Ultra Sonar Systems Limited

Introduction The period the Financial Statements covers is the year from 1 January 2025 to 31 December 2025. Business review Ultra Sonar Systems Limited is headquartered in Loudwater, UK and has two other operating sites at Greenford and Weymouth, where we partner with the UK Ministry of Defence ("MoD") and other governmental, aerospace, defence and critical infrastructure providers, both directly and through prime contractors. Ultra Sonar Systems service countries and navies around the globe with UK MoD being the largest customer. The Company is positioned on all Royal Navy warships and submarines. Delivering against Royal Navy needs, with strong Anti-Submarine Warfare incumbent positions across air, surface and subsurface platforms, exporting to "five eyes" and targeted allied partners who value high-technology solutions. Through innovative problem solving, and by using evolving technologies, Ultra Sonar Systems engages directly with its customers to design mission-led solutions aligned to their future needs. Ultra's core markets are the "five eyes" nations (Australia, Canada, New Zealand, the UK and the US) in the maritime sector. The Company employs around 373 people [2024: 341] working principally, but not exclusively, on UK MoD contracts and other highly regulated markets, focussing on providing mission-specific, bespoke solutions and capabilities. Order intake grew by 40% on 2024 results to £148m [2024: £105m] with significant orders received across the business providing a healthy backlog. Growth was underpinned by our incumbent position on Global Combat Ship (Type 26) exports to Canada and Australia - notably the new Canadian Surface Combatant Hull Mounted Sonar & Torpedo Defence order – as well as a further follow-on contract for supply of UK Sonobuoys, the Vehicle Missile Launcher, and varied spares & repairs support contracts for existing customers. Significant milestones were also achieved in Customer-funded Research and Development programs for UK MoD, including advances in AI/ML technologies. Strong revenue of £93.9m [2024: £71.3m] was achieved through product deliveries and development work, 52% of which for our UK domestic customers [2024: 69%] generating a 158% increase in Gross Profit to £19.9m [2024: £12.6m] which represented a Gross Margin of 21.2% [2024: 17.7%]. Administrative Costs were £13.6m [2024: £9.9m] and include continued investment by the business in Internal Research & Development activities. These costs were partially offset by Other Operating Income of £2.0m [2024: £1.7m], resulting in Operating Profit for the period of £8.0m [2024: £4.4m]. Principal risks and uncertainties Defence Sector Cycle Risk 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. Lower defence spending by our major customers in a down cycle could have a material impact on future results and financial conditions. Mitigation commentary/examples Ultra Sonar Systems is geographically spread across the UK and international defence markets Investment in technology to help us access high growth segments of the market Long-term projects, which help mitigate against short-term changes in the defence cycle Comment, changes and outlook The defence markets are a key focus for Ultra Sonar Systems, being an area where we believe we can grow at good returns on capital in the medium and long term. Ultra Sonar Systems has a degree of tolerance to defence cycle risk and are not seeking to diversify away from the defence market. However, we do seek to have a diverse customer and programme base, which provides resilience. As mentioned above, we see growth in our markets over the medium term, driven by the increasing threat presented by current military conflicts in the world. Bid and Contract Risk 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. A failure to fully recognise contract risks or to anticipate technical challenges and estimate costs accurately at the outset of a contract can lead to unexpected liabilities, increased outturn costs and reduced profitability. Mitigation commentary/examples New and improved business bid and contract management processes Legal reviews of contract terms and conditions Contract-specific risk assessments Delegation of authority/escalation criteria for approvals Reviews of contract performance Comment, changes and outlook Ultra Sonar Systems maintains a balanced risk appetite, with additional controls investment where justified. We have continued to invest in specialist resources in commercial and legal spheres, improving our bid competency and ability to align new contracts with our risk appetite. Programme Risk Many of the programmes entered into by Ultra Sonar Systems are complex, long term and 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 Failure to meet customer specifications or predict technical problems Inability to deliver to contract terms Inability to manage programme costs or forecast accurately 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 Ultra Sonar Systems ability to win future contracts and could result in cost overruns and significantly lower returns than expected. Mitigation commentary/examples Embedded programme management Formal review and escalation framework Review and approval of key programmes ‘Lessons learned’ and best practice sharing Inspection of programmes by customers Comment, changes and outlook A risk averse appetite for failures on programme management drives investment in strong controls for a key business process. Geo-Political Risk With a key focus on the defence sector, geo-political factors could lead to an unfavourable business climate for defence spending or restrict the access of overseas suppliers to national markets. Political change in country 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 Ultra Sonar Systems 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 key market countries Diversification of end customers in multiple countries Long-term nature of defence contracts and domain expertise Comment, changes and outlook Ultra Sonar Systems maintains a balanced risk appetite, with additional controls investment where justified. Risk iis mitigated in the short to medium term with increasing political prioritisation of defence capability by multiple governments in the current period of global political instability and events, including the Russian invasion of Ukraine. Delivering Change The ability to continuously improve and transform our business to deliver objectives in complex technology markets 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 Sonar Systems drive to deliver our strategy and supporting operational improvement. 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 procedures and controls Robust governance around all programmes, including strong steering committees, standard reporting and executive level sponsorship Investment in dedicated professional transformation resource and leadership Comment, changes and outlook Ultra Sonar Systems maintains a balanced risk appetite, with additional controls investment where justified; increased current investment reflects scale and scope of current change activity. Security and Cyber Risks As a key partner to our customers and end customers, Ultra Sonar Systems has custody of classified information and customer and its own intellectual property. In circumstances where the incidence and sophistication of cyber security crime continues to rise, the effective management and protection of information and Ultra Sonar Systems security and IT systems is necessary to prevent the compromise of secure information, intellectual property or our people’s personal data. There could be reputational damage to Ultra Sonar Systems as a highly regarded partner in the event of compromise of classified information or IP. 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 IP or classified information. Mitigation commentary/examples Ultra Sonar Systems has invested in specialist cyber security resources 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 Defence business governance framework in place Independent security reviews by defence departments and customers Comment, changes and outlook Focus on investment in strong controls are a key enabling capability to support Ultra Sonar Systems risk adverse position in respect of security and cyber risks. Governance, Compliance & Internal Controls In common with other businesses in our sector, Ultra Sonar Systems operates in a highly regulated environment across multiple jurisdictions and is subject to a range of regulatory, governance and compliance requirements. New or retrospective compliance changes (for example in tax) or a failure in the framework of internal controls could result in penalties, liabilities or reputational damage. 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 UK or USA, 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 ITAR controls, could result in regulatory action and penalties Bid and contract requirements for some government and defence contracts introduce “Offset” compliance obligations requiring special national investment or operations constraints. While typically very long term by nature, failure to comply could lead eventually to regulatory action or 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 Tax compliance – retrospective regulatory changes could lead to significant unforeseen liabilities Mitigation commentary/examples Corporate and business level controls policies, procedures, training and systems Internal expert teams in key functional areas Built-in IT system controls Controls and compliance reviews by management and internal audit Specialist advisers Comment, changes and outlook As an international defence supplier, investment in strong compliance controls is key to our standing as a responsible and reputable supplier to governments. While recognising the increasing demands of the compliance environment, the assessment of the net risk as reducing reflects improvements in our compliance controls framework. Supply Chain Increased costs from supply chain and energy cost inflation, some of which may not be able to be passed on under contractual terms, could impact profits. Shortages or logistic delays for materials and components post Covid-19 or from emergent sanctions in response to the invasion of Ukraine may impair delivery timeframes, leading to penalties. Mitigation commentary/examples Proactive management of sourcing and stock levels of critical materials and components Use of contractual terms or renegotiation to reflect increasing cost base in pricing by agreement with customers Supply chain analysis following events in Ukraine indicate no direct supply chain implications Comment, changes and outlook Ultra Sonar Systems risk-averse stance supports investment in standardisation, controls and tools to proactively manage supply chain risks. Specialist Recruitment and Retention With our focus on the defence sector, geo-political factors could lead to a restriction in the access of overseas suppliers to national markets. Highly competitive labour markets as economies recover from Covid-19, is driving specialist resourcing gaps in our operations which, if enduring, could start to impact customer programme delivery. Mitigation commentary/examples Embedding of specialist HR talent acquisition function to directly address Ultra Sonar Systems recruitment priorities Proactive strategies to retain critical specialist employees targeted for individual locations and circumstances Comment, changes and outlook The quality of our people is a key asset and differentiator for Ultra Sonar Systems and, recognising the increasingly challenging labour market conditions, we are investing in our recruitment capabilities Financial risk management Ultra Sonar Systems operations expose it to a variety of financial risks that include credit risk, liquidity risk, interest rate, cash flow risk and foreign currency exchange rate risk. Ultra Group’s policies seek to limit the adverse effects of these risks on the financial performance of Ultra Sonar Systems. This includes the use of debt and other instruments. Ultra Sonar Systems does not trade in financial instruments. Credit risk Ultra Sonar Systems Limited has policies that require appropriate credit checks on potential customers before contracts are signed and sales are made. The businesses also monitor existing customer accounts on an ongoing basis and take appropriate action where necessary to minimise any potential credit risk. Cash and bank balances are held with banks that have been assigned satisfactory credit ratings by international credit rating agencies. Liquidity risk Ultra Sonar Systems Limited continues to rely upon revolving credit facilities under a Group banking arrangement to fund its operations and strategic endeavours. Foreign currency exchange rate risk Ultra Sonar Systems Limited’s aim is to reduce foreign exchange transaction risk. The US dollar/sterling exchange rate is the most significant exposure, together with several other, smaller foreign exchange transaction exposures. Financial key performance indicators The company annually updates a Strategic Business Review (SBR) covering 5 years which is supplemented by Short Term Forecasts (STFs), updated at least quarterly. The key components of these performance indicators include Orders, Revenue, Earning Before Interest & Tax, Net Cash and associated average headcounts. As Ultra Groups operations are managed on a Strategic Business Unit ("SBU") basis, the Company's Directors believe that key performance indicators for the Company are not necessarily or appropriate for an understanding of the development, performance or position of the business. The performance of the Group which includes this Company, is discussed in the Group's Annual Report, which is available at www.ultra.group and does not form part of this Report. Other key performance indicators All employees undertook annual compliance and ethics training. The company operates a Quality Management System (QMS) which complies with the requirements of BS EN ISO9001:2015. The QMS is subject to annual continuing surveillance assessments and recertification every 3 years by an external certification body. The company recognises that all accidents are preventable and through focus on a safety commitment, communication, education, behavioural safety and culture in developing a zero-accident policy, performance is measure using a total recordable incident rate. This is set at 1.2 which is below the 3.2 average in industry. Directors' statement of compliance with duty to promote the success of the Company In discharging the Board’s s172 responsibilities to promote the success of the company for its members, the Directors have regard, amongst other matters, to the: Likely consequences of decisions in the long term; Interests of the company’s employees; Need to foster the company’s business relationships with customers, suppliers and others; Impact on the company’s operation on the community and environment; Desirability of the company maintaining a reputation for high standards of business conduct; and Need to act fairly between shareholders / stakeholders. This section describes how the Directors have considered the matters set out in Section 172(1) of the Companies Act 2006, as amended by the Companies (Miscellaneous Reporting) Regulations 2018, when performing their duty to promote the success of the Company. Further details on key actions regarding Employee Engagement and Business Relationships are also contained within the Directors’ Report on pages 8 - 11 and are incorporated into this statement by cross reference.