TIDMQQ.
RNS Number : 4000P
QinetiQ Group plc
17 November 2016
QinetiQ Group plc
For release at 0700 hours on 17 November 2016
Continuing operational delivery and progress implementing
strategy
QinetiQ is a leading science and engineering company operating
primarily in the defence, security and aerospace markets. We work
in partnership with customers to solve real world problems through
innovative solutions, delivering operational and competitive
advantage. Today QinetiQ publishes its interim results for the half
year ended 30 September 2016.
Note H1 2017 H1 2016
Business Performance
Orders GBP376.8m GBP228.4m
Revenue 2 GBP361.8m GBP370.9m
Underlying 2 GBP51.9m GBP49.8m
operating
profit*
Underlying
operating
margin* 2 14.3% 13.4%
Underlying 4 GBP45.5m GBP43.2m
profit after
tax*
Underlying net 6 GBP50.9m GBP46.9m
cash flow from
operations
(post capex)*
Underlying cash
conversion
ratio* 6 98% 94%
Underlying
earnings per
share
(eps)* 5 7.9p 7.3p
Net cash 7 GBP271.2m GBP181.5m
Dividend per
share 9 2.0p 1.9p
Statutory Reporting
Operating 2 GBP51.7m GBP48.9m
profit
Profit attributable to shareholders GBP49.5m GBP42.0m
Total earnings
per share 5 8.6p 7.1p
Headlines
-- Delivered solid operational performance in H1 FY17
o Stable revenue and profit with continued high cash
conversion
o 5% increase in interim dividend in line with commitment to a
progressive dividend; GBP17m remaining of the share buyback
programme
-- Focus on delivery of FY17
o 94% of FY17 revenue under contract, consistent with prior
period (90%)
o Maintaining expectations for Group performance in the current
financial year
-- Progress implementing strategy
o Orders increase due to GBP109m 11-year renewal for UK Naval
Combat System Integration Support Services (NCSISS) and $28m US
aircraft carrier orders
o Transformation programme on track to improve customer focus
and competitiveness
Steve Wadey, Group Chief Executive Officer said:
"We have secured good order intake, delivered a solid
operational performance and demonstrated encouraging progress in
the implementation of our strategy to drive future growth. We are
on track with transforming the company and have secured the renewal
of NCSISS for 11 years creating a UK centre of excellence for
maritime mission systems and taking a significant step forward in
modernising vital test and evaluation services in the UK."
* Definitions of underlying measures of performance and specific
adjusting items can be found in the glossary
S
Basis of preparation
Throughout this Interim Report, certain measures are used to
describe the Group's financial performance which are not recognised
under IFRS or other generally accepted accounting principles
(GAAP). The Group's Directors and management assess financial
performance based on underlying measures of performance*, which are
adjusted to exclude certain 'specific adjusting items'. In the
judgment of the Directors, the use of adjusted measures such as
underlying operating profit and underlying earnings per share are
more representative of ongoing trading, facilitate meaningful
year-to-year comparison and, therefore, allow the reader to obtain
a fuller understanding of the financial information.
Other information
There will be a presentation of the interim results to analysts
at 0900 hours UK time on 17 November 2016 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 by dialling +44 (0)20 3059 8125 (confirmation:
QinetiQ).
About QinetiQ:
QinetiQ is a leading science and engineering company operating
primarily in the defence, security and aerospace markets. We work
in partnership with our customers to solve real world problems
through innovative solutions delivering operational and competitive
advantage. Visit our website www.QinetiQ.com. Follow us on LinkedIn
and Twitter @QinetiQ. Visit our blog www.QinetiQ-blogs.com.
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 were GBP376.8m (H1 2016: GBP228.4m), due to the award of
a GBP109m 11-year renewal from the UK Ministry of Defence (MOD) for
the Naval Combat System Integration Support Services (NCSISS)
contract plus improved order flow in Global Products driven by $28m
of orders for Advanced Launch and Recovery Equipment for next
generation US aircraft carriers.
Revenue was GBP361.8m (H1 2016: GBP370.9m), down 3% on an
organic basis after adjusting for foreign exchange movements and
the divestment of the non-core Cyveillance business in December
2015. This was principally due to a reduction in revenues in Global
Products which were down 8% on an organic basis illustrating the
lumpy nature of the division's revenue profile. EMEA Services
revenue fell by 1% on an organic basis. On 1 October 2016, the
Group had 94% of FY17 revenue under contract, consistent with the
prior period (90%) and up from 74% at the beginning of this
financial year.
Underlying operating profit* was up 4% at GBP51.9m (H1 2016:
GBP49.8m), assisted by a credit of GBP1.3m relating to the
resolution of an overseas licensing dispute within Global Products.
Underlying profit after tax* was GBP45.5m (H1 2016: GBP43.2m) with
underlying net finance income* of GBP0.1m (H1 2016: cost GBP0.1m)
and an underlying tax charge of GBP6.5m (H1 2016: GBP6.5m).
Underlying earnings per share* increased 8% to 7.9p (H1 2016:
7.3p) benefiting from the higher underlying profit after tax* and
reduced number of shares due to the ongoing share buyback
programme.
At 30 September 2016, the Group had GBP271.2m net cash, compared
to GBP274.5m net cash at 31 March 2016 and higher than GBP181.5m
net cash at 30 September 2015. The increase from 30 September 2015
was due primarily to disposal proceeds and net tax receipts in H2
FY16. Underlying operating cash conversion* remained strong at 98%
(H1 2016: 94%), delivering an underlying cash flow of GBP50.9m (H1
2016: GBP46.9m) with capital expenditure of GBP9.7m (H1 2016:
GBP16.0m). Capital expenditure is expected to increase in future as
we intend to invest in the Long Term Partnering Agreement (LTPA)
and other long-term contracts.
Priorities for capital allocation are:
1. Organic investment complemented by bolt-on acquisitions where
there is a strong strategic fit;
2. The maintenance of necessary balance sheet strength;
3. A progressive dividend; and
4. The return of excess cash to shareholders.
The Group had bought back GBP29m of the previously announced
GBP50m share repurchase at 30 September 2016 and GBP33m at 11
November 2016. We expect to complete the remaining GBP17m of the
current share buyback programme in the second half of this
financial year.
An interim dividend of 2.0p (H1 2016: 1.9p) will be paid on 10
February 2017 to shareholders on the register at 13 January 2017.
The 5% 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.
Board changes
As previously announced, David Mellors, Chief Financial Officer
(CFO), will leave QinetiQ on 31 December 2016 to become CFO of
Cobham plc and will be replaced by David Smith. David Smith is
currently CFO of Rolls Royce plc and was previously CFO of the
technology group Edwards and Chief Executive Officer of Jaguar Land
Rover. He will be in post no later than 1 March 2017 with Dr
Malcolm Coffin, QinetiQ Group Financial Controller since October
2010, undertaking the CFO role on an interim basis.
Trading environment
QinetiQ operates principally in three home markets: the United
Kingdom, the United States and Australia.
UK
The new UK Government, established this summer following the
referendum vote in favour of the UK leaving the EU, has reaffirmed
its commitment to the outcome of the Strategic Defence and Security
Review (SDSR) published at the end of 2015 which helped to clarify
the UK's capability priorities. In the SDSR the MOD pledged to
spend 2% of GDP on defence and to address capability gaps such as
combat air and maritime surveillance. Investment in cyber security
is also to rise over the next five years with a UK National Cyber
Security Centre established in 2016.
New capabilities will be funded by 30% reductions in MOD
civilian staff and in its 'built' estate, and by GBP11bn of savings
over the next four years. The introduction of new capabilities and,
in particular, extending the life of existing capabilities,
provides QinetiQ with opportunities to deliver engineering, test
and evaluation services as well as further opportunities for
outsourcing, while recognising that in the short term there may
continue to be some uncertainty and the potential for interruptions
to order flow.
The Single Source Regulations Office (SSRO) is developing a new
methodology for calculating the baseline profit rate in future
years, potentially introducing multiple profit rates. This baseline
rate acts as the starting point for agreeing the profit rates of
new and renewed contracts, and suppliers can both under and
over-perform the contracted rate depending on, for example, risk,
capital servicing and project execution. Approximately 70% of our
total EMEA Services revenue is derived from single source
contracts, including the non-tasking element of the Long Term
Partnering Agreement (LTPA) and we anticipate that the majority of
our single source revenue will fall under the regulations within
the next three years.
MOD spending on science and technology will continue to be
protected at 1.2% of the defence budget with an increased emphasis
on disruptive technologies and innovation, and a move away from
some more traditional research programmes. On 16 September 2016,
the Secretary of State for Defence launched a new Defence
Innovation Initiative for the UK focused on ensuring that Britain
remains a credible military force against major adversaries, using
traditional lethal and non-lethal effects to respond to evolving
threats with pace and agility. As part of the Initiative, a Defence
and Security Accelerator will launch next year to administer an
GBP800m Innovation Fund. In addition, an Innovation and Research
Insight Unit will be established to inform the future direction of
Science & Technology programmes for defence and security,
drawing on industry, SMEs and academia for the latest intelligence.
The Defence Innovation Initiative has a particular emphasis on
partnership and the "Whole Force" - military, civil servants and
industry people - working as one. At the launch of the initiative,
the Secretary of State highlighted the QinetiQ-facilitated Unmanned
Warrior exercise in October 2016 as "a signal of our desire to work
with global partners."
US
In the US, Congress passed a Continuing Resolution to fund the
US Government through the November Presidential elections and up to
9 December 2016. This creates the potential for some short-term
delays but in the longer term defence spending is expected to rise
with a 2% increase in the US base budget forecast through 2020. A
renewed commitment by US military customers to unmanned ground
vehicle products is reflected in plans to award new competitive
Programs of Record over the next two years to enhance and sustain
the US unmanned systems capability as a funded capability in the US
Department of Defense (DoD) budget. The research and development
(R&D) budget for defence is also expected to increase with the
Defense Innovation Initiative, also known as the Third Offset
Strategy, putting $18bn a year behind innovation and R&D.
Australia
Following its narrow re-election, the Australian Government
remains committed to increasing defence expenditure to 2% of GDP
and to improving defence capability in line with the Defence White
Paper. This is likely to result in 6% growth in the Australian
defence budget through 2020 and the replacement of the majority of
its platforms over the next 15 years, revitalising the Australian
defence industry.
International
Despite tight economic conditions, growth is projected in global
defence markets and in adjacent budgets such as security of civil
infrastructure due to continued concerns about unrest and
insecurity.
Themes in our markets
We live in a time of unprecedented uncertainty, insecurity, and
complexity with governments having to respond to increasing
security threats with reducing budgets. Government customers need
to deliver more with less so are seeking greater value for money
from their suppliers and are looking for assistance in meeting
their own efficiency challenges. They also need to innovate to
respond to these fast evolving threats. They are seeking new
approaches to innovation in both equipment and processes so that
they can rapidly integrate new technologies into existing
capabilities. Many customers are keen to capture the innovation
that comes from universities and SMEs and are looking for
assistance from organisations that can collaborate and help them
connect their supply chains. Similarly governments are promoting
multilateral approaches to developing new capabilities, encouraging
suppliers to cooperate internationally.
QinetiQ has a solid foundation to build on because our
capabilities and strengths are particularly well matched to
emerging themes in global markets. These include the acquisition of
new air and maritime platforms (notably in our UK and Australia
home markets), persistent requirements in cyber security and
Intelligence, Surveillance & Reconnaissance (ISR), growing
demand for 'integrated' capabilities such as the teaming of manned
and unmanned platforms, and greater use of autonomy in a wide range
of military and civil applications. There is also a growing
appetite for the rapid development, experimentation and deployment
of new capabilities to respond to growing and diversifying threats
that our more agile approach to test and evaluation (T&E) and
technology insertion are well positioned to address. We are also
experienced in delivering more for less and responding to new
challenges through innovation in services, products and business
models. In this dynamic market we need to act with pace and agility
to stay ahead of the competition and meet customer needs.
Vision and strategy - Becoming the chosen partner
Our vision is to be: "The chosen partner around the world for
mission-critical solutions, innovating for our customers'
advantage." To realise our vision, we are implementing three
mutually-reinforcing strategic priorities designed to grow the
company by focusing on UK customers to modernise the defence test
and evaluation enterprise, on international customers and on
innovation. Being 'the chosen partner' requires that we embrace
innovation in all its forms, and that we adopt a global mind-set. A
particular focus of our strategy is smart partnering, choosing the
right strategic partners with complementary capabilities to ours so
that we can be competitive and win.
UK Test and Evaluation
Our first strategic priority is to be a leader in defence test
and evaluation (T&E) by working in partnership with the MOD and
prime contractors. As threats change we are modernising the overall
delivery of T&E to enable the UK Armed Forces to deploy
advanced military capability quickly and flexibly to meet rapidly
evolving and sophisticated threats.
In November last year we were awarded a GBP153m Strategic
Enterprise contract that changed the way we deliver aircraft
engineering services for the MOD to an output-based model, where we
are paid and measured on deliverables. In the first half of this
year, we added GBP20m of additional work into this Strategic
Enterprise model, so that we are now providing engineering services
for nine aircraft types, both fixed and rotary wing. There are
further opportunities to expand this contract, working with
partners to pool skills and bring collaborative teams together
across industry.
At the end of September, we signed the 11-year, GBP109m contract
extension for Naval Combat System Integration Support Services
(NCSISS) to the MOD, under which we lead the T&E, integration
and development of mission systems that keep the UK's surface
warships at sea and fit to fight. This is a leading example of our
strategy in action, with a focus on partnership with our customers
and across the broader supply chain as we look to develop our
Portsdown Technology Park site as the UK Centre of Excellence for
maritime mission systems for the whole supply chain. While not
delivering increased revenue in the short term, the extension of
this contract for 11 years improves the security of future revenues
and provides a platform to win incremental work.
Further work is underway with the Front Line Commands and prime
contractors to develop the future vision for UK T&E to ensure
it meets the needs of the UK defence plan, supports exports and
international partnerships, and delivers the right outputs to
enable future military capability. For example, in October 2016, we
hosted Unmanned Warrior, a world-first demonstration of how over 50
unmanned systems can operate as part of a major multinational naval
exercise on missions ranging from anti-submarine warfare to mine
countermeasures. From inception to delivery, QinetiQ was
instrumental in making Unmanned Warrior happen, providing logistics
and range management expertise under the LTPA contract, a
transportable command and control system, and leading the UK
component of the demonstration to achieve the world's first
deployment of autonomous vehicles operating in the air, on the
water and under the surface.
International
Our second strategic priority is to grow QinetiQ as an
international company through the development of our existing home
markets, creation of new home markets and exporting UK products and
services.
On 1 April 2016, a new International business unit was created
incorporating our Australian, Swedish, Canadian, Commerce Decisions
and Advisory Services operations. This business is completely
focused on developing and expanding our international sales through
partnership, organic and inorganic growth. While QinetiQ has
managed international operations and delivered products to a
diverse range of international customers for some time, so far our
approach to the broader international market has lacked a unifying
purpose and focus. The mission of our newly created International
business as an 'enabler' for broader QinetiQ is designed to bring
greater coherence, alignment, and focus to our activities and
pursuits internationally, ensuring that we think globally so that
we can add more value.
Iain Farley joined QinetiQ at the beginning of August 2016 to
run the new International business from Expro Group International
where he was Vice President for Business Development & Emerging
Businesses. Iain worked previously in the oil and gas industry for
Mobil, Schlumberger and Weatherford and has experience of building
businesses in new markets, commercialising new technologies and
forming partnerships and joint ventures.
As part of our international strategy, we are building our
capabilities in our home markets (the US and Australia in addition
to the UK) where we already have a presence and market share.
During the period we engaged with key industrial and government
partners, such as the US Defense Advanced Research Projects Agency
(DARPA) and a number of US prime contractors to collaborate to
create new business opportunities. We continue to implement our
strategy in the Australian market where the Government is committed
to increasing defence expenditure and upgrading military
platforms.
We have also made progress in other existing markets such as
Sweden, where Andreas Ward has been appointed as Managing Director.
Andreas joined us from Saab, Sweden's leading defence and security
company, where he worked for more than a decade, most recently as
Vice President Nordic & Baltics, following 13 years in the
Swedish Army. The evaluation of new home markets has commenced and
over the next six months we expect to review key regions such as
Asia, Europe, the Middle East, and North America to develop focused
plans for specific countries, campaigns, and accounts which will
then inform the prioritisation of resources and the identification
of potential partners.
We have an opportunity to grow sales by exporting our products
and services. In the last six months we have shared and agreed our
priorities for export with the UK Government through the new
Department for International Trade as well as the UK Trade and
Investment's Defence and Security Organisation (UKTI DSO). We have
commenced the development of our export capability as a team and
are positioning for strategic bids in key new markets, for example,
choosing to partner with BAE Systems, with the backing of the UK
Government, for a competition in Chile to upgrade their Type 23
frigates.
Innovation
Our third strategic priority is to innovate - investing in and
applying our core competence for customer advantage in defence and
commercial markets. As customers demand more capability and as the
boundaries between defence and civil security, military and
commercial technologies, and domestic and foreign sources of
capability become increasingly blurred, value-creating innovation
is vital to maintaining our distinctiveness in the market-place and
as a driver for future growth.
Critical know-how and technical innovation have been at the
heart of QinetiQ's success to date, and will remain a key source of
growth into the future. However, turning creativity and technical
innovation into tangible value for our customers increasingly
requires innovative thinking across the broader range of activities
and operations. Innovative business models, new processes and
commercial innovation are often as, if not more, value-creating for
customers as new inventions or pure product innovations.
In 2015, we launched a new Internal Research and Development
(IRAD) programme for QinetiQ led by Dr Jeremy Ward, Chief
Technology Officer and guided by an Innovation Steering Board to
ensure that projects are customer-driven and properly controlled.
More than 40 projects are now underway, including projects to
develop next-generation approaches to test and evaluation services,
robotics and OptaSense applications in the rail industry. Around
half of these projects are related directly to key growth
campaigns, where we are using our investment and partnerships with
companies such as MBDA on laser technology and Thales on Defence
Operational Training to position ourselves for growth.
In September 2016, the MOD announced that it was finalising the
agreement of a GBP30m contract with UK DRAGONFIRE, a UK industrial
team led by MBDA and including QinetiQ, to conduct the Laser
Capability Demonstrator Programme (Laser CDP) that will deliver a
step change in the UK's capability in high energy defensive laser
weapon systems. Once under contract we will provide the innovative
high-powered laser technology for this programme and conduct trial
engagements of land and maritime targets that are due to take place
at the ranges that we manage under the LTPA in 2019.
In July 2016, QinetiQ, Thales and Textron AirLand announced that
they will partner to bid for the MOD's Air Support to Defence
Operational Training (ASDOT) programme. The team will propose an
innovative, cost effective, technologically advanced service using
the Textron AirLand Scorpion jet equipped with Thales and QinetiQ
sensors to train all three armed services. The competitive contract
is expected to be awarded in September 2018 with a service delivery
start in January 2020, and is anticipated to be worth up to
GBP1.2bn over 15 years. QinetiQ will provide the safe operation of
aircraft - including maintenance, provision of pilots, and
certification, as well as the integration of sensors, jamming pods
and synthetic training capabilities.
Transformation programme - Driving customer focus
In April 2016, we launched a transformation programme, initially
scoped for two years, to deliver the key changes that we need to
put in place as a company to achieve growth. The objectives of the
programme are to enhance customer focus, improve competitiveness
and drive investment in sustainable growth.
Leadership and organisation
To respond to a changing market environment we have reorganised
the company, establishing new businesses responsible for contract
delivery as well as new functions to provide support, in particular
the dynamic resourcing of people and assets from across QinetiQ to
enable the business units to win and deliver work. Following the
successful transition of systems and software engineers into this
structure during H1, all of our scientists and engineers will
transition during H2, and the reorganisation will be complete
before the end of the financial year. This structure will be
supported by an effective sales and operational planning process,
enabling us to resource as one company.
During 2016, the leadership team has been strengthened by the
appointment of new leaders for the International business and our
Business Development and Human Resources functions, all from
outside QinetiQ. A development programme is also underway for the
top 100 leaders across the Group.
Operational excellence
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. In addition to our day-to-day
focus on consistent operational delivery, safety is a top priority
particularly during this period of change.
A new Strategy function has been established to help position
QinetiQ for future growth by developing a pipeline of potential
acquisitions and driving an Integrated Strategy Business Planning
process. This ensures we have a clear long-term strategy supported
by coherent plans and consistent actions.
Business winning
To improve our business winning capability in an increasingly
challenging market, we have launched a programme to develop the
skills of employees engaged in sales and bidding, bringing in
experienced hires where required. We are also simplifying our
processes to bid in a more agile and competitive way.
We have introduced a new proactive approach to bidding and
winning strategically important corporate campaigns that will drive
our future growth alongside a continued focus on our run-rate
business. Based on horizon scanning of future customer needs,
Group-level campaigns align with four main growth levers: major
government-funded programmes, such as Ballistic Missile Defence and
Carrier Strike; areas of QinetiQ strategic capability, such as
modernised T&E, cyber security, and experimentation and
rehearsal; major near-term competitions; and exploitation of
promising capabilities we have previously invested in, such as
airborne surveillance.
Over the last six months, we have selected more than 30
campaigns across the Group. We are now resourcing these campaigns
with the best skills that are available across QinetiQ, and
considering which companies we want to partner with to enhance our
probability of winning, as well as what investment we need for
success. This combination of focused investment and a strategic
approach to partnering will help drive our future growth.
Investing in our future
By improving productivity, including a reduction of
approximately 200 roles across the company this year, we are
delivering efficiencies that will provide better value for money
for customers and headroom for investment. This allows us to invest
carefully in our business winning capability and in Research and
Development particularly in support of our selected growth
campaigns.
Our priorities for capital allocation remain: investing in
organic capabilities, complemented by bolt-on acquisitions where
there is a strong strategic fit; maintaining the necessary balance
sheet strength; providing a progressive dividend to shareholders;
and returning excess cash to shareholders. The strength of our
balance sheet and the cash generative nature of our portfolio
enables us to invest in our core competencies such as T&E, with
capital expenditure expected to increase in future as we invest in
the LTPA and other long-term contracts.
Outlook
The initial progress we have made, combined with our ongoing
assessment of the market environment, and in particular feedback
from customers reinforce that we have the right strategy in place
to drive future growth.
In FY17, 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, while recognising that
there may continue to be some uncertainty and the potential for
interruptions to order flow. At 30 September 2016, revenue under
contract for FY17 was in line with the prior year, 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. At 30 September 2016, FY17 revenue under
contract was above that of a year ago, but the performance of
Global Products remains dependent on the timing of shipments of key
orders.
Overall, the Board's expectations for Group performance this
financial year remain unchanged.
Business overview
EMEA Services
H1 2017 H1 2016
GBPm GBPm
---------------------- -------- -----------
Orders 284.3 170.8
Revenue 293.3 301.4
Underlying operating
profit* 43.0 42.7
Underlying operating
margin* 14.7% 14.2%
Book to bill ratio(1) 1.5x 0.8x
Funded backlog(1) 780.2 631.3
---------------------- -------- -----------
(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.
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
13 years. EMEA Services has significant scale and depth of
expertise in the air, maritime and weapons domains, alongside
differentiated capabilities in C4ISR and cyber, and a niche
footprint in space and land.
Financial performance
Orders rose to GBP284.3m (H1 2016: GBP170.8m), principally due
to the award of a GBP109m 11-year renewal from the UK Ministry of
Defence (MOD) for the Naval Combat System Integration Support
Services (NCSISS) contract.
Reported revenue decreased against the prior period by GBP8.1m,
of which GBP5.7m was due to the December 2015 disposal of
Cyveillance. Excluding this and the impacts of currency movements,
revenue declined 1% on an organic basis with a largely consistent
performance across the division. At the start of H2, EMEA Services
had 93% of its FY17 revenue under contract, consistent with the
prior period and up from 77% at the beginning of this year.
Underlying operating profit* was flat at GBP43.0m (H1 2016:
GBP42.7m). The resulting underlying margin* increased to 14.7% (H1
2016: 14.2%) following the Cyveillance disposal and including
GBP4.3m (H1 2016: GBP4.2m) of other income relating to letting of
surplus space in the Group's property portfolio.
H1 commentary
Air & Space
With technology developments increasingly blurring boundaries
between air and space systems, our Air & Space businesses were
combined on 1 April 2016 to increase collaboration in our
engineering capabilities to de-risk complex aerospace
programmes.
The business is continuing to work in partnership with the MOD
and the supply chain to deliver the Strategic Enterprise model
which transforms the provision of aircraft test and evaluation and
which has now been in place for a year. The model represents a new
way of working under which we are measured and paid on results and
outputs, not inputs, improving long-term planning, providing better
visibility, and delivering considerable savings to the MOD. Under
this model, contracts totalling GBP20m were won in the period to
provide in-service support for Apache and Puma helicopters, as well
as Tornado fast jets, and test and evaluation services for the
Wildcat Future Air to Surface Guided Weapon programme. Since the
end of H1 the business has won a contract to provide safety advice
for the Merlin helicopter programme under the Strategic Enterprise
model.
During the period the business entered a teaming agreement with
Thales and Textron to provide a cost effective and innovative offer
to the MOD for the Air Support to Defence Operational Training
Programme. It also successfully secured GBP2m of research funding
to lead a group from industry, academia and SMEs to upgrade the
scale models used in the Farnborough wind tunnel using technology
adapted from F1 motor racing, leading to improved efficiency and
increased capacity. The business also revealed an innovative new
material, Titan Weave, that will help reduce the weight of
aircraft, while being three times stronger than current materials
used to protect against bird strikes and other impacts.
In October, as part of its ExoMars mission, the European Space
Agency (ESA) attempted to place its Schiaparelli lander on the
surface of Mars, equipped with a QinetiQ-built transceiver
responsible for transmitting data back to Earth. The lander was
lost, but QinetiQ's transceiver operated successfully, providing
data that helped scientists to understand what happened to the
spacecraft in its final moments. The business also continues to
deploy significant resources to develop the gridded ion engine
electric propulsion system for the flight module to be used on
ESA's BepiColombo mission to Mercury.
Maritime, Land & Weapons
The Maritime, Land & Weapons business was created on 1 April
2016 combining businesses with a strong focus on test and
evaluation at a time when customers are increasingly undertaking
more complex, multi-domain trials. The business delivers
operational advantage to customers by providing independent
research, evaluation and training services.
Sustaining and growing its core technical advice and design
support services to the UK Royal Navy is a strategic priority for
the Maritime Land & Weapons business, and during the period it
was awarded an 11-year contract extension worth GBP109m for the
Naval Combat Systems Integration & Support Services based at
Portsdown Technology Park. The contract is an important milestone
in establishing the site as a UK Centre for Excellence for maritime
mission systems integration and testing for the Royal Navy.
In the weapons domain, the business is a leading provider of
independent research on weapons and energetics, coordinating the
MOD's conventional weapons research programme through its
leadership of the Weapons Science and Technology Centre. During the
period it won an GBP8m contract to implement and evaluate vehicle
survivability for Dstl, including installing a Soft-Kill Defensive
Aids System on a Challenger 2 tank. International customers
continue to want to use QinetiQ expertise for their own
development, with the South Korean Agency for Defence Development
committing to a GBP3m programme to test their latest warhead
designs using the Long Test track at MOD Pendine.
In October 2016, the Maritime, Land & Weapons business led a
team from across QinetiQ to deliver Unmanned Warrior for the Royal
Navy, a demonstration by 40 companies of how autonomous vehicles
under the water, on the surface and in the air, can be used for
future operations such as mine hunting. The successful
demonstration used LTPA sites at MOD Aberporth, MOD Hebrides and
MOD BUTEC (British Underwater Test and Evaluation Centre).
International delegations from around the world including the US,
Canada and Australia visited the demonstration alongside senior MOD
and UK Government Ministers. Next year, building on Unmanned
Warrior and At Sea Demonstration 2015, another international
exercise will be taking place at MOD Hebrides, Formidable Shield
2017.
Cyber, Information & Training (CIT)
The CIT business helps government and commercial customers
respond to fast-evolving threats based on its expertise in
training, secure communication networks and devices, intelligence
gathering and surveillance sensors, and cyber security.
Although competition is fierce, the SDSR and the focus on
counter-terrorism are likely to drive increases in budgets for
C4ISR and cyber security. The CIT business is the MOD's leading
supplier of C4ISR research, and is well placed to compete for new
enabling contracts, building and leading consortia of large
companies, SMEs and academia. 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. It was awarded an
innovative Open Source Intelligence (OSINT) contract bringing
together expertise in technology horizon scanning, human sciences,
commercial-off-the-shelf exploitation and experimentation as a
service to help customers keep pace with the rapidly evolving
technical and social media landscape.
Outside its traditional markets, CIT is continuing to see
interest from regional and local government customers on innovation
initiatives to support local business growth, and is delivering
training and simulation services to customers in North America,
Europe and the Middle East. During the period the business secured
a number of contracts worth a total of GBP10m for secured
navigation, working with the European GNSS Supervisory Authority to
help enable the effective exploitation by users of Galileo
constellation of satellites - the European Union version of GPS
which goes live in 2017. This included the first demonstration of
accessing the encrypted Public Regulated Service (PRS) via the
Cloud. The business is also working in collaboration with Lloyds
Register to improve the security on board cyber-enabled ships.
International
On 1 April 2016, a new International business was established
incorporating operations with a significant international footprint
and those with international potential, as well as to manage other
opportunities via our international offices. The business includes
QinetiQ Australia, QinetiQ Canada, Advisory Services (previously
known as Procurement Advisory Services), Commerce Decisions and
QinetiQ Sweden AB.
In August 2016, Iain Farley joined the business as Managing
Director International from Expro Group International, having spent
much of his career working overseas in the oil and gas industry for
Mobil, Schlumberger and Weatherford. In September, Andreas Ward
joined from Saab to be Managing Director for QinetiQ Sweden AB.
The Australian business provides impartial advice and services
predominately to government customers. During the period the
business has continued to position itself as a 'strategic partner'
to the Australian Government as it implements its recapitalisation
and defence acquisition reform programmes. QinetiQ Australia
secured more than A$30m of wins. These included: support to tanker
aircraft, the AP-3C Orion replacement, Navy guided weapons systems,
ground-based air defence, the Australian Artillery Regiment, and a
contract to extend the provision of technical advice at munitions
manufacturing plants. The business also gained accreditation from
Australia's Defence Aviation Safety Authority to approve structural
changes on all Australian Defence Force aircraft, building on its
Aircraft Structural Integrity (ASI) services contract which
supports the airworthiness of military aircraft.
Our Canadian business is recently established but has already
secured cost engineering and AWARD procurement software contracts.
Additional consulting contracts are being pursued and the business
is being positioned, through prime contractors and potential
partners, for strategic campaigns.
Advisory Services helps customers deliver complex programmes by
providing analytical services and the evidence required to make
complex decisions. The business is successfully delivering a major
contract to provide early stage advice and business case support to
a Middle Eastern client for a complex engineering project.
Global Products
H1 2017 H1 2016
GBPm GBPm
--------------------- -------- --------
Orders 92.5 57.6
Revenue 68.5 69.5
Underlying operating
profit* 8.9 7.1
Underlying operating
margin* 13.0% 10.2%
Book to bill ratio 1.4x 0.8x
Funded backlog 171.8 101.4
--------------------- -------- --------
Global Products delivers innovative solutions to meet customer
requirements and undertakes customer-funded research and
development, developing intellectual property in partnership with
key customers and through internal funding with potential for new
revenue streams.
Financial performance
Orders grew to GBP92.5m (H1 2016: GBP57.6m) due mainly to
improved order flow in QinetiQ North America, in particular $28m of
orders for next generation US aircraft carriers.
Reported revenue was GBP68.5m (H1 2016: GBP69.5m). Excluding
GBP4.5m of foreign exchange variance, there was an 8% decline in
the organic revenue primarily due to lower robot shipments in the
period and illustrating the lumpy nature of this division's revenue
profile. At the beginning of H2, the division had 98% of its FY17
revenue under contract compared to 81% in the prior period and up
from 64% at the beginning of the financial year, although the
delivery of this is dependent of the timing of shipments in the
remainder of FY17.
Underlying operating profit* increased to GBP8.9m (H1 2016:
GBP7.1m) with an underlying operating profit margin* of 13.0% (H1
2016: 10.2%), assisted by a credit of GBP1.3m relating to the
resolution of an overseas licensing dispute.
H1 commentary
QinetiQ North America
QinetiQ North America (QNA) develops and produces innovative
military protection products, specialising in unmanned systems,
survivability and maritime systems, along with products in related
commercial markets.
The period saw a strong orders performance, driven by awards in
robotics, air and ground armour, research & development, and in
particular for Advanced Launch and Recovery Equipment (ALRE) for US
aircraft carriers. The ALRE equipment includes control hardware and
software for the Electromagnetic Aircraft Launch System (EMALS) and
the Advanced Arresting Gear (AAG) to be installed on the next
generation of US aircraft carriers. Demand for the reset and
recapitalisation of robots previously used in operations has
remained high, as has demand for capability upgrades such as
detection of CBRNE (chemical, biological, radiological, nuclear and
explosives). The business is also positioning for multi-year
Programs of Record that will be funded out of the Department of
Defense's base budget. Through both internal and external funding,
QNA has added to the capability and strategic relevance of its
robotic fleet, especially for the Talon family of robots, its
flagship mid-size offering. In October 2016, it announced a
strategic partnership with the Estonian company Milrem for Titan, a
modular, hybrid military unmanned ground vehicle (UGV) for
dismounted troop support.
Outside of robotics, the business launched in September a new
meteorological product, iQ-3, that provides real-time atmospheric
data in support of military requirements such as artillery fire
support, tactical weather modelling, and air drop. Its LineWatch
product, which accurately measures the current and voltage of power
distribution lines, is being piloted by ten North American utility
companies.
In international markets, robots, vehicle protection, and
soldier protection systems, remain highly relevant as security
challenges and instability persist in the Middle East and
elsewhere. In addition to product sales, QNA is building its base
of contract R&D projects to drive technology development,
explore new customer problems and expand its competitive
offerings.
OptaSense
OptaSense is a Distributed Acoustic Sensing (DAS) business
operating in multiple vertical markets. The business continues to
make progress in infrastructure security, delivering ahead of
schedule on the world's largest distributed fibre sensing project,
for the 1,850km Trans-Anatolian Natural Gas Pipeline (TANAP) that
runs from Azerbaijan, through Georgia and Turkey, to Europe.
Following the establishment of an advisory board to provide
expertise in key target markets, OptaSense has signed an agreement
to work together with Siemens to pursue new opportunities in the
rail sector. The business is also undertaking collaborative
research with Stanford School of Earth, Energy and Environmental
Sciences in California that includes the installation of a
fibre-optic seismic array on the Stanford campus to better
understand the complex geology of the Bay Area.
Space Products
QinetiQ's Space Products business develops satellites, payload
instruments, sub-systems and ground station services. During the
period QinetiQ's P200 satellite, the latest evolution of the Proba
series of satellites, was listed in the NASA catalogue which will
help facilitate the procurement of spacecraft by US federal
agencies and their affiliates. The business also won a EUR2m
contract with the European Space Agency (ESA) to develop the next
generation computer and power management for the QinetiQ-built
Proba series of satellites.
EMEA Products
EMEA Products provides research services and bespoke
technological solutions developed from intellectual property spun
out from EMEA Services. During the period, the US Defense Advanced
Research Projects Agency (DARPA) invested a further $3m in
QinetiQ's electric hub-drive technology that will improve mobility
and survivability of future military ground vehicles. The new
agreement builds on previous contract awards and will take the
technology from concept design to the building and testing phase,
including production of two fully working units.
Internationally, ASX airborne surveillance products have been
delivered successfully and there has been further interest in wind
farm radar impact assessments to help secure planning permissions
in Europe and other regions, including South Africa. Following
QinetiQ's success in developing advanced materials for the
Department of National Defence in Canada, the UK Ministry of
Defence has now placed an order for similar equipment as a
technology demonstrator for the Royal Navy.
Subsidiaries Boldon James and Commerce Decisions are reported in
EMEA Products. Boldon James further expanded its product portfolio
with the introduction of several new enhancements to its data
classification offering, which it provides to large military and
commercial organisations.
Financial items
Net finance costs
Net finance costs were flat at GBP0.5m (H1 2016: GBP0.6m)
including the defined benefit pension net finance expense of
GBP0.6m (H1 2016: GBP0.5m). The underlying net finance income* was
GBP0.1m (H1 2016: cost GBP0.1m).
Tax
The total tax charge is GBP1.7m (H1 2016: GBP6.3m).
Underlying tax charge
The underlying tax charge* of GBP6.5m (H1 2016: GBP6.5m) is
calculated by applying the expected effective tax rate of 12.5% for
the year ending 31 March 2017 to the Group's underlying profit
before tax for the six months to 30 September 2016 (September 2015:
13.1%). The effective tax rate continues to be below the UK
statutory rate, primarily as a result of the benefit of research
and development expenditure credits ('RDEC') in the UK. 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 and the assumption that the benefit
of net RDEC retained by the Group remains in the tax line. Future
recognition of unrecognised tax losses will also affect future tax
charges.
Tax losses and specific adjusting items tax
At 31 March 2016 the Group had unused tax losses of GBP154.8m
which are available for offset against future profits. As at 30
September 2016 a deferred tax asset of GBP4.1m (representing UK
non-trading losses of GBP22.0m) has been recognised on the balance
sheet in respect of an element of these unused tax losses expected
to be utilised in the foreseeable future. The income statement
credit arising from recognition of this deferred tax asset is
reported as a specific adjusting item. No deferred tax asset is
recognised in respect of the other losses due to uncertainty over
the timing and extent of their utilisation. Other deferred tax
movements of GBP0.6m have been credited to the income statement as
a specific adjusting item. This is in respect of changes in
estimates in respect of the apportionment of book values between
qualifying and non-qualifying property, plant and equipment.
Together with a GBP0.1m tax effect of the items impacting specific
adjusting items PBT, the total specific adjusting items tax income
is GBP4.8m (H1 2016: GBP0.2m).
Current tax liability
The current tax liability is GBP27.5m as at 30 September (31
March 2016: GBP39.9m). The decrease in the liability is primarily
due to part-settlement of a liability in respect of taxes payable
as a result of the Group's acquisition of Dominion Technology
Resources, Inc. (DTRI) in October 2008. The funds required to make
this part-settlement were recovered from the vendors of DTRI (for
which an offsetting receivable was held on the Group's balance
sheet as at 31 March 2016). An insurance policy was taken out by
the Group at the point of acquisition and if, subject to an appeal,
the Tax Court's decision is upheld then the funds required to fully
settle this dispute are expected to be provided by the insurers. As
a result, an offsetting receivable for the residual balance is
reported on the balance sheet as at 30 September 2016 (included
within trade and other receivables).
Earnings per share
Underlying earnings per share* for the Group increased by 8% to
7.9p (H1 2016: 7.3p) benefiting from the higher profit before tax
and reduced number of shares due to the ongoing buyback programme.
Basic earnings per share for the total Group (including specific
adjusting items) rose 21% to 8.6p (H1 2016: 7.1p), aided by the
recognition of a deferred tax asset in respect of UK non-trade loan
relationship losses.
Dividend
An interim dividend of 2.0p (H1 2016: 1.9p) will be paid on 10
February 2017 to shareholders on the register at 13 January 2017.
The 5% 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.
Pensions
The net pension liability under IAS 19, before adjusting for
deferred tax, was GBP65.6m (31 March 2016: GBP37.7m; 30 September
2015: GBP20.4m). The key assumptions used in the IAS 19 valuation
of the scheme were:
30 September 31 March
Assumption 2016 2016
-------------------------- ------------- ---------
Discount rate 2.3% 3.4%
CPI Inflation 2.2% 2.1%
Life expectancy - male
(currently aged 40) 91 91
Life expectancy - female
(currently aged 40) 93 93
-------------------------- ------------- ---------
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 the gross Scheme
liabilities to each of the key assumptions is shown in the table
below.
Indicative impact
Key assumptions Change in assumption on Scheme liabilities
---------------------- --------------------- -----------------------
Discount rate - small Increase/decrease Decrease/increase
movement* by 0.1% by GBP37m
Discount rate - large Increase by 1.0% Decrease by GBP341m
movement*
Discount rate - large Decrease by 1.0% Increase by GBP453m
movement*
Increase/decrease Increase/decrease
Rate of inflation by 0.1% by GBP33m
Increase by one
Rate of mortality year Increase by GBP50m
---------------------- --------------------- -----------------------
*Due to a compounding effect, it would not be accurate to
extrapolate the 0.1% discount rate sensitivity to estimate a large
increase or decrease in discount rates. Therefore, the table above
also sets out the impact of a larger change in the discount rate
(+1.0% and -1.0%), allowing for the compounding effect.
The impact of movements in Scheme liabilities will, to an
extent, be offset by movements in the value of Scheme assets as the
Scheme has assets invested in a Liability Driven Investment
Portfolio. As at 30 September 2016 this hedges against
approximately 45% of the interest rate risk and 100% of the
inflation rate risk, as measured on the Trustees' gilt-funded
basis.
The market value of the assets at 30 September 2016 was
GBP1,776.4m (31 March 2016: GBP1,410.4m; 30 September 2015:
GBP1,399.5m) and the present value of scheme liabilities was
GBP1,842.0m (31 March 2016: GBP1,448.1m; 30 September 2015:
GBP1,419.9m). 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.
Cash flow, net cash and liquidity
Underlying operating cash conversion* increased to 98% (H1 2016:
94%), enhanced by lower than forecast capital expenditure in our
core contracts. This is expected to be a timing difference as we
are proactively seeking to invest capital in these contracts. The
underlying operating cash conversion* delivered an underlying cash
flow of GBP50.9m (H1 2016: GBP46.9m). Underlying operating cash
conversion includes the GBP6.4m (H1 2016: GBP7.3m) pension repair
payments for which there is no corresponding P&L charge as the
full liabilities are on the balance sheet.
We expect to pay approximately GBP7m during H2 relating to a
court order over a very old overseas dispute over a contract signed
in 2005. This payment must be made even though the Group expects to
make a court appeal. The amount was fully provided in the Group's
accounts in prior years.
The Group had bought back GBP29m of the previously announced
GBP50m share repurchase at 30 September 2016 and GBP33m at 11
November 2016. We expect to complete the remaining GBP17m of the
current share buyback programme in the second half of the financial
year.
At 30 September 2016, the Group had GBP271.2m net cash, compared
to GBP274.5m net cash at 31 March 2016. Net cash inflow from
operating and investing activities in the six months to September
2016 was offset by dividend payments and payments in respect of the
share repurchases noted above.
Total committed facilities, which are undrawn, amounted to
GBP242.8m at 30 September 2016, 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 to
30 September 30 September
2016 2015
------------------- -------------- --------------
GBP/US$ - average 1.38 1.54
GBP/US$ - closing 1.30 1.52
GBP/US$ - opening 1.44 1.49
------------------- -------------- --------------
Condensed consolidated income statement
6 months ended 6 months ended
30 September 2016 30 September 2015
(unaudited) (unaudited)
-------------------------- ---- ------------------------------- -------------------------------
Specific Specific
all figures in adjusting adjusting
GBP million note Underlying items* Total Underlying items* Total
-------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Revenue 361.8 - 361.8 370.9 - 370.9
Operating costs
excluding depreciation
and amortisation (301.0) - (301.0) (313.8) 0.2 (313.6)
Other income 4.3 - 4.3 4.2 - 4.2
-------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
EBITDA (earnings
before interest,
tax, depreciation
and amortisation) 65.1 - 65.1 61.3 0.2 61.5
Depreciation and
impairment of property,
plant and equipment (12.0) - (12.0) (10.2) - (10.2)
Amortisation of
intangible assets (1.2) (0.2) (1.4) (1.3) (1.1) (2.4)
-------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Operating profit/(loss) 51.9 (0.2) 51.7 49.8 (0.9) 48.9
Finance income 3 0.7 - 0.7 0.5 - 0.5
Finance expense 3 (0.6) (0.6) (1.2) (0.6) (0.5) (1.1)
-------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) before
tax 52.0 (0.8) 51.2 49.7 (1.4) 48.3
Taxation (expense)/income 4 (6.5) 4.8 (1.7) (6.5) 0.2 (6.3)
-------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Profit/(loss) for
the year attributable
to equity shareholders 45.5 4.0 49.5 43.2 (1.2) 42.0
-------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
Earnings per share
Basic 5 7.9p 8.6p 7.3p 7.1p
Diluted 5 7.8p 8.5p 7.3p 7.1p
-------------------------- ---- ---------- ---------- ------- ---------- ---------- -------
* 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
2016 2015
all figures in GBP million (unaudited) (unaudited)
------------------------------------------------------------- ------------- -------------
Profit for the period 49.5 42.0
Items that will not be reclassified to the income statement:
Actuarial (loss)/gain recognised in defined benefit pension
schemes (33.7) 12.2
Tax on items that will not be reclassified to the income
statement 6.7 (2.4)
------------------------------------------------------------- ------------- -------------
Total items that will not be reclassified to the income
statement (27.0) 9.8
Items that may be reclassified subsequently to the income
statements:
Foreign currency translation gains/(losses) for foreign
operations 9.0 (2.6)
(Decrease)/increase in fair value of hedging derivatives (0.6) 0.5
Movement on deferred tax on hedging derivatives 0.1 (0.1)
Fair value gains/(losses) on available for sale investments 0.4 (0.3)
------------------------------------------------------------- ------------- -------------
Total items that may be reclassified to the income statement 8.9 (2.5)
------------------------------------------------------------- ------------- -------------
Other comprehensive (expense)/income for period, net of
tax (18.1) 7.3
------------------------------------------------------------- ------------- -------------
Total comprehensive income for period, net of tax 31.4 49.3
------------------------------------------------------------- ------------- -------------
Condensed consolidated statement of changes in equity
Issued Capital
all figures share redemption Share Hedge Translation Retained Non-controlling Total
in GBP million capital reserve premium reserve reserve earnings Total interest equity
----------------- ------- ---------- ------- ------- ------------- -------- ------ --------------- ------
At 1 April 2016 5.9 40.6 147.6 - (1.9) 132.4 324.6 0.2 324.8
Profit for the
period - - - - - 49.5 49.5 - 49.5
Other
comprehensive
income/(expense)
for the period,
net of tax - - - (0.5) 9.0 (26.6) (18.1) - (18.1)
Purchase of
own shares - - - - - (0.4) (0.4) - (0.4)
Purchase and
cancellation
of shares (0.2) 0.2 - - - (26.0) (26.0) - (26.0)
Share-based
payments charge - - - - - 0.9 0.9 - 0.9
Dividends paid - - - - - (21.9) (21.9) - (21.9)
----------------- ------- ---------- ------- ------- ------------- -------- ------ --------------- ------
At 30 September
2016 5.7 40.8 147.6 (0.5) 7.1 107.9 308.6 0.2 308.8
----------------- ------- ---------- ------- ------- ------------- -------- ------ --------------- ------
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
2015 5.9 40.6 147.6 0.5 (9.4) 99.9 285.1 0.1 285.2
----------------- ------- ---------- ------- ------- ------------- -------- ------ --------------- ------
Condensed consolidated balance sheet
-----------------------------------------------------------------------------------------------------------
30 September 30 September 31 March
2016 2015 2016
all figures in GBP
million note (unaudited) (unaudited) (audited)
--------------------------- ---------------------------- ------------- ---------------- ---------------
Non-current assets
Goodwill 77.7 105.5 73.1
Intangible assets 7.9 13.6 8.3
Property, plant and
equipment 230.6 233.9 233.4
Other financial assets 0.4 0.8 0.6
Investments 1.0 0.4 0.9
Deferred tax asset 13.2 3.7 4.1
--------------------------- ---------------------------- ------------- ---------------- ---------------
330.8 357.9 320.4
--------------------------- ---------------------------- ------------- ---------------- ---------------
Current assets
Inventories 19.6 15.3 19.0
Other financial assets 11.1 10.7 10.8
Trade and other
receivables 119.7 140.8 156.2
Investments 2.1 2.1 1.7
Cash and cash equivalents 260.8 170.1 263.5
--------------------------- ---------------------------- ------------- ---------------- ---------------
413.3 339.0 451.2
--------------------------- ---------------------------- ------------- ---------------- ---------------
Total assets 744.1 696.9 771.6
--------------------------- ---------------------------- ------------- ---------------- ---------------
Current liabilities
Trade and other payables (306.6) (325.4) (338.7)
Current tax 4 (27.5) (30.9) (39.9)
Provisions (4.7) (9.5) (5.3)
Other financial
liabilities (0.4) (0.1) (0.2)
--------------------------- ---------------------------- ------------- ---------------- ---------------
(339.2) (365.9) (384.1)
--------------------------- ---------------------------- ------------- ---------------- ---------------
Non-current liabilities
Retirement benefit
obligation 10 (65.6) (20.4) (37.7)
Provisions (16.0) (15.5) (13.8)
Other financial
liabilities (0.7) - (0.2)
Other payables (13.8) (9.9) (11.0)
--------------------------- ---------------------------- ------------- ---------------- ---------------
(96.1) (45.8) (62.7)
--------------------------- ---------------------------- ------------- ---------------- ---------------
Total liabilities (435.3) (411.7) (446.8)
--------------------------- ---------------------------- ------------- ---------------- ---------------
Net assets 308.8 285.2 324.8
--------------------------- ---------------------------- ------------- ---------------- ---------------
Capital and reserves
Ordinary shares 5.7 5.9 5.9
Capital redemption
reserve 40.8 40.6 40.6
Share premium account 147.6 147.6 147.6
Hedging and translation
reserve 6.6 (8.9) (1.9)
Retained earnings 107.9 99.9 132.4
--------------------------- ---------------------------- ------------- ---------------- ---------------
Capital and reserves
attributable to
shareholders
of the parent company 308.6 285.1 324.6
--------------------------- ---------------------------- ------------- ---------------- ---------------
Non-controlling interest 0.2 0.1 0.2
--------------------------- ---------------------------- ------------- ---------------- ---------------
Total shareholders'
funds 308.8 285.2 324.8
--------------------------- ---------------------------- ------------- ---------------- ---------------
Condensed consolidated cash flow statement
-----------------------------------------------------------------------------------------
6 months 6 months Year
ended ended ended
30 30 31
September September March
2016 2015 2016
all figures in GBP million note (unaudited) (unaudited) (audited)
--------------------------------------- ----- ------------- ------------- -----------
Net cash inflow from operations 6 60.6 62.9 133.4
Tax (paid)/received (8.8) (0.4) 27.9
Interest received 0.6 0.4 0.9
Interest paid (0.3) (0.3) (0.6)
--------------------------------------- ----- ------------- ------------- -----------
Net cash inflow from operating
activities 52.1 62.6 161.6
--------------------------------------- ----- ------------- ------------- -----------
Purchases of intangible assets (0.8) (0.8) (1.6)
Purchases of property, plant
and equipment (8.9) (15.5) (28.6)
Proceeds from sale of property,
plant and equipment - 0.3 0.4
Acquisition of business - - (0.6)
Sale of investment in subsidiary - 6.2 28.0
Net cash outflow from investing
activities (9.7) (9.8) (2.4)
--------------------------------------- ----- ------------- ------------- -----------
Purchase of own shares (26.3) (45.3) (48.6)
Dividends paid to shareholders (21.9) (21.2) (32.3)
Capital element of finance
lease rental payments - (1.4) (1.4)
Capital element of finance
lease rental receipts - 1.5 1.5
Net cash outflow from financing
activities (48.2) (66.4) (80.8)
--------------------------------------- ----- ------------- ------------- -----------
(Decrease)/increase in cash
and cash equivalents (5.8) (13.6) 78.4
Effect of foreign exchange
changes on cash and cash equivalents 3.1 (0.6) 0.8
Cash and cash equivalents
at beginning of period 263.5 184.3 184.3
Cash and cash equivalents
at end of period 260.8 170.1 263.5
--------------------------------------- ----- ------------- ------------- -----------
Reconciliation of movement in net cash
6 months 6 months Year
ended ended ended
30 September 30 September 31 March
2016 2015 2016
all figures in GBP million note (unaudited) (unaudited) (audited)
--------------------------------- ----- -------------- -------------- -----------
(Decrease)/increase in cash
and cash equivalents (5.8) (13.6) 78.4
Add back net cash flows not
impacting net debt - (0.1) (0.1)
--------------------------------- ----- -------------- -------------- -----------
Change in net cash resulting
from cash flows (5.8) (13.7) 78.3
Other movements including
foreign exchange 2.5 (0.3) 0.7
--------------------------------- ----- -------------- -------------- -----------
(Decrease)/increase in net
cash as defined by the Group (3.3) (14.0) 79.0
Net cash as defined by the
Group at beginning of period 274.5 195.5 195.5
--------------------------------- ----- -------------- -------------- -----------
Net cash as defined by the
Group at end of period 7 271.2 181.5 274.5
Less: other financial asset
and liabilities (10.4) (11.4) (11.0)
--------------------------------- ----- -------------- -------------- -----------
Total cash and cash equivalents 260.8 170.1 263.5
--------------------------------- ----- -------------- -------------- -----------
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 2016
comprise statements for the Company and its subsidiaries (together
referred to as the 'Group') and were approved by the Board of
Directors on 16 November 2016.
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 2016.
In the income statement, the Group presents specific adjusting
items separately. In the judgment 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. Underlying measures of performance exclude
specific adjusting items. Specific adjusting items include:
-- amortisation of intangible assets arising from acquisitions;
-- pension net finance expense;
-- gains/losses on business divestments and disposal of property and investments;
-- impairment of goodwill and other intangible assets;
-- tax on the above items; and
-- other significant non-recurring deferred tax movements.
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 2016.
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 2016 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 2016 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 2016
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 and reconciliation of reported revenue to
organic constant currency revenue
6 months ended 6 months ended
30 September 30 September
2016 2015 (unaudited)
all figures in GBP million (unaudited)
--------------------------------------------- ------------------------ -------------------------
Underlying Underlying
operating operating
Revenue Profit(1) Revenue Profit(1)
--------------------------------------------- --------- ------------- ----------- ------------
EMEA Services 293.3 43.0 301.4 42.7
Global Products 68.5 8.9 69.5 7.1
--------------------------------------------- --------- ------------- ----------- ------------
Total operating segments 361.8 51.9 370.9 49.8
--------------------------------------------- --------- ------------- ----------- ------------
Underlying operating margin* 14.3% 13.4%
Less: Revenue of divested
business (Cyveillance) - (5.7)
Adjust to constant prior
year FX rates (6.2) -
--------------------------------------------- --------- ------------- ----------- ------------
Revenue on an organic, constant
currency basis 355.6 365.2
--------------------------------------------- --------- ------------- ----------- ------------
The year on year change in revenue on an organic
basis at constant currency and adjusting for divested
businesses is a reduction of GBP9.6m (3% decline).
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
ended
6 months
ended 30
30 September September
2016 2015
all figures in GBP million Note (unaudited) (unaudited)
Underlying operating profit(1) 51.9 49.8
Specific adjusting items:
Gain on sale of property - 0.2
Amortisation of intangible
assets arising from acquisitions (0.2) (1.1)
--------------------------------------------- --------- ------------- ----------- ------------
Operating profit 51.7 48.9
--------------------------------------------- --------- ------------- ----------- ------------
Underlying net finance
expense* 0.1 (0.1)
Specific adjusting item:
Defined benefit pension scheme
net finance expense (0.6) (0.5)
-------------------------------------------------------- ------------- ----------- ------------
Net finance expense (0.5) (0.6)
Profit before tax 51.2 48.3
Taxation 4 (1.7) (6.3)
--------------------------------------------- --------- ------------- ----------- ------------
Profit for the period attributable
to equity shareholders 49.5 42.0
--------------------------------------------- --------- ------------- ----------- ------------
(1) The measure of profit presented to the chief operating
decision maker is operating profit stated before
specific adjusting items ('underlying operating profit'). The
specific adjusting items are set out in the table above.
3. Finance income and expense
6 months
6 months ended ended
30 September 30 September
All figures in GBP million 2016 (unaudited) 2015 (unaudited)
---------------------------------------- ----------------- -----------------
Receivable on bank deposits 0.7 0.5
Finance income 0.7 0.5
---------------------------------------- ----------------- -----------------
Amortisation of recapitalisation
fee (0.2) (0.2)
Interest on bank loans and overdrafts (0.3) (0.3)
Unwinding of discount on financial
liabilities (0.1) (0.1)
---------------------------------------- ----------------- -----------------
Finance expense before specific
adjusting items* (0.6) (0.6)
Defined benefit pension scheme
net finance expense (0.6) (0.5)
---------------------------------------- ----------------- -----------------
Finance expense (1.2) (1.1)
---------------------------------------- ----------------- -----------------
Net finance expense (0.5) (0.6)
Less: Defined benefit pension scheme
net finance expense 0.6 0.5
---------------------------------------- ----------------- -----------------
Underlying net finance income/(expense) 0.1 (0.1)
---------------------------------------- ----------------- -----------------
4. Taxation
6 months ended 6 months ended
30 September 2016 30 September 2015
(unaudited) (unaudited)
----------------------------- -----------------------------
Specific Specific
all figures in adjusting adjusting
GBP million Underlying items* Total Underlying items* Total
-------------------------- ---------- ---------- ----- ---------- ---------- -----
Profit/(loss) before
tax 52.0 (0.8) 51.2 49.7 (1.4) 48.3
Taxation (expense)/income (6.5) 4.8 (1.7) (6.5) 0.2 (6.3)
------------------------------ ---------- ---------- ----- ---------- ---------- -----
Profit/(loss) for
the year attributable
to equity shareholders 45.5 4.0 49.5 43.2 (1.2) 42.0
------------------------------ ---------- ---------- ----- ---------- ---------- -----
Effective tax rate 12.5% 13.1%
------------------------------ ---------- ---------- ----- ---------- ---------- -----
The total tax charge is GBP1.7m (H1 2016: GBP6.3m). The
underlying* tax charge of GBP6.5m (H1 2016: GBP6.5m) is calculated
by applying the expected effective tax rate of 12.5% for the year
ending 31 March 2017 to the Group's underlying profit before tax
for the six months to 30 September 2016 (September 2015: 13.1%).
The effective tax rate continues to be below the UK statutory rate,
primarily as a result of the benefit of research and development
expenditure credits ('RDEC') in the UK. 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 and the assumption that the benefit of net RDEC retained by
the Group remains in the tax line. Future recognition of
unrecognised tax losses will also affect future tax charges.
Tax losses and specific adjusting items
At 31 March 2016 the Group had unused tax losses of GBP154.8m
which are available for offset against future profits. As at 30
September 2016 a deferred tax asset of GBP4.1m (representing UK
non-trading losses of GBP22.0m) has been recognised on the balance
sheet in respect of an element of these unused tax losses expected
to be utilised in the foreseeable future. The income statement
credit arising from recognition of this deferred tax asset is
reported as a specific adjusting item. No deferred tax asset is
recognised in respect of the other losses due to uncertainty over
the timing and extent of their utilisation. Other deferred tax
movements of GBP0.6m have been credited to the income statement as
a specific adjusting item. This is in respect of changes in
estimates in respect of the apportionment of book values between
qualifying and non-qualifying property, plant and equipment.
Together with a GBP0.1m tax effect of the items impacting specific
adjusting items PBT, the total specific adjusting items tax income
is GBP4.8m (H1 2016: GBP0.2m).
Current tax liability
The current tax liability is GBP27.5m as at 30 September (31
March 2016: GBP39.9m). The decrease in the liability is primarily
due to part-settlement of a tax liability in respect of taxes
payable in respect of the Group's acquisition of Dominion
Technology Resources, Inc. in October 2008. The funds required to
make this part-settlement were recovered from the vendors of DTRI
(for which an offsetting receivable was held on the Group's balance
sheet as at 31 March 2016). An insurance policy was taken out by
the Group at the point of acquisition and if, subject to an appeal,
the Tax Court's decision is upheld then the funds required to fully
settle this dispute will be provided by the insurers. Hence, an
offsetting receivable for the residual balance is reported on the
balance sheet as at 30 September 2016 (included within trade and
other receivables).
5. 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
6 months
ended
6 months
ended 30
30 September September
2016 2015
(unaudited) (unaudited)
------------------------------------------- ---------- -------------- -------------
Profit attributable to equity shareholders GBPm 49.5 42.0
Weighted average number of shares Million 578.9 589.6
------------------------------------------- ---------- -------------- -------------
Basic EPS Pence 8.6 7.1
------------------------------------------- ---------- -------------- -------------
Profit attributable to equity shareholders GBPm 49.5 42.0
Weighted average number of shares Million 578.9 589.6
Effect of dilutive securities Million 2.6 3.7
------------------------------------------- ---------- -------------- -------------
Dilutive number of shares Million 581.5 593.3
------------------------------------------- ---------- -------------- -------------
Diluted EPS Pence 8.5 7.1
------------------------------------------- ---------- -------------- -------------
Underlying basic EPS
6 months
ended
6 months
ended 30
30 September September
2016 2015
(unaudited) (unaudited)
----------------------------------- -------- -------------- ------------
Profit attributable to equity
shareholders GBPm 49.5 42.0
(Profit)/loss after tax in respect
of specific adjusting items* GBPm (4.0) 1.2
----------------------------------- -------- -------------- ------------
Underlying profit after taxation GBPm 45.5 43.2
----------------------------------- -------- -------------- ------------
Weighted average number of shares Million 578.9 589.6
----------------------------------- -------- -------------- ------------
Underlying basic EPS Pence 7.9 7.3
----------------------------------- -------- -------------- ------------
Underlying diluted EPS*
6 months ended 6 months ended
30 September 30 September
2016 2015
(unaudited) (unaudited)
------------------------ -------- -------------- --------------
Profit attributable
to equity shareholders GBPm 49.5 42.0
(Profit)/loss
after tax in
respect of specific
adjusting items* GBPm (4.0) 1.2
------------------------ -------- -------------- --------------
Underlying profit
after taxation GBPm 45.5 43.2
------------------------ -------- -------------- --------------
Weighted average
number of shares Million 578.9 589.6
Effect of dilutive
securities Million 2.6 3.7
------------------------ -------- -------------- --------------
Diluted number
of shares Million 581.5 593.3
------------------------ -------- -------------- --------------
Underlying diluted
EPS Pence 7.8 7.3
------------------------ -------- -------------- --------------
6. Cash flows from operations
6 months 6 months
ended ended
30 September 30 September
2016 2015
Year ended
31 March
All figures in GBP million (unaudited) (unaudited) 2016 (audited)
---------------------------------------- -------------- -------------- ---------------
Profit after tax for the period 49.5 42.0 106.1
Adjustments for:
Taxation expense/(income) 1.7 6.3 (8.4)
Net finance costs 0.5 0.6 1.3
Gain on business divestments - - (23.7)
Impairment of goodwill - - 31.9
Amortisation of purchased or internally
developed intangible assets 1.2 1.3 2.8
Amortisation of intangible assets
arising from acquisitions 0.2 1.1 2.0
Depreciation and impairment of
property, plant and equipment 12.0 10.2 23.0
Loss on disposal of property,
plant and equipment - 0.6 1.2
Share of post-tax profit of equity
accounted entities - - (0.5)
Share-based payments charge 1.2 3.3 4.7
Changes in retirement benefit
obligations (6.4) (7.3) (13.4)
Net movement in provisions 1.4 (0.3) (0.3)
Decrease/(increase) in inventories 0.4 2.9 (0.2)
Decrease in receivables 41.5 27.7 13.8
Decrease in payables (42.6) (25.5) (6.9)
---------------------------------------- -------------- -------------- ---------------
Changes in working capital (0.7) 5.1 6.7
Net cash inflow from operations 60.6 62.9 133.4
---------------------------------------- -------------- -------------- ---------------
Reconciliation of net cash flow from operations to underlying
net cash flow from operations (post capex)
6 months 6 months
ended ended Year ended
30 September 30 September
2016 2015 31 March
All figures in GBP million (unaudited) (unaudited) 2016 (audited)
--------------------------------- -------------- -------------- ----------------
Net cash flow from operations 60.6 62.9 133.4
Purchases of intangible assets (0.8) (0.8) (1.6)
Purchases of property, plant and
equipment (8.9) (15.5) (28.6)
Proceeds from sale of property,
plant and equipment - 0.3 0.4
--------------------------------- -------------- -------------- ----------------
Underlying net cash flow from
operations (post capex) 50.9 46.9 103.6
--------------------------------- -------------- -------------- ----------------
Underlying cash conversion ratio
6 months 6 months
ended ended Year ended
30 September 30 September
2016 2015 31 March
(unaudited) (unaudited) 2016 (audited)
--------------------------------- -------------- -------------- ----------------
Underlying operating profit -
GBP million 51.9 49.8 108.9
Underlying net cash flow from
operations (post capex) - GBP
million 50.9 46.9 103.6
Underlying cash conversion ratio
- % 98% 94% 96%
--------------------------------- -------------- -------------- ----------------
7. Analysis of net cash and reconciliation to cash and cash
equivalents
Year ended
6 months 6 months
ended ended 31 March
30 September 30 September
2016 2015 2016
All figures in GBP million (unaudited) (unaudited) (audited)
--------------------------------- -------------- -------------- ----------
Due within one year:
Bank and cash 260.8 170.1 263.5
Available for sale investment 10.2 9.9 9.9
Recapitalisation fee 0.3 0.3 0.3
Derivative financial assets 0.6 0.5 0.6
Derivative financial liabilities (0.4) (0.1) (0.2)
--------------------------------- -------------- -------------- ----------
271.5 180.7 274.1
Due after one year:
Recapitalisation fee 0.3 0.7 0.5
Derivative financial assets 0.1 0.1 0.1
Derivative financial liabilities (0.7) - (0.2)
--------------------------------- -------------- -------------- ----------
(0.3) 0.8 0.4
--------------------------------- -------------- -------------- ----------
Total net cash as defined by the
Group 271.2 181.5 274.5
Less: other financial asset and
liabilities (10.4) (11.4) (11.0)
--------------------------------- -------------- -------------- ----------
Total cash and cash equivalents 260.8 170.1 263.5
--------------------------------- -------------- -------------- ----------
8. 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 2016. 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 2016, are as follows:
all figures in GBP million Level 1 Level 2 Level 3 Total
--------------------------------------------- ------- ------- ------- -----
Assets:
Available for sale investment 10.2 - - 10.2
Current other investments 2.1 - - 2.1
Current derivative financial instruments - 0.6 - 0.6
Non-current other investments - - 0.1 0.1
Non-current derivative financial instruments - 0.1 - 0.1
Liabilities:
Current derivative financial instruments - (0.4) - (0.4)
Non-current derivative financial instruments - (0.7) - (0.7)
Total 12.3 (0.4) 0.1 12.0
--------------------------------------------- ------- ------- ------- -----
The following table presents the Group's assets and liabilities
that are measured at fair value at 31 March 2016:
all figures in GBP million Level 1 Level 2 Level 3 Total
--------------------------------------------- ------- ------- ------- -----
Assets:
Available for sale investments 9.9 - - 9.9
Current other investments 1.7 - - 1.7
Current derivative financial instruments - 0.6 - 0.6
Non-current other investments - - 0.1 0.1
Non-current derivative financial instruments - 0.1 - 0.1
Liabilities:
Current derivative financial instruments - (0.2) - (0.2)
Non-current derivative financial instruments - (0.2) - (0.2)
Total 11.6 0.3 0.1 12.0
--------------------------------------------- ------- ------- ------- -----
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.
9. Dividends
An analysis of the dividends paid and proposed in respect of the
period ended 30 September 2016 and comparative periods is provided
below:
Pence per
ordinary
share GBPm Date paid/payable
---------------------------------- --------- ---- -----------------
Interim 2017 2.0 11.3 Feb 2017
---------------------------------- --------- ---- -----------------
Interim 2016 1.9 11.1 Feb 2016
Final 2016 3.8 21.9 Sep 2016
---------------------------------- --------- ---- -----------------
Total for the year ended 31 March
2016 5.7 33.0
---------------------------------- --------- ---- -----------------
The interim dividend is 2.0p (interim 2016: 1.9p). The dividend
will be paid on 10 February 2017. The ex-dividend date is 12
January 2017 and the record date is 13 January 2017.
10. 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:
31 March
30 September 30 September
2016 2015 2016
all figures in GBP million (unaudited) (unaudited) (audited)
-------------------------------------- ------------ ------------ ----------
Equities - quoted 408.2 406.2 347.9
Equities - unquoted 71.7 69.1 66.1
LDI investment 626.2 313.8 362.8
Liquidity fund 69.9 - -
Corporate bonds 345.4 302.5 314.2
Alternative bonds 124.3 177.6 176.6
Property 124.0 120.3 126.6
Cash and other 6.7 10.0 16.2
Total market value of scheme assets 1,776.4 1,399.5 1,410.4
Present value of scheme liabilities (1,842.0) (1,419.9) (1,448.1)
-------------------------------------- ------------ ------------ ----------
Net pension liability before deferred
tax (65.6) (20.4) (37.7)
Deferred tax asset/(liability) 6.8 (1.6) 1.5
-------------------------------------- ------------ ------------ ----------
Net pension liability (58.8) (22.0) (36.2)
-------------------------------------- ------------ ------------ ----------
Changes to the net pension liability
before deferred tax
---------------------------------------- ------------ ------------ ----------
31 March
30 September 30 September
2016 2015 2016
all figures in GBP million (unaudited) (unaudited) (audited)
---------------------------------------- ------------ ------------ ----------
Opening net pension liability before
deferred tax (37.7) (39.4) (39.4)
Re-measurement gain/(loss) on scheme
assets 352.9 (72.0) (75.8)
Actuarial (loss)/gain on scheme
liabilities (386.6) 84.2 65.2
Contributions by the employer 7.0 7.9 14.6
Current service cost and administration
costs (0.6) (0.6) (1.2)
Net finance expense (0.6) (0.5) (1.1)
Closing net pension liability before
deferred tax (65.6) (20.4) (37.7)
---------------------------------------- ------------ ------------ ----------
Assumptions
The major assumptions (weighted to reflect individual scheme
differences) were:
31 March
30 September
2016 2016
30 September
(unaudited) 2015 (unaudited) (audited)
--------------------------------------------- ------------ ----------------- ----------
Discount rate applied to scheme liabilities 2.3% 3.7% 3.4%
CPI inflation assumption 2.2% 2.3% 2.1%
--------------------------------------------- ------------ ----------------- ----------
Assumed life expectancies in years:
Future male pensioners (currently aged 60) 89 88 89
Future female pensioners (currently aged 60) 91 91 91
Future male pensioners (currently aged 40) 91 91 91
Future female pensioners (currently aged 40) 93 93 93
--------------------------------------------- ------------ ----------------- ----------
The sensitivity of the gross Scheme liabilities to each of the
key assumptions is shown in the table below:
Indicative impact
Key assumptions Change in assumption on Scheme liabilities
--------------------- -------------------- ----------------------
Discount rate - small Increase/decrease Decrease/increase
movement* by 0.1% by GBP37m
Discount rate - large Increase by 1.0% Decrease by GBP341m
movement*
Discount rate - large Decrease by 1.0% Increase by GBP453m
movement*
Increase/decrease Increase/decrease
Rate of inflation by 0.1% by GBP33m
Increase by one
Rate of mortality year Increase by GBP50m
--------------------- -------------------- ----------------------
*Due to a compounding effect, it would not be accurate to
extrapolate the 0.1% discount rate sensitivity to estimate a large
increase or decrease in discount rates. Therefore, the table above
also sets out the impact of a larger change in the discount rate
(+1.0% and -1.0%), allowing for the compounding effect.
The impact of movements in Scheme liabilities will, to an
extent, be offset by movements in the value of Scheme assets as the
Scheme has assets invested in a Liability Driven Investment
Portfolio. As at 30 September 2016 this hedges against
approximately 45% of the interest rate and 100% of the inflation
rate risk, as measured on the Trustees' gilt-funded basis.
The above sensitivity analyses are based on a change in an
assumption while holding all other assumptions constant. In
practice, this is unlikely to occur, and changes in some of the
assumptions may be correlated. When calculating the sensitivity of
the defined benefit obligation to significant actuarial assumptions
the same method (projected unit credit method) has been applied as
when calculating the pension liability recognised within the
statement of financial position. The methods and types of
assumption did not change.
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. The latest triennial valuation of the
Scheme was a net surplus of GBP31.0m as at 30 June 2014. The
triennial valuations are calculated on a 'funding basis' and use a
different set of assumptions, as agreed with the pension Trustees.
The key assumption that varies between the two methods 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 IAS19 accounting basis valuation uses
corporate bond yields as the base. Due to this use of different
assumption a funding valuation of Scheme would probably have
resulted in a higher net liability at period end if one had been
performed.
11. 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 2016 in respect of 4,556,156 own
shares (31 March 2016: 4,862,182).
In the six months to 30 September 2016 the Group granted/awarded
3.1 million new share-based awards to employees (30 September 2015:
3.8 million).
12. Related party transactions with equity accounted
investments
During the period there were sales to associates of GBP1.7m (30
September 2015: GBP1.6m). At the period end there were outstanding
receivables from associates of GBP0.3m (30 September 2015:
GBP0.4m).
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 42-49 of the 2016 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;
-- Complex market characteristics including a changing
regulatory environment for single source contracts;
-- 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;
-- Tax liabilities may change as a result of changes in tax legislation;
-- Financial position of the defined benefit pension scheme.
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 2016.
By order of the Board
Mark Elliott Steve Wadey David Mellors
Chairman Chief Executive Chief Financial
16 November 2016 Officer Officer
16 November 2016 16 November 2016
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 2016 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
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the interim financial report for the six months ended 30
September 2016 is not prepared, in all material respects, in
accordance with IAS 34 as adopted by the EU and the Disclosure and
Transparency Rules of the UK FCA.
Anthony Sykes
For and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square, London E14 5GL
16 November 2016
Glossary
Book to Ratio of funded Underlying Basic earnings per
bill ratio orders received basic earnings share as adjusted
in the year to per share to exclude 'specific
revenue for the adjusting items'
year, adjusted
to exclude revenue
from the 25-year
LTPA contract
EPS Earnings per share Underlying The tax charge for
effective the period excluding
tax rate the tax impact of
'specific adjusting
items' expressed
as a percentage of
underlying profit
before tax
Funded The expected future Underlying Net cash inflow from
backlog value of revenue net cash operations before
from contractually from operations specific adjusting
committed and funded (post capex) items less net cash
customer orders outflow on purchase/sale
(excluding the of intangible assets
remaining revenue and property, plant
to come from the and equipment
five-year third-term
re-pricing of the
LTPA contract)
IAS International Accounting Underlying Net finance income/expense
Standards net finance as adjusted to exclude
income/expense 'specific adjusting
items'
IFRS International Financial Underlying The ratio of underlying
Reporting Standards operating net cash from operations
cash conversion (post-capex) to underlying
operating profit
LTPA Long Term Partnering Underlying Underlying operating
Agreement - 25 operating profit expressed
year contract established margin as a percentage of
in 2003 to manage revenue
the MOD's test
and evaluation
ranges
MOD UK Ministry of Underlying Operating profit
Defence operating as adjusted to exclude
profit 'specific adjusting
items'
Organic The level of year-on-year Underlying Profit after tax
Growth growth, expressed profit after as adjusted to exclude
as a percentage, tax 'specific adjusting
calculated at constant items'
foreign exchange
rates, adjusting
comparatives to
incorporate the
results of acquired
entities and excluding
the results for
any disposals for
the same duration
of ownership as
the current period
Specific Amortisation of
adjusting intangible assets
items arising from acquisitions;
impairment of goodwill
and intangible
assets; gains/losses
on business divestments
and disposal of
property and investments;
net pension finance
expense; tax on
the preceding items;
creation of deferred
tax asset in respect
of recognition
of tax losses;
and other significant
non-recurring deferred
tax movements
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR FFFESMFMSELF
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