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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Qinetiq Group Plc | LSE:QQ. | London | Ordinary Share | GB00B0WMWD03 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.40 | 0.12% | 335.80 | 336.20 | 336.80 | 338.20 | 331.80 | 337.40 | 1,735,255 | 16:35:11 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Security Systems Service | 1.58B | 154.4M | 0.2681 | 12.54 | 1.94B |
From Apr 2019 to Apr 2024
TIDMQQ.
RNS Number : 1041P
QinetiQ Group plc
24 May 2018
Preliminary Results
24 May 2018
Our strategy is delivering - second year of growth
Results for the year ended 31 March 2018
Hot Features
Premium
Statutory results Underlying* results
2018 2017 2018 2017
Revenue GBP833.0m GBP783.1m GBP833.0m GBP783.1m
Operating profit GBP141.0m GBP132.7m GBP122.5m GBP116.3m
Profit after tax GBP138.1m GBP123.3m GBP109.0m GBP103.8m
Earnings per share 24.4p 21.5p 19.3p 18.1p
Full year dividend per share 6.3p 6.0p 6.3p 6.0p
Total funded order backlog GBP2,005.4m GBP2,178.7m
Total orders GBP687.4m(1,2) GBP1,676.7m
Orders excluding LTPA amendments GBP587.2m(2) GBP675.3m(3)
Net cash flow from operations GBP132.4m GBP111.9m GBP126.5m GBP111.9m
Net cash GBP266.8m GBP221.9m
* Definitions of the Group's 'Alternative Performance Measures'
can be found in the glossary.
(1) Includes value associated with work to be performed under the
interim LTPA arrangement for twelve months beginning 1 April 2018
(2) Includes share of Joint Ventures
(3) FY17 orders included GBP109m 11-year NCSISS contract and GBP55m
Strategic Enterprise contracts
Delivered second year of organic growth
- Revenue up 6%, 3% on an organic basis
- Underlying operating profit up 5%, assisted by GBP8.7m non-recurring trading items (2017:
GBP7.4m), broadly flat on an organic basis
- Solid orders performance, excluding multi-year orders in FY17
- 103% underlying cash conversion pre-capex
- Underlying EPS up 7%; 5% increase in full year dividend
Driving growth through strategy implementation
- Selected to be Engineering Delivery Partner for UK Ministry of Defence (MOD) - Down-selected on first phase of robotics program of record for US Department of Defense (DoD) - Grown international share of revenue from 21% to 27% in 2 years - Announced acquisition of E.I.S. Aircraft Operations, a German airborne training business
Priorities for FY19
- Conclude repricing of the Long Term Partnering Agreement (LTPA) with UK MOD - Win further campaigns and build on successful down-selects - Accelerate international growth in selected countries - Continue investment driving sustainable growth
Steve Wadey, Group Chief Executive Officer said:
"This has been a year of significant progress for QinetiQ. We delivered a strong operational performance in FY18, with a second successive year of organic growth and an increasing contribution from our international businesses overcoming the profit headwinds in the UK on single-sourced work.
"Our strategy is delivering as we continue to transform QinetiQ into a more customer focused and international company, well placed to deliver further long-term growth. With more than two thirds of our FY19 revenue under contract, we enter the year in a position of strength and are maintaining expectations for Group performance".
Preliminary results presentation:
There will be a presentation of the preliminary results at 0900 hours UK time on 24 May 2018 at the London Stock Exchange, 10 Paternoster Square, EC4M 7LS. Registration for the webcast is available at: www.QinetiQ.com/investors where the presentation will also be available. An audiocast of the event through which participants will be able to ask questions will also be available by dialling + 44 20 3936 2999 (access code: 008838).
About QinetiQ:
QinetiQ (QQ.L) is a leading science and engineering company operating primarily in the defence, security and critical infrastructure markets. We work in partnership with our customers to solve real world problems through innovative solutions delivering operational and competitive advantage. Visit our website www.QinetiQ.com. Follow us on LinkedIn and Twitter @QinetiQ. Visit our blog www.QinetiQ-blogs.com.
For further information please contact:
David Bishop, Group Director Investor Relations and Communications: +44 (0) 7920 108675 Ian Brown, Group Head of Investor Relations: +44 (0) 7908 251123 Jon Hay-Campbell, Group Head of Communications: +44 (0) 7500 856953
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 adjusted performance measures (APMs) such as underlying operating profit and underlying earnings per share are more representative of ongoing trading, facilitate meaningful year-to-year comparison and, therefore, allow the reader to obtain a fuller understanding of the financial information. The adjusted measures used by QinetiQ may differ from adjusted measures used by other companies. Details of QinetiQ's APMs are set out in the glossary to the document.
Year references (FY18, FY17, 2018, 2017) refer to the year ended 31 March.
Disclaimer
This document contains certain forward-looking statements relating to the business, strategy, financial performance and results of the Company and/or the industry in which it operates. Actual results, levels of activity, performance, achievements and events are most likely to vary materially from those implied by the forward-looking statements. The forward-looking statements concern future circumstances and results and other statements that are not historical facts, sometimes identified by the words 'believes',' expects', 'predicts', 'intends', 'projects', 'plans', 'estimates', 'aims', 'foresees', 'anticipates', 'targets', 'goals', 'due', 'could', 'may', 'should', 'potential', 'likely' and similar expressions, although these words are not the exclusive means of doing so. These forward-looking statements include, without limitation, statements regarding the Company's future financial position, income growth, impairment charges, business strategy, projected levels of growth in the relevant markets, projected costs, estimates of capital expenditures, and plans and objectives for future operations. Forward-looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Nothing in this document should be regarded as a profit forecast.
The forward-looking statements, including assumptions, opinions and views of the Company or cited from third party sources, contained in this announcement are solely opinions and forecasts which are uncertain and subject to risks. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Actual results may differ materially from those expressed or implied by these forward-looking statements. A number of factors could cause actual events to differ significantly and these are set out in the principal risks and uncertainties section of this document.
Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. Any forward-looking statements made by, or on behalf of, the Company speak only as of the date they are made. Save as required by law, the Company will not publicly release the results of any revisions to any forward-looking statements in this document that may occur due to any change in the Directors' expectations or to reflect events or circumstances after the date of this document.
Chief Executive Officer's Review
We are pleased with the progress we have made in FY18 reversing five years of falling revenue with a second year of organic growth. We delivered 3% organic revenue growth and grew our international revenue to 27% of revenue compared to 21% two years ago. Overall, underlying earnings per share increased 7%, cash conversion was strong and we continued to grow our dividend progressively with a 5% increase for the full year. The progress we have made demonstrates QinetiQ's ability to capitalise on the opportunities in our markets as well as our growing international presence.
Through international growth, we were able to overcome well-flagged headwinds in the UK from the lower baseline profit rate set by the Single Source Regulations Office (SSRO), which made for a tougher trading environment in FY18. Whilst this headwind is expected to intensify in FY19, with the anticipated repricing of the remainder of the Long Term Partnering Agreement (LTPA) which was not part of the December 2016 amendment, we expect the headwind will moderate in FY20 and beyond enabling growing revenue to deliver increased profitability.
We are making progress in a number of ways that are as a direct result of our strategy.
We have engaged with our core customers to help them achieve their objectives of maintaining or increasing their capabilities while also driving cost efficiencies. Our ability to respond to our customers' challenges has enabled us to deliver greater value to them and create opportunities for us. This is a reflection of the more agile and customer-focused organisation that QinetiQ has become, driven by our people. This change in approach has increased the level of bidding activity for a number of new opportunities with the UK Government.
We are investing into our core contracts, such as the LTPA, allowing us to modernise our facilities and the services we offer. This makes them more relevant to our customers for Test and Evaluation (T&E) and Training and Rehearsal (T&R) against current and future threats. By investing in our contracts we can extend their duration, increasing our long-term visibility, and attract a growing number of international customers.
We are becoming a truly international company, expanding the skills and experience honed in the UK to support customers in attractive international markets. We have increasing opportunities within some of the largest and fastest growing defence, security and critical infrastructure markets. We have made two successful acquisitions to date that are helping accelerate our progress and create revenue synergy opportunities across the Company. They are integrating well into our operations and we are pleased with their performance to date. QinetiQ is providing vital advice and support in modernising or developing indigenous defence capabilities across the globe, leveraging our core expertise.
We are at the forefront of innovation, and are better than we have ever been at effectively deploying real, commercial innovation. From advanced future laser weaponry to autonomous robotics to innovative approaches to business models and contracting, we are leading innovation in support of our customers' objectives.
We have been disciplined on costs, ensuring we remain efficient in how we resource and structure our Company. Our investment programme significantly increases capability and reduces the operating costs of a number of our facilities. We appointed six new senior leaders to the Executive Committee over the past two years, and we have improved our internal structures, modernising them to deliver efficiencies and enhancing our ability to operate at pace. We are now far better able to deploy our people and their skills to best support our customers and reduce costs.
And finally, we remain financially strong. We have one of the strongest balance sheets in UK defence and we are reinvesting the cash we generate back into the Company to support our long-term growth ambitions. As well as supporting our international expansion, this investment delivers an attractive return in its own right.
Strategy
Our strategy was developed in anticipation of the market conditions we see today and is designed to reinforce our leading position in the UK T&E market, increase our international exposure and draw upon our ability to innovate. The three components of the strategy, while presented distinctly, are interlinked and mutually reinforcing. Delivery of the strategy will enable us to better support customers and deliver long-term, sustainable growth and returns to our shareholders. As the trusted partner to UK defence, our UK credentials enable us to establish relationships with international customers. Investing in modernising our UK T&E reinforces QinetiQ's credentials and is a competitive advantage when bidding for international work.
UK defence test and evaluation
With our origins in UK Government, QinetiQ plays a unique role in UK defence. Defining and supporting this set of capabilities is the LTPA. It is our largest contract and underpins much of the defence test and evaluation capability in the UK.
Our strategy is to invest in and modernise this unique capability, enabling us to meet our customers' growing demand for more complex and integrated testing and training. This approach provides us with a strong foundation, securing UK customers and growing international users. Being a leader in UK T&E is also critical to supporting our international ambitions. Our ability to win work internationally is in part built upon our credibility within our UK home market. Our work within UK T&E also enables us to grow into near adjacent markets such as cost-effective training.
Highlights during the year included:
-- We are investing in modernising our air ranges and test aircrew training facilities with new
advanced tracking radar and aircraft, delivering significant operational and cost benefits.
The investment enabled us to sign contracts with the Swiss defence procurement agency and
with the Royal Netherlands Air Force, the latter to train Dutch test pilots and flight test
engineers until at least 2022.
-- The investment allows us to deliver larger and more complex training exercises, such as Formidable
Shield. Led by the US Navy, and incorporating forces from eight countries, over 18 months
QinetiQ managed every aspect of the planning and delivery of the exercise to evaluate the
ability to track and destroy long-range ballistic missiles.
-- Working in partnership with the MOD and MBDA, the manufacturer of the Brimstone 2 missile,
and using our facilities at MOD Aberporth, we provided the capability assurance required to
ensure that the missile can be integrated safely onto Typhoon, expanding the aircraft's capabilities
and allowing for the timely retirement of Tornado.
-- With our partners Atkins and BMT, we have been invited by the UK MOD to negotiate the Engineering
Delivery Partner (EDP) programme on a sole source basis. This is a significant arrangement
through which the MOD will procure its engineering services. Discussions with the MOD are
ongoing and we are actively embracing our customers' challenges, innovating service delivery
and business models, and building on the successful track record of our Strategic Enterprise
approach.
Focus for FY19:
Our focus areas for FY19 include repricing of the remainder of the LTPA which was not part of the December 2016 amendment, covering the operation and management of 15 sites and facilities and representing approximately GBP100m in annual revenue. We are confident of concluding constructive discussions with the MOD in FY19 and have put in place an arrangement for the interim period under existing LTPA contract terms. We will also continue our investment into our air ranges and test aircrew training facilities, and invest in the digitisation of our capabilities to enable real-time data transfer and evaluation.
International
We have made significant strides in becoming a truly international company. Over the last two years we have increased our international share of revenue from 21% to 27%.
Our international 'home countries' of the US and Australia have performed well with the US achieving good order performance and Australia delivering record orders for the third consecutive year. Outside of our home countries, we have made good progress in the Middle East where there is a growing customer requirement for capability integration to complement many years of platform acquisition.
Highlights during the year included:
-- We achieved record orders in Australia in FY18 as we continued to transform the business to
become a leading partner to defence support acquisition and sustainment programmes. Building
on our eight year partnership with the Australian Department of Defence's Science and Technology
Group managing their scientific engineering services facility, we secured our second T&E facilities
operations contract in the country.
-- In North America we maintained good momentum, winning significant orders for maritime systems.
In March, we were down-selected for the first phase of a significant program of record for
robotics, with a total budget of approximately US$400m in the form of an indefinite-delivery
/ indefinite quantity contract over seven years. QinetiQ is one of two remaining bidders with
a decision on the final stage expected towards the end of FY19.
-- The Middle East is a key growth region for QinetiQ as we support countries in the region to
develop their defence capabilities and ensure the security of critical national infrastructure.
We have established key partnerships with local companies and government agencies to accelerate
the delivery of services and products within the region accordingly. This approach allows
us to move with greater pace and is well aligned with our customers' objectives to develop
indigenous capabilities and skills.
-- Since the implementation of the strategy, we have made two very successful acquisitions which
enhance our overall offer and increase our international footprint. We were pleased to announce
in April 2018, our intention to acquire a third business which enhances our airborne training
services and grows our international footprint further.
o Good organic growth in Australia was complemented by better than expected revenue contribution
from RubiKon, the integrated logistics support business we acquired in January 2017. The acquisition
strengthened our position in the market enabling us to take on broader programmes of work
for our customers and enhancing our technical expertise and domain knowledge.
o The strategic rationale for our acquisition of QinetiQ Target System (QTS) in December 2016,
was to complement our T&E offer through the addition of threat representation products and
services, accelerate our international expansion and to enhance our capabilities in unmanned
systems. During FY18 we have been extremely pleased with QTS's performance as part of QinetiQ,
enhancing our ability to leverage their offering and meeting our profitability expectations
in addition to enhancing the overall margins of the division.
o In April 2018, we were pleased to announce the EUR70m acquisition of E.I.S. Aircraft Operations,
a high-growth provider of airborne training services based in Germany, delivering threat representation
and operational readiness for military customers. The company generated EUR20.1m revenue and
EUR5.4m EBITDA in the year to 31 December 2017 and further enhances our training and T&E capabilities
as well as providing an entry into the German market and the wider European defence market.
The acquisition is expected to complete towards the end of H1 2019, subject to legal and regulatory
approvals.
Focus for FY19
Our focus in FY19 is to build on the momentum achieved in FY18, continuing to accelerate the growth in our home countries, deepening our new relationships in the Middle East and leveraging the investment we have made in our export sales team to win more business. In the US, we will continue to rigorously pursue significant opportunities in our robotics and maritime capabilities. Once completed, we will leverage our recently announced acquisition of E.I.S. Aircraft Operations, to deliver international revenue synergies and enhance our overall customer offer.
Innovation
We are a company which is founded upon innovation. Our people, using their extensive technical and scientific expertise, innovate to overcome some of the most challenging problems our customers face. A core part of our strategy to grow QinetiQ is to build on this technical expertise with commercial innovation, and to apply this approach across all our activities and geographies, as a major source of competitive advantage.
Highlights during the year included:
-- In FY17 we established business winning campaigns supported by investment and strategic partnering
to drive growth. These are focused on T&E, engineering services, training, mission assurance,
information insight and experimentation. In FY18 we were down-selected for five major campaign
areas, including as Engineering Delivery Partner (EDP) with the MOD, a framework through which
the UK MOD will procure its engineering services.
-- Our success on EDP was built on the innovative Strategic Enterprise model for the delivery
of aircraft engineering services for the MOD that has now been in operation for more than
two years. In FY18, we successfully added the evaluation of a missile system to the programme,
our first non-aircraft related work.
-- The space industry continues to grow rapidly, and QinetiQ is at the forefront of some of the
innovative technology that is critical to its success. In FY18, we signed a EUR25m contract
with the European Space Agency (ESA) to develop the International Berthing and Docking Mechanism
(IBDM), which positions us to become the international standard for spacecraft berthing and
docking globally.
-- We opened our Dragonworks facility, which will serve as a test bed for all technologies associated
with high-energy lasers for military and commercial applications. Based on research we undertook
and working in partnership with MBDA and Leonardo, we are leading the next phase of disruptive
directed energy weapon systems.
Focus for FY19
Our focus in FY19 will be to build on the success to date of our campaign approach, converting down-selects into contract awards. We will continue our internal research and development investment focusing on major customer opportunities including the digitisation of our T&E services.
Outlook - FY19
We enter FY19 with confidence, having delivered a second successive year of organic revenue growth.
In the UK, the impact of changes to single source pricing regulations to QinetiQ is expected to intensify this year with the anticipated repricing of the remainder of the LTPA which was not part of the December 2016 amendment.
The Group's Global Products division has shorter order cycles than EMEA Services and its performance is dependent on the timing of shipments of key orders. As a result of its strong FY18 orders performance and pipeline of opportunities, we expect the division to make continued progress in FY19 with further organic growth partially offset by a translational impact from foreign exchange at current rates.
FY19 cash flow will reflect continued investment including capital expenditure of GBP80m - GBP100m, the majority of which will be invested into the LTPA and returned over the contract life, as well as an anticipated working capital outflow of GBP15m - GBP25m.
Overall we are maintaining expectations for Group performance in FY19, excluding non-recurring trading items, with an approximate GBP6m profit headwind on UK single-sourced revenue. We anticipate continued modest organic revenue growth in FY19, with the associated profit improvement largely offset by the impact of foreign exchange at current rates.
Outlook - longer term
Our performance in FY18 demonstrates that we can create opportunities for growth, provided we are customer focused, innovative and competitive. In the UK, our customers have the challenge of overcoming new threats within the constraints of tight budgets. We are well placed to help support our customers develop their capabilities while also delivering efficiencies. Through our international businesses, we are operating in attractive and growing markets that provide long-term growth opportunities.
Based on changes to the profit rate for single source contracts and our contract mix, we expect a reduction in the headwind to our EMEA Services division's profitability in FY20 and onwards, enabling growing revenue to deliver increased profitability.
Steve Wadey, Chief Executive Officer, 24 May 2018
Chief Financial Officer's Review
Overview of full year results
We delivered a strong financial performance in FY18, building on the strategic progress we have made over the past two years. The performance is all the more encouraging given the well flagged headwinds we face in the UK on single-sourced work. While we are making good progress, we continue to maintain our financial discipline and a rigorous focus on cost control and cash generation. Consequently, we enter FY19 well positioned with good revenue visibility and a strong balance sheet, which provides the resources to continue to invest in our organic capabilities and take advantage of attractive bolt-on acquisitions where there is a strong strategic fit.
Revenue was up 6% at GBP833.0m (2017: GBP783.1m), including a strong contribution from the QinetiQ Target Systems (QTS) and RubiKon businesses which were acquired in FY17. Revenue grew by 3% on an organic basis, with a 4% increase in EMEA Services more than offsetting a 4% decline in Global Products, reflecting its lumpy revenue profile.
Orders in the year excluding LTPA amendments totalled GBP587.2m (2017: GBP675.3m) and grew 15% excluding the GBP109m 11-year NCSISS contract and GBP55m Strategic Enterprise contracts awarded in the prior year. This increase was driven by a strong performance in Global Products and the contribution of the QTS and RubiKon businesses acquired in FY17 offsetting a small decline in EMEA Services. Key orders won in FY18 included US maritime systems contracts totalling more than US$50m and EUR25m for a spacecraft docking mechanism with the European Space Agency.
At the beginning of the new financial year, 69% of the Group's FY19 revenue was under contract, compared to 74% at the same point last year. The change is a reflection of lower value, shorter dated orders during FY18, an increasing international mix within the business, which is typically shorter dated, and an overall increase in expected revenues. The FY19 revenue cover includes the work to be performed under the interim LTPA arrangement with the MOD for the 12 months beginning 1 April 2018.
Underlying operating profit was up 5% at GBP122.5m (2017: GBP116.3m), assisted by GBP8.7m (2017: GBP7.4m) non-recurring trading items including: GBP5.3m credit relating to the release of engine servicing obligations; GBP4.7m credit related to settlement of a contractual dispute; GBP2.7m charge relating to property liabilities and a number of other contract-related releases. Excluding these non-recurring trading items, the QTS and RubiKon acquisitions and the effect of foreign exchange, underlying operating profit for the Group was broadly flat. This included a GBP3.4m reduction in EMEA Services driven by the lower baseline profit rate for single source contracts, in line with our expectations. Global Products underlying operating profit grew by 19% (6% on an organic basis) driven by improved profitability in OptaSense and high margins in the QTS business.
Total operating profit was GBP141.0m (2017: GBP132.7m), including GBP14.6m (2017: GBP18.4m) recognised on the disposal of property and GBP5.9m (2017: nil) on the sale of intellectual property.
Underlying profit before tax increased 5% to GBP122.1m (2017: GBP116.1m) in line with the increase in underlying operating profit, with underlying net finance costs at GBP0.4m (2017: GBP0.2m).
Total profit before tax increased to GBP144.8m (2017: GBP131.5m) due to the higher underlying profit before tax, the GBP5.9m sale of intellectual property and GBP4.2m (2017: cost GBP1.0m) finance income related to the defined benefit pension asset.
Specific adjusting items
Specific adjusting items, shown in the 'middle column', at the profit after tax level amounted to a total credit of GBP29.1m (2017: GBP19.5m). This included a profit of GBP14.6m (2017: GBP18.4m) recognised on the disposal of property, GBP5.9m (2017: nil) on the sale of intellectual property, GBP4.2m (2017: cost GBP1.0m) finance income related to the defined benefit pension asset, and GBP6.4m (2017: GBP4.1m) of tax movements, predominantly relating to the recognition of deferred tax assets in respect of tax losses and internally generated intellectual property. This was offset by GBP2.6m (2017: GBP1.0m) amortisation of acquired intangible assets reflecting a full year's ownership of the QTS and RubiKon businesses.
Net finance costs
Net finance income was GBP3.8m (2017: cost GBP1.2m). The underlying net finance cost was GBP0.4m (2017: GBP0.2m) with additional income of GBP4.2m (2017: cost GBP1.0m) in respect of the defined benefit pension asset reported within specific adjusting items.
Tax
The total tax charge was GBP6.7m (2017: GBP8.2m). The underlying tax charge was GBP13.1m (2017: GBP12.3m) with an underlying effective tax rate of 10.7% (2017: 10.6%). The effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development expenditure credits (RDEC) in the UK. The effective tax rate is expected to remain below the UK statutory rate in the medium term, subject to any tax legislation changes, the geographic mix of profits, the future recognition of unrecognised tax losses and the assumption that the benefit of net R&D expenditure credits retained by the Group remains in the tax line. Future recognition of unrecognised tax losses will also affect future tax charges.
Deferred tax assets of GBP7.6m have been recognised in the period (2017: GBP3.7m), with the income statement credit classified as a specific adjusting item. These assets are in respect of US net operating losses and the recognition of tax deductible intellectual property assets in the UK, whereas the prior year related to an element of the Group's UK non-trade loan relationship deficits. Together with a GBP1.2m tax effect of the pre-tax specific adjusting items, the total specific adjusting items tax credit was GBP6.4m (2017: GBP4.1m).
At 31 March 2018, the Group had unused tax losses and surplus interest costs of GBP118.0m (2017: GBP141.7m) which are available for offset against future profits. A deferred tax asset is recognised in respect of GBP17.0m of US net operating losses (2017: nil) and GBP7.7m (2017: GBP20.2m) of UK losses. No deferred tax asset is recognised in respect of the remaining GBP93.3m of losses/interest costs due to uncertainty over the timing of their utilisation.
The current tax liability is GBP8.9m as at 31 March 2018 (2017: GBP43.7m). The decrease in the liability is primarily due to the settlement of a tax liability in the US related to an unfavourable court decision in respect of the tax treatment of the Group's acquisition of Dominion Technology Resources, Inc. in 2008. The tax settlement was funded through a recovery under an insurance policy (the receivable for which had previously been included within trade and other receivables).
Cash flow, working capital, capex and net cash
Underlying net cash flow from operations was GBP126.5m (2017: GBP111.9m). This included a GBP14.2m working capital unwind, of which GBP6.8m was due to non-recurring trading items, and GBP12.4m of pension deficit repair contributions, which are expected to fall to c.GBP2.5m from FY19 onwards. This resulted in a cash conversion* of 103% (2017: 96%).
Net cash flow associated with capex increased to GBP54.5m (2017: GBP32.9m) with an additional non-cash GBP25.9m capex creditor, which will be settled in the first half of 2019. After paying tax and net interest of GBP15.7m the Group generated free cash flow of GBP56.3m (2017: GBP76.4m).
As at 31 March 2018, the Group had GBP266.8m net cash (2017: GBP221.9m). The increase was primarily due to the GBP56.3m free cash flow and GBP23.1m cash inflow from property disposals offsetting GBP34.5m of dividends.
Total committed facilities available to the Group at year end, consisting of a revolving credit facility which is currently undrawn, amounted to GBP237.3m (2017: GBP245.7m), the decrease being solely due to foreign exchange movements (the facility containing a USD denominated component).
Capital allocation
Priorities for capital allocation are:
1. Organic investment complemented by bolt-on acquisitions where there is a strong strategic fit; 2. The maintenance of balance sheet strength; 3. A progressive dividend; and 4. The return of excess cash to shareholders.
Capital expenditure increased to GBP80.4m (2017: GBP32.9m) to support the development and modernisation of capabilities for long-term UK MOD contracts and expansion into high growth, international markets. Capital expenditure is expected to be in the GBP80m-GBP100m range in FY19 with the capex associated with the LTPA recovered in full under existing LTPA contract terms.
Earnings per share
Underlying basic earnings per share increased by 7% to 19.3p (2017: 18.1p) benefiting from the higher underlying profit before tax and the reduced share count following the completion of the GBP50m share buyback in FY17. Basic earnings per share for the total Group (including specific adjusting items) increased 13% to 24.4p (2017: 21.5p).
The average number of shares in issue during the year, as used in the basic earnings per share calculations, was 565.2m (2017: 573.9m) and there were 565.4m shares in issue at 31 March 2018 (all net of Treasury shares).
Dividend
The Board proposes a final FY18 dividend per share of 4.2p (2017: 4.0p) making the full year dividend 6.3p (2017: 6.0p). The full year dividend represents an increase of 5% in line with the Group's progressive dividend policy.
Subject to approval at the Annual General Meeting, the final FY18 dividend will be paid on 31 August 2018 to shareholders on the register at 3 August 2018.
In future, the Board will announce the full year dividend at the preliminary results for the year in question, with the interim dividend expected to represent one third of the prior full year dividend.
Pensions
In the UK the Group operates a defined benefit pension scheme. The Scheme is closed to future accrual and there is no on-going service cost. The Scheme is in a very healthy position with the most recently completed actuarial valuation showing a surplus of GBP139.7m (as at 30 June 2017) and on an accounting basis under IAS19 the net asset position was GBP316.2m as at 31 March 2018 (2017: GBP156.0m). As at year end the Scheme is hedged against approximately 85% of the interest rate risk and 100% of the inflation rate risk, as measured on the Trustees' gilt-funded basis. Full details are set out in note 13.
IFRS 15 implementation
The adoption of accounting standard IFRS 15 for our FY19 financial year is not expected to have a significant impact on QinetiQ's reported financial performance, given the nature of our contracts and the existing method of accounting (using 'percentage of completion' accounting for service contracts as opposed to milestone accounting). The Group completed an assessment on FY18 revenue with the conclusion that the impact would not be material if the new standard was adopted for FY18.
David Smith, Chief Financial Officer, 24 May 2018.
Trading Environment
UK
In the UK, the Modernising Defence Programme (MDP) is underway to understand the threats the UK faces, optimise how UK MOD works and determine the capabilities required to meet national security priorities. The UK Government's commitments on overall defence spending await the results of the MDP review, with the initial themes of the review expected to be reported in July 2018. Secretary of State for Defence, Gavin Williamson, has said that the review will not necessarily be "fiscally neutral" and he will be aiming for budget increases if the review concludes there is a need for additional personnel and equipment to meet the threats identified.
It is likely that the outcome of the MDP will present opportunities and challenges for us as we are well placed to support our customers in reducing procurement and operational costs as well as risks. We also support our customers by applying our skills to overcome emerging security threats in the land, sea, air, space and cyberspace environments.
US
The US has by far the largest defence budget globally and is likely to see a top-line budget increase of more than 10% in 2018 to $670.7bn, and then a further 2% increase in 2019.
The National Defence Strategy published in January 2018 reinforced the need for investment and modernisation in US defence capability. As part of this, QinetiQ is well placed to support the advancement of robotic systems which are a key priority for future defence capabilities. In addition to a number of formal "Programs of Record" which provide a systematic approach to procurement of capabilities such as robotics, there are opportunities for greater robotic systems across the whole of US defence, and increasingly in other governmental agencies, such as the Police.
The requirement to enhance capability also reinforces the need to modernise test and evaluation capabilities which has the potential to create longer-term opportunities for QinetiQ in the US. During FY18 the US Navy ran a complex ballistic missile trial at the Hebrides range operated and managed by QinetiQ. Our investment in our core UK T&E capabilities supports our ability to build relationships in the US to help support their ambitious defence plans.
Australia
Modernising and enhancing defence capability is a key priority for the Australian Government which is reflected in its spending commitments. In Australia, defence budgets are expected to grow to 2% of GDP by 2021, three years earlier than the Government's 2013 election pledge. Defence expenditure is expected to see sustained growth of at least 3% to 4% a year over the remainder of the decade. QinetiQ has been able to build on its position in this attractive growth market both organically and through the acquisition of RubiKon, which provides specialised integrated logistics support to key programmes in support of Australia's defence objectives. Our strengthening relationship with the Australian Government is reflected in the award of our second T&E facilities operation contract, providing mine warfare engineering facilities and support at HMAS Waterhen. QinetiQ is well positioned for growth in Australia supporting defence procurement, research and development, T&E and operational support activities.
Broader international markets
A core part of QinetiQ's growth strategy is to take the products, skills and expertise developed in its home countries into attractive international markets. QinetiQ's role as a "customer friend", providing best advice and support on how to develop indigenous defence and security capabilities is proving to be an attractive proposition in high-growth markets.
In the Middle East, defence budgets have remained resilient. QinetiQ is positioned well to help support governments in the region with the development of indigenous defence capabilities. Our approach, creating in country presence through partnerships with local companies and governments, allows us to play a key role in the development of the local defence industry.
In Asia Pacific, as in the Middle East, governments are eager to develop their own defence industrial bases. Singapore, Malaysia and South Korea are all looking to either modernise the capabilities they have or enhance overall capabilities; systems in air, sea and missile defence being areas of key focus within the region. QinetiQ, building on its experience and credibility in the UK, is well positioned to support these nations to continue to enhance their own capabilities and develop their own defence industrial base.
Where references to international revenues are made within these results, they include non-UK revenues from both EMEA Services and Global Products.
Operating review
EMEA Services
2018 2017
GBPm GBPm
--------------------------------------------------------------------- -------------- -------------
Total orders(1)(3) 456.1 1,522.3
Orders excluding LTPA amendments(1) 355.9 520.9
Revenue 651.4 613.5
Underlying operating profit 94.3 92.7
Underlying operating margin 14.5% 15.1%
Book to bill ratio(2) 0.8x 1.3x
Funded order backlog 709.6 813.6
Total funded order backlog(3) 1,804.9 2,019.8
--------------------------------------------------------------------- -------------- -------------
(1)Includes share of orders from Joint Ventures
(2)B2B ratio is orders won divided by revenue recognised, excluding the LTPA contract and
share of JV orders
(3)FY18 includes value associated with work to be performed under the interim LTPA arrangement
for twelve months beginning 1 April 2018
Overview
EMEA (Europe, Middle East and Australasia) Services combines world-leading expertise with unique facilities to provide capability integration and assurance. Our core value proposition is built upon our expertise in capability integration, threat representation and operational readiness underpinned by long-term contracts that provide good visibility of revenues and cash flows. The division is also a market leader in research and advice in specialist areas such as C4ISR, weapons and energetics, cyber security and procurement advisory services.
Financial performance
Orders for the year were GBP355.9m (2017: GBP520.9m) due in part to the award in the prior period of the GBP109m Naval Combat System Integration Support Services (NCSISS) contract and GBP55m of Strategic Enterprise contracts. Excluding the impact of these multi-year contracts, acquisition contribution and foreign exchange, we saw slower H1 2018 orders offset in part by stronger order performance in H2 2018 resulting in an overall modest decrease of GBP12.7m for the year.
Revenue increased by 6% to GBP651.4m (2017: GBP613.5m) and increased by 4% on an organic constant currency basis, principally driven by the International and Maritime, Land & Weapons businesses.
At the beginning of the new financial year, 75% of EMEA Services' FY19 revenue was under contract, compared with 79% at the beginning of the prior year. The change is a reflection of lower value, shorter dated orders during FY18, and an increasing international mix within the business, which is typically shorter dated.
Underlying operating profit increased to GBP94.3m (2017: GBP92.7m). FY18 underlying operating profit was assisted by GBP7.7m (2017: GBP5.2m) non-recurring trading items including: GBP5.3m credit relating to the release of engine servicing obligations; GBP4.7m credit related to settlement of a contractual dispute; GBP2.7m charge relating to property liabilities and a number of other contract-related releases. Excluding these non-recurring trading items, the effect of foreign exchange and acquisitions, underlying operating profit fell by GBP3.4m due to the lower baseline profit rate for single source contracts, in line with our expectations.
Approximately 75% of EMEA Services revenue is derived from single source contracts. By investing in our core contracts and extending their duration we are reducing our exposure to future changes in the baseline profit rate set annually, and the methodology used by the Single Source Regulations Office, as well as securing longer term revenue visibility.
The baseline profit rate which applies to pricing discussions is a three-year rolling average. Whilst the input rate for FY19 increased from 6.44% to 7.94%, the overall three year rolling average, which forms the basis for pricing discussions in the year, decreased from 7.46% to 6.81% for FY19.
The impact of changes to single source pricing regulations to QinetiQ are expected to intensify this year with the anticipated repricing on the remainder of the LTPA which was not part of the December 2016 amendment, representing a headwind of approximately GBP6m to operating profit in the EMEA Services division for FY19. Based on changes to the profit rate for single source contracts and our contract mix, we expect a reduction in the headwind to our EMEA Services division's profitability in FY20 and onwards.
FY18 review
Air & Space (29% of EMEA Services revenue)
The Air & Space business de-risks complex aerospace programmes by testing systems and equipment, evaluating the risks and assuring safety.
-- In March we announced the appointment of Dr Nic Anderson as Manging Director of Air & Space.
Nic joined from Babcock where he was MD of Land Defence.
-- We are building upon the investment made as part of the December 2016 amendment to the LTPA
in test aircrew training. We have begun marketing the new enhanced offer, which utilises our
new aircraft and syllabus, and in November 2017 signed the first multi-year contract with
the Royal Netherlands Air Force for GBP6m. We have subsequently signed a contract with Armasuisse,
which is responsible for defence procurement in Switzerland, and we are in close dialogue
with a number of other potential customers.
-- The business completed the implementation of Strategic Enterprise, securing customer endorsement
and achieving Full Operating Capability, a major milestone under the contract. Strategic Enterprise
has been a significant achievement for QinetiQ, with over GBP250m of orders placed under the
framework since its inception. In addition, we have received positive customer response for
the framework increasing customer satisfaction from 80% to 85%.
-- Looking at ways to bring innovation to our service delivery, we have piloted a number of approaches
with the Air Warfare Centre to deliver faster and more cost efficient test and evaluation
to accelerate the ability to bring new or modified equipment into frontline service.
-- The business continues to deploy significant resources to develop the gridded ion engine electric
propulsion system to be used on ESA's BepiColombo mission to Mercury. This ambitious, multi-spacecraft
mission remains scheduled to launch in October 2018 and the module has now been shipped to
the launch site in French Guiana. Technical qualification of the electric propulsion system
needs to be satisfactorily completed and accepted by the customer before approval can be given
to launch.
-- By actively embracing our customer challenges, and proposing innovative service delivery and
business models, we have been invited by the UK MOD to negotiate the Engineering Delivery
Partner (EDP) programme on a sole source basis. This is a significant arrangement through
which the MOD will procure its engineering services, which we will deliver with Atkins and
BMT.
Maritime, Land & Weapons (45% of EMEA Services revenue)
The Maritime, Land & Weapons business delivers operational advantage to customers by providing independent research, evaluation and training services.
-- In May 2017, Steve Fitz-Gerald was appointed as Managing Director of Maritime, Land & Weapons.
Steve joined from Marshall Aerospace and Defence Group where he was Chief Executive Officer.
-- The investment in our air ranges we are making as part of the December 2016 amendment will
allow us to deliver more complex trials and rehearsals to our UK and international customers.
Large scale exercises, such as Formidable Shield, are a reflection of the increasing demand
from customers to rehearse against increasing threat complexity.
-- Using our facilities at MOD Aberporth, we worked in partnership with the MOD and MBDA, the
manufacturer of the Brimstone 2 missile system, to provide the capability assurance required
to ensure that the missile can be integrated safely onto Typhoon. This expands the aircraft's
capabilities, enabling the timely retirement of Tornado which will ensure cost efficiencies
for the MOD.
-- We showcased the short-range engagement capabilities of the Sea Ceptor air defence system
against Mirach aerial targets, which emulate the threat from missiles, from within 2km of
the firing frigate. Sea Ceptor is in development for the UK MOD as the principal air defence
capability for the Royal Navy's Type 23 and 26 frigates.
-- We are delivering an increasing amount of work for international customers. In January 2018,
we won an order from a key international customer to perform submarine research, modelling
and testing at our Haslar site which provides world-class ocean and ship testing facilities.
-- As part of an ongoing programme of work we provided test and evaluation services on the escape
systems of the new class of submarines being built for the Italian Navy.
-- Our credentials in delivering real innovation to our customers were recognised by our appointment
to lead a new framework programme for naval research and development for the UK MOD. This
is an innovative four-year framework programme providing the UK MOD with access to key industry,
academia and SME expertise.
-- Working with MBDA, the missile systems specialist, and the MOD, the business is developing
a joint UK energetics strategy. As part of this strategy, we have secured a significant contract
for weapon test and evaluation and completed the refurbishment of an Environmental Test Centre,
a key facility at MOD Shoeburyness.
-- Following successful delivery of the DragonFire design review, the MOD has agreed to place
the second year of funding with the DragonFire consortium, formed of QinetiQ, MBDA and Leonardo.
We provide world-leading high energy laser source expertise into the critical programme for
the UK.
Cyber, Information & Training (CIT) (15% of EMEA Services revenue)
The CIT business helps government and commercial customers respond to fast-evolving threats based on its expertise in training, secure communication networks and devices, intelligence gathering and surveillance sensors, and cyber security.
-- CIT's orders were lower in FY18 than the prior year, principally due to fewer research related
orders from the UK MOD during the period.
-- Following the appointment of James Willis as Managing Director of CIT in July 2017, the business
is focused on bidding and winning more transformational deals with new customers, services
and products. The strategy is focused on becoming the 'Mission Assurance Partner' to key strategic
clients within the defence and security market. This will enable CIT to build its services
and products portfolio to change the revenue profile from short term contracts to more multi-year
service and product revenue streams. Major deals being bid for include work for client side
support for Battlefield and Tactical Communications & Information Systems (BATCIS) with an
estimated contract value of between GBP50m to GBP95m, the new Defence Operational Training
(DOT) synthetic training environment, and continuation of the Rockwell Collins partnership
for the next generation of position, navigation and timing (PNT) receivers.
-- QinetiQ is bidding for Serapis, the replacement for the MOD's current communications and information
systems R&D framework run by QinetiQ (CSIIS).
-- During the period the business was awarded a GBP4m consultancy contract to the UK Space Agency
utilising our experience in satellite communications.
-- The business has developed a cyber test and evaluation service to enable organisations to
test and rehearse cyber defence scenarios to better understand vulnerabilities and responses
to them.
-- QinetiQ is responding to customer needs and building a new capability hub in Lincoln to address
new requirements for the Electronic Warfare community based around RAF Waddington.
International (11% of EMEA Services revenue)
Our International business leverages our expertise and skills developed in the UK and applies them to opportunities in attractive markets globally. Revenue derived from outside of the UK is reported in many of our businesses, and are not exclusive to our International business.
-- FY18 marked a significant year for our business in Australia. Overall record orders were complemented
with strategically significant contract wins and an increase in revenue of approximately one
third. Earlier in the year we announced the award of our second test and evaluation facilities
operations contract in Australia to run the Mine Warfare Maintenance Facilities at HMAS Waterhen
in Sydney.
-- Building on our January 2017 acquisition of RubiKon, an Australian specialist in integrated
logistics services, we achieved an A$16m increase in our contract under AIR7000 to provide
support relating to the procurement of maritime patrol aircraft in Australia.
-- QinetiQ, as part of a consortium led by Nova Systems, has been down-selected by the Australian
Department of Defence as one of four Major Services Providers (MSPs) enabling it to bid for
larger strategic, capability and integrated work partner contracts.
-- Our Advisory Services business increased its international consulting contract wins and entered
a number of new Middle Eastern and European countries. As a result the business doubled the
size of its order intake in 2018.
-- In Sweden, we secured three new international customers at our Flight Physiological Centre
that we operate on behalf of the Swedish FMV. The centre also conducted its first space mission
training.
-- Post the year end, we announced the acquisition of E.I.S. Aircraft Operations, a leading provider
of airborne training services based in Germany. The acquisition will, subject to completion,
enhance QinetiQ's international growth strategy, establishing a test and evaluation and engineering
capability in Germany and enhancing our access to the broader European market.
Global Products
2018 2017
GBPm GBPm
--------------------- ----- -----
Orders 231.3 154.4
Revenue 181.6 169.6
Underlying operating
profit 28.2 23.6
Underlying operating
margin 15.5% 13.9%
Book to bill ratio 1.3x 0.9x
Funded backlog 200.5 158.9
--------------------- ----- -----
Overview
Global Products delivers innovative solutions to meet customer requirements and undertakes contract-funded research and development, developing intellectual property in partnership with key customers and through internal funding with potential for new revenue streams. The division is technology-based and has shorter order cycles than EMEA Services so can have a more lumpy revenue profile.
Financial performance
Orders increased to GBP231.3m (2017: GBP154.4m) including a total of more than US$50m orders for maritime systems in the US and a EUR25m spacecraft docking mechanism order from the European Space Agency.
The Global Products division had 51% of its FY19 revenue already under contract at the beginning of the new financial year compared with 55% at the same time last year, reflecting the shorter contract cycle of the division and an overall increase in expected revenues.
Revenue was up 7% on a reported basis at GBP181.6m (2017: GBP169.6m) driven by the impact of the acquisition of QinetiQ Target Systems. On an organic constant currency basis revenue declined by 4% due to lower robot sales.
Underlying operating profit increased to GBP28.2m (2017: GBP23.6m). Adjusting for the impact of the acquisition of QinetiQ Target Systems, foreign exchange movements and GBP1.0m (2017: GBP2.2m) of non-recurring trading items, underlying operating profit increased by GBP2.7m predominantly driven by improved profitability in OptaSense and high margins in the QTS business in the last quarter.
FY18 review
QinetiQ North America (40% of Global Products revenue)
QinetiQ North America (QNA) develops and produces innovative defence products specialising in unmanned systems, survivability and maritime systems along with products in related commercial markets.
-- In a highly competitive field, we were unsuccessful on the US Department of Defense's (DoD)
Man-Transportable Robotic System (MTRS Inc II) program of record. Despite this, we are well
placed for the remaining programs and were pleased to be selected as one of two suppliers
for the Engineering and Manufacturing Development (EMD) phase of Common Robotic System (Individual)
program of record. The EMD phase will last approximately 10 months, during which time the
DoD will test and evaluate robots from the two suppliers. The total budget for the program
is approximately $400m in the form of an indefinite-delivery / indefinite-quantity contract
over seven years.
-- We secured over US$20m of orders during the period for Talon robots and more than US$20m of
orders for our Q-Nets and Armor products.
-- We won a total of more than US$50m orders for maritime systems in the US, including for aircraft
launch and recovery equipment for the new class of aircraft carriers. Our ability to innovate
was shown by the successful demonstration of our Dolphin system, allowing underwater full
duplex acoustic communications.
OptaSense (14% of Global Products revenue)
OptaSense provides innovative fibre sensing solutions to deliver decision-ready data in multiple vertical markets.
-- The performance of OptaSense improved as we saw the impact of returning confidence in the
oil field market and its diversification into adjacent markets started to reap rewards.
-- The move to a more customer aligned organisation since the beginning of the year has delivered
higher quality orders with less reliance on R&D investments. Our industry leading and proven
technology has continued to be a differentiator with major in-well acquisitions taking place
in three continents as the focus on production and efficiency accelerates.
-- OptaSense has made multiple significant deliveries to infrastructure customers during the
year: the largest single system awarded (TANAP) has been delivered to Turkey; we have had
significant deliveries into the Middle East region and the first significant award and first
phase delivery into the US.
-- Oil field activity in North America continues to increase while the adoption in the Middle
East and Asia markets becomes more embedded.
Space Products (11% of Global Products revenue)
QinetiQ's Space Products business provides satellites, payload instruments, sub-systems and ground station services.
-- During the year we were awarded a EUR25m contract from the European Space Agency for our innovative
International Berthing and Docking Mechanism. We are engaged in discussions with other potential
users of the system both in the commercial and governmental sectors for the supply of docking
modules, potentially creating a new revenue stream for the business.
-- The business secured a EUR3m contract with the European Space Agency for the preliminary design
activities on the Altius earth observation satellite. This satellite will study the distribution
of ozone in the earth's stratosphere.
-- The business also secured a number of new contracts, the most significant of which was COLIS,
a EUR6m project to build a Colloid Light Scattering instrument for investigating the effect
of density and temperature on colloidal structures.
EMEA Products (35% of Global Products revenue)
EMEA Products provides research services and bespoke technological solutions developed from intellectual property spun out from EMEA Services. It also includes various product based acquired businesses including QinetiQ Target Systems.
-- The performance of QinetiQ Targets Systems, which we acquired in December 2016, continues
to exceed our expectations. During the year it won work from two new customers, the Republic
of Korea Air Force and the Japanese Self Defence Force. It was also awarded a five year framework
contract for the Dutch Navy for the majority of its portfolio of aerial, rotary and maritime
targets in addition to a long-term framework with the US Targets Management Office. QTS reached
production milestones with its Hammerhead and Banshee targets making them the most proliferated
surface maritime and aerial target anywhere in the world.
-- QinetiQ is supporting the Canadian government with trials of QinetiQ's counter-UAV system
Obsidian. Obsidian uses state of the art radar technology and optics linked to a powerful
management and tracking software tool to provide an industry leading solution to detect and
track drones.
-- Exploiting our research into metamaterials, we are collaborating with Isotropics Ltd in the
development of electromagnetic lenses for use in electronically steered flat panel satellite
antennas. This technology enables High Throughput Satellite communications in the growing
areas of communications on the move and consumer broadband.
-- QinetiQ is launching its new secure Iridium-based satcom phone for military, emergency services
and users working in challenging environments such as oil & gas or mining. It will use a ruggedised
design with encrypted data links to ensure global secure coverage for users.
Other finance items - foreign exchange
The Group's income and expenditure is largely settled in the functional currency of the relevant Group entity, mainly Sterling or US Dollar. The Group has a policy in place to hedge all material transaction exposure at the point of commitment to the underlying transaction. Uncommitted future transactions are not routinely hedged. The Group continues its practice of not hedging income statement translation exposure.
The principal exchange rate affecting the Group was the Sterling to US Dollar exchange rate and the Sterling to Australian Dollar rate.
12 months to 12 months to
31 March 2018 31 March 2017
------------------- --------------- ---------------
GBP/US$ - opening 1.25 1.44
GBP/US$ - average 1.33 1.30
GBP/US$ - closing 1.40 1.25
GBP/A$ - opening 1.64 1.87
GBP/A$ - average 1.71 1.74
GBP/A$ - closing 1.83 1.64
------------------- --------------- ---------------
Principal risks and uncertainties
The Group continues to be exposed to a number of risks and uncertainties which management continue to assess, manage and mitigate to minimise their potential impact on the reported performance of the Group. An explanation of these risks, together with details of risk management and mitigation, can be found in the annual report which will be available for download at:
https://www.qinetiq.com/investors.
A summary of the significant risks and uncertainties is set out below:
-- Reduced spending in the core markets in which the Group operates;
-- Failure to execute the international strategy or adequately to mitigate specific risks arising
from international business;
-- Failure to create a culture of innovation or to invest adequately in, or create value from,
our innovation investment;
-- A future skills shortage;
-- Group performance is adversely affected by application of the Single Source Contract Regulations;
-- A breach of data security, cyber-attacks or IT systems failure could have an adverse impact
on our customers' operations;
-- The Group operates in highly regulated environments and recognises that its operations have
the potential to have an impact on a variety of stakeholders; and
-- A material element of the Group's revenue is derived from one contract (the LTPA contract).
Consolidated income statement for the year ended 31 March
2018 2017
-------------------------------- --------------------------------
All figures in GBP million Note Underlying* Specific Total Underlying* Specific Total
adjusting adjusting
items* items*
--------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Revenue 833.0 - 833.0 783.1 - 783.1
Operating costs excluding
depreciation and amortisation (690.9) - (690.9) (647.0) (1.0) (648.0)
Other income 9.7 21.1 30.8 9.2 18.4 27.6
--------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 151.8 21.1 172.9 145.3 17.4 162.7
Depreciation of property,
plant and equipment (25.6) - (25.6) (26.4) - (26.4)
Amortisation of intangible
assets (3.7) (2.6) (6.3) (2.6) (1.0) (3.6)
--------------------------------- ---- ----------- ---------- ------- ----------- ---------- ------- Operating profit 122.5 18.5 141.0 116.3 16.4 132.7 Finance income 5 0.7 4.2 4.9 1.0 - 1.0 Finance expense 5 (1.1) - (1.1) (1.2) (1.0) (2.2) --------------------------------- ---- ----------- ---------- ------- ----------- ---------- ------- Profit before tax 122.1 22.7 144.8 116.1 15.4 131.5 Taxation (expense)/income 6 (13.1) 6.4 (6.7) (12.3) 4.1 (8.2) --------------------------------- ---- ----------- ---------- ------- ----------- ---------- ------- Profit for the year attributable to equity shareholders 109.0 29.1 138.1 103.8 19.5 123.3 --------------------------------- ---- ----------- ---------- ------- ----------- ---------- ------- Earnings per share Basic 7 19.3p 24.4p 18.1p 21.5p Diluted 7 19.2p 24.3p 17.9p 21.3p --------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
*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.
Consolidated comprehensive income statement for the year ended 31 March
All figures in GBP million 2018 2017 ------------------------------------------------------------------ ------ ------ Profit for the year 138.1 123.3 Items that will not be reclassified to profit and loss: Actuarial gain recognised in defined benefit pension schemes 143.6 183.3 Tax on items that will not be reclassified to profit and loss (24.4) (31.2) ------------------------------------------------------------------ ------ ------ Total items that will not be reclassified to profit and loss 119.2 152.1 Items that may be reclassified subsequently to profit and loss: Foreign currency translation (losses)/gains on foreign operations (9.7) 12.2 Movement in deferred tax on foreign currency translation (1.0) - Decrease in fair value of hedging derivatives (2.2) - Movement in deferred tax on hedging derivatives 0.4 - Fair value losses on available for sale investments (0.6) (0.4) Total items that may be reclassified to profit and loss (13.1) 11.8 ------------------------------------------------------------------ ------ ------ Other comprehensive income for the year, net of tax 106.1 163.9 ------------------------------------------------------------------ ------ ------ Total comprehensive income for the year 244.2 287.2 ------------------------------------------------------------------ ------ ------
Consolidated statement of changes in equity for the year ended 31 March
All figures in Issued Capital Share Hedge Translation Retained Total Non-controlling Total
GBP million share redemption premium reserve reserve earnings interest equity
capital reserve
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 1 April 2017 5.7 40.8 147.6 - 10.3 328.0 532.4 0.2 532.6
Profit for the
year - - - - - 138.1 138.1 - 138.1
Other
comprehensive
income/(expense)
for the year,
net of tax - - - (1.8) (10.7) 118.6 106.1 - 106.1
Purchase of own
shares - - - - - (0.7) (0.7) - (0.7)
Share-based
payments charge - - - - - 2.7 2.7 - 2.7
Dividends - - - - - (34.5) (34.5) - (34.5)
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 30 March 2018 5.7 40.8 147.6 (1.8) (0.4) 552.2 744.1 0.2 744.3
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 1 April 2016 5.9 40.6 147.6 - (1.9) 132.4 324.6 0.2 324.8
Profit for the
year - - - - - 123.3 123.3 - 123.3
Other
comprehensive
income
for the year,
net of tax - - - - 12.2 151.7 163.9 - 163.9
Purchase of own
shares - - - - - (0.7) (0.7) - (0.7)
Purchase and
cancellation
of shares (0.2) 0.2 - - - (47.4) (47.4) - (47.4)
Share-based
payments charge - - - - - 2.1 2.1 - 2.1
Dividends - - - - - (33.4) (33.4) - (33.4)
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 30 March 2017 5.7 40.8 147.6 - 10.3 328.0 532.4 0.2 532.6
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
Consolidated balance sheet as at 31 March
All figures in GBP million Note 2018 2017
--------------------------------------------------- ----- -------- ---------
Non-current assets
Goodwill 101.5 107.8
Intangible assets 41.1 34.7
Property, plant and equipment 269.0 238.8
Other financial assets 0.3 0.5
Equity accounted investments 2.2 1.5
Retirement benefit surplus 13 316.2 156.0
Deferred tax asset 6.4 5.4
--------------------------------------------------- ----- -------- ---------
736.7 544.7
--------------------------------------------------- ----- -------- ---------
Current assets
Inventories 38.1 28.9
Other financial assets 16.9 10.7
Trade and other receivables 150.3 175.6
Investment 0.7 1.3
Asset held for sale 1.2 -
Cash and cash equivalents 254.1 211.8
--------------------------------------------------- ----- -------- ---------
461.3 428.3
--------------------------------------------------- ----- -------- ---------
Total assets 1,198.0 973.0
--------------------------------------------------- ----- -------- ---------
Current liabilities
Trade and other payables (334.9) (322.1)
Current tax 6 (8.9) (43.7)
Provisions (6.0) (6.2)
Other financial liabilities (2.6) (0.8)
--------------------------------------------------- ----- -------- ---------
(352.4) (372.8)
--------------------------------------------------- ----- -------- ---------
Non-current liabilities
Deferred tax liability (66.4) (37.0)
Provisions (14.3) (17.8)
Other financial liabilities (1.9) (0.3)
Other payables (18.7) (12.5)
--------------------------------------------------- ----- -------- ---------
(101.3) (67.6)
--------------------------------------------------- ----- -------- ---------
Total liabilities (453.7) (440.4)
--------------------------------------------------- ----- -------- ---------
Net assets 744.3 532.6
--------------------------------------------------- ----- -------- ---------
Capital and reserves
Ordinary shares 5.7 5.7
Capital redemption reserve 40.8 40.8
Share premium account 147.6 147.6
Hedging reserve (1.8) - Translation reserve (0.4) 10.3 Retained earnings 552.2 328.0 --------------------------------------------------- ----- -------- --------- Capital and reserves attributable to shareholders of the parent company 744.1 532.4 Non-controlling interest 0.2 0.2 --------------------------------------------------- ----- -------- --------- Total shareholders' funds 744.3 532.6 --------------------------------------------------- ----- -------- ---------
Consolidated cash flow statement for year ended 31 March
All figures in GBP million Note 2018 2017 -------------------------------------------------- ----- ------- ------- Underlying net cash inflow from operations 126.5 111.9 Add back specific adjusting items: proceeds from sale of intellectual property 3 5.9 - Net cash inflow from operations 8 132.4 111.9 Tax paid (15.7) (3.0) Interest received 0.7 1.0 Interest paid (0.7) (0.6) --------------------------------------------------- ----- ------- ------- Net cash inflow from operating activities 116.7 109.3 --------------------------------------------------- ----- ------- ------- Purchases of intangible assets (8.5) (2.2) Purchases of property, plant and equipment (46.0) (30.7) Proceeds from sale of property, plant and equipment 23.1 14.3 Acquisition of business and investment in joint venture (1.6) (65.7) Investments in available for sale investments (5.0) - Net cash outflow from investing activities (38.0) (84.3) --------------------------------------------------- ----- ------- ------- Purchase of own shares (0.7) (48.1) Dividends paid to shareholders (34.5) (33.4) Net cash outflow from financing activities (35.2) (81.5) --------------------------------------------------- ----- ------- ------- Increase/(decrease) in cash and cash equivalents 43.5 (56.5) Effect of foreign exchange changes on cash and cash equivalents (1.2) 4.8 Cash and cash equivalents at beginning of year 211.8 263.5 Cash and cash equivalents at end of year 254.1 211.8 --------------------------------------------------- ----- ------- -------
Reconciliation of movement in net cash
All figures in GBP million Note 2018 2017 -------------------------------------------------- ----- ------- ------- Increase/(decrease) in cash and cash equivalents in the year 43.5 (56.5) Add back net outflows not impacting net 5.0 - cash -------------------------------------------------- ----- ------- ------- Change in net cash resulting from cash flows 48.5 (56.5) Other movements including foreign exchange (3.6) 3.9 --------------------------------------------------- ----- ------- ------- Increase/(decrease) in net cash as defined by the Group 44.9 (52.6) Net cash as defined by the Group at beginning of the year 221.9 274.5 --------------------------------------------------- ----- ------- ------- Net cash as defined by the Group at end of the year 9 266.8 221.9 Less: other financial asset and liabilities 9 (12.7) (10.1) --------------------------------------------------- ----- ------- ------- Total cash and cash equivalents 9 254.1 211.8 --------------------------------------------------- ----- ------- -------
Notes to the financial statements
1. Significant accounting policies
Basis of preparation
QinetiQ Group plc is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in England.
The financial information included within the preliminary announcement has been prepared using accounting policies consistent with International Financial Reporting Standards (IFRSs) as endorsed by the European Union. The accounting policies followed are the same, subject to the changes noted below, as those published by the Group within its Annual Report for the year ended 31 March 2017 which is available on the Group's website, www.QinetiQ.com.
Accounting developments adopted by the Group in 2018 with no material impact on the financial statements
The following IFRS and EU-endorsed Standards and amendments, improvements and interpretations of published standards are effective for accounting periods beginning on or after 1 January 2017 and have been adopted with no material impact on the Group's financial statements:
- IAS 7 Cash flow statements - amendments to the Disclosure initiatives
requires disclosure of changes in liabilities arising from financing
activities. The Group does not currently have liabilities arising
from financing activities to disclose in the cash flow statement.
The adoption of the amendment has no impact on the Group
- IAS 12 Income taxes - amendments to the recognition of deferred
tax assets for unrealised losses clarifies how an entity should
evaluate whether there will be sufficient taxable profits against
which it can utilise a deductible temporary difference. The Group
already assesses the sufficiency of future taxable profits in a
manner consistent with these amendments. The adoption of the amendment
has no impact on the Group
- Annual improvement 2014-2016 cycle have been adopted with effect
from 1 January 2017. No changes to the previously published accounting
policies or other adjustments were required on the adoption of
these amendments.
The preliminary announcement was approved by the Board of Directors on 24 May 2018. 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.
The statutory accounts for 2018 were approved by the Board of Directors on 24 May 2018 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting on 25 July 2018. The financial information for 2017 is derived from the statutory accounts for 2017 which have been delivered to the Registrar of Companies. The auditors have reported on the 2018 and 2017 accounts. The reports were (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
In the income statement, the Group presents specific adjusting items separately. In the judgment of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items need to be disclosed separately because of their size and nature. Underlying measures of performance exclude specific adjusting items. Specific adjusting items include:
-- amortisation of intangible assets arising from acquisitions;
-- pension net finance income/expense;
-- gains/losses on business divestments and disposal of property,
investments and intellectual property;
-- impairment of goodwill and other intangible assets;
-- transaction costs in respect of business acquisitions;
-- tax impact on the above items; and
-- other significant non-recurring deferred tax movements.
All items treated as a specific adjusting item in the current and prior year are detailed in note 3.
Going concern basis
The Group meets its day-to-day working capital requirements through its available cash funds and its bank facilities. The market conditions in which the Group operates have been, and are expected to continue to be, challenging as spending from the Group's key customers in its primary markets in the UK and US remains under pressure. Despite these challenges, the Directors believe that the Group is well positioned to manage its overall business risks successfully. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going-concern basis in preparing its 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.
2. Segmental analysis
Operating segments
for the year ended 31 March
All figures in GBP 2018 2017
million
----------------------- ------------------------------------------- ---------------------------------------------
Revenue from external Underlying operating Revenue from external Underlying operating
customers profit(1) customers profit(1)
----------------------- --------------------- -------------------- --------------------- ----------------------
EMEA Services 651.4 94.3 613.5 92.7
Global Products 181.6 28.2 169.6 23.6
------------------------ --------------------- -------------------- --------------------- ----------------------
Total operating segments 833.0 122.5 783.1 116.3
------------------------ --------------------- -------------------- --------------------- ----------------------
Underlying operating
margin* 14.7% 14.9%
------------------------ --------------------- -------------------- --------------------- ----------------------
(1) The measure of profit presented to the Chief Operating Decision Maker is underlying operating profit (as defined in glossary).
Reconciliation of total operating segments to total on an organic, constant currency basis
for the year ended 31 March
All figures in GBP
million 2018 2017
---------------------- ------------------------------------------- ----------------------------------------------
Revenue from external Underlying operating Revenue from external Underlying operating
customers profit customers profit
---------------------- --------------------- -------------------- ---------------------- ----------------------
Total operating
segments 833.0 122.5 783.1 116.3
Less: contribution from
acquired businesses^ (30.7) (6.6) - -
----------------------- --------------------- -------------------- ---------------------- ----------------------
Total operating
segments on an organic
basis 802.3 115.9 783.1 116.3
Adjust to constant
prior year exchange
rates 1.1 1.0 - -
----------------------- --------------------- -------------------- ---------------------- ----------------------
Total operating
segments on an
organic, constant
currency basis 803.4 116.9 783.1 116.3
----------------------- --------------------- -------------------- ---------------------- ----------------------
Organic revenue growth
at constant currency* 3% 1%
----------------------- --------------------- -------------------- ---------------------- ----------------------
^For the period of which there was no contribution in the equivalent period in the prior year which was pre-ownership by the Group.
* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary.
Reconciliation of segmental results to total profit
for the year ended 31 March
All figures in GBP million Note 2018 2017 -------------------------------------------------------- ---- ----- ----- Underlying operating profit 122.5 116.3 Specific adjusting items operating profit 3 18.5 16.4 -------------------------------------------------------- ---- ----- ----- Operating profit 141.0 132.7 Net finance income/(expense) 5 3.8 (1.2) -------------------------------------------------------- ---- ----- ----- Profit before tax 144.8 131.5 Taxation expense 6 (6.7) (8.2) -------------------------------------------------------- ---- ----- ----- Profit for the year attributable to equity shareholders 138.1 123.3 -------------------------------------------------------- ---- ----- -----
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 GBP million Note 2018 2017 -------------------------------------------------------------------------------- ---- ----- ----- Gain on sale of property 14.6 18.4 Gain on sale of investment 0.6 - Gain on sale of intellectual property 5.9 - Acquisition costs - (1.0) -------------------------------------------------------------------------------- ---- ----- ----- Specific adjusting items before interest, tax, depreciation and amortisation 21.1 17.4 Amortisation of intangible assets arising from acquisitions (2.6) (1.0) -------------------------------------------------------------------------------- ---- ----- ----- Specific adjusting items operating profit 18.5 16.4 Defined benefit pension scheme net finance income/(expense) 4.2 (1.0) -------------------------------------------------------------------------------- ---- ----- ----- Specific adjusting items profit before tax 22.7 15.4 Specific adjusting items - tax 6 6.4 4.1 -------------------------------------------------------------------------------- ---- ----- ----- Total specific adjusting items profit after tax 29.1 19.5 -------------------------------------------------------------------------------- ---- ----- ----- Reconciliation of underlying profit for the year to total profit for the year all figures in GBP million 2018 2017 -------------------------------------------------------------------------------- ---- ----- ----- Underlying profit after tax - total Group 109.0 103.8 Total specific adjusting items profit after tax 29.1 19.5 -------------------------------------------------------------------------------- ---- ----- ----- Total profit for the year attributable to equity shareholders 138.1 123.3 -------------------------------------------------------------------------------- ---- ----- -----
4. Profit before tax
The following items have been charged in arriving at profit before tax for continuing operations:
All figures in GBP million 2018 2017 ----------------------------------------------------------------- ----- ----- Cost of inventories expensed 25.4 23.2 Owned assets: depreciation 25.6 26.4 Foreign exchange loss - 0.2 Research and development expenditure - customer funded contracts 284.3 272.8 Research and development expenditure - Group funded 25.8 33.6 ----------------------------------------------------------------- ----- -----
5. Finance income and expense
All figures in GBP million 2018 2017 ------------------------------------------------------------ ----- ----- Receivable on bank deposits 0.7 1.0 Finance income before specific adjusting items 0.7 1.0 ------------------------------------------------------------ ----- ----- Amortisation of deferred financing costs (0.3) (0.3) Payable on bank loans and overdrafts (0.7) (0.6) Unwinding of discount on financial liabilities (0.1) (0.3) ------------------------------------------------------------ ----- ----- Finance expense before specific adjusting items (1.1) (1.2) ------------------------------------------------------------ ----- ----- Specific adjusting items: Defined benefit pension scheme net finance income/(expense) 4.2 (1.0) ------------------------------------------------------------ ----- ----- Net finance income/(expense) 3.8 (1.2) ------------------------------------------------------------ ----- ----- 6. Taxation
All figures in GBP million 2018 2017
--------------------------------------- ------------------------------------- -----------------------------------
Underlying Specific adjusting Total Underlying Specific Total
items adjusting items
--------------------------------------- ---------- ------------------ ----- ---------- ---------------- -----
Profit before tax 122.1 22.7 144.8 116.1 15.4 131.5
Taxation (expense)/income (13.1) 6.4 (6.7) (12.3) 4.1 (8.2)
---------------------------------------- ---------- ------------------ ----- ---------- ---------------- -----
Profit for the year attributable to
equity shareholders 109.0 29.1 138.1 103.8 19.5 123.3
---------------------------------------- ---------- ------------------ ----- ---------- ---------------- -----
Effective tax rate 10.7% 10.6%
---------------------------------------- ---------- ------------------ ----- ---------- ---------------- -----
The total tax charge was GBP6.7m (2017: GBP8.2m). The underlying tax charge was GBP13.1m (2017: GBP12.3m) with an underlying effective tax rate of 10.7% for the year ending 31 March 2018 (2017: 10.6%). The effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development expenditure credits ('RDEC') in the UK.
Tax losses and specific adjusting items
Deferred tax assets of GBP7.6m have been recognised in the year (2017: GBP3.7m), with the income statement credit classified as a specific adjusting item. These assets are in respect of US net operating losses and the recognition of tax deductible intellectual property assets in the UK, whereas the prior year related to an element of the Group's UK non-trade loan relationship deficits. Together with a GBP1.2m tax effect of the other items impacting specific adjusting items PBT, the total specific adjusting items tax credit was GBP6.4m (2017: GBP4.1m).
At 31 March 2018 the Group had unused tax losses and surplus interest costs of GBP118.0m (2017: GBP141.7m) which are available for offset against future profits. A deferred tax asset is recognised in respect of GBP17.0m of US net operating losses (2017: nil) and GBP7.7m (2017: GBP20.2m) of UK losses. No deferred tax asset is recognised in respect of the remaining GBP93.3m of losses/interest costs due to uncertainty over the timing of their utilisation. The Group has GBP60.2m of time limited losses of which US capital losses of GBP26.2m will expire in 2020, GBP5.5m will expire in 2034, GBP20.3m in 2035 and GBP8.2m in 2036. A reduction in the US Federal rate of tax to 21% (from 35%) has been substantively enacted during the period. The deferred tax assets in the US have been calculated using this rate. Deferred tax in other jurisdictions has been calculated using the enacted future statutory tax rates.
Current tax liability
The current tax liability was GBP8.9m as at 31 March 2018 (2017: GBP43.7m). The decrease in the liability is primarily due to the settlement of a tax liability in the US related to an unfavourable court decision in respect of the tax treatment of the Group's acquisition of Dominion Technology Resources, Inc. in 2008. The settlement was funded through a recovery under an insurance policy (the receivable for which had previously been included within trade and other receivables).
Factors affecting future tax charges
The effective tax rate is expected to remain below the UK statutory rate in the medium term, subject to the impact of any tax legislation changes, the geographic mix of profits and the assumption that the benefits of net R&D expenditure credits retained by the Group remain in the tax line. Future recognition of unrecognised tax losses will also affect future tax charges.
7. 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.
for the year ended 31 March 2018 2017 ---------------------------------- -------- ----- ----- Weighted average number of shares Million 565.2 573.9 Effect of dilutive securities Million 2.0 4.8 ---------------------------------- -------- ----- ----- Diluted number of shares Million 567.2 578.7 ---------------------------------- -------- ----- -----
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
for the year ended 31 March 2018 2017 ------------------------------------------- ------------ ------ ------ Profit attributable to equity shareholders GBP million 138.1 123.3 Remove profit after tax in respect of specific adjusting items GBP million (29.1) (19.5) ------------------------------------------- ------------ ------ ------ Underlying profit after taxation GBP million 109.0 103.8 ------------------------------------------- ------------ ------ ------ Weighted average number of shares Million 565.2 573.9 ------------------------------------------- ------------ ------ ------ Underlying basic EPS Pence 19.3 18.1 ------------------------------------------- ------------ ------ ------ Diluted number of shares Million 567.2 578.7 ------------------------------------------- ------------ ------ ------ Underlying diluted EPS Pence 19.2 17.9 ------------------------------------------- ------------ ------ ------
Basic and diluted EPS
for the year ended 31 March 2018 2017 ------------------------------------------- ------------ ----- ----- Profit attributable to equity shareholders GBP million 138.1 123.3 Weighted average number of shares Million 565.2 573.9 ------------------------------------------- ------------ ----- ----- Basic EPS - total Group Pence 24.4 21.5 ------------------------------------------- ------------ ----- ----- Diluted number of shares Million 567.2 578.7 Diluted EPS - total Group Pence 24.3 21.3 ------------------------------------------- ------------ ----- -----
8. Cash flows from operations
All figures in GBP million 2018 2017 ---------------------------------------------- ------ ------ Profit after tax for the year 138.1 123.3 Adjustments for: Taxation expense 6.7 8.2 Net finance (income)/expense (3.8) 1.2 Gain on sale of investment (0.6) - Gain on sale of property (14.6) (18.4) Transaction costs in respect of acquisition of business - 1.0 Amortisation of purchased or internally developed intangible assets 3.7 2.6 Amortisation of intangible assets arising from acquisitions 2.6 1.0 Depreciation of property, plant and equipment 25.6 26.4 Loss on disposal of plant and equipment 2.9 1.2 Share of post-tax profit of equity accounted entities (0.3) (0.5) Share-based payments charge 2.4 2.1 Retirement benefit contributions in excess of income statement expense (12.4) (11.4) Net movement in provisions (3.7) 4.5 ----------------------------------------------- ------ ------ Increase in inventories (10.8) - Decrease in receivables 19.0 2.9 Decrease in payables (22.4) (32.2) ----------------------------------------------- ------ ------ Changes in working capital (14.2) (29.3) Net cash flow from operations 132.4 111.9 ----------------------------------------------- ------ ------
Reconciliation of net cash flow from operations to underlying net cash flow from operations and to free cash flow
All figures in GBP million 2018 2017 ----------------------------------------- ------ ------ Net cash flow from operations 132.4 111.9 Less specific adjusting item: proceeds from sale of intellectual property (5.9) - ----------------------------------------- ------ ------ Underlying net cash flow from operations 126.5 111.9 Less: tax and net interest payments (15.7) (2.6) Less: purchases of intangible assets and property, plant & equipment (54.5) (32.9) ------------------------------------------ ------ ------ Free cash flow 56.3 76.4 ------------------------------------------ ------ ------
Underlying cash conversion ratio
2018 2017
------------------------------------------ ----- -----
Underlying operating profit - GBP million 122.5 116.3
Underlying net cash flow from operations
- GBP million 126.5 111.9
------------------------------------------- ----- -----
Underlying cash conversion ratio - % 103% 96%
------------------------------------------- ----- -----
9. Net cash
All figures in GBP million 2018 2017 ----------------------------------------------------- ----- ----- Current financial assets/(liabilities) Available-for-sale investment 15.7 10.4 Deferred financing costs 0.1 0.3 Derivative financial assets 1.1 - Derivative financial liabilities (2.6) (0.8) ------------------------------------------------------ ----- ----- Total current net financial assets 14.3 9.9 Non-current financial assets/(liabilities) Deferred financing costs - 0.2 Derivative financial assets 0.3 0.3 Derivative financial liabilities (1.9) (0.3) ------------------------------------------------------ ----- ----- Total non-current net financial (liabilities)/assets (1.6) 0.2 ------------------------------------------------------ ----- ----- Total financial assets/liabilities (net) 12.7 10.1 Cash and cash equivalents 254.1 211.8 ------------------------------------------------------ ----- ----- Total net cash as defined by the Group 266.8 221.9 ------------------------------------------------------ ----- -----
10. 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
Level 3 - measured using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs).
The Group's assets and liabilities that are measured at fair value, as at 31 March 2018, are as follows:
All figures in GBP million Level 1 Level 2 Level 3 Total ----------------------------------------- ------- ------- ------- ----- Assets: Available-for-sale investment 15.7 - - 15.7 Current other investments 0.7 - - 0.7 Current derivative financial instruments - 1.1 - 1.1 Non-current derivative financial instruments - 0.3 - 0.3 Liabilities: Current derivative financial instruments - (2.6) - (2.6) Non-current derivative financial instruments - (1.9) - (1.9) ----------------------------------------- ------- ------- ------- ----- Total 16.4 (3.1) - 13.3 ----------------------------------------- ------- ------- ------- -----
The following table presents the Group's assets and liabilities that are measured at fair value at 31 March 2017:
All figures in GBP million Level 1 Level 2 Level Total
3
--------------------------------------------- ------- ------- ----- -----
Assets:
Available-for-sale investments 10.4 - - 10.4
Current other investments 1.3 - - 1.3
Non-current other investments - - 0.1 0.1
Non-current derivative financial instruments - 0.3 - 0.3
Liabilities:
Current derivative financial instruments - (0.8) - (0.8)
Non-current derivative financial instruments - (0.3) - (0.3)
--------------------------------------------- ------- ------- ----- -----
Total 11.7 (0.8) 0.1 11.0
--------------------------------------------- ------- ------- ----- -----
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.
11. Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2018 and 31 March 2017 is provided below:
Pence per ordinary share GBPm Date paid/payable
--------------------------------------- ------------------------ ---- -----------------
Interim 2018 2.1 11.9 Feb 2018
Final 2018 (proposed) 4.2 23.7 Aug 2018
--------------------------------------- ------------------------ ---- -----------------
Total for the year ended 31 March 2018 6.3 35.6
--------------------------------------- ------------------------ ---- -----------------
Interim 2017 2.0 11.5 Feb 2017
Final 2017 4.0 22.6 Sep 2017
--------------------------------------- ------------------------ ---- -----------------
Total for the year ended 31 March 2017 6.0 34.1
--------------------------------------- ------------------------ ---- -----------------
The Directors propose a final dividend of 4.2p (2017: 4.0p). The dividend, subject to shareholder approval, will be paid on 31 August 2018. The ex-dividend date is 2 August 2018 and the record date is 3 August 2018.
12. Goodwill
All figures in GBP million 2018 2017 --------------------------- ------- ------- Cost At 1 April 220.4 171.5 Acquisitions - 28.4 Foreign exchange (17.4) 20.5 --------------------------- ------- ------- At 31 March 203.0 220.4 Impairment At 1 April (112.6) (98.4) Foreign exchange 11.1 (14.2) --------------------------- ------- ------- At 31 March (101.5) (112.6) --------------------------- ------- ------- Net book value at 31 March 101.5 107.8 --------------------------- ------- -------
Cash-generating units (CGU)
Goodwill is allocated across two cash generating units ('CGUs') within the EMEA Services segment and five CGUs within the Global Products segment. The Group previously disclosed four separate CGUs and one of those CGUs, 'EMEA Services' was an aggregation of several other CGUs that could be considered as CGUs in their own right. The Group has now disaggregated that CGU into three separate CGUs, being Boldon James, Commerce Decisions and Advisory Services. In Global Products, the Group also disaggregated one CGU into the two components of Target Systems and Space Products. The full list of CGUs that have goodwill allocated to them is as follows:
All figures in GBP million Primary reporting segment 2018
------------------------------ -------------------------- -----
QinetiQ North America ('QNA') Global Products 38.8
Target Systems Global Products 24.1
Space Products Global Products 5.8
Boldon James Global Products 10.7
Commerce Decisions Global Products 6.4
Australia EMEA Services 5.9
Advisory Services EMEA services 9.8
------------------------------ -------------------------- -----
Net book value at 31 March 101.5
---------------------------------------------------------- -----
Goodwill is attributable to the excess of consideration over the fair value of net assets acquired and includes expected synergies, future growth prospects and employee knowledge, expertise and security clearances. The Group tests each CGU for impairment annually, or more frequently if there are indications that goodwill might be impaired. Impairment testing is dependent on management's estimates and judgments, particularly as they relate to the forecasting of future cash flows, the discount rates selected and expected long-term growth rates. Significant headroom exists in all CGUs and management considers that there are no likely variations in the key assumptions which would lead to an impairment being recognised.
Key assumptions
Cash flows
The value in use calculations generally use discounted future cash flows based on financial plans approved by the Board covering a three-year period. Cash flows for periods beyond these periods are extrapolated based on the last year of the plans, with a terminal growth-rate assumption applied.
Terminal growth rates
The specific plans for each of the CGUs have been extrapolated using a terminal growth rate of 1.0%-2.5% (2017: 2.0%-2.4%). The US terminal growth rate was 1.7% (2017: 2.0%). 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.
Discount rates
The Group's weighted average cost of capital was used as a basis in determining the discount rate to be applied, adjusted for risks specific to the market characteristics of CGUs, as appropriate on a pre-tax basis. This is considered an appropriate estimate of a market participant discount rate. The pre-tax discount rates applied to the cash flows of the QNA CGU and to the Target Systems CGU were 13.1% and 11.8% respectively. Discount rates ranging from 10.1% to 12.4% were applied to the cash flows of the other, less significant, CGUs.
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 flow.
Significant CGUs
QinetiQ North America ('QNA')
The carrying value of the goodwill for QNA CGU, was GBP38.8m as at 31 March 2018 (2017: GBP43.4m). The recoverable amount of this CGU as at 31 March 2018, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating assets (of GBP47.3m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. These cash flows include certain assumptions about revenue and profit in respect of new product lines still to be launched and the success of winning certain government contracts. An increase in the discount rate by 1%, a decrease in the terminal growth rate by 1% or a decrease in the terminal year cash flows of GBP2.0m would not cause the net operating assets to exceed their recoverable amount.
Target Systems
The recoverable amount of this CGU as at 31 March 2018, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating assets (of GBP27.8m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in the discount rate by 1%, a decrease in the terminal growth rate by 1% or a decrease in the terminal year cash flows of GBP2.0m would not cause the net operating assets to exceed their recoverable amount.
13. Post-retirement benefits
Set out below is a summary of the financial position of the Group's defined benefit pension scheme. The fair value of the Scheme's assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the Scheme's liabilities, which are derived from cash flow projections over long periods, and thus inherently uncertain, are as follows:
All figures in GBP million 2018 2017 -------------------------------------- --------- --------- Equities - quoted 115.8 284.0 Equities - unquoted 58.9 71.4 Liability Driven Investment 1,050.9 968.2 Corporate bonds 311.3 340.6 Alternative bonds - quoted 197.9 132.3 Alternative bonds - unquoted 35.0 - Property fund 138.7 126.7 Cash and cash equivalents 80.2 3.1 Derivatives 1.8 - Total market value of scheme assets 1,990.5 1,926.3 Present value of scheme liabilities (1,674.3) (1,770.3) --------------------------------------- --------- --------- Net pension asset before deferred tax 316.2 156.0 Deferred tax liability (58.6) (31.4) --------------------------------------- --------- --------- Net pension asset after deferred tax 257.6 124.6 --------------------------------------- --------- --------- Changes to the net pension asset/(liability) All figures in GBP million 2018 2017 ----------------------------------------------- ----- ------ Opening net pension asset/(liability) 156.0 (37.7) Net finance income/(expense) 4.2 (1.0) Net actuarial gain 143.6 183.3 Administration expenses (1.0) (1.5) Contributions by the employer 13.4 12.9 Closing net pension asset 316.2 156.0 ------------------------------------------------ ----- ------
Assumptions
The major assumptions used in the IAS 19 valuation of the Scheme
2018 2017
--------------------------------------------- ----- -----
Discount rate applied to Scheme liabilities 2.60% 2.60%
CPI inflation assumption 2.25% 2.35%
---------------------------------------------- ----- -----
Assumed life expectancies in years:
Future male pensioners (currently aged 60) 88 89
Future female pensioners (currently aged 60) 90 91
Future male pensioners (currently aged 40) 90 91
Future female pensioners (currently aged 40) 92 93
---------------------------------------------- ----- -----
The sensitivity of the gross Scheme liabilities to each of the key assumptions is shown in the following table:
Key assumptions Change in assumption Indicative impact on gross Scheme liabilities before Indicative impact on
deferred tax net pension asset
Discount rate Increase by 0.1% Decrease by GBP31m Decrease by GBP11m
-------------------- ------------------------------------------------------- --------------------
Rate of inflation Increase by 0.1% Increase by GBP34m Increase by GBP17m
-------------------- ------------------------------------------------------- --------------------
Life expectancy Increase by one year Increase by GBP46m Decrease by GBP46m
-------------------- ------------------------------------------------------- --------------------
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 2018 this hedges against approximately 85% of the interest rate and 100% of the inflation rate risk, as measured on the Trustees' gilt-funded basis.
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (projected unit credit method) has been applied as when calculating the pension liability recognised within the statement of financial position. The methods and types of assumption did not change.
The accounting assumptions noted above are used to calculate the year end net pension asset/liability in accordance with the relevant accounting standard, IAS 19 (revised) 'Employee benefits'. Changes in these assumptions have no impact on the Group's cash payments into the Scheme. The payments into the Scheme are reassessed after every triennial valuation.
The most recent completed full actuarial valuation of the Scheme was undertaken as at 30 June 2017 and resulted in an actuarially assessed surplus of GBP139.7m (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 2020.
The agreed recovery plan requires GBP2.5m per annum distributions to the Scheme until 25 March 2032, indexed by reference to CPI. Such distributions are from the Group's Pension Funding Partnership. The previous recovery plan required GBP13.0m contributions per annum until 31 March 2018, including GBP2.5m p.a. distributions to the Scheme, indexed by reference to CPI, from the Group's Pension Funding Partnership.
14. Own shares and share-based awards
Own shares represent shares in the Company that are held by independent trusts and include treasury shares and shares held by the employee share ownership plan. Included in retained earnings at 31 March 2018 are 7,934,634 shares (2017: 8,957,048 shares).
In the year ended 31 March 2018 the Group granted/awarded 3.7 million new share-based awards to employees (2017: 4.1 million).
15. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of GBP30.1m at 31 March 2018 (2017: GBP46.1m) in the ordinary course of business.
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.
The Group has also not recognised contingent amounts receivable relating to property impairments in prior years that may potentially be recovered from the MOD. Recovery is subject to future negotiations. It is not considered practicable to calculate the value of this contingent asset.
16. Related party transactions with equity accounted investments
During the year there were sales to associates and joint ventures of GBP10.4m (2017: GBP3.4m). At the year end there were outstanding receivables from associates and joint ventures of GBP4.5m (2017: GBP0.4m).
17. Capital commitments
The Group had the following capital commitments for which no provision has been made:
All figures in GBP million 2018 2017 --------------------------- ---- ----- Contracted 76.2 155.3 ---------------------------- ---- -----
Capital commitments at 31 March 2018 include GBP74.3m (2017: GBP155.1m) in relation to property, plant and equipment that will be wholly funded by a third party customer under a long-term contract arrangements. These primarily relate to investments under the LTPA contract.
18. Post balance sheet event
Post year end, in April 2018, QinetiQ entered into an agreement to acquire E.I.S. Aircraft Operations ("Aircraft Operations"), currently part of E.I.S. Aircraft Group, for EUR70 million on a cash-free, debt-free basis.
Aircraft Operations is a leading provider of airborne training services based in Germany, delivering threat-representation and operational readiness for military customers. It generated EUR20.1m revenue and EUR5.4m EBITDA in the year to 31 December 2017.
The transaction is subject to certain regulatory and legal approvals and is expected to close towards the end of the first half of QinetiQ's 2019 financial year.
Following completion, Aircraft Operations will continue to be led by its existing management team. It will form part of QinetiQ's International business unit and will be reported within QinetiQ's EMEA Services division.
Glossary
C4ISR Command, control, communications, computers, intelligence, surveillance and reconnaissance
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation 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, Note 2
expressed as a percentage, calculated
at constant prior year foreign exchange
rates, adjusting for business acquisitions
and disposals to reflect equivalent
composition of the Group
---------------------------------------------- -------------------
Underlying operating Operating profit as adjusted to exclude Note 2
profit 'specific adjusting items'
---------------------------------------------- -------------------
Underlying operating Underlying operating profit expressed Note 2
margin as a percentage of revenue
---------------------------------------------- -------------------
Underlying net finance Net finance income/expense as adjusted Note 5
income/expense to exclude 'specific adjusting items'
---------------------------------------------- -------------------
Underlying profit Profit before/after tax as adjusted Note 6
before/after tax to exclude 'specific adjusting items'
---------------------------------------------- -------------------
Underlying effective The tax charge for the year excluding Note 6
tax rate the tax impact of 'specific adjusting
items' expressed as a percentage
of underlying profit before tax
---------------------------------------------- -------------------
Underlying basic Basic and diluted earnings per share Note 7
and diluted EPS as adjusted to exclude 'specific
adjusting items'
---------------------------------------------- -------------------
Orders The level of new orders (and amendments N/A
to existing orders) booked in the
year. Includes share of orders won
by joint ventures
---------------------------------------------- -------------------
Backlog, funded backlog The expected future value of revenue N/A
or order book from contractually committed and
funded customer orders
---------------------------------------------- -------------------
Book to bill ratio Ratio of funded orders received in N/A
the year to revenue for the year,
adjusted to exclude revenue from
the 25-year LTPA contract due to
significant size and timing differences
of LTPA order and revenue recognition
which may distort the ratio calculation.
---------------------------------------------- -------------------
Underlying net cash Net cash flow from operations before Note 8
flow from operations cash flows of specific adjusting
items
---------------------------------------------- -------------------
Underlying operating The ratio of underlying net cash Note 8
cash conversion or flow from operations to underlying
cash conversion ratio operating profit
---------------------------------------------- -------------------
Free cash flow Underlying net cash flow from operations Note 8
less net tax and interest payments
less purchases of intangible assets
and property, plant and equipment
---------------------------------------------- -------------------
Net cash Net cash as defined by the Group Note 9
combines cash and cash equivalents
with other financial assets and liabilities,
primarily available for sale investments
and derivative financial instruments.
---------------------------------------------- -------------------
Specific adjusting Amortisation of intangible assets Note 3
items arising from acquisitions; impairment
of goodwill and intangible assets;
gains/losses on business divestments
and disposal of property, investments
and intellectual property; net pension
finance income/expense; tax impact
of the preceding items; and significant
non-recurring deferred tax movements
---------------------------------------------- -------------------
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR EAESDADKPEAF
(END) Dow Jones Newswires
May 24, 2018 02:01 ET (06:01 GMT)
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