REG - QinetiQ Group plc - QinetiQ Preliminary Results
23/05/2024 07:00
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RNS Number : 5549P QinetiQ Group plc 23 May 2024
Preliminary Results
23 May 2024
Strong Group Performance
Results for the year ended 31 March 2024
Steve Wadey, Group Chief Executive Officer, said: "I am pleased with our
strong Group financial results for FY24, delivered against the background of
difficult market conditions in the US. These results have been achieved
through the outstanding skills of our people, delivering highly relevant
services and products critical to enduring national defence and security
priorities."
"We enter this year with strong momentum and increasing spending in our major
markets, which gives us confidence to increase our guidance for FY25 and
underpins our FY27 outlook of c.£2.4bn organic revenue at c.12% margin. With
a strengthened balance sheet and enhanced focus on disciplined capital
allocation, we are well positioned and have a clear strategy with optionality
for additional investment in sustainable growth and further shareholder
returns."
Financial highlights
Underlying(1) results Statutory results
FY24 FY23 FY24 FY23
Revenue £1,912.1m £1,580.7m £1,912.1m £1,580.7m
Operating profit(2) £215.2m £178.9m £192.5m £172.8m
Profit after tax £169.6m £152.9m £139.6m £154.4m
Earnings per share 29.4p 26.5p 24.2p 26.8p
Full year dividend per share 8.25p 7.70p 8.25p 7.70p
Order intake £1,740.4m £1,724.1m
Funded order backlog £2,873.0m £3,070.3m
Net cash inflow from operations £320.2m £270.1m £294.1m £240.6m
Net debt £151.2m £206.9m £151.2m £206.9m
Strong overall Group operational and financial performance
- Revenue up 21% through good programme execution, up 14% on an organic basis
- Underlying operating profit up 20% with stable margin at 11.3%, up 16% on an
organic basis
- Cash performance remains strong with high conversion at 104%, reducing
leverage to 0.5x
- Record order intake at £1.74bn, with a book-to-bill of 1.1x(3) and order
backlog of £2.9bn
- Continued strong earnings growth, with underlying EPS up 11% to 29.4p
- Progressive dividend growth up from 5% to 7%, with full year dividend of 8.25p
- £100m share buyback launched, on-track to complete by the end of FY25
Differentiated global company aligned to enduring needs of our AUKUS customers
- EMEA Services delivered excellent revenue growth at stable margin, driven by
strong execution of prior year orders and consistent operational delivery on
our long-term contracts
- Global Solutions continued to be impacted by difficult market conditions in
the US resulting in lower revenue at stable margin, however, a strong order
intake achieved a book-to-bill of 1.1x
- Within Global Solutions, Avantus won $977m(4) of awards aligned to national
security priorities resulting in a funded book-to-bill of 1.2x and confidence
in our platform for future growth
Expecting another strong year with clear strategy delivering sustainable
growth
- Highly relevant services and products, aligned with increasing spending in our
major markets
- Increasing guidance for FY25 with strong growth in EMEA Services and stable
Global Solutions
- On-track to deliver FY27 outlook of c.£2.4bn organic revenue at c.12% margin
- Enhanced focus on capital allocation to deliver attractive returns and
shareholder value
(1 )Definitions of the Group's 'Alternative Performance Measures' can be
found in the glossary
(2 )Underlying operating profit refers to operating profit from segments. See
note 2 for details
(3 )B2B ratio is orders won divided by revenue recognised, excluding LTPA
revenue of £266m (FY23: £225m)
(4 )$331m of orders were recognised in FY24
Preliminary results presentation:
Management will host a presentation at 09:30 hours BST on Thursday 23 May 2024
at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. 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/fy24-prelim-results
(https://www.qinetiq.com/en/investors/results-reports-and-presentations/fy24-prelim-results)
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 c.8,500 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.
For further information please contact:
Stephen Lamacraft, Interim Group Investor Relations Director:
+44 (0) 7570 082140
Lindsay Walls, Group Communications Director (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 (FY24, FY23, 2024, 2023) 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 applicable 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. All subsequent written and
oral forward-looking statements attributable to either QinetiQ Group plc or to
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements referred to in this disclaimer and contained elsewhere
in this document.
QinetiQ Group plc and its directors accept no liability to third parties in
respect of this document save as would arise under English law. Accordingly,
any liability to a person who has demonstrated reliance on any untrue or
misleading statement or omission shall be determined in accordance with
Schedule 10A of the Financial Services and Markets Act 2000. It should be
noted that Schedule 10A and Section 463 of the Companies Act 2006 contain
limits on the liability of the directors of QinetiQ Group plc so that their
liability is solely to QinetiQ Group plc.
.
Group Chief Executive Officer's Review
Overview
We have delivered strong overall Group financial results, against the
background of difficult market conditions in the US. These results have been
achieved through the outstanding skills and capabilities of our people working
in partnership with our customers and supply chain. The world is experiencing
the highest and most rapidly evolving threat environment for a generation and
our teams have continued to deliver our highly relevant services and products,
critical to enduring national defence and security priorities.
Since launching our strategy in 2016 to build a disruptive and uniquely
integrated global defence and security company, we have grown our revenue by
more than 2.5x, doubled earnings, and now have more than 8,500 highly-skilled
people across 60 sites globally. Our depth and breadth of expertise across the
defence and security lifecycle helps our customers to rapidly create, test and
use capability to stay ahead of the threat. Our cutting edge technology and
innovation, allied with world leading expertise in science, technology and
engineering, is critical to enabling our customers' mission.
Our strategy is structurally aligned and focused on enabling the shared
security mission of our Australian, United Kingdom and United States (AUKUS)
customers and their allies. Our six distinctive offerings(5) are highly
relevant to the rapidly changing character of warfare and aligned to our
customers' high-priority areas that are attracting increasing defence and
security spending, most notably in Research & Development (R&D), Test
& Evaluation (T&E), Training & Mission Rehearsal and Cyber &
Intelligence.
For our people, we've made significant progress creating an environment where
they can all thrive, with our highest ever level of employee engagement
achieved this year. Having a highly skilled and engaged team, with an
inclusive culture, enables us to deliver for our customers' mission with even
greater agility and pace.
For our shareholders, we are focused on continuing disciplined execution of
our strategy and are on-track to deliver our FY27 outlook of c.£2.4bn organic
revenue at c.12% margin. With a strong balance sheet and enhanced focus on
disciplined capital allocation, we are well positioned and have a clear
strategy with optionality for investment in sustainable growth and further
shareholder returns.
(5) Our six distinctive offerings are: Experimentation and Technology,
Robotics and Autonomous Systems, Engineering Services and Support, Test and
Evaluation, Cyber and Information Advantage, Training and Mission Rehearsal
Performance in the year
We delivered another year of strong overall Group operational and financial
performance. Revenue growth was 21%, or 14% on an organic constant currency
basis and underlying operating profit grew by 20%, or 16% on an organic
constant currency basis, with stable margin at 11.3%. We continued our track
record of high cash generation with underlying cash conversion at 104%,
contributing to the reduction of our leverage (net debt to EBITDA) from 0.8x
to 0.5x. Order intake achieved a record high of £1.74bn, with a book-to-bill
of 1.1x and an order backlog of £2.9bn. As part of our enhanced capital
allocation policy, we launched a value accretive £100m share buyback
programme and have increased the growth rate of our progressive dividend from
5% to 7%.
EMEA Services
EMEA Services delivered excellent growth, achieving 19% organic revenue growth
with stable margin at 11.5%. This performance was driven by the strong
execution of prior year orders and consistent operational delivery on our
long-term contracts.
In the UK, service delivery partnerships remain the bedrock of our offering.
Our large long-term Engineering Delivery Partner (EDP) contract has now
delivered more than £1.5bn of orders since inception, enabling capability and
sustainment of the majority of UK military systems; and we signed a Principles
Agreement with UK MOD to extend the Long Term Partnering Agreement (LTPA) to
2033, where we test, trial, train and evaluate (T3E) national defence and
security capabilities critical to mitigating global threats. Both of these
contracts make a meaningful contribution to the sustainable performance and
returns generated by EMEA Services. In addition, to accelerate the production
of mission data for the Royal Air Force, the SOCIETAS transformation programme
has achieved full operating capability three months early. Also in the UK we
commenced support of the new AUKUS submarine programme through initial tasking
as a capability partner. In Australia, as a leading provider within Team Nova,
we secured a three year extension to our Managed Service Provider (MSP)
contract to provide technical advisory services in support of the Australian
Capability Acquisition and Sustainment Group; and we continue to successfully
develop the high energy defensive laser system prototype in collaboration with
the Defence Science and Technology Group. In Germany, we signed a significant,
multi-year contract to provide aerial training and mission rehearsal services
for their Armed Forces.
Strategic achievements include:
- Formidable Shield for NATO - Over three weeks in May 2023 at UK MOD
Hebrides, we hosted Formidable Shield 23, one of the world's largest and most
complex tests of naval and missile defences. The exercise saw over 20 ships,
35 aircraft, and nearly 4,000 allied military personnel from 13 NATO nations
come together to test military platforms, missiles, and sensor systems against
representative threat scenarios in realistic live-fire mission rehearsal
exercises.
- DragonFire for the UK - In collaboration with the UK's Defence Science and
Technology Laboratory (Dstl), MBDA and Leonardo, we demonstrated the
capabilities of our world-leading beam combining technology with the UK's
first high-power firing of a laser weapon against aerial targets.
Subsequently, the MOD has recently announced that the cutting-edge DragonFire
laser directed energy weapon system will be installed on Royal Navy warships
for the first time from 2027, far sooner than previously envisaged.
- Joint Adversarial Training and Testing Services (JATTS) for Australia - The
JATTS contract supports our ambition to double the size of the Australian
business over the next four years through training support to the Australian
Defence Force with 'enemy' force aircraft and aerial targets. In the year we
achieved a 20% increase in aircraft flying hours and 90% more aerial target
missions than originally planned. A notable highlight was providing our threat
representation services into the Talisman Sabre training exercise involving 13
allied nations and involving 30,000 military personnel.
With strong visibility, and a pipeline of significant opportunities, our
confidence remains high that EMEA Services will continue to support the
sustainable growth of the Group.
Global Solutions
Global Solutions was impacted by difficult market conditions in the US, with
recent headwinds including one of the longest periods of Continuing Resolution
on record. Overall, revenue was up 23%, declining 3% on an organic basis, with
margin remaining stable at 10.5%.
Avantus, delivered a high single digit revenue decline over the course of the
year. However, the business achieved modest revenue growth in the second half,
with double digit margin and cash conversion of c.100% over the full year.
With the integration now complete, the benefits of Group synergies are now
being realised with $977m of total contract awards during the year and a
funded book-to-bill of 1.2x. We remain confident of Avantus delivering value
for shareholders and expect mid-single digit growth in FY25 before returning
to double digit growth in FY26. Notable contract awards include a $170m five
year Tethered Aerostat Radar System (TARS) contract providing surveillance
operations along the southern border of the US and its territories, a $126m
five year contract to provide technical, professional, and support services to
the Office of the Secretary of Defense Strategic Capabilities Office (SCO),
and a $224m, five year, firm fixed price contract with the US Space
Development Agency (SDA) to provide systems engineering and technical
assistance support needed to deliver the Proliferated Space Warfare
Architecture.
Revenue in the rest of Global Solutions was broadly flat for the year, due to
the loss of the Optionally Manned Fighting Vehicle (OMFV) opportunity. We also
saw the planned production ramp down of the Common Robotic System - Individual
(CRS-I) small ground robots in the US, offset by QinetiQ Target Systems (QTS)
achieving its highest ever production levels within the year in the UK. A
significant step forward in the year was the successful certification of our
Banshee target by the US Threat Systems Management Office, enabling market
entry and opening up growth opportunities in FY25 and beyond.
Strategic achievements include:
- Tethered Aerostat Radar System (TARS) - We were awarded a five year $170m
TARS contract as a Prime System Integrator to the Department of Homeland
Security providing persistent surveillance operations and sustainment along
the southern border of the US and its territories. Upon award, we successfully
transitioned eight operational sites in six weeks, hired 229 employees,
negotiated union agreements, and the management of all critical services
providers. We are on track to secure more than 10% on-contract growth in FY25
through expanded mission scope and capability enhancements, and have
identified c.50% on-contract growth opportunities over the life of the
programme.
- Robotic Combat Vehicle Light (RCV-L) - Working alongside Oshkosh Defence, we
were one of four awardees for the RCV-L full scale prototype contract from the
US Army, following successful operational trials. The RCV-L solution works
directly with warfighters on the ground providing an intelligence and
reconnaissance platform used for forward scouting with the ability to carry
lethal payloads. The prototype contract positions us well to compete for our
share of the future development and production phases worth up to $500m.
- Next Generation Advanced Bomb Suits (NGABS) - A five year, $83m contract for
the testing and production of over 700 next generation advanced bomb suits for
the US Army, demonstrating our ability to leverage our R&D into core
capability.
With an attractively positioned portfolio of high priority capabilities, and
the integration of Avantus complete, we are confident that Global Solutions is
well placed to deliver a meaningful contribution to our FY27 organic revenue
target of c.£2.4bn.
Aligned with high priority customer needs
Global tensions continue at elevated levels. In the Middle East, Houthi forces
attempt to disrupt world supply lines and broaden the Yemeni civil war, whilst
Iran has escalated the Israel-Hamas conflict, and Russian forces remain
entrenched within Ukraine. China continues to provide a destabilising
influence, notably in the Indo-Pacific, as does North Korea and transnational
terrorist networks. As a result, Australia, the UK and the US, through the
AUKUS security pact, and with their 5-Eyes and NATO allies, continue to review
their evolving defence and security capabilities and investment priorities.
Given this heightened threat environment, levels of defence spending are
expected to increase over the long-term. In the US, the Research, Development,
Test and Evaluation (RDT&E) budget is the largest ever at $145bn(6).
Governments in the UK and Australia intend to increase defence spending to
c.2.5% of GDP over the long-term, with the UK ring-fencing 5% of the defence
budget for R&D and 2% for exploitation. In total, our addressable market
is estimated to be greater than £30bn per annum(7). More broadly, a record 18
member countries are now set to meet NATO's target of spending 2% of their
economic output on defence and security this year, a marked increase from 11
out of the 31 members a year ago.
These investment priorities are driving increasing spending in high-priority
areas such as, R&D, T&E, Training & Mission Rehearsal, and Cyber
& Intelligence, to enable our customers to maintain and develop
technological superiority in areas such as robotics, autonomy, directed
energy, hypersonics, integrated sensing, cyber, advanced data analytics and
artificial intelligence. We remain at the forefront of the adoption and
integration of these new and emerging technologies with traditional defence
capabilities, providing enhanced inter-operability between allied systems and
enhancing our customers' operational effectiveness.
A combination of our global reach and alignment to these high-priority
high-growth areas provides confidence in the Group's ability to deliver
organic revenue growth at double the rate of growth of national defence
budgets, as we have done consistently over the past five years.
(6) IN12209 (congress.gov)
(https://crsreports.congress.gov/product/pdf/IN/IN12209)
(7) Sources: Jane's Market Budget Forecast March 2023, UK MOD and US DOD
forecasts, Australia Defence publications, QinetiQ estimates
Clear purpose and strategy delivering for our customers
At this time of heightened geopolitical uncertainty and conflict, our purpose
has never been more relevant: protecting lives by serving the national
security interests of our customers. With a unique customer value proposition
to rapidly create, test and train effective use of capability, we enable our
customers to respond to their national and global security needs and counter
the increasing threat at pace.
With a clear purpose and strategy, the Group is well positioned to deliver
sustainable shareholder value. Our strategy has three inter-related
components:
1. Delivering six distinctive and mutually supportive offerings: We co-create
high-value differentiated solutions for our customers in experimentation,
test, training, information, engineering and autonomous systems;
2. Applying disruptive and innovative technology and business models: We invest
in and apply disruptive business models, digitisation and advanced
technologies to enable our customers' operational mission at pace; and,
3. Leveraging those capabilities across our global operations: We are developing
an integrated global defence and security company that leverages our
capability in the UK, the US, Australia, Canada and Germany.
The disciplined execution of our strategy is building a global platform and
delivering sustainable growth, underpinning our FY27 outlook to deliver
c.£2.4bn organic revenue at c.12% margin. Our focus on our customers'
high-priority areas, specifically Research and Development (R&D), Test and
Evaluation (T&E), Training & Mission Rehearsal, and Cyber &
Intelligence, provides confidence in our high single digit revenue growth
guidance and is why our growth outpaces headline defence spending. Our
strategy is further underpinned by a record order intake of £1.74bn with a
backlog of £2.9bn, and an exceptionally strong pipeline of future growth
opportunities worth more than £11bn over the next five years.
Enhanced focus on disciplined capital allocation and execution
Our strategy to deliver long-term sustainable growth is underpinned by an
enhanced focus on disciplined capital allocation and execution. Given the
highly cash generative nature of the Group, as well as the strength of the
balance sheet, we continually assess the best risk adjusted opportunities to
deploy capital to support shareholder returns.
We are continuing to invest in value accretive organic growth, with a focus on
our people, technology and capability. This will be complemented by value
accretive bolt-on acquisitions in time, following strengthened delivery and
performance of our US platform and growth of Avantus.
Reflecting our confidence in the future prospects of the business, we have
increased the growth rate of our progressive dividend from 5% to 7% and are
returning excess cash to shareholders through the £100m share buyback
programme announced in January.
Our strengthened balance sheet provides optionality for investment in growth
and further shareholders returns.
Sustainability
In delivering our strategy, the single biggest contributor will be our people.
Their safety, wellbeing and motivation is essential for our success.
We measure employee engagement each quarter and I was delighted that at the
end of this year we achieved our highest ever employee engagement measure
since introducing this metric five years ago. Since its introduction we have
improved employee engagement by 19% and the loyalty measure by 25%, a
fantastic achievement and symbolic of the inclusive culture we are growing.
We were deeply saddened by the fatal crash involving two aircrew on-board one
of our PC-9 aircraft in the Neuenstein area of Germany whilst on a customer
training exercise in September 2023. Our thoughts remain with the families and
close colleagues. Although the formal investigations into this accident are
ongoing, we do not believe that there was any contributory fault by the
company.
We continue to make good progress on our Net-Zero plan. Our Scope 1 and 2
emissions have now reduced by 33% against our re-baselined FY20 base year,
including a c.8% reduction in FY24, whilst some elements of our Scope 3
emissions, such as business travel, have increased as we have grown globally.
With our strong focus on our Environmental, Social and Governance (ESG)
agenda, we are ranked as one of the top ESG companies in the defence and
security sector by Sustainalytics and we have retained our AA rating from
MSCI.
Leadership changes
At the start of April, we announced that Carol Borg, Group CFO, and the Board
together agreed that Carol would step down from her role. The Board and I were
delighted to announce the appointment of Martin Cooper as Group CFO. Martin is
a qualified chartered accountant with more than 25 years' experience leading
multi-disciplinary teams in senior finance roles and is expected to join
QinetiQ no later than October. To enable a smooth transition prior to Martin
joining, Heather Cashin, previously Group Financial Controller, has been
appointed Interim Group CFO.
Also in April, I was delighted to announce the appointment of Iain Stevenson
to the newly created role of Chief Operating Officer. As an experienced senior
business leader having previously led large business divisions in the defence
and construction sectors, his skills will strengthen the delivery of
consistent operational performance across the Group as we continue to scale
and grow.
Finally, I was extremely pleased to confirm the internal promotion of Will
Blamey to Chief Executive UK Defence. Will has played a critical role leading
the successful development and delivery of major programmes, such as the
LTPA.
These appointments will add strength and depth to our leadership team and
further enhance our capabilities to execute our plan for sustainable growth.
FY25 guidance increased and on-track to deliver FY27 outlook
We enter FY25 with strong momentum, a healthy order book and increased
visibility, with 64% revenue under contract. We expect FY25 to deliver high
single-digit organic revenue growth, compared to FY24, at a stable operating
profit margin.
We are on-track to achieve c.£2.4bn organic revenue at c.12% margin by FY27.
This will deliver an attractive return on capital employed at or above the
upper end of the 15-20%+ range.
Cash conversion will remain high at 90%+ with capital expenditure within the
£90m to £120m range. Our strengthened balance sheet provides optionality,
through disciplined deployment of capital, for bolt-on acquisitions to
compound growth at 11-12% margin and further shareholder returns.
Summary
I am pleased with the significant progress we have made in FY24, delivering
another year of strong Group operational and financial performance with
stronger growth in EMEA Services and stable performance in Global Solutions.
The company is well positioned with a clear strategy, underpinning our
confidence in delivering sustainable growth and attractive returns for our
shareholders.
Our strategy and distinctive offerings are uniquely relevant to our customers'
mission within the current heightened threat environment. Everything we do is
about delivering on our purpose: protecting lives by serving the national
security interests of our customers. Our purpose continues to connect us all,
giving us a sense of focus, direction and pride. We look forward to continuing
to deliver for the benefit of all our stakeholders in the coming years.
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; and the
Israel-Hamas conflict increasing further tension in the Middle East and
threatening wider escalation in the region. These conflicts and ongoing
tensions come at a time when many countries are holding national elections and
this could potentially compound global uncertainty.
In parallel, rapidly emerging and evolving technologies continue to disrupt
traditional business and society with both positive and negative outcomes
including the creation of unprecedented vulnerabilities.
To meet these increasing challenges, Australia, the UK, the US and their
allies continue to review their evolving defence and security capabilities and
are increasing spending in high-priority areas aligned with our strategy.
UK
A more contested and volatile international environment has reinforced the UK
Government's commitment to increased defence spending. In April, the UK
Government announced an incremental £75bn of defence spending over six years,
with defence spending set to rise to 2.5% of GDP by the end of the decade -
reaching £87bn a year in 2030. The Government states that "additional funding
will be used to put the UK's defence industry on a war footing, deliver
cutting-edge technology and back Ukraine against Russia"(8). The new
(https://assets.publishing.service.gov.uk/media/6628c835b0ace32985a7e51c/2024-04-23_Defending_Britain_-_FINAL.pdf)
spending plan comes with a promise to spend at least 5% of the budget on
R&D from next year, and another 2% to "support the exploitation of
promising science and technology in military capability"(9).
As the UK seeks to develop and deploy next-generation capabilities faster than
its adversaries, we are well positioned to support our customers in applying
mission-led innovation to achieve this.
(8) PM announces 'turning point' in European security as UK set to increase
defence spending to 2.5% by 2030, 23 April 2024 (gov.uk)
(9) Defending Britain 23 April 2024 (gov.uk)
US
The US continues to address the comprehensive and serious challenge of the
People's Republic of China, while tackling the acute threat of a highly
aggressive Russia, and increasing vigilance against the persistent threats of
North Korea, Iran and transnational terrorist networks.
To support these aims, the Department of Defense funding for 2024 is
$841.4bn(10). As part of this, the Research, Development, Test and Evaluation
(RDT&E) budget is the largest ever at $145bn(11). Investment in critical
technology areas aimed at strengthening technological advantage include
directed energy, hypersonics, integrated sensing and cyber.
We serve our US customers' mission in the areas of Intelligence, Surveillance
and Reconnaissance (ISR), mission operations, advanced cyber, information
advantage, multi-domain autonomous solutions and systems and engineering and
innovation.
(10) FY24 NDAA Bill Report (senate.gov)
(https://www.armed-services.senate.gov/imo/media/doc/fy24_ndaa_conference_executive_summary1.pdf)
((11)) IN12209 (congress.gov)
(https://crsreports.congress.gov/product/pdf/IN/IN12209)
Australia
In 2024, the Australian Government released the inaugural National Defence
Strategy and Integrated Investment Program complementing the 2023 Defence
Strategic Review. Recognising that the current environment demands a new
approach to defending its national interests, there is a commitment to invest
in conventionally armed, nuclear-powered submarines through a partnership
between Australia, the UK and the US (AUKUS), alongside deepening cooperation
on a range of advanced security and defence capabilities. The Defence Industry
Development Strategy (DIDS) now articulates the defence industrial base
required with Test and Evaluation, Certification and Systems Assurance (TECSA)
forming one of the seven Sovereign Defence Industrial Priorities.
The consolidated Defence and Australian Signals Directorate funding for
FY24/25 is estimated at AUD $55.3bn(12). In April 2024, the Australian
Government announced that it will increase defence spending by $50.3bn over
the next decade, hitting $100bn by 2033, or c.2.4% of GDP.
(12) Budget
(https://previewapi.transparency.gov.au/delivery/assets/80a82ed1-3e33-027b-b7e0-6493f97f18f8/66fdc607-00ae-4a6d-9727-934ded703951/2023-24_pbs_defence.pdf)
2024-25 Budget Paper No. 1.4A, page 16
Broader international markets
During 2023 there has been a marked increase in global defence investment as
many countries have re-evaluated their defence and security priorities as a
consequence of the Russia-Ukraine war. The 2024 forecast for global defence
spending stands at $2.47tn(13), which represents a 13% increase since 2022.
While priority and investment focus will be attached to the prosecution of our
three home country strategies (Australia, UK and US), we continue to conduct
business in the support of allied nations.
(13) Janes Defence Budgets, January 2024
Group Chief Financial Officer's Review
Overview of full year results
The Group has delivered strong growth and underlying performance across all
metrics, reflecting continued disciplined execution of our strategy.
Consistently strong cash generation contributed to net debt to EBITDA falling
to 0.5x (FY23: 0.8x). We have increased the growth rate of our progressive
dividend from 5% to 7%, growing the distribution to 8.25p per share (FY23:
7.70p).
The Group achieved record orders in the year, totalling £1,740.4m (FY23:
£1,724.1m), a year-on-year 1% increase and a book-to-bill of 1.1x. This is on
the back of a very strong prior-year comparator, which included the 10 year
£260m Maritime Strategic Capability Agreement (MSCA) contract. Excluding the
MSCA contract, orders were up 19%; orders declined 10% organically with MSCA
included. We have secured major orders across both of our operating segments.
Within EMEA Services we secured £1,193m of orders, including a £54m
variation of price uplift to the LTPA, a £39m extension to our Battlefield
and Tactical Communications & Information Systems (BATCIS) contract and a
significant multi-year aerial training services contract in Germany.
Within Global Solutions, FY24 orders were £547m, a 56% increase on a reported
basis and 7% organic. The drivers of this performance are an 18% increase in
our QTS business to £68m, together with a significant increase in funded
orders through the US business as a result of the Avantus acquisition in FY23.
In the US, the total value of contract awards was $1.3bn. Of this, $571m has
been funded and is reported within the Global Solutions order intake. The
remaining $729m represents unfunded orders, which are contract awards for
which funding has not yet been appropriated or authorised.
Highlights include a $46m funded order for our Electromagnetic Aircraft Launch
System (EMALS) and Advanced Arresting Gear (AAG) systems for the US Navy's CVN
81 aircraft carrier, and a five year contract worth $83m for the Next
Generation Advanced Bomb Suit (NGABS) ($34m funded and $49m unfunded). We
secured contract awards for a five year contract with the Secretary of Defense
Strategic Capabilities Office (SCO) for $126m ($14m funded and $112m
unfunded), a $223m contract award for Space Development Agency (SDA) support
($43m funded and $180m unfunded), and a five year Tethered Aerostat Radar
System (TARS) Operations & Maintenance contract with a total contract
value of $170m ($16m funded and $154m unfunded).
Funded order backlog remains strong at £2.9bn, or £3.7bn including unfunded
orders, providing good visibility going forward:
- In EMEA Services the total funded order backlog was £2.6bn (FY23: 2.8bn).
The reduction in the backlog is due to the delivery of non-tasking revenue
(c.£266m per annum) within the Long-term Partnering Agreement (LTPA). This is
a large multi-year contract that was booked in prior years and as we deliver
this will naturally reduce the LTPA order backlog. Outside of the LTPA,
backlog has remained broadly stable at £1.4bn (FY23: £1.5bn).
- In Global Solutions the total funded order backlog grew from £302m in FY23
to £321m in FY24. Our US unfunded order backlog grew from $245m to $974m
driven by the contracts referenced above.
At the beginning of FY25 approximately £1.3bn of the Group's FY25 revenue was
under contract, compared to £1.1bn (of the FY24 revenue) at the same point
last year. In addition, it is anticipated that $150m of unfunded orders will
be funded during FY25.
We delivered strong revenue growth of 21% to £1,912.1m (FY23: £1,580.7m),
14% on an organic basis, demonstrating increasing demand for our six
distinctive offerings. We saw a 19% organic revenue increase in EMEA Services
primarily due to good growth in the UK, underpinned by new work as part of the
EDP framework (delivering 28% revenue growth within the framework) and a
variation of price uplift on the LTPA. Global Solutions revenue decreased by
3% organically with Avantus delivering high single digit revenue decline over
the course of the year. Revenue in the rest of Global Solutions was broadly
flat for the year, impacted by the loss of the Optionally Manned Fighting
Vehicle (OMFV) opportunity. We also saw the planned production ramp down of
the Common Robotic System - Individual (CRS-I) small ground robots in the US
from $40.2m in FY23 to $13.8m in FY24, offset by the highest ever production
levels in QinetiQ Target Systems (QTS) in the UK.
Operating profit from segments of £215.2m (FY23: £178.9m) was up 20%. This
represents a stable 11.3% operating margin (FY23: 11.3%), consistent with our
guidance range of 11-12%. The largest contributions to year-on-year growth
were the full-year impact of the Avantus acquisition and organic revenue
growth at stable operating margin in EMEA Services.
To ensure consistency and clarity on our headline profit figures, our headline
profit figure remains as operating profit from segments and excludes any
benefit arising from RDEC income (which was previously reported within the tax
line prior to FY23). Statutory operating profit was £192.5m (FY23: £172.8m),
including the impact of specific adjusting items and RDEC income. Underlying
RDEC income increased to £27.2m (FY23: £17.4m) due to the increase in the
applicable rate.
Underlying profit before tax increased 16% to £227.0m (FY23: £189.7m) in
line with the increase in underlying operating profit, with underlying net
finance expense at £15.4m (FY23: £6.6m). Underlying net finance expense
increased due to the full-year impact of interest payable on the term loan
drawn down to fund the Avantus acquisition.
Specific adjusting items
The total impact of specific adjusting items (which are excluded from
underlying performance due to their distorting nature) on operating profit was
a £49.9m cost (FY23: cost of £23.5m).
Acquisition and disposal costs of £2.7m (FY23: £16.4m) comprise costs
associated with an aborted acquisition attempt during the year, as well as a
number of ongoing disposal projects. Acquisition-related remuneration relates
to specific post-deal retention arrangements relating to Avantus employees.
Acquisition integration costs of £5.3m (FY23: £2.0m) comprises costs
associated with the Avantus and Air Affairs acquisitions which were completed
in H2 of FY23.
We continue to deliver on our discrete investment project to build our digital
platform to enable our global growth strategy and our AUKUS customers' needs.
The project runs for a further three years and we expect an additional c.£35m
of non-recurring costs to 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 FY24 the
non-recurring cost of the digital investment project was £16.9m (FY23:
£5.8m).
FY23 included exceptional restructuring costs of £5.0m, as part of the
significant Group-wide organisation redesign, and a £19.6m credit in respect
of UK MOD appropriation for RDEC, following a determination by the Single
Source Regulations Office on the interpretation of the Statutory Guidance for
Allowable Costs regulations. The accounting judgement remains that RDEC on
single-source contracts from 1 April 2019 onwards will not be paid on to the
UK MOD, which was a change from the accounting judgement at the FY22 year end.
Also included within specific adjusting items are a gain on the sale of
property of £2.1m (FY23: £2.0m), financing income from pensions of £5.6m
(FY23: £9.9m), impairment of right-of-use lease assets in the US following
space relocation of £0.7m, and amortisation of acquisition intangibles of
£25.2m (FY23: £15.6m). Amortisation of acquisition intangibles has
increased due to the amortisation of new intangible assets recognised on the
FY23 acquisitions (primarily the Customer Relationships asset associated with
Avantus). FY23 also included a gain on disposal of the Space NV business in
Belgium of £15.9m.
Tax
The total tax charge was £43.1m (FY23: £37.6m). The underlying tax charge
was £57.4m (FY23: £36.8m), on a higher underlying profit before tax, with an
underlying effective tax rate of 25.3% for the year ending 31 March 2024
(FY23: 19.4%), increased from the prior year due to the change in UK statutory
rate. The underlying effective tax rate is above the UK statutory rate of 25%
(FY23:19%) primarily as a result of higher overseas tax rates and
non-deductible overseas interest, offset by prior year adjustments to returns.
The underlying effective tax rate is expected to remain marginally above the
UK statutory rate, subject to the impact of any tax legislation changes and
the geographic mix of profits. The Group has engaged with advisers to assess
any potential impact on the tax charge by the UK's enactment of the OECD's
Global Anti-Base Erosion Model Rules (Pillar Two). The Group performed an
assessment of the potential exposure to Pillar Two income taxes based on
current period data. The Group understands it qualifies for one of the
transitional safe harbours provided in the rules in all territories in which
it operates. Therefore, the Group does not anticipate a material impact from
Pillar Two legislation in the near future. The Group has applied the
temporary exemption issued by the International Accounting Standards Board
from the accounting for deferred taxes under IAS12 and neither recognises nor
discloses information about deferred taxes related to Pillar Two income
taxes. The Group does not anticipate a material quantitative impact from
Pillar Two legislation, however, there are expected to be significant
compliance obligations.
Cash management and capital allocation policy
Working capital management and overall cash performance has remained robust,
with a particularly strong performance in the second half.
Underlying net cash flow from operations was £320.2m (FY23: £270.1m). Our
cash conversion definition reflects our pre-capital expenditure cash flows as
a proportion of EBITDA to demonstrate how we convert our profit (excluding
interest, tax, depreciation and amortisation) into cash flow - under this
definition we achieved consistent underlying cash conversion of 104%, (FY23:
106%).
As at 31 March 2024 the Group had £151.2m net debt, reduced from £206.9m as
at 31 March 2023 due to the strong operating cash conversion during the year.
During the year, we have successfully reduced leverage to 0.5x (31 March 2023:
0.8x).
Through FY24 we have demonstrated our capital allocation policy in action:
- Invest in our organic growth - net capital expenditure of £96.1m (FY23:
£109.0m), focused on contractual commitments (39% relating to customer funded
contracts including £37m into the LTPA), sustainment of the portfolio and
investment to support future growth
- Complement with value accretive acquisitions - successful integration of
Avantus and Air Affairs with focus on proving delivery performance and growth
- Provide a progressive dividend to shareholders - increase in the
year-on-year growth rate from 5% to 7%
- Return of excess cash to shareholders - £100m share buyback programme, with
£16m completed by the end of March
The Group is not subject to any externally imposed capital requirements.
Committed facilities
The Group has a £340m Term Loan split into two tranches: GBP Term Loan £273m
(Tranche A); and, USD Term Loan £67m (Tranche B), which will mature on 27
September 2026 and has a one year option to extend the final maturity to 27
September 2027. In line with Group policy, £270m (c.80%) of the floating rate
debt has been fixed using SONIA interest rate swaps split over a three year
and five year tenure at a weighted average rate of 3.29%. Including all fees
and charges, the weighted average cost of debt is 5.21%.
At the year-end, the Group had a £275m bank revolving credit facility with an
additional 'accordion' facility to increase the limit up to £400m. The
facility was due to mature on 27 September 2025 and was undrawn at 31 March
2024. The facility was refinanced on 22 April 2024 and replaced with a new
£290m facility, which will mature on 22 April 2027. It has two one year
extension options to extend the final maturity date to 22 April 2029. It
provides the Group with significant scope to execute its strategic growth
plans.
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. The banks have been
selected for their capabilities in our home countries to support our
business.
Return on Capital Employed (ROCE)
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 underlying 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 FY24 Group ROCE was 21% (FY23: 23%), modestly lower due to the full-year
impact of the increased capital employed with the acquisitions completed in
the prior year. As we continue to invest in our business to support
sustainable long-term growth, our ROCE is forecast to remain attractive, at or
above the upper end of the 15-20%+ range, excluding the impact of any further
acquisitions.
Earnings per share
Underlying basic earnings per share increased by 11% to 29.4p (FY23: 26.5p)
driven by the higher underlying profit after tax. Basic earnings per share for
the total Group (including specific adjusting items) reduced 11% to 24.2p
(FY23: 26.8p), with the prior year including the gain on disposal of the Space
NV business and the release of the liability for the MOD appropriation of
RDEC.
The average number of shares in issue during the year, net of treasury shares
and as used in the basic earnings per share calculations, was 577.0m (FY23:
575.9m). There were 573.5m shares in issue at 31 March 2024, reduced due to
the ongoing share buyback.
Dividend
The Board proposes a final FY24 dividend per share of 5.65p (FY23: 5.30p)
making the full-year dividend 8.25p (FY23: 7.70p). The full-year dividend
represents an increase in the Group's progressive dividend from 5% to 7%.
Subject to approval at the Annual General Meeting, the final FY24 dividend
will be paid on 22nd August 2024 to shareholders on the register at 26th July
2024.
Pensions
The triennial valuation of the Scheme was undertaken as at 30 June 2023 and
resulted in an actuarially assessed surplus.
The net pension asset under IAS 19, before adjusting for deferred tax, was
£18.4m (31 March 2023: £119.8m). The key driver for the decrease in the net
pension asset since the March 2023 year end was an actuarial adjustment
following recalibration of demographic and financial assumptions to the
recently completed 30 June 2023 triennial valuation.
The next triennial valuation will be performed as at 30 June 2026. Under the
new schedule of contributions agreed, and reflecting the Scheme being in
surplus, there are no deficit reduction employer contributions required.
During the year the pension fund took out a loan of £125m to facilitate an
increase in the level of hedging in place. This has increased the hedges to
cover approximately 80% of the interest rate risk and 85% of the inflation
rate risk as at 31 March 2024, as measured on the Trustees' gilt-funded basis.
The loan will be repaid in tranches by FY27 using proceeds from the
realisation of investments.
The key assumptions used in the IAS 19 valuation of the Scheme are set out in
note 16.
Net finance income and expense
Net finance expense was £9.8m (FY23: income of £3.3m). The underlying net
finance expense was £15.4m (FY23: £6.6m), increased due to a full year of
interest payable on the Avantus funding borrowings, with additional income of
£5.6m (FY23: £9.9m) in respect of the defined benefit pension net surplus
reported within specific adjusting items.
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.
FY24 FY23
£/US$ - opening 1.24 1.31
£/US$ - average 1.26 1.21
£/US$ - closing 1.26 1.24
£/A$ - opening 1.85 1.75
£/A$ - average 1.91 1.76
£/A$ - closing 1.94 1.85
Foreign exchange translation has provided a modest headwind to revenue and
operating profit in the year. Most significantly, the US Dollar has
strengthened with the average exchange rate to Sterling increasing from 1.21
to 1.26. In FY24, c.20% 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 decreased by £20.9m and operating profit decreased by £2.2m. For
every 1% move in the USD FX rate this would impact Group revenue by c.£4m.
Operating Review
EMEA Services
FY24 FY23
£m £m
Orders 1,193.1 1,372.2
Revenue 1,417.4 1,179.3
Underlying operating profit 163.4 137.1
Underlying operating margin 11.5% 11.6%
Book-to-bill ratio(1) 1.0x 1.4x
Total funded order backlog 2,551.7 2,768.8
(1) Book-to-bill (B2B) ratio is orders won divided by revenue recognised,
excluding the LTPA non-tasking services revenue of £266m (FY23: £225m)
Overview
EMEA (Europe, Middle East and Australasia) Services combines world-leading
expertise with unique facilities to generate and assure capability. We do this
through capability integration, threat representation and operational
readiness, underpinned by long-term contracts that provide good revenue
visibility and cash generation.
Financial performance
Orders increased 7% excluding the 10 year £260m MSCA order in FY23. Including
MSCA in the strong FY23 comparator, orders decreased by 13% (organic and
reported). The funded order backlog excluding LTPA ended the year at £1.4bn,
with a book-to-bill ratio of 1.04x (FY23: 1.17x, excluding MSCA). There has
been an increase in orders through the Engineering Delivery Partner (EDP)
framework totalling £472m in FY24 (FY23: £404m), as well as an increase in
the German business, which secured a significant, multi-year aerial training
services contract, representing the single largest and longest contract award
within our Threat Representation business.
Revenue increased by 20% to £1,417.4m (FY23: £1,179.3m), and grew by 19% on
an organic basis, as a result of good growth in the UK, underpinned by new
work as part of the EDP framework and a variation of price uplift on the LTPA.
At the beginning of FY25, we had £1.0bn of EMEA Services' FY25 revenue under
contract, compared to £0.8bn (of the FY24 revenue) at the same point last
year.
Underlying operating profit grew by 19% to £163.4m (FY23: £137.1m) in line
with revenue growth. Operating margin remained stable at 11.5%.
Approximately 66% of EMEA Services revenue is derived from single-source
contracts (FY23: approximately 64%). 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. The distinctive offerings across
our customer base have delivered good revenue growth this year, whilst
sustaining strong cash conversion and operating profit. Framework partnerships
remain central to how we deliver customer value, with the EDP contract alone
delivering over £1.5bn of orders in its first five years. Following a
Principles Agreement with UK MOD for an extension option to jointly develop
the LTPA test, trials, training and evaluation (T3E) capabilities beyond 2028,
future prospects are well underpinned.
Over three weeks in May 2023 at MOD Hebrides, we hosted Formidable Shield 23,
one of the world's largest and most complex multi-domain tests of naval and
missile defences. Operated by QinetiQ, the exercise saw over 20 ships, 35
aircraft, and nearly 4,000 allied military personnel from 13 NATO nations come
together to test missiles, systems, sensors and software against
representative threat scenarios in realistic live-fire mission rehearsal
exercises.
We have secured significant orders to increase environmental testing capacity
in support of the UK's Weapons stockpile resilience effort, and for further
work at our Hurn vehicle testing capability. We delivered a complex synthetic
training demonstration from Portsdown Technology Park delivering collective
training to three platforms docked at HM Naval Base in Portsmouth: HMS Queen
Elizabeth, HMS Diamond and HMS Kent. This ability to train across multiple
geographically dispersed units provides a step change in capability to the
Navy.
Demand remains strong for engineering services across a broad range of
programmes, primarily as the Engineering Delivery Partner for MOD. Key
achievements this year include securing:
- An initial task as Capability Partner in support of the new AUKUS submarine programme, and a greater role supplying specialist design services;
- Supply of further technical support services to the DE&S Catalyst delivery team for the Future Combat Air System (FCAS) programme;
- The Defence Science and Technology Laboratory (Dstl) funded Modular Integrated Protection System programme developing a new pan-fleet active protection system architecture for British Army vehicles.
We have also been working closely with DE&S in support of the new
acquisition reforms and investing in our enabling digital toolsets to deliver
increased customer value from our engineering services.
In collaboration with Dstl, MBDA and Leonardo, we achieved the UK's first
high-power firing of a Laser Directed Energy Weapon (LDEW) against aerial
targets. This was an important step forward demonstrating the capabilities of
QinetiQ's world-leading beam combining laser technology, and development of
the enabling Test & Evaluation capability. The MOD has recently announced
that the cutting-edge DragonFire laser directed energy weapon system will be
installed on Royal Navy warships for the first time from 2027, far sooner than
previously envisaged.
We also delivered the UK's first jet-to-jet crewed-uncrewed-teaming
demonstration in March 2024 working in partnership with Dstl, the Royal Navy
and the Air and Space Warfare Centre as part of the UK's Accelerating Air
Autonomy Capability Experimentation programme. The trial showcased human
machine teaming between a crewed aircraft and an autonomous drone; the UK's
first jet-to-jet crewed-uncrewed-teaming demonstration.
During the 2023 NATO Robotic Experimentation Prototyping Augmented by Maritime
Unmanned Systems (REPMUS) Exercise, we supported the Royal Navy leading a UK
team delivering the experimental Command & Control exercises for the
mission management of multiple uncrewed vehicles across a task group.
UK Intelligence (31% of EMEA Services revenue)
The UK Intelligence Sector utilises its unique domain knowledge across C5ISTAR
(Command, Control, Communications, Computers, Cyber,
Intelligence, Surveillance and Reconnaissance), allied to its' research,
innovation and applied engineering pedigree, to support UK Government in the
development, assurance, integration and deployment of mission critical
capabilities at pace. We are a key industry partner to the MOD, and continue
to be well-placed to deliver critical digital change programmes over the
coming years to Defence Digital (DD), Defence Intelligence (DI) and Defence
Science and Technology Laboratory (Dstl). Within the year, highlights include:
- SOCIETAS - 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. SOCIETAS continues to perform beyond expectations with the Full Operating Capability declared three months early.
- The establishment of the Training and Simulation Centre of Excellence at Farnborough providing increased support to Land (Army Virtual Proving Ground), Maritime (Type 23 and Type 45 training simulation systems) and the RAF, Dstl and secure cyber domains. This business area is growing strongly, achieving 30% revenue growth on prior year.
- New Style of IT (Deployed) (NSOITD) - We have continued our strong and enduring relationship with Defence Digital's successful NSOITD programme for over five years to a value of £107m, and have now secured another 12 months of support. Our offering enables the agile delivery of the nodes across Design, Engineering, Test and Integration and through engineering support to the Live Services.
We continue to demonstrate our ability to leverage our acquisitions for future success. Fully acquired in 2020, Naimuri demonstrated strong year-on-year orders growth exceeding 80%, and headcount growth to c.200 employees in the same time frame. Naimuri's portfolio has significantly diversified beyond National Security into Homeland Security, and UK MOD. Amongst the new orders were two sizeable three year contracts in Homeland Security, delivering two strategic aims: i) diversification of Naimuri's customer base; and ii) increase to the longevity of contracts. 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 and growth as part of the Northern Powerhouse.
UK Intelligence continues to evolve to ensure we have the capabilities and expertise in emerging technologies e.g. quantum technology. This is an emerging and disruptive capability covering quantum sensing, navigation and computing. We are building the capability through a mixture of internal investment and customer projects, and ensuring alignment with the UK's National Quantum Technology Programme.
Finally, we remain committed to providing operational support to the UK Government including 24/7 support to operations and deployment throughout this difficult period in Eastern Europe, which has enabled UK platforms to support burden sharing with allies, assisting with military aid provision
Australia Sector (10% of EMEA Services revenue)
Our Australia Sector comprises our specialist advisory and engineering
business in Australia and also includes our threat representation business
operating in the Australian, UK, German and Canadian markets.
During the year we established a new leadership team, implemented an
integrated operating model, adapted to the new Australian defence policy and
priorities, and completed the integration of Air Affairs. Tragically, we lost
two of our experienced and long-serving German pilots in a fatal aircraft
crash while delivering training for the German military.
The sector has performed well throughout the year. Order intake was impacted
due to Australian customer delays arising from the Defence Strategic Review.
However, we secured a number of strategic and long term orders, that position
us well for the future.
- Our Advisory business obtained a significant, multi-year extension to deliver professional and technical services to major defence capability programmes in vehicles, maritime warfare, guided weapons, explosive ordnance, and aerospace surveillance and reconnaissance.
- Our German operation secured a significant, multi-year aerial training services contract, representing the single largest and longest contract award within our Threat Representation business.
- Our Canadian target systems operation entered an agreement with the Royal Canadian Navy and Defence Research and Development Canada (DRDC) to develop and supply a new Uncrewed Surface Vehicle. Joining the existing maritime target portfolio, this new multi-role boat will also feature remote autonomous operation with crewed and uncrewed functionality.
We continued to see demand for our technical engineering and advisory services
in Australia, and global demand for our portfolio of aerial and maritime
targets and mission rehearsal services. Notable operational highlights for the
year include:
- Our UK target systems operation manufactured and delivered over 600 aerial targets, representing a 50% increase in volume.
- Our Engineering business invested in state-of-the-art facilities to support business growth. In Melbourne we established the QinetiQ Technology and Engineering Centre (QTEC), delivering a complex vehicle project for the Australian Army. In Adelaide we opened QLabs, providing critical capability in Directed Energy Weapons with the Department of Defence.
- Our MakerSpace programme added additional sites, helping the Australian Army create a culture of digital thinking and innovation.
- Substantial progress was made integrating the Air Affairs business acquired in December 2022. Now named QinetiQ Air Affairs (QAA), over the last year it was transformed from a local Australian specialist business into a key pillar of QinetiQ's global threat representation offering. QAA's achievements in FY24 have included participation in a number of international defence exercises and development of new training targets.
Global Solutions
FY24 FY23
£m £m
Orders 547.3 351.9
Revenue 494.7 401.4
Underlying operating profit 51.8 41.8
Underlying operating margin 10.5% 10.4%
Book-to-bill ratio(1) 1.1x 0.9x
Total funded order backlog 321.3 301.5
(1) Book-to-bill (B2B) ratio is orders won divided by revenue recognised
Overview
Global Solutions combines our world-leading technology-based products and
services. Our strategy is to expand the portfolio of solutions to win larger,
longer-term programmes providing good visibility of revenue and cash flows.
Financial performance
Orders increased by 56% to £547.3m (FY23: £351.9m), 7% organically. This was
driven by a growing order intake in the targets business and good order intake
in the Avantus business.
Revenue was up 23% on a reported basis at £494.7m (FY23: £401.4m) due to the
full-year impact of the Avantus acquisition. There was a small organic decline
of 3%, with Avantus delivering high single digit revenue decline over the
course of the year, but achieving positive revenue growth in the second half.
Revenue in the rest of Global Solutions was broadly flat for the year,
impacted by the loss of the Optionally Manned Fighting Vehicle (OMFV)
opportunity. We also saw the planned production ramp down of the Common
Robotic System - Individual (CRS-I) small ground robots in the US, offset by
the highest ever production levels in QinetiQ Target Systems (QTS) in the UK.
At the beginning of FY25, we have 52% of Global Solutions' FY25 revenue under
contract, compared to 44% (of the FY24 revenue) at the same point last year.
In addition, we have a further $150m of US contract awards in FY24, which are
expected to be funded during FY25. This would increase revenue cover to 75% in
FY25.
Underlying operating profit increased to £51.8 (FY23: £41.8m) due to the
full-year impact of the Avantus acquisition, with a stable underlying
operating profit margin of 10.5% (FY23: 10.4%). Organically, operating profit
increased by 6%, driven by improved margins in the US business.
Sector commentary
United States (82% of Global Solutions revenue)
Our US Sector provides design, development, rapid prototyping, systems
engineering and integration and manufacture of speciality defence mission
products and solutions related to robotics, autonomy, maritime and sensors.
The integration of Avantus provided a complementary suite of services related
to mission support, modernisation, enablement and operations, technical
advisory, cyber, information advantage for US Defense, Federal, Homeland and
National Security customers.
- The US Sector had $1.3bn of total contract awards during the year, including $977m from Avantus. We have completed the integration of Avantus into a single operating model for the Sector and expect to benefit from market and operational synergies.
- We won a $223m, five year, firm fixed price contract with the US Space Development Agency (SDA) to provide systems engineering and technical assistance support needed to deliver the Proliferated Space Warfare Architecture, a threat-driven constellation of small satellites that deliver critical services to our warfighters from space. Services include tracking of advanced missile threats, low-latency data transport integrated with tactical data links, custody of time-critical land and maritime targets, and space-based battle management. During the autumn, our team supported SDA's successful demonstration of the first-ever Link 16 space to ground transmission.
- We won a $126m, five year, hybrid firm fixed price contract to provide technical, professional, and administrative support services to the Office of the Secretary of Defense Strategic Capabilities Office (SCO). This award builds upon our existing work within SCO and supports SCO's mission to analyse and accelerate the development, demonstration, and transition of capabilities to counter strategic adversaries and improve the United States security posture in peacetime, crisis, and conflict.
- We won a $170m, five year, firm fixed price Tethered Aerostat Radar System (TARS) Operations & Maintenance contract with the US Department of Homeland Security, Customs and Border Protection and Air and Marine Operations. The team provides persistent surveillance operations and sustainment services at eight sites along the southern border of the United States and territories, spanning from Arizona to Puerto Rico. Services include, air-surface radar operations, ground control and data networking systems monitoring, and data fusion and analysis as an integral part of the mission to detect, sort, intercept, track, and apprehend criminals in diverse environments at and beyond the US borders.
- We were awarded a $12.7m contract to build and test the Electromechanical Actuator Power Conditioner and Controller (EPCC) for ten shipsets for the Virginia class submarine programme as an extension of our previous design and development effort. The EPCC is a rack of hardware and software designed to control precision actuators as part of the weapon stowage and handling system. In FY24, we have successfully delivered the first two shipsets.
- We won a five year indefinite delivery, indefinite quantity (IDIQ) contract for $83m to deliver the Program of Record Next Generation Advanced Bomb Suit (NGABS) for Product Manager Soldier Protective Equipment. QinetiQ's technology increases the situational awareness through advancement in its low/no light operation integrated capability provided by a Modular Sensor Suite and Heads Up Display.
Other Products (18% of Global Solutions revenue)
The portfolio of our other Global Solutions products provides research
services and bespoke technological solutions derived from EMEA Services, and
includes QinetiQ Target Systems (QTS).
- UK Intelligence continues to invest in and sees demand for its product portfolio. For example, this past year saw continued demand for our Position Navigation and Timing Product (Q20) from 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) later this year.
- QTS offerings include fixed-wing targets, remotely-operated surface vessels (e.g. fast attack and piracy threats), customised uncrewed special mission vehicles, command and control systems, and teams, scoring systems, and launchers.
- QTS is committed to optimising customers' operational capabilities through the creation of realistic scenarios, rigorous testing, and live exercises. Low-cost supersonic targets like the Rattler (launched from QinetiQ's jet Banshee aerial platform) represent the next generation of threats that customers can use to train against.
- Demand for QTS products led to the highest production levels ever during FY24, and a continuing trend of increasing demand. QTS will achieve the significant production milestone of 10,000 Banshee and 750 Hammerhead targets during FY25 and continues to innovate to meet the changing customer training needs and evolving threats. For example, in the last year we have delivered improvements to manoeuvrability and altitude performance to the market leading Jet80+ target, improving the realism of the threat representation provided.
- QTS continues to make positive progress with customers such as the US Department of Defence, recently providing Test & Evaluation capabilities utilising the Rattler supersonic target to support the development of Laser Directed Energy Weapons (LDEW) in response to emerging and evolving threats.
QTS has delivered multi-domain threat representation, utilising both uncrewed aerial and maritime surface targets to present a realistic threat scenario for warships on pre-deployment training.
- In Germany QTS, working in collaboration with QinetiQ Germany as part of the newly established Threat Representation business, has delivered target services in support of the training and deployment of anti-aircraft systems.
Principal risks
There are a number of risks which management continue to identify, assess and
mitigate to minimise their potential impact on performance. An explanation of
risks and their mitigations, together with details of our risk management
framework can be found in the 2024 Annual Report and Accounts (on pages 56 to
61) which will be available for download at: https://www.qinetiq.com/investors
(https://www.qinetiq.com/investors) .
Having considered recent geopolitical and macroeconomic events, the Group
believes the principal risks for FY25 are included in the 2024 Annual Report
and Accounts. The Group's principal risks at 31 March 2024 related to the
following areas: competitive landscape, disruptive technologies, acquisition
integration, climate change, organisational culture, cyber security,
management of change, health, safety & wellbeing, information security, IT
infrastructure, licence to operate, P3M capability and strategic capability
planning.
Consolidated income statement for the year ended 31 March
FY24 FY23
All figures in £ million Note Underlying* Specific adjusting items* Total Underlying* Specific adjusting items* Total
Revenue 1,2 1,912.1 - 1,912.1 1,580.7 - 1,580.7
Operating costs excluding depreciation and amortisation (1,644.3) (26.1) (1,670.4) (1,353.4) (29.5) (1,382.9)
Other income 40.1 2.1 42.2 28.0 21.6 49.6
EBITDA (earnings before interest, tax, depreciation and amortisation) 307.9 (24.0) 283.9 255.3 (7.9) 247.4
Depreciation and impairment of property, plant and equipment (58.1) (0.7) (58.8) (51.5) - (51.5)
Amortisation of intangible assets (7.4) (25.2) (32.4) (7.5) (15.6) (23.1)
Operating profit/(loss) 2 242.4 (49.9) 192.5 196.3 (23.5) 172.8
Gain on business divestments 6 - - - - 15.9 15.9
Finance income 7 5.3 5.6 10.9 6.8 9.9 16.7
Finance expense 7 (20.7) - (20.7) (13.4) - (13.4)
Profit/(loss) before tax 227.0 (44.3) 182.7 189.7 2.3 192.0
Taxation (charge)/credit 8 (57.4) 14.3 (43.1) (36.8) (0.8) (37.6)
Profit/(loss) for the year 169.6 (30.0) 139.6 152.9 1.5 154.4
Earnings per share for profit attributable to the owners of the parent company FY24 FY23
All figures in pence Note Underlying* Total Underlying* Total
Basic 9 29.4 24.2 26.5 26.8
Diluted 9 29.0 23.8 26.3 26.5
* 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
FY24 FY23
All figures in £ million
Profit for the year 139.6 154.4
Items that will not be reclassified to profit and loss:
Actuarial loss recognised in defined benefit pension schemes (108.9) (253.9)
Tax on items that will not be reclassified to profit and loss 27.2 63.5
Total items that will not be reclassified to profit and loss (81.7) (190.4)
Items that may be reclassified to profit and loss:
Foreign currency translation losses on foreign operations (12.6) (6.5)
Movement in deferred tax on foreign currency translation 0.1 (0.5)
Increase in the fair value of hedging derivatives 0.1 7.8
Movement in deferred tax on hedging derivatives - (1.6)
Total items that may be reclassified to profit and loss (12.4) (0.8)
Other comprehensive expense for the year, net of tax (94.1) (191.2)
Total comprehensive income/(expense) for the year 45.5 (36.8)
Consolidated statement of changes in equity
for the year ended 31 March
Share Capital Share Hedge Translation Retained Total Non Total
capital redemption premium reserve reserve earnings controlling equity
reserve interest
All figures in £ million
At 1 April 2023 5.8 40.8 147.6 6.3 (4.2) 772.0 968.3 - 968.3
Total comprehensive income/(expense)
Profit for the year - - - - - 139.6 139.6 - 139.6
Other comprehensive income/(expense) for the year, net of tax - - - 0.1 (12.5) (81.7) (94.1) - (94.1)
Total comprehensive income/(expense) - - - 0.1 (12.5) 57.9 45.5 - 45.5
Purchase of own shares (0.1) - - - - (51.0) (51.1) - (51.1)
Share-based payments - - - - - 8.8 8.8 - 8.8
Deferred tax on share-based payments - - - - - 0.2 0.2 - 0.2
Dividends - - - - - (45.6) (45.6) - (45.6)
At 31 March 2024 5.7 40.8 147.6 6.4 (16.7) 742.3 926.1 - 926.1
At 1 April 2022 5.8 40.8 147.6 0.1 1.9 845.0 1,041.2 0.2 1,041.4
Total comprehensive income/(expense)
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)
Total comprehensive income/(expense) - - - 6.2 (7.0) (36.0) (36.8) - (36.8)
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
Consolidated balance sheet as at 31 March
All figures in £ million Note 31 March 2024 31 March 2023
Non-current assets
Goodwill 14 401.4 409.0
Intangible assets 321.8 343.0
Property, plant and equipment 531.8 477.8
Other financial assets 4.9 6.2
Equity accounted investments 2.2 1.4
Net pension asset 15 18.4 119.8
Deferred tax asset 36.7 32.6
1,317.2 1,389.8
Current assets
Inventories 89.2 68.8
Other financial assets 6.2 5.7
Trade and other receivables 456.8 452.6
Current tax asset 5.8 4.0
Cash and cash equivalents 231.0 151.2
789.0 682.3
Total assets 2,106.2 2,072.1
Current liabilities
Trade and other payables (654.7) (575.2)
Current tax payable (6.6) (4.6)
Provisions (15.3) (19.7)
Other financial liabilities (9.2) (8.2)
(685.8) (607.7)
Non-current liabilities
Deferred tax liability (94.4) (112.0)
Provisions (4.2) (7.1)
Borrowings and other financial liabilities (384.1) (361.8)
Other payables (11.6) (15.2)
(494.3) (496.1)
Total liabilities (1,180.1) (1,103.8)
Net assets 926.1 968.3
Equity
Ordinary shares 5.7 5.8
Capital redemption reserve 40.8 40.8
Share premium account 147.6 147.6
Hedging reserve 6.4 6.3
Translation reserve (16.7) (4.2)
Retained earnings 742.3 772.0
Capital and reserves attributable to shareholders of the parent company 926.1 968.3
Consolidated cash flow statement for year ended 31 March
All figures in £ million Note FY24 FY23
Underlying net cash inflow from operations 10 320.2 270.1
Less: specific adjusting items: 10 (26.1) (29.5)
Net cash inflow from operations 10 294.1 240.6
Tax paid (36.9) (30.2)
Interest received 5.3 5.5
Interest paid (19.4) (9.9)
Net cash inflow from operating activities 243.1 206.0
Purchases of intangible assets (10.9) (13.8)
Purchases of property, plant and equipment (85.4) (95.2)
Proceeds from sale of property 2.1 2.4
Proceeds from sale of plant and equipment 0.2 -
Proceeds from disposal of business - 28.1
Acquisition of businesses 5 (5.1) (385.9)
Net cash outflow from investing activities (99.1) (464.4)
Purchase of own shares (17.1) (0.8)
Dividends paid to shareholders (45.6) (42.6)
Payment of bank facility arrangement fees (0.5) (2.7)
Capital element of lease payments (6.8) (7.4)
Drawdown of new borrowings - 481.1
Repayment of borrowings - (140.0)
Repayment of acquired borrowings - (117.9)
Cash flow relating to intercompany loan hedges 6.8 (10.0)
Net cash (outflow)/inflow from financing activities (63.2) 159.7
Increase/(decrease) in cash and cash equivalents 80.8 (98.7)
Effect of foreign exchange changes on cash and cash equivalents (1.0) 1.8
Cash and cash equivalents at beginning of year 151.2 248.1
Cash and cash equivalents at end of year 231.0 151.2
Reconciliation of movement in net (debt)/cash for the year ended 31 March
All figures in £ million Note FY24 FY23
Increase/(decrease) in cash and cash equivalents in the year 80.8 (98.7)
Add back net cash flows not impacting net (debt)/cash 7.3 (331.0)
Movement in net (debt)/cash resulting from cash flows 88.1 (429.7)
Net increase in lease obligations (31.2) (15.3)
Net movement in derivative financial instruments (0.5) 9.8
Other movements including foreign exchange (0.7) 3.2
Movement in net (debt)/cash as defined by the Group 55.7 (432.0)
Net (debt)/cash as defined by the Group at beginning of the year (206.9) 225.1
Net debt as defined by the Group at end of the year 11 (151.2) (206.9)
Less: borrowings 11 336.3 337.6
Less: total net derivative financial instruments, capitalised borrowing costs 45.9 20.5
and lease liabilities
Total cash and cash equivalents 11 231.0 151.2
Notes to the financial statements
1. Revenue from contracts with customers and other income
Revenue by category
All figures in £ million FY24 FY23
Service contracts with customers 1,811.2 1,481.4
Sale of goods contracts with customers 95.7 96.1
Royalties and licences 5.2 3.2
Total revenue 1,912.1 1,580.7
Less: adjust current year for acquired businesses(1) (161.0) -
Less: adjust prior year for disposed businesses(1) - (27.6)
Adjust to constant prior year exchange rates 20.9 -
Total revenue on an organic, constant currency basis(2) 1,772.0 1,553.1
Organic revenue growth at constant currency(2) 14% 12%
(1) 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.
(2) Alternative performance measures are used to supplement the statutory
figures. See Glossary.
Other income
All figures in £ million FY24 FY23
Share of associates' and joint ventures' profit after tax 0.8 0.8
Research and development expenditure credits (RDEC) 27.2 17.4
Other income 12.1 9.8
Underlying other income 40.1 28.0
Specific adjusting item: gain on sale of property (note 3) 2.1 2.0
Specific adjusting item: release of RDEC MOD appropriation liability (note 3) - 19.6
Total other income 42.2 49.6
Revenue by customer geographical location
All figures in £ million FY24 FY23
United Kingdom (UK) 1,265.8 1,045.7
United States of America (US) 401.9 301.0
Australia 130.6 124.1
Home countries 1,798.3 1,470.8
Europe 52.8 69.4
Rest of World 61.0 40.5
Total revenue 1,912.1 1,580.7
Home countries revenue % 94% 93%
International (non-UK) revenue % 34% 34%
Revenue by major customer type
All figures in £ million FY24 FY23
UK government 1,184.9 969.4
US government 389.3 230.8
Other* 337.9 380.5
Total revenue 1,912.1 1,580.7
* '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 FY24 FY23
Revenue from external customers Underlying operating profit(*) Revenue from external customers Underlying operating profit(*)
EMEA Services 1,417.4 163.4 1,179.3 137.1
Global Solutions 494.7 51.8 401.4 41.8
Operating profit from segments 1,912.1 215.2 1,580.7 178.9
Research and development expenditure credits (RDEC) 27.2 17.4
Underlying operating profit 242.4 196.3
Operating profit margin from segments* 11.3% 11.3%
( )
Reconciliation of segmental results to total profit
All figures in £ million Note FY24 FY23
Operating profit from segments* 215.2 178.9
Research and development expenditure credits (RDEC) 27.2 17.4
Underlying operating profit* 242.4 196.3
Specific adjusting items loss 3 (49.9) (23.5)
Operating profit 192.5 172.8
Gain on business divestments - 15.9
Net finance income (9.8) 3.3
Profit before tax 182.7 192.0
Taxation expense (43.1) (37.6)
Profit for the year 139.6 154.4
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary.
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 FY24 FY23
Acquisition and disposal costs (2.7) (16.4)
Acquisition integration costs (5.3) (2.0)
Acquisition related remuneration costs (1.2) (0.3)
One-off period of digital investment (16.9) (5.8)
Restructuring costs - (5.0)
Release of RDEC MOD appropriation liability - 19.6
Gain on sale of property 2.1 2.0
Specific adjusting items loss before interest, tax, depreciation and (24.0) (7.9)
amortisation
Impairment of property (0.7) -
Amortisation of intangible assets arising from acquisitions (25.2) (15.6)
Specific adjusting items operating loss (49.9) (23.5)
Gain on disposal of businesses 6 - 15.9
Defined benefit pension scheme net finance income 5.6 9.9
Specific adjusting items (loss)/gain before tax (44.3) 2.3
Tax impact of the above specific adjusting items 8 14.3 3.8
Deferred tax impact of change in future UK corporation tax rate 8 - (4.6)
Total specific adjusting items (loss)/gain after tax (30.0) 1.5
Reconciliation of underlying profit for the year to total profit for the year
All figures in £ million FY24 FY23
Underlying profit after tax 169.6 152.9
Total specific adjusting items (loss)/gain after tax (30.0) 1.5
Total profit for the year 139.6 154.4
4. Profit before tax
The following items have been charged in arriving at profit before tax for
continuing operations:
All figures in £ million FY24 FY23
Cost of inventories expensed 59.4 55.2
Owned assets: depreciation 49.3 45.3
Leases assets: depreciation 8.8 6.2
Foreign exchange loss/(gain) 0.6 (0.6)
Research and development expenditure - customer funded contracts* 315.4 299.2
Research and development expenditure - Group funded 12.8 14.6
* The prior year number for research and development expenditure from customer
funded contracts was incorrectly reported in the 2023 financial statements as
£313.8m and has been restated to £299.2m.
5. Business combinations
Acquisitions in the year to 31 March 2024
There were no acquisitions in the year ended 31 March 2024. However, £5.1m of
deferred consideration payments were made in respect of the Air Affairs
acquisition and legacy acquisitions within Avantus. The specific adjusting
items operating result for the year includes various acquisition related items
as set out in note 3.
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, were 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, were 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.
Air Affairs Australia
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$53.0m,
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.
6. Gain/(loss) on business divestments
During the year 31 March 2024, there were no business divestments. The gain on
business divestments of £15.9m in year ended 31 March 2023 related 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 was settled entirely in cash.
7. Finance income and expense
All figures in £ million FY24 FY23
Bank interest receivable 5.3 6.8
Finance income before specific adjusting items 5.3 6.8
Amortisation of deferred financing costs (1.2) (0.8)
Bank interest and commitment fees (16.6) (10.6)
Lease expense (2.8) (1.1)
Unwinding of discount on financial liabilities (0.1) (0.1)
Other interest - (0.8)
Finance expense (20.7) (13.4)
Underlying net finance expense (15.4) (6.6)
Plus: specific adjusting items - defined benefit pension scheme net finance 5.6 9.9
income
Net finance income (9.8) 3.3
8. Taxation
All figures in £ million FY24 FY23
Underlying Specific adjusting items Total Underlying Specific adjusting items Total
Profit/(loss) before tax 227.0 (44.3) 182.7 189.7 2.3 192.0
Taxation (expense)/income (57.4) 14.3 (43.1) (36.8) (0.8) (37.6)
Profit/(loss) for the year 169.6 (30.0) 139.6 152.9 1.5 154.4
Effective tax rate 25.3% 23.6% 19.4% 19.6%
The total tax charge was £43.1m (FY23: £37.6m). The underlying tax charge
was £57.4m (FY23: £36.8m), on a higher underlying profit before tax, with an
underlying effective tax rate of 25.3% for the year ending 31 March 2024
(FY23: 19.4%). The underlying effective tax rate is above the UK statutory
rate of 25% (FY23:19%) primarily as a result of higher overseas tax rates
and non-deductible overseas interest offset by prior year adjustments to
returns.
Tax on specific adjusting items
The total specific adjusting items tax credit £14.3m (FY23 charge: £0.8m).
The tax credit primarily arises on intangible amortisation and tax deductible
digital transformation, acquisition and integration costs.
Factors affecting future tax charges
The underlying effective tax rate is expected to remain marginally above the
UK statutory rate, subject to the impact of any tax legislation changes and
the geographic mix of profits. The Group has engaged with advisers to assess
and manage any potential impact on the tax charge by the UK's enactment of the
OECD's Global Anti-Base Erosion Model Rules (Pillar Two). The Group has
applied the temporary exemption issued by the International Accounting
Standards Board from the accounting for deferred taxes under IAS12 and neither
recognises nor discloses information about deferred taxes related to Pillar
Two income taxes. The Group does not anticipate a material quantitative
impact from Pillar Two legislation, however, there are expected to be
significant compliance obligations.
Tax losses
At 31 March 2024 the Group had unused tax losses and carried forward interest
expense of £212.3m (31 March 2023: £175.6m) which are available for offset
against future taxable profits. Deferred tax assets are recognised on the
balance sheet of £29.0m in respect of £109.8m of US net operating losses,
£4.9m in respect of £20.9m of Canadian net operating losses and £2.0m in
respect of £6.8m of German trade losses. A deferred tax asset of £1.0m is
recognised in respect of £3.3m of German excess interest. No deferred tax
asset is recognised in respect of the £71.5m 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 £19.3m. 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 2024 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 9-11 years. A 10% change in
the forecast profits would alter the utilisation period by 3 years.
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.
FY24 FY23
Weighted average number of shares Million 577.0 575.9
Effect of dilutive securities Million 8.7 6.4
Diluted number of shares Million 585.7 582.3
Underlying basic earnings per share figures are presented below, in addition
to the basic and diluted earnings per share, because the Directors consider
this gives a more relevant indication of underlying business performance and
reflects the adjustments to basic earnings per share for the impact of
specific adjusting items (see note 3) and tax thereon.
Underlying EPS
FY24 FY23
Profit attributable to the owners of the Company £ million 139.6 154.4
Remove (profit)/loss after tax in respect of specific adjusting items £ million 30.0 (1.5)
Underlying profit after taxation £ million 169.6 152.9
Weighted average number of shares Million 577.0 575.9
Underlying basic EPS Pence 29.4 26.5
Diluted number of shares Million 585.7 582.3
Underlying diluted EPS Pence 29.0 26.3
Basic and diluted EPS
FY24 FY23
Profit attributable to the owners of the Company £ million 139.6 154.4
Weighted average number of shares Million 577.0 575.9
Basic EPS Pence 24.2 26.8
Diluted number of shares Million 585.7 582.3
Diluted EPS Pence 23.8 26.5
10. Cash flows from operations
All figures in £ million FY24 FY23
Profit after tax for the year 139.6 154.4
Adjustments for:
Taxation expense 43.1 37.6
Net finance expense/(income) 9.8 (3.3)
Gain on disposal of businesses - (15.9)
Loss on disposal of plant and equipment - 0.2
Loss on disposal of intangibles 0.9 -
Gain on sale of property (2.1) (2.0)
Impairment of property 0.7 -
Amortisation of purchased or internally developed intangible assets 7.4 7.5
Amortisation of intangible assets arising from acquisitions 25.2 15.6
Depreciation of property, plant and equipment 58.1 51.5
Share of post-tax profit of equity accounted entities (0.8) (0.8)
Share-based payments charge 9.4 6.1
Retirement benefit contributions in excess of income statement expense (1.9) (1.6)
Net movement in provisions (5.1) (1.0)
284.3 248.3
Increase in inventories (21.4) (9.6)
Increase in receivables (10.0) (56.7)
Increase in payables 41.2 58.6
Changes in working capital 9.8 (7.7)
Net cash flow from operations 294.1 240.6
Reconciliation of net cash flow from operations to underlying net cash flow
from operations and to free cash flow
All figures in £ million FY24 FY23
Net cash flow from operations 294.1 240.6
Add back specific adjusting item: digital investment 16.9 5.8
Add back specific adjusting item: restructuring costs - 5.0
Add back specific adjusting item: acquisition integration and remuneration 6.5 2.3
costs
Add back specific adjusting item: acquisition transaction costs 2.7 16.4
Total specific adjusting items 26.1 29.5
Underlying net cash flow from operations 320.2 270.1
Less: tax and net interest payments (51.0) (34.6)
Less: net purchases of intangible assets and property, plant and equipment (96.1) (109.0)
Free cash flow 173.1 126.5
Underlying cash conversion ratio
FY24 FY23
Underlying EBITDA - £ million 307.9 255.3
Underlying net cash flow from operations - £ million 320.2 270.1
Underlying cash conversion ratio - % 104% 106%
11. Net debt
All figures in £ million 31 March 31 March
2024 2023
Current financial assets/(liabilities)
Deferred financing costs 1.0 1.3
Derivative financial assets 5.2 4.4
Lease liabilities (8.1) (7.6)
Derivative financial liabilities (1.1) (0.6)
Total current net financial liabilities (3.0) (2.5)
Non-current financial assets/(liabilities)
Deferred financing costs 1.1 1.5
Derivative financial assets 3.8 4.7
Lease liabilities (47.4) (23.7)
Borrowings - Term loan (336.3) (337.6)
Derivative financial liabilities (0.4) (0.5)
Total non-current net financial liabilities (379.2) (355.6)
Total net financial liabilities (382.2) (358.1)
Total cash and cash equivalents 231.0 151.2
Total net debt as defined by the Group (151.2) (206.9)
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 2024:
All figures in £ million Level 1 Level 2 Level 3 Total
Assets:
Current derivative financial instruments - 5.2 - 5.2
Non-current derivative financial instruments - 3.8 - 3.8
Liabilities:
Current derivative financial instruments - (1.1) - (1.1)
Non-current derivative financial instruments - (0.4) - (0.4)
Total - 7.5 - 7.5
The following table presents the Group's assets and liabilities that are
measured at fair value 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
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 2024 and 31 March 2023 is provided below:
Pence per share £m Date paid/payable
Interim 2024 2.60 15.0 Feb 2024*
Final 2024 (proposed) 5.65 31.9 Aug 2024
Total for the year ended 31 March 2024 8.25 46.9
Interim 2023 2.40 13.8 Feb 2023
Final 2023 5.30 30.6 Aug 2023*
Total for the year ended 31 March 2023 7.70 44.4
* Total cash paid in the year to 31 March 2024 was £45.6m (FY23: £42.6m).
The proposed final dividend in respect of the year ending 31 March 2024 will
be paid on 22 August 2024. The ex-dividend date is 25 July 2024 and the record
date is 26 July 2024.
14. Goodwill
All figures in £ million 31 March 2024 31 March 2023
Cost
At 1 April 562.7 296.1
Acquisitions - 267.7
Disposals - (5.6)
Foreign exchange (11.0) 4.5
At 31 March 551.7 562.7
Accumulated impairment
At 1 April (153.7) (146.7)
Foreign exchange 3.4 (7.0)
At 31 March (150.3) (153.7)
Net book value at 31 March 401.4 409.0
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 Solutions segment. The full
list of CGUs that have goodwill allocated to them is as follows:
All figures in £ million Primary reporting segment 31 March 2024 31 March 2023
US Technology Solutions Global Solutions 43.1 44.1
US C5ISR Global Solutions 36.0 36.8
US Avantus Federal Global Solutions 252.5 257.8
Target Systems Global Solutions 24.4 24.5
Germany EMEA services 2.7 2.7
Naimuri EMEA services 14.8 14.8
Inzpire EMEA services 11.7 11.7
QinetiQ Training & Simulation EMEA services 7.8 7.8
Australia EMEA Services 5.6 5.8
Air Affairs Australia EMEA Services 2.8 3.0
Net book value at 31 March 401.4 409.0
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. There are no likely variations in the key assumptions
used for any of the CGUs 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 generally 'bottom-up'
forecasts based on detailed analysis by contract for the revenue under
contract and by opportunity for the pipeline, or with growth rates assumed
based on market benchmarks. 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 2024: (2023)
Terminal growth rate 2.3 (2.3) 2.2 (2.2) 2.3 (2.3) 2.3 (2.3) 2.2 (2.2) 2.4 (2.3) 2.4 (2.3) 2.2 (2.2) 2.2 (2.2) 2.2 (2.2)
Pre-tax discount rate 10.7 (11.1) 11.1 (10.9) 10.6 (11.2) 10.7(11.2) 11.1(12.0) 13.0(12.9) 12.8(12.9) 8.8 (8.9) 11.1 (10.9) 11.0 (11.8)
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
£43.1m as at 31 March 2024 (2023: £44.1m). The recoverable amount of this
CGU as at 31 March 2024, based on value in use and calculated using the
assumptions noted above, is higher than the carrying value of net operating
assets (of £120.2m). 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.
US C5ISR
The carrying value of the goodwill for the US C5ISR CGU as at 31 March 2024
was £36.0m (2023: £36.8m). The recoverable amount of this CGU as at 31 March
2024, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £91.2m). 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.
Avantus
The carrying value of the goodwill for the Avantus CGU as at 31 March 2024 was
£252.5m (2023: £257.8m). The recoverable amount of this CGU as at 31 March
2024, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of the net operating assets (of £411.7m).
The key sensitivity impacting on the value in use calculations is the terminal
year cash flows. The key assumption impacting those terminal year cash flows
is the revenue growth rate applied over the period of the value in use
calculation, which is based on market growth rates for the high growth
segments in which the business operates in. A 400 basis point reduction in the
compound annual revenue growth rate over the period, which is considered a
reasonably possible change, would not cause the net operating assets to exceed
their recoverable amount. 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 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
2024 was £24.4m (2023: £24.5m). The recoverable amount of this CGU as at 31
March 2024, based on value in use and calculated using the assumptions noted
above, is higher than the carrying value of net operating assets (of £92.0m).
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 2024 was
£2.7m (2023: £2.7m). The recoverable amount of this CGU as at 31 March 2024,
based on value in use and calculated using the assumptions noted above, is
higher than the carrying value of net operating assets (of £52.6m).
Confidence in the business prospects over the next five years has increased
during the year, with a healthy pipeline of opportunities. The key sensitivity
affecting 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. 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.
Naimuri
The carrying value of the goodwill for the Naimuri CGU as at 31 March 2024 was
£14.8m (2023: £14.8m). The recoverable amount of this CGU as at 31 March
2024, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £23.6m). The
key sensitivity affecting 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.
Inzpire
The carrying value of the goodwill for the Inzpire CGU as at 31 March 2024 was
£11.7m (2023: £11.7m). The recoverable amount of this CGU as at 31 March
2024, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £20.8m). 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
£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 2024 was £7.8m (2023: £7.8m). The recoverable amount of this
CGU as at 31 March 2024, based on value in use and calculated using the
assumptions noted above, is higher than the carrying value of net operating
assets (of £11.6m). 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 £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 2024
was £5.6m (2023: £5.8m). The recoverable amount of this CGU as at 31 March
2024, based on value in use and calculated using the assumptions noted above,
is higher than the carrying value of net operating assets (of £15.5m). 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.
Air Affairs Australia
The carrying value of the goodwill for the Air Affairs Australia CGU as at 31
March 2024 was £2.8m (2023: £3.0m). The recoverable amount of this CGU as at
31 March 2024, based on value in use and calculated using the assumptions
noted above, is higher than the carrying value of net operating assets (of
£36.0m). The key sensitivity impacting on the value in use calculations is
the terminal year cash flows. An increase in the discount rate of 1% or 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.
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 FY24 FY23
Total market value of assets - see following table for analysis by category of 1,316.2 1,355.2
asset
Present value of Scheme liabilities (1,297.8) (1,235.4)
Net pension asset before deferred tax 18.4 119.8
Deferred tax liability (9.6) (35.4)
Net pension asset after deferred tax 8.8 84.4
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 2023
year end was an experience loss following recalibration to the recently
completed 30 June 2023 triennial valuation.
Total expense recognised in the income statement
All figures in £ million FY24 FY23
Net finance income 5.6 9.9
Administrative expenses (1.5) (1.4)
Total net income recognised in the income statement (gross of deferred tax) 4.1 8.5
Movement in the net pension asset
The movement in the net pension asset (before deferred tax) is set out below:
All figures in £ million FY24 FY23
Opening net pension asset 119.8 362.2
Net finance income 5.6 9.9
Net actuarial loss (108.9) (253.9)
Administration expenses (1.5) (1.4)
Contributions by the employer 3.4 3.0
Closing net pension asset 18.4 119.8
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 2024 31 March 2023^
Quoted Not quoted in an active market Total Quoted Not quoted in an active market Total
Equities - 21.8 21.8 - 32.9 32.9
Liability Driven Investment 414.9 - 414.9 399.2 - 399.2
Asset backed securities 35.5 - 35.5 4.3 - 4.3
Alternative bonds(1) - 253.8 253.8 - 256.4 256.4
Corporate bonds(2) 31.1 120.6 151.7 - 115.6 115.6
Cash and cash equivalents - 36.5 36.5 - 17.2 17.2
Equity derivative financial instruments(3) 15.8 - 15.8 5.4 - 5.4
Corporate credit derivative financial instruments(4) 2.2 - 2.2 2.0 - 2.0
Other derivatives (forward FX contracts)(5) 1.6 - 1.6 6.7 - 6.7
Insurance buy-in policies - 507.4 507.4 - 515.5 515.5
Borrowings - (125.0) (125.0) - - -
Total market value of assets 501.1 815.1 1,316.2 417.6 937.6 1,355.2
( )
^ Restated to reclassify equity and corporate credit derivatives based on fair
values
(1) Primarily private market debt investments.
(2) Includes unlisted corporate bonds with commercial property held as
security.
(3) The fair value of equity derivative financial instruments is £15.8m. This
reflects the marked to market valuation of all equity derivatives held by the
Scheme. The exposure to equities is significantly greater than the fair value,
with a notional value of the equity derivative financial instruments of
£171.7m as at 31 March 2024, and a total economic exposure value of £187.5m.
(4) The fair value of corporate credit derivative financial instruments is
£2.2m. This is in respect of various credit default swap financial
instruments held by the Scheme. These provide significantly greater exposure
to corporate bonds. The notional value of these financial instruments was
£100.1m as at 31 March 2024, with a total economic exposure value of
£102.3m.
(5) The fair value of other derivative financial instruments is £1.6m. This
is in respect of various foreign exchange contracts held by the Scheme. The
exposure to foreign exchange risk is significantly greater than the £1.6m
marked to market value of the forward contracts. The notional value of these
financial instruments was £210.0m as at 31 March 2024, with a total economic
exposure value of £211.6m.
During the year the pension fund took out a loan of £125m to facilitate an
increase in the level of hedging in place.
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 2024 31 March 2023
Insured members Uninsured members Insured members Uninsured members
Discount rate applied to Scheme liabilities 4.80% 4.80% 4.80% 4.65%
CPI inflation assumption 2.55% 2.60% 2.55% 2.70%
Net rate (discount rate less inflation) 2.25% 2.20% 2.25% 1.95%
Assumed life expectancies in years:
At 60 for males currently aged 40 n/a 28.3 n/a 27.9
At 60 for females currently aged 40 n/a 30.7 n/a 30.3
At 60 for males currently aged 60 n/a 26.7 n/a 26.2
At 60 for females currently aged 60 n/a 29.1 n/a 28.2
At 65 for males currently aged 65 22.3 n/a 21.6 n/a
At 65 for females currently aged 65 24.8 n/a 23.3 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
Decrease discount rate by 0.25% Increase by £12.6m Increase by £42.5m Decrease by £29.9m
Increase rate of inflation by 0.25% Increase by £12.3m Increase by £41.6m Decrease by £29.3m
Increase life expectancy by one year Increase by £13.8m Increase by £34.4m Decrease by £20.6m
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 2023 this portfolio
hedged against approximately 65% of the interest rate and also 80% of the
inflation rate risk, as measured on the Trustees' gilt-funded basis. During
the current financial year the hedges have been increased to cover
approximately 80% of the interest rate risk and 85% of the inflation rate risk
as at 31 March 2024, 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 reduces 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 £253.8m; the
unquoted corporate bonds of £120.6m and the unquoted equities of £21.8m are
the assets with most uncertainty as to valuation as at 31 March 2024.
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.
The most recent completed full actuarial valuation of the Scheme was
undertaken as at 30 June 2023 and resulted in an actuarially assessed surplus
of £11.4m (relative to the technical provisions i.e. the level of assets
agreed by the Trustee and the Company as being appropriate to meet member
benefits, assuming the Scheme continues as a going concern). The next
triennial valuation will be performed as at 30 June 2026. Under the new
schedule of contributions agreed at the conclusion of the recent triennial
valuation, and reflecting the Scheme being in surplus, there are no employer
contributions required. Separately to the schedule of contributions the
Company does have a cash commitment to the Scheme in respect of an
asset-backed funding arrangement established in 2012. The annual distribution
in the year to 31 March 2025 will be £3.5m, which will increase thereafter,
indexed by reference to CPI, until 2032.
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 2,767,125 shares (FY23: 4,208,899
shares). In the year ended 31 March 2024 the Group granted/awarded 8.1m new
share-based awards to employees (FY23: 1.5m).
17. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of
£56.7m at 31 March 2024 (31 March 2023: £33.6m) 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 2024 there were sales to associates and joint
ventures of £3.1m (FY23: £0.4m). At the year end there were outstanding
receivables from associates and joint ventures of £2.8m (FY23: £0.5m).
19. Capital commitments
The Group had the following capital commitments for which no provision has
been made:
All figures in £ million 31 March 2024 31 March
2023
Total contracted 57.8 43.4
Capital commitments at 31 March 2024 include £49.7m (2023: £21.2m) 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 2023, 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 2024. 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 2023 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.
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. 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 businesses, property and investments P P P
Transaction, integration and on-off remuneration costs in respect of business P P
acquisitions and disposals
Impairment of property and goodwill P
One-off period of 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 Group enters the year with a
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.
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 (debt)/cash Net (debt)/cash as defined by the Group combines cash and cash equivalents Note 11
with borrowings, deferred financing costs, derivative financial instruments
and lease liabilities. Net (debt)/cash does not include liabilities relating
to irrevocable share buyback obligations.
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, integration and
acquisition-related remuneration costs in respect of business acquisitions and
disposals; digital investment; tax impact of the preceding items and
significant non-recurring tax and RDEC movements
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