure, including
Enterprise Resource Planning (‘ERP’) systems
implementation, increased to £18.3m (2017: £11.2m).
Seven Ultra businesses commenced ERP
implementations over the year, with two going
live in 2018 and the others on track to go live in
the first half of 2019. Working capital increased
by £7.9m principally due to increases in inventory
work-in-progress and raw materials reflecting
organic revenues in the year. Specifically, this
increase was due to purchases required to
supply orders in early 2019 and purchasing
requirements on essential long lead-time
components. The inventory increase was
partially offset by an increase in payables.
Non-operating cash flow
The underlying operating cash flow of £89.3m
(2017: £116.5m) 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:
• £91.9m spent on the share buy-back with
6.3m shares repurchased. In 2017 there was a
£137.3m inflow from the share placing and
share options exercised in the year.
• Dividend payments of £36.9m (2017: £35.0m).
• Tax paid of £4.6m (2017: £10.3m).
• A £1.5m outflow on significant legal charges
and expenses relating to the anti-bribery and
corruption investigation costs. (2017: £9.8m
on Ithra (Oman) related legal fees).
• £13.6m on acquisition and disposal related
costs (2017: £13.0m), £11.1m of this
represented the close out cost of the foreign
exchange forward contract taken out to fund
the Sparton Corporation acquisition, which
was terminated in March 2018.
• £2.6m on the S3 programme (2017: £8.9m).
Consequently, net debt was £157.4m
(2017: £74.5m).
† For consistency of comparative, 2017 has been calculated as
if the share buy back conducted in 2018 had also similarly
impacted the December 2017 balance sheet.
Return on Invested Capital (ROIC)
ROIC was 18.8% (2017: 19.8%†) 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. The
decline relative to the prior year reflects the
reduction in underlying operating profit.
“ Seven Ultra
businesses
commenced
implementations
over the year, with
two going live in
2018 and others on
track to go live in the
first half of 2019.“
Borrowing facilities
Ultra’s net debt at the end of the year was
£157.4m (2017: £74.5m) and reflected the
impact of the £91.9m spent in the year to
re-purchase 6.3m ordinary shares.
The Group’s committed banking facilities
amount to £526.4m 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. The facility is
provided by a group of six international banks
and has a committed maturity to November
2023, and may be extended to November 2024
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 holds $165m of term loan which was
established in May 2015; $40m is repayable on
31 March 2019, $40m on 30 June 2019 and the
remainder on 1 August 2019. The Group also
has loan notes in issue to Pricoa which totalled
£50m (with an expiry date of October 2025) and
$60m (with an expiry date of 25 January 2019)
at 31 December 2018 (2017: $70m). Agreement
UNDERLYING EPS
109.5p
-6.2%
STATUTORY BASIC EPS
43.6p
-34.1%
2018
2017
2016
2015
2014
109.5
116.7
134.6
123.9
123.1
2018
2017
2016
2015
2014
43.6
66.2
82.8
35.7
29.8
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
32
Financial Review continued
“ The Group's net debt/
EBITDA was 1.25 times
(2017: 0.56 times),
and net interest
payable on borrowings
was covered around
10x by underlying
operating profit.“
was reached with Pricoa in September 2018 to
issue new loan notes of $70m. These were
issued on 25 January 2019. This debt will expire
in January 2026 and January 2029.
As at 31 December 2018, the total borrowings
drawn from the revolving facility were £20.0m
(2017: £nil), giving headroom of £280.0m
(2017: £300.0m) in addition to the £5m and
$10m overdrafts. The Group also held £96.3m
(2017: £149.5m) of cash for working
capital purposes.
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.
The Group’s net debt/EBITDA was 1.25 times
(2017: 0.56 times), and net interest payable on
borrowings was covered 10x by underlying
operating profit.
The Group’s main financial covenants are that
the ratio of net consolidated total borrowings/
EBITDA is less than three, and that the net
interest payable on borrowings is covered at
least three times by EBITA.
Interest rate management
To reduce the risks associated with interest rate
fluctuations and the associated volatility in
reported earnings, Ultra holds a mix of fixed rate
and floating rate debt, as well as a $45m interest
rate hedging contract that expires on 30 June
2019. The amount of fixed-term debt and the
associated interest rate policy is kept under
regular review and the Group targets that
between 40% and 60% of forecast debt is
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 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 2018 when the net
scheme deficit, calculated in accordance with
IAS19, was £59.1m (2017: £67.6m). The present
value of the liabilities decreased by £18.2m to
£353.1m in 2018 primarily due to changes in
the discount rate. There was a £8.1m decrease
in scheme assets, mainly driven by decreases in
investment values in equities.
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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
33
2019 FINANCIAL
GUIDANCE
• We are targeting an increase in our own
R&D investment to between 4% and
5% of revenue compared with 3.7% last
year. The investment programme in the
Group’s IT infrastructure and systems
will be a three to four-year operational
expenditure improvement programme
at a cost of c.£5m per year. These costs
are partially offset by an improvement in
organic profit and we expect operating
margin to remain in the mid-teens range.
• The Group will regularise trade debtors and
creditors during the year to reflect average
working balances rather than those at period
ends. This will have a cash impact of about
£46m and will be reflected in a reduced cash
conversion for the year, and the first half of
2019 will likely see a net cash out-flow for the
Group. It is anticipated that cash conversion
will return to the Group’s historical range of
80–85% in the medium term.
• Year-end net debt/EBITDA is expected to be
around 1.2x, reflecting the normalisation of
working capital during the year and the
disposal of Airport Systems.
• Ultra has forward contracts in place to hedge
the net US dollar cash generation of its UK
businesses. However, the balance sheet,
which has carried increasing US dollar
denominated assets from certain long-term
programmes, has not been hedged prior to
the conversion of those assets into cash.
From 1 January 2019 we have revised our
hedging strategy under IFRS 9 to reduce
income statement volatility from re-valuation
of US dollar assets held on the UK balance
sheet. The £2.9m gain in FY 2018 will
therefore not recur.
• Tax guidance has been updated to c.20%
(2018: 21.5%) reflecting changes to US
tax structure.
• IFRS 16 will result in a c.£1.5m increase in
finance costs, partially offset by a c.£1m
increase in operating profit. Net finance
charges on defined benefit pensions will
move to become an underlying cost from
1 January 2019.
• Capital Expenditure will increase to c.£25m
(2018: £18.3m) due to ERP systems
implementation.
• 2019 will have a similar second half
weighting to 2018 due to the phasing
in the Group’s revenue from military
tactical radios for the US Army’s
Network Modernisation programme.
• The impact of Brexit is difficult to
estimate with the number of different
scenarios that could occur. Please see
page 35 for more commentary.
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 £0.4m at the end of the year (2017:
£0.1m). 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 2018 (2017: £0.9m).
In the US, Ultra offers a defined contribution
401(k) retirement benefit plan to all full-time
employees. Under this plan, Ultra provides
participating and contributing employees with
matching contributions, subject to plan and
US Internal Revenue Service limitations.
Foreign exchange risks
Ultra’s results are affected by both the
translation and transaction effects of foreign
currency movements. By their nature, currency
translation risks cannot be mitigated, but the
transaction position is actively managed.
The majority of sales made by Ultra’s businesses
are made in local currency, thus avoiding any
transaction risk. However, this risk does arise
when businesses make sales and purchases
which are denominated in foreign currencies,
most often in US dollars. To reduce the potential
volatility, Ultra attempts to source in US dollars
a high proportion of the 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 2019, 100% of the
expected exposure is covered, reducing to 44%
of the exposure for 2020 and 33% of the
exposure for 2021. Exposure to other currencies
is hedged as it arises on specific contracts.
Capital allocation priorities
The Group intends to take a prudent and
disciplined approach to capital management
with the following priorities:
1. Investing for sustainable growth
2. Progressive dividend policy
3. Efficient balance sheet
4. Longer term strategic investment potential.
AMITABH SHARMA
Group Finance Director
6 March 2019
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
34
2018 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 risk management process
Board and Committees
Executive Team
Divisions
• Aerospace & Infrastructure
• Communications & Security
• Maritime & Land
First Line
• Risk and control processes as part of
'business as usual'
• Group Operating Manual
(setting out policies & processes)
• Training and development
• Regulatory and compliance requirements
• Risk registers
• Culture
* Provided by Deloitte.
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.
In June 2018, we announced that the Herley
business was likely to be impacted by cost
overruns on development contracts. This
was extremely disappointing; management
are working to address the issues. Actions
include a review of Ultra’s programme and
contracting approval and management
systems, and a specific Internal Audit review
across a number of the businesses to assess
compliance against the contract management
policies. Other than this item, no significant
failings or weaknesses have been identified.
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
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
Third Line
Independent challenge to the levels of
assurance provided by management
on the effectiveness of governance,
risk management and internal
controls
R
e
g
u
a
t
o
r
s
l
E
x
t
e
r
n
a
l
A
u
d
i
t
*
• Internal Audit (provided by PwC)
• Other independent assurance activities
e.g. health, safety and environment audits
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements
Ultra Electronics
Holdings plc
35
potential impacts. Risk Champions are employed
at all levels of the business so that they have 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:
• Risk is a standing agenda item at the Board
and the Audit Committee, and the culture of
openness is enabling emerging risks to be
highlighted at Board level.
• A deep dive review was undertaken in respect
of innovation and development (see page 42).
This included a 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.
• A watching brief is being maintained in
respect of the economic and political
uncertainties (including Brexit) 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 2019 will be to:
• Support and development of Ultra’s
• Continue to review and improve the
effectiveness of the Risk Management
Framework and the related processes.
• Recruit a permanent Chief Risk Officer
to lead the risk management function
and undertake the review noted above.
• Manage the impact of Brexit (if any).
• Manage ongoing GDPR compliance.
• Introduce Programme Management
discipline.
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 18–27) 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.
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.
BREXIT
Preparing for Brexit is a challenge due
to the different possible scenarios.
Approaching 29 March 2019 the business
focus has been to minimise the Group
risks, particularly with No Deal becoming
a higher probability scenario. Following
review and evaluation across the Group
the key risk areas in the context of a No
Deal Brexit are supply chain and growth.
Ultra has been working to establish Brexit
plans within the supply chain during 2018
and continues to work with our suppliers to
proactively manage Brexit interruption risk.
Given the typical timeline for project delivery
UK businesses are preparing to adopt work
arounds such as reworking schedules to
mitigate impact where necessary. While
these potential work arounds have been
identified, a risk remains that any delays
to contracted customer deliveries arising
from a disorderly Brexit could result in
claims from customers. The impact is
difficult to estimate with the combination
of different scenarios that could occur.
Another growth risk is that of exports
to non EU countries when EU originated
trade deals expire and are not immediately
replaced by UK originated trade deals.
Until the UK Government confirms how
they will replicate the effects of existing
EU free trade agreements from exit day
this risk cannot be completely mitigated.
While agreement by the Government
of the transitional arrangements will
be of enormous value to Ultra to avoid
uncertainty, in the short term the impact
of Brexit is potentially three to six month
delays in deliveries and the time taken
to resolve the resultant disruption. The
residual risk of additional tariffs and
duties and the practicalities of border
controls resulting from No Deal require
clarification. In the longer term, the
implications for UK suppliers into the
Eurozone are harder to forecast.
While Ultra will continue to be responsive
to changing markets it must be recognised
that short-term growth is a risk. While the
UK Government is seeking to replicate the
effects of existing EU free trade agreements
from exit day, or as soon as possible
thereafter, details are not currently fully
known. With consideration to commercial
and contractual arrangements there could
be some financial exposure arising from
the supply chain being unable to deliver
as a result of No Deal related issues. Focus
on supply chain management is the best
mitigation and the Executive Team will
examine impacts and direct Ultra businesses
in adapting to changing markets.
Ultra continues to review the numbers of
EU nationals, with the number of potentially
impacted employees representing no
more than 3% of the UK work force.
The Executive Team and the Board will
continue to operate a vigilant and tactical
approach to managing any periods of
uncertainty, whilst adhering to our risk
management and internal control systems.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
36
2018 Principal risks and uncertainties continued
Principal risks
The Board has considered the impact of political and economic uncertainties in its major markets including Brexit and the potential risks and opportunities
these may have for the Group alongside other applicable risks. Risk Champions at Divisional and Business levels continue to proactively manage risks and
these are monitored at a Group level by the Executive Team. The Board remains focused on the effective management of risk and will oversee
improvements to policies and processes during 2019. The Group’s risk exposure remains largely unchanged.
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.
RISK/DESCRIPTION
CHANGES DURING 2018
RISK 1
GROWTH
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.
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 2019. Political and
economic circumstances in some of the Group’s key markets mean that it is
optimistic about organic growth continuing. 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. During the year a deep dive
into innovation and development was undertaken (see page 42).
TREND: NO SIGNIFICANT CHANGE
Pgs 06–09 Chief Executive Officer's
Review
RISK 2
DELIVERING CHANGE
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.
TREND: NO SIGNIFICANT CHANGE
Pg 08 Focus, Fix, Grow
The S3 programme was completed in 2018 having broadly achieved the
savings target of £20m but these savings were delivered principally
through restructuring, onerous lease provisions and indirect procurement
in the UK, and so there are still significant opportunities here. In 2019
change will be dominated by investment in ERP (as was the case in 2018)
and IT networks which represents a higher risk, as is normal for ERP
programmes. New actions have been identified to mitigate these risks.
RISK 3
PEOPLE AND CULTURE
Preserving Ultra’s culture and attracting, developing and retaining the
right people who have relevant domain expertise and who embrace
Ultra’s culture is critical to the Group’s strategic objectives.
TREND: NO SIGNIFICANT CHANGE
Pgs 18–21 People and culture
Ultra’s culture and how it is reflected across its businesses has been the
subject of discussion at both the Board and Executive levels, throughout
2018. Talent and succession planning remained a focus for the Executive
Team and the Board in 2018. The recruitment of a new Chief HR Officer in
November 2018 enabled the Executive Team and the Board to increase this
focus further. In 2019 work will be undertaken to consider employee
engagement and promote diversity.
• Poor investment decisions leading to inadequate returns
• The Group is offsetting challenges in
• The Board conducts a rigorous review of
• Reduced business opportunity and loss of reputation,
the UK defence market by expanding
acquisition opportunities including
customers, market share, revenue and profit
in targeted overseas regions that
• Specialist capabilities eroded through commoditisation
exhibit long-term growth
• Reduction in anticipated acquisition value through
characteristics
commissioning third party market
reports and due diligence. Post-
acquisition reviews are performed on all
overpayment, non-delivery of synergies and/or economies
• The market-facing segments enable
acquisitions comprising integration
of scale and senior management focus diverted away from
Ultra to remain competitive and use
effectiveness, operational performance
delivering “business as usual“
the capabilities of its businesses to
deliver enhanced solutions more
learned
compared to expectation and lessons
effectively to its customers
• A working group reporting to the
• Improving the capacity and capability
Executive Team has been established to
of the Group’s sales and marketing
evaluate the impact of recent geo-
teams
political events on Ultra
• Establishment and implementation of
• The recommendations from the deep
rigorous gate reviews of risk appetite
dive into innovation and development
will be implemented
for major opportunities so that
acceptable margin levels and risk
tolerances are maintained
• 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
• An Executive Team sponsor is allocated
• Experienced personnel have been
to all major change programmes
recruited to operate the shared services
• Not recruiting and retaining the right employees in the
• Ultra continues to engage in a number
• Measure Employee engagement and
right roles would result in Ultra being unable to fulfil its
of initiatives with local schools,
morale through engagement surveys.
contractual obligations and would lead to operational
colleges and universities to gain access
The leadership team use the survey to
inefficiencies and loss of productivity
• Potential loss of future growth opportunities
to the best people for its
apprenticeship and graduate
address any areas of concern so that
Ultra’s people remain engaged and
• Staff morale could be impaired resulting in a rise in
recruitment programmes. This enables
committed
employee-related issues (e.g. grievances and sickness)
Ultra to grow a broad range of skills
• Talent and succession planning has
• Potential legal, regulatory and employee rights breaches
and capabilities and to remain
successful at innovating to meet
customers’ needs
been, and will continue to be, a focus
for the Board
• The annual Organisation, Succession &
• Ultra’s people and their development
Development Plan (OSDP) results in
are fundamental to Group success.
Employee development needs form
high-potential employees being
identified and their development
part of performance and development
monitored
reviews and are aligned to employees’
specific needs
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
37
POTENTIAL IMPACT OF FAILURE
MITIGATIONS (EXAMPLES)
RISK 1
GROWTH
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 2019. Political and
Ultra’s strategic objective for year-on-year growth requires: the ability to
economic circumstances in some of the Group’s key markets mean that it is
respond to changing market dynamics; the capacity to win new business
optimistic about organic growth continuing. The Company’s focus in the
and deliver successfully against contracted customer requirements; the
year continued to be on its market-facing segment strategies, improving its
development of highly differentiated solutions to address customer
needs; and the ability to select, execute and integrate acquisitions
planning for future political and economic developments in its key markets,
and exploiting the anticipated market upturn. During the year a deep dive
into innovation and development was undertaken (see page 42).
• 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“
effectively.
TREND: NO SIGNIFICANT CHANGE
Pgs 06–09 Chief Executive Officer's
Review
• 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
• 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
• The recommendations from the deep
dive into innovation and development
will be implemented
RISK 2
DELIVERING CHANGE
The S3 programme was completed in 2018 having broadly achieved the
savings target of £20m but these savings were delivered principally
through restructuring, onerous lease provisions and indirect procurement
Effective delivery of major change programmes with minimal effect on
in the UK, and so there are still significant opportunities here. In 2019
business as usual is a key component of Ultra’s continual drive for
change will be dominated by investment in ERP (as was the case in 2018)
and IT networks which represents a higher risk, as is normal for ERP
programmes. New actions have been identified to mitigate these risks.
operational improvement.
TREND: NO SIGNIFICANT CHANGE
Pg 08 Focus, Fix, Grow
• 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
• An Executive Team sponsor is allocated
• Experienced personnel have been
to all major change programmes
recruited to operate the shared services
RISK 3
PEOPLE AND CULTURE
Ultra’s culture and how it is reflected across its businesses has been the
subject of discussion at both the Board and Executive levels, throughout
2018. Talent and succession planning remained a focus for the Executive
Preserving Ultra’s culture and attracting, developing and retaining the
Team and the Board in 2018. The recruitment of a new Chief HR Officer in
right people who have relevant domain expertise and who embrace
November 2018 enabled the Executive Team and the Board to increase this
Ultra’s culture is critical to the Group’s strategic objectives.
focus further. In 2019 work will be undertaken to consider employee
engagement and promote diversity.
TREND: NO SIGNIFICANT CHANGE
Pgs 18–21 People and culture
• 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
• Potential loss of future growth opportunities
• Staff morale could be impaired resulting in a rise in
employee-related issues (e.g. grievances and sickness)
• Potential legal, regulatory and employee rights breaches
• 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
• Measure Employee engagement and
morale through engagement surveys.
The leadership team 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
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
38
2018 Principal risks and uncertainties continued
RISK/DESCRIPTION
CHANGES DURING 2018
RISK 4
INFORMATION MANAGEMENT
AND SECURITY
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.
TREND: NO SIGNIFICANT CHANGE
Pg 33 Financial guidance – investment
programme
RISK 5
SUPPLY CHAIN
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.
TREND: SLIGHT INCREASE
Pg 35 Brexit case study
The CORVID Protect and Ultra approach to security continues to provide 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. A review of all systems was undertaken in light of
the GDPR legislation and new processes are now being embedded.
• Reduced product differentiation caused by loss of
• The Group’s information security is
• Intellectual property is addressed in the
provided through its continued
bid and contract management process
• Reputational damage to Ultra as a highly regarded provider
investment in Ultra’s Cyber Protection
and protected through information
Group (part of CORVID Protect). It
security
• Loss of business opportunity with removal of government
provides Group-wide monitoring,
• Security clearance processes are in place
approval to work on classified programmes
incident response and continued
for all employees
• Disruption of business activity as systems are cleansed
enhancement of Ultra’s IT systems and
• Established physical security processes
intellectual property
of secure data systems
and restored
processes
are implemented at all sites
• The Board is kept updated on how
• Cyber insurance has been evaluated
CORVID Protect secures Ultra’s
as a risk mitigation over the course of
network, including protecting Ultra
the year.
from phishing attacks
A procurement strategy and SMART objectives are being developed and
an assessment of the impact of Brexit has been undertaken. The Brexit risk
has meant the supply chain risk has slightly increased.
• Failure to deliver against customer commitments
• Building ongoing partnerships with
• The Board’s commitment to compliance
• Reduced profit margins and increased contractual disputes
strategic suppliers and managing
and litigation
• Loss of reputation and investor confidence
major supplier risks and issues
with the Modern Slavery Act 2015 is
contained in the Anti-Slavery and
(including single source arrangements)
Human Trafficking Statement
through the bid management and
(www.ultra-electronics.com/ investors/
contract management policies
• Establishment of regional
anti-slavery-and-human-trafficking-
policy.aspx)
procurement councils to target the
• Business continuity and disaster
optimisation of Ultra’s supply chain for
recovery plans are in place
Direct Procurement
• The Group has business interruption,
• Evaluation of Brexit risk has identified
property damage, professional
supply chain as the key area of risk.
More detail is included on page 35
indemnity and product liability insurance
RISK 6
GOVERNANCE AND INTERNAL
CONTROLS
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.
TREND: SLIGHT INCREASE
Pgs 47–53 Governance and
Accountability
A new Chief Executive Officer joined the Company in June 2018 and as a
result, the roles of Chief Executive Officer and Chair of the Board were
separated again bringing Ultra back into line with the expectations of the
Code. As further described on page 52, the The Board undertook a
Governance workshop during the year with actions being identified to
make improvements to processes. The Board determined that there had
been a slight increase in this risk, however, this is expected to reduce as we
continue to review and refresh our governance processes and policies
following the corporate governance workshop and implement changes
necessary as a result of new Corporate Governance Code and statutory
reporting requirements during 2019.
• Significant financial loss (e.g. fraud, theft, material errors)
• The Group Operating Manual and Risk
• Internal Audit conducts an audit of the
• Loss of reputation and investor confidence
Management Framework provides
Group’s internal control system
• Loss of business opportunity with removal of government
approval to work on classified programmes
clear instructions on the Group’s
internal governance and controls
The terms of reference for the Board
• The businesses provide year-end
and committees are reviewed and
disclosures on the effectiveness of
updated annually.
their accounting and internal control
systems
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
39
RISK 4
INFORMATION MANAGEMENT
AND SECURITY
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.
TREND: NO SIGNIFICANT CHANGE
Pg 33 Financial guidance – investment
programme
RISK 5
SUPPLY CHAIN
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.
TREND: SLIGHT INCREASE
Pg 35 Brexit case study
The CORVID Protect and Ultra approach to security continues to provide 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. A review of all systems was undertaken in light of
the GDPR legislation and new processes are now being embedded.
POTENTIAL IMPACT OF FAILURE
MITIGATIONS (EXAMPLES)
• 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
• 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
• 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
• Cyber insurance has been evaluated
as a risk mitigation over the course of
the year.
A procurement strategy and SMART objectives are being developed and
an assessment of the impact of Brexit has been undertaken. The Brexit risk
has meant the supply chain risk has slightly increased.
• Failure to deliver against customer commitments
• Reduced profit margins and increased contractual disputes
and litigation
• Loss of reputation and investor confidence
• 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
• Evaluation of Brexit risk has identified
supply chain as the key area of risk.
More detail is included on page 35
• 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
GOVERNANCE AND INTERNAL
RISK 6
CONTROLS
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.
TREND: SLIGHT INCREASE
Pgs 47–53 Governance and
Accountability
A new Chief Executive Officer joined the Company in June 2018 and as a
result, the roles of Chief Executive Officer and Chair of the Board were
separated again bringing Ultra back into line with the expectations of the
Code. As further described on page 52, the The Board undertook a
Governance workshop during the year with actions being identified to
make improvements to processes. The Board determined that there had
been a slight increase in this risk, however, this is expected to reduce as we
continue to review and refresh our governance processes and policies
following the corporate governance workshop and implement changes
necessary as a result of new Corporate Governance Code and statutory
reporting requirements during 2019.
• 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
• The Group Operating Manual and Risk
Management Framework provides
clear instructions on the Group’s
internal governance and controls
• The businesses provide year-end
disclosures on the effectiveness of
their accounting and internal control
systems
• Internal Audit conducts an audit of the
Group’s internal control system
The terms of reference for the Board
and committees are reviewed and
updated annually.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
40
2018 Principal risks and uncertainties continued
RISK/DESCRIPTION
CHANGES DURING 2018
RISK 7
PENSIONS
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.
TREND: NO SIGNIFICANT CHANGE
Pg 32 Pensions
RISK 8
LEGISLATION/REGULATION
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.
TREND: NO SIGNIFICANT CHANGE
Pgs 57–61 Audit Committee Report
RISK 9
HEALTH, SAFETY AND
ENVIRONMENT (HS&E)
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.
TREND: NO SIGNIFICANT CHANGE
Pg 25 Health and safety
The pension scheme has continued to increase the hedging of its
liabilities. There is no change to this risk.
• Any increase in the deficit may require additional cash
• Annual accounting and triennial
• The Pension Trustees and the Company
contributions and thereby reduce the available cash for
pension valuations are in place and
agreed to increased hedging of the
the Group
any issues that may arise are
highlighted to the Board
scheme’s liabilities
• The Board undertakes regular Pension
• The Pension Trustees and the
Strategy Reviews
Company actively consider pension
• Long term scheme funding targets
risk reduction activities such as liability
have been agreed
matching, dynamic de-risking,
pension increase exchange and
retirement transfer options
The Company continues to take compliance very seriously and the Board
and Executive Team strive to reinforce an ethical culture. For example, all
employees are required to undertake anti-bribery training on an annual
basis and updated agents' policies are now in place. GDPR processes are
being transferred from a change programme to “business as usual“.
• Failure to comply with legislation and regulations could
• The Group Operating Manual is well
• The Ethics Overview Committee
result in fines and penalties and/or the debarment of the
established and policies and
provides independent advice and
Group from government contracts
procedures are regularly updated to
scrutiny of Ultra’s business activity. It
• Reduced access to export markets could have a material
reflect changing legislative and
provides assurance to the Board that
adverse effect on the Group’s future revenue and profit
regulatory requirements
• Loss of reputation and investor confidence
• Regular compliance training is
undertaken as part of Ultra’s
the Group’s undertakings are
transparent and conducted ethically
within the legislative environment
commitment to an ethical culture and
• Employees have access to a Group-
individual businesses provide
compliance statements as part of
monthly business performance
reporting
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
The Board has zero appetite for HS&E reportable incidents. The number
of lost time accidents increased slightly however reportable accidents
reduced slightly.
• Incidents may occur which could result in harm to
• The Board has zero appetite for HS&E
• The Board undertakes an annual
employees and visitors, the temporary shutdown of
facilities or other business disruption
• The Group may be exposed to regulatory action and
financial loss
risk and the Group’s leadership is
committed to ensuring that this
remains a top priority. Any material
incidents are reported to the Board
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
• Loss of reputation and investor confidence
along with a correction or mitigation
addition to a biannual external audit
plan
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
41
POTENTIAL IMPACT OF FAILURE
MITIGATIONS (EXAMPLES)
The pension scheme has continued to increase the hedging of its
liabilities. There is no change to this risk.
• Any increase in the deficit may require additional cash
contributions and thereby reduce the available cash for
the Group
• Annual accounting and triennial
pension valuations are in place and
any issues that may arise are
highlighted to the Board
• The Pension Trustees and the Company
agreed to increased hedging of the
scheme’s liabilities
• The Board undertakes regular Pension
• The Pension Trustees and the
Strategy Reviews
Company actively consider pension
risk reduction activities such as liability
matching, dynamic de-risking,
pension increase exchange and
retirement transfer options
• Long term scheme funding targets
have been agreed
RISK 8
LEGISLATION/REGULATION
The Group operates in a highly regulated environment across many
The Company continues to take compliance very seriously and the Board
and Executive Team strive to reinforce an ethical culture. For example, all
employees are required to undertake anti-bribery training on an annual
basis and updated agents' policies are now in place. GDPR processes are
jurisdictions and is subject to regulatory and legislative requirements.
being transferred from a change programme to “business as usual“.
• Failure to comply with legislation and regulations could
• The Group Operating Manual is well
result in fines and penalties and/or the debarment of the
Group from government contracts
• Reduced access to export markets could have a material
adverse effect on the Group’s future revenue and profit
• Loss of reputation and investor confidence
established and policies and
procedures are regularly updated to
reflect changing legislative and
regulatory requirements
• 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
The Board has zero appetite for HS&E reportable incidents. The number
of lost time accidents increased slightly however reportable accidents
reduced slightly.
• 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
• 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
• 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
RISK 7
PENSIONS
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.
TREND: NO SIGNIFICANT CHANGE
Pg 32 Pensions
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.
TREND: NO SIGNIFICANT CHANGE
Pgs 57–61 Audit Committee Report
RISK 9
HEALTH, SAFETY AND
ENVIRONMENT (HS&E)
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.
TREND: NO SIGNIFICANT CHANGE
Pg 25 Health and safety
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
42
2018 Principal risks and uncertainties continued
INNOVATION AND
DEVELOPMENT
Innovation and Development is an important
cornerstone of organic growth. The Group is
both self and customer funded for its R&D
activities. Whilst the environment for
customer funding is strengthening, Ultra has
not increased its internally funded R&D in
recent years. This has been due to increased
customer funded R&D and the cyclicality of
the aerospace R&D cycle. The importance of
continuing organic growth results in this risk
being a priority for the Company. As such,
this risk was the subject of a deep dive review
in 2017/18.
Innovation is about creating new
differentiating solutions to customers'
problems which yield products that satisfy
user needs. Ultra is committed to growth in
2019 spending, above the 2018 levels. Current
controls include some technology mapping
and project approval documentation with
proposed internal R&D spend evaluated
against future returns followed by a gated
project process. Multi-year projects are also
re-evaluated annually.
Along with this increase in own funded R&D
expenditures will come modifications and
enhancements in group governance to
improve focus and efficiency of the
investment projects. This will include greater
use of technology roadmaps, work with
academia and the appointment of
technology leads where appropriate.
Marketing plans should identify technology
investment timelines and requirement.
Overall risk exposure
Following the review and deep dive, the
overall severity of the risk remains
unchanged.
Risk appetite statement
Ultra operates in a market that is subject to
high levels of scrutiny. Our relationships with
our partners, our reputation and our integrity
are a key part of our continued success and
the trust placed in us by our stakeholders.
Ultra has a very low appetite to take risk
where our culture, reputation or financial
standing might be adversely affected and
as a consequence we seek to implement
governance and internal controls to manage
risks to quality, safety, regulatory and legal
compliance, and financial integrity.
This does not mean however, that we do
not take risk. Our objective is to outperform
the market in terms of total shareholder
return. Although we exercise natural caution
through considered assessment, Ultra
has an appetite for growth, particularly
through product and service innovation and
through acquisition where this complements
existing markets and our core capability. In
addition, we have an appetite to explore and
operate in new markets provided we have
high levels of confidence in the partners in
these markets that we collaborate with.
Ultra’s individual business units work in
an autonomous manner where being
entrepreneurial is encouraged. As a result, we
accept a higher level of risk as this is managed
in part by the diversity of our product and
service portfolio. By leveraging the strength
of the individual businesses, Ultra remains
an agile organisation that is able to explore
opportunities and markets for growth. We
have a lower appetite for risk taking in our
individual businesses where in aggregate there
is a potential to impact the Group as a whole.
The Board will ultimately always consider
taking higher risks that benefit our
stakeholders where the opportunity is seen
to outweigh the risks provided appropriate
levels of mitigation are put in place.
Statement of going concern
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.
Ultra’s net debt at 31 December 2018 was
£157.4m (2017: £74.5m). The Group’s
committed banking facilities amount to
£526.4m 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. The facility is provided by
a group of six international banks and has a
committed maturity to November 2023, and
may be extended to November 2024 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 holds $165m of term
loan which was established in May 2015;
$40m is repayable on 31 March 2019, $40m
on 30 June 2019 and the remainder on
1 August 2019. The Group also has loan notes
in issue to Pricoa which totalled £50m (with
an expiry date of October 2025) and $60m
(with an expiry date of 25 January 2019) at
31 December 2018 (2017: $70m). Agreement
was reached with Pricoa in September 2018
to issue new loan notes of $70m. These were
issued on 25 January 2019. This debt will
expire in January 2026 and January 2029.
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 UK landscape
due to Brexit (detail on the potential risks
to the Group associated with this are set
out on pages 35 and 38), the long-term
nature of Ultra’s business and its positioning
in attractive sectors of its markets, taken
together with the Group’s forward order
book, provide a satisfactory level of confidence
in respect of trading in the year to come.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
43
This conclusion is based on a review of the
resources available to the Group, taking
account of the Group’s financial projections,
the diversified nature of the key markets
and programmes on which the Group
operates, the long-term nature of many of
these programmes, together with available
cash and committed borrowings and the
ability of the Group to raise new finance,
the key financial covenants and material
uncertainties, including the uncertainty arising
due to Brexit. 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.
Long-term viability statement
Long-term viability statement
In accordance with provision C.2.2 of the
2016 UK Corporate Governance 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 2021,
to coincide with its review of the Group’s
financial budgets and medium-term forecasts
from its Strategic Plan. The certainty is lower in
later years due to the inherent uncertainties in
forecasting future performance. The Strategic
Plan is underpinned by the regular Executive
Team reviews of divisional 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
2021. In making this statement the Directors
have considered the resilience of the Group,
taking account of its current position, the
principal risks facing the business in severe
but plausible scenarios, the uncertainty arising
over the future landscape due to Brexit, and
the effectiveness of any mitigating actions. This
assessment has considered the potential impacts
of these risks on the business model, future
performance, solvency and liquidity over the
period. The following two severe but plausible
scenarios were modelled: (i) no revenue or
underlying profit growth and an average
underlying operating cash conversion of 50%
over the three-year period to December 2021
and (ii) a year-on-year revenue and underlying
operating profit decline of 10% over the period
to December 2021. Consideration was also
given to the level of unexpected cash outflow
or decline in profitability that would be required
to result in a breach of financial covenants.
The Directors have determined that the
three-year period to December 2021 is an
appropriate period to provide its viability
statement. In making their assessment, of the
viability of the Company 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 actions of restricting dividend
payments and reductions in non-essential
expenditure and capital expenditure.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
44
Board of Directors and Company Secretary
Tony Rice
Chair
Simon Pryce
Chief Executive Officer
Amitabh Sharma
Group Finance Director
John Hirst
Independent Non-Executive
Director
Time in position:
since 28 Jan 19
Time in position:
6 mths
Time in position:
2 yrs 8 mths
Time in position:
4 yrs
Tony Rice was CEO of Cable &
Wireless Communications plc, CEO
of Tunstall plc and held a number
of senior roles in BAE Systems plc.
Tony has a BA in Business Studies
from City of London College
and an MBA from Cranfield
School of Management.
Appointed to the Board:
18 December 2018
Committees
Nomination (Chair)
Other Key Appointments
• Chair of Dechra
Pharmaceuticals plc
• Senior Independent
Director of Halma plc
Prior to his appointment, Simon
was Group Chief Executive of
BBA Aviation plc for 10 years.
Simon qualified as a Chartered
Accountant in the UK before
working at the global investment
banking firms of Lazards and JP
Morgan, and then at GKN plc.
Simon is a Fellow of the Royal
Aeronautical Society and a
member of the Chartered Institute
for Securities and Investment. He
is also a member of the Council
of the University of Reading.
Appointed to the Board:
18 June 2018
• Non-Executive Director of the
Whittington Hospital Trust
Committees
None
Skills and Experience
Senior business management
in the aeronautical and
electronics engineering sectors.
Senior non-executive roles
in UK listed companies.
Other Key Appointments
• Non-Executive Director of
Electrocomponents plc
Skills and Experience
International automotive
and engineering sector.
Senior leadership and general
management experience in
multinational listed companies.
Amitabh has held senior
finance positions at listed
and private companies with
multi-sector experience.
Amitabh was previously Group
Financial Controller at Ultra from
1999 to 2005 and at Senior plc
in 2014. He was Group Finance
Director at Gibbs and Dandy
plc (now Gibbs and Dandy
Ltd) and a Divisional Finance
Director at Saint Gobain.
He qualified as a Chartered
Accountant in 1993 and was
subsequently an audit manager
with KPMG in London.
Appointed to the Board:
4 May 2016
Committees
None
Other Key Appointments
None
Skills and Experience
Financial professional with
extensive industry experience.
Business management in
the electronics sector.
John was Chief Executive of the
Met Office, a post he held from
2005 to 2014. Between 1998 and
2005 John was CEO of Premier
Farnell plc, having previously spent
19 years with ICI plc, where he was
Chief Executive of ICI Performance
Chemicals and ICI Autocolour, as
well as being Group Treasurer.
He was awarded a CBE in the
2014 New Year’s Honours List
for his national and international
services to Meteorology.
He is a Fellow of the Institute
of Chartered Accountants, a
Member of the Association
of Corporate Treasurers and a
companion of the Chartered
British Institute of Management.
Appointed to the Board:
1 January 2015
Committees
Audit (Chair), Nomination
and Remuneration
Other Key Appointments
• Non-Executive Director of Marsh
UK; Jelf plc; ORSUS Medical Ltd
and White Square Chemical Inc.
• Senior Independent Director
and Audit Committee
Chair at Anglian Water
• Chair of Risk Committee
of Jelf plc
• Chairman of the British
Standards Institute and the
National Oceanography Centre
Skills and Experience
Leadership in large global
organisations.
Public and private sector
experience.
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Ultra Electronics
Holdings plc
45
Executive Director
Audit Committee member
Non-Executive Director
Remuneration Committee member
Nomination Committee member
Geeta Gopalan
Independent
Non-Executive
Director
Martin Broadhurst
Independent
Non-Executive
Director
Time in position:
1 yr 8 mths
Time in position:
6 yrs 5 mths
Victoria Hull
Independent
Non-Executive
Director
Time in position:
1 yr 8 mths
Sir Robert Walmsley
Senior Independent
Non-Executive
Director
Louise Ruppel
General Counsel and
Company Secretary
Time in position:
9 yrs 11 mths
Time in position:
Since 28 Jan 2019
Louise Ruppel joined
Ultra in January 2019.
She trained as a solicitor
at UK city firm Slaughter
and May where she
qualified into the
corporate department.
She subsequently worked
as an in-house lawyer
at Merrill Lynch & Co.
Limited in London and
worked for FirstGroup plc
as Company Secretary
and Group Legal Director
until 2016, when she
left to become General
Counsel and Company
Secretary at Manchester
Airports Group.
Skills and Experience
Legal, compliance and
Board-level experience.
Geeta has worked in
commercial and retail
banking as well as
social investment and
community development
in the third sector.
Her executive roles
included Chair Europe for
Monitise plc, and Director
of Payments Services at
HBOS. Geeta also worked
at Citigroup for 16 years,
during which time she
was a Managing Director
for its UK retail bank and
Business Development
Head of EMEA.
She has experience
coaching and mentoring
as well as in-depth
knowledge of the
digital economy, mobile
and internet spaces.
Appointed to the Board:
28 April 2017
Committees
Audit, Nomination
and Remuneration
Other Key
Appointments
• Non-Executive Director
of CYBG plc
• Non-Executive
Director of Funding
Circle Holdings plc
• Non-Executive Director
of Wizink Bank S.A.
Skills and Experience
Senior management in
the financial services
sector digital economy
and the social sector.
JMartin joined Marshall
Aerospace as a
management trainee in
1975 and, following a
number of roles with the
Company, including
Production Director and
Director of Programmes,
served as Chief Executive
between February 1996
and December 2010.
During his time as
Chief Executive, he
served on the Group
Holdings Board and was
Chair of a number of
subsidiary companies.
Victoria is a former
Executive Director and
General Counsel of
Invensys plc and Telewest
Communications plc.
She has considerable
international and
domestic experience of
legal, commercial and
governance matters
having worked in global
and domestic companies
operating at a Executive
Committee or Board level.
Appointed to the Board:
28 April 2017
Appointed to the Board:
2 July 2012
Committees
Audit, Nomination
and Remuneration
Other Key
Appointments
• Non-Executive Director
of Rosenblatt Group plc
Skills and Experience
Experience across a
diverse range of sectors.
Legal and Board-
level experience.
Committees
Audit, Nomination and
Remuneration (Chair)
Other Key
Appointments
• Non-Executive
Director of the Centre
for Engineering
and Manufacturing
Excellence
• Trustee of the Royal
Aeronautical Society
Skills and Experience
Extensive experience
in the defence and
aerospace markets.
International business
leadership and growth.
Large engineering
organisation management
experience.
Sir Robert was Chief of
Defence Procurement
at the UK Ministry of
Defence (MOD), a post
which he held from 1996
until his retirement from
public service in 2003.
Prior to his MOD
appointment, Sir Robert
had a distinguished career
in the Royal Navy, where
he rose to the rank of
Vice Admiral in 1994 and
served for two years as
Controller of the Navy.
Appointed to
the Board:
22 January 2009
Committees
Audit, Nomination
and Remuneration
Other Key
Appointments
• Non-Executive Director
of Cohort plc
Skills and Experience
Defence, security,
transport and energy.
Knowledge of Ultra’s
main geographic markets.
Substantial experience of
government procurement.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements
Ultra Electronics
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46
Chair's Governance Statement
“ A refreshed Board
and Executive Team
and a renewed
focus on business
strategy, culture and
governance, will
ensure that Ultra
remains a resilient and
sustainable business.”
Dear Shareholder,
This is my first Governance Report as Chair of
Ultra Electronics Holdings plc. First, I would
like to thank Douglas Caster for his work as
Chair and Executive Chair. The Board is
particularly grateful to Douglas for having
stepped into the Executive Chair role at a
difficult time for Ultra and for his leadership
and guidance during the ensuing period of
significant change and transition. On behalf
of the Board and all of Ultra’s employees, I
would like to thank Douglas for his long and
dedicated service to the Group and wish him
all the best for his retirement.
The key themes of Board composition,
culture and governance reform that Douglas
referred to in the 2017 Governance Statement
remained pertinent throughout 2018. Whilst
a number of governance objectives have
been successfully achieved during the year,
others have come to the fore and we remain
vigilant and firm in our resolve to ensure that
our governance supports and enhances the
performance of our Group’s businesses.
I am therefore pleased to present Ultra’s 2018
Corporate Governance Report, which explains
how the Board has applied itself to good
governance and, in particular, applied the
principles of the UK Corporate Governance
Code (the Code) during the year.
Board changes and succession planning
A year ago the Board, and particularly the
Nomination Committee, was in the process of
recruiting a new Chief Executive Officer. That
process was successfully completed during the
year and we are already seeing the benefits of
having our new Chief Executive Officer, Simon
Pryce, in place. Simon’s appointment also
enabled Douglas to step back into the role of
Non-Executive Chair.
In addition to recruiting Simon, the Board and
the Nomination Committee, led by Sir Robert
Walmsley as Senior Independent Non-Executive
Director, undertook a search for a new
Non-Executive Director and Chair Designate,
resulting in my joining the Board in December
2018 and taking over as Chair on 28 January
2019. Details of the process by which I was
appointed are set out in the Report from the
Chair of the Nomination Committee set out
on page 54.
As announced on 6 March 2019, due to his
increasing non-Ultra commitments and his
recent appointment as Chair of the British
Standards Institution, John Hirst has indicated
that he intends to step down as a Non-Executive
Director and Chair of the Audit Committee later
this year, once a suitable replacement has been
found. John will step down from the
Remuneration Committee after the 2019 Annual
General Meeting. We thank him for his wise
counsel over the years and wish him all the best
for his future endeavours.
Sir Robert Walmsley’s term as a Non-Executive
Director was due to expire in April 2018. Given
the changes to the Board, in November 2017, it
was announced that the Board had asked Sir
Robert to remain on the Board for a further year
as Senior Independent Non-Executive Director
to provide non-executive continuity and
leadership. Despite the considerable progress
in 2018 there are further changes needed and
the Board has again requested Sir Robert to
continue as Senior Independent Non-Executive
Director until, at the latest, January 2020. This
allows sufficient time to recruit a new Chair of
Audit Committee and a replacement Senior
Independent Non-Executive Director, whilst
maintaining a degree of business continuity and
industry knowledge, particularly in light of Sir
Robert’s extensive understanding of the UK and
US defence sectors. The Board is mindful of the
need to ensure that we maintain a broad and
complementary range of experience, skills,
personalities and competencies on the Board,
and this will form part of its criteria for any new
non-executive appointments.
Culture
In the 2017 Governance Statement, recognising
the importance of culture as the foundation for
resilient and sustainable businesses across the
Group, Douglas commented on the Board’s role
in overseeing the culture of the Group and the
importance it plays in creating accountability
and responsibility. We welcomed the
appointment of a new Chief Human Resources
Officer during the year, who will assist the Board
in its continuing work in this area.
As part of its role in overseeing the culture
of the business, the programme of Non-
Executive Director site visits continued during
2018 including visits to our facilities in the
UK and the USA. The Board and Executive
Team also have a number of visits planned for
2019, which will be important in assessing
how Ultra's “Focus, Fix, Grow” journey
is being supported across the Group.
Corporate governance reforms –
looking ahead
The publication, in July 2018, of the new UK
Corporate Governance Code, has prompted
the Board to review how it engages with key
stakeholders (and especially employees),
promotes diversity across the workforce
(including the Executive Team), and monitors
and assesses Ultra’s culture, so that behaviour
throughout the Group is aligned with its values
and strategic goals. A review of the Group’s
governance arrangements is under way, aimed
at ensuring that the Group operates effectively
within the new Code and statutory reporting
requirements, and the outcome and compliance
with the Code and those requirements will be
reported in our 2019 Annual Report.
Notwithstanding the challenges it has faced
in the past 18 months, I believe that a refreshed
Board and Executive Team and a renewed focus
on business strategy, culture and governance,
will ensure that Ultra remains a resilient and
sustainable business, focused on medium and
long-term growth and value generation.
TONY RICE
Chair
6 March 2019
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Corporate Governance Report
Board has always considered Sir Robert to
be independent in character and judgement,
which is the primary consideration for the
purposes of Provision B.1.1 of the Code,
and he has continued to demonstrate that
independence of character and judgement,
and to constructively challenge Board
and Management decisions through his
participation in Board meetings and strategy
reviews during the year. On that basis,
the Board considers that Sir Robert should
continue to be regarded as independent
for the purposes of the Code. The Board is
confident that he will continue to demonstrate
these characteristics during the coming
year, until he retires from the Board.
Throughout the financial year ended
31 December 2018, the Board considers that
it, and the Company, has complied in all other
respects with the other provisions set out in
the Code. The Code is issued by the Financial
Reporting Council and is publicly available on
their website (www.frc.org.uk). In this Corporate
Governance Report, we describe how the Board
has applied the Main Principles of the Code.
Compliance statement
Until the appointment of Simon Pryce as Chief
Executive Officer on 18 June 2018, Douglas
Caster carried out the role of Executive Chair,
meaning that the Board did not comply with
Code Provision A.2.1 of the Code, which
requires the separation of the roles of Chair
and Chief Executive Officer. Following the
resignation of the previous Chief Executive
in November 2017, Douglas' appointment
as Executive Chair was always expected
to be a temporary arrangement pending
the appointment of a new Chief Executive
Officer. That process concluded in March
2018 when it was announced that Simon
Pryce would be appointed Chief Executive
Officer from 18 June 2018, and Douglas
would revert to being the Non-Executive
Chair. Since 18 June 2018, the Board has
been compliant with Code Provision A.2.1.
In late 2017, the Board asked Sir Robert
Walmsley, whose term as a Non-Executive
Director was due to expire in April 2018, to
remain on the Board for a further year as
Senior Independent Director. As outlined
above, this step was taken to provide non-
executive continuity on the Board during the
period of transition in the executive leadership
of the Company. Further, for the reasons
set out above, Sir Robert’s term has been
further extended until January 2020. The
Board and Committee Structure
Board
Audit Committee
Nomination
Committee
Executive
Team
Remuneration
Committee
The Board has delegated certain key responsibilities to the Nomination Committee (see page 54),
to the Audit Committee (see page 57) and to the Remuneration Committee (see page 62). These
Committees make recommendations to the Board for approval; however, ultimate responsibility lies
with the Board.
Ultra Electronics
Holdings plc
47
Summarised below and explained in detail
throughout this report, we have described
how we have applied the main principles
of the Code.
LEADERSHIP
The Board provides leadership to the
Group and rigorously challenges
strategy, performance, responsibility and
accountability to ensure that the right
decisions are made in the right way
and in consideration of the long-term
success of the Group.
Read more about the Board's
LEADERSHIP on Pg 48
EFFECTIVENESS
Directors are appointed on merit, following
a rigorous and transparent process.
The Board has evaluated the balance
of skills, experience, knowledge and
independence of the Directors through
an externally facilitated evaluation
process and ensures that all new Directors
undertake an induction programme.
Read more about the Board's
EFFECTIVENESS on Pg 51
ACCOUNTABILITY
Effective risk management is fundamental
to achieving the Company’s objectives.
Decisions are based on the Board’s appetite
for risk.
Read more about the Board's
ACCOUNTABILITY on Pg 53
RELATIONS WITH
SHAREHOLDERS
We maintain strong relations with
shareholders through events and
consultations.
Read more about SHAREHOLDER
RELATIONS on Pg 53
REMUNERATION
Executive Directors’ remuneration is
designed to promote the long-term
success of the Company. The Board
ensures performance-related elements
are transparent, stretching and
rigorously applied.
Read more about the Company’s
REMUNERATION on Pgs 62–77
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
48
Corporate Governance Report continued
Leadership
Summary of Board Activities during 2018
Key Activity
Timetable
Review of Health, Safety and
Environmental Report
January Board Meeting
Receipt of Ethics Committee Report April Board Meeting
Governance Workshop
April
Received Divisional Strategy
Presentations
September, November
and December
Appointment of CEO
June Board Meeting
Appointment of NED and Chair
Designate
December Board Meeting
Board attendance during 2018 (9 scheduled and 6 unscheduled meetings held)
Douglas Caster (Chair)
Simon Pryce
Amitabh Sharma
Martin Broadhurst
Geeta Gopalan
John Hirst
Victoria Hull
Sir Robert Walmsley
Tony Rice
15/15
6/15
15/15
15/15
14/15
14/15
15/15
15/15
1/15
Simon Pryce attended all Board meetings after his appointment in June 2018; Geeta Gopalan and John Hirst were unable to attend one unscheduled meeting; Tony Rice attended all Board meetings
after his appointment as Non-Executive Director in December 2018.
Roles
The role of the Board
All the Directors are collectively responsible for providing effective
leadership and direction in delivering the key corporate objective of
generating shareholder value. In addition, the Non-Executive Directors are
responsible for exercising independent and objective judgement and
for scrutinising and challenging management. The Board is responsible
for approving strategy and policies, for oversight of risk, controls and
corporate governance, and for setting a culture which encourages the
Group’s businesses to behave ethically. The Board is accountable to
shareholders for the proper conduct of the business and for Ultra’s
long-term success; it represents the interests of all stakeholders.
Members of the Board and their biographies are shown on pages 44
and 45.
Leadership
The Board is led by the Chair of the Board, whilst the Chief Executive
Officer is ordinarily responsible for the running of the business. Between
November 2017 and June 2018, Douglas Caster, as Executive Chair,
undertook both roles on an interim basis pending the appointment of a
new Chief Executive Officer. Since June 2018, the roles of Chair of the
Board and Chief Executive Officer have been held by different individuals.
A written statement of the responsibilities of the Chair of the Board, Senior
Independent Director and Chief Executive Officer has been in place for
several years and will be reviewed in 2019.
Executive Team
It is the function of the Group’s management, through the Chief Executive
Officer and his Executive Team, to run the operations of the Group. The
Executive Directors set the Group strategy, which is subject to challenge
by the Board before final agreement. The Executive Team considers major
business issues and reviews those matters which are to be submitted to the
Board for its consideration. The Chief Executive Officer is responsible for
establishing the Executive Team and chairing the Executive Team meetings.
The Executive Team comprises: Chief Executive Officer; Group Finance
Director; Corporate Marketing Director; EVP Commercial and Corporate
Affairs; General Counsel and Company Secretary; Chief HR Officer; and
Divisional Managing Directors/Presidents.
Ethics Overview Committee
Ultra is committed to ethical business conduct. In this regard, the
Group has the benefit of an independent Ethics Overview Committee.
Ultra's Policy Statement on Ethics and Business Conduct is available
from the Corporate Responsibility section of the Group's website
www.ultra-electronics.com. The Ethics Overview Committee,
through its independently appointed members, underpins this
policy, by checking and testing it in support of the Board. It does this
through discussions with senior managers, receipt of reports, visits
to Company sites, engagement with employees and managers at
those sites and, where appropriate, requests to senior managers for
various documents that assist the members in fulfilling this role.
Board meetings
There were nine scheduled Board meetings during 2018, plus a number
of unscheduled Board meetings to consider and approve, amongst other
things, the termination of Ultra's bid to acquire Sparton Corporation, the
raising of long-term debt of up to US$200m, and the appointment of
a new Chief Executive Officer and a new Non-Executive Director and
Chair Designate.
Comprehensive briefing papers were circulated to the Directors in
advance of each Board meeting. At each scheduled Board meeting,
the Board received:
• An Executive Chair’s (prior to June)/Chief Executive Officer’s Report
(from June onwards), which covered the Group’s operational
performance and particular performance issues in each division;
• A Group Finance Director’s Report, which covered financial forecasts
for the half-year and full-year and reviews of financial performance,
banking covenants and analysts’ views of the Group, major
shareholdings and major share buyers and sellers; and
• An update on Major Projects and Mergers, Divestments and
Acquisitions.
At certain scheduled Board meetings, presentations were made by Ultra’s
businesses detailing recent performance, key opportunities (including in
respect of specific bids or programmes) and future forecasts. The Executive
Directors provided appropriate explanations for matters having a
significant impact on the Group’s financial performance and drew the
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
49
wider Board’s attention to any significant trends or deviations from budget
revealed by monthly forecasts of future performance. Acquisition and
divestment opportunities were also presented to the Board.
As a result of responsibility for the preparation of papers for the Board
passing to the new Chief Executive Officer, (having previously been the
responsibility of the Executive Chair), the structure of the Board papers
has developed during the year. In addition, the Board received regular
privileged legal reports on the investigation by the Serious Fraud Office
(the ‘SFO’), announced on 19 April 2018, and also reports on the Sparton
acquisition and Senior Management and Board recruitment. The Group
also received compliance reports from the businesses across the Group.
When a scheduled Board meeting is not held in the month, the Directors
receive a summary financial report for the Group comprising consolidated
financial information and business financial information, summary financial
reports from each of the businesses, forecasts for the half- and full-year,
and a shareholder analysis summary report on Ultra.
During 2018, the Board visited three operating businesses in the UK:
Command and Sonar Systems at Loudwater, PMES at Rugeley and PCS,
Cheltenham. Martin Broadhurst also visited some of the Company’s US
businesses in October 2018. Such visits provide a useful cultural barometer
and enable the Board to see the Group’s capabilities first-hand and to
engage with colleagues, both formally and informally. Members of the
Ethics Overview Committee also visited Energy in Wimborne, 3eTI in
Washington, USA and Energy and ATS in Austin, USA.
A summary of how the Board spent its time in 2018 is set out below. The
full range of Board responsibilities are detailed in the document entitled
“Terms of Reference for Main Board”, which is available from the Group’s
website (www.ultra-electronics.com/about-us/corporate-governance/
board-and-sub-committees-terms-of-reference). The principal duties of the
Board during the year were discharged as follows:
Group strategy
• Review the Group’s strategies for growth and the market segment
• Half-day Board strategy sessions were held on 27 September,
strategies.
• Monitor the performance of the Group against these strategies.
Financial reporting and controls
• Agree the budget.
• Review the financial results and forecasts, reports on performance
against budget.
• Shareholder engagement and analysis.
• Treasury and tax activities.
• Review dividend policy and set dividend.
• Review and approve the Annual Report and Accounts and interim
report.
Market analysis and major bids
• Receive market reports.
• Review major bid wins and losses.
• Review significant current and future bids.
29 November and 17 December, which focused on the divisional
strategies. Presentations were given by the Executive Team and
Divisional Leads and discussions were held on significant matters
identified in respect of each of the divisions.
• Following his appointment to the Board, the new Chief Executive
Officer has reported his initial thoughts on the strategic and
operational development of the Group and has provided regular
updates to the Board as his views on the Group’s strategy crystallise.
• As part of its annual work plan, the Board approved the annual
and interim financial statements and accompanying regulatory
announcements, reviewed and approved the annual budget and
approved the Group’s dividend policy, payment of the interim
dividend and the recommendation of the final dividend.
• The Board reviewed reports from the Board’s Committees, including
recommendations from the Audit Committee in respect of: the
effectiveness of the Company’s risk management and internal
control statement; the adoption of the going concern statement;
the long-term viability statement; impairment; and the
reappointment of the External Auditor.
• The Board approved the Group tax and treasury strategy and
also considered the implications of US Corporate Tax Reform
for the Company.
• The Board approved the raising of long-term debt up to US$200m.
• At each scheduled Board meeting, the Board received a Marketing
Report providing a brief on market developments, order intake and
bids (including information in respect of missed bids). Further
improvements were made to this report in the year to improve order
pipeline visibility.
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Corporate Governance Report continued
Group risk framework and management
• Set the Group’s risk appetite and monitor the Group’s
• The Board supported by the Audit Committee conducted an annual
significant risks.
People, Board effectiveness and succession planning
• Receive reports on changes in senior management.
• Review board succession planning.
• Undertake formal Board evaluation.
Significant transactions, matters and expenditure
• Consider, review and approve significant transactions.
• Review major capital projects and bids.
• Monitor significant litigation and disputes.
Corporate governance and legal & regulatory compliance
• Receive reports from the Board Committees.
• Receive reports on legal and regulatory developments.
• Review Group policies.
refresh of the Group risk register (including risk appetite), and
reviewed the Group’s principal risks to determine the nature and
extent of the risks it is willing to take and to review the management
of those risks.
• The Board received a health, safety and environment report
summarising the position across the Group and considered reports
on externally reportable health and safety incidents and evaluated
the adequacy of the correction and mitigation plans.
• The Board approved the Group’s insurance programme.
• At each scheduled Board meeting, the Board received an update on
changes and recruitment in senior management.
• The Board took part in an annual Board evaluation (see page 52 for
further information on this).
• At each scheduled Board meeting, the Board received project reports
on major contracts and programmes (including the S3 and ERP
programmes) and evaluated acquisition opportunities.
• Privileged legal reports were received on the regulatory processes in
connection with the conclusion of the Sparton Corporation
acquisition and the ongoing SFO investigation.
• Biannually, the Board reviews the Compliance Reports prepared by
Divisional Managing Directors (DMDs) and Presidents which
summarise the compliance matters in the Business Performance
Reports submitted each month by the Business MDs and Presidents.
• The Board participated in a Corporate Governance Workshop.
• The Board considered and approved Group policies.
• The Board reviewed and approved its policy in relation to the use
of Agents.
• The Board reviewed the annual corporate governance update
prepared by the General Counsel and Company Secretary, and
approved recommended associated actions.
• The Board considered, evaluated and approved actions in respect
of material upcoming legal and regulatory updates, including the
EU General Data Protection Regulation (GDPR), gender pay gap
reporting and US tax reforms.
• The Board received a report on the UK Corporate Governance Code
and considered the steps to be taken to ensure compliance.
• The Board reviewed reports on the Group’s offset policy.
Board priorities for 2019
• Strategic development and implementation.
• Support further development of talent and succession planning across
the Group with particular focus on the sales and marketing, project
management and commercial functions.
• Ensure that the Board has the right mix of experience and competencies,
particularly in the light of the ongoing changes to its composition.
• Governance and Compliance – continue to develop and maintain best
practice standards in corporate governance and compliance – the Board
will oversee the Group’s compliance with GDPR, gender pay gap
reporting, payment practices reporting, and any changes required as a
result of the 2018 Code and new statutory reporting requirements.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
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Effectiveness
Board skills and experience
The Board has a balance of skills, understanding, perspectives and
experience relevant to the Group’s activities. Collectively, the Board
members possess an understanding of the Group’s core defence, security,
transport and energy markets. This is complemented by members’
experience and expertise in other industries and disciplines including
procurement, accountancy, financial management and financial services,
legal and growing international businesses. This range of skills and
experience informs the Board’s decision-making and enables it to provide
effective leadership. The particular skills and experience that each Director
brings to the Board are described in their biographies on pages 44–45 and
summarised as follows:
Sectors
Geographies
Experience
Defence &
Aerospace
Security &
Cyber
Transport
markets
Energy
markets
UK &
Europe
North
America
Rest of the
World
Finance &
legal
Capital
markets &
public
companies
Public sector &
procurement
Leadership
in large
organisations
Corporate
Governance
Tony Rice
Douglas Caster
Simon Pryce
Amitabh Sharma
Martin Broadhurst
Geeta Gopalan
John Hirst
Victoria Hull
Sir Robert Walmsley
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Executive Directors are permitted to accept one appointment as a Non-Executive Director (other than the Chair) in another listed company. The Board considers that such roles enrich the skills and
experience of its Executive Directors to the overall benefit of the Company. Executive Directors are permitted to retain any fees they receive from such external appointments. Simon Pryce is a
Non-Executive Director of Electrocomponents plc.
Directors’ induction and training
All new appointments to the Board receive an induction to the Group
covering:
Non-Executive Directors
The key role of the Non-Executive Directors is to provide an appropriate
level of constructive challenge to the plans of the Executive Directors on
behalf of stakeholders.
• the Group’s strategy, governance framework policies, and procedures;
• the products and services of the Group’s businesses;
• the key markets in which the businesses operate;
• the key risks which the Group faces (together with the actions and plans
which are in place to mitigate these risks);
• the corporate and organisational structure;
• financing principles; and
• legal and regulatory matters.
Visits to operating businesses are arranged. New Directors are encouraged
to meet business and divisional management teams to gain a feel for the
Group’s style and culture.
The General Counsel and Company Secretary presents to the Board
annually on corporate governance. The Board is briefed on significant
changes in the law or governance codes affecting their duties as Directors.
Experts present to the Board on specialist areas, such as pensions and tax.
Specific training is arranged for Directors as and when appropriate, and as
may be requested by any member of the Board. The Directors are able to
call on independent professional advice at any time should this be
necessary in order for them to carry out their duties.
Martin Broadhurst, Geeta Gopalan, Victoria Hull, John Hirst and Sir Robert
Walmsley are designated as independent Non-Executive Directors. The
Board considers them all to be independent in character and judgement. In
making this assessment, the Board considers that they are independent of
management and free from business or any other relationship, which could
interfere with the exercise of independent judgement, now or in the
future. Furthermore, with the exception of Sir Robert Walmsley for the
reason set out on page 46 above, none of the circumstances set out in
Code Provision B.1.1 applies to any of the Non-Executive Directors. The
Chair of the Board has also considered the Non-Executive Directors’
performance in the year and has determined them to be effective and to
have demonstrated commitment to their roles. The Board considers that
any shareholdings of the Chair of the Board and Non-Executive Directors
serve to align their interests with those of its shareholders.
The Non-Executive Directors met without the Chair of the Board or
Executive Directors being present during the year to discuss aspects
relating to the Board and the Company and gave appropriate feedback.
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Corporate Governance Report continued
The evaluation and subsequent discussions demonstrate the Board's
commitment to continue to improve its effectiveness as a whole. Further,
the Board considers that each Director contributes effectively and
demonstrates commitment to the role. In addition, whilst the Nomination
Committee's focus has turned to succession planning for the Board and its
Committees, there is currently an appropriate balance of skills, experience,
independence, diversity and knowledge of the Company to enable the
Directors to discharge their respective duties and responsibilities effectively.
Commitment of time by all Directors to Board and Committee meetings
and other duties is also considered sufficient for the effective discharge of
their responsibilities.
Corporate Governance Workshop
In April 2018, the Board participated in a Governance Workshop facilitated
by BP&E Global, the purpose of which was to review certain corporate
governance processes and systems, and consider whether the Board perceived
that any improvements to such processes and systems were required.
In preparation for the Workshop, a Senior Consultant at BP&E Global
held telephone interviews with, or received email feedback from, each
member of the Board in order to create a suitable framework for
discussions at the Workshop.
A summary of the significant and common themes based on these
telephone calls/email feedback were provided at the Workshop to facilitate
Board discussions. A number of action points, focused on improving
certain elements of Ultra's internal governance processes, were agreed as a
result of this Workshop. A follow-up meeting of the Board in November
2018 reviewed progress in respect of each of these actions, and ongoing
implementation will continue to be monitored by the Board during 2019.
Serious Fraud Office investigation
As previously announced, the SFO is continuing to investigate the conduct
of business in Algeria by Ultra Electronics Holdings plc (‘Ultra’), its
subsidiaries, employees and associated persons. The investigation
commenced in April 2018 following a voluntary self-report made by Ultra
to the SFO. Ultra continues to cooperate with the SFO and will make a
further statement once the investigation is complete.
Board evaluation
Historically, Board evaluations have been run on a two-year cycle with the
effectiveness of the Board and its Committees evaluated in one year and,
individual Directors’ performance evaluated in the following year.
In November 2018, Jack Telfer of Auxesis Consulting Ltd facilitated a Board
evaluation of the effectiveness of the Board and its Committees. All
Directors completed a detailed questionnaire requiring them to give
feedback on their perception of the effectiveness of the Board and its
Committees. The objective of the process was to encourage the improved
performance of the Board as a whole. A report of the results was given to
the Chair and discussed with the Board in December 2018. The Chair has
also met with Mr Telfer, and with each member of the Board separately, to
discuss the findings of the report, and actions resulting from the evaluation
will be formulated over the coming weeks and months.
Mr Telfer has considerable experience working at board level. He was the
Group Human Resources Director of Ultra until June 2004 (when he left
Ultra to set up his own consultancy) and so is able to facilitate the
evaluation from a position of having a good understanding of the
foundation of the Group’s operations culture.
The report reflects a point in time following a period of significant change
and a number of challenges faced by the Board. In this context it is
acknowledged in the report that some disruption to the Board's usual
disciplines was always likely, but the Board had worked well together in
difficult circumstances to respond to a challenging set of events. The
evaluation, report and subsequent Board discussions have resulted in
certain key areas of focus for the Board in 2019, which are set out below:
• Ensuring Board oversight of risk and oversight processes and practices
across the Group;
• Keeping management accountable for business performance;
• improving the rigour of decision-making processes for key investment
opportunities;
• Ensuring effective processes are in place to develop senior management;
• Reviewing Board processes, administration and functionality.
The Board considered that prioritising these matters in 2019 would
improve the performance of the Board as a whole. Further, the
appointment of a new Chief Human Resources Officer in November 2018,
a new Head of Investor Relations and a permanent General Counsel and
Company Secretary in January 2019, and a permanent Chief Risk Officer
during the course of 2019, would support the Board's renewed focus on
these matters in 2019.
The Board intends to commission an external Board evaluation in 2020
but, given the ongoing changes to the composition of the Board, it
considers it more appropriate to carry out an internal evaluation in 2019,
facilitated by the General Counsel and Company Secretary, but using a
recognised online Board evaluation platform.
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Accountability
Risk management and internal control
The Board is responsible for the Group’s risk management framework and
internal control systems and for reviewing their effectiveness.
The Group has internal control systems across finance, operations, human
resources and compliance and key controls have been identified. The
Board, via the Audit Committee, monitors the internal control systems on
an ongoing basis. The risk framework and internal control systems play a
key role in the management of risks that may impact the fulfilment of the
Board’s objectives. They are designed to identify and manage, rather than
eliminate, the risk of Ultra failing to achieve its business objectives and can
only provide reasonable, not absolute, assurance against material
misstatement of losses. In addition, the Company is in the process of
recruiting a permanent Chief Risk Officer to bolster the monitoring and
reporting of risk to the Board.
Details of the processes the Board has in place to identify, evaluate and
manage the principal risks faced by the Group can be found in the risk
section of the Strategic Report.
In accordance with the Code, the Board confirms that:
• There is a continuing process for identifying, evaluating and managing
the principal risks faced by the Group.
• The systems have been in place for the year under review and up to the
date of approval of this Annual Report and Accounts.
• The systems are regularly reviewed by the Board.
• Except as described on page 52 no significant failings or weaknesses
have been identified and the systems accord with the FRC guidance on
risk management, internal control and related financial business
reporting.
In light of developments during the year, the Board has reviewed risk
management and internal control processes and, except as set out on
page 52, consider that they continue to be effective. Further details on
the internal control systems and processes can be found in the Audit
Committee Report.
Relations with shareholders
Commitment to dialogue
The Board is committed to a high-quality dialogue with shareholders.
The Executive Directors take the lead in engaging with shareholders and
analysts on the performance of the business. The Chair of the Board,
Senior Independent Director and other Non-Executive Directors are
available to meet with shareholders on request if there are matters that
they wish to discuss outside of the normal channels of communication.
The Board conducted an independent perception audit of the Group
during the year which included views from shareholders and analysts. As
a result, a new Head of Investor Relations was appointed in January 2019.
Her role is to strengthen relationships with shareholders and to create a
more consistent communications strategy for the Group. She will keep the
Board informed of views and changes in Ultra's shareholder base.
Annual programme
A full programme of engagement with shareholders, potential investors
and analysts is undertaken each year by the Executive Directors. Focused
events and/or site visits are arranged to provide greater insight into the
strengths and potential of its extensive portfolio of specialist capabilities.
Visits and presentations in the year included various roadshows, investor
conferences and hosted visits for analysts. These range from introductory
briefings on the Group as a whole to presentations on specific areas
of capability.
During 2018, two roadshows were held following the preliminary and
interim results announcements, and analysts were invited to visit the
Ultra stand at the Farnborough airshow.
Meetings are held with institutional investors and financial analysts after
the release of the interim and full-year financial results, at which detailed
briefings are given. These briefings are also available from the Investors’
section of the Group’s website (www.ultra-electronics.com), together with
copies of all regulatory announcements, press releases and copies of the
published full-year and interim Reports and Accounts.
The Board is regularly updated by the Head of Investor Relations and the
Company’s stockbrokers on analysts’ and major shareholders’ views on the
Company. The Board receives a report at each Board meeting on any
changes to the holdings of the Company’s main institutional shareholders.
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Nomination Committee Report
“ We continue to
be mindful of the
expectation of our
shareholders and
other stakeholders
in relation to diversity,
in all of its forms.”
TONY RICE
Chair of the
Nomination Committee
CONSTITUTION
• Written terms of reference of the
Committee include all matters
recommended by the Code.
• The terms of reference were reviewed
during 2018.
• These terms of reference are available
on the Group’s website
(www.ultra-electronics.com/investor-
centre).
CHAIR’S
INTRODUCTION
Dear Shareholder,
During 2018, our main priority was to undertake
in a timely and thorough manner, the process of
appointing a new Chief Executive and Chair.
After objectives were successfully achieved in
June and December respectively, our focus has
turned to reviewing the tenure of our long-
serving Non-Executive Directors, and succession
planning to ensure a balance of skills, experience
and knowledge is maintained on the Board and
its Committees.
We also kept in view the succession planning
and career progression of senior employees,
and the recruitment and development of talent
across the Group. We believe that the Board
and its Committees have an appropriate mix
of skills and experience to operate effectively,
but recognise that changes to the composition
of the Board will be needed to ensure that
the balance of executive and independent
non-executive oversight is maintained. As we
carry on with this process, we continue to be
mindful of the expectation of our shareholders
and other stakeholders in relation to the
diversity, in all of its forms, of our Board.
TONY RICE
Chair of the Nomination Committee
About the Committee
Committee membership
Tony Rice (Chair)
(appointed 28 January 2019)
Douglas Caster
Martin Broadhurst
Geeta Gopalan
John Hirst
Victoria Hull
Sir Robert Walmsley
Attendance
during 2018
0/5
4/5
5/5
5/5
5/5
5/5
5/5
Douglas Caster did not attend one meeting at which the
agenda items dealt with his succession.
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Activity during 2018
During 2018, there were five (two scheduled and three unscheduled) meetings of the Committee. The key activities of the Committee during the year are
summarised as follows:
Board appointment
• Before any appointment is made by the Board, evaluate the balance
of skills, knowledge, experience and diversity on the Board and, in
the light of this evaluation, prepare a description of the role and
capabilities required for a particular appointment.
• In identifying suitable candidates, the Committee shall: use open
advertising or the services of external advisors to facilitate the search.
• Consider candidates from a wide range of backgrounds.
• Consider candidates on merit and against objective criteria and
with due regard for the benefits of diversity on the Board,
including gender.
Board composition and pipeline
• Regularly review the structure, size and composition (including the
skills, knowledge, experience and diversity) of the Board in line with
the Code’s requirements.
• 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.
The search for a new Chief Executive Officer was the primary task of
the Committee in the first half of 2018. The executive search firm Korn
Ferry was engaged to assist in this process. The Company does not
have any other connection with Korn Ferry. The following process was
adopted:
• the role specification and selection criteria were determined by the
Nomination Committee;
• the curricula vitae of the candidates were considered by the
Nomination Committee;
• a sub-committee of the Committee interviewed the shortlisted
candidates (four of whom were external and two of whom were
internal candidates);
• a number of shortlisted candidates were subsequently interviewed
by each member of the Nomination Committee;
• the Nomination Committee met to agree the appointment of Simon
Pryce as Chief Executive Officer; and
• a recommendation was put to the Board and approved.
The search for a new Chair was undertaken in the second half of the
year. Korn Ferry was again engaged to assist in this process. Sir Robert
Walmsley led the process and chaired all meetings in relation to this
appointment:
• the role specification and selection criteria were determined by the
Nomination Committee;
• the curricula vitae of the candidates were considered by the
Nomination Committee;
• a sub-committee of the Committee interviewed the shortlisted
candidates;
• a number of shortlisted candidates were subsequently interviewed
by each member of the Nomination Committee;
• the Nomination Committee met to agree the appointment of Tony
Rice as Non-Executive and Chair designate; and
• a recommendation was put to the Board and was subsequently
approved by the Board.
• The Committee considered the composition of the Board in view of
Sir Robert Walmsley’s tenure as Non-Executive Director having
exceeded the nine-year term recommended by the UK Corporate
Governance Code. As previously mentioned, the Committee’s focus
in the year was on the recruitment of the CEO and the Chair, and, in
2019, consideration will be given to finding appropriate
replacements for John Hirst as Chair of the Audit Committee and Sir
Robert Walmsley as Senior Independent Director.
• The Committee also reviewed the appointment of Martin
Broadhurst, given that his period of service had exceeded six years.
The Committee concluded that his contribution and role on the
Board was invaluable at a time of changes on the Board and
unanimously supported his continued appointment as an
independent Non-Executive Director.
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Nomination Committee Report continued
Succession planning
• Consider succession planning for Directors and senior executives
• In consideration of Executive-level succession planning, the
below Board level.
Committee received a report explaining the annual Organisation,
Succession & Development Plan (OSDP) process, the output from
which is reviewed quarterly 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.
A review of the OSDP process will be undertaken in 2019.
• Senior Executive Team recruitment processes were undertaken
during the year in respect of the appointment of a Chief Human
Resources Officer and a permanent General Counsel and Company
Secretary.
Board evaluation
• Consider the results of the annual Board evaluation.
• The results of the Board performance evaluation process were
considered and presented to the new Chair of the Board shortly after
his appointment.
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 judgement. 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 reassignment, 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 to the
Board during 2017, the proportion of female members of the Board was
29% (2/7 Directors) at the beginning of the year. Simon Pryce was
appointed to the Board as Chief Executive Officer following a rigorous
appointment process, which was conducted in conformity with this Board
Diversity Policy. Nevertheless, with the appointment of another male Board
member, the proportion of female members of the Board is currently 25%
(2/8 Directors).
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.
Further information 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, is set out on page 25 of our
Strategic Report. Details of our Gender Pay Gap is provided on our website
at www.ultra-electronics.com.
The Committee's focus for 2019
In 2019, the focus of the Nomination Committee will be to:
• Appoint a replacement for Sir Robert Walmsley as a Senior Independent
Director.
• Appoint a replacement for John Hirst as Chair of the Audit Committee.
• Review the performance of Executive Directors on the Board as part of
the Committee's regular review of the Board's composition.
• Review the remit and constitution of the Committee in the light of the
requirements of the 2018 UK Corporate Governance Code.
• In association with the Executive Team review the OSDP process.
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Audit Committee Report
“ Throughout the year,
the Committee
continued to focus
on the integrity of
financial reporting,
internal controls and
risk management
processes.”
JOHN HIRST
Chair of the Audit Committee
CONSTITUTION
• Written terms of reference of the
Committee include all matters
recommended by the Code.
• The terms of reference were reviewed
during 2018.
• These terms of reference are available
on the Group’s website
(www.ultra-electronics.com/investor-
centre).
• The Board is kept fully informed of the
Committee’s work and the minutes of
each Committee meeting are circulated to
Board members.
CHAIR’S
INTRODUCTION
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 53.
An assessment of the Group’s principal
risks and uncertainties can be found on
pages 34–42 and the going concern
and long-term viability statements can
be found on pages 42 and 43.
The Group’s risk management framework has
been a particular area of focus during 2018.
With the position of Chief Risk Officer being
vacant throughout 2018, the Audit Committee
has monitored the compensating activities of
the Executive Team and the work of the Risk
Owners at Business Unit level to ensure that
appropriate levels of focus and proactivity
have been maintained. Evolving areas of risk
have been reviewed with specific assessments
being undertaken on Brexit and innovation
risk. Regular reports from PwC who provide
the Group’s internal audit function on the
testing of the Group’s control activities
have indicated that the business control
environments continue to show improvements.
We continue to work to ensure that our
financial reporting is accurate and complies
with emerging regulatory requirements.
We monitored the impacts of IFRS 9,
IFRS 15 and IFRS 16 on our financial
reporting as well as scrutinising the
approach taken by management to the
key areas of judgement in preparing the
financial statements (see the section on
Significant Judgements on page 59).
About the Committee
Committee membership
John Hirst (Chair)
Martin Broadhurst
Geeta Gopalan
Victoria Hull
Sir Robert Walmsley
Attendance
during 2018
4/4
4/4
4/4
4/4
4/4
The Chair 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.
In addition to the members of the Committee,
regular attendees included the Chair, Chief
Executive Officer and the Group Finance
Director. The General Counsel and Company
Secretary is the Secretary to the Committee.
Deloitte is the Group’s external auditor and is
represented at all scheduled Committee
meetings, and the partner from PwC attends
those meetings at which key findings from
Internal Audit reports were reviewed by the
Committee. During 2018, the Chair 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.
JOHN HIRST
Chair of the Audit Committee
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Audit Committee Report continued
Activity during 2018
Financial statements and accounting policies
• Review management’s significant issues and judgements.
• Review 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 and financial control frameworks
• Assess the effectiveness of the Group’s system of internal control
and risk management.
Internal audit
• Review the effectiveness of the Internal Audit function.
• Discuss control issues identified by Internal Audit.
External audit, engagement and policy
• Review the scope and effectiveness of the external audit process.
• Negotiating the terms of the external auditor’s appointment, the
scope, fees and independence.
• Supervising any audit tender process.
• The Committee considered and recommended to the Board for
approval of the annual and interim financial statements and related
results announcements.
• The Committee discussed the key accounting policies and practices
adopted by the Group.
• It also reviewed the key accounting judgements and matters that
required the exercise of significant management judgement (see
section on Significant Judgements on page 59).
• The Committee reviewed the underlying assumptions and the rigour
of the testing underpinning the going concern statement and
long-term viability statement (which are set out on pages 42 and 43)
prior to approving them.
• The Committee considered reports on the internal control
environment and risk management and their effectiveness.
• 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.
• The Committee considered reports on known or suspected fraud.
Further details of the approach to risk management can be found on
pages 34 and 35.
• 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, noting the progress made in the control
environment within the Group’s businesses. It also considered the
controls around the ERP Programme rollout, and the results of a
review across a number of the businesses assessing compliance
against the contract management policies.
• The Committee considered Deloitte’s external audit planning report
prior to the commencement of the 2018 audit.
• The Committee received reports from the external auditor on
the outcomes of their audit process and the external audit plan
for the year.
• The Committee discussed Deloitte’s letter to management and
management responses to that letter.
• The Committee reviewed the external auditor’s engagement policy,
independence and effectiveness, and audit and non-audit fees.
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Significant judgements
The Audit Committee considered the areas of most significant accounting judgement and disclosure both prior to and during the course of the 2018
year-end external audit.
Judgement area
Committee assessment
Valuation and impairment testing of goodwill
and intangible assets
Accounting updates – IFRS 9 (Financial
Instruments); IFRS 15 (Revenue from Contracts
with Customers); IFRS 16 (Leases)
Long-term contract accounting
Pension scheme obligations
The Committee reviewed the methodology and assumptions used to determine the balance
sheet carrying values, including the discount rates and value in use determinations. The
Committee considered the recoverability of the goodwill relating to the C2ISR CGU grouping,
and sensitivity disclosures made, in light of the development contract cost overruns at Herley in
the year. The Committee also considered the implications of the disposal of the Airport
Systems business in relation to the Infrastructure CGU goodwill.
Updates on the implementation of the new IFRS requirements and their impact on the
financial statements and disclosure were presented and considered by the Committee.
The Committee considered the judgements taken in the forecast cost to complete estimates
for significant contracts.
The Committee considered the current funding level of the pension scheme and the liabilities
of the Defined Benefit Pension Scheme, and the impact of the High Court ruling in October
2018 against Lloyds Banking Group that impacts many UK businesses with regards to
Guaranteed Minimum Pensions (GMP) Equalisation.
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.
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 has 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:
• Self-assessment against the Group Operating Manual.
• Outstanding Internal and External Audit recommendations.
• Review of segregation of duties.
• Review of reconciliations.
Summary results from these reviews are included in the Internal Controls
Improvement Status Report, which is presented to the Audit Committee
bi-annually.
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 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.
The Committee’s focus for 2019
In addition to the annual routine matters for consideration, the main areas
of focus for the Committee for 2019 will be:
• Focusing on the risks highlighted in the 2018 internal audit.
• Overseeing the transfer of GDPR processes from a change programme
to business as usual.
Internal audit
PwC is 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.
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Audit Committee Report continued
The lead Partner from PwC reports directly to the Chair 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.
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 effectiveness of Internal Audit is assessed by the review of Internal
Audit reports, meetings with the Chair 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. The FRC’s Audit Quality Review Team selected to review the audit
of Ultra’s 2017 Annual Report as part of the 2018 annual inspection of
audit firms. The focus of the review and their reporting is on identifying
areas where improvements are required rather than highlighting areas
performing to or above the expected level. The Chair of the Audit
Committee received a full copy of the findings and discussed these with
Deloitte. The Audit Committee confirms that there were no significant
areas for improvement identified with the report, or any material issues in
relation to the financial statements. The Audit Committee is also satisfied
that there is nothing within the report that might have a bearing on the
audit appointment.
In addition, the Committee considered the questions contained in a
questionnaire issued by the Institute of Chartered Accountants of Scotland
in October 2007 to assess performance, effectiveness and independence.
The effectiveness of the External Audit process is assessed by the
Committee, which meets regularly throughout the year with the senior
audit partner and senior audit managers. Key to the overall effectiveness of
the process is that both the Company and the auditor make the other
aware of accounting and financial reporting issues as and when they arise,
and this exchange is not limited to the period in which formal audit and
review engagements take place.
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 2019 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.
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
Corporate Governance 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.
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 Chair 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 Chair 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. 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 policy for
engagement of the external auditor to undertake non-audit work will be
reviewed during 2019.
Ultra has adopted a policy which restricts 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. In 2017 Deloitte provided non-audit services
related to the Sparton acquisition. Being a Class 1 transaction, a significant
amount of non-audit work was required and the scope and fees for the
work was agreed by the Audit Committee prior to commencement. The
fees paid to Deloitte in respect of audit and non-audit services are shown
on page 99 of the Financial Statements.
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Fraud
The Internal Audit process, carried out by PwC, described on page 59, 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 Chief Executive Officer review the
performance of the businesses with the Divisional team monthly.
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.
Employee concerns are forwarded to the Senior Independent Director or,
in the case of issues covered by US security legislation, to the Chair of the
Security Committee of either Ultra’s Special Security Agreement Company
or Ultra’s Proxy Board Company, as appropriate. During 2018, two reports
were filed via this system (one for an HR matter and one an unsolicited
invitation to a conference). Each of these reports were reviewed as
received, responses were provided promptly via the system, and the
matters were subsequently closed.
Anti-bribery
Ultra has anti-bribery policies and procedures in place, which it continues
to review on a regular basis, and update as required. All Directors and
employees are required to sign Ultra’s code of conduct on anti-bribery and
commit to act in accordance with it. All new-starters at Ultra are also
required to undertake anti-bribery training, and then subsequently on a
regular basis. Additional anti-bribery training is given as appropriate; it is
intended that focused anti-bribery training will be delivered across the
Ultra Group during the year ahead. The Group intranet contains a
statement regarding compliance with Ultra’s anti-bribery policies.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
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Directors' Remuneration Report
“ I am pleased
to present the
Remuneration Report,
as prepared by the
Remuneration
Committee for the
financial year ended
31 December 2018.”
MARTIN BROADHURST
Chair of the
Remuneration Committee
KEY ACTIVITIES OF
THE COMMITTEE
• Considered Appointment Terms of Chief
Executive Officer; Chair Designate and
new Executive Team members.
• Reviewed salaries of the Group Finance
Director and the Executive Team.
1. ANNUAL STATEMENT
Dear Shareholder,
As the Chair of the Remuneration Committee, I
am pleased to present the Remuneration Report,
as prepared by the Remuneration Committee
and approved by the Board, for the financial year
ended 31 December 2018. 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 2018
and how the Remuneration Policy will be
implemented in the financial year ending
31 December 2019.
Board changes
During the year, the Committee considered
the appointment terms of Simon Pryce as
Chief Executive Officer, which are in line with
the shareholder-approved Policy. The Chief
Executive Officer was appointed on a base
salary of £665,000. The maximum annual
bonus potential is 125% of salary, which is
pro-rated for service in 2018. Shortly after
his arrival, a long-term incentive grant was
made equal to 175% of salary which will vest
three years from the date of grant, subject to
performance conditions and in line with awards
granted to the Group Finance Director and
members of the Executive Team during the year.
In line with the Policy, a two-year post-vesting
holding period applies and the Chief Executive
Officer is required to retain at least 50% of the
post-tax shares received on the vesting of this
award until he has met the share ownership
guidelines. These requirements will also apply
to any future Long-Term Incentive Plan (LTIP)
awards. This award level is made under the
exceptional limit of the policy and future awards
will be limited to the normal annual limit. The
Committee believes the total package reflects
Simon's extensive skills, experience and track
record that he brings to the Company.
Douglas Caster reverted to the role of Non-
Executive Chair from 18 June 2018, the date
of appointment of the Chief Executive Officer.
His remuneration returned to the previous
arrangements from that date.
Performance and reward during 2018
In 2018, revenue and underlying operating
profit* were £766.7m (2017: £775.4m) and
£112.7m (2017: £120.1m) respectively;
underlying earnings per share* was 109.5p
(2017: 116.7p); underlying operating cash flow
was £89.3m (2017: £116.5m); and total
shareholder return was -5% (2017: -2%).
Bonuses for 2018 were based on underlying
operating profit (25% of the maximum bonus
opportunity) and underlying operating cash
flow (75% of the maximum bonus opportunity).
Based on the business performance stated
above and in accordance with the design of the
bonus plans, a bonus payout of 70.6% of the
maximum opportunity was therefore achieved.
As a result, bonuses of 88.25% of base salary
versus a maximum opportunity of 125% of base
salary were awarded to the Executive Directors.
In line with the Policy, 20% of the bonus is
deferred into shares for three years. As noted
above, the Chief Executive Officer’s bonus is
pro-rated for time served.
The 2016 LTIP awards due to vest in 2019 will
not vest as a result of TSR targets not being met
over the three-year period to 31 December 2018.
Key activities of the Committee
during 2018
In addition to the Board change-related
activities outlined above, the Committee
also reviewed the salaries of the Group
Finance Director and the Executive Team,
approved the offers for all new members
of the Executive Team appointed in 2018
and reviewed and approved changes to the
Bonus Plan design for the Executive Team
for 2019. It also approved the targets for the
2019 bonus plans and the LTIP performance
for awards that were due to vest in 2018.
The Committee has continued to monitor
developments in corporate governance and
has considered changes to the UK Corporate
Governance Code and UK secondary legislation
to amend the annual report regulations under
the Companies Act 2006. Requirements
under both of these will apply from the
2019 financial year, and will be reflected in
next year’s Annual Report and Accounts.
* See footnote on page 145.
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For the 2019 financial year, the Committee
has determined to increase the Group Finance
Director’s salary by 2% from £350,000 to
£357,000. This increase takes into account
the salary increase of 9.38% awarded in
2018 to position the Group Finance Director
at an industry-competitive level and is in line
with the overall salary budgets for the rest
of the organisation and general industry
market movements. The Committee also
reviewed the salary of the Chief Executive
Officer and decided not to increase the
salary due to the salary being competitively
positioned at the time of joining the Company
in June 2018. The Committee intends to
grant a Long-Term Incentive award of
150% to the Chief Executive Officer and
125% to the Group Finance Director, with
metrics and weightings unchanged.
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
Chair of the Remuneration Committee
Implementation of the Policy for 2019
In the latter part of 2018 and moving into 2019,
the Committee has been working, and will
continue to work on changes to our reward
strategy that better align with our overall
business strategy and objectives.
As a result, for the 2019 Executive Directors'
bonus plan, whilst the overall bonus
opportunity remains at 125% of base salary,
we have adjusted the relative weightings
between cash and profit metrics to 45%
and 40% of maximum, respectively (2018:
75% and 25%), which reflects the relative
importance of profit delivery alongside cash.
Further, the cash metric will be linked to average
working capital turn improvement during the
year rather than underlying operating cash
flow at the mid-year and year-end in order
to improve business practices and culture.
In addition, individual performance objectives
will apply to the remaining 15% of maximum
bonus. These are targeted against four
categories: delivering business results; creating
efficiencies and productivities; driving strategic
growth; and improving the organisation's health
and have also been introduced to focus Ultra's
business leaders on objectives that will help
meet our short-term goals and longer-term
aspirations, whilst also improving the overall
engagement and retention of existing staff
across the business.
In 2019, the Committee will be reviewing
our overall Group compensation strategy,
philosophy, processes and governance.
The Committee will also review the outputs
of a project looking at introducing a
consistent job-levelling architecture across
the organisation. Additionally, we will be
reviewing our Long-Term Incentive Plans, in
order to make sure our senior business leaders
are incentivised to focus on delivering long-
term, sustainable value for the overall Group.
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Directors' Remuneration Report continued
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 the 2016 AGM, to remove the legacy pension arrangement for the former
Chief Executive Officer and to update the scenario charts for the 2019 Executive Director remuneration levels. The full version of the Policy approved by
shareholders can be found in the 2016 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.
Operation of the remuneration element
Maximum potential
Performance targets
How the remuneration element supports
our strategy
SALARY
Reflects the value of the individual
and their role and responsibilities
Normally reviewed annually, effective
1 April
Reflects underlying performance of
the individual
Paid in cash on a monthly basis;
pensionable
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
Provides an appropriate level of
basic fixed income avoiding
excessive risk arising from over-
reliance on variable income
Is benchmarked against companies
with similar characteristics and sector
comparators
Annual salary increases take into
account:
• Underlying performance of the
Targeted at or below median
individual.
Reviewed in the context of the salary
increase budget across the Group
• 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
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How the remuneration element supports
our strategy
ANNUAL BONUS
Provides focus on delivering/
exceeding annual budget
Rewards and helps retain key
executives and is aligned to the
Group’s risk profile
Maximum bonus only payable for
achieving demanding targets
Operation of the remuneration element
Maximum potential
Performance targets
Payable in cash. Non-pensionable
125% of salary p.a.
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
At least 75% of bonus
potential based on
financial measures (e.g.
underlying profit before
tax; and underlying
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
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
Discretionary annual grant of nil cost
options or conditional share awards
Normal limit:
• 150% of salary p.a. for the Chief
Performance measured
over three years
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
Executive Officer.
• 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
Defined contribution and/or salary
supplements paid on a cash neutral
basis
Up to a maximum of 20% of base
salary for Executive Directors
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
Up to four performance
measures which are set
by the Committee
before each grant
20% of award vests at
threshold performance
n/a
n/a
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Directors' Remuneration Report continued
2. DIRECTORS’ REMUNERATION POLICY continued
How the remuneration element supports
our strategy
SHARE OWNERSHIP GUIDELINES
To provide alignment of interests
between Executive Directors and
shareholders
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 Chair’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
Operation of the remuneration element
Maximum potential
Performance targets
n/a
Executive Directors are required to
build and maintain a shareholding
equivalent to two years’ base salary
through the retention of at least 50%
of the post-tax shares received on the
vesting of LTIP awards and at least
50% of the post-tax shares received
upon vesting of the deferred bonus
Aim to hold a
shareholding equal to
200% of base salary
for all Executive
Directors
Under the AESOP, up to the prevailing
HMRC limits, or any lower limit set by
Ultra, per annum from pre-tax salary
n/a
Under the Savings Related Share
Option Scheme, up to the prevailing
HMRC limits, or any lower limit set by
Ultra, per annum from post-tax salary
Aggregate annual limit imposed by the
Articles of Association
n/a
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 12-month contracts with no
notice periods
An additional fee is paid to the
Chair of the Audit, Remuneration
and Nomination Committees and
to the Senior Independent Director
Any reasonable business related
expenses (including tax thereon)
which are determined to be a
taxable benefit can be reimbursed
Notes to Directors’ Remuneration Policy table:
(1) A description of how the Company intends to implement the Policy in 2019 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.
(3) The choice of the performance metrics applicable to the annual bonus scheme reflect the Committee’s view that any incentive compensation should be appropriately challenging and largely tied to
financial performance. Underlying operating cash conversion and profit are both Key Performance Indicators of the Group. The performance conditions applicable to the LTIP 2019 awards were
selected by the Committee on the basis that:
• Total Shareholder Return (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 73.
(6) For the avoidance of doubt, 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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
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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.
)
s
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
R
£3,500
£3,000
£2,500
£2,000
£1,500
£1,000
£500
0
£3,133
48%
£2,634
36%
£1,421
36%
27%
14%
29%
£805
100%
57%
28%
26%
£1,557
48%
£1,334
27%
41%
27%
32%
26%
£754
12%
30%
59%
£441
100%
Minimum
Target
Maximum Maximum +50%
Minimum
Target
Maximum Maximum +50%
share price
growth
share price
growth
Chief Executive Officer
Chief Financial Officer
Fixed pay
Annual variable pay
Long-term variable pay
Notes to remuneration scenarios:
(1) Base salary levels are based on those applying from 1 April 2019.
(2) Benefit values for 2019 have been based on 2018 actual values.
(3) Annual bonus outturn is assumed to be 50% of maximum at target level. For maximum, outturn assumes a maximum bonus award level of 125% of salary.
(4) LTIP awards assume an LTIP grant policy of 150% of salary for the Chief Executive Officer and 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.
(5) For maximum plus 50% growth, LTIP awards vest at maximum performance, with an assumed share price increase of 50% over the performance period.
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Directors' Remuneration Report continued
2. DIRECTORS’ REMUNERATION POLICY continued
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 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.
Buyouts
To facilitate recruitment, the Committee may make an award to buy out incentive arrangements forfeited on leaving a previous employer. In doing so, the
Committee will take account of all relevant factors including any performance conditions attached to these awards and the time over which they would have
vested or been paid. Ultra may make use of the flexibility provided in the Listing Rules (LR 9.4.2) to make awards if appropriate. Where possible, incentives
will be bought out on a like-for-like basis with respect to vesting/payment dates, currency (i.e. cash versus shares) and the use of performance targets.
Non-Executive Directors
The approach to the recruitment of Non-Executive Directors is to pay an annual fixed fee, having considered existing Non-Executive Directors’ fee levels,
market levels and expected time commitment. In deciding whether to accept any fee increase the Non-Executive Directors consider Company performance.
Executive Directors' 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
S Pryce
A Sharma
Effective date of contract
18 Jun 2018
2 May 2016
Notice Period
12 months
12 months
No Executive Directors have provisions in their contracts for compensation on early termination other than for the notice period.
External appointments of Executive Directors
Executive Directors may accept no more than one external appointment as a Non-Executive Director (excluding Chair). 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.
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Ultra Electronics
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69
3. ANNUAL REPORT ON REMUNERATION
Implementation of the Directors’ Remuneration Policy in 2019
A summary of how the Directors’ Remuneration Policy will be applied for the year ending 31 December 2019 is set out below.
Salaries
Salary increases are effective from 1 April 2019 and the increases for the Executive Directors are in line with those for the wider workforce. Current
Executive Director salary levels, and increases effective in April 2019, are as follows:
S Pryce
A Sharma
S Pryce hired in June 2018 so less than 1 year service, salary will be reviewed in 2019.
2019 Salary
£'000
2018 Salary
£'000
665
357
665
350
Increase awarded
from
1 April 2019
%
0
2
Directors’ pension entitlements
Simon Pryce and Amitabh Sharma receive an annual Company contribution of 18% of salary. Simon receives this as a cash allowance in lieu of pension
contribution. Amitabh can elect to receive cash supplements in lieu of pension contributions to the Company defined contribution scheme 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 increase by 5.6% from 1 April 2019 to re-align with market levels (the Chair's fees remains unchanged). The fee
structure is as follows:
Chair
Non-Executive Director
Senior Independent Director
Committee Chair
Fees
£’000
202
56
7.5
7.5
Annual bonus for 2019
The maximum bonus for Executive Directors in 2019 will be 125% of base salary; 20% of the bonus paid will be deferred into Ultra shares for three years.
Up to 40% of maximum will be payable for the achievement of an agreed profit target, up to 45% payable for the achievement of an agreed
improvement in average working capital turn and up to 15% payable for the achievement of individual objectives. 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
improvement in average working capital turn target, vesting occurs on a straight-line basis from threshold to maximum. For the individual measure 0%
of the maximum is awarded for below expectations performance against aligned personal objectives with a maximum payable for exceeds expectations
performance rating.
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 2019
Consistent with the Directors’ Remuneration Policy, the Committee intends to grant an annual LTIP award in the form of shares worth 150% of salary for
the Chief Executive Officer and 125% of salary for the Group Finance Director during 2019.
For 2019, 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 operating profit: 25%
• Annual growth in organic revenue: 25%
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Directors’ Remuneration Report continued
Performance measures
Targets
Vesting %
Total Shareholder Return (TSR)1
Below threshold
Threshold
Stretch
ROIC2
Below threshold
Threshold
Stretch
Organic Operating Profit Growth3
Below threshold
Threshold
Stretch
Organic Revenue Growth3
Below threshold
Threshold
Stretch
TSR ranking of the Company against the Comparator Group
Below median
Median
Upper quartile or above
Return on Invested Capital
< 15.0%
15.00%
25.00%
Annual growth in organic operating profit
< 2.0%
2.00%
5.00%
Annual growth in organic revenue
< 2.0%
2.00%
5.00%
0%
5%
25%
0%
5%
25%
0%
5%
25%
0%
5%
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.
* See footnote on page 145.
Single total figure of remuneration – Audited
Directors’ emoluments are detailed below:
Basic
salary/fees
£'000
Benefits6
£'000
Pension7
£'000
Subtotal
£'000
Annual
performance
bonus8
£'000
LTIP9
£'000
Subtotal
£'000
Total
£'000
2018
Executive Directors
S. Pryce1, 2
D. Caster3,4
A. Sharma
Non-Executive Directors
D. Caster5
M. Broadhurst
G. Gopalan
J. Hirst
V. Hull
Sir Robert Walmsley
358
275
343
101
58
53
58
53
58
11
9
20
–
–
–
–
–
–
64
–
61
–
–
–
–
–
–
433
284
424
101
58
53
58
53
58
317
–
302
–
–
–
–
–
–
Total
1,357
40
125
1,522
619
–
–
–
–
–
–
–
–
–
–
317
–
302
–
–
–
–
–
–
750
284
726
101
58
53
58
53
58
618
2,141
1 Simon Pryce joined as a Director on 18 June 2018.
2 Simon Pryce is a Non-Executive Director of Electrocomponents. Simon received fees of £36,667 in relation to this role for the period 18 June 2018 to 31 December 2018.
3 Douglas Caster transferred from Executive Chair to Chair on 18 June 2018. Remuneration is shown in respect of his time as Executive Chair.
4 Douglas Caster was a Non-Executive Director of Morgan Advanced Materials (now Non-Executive Chair) and is Non-Executive Chair of Metalysis. During his appointment as Executive Chair, Douglas
received fees of £68,450 in aggregate in relation to these roles.
5 Douglas Caster transferred from Executive Chair to Chair on 18 June 2018. Remuneration is shown in respect of his time as Chair.
6 Benefits are taxable car benefit, life assurance and private medical insurance (Douglas Caster did not receive private medical insurance whilst Executive Chair). No other benefits are payable.
7 Pensions: Simon Pryce received a cash supplement in lieu of pension contribution of 18% of salary. Amitabh Sharma received pension contributions of 18% of basic salary, part cash supplement part
pension contribution.
8 20% of this bonus is deferred into shares for three years.
9 No current Executive Directors have LTIP awards vesting in the year.
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71
2017
Executive Directors
D. Caster1, 2
R. Sharma4,5
A. Sharma
M. Anderson6
Non-Executive Directors
D. Caster3
M. Broadhurst
G. Gopalan7
J. Hirst
V. Hull7
Sir Robert Walmsley
Total
Basic
salary/fees
£'000
Benefits8
£'000
Pension9
£'000
Subtotal
£'000
Annual
performance
bonus
£'000
LTIP10
£'000
Subtotal
£'000
Total
£'000
78
546
312
215
184
58
35
58
35
58
3
20
17
22
–
–
–
–
–
–
–
199
56
39
–
–
–
–
–
–
81
765
385
276
184
58
35
58
35
58
1,579
62
294
1,935
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
81
765
385
276
184
58
35
58
35
58
1,935
1 Douglas Caster transferred from Chair to Executive Chair on 10 November 2017. Remuneration is shown in respect of his time as Executive Chair.
2 Douglas Caster was a Non-Executive Director of Morgan Advanced Materials (now Non-Executive Chair) and is Non-Executive Chairman of Metalysis. Since his appointment as Executive Chair,
Douglas received fees of £23,976 in aggregate in relation to these roles.
3 Douglas Caster transferred from Chair to Executive Chair on 10 November 2017. Remuneration is shown in respect of his time as Chair.
4 Rakesh Sharma ceased to be a Director on 10 November 2017.
5 Rakesh Sharma is a Non-Executive Director of PayPoint. Rakesh received fees of £23,300 in relation to this role for the period 1 January 2017 to 10 November 2017.
6 Mark Anderson ceased to be a Director on 1 June 2017 and left the Group on 31 October 2017.
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 (Douglas Caster did not receive private medical insurance during his time as Executive Chair).
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 No current Executive Directors have LTIP awards vesting in the year.
Annual bonus for year under review – Audited
Annual bonuses in relation to 2018 were based upon the achievement of a sliding scale of underlying profit before tax and underlying operating cash
flow targets. Targets were derived from the annual budgets approved by the Board and 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 pages 10 and 11 for details.
The bonus targets set by the Committee for 2018 were: a maximum of 31.25% of salary (subject to the achievement of £101.4m* underlying profit
before tax); and a maximum of 93.75% of salary (subject to achieving an underlying operating cash flow of £100.8m* 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 Committee assessed the achievement of performance against each target as follows:
Underlying profit before tax
Underlying operating cash flow*
1 The underlying operating cash flow element is payable only if the profit element achieves threshold.
Threshold1
(0% payable)
£'000
Maximum
(100% payable)
£'000
Actual achieved
£'000
Bonus payable
%
91,244
70,560
101,382
100,800
101,379
89,253
31.25%
57.00%
The Committee determined that bonuses of 88.25% of salary would be payable to the Executive Directors. The bonus for Simon Pryce was pro-rated to
reflect time served in the year. In line with the policy, 20% of any bonus awarded is deferred into shares for three years. Accordingly bonuses for the
Executive Directors were as follows:
% of maximum
% of salary
Cash bonus
£'000
Deferred bonus
£'000
Total bonus
£'000
70.6
70.6
88.25
88.25
254
242
63
60
317
302
S. Pryce
A. Sharma
LTIP vesting for year under review – Audited
No awards vested to Executive Directors in 2018.
* See footnote on page 145.
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Directors' Remuneration Report continued
Share awards granted during the year – Audited
Scheme
Date of grant
Basis of award
Face value3
£'000
Number of
shares
Vesting at
threshold
Vesting at
maximum
Performance
period
S. Pryce1, 2
A. Sharma2
LTIP*
LTIP*
2 July 2018
20 March 2018
175% of salary
125% of salary
1,164
400
71,978
28,145
20%
20%
100% 3 years to 31 December 2020
100% 3 years to 31 December 2020
* Structured as nil cost options. The 2018 grant is subject to a two- year holding period.
In line with the policy, Simon Pryce received an LTIP grant equivalent to 175% of salary on appointment.
In addition, Simon Pryce purchased 30 Partnership shares and Amitabh Sharma purchased 120 Partnership shares and received six Dividend Shares under the AESOP during 2018.
1
2
3 Face value of the award calculated at time of grant using the average of the five previous days’ mid-market price of 1616.8p for Simon Pryce and 1392p for Amitabh Sharma.
For the awards presented above, four performance metrics apply, which are equally weighted:
Performance measures
Targets
Total Shareholder Return (TSR)1
Below threshold
Threshold
Stretch
ROIC2
Below threshold
Threshold
Stretch
Organic Operating Profit Growth3
Below threshold
Threshold
Stretch
Organic Revenue Growth3
Below threshold
Threshold
Stretch
TSR ranking of the Company against the Comparator Group
Below median
Median
Upper quartile or above
Return on Invested Capital
< 15.0%
15.00%
25.00%
Annual growth in organic operating profit
< 2.0%
2.00%
5.00%
Annual growth in organic revenue
< 2.0%
2.00%
5.00%
Vesting % of
total award
0%
5%
25%
0%
5%
25%
0%
5%
25%
0%
5%
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.
Change in Chief Executive Officer’s remuneration
The following table illustrates the change (as a percentage) in elements of the Chief Executive Officer’s remuneration from 2017 to 2018, and compares
that to the average remuneration of employees of the Group in the UK, excluding the Chief Executive Officer, who were employed on 1 January 2017
and 1 January 2018. This group best reflects the remuneration environment of the Chief Executive Officer. The Chief Executive Officer combines the
remuneration of Douglas Caster for his period as Executive Chair, with that of Simon Pryce from his appointment as Chief Executive Officer.
Salary
Taxable Benefits
Bonus
†
Increased from £nil to £317,000.
Chief Executive
Officer/Executive
Chair
% change
6.0
-35.4
†
All UK
employees
% change
5.1
5.1
31.6
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73
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
Revenue3
Statutory profit before tax3
2018
£m
252.7
37.0
766.7
42.6
2017
£m
259.0
38.4
775.4
60.6
Change
%
-2.4
-3.6
-1.1
-29.7
1 £1.1m (2017: £1.5m) of the staff costs figures relate to pay for the Executive Directors.
2 The dividends figures relate to amounts payable in respect of the relevant financial year.
3 Although not required, revenue and statutory profit before tax have also been provided as this disclosure is considered to add further context to the annual spend on pay number.
Payments for loss of office and payments to past Directors – Audited
No payments were made to Directors for loss of office and no payments were made to past Directors, other than the arrangements for Rakesh Sharma
disclosed in last year’s report.
Statement of Directors’ shareholdings – Audited
Legally owned
LTIP awards1
AESOP
SAYE
Executive Directors
S. Pryce
A. Sharma
Non-Executive Directors
D. Caster
M. Broadhurst
G. Gopalan
J. Hirst
V. Hull
T. Rice
Sir Robert Walmsley
2018
2017
Unvested
Restricted2
Unrestricted
13,820
8,026
–
7,371
71,978
47,101
20
274
308,160 308,160
1,600
–
4,055
1,684
–
3,000
1,600
–
4,055
1,684
–
3,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Under
option
830
794
–
–
–
–
–
–
–
1 There were no vested LTIP share awards within the period.
2 The restricted shares under the AESOP are held in the Ultra Electronics Holdings plc Employee Benefit Trust.
Exercised
Total
% Share
ownership
guidelines
Share
ownership
met Y/N
0
0
86,628
55,921
200%
200%
– 308,160
1,600
–
–
–
4,055
–
1,684
–
–
–
3,000
–
–
–
–
–
–
–
–
N
N
–
–
–
–
–
–
–
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Directors' Remuneration Report 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 ten years. The graph shows the value at the
end of 2018 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
Date
31 December 2008
31 December 2009
31 December 2010
31 December 2011
31 December 2012
31 December 2013
31 December 2014
31 December 2015
31 December 2016
31 December 2017
31 December 2018
TSR (rebased to 100)
Ultra Electronics
Holdings Plc
100.00
124.29
156.49
139.46
160.79
190.75
182.48
205.62
207.50
147.49
147.26
FTSE 250
100.00
150.64
191.91
172.60
217.66
287.90
298.43
331.78
353.88
416.80
361.57
This graph shows the value, by 31 December 2018, of £100 invested in Ultra Electronics Holdings Plc on 31 December 2008, compared with the value of £100 invested in the FTSE 250 Index on the
same date.
The other points plotted are the values at intervening financial year-ends.
Total shareholder return
Source: FactSet
)
d
e
s
a
b
e
r
(
)
£
(
e
u
a
V
l
500
400
300
200
100
0
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
31 Dec 18
Ultra Electronics Holdings Plc FTSE 250
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Ultra Electronics
Holdings plc
75
Total shareholder return graph and single figure remuneration table
The table below presents single-figure remuneration for the Chief Executive Officer over the past nine years, together with past annual bonus payouts
and relevant LTIP vesting figures.
Year ended
31 December 2018
31 December 2018
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
S. Pryce1
D. Caster2
D. Caster3
R. Sharma4
R. Sharma
R. Sharma
R. Sharma
R. Sharma
R. Sharma
R. Sharma5
D. Caster6
D. Caster
D. Caster
1 Chief Executive Officer from 18 June 2018.
2 Executive Chair to 18 June 2018.
3 Executive Chair from 10 November 2017.
4 Chief Executive Officer to 10 November 2017.
5 Chief Executive Officer from 21 April 2011.
6 Chief Executive Officer to 21 April 2011.
Total remuneration
£'000
Annual bonus %
max. payout
LTIP %
max. payout
750
284
81
765
1,194
1,197
680
612
597
722
141
1,068
1,512
71
–
–
–
82
88
–
–
–
76
–
46
67
–
–
–
–
–
–
–
–
–
–
–
81
100
Statement of Shareholder Voting
At the 2018 Annual General Meeting, the 2017 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)
% of
votes cast
99.73
0.27
100
Total number of
votes
63,109,042
172,420
63,281,462
613,029
63,894,491
At the 2017 Annual General Meeting, the 2016 Director’s Remuneration Policy received the following votes from shareholders:
Votes for
Votes against
Total votes cast (for and against)
Votes withheld
Total votes cast (including withheld votes)
Total number of
votes
% of
votes cast
59,669,864
402,746
60,072,610
656,074
60,728,684
99.33
0.67
100
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76
Directors' Remuneration Report continued
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
2017 award
Interests at 1 January 2018
2018 award (March)
2018 award (July)
Awards lapsed during the year
Interests at 31 December 2018
Mr Sharma did not receive a 2015 or 2016 LTIP award.
Directors’ interests under the All-Employee arrangements
Market price of
shares granted
Crystallising dates
of outstanding
awards
£21.10
March 2020
£13.92
£16.17
March 2021
July 2021
S. Pryce
–
–
–
71,978
–
71,978
A. Sharma
18,956
18,956
28,145
–
–
47,101
S. Pryce
A. Sharma
Interests as at
1 January 2018
Shares acquired
during year
Interests as at
31 December 2018
Shares
acquired from
1 January 2019 to
1 March 2019
–
148
20
126
20
274
35
35
Interests as at
1 March 2019
55
309
Other than those purchased under the AESOP no other shares were purchased by Executive Directors in 2019.
During the year, the Employee Benefit Trust, established and operated in connection with the AESOP, purchased 32,958 (2017: 27,018) Ultra Electronics
Holdings plc shares, with a nominal value of £1,648 (2017: £1,351) for £495,377 (2017: £515,711).
Directors’ interests under the Save As You Earn arrangements
S. Pryce
A. Sharma
Interests as at
1 January 2018
Share Options
acquired during
year
Interests as at
31 December 2018
Share Options
acquired from
1 January 2019 to
1 March 2019
–
794
830
–
830
794
–
–
Interests as at
1 March 2019
830
794
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, Chair 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/investor-centre).
Composition
Martin Broadhurst was Chair of the Committee and Sir Robert Walmsley, John Hirst, Geeta Gopalan and Victoria Hull were members throughout the year.
The General Counsel and Company Secretary is Secretary to the Committee. Although not Committee members, amongst others, the Chair and Chief
Executive Officer attend Committee meetings by invitation, except where matters directly relating to their own remuneration are discussed.
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77
Advice
Wholly independent advice on executive remuneration and share schemes is received from the Executive Compensation practice of Aon plc. Aon is a
member of the Remuneration Consultants Group and is a signatory to its Code of Conduct. Aon was appointed by the Committee after a tender process.
During the year, Aon 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 2018, insurance broking services were also provided to the Group by other subsidiaries of Aon plc
which the Committee considers in no way prejudices Aon’s position as the Committee’s independent advisers. Fees charged by Aon for advice provided
to the Committee for 2018 amounted to £57,350 (excluding VAT) on a time and materials basis. Pension advisory services were provided to the
Committee and the Group by Willis Towers Watson. The Committee considers Willis Towers Watson to be objective and independent. Fees charged by
Willis Towers Watson for advice provided to the Committee for 2018 amounted to £88,270 (excluding VAT) on a time and materials basis, no other
services have been provided to the Company by Willis Towers Watson. In addition, the Committee consults the Chief Executive Officer 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 2019 Annual General Meeting
The Committee encourages shareholders to vote in favour of the Directors’ Remuneration Report resolution at the 2019 AGM. The Directors’
Remuneration Report was approved by the Board on 6 March 2019 and signed on its behalf by:
MARTIN BROADHURST
Chair of the Remuneration Committee
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Directors’ Report
FOR THE YEAR ENDED 31 DECEMBER 2018
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 2018.
Results and dividends
The Group results for the year-ended 31 December 2018 are set out on
page 3 of the Strategic Report.
The final 2018 dividend of 37.0 pence per share (2017: 35.0 pence per
share) is proposed to be paid on 9 May 2019 to shareholders on the
register of members on 12 April 2019. The interim dividend of 14.6 pence
per share (2017: 14.6 pence per share) was paid on 22 September 2018,
making a total of 51.6 pence per share in the year (2017: 49.6 pence).
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 £145.8m (2017: £161.1m)
was spent on engineering and business development of which £117.7m
(2017: £131.2m) was funded by customers and £28.1m (2017: £29.9m) by
the Group.
Political expenditure
Neither the Company nor any of its subsidiaries have made any political
donations during the year (2017: £nil).
Directors
Details of the Directors serving during the year are set out on pages 44 of
the Corporate Governance Report. Martin Broadhurst, Geeta Gopalan,
John Hirst, Victoria Hull, Amitabh Sharma and Sir Robert Walmsley will
stand for re-election at the Annual General Meeting on 3 May 2019.
Simon Pryce and Tony Rice will stand for election.
Directors and their interests
The Directors who served throughout the year and to the date of signing
of this Report (see biographies on pages 44–45), and their interests in the
shares and share options of Ultra at the end of the year and at 6 March
2019 are shown in the Annual Report on Remuneration (see page 73).
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 2018.
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 6,288,127 (2017: nil) ordinary shares and
nil (2017: nil) ordinary shares were distributed following vesting of awards
under the Ultra Electronics Long-Term Incentive Plan. At 31 December
2018, the Group held 227,174 ordinary shares under the Ultra Electronics
Long-Term Incentive Plan (representing 0.3% of the ordinary shares in
issue as at 31 December 2018).
Substantial shareholdings
As at 1 March 2019, being the latest practicable date prior to the approval
of this report, Ultra had been notified of the following voting rights as
shareholders of Ultra:
Fidelity Management & Research Company
Fidelity International Limited
Invesco Ltd
Heronbridge Investment Management
Baillie Gifford & Co Ltd
Mondrian Investment Partners Ltd
Legal & General Investment Mgmt Ltd
Aberforth Partners LLP
BlackRock Inc
Aberdeen Standard Investments
Wellington Management Company
The Vanguard Group Inc
Percentage of
ordinary share
capital
Number of
5p ordinary
shares
10.00
9.49
6.54
6.11
4.93
4.86
4.86
4.81
4.22
3.99
3.85
3.41
7,083,423
6,721,162
4,630,632
4,331,165
3,490,258
3,588,536
3,443,207
3,403,594
2,988,535
2,824,639
2,729,425
2,418,219
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.
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/investor-centre).
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Ultra Electronics
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Directors’ Responsibility
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.
• 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.
Annual General Meeting
The next Annual General Meeting of Ultra will be held at 10.00 a.m. on
3 May 2019 at 417 Bridport Road, Greenford, Middlesex UB6 8UA. A
separate circular providing details of the Annual General Meeting will be
sent to shareholders with the 2018 Annual Report and Accounts.
Additional disclosure requirements
The following information which is required to be included in the Strategic
Report and forms part of this Report may be found elsewhere in the
Annual Report as follows.
Information
Business review
Location
Future developments
Strategic Report: pages 4–9
Corporate responsibility
Strategic Report: pages 22–27
The environment and
greenhouse gas emissions
Principal risks and
uncertainties facing the Group
Business ethics and
employment practices
Strategic Report: page 26–27
Strategic Report: pages 36–41
Strategic Report: pages 28–33
In preparing the Company’s financial statements, the Directors are required to:
Strategic Report: pages 18–21
In preparing the Group financial statements, International Accounting Standard 1
requires that Directors:
Details of long-term incentive
plans
Governance Report: pages 62–77 and
note 26 to the financial statements
Corporate Governance
Governance Report: pages 46–53
Non-Financial KPI’s
Strategic Report page 11
Financial Risk Management
Finance Report: pages 28–33 and note
22 to the financial statements
A non-financial information statement summarising the nature and
location of non-financial disclosures within the Strategic Report is provided
on page 11, in compliance with sections 414CA and 414CB of the
Companies Act 2006. There is no other information to be disclosed
pursuant to the requirements of the Listing Rule 9.8.4R.
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.
This Directors’ Report was approved by the Board on 6 March 2019 and
signed on its behalf by:
LOUISE RUPPEL
General Counsel and Company Secretary
Registered Office: 417 Bridport Road, Greenford, Middlesex, UB6 8UA
Registered Number: 02830397
• 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 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 on pages 3–43 and this
Directors’ Responsibilities Statement) was approved by the Board on 6 March
2019 and signed on its behalf by:
LOUISE RUPPEL
General Counsel and Company Secretary
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Independent Auditor’s Report
TO THE MEMBERS OF ULTRA ELECTRONICS HOLDINGS PLC
Opinion
In our opinion:
• the financial statements of Ultra Electronics Holdings plc (the ‘parent company’) and its subsidiaries (the ‘group’) give a true and fair view of the
state of the group’s and of the parent company’s affairs as at 31 December 2018 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 Financial Reporting Standard 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 which comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated and parent company balance sheets;
• the consolidated cash flow statement;
• the consolidated and parent company statements of changes in equity;
• the statement of accounting policies; and
• the related notes 1 to 48.
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.
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 Financial Reporting Council’s (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
Materiality
Scoping
Significant changes in our approach
The key audit matters that we identified in the current year were:
• Revenue and profit recognition
• Management override of controls
• Valuation of goodwill and intangible assets
• Defined benefit pensions liabilities valuation
Within this report, any new key audit matters are identified with and any key audit
matters which are the same as the prior year identified with
.
The materiality that we used for the group financial statements was £5.0m 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 17 (2017: 20) locations,
12 (2017: 12) of these were subject to a full audit, whilst the remaining 5 (2017: 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 17 locations accounted for 88%
(2017: 88%) of group revenue and 86% (2017: 94%) of underlying profit before tax.
The reduced number of audit locations reflects amalgamations made by management of
certain business units.
There are no other significant changes to our audit approach.
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We confirm that we have nothing material to
report, add or draw attention to in respect of
these matters.
We confirm that we have nothing material to
report, add or draw attention to in respect of
these matters.
Conclusions relating to going concern, principal risks and viability statement
Going concern
We have reviewed the directors’ statement on page 42 of the financial statements about
whether they considered it appropriate to adopt the going concern basis of accounting in
preparing them and their identification of any material uncertainties to the group’s 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 considered as part of our risk assessment the nature of the group, its business model and
related risks including where relevant the impact of Brexit, the requirements of the applicable
financial reporting framework and the system of internal control. We evaluated the directors’
assessment of the group’s ability to continue as a going concern, including challenging the
underlying data and key assumptions used to make the assessment, and evaluated the
directors’ plans for future actions in relation to their going concern assessment.
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 36 to 42 that describe the principal risks and explain how they
are being managed or mitigated;
• the directors’ confirmation on pages 34 to 35 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 43 as to how they have assessed the prospects of the
group, over what period they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a reasonable expectation that
the group will be able to continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
We 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.
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Independent Auditor’s Report continued
TO THE MEMBERS OF ULTRA ELECTRONICS HOLDINGS PLC
Revenue and profit recognition
Key audit matter description
The group recognised revenue of £766.7m in 2018 (2017: £775.4m). IFRS 15 was adopted on 1 January
2018 and all revenues are now accounted for under this standard. £462.7m of the 2018 revenue was
recognised on an over time basis, and £304.0m on a point in time basis.
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 of significant 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 131 (key sources of estimation uncertainty – contract revenue and profit recognition);
page 133 (accounting policies – revenue recognition); page 59 (Audit Committee report – significant
judgements considered; and page 98 (note 3 of the Financial Statements).
How the scope of our audit
responded to the key audit matter
We assessed the adequacy of the design and implementation of controls over long-term contract
accounting.
Key observations
Management override of controls
Key audit matter description
To assess whether 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 contracts recognised over time, 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 over 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 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.
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.
We consider that the risk of error or fraud as a result of management override of controls is heightened
in light of the revised full-year profit expectation communicated in June 2018. We therefore consider
this to be a key audit matter.
There are a number of areas within the Group financial statements which contain accounting estimates
made by management or have been determined as a result of management’s judgements as set out on
page 131 (critical accounting judgements and key sources of estimation uncertainty), in particular those
areas of judgement and estimation uncertainty related to contract revenue and profit recognition, the
valuation of goodwill and intangible asset, 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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How the scope of our audit
responded to the key audit matter
We assessed the design and implementation of controls which address the risk of management
override at both a business unit and 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 by
considering the nature of each item. 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.
Valuation of goodwill and intangible assets
Key audit matter description
The group held £377.8m (2017: £394.5m) of goodwill arising on its acquisitions made and £93.2m
(2017: £118.4m) of acquired intangibles as at 31 December 2018. There is a risk that inappropriate
judgements relating to future cashflow forecasts and discount rates are used which lead to the
overstatement of the value 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 poor financial performance in 2018, we have focused this key audit matter on the
following goodwill and acquired intangible asset balances:
• goodwill attributable to the C2ISR cash generating unit group; and
• certain acquired intangible assets associated with the Herley business.
Refer to page 132 (Critical accounting estimates and assumptions – impairment testing); page 132
(accounting policies – goodwill); page 59 (Audit Committee report – significant judgements
considered); and pages 103 to 105 (note 14 and 15 of the Financial Statements).
How the scope of our audit
responded to the key audit matter
We 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 data on forecast market growth as well as management’s
assessment of the impact of Brexit, 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 C2ISR cash generating unit group
under a sensitised scenario.
We are satisfied that headroom exists over the carrying value of the C2ISR cash generating unit group,
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 C2ISR cash generating unit
group within a sensitised scenario is appropriate.
Key observations
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Independent Auditor’s Report continued
TO THE MEMBERS OF ULTRA ELECTRONICS HOLDINGS PLC
Defined benefit pensions liabilities valuation
Key audit matter description
The group operates defined benefit pension schemes in the UK, Switzerland and Canada. At
31 December 2018 the defined benefit pension scheme obligation was £370.7m (2017: £389.0m)
which resulted in a net IAS 19 ‘Employment Benefits’ deficit of £73.0m (2017: £82.7m). The UK scheme
accounted for 98% 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 assumption is the discount rate, and we
also considered the assumptions relating to the Guaranteed Minimum Pensions (“GMP”) equalisation.
Refer to page 131 (key sources of estimation uncertainty – retirement benefit plans); page 135
(accounting policies – pensions); and page 59 (Audit Committee report – significant issues considered),
and pages 120 to 123 (note 30 of the Financial Statements).
How the scope of our audit
responded to the key audit matter
We assessed the adequacy of the design and implementation of controls over the accounting for
defined benefit pension scheme.
We included a pension specialist within our audit team to assess the appropriateness of the
assumptions through benchmarking to industry data and comparison with the peer group. Along with
our specialist, we also assessed the additional liability in respect of GMP equalisation.
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
Group financial statements
£5.0m (2017: £5.5m)
Parent company financial statements
£2.0m (2017: £2.2m)
Basis for determining materiality
5% (2017: 5%) of underlying profit before tax
Underlying profit before tax is reconciled to
statutory profit before tax in note 2 of the
financial statements.
Parent company materiality represents less than
1% of net assets, but capped at 40% (2017: 40%)
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 agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £250k (2017: £275k), 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.
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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85
An overview of the scope of our audit
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 17
(2017: 20) locations, 12 (2017: 12) of these were subject to a full audit, whilst the remaining 5 (2017: 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.
Underlying PBT
Group materiality
101m
UNDERLYING PBT
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Group materiality £5m
Component materiality
to range £3m to £2m
Audit Committee
reporting threshold
£0.25m
These 17 locations, which are largely located in the UK and USA, represent the principal business units and account for 88% (2017: 88%) of the
group’s revenue and 86% (2017: 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 17 units was executed at levels of materiality applicable
to each individual entity, ranging from £2.0m to £3.0m (2017: £2.2m to £3.3m), which did not exceed 60% (2017: 60%) of group materiality.
At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm that there were no significant
risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified
account balances.
The group audit team follows a programme of planned visits that has been designed so that the Senior Statutory Auditor or another senior member
of the group audit team visits each of the significant overseas 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 2018, a senior member of the group audit team visited all of the UK components as well as the following overseas components:
USSI, Herley, Ocean Systems, NSPI and ATS.
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Full audit scope
Specified audit procedures
Review at group level
75%
13%
12%
Full audit scope
Specified audit procedures
Review at group level
85%
1%
14%
REVENUE
PROFIT BEFORE TAX
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements
Ultra Electronics
Holdings plc
86
Independent Auditor’s Report continued
TO THE MEMBERS OF ULTRA ELECTRONICS HOLDINGS PLC
Other information
The directors are responsible for the other information. The other information comprises the information included in
the annual report, other than the financial statements and our auditor’s report thereon.
We have nothing to
report 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.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform
audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
87
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
• enquiring of management, internal audit and the audit committee, including obtaining and reviewing supporting documentation, concerning
the group’s policies and procedures relating to:
–
identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance. In
particular, we considered the response in relation to the ongoing SFO investigation;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;
• discussing among the engagement team, including all component audit teams, and involving relevant internal specialists, including tax,
valuations, pensions, and financial instruments, regarding how and where fraud might occur in the financial statements and any potential
indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas:
– manipulation of revenue and profit recognition to improve performance;
– management bias within the critical accounting judgements and key sources of estimation uncertainty to improve performance;
• obtaining an understanding of the legal and regulatory framework that the group operates in, focusing on those laws and regulations that had
a direct effect on the financial statements or that had a fundamental effect on the operations of the group. The key laws and regulations we
considered in this context included the UK Companies Act, Listing Rules, pensions legislation and tax legislation.
Audit response to risks identified
As a result of performing the above, we identified key audit matters with respect to revenue and profit recognition, and management override of
controls. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed in
response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and regulations
discussed above;
• enquiring of management, the audit committee and external legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due
to fraud;
• reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC;
•
and
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments;
assessing whether the judgements made in making accounting estimates are indicative of a potential bias; challenging the presentation of the
financial statements and the distinction between underlying and non-underlying items of income and expense, and; evaluating the business
rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal
specialists and all component audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout
the audit.
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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
88
Independent Auditor’s Report continued
TO THE MEMBERS OF ULTRA ELECTRONICS HOLDINGS PLC
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns
adequate for our audit have not been received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting
records and returns.
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.
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 15 years, covering the years ending 31 December 2003 to 31 December 2018.
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).
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.
Alexander Butterworth ACA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Reading, United Kingdom
6 March 2019
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Group highlights
FOR THE YEAR ENDED 31 DECEMBER 2018
Revenue
Operating profit
Underlying operating profit*
Profit before tax
Underlying profit before tax*
Basic earnings per share
Underlying earnings per share*
Dividend per share
Ultra Electronics
Holdings plc
89
2018
£’000
2017
£’000
Change
%
766,745
65,338
112,726
42,555
101,379
775,400
61,484
120,136
60,592
110,002
2018
pence
43.6
109.5
51.6
2017
pence
66.2
116.7
49.6
-1.1
+6.3
-6.2
-29.8
-7.8
Change
%
-34.1
-6.2
+4.0
* Alternative Performance Measures
‘Underlying’ information is presented to provide readers and stakeholders with additional performance indicators that are prepared on a non-statutory basis. These non-statutory performance
measures are consistent with how business performance is reported within the internal management reporting. See page 138 for further information. 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, acquisition and disposal related costs net of contingent
consideration adjustments, and significant legal charges and expenses.
Underlying profit before tax is before the S3 programme, amortisation of intangibles arising on acquisition, impairment charges, fair value movements on derivatives and the loss on closing out
a foreign currency derivative contract, defined benefit pension finance charges and GMP equalisation, acquisition and disposal related costs net of contingent consideration adjustments, loss
on disposal, and significant legal charges and expenses.
Underlying earnings per share is before the S3 programme, amortisation of intangibles arising on acquisition, impairment charges, fair value movements on derivatives and the loss on closing
out a foreign currency derivative contract, defined benefit pension finance charges and GMP equalisation, acquisition and disposal related costs net of contingent consideration adjustments,
loss on disposal, significant legal charges and expenses and before related taxation.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements
Ultra Electronics
Holdings plc
90
Consolidated income statement
FOR THE YEAR ENDED 31 DECEMBER 2018
Revenue
Cost of sales
Gross profit
Other operating income
Distribution costs
Administrative expenses
Other operating expenses
Impairment charges
S3 programme
Significant legal charges and expenses
Operating profit
Loss on disposal
Retirement benefit scheme GMP equalisation
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
2018
£’000
2017
£’000
3
4
5
2
2
7
6
31
30
9
10
11
766,745
(544,649)
775,400
(545,178)
222,096
3,195
(1,573)
(138,721)
(3,275)
(7,589)
(6,503)
(2,292)
65,338
(729)
(3,150)
6,193
(25,097)
42,555
(10,205)
230,222
249
(1,066)
(134,857)
(15,648)
(1,608)
(7,850)
(7,958)
61,484
–
–
12,439
(13,331)
60,592
(11,666)
32,350
48,926
32,381
(31)
48,956
(30)
13
13
43.6
43.6
66.2
66.1
The accompanying notes are an integral part of this consolidated income statement. All results are derived from continuing operations.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
91
Consolidated statement of comprehensive income
FOR THE YEAR ENDED 31 DECEMBER 2018
Profit for the year
Items that will not be reclassified to profit or loss:
Actuarial profit 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
Transfer from profit and loss on cash flow hedge
(Loss)/profit on loans used in net investment hedges
(Loss)/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/(expense) 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
2018
£’000
2017
£’000
32,350
48,926
30
11
4,588
(713)
24,135
(4,113)
3,875
20,022
21,100
435
(11,521)
(604)
29
(44,089)
27
20,567
407
(74)
9,439
(23,162)
13,314
(3,140)
11
27
45,664
45,786
45,695
(31)
45,816
(30)
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
92
Consolidated balance sheet
31 DECEMBER 2018
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Derivative financial instruments
Trade and other receivables
Current assets
Inventories
Trade and other receivables
Tax assets
Cash and cash equivalents
Derivative financial instruments
Assets classified as held for sale
Total assets
Current liabilities
Trade and other payables
Tax liabilities
Derivative financial instruments
Borrowings
Liabilities classified as held for sale
Short-term provisions
Non-current liabilities
Retirement benefit obligations
Other payables
Deferred tax liabilities
Derivative financial instruments
Borrowings
Long-term provisions
Total liabilities
Net assets
Equity
Share capital
Share premium account
Capital redemption reserve
Own shares
Hedging reserve
Translation reserve
Retained earnings
Equity attributable to owners of the Company
Non-controlling interests
Total equity
Note
14
15
16
24
22
19
17
19
22
31
20
22
21
31
25
30
20
24
22
21
25
26
27
27
27
27
27
27
27
2018
£’000
2017
£’000
377,761
113,889
62,597
18,692
113
22,639
394,529
136,889
59,150
15,659
2,025
32,225
595,691
640,477
88,551
205,184
8,108
96,319
301
30,575
76,627
205,627
11,127
149,522
437
–
429,038
443,340
1,024,729
1,083,817
(212,247)
(5,032)
(5,534)
(175,759)
(8,575)
(13,326)
(215,080)
(2,255)
(11,203)
(51,752)
–
(8,665)
(420,473)
(288,955)
(72,970)
(14,878)
(10,454)
(1,000)
(77,964)
(6,200)
(82,732)
(8,114)
(11,337)
(2,688)
(172,227)
(5,553)
(183,466)
(282,651)
(603,939)
(571,606)
420,790
512,211
3,574
201,033
314
(2,581)
(59,720)
116,503
161,659
420,782
8
3,887
200,911
–
(2,581)
(48,059)
95,403
262,611
512,172
39
420,790
512,211
The financial statements of Ultra Electronics Holdings plc, registered number 02830397, were approved by the Board of Directors and authorised
for issue on 6 March 2019.
On behalf of the Board,
S. PRYCE, Chief Executive Officer
A. SHARMA, Group Finance Director
The accompanying notes are an integral part of this consolidated balance sheet.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Consolidated cash flow statement
FOR THE YEAR ENDED 31 DECEMBER 2018
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
Net cash used in investing activities
Financing activities
Issue of share capital
Share buy-back (including transaction costs)
Dividends paid
Loan syndication costs
Repayments of borrowings
Proceeds from borrowings
Cash out-flow on closing out foreign currency hedging contracts
Net cash (used in)/from financing activities
Net (decrease)/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.
Ultra Electronics
Holdings plc
93
Note
2018
£’000
2017
£’000
28
86,712
77,565
31
28
715
(12,953)
134
(7,029)
225
455
(7,098)
102
(5,680)
–
(18,908)
(12,221)
123
(91,902)
(36,883)
(657)
(181,297)
198,961
(11,104)
137,255
–
(34,959)
(2,040)
(168,975)
83,493
–
(122,759)
14,774
(54,955)
149,522
1,752
80,118
74,625
(5,221)
96,319
149,522
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
94
Consolidated statement of changes in equity
FOR THE YEAR ENDED 31 DECEMBER 2018
Equity attributable to equity holders of the parent
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
Balance at 31 December
2017
Adoption of IFRS 15
Tax adjustment on adoption
of IFRS 15
Restated total equity
at 1 January 2018
Profit for the year
Other comprehensive income
for the year
Total comprehensive
income for the year
Equity-settled employee
share schemes
Shares purchased in buy-back
Dividend to shareholders
Balance at 31 December
2018
Share
capital
£’000
3,523
–
–
–
352
12
–
–
Share
premium
account
£’000
64,020
–
–
–
133,195
3,696
–
–
3,887
200,911
–
–
–
–
3,887
–
200,911
–
–
–
1
(314)
–
–
–
122
–
–
Capital
redemption
reserve
£’000
Reserve for
own shares
£’000
Hedging
reserve
£’000
Translation
reserve
£’000
Retained
earnings
£’000
Non-
controlling
interest
£’000
Total
equity
£’000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
314
–
(2,581)
–
(68,986)
–
139,492
–
228,034
48,956
69
(30)
363,571
48,926
–
–
–
–
–
–
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)
(2,581)
(48,059)
95,403
262,611
39
512,211
–
–
–
–
–
–
(12,156)
2,240
–
–
(12,156)
2,240
(2,581)
–
(48,059)
–
95,403
–
252,695
32,381
39
(31)
502,295
32,350
–
–
–
–
–
(11,661)
21,100
3,875
–
13,314
(11,661)
21,100
36,256
(31)
45,664
–
–
–
–
–
–
1,493
(91,902)
(36,883)
–
–
–
8
1,616
(91,902)
(36,883)
420,790
3,574
201,033
314
(2,581)
(59,720)
116,503
161,659
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
95
Notes to accounts – Group
FOR THE YEAR ENDED 31 DECEMBER 2018
1 Segment information
For management purposes, the Group is organised into three operating segments, which comprise the divisions Aerospace & Infrastructure,
Communications & Security and Maritime & Land. These operating segments are consistent with the internal reporting as reviewed by the Chief
Executive Officer. Each segment includes businesses with similar operating and market characteristics. See the Divisional reviews on pages 12−17
for further information.
Revenue
Aerospace & Infrastructure
Communications & Security
Maritime & Land
Eliminations
Consolidated revenue
All inter-segment trading is at arm’s length.
Underlying operating profit
Amortisation of intangibles arising on acquisition
Impairment charge
Significant legal charges and expenses
Acquisition and disposal related costs net of adjustments to
contingent consideration
S3 programme
Operating profit/(loss)
Loss on disposal
Retirement benefit scheme GMP equalisation
Investment revenue
Finance costs
Profit before tax
Tax
Profit after tax
External
revenue
£’000
196,213
252,575
317,957
–
766,745
2018
Inter-
segment
£’000
Total
£’000
External
revenue
£’000
2017
Inter-
segment
£’000
Total
£’000
7,938
8,972
12,960
(29,870)
204,151
261,547
330,917
(29,870)
203,174
242,708
329,518
–
10,219
7,000
14,920
(32,139)
213,393
249,708
344,438
(32,139)
–
766,745
775,400
–
775,400
Aerospace &
Infrastructure
£’000
Communications
& Security
£’000
29,966
(1,357)
(6,550)
–
(560)
(457)
21,042
29,953
(14,437)
–
–
(465)
(1,484)
13,567
2018
Maritime
& Land
£’000
52,807
(12,466)
(1,039)
–
(1,719)
(4,562)
33,021
Unallocated
£’000
–
–
–
(2,292)
–
–
(2,292)
Total
£’000
112,726
(28,260)
(7,589)
(2,292)
(2,744)
(6,503)
65,338
(729)
(3,150)
6,193
(25,097)
42,555
(10,205)
32,350
Significant legal charges and expenses include £2,292,000 incurred in relation to the ongoing anti-bribery and corruption investigation. £7,958,000
was incurred in the prior period on legal charges relating to the Ithra contract. Unallocated items are specific corporate level costs that cannot be
allocated to a specific division. The S3 programme is the Group’s Standardisation & Shared Services programme.
Underlying operating profit
Amortisation of intangibles arising on acquisition
Impairment charge
Significant legal charges and expenses
Acquisition and disposal related costs net of adjustments to
contingent consideration
S3 programme
Operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Profit after tax
2017
Aerospace &
Infrastructure
£’000
Communications
& Security
£’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
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 in 2017 included those associated with the proposed Sparton Corporation acquisition
and 3Phoenix staff retention payments (see note 31) which were put in place at the time of the acquisition of that business.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
96
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
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)
2018
£’000
4,172
9,268
6,542
2017
£’000
3,546
4,840
4,392
19,982
12,778
Depreciation and
amortisation
2018
£’000
4,807
19,471
17,021
41,299
2017
£’000
4,783
25,516
11,862
42,161
The 2018 depreciation and amortisation expense includes £32,366,000 of amortisation charges (2017: £31,995,000) and £8,933,000 of property,
plant and equipment depreciation charges (2017: £10,166,000).
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
2018
£’000
2017
£’000
224,523
429,451
247,222
901,196
123,533
227,932
428,884
248,231
905,047
178,770
1,024,729
1,083,817
2018
£’000
2017
£’000
51,573
87,479
104,848
243,900
360,039
61,376
81,443
102,085
244,904
326,702
603,939
571,606
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
2018
£’000
2017
£’000
171,511
62,870
22,825
416,495
93,044
161,293
78,199
22,844
384,330
128,734
766,745
775,400
During the year, there was one direct customer (2017: one) that individually accounted for greater than 10% of the Group’s total turnover. Sales to
this customer in 2018 were £127.2m (2017: £146.6m) across all segments.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
97
1 Segment information continued
Other information (by geographic location)
United Kingdom
USA
Canada
Rest of World
Unallocated
Non-current assets
Total assets
2018
£’000
2017
£’000
2018
£’000
2017
£’000
163,060
322,611
82,549
8,666
576,886
18,805
206,433
317,613
91,057
7,689
622,792
17,685
328,296
439,749
118,209
14,943
901,197
123,532
342,792
426,826
123,646
11,784
905,048
178,769
595,691
640,477
1,024,729
1,083,817
Additions to property,
plant and equipment
and intangible assets
(excluding acquisitions)
2018
£’000
7,781
7,531
4,278
392
19,982
–
19,982
2017
£’000
4,742
6,069
1,341
626
12,778
–
12,778
2 Additional non-statutory performance measures
To present the underlying trading of the Group on a consistent basis year-on-year, additional non-statutory performance indicators have been used.
These are calculated as follows:
Operating profit
Amortisation of intangibles arising on acquisition (see note 15)
Impairment charges (see notes 14 and 15)
Significant legal charges and expenses (see note 7)
Acquisition and disposal related costs net of adjustments to contingent consideration (see note 1)
S3 programme
Underlying operating profit
Profit before tax
Amortisation of intangibles arising on acquisition (see note 15)
Impairment charges (see notes 14 and 15)
Acquisition and disposal related costs net of adjustments to contingent consideration (see note 1)
Loss on closing out foreign currency derivative contract*
(Profit) on fair value movements of derivatives (see note 22)
Net interest charge on defined benefit pensions (see note 10)
S3 programme
Loss on disposal (see note 31)
Significant legal charges and expenses (see note 7)
Retirement benefit scheme GMP equalisation (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
Significant legal charges and expenses
S3 programme
Acquisition and disposal related payments
Underlying operating cash flow
2018
£’000
65,338
28,260
7,589
2,292
2,744
6,503
2017
£’000
61,484
28,448
1,608
7,958
12,788
7,850
112,726
120,136
42,555
28,260
7,589
2,744
11,104
(5,476)
1,929
6,503
729
2,292
3,150
60,592
28,448
1,608
12,788
–
(11,983)
2,741
7,850
–
7,958
–
101,379
110,002
102,446
(12,953)
134
(7,029)
1,532
2,600
2,523
97,432
(7,098)
102
(5,680)
9,836
8,949
12,966
89,253
116,507
The above analysis of the Group’s operating results 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
138 for further details.
* In March 2018, the USD 250m foreign exchange forward, put in place in July 2017 with respect to the proposed Sparton acquisition, was closed out when the acquisition was terminated.
This resulted in a £11.1m non-underlying cash outflow and a net debit to the 2018 income statement of £3.9m when the impact to the fair value movements on derivatives is also taken into
consideration. In 2017, the fair value movements on derivatives included £7.2m of loss incurred with respect to the mark-to-market revaluation of this derivative as at 31 December 2017.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
98
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
3 Revenue
An analysis of the Group’s revenue is as follows:
2018 under IFRS 15
2017 under IAS 11 and IAS 18
Point in time
Over time
Aerospace &
Infrastructure
2018
£’000
105,411
90,802
196,213
Communications
& Security
2018
£’000
114,620
137,955
Maritime
& Land
2018
£’000
Total
2018
£’000
84,000
233,957
304,031
462,714
Sale of goods
Revenue from long-term contracts
252,575
317,957
766,745
2017
£’000
308,416
466,984
775,400
The recognition of over time revenue and profit is a critical accounting estimate as set out on page 131.
The table below notes the revenue expected to be recognised in the future that is related to performance obligations that are unsatisfied (or
partially unsatisfied) at the reporting date.
Over time revenue
Point in time revenue
4 Other operating income
Amounts included in other operating income were as follows:
Foreign exchange gains
2019
£’000
2020
£’000
2021 and
beyond
£’000
Total
£’000
289,174
244,588
157,958
91,664
171,253
29,224
618,385
365,476
2018
£’000
3,195
3,195
2017
£’000
249
249
Foreign exchange gains and losses are impacted by gains or losses on foreign exchange transactions and revaluation of currency assets and
liabilities.
5 Other operating expenses
Amounts included in other operating expenses were as follows:
Amortisation of internally generated development costs (see note 15)
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
Impairment of intangible assets (see notes 14 and 15)
Contingent consideration release
Government grant income (see note 23)
Net foreign exchange (gain)/loss
Loss on disposal of property, plant and equipment
Operating lease rentals
– plant and machinery
– other
Research and development costs
Auditor’s remuneration for statutory audit work (including expenses)
2018
£’000
1,502
1,773
3,275
2017
£’000
1,197
14,451
15,648
2018
£’000
2017
£’000
238,380
252,691
8,933
1,502
30,864
7,589
–
(233)
(7,228)
53
898
14,565
26,441
1,212
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
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements
6 Operating profit continued
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
Ultra Electronics
Holdings plc
99
2018
£’000
330
882
2017
£’000
348
851
1,212
1,199
11
3
–
13
27
–
5
1,498
8
1,511
During the prior year, the auditor provided due diligence and reporting accountant work principally relating to the Circular Announcement in
relation to the proposed Sparton acquisition.
The Company-only audit fee included in the Group audit fee shown above was £20,000 (2017: £20,000).
7 Significant legal charges and expenses
Significant legal charges and expenses are the charges arising from investigations and settlement of litigation that are not in the normal course of
business. £2,292,000 was expensed in the current year relating to anti-bribery and corruption investigation costs. In the prior year, £7,958,000 of
legal charges associated with the Oman Airport IT contract termination were expensed 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
2018
£’000
2017
£’000
219,694
22,982
10,015
228,270
20,616
10,095
252,691
258,981
The wages and salaries figure for 2017 includes £6.5m in relation to 3Phoenix 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
2018
Number
1,788
1,381
217
733
4,119
2017
Number
1,729
1,457
227
759
4,172
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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
100
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
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
Loss on closing out foreign currency derivative contract (see note 2)
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 of deferred tax assets
US tax rate change
Total deferred tax (credit)/charge
Total tax charge
2018
£’000
717
5,476
6,193
2018
£’000
825
11,239
12,064
1,929
11,104
25,097
2017
£’000
456
11,983
12,439
2017
£’000
1,281
9,309
10,590
2,741
–
13,331
2018
£’000
2017
£’000
2,435
2,683
5,118
7,494
(375)
7,119
12,237
(1,635)
(397)
–
(2,032)
2,441
(122)
2,319
5,400
(1,690)
3,710
6,029
7,676
(2,077)
38
5,637
10,205
11,666
Corporation tax in the UK is calculated at 19.00% (2017: 19.25%) of the estimated assessable profit for the year.
The Finance (No.2) Act 2015 and Finance Act 2016 provide for reductions in the main rate of corporation tax from 20% to 19% for the financial
year beginning 1 April 2017 and to 17% for the financial year beginning 1 April 2020. UK deferred tax at the balance sheet date has been
calculated at 17%. Deferred tax in other territories has been calculated at enacted tax rates that are expected to apply to the period when assets
are realised or liabilities are settled. US deferred tax balances at 31 December 2018 have been calculated at 24% (2017: 24%). 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 on defined benefit pension schemes
Revaluation of interest rate hedge
Total income tax charge recognised directly in other comprehensive income
2018
£’000
2017
£’000
(713)
29
(684)
(4,113)
(74)
(4,187)
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
101
11 Tax continued
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:
Deferred tax
IFRS 15 adjustment
Change in estimated excess tax deductions related to share-based payments
Total income tax recognised directly in equity
2018
£’000
2017
£’000
2,240
–
2,240
–
(124)
(124)
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 19.00% (2017: 19.25%)
Tax effects of:
Income/(expenses) that are not taxable/allowable in determining taxable profits
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
Deferred tax differences on temporary differences
Patent Box
Adjustments in respect of prior years
Tax expense for the year
2018
£’000
2017
£’000
42,555
60,592
8,085
11,664
1,367
–
(374)
2,909
1,720
(4,269)
315
(342)
794
5,113
38
(2,077)
1,000
1,238
(4,401)
–
(623)
(286)
10,205
11,666
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, in 2017, the recognition of Canadian deferred tax assets, which were not recognised in 2016. In addition, a deferred tax asset was
not recognised for certain expenses in our US business in both 2018 and 2017 and this will continue to be assessed annually. The differences
attributable to the UK CFC exemption, Patent Box and higher overseas tax rates are expected to recur in the future (the level of profits in overseas
jurisdictions and changes to the UK and overseas tax rates will affect the size of this difference in the 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. There have been no further announcements by the EU Commission since October 2017,
no provision for this potential liability continues to be 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 2017 of 35.0p (2016: 33.6p) per share
Interim dividend for the year ended 31 December 2018 of 14.6p (2017: 14.6p) per share
Proposed final dividend for the year ended 31 December 2018 of 37.0p (2017: 35.0p) per share
2018
£’000
26,269
10,614
36,883
26,360
2017
£’000
23,647
11,312
34,959
27,124
The 2018 proposed final dividend of 37.0p per share is proposed to be paid on 9 May 2019 to shareholders on the register at 12 April 2019. It was
approved by the Board after 31 December 2018 and has not been included as a liability as at 31 December 2018.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
102
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
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
Amortisation of intangibles arising on acquisition (net of tax)
Impairment charges (net of tax)
Acquisition and disposal related costs net of adjustments to contingent consideration (net of tax)
Loss on closing out foreign currency derivative contract (net of tax)
(Profit) on fair value movements on derivatives (net of tax)
Net interest charge on defined benefit pensions (net of tax)
S3 programme (net of tax)
Loss on disposal (net of tax)
Significant legal charges and expenses (net of tax)
Retirement benefit scheme GMP equalisation (net of tax)
2018
pence
109.5
109.5
43.6
43.6
2017
pence
116.7
116.5
66.2
66.1
2018
£’000
2017
£’000
32,381
48,956
32,381
21,968
7,342
2,744
11,104
(6,433)
1,929
5,059
729
2,292
2,300
48,956
20,005
997
10,394
–
(9,411)
2,275
5,983
–
7,097
–
Earnings for the purposes of underlying earnings per share
81,415
86,296
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
2018
Number
of shares
2017
Number
of shares
74,350,521 73,959,565
86,340
831
74,351,352 74,045,905
2018
£’000
2017
£’000
101,379
19.7%
110,002
21.6%
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. During 2018, the Company purchased and cancelled 6,288,127 shares. See note 26.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements 14 Goodwill
Cost
At 1 January
Exchange differences
Reclassified as held for sale (see note 31)
At 31 December
Accumulated impairment losses
At 1 January
Impairment of goodwill (see note 31)
Reclassified as held for sale (see note 31)
Exchange differences
Carrying amount at 31 December
Ultra Electronics
Holdings plc
103
2018
£’000
2017
£’000
451,807
15,001
(28,311)
478,565
(26,758)
–
438,497
451,807
(57,278)
(6,550)
6,550
(3,458)
(62,972)
–
–
5,694
377,761
394,529
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
2018
Pre-tax
Discount rate
%
2017
Pre-tax
Discount rate
%
9.7
9.7
9.7 − 11.4
10.1
10.1
10.1
2018
£’000
32,686
–
18,869
51,555
2017
£’000
32,531
28,276
18,030
78,837
9.7 − 11.4
10.7 − 11.4
10.1
10.1
92,279
120,020
90,894
115,135
212,299
206,029
9.7 − 11.4
9.7 − 11.4
10.1
10.1
35,118
78,789
33,716
75,947
113,907
109,663
377,761
394,529
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% (2017: 2.5%)
per annum. Cash flows beyond that period are not included in the value-in-use calculation.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
104
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
14 Goodwill continued
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 underlying 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 2018 was 9.7% for UK and
Australia, 10.7% for Canada and 11.4% for USA (2017: 10.1% for all regions). Future revenues are based on orders already received, opportunities
that are known and expected at the time of setting the budget and strategic plans and future growth rates. Budget and strategic plan growth rates
are based on a combination of historical experience, available government spending data, and management and industry expectations of the
growth rates that are expected to apply in the major markets in which each CGU operates. Longer-term growth rates, applied for the ten-year
period after the end of the strategic planning period, are set at 2.5%. Ultra considers the long-term growth rate to be appropriate for the sectors in
which it operates. Forecast gross margins reflect past experience, factor in expected efficiencies to counter inflationary pressures, and also reflect
likely margins achievable in the shorter-term period of greater defence spending uncertainty.
Within each of the strategic plans, a number of assumptions are made about business growth opportunities, contract wins, product development
and available markets. A key assumption is that there will be continued demand for Ultra’s products and expertise from a number of US
government agencies and prime contractors during the strategic plan period.
Sensitivity analysis, which included consideration of the potential impacts of Brexit, has been performed on the value-in-use calculations to:
(i) reduce the post-2023 growth assumption from 2.5% to nil;
(ii) apply a 20% reduction to forecast operating profits in each year of the modelled cash inflows; and
(iii) consider specific market factors as noted above.
Certain of these sensitivity scenarios give rise to a potential impairment in C2ISR, the CGU grouping which includes Herley, ATS and Forensic
Technology. Profitability in Herley in 2017 and 2018 has missed expectations due to difficulties encountered with certain development contracts,
however an improvement in profitability is envisaged in future years as contracts enter the production phase. Despite these profitability challenges
at Herley, headroom in C2ISR which represents the value derived from the key growth assumptions in the value-in-use calculations, is £46.5m
(2017: £79.4m). Sensitivity (ii) results in a £2.3m impairment to the goodwill allocated to the C2ISR CGU group. This CGU grouping is also sensitive
to the ability of the operations to retain existing customers, win new business and profitably execute contracts over the medium term, particularly
given the recent profitability challenges at Herley.
On 2 November 2018 Ultra announced the sale of its Airport Systems business for a total consideration of £22m. The Infrastructure CGU is
comprised entirely of the Airport Systems business. The disposal proceeds are below the carrying value of the net assets being sold and
consequently a goodwill impairment charge of £6.6m has been recorded in the year. Following the impairment charge, the carrying value of the
goodwill for the Infrastructure CGU was £21.8m, which has been reclassified as held for sale. As set out in note 2, the £6.6m impairment charge
has been included as part of the non-underlying operating results of the Group. Airport Systems is within the Aerospace & Infrastructure operating
segment. The disposal completed on 1 February 2019.
For all other CGUs, the value-in-use calculations exceed the CGU carrying values after applying sensitivity analysis.
* See footnote on page 145.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
105
15 Other intangible assets
Cost
At 1 January 2017
Foreign exchange differences
Additions
Reclassification from tangible fixed assets
Disposals
Acquired intangibles
Customer
relationships
£’000
Intellectual
property
£’000
Profit in
order book
£’000
Other
acquired
£’000
Internally
generated
capitalised
development
costs
£’000
Software,
patents and
trademarks
£’000
Total
£’000
222,459
(12,574)
–
–
–
117,588
(7,114)
–
–
–
34,957
(1,882)
–
–
–
8,765
(388)
–
–
–
26,989
(1,264)
1,582
–
–
30,022
(1,621)
4,098
418
(1,595)
440,780
(24,843)
5,680
418
(1,595)
At 1 January 2018
209,885
110,474
33,075
8,377
27,307
31,322
420,440
Foreign exchange differences
Additions
Reclassified as held for sale (see note 31)
Disposals
At 31 December 2018
Accumulated amortisation
At 1 January 2017
Foreign exchange differences
Impairment charges
Disposals
Charge
At 1 January 2018
Foreign exchange differences
Reclassified as held for sale (see note 31)
Impairment charges
Disposals
Charge
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
6,581
–
(1,377)
–
3,909
–
–
(10,846)
1,014
–
(381)
(518)
148
–
–
(862)
755
1,651
–
–
1,005
5,378
(323)
(974)
13,412
7,029
(2,081)
(13,200)
215,089
103,537
33,190
7,663
29,713
36,408
425,600
(125,692)
7,373
–
–
(18,193)
(65,389)
4,223
–
–
(8,359)
(33,422)
1,789
–
–
(954)
(4,024)
217
–
–
(942)
(14,988)
783
(1,608)
–
(1,197)
(23,628)
1,222
–
1,588
(2,350)
(267,143)
15,607
(1,608)
1,588
(31,995)
(136,512)
(69,525)
(32,587)
(4,749)
(17,010)
(23,168)
(283,551)
(4,560)
1,376
–
–
(15,556)
(2,945)
–
–
10,846
(11,401)
(1,008)
381
–
518
(494)
(148)
–
–
862
(809)
(578)
–
(1,039)
–
(1,502)
(781)
312
–
970
(2,604)
(10,020)
2,069
(1,039)
13,196
(32,366)
(155,252)
(73,025)
(33,190)
(4,844)
(20,129)
(25,271)
(311,711)
59,837
73,373
30,512
40,949
–
488
2,819
3,628
9,584
11,137
113,889
10,297
8,154
136,889
Of the £11,137,000 (2017: £8,154,000) net book value within the software, patents and trademarks category, £241,000 (2017: £291,000) 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
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements
Ultra Electronics
Holdings plc
106
Notes to accounts – Group continued
31 DECEMBER 2018
16 Property, plant and equipment
Cost
At 1 January 2017
Foreign exchange differences
Additions
Disposals
Reclassified to software (see note 15)
At 1 January 2018
Foreign exchange differences
Additions
Disposals
Reclassified to held for sale
At 31 December 2018
Accumulated depreciation
At 1 January 2017
Foreign exchange differences
Charge
Disposals
At 1 January 2018
Foreign exchange differences
Charge
Disposals
Reclassification
Reclassified to held for sale
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Land and buildings
Freehold
£’000
41,561
(1,640)
1,697
(11)
–
Short
leasehold
£’000
Plant and
machinery
£’000
Total
£’000
25,909
(1,076)
230
(2,911)
–
114,840
(5,073)
5,171
(19,786)
(418)
182,310
(7,789)
7,098
(22,708)
(418)
41,607
22,152
94,734
158,493
753
837
(11)
–
573
409
(603)
–
2,590
11,707
(11,666)
(4,057)
3,916
12,953
(12,280)
(4,057)
43,186
22,531
93,308
159,025
(8,389)
359
(1,148)
8
(16,010)
794
(2,040)
2,899
(91,716)
3,744
(6,978)
19,134
(116,115)
4,897
(10,166)
22,041
(9,170)
(14,357)
(75,816)
(99,343)
(111)
(1,018)
11
771
–
(460)
(1,819)
603
(438)
–
(1,837)
(6,096)
11,099
(333)
2,543
(2,408)
(8,933)
11,713
–
2,543
(9,517)
(16,471)
(70,440)
(96,428)
33,669
32,437
6,060
7,795
22,868
18,918
62,597
59,150
Freehold land amounting to £6,944,000 (2017: £6,748,000) has not been depreciated. Included within Land and Buildings is £nil (2017: £nil) of
assets in the course of construction.
17 Inventories
Raw materials and consumables
Work in progress
Finished goods and goods for resale
2018
£’000
56,090
23,682
8,779
88,551
2017
£’000
48,965
18,787
8,875
76,627
The amount of any write-down of inventory recognised as an expense in the year was £2,342,000 (2017: £1,666,000).
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
107
18 Over time contract balances
Amounts receivable from over time contract customers relates to work performed and revenue recognised on agreed contracts prior to the
customer being invoiced.
The movement in the year of amounts receivable from over time contract customers was as follows:
As at 1 January 2018
Adoption of IFRS 15 (see note 37)
Foreign exchange differences
Revenue earned net of billings
Impairment
Reclassified to held for sale
As at 31 December 2018
2018
£’000
116,732
(10,497)
1,776
956
(1,209)
(4,093)
103,665
The impairment recognised in 2018 relates to a non-core product line that was closed in the Maritime & Land division in the year.
Amounts payable to over time contract customers relates to payments received from customers in relation to the contract prior to the work being
completed and the revenue recognised.
The movement in the year of amounts payable to over time contract customers was as follows:
As at 1 January 2018
Adoption of IFRS 15 (see note 37)
Foreign exchange differences
Cash advances net of revenue recognised
Other
Reclassified to held for sale
As at 31 December 2018
Within the opening 2018 balance of £58.7m, £55.2m was utilised during the period.
19 Trade and other receivables
Non-current
Amounts receivable from over time contract customers (see note 18)
Current
Trade receivables
Provisions against receivables
Net trade receivables
Amounts receivable from over time contract customers (see note 18)
Other receivables
Prepayments
Accrued income
Trade receivables do not carry interest. The average credit period on sale of goods is 36 days (2017: 32 days).
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
2018
£’000
(58,707)
(2,801)
(608)
(4,463)
(3,044)
6,120
(63,503)
2018
£’000
2017
£’000
22,639
22,639
32,225
32,225
2018
£’000
2017
£’000
109,176
(3,910)
105,266
81,026
6,517
9,180
3,195
102,934
(1,505)
101,429
84,507
12,897
6,794
–
205,184
205,627
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
108
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
19 Trade and other receivables continued
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
2018
£’000
18,038
1,382
808
4,839
25,067
Related
provision
£’000
(218)
(7)
(73)
(3,612)
Total
£’000
17,820
1,375
735
1,227
2017
£’000
16,361
4,374
871
1,214
Related
provision
£’000
(112)
(480)
(71)
(842)
Total
£’000
16,249
3,894
800
372
(3,910)
21,157
22,820
(1,505)
21,315
The Group makes provisions against its trade receivables based on expected credit losses 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
Reclassified to held for sale
Balance at end of year
2018
£’000
2017
£’000
1,505
(1)
2,611
(139)
(66)
3,910
1,307
(23)
617
(396)
–
1,505
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.
20 Trade and other payables
Amounts included in current liabilities:
Trade payables
Amounts due to over time contract customers (note 18)
Other payables
Accruals
Deferred income
Amounts included in non-current liabilities:
Amounts due to over time contract customers (note 18)
Other payables
Accruals
Deferred income
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
2018
£’000
2017
£’000
78,742
52,442
20,608
42,158
18,297
89,205
55,166
21,007
41,263
8,439
212,247
215,080
11,061
7
224
3,586
14,878
3,541
12
3,333
1,228
8,114
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements 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
Ultra Electronics
Holdings plc
109
2018
£’000
2017
£’000
128,722
47,037
175,759
44,359
7,393
51,752
17,582
50,000
10,382
120,375
44,359
7,493
77,964
172,227
175,759
77,964
51,752
172,227
253,723
223,979
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
–
–
–
149
265
414
2018
Total
£’000
149
265
414
10,382
–
–
6,534
10,382
6,534
10,382
6,534
16,916
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
110
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
22 Financial instruments and financial risk management continued
Fair value measurements recognised in the balance sheet continued
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
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:
Cash and cash equivalents
Currency derivatives used for hedging and interest rate swap
Amounts receivable from over time contract customers
Other receivables
Trade receivables
Prepayments
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 over time contract customers
Deferred consideration
Accruals
Other payables
The Directors consider that the carrying amount for all financial liabilities approximates to their fair value.
Level 3
£’000
Level 2
£’000
–
–
–
2,028
434
2,462
2017
Total
£’000
2,028
434
2,462
7,493
–
7,493
–
13,891
7,493
13,891
13,891
21,384
Current assets/(liabilities)
Non-current assets/(liabilities)
2018
£’000
2017
£’000
2018
£’000
2017
£’000
(5,534)
(11,203)
(1,000)
(2,688)
36
437
113
2,025
2018
£’000
2017
£’000
96,319
414
103,665
6,517
105,266
9,180
3,195
149,522
2,462
116,732
12,897
101,429
6,794
–
2018
£’000
2017
£’000
6,534
146,304
97,037
10,382
78,742
63,503
2,441
42,382
20,615
13,891
164,734
51,752
7,493
89,205
58,707
2,302
44,596
21,019
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
111
22 Financial instruments and financial risk management continued
Liquidity risk
The Group maintains committed banking facilities with core banks to provide prudent levels of borrowing headroom.
The Group’s banking facilities are provided by a small group of banks, led by The Royal Bank of Scotland. On 7 November 2017, the Group obtained
a £300 million facility of revolving credit with a current expiry date of November 2023. The facility has the option to be extended, subject to lender
consent, 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. The Group holds $165m of term loan,
which was established in May 2015; $40m is repayable on 31 March 2019, $40m on 30 June 2019 and the remainder on 1 August 2019.
All bank loans are unsecured. Interest was predominantly charged at 0.96% (2017: 1.20%) over base or contracted rate. At 31 December 2018, the
Group had available £280 million (2017: £300 million) of undrawn, committed revolving credit facilities.
At 31 December 2018 the Group also has unsecured loan notes in issue to Prudential Investment Management Inc (“Pricoa”) of £50m with an
expiry date of October 2025, and US$60m with an expiry date of 25 January 2019 (2017: $70m). Agreement was reached with Pricoa in September
2018 for new loan notes of US$70m which were issued on 25 January 2019, this debt will expire in January 2026 and January 2029.
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.
A £5 million overdraft and US$10 million overdraft are available for short-term working capital funding.
The following table details the Group’s remaining contractual maturity for its financial liabilities:
2018
Bank loans and overdrafts
Loan notes
Government loans
Trade payables
Currency derivatives used for hedging and interest rate swap
Deferred consideration
Accruals
Other payables
2017
Bank loans and overdrafts
Loan notes
Government loans
Trade payables
Currency derivatives used for hedging
Deferred consideration
Accruals
Other payables
Within 1 year
£’000
1 to 2 years
£’000
2 to 5 years
£’000
Over 5 years
£’000
Total
£’000
130,640
48,583
–
78,742
5,534
59
42,158
20,608
48,640
9,115
–
89,205
11,203
55
41,263
21,007
306
1,435
–
–
641
–
224
7
122,253
44,462
–
–
2,285
–
2,736
12
17,861
4,305
–
–
359
2,382
–
–
–
–
–
–
384
2,247
597
–
–
51,077
10,382
–
–
–
–
–
–
–
7,493
–
19
–
–
–
148,807
105,400
10,382
78,742
6,534
2,441
42,382
20,615
170,893
53,577
7,493
89,205
13,891
2,302
44,596
21,019
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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
112
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
22 Financial instruments and financial risk management continued
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 2018, the net fair value of the Group’s currency derivatives is estimated to be a liability of approximately £6,387,000 (2017: liability
£11,863,000), comprising £147,000 assets (2017: £2,462,000) and £6,534,000 liabilities (2017: £13,891,000). The gain on derivative financial
instruments included in the Group’s consolidated income statement for the period was £5,476,000 (2017: gain £11,983,000).
The net notional or net contracted amounts of foreign currency related forward sales contracts, classified by year of maturity are shown below.
2018
US Dollars/Sterling
Euro/other currencies
Total
2017
US Dollars/Sterling
Euro/other currencies
Total
Not
exceeding
1 year
£’000
Between
1 year and
5 years
£’000
Over
5 years
£’000
66,758
24,347
7,035
(8,435)
73,793
15,912
–
–
–
Total
£’000
91,105
(1,400)
89,705
(139,103)
57,182
–
(81,921)
1,407
(9,806)
(589)
(8,988)
(137,696)
47,376
(589)
(90,909)
In July 2017, the Group’s foreign exchange derivatives included forward contracts to sell £191.9m and receive USD$250.0m in March 2018 in
connection with the proposed Sparton Corporation acquisition. The 2017 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 and meets the conditions required to qualify as
effective hedges. The value of the net investment hedge was US$84m (2017: US$265m).
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 1.23%. The floating rates are US Dollar LIBOR. At the year
end, the nominal amounts of the interest rate swaps were US$45m (2017: US$60m). The hedging contracts fix US$45m of borrowings to
31 December 2018 reducing to nil by July 2019.
The interest rate swaps were designated effective cash flow hedges and the change in fair value is charged to equity. At 31 December 2018, the net
fair value of interest rate swaps was £265,000 (2017: £434,000). The amount recycled from the income statement during the year was £435,000
and has been credited to interest cost in the year (2017: £27,000 charged).
The fair value will be realised in the income statement on a quarterly basis over the next 0.5 years. The Group also has US$60m of fixed rate debt
with Pricoa at an interest rate of 3.60%, which is due for repayment in January 2019, and £50m of fixed rate debt with Pricoa at an interest rate of
2.87%, which is due for repayment in October 2025. 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:
2018
Cash and cash equivalents
Loan notes
Unsecured bank loans
Government loans
2017
Cash and cash equivalents
Loan notes
Unsecured bank loans
Government loans
Effective
interest rate
Total
£’000
Within 1 year
£’000
1 to 2 years
£’000
2 to 5 years
£’000
5+ years
£’000
0.57% 96,319
3.11% 97,037
2.46% 146,304
4.43% 10,382
0.55% 149,522
3.60% 51,752
2.56% 164,734
7,493
4.43%
96,319
47,037
128,722
–
149,522
7,393
44,359
–
–
–
17,582
–
–
44,359
120,375
–
–
–
–
–
–
–
–
–
–
50,000
–
10,382
–
–
–
7,493
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
113
22 Financial instruments and financial risk management continued
Market risk sensitivity analysis
Interest rate risk
During 2018 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 2018. There is no significant difference between the
amount recharged to the income statement and equity in the year.
2018
Interest rate sensitivity
2017
Interest rate sensitivity
Profit before
tax
£’000
1% change
(1,977)
(1,700)
Currency risks
The Group has estimated the impact on the income statement and equity of a 10% and 25% strengthening or weakening of average actual and
transactional currency rates applicable during the year and a 10% and 25% change in the foreign exchange rates applicable for valuing foreign
exchange derivative instruments.
10% weakening of GBP
10% strengthening of GBP
25% weakening of GBP
25% strengthening of GBP
Profit before
tax
£’000
Equity
£’000
Profit before
tax
£’000
Equity
£’000
Profit before
tax
£’000
Equity
£’000
Profit before
tax
£’000
Equity
£’000
2018
Transaction
P&L translation
Foreign exchange derivatives
5,479
4,601
(13,776)
5,479
4,094
(13,776)
(5,479)
(4,601)
792
(5,479)
(4,094)
792
16,437
11,504
(28,713)
16,437
12,282
(28,713)
(16,437)
(11,504)
9,040
(16,437)
(12,282)
9,040
Total foreign exchange
(3,696)
(4,203)
(9,288)
(8,781)
(772)
6
(18,901)
(19,679)
2017
Transaction
P&L translation
Foreign exchange derivatives
Total foreign exchange
6,689
5,177
10,885
22,751
6,689
4,686
10,885
(6,689)
(5,177)
(9,294)
(6,689)
(4,685)
(9,294)
20,067
12,942
32,948
20,067
11,713
32,948
(20,067)
(12,942)
(20,245)
(20,067)
(11,713)
(20,245)
22,260
(21,160)
(20,668)
65,957
64,728
(53,254)
(52,025)
In 2017, the Group’s foreign exchange derivatives include forward contracts to sell £191.9m and receive USD$250.0m in March 2018 in connection
with the proposed Sparton Corporation acquisition. The 2017 table above includes these forwards.
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, C$31.8m was provided to TCS and will be reimbursed
at favourable rates of interest over the period to 2032. 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.
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$47.7m. 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 2018
C$2.8m 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 15 years, particularly in later years. For TCS, if the compound annual revenue growth rate over the period from
2018 to 2032 was 2.5% higher than assumed in the valuation model, then the net present value of the liability as at 31 December 2018 would
increase by C$2.3m (£1.3m). 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 2018 would increase by C$0.6m (£0.4m).
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
114
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
23 Government grants and loans continued
TCS has also benefited from an Investissement Quebec (IQ) research and development programme, whereby IQ shared in the cost of research
and development of certain specified new products. Under this arrangement, from 2010 to 2014 IQ financed C$8.8M of eligible costs associated
with these specified projects. The funding is repayable under a royalty arrangement over the period of 2014 to 2021, based on sales of specified
products. As there is no minimum repayment, funding received in respect of the IQ programme has been included in the income statement.
Royalties repaid have also been included as costs in the income statement in the period where they have been incurred.
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†
2018
£’000
7,493
1,630
1,444
(185)
10,382
2018
£’000
233
–
233
2017
£’000
6,308
214
1,133
(162)
7,493
2017
£’000
2,010
19
2,029
† In 2017, Ultra Electronics Limited received a £13,000 grant from the UK Government and a £6,000 grant from the Technology Strategy Board.
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 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 1 January 2018
Credit/(charge) to income
Credit/(charge) to other comprehensive income
Credit direct to equity
Exchange differences
Effect of change in US tax rate
Reclassification
At 31 December 2018
Non-current assets
Non-current liabilities
(3,596)
1,087
–
–
462
(2,285)
346
(3,986)
(392)
–
–
(154)
–
–
(4,532)
589
(470)
–
(124)
5
–
–
–
–
–
–
–
–
–
–
Retirement
benefit
obligations
£’000
19,517
(1,271)
(4,113)
–
–
–
–
Goodwill
£’000
(12,629)
(3,926)
–
–
(315)
5,268
–
(840)
(713)
–
–
–
–
(2)
–
–
(42)
–
–
4,054
(4,291)
–
–
–
–
–
1,252
29
–
–
–
–
1,044
(237)
14,133
(11,602)
Other
£’000
6,887
3,272
(74)
–
(704)
(3,021)
(346)
6,014
2,014
–
2,240
524
–
–
12,580
(11,646)
10,792
2018
£’000
Total
£’000
14,822
(5,599)
(4,187)
(124)
(552)
(38)
–
4,322
2,032
(684)
2,240
328
–
–
8,238
2017
£’000
18,692
(10,454)
15,659
(11,337)
8,238
4,322
* 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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
115
24 Deferred tax continued
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 (2017: £1.2m) and a US deferred tax asset of £3.1m
(2017: £0.7m) have not been recognised as their recovery is uncertain.
25 Provisions
At 1 January 2018
Created
Reversed
Utilised
Exchange differences
At 31 December 2018
Included in current liabilities
Included in non-current liabilities
Contract
related
provisions
£’000
Warranties
£’000
4,666
3,081
(189)
(1,414)
123
6,267
3,114
3,153
6,267
3,131
5,959
(1,365)
(1,308)
105
6,522
5,992
530
6,522
Other
£’000
6,421
1,900
(207)
(1,437)
60
6,737
4,220
2,517
6,737
Total
£’000
14,218
10,940
(1,761)
(4,159)
288
19,526
13,326
6,200
19,526
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 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 and dilapidation costs. Dilapidations
will be payable at the end of the contracted life, which is up to fifteen years. Contingent consideration is payable when earnings targets are met.
26 Share capital and share options
Authorised:
5p ordinary shares
Allotted, called-up and fully paid:
5p ordinary shares
2018
No.
£’000
2017
No.
£’000
90,000,000
4,500
90,000,000
4,500
71,470,065
3,574
77,731,224
3,887
During 2018, the Company purchased and cancelled 6,288,127 shares. The shares were acquired at an average price of £14.52 per share, with
prices ranging from £12.87 to £16.90. The total cost of £91,904,241, including fees and stamp duty of £606,011, has been transferred to retained
earnings. The total reduction in paid up capital was £314,000.
23,968 ordinary shares having a nominal value of £1,198 were allotted during the year under the terms of the Group’s various share option
schemes. The aggregate consideration received was £123,000.
Share options
During the year to 31 December 2018, 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 average of the daily
average market price on the day before the grant less 10%. The vesting period is three years. If the options remain unexercised after a period of six
months from the date of maturity, the options expire. Options are forfeited if the employee leaves the Group before the options vest.
A Savings-Related Share Option Scheme is open to all UK employees and provides for a purchase price equal to the average of 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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
116
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
26 Share capital and share options continued
At 31 December 2018, share options outstanding under the Savings-Related Share Option Schemes were as follows:
Options granted
2016 – US scheme
2017 – US scheme
2018 – US scheme
2014 – Canadian scheme
2015 – Canadian scheme
2016 – Canadian scheme
2017 – Canadian scheme
2018 – Canadian scheme
2012 – UK 5 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
2018 – UK 3 year scheme
2018 – UK 5 year scheme
Number of shares
2018
2017
Option price
(£)
36,392
43,945
44,497
–
9,391
6,590
7,800
12,577
–
10,925
–
5,831
9,725
5,817
46,617
32,660
26,829
13,233
35,219
17,126
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
–
–
15.98
15.89
14.60
16.13
16.12
15.98
16.55
14.45
13.85
16.80
16.13
16.13
16.12
16.12
15.10
15.10
16.55
16.55
14.45
14.45
Exercise dates
September 2018 – December 2018
September 2019 – December 2019
September 2020 – December 2020
October 2017 – April 2018
December 2018 – June 2019
December 2019 – June 2020
December 2020 – June 2021
December 2021 – June 2022
December 2017 – June 2018
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
December 2021 – June 2022
December 2023 – June 2024
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 2018, share options outstanding under the Company Share Option Plan were as follows:
Options granted
2010
2011
2012
2013
2014
2015
2016
2017
2018
Number of shares
2018
2017
Option price
(£)
2,661
3,673
4,022
9,309
10,748
6,436
24,081
16,374
28,691
3,054
3,673
4,022
10,715
13,108
10,758
27,206
18,674
–
14.83
16.97
17.10
17.18
18.29
17.31
17.90
21.91
14.65
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
March 2021 – March 2028
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
117
26 Share capital and share options continued
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 2018, share options outstanding under the Executive Share Option Scheme were as follows:
Options granted
2011
2012
2013
2014
2015
2016
2017
2018
Number of shares
2018
2017
Option price
(£)
–
20,296
40,266
53,901
91,284
105,623
102,255
161,865
16,276
22,549
41,186
61,942
101,014
111,662
109,420
–
16.97
17.10
17.18
18.29
17.31
17.90
21.91
14.65
Exercise dates
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
March 2021 – March 2025
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 62−77. In April 2018, LTIPs were awarded to nominated employees. The awards will vest in March 2021 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
(£)
2018
10.65
7.34
15.78
6.28
4.68
Number
of options
2018
1,453,170
614,785
(31,762)
(283,609)
(22,919)
Weighted
average
exercise price
(£)
2017
Number
of options
2017
11.64 1,450,545
468,851
10.40
(83,566)
15.91
(176,792)
7.79
(205,868)
17.39
10.17
1,729,665
10.65 1,453,170
17.20
309,029
17.10
214,392
The Group recognised total expenses of £1,493,000 (2017: £682,000) 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 £15.00. The fair value
of options granted during the year that are expected to vest was £4,402,058 (2017: £4,283,912).
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:
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
118
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
26 Share capital and share options continued
2018
Weighted average share price (£)
Weighted average exercise price (£)
Expected volatility %
Expected option life (years)
Risk-free interest rate %
Expected dividends %
2017
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*†
17.30
15.53
22.8
3.6
0.7
2.7
17.37
17.42
23.5
6.0
1.4
2.5
Share save*
CSOP*
17.49
15.71
20.4
3.8
0.6
2.6
17.61
17.66
23.2
6.0
1.4
2.4
17.14
17.13
24.4
5.0
1.5
2.4
ESOS*
17.47
17.46
23.9
5.0
1.5
2.3
17.18
n/a
5.2
3.0
0.2
0.0
LTIP*
18.86
n/a
19.0
3.0
0.5
0.0
* Figures in the above table show an average across the invested schemes at year end.
† April 2018 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 %
Figures in the above table show an average across the schemes.
The weighted average fair value of options granted during the year was £8.32 (2017: £11.88).
The weighted average remaining contractual life of share options was 3.3 years (2017: 4.2 years).
27 Equity
2018
n/a
17.96
3.0
10.3
0.3
2017
n/a
19.05
3.0
19.2
0.4
Share
capital
£’000
Share
premium
account
£’000
Capital
redemption
reserve
£’000
Balance at 1 January 2017
Total comprehensive income for the year
Issue of share capital
Equity-settled employee share scheme
Tax on share based payments
Dividends to shareholders
3,523
–
64,020
–
352 133,195
3,696
–
–
12
–
–
Balance at 1 January 2018
3,887 200,911
Adoption of IFRS 15 (net of tax)
Total comprehensive income for the year
Equity-settled employee share scheme
Shares purchased in buy-back
Dividends to shareholders
–
–
1
(314)
–
–
–
122
–
–
Balance at 31 December 2018
3,574 201,033
–
–
–
–
–
–
–
–
–
–
314
–
314
Reserve
for
own
shares
£’000
(2,581)
–
–
–
–
–
Hedging
reserve
£’000
Translation
reserve
£’000
Retained
earnings
£’000
(68,986) 139,492 228,034
68,978
(44,089)
20,927
–
–
–
682
–
–
(124)
–
–
(34,959)
–
–
Non-
controlling
interests
£’000
Total
equity
£’000
69 363,571
45,786
(30)
– 133,547
4,390
–
(124)
–
(34,959)
–
(2,581)
(48,059)
95,403 262,611
39 512,211
–
–
–
–
–
–
(11,661)
–
–
–
–
21,100
–
–
–
(9,916)
36,256
1,493
(91,902)
(36,883)
–
(31)
–
–
–
(9,916)
45,664
1,616
(91,902)
(36,883)
(2,581)
(59,720) 116,503 161,659
8 420,790
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 2018, the number of own
shares held was 235,247 (2017: 235,245).
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements 28 Notes to the cash flow statement
Operating profit
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment charge
Cost of equity-settled employee share schemes
Adjustment for pension funding
Loss on disposal of property, plant and equipment
Increase/(decrease) in provisions
Operating cash flow before movements in working capital
Increase in inventories
Increase in receivables
Increase 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
Ultra Electronics
Holdings plc
119
2018
£’000
2017
£’000
65,338
61,484
8,933
32,366
7,589
1,493
(10,301)
53
4,948
110,419
(10,198)
(1,808)
4,033
10,166
31,995
1,608
682
(8,964)
565
(7,086)
90,450
(2,093)
(15,367)
24,442
102,446
97,432
(4,640)
(11,094)
(10,324)
(9,543)
86,712
77,565
2018
£’000
(54,955)
(17,664)
(72,619)
657
(761)
(10,224)
(82,947)
(74,457)
2017
£’000
80,118
85,482
165,600
2,040
(1,281)
15,884
182,243
(256,700)
(157,404)
(74,457)
2018
£’000
2017
£’000
96,319
(253,723)
149,522
(223,979)
(157,404)
(74,457)
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
2018
£’000
2017
£’000
(223,979)
181,297
(198,961)
657
(761)
(11,976)
(331,325)
168,975
(83,493)
2,040
(1,281)
21,105
(253,723)
(223,979)
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
120
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
29 Other financial commitments
a) Capital commitments
At the end of the year capital commitments were:
Contracted but not provided
2018
£’000
1,009
2017
£’000
696
b) Lease commitments
At 31 December 2018, 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
2018
£’000
10,390
22,611
3,908
36,909
2017
£’000
11,557
24,402
5,961
41,920
30 Retirement benefit schemes
Some UK employees of the Group are members of the Ultra Electronics Limited defined benefit scheme which was established on 1 March 1994.
The scheme 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 £9,749,000 (2017: £9,848,000).
Defined benefit schemes
All the defined benefit schemes were actuarially assessed at 31 December 2018 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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
121
30 Retirement benefit schemes continued
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.
GMP Equalisation
Following a High Court judgment on 26 October 2018, it has become apparent across the UK pension industry that equalisation is required with
respect to Guaranteed Minimum Pensions (“GMPs”). Scheme benefits earned in the period 17 May 1990 to 5 April 1997 may be affected by the
requirement to equalise GMPs. It will take a considerable time for trustees and employers to decide on the approach for GMP equalisation, gather
data, calculate the new benefits and cost, and ultimately make payments to members. The initial estimate for the Ultra Electronics Limited defined
benefit scheme is that the impact is £3.2m; this has been recorded as a debit to the income statement in 2018 with a corresponding increase in
scheme liabilities.
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 2018 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
2018
Canada
2018
Switzerland
2018
UK
2017
Canada
2017
Switzerland
2017
2.80%
3.20%
2.20%
n/a
2.95%
1.95%
3.75%
3.20%
2.20%
3.45%
n/a
n/a
0.90%
1.10%
1.10%
1.00%
n/a
n/a
2.50%
3.20%
2.20%
n/a
2.95%
1.95%
3.50%
3.20%
2.20%
3.45%
n/a
n/a
0.65%
1.00%
1.00%
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 0.5% increase in the inflation assumption to 3.70% and a 0.5% decrease in the discount
rate to 2.30% would increase the scheme’s liabilities by 6.5% and 9.6% respectively. If the members’ life expectancy were to increase by 1 year,
the scheme liabilities would increase by 4.2%. The average duration of the scheme liabilities is 18 years (2017: 19 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 18 years.
The key demographic assumption used was in relation to the mortality rates of current and future pensioners. Due to the size of the scheme the
mortality rates were based on standard tables, namely:
Current pensioners
Future pensioners
100% SAPS S2PMA_L/84% SAPS S2PFA_L c2007 CMI 2017 1.25% imps from 2007 (UK only)
100% SAPS S2PMA_L/84% SAPS S2PFA_L c2007 CMI 2017 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
2018
2017
23 years
26 years
24 years
27 years
23 years
26 years
25 years
27 years
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
122
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
30 Retirement benefit schemes continued
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
GMP equalisation
Expected return on pension scheme assets
Charge/(credit)
UK
2018
£m
–
–
9.1
3.2
(7.2)
5.1
Canada
2018
£m
Switzerland
2018
£m
0.1
0.1
0.4
–
(0.4)
0.2
0.3
–
–
–
–
0.3
Total
2018
£m
0.4
0.1
9.5
3.2
(7.6)
5.6
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
Of the current service cost for the year, £0.1 million (2017: £nil) has been included in cost of sales, and £0.3 million (2017: £0.4 million) has been
included in administrative expenses.
Actuarial gains and losses have been reported in the statement of comprehensive income.
The amount included in the balance sheet arising from the Group’s obligations in respect of its defined benefit retirement schemes is as follows:
Fair value of scheme assets
Present value of scheme liabilities
Scheme deficit
Related deferred tax asset
Net pension liability
UK
2018
£m
281.7
(353.1)
(71.4)
12.3
(59.1)
Canada
2018
£m
Switzerland
2018
£m
9.6
(10.1)
(0.5)
0.1
(0.4)
6.4
(7.5)
(1.1)
0.2
(0.9)
Total
2018
£m
297.7
(370.7)
(73.0)
12.6
(60.4)
Movements in the present value of defined benefit obligations during the year were as follows:
Present value of obligation at 1 January
Current service cost
Interest cost
Actuarial gains and losses
Exchange difference
Insured pensioner adjustment
GMP equalisation
Benefits paid
Present value of obligation
at 31 December
UK
2018
£m
(371.3)
–
(9.1)
16.4
–
–
(3.2)
14.1
Canada
2018
£m
Switzerland
2018
£m
(10.7)
(0.1)
(0.4)
0.2
0.3
(0.1)
–
0.7
(7.0)
(0.3)
–
0.1
(0.4)
–
–
0.1
Total
2018
£m
(389.0)
(0.4)
(9.5)
16.7
(0.1)
(0.1)
(3.2)
14.9
UK
2017
£m
289.8
(371.3)
(81.5)
13.9
(67.6)
UK
2017
£m
(382.4)
–
(9.6)
9.0
–
–
–
11.7
Canada
2017
£m
10.6
(10.7)
(0.1)
–
(0.1)
Switzerland
2017
£m
5.9
(7.0)
(1.1)
0.2
(0.9)
Canada
2017
£m
Switzerland
2017
£m
(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
306.3
(389.0)
(82.7)
14.1
(68.6)
Total
2017
£m
(400.5)
(0.4)
(10.0)
8.8
0.6
–
–
12.5
(353.1)
(10.1)
(7.5)
(370.7)
(371.3)
(10.7)
(7.0)
(389.0)
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
Insured pensioner adjustment
Administration expenses
Benefits paid
Fair value at 31 December
UK
2018
£m
289.8
7.2
(11.2)
–
10.0
–
–
(14.1)
281.7
Canada
2018
£m
Switzerland
2018
£m
10.6
0.4
(0.9)
(0.3)
0.5
0.1
(0.1)
(0.7)
9.6
5.9
–
–
0.3
0.3
–
–
(0.1)
6.4
Total
2018
£m
306.3
7.6
(12.1)
–
10.8
0.1
(0.1)
(14.9)
297.7
UK
2017
£m
271.2
7.0
14.7
0.1
9.4
–
(0.9)
(11.7)
289.8
Canada
2017
£m
Switzerland
2017
£m
10.4
0.3
0.4
(0.3)
0.6
–
(0.1)
(0.7)
10.6
5.7
–
0.2
(0.3)
0.4
–
–
(0.1)
5.9
Total
2017
£m
287.3
7.3
15.3
(0.5)
10.4
–
(1.0)
(12.5)
306.3
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
123
Canada
2017
£m
Switzerland
2017
£m
Total
2017
£m
30 Retirement benefit schemes continued
Scheme assets were as follows:
Fair value:
Equities
Bonds
Property
Other assets
Other investment funds:
Absolute return
LDI
Multi-asset credit
UK
2018
£m
73.9
–
25.2
0.6
83.6
82.8
15.6
281.7
Canada
2018
£m
Switzerland
2018
£m
2.3
4.6
–
2.7
–
–
–
9.6
2.1
1.7
1.0
1.3
0.3
–
–
6.4
Total
2018
£m
78.3
6.3
26.2
4.6
83.9
82.8
15.6
UK
2017
£m
95.1
–
16.6
1.5
78.4
75.5
22.7
297.7
289.8
10.6
3.5
6.5
–
0.6
–
–
–
2.1
1.7
0.8
1.0
0.3
–
–
5.9
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
2018
£m
Canada
2018
£m
Switzerland
2018
£m
Total
2018
£m
UK
2017
£m
Canada
2017
£m
Switzerland
2017
£m
(11.2)
(0.9)
–
(12.1)
14.7
(3.7)
20.1
5.2
–
(0.1)
(3.8)
(0.3)
0.2
(0.7)
0.2
0.1
20.5
4.6
9.3
23.7
0.4
(0.2)
–
0.2
0.2
(0.3)
0.3
0.2
100.7
8.2
17.4
3.1
78.7
75.5
22.7
306.3
Total
2017
£m
15.3
(0.8)
9.6
24.1
Cumulative actuarial losses, net of deferred tax, recognised in the consolidated statement of comprehensive income at 31 December 2018 were
£68.9 million (2017: £73.5 million).
The five-year history of experience adjustments is as follows:
Present value of defined benefit obligations
Fair value of scheme assets
Scheme deficit
Experience adjustments on scheme liabilities
Percentage of scheme liabilities
Experience adjustment on scheme assets
Percentage of scheme assets
2018
£m
(370.7)
297.7
(73.0)
2017
£m
(389.0)
306.3
(82.7)
2016
£m
(400.5)
287.3
(113.2)
2015
£m
(322.4)
237.6
(84.8)
2014
£m
(321.7)
234.4
(87.3)
(3.8)
(1.0%)
(12.1)
(4.1%)
(0.8)
(0.2%)
15.3
5.0%
4.0
1.0%
40.7
14.2%
–
–
(7.9)
(3.3%)
(2.5)
0.8%
21.8
9.3%
The amount of contributions expected to be paid to defined benefit schemes during the 2019 financial year is £10.5m. For the UK scheme this
includes an additional deficit payment of £10m agreed with the Trustee. This will be followed by £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 discussions with the
DOJ, and competition concerns raised by it, Ultra and Sparton mutually decided to terminate the merger agreement in March 2018.
Acquisitions
In aggregate, cash consideration of £6.5m was paid in respect of retention payments in the prior period for the 3Phoenix acquisition. No such
payments have been made in the current year.
Disposals
Fuel Cell business
The Maritime & Land division disposed of its small Fuel Cell business in December 2018. Cash proceeds of the sale totalled £0.6m, of which £0.2m
was received in the year with an additional £0.4m to be received in 2019. The net loss on disposal was £0.7m.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
124
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
31 Acquisitions and disposals continued
Property, plant and equipment
Inventories
Payables
Total
Proceeds (cash in 2018 and 2019)
Loss on disposal
2018
£’000
402
1,032
(80)
1,354
(625)
729
Airport Systems
On 2 November 2018, the Group announced the agreed disposal of the Airport Systems business to ADB SAFEGATE for £22m, of which £2m will
be deferred until the novation of certain contracts has completed. The Airport Systems business was in the Aerospace & Infrastructure division. The
disposal was completed on 1 February 2019. As at 31 December 2018, the assets and liabilities have been classified as held for sale. As set out in
note 14, a £6.6m goodwill impairment charge has been recorded in 2018.
Goodwill
Intangible fixed assets
Property, plant and equipment
Inventories
Trade and other receivables
Total assets classified as held for sale
Trade and other payables
Total liabilities classified as held for sale
Net assets of disposal group
2018
£’000
21,761
12
1,514
615
6,673
30,575
(8,575)
(8,575)
22,000
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 62−77.
Short-term employee benefits
Post-employment benefits
Share-based payments
2018
£’000
3,301
277
3,761
7,339
2017
£’000
3,428
425
2,592
6,445
33 Non-controlling interests
There is a 5% non-controlling interest in the Group’s Corvid Holdings Limited subsidiary. Before any intra-Group eliminations, the consolidated
revenue of the subsidiary in the year was £4,255,000 (2017: £4,211,000), the loss was £595,000 (2017: £578,000 loss) and the net assets were
£2,321,000 (2017: £2,892,000). Sales to Group companies were £2,411,000 (2017: £2,418,000).
34 Contingent liabilities
The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business totalling £50.6m
(2017: £42.8m).
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 between the Sultanate of Oman, Ministry of Transport & Communications and ‘Ithra’ (“Ultra
Electronics in collaboration with Oman Investment Corporation LLC”, the legal entity established with the sole purpose of delivering that contract
and which was placed into voluntary liquidation in March 2015) was terminated in February 2015 and there are various proceedings in relation to
that contract and its termination. There remains significant uncertainty regarding the likely outcome of these proceedings and it is not possible to
reliably estimate the financial effect that may result from the ultimate outcome. Further, as previously announced, the SFO is continuing to
investigate the conduct of business in Algeria by Ultra Electronics Holdings plc, its subsidiaries, employees and associated persons. The investigation
commenced in April 2018 following a voluntary self-report made by Ultra to the SFO. Ultra continues to cooperate with the SFO and will make a
further statement once the investigation is complete. It is not yet possible to estimate the timescale in which the investigation might be resolved, or
to reliably predict its outcome.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
125
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 51
• Contractual arrangements – see Directors’ Report on page 78
• Details of independent Directors – see Corporate Governance Report on page 44–45
• Substantial shareholders – see Directors’ Report on page 78
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 are 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
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.
Country incorporated
United States
United States
Malaysia
Australia
United States
Ireland
United Kingdom
Guernsey
Guernsey
Guernsey
Cyprus
United Kingdom
United States
United States
United Kingdom
United States
Ireland
Thailand
United States
Mexico
Brazil
United States
United Kingdom
United States
Australia
United States
United States
Switzerland
United States
United States
United States
United States
%
owned
100%
100%
100%
100%
100%
100%
100%
95%
95%
95%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Direct/Indirect
(Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Direct
Indirect (Group interest)
Direct
Indirect (Group interest)
Indirect (Group interest)
Direct
Direct
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Direct
Direct
Direct
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Direct
Direct
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Direct
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
126
Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
36 Related undertakings continued
Company name
Ultra Electronics Airport Systems (South Africa) (Proprietary) Limited
Ultra Electronics Airport Systems Inc.
Ultra Electronics Australia Pty Limited
Ultra Electronics Avalon Systems Pty Limited
Ultra Electronics Canada Inc.
Ultra Electronics Connecticut LLC
Ultra Electronics Defense Inc.
Ultra Electronics DNE Technologies Inc.
Ultra Electronics Enterprises (USA) LLC
Ultra Electronics Finance Limited
Ultra Electronics Finance Switzerland A.G.
Ultra Electronics Forensic Technology Inc./Les Technologies Ultra Electronics
Forensic Inc.
Ultra Electronics Hong Kong Holdings Limited
Ultra Electronics ICE, Inc.
Ultra Electronics in collaboration with Oman Investment Corporation LLC
(in liquidation)
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.
Country incorporated
South Africa
United States
Australia
Australia
Canada
United States
United States
United States
United States
Jersey
Switzerland
Canada
Hong Kong
United States
Oman
United States
United States
United Kingdom
Canada
United States
United Kingdom
United States
United Kingdom
United States
United States
United Kingdom
Canada
China
France
Hong Kong
United States
United Kingdom
United States
%
owned
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
70%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
Direct/Indirect
(Group interest)
Direct
Indirect (Group interest)
Direct
Indirect (Group interest)
Direct
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Direct
Direct
Indirect (Group interest)
Direct
Indirect (Group interest)
Indirect (Group interest)
Direct
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Indirect (Group interest)
Direct
Direct
Direct
Indirect (Group interest)
Indirect (Group interest)
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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37 IFRS 15 – Revenue from contracts with customers
IFRS 15 Revenue from contracts with customers became effective from 1 January 2018. The standard has been adopted using the modified
retrospective method such that the cumulative impact of IFRS 15 was posted through retained earnings on 1 January 2018, as shown on the
Statement of Changes in Equity. Comparative statutory numbers are not restated. The table below sets out the impact to the 1 January 2018
opening balance sheet of the application of IFRS 15.
Balance Sheet impact
Inventories
Amounts receivable from over time contract customers
Amounts due to over time contract customers
Tax liabilities
Net assets
Adjustment to retained earnings
Adjustment
Year ended
31 December
2017 as
presented
£m
Over time
becoming
point in time
£m
Separation of
performance
obligations
£m
Year ended
31 December
2017 if
presented
under IFRS 15
£m
Other
£m
Total
adjustment
£m
76.6
116.7
(58.7)
(13.6)
512.2
262.6
1.5
(1.6)
(2.9)
–
(3.0)
(3.0)
–
(10.3)
–
–
(10.3)
(10.3)
(0.3)
1.4
0.1
2.2
3.4
3.4
1.2
(10.5)
(2.8)
2.2
(9.9)
(9.9)
77.8
106.2
(61.5)
(11.4)
502.3
252.7
Although Ultra has adopted the modified retrospective approach, with the cumulative impact of IFRS 15 posted through retained earnings at
1 January 2018, to provide further information to readers of the financial statements, the table below sets out the impact to the 2017 full year
income statement as if IFRS 15 had been applied during 2017.
Income Statement impact
Revenue
Cost of sales
Gross profit
Underlying operating profit
Statutory operating profit
Statutory profit before tax
Tax
Statutory profit after tax
Adjustment
Year ended
31 December
2017 as
presented
£m
Over time
becoming
point in time
£m
Separation of
performance
obligations
£m
Year ended
31 December
2017 if
presented
under IFRS 15
£m
Other
£m
Total
adjustment
£m
775.4
(545.2)
230.2
120.1
61.5
60.6
(11.7)
48.9
(5.6)
4.2
(1.4)
(1.4)
(1.4)
(1.4)
–
(1.4)
(0.6)
–
(0.6)
(0.6)
(0.6)
(0.6)
–
(0.6)
(0.9)
0.5
(0.4)
(0.4)
(0.4)
(0.4)
0.7
0.3
(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
The most significant changes relative to previous accounting treatments arise in the following areas:
Over time revenue becoming point in time
A small number of contracts no longer qualify to be contract-accounted and revenue is now recorded at the point at which control of the goods
transfers to the customer as opposed to revenue being recognised over the life of the contract. If IFRS 15 had been applied in 2017 then £1.4m
of profit would have been delayed from 2017 to 2018, when the control was transferred to the customer.
Separation of performance obligations
The revenue for the substantial majority of contracts that were previously recognised using contract accounting continues to be accounted for over
the life of the contract, however the method by which performance obligations are determined has changed on certain contracts. Details on how
the Group determines performance obligations is included in accounting policies on page 133.
For a performance obligation to be recognised over time, the Group recognises revenue using an input method. As such, revenue and related
margin are calculated based on reliable estimates of transaction price and total expected costs, with revenue recognised as costs are incurred.
The Group has determined that this method reflects the Group’s performance in transferring control of the goods and services to the customer.
When applying IFRS 15 there was a separation of performance obligations on a number of contracts, primarily between development and
production phases, which led to lower margins being recognised in the initial contract performance obligations. As such, £0.6m of profit
recognised in 2017 under prior revenue recognition accounting standards is recognised in 2018 under IFRS 15. Additionally, revenue and profit
recognised in prior periods would have been lower due to the lower margin on the initial performance obligations of these contracts. The
separation of performance obligations led to an adjustment of £10.3m to reduce opening reserves and amounts receivable from over time contract
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Notes to accounts – Group continued
FOR THE YEAR ENDED 31 DECEMBER 2018
37 IFRS 15 – Revenue from contracts with customers continued
customers; this was predominantly from two UK contracts within the Aerospace & Infrastructure division on electronics development and production
programmes. These contracts have been running for a number of years and the majority of the impact to the income statement would have
impacted the years prior to 2017, if IFRS 15 had been adopted in those earlier periods.
Other
Items included within the ‘other’ category in the tables on the prior page predominantly relate to certain licences that are deemed to provide
separately identifiable benefits to customers and to certain material rights in licensing arrangements.
The timing of revenue recognised on the substantial majority of sale-of-goods contracts was not significantly affected with revenue continuing to
be recognised as control of goods is passed to the customer, which is normally when legal title has passed to the customer.
2018 impact
The tables below set out the impact to the 2018 income statement and balance sheet if IFRS 15 had not 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 over time contract customers
Amounts due to over time contract customers
Tax liabilities
Net assets
Adjustment to retained earnings
Adjustment
2018 as
presented
£m
Over time
becoming
point in time
£m
Separation of
performance
obligations
£m
Total
adjustment
£m
2018 if not
presented
under IFRS 15
£m
Other
£m
766.7
(544.6)
222.1
112.7
65.3
42.6
(10.2)
32.4
(2.7)
0.7
(2.0)
(2.0)
(2.0)
(2.0)
–
(2.0)
(0.1)
–
(0.1)
(0.1)
(0.1)
(0.1)
–
(0.1)
Adjustment
2018 as
presented
£m
Over time
becoming
point in time
£m
Separation of
performance
obligations
£m
88.6
103.7
(63.5)
(15.5)
420.8
161.7
(0.7)
1.2
0.7
–
1.2
1.2
–
10.3
–
–
10.3
10.3
0.3
0.1
0.4
0.4
0.4
0.4
0.7
1.1
Other
£m
0.5
(1.5)
–
(1.5)
(2.5)
(2.5)
(2.5)
0.8
(1.7)
(1.7)
(1.7)
(1.7)
0.7
(1.0)
764.2
(543.8)
220.4
111.0
63.6
40.9
(9.5)
31.4
Total
adjustment
£m
2018 if not
presented
under IFRS 15
£m
(0.2)
10.0
0.7
(1.5)
9.0
9.0
88.4
113.7
(62.8)
(17.0)
429.8
170.7
38 IFRS 16 – Leases
IFRS 16 Leases is effective from 1 January 2019. A project has been undertaken to determine the impact of IFRS 16. The project has assessed lease
contracts (excluding short-term and immaterial leases) from across all the Group’s business units. The Group has adopted the modified retrospective
approach and will recognise the cumulative effect of applying IFRS 16 at the 1 January 2019 transitional date; the prior period will not be restated.
The table below sets out the current estimated impact to the 1 January 2019 balance sheet:
Leased assets – Right of use asset
Lease liability
Lease accruals
Onerous lease provisions
Expected net assets adjustment
Expected adjustment to retained earnings
31 December
2018
£m
Property
leases
adjustment
£m
Non-property
leases
adjustment
£m
1 January
2019
£m
–
–
(0.2)
(0.9)
420.8
161.7
31.1
(34.9)
0.2
0.9
(2.7)
(2.7)
1.5
(1.5)
–
–
–
–
32.6
(36.4)
–
–
418.1
159.0
Further work will be undertaken in early 2019 to finalise this opening balance sheet determination.
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38 IFRS 16 – Leases continued
Under IFRS 16, operating leases that are longer than 12 months must be recognised on the balance sheet and amortised over the life of the lease.
The impact of IFRS 16 on the accounts will be as follows:
(i) Balance sheet – recognise right-of-use assets and lease liabilities in the consolidated balance sheet for all leases >1yr or where the asset value is
>£3.5k. Leases that do not meet this criteria will be expensed on a straight-line basis. The asset and liability are initially measured at the present
value of all future lease payments.
(ii) Income statement – previous lease charges (recognised in gross profit or indirect costs) are replaced with depreciation on the right-of-use asset
and interest on the lease liability in the consolidated income statement.
(iii) Cash flow statement – the cash impact of the lease is split between the principal and interest, with net cash flow remaining unchanged to
pre-IFRS 16 cash flow.
Onerous lease provisions are offset against the right-of-use asset and will be replaced by an annual assessment of impairment on the right-of-use
assets in accordance with IAS 36. Additionally, under IFRS 16, lease incentives (e.g. rent free periods) will be recognised as part of the measurement
of the right-of-use asset and lease liability rather than recognised as a separate liability as under IAS 17.
The Group will make use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease.
Therefore, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to apply to those leases entered or modified before
1 January 2019. For leases entered into or modified on or after 1 January 2019, a contract will be determined as a lease if the Group has control of
the leased asset, as defined by IFRS 16. The following practical expedients, permitted by IFRS 16, have also been utilised:
• The application of a single discount rate to a portfolio of similar characteristic leases;
• Reliance on prior IAS 37 assessments of onerous leases as an alternative to performing an impairment review on transition;
• The use of hindsight: for property leases with historic extension option exercise dates, hindsight was applied such that the initial lease period
also includes the extension period. Similarly, if the exercise date for a termination option had already passed by the transition date, it was
assumed that the termination option was not exercised.
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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:
• None.
The following standards were also adopted in the current year and have
had the impact as set out below:
IFRS 9 Financial Instruments.
•
IFRS 15 Revenue from contracts with customers.
•
The impact of IFRS 15 on the accounts has been set out in note 37. The
adoption of IFRS 9 has not had a financial impact. Further detail is
provided on page 136.
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:
•
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 16 Leases – The new standard requires all leases to be
recognised on the balance sheet with the exception of short-term
and immaterial leases. IFRS 16 is effective from 1 January 2019. A
project has been undertaken to determine the impact of IFRS 16.
The key findings and determination of the impact are set out in note
38. The Group will recognise the cumulative effect of applying IFRS
16 at the 1 January 2019 transitional date. The prior period will not
be restated.
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 42.
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 or, when applicable, the cost on initial recognition of an
investment in an associate or jointly controlled entity.
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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 and, in 2018, included consideration
of the potential impacts of Brexit. 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. There are various proceedings in relation to that
contract and its termination. There remains significant uncertainty
regarding the likely outcome of these proceedings. 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 IFRS 15 Revenue from contracts with customers. This revenue is
derived from a large number of individual contracts across the Group.
Revenue and profit on such contracts are recognised in relation to
estimates of the stage of completion of the contract performance
obligation activity at the balance sheet date. Refer to our accounting
policies on page 133 for more details on determining performance
obligations. Revenue and profit are calculated by reference to reliable
estimates of transaction price and total expected costs. The transaction
price is allocated to each performance obligation based on relative
standalone selling prices of all items in the contract. Refer to our
accounting policies on page 133 for more details on allocating the
transaction price. The revenue and costs of the contract are then
applied to each individual performance obligation, which requires
judgement by the Group. 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 and the allocation of costs and
revenue to each performance obligation are 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.
The transaction price is typically allocated to each performance
obligation on the basis of the relative stand-alone selling prices of each
distinct good or service (performance obligations) promised in the
contract. If a stand-alone selling price is not observable then an
estimate is calculated, which may use market data, a cost plus margin
approach or other reliable data available. Discounts are generally
allocated to all performance obligations based on the transaction price
applied to the performance obligation. Variable consideration (for
example discounts dependent on sales levels, returns, refunds, rebates
and other incentives) is analysed to determine if it should be applied
against one or more of the performance obligations based on the terms
of the consideration and the contract. The variable consideration
amount is estimated using an expected value method or applying the
most likely amount. The estimated amount of variable consideration is
included in the transaction price only to the extent that it is highly
probable that a significant reversal in revenue will take place. Therefore
this method is used to ensure the transaction price is constrained to the
amount that is highly probable to be received.
A warranty may represent a separate performance obligation if it is
distinct from the other elements of the contract (i.e. it can be sold
separately and provides additional goods and services beyond the
agreed-upon specifications), otherwise it is treated as a provision. If it is
a separate performance obligation then the revenue is recognised when
the control of the additional good or service under the warranty is
passed to the customer.
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.
In 2018, judgement has been applied with respect to determining how
to estimate the impact of GMP Equalisation as set out in note 30.
Details of the pension scheme estimates, assumptions and obligations
at 31 December 2018 are provided in note 30.
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Statement of accounting policies continued
IN RESPECT OF THE GROUP’S CONSOLIDATED FINANCIAL STATEMENTS
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 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
entity that is operated under the management of a Proxy Board is Ultra
Electronics Advanced Tactical Systems Inc. (“ATS”).
The Directors consider that the Group has control over the operating
and financial policies and results of this entity and therefore they are
consolidated in the Group consolidated accounts in accordance with
IFRS 10 Consolidated Financial Statements.
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the
acquisition method. The consideration transferred in a business
combination is measured at fair value, which is calculated as the sum of
the acquisition-date fair values of assets transferred by the Group,
liabilities incurred by the Group to the former owners of the acquiree
and the equity interest issued by the Group in exchange for control of
the acquiree. Acquisition-related costs are recognised in profit or loss as
incurred.
At the acquisition date, the identifiable assets acquired and the liabilities
assumed are recognised at their fair value at the acquisition date, except
that:
• deferred tax assets or liabilities and assets or liabilities related to
employee benefit arrangements are recognised and measured in
accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits
respectively; and
• assets (or disposal groups) that are classified as held for sale in
accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations are measured in accordance with that
standard.
Goodwill is measured as the excess of the sum of the consideration
transferred, the amount of any non-controlling interests in the acquiree,
and the fair value of the acquirer’s previously held equity interest in the
acquiree (if any) over the net of the acquisition-date amounts of the
identifiable assets acquired and the liabilities assumed. If, after
reassessment, the net of the acquisition-date amounts of the
identifiable assets acquired and liabilities assumed exceeds the sum of
the consideration transferred, the amount of any non-controlling
interests in the acquiree and the fair value of the acquirer’s previously
held interest in the acquiree (if any), the excess is recognised
immediately in profit or loss as a bargain purchase gain.
When the consideration transferred by the Group in a business
combination includes an asset or liability resulting from a contingent
consideration arrangement, the contingent consideration is measured at
its acquisition-date fair value and included as part of the consideration
transferred in a business combination. Changes in fair value of the
contingent consideration that qualify as measurement period
adjustments are adjusted retrospectively, with corresponding
adjustments against goodwill. Measurement period adjustments are
adjustments that arise from additional information obtained during the
“measurement period” (which cannot exceed one year from the
acquisition date) about facts and circumstances that existed at the
acquisition date.
The subsequent accounting for changes in the fair value of the
contingent consideration that do not qualify as measurement period
adjustments depends on how the contingent consideration is classified.
Contingent consideration that is classified as equity is not remeasured
at subsequent reporting dates and its subsequent settlement is
accounted for within equity. Contingent consideration that is classified
as an asset or a liability is remeasured at subsequent reporting dates in
accordance with IFRS 9, 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 are remeasured to their
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.
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Revenue recognition
IFRS 15 Revenue from contracts with customers was adopted on
1 January 2018. The Group has recognised the cumulative effect of
applying IFRS 15 at the 1 January 2018 transitional date. The prior
period has not been restated; the adjustment to opening retained
earnings of £(9.9)m at 1 January 2018 is reflected in the Consolidated
Statement of Changes in Equity. Refer to note 37 for details on the
adjustment to opening retained earnings. The revenue recognition
policy adopted from 1 January 2018 is as follows:
The Group recognises revenue from the sales of goods and from
long-term contracts. Revenue is measured based on the consideration
specified in a contract. Revenue is recognised either when the
performance obligation in the contract has been performed, i.e. “point
in time” recognition, or, “over time”, as control of the performance
obligation is transferred to the customer. Under a book-and-hold
agreement with a customer, the Group may have physical possession of
an asset that the customer controls, therefore the revenue is recognised
when the customer has control of the asset. The Group follows the
“five step” model as set out in IFRS 15 to ensure revenue is recognised
at the appropriate point whether over time or at a point in time; the five
steps are:
1. Identify the contract(s) with a customer.
2. Identify the performance obligations.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognise revenue as performance obligations are satisfied.
For each performance obligation, the Group determines if revenue will
be recognised over time or at a point in time.
Over time
Revenue that is recognised over time is determined by reference to the
stage of completion of the performance obligation. For each
performance obligation to be recognised over time, revenue and
attributable margin are calculated by reference to reliable estimates of
transaction price and total expected costs, after making suitable
allowances for technical and other risks, except in limited scenarios
where the proportion of costs incurred would not be representative of
the stage of completion. Revenue and associated margin are recognised
progressively as costs are incurred and as risks have been mitigated or
retired.
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. For contracts with
multiple activities or deliverables, management applies judgement to
consider whether those promised goods and services are: (i) distinct – to
be accounted for as separate performance obligations; (ii) not distinct
– to be combined with other promised goods or services until a bundle
is identified that is distinct; or (iii) part of a series of distinct goods and
services that are substantially the same and have the same pattern of
transfer to the customer.
The transaction price is allocated to each performance obligation based
on relative standalone selling prices of all items in the contract, this
could be based on list prices, external market evidence or where
individual tailored products are concerned, based on the estimated
expected costs to produce the item or deliver the services, plus a
reasonable margin to reflect the risk of delivering the product or
service. On complex contracts, judgement will be required to select
appropriate inputs and estimates when determining the standalone
selling price for each performance obligation.
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.
Point in time
If performance obligations do not meet the criteria to recognise revenue
over time, then revenue from the sale of goods or services is recognised
at a point in time. This is measured at the fair value of the consideration
received or receivable and represents amounts receivable for goods or
services provided in the normal course of business, net of discounts,
VAT and other sales related taxes. Revenue is normally recognised when
control of the goods or services have transferred to the customer. This
may be:
• at the point of physical delivery of goods and acceptance by the
customer;
• when the customer has legal title to the asset;
• when the customer has the significant risks and rewards of
ownership of the asset; or
• when customer specific acceptance criteria have been met e.g. when
product testing has been completed.
Contract assets and liabilities
Amounts payable to over time contract customers relates to payments
received from customers in relation to the contract prior to the work
being completed and the revenue recognised. Amounts receivable from
over time contract customers relates to work performed and revenue
recognised on agreed contracts prior to the customer being invoiced.
For contracts where revenue is recognised at a point in time, deferred
income recorded on the balance sheet represents payments received
from customers prior to the work being completed and the revenue
recognised, and accrued income recorded on the balance sheet
represents any revenue recognised on agreed contracts prior to the
customer being invoiced.
When a good or service provided is returned or to be refunded the
revenue is reversed equal to the amount originally recognised as
revenue for that good or service. Consideration of returns and refunds
is made when calculating the transaction price to be allocated to the
performance obligation. For more details on this variable consideration
refer to the Critical accounting judgements and key sources of
estimation uncertainty section on page 131.
The revenue recognition policy applied up to 31 December 2017 was as
follows:
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.
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Statement of accounting policies continued
IN RESPECT OF THE GROUP’S CONSOLIDATED FINANCIAL STATEMENTS
Revenue from long-term contracts is recognised in accordance with the
Group’s accounting policy on long-term contracts (see below).
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.
Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable.
Long-term contracts
The accounting policy applied up to 31 December 2017 for long-term
contracts is noted below. This was replaced by IFRS 15, which is
discussed above.
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.
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 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.
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.
Research and development
Expenditure on research activities is recognised as an expense in the
period in which it is incurred.
Property, plant and equipment
Property, plant and equipment is shown at original historical cost, net of
depreciation and any provision for impairment.
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.
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:
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.
Freehold buildings
40 to 50 years
Short leasehold improvements
over remaining period of lease
Plant and machinery
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.
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Leases continued
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.
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.
Amounts receivable from over time contract customers
For a contract recognised over time under IFRS 15 the control of the
product may be passed to the customer before the customer is
invoiced. At this point revenue is recognised and an asset is recorded on
the balance sheet as an amount receivable from over time contract
customers. The amount receivable from over time contract customers is
classified as a current asset when it is to be invoiced within twelve
months, otherwise it is recorded as a non-current asset. This asset is
transferred to trade receivables once the customer is invoiced, following
which cash is expected to be received per the agreed contractual terms.
Refer to note 19 for details on the average debtor days.
Amounts due to over time contract customers
For a contract recognised over time under IFRS 15, a payment may be
received from the customer before the control of the product is passed
to the customer. At this point a liability is recorded on the balance sheet
as an amount due to over time contract customers, which is recognised
net of any refunds expected to be paid. This liability is derecognised
when the control is passed to the customer and revenue can be
recorded. Amounts due to over time contract customers is recorded as
a current liability when the revenue is expected to be recognised within
the next 12 months, otherwise it is classified as a non-current liability.
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.
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Statement of accounting policies continued
IN RESPECT OF THE GROUP’S CONSOLIDATED FINANCIAL STATEMENTS
Retirement benefit costs continued
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.
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
IFRS 9
The Group applied IFRS 9 Financial Instruments from 1 January 2018.
IFRS 9 replaces the multiple classification and measurement models in
IAS 39 ‘Financial Instruments: Recognition and Measurement’.
Management have considered and assessed the expected credit loss
requirements applicable to financial assets under IFRS 9 and have
concluded that there is no material impact arising from the adoption of
an expected credit loss model. This is due to the nature of the Group’s
customer base which includes a significant proportion from government
agencies in major economies for which the expected credit loss is
immaterial. Furthermore, the adoption of IFRS 9, based on financial
instruments and hedging relationships as at the date of initial
application of IFRS 9 did not have a material impact on the Group
Consolidated Financial Statements. There is therefore no adjustment to
opening retained earnings arising from the adoption of IFRS 9 using the
modified retrospective approach.
The policy adopted from 1 January 2018 is as follows:
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.
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Derivative financial instruments continued
From 1 January 2019 the Group has revised its hedging strategy under
IFRS 9 to reduce income statement volatility from re-valuation of US
dollar assets and liabilities held on the UK balance sheet. Although the
Group has forward foreign exchange contracts in place to reduce the
currency exposure arising from the net US dollar cash generation of its
UK businesses, the balance sheet, which has carried increasing US dollar
denominated assets from certain long-term programmes, has not been
hedged prior to the conversion of those assets into cash. From
1 January 2019 the net investment hedge has been revised to eliminate
this volatility.
Classification and measurement
All financial instruments are initially measured at fair value plus or
minus, in the case of a financial asset or financial liability not at fair
value through profit or loss, transaction costs.
IFRS 9 divides all financial assets that were previously in the scope of
IAS 39 into two classifications – those measured at amortised cost and
those measured at fair value. Where assets are measured at fair value,
gains and losses are either recognised entirely in profit or loss (fair value
through profit or loss, FVTPL), or recognised in other comprehensive
income (fair value through other comprehensive income, FVTOCI).
A debt instrument is measured at amortised cost if: a) the objective is to
hold the financial asset for the collection of the contractual cash flows,
and b) the contractual cash flows under the instrument solely represent
payments of principal and interest. A debt instrument is measured at
FVTOCI if: a) the objective is to hold the financial asset both for the
collection of the contractual cash flows and selling financial assets, and
b) the contractual cash flows under the instrument solely represent
payments of principal and interest. All other debt instruments must be
measured at FVTPL.
Hedge accounting
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 IFRS 9. When hedge
accounting is used, the relevant hedging relationships will be classified
as fair value hedges, cash flow hedges or net investment hedges. In
order to qualify for hedge accounting, the hedge relationship must
meet the following effectiveness criteria at the beginning of each
hedged period:
• there is an economic relationship between the hedged item and the
hedging instrument;
• the effect of credit risk does not dominate the value changes that
result from that economic relationship; and
• the hedge ratio of the hedging relationship is the same as that
actually used in the economic hedge.
If a hedging relationship ceases to meet the hedge effectiveness
requirement relating to the hedge ratio but the risk management
objective for that designated hedging relationship remains the same,
the hedge ratio of the hedging relationship is adjusted so that it meets
the qualifying criteria.
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 permissible under IFRS 9.
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. 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.
Impairment
The amount of expected credit losses is updated at each reporting date.
For the year ended 31 December 2017, derivative financial instruments
were accounted for according to IAS 39; the 2017 accounting policy is
noted below.
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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Statement of accounting policies continued
IN RESPECT OF THE GROUP’S CONSOLIDATED FINANCIAL STATEMENTS
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. Significant legal
charges and expenses are also separately disclosed; these are the
charges arising from investigations and settlement of litigation that
are not in the normal course of business.
• One-off GMP Equalisation charge arising on defined benefit pension
scheme.
• Material costs or reversals arising from a significant restructuring of
the Group’s operations, such as the S3 programme and costs of
closure of product lines, businesses or facilities, 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-related 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 IFRS 9. This
creates volatility in the valuation of the outstanding instruments as
exchange rates move over time. This has a 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 underlying 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.
ROIC 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.
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 US dollar 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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Company balance sheet
31 DECEMBER 2018
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
Capital redemption reserve
Retained earnings brought forward
Profit and loss for year
Own shares
Shareholders’ funds
Ultra Electronics
Holdings plc
139
Note
2018
£’000
2017
£’000
39
40
613
748,244
511
815,144
748,857
815,655
41
5,187
5,187
11,352
11,352
43
(260,887)
(191,081)
(255,700)
(179,729)
493,157
(67,582)
635,926
(164,734)
425,575
471,192
3,574
201,033
314
141,683
81,552
(2,581)
3,887
200,911
–
352,681
(83,706)
(2,581)
425,575
471,192
44
46
47
47
47
47
47
The financial statements of Ultra Electronics Holdings plc, registered number 02830397, were approved by the Board of Directors and authorised
for issue on 6 March 2019.
On behalf of the Board,
S. PRYCE, Chief Executive Officer
A. SHARMA, Group Finance Director
The accompanying notes are an integral part of this balance sheet.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
140
Company statement of changes in equity
FOR THE YEAR ENDED 31 DECEMBER 2018
Share
premium
account
£’000
Capital
redemption
reserve
£’000
Profit and
loss account
£’000
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
Balance at 1 January 2018
Retained profit for the year
Total comprehensive income for the year
Issue of share capital
Equity-settled employee share schemes
Shares purchased in buy-back
Dividends paid
Share
capital
£’000
3,523
–
–
352
12
–
3,887
3,887
–
–
–
1
(314)
–
64,020
–
–
133,195
3,696
–
200,911
200,911
–
–
–
122
–
–
Balance at 31 December 2018
3,574
201,033
Own
shares
£’000
(2,581)
–
–
–
–
–
Total
£’000
451,920
(83,706)
(83,706)
133,547
4,390
(34,959)
386,958
(83,706)
(83,706)
–
682
(34,959)
268,975
(2,581)
471,192
268,975
81,552
81,552
–
1,493
(91,902)
(36,883)
(2,581)
–
471,192
81,552
–
–
–
–
–
81,552
–
1,616
(91,902)
(36,883)
223,235
(2,581)
425,575
–
–
–
–
–
–
–
–
–
–
–
–
314
–
314
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Notes to accounts – Company
FOR THE YEAR ENDED 31 DECEMBER 2018
39 Property, plant and equipment
Cost
At 1 January 2017
Disposals
At 1 January 2018
Additions
At 31 December 2018
Accumulated depreciation
At 1 January 2017
Charge
At 1 January 2018
Charge
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
Ultra Electronics
Holdings plc
141
Plant and
machinery
£’000
2,573
(518)
2,055
116
2,171
1,535
9
1,544
14
1,558
613
511
40 Investments
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 2018
Additions
Impairments
At 31 December 2018
The impairments arose following review of the recoverability of investments within the corporate Company structure.
41 Debtors
Amounts falling due within one year:
Amounts due from subsidiary undertakings
Deferred tax assets
Other receivables
Prepayments
Total
£’000
815,144
1,280
(68,180)
748,244
2018
£’000
2017
£’000
3,485
804
538
360
5,187
8,785
505
1,747
315
11,352
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
142
Notes to accounts – Company continued
31 DECEMBER 2018
42 Deferred tax
Movements in the deferred tax asset were as follows:
Beginning of year
Credit to the profit and loss account
End of year
The deferred tax balances are analysed as follows:
Other temporary differences relating to current assets and liabilities
Deferred tax asset
These balances are shown as follows:
Debtors: Amounts falling due within one year
2018
£’000
505
299
804
2018
£’000
804
804
2018
£’000
804
2017
£’000
30
475
505
2017
£’000
505
505
2017
£’000
505
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. At the balance sheet date the Company had deferred tax assets of £1.2m (2017: nil)
that have not been recognised as their recovery is uncertain.
43 Creditors: amounts falling due within one year
Bank loans and overdraft
Amounts owed to subsidiary undertakings
Other payables
Accruals
The bank loans are unsecured. Interest was predominantly charged at 0.96% (2017: 1.20%) over base or contracted rate.
44 Creditors: amounts falling due after more than one year
Borrowings
2018
£’000
2017
£’000
207,353
39,948
3,536
10,050
72,283
112,208
1,089
5,501
260,887
191,081
2018
£’000
2017
£’000
67,582
164,734
67,582
164,734
The financial risk management objectives and policies of the Company are managed at a Group level; further information is set out in note 22.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements 45 Borrowings
Borrowings fall due as analysed below:
Bank loans and overdraft
Amounts due in less than one year
Bank loans and overdrafts
Unsecured loan notes
Amounts due after more than one year
Bank loans
Unsecured loan notes
Ultra Electronics
Holdings plc
143
2018
£’000
2017
£’000
160,316
47,037
72,283
–
207,353
72,283
17,582
50,000
120,375
44,359
67,582
164,734
The loan notes are unsecured and due for repayment in 2019. Interest was charged at 3.11% (2017: 3.60%).
46 Called-up share capital
The movements are disclosed in note 26.
47 Equity reserve
The profit and loss account includes £65,400,000 (2017: £65,400,000) which is not distributable. A net foreign exchange loss of £12,063,000 was
taken to reserves in the year (2017: £23,707,000 gain). Further details in respect of dividends are presented in note 12 and in respect of share-based
payments in note 26.
The Company holds 235,247 own shares (2017: 235,245).
48 Related parties
Transactions with Corvid Holdings Limited are set out in note 33.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
144
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 47.
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.
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 42.
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 70−71.
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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
145
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 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 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 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 £3.6m, and a 1% reduction in forecast future
cash flows would increase the impairment charge by £5.9m.
Footnote
The narrative in some of this report includes two figures for
2017 revenue and underlying operating profit to present the
result as stated in the 2017 annual report, and the result as if
presented under IFRS 15. Refer to note 37. 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 138.
underlying operating profit is before the S3 programme,
amortisation of intangibles arising on acquisition,
impairment charges, acquisition and disposal related costs
net of contingent consideration adjustments, and significant
legal charges and expenses. IFRS operating profit was
£65.3m (2017: £61.5m).
underlying profit before tax is before the S3 programme,
amortisation of intangibles arising on acquisition,
impairment charges, fair value movements on derivatives
and the loss on closing out a foreign currency derivative
contract, defined benefit pension finance charges and GMP
equalisation, acquisition and disposal related costs net of
contingent consideration adjustments, loss on disposal, and
significant legal charges and expenses.
underlying tax is the tax charge on underlying profit before
tax. The underlying tax rate is underlying tax expressed as a
percentage of underlying profit before tax.
underlying operating cash flow is cash generated by
operations and dividends from associates, less net capital
expenditure, R&D, and excluding the cash outflows from the
S3 programme, acquisition and disposal related payments
and significant legal charges and expenses.
organic growth (of revenue, profit or orders) is the annual
rate of increase 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.
operating cash conversion is underlying operating cash
flow as a percentage of underlying operating profit.
total shareholder return is annual shareholder return
(capital growth plus dividends paid, assuming dividends
reinvested) over a rolling five-year period.
underlying operating margin is the underlying operating
profit as a percentage of revenue.
net debt comprises loans and overdrafts less cash and cash
equivalents.
net finance charges exclude fair value movements on
derivatives, defined benefit pension interest charges and
discount on provisions.
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 the S3
programme, amortisation of intangibles arising on
acquisition, impairment charges, fair value movements on
derivatives and the loss on closing out a foreign currency
derivative contract, defined benefit pension finance charges
and GMP equalisation, acquisition and disposal related costs
net of contingent consideration adjustments, loss on
disposal, significant legal charges and expenses and before
related taxation. Basic EPS 43.6p (2017: 66.2p).
ROIC 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.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
146
Shareholder information
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
Underlying operating cash flow2
Free cash flow before dividend payments, acquisitions and financing3
Net debt at year-end4
Underlying earnings per share (p)5
Dividend per share (p)
Average employee numbers
2014*
£m
2015*
£m
2016*
£m
2017*
£m
2018
£m
198.6
224.4
290.7
713.7
29.6
37.0
51.5
193.2
239.3
293.8
726.3
28.7
40.4
50.9
204.7
259.0
322.1
785.8
32.4
39.7
59.0
203.2
242.7
329.5
775.4
32.6
28.2
59.3
196.2
252.6
317.9
766.7
30.0
29.9
52.8
118.1
120.0
131.1
120.1
112.7
16.5%
16.5%
16.7%
15.5%
14.7%
21.5
6.5
83.1
52.8
(129.5)
123.1
44.3
4,787
34.8
25.0
81.3
48.4
(295.6)
123.9
46.1
4,843
67.6
58.3
120.4
86.0
(256.7)
134.6
47.8
4,466
60.6
48.9
116.5
65.3
(74.5)
116.7
49.6
4,172
42.6
32.4
89.3
67.6
(157.4)
109.5
51.6
4,119
1 Underlying operating profit is before the S3 programme, amortisation of intangibles arising on acquisition, impairment charges, acquisition and disposal related costs net of contingent
consideration adjustments, and significant legal charges and expenses.
2 Cash generated by operations and dividends from associates, less net capital expenditure, R&D, and excluding cash outflows from the S3 programme, acquisition and disposal related
payments and significant legal charges and expenses. See note 2 for reconciliation to cash generated by operations.
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 Underlying earnings per share is before the S3 programme, amortisation of intangibles arising on acquisition, impairment charges, fair value movements on derivatives and the loss on closing
out a foreign currency derivative contract, defined benefit pension finance charges and GMP equalisation, acquisition and disposal related costs net of contingent consideration adjustments,
loss on disposal, significant legal charges and expenses and before related taxation.
* Not prepared under IFRS 15.
Financial Calendar
6 March 2019
12 April 2019
3 May 2019
9 May 2019
Preliminary results announced
Preliminary record date
Annual General Meeting
Final Dividend payment date
6 August 2019
Interim Results announced
20 August 2019
Interim Record date
20 September 2019
Interim Dividend payment date
Annual General Meeting
All shareholders are invited to attend the Annual General Meeting on
3 May 2019, where they will have the opportunity to meet
with Directors, all of whom will attend the meeting, and to ask
questions. The notice of the meeting and accompanying papers
are expected to be sent to shareholders on 27 March 2019. Voting at
the Annual General Meeting is conducted by way of a show of
hands. Proxy votes lodged for each Annual General Meeting are
announced at the meeting and published on the Group’s website
(www.ultra-electronics.com).
Electronic communication with shareholders is preferred wherever
possible since this is both more efficient and environmentally friendly.
However, shareholders may opt to receive hard copy communications if
they wish.
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
147
Shareholder information continued
ULTRA’S ORGANISATIONAL STRUCTURE
Simon Pryce
Chief Executive Officer
Amitabh Sharma
Group Finance Director
Aerospace & Infrastructure
Graeme Stacey – MD
Communications & Security
Mike Baptist – MD
Maritime & Land
Thomas Link – Interim President
Chris Binsley
Corporate Marketing Director
Steve Izquierdo
Chief Human
Resources Officer
Louise Ruppel
General Counsel & Company
Secretary
Carlos Santiago
Executive Vice President
Commercial & Corporate
Affairs
William Terry
President, Ultra Electronics
Defense Inc.
Energy
Nick Gaines – President (US,UK)
3eTI
Dirk van der Vaart – President (US)
Precision Control Systems
Mike Clayton – MD (UK)
ATS
Tim Stanley – President (US)
CIS
Gavin Newport – MD (UK)
Forensic Technology
Brian Sinnott – President (Canada)
Herley
Dan Pikora – President (US)
S
P
S
Command & Sonar Systems
Mike Williams – MD (UK)
EMS
Pete Crawford – President (US)
S
Flightline Systems
S
Pete Crawford – Acting President (US)
Maritime Systems
Bernard Mills – President (Canada)
Ocean Systems
Rochelle Borden – President (US)
TCS
Iwan Jemczyk – President (Canada)
PMES
Michael Hawkins – MD (UK)
CORVID Protect
Andrew Nanson – MD (UK)
USSI
David Jost – President (US)
CORVID PayGate
Craig Steger-Lewis – MD (UK)
Avalon Systems
Doug Burd – MD (Aus)
S
S
P
S
Businesses operate under the US Proxy Board
Businesses operate under a US Special Security Agreement (SSA)
Contacts
Louise Ruppel
General Counsel and Company Secretary
Gabby Clinkard
Head of Investor Relations
investorrelations@ultra-electronics.com
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
Financial advisors
JPMorgan Cazenove Limited
25 Bank Street, Canary Wharf
London E14 5JP
Investec Bank plc
2 Gresham Street
London EC2V 7QP
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
Annual Report & Accounts 2018Strategic reportGovernance reportFinancial statements Ultra Electronics
Holdings plc
148
Business addresses
Aerospace & Infrastructure
Energy (Nuclear Control Systems)
Innovation House
Lancaster Road
Ferndown Industrial Estate
Wimborne, Dorset BH21 7SQ
England
Tel: +44 (0)1202 850450
www.ultra-ncs.com
Energy (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
Communications & Security
3eTI
9713 Key West Avenue
Suite 500
Rockville, Maryland 20850
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
Cote St-Luc, Québec H4W 2W8
Canada
Tel: +1 514 4894 247
www.ultra-forensictechnology.com
Herley
10 Sonar Drive
Woburn, Massachusetts 01801
USA
Tel: +1 781 729 9450
www.ultra-herley.com
TCS
5990 Côte de Liesse
Montreal, Québec H4T 1V7
Canada
Tel: +1 514 855 6363
www.ultra-tcs.com
Maritime & Land
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
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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
For more information:
www.ultra-electronics.com