Recommendation factsheet 2020/21

Recommendation factsheet

Under the Defence Reform Act 2014, the SSRO must provide the Secretary of State with its assessment of the appropriate rates used to determine the contract proft rate for pricing qualifying defence contracts and qualifying sub-contracts. For further information on the methodology used to calculate these rates please see the Single Source baseline proft rate, capital servicing rates and funding adjustment methodology. Baseline Proft Rate The baseline proft rate is Step 1 of the six-step process for determining the contract proft rate for a qualifying defence contract.

The baseline proft rate is calculated from an index of public and private companies. The rate is a composite that combines search results from the “Develop and Make” and “Provide and Maintain” activity groups. The underlying rate is the average of the median capital servicing adjusted proft on cost of production of each group. The baseline proft rate is the three-year rolling average of the underlying rate.

2016/17 2017/18 2018/19 2019/20 2020/21 Underlying rate (unadjusted for capital servicing) 7.52% 8.39% 9.22% 9.85% 9.80% Capital servicing adjustment -1.46% -1.95% -1.28% -1.35% -1.57% Underlying rate 6.06% 6.44% 7.94% 8.50% 8.23% Baseline proft rate: 8.95% 7.46% 6.81% 7.63% 8.22% three-year rolling average of the underlying rate Note: The capital servicing adjustment accounts, at an aggregate level, for diferent levels of capital employed across the companies in the index and so sets a baseline upon which Step 6 of the contract proft rate applies. The pre-2016/17 underlying rates used for the three-year average were calculated using the Review Board’s methodology. 2014/15: 10.92%, 2015/16: 9.88%.

Data sources For further information on the data selection approach please see section 7 of the Single Source baseline proft rate, capital servicing rates and funding adjustment methodology. A full search of the Orbis database1 was carried out on 11 November 2019 on data update number 189002 using software version 189. The fnancial data for the calculation was extracted from Orbis at the same time.

1 https://www.bvdinfo.com/en-gb/our-products/data/international/orbis

1 Recommendation factsheet 2020/21

Median capital servicing adjusted return on cost of production

12% 9.85% 9.80% 8.39% 9.22% 10% 8.95% 8.50% 8.23% 8% 7.94% 7.52% 7.46% 7.63% 8.22% 6% 6.81% 6.06% 6.44% 4%

2%

0% 2016/17 2017/18 2018/19 2019/20 2020/21 Underlying rate (unadjusted for capital servicing) Underlying rate Baseline profit rate

Proportion of Companies by country Proportion of companies with defence keyword

27%

39% 43%

73%

18%

Western Europe excluding

United Kingdom Defence Other North America

Supplementary statistics

Number or companies 457 of which proft making 384 Aggregate turnover £1,220 Total capital employed (CE) £304 Average company CP:CE ratio 3.57 Source: Orbis (Cash fgures shown in GBP Billions)

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Names of companies in the index

A C C Ingenierie et Maintenance * Avant Tecno Oy Chart Industries INC Electromecanica Naval E Industrial SA

A/S Vestfrost Aviat Networks, Inc. Chemring Group PLC * Elettronica - Societa PER Azioni

Aaon INC Aviation Training International Limited * CMZ Machine Tool Manufacturer Sociedad Energy Recovery, Inc. Limitada. AAR Corp Axcelis Technologies INC Environnement S.A. CNH Industrial N.V. AB Transitio Axon Enterprise, Inc. Esbelt SA Cobham PLC * AB Volvo Azkoyen SA Espey Manufacturing & Electronics Corp Cognex Corp Accuracy International Limited * B.M.B. S.P.A. Eurofghter Jagdfugzeug GmbH Coherent INC Actuant Corp Babcock & Wilcox Enterprises, Eurofghter Simulation Systems GmbH Cohort PLC Adcock Refrigeration and AIR Inc. * EUROJET Turbo Gesellschaft Conditioning Limited Cohu INC * Babcock International Group PLC mit beschraenkter Haftung Advanced Energy Industries INC Colfax Corporation BAE Systems PLC Europress Group Oy Aerdragon Aviation Partners Colosio S.R.L. Bailey Trailers Limited EVS Broadcast Equipment SA Limited Colt Investments Limited Barco NV Faro Technologies INC Aerojet Rocketdyne Holdings, Inc. Columbus Mckinnon Corp Barnes Group INC Fedegari Autoclavi - S.P.A. Aerovironment, Inc. Comerio Ercole S.P.A. Basic Energy Services, INC * Federal Signal Corp Aertec Solutions SL. Commercial Vehicle Group, Inc. BBA Aviation PLC Filtronic PLC Aggreko PLC Comrod Communication AS Bevan Group LTD Finning International INC Airbus SE Comtech Telecommunications Bioanalytical Systems INC * Flir Systems INC Airtanker Holdings Limited Corp Bittium OYJ Flowserve Corp Airtanker Services Limited Construcciones Y Auxiliar de Ferrocarriles, BK Technologies INC S.A. Forbes Energy Services Ltd. * AKO Electromecanica, SA L Blonder Tongue Laboratories INC* Continental AG Forum Energy Technologies, Inc. * Alamo Group INC Boeing Company (The) Cormach S.R.L. Fratelli Mazzocchia S.P.A. ALC (Superholdco) Limited Bombardier INC Costar Technologies, Inc. * Freightcar America, Inc. * Alfred Cheyne Engineering Borgwarner INC Cowles Holdings Limited Frigoveneta S.P.A. Limited* Boston Scientifc Corp CPI Aerostructures INC G.H.B. (Holding) Limited Alimak Group AB Brieda E C. - S.R.L. CTA International SAS Gama Aviation PLC * Allied Motion Technologies, Inc. Broadwind Energy, Inc. * CTT Systems AB GAP Holdings Limited Allimand * Bruker Corporation Cubic Corp Gatx Corp Allison Transmission Holdings, Inc. Brunvoll Holding AS Cummins Inc. Gencor Industries, Inc. Alstom S.A. Burkhalter Holding AG Curtiss Wright Corp General Dynamics Corp Altra Industrial Motion Corp. Burnside Autocyl (Tullow) Limited Cuypers Vorkliften General Electric Company * Altran Technologies SA BWX Technologies Inc. CVD Equipment Corporation * Gentex Corp American Axle & Manufacturing Holdings, Byggesystemer Norge AS Inc. Cyberoptics Corp Gesellschaft fuer Oeltechnik mit beschraenkter Haftung C&J Energy Services, Inc. * American Outdoor Brands Corporation Dallan S.P.A. GHL Holdings Limited C.M.A. S.P.A. Ametek INC Dalmec S.P.A. Glunz & Jensen Holding A/S * C.S.C. - S.P.A. Amtech Systems INC Dana Incorporated GNS Gesellschaft fuer Nuklear-Service Caci International INC Antonio Carraro S.P.A. Data I/O Corp mbH CAE INC Applus Services, S.A. Dawsongroup PLC GO Plant Fleet Services LTD * CAI International INC Aptiv PLC Deere & CO Gorman-Rupp Company (The) Calf S.P.A. Archrock, Inc. DEL BO Impianti S.R.L. Graco INC Calpeda S.P.A. Arts WAY Manufacturing CO INC* Della Tofola S.P.A. Graham Corp * Caprari S.P.A. Public Limited Company Deutz AG Gray & Adams (Doncaster) Limited Carmanah Technologies Corp. Astec Industries INC * Dinolift Oy Greenbrier Companies, Inc. (The) Carrocera Castrosua SA Astronics Corporation Douglas Dynamics, Inc. Grovgaarden AS * Carver Group Limited Astronova, Inc. Dril-Quip INC * Guaresi S.P.A. Casagrande S.P.A. Atlas AIR Worldwide Holdings, Inc. Dublin Aerospace Limited Gulf Island Fabrication INC * Castledon LTD Atlas Converting (UK Holdings) Limited * Ducommun INC H&E Equipment Services, Inc. Caterpillar INC Atlas Copco AB Durr AG Harro Hoefiger Verpackungsmaschinen Ceco Environmental Corp. GmbH ATS Automation Tooling Systems Inc. DXP Enterprises INC Ceotronics AG * Havyard Group ASA * Autoliv, Inc. Edge Innovate (NI) Limited Heico Corp

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Heidelberger Druckmaschinen AG Lecitrailer SA Nordson Corp Ryder System INC

Heroux-Devtek Inc. Leidos Holdings, Inc. Northrop Grumman Corporation Saab AB

Hexcel Corp Leonardo S.P.A. Novanta INC Saalasti Oy

Hiden Instruments Limited Lillbacka Powerco Oy * Nuova Idropress - Societa’ PER Azioni IN Saf-Holland S.A Forma Abbreviata NIP S.P.A. Honeywell International INC Linamar Corporation Safra Oceaneering International INC * Huntington Ingalls Industries, Inc. Lockheed Martin Corp Safran S.A. Ocrim - Societa’ PER l’Industria Hurco Companies INC Logset Oy Meccanica S.P.A. Sahala Works Oy HWA AG Lrad Corporation * Ofcina Bocedi SRL Saltire Energy Limited Idex Corp Luminex Corp Ofcina Meccanica Sestese S.P.A. Samp S.P.A. Ii-Vi INC M.T.A. Societa’ PER Azioni IN Sigla M.T.A. Ofcine Biefebi S.P.A. Sampo-Rosenlew Oy * S.P.A. Ilmor Engineering Limited Ofcine Meccaniche Galletti (O.M.G.) Sandvik AB Macpresse Europa S.R.L. S.R.L. Imer International SPA Schaltbau Holding AG * Mactaggart Scott (Holdings) Limited Omav - S.P.A. Indra Sistemas SA Schlatter Industries AG Magna International INC Ormet S.R.L. Indus Holding AG Schmitt - Elevadores, LDA Makron Oy Oshkosh Corporation Infcon Holding AG Science Applications International Corp Malm Orstad AS Oxford Instruments PLC Infrabel * SCM Group S.P.A. Manitex International, Inc. * P B Donoghue (Waste Management) Ingenieria Y Tecnicas de Montajes Lointek Seacor Marine Holdings Inc. * SL Manitou BF SA Limited Sele S.R.L. Ingersoll-Rand PLC Manitowoc Company, Inc. (The) * P P S Commercials Limited Servotronics INC Innovative Solutions & Support INC * Marel HF. P.F.M. - S.P.A. Shefeld Forgemasters International Paccar INC Insta Group Oy Mariani S.R.L. Limited Park Aerospace Corp. Interroll Holding AG Maritime Partner AS * Sicamb - S.P.A. Paul Mueller Company Intevac INC * Maschinenfabrik Berthold Hermle AG Siemens AG PC TEL INC * Intricon Corporation Matteuzzi SRL Sigma Industries Inc. Pekkaniska Group Oy Invertek Drives Limited MAX Automation SE Skako A/S Perceptron INC Istobal SA Maxar Technologies Inc. * Smith Brothers (Leicester) Limited Petards Group PLC Italcab S.P.A. Mccoy Global Inc. * Smiths Group PLC Pietro Fiorentini S.P.A. Jacobs Engineering Group INC Mcgrath Rentcorp Snc-Lavalin Group INC * PKL Topco Limited James Fisher and Sons Public Limited Meggitt PLC Societe Nationale de Company Aerospatiale * Mercury Systems INC Polaris Industries INC John Bean Technologies Corp Socket Mobile, Inc. * Mikron Holding AG Ponsse OYJ John Nixon Limited Spartan Motors INC Miller Industries INC Portsmouth Aviation Holdings Limited * P.L.C. Speedy Hire PLC Mino S.P.A. Powell Industries INC * Judges Scientifc PLC Spirax-Sarco Engineering PLC MKS Instruments INC Pratt & Whitney Canada Customer Service Centre Europe GmbH A Joint Kadant INC Spirit Aerosystems Holdings, Inc. Mobile Mini INC * Venture of P & WC Kaman Corp SPX Corp Modine Manufacturing CO Prima Industrie SPA Katsa Oy SPX Flow, Inc. Moen Marin Group AS Qinetiq Group PLC Kbr, Inc. Star Refrigeration Limited Moog INC Radley Engineering Limited Kesla OYJ Steerprop Oy * Morgan Advanced Materials PLC Ramirent OYJ KEY Technologies Limited Streason Limited Motorola Solutions, Inc. Raute OYJ Keysight Technologies, Inc. * Sturm Ruger & CO INC Mpac Group PLC * Raytheon Company Kiplun Limited * Sulzer AG MS International PLC Reductores Cunat SA KIS Partners AS Group PLC * MTS Systems Corp Renew Holdings PLC KMG Systems Limited SVI S.P.A. MTU Aero Engines AG Renishaw P L C Knapp AG Swede Ship Marine Aktiebolag Muehlhan AG Rheinmetall AG Koenig UND Bauer AG Systemair AB MULTIVAC Sepp Haggenmueller SE & Ricardo PLC Komax Holding AG Co. KG Tacchi Giacomo E Figli- S.P.A. * Rival S.R.L. Lavorazioni Meccaniche Konecranes OYJ Nanometrics INC TAI Milano S.P.A. Robor SRL Kratos Defense & Security Solutions, Inc. National Oilwell Varco, Inc. Talgo, S.A. Rockwell Automation, Inc. Krohne Italia SRL Natural GAS Services Group, Inc.* Talleres Daumar SL Rodman Polyships SA * KVH Industries INC * Navistar International Corp Talleres Zitron, SA Rohde & Schwarz GmbH & Co. L3 Technologies INC NC Engineering (Hamiltonsbawn) Limited Kommanditgesellschaft Taylor Devices INC

L3harris Technologies, Inc. NG Bailey Group Limited Rolls-Royce Holdings PLC * Teagle Holdings Limited

LAM Research Corp Nicolas Correa S.A. Roper Technologies, Inc. Team INC *

Langham Industries Limited NIMAK Gesellschaft mit beschraenkter RWG (Repair & Overhauls) Teledyne Technologies Incorporated Haftung Latecoere SA * Limited Tennant CO

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Tenneco Inc. Trinity Industries INC VSE Corp Willis Lease Finance Corp

Teradyne INC Triumph Group INC * Wabash National Corp Willis Mitsui & CO Engine Support Limited

Terex Corp Tronrud Engineering AS * Wabco Holdings Inc. Wilton Universal Group Limited

Tesmec SPA TTS Group ASA Wacker Neuson SE Wireless Telecom Group INC

Textron INC Turbo’s Hoet Group Wartsila OYJ Witt & SON UK Holdings Limited

Thales SA Twin Disc INC Washtec AG Woodward, Inc.

Thomas Broadbent & Sons,Limited Ultra Electronics Holdings PLC Waters Corp Worthington Industries INC

Thwaites Limited UMI Aeronautica SL Weber Maschinenbau GmbH Breidenbach Wozair Limited *

Thyssenkrupp AG United Rentals INC Welbilt INC Xylem Inc.

Tomra Systems ASA United Technologies Corporation Westinghouse AIR Brake Technologies Zambello Riduttori 2 - S.R.L. Corp Tornos Holding S.A Univer S.P.A. * Zebra Technologies Corp Whale Tankers Limited Total Aircraft Product Support (Holdings) Vaisala OYJ Limited Williams Industrial Services Group INC * Varian Medical Systems INC Total Energy Services Inc. Williams Shipping Holdings VEO Oy * Trakm8 Holdings PLC * Limited VMS (Holdings) Limited * Transdigm Group Incorporated

* Indicates that the company is a loss-maker in the year. The data for loss-makers are not included in the 2020/21 assessment, but the companies will be taken forward for consideration next year.

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Capital servicing rates The capital servicing rates are used as part of the Step 6 Capital Servicing Adjustment (CSA) of the six- step process for determining the contract proft rate for a qualifying defence contract. A corresponding adjustment accounts, at an aggregate level, for diferent levels of capital employed across the companies in the index and so sets a baseline upon which Step 6 of the contract proft rate applies.

The capital servicing rates are calculated from indices of sterling denominated corporate bonds or fxed maturity deposits. The rates are rolling averages of the underlying rates.

2016/17 2017/18 2018/19 2019/20 2020/21 Fixed capital servicing rate 5.08% 4.84% 4.38% 3.98% 3.66% Positive working capital servicing rate 1.40% 1.37% 1.21% 1.18% 1.22% Negative working capital servicing rate 0.74% 0.59% 0.53% 0.53% 0.61%

Data sources For further information on the data selection approach please see section 13 of the Single Source baseline proft rate, capital servicing rates and funding adjustment methodology.

Rate Description Seven-year average of ’15-year BBB GBP’ Fixed capital servicing rate C40515Y INDEX bonds* Positive working capital servicing Three-year average of ‘1-year BBB GBP’ C4051Y INDEX rate bonds Three-year average of Monthly average of UK resident monetary fnancial institutions' (excl. Central Bank) sterling weighted average Negative working capital interest rate - time deposits with fxed original CFMBI32 servicing rate maturity <=1 year from private non-fnancial corporations (in percent) not seasonally adjusted

Sources: Bloomberg or Bank of England

*Note: Prior to 31 December 2014 the underlying rate is calculated using the Review Board’s methodology, adding 0.5pp to estimate a BBB- yield.

Trends in capital servicing rates

6%

5.08% 4.84% 5% 4.38% Fixed Capital Servicing 3.98% Rate 4% 3.66%

3% Positive Working Capital Servicing Rate

2% 1.40% 1.37% Negative Working Capital 1.21% 1.18% 1.22% Servicing Rate 1% 0.59% 0.53% 0.53% 0.61%

0.74% 0% 2016/17 2017/18 2018/19 2019/20 2020/21

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The SSRO funding adjustment The SSRO funding adjustment is Step 4 of the six-step process for determining the contract proft rate for a qualifying defence contract. The SSRO will be funded equally by the Secretary of State and industry. Industry funding is intended to be equitably shared across contractors based upon the value of their QDCs.

Calculation of SSRO funding adjustment

SSRO costs - Cost of additional tasks requested by SofS 1 SSRO funding adjustment = x Total Allowable Costs of QDCs entered in to 2

Financial Year 2016/17 2017/18 2018/19 SSRO running costs (£ thousand) 5,403 5,916 6,148 Cost of additional tasks requested by SofS - - - (£ thousand) Total Allowable Costs of QDCs and QSCs 10,079,000 2,602,000 4,072,000 (£ thousand)

Recommendation 2020/21 SSRO running costs (£ thousand) – 3-year average a 5,822 Cost of additional tasks requested by SofS b - (£ thousand) – 3-year average Total Allowable Costs of QDCs and QSCs c 5,584,333 (£ thousand) – 3-year average SSRO funding adjustment = ((a-b)/c) × 50% 0.052% Data sources: For further information on the data selection approach please see section 1 of part 2 of the Single Source baseline proft rate, capital servicing rates and funding adjustment methodology. The SSRO costs and the costs of additional tasks requested by the Secretary of State are from the SSRO Annual Report and Accounts.2 The total value of contracts is as reported in the latest SSRO Qualifying defence contract statistics.3

SSRO funding adjustment history 0.10%

0.08%

0.06% 0.052%

0.042% 0.04%

0.025% 0.024% 0.02%

0.000% 0.000% 0.00% 2 https://www.gov.uk/government/collections/ssro-annual-reports-and-accounts2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 3 https://www.gov.uk/government/collections/ssro-qualifying-defence-contract-statistics SSRO Funding Adjustment

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