QinetiQ Group plc Interim Results

Data : 14/11/2019 @ 08:00
Fonte : UK Regulatory (RNS & others)
Titolo : Qinetiq Group Plc (QQ.)
Quotazione : 340.0  -0.6 (-0.18%) @ 17:35
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QinetiQ Group plc Interim Results

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1 Mese : Da Nov 2019 a Dic 2019

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RNS Number : 3449T

QinetiQ Group plc

14 November 2019

Interim Results

14 November 2019

Customer focus and strategic progress delivers profitable growth

Results for six months to 30 September 2019

 
                                    Statutory results        Underlying* results 
                                   H1 2020    H1 2019^      H1 2020       H1 2019^ 
 Revenue                          GBP486.5m   GBP420.3m     GBP486.5m     GBP420.3m 
 Operating profit                  GBP68.5m    GBP47.8m      GBP59.7m      GBP51.6m 
 Profit after tax                  GBP62.2m    GBP50.1m      GBP52.0m      GBP45.8m 
 Earnings per share                   11.0p        8.9p          9.2p          8.1p 
 Interim dividend per share            2.2p        2.1p          2.2p          2.1p 
 
 Total funded order backlog                               GBP3,083.6m   GBP1,882.1m 
 Total orders in the period(1)                              GBP410.8m     GBP298.1m 
 
 Net cash flow from operations     GBP77.0m    GBP54.9m      GBP77.0m      GBP54.9m 
 Net cash                         GBP173.5m   GBP220.8m     GBP173.5m     GBP220.8m 
 

* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary.

^ Restated due to the retrospective adoption of new accounting standard, IFRS 16, in respect of finance leases. Refer to Note 1.

(1) H1 2020 excludes LTPA contract amendment signed 5 April 2019.

Delivered strong operational and financial performance

 
 -   38% increase in orders, 30% on an organic basis, driven by growth 
      across the Group 
 -   16% revenue growth, 10% on an organic basis, driven by good performance 
      in both divisions 
 -   Underlying operating profit up 16% including GBP1.6m non-recurring 
      trading items (H1 2019: nil), excluding them up 8% on an organic 
      basis 
 -   Strong cash performance with 129% underlying cash conversion pre-capex 
 -   Underlying EPS up 14%; 2.2p interim dividend - one third of FY19 
      full year dividend 
 

Continued focus on strategy implementation

 
 -   On-track with delivery of new LTPA contract for UK Ministry of 
      Defence (MOD) 
 -   Grown international revenue to GBP150.8m (H1 2019: GBP129.7m) 
      - 31% of total revenue 
 -   Won GBP67m secure navigation programme for UK MOD 
 -   Good acquisition performance, including 50% growth in QinetiQ 
      Target Systems revenue 
 -   Announced acquisition of MTEQ; US presence to increase to c25% 
      of Group revenue 
 

Priorities and expectations for the remainder of the year

 
 -   Operational performance; 96% of forecast FY20 revenue under contract 
      (H1 2019: 90%) 
 -   Win further competitions and pursue campaigns globally 
 -   Drive sustainable profitable growth through continued investment 
 -   Maintaining expectations for Group operating profit in FY20 
 

Steve Wadey, Group Chief Executive Officer said:

"Our strategy to drive value for our customers and shareholders continues to gather momentum. We delivered a strong first half result, with organic growth in orders, revenue and profit driven by a good performance across our businesses, both in the UK and internationally. We are maintaining expectations for full year operating profit with high single digit revenue growth.

"Our focus for the remainder of the year is to win further campaigns globally, successfully deliver key programmes, and complete the acquisition of MTEQ to transform the scale of our US operations as we build an integrated, global defence and security company."

Interims results presentation:

Results will be webcast at 0900 hours UK time on 14 November 2019 at: www.qinetiq.com/investors through which analysts and investors will be able to ask questions.

A listen-only audiocast of the event will also be available by dialling +44 20 3936 2999, Participant Access Code: 809002

About QinetiQ:

QinetiQ (QQ.L) is a leading science and engineering company operating primarily in the defence, security and critical infrastructure markets. We work in partnership with our customers to solve real world problems through innovative solutions delivering operational and competitive advantage. Visit our website www.QinetiQ.com. Follow us on LinkedIn and Twitter @QinetiQ. Visit our blog www.QinetiQ-blogs.com.

For further information please contact:

 
 David Bishop, Group Director Investor Relations 
  and Communications:                               +44 (0) 7920 108675 
 Ian Brown, Group Head of Investor Relations:       +44 (0) 7908 251123 
 Jon Hay-Campbell, Group Head of Communications:    +44 (0) 7500 856953 
 

Basis of preparation:

Throughout this Interim Report, certain measures are used to describe the Group's financial performance which are not recognised under IFRS or other generally accepted accounting principles (GAAP). The Group's Directors and management assess financial performance based on underlying measures of performance, which are adjusted to exclude certain 'specific adjusting items'. In the 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 (FY20, FY19, 2020, 2019) refer to the year ended 31 March. H1 2020 and H1 2019 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

As our growth strategy gathers momentum, we have delivered a strong first half result driven by a good performance in all our businesses, both in the UK and internationally. On an organic basis, we have grown orders by 30%, revenue by 10% and operating profit by 8% excluding non-recurring trading items. We also delivered a strong cash performance with 129% conversion before capital expenditure.

Strong organic growth was complemented by revenue and profit growth in QinetiQ Germany, previously known as EIS Aircraft Operations which we acquired in October 2018, and Inzpire, in which we acquired an 85% interest in November 2018. The integration of QinetiQ Germany is progressing well and we have been able to deploy the capabilities of both Inzpire and our new business in Germany to support Group-wide opportunities globally. As we continue to successfully grow, our focus remains on the effectiveness of our bidding, programme delivery and acquisition integration.

A significant addressable market and a clear value proposition to our customers

We have an addressable market of more than GBP8bn per annum across Research, Development, Test & Evaluation, Training & Rehearsal and Services & Products. By focusing on our core offerings and target markets we have plenty of opportunities for growth.

Our strategic progress and growth has been supported by a clear definition of our unique value proposition to our customers. QinetiQ's inherent strengths are the expertise of our people, our independence from the supply chain and our ability to effectively partner with academia, SMEs and other industry contractors to deliver customer solutions.

Using these strengths we help our customers to:

 
 -   Create it. We develop cutting-edge technology and turn it into 
      capability; 
 -   Test it. We test capabilities to ensure they work when they are 
      critically needed; and, 
 -   Use it. We enable our customers to be trained and operationally 
      ready. 
 

Good strategic progress

During H1 2020, we have made consistent progress against our strategy of leading and modernising UK test & evaluation, growing our business internationally and delivering innovation for our customers' advantage.

1. UK Test & Evaluation

We are already seeing the benefits of our investment in the Long Term Partnering Agreement (LTPA) with the UK MOD under the December 2016 contract amendment. In May, we successfully hosted Formidable Shield 2019 for the US Navy, an example of the complex international trials we can facilitate for our customers thanks to the investment and modernisation we are delivering. This event is now expected to be repeated every two years, increasing in complexity and scale to more closely reflect the threats our customers face. The investment into the LTPA secures revenues until 2028 and delivers appropriate and contracted returns - returns we are able to enhance further by driving greater throughput.

Having secured the second amendment to the LTPA in April 2019, our attention is on ensuring we successfully transition to the new ways of working which will enable us to fulfil the potential of the contract. The contract incorporates a two-year transition period from the old, input-based ways of working to modern, relevant and output-based ones. We are making good progress and during H1 successfully met two key customer milestones associated with our delivery during this transition period.

Building on the modernisation of the LTPA, we were awarded a further GBP19m contract to reduce the electromagnetic and acoustic signatures of the UK Royal Navy's submarines and ships, enhancing their operational effectiveness. Over a dozen services will be made available through the LTPA using the new output-based approach to deliver a more cost effective service to the Royal Navy.

2. International

Our International business unit continues to grow. In the first half of the year we grew orders in our International business unit by more than 50% on an organic basis, almost doubling them when the contribution from QinetiQ Germany is included. The strong performance of QinetiQ Target Systems (QTS), acquired in FY17, also continued as it doubled its orders and delivered a 50% increase in revenue. With carefully focused investment, QTS has developed two new products: Rattler, a low-cost supersonic target that represents missile threats, and the Next-Generation Banshee, which replicates fast flying jets and missiles. In Australia, we also grew orders and revenue as our status as a Major Service Provider (MSP) to the Australian Government increased the volume of work we won and delivered.

Shortly after the end of the period we were pleased to announce the acquisition of MTEQ, a leading US provider of advanced sensing solutions with a strong reputation for mission-led innovation. The acquisition has a number of strategic benefits to QinetiQ: MTEQ has a strong track record and further growth potential in an expanding sensors market, it accelerates our growth in the US, the world's largest defence and security market, and it strengthens implementation of our international growth and innovation strategy across the Group. For example, we expect to be able to combine MTEQ's expertise in advanced sensors with our existing capabilities in robotics and autonomy. The acquisition is subject to regulatory approval and is expected to close towards the end of FY20, creating a US operation of c.$300m and c.750 employees.

3. Innovation

We are making good progress on our innovation strategy, combining our people's expertise with commercially relevant propositions.

An example of this approach in action was the award in September of a GBP67 million contract with the UK Government to develop the next generation of multi-constellation satellite receivers under the UK Robust Global Navigation System (R-GNS) programme. This contract was won as a result of our investment in sovereign cutting-edge technology and our innovative commercial approach, including developing a strategic partnership with Collins Aerospace (announced in May 2017). In addition to supporting the UK MOD, this contract also provides us with a platform to sell the capability to other international customers.

We have made further progress on the 10-year Engineering Delivery Partner (EDP) contract adding GBP60m of orders during H1 2020, bringing the total to GBP129m since the contract was signed in October 2019. EDP is an example of applying an innovative approach to address key customer challenges. The MOD's procurement agency DE&S is responsible for the procurement and support of equipment and services that the UK armed forces need to operate effectively, and uses EDP as the default route for procuring engineering services, with QinetiQ as prime contractor. We deliver the services working in collaboration with our partners, Atkins and BMT, and a supply chain of over 80 small and medium sized enterprises. This significantly streamlines the procurement process for engineering services for DE&S and wider MOD, improving availability and ensuring quality, particularly for highly specialised requirements. As a single source contract and given its minimal capital requirements, the margin we make on EDP, and other similar contracts, is lower than our average Group margin, but remains well in line with the defence industry more generally and delivers appropriate returns. We expect EDP to be a growth driver of our UK business in the medium to long term.

In July 2018, we were awarded a contract worth up to GBP95 million to deliver Private Sector Support to the Battlefield Tactical Communication and Information Systems (BATCIS) Delivery Team within Information Systems and Services which is part of the UK MOD's Joint Forces Command. The award is strategically important for QinetiQ as it demonstrates our increasing customer focus and more strategic approach to business winning. The contract was a key driver of growth of the Cyber, Information and Training (CIT) business during H1 2020.

Outlook - FY20

We delivered a strong first half result, with organic growth in orders, revenue and profit driven by good performance in all our businesses, both in the UK and internationally. We are maintaining expectations for full year operating profit with high single digit revenue growth.

Outlook - Longer term

We will continue to grow by implementing our strategy and investing in our people, technology, systems and infrastructure. By doing so, our objective is to deliver continued organic revenue growth, further supported by acquisitions, resulting in sustainable profitable growth at stable margins.

Chief Financial Officer's Review

We delivered a strong performance in the period with orders of GBP410.8m, compared to GBP298.1m in the same period a year ago. Excluding foreign exchange and the impact of acquired businesses, orders grew organically by GBP89.7m (30%). This increase was primarily driven by the multi-year GBP67m order for the UK Robust Global Navigation System (R-GNS) programme and GBP60m orders through the EDP contract.

Revenue visibility remains good and the Group's total funded order backlog at 30 September 2019 stood at GBP3.1bn, compared with GBP1.9bn in the comparable period, the step-up primarily due to the LTPA contract amendment signed on 5 April 2019. At the start of H2 2020, the Group had 96% of FY20 revenue under contract, up from 74% at the beginning of the financial year. This compares with 90% at the same time last year.

Revenue was GBP486.5m (H1 2019: GBP420.3m), up 10% on an organic basis. Overall organic growth was principally due to the increase of revenue in EMEA Services which was up 9% on an organic basis, driven by new work delivered under EDP and the Battlefield Tactical Communications Information Systems (BATCIS) contract. Global Products revenue was up 14% organically, principally driven by sales of target systems.

Underlying operating profit was GBP59.7m (H1 2019 restated: GBP51.6m - see note 1), with the increase assisted by GBP1.6m of non-recurring trading items in H1 2020 (H1 2019: nil) in respect of a gain on sale of aircraft and spares. There was also a contribution of GBP2.1m from QinetiQ Germany and Inzpire Ltd which were acquired in H2 2019.

Excluding the non-recurring trading items, acquisitions and the effect of foreign exchange, underlying operating profit was up GBP4.2m (8%) on an organic basis. Margin pressure as a result of single source regulations has abated in this period as expected, although organic operating profit growth in EMEA Services reflects the higher volume of work under the EDP contract which, given its minimal capital requirements, delivers a margin more in line with the prevailing norm in the UK defence industry. Operating profit in Global Products increased by GBP3.1m (30%) during H1 2020 as the result of increased sales of higher margin products in QinetiQ Target Systems.

Statutory operating profit, including the impact of specific adjusting items, was GBP68.5m (H1 2019 restated: GBP47.8m). Current period specific adjusting items were an GBP8.8m gain at the operating profit level (H1 2019: GBP3.8m loss) and included a GBP13.3m profit on disposal of surplus property. See note 3 for full details of all specific adjusting items.

Underlying net finance expense was GBP0.4m (H1 2019 restated: GBP0.3m) and the underlying tax charge was GBP7.3m (H1 2019 restated: GBP5.5m). This resulted in an underlying profit after tax of GBP52.0m (H1 2019 restated: GBP45.8m).

Underlying earnings per share for the Group were 9.2p (H1 2019 restated: 8.1p), with the increase primarily due to strong trading and top line revenue growth. Statutory basic earnings per share for the total Group (including specific adjusting items) were 11.0p (H1 2019: 8.9p) with the current period enhanced by the inclusion of a GBP13.3m gain on disposal of surplus property.

We delivered strong cash performance during H1 2020, with net cash flows from operations of GBP77.0m (H1 2019 restated: GBP54.9m), resulting in cash conversion, before capital expenditure, of 129%.

Working capital outflow was GBP5.1m in H1 2020 compared with GBP18.5m in H1 2019. We anticipate a full year working capital outflow of GBP20-30m.

Net capex for the period was GBP38.8m (H1 2019: GBP48.3m). 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 GBP80-100m.

In October we announced the acquisition of Manufacturing Techniques Inc. (MTEQ) on a cash-free, debt-free basis for $105m to be paid on completion, and an earn-out of $20m payable in cash and shares dependent upon performance over three years. The transaction is subject to US Government approval and is expected to close towards the end of FY20.

At 30 September 2019 the Group had GBP173.5m net cash, compared to GBP161.3m at 31 March 2019 (restated from GBP188.5m due to the retrospective adoption of the new accounting standard, IFRS 16, in respect of leases).

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 bolt-on acquisitions where there 
       is a strong strategic fit; 
 2.   The maintenance of necessary balance sheet strength; 
 3.   A progressive dividend; and 
 4.   The return of excess cash to shareholders. 
 

An interim dividend of 2.2p (H1 2019: 2.1p) will be paid on 7 February 2020 to shareholders on the register at 10 January 2020. The interim dividend represents one third of the prior year total dividend reflecting our previously communicated methodology. The full year dividend will be proposed in May.

Trading environment

QinetiQ operates principally in three home countries: the United Kingdom, the United States and Australia. We define home countries as ones where we have a significant indigenous industrial presence of scale. In addition to our home countries, we sell directly from our home countries into other geographies as well as having smaller operations in countries such as Canada, Germany, Belgium and Sweden.

UK

The additional GBP2.2bn of funding allocated to the MOD as part of the Autumn spending round provides near term support to UK defence budgets and includes GBP1.2bn in FY21 for key priority programmes. With the threat environment continually evolving, the MOD is tasked with enhancing its capability, whilst also delivering efficiencies elsewhere. Defence policy therefore remains focused on driving innovation and generating new technologies to support this. With innovation at the core of our strategy QinetiQ remains well positioned to help the MOD in achieving its ambitions, as evidenced by the renegotiated LTPA contract where we are delivering enhanced Test & Evaluation to the MOD and also saving the customer GBP85m over the remainder of the contract.

Longer term, the budgetary environment is likely to be governed by a three-year spending review scheduled for 2020, with the outcome of this largely dependent on the nature of the UK's departure from the European Union and the outcome of the General Election in December 2019.

US

The US continues to be the largest defence market in the world and the Department of Defense budget request for $718bn in FY20 implies further growth. In addition, a deteriorating geopolitical environment combined with the need to maintain a superior technological advantage in such an environment is likely to support growth beyond FY20. QinetiQ continues to support the US in the modernisation of its defence capabilities with our expertise in robotics and unmanned systems well aligned with the DoD's ambitions to make greater use of this technology. Our acquisition of MTEQ, a business with a strong reputation for rapidly developing and fielding operationally relevant advanced sensor solutions, enhances our offering in the US market and creates further opportunities for QinetiQ to grow in the world's largest defence market.

Australia

Modernising and enhancing defence capability remains a key priority for the Australian military with the core focus being the modernisation of naval platforms. Defence spending has grown over recent years and core defence spending is likely to hit 2% of GDP by FY21. The 2018 Defence Industrial Capability Plan outlined ten areas of focus critical to enhancing Australian sovereign industrial capability, including conducting Test & Evaluation and advancing signal processing capability in electronic warfare. We continue to grow our presence in Australia supporting the modernisation of their capability through Test and Evaluation and see further opportunities to build on this offering.

International markets

To achieve our ambition of growing international revenue to 50% of total Group revenue we will need to grow not just in our home countries but also in broader international markets. We aim to leverage the skills and expertise developed in our home countries to support allies in high growth markets in developing their own indigenous capability. We have identified Canada and Germany as priority markets and also operate three joint ventures in the Middle East. Canada is a significant market outside of our home countries and the drive to modernise defence platforms in the region supports defence spending. In Germany, the need to modernise key defence platforms continues to present opportunities and we will look to leverage both our existing in-country capability, established through the acquisition of EIS Aircraft Operations, and Group-wide expertise to support these opportunities.

Business overview

EMEA Services

 
                                H1 2020   H1 2019^ 
                                   GBPm       GBPm 
-----------------------------  --------  --------- 
Orders (incl. JVs)(1)             308.4      196.1 
Revenue                           369.1      319.9 
Underlying operating profit*       46.2       41.2 
Underlying operating margin*      12.5%      12.9% 
Book to bill ratio(2)              1.2x       0.9x 
Funded order backlog excl. 
 LTPA                             823.8      683.7 
Total funded order backlog 
 incl. LTPA                     2,872.0    1,674.6 
-----------------------------  --------  --------- 
 
   *     Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary. 

^ Underlying operating profit and margin have been restated due to adoption of IFRS 16 'Leases'.

(1) 2020 excludes LTPA contract amendment signed 5 April 2019.

(2) B2B ratio is orders won divided by revenue recognised, excluding the LTPA contract.

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 57% to GBP308.4m (H1 2019: GBP196.1m), driven by a GBP67m contract for the UK Robust Global Navigation System (R-GNS) programme and GBP60m orders under the Engineering Delivery Partner (EDP) contract.

Revenue increased 9% on an organic basis as a result of new work delivered under EDP and the Battlefield Tactical Communications and Information Systems (BATCIS) contract. At the start of H2 2020, EMEA Services had 98% of its forecast FY20 revenue under contract, compared with 91% at the same point last year and up from 79% at the beginning of FY20.

Underlying operating profit grew to GBP46.2m (H1 2019 restated: GBP41.2m), including a GBP1.6m benefit from non-recurring trading items in H1 2020 (H1 2019: nil) in respect of a gain on sale of aircraft and spares. There was also a contribution of GBP2.1m from QinetiQ Germany and Inzpire Ltd acquired in H2 2019 which was not in the comparator period. Excluding non-recurring trading items, acquisitions and foreign exchange, underlying operating profit was up 3% (H1 2019: 0%) with margins impacted by the higher volume of work under the EDP contract.

Including the LTPA, approximately 70% of EMEA Services revenue is derived from single source contracts (2019: approximately 70%). By investing in our core contracts and extending their duration we have increased the proportion of single source revenue contracted on a long-term basis providing visibility and reducing our exposure to future changes in the baseline profit rate set annually by the Single Source Regulations Office.

H1 commentary

Air & Space

The Air & Space business de-risks complex aerospace programmes by evaluating systems and equipment, evaluating the risks and assuring safety.

 
 -   In June 2019, the transformed Empire Test Pilots' School (ETPS) 
      was formally opened by Air Chief Marshal Sir Stephen Hillier. 
      Following investment under the December 2016 LTPA amendment, 
      ETPS is now equipped to provide relevant, affordable and world-class 
      test aircrew training. Building on this investment we have experienced 
      strong demand for both short and long ETPS courses, in particular 
      from international customers. 
 -   Engineering Delivery Partner (EDP), our innovative delivery model 
      for engineering services to the MOD's procurement agency DE&S, 
      continued to drive performance in our Air & Space business, with 
      total orders of GBP60m in H1 and GBP129m since the contract was 
      signed. Within this we secured an GBP11m contract to provide 
      independent technical evaluation services on the F35 Lightning 
      II aircraft, to ensure it meets the requirements of the UK RAF 
      and Royal Navy. 
 

Maritime, Land & Weapons (MLW)

The MLW business delivers operational advantage to customers by providing independent research, evaluation and training services.

 
 -   In April 2019, we signed a GBP1.3bn amendment to the LTPA to 
      cover sites and capabilities not included in the December 2016 
      amendment. QinetiQ is now in a two year transition period to 
      deliver the new modern ways of working covered under the contract. 
      Key milestones during the transition period have been agreed 
      with the customer, and we were pleased to have successfully met 
      the first two of these on time. We are focused on the successful 
      delivery of this transition period, the conclusion of which will 
      enable us to realise the full benefits of the modernised LTPA. 
 -   We successfully supported the delivery of Formidable Shield 2019, 
      a live-fire exercise testing integrated air and missile defence 
      capabilities led by the US Navy, involving over 3,300 personnel 
      and 12 warships. Increasingly complex trials such as Formidable 
      Shield 2019 have been facilitated by our investment in UK T&E 
      and are aligned with growing customer requirements. 
 -   We were awarded a GBP19m contract to provide electromagnetic 
      and acoustic mapping services to the Royal Navy through the LTPA 
      contract. The Operational Assessment of Signatures Informing 
      Susceptibility (OASIS) contract will help reduce the detectability 
      of the Royal Navy's ships and submarines, improving their operational 
      advantage. 
 

Cyber, Information & Training (CIT)

The CIT business helps government and commercial customers respond to fast-evolving threats based on its expertise in training, secure communication networks and devices, intelligence gathering and surveillance sensors, and cyber security.

 
 -   The CIT business secured a GBP67m contract with the UK MOD to 
      develop secured satellite navigation receivers. Under the UK 
      Robust Global Navigation System (R-GNS) programme, QinetiQ, along 
      with our partner Collins Aerospace, will deliver an accurate 
      and resilient positioning, navigation and timing capability to 
      the UK MOD. This is a significant strategic milestone for our 
      CIT business supported by our expertise in secure communications 
      systems. 
 -   Building on our expertise in secure communication systems we 
      booked GBP16m orders under a new GBP20m contract to provide assurance 
      and testing services on a new air-to-ground communications system 
      for all police and air ambulance aircraft. 
 -   The on-going delivery of BATCIS, where QinetiQ is supporting 
      the development of next generation Tactical Communication and 
      Information Systems is progressing well and made a notable contribution 
      to a good performance in the first half. 
 -   In November 2018 we completed a strategic investment in Inzpire, 
      the highly regarded provider of training services principally 
      to the Royal Air Force and British Army. Inzpire has performed 
      well and is delivering growth since we made this strategic investment. 
 

International

Our International business leverages our expertise and the skills we have developed in the UK and applies them to opportunities in attractive markets globally.

 
 -   We have delivered a very positive performance across our International 
      business in H1 2020, with strong growth in orders, revenue and 
      operating profit. 
 -   Performance in Australia, the largest component of our International 
      business, has been strong during H1 2020, underpinned by its 
      status as a Major Service Provider to the Australian Government 
      working in partnership with Nova Systems. 
 -   The integration of QinetiQ Germany following the completion of 
      the acquisition in October 2018 is proceeding well and we have 
      been able to leverage its capabilities in other key markets. 
      As part of the LTPA air range modernisation programme agreed 
      in December 2016, QinetiQ Germany has secured a EUR10m contract 
      to provide range clearance services in the UK over the next nine 
      years. These services will utilise QinetiQ Germany's fleet of 
      PC-12 aircraft configured as maritime patrol aircraft. 
 
 

Global Products

 
                                H1 2020   H1 2019^ 
                                   GBPm       GBPm 
-----------------------------  --------  --------- 
Orders                            102.4      102.0 
Revenue                           117.4      100.4 
Underlying operating profit*       13.5       10.4 
Underlying operating margin*      11.5%      10.4% 
Book to bill ratio                 0.9x       1.0x 
Funded order backlog              211.6      207.5 
-----------------------------  --------  --------- 
 

* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary.

^ Underlying operating profit and margin have been restated due to adoption of IFRS 16 'Leases'.

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 were stable at GBP102.4m (H1 2019: GBP102.0m).

Reported revenue was up 17% to GBP117.4m (H1 2019: GBP100.4m), principally driven by QinetiQ Target Systems. Revenue was up 14% (GBP14.0m) on an organic basis, excluding foreign exchange.

At the beginning of H2, the division had 89% of its forecast FY20 revenue under contract compared to 86% at the same point last year and up from 60% at the beginning of the financial year.

Underlying operating profit increased to GBP13.5m (H1 2019 restated: GBP10.4m), with an underlying operating profit margin of 11.5% (H1 2019: 10.4%). This was driven by increased sales of higher margin products in QinetiQ Target Systems.

H1 commentary

QinetiQ North America

QinetiQ North America (QNA) develops and produces innovative military protection products, specialising in unmanned systems, survivability and maritime systems, along with products in related commercial markets.

 
 -   QNA continues to provide innovative solutions in the Land and 
      Maritime domains for our customers, with strong performance in 
      the period primarily driven by robotics orders. 
 -   In March 2019, we were awarded the US Army's Common Robotic System-Individual 
      (CRS(I)) program of record. QNA has successfully completed the 
      first set of deliveries under the CRS(I) production contact. 
 -   In larger unmanned ground vehicles, QNA has partnered with Pratt 
      & Miller Defense to submit a bid based on a variant of the Expeditionary 
      Modular Autonomous Vehicle into the competition for the Robotic 
      Combat Vehicle program of record. This submission will leverage 
      QNA's modular open architecture unmanned ground vehicle control 
      systems integrated with Pratt & Miller's advanced mobility platform. 
 -   In the maritime domain, QNA was awarded a contract by General 
      Dynamics Electric Boat to design, test and qualify a next generation 
      Electronic Grounding Unit for Virginia Class submarines. 
 

OptaSense

OptaSense provides innovative fibre sensing solutions to deliver decision ready data in multiple vertical markets.

 
 -   OptaSense performance during the period was positive with growth 
      in revenues and profits. 
 -   Orders declined slightly, following a tougher comparator in the 
      prior period and slippage of confirmed orders into H2. 
 -   While the oil and gas end market remains challenging, we have 
      seen encouraging progress in the uptake of OptaSense in key international 
      basins. 
 -   Demand for linear assets protection, pipelines, perimeters and 
      transport, also continued to improve with significant uptake 
      in North and South America. 
 

Space Products

QinetiQ's Space Products business develops satellites, payload instruments, sub-systems and ground station services.

 
 -   Our new higher grade clean room facility in Kruibeke, Belgium, 
      was officially opened in the period by Frank De Winne, the first 
      European commander of the International Space Station. This new 
      facility enables us to produce up to four major products at any 
      one time and will support growth in satellites and docking systems 
      production. 
 -   Leveraging these new clean room facilities, we were awarded a 
      EUR9m three year contract to build equipment that will support 
      experiments in the International Space Station. 
 

EMEA Products

EMEA Products provides research services and bespoke technological solutions developed from intellectual property spun out from EMEA Services. We also report QinetiQ Target Systems under this heading.

 
 -   QinetiQ Target Systems (QTS), acquired in FY17, delivered strong 
      performance in H1 2020 as it doubled its orders and delivered 
      a 50% increase in revenue. 
 -   QTS developed two new products in the period. The first, our Next 
      Generation Banshee target replicates fast flying jets, and enables 
      customers to conduct Test & Evaluation and live-fire training 
      exercises against faster, higher flying, more manoeuvrable and 
      less detectable targets. Launched at the DSEI trade show in September 
      2019 we have already seen strong customer interest for the Next 
      Generation Banshee target. 
 -   We also released the Air-Launched 'Rattler' target, a low-cost 
      supersonic target used to accurately replicate anti-radiation 
      missiles and supersonic/high-diving threats, and have received 
      our first orders from the UK Royal Navy. 
 -   These product developments underline our ambition to continue 
      delivering cutting edge test & evaluation and training & rehearsal 
      for customers around the world supported by our target product 
      portfolio. 
 -   Beyond QTS, we were awarded a GBP3m contract to conduct research 
      into the latest vehicle technologies to boost the performance 
      of UK Future Ground Combat Vehicles. The project, led by QinetiQ 
      will focus on innovative solutions for ground vehicle mobility 
      exploiting the potential provided by electric drive systems. 
 -   We are seeing encouraging demand for our broader product portfolio, 
      including Obsidian, our counter drone technology specifically 
      designed to detect, identify and track small drones and Bracer, 
      our secure commercial satellite communication system. 
 

Financial items

Net finance costs

Net finance income was GBP2.8m (H1 2019 restated: GBP3.8m) primarily reflecting the defined benefit pension net finance income of GBP3.2m (H1 2019: GBP4.1m). The year-on-year decrease reflects the reduced pension surplus following the buy-in in H2 of 2019. The prior year comparative for total net finance income has been restated following the retrospective adoption of the new accounting standard (IFRS 16) in respect of leases. See below and Note 1 to the financial statements for more details.

The underlying net finance expense was GBP0.4m (H1 2019 restated: GBP0.3m).

Tax

The total tax charge was GBP9.1m (H1 2019: GBP2.6m). The underlying tax charge was GBP7.3m (H1 2019: GBP5.5m) with an underlying effective tax rate of 12.3% (H1 2019: 10.7%). The effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development expenditure credits (RDEC) in the UK. The effective tax rate is expected to remain below the UK statutory rate in the medium term, subject to any tax legislation changes, variations in the geographic mix of profits, the future recognition of unrecognised tax losses and while the benefit of net RDEC retained by the Group remains part of the tax line.

Following adoption of the new accounting standard, IFRIC 23 'Uncertainty over income tax treatment', the Group's tax provisions have been re-assessed and recalculated. QinetiQ has chosen to apply the transition approach and has not restated comparative information in the financial statements. Rather, IFRIC 23 has been applied as an adjustment (to the value of GBP2.1m) to retained earnings at the beginning of the current financial year. Refer to note 1 for more details.

The total tax expense on specific adjusting items of GBP1.8m (H1 2019: GBP2.9m income) arises mainly on a capital gain on the sale of property while the H1 2019 credit arises mainly in respect of initial recognition of corporate tax deductions for certain equity-settled share based payment schemes.

Earnings per share

Underlying earnings per share for the Group were 9.2p (H1 2019 restated: 8.1p), with the increase primarily due to strong trading and top line revenue growth. Statutory basic earnings per share for the total Group (including specific adjusting items) were 11.0p (H1 2019 restated: 8.9p) with the current year enhanced by the inclusion of a GBP13.3m gain on disposal of surplus property.

Dividend

An interim dividend of 2.2p (H1 2019: 2.1p) will be paid on 7 February 2020 to shareholders on the register at 10 January 2020. The interim dividend represents one third of the prior year total dividend reflecting our previously communicated methodology. The full year dividend will be set in May.

Pensions

The net pension asset under IAS 19, before adjusting for deferred tax, was GBP295.5m (31 March 2019: GBP259.1m). The key driver for the increase in the net pension asset since the March 2019 year end was net re-measurement gains on scheme assets in excess of net actuarial losses on scheme liabilities (with decreasing discount rates which increase the present value of scheme liabilities).

The key assumptions used in the IAS 19 valuation of the scheme are set out in note 11.

Committed facilities

The Group has available a GBP275m bank financing facility with an additional 'accordion' facility to expand this up to a maximum of GBP400m. The facility has an initial term of five years but with two one-year options to extend the final maturity to 27 September 2025. The facility has yet to be drawn down on. Such a facility provides significant scope to execute the Group's 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 in place to hedge all material transaction exposure at the point of commitment to the underlying transaction. Uncommitted future transactions are not routinely hedged. The Group continues its practice of not hedging income statement translation exposure. The principal exchange rates affecting the Group were the Sterling to US Dollar and Sterling to Australian Dollar exchange rates.

 
                      6 months to          6 months to 
                       30 September 2019    30 September 2018 
-------------------  -------------------  ------------------- 
 GBP/US$ - average    1.25                 1.32 
 GBP/US$ - closing    1.23                 1.30 
 GBP/US$ - opening    1.30                 1.40 
 
 GBP/A$ - average     1.82                 1.80 
 GBP/A$ - closing     1.82                 1.80 
 GBP/A$ - opening     1.80                 1.83 
-------------------  -------------------  ------------------- 
 

IFRS 16 implementation

The new leases standard became effective for periods beginning on or after 1 January 2019, i.e. FY20 for QinetiQ, using either the full retrospective approach or the modified retrospective approach. QinetiQ has adopted the new standard on the required effective date, 1 April 2019, using the full retrospective approach.

Under the new standard, companies will recognise new assets and liabilities, bringing added transparency to the balance sheet. IFRS eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice i.e. lessors continue to classify leases as finance leases and operating leases.

The impact on the income statement for QinetiQ is negligible at a 'profit before tax' level with no impact on EPS, but EBITDA is increased, offset by an increase in depreciation and an increase in finance expense. See note 1 for details.

The impact on the balance sheet is the recognition of a new 'right of use' asset within Property Plant & Equipment and the recognition of a new lease liability. The latter is incorporated within the Group's definition (see glossary) of net cash, hence the most significant impact on the Group's financial KPIs is this change to net cash (reducing previously reported net cash at 31 March 2019 by GBP27.2m). There is no impact on 'free cash flow' as a result of implementing IFRS 16.

Prior year comparatives have been restated (to the extent impacted by IFRS 16) and more details are set out in Note 1 to the financial statements.

Principal risks and uncertainties

The Group continues to be exposed to a number of risks and uncertainties which management continue to assess, manage and mitigate to minimise their potential impact on the reported performance of the Group. An explanation of these risks, together with details of risk management and mitigation, can be found in the annual report which is available for download at:

https://www.qinetiq.com/investors.

A summary of the significant risks and uncertainties is set out below:

Strategic risks

 
      --   UK defence test and evaluation strategy - UK Government budget 
            constraints lead to reduced spending in the core markets in which 
            the Group operates. This and the ever increasing pace of technology 
            is modernising the ways of evaluating capability resulting in 
            a risk that our approaches/offerings may not remain relevant. 
            EU exit causes a loss of market confidence and reduction in collaborative 
            EU funding; 
      --   International strategy - Plans to grow our international business 
            may be impacted by external influences outside of our control, 
            such as geopolitical risks, or specific risks arising from working 
            in new markets; 
      --   Innovation strategy - Failure to create a culture of innovation 
            or to invest adequately in, or create value from, our innovation 
            investment. As well as the risks arising from the introduction 
            of disruptive technologies/alternative business models; 
      --   A material element of the Group's revenue is dependent on a number 
            of UK Government contracts - Government budget constraints could 
            impact QinetiQ's ability to grow; 
      --   Single Source Contract Regulations - Group performance is adversely 
            affected by application of the regulations from the SSRO. 
 
 Operational risks 
      --   Recruitment and retention - The Group operates in many specialised 
            engineering, technical and scientific domains where key capabilities 
            and competencies may be lost through failure to recruit and 
            retain employees or a lack of domain specific graduates leads 
            to a future skills shortage; 
      --   Significant breach of relevant laws and regulations - The Group 
            operates in highly regulated environments and recognises that 
            non-compliance has the potential to compromise our ability to 
            conduct business in certain jurisdictions and would potentially 
            have an impact on a variety of stakeholders; 
      --   Security and IT systems - A breach of physical or data security, 
            cyber-attacks or IT systems failure could have an adverse impact 
            on our customers' operations. 
 

Condensed consolidated income statement

 
                                       6 months ended 30 September       6 months ended 30 September 
                                                   2019                              2018 
                                                (unaudited)                  (unaudited/restated)^ 
                                     --------------------------------  -------------------------------- 
                                                    Specific                          Specific 
All figures in GBP million                         adjusting                         adjusting 
 unless stated otherwise       Note  Underlying*      items*    Total  Underlying*      items*    Total 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
Revenue                           2        486.5           -    486.5        420.3           -    420.3 
Operating costs excluding 
 depreciation, impairment 
 and amortisation                        (409.0)       (1.4)  (410.4)      (355.3)       (0.2)  (355.5) 
Other income                                 4.0        13.3     17.3          4.9         0.1      5.0 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
EBITDA (earnings before 
 interest, tax, depreciation 
 and amortisation)                          81.5        11.9     93.4         69.9       (0.1)     69.8 
Depreciation and impairment 
 of property, plant and 
 equipment                                (20.0)           -   (20.0)       (16.8)       (2.6)   (19.4) 
Amortisation of intangible 
 assets                                    (1.8)       (3.1)    (4.9)        (1.5)       (1.1)    (2.6) 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
Operating profit/(loss)                     59.7         8.8     68.5         51.6       (3.8)     47.8 
Gain on sale of investment                     -           -        -            -         1.1      1.1 
Finance income                    4          0.7         3.2      3.9          0.7         4.1      4.8 
Finance expense                   4        (1.1)           -    (1.1)        (1.0)           -    (1.0) 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
Profit before tax                           59.3        12.0     71.3         51.3         1.4     52.7 
Taxation (expense)/income         5        (7.3)       (1.8)    (9.1)        (5.5)         2.9    (2.6) 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
Profit for the period 
 attributable to equity 
 shareholders                               52.0        10.2     62.2         45.8         4.3     50.1 
 
 
  Attributable to: 
Owners of the parent                        51.9        10.2     62.1         45.8         4.3     50.1 
Non-controlling interests                    0.1           -      0.1            -           -        - 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
Profit for the period 
 attributable to equity 
 shareholders                               52.0        10.2     62.2         45.8         4.3     50.1 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
 
 
  Earnings per share 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
 
  Basic                           6         9.2p                11.0p         8.1p                 8.9p 
Diluted                           6         9.1p                10.9p         8.1p                 8.8p 
-----------------------------  ----  -----------  ----------  -------  -----------  ----------  ------- 
 

* 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.

^ Further details of the restatement of the prior year due to the implementation of IFRS 16 'Leases' can be found in Note 1.

Condensed consolidated statement of comprehensive income

 
                                                                               6 months ended 
                                                                                 30 September 
                                                               6 months ended            2018 
                                                                 30 September 
                                                                         2019     (unaudited/ 
All figures in GBP million                                        (unaudited)       restated) 
-------------------------------------------------------------  --------------  -------------- 
Profit for the period                                                    62.2            50.1 
Items that will not be reclassified to profit and loss: 
Actuarial gain recognised in defined benefit pension schemes             31.2            31.2 
Tax on items that will not be reclassified to the income 
 statement                                                              (5.3)           (5.4) 
-------------------------------------------------------------  --------------  -------------- 
Total items that will not be reclassified to the income 
 statement                                                               25.9            25.8 
Movement in deferred tax on foreign currency translation                (0.4)           (0.4) 
Foreign currency translation gains for foreign operations                 7.5             6.7 
Increase in fair value of hedging derivatives                             0.9             2.6 
Movement on deferred tax on hedging derivatives                         (0.2)           (0.2) 
Recycling of gains to the income statement on disposal 
 of investments                                                             -           (1.1) 
Fair value gains on available for sale investments                          -             0.7 
Total items that may be reclassified to the income statement              7.8             8.3 
-------------------------------------------------------------  --------------  -------------- 
Other comprehensive income for the period, net of tax                    33.7            34.1 
-------------------------------------------------------------  --------------  -------------- 
 
Total comprehensive income for the period, net of tax                    95.9            84.2 
-------------------------------------------------------------  --------------  -------------- 
 

Condensed consolidated statement of changes in equity

 
                          Issued     Capital 
All figures in GBP         share  redemption    Share    Hedge  Translation  Retained          Non-controlling   Total 
 million                 capital     reserve  premium  reserve      reserve  earnings   Total         interest  equity 
-----------------------  -------  ----------  -------  -------  -----------  --------  ------  ---------------  ------ 
At 31 March 2019 
 (as originally stated)      5.7        40.8    147.6    (0.2)          3.8     581.1   778.8              2.2   781.0 
Change in accounting 
 policy - adoption 
 of IFRS 16                    -           -        -        -            -     (2.0)   (2.0)                -   (2.0) 
At 31 March 2019 
 (unaudited, restated)       5.7        40.8    147.6    (0.2)          3.8     579.1   776.8              2.2   779.0 
Change in accounting 
 policy - adoption 
 of IFRIC 23                   -           -        -        -            -       2.1     2.1                -     2.1 
Profit for the period          -           -        -        -            -      62.1    62.1              0.1    62.2 
Other comprehensive 
 income for the period, 
 net of tax                    -           -        -      0.7          7.1      25.9    33.7                -    33.7 
Purchase of own shares         -           -        -        -            -     (0.4)   (0.4)                -   (0.4) 
Share-based payments 
 charge                        -           -        -        -            -       3.0     3.0                -     3.0 
Deferred tax on share 
 options                       -           -        -        -            -     (1.0)   (1.0)                -   (1.0) 
Dividends paid                 -           -        -        -            -    (25.5)  (25.5)                -  (25.5) 
-----------------------  -------  ----------  -------  -------  -----------  --------  ------  ---------------  ------ 
At 30 September 2019 
 (unaudited)                 5.7        40.8    147.6      0.5         10.9     645.3   850.8              2.3   853.1 
-----------------------  -------  ----------  -------  -------  -----------  --------  ------  ---------------  ------ 
 
At 31 March 2018 
 (as originally stated)      5.7        40.8    147.6    (1.8)        (0.4)     552.2   744.1              0.2   744.3 
Change in accounting 
 policy - adoption 
 of IFRS 16                    -           -        -        -            -     (2.3)   (2.3)                -   (2.3) 
At 31 March 2018 
 (unaudited, restated)       5.7        40.8    147.6    (1.8)        (0.4)     549.9   741.8              0.2   742.0 
Profit for the period          -           -        -        -            -      50.1    50.1                -    50.1 
Other comprehensive 
 income for the period, 
 net of tax                    -           -        -      2.4          6.3      25.4    34.1                -    34.1 
Purchase of own shares         -           -        -        -            -     (0.3)   (0.3)                -   (0.3) 
Share-based payments 
 charge                        -           -        -        -            -       2.2     2.2                -     2.2 
Deferred tax on share 
 options                       -           -        -        -            -       1.1     1.1                -     1.1 
Dividends paid                 -           -        -        -            -    (23.8)  (23.8)                -  (23.8) 
-----------------------  -------  ----------  -------  -------  -----------  --------  ------  ---------------  ------ 
At 30 September 2018 
 (unaudited - restated)      5.7        40.8    147.6      0.6          5.9     604.6   805.2              0.2   805.4 
-----------------------  -------  ----------  -------  -------  -----------  --------  ------  ---------------  ------ 
 

Condensed consolidated balance sheet

 
                                                            30 September 
                                                                    2018            31 March 
                                             30 September 
                                                     2019    (unaudited/    2019 (unaudited/ 
 All figures in GBP million           Note    (unaudited)      restated)           restated) 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Non-current assets 
 Goodwill                                           152.3          105.0               148.6 
 Intangible assets                                   90.0           41.3                88.5 
 Property, plant and equipment                      333.4          304.5               322.4 
 Other financial assets                               1.1              -                 0.9 
 Equity accounted investments                         3.3            1.8                 4.5 
 Retirement benefit surplus             11          295.5          353.8               259.1 
 Deferred tax asset                                   8.9            7.3                 7.8 
-----------------------------------  -----  -------------  -------------  ------------------ 
                                                    884.5          813.7               831.8 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Current assets 
 Inventories                                         49.2           40.0                40.1 
 Other financial assets                               0.5              -                 0.5 
 Trade and other receivables                        178.3          142.4               208.5 
 Assets held for sale                                 1.2            1.2                 1.9 
 Current tax receivable                               1.9              -                 1.5 
 Cash and cash equivalents                          201.2          251.0               190.8 
-----------------------------------  -----  -------------  -------------  ------------------ 
                                                    432.3          434.6               443.3 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Total assets                                     1,316.8        1,248.3             1,275.1 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Current liabilities 
 Trade and other payables                         (311.7)        (291.3)             (346.6) 
 Current tax payable                                    -          (0.2)               (8.5) 
 Provisions                                         (6.2)          (9.0)               (6.2) 
 Other financial liabilities                        (9.3)          (8.6)              (10.8) 
-----------------------------------  -----  -------------  -------------  ------------------ 
                                                  (327.2)        (309.1)             (372.1) 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Non-current liabilities 
 Deferred tax liability                            (87.6)         (77.9)              (72.7) 
 Provisions                                        (10.2)         (13.7)              (10.7) 
 Other financial liabilities                       (20.0)         (21.6)              (20.1) 
 Other payables                                    (18.7)         (20.6)              (20.5) 
-----------------------------------  -----  -------------  -------------  ------------------ 
                                                  (136.5)        (133.8)             (124.0) 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Total liabilities                                (463.7)        (442.9)             (496.1) 
-----------------------------------  -----  -------------  -------------  ------------------ 
 
 Net assets                                         853.1          805.4               779.0 
-----------------------------------  -----  -------------  -------------  ------------------ 
 
 Capital and reserves 
 Ordinary shares                                      5.7            5.7                 5.7 
 Capital redemption reserve                          40.8           40.8                40.8 
 Share premium account                              147.6          147.6               147.6 
 Hedging reserve                                      0.5            0.6               (0.2) 
 Translation reserve                                 10.9            5.9                 3.8 
 Retained earnings                                  645.3          604.6               579.1 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Capital and reserves attributable 
  to shareholders of the parent 
  company                                           850.8          805.2               776.8 
 Non-controlling interest                             2.3            0.2                 2.2 
-----------------------------------  -----  -------------  -------------  ------------------ 
 Total shareholders' funds                          853.1          805.4               779.0 
-----------------------------------  -----  -------------  -------------  ------------------ 
 

Condensed consolidated cash flow

 
                                                                             6 months 
                                                                                ended                 Year 
                                                             6 months    30 September 
                                                                ended            2018                ended 
                                                         30 September                             31 March 
                                                                 2019     (unaudited/     2019 (unaudited/ 
 All figures in GBP million                      Note     (unaudited)       restated)            restated) 
----------------------------------------------  -----  --------------  --------------  ------------------- 
 Underlying net cash inflow from operations                      77.0            54.9                135.0 
 Less specific adjusting items                                      -               -                (0.7) 
 Net cash inflow from operations                    8            77.0            54.9                134.3 
 Tax paid                                                       (8.9)           (4.8)               (10.7) 
 Interest received                                                0.7             0.7                  1.3 
 Interest paid                                                  (0.9)           (0.9)                (1.7) 
----------------------------------------------  -----  --------------  --------------  ------------------- 
 Net cash inflow from operating activities                       67.9            49.9                123.2 
----------------------------------------------  -----  --------------  --------------  ------------------- 
 Purchases of intangible assets                                 (7.1)           (4.6)               (10.6) 
 Purchases of property, plant and equipment                    (33.3)          (43.7)               (77.0) 
 Proceeds from sale of property, plant 
  and equipment                                                  14.1             4.4                 12.2 
 Proceeds from sale of investment                                   -             1.5                  1.5 
 Acquisition of business and investment 
  in joint venture                                              (0.1)           (0.2)               (62.8) 
 Proceeds from disposal of available-for-sale 
  investments                                                       -            15.7                 15.7 
 Net cash outflow from investing activities                    (26.4)          (26.9)              (121.0) 
----------------------------------------------  -----  --------------  --------------  ------------------- 
 Purchase of own shares                                         (0.4)           (0.3)                (0.7) 
 Dividends paid to shareholders                                (25.5)          (23.8)               (35.7) 
 Repayment of external bank loan                                    -               -               (20.0) 
 Payment of bank facility arrangement 
  fee                                                           (0.2)               -                (1.5) 
 Capital element of finance lease payments                      (5.0)           (3.5)                (8.1) 
 Net cash outflow from financing activities                    (31.1)          (27.6)               (66.0) 
----------------------------------------------  -----  --------------  --------------  ------------------- 
 Increase/(decrease) in cash and cash 
  equivalents                                                    10.4           (4.6)               (63.8) 
 Effect of foreign exchange changes 
  on cash and cash equivalents                                      -             1.5                  0.5 
 Cash and cash equivalents at beginning 
  of period                                                     190.8           254.1                254.1 
 Cash and cash equivalents at end of 
  period                                                        201.2           251.0                190.8 
----------------------------------------------  -----  --------------  --------------  ------------------- 
 

Reconciliation of movement in net cash

 
                                                                           6 months 
                                                                              ended                 Year 
                                                           6 months    30 September 
                                                              ended            2018                ended 
                                                       30 September                             31 March 
                                                               2019     (unaudited/     2019 (unaudited/ 
 All figures in GBP million                    Note     (unaudited)       restated)            restated) 
--------------------------------------------  -----  --------------  --------------  ------------------- 
 Increase/(decrease) in cash and cash 
  equivalents                                                  10.4           (4.6)               (63.8) 
 Add back net cash flows not impacting 
  net cash                                                      5.2          (12.2)                 13.9 
--------------------------------------------  -----  --------------  --------------  ------------------- 
 Change in net cash resulting from cash 
  flows                                                        15.6          (16.8)               (49.9) 
 Finance leases and debt recognised 
  on acquisition                                                  -               -               (22.7) 
 Increase in lease obligation                                 (3.1)           (2.7)                (5.8) 
 Other movements including foreign exchange                   (0.3)             2.6                  2.0 
--------------------------------------------  -----  --------------  --------------  ------------------- 
 Increase/(decrease) in net cash as 
  defined by the Group                                         12.2          (16.9)               (76.4) 
 Net cash as defined by the Group at 
  beginning of period                                         161.3           237.7                237.7 
--------------------------------------------  -----  --------------  --------------  ------------------- 
 Net cash as defined by the Group at 
  end of period                                   7           173.5           220.8                161.3 
 Exclude: non-cash items (other financial 
  asset and liabilities)                          7            27.7            30.2                 29.5 
--------------------------------------------  -----  --------------  --------------  ------------------- 
 Total cash and cash equivalents                  7           201.2           251.0                190.8 
--------------------------------------------  -----  --------------  --------------  ------------------- 
 

Notes to the condensed interim financial statements

 
 1.   Significant accounting policies 
 

Basis of preparation

QinetiQ Group plc is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in England.

The condensed consolidated interim financial statements of the Group for the six months ended 30 September 2019 comprise statements for the Company and its subsidiaries (together referred to as the 'Group') and were approved by the Board of Directors on 14 November 2019.

These condensed Group interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the requirements of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority. They do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's financial statements for the year ended 31 March 2019 which have been prepared in accordance with IFRS as adopted by the European Union.

In the income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items need to be disclosed separately because of their size and nature. Underlying measures of performance exclude specific adjusting items. Specific adjusting items include:

 
                                                                            Does not reflect 
                                           Distorting           Distorting           in-year 
                                               due to   due to fluctuating       operational 
                                            irregular               nature       performance 
                                               nature            (size and     of continuing 
Item                                     year on year                sign)          business 
--------------------------------------  -------------  -------------------  ---------------- 
Amortisation of intangible assets 
 arising from acquisitions                                                         P 
--------------------------------------  -------------  -------------------  ---------------- 
Pension net finance income and pension 
 past service cost                                              P                  P 
--------------------------------------  -------------  -------------------  ---------------- 
Gains/losses on business divestments          P                 P                  P 
 and disposal of property, investments 
 and intellectual property 
--------------------------------------  -------------  -------------------  ---------------- 
Transaction & integration costs 
 in respect of business acquisitions          P                                    P 
--------------------------------------  -------------  -------------------  ---------------- 
Impairment of property                        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.

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 2019 (with the exception of the implementation of IFRS 16 and IFRIC 23).

Recent accounting developments adopted by the Group

IFRS 16 'Leases'

Under the new standard, the Group has recognised new assets and liabilities, bringing added transparency to the balance sheet. IFRS 16 has eliminated the current dual accounting model for lessees, which distinguished between on-balance sheet finance leases and off-balance sheet operating leases. Instead, IFRS 16 has brought about a single, on-balance sheet accounting model that is similar to current finance lease accounting, Lessor accounting remains similar to previous practice i.e. lessors have continued to classify leases as finance and operating leases.

The standard became effective for periods beginning on or after 1 January 2019, i.e. FY20 for QinetiQ. The Group has adopted the new standard on the required effective date, 1 April 2019, using the full retrospective approach. Under the full retrospective approach, QinetiQ has applied IFRS 16 to all periods presented as if it had always been applied by restating comparative periods.

Under IFRS 16, a liability is recognised at lease inception equal to the discounted lease payments under the lease. The lease payments also include extension options, where reasonably certain to be exercised by the Group. The lease liability is subsequently measured using the effective interest method, with the liability increasing to reflect the accretion of interest and reduced by lease payments made, with interest charged to finance costs. In addition, the carrying amount of lease liabilities is re-measured if there is a modification, for example a change in the lease term or non-fixed lease payments.

The initial cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct cost incurred, expected asset restoration costs and lease payments made at or before the commencement date, less any lease incentives received. The right-of-use asset is depreciated on a straight-line basis over the shorter of the lease term and the economic life of the asset. The right-of-use asset is tested for impairment where appropriate.

When applying the full retrospective approach, QinetiQ elected to use the short-term lease and low-value asset exemptions for leases less than 12 months and lease assets under GBP5,000. QinetiQ also elected to reassess all leases using new IFRS 16 lease definitions and have not elected to use the practical expedient which exempts entities from doing so.

The comparative information presented in these financial statements has been restated as disclosed in the tables below. The main restatement impacts to the balance sheet related to the recognition of right-to-use assets and additional lease obligations. Trade and other receivables and trade and other payables have been restated to remove balances related to leases such as lease incentives, advance payments and accrued liabilities.

'Net cash' (as defined by the Group, see Glossary) decreases through implementation of IFRS 16. As well as the recognition of right-of-use assets on the balance sheet (increasing property, plant and equipment) IFRS 16 also creates a finance lease liability, which impacts the Group's 'net cash' measure. Net cash as defined by the Group combines cash and cash equivalents with other financial assets and liabilities, primarily available for sale investments, derivative financial instruments and finance lease assets/liabilities. There is no impact on 'free cash flow' as a result of implementing IFRS 16.

Impact on the condensed consolidated balance sheet at 30 September 2019

 
                                                      Pre IFRS        IFRS 16 
 All figures in GBP million                                 16    adjustments   As reported 
------------------------------------  -------------  ---------  -------------  ------------ 
 Assets 
 Property, plant and equipment                           309.4           24.0         333.4 
 Deferred tax asset                                        8.9              -           8.9 
 Trade and other receivables                             178.3              -         178.3 
 Other assets                                            796.2              -         796.2 
                                                       1,292.8           24.0       1,316.8 
 --------------------------------------------------  ---------  -------------  ------------ 
 
 Liabilities 
 Trade and other payables                              (311.7)              -       (311.7) 
 Other financial liabilities                             (2.7)         (26.6)        (29.3) 
 Deferred tax liability                                 (87.2)          (0.4)        (87.6) 
 Other liabilities                                      (35.1)              -        (35.1) 
                                                       (436.7)         (27.0)       (463.7) 
 --------------------------------------------------  ---------  -------------  ------------ 
 
 Net assets                                              856.1          (3.0)         853.1 
---------------------------------------------------  ---------  -------------  ------------ 
 
 Capital and reserves 
 Retained earnings                                       648.3          (3.0)         645.3 
 Other                                                   205.5              -         205.5 
---------------------------------------------------  ---------  -------------  ------------ 
 Capital and reserves attributable 
  to shareholders of the parent 
  company                                                853.8          (3.0)         850.8 
 Non-controlling interest                                  2.3              -           2.3 
---------------------------------------------------  ---------  -------------  ------------ 
 Total shareholders' funds                               856.1          (3.0)         853.1 
---------------------------------------------------  ---------  -------------  ------------ 
 
 
 Impact on net cash at 30 September 
  2019 
------------------------------------  -------------  ---------  -------------  ------------ 
 Net cash (as defined by the Group - see 
  glossary)                                              200.1         (26.6)         173.5 
---------------------------------------------------  ---------  -------------  ------------ 
 
 

Impact on the condensed consolidated balance sheet at 31 March 2019

 
                                                                        IFRS 16 
 All figures in GBP million                          As reported    adjustments   Restated 
-----------------------------------  -------------  ------------  -------------  --------- 
 Assets 
 Property, plant and equipment                             298.0           24.4      322.4 
 Deferred tax asset                                          7.8              -        7.8 
 Trade and other receivables                               208.5              -      208.5 
 Other assets                                              736.4              -      736.4 
                                                         1,250.7           24.4    1,275.1 
 -------------------------------------------------  ------------  -------------  --------- 
 
 Liabilities 
 Trade and other payables                                (346.6)              -    (346.6) 
 Other financial liabilities                               (3.7)         (27.2)     (30.9) 
 Deferred tax liability                                   (73.1)            0.4     (72.7) 
 Other liabilities                                        (46.3)            0.4     (45.9) 
                                                         (469.7)         (26.4)    (496.1) 
 -------------------------------------------------  ------------  -------------  --------- 
 
 Net assets                                                781.0          (2.0)      779.0 
--------------------------------------------------  ------------  -------------  --------- 
 
 Capital and reserves 
 Retained earnings                                         581.1          (2.0)      579.1 
 Other                                                     197.7              -      197.7 
--------------------------------------------------  ------------  -------------  --------- 
 Capital and reserves attributable 
  to shareholders of the parent 
  company                                                  778.8          (2.0)      776.8 
 Non-controlling interest                                    2.2              -        2.2 
--------------------------------------------------  ------------  -------------  --------- 
 Total shareholders' funds                                 781.0          (2.0)      779.0 
--------------------------------------------------  ------------  -------------  --------- 
 
 
 Impact on net cash at 31 March 
  2019 
-----------------------------------  -------------  ------------  -------------  --------- 
 Net cash (as defined by the Group - see 
  glossary)                                                188.5         (27.2)      161.3 
--------------------------------------------------  ------------  -------------  --------- 
 
 

Impact on the condensed consolidated balance sheet at 30 September 2018

 
                                                                           IFRS 16 
 All figures in GBP million                             As reported    adjustments     Restated 
--------------------------------------  -------------  ------------  -------------  ----------- 
 Assets 
 Property, plant and equipment                                278.9           25.6        304.5 
 Deferred tax asset                                             7.3              -          7.3 
 Trade and other receivables                                  142.4              -        142.4 
 Other assets                                                 794.1              -        794.1 
                                                            1,222.7           25.6      1,248.3 
 ----------------------------------------------------  ------------  -------------  ----------- 
 
 Liabilities 
 Trade and other payables                                   (291.3)              -      (291.3) 
 Other financial liabilities                                  (1.9)         (28.3)       (30.2) 
 Deferred tax liability                                      (78.3)            0.4       (77.9) 
 Other liabilities                                           (43.5)              -       (43.5) 
                                                            (415.0)         (27.9)      (442.9) 
 ----------------------------------------------------  ------------  -------------  ----------- 
 
 Net assets                                                   807.7          (2.3)        805.4 
-----------------------------------------------------  ------------  -------------  ----------- 
 
 Capital and reserves 
 Retained earnings                                            606.9          (2.3)        604.6 
 Other                                                        200.6              -        200.6 
-----------------------------------------------------  ------------  -------------  ----------- 
 Capital and reserves attributable 
  to shareholders of the parent 
  company                                                     807.5          (2.3)        805.2 
 Non-controlling interest                                       0.2              -          0.2 
-----------------------------------------------------  ------------  -------------  ----------- 
 Total shareholders' funds                                    807.7          (2.3)        805.4 
-----------------------------------------------------  ------------  -------------  ----------- 
 
 
   Impact on net cash at 30 September 
   2018 
 
 Net cash (as defined by the Group - see 
  glossary)                                                   249.1         (28.3)        220.8 
-----------------------------------------------------  ------------  -------------  ----------- 
 
 

Impact on the condensed consolidated income statement

The impact to the Income Statement as a result of adopting IFRS 16 was insignificant. Operating profit increased, reflecting the removal of the operating lease expenses previously charged to profit, partially offset by the inclusion of depreciation of the right-of-use assets.

 
                                     6 months ended 30 September        6 months ended 30 September 
                                                 2019                               2018 
                                             (unaudited)                         (unaudited) 
                                   -------------------------------  ------------------------------------ 
All figures in GBP million         Pre-IFRS      IFRS 16            As originally      IFRS 16 
 unless stated otherwise                 16   adjustment  Reported         stated   adjustment  Restated 
-----------------------------      --------  -----------  --------  -------------  -----------  -------- 
EBITDA (earnings before 
 interest, tax, depreciation 
 and amortisation)                     88.3          5.1      93.4           65.8          4.0      69.8 
Depreciation and impairment 
 of property, plant and 
 equipment                           (15.4)        (4.6)    (20.0)         (15.9)        (3.5)    (19.4) 
Amortisation of intangible 
 assets                               (4.9)            -     (4.9)          (2.6)            -     (2.6) 
---------------------------------  --------  -----------  --------  -------------  -----------  -------- 
Operating profit                       68.0          0.5      68.5           47.3          0.5      47.8 
Gain on sale of investment                -            -         -            1.1            -       1.1 
Finance income                          3.9            -       3.9            4.8            -       4.8 
Finance expense                       (0.6)        (0.5)     (1.1)          (0.5)        (0.5)     (1.0) 
---------------------------------  --------  -----------  --------  -------------  -----------  -------- 
Profit before tax                      71.3            -      71.3           52.7            -      52.7 
Taxation expense                      (9.1)            -     (9.1)          (2.6)            -     (2.6) 
---------------------------------  --------  -----------  --------  -------------  -----------  -------- 
Profit for the period 
 attributable to equity 
 shareholders                          62.2            -      62.2           50.1            -      50.1 
---------------------------------  --------  -----------  --------  -------------  -----------  -------- 
 
 
  Attributable to: 
-----------------------------      --------  -----------  --------  -------------  -----------  -------- 
Owners of the parent                   62.1            -      62.1           50.1            -      50.1 
Non-controlling interests               0.1            -       0.1              -            -         - 
Profit for the period 
 attributable to equity 
 shareholders                          62.2            -      62.2           50.1            -      50.1 
---------------------------------  --------  -----------  --------  -------------  -----------  -------- 
 
 
  Earnings per share 
-----------------------------      --------  -----------  --------  -------------  -----------  -------- 
Basic                                 11.0p                  11.0p           8.9p                   8.9p 
Diluted                               10.9p                  10.9p           8.8p                   8.8p 
---------------------------------  --------  -----------  --------  -------------  -----------  -------- 
 

Underlying measures:

 
                                     6 months ended 30 September        6 months ended 30 September 
                                                 2019                               2018 
                                             (unaudited)                         (unaudited) 
                                   -------------------------------  ------------------------------------ 
All figures in GBP million         Pre-IFRS      IFRS 16            As originally      IFRS 16 
 unless stated otherwise                 16   adjustment  Reported         stated   adjustment  Restated 
-----------------------------      --------  -----------  --------  -------------  -----------  -------- 
Operating profit                       59.2          0.5      59.7           51.1          0.5      51.6 
Profit after tax                       52.0            -      52.0           45.8            -      45.8 
Earnings per share (Basic)             9.2p                   9.2p           8.1p                   8.1p 
Earnings per share (Diluted)           9.1p                   9.1p           8.1p                   8.1p 
---------------------------------  --------  -----------  --------  -------------  -----------  -------- 
 

FRIC 23 'Uncertainty over income tax treatment'

This interpretation was published in June 2017 and is required to be applied in the determination of taxable profits / losses and tax attributes, when there is uncertainty over their treatment under IAS 12. The primary impact on QinetiQ's financial statements arises in relation to the provision for potential overseas tax liabilities in territories where the Group does not have a registered taxable presence (i.e. territories to which the Group exports goods or provides short-term services).

The Group previously recorded provisions under IAS 12 reflecting the potential risk of QinetiQ's many activities across many jurisdictions. These provisions have been reassessed and recalculated to meet the more prescriptive threshold for recognition under IFRIC 23, which explicitly requires consideration of each tax jurisdiction individually. Combined with an assessment of other tax reserves, the impact of the adoption of IFRIC 23 in FY20 is a reduction in tax provisions (within current tax payable) of GBP2.1m.

QinetiQ has chosen to apply the transition approach for adopting IFRIC 23 and not restate comparative information in the first year of adoption. An adjustment, to the value of GBP2.1m, has been made to retained earnings at the beginning of the first period of adoption i.e. in the six months to 30 September 2019.

Going-concern basis

The Group meets its day-to-day working capital requirements through its available cash funds and its bank facilities. The market conditions in which the Group operates have been, and are expected to continue to be, challenging as spending from the Group's key customers in its primary markets in the UK and US remains under pressure. Despite these challenges, the Directors believe that the Group is well positioned to manage its overall business risks successfully. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going-concern basis in preparing its interim financial statements.

The Group is exposed to various risks and uncertainties, the principal ones being summarised in the 'Principal risks and uncertainties' section. Crystallisation of such risks, to the extent not fully mitigated, would lead to a negative impact on the Group's financial results but none are deemed sufficiently material to prevent the Group from continuing as a going concern for at least the next 12 months.

Comparative data

The comparative figures for the year ended 31 March 2019 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 2019 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 2019 are available upon request from the Company's registered office at Cody Technology Park, Ively Road, Farnborough, Hampshire, GU14 0LX.

 
 2.   Disaggregation of revenue and segmental analysis 
 

Revenue by category and reconciliation to revenue on an organic, constant currency basis

For the six months ended 30 September

 
                                                             H1 2020 
                                                                           H1 2019 
    All figures in GBP million                           (unaudited)   (unaudited) 
    ----------------------------------------------      ------------  ------------ 
 Service contracts with customers                              426.9         369.7 
 Sale of goods contracts with customers                         55.0          44.3 
 Royalties and licences                                          4.6           6.3 
 --------------------------------------------------     ------------  ------------ 
 Revenue                                                       486.5         420.3 
 Less: inorganic revenue of acquired 
  businesses*                                                 (20.7)             - 
 Adjust to constant prior year exchange 
  rates                                                        (2.6)             - 
 --------------------------------------------------     ------------  ------------ 
 Total revenue on an organic, constant currency 
  basis                                                        463.2         420.3 
 --------------------------------------------------     ------------  ------------ 
 Organic revenue growth at constant currency                     10%            8% 
 --------------------------------------------------     ------------  ------------ 
 

*For the period during which there was no contribution in the equivalent period in the prior year which was pre-ownership by the Group.

Other income

 
                                                            H1 2020 
                                                                          H1 2019 
    All figures in GBP million                          (unaudited)   (unaudited) 
    -----------------------------------------          ------------  ------------ 
 Share of joint ventures' and associates' 
  loss after tax                                              (1.0)         (0.2) 
 Other income                                                   5.0           5.1 
 -------------------------------------------------     ------------  ------------ 
 Other income - underlying                                      4.0           4.9 
 Gain on sale of assets                                        13.3           0.1 
 -------------------------------------------------     ------------  ------------ 
 Total other income                                            17.3           5.0 
 -------------------------------------------------     ------------  ------------ 
 

Revenue by customer geographical location

For the six months ended 30 September

 
                                                              H1 2020 
                                                                            H1 2019 
    All figures in GBP million                            (unaudited)   (unaudited) 
    -----------------------------------------------      ------------  ------------ 
                                                                 52.5          48.2 
                                                                 32.6          27.3 
                                                                 37.5          25.5 
                                                                  8.9           8.5 
    US                                                           19.3          20.2 
    Australia 
    Europe 
    Middle East 
    Rest of World 
                                                                150.8         129.7 
    International (31% and 31% of total revenue for             335.7         290.6 
     2020 and 2019 respectively) 
                                                         ------------  ------------ 
    United Kingdom 
    -----------------------------------------------      ------------  ------------ 
 Total revenue                                                  486.5         420.3 
 ---------------------------------------------------     ------------  ------------ 
 

Revenue by major customer type

For the six months ended 30 September

 
                                                                H1 2020 
                                                                              H1 2019 
    All figures in GBP million                              (unaudited)   (unaudited) 
    -------------------------------  -------------------  -------------  ------------ 
                                                                  306.6         258.9 
                                                                   43.4          39.5 
    UK Government                                                 136.5         121.9 
    US Government 
    Other 
 Total revenue                                                    486.5         420.3 
 -----------------------------------------------------     ------------  ------------ 
 
 

'Other' does not contain any customers with revenue in excess of 10% of total Group revenue.

Operating segments

For the six months ended 30 September

 
                                               H1 2020                    H1 2019 
    All figures in GBP million                (unaudited)          (unaudited, restated^) 
    -----------------------------      ------------------------  ------------------------- 
                                       Revenue from  Underlying   Revenue from  Underlying 
                                           external   operating       external   operating 
                                          customers   profit(*)      customers   profit(*) 
    -----------------------------      ------------  ----------  -------------  ---------- 
 EMEA Services                                369.1        46.2          319.9        41.2 
 Global Products                              117.4        13.5          100.4        10.4 
 ---------------------------------     ------------  ----------  -------------  ---------- 
 Total operating segments                     486.5        59.7          420.3        51.6 
 ---------------------------------     ------------  ----------  -------------  ---------- 
 Underlying operating margin*                             12.3%                      12.3% 
 ---------------------------------     ------------  ----------  -------------  ---------- 
 

* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary.

^See Note 1 for details of the restatement following adoption of IFRS 16.

Reconciliation of segmental results to total profit

For the six months ended 30 September

 
                                                                   H1 2020 
                                                        Note                     H1 2019 
                                                                             (unaudited, 
    All figures in GBP million                                 (unaudited)    restated^) 
    -------------------------------------------------  -----  ------------  ------------ 
 Underlying operating profit                                          59.7          51.6 
 Specific adjusting items operating profit/(loss)          3           8.8         (3.8) 
 ----------------------------------------------------  -----  ------------  ------------ 
 Operating profit                                                     68.5          47.8 
 Gain on sale of investment                                              -           1.1 
 Net finance income                                                    2.8           3.8 
 ----------------------------------------------------  -----  ------------  ------------ 
 Profit before tax                                                    71.3          52.7 
 Taxation expense                                                    (9.1)         (2.6) 
 ----------------------------------------------------  -----  ------------  ------------ 
 Profit for the period attributable to 
  equity shareholders                                                 62.2          50.1 
 ----------------------------------------------------  -----  ------------  ------------ 
 
 
 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 2020 
                                                                            H1 2019 
All figures in GBP million                         Note   (unaudited)   (unaudited) 
-------------------------------------------------  ----  ------------  ------------ 
Gain on sale of property                                         13.3           0.1 
Acquisition costs                                               (1.4)         (0.2) 
Specific adjusting items before amortisation, 
 depreciation and impairment                                     11.9         (0.1) 
Impairment of property                                              -         (2.6) 
Amortisation of intangible assets arising from 
 acquisition                                                    (3.1)         (1.1) 
-------------------------------------------------  ----  ------------  ------------ 
Specific adjusting items operating profit/(loss)                  8.8         (3.8) 
Defined benefit pension scheme net finance 
 income                                                           3.2           4.1 
Gain on sale of investment                                          -           1.1 
-------------------------------------------------  ----  ------------  ------------ 
Specific adjusting items profit before tax                       12.0           1.4 
Specific adjusting items - tax                        5         (1.8)           2.9 
-------------------------------------------------  ----  ------------  ------------ 
Total specific adjusting items profit after 
 tax                                                             10.2           4.3 
-------------------------------------------------  ----  ------------  ------------ 
 

Reconciliation of underlying profit for the period to total profit for the period

 
                                                       H1 2020 
                                                                     H1 2019 
                                                                 (unaudited, 
All figures in GBP million                         (unaudited)    restated^) 
--------------------------------------------      ------------  ------------ 
Underlying profit after tax                               52.0          45.8 
Total specific adjusting items profit after 
 tax (see above)                                          10.2           4.3 
------------------------------------------------  ------------  ------------ 
Total profit for the period attributable to 
 equity shareholders                                      62.2          50.1 
------------------------------------------------  ------------  ------------ 
 
 
 4.   Finance income and expense 
 
 
                                                         H1 2020       H1 2019 
                                                                   (unaudited, 
All figures in GBP million                           (unaudited)    restated^) 
--------------------------------------------------  ------------  ------------ 
Receivable on bank deposits                                  0.7           0.7 
Underlying finance income                                    0.7           0.7 
--------------------------------------------------  ------------  ------------ 
 
Amortisation of recapitalisation fee                       (0.2)         (0.1) 
Interest on bank loans and overdrafts                      (0.4)         (0.4) 
Finance lease expense                                      (0.5)         (0.5) 
Underlying finance expense                                 (1.1)         (1.0) 
--------------------------------------------------  ------------  ------------ 
Underlying net finance expense                             (0.4)         (0.3) 
Specific adjusting items: 
Defined benefit pension scheme net finance income            3.2           4.1 
--------------------------------------------------  ------------  ------------ 
Net finance income                                           2.8           3.8 
--------------------------------------------------  ------------  ------------ 
 

^See Note 1 for details of the restatement following adoption of IFRS 16.

 
 5.   Taxation 
 
 
                                            H1 2020                        H1 2019 
                                          (unaudited)               (unaudited, restated) 
                                 -----------------------------  ----------------------------- 
                                               Specific                       Specific 
All figures in GBP million                    adjusting                      adjusting 
 unless stated otherwise         Underlying       items  Total  Underlying       items  Total 
---------------------------      ----------  ----------  -----  ----------  ----------  ----- 
Profit before tax                      59.3        12.0   71.3        51.3         1.4   52.7 
Taxation (expense)/income             (7.3)       (1.8)  (9.1)       (5.5)         2.9  (2.6) 
-------------------------------  ----------  ----------  -----  ----------  ----------  ----- 
Profit for the period 
 attributable to equity 
 shareholders                          52.0        10.2   62.2        45.8         4.3   50.1 
-------------------------------  ----------  ----------  -----  ----------  ----------  ----- 
Effective tax rate                    12.3%                          10.7% 
-------------------------------  ----------  ----------  -----  ----------  ----------  ----- 
 

The total tax charge is GBP9.1m (H1 2019: GBP2.6m). The underlying tax charge of GBP7.3m (H1 2019: GBP5.5m) is calculated by applying the expected effective tax rate of 12.3% for the year ending 31 March 2020 to the Group's underlying profit before tax for the six months to 30 September 2019 (H1 2019: 10.7%). The effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development expenditure credits ('RDEC') in the UK which are accounted for under IAS12 within the tax line. The adjusted effective tax rate before the impact of RDEC would be 18.6%. The effective tax rate is expected to remain below the UK statutory rate in the medium term, subject to any tax legislation changes, variations in the geographic mix of profits, the future 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 2019 the Group had unused tax losses and surplus interest costs of GBP119.5m which are available for offset against future profits. A deferred tax asset of GBP5.0m (31 March 2019: GBP4.9m) is recognised in respect of GBP23.2m (31 March 2019: GBP21.1m) of US net operating losses. No deferred tax asset is recognised in respect of the remaining GBP96.3m of losses/interest costs due to uncertainty over the timing and extent of their utilisation. The Group has GBP61.8m of time-limited losses of which US capital losses of GBP29.9m will expire in 2020 and US net operating losses of GBP20.8m will expire in 2035, GBP9.6m in 2036 and GBP1.5m in 2038. Deferred tax has been calculated using the enacted future statutory tax rates.

The total specific adjusting items tax charge of GBP1.8m (H1 2019: credit GBP2.9m) arises mainly on a capital gain on the sale of property while the H1 2019 credit arises mainly in respect of initial recognition of corporate tax deductions for certain equity-settled share based payment schemes.

Adoption of IFRIC 23 'Uncertainty over income tax treatment'

Following adoption of the new accounting standard, IFRIC 23 'Uncertainty over income tax treatment', the Group's tax provisions have been re-assessed and recalculated. QinetiQ has chosen to apply the transition approach and has not restated comparative information in the financial statements. Rather, IFRIC 23 has been applied as an adjustment (to the value of GBP2.1m) to retained earnings at the beginning of the current financial year. Refer to note 1 for more details.

Current tax liability

The current tax recoverable is GBP1.9m as at 30 September 2019 (31 March 2019: liability GBP7.0m).

 
 6.   Earnings per share 
 

Basic earnings per share is calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the 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 2020        H1 2019 
                                                (unaudited)    (unaudited) 
----------------------------------  --------  -------------  ------------- 
Weighted average number of shares    Million          566.7          565.7 
Effect of dilutive securities        Million            4.0            2.7 
----------------------------------  --------  -------------  ------------- 
Diluted number of shares             Million          570.7          568.4 
----------------------------------  --------  -------------  ------------- 
 

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 2020        H1 2019 
Underlying EPS                                               (unaudited)    (unaudited) 
-------------------------------------------  ------------  -------------  ------------- 
Profit attributable to equity shareholders    GBP million           62.2           50.1 
Remove profit after tax in respect of 
 specific adjusting items                     GBP million         (10.2)          (4.3) 
-------------------------------------------  ------------  -------------  ------------- 
Underlying profit after taxation              GBP million           52.0           45.8 
-------------------------------------------  ------------  -------------  ------------- 
Weighted average number of shares                 Million          566.7          565.7 
-------------------------------------------  ------------  -------------  ------------- 
Underlying basic EPS                                Pence            9.2            8.1 
-------------------------------------------  ------------  -------------  ------------- 
Diluted number of shares                          Million          570.7          568.4 
-------------------------------------------  ------------  -------------  ------------- 
Underlying diluted EPS                              Pence            9.1            8.1 
-------------------------------------------  ------------  -------------  ------------- 
 
 
                                                                      H1 2020        H1 2019 
Basic and diluted EPS                                             (unaudited)    (unaudited) 
----------------------------------------------  --------------  -------------  ------------- 
Profit attributable to equity shareholders         GBP million           62.2           50.1 
Weighted average number of shares                      Million          566.7          565.7 
----------------------------------------------  --------------  -------------  ------------- 
Basic EPS - total Group                                  Pence           11.0            8.9 
----------------------------------------------  --------------  -------------  ------------- 
Diluted number of shares                               Million          570.7          568.4 
Diluted EPS - total Group                                Pence           10.9            8.8 
------------------------------------------  ------------------  -------------  ------------- 
 
 
 
 7.   Net cash 
 
 
 All figures in GBP million                      30 September    30 September       31 March 
                                                         2019            2018 
                                                  (unaudited)     (unaudited,           2019 
                                                                    restated) 
                                                                                 (unaudited, 
                                                                                   restated) 
---------------------------------------------  --------------  --------------  ------------- 
 Current financial assets/(liabilities) 
 Deferred financing costs                                 0.4               -            0.4 
 Finance leases                                         (8.6)           (7.0)          (9.7) 
 Derivative financial assets                              0.1               -            0.1 
 Derivative financial liabilities                       (0.7)           (1.6)          (1.1) 
---------------------------------------------  --------------  --------------  ------------- 
 Total current net financial liabilities                (8.8)           (8.6)         (10.3) 
 Non-current financial assets/(liabilities) 
 Deferred financing costs                                 1.0               -            0.9 
 Finance leases                                        (19.8)          (21.3)         (19.8) 
 Derivative financial assets                              0.1               -              - 
 Derivative financial liabilities                       (0.2)           (0.3)          (0.3) 
---------------------------------------------  --------------  --------------  ------------- 
 Total non-current net financial liabilities           (18.9)          (21.6)         (19.2) 
---------------------------------------------  --------------  --------------  ------------- 
 Total net financial liabilities                       (27.7)          (30.2)         (29.5) 
 Cash and cash equivalents                              201.2           251.0          190.8 
---------------------------------------------  --------------  --------------  ------------- 
 Total net cash as defined by the Group                 173.5           220.8          161.3 
---------------------------------------------  --------------  --------------  ------------- 
 
 
 8.   Cash flows from operations 
 
 
                                                        H1 2020 
                                                                                             Year ended 
                                                                                               31 March 
                                                                 H1 2019 (unaudited/   2019 (unaudited/ 
All figures in GBP million                          (unaudited)            restated)          restated) 
-------------------------------------------------  ------------  -------------------  ----------------- 
Profit after tax for the period                            62.2                 50.1              113.9 
Adjustments for: 
Taxation expense                                            9.1                  2.6                9.3 
Net finance income                                        (2.8)                (3.8)              (7.3) 
Gain on sale of investment                                    -                (1.1)              (1.1) 
Gain on sale of property                                 (13.3)                (0.1)              (0.2) 
Impairment of property                                        -                  2.6                6.4 
Pension past service cost                                     -                    -                0.7 
Transaction costs in respect of acquisition 
 of business                                                1.4                  0.2                1.3 
Amortisation of purchased or internally 
 developed intangible assets                                1.8                  1.5                3.2 
Amortisation of intangible assets arising 
 from acquisitions                                          3.1                  1.1                3.9 
Depreciation of property, plant and equipment              20.0                 16.8               37.5 
(Profit)/loss on disposal of plant and equipment          (1.6)                  0.9              (5.5) 
Share of post-tax loss/(profit) of equity 
 accounted entities                                         1.0                  0.2              (0.6) 
Share-based payments charge                                 3.6                  2.4                6.1 
Retirement benefit contributions in excess 
 of income statement expense                              (2.0)                (2.3)              (1.8) 
Net movement in provisions                                (0.4)                  2.3              (3.6) 
 Increase in inventories                                  (7.6)                (0.3)              (0.5) 
 Decrease/(increase) in receivables                        32.5                  5.4             (48.7) 
 (Decrease)/increase in payables                         (30.0)               (23.6)               21.3 
-------------------------------------------------  ------------  -------------------  ----------------- 
Changes in working capital                                (5.1)               (18.5)             (27.9) 
 
Net cash flow from operations                              77.0                 54.9              134.3 
-------------------------------------------------  ------------  -------------------  ----------------- 
 

Reconciliation of net cash flow from operations to underlying net cash flow from operations to free cash flow

 
                                                                                                  Year ended 
                                                                                                    31 March 
                                                                      H1 2019 (unaudited/   2019 (unaudited/ 
All figures in GBP million                       H1 2020 (unaudited)            restated)          restated) 
----------------------------------------------   -------------------  -------------------  ----------------- 
Net cash flow from operations                                   77.0                 54.9              134.3 
Add back specific adjusting item: acquisition 
 integration costs                                                 -                    -                0.7 
-----------------------------------------------  -------------------  -------------------  ----------------- 
Underlying net cash flow from operations                        77.0                 54.9              135.0 
Add: proceeds from disposal of plant and 
 equipment                                                       1.6                    -                6.9 
Less: tax and net interest payments                            (9.1)                (5.0)             (11.1) 
Less: purchases of intangible assets and 
 property, plant & equipment                                  (40.4)               (48.3)             (87.6) 
-----------------------------------------------  -------------------  -------------------  ----------------- 
Free cash flow                                                  29.1                  1.6               43.2 
-----------------------------------------------  -------------------  -------------------  ----------------- 
 

Underlying cash conversion ratio

 
                                                                                              Year ended 
                                                                                                31 March 
                                                                  H1 2019 (unaudited/   2019 (unaudited/ 
                                             H1 2020 (unaudited)            restated)          restated) 
------------------------------------------   -------------------  -------------------  ----------------- 
Underlying operating profit - GBP million                   59.7                 51.6              124.9 
Underlying net cash flow from operations 
 - GBP million                                              77.0                 54.9              135.0 
-------------------------------------------  -------------------  -------------------  ----------------- 
Underlying cash conversion ratio - %                        129%                 106%               108% 
-------------------------------------------  -------------------  -------------------  ----------------- 
 
 
 9.   Financial risk management 
 
 

The interim financial statements do not include all financial risk management information and disclosures required in annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 31 March 2019. 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 2019, are as follows:

 
all figures in GBP million                 Level 1  Level 2  Level 3  Total 
-----------------------------------------  -------  -------  -------  ----- 
Assets: 
Current derivative financial instruments         -      0.1        -    0.1 
Non-current derivative financial 
 instruments                                     -      0.1        -    0.1 
 
Liabilities: 
Current derivative financial instruments         -    (0.7)        -  (0.7) 
Non-current derivative financial 
 instruments                                     -    (0.2)        -  (0.2) 
Total                                            -    (0.7)        -  (0.7) 
-----------------------------------------  -------  -------  -------  ----- 
 

The following table presents the Group's assets and liabilities that are measured at fair value as at 31 March 2019:

 
all figures in GBP million                 Level 1  Level 2  Level 3  Total 
-----------------------------------------  -------  -------  -------  ----- 
Assets: 
Current derivative financial instruments         -      0.1        -    0.1 
Non-current derivative financial                 -        - 
 instruments                                                       -      - 
 
Liabilities: 
Current derivative financial instruments         -    (1.1)        -  (1.1) 
Non-current derivative financial 
 instruments                                     -    (0.3)        -  (0.3) 
Total                                            -    (1.3)        -  (1.3) 
-----------------------------------------  -------  -------  -------  ----- 
 

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.

 
 10.   Dividends 
 

An analysis of the dividends paid and proposed in respect of the period ended 30 September 2019 and comparative periods is provided below:

 
                                         Pence per 
                                          ordinary 
                                             share  GBPm  Date paid/payable 
---------------------------------------  ---------  ----  ----------------- 
Interim 2020                                   2.2  12.5           Feb 2020 
---------------------------------------  ---------  ----  ----------------- 
 
Interim 2019                                   2.1  11.9           Feb 2019 
Final 2019                                     4.5  25.5           Aug 2019 
---------------------------------------  ---------  ----  ----------------- 
Total for the year ended 31 March 2019         6.6  37.4 
---------------------------------------  ---------  ----  ----------------- 
 

The interim dividend is 2.2p (interim 2019: 2.1p). The dividend will be paid on 7 February 2020. The ex-dividend date is 9 January 2020 and the record date is 10 January 2020.

 
 
 11.    Post-retirement benefits 
 

Set out below is a summary of the financial position of the Group's defined benefit pension scheme ('the Scheme'). The fair value of the Scheme's assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the Scheme's liabilities, which are derived from cash flow projections over long periods, and thus inherently uncertain, are as follows:

 
                                                    30 September  30 September    31 March 
                                                            2019          2018 
                                                     (unaudited)   (unaudited)        2019 
all figures in GBP million                                                       (audited) 
---------------------------------------------  -----------------  ------------  ---------- 
Equities - quoted                                          139.7         127.7       127.0 
Equities - unquoted                                         53.1          60.5        51.8 
Liability driven investment                                415.3         969.7       690.8 
Corporate bonds                                                -         308.9        96.0 
Asset backed security investments                          452.0             -           - 
Alternative bonds - quoted                                 328.3         201.8       304.4 
Alternative bonds - unquoted                                   -          78.4           - 
Property funds                                             145.2         144.9       145.6 
Cash and other equivalents                                  41.0          75.9        75.1 
Derivatives                                                  1.4         (0.9)         2.5 
Insurance buy-in policy                                    608.2             -       566.4 
Outstanding payment due in respect of buy-in                   -             -      (96.0) 
Total market value of Scheme assets                      2,184.2       1,966.9     1,963.6 
Present value of Scheme liabilities                    (1,888.7)     (1,613.1)   (1,704.5) 
---------------------------------------------  -----------------  ------------  ---------- 
Net pension asset before deferred tax                      295.5         353.8       259.1 
Deferred tax liability                                    (54.6)        (64.9)      (48.6) 
---------------------------------------------  -----------------  ------------  ---------- 
Net pension asset after deferred tax                       240.9         288.9       210.5 
---------------------------------------------  -----------------  ------------  ---------- 
 
  Changes to the net pension asset 
                                                                                  31 March 
                                                                  30 September 
                                                                          2018        2019 
                                                    30 September 
all figures in GBP million                      2019 (unaudited)   (unaudited)   (audited) 
---------------------------------------------  -----------------  ------------  ---------- 
Opening net pension asset before deferred 
 tax                                                       259.1         316.2       316.2 
Net finance income                                           3.2           4.1         8.2 
Net actuarial gain/(loss)                                   31.2          31.2      (66.4) 
Contributions by the employer                                2.7           2.7         2.7 
Administration expenses                                    (0.7)         (0.4)       (0.9) 
Past service cost                                              -             -       (0.7) 
Closing net pension asset before deferred 
 tax                                                       295.5         353.8       259.1 
---------------------------------------------  -----------------  ------------  ---------- 
 

Assumptions

The major assumptions used in the IAS 19 valuations of the Scheme were:

 
                                                    30 September       30 September    31 March 
                                                2019 (unaudited)   2018 (unaudited) 
                                                                                           2019 
                                                                                      (audited) 
---------------------------------------------  -----------------  -----------------  ---------- 
Discount rate applied to Scheme liabilities                1.85%              2.90%       2.45% 
CPI inflation assumption                                   2.30%              2.35%       2.35% 
---------------------------------------------  -----------------  -----------------  ---------- 
Assumed life expectancies in years: 
Future male pensioners (currently aged 60)                    87                 88          87 
Future female pensioners (currently aged 60)                  89                 90          89 
Future male pensioners (currently aged 40)                    89                 90          89 
Future female pensioners (currently aged 40)                  91                 92          91 
---------------------------------------------  -----------------  -----------------  ---------- 
 

The sensitivity of the gross Scheme liabilities to each of the key assumptions is shown in the following table:

 
                                                                 Indicative impact 
                                         Indicative impact        on net pension 
Key assumptions    Change in assumption   on Scheme liabilities   asset 
                   --------------------  ---------------------- 
Discount rate      Increase by 0.1%      Decrease by GBP38m      Decrease by GBP14m 
Rate of inflation  Increase by 0.1%      Increase by GBP38m      Increase by GBP14m 
                   Increase by one 
Life expectancy     year                 Increase by GBP65m      Decrease by GBP44m 
-----------------  --------------------  ----------------------  ------------------ 
 

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 2019 this hedges against approximately 86% of the interest rate and 92% of the inflation rate risk, as measured on the Trustees' gilt-funded basis.

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (projected unit credit method) has been applied as when calculating the pension liability recognised within the statement of financial position. The methods and types of assumption did not change.

The accounting assumptions noted above are used to calculate the 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 triennial valuation of the Scheme was a net surplus of GBP139.7m as at 30 June 2017. 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.

Per the Scheme rules, the Company has an unconditional right to a refund of any surplus that 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.

 
 12.   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 2019 are 6,174,168 shares (31 March 2019: 6,946,678 shares).

In the six months to 30 September 2019 the Group granted 0.5 million new share-based awards to employees (30 September 2018: 0.1 million).

 
 13.   Related party transactions with equity accounted investments 
 

During the period there were sales to associates and joint ventures of GBP2.4m (30 September 2018: GBP6.3m). At the period end there were outstanding receivables from associates and joint ventures of GBP1.5m (30 September 2018: GBP5.3m).

 
 14.   Capital commitments 
 

The Group has the following capital commitments for which no provision has been made:

 
                                                    31 March 2019 
                                      30 September 
all figures in GBP million        2019 (unaudited)      (audited) 
---------------------------      -----------------  ------------- 
Contracted                                    35.7           40.6 
-------------------------------  -----------------  ------------- 
 

Capital commitments at 30 September 2019 include GBP22.1m (31 March 2019: GBP20.6m) in relation to property, plant and equipment that will be wholly funded by a third party customer under a long-term contract arrangements. These primarily relate to investments under the LTPA contract.

Responsibility statements of the Directors in respect of the interim financial report

The Directors confirm to the best of our knowledge:

 
 --   the condensed set of financial statements has been prepared 
       in accordance with IAS 34 Interim Financial Reporting 
       as adopted by the EU 
 --   the interim management report includes a fair review 
       of the information required by: 
         (a)   DTR 4.2.7R of the Disclosure Guidance and Transparency 
                Rules, being an indication of important events that 
                have occurred during the first six months of the 
                financial year 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 year; and 
         (b)   DTR 4.2.8R of the Disclosure Guidance and Transparency 
                Rules, being related party transactions that have 
                taken place in the first six months of the current 
                financial year and that have materially affected 
                the financial position or performance of the entity 
                during that period; and any changes in the related 
                party transactions described in the last annual report 
                that could do so. 
 
 

The Directors of QinetiQ Group plc are listed in the QinetiQ Group plc Annual Report for 31 March 2019.

By order of the Board

 
 
 Neil Johnson       Steve Wadey               David Smith 
 Chairman           Chief Executive Officer   Chief Financial 
                                               Officer 
 14 November 2019   14 November 2019          14 November 2019 
 

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 2019. 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 International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

 
      --              the Condensed consolidated balance sheet as at 30 September 
                       2019; 
      --              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 have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

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.

Our responsibility is to express a conclusion on the interim financial statements in the interim results based on our review. 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.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board 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.

PricewaterhouseCoopers LLP

Chartered Accountants

Southampton

14 November 2019

Glossary

 
 
CPI     Consumer Price Index 
EBITDA  Earnings before interest, tax, depreciation and amortisation 
EPS     Earnings per share 
IAS     International Accounting Standards 
IFRS    International Financial Reporting Standards 
LTPA    Long Term Partnering Agreement: A 25-year contract (re-priced 
         every five years) established in 2003 to manage the MOD's 
         test and evaluation ranges. 
 
MOD     UK Ministry of Defence 
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 4 
  income/expense            to exclude 'specific adjusting items' 
                          ----------------------------------------------  ------------------- 
 Underlying profit         Profit before/after tax as adjusted             Note 5 
  before/after tax          to exclude 'specific adjusting items' 
                          ----------------------------------------------  ------------------- 
 Underlying effective      The tax charge for the period excluding         Note 5 
  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 6 
  and diluted EPS           as adjusted to exclude 'specific 
                            adjusting items' 
                          ----------------------------------------------  ------------------- 
                           Amortisation of intangible assets               Note 3 
  Specific adjusting        arising from acquisitions; impairment 
  items                     of property; gains/losses on disposal 
                            of property, investments and intellectual 
                            property; net pension finance income; 
                            pension past service costs, acquisition 
                            costs; 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. Includes share of orders 
                            won by joint ventures 
                          ----------------------------------------------  ------------------- 
 Backlog, funded backlog   The expected future value of revenue            N/A 
  or order book             from contractually committed and 
                            funded customer orders 
                          ----------------------------------------------  ------------------- 
 Book to bill ratio        Ratio of funded orders received in              N/A 
                            the 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 7 
                            combines cash and cash equivalents 
                            with other financial assets and liabilities, 
                            primarily available for sale investments, 
                            derivative financial instruments 
                            and finance lease assets/liabilities. 
                          ----------------------------------------------  ------------------- 
 Underlying net cash       Net cash flow from operations before            Note 8 
  flow from operations      cash flows of specific adjusting 
                            items 
                          ----------------------------------------------  ------------------- 
 Underlying operating      The ratio of underlying net cash                Note 8 
  cash conversion           flow from operations to underlying 
                            operating profit 
                          ----------------------------------------------  ------------------- 
 Free cash flow            Underlying net cash flow from operations        Note 8 
                            less net tax and interest payments 
                            less purchases of intangible assets 
                            and property, plant and equipment 
                            plus proceeds from disposal of plant 
                            and equipment. 
                          ----------------------------------------------  ------------------- 
 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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