TIDMQQ.
RNS Number : 8514N
QinetiQ Group plc
21 May 2015
Full Year Results for the year ended 31 March 2015
2015 2014 % Change
(restated^)
Business Performance - continuing operations(+)
Orders GBP613.6m GBP596.9m 3%
Revenue GBP763.8m GBP782.6m (2)%
Underlying operating profit* GBP111.3m GBP113.7m (2)%
Underlying operating margin* 14.6% 14.5%
Underlying profit before tax* GBP107.8m GBP101.2m 7%
Underlying net cash flow from operations
(post capex)* GBP114.9m GBP106.2m 8%
Underlying cash conversion ratio* 103% 93%
Underlying earnings per share* 15.2p 13.8p 10%
Net cash GBP195.5m GBP170.5m
Full year dividend per share 5.4p 4.6p 17%
(+) The Group completed the sale of US Services on 23 May 2014.
Total Group performance in 2015 included approximately two months
contribution from US Services compared to twelve months in the
prior period. Continuing operations (above) comprise EMEA Services
and Global Products but exclude US Services.
*Definitions of underlying measures of performance can be found
in the glossary. For details of 'specific adjusting items' refer to
note 3.
^ Restated to reflect continuing/discontinued operations (see
note 1)
The statutory reporting summary below includes the effect of the
US Services disposal in 2015 and other specific adjusting items as
outlined in the Group overview on page 3.
Statutory Reporting
2015 2014
Operating profit from continuing GBP109.5m GBP97.1m
operations
Profit/(loss) attributable to shareholders GBP104.7m GBP(12.7)m
Earnings per share including US Services 16.6p (1.9)p
Headlines
-- Strong performance in EMEA Services with increased orders, revenue and operating profit
-- Core Air, Weapons and Maritime businesses all performed well
-- New President appointed to lead repositioning of US Global
Products in response to a challenging market
-- Continued high cash conversion
-- GBP150m share buyback well advanced; GBP128m complete at 15 May 2015
-- 17% increase in full year dividend reflecting upgrade at the
half year and progressive dividend policy
-- 77% revenue under contract at start of FY16 consistent with
prior year; balance supported by pipeline of opportunities
-- Maintaining expectations for Group performance in the current financial year
Steve Wadey, who joined QinetiQ as Chief Executive Officer on 27
April 2015, said:
"In my first few weeks at QinetiQ I've been impressed with the
expertise of our people, as well as our capabilities and
technologies, all of which are well matched to the dynamics in our
markets. It's a company with great potential and I look forward to
working with our customers to develop and grow QinetiQ to meet
their changing needs."
Other information
There will be a presentation of the preliminary results to
analysts at 0900 hours UK time on 21 May 2015 in the Milton Suite,
The Grange Hotel - St Pauls, 10 Godliman Street, London EC4V 5AJ.
Registration for the webcast is available at:
www.QinetiQ.com/investors where the presentation will also be
available. An audiocast of the event will be available on the
following numbers (confirmation: QinetiQ):
* UK 020 3059 8125
* US 1 866 796 1569
* International +44 203 059 8125
For further information please contact:
Media relations: QinetiQ press office +44 (0) 1252 393500
Neil Bennett, Maitland +44 (0) 2073 795151
Rebecca Mitchell, Maitland +44 (0) 7951 057351
Investor relations: David Bishop, QinetiQ +44 (0) 7920 108675
Disclaimer
All statements other than statements of historical fact included
in this document, including, without limitation, those regarding
the financial condition, results, operations and businesses of
QinetiQ and its strategy, plans and objectives and the markets and
economies in which it operates, are forward-looking statements.
Such forward-looking statements, which reflect management's
assumptions made on the basis of information available to it at
this time, involve known and unknown risks, uncertainties and other
important factors which could cause the actual results, performance
or achievements of QinetiQ or the markets and economies in which
QinetiQ operates to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements. Nothing in this document should be
regarded as a profit forecast.
Group overview
Orders grew 3% to GBP613.6m (2014: GBP596.9m^) and Group
Book-to-Bill ratio was 1.1x. At the beginning of the new financial
year, 77% of the Group's FY16 revenue was already under contract, a
similar level to a year ago.
Revenue was GBP763.8m (2014: GBP782.6m^). EMEA Services
delivered a strong performance, with a 3% increase in revenue and
the core Air, Weapons and Maritime businesses all delivering
improved results. The performance of Global Products continued to
be impacted by the ongoing reduction of US military forces deployed
to Afghanistan, which depressed demand for conflict-related
products.
Underlying operating profit* was GBP111.3m (2014: GBP113.7m^)
with growth in EMEA Services offset by Global Products, which was
impacted by the reduction in revenue and by approximately $5m of
additional one-off costs associated with separating from US
Services infrastructure.
Underlying profit before tax* increased 7% to GBP107.8m (2014:
GBP101.2m^) with underlying net finance costs* falling to GBP3.5m
(2014: GBP12.5m^) as a result of the early repayment of the private
placement debt in June 2014.
Underlying earnings per share* for the continuing Group were up
10% at 15.2p (2014: 13.8p^), benefiting from the higher underlying
profit before tax* and reduced number of shares following the
repurchase of GBP107m of the GBP150m share buyback programme as at
31 March 2015. Basic earnings per share for the total Group
(including US Services) were 16.6p (2014: 1.9p loss per share).
Specific adjusting items, shown in the 'middle column', include
a profit of GBP15.9m recognised on the disposal of US Services, a
one-off accelerated interest cost of GBP28.8m associated with the
early repayment of the private placement debt and a credit of
GBP25.2m in respect of the capitalisation of a proportion of the
Group's unused tax losses. The prior year statutory operating
profit included a one-off net benefit of GBP27.1m following the
closure of the Group's defined benefit pension scheme to future
accrual and a goodwill impairment charge of GBP125.9m.
Underlying operating cash conversion* remained strong at 103%
(2014: 93%^), delivering an underlying cash flow from continuing
operations* of GBP114.9m (2014: GBP106.2m^). At 31 March 2015, the
Group had GBP195.5m net cash, compared to GBP170.5m net cash at 31
March 2014 and GBP205.7m at 30 September 2014.
A GBP150m share buyback was initiated on 28 May 2014. By 15 May
2015 the Group had bought back 63m shares at a cost of GBP128m.
The Group successfully re-financed its multi-currency revolving
credit facility during the year. The five-year facility totals
GBP233m and is undrawn.
The Board proposes a final dividend of 3.6p (2014: 3.2p) making
the full year dividend 5.4p (2014: 4.6p). Subject to approval at
the Annual General Meeting, the final dividend will be paid on 4
September 2015 to shareholders on the register at 7 August 2015.
The full year dividend represents an increase of 17% reflecting the
Group's progressive dividend policy and the upgrade at the half
year.
Leadership
Steve Wadey joined QinetiQ as Chief Executive Officer (CEO) on
27 April 2015. He was previously the Managing Director of MBDA UK
and Technical Director for the MBDA Group, and brings a deep
understanding of the European defence industry and a track record
of driving growth. David Mellors, who has served as interim CEO,
will return to an expanded Chief Financial Officer role.
Strategy
The objective of the Group's Organic-Plus strategy, launched in
May 2012, is to deliver growing sustainable earnings. The Group is
focused on building on its track record of delivering 'more for
less' to win market share in its core markets and is nurturing
'Explore' opportunities to deliver growth particularly beyond
defence, all built on well-established financial and operating
disciplines. QinetiQ is cash generative and disciplined about
capital allocation. This supports ongoing investment in growth
opportunities, a progressive dividend policy and the maintenance of
the balance sheet strength necessary in an uncertain trading
environment.
Trading environment
Market Drivers
The world is an increasingly uncertain and less secure place.
Technology proliferation has lowered the bar for terrorism,
organised crime and conflict, meaning that threats to security are
increasing in number and diversity.
At the same time, technology proliferation enables governments
to 'spin-in' technologies from the commercial sector with the help
of organisations like QinetiQ which are independent from the supply
chain and experts in the application of technology.
QinetiQ's ability to innovate and apply technology to mitigate
security threats enables us to 'work smarter' and to leverage
available resources to help customers deliver when budgets are
under pressure.
The UK Government continues to face a significant budget
deficit, and a further period of fiscal austerity looks likely
following the 2015 election result. Defence expenditure is not
protected by Government ring-fencing, unlike spending on
healthcare, schools and international aid, but the MOD has made
significant progress over the last five years in balancing its
budget.
In the US, the Federal Government continues to pursue
technological superiority in response to the deteriorating security
situation and as its principal source of military advantage.
President Obama recently requested an 8% increase to the US defence
budget for 2016, forcing the Republican majority to weigh up
competing concerns about defence and tackling the ongoing fiscal
deficit.
Elsewhere, governments and commercial organisations continue to
build capability and balance budgetary constraints with security
concerns.
These fiscal pressures, both in the UK and worldwide, are no
longer new. Despite a reduction in the UK defence budget over the
last parliamentary term, QinetiQ was able to improve its financial
performance.
UK Defence Market
To date, the UK Government has aimed to spend 2% of GDP on
defence and 1.2% of the budget on science and technology, although
these commitments are likely to be considered as part of the
Strategic Defence and Security Review (SDSR) expected in 2015. As
in 2010, we expect the SDSR to include consultation with industry
to help the Government meet the challenges facing UK defence, and
look forward to contributing to topics including test and
evaluation, and research and technology. QinetiQ has maintained the
capability to carry out work not required to be undertaken within
Government and the rationalisation of defence budgets and
structures could provide further opportunities in this area.
Defence transformation has been a priority since 2010,
incorporating a number of significant programmes. For example, the
MOD's procurement agency Defence Equipment and Support (DE&S)
is transforming its operating model and has been given access to
private sector expertise to help improve its performance.
The Front Line Commands (Navy, Army, Air and Joint Forces) are
exercising their newly delegated powers to shape future
capabilities. Our business units are aligned closely to these
Commands and are well placed to help them with their growing
procurement responsibilities.
Joint Forces Command has been created to bring 'improved focus
to technological enablers' and 'give intellectual energy' to how
warfare should be conducted 'in the information age.' With its own
procurement arm and multi-billion pound budget, Joint Forces
Command provides a more focused channel for our Cyber Security,
C4ISR, and Training businesses which were aligned during the
year.
Revised single source regulations and pricing terms for single
source contracts are now in place under the new 'Orange Book'. They
cover new contracts worth GBP5m or more, requiring additional
reporting and tightening definitions of allowable costs. Our
combination of capabilities is unique in the UK and, consequently,
33% of EMEA Services revenue is derived from single source
contracts excluding the non-tasking element of the Long Term
Partnering Agreement (LTPA). Greater transparency and an
independent regulator - the Single Source Regulations Office (SSRO)
- will help demonstrate the value for money the Government derives
from single source contracts. The SSRO has confirmed the Government
profit formula for FY16 is broadly consistent with FY15 but has
stated it will be reviewing the methodology for this formula for
future periods.
Global Markets
In May 2014, we completed the sale of the US Services division
and are no longer active in the US federal services market. Our
Global Products division has a significant US footprint, providing
a route to the world's largest defence market.
The US Government is continuing to drawdown the number of troops
deployed on Overseas Contingency Operations (OCO) and reduce the
accompanying OCO procurement budget. Although there are 'reset'
opportunities, this continues to depress demand for
conflict-related products.
US military customers are assessing their post-war requirements
and formulating new Programs of Record which will determine the
'peacetime' demand for products, such as unmanned systems. Our US
products business is responding to these opportunities with a
greater focus on these Programs of Record, contract-funded research
and development, and non-defence markets. The disposal of US
Services has helped to facilitate this renewed focus by removing
any customer concerns about Organisational Conflict of
Interest.
Although our traditional markets are the UK and US, many of our
unique capabilities are transferable to other geographies. For
example, as the Canadian and Australian Governments pursue similar
defence transformation programmes to the UK, they value our
independent advice, test and evaluation in support of better
procurement.
Governments in Europe, the Middle East and Asia are building
their defence capabilities in response to the increasing volume and
diversity of the threats to security, increasing the demand for
C4ISR, cyber and training expertise.
Amongst the prime contractors, competition is becoming fiercer.
They are liaising with the supply chain to find new sources of
competitive advantage.
Much of QinetiQ's innovation is created from solving a specific
set of customer problems, and at the same time generating
technology and expertise with the potential to be transferred into
new sectors offering higher growth potential.
FY16 Outlook
Defence transformation, and the forthcoming Comprehensive
Spending Review and SDSR are expected to have an impact on the UK
defence market this year. This will provide future opportunities
for EMEA Services to build on its strong record of delivering 'more
for less', whilst recognising that in FY16 there will be
uncertainty and the potential for interruptions to order flow. The
portion of revenue under contract at the start of FY16 was similar
to a year ago and the balance is supported by a pipeline of
opportunities but order flow and contract cover will be watched
closely over the coming months. Overall, given the opening backlog
position, expectations for the performance of EMEA Services in the
current financial year are unchanged.
In Global Products, newer products are recording notable
milestones and the amount of revenue under contract at the start of
FY16 is up slightly on a year ago, but the drawdown of American
overseas military forces is continuing to depress demand for
conflict-related products. As the division has a lumpy revenue
profile which is dependent on the timing and shipment of key
orders, there is a range of possible outcomes for the performance
of Global Products in the current year.
In balancing the market uncertainties with the strength of the
Group's operations, the Board is maintaining its expectations for
Group performance in the current financial year.
Business overview
EMEA Services
2015 2014
GBPm GBPm
---------------------- ----- -----
Orders(1) 461.6 447.8
Revenue 625.6 607.0
Underlying operating
profit* 93.0 86.7
Underlying operating
margin* 14.9% 14.3%
Book to bill ratio(1) 1.1x 1.1x
Funded backlog(1) 678.6 661.0
---------------------- ----- -----
(1) Excludes the GBP998m third-term of the LTPA contract.
B2B ratio is orders won divided by revenue recognised, excluding
the LTPA contract.
Financial performance
EMEA Services delivered a strong performance in 2015. Each of
the core Air, Weapons and Maritime businesses performed well
despite the uncertainty in the UK defence market resulting from the
MOD transformation programme and forthcoming Strategic Defence and
Security Review.
Orders, excluding the GBP998m third-term of the LTPA contract,
grew 3% to GBP461.6m (2014: GBP447.8m) demonstrating the unique
strengths of the division and its highly differentiated position in
its markets.
Revenue grew 3% on an organic basis at constant currency,
building on the 3% increase last year. At the beginning of the new
financial year, 80% of the division's FY16 revenue was already
under contract, a similar level to a year ago.
Underlying operating profit* increased 7% to GBP93.0m (2014:
GBP86.7m) assisted by an insurance recovery and the completion of a
final milestone on an international project.
Year in review
EMEA Services combines world-leading expertise with unique
facilities to provide technical assurance, test and evaluation and
training services, underpinned by long-term contracts. The most
significant of these is the Long Term Partnering Agreement (LTPA)
for test, evaluation and training services which has delivered an
improved service and significant savings for the MOD over the last
12 years. Capital expenditure is likely to increase in the future
as we continue to invest in the LTPA contract. EMEA Services is
also a market leader in research and advice in specialist areas
such as C4ISR, procurement advisory services and cyber
security.
The Front Line Commands (Navy, Army, Air and Joint Forces) are
exercising their newly delegated powers to shape future
capabilities. QinetiQ's business units are aligned closely to these
Commands and so are well placed to help them with their growing
procurement responsibilities. During the year our Cyber, C4ISR and
Training businesses were aligned to meet the requirements of the
recently created Joint Forces Command, such as the need for
information superiority, as well as demand from other government
and commercial customers.
Core
QinetiQ's Air business de-risks complex aviation programmes. It
works with supply chain partners and signed new long-term
agreements with key suppliers to deliver additional flexibility for
customers. During the year it secured a GBP16m extension to its
largest MOD test and evaluation contract, and a four-year GBP5m
contract for research into aircrew performance. The business also
continued to grow its engineering services offering and now
provides maintenance, repair and overhaul services for fixed and
rotary wing aircraft across three main contracts, with
opportunities to take this capability into new international
markets.
QinetiQ's Weapons business supplies independent research,
evaluation and training services for integrated weapons systems.
The business delivers the MOD's conventional weapons research
programme through the Weapons Science and Technology Centre, which
secured GBP17m of orders during the year. In response to the
growing complexity of weapons systems trials work, major
infrastructure improvements took place at a number of the ranges
that the business runs under the LTPA contract including new
communications infrastructure in the Hebrides and a new range
control centre at Aberporth in Wales. QinetiQ's expertise continues
to attract international customers with work undertaken for the
South Korean government as well as European customers. The Weapons
business has a long track record of delivering complex managed
services in high risk environments and is pursuing a number of
outsourcing opportunities.
The Maritime business delivers operational advantage to naval
clients worldwide through the provision of independent technical
advice and support, particularly in the areas of platform
performance, stealth, command information systems and systems
integration. The business won a GBP5m contract from a competitor to
deliver the MOD's mobile underwater targets service at the BUTEC
range it operates off North West Scotland, which also benefitted
from over GBP20m of investment to modernise its acoustic
measurement system, enhancing QinetiQ's ability to deliver
stealth-related services. During the year the business supported
the integration of a new radar on Type 23 frigates and a new
Command System for the helicopter carrier HMS Ocean. This expertise
underpins a new mission systems integration service to meet demand
from international customers, particularly in the Asia Pacific
region. The business was also awarded a contract to deliver
technical support for ship procurement for the Canadian government.
QinetiQ's Portsdown site was selected to host the Defence Growth
Partnership's Centre for Maritime Intelligent Systems which will
help UK industry meet customer interest in emerging technologies
such as autonomous systems.
QinetiQ Australia provides impartial advice and services
predominantly to government customers. The business is underpinned
by two long-term contracts with the Commonwealth Government of
Australia's Department of Defence - the Defence Science and
Technology Organisation (DSTO) contract which is focused on
provision of engineering services workshops and the Aircraft
Structural Integrity contract which supports the airworthiness of
military aircraft. QinetiQ Australia delivered a steady performance
against a background of fiscal pressures and defence reform,
securing a two-year extension to the services it delivers at DSTO
Fishermans Bend in Melbourne. Greg Barsby, a former KBR executive,
took up the role of Managing Director in December 2014. His remit
is to target long-term contracts through improved commercial and
business development capabilities as well as to reinforce
partnerships with government and industry.
QinetiQ's C4ISR business provides research, advice and bespoke
solutions for secure communications, command and control,
surveillance sensors and information management. It is the MOD's
leading supplier of C4ISR research, which underpins the advice
capability of the business as well as future opportunities to
support customers' transformation and innovation needs. In the UK,
recent funding rounds and announcements have protected or enhanced
budgets for C4ISR. The UK's Joint Forces Command provides a focus
for multi-billion pound procurements of 'enabling' capabilities
that have not existed before and C4ISR is now aligned with the
Cyber and Training businesses to meet these requirements. In
addition, ongoing instability in the Middle East is increasing
opportunities from governments in the region.
Explore
In the 'Explore' category, QinetiQ's Training business uses
Commercial-Off-The-Shelf (COTS) technology to connect people and
assets for mission rehearsal and tactic development. The business
secured its largest ever contract for the continued provision in
the UK of Distributed Synthetic Air Land Training valued at GBP33m
over five years. It also beat a number of competitors to win the
next stage of a core research programme worth GBP3m over four
years. As a result, the business is well positioned for future
opportunities as the MOD moves towards its vision of a network of
simulators across the UK to augment live training. Having
established an office in Orlando, Florida, the heart of the US
training and simulation market, the business has secured a position
on three IDIQ contracts working in partnership with established
prime contractors such as Alion and developing a promising pipeline
of opportunities in the US.
Cyber Security is an 'Explore' business with opportunities in
critical national infrastructure, as well as defence and security.
It won a new GBP3m contract to deliver secure monitoring and
hosting services for a major financial institution. In recognition
that compliant systems alone do not necessarily reduce business
risk, the business is integrating QinetiQ's human science expertise
into its consultancy offering and is investing in its cyber
intelligence capabilities. Closer alignment with the Training
business will ensure that QinetiQ is better able to meet the demand
for cyber training. QinetiQ's cyber intelligence business,
Cyveillance(R), launched a cloud-based cyber threat centre that
monitors the internet, provides alerts and delivers data on domain
names, IP addresses, phishing and malware attacks. This provides
direct access for customers to its monitoring and investigative
tools and complements its existing consultancy-based services.
QinetiQ's suite of cyber security offerings is completed by its
wholly-owned subsidiary Boldon James, which provides data
classification and secure messaging solutions and is reported as
part of the Global Products division.
Procurement Advisory Services was established as a stand-alone
'Explore' business in 2014. It provides tender assessment, cost and
analytical services principally to support complex procurement
programmes in highly regulated markets. During the year, the
business provided horizon scanning for the UK Cabinet Office, cost
forecasting services to the MOD, and won a GBP2m MOD contract for
business case support to help address frontline challenges such as
the supply of water, fuel and power. Procurement Advisory Services
is spear-heading QinetiQ's presence in Canada, where an office was
opened during the year.
Within the Air business, QinetiQ delivers turnkey services for
customers using Unmanned Aerial Systems (UAS) to meet growing
demand particularly from international organisations such as the
United Nations. The business has developed commercial relationships
with the three largest manufacturers of unmanned aircraft outside
the US and in September opened the UK's first airfield capable of
operating large UAS at Llanbedr in Wales. During the year, it was
awarded a competitively-won contract to provide manpower for a
short duration service for an international institution.
Test for Value
EMEA Services is 'testing for value' a number of early stage
offerings. These include the provision of technical services in
support of Directed Energy Weapons (DEW) and the delivery of
secured navigation systems such as the secure signal processing
already being provided for the Galileo constellation of satellites
- the European Union version of GPS.
Global Products
2015 2014
GBPm GBPm
--------------------- ----- -----
Orders 152.0 149.1
Revenue 138.2 175.6
Underlying operating
profit* 18.3 27.0
Underlying operating
margin* 13.2% 15.4%
Book to bill ratio 1.1x 0.8x
Funded backlog 116.7 97.1
--------------------- ----- -----
Financial performance
The performance of Global Products continued to be impacted by
the ongoing reduction of US military forces deployed to Afghanistan
and reduced funding for US military operations which depressed
demand for conflict-related products.
Revenue was GBP138.2m (2014: GBP175.6m) primarily due to reduced
sales of conflict-related products.
Orders grew by 2% to GBP152.0m (2014: GBP149.1m) as demand for
EMEA products offset the slow order intake in the US products
business. The Global Products division had more than half of its
FY16 revenue already under contract at the beginning of the new
financial year, slightly better than at the same time last
year.
Underlying operating profit* was GBP18.3m (2014: GBP27.0m)
impacted by the reduction in revenue and by approximately $5m of
additional one-off costs associated with separating from US
Services infrastructure.
Despite the continued prevalence of
Lowest-Price-Technically-Acceptable acquisitions in the US, careful
cost control and a reduction of headcount provided some protection
to profitability, with the division delivering an underlying
operating profit margin* of 13.2% (2014: 15.4%).
Year in review
Global Products combines cutting-edge technologies with an
intimate understanding of customer problems and strong
productisation skills to deliver innovative solutions to meet
customer requirements. The division also undertakes contract-funded
research and development, developing intellectual property in
partnership with key customers, with potential for new revenue
streams. To reduce the volatility of its revenue profile over time,
QinetiQ is seeking to increase its portfolio of products and to
find new markets and applications for its existing offerings.
Core
In January 2015, Jeff Yorsz took up his appointment as President
of QinetiQ's US products business, joining from Northrop Grumman.
Jeff is leading the realignment of the business in response to
structural changes in its core markets. This will result in a
greater focus on contract-funded research and development and US
DoD Programs of Record, as well as on commercial and international
markets.
US Global Products continues to meet the DoD's requirements for
maintenance, repair and overhaul for military robots, demonstrating
the customer's commitment to keeping unmanned systems as a
principal part of Explosive Ordnance Disposal missions. The
business won $24m of orders to reset TALON(R) robots, modernising
them for future operations. These 'reset' awards position the
business well for future US DoD Programs of Record, although to
date these have been slow to emerge. The fifth generation of
TALON(R) was launched during the year, incorporating the ability to
use third-party commercial components to capitalise on the
continued convergence of military and civil robotic technologies.
In addition, $14m of orders for unmanned systems were won from
international customers. In response to the growing use of robotics
in the construction and demolition industries, the US Products
business launched DriveRobotics(TM) , an applique kit that
transforms existing and new Bobcat vehicles into unmanned vehicles.
Demand for survivability products continues to be impacted by the
drawdown of US military operations, although new orders were
received for armour for the C-130 aircraft.
The sale of QinetiQ's US Services division, completed in May
2014, removed organisational conflict of interest (OCI) barriers
that prohibited the US Global Products business from pursuing
strategically important DoD research and development contracts. The
business is now building on its base of contract-funded R&D
projects both as an alternative revenue stream and as a source of
future intellectual property; it saw a modest increase in these
activities during the year. For example, it was one of two
suppliers to receive a contract from the Defense Advanced Research
Projects Agency (DARPA) for the first phase development of the
Hydra programme to develop a distributed undersea network of
modular unmanned platforms and payloads. This positions the
business well for follow-on phases of the programme and other
projects with the US Office of Naval Research.
Explore
OptaSense(R) is a Distributed Acoustic Sensing (DAS) business
which is organised around market-facing business development units
and a single technical Centre of Excellence now incorporating the
laser manufacturer Redfern Integrated Optics (RIO) acquired this
year. The business made progress implementing its strategy of
developing partnerships with leading industry players to exploit
its key markets. In rail, OptaSense(R) continues to work with
German rail operator Deutsche Bahn and also won a $5m initial award
from the Saudi Rail Organisation to provide security monitoring for
over 1,000km of rail line. In oil and gas, the product development
agreement with Shell continues to deliver significant technical
progress. This year, the fall in the oil price, and consequent
capex reductions by Oil Majors, slowed the adoption of DAS for well
completion but improved the economics of its use for flow
monitoring and seismic profiling. Immediately after year end the
business entered into a non-exclusive strategic alliance with
Weatherford to deliver solutions to optimise well planning,
construction and production. In infrastructure security, the
delivery of some key projects was interrupted by a worsening
security situation particularly in the Middle East, however the
increased threat to national infrastructure also increased demand.
At the end of the year, OptaSense(R) signed a framework supply
agreement to protect critical national infrastructure including
pipelines, airports and other facilities for a customer in the
Middle East. When complete, the two-year project could involve 200
units and encompass up to 8,000km of assets.
QinetiQ's Space Products business provides satellites, payload
instruments, sub-systems and ground station services. At the end of
the year, it was awarded a contract worth 16m Euros over three
years to develop the computer and avionics for the European Space
Agency's (ESA's) Proba 3 satellites that will fly in formation and
use an eclipsing mechanism to study the Sun. The business is also
playing a vital role in ESA's IXV mission launched in February
2015, as its technology will be responsible for guiding the "space
taxi", a smaller version of the US space shuttle, safely back to
Earth.
Subsidiaries Boldon James and Commerce Decisions are reported in
Global Products. Commerce Decisions delivered record revenue and
profit in FY15, securing an enterprise-wide contract for the third
year from the MOD for its AWARD(R) procurement software, as well as
delivering growth in the UK health and transport markets. The
business also secured its first order in Canada shortly after year
end.
Test for Value
In the 'Test for Value' category, field evaluations are underway
for the Linewatch(TM) power line sensor system, which precisely
measures voltage and currents on power grids. The product is
designed to meet emerging Smart Grid requirements for the detection
of faults and power theft, condition-based maintenance, and
distributed power generation. In addition, the US products business
is developing a High Power Density Generator which can provide the
modular 'roll-on / roll-off' power required for emerging defence
and civil applications.
QinetiQ's UK business has world-leading capabilities in
electronic signals intelligence and during the year it launched
ASX(TM) , a small sensor that delivers airborne surveillance
capability. The MOD selected QinetiQ's Modular Electronic Warfare
System (MEWS(TM) ) ahead of more established products to form the
basis of its Medium Weight Electronic Surveillance Capability for
expeditionary operations. Further milestone orders won during the
year included a $3m contract with the US Transportation Security
Administration to develop the next generation of QinetiQ's SPO(TM)
stand-off Millimetre Wave threat detection system.
Financial items
Net finance costs
Net finance costs were GBP4.1m (2014: GBP14.2m^). The underlying
net finance costs* were GBP3.5m (2014: GBP12.5m^), as a result of
the early repayment of the private placement debt in June 2014.
Tax
The effective tax rate for the continuing Group was 10.9% (2014:
11.3%^). The effective tax rate continues to be below the statutory
rate in the UK, primarily as a result of the benefit of research
and development relief in the UK. The effective tax rate is
expected to remain below the UK statutory rate in the medium term,
subject to the impact of any tax legislation changes, the
geographic mix of profits and the assumption that the benefit of
R&D tax relief continues to be reported in the tax line. The
2013 Finance Act allows the continued super-deduction approach for
R&D expenditure until April 2016, when mandatory R&D
Expenditure Credit (RDEC) treatment is introduced.
At 31 March 2015 the Group had unused tax losses of GBP291.6m
(31 March 2014: GBP213.9m) available to offset against future
profits. These comprise UK and overseas trade and non-trade losses.
A deferred tax asset of GBP25.2m in respect of an element of these
losses was capitalised on the balance sheet in the year due to the
probability of them being used in the foreseeable future. The
income statement credit associated with this capitalisation went
through the 'middle column' rather than underlying earnings. No
deferred tax asset has been recognised in respect of other tax
losses due to uncertainty over timing and extent of their
utilisation.
Earnings per share
Underlying basic earnings per share* for the continuing Group
were 15.2p (2014: 13.8p^) benefiting from the higher underlying
profit before tax* and the reduced number of shares in issue
following the repurchase of GBP107m of the GBP150m share buyback
programme as at 31 March 2015. Basic earnings per share for the
total Group (including US Services) were 16.6p (2014: 1.9p loss per
share). The average number of shares in issue during the year, as
used in the basic earnings per share calculations, was 630.9m
(2014: 651.7m), and there were 608.6m shares in issue at the year
end.
Dividend
The Board proposes a final dividend of 3.6p (2014: 3.2p) making
the full year dividend 5.4p (2014: 4.6p). Subject to approval at
the Annual General Meeting, the final dividend will be paid on 4
September 2015 to shareholders on the register at 7 August 2015.
The full year dividend represents an increase of 17% reflecting the
Group's progressive dividend policy and the upgrade at the half
year.
Cash flow, net cash and liquidity
Underlying operating cash conversion* remained strong at 103%
(2014: 93%^), delivering an underlying cash flow from continuing
operations* of GBP114.9m (2014: GBP106.2m^).
At 31 March 2015 the Group had GBP195.5m net cash, compared to
GBP170.5m net cash at 31 March 2014 and GBP205.7m at 30 September
2014. A GBP150m share buyback was initiated on 28 May 2014 and at
15 May 2015 the Group had bought back 63m shares at a cost of
GBP128m. The Group successfully completed the refinancing of its
revolving credit facility in August 2014 with a new five-year
multi-currency facility of GBP166m and $100m. Total committed
facilities amounted to GBP233.3m at 31 March 2015, with no maturity
before 2019.
Foreign exchange
The Group's income and expenditure is largely settled in the
functional currency of the relevant Group entity, mainly Sterling
or US dollar. The Group has a policy in place to hedge all material
transaction exposure at the point of commitment to the underlying
transaction. Uncommitted future transactions are not routinely
hedged. The Group continues its practice of not hedging income
statement translation exposure.
The principal exchange rates affecting the Group were the
Sterling to US Dollar exchange rate and the Sterling to Australian
Dollar rate.
12 months to 12 months
31 March 2015 to
31 March 2014
------------------- --------------- ---------------
GBP/US$ - opening 1.67 1.52
GBP/US$ - average 1.63 1.59
GBP/US$ - closing 1.49 1.67
GBP/A$ - opening 1.80 1.46
GBP/A$ - average 1.85 1.69
GBP/A$ - closing 1.95 1.80
------------------- --------------- ---------------
Pensions
The net pension liability under IAS 19, before adjusting for
deferred tax, was GBP39.4m (31 March 2014: GBP22.2m; 30 September
2014: GBP22.8m). The key assumptions used in the IAS 19 valuation
of the scheme were:
Assumption 31 March 2015 31 March 2014
------------------------------------- -------------- --------------
Discount rate 3.2% 4.2%
CPI Inflation 2.1% 2.6%
Life expectancy - male (currently
aged 40) 91 90
Life expectancy - female (currently
aged 40) 93 92
------------------------------------- -------------- --------------
Each assumption is selected by the Group in consultation with
the Company actuary and takes account of industry practice amongst
comparator listed companies. The sensitivity of each of the key
assumptions is shown in the table below.
Indicative effect on scheme
liabilities
Assumption Change in assumption (before deferred tax)
---------------- ----------------------- ----------------------------
Discount rate Increase / decrease by Decrease / increase by
0.1% GBP28.0m
Inflation Increase / decrease by Increase / decrease by
0.1% GBP28.0m
Life expectancy Increase by 1 year Increase by GBP37.0m
---------------- ----------------------- ----------------------------
The market value of the assets at 31 March 2015 was GBP1,454.6m
(31 March 2014: GBP1,304.6m) and the present value of scheme
liabilities was GBP1,494.0m (31 March 2014: GBP1,326.8m). The
funding basis of calculating scheme funding requirements differs
from IAS 19 in that it does not use corporate bonds as a basis for
the discount rate but instead uses the risk free rate from UK
gilts, prudently adjusted for long-term expected returns for the
pre-retired.
The latest triennial valuation of the scheme is being completed
as at 30 June 2014. It is expected that the recovery plan will
require GBP13m contributions per year until 31 March 2018, the same
annual funding level as previously.
Consolidated income statement
2015 2014^
Specific Specific
all figures in GBP adjusting adjusting
million Note Underlying items(*) Total Underlying items(*) Total
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Revenue 2 763.8 - 763.8 782.6 - 782.6
Operating costs excluding
depreciation, amortisation
and impairment (636.9) 1.0 (635.9) (653.4) 27.3 (626.1)
Other income 7.6 - 7.6 7.0 - 7.0
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 134.5 1.0 135.5 136.2 27.3 163.5
Depreciation and impairment
of property, plant
and equipment 3 (21.7) - (21.7) (21.8) 1.4 (20.4)
Impairment of goodwill - - - - (41.9) (41.9)
Amortisation of intangible
assets (1.5) (2.8) (4.3) (0.7) (3.4) (4.1)
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Operating profit/(loss) 111.3 (1.8) 109.5 113.7 (16.6) 97.1
Gain on business divestments 6 - - - - 1.1 1.1
Finance income 7 1.3 - 1.3 1.9 - 1.9
Finance expense 7 (4.8) (0.6) (5.4) (14.4) (1.7) (16.1)
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) before
tax 3 107.8 (2.4) 105.4 101.2 (17.2) 84.0
Taxation (expense)/income 8 (11.8) 23.8 12.0 (11.4) (4.6) (16.0)
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) for the
year from continuing
operations 96.0 21.4 117.4 89.8 (21.8) 68.0
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Discontinued operations
Profit/(loss) before
tax - discontinued
operations 1.2 (13.7) (12.5) 18.2 (98.1) (79.9)
Tax in respect of discontinued
operations (0.5) 0.3 (0.2) (4.0) 3.2 (0.8)
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) for the
year from discontinued
operations 0.7 (13.4) (12.7) 14.2 (94.9) (80.7)
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) for the
year attributable to
equity shareholders 96.7 8.0 104.7 104.0 (116.7) (12.7)
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Earnings per share
Basic - continuing
operations 10 15.2p 18.6p 13.8p 10.4p
Basic - total Group 10 15.3p 16.6p 16.0p (1.9)p
Diluted - continuing
operations 18.5p 10.4p
Diluted - total Group 16.5p (1.9)p
------------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
* For details of 'specific adjusting' items refer to note 3.
^ Restated to reflect continuing/discontinued operations (see
note 1).
Consolidated statement of comprehensive income
for the year ended 31 March
all figures in GBP million 2015 2014
--------------------------------------------------- ------ ------
Profit/(loss) for the year 104.7 (12.7)
Items that will not be reclassified to profit
or loss:
Actuarial loss recognised in defined benefit
pension schemes (24.5) (5.6)
Tax on items that will not be reclassified
to profit and loss 5.1 1.3
---------------------------------------------------- ------ ------
Total items that will not be reclassified to
profit or loss (19.4) (4.3)
Items that may be reclassified to profit or
loss:
Foreign currency translation differences for
foreign operations 11.0 (21.2)
Recycling of currency translation differences
to the income statement on disposal of foreign
subsidiary (40.9) -
(Decrease)/increase in fair value of hedging
derivatives (0.1) 0.4
Reclassification of hedging derivatives to
the income statement 0.1 (0.2)
Fair value gains on available-for-sale investments 0.2 0.9
Tax on items that may be reclassified to profit
or loss - (0.1)
---------------------------------------------------- ------ ------
Total items that may be reclassified to profit
or loss (29.7) (20.2)
---------------------------------------------------- ------ ------
Other comprehensive expense for the year, net
of tax (49.1) (24.5)
---------------------------------------------------- ------ ------
Total comprehensive income/(expense) for the
year 55.6 (37.2)
---------------------------------------------------- ------ ------
Consolidated statement of changes in equity
for the year ended 31 March
all figures in Issued Capital
GBP share redemption Share Hedge Translation Retained Non-controlling Total
million capital reserve premium reserve reserve earnings Total interest equity
--------------- --------- ----------- -------- -------- ----------- --------- ------- --------------- -------
At 1 April 2014 6.6 39.9 147.6 0.1 23.1 160.7 378.0 0.1 378.1
Profit for the
year - - - - - 104.7 104.7 - 104.7
Other
comprehensive
expense for
the year,
net of tax - - - - (29.9) (19.2) (49.1) - (49.1)
Purchase of own
shares - - - - - (0.6) (0.6) - (0.6)
Share-based
payments
settlement - - - - - 0.6 0.6 - 0.6
Purchase and
cancellation
of shares (0.5) 0.5 - - - (107.1) (107.1) - (107.1)
Share-based
payments - - - - - 3.2 3.2 - 3.2
Dividends - - - - - (31.7) (31.7) - (31.7)
--------------- --------- ----------- -------- -------- ----------- --------- ------- --------------- -------
At 31 March
2015 6.1 40.4 147.6 0.1 (6.8) 110.6 298.0 0.1 298.1
--------------- --------- ----------- -------- -------- ----------- --------- ------- --------------- -------
At 1 April 2013 6.6 39.9 147.6 - 44.3 200.0 438.4 0.1 438.5
Loss for the
year - - - - - (12.7) (12.7) - (12.7)
Other
comprehensive
income/
(expense)
for the year,
net
of tax - - - 0.1 (21.2) (3.4) (24.5) - (24.5)
Purchase of own
shares - - - - - (0.5) (0.5) - (0.5)
Share-based
payments
settlement - - - - - 0.9 0.9 - 0.9
Share-based
payments - - - - - 3.2 3.2 - 3.2
Dividends - - - - - (26.8) (26.8) - (26.8)
--------------- --------- ----------- -------- -------- ----------- --------- ------- --------------- -------
At 31 March
2014 6.6 39.9 147.6 0.1 23.1 160.7 378.0 0.1 378.1
--------------- --------- ----------- -------- -------- ----------- --------- ------- --------------- -------
Consolidated balance sheet
as at 31 March
all figures in GBP million Note 2015 2014
-------------------------------------------------- ---- ------- -------
Non-current assets
Goodwill 11 107.2 141.3
Intangible assets 15.3 44.2
Property, plant and equipment 229.6 233.8
Other financial assets 0.9 1.5
Investments 0.4 0.5
Deferred tax 12.9 18.1
-------------------------------------------------- ---- ------- -------
366.3 439.4
-------------------------------------------------- ---- ------- -------
Current assets
Inventories 18.5 19.8
Other financial assets 12.3 3.1
Trade and other receivables 159.2 250.5
Investments 2.3 2.1
Cash and cash equivalents 184.3 322.2
-------------------------------------------------- ---- ------- -------
376.6 597.7
-------------------------------------------------- ---- ------- -------
Total assets 742.9 1,037.1
-------------------------------------------------- ---- ------- -------
Current liabilities
Trade and other payables (352.3) (425.6)
Current tax (15.3) (4.6)
Provisions (3.0) (4.8)
Other financial liabilities (1.9) (2.2)
-------------------------------------------------- ---- ------- -------
(372.5) (437.2)
-------------------------------------------------- ---- ------- -------
Non-current liabilities
Retirement benefit obligation 13 (39.4) (22.2)
Deferred tax - (15.0)
Provisions (22.4) (19.3)
Other financial liabilities (0.1) (154.1)
Other payables (10.4) (11.2)
-------------------------------------------------- ---- ------- -------
(72.3) (221.8)
-------------------------------------------------- ---- ------- -------
Total liabilities (444.8) (659.0)
-------------------------------------------------- ---- ------- -------
Net assets 298.1 378.1
-------------------------------------------------- ---- ------- -------
Capital and reserves
Ordinary shares 6.1 6.6
Capital redemption reserve 40.4 39.9
Share premium account 147.6 147.6
Hedging and translation reserve (6.7) 23.2
Retained earnings 110.6 160.7
-------------------------------------------------- ---- ------- -------
Capital and reserves attributable to shareholders
of the parent company 298.0 378.0
-------------------------------------------------- ---- ------- -------
Non-controlling interest 0.1 0.1
-------------------------------------------------- ---- ------- -------
Total shareholders' funds 298.1 378.1
-------------------------------------------------- ---- ------- -------
Consolidated cash flow statement
for the year ended 31 March
all figures in GBP million Note 2015 2014
---------------------------------------------------- ---- ------- ------
Net cash inflow from continuing operations
before cash flows in respect of specific adjusting
items 143.9 127.0
Net cash outflow relating to restructuring (0.6) (10.3)
Disposal-related pension contribution (6.0) -
Cash generated from discontinued operations 1.8 30.3
Net cash outflow relating to pension scheme
closure costs - (4.0)
---------------------------------------------------- ---- ------- ------
Cash inflow from operations 139.1 143.0
Tax received 8.8 2.1
Interest received 1.0 1.0
Interest paid (36.4) (12.3)
---------------------------------------------------- ---- ------- ------
Net cash inflow from operating activities 112.5 133.8
---------------------------------------------------- ---- ------- ------
Purchases of intangible assets (4.2) (2.6)
Purchases of property, plant and equipment (24.8) (24.2)
Proceeds from sale of property, plant and equipment - 6.0
Acquisition of business (3.7) -
Sale of investment in subsidiary 79.6 -
---------------------------------------------------- ---- ------- ------
Net cash inflow/(outflow) from investing activities 46.9 (20.8)
---------------------------------------------------- ---- ------- ------
Repayment of bank borrowings (147.1) -
Investment in available for sale investments (10.0) -
Payment of bank loan arrangement fee (1.3) -
Purchase of own shares (106.8) (0.5)
Dividends paid to shareholders (31.7) (26.8)
Capital element of finance lease rental payments (2.8) (2.8)
Capital element of finance lease rental receipts 3.0 3.0
---------------------------------------------------- ---- ------- ------
Net cash outflow from financing activities (296.7) (27.1)
---------------------------------------------------- ---- ------- ------
(Decrease)/increase in cash and cash equivalents (137.3) 85.9
Effect of foreign exchange changes on cash
and cash equivalents 0.4 (4.1)
Cash and cash equivalents at beginning of year 322.2 240.4
Cash and cash equivalents disposed (1.0) -
---------------------------------------------------- ---- ------- ------
Cash and cash equivalents at end of year 12 184.3 322.2
---------------------------------------------------- ---- ------- ------
Reconciliation of movement in net cash
for the year ended 31 March
all figures in GBP million Note 2015 2014
-------------------------------------------------------- ---- ------- -----
(Decrease)/increase in cash and cash equivalents in the
year (137.3) 85.9
Add back net cash flows not impacting net cash 158.2 (0.2)
-------------------------------------------------------- ---- ------- -----
Change in net cash resulting from cash flows 20.9 85.7
-------------------------------------------------------- ---- ------- -----
Cash and cash equivalents disposed (1.0) -
Other movements including foreign exchange 5.1 10.8
-------------------------------------------------------- ---- ------- -----
Movement in net cash in the year 25.0 96.5
Net cash at beginning of year 170.5 74.0
-------------------------------------------------------- ---- ------- -----
Net cash at end of year 12 195.5 170.5
-------------------------------------------------------- ---- ------- -----
1. Significant accounting policies
Accounting policies
The following accounting policies have been applied consistently
to all periods presented in dealing with items that are considered
material in relation to the Group's financial statements. In the
income statement, the Group presents specific adjusting items
separately. In the judgement of the Directors, for the reader to
obtain a proper understanding of the financial information,
specific adjusting items need to be disclosed separately because of
their size and nature.
Specific adjusting items include:
-- amortisation of intangibles arising from acquisitions;
-- pension gain on closure to future accrual and associated Scheme-closure mitigation costs;
-- pension net finance expense;
-- gains/losses on business divestments and disposal of investments;
-- restructuring costs;
-- gains/losses on disposal of property;
-- impairment of property;
-- impairment of goodwill and other intangible assets;
-- tax on the above items; and
-- tax credits on one-off recognition of deferred tax asset in respect of UK trade losses.
Basis of preparation
The financial information in this preliminary announcement has
been extracted from the Group's consolidated financial statements
for the year ended 31 March 2015. The Group's financial statements
have been prepared on a going concern basis and in accordance with
International Financial Reporting Standards as adopted by the EU
('IFRS') and the Companies Act 2006 applicable to companies
reporting under IFRS. The comparative income statement for the year
ended 31 March 2014 has been re-presented for the sale of the US
Services business, excluding Cyveillance, which completed in May
2014. This disposal qualifies as a discontinued operation during
the current year. Revenue as previously reported has been reduced
by GBP408.8m and now reflects continuing operations only. Profit
before tax, previously reported as a single figure of GBP4.1m has
been split into its component parts for continuing operations and
discontinued operations. Further details of discontinued operations
are presented within note 4.
The financial information included within the preliminary
announcement has been prepared using accounting policies consistent
with International Financial Reporting Standards (IFRSs) as
endorsed by the European Union. The accounting policies followed
are the same as those published by the Group within its Annual
Report for the year ended 31 March 2015 which is available on the
Group's website, www.QinetiQ.com subject to the changes noted
below. The preliminary announcement was approved by the Board of
Directors on 21 May 2015. The financial information in this
preliminary announcement does not constitute the statutory accounts
of QinetiQ Group plc ('the Company') within the meaning of section
435 of the Act.
The statutory accounts for 2015 were approved by the Board of
Directors on 21 May 2015 and will be delivered to the Registrar of
Companies following the Company's Annual General Meeting on 22 July
2015. The financial information for 2014 is derived from the
statutory accounts for 2014 which have been delivered to the
Registrar of Companies. The auditors have reported on the 2015 and
2014 accounts. The reports were (i) unqualified; (ii) did not
include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report; and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006.
Basis of consolidation
The consolidated financial statements comprise the financial
statements of the Company and its subsidiary undertakings to 31
March 2015. The purchase method of accounting has been adopted.
Those subsidiary undertakings acquired or disposed of in the period
are included in the consolidated income statement from the date
control is obtained to the date that control is lost (usually on
acquisition and disposal respectively). An investor controls an
investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to
affect those returns through its power over the investee. This is
the IFRS 10 definition of "control".
The Group comprises certain entities that are operated under the
management of a Proxy Board. Details of the Proxy Board
arrangements and the powers of the proxy holders and QinetiQ
management are set out in the Corporate Governance section of the
Annual Report. IFRS 10 is the accounting standard now applicable in
respect of consolidation of entities. This does not specifically
deal with proxy situations. However, having considered the terms of
the proxy agreement, the Directors consider that the Group meets
the requirements of IFRS 10 in respect of control over such
affected entities and, therefore, consolidates these entities in
the consolidated accounts.
An associate is an undertaking over which the Group exercises
significant influence, usually from 20%-50% of the equity voting
rights, in respect of financial and operating policy. A joint
venture is an undertaking over which the Group exercises joint
control. Associates and joint ventures are accounted for using the
equity method from the date of acquisition to the date of disposal.
The Group's investments in associates and joint ventures are held
at cost including goodwill on acquisition and any post-acquisition
changes in the Group's share of the net assets of the associate
less any impairment to the recoverable amount. Where an associate
or joint venture has net liabilities, full provision is made for
the Group's share of liabilities where there is a constructive or
legal obligation to provide additional funding to the associate or
joint venture.
The financial statements of subsidiaries, joint ventures and
associates are adjusted where necessary to ensure compliance with
Group accounting policies.
On consolidation, all intra-Group income, expenses and balances
are eliminated.
Recent accounting developments
Developments adopted by the Group in 2015
The following EU-endorsed accounting standard was adopted for
the first time in 2015.
IFRS 10 'Consolidated Financial Statements' - part of a new
suite of standards on consolidation and related areas, replacing
the existing accounting standards for subsidiaries and joint
ventures (now joint arrangements) and making limited amendments in
relation to associates. The Group and the US Department of Defense
(DoD) have entered into a Proxy agreement that regulates the
ownership, management and operation of certain Group subsidiaries.
Having considered the terms of the Proxy agreement, the Directors
consider that the Group meets the requirements of IFRS 10 in
respect of control over such affected entities and, therefore,
consolidates the subsidiaries in the consolidated accounts.
Developments adopted by the Group in 2015 with no material
impact on the financial statements
The following EU-endorsed amendments, improvements and
interpretations of published standards are effective for accounting
periods beginning on or after 1 April 2014 and have been adopted
with no material impact on the Group's financial statements.
IFRS 11 'Joint Arrangements' - part of the same suite as IFRS
10;
IFRS 12 'Disclosure of Interests in Other Entities' - as above,
contains the disclosure requirements for entities that have
interest in subsidiaries, joint arrangements, associates and/or
unconsolidated structure entities;
IAS 27 'Separate Financial Statements' - amended as part of the
new suite of IFRSs as above;
IAS 28 'Investments in Associates' - resissued as IAS 28
'Investments in Associates and Joint Ventures'; it also forms part
of the new suite of IFRSs 10-12;
IFRS 10, 11, and 12 - amendments on transition guidance and on
consolidated for investment entities;
IAS 32 'Financial Instruments' - amendment relating to asset and
liability offsetting;
IAS 39 'Financial Instruments: Recognition and Measurement' -
amendment relating to the novation of derivatives and hedge
accounting; and
IFRIC 21 'Levies'.
Developments expected in future periods of which the impact is
being assessed
Revenue from Contracts with Customers: The final standard, IFRS
15, was published in May 2014. The IASB has tentatively decided to
defer the effective date by one year and it is now expected that
the standard will become effective, subject to EU endorsement, for
annual reporting periods beginning on or after 1 January 2018, with
earlier application permitted. The new Standard introduces a five
step model to the principle of revenue recognition. Briefly, the
framework includes identifying the contract with the customer,
identifying the performance obligations in the contract,
determining the transaction price, allocating the transaction price
to the performance obligations in the contract and recognising
revenue when (or as) the entity satisfies a performance obligation.
QinetiQ is currently undertaking an assessment of the impact the
new standard. Typical issues to be analysed on a
contract-by-contract basis include whether the current methodology
for recognising revenue over time remains appropriate, the
treatment of contract modifications, variable consideration,
determination and distinction of performance obligations,
collectability and licences (list not exhaustive). QinetiQ is also
undertaking an analysis of the transitional guidance which allows
for two different approaches, the retrospective method (with
optional practical expedients) or the cumulative effect method.
FRS 100, 101 and 102:FRS 100, 101 and 102 all fall under the new
UK GAAP regime. FRS 100 sets out the application of financial
reporting requirements in the UK and Republic of Ireland and FRS
101, known as 'IFRS with reduced disclosures', outlines the reduced
disclosure framework available for use by qualifying entities
choosing to follow the principles of IFRS but under the umbrella of
UK GAAP. FRS 102 is applicable in the UK and Republic of Ireland
and is known as the 'new UK GAAP'. FRS 102 follows more closely the
principles of existing UK GAAP with some exceptions. The mandatory
effective date for the new framework of reporting is for accounting
periods beginning on or after 1 January 2015. The Group can choose
to apply either full IFRS, or a choice of either FRS 101 or FRS 102
to the Company and to its subsidiary entities. The two latter
options both fall under UK GAAP and either may therefore be applied
to Group companies on an entity by entity basis. If full IFRS is
selected, this must be applied to all Group companies consistently.
The Group will adopt the UK GAAP option from 1 April 2015.
Leases: A revised exposure draft was issued in May 2013 and
following subsequent deliberations the IASB has decided upon the
tentative adoption of a single right-of-use ("ROU") model. This
approach eliminates off balance sheet accounting for lessees who
will instead account for most leases on balance sheet as financing
the purchase of an ROU asset. The ROU asset is a non-financial
asset which would be accounted for consistently with other
non-financial assets i.e. amortised. A corresponding liability
would be recognised separately and accounted for at amortised cost,
yielding an overall front-loaded expense profile, similar to
existing finance leases. The IASB has tentatively agreed that no
significant changes are needed to the current lessor model. The
standard is expected to be published in 2015; the effective date is
not yet known.
2. Segmental analysis
Operating segments
For the year ended 31 March
all figures in GBP million Note 2015 2014 ^
------------------------------------------- ---- ------------------ ------------------
Operating Operating
Revenue profit Revenue profit
------------------------------------------- ---- ------- --------- ------- ---------
EMEA Services 625.6 93.0 607.0 86.7
Global Products 138.2 18.3 175.6 27.0
------------------------------------------- ---- ------- --------- ------- ---------
Total operating segments 763.8 111.3 782.6 113.7
Operating profit before specific adjusting
items(1) - underlying operating profit 111.3 113.7
Specific adjusting items:
Restructuring 1.0 0.2
Pension scheme closure costs - 27.1
Property impairment reversal - 1.4
Impairment of goodwill - (41.9)
Amortisation of intangible assets arising
from acquisitions (2.8) (3.4)
------------------------------------------- ---- ------- --------- ------- ---------
Operating profit 109.5 97.1
Gain on business divestments 6 - 1.1
Net finance expense 7 (4.1) (14.2)
------------------------------------------- ---- ------- --------- ------- ---------
Profit before tax 105.4 84.0
Taxation income/(expense) 8 12.0 (16.0)
------------------------------------------- ---- ------- --------- ------- ---------
Profit for the year from continuing
operations 117.4 68.0
------------------------------------------- ---- ------- --------- ------- ---------
Discontinued operations
Loss from discontinued operations, net
of tax 4 (12.7) (80.7)
------------------------------------------- ---- ------- --------- ------- ---------
Profit/(loss) for the period attributable
to equity shareholders 104.7 (12.7)
------------------------------------------- ---- ------- --------- ------- ---------
(1) The measure of profit presented to the chief operating
decision maker is underlying operating profit (as defined in
glossary).
^ Restated for the reclassification of the US Services segment as a discontinued operation.
3. Profit/loss before tax
The following items have been charged in arriving at profit/loss
before tax for continuing operations:
all figures in GBP million 2015 2014^
------------------------------------------------------- ------- -------
Depreciation of property, plant and equipment:
Owned assets: depreciation (20.7) (21.8)
Owned assets: impairment (charge)/reversal (1.0) 1.4
Foreign exchange loss (0.3) (1.1)
Research and development expenditure - customer funded
contracts (285.8) (288.7)
Research and development expenditure - Group funded (20.8) (25.9)
------------------------------------------------------- ------- -------
In the income statement, the Group presents specific adjusting
items separately. In the judgement of the Directors, for the reader
to obtain a proper understanding of the financial information,
specific adjusting items need to be disclosed separately because of
their size and nature. The following specific adjusting items have
been (charged)/credited in arriving at profit/loss before tax:
all figures in GBP million 2015 2014^
------------------------------------------------------ ------ -------
Reversal of unutilised restructuring provisions 1.0 0.2
Reduction in pension liabilities on closure
to future accrual - 31.1
Pension scheme closure mitigation costs - (4.0)
------------------------------------------------------ ------ -------
Specific adjusting items before amortisation,
depreciation and impairment 1.0 27.3
Impairment of goodwill - (41.9)
Property impairment reversal - 1.4
Amortisation of intangible assets arising from
acquisition (2.8) (3.4)
------------------------------------------------------ ------ -------
Specific adjusting items operating loss (1.8) (16.6)
Gain on business divestments - 1.1
Defined benefit pension scheme net finance
expense (0.6) (1.7)
------------------------------------------------------ ------ -------
Specific adjusting items loss before tax -
continuing operations (2.4) (17.2)
------------------------------------------------------ ------ -------
Profit on disposal of subsidiary - before accelerated
interest expense 5 15.9 -
Loss on disposal of subsidiary - accelerated
interest expense (28.8) -
------------------------------------------------------ ------ -------
Loss on disposal of subsidiary (12.9) -
US Services pre-sale transaction costs - (6.0)
Impairment of goodwill - (84.0)
Amortisation of intangible assets arising from
acquisition (0.8) (7.6)
Restructuring costs - (0.5)
------------------------------------------------------ ------ -------
Specific adjusting items loss before tax -
discontinued operations (13.7) (98.1)
------------------------------------------------------ ------ -------
Total specific adjusting items loss before
tax (16.1) (115.3)
------------------------------------------------------ ------ -------
^ Restated for the reclassification of the US Services segment as a discontinued operation.
4. Discontinued operations
On 23 May 2014 the Group completed its sale of the US Services
division, comprising QinetiQ North America Inc. and its
subsidiaries. The Circular seeking shareholder approval for the
sale specified that the proceeds would be applied in settling the
remaining private placement ('PP') debt of $248m which was put in
place to finance the acquisitions of the US Services business.
Accordingly, the penalty of GBP28.8m incurred on the early
redemption of the PP is considered to be inextricably linked to the
sale of that business and has therefore been disclosed as an
adjustment to the loss on its sale rather than as a finance
expense.
The initial cash consideration was $165m prior to the standard
working capital adjustments at completion. The mid-month completion
of the deal resulted in the May month end payroll and creditor
payments falling outside QinetiQ's period of ownership. This caused
the closing balance sheet to have higher cash (to be retained by
QinetiQ) and lower working capital than would have been the case at
the month end. The working capital mechanism was designed to make
such timing issues neutral. Hence working capital adjustments (and
closing net-debt adjustments) of $10.6m were required. Additional
deferred consideration remains receivable. The earn-out is
scheduled to be payable in the first half of the Group's next
financial year on a sliding scale between zero and $50m based on
gross profit generated by the disposed business in the financial
year to 31 March 2015. Actual gross profit delivered by the
disposed business (still subject to audit) indicates that the
deferred consideration receivable will be approximately $9m in
cash. The full impact of the disposal is given below:
a) Results of discontinued operations
all figures in GBP million 2015 2014
--------------------------------------------------------------- ------ -------
Revenue 55.7 408.8
Operating costs excluding depreciation, amortisation and
impairment (54.2) (387.3)
---------------------------------------------------------------- ------ -------
EBITDA (earnings before interest, tax, depreciation and
amortisation) 1.5 21.5
Depreciation, amortisation and impairment of assets (0.3) (2.5)
---------------------------------------------------------------- ------ -------
Underlying operating profit 1.2 19.0
Impairment of goodwill - (84.0)
Amortisation of intangible assets arising from acquisitions (0.8) (7.6)
Other specific adjusting items - (6.5)
---------------------------------------------------------------- ------ -------
Operating profit/(loss) 0.4 (79.1)
Finance expense - (0.8)
---------------------------------------------------------------- ------ -------
Profit/(loss) before tax 0.4 (79.9)
Income tax (0.2) (0.8)
---------------------------------------------------------------- ------ -------
Results from operating activities, net of tax 0.2 (80.7)
Profit on sale of discontinued operations - before accelerated
interest costs 15.9 -
Loss on sale of discontinued operations - accelerated
interest costs (28.8) -
---------------------------------------------------------------- ------ -------
Loss for the period (12.7) (80.7)
---------------------------------------------------------------- ------ -------
Basic loss per share (2.0)p (12.4)p
Diluted loss per share (2.0)p (12.4)p
Underlying basic earnings per share 0.1 p 2.2 p
---------------------------------------------------------------- ------ -------
b) Cash flows from discontinued operations
all figures in GBP million 2015 2014
----------------------------------- ---- ----
Net cash from operating activities 1.8 30.3
Net cash from investing activities - -
----------------------------------- ---- ----
Net cash inflow for the year 1.8 30.3
------------------------------------ ---- ----
c) Effect of disposal on the financial position of the Group
all figures in GBP million 2015
------------------------------------------------------------- ------
Goodwill 41.2
Intangible assets 32.6
Property, plant and equipment 5.9
Inventories 0.8
Trade and other receivables 71.7
Cash and cash equivalents 1.0
Deferred tax asset 9.6
Trade and other payables (54.7)
-------------------------------------------------------------- ------
Net assets and liabilities 108.1
-------------------------------------------------------------- ------
Consideration received (net of transaction costs), satisfied
in cash 79.6
Cash and cash equivalents disposed (1.0)
-------------------------------------------------------------- ------
Net cash inflow in the year to 31 March 2015 78.6
-------------------------------------------------------------- ------
5. Business combinations
The Group made two acquisitions in the year to 31 March 2015. On
the 7 August 2014 the Group acquired the trade and assets of
Redfern Integrated Optics Inc. from its founder management team and
on the 19 November 2014 the Group acquired the trade and assets of
SR2020. Further information on each acquisition is given below.
Redfern Integrated Optics Inc. ("RIO")
RIO is a US-based business that designs and manufactures highly
coherent semiconductor lasers. QinetiQ's OptaSense business uses
the lasers within its core product range in the Distributed
Acoustic Sensing market. RIO is the sole source supplier for this
type of product and the acquisition was made to protect the supply
to OptaSense of the RIO laser product.
If the acquisition had been completed on the first day of the
financial year, Group revenue for the period ended 31 March 2015
would have been GBP764.7m and the Group profit before tax would
have been GBP105.4m.
Contribution post-acquisition
-------------------------------
Expected cash Operating
consideration Revenue profit
Acquisition Acquisition date GBPmillion GBPmillion GBPmillion
----------------------- ----------------- -------------- --------------- --------------
Trade and assets
of Redfern Integrated
Optics Inc. 7 August 2014 3.8 1.8 -
----------------------- ----------------- -------------- --------------- --------------
Set out below are the allocations of purchase consideration,
assets and liabilities of the acquisition made in the year and the
adjustments required to the book values of the assets and
liabilities in order to present the net assets of this business at
fair value and in accordance with the Group accounting
policies.
Book Fair value Fair value
all figures in GBP million value adjustment at acquisition
------------------------------- ------ ----------- ---------------
Net assets acquired 1.8 (0.9) 0.9
Goodwill and intangibles - 2.9 2.9
-------------------------------- ------ ----------- ---------------
1.8 2.0 3.8
------------------------------- ------ ----------- ---------------
Consideration satisfied by:
Cash 3.3
Deferred consideration payable 0.5
-------------------------------- ------ ----------- ---------------
Total consideration 3.8
-------------------------------- ------ ----------- ---------------
SR2020 Inc.
SR2020 Inc. is a US-based leading provider of borehole seismic
services who develop and use purpose written, proprietary software
for borehole seismic imaging, micro-seismic monitoring and passive
seismic monitoring. The business has extensive oil and gas industry
experience and its expertise in processing and interpretation
services will further enhance the Group's Optasense product and
services portfolio.
If the acquisition had been completed on the first day of the
financial year, Group revenue for the period ended 31 March 2015
would have been GBP763.9m and the Group profit before tax would
have been GBP104.6m.
Contribution post-acquisition
-------------------------------
Expected cash Operating
consideration Revenue profit
Acquisition Acquisition date GBPmillion GBPmillion GBPmillion
----------------- ----------------- -------------- --------------- --------------
Trade and assets
of SR2020 Inc. 19 November 2014 0.4 0.1 (0.4)
----------------- ----------------- -------------- --------------- --------------
Set out below are the allocations of purchase consideration,
assets and liabilities of the acquisition made in the year and the
adjustments required to the book values of the assets and
liabilities in order to present the net assets of theis business at
fair value and in accordance with the Group accounting
policies.
Book Fair value Fair value
all figures in GBP million value adjustment at acquisition
------------------------------- ------ ----------- ---------------
Net assets acquired 0.3 (0.3) -
Goodwill and intangibles - 0.4 0.4
-------------------------------- ------ ----------- ---------------
0.3 0.1 0.4
------------------------------- ------ ----------- ---------------
Consideration satisfied by:
Cash 0.4
Deferred consideration payable -
------------------------------- ------ ----------- ---------------
Total consideration 0.4
-------------------------------- ------ ----------- ---------------
6. Gain on business divestments - continuing operations
For the year ended 31 March
all figures in GBP million 2015 2014
----------------------------- ---- ----
Gain on business divestments - 1.1
----------------------------- ---- ----
The gain on business divestments relates to deferred
consideration received in respect of the disposal of the
Calibration business in 2009.
7. Finance income and expense - continuing operations
For the year ended 31 March
all figures in GBP million 2015 2014^
--------------------------------------------------- ----- ------
Receivable on bank deposits 1.1 1.4
Finance lease income 0.2 0.5
--------------------------------------------------- ----- ------
Finance income 1.3 1.9
--------------------------------------------------- ----- ------
Amortisation of recapitalisation fee (0.7) (0.6)
Payable on bank loans and overdrafts (0.9) (1.4)
Payable on US dollar private placement debt (2.6) (11.3)
Finance lease expense (0.2) (0.4)
Unwinding of discount on financial liabilities (0.4) (0.7)
--------------------------------------------------- ----- ------
Finance expense before specific adjusting items (4.8) (14.4)
Specific adjusting items:
Defined benefit pension scheme net finance expense (0.6) (1.7)
--------------------------------------------------- ----- ------
Total finance expense (5.4) (16.1)
--------------------------------------------------- ----- ------
Net finance expense (4.1) (14.2)
--------------------------------------------------- ----- ------
^ Restated for the reclassification of the US Services segment
as a discontinued operation.
The Circular seeking shareholder approval for the sale of the US
Services division specified that the proceeds would be applied in
settling the remaining private placement ('PP') debt of $248m which
was put in place to finance the acquisitions of the US Services
business. Accordingly, the penalty of GBP28.8m incurred on the
early redemption of the PP is considered to be inextricably linked
to the sale of that business and has therefore been disclosed as an
adjustment to the loss on its sale rather than as a finance
expense. See note 4.
8. Taxation - continuing operations
2015 2014^
-------------------------------- -------------------------------
Specific Specific
adjusting adjusting
all figures in GBP million Underlying* items* Total Underlying* items* Total
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Analysis of charge
Current UK tax expense/(income) 0.5 - 0.5 (4.2) (0.9) (5.1)
Overseas corporation tax
Current year 1.4 (0.5) 0.9 (10.3) (1.1) (11.4)
Adjustment for prior year (1.0) 0.6 (0.4) - - -
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Current tax expense/(income) 0.9 0.1 1.0 (14.5) (2.0) (16.5)
Deferred tax expense/(income) 11.3 (22.9) (11.6) 25.0 7.8 32.8
Deferred tax impact of change
in rates (0.4) - (0.4) 0.9 - 0.9
Deferred tax in respect of
prior years - (1.0) (1.0) - (1.2) (1.2)
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Deferred tax expense/(income) 10.9 (23.9) (13.0) 25.9 6.6 32.5
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Taxation expense/(income) -
continuing operations 11.8 (23.8) (12.0) 11.4 4.6 16.0
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Factors affecting tax charge/(credit)
in year
Principal factors reducing
the Group's current year tax
charge below the UK statutory
rate are explained below:
Profit/(loss) before tax 107.8 (2.4) 105.4 101.2 (23.2) 78.0
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Tax on profit/(loss) before
tax at 21%
(2014: 23%) 22.6 (0.5) 22.1 23.3 (5.3) 18.0
Effect of:
Expenses not deductible for
tax purposes, research and
development relief and
non-taxable items (18.6) 1.7 (16.9) (9.9) 10.4 0.5
Recognition of deferred tax
asset in respect of UK trading
losses(1) - (25.2) (25.2) - - -
Current tax losses for which
no deferred tax asset was recognised 6.9 - 6.9 (1.0) - (1.0)
Deferred tax impact of change
in rates (0.4) - (0.4) 0.9 - 0.9
Deferred tax in respect of
prior years 0.9 - 0.9 0.2 - 0.2
Effect of different rates in
overseas jurisdictions 0.4 0.2 0.6 (2.1) (0.5) (2.6)
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Taxation expense/(income) -
continuing operations 11.8 (23.8) (12.0) 11.4 4.6 16.0
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
Effective tax rate 10.9% (11.4%) 11.3% 20.5%
-------------------------------------- ----------- ---------- ------- ----------- ---------- ------
^ Restated for the reclassification of the US Services segment
as a discontinued operation.
* Definitions of underlying measures of performance and specific
adjusting items can be found in the glossary.
Tax expense on continuing operations excludes the tax expense of
the discontinued operation of GBP0.2m. This is included in
'profit/(loss) from discontinued operation, net of tax' (see note
4).
Factors affecting future tax charges
The effective tax rate continues to be below the statutory rate
in the UK, primarily as a result of the benefit of research and
development tax relief in the UK. The effective tax rate is
expected to remain below the UK statutory rate in the medium term,
subject to the impact of any tax legislation changes and the
geographic mix of profits and the assumption that the benefit of
R&D tax relief remains in the tax line. The Finance Act 2013
allows the continued treatment of R&D tax relief as a super
deduction until 1 April 2016, when R&D Expenditure Credit
treatment becomes mandatory.
Deferred tax has been calculated at 20% being the enacted future
statutory tax rate.
At 31 March 2015 the Group had unused tax losses of GBP291.6m
(2014: GBP213.9m) which are available for offset against future
profits. An asset of GBP25.2m has been recognised in respect of an
element of these unused tax losses, relating to certain UK trading
losses which are expected to be utilised in the foreseeable future.
No deferred tax asset is recognised in respect of the other losses
due to uncertainty over the timing and extent of their
utilisation.
9. Dividends
An analysis of the dividends paid and proposed in respect of the
years ended 31 March 2015 and 2014 is provided below:
Pence Date paid/
per share GBPm payable
--------------------------------------- ---------- ---- ----------
Interim 2015 1.8 11.1 Feb 2015
Final 2015 (proposed) 3.6 21.2 Sept 2015
--------------------------------------- ---------- ---- ----------
Total for the year ended 31 March 2015 5.4 32.3
--------------------------------------- ---------- ---- ----------
Interim 2014 1.4 9.2 Feb 2014
Final 2014 3.2 20.6 Sept 2014
--------------------------------------- ---------- ---- ----------
Total for the year ended 31 March 2014 4.6 29.8
--------------------------------------- ---------- ---- ----------
The Directors propose a final dividend of 3.6p (2014: 3.2p) per
share. The dividend, which is subject to shareholder approval, will
be paid on 4 September 2015. The ex-dividend date is 6 August 2015
and the record date is 7 August 2015.
10. Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to equity shareholders by the weighted average number
of ordinary shares in issue during the year. The weighted average
number of shares used excludes those shares bought by the Group and
held as own shares. For diluted earnings per share the weighted
average number of shares in issue is adjusted to assume conversion
of all potentially dilutive ordinary shares arising from unvested
share-based awards including share options. Underlying basic
earnings per share figures are presented below, in addition to the
basic and diluted earnings per share, because the Directors
consider this gives a more relevant indication of underlying
business performance and reflects the adjustments to basic earnings
per share for the impact of specific adjusting items (see note 3)
and tax thereon.
2014
For the year ended 31 March 2015
----------------------------------------------------------------------- ------------ ------ -----
Underlying basic EPS - continuing operations
Profit attributable to equity shareholders GBP million 117.4 68.0
Remove (profit)/loss after tax in respect of specific adjusting items* Million (21.4) 21.8
----------------------------------------------------------------------- ------------ ------ -----
Underlying profit after taxation Million 96.0 89.8
----------------------------------------------------------------------- ------------ ------ -----
Weighted average number of shares Million 630.9 651.7
----------------------------------------------------------------------- ------------ ------ -----
Underlying basic EPS - continuing operations Pence 15.2 13.8
----------------------------------------------------------------------- ------------ ------ -----
Underlying basic EPS - total Group
----------------------------------------------------------------------- ------------ ----- ------
Profit/(loss) attributable to equity shareholders GBP million 104.7 (12.7)
Remove (profit)/loss after tax in respect of specific adjusting items* Million (8.0) 116.7
----------------------------------------------------------------------- ------------ ----- ------
Underlying profit after taxation Million 96.7 104.0
----------------------------------------------------------------------- ------------ ----- ------
Weighted average number of shares Million 630.9 651.7
----------------------------------------------------------------------- ------------ ----- ------
Underlying basic EPS - total Group Pence 15.3 16.0
----------------------------------------------------------------------- ------------ ----- ------
For the year ended 31 March 2015 2014
------------------------------------------- ------------ ----- -----
Basic EPS - continuing operations
Profit attributable to equity shareholders GBP million 117.4 68.0
Weighted average number of shares Million 630.9 651.7
-------------------------------------------- ----------- ----- -----
Basic EPS - continuing operations Pence 18.6 10.4
-------------------------------------------- ----------- ----- -----
Diluted EPS - continuing operations
Profit attributable to equity shareholders GBP million 117.4 68.0
Weighted average number of shares Million 630.9 651.7
Effect of dilutive securities Million 3.7 5.1
-------------------------------------------- ----------- ----- -----
Diluted number of shares Million 634.6 656.8
-------------------------------------------- ----------- ----- -----
Diluted EPS - continuing operations Pence 18.5 10.4
-------------------------------------------- ----------- ----- -----
For the year ended 31 March 2015 2014
------------------------------------- ------------ ----- ------
Basic EPS - total Group
Profit/(loss) attributable to equity
shareholders GBP million 104.7 (12.7)
Weighted average number of shares Million 630.9 651.7
-------------------------------------- ----------- ----- ------
Basic EPS - total Group Pence 16.6 (1.9)
-------------------------------------- ----------- ----- ------
Diluted EPS - total Group
Profit/(loss) attributable to equity
shareholders GBP million 104.7 (12.7)
Weighted average number of shares Million 630.9 651.7
Effect of dilutive securities(1) Million 3.7 -
Diluted number of shares Million 634.6 651.7
------------------------------------- ------------- ----- ------
Diluted EPS - total Group Pence 16.5 (1.9)
------------------------------------- ------------- ----- ------
* For details of 'specific adjusting' items refer to note 3.
(1) The loss attributable to equity shareholders results in the
effect of dilutive securities on the weighted average number of
shares being nil in the prior year.
11. Goodwill
all figures in GBP million 2015 2014
--------------------------- ------- -------
Cost
At 1 April 541.4 593.0
Acquisitions 0.1 -
Disposals (370.1) -
Foreign exchange 11.9 (51.6)
---------------------------- ------- -------
At 31 March 183.3 541.4
---------------------------- ------- -------
Impairment
At 1 April (400.1) (302.6)
Disposals 328.9 -
Impairment - (125.9)
Foreign exchange (4.9) 28.4
---------------------------- ------- -------
At 31 March (76.1) (400.1)
---------------------------- ------- -------
Net book value at 31 March 107.2 141.3
---------------------------- ------- -------
Goodwill as at 31 March 2015 was allocated across various cash
generating units (CGUs) in the following segments: EMEA Services
(three) and Global Products (two). Goodwill previously allocated to
the US Services CGU was written off in the year on disposal of that
CGU.
Goodwill is attributable to the excess of consideration over the
fair value of net assets acquired and includes expected synergies,
future growth prospects and employee knowledge, expertise and
security clearances. The Group tests each CGU for impairment
annually, or more frequently if there are indications that goodwill
might be impaired.
Impairment testing is dependent on management's estimates and
judgments, particularly as they relate to the forecasting of future
cash flows, the discount rates selected and expected long-term
growth rates. Significant headroom exists in all CGUs with the
exception of US Global Products, discussed below, and management
considers that there are no likely variations in the key
assumptions which would lead to an impairment being recognised in
any of the other CGUs.
Key assumptions
Cash flows
The value-in-use calculations generally use discounted future
cash flows based on financial plans approved by the Board covering
a two-year period. Discounted cash flows for the US Global Products
CGU were based on a Board-approved three-year plan, reflecting
increases in revenue from new product lines. Cash flows for periods
beyond these periods are extrapolated based on the last year of the
plans, with a terminal growth-rate assumption applied.
Terminal growth rates
The specific plans for each of the CGUs have been extrapolated
using a terminal growth rate of 2.0% - 3.0% (2014: 2.0% - 3.0%).
Growth rates are based on management's estimates which take into
consideration the long-term nature of the industry in which the
CGUs operate and external forecasts as to the likely growth of the
industry in the longer term.
Discount rates
The Group's weighted average cost of capital was used as a basis
in determining the discount rate to be applied adjusted for risks
specific to the market characteristics of CGUs as appropriate on a
pre-tax basis. This is considered to appropriately estimate a
market participant discount rate. The pre-tax discount rates
applied for the three EMEA Services CGUs were 10.6%, 13.2% and
17.0% and for the Global Products CGUs 10.0% and 10.5%.
Sensitivity analysis shows that the value of the terminal year
cash flow, the discount rate and the terminal growth rates have a
significant impact on the value of the discounted cash flow.
Significant CGUs
The carrying value of the net operating assets of the US Global
Products CGU was written down in the prior year. This brought the
carrying value in line with the calculated value in use as at 31
March 2014. The carrying value of the goodwill for this CGU as at
31 March 2015 was GBP67.2m (2014: GBP60.0m). The value in use of
this CGU as at 31 March 2015, calculated using the assumptions
noted above, is marginally higher than the carrying value of net
operating assets (of GBP78.0m) and no further impairment is
required in the year to 31 March 2015. The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. These cash flows include certain assumptions about
revenue and profit in respect of new product lines still to be
launched. Applying a sensitivity to remove the new product
contribution from the terminal year results in an impairment of
GBP9.9m. An additional sensitivity to remove all expected growth in
the terminal year (i.e. growth in existing products as well as new
products) results in an impairment of GBP34.8m. Sensitivity
analysis also shows that an increase of 1% in the discount rate
assumption would result in an impairment of GBP9.5m. Sensitivity
analysis also shows that a decrease of 1% in the terminal growth
rate would result in an impairment of GBP8.2m.
The UK Global Products CGU and the three individual CGUs within
EMEA Services all have significant headroom. An increase in the
discount rate or a decrease in the terminal growth rate by 1% would
not cause the net operating assets to exceed their recoverable
amount. The carrying value of goodwill for the UK Global Products
CGU as at 31 March 2015 was GBP5.2m (2014: GBP5.5m). The carrying
values of goodwill for the three EMEA Services CGUs as at 31 March
2015 were GBP27.5m, GBP5.2m and GBP2.1m (2014: GBP27.5m, GBP4.6m
and GBP2.3m). The Directors have not identified any other likely
changes in other significant assumptions between 31 March 2015 and
the signing of the financial statements that would cause the
carrying value of the recognised goodwill to exceed its recoverable
amount.
12. Net cash
As at 31 March
2015 2014
-------------------------- ----------------------------
all figures in GBP million Assets Liabilities Net Assets Liabilities Net
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Current financial assets/(liabilities)
Deferred financing costs 0.3 - 0.3 - 0.5 0.5
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Borrowings 0.3 - 0.3 - 0.5 0.5
Available for sale investment 10.0 - 10.0 - - -
Derivative financial instruments 0.5 (0.5) - 0.3 (0.1) 0.2
Finance lease debtor/(creditor) 1.5 (1.4) 0.1 2.8 (2.6) 0.2
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Total current financial
assets/(liabilities) 12.3 (1.9) 10.4 3.1 (2.2) 0.9
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Non-current assets/(liabilities)
US$ private placement notes
- 7.13% - - - - (26.6) (26.6)
US$ private placement notes
- 5.50% - - - - (29.2) (29.2)
US$ private placement notes
- 7.62% - - - - (96.9) (96.9)
Deferred financing costs 0.8 - 0.8 - - -
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Borrowings 0.8 - 0.8 - (152.7) (152.7)
Derivative financial instruments 0.1 (0.1) - 0.1 - 0.1
Finance lease debtor/(creditor) - - - 1.4 (1.4) -
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Total non-current financial
assets/(liabilities) 0.9 (0.1) 0.8 1.5 (154.1) (152.6)
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Cash 41.6 - 41.6 53.7 - 53.7
Cash equivalents 142.7 - 142.7 268.5 - 268.5
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Total cash and cash equivalents 184.3 - 184.3 322.2 - 322.2
--------------------------------------- ------ ----------- ----- ------ ----------- -------
Total net cash as defined
by the Group 195.5 170.5
--------------------------------------- ------ ----------- ----- ------ ----------- -------
At 31 March 2015 GBP1.3m (2014: GBP2.2m) of cash was held by the
Group's captive insurance subsidiary, including GBP0.1m (2014:
GBP0.1m) that was restricted in its use.
All US$ private placement notes were repaid in the year (see
note 7). The Circular seeking shareholder approval for the sale of
the US Services division specified that the proceeds would be
applied in settling the remaining private placement debt of $248m,
which was put in place to finance the acquisitions of the US
Services business.
Reconciliation of net cash flow to movement in net cash
all figures in GBP million 2015 2014
---------------------------------------------------- ------- -----
(Decrease)/increase in cash and cash equivalents
in the year (137.3) 85.9
Repayment of US$ private placement notes 147.1 -
Outflow in respect of available for sale investment 10.0 -
Payment of bank loan arrangement fee 1.3 -
Capital element of finance lease payments 2.8 2.8
Capital element of finance lease receipts (3.0) (3.0)
----------------------------------------------------- ------- -----
Change in net cash resulting from cash flows 20.9 85.7
Cash and cash equivalents disposed (1.0) -
Amortisation of deferred financing costs (0.7) (0.6)
Finance lease receivables 0.3 0.4
Finance lease payables (0.2) (0.4)
Foreign exchange and other non-cash movements 5.7 11.4
----------------------------------------------------- ------- -----
Movement in net cash in year 25.0 96.5
Net cash at beginning of year 170.5 74.0
----------------------------------------------------- ------- -----
Net cash at 31 March 195.5 170.5
----------------------------------------------------- ------- -----
13. Post-retirement benefits
In the UK the Group operates the QinetiQ Pension Scheme ('the
Scheme') for a significant proportion of its UK employees. The
Scheme closed to future accrual on 31 October 2013. After this
date, defined benefit members transferred to a defined contribution
scheme. On closure, the Group realised a reduction in Scheme
liabilities of GBP31.1m and a one-off cost of GBP4.0m arising from
associated contributions to affected members' defined contribution
plans following the closure of the Scheme.
The fair value of the QinetiQ Pension Scheme assets, which are
not intended to be realised in the short term and may be subject to
significant change before they are realised, and the present value
of the Scheme's liabilities, which are derived from cash flow
projections over long periods, and thus inherently uncertain,
were:
all figures in GBP million 2015 2014 2013 2012 2011
------------------------------------ --------- --------- --------- --------- ---------
Equities 517.2 434.4 487.3 583.2 564.1
LDI investment(1) 323.4 273.6 205.9 - -
Corporate bonds 311.4 279.9 276.8 194.6 158.7
Alternative bonds(2) 176.3 183.0 174.8 - -
Government bonds - - - 183.5 165.3
Property 113.4 94.0 81.3 82.4 78.0
Other 12.9 39.7 30.4 64.2 15.0
------------------------------------ --------- --------- --------- --------- ---------
Total market value of assets 1,454.6 1,304.6 1,256.5 1,107.9 981.1
Present value of Scheme liabilities (1,494.0) (1,326.8) (1,310.6) (1,139.4) (1,105.7)
------------------------------------ --------- --------- --------- --------- ---------
Net pension liability before
deferred tax (39.4) (22.2) (54.1) (31.5) (124.6)
Deferred tax asset 1.6 1.3 13.7 13.3 32.4
------------------------------------ --------- --------- --------- --------- ---------
Net pension liability after
deferred tax (37.8) (20.9) (40.4) (18.2) (92.2)
------------------------------------ --------- --------- --------- --------- ---------
(1) The Scheme has assets invested in a Liability Driven
Investment portfolio. As at 31 March 2015 this hedges against
approximately 20% of the interest rate and 45% of the inflation
rate risk, as measured on the Trustee's gilt-funding basis.
(2) Includes allocations to high-yield bonds, secured loans and
emerging market debt.
Changes to the fair value of Scheme assets
all figures in GBP million 2015 2014
------------------------------------- ------- -------
Opening fair value of Scheme assets 1,304.6 1,256.5
Interest income on Scheme assets 53.9 54.9
Re-measurement gain on Scheme assets 116.3 2.6
Contributions by the employer 9.2 20.6
Net benefits paid out and transfers (28.1) (28.8)
Administrative expenses (1.3) (1.2)
------------------------------------- ------- -------
Closing fair value of Scheme assets 1,454.6 1,304.6
------------------------------------- ------- -------
Changes to the present value of the defined benefit
obligation
all figures in GBP million 2015 2014
------------------------------------------------------ --------- ---------
Opening defined benefit obligation (1,326.8) (1,310.6)
Current service cost - (11.3)
Interest cost (54.5) (56.6)
Actuarial (loss)/gain on Scheme liabilities based on:
Change in financial assumptions (128.3) (39.2)
Experience gains 7.8 31.0
Change in demographic assumptions (20.3) -
Curtailment gain - 31.1
Net benefits paid out and transfers 28.1 28.8
------------------------------------------------------ --------- ---------
Closing defined benefit obligation (1,494.0) (1,326.8)
------------------------------------------------------ --------- ---------
Total income/expense recognised in the income statement
all figures in GBP million 2015 2014
---------------------------------------------------------- ---- ------
Current service cost - 11.3
Past service gain (including curtailments) - (31.1)
Net interest on the net defined benefit liability 0.6 1.7
Administrative expenses 1.3 1.2
---------------------------------------------------------- ---- ------
Total expense/(income) recognised in the income statement
(gross of deferred tax) 1.9 (16.9)
---------------------------------------------------------- ---- ------
Assumptions
The major assumptions used in IAS19 valuation of the Scheme
were:
2015 2014
--------------------------------------------- ---- ----
Discount rate applied to scheme liabilities 3.2% 4.2%
CPI inflation assumption 2.1% 2.6%
--------------------------------------------- ---- ----
Assumed life expectancies in years:
Future male pensioners (currently aged 60) 88 88
Future female pensioners (currently aged 60) 91 90
Future male pensioners (currently aged 40) 91 90
Future female pensioners (currently aged 40) 93 92
--------------------------------------------- ---- ----
14. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured
guarantees of GBP36.2m at 31 March 2015 (2014: GBP40.3m) in the
ordinary course of business.
The Company has on occasion been required to take legal action
to protect its intellectual property rights, to enforce commercial
contracts or otherwise and similarly to defend itself against
proceedings brought by other parties. Provisions are made for the
expected costs associated with such matters, based on past
experience of similar items and other known factors, taking into
account professional advice received, and represent management's
best estimate of the likely outcome. The timing of utilisation of
these provisions is uncertain pending the outcome of various court
proceedings and negotiations. However, no provision is made for
proceedings which have been or might be brought by other parties
unless management, taking into account professional advice
received, assesses that it is more likely than not that such
proceedings may be successful. Contingent liabilities associated
with such proceedings have been identified but the Directors are of
the opinion that any associated claims that might be brought can be
resisted successfully and therefore the possibility of any outflow
in settlement is assessed as not probable.
The Group has not recognised contingent amounts receivable
relating to the Chertsey property which was disposed of during 2004
or the Fort Halstead property disposed of in September 2005.
Additional consideration is potentially due on the purchasers
obtaining additional planning consents, with the quantum dependent
on the scope of the consent achieved.
The Group has also not recognised contingent amounts receivable
relating to property impairments in prior years that may
potentially be recovered from the MOD. Recovery is subject to
future negotiations. It is not considered practicable to calculate
the value of this contingent asset.
15. Cash flows from operations
For the year ended 31 March
all figures in GBP million 2015 2014
------------------------------------------------------------- ------ ------
Profit/(loss) after tax for the year 104.7 (12.7)
Adjustments for:
Taxation (income)/expense (11.8) 16.8
Net finance costs 4.1 15.0
Loss on business divestments and disposal of investments 12.9 4.9
Reversal of unutilised restructuring provisions (1.0) -
Amortisation of purchased or internally developed intangible
assets 1.5 1.0
Amortisation of intangible assets arising from acquisitions 3.6 11.0
Impairment of goodwill - 125.9
Depreciation and impairment of property, plant and
equipment 22.0 22.6
Loss on disposal of property, plant and equipment 1.2 1.4
Share of post-tax (loss)/profit of equity accounted
entities 0.1 (0.1)
Share-based payments charge 3.6 4.5
Changes in retirement benefit obligations (7.9) (8.1)
Pension curtailment gain - (31.1)
Net movement in provisions (1.6) (10.5)
------------------------------------------------------------- ------ ------
131.4 140.6
------------------------------------------------------------- ------ ------
Decrease in inventories 2.6 4.4
Decrease in receivables 27.3 21.7
Decrease in payables (22.2) (23.7)
------------------------------------------------------------- ------ ------
Changes in working capital 7.7 2.4
------------------------------------------------------------- ------ ------
Cash generated from operations 139.1 143.0
Add back: cash outflow relating to restructuring 0.6 10.3
Add back: disposal-related pension contribution 6.0 -
Less: cash generated from discontinued operations (1.8) (30.3)
Add back: cash outflow relating to pension scheme closure
costs - 4.0
------------------------------------------------------------- ------ ------
Net cash flow from operations before restructuring
costs 143.9 127.0
------------------------------------------------------------- ------ ------
Glossary
Book to bill Ratio of funded orders Specific adjusting Amortisation of intangible
ratio received in the year items assets arising from acquisitions;
to revenue for the year, net restructuring charges/recoveries;
adjusted to exclude net pension finance expense;
revenue from the 25-year net pension gain on closure
LTPA contract to future accrual; impairment
of property; impairment
of goodwill and intangible
assets; gain/loss on business
combinations and divestments;
gain/loss on disposal of
investments; tax on the
preceding items; and tax
credits on one-off recognition
of deferred tax asset in
respect of UK trade losses
SDSR Strategic Defence and Security
Review
C4ISR Command, control, communications, SSRO Single Source Regulations
computers, intelligence, Office
surveillance and reconnaissance
CPI Consumer Price Index
UK GAAP UK Generally Accepted Accounting
Practice
DE&S MOD's Defence, Equipment Underlying basic Basic earnings per share
and Support organisation earnings per as adjusted to exclude
share 'specific adjusting items'
Underlying effective The tax charge for the
tax rate year excluding the tax
impact of 'specific adjusting
items' expressed as a percentage
of underlying profit before
tax
EBITDA Earnings before interest, Underlying net Net cash inflow from operations
tax, depreciation cash from operations before cash flows of specific
and amortisation (post capex) adjusting items less net
cash outflow on purchase/sale
of intangible assets and
property, plant and equipment
EPS Earnings per share Underlying net Net finance costs excluding
finance costs net pension finance costs
Underlying operating The ratio of underlying
cash conversion net cash from operations
(post capex) to underlying
operating profit excluding
share of post-tax result
of equity-accounted joint
ventures and associates
Funded backlog The expected future
value of revenue from
contractually committed
and funded customer
orders (excluding the
GBP998m third-term re-pricing
of the LTPA contract)
IAS International Accounting Underlying operating Underlying operating profit
Standards margin expressed as a percentage
of revenue
IFRS International Financial Underlying operating Operating profit as adjusted
Reporting Standards profit to exclude 'specific adjusting
items'
LTPA Long-Term Partnering Underlying profit Profit before tax as adjusted
Agreement - 25-year before tax to exclude 'specific adjusting
contract established items'
in 2003 to manage the
MOD's test and evaluation
ranges
MOD UK Ministry of Defence
Organic growth The level of year-on-year
growth, expressed as
a percentage, calculated
at constant foreign
exchange rates, adjusting
comparatives to incorporate
the results of acquired
entities but excluding
the results for any
disposals or discontinued
operations for the same
duration of ownership
as the current period
This information is provided by RNS
The company news service from the London Stock Exchange
END
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