TIDMQQ.
RNS Number : 2271G
QinetiQ Group plc
19 November 2015
For release at 0700 hours on 19 November 2015
Interim Results for the half year ended 30 September 2015
H1 2016 H1 2015
Business Performance
Orders GBP228.4m GBP320.5m
Revenue GBP370.9m GBP365.6m
Underlying operating profit* GBP49.8m GBP49.3m
Underlying operating margin* 13.4% 13.5%
Underlying profit before tax* GBP49.7m GBP46.0m
Underlying net cash flow from GBP46.9m GBP57.0m
operations (post capex)*
Underlying cash conversion
ratio* 94% 116%
Underlying earnings per share
(eps)* 7.3p 6.3p
Net cash GBP181.5m GBP205.7m
Dividend per share 1.9p 1.8p
Statutory Reporting
Operating profit from continuing GBP48.9m GBP48.0m
operations
Profit attributable to shareholders GBP42.0m GBP32.9m
Total earnings per share 7.1p 5.1p
* Definitions of underlying measures of performance can be found
in the glossary.
Headlines
-- Good trading result in challenging markets
o Solid revenue and operating profit performance
o Continued high cash conversion
-- Reduced order intake during H1 against a strong comparator period
o Approximately two thirds of the orders reduction due to timing
of multi-year contract awards
o GBP153m 5-year UK MOD renewal for aircraft engineering
services awarded after period end
o Some de-scoping and delay to orders in tough and uncertain
markets
o 90% of FY16 revenue under contract at start of H2, consistent
with prior period
-- Continued focus on shareholder returns
o 16% increase in underlying eps* due to lower finance costs and
reduced share count
o 6% increase in interim dividend in line with commitment to a
progressive dividend
o GBP50m share buyback over next 12 months, consistent with
capital allocation policy
-- QinetiQ has core competencies well matched to emerging themes in global markets
o Priorities to improve customer focus and competitiveness
Steve Wadey, Group Chief Executive Officer said:
"This is a good trading result in a challenging market
environment and our expectations for Group performance in the
current financial year remain unchanged."
"Whilst markets are tough and uncertain, I am convinced that we
have the core competencies required to help our customers deliver
both more for less and respond to increasing security threats
through innovation. To address this, I have identified clear
priorities to improve our customer focus and competitiveness that
will build a stronger future for QinetiQ."
ENDS.
Other information
There will be a presentation of the interim results to analysts
at 0900 hours UK time on 19 November 2015 at the London Stock
Exchange, 10 Paternoster Square, EC4M 7LS. 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 / International: +44 (0)20 3059 8125
-- US: +1 855 287 9927
About QinetiQ:
For further information please contact:
+44 (0) 1252
Media relations: QinetiQ press office 393500
Chris Barrie, Citigate +44 (0) 7968
Dewe Rogerson 727289
+44 (0) 7920
Investor relations: David Bishop, QinetiQ 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 of H1 results
Orders fell to GBP228.4m against a strong prior period (H1 2015:
GBP320.5m). The market environment was challenging with budgets
under pressure and some de-scoping and delay to orders.
Additionally, approximately two thirds of the orders reduction from
the prior period was due to the timing of multi-year contract
awards and the impact of this on near-term revenue is expected to
be limited. Some significant multi-year orders were awarded after
period end including a GBP153m five-year renewal for engineering
support to the UK MOD for the A400M Atlas, Typhoon and Tornado
aircraft under a new output-based model.
Revenue grew 1% to GBP370.9m (H1 2015: GBP365.6m). On 1 October
2015, the Group had 90% of FY16 revenue under contract, consistent
with the prior period and up from 77% at the beginning of this
financial year.
Underlying operating profit* was flat at GBP49.8m (H1 2015:
GBP49.3m). Underlying profit before tax* increased 8% to GBP49.7m
(H1 2015: GBP46.0m) with underlying net finance costs* falling to
GBP0.1m (H1 2015: GBP3.3m) as a result of repayment of the private
placement debt in the prior year.
Underlying earnings per share* increased 16% to 7.3p (H1 2015:
6.3p) benefiting from the higher underlying profit before tax* and
reduced number of shares following the completion of the GBP150m
share buyback programme.
Underlying operating cash conversion* remained strong at 94% (H1
2015: 116%), delivering an underlying cash flow from continuing
operations* of GBP46.9m (H1 2015: GBP57.0m) after a higher
investment in capital expenditure on the Long Term Partnering
Agreement (LTPA). At 30 September 2015, the Group had GBP181.5m net
cash, compared to GBP195.5m net cash at 31 March 2015.
QinetiQ's priorities for capital allocation will continue to be:
organic investment complemented by bolt-on acquisitions where there
is a strong strategic fit, the maintenance of balance sheet
strength, a progressive dividend, and the return of excess cash to
shareholders. The GBP150m share buyback, which commenced on 28 May
2014, was completed by 30 September 2015 with 72.5m shares
purchased in total. A further GBP50m share repurchase was initiated
today in line with the Group's capital allocation policy. It will
be executed over the next 12 months provided there are no other
significant and better opportunities for investment within the
business during this period.
An interim dividend of 1.9p (H1 2015: 1.8p) will be paid on 12
February 2016 to shareholders on the register at 15 January 2016.
The 6% increase in interim dividend reflects the Group's
progressive dividend policy. The interim dividend is normally
expected to represent approximately one third of the anticipated
total dividend for the 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.
Over the first six months, he has focused on the topics most
important to the future of the company, spending the vast majority
of his time with the company's three key stakeholders - our
customers, employees and shareholders.
Trading environment
UK
The trading environment is tough in the short term, particularly
in the UK.
The UK Government's Strategic Defence and Security Review (SDSR)
will be published shortly, and its publication will help bring
clarity on the UK's capability priorities and the associated
allocation of the UK defence budget. Whilst the conclusions of the
SDSR are not yet known, efficiency and innovation are likely to be
key themes.
Also underway is a public consultation by the recently
established Single Source Regulations Office (SSRO) on the proposed
approach to calculating the baseline profit rate for single source
contracts which is expected to conclude in early 2016. The
regulations apply to new single source contracts, plus existing
single source contracts when they come up for renewal. Our
combination of capabilities is unique in the UK and, consequently,
approximately 70% of total EMEA Services revenue is derived from
single source contracts, including the non-tasking element of the
Long Term Partnering Agreement (LTPA).
US
In the US, the defence downturn is reaching the bottom, however,
the defence spending cycle is long. New Programs of Record for
capabilities such as ground robots are still at least a year away,
and so in the near term most opportunities are likely to be for the
reset and recapitalisation of products previously used on
operations. Our US products business is responding to the changes
in its markets with a greater focus on these Programs of Record,
contract-funded research and development, as well as commercial and
international markets.
(MORE TO FOLLOW) Dow Jones Newswires
November 19, 2015 02:00 ET (07:00 GMT)
The Department of Defense is increasingly concerned that its
'technological superiority' has been steadily eroding. It has
launched the Defence Innovation Initiative, also known as the Third
Offset Strategy, "an ambitious effort to identify and invest in
innovative ways to sustain and advance America's military dominance
for the 21st Century." This will put new resources behind
innovation and in particular research and development in technology
areas such as advanced sensors, communications, munitions and high
energy lasers, space, missile defence, cyber capabilities and
unmanned vehicles; all areas in which QinetiQ has some particular
strengths.
Australia
In Australia, the Government needs to modernise its defence
equipment and plans to replace the majority of its platforms over
the next 15 years, supported by an increase in defence expenditure
to 2% of GDP. In line with the recommendations of the First
Principles Review, the Government is also pursuing a defence
transformation programme similar to that which has been underway in
the UK since the beginning of the decade.
Emerging themes in our markets
A number of the strategic themes are common in our home markets
of the UK, US and Australia as well as for many customers around
the world.
Governments are having to respond to increasing security threats
with reducing budgets. They need to deliver more with less; i.e.
more "efficiency" will be required as the British Secretary of
State for Defence said in a recent speech. So not only are
Government customers seeking greater value for money from their
suppliers, they are also looking for assistance in meeting their
own "efficiency" challenges. Companies like QinetiQ, with a track
record of delivering more for less, are well positioned to
help.
But the Secretary of State also said: "Being efficient won't be
enough. We also need to innovate." Governments are seeking models
for innovation in both equipment and processes so that they can
rapidly integrate new technologies into existing capabilities to
respond to fast-evolving threats. Many customers are keen to
capture the innovation that comes from universities and small and
medium sized companies and are looking for assistance from
organisations that can help them connect their supply chains.
Similarly governments are promoting multilateral approaches to
developing new capabilities, encouraging suppliers to cooperate
internationally.
QinetiQ already delivers an 'innovation integrator' role,
building networks to bring together Government, industry, SMEs and
academia in collaborating teams and thereby facilitating innovation
at every stage of the procurement process. Our Cyber Information
and Training (CIT) business, for example, is the MOD's leading
supplier of C4ISR research, managing framework contracts for the
MOD that involve more than 100 UK SMEs.
Immediate priorities
There is no denying that global markets are challenging, but
they also present opportunities. QinetiQ is well positioned to help
customers meet the dual challenges of budget pressures and
increasing global security threats. They are looking for suppliers
that not only have a track record of delivering more for less but
can also be their chosen partner to help them meet new challenges
and secure an advantage through innovation.
QinetiQ is a company that is built on the expertise of its
people whose inherent capabilities in information, knowledge and
technology are critical to meeting current and future global
challenges. Not only are our core competencies well matched to
changing global defence dynamics, they are also applicable to other
sectors such as security and space. We are building a map of these
core competencies to improve how we integrate them across the
company and exploit them for the benefit of our customers. We are
also investing in core competencies such as test and evaluation to
win market share, with capital expenditure likely to increase
further as we continue to invest in the LTPA contract.
Customer requirements are not only changing, they are also
getting more demanding. There is a need to improve our business
winning skills in order to thrive in an increasingly challenging
market, so we have instigated a programme to develop the skills of
our sales teams. We also need to improve our market knowledge; for
example in August we appointed Jamie Pollard as CEO for
OptaSense(R) to bring an in-depth understanding of the oil and gas
sector in which he has worked for more than 20 years. We have
launched a new process for bidding and winning strategically
important corporate campaigns which uses the best skills from
across the company. Customers outside our UK, US and Australian
home markets are unlikely to know QinetiQ, so we are also improving
the visibility of our brand - particularly in European countries
such as Belgium and Sweden where we already have a presence.
The key enabler to the themes across our markets is innovation,
not just novel technologies but also innovation in products,
services and business models. By working in partnership with our
customers we can propose innovative solutions to meet their
emerging needs. For example, the GBP153m outputs-based contract
renewal signed shortly after period end represents a new way of
doing business with the MOD that delivers more for less, improves
long-term planning providing better visibility, and supports the
retention of the skills base required to deliver future programmes.
This summer, we launched a new Internal Research and Development
(IRAD) programme for QinetiQ led by our Chief Technology Officer
and guided by an Innovation Steering Board to ensure that projects
are customer-driven and properly controlled. A number of projects
are already underway using investment funded through cost savings
in the business. QinetiQ's Organic-Plus framework of 'Core',
'Explore' and 'Test for Value' is a useful maturity model for
managing our innovation pipeline, helping to identify and control
each stage in the process.
Our future success will be built on operational excellence -
doing what we say we are going to do, and underpinned by continued
operational and financial discipline. We can improve the efficiency
of our operations and the way in which we deliver projects to make
us more competitive. The productivity savings that are made in
project delivery and our 'back office' can be re-invested in
innovation and the front end of the business to make a more direct
contribution to winning new work.
In addition to optimising trading in the short term, we are
positioning QinetiQ for the future through an integrated business
planning process. The output will be a robust plan that puts the
emphasis firmly on effective delivery and efficiency. We have also
established a Leadership Community at QinetiQ for the first time,
bringing together the top 100 leaders every month to ensure we are
focused on our business performance.
A key part of building for the future will be capital
discipline. We intend to maintain our priorities for capital
allocation as follows:
1. Invest in our organic capabilities, complemented by bolt-on
acquisitions where there is a strong strategic fit;
2. Maintain the necessary balance sheet strength;
3. Provide a progressive dividend to shareholders;
4. Return excess cash to shareholders.
As a result of these priorities, we have announced a further
share buyback of GBP50m to be executed over the next twelve months
provided there are no other significant and better opportunities
for investment within the business during this period.
Given the timing of the SDSR, our immediate priorities are to
engage with customers to understand its impact and the emerging
opportunities, and to ensure we deliver our expected performance
this financial year. In parallel, we will continue to build a
robust plan for the future that is both practical and grounded.
FY16 Outlook
The UK Government's Strategic Defence and Security Review,
together with ongoing defence transformation, are expected to
continue to have an impact on the UK defence market. 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 continue to be uncertainty and the potential for
interruptions to order flow. However, revenue under contract for
this financial year is as anticipated at this stage, and the
division's performance as a whole is expected to remain steady this
year.
The Group's Global Products division has shorter order cycles
than EMEA Services. Although the performance of Global Products
remains dependent on the timing and shipment of key orders, revenue
under contract for this financial year is as anticipated at this
stage.
Overall, the Board's expectations for Group performance this
financial year remain unchanged.
Business overview
EMEA Services
H1 2016 H1 2015
GBPm GBPm
---------------------- -------- -----------
Orders 170.8 249.5
Revenue 301.4 297.1
Underlying operating
profit* 42.7 42.6
Underlying operating
margin* 14.2% 14.3%
Book to bill ratio(1) 0.8x 1.2x
Funded backlog(1) 631.3 703.0
---------------------- -------- -----------
(1) Excludes the GBP998m third term contractual renewal of the LTPA contract
B2B ratio is orders won divided by revenue recognised, excluding
the LTPA contract.
Overview
(MORE TO FOLLOW) Dow Jones Newswires
November 19, 2015 02:00 ET (07:00 GMT)
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. EMEA Services is also a market leader in research and
advice in specialist areas such as C4ISR, cyber security and
procurement advisory services. The division is well aligned to the
UK Front Line Commands (Navy, Army, Air and Joint Forces) which now
have considerable responsibility for shaping future capability. In
particular, Joint Forces Command, with its own procurement arm and
a multi-billion pound budget, provides a more focused channel for
our cyber security, C4ISR, and training offerings.
Financial performance
Orders fell to GBP170.8m against a strong prior period (H1 2015:
GBP249.5m). The market environment was challenging with budgets
under pressure and some orders deferred or delayed. Additionally,
GBP58m of the orders reduction in EMEA Services from the prior
period was due to the timing of multi-year contracts and the impact
of this on near-term revenue is expected to be limited.
Revenue grew 2% on an organic basis. At the start of H2, EMEA
Services had 92% of its FY16 revenue under contract, consistent
with the prior year and up from 80% at the beginning of this
year.
Underlying operating profit* was flat at GBP42.7m (H1 2015:
GBP42.6m). The resulting underlying margin* also remained broadly
flat at 14.2% (H1 2015: 14.3%).
H1 commentary
QinetiQ's Air business de-risks complex aviation programmes. The
business is working in partnership with the MOD and the supply
chain to develop a new model to transform the provision of aircraft
test and evaluation. Shortly after period end, it was awarded two
contract renewals under this new model, worth a combined GBP153m
over five years, to deliver technical services to fast jets and
heavy lift aircraft. This new way of working improves long-term
planning providing better visibility, and delivers considerable
savings to the MOD. This award complements a GBP13m contract won in
the period to assist the MOD in bringing the Delta Test variant of
the A400M Atlas into UK service, and a GBP5m contract to evaluate
flight control system upgrades to Boeing's Chinook helicopter. In
international markets, the business was awarded a five year
extension to the contract under which it manages and assists in the
delivery of training at the Swedish Flight Physiological Centre.
The Air business also delivers turnkey services for customers using
Remotely Piloted Air Systems (RPAS) to meet growing demand
particularly from international organisations such as the United
Nations. Following last year's opening of the Snowdonia Aerospace
Centre at Llanbedr in Wales, the business is to demonstrate the use
of Remotely Piloted Aircraft in tackling environmental issues in a
project for the Welsh Government.
QinetiQ's Weapons business supplies independent research,
evaluation, training and through-life support services for the
weapons and land domains. Its strong competitive position is built
on the breadth of technical services it offers, ranging from
research and extending across the whole lifecycle. The business
coordinates the MOD's conventional weapons research programme
through its leadership of the Weapons Science and Technology
Centre; during the period it was awarded a new research framework
contract for trials, testing and analysis in cyber and electronic
warfare. It also won a GBP5m contract from Raytheon to develop and
qualify a new generation of the Paveway precision-guided bomb for
the Typhoon aircraft due to enter service with the RAF in 2019. In
addition to research, core capabilities include test and
evaluation, delivered mainly under the LTPA, and targets services.
Its targets offering was augmented in the period by the
introduction of the new Firejet target which will underpin future
expansion in international markets. During October, the Weapons
business led a team from across QinetiQ to deliver an international
at sea demonstration at the Hebrides range, the largest in Europe.
The exercise attracted nine ships from eight nations, culminating
in the first ever launch of a ballistic rocket into space from the
UK and its subsequent engagement by an SM3 missile launched by a US
guided missile destroyer.
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, with the majority of its revenue underpinned by four
core MOD contracts. Sustaining and developing its core UK naval
business is a strategic priority for the business and during the
period it was awarded a new contract to deliver acceptance trials
for the four new MARS class tankers. Its combination of expert
people and specialist testing facilities is also attractive to
international customers and the Maritime business is targeting
international markets, principally through the supply of mission
systems for offshore patrol vessels, corvettes and frigates. The
business is also pursuing selected growth campaigns with a focus on
emerging technologies such as autonomous systems. During the period
it was selected to develop and deliver a containerised command
system to control multiple unmanned systems for demonstration by
the UK Royal Navy in 2016.
The Cyber, Information and Training (CIT) business was formed
last year through the integration of the Group's cyber, C4ISR and
training capabilities to meet the needs of the UK MOD's Joint
Forces Command as well as other government and commercial
customers. Two subsidiaries that also offer cyber security
capability were not integrated into CIT: Cyveillance(R), a cyber
intelligence business, and Boldon James, a provider of secure
messaging solutions which is reported in Global Products. Although
competition is fierce, budgets for C4ISR and cyber security are
expected to grow as recent funding rounds have either protected or
enhanced spending. The CIT business is the MOD's leading supplier
of C4ISR research, growing its research revenues in the period and
winning new work to improve information systems for deployed
headquarters. The business manages a network of more than 100 UK
SMEs through these research framework contracts, fulfilling an
'innovation integrator' role that is becoming more and more
important in defence and other sectors. Large framework contracts
are also being used increasingly by the UK Government for the
delivery of technology services and during the period the business
was awarded a position with Northrop Grumman on a seven year
framework contract to deliver cyber security support to the UK
Government. CIT is also going to market in partnership with
established prime contractors outside the UK, most notably in the
US training and simulation market. Finally, the business is
providing secure receiver processing for the encrypted Public
Regulated Service (PRS) on the Galileo constellation of satellites
- the European Union version of GPS which goes live in 2017. During
the period it launched a new receiver that will utilise the PRS
service for use by governments, the military and emergency services
across Europe.
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 Group (DST Group) Specialist Engineering Support
contract and the Aircraft Structural Integrity (ASI) contract which
supports the airworthiness of military aircraft. These contracts
position the business well for 'strategic support partner' style
contracts which the Australian Government is using increasingly as
it implements its recapitalisation and defence acquisition reform
programmes that follow the First Principles Review.
Procurement Advisory Services provides tender assessment, cost
and analytical services principally to support complex procurement
programmes in highly regulated markets. Procurement Advisory
Services leads QinetiQ's presence in Canada; it has now delivered
contracts to the Defence, Transport and Cabinet Office equivalents
of governments in the UK, Australia, Canada and the Middle
East.
Global Products
H1 2015 H1 2014
GBPm GBPm
--------------------- -------- --------
Orders 57.6 71.0
Revenue 69.5 68.5
Underlying operating
profit* 7.1 6.7
Underlying operating
margin* 10.2% 9.8%
Book to bill ratio 0.8x 1.0x
Funded backlog 101.4 99.6
--------------------- -------- --------
Overview
Global Products delivers innovative solutions to meet customer
requirements and undertakes contract-funded research and
development, developing intellectual property in partnership with
key customers with potential for new revenue streams. Global
Products has shorter order cycles and a more lumpy revenue profile
than EMEA Services. 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.
Financial performance
Orders fell to GBP57.6m (H1 2015: GBP71.0m) due to reduced
demand for military products driven by lower levels of operational
spending in the US and the timing of recapitalisation orders for
the robot fleet, partially offset by a small increase in orders for
OptaSense(R), the Distributed Acoustic Sensing business.
Revenue was GBP69.5m (H1 2015: GBP68.5m). At the beginning of
H2, the division had 81% of its FY16 revenue under contract, an
increase from 60% at the beginning of the year.
(MORE TO FOLLOW) Dow Jones Newswires
November 19, 2015 02:00 ET (07:00 GMT)
Underlying operating profit* grew 6% to GBP7.1m (H1 2015:
GBP6.7m) with an underlying operating profit margin* of 10.2% (H1
2015: 9.8%), benefiting from a reduction in overhead costs in the
US products business.
H1 commentary
The US products business principally delivers land systems,
which account for approximately three quarters of its revenue, but
the business is also expanding into the commercial, maritime and
transportation markets often via contract-funded research and
development (R&D). It is the world's leading provider of
military robots, employing experts in unmanned systems based in
Massachusetts and Pennsylvania. The US Government is repairing,
restocking, and adding capability to its ground robots such as
CBRNE (chemical, biological, radiological, nuclear, and explosives)
while preparing for future multi-year Programs of Record. Revenues
generated by sales of unmanned systems were higher in the first
half of the year than in the prior period, principally for the
maintenance, repair and overhaul, or reset of robots previously
used on operations. This demonstrates continued customer intent to
keeping QinetiQ's TALON(R) and Dragon Runner(TM) platforms as a
principal part of Explosive Ordnance Disposal missions and
positions the business well for future Programs of Record. Demand
for survivability products continues to be impacted by reduced
operational budgets, but the business shipped armour for the C-130
aircraft as well as ground vehicles during the period. Shortly
after period end, the business was awarded an initial $16m contract
by General Atomics to deliver control hardware and software for the
Electromagnetic Aircraft Launch Control System (EMALS) and Advanced
Arresting Gear (AAG) for the US Navy's next generation aircraft
carrier, the CVN-79 John F. Kennedy. The US products business is
also building on its base of contract-funded R&D projects both
as an alternative revenue stream and as a source of future
intellectual property, which now represents about twenty per cent
of its revenues.
In August, Jamie Pollard was appointed as CEO of OptaSense(R),
the Distributed Acoustic Sensing (DAS) business, bringing over 20
years' experience of leading and growing businesses within
Schlumberger, a world-leading oilfield services company. In
addition, an advisory board has been established for OptaSense
comprising industry experts including Hansjorg Hess, a former
Deutsche Bahn and Siemens Rail executive. At the end of September,
the business successfully completed the 18-month development
project with Deutsche Bahn, which concluded that DAS technology has
the potential to significantly reduce the cost of sensing in the
rail industry. OptaSense also won a contract with a Class 1 US
Railroad operator to deliver a software platform in preparation for
a wider rollout of DAS technology. In upstream oil and gas, the
product development agreement with Shell continues to deliver
significant technical progress and a fourth generation OptaSense
system was launched recently. Although growth has been constrained
by the low oil price, the business signed a strategic marketing
agreement with Weatherford. In infrastructure security, OptaSense
signed a two-year framework agreement to deliver up to 200 units to
protect critical national infrastructure for a customer in the
Middle East.
QinetiQ's Space Products business provides satellites, payload
instruments, sub-systems and ground station services. The business
is currently developing the computer and avionics for ESA's Proba 3
satellites, to be launched in 2018 to study the Sun.
Other EMEA product orders placed during the first half of the
year included a contract to develop an electric hub-drive for
military ground vehicles for the US Defense Advanced Research
Projects Agency (DARPA) worth $2m, with an option for a further
$3m. During the period Boldon James launched a new data
classification system for businesses. Commerce Decisions won its
first contract through its Australian arm and was selected to
deliver bid evaluation criteria that will be used to assess
prospective warship designers for the Canadian Surface
Combatant.
Financial items
Net finance costs
Net finance costs fell to GBP0.6m (H1 2015: GBP3.6m). The
underlying net finance costs* fell to GBP0.1m (H1 2015: GBP3.3m),
benefiting from the repayment of private placement debt in the
prior year.
Tax
The continuing operations underlying* tax charge is calculated
by applying the expected effective tax rate of 13.1% for the year
ending 31 March 2016 to the Group's underlying profit before tax
for the six months to 30 September 2015 (September 2014: 12.0%).
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 and the availability of
brought-forward losses. The effective tax rate is expected to
remain below the UK statutory rate in the medium term, subject to
any tax legislation changes, the geographic mix of profits, the
assumption that the benefit of R&D tax relief remains in the
tax line, and the level of R&D relief retained by the
Group.
The 2013 Finance Act allows the continued super-deduction
approach for R&D expenditure until 1 April 2016, when R&D
Expenditure Credit ('RDEC') treatment becomes mandatory. The
expected effective tax rate for the year of 13.1% assumes a
super-deduction approach. The Company is considering whether or not
to elect into the RDEC scheme earlier. The impact on the effective
tax rate for the year ending 31 March 2016 is being assessed.
At 31 March 2015 the Group had unused tax losses of GBP291.6m
(2014: GBP213.9m) which are available for offset against future
profits. A deferred tax asset of GBP25.2m (representing UK trading
losses of GBP126m) is held in respect of an element of these unused
tax losses 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.
The current tax liability is GBP30.9m as at 30 September 2015
(31 March 2015: GBP15.3m). The increase in the liability is
primarily due to a potential tax liability crystallising in the US
following a court decision in respect of taxes payable in respect
of the Group's acquisition of Dominion Technology Resources, Inc.
in October 2008. An insurance policy was taken out by the Group at
the point of acquisition and if, subject to an appeal, the court's
decision is final then the funds required to settle this dispute
will be provided by the insurers. Hence, an offsetting receivable
is reported on the balance sheet as at 30 September 2015 (included
within trade and other receivables).
Earnings per share
Underlying earnings per share* for the continuing Group
increased by 16% to 7.3p (H1 2015: 6.3p) benefiting from the higher
profit before tax and reduced number of shares following the
buyback programme. Basic earnings per share for the total Group
(including discontinued operations) rose 39% to 7.1p (H1 2015:
5.1p).
Dividend
An interim dividend of 1.9p (H1 2015: 1.8p) will be paid on 12
February 2016 to shareholders on the register at 15 January 2016.
The 6% increase in interim dividend reflects the Group's
progressive dividend policy. The interim dividend is normally
expected to represent approximately one third of the anticipated
total dividend for the year.
Cash flow, net cash and liquidity
Underlying operating cash conversion* remained strong at 94% (H1
2015: 116%), delivering an underlying cash flow from continuing
operations* of GBP46.9m (H1 2015: GBP57.0m).
At 30 September 2015 the Group had GBP181.5m net cash, compared
to GBP195.5m net cash at 31 March 2015. The GBP150m share buyback
that commenced on 28 May 2014 was completed by 30 September 2015
with 72.5m shares purchased in total. A further GBP50m share
repurchase was initiated today in line with the Group's capital
allocation policy. It will be executed over the next 12 months
provided there are no other significant and better opportunities
for investment within the business during this period. Total
committed facilities amounted to GBP231.0m at 30 September 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 rate affecting the Group was the Sterling
to US Dollar exchange rate.
6 months to 6 months
30 September to
2015 30 September
2014
------------------- -------------- --------------
GBP/US$ - average 1.54 1.68
GBP/US$ - closing 1.52 1.62
GBP/US$ - opening 1.49 1.67
------------------- -------------- --------------
Pensions
The net pension liability under IAS 19, before adjusting for
deferred tax, was GBP20.4m (31 March 2015: GBP39.4m; 30 September
2014: GBP22.8m). The key assumptions used in the IAS 19 valuation
of the scheme were:
30 September 30 September
Assumption 2015 2014
-------------------------- ------------- -------------
Discount rate 3.7% 3.8%
CPI Inflation 2.3% 2.4%
Life expectancy - male
(currently aged 40) 91 90
Life expectancy - female
(currently aged 40) 93 92
-------------------------- ------------- -------------
(MORE TO FOLLOW) Dow Jones Newswires
November 19, 2015 02:00 ET (07:00 GMT)
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
(before deferred
Assumption Change in assumption tax)
---------------- --------------------- -----------------------
Discount rate Increase / decrease Decrease / increase
by 0.1% by GBP27m
Inflation Increase / decrease Increase / decrease
by 0.1% by GBP25m
Life expectancy Increase by 1 year Increase by GBP34m
---------------- --------------------- -----------------------
The market value of the assets at 30 September 2015 was
GBP1,399.5m (31 March 2015: GBP1,454.6m; 30 September 2014:
GBP1,373.4m) and the present value of scheme liabilities was
GBP1,419.9m (31 March 2015: GBP1,494.0m; 30 September 2014:
GBP1,396.2m). The latest triennial valuation of the scheme, on a
funding basis, was a net surplus of GBP31m as at 30 June 2014,
although if a funding valuation was carried out today the valuation
could be a net deficit. There has been no change to the cash
contributions required under the recovery plan, which continues to
require GBP13m of company contributions per annum until 31 March
2018.
Condensed consolidated income statement
6 months ended 6 months ended
30 September 2015 30 September 2014
(unaudited) (unaudited)
------------------------------- -------------------------------
Specific Specific
all figures in adjusting adjusting
GBP million note Underlying items* Total Underlying items* Total
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Revenue 370.9 - 370.9 365.6 - 365.6
Other operating
costs excluding
depreciation and
amortisation (313.8) 0.2 (313.6) (308.0) - (308.0)
Other income 4.2 - 4.2 3.7 - 3.7
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
EBITDA (earnings
before interest,
tax, depreciation
and amortisation) 61.3 0.2 61.5 61.3 - 61.3
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Depreciation and
impairment of property,
plant and equipment (10.2) - (10.2) (11.5) - (11.5)
Amortisation of
intangible assets (1.3) (1.1) (2.4) (0.5) (1.3) (1.8)
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Operating profit/(loss) 49.8 (0.9) 48.9 49.3 (1.3) 48.0
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Finance income 4 0.5 - 0.5 0.7 - 0.7
Finance expense 4 (0.6) (0.5) (1.1) (4.0) (0.3) (4.3)
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) before
tax 49.7 (1.4) 48.3 46.0 (1.6) 44.4
Taxation expense 5 (6.5) 0.2 (6.3) (5.5) (0.7) (6.2)
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) from
continuing operations 43.2 (1.2) 42.0 40.5 (2.3) 38.2
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Discontinued operations
Profit/(loss) before
tax - discontinued
operations 3 - - - 1.2 (6.3) (5.1)
Tax in respect
of discontinued
operations 3 - - - (0.5) 0.3 (0.2)
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) from
discontinued operations - - - 0.7 (6.0) (5.3)
Profit/(loss) for
the year attributable
to equity shareholders 43.2 (1.2) 42.0 41.2 (8.3) 32.9
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Earnings per share
Basic - continuing
operations 6 7.3p 7.1p 6.3p 5.9p
Basic - total Group 6 7.3p 7.1p 6.4p 5.1p
Diluted - continuing
operations 6 7.3p 7.1p 6.2p 5.9p
Diluted - total
Group 6 7.3p 7.1p 6.3p 5.1p
------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
* Definitions of underlying measures of performance and specific
adjusting items can be found in the glossary.
Condensed consolidated statement of comprehensive
income
--------------------------------------------------------------------------
6 months 6 months
ended ended
30 September 30 September
2015 2014
all figures in GBP million (unaudited) (unaudited)
-------------------------------------------- ------------- -------------
Profit for the period 42.0 32.9
Items that will not be reclassified
to the income statement:
Actuarial gain/(loss) recognised in
defined benefit pension schemes 12.2 (8.3)
Tax on items that will not be reclassified
to the income statement (2.4) 1.7
-------------------------------------------- ------------- -------------
Total items that will not be reclassified
to the income statement 9.8 (6.6)
Items that may be reclassified subsequently
to the income statements:
Foreign currency translation differences
for foreign operations (2.6) 2.5
Increase in fair value of hedging
derivatives 0.5 0.1
Reclassification of hedging derivatives
to the income statement - 0.1
Movement on deferred tax on hedging
derivatives (0.1) -
Fair value (losses)/gains on available
for sale investments (0.3) 0.2
Recycling of currency translation
differences to the income statement
on disposal of foreign subsidiary - (40.9)
Total items that may be reclassified
to the income statement (2.5) (38.0)
-------------------------------------------- ------------- -------------
Other comprehensive income/(expense)
for period, net of tax 7.3 (44.6)
-------------------------------------------- ------------- -------------
Total comprehensive income/(expense)
for period, net of tax 49.3 (11.7)
-------------------------------------------- ------------- -------------
Condensed consolidated statement of changes in equity
Issued Capital
all figures in share redemption Share Hedge Translation Retained Non-controlling Total
GBP million capital reserve premium reserve reserve earnings Total interest equity
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 1 April 2015 6.1 40.4 147.6 0.1 (6.8) 110.6 298.0 0.1 298.1
Profit for the
period - - - - - 42.0 42.0 - 42.0
Other
comprehensive
income/(expense)
for the period,
net of tax - - - 0.4 (2.6) 9.5 7.3 - 7.3
Purchase of own
shares - - - - - (0.3) (0.3) - (0.3)
Purchase and
cancellation
of shares (0.2) 0.2 - - - (44.0) (44.0) - (44.0)
Share-based
payments
charge - - - - - 3.3 3.3 - 3.3
Dividends paid - - - - - (21.2) (21.2) - (21.2)
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 30 September
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November 19, 2015 02:00 ET (07:00 GMT)
2015 5.9 40.6 147.6 0.5 (9.4) 99.9 285.1 0.1 285.2
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
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
period - - - - - 32.9 32.9 - 32.9
Other
comprehensive
income/(expense)
for the period,
net of tax - - - 0.2 (38.4) (6.4) (44.6) - (44.6)
Purchase of own
shares - - - - - (0.3) (0.3) - (0.3)
Purchase and
cancellation
of shares (0.2) 0.2 - - - (40.7) (40.7) - (40.7)
Share-based
payments
- settlement - - - - - 0.6 0.6 - 0.6
Share-based
payments
charge - - - - - 2.5 2.5 - 2.5
Dividends paid - - - - - (20.6) (20.6) - (20.6)
At 30 September
2014 6.4 40.1 147.6 0.3 (15.3) 128.7 307.8 0.1 307.9
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
Condensed consolidated balance sheet
-----------------------------------------------------------------------------------
30 September 30 September 31 March
2015 2014 2015
all figures in GBP
million note (unaudited) (unaudited) (audited)
------------------------------- ----- ------------- ------------- -------------
Non-current assets
Goodwill 105.5 101.4 107.2
Intangible assets 13.6 14.7 15.3
Property, plant and
equipment 233.9 224.0 229.6
Other financial assets 0.8 1.9 0.9
Investments 0.4 0.5 0.4
Deferred tax asset 3.7 6.7 12.9
------------------------------- ----- ------------- ------------- -----------
357.9 349.2 366.3
------------------------------- ----- ------------- ------------- -----------
Current assets
Inventories 15.3 15.8 18.5
Other financial assets 10.7 2.5 12.3
Trade and other receivables 140.8 134.5 159.2
Investments 2.1 2.3 2.3
Cash and cash equivalents 170.1 204.4 184.3
------------------------------- ----- ------------- ------------- -----------
339.0 359.5 376.6
------------------------------- ----- ------------- ------------- -----------
Total assets 696.9 708.7 742.9
------------------------------- ----- ------------- ------------- -----------
Current liabilities
Trade and other payables (325.4) (317.6) (352.3)
Current tax 5 (30.9) (3.0) (15.3)
Provisions (9.5) (3.8) (3.0)
Other financial liabilities (0.1) (2.4) (1.9)
------------------------------- ----- ------------- ------------- -----------
(365.9) (326.8) (372.5)
------------------------------- ----- ------------- ------------- -----------
Non-current liabilities
Retirement benefit
obligation 11 (20.4) (22.8) (39.4)
Deferred tax liability - (17.8) -
Provisions (15.5) (22.3) (22.4)
Other financial liabilities - (0.7) (0.1)
Other payables (9.9) (10.4) (10.4)
------------------------------- ----- ------------- ------------- -----------
(45.8) (74.0) (72.3)
------------------------------- ----- ------------- ------------- -----------
Total liabilities (411.7) (400.8) (444.8)
------------------------------- ----- ------------- ------------- -----------
Net assets 285.2 307.9 298.1
------------------------------- ----- ------------- ------------- -----------
Capital and reserves
Ordinary shares 5.9 6.4 6.1
Capital redemption
reserve 40.6 40.1 40.4
Share premium account 147.6 147.6 147.6
Hedging and translation
reserve (8.9) (15.0) (6.7)
Retained earnings 99.9 128.7 110.6
------------------------------- ----- ------------- ------------- -----------
Capital and reserves
attributable to shareholders
of the parent company 285.1 307.8 298.0
------------------------------- ----- ------------- ------------- -----------
Non-controlling interest 0.1 0.1 0.1
------------------------------- ----- ------------- ------------- -----------
Total shareholders'
funds 285.2 307.9 298.1
------------------------------- ----- ------------- ------------- -----------
Condensed consolidated cash flow statement
--------------------------------------------------------------------------------------------------
6 months 6 months Year
ended ended ended
30 September 30 September 31 March
2015 2014 2015
all figures in GBP million note (unaudited) (unaudited) (audited)
---------------------------------------------- ----- -------------- -------------- -----------
Underlying net cash inflow
from continuing operations
before cash flows in respect
of specific adjusting items 8 62.9 67.7 143.9
Net cash outflow relating to restructuring - - (0.6)
Disposal-related pension contribution - (6.0) (6.0)
Cash generated from discontinued operations - 1.8 1.8
Net cash inflow from operations 62.9 63.5 139.1
Tax (paid)/received (0.4) (0.8) 8.8
Interest received 0.4 0.2 1.0
Interest paid (0.3) (35.8) (36.4)
---------------------------------------------- ----- -------------- -------------- -----------
Net cash inflow from operating activities 62.6 27.1 112.5
---------------------------------------------- ----- -------------- -------------- -----------
Purchases of intangible assets (0.8) (2.9) (4.2)
Purchases of property, plant and equipment (15.5) (7.8) (24.8)
Proceeds from sale of property, plant 0.3 - -
and equipment
Investment in available for sale investments - - (10.0)
Acquisition of business - (3.3) (3.7)
Sale of investment in subsidiary 6.2 79.6 79.6
Net cash (outflow)/inflow/ from investing
activities (9.8) 65.6 36.9
---------------------------------------------- ----- -------------- -------------- -----------
Repayment of bank borrowings - (147.1) (147.1)
Payment of bank loan arrangement fee - (1.3) (1.3)
Purchase of own shares (45.3) (40.4) (106.8)
Dividends paid to shareholders (21.2) (20.6) (31.7)
Capital element of finance lease rental
payments (1.4) (1.4) (2.8)
Capital element of finance lease rental
receipts 1.5 1.5 3.0
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November 19, 2015 02:00 ET (07:00 GMT)
Net cash outflow from financing activities (66.4) (209.3) (286.7)
---------------------------------------------- ----- -------------- -------------- -----------
Decrease in cash and cash equivalents (13.6) (116.6) (137.3)
Effect of foreign exchange changes
on cash and cash equivalents (0.6) (0.2) 0.4
Cash and cash equivalents at beginning
of period 184.3 322.2 322.2
Cash and cash equivalents disposed - (1.0) (1.0)
---------------------------------------------- ----- -------------- -------------- -----------
Cash and cash equivalents at end of
period 170.1 204.4 184.3
---------------------------------------------- ----- -------------- -------------- -----------
Reconciliation of movement in net cash
Year
6 months 6 months
ended ended ended
30 September 30 September 31 March
2015 2014 2015
all figures in GBP million note (unaudited) (unaudited) (audited)
--------------------------------- ----- -------------- -------------- -----------
Decrease in cash and cash
equivalents (13.6) (116.6) (137.3)
Add back net cash flows not
impacting net debt (0.1) 148.3 158.2
--------------------------------- ----- -------------- -------------- -----------
Change in net cash resulting
from cash flows (13.7) 31.7 20.9
Cash and cash equivalents
disposed - (1.0) (1.0)
Other movements including
foreign exchange (0.3) 4.5 5.1
--------------------------------- ----- -------------- -------------- -----------
(Decrease)/increase in net
cash (14.0) 35.2 25.0
Net cash at beginning of period 195.5 170.5 170.5
--------------------------------- ----- -------------- -------------- -----------
Net cash at end of period 9 181.5 205.7 195.5
--------------------------------- ----- -------------- -------------- -----------
Notes to the condensed interim financial statements
1. Significant accounting policies
Basis of preparation
QinetiQ Group plc 'the Company' is a company domiciled in the
United Kingdom. The condensed consolidated interim financial
statements of the Group for the six months ended 30 September 2015
comprise statements for the Company and its subsidiaries (together
referred to as the 'Group') and were approved by the Board of
Directors on 18 November 2015.
These condensed Group interim financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting as
adopted by the EU and the requirements of the Disclosure and
Transparency Rules of the Financial Conduct Authority. They do not
comprise statutory accounts within the meaning of Section 498 (2)
or (3) of the Companies Act 2006. They do not include all of the
information required for full annual financial statements and
should be read in conjunction with the Group's financial statements
for the year ended 31 March 2015.
The Group separately presents 'specific adjusting items' in the
income statement which in the judgement of the Directors need to be
disclosed separately from the 'underlying' financial measures, by
virtue of their size and incidence, to provide a more relevant
indication of underlying business. Specific adjusting items relate
to gains/losses in respect of disposal of businesses and property,
amortisation of intangible assets created on acquisition,
impairment of goodwill or property, pension net finance
income/expense, and tax thereon. All items treated as a specific
adjusting item in the current and prior year are detailed in note
2.
The accounting policies adopted in the preparation of these
condensed consolidated financial statements are consistent with the
policies applied by the Group in its consolidated financial
statements for the year ended 31 March 2015.
Going-concern basis
The Group meets its day-to-day working capital requirements
through its available cash funds and its bank facilities. The
market conditions in which the Group operates have been, and are
expected to continue to be, challenging as spending from the
Group's key customers in its primary markets in the UK and US
remains under pressure. Despite these challenges, the Directors
believe that the Group is well positioned to manage its overall
business risks successfully. After making enquiries, the Directors
have a reasonable expectation that the Group has adequate resources
to continue in operational existence for the foreseeable future.
The Group therefore continues to adopt the going-concern basis in
preparing its interim financial statements.
The Group is exposed to various risks and uncertainties, the
principal ones being summarised in the 'Principal risks and
uncertainties' section. Crystallisation of such risks, to the
extent not fully mitigated, would lead to a negative impact on the
Group's financial results but none are deemed sufficiently material
to prevent the Group from continuing as a going concern for the
next 12 months.
Comparative data
The comparative figures for the year ended 31 March 2015 do not
contain all of the information required for full annual financial
statements. The Group's full annual financial statements for the
year ended 31 March 2015 have been reported on by the Group's
auditors and delivered to the registrar of companies. The report of
the auditors (i) was 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.
The Group's financial statements for the year ended 31 March 2015
are available upon request from the Company's registered office at
Cody Technology Park, Ively Road, Farnborough, Hampshire, GU14
0LX.
2. Segmental analysis
Operating segments
6 months ended 6 months ended
30 September 2015 30 September
all figures in GBP million (unaudited) 2014 (unaudited)
--------------------------------------------- --------------------------- -----------------------------
Operating Operating
Revenue Profit(1) Revenue Profit(1)
--------------------------------------------- -------- ----------------- ---------- -----------------
EMEA Services 301.4 42.7 297.1 42.6
Global Products 69.5 7.1 68.5 6.7
--------------------------------------------- -------- ----------------- ---------- -----------------
Total operating segments
- continuing operations 370.9 49.8 365.6 49.3
--------------------------------------------- -------- ----------------- ---------- -----------------
No measure of segmental assets and liabilities is reported
as this information is not regularly provided to the
chief operating decision maker.
Reconciliation of segmental results
to total profit
------------------------------------------------------- ----------------- ---------- -----------------
6 months 6 months
ended ended 30
30 September September
all figures in GBP million 2015 (unaudited) 2014 (unaudited)
Operating profit before
specific adjusting items(1)
- underlying operating profit 49.8 49.3
Specific adjusting items:
Gain on sale of property 0.2 -
Amortisation of intangible
assets arising from acquisitions (1.1) (1.3)
--------------------------------------------- -------- ----------------- ---------- -----------------
Operating profit 48.9 48.0
--------------------------------------------- -------- ----------------- ---------- -----------------
Underlying net finance
expense* (0.1) (3.3)
Specific adjusting item:
Defined benefit pension
scheme net finance expense (0.5) (0.3)
--------------------------------------------- -------- ----------------- ---------- -----------------
Net finance expense (0.6) (3.6)
(MORE TO FOLLOW) Dow Jones Newswires
November 19, 2015 02:00 ET (07:00 GMT)
Profit before tax 48.3 44.4
Taxation (6.3) (6.2)
--------------------------------------------- -------- ----------------- ---------- -----------------
Profit for the period from
continuing operations 42.0 38.2
--------------------------------------------- -------- ----------------- ---------- -----------------
Discontinued operations
Loss from discontinued operations,
net of tax - (5.3)
--------------------------------------------- -------- ----------------- ---------- -----------------
Profit for the period attributable
to equity shareholders 42.0 32.9
--------------------------------------------- -------- ----------------- ---------- -----------------
(1) The measure of profit presented to the chief operating
decision maker is operating profit stated before specific adjusting
items. The specific adjusting items are set out in the table
above.
3. Discontinued operations
Cash was received in the six months to 30 September 2015 in
respect of the prior year disposal of the Group's US Services
division. Net cash proceeds of GBP79.6m were received in the year
to 31 March 2015. Additional deferred consideration of up to $50m
remained receivable as at 31 March 2015. Actual gross profit
delivered by the disposed business resulted in deferred
consideration of $9.2m (GBP6.2m) being received in the six months
to 30 September 2015. This was in line with expectations as at 31
March 2015 and there was no income statement impact in respect of
this deferred consideration in the six months to 30 September 2015.
No further consideration remains outstanding.
4. Finance income and expense - continuing operations
6 months
6 months ended ended
30 September
2015 30 September2014
All figures in GBP million (unaudited) (unaudited)
---------------------------------------- -------------- ------------------
Receivable on bank deposits 0.5 0.6
Finance lease income - 0.1
Finance income 0.5 0.7
---------------------------------------- -------------- ------------------
Amortisation of recapitalisation
fee (0.2) (0.5)
Interest on bank loans and overdrafts (0.3) (0.6)
Interest on US-dollar private placement
debt - (2.6)
Finance lease expense - (0.1)
Unwinding of discount on financial
liabilities (0.1) (0.2)
---------------------------------------- -------------- ------------------
Finance expense before specific
adjusting items* (0.6) (4.0)
Defined benefit pension scheme
net finance expense (0.5) (0.3)
---------------------------------------- -------------- ------------------
Finance expense (1.1) (4.3)
---------------------------------------- -------------- ------------------
Net finance expense - continuing
operations (0.6) (3.6)
---------------------------------------- -------------- ------------------
5. Taxation
The continuing operations underlying* tax charge is calculated
by applying the expected effective tax rate of 13.1% for the year
ending 31 March 2016 to the Group's underlying profit before tax
for the six months to 30 September 2015 (September 2014: 12.0%).
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 and the availability of
brought-forward losses. The effective tax rate is expected to
remain below the UK statutory rate in the medium term, subject to
any tax legislation changes, the geographic mix of profits, the
assumption that the benefit of R&D tax relief remains in the
tax line, and the level of R&D relief retained by the
Group.
The 2013 Finance Act allows the continued super-deduction
approach for R&D expenditure until 1 April 2016, when R&D
Expenditure Credit ('RDEC') treatment becomes mandatory. The
expected effective tax rate for the year of 13.1% assumes a
super-deduction approach. The Company is considering whether or not
to elect into the RDEC scheme earlier. The impact on the effective
tax rate for the year ending 31 March 2016 is being assessed.
At 31 March 2015 the Group had unused tax losses of GBP291.6m
(2014: GBP213.9m) which are available for offset against future
profits. A deferred tax asset of GBP25.2m (representing UK trading
losses of GBP126m) is held in respect of an element of these unused
tax losses 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.
The current tax liability is GBP30.9m as at 30 September (31
March 2015: GBP15.3m). The increase in the liability is primarily
due to a tax liability crystallising in the US following a court
decision in respect of taxes payable in respect of the Group's
acquisition of Dominion Technology Resources, Inc. in October 2008.
An insurance policy was taken out by the Group at the point of
acquisition and if, subject to an appeal, the court's decision is
final then the funds required to settle this dispute will be
provided by the insurers. Hence, an offsetting receivable is
reported on the balance sheet as at 30 September 2015 (included
within trade and other receivables).
6. 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 period. 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 as 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, as defined in the Glossary.
Basic and diluted EPS - continuing operations
6 months 6 months
ended ended
30 September 30 September
2015 (unaudited) 2014 (unaudited)
------------------------------------------- -------- ----------------- -----------------
Profit attributable to equity shareholders GBPm 42.0 38.2
Weighted average number of shares Million 589.6 645.6
------------------------------------------- -------- ----------------- -----------------
Basic EPS - continuing operations Pence 7.1 5.9
------------------------------------------- -------- ----------------- -----------------
Profit attributable to equity shareholders GBPm 42.0 38.2
Weighted average number of shares Million 589.6 645.6
Effect of dilutive securities Million 3.7 4.6
------------------------------------------- -------- ----------------- -----------------
Dilutive number of shares Million 593.3 650.2
------------------------------------------- -------- ----------------- -----------------
Diluted EPS - continuing operations Pence 7.1 5.9
------------------------------------------- -------- ----------------- -----------------
Basic and diluted EPS - total Group
6 months 6 months
ended ended
30 September 30 September
2015 (unaudited) 2014 (unaudited)
------------------------------------------- -------- ----------------- -----------------
Profit attributable to equity shareholders GBPm 42.0 32.9
Weighted average number of shares Million 589.6 645.6
------------------------------------------- -------- ----------------- -----------------
Basic EPS - total Group Pence 7.1 5.1
------------------------------------------- -------- ----------------- -----------------
Profit attributable to equity shareholders GBPm 42.0 32.9
Weighted average number of shares Million 589.6 645.6
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Effect of dilutive securities Million 3.7 4.6
------------------------------------------- -------- ----------------- -----------------
Dilutive number of shares Million 593.3 650.2
------------------------------------------- -------- ----------------- -----------------
Diluted EPS - total Group Pence 7.1 5.1
------------------------------------------- -------- ----------------- -----------------
Underlying* basic EPS - continuing operations
6 months 6 months
ended ended
30 September 30 September
2015 (unaudited) 2014 (unaudited)
---------------------------------- -------- ----------------- -----------------
Profit attributable to equity
shareholders GBPm 42.0 38.2
Loss after tax in respect of
specific adjusting items* GBPm 1.2 2.3
---------------------------------- -------- ----------------- -----------------
Underlying profit after taxation GBPm 43.2 40.5
---------------------------------- -------- ----------------- -----------------
Weighted average number of shares Million 589.6 645.6
---------------------------------- -------- ----------------- -----------------
Underlying basic EPS - continuing
operations Pence 7.3 6.3
---------------------------------- -------- ----------------- -----------------
Underlying* diluted EPS - continuing operations
6 months 6 months
ended ended
30 September 30 September
2015 (unaudited) 2014 (unaudited)
------------------------------------ -------- ----------------- -----------------
Profit attributable to equity
shareholders GBPm 42.0 38.2
Loss after tax in respect of
specific adjusting items* GBPm 1.2 2.3
------------------------------------ -------- ----------------- -----------------
Underlying profit after taxation GBPm 43.2 40.5
------------------------------------ -------- ----------------- -----------------
Weighted average number of shares Million 589.6 645.6
Effect of dilutive securities Million 3.7 4.6
------------------------------------ -------- ----------------- -----------------
Diluted number of shares Million 593.3 650.2
------------------------------------ -------- ----------------- -----------------
Underlying diluted EPS - continuing
operations Pence 7.3 6.2
------------------------------------ -------- ----------------- -----------------
Underlying* basic EPS - total Group
6 months 6 months
ended ended
30 September 30 September
2015 (unaudited) 2014 (unaudited)
---------------------------------- -------- ----------------- -----------------
Profit attributable to equity
shareholders GBPm 42.0 32.9
Loss after tax in respect of
specific adjusting items* GBPm 1.2 8.3
---------------------------------- -------- ----------------- -----------------
Underlying profit after taxation GBPm 43.2 41.2
---------------------------------- -------- ----------------- -----------------
Weighted average number of shares Million 589.6 645.6
---------------------------------- -------- ----------------- -----------------
Underlying basic EPS - total
Group Pence 7.3 6.4
---------------------------------- -------- ----------------- -----------------
Underlying* diluted EPS - total Group
6 months 6 months
ended ended
30 September 30 September
2015 (unaudited) 2014 (unaudited)
---------------------------------- -------- ----------------- -----------------
Profit attributable to equity
shareholders GBPm 42.0 32.9
---------------------------------- -------- ----------------- -----------------
Loss after tax in respect of
specific adjusting items* GBPm 1.2 8.3
---------------------------------- -------- ----------------- -----------------
Underlying profit after taxation GBPm 43.2 41.2
---------------------------------- -------- ----------------- -----------------
Weighted average number of shares Million 589.6 645.6
Effect of dilutive securities Million 3.7 4.6
---------------------------------- -------- ----------------- -----------------
Diluted number of shares Million 593.3 650.2
---------------------------------- -------- ----------------- -----------------
Underlying diluted EPS - total
Group Pence 7.3 6.3
---------------------------------- -------- ----------------- -----------------
* Definitions of underlying measures of performance and specific
adjusting items can be found in the glossary
7. Dividends
An analysis of the dividends paid and proposed in respect of the
period ended 30 September 2015 and comparative periods is provided
below:
Pence per
ordinary
share GBPm Date paid/payable
---------------------------------- --------- ---- -----------------
Interim 2016 1.9 11.1 Feb 2016
---------------------------------- --------- ---- -----------------
Interim 2015 1.8 11.1 Feb 2015
Final 2015 3.6 21.2 Sep 2015
---------------------------------- --------- ---- -----------------
Total for the year ended 31 March
2015 5.4 32.3
---------------------------------- --------- ---- -----------------
The interim dividend is 1.9p (interim 2015: 1.8p). The dividend
will be paid on 12 February 2016. The ex-dividend date is 14
January 2016 and the record date is 15 January 2016.
8. Cash flows from operations
6 months ended
30 September 6 months
2015 ended Year ended
30 September 31 March
All figures in GBP million (unaudited) 2014 (unaudited) 2015 (audited)
--------------------------------------- -------------- ------------------ ----------------
Profit after tax for the period 42.0 32.9 104.7
Adjustments for:
Taxation expense/(income) 6.3 6.4 (11.8)
Net finance costs 0.6 3.6 4.1
Loss on business divestments
and disposal of investments - 5.5 12.9
Reversal of unutilised restructuring
provisions - - (1.0)
Amortisation of purchased or
internally developed intangible
assets 1.3 0.5 1.5
Amortisation of intangible assets
arising from acquisitions 1.1 2.1 3.6
Profit on disposal of land and
property (0.2) - -
Depreciation and impairment of
property, plant and equipment 10.2 11.8 22.0
Loss on disposal of plant and
equipment 0.8 0.4 1.2
Share of post-tax profit of equity
accounted entities - - 0.1
Share-based payments charge 3.3 2.9 3.6
Changes in retirement benefit
obligations (7.3) (8.0) (7.9)
Net movement in provisions (0.3) (1.1) (1.6)
--------------------------------------- -------------- ------------------ ----------------
57.8 57.0 131.4
Decrease in inventories 2.9 4.2 2.6
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Decrease in receivables 27.7 57.2 27.3
Decrease in payables (25.5) (54.9) (22.2)
--------------------------------------- -------------- ------------------ ----------------
Changes in working capital 5.1 6.5 7.7
Cash generated from operations 62.9 63.5 139.1
Add back: net cash outflow relating
to restructuring - - 0.6
Add back: disposal-related pension
contribution - 6.0 6.0
Less: cash generated from discontinued
operations - (1.8) (1.8)
Net cash flow from continuing
operations before cash flows
in respect of specific adjusting
items 62.9 67.7 143.9
--------------------------------------- -------------- ------------------ ----------------
9. Analysis of net cash
6 months ended Year ended
30 September 6 months
2015 ended 31 March
30 September 2015
All figures in GBP million (unaudited) 2014 (unaudited) (audited)
--------------------------------------- -------------- ------------------ -----------
Due within one year:
Bank and cash 170.1 204.4 184.3
Available for sale investment 9.9 - 10.0
Recapitalisation fee 0.3 0.3 0.3
Finance lease receivables - 2.1 1.5
Finance lease payables - (2.0) (1.4)
Derivative financial assets 0.5 0.1 0.5
Derivative financial liabilities (0.1) (0.3) (0.5)
--------------------------------------- -------------- ------------------ -----------
180.7 204.6 194.7
Due after one year:
Recapitalisation fee 0.7 1.0 0.8
Finance lease receivables - 0.6 -
Finance lease payables - (0.7) -
Derivative financial assets 0.1 0.2 0.1
Derivative financial liabilities - - (0.1)
--------------------------------------- -------------- ------------------ -----------
0.8 1.1 0.8
--------------------------------------- -------------- ------------------ -----------
Total net cash as defined by the Group 181.5 205.7 195.5
--------------------------------------- -------------- ------------------ -----------
10. Financial risk management
The interim financial statements do not include all financial
risk management information and disclosures required in annual
financial statements; they should be read in conjunction with the
Group's annual financial statements as at 31 March 2015. There have
been no changes in any risk management policies since the year end.
The table below analyses financial instruments carried at fair
value, by valuation method. The different levels have been defined
as follows:
Level 1 - measured using quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level 2 - measured using inputs other than quoted prices
included within Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices). Level 2 derivatives comprise forward foreign
exchange contracts which have been fair valued using forward
exchange rates that are quoted in an active market; and
Level 3 - measured using inputs for the assets or liability that
are not based on observable market data (i.e. unobservable
inputs).
The Group's assets and liabilities that are measured at fair
value, as at 30 September 2015, are as follows:
all figures in GBP million Level 1 Level 2 Level 3 Total
--------------------------------------------- ------- ------- ------- -----
Assets:
Available for sale investment 9.9 - - 9.9
Current other investments 2.1 - - 2.1
Current derivative financial instruments - 0.5 - 0.5
Non-current other investments - - 0.1 0.1
Non-current derivative financial instruments - 0.1 - 0.1
Liabilities:
Current derivative financial instruments - (0.1) - (0.1)
Total 12.0 0.5 0.1 12.6
--------------------------------------------- ------- ------- ------- -----
The following table presents the Group's assets and liabilities
that are measured at fair value at 31 March 2015:
all figures in GBP million Level 1 Level 2 Level 3 Total
--------------------------------------------- ------- ------- ------- -----
Assets:
Available for sale investments 10.0 - - 10.0
Current other investments 2.3 - - 2.3
Current derivative financial instruments - 0.5 - 0.5
Non-current other investments - - 0.1 0.1
Non-current derivative financial instruments - 0.1 - 0.1
Liabilities:
Current derivative financial instruments - (0.5) - (0.5)
Non-current derivative financial instruments - (0.1) - (0.1)
Total 12.3 - 0.1 12.4
--------------------------------------------- ------- ------- ------- -----
For cash and cash equivalents, trade and other receivables and
bank and current borrowings, the fair value of the financial
instruments approximate to their carrying value as a result of the
short maturity periods of these financial instruments. For trade
and other receivables, allowances are made within the carrying
value for credit risk. For other financial instruments, the fair
value is based on market value, where available. Where market
values are not available, the fair values have been calculated by
discounting cash flows to net present value using prevailing
market-based interest rates translated at the year-end rates,
except for unlisted fixed asset investments where fair value equals
carrying value. There have been no transfers between levels.
11. Post-retirement benefits
Set out below is a summary of the financial position of the
Group's defined benefit pension scheme. The fair value of the
scheme's 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, are as follows:
30 September 30 September 31 March
2015
(unaudited) 2014 2015
all figures in GBP million (unaudited) (audited)
-------------------------------------- ------------ ------------ ----------
Total market value of scheme assets 1,399.5 1,373.4 1,454.6
Present value of scheme liabilities (1,419.9) (1,396.2) (1,494.0)
-------------------------------------- ------------ ------------ ----------
Net pension liability before deferred
tax (20.4) (22.8) (39.4)
Deferred tax (liability)/asset (1.6) 0.1 1.6
-------------------------------------- ------------ ------------ ----------
Net pension liability (22.0) (22.7) (37.8)
-------------------------------------- ------------ ------------ ----------
Changes to the net pension liability
before deferred tax
---------------------------------------- ------------ ------------ ----------
31 March
30 September 30 September
2015 2014 2015
all figures in GBP million (unaudited) (unaudited) (audited)
---------------------------------------- ------------ ------------ ----------
Opening net pension liability before
tax (39.4) (22.2) (22.2)
Actuarial gain/(loss) on scheme
assets 12.2 (8.3) (24.5)
Contributions by the employer 7.9 8.6 9.2
Current service cost and administration
costs (0.6) (0.6) (1.3)
Net finance expense (0.5) (0.3) (0.6)
Closing net pension liability before
deferred tax (20.4) (22.8) (39.4)
---------------------------------------- ------------ ------------ ----------
Assumptions
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The major assumptions (weighted to reflect individual scheme
differences) were:
30 September 30 September 31 March
2015 2014 (unaudited)
(unaudited) 2015
(audited)
--------------------------------------------- ------------ ----------------- ----------
Discount rate applied to scheme liabilities 3.7% 3.8% 3.2%
CPI inflation assumption 2.3% 2.4% 2.1%
--------------------------------------------- ------------ ----------------- ----------
Assumed life expectancies in years:
Future male pensioners (currently aged 60) 88 88 88
Future female pensioners (currently aged 60) 91 90 91
Future male pensioners (currently aged 40) 91 90 91
Future female pensioners (currently aged 40) 93 92 93
--------------------------------------------- ------------ ----------------- ----------
The accounting assumptions noted above are used to calculate the
period end net pension liability in accordance with the relevant
accounting standard, IAS 19 (revised) 'Employee benefits'. Changes
in these assumptions have no impact on the Group's cash payments
into the scheme. The payments into the scheme are reassessed after
every triennial valuation. A triennial valuation, on a 'funding
basis' as at 30 June 2014, was a net surplus of GBP31m, although it
is expected that if a funding valuation was carried out at present
the valuation could be a net deficit. The 'funding basis' of
calculating scheme funding requirements uses certain assumptions
that are different to those used in an IAS 19 'accounting basis'
valuation. The key assumption that varies between the two types of
valuation is the discount rate. The 'funding basis' valuation uses
the risk-free rate from UK gilts as the base for calculating the
discount rate, whilst the 'accounting basis' valuation uses
corporate bond yields as the base. Due to the different assumptions
used the 'funding basis' valuations of the scheme can be
significantly different to the 'accounting basis' value reported
above.
12. Own shares and share-based awards
Own shares represent shares in the Company that are held by
independent trusts and include treasury shares and shares held by
the employee share ownership plan. A deduction has been made from
retained earnings at 30 September 2015 in respect of 4,141,745 own
shares (31 March 2015: 5,443,881).
In the six months to 30 September 2015 the Group granted/awarded
3.8 million new share-based awards to employees (30 September 2014:
4.3 million).
13. Related party transactions with equity accounted
investments
During the period there were sales to associates of GBP1.6m (30
September 2014: GBP1.6m). At the period end there were outstanding
receivables from associates of GBP0.4m (30 September 2014:
nil).
Principal risks and uncertainties
The Group continues to be exposed to a number of risks and
uncertainties which management continue to assess, manage and
mitigate to minimise their potential impact on the reported
performance of the Group. Pages 32-37 of the 2015 Annual Report and
Accounts detail the principal risks and uncertainties which have
not materially changed and these are expected to continue to be
relevant for the remaining six months of the year. A summary of the
significant risks and uncertainties is set out below:
-- Reduction in government defence and security
spending;
-- Operating in a highly competitive marketplace;
-- A material element of the Group's revenue and
operating profit is derived from one customer
(the UK MOD), governed by complex pricing requirements;
-- A high proportion of the Group's revenue is
derived from fixed price contracts that would
be adversely impacted by increases in costs;
-- Change in the timing of orders receipts;
-- Policies or attitudes may change towards Organisational
Conflicts of Interest (OCI);
-- A material element of the Group's revenue and
operating profit is derived from one contract;
-- Losing key capability and competencies through
failure to recruit and retain employees;
-- Failure of information technology systems and
breaches of data security;
-- Inherent risks from trading in a global marketplace;
-- Failure to comply with laws and regulations,
particularly trading restrictions and export
controls;
-- Financial position of the defined benefit pension
scheme;
-- Tax liabilities may change as a result of changes
in tax legislation.
The Directors have considered the Financial Reporting Council's
guidance around consideration of heightened country and currency
risk in interim financial reports but the Group is not directly
exposed to significant overseas sovereign and currency risks (other
than translation risk), although it is exposed indirectly to
increased counter-party risk. The Group attempts to mitigate risk
by counter party monitoring and the avoidance of concentrations of
counter party risk. The significant Group risks remain those
referred to above.
Responsibility statements of the Directors in respect of the
interim financial report
The Directors confirm to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU;
-- the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being
an indication of important events that have occurred during the
first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
The Directors of QinetiQ Group plc are listed in the QinetiQ
Group plc Annual Report for 31 March 2015.
By order of the Board
Mark Elliott Steve Wadey David Mellors
Chairman Chief Executive Chief Financial
18 November 2015 Officer Officer
18 November 2015 18 November 2015
Independent review report to QinetiQ Group plc
We have been engaged by the Company to review the condensed set
of financial statements in the interim financial report for the six
months ended 30 September 2015 which comprises the Condensed
Consolidated Income Statement, the Condensed Consolidated Statement
of Comprehensive Income, the Condensed Consolidated Statement of
Changes in Equity, the Condensed Consolidated Balance Sheet, the
Condensed Consolidated Cash Flow Statement and the related
explanatory notes. We have read the other information contained in
the interim financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the Disclosure and Transparency Rules of the UK's
Financial Conduct Authority ('the UK FCA'). Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
Directors' responsibilities
The interim financial report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the interim financial report in accordance with the
Disclosure and Transparency Rules of the UK FCA.
The annual financial statements of the Group are prepared in
accordance with IFRSs as adopted by the European Union (EU). The
condensed set of financial statements included in this interim
financial report has been prepared in accordance with IAS 34
Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the interim financial
report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK and Ireland) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
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