25th Apr 2018 07:01
25 April 2018
Ultra Electronics Holdings plc
("Ultra" or "the Group")
Dissemination Announcement
Ultra announces the dissemination of its Annual Financial Report for the year ended 31 December 2017. A preliminary announcement of the Group's results was made on 5 March 2018.
The Group's 2017 Annual Financial Report and the Notice of Annual General Meeting 2018 were published on Ultra's website www.ultra-electronics.com on 21 March 2018. The Annual General Meeting will be held at 10.00 a.m. on 27 April 2018 at Ultra Electronics, 417 Bridport Road, Greenford, Middlesex, UB6 8UA.
These documents are available for inspection on the National Storage Mechanism (NSM), found online at www.morningstar.co.uk/uk/NSM.
In compliance with DTR 6.3.5, the following information is extracted from the 2017 Annual Financial Report and should be read together with Ultra's Final Results announcement issued on 5 March 2018 which can be found at http://www.ultra-electronics.com/investors/ir-home.aspx. Together these constitute the information required to be communicated to the media in unedited full text through a Regulatory Information Service. This information is not a substitute for reading the full 2017 Annual Financial Report.
- Ends -
For further information contact:
Ultra Electronics Holdings plc
Cherise Trumper, Company Secretarial Assistant +44(0)20 8813 4313
Ultra Electronics Holdings plc
("Ultra" or "the Group")
RISKS AND UNCERTAINTIES
Risk 1. | Growth | Trend: No significant change |
Changes during 2017 Although the defence market has been challenging in recent years, there are strong indications of a return to growth, particularly in the US, as indicated by the Group's strong order book going into 2018. Political and economic circumstances in some of the Group's key markets mean that it is cautiously optimistic about any return to organic growth. The Company's focus in the year continued to be on its market-facing segment strategies, improving its planning for future political and economic developments in its key markets, and exploiting the anticipated market upturn. | ||
Description Ultra's strategic objective for year on year growth requires: the ability to respond to changing market dynamics; the capacity to win new business and deliver successfully against contracted customer requirements; the development of highly differentiated solutions to address customer needs; and the ability to select, execute and integrate acquisitions effectively. | Potential impact of failure: • Poor investment decisions leading to inadequate returns • Reduced business opportunity and loss of reputation, customers, market share, revenue and profit • Specialist capabilities eroded through commoditisation • Reduction in anticipated acquisition value through overpayment, non-delivery of synergies and/or economies of scale and senior management focus diverted away from delivering "business as usual". | Mitigations (examples): • The Group is offsetting challenges in the UK defence market by expanding in targeted overseas regions that exhibit long term growth characteristics • The market-facing segments enable Ultra to remain competitive and use the capabilities of its businesses to deliver enhanced solutions more effectively to its customers • Improving the capacity and capability of the Group's sales and marketing teams using the LAUNCH approach and providing training • Establishment and implementation of rigorous gate reviews of risk appetite for major opportunities so that acceptable margin levels and risk tolerances are maintained • The Board conducts a rigorous review of acquisition opportunities including commissioning third party market reports and due diligence. Post-acquisition reviews are performed on all acquisitions comprising integration effectiveness, operational performance compared to expectation and lessons learned • A working group reporting to the Executive Team has been established to evaluate the impact of recent geo-political events on Ultra. |
Risk 2. | Delivering change | Trend: No significant change |
Changes during 2017 The scale and complexity of change has increased as S3 initiatives and business consolidations take effect. S3 has adopted a multi-faceted and proactive communication strategy and recruited specialist skills to augment Group talent in key roles. | ||
Description Effective delivery of major change programmes with minimal effect on business as usual is a key component of Ultra's continual drive for operational improvement. | Potential impact of failure: • Expected benefits of change not realised • Significant increase in change programme costs • Senior management distraction from business as usual • Reduction in employee morale • Disruption of business performance. | Mitigations (examples): • An Executive Team sponsor is allocated to all major change programmes which are also monitored on a monthly basis by the Board • Recommendations arising from the deep dive review and external review conducted in 2017 are being considered for implementation • An S3 steering committee, chaired by the Group Finance Director, meets monthly to track progress against the plan • An S3 Communications Manager has been recruited with responsibility for implementing the communications strategy approved by the S3 steering committee |
Risk 3. | People and culture | Trend: No significant change |
Changes during 2017 Ultra's culture and how this is reflected across its businesses has been the subject of discussion at both the Board and Executive levels, especially in the last quarter of 2017. Talent and succession planning remained a focus for the Executive Team in 2017 and remains on the Board's agenda as an area of focus in 2018. | ||
Description Preserving Ultra's culture (underpinned by its behaviours of LEAP: leadership, entrepreneurship, audacity and paranoia) and attracting, developing and retaining the right people who have the domain expertise and who embrace Ultra's culture is critical to the Group's strategic objectives. | Potential impact of failure: • Not recruiting and retaining the right employees in the right roles would result in Ultra being unable to fulfil its contractual obligations and would lead to operational inefficiencies and loss of productivity • Staff morale could be impaired resulting in a rise in employee related issues (e.g. grievances and sickness) • Failure to maintain a strong ethical culture would increase the Group's exposure to legal and regulatory breaches. | Mitigations (examples): • Ultra continues to engage in a number of initiatives with local schools, colleges and universities to gain access to the best people for its apprenticeship and graduate recruitment programmes. This enables Ultra to grow a broad range of skills and capabilities and to remain successful at innovating to meet customers' needs • Ultra's people and their development are fundamental to Group success. Employee development needs form part of performance and development reviews and are aligned to employees' specific needs • Employee engagement and morale is measured through YOURviews surveys. The leadership teams in the businesses use the survey to address any areas of concern so that Ultra's people remain engaged and committed • Talent and succession planning has been, and will continue to be, a focus for the Board • The annual Organisation, Succession & Development Plan (OSDP) results in highpotential employees being identified and their development monitored.
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Risk 4. | Information management and security | Trend: No significant change |
Changes during 2017 The CORVID Protect and Ultra approach to security 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. As such, this risk was the subject of a deep dive review in 2017. | ||
Description The incidence and sophistication of cyber security crime continues to rise. The effective management and protection of information and Ultra's IT systems is necessary to prevent the loss of data and the disruption of operations. | Potential impact of failure: • Reduced product differentiation caused by loss of intellectual property • Reputational damage to Ultra as a highly regarded provider of secure data systems • Loss of business opportunity with removal of government approval to work on classified programmes • Disruption of business activity as systems are cleansed and restored | Mitigations (examples): • The Group's information security is provided through its continued investment in Ultra's Cyber Protection Group (part of CORVID Protect). It provides Group-wide monitoring, incident response and continued enhancement of Ultra's IT systems and processes • The Board is kept updated on how CORVID Protect secures Ultra's network, including protecting Ultra from phishing attacks • The Group's Information Security Policy is being updated to reflect GDPR • Recommendations arising from the deep dive review have been implemented • Intellectual property is addressed in the bid and contract management process and protected through information security • Security clearance processes are in place for all employees • Established physical security processes are implemented at all sites. |
Risk 5. | Supply chain | Trend: No significant change |
Changes during 2017 The level of risk remains unchanged in the year. | ||
Description The Group relies upon suppliers and subcontractors to deliver upon its customer commitments. Ultra's supply chain needs to be efficient to maintain margins and to be compliant with legislation. The Group's manufacturing facilities are exposed to natural catastrophe risks and the Group is exposed to social, economic, regulatory and political conditions in the countries in which it operates. | Potential impact of failure: • Failure to deliver against customer commitments • Reduced profit margins and increased contractual disputes and litigation • Loss of reputation and investor confidence. | Mitigations (examples): • Using the visibility created by S3 deliverables to consolidate the supply chain and to leverage the commercial scale of the Group • Building ongoing partnerships with strategic suppliers and managing major supplier risks and issues (including single source arrangements) through the bid management and contract management policies • Establishment of regional procurement councils to target the optimisation of Ultra's supply chain for Direct Procurement • The Board's commitment to compliance with the Modern Slavery Act 2015 is contained in the Anti-Slavery and Human Trafficking Statement (www.ultra-electronics.com/ investors/anti-slavery-and-humantrafficking-policy.aspx) • Business continuity and disaster recovery plans are in place • The Group has business interruption, property damage, professional indemnity and product liability insurance. |
Risk 6. | Governance and internal controls | Trend: No significant change |
Changes during 2017 Ultra does not consider that the level of risk has changed in the year even though the role of Chairman and Chief Executive is being by the Group's Executive Chairman until a new Chief Executive is appointed. This is due to the effectiveness of existing controls, ongoing mitigations and the broader perspective provided by the appointment of two new Non-Executive Directors in 2017. | ||
Description Maintaining corporate governance standards as well as an effective risk management and internal control system is critical to supporting the delivery of the Group's strategy. | Potential impact of failure: • Significant financial loss (e.g. fraud, theft, material errors) • Loss of reputation and investor confidence • Loss of business opportunity with removal of government approval to work on classified programmes. | Mitigations (examples): • The Group Operating Manual (GOM) and Risk Management Framework provides clear instructions on the Group's internal governance and controls • The businesses provide year end disclosures on the effectiveness of their accounting and internal control systems • Internal Audit conducts an audit of the Group's internal control system • The terms of reference for the Board and committees are reviewed and updated annually |
Risk 7. | Pensions | Trend: Decreased risk |
Changes during 2017 Following the closure of the pension scheme to future accruals in 2016, the pension scheme has increased the hedging of its liabilities. This risk has therefore reduced. | ||
Description The Group's UK defined benefit pension scheme needs to be managed to ensure it does not become a serious liability for the Group. There are a number of factors including investment returns, long-term interest rate and price inflation expectations, and anticipated members' longevity that can increase the liabilities of the scheme. | Potential impact of failure: • Any increase in the deficit may require additional cash contributions and thereby reduce the available cash for the Group. | Mitigations (examples): • Annual accounting and triennial pension valuations are in place and any issues that may arise are highlighted to the Board • The pension scheme deficit decreased during 2017 due to improved asset performance and following the closure of the Group's UK defined benefit pension scheme to future accrual in 2016 • The Pension Trustees and the Company actively consider pension risk reduction activities such as liability matching, dynamic de-risking, pension increase exchange and retirement transfer options • The Pension Trustees and the Company agreed to increased hedging of the scheme's liabilities • The Board undertakes regular Pension Strategy Reviews • Recommendations arising from the deep dive review conducted in 2017 have been implemented. |
Risk 8. | Legislation/regulation | Trend: Increased Risk |
Changes during 2017 The Company continues to take compliance very seriously and the Board and Executive Team strive to reinforce an ethical culture. For example, the Group provided additional targeted training to certain groups of employees on anti-bribery and managing agents. Ultra is proactively working towards GDPR compliance and has employed legal advisers to help with achieving compliance in this and other legislative and regulatory changes. The overall level of risk may increase due to various changes in legislation and regulation. | ||
Description The Group operates in a highly regulated environment across many jurisdictions and is subject to regulatory and legislative requirements. There is a risk that the Group may not always be in complete compliance with laws, regulations or permits. Export restrictions could become more arduous and factors outside of Ultra's control could result in the Group being unable to obtain or maintain necessary export licences. | Potential impact of failure: • Failure to comply with legislation and regulations could result in fines and penalties and/or the debarment of the Group from government contracts • Reduced access to export markets could have a material adverse effect on the Group's future revenue and profit • Loss of reputation and investor confidence. | Mitigations (examples): • The Group Operating Manual is well 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 • A project has been established to evaluate the impact of the GDPR and to ensure that Ultra is compliant with the regulation • External advice has been sought on the impact of recent changes to the US tax regime on Ultra. |
Risk 9. | Health, safety and environment | Trend: No significant change |
Changes during 2016 Ultra has strong HS&E processes and procedures. The Board has zero appetite for HS&E reportable incidents. The number of lost time accidents per 100,000 hours reduced in 2017 and the reportable/ recordable accident rate per employee remained unchanged. | ||
Description Ensuring high standards of health and safety of employees and visitors and maintaining commitment to minimise the environmental impact of activities is of paramount importance to the Company. | Potential impact of failure: • Incidents may occur which could result in harm to employees and visitors, the temporary shutdown of facilities or other business disruption • The Group may be exposed to regulatory action and financial loss • Loss of reputation and investor confidence. | Mitigations (examples): • The Board has zero appetite for HS&E risk and the Group's leadership is committed to ensuring that this remains a top priority. Any material incidents are reported to the Board along with a correction or mitigation plan • Near miss reporting has been introduced in order for Ultra to be proactive in identifying and taking action on early warning indicators to prevent serious injury or fatality • The Board undertakes an annual review of HS&E and the Executive Team reviews HS&E on a quarterly basis. Each business conducts an annual HS&E self-assessment in addition to a biannual external audit. |
RELATED PARTY TRANSACTIONS
Remuneration of key management personnel
The remuneration of key management personnel, which includes the Directors of the Group, is set out below in aggregate for each of the categories specified in IAS 24: Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration Report on pages 78-91.
2017 £'000 | 2016 £'000 | |
Short-term employee benefits | 3,428 | 4,628 |
Post-employment benefits | 425 | 410 |
Share-based payments | 2,592 | 1,042 |
6,445 | 6,080 |
Statement of going concern
Ultra's net debt at 31 December 2017 was £74.5m. The Group's committed banking facilities amount to £466.3m in total, together with a £5.0m and $10.0m overdraft. The Group's revolving credit facility of £300m is denominated in Sterling, US Dollars, Canadian Dollars, Australian Dollars or Euros. This facility was signed in November 2017, and replaces the previous £100m and £200m revolving credit facilities. The facility is provided by a group of six international banks and has a committed maturity of five years to November 2022, and may be extended to a maximum of seven years subject to lender consent. The facility agreement permits an additional £150m 'accordion' which is uncommitted and subject to lender consent and can be used in certain acquisition scenarios.
The Group also holds a $225m term loan which was established in May 2015. This loan, denominated in US Dollars, was drawn in full in August 2015 to complete the Herley acquisition. $60m is repayable in late 2018 and the loan expires in August 2019. The Group also has loan notes in issue to Pricoa which totalled $70m at 31 December 2017 (2016: $70m). $10m will be repaid on 14 July 2018 and the remaining $60m will be repaid on 25 January 2019. As well as being used to fund acquisitions, the financing facilities are also used for other balance sheet and operational needs, including the funding of dayto-day working capital requirements. The US Dollar borrowings also represent natural hedges against assets denominated in that currency. Details of how Ultra manages its liquidity risk can be found in note 22 - Financial Instruments and Financial Risk Management.
Though global macro-economic conditions remain uncertain, and there continues to be uncertainty over the future landscape due to Brexit, the long-term nature of Ultra's business and its positioning in attractive sectors of its markets particularly in defence and aerospace which are long-term in nature, taken together with the Group's forward order book, provide a satisfactory level of confidence in respect of trading in the year to come. The Directors have a reasonable expectation that the Group has adequate resources for a period of at least 12 months from the date of approval of the financial statements and have therefore assessed that the going concern basis of accounting is appropriate in preparing the financial statements and that there are no material uncertainties to disclose.
Directors' responsibilities statement
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the Group financial statements in accordance with IFRSs as adopted by the European Union and Article 4 of the International Accounting Standards Regulation (IAS) and have elected to prepare the Company's financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) including FRS 101. Under company law, the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs and of the profit or loss of the Company, as well as the undertakings included in the consolidation for that period.
In preparing the Company's financial statements, the Directors are required to:
• Select suitable accounting policies and then apply them consistently
• Make judgements and accounting estimates that are reasonable and prudent
• State whether applicable UK Accounting Standards have been followed subject to any material departures disclosed and explained in the financial statements
• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
• Properly select and apply accounting policies
• Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
• Provide additional disclosures, when compliance with the specific requirements in IFRS are insufficient, to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance
• Make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group's website (www.ultra-electronics.com). Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that, to the best of our knowledge, taken as a whole:
• The financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole
• The Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation, together with a description of the principal risks and uncertainties that they face
• The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
The Annual Report (including the Strategic Report and Directors' responsibilities statement) on pages 6-94 was approved by the Board on 5 March 2018 and signed on its behalf by:
Douglas Caster, Executive Chairman
Amitabh Sharma, Group Finance Director
About Ultra
Ultra Electronics is an internationally successful defence, security, transport and energy company with a long track record of development and growth. Ultra and Ultra's subsidiaries and subsidiary undertakings (the "Ultra Group") manage a portfolio of specialist capabilities generating innovative solutions to customer needs. Ultra applies electronic and software technologies in demanding and critical environments ranging from military applications, through safety-critical devices in aircraft, to nuclear controls and sensor measurement. These capabilities have seen the Ultra Group's highly-differentiated products contributing to a large number of platforms and programmes.
Ultra has world-leading positions in many of its specialist capabilities and, as an independent, non-threatening partner, is able to support all of the main prime contractors in its sectors. As a result of such positioning, Ultra's systems, equipment or services are often mission or safety-critical to the successful operation of the platform to which they contribute. In turn, this mission-criticality secures Ultra's positions for the long-term which underpins the superior financial performance of the Ultra Group.
Ultra offers support to its customers through the design, delivery and support phases of a programme. Ultra businesses have a high degree of operational autonomy where the local management teams are empowered to devise and implement competitive strategies that reflect their expertise in their specific niches. The Ultra Group has a small head office and executive team that provide to the individual businesses the same agile, responsive support that they provide to customers, as well as formulating Ultra's overarching, corporate strategy.
Across the Ultra Group's three divisions, Ultra operates in the following eight market segments:
· Aerospace · | · C2ISR |
· Land · | · Nuclear |
· Communications · | · Infrastructure · |
· Maritime · | · Underwater Warfare |
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