1.   General information

Ricardo plc (the 'Company'), a public company limited by shares, is listed on the London Stock Exchange and incorporated and domiciled in the United Kingdom. The address of its registered office is Shoreham Technical Centre, Shoreham-by-Sea, West Sussex, BN43 5FG, England, United Kingdom, and its registered number is 222915.

The condensed interim financial statements were approved for issue by the Board of Directors on 23 February 2022. These condensed interim financial statements have not been audited, but they have been subject to an independent review by KPMG LLP ('KPMG'), whose independent review report is included at the end of this report.

2.  Basis of preparation

These condensed interim financial statements of the Company and its subsidiaries (together, the 'Group') for the six months ended 31 December 2021 do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. They have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and IAS 34 Interim Financial Reporting, as adopted for use in the UK.

These condensed interim financial statements should be read in conjunction with the financial statements for the year ended 30 June 2021 within the Annual Report & Accounts 2020/21, which were prepared in accordance with International Financial Reporting Standards ('IFRS'), IFRS Interpretations Committee ('IFRS IC') interpretations adopted by the UK and the Companies Act 2006 applicable to companies reporting under IFRS. The Annual Report & Accounts 2020/21, which was approved by the Board of Directors on 14 September 2021 and delivered to the Registrar of Companies. The report of the auditors on those statutory accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.

The accounting policies adopted within this Interim Report are consistent with the Annual Report & Accounts 2020/21 except for the requirements of IAS 34 Interim Financial Reporting in respect of income tax. Taxes on income in the interim period are accrued using the tax rate that would be applicable to expected total annual profit or loss.

In the context of the challenging economic environment in the automotive sector, exacerbated by the economic uncertainty caused by the ongoing COVID-19 pandemic, the Board of Ricardo plc has undertaken an assessment of the ability of the Group and Company to continue in operation and meet its liabilities as they fall due over the period of its assessment. In doing so, the Board considered events throughout the period of their assessment, including the availability and maturity profile of the Group's financing facilities and covenant compliance. These condensed interim financial statements have been prepared on the going concern basis which the directors consider appropriate for the reasons set out below. The Group funds its operations through cash generated by the Group and has access to a £200.0m Revolving Credit Facility ("RCF") which is linked to two covenants. These covenants are tested at 30 June and 31 December each year until the debt matures in July 2023. The threshold for the Adjusted Leverage (defined as net debt over underlying EBITDA for the last twelve months, excluding IFRS 16 Leases) is 3.0x for each test date. The threshold for the Interest Cover (defined as underlying EBITDA for the last twelve months over net finance costs, excluding IFRS 16 Leases) is 4.0x for each test date.

At the reporting date, the Group had an adjusted leverage of 1.0x and interest cover was 11.7x. As at the date of approval of these condensed interim financial statements, the amount of the RCF undrawn and available to the Group was £125m, with total borrowing, including overdrafts and hire purchase liabilities, of £82m and cash and cash equivalents of £43m.

The Directors have prepared a cash flow forecast which covers at least 12 months from the date of approval of these condensed interim financial statements. In this forecast, the directors have considered the impact of the ongoing COVID-19 pandemic on trading levels, as well as delays in starting new projects and converting pipeline opportunities, on the Group's results, operations and financial position, in a severe but plausible downside scenario. This scenario models a reduction of 15% in the Group's EBITDA in FY 2021/22 with no growth in FY 2022/23. In addition, the downside scenario models an increase in net working capital days over the remainder of FY 2021/22 and FY 2022/23.

The modelled downside scenario incorporates some mitigating actions which are within the control of the Group, such as setting appropriate levels of dividends, the non-payment of discretionary bonuses and a reduction in non-essential capital expenditure. Although headroom under the Group's banking covenants is reduced under this downside scenario, the Group (and Company) is expected to operate within its committed facilities and covenant requirements during the forecast period.

Consequently, the directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the condensed interim financial statements and therefore have prepared the condensed interim financial statements on a going concern basis.

3.  Seasonality

Based upon management's experience, higher levels of revenue and profit are expected in the second half of each financial year. This is typically due to lower levels of annual leave and a greater number of chargeable hours, which equates to higher revenues on a predominantly fixed cost base, and therefore higher profits.

4.  Alternative Performance Measures

Throughout this document the Group presents various alternative performance measures ('APMs') in addition to those reported under IFRS. The measures presented are those adopted by the Chief Operating Decision Maker ('CODM', deemed to be the Chief Executive Officer), together with the main Board, and analysts who follow us in assessing the performance of the business. Explanations of how they are calculated and how they are reconciled to an IFRS statutory measure are set out below.

(a) Group profit and earnings measures

Underlying profit before tax ('PBT') and underlying operating profit: These measures are used by the Board to monitor and measure the trading performance of the Group. They exclude certain items which the Board believes distort the trading performance of the Group. These include the amortisation of acquired intangible assets, acquisition-related expenditure, costs related to implementation and configuration of purchased software services, reorganisation costs, and other specific adjusting items.

The Group's strategy includes geographic and sector diversification, including targeted acquisitions and disposals. By excluding acquisition-related expenditure from underlying PBT and underlying operating profit, the Board has a clearer view of the performance of the Group and is able to make better operational decisions to support its strategy.

Acquisition-related expenditure includes the costs of acquisitions, deferred and contingent consideration fair value adjustments (including the unwinding of discount factors), transaction-related fees and expenses, and post-deal integration costs.

Costs related to implementation and configuration of purchased software services are excluded from underlying PBT and operating profit as they are not considered to be reflective of the Group's trading performance in the year. The costs relate to software which is expected to be utilised over multiple years.

Reorganisation costs arising from major restructuring activities, profits or losses on the disposal of businesses, and significant impairments of property, plant and equipment, are excluded from underlying PBT and underlying operating profit as they are not reflective of the Group's trading performance in the year, as are any other specific adjusting items deemed to be one-off in nature.

The related tax effects on the above and other tax items which do not form part of the underlying tax rate are also taken into account. Items are treated consistently year-on-year, and these adjustments are also consistent with the way that performance is measured under the Group's incentive plans and its banking covenants. A reconciliation is shown below. Further details of the nature of the specific adjusting items are given in Note 8.

Reconciliation of underlying profit before tax to reported profit/(loss) before tax

Underlying earnings attributable to the owners of the parent: The Group uses underlying earnings attributable to the owners of the parent as the input to its adjusted EPS measure. This profit measure excludes the amortisation of acquired intangibles, acquisition-related expenditure, reorganisation costs and other specific adjusting items, but is an after-tax measure. The Board considers underlying EPS to be more reflective of the Group's trading performance in the year than reported EPS. A reconciliation between earnings attributable to the owners of the parent and underlying earnings attributable to the owners of the parent is shown in Note 9.

Constant currency growth/decline: The Group generates revenues and profits in various territories and currencies because of its international footprint. Those results are translated on consolidation at the foreign exchange rates prevailing at the time. Constant currency growth/decline is calculated by translating the result for the prior period using foreign currency exchange rates applicable to the current period. This provides an indication of the growth/decline of the business, excluding the impact of foreign exchange. In the prior reporting period, constant currency results were calculated by translating the result for the current period using foreign currency exchange rates applicable to the prior period. Using current period rates to restate prior period results is considered to provide a more useful comparison, since current period performance remains stated at actual rates.

Headline trading performance

Segmental underlying operating profit: This is presented in the Group's segmental disclosures and reflects the underlying trading of each segment, as assessed by the main Board. This excludes segment-specific amortisation of acquired intangibles, acquisition-related expenditure and other specific adjusting items, such as reorganisation costs. It also excludes unallocated Plc costs, which represent the costs of running the public limited company and specific adjusting items which are outside of the control of segment management. A reconciliation between segment underlying operating profit, the Group's underlying operating profit and operating profit is presented in Note 6.

(b) Cash flow measures

Cash conversion: A key measure of the Group's cash generation is the conversion of profit into cash. This is the reported cash generated from operations (defined as operating cash flow, less movements in net working capital and defined benefit pension deficit contributions) divided by earnings before interest, tax, depreciation and amortisation ('EBITDA'), expressed as a percentage.

Underlying cash conversion: This is underlying cash generated from operations (defined as reported cash generated from operations, adjusted for the cash impact of specific adjusting items) divided by underlying EBITDA (defined as reported EBITDA, adjusted for the impact of specific adjusting items). A reconciliation between the two is shown below.

Cash conversion

Net debt: is defined as current and non-current borrowings less cash and cash equivalents, including hire purchase agreements, but excluding any impact of IFRS 16 lease liabilities. Management believes this definition is the most appropriate for monitoring the indebtedness of the Group and is consistent with the treatment in the Group's banking agreements.

(c) Tax measures

Underlying effective tax rate ('ETR'): We report one adjusted tax measure, which is the tax rate on underlying profit before tax. This is the tax charge applicable to underlying profit before tax expressed as a percentage of underlying profit before tax.

5.  Critical judgements and key sources of estimation uncertainty

As set out in Note 1c to the Group annual financial statements 2020/21, management undertakes a process to assess the risks on inception of all fixed price contracts, then monitors and reviews the risks and performance of contracts as they progress to completion. The highest value, highest risk, most technically complex and financially challenging contracts to deliver, as measured against a number of quantitative and qualitative factors, are categorised as 'Red Category 4' contracts, which are subject to more frequent and senior levels of management review.

As at 31 December 2021, 12 contracts (30 June 2021: 9) were categorised as Red Category 4. At 31 December 2021, £4.7m (30 June 2021: £3.6m) of revenue had been recognised in respect of work performed on these plus one other contract where outcomes were subject to negotiation with customers. This amount includes a change in scope which was deemed to be a contract modification as it had been agreed with the customer and was awaiting formal signature at 31 December 2021. If this change had not been accounted for as a contract modification, reported revenue would have been up to £0.4m lower. Management has made a specific judgement over the ability to recover each of the amounts under negotiation and has recognised provisions of £2.0m (30 June 2021: £1.7m) against this revenue, resulting in a net exposure of £2.7m (30 June 2021: £1.9m). The possible financial outcomes from these negotiations range from an upside of £2.5m, if management recovers the full £4.7m of revenue and potential negotiation upside, to a downside of £2.7m, if management is unsuccessful in recovering any of the £4.7m.

6.  Financial performance by segment

The Group's operating segments are being reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer). The information reported includes financial performance but does not include the financial position of assets and liabilities. The operating segments were identified by evaluating the Group's products and services, processes, types of customers and delivery methods.

The Group reports the following five segments: Energy & Environment ('EE'); Rail; Automotive & Industrial ('A&I'); Defense; and  Performance Products ('PP').

The Software business is aggregated into the Performance Products operating segment for reporting purposes. Whilst the Software business continues to be run as a separate business with its own leadership team, it has a number of similar characteristics to the Performance Products manufacturing business, in that it is involved in the development and sale of niche products, requiring a high level of capital/development spend, primarily selling to automotive manufacturers.

Measurement of performance

Management monitors the financial results of its operating segments separately for the purpose of making decisions about allocating resources and assessing performance. Segmental performance is measured based on underlying operating profit, as this measure provides management with an overall view of how the different operating segments are managing their total cost base against the revenue generated from their portfolio of contracts.

There are varying levels of integration between the segments. The segments use EE for their specialist environmental knowledge. A&I and PP have various shared projects. There are also shared service costs between the segments. Inter-segment transactions are eliminated on consolidation. Inter‑segment pricing is determined on an arm's length basis in a manner similar to transactions with third parties.  Included within Plc costs are costs arising from a central Group function, including the costs of running the public limited company, which are not recharged to the other operating segments.
 

(*) See Note 8

7.  Revenue

8.  Specific adjusting items

Specific adjusting items are disclosed separately in the financial statements where it is necessary to do so in order to provide further understanding of the financial performance of the Group. These items comprise the amortisation of acquired intangible assets, acquisition-related expenditure, costs related to implementation and configuration of purchased software services, reorganisation costs and other non-recurring items that are included due to the significance of their nature or amount. Acquisition-related expenditure is incurred by the Group to effect a business combination, including the costs associated with the integration of acquired businesses. Costs related to implementation and configuration of purchased software services are excluded as they relate to software which is expected to be utilised over multiple years. Reorganisation costs relate to non-recurring expenditure incurred as part of fundamental restructuring activities, significant impairments of property, plant and equipment, and other items deemed to be one-off in nature.

Amortisation of acquired intangible assets

On acquisition of a business, the purchase price is allocated to assets such as customer contracts and relationships. Amortisation occurs on a straight-line basis over the asset's useful economic life, which is between 3 to 9 years. During the period, certain "customer contracts and relationships" intangible assets reached the end of their economic life, resulting in a decrease in amortisation charges compared to the prior period.

Acquisition-related expenditure

The current period acquisition-related expenditure comprises £1.1m of external fees in respect of strategic projects.  The comparative period included £1.1m of earn-out and employee retention costs, in relation to Transport Engineering Pty Ltd (now Ricardo Rail Australia - 'RRA'), and PLC Consulting Pty Ltd (now Ricardo Energy Environment and Planning - 'REEP'), acquired in May 2019 and July 2019 respectively.

ERP implementation costs

As a result of an IFRS Interpretations Committee ('IFRIC') decision in March 2021, £0.5m of external costs incurred in FY 2020/21 in relation to the implementation of a new cloud-based ERP system within the PP segment have been expensed in the current period. These costs were previously capitalised in line with prevailing practice at the time the costs were incurred. They have been classified as a specific adjusting item as they are not reflective of the underlying performance of the business in the period. The ERP system is expected to be utilised by the Group for at least five years.

Reorganisation costs

Purchases and disposals

The current period charge of £0.3m (HY 2020/21: £0.1m) relates to a reduction in the fair value of deferred consideration in respect of the sale of Ricardo's Detroit engine test business on 3 June 2020, in accordance with the treatment of the original proceeds in FY 2019/20. The reduction in the fair value reflects lower levels of traditional engine testing work than originally forecast at the time the business was sold. The comparative period charge includes a £1.5m impairment charge as a result of a decrease in the fair value of the Detroit Technology Campus ('DTC') South building, reflecting its market value at the balance sheet date. These costs were classified as specific adjusting items as they are significant in value and would distort the underlying trading performance of the Group if included.

Other reorganisation costs

A credit of £0.1m has been recognised in the current period reflecting the difference between actual costs in incurred in HY 2021/22 and provisions made at 30 June 2021. The comparative period charge reflects £1.5m of redundancy costs from headcount reductions in the Group's A&I business in Europe.

Guaranteed Minimum Pensions ('GMP') equalisation

In the prior period, a charge of £0.1m was incurred in order to equalise male and female members' benefits for the effect of for historical transfers out of the Group's defined benefit pension scheme.
 

9.  Earnings per share

Underlying earnings per share is also shown because the Directors consider that this provides a more useful indication of underlying performance and trends over time than reported earnings per share.

There are no potentially dilutive shares (HY 2020/21: Nil).

10. Dividends

On 23 February 2022 the Directors declared an interim dividend of 2.91p per share, which will be paid gross on 8 April 2022 to holders of ordinary shares on the Company's register of members on 11 March 2022.

In HY 2020/21 a dividend of £0.4m was issued during the period to a non-controlling interest. No such dividend was issued in the current period.

11.  Fair value of financial assets and liabilities

There are no differences between the fair value of financial assets and liabilities included within the following categories in the Condensed Consolidated Statement of Financial Position and their carrying value:

•        Trade, contract and other receivables;

•        Derivative financial assets;

•        Cash and cash equivalents;

•        Trade, contract and other payables; and

•        Derivative financial liabilities

Derivative financial assets of £0.6m (30 June 2021: £0.9m) and derivative financial liabilities of £2.2m (30 June 2021: £1.0m) relate to foreign exchange forward and swap contracts, which are Level 2 of the fair value hierarchy within IFRS 13 Fair Value Measurement. The Group use derivative financial instruments primarily to manage currency risk on its US Dollar, Euro, Chinese Renminbi, Japanese Yen, Hong Kong Dollar and Australian Dollar denominated receivables and payables from its subsidiaries, in addition to managing transactional exposures relating to customer contracts denominated in foreign currencies. It is the Group's policy not to undertake any speculative currency transactions.

12. Net debt

Net debt is defined as current and non-current borrowings less cash and cash equivalents, including hire purchase agreements, but excluding any impact of IFRS 16 lease liabilities. Management believe this definition is the most appropriate for monitoring the indebtedness of the Group and is consistent with the treatment in the Group's banking agreements.

Net debt at 31 December 2021 was £38.5m (FY 2020/21: £46.9m). As reported to the Board on a monthly basis, there is sufficient headroom in our banking facilities. At 31 December 2021 the Group held total facilities of £215.7m (FY 2020/21: £215.5m), which included committed facilities of £200.0m (FY 2020/21: £200.0m). The committed facility consists of a £200.0m multi-currency Revolving Credit Facility ('RCF') which provides the Group with committed funding through to July 2023. In addition, the Group has uncommitted facilities including overdrafts of £15.7m (FY 2020/21: £15.5m), which mature throughout this and the next financial year, and are renewable annually.

Non-current bank loans comprise committed facilities of £86.1m (FY 2020/21: £75.8m), net of direct issue costs, which were drawn primarily to fund acquisitions and general corporate purposes. These are denominated in Pounds Sterling and have variable rates of interest dependent upon the Group's adjusted leverage, which range from 1.4% to 2.2% above SONIA (FY 2020/21: 1.4% to 2.2% above LIBOR). Adjusted Leverage is defined in the Group's banking documents as being the ratio of total net debt to adjusted EBITDA for the last twelve months, excluding IFRS 16 Leases. Adjusted EBITDA is further defined as being operating profit before interest, tax, depreciation and amortisation, adjusted for any one-off, non-recurring, exceptional costs and acquisitions or disposals during the relevant period. At the reporting date, the Group has an adjusted leverage of 1.0x (FY 2020/21: 1.3x) which gives rise to an applicable interest rate of SONIA plus 1.4% (FY 2020/21: LIBOR plus 1.8%). The Group has banking facilities for its UK companies which together have a net overdraft limit, but the balances are presented on a gross basis in the condensed interim financial statements.

The Adjusted Leverage (covenant is 3.0x for each test date.  The only other financial covenant is Interest Cover (defined as underlying EBITDA net finance costs for the last twelve months over, excluding IFRS 16 Leases), which is set at 4.0x for each test date.

13. Contingent liabilities

In the ordinary course of business, the Group has £11.8m (30 June 2021: £13.0m) of possible obligations for bonds, guarantees and counter-indemnities placed with our banking and other financial institutions, primarily relating to performance under contracts with customers. These possible obligations are contingent on the outcome of uncertain future events which are considered unlikely to occur. The Group is also involved in commercial disputes and litigation with some customers, which is also in the normal course of business. Whilst the result of such disputes cannot be predicted with certainty, the ultimate resolution of these disputes is not expected to have a material effect on the Group's financial position or results.

In July 2013, a guarantee was provided to the Ricardo Group Pension Fund ('RGPF') of £2.8m in respect of certain contingent liabilities that may arise, which have been secured on specific land and buildings. The outcome of this matter is not expected to give rise to any material cost to the Group. In October 2018, a further guarantee was provided to the RGPF for an amount that shall not exceed the employer's liability were a debt to arise under Section 75 of the Pensions Act 1995. The guarantee will terminate on 5 April 2023. The outcome of this matter is not expected to give rise to any material cost to the Group on the basis that the Group continues as a going concern.

14. Principal risks and uncertainties

The Board regularly reviews its principal risks and uncertainties, including those relating to COVID-19. To ensure our risk process drives continuous improvement across the business, we monitor the ongoing status and progress of key action plans against each risk on a half-yearly basis. Risk is a key consideration of the Board in all strategic decisions. In the most recent risk review cycle, risks were reviewed which relate to customers and markets; contracts; people; cyber and information security; technology; compliance with laws and regulations; the defined benefit pension scheme; financing; and these included the continued consideration of the potential impact of COVID-19. The approach to mitigation of these principal risks is discussed on pages 35 to 37 of the Group's Annual Report & Accounts 2020/21, and the Directors have concluded that the disclosure remains appropriate. These principal risks and uncertainties should be read in conjunction with the Trading Summary and Operating Segments Review for the six months ended 31 December 2021 included within this Interim Report.