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Ultra Electronics Holdings plc
Annual Report and Accounts 2016
Why Ultra?
We enjoy solving tough
problems, beating our
competitors and making
a difference for our
customers, shareholders
and employees.
Financial highlights
Revenue Underlying profit before tax* 1. Introduction
> KPI > KPI
Group at a glance 02
£785.8m £120.1m
+8.2% +6.8%
2. Strategic report
(2015: £726.3m) (2015: £112.4m) Chief Executive’s review
Rakesh Sharma, Chief Executive 04

Business model 08
Dividend per share Underlying earnings per share* Strategies for growth 10
> KPI > KPI
Standardisation & Shared Services 12
47.8p 134.6p
Market-facing segments 14
+3.7% +8.6%
Financial review
(2015: 46.1p) (2015: 123.9p) Amitabh Sharma, Group Finance Director 22
Key Performance Indicators 28
Aerospace & Infrastructure 30
Underlying operating profit* > IFRS operating profit > C o m m u n ic a ti o n s & S e c u ri t y 32
£131.1m £89.7m Maritime & Land 34
+9.3% +35.1% Risk management 36
Making a difference 44
(2015: £120.0m) (2015: £66.4m)
Developing Ultra’s people 46

Corporate and social responsibility 51
Group order book > D iv id e n d 3. Governance
The proposed final dividend is 33.6p,
£799.3m bringing the total dividend for the year to Board of Directors 54
+6.0% 47.8p(2015: 46.1p). This represents an Chairman’s governance statement
Douglas Caster, Chairman 56
annual increase of 3.7%, with the dividend
(2015: £753.8m)
being covered 2.8 times(2015: 2.7 times) by Corporate Governance Report 57
underlying earnings per share. If approved at Nomination Committee Report 67
the Annual General Meeting, the dividend Audit Committee Report 69
will be paid on 4 May 2017 to shareholders
Remuneration Report 74
on the register on 7 April 2017.
Directors’ Report 89
Executives and advisors 91
Operational highlights
4. Group financials
Independent auditor’s report 92
• The award of an $18m contract to provide Electronic
Group highlights 98
Warfare equipment to a NATO country for use in unmanned
Consolidated income statement 99
surveillance aircraft. Consolidated statement of
comprehensive income 99
• Securing a £16m programme for the continued support of our
Consolidated balance sheet 100
world-leading software-defined encryption device (ECU RP) for Consolidated cash flow statement 101
the UK Ministry of Defence (MoD). Consolidated statement of changes in equity 102
Notes to accounts 103
• A $34.6m award for the critical infrastructure protection and
Statement of accounting policies in respect of
cyber security for US naval bases. the Group’s consolidated financial statements 131
• Securing a $27m contract with Lockheed Martin for development 5. Company financials
Company balance sheet 138
and production of an acoustic nose array for the US Navy Mark 48
Company statement of changes in equity 138
(MK 48) torpedo programme.
Notes to accounts 139
• Successful delivery of a ship refit and modernisation upgrade of Statement of accounting policies
for the Company accounts 142
a Fatahillah-class corvette for the Indonesian Navy, and award of
6. Five-year review
a contract for the restoration and sustainment of two Philippines
Five-year review 143
Jacinto-class patrol vessels.
• A multi-year agreement for supply of Canadian sonobuoys to the
Cautionary statement
South Korean P-3C maritime patrol aircraft, worth Canadian $14.9m. This document contains forward-looking statements
which are subject to risk factors associated with,
amongst other things, the economic and business
circumstances occurring from time to time in the
countries and sectors in which the Group operates.
It is believed that the expectations reflected in these
For more information:
statements are reasonable, but they may be affected by a
www.ultra-electronics.com/ wide range of variables which could cause actual results
investors/irhome.php to differ materially from those currently anticipated.
*see footnote on page144
6. Five-year review 5. Company financials 4. Group financials 3. Governance 2. Strategic report 1. Introduction
01
What is Ultra?
The Ultra Electronics Group manages a wide range of specialist capabilities,
generating highly-differentiated solutions and products in the Defence & Aerospace,
Security & Cyber, Transport and Energy markets. We meet customer needs by applying electronic
and software technologies in demanding environments and meeting critical requirements.
Our vision
Why?
We enjoy solving tough problems, beating our competitors and
making a difference for our customers, shareholders and employees.
How?
We innovate to disrupt market dynamics.
What?
We offer superior solutions in regulated markets.
Ultra has developed its vision using
Our business model the Simon Sinek Inc.“Golden Circle”.
The value we create through our business model
enables us to achieve our strategic objective.
y See pages 4 4-5 3 People and cul
t t
abili ure
n Se
i e
a p
ust Pstorretnfogltiho custFoomcuesr o nneed ages
S 4
4
See pages 4-21 See pages 4-21 -5
3
Objective
Outperform the
market in terms of
annual increases in
shareholder return
R
i 1
s 9
k 54-
m Operational es
a g
n excellence pa
a e
ge See pages 22-35 e Se
ment See pages 36-43 G o o d g o v ernanc
See full details of Ultra’s business
model on pages 8 and9
Ultra Electronics Holdings plc. Annual Report & Accounts 2016
02 Group at a glance. How and where Ultra operates
How and where Ultra operates
2016 saw the embedding of Ultra’s three new Divisions; Aerospace & Infrastructure,
Communications & Security and Maritime & Land, through which it delivers and reports
its performance. Ultra’s Divisions deliver specialist capabilities to our key end markets of
Defence & Aerospace, Security & Cyber, Transport and Energy. The Group addresses
these end markets through eight distinct market segments, discussed on pages 14 to 21.
Ultra’s place Where Ultra Ultra’s
in the market operates customers
3 1Defence & 4 1United Kingdom 24 US DoD
Aerospace 64 1 2North America 52 UK MoD
3
2Security & 3Mainland Europe 10 LockheedMartin
2 Cyber 18
4Rest of the world 14 BAE Systems
1
3Transport &
Boeing
Energy 18 2
Australian DoD
Northrop Grumman
% of Group revenue by market % of Group revenueby region
US Alcohol, Tobacco & Firearms
Ultra continues to focus on its main markets Ultra’s core markets remain North America Raytheon
of Defence & Aerospace, Security & Cyber, and the United Kingdom. In mainland EDF Energy
Transportand Energy.To explain its wide Europe the Group generally supplies Thales
portfolio of capabilities more effectively, the technologies that are unavailable from
Rolls Royce
Group uses market segmentation. Each of indigenous suppliers, for example,
Level 3 for US Navy
the eight segmentsgenerate highly- sonobuoys. Given this relatively low exposure
Airbus
differentiated, cost-effective and proven to mainland Europe, the UK decision to exit
UTC
technologies at the system, sub-system and the EU (BREXIT) has not had a significant
component level. These technologies are often specific impact on the Group, global % 5 10 15 20 25 30
fundamental to the performance, safety or macroeconomic impacts aside. Elsewhere in
This market position, together with Ultra’s
mission success of the platforms in which they the world, the Group has developed strategic
independence, allows the Group to work
are incorporated, making Ultra a critical supplier positions in its target regions of Australia,
closely with the world’s prime contractors in
on many complex platforms, enjoying long- the Middle East, India, and (for non-defence
our chosen markets. The chart above shows
term positions. products) China, while continuing to pursue
Ultra’s major customers, including the US
individual opportunities and business
The segment structure allows Ultra to harness Department of Defense (DoD), the UK
relationships in many other nations. Looking
the capabilities of its 19 businessestogether, Ministry of Defence (MoD) and Lockheed
ahead, Japan is considered a promising
providing technical expertise and domain Martin. The Group supplies to a wide range
market for Ultra. These core markets and
knowledge to deliver the adaptable, of project offices, integrated project teams
target regions allow Ultra to access the
comprehensive and cost-effective solutions and platform teams, having a larger number
largest addressable defence and security
customers demand. Where required, the Group of different partners and customers than the
budgets in the world, positioning for long-
will seek partners with best-of-breed suppliers chart might at first suggest, and executing
term growth through well-considered
to offer a more complete solution and will against tens of thousands of contracts and
partnerships and government relationships.
seamlessly “lead or follow”as a non- production orders on an annual basis.
threatening mid-tier company in order to satisfy
customer needs. Equally, individual businesses
continue to develop and supply the specific
high-end technologies for which they are well
known, providing the agility and responsiveness
of a smaller, autonomous business unit. To
maintain its position, the Group harnesses both
internal and customer-funded research and
development, tailoring its solutions to changing
customer needs and budgets. This sustains the
Group’s reputation as an innovative supplier of
enabling technology.
See Ultra’s business model
on pages 8 and 9
Ultra Electronics Holdings plc. Annual Report & Accounts 2016
6. Five-year review 5. Company financials 4. Group financials 3. Governance 2. Strategic report 1. Introduction
Group at a glance. How and where Ultra operates 03
Aerospace Communications Maritime
& Infrastructure & Security & Land
1 7 8
2
26% 3 25% 33% 30% 6 41% 45%
4
5
% of Group revenue % of Group profit* % of Group revenue % of Group profit* % of Group revenue % of Group profit*
Market segments Market segments Market segments
1. Aerospace 4. Communications 6. Underwater warfare
2. Infrastructure 5. C2ISR+ 7. Maritime
3. Nuclear 8. Land
Revenue Revenue Revenue
£204.7m +6.0% £259.0m +8.2% £322.1m +9.6%
2015: £193.2m 2015: £239.3m 2015: £293.8m
Underlyingoperating profit* Underlyingoperating profit* Underlyingoperating profit*
£32.4m +12.9% £39.7m -1.7% £59.0m +15.9%
2015: £28.7m 2015: £40.4m 2015: £50.9m
Order book Order book Order book
£267.8m +0.9% £227.0m +6.2% £304.5m +10.8%
2015: £265.4m 2015: £213.7m 2015: £274.7m
+
Command & Control, Intelligence,
Surveillance and Reconnaissance
Ultra’s Cyber capabilities sit primarily in C2ISR and
Communications, but run across all eight segments
For more information on Ultra’s
Divisions see pages 30-35
*see footnote on page144 Ultra Electronics Holdings plc. Annual Report & Accounts 2016
04 Strategic report. Chief Executive’s review
Chief Executive’s review
“ We are well
prepared to exploit
the challenges and
opportunities in our
market and return
”
Ultra to growth.
Rakesh Sharma
Chief Executive
A year of surprises The US election provided the second major
shock of the year with the full implications
and opportunities yet to be realised. However, there is now a
strong expectation in the market of a return
2016 will be remembered as a year of shocks
to growth of about 3% in the defence sector,
and surprises. The UK electorate’s surprise
fuelled by increased US defence spending.
decision to exit the European Union (BREXIT) This will need to be enabled by the expected
was a result that continues to cause UK early repeal of the Budget Control Act and
businesses uncertainty. Despite having a less action to achieve an agreed defence budget
immediate impact on the national economy, for FY17. President Trump is also insistent
concerns remain regarding long-term UK that those allies living under a US defence
inflation and currency instability as the details umbrella“pay their way”, implying increased
of withdrawal emerge. Ultra is largely defence expenditure in those nations. Initial
insulated from the direct impacts of BREXIT, signs of the new Administration’s
commitment to closer working with the UK,
with exports from the UK to mainland Europe
on both trade and defence, are also positive
contributing just 7% of Group revenue, and
indicators for Ultra given that they represent
minimal dependency on the free movement
Ultra’s two largest markets.
of skilled staff. Indeed, our much greater
exposure to the US should provide
reassurance to our investors during a period
of such uncertainty.
Ultra Electronics Holdings plc. Annual Report & Accounts 2016
6. Five-year review 5. Company financials 4. Group financials 3. Governance 2. Strategic report 1. Introduction
Strategic report. Chief Executive’s review 05
Portfolio strength focused on customer need
Group order book+6.0% In the UK, major programmes are on a Increasing efficiency
£799.3m sounder footing after the comprehensive There is a general consensus that the
>
(2015: £753.8m) Strategic Defence and Security Review (SDSR) commercial aerospace market has peaked in
2016, but budgets remain taut. This orders and is approaching a manufacturing
2016 799.3
budgetary pressure can translate into cash highpoint. Ultra has already responded to this
2015 753.8 flow constraints at the mid-tier of the supply expected change by significantly reducing its
chain as the Government and primes attempt investment in development of new
2014 787.3
to control spending. We have seen a growing capabilities, choosing instead to focus
2013 781.2 trend of limited funding approvals and delays resources on production efficiency. Strong
in programmes. That being said, our key positions on many aircraft types, now
2012 905.0 positions on major platforms, such stepping up production rates to meet existing
as the Joint Strike Fighter (JSF) and the orders, will underpin performance for several
“Dreadnought” submarine, underpin our years. Where we are able to readily adapt our
Underlying earnings per share* +8.6% longer-term performance. existing technologies for new opportunities,
134.6p we will do so. China will become an
(2015: 123.9p) > KPI Globally, the range of conflicts and tensions increasingly important market for commercial
in Asia, Eastern Europe and the Middle East
2016 134.6 are expected to result in increased defence aviation and our long-established joint
venture partnership with Top-Scientific Inc.
spending in these regions; more so as oil
2015 123.9 will allow us good access to these large
prices recover. Many nations are already
commercial opportunities. The year saw some
2014 123.1 upgrading their military and security
important decisions made on the future of
capabilities, providing opportunities for Ultra
2013 127.1 the UK nuclear electricity generation
in our areas of strength: communications,
programme: we continue to work with the
2012 125.5 ISTAR**and cyber protection.Competition in
UK Government and major industrial
these markets is fierce and procurement
participants to demonstrate how Ultra can
processes extended, so contract awards are
provide a significant, UK-based contribution
Dividend per share+3.7% less predictable than in our core markets.
to these long-term projects. Our relationship
Extensive delays in order intake are not
47.8p (2015: 46.1p) > unusual and can disrupt short-term with EDF remains excellent, culminating in the
award of EDF Energy’s “UK Supplier of the
performance. To mitigate this uncertainty our
2016 47.8 efforts remain focused, selecting target Year” award. I am also very pleased by our
partnership with NuScale, which will see Ultra
2015 46.1 programmes and in-country partners with
responsible for developing the safety and
great care. Currently, we see India, Australia,
2014 44.3 Japan, the Middle East, and (for non-defence sensor suites for the first Small Modular
Reactors (SMRs) to seek regulatory approval.
2013 42.2 products) China as important regions to
prioritise marketing efforts.
2012 40.0
“ Our relationship
with EDF remains
excellent, culminating
in the award of EDF
Energy’s “UK Supplier
of the Year”award.”
**Intelligence, Surveillance, Target
**Acquisition and Reconnaissance
**see footnote on page144 Ultra Electronics Holdings plc. Annual Report & Accounts 2016
06 Strategic report. Chief Executive’s review
Chief Executive’s review (continued)
“ We will continue Delivering excellence In 2016 we made our first significant
During our annual Business Leaders disposal, with the sale of the ID Card
to retain a core of Conference, I sought my senior team's view business for £22m. This important exercise
on the core question of why we do what do, of discipline demonstrates the greater
capability at Tiers 3
as more important than who we are and attention we are paying to the development
what we do. The“Why”we developed from of our capability portfolio across the Group,
and 4, with most Ultra
our own discussions is set out on the front as we reposition to achieve long-term
businesses reflecting cover of this report and neatly captures growth. Acceleration of the integration of
Ultra’s fundamental culture (see also page 1). Herley and an excellent cash conversion rate
”
this focus. We are disruptors in the marketplace. Simply has quickly reduced the Group’s leverage to
put, this means that Ultra is always looking a point where we can actively consider our
for a new approach or a new method that next significant acquisition.
utilises our technology to displace the
Our Standardisation & Shared Services (S3)
incumbent supplier, through innovative and
workstreams continue to make good progress
adaptive solutions.
(see pages 12-13). Importantly, this
Achieving this still depends upon the programme does not reduce business
innovation and agility of our businesses, which autonomy but instead brings together non-
stems from their autonomy. Ultra businesses differentiating activities (including HR, finance
retain great freedom to make decisions and and IT) into a single hub and service provider.
react quickly to market opportunities, while Individual businesses retain expert roles in
meeting their budget goals. Over the past two order to support managerial decisions and to
years, we have enhanced this responsiveness be “demanding customers” for S3services.
by restructuring into three Divisions (pages30-
35) which reflect the eight market segments
we face. This structure has increased the level
of collaboration across the Group, improving
shared understanding of Ultra’s capabilities
and the market as a whole, resulting in greater
opportunities to provide well-matched
solutions to customer needs. This approach
has led to some further consolidation, from
24 businesses in 2015 to the current 19,
where businesses face a similar customer
set and have complementary capabilities.
An additional benefit to these selective
In 2016 I was delighted to welcome the return
consolidations is the generation of a small
of Amitabh Sharma to the Head Office, where
number of larger businesses that are capable
he succeeded Mary Waldner as Group Finance
of taking on larger opportunities at a Tier 2
Director. When he was with Ultra previously,
level (defined on page 8), with the greater
Amitabh was formative in the development of
depth, experience and skill set that a
many of Ultra’s financial control systems, so his
larger-scale business allows us to attract
transition into the lead financial role has been
into our management teams. We will
very swift. He brings an important insight,
continue to retain a core of capability at
rigour and discipline to our financial processes
Tiers 3and 4, with most Ultra businesses
and is leading the S3programme.
reflecting this focus.
”
“ In 2016 we made our first significant disposal.
Ultra Electronics Holdings plc. Annual Report & Accounts 2016
6. Five-year review 5. Company financials 4. Group financials 3. Governance 2. Strategic report 1. Introduction
Strategic report. Chief Executive’s review 07
Portfolio strength focused on customer need
Return to growth None of this happens without immense effort
Operational highlights In such a turbulent year in terms of global from across the entire workforce. 2016 has
surprises, I am pleased to report these sound been another challenging year for all our
• The award of an $18mcontract to
results which reflect the disciplined approach businesses and the positive results reflect a
provide Electronic Warfare equipment
we have taken to the restructuring of the huge amount of hard work and commitment
to a NATO country for use in
Group and control of our costs. Through our by every one of the Group’s 4,466 employees.
unmanned surveillance aircraft.
focused approach to the market, continuing In all the disciplines of the Group –
• Securing a £16mprogramme for the investment in developing highly-differentiated management, engineering, production,
continued support of our world-leading technology capabilities and further refinement marketing, HR and finance –people continue
software-defined encryption device of our portfolio, we are well prepared to to improvise, adapt and overcome. No one is
(ECU RP) for the UK Ministry of exploit the challenges and opportunities in standing still or taking their revenue or market
Defence (MoD). our markets and return Ultra to growth. In the for granted. It is that strength in people that
prevailing markets the Executive Team will gives me the confidence that we will return to
• A $34.6maward for the critical
maintain a careful balance between growth and ensure the Group’s continuing
infrastructure protection and cyber
performance during the year and investing success for the future.
security for US naval bases.
and positioning for longer-term growth. Our
• Securing a $27mcontract with Lockheed recent restructuring provides us with a much
Martin for the development and better framework within which to make these
production of an acoustic nose array for judgements, while the S3programme and Rakesh Sharma
the US Navy MK 48 torpedo programme. continuing discipline within businesses Chief Executive
• Successful delivery of a ship refit and ensures we control our costs effectively.
modernisation upgrade of a Fatahillah-
class corvette for the Indonesian Navy,
and award of a contract for the
restoration and sustainment of two
Philippines Jacinto-class Patrol Vessels.
Ultra’s track record of delivering
• A multi-year agreement for supply of above-average shareholder returns (pence)
Canadian sonobuoys to the South
Korean P-3C maritime patrol aircraft, 250
worth Canadian $14.9m.
200
150
100
Ultra Electronics Holdings plc KPI
50 FTSE all share price index
FTSE 100 price index
FTSE 250 price index
FTSE all share aerospace/defence
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
KPI =Key Performance Indicator,
see pages 28-29for details
Ultra Electronics Holdings plc. Annual Report & Accounts 2016
08 Strategic report. Business model
Business model
Tahchei evvaelu iets U plrtirma acrrey aotbesje tchtirvoeu: gtho iotsu btpuesrinfoersms mthoed melaernkaebtl eins itte troms SustainabPsiltoirrtetynf ogltiho CPunesteooepmdlee arnd cultu
re
of annual increases in shareholder return.
Objective
Risk managementOexpceerallteionncaelGood governance
> >
Ultra faces the market Ultra constantly innovates
withportfolio strength to meet customer needs
Eight distinct and wide-ranging Focus on Tiers 2-4 Ultra aims to invest 5% of revenue in
market segments R&D to develop new offerings and its
Ultra has no strategic intent to be a Tier 1,
customers typically invest a further 15%
Clearly defined market segments allow Ultra top-level platform provider. Therefore, the
to provide more complex offerings from Group is non-threatening to the Tier 1 Ultra aims to maintain investment at 5% or
across the full range of the Group’s prime contractors, for example, BAE Systems more of its revenue on innovation, new
capabilities, rather than only supplying or Boeing, and so counts them amongst its products and business development. In
individual products from single businesses. key customers. As such, Tier 1contractors addition, over 14% of Group revenue is
This approach establishes a framework that can rely on Ultra to provide the specialist customer-funded product development. In
aligns resources to greater effect across each capabilities at which the Group is expert, total over 18% of revenue spend is focused
market-facing segment and utilises the most rather than regarding us as a competitor. on enhancing the portfolio of capabilities
effective customer relationship. In turn, this and programme positions which underpin
Ultra’s specialist capabilities are mainly at
supports the development of coherent further growth.
Tiers 3and 4, supplying equipment and
strategies against particular end markets,
components to support Tiers 1and 2
based upon collective market research and Funded by:
systems and programmes. The Group does
opportunity capture. The market segment (cid:1)Group 23%
undertake Tier 2system integration, but
approach provides the Group with improved (cid:1) Customer 77%
does this mainly when integrating its own
analysis at an appropriate level of
Tier 3offerings where it understands the
complexity, thus allowing Ultra to better
detailed Tier 3interfaces and so is able to
manage and prioritise the Group’s
manage the risk inherent in system
investments, including Research and
integration activities.
Development (R&D) alignment and
acquisition strategy.
Where the Group has
Acquisition and divestment to
complementary capabilities, it
position in growth markets
can combine these to offer more
Ultra invests in targeted acquisitions to
further strengthen its portfolio and will comprehensive and innovative
dispose of capabilities that no longer fit Tier 1 solutions. This means that Ultra’s
within the portfolio. The Group invests in
acquisitions that develop and apply domain Tier 2 products, capabilities and the
expertise, capabilities and technical associated domain expertise
synergies in common end markets. Ultra’s Tier 3
uniquely position the Group to
deep understanding of the users’ domain,
its enduring customer relationships, and its Tier 4 be able to meet more complex
outward-facing nature inform the Group’s
and demanding system and sub-
investment decisions.
system requirements.
Innovative solutions focused
on customer need
Ultra creates value by generating innovative Tier 1. Platform provider Tier 3. Equipment supplier
solutions from across its portfolio and by Responsible for being the prime contractor Ultra has a large presence at this level of
becoming a key partner in its customers’ of the platform in question, examples being the supply chain, supplying equipment
design process ensuring their needs are met. a naval ship or a terminal at an airport. such as data links, cryptographic equipment
Ultra businesses innovate constantly to Tier 2. Sub-system integrator and sonobuoys.
create solutions for customers –often Responsible for integrating equipment or Tier 4. Component supplier
through highly specialised, disruptive components that will make up a functional Ultra also provides a broad range of smaller
technological innovation –which are element of the platform. Examples of components for many programmes worldwide,
different from, and better than, those of the system integration completed by Ultra including sensors for measuring the
Group’s competitors. include the integrated sonar systems and performance of a nuclear reactor and joysticks
wing ice protection systems. to control unmanned aerial vehicles (UAVs).
Ultra Electronics Holdings plc. Annual Report & Accounts 2016