15 April 2020
Ultra Electronics Holdings plc
("Ultra" or the "Company")
Publication of Annual Report, Sustainability Report and Notice of AGM
Further to the release of Ultra's preliminary results announcement on 9 March 2021, the Company's Annual Report and accounts for the year ended 31 December 2020 ("Annual Report and Accounts 2020"), 2020 Sustainability Report and Notice of Annual General Meeting ("AGM") 2021 have today been published on the Company's website: www.ultra.group.
Copies of the Annual Report and Accounts 2020, Notice of AGM 2021 and proxy form for the AGM will be posted to shareholders today and have been submitted to the National Storage Mechanism; https://data.fca.org.uk/#/nsm/nationalstoragemechanism where they will shortly be available for inspection.
The AGM of the Company will be held at 12.00 noon on 12 May 2021 at the Company's office: 4th Floor, 35 Portman Square, London W1H 6LR.
Given current Government restrictions on gatherings in relation to Covid-19, we are proposing to hold the AGM with the minimum attendance required to form a quorum, together with any other person whose attendance is necessary for the conduct of the meeting. A webcast of the AGM will be broadcast to shareholders who wish to follow the formal proceedings of the meeting. Shareholders are strongly encouraged to exercise their vote by submitting their proxies well in advance of the deadline.
The Company is taking these precautionary measures to safeguard its shareholders' and employees' health and make the AGM as safe and efficient as possible. Further details of how to register for, and access, the webcast and how to vote by proxy are contained in the Notice of AGM.
In compliance with DTR 6.3.5, the following information is extracted from the 2020 Annual Financial Report and should be read together with Ultra's Final Results announcement issued on 9 March 2019 which can be found at www.ultra.group. 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 Annual Report and Accounts 2020.
Principal risks and uncertainties
We manage risk to support our ONE Ultra strategy
The identification and management of risk is a core element of the way we operate in Ultra's businesses. We consider risk when we evaluate the market environment, assess business opportunities and review delivery of performance against objectives.
The Board has overall responsibility for ensuring an effective system of risk management, governance and internal controls. The Board reviews risk as part of its strategy review process and, as part of standard cadence in a year, reviews the Group's key and emerging risks, and the controls and indicators to manage them.
The risk management framework underpins Ultra's approach to managing risk effectively. The framework facilitates the proactive review and management of existing and emerging risks through the identification, measurement, control and reporting of risk that can undermine the business model, future performance, solvency or liquidity of the Group. As part of this, we:
· identify the causes and drivers of a risk and accountability for its management
· identify the potential consequences of each risk through analysis of likelihood and consequences, before and after the impact of specific controls
· analyse the speed to impact of risks to aid prioritisation, recognising that it is often the pace with which a risk crystallises that impairs a business's ability to mitigate and control it
· articulate the specific controls and warning indicators in place or being strengthened to manage and mitigate a risk
Day-to-day ownership of risk sits with business and functional management, under the regular review of the Executive Team to whom the Board have delegated principal responsibility for risk oversight. As Ultra implements its transformation programmes in 2021 and beyond, risk management and effective controls are key drivers in the development of our new structures, polices and processes as we transition to ONE Ultra.
Risk assurance
Ultra's management, Audit Committee and Board receive independent assurance on our key risks and controls through Internal Audit reviews which are outsourced and conducted by PwC. Outputs of the risk process are an input to the Internal Audit plan, focusing review activity on recognised priority risks. Twice-yearly financial control reviews are conducted across all five SBUs and global shared services, chaired by the CFO with Internal Audit represented, to provide additional assurance, oversight and accountability for the management of risk and controls.
Risk appetite statement
The Group's objective to generate long-term sustainable value for all stakeholders is reflected in Ultra's appetite for risk, which is reviewed annually. 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 risks, provided that appropriate levels of mitigating controls are in place. Where safety may be compromised, Ultra has zero tolerance. The Executive Team and Board assessed specific risk appetite in relation to Ultra's key and principal risks in 2020, assessing appetite as risk tolerant (where greater risk can be effectively managed to deliver high return with established confidence), risk balanced (where additional investment in control is supported by the business case) or risk averse (where Ultra invests to minimise the risk threat, in areas such as compliance risks).
Principal risks
In line with developing guidance on risk reporting, we have focused our statement on principal risks to those that are current and/or particular to Ultra, either through the nature of our sector or business model, or because factors or circumstances have elevated more generic risks in Ultra's current business environment. In addition to the principal risks identified below, Ultra also actively manages risks assessed as a lower, but not to say insignificant, level. These potential risks are often common to listed businesses and include business interruption risks (where in 2020 Ultra demonstrated very effective management of the Covid-19 outbreak), talent retention and recruitment risks (which has also been reducing for Ultra as our ONE Ultra HR programmes roll-out) and health, safety and environment risks (which are seen as a priority for excellence rather than principal risk), which have been reported on externally in previous years.
SWOT Analysis
Strengths
· World-leading domain technology/capability
· Specialist sub-system engineering and design expertise
· Established customer relationships with opportunities for solution expansion and share gain
· Long-cycle, growing defence markets
· Business model generates high returns on capital
· Asset-light, high capital return model with broad technology, platform and product exposure
· Strong cash generation for re-investment
Weaknesses
· Historically no value-focused strategy
· Inconsistent execution and delivery
· Resistance to change
· Disaggregated systems and processes
· Historic lack of investment discipline
· Underinvestment in people, processes and infrastructure
· Limited collaboration
· Technology silos and duplication/inefficient resource usage
Opportunities
· Core domain expertise in customer priority areas for 'five-eyes' markets
· Greater strategic engagement potential for improved execution
· ONE Ultra and parenting advantage efficiency and effectiveness
· Values differentiation
Threats
· Political change/defence spending reduction from Covid-19 governmental refinancing
· Increasing regulation/compliance burden
· Failure to deliver necessary wide-scale change for transformation
· Long-term contract bid error
· Execution error on large, long-term programmes
· Compliance failure
· Unknown impact on businesses of global environment change
| Defence Sector Cycle Risk | Increased risk (medium term) |
| Defence spending by governments can fluctuate cyclically depending on economic conditions, change of government policy or political considerations, budgetary constraints, and changes to national and global threats. Risk appetite: Tolerant Potential impact Lower defence spending by the Group's major customers could have a material impact on the Group's future results and financial conditions. Mitigation commentary/examples · The Group is geographically spread across the USA, UK and international defence markets · We develop and maintain strong relationships with customers, governments and stakeholders differentiating through our domain expertise · Long-term nature of specialist defence contracts · We seek to position the Group to access the higher-growth parts of the market Comment, changes and outlook As the key inherent risk for our chosen sector, there is a higher risk tolerance recognising that we are well placed to manage risks which are at the core of what we do. Growth in global tensions and instability is raising defence priorities for national governments in our key markets in the short term. This may be offset in the medium term if, following the economic impact of Covid-19, defence spending is impacted for a period in key markets as governments seek to reduce Covid-19-driven deficits. This drives an increasing potential risk assessment beyond 2022. | |
| Geopolitical Risk | Reducing risk |
| With our focus on the defence sector, geopolitical factors could lead to an unfavourable business climate for defence spending or restrict the access of overseas suppliers to national markets. Risk appetite: Balanced Potential impact Political change in a major end-customer country such as the USA could impact revenue flows from cancellation of defence programmes or reduction in future programmes for political reasons, or a change of supplier selection conditions on defence contracts. Mitigation commentary/examples · The Group proactively monitors the political environments affecting our key markets · We develop and maintain strong relationships with customers, governments and stakeholders differentiating through our domain expertise · Diversified operations with local manufacturing in our target market countries · Diversification of end customers in multiple countries · Long-term nature of defence contracts and domain expertise Comment, changes and outlook Balanced risk appetite, with additional controls investment where justified. As well as carrying elements of risk, changes in the geopolitical and threat environment for our 'five-eyes' markets can also carry opportunity as our key customers draw on areas of our domain expertise in their response to a changing threat environment. Uncertainty has reduced with the finalisation of the US election, and while Brexit was not a key risk for Ultra, agreement on arrangements for relevant trading areas post Brexit has improved the ability to plan for and manage future opportunities. | |
| Bid and Contract Risk | Reducing risk |
| Across Ultra's businesses, a major proportion of revenues are generated through contracts which are long term in nature and subject to complex terms and conditions. Contracts include commitments relating to pricing, quality and safety, technical and customer requirements, and product servicing. Risk appetite: Balanced Potential impact A failure to fully recognise contract risks or to anticipate technical challenges and estimate costs accurately or other incorrect assumptions at the outset of a contract can lead to unexpected liabilities, increased outturn costs and reduced profitability. Mitigation commentary/examples · Business bid and contract management processes · Legal reviews of contract terms and conditions · Contract-specific risk assessments · Clear delegation of authority/escalation criteria for approvals · Reviews of contract performance Comment, changes and outlook Balanced risk appetite, with additional controls investment where justified. Our investment in enhancing our internal professional legal team continued in 2020, improving our capability to tailor contract risk reviews to Ultra's risk appetite compared with more generic external legal reviews. The implementation of standardised bid and contract policies and processes, and the pooling of capability and the alignment of similar businesses under the ONE Ultra banner are in place and will bed in during 2021. | |
| Programme Risk | Reducing risk |
| Many of the programmes entered into by Ultra are complex and long term and are subject to various performance conditions which must be adhered to throughout the programme. Poor management of such programmes brings risks related to: · delays in product development or launch schedules · failure to meet customer specifications or predict technical problems · inability to deliver to contract terms · inability to manage programme costs or forecast accurately
Risk appetite: Risk averse Potential impact Ineffective programme management could result in damage to customer relationships or cancellation of a contract resulting in claims for loss and reputational damage. Poor performance against a contract could also undermine the Group's ability to win future contracts and could result in cost overruns and significantly lower returns than expected. Mitigation commentary/examples · Strengthened programme capability and processes · Newly implemented ONE Ultra programme management policy in 2020, replacing local diverse business policies · Formal review and escalation framework · Review and approval of key programmes by SBU management teams, the Executive Team and the Board · 'Lessons learned' and best practice sharing · Inspection of programmes by customers
Changes and outlook Focus on investment in strong controls for a key enabling process; risk averse. The standardisation of programme management policies and tools was rolled out in 2020 as part of the ONE Ultra implementation, standardising our approach to programme management and its control framework. Additionally, the business reorganisation effective from the start of 2021 brings alignment of specialist resources and simplified management and oversight. We also have a successful programme of supporting our Programme Managers to become accredited by the Project Management Institute. | |
| Delivering Change | Increased risk (short term) |
| The ability to continuously improve and transform our business in line with our ONE Ultra strategy is vital for business success. Effective delivery of major or concurrent change programmes with minimal effect on business as usual is a key component of Ultra's drive to deliver our strategy and support operational improvement. Risk appetite: Balanced Potential impact Transformation programmes may not be delivered on time, or costs may increase. The expected benefits of change from programmes may not be realised. Under-resourcing may lead to management distraction from business as usual. Structural change may impact employee morale. Mitigation commentary/examples · Change programme management policy, procedures and controls · Executive sponsorship of all major programmes · Bi-weekly Executive Team review of transformation programmes · Investment in dedicated professional transformation resource and leadership Changes and outlook Balanced risk appetite, with additional controls investment where justified; increased current investment reflects scale and scope of current change activity. We have strengthened capability around change management, together with our methodology for measuring the amount of change required by each project and the change management initiatives required to effect the change. | |
| Security and Cyber Risks | Increased risk |
| As a key partner to our customers, Ultra has custody of classified information. The incidence and sophistication of cyber crimes continue to rise. The effective management and protection of information and Ultra's security and IT systems are necessary to prevent the compromise of secure information, intellectual property or our people's personal data. Risk appetite: Risk averse Potential impact Reputational damage to Ultra as a highly regarded partner in the event of compromise of classified information or intellectual property. This could lead to loss of business opportunities with removal of government approval to work on classified programmes. Regulatory action or civil/contractual penalties could result from loss of personal data, a partner's intellectual property or classified information. Mitigation commentary/examples · Consolidation of CORVID Protect as specialist internal cyber security resource · As a business-to-business provider with minimal personal data, Ultra's conventional cyber risk profile for personal data loss is naturally mitigated · Intellectual property is addressed in the bid and contract management process, and protected through information security policies, procedures and systems · Security clearance processes are in place for all employees · Established physical security processes are implemented at all sites · US defence business governance framework in place using US Social Security Administration and Proxy Board vehicles · Independent security reviews by defence departments and customers Changes and outlook Focus on investment in strong controls for a key enabling capability; risk averse. The focus of CORVID Protect as an internal professional specialist cyber resource was instrumental in enabling secure, effective remote-working capabilities during Covid-19, enabling 60% or more of staff to work securely from home at peak lockdown periods, despite an increased general business cyber risk environment. Investment in and implementation of improved, standardised secure systems through 2021 is a key enabler of the ONE Ultra strategy. This will drive mitigation of the increasing levels of risk in the global cyber environment. | |
| Governance, Compliance & Internal Controls | Reducing risk |
| In common with other businesses in our sector, the Group operates in a highly regulated environment across multiple jurisdictions and is subject to a range of regulatory, governance and compliance requirements. Retrospective compliance changes (for example, tax) or a failure in the framework of internal controls could result in penalties, liabilities or reputational damage. Risk appetite: Risk averse Potential impact Key impacts from specific relevant controls/events, all of which carry the potential for reputational damage are: · Financial rules and standards compliance - failure to comply in key areas such as revenue recognition could result in adjustments that undermine results · Breach of defence contractor financial compliance rules in a key market such as the USA or UK, could lead to financial/participation penalties and/or reputational damage · Trade compliance - failure to comply with export controls or defence-specific requirements such as US International Traffic in Arms Regulations controls could result in regulatory action and penalties · Anti-bribery and corruption (ABC) - failure to comply with multiple jurisdiction rules in relation to public sector contracts directly or through intermediaries could result in regulatory action and penalties Mitigation commentary/examples · Corporate and business-level controls policies, procedures and systems · Internal expert corporate teams in key functional areas · IT system controls · Controls and compliance reviews by management and independent providers · Specialist advisers Changes and outlook As an international defence supplier, investment in strong compliance controls are key to our standing as a responsible and reputable supplier to governments; risk averse. 2020 has seen continued investment in professional roles and capabilities for guidance and oversight in our key industry compliance areas including trade compliance, defence contractor compliance and ABC. While recognising the increasing demands of the compliance environment, the assessment of the net risk as reducing reflects the marked improvements in our compliance controls framework. New ONE Ultra processes and systems in finance and key compliance areas, with strengthened and hard-wired controls, will continue to roll out in 2021 as part of our transformation programmes. | |
| Pensions | No significant change |
| 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. Risk appetite: Risk averse Potential impact Any increase in the deficit may require additional cash contributions and thereby reduce the available cash for the Group. Mitigation commentary/examples · 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 actively consider pension risk reduction activities such as liability matching, lower risk investment strategy and hedging · The Board undertakes regular pension strategy reviews Changes and outlook Investment in the management of pension risk takes account of prudent specialist advice; risk averse. Periodic professional review and reports from advisers as the risk environment changes are in place as indicators for this legacy cash risk. The pension scheme has continued to increase the hedging of its liabilities and the de-risking of its investment strategy. There is no change to this risk. | |
HEALTH, SAFETY AND ENVIRONMENT RISKS AND OPPORTUNITIES
ONE Ultra ONE Safety:
Think Safe, Act Safe, be Ultra Safe
As the Group transforms itself to ONE Ultra, our approach to the management of health and safety risks is moving from a localised model to one with ONE Ultra ONE Safety at its heart. Programmes, developed through consultation with our businesses in 2020, will roll out in 2021 to align our management of safety risk with a unified management system and global toolset. While Ultra's operating environment is relatively benign from a health and safety perspective, it is our aim to seize the opportunity to develop a true safety culture, aligned to our ASPIRE values, where every individual recognises their ownership, and the contribution they can make to achieving excellence in safety, reflecting Ultra's zero tolerance to safety risk.
Global Environment Risk
Ultra recognises that a compliance-focused approach to environmental risks is neither appropriate nor will it fit with our CSR priorities. In line with our newly launched ASPIRE values, environmental priorities are a key pillar of our sustainability plan to be the best environmental custodians we can be, as part of an opportunity to differentiate ourselves for all our stakeholders through our values as well as wider business capability and performance. While environmental factors are not yet recognised as a current principal risk, they feature on our wider risk radar. We see here an opportunity for excellence and anticipate that they will become an emergent key risk in coming years as we commit to environmental targets and support global initiatives on climate change and environmental improvement.
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 page 92.
|
| 2020 £m | 2019 £m |
| Short-term employee benefits | 5.5 | 5.1 |
| Post-employment benefits | 0.3 | 0.4 |
| Termination benefits | 0.4 | 0.2 |
| Share-based payments | 3.1 | 4.3 |
|
| 9.3 | 10.0 |
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 2020 was £85.8m (2019: £154.8m) including £37.7m (2019: £41.2m) of lease liability. The Group's committed lending facilities amount to £401.2m in total and comprise loan notes in issue to Pricoa of £50m and $70m, and a revolving credit facility (RCF) of £300m that is denominated in Sterling, US Dollars, Canadian Dollars, Australian Dollars or Euros. The RCF is provided by a group of eight international banks and, in certain acquisition scenarios, permits an additional £150m 'accordion' which is uncommitted and subject to lender consent. The Group also has access to £5.0m and $2.5m net overdrafts. The financing facilities are used for balance sheet and operational needs, including the funding of day-to-day working capital requirements. The maturity profile for the Group's committed lending facilities is as follows:
| Facility | Expiry |
| RCF £50m | November 2023 |
| RCF £250m | November 2024 |
| Pricoa £50m | October 2025 |
| Pricoa $40m | January 2026 |
| Pricoa $30m | January 2029 |
Though global macro-economic conditions remain uncertain with continued uncertainty arising from impacts of the Covid-19 pandemic (detail on the potential risks to the Group associated with this are set out on pages 55-57), the Group's ability to continue trading successfully in 2020 during the pandemic, 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.
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 UK Generally Accepted Accounting Practice (UK 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 not 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.group. Legislation in the UK 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 position, performance, business model and strategy
By order of the Board
Louise Ruppel
General Counsel and Company Secretary
Enquiries:
| Ultra Electronics Holdings plc |
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| Gabby Colley, Head of Investor Relations | 07891 206239 Investor.relations@ultra-electronics.com |
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| MHP Communications | 020 3128 8570 |
| Tim Rowntree / James Bavister / Pete Lambie |
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About Ultra:
Ultra provides application-engineered solutions in the key elements of mission critical and intelligent systems. Through innovative problem solving, using sustainable capabilities, and evolving technologies, we deliver outstanding solutions to our customers' most complex problems in defence, security, critical detection and control environments.
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