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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| -24.20 | -6.76% | 333.60 | 335.80 | 336.40 | 349.40 | 329.80 | 345.00 | 4,735,264 | 16:35:19 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Security Systems Service | 1.58B | 154.4M | 0.2681 | 12.53 | 1.93B |
From Apr 2022 to Apr 2024
TIDMQQ.
RNS Number : 9161F
QinetiQ Group plc
10 November 2022
Interim Results
10 November 2022
Contributing to global and national security
Results for six months to 30 September 2022 ('H1 FY23')
Hot Features
Premium
Statutory results Underlying* results
H1 FY23 H1 FY22^ H1 FY23 H1 FY22
Revenue GBP673.4m GBP600.1m GBP673.4m GBP600.1m
Operating profit GBP100.1m GBP41.0m GBP74.1m GBP53.4m
Profit after tax GBP112.4m GBP22.3m GBP65.4m GBP46.6m
Earnings per share 19.5p 3.9p 11.4p 8.1p
Interim dividend per share 2.4p 2.3p 2.4p 2.3p
Orders GBP798.8m GBP677.8m
Order backlog GBP2,968.6m GBP3,007.6m
Net cash flow from operations GBP99.5m GBP64.2m GBP106.8m GBP70.2m
Net cash GBP264.0m GBP139.2m GBP264.0m GBP139.2m
* Definitions of the Group's 'Alternative Performance Measures'
can be found in the glossary
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of software implementation costs.
See note 1 to the interim financial statements.
Strong and consistent operational performance across the Group
- Orders up 18%, revenue up 12% and underlying operating profit
up 39%
- On an organic constant currency basis, and excluding the impact
of the write-down in FY22 half year results: Orders up 11%,
revenue up 8% and underlying operating profit up 7%
- Consistently strong cash conversion at 106% cash conversion
pre-capex
- Statutory operating profit GBP100.1m, assisted by FX gain on
Avantus acquisition
- Underlying EPS up 41%; 2.4p interim dividend declared - one
third of FY22 dividend
Disciplined execution of multi-domestic growth strategy
- Strong programme delivery across all major contracts - Good order intake across the Group at c.GBP800m - Increased investment in people and capabilities for the future - Step-change through strategic acquisitions in the US and Australia
On-track to deliver five year strategic growth ambition; GBP2.3bn revenue at stable margins
- Increasing revenue guidance and will deliver profit in-line
with FY23 expectations
- Respond to increased demand for our distinctive offerings driven
by threat environment
- Close Avantus and Air Affairs deals and execute integration
plans
- Drive sustainable growth in our >GBP20bn addressable market
Steve Wadey, Group Chief Executive Officer of QinetiQ said:
"World events continue to reinforce the vital importance of a technologically advanced defence industry to society and the needs of our customers for differentiated solutions, aligned with our strategy. I am immensely proud of how our people have supported our customers at this time of need: we are fulfilling our company purpose and contributing to global and national security.
Our first half results demonstrate the strong demand we continue to see from our customers for our distinctive offerings. We have delivered good programme execution and delivery across all our major contracts. Our home countries of UK, US and Australia have all achieved significant organic growth and the US has performed particularly well, delivering improved and consistent performance.
We have also secured two strategically significant acquisitions in the US and Australia, Avantus and Air Affairs respectively, which demonstrate the disciplined execution of our growth strategy and capital allocation policy. We have increased our investment in our people and capability for the future to enable our long-term growth, as we continue to build an integrated global defence and security company. We are on-track to deliver our 5 year strategic growth ambition and enhanced shareholder returns."
Interim results presentation:
We will be hosting an in-person results presentation at 09:30 GMT at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Registration to join in-person or via the live webcast is available here:
https://www.qinetiq.com/en/investors/results-reports-and-presentations/interim-results-webcast-2022
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:
John Haworth, Group Director Investor Relations: +44 (0) 7920 545841 Lorna Cobbett, Citigate Dewe Rogerson (Media enquiries): +44 (0) 7771 344781
Basis of preparation:
Throughout this Interim Report, certain measures are used to describe the Group's financial performance which are not recognised under UK-adopted International Accounting Standards. The Group's Directors and management assess financial performance based on underlying measures of performance, which are adjusted to exclude certain 'specific adjusting items'. In the judgement of the Directors, the use of adjusted performance measures (APMs) such as underlying operating profit and underlying earnings per share are more representative of ongoing trading, facilitate meaningful year-to-year comparison and, therefore, allow the reader to obtain a fuller understanding of the financial information. The adjusted measures used by QinetiQ may differ from adjusted measures used by other companies. Details of QinetiQ's APMs are set out in the glossary to this document.
Year references (FY23, FY22, 2023, 2022) refer to the year ended 31 March. H1 FY23 and H1 FY22 refer to the six months ended 30 September.
Disclaimer
This document contains certain forward-looking statements relating to the business, strategy, financial performance and results of the Company and/or the industry in which it operates. Actual results, levels of activity, performance, achievements and events are most likely to vary materially from those implied by the forward-looking statements. The forward-looking statements concern future circumstances and results and other statements that are not historical facts, sometimes identified by the words 'believes',' expects', 'predicts', 'intends', 'projects', 'plans', 'estimates', 'aims', 'foresees', 'anticipates', 'targets', 'goals', 'due', 'could', 'may', 'should', 'potential', 'likely' and similar expressions, although these words are not the exclusive means of doing so. These forward-looking statements include, without limitation, statements regarding the Company's future financial position, income growth, impairment charges, business strategy, projected levels of growth in the relevant markets, projected costs, estimates of capital expenditures, and plans and objectives for future operations. Forward-looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Nothing in this document should be regarded as a profit forecast.
The forward-looking statements, including assumptions, opinions and views of the Company or cited from third party sources, contained in this announcement are solely opinions and forecasts which are uncertain and subject to risks. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Actual results may differ materially from those expressed or implied by these forward-looking statements. A number of factors could cause actual events to differ significantly and these are set out in the principal risks and uncertainties section of this document.
Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. Any forward-looking statements made by, or on behalf of, the Company speak only as of the date they are made. Save as required by law, the Company will not publicly release the results of any revisions to any forward-looking statements in this document that may occur due to any change in the Directors' expectations or to reflect events or circumstances after the date of this document.
Chief Executive Officer's Review
We delivered strong and consistent operational performance in the first half of the year. With a clear focus on disciplined execution of our strategy and strong programme execution across all our major contracts, we grew orders by 18%, revenue by 12% and underlying operating profit by 39%. Excluding foreign exchange and the impact of the write-down in the prior year first half results, orders grew by 11%, revenue by 8% and underlying operating profit by 7%. We continue to deliver strong cash performance with 106% underlying cash conversion before capital expenditure.
EMEA Services has continued to deliver good growth in the first half, with margins consistent with the second half of FY22, demonstrating continued investment in our people to support ongoing long-term growth. Global Products has performed well, particularly in the US, with US orders, revenue and profit in the first half of FY23 above the second half of FY22 demonstrating greater stability, resilience and consistent performance, giving us confidence of a strong platform for growth going forward .
I am delighted with the three M&A transactions that we have announced in this first half, most significantly with our acquisition of Avantus Federal in the US. We have successfully completed the disposal of QinetiQ Space NV in Belgium and expect to complete the acquisition of Air Affairs in Australia at the end of November and the acquisition of Avantus Federal in the US before the end of December, as previously guided. These are strategically significant transactions which demonstrate our disciplined execution of our strategy, focusing our capital deployment into strategically-aligned businesses to support and drive long-term growth in our three home countries, the UK, US and Australia, through our six distinctive offerings as we continue to build an integrated global defence and security company, delivering opportunities for our people and enhanced shareholder returns.
Delivering our global ambition
World events continue to reinforce the long-term needs of our customers around differentiated technology, test and training solutions. This defence and security context continues to elevate the market needs for our six distinctive offerings. Our addressable market is worth more than GBP20bn per year and we see increased customer demand for our high value solutions in their priority growth segments. The major focus for growth is in our three home countries, the UK, US and Australia, where we are pursuing similar opportunities to support their shared defence and security mission and leveraging our skillset across these key geographies. The formation of the AUKUS alliance, between these nations, reinforces our multi-domestic strategy and makes us increasingly relevant. We are well positioned to deliver strong growth in the UK and more than double the size of our US and Australian businesses over the next five years.
In April 2022 we set out an ambitious plan to grow the company to more than GBP2.3bn revenue in the next five years. With our acquisitions of Avantus Federal in the US and Air Affairs in Australia, we are on-track to deliver at least this level of growth.
Our strategy is increasingly relevant and provides focus for our business decisions, our people and our investment choices. We are a company with a clear purpose, vision and customer value proposition that we call "Mission-led innovation", where we co-create innovative cost-effective solutions to meet our customers' needs at pace. Our strategy is a multi-domestic strategy, with a clear focus on where we operate, what we do and how we deliver value for our customers:
1. Global leverage 2. Distinctive offerings 3. Disruptive innovation
Build an integrated Co-create high-value Invest in and apply
global defence and security differentiated solutions disruptive business
company to leverage for our customers in models, digitisation
our capability through experimentation, test, and advanced technologies
single routes to market training, information, to enable our customers'
in UK, US, Australia, engineering and autonomous operational mission
Canada and Germany systems at pace
------------------------------ ------------------------------
Our first priority is to maintain focus on driving organic growth in each country. We remain disciplined in delivering our commitments to our customers and shareholders by continuously improving our bidding, programme execution and risk management capability.
Looking forward, we have a clear strategic business plan focused on creating a global leader in mission-led innovation. With a strong balance sheet, we continue to invest in our multi-domestic growth strategy to realise our ambition. We have clarity around our six distinctive offerings and focus on our home countries, to provide a guide for our future investment decisions. Growth will be driven by investing in these distinctive offerings and leveraging opportunities across countries.
The acquisition of Avantus is our most strategically significant and sizeable acquisition to-date and demonstrates our clear strategic focus, to build a material presence and expertise in our three home countries across our six distinctive offerings. Avantus is a leading provider of mission-focused cyber, data analytics and software development solutions to the US Department of Defense Intelligence Community, Department of Homeland Security and other Federal civilian agencies. Avantus is an excellent strategic fit, with a similar skillset, customer intimacy and offerings as our UK Intelligence business. Avantus not only has impressive growth prospects but also provides attractive leverage opportunities and greater scale to our existing US business, whilst being a platform for further growth and acquisitions.
Strategic achievements
We have continued to make good strategic progress implementing our strategy to become an integrated global defence and security company. Alongside the significant M&A transactions announced, our major achievements are:
- Support to UK MOD for the Future Combat Air System (FCAS)
programme - we have been awarded a GBP32m three-year contract
through the Engineering Delivery Partner (EDP) framework to
provide programme and technical support to the new Catalyst
Delivery Team, responsible for introducing new capability to
the MOD air domain for various front line commands. This demonstrates
our Engineering Services and Support offering in practice,
in the introduction of new technologies and delivery approaches
for the next generation of aircraft Test & Evaluation.
- Our large contracts continue to support significant growth
in the UK - our large long-term contracts and frameworks in
the UK are supporting significant and continued revenue growth
for EMEA Services. The EDP framework continues to deliver for
our customer, alongside our partners Atkins and BMT, with H1
orders of GBP193m and GBP135m revenue. The Serapis framework
is driving good growth in our UK Intelligence Sector, for research
and development of command and control systems, communications
and networks, and training and simulation projects. The Long
Term Partnering Agreement (LTPA) remains our largest contract
delivering world-leading test, trials, training and evaluation
(T3E) for the UK MOD.
- Continued strong growth in Australia - strong revenue growth
continues in Australia, up 22% versus the prior year, driven
from continued demand and delivery through the Major Service
Provider (MSP) contract. The MSP contract positions us for
future growth as a trusted partner able to provide sovereign
Australian industry capability, while leveraging our global
capabilities. A major contributor of our growth has been our
close support to the Australian Army acquisition programme
for their next generation of heavy armoured vehicles, a cornerstone
of the broader Army modernisation programme.
- US performance - performance has been strong in the US with
orders, revenue and profit seeing good improvement on the second
half of FY22 with greater stability, resilience and consistent
performance. As part of this we have won two significant contracts:
a 5-year contract worth up to $45m to provide services for
the Development Command C4ISR at the Fort Belvoir Prototyping
Integration Facility; and a multi-year research, development
and technology integration contract, worth up to $49m, with
the US Army for imaging services.
- QinetiQ Target Systems (QTS) performance - QTS continues to
make positive progress with customers resuming trials and exercises
(post COVID-19) and winning some significant orders, including
a number of notable wins and deliveries for customer training
exercises in Europe.
The changing market dynamics present opportunities for the Group
As a global defence and security business we operate on a multi-domestic basis, supporting the development and sustainment of indigenous capabilities.
As the threat environment becomes increasingly complex, Western forces must rethink their approach to defence and security. The complexity is driven by rapid technological advances and our adversaries' alternative approaches to warfare. The importance of information advantage, emerging technologies, cyber capabilities and autonomous platforms has significantly increased. In addition, the interoperability between platforms to create integrated systems and seamless coordination between forces and nations, to countering modern threats is of paramount importance, including in the "Grey Zone" conflict area below conventional warfare.
Pressure on Government resources will intensify and global Defence departments will need to balance investment in traditional platforms alongside investment in new technologies, as well as addressing fiscal pressure brought about by Governments supporting economies through the COVID-19 pandemic, supply-chain challenges and cost of living crisis. With our domain knowledge, partnering skills and a track record of delivering mission-led innovation at pace whilst delivering efficiencies and value for money to customers, we are well positioned to continue to grow in these unsettled times. While the world around us continues to change, our offering is more relevant than ever.
Investment to drive our long-term growth
To stay ahead for our customers' advantage, we are investing in our people, technology and digital transformation. We have increased our investment to enable a step-change and to deliver our five year growth ambition.
Ensuring we are internationally competitive to retain, attract and reward the best people across the whole company, is critical to our performance and growth. In response to ongoing cost of living pressures, we have committed a further GBP5m into our reward offering, focused on supporting those on lower pay. We have also built a highly capable leadership team in the US, consistent with our long-term ambition, and are expanding the skills of our Australian business through our T&E sovereign skills programme, leveraging our UK experience.
To deliver operational advantage for our customers, we must remain at the cutting-edge of technology and create innovative solutions at pace. Project Vampire is an excellent example of partnering with the Royal Navy to develop their Future Maritime Aviation Force through rapid prototyping the novel application of uncrewed systems, and offers the potential to experiment with new technologies from our Internal Research & Development programme, such as swarming and teaming.
As we scale the company globally, our digital transformation programme is building a secure interoperable digital workspace, with modern systems and tools, to adapt our ways of working and harness the diversity and creativity of our global teams and supply chain. We are also establishing new digital design and assurance techniques, to increase our competitive advantage by reducing the time and cost of major projects for our customers, such as OMFV in the US and the LTPA in the UK.
We have previously guided that we are continuing to invest in our people and capabilities, investing 1% of our margin to enable the step-change to deliver our five year growth ambitions. The additional GBP5m announced today, in response to the cost of living pressures, brings our total committed strategic operating investments for FY23 to approximately GBP20m. This additional investment has the effect of marginally shifting our investment period to the right, with no change to our short or long-term profit guidance. Whilst investment brings pressure on margins in the short-term, investing in our innovation platform, comprising of our people, technology and digital transformation, will increase competitiveness and drive efficiency, ensuring our growth is sustainable in the long-term at 12-13% margins.
Outlook: FY23
We enter the second half of FY23 with confidence, a healthy order-book and positive momentum with 95% revenue under contract - we are increasing our revenue guidance and are on-track to deliver profit in-line with expectations for FY23. Given our strong growth in the first half, we will deliver high single-digit percentage organic revenue growth with underlying profit margin at the lower end of our 11-12% short-term expected range due to increased investment in our people and capabilities to enable growth. Capital expenditure is expected towards the middle of our GBP90m to GBP120m expected range.
Whilst the expectations we set out at the time of the Avantus and Air Affairs announcements remain unchanged, we will update for the combined effect of the acquisitions following completion.
Outlook: Longer term
Our ambition remains to grow revenues to more than GBP2.3bn by FY27. With our recently announced acquisitions, this means we are targeting mid-to-high single digit percentage compound revenue growth over the next five years , with further strategic acquisitions enhancing this growth. We are targeting an operating profit margin of 12-13% in the mid to long-term. ROCE is forecast to remain strong at the upper end of the 15-20% range.
Trading environment
Geopolitical tensions remain high, even as Russia's advances in Ukraine have faltered, Global defence budgets have increased as NATO countries seek to bolster their own defence capabilities whilst sending increasing levels of military aid to Ukraine. Alongside this, there has been a proliferation of "Grey Zone" warfare, a need for advanced capabilities, informational advantage and better interoperability, as well as a focus on the resilience of domestic supply chains.
As a predominantly service-based business we are uniquely placed to operate across the breadth of platforms, systems and lifecycles unlike a more traditional vertical platform manufacturer. We can experiment, innovate and develop new capabilities, drawing on a broad range of existing, emerging and disruptive technologies across all our geographies.
The UK, US and Australia are our home countries and collectively represent 92% of our revenue. We also have a significant presence in our priority countries of Canada and Germany.
UK
The 2021 Integrated Review outlined the UK's current defence and security policy. This, alongside the Defence Command Paper and the Defence and Security Industrial Strategy, has seen the allocation of an additional GBP24.1bn in funding over a four-year period from November 2020 to 2024. The Integrated Review placed science and technology at the heart of the UK's defence policy with innovation cited as critical to UK success. The UK is investing over GBP6.6bn in research and development to develop next generation and emerging technologies in areas such as cyber, space, directed energy weapons, and advanced high-speed missiles. The Russian invasion of Ukraine has further cemented wider support for defence investment, with Government statements being made that the Defence budget could increase further to 3% of GDP, and double current levels by 2030.
As the UK MOD seeks to develop and deploy next generation capabilities faster than their adversaries, we are well positioned to support them in applying mission-led innovation to achieve this. Our unrivalled expertise in Research & Development and Test & Evaluation (RDT&E) combined with our recent investment to modernise UK test ranges will help our customers generate and assure new and emerging technologies at pace. Delivering value for money remains critical to our customers and we will continue to utilise innovative delivery models to support our customers in achieving this.
US
The US maintains the largest defence budget worldwide, with the 2023 budget currently targeted at $773bn and an expectation it could exceed $800bn. As well as supporting the preparation for future challenges, such as climate change, it preserves investment for readiness and deterrence against current threats including the acute threat of an aggressive Russia and the constantly emerging threats posed by North Korea, Iran, and violent extremist organisations. The Biden administration is seeking to increase the Research, Development, Test and Evaluation (R&DTE) budget by 7% in FY23, increasing spend to $132bn, to continue to address the need to sharpen readiness in advanced technology, cyber, space and artificial intelligence.
In the US, we are a market leader in robotics, autonomy and advanced sensing solutions, delivering value to our customers through the rapid development and deployment of disruptive solutions. Following the completion of the acquisition of Avantus Federal, this will build capabilities of mission-focused cyber, data analytics and software development solutions. All these offerings are in areas of defence budget growth. We have ambitious growth plans in the US. This is underpinned by a relevant offering with a growing need to provide actionable intelligence in to war fighters' hands quicker and a push to develop and integrate multiple autonomous and semi-autonomous systems as the US seeks to invest in next generation technologies to maintain a technological advantage.
Australia
Tensions in the Indo-Pacific region remain heightened with the area becoming the main theatre for greater strategic competition between global powers, being reflected in national defence budgets. Australia's defence expenditure for the 2022-23 financial year will rise by 7.4% to A$48.6bn. The current Labor government has reiterated its commitment to raising defence spending to 2.2% of GDP, reaching A$80bn a year by 2032. That does not count the $300 billion designated for upgraded military weaponry, in addition to the funds required to acquire and base nuclear powered submarines and other weaponry under the AUKUS partnership.
The AUKUS partnership still holds significant opportunity for QinetiQ, with demand expected in specific technology areas where QinetiQ has strengths. The Australian business is closely engaged with the Australian government and internally within QinetiQ to identify specific capability areas and opportunities under AUKUS. We see many opportunities to support the Australian forces in modernising sovereign defence capabilities as they seek to deter adversaries and maintain stability in the region.
Broader international markets
Due to the seismic shift to the global-political landscape caused by Russia's invasion of Ukraine, NATO is ramping up its defence capabilities and readiness. Following the announcement by Germany to increase defence spending by EUR100bn over the next 5 years, many other NATO and European countries are also increasing their defence and security investment.
Whilst priority and investment focus will be attached to the support of our three home country strategies (UK, US and Australia), we will continue to conduct business in the support of allies in 5-Eyes, NATO and Continental Europe. In order to continue expanding our international presence we aim to leverage the skills and expertise developed in our home countries to support allies in high growth markets to develop their own indigenous capabilities.
Chief Financial Officer's Review
Operating performance
We delivered strong order performance in the period with orders of GBP798.8m, compared to GBP677.8m in the same period a year ago, up 18%. Excluding foreign exchange, orders grew organically by 14%, and excluding the impact of the write-down in the prior year by 11%. This increase was driven by a GBP32m three-year contract with UK MOD for the Future Combat Air System (FCAS) programme through the Engineering Delivery Partner framework, a GBP26m uplift to the LTPA contract to reflect inflationary effects in the UK, a 5-year contract extension with Boeing for our 5 metre wind tunnel services and contracts totalling A$77m in Australia through growth of the MSP programme. As part of our previously stated strategy, we are also seeing success in winning and delivering on larger longer-term contracts, with 45% of our H1 FY23 Orders from contracts over GBP5m in size, up from 41% from H1 FY22.
Revenue visibility remains good and the Group's total funded order backlog at 30 September 2022 stood at GBP3.0bn , consistent with the comparable period last year. Maintaining our order backlog of GBP3.0bn is a significant achievement given that this will naturally reduce as we deliver revenue on the Long Term Partnering Agreement contract (multi-year contract booked in prior years); the offsetting growth in order backlog delivered from our order wins as mentioned above, including from EDP and growth in the US and Australia. At the start of H2 FY23, the Group had approximately GBP700m of H2 FY23 revenue under contract. This compares with approximately GBP600m of H2 FY22 revenue at the same time last year - a significant improvement as a result of the strong order-intake.
Revenue was GBP673.4m (H1 FY22: GBP600.1m), up 12% on a reported basis. Excluding foreign exchange, revenue grew organically by 10%, and excluding the impact of the write-down in the prior year up 8%. Overall growth was due to the increase of revenue in EMEA Services which was up 7% on an organic basis, driven by new work delivered under EDP and the MSP contract in Australia. Global Products revenue was up 14% organically excluding the impact of the write-down in the prior year, due to improvement in US and QTS performance.
Underlying operating profit was GBP74.1m (H1 FY22: GBP53.4m), up 39% on the prior first half. Excluding foreign exchange, profit grew organically by 37%, and excluding the impact of the write-down in the prior year up 7%. The significant improvement in profit is as a result of good performance in the US and QTS (within Global Products) This was offset by EMEA Services which saw a 9% organic decrease in profit driven by a particularly strong prior year comparator with strong profit margin in H1 FY22 and additional investment this year into our people and capabilities.
The impact of foreign exchange movements on underlying performance in H1 FY23 has been a GBP23.2m benefit on orders, GBP15.7m benefit on revenue and GBP1.2m benefit to underlying operating profit. Most of this benefit was seen in Global Products from the translation effect of our US business. There have been no effect of acquisitions or disposals in either H1 FY23 or prior year comparator H1 FY22. Should FX rates remain static we forecast the full year benefit for FY23 to be in the region of GBP2-3m underlying profit.
Underlying operating profit margin was 11.0% at the lower end of our 11-12% short-term target margin. The modest reduction from H1 FY22 is due to the incremental strategic investments in FY23: we have previously guided to 100bps of our profit being committed to additional investments in the short-term (across our people, technology and digital) and during the period have committed a further GBP5m investment in our people in FY23, as explained in the CEO Review, against the cost of living crisis. As a result, we expect underlying operating profit margin in the second half and for FY23 to remain at the lower end of our 11-12% short-term expected range.
Statutory operating profit, including the impact of specific adjusting items, was GBP100.1m (H1 FY22 restated: GBP41.0m). Current period specific adjusting items increased operating profit by GBP26.0m (H1 FY22 restated: GBP12.4m reduction to operating profit) and were driven by acquisition and foreign exchange impacts, as described below. We remain focussed on delivering our stated ambition which includes strategically aligned acquisitions - we retain a rigorous approach to evaluation and execution of our acquisition strategy.
Seasonality / cyclicality has not had a material impact on the interim operations of the Group.
Specific adjusting items
The total impact of specific adjusting items on operating profit (which are excluded from underlying performance) was a GBP26.0m income (H1 FY22 restated: cost of GBP12.4m). H1 FY23 includes a GBP42.9m gain from the foreign exchange derivative contract, due to the recent GBP:USD movement, which was taken out to hedge the foreign exchange exposure on the $590m Avantus acquisition and was executed in accordance with the Group's Treasury Policy. The size of this gain (or loss), which has partially reversed since 30 September 2022, will ultimately depend on the GBP to USD foreign exchange rate at the date of completion of the acquisition.
Acquisition and disposal costs of GBP6.4m (H1 FY22: GBP4.1m) comprise costs associated with the Avantus and Air Affairs acquisitions which are due to complete in H2 FY23, and the disposal of Space NV. The H1 FY22 amount was relating to an unsuccessful acquisition, as disclosed previously. The cash flow for H1 FY23 includes a GBP1.6m deposit payment on the Air Affairs acquisition.
Restructuring costs of GBP3.3m have been incurred as part of the re-organisation to create Group-wide global support functions and four market-facing Sectors.
QinetiQ has embarked on a digital investment programme to improve the infrastructure, digital tools and operating systems of the company - the majority of costs will be reported as exceptional specific adjusting items in the P&L, with ongoing recurring operating costs (such as licence costs and overheads) remaining within underlying operating costs. Early stage implementation and planning work has been undertaken through FY22 and FY23, with the full digital investment programme due to be implemented over the next three to four year period. FY22 included a specific adjusting item relating to the change in accounting policy for software implementation costs as a result of the International Financial Reporting Interpretations Committee (IFRIC) decision to expense rather than capitalise configuration and customisation costs in cloud computing arrangements. H1 FY22 has been restated to reflect this. In H1 FY23 the exceptional cost element of the digital investment programme within specific adjusting items totals GBP2.5m. The majority of this expenditure would previously have been capitalised and follows the IFRIC decision, with a small movement from underlying operating costs to exceptional costs (FY23 benefit to underlying operating profit expected to be <GBP1m).
Also included within specific adjusting items were a gain on the sale of property of GBP0.9m (H1 FY22 GBP0.5m) and amortisation of acquisition intangibles of GBP5.6m (H1 FY22: GBP5.4m).
Net finance costs
Net finance income was GBP4.4m (H1 FY22: GBP1.4m) reflecting an increase in the pension net finance income to GBP4.9m (H1 FY22: GBP2.3m). This income is partially offset by lease interest expense and other financing costs.
The underlying net finance expense, which excludes the pension net finance income, was GBP0.5m (H1 FY22: GBP0.9m).
Tax
The total tax credit is GBP7.9m (H1 FY22 restated charge: GBP20.1m). The underlying tax charge of GBP8.2m (H1 FY22: GBP5.9m) is calculated by applying the expected underlying effective tax rate at a jurisdictional level for the year ending 31 March 2023 to the underlying profit before tax for the six months to 30 September 2022. The Group's full year expected underlying effective tax rate is 11.5% which is higher than the half year underlying effective tax rate of 11.1% (H1 FY22: 11.2%) due to jurisdictional mix of profits in H1 FY23.
The underlying effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development expenditure credits (RDEC) in the UK which are accounted for under IAS12 within the tax line. The adjusted underlying effective tax rate before the impact of RDEC would be 19.4% (H1 FY22: 18.0%). The underlying effective tax rate is expected to remain below the UK statutory rate in the medium term, subject to any tax legislation changes, the geographic mix of profits, the recognition of unrecognised tax losses and while the benefit of net RDEC retained by the Group remains in the tax line.
Specific adjusting items includes a GBP18.1m credit in respect of UK MOD appropriation for RDEC which has been classified as a specific adjusting item. Following a determination by the Single Source Regulations Office (SSRO) on the interpretation of the Statutory Guidance for Allowable Costs regulations (SGAC), the accounting judgement is that RDEC on single source contracts from 1 April 2019 onwards will no longer be paid on to UK MOD, which is a change from the accounting judgement at the year end. The existing creditor has been reversed through the tax charge in line with IAS 12. Together with a GBP4.9m charge arising on the UK statutory rate change to 25% from 1 April 2023, a GBP1.7m credit for tax on the amortisation of acquisition intangibles and a GBP1.2m credit in respect of other pre-tax specific adjusting items, the total specific adjusting items tax credit was GBP16.1m (H1 FY22: restated charge of GBP14.2m). Specific adjusting items includes the foreign exchange gain of GBP42.9m on the derivative instrument taken out for the Avantus acquisition which is not expected to be taxable as it relates to a prospective share transaction.
Earnings per share
Underlying basic earnings per share for the Group was 11.4p up 41% on the prior year first half (H1 FY22: 8.1p), with the increase primarily due to the impact of the write-down in the prior year . Statutory basic earnings per share (including specific adjusting items) were 19.5p (H1 FY22 restated: 3.9p) with the current period further enhanced by the GBP42.9m foreign exchange gain on the derivatives taken out to hedge the exposure on the Avantus acquisition and the GBP18.1m release of the liability in respect of UK MOD appropriation of RDEC .
Dividend
An interim dividend of 2.4p (H1 FY22: 2.3p) will be paid on 3 February 2023 to shareholders on the register on 6 January 2023. The interim dividend represents one third of the prior year total dividend reflecting our previously communicated methodology. The full year dividend will be announced with our full year preliminary results in May 2023.
Cash performance
The Group delivered strong cash performance during H1 FY23, with underlying net cash flows from operations of GBP106.8m (H1 FY22: GBP70.2m), resulting in cash conversion before capital expenditure of 106% (H1 FY22: 89%).
Underlying working capital inflow (which excludes the working capital impact of specific adjusting items) was GBP4.5m in H1 FY23 compared with a GBP13.0m outflow in H1 FY22. We continue to manage our working capital well, although we do expect a modest working capital outflow by the year end with an evolving mix of payables and receivables on our large long-term contracts.
Capex for the period was GBP48.5m (H1 FY22 restated: GBP46.9m). We continue to invest in core contracts including the LTPA following the contract amendment announced in April 2019. Full year total capex is expected to be in line with previous guidance of GBP90-120m.
At 30 September 2022 the Group had GBP264.0m net cash, compared to GBP225.1m at 31 March 2022. We retain a strong balance sheet to support investment in our long-term growth strategy.
The net cash balance as at 30 September 2022 includes the GBP42.9m FX hedge relating to the Avantus acquisition, GBP14.9m of interest rate swaps which have been taken out to hedge future interest rate exposure on the associated debt financing and GBP7.6m of other foreign exchange related derivatives. The statutory cash flow statement includes a GBP29.2m cash outflow in relation to the realised foreign exchange movement on derivatives which hedge intercompany loan amounts, which are executed in accordance with our Treasury Policy.
We maintain a rigorous approach to the deployment of our capital, scrutinising organic and inorganic opportunities in the same manner to ensure returns to our shareholders are appropriate for the risks taken.
Our priorities for capital allocation, following this rigorous methodology, are:
1. Organic investment complemented by acquisitions where there is
a strong strategic fit;
2. The maintenance of balance sheet strength;
3. A progressive dividend; and
4. The return of excess cash to shareholders.
Normalised trading performance
The year-on-year performance of the Group is skewed by the write-down incurred in the prior year comparator period (H1 FY22). To understand the normalised trading performance of the Group the following table demonstrates the results before the impact of the write-down.
H1 FY23 H1 FY22 Underlying change
Underlying* Underlying* Write-down Excluding Reported Organic* Reported Organic*
results results write-down including including excluding excluding
write-down write-down write-down write-down
------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------
Orders GBP798.8m GBP677.8m GBP22.5m GBP700.3m 18% 14% 14% 11%
------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------
Revenue GBP673.4m GBP600.1m GBP8.0m GBP608.1m 12% 10% 11% 8%
------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------
Operating
profit GBP74.1m GBP53.4m GBP14.5m GBP67.9m 39% 37% 9% 7%
------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------
Margin 11.0% 8.9% 11.2%
------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------
* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary
The above table demonstrates that excluding the impact of the write-down, the Group has achieved orders growth of 14% (11% on an organic constant currency basis), revenue up 11% (8% on an organic constant currency basis) and underlying operating profit up 9% (7% on an organic constant currency basis).
Committed facilities
The Group has a GBP275m bank revolving credit facility with an additional 'accordion' facility to increase the limit up to GBP400m. The facility, of which GBP65m will mature on 27 September 2024 and GBP210m will mature on 27 September 2025, was undrawn at the half year. In addition the Group has a GBP340m term loan facility available to be drawn on completion of the acquisition of Avantus Federal. It is our policy to fix between 30-80% of our interest rate exposure through a combination of derivatives or fixed rate debt - of the new GBP340m term debt to finance the Avantus acquisition 47% (GBP160m) will be fixed with this increasing based on materialisation of future projected cash performance. Our cost of debt for both the fixed and the floating element is currently in the 3-4% range, with a full year interest charge of c.GBP12m per annum. These facilities provide the Group with significant scope to execute its strategic growth plans.
Foreign exchange
The Group's income and expenditure is largely settled in the functional currency of the relevant Group entity, mainly Sterling, US Dollar or Australian Dollar. The Group has a policy to hedge all material transaction exposure at the point of commitment to the underlying transaction. Uncommitted future transactions are not routinely hedged. The Group does not hedge its exposure to translation of the income statement. The principal exchange rates affecting the Group were the Sterling to US Dollar and Sterling to Australian Dollar exchange rates.
H1 FY23 H1 FY22
------------------- -------- --------
GBP/US$ - average 1.21 1.39
GBP/US$ - closing 1.11 1.35
GBP/US$ - opening 1.31 1.38
GBP/A$ - average 1.75 1.84
GBP/A$ - closing 1.72 1.86
GBP/A$ - opening 1.75 1.81
------------------- -------- --------
Pensions
The net pension asset under IAS 19, before adjusting for deferred tax, was GBP209.0m (31 March 2022: GBP362.2m). The key driver for the decrease in the net pension asset since the March 2022 year end was the recent turmoil in financial markets, particularly a sharp increase in gilt yields (and reduced gilt prices) which significantly reduced the value of the Scheme's Liability Driven Investments (LDIs) and related asset-backed securities. Together with falls in other assets the reduction across the whole investment portfolio was in excess of the reduction in Scheme liabilities (which have also fallen substantially, due to an increase in the discount rate).
The key assumptions used in the IAS 19 valuation of the scheme are set out in note 13.
Operating review
EMEA Services
H1 FY23 H1 FY22
GBPm GBPm
------------------------- -------- ---------
Orders 600.8 506.4
Revenue 524.3 488.7
Underlying operating
profit* 61.5 67.1
Underlying operating
margin* 11.7% 13.7%
Book to bill ratio(1) 1.4x 1.3x
Order backlog 2,601.2 2,718.0
Order backlog excl. LTPA 1,175.3 1,105.7
------------------------- -------- ---------
* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary
(1) B2B ratio is orders won divided by revenue recognised, excluding the LTPA contract
Overview
EMEA (Europe, Middle East and Australasia) Services combines world-leading expertise with unique facilities to provide capability generation and assurance, underpinned by long-term contracts that provide good visibility of revenue and cash flows.
Financial performance
Orders were up 19% to GBP600.8m (H1 2021: GBP506.4m), driven by a GBP32m three-year contract with UK MOD for the Future Combat Air System (FCAS) programme through the Engineering Delivery Partner framework, a GBP26m uplift to the LTPA contract to reflect inflationary effects in the UK, a five-year contract extension with Boeing for our five metre wind tunnel services and contracts totalling A$77m in Australia through growth of the MSP programme.
Revenue increased 7% on an organic basis as a result of new work delivered under EDP in the UK and the growth of the MSP contract in Australia.
Underlying operating profit reduced by 8% to GBP61.5m (H1 FY22: GBP67.1m) with margin at 11.7% (H1 FY22: 13.7%), consistent with the margin in H2 FY22 at 12.0%. The prior year comparator of H1 FY22 was particularly strong, the modest reduction in margin is as a result of additional investment into our people and capabilities to support long-term growth as set out in the CEO and CFO Review sections.
Including the LTPA, approximately 65% of EMEA Services revenue is derived from single source contracts (H1 FY22: approximately 67%) demonstrating our critical and unique capabilities for our customers.
Business Unit commentary
UK Defence (60% of EMEA Services revenue)
The UK Defence sector delivers mission critical solutions, innovating for our Air, Maritime & Land customers' advantage. This sector represents the previously reported Air and Space, and Maritime and Land business units. Its formation provides a sharper focus on our strategy of maximising growth through our framework contracts, building new core offerings through our global campaigns and exploring new growth opportunities. The new sector improves coherence of our distinctive offerings across QinetiQ's customer base, with the embedding of enabling functions bringing greater cohesion to operational strategy execution for business performance excellence.
- The Long Term Partnering Agreement (LTPA) remains our largest
contract delivering world-leading test, trials, training and
evaluation (T3E) for the UK MOD. As with a number of our large
long-term contracts, the commercial arrangement within the
LTPA enables us to be reimbursed for future allowable cost
increases in line with the Single Source Regulation Office
(SSRO) aligned to an agreed index; in H1 this represented a
GBP26m order uplift.
- The Engineering Delivery Partner (EDP) programme continues
to deliver for our customer with a collaborative mind-set and
commitment to transparency helping to maximise and accelerate
outputs for vitally important UK MOD programmes. Alongside
our partners Atkins and BMT, in H1 we have won orders totalling
GBP193m and revenue of GBP135m .
- We have won a GBP32m three-year contract with UK MOD for the
Future Combat Air System (FCAS) programme through EDP. The
contract is to provide programme and technical support to the
Catalyst Delivery Team, a new Defence Equipment & Support (DE&S)
team responsible for introducing new capability to the MOD
air domain for various front line commands. The FCAS Acquisition
Programme is one of the first capabilities which the Catalyst
Delivery team are initiating under this new construct. Contributing
to Attack, Information, Surveillance and Reconnaissance, FCAS
will be primarily responsible for delivering systems to undertake
control of the air duties.
- Working in close collaboration with our partners from the Air
and Space Warfare Centre as the Air Test and Evaluation Centre
(ATEC) and wider stakeholders, we were tasked with leading
and managing a dedicated series of test and evaluation trials
for high altitude parachuting from the Atlas C Mk 1 aircraft
.
- We have successfully signed a five-year contract extension
with Boeing for our five metre wind tunnel services and have
successfully completed third party testing in the facility.
UK Intelligence (28% of EMEA Services revenue)
The UK Intelligence sector helps government and commercial customers respond to fast-evolving threats based on its expertise in training, secure communication networks and devices, intelligence gathering and surveillance sensors, and cyber security. Contained within UK Intelligence are three acquired businesses: QinetiQ Training and Simulation Ltd (QTSL, formerly NSC), Inzpire and Naimuri. This Sector represents the previously reported Cyber and Information business unit.
- The Serapis framework enables the UK Defence Science and Technology
Laboratory (Dstl), UK MOD and the frontline commands to quickly
and efficiently place contracts for scientific and technical
research and development (R&D). Of the six 'Lots', QinetiQ
is leading three for R&D of command and control systems, communications
and networks, and training and simulation projects. By working
collaboratively with Dstl, we have efficiently delivered over
GBP30m of technical R&D in the first half, both our own expert
scientists and engineers, and through a supply chain of 200
companies. This is supporting exploitation of technology with
the front line commands, and de-risking generation-after-next
capabilities.
- Engineering, software development and test on the highly complex
Robust Global Navigation System (RGNS) programme is progressing
well as we progress towards release of initial operating capability.
The RGNS programme is a funded development programme with UK
MOD to develop the Q40 product, providing our customers the
next generation of class-leading, robust and resilient position,
navigation and timing (PNT) capability. The contract is a great
example of QinetiQ delivering on highly complex programmes
at the leading-edge of technology for sovereign capability.
- We continue to deliver well on the Battlefield Tactical Communication
and Information Systems (BATCIS) contract, winning the fifth
year option contract award worth GBP35m. This is the public
sector support programme for Defence Digital, delivering procurement
and engineering expertise for this transformational digital
backbone programme. With our partners ATOS, BMT and Roke we
deliver specialist expertise across this complex set of projects
(Trinity, Niobe, Morpheus, DSA etc.) covering a wide array
of disciplines; developing concepts, engineering solutions,
managing obsolescence issues, supporting critical operational
requirements and enabling procurement competitions.
- QTSL (formerly NSC), Inzpire and Naimuri have achieved significant
growth, all nearly doubling in size since acquisition. Inzpire's
Graphical Electronic Cockpit Organiser (GECO) mission planning
product continues to sell well to air forces around the world
as an inexpensive way to get up-to-date mission systems into
the cockpit of older aircraft.
International (12% of EMEA Services revenue)
Our International sector provides advisory services, engineering services and training and mission rehearsal in the Australian, German and Canadian markets.
- The Australian business has started FY23 strongly due to increased
orders on the Major Service Provider (MSP) contract. The Canadian
business has made good progress in the US with the integration
of the Army Ground Aerial Target Control System and our QTS
targets, which represents a major milestone (6+ years in the
making) in US market penetration.
- Our MSP contract has delivered orders totalling A$77m and increased
revenues by 10% through consistent high operational performance
and delighting the customer. This contract positions us for
future growth as a trusted partner able to provide sovereign
Australian industry capability, while leveraging our global
capabilities. A major contributor of our growth has been our
close support to the Australian Army acquisition programme
for their next generation of heavy armoured vehicles, a cornerstone
of the broader Army modernisation programme.
- As one of only four MSP consortia we are also continuing to
support our Australian customer with the supply and sustainment
of next generation munitions, ensuring Defence has the right
capability and enhancing Australia's self-reliance and supply
chain resilience. We are also supporting with the ongoing acquisition
and sustainment support for RAAFs Surveillance and Reconnaissance
capability, enhancing Defence's ability to maintain situational
awareness of Australia's maritime approaches.
- In FY22 we had our contract extended to provide valuable mine
warfare equipment and support services to the Australian Defence
Force at HMAS Waterhen for the next five years. This contract
continues to deliver well, enabling the Royal Australian Navy
to both sustain and enhance its essential in-country training
and threat representation capability.
- In October 2022 we announced the acquisition of Air Affairs
(Australia) Pty Ltd for a cash consideration of A$53m - we
remain on-track to complete the acquisition in November. Air
Affairs is an Australian defence services company - a leader
in air threat representation, T&E, unmanned targets and mission
rehearsal. Air Affairs provides targets and training services,
and electronic warfare capabilities to the Australian Defence
Force, as well as aerial surveillance and reconnaissance in
support of government firefighting efforts. It owns and operates
a fleet of special mission aircraft and maintains an advanced
manufacturing and engineering facility providing design, manufacture
and certification operations. Air Affairs employs c.180 people,
headquartered in Nowra, New South Wales. The acquisition of
Air Affairs further establishes QinetiQ as a long-term, strategic
partner to the Australian Defence Force and underpins QinetiQ's
strategic position as market leader in T&E and air threat representation,
now with a significant presence across the UK, Canada and Australia,
and training and special operations in Germany. In the 12 months
to 30 June 2022, Air Affairs delivered A$43m revenue, EBITDA
of A$5m (on an IFRS basis).
- In Germany the Slow Speed Aerial Target Services contract has
delivered consistent ongoing flying performance supporting
the customer in target operations, providing a strong foundation
for the future Next Generation German Aerial Training Services
(NGGATS) opportunity.
Global Products
H1 FY23 H1 FY22
GBPm GBPm
------------------------------------ -------- --------
Orders 198.0 171.4
Revenue 149.1 111.4
Underlying operating profit/(loss)* 12.6 (13.7)
Underlying operating margin* 8.5% (12.3%)
Book to bill ratio 1.3x 1.5x
Order backlog 367.4 289.6
------------------------------------ -------- --------
* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary
Global Products delivers innovative solutions to meet customer requirements. The division is technology-based and has shorter order cycles than EMEA Services.
Financial performance
Orders increased by 16% to GBP198.0m (H1 FY22: GBP171.4m). Excluding foreign exchange, orders grew organically by 4%. Order performance in H1 FY23 has remained strong, particularly in the US, with the prior year impacted by the write-down (GBP22.5m). We have modified our order recognition criteria to align with industry best practice. This results in a one-off order catch-up in the US of GBP48m in H1 FY23 for orders under-recognised in the past, and is aligned with our strong revenue performance in the US.
Revenue was up 34% to GBP149.1m (H1 FY22: GBP111.4m). Excluding foreign exchange, revenue grew organically by 22%, and excluding the impact of the write-down (GBP8m) in the prior year up 14%, driven by good performance in the US and QTS.
Underlying operating profit increased to GBP12.6m (H1 FY22: GBP13.7m loss), with an underlying operating profit margin of 8.5% (H1 FY22: -12.3%). The significant improvement in profit is as a result of good performance in the US and a weaker prior year comparator with H1 FY22 including the write-down (GBP14.5m).
Business Unit commentary
United States (68% of Global Products revenue)
Our US sector provides technical advice, design and manufacture of innovative defence products specialising in robotics, autonomy and sensing solutions, comprising Technology Solutions (formerly QNA) and C5ISR Solutions (formerly MTEQ). Following completion of the Avantus acquisition, we will also become a leading provider of mission-focused cyber, data analytics and software development solutions - the three business areas will be managed under the US sector.
- The US sector has had a strong first half with orders, revenue
and profit seeing good improvement on the second half of FY22
with greater stability and consistent performance. With a new
leadership team and steps taken to improve the resilience,
project controls and performance, we are pleased to see that
the US has performed well in the first half.
- We secured a contract to provide technical services to the
US Army. The five year contract, worth up to $45m, will provide
services for the Development Command (DEVCOM) Command, Control,
Computers, Communications, Cyber, Intelligence, Surveillance
and Reconnaissance (C5ISR) at the Fort Belvoir Prototyping
Integration Facility (PIF). The contract, a one-year base period
followed by four one-year option periods, will provide technical
services for system development, fabrication, sensor and system
integration, prototyping of multi-function sensor suites, and
technology assessment efforts aimed at supporting current and
future DEVCOM C5ISR PIF Belvoir customers. This contract is
an important competitive win for the business and reinforces
our continued value to our customers.
- We also won a multi-year research, development and technology
integration contract, worth up to $49m, with the US Army C5ISR
Center, Research & Technology Integration Directorate's Image
Processing Division for Image Processing and advanced Optics
Technologies.
- The US Navy's newest and most advanced aircraft carrier (USS
Gerald R. Ford - CVN 78) has been successfully deployed with
QinetiQ's Electromagnetic Aircraft Launch System (EMALS) and
Advanced Arresting Gear (AAG) systems aboard, bringing improved
functionality and reliability.
- We have successfully completed the Low-Rate Production (LRIP)
contract on the Common Robotic System Individual (CRS-I), known
as the SPUR robot, for the US Army. We are ramping-up production
for the $64m Full-Rate Production (FRP) contract which we won
last year; the largest Program of Record for US Robotics for
the delivery of a further 1,200 SPUR robots, with the first
170 systems delivered to the customer. Whilst supply-chain
remains challenging we are actively managing this to maintain
the delivery schedule.
- The RCV-L (Robotic Combat Vehicle Light) has completed successful
summer soldier trials at Fort Hood. The trials are both testing
the capability of the vehicle whilst also developing tactical
scenarios and situational training exercises, the output of
which will be used to further develop the robotic vehicle's
capabilities with the end-user in mind.
- We have successfully completed high altitude test flights of
the SPECTRE system. SPECTRE is a next generation prototype
Intelligence, Surveillance & Reconnaissance (ISR) sensor system
that enables multi-mission Uncrewed Air Systems (UAS) and crewed
aircraft to operate in parallel to other critical sensor payloads
and weapons, with improved performance at a fraction of the
size and weight of the sensors currently in use by the US Government.
- We have made good progress on the Optionally Manned Fighting
Vehicle (OMFV) Phase 2 contract as the program nears completion,
with our teams delivering digital engineering designs allowing
platform validation in a virtual environment. The vehicle's
modular open architecture will make it easy to upgrade and
modify according to future needs.
Space Products (16% of Global Products revenue)
Space NV is a Belgium-based commercial space business providing design and integration of small commercial satellites, docking and berthing systems, and instruments for end-to-end space missions; its principal customer is the European Space Agency. In October 2022 we announced the disposal of QinetiQ Space NV in Belgium to Redwire Space Europe for a cash consideration of EUR32m and we are delighted to announce completion of the transaction on 31st October 2022 . Space NV is an attractive and well-positioned business in the commercial space sector, which has delivered good operational performance and growth under QinetiQ's ownership. Whilst the space domain remains an integral part of our core defence and security strategy, Space NV products provide limited operational synergies and alignment with our global ambition - QinetiQ is therefore delighted to have announced the sale of Space NV to Redwire Corporation, who can provide greater synergies and relevant market access to enable future growth of the business and new opportunities for its employees. In the year ended 31 March 2022 Space NV generated revenue of EUR49m and EBITDA of EUR5m.
EMEA Other Products (16% of Global Products revenue)
EMEA Products provides research services and bespoke technological solutions developed from intellectual property spun out from EMEA Services. QinetiQ Target Systems (QTS) is also reported within EMEA Products.
- Through FY22 and FY23 we have seen positive progress across
the QTS business with customers resuming trials and exercises
and winning some significant orders, including a number of
notable wins and deliveries for customer training exercises
in Europe.
- QTS secured a GBP1.5m contract from the Royal Navy to trial
the military effect of Banshee Jet80+ air vehicle off HMS Prince
of Wales. QinetiQ will provide its experimentation expertise
and Banshee Jet80+ air vehicles to support the Royal Navy's
future use of high-performance Uncrewed Aerial Systems (UAS)
in Carrier Strike Group operations. The experimental trials,
which are closely associated with the Navy's Vampire Phase
1 programme, will test QinetiQ Target Systems' Banshees in
training and ISR scenarios, focussing on specific flight profiles
and the optical recognition of assets to enable 'friend or
foe' confirmation.
- QTS also supported a major Dutch target exercise (Mjolnir),
with live testing of the SM2 (medium-range surface-to-air missile),
as well as Aerial Target deployments in Turkey and Germany.
Principal risks and uncertainties
The Group continues to be exposed to a number of risks and uncertainties which management continue to identify, assess and mitigate to minimise their potential impact on the reported performance of the Group. An explanation of risks and their mitigations, together with details of our risk management framework can be found in the 2022 Annual Report and Accounts which is available for download at: https://www.qinetiq.com/investors .
A summary of the significant risks and uncertainties are set out below:
-- Failure to grow and adapt our ways of working in order to ensure
that we attract, develop and retain the right capability to deliver
excellence for our customers to support QinetiQ's future growth;
-- Failure to create a culture of innovation, develop relevant technology
and business models or to attract and retain the right talent
to enable the realisation of new ideas for our customers and our
organisation;
-- Failure to anticipate, plan and scenario-test for volatile macroeconomic
environments that could impact customer spending, inflationary
impacts on our cost-base, interest rates and foreign currency
exchange movements;
-- Failure to execute our growth strategy within the UK, US and Australian
market impacts the overall financial performance of the Group;
-- Large long-term contracts that contribute a material element of
the Group's revenue do not continue or are not renewed;
-- The M&A strategy, which is a key element of our strategic growth,
does not realise the maximum potential benefits;
-- The Group operates in highly regulated environments and recognises
that non-compliance could pose a risk to both our ability to conduct
business, and to our stakeholders;
-- A breach of physical data security, cyber-attacks or IT systems
failure could have an adverse impact on our customers' operations;
-- Our Portfolio, Programme and Project Management (P3M) maturity
fails to keep pace with our growth plans and the successful delivery
of larger, longer-term contracts; and
-- Failure to manage our climate change risk would leave operations
on our estates and our supply chains exposed and we may not meet
legislative or customer requirements, stakeholder expectations
and may not be correctly positioned in a decarbonised future.
Condensed consolidated income statement
H1 FY23 H1 FY22 restated^
(unaudited) (unaudited)
-------------------------------- --------------------------------
Specific Specific
All figures in GBP million adjusting adjusting
unless stated otherwise Note Underlying* items* Total Underlying* items* Total
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Revenue 2 673.4 - 673.4 600.1 - 600.1
Operating costs excluding
depreciation, impairment
and amortisation (577.6) 30.7 (546.9) (525.8) (6.3) (532.1)
Other income 5.2 0.9 6.1 4.8 0.5 5.3
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 101.0 31.6 132.6 79.1 (5.8) 73.3
Depreciation and impairment
of property, plant and
equipment (23.5) - (23.5) (22.9) (1.2) (24.1)
Amortisation of intangible
assets (3.4) (5.6) (9.0) (2.8) (5.4) (8.2)
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Operating profit/(loss) 74.1 26.0 100.1 53.4 (12.4) 41.0
Finance income 5 1.4 4.9 6.3 0.1 2.3 2.4
Finance expense 5 (1.9) - (1.9) (1.0) - (1.0)
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit /(loss) before
tax 73.6 30.9 104.5 52.5 (10.1) 42.4
Taxation (expense)/income 6 (8.2) 16.1 7.9 (5.9) (14.2) (20.1)
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit/(loss) for the
period 65.4 47.0 112.4 46.6 (24.3) 22.3
Attributable to:
Owners of the Company 65.4 47.0 112.4 46.6 (24.3) 22.3
Non-controlling interests - - - - - -
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit/(loss) for the
period 65.4 47.0 112.4 46.6 (24.3) 22.3
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Earnings per share
for profit attributable
to the owners of the
Company
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Basic 7 11.4 19.5 8.1 3.9
Diluted 7 11.3 19.3 8.1 3.9
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of software implementation costs.
See note 1.
* Alternative performance measures are used to supplement the statutory
figures. These are additional financial indicators used by management
internally to assess the underlying performance of the Group.
Definitions can be found in the glossary.
Condensed consolidated statement of comprehensive income
H1 FY23 H1 FY22^
All figures in GBP million (unaudited) (unaudited)
---------------------------------------------------- ------------- ------------
Profit for the period 112.4 22.3
Items that will not be reclassified to the income
statement:
Actuarial (loss)/gain recognised in defined benefit
pension schemes (157.5) 61.5
Tax on items that will not be reclassified to
the income statement 39.4 (27.1)
---------------------------------------------------- ------------- ------------
Total items that will not be reclassified to
the income statement (118.1) 34.4
Items that may be reclassified to the income
statement:
Foreign currency translation gains for foreign
operations 19.7 2.4
Movement in deferred tax on foreign currency
translation (1.7) 0.2
Increase in fair value of hedging derivatives 16.5 0.5
Movement on deferred tax on hedging derivatives (0.3) (0.1)
Total items that may be reclassified to the
income statement 34.2 3.0
---------------------------------------------------- ------------- ------------
Other comprehensive (expense)/income for the
period, net of tax (83.9) 37.4
---------------------------------------------------- ------------- ------------
Total comprehensive income for the period, net
of tax 28.5 59.7
---------------------------------------------------- ------------- ------------
^ Prior period comparatives have been restated due to a change in
accounting policy in respect of software implementation costs. See
note 1.
Condensed consolidated statement of changes in equity
All figures in Issued Capital GBP share redemption Share Hedge Translation Retained Non-controlling Total million capital reserve premium reserve reserve earnings Total interest equity ----------------- -------- ---------- -------- -------- ----------- --------- ------- --------------- ------- At 1 April 20 22 5.8 40.8 147.6 0.1 1.9 847.0 1,043.2 0.2 1,043.4 Profit for the period - - - - - 112.4 112.4 - 112.4 Other comprehensive income/(expense) , net of tax - - - 16.2 18.0 (118.1) (83.9) - (83.9) Purchase of own shares - - - - - (0.4) (0.4) - (0.4) Share-based payments charge - - - - - 0.8 0.8 - 0.8 Deferred tax on share-based payments - - - - - 0.3 0.3 - 0.3 Dividends - - - - - (28.8) (28.8) - (28.8) At 30 September 20 22 (unaudited) 5.8 40.8 147.6 16.3 19.9 813.2 1,043.6 0.2 1,043.8
----------------- -------- ---------- -------- -------- ----------- --------- ------- --------------- -------
At 1 April 20 21
- previously
reported 5.7 40.8 147.6 (0.4) (2.9) 698.6 889.4 0.3 889.7
Change in
accounting
policy -
software
implementation
costs - - - - - (4.8) (4.8) - (4.8)
At 1 April 20 21
- restated^ 5.7 40.8 147.6 (0.4) (2.9) 693.8 884.6 0.3 884.9
Profit for the
period - - - - - 22.3 22.3 - 22.3
Other
comprehensive
income , net of
tax - - - 0.4 2.6 34.4 37.4 - 37.4
Purchase of own
shares - - - - - (0.5) (0.5) - (0.5)
Issue of new
shares 0.1 - - - - - 0.1 - 0.1
Share-based
payments
charge - - - - - 3.6 3.6 - 3.6
Deferred tax on
share-based
payments - - - - - (0.7) (0.7) - (0.7)
Fair value
adjustment
in respect of
equity-based
contingent
consideration - - - - - 0.7 0.7 - 0.7
Dividends - - - - - (27.0) (27.0) (0.1) (27.1)
At 30 September
20 21^
(unaudited) 5.8 40.8 147.6 - (0.3) 726.6 920.5 0.2 920.7
----------------- -------- ---------- -------- -------- ----------- --------- ------- --------------- -------
^ Prior period comparatives have been restated due to a change in
accounting policy in respect of software implementation costs. See
note 1.
Condensed consolidated balance sheet
31 March
30 September 30 September
2022 2021^ 2022
All figures in GBP million Note (unaudited) (unaudited) (audited)
------------------------------------------ ----- -------------- ------------- -----------
Non-current assets
Goodwill 12 158.3 147.1 149.4
Intangible assets 140.2 135.7 140.3
Property, plant and equipment 431.6 408.6 414.5
Derivatives and other financial assets 12.8 0.7 0.5
Financial assets at fair value through - 0.9 -
profit and loss
Equity accounted investments 1.1 2.2 2.6
Retirement benefit surplus 13 209.0 277.4 362.2
Deferred tax asset 25.5 16.0 21.0
------------------------------------------ ----- -------------- ------------- -----------
978.5 988.6 1,090.5
------------------------------------------ ----- -------------- ------------- -----------
Current assets
Inventories 63.9 61.5 54.9
Derivatives and other financial assets 54.3 0.3 0.6
Trade and other receivables 330.8 311.4 361.2
Current tax asset 18.4 6.6 1.4
Assets classified as held for sale 39.5 - -
Cash and cash equivalents 220.3 165.7 248.1
------------------------------------------ ----- -------------- ------------- -----------
727.2 545.5 666.2
------------------------------------------ ----- -------------- ------------- -----------
Total assets 1,705.7 1,534.1 1,756.7
------------------------------------------ ----- -------------- ------------- -----------
Current liabilities
Trade and other payables (439.3) (383.9) (462.7)
Current tax payable - (0.6) (3.9)
Provisions (21.1) (4.4) (21.1)
Liabilities of disposal group classified (29.1) - -
as held for sale
Leases and other financial liabilities (6.0) (8.2) (6.9)
------------------------------------------ ----- -------------- ------------- -----------
(495.5) (397.1) (494.6)
------------------------------------------ ----- -------------- ------------- -----------
Non-current liabilities
Deferred tax liability (134.1) (136.6) (156.7)
Provisions (4.5) (7.4) (6.0)
Leases and other financial liabilities (17.4) (19.3) (17.2)
Other payables (10.4) (53.0) (38.8)
------------------------------------------ ----- -------------- ------------- -----------
(166.4) (216.3) (218.7)
------------------------------------------ ----- -------------- ------------- -----------
Total liabilities (661.9) (613.4) (713.3)
------------------------------------------ ----- -------------- ------------- -----------
Net assets 1,043.8 920.7 1,043.4
------------------------------------------ ----- -------------- ------------- -----------
Equity
Ordinary shares 5.8 5.8 5.8
Capital redemption reserve 40.8 40.8 40.8
Share premium account 147.6 147.6 147.6
Hedging reserve 16.3 - 0.1
Translation reserve 19.9 (0.3) 1.9
Retained earnings 813.2 726.6 847.0
------------------------------------------ ----- -------------- ------------- -----------
Capital and reserves attributable
to shareholders of the parent company 1,043.6 920.5 1,043.2
Non-controlling interest 0.2 0.2 0.2
------------------------------------------ ----- -------------- ------------- -----------
Total equity 1,043.8 920.7 1,043.4
------------------------------------------ ----- -------------- ------------- -----------
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1
Condensed consolidated cash flow statement
H1 FY23 H1 FY22^*
All figures in GBP million Note (unaudited) (unaudited) FY22* (audited)
------------------------------------------- ----- -------------- ------------- ----------------
Underlying net cash inflow from
operations 106.8 70.2 215.3
Less specific adjusting items 9 (7.3) (6.0) (5.6)
Net cash inflow from operations 9 99.5 64.2 209.7
Tax paid (18.2) (12.8) (20.0)
Interest received 1.4 0.1 0.5
Interest paid (1.0) (0.8) (1.5)
------------------------------------------- ----- -------------- ------------- ----------------
Net cash inflow from operating activities 81.7 50.7 188.7
------------------------------------------- ----- -------------- ------------- ----------------
Purchases of intangible assets (3.5) (9.6) (21.4)
Purchases of property, plant and
equipment (45.0) (37.3) (62.9)
Proceeds from sale of property 1.1 - 1.5
Dividends from joint ventures and
associates - 2.0 2.0
Acquisition of businesses (1.6) - (0.8)
Net cash outflow from investing
activities (49.0) (44.9) (81.6)
------------------------------------------- ----- -------------- ------------- ----------------
Purchase of own shares (0.4) (0.4) (0.8) Dividends paid to shareholders (28.8) (27.0) (40.2) Payment of term loan arrangement (0.6) - - fee Capital element of finance lease payments (3.1) (3.5) (6.2) Cash flow relating to intercompany loan hedges (29.2) 0.4 (3.1) Dividends paid to non-controlling interests in subsidiaries - (0.1) (0.1) Net cash outflow from financing activities (62.1) (30.6) (50.4) ------------------------------------------- ----- -------------- ------------- ---------------- (Decrease)/Increase in cash and cash equivalents (29.4) (24.8) 56.7 Effect of foreign exchange changes on cash and cash equivalents 1.6 0.4 1.3 Cash and cash equivalents at beginning of period 248.1 190.1 190.1 Cash and cash equivalents at end of period 220.3 165.7 248.1 ------------------------------------------- ----- -------------- ------------- ----------------
Reconciliation of movement in net cash
H1 FY23 H1 FY22^* FY22*
All figures in GBP million Note (unaudited) (unaudited) (audited)
--------------------------------------------------- ----- -------------- ------------- ------------
(Decrease)/Increase in cash and
cash equivalents (29.4) (24.8) 56.7
Add back net cash flows not impacting
net cash 3.7 3.5 6.2
--------------------------------------------------- ----- -------------- ------------- ------------
Change in net cash resulting from
cash flows (25.7) (21.3) 62.9
Net increase in lease obligation (1.4) (1.1) (1.3)
Net movement in derivative financial
instruments 67.2 (2.6) (1.3)
Other movements including foreign
exchange (1.2) 0.1 0.7
--------------------------------------------------- ----- -------------- ------------- ------------
Increase/(Decrease) in net cash as
defined by the Group 38.9 (24.9) 61.0
Net cash as defined by the Group
at beginning of the period 225.1 164.1 164.1
--------------------------------------------------- ----- -------------- ------------- ------------
Net cash as defined by the Group
at end of the period 8 264.0 139.2 225.1
Less: non-cash net financial (assets)/liabilities 8 (43.7) 26.5 23.0
--------------------------------------------------- ----- -------------- ------------- ------------
Total cash and cash equivalents 8 220.3 165.7 248.1
--------------------------------------------------- ----- -------------- ------------- ------------
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
* To be consistent with H1 FY23, prior periods have been re-presented
in respect of the cash flow impact of intercompany loan hedging
Notes to the condensed interim financial statements
Significant accounting policies
1.
Basis of preparation
QinetiQ Group plc is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in England.
The condensed consolidated interim financial statements of the Group for the six months ended 30 September 2022 comprise statements for the Company and its subsidiaries (together referred to as the 'Group') and were approved by the Board of Directors on 10 November 2022.
The financial statements have been reviewed, not audited.
This condensed consolidated interim financial report for the half-year reporting period ended 30 September 2022 has been prepared in accordance with the UK-adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
In the income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, for the reader to obtain a proper understanding of the financial information, 'specific adjusting items' need to be disclosed separately because of their size and nature. Specific adjusting items include:
Distorting due to Distorting due to Does not reflect in-year
irregular nature fluctuating nature operational performance
Item year on year (size and/or sign) of continuing business
---------------------------------------------------- ----------------- ------------------- ------------------------
Amortisation of intangible assets arising from P
acquisitions
---------------------------------------------------- ----------------- ------------------- ------------------------
Pension net finance income P P
---------------------------------------------------- ----------------- ------------------- ------------------------
Gains/losses on business divestments and disposal of P P P
property and investments
---------------------------------------------------- ----------------- ------------------- ------------------------
Transaction & integration costs in respect of P P P
business acquisitions and disposals
---------------------------------------------------- ----------------- ------------------- ------------------------
Digital investment P P P
---------------------------------------------------- ----------------- ------------------- ------------------------
One-off FX gain on acquisition funding arrangements P P P
---------------------------------------------------- ----------------- ------------------- ------------------------
Impairment of goodwill and property P P P
---------------------------------------------------- ----------------- ------------------- ------------------------
The tax impact of the above P P P
---------------------------------------------------- ----------------- ------------------- ------------------------
Other significant non-recurring tax movements P P P
---------------------------------------------------- ----------------- ------------------- ------------------------
All items treated as a specific adjusting item in the current and prior period are detailed in note 3 and are excluded from the 'underlying' measures of performance. These Alternative Performance Measures (APMs), definitions of which can be found in the glossary at the end of this document, are used to monitor performance and also used for management remuneration purposes.
In periods where there are significant one-off trading items impacting on performance (such as a contract write-down which is not of the nature/type detailed above and hence not reported as a specific adjusting item) then these are still reported within underlying measures of performance but narrative explanation is provided to quantify the impact on such measures (where appropriate).
The accounting policies adopted in the preparation of these condensed consolidated financial statements are consistent with the policies applied by the Group in its consolidated financial statements for the year ended 31 March 2022.
Recent accounting developments adopted by the Group
IFRIC Agenda Decision 'Configuration and customisation costs in a cloud computing arrangements'
In the 31 March 2022 Annual Report, the Group changed its accounting policy related to the capitalisation of configuration and customisation costs in a cloud computing (Software as a Service, 'SaaS') arrangement. This change is as a result of the IFRS Interpretations Committee's agenda decision published in April 2021.
The Group's accounting policy had historically been to capitalise costs directly attributable to the configuration and customisation of cloud computing arrangements as intangible assets in the balance sheet, whether or not the services were performed by the SaaS provider, SaaS subcontractors or a third party. Following the publication of the above IFRIC agenda decision, cloud computing arrangements were identified and assessed to determine if the Group has control of the software. For those arrangements where it was determined that we do not have control of the developed software, to the extent that the services were performed by third parties, the Group derecognised the intangible asset previously capitalised. Amounts paid to the SaaS provider in advance of the commencement of the service period, including for configuration or customisation, if identified as not distinct, were treated as a prepayment.
The change in accounting policy led to adjustments amounting to an GBP8.0m reduction in the intangible assets recognised as at 31 March 2022, and to a GBP2.4m increase in operating costs (excluding amortisation) for the year.
Accordingly, the 30 September 2021 balance sheet has been restated in accordance with IAS 8, together with related notes. The following table shows the adjustments recognised for each individual line item as at 30 September 2021.
Impact on the condensed consolidated balance sheet at 30 September 2021
As originally Impact
All figures in GBP million presented of restatement Restated
------------------------------- -------------- ---------------- ---------
Assets/liabilities
Intangible assets 143.7 (8.0) 135.7
Current tax asset 4.9 1.7 6.6
Other net assets 778.4 - 778.4
Net assets 927.0 (6.3) 920.7
---------------------------------- -------------- ---------------- ---------
Equity
Retained earnings 732.9 (6.3) 726.6
Share capital and other
reserves 193.9 - 193.9
Non-controlling interest 0 .2 - 0.2
---------------------------------- -------------- ---------------- ---------
Total equity 927.0 (6.3) 920.7
---------------------------------- -------------- ---------------- ---------
Impact on net cash
------------------------------- -------------- ---------------- ---------
Net cash (as defined
by the Group - see glossary) 139.2 - 139.2
---------------------------------- -------------- ---------------- ---------
Impact on the condensed consolidated income statement for H1 FY22
As originally Impact of
All figures in GBP million presented restatement Restated
----------------------------- ------------- ------------ --------
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 75.2 (1.9) 73.3
Depreciation and impairment
of property, plant and ( 24.1
equipment ) - (24.1)
Amortisation of intangible
assets (8. 2 ) - (8 .2 )
--------------------------------- ------------- ------------ --------
Operating profit/(loss) 42.9 (1.9) 41.0
Finance income 2.4 - 2.4
Finance expense ( 1.0 ) - ( 1.0 )
--------------------------------- ------------- ------------ --------
Profit/(loss) before tax 44.3 (1.9) 42.4
( 20.5
Taxation expense ) 0.4 ( 20.1 )
--------------------------------- ------------- ------------ --------
Profit/(loss) for the
year attributable to equity
shareholders 23.8 (1.5) 22.3
--------------------------------- ------------- ------------ --------
The impact is classified as a specific adjusting item and there is no impact on underlying measures of performance.
Going-concern basis
The Group is exposed to various risks and uncertainties, the principal ones being summarised in the 'Principal risks and uncertainties' section. Crystallisation of such risks, to the extent not fully mitigated, would lead to a negative impact on the Group's financial results but none are deemed sufficiently material to prevent the Group from continuing as a going concern for at least the next 12 months . The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going-concern basis in preparing its interim financial statements.
Comparative data
The comparative figures for the year ended 31 March 2022 (and half year ended 30 September 2021) do not contain all of the information required for full annual financial statements. The Group's full annual financial statements for the year ended 31 March 2022 have been delivered to the registrar of companies. The report of the auditors (i) was unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's financial statements for the year ended 31 March 2022 are available upon request from the Company's registered office at Cody Technology Park, Ively Road, Farnborough, Hampshire, GU14 0LX, or at the Company's website (www.QinetiQ.com) .
Disaggregation of revenue and segmental analysis
2.
Revenue by category and reconciliation to revenue on an organic, constant currency basis
H1 FY23
H1 FY22
All figures in GBP million (unaudited) (unaudited)
---------------------------------------------- ------------- ------------
Service contracts with customers 640.1 574.5
Sale of goods contracts with customers 31.8 24.1
Royalties and licences 1.5 1.5
-------------------------------------------------- ------------- ------------
Revenue (statutory) 673.4 600.1
Restated for:
Adjust to constant prior year
exchange rates (15.7) -
-------------------------------------------------- ------------- ------------
Total revenue on an organic, constant currency
basis 657.7 600.1
-------------------------------------------------- ------------- ------------
Organic revenue growth at constant
currency 10% 3%
-------------------------------------------------- ------------- ------------
Other income
H1 FY23
H1 FY22
All figures in GBP million (unaudited) (unaudited)
----------------------------------------- ------------- ------------
Share of joint ventures' and associates'
profit after tax 0.3 -
Other income (property related) 4.9 4.8
------------------------------------------------- ------------- ------------
Other income - underlying 5.2 4.8
Specific adjusting item: gain
on sale of property 0.9 0.5
------------------------------------------------- ------------- ------------
Total other income 6.1 5.3
------------------------------------------------- ------------- ------------
Revenue by customer geographical location
H1 FY23
H1 FY22
All figures in GBP million (unaudited) (unaudited)
------------------------------------------------ ------------- ------------
United Kingdom 459.4 434.3
US 102.0 75.1
Australia 57.4 47.1
Home countries (92% and 93% of total revenue for
H1 FY23 and H1 FY22 respectively) 618.8 556.5
Europe 42.8 40.6
Rest of World 11.8 3.0
---------------------------------------------------- ------------- ------------
Total revenue 673.4 600.1
---------------------------------------------------- ------------- ------------
Revenue by major customer type
For the six months ended 30 September
H1 FY23
H1 FY22
All figures in GBP million (unaudited) (unaudited)
--------------------------- ------------- ------------
UK Government 423.8 398.2
US Government 97.7 68.1
Other 151.9 133.8
------------------------------- ------------- ------------
Total revenue 673.4 600.1
------------------------------- ------------- ------------
Operating segments
H1 FY23 H1 FY22
All figures in GBP million (unaudited) (unaudited)
----------------------------- --------------------------- ---------------------------------
Revenue Underlying* Revenue Underlying*
from external operating from external operating
customers profit(*) customers profit/(loss)(*)
----------------------------- -------------- ----------- -------------- -----------------
EMEA Services 524.3 61.5 488.7 67.1
Global Products 149.1 12.6 111.4 (13.7)
--------------------------------- -------------- ----------- -------------- -----------------
Total operating segments 673.4 74.1 600.1 53.4
--------------------------------- -------------- ----------- -------------- -----------------
Underlying operating margin* 11.0% 8.9%
--------------------------------- -------------- ----------- -------------- -----------------
* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary
The prior period included a write-down on a large complex project. This reduced revenue and underlying operating profit (within the Global Products operating segment) by GBP8.0m and GBP14.5m respectively.
Reconciliation of segmental results to total profit
H1 FY23
Note H1 FY22^
All figures in GBP million (unaudited) (unaudited)
----------------------------------- ----- ------------- ------------
Underlying operating profit 74.1 53.4
Specific adjusting items operating
profit/(loss) 3 26.0 (12.4)
-------------------------------------- ----- ------------- ------------
Operating profit 100.1 41.0
Net finance income 4.4 1.4
-------------------------------------- ----- ------------- ------------
Profit before tax 104.5 42.4
Taxation income/(expense) 7.9 (20.1)
-------------------------------------- ----- ------------- ------------
Profit for the period attributable
to equity shareholders 112.4 22.3
-------------------------------------- ----- ------------- ------------
^ Prior period comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 1.
3. Specific adjusting items
In the income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items need to be disclosed separately because of their size and nature. Underlying measures of performance exclude specific adjusting items. The following specific adjusting items have been (charged)/credited in the consolidated income statement:
H1 FY23
H1 FY22^
All figures in GBP million Note (unaudited) (unaudited)
------------------------------------------------- ---- ------------- ------------
FX gain on acquisition funding derivatives 42.9 -
Acquisition and disposal costs 4 (6.4) (4.1)
Restructuring costs (3.3) -
Digital investment (2.5) (1.9)
Gain on sale of property 0.9 0.5
Acquisition related remuneration - (0.9)
Fair value adjustment in respect of contingent
consideration 4 - 0.6
------------------------------------------------- ---- ------------- ------------
Specific adjusting items before amortisation,
depreciation and impairment 31.6 (5.8)
Impairment of property - (1.2)
Amortisation of intangible assets arising from
acquisition (5.6) (5.4)
------------------------------------------------- ---- ------------- ------------
Specific adjusting items operating profit/(loss) 26.0 (12.4)
Defined benefit pension scheme net finance
income 13 4.9 2.3
Specific adjusting items profit/(loss) before
tax 30.9 (10.1)
Specific adjusting items - tax income/(expense) 6 16.1 (14.2)
------------------------------------------------- ---- ------------- ------------
Total specific adjusting items profit/(loss)
after tax 47.0 (24.3)
------------------------------------------------- ---- ------------- ------------
Reconciliation of underlying profit for the period to total profit for the period
H1 FY23
H1 FY22^
All figures in GBP million (unaudited) (unaudited)
--------------------------------------------- ------------- ------------
Underlying profit after tax 65.4 46.6
Total specific adjusting items profit/(loss)
after tax (see above) 47.0 (24.3)
------------------------------------------------- ------------- ------------
Total profit for the period attributable to
equity shareholders 112.4 22.3
------------------------------------------------- ------------- ------------
^ Prior period comparatives have been restated due to a change in
accounting policy in respect of software implementation costs. See
note 1.
The total impact of specific adjusting items on operating profit (which are excluded from underlying performance) before tax was a GBP26.0m income (H1 FY22 restated: expense of GBP12.4m). H1 FY23 includes a GBP42.9m gain from the foreign exchange derivative contract, due to the recent GBP:USD movement, which was taken out to hedge the foreign exchange exposure on the $590m Avantus acquisition and was executed in accordance with the Group's Treasury Policy. The size of this gain (or loss), which has partially reversed since 30 September 2022, will ultimately depend on the GBP to USD foreign exchange rate at the date of completion of the acquisition.
Acquisition and disposal costs of GBP6.4m (H1 FY22: GBP4.1m) comprise costs associated with the Avantus and Air Affairs acquisitions (which are due to complete in H2), and costs relating to the disposal of Space NV. The H1 FY22 amount was relating to an unsuccessful acquisition, as disclosed previously. The cash flow for H1 FY23 includes a GBP1.6m deposit payment on the Air Affairs acquisition.
Restructuring costs of GBP3.3m have been incurred as part of the re-organisation to create Group-wide global support functions and four market-facing Sectors. The costs of reorganisation in previous years, which have been smaller in scale, have been included within underlying operating costs.
QinetiQ has embarked on a digital investment programme to improve the infrastructure, digital tools and operating systems of the company - the majority of costs will be reported as exceptional specific adjusting items in the P&L, with ongoing recurring operating costs (such as licence costs and overheads) remaining within underlying operating costs. Early stage implementations and planning work has been undertaken through FY22 and FY23, with the full digital investment programme due to be implemented over the next three to four year period. FY22 included specific adjusting item relating to the change in accounting policy for software implementation costs as a result of the International Financial Reporting Interpretations Committee (IFRIC) decision to expense rather than capitalise configuration and customisation costs in cloud computing arrangements. H1 FY22 has been restated to reflect this. In H1 FY23 the exceptional cost element of the digital investment programme within specific adjusting items totals GBP2.5m. The majority of this expenditure would previously have been capitalised and follows the IFRIC decision, with a small movement from underlying
operating costs to exceptional costs as referenced above (FY23 benefit to underlying operating profit expected to be <GBP1m).
Also included within specific adjusting items were a gain on the sale of property of GBP0.9m (H1 FY22 GBP0.5m) and amortisation of acquisition intangibles of GBP5.6m (H1 FY22: GBP5.4m).
4. Business combinations
There were no acquisitions in the period to 30 September 2022 or 30 September 2021. In the current period, the Group incurred GBP6.4m costs in respect of the recently announced acquisitions of Avantus Federal and Air Affairs, and the disposal of Space NV. These costs are classified as a specific adjusting item (note 3). A GBP1.6m deposit payment has been made on the Air Affairs acquisition.
In H1 HY22 the fair value of the MTEQ earn-out agreement was reassessed as nil. An amount of GBP0.6m was credited to the income statement as a specific adjusting item in respect of the cash-settled element.
5. Finance income and expense
H1 FY23 H1 FY22
(unaudited
All figures in GBP million ) (unaudited)
-------------------------------------------------- ------------ ------------
Receivable on bank deposits 1.4 0.1
Underlying finance income 1.4 0.1
-------------------------------------------------- ------------ ------------
Amortisation of recapitalisation fee (0.2) (0.2)
Interest on bank loans and overdrafts (0.4) (0.3)
Lease expense (0.5) (0.5)
Other interest expense (0.8) -
Underlying finance expense (1.9) (1.0)
-------------------------------------------------- ------------ ------------
Underlying net finance expense (0.5) (0.9)
Specific adjusting items:
Defined benefit pension scheme net finance income 4.9 2.3
-------------------------------------------------- ------------ ------------
Net finance income 4.4 1.4
-------------------------------------------------- ------------ ------------
6. Taxation
H1 FY23 H1 FY22^
(unaudited) (unaudited)
----------------------------- ------------------------------
Specific Specific
All figures in GBP million adjusting adjusting
unless stated otherwise Underlying items Total Underlying items Total
--------------------------- ---------- ---------- ----- ---------- ---------- ------
Profit /(loss) before
tax 73.6 30.9 104.5 52.5 (10.1) 42.4
Taxation (expense)/income (8.2) 16.1 7.9 (5.9) (14.2) (20.1)
------------------------------- ---------- ---------- ----- ---------- ---------- ------
Profit/(loss) for the
period attributable to
equity shareholders 65.4 47.0 112.4 46.6 (24.3) 22.3
------------------------------- ---------- ---------- ----- ---------- ---------- ------
Effective tax rate 11.1% 11.2%
------------------------------- ---------- ---------- ----- ---------- ---------- ------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of software implementation costs.
See note 1.
The total tax credit is GBP7.9m (H1 FY22 restated charge: GBP20.1m). The underlying tax charge of GBP8.2m (H1 2021: GBP5.9m) is calculated by applying the expected underlying effective tax rate at a jurisdictional level for the year ending 31 March 2023 to the underlying profit before tax for the six months to 30 September 2022. The Group's full year expected underlying effective tax rate is 11.5% which is higher than the half year underlying effective tax rate of 11.1% (H1 FY22: 11.2%) due to the jurisdictional mix of profits in H1 FY23.
The underlying effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development expenditure credits ('RDEC') in the UK which are accounted for under IAS12 within the tax line. The adjusted underlying effective tax rate before the impact of RDEC would be 19.4% (H1 FY22: 18.0%). The underlying effective tax rate is expected to remain below the UK statutory rate in the medium term, subject to any tax legislation changes, the geographic mix of profits, the recognition of unrecognised tax losses and while the benefit of net RDEC retained by the Group remains in the tax line.
Tax losses and specific adjusting items
At 30 September 2022 the Group had unused tax losses and surplus interest expenses of GBP156.9m (31 March 2022: GBP128.1m) which are available for offset against future profits. Within deferred tax assets recognised on the balance sheet is GBP15.8m in respect of GBP75.3m of US net operating losses, GBP5.0m in respect of GBP21.6m of Canadian net operating losses and GBP1.7m in respect of GBP5.1m of German trade losses.
No deferred tax asset is recognised in respect of the GBP54.9m of US interest deductions due to uncertainty over the timing and extent of their utilisation. Full recognition of the US interest deductions would increase the deferred tax asset by GBP14.8m. The Group has GBP36.1m of time-limited US net operating losses of which GBP25.5m will expire in 2035 and GBP10.6m in 2036. Deferred tax has been calculated using the enacted future statutory tax rates.
Specific adjusting items includes a GBP18.1m credit in respect of UK MOD appropriation for RDEC has been classified as a specific adjusting item. Following a determination by the SSRO on the interpretation of the Statutory Guidance for Allowable Costs regulations ('SGAC'), the accounting judgement is that RDEC on single source contracts from 1 April 2019 onwards will no longer be paid on to MOD, which is a change from the accounting judgement at the year end. The existing creditor has been reversed through the tax charge in line with IAS 12. Together with a GBP4.9m charge arising on the UK statutory rate change to 25% from 1 April 2023, a GBP1.7m credit for tax on the amortisation of acquisition intangibles and a GBP1.2m credit in respect of other pre-tax specific adjusting items, the total specific adjusting items tax credit was GBP16.1m (H1 2022 restated: charge of GBP14.2m). Specific adjusting items includes the foreign exchange gain GBP42.9m on the derivative instrument taken out for the Avantus acquisition which is not expected to be taxable as it relates to a prospective share transaction.
Earnings per share
7.
Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of ordinary shares in issue during the period. The weighted average number of shares used excludes those shares bought by the Group and held as own shares. For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares arising from unvested share-based awards including share options.
H1 FY23 H1 FY22
(unaudited) (unaudited)
---------------------------------- -------- ------------- -------------
Weighted average number of shares Million 575.4 572.6
Effect of dilutive securities Million 5.5 5.7
---------------------------------- -------- ------------- -------------
Diluted number of shares Million 580.9 578.3
---------------------------------- -------- ------------- -------------
Underlying basic earnings per share figures are presented below, in addition to the basic and diluted earnings per share, because the Directors consider this gives a more relevant indication of underlying business performance and reflects the adjustments to basic earnings per share for the impact of specific adjusting items (see note 3) and tax thereon.
H1 FY23 H1 FY22^
Underlying basic and diluted EPS (unaudited) (unaudited)
------------------------------------------ ------------ ------------- -------------
Profit attributable to the owners of the
Company GBP million 112.4 22.3
Remove (profit)/loss after tax in respect
of specific adjusting items GBP million (47.0) 24.3
------------------------------------------ ------------ ------------- -------------
Underlying profit after taxation GBP million 65.4 46.6
------------------------------------------ ------------ ------------- -------------
Weighted average number of shares Million 575.4 572.6
------------------------------------------ ------------ ------------- -------------
Underlying basic EPS Pence 11.4 8.1
------------------------------------------ ------------ ------------- -------------
Diluted number of shares Million 580.9 578.3
------------------------------------------ ------------ ------------- -------------
Underlying diluted EPS Pence 11.3 8.1
------------------------------------------ ------------ ------------- -------------
H1 FY23 H1 FY22^
Basic and diluted EPS (unaudited) (unaudited)
------------------------------------------ ------------ ------------- -------------
Profit attributable to the owners of the
Company GBP million 112.4 22.3
Weighted average number of shares Million 575.4 572.6
------------------------------------------ ------------ ------------- -------------
Basic EPS - total Group Pence 19.5 3.9
------------------------------------------ ------------ ------------- -------------
Diluted number of shares Million 580.9 578.3
Diluted EPS - total Group Pence 19.3 3.9
------------------------------------------ ------------ ------------- -------------
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
Net cash
8.
31 March
30 September 30 September
2022 2021 2022
All figures in GBP million (unaudited) (unaudited) (audited)
-------------------------------------------------- -------------- -------------- ------------
Current financial assets/(liabilities)
Deferred financing costs 0.6 0.3 0.4
Derivative financial assets 53.7 - 0.2
Lease liabilities (5.8) (5.7) (5.5)
Derivative financial liabilities (0.2) (2.5) (1.4)
-------------------------------------------------- -------------- -------------- ------------
Total current net financial assets/(liabilities) 48.3 (7.9) (6.3)
Non-current financial assets/(liabilities)
Deferred financing costs 0.7 0.7 0.5
Derivative financial assets 12.1 - -
Lease liabilities (17.2) (18.7) (16.6)
Derivative financial liabilities (0.2) (0.6) (0.6)
-------------------------------------------------- -------------- -------------- ------------
Total non-current net financial liabilities (4.6) (18.6) (16.7)
-------------------------------------------------- -------------- -------------- ------------
Total net financial assets/(liabilities) 43.7 (26.5) (23.0)
Cash and cash equivalents 220.3 165.7 248.1
-------------------------------------------------- -------------- -------------- ------------
Total net cash as defined by the Group 264.0 139.2 225.1
-------------------------------------------------- -------------- -------------- ------------
Cash flows from operations
9.
H1 FY23
H1 FY22^
All figures in GBP million (unaudited) (unaudited) FY22 (audited)
---------------------------------------------- ------------- ------------ ---------------
Profit after tax for the period 112.4 22.3 90.0
Adjustments for:
Taxation (income)/expense (7.9) 20.1 29.7
Net finance income (4.4) (1.4) (3.1)
Gain on acquisition funding foreign exchange
derivatives (42.9) - -
Acquisition related remuneration costs not
paid as at year end - - 0.9
Gain on sale of property (0.9) (0.5) (0.7)
Impairment in respect of property, plant
and equipment - 1.2 1.7
Fair value gain in respect of contingent
consideration - (0.6) (0.6)
Acquisition related remuneration costs not
paid as at year end - 0.9 -
Amortisation of purchased or internally
developed intangible assets 3.4 2.8 5.4
Amortisation of intangible assets arising
from acquisitions 5.6 5.4 10.7
Depreciation of property, plant and equipment 23.5 22.9 46.2
Share of post-tax gain of equity accounted
entities (0.3) - (0.3)
Share-based payments charge 1.0 3.6 7.4
Retirement benefit contributions in excess
of income statement expense 0.6 0.7 (1.8)
Pension past service cost - - 2.4
Net movement in provisions - (0.2) (1.0)
(Increase)/Decrease in inventories (3.9) (6.2) 1.4
Decrease/(Increase) in receivables 16.0 18.5 (12.8)
(Decrease)/Increase in payables (2.7) (25.3) 34.2
---------------------------------------------- ------------- ------------ ---------------
Changes in working capital 9.4 (13.0) 22.8
Net cash flow from operations 99.5 64.2 209.7
---------------------------------------------- ------------- ------------ ---------------
Reconciliation of net cash flow from operations to underlying net cash flow from operations to free cash flow
H1 FY22^ FY22 (audited)
All figures in GBP million H1 FY23 (unaudited) (unaudited)
------------------------------------------- ------------------- ------------ --------------
Net cash flow from operations 99.5 64.2 209.7
Add back cash impact of specific adjusting
item: acquisition and disposal costs 2.4 4.1 3.7
Add back cash impact of specific adjusting
item: restructuring costs 2.4 - -
Add back cash impact of specific adjusting
item: digital investment 2.5 1.9 1.9
Underlying net cash flow from operations 106.8 70.2 215.3
Less: tax and net interest payments (17.8) (13.5) (21.0)
Less: purchases of intangible assets and
property, plant & equipment (48.5) (46.9) (84.3)
-------------------------------------------- ------------------- ------------ --------------
Free cash flow 40.5 9.8 110.0
-------------------------------------------- ------------------- ------------ --------------
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of software implementation costs. See note 1.
Underlying cash conversion ratio
H1 FY22 FY22 (audited)
H1 FY23 (unaudited) (unaudited)
----------------------------------------- ------------------- ------------ --------------
Underlying EBITDA - GBP million 101.0 79.1 189.5
Underlying net cash flow from operations
- GBP million 106.8 70.2 215.3
------------------------------------------ ------------------- ------------ --------------
Underlying cash conversion ratio - % 106% 89% 114%
------------------------------------------ ------------------- ------------ --------------
Financial risk management
10.
The interim financial statements do not include all financial risk management information and disclosures required in annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 31 March 2022. There have been no changes in any risk management policies since the year end. The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
Level 1 - measured using quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 2 derivatives comprise forward foreign exchange contracts which have been fair valued using forward exchange rates that are quoted in an active market; and
Level 3 - measured using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs).
The Group's assets and liabilities that are measured at fair value, as at 30 September 2022, are as follows:
All figures in GBP million Level 1 Level 2 Level 3 Total --------------------------------------------- ------- ------- ------- ----- Assets: Current derivative financial instruments - 53.7 - 53.7 Non-current derivative financial instruments - 12.1 - 12.1 Liabilities: Current derivative financial instruments - (0.2) - (0.2) Non-current derivative financial instruments - (0.2) - (0.2) Total - 65.4 - 65.4 --------------------------------------------- ------- ------- ------- -----
The following table presents the Group's assets and liabilities that are measured at fair value as at 31 March 2022:
All figures in GBP million Level 1 Level 2 Level 3 Total --------------------------------------------- ------- ------- ------- ----- Assets: Current derivative financial instruments - 0.2 - 0.2 Non-current derivative financial instruments - - - - Liabilities: Current derivative financial instruments - (1.4) - (1.4) Non-current derivative financial instruments - (0.6) - (0.6) Total - (1.8) - (1.8) --------------------------------------------- ------- ------- ------- -----
The fair value of current and non-current derivative financial instruments assets at half year increased significantly from year end due to forward foreign exchange and interest rate contracts put in place to cover the acquisition of Avantus Federal and fix interest costs in line with Group risk management policies.
For cash and cash equivalents, trade and other receivables and bank and current borrowings, the fair value of the financial instruments approximate to their carrying value as a result of the short maturity periods of these financial instruments. For trade and other receivables, allowances are made within the carrying value for credit risk. For other financial instruments, the fair value is based on market value, where available. Where market values are not available, the fair values have been calculated by discounting cash flows to net present value using prevailing market-based interest rates translated at the year-end rates, except for unlisted fixed asset investments where fair value equals carrying value. There have been no transfers between levels.
11. Dividends
An analysis of the dividends paid and proposed in respect of the period ended 30 September 2022 and comparative periods is provided below:
Pence per
ordinary
share GBPm Date paid/payable
---------------------------------------- --------- ---- -----------------
Interim FY23 2.4 13.8 Feb 2023
---------------------------------------- --------- ---- -----------------
Interim FY22 2.3 13.2 Feb 2022
Final FY22 5.0 28.8 Aug 2022
---------------------------------------- --------- ---- -----------------
Total for the year ended 31 March 20 22 7.3 42.0
---------------------------------------- --------- ---- -----------------
The interim dividend is 2.4p (Interim FY22: 2.3p). The dividend will be paid on 3 February 2023. The ex-dividend date is 5 January 2023 and the record date is 6 January 2023.
Goodwill
12.
Goodwill is allocated across five cash generating units ('CGUs') within the EMEA Services segment and four CGUs within the Global Products segment. The full list of CGUs that have goodwill allocated to them is as follows:
Primary reporting 30 September 30 September 31 March
segment 2022 2021
(unaudited) (unaudited) 2022
All figures in GBP million (audited)
-------------------------------- ------------------- ------------- ------------- -------------
US Technology Solutions Global Products 49.0 40.5 41.5
US C5ISR Global Products 40.9 33.8 34.6
Target Systems Global Products 25.1 24.3 24.7
Space Products Global Products - 5.7 5.6
QinetiQ Germany EMEA Services 2.7 2.7 2.6
Inzpire EMEA Services 11.7 11.7 11.7
QinetiQ Training and Simulation EMEA Services 7.8 7.8 7.8
Naimuri EMEA Services 14.8 14.8 14.8
Australia EMEA Services 6.3 5.8 6.1
Net book value 158.3 147.1 149.4
----------------------------------------------------- ------------- ------------- -------------
Goodwill is attributable to the excess of consideration over the fair value of net assets acquired and includes expected synergies, future growth prospects and employee knowledge, expertise and security clearances. The Group tests each CGU for impairment annually, or more frequently if there are indications that goodwill might be impaired. Impairment testing is dependent on management's estimates and judgments, particularly as they relate to the forecasting of future cash flows, the discount rates selected and expected long-term growth rates. As at 31 March 2022, significant headroom existed in all CGUs with the exception of QinetiQ Germany (see below) and management considers that there are no likely variations in the key assumptions which would lead to an impairment being recognised in those other CGUs.
The carrying value of the goodwill for the Germany CGU as at 30 September 2022 was GBP2.7m (31 March 2022: GBP2.6m). As at 31 March 2022, headroom (the excess of calculated value in use compared to carrying value) was small following re-baselining of the business plan. We are seeing positive progress in FY23, securing an important renewal of the core contract until June 2023, however the market remains challenging.
The key sensitivity impacting on the value in use calculations for the Germany CGU is the terminal year cash flows, with the core contract contributing approximately one third of the business's revenue in the terminal year (2027). Should this key contract not be successfully won (on a long-term basis) in June 2023 then there would be a significant decrease in future cash flows and this would lead to full impairment of the residual GBP2.7m carrying value of goodwill together with an impairment charge of approximately GBP1.3m against the carrying value of intangible assets. An increase in the discount rate of 1% or a decrease in the terminal growth rate of 1% would decrease the value in use by GBP7.0m and GBP5.3m respectively.
The Goodwill associated with Space Products is related to Space NV and has been reclassified as Assets held for sale, per note 18.
Post-retirement benefits
13.
In the UK the Group operates the QinetiQ Pension Scheme (the Scheme) for approximately one quarter of its UK employees. The Scheme closed to future accrual on 31 October 2013 and there is no on-going service cost. The Scheme is in a net asset position with the market value of assets in excess of the present value of Scheme liabilities. These have the values set out below as at each period end.
30 September 30 September 31 March
2022 2021
(unaudited) (unaudited) 2022
All figures in GBP million (audited)
-------------------------------------- ------------- ------------- -----------
Total market value of Scheme assets 1,429.6 2,139.8 2,065.7
Present value of Scheme liabilities (1,220.6) (1,862.4) (1,703.5)
-------------------------------------- ------------- ------------- -----------
Net pension asset before deferred tax 209.0 277.4 362.2
Deferred tax liability (58.3) (75.7) (96.4)
-------------------------------------- ------------- ------------- -----------
Net pension asset after deferred tax 150.7 201.7 265.8
-------------------------------------- ------------- ------------- -----------
The balance sheet net pension asset is a snapshot view which can be significantly influenced by short-term market factors. The calculation of the net asset depends on factors which are beyond the control of the Group - principally the value at the balance sheet date of the various categories of assets in which the Scheme has invested and long-term interest rates and inflation rates used to value the Scheme's liabilities. This is particularly pertinent in the current economic climate whilst markets are extremely volatile. Sensitivities and risks are described below.
Per the Scheme rules the Company has an unconditional right to a refund of any surplus, assuming gradual settlement of all liabilities over time. Such surplus may arise on cessation of the Scheme in the context of IFRIC 14 paragraphs 11(b) and 12 and therefore the full net pension asset can be recognised on the Group's balance sheet and the Group's minimum funding commitments to the Scheme do not give rise to an additional balance sheet liability.
The fair value of the QinetiQ Pension Scheme assets, which are not intended to be realised in the short term and may be subject to significant changes before they are realised, were:
30 September 30 September 31 March
2022 2021
(unaudited) (unaudited) 2022
All figures in GBP million (audited)
------------------------------------ ------------- ------------- -----------
Equities - quoted 176.9 173.4 176.1
Equities - unquoted 41.2 48.1 44.7
Liability driven investment 252.4 327.0 291.8
Asset backed security investments 116.2 499.5 501.7
Alternative bonds 242.7 250.7 208.6
Corporate bonds 94.4 92.9 97.4
Property funds 13.9 48.3 29.5
Cash and other equivalents 16.9 17.3 78.5
Derivatives (21.8) (5.3) (8.5)
Insurance buy-in policy 496.8 687.9 645.9
Total market value of Scheme assets 1,429.6 2,139.8 2,065.7
------------------------------------ ------------- ------------- -----------
The Scheme's assets do not include any of the Group's own transferable financial instruments, property occupied by, or other assets used by the Group.
The movement in the net pension asset (before deferred tax) is set out below:
30 September 30 September 31 March
2022 2021
(unaudited) (unaudited) 2022
All figures in GBP million (audited)
------------------------------------------ ------------- ------------- -----------
Opening net pension asset before deferred
tax 362.2 214.3 214.3
Net finance income 4.9 2.3 4.5
Net actuarial (loss)/gain (157.5) 61.5 144.0
Contributions by the employer - - 2.9
Past service cost - - (2.4)
Administration expenses (0.6) (0.7) (1.1)
Closing net pension asset before deferred
tax 209.0 277.4 362.2
------------------------------------------ ------------- ------------- -----------
Assumptions
The major assumptions used in the IAS 19 valuations of the Scheme were:
30 September 30 September 31 March 2022
2022 (unaudited) 2021 (unaudited)
(audited)
Un-insured Insured Un-insured Insured Un-insured Insured
members members members members members members
-------------------------------- ---------- -------- ---------- -------- ---------- --------
Discount rate applied to Scheme
liabilities 4.95% 5.35% 2.10% 2.05% 2.70% 2.80%
CPI inflation assumption 3.00% 2.95% 2.75% 2.70% 2.90% 3.00%
Net rate (discount rate less
inflation) 1.95% 2.40% (0.65%) (0.65%) (0.20%) (0.20%)
Assumed life expectancies(at
age 60) in years:
For males currently aged
40 28.4 n/a 28.4 n/a 28.4 n/a
For females currently aged
40 30.7 n/a 30.7 n/a 30.7 n/a
For males currently aged
60 26.7 22.0^ 26.7 23.2^ 26.7 22.0^
For females currently aged
60 28.6 23.7^ 28.6 25.4^ 28.6 23.7^
-------------------------------- ---------- -------- ---------- -------- ---------- --------
^For pensioners currently aged 65
Risks
The Group is exposed to a number of risks in respect to the valuation of the Scheme, the most significant of which are detailed below:
Volatility in market conditions
Results under IAS 19 can change dramatically depending on market conditions. The present value of Scheme liabilities is linked to yields on AA-rated corporate bonds, while many of the assets of the Scheme are invested in various forms of assets subject to fluctuating valuations. Changing markets in conjunction with discount rate volatility will lead to volatility in the net pension asset on the Group's balance sheet and in other comprehensive income. To a lesser extent this will also lead to volatility in the IAS 19 pension net finance income in the Group's income statement.
Choice of accounting assumptions
The calculation of the present value of Scheme liabilities involves projecting future cash flows from the Scheme many years into the future. This means that the assumptions used can have a material impact on the balance sheet position and profit and loss charge. In practice future experience within the Scheme may not be in line with the assumptions adopted. For example, members could live longer than foreseen or inflation could be higher or lower than allowed for in the calculation of the liabilities. Sensitivities to the main assumptions are set out below.
Indicative impact Indicative impact
on Scheme assets Indicative impact on net pension
Key assumptions on Scheme liabilities asset
-------------------- ----------------------
Increase discount rate
by 0.1% Decrease by GBP36.2m Decrease by GBP19.6m Decrease by GBP16.6m
Increase rate of inflation
by 0.1% Increase by GBP26.2m Increase by GBP12.2m Increase by GBP14.0m
Increase life expectancy
by one year Increase by GBP20.1m Increase by GBP45.5m Decrease by GBP25.4m
-------------------------- -------------------- ---------------------- --------------------
The impact of movements in Scheme liabilities will, to an extent, be offset by movements in the value of Scheme assets as the Scheme has assets invested in a Liability Driven Investment Portfolio. As at 30 September 2022 this hedges against approximately 95% of the interest rate risk and also 95% of the inflation rate risk, as measured on the Trustees' gilt-funded basis. Post period end, due to the increased volatility in gilt yields and reflecting increased liquidity requirements for Schemes running LDI portfolios, the hedges have been amended to cover approximately 65% of the interest rate risk and 80% of the inflation rate risk, as measured on the Trustees' gilt-funded basis.
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (projected unit credit method) has been applied as when calculating the pension liability recognised within the statement of financial position. The methods and types of assumption did not change.
In addition to the sensitivity of the liability side of the net pension asset (which will impact the value of the net pension asset) the net pension asset is also exposed to significant variation due to changes in the fair value of Scheme assets. A specific sensitivity on assets has not been included in the above table but any change in valuation of assets flows straight through to the value of the net pension asset e.g. if equities fall by GBP10m then the net pension asset falls by GBP10m. The values of unquoted assets assume that an available buyer is willing to purchase those assets at that value. For the Group's portfolio of assets, the unquoted alternative bonds, unquoted corporate bonds, unquoted equities and the property assets of GBP242.7m, GBP94.4m, GBP41.2m and GBP13.9m respectively are the assets with most uncertainty as to valuation as at 30 September 2022.
The accounting assumptions noted above are used to calculate the period end present value of Scheme liabilities in accordance with the relevant accounting standard, IAS 19 (revised) 'Employee benefits'. Changes in these assumptions have no impact on the Group's cash payments into the Scheme. The payments into the Scheme are reassessed after every triennial valuation. The latest completed triennial valuation of the Scheme was a net surplus of GBP176.5m as at 30 June 2020. The triennial valuations are calculated on a 'funding basis' and use a different set of assumptions, as agreed with the pension Trustees. The key assumption that varies between the two methods of valuation is the discount rate. The funding basis valuation uses the risk-free rate from UK gilts as the base for calculating the discount rate, whilst the IAS 19 accounting basis valuation uses corporate bond yields as the base.
14. Own shares and share-based awards
Own shares represent shares in the Company that are held by independent trusts and include treasury shares and shares held by the employee share ownership plan. Included in retained earnings at 30 September 2022 are 4,228,478 shares (31 March 2022: 6,816,291 shares).
In H1 FY23 the Group granted 0.2 million new share-based awards to employees (H1 FY22: 0.4 million).
15. Related party transactions with equity accounted investments
During H1 FY23 there were sales to associates and joint ventures of GBP0.3m (H1 FY22: GBP2.4m). At the period end there were outstanding receivables from associates and joint ventures of GBP0.5m (30 September 2021: GBP1.1m).
Capital commitments
16.
The Group has the following capital commitments for which no provision has been made:
31 March 2022
30 September
all figures in GBP million 2022 (unaudited) (audited)
--------------------------- ----------------- -------------
Contracted 53.3 34.7
------------------------------- ----------------- -------------
Capital commitments at 30 September 2022 include GBP26.3m (31 March 2022: GBP24.5m) in relation to property, plant and equipment that will be wholly funded by a third party customer under a long-term contract arrangement. These primarily relate to investments under the LTPA contract.
17. Contingent liabilities
The Company has on occasion been required to take legal action to protect its intellectual property rights, to enforce commercial contracts or otherwise and similarly to defend itself against proceedings brought by other parties, including in respect of environmental and regulatory issues. Provisions are made for the expected costs associated with such matters, based on past experience of similar items and other known factors, taking into account professional advice received, and represent management's best estimate of the likely outcome. The timing of utilisation of these provisions is uncertain pending the outcome of various court proceedings, ongoing investigations and negotiations. However, no provision is made for proceedings which have been or might be brought by other parties unless management, taking into account professional advice received, assesses that it is more likely than not that such proceedings may be successful. Contingent liabilities associated with such proceedings have been identified but the Directors are of the opinion that any associated claims that might be brought can be resisted successfully and therefore the possibility of any outflow in settlement is assessed as remote.
18. Post balance sheet events (disposal group held for sale)
Subsequent to the period end the Group completed a transaction for the disposal of the non-core Space NV business for a cash consideration of EUR32m (on a cash-free debt-free basis). The assets and liabilities of Space NV have been reclassified as Assets held for sale and Liabilities of disposal group held for sale as at 30 September 2022.
Responsibility statements of the Directors in respect of the interim financial report
The Directors confirm that these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:
-- an indication of important events that have occurred during
the first six months and their impact on the condensed set
of financial statements, and a description of the principal
risks and uncertainties for the remaining six months of the
financial year; and
-- material related-party transactions in the first six months
and any material changes in the related-party transactions
described in the last annual report.
The Directors of QinetiQ Group plc are listed in the QinetiQ Group plc Annual Report for 31 March 2022. A list of current directors is maintained on the QinetiQ Group plc website: www.qinetiq.com .
By order of the Board
Steve Wadey Carol Borg
Chief Executive Officer Chief Financial
Officer
10 November 2022 10 November 2022
Independent review report to QinetiQ Group plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed QinetiQ Group plc's condensed consolidated interim financial statements (the 'interim financial statements') in the Interim Results of QinetiQ Group plc for the 6 month period ended 30 September 2022 (the "period").
Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
-- the Condensed consolidated balance sheet as at 30 September
2022;
-- the Condensed consolidated income statement and Condensed consolidated
statement of comprehensive income for the period then ended;
-- the Condensed consolidated cash flow statement for the period
then ended;
-- the Condensed consolidated statement of changes in equity for
the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Results of QinetiQ Group plc have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed. This conclusion is based on the review procedures performed in accordance with this ISRE. However, future events or conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Interim Results, including the interim financial statements, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the Interim Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. In preparing the Interim Results including the interim financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial statements in the Interim Results based on our review. Our conclusion, including our Conclusions relating to going concern, is based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion paragraph of this report. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
Southampton
10 November 2022
Glossary
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation and amortisation
EPS Earnings per share
EDP Engineering Delivery Partner
IAS International Accounting Standards
IFRS International Financial Reporting Standards
LTPA Long Term Partnering Agreement: A 25-year contract (re-priced
every five years) established in 2003 to manage the MOD's
ranges.
MOD UK Ministry of Defence
SGAC Statutory Guidance for Allowable Costs regulations
SSRO Single Source Regulations Office
T&E Test and Evaluation
Alternative performance measures ('APMs')
The Group uses various non-statutory measures of performance, or APMs. Such APMs are used by management internally to monitor and manage the Group's performance and also allow the reader to obtain a proper understanding of performance (in conjunction with statutory financial measures of performance). The APMs used by QinetiQ are set out below:
Measure Explanation Note reference
to calculation
or reconciliation
to statutory
measure
Organic growth The level of period-on-period growth, 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 3
before/after tax to exclude 'specific adjusting items'.
------------------------------------------------ -------------------
Underlying effective The tax charge for the period 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'.
------------------------------------------------ -------------------
Amortisation of intangible assets Note 3
Specific adjusting arising from acquisitions; acquisition-related
items costs; impairment of property; gains/losses
on disposal of property, investments
and intellectual property; net pension
finance income; pension past service
costs, acquisition and disposal costs;
costs of significant group-wide restructuring
programmes; Digital investment, tax
impact of the preceding items; and
significant non-recurring tax movements.
------------------------------------------------ -------------------
Orders The level of new orders (and amendments N/A
to existing orders) booked in the
period.
------------------------------------------------ -------------------
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 period to revenue for the period,
adjusted to exclude revenue from
the 25-year LTPA contract due to
the significant size and timing differences
of LTPA order and revenue recognition
which may distort the ratio calculation.
------------------------------------------------ -------------------
Net cash Net cash as defined by the Group Note 8
combines cash and cash equivalents
with other financial assets and liabilities,
primarily available for sale investments,
derivative financial instruments
and lease assets/ liabilities.
------------------------------------------------ -------------------
Underlying net cash Net cash flow from operations before Note 9
flow from operations cash flows of specific adjusting
items.
------------------------------------------------ -------------------
Underlying operating The ratio of underlying net cash Note 9
cash conversion flow from operations to underlying
EBITDA.
------------------------------------------------ -------------------
Underlying EBITDA EBITDA (as defined above), adjusted Note 9
to exclude 'specific adjusting items'.
------------------------------------------------ -------------------
Free cash flow Underlying net cash flow from operations Note 9
less net tax and interest payments
less purchases of intangible assets
and property, plant and equipment
plus proceeds from disposal of plant
and equipment.
------------------------------------------------ -------------------
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END
IR FSIEDUEESEEF
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