23rd Mar 2016 07:00
Embargoed until 0700 23 March 2016
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 2015. A preliminary announcement of the Group's results was made on 29 February 2016.
The Group's 2015 Annual Financial Report and the Notice of Annual General Meeting 2016 are published today on Ultra's website www.ultra-electronics.com. The Annual General Meeting will be held on 29 April 2016 at Ultra Electronics, 417 Bridport Road, Greenford, Middlesex, UB6 8UA.
These documents will shortly be available for inspection on the National Storage Mechanism (NSM), online at: www.hemscott.com/nsm.do.
In compliance with DTR 6.3.5, the following information is extracted from the 2015 Annual Financial Report and should be read together with Ultra's Final Results announcement issued on 29 February 2016 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 2015 Annual Financial Report.
Enquiries:
Rakesh Sharma, Chief Executive 020 8813 4307
Ami Sharma, Interim Group Finance Director
Susan McErlain, Corporate Affairs Director 07836 522 722
James White, MHP Communications 020 3128 8756
www.ultra-electronics.com
020 8813 4321
Ultra Electronics Holdings plc
("Ultra" or "the Group")
RISKS AND UNCERTAINTIE
Risk 01. Strategy and market environment Trend: No significant change | ||
Description Ultra's core markets continually change as government budgets come under fiscal strain and/or geopolitical events affect the Group's operations.
Understanding and effectively responding to these changing market dynamics is key to delivering future organic growth. | Potential impact · Reduced business opportunity through an inability to adapt our offerings and approach quickly enough · Inability to match the full range of customer requirements · Loss of market share | Mitigation (examples) · Clearly defined and consistently applied approach for setting strategies for each of the eight segments (see page 12) · Dedicated Regional Marketing Directors focused on creating local networks, understanding the market and culture/procurement regime · LAUNCH principles embedded to understand customers' requirements (see page 45) · Ultra has a diversified portfolio of businesses that mitigates exposure |
Risk 02. Contract win/delivery Trend: No significant change | ||
Description Underpinning the overall success of the Group is its ability to win new business and manage/ deliver against contracted customer commitments (on budget, on time and to the agreed quality).
| Potential impact · Customer dissatisfaction and reputational damage · Loss of future order book opportunities · Ultra may need to provide for unrecoverable additional costs incurred until the end of a programme · Contract disputes/litigation | Mitigation (examples) · The Group Operating Manual sets out the policies and procedures for major bids · The monthly review process of the Business Performance Reports provides oversight and challenge on the order book and delivery status of significant contracts · Commercial Directors support their Divisional Directors in reviewing major bids and assist collaboration across the divisions · A country risk assessment process has been implemented to evaluate jurisdictional contracting risks |
Risk 03. Delivering change Trend: Escalated to a principal risk | ||
Description Effective delivery of major change programmes with minimal effect on business as usual (BAU) is a key component of Ultra's continual programme of operational improvement.
The introduction of two major change programmes in the year (market-facing segment strategies (see page 12) and S3 (see page 5)) resulted in the escalation of this to a principal risk. | Potential impact · Identified benefits of change not realised · Significant increase in change programme costs · Senior management distraction from BAU · Reduction in employee morale | Mitigation (examples) · All major change programmes are monitored on a monthly basis by the Board · An Executive Team sponsor for all major change programmes · Recruitment of specialists in designing and delivering change programmes to support delivery · Employee communication and engagement strategies |
Risk 04. Acquisitions Trend: Escalated to a principal risk | ||
Description The Group continues to look at acquisitions to add capabilities, market access and critical mass. The effective selection, due diligence and/or integration of acquisitions is critical to making this a success.
The acquisition of the Electronic Products Division of Kratos Defense & Security Solutions was the largest the Group has done, which resulted in the escalation of this to a principal risk. | Potential impact · Destruction of value through overpayment for acquisitions · Non-delivery of synergies and/or economies of scale · Senior management focus diverted away from delivering BAU | Mitigation (examples) · The Group acquisition process and procedures are led by the M&A Director and include due diligence, the use of professional advisors and appropriate and enforceable representations and warranties · Detailed post-acquisition integration plans are in place and led by an Executive Team sponsor · Formal two and five-year post-acquisition reviews are undertaken by the Board · Medium-term integration milestones and plans are reported quarterly to the Executive Team |
Risk 05. Intellectual property/information security Trend: No significant change | ||
Description The Group's information systems, personnel and facilities are subject to security risks. The incidence and sophistication of cyber security crime is on the rise. Breach of security could cause controlled or critical data to be lost, made inaccessible, corrupted or be accessed by unauthorised users. | Potential impact · Reputational damage to Ultra as a highly regarded provider of secure data systems · Loss of business opportunity with removal of government approval to work on classified programmes · Reduced product differentiation with loss of intellectual property · Disruption to business activity as systems are cleansed and restored | Mitigation (examples) · Dedicated Cyber Protection Group (CPG) providing Group-wide monitoring, incident response and continued enhancement of Ultra's IT systems and processes · Security clearance process for all employees · The Group Information Security policy classifies all information assets · Established physical security processes implemented at all sites · Training provided on IP awareness, IP management and IP exploitation |
Risk 06. Innovation and development Trend: Increased risk | ||
Description Ultra must continue to distinguish itself from its competitors through product and service innovation/development. This needs to address changing customer preferences and deliver highly-differentiated solutions.
The market conditions throughout the year have continued to have a direct impact on the availability of customer funding for new product development. | Potential impact · Loss of key customers · Significant loss of revenue, profits and or market share · Ultra's portfolio of specialist capabilities is eroded through commoditisation | Mitigation (examples) · A culture that focusses on ensuring a deep understanding of customer need and delivering innovation · Market and competitor analysis to support technology and product roadmaps · Segment focussed R&D prioritisation to avoid duplication and maximise advantage |
Risk 07. People Trend: No significant change | ||
Description Attracting, developing and retaining the right people who embrace and sustain Ultra's culture, and who have the domain expertise is critical to delivering the Group's strategy and business plan.
| Potential impact · Ultra could lose key staff or capabilities and be unable to fulfil its contractual obligations · Reduction in staff morale results in a rise of employee related issues (e.g. grievances and sickness) · Talent within the business is not developed to its full potential | Mitigation (examples) · Clearly defined and implemented recruitment processes · Annual Organisation, Succession and Development Process · The Chief Executive meets high potential employees to assess performance, skills and competencies first-hand · Quarterly review by the Executive Team and annual review by the Nomination Committee of the succession planning and career progression of senior employees · Engagement with potential recruits at an early stage through links with schools and universities by offering apprenticeships, work placements and graduate training (see page 46) · Monitoring and reviewing salary and benefits surveys |
Risk 08. Culture Trend: Escalated to a principal risk | ||
Description The preservation of Ultra's culture (innovation, agility and accountability) as the Group expands through organic growth, natural staff turnover and acquisitions is a key driver for future success.
In 2015, the Group completed its largest acquisition (Ultra Electronics Herley); introduced a new market segment structure; and launched S3. Preserving Ultra's culture in light of this has resulted in the escalation of this to a principal risk. | Potential impact · Reduction in the quality and consistency of service delivery to customers · Reduction in staff morale results in a rise of employee related issues (e.g. grievances and sickness) · Loss of high potential employees | Mitigation (examples) · Delivery and follow-up analysis of the YOURviews employee survey (which is reviewed annually by the Board) · Implementation of LEAP and LAUNCH behaviours across the Group · Group culture expectations is a key part of the HR induction process · Culture transition requirements are included as part of the formal integration plans for all new acquisitions |
Risk 09. Supply chain Trend: Escalated to a principal risk | ||
Description The Group places significant reliance on key suppliers/sub-contractors for the delivery of its customer commitments and therefore, there is a need to ensure the continuing effectiveness of the supply chain. The Group's manufacturing facilities are exposed to natural catastrophe risks and the Group is affected by the social, economic, regulatory and political conditions in the countries in which it operates.
Continued funding pressures on US and UK defence procurement programmes has led to increasing demands for improved efficiency in the supply chain. This has resulted in the escalation of this to a principal risk. | Potential impact · Failure to deliver against customer commitments · Significant product quality defect | Mitigation (examples) · Pre-contract audits of key suppliers and sub-contractors and continuing review of their performance · Business continuity and disaster recovery plans are in place and tested · Single-source supplier risks are identified through risk management process and, where possible, key materials or components are dual-sourced · The Group has business interruption, property damage and product liability insurance |
Risk 10. Legislation/regulation Trend: No significant change | ||
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. | Potential impact · Debarment from government contracts · Regulatory fines and/or penalties · Legal disputes · Reputational damage
| Mitigation (examples) · Implementation of the Group Operating Manual that sets out policies and procedures for legislative and regulatory requirements and compliance training · Monthly compliance reporting · Ethics Overview Committee (see page 49) · Effective whistle blowing procedures (EthicsPoint) (see page 49) |
Risk 11. Governance and internal control Trend: Escalated to a principal risk | ||
Description Maintaining corporate governance standards and an effective and efficient risk management and internal control system is critical to supporting the delivery of the Group strategy.
As a result of the re-fresh of the principal risks in 2015, governance and internal control has been separated out from the legislation/regulation risk to provide greater granularity and to reflect the continued focus of the Board in this area. This has resulted in the escalation of this to a principal risk. | Potential impact · Significant financial loss (e.g. fraud, theft, material errors) · Loss of investor confidence · Loss of business opportunity with removal of government approval to work on classified programmes
| Mitigation (examples) · Implementation of the Group Operating Manual as the overall policy and procedures framework · Effective internal controls and Risk Management Framework · Year end disclosures by the businesses on the effectiveness of accounting and internal control systems · Terms of reference for Board and Committees are reviewed and updated annually
|
Risk 12. Health, safety and environment Trend: Escalated to a principal risk | ||
Description A continued focus on: ensuring high standards of health and safety of employees and visitors; and maintaining our commitment to minimise the environmental impact of our activities is of paramount importance to support the achievement of Ultra's business objectives.
As a result of the refresh of the principal risks in 2015, health, safety and environment has been separated out from the legislation/regulation risk to provide greater granularity and to reflect the continued focus of the Board in this area (see page 50). This has resulted in the escalation of this to a principal risk. | Potential impact · Harm to people's well-being · Serious business interruption · Reputational damage
| Mitigation (examples) · Annual self-assessment of health, safety and environment by each business and bi-annual external health, safety and environment audit for each business · Quarterly review of health, safety and environment by the Executive Team and annual review by the Board
|
Risk 13. Pensions Trend: Decreased risk | ||
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.
The planned closure of the Group's UK defined benefit pension scheme will contribute to reducing the overall risk exposure (see page 26). | Potential impact · Any increase in the deficit may require additional cash contributions and therefore reduce the available cash for the Group
| Mitigation (examples) · The Group's UK defined benefit pension scheme is closed to new members · Formal annual reviews of the Group pension strategy by the Board · Annual accounting and triennial valuation processes in order to highlight issues to the Board as they emerge · Appointment of Willis Towers Watson as the Group's pension strategy advisors
|
Risk 14. Treasury and tax Trend: No significant change | ||
Description Operating across a number of countries adds complexity to managing currency exchange rate and interest rate fluctuations that can directly impact on Ultra's business performance.
As for all companies, Ultra is exposed to changing tax legislation in the territories in which it operates including as an international business, changes that may arise due to local legislation arising from the OECD's current Base Erosion and Profit Shifting project.
| Potential impact · Ultra's revenue and earnings could be adversely impacted by the weakening of a currency in which it generates sales · The impact of foreign exchange could either be through translation of the balance sheets and profits of foreign operations or UK businesses transacting in a foreign currency
| Mitigation (examples) · The translation impact cannot be mitigated; however, the Group Finance Director ensures that analysts and investors are aware of the impact · Transaction impact is mitigated through the Treasury policy of hedging forecast cash flows and, where possible, through ensuring that contracts provide protection against exchange movements, and cost and revenue currencies are matched · Ultra is committed to complying fully with the laws in the countries in which it operates from a tax perspective. It seeks to achieve a competitive tax rate by maintaining established financing structures where appropriate. We manage these risks by monitoring international developments, participating in pro-legislative consultations where appropriate and adapting our approach where necessary and practical |
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 75 to 78.
| 2015 | 2014 |
| £'000 | £'000 |
Short-term employee benefits | 4,927 | 3,241 |
Post-employment benefits | 422 | 423 |
Share-based payments | 1,016 | 905 |
| 6,365 | 4,569 |
Transactions with associate
At 31 December 2015, a loan of £nil (2014: £2,428,000) was due from Al Shaheen Adventure LLC (ASA), the Group's 49% equity-accounted investment (see note 17).
A small amount of trading also occurs with ASA, in the normal course of business and on an arm's length basis. Balances are settled on normal trade terms and the amounts outstanding at year end were insignificant.
STATEMENT OF GOING CONCERN
Ultra's committed banking facilities amount to £451.8m in total, together with a £15.0m overdraft. They were established in three tranches.
The first tranche comprises £100m of revolving credit, denominated in Sterling, US Dollars, Canadian Dollars, Australian Dollars or Euros. This facility was signed in December 2012, amended and extended in July 2015 and expires in August 2019. The facility is provided by a group of five banks.
The second tranche provides a further £200m of revolving credit in the same currencies. This was signed in August 2014 with seven banks and expires in August 2019. Both facilities have the same covenants.
The third tranche, agreed in May 2015, is a $225m term loan with a group of four banks from our existing lending group. This loan, denominated in US Dollars, was drawn in full in August 2015 to complete the Herley acquisition. The covenants match the revolving credit facilities.
The Group has a "shelf" facility with Pricoa. This agreement gives the Group access to the US private placement market on a bilateral basis. The facility is non-committed but is for up to $195m. At the year-end $70m of loan notes had been issued, which mature in 2018 and 2019.
As well as being used to fund acquisitions, the financing facilities are also used for other balance sheet and operational needs, including the funding of day-to-day working capital requirements. The US Dollar borrowings also represent natural hedges against assets denominated in that currency. Details of how Ultra manages its liquidity risk can be found in note 23 - Financial Instruments and Financial Risk Management.
Though global macro-economic conditions remain uncertain, the long-term nature of Ultra's business and its positioning in attractive sectors of its markets, taken together with the Group's forward order book, provide a satisfactory level of confidence in respect of trading in the year to come.
The Directors have a reasonable expectation that 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 judgments and accounting estimates that are reasonable and prudent
• State whether applicable UK Accounting Standards have been followed subject to any material departures disclosed and explained in the financial statements
• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
• Properly select and apply accounting policies
• Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
• Provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance
• Make an assessment of the Company's ability to continue as a going concern
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on 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 1 to 83 was approved by the Board on 26 February 2016 and signed on its behalf by:
Rakesh Sharma, Chief Executive
Mary Waldner, Group Finance Director
Further information about Ultra:
Ultra Electronics is a group of businesses which manage a portfolio of specialist capabilities, generating highly differentiated solutions and products in the defence & aerospace, security & cyber, transport and energy markets by applying electronic and software technologies in demanding and critical environments to meet customer needs
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 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 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 Group's three divisions, Ultra operates in the following eight market segments:
· Aerospace | · Land |
· Communications | · Maritime |
· C2ISR | · Nuclear |
· Infrastructure | · Underwater Warfare |
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