REG - QinetiQ Group plc - Interim Results
10/11/2022 07:00
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RNS Number : 9161F QinetiQ Group plc 10 November 2022
Interim Results
10 November 2022
Contributing to global and national security
Results for six months to 30 September 2022 ('H1 FY23')
Statutory results Underlying* results
H1 FY23 H1 FY22^ H1 FY23 H1 FY22
Revenue £673.4m £600.1m £673.4m £600.1m
Operating profit £100.1m £41.0m £74.1m £53.4m
Profit after tax £112.4m £22.3m £65.4m £46.6m
Earnings per share 19.5p 3.9p 11.4p 8.1p
Interim dividend per share 2.4p 2.3p 2.4p 2.3p
Orders £798.8m £677.8m
Order backlog £2,968.6m £3,007.6m
Net cash flow from operations £99.5m £64.2m £106.8m £70.2m
Net cash £264.0m £139.2m £264.0m £139.2m
* Definitions of the Group's 'Alternative Performance Measures' can be found in
the glossary
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1 to the interim
financial statements.
Strong and consistent operational performance across the Group
- Orders up 18%, revenue up 12% and underlying operating profit up 39%
- On an organic constant currency basis, and excluding the impact of the
write-down in FY22 half year results: Orders up 11%, revenue up 8% and
underlying operating profit up 7%
- Consistently strong cash conversion at 106% cash conversion pre-capex
- Statutory operating profit £100.1m, assisted by FX gain on Avantus
acquisition
- Underlying EPS up 41%; 2.4p interim dividend declared - one third of FY22
dividend
Disciplined execution of multi-domestic growth strategy
- Strong programme delivery across all major contracts
- Good order intake across the Group at c.£800m
- Increased investment in people and capabilities for the future
- Step-change through strategic acquisitions in the US and Australia
On-track to deliver five year strategic growth ambition; £2.3bn revenue at
stable margins
- Increasing revenue guidance and will deliver profit in-line with FY23
expectations
- Respond to increased demand for our distinctive offerings driven by threat
environment
- Close Avantus and Air Affairs deals and execute integration plans
- Drive sustainable growth in our >£20bn addressable market
Steve Wadey, Group Chief Executive Officer of QinetiQ said:
"World events continue to reinforce the vital importance of a technologically
advanced defence industry to society and the needs of our customers for
differentiated solutions, aligned with our strategy. I am immensely proud of
how our people have supported our customers at this time of need: we are
fulfilling our company purpose and contributing to global and national
security.
Our first half results demonstrate the strong demand we continue to see from
our customers for our distinctive offerings. We have delivered good programme
execution and delivery across all our major contracts. Our home countries of
UK, US and Australia have all achieved significant organic growth and the US
has performed particularly well, delivering improved and consistent
performance.
We have also secured two strategically significant acquisitions in the US and
Australia, Avantus and Air Affairs respectively, which demonstrate the
disciplined execution of our growth strategy and capital allocation policy. We
have increased our investment in our people and capability for the future to
enable our long-term growth, as we continue to build an integrated global
defence and security company. We are on-track to deliver our 5 year strategic
growth ambition and enhanced shareholder returns."
Interim results presentation:
We will be hosting an in-person results presentation at 09:30 GMT at the
London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Registration
to join in-person or via the live webcast is available here:
https://www.qinetiq.com/en/investors/results-reports-and-presentations/interim-results-webcast-2022
(https://www.qinetiq.com/en/investors/results-reports-and-presentations/interim-results-webcast-2022)
About QinetiQ:
QinetiQ (QQ.L) is a leading science and engineering company operating
primarily in the defence, security and critical infrastructure 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 (http://www.QinetiQ.com) . Follow us on LinkedIn
and Twitter @QinetiQ. Visit our blog www.QinetiQ-blogs.com
(http://www.QinetiQ-blogs.com) .
For further information please contact:
John Haworth, Group Director Investor Relations: +44 (0) 7920 545841
Lorna Cobbett, Citigate Dewe Rogerson (Media enquiries): +44 (0) 7771 344781
Basis of preparation:
Throughout this Interim Report, certain measures are used to describe the
Group's financial performance which are not recognised under UK-adopted
International Accounting Standards. 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
judgement of the Directors, the use of adjusted performance measures (APMs)
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. The adjusted measures used by QinetiQ may differ
from adjusted measures used by other companies. Details of QinetiQ's APMs are
set out in the glossary to this document.
Year references (FY23, FY22, 2023, 2022) refer to the year ended 31 March. H1
FY23 and H1 FY22 refer to the six months ended 30 September.
Disclaimer
This document contains certain forward-looking statements relating to the
business, strategy, financial performance and results of the Company and/or
the industry in which it operates. Actual results, levels of activity,
performance, achievements and events are most likely to vary materially from
those implied by the forward-looking statements. The forward-looking
statements concern future circumstances and results and other statements that
are not historical facts, sometimes identified by the words 'believes','
expects', 'predicts', 'intends', 'projects', 'plans', 'estimates', 'aims',
'foresees', 'anticipates', 'targets', 'goals', 'due', 'could', 'may',
'should', 'potential', 'likely' and similar expressions, although these words
are not the exclusive means of doing so. These forward-looking statements
include, without limitation, statements regarding the Company's future
financial position, income growth, impairment charges, business strategy,
projected levels of growth in the relevant markets, projected costs, estimates
of capital expenditures, and plans and objectives for future operations.
Forward-looking statements contained in this announcement regarding past
trends or activities should not be taken as a representation that such trends
or activities will continue in the future. Nothing in this document should be
regarded as a profit forecast.
The forward-looking statements, including assumptions, opinions and views of
the Company or cited from third party sources, contained in this announcement
are solely opinions and forecasts which are uncertain and subject to risks.
Although the Company believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no assurance that these
expectations will prove to be correct. Actual results may differ materially
from those expressed or implied by these forward-looking statements. A number
of factors could cause actual events to differ significantly and these are set
out in the principal risks and uncertainties section of this
document.
Most of these factors are difficult to predict accurately and are generally
beyond the control of the Company. Any forward-looking statements made by, or
on behalf of, the Company speak only as of the date they are made. Save as
required by law, the Company will not publicly release the results of any
revisions to any forward-looking statements in this document that may occur
due to any change in the Directors' expectations or to reflect events or
circumstances after the date of this document.
Chief Executive Officer's Review
We delivered strong and consistent operational performance in the first half
of the year. With a clear focus on disciplined execution of our strategy and
strong programme execution across all our major contracts, we grew orders by
18%, revenue by 12% and underlying operating profit by 39%. Excluding foreign
exchange and the impact of the write-down in the prior year first half
results, orders grew by 11%, revenue by 8% and underlying operating profit by
7%. We continue to deliver strong cash performance with 106% underlying cash
conversion before capital expenditure.
EMEA Services has continued to deliver good growth in the first half, with
margins consistent with the second half of FY22, demonstrating continued
investment in our people to support ongoing long-term growth. Global Products
has performed well, particularly in the US, with US orders, revenue and profit
in the first half of FY23 above the second half of FY22 demonstrating greater
stability, resilience and consistent performance, giving us confidence of a
strong platform for growth going forward.
I am delighted with the three M&A transactions that we have announced in
this first half, most significantly with our acquisition of Avantus Federal in
the US. We have successfully completed the disposal of QinetiQ Space NV in
Belgium and expect to complete the acquisition of Air Affairs in Australia at
the end of November and the acquisition of Avantus Federal in the US before
the end of December, as previously guided. These are strategically significant
transactions which demonstrate our disciplined execution of our strategy,
focusing our capital deployment into strategically-aligned businesses to
support and drive long-term growth in our three home countries, the UK, US and
Australia, through our six distinctive offerings as we continue to build an
integrated global defence and security company, delivering opportunities for
our people and enhanced shareholder returns.
Delivering our global ambition
World events continue to reinforce the long-term needs of our customers around
differentiated technology, test and training solutions. This defence and
security context continues to elevate the market needs for our six distinctive
offerings. Our addressable market is worth more than £20bn per year and we
see increased customer demand for our high value solutions in their priority
growth segments. The major focus for growth is in our three home countries,
the UK, US and Australia, where we are pursuing similar opportunities to
support their shared defence and security mission and leveraging our skillset
across these key geographies. The formation of the AUKUS alliance, between
these nations, reinforces our multi-domestic strategy and makes us
increasingly relevant. We are well positioned to deliver strong growth in the
UK and more than double the size of our US and Australian businesses over the
next five years.
In April 2022 we set out an ambitious plan to grow the company to more than
£2.3bn revenue in the next five years. With our acquisitions of Avantus
Federal in the US and Air Affairs in Australia, we are on-track to deliver at
least this level of growth.
Our strategy is increasingly relevant and provides focus for our business
decisions, our people and our investment choices. We are a company with a
clear purpose, vision and customer value proposition that we call "Mission-led
innovation", where we co-create innovative cost-effective solutions to meet
our customers' needs at pace. Our strategy is a multi-domestic strategy, with
a clear focus on where we operate, what we do and how we deliver value for our
customers:
1. Global leverage 2. Distinctive offerings 3. Disruptive innovation
Build an integrated global defence and security company to leverage our Co-create high-value differentiated solutions for our customers in Invest in and apply disruptive business models, digitisation and advanced
capability through single routes to market in UK, US, Australia, Canada and experimentation, test, training, information, engineering and autonomous technologies to enable our customers' operational mission at pace
Germany systems
Our first priority is to maintain focus on driving organic growth in each
country. We remain disciplined in delivering our commitments to our customers
and shareholders by continuously improving our bidding, programme execution
and risk management capability.
Looking forward, we have a clear strategic business plan focused on creating a
global leader in mission-led innovation. With a strong balance sheet, we
continue to invest in our multi-domestic growth strategy to realise our
ambition. We have clarity around our six distinctive offerings and focus on
our home countries, to provide a guide for our future investment decisions.
Growth will be driven by investing in these distinctive offerings and
leveraging opportunities across countries.
The acquisition of Avantus is our most strategically significant and sizeable
acquisition to-date and demonstrates our clear strategic focus, to build a
material presence and expertise in our three home countries across our six
distinctive offerings. Avantus is a leading provider of mission-focused cyber,
data analytics and software development solutions to the US Department of
Defense Intelligence Community, Department of Homeland Security and other
Federal civilian agencies. Avantus is an excellent strategic fit, with a
similar skillset, customer intimacy and offerings as our UK Intelligence
business. Avantus not only has impressive growth prospects but also provides
attractive leverage opportunities and greater scale to our existing US
business, whilst being a platform for further growth and acquisitions.
Strategic achievements
We have continued to make good strategic progress implementing our strategy to
become an integrated global defence and security company. Alongside the
significant M&A transactions announced, our major achievements are:
- Support to UK MOD for the Future Combat Air System (FCAS) programme - we have
been awarded a £32m three-year contract through the Engineering Delivery
Partner (EDP) framework to provide programme and technical support to the new
Catalyst Delivery Team, responsible for introducing new capability to the MOD
air domain for various front line commands. This demonstrates our Engineering
Services and Support offering in practice, in the introduction of new
technologies and delivery approaches for the next generation of aircraft Test
& Evaluation.
- Our large contracts continue to support significant growth in the UK - our
large long-term contracts and frameworks in the UK are supporting significant
and continued revenue growth for EMEA Services. The EDP framework continues to
deliver for our customer, alongside our partners Atkins and BMT, with H1
orders of £193m and £135m revenue. The Serapis framework is driving good
growth in our UK Intelligence Sector, for research and development of command
and control systems, communications and networks, and training and simulation
projects. The Long Term Partnering Agreement (LTPA) remains our largest
contract delivering world-leading test, trials, training and evaluation (T3E)
for the UK MOD.
- Continued strong growth in Australia - strong revenue growth continues in
Australia, up 22% versus the prior year, driven from continued demand and
delivery through the Major Service Provider (MSP) contract. The MSP contract
positions us for future growth as a trusted partner able to provide sovereign
Australian industry capability, while leveraging our global capabilities. A
major contributor of our growth has been our close support to the Australian
Army acquisition programme for their next generation of heavy armoured
vehicles, a cornerstone of the broader Army modernisation programme.
- US performance - performance has been strong in the US with orders, revenue
and profit seeing good improvement on the second half of FY22 with greater
stability, resilience and consistent performance. As part of this we have won
two significant contracts: a 5-year contract worth up to $45m to provide
services for the Development Command C4ISR at the Fort Belvoir Prototyping
Integration Facility; and a multi-year research, development and technology
integration contract, worth up to $49m, with the US Army for imaging services.
- QinetiQ Target Systems (QTS) performance - QTS continues to make positive
progress with customers resuming trials and exercises (post COVID-19) and
winning some significant orders, including a number of notable wins and
deliveries for customer training exercises in Europe.
The changing market dynamics present opportunities for the Group
As a global defence and security business we operate on a multi-domestic
basis, supporting the development and sustainment of indigenous capabilities.
As the threat environment becomes increasingly complex, Western forces must
rethink their approach to defence and security. The complexity is driven by
rapid technological advances and our adversaries' alternative approaches to
warfare. The importance of information advantage, emerging technologies, cyber
capabilities and autonomous platforms has significantly increased. In
addition, the interoperability between platforms to create integrated systems
and seamless coordination between forces and nations, to countering modern
threats is of paramount importance, including in the "Grey Zone" conflict area
below conventional warfare.
Pressure on Government resources will intensify and global Defence departments
will need to balance investment in traditional platforms alongside investment
in new technologies, as well as addressing fiscal pressure brought about by
Governments supporting economies through the COVID-19 pandemic, supply-chain
challenges and cost of living crisis. With our domain knowledge, partnering
skills and a track record of delivering mission-led innovation at pace whilst
delivering efficiencies and value for money to customers, we are well
positioned to continue to grow in these unsettled times. While the world
around us continues to change, our offering is more relevant than ever.
Investment to drive our long-term growth
To stay ahead for our customers' advantage, we are investing in our people,
technology and digital transformation. We have increased our investment to
enable a step-change and to deliver our five year growth ambition.
Ensuring we are internationally competitive to retain, attract and reward the
best people across the whole company, is critical to our performance and
growth. In response to ongoing cost of living pressures, we have committed a
further £5m into our reward offering, focused on supporting those on lower
pay. We have also built a highly capable leadership team in the US, consistent
with our long-term ambition, and are expanding the skills of our Australian
business through our T&E sovereign skills programme, leveraging our UK
experience.
To deliver operational advantage for our customers, we must remain at the
cutting-edge of technology and create innovative solutions at pace. Project
Vampire is an excellent example of partnering with the Royal Navy to develop
their Future Maritime Aviation Force through rapid prototyping the novel
application of uncrewed systems, and offers the potential to experiment with
new technologies from our Internal Research & Development programme, such
as swarming and teaming.
As we scale the company globally, our digital transformation programme is
building a secure interoperable digital workspace, with modern systems and
tools, to adapt our ways of working and harness the diversity and creativity
of our global teams and supply chain. We are also establishing new digital
design and assurance techniques, to increase our competitive advantage by
reducing the time and cost of major projects for our customers, such as OMFV
in the US and the LTPA in the UK.
We have previously guided that we are continuing to invest in our people and
capabilities, investing 1% of our margin to enable the step-change to deliver
our five year growth ambitions. The additional £5m announced today, in
response to the cost of living pressures, brings our total committed strategic
operating investments for FY23 to approximately £20m. This additional
investment has the effect of marginally shifting our investment period to the
right, with no change to our short or long-term profit guidance. Whilst
investment brings pressure on margins in the short-term, investing in our
innovation platform, comprising of our people, technology and digital
transformation, will increase competitiveness and drive efficiency, ensuring
our growth is sustainable in the long-term at 12-13% margins.
Outlook: FY23
We enter the second half of FY23 with confidence, a healthy order-book and
positive momentum with 95% revenue under contract - we are increasing our
revenue guidance and are on-track to deliver profit in-line with expectations
for FY23. Given our strong growth in the first half, we will deliver high
single-digit percentage organic revenue growth with underlying profit margin
at the lower end of our 11-12% short-term expected range due to increased
investment in our people and capabilities to enable growth. Capital
expenditure is expected towards the middle of our £90m to £120m expected
range.
Whilst the expectations we set out at the time of the Avantus and Air Affairs
announcements remain unchanged, we will update for the combined effect of the
acquisitions following completion.
Outlook: Longer term
Our ambition remains to grow revenues to more than £2.3bn by FY27. With our
recently announced acquisitions, this means we are targeting mid-to-high
single digit percentage compound revenue growth over the next five years, with
further strategic acquisitions enhancing this growth. We are targeting an
operating profit margin of 12-13% in the mid to long-term. ROCE is forecast to
remain strong at the upper end of the 15-20% range.
Trading environment
Geopolitical tensions remain high, even as Russia's advances in Ukraine have
faltered, Global defence budgets have increased as NATO countries seek to
bolster their own defence capabilities whilst sending increasing levels of
military aid to Ukraine. Alongside this, there has been a proliferation of
"Grey Zone" warfare, a need for advanced capabilities, informational advantage
and better interoperability, as well as a focus on the resilience of domestic
supply chains.
As a predominantly service-based business we are uniquely placed to operate
across the breadth of platforms, systems and lifecycles unlike a more
traditional vertical platform manufacturer. We can experiment, innovate and
develop new capabilities, drawing on a broad range of existing, emerging and
disruptive technologies across all our geographies.
The UK, US and Australia are our home countries and collectively represent 92%
of our revenue. We also have a significant presence in our priority countries
of Canada and Germany.
UK
The 2021 Integrated Review outlined the UK's current defence and security
policy. This, alongside the Defence Command Paper and the Defence and Security
Industrial Strategy, has seen the allocation of an additional £24.1bn in
funding over a four-year period from November 2020 to 2024. The Integrated
Review placed science and technology at the heart of the UK's defence policy
with innovation cited as critical to UK success. The UK is investing over
£6.6bn in research and development to develop next generation and emerging
technologies in areas such as cyber, space, directed energy weapons, and
advanced high-speed missiles. The Russian invasion of Ukraine has further
cemented wider support for defence investment, with Government statements
being made that the Defence budget could increase further to 3% of GDP, and
double current levels by 2030.
As the UK MOD seeks to develop and deploy next generation capabilities faster
than their adversaries, we are well positioned to support them in applying
mission-led innovation to achieve this. Our unrivalled expertise in Research
& Development and Test & Evaluation (RDT&E) combined with our
recent investment to modernise UK test ranges will help our customers generate
and assure new and emerging technologies at pace. Delivering value for money
remains critical to our customers and we will continue to utilise innovative
delivery models to support our customers in achieving this.
US
The US maintains the largest defence budget worldwide, with the 2023 budget
currently targeted at $773bn and an expectation it could exceed $800bn. As
well as supporting the preparation for future challenges, such as climate
change, it preserves investment for readiness and deterrence against current
threats including the acute threat of an aggressive Russia and the constantly
emerging threats posed by North Korea, Iran, and violent extremist
organisations. The Biden administration is seeking to increase the Research,
Development, Test and Evaluation (R&DTE) budget by 7% in FY23, increasing
spend to $132bn, to continue to address the need to sharpen readiness in
advanced technology, cyber, space and artificial intelligence.
In the US, we are a market leader in robotics, autonomy and advanced sensing
solutions, delivering value to our customers through the rapid development and
deployment of disruptive solutions. Following the completion of the
acquisition of Avantus Federal, this will build capabilities of
mission-focused cyber, data analytics and software development solutions. All
these offerings are in areas of defence budget growth. We have ambitious
growth plans in the US. This is underpinned by a relevant offering with a
growing need to provide actionable intelligence in to war fighters' hands
quicker and a push to develop and integrate multiple autonomous and
semi-autonomous systems as the US seeks to invest in next generation
technologies to maintain a technological advantage.
Australia
Tensions in the Indo-Pacific region remain heightened with the area becoming
the main theatre for greater strategic competition between global powers,
being reflected in national defence budgets. Australia's defence expenditure
for the 2022-23 financial year will rise by 7.4% to A$48.6bn. The current
Labor government has reiterated its commitment to raising defence spending to
2.2% of GDP, reaching A$80bn a year by 2032. That does not count the $300
billion designated for upgraded military weaponry, in addition to the funds
required to acquire and base nuclear powered submarines and other weaponry
under the AUKUS partnership.
The AUKUS partnership still holds significant opportunity for QinetiQ, with
demand expected in specific technology areas where QinetiQ has strengths. The
Australian business is closely engaged with the Australian government and
internally within QinetiQ to identify specific capability areas and
opportunities under AUKUS. We see many opportunities to support the Australian
forces in modernising sovereign defence capabilities as they seek to deter
adversaries and maintain stability in the region.
Broader international markets
Due to the seismic shift to the global-political landscape caused by Russia's
invasion of Ukraine, NATO is ramping up its defence capabilities and
readiness. Following the announcement by Germany to increase defence spending
by EUR100bn over the next 5 years, many other NATO and European countries are
also increasing their defence and security investment.
Whilst priority and investment focus will be attached to the support of our
three home country strategies (UK, US and Australia), we will continue to
conduct business in the support of allies in 5-Eyes, NATO and Continental
Europe. In order to continue expanding our international presence we aim to
leverage the skills and expertise developed in our home countries to support
allies in high growth markets to develop their own indigenous capabilities.
Chief Financial Officer's Review
Operating performance
We delivered strong order performance in the period with orders of £798.8m,
compared to £677.8m in the same period a year ago, up 18%. Excluding foreign
exchange, orders grew organically by 14%, and excluding the impact of the
write-down in the prior year by 11%. This increase was driven by a £32m
three-year contract with UK MOD for the Future Combat Air System (FCAS)
programme through the Engineering Delivery Partner framework, a £26m uplift
to the LTPA contract to reflect inflationary effects in the UK, a 5-year
contract extension with Boeing for our 5 metre wind tunnel services and
contracts totalling A$77m in Australia through growth of the MSP programme. As
part of our previously stated strategy, we are also seeing success in winning
and delivering on larger longer-term contracts, with 45% of our H1 FY23 Orders
from contracts over £5m in size, up from 41% from H1 FY22.
Revenue visibility remains good and the Group's total funded order backlog at
30 September 2022 stood at £3.0bn, consistent with the comparable period last
year. Maintaining our order backlog of £3.0bn is a significant achievement
given that this will naturally reduce as we deliver revenue on the Long Term
Partnering Agreement contract (multi-year contract booked in prior years); the
offsetting growth in order backlog delivered from our order wins as mentioned
above, including from EDP and growth in the US and Australia. At the start of
H2 FY23, the Group had approximately £700m of H2 FY23 revenue under contract.
This compares with approximately £600m of H2 FY22 revenue at the same time
last year - a significant improvement as a result of the strong order-intake.
Revenue was £673.4m (H1 FY22: £600.1m), up 12% on a reported basis.
Excluding foreign exchange, revenue grew organically by 10%, and excluding the
impact of the write-down in the prior year up 8%. Overall growth was due to
the increase of revenue in EMEA Services which was up 7% on an organic basis,
driven by new work delivered under EDP and the MSP contract in Australia.
Global Products revenue was up 14% organically excluding the impact of the
write-down in the prior year, due to improvement in US and QTS performance.
Underlying operating profit was £74.1m (H1 FY22: £53.4m), up 39% on the
prior first half. Excluding foreign exchange, profit grew organically by 37%,
and excluding the impact of the write-down in the prior year up 7%. The
significant improvement in profit is as a result of good performance in the US
and QTS (within Global Products) This was offset by EMEA Services which saw a
9% organic decrease in profit driven by a particularly strong prior year
comparator with strong profit margin in H1 FY22 and additional investment this
year into our people and capabilities.
The impact of foreign exchange movements on underlying performance in H1 FY23
has been a £23.2m benefit on orders, £15.7m benefit on revenue and £1.2m
benefit to underlying operating profit. Most of this benefit was seen in
Global Products from the translation effect of our US business. There have
been no effect of acquisitions or disposals in either H1 FY23 or prior year
comparator H1 FY22. Should FX rates remain static we forecast the full year
benefit for FY23 to be in the region of £2-3m underlying profit.
Underlying operating profit margin was 11.0% at the lower end of our 11-12%
short-term target margin. The modest reduction from H1 FY22 is due to the
incremental strategic investments in FY23: we have previously guided to 100bps
of our profit being committed to additional investments in the short-term
(across our people, technology and digital) and during the period have
committed a further £5m investment in our people in FY23, as explained in the
CEO Review, against the cost of living crisis. As a result, we expect
underlying operating profit margin in the second half and for FY23 to remain
at the lower end of our 11-12% short-term expected range.
Statutory operating profit, including the impact of specific adjusting items,
was £100.1m (H1 FY22 restated: £41.0m). Current period specific adjusting
items increased operating profit by £26.0m (H1 FY22 restated: £12.4m
reduction to operating profit) and were driven by acquisition and foreign
exchange impacts, as described below. We remain focussed on delivering our
stated ambition which includes strategically aligned acquisitions - we retain
a rigorous approach to evaluation and execution of our acquisition strategy.
Seasonality / cyclicality has not had a material impact on the interim
operations of the Group.
Specific adjusting items
The total impact of specific adjusting items on operating profit (which are
excluded from underlying performance) was a £26.0m income (H1 FY22 restated:
cost of £12.4m). H1 FY23 includes a £42.9m gain from the foreign exchange
derivative contract, due to the recent GBP:USD movement, which was taken out
to hedge the foreign exchange exposure on the $590m Avantus acquisition and
was executed in accordance with the Group's Treasury Policy. The size of this
gain (or loss), which has partially reversed since 30 September 2022, will
ultimately depend on the GBP to USD foreign exchange rate at the date of
completion of the acquisition.
Acquisition and disposal costs of £6.4m (H1 FY22: £4.1m) comprise costs
associated with the Avantus and Air Affairs acquisitions which are due to
complete in H2 FY23, and the disposal of Space NV. The H1 FY22 amount was
relating to an unsuccessful acquisition, as disclosed previously. The cash
flow for H1 FY23 includes a £1.6m deposit payment on the Air Affairs
acquisition.
Restructuring costs of £3.3m have been incurred as part of the
re-organisation to create Group-wide global support functions and four
market-facing Sectors.
QinetiQ has embarked on a digital investment programme to improve the
infrastructure, digital tools and operating systems of the company - the
majority of costs will be reported as exceptional specific adjusting items in
the P&L, with ongoing recurring operating costs (such as licence costs and
overheads) remaining within underlying operating costs. Early stage
implementation and planning work has been undertaken through FY22 and FY23,
with the full digital investment programme due to be implemented over the next
three to four year period. FY22 included a specific adjusting item relating to
the change in accounting policy for software implementation costs as a result
of the International Financial Reporting Interpretations Committee (IFRIC)
decision to expense rather than capitalise configuration and customisation
costs in cloud computing arrangements. H1 FY22 has been restated to reflect
this. In H1 FY23 the exceptional cost element of the digital investment
programme within specific adjusting items totals £2.5m. The majority of this
expenditure would previously have been capitalised and follows the IFRIC
decision, with a small movement from underlying operating costs to exceptional
costs (FY23 benefit to underlying operating profit expected to be <£1m).
Also included within specific adjusting items were a gain on the sale of
property of £0.9m (H1 FY22 £0.5m) and amortisation of acquisition
intangibles of £5.6m (H1 FY22: £5.4m).
Net finance costs
Net finance income was £4.4m (H1 FY22: £1.4m) reflecting an increase in the
pension net finance income to £4.9m (H1 FY22: £2.3m). This income is
partially offset by lease interest expense and other financing costs.
The underlying net finance expense, which excludes the pension net finance
income, was £0.5m (H1 FY22: £0.9m).
Tax
The total tax credit is £7.9m (H1 FY22 restated charge: £20.1m). The
underlying tax charge of £8.2m (H1 FY22: £5.9m) is calculated by applying
the expected underlying effective tax rate at a jurisdictional level for the
year ending 31 March 2023 to the underlying profit before tax for the six
months to 30 September 2022. The Group's full year expected underlying
effective tax rate is 11.5% which is higher than the half year underlying
effective tax rate of 11.1% (H1 FY22: 11.2%) due to jurisdictional mix of
profits in H1 FY23.
The underlying 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 which are accounted for under IAS12 within the tax
line. The adjusted underlying effective tax rate before the impact of RDEC
would be 19.4% (H1 FY22: 18.0%). The underlying effective tax rate is
expected to remain below the UK statutory rate in the medium term, subject to
any tax legislation changes, the geographic mix of profits, the recognition of
unrecognised tax losses and while the benefit of net RDEC retained by the
Group remains in the tax line.
Specific adjusting items includes a £18.1m credit in respect of UK MOD
appropriation for RDEC which has been classified as a specific adjusting item.
Following a determination by the Single Source Regulations Office (SSRO) on
the interpretation of the Statutory Guidance for Allowable Costs regulations
(SGAC), the accounting judgement is that RDEC on single source contracts from
1 April 2019 onwards will no longer be paid on to UK MOD, which is a change
from the accounting judgement at the year end. The existing creditor has been
reversed through the tax charge in line with IAS 12. Together with a £4.9m
charge arising on the UK statutory rate change to 25% from 1 April 2023, a
£1.7m credit for tax on the amortisation of acquisition intangibles and a
£1.2m credit in respect of other pre-tax specific adjusting items, the total
specific adjusting items tax credit was £16.1m (H1 FY22: restated charge of
£14.2m). Specific adjusting items includes the foreign exchange gain of
£42.9m on the derivative instrument taken out for the Avantus acquisition
which is not expected to be taxable as it relates to a prospective share
transaction.
Earnings per share
Underlying basic earnings per share for the Group was 11.4p up 41% on the
prior year first half (H1 FY22: 8.1p), with the increase primarily due to the
impact of the write-down in the prior year. Statutory basic earnings per share
(including specific adjusting items) were 19.5p (H1 FY22 restated: 3.9p) with
the current period further enhanced by the £42.9m foreign exchange gain on
the derivatives taken out to hedge the exposure on the Avantus acquisition and
the £18.1m release of the liability in respect of UK MOD appropriation of
RDEC.
Dividend
An interim dividend of 2.4p (H1 FY22: 2.3p) will be paid on 3 February 2023 to
shareholders on the register on 6 January 2023. The interim dividend
represents one third of the prior year total dividend reflecting our
previously communicated methodology. The full year dividend will be announced
with our full year preliminary results in May 2023.
Cash performance
The Group delivered strong cash performance during H1 FY23, with underlying
net cash flows from operations of £106.8m (H1 FY22: £70.2m), resulting in
cash conversion before capital expenditure of 106% (H1 FY22: 89%).
Underlying working capital inflow (which excludes the working capital impact
of specific adjusting items) was £4.5m in H1 FY23 compared with a £13.0m
outflow in H1 FY22. We continue to manage our working capital well, although
we do expect a modest working capital outflow by the year end with an evolving
mix of payables and receivables on our large long-term contracts.
Capex for the period was £48.5m (H1 FY22 restated: £46.9m). We continue to
invest in core contracts including the LTPA following the contract amendment
announced in April 2019. Full year total capex is expected to be in line with
previous guidance of £90-120m.
At 30 September 2022 the Group had £264.0m net cash, compared to £225.1m at
31 March 2022. We retain a strong balance sheet to support investment in our
long-term growth strategy.
The net cash balance as at 30 September 2022 includes the £42.9m FX hedge
relating to the Avantus acquisition, £14.9m of interest rate swaps which have
been taken out to hedge future interest rate exposure on the associated debt
financing and £7.6m of other foreign exchange related derivatives. The
statutory cash flow statement includes a £29.2m cash outflow in relation to
the realised foreign exchange movement on derivatives which hedge intercompany
loan amounts, which are executed in accordance with our Treasury Policy.
We maintain a rigorous approach to the deployment of our capital, scrutinising
organic and inorganic opportunities in the same manner to ensure returns to
our shareholders are appropriate for the risks taken.
Our priorities for capital allocation, following this rigorous methodology,
are:
1. Organic investment complemented by acquisitions where there is a strong
strategic fit;
2. The maintenance of balance sheet strength;
3. A progressive dividend; and
4. The return of excess cash to shareholders.
Normalised trading performance
The year-on-year performance of the Group is skewed by the write-down incurred
in the prior year comparator period (H1 FY22). To understand the normalised
trading performance of the Group the following table demonstrates the results
before the impact of the write-down.
H1 FY23 H1 FY22 Underlying change
Underlying* results Underlying* results Write-down Excluding write-down Reported including write-down Organic* including write-down Reported excluding write-down Organic* excluding write-down
Orders £798.8m £677.8m £22.5m £700.3m 18% 14% 14% 11%
Revenue £673.4m £600.1m £8.0m £608.1m 12% 10% 11% 8%
Operating profit £74.1m £53.4m £14.5m £67.9m 39% 37% 9% 7%
Margin 11.0% 8.9% 11.2%
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary
The above table demonstrates that excluding the impact of the write-down, the
Group has achieved orders growth of 14% (11% on an organic constant currency
basis), revenue up 11% (8% on an organic constant currency basis) and
underlying operating profit up 9% (7% on an organic constant currency basis).
Committed facilities
The Group has a £275m bank revolving credit facility with an additional
'accordion' facility to increase the limit up to £400m. The facility, of
which £65m will mature on 27 September 2024 and £210m will mature on 27
September 2025, was undrawn at the half year. In addition the Group has a
£340m term loan facility available to be drawn on completion of the
acquisition of Avantus Federal. It is our policy to fix between 30-80% of our
interest rate exposure through a combination of derivatives or fixed rate debt
- of the new £340m term debt to finance the Avantus acquisition 47% (£160m)
will be fixed with this increasing based on materialisation of future
projected cash performance. Our cost of debt for both the fixed and the
floating element is currently in the 3-4% range, with a full year interest
charge of c.£12m per annum. These facilities provide the Group with
significant scope to execute its strategic growth plans.
Foreign exchange
The Group's income and expenditure is largely settled in the functional
currency of the relevant Group entity, mainly Sterling, US Dollar or
Australian Dollar. The Group has a policy to hedge all material transaction
exposure at the point of commitment to the underlying transaction. Uncommitted
future transactions are not routinely hedged. The Group does not hedge its
exposure to translation of the income statement. The principal exchange rates
affecting the Group were the Sterling to US Dollar and Sterling to Australian
Dollar exchange rates.
H1 FY23 H1 FY22
£/US$ - average 1.21 1.39
£/US$ - closing 1.11 1.35
£/US$ - opening 1.31 1.38
£/A$ - average 1.75 1.84
£/A$ - closing 1.72 1.86
£/A$ - opening 1.75 1.81
Pensions
The net pension asset under IAS 19, before adjusting for deferred tax, was
£209.0m (31 March 2022: £362.2m). The key driver for the decrease in the net
pension asset since the March 2022 year end was the recent turmoil in
financial markets, particularly a sharp increase in gilt yields (and reduced
gilt prices) which significantly reduced the value of the Scheme's Liability
Driven Investments (LDIs) and related asset-backed securities. Together with
falls in other assets the reduction across the whole investment portfolio was
in excess of the reduction in Scheme liabilities (which have also fallen
substantially, due to an increase in the discount rate).
The key assumptions used in the IAS 19 valuation of the scheme are set out in
note 13.
Operating review
EMEA Services
H1 FY23 H1 FY22
£m £m
Orders 600.8 506.4
Revenue 524.3 488.7
Underlying operating profit* 61.5 67.1
Underlying operating margin* 11.7% 13.7%
Book to bill ratio((1)) 1.4x 1.3x
Order backlog 2,601.2 2,718.0
Order backlog excl. LTPA 1,175.3 1,105.7
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary
(1) B2B ratio is orders won divided by revenue recognised, excluding the LTPA
contract
Overview
EMEA (Europe, Middle East and Australasia) Services combines world-leading
expertise with unique facilities to provide capability generation and
assurance, underpinned by long-term contracts that provide good visibility of
revenue and cash flows.
Financial performance
Orders were up 19% to £600.8m (H1 2021: £506.4m), driven by a £32m
three-year contract with UK MOD for the Future Combat Air System (FCAS)
programme through the Engineering Delivery Partner framework, a £26m uplift
to the LTPA contract to reflect inflationary effects in the UK, a five-year
contract extension with Boeing for our five metre wind tunnel services and
contracts totalling A$77m in Australia through growth of the MSP programme.
Revenue increased 7% on an organic basis as a result of new work delivered
under EDP in the UK and the growth of the MSP contract in Australia.
Underlying operating profit reduced by 8% to £61.5m (H1 FY22: £67.1m) with
margin at 11.7% (H1 FY22: 13.7%), consistent with the margin in H2 FY22 at
12.0%. The prior year comparator of H1 FY22 was particularly strong, the
modest reduction in margin is as a result of additional investment into our
people and capabilities to support long-term growth as set out in the CEO and
CFO Review sections.
Including the LTPA, approximately 65% of EMEA Services revenue is derived from
single source contracts (H1 FY22: approximately 67%) demonstrating our
critical and unique capabilities for our customers.
Business Unit commentary
UK Defence (60% of EMEA Services revenue)
The UK Defence sector delivers mission critical solutions, innovating for our
Air, Maritime & Land customers' advantage. This sector represents the
previously reported Air and Space, and Maritime and Land business units. Its
formation provides a sharper focus on our strategy of maximising growth
through our framework contracts, building new core offerings through our
global campaigns and exploring new growth opportunities. The new sector
improves coherence of our distinctive offerings across QinetiQ's customer
base, with the embedding of enabling functions bringing greater cohesion to
operational strategy execution for business performance excellence.
- The Long Term Partnering Agreement (LTPA) remains our largest contract
delivering world-leading test, trials, training and evaluation (T3E) for the
UK MOD. As with a number of our large long-term contracts, the commercial
arrangement within the LTPA enables us to be reimbursed for future allowable
cost increases in line with the Single Source Regulation Office (SSRO) aligned
to an agreed index; in H1 this represented a £26m order uplift.
- The Engineering Delivery Partner (EDP) programme continues to deliver for our
customer with a collaborative mind-set and commitment to transparency helping
to maximise and accelerate outputs for vitally important UK MOD programmes.
Alongside our partners Atkins and BMT, in H1 we have won orders totalling
£193m and revenue of £135m.
- We have won a £32m three-year contract with UK MOD for the Future Combat Air
System (FCAS) programme through EDP. The contract is to provide programme and
technical support to the Catalyst Delivery Team, a new Defence Equipment &
Support (DE&S) team responsible for introducing new capability to the MOD
air domain for various front line commands. The FCAS Acquisition Programme is
one of the first capabilities which the Catalyst Delivery team are initiating
under this new construct. Contributing to Attack, Information, Surveillance
and Reconnaissance, FCAS will be primarily responsible for delivering systems
to undertake control of the air duties.
- Working in close collaboration with our partners from the Air and Space
Warfare Centre as the Air Test and Evaluation Centre (ATEC) and wider
stakeholders, we were tasked with leading and managing a dedicated series of
test and evaluation trials for high altitude parachuting from the Atlas C Mk 1
aircraft.
- We have successfully signed a five-year contract extension with Boeing for our
five metre wind tunnel services and have successfully completed third party
testing in the facility.
UK Intelligence (28% of EMEA Services revenue)
The UK Intelligence sector 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. Contained within UK Intelligence are three
acquired businesses: QinetiQ Training and Simulation Ltd (QTSL, formerly NSC),
Inzpire and Naimuri. This Sector represents the previously reported Cyber and
Information business unit.
- The Serapis framework enables the UK Defence Science and Technology Laboratory
(Dstl), UK MOD and the frontline commands to quickly and efficiently place
contracts for scientific and technical research and development (R&D). Of
the six 'Lots', QinetiQ is leading three for R&D of command and control
systems, communications and networks, and training and simulation projects. By
working collaboratively with Dstl, we have efficiently delivered over £30m of
technical R&D in the first half, both our own expert scientists and
engineers, and through a supply chain of 200 companies. This is supporting
exploitation of technology with the front line commands, and de-risking
generation-after-next capabilities.
- Engineering, software development and test on the highly complex Robust Global
Navigation System (RGNS) programme is progressing well as we progress towards
release of initial operating capability. The RGNS programme is a funded
development programme with UK MOD to develop the Q40 product, providing our
customers the next generation of class-leading, robust and resilient position,
navigation and timing (PNT) capability. The contract is a great example of
QinetiQ delivering on highly complex programmes at the leading-edge of
technology for sovereign capability.
- We continue to deliver well on the Battlefield Tactical Communication and
Information Systems (BATCIS) contract, winning the fifth year option contract
award worth £35m. This is the public sector support programme for Defence
Digital, delivering procurement and engineering expertise for this
transformational digital backbone programme. With our partners ATOS, BMT and
Roke we deliver specialist expertise across this complex set of projects
(Trinity, Niobe, Morpheus, DSA etc.) covering a wide array of disciplines;
developing concepts, engineering solutions, managing obsolescence issues,
supporting critical operational requirements and enabling procurement
competitions.
- QTSL (formerly NSC), Inzpire and Naimuri have achieved significant growth, all
nearly doubling in size since acquisition. Inzpire's Graphical Electronic
Cockpit Organiser (GECO) mission planning product continues to sell well to
air forces around the world as an inexpensive way to get up-to-date mission
systems into the cockpit of older aircraft.
International (12% of EMEA Services revenue)
Our International sector provides advisory services, engineering services and
training and mission rehearsal in the Australian, German and Canadian markets.
- The Australian business has started FY23 strongly due to increased orders on
the Major Service Provider (MSP) contract. The Canadian business has made good
progress in the US with the integration of the Army Ground Aerial Target
Control System and our QTS targets, which represents a major milestone (6+
years in the making) in US market penetration.
- Our MSP contract has delivered orders totalling A$77m and increased revenues
by 10% through consistent high operational performance and delighting the
customer. This contract positions us for future growth as a trusted partner
able to provide sovereign Australian industry capability, while leveraging our
global capabilities. A major contributor of our growth has been our close
support to the Australian Army acquisition programme for their next generation
of heavy armoured vehicles, a cornerstone of the broader Army modernisation
programme.
- As one of only four MSP consortia we are also continuing to support our
Australian customer with the supply and sustainment of next generation
munitions, ensuring Defence has the right capability and enhancing Australia's
self-reliance and supply chain resilience. We are also supporting with the
ongoing acquisition and sustainment support for RAAFs Surveillance and
Reconnaissance capability, enhancing Defence's ability to maintain situational
awareness of Australia's maritime approaches.
- In FY22 we had our contract extended to provide valuable mine warfare
equipment and support services to the Australian Defence Force at HMAS
Waterhen for the next five years. This contract continues to deliver well,
enabling the Royal Australian Navy to both sustain and enhance its essential
in-country training and threat representation capability.
- In October 2022 we announced the acquisition of Air Affairs (Australia) Pty
Ltd for a cash consideration of A$53m - we remain on-track to complete the
acquisition in November. Air Affairs is an Australian defence services company
- a leader in air threat representation, T&E, unmanned targets and mission
rehearsal. Air Affairs provides targets and training services, and electronic
warfare capabilities to the Australian Defence Force, as well as aerial
surveillance and reconnaissance in support of government firefighting efforts.
It owns and operates a fleet of special mission aircraft and maintains an
advanced manufacturing and engineering facility providing design, manufacture
and certification operations. Air Affairs employs c.180 people, headquartered
in Nowra, New South Wales. The acquisition of Air Affairs further establishes
QinetiQ as a long-term, strategic partner to the Australian Defence Force and
underpins QinetiQ's strategic position as market leader in T&E and air
threat representation, now with a significant presence across the UK, Canada
and Australia, and training and special operations in Germany. In the 12
months to 30 June 2022, Air Affairs delivered A$43m revenue, EBITDA of A$5m
(on an IFRS basis).
- In Germany the Slow Speed Aerial Target Services contract has delivered
consistent ongoing flying performance supporting the customer in target
operations, providing a strong foundation for the future Next Generation
German Aerial Training Services (NGGATS) opportunity.
Global Products
H1 FY23 H1 FY22
£m £m
Orders 198.0 171.4
Revenue 149.1 111.4
Underlying operating profit/(loss)* 12.6 (13.7)
Underlying operating margin* 8.5% (12.3%)
Book to bill ratio 1.3x 1.5x
Order backlog 367.4 289.6
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary
Global Products delivers innovative solutions to meet customer requirements.
The division is technology-based and has shorter order cycles than EMEA
Services.
Financial performance
Orders increased by 16% to £198.0m (H1 FY22: £171.4m). Excluding foreign
exchange, orders grew organically by 4%. Order performance in H1 FY23 has
remained strong, particularly in the US, with the prior year impacted by the
write-down (£22.5m). We have modified our order recognition criteria to align
with industry best practice. This results in a one-off order catch-up in the
US of £48m in H1 FY23 for orders under-recognised in the past, and is aligned
with our strong revenue performance in the US.
Revenue was up 34% to £149.1m (H1 FY22: £111.4m). Excluding foreign
exchange, revenue grew organically by 22%, and excluding the impact of the
write-down (£8m) in the prior year up 14%, driven by good performance in the
US and QTS.
Underlying operating profit increased to £12.6m (H1 FY22: £13.7m loss), with
an underlying operating profit margin of 8.5% (H1 FY22: -12.3%). The
significant improvement in profit is as a result of good performance in the US
and a weaker prior year comparator with H1 FY22 including the write-down
(£14.5m).
Business Unit commentary
United States (68% of Global Products revenue)
Our US sector provides technical advice, design and manufacture of innovative
defence products specialising in robotics, autonomy and sensing solutions,
comprising Technology Solutions (formerly QNA) and C5ISR Solutions (formerly
MTEQ). Following completion of the Avantus acquisition, we will also become a
leading provider of mission-focused cyber, data analytics and software
development solutions - the three business areas will be managed under the US
sector.
- The US sector has had a strong first half with orders, revenue and profit
seeing good improvement on the second half of FY22 with greater stability and
consistent performance. With a new leadership team and steps taken to improve
the resilience, project controls and performance, we are pleased to see that
the US has performed well in the first half.
- We secured a contract to provide technical services to the US Army. The five
year contract, worth up to $45m, will provide services for the Development
Command (DEVCOM) Command, Control, Computers, Communications, Cyber,
Intelligence, Surveillance and Reconnaissance (C5ISR) at the Fort Belvoir
Prototyping Integration Facility (PIF). The contract, a one-year base period
followed by four one-year option periods, will provide technical services for
system development, fabrication, sensor and system integration, prototyping of
multi-function sensor suites, and technology assessment efforts aimed at
supporting current and future DEVCOM C5ISR PIF Belvoir customers. This
contract is an important competitive win for the business and reinforces our
continued value to our customers.
- We also won a multi-year research, development and technology integration
contract, worth up to $49m, with the US Army C5ISR Center, Research &
Technology Integration Directorate's Image Processing Division for Image
Processing and advanced Optics Technologies.
- The US Navy's newest and most advanced aircraft carrier (USS Gerald R. Ford -
CVN 78) has been successfully deployed with QinetiQ's Electromagnetic Aircraft
Launch System (EMALS) and Advanced Arresting Gear (AAG) systems aboard,
bringing improved functionality and reliability.
- We have successfully completed the Low-Rate Production (LRIP) contract on the
Common Robotic System Individual (CRS-I), known as the SPUR robot, for the US
Army. We are ramping-up production for the $64m Full-Rate Production (FRP)
contract which we won last year; the largest Program of Record for US Robotics
for the delivery of a further 1,200 SPUR robots, with the first 170 systems
delivered to the customer. Whilst supply-chain remains challenging we are
actively managing this to maintain the delivery schedule.
- The RCV-L (Robotic Combat Vehicle Light) has completed successful summer
soldier trials at Fort Hood. The trials are both testing the capability of the
vehicle whilst also developing tactical scenarios and situational training
exercises, the output of which will be used to further develop the robotic
vehicle's capabilities with the end-user in mind.
- We have successfully completed high altitude test flights of the SPECTRE
system. SPECTRE is a next generation prototype Intelligence, Surveillance
& Reconnaissance (ISR) sensor system that enables multi-mission Uncrewed
Air Systems (UAS) and crewed aircraft to operate in parallel to other critical
sensor payloads and weapons, with improved performance at a fraction of the
size and weight of the sensors currently in use by the US Government.
- We have made good progress on the Optionally Manned Fighting Vehicle (OMFV)
Phase 2 contract as the program nears completion, with our teams delivering
digital engineering designs allowing platform validation in a virtual
environment. The vehicle's modular open architecture will make it easy to
upgrade and modify according to future needs.
Space Products (16% of Global Products revenue)
Space NV is a Belgium-based commercial space business providing design and
integration of small commercial satellites, docking and berthing systems, and
instruments for end-to-end space missions; its principal customer is the
European Space Agency. In October 2022 we announced the disposal of QinetiQ
Space NV in Belgium to Redwire Space Europe for a cash consideration of €32m
and we are delighted to announce completion of the transaction on 31st October
2022. Space NV is an attractive and well-positioned business in the commercial
space sector, which has delivered good operational performance and growth
under QinetiQ's ownership. Whilst the space domain remains an integral part of
our core defence and security strategy, Space NV products provide limited
operational synergies and alignment with our global ambition - QinetiQ is
therefore delighted to have announced the sale of Space NV to Redwire
Corporation, who can provide greater synergies and relevant market access to
enable future growth of the business and new opportunities for its employees.
In the year ended 31 March 2022 Space NV generated revenue of €49m and
EBITDA of €5m.
EMEA Other Products (16% of Global Products revenue)
EMEA Products provides research services and bespoke technological solutions
developed from intellectual property spun out from EMEA Services. QinetiQ
Target Systems (QTS) is also reported within EMEA Products.
- Through FY22 and FY23 we have seen positive progress across the QTS business
with customers resuming trials and exercises and winning some significant
orders, including a number of notable wins and deliveries for customer
training exercises in Europe.
- QTS secured a £1.5m contract from the Royal Navy to trial the military effect
of Banshee Jet80+ air vehicle off HMS Prince of Wales. QinetiQ will provide
its experimentation expertise and Banshee Jet80+ air vehicles to support the
Royal Navy's future use of high-performance Uncrewed Aerial Systems (UAS) in
Carrier Strike Group operations. The experimental trials, which are closely
associated with the Navy's Vampire Phase 1 programme, will test QinetiQ Target
Systems' Banshees in training and ISR scenarios, focussing on specific flight
profiles and the optical recognition of assets to enable 'friend or foe'
confirmation.
- QTS also supported a major Dutch target exercise (Mjolnir), with live testing
of the SM2 (medium-range surface-to-air missile), as well as Aerial Target
deployments in Turkey and Germany.
Principal risks and uncertainties
The Group continues to be exposed to a number of risks and uncertainties which
management continue to identify, assess and mitigate to minimise their
potential impact on the reported performance of the Group. An explanation of
risks and their mitigations, together with details of our risk management
framework can be found in the 2022 Annual Report and Accounts which is
available for download at: https://www.qinetiq.com/investors
(https://www.qinetiq.com/investors) .
A summary of the significant risks and uncertainties are set out below:
• Failure to grow and adapt our ways of working in order to ensure that we
attract, develop and retain the right capability to deliver excellence for our
customers to support QinetiQ's future growth;
• Failure to create a culture of innovation, develop relevant technology and
business models or to attract and retain the right talent to enable the
realisation of new ideas for our customers and our organisation;
• Failure to anticipate, plan and scenario-test for volatile macroeconomic
environments that could impact customer spending, inflationary impacts on our
cost-base, interest rates and foreign currency exchange movements;
• Failure to execute our growth strategy within the UK, US and Australian market
impacts the overall financial performance of the Group;
• Large long-term contracts that contribute a material element of the Group's
revenue do not continue or are not renewed;
• The M&A strategy, which is a key element of our strategic growth, does not
realise the maximum potential benefits;
• The Group operates in highly regulated environments and recognises that
non-compliance could pose a risk to both our ability to conduct business, and
to our stakeholders;
• A breach of physical data security, cyber-attacks or IT systems failure could
have an adverse impact on our customers' operations;
• Our Portfolio, Programme and Project Management (P3M) maturity fails to keep
pace with our growth plans and the successful delivery of larger, longer-term
contracts; and
• Failure to manage our climate change risk would leave operations on our
estates and our supply chains exposed and we may not meet legislative or
customer requirements, stakeholder expectations and may not be correctly
positioned in a decarbonised future.
Condensed consolidated income statement
H1 FY23 H1 FY22 restated^
(unaudited) (unaudited)
All figures in £ million unless stated otherwise Note Underlying* Specific adjusting items* Total Underlying* Specific adjusting items* Total
Revenue 2 673.4 - 673.4 600.1 - 600.1
Operating costs excluding depreciation, impairment and amortisation (577.6) 30.7 (546.9) (525.8) (6.3) (532.1)
Other income 5.2 0.9 6.1 4.8 0.5 5.3
EBITDA (earnings before interest, tax, depreciation and amortisation) 101.0 31.6 132.6 79.1 (5.8) 73.3
Depreciation and impairment of property, plant and equipment (23.5) - (23.5) (22.9) (1.2) (24.1)
Amortisation of intangible assets (3.4) (5.6) (9.0) (2.8) (5.4) (8.2)
Operating profit/(loss) 74.1 26.0 100.1 53.4 (12.4) 41.0
Finance income 5 1.4 4.9 6.3 0.1 2.3 2.4
Finance expense 5 (1.9) - (1.9) (1.0) - (1.0)
Profit/(loss) before tax 73.6 30.9 104.5 52.5 (10.1) 42.4
Taxation (expense)/income 6 (8.2) 16.1 7.9 (5.9) (14.2) (20.1)
Profit/(loss) for the period 65.4 47.0 112.4 46.6 (24.3) 22.3
Attributable to:
Owners of the Company 65.4 47.0 112.4 46.6 (24.3) 22.3
Non-controlling interests - - - - - -
Profit/(loss) for the period 65.4 47.0 112.4 46.6 (24.3) 22.3
Earnings per share for profit attributable to the owners of the Company
7 11.4 19.5 8.1 3.9
Basic
Diluted 7 11.3 19.3 8.1 3.9
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
* Alternative performance measures are used to supplement the statutory figures.
These are additional financial indicators used by management internally to
assess the underlying performance of the Group. Definitions can be found in
the glossary.
Condensed consolidated statement of comprehensive income
All figures in £ million H1 FY23 H1 FY22^
(unaudited) (unaudited)
Profit for the period 112.4 22.3
Items that will not be reclassified to the income statement:
Actuarial (loss)/gain recognised in defined benefit pension schemes (157.5) 61.5
Tax on items that will not be reclassified to the income statement 39.4 (27.1)
Total items that will not be reclassified to the income statement (118.1) 34.4
Items that may be reclassified to the income statement:
Foreign currency translation gains for foreign operations 19.7 2.4
Movement in deferred tax on foreign currency translation (1.7) 0.2
Increase in fair value of hedging derivatives 16.5 0.5
Movement on deferred tax on hedging derivatives (0.3) (0.1)
Total items that may be reclassified to the income statement 34.2 3.0
Other comprehensive (expense)/income for the period, net of tax (83.9) 37.4
Total comprehensive income for the period, net of tax 28.5 59.7
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
Condensed consolidated statement of changes in equity
All figures in £ million Issued share capital Capital redemption reserve Share premium Hedge reserve Translation reserve Retained earnings Total Non-controlling interest Total
equity
At 1 April 2022 5.8 40.8 147.6 0.1 1.9 847.0 1,043.2 0.2 1,043.4
Profit for the period - - - - - 112.4 112.4 - 112.4
Other comprehensive income/(expense), net of tax - - - 16.2 18.0 (118.1) (83.9) - (83.9)
Purchase of own shares - - - - - (0.4) (0.4) - (0.4)
Share-based payments charge - - - - - 0.8 0.8 - 0.8
Deferred tax on share-based payments - - - - - 0.3 0.3 - 0.3
Dividends - - - - - (28.8) (28.8) - (28.8)
At 30 September 2022 (unaudited) 5.8 40.8 147.6 16.3 19.9 813.2 1,043.6 0.2 1,043.8
At 1 April 2021 - previously reported 5.7 40.8 147.6 (0.4) (2.9) 698.6 889.4 0.3 889.7
Change in accounting policy - software implementation costs - - - - - (4.8) (4.8) - (4.8)
At 1 April 2021 - restated^ 5.7 40.8 147.6 (0.4) (2.9) 693.8 884.6 0.3 884.9
Profit for the period - - - - - 22.3 22.3 - 22.3
Other comprehensive income, net of tax - - - 0.4 2.6 34.4 37.4 - 37.4
Purchase of own shares - - - - - (0.5) (0.5) - (0.5)
Issue of new shares 0.1 - - - - - 0.1 - 0.1
Share-based payments charge - - - - - 3.6 3.6 - 3.6
Deferred tax on share-based payments - - - - - (0.7) (0.7) - (0.7)
Fair value adjustment in respect of equity-based contingent consideration - - - - - 0.7 0.7 - 0.7
Dividends - - - - - (27.0) (27.0) (0.1) (27.1)
At 30 September 2021^ (unaudited) 5.8 40.8 147.6 - (0.3) 726.6 920.5 0.2 920.7
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
Condensed consolidated balance sheet
All figures in £ million Note 30 September 2022 30 September 2021^ 31 March
(unaudited) (unaudited) 2022
(audited)
Non-current assets
Goodwill 12 158.3 147.1 149.4
Intangible assets 140.2 135.7 140.3
Property, plant and equipment 431.6 408.6 414.5
Derivatives and other financial assets 12.8 0.7 0.5
Financial assets at fair value through profit and loss - 0.9 -
Equity accounted investments 1.1 2.2 2.6
Retirement benefit surplus 13 209.0 277.4 362.2
Deferred tax asset 25.5 16.0 21.0
978.5 988.6 1,090.5
Current assets
Inventories 63.9 61.5 54.9
Derivatives and other financial assets 54.3 0.3 0.6
Trade and other receivables 330.8 311.4 361.2
Current tax asset 18.4 6.6 1.4
Assets classified as held for sale 39.5 - -
Cash and cash equivalents 220.3 165.7 248.1
727.2 545.5 666.2
Total assets 1,705.7 1,534.1 1,756.7
Current liabilities
Trade and other payables (439.3) (383.9) (462.7)
Current tax payable - (0.6) (3.9)
Provisions (21.1) (4.4) (21.1)
Liabilities of disposal group classified as held for sale (29.1) - -
Leases and other financial liabilities (6.0) (8.2) (6.9)
(495.5) (397.1) (494.6)
Non-current liabilities
Deferred tax liability (134.1) (136.6) (156.7)
Provisions (4.5) (7.4) (6.0)
Leases and other financial liabilities (17.4) (19.3) (17.2)
Other payables (10.4) (53.0) (38.8)
(166.4) (216.3) (218.7)
Total liabilities (661.9) (613.4) (713.3)
Net assets 1,043.8 920.7 1,043.4
Equity
Ordinary shares 5.8 5.8 5.8
Capital redemption reserve 40.8 40.8 40.8
Share premium account 147.6 147.6 147.6
Hedging reserve 16.3 - 0.1
Translation reserve 19.9 (0.3) 1.9
Retained earnings 813.2 726.6 847.0
Capital and reserves attributable to shareholders of the parent company 1,043.6 920.5 1,043.2
Non-controlling interest 0.2 0.2 0.2
Total equity 1,043.8 920.7 1,043.4
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1
Condensed consolidated cash flow statement
All figures in £ million Note H1 FY23 H1 FY22^* FY22* (audited)
(unaudited) (unaudited)
Underlying net cash inflow from operations 106.8 70.2 215.3
Less specific adjusting items 9 (7.3) (6.0) (5.6)
Net cash inflow from operations 9 99.5 64.2 209.7
Tax paid (18.2) (12.8) (20.0)
Interest received 1.4 0.1 0.5
Interest paid (1.0) (0.8) (1.5)
Net cash inflow from operating activities 81.7 50.7 188.7
Purchases of intangible assets (3.5) (9.6) (21.4)
Purchases of property, plant and equipment (45.0) (37.3) (62.9)
Proceeds from sale of property 1.1 - 1.5
Dividends from joint ventures and associates - 2.0 2.0
Acquisition of businesses (1.6) - (0.8)
Net cash outflow from investing activities (49.0) (44.9) (81.6)
Purchase of own shares (0.4) (0.4) (0.8)
Dividends paid to shareholders (28.8) (27.0) (40.2)
Payment of term loan arrangement fee (0.6) - -
Capital element of finance lease payments (3.1) (3.5) (6.2)
Cash flow relating to intercompany loan hedges (29.2) 0.4 (3.1)
Dividends paid to non-controlling interests in subsidiaries - (0.1) (0.1)
Net cash outflow from financing activities (62.1) (30.6) (50.4)
(Decrease)/Increase in cash and cash equivalents (29.4) (24.8) 56.7
Effect of foreign exchange changes on cash and cash equivalents 1.6 0.4 1.3
Cash and cash equivalents at beginning of period 248.1 190.1 190.1
Cash and cash equivalents at end of period 220.3 165.7 248.1
Reconciliation of movement in net cash
All figures in £ million Note H1 FY23 H1 FY22^* FY22*
(unaudited) (unaudited) (audited)
(Decrease)/Increase in cash and cash equivalents (29.4) (24.8) 56.7
Add back net cash flows not impacting net cash 3.7 3.5 6.2
Change in net cash resulting from cash flows (25.7) (21.3) 62.9
Net increase in lease obligation (1.4) (1.1) (1.3)
Net movement in derivative financial instruments 67.2 (2.6) (1.3)
Other movements including foreign exchange (1.2) 0.1 0.7
Increase/(Decrease) in net cash as defined by the Group 38.9 (24.9) 61.0
Net cash as defined by the Group at beginning of the period 225.1 164.1 164.1
Net cash as defined by the Group at end of the period 8 264.0 139.2 225.1
Less: non-cash net financial (assets)/liabilities 8 (43.7) 26.5 23.0
Total cash and cash equivalents 8 220.3 165.7 248.1
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
* To be consistent with H1 FY23, prior periods have been re-presented in respect
of the cash flow impact of intercompany loan hedging
Notes to the condensed interim financial statements
1. Significant accounting policies
Basis of preparation
QinetiQ Group plc is a public limited company, which is listed on the London
Stock Exchange and is incorporated and domiciled in England.
The condensed consolidated interim financial statements of the Group for the
six months ended 30 September 2022 comprise statements for the Company and its
subsidiaries (together referred to as the 'Group') and were approved by the
Board of Directors on 10 November 2022.
The financial statements have been reviewed, not audited.
This condensed consolidated interim financial report for the half-year
reporting period ended 30 September 2022 has been prepared in accordance with
the UK-adopted International Accounting Standard 34, 'Interim Financial
Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
In the income statement, the Group presents specific adjusting items
separately. In the judgement of the Directors, for the reader to obtain a
proper understanding of the financial information, 'specific adjusting items'
need to be disclosed separately because of their size and nature. Specific
adjusting items include:
Item Distorting due to Distorting due to Does not reflect in-year
irregular nature
fluctuating nature
operational performance
year on year
(size and/or sign)
of continuing business
Amortisation of intangible assets arising from acquisitions P
Pension net finance income P P
Gains/losses on business divestments and disposal of property and investments P P P
Transaction & integration costs in respect of business acquisitions and P P P
disposals
Digital investment P P P
One-off FX gain on acquisition funding arrangements P P P
Impairment of goodwill and property P P P
The tax impact of the above P P P
Other significant non-recurring tax movements P P P
All items treated as a specific adjusting item in the current and prior period
are detailed in note 3 and are excluded from the 'underlying' measures of
performance. These Alternative Performance Measures (APMs), definitions of
which can be found in the glossary at the end of this document, are used to
monitor performance and also used for management remuneration purposes.
In periods where there are significant one-off trading items impacting on
performance (such as a contract write-down which is not of the nature/type
detailed above and hence not reported as a specific adjusting item) then these
are still reported within underlying measures of performance but narrative
explanation is provided to quantify the impact on such measures (where
appropriate).
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
2022.
Recent accounting developments adopted by the Group
IFRIC Agenda Decision 'Configuration and customisation costs in a cloud computing arrangements'
In the 31 March 2022 Annual Report, the Group changed its accounting policy
related to the capitalisation of configuration and customisation costs in a
cloud computing (Software as a Service, 'SaaS') arrangement. This change is as
a result of the IFRS Interpretations Committee's agenda decision published in
April 2021.
The Group's accounting policy had historically been to capitalise costs
directly attributable to the configuration and customisation of cloud
computing arrangements as intangible assets in the balance sheet, whether or
not the services were performed by the SaaS provider, SaaS subcontractors or a
third party. Following the publication of the above IFRIC agenda decision,
cloud computing arrangements were identified and assessed to determine if the
Group has control of the software. For those arrangements where it was
determined that we do not have control of the developed software, to the
extent that the services were performed by third parties, the Group
derecognised the intangible asset previously capitalised. Amounts paid to the
SaaS provider in advance of the commencement of the service period, including
for configuration or customisation, if identified as not distinct, were
treated as a prepayment.
The change in accounting policy led to adjustments amounting to an £8.0m
reduction in the intangible assets recognised as at 31 March 2022, and to a
£2.4m increase in operating costs (excluding amortisation) for the year.
Accordingly, the 30 September 2021 balance sheet has been restated in
accordance with IAS 8, together with related notes. The following table shows
the adjustments recognised for each individual line item as at 30 September
2021.
Impact on the condensed consolidated balance sheet at 30 September 2021
All figures in £ million As originally presented Impact of restatement Restated
Assets/liabilities
Intangible assets 143.7 (8.0) 135.7
Current tax asset 4.9 1.7 6.6
Other net assets 778.4 - 778.4
Net assets 927.0 (6.3) 920.7
Equity
Retained earnings 732.9 (6.3) 726.6
Share capital and other reserves 193.9 - 193.9
Non-controlling interest 0.2 - 0.2
Total equity 927.0 (6.3) 920.7
Impact on net cash
Net cash (as defined by the Group - see glossary) 139.2 - 139.2
Impact on the condensed consolidated income statement for H1 FY22
All figures in £ million As originally presented Impact of restatement Restated
EBITDA (earnings before interest, tax, depreciation and amortisation) 75.2 (1.9) 73.3
Depreciation and impairment of property, plant and equipment (24.1) - (24.1)
Amortisation of intangible assets (8.2) - (8.2)
Operating profit/(loss) 42.9 (1.9) 41.0
Finance income 2.4 - 2.4
Finance expense (1.0) - (1.0)
Profit/(loss) before tax 44.3 (1.9) 42.4
Taxation expense (20.5) 0.4 (20.1)
Profit/(loss) for the year attributable to equity shareholders 23.8 (1.5) 22.3
The impact is classified as a specific adjusting item and there is no impact
on underlying measures of performance.
Going-concern basis
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 at least the next 12 months. 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.
Comparative data
The comparative figures for the year ended 31 March 2022 (and half year ended
30 September 2021) 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 2022 have been 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 2022 are available upon
request from the Company's registered office at Cody Technology Park, Ively
Road, Farnborough, Hampshire, GU14 0LX, or at the Company's website
(www.QinetiQ.com).
2. Disaggregation of revenue and segmental analysis
Revenue by category and reconciliation to revenue on an organic, constant
currency basis
All figures in £ million H1 FY23 H1 FY22 (unaudited)
(unaudited)
Service contracts with customers 640.1 574.5
Sale of goods contracts with customers 31.8 24.1
Royalties and licences 1.5 1.5
Revenue (statutory) 673.4 600.1
Restated for:
Adjust to constant prior year exchange rates (15.7) -
Total revenue on an organic, constant currency basis 657.7 600.1
Organic revenue growth at constant currency 10% 3%
Other income
All figures in £ million H1 FY23 H1 FY22 (unaudited)
(unaudited)
Share of joint ventures' and associates' profit after tax 0.3 -
Other income (property related) 4.9 4.8
Other income - underlying 5.2 4.8
Specific adjusting item: gain on sale of property 0.9 0.5
Total other income 6.1 5.3
Revenue by customer geographical location
All figures in £ million H1 FY23 H1 FY22 (unaudited)
(unaudited)
United Kingdom 459.4 434.3
US 102.0 75.1
Australia 57.4 47.1
Home countries (92% and 93% of total revenue for H1 FY23 and H1 FY22 618.8 556.5
respectively)
Europe 42.8 40.6
Rest of World 11.8 3.0
Total revenue 673.4 600.1
Revenue by major customer type
For the six months ended 30 September
All figures in £ million H1 FY23 H1 FY22 (unaudited)
(unaudited)
UK Government 423.8 398.2
US Government 97.7 68.1
Other 151.9 133.8
Total revenue 673.4 600.1
Operating segments
H1 FY23 H1 FY22
All figures in £ million (unaudited) (unaudited)
Revenue from external customers Underlying* operating Revenue from external customers Underlying* operating profit/(loss)(*)
profit(*)
EMEA Services 524.3 61.5 488.7 67.1
Global Products 149.1 12.6 111.4 (13.7)
Total operating segments 673.4 74.1 600.1 53.4
Underlying operating margin* 11.0% 8.9%
( )
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary
The prior period included a write-down on a large complex project. This
reduced revenue and underlying operating profit (within the Global Products
operating segment) by £8.0m and £14.5m respectively.
Reconciliation of segmental results to total profit
All figures in £ million H1 FY23 H1 FY22^ (unaudited)
Note (unaudited)
Underlying operating profit 74.1 53.4
Specific adjusting items operating profit/(loss) 3 26.0 (12.4)
Operating profit 100.1 41.0
Net finance income 4.4 1.4
Profit before tax 104.5 42.4
Taxation income/(expense) 7.9 (20.1)
Profit for the period attributable to equity shareholders 112.4 22.3
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
3. Specific adjusting items
In the income statement, the Group presents specific adjusting items
separately. In the judgement of the Directors, for the reader to obtain a
proper understanding of the financial information, specific adjusting items
need to be disclosed separately because of their size and nature. Underlying
measures of performance exclude specific adjusting items. The following
specific adjusting items have been (charged)/credited in the consolidated
income statement:
All figures in £ million Note H1 FY23 H1 FY22^ (unaudited)
(unaudited)
FX gain on acquisition funding derivatives 42.9 -
Acquisition and disposal costs 4 (6.4) (4.1)
Restructuring costs (3.3) -
Digital investment (2.5) (1.9)
Gain on sale of property 0.9 0.5
Acquisition related remuneration - (0.9)
Fair value adjustment in respect of contingent consideration 4 - 0.6
Specific adjusting items before amortisation, depreciation and impairment 31.6 (5.8)
Impairment of property - (1.2)
Amortisation of intangible assets arising from acquisition (5.6) (5.4)
Specific adjusting items operating profit/(loss) 26.0 (12.4)
Defined benefit pension scheme net finance income 13 4.9 2.3
Specific adjusting items profit/(loss) before tax 30.9 (10.1)
Specific adjusting items - tax income/(expense) 6 16.1 (14.2)
Total specific adjusting items profit/(loss) after tax 47.0 (24.3)
Reconciliation of underlying profit for the period to total profit for the
period
All figures in £ million H1 FY23 H1 FY22^ (unaudited)
(unaudited)
Underlying profit after tax 65.4 46.6
Total specific adjusting items profit/(loss) after tax (see above) 47.0 (24.3)
Total profit for the period attributable to equity shareholders 112.4 22.3
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
The total impact of specific adjusting items on operating profit (which are
excluded from underlying performance) before tax was a £26.0m income (H1 FY22
restated: expense of £12.4m). H1 FY23 includes a £42.9m gain from the
foreign exchange derivative contract, due to the recent GBP:USD movement,
which was taken out to hedge the foreign exchange exposure on the $590m
Avantus acquisition and was executed in accordance with the Group's Treasury
Policy. The size of this gain (or loss), which has partially reversed since 30
September 2022, will ultimately depend on the GBP to USD foreign exchange rate
at the date of completion of the acquisition.
Acquisition and disposal costs of £6.4m (H1 FY22: £4.1m) comprise costs
associated with the Avantus and Air Affairs acquisitions (which are due to
complete in H2), and costs relating to the disposal of Space NV. The H1 FY22
amount was relating to an unsuccessful acquisition, as disclosed previously.
The cash flow for H1 FY23 includes a £1.6m deposit payment on the Air Affairs
acquisition.
Restructuring costs of £3.3m have been incurred as part of the
re-organisation to create Group-wide global support functions and four
market-facing Sectors. The costs of reorganisation in previous years, which
have been smaller in scale, have been included within underlying operating
costs.
QinetiQ has embarked on a digital investment programme to improve the
infrastructure, digital tools and operating systems of the company - the
majority of costs will be reported as exceptional specific adjusting items in
the P&L, with ongoing recurring operating costs (such as licence costs and
overheads) remaining within underlying operating costs. Early stage
implementations and planning work has been undertaken through FY22 and FY23,
with the full digital investment programme due to be implemented over the next
three to four year period. FY22 included specific adjusting item relating to
the change in accounting policy for software implementation costs as a result
of the International Financial Reporting Interpretations Committee (IFRIC)
decision to expense rather than capitalise configuration and customisation
costs in cloud computing arrangements. H1 FY22 has been restated to reflect
this. In H1 FY23 the exceptional cost element of the digital investment
programme within specific adjusting items totals £2.5m. The majority of this
expenditure would previously have been capitalised and follows the IFRIC
decision, with a small movement from underlying operating costs to exceptional
costs as referenced above (FY23 benefit to underlying operating profit
expected to be <£1m).
Also included within specific adjusting items were a gain on the sale of
property of £0.9m (H1 FY22 £0.5m) and amortisation of acquisition
intangibles of £5.6m (H1 FY22: £5.4m).
4. Business combinations
There were no acquisitions in the period to 30 September 2022 or 30 September
2021. In the current period, the Group incurred £6.4m costs in respect of the
recently announced acquisitions of Avantus Federal and Air Affairs, and the
disposal of Space NV. These costs are classified as a specific adjusting item
(note 3). A £1.6m deposit payment has been made on the Air Affairs
acquisition.
In H1 HY22 the fair value of the MTEQ earn-out agreement was reassessed as
nil. An amount of £0.6m was credited to the income statement as a specific
adjusting item in respect of the cash-settled element.
5. Finance income and expense
All figures in £ million H1 FY23 H1 FY22
(unaudited) (unaudited)
Receivable on bank deposits 1.4 0.1
Underlying finance income 1.4 0.1
Amortisation of recapitalisation fee (0.2) (0.2)
Interest on bank loans and overdrafts (0.4) (0.3)
Lease expense (0.5) (0.5)
Other interest expense (0.8) -
Underlying finance expense (1.9) (1.0)
Underlying net finance expense (0.5) (0.9)
Specific adjusting items:
Defined benefit pension scheme net finance income 4.9 2.3
Net finance income 4.4 1.4
6. Taxation
H1 FY23 H1 FY22^
(unaudited) (unaudited)
All figures in £ million unless stated otherwise Underlying Specific Total Underlying Specific Total
adjusting
adjusting items
items
Profit/(loss) before tax 73.6 30.9 104.5 52.5 (10.1) 42.4
Taxation (expense)/income (8.2) 16.1 7.9 (5.9) (14.2) (20.1)
Profit/(loss) for the period attributable to equity shareholders 65.4 47.0 112.4 46.6 (24.3) 22.3
Effective tax rate 11.1% 11.2%
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
The total tax credit is £7.9m (H1 FY22 restated charge: £20.1m). The
underlying tax charge of £8.2m (H1 2021: £5.9m) is calculated by applying
the expected underlying effective tax rate at a jurisdictional level for the
year ending 31 March 2023 to the underlying profit before tax for the six
months to 30 September 2022. The Group's full year expected underlying
effective tax rate is 11.5% which is higher than the half year underlying
effective tax rate of 11.1% (H1 FY22: 11.2%) due to the jurisdictional mix of
profits in H1 FY23.
The underlying 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 which are accounted for under IAS12 within the tax
line. The adjusted underlying effective tax rate before the impact of RDEC
would be 19.4% (H1 FY22: 18.0%). The underlying effective tax rate is
expected to remain below the UK statutory rate in the medium term, subject to
any tax legislation changes, the geographic mix of profits, the recognition of
unrecognised tax losses and while the benefit of net RDEC retained by the
Group remains in the tax line.
Tax losses and specific adjusting items
At 30 September 2022 the Group had unused tax losses and surplus interest
expenses of £156.9m (31 March 2022: £128.1m) which are available for offset
against future profits. Within deferred tax assets recognised on the balance
sheet is £15.8m in respect of £75.3m of US net operating losses, £5.0m in
respect of £21.6m of Canadian net operating losses and £1.7m in respect of
£5.1m of German trade losses.
No deferred tax asset is recognised in respect of the £54.9m of US interest
deductions due to uncertainty over the timing and extent of their utilisation.
Full recognition of the US interest deductions would increase the deferred tax
asset by £14.8m. The Group has £36.1m of time-limited US net operating
losses of which £25.5m will expire in 2035 and £10.6m in 2036. Deferred tax
has been calculated using the enacted future statutory tax rates.
Specific adjusting items includes a £18.1m credit in respect of UK MOD
appropriation for RDEC has been classified as a specific adjusting item.
Following a determination by the SSRO on the interpretation of the Statutory
Guidance for Allowable Costs regulations ('SGAC'), the accounting judgement is
that RDEC on single source contracts from 1 April 2019 onwards will no longer
be paid on to MOD, which is a change from the accounting judgement at the year
end. The existing creditor has been reversed through the tax charge in line
with IAS 12. Together with a £4.9m charge arising on the UK statutory rate
change to 25% from 1 April 2023, a £1.7m credit for tax on the amortisation
of acquisition intangibles and a £1.2m credit in respect of other pre-tax
specific adjusting items, the total specific adjusting items tax credit was
£16.1m (H1 2022 restated: charge of £14.2m). Specific adjusting items
includes the foreign exchange gain £42.9m on the derivative instrument taken
out for the Avantus acquisition which is not expected to be taxable as it
relates to a prospective share transaction.
7. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
owners of the Company 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.
H1 FY23 H1 FY22
(unaudited)
(unaudited)
Weighted average number of shares Million 575.4 572.6
Effect of dilutive securities Million 5.5 5.7
Diluted number of shares Million 580.9 578.3
Underlying basic earnings per share figures are presented below, in addition
to the basic and diluted earnings per share, because the Directors consider
this gives a more relevant indication of underlying business performance and
reflects the adjustments to basic earnings per share for the impact of
specific adjusting items (see note 3) and tax thereon.
Underlying basic and diluted EPS H1 FY23 H1 FY22^
(unaudited)
(unaudited)
Profit attributable to the owners of the Company £ million 112.4 22.3
Remove (profit)/loss after tax in respect of specific adjusting items £ million (47.0) 24.3
Underlying profit after taxation £ million 65.4 46.6
Weighted average number of shares Million 575.4 572.6
Underlying basic EPS Pence 11.4 8.1
Diluted number of shares Million 580.9 578.3
Underlying diluted EPS Pence 11.3 8.1
Basic and diluted EPS H1 FY23 H1 FY22^
(unaudited)
(unaudited)
Profit attributable to the owners of the Company £ million 112.4 22.3
Weighted average number of shares Million 575.4 572.6
Basic EPS - total Group Pence 19.5 3.9
Diluted number of shares Million 580.9 578.3
Diluted EPS - total Group Pence 19.3 3.9
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
8. Net cash
All figures in £ million 30 September 2022 30 September 2021 31 March
(unaudited)
(unaudited)
2022
(audited)
Current financial assets/(liabilities)
Deferred financing costs 0.6 0.3 0.4
Derivative financial assets 53.7 - 0.2
Lease liabilities (5.8) (5.7) (5.5)
Derivative financial liabilities (0.2) (2.5) (1.4)
Total current net financial assets/(liabilities) 48.3 (7.9) (6.3)
Non-current financial assets/(liabilities)
Deferred financing costs 0.7 0.7 0.5
Derivative financial assets 12.1 - -
Lease liabilities (17.2) (18.7) (16.6)
Derivative financial liabilities (0.2) (0.6) (0.6)
Total non-current net financial liabilities (4.6) (18.6) (16.7)
Total net financial assets/(liabilities) 43.7 (26.5) (23.0)
Cash and cash equivalents 220.3 165.7 248.1
Total net cash as defined by the Group 264.0 139.2 225.1
9. Cash flows from operations
All figures in £ million H1 FY23 H1 FY22^ (unaudited) FY22 (audited)
(unaudited)
Profit after tax for the period 112.4 22.3 90.0
Adjustments for:
Taxation (income)/expense (7.9) 20.1 29.7
Net finance income (4.4) (1.4) (3.1)
Gain on acquisition funding foreign exchange derivatives (42.9) - -
Acquisition related remuneration costs not paid as at year end - - 0.9
Gain on sale of property (0.9) (0.5) (0.7)
Impairment in respect of property, plant and equipment - 1.2 1.7
Fair value gain in respect of contingent consideration - (0.6) (0.6)
Acquisition related remuneration costs not paid as at year end - 0.9 -
Amortisation of purchased or internally developed intangible assets 3.4 2.8 5.4
Amortisation of intangible assets arising from acquisitions 5.6 5.4 10.7
Depreciation of property, plant and equipment 23.5 22.9 46.2
Share of post-tax gain of equity accounted entities (0.3) - (0.3)
Share-based payments charge 1.0 3.6 7.4
Retirement benefit contributions in excess of income statement expense 0.6 0.7 (1.8)
Pension past service cost - - 2.4
Net movement in provisions - (0.2) (1.0)
(Increase)/Decrease in inventories (3.9) (6.2) 1.4
Decrease/(Increase) in receivables 16.0 18.5 (12.8)
(Decrease)/Increase in payables (2.7) (25.3) 34.2
Changes in working capital 9.4 (13.0) 22.8
Net cash flow from operations 99.5 64.2 209.7
Reconciliation of net cash flow from operations to underlying net cash flow
from operations to free cash flow
All figures in £ million H1 FY23 (unaudited) H1 FY22^ (unaudited) FY22 (audited)
Net cash flow from operations 99.5 64.2 209.7
Add back cash impact of specific adjusting item: acquisition and disposal 2.4 4.1 3.7
costs
Add back cash impact of specific adjusting item: restructuring costs 2.4 - -
Add back cash impact of specific adjusting item: digital investment 2.5 1.9 1.9
Underlying net cash flow from operations 106.8 70.2 215.3
Less: tax and net interest payments (17.8) (13.5) (21.0)
Less: purchases of intangible assets and property, plant & equipment (48.5) (46.9) (84.3)
Free cash flow 40.5 9.8 110.0
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
Underlying cash conversion ratio
H1 FY23 (unaudited) H1 FY22 (unaudited) FY22 (audited)
Underlying EBITDA - £ million 101.0 79.1 189.5
Underlying net cash flow from operations - £ million 106.8 70.2 215.3
Underlying cash conversion ratio - % 106% 89% 114%
10. Financial risk management
The interim financial statements do not include all financial risk management
information and disclosures required in annual financial statements; they
should be read in conjunction with the Group's annual financial statements as
at 31 March 2022. 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 2022, are as follows:
All figures in £ million Level 1 Level 2 Level 3 Total
Assets:
Current derivative financial instruments - 53.7 - 53.7
Non-current derivative financial instruments - 12.1 - 12.1
Liabilities:
Current derivative financial instruments - (0.2) - (0.2)
Non-current derivative financial instruments - (0.2) - (0.2)
Total - 65.4 - 65.4
The following table presents the Group's assets and liabilities that are
measured at fair value as at 31 March 2022:
All figures in £ million Level 1 Level 2 Level 3 Total
Assets:
Current derivative financial instruments - 0.2 - 0.2
Non-current derivative financial instruments - - - -
Liabilities:
Current derivative financial instruments - (1.4) - (1.4)
Non-current derivative financial instruments - (0.6) - (0.6)
Total - (1.8) - (1.8)
The fair value of current and non-current derivative financial instruments
assets at half year increased significantly from year end due to forward
foreign exchange and interest rate contracts put in place to cover the
acquisition of Avantus Federal and fix interest costs in line with Group risk
management policies.
For cash and cash equivalents, trade and other receivables and bank and
current borrowings, the fair value of the financial instruments approximate to
their carrying value as a result of the short maturity periods of these
financial instruments. For trade and other receivables, allowances are made
within the carrying value for credit risk. For other financial instruments,
the fair value is based on market value, where available. Where market values
are not available, the fair values have been calculated by discounting cash
flows to net present value using prevailing market-based interest rates
translated at the year-end rates, except for unlisted fixed asset investments
where fair value equals carrying value. There have been no transfers between
levels.
11. Dividends
An analysis of the dividends paid and proposed in respect of the period ended
30 September 2022 and comparative periods is provided below:
Pence per ordinary share £m Date paid/payable
Interim FY23 2.4 13.8 Feb 2023
Interim FY22 2.3 13.2 Feb 2022
Final FY22 5.0 28.8 Aug 2022
Total for the year ended 31 March 2022 7.3 42.0
The interim dividend is 2.4p (Interim FY22: 2.3p). The dividend will be paid
on 3 February 2023. The ex-dividend date is 5 January 2023 and the record date
is 6 January 2023.
12. Goodwill
Goodwill is allocated across five cash generating units ('CGUs') within the
EMEA Services segment and four CGUs within the Global Products segment. The
full list of CGUs that have goodwill allocated to them is as follows:
All figures in £ million Primary reporting segment 30 September 2022 30 September 2021 31 March
2022
(unaudited) (unaudited)
(audited)
US Technology Solutions Global Products 49.0 40.5 41.5
US C5ISR Global Products 40.9 33.8 34.6
Target Systems Global Products 25.1 24.3 24.7
Space Products Global Products - 5.7 5.6
QinetiQ Germany EMEA Services 2.7 2.7 2.6
Inzpire EMEA Services 11.7 11.7 11.7
QinetiQ Training and Simulation EMEA Services 7.8 7.8 7.8
Naimuri EMEA Services 14.8 14.8 14.8
Australia EMEA Services 6.3 5.8 6.1
Net book value 158.3 147.1 149.4
Goodwill is attributable to the excess of consideration over the fair value of
net assets acquired and includes expected synergies, future growth prospects
and employee knowledge, expertise and security clearances. The Group tests
each CGU for impairment annually, or more frequently if there are indications
that goodwill might be impaired. Impairment testing is dependent on
management's estimates and judgments, particularly as they relate to the
forecasting of future cash flows, the discount rates selected and expected
long-term growth rates. As at 31 March 2022, significant headroom existed in
all CGUs with the exception of QinetiQ Germany (see below) and management
considers that there are no likely variations in the key assumptions which
would lead to an impairment being recognised in those other CGUs.
The carrying value of the goodwill for the Germany CGU as at 30 September 2022
was £2.7m (31 March 2022: £2.6m). As at 31 March 2022, headroom (the excess
of calculated value in use compared to carrying value) was small following
re-baselining of the business plan. We are seeing positive progress in FY23,
securing an important renewal of the core contract until June 2023, however
the market remains challenging.
The key sensitivity impacting on the value in use calculations for the Germany
CGU is the terminal year cash flows, with the core contract contributing
approximately one third of the business's revenue in the terminal year (2027).
Should this key contract not be successfully won (on a long-term basis) in
June 2023 then there would be a significant decrease in future cash flows and
this would lead to full impairment of the residual £2.7m carrying value of
goodwill together with an impairment charge of approximately £1.3m against
the carrying value of intangible assets. An increase in the discount rate of
1% or a decrease in the terminal growth rate of 1% would decrease the value in
use by £7.0m and £5.3m respectively.
The Goodwill associated with Space Products is related to Space NV and has
been reclassified as Assets held for sale, per note 18.
13. Post-retirement benefits
In the UK the Group operates the QinetiQ Pension Scheme (the Scheme) for
approximately one quarter of its UK employees. The Scheme closed to future
accrual on 31 October 2013 and there is no on-going service cost. The Scheme
is in a net asset position with the market value of assets in excess of the
present value of Scheme liabilities. These have the values set out below as at
each period end.
All figures in £ million 30 September 2022 30 September 2021 31 March
2022
(unaudited) (unaudited)
(audited)
Total market value of Scheme assets 1,429.6 2,139.8 2,065.7
Present value of Scheme liabilities (1,220.6) (1,862.4) (1,703.5)
Net pension asset before deferred tax 209.0 277.4 362.2
Deferred tax liability (58.3) (75.7) (96.4)
Net pension asset after deferred tax 150.7 201.7 265.8
The balance sheet net pension asset is a snapshot view which can be
significantly influenced by short-term market factors. The calculation of the
net asset depends on factors which are beyond the control of the Group -
principally the value at the balance sheet date of the various categories of
assets in which the Scheme has invested and long-term interest rates and
inflation rates used to value the Scheme's liabilities. This is particularly
pertinent in the current economic climate whilst markets are extremely
volatile. Sensitivities and risks are described below.
Per the Scheme rules the Company has an unconditional right to a refund of any
surplus, assuming gradual settlement of all liabilities over time. Such
surplus may arise on cessation of the Scheme in the context of IFRIC 14
paragraphs 11(b) and 12 and therefore the full net pension asset can be
recognised on the Group's balance sheet and the Group's minimum funding
commitments to the Scheme do not give rise to an additional balance sheet
liability.
The fair value of the QinetiQ Pension Scheme assets, which are not intended to
be realised in the short term and may be subject to significant changes before
they are realised, were:
All figures in £ million 30 September 2022 30 September 2021 31 March
2022
(unaudited) (unaudited)
(audited)
Equities - quoted 176.9 173.4 176.1
Equities - unquoted 41.2 48.1 44.7
Liability driven investment 252.4 327.0 291.8
Asset backed security investments 116.2 499.5 501.7
Alternative bonds 242.7 250.7 208.6
Corporate bonds 94.4 92.9 97.4
Property funds 13.9 48.3 29.5
Cash and other equivalents 16.9 17.3 78.5
Derivatives (21.8) (5.3) (8.5)
Insurance buy-in policy 496.8 687.9 645.9
Total market value of Scheme assets 1,429.6 2,139.8 2,065.7
The Scheme's assets do not include any of the Group's own transferable
financial instruments, property occupied by, or other assets used by the
Group.
The movement in the net pension asset (before deferred tax) is set out below:
All figures in £ million 30 September 2022 30 September 2021 31 March
2022
(unaudited) (unaudited)
(audited)
Opening net pension asset before deferred tax 362.2 214.3 214.3
Net finance income 4.9 2.3 4.5
Net actuarial (loss)/gain (157.5) 61.5 144.0
Contributions by the employer - - 2.9
Past service cost - - (2.4)
Administration expenses (0.6) (0.7) (1.1)
Closing net pension asset before deferred tax 209.0 277.4 362.2
Assumptions
The major assumptions used in the IAS 19 valuations of the Scheme were:
30 September 2022 (unaudited) 30 September 2021 (unaudited) 31 March 2022
(audited)
Un-insured members Insured members Un-insured members Insured members Un-insured members Insured members
Discount rate applied to Scheme liabilities 4.95% 5.35% 2.10% 2.05% 2.70% 2.80%
CPI inflation assumption 3.00% 2.95% 2.75% 2.70% 2.90% 3.00%
Net rate (discount rate less inflation) 1.95% 2.40% (0.65%) (0.65%) (0.20%) (0.20%)
Assumed life expectancies(at age 60) in years:
For males currently aged 40 28.4 n/a 28.4 n/a 28.4 n/a
For females currently aged 40 30.7 n/a 30.7 n/a 30.7 n/a
For males currently aged 60 26.7 22.0^ 26.7 23.2^ 26.7 22.0^
For females currently aged 60 28.6 23.7^ 28.6 25.4^ 28.6 23.7^
^For pensioners currently aged 65
Risks
The Group is exposed to a number of risks in respect to the valuation of the Scheme, the most significant of which are detailed below:
Volatility in market conditions
Results under IAS 19 can change dramatically depending on market conditions.
The present value of Scheme liabilities is linked to yields on AA-rated
corporate bonds, while many of the assets of the Scheme are invested in
various forms of assets subject to fluctuating valuations. Changing markets in
conjunction with discount rate volatility will lead to volatility in the net
pension asset on the Group's balance sheet and in other comprehensive income.
To a lesser extent this will also lead to volatility in the IAS 19 pension net
finance income in the Group's income statement.
Choice of accounting assumptions
The calculation of the present value of Scheme liabilities involves projecting
future cash flows from the Scheme many years into the future. This means that
the assumptions used can have a material impact on the balance sheet position
and profit and loss charge. In practice future experience within the Scheme
may not be in line with the assumptions adopted. For example, members could
live longer than foreseen or inflation could be higher or lower than allowed
for in the calculation of the liabilities. Sensitivities to the main
assumptions are set out below.
Key assumptions Indicative impact on Scheme assets Indicative impact on Scheme liabilities Indicative impact on net pension asset
Increase discount rate by 0.1% Decrease by £36.2m Decrease by £19.6m Decrease by £16.6m
Increase rate of inflation by 0.1% Increase by £26.2m Increase by £12.2m Increase by £14.0m
Increase life expectancy by one year Increase by £20.1m Increase by £45.5m Decrease by £25.4m
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 2022 this hedges
against approximately 95% of the interest rate risk and also 95% of the
inflation rate risk, as measured on the Trustees' gilt-funded basis. Post
period end, due to the increased volatility in gilt yields and reflecting
increased liquidity requirements for Schemes running LDI portfolios, the
hedges have been amended to cover approximately 65% of the interest rate risk
and 80% 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.
In addition to the sensitivity of the liability side of the net pension asset
(which will impact the value of the net pension asset) the net pension asset
is also exposed to significant variation due to changes in the fair value of
Scheme assets. A specific sensitivity on assets has not been included in the
above table but any change in valuation of assets flows straight through to
the value of the net pension asset e.g. if equities fall by £10m then the net
pension asset falls by £10m. The values of unquoted assets assume that an
available buyer is willing to purchase those assets at that value. For the
Group's portfolio of assets, the unquoted alternative bonds, unquoted
corporate bonds, unquoted equities and the property assets of £242.7m,
£94.4m, £41.2m and £13.9m respectively are the assets with most uncertainty
as to valuation as at 30 September 2022.
The accounting assumptions noted above are used to calculate the period end
present value of Scheme liabilities 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
completed triennial valuation of the Scheme was a net surplus of £176.5m as
at 30 June 2020. 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 IAS 19
accounting basis valuation uses corporate bond yields as the base.
14. 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. Included in retained earnings at 30 September 2022 are 4,228,478 shares
(31 March 2022: 6,816,291 shares).
In H1 FY23 the Group granted 0.2 million new share-based awards to employees
(H1 FY22: 0.4 million).
15. Related party transactions with equity accounted investments
During H1 FY23 there were sales to associates and joint ventures of £0.3m (H1
FY22: £2.4m). At the period end there were outstanding receivables from
associates and joint ventures of £0.5m (30 September 2021: £1.1m).
16. Capital commitments
The Group has the following capital commitments for which no provision has
been made:
all figures in £ million 30 September 2022 (unaudited) 31 March 2022
(audited)
Contracted 53.3 34.7
Capital commitments at 30 September 2022 include £26.3m (31 March 2022:
£24.5m) in relation to property, plant and equipment that will be wholly
funded by a third party customer under a long-term contract arrangement. These
primarily relate to investments under the LTPA contract.
17. Contingent liabilities
The Company has on occasion been required to take legal action to protect its
intellectual property rights, to enforce commercial contracts or otherwise and
similarly to defend itself against proceedings brought by other parties,
including in respect of environmental and regulatory issues. Provisions are
made for the expected costs associated with such matters, based on past
experience of similar items and other known factors, taking into account
professional advice received, and represent management's best estimate of the
likely outcome. The timing of utilisation of these provisions is uncertain
pending the outcome of various court proceedings, ongoing investigations and
negotiations. However, no provision is made for proceedings which have been or
might be brought by other parties unless management, taking into account
professional advice received, assesses that it is more likely than not that
such proceedings may be successful. Contingent liabilities associated with
such proceedings have been identified but the Directors are of the opinion
that any associated claims that might be brought can be resisted successfully
and therefore the possibility of any outflow in settlement is assessed as
remote.
18. Post balance sheet events (disposal group held for sale)
Subsequent to the period end the Group completed a transaction for the
disposal of the non-core Space NV business for a cash consideration of €32m
(on a cash-free debt-free basis). The assets and liabilities of Space NV have
been reclassified as Assets held for sale and Liabilities of disposal group
held for sale as at 30 September 2022.
Responsibility statements of the Directors in respect of the interim financial
report
The Directors confirm that these condensed interim financial statements have
been prepared in accordance with UK adopted International Accounting Standard
34, 'Interim Financial Reporting' and Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct Authority and that
the interim management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8, namely:
● an indication of important events that have occurred during the first six
months 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 financial year; and
● material related-party transactions in the first six months and any material
changes in the related-party transactions described in the last annual report.
The Directors of QinetiQ Group plc are listed in the QinetiQ Group plc Annual
Report for 31 March 2022. A list of current directors is maintained on the
QinetiQ Group plc website: www.qinetiq.com (http://www.QinetiQ.com) .
By order of the Board
Steve Wadey Carol Borg
Chief Executive Officer Chief Financial Officer
10 November 2022 10 November 2022
Independent review report to QinetiQ Group plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed QinetiQ Group plc's condensed consolidated interim financial
statements (the 'interim financial statements') in the Interim Results of
QinetiQ Group plc for the 6 month period ended 30 September 2022 (the
"period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim financial statements comprise:
· the Condensed consolidated balance sheet as at 30 September 2022;
· the Condensed consolidated income statement and Condensed consolidated
statement of comprehensive income for the period then ended;
· the Condensed consolidated cash flow statement for the period then ended;
· the Condensed consolidated statement of changes in equity for the period then
ended; and
· the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Results of QinetiQ
Group plc have been prepared in accordance with UK adopted International
Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council for use in the United Kingdom. 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, 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.
We have read the other information contained in the Interim Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with this ISRE. However, future events or
conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Interim Results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the Interim Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the Interim Results including the
interim financial statements, the directors are responsible for assessing the
group's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the Interim Results based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
Southampton
10 November 2022
Glossary
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation and amortisation
EPS Earnings per share
EDP Engineering Delivery Partner
IAS International Accounting Standards
IFRS International Financial Reporting Standards
LTPA Long Term Partnering Agreement: A 25-year contract (re-priced every five
years) established in 2003 to manage the MOD's ranges.
MOD UK Ministry of Defence
SGAC Statutory Guidance for Allowable Costs regulations
SSRO Single Source Regulations Office
T&E Test and Evaluation
Alternative performance measures ('APMs')
The Group uses various non-statutory measures of performance, or APMs. Such
APMs are used by management internally to monitor and manage the Group's
performance and also allow the reader to obtain a proper understanding of
performance (in conjunction with statutory financial measures of performance).
The APMs used by QinetiQ are set out below:
Measure Explanation Note reference to calculation or reconciliation to statutory measure
Organic growth The level of period-on-period growth, expressed as a percentage, calculated at Note 2
constant prior year foreign exchange rates, adjusting for business
acquisitions and disposals to reflect equivalent composition of the Group.
Underlying operating profit Operating profit as adjusted to exclude 'specific adjusting items'. Note 2
Underlying operating margin Underlying operating profit expressed as a percentage of revenue. Note 2
Underlying net finance income/expense Net finance income/expense as adjusted to exclude 'specific adjusting items'. Note 5
Underlying profit before/after tax Profit before/after tax as adjusted to exclude 'specific adjusting items'. Note 3
Underlying effective tax rate The tax charge for the period excluding the tax impact of 'specific adjusting Note 6
items' expressed as a percentage of underlying profit before tax.
Underlying basic and diluted EPS Basic and diluted earnings per share as adjusted to exclude 'specific Note 7
adjusting items'.
Specific adjusting items Amortisation of intangible assets arising from acquisitions; Note 3
acquisition-related costs; impairment of property; gains/losses on disposal of
property, investments and intellectual property; net pension finance income;
pension past service costs, acquisition and disposal costs; costs of
significant group-wide restructuring programmes; Digital investment, tax
impact of the preceding items; and significant non-recurring tax movements.
Orders The level of new orders (and amendments to existing orders) booked in the N/A
period.
Backlog, funded backlog or order book The expected future value of revenue from contractually committed and funded N/A
customer orders.
Book to bill ratio Ratio of funded orders received in the period to revenue for the period, N/A
adjusted to exclude revenue from the 25-year LTPA contract due to the
significant size and timing differences of LTPA order and revenue recognition
which may distort the ratio calculation.
Net cash Net cash as defined by the Group combines cash and cash equivalents with other Note 8
financial assets and liabilities, primarily available for sale investments,
derivative financial instruments and lease assets/ liabilities.
Underlying net cash flow from operations Net cash flow from operations before cash flows of specific adjusting items. Note 9
Underlying operating cash conversion The ratio of underlying net cash flow from operations to underlying EBITDA. Note 9
Underlying EBITDA EBITDA (as defined above), adjusted to exclude 'specific adjusting items'. Note 9
Free cash flow Underlying net cash flow from operations less net tax and interest payments Note 9
less purchases of intangible assets and property, plant and equipment plus
proceeds from disposal of plant and equipment.
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