REG - QinetiQ Group plc - Results for the year ended 31 March 2023
25/05/2023 07:00
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RNS Number : 5828A QinetiQ Group plc 25 May 2023
Preliminary Results
25 May 2023
Serving the national security interests of our customers
Results for the year ended 31 March 2023
Statutory results Underlying* results
FY23 FY22 FY23 FY22
Revenue £1,580.7m £1,320.4m £1,580.7m £1,320.4m
Operating profit(2) £172.8m £123.7m(1) £178.9m £137.4m
Profit after tax £154.4m £90.0m £152.9m £118.1m
Earnings per share 26.8p 15.7p 26.5p 20.6p
Full year dividend per share 7.7p 7.3p 7.7p 7.3p
Funded order backlog £3,070.3m £2,828.8m
Orders £1,724.1m £1,226.6m
Net cash inflow from operations £240.6m £215.1m(1) £270.1m £220.7m(1)
Net (debt)/cash £(206.9)m £225.1m £(206.9)m £225.1m
Excellent operational performance across the Group
- Orders up 41%, a record-high of £1.7bn, growing our backlog to £3.1bn
- Revenue is up 20% and profit is up 30%; up 11% and 12% respectively on an
organic basis, excluding the impact of the write-down in FY22
- Cash performance remains strong with 106% conversion
- Statutory operating profit of £172.8m, an increase of 40%
- Returns are healthy with underlying EPS up to 26.5p and the full year dividend
up 5% to 7.7p
The defence & security context is heightening market demand for our
distinctive offerings
- We now see an addressable market of more than £30bn per year
- We have delivered a step-change in our global growth platform with two
strategic acquisitions in the US and Australia, both are performing well and
the integrations are on-track
FY24 expectations unchanged, upgraded long-term guidance
- We are targeting high single digit organic revenue growth at 11-12% margin
- We have increased the scale of our ambition to grow the company to approx.
£3bn revenue by FY27, including further strategic acquisitions
- This upgraded guidance will approximately double our revenue and profit over
the next 4 years, a 20% improvement to our previous guidance
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary
(1) Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20 to
the financial statements for details.
(2) Underlying operating profit refers to operating profit from segments. See
note 2 for details.
Steve Wadey, Group Chief Executive Officer said:
"We have delivered an excellent set of results characterised by a record order
intake and strong operational performance across the Group. The integration of
the two strategically significant acquisitions of Avantus and Air Affairs
gives us a compelling global platform from which to grow.
"We are operating in an uncertain world and the heightened threat environment
is increasing demand for our distinctive offerings, which are closely aligned
to our customers' priorities. We are now seeing an increased addressable
market presenting opportunities for further growth and enhanced shareholder
returns.
"As a result we have accelerated our global ambition to build an integrated
global company with c.£3bn revenue by FY27. We move forward into FY24 with
optimism due to our track-record of performance and confidence in our
strategy. We are proud of the critical role we play serving the national
security interests of our customers."
Preliminary results presentation:
Management will host a presentation at 09:30 hours BST on 25 May 2023 at
Numis' auditorium, 45 Gresham Street, London EC2V 7BF. The presentation will
also be shared as a live webcast. To register to join this event, please see
details on our website here:
https://www.qinetiq.com/en/investors/results-reports-and-presentations/full-year-results-webcast-2023
(https://www.qinetiq.com/en/investors/results-reports-and-presentations/full-year-results-webcast-2023)
You are warmly invited to join, either in person or virtually.
About QinetiQ:
QinetiQ is an integrated global defence and security company focused on
mission-led innovation. QinetiQ employs more than 8,000 highly-skilled people,
committed to creating new ways of protecting what matters most; testing
technologies, systems, and processes to make sure they meet operational needs;
and enabling customers to deploy new and enhanced capabilities with the
assurance they will deliver the performance required.
Visit our website www.QinetiQ.com. Follow us on LinkedIn and Twitter @QinetiQ.
For further information please contact:
John Haworth, Group Director Investor Relations: +44 (0) 7920 545841
Lindsay Walls, Group Director Communications (Media enquiries): +44 (0) 7793 427582
Basis of preparation:
Throughout this document, certain measures are used to describe the Group's
financial performance which are not recognised under IFRS or other generally
accepted accounting principles (GAAP). The Group's Directors and management
assess financial performance based on underlying measures of performance,
which are adjusted to exclude certain 'specific adjusting items'. In the
judgment of the Directors, the use of alternative 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 the document.
Year references (FY23, FY22, FY21, 2023, 2022, 2021) refer to the year ended
31 March.
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.
Group Chief Executive Officer's Review
We delivered excellent operational performance throughout the year, reflecting
continued disciplined execution of our strategy. We grew orders by 41% at a
record-high of more than £1.7bn, demonstrating the continued high demand for
our distinctive offerings. We achieved 20% revenue growth, 11% on an organic
constant currency basis excluding the impact of the write-down in the prior
year, with underlying operating profit margin at 11.3%. In addition to the
robust orders, revenue and profit performance, cash flow management continues
to remain strong with 106% underlying cash conversion. We have successfully
reduced leverage to 0.8x net debt to EBITDA, a year ahead of our original
guidance.
EMEA Services continues to perform well, delivering 10% organic revenue growth
and margins of 11.6%, with ongoing investment in our people supporting
long-term growth. Global Products performance has been strong with revenue
growth of 20% organically and profit margin of 10.4%. In particular our US
business has performed well, with high order intake of $280m and impressive
revenue growth of 25%, prior to the benefit of the Avantus acquisition. We
have won a number of key contracts in the US that will support the delivery of
our ambitious growth targets. The performance throughout the year in the US
demonstrates greater stability and resilience, providing a strong platform for
continued growth.
We completed three M&A transactions in late-2022, the disposal of QinetiQ
Space NV in Belgium, the acquisition of Air Affairs in Australia, and of most
strategic significance the acquisition of Avantus in the US. These
transactions demonstrate the disciplined execution of our strategy and focused
deployment of capital to drive long-term growth, building one integrated
global defence and security company operating in our three home countries with
six distinctive offerings.
Today we are announcing an increase in our global ambition for the company. We
are targeting high single digit organic revenue growth at stable 11-12%
margins, supplemented by strategically aligned acquisitions to build a
business with revenues of c.£3bn by FY27. As we pursue our strategy the
geographic mix of the company will change. Whilst the UK will scale by 50%, we
will more than double the scale of our businesses in Australia and the US.
This evolving mix across our home countries will result in delivering higher
revenue growth at 11-12% margins, representing upper quartile performance. The
result of this upgrade in our long-term guidance will deliver an increase of
approximately 20% profit by FY27, compared to our previous guidance.
Strategic achievements
We have continued to make good progress implementing our strategy. Our major
strategic achievements as we are building an integrated global defence and
security company are:
- Partnering to deliver experimentation, test and evaluation for the Royal
Navy's fleet - We renewed our Maritime Strategic Capability Agreement (MSCA)
with the Submarine Delivery Agency. The 10 year, £260m contract, will deliver
critical capabilities in Hydromechanics, Stealth and Signatures, Structures
and Maritime Life Support that assure the UK's ability to design, build and
safely operate the Royal Navy's surface and subsurface fleet, including the
UK's Continuous at Sea Deterrent. This significant 10 year commitment from the
MoD, which includes an option for an additional 5 years, is a testament to the
value that QinetiQ has delivered since 2008 when the original 15 year contract
was secured.
- Transforming Mission Data for the UK MOD - The UK MOD has signed an £80m, 10
year industry partnership, with QinetiQ-led Team Pegasus enhancing the UK's
ability to provide its military platforms and systems with the data needed to
keep them safe and effective. Team Pegasus will work in partnership with the
MOD for a 10 year period on the transformation project, known as SOCIETAS,
providing a specialist mission data and electronic warfare skills solution
alongside training and IT support.
- Delivering Digital Night Vision Technology for US Army - We have been awarded
a $93m single award four year contract to support the US Army with the
development, testing, deployment and training of Digital Night Vision
Technology (DNVT) to support military operations. DNVT will substantially
enhance the user's situational awareness and decision-making abilities by
fielding digital night vision capabilities coupled with component technology
enhancements.
- Acquisition of Avantus extending into US intelligence customer - At the end of
November 2022 we completed the acquisition of Avantus for an enterprise value
of $590 million. 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 has a strong track record of achieving
speed-to-mission impact. Since completion, Avantus has continued to perform
well, including two successful re-competes and selection for a new $80m
multi-year contract with a national intelligence customer.
- Acquisition of Air Affairs expanding Australian threat representation - In
December 2022 we completed the acquisition of Air Affairs (Australia) Pty Ltd
for a cash consideration of A$53m. 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. The business positions QinetiQ as a market leader in air
threat representation and aerial target services and further extends the scope
of our capabilities.
- Developing new laser technology with Australian Armed Forces - We have
partnered with the Australian Department of Defence to develop and manufacture
a high energy defensive laser weapon system prototype. The contract involves
leveraging QinetiQ's high-power laser technology and test and evaluation
expertise from the UK in collaboration with DST's scientific innovation, to
deliver enhanced sovereign capability to the Australian Defence Force.
The growing market opportunity
The global security situation continues to worsen and tensions remain high. In
Europe, Russia's invasion of Ukraine is reshaping their relationship with the
West, and the threat from China remains uncertain. These dynamics are
driving defence and security policies, prioritisation of budgets and
modernisation of capabilities. Our major focus is on our three home countries
who have a shared defence and security mission under the trilateral
partnership known as AUKUS.
The US has requested the largest ever Research & Development and Test
& Evaluation, budget at $145bn, increasing 40% since 2020. The UK has
refreshed its Integrated Review and is investing £6.6bn in R&D and
experimentation over 4 years. And the Australian government has completed its
Defence Strategic Review and is increasing defence spending by 7% to $53bn.
Beyond the new nuclear submarine programme, all three countries are committed
to working together on a range of advanced capabilities and technologies,
critical to future warfare, such as advanced cyber and directed energy.
These areas align well with our strengths and provide attractive opportunities
over the long-term.
In response to this geo-political context, we see greater opportunity from the
widening threat spectrum and our enhanced offerings. As a result, we have
increased our addressable market from £20bn to more than £30bn per year.
This increase is driven by RDT&E markets growing in each of our home
countries, adding intelligence and security markets for the first time, and
our offerings are increasingly aligned with high-priority customer needs,
enabling us to grow market share.
Building a £3bn defence and security company
QinetiQ is a purpose-driven company: protecting lives and securing the vital
interests of our customers. Our purpose drives our strategy: to build an
integrated global defence and security company, operating in attractive
markets with distinctive offerings, to deliver sustainable growth for our
shareholders.
Our strategy is increasingly relevant and provides focus for our business
decisions, our people and our investment choices. Our multi-domestic strategy
has a clear focus on building one integrated global defence and security
company, in three home countries, with six distinctive offerings:
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, the US, Australia, Canada experimentation, test, training, information, engineering and autonomous technologies to enable our customers' operational mission at pace
and Germany systems
We have a clear business plan, guiding our strategic focus and investment
choices, to enhance our global platform for growth.
The integration of Avantus is ahead of plan and will complete before the end
of the year. The business continues to perform well, delivering high quality
operational outcomes for our customers, and winning $100m of customer business
including 100% of re-competes. The leadership team is now fully integrated and
working together to pursue a number of revenue synergies by leveraging and
cross-selling our offerings to existing and new customers, for example our
sensor solutions for the US Army into the US Intelligence community. We've had
a strong start to the year and we remain excited about the opportunity we've
created, building a disruptive mid-tier defence and intelligence company, in
the largest defence and security market in the world.
Following the acquisitions of Avantus and Air Affairs, we will now achieve our
previous FY27 growth ambition and guidance organically. Given our significant
growth potential, we have chosen to increase the scale of our ambition. We are
upgrading our revenue target to deliver high single digit organic growth,
supplemented by further strategic acquisitions, to build the company to £3bn
revenue approximately doubling revenue and profit over the next four years.
As we pursue our strategy the geographic mix of the company will change.
Whilst the UK will scale by 50%, we will more than double the scale of our
businesses in Australia and the US. This evolving mix across our home
countries will result in delivering higher revenue growth at 11-12% margins,
representing upper quartile performance. The result of this upgrade in our
long-term guidance will deliver an increase of approximately 20% profit by
FY27, compared to our previous guidance. We remain disciplined in the
execution of our strategy and have a robust plan to achieve this increased
ambition, which will accelerate sustainable profitable growth.
Creating an environment for our people to thrive is critical to our
performance and growth. We have increased employee engagement to a new high
and invested in our response to ongoing cost of living pressures to retain,
attract and reward the best talent across the whole company. We have also
continued to strengthen our leadership with over 35% of our Top 100 leaders
being American or Australian. We have a leadership team with the diversity,
skills and experience to deliver the scale of our AUKUS growth ambition.
In response to today's threat environment, our people are delivering for our
customers with increasing agility and pace. They are focused on co-creating
innovative solutions that are directly aligned with the priorities of the
AUKUS customers in advanced technologies, such as sensing, autonomy and
directed energy. To maintain our relevance at the forefront of innovation, we
continue to invest in our ongoing Internal Research and Development programme
of c.£20m per year.
Our people are also passionate about protecting the environment and delivering
sustainable solutions for our customers. This year we have continued to make
progress on our net zero plan and reduced our Scope 1 & 2 emissions by a
further 12%. To accelerate progress, our top 1,000 managers have 17.5% of
their incentives aligned to delivery of our ESG commitments. This is just one
example of why we have been rated as a top ESG company in our industry by
Sustainalytics.
Outlook: FY24 expectations unchanged(1)
We enter FY24 with confidence, a healthy order-book and positive momentum with
61% revenue under contract. Consistent with our upgraded long-term guidance,
we expect to deliver high single digit revenue growth compared to the FY23
pro-forma revenue (full year effect of FY23 M&A activity); this equates to
high teens total revenue growth versus the FY23 reported revenue. Operating
profit margin will be at the lower end of the 11-12% range. Capital
expenditure is expected to remain within the £90m to £120m range.
(1) Analyst expectations (average) for FY24 operating profit as at 23/05/23:
£206m
Outlook: Longer-term upgraded guidance
We are targeting high single-digit organic revenue growth, supplemented by
strategically aligned acquisitions to build a circa £3bn company by FY27.
This increased level of growth will be delivered at stable margins of 11-12%,
reflecting the evolving geographic mix of the global company. Cash conversion
will remain strong at over 90%, supporting our ability to deploy capital
effectively to achieve our long-term growth ambition and deliver a return on
capital employed at the upper end of the 15-20% range.
Trading Environment
Global context
We are operating in an environment where there is an increasing threat of
wider global conflict. This follows Russia's full-scale invasion of Ukraine;
the threat posed by China's growing military power coupled with its push to
change global norms and potentially threaten its neighbours; the rise of
extremism in Africa; and ongoing tensions and conflict in the Middle East.
In parallel, rapidly emerging and evolving technologies continue to disrupt
traditional business and society with both positive and negative outcomes as
well as creating unprecedented vulnerabilities.
Strategic response
To meet these increasing challenges, the UK, US and Australia have reviewed
their strategic defence and security capabilities and investment priorities as
well as their allied activities.
UK
The 2023 Integrated Review Refresh (IRR) recognised the urgent and immediate
pressures brought about by the deteriorating security situation. In the Spring
2023 budget statement, the government announced that the UK defence budget
would be increased by £11bn over the next five years in response to these
growing threats. The IRR emphasised that strategic advantage in science and
technology is a core national priority. As announced in 2021, the UK MOD is
also 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.
As the UK 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 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 2022 National Defense Strategy and National Security Strategy recognised
an intensifying competitive landscape and the urgent need to sustain and
strengthen deterrence, with China as its pacing challenge. The 2024 Department
of Defense Budget Request builds on the principles of National Security
Strategy and has grown by nearly $100bn (13%) to $842bn since 2022. As part of
this, the FY24 research development test and evaluation budget request is the
largest ever at $145bn. This represents an increase of $26bn (22%) since FY22.
Investment in critical technology areas aimed at strengthening technological
advantage include: directed energy, hypersonics and integrated sensing and
cyber.
In the US, we are a market leader in robotics, autonomy and advanced sensing
solutions, an area of budget growth, delivering value to our customers through
the rapid development and deployment of disruptive solutions. With the
acquisition of Avantus we are also a leading cyber, data analytics and
software development provider. There is a growing need to provide actionable
intelligence into 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
The 2023 Defence Strategic Review addresses the prospect of major conflict in
the Indo-Pacific that directly threatens Australia's national interest. It
frames the priority of investment in Defence capability and posture to meet
Australia's security challenges through to 2032-33. In the 2023 Budget,
Defence spending will increase by 7% to AUD$52.6bn in 2023-24.
The Australian government reinforced its commitment to delivering on the
recommendations of the Defence Strategic Review, with plans to commence the
work to deliver Australia's nuclear-powered submarine program. Defence
spending as a proportion of GDP will lift above its current trajectory to be
0.2 per cent higher by 2032-33. As part of this, the Government announced it
would invest more than $19bn to implement the immediate priorities identified
in response to the Defence Strategic Review, namely:
• $9bn for the nuclear-powered submarine programme through AUKUS;
• $4.1bn for long-range strike capabilities;
• $3.8bn for northern base infrastructure and;
• $900m on defence innovation, to establish the Advanced Strategic Capabilities
Accelerator and through AUKUS Pillar 2.
We see many opportunities to support the Australian forces in modernising
sovereign defence capabilities, leveraging expertise from across QinetiQ.
The significance of the AUKUS Alliance
In September 2021, leaders of Australia, the United Kingdom, and the United
States announced the creation of an enhanced trilateral security partnership
called "AUKUS". AUKUS is intended to strengthen the ability of each government
to support security and defence interests, building on longstanding and
ongoing bilateral ties. It will promote deeper information sharing and
technology sharing; and foster deeper integration of security and
defence-related science, technology, industrial bases and supply chains.
The first initiative under AUKUS is a commitment to support Australia in
acquiring nuclear-powered submarines for the Royal Australian Navy. The second
initiative centres on enhancing joint capabilities and interoperability,
focusing on cyber and electronic warfare capabilities, artificial
intelligence, quantum technologies, additional undersea capabilities, as well
as hypersonic and counter-hypersonic capabilities.
With these collaboration activities involving technology development, trials
and experimentation, we anticipate increasing demand for support across each
of our three 'home' nations.
Broader international markets
The strategic landscape has undergone a seismic shift following Russia's
invasion of Ukraine in February 2022. This has provoked NATO to increase its
defence capabilities and readiness to respond, adding to the pressure for the
NATO member countries to increase their defence spending of at least 2% of
GDP. Following the announcement of Germany to increase defence spending by
€100bn over the next five years, many other NATO and European countries are
also increasing their defence and security investment.
While priority and investment focus will be attached to the prosecution 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.
Group Chief Financial Officer's Review
Overview of full year results
The Group has delivered excellent growth and underlying performance across all
metrics, reflecting continued disciplined execution of our strategy. We have
deployed our balance sheet to acquire Avantus and Air Affairs in the year,
expanding our capabilities in the US and Australia. Strong cash generation,
driven by disciplined working capital management, with underlying cash
conversion of 106% (FY22 restated: 113%), has successfully reduced leverage to
0.8x net debt to EBITDA, well ahead of our original guidance. The acquisitions
are performing as expected with integration on-track. The Global Products
segment has performed particularly well during FY23, driven by strong US
performance. The full year dividend is up 5% at 7.7p per share.
Record orders in the year, totalling £1,724.1m (FY22: £1,226.6m), a
year-on-year 41% increase, 37% on an organic basis excluding the impact of the
write-down in prior year; this demonstrates the continued high demand for our
six distinctive offerings. This has been driven by multi-year framework
contracts including a £260m, 10-year extension of the Maritime Strategic
Capability Arrangement (MSCA) contract to deliver critical sovereign
capabilities to the UK MoD, £404m of Engineering Delivery Partner (EDP)
framework orders and £80m for SOCIETAS within EMEA Services, and in Global
Products a $93m award for the Digital Night Vision Technology (DNVT) over
4-years.
We continue to see positive trends in our order book progression:
• Backlog: The Long-term Partnering Agreement (LTPA) is a large multi-year
contract that was booked in prior years - as we deliver non-tasking revenue
(c.£225m per annum) this will naturally reduce the LTPA order backlog.
Outside of the LTPA, with our high orders in FY23 and the addition of Avantus,
our backlog has seen significant growth: total order backlog as at 31 March
2023 was £3.1bn (FY22: £2.8bn).
• Opportunity size: As part of our previously stated strategy, we are also
seeing success in winning and delivering on larger longer-term contracts, with
47% of our FY23 orders from contracts over £5m in size, up from 28% three
years ago.
At the beginning of FY24 approximately £1.1bn of the Group's FY24 revenue was
under contract, compared to £900m (of the FY23 revenue) at the same point
last year. This notable increase reflects the strong performance on our key
framework contracts in EMEA Services and the good FY23 order intake in the US.
We delivered strong revenue growth of 20% to £1,580.7m (FY22: £1,320.4m),
11% on an organic basis excluding the impact of the write-down in prior year,
with operating profit margins within our guidance range at 11.3%,
demonstrating increasing demand for our six distinctive offerings. We saw a
10% organic revenue increase in EMEA Services primarily due to a 37%
year-on-year growth in EDP delivery and work delivered under the Major Service
Provider (MSP) contract in Australia. Global Products revenue increased 15%
organically excluding the write-down in the prior year, due to the strong
performance in the US business with the full rate CRS-I production contract
now underway following delays due to COVID-related delivery and supply chain
issues during the previous year. Our Targets business also delivered good
growth.
Operating profit from segments of £178.9m (FY22: £137.4m) was up 30%, this
represents 11.3% operating margin (FY22: 10.4%), consistent with our guidance
range of 11-12% demonstrating sustainable revenue growth at stable margins.
Global Products was the largest contributor to year-on-year growth, with this
segment at double-digit margins, 10.4% (FY22: 0.7%). The increase has been
driven by strong performance across the US business and the prior year being
impacted by the write-down. EMEA Services saw a modest decrease in operating
margin to 11.6% (FY22: 12.8%), driven by our investment in our people,
capabilities and tools.
Following a routine Financial Reporting Council (FRC) review of the
consolidated financial statements for the year ended 31 March 2022, the Group
engaged with the FRC which resulted in the decision to change its accounting
policy for Research and Development Expenditure Credits (RDEC). We welcomed
the FRC's review and have set out the impact of the change in accounting
policy in note 20. As a result we are now reporting RDEC under IAS 20 within
underlying operating profit.
To ensure consistency and clarity on our headline profit figures, our headline
profit figure remains as Operating profit from segments and we have determined
that any benefit arising from the RDEC change should not be attributed to
segmental performance. Statutory operating profit, as set out below, was
£172.8m (FY22 restated: £123.7m), including the impact of specific adjusting
items and RDEC income.
Underlying profit before tax increased 33% to £189.7m (FY22 restated:
£142.2m) in line with the increase in underlying operating profit, with
underlying net finance expense at £6.6m (FY22: £1.4m). Underlying net
finance expense increased due to the interest payable on the term loan drawn
down to fund the Avantus acquisition.
The acquisitions of Avantus and Air Affairs have together contributed £91.1m
revenue and £9.4m underlying operating profit in the year. Since completion
of the acquisitions, the businesses have continued to perform as expected and
integration is progressing on-track.
Specific adjusting items
In line with our previously approved policy, the total impact of specific
adjusting items (which are excluded from underlying performance due to their
distorting nature) on operating profit was a £23.5m cost (FY22: cost of
£19.9m). M&A activity during the year has contributed to the overall
level of specific adjusting items.
Acquisition and integration costs of £18.7m (FY22: £5.0m) comprise costs
associated with the Avantus and Air Affairs acquisitions which completed in
FY23.
Restructuring costs of £5.0m have been incurred as part of significant
Group-wide organisation redesign completed in FY23 to better align the
organisation structure with future growth ambitions of the Company. These
restructuring costs have been completed in year to enable our next step-change
in growth.
We continue to deliver on our digital investment programme to modernise the IT
infrastructure to support our future growth ambitions. The non-recurring costs
will be reported as specific adjusting items in the P&L, with ongoing
recurring operating costs (such as licence costs and overheads) remaining
within underlying operating costs. In FY23 the non-recurring cost of the
digital investment programme is £5.8m (FY22: £1.9m).
In FY23 specific adjusting items includes a £19.6m credit in respect of UK
MOD appropriation for RDEC. 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
the UK MoD, which is a change from the accounting judgement at FY22 year end.
Therefore the release of the liability is reported as a specific adjusting
item through operating profit.
Also included within specific adjusting items are a gain of disposal of the
Space NV business in Belgium of £15.9m, a gain on the sale of property of
£2.0m (FY22: £0.7m), financing income from pensions of £9.9m (FY22: £4.5m)
and amortisation of acquisition intangibles of £15.6m (FY22: £10.7m), the
last of which has increased due to the amortisation of new intangible assets
recognised on the FY23 acquisitions (primarily the Customer Relationships
asset associated with Avantus).
Tax
The total tax charge was £37.6m (FY22: £35.9m restated). The underlying tax
charge was £36.8m (FY22: £24.1m restated), on a higher underlying profit
before tax, with an underlying effective tax rate (ETR) of 19.4% for the year
ended 31 March 2023 (FY22: 16.9% restated). The underlying effective tax rate
is above the UK statutory rate primarily as a result of higher tax rates in
overseas jurisdictions.
The total specific adjusting items tax charge was £0.8m (FY22 charge:
£11.8m). The tax charge arises on the UK statutory rate change to 25% from
1 April 2023 (£4.6m) and a taxable Research and Development Allowances
clawback (£1.2m), offset by non-taxable profit on sale of Space NV (£3.0m)
and overseas rate differences (£2.5m).
In the Spring Budget 2021, the UK Government announced that from 1 April 2023
the corporation tax rate will increase from 19% to 25%. The 25% rate has been
substantively enacted at the balance sheet date. An adjustment was made in
FY22 and a further £4.6m adjustment has been made in FY23 to reflect that the
revised UK deferred tax balances that are expected to unwind at the new rate
of 25%.
The effective tax rate is expected to remain above the UK statutory rate,
subject to the impact of any tax legislation changes and the geographic mix of
profits. The OECD has released model rules for Pillar II of the Base Erosion
and Profit Shifting regulations covering application of a Global Minimum Tax.
The Group is monitoring progress of these rules and will engage with advisers
to assess any potential future impact on the tax charge.
RDEC was previously included as a tax benefit and included in the tax line,
reducing the ETR. Due to the change in treatment of RDEC, this has moved it
out of the tax line and into underlying operating profit, therefore the
headline tax rate has increased compared to prior year reporting periods. As
explained above, to be consistent with prior reporting and guidance the RDEC
benefit is not included in our headline reported operating profit from
segments, but is included in reported underlying operating profit. The table
below illustrates the impact of the accounting change on the tax rate:
FY23 FY22
£m £m
Underlying operating profit 196.3 143.6
Underlying tax charge 36.8 24.1
Underlying tax rate 19.4% 16.9%
Illustrative effective tax rate, with impact of RDEC income included in the
tax charge
Operating profit from segments 178.9 137.4
Tax charge including RDEC income 19.4 17.9
Effective tax rate including RDEC income 11.3% 13.2%
For comparison and modelling purposes, if using operating profit from segments
the equivalent tax rate is 11.3% (not the headline 19.4% ETR). With the
increase in UK statutory rate, this 11.3% baseline ETR is expected to increase
to c.19% in FY24.
Capital allocation policy
Working capital management and overall cash performance has remained
consistently strong. Underlying net cash flow from operations was £270.1m
(FY22 restated: £220.7m). Our cash conversion definition reflects our
pre-capital expenditure cash flows as a proportion of EBITDA in order to
demonstrate how we convert our profit (excluding interest, tax, depreciation
and amortisation) into cash flow - under this definition we achieved
underlying cash conversion of 106%, (FY22 restated: 113%).
As at 31 March 2023 the Group had £206.9m net debt (FY22: £225.1m net cash),
a transition into debt and a more efficient balance sheet position, due to the
strategic acquisitions completed in the year and higher capital expenditure to
support the Group strategic growth ambitions. We have successfully reduced
leverage to 0.8x, within 4 months of the completion of the Avantus and Air
Affairs acquisitions, ahead of our original guidance by 12 months.
Through FY23 we have demonstrated our capital allocation policy in action:
1. Organic and inorganic investment - increased capital expenditure to £109.0m
(FY22: £84.3m), focused on contractual commitments (£44m into the LTPA),
sustainment of the portfolio and investment to support future growth.
Inorganic investment to acquire Avantus and Air Affairs.
2. The maintenance of balance sheet strength - continued discipline and cash
generative nature of the business model, further reinforced by the strategic
disposal of Space NV.
3. A progressive dividend policy with a proposed 5% year-on-year increase.
4. Return of excess cash to shareholders - we continue to review this element of
the capital allocation policy in the best interests of all our stakeholders to
support long-term sustainable growth.
The Group is not subject to any externally imposed capital requirements.
Committed facilities
The acquisition of Avantus was financed using a combination of cash and debt
from a multicurrency floating rate Term Loan placed with our relationship
banks, acquisition financing totalled £340m. The Loan is split into two
Tranches: GBP Term Loan £273m (Tranche A); and, USD Term Loan £67m (Tranche
B), and has a 3-year term with two 1-year extension options. Participating
banks have lent on a 2-tier basis - 3-banks at £67m and 4-banks at £35m.
In line with Group policy, £270m (c.80%) of the floating rate debt has been
fixed using SONIA interest rate swaps split over a 3-year and 5-year tenure at
a weighted average rate of 3.29%. Including all fees and charges, the weighted
average cost of debt is 5.21%.
The Group has a £275m bank revolving credit facility with an additional
'accordion' facility to increase the limit up to £400m. The facility which
will mature on 27 September 2025 was undrawn at 31 March 2023 and provides the
Group with significant scope to execute its strategic growth plans.
We highlight that the Group adopts a strict policy on managing counterparty
risk through a combination of diversification of investments and regular
reviews of counterparty limits using credit rating assessments. We are proud
that our debt sits with our key relationship banks who have strong credit
ratings and diverse portfolios demonstrating their resilience to the bank
turmoil. The banks have been selected for their capabilities in our home
countries to support our business.
Return on Capital Employed (ROCE)
In order to help understand the overall return profile of the Group, we
continue to report our Return on Capital Employed, using the calculation of:
profit from segments less amortisation / (average capital employed less net
pension asset), where average capital employed is defined as shareholders'
equity plus net debt (or minus net cash).
For FY23 Group ROCE was 23% (FY22: 26%), modestly lower due to the increased
capital employed with the acquisitions completed in year. As we continue to
invest in our business to support sustainable long-term growth our ROCE is
forecast to remain attractive, at the upper end of the 15-20% range.
Earnings per share
Underlying basic earnings per share increased by 29% to 26.5p (FY22: 20.6p)
driven by the higher underlying profit after tax. Basic earnings per share for
the total Group (including specific adjusting items) increased 71% to 26.8p
(FY22: 15.7p).
The average number of shares in issue during the year, as used in the basic
earnings per share calculations, was 575.9m (FY22: 573.2m) and there were
578.8m shares in issue at 31 March 2023 (all net of Treasury shares).
Dividend
The Board proposes a final FY23 dividend per share of 5.3p (FY22: 5.0p) making
the full year dividend 7.7p (FY22: 7.3p). The full year dividend represents an
increase of 5% in line with the Group's progressive dividend policy.
Subject to approval at the Annual General Meeting, the final FY23 dividend
will be paid on 24 August 2023 to shareholders on the register at 28 July
2023.
Pensions
The key driver for the decrease in the net pension asset since 31 March 2022
was the turmoil in financial markets following the Government's 'mini-budget'
in September 2022, 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). As with previous
years, Aon have undertaken the IAS19 valuation.
During the current financial year, 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 at 31 March 2023, as
measured on the Trustees' gilt-funded basis.
The key assumptions used in the IAS 19 valuation of the Scheme are set out in
note 16.
Net finance costs
Net finance income was £3.3m (FY22: £3.1m). The underlying net finance
expense was £6.6m (FY22: £1.4m), increased due to the interest payable on
the Avantus funding borrowings, with additional income of £9.9m (FY22:
£4.5m) in respect of the defined benefit pension net surplus reported within
specific adjusting items. The pension net finance income is calculated as a
percentage of the opening net asset. In FY23 the opening net asset (£362.2m)
was larger than the net asset at the start of FY22 (£214.3m) generating an
increase in the level of net finance income. Similarly, the decrease in the
net surplus within FY23 (closing at £119.8m) will lead to a decrease in the
pension net finance income in FY24.
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.
FY23 FY22
£/US$ - opening 1.31 1.38
£/US$ - average 1.21 1.36
£/US$ - closing 1.24 1.31
£/A$ - opening 1.75 1.81
£/A$ - average 1.76 1.85
£/A$ - closing 1.85 1.75
Foreign exchange translation has provided a modest tailwind to revenue and
operating profit in the year. Most significantly, the US Dollar has
strengthened with the average exchange rate to Sterling decreasing from 1.36
to 1.21. In FY23, 19% of our total Group revenue was generated in the US. As a
result of the strengthening US Dollar and other FX movements in year, revenue
increased by £31.9m and operating profit increased by £1.3m. Looking ahead
we expect US revenues to represent 25-30% of Group revenues in FY24, so for
every 1% move in the FX rate this would impact Group revenue by c.£5m and
Group profit by c.£0.5m.
Operating Review
EMEA Services
FY23 FY22
£m £m
Orders 1,372.2 918.9
Revenue 1,179.3 1,059.2
Underlying operating profit 137.1 135.6
Underlying operating margin 11.6% 12.8%
Book to bill ratio(*) 1.4x 1.1x
Total funded order backlog 2,768.8 2,541.6
* B2B ratio is orders won divided by revenue recognised, excluding the LTPA
non-tasking services revenue of £225m (FY22: £222m)
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 for the year increased by 49% to £1,372.2m (FY22: £918.9m), driven by
a £260m MSCA contract in the UK, for the delivery of critical sovereign
capabilities to the UK and continued growth in orders through the EDP
framework, totalling £404m orders in-year.
Revenue increased by 11% to £1,179.3m (FY22: £1,059.2m), and grew by 10% on
an organic basis, as a result of new work under the EDP framework and under
the Major Service Provider (MSP) contract in Australia.
At the beginning of FY24, we had £0.8bn of EMEA Services' FY24 revenue under
contract, compared to £0.7bn (of the FY23 revenue) at the same point last
year. This increase is driven by the 49% orders growth in the year.
Underlying operating profit grew by 1% to £137.1m (FY22: £135.6m). Operating
margin decreased to 11.6% reflecting the investment in our people in response
to the cost of living crisis.
Approximately 64% of EMEA Services revenue is derived from single source
contracts, including the LTPA (FY22: approximately 67%). By investing in our
core contracts and extending their duration the high proportion of single
source revenue contracted on a long-term basis provides visibility and reduces
our exposure to future changes in the baseline profit rate set annually by the
Single Source Regulations Office.
Sector commentary
UK Defence (58% of EMEA Services revenue)
The UK Defence Sector delivers mission critical solutions, innovating for our
Air, Maritime and 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 our customer base, with
the embedding of enabling functions bringing greater cohesion to operational
strategy execution for business performance excellence.
- We secured a £260m contract with the Submarine Delivery Agency for a further
ten years of the Maritime Strategic Capability Arrangement (MSCA), which also
includes an option for an additional five years. The MSCA delivers critical
sovereign capabilities that contribute to the assurance of the UK's ability to
design, build and safely operate the Royal Navy's surface and subsurface
fleet, including the UK's continuous at sea deterrent.
- We have also seen a high level of usage of LTPA capabilities over the last 12
months supporting operational training needs and urgent capability
requirements:
- We have completed our Air Range Modernisation investment programme, securing
recognition by the Ministry of Defence (MoD) Sanctuary Awards for achievements
in conservation and sustainability in relation to the renovation programme on
St Kilda in the Outer Hebrides;
- Usage of LTPA capabilities by allies continues to increase and included the
Atlantic Thunder 22 live-fire exercise. This involved the US Naval Forces
Europe, US Air Forces Europe, the UK Royal Navy and UK Royal Air Force
developing combined proficiency in tactics, targeting and live-firing against
a surface target at sea;
- We continue to work in partnership with our customer to develop new approaches
to test and evaluation increasing the adoption of modelling, synthetics and
artificial intelligence (AI) techniques; and
- Investment to pilot the transition to Net-Zero site operations has been
secured and is underway.
- The Engineering Delivery Partner (EDP) programme has now delivered over
£1.3bn of orders since inception in October 2018, and our partnership
continues to evolve in support of our customers' need to transform their
approach to capability acquisition. Key achievements this year include:
- Securing the £32m contract to provide technical support to the UK MoD's
Future Combat Air System (FCAS) Enterprise and the Defence Equipment &
Support (DE&S) Catalyst delivery team, which is responsible for delivering
the latest combat air capabilities to UK frontline commands;
- Increasing the EDP supplier network by c.25% and the volume of work delivered
through them;
- Continuing to deliver over 97% of outputs on time and right first time;
- Embedding new services supporting the adoption of digital design technologies;
and
- Starting to provide Net-Zero engineering services.
- Science and technology is a priority area where we continue to make progress
primarily through contracting with Defence Science and Technology Laboratory
(DSTL), but also through increasing international collaboration across the
Group which provides a great platform to support the priorities of AUKUS:
- Delivering the UK's first high-powered, long-range laser-directed energy
weapon (LDEW) trial at DSTL Porton Down in partnership with Leonardo and MBDA,
demonstrating the capabilities of our phase-combined laser technology;
- Leading the Weapons Sector Research Framework with an increasing focus on
novel and hypersonic weapons, including an annual conference with over 300
representatives from across the MOD and industry;
- Developing our E-X Drive technology through our US Sector for the BAE Systems
solution to the US Army's Optionally Manned Fighting Vehicle (OMFV) programme;
- Supporting our Australian Sector to secure and deliver a higher energy laser
development programme to their Australian Defence Science and Technology (DST)
customer.
- We continue to develop our mission rehearsal offerings through:
- Securing the second demonstration phase in partnership with BAE Systems for
the Platform Enabled Training Capability (PETC) programme delivering
multi-platform innovative synthetic training capability to the Royal Navy in
support of the wider Defence Operational Training Capability (Maritime)
(DOTC(M)) programme;
- Fielding a new threat representation training capability with the Royal Navy
through securing the four-year Vampire Phase 1 contract to support the Royal
Navy's future high-performance Unmanned Aerial Systems (UAS) operations;
- Delivering enhanced mission support through the Royal Navy Sharpshooter
training exercise providing operationally realistic scenarios to train as they
would fight with close-in weapon systems.
UK Intelligence (30% 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 (UK-I) are three
acquired businesses: QinetiQ Training and Simulation Limited (QTSL, formerly
NSC), Inzpire and Naimuri. This Sector represents the previously reported
Cyber and Information business unit.
- We won an £80m transformation programme focused on accelerating the
production of mission data, enabling the UK's military platforms and personnel
to be better protected in a rapidly changing threat landscape. We formed and
led a winning industrial partnership team that included Inzpire, SRC, CGI and
an ecosystem of other expert SMEs. The team will contribute to the UK's export
agenda by providing our allies with access to world-class mission data. In
demonstrating our commitment to the Social Value Act, this programme includes
a significant investment to create at least 70 highly skilled data science
jobs in the Lincolnshire Area, and upskill customer personnel in advanced data
analysis techniques and technology.
- Through the SERAPIS framework contract, we have won a £5m 18-month research
contract focused on helping the UK MOD solve one of its most enduring and
significant capability challenges: pervasive, full spectrum, multi-domain ISR
(intelligence, surveillance and reconnaissance). The aim is to use coherent
real-time multi-modal sensing to find and identify difficult land targets on a
complex battlefield.
- The partnership with Defence Intelligence in the UK has continued to grow
strongly with orders exceeding £100m in the year. Using the EDP framework,
combined with the rapid innovation it enables, we have pulled through
expertise from across industry and led delivery of a wide portfolio which is
helping Defence Intelligence to drive its transformation strategy.
- We won the Vivace contract with the Home Office in 2017 to deliver our
Accelerated Capability Environment (ACE). ACE leverages a wide and diverse
ecosystem of suppliers to drive innovation into the delivery of mission
critical capability, and it operates at high tempo greatly accelerating
delivery of deployable capability. In the past year Vivace has extended its
core team and under open competition was awarded the next phase in development
of ACE through the Private Sector Partner contract.
- 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.
- We continue to demonstrate our ability to take acquisitions and position them
for future success:
- This year has seen Inzpire reach a major milestone in the delivery of the GECO
Mission planning system to the UK's Military Flying Training System. GECO is
now used on the RAF's Prefect, Phenom and Texan Fixed Wing aircraft and also
Juno and Jupiter Rotary Wing platforms as well as integration into the
simulators. In total, more than 100 systems will be rolled out.
- We have established the Training and Simulation Centre of Excellence at our
Farnborough site combining expertise from the NSC acquisition with its extant
training business unit (NSC now rebranded as QinetiQ Training and Simulation
Limited: QTSL). This business area is growing strongly with recent key wins in
the Land (Army Virtual Proving Ground), Maritime (T23 and T45 training
simulation systems), and secure Cyber domains coupled with a significant
increase in simulation research and war-gaming demand as the UK Armed Forces
consider future operating requirements.
- Similarly, Naimuri's portfolio has significantly diversified beyond National
Security into Homeland Security, and the UK MOD. Naimuri continues to be cited
as an example of a high-performing SME working on the highest priority
government systems and highly engaged in supporting social values growth.
- We remain committed to providing operational support to the UK Government
including 24/7 support to operations and deployment, which has enabled UK
platforms to support burden sharing with Allies, assisting with military aid
provision.
Australia (12% of EMEA Services revenue)
Our Australia Sector provides advisory services, engineering services and
training and mission rehearsal in the Australian and German markets.
- The Australian business has continued to deliver impressive growth in the year
with a significant improvement in revenue coming from the Advisory Services
business. Notably, the business has responded successfully to an increase in
delivering to operations and exercises as our customer uplifts activity in
response to geo-political challenges. An increase in deployments and training
events has seen a positive impact on the engineering, technical and advisory
services contracts.
- In December 2022 we completed the acquisition of Air Affairs (Australia) Pty
Ltd for A$53m. Air Affairs is an Australian defence services company - a
leader in air threat representation, Test and Evaluation (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.
- Integration of Air Affairs is progressing to plan and the business is
performing well, including securing the next phase of airborne training
services for the Australian Defence Force. As demand for threat
representation increases across all our home countries, we are focused on
leveraging our airborne training and target capabilities across QTS, GmbH and
Air Affairs to pursue new customer opportunities. A recent example is the
successful sale of our Banshee target into the US Army's Threat Systems
Management Office.
- The engineering services facility in South Melbourne (named "QTech") is now
open and will be a cornerstone facility for further growth through the
Robotics and Autonomous Systems and the Test and Evaluation Campaigns.
Additionally, the inaugural Test and Evaluation Sovereign Skills Programme has
commenced with the 2023 cohort in the United Kingdom undertaking T&E
training already.
- In Germany, we have continued to invest in the business with a strategic
uplift in fleet composition with a number of aircraft added to the fleet. The
fleet has seen further improvement with modifications to target towing and
cameras resulting in increased capability and capacity. In the year, the
business delivered more flying hours than in any previous contract year. These
successes continue to mature our flexibility and credibility in our Air
Services growth plans. In response to the ongoing and increased customer
demand for live environment target simulations, the German business has
proactively responded with precision and professionalism to an increased
tempo, by delivering an increase of 50% in aerial target service tasks in the
last two years. The Government's commitment to increased defence spending
supports a positive view of business growth into the future.
Global Products
FY23 FY22
£m £m
Orders 351.9 307.7
Revenue 401.4 261.2
Underlying operating profit 41.8 1.8
Underlying operating margin 10.4% 0.7%
Book to bill ratio((1)) 0.9x 1.2x
Funded backlog 301.5 287.2
(1) B2B ratio is orders won divided by revenue recognised
Overview
Global Products delivers innovative solutions to meet customer requirements.
The segment is technology-based and has shorter order cycles than EMEA
Services. Our strategy is to expand the product portfolio and win larger,
longer-term programmes to improve the consistency of the financial performance
of this segment.
Financial performance
Orders increased by 14% to £351.9m (FY22: £307.7m). This was driven by a
good order intake in the US and the effect of the complex project write-down
in the prior year.
Revenue was up 54% on a reported basis at £401.4m (FY22: £261.2m), due to
strong US growth following prior year supply-chain challenges on the initial
production ramp-up of CRS-I robots. Furthermore there was an increase in
revenue from the acquisition of Avantus of £83.0m offset partially by the
disposal of Space NV. Excluding the impact of this acquisition and foreign
exchange, revenue was up 20% (£48.9m) on an organic basis.
At the beginning of FY24, we had £0.3bn of Global Products' FY24 revenue
under contract, compared to £0.2bn (of the FY23 revenue) at the same point
last year. This increase is driven by the significant orders growth in year
plus the contribution from the Avantus acquisition.
Underlying operating profit increased to £41.8m (FY22: £1.8m), with an
underlying operating profit margin of 10.4% (FY22: 0.7%). This was driven by
strong performance in both the US and within QinetiQ Target Systems, and the
acquisition of Avantus. FY22 operating profit included the £14.5m write-down
on the complex project.
Sector commentary
United States (75% of Global Products revenue)
Our US Sector provides technical advice, design and manufacture of innovative
defence products specialising in robotics, autonomy and sensing solutions, and
with the acquisition of Avantus is an expert in cyber, data analytics and
software development. We have invested to support the long-term growth of our
US Sector, in leadership, integration, systems and tools; the business is now
a fully integrated single US Sector.
- The US Sector has had a strong year, with high order intake of $280m and
impressive revenue growth of 25%, prior to the benefit of Avantus. We have won
a number of key contracts in the US that will support the delivery of our
ambitious growth targets.
- We have won a $93m single award Indefinite Delivery Indefinite Quantity (IDIQ)
by the US Army for a Digital Night Vision Technology (DNVT) contract to
support the continued evolution of DNVT capabilities through development,
integration, experimentation and laboratory and platform test and evaluation
including using digital imaging, display, processing and network architecture
technologies. DNVT will substantially enhance the user's situational awareness
and decision-making abilities by developing digital night vision capabilities
coupled with component technology enhancements including fused imagers,
display enhancements, and image processing hardware and algorithms.
- 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.
- We completed the RCV-L Surrogate Prototype base program activities through the
successful completion of US Army Performance Testing. We delivered four (of
eight) option vehicles (awarded in FY22) and received circa $20m in orders to
support ongoing experimentation through the provision of spare parts, platform
integration and updates, technology insertions, and support and maintenance
activities.
- Following successful completion of the Low Rate Production (LRIP) phase we
made significant progress on the Common Robotic System-Individual (CRS-I)
programme, entering into Full Rate Production in September 2022. In the year
over 600 units were delivered bringing the total delivery to over 900, with
over 500 systems fielded to Combat Engineering and Explosive Ordnance Disposal
(EOD) units. Production remains on track with full production continuing
through FY24.
- We completed Optionally Manned Fighting Vehicle (OMFV) Phase 2, supporting
prime contractor Oshkosh Defense. This phase delivered a successful concept
design to the US Army with QinetiQ US supporting the development of the
modular open architecture next generation infantry fighting vehicle to replace
the US Army Bradley fighting vehicle.
- At the end of November 2022 we completed the acquisition of Avantus for $590m.
Avantus has a strong track record of achieving speed-to-mission impact. Over
the last three years, Avantus has demonstrated a strong track record of
consistent double-digit revenue growth on a proforma organic basis, at
attractive margins.
- Since completion, Avantus has continued to perform well, including two
successful re-competes and selection for a new $80m multi-year contract with a
national intelligence customer. In the first four months of our ownership,
while new business awards were lower than assumed, we achieved good
performance across our contracts delivering $100m revenue at our expected
margin of 10.8%. Integration is progressing ahead of plan and we are actively
pursuing revenue synergies by leveraging and cross selling our offerings to
our existing and new customer base. The combination of capabilities across
QinetiQ and Avantus has created a disruptive defence and intelligence business
in the US and we remain on track to deliver on the strategic and financial
returns outlined previously.
Other Products (18% of Global Products revenue)
The portfolio of our other Global Products provide research services and
bespoke technological solutions developed from intellectual property spun out
from EMEA Services, and includes QinetiQ Target Systems (QTS).
- QTS continues to make positive progress with customers resuming trials and
exercises. In response to increased customer demand for live environment
target simulations, QTS has successfully delivered a significant improvement
in production throughput which has been positively received by our UK MOD
customer and has delivered positive growth.
- QTS has responded with agility to customer requirements including the delivery
of a Dutch and German training exercise led by the Royal Netherlands Army
where QTS provided products and services to support a bi-national Tactical
Firing event with Germany at the NATO Missile Firing Installation on Crete.
QTS has also made good progress in the US with the integration of the Army
Ground Aerial Target Control System and our QTS targets. This represents a
major milestone in US market penetration.
- Following the successful demonstration of Banshee Jet80+ from the deck of the
Royal Navy's HMS Prince of Wales aircraft carrier late last year, QTS has
recently won a contract that enables the test and evaluation of the capability
of small fixed wing, jet-powered uncrewed systems to support Carrier Aviation.
- We continue to experience strong demand for QTS products and services arising
from an increased demand from many of our global customers which has resulted
in March 2023 being the biggest production month to date with over 100 aerial
and surface targets delivered.
- We continue to invest in and see demand for our sensors and communication
product portfolio. This past year saw record demand for its Position
Navigation and Timing (PNT) product (Q20) across a number of customers. This
gives a high degree of confidence that the market potential remains strong
ahead of launching the next generation product (Q40) in the near future.
Space Products (7% 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 completed the disposal of QinetiQ
Space NV in Belgium to Redwire Space Europe for an enterprise value of €32m.
Space NV is an attractive and well-positioned business in the commercial space
sector, which has delivered good operational performance and growth under our
ownership. Whilst the space domain remains an integral part of our core
defence and security strategy, Space NV products provided limited operational
synergies and alignment with our global ambition.
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 2023 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 develop an inclusive, high-performing culture where our people can
thrive and maximise potential in a rapidly changing and disruptive global
landscape;
• 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;
• Large long-term UK 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, personnel or sensitive asset security could lead to loss
of information or harm to our employees, customers and broader stakeholders;
• A successful Cyber-attack could impact our customer deployed capabilities, our
ability to operate as a business or exclude us from some types of future
government or cyber domain work
• 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;
• Failure to manage our climate change resilience 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;
• Failure to achieve the intended outcomes of the Digital and Data Programme
within budget will constrain our growth strategy; and
• Failure of our Health and Safety Strategy could increase the risk of serious
injury to our employees, contractors or third parties, potentially resulting
in regulatory enforcement and reputation loss.
Consolidated income statement for the year ended 31 March
FY23 FY22^
All figures in £ million Note Underlying* Specific adjusting items* Total Underlying* Specific adjusting items* Total
Revenue 1,2 1,580.7 - 1,580.7 1,320.4 - 1,320.4
Operating costs excluding depreciation and amortisation (1,353.4) (29.5) (1,382.9) (1,140.7) (8.7) (1,149.4)
Other income 28.0 21.6 49.6 16.0 0.7 16.7
EBITDA (earnings before interest, tax, depreciation and amortisation) 255.3 (7.9) 247.4 195.7 (8.0) 187.7
Depreciation and impairment of property, plant and equipment (51.5) - (51.5) (46.7) (1.2) (47.9)
Amortisation of intangible assets (7.5) (15.6) (23.1) (5.4) (10.7) (16.1)
Operating profit/(loss) 2 196.3 (23.5) 172.8 143.6 (19.9) 123.7
Gain/(loss) on business divestments 6 - 15.9 15.9 - (0.9) (0.9)
Finance income 7 6.8 9.9 16.7 0.5 4.5 5.0
Finance expense 7 (13.4) - (13.4) . (1.9) - (1.9)
Profit/(loss) before tax 189.7 2.3 192.0 142.2 (16.3) 125.9
Taxation charge 8 (36.8) (0.8) (37.6) (24.1) (11.8) (35.9)
Profit/(loss) for the year 152.9 1.5 154.4 118.1 (28.1) 90.0
Profit/(loss) is attributable to:
Owners of the parent company 152.9 1.5 154.4 118.1 (28.1) 90.0
Non-controlling interests - - - - - -
Profit/(loss) for the year 152.9 1.5 154.4 118.1 (28.1) 90.0
Earnings per share for profit attributable to the owners of the parent company FY23 FY22
All figures in pence Note Underlying* Total Underlying* Total
Basic 9 26.5 26.8 20.6 15.7
Diluted 9 26.3 26.5 20.4 15.5
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
* 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. Also refer to note 3 for details of 'specific
adjusting items'.
Consolidated comprehensive income statement
for the year ended 31 March
FY23 FY22
All figures in £ million
Profit for the year 154.4 90.0
Items that will not be reclassified to profit and loss:
Actuarial (loss)/gain recognised in defined benefit pension schemes (253.9) 144.0
Tax on items that will not be reclassified to profit and loss 63.5 (47.6)
Total items that will not be reclassified to profit and loss (190.4) 96.4
Items that may be reclassified to profit and loss:
Foreign currency translation (losses)/gains on foreign operations (6.5) 5.6
Movement in deferred tax on foreign currency translation (0.5) (0.8)
Increase in the fair value of hedging derivatives 7.8 0.6
Movement in deferred tax on hedging derivatives (1.6) (0.1)
Total items that may be reclassified to profit and loss (0.8) 5.3
Other comprehensive (expense)/income for the year, net of tax (191.2) 101.7
Total comprehensive (expense)/income for the year (36.8) 191.7
Total comprehensive (expense)/income is attributable to:
Owners of the parent company (36.8) 191.5
Non-controlling interests - 0.2
Total comprehensive (expense)/income for the year (36.8) 191.7
Consolidated statement of changes in equity
for the year ended 31 March
Share capital Capital redemption reserve Share premium Hedge reserve Translation reserve Retained earnings Total Non controlling interest Total equity
All figures in £ million
At 31 March 2022 - previously reported 5.8 40.8 147.6 0.1 1.9 847.0 1,043.2 0.2 1,043.4
Change in accounting policy^ (note 20) - - - - - (2.0) (2.0) - (2.0)
At 1 April 2022 - restated^ 5.8 40.8 147.6 0.1 1.9 845.0 1,041.2 0.2 1,041.4
Profit for the year - - - - - 154.4 154.4 - 154.4
Other comprehensive income/(expense) for the year, net of tax - - - 6.2 (7.0) (190.4) (191.2) - (191.2)
Purchase of own shares - - - - - (0.8) (0.8) - (0.8)
Share-based payments - - - - - 5.7 5.7 - 5.7
Deferred tax on share-based payments - - - - - 0.7 0.7 - 0.7
Movements on business divestment - - - - 0.9 - 0.9 (0.2) 0.7
Dividends - - - - - (42.6) (42.6) - (42.6)
At 31 March 2023 5.8 40.8 147.6 6.3 (4.2) 772.0 968.3 - 968.3
At 31 March 2021 - previously reported 5.7 40.8 147.6 (0.4) (2.9) 693.8 884.6 0.3 884.9
Change in accounting policy^ (note 20) - - - - - (2.0) (2.0) - (2.0)
At 1 April 2021 - restated^ 5.7 40.8 147.6 (0.4) (2.9) 691.8 882.6 0.3 882.9
Profit for the year - - - - - 90.0 90.0 - 90.0
Other comprehensive income for the year, net of tax - - - 0.5 4.8 96.4 101.7 - 101.7
Purchase of own shares - - - - - (0.8) (0.8) - (0.8)
Issues of new shares 0.1 - - - - - 0.1 - 0.1
Share-based payments - - - - - 7.4 7.4 - 7.4
Deferred tax on share-based payments - - - - - (0.3) (0.3) - (0.3)
Fair value adjustment in respect of equity-based contingent consideration - - - - - 0.7 0.7 - 0.7
Dividends - - - - - (40.2) (40.2) (0.1) (40.3)
At 31 March 2022 5.8 40.8 147.6 0.1 1.9 845.0 1,041.2 0.2 1,041.4
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
Consolidated balance sheet as at 31 March
All figures in £ million Note 31 March 2023 31 March 2022^ 31 March 2021^
Non-current assets
Goodwill 14 409.0 149.4 145.5
Intangible assets 343.0 140.3 133.1
Property, plant and equipment 477.8 414.5 397.2
Other financial assets 6.2 0.5 0.8
Financial assets at fair value through profit or loss - - 0.9
Equity accounted investments 1.4 2.6 4.2
Net pension asset 15 119.8 362.2 214.3
Deferred tax asset 32.6 21.0 11.7
1,389.8 1,090.5 907.7
Current assets
Inventories 68.8 54.9 54.4
Other financial assets 5.7 0.6 0.9
Trade and other receivables 452.6 373.2 338.5
Current tax asset 4.0 1.4 0.7
Cash and cash equivalents 151.2 248.1 190.1
682.3 678.2 584.6
Total assets 2,072.1 1,768.7 1,492.3
Current liabilities
Trade and other payables (575.2) (474.7) (424.3)
Current tax payable (4.6) (5.9) (3.7)
Provisions (19.7) (21.1) (4.2)
Other financial liabilities (8.2) (6.9) (7.0)
(607.7) (508.6) (439.2)
Non-current liabilities
Deferred tax liability (112.0) (156.7) (89.7)
Provisions (7.1) (6.0) (7.8)
Borrowings and other financial liabilities (361.8) (17.2) (20.7)
Other payables (15.2) (38.8) (52.0)
(496.1) (218.7) (170.2)
Total liabilities (1,103.8) (727.3) (609.4)
Net assets 968.3 1,041.4 882.9
Equity
Ordinary shares 5.8 5.8 5.7
Capital redemption reserve 40.8 40.8 40.8
Share premium account 147.6 147.6 147.6
Hedging reserve 6.3 0.1 (0.4)
Translation reserve (4.2) 1.9 (2.9)
Retained earnings 772.0 845.0 691.8
Capital and reserves attributable to shareholders of the parent company 968.3 1,041.2 882.6
Non-controlling interest - 0.2 0.3
Total equity 968.3 1,041.4 882.9
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
Consolidated cash flow statement for year ended 31 March
All figures in £ million Note FY23 FY22^*
Underlying net cash inflow from operations 10 270.1 220.7
Less specific adjusting items: 10 (29.5) (5.6)
Net cash inflow from operations 10 240.6 215.1
Tax paid (30.2) (25.4)
Interest received 5.5 0.5
Interest paid (9.9) (1.5)
Net cash inflow from operating activities 206.0 188.7
Purchases of intangible assets (13.8) (21.4)
Purchases of property, plant and equipment (95.2) (62.9)
Proceeds from sale of property 2.4 1.5
Proceeds from disposal of business 28.1 -
Dividends from joint venture and associates - 2.0
Acquisition of businesses 5 (385.9) (0.8)
Net cash outflow from investing activities (464.4) (81.6)
Purchase of own shares (0.8) (0.8)
Dividends paid to shareholders (42.6) (40.2)
Payment of bank facility arrangement fees (2.7) -
Capital element of lease payments (7.4) (6.2)
Drawdown of new borrowings 481.1 -
Repayment of borrowings (140.0) -
Repayment of acquired borrowings (117.9) -
Cash flow relating to intercompany loan hedges (10.0) (3.1)
Transaction with non-controlling interests - (0.1)
Net cash inflow/(outflow) from financing activities 159.7 (50.4)
(Decrease)/increase in cash and cash equivalents (98.7) 56.7
Effect of foreign exchange changes on cash and cash equivalents 1.8 1.3
Cash and cash equivalents at beginning of year 248.1 190.1
Cash and cash equivalents at end of year 151.2 248.1
Reconciliation of movement in net (debt)/cash for the year ended 31 March
All figures in £ million Note FY23 FY22^
(Decrease)/increase in cash and cash equivalents in the year (98.7) 56.7
Add back net cash flows not impacting net (debt)/cash (331.0) 6.2
Movement in net (debt)/cash resulting from cash flows (429.7) 62.9
Net increase in lease obligations (15.3) (1.3)
Net movement in derivative financial instruments 9.8 (1.3)
Other movements including foreign exchange 3.2 0.7
Movement in net (debt)/cash as defined by the Group (432.0) 61.0
Net cash as defined by the Group at beginning of the year 225.1 164.1
Net (debt)/cash as defined by the Group at end of the year 11 (206.9) 225.1
Less: total net financial liabilities 11 358.1 23.0
Total cash and cash equivalents 11 151.2 248.1
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
* To be consistent with FY23, the prior year has been re-presented in respect
of the cash flow impact of intercompany loan hedging.
Notes to the financial statements
1. Revenue from contracts with customers and other income
Revenue by category
All figures in £ million FY23 FY22
Service contracts with customers 1,481.4 1,234.4
Sale of goods contracts with customers 96.1 82.9
Royalties and licences 3.2 3.1
Total revenue 1,580.7 1,320.4
Less: adjust current year for acquired businesses(^) (91.1) -
Less: adjust prior year for disposed businesses(^) - (17.7)
Adjust to constant prior year exchange rates (31.9) -
Total revenue on an organic, constant currency basis(*) 1,457.7 1,320.7
Organic revenue growth at constant currency(*) 12% 5%
^ For the period of which there was no contribution in the equivalent period
in the comparator year which was pre-ownership (for acquisitions) or
post-ownership (for disposals) by the Group.
* Alternative performance measures are used to supplement the statutory
figures. See Glossary.
Other income
All figures in £ million FY23 FY22^
Share of associates' and joint ventures' profit after tax 0.8 0.3
Research and development expenditure credits (RDEC) 17.4 6.2
Other income 9.8 9.5
Underlying other income 28.0 16.0
Specific adjusting item: gain on sale of property 2.0 0.7
Specific adjusting item: release of RDEC MOD appropriation liability 19.6 -
Total other income 49.6 16.7
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
Revenue by customer geographical location
All figures in £ million FY23 FY22
United Kingdom (UK) 1,045.7 961.9
United States of America (US) 301.0 153.0
Australia 124.1 98.2
Home countries 1,470.8 1,213.1
Europe 69.4 76.9
Rest of World 40.5 30.4
Total revenue 1,580.7 1,320.4
Home countries revenue % 93% 92%
International (non-UK) revenue % 34% 27%
Revenue by major customer type
All figures in £ million FY23 FY22
UK government 969.4 881.7
US government 230.8 104.7
Other* 380.5 334.0
Total revenue 1,580.7 1,320.4
* 'Other' does not contain any customers with revenue in excess of 10% of
total Group revenue.
2. Segmental analysis
Operating segments
All figures in £ million FY23 FY22^
Revenue from external customers Underlying operating profit(*) Revenue from external customers Underlying operating profit(*)
EMEA Services 1,179.3 137.1 1,059.2 135.6
Global Products 401.4 41.8 261.2 1.8
Operating profit from segments 1,580.7 178.9 1,320.4 137.4
Research and development expenditure credits (RDEC) 17.4 6.2
Underlying operating profit 196.3 143.6
Operating profit margin from segments* 11.3% 10.4%
( )
Reconciliation of segmental results to total profit
All figures in £ million Note FY23 FY22^
Operating profit from segments* 178.9 137.4
Research and development expenditure credits (RDEC) 17.4 6.2
Underlying operating profit* 196.3 143.6
Specific adjusting items loss 3 (23.5) (19.9)
Operating profit 172.8 123.7
Gain/(loss) on business divestments 15.9 (0.9)
Net finance income 3.3 3.1
Profit before tax 192.0 125.9
Taxation expense (37.6) (35.9)
Profit for the year 154.4 90.0
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary.
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
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 FY23 FY22
Acquisition and disposal costs (16.4) (3.7)
Acquisition related remuneration costs (0.3) (1.3)
Acquisition integration costs (2.0) -
Pension past service cost - (2.4)
Digital investment (5.8) (1.9)
Restructuring costs (5.0) -
Release of RDEC MOD appropriation liability 19.6 -
Fair value adjustment in respect of contingent consideration - 0.6
Gain on sale of property 2.0 0.7
Specific adjusting items loss before interest, tax, depreciation and (7.9) (8.0)
amortisation
Impairment of property - (1.2)
Amortisation of intangible assets arising from acquisitions (15.6) (10.7)
Specific adjusting items operating loss (23.5) (19.9)
Gain/(loss) on business divestments 6 15.9 (0.9)
Defined benefit pension scheme net finance income 9.9 4.5
Specific adjusting items gain/(loss) before tax 2.3 (16.3)
Specific adjusting items - tax 8 3.8 4.1
Deferred tax impact of change in future UK corporation tax rate 8 (4.6) (15.9)
Total specific adjusting items gain/(loss) after tax 1.5 (28.1)
Reconciliation of underlying profit for the year to total profit for the year
All figures in £ million FY23 FY22
Underlying profit after tax - total Group 152.9 118.1
Total specific adjusting items gain/(loss) after tax 1.5 (28.1)
Total profit for the year 154.4 90.0
4. Profit before tax
The following items have been charged in arriving at profit before tax for
continuing operations:
All figures in £ million FY23 FY22
Cost of inventories expensed 55.2 47.1
Owned assets: depreciation 45.3 40.3
Leases assets: depreciation 6.2 5.9
Foreign exchange gain (0.6) (0.7)
Research and development expenditure - customer funded contracts 313.8 287.5
Research and development expenditure - Group funded 14.6 14.6
5. Business combinations
Acquisitions in the year to 31 March 2023
Contribution post-acquisition
All figures in £ million Date acquired Total consideration Goodwill Fair value of net assets acquired Revenue Operating profit
Avantus Federal LLC 23 November 2022 392.2 264.6 127.6 82.9 8.9
Air Affairs Australia 1 December 2022 12.6 3.1 9.5 8.2 0.5
Total 404.8 267.7 137.1 91.1 9.4
Less: deferred consideration (4.0)
Less: cash acquired (14.9)
Net cash outflow for the year 385.9
Total acquisition costs of £16.4m relating to the two acquisitions, as well
as an aborted disposal, are included within operating profit as a specific
adjusting item (see note 3). A further £2.3m of integration costs and
acquisition related remuneration costs, both relating to Avantus, are also
included within operating profit as a specific adjusting item (see note 3).
Avantus Federal LLC
On 23 November 2022, the Group acquired 100% of the issued share capital of
Avantus for an enterprise value of $590m, on a cash-free, debt-free valuation
basis. 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. The Avantus acquisition will significantly enhance our US
offering and provide a strong platform from which to further grow our US
operations. Avantus has a track record of high growth at attractive margins
and is well-positioned across priority areas for key defence and intelligence
customers in the US.
Avantus forms part of QinetiQ's US Sector and is reported within the Global
Products segment. If the acquisition had occurred on the first day of the
financial year, Group revenue for the period would have been £1,740.6m and
the Group profit before tax £209.7m.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and
liabilities assumed at the date of acquisition, at fair value and in
accordance with Group accounting policies. The fair values remain provisional,
but will be finalised within 12 months of acquisition.
All figures in £ million Note Fair value at acquisition
Intangible assets 209.2
Property, plant and equipment 8.3
Trade and other receivables 39.0
Cash and cash equivalents 14.5
Trade and other payables (34.3)
Lease liabilities (7.2)
Borrowings (104.9)
Deferred tax 6.0
Other assets and liabilities (3.0)
Net assets acquired 127.6
Goodwill 14 264.6
Total consideration 392.2
The consideration of £392.2m was satisfied entirely in cash in the financial
year, with no deferred consideration. The borrowings of £104.9m were repaid
as part of the acquisition, which is presented separately in the cash flow
statement. The fair value adjustments include £171.9m in relation to the
step-up in value and recognition of acquired intangible assets. £163.1m
relates to the step up in value of customer relationship assets, £2.2m
relates to the recognition of existing technology assets and £6.6m relates to
recognition of the Avantus trading name asset. These fair value adjustments
will unwind as the assets themselves are amortised, over 16 years for the
customer relationships and five years for the existing technology and trade
name.
There has been no adjustment to the fair value of acquired receivables given
the low credit risk of the customers. The gross contractual and net amounts of
receivables acquired were the same and there was no allowance for credit loss
recognised at acquisition.
Customer relationships have been valued based on an income approach using an
excess earnings method. The key assumptions are the revenue and profit
projections, customer contract retention/attrition assumptions, discount rate
and contributory asset charges. Existing technology has been valued using a
replacement cost approach and the trade name has been valued using a relief
from royalty method.
The goodwill is attributable mainly to the skills, technical talent and
security clearances of Avantus' work force and the synergies expected to be
achieved from integrating the company into the existing US business. The
goodwill recognised on acquisition is tax deductible over a 15 year period as
the purchase is as an asset deal rather than a share purchase for tax
purposes.
Air Affairs Australia PTY
On 1 December 2022, the Group acquired 100% of the issued share capital of the
Air Affairs Australia group of companies for an enterprise value of A$53m, on
a cash-free, debt-free valuation basis. Air Affairs is an Australian defence
services company - a leader in air threat representation, Test and Evaluation,
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 us as a long-term,
strategic partner to the Australian Defence Force and underpins QinetiQ's
strategic position as market leader in test & evaluation and air threat
representation, now with a significant presence across the UK, Canada and
Australia, and training and special operations in Germany.
Air Affairs forms part of QinetiQ's Australia business unit and is reported
within the EMEA Services segment. If the acquisition had occurred on the first
day of the financial year, Group revenue for the period would have been
£1,599.3m and the Group profit before tax would have been £192.8m.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and
liabilities assumed at the date of acquisition, at fair value and in
accordance with Group accounting policies. The fair values remain provisional,
but will be finalised within 12 months of acquisition.
All figures in £ million Note Fair value at acquisition
Intangible assets 2.4
Property, plant and equipment 29.8
Inventory 3.2
Trade and other receivables 5.1
Cash and cash equivalents 0.4
Trade and other payables (8.8)
Lease liabilities (7.9)
Borrowings (13.0)
Current tax (0.1)
Deferred tax (1.6)
Net assets acquired 9.5
Goodwill 14 3.1
Total consideration 12.6
The consideration of £12.6m includes £8.6m which was satisfied by cash in
the financial year, and £4.0m of deferred consideration which is expected to
be settled within one year. The borrowings of £13.0m were repaid as part of
the acquisition, which is presented separately in the cash flow statement.
There has been no adjustment to the fair value of acquired receivables given
the low credit risk of the customers. The gross contractual and net amounts of
receivables acquired were the same and there was no allowance for credit loss
recognised at acquisition.
The most significant asset on the opening balance sheet is the PPE (Property,
Plant and Equipment). A fair value uplift of £5.5m has been applied to the
aircraft, increasing the book value of £13.2m to £18.7m. The aircraft were
valued based on a desktop exercise performed by professional specialists. The
key assumption relates to the market value of the aircraft. The fair value
adjustments to PPE also include a step-down to the value of leasehold
improvements.
The fair value adjustments also include £2.4m in relation to the step-up in
value and recognition of acquired intangible assets. £2.3m relates to the
recognition of existing technology assets and £0.1m relates to recognition of
the Air Affairs trading name asset. These fair value adjustments will unwind
as the assets themselves are amortised. This is ten years for the existing
technology and three years for the trade name. Deferred tax of £0.7m was
recognised on the intangibles.
Existing technology has been valued using a replacement cost approach and the
trade name has been valued using a relief from royalty method.
The goodwill is attributable mainly to the skills and technical talent of Air
Affairs' work force and the synergies expected to be achieved from integrating
the company into Australia sector and wider existing business. The goodwill
recognised on acquisition is not tax deductible.
Acquisitions in the year to 31 March 2022
There were no acquisitions in the year to 31 March 2022. Deferred
consideration of £0.8m was paid in the year to 31 March 2022 in respect of
the acquisition of QinetiQ Training & Simulation Limited (formerly known
as Newman & Spurr Consultancy Limited) in the year to 31 March 2021.
6. Gain/(loss) on business divestments
All figures in £ million FY23 FY22
Space NV business 15.9 -
Commerce Decisions business - (0.9)
Gain/(loss) on business divestments 15.9 (0.9)
The gain on business divestments relates to the sale of the Space NV for
disposal proceeds of £32.3m (€37.0m). The enterprise value was €32.0m.
Proceeds received in the period, net of transaction costs of £1.2m and £3.0m
of cash divested with the businesses, were £28.1m. All consideration is
settled entirely in cash.
Deferred consideration of £1.5m was potentially receivable in respect of the
Commerce Decisions business, contingent on performance of the disposed
business in the year to 31 March 2022. The fair value of which had been
estimated at £0.9m as at 31 March 2021. The required performance was not
achieved, nil deferred consideration became due and the receivable has been
written off to the income statement in the current year, classified as a
specific adjusting item.
7. Finance income and expense
All figures in £ million FY23 FY22
Receivable on bank deposits 6.8 0.5
Finance income before specific adjusting items 6.8 0.5
Amortisation of deferred financing costs (0.8) (0.4)
Bank interest and commitment fees (10.6) (0.5)
Lease expense (1.1) (1.0)
Unwinding of discount on financial liabilities (0.1) -
Other interest (0.8) -
Finance expense (13.4) (1.9)
Underlying net finance expense (6.6) (1.4)
Plus: specific adjusting items - defined benefit pension scheme net finance 9.9 4.5
income
Net finance income 3.3 3.1
8. Taxation
All figures in £ million FY23 FY22^
Underlying Specific adjusting items Total Underlying Specific adjusting items Total
Profit/(loss) before tax 189.7 2.3 192.0 142.2 (16.3) 125.9
Taxation (expense)/income (36.8) (0.8) (37.6) (24.1) (11.8) (35.9)
Profit/(loss) for the year 152.9 1.5 154.4 118.1 (28.1) 90.0
Effective tax rate 19.4% 19.6% 16.9% 28.5%
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
The total tax charge was £37.6m (FY22 restated: £35.9m). The underlying tax
charge was £36.8m (FY22 restated: £24.1m), on a higher underlying profit
before tax, with an underlying effective tax rate of 19.4% for the year ended
31 March 2023 (FY22 restated: 16.9%). The underlying effective tax rate is
above the UK statutory rate, primarily as a result of higher tax rates in
overseas jurisdictions.
Tax on specific adjusting items
The total specific adjusting items tax charge was £0.8m (FY22 charge:
£11.8m). The tax charge arises on the UK statutory rate change to 25% from
1 April 2023 (£4.6m) and a taxable Research and Development Allowances
clawback (£1.2m), offset by non-taxable profit on sale of Space NV (£3.0m)
and overseas rate differences (£2.5m).
Factors affecting future tax charges
The effective tax rate is expected to remain above the UK statutory rate,
subject to the impact of any tax legislation changes and the geographic mix of
profits. The OECD has released model rules for Pillar II of the Base Erosion
and Profit Shifting regulations covering application of a Global Minimum Tax.
The Group is monitoring progress of these rules and will engage with advisers
to assess any potential future impact on the tax charge.
Changes in tax rates
In the Spring Budget 2021, the UK Government announced that from 1 April 2023
the corporation tax rate will increase from 19% to 25%. The 25% rate has been
substantively enacted at the balance sheet date. An adjustment was made in
FY22 and a further adjustment has been made in FY23 of £4.6m to reflect that
the revised UK deferred tax balances that are expected to unwind at the new
rate of 25%.
Tax losses
At 31 March 2023 the Group had unused tax losses and US carried forward
interest expense of £175.6m (31(st) March 2022: £128.1m) which are available
for offset against future taxable profits. Deferred tax assets are recognised
on the balance sheet of £22.7m in respect of £88.0m of US net operating
losses, £5.4m in respect of £21.5m of Canadian net operating losses and
£2.5m in respect of £8.3m of German trade losses. No deferred tax asset is
recognised in respect of the £57.8m of US interest deductions due to
uncertainty over the timing and extent of their utilisation. Full recognition
of the US carried forward interest expense would increase the deferred tax
asset by £15.6m. The Group has £32.4m of time-limited US net operating
losses of which £22.9m will expire in 2035 and £9.5m in 2036. The Group made
overseas losses in the period ended 31 March 2023 and recognition of deferred
tax assets is dependent on future forecast taxable profits. The Group has
reviewed the latest forecasts for these businesses which incorporate the
unsystematic risks of operating in the defence business. In the period
beyond the 5 year forecast we have reviewed the terminal period profits and
based on these and our expectations for these businesses we believe it is
probable the losses, with the exception of the interest deductions, will be
fully utilised. Based on the current forecasts the losses will be fully
utilised over the next 4-7 years. A 10% change in the forecast profits would
alter the utilisation period by 1 year.
9. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
equity shareholders by the weighted average number of ordinary shares in issue
during the year. The weighted average number of shares used excludes those
shares bought by the Group and held as own shares. For diluted earnings per
share the weighted average number of shares in issue is adjusted to assume
conversion of all potentially dilutive ordinary shares arising from unvested
share-based awards including share options.
FY23 FY22
Weighted average number of shares Million 575.9 573.2
Effect of dilutive securities Million 6.4 6.4
Diluted number of shares Million 582.3 579.6
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 EPS
FY23 FY22
Profit attributable to the owners of the Company £ million 154.4 90.0
Remove (profit)/loss after tax in respect of specific adjusting items £ million (1.5) 28.1
Underlying profit after taxation £ million 152.9 118.1
Weighted average number of shares Million 575.9 573.2
Underlying basic EPS Pence 26.5 20.6
Diluted number of shares Million 582.3 579.6
Underlying diluted EPS Pence 26.3 20.4
Basic and diluted EPS
FY23 FY22
Profit attributable to the owners of the Company £ million 154.4 90.0
Weighted average number of shares Million 575.9 573.2
Basic EPS - total Group Pence 26.8 15.7
Diluted number of shares Million 582.3 579.6
Diluted EPS - total Group Pence 26.5 15.5
10. Cash flows from operations
All figures in £ million FY23 FY22^
Profit after tax for the year 154.4 90.0
Adjustments for:
Taxation expense 37.6 35.9
Net finance income (3.3) (3.1)
(Gain)/loss on disposal of businesses (15.9) 0.9
Loss on disposal of plant and equipment 0.2 -
Gain on sale of property (2.0) (0.7)
Impairment of plant and equipment - 0.5
Impairment of property - 1.2
Amortisation of purchased or internally developed intangible assets 7.5 5.4
Amortisation of intangible assets arising from acquisitions 15.6 10.7
Depreciation of property, plant and equipment 51.5 46.2
Share of post-tax profit of equity accounted entities (0.8) (0.3)
Share-based payments charge 6.1 7.4
Retirement benefit contributions in excess of income statement expense (1.6) (1.8)
Pension past service cost - 2.4
Fair value adjustment in respect of contingent consideration - (0.6)
Net movement in provisions (1.0) (1.0)
248.3 193.1
(Increase)/decrease in inventories (9.6) 1.4
Increase in receivables (56.7) (13.0)
Increase in payables 58.6 33.6
Changes in working capital (7.7) 22.0
Net cash flow from operations 240.6 215.1
Reconciliation of net cash flow from operations to underlying net cash flow
from operations and to free cash flow
All figures in £ million FY23 FY22^
Net cash flow from operations 240.6 215.1
Add back specific adjusting item: digital investment 5.8 1.9
Add back specific adjusting item: restructuring costs 5.0 -
Add back specific adjusting item: acquisition integration and remuneration 2.3 -
costs
Add back specific adjusting item: acquisition transaction costs 16.4 3.7
Underlying net cash flow from operations 270.1 220.7
Less: tax and net interest payments (34.6) (26.4)
Less: purchases of intangible assets and property, plant and equipment (109.0) (84.3)
Free cash flow 126.5 110.0
Underlying cash conversion ratio
FY23 FY22^
Underlying EBITDA - £ million 255.3 195.7
Underlying net cash flow from operations - £ million 270.1 220.7
Underlying cash conversion ratio - % 106% 113%
^ Prior year comparatives have been restated due to a change in accounting
policy for Research and Development Expenditure Credits (RDEC). See note 20
for details.
11. Net (debt)/cash
All figures in £ million 31 March 31 March
2023 2022
Current financial assets/(liabilities)
Deferred financing costs 1.3 0.4
Derivative financial assets 4.4 0.2
Lease liabilities (7.6) (5.5)
Derivative financial liabilities (0.6) (1.4)
Total current net financial liabilities (2.5) (6.3)
Non-current financial assets/(liabilities)
Deferred financing costs 1.5 0.5
Derivative financial assets 4.7 -
Lease liabilities (23.7) (16.6)
Borrowings - Term loan (337.6) -
Derivative financial liabilities (0.5) (0.6)
Total non-current net financial liabilities (355.6) (16.7)
Total net financial liabilities (358.1) (23.0)
Total cash and cash equivalents 151.2 248.1
Total net (debt)/cash as defined by the Group (206.9) 225.1
12. Financial risk management
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 interest rate swaps
which have been fair valued using interest rates that are quoted in an active
market
Level 3 - measured using inputs for the assets or liability that are not based
on observable market data (i.e. unobservable inputs).
The following table presents the Group's assets and liabilities that are
measured at fair value as at 31 March 2023:
All figures in £ million Level 1 Level 2 Level 3 Total
Assets:
Current derivative financial instruments - 4.4 - 4.4
Non-current derivative financial instruments - 4.7 - 4.7
Liabilities:
Current derivative financial instruments - (0.6) - (0.6)
Non-current derivative financial instruments - (0.5) - (0.5)
Total - 8.0 - 8.0
The following table presents the Group's assets and liabilities that are
measured at fair value 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)
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.
13. Dividends
An analysis of the dividends paid and proposed in respect of the years ended
31 March 2023 and 31 March 2022 is provided below:
Pence per share £m Date paid/payable
Interim 2023 2.4 13.8 Feb 2023*
Final 2023 (proposed) 5.3 30.6 Aug 2023
Total for the year ended 31 March 2023 7.7 44.4
Interim 2022 2.3 13.2 Feb 2022
Final 2022 5.0 28.8 Aug 2022*
Total for the year ended 31 March 2022 7.3 42.0
*Total cash paid in the year to 31 March 2023 was £42.6m (FY22: £40.2m).
The proposed final dividend in respect of the year ending 31 March 2023 will
be paid on 24 August 2023. The ex-dividend date is 27 July 2023 and the record
date is 28 July 2023.
14. Goodwill
All figures in £ million 31 March 2023 31 March 2022
Cost
At 1 April 296.1 287.6
Acquisitions 267.7 -
Disposals (5.6) -
Foreign exchange 4.5 8.5
At 31 March 562.7 296.1
Accumulated impairment
At 1 April (146.7) (142.1)
Foreign exchange (7.0) (4.6)
At 31 March (153.7) (146.7)
Net book value at 31 March 409.0 149.4
Goodwill analysed by cash-generating unit (CGU)
Goodwill is allocated across six cash generating units 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 31 March 2023 31 March 2022
US Technology Solutions Global Products 44.1 41.5
US C5ISR Global Products 36.8 34.6
Target Systems Global Products 24.5 24.7
Space Products Global Products - 5.6
Avantus Federal LLC Global Products 257.8 -
QinetiQ Germany EMEA services 2.7 2.6
Inzpire EMEA services 11.7 11.7
QinetiQ Training & Simulation EMEA services 7.8 7.8
Naimuri EMEA services 14.8 14.8
Australia EMEA Services 5.8 6.1
Air Affairs Australia EMEA Services 3.0 -
Net book value at 31 March 409.0 149.4
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 judgements, particularly as they relate to the
forecasting of future cash flows, the discount rates selected and expected
long-term growth rates. As a result of impairment in prior years, QinetiQ
Germany has limited headroom and a critical sensitivity is discussed further
below. For all other CGUs, management considers that there are no likely
variations in the key assumptions which would lead to an impairment being
recognised.
Key assumptions
Cash flows
The value-in-use calculations generally use discounted future cash flows based
on financial plans approved by the Board covering a five-year period (aligned
with the Group's Integrated Strategic Business Plan process and the
longer-term viability assessment period). These are 'bottom-up' forecasts
based on detailed analysis by contract for the revenue under contract and by
opportunity for the pipeline. Pipeline opportunities are categorised as 'base
case' and 'high case' by management and only 'base case' opportunities are
included in the financial plans used for the value in-use calculations.
Cash flows beyond these periods are extrapolated based on the last year of the
plans, with a terminal growth-rate assumption applied.
Terminal growth rates and discount rates
The specific plans for each of the CGUs have been extrapolated using the
terminal growth rates as detailed below. Growth rates are based on
management's estimates which take into consideration the long-term nature of
the industry in which the CGUs operate and external forecasts as to the likely
growth of the industry in the longer term. The discount rates used are
calculated based on the weighted average cost of capital of a portfolio of
comparable companies, adjusted for risks specific to the market
characteristics of each CGU, on a pre-tax basis. This is considered an
appropriate estimate of a market participant discount rate.
All figures % US Technology Solutions Target Systems US Avantus US C5ISR Inzpire Australia Air Affairs Australia QinetiQ Germany QinetiQ Training & Simulation Naimuri
31 March 2023: (2022)
Terminal growth rate 2.3 (2.3) 2.2 (2.1) 2.3 (n/a) 2.3 (2.3) 2.2 (2.1) 2.3 (2.3) 2.3 (n/a) 2.2 (1.6) 2.2 (2.1) 2.2 (2.1)
Pre-tax discount rate 11.1 (10.8) 10.9 (11.6) 11.2 (n/a) 11.2 (10.8) 12.0 (12.2) 12.9 (9.4) 12.9 (n/a) 8.9 (9.1) 10.9 (11.5) 11.8 (12.2)
Sensitivity analysis shows that the value of the terminal year cash flow, the
discount rate and the terminal growth rates have a significant impact on the
value of the discounted cash flows. Sensitivities are provided below for each
of the CGUs.
Significant CGUs
US Technology Solutions
The carrying value of the goodwill for the US Technology Solutions CGU was
£44.1m as at 31 March 2023 (2022: £41.5m). The recoverable amount of this
CGU as at 31 March 2023, based on value in use and calculated using the
assumptions noted above, is higher than the carrying value of net operating
assets (of £111.7m). The key sensitivity impacting on the value in use
calculations is the terminal year cash flows. These cash flows include certain
assumptions around growth of new product lines in development, with clear
market opportunity, and winning identified future government contracts. US
organic revenue grew by 25% compared to prior year, following a year of
decline in FY22 which was impacted by the US defence budget being constrained
by the extended Continuing Resolution.
Confidence remains in continued growth into FY24 having secured significant
growth in order intake in H2 FY22 and FY23 which, coupled with the new
leadership team provides a strong foundation for delivery of our strategy in
the US. An increase in the discount rate of 1%, a decrease in the terminal
growth rate of 1% or a decrease in the terminal year cash flows of $2.0m, all
of which are reasonably possible changes, would not cause the net operating
assets to exceed their recoverable amount.
US C5ISR
The carrying value of the goodwill for the US C5ISR CGU as at 31 March 2023
was £36.8m (2022: £34.6m). The recoverable amount of this CGU as at 31 March
2023, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £88.9m). The
key sensitivity impacting on the value in use calculations is the terminal
year cash flows. An increase in the discount rate of 1%, a decrease in the
terminal growth rate of 1% or a decrease in the terminal year cash flows of
$2.0m, all of which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
Target Systems
The carrying value of the goodwill for the Target Systems CGU as at 31 March
2023 was £24.5m (2022: £24.7m). The recoverable amount of this CGU as at 31
March 2023, based on value in use and calculated using the assumptions noted
above, is higher than the carrying value of net operating assets (of £88.6m).
The key sensitivity impacting on the value in use calculations is the terminal
year cash flows. An increase in the discount rate of 1%, a decrease in the
terminal growth rate of 1% or a decrease in the terminal year cash flows of
£2.0m, all of which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
Germany
The carrying value of the goodwill for the Germany CGU as at 31 March 2023 was
£2.7m (2022: £2.6m). The current forecasts result in the recoverable amount
based on the value in use calculations being £6.4m higher than the carrying
value of assets. Confidence remains in the business prospects over the next
five years, with a new leadership team on board and a healthy pipeline of
opportunities.
The key sensitivity impacting on the value in use calculations is the terminal
year cash flows. These cash flows include certain assumptions around
utilisation of aircraft, renewal of existing contracts and successful winning
of new business opportunities. A reduction in the terminal value year cash
flows of €3m, which would be a reasonably possible change, would lead to an
impairment of the £2.7m carrying value of goodwill together with an
impairment charge against the carrying value of intangible assets of
approximately £12.8m. An increase in the discount rate of 1% or a decrease in
the terminal growth rate of 1%, both of which are also reasonably possible
changes, would result in an impairment of £4.1m and £2.1m respectively.
Inzpire
The carrying value of the goodwill for the Inzpire CGU as at 31 March 2023 was
£11.7m (2022: £11.7m). The recoverable amount of this CGU as at 31 March
2023, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £23.3m). The
key sensitivity impacting on the value in use calculations is the terminal
year cash flows. An increase in the discount rate of 1%, a decrease in the
terminal growth rate of 1% or a decrease in the terminal year cash flows of
£1.0m, all of which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
Naimuri
The carrying value of the goodwill for the Naimuri CGU as at 31 March 2023 was
£14.8m (2022: £14.8m). The recoverable amount of this CGU as at 31 March
2023, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £25.3m). The
key sensitivity impacting on the value in use calculations is the terminal
year cash flows. An increase in the discount rate of 1%, a decrease in the
terminal growth rate of 1% or a decrease in the terminal year cash flows of
£1.0m, all of which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
Australia
The carrying value of the goodwill for the Australia CGU, as at 31 March 2023
was £5.8m (2022: £6.1m). The recoverable amount of this CGU as at 31 March
2023, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £10.8m). The
key sensitivity impacting on the value in use calculations is the terminal
year cash flows. An increase in the discount rate of 1%, a decrease in the
terminal growth rate of 1% or a decrease in the terminal year cash flows of
A$2.0m, all of which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
Avantus
The carrying value of the goodwill for the Avantus CGU, which was acquired
during the year, as at 31 March 2023 was £257.8m. The recoverable amount of
this CGU as at 31 March 2023, based on value in use and calculated using the
assumptions noted above, is higher than the carrying value of net operating
assets (of £431.1m). The key sensitivity impacting on the value in use
calculations is the terminal year cash flows. An increase in the discount rate
of 1%, a decrease in the terminal growth rate of 1% or a decrease in the
terminal year cash flows of $2.0m, all of which are reasonably possible
changes, would not cause the net operating assets to exceed their recoverable
amount.
Air Affairs Australia
The carrying value of the goodwill for the Air Affairs Australia CGU, which
was acquired during the year, as at 31 March 2023 was £3.0m. The recoverable
amount of this CGU as at 31 March 2023, based on value in use and calculated
using the assumptions noted above, is higher than the carrying value of net
operating assets (of £35.9m). The key sensitivity impacting on the value in
use calculations is the terminal year cash flows. An increase in the discount
rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the
terminal year cash flows of A$1.0m, all of which are reasonably possible
changes, would not cause the net operating assets to exceed their recoverable
amount.
QinetiQ Training and Simulation
The carrying value of the goodwill for the QinetiQ Training and Simulation CGU
as at 31 March 2023 was £7.8m. The recoverable amount of this CGU as at 31
March 2023, based on value in use and calculated using the assumptions noted
above, is higher than the carrying value of net operating assets (of £14.1m).
The key sensitivity impacting on the value in use calculations is the terminal
year cash flows. An increase in the discount rate of 1%, a decrease in the
terminal growth rate of 1% or a decrease in the terminal year cash flows of
£1.0m, all of which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
15. Post-retirement benefits
In the UK the Group operates the QinetiQ Pension Scheme ('the Scheme') for
approximately one fifth of its UK employees. The Scheme closed to future
accrual on 31 October 2013 and there is no on-going service cost. After this
date, defined benefit members transferred to a defined contribution section of
the Scheme. The Scheme is a final salary plan, which provides benefits to
members in the form of a guaranteed level of pension payable for life. 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 31 March of each year end.
All figures in £ million FY23 FY22
Total market value of assets - see following table for analysis by category of 1,355.2 2,065.7
asset
Present value of Scheme liabilities (1,235.4) (1,703.5)
Net pension asset before deferred tax 119.8 362.2
Deferred tax liability (35.4) (96.4)
Net pension asset after deferred tax 84.4 265.8
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 liabilities.
The key driver for the decrease in the net pension asset since the March 2022
year end was the turmoil in financial markets following the Government's
'mini-budget' in September 2022, particularly a sharp increase in gilt yields
(and reduced gilt prices). Prior to the 'mini-budget' the Scheme was 100%
hedged on both interest rate and inflation risk, and significant levels of
collateral were required to maintain such hedging levels. The spike in gilt
yields in October 2022 eroded the collateral required to be held in the LDI
portfolio to such an extent that the hedges needed to be reduced to a lower
level, covering approximately 65% of the interest rate risk and 80% of the
inflation rate risk. Subsequent falls in gilt yields meant that, as interest
rate risk was then 35% unhedged, the Scheme suffered a loss in value. This
reduced level of hedging was maintained through to 31 March 2023, as measured
on the Trustees' gilt-funded basis. Over the course of the year, the fall in
value of assets across the whole investment portfolio (primarily LDI-related
collateral) was in excess of the reduction in Scheme liabilities (which also
fell substantially, primarily due to an increase in the discount rate).
Total expense recognised in the income statement
All figures in £ million FY23 FY22
Net finance income 9.9 4.5
Past service cost - (2.4)
Administrative expenses (1.4) (1.1)
Total net income recognised in the income statement (gross of deferred tax) 8.5 1.0
Movement in the net pension asset
The movement in the net pension asset (before deferred tax) is set out below:
All figures in £ million FY23 FY22
Opening net pension asset 362.2 214.3
Net finance income 9.9 4.5
Net actuarial (loss)/gain (253.9) 144.0
Administration expenses (1.4) (1.1)
Past service cost - (2.4)
Contributions by the employer 3.0 2.9
Closing net pension asset 119.8 362.2
The fair value of the Scheme's assets, which are not intended to be realised
in the short term and may be subject to significant change before they are
realised, were:
All figures in £ million 31 March 2023 31 March 2022
Quoted Not quoted in an active market Total Quoted Not quoted in an active market Total
Equities 177.4 32.9 210.3 176.1 44.7 220.8
Liability Driven Investment 227.2 - 227.2 291.8 - 291.8
Asset backed securities(1) 4.3 - 4.3 501.7 - 501.7
Alternative bonds(2) - 256.4 256.4 - 208.6 208.6
Corporate bonds(3) - 117.6 117.6 - 97.4 97.4
Property fund - - - - 29.5 29.5
Cash and cash equivalents - 17.2 17.2 - 78.5 78.5
Derivatives - 6.7 6.7 - (8.5) (8.5)
Insurance buy-in policies - 515.5 515.5 - 645.9 645.9
Total market value of assets 408.9 946.3 1,355.2 969.6 1,096.1 2,065.7
( )
(1)Asset backed securities are used as collateral for the LDI. As gilt yields
spiked during the year, the LDI drew down on significant levels of security,
causing the year on year drop shown above.
(2)Primarily private market debt investments.
(3)Unlisted corporate bonds with commercial property held as security.
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.
Assumptions
The major assumptions used in the IAS 19 valuations of the Scheme were:
31 March 2023 31 March 2022
Insured members Uninsured members Insured members Uninsured members
Discount rate applied to Scheme liabilities 4.80% 4.65% 2.80% 2.70%
CPI inflation assumption 2.55% 2.70% 3.00% 2.90%
Net rate (discount rate less inflation) 2.25% 1.95% (0.20%) (0.20%)
Assumed life expectancies in years:
At 60 for males currently aged 40 n/a 27.9 n/a 28.4
At 60 for females currently aged 40 n/a 30.3 n/a 30.7
At 60 for males currently aged 60 n/a 26.2 n/a 26.7
At 60 for females currently aged 60 n/a 28.2 n/a 28.6
At 65 for males currently aged 65 21.6 n/a 22.0 n/a
At 65 for females currently aged 65 23.3 n/a 23.7 n/a
The sensitivity of the gross Scheme liabilities to each of the key assumptions
is shown in the following table:
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 £7.0m Decrease by £21.7m Decrease by £14.7m
Increase rate of inflation by 0.1% Increase by £5.5m Increase by £20.6m Increase by £15.1m
Increase life expectancy by one year Increase by £14.3m Increase by £34.0m Decrease by £19.7m
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 31 March 2022 this portfolio
hedged against approximately 95% of the interest rate and also 95% of the
inflation rate risk, as measured on the Trustees' gilt-funded basis. During
the current financial year, 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 at 31 March 2023, 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 surplus) 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 of £256.4m; the
unquoted corporate bonds of £117.6m and the unquoted equities of £32.9m are
the assets with most uncertainty as to valuation as at 31 March 2023.
The accounting assumptions noted are used to calculate the year end net
pension asset 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 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.
Risks
Through its defined benefit pension plan, 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 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.
16. 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 are 4,208,899 shares (FY22: 6,816,291
shares). In the year ended 31 March 2023 the Group granted/awarded 1.5m new
share-based awards to employees (FY22: 1.3m).
17. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of
£33.6m at 31 March 2023 (31 March 2022: £37.2m) in the ordinary course of
business, typically in respect of performance bonds and rental guarantees.
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. Related parties
During the year ended 31 March 2023 there were sales to associates and joint
ventures of £0.4m (FY22: £5.2m). At the year end there were outstanding
receivables from associates and joint ventures of £0.5m (FY22: £1.0m).
19. Capital commitments
The Group had the following capital commitments for which no provision has
been made:
All figures in £ million 31 March 2023 31 March
2022
Total contracted 43.4 34.7
Capital commitments at 31 March 2023 include £21.2m (2022: £24.5m) in
relation to property, plant and equipment that will be wholly funded by a
third party customer under long-term contract arrangements. These primarily
relate to investments under the LTPA contract.
20. 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 the United Kingdom.
Statutory Consolidated Financial Statements for the Group for the year ended
31 March 2022, prepared in accordance with adopted IFRS, have been delivered
to the Registrar of Companies. The auditors have reported on those accounts;
their report was (i) unqualified, (ii) did not include a reference to any
matters to which the auditors drew attention by way of any emphasis without
qualifying their opinion and (iii) did not contain a statement under Section
498 (2) or (3) of the Companies Act 2006. This preliminary announcement does
not constitute the Group's full financial statements for the year ended 31
March 2023. This report is based on the accounts which are approved by the
Board and will subsequently be filed with the Registrar of Companies in the
United Kingdom.
The financial information included within the preliminary announcement has
been prepared in accordance with UK-adopted International Accounting Standards
and with the requirements of the Companies Act 2006. The accounting policies
followed are the same, subject to the changes noted below under 'change in
accounting policies', as those published by the Group within its Annual Report
for the year ended 31 March 2022 which is available on the Group's website,
www.QinetiQ.com (http://www.QinetiQ.com) .
The preliminary announcement was approved by the Board of Directors on 25 May
2023. The financial information in this preliminary announcement does not
constitute the statutory accounts of QinetiQ Group plc ('the Company') within
the meaning of section 435 of the Act.
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. Specific adjusting
items include:
Item Distorting due to irregular nature year on year Distorting due to fluctuating nature (size and sign) Does not reflect in-year operational performance of continuing business
Amortisation of intangible assets arising from acquisitions P
Pension net finance income P P
Gains/losses on disposal of property and investments P P P
Transaction & integration costs in respect of business acquisitions and P P
disposals
Impairment of property and goodwill P
Digital investment P P P
Costs of group-wide restructuring programmes P P
The tax impact of the above P P P
Other significant non-recurring tax and RDEC movements P P P
All items treated as a specific adjusting item in the current and prior year
are detailed in note 3. These 'specific adjusting items' are of a
'non-operational' nature and do not include all significant, irregular items
that are of an operational nature, for example contract risk provisions, cost
of redundancy exercises and gains/losses on disposal of plant and equipment.
Such 'non-recurring trading items' are referred to in the business performance
narrative to aid readers from a 'quality of earnings perspective'. They are
considered by the Directors to be irregular but still part of our businesses'
normal 'operating' performance and are included within the KPIs used to
measure those business units (and total Group performance for remuneration
purposes).
Going concern basis
The Group meets its day-to-day working capital requirements through its
available cash funds and its bank facilities. The market conditions in which
the Group operates are expected to be challenging as spending from key
customers comes under pressure, however the Group enters the year with a very
strong balance sheet and a healthy order book. After making enquiries, the
Directors have a reasonable expectation that the Group is well-positioned to
manage its overall business risks successfully and has 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 financial statements.
The Group is exposed to various risks and uncertainties, the principal ones
being summarised in the 'Principal risks and uncertainties' section.
Crystallisation of such risks, to the extent not fully mitigated, would lead
to a negative impact on the Group's financial results but none are deemed
sufficiently material to prevent the Group from continuing as a going concern
for at least the next 12 months.
Changes in accounting policies
Following a routine Financial Reporting Council ("FRC") review of the
consolidated financial statements for the year ended 31 March 2022, the Group
has changed its accounting policy relating to RDEC. The Group's accounting
policy has historically been to account for RDEC under IAS12 Income Tax, as a
credit within the tax charge. Following engagement with the FRC, and a review
of common market practice, the Group has now decided to account for RDEC as
other operating income under IAS20 Government grants.
The impact of this change is to move £6.2m of RDEC income for the year ending
31 March 2022 from the tax charge into other operating income. The impact on
the balance sheet and related notes is to reclassify a £12.0m receivable from
current tax payable to other receivables as at 31 March 2022 (£11.8m as at 31
March 2021) as well as £12.0m (£12.6m as at 31 March 2021) from current tax
to accrued expenses and other payables. There is an impact on net assets of
£2.0m as at both 31 March 2022 and 31 March 2021 due to the deferred income
impact of the updated income recognition under IAS12. There is nil impact on
profit after tax for FY22.
The following tables show the adjustments recognised for each individual line
item as at 31 March 2023, 31 March 2022 and 1 April 2021.
Impact on the balance sheet (extract) at 31 March 2023 and 31 March 2022
31 March 2023 31 March 2022
All figures in £ million Previous policy Change in policy As presented As originally presented Impact of restatement Restated
Assets/(liabilities)
Other receivables 27.9 15.4 43.3 26.8 12.0 38.8
Accrued expenses and other payables (153.8) (12.9) (166.7) (139.5) (12.0) (151.5)
Current tax payable 3.7 (8.3) (4.6) (3.9) (2.0) (5.9)
Deferred tax liability (112.6) 0.6 (112.0) (156.7) (156.7)
Other net assets 1,208.3 - 1,208.3 1,316.7 - 1,316.7
Net assets 973.5 (5.2) 968.3 1,043.4 (2.0) 1,041.4
Impact on the balance sheet (extract) at 1 April 2021
1 April 2021
All figures in £ million As originally presented Impact of restatement Restated
Assets/(liabilities)
Other receivables 7.8 11.8 19.6
Accrued expenses and other payables (133.4) (12.6) (146.0)
Current tax payable (2.5) (1.2) (3.7)
Deferred tax liability (89.7) - (89.7)
Other net assets 1,102.7 - 1,102.7
Net assets 884.9 (2.0) 882.9
Impact on the income statement (extract)
The impact on the Group's consolidated income statement of applying the
restatement is set below:
FY23 FY22
All figures in £ million Previous policy Change in policy As presented As originally presented Impact of restatement Restated
Operating profit 135.8 37.0 172.8 117.5 6.2 123.7
Gain/(loss) on business divestment 15.9 - 15.9 (0.9) - (0.9)
Finance income 16.7 - 16.7 5.0 - 5.0
Finance expense (13.4) - (13.4) (1.9) - (1.9)
Profit/(loss) before tax 155.0 37.0 192.0 119.7 6.2 125.9
Taxation expense 2.6 (40.2) (37.6) (29.7) (6.2) (35.9)
Profit/(loss) for the year attributable to equity shareholders 157.6 (3.2) 154.4 90.0 - 90.0
Impact on underlying measures of performance
Operating profit from segments 178.9 - 178.9 137.4 - 137.4
Underlying operating profit 178.9 17.4 196.3 137.4 6.2 143.6
Glossary
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation and amortisation
EBITA Earnings before interest, tax and amortisation
EPS Earnings per share
IAS International Accounting Standards
IFRS International Financial Reporting Standards
LTPA Long Term Partnering Agreement: 25-year contract established in 2003 to manage
the MOD's test and evaluation ranges
MOD UK Ministry of Defence
SSRO Single Source Regulations Office
Alternative performance measures ('APM's)
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 year-on-year 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
Operating profit from segments Total operating profit from segments which excludes 'specific adjusting items' Note 2
and research and development expenditure credits ('RDEC')
Operating profit margin from segments Operating profit from segments expressed as a percentage of revenue Note 2
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 7
Underlying profit before/after tax Profit before/after tax as adjusted to exclude 'specific adjusting items' Note 8
Underlying effective tax rate The tax charge for the year excluding the tax impact of 'specific adjusting Note 8
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 9
adjusting items'
Orders The level of new orders (and amendments to existing orders) booked in the year N/A
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 year to revenue for the year, adjusted N/A
to exclude revenue from the 25-year LTPA contract due to significant size and
timing differences of LTPA order and revenue recognition which distort the
ratio calculation
Underlying net cash flow from operations Net cash flow from operations before cash flows of specific adjusting items Note 10
Underlying operating cash conversion or cash conversion ratio The ratio of underlying net cash from operations to underlying EBITDA. Note 10
Free cash flow Underlying net cash flow from operations less net tax and interest payments Note 10
less purchases of intangible assets and property, plant and equipment plus
proceeds from disposals of plant and equipment
Net cash Net cash as defined by the Group combines cash and cash equivalents with other Note 11
financial assets and liabilities, primarily available for sale investments,
derivative financial instruments and lease liabilities
Return on capital employed Calculated as: Underlying EBITA / (average capital employed less net pension CFO Review
asset), where average capital employed is defined as shareholders equity plus
net debt (or minus net cash)
Specific adjusting items Amortisation of intangible assets arising from acquisitions; impairment of Note 3
property and goodwill; gains/losses on disposal of property, investments and
businesses; net pension finance income; transaction and integration costs in
respect of business acquisitions; digital investment; tax impact of the
preceding items and significant non-recurring tax and RDEC movements
FY The financial year ended 31 March n/a
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