TIDMQQ.
RNS Number : 5501N
QinetiQ Group plc
21 May 2020
Preliminary Results
21 May 2020
Fourth year of growth - well positioned for a new world
Results for the year ended 31 March 2020
Statutory results Underlying* results
2020 2019 2020 2019
Revenue GBP1,072.9m GBP911.1m GBP1,072.9m GBP911.1m
Operating profit^ GBP117.6m GBP114.8m GBP133.2m GBP124.9m
Profit after tax GBP106.5m GBP113.9m GBP113.7m GBP111.5m
Earnings per share 18.7p 20.1p 20.0p 19.7p
Full year dividend per share 2.2p 6.6p 2.2p 6.6p
Total funded order backlog (1) GBP3,104.9m GBP3,133.6m
Total orders GBP2,227.4m GBP776.4m
Orders excluding LTPA amendments GBP972.1m GBP776.4m
(2)
Net cash inflow from operations^ GBP166.5m GBP134.6m GBP177.8m GBP135.3m
Net cash^ GBP84.7m GBP160.5m
* Definitions of the Group's 'Alternative Performance Measures' can
be found in the glossary ^ Prior year restated due to the retrospective
adoption of the new accounting standard, IFRS 16, in respect of leases;
refer to Note 1. (1) 2019 adjusted to include GBP1.3bn LTPA amendment
signed 5 April 2019 (2) Includes share of Joint Ventures, excludes
GBP1.3bn LTPA contract amendment signed 5 April 2019
Delivered fourth year of growth
- Orders up 25% (excluding the LTPA amendment); largest annual
order intake in 9 years
- Revenue up 18%, 10% on an organic basis
- Underlying operating profit up 7%, 2% on an organic basis, underlying
EPS up 2%
- 133% underlying cash conversion pre-capex
Driving growth through disciplined execution of strategy
- Secured GBP168m of orders under Engineering Delivery Partner
(EDP) contract
- Won four major long-term contracts in UK, US and Belgium
- Completed acquisitions of MTEQ in the US and NSC in the UK
- Grown international revenue from 21% to 31% in four years
- Improved employee engagement by 10%, driving a high performance
culture
Strategic response to COVID-19 crisis over the coming year and beyond
- Robust action to build resilience to immediate challenges
- Partnering with our customers to respond to their evolving priorities
- Engaging our employees to adapt our working practices
- Accelerating capabilities to meet the needs of a new world
- As previously announced, guidance for Group performance and dividend
decision later in the year
Steve Wadey, Group Chief Executive Officer said:
"Our immediate priority in response to the COVID-19 crisis
remains protecting the health and wellbeing of our people who are
doing a fantastic job continuing to deliver critical work for our
customers. The impact on our performance has been limited to date,
predominantly in our shorter-cycle products business. We have taken
prudent actions to boost the resilience of our company by managing
cash outflows and reducing costs in the short-term, whilst ensuring
we continue to deliver for our customers."
"We delivered a fourth consecutive year of top-line growth. Our
strategy is working to successfully become a truly integrated
global company. With strong order intake, organic profit growth and
net cash on balance sheet, we enter this period of uncertainty in a
strong position enabling us to be agile and proactive in addressing
both the short-term challenges and pursuing medium to long-term
growth."
Preliminary results presentation:
There will be a webcast presentation of the preliminary results
at 1000 hours UK time on 21 May 2020. The webcast is available at
https://us02web.zoom.us/webinar/register/WN_EUdJ4Q-URMGpkjiC-EMfFA
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:
Ian Brown, Group Head of Investor Relations: +44 (0) 7908 251123
Citigate Dewe Rogerson (Media enquiries): +44 (0) 20 7638 9571
Chris Barrie +44 (0)7968 727 289
Ellen Wilton +44 (0)7921 352 851
Basis of preparation:
Throughout this document, certain measures are used to describe
the Group's financial performance which are not recognised under
IFRS or other generally accepted accounting principles (GAAP). The
Group's Directors and management assess financial performance based
on underlying measures of performance, which are adjusted to
exclude certain 'specific adjusting items'. In the judgment of the
Directors, the use of alternative performance measures (APMs) such
as underlying operating profit and underlying earnings per share
are more representative of ongoing trading, facilitate meaningful
year-to-year comparison and, therefore, allow the reader to obtain
a fuller understanding of the financial information. The adjusted
measures used by QinetiQ may differ from adjusted measures used by
other companies. Details of QinetiQ's APMs are set out in the
glossary to the document.
Year references (FY20, FY19, FY18, 2020, 2019, 2018) refer to
the year ended 31 March.
Disclaimer
This document contains certain forward-looking statements
relating to the business, strategy, financial performance and
results of the Company and/or the industry in which it operates.
Actual results, levels of activity, performance, achievements and
events are most likely to vary materially from those implied by the
forward-looking statements. The forward-looking statements concern
future circumstances and results and other statements that are not
historical facts, sometimes identified by the words 'believes','
expects', 'predicts', 'intends', 'projects', 'plans', 'estimates',
'aims', 'foresees', 'anticipates', 'targets', 'goals', 'due',
'could', 'may', 'should', 'potential', 'likely' and similar
expressions, although these words are not the exclusive means of
doing so. These forward-looking statements include, without
limitation, statements regarding the Company's future financial
position, income growth, impairment charges, business strategy,
projected levels of growth in the relevant markets, projected
costs, estimates of capital expenditures, and plans and objectives
for future operations. Forward-looking statements contained in this
announcement regarding past trends or activities should not be
taken as a representation that such trends or activities will
continue in the future. Nothing in this document should be regarded
as a profit forecast.
The forward-looking statements, including assumptions, opinions
and views of the Company or cited from third party sources,
contained in this announcement are solely opinions and forecasts
which are uncertain and subject to risks. Although the Company
believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that these
expectations will prove to be correct. Actual results may differ
materially from those expressed or implied by these forward-looking
statements. A number of factors could cause actual events to differ
significantly and these are set out in the principal risks and
uncertainties section of this document.
Most of these factors are difficult to predict accurately and
are generally beyond the control of the Company. Any
forward-looking statements made by, or on behalf of, the Company
speak only as of the date they are made. Save as required by law,
the Company will not publicly release the results of any revisions
to any forward-looking statements in this document that may occur
due to any change in the Directors' expectations or to reflect
events or circumstances after the date of this document.
Chief Executive Officer's Review
Through the consistent and successful implementation of our
strategy we have delivered our fourth year of growth. Our FY20
performance was strong, with the largest order intake in nearly a
decade, revenue growth of 18% and operating profit growth of 7%. We
also completed our largest acquisition to date under our strategy
with the purchase of MTEQ. This significantly enhances our
capabilities in sensing technology, complements our existing US
business and expands our presence in the world's largest defence
market. With our strategy firmly embedded and delivering consistent
results, we are taking steps to mature our organisation ensuring we
have the right teams, systems and processes in place to continue
building a truly integrated global defence and security
company.
Strategic achievements
Having launched our vision-based strategy in 2016, we are
delivering significant progress and continue to drive its
implementation. Our strategy has three mutually reinforcing
pillars: 1) leading and modernising UK defence test and evaluation
(T&E), 2) building an international company, and 3) innovating
to deliver advantage to our customers.
During the course of FY20 we secured many strategic
achievements, winning significant orders, delivering for our
customers, investing in our capabilities and successfully acquiring
two businesses. What has been particularly notable is the
consistency of performance across our business. The growth we are
delivering is across all areas of QinetiQ, both within EMEA
Services and Global Products in the UK and internationally.
UK International Innovation
-- Continuing successful -- Record year of growth -- GBP168m of new orders
investment and delivery in Australia under the Engineering
against amended LTPA -- Grew international Delivery Partner
contract revenues to 31% of -- contract
-- Acquired Newman & our company EUR75m contract from
Spurr Consultancy, -- Completed acquisition European Space Agency
enhancing our training of MTEQ and secured -- for ALTIUS satellite
and simulation capabilities special security agreement; GBP67m contract to
enabling global collaboration develop secure satellite
Secured orders for navigation receivers
-- key US robotic Program
of Record
---- ----------------------------- ---- ------------------------------- ---- --------------------------
We outline more of our FY20 strategic progress in our Operating
Review.
Current impact from COVID-19
Our EMEA Services division benefits from long-term contracts,
performing work that is critical to sovereign defence capabilities.
To date, the effects of COVID-19 have been limited within this
division. We have experienced some limited delay in trial activity,
and in Germany a reduction in flying hours, while other work more
directly associated with the response to COVID-19 has been
accelerated. While many of our employees are able to work
effectively and productively from home, similar requirements for
our customers and partners to do the same are likely to have a
knock-on effect to our business, although it is difficult to
quantify the effects at this stage.
The scale and impact of COVID-19 became increasingly apparent as
we approached our year end. As we enter FY21, we are seeing
isolated effects to our business associated with the restrictions
on travel and requirements to implement social distancing. These
effects are more likely in our shorter-cycle products business
outside of our home and priority countries, particularly within
QinetiQ Target Systems where some customers have delayed trial
activity and reduced orders for targets.
Strategic response to COVID-19
We entered FY21 in a very strong position, with a large order
book and net cash on our balance sheet. Despite our resilient
business model and strong financial position, we think it is
appropriate to be prudent and have taken decisive action now to
maintain the strength of our business in the long-term interests of
our employees, customers and investors.
The COVID-19 crisis creates uncertainty and as yet, with no
clear guidance on the scale back of national safeguarding measures
as well as the potential knock-on impact to customer priorities and
budgets, we are taking an appropriately cautious approach. We hope
the impact is less pronounced than we are planning for, in which
case we will be able to remove the actions quickly.
We are ensuring that our strategic response to the COVID-19
crisis is fair, balanced and proportionate across all our
stakeholders, enabling us to be agile and proactive so that we can
emerge from the crisis as a stronger more agile company and pursue
medium to long-term growth.
1) Our employees
Short-term
Our primary concern is for our people, whose knowledge and
expertise are key to our success. Globally, we are taking steps to
ensure that employees can work effectively and safely from home
while continuing to feel supported. For those employees who need to
work on our sites to enable delivery of critical defence and
national security programmes, we have implemented a range of
safeguarding measures including social distancing, additional
cleaning services and provision of personal protection equipment as
necessary to ensure our working environments are safe and
clean.
Longer-term
With nearly 80% of our employees working from home, our people
have successfully risen to the challenge of extensive remote
working delivering high levels of productivity and effectiveness.
To support longer-term remote working we are accelerating aspects
of our digital transformation and evolving our functional delivery
model. We are continuing our employee engagement activity using
virtual rather than physical meetings building on the positive 10%
increase in engagement scores we delivered during FY20. We have
continued our All Employee Incentive Scheme, which we introduced
last year, which will pay each employee GBP740 in QinetiQ shares
and is a key enabler for growth by aligning our employee and
shareholder interests.
2) Our customers
Short-term
The work QinetiQ does is vital to maintaining the capabilities
of defence, security and critical national infrastructure,
including the emergency services. Our customers are facing
significant challenges due to the threat of COVID-19, and we are
working closely with them to provide support delivering their
priorities at this critical time. We are proud of the role we play
in this regard, and we are aware of the responsibilities that we
are fulfilling.
Longer-term
We are partnering with customers to understand how their
longer-term needs will evolve. We anticipate that future defence
and security budgets are likely to come under pressure as the full
financial impact to governments of COVID-19 is understood. While
overall budgets may come under pressure, we anticipate there being
areas within overall defence spending, aligned with our strategy,
that will continue to grow. We occupy a privileged position in
defence with very close customer relationships and as such are able
to advise on defence and security priorities as well as upgrading
existing capabilities to respond to the latest threats.
We believe the challenges COVID-19 creates will accelerate the
shift to a new defence paradigm that puts rapid, mission-led
innovation at the centre of procurement, a trend that is well
aligned with our own innovation strategy, expertise and recently
acquired businesses. Our strategy, which we have been successfully
implementing over the last four years, was developed in a
constrained budgetary environment, and as such we are confident we
can continue to deliver medium to long-term and profitable growth
despite potential macro headwinds.
3) Our company and investors
Short-term
To protect our business we are implementing a series of
short-term actions to sustain our skills and critical capabilities
for the long-term. These temporary actions include the CEO and CFO
volunteering a salary reduction of c.33% and the wider Board
volunteering a 25% reduction in fees. We are also taking a prudent
approach to controlling cash outflows, including reducing operating
expenditure and deferring discretionary capital expenditure. All
bonuses will be paid in shares.
Given the unprecedented nature of COVID-19 and the Board's wish
to adopt a prudent course of action to protect the long-term, it
will postpone the decision on the proposal of a dividend until a
later date. This decision was not taken lightly and will be
reviewed as soon as sensible to do so.
We have a strong balance sheet with GBP85m of net cash available
and an undrawn committed revolving credit facility of GBP275m. The
initial five-year facility has been extended by one year to
September 2024 and has a further option to extend by one more year
to September 2025.
Longer-term
With 92% of our revenue delivered within our six home or
priority countries, we have a resilient business model and growth
strategy. We believe that the steps we are taking will preserve our
balance sheet strength and retain the critical talent we need
within our company. Our aim is to emerge from the current crisis
able to continue accelerating our strategy to meet the needs of a
new world, delivering both organic and inorganic growth.
We are continuing to make good progress on the integration of
our acquisitions of MTEQ and NSC. In the US, we are successfully
moving our governance structure to a Special Security Agreement
(SSA), which will allow greater coordination and collaboration with
QinetiQ globally supporting our longer term growth.
In April, we implemented our new Global Operating Model,
simplifying our management structure, digitalising our business,
leveraging our capabilities globally and driving a performance
culture across the organisation.
By taking prudent actions to preserve our balance sheet, we will
be well placed to take advantage of the opportunities created by
the current crisis, particularly in M&A.
Our strategy has enabled us to successfully grow in an uncertain
world over the last four years by adding value to our customers.
Whilst the world has changed around us, our strategy is unchanged
and is more relevant than ever to meet the needs of our customers
in this new world.
Outlook - FY21
While we enter FY21 in a position of strength, it is too early
to draw conclusions on the overall impact of COVID-19 to our
business. At this stage we are planning for a range of outcomes
depending upon the duration and extent of national safeguarding
measures and any potential budget pressures. We have implemented
short-term temporary actions to mitigate the immediate challenges
and will provide further updates to the market as we gain more
clarity both in terms of near-term trading and longer-term
trends.
Outlook - Longer term
With the continued implementation of our strategy and
investment, we are well placed to respond to changing customer
requirements delivering medium to long-term, profitable growth.
Steve Wadey, Chief Executive Officer, 21 May 2020
Chief Financial Officer's Review
Overview of full year results
We reported a strong performance in FY20, delivering growth
across orders, revenue and profitability as we continue to
successfully implement our strategy. We enter FY21 in a strong
position to face the challenges arising from COVID-19, with a large
order backlog and a robust balance sheet. Strong cash generation
from the company has continued in FY20 with 133% cash conversion
and a net cash position of GBP84.7m continues to provide support
for investment opportunities.
Orders in the year totalled GBP972.1m (2019: GBP776.4m), a 19%
increase on an organic basis. This was driven by GBP168m of orders
under the EDP framework contract in EMEA services, a GBP67m UK
Robust Global Navigation System (R-GNS) order and EUR75m contract
with the European Space Agency for the Altius satellite in Global
Products.
At the beginning of the new financial year, approximately
GBP850m of the Group's FY21 revenue was under contract, compared to
GBP706m (of the FY20 revenue) at the same point last year. This
reflects the contribution from the two acquired businesses in the
year together with the 19% organic increase in orders won in the
year.
Revenue increased 18% at GBP1,072.9m (2019: GBP911.1m), assisted
by a full-year of trading from our 2019 acquisitions and a GBP39.7m
contribution from MTEQ and NSC which both completed during the
second half of FY20. Revenue grew by 10% on an organic basis, with
a 12% increase in EMEA Services primarily due to Engineering
Delivery Partner (EDP) and a 5% increase in Global Products driven
by small robotics and upgrade kits in QNA as well as ongoing growth
in QTS.
Underlying operating profit was up 7% at GBP133.2m (2019
restated: GBP124.9m), assisted by GBP6m (2019: GBP7m) non-recurring
trading items. Current year non-recurring trading items include a
GBP4m benefit in respect of finalising business rates agreements
and a GBP3m benefit related to cost recovery on a major contract in
the EMEA Services division, partially offset by a number of other
project and commercial risk reassessments. During the year we
completed the acquisitions of MTEQ and Newman & Spurr
Consultancy which together contributed GBP3.4m of operating profit
in the period of our ownership. Excluding the FY20 acquisitions,
the impact of a full year of trading versus a part year of trading
for the 2019 acquisitions and the effect of foreign exchange,
underlying operating profit for the Group increased organically by
GBP2m (2%).
EMEA Services operating profit grew 4% assisted by a full-year
of trading from our 2019 acquisitions. On an organic basis EMEA
Services profit grew by 1%. The level of profit from non-recurring
trading items in FY20 was GBP2m lower compared to the prior year.
Excluding such non-recurring trading items, organic growth was 4%.
Global Products underlying operating profit grew by 16% reflecting
the acquisition of MTEQ in December 2019. On an organic basis
Global Products profit grew by 4%. The level of non-recurring
charges was GBP1m lower in FY20 and excluding these items organic
profit declined by 1% driven by a loss in Optasense due to a
challenging trading environment.
Total operating profit was GBP117.6m (2019 restated: GBP114.8m),
net of GBP15.6m expense in respect of specific adjusting items
(2019: GBP10.1m), as set out below.
Underlying profit before tax increased 7% to GBP132.2m (2019
restated: GBP124.0m) in line with the increase in underlying
operating profit, with underlying net finance expense at GBP1.0m
(2019 restated: GBP0.9m).
Total profit before tax was GBP123.1m (2019: GBP123.2m).
Specific adjusting items
Specific adjusting items, shown in the 'middle column', at the
profit after tax level amounted to a total net loss of GBP7.2m
(2019: net profit of GBP2.4m). This included a gain on sale of
surplus property of GBP14.0m (2019: GBP0.2m) and net finance income
related to the defined benefit pension scheme of GBP6.5m (2019:
GBP8.2m) offset by a GBP14.1m goodwill impairment (2019: nil), in
relation to EIS Aircraft Operations in Germany (GBP4.3m) and our
Group's Advisory Services business unit (GBP9.8m), and costs of
GBP7.5m in respect of the acquisitions completed in the year (2019:
GBP2.0m). The tax effect of items impacting profit before tax was
an expense of GBP1.4m (2019: income of GBP0.4m). The tax line also
includes a GBP3.3m gain from recognising tax losses and surplus
interest costs on the balance sheet. See below.
Further analysis is set out in note 3 with goodwill (and
impairments of) discussed in note 13.
Net finance costs
Net finance income was GBP5.5m (2019 restated: GBP7.3m). The
underlying net finance expense was GBP1.0m (2019 restated: GBP0.9m)
with additional income of GBP6.5m (2019: GBP8.2m) in respect of the
defined benefit pension net surplus reported within specific
adjusting items.
Tax
The total tax charge was GBP16.6m (2019: GBP9.3m). The
underlying tax charge was GBP18.5m (2019: GBP12.5m) with an
underlying effective tax rate of 14.0% for the year ended 31 March
2020 (2019: 10.1%). 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 under IAS12 within the tax line. An adjusted
effective tax rate before the impact of RDEC would be 20.0%. The
effective tax rate is expected to remain below the UK statutory
rate in the medium term, subject to any tax legislation changes,
the geographic mix of profits, the recognition of deferred tax
assets and while the benefit of net RDEC retained by the Group
remains in the tax line.
A GBP3.3m credit in respect of recognition of tax losses in the
US has been classified as a specific adjusting item. This follows
from the acquisition of MTEQ in the year that contributes future
taxable profits against which historic unrecognised tax losses can
be utilised. The prior year included a GBP2.8m credit from initial
recognition of corporate tax deductions for certain equity-settled
share based payment schemes. Together with a GBP1.4m net expense
(2019: income of GBP0.4m) in respect of the pre-tax specific
adjusting items, the total specific adjusting items tax credit was
GBP1.9m (2019: GBP3.2m).
At 31 March 2020 the Group had unused tax losses and surplus
interest costs of GBP90.3m which are available for offset against
future taxable profits.
Cash flow, working capital, capex and net cash
Underlying net cash flow from operations was GBP177.8m (2019
restated: GBP135.3m) with an underlying operating cash conversion
of 133% (2019 restated: 108%).
Capital expenditure increased to GBP107.8m (2019: GBP80.7m) as
we continue to invest in core contracts including the LTPA
following the contract amendment announced in April 2019. After
paying tax and net interest of GBP10.5m the Group generated free
cash flow of GBP59.5m (2019 restated: GBP43.5m), before property
disposal proceeds of GBP12.5m (2019: GBP5.3m).
Overall capex between FY21-FY23 is expected to be in the range
of GBP70-100m per annum, of which the majority reflects our
investment into the LTPA. Given the nature of our business model,
we expect to be able to fund our capex requirements from
operational cash flow.
As at 31 March 2020 the Group had GBP84.7m net cash (2019
restated: GBP160.5m). The reduction in net cash was primarily due
to the GBP90.2m of consideration for the acquisition of MTEQ and
NSC, and payment of GBP38m of dividends; these were partially
offset by GBP59.5m free cash flow and GBP12.5m of property
disposals.
The Company's GBP275m multi-currency revolving credit facility
(with an 'accordion' feature to expand up to a maximum of GBP400m)
was extended during the year to 27 September 2024, with an option
to extend to a final maturity of 27 September 2025. The facility,
undrawn as at 31 March 2020, provides a modest margin adjustment of
+/- 0.02% based on QinetiQ's greenhouse gas emissions, compared to
targets, over the life of the facility.
Capital allocation
Priorities for capital allocation remain in the long-term:
1. Organic investment complemented by bolt-on acquisitions where
there is a strong strategic fit;
2. The maintenance of balance sheet strength;
3. A progressive dividend; and
4. The return of excess cash to shareholders.
The Group is not subject to any externally imposed capital
requirements.
Return on Capital Employed (ROCE)
In order to help understand the overall return profile of the
Group, QinetiQ have formulated a Return on Capital employed metric.
This is calculated as Underlying EBITA / (Average Capital Employed
less net pension asset), where average capital employed is defined
as shareholders equity plus net debt (or minus net cash).
For FY20 Group ROCE is 28% compared to 39% in the previous year
reflecting investment into our business to support sustainable long
term growth.
Earnings per share
Underlying basic earnings per share increased by 2% to 20.0p
(2019 restated: 19.7p) benefiting from the higher underlying profit
after tax. Basic earnings per share for the total Group (including
specific adjusting items) decreased 7% to 18.7p (2019 restated:
20.1p).
The average number of shares in issue during the year, as used
in the basic earnings per share calculations, was 567.0m (2019:
566.0m) and there were 567.2m shares in issue at 31 March 2020 (all
net of Treasury shares).
Dividend
Given the unprecedented nature of COVID-19 and the Board's wish
to adopt a prudent course of action to protect the long-term, as
announced on 1 April 2020, it will postpone the decision on the
proposal of a dividend until a later date.
Pensions
The net pension asset under IAS 19, before adjusting for
deferred tax, was GBP309.7m (31 March 2019: GBP259.1m). The key
driver for the increase in the net pension asset since the March
2019 year end was gains due to changes in financial assumptions
(primarily in respect of inflation), which decrease the present
value of scheme liabilities, partially offset by reduction in value
of scheme assets.
The key assumptions used in the IAS 19 valuation of the scheme
are set out in note 14.
Implementation of IFRS 16 'Leases'
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 for FY20 using the full
retrospective approach.
Under the new standard, companies will recognise new assets and
liabilities, bringing added transparency to the balance sheet. IFRS
16 eliminates the previous dual accounting model for lessees, which
distinguished 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 previous
finance lease accounting. Lessor accounting remains similar to
existing 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 GBP28.0m).
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.
Foreign exchange
The principal exchange rates affecting the Group were the
Sterling to US Dollar exchange rate and the Sterling to Australian
Dollar rate.
2020 2019
------------------- ----- -----
GBP/US$ - opening 1.30 1.40
GBP/US$ - average 1.27 1.31
GBP/US$ - closing 1.24 1.30
GBP/A$ - opening 1.83 1.83
GBP/A$ - average 1.86 1.80
GBP/A$ - closing 2.03 1.83
------------------- ----- -----
Trading Environment
The UK, US and Australia are our home countries where we have
our own indigenous industrial capabilities and collectively
represent 87% of our revenues.
UK
With defence spending of GBP41.3bn in 2020, the UK has the
largest defence budget in Europe. As the threat environment
continues to evolve the UK Ministry of Defence (MOD) is committed
to driving innovation and developing next generation capabilities.
This was recognised in the 2018 Modernising Defence Programme,
which placed a particular emphasis on technologies in areas such as
artificial intelligence, cyberspace and space; all areas in which
we have considerable expertise.
The UK spends approximately GBP1.5bn on Research, Development,
Test & Evaluation (RDT&E) and remains a key market for
QinetiQ where we continue to drive mission-led innovation. While
the outcome and timing of the forthcoming Integrated Security,
Defence & Foreign Policy Review is not yet known, QinetiQ is
partnered closely with the MOD to support it in achieving its
objectives and realising efficiencies, an approach we believe will
create new opportunities for growth. Whilst the COVID-19 pandemic
will result in significant fiscal pressure for the UK Government,
with the possibility this could be exacerbated by an unfavourable
conclusion to trade negotiations with the European Union, the UK's
spending commitments to NATO and the evolving threat environment
and need to ensure the resilience and security of critical national
infrastructure is likely to offer support to UK defence
budgets.
US
The US is by far the largest defence market globally with total
spending of $738bn in 2020, more than the next ten largest military
budgets combined. With continuing tensions between the US and
China, a more assertive Russia and widespread unrest in the Middle
East with a resurgent Iran, the 2018 National Defense Strategy
cited the need to modernise key capabilities across all domains to
maintain superiority and recognised the value of collaboration with
the private sector.
If passed, the FY21 Presidential budget request of $740bn
maintains support for key modernisation programmes and features the
largest RDT&E budget in 70 years, as the US looks to harness
emerging technologies. QinetiQ remains committed to supporting the
DOD and our existing expertise in robotics and autonomy are well
aligned with their ambitions to make greater use of this
technology, evidenced by our recent robotics contract wins. The
acquisition of MTEQ, specialising in next generation sensing
solutions, a complementary area of focus for the US, also creates
further opportunities for us to accelerate and sustain our growth
in the world's largest defence market.
Australia
In Australia, current defence spending of $33bn is forecast to
grow at 3% per annum over the next decade, underpinned by cross
party support for defence. The modernisation of defence platforms
remains a key priority as Australia seeks to reform its force
structure to counter rapid developments in "peer-to-peer" threats
and China's increasing assertiveness in the South China Sea. In
light of this environment Australia is increasingly working in
partnership with allied nations, particularly in the Pacific,
driving the need for greater interoperability between allied
forces. With the need for innovation to counter rapid developments
in the threat environment, Australia is placing an increased focus
on the RDT&E of cyber capability, hypersonic weapons and
autonomous vehicles. With a $1.2bn RDT&E budget, Australia
remains a key market for QinetiQ where we can provide the
Australian forces with assurance of existing military capability,
facilitate rapid experimentation of new capability and support
operational readiness.
Broader international markets
In order to achieve our ambition of growing international
revenue to 50% of Group revenue, we aim to drive growth in our
three home countries, three priority countries of Canada, Germany
and Belgium as well as wider international markets. Our
international strategy is underpinned by harnessing the skills and
expertise developed in our home countries across the Group to
support allies in other high growth markets.
Canada is an attractive market for QinetiQ where we see
opportunities to support the Canadian Armed Forces in modernising
their own capabilities. The outlook for Canadian defence spending
is positive with spending of $16.9bn in 2020 expected to grow by 5%
per annum over the next five years, underpinned by Canada's drive
to hit NATO spending targets.
Europe is also an attractive market for QinetiQ, representing
nearly 20% of global defence spending. Within this, Germany is a
key market with our in-country operation built on the acquisition
of EIS Aircraft Operations. Current defence spending in Germany is
$48bn and in a similar fashion to other NATO nations the trajectory
is positive supported by the drive to hit NATO spending
commitments. Belgium is another key market within Europe, where we
are seeing increasing demand for our space products driven by the
European Space Agency.
With growing unrest in the Gulf region, defence spending has
trended upwards. However, nations driving this spend have
predominantly focused on the procurement of new equipment and are
increasingly aware of the benefits of integration, assurance and
training to create true capabilities. We therefore see
opportunities in the Gulf region to support allied nations in
creating assured military capabilities.
Impact of COVID-19
The impacts of COVID-19 on our key markets have been both severe
and widespread, with most affected in some way. In recent months,
national safeguarding measures, including travel restrictions, put
in place to halt the spread of the virus have impacted our ability
to deliver for customers, with challenges relating to on-site
delivery and the shipment of products. Whilst this is short-term in
nature and we have been able to adapt to new ways of working to
minimise its impact, it would pose more of a challenge were these
measures a consistent feature over a longer period. The
unprecedented stimulus that many governments have deployed in
response to reduce the economic impact of the pandemic will
significantly reduce their fiscal flexibility and place pressure on
their spending. However, with the geopolitical environment growing
increasingly complex and the need to retain superior technological
advantage more pressing than ever, we believe demand in our key
markets will remain robust over the long-term.
Operating review
EMEA Services
2020 2019
GBPm GBPm
------------------------------------ ------- -------
Orders excluding LTPA amendments(1) 670.0 534.6
Revenue 797.4 687.7
Underlying operating profit^ 100.6 96.8
Underlying operating margin^ 12.6% 14.1%
Book to bill ratio(2) 1.1x 1.2x
Total funded order backlog 2,797.7 2,916.8
------------------------------------ ------- -------
(1) Includes share of orders from Joint Ventures
(2) B2B ratio is orders won divided by revenue recognised,
excluding the LTPA contract and share of JV orders
^ Prior year restated due to the retrospective adoption of the
new accounting standard, IFRS 16, in respect of leases. Refer to
Note 1.
Overview
EMEA (Europe, Middle East and Australasia) Services combines
world-leading expertise with unique facilities to provide
integrated capability generation and assurance. Our core value
proposition is built upon our expertise in capability integration,
threat representation and operational readiness underpinned by
long-term contracts that provide good visibility of revenues and
cash flows. The division is also a market leader in research and
advice in specialist areas such as Command, Control,
Communications, Computers, Intelligence, Surveillance and
Reconnaissance (C4ISR), weapons and energetics, cyber security and
procurement advisory services.
Financial performance
Orders for the year were GBP670m (2019: GBP534.6m), growing
GBP115.4m (22%) on an organic basis excluding acquisitions and
foreign exchange. The increase was driven by GBP168m of orders
under the Engineering Delivery Partner (EDP) framework contract and
a GBP67m order for the UK Robust Global Navigation System (R-GNS)
programme.
Revenue increased by 16% to GBP797.4m (2019: GBP687.7m),
including GBP29.2m from acquisitions, and increased by 12% on an
organic basis, principally driven by new work under the EDP and
Battlefield Tactical Communication and Information Systems (BATCIS)
contracts.
At the beginning of the new financial year GBP656m of the
division's FY21 revenue was under contract, compared to GBP565m (of
the FY20 revenue) at the same point last year. This reflects the
contribution from the acquired business in the year together with
the 22% organic increase in orders won in the year.
Underlying operating profit grew by 4% to GBP100.6m (2019
restated: GBP96.8m) assisted by a full-year of trading from our
2019 acquisitions. Organic growth was 1% due to GBP2m lower
non-recurring trading items at GBP7m (2019: GBP9m) comprising a
GBP4m benefit in respect of finalising business rates agreements
and a GBP3m benefit related to cost recovery on a major contract.
The increasing proportion of EDP work drives profit growth at a
lower rate than revenue growth, diluting the operating profit
margin, but has limited capital requirements supporting overall
returns.
Including the Long Term Partnering Agreement (LTPA), the
proportion of EMEA Services revenue derived from single source
contracts has remained stable at approximately 70% (2019:
approximately 70%). While we have increased revenue derived from
competitive contracts this has also been complemented by growth in
single source EDP work.
FY20 review
Air & Space (25% of EMEA Services revenue)
The Air & Space business de-risks complex aerospace
programmes by testing systems and equipment, evaluating the risks
and assuring safety.
-- Engineering Delivery Partner (EDP), our innovative delivery model
for the provision of engineering services, continued to be a key
driver of performance. In FY20 GBP168m of orders were contracted
through EDP taking the total since inception to GBP238m. While
EDP remains the default route for the procurement of engineering
services to DE&S, it is available to other MOD departments and
agencies creating further opportunities for growth.
-- Key contract awards through EDP include an GBP11m contract to
provide independent technical evaluation services on the F35 Lightning
II aircraft and shortly after year end, a GBP30m contract that
will unify the technical services provided to the Typhoon Delivery
Team.
-- Building on our investment in Test Aircrew Training, the transformed
Empire Test Pilots' School successfully delivered its first year
of the new syllabus, with all students passing. The new modernised
ETPS is equipped to continue delivering world-class test aircrew
training and we continue to experience strong demand for all courses
from both domestic and international customers.
Maritime, Land & Weapons (39% of EMEA Services revenue)
The Maritime, Land & Weapons business delivers operational
advantage to customers by providing independent research, test,
evaluation and training services.
-- Following the GBP1.3bn amendment to the LTPA in April 2019, we
are progressing through a two-year transition period to new ways
of working. We successfully reached the third operating milestone
in this transition on schedule with positive customer feedback.
We are continuing to drive modernisation to support our customer
in an increasingly complex threat environment.
-- As part of this transition many of our sites are undergoing investment
and enhancement of facilities and capabilities, enabling us to
support larger and more complex trials adding greater value for
our customers.
-- In April 2020 we were awarded a GBP13m contract as the industry
lead on the Weapons Sector Research Framework providing research
and technology into current and future weapons capabilities including
laser and directed energy weapons systems.
-- Our long-term contracts support solving complex customer problems
and have opened new opportunities for us including being awarded
a GBP5m contract to support the Royal Navy in developing their
approach to the new Carrier Strike group operations.
Cyber, Information & Training (CIT) (23% of EMEA Services
revenue)
The CIT business helps government and commercial customers
respond to fast-evolving threats based on its expertise in
training, secure communication networks and devices, intelligence
gathering and surveillance sensors, and cyber security.
-- The business delivered an excellent performance across all key
metrics as we continue to reposition the business to become a critical
mission assurance partner, driving improved visibility and growth.
-- Key contract wins include the GBP67m Robust Global Navigation System
(R-GNS) contract to develop secure satellite navigation receivers
on behalf of the MOD. The programme will deliver critical capability
to provide UK Defence with accurate and resilient positioning,
navigation and timing which will underpin the UK's ability to undertake
24/7 military operations around the world in the most demanding
and increasingly contested operational environments.
-- In February 2020 we completed the acquisition of Newman & Spurr
Consultancy (NSC) for GBP14m (net of cash acquired). NSC provides
a range of training and simulation solutions and the strategy-led
acquisition enhances our capability in areas such as modelling,
simulation and synthetic environments.
-- Following our strategic investment in November 2018, Inzpire, the
highly regarded provider of operational training services, continues
to perform in line with the Board's expectations, delivering good
growth in revenue and profit.
International (13% of EMEA Services revenue)
Our International business leverages our expertise and skills
developed in the UK, and applies them to opportunities in
attractive markets globally. Revenue derived from outside of the UK
is reported in many of our businesses and is not exclusive to our
International business unit.
-- The International business unit delivered a strong performance
with good growth in orders, revenue and profit.
-- This was underpinned by our performance in Australia where we delivered
record orders, as our status as a Major Service Provider in partnership
with Nova Systems continues to gather momentum and drive performance.
We are working with the Australian Government on a proposal to
design and build an Unmanned Air System (UAS) Test Range.
-- Our German operations, built on the acquisition of EIS Aircraft
Operations in October 2018 performed in line with expectations
for orders with some significant contract wins during the period.
Delivery performance and profitability was, however, impacted by
other operational and cost issues and towards the end of the financial
year by the effects of COVID-19. We have written down GBP4.3m of
goodwill associated with the acquisition in anticipation of the
financial impact of lower revenue and margins. We continue to seek
ways to leverage our capabilities within QinetiQ Germany and see
good opportunities to drive long-term growth in a significant European
defence market.
-- We operate three joint ventures in the Middle East. Our progress
in the region has been slower than anticipated, however we have
made good progress with a number of strategic contract wins including
two significant framework contracts to provide customer side consultancy
services. Looking forward we see encouraging opportunities as our
joint ventures continue to grow in maturity, capability and local
reputation.
Global Products
2020 2019
GBPm GBPm
----------------------------- ----- -----
Orders 302.1 241.8
Revenue 275.5 223.4
Underlying operating profit^ 32.6 28.1
Underlying operating margin^ 11.8% 12.6%
Book to bill ratio(1) 1.1x 1.1x
Funded backlog 307.2 216.8
----------------------------- ----- -----
^ Prior year restated due to the retrospective adoption of the
new accounting standard, IFRS 16, in respect of leases. Refer to
Note 1.
1) B2B ratio is orders won divided by revenue recognised
Overview
Global Products delivers innovative solutions to meet customer
requirements and undertakes contract-funded research and
development, developing intellectual property in partnership with
key customers and through internal funding with potential for new
revenue streams. The division is technology-based and has shorter
order cycles than EMEA Services so can have a more lumpy revenue
profile. Our strategy is to expand the product portfolio and win
larger, longer-term programmes to improve the consistency of the
financial performance of this division. In FY20 the company
expanded its products portfolio with the successful acquisition of
MTEQ.
Financial performance
Orders increased to GBP302.1m (2019: GBP241.8m) with growth
assisted by a EUR75m order for the European Space Agency Altius
contract and GBP25m of orders from the acquired MTEQ business,
partially offset by a C$51m order in the prior year figure in
respect of delivering unmanned air system services to the Canadian
Armed Forces. Organic orders growth was 14%.
At the beginning of the new financial year GBP193m of the
division's FY21 revenue was under contract, compared to GBP141m (of
the FY20 revenue) at the same point last year. This reflects the
contribution from the acquired business in the year together with
the organic increase in orders won in the year.
Revenue was up 23% on a reported basis at GBP275.5m (2019:
GBP223.4m), primarily due to contribution from the MTEQ business
acquired during the year. On an organic basis, revenue increased by
5% driven by small robotics and Talon upgrade kits in QNA, ongoing
growth in QTS and delivery of the Canadian armed forces contract
won in FY19.
Global Products underlying operating profit grew by 16% to
GBP32.6m (2019: GBP28.1m) reflecting the acquisition of MTEQ in
December 2019. On an organic basis operating profit increased by
4%, but excluding non-recurring trading items declined by 1%. This
was driven by a loss in Optasense, due to a challenging trading
environment, partially offset by growth in QTS and a more
profitable product mix in QNA.
FY20 review
United States (44% of Global Products revenue)
Our US business develops and manufactures innovative defence
products specialising in robotics, autonomy and sensing solutions.
This business unit comprises our existing US operations (QNA) as
well as MTEQ, which we acquired in December 2019.
-- Our US business delivered a strong performance in FY20, primarily
driven by robotics orders, with the first deliveries under the
Common Robotic System-Individual (CRS-I) contract accepted by the
customer.
-- We were also awarded the Robotic Combat Vehicle-Light (RCV-L) contract
to provide the US military with combat vehicles to support the
customer in determining the feasibility of integrating unmanned
vehicles into ground combat operations.
-- In December 2019, we completed the acquisition of Manufacturing
Techniques Inc. (MTEQ) for $105m with a potential further earn-out
of up to $20m. MTEQ is a leading provider of advanced sensing solutions
in the US, and the combination of MTEQ with our existing expertise
in robotics and autonomy capabilities creates a powerful customer
proposition.
-- The integration of our US businesses into a single entity operating
under a Special Security Agreement (SSA) is progressing well and
we are seeing an increasing number of opportunities for the combined
entities to work collaboratively, including on the RCV-L programme.
The change in the governance of our US business through the SSA
is a significant enabling factor. It will enhance our ability to
operate coherently and collaboratively across QinetiQ's global
operations meaning we are better able to innovate and deliver for
our customers.
OptaSense (9% of Global Products revenue)
OptaSense provides innovative fibre sensing solutions to deliver
decision-ready data in multiple vertical markets.
-- Despite a positive first half, performance at OptaSense deteriorated
in the second half, impacted by severe weakness in oil and gas
markets, which was further exacerbated by the impacts of COVID-19.
In light of this trading environment OptaSense reported a net
loss for the period of GBP1.9m.
Space Products (9% of Global Products revenue)
QinetiQ's Space Products business provides satellites, payload
instruments, sub-systems and ground station services.
-- Our Belgium based space business was awarded a EUR75m contract
with the European Space Agency (ESA) to develop and assemble the
new Altius satellite. The satellite extends Europe's capabilities
in operational Earth Observation and will study the distribution
of ozone in the earth's stratosphere helping to chart climate
change.
-- The satellite will be built utilising our new, higher grade cleanroom
facility in Kruibeke, Belgium that was officially opened during
the year. The upgraded facility gives us the capacity to produce
up to four major products at any one time supporting growth in
satellite and docking systems production capacity.
-- We were also awarded a EUR9m three-year contract to build equipment
that will support experiments in the International Space Station.
EMEA Products (38% of Global Products revenue)
EMEA Products provides research services and bespoke
technological solutions developed from intellectual property spun
out from EMEA Services. It also includes our QinetiQ Target Systems
(QTS) business.
-- Building on an excellent first half, QinetiQ Target Systems delivered
a strong performance with mid-teens growth in revenues and profit.
This was despite the impacts of COVID-19 towards the end of the
year which resulted in delayed trial activity and reduced targets
orders. Whilst we are currently experiencing COVID-19 related
disruption within QTS, we believe longer-term the business remains
well positioned, offering advanced target systems at an attractive
price point.
-- To support our medium-term growth and ensure our customers can
continue to emulate the most advanced aerial threats we launched
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. 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.
Principal risks and uncertainties
The Group continues to be exposed to a number of risks and
uncertainties which management continue to identify, assess and
mitigate to minimise their potential impact on the reported
performance of the Group. An explanation of risks and their
mitigations, together with details of our risk management framework
can be found in the annual report which will be available for
download at:
https://www.qinetiq.com/investors .
A summary of the significant risks and uncertainties is set out
below:
-- Reduced spending in the core markets in which the Group operates
due to government budget pressures;
-- Failure to execute the international strategy or adequately to
mitigate specific risks arising from international business;
-- Failure to create a culture of innovation, develop relevant technology
and business models or to attract and retain the right talent
to enable the realisation of new ideas for our customers and our
organisation;
-- A material element of the Group's revenue is dependent on a number
of UK Government contracts;
-- M&A activity forms a key element of our strategic growth plans
in order to expand our customer offerings;
-- The transformation programme does not realise the expected benefits;
-- The Group operates in highly regulated environments and recognises
that its operations have the potential to have an impact on a
variety of stakeholders;
-- A breach of physical data security, cyber-attacks or IT systems
failure could have an adverse impact on our customers' operations;
and
-- The COVID-19 pandemic disrupts QinetiQ operations.
Consolidated income statement
for the year ended 31 March
2020 2019 (restated)^
-------------------------------- --------------------------------
Specific Specific
adjusting adjusting
All figures in GBP million Note Underlying* items* Total Underlying* items* Total
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Revenue(1) 1,072.9 - 1,072.9 911.1 - 911.1
Operating costs excluding
depreciation and amortisation (903.6) (8.0) (911.6) (753.5) (2.7) (756.2)
Other income 9.2 14.0 23.2 10.6 0.2 10.8
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 178.5 6.0 184.5 168.2 (2.5) 165.7
Depreciation and impairment
of property, plant and
equipment (41.0) - (41.0) (40.1) (3.7) (43.8)
Impairment of goodwill - (14.1) (14.1) - - -
Amortisation of intangible
assets (4.3) (7.5) (11.8) (3.2) (3.9) (7.1)
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Operating profit/(loss) 133.2 (15.6) 117.6 124.9 (10.1) 114.8
Gain on sale of investments - - - - 1.1 1.1
Finance income 6 1.1 6.5 7.6 1.2 8.2 9.4
Finance expense 6 (2.1) - (2.1) (2.1) - (2.1)
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit/(loss) before
tax 132.2 (9.1) 123.1 124.0 (0.8) 123.2
Taxation (expense)/income 7 (18.5) 1.9 (16.6) (12.5) 3.2 (9.3)
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit for the year 113.7 (7.2) 106.5 111.5 2.4 113.9
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit is attributable
to
Owners of the Company 113.5 (7.2) 106.3 111.5 2.4 113.9
Non-controlling interests 0.2 - 0.2 - - -
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit for the year 113.7 (7.2) 106.5 111.5 2.4 113.9
------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Earnings per share for
profit attributable to
the owners of the Company 2020 2019 (restated)^
------------------ ------------------
All figures in pence Note Underlying* Total Underlying* Total
--------------------------- ---- ----------- ----- ----------- -----
Basic 8 20.0p 18.7p 19.7p 20.1p
Diluted 8 19.8p 18.6p 19.6p 20.0p
--------------------------- ---- ----------- ----- ----------- -----
(1) Revenue excludes the share of revenue of joint ventures
GBP3.3m (2019: GBP1.9m).
^ Prior year comparatives have been restated due to a change in
accounting policy in respect of leases. See note 1 for details.
* Alternative performance measures are used to supplement the
statutory figures. These are additional financial indicators used
by management internally to assess the underlying performance of
the Group. Definitions can be found in the glossary.
Consolidated comprehensive income statement
for the year ended 31 March
All figures in GBP million 2020 2019
---------------------------------------------------- ------ ------
Profit for the year 106.5 113.9
Items that will not be reclassified to profit
and loss:
Actuarial gain/(loss) recognised in defined benefit
pension schemes 39.8 (66.4)
Tax on items that will not be reclassified to
profit and loss (12.7) 11.3
---------------------------------------------------- ------ ------
Total items that will not be reclassified to
profit and loss 27.1 (55.1)
Items that may be reclassified subsequently to
profit and loss:
Foreign currency translation gains on foreign
operations 5.1 4.6
Movement in deferred tax on foreign currency
translation (0.6) (0.4)
Increase in fair value of hedging derivatives 0.8 1.8
Movement in deferred tax on hedging derivatives (0.2) (0.2)
Recycling of gain on disposal of investments - (1.1)
Fair value gain on available for sale investments - 0.7
Total items that may be reclassified to profit
and loss 5.1 5.4
---------------------------------------------------- ------ ------
Other comprehensive income/(expense) for the
year, net of tax 32.2 (49.7)
---------------------------------------------------- ------ ------
Total comprehensive income for the year 138.7 64.2
---------------------------------------------------- ------ ------
Consolidated statement of changes in equity
for the year ended 31 March
Capital
All figures in Share redemption Share Hedge Translation Retained Non-controlling Total
GBP million capital reserve premium reserve reserve earnings Total interest equity
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 31 March 2019
(previously
reported) 5.7 40.8 147.6 (0.2) 3.8 581.1 778.8 2.2 781.0
Restatement in
respect
of IFRS 16 - - - - - (2.0) (2.0) - (2.0)
-----------------
At 31 March 2019
(restated) 5.7 40.8 147.6 (0.2) 3.8 579.1 776.8 2.2 779.0
Change in
accounting
policy - IFRIC
23 - - - - - 2.1 2.1 - 2.1
At 1 April 2019 5.7 40.8 147.6 (0.2) 3.8 581.2 778.9 2.2 781.1
Profit for the
year - - - - - 106.3 106.3 0.2 106.5
Other
comprehensive
income
for the year,
net of
tax - - - 0.6 4.5 27.1 32.2 - 32.2
Purchase of own
shares - - - - - (0.7) (0.7) - (0.7)
Share-based
payments
charge - - - - - 6.8 6.8 - 6.8
Deferred tax on
share
options - - - - - (0.8) (0.8) - (0.8)
Dividends - - - - - (38.0) (38.0) - (38.0)
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 31 March 2020 5.7 40.8 147.6 0.4 8.3 681.9 884.7 2.4 887.1
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 1 April 2018
(previously
reported) 5.7 40.8 147.6 (1.8) (0.4) 552.2 744.1 0.2 744.3
Restatement in
respect
of IFRS 16 - - - - - (2.0) (2.0) - (2.0)
-----------------
At 1 April 2018
(restated) 5.7 40.8 147.6 (1.8) (0.4) 550.2 742.1 0.2 742.3
Profit for the
year - - - - - 113.9 113.9 - 113.9
Acquisition of
partially
owned subsidiary - - - - - - - 2.0 2.0
Other
comprehensive
income/(expense)
for the year,
net of
tax - - - 1.6 4.2 (55.5) (49.7) - (49.7)
Purchase of own
shares - - - - - (0.7) (0.7) - (0.7)
Share-based
payments
charge - - - - - 5.9 5.9 - 5.9
Deferred tax on
share
options - - - - - 1.0 1.0 - 1.0
Dividends - - - - - (35.7) (35.7) - (35.7)
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
At 31 March 2019
(restated) 5.7 40.8 147.6 (0.2) 3.8 579.1 776.8 2.2 779.0
----------------- -------- ----------- -------- -------- ----------- --------- ------ --------------- -------
* Prior year comparatives have been restated due to a change in
accounting policy in respect of leases. The opening position for
2020 has also been adjusted due to the adoption of a new accounting
policy in respect of 'uncertainty over income tax treatments'. See
note 1 for details.
Consolidated balance sheet as at 31 March
2019 2018
All figures in GBP million Note 2020 (restated) (restated)
----------------------------------- ----- -------- ------------- -------------
Non-current assets
Goodwill 13 180.8 148.6 101.5
Intangible assets 138.9 88.5 41.1
Property, plant and equipment 375.6 323.2 295.4
Other financial assets 1.0 0.9 0.3
Equity accounted investments 3.6 4.5 2.2
Retirement benefit surplus 14 309.7 259.1 316.2
Deferred tax asset 13.3 7.8 6.4
----------------------------------- ----- -------- ------------- -------------
1,022.9 832.6 763.1
----------------------------------- ----- -------- ------------- -------------
Current assets
Inventories 52.3 40.1 38.1
Other financial assets 6.7 0.5 16.9
Trade and other receivables 250.0 208.5 150.3
Investments - - 0.7
Current tax receivable 0.2 1.5 -
Assets held for sale - 1.9 1.2
Cash and cash equivalents 105.8 190.8 254.1
----------------------------------- ----- -------- ------------- -------------
415.0 443.3 461.3
----------------------------------- ----- -------- ------------- -------------
Total assets 1,437.9 1,275.9 1,224.4
----------------------------------- ----- -------- ------------- -------------
Current liabilities
Trade and other payables (379.8) (346.6) (334.9)
Current tax payable (4.1) (8.5) (8.9)
Provisions (1.8) (6.2) (6.0)
Other financial liabilities (8.9) (10.8) (9.4)
----------------------------------- ----- -------- ------------- -------------
(394.6) (372.1) (359.2)
----------------------------------- ----- -------- ------------- -------------
Non-current liabilities
Deferred tax liability (101.3) (72.7) (66.0)
Provisions (9.7) (10.7) (14.3)
Other financial liabilities (19.9) (20.9) (23.9)
Other payables (25.3) (20.5) (18.7)
----------------------------------- ----- -------- ------------- -------------
(156.2) (124.8) (122.9)
----------------------------------- ----- -------- ------------- -------------
Total liabilities (550.8) (496.9) (482.1)
----------------------------------- ----- -------- ------------- -------------
Net assets 887.1 779.0 742.3
----------------------------------- ----- -------- ------------- -------------
Equity
Share capital 5.7 5.7 5.7
Capital redemption reserve 40.8 40.8 40.8
Share premium 147.6 147.6 147.6
Hedging reserve 0.4 (0.2) (1.8)
Translation reserve 8.3 3.8 (0.4)
Retained earnings 681.9 579.1 550.2
----------------------------------- ----- -------- ------------- -------------
Capital and reserves attributable
to shareholders of the parent
company 884.7 776.8 742.1
Non-controlling interest 2.4 2.2 0.2
----------------------------------- ----- -------- ------------- -------------
Total equity 887.1 779.0 742.3
----------------------------------- ----- -------- ------------- -------------
Consolidated cash flow statement for year ended 31 March
2019
All figures in GBP million Note 2020 (restated)
---------------------------------------------- --- ----- -------- ------------
Underlying net cash inflow from operations 9 177.8 135.3
Less: specific adjusting items 9 (11.3) (0.7)
Net cash inflow from operations 9 166.5 134.6
Tax paid (10.0) (10.7)
Interest received 1.2 1.3
Interest paid (1.7) (1.7)
--------------------------------------------------- ----- -------- ------------
Net cash inflow from operating activities 156.0 123.5
--------------------------------------------------- ----- -------- ------------
Purchases of intangible assets (16.7) (10.6)
Purchases of property, plant and equipment (92.7) (77.0)
Proceeds from disposals of plant and
equipment 1.6 6.9
Proceeds from sale of property 12.5 5.3
Proceeds from sale of investments - 1.5
Acquisition of businesses (90.2) (61.2)
Investment in joint venture - (1.6)
Proceeds from disposal of available-for-sale
investments - 15.7
Net cash outflow from investing activities (185.5) (121.0)
--------------------------------------------------- ----- -------- ------------
Purchase of own shares (0.7) (0.7)
Dividends paid to shareholders (38.0) (35.7)
Repayment of external bank loan - (20.0)
Payment of bank facility arrangement
fees (0.3) (1.5)
Capital element of finance lease payments (9.7) (8.4)
Net cash outflow from financing activities (48.7) (66.3)
--------------------------------------------------- ----- -------- ------------
Decrease in cash and cash equivalents (78.2) (63.8)
Effect of foreign exchange changes
on cash and cash equivalents (6.8) 0.5
Cash and cash equivalents at beginning
of year 190.8 254.1
--------------------------------------------------- ----- -------- ------------
Cash and cash equivalents at end of
year 105.8 190.8
--------------------------------------------------- ----- -------- ------------
Reconciliation of movement in net cash for the year ended 31
March
2019
All figures in GBP million Note 2020 (restated)
------------------------------------------ --- ----- ------- --------------
Decrease in cash and cash equivalents
in the year (78.2) (63.8)
Add back net cash flows not impacting
net cash 10.0 14.2
----------------------------------------------- ----- ------- --------------
Change in net cash resulting from
cash flows (68.2) (49.6)
Lease and debt recognised on acquisition (2.7) (22.7)
Increase in lease obligation (4.0) (7.2)
Other movements including foreign
exchange (0.9) 2.0
----------------------------------------------- ----- ------- --------------
Decrease in net cash as defined by
the Group (75.8) (77.5)
Net cash as defined by the Group at
beginning of the year 160.5 238.0
----------------------------------------------- ----- ------- --------------
Net cash as defined by the Group at
end of the year 10 84.7 160.5
Less: non-cash net financial liabilities 10 21.1 30.3
----------------------------------------------- ----- ------- --------------
Total cash and cash equivalents 10 105.8 190.8
----------------------------------------------- ----- ------- --------------
Notes to the financial statements
1. Significant accounting policies
Basis of preparation
QinetiQ Group plc is a public limited company, which is listed
on the London Stock Exchange and is incorporated and domiciled in
the United Kingdom.
The financial information included within the preliminary
announcement has been prepared using accounting policies consistent
with International Financial Reporting Standards (IFRSs) as
endorsed by the European Union. The accounting policies followed
are the same, subject to the changes noted below, as those
published by the Group within its Annual Report for the year ended
31 March 2019 which is available on the Group's website,
www.QinetiQ.com .
The preliminary announcement was approved by the Board of
Directors on 21 May 2020. The financial information in this
preliminary announcement does not constitute the statutory accounts
of QinetiQ Group plc ('the Company') within the meaning of section
435 of the Act.
The statutory accounts for 2020 were approved by the Board of
Directors on 21 May 2020 and will be delivered to the Registrar of
Companies following the Company's Annual General Meeting on 24 July
2020. The financial information for 2019 is derived from the
statutory accounts for 2019 which have been delivered to the
Registrar of Companies. The auditors have reported on the 2020 and
2019 accounts. The reports were (i) unqualified; (ii) did not
include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report; and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006.
In the income statement, the Group presents specific adjusting
items separately. In the 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:
Distorting Distorting Does not reflect
due to due to fluctuating in-year operational
irregular nature performance
nature (size and of continuing
Item year on year sign) business
--------------------------------------- -------------- -------------------- ---------------------
Amortisation of intangible assets P
arising from acquisitions
--------------------------------------- -------------- -------------------- ---------------------
Pension net finance income and P P
pension past service cost
--------------------------------------- -------------- -------------------- ---------------------
Gains/losses on disposal of property, P P P
investments and intellectual property
--------------------------------------- -------------- -------------------- ---------------------
Transaction & integration costs P P
in respect of business acquisitions
--------------------------------------- -------------- -------------------- ---------------------
Impairment of property and goodwill P
--------------------------------------- -------------- -------------------- ---------------------
The tax impact of the above P P P
--------------------------------------- -------------- -------------------- ---------------------
Other significant non-recurring P P P
tax movements
--------------------------------------- -------------- -------------------- ---------------------
All items treated as a specific adjusting item in the current
and prior year are detailed in note 3. These 'specific adjusting
items' are of a 'non-operational' nature and do not include all
significant, irregular items that are of an operational nature, for
example contract risk provisions, cost of redundancy exercises and
gains/losses on disposal of plant and equipment. Such
'non-recurring trading items' are referred to in the business
performance narrative to aid readers from a 'quality of earnings
perspective'. They are considered by the Directors to be irregular
but still part of our businesses' normal 'operating' performance
and are included within the KPIs used to measure those business
units (and total Group performance for remuneration purposes).
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 31 March
2020 and 31 March 2019
2020 2019
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Applying Applying
If applying IFRS As originally IFRS
All figures in GBP million IAS 17 16 As presented presented 16 Restated
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Assets
Property, plant and equipment 350.8 24.8 375.6 298.0 25.2 323.2
Deferred tax asset 13.3 - 13.3 7.8 - 7.8
Other assets 1,049.0 - 1,049.0 944.9 - 944.9
1,413.1 24.8 1,437.9 1,250.7 25.2 1,275.9
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Liabilities
Trade and other payables (405.1) - (405.1) (367.1) - (367.1)
Other financial liabilities (0.9) (27.9) (28.8) (3.7) (28.0) (31.7)
Deferred tax liability (101.3) - (101.3) (73.1) 0.4 (72.7)
Other liabilities (15.6) - (15.6) (25.8) 0.4 (25.4)
(522.9) (27.9) (550.8) (469.7) (27.2) (496.9)
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Net assets 890.2 (3.1) 887.1 781.0 (2.0) 779.0
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Equity
Retained earnings 685.0 (3.1) 681.9 581.1 (2.0) 579.1
Share capital and other
reserves 202.8 - 202.8 197.7 - 197.7
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Capital and reserves
attributable to shareholders
of the parent company 887.8 (3.1) 884.7 778.8 (2.0) 776.8
Non-controlling interest 2.4 - 2.4 2.2 - 2.2
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Total equity 890.2 (3.1) 887.1 781.0 (2.0) 779.0
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Impact on net cash
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Net cash (as defined
by the Group - see glossary) 112.6 (27.9) 84.7 188.5 (28.0) 160.5
------------------------------- ------------ --------- ------------- -------------- --------- ---------
Impact on the condensed consolidated balance sheet at 1 April
2018
Applying 1 April
As originally IFRS 2018
All figures in GBP million presented 16 Restated
----------------------------- -------------- --------- ----------
Assets
Property, plant and
equipment 269.0 26.4 295.4
Deferred tax asset 6.4 - 6.4
Other assets 922.6 - 922.6
1,198.0 26.4 1,224.4
----------------------------- -------------- --------- ----------
Liabilities
Trade and other payables (353.6) - (353.6)
Other financial liabilities (4.5) (28.8) (33.3)
Deferred tax liability (66.4) 0.4 (66.0)
Other liabilities (29.2) - (29.2)
(453.7) (28.4) (482.1)
----------------------------- -------------- --------- ----------
Net assets 744.3 (2.0) 742.3
-------------------------------- -------------- --------- ----------
Equity
Retained earnings 552.2 (2.0) 550.2
Share capital and other
reserves 191.9 - 191.9
Non-controlling interest 0.2 - 0.2
-------------------------------- -------------- --------- ----------
Total equity 744.3 (2.0) 742.3
-------------------------------- -------------- --------- ----------
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, offset by the inclusion of depreciation of the right-of-use
assets.
Year ended 31 March Year ended 31 March
2020 2019
----------------------------------- ---------------------------------
Applying
All figures in GBP million If applying Applying As originally IFRS
unless stated otherwise IAS 17 IFRS 16 As presented presented 16 Restated
--------------------------------- ----------- -------- ------------ ------------- -------- --------
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 173.8 10.7 184.5 156.7 9.0 165.7
Depreciation and impairment
of property, plant and
equipment (31.3) (9.7) (41.0) (35.8) (8.0) (43.8)
Impairment of goodwill (14.1) - (14.1) - - -
Amortisation of intangible
assets (11.8) - (11.8) (7.1) - (7.1)
---------------------------------- ----------- -------- ------------ ------------- -------- --------
Operating profit 116.6 1.0 117.6 113.8 1.0 114.8
Gain on sale of investment - - - 1.1 - 1.1
Finance income 7.6 - 7.6 9.4 - 9.4
Finance expense (1.1) (1.0) (2.1) (1.1) (1.0) (2.1)
---------------------------------- ----------- -------- ------------ ------------- -------- --------
Profit before tax 123.1 - 123.1 123.2 - 123.2
Taxation expense (16.6) - (16.6) (9.3) - (9.3)
---------------------------------- ----------- -------- ------------ ------------- -------- --------
Profit for the year attributable
to equity shareholders 106.5 - 106.5 113.9 - 113.9
---------------------------------- ----------- -------- ------------ ------------- -------- --------
Impact on underlying measures of performance:
Year ended 31 March Year ended 31 March
2020 2019
----------------------------------- ---------------------------------
All figures in GBP million If applying Applying As originally Applying
unless stated otherwise IAS 17 IFRS 16 As presented presented IFRS 16 Restated
---------------------------- ----------- -------- ------------ ------------- -------- --------
Underlying operating profit 132.2 1.0 133.2 123.9 1.0 124.9
----------------------------- ----------- -------- ------------ ------------- -------- --------
IFRIC 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 (the year to 31 March 2020) as shown in the consolidated
statement of changes in equity.
Going concern basis
The Group meets its day-to-day working capital requirements
through its available cash funds and its bank facilities. The
COVID-19 crisis has introduced considerably more uncertainty across
markets globally. As such the market conditions in which the Group
operates are expected to be challenging as spending from the
Group's key customers comes under pressure. Despite these
challenges, and considering the decisive action already taken by
management to maintain the strength of our business, the Directors
believe that the Group is well positioned to manage its overall
business risks successfully.
After making enquiries, the Directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. The Group
therefore continues to adopt the going-concern basis in preparing
its financial statements.
The Group is exposed to various risks and uncertainties, the
principal ones being summarised in the 'Principal risks and
uncertainties' section. Crystallisation of such risks, to the
extent not fully mitigated, would lead to a negative impact on the
Group's financial results but none are deemed sufficiently material
to prevent the Group from continuing as a going concern for at
least the next 12 months.
2. Disaggregation of revenue and segmental analysis
Revenue by category and other income
for the year ended 31 March
All figures in GBP million 2020 2019
--------------------------------------- ------- -----
Service contracts with customers 945.6 790.9
Sale of goods contracts with customers 116.8 105.6
Royalties and licences 10.5 14.6
---------------------------------------- ------- -----
Total revenue 1,072.9 911.1
Less: adjust current year for acquired
businesses^ (66.2) -
Adjust to constant prior year exchange
rates (1.1) -
---------------------------------------- ------- -----
Total revenue on an organic, constant
currency basis 1,005.6 911.1
---------------------------------------- ------- -----
Organic revenue growth at constant
currency 10% 8%
---------------------------------------- ------- -----
^ For the period of which there was no contribution in the
equivalent period in the prior year which was pre-ownership by the
Group
Other income 2020 2019
----------------------------------------- ----- ----
Share of joint ventures' and associates'
(loss)/profit after tax (0.7) 0.6
Other income 9.9 10.0
------------------------------------------ ----- ----
Other income - underlying 9.2 10.6
Specific adjusting item: gain on sale
of assets 14.0 0.2
------------------------------------------ ----- ----
Total other income 23.2 10.8
------------------------------------------ ----- ----
Revenue by customer geographical location
for the year ended 31 March
All figures in GBP million 2020 2019
--------------------------- ------- ------
136.0 105.3
60.7 55.2
75.9 60.8
16.3 11.0
US 44.5 41.4
Australia
Europe
Middle East
Rest of World
333.4 273.7
International 739.5 637.4
------- ------
United Kingdom
--------------------------- ------- ------
Total revenue 1,072.9 911.1
------------------------------- ------- ------
International revenue % 31.1% 30.0%
------------------------------- ------- ------
Reconciliation of international revenue to organic international
revenue including share of joint ventures
for the year ended 31 March
All figures in GBP million 2020 2019
------------------------------------------------------ ------ -----
International revenue 333.4 273.7
Less: international revenue from businesses acquired
in current (2020) financial year (37.0) -
Add: incremental share of revenue from joint ventures 3.3 1.9
------------------------------------------------------- ------ -----
Organic international revenue including share
of joint ventures 299.7 275.6
------------------------------------------------------- ------ -----
The year on year organic growth in international revenue
including share of joint ventures was GBP24.1m. This metric is used
for management remuneration purposes under the Deferred Share Plan
remuneration scheme in 2020.
Revenue by major customer type
for the year ended 31 March
All figures in GBP million 2020 2019
------------------------------- ------------------- -------- --------
UK Government 667.2 562.7
US Government 116.2 83.1
Other 289.5 265.3
Total revenue 1,072.9 911.1
---------------------------------------------------- -------- --------
'Other' does not contain any customers with revenue in excess of
10% of total Group revenue.
Operating segments
for the year ended 31 March
All figures in GBP million 2020 2019 (restated)
----------------------------- -------------------------- --------------------------
Revenue Underlying Revenue Underlying
from external operating from external operating
customers profit(*) customers profit(*)
----------------------------- -------------- ---------- -------------- ----------
EMEA Services 797.4 100.6 687.7 96.8
Global Products 275.5 32.6 223.4 28.1
------------------------------ -------------- ---------- -------------- ----------
Total operating segments 1,072.9 133.2 911.1 124.9
------------------------------ -------------- ---------- -------------- ----------
Underlying operating margin* 12.4% 13.7%
------------------------------ -------------- ---------- -------------- ----------
* Definitions of the Group's 'Alternative Performance Measures'
can be found in the glossary.
Reconciliation of segmental results to total profit
for the year ended 31 March
2019
All figures in GBP million Note 2020 (restated)
------------------------------ ----- ------ -----------
Underlying operating profit 133.2 124.9
Specific adjusting items loss 3 (15.6) (10.1)
------------------------------ ----- ------ -----------
Operating profit 117.6 114.8
Gain on sale of investment - 1.1
Net finance income 5.5 7.3
------------------------------ ----- ------ -----------
Profit before tax 123.1 123.2
Taxation expense (16.6) (9.3)
------------------------------ ----- ------ -----------
Profit for the year 106.5 113.9
------------------------------ ----- ------ -----------
3. Specific adjusting items
In the income statement, the Group presents specific adjusting
items separately. In the judgement of the Directors, for the reader
to obtain a proper understanding of the financial information,
specific adjusting items need to be disclosed separately because of
their size and nature. Underlying measures of performance exclude
specific adjusting items. The following specific adjusting items
have been (charged)/credited in the consolidated income
statement:
All figures in GBP million Note 2020 2019
-------------------------------------------------- ---- ------ ------
Gain on sale of property 14.0 0.2
Pension past service costs in respect of GMP
equalisation - (0.7)
Acquisition transaction costs (7.4) (1.3)
Acquisition integration costs (0.1) (0.7)
Acquisition related remuneration costs (0.5) -
Specific adjusting items profit/(loss) before
interest, tax, depreciation and amortisation 6.0 (2.5)
Impairment of goodwill (14.1) -
Impairment of property - (3.7)
Amortisation of intangible assets arising from
acquisitions (7.5) (3.9)
-------------------------------------------------- ---- ------ ------
Specific adjusting items operating loss (15.6) (10.1)
Gain on sale of investment - 1.1
Defined benefit pension scheme net finance income 6.5 8.2
-------------------------------------------------- ---- ------ ------
Specific adjusting items loss before tax (9.1) (0.8)
Specific adjusting items - tax 7 1.9 3.2
-------------------------------------------------- ---- ------ ------
Total specific adjusting items (loss)/profit
after tax (7.2) 2.4
-------------------------------------------------- ---- ------ ------
Reconciliation of underlying profit for the
year to total profit for the year
all figures in GBP million 2020 2019
--------------------------------------------- ----- -----
Underlying profit after tax - total Group 113.7 111.5
Total specific adjusting items (loss)/profit
after tax (7.2) 2.4
---------------------------------------------- ----- -----
Total profit for the year 106.5 113.9
---------------------------------------------- ----- -----
4. Profit before tax
The following items have been charged in arriving at profit
before tax for continuing operations:
All figures in GBP million 2020 2019 restated
------------------------------------------------------- ----- -------------
Cost of inventories expensed 32.6 28.5
Owned assets: depreciation 31.7 29.0
Leases assets: depreciation 9.7 8.4
Foreign exchange loss 1.4 0.5
Research and development expenditure - customer funded
contracts 270.8 272.9
Research and development expenditure - Group funded 21.5 26.0
------------------------------------------------------- ----- -------------
5. Business combinations
Acquisitions in the year to 31 March 2020
all figures
in GBP million Contribution post-acquisition
Fair value
of net
Date Cash assets Operating
Company acquired acquired consideration Goodwill acquired Revenue profit
----------------------------------- ------------ -------------- ---------- ---------- ------- ---------
Manufacturing Techniques 20 December
Inc 2019 81.7 (35.1) 46.6 37.0 2.9
03 February
Newman and Spurr Consultancy 2020 17.1 (7.6) 9.5 2.7 0.5
----------------------------------- ------------ -------------- ---------- ---------- ------- ---------
Total current year acquisitions 98.8 (42.7) 56.1 39.7 3.4
----------------------------------- ------------ -------------- ---------- ---------- ------- ---------
Payment of deferred
consideration - prior
year acquisitions (1) 0.1
Less: deferred consideration
and contingent consideration
(2) (2.2)
Less: cash acquired (6.5)
----------------------------------- ------------ --------------
Net cash outflow in
the year 90.2
----------------------------------- ------------ --------------
(1) Deferred consideration has been paid in respect of the prior
year acquisition of QinetiQ Target Systems.
(2) Deferred consideration of GBP0.8m is expected to be payable
in respect of the NSC acquisition and contingent consideration of
GBP1.4m is expected in respect of the MTEQ acquisition.
Manufacturing Techniques Inc. (MTEQ)
On 20 October 2019 the Group acquired a 100% of the issued share
capital of MTEQ for $105m on a cash-free, debt-free valuation basis
and an earn-out of up to $20m payable in cash and shares dependent
on delivering stretching financial targets over three years. MTEQ
is a leading US provider of advanced sensing solutions with a
strong reputation for mission-led innovation, rapidly developing
and fielding operationally relevant solutions to deliver
information advantage to the war-fighter. The MTEQ acquisition will
accelerate our growth in the USA, the world's largest defence and
security market by delivering solutions critical to next generation
warfighting capability through the combination of MTEQ's expertise
in advanced sensors with our existing capabilities in robotics and
autonomy, transitioning MTEQ's sensors solutions into larger
production programmes, leveraging our manufacturing capabilities in
the USA and deepening our US Army relationship and broadening our
US customer base. MTEQ will form part of QinetiQ's USA business
unit and will be reported within QinetiQ's Global Products
division. If the acquisition had occurred on the first day of the
financial year, Group revenue for the period would have been
GBP1,167.2m and the Group profit before tax would have been
GBP128.2m
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets
acquired and liabilities assumed at the date of acquisition and the
adjustments required to the book values of the assets and
liabilities in order to present the net assets of these businesses
at fair value and in accordance with Group accounting policies. The
fair values remain provisional, but will be finalised within 12
months of acquisition.
Book Fair value Fair value
All figures in GBP million Note value adjustment at acquisition
------------------------------ ---- ------ ----------- ---------------
Intangible assets 0.7 38.1 38.8
Property, plant and equipment 3.4 - 3.4
Inventory 0.1 - 0.1
Trade and other receivables 12.4 - 12.4
Cash and cash equivalents 3.1 - 3.1
Trade and other payables (9.0) - (9.0)
Lease liabilities (2.2) - (2.2)
Net assets acquired 8.5 38.1 46.6
------------------------------ ---- ------ ----------- ---------------
Goodwill 13 35.1
------------------------------ ---- ------ ----------- ---------------
81.7
------------------------------ ---- ------ ----------- ---------------
Consideration satisfied by:
------------------------------ ---- ------ ----------- ---------------
Cash 80.3
Contingent consideration 1.4
------------------------------ ---- ------ ----------- ---------------
Total consideration 81.7
------------------------------ ---- ------ ----------- ---------------
The fair value adjustments include GBP38.1m in relation to the
recognition of acquired intangible assets of which GBP20.4m relates
to customer relationships and GBP17.7m relates to existing
technology. The goodwill is attributable mainly to the skills and
technical talent of the MTEQ's work force and the synergies
expected to be achieved from integrating the company into the
Group's existing business.
On 9 January 2020, MTEQ changed its name to QinetiQ Inc.
Newman & Spurr Consultancy Limited (NSC)
On 3 February 2020 the Group acquired a 100% of the issued share
capital of NSC for GBP17.1m (GBP13.7m net of cash acquired). NSC
offers a range of attractive training and simulation solutions,
primarily in land and joint training areas. NSC represents another
strategy-led acquisition, enhancing our capability in areas such as
modelling and simulation, synthetic environments and operational
analysis. The acquisition will support our global training and
mission rehearsal campaign driving future sustainable growth. NSC
will form part of QinetiQ's Cyber, Information & Training (CIT)
business unit and will be reported within QinetiQ's EMEA Services
Products division. If the acquisition had occurred on the first day
of the financial year, Group revenue for the period would have been
GBP1,079.9m and the Group profit before tax would have been
GBP124.3m.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets
acquired and liabilities assumed at the date of acquisition and the
adjustments required to the book values of the assets and
liabilities in order to present the net assets of the business at
fair value and in accordance with Group accounting policies. The
fair values remain provisional, but will be finalised within 12
months of acquisition.
Book Fair value Fair value
all figures in GBP million Note value adjustment at acquisition
------------------------------- ---- ------ ----------- ---------------
Intangible assets - 6.7 6.7
Property, plant and equipment 0.6 - 0.6
Trade and other receivables 2.4 - 2.4
Cash and cash equivalents 3.4 - 3.4
Trade and other payables (1.9) - (1.9)
Lease liability (0.5) - (0.5)
Deferred tax asset/(liability) 0.1 (1.3) (1.2)
------------------------------- ---- ------ ----------- ---------------
Net assets acquired 4.1 5.4 9.5
------------------------------- ---- ------ ----------- ---------------
Goodwill 13 7.6
------------------------------- ---- ------ ----------- ---------------
17.1
------------------------------- ---- ------ ----------- ---------------
Considerations satisfied by:
------------------------------- ---- ------ ----------- ---------------
Cash 16.3
Deferred consideration 0.8
------------------------------- ---- ------ ----------- ---------------
Total Consideration 17.1
------------------------------- ---- ------ ----------- ---------------
The fair value adjustments include GBP6.7m in relation to the
recognition of acquired intangible assets of which GBP4.1m relates
to customer relationships and GBP2.6m relates to existing
technology. The goodwill is attributable mainly to the skills and
technical talent of NSC's work force and the synergies expected to
be achieved from integrating the company into the Group's existing
business.
6. Finance income and expense
2019
All figures in GBP million 2020 (restated)
-------------------------------------------------- ----- -----------
Receivable on bank deposits 1.1 1.2
Finance income before specific adjusting items 1.1 1.2
-------------------------------------------------- ----- -----------
Amortisation of deferred financing costs (0.4) (0.3)
Payable on commitment fees (0.6) (0.6)
Lease expense (1.0) (1.1)
Unwinding of discount on financial liabilities (0.1) (0.1)
-------------------------------------------------- ----- -----------
Finance expense before specific adjusting items (2.1) (2.1)
-------------------------------------------------- ----- -----------
Net finance expense - underlying (1.0) (0.9)
-------------------------------------------------- ----- -----------
Specific adjusting items:
Defined benefit pension scheme net finance income 6.5 8.2
-------------------------------------------------- ----- -----------
Net finance income 5.5 7.3
-------------------------------------------------- ----- -----------
7. Taxation
All figures in GBP million 2020 2019 (restated)
--------------------------- ------------------------------ -----------------------------
Specific Specific
adjusting adjusting
Underlying items Total Underlying items Total
--------------------------- ---------- ---------- ------ ---------- ---------- -----
Profit/(loss) before
tax 132.2 (9.1) 123.1 124.0 (0.8) 123.2
Taxation (expense)/income (18.5) 1.9 (16.6) (12.5) 3.2 (9.3)
---------------------------- ---------- ---------- ------ ---------- ---------- -----
Profit for the year 113.7 (7.2) 106.5 111.5 2.4 113.9
---------------------------- ---------- ---------- ------ ---------- ---------- -----
Effective tax rate 14.0% 10.1%
---------------------------- ---------- ---------- ------ ---------- ---------- -----
The total tax charge was GBP16.6m (2019: GBP9.3m). Deferred tax
has been calculated at the rate at which the timing difference is
expected to reverse. The underlying tax charge was GBP18.5m (2019:
GBP12.5m) with an underlying effective tax rate of 14.0% for the
year ending 31 March 2019 (2019: 10.1%). The tax rate for the year
has increased as certain deferred tax liabilities have been
recalculated following the decision not to reduce the UK rate to
17% as previously enacted. An amount of GBP5.1m has been taken to
OCI in respect of the deferred tax rate change related to the net
pension surplus. 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 under IAS12 within the tax line. An adjusted effective
tax rate before the impact of RDEC would be 20.0%. The effective
tax rate is expected to remain below the UK statutory rate in the
medium term, subject to any tax legislation changes, the geographic
mix of profits, the recognition of deferred tax assets and while
the benefit of net RDEC retained by the Group remains in the tax
line.
Tax losses and specific adjusting items
A GBP3.3m credit in respect of recognition of tax losses in the
US has been classified as a specific adjusting item. This follows
from the acquisition of MTEQ in the year that contributes future
taxable profits against which historic unrecognised tax losses can
be utilised. The prior year included a GBP2.8m credit from initial
recognition of corporate tax deductions for certain equity-settled
share based payment schemes. Together with a GBP1.4m net expense
(2019: income of GBP0.4m) in respect of the pre-tax specific
adjusting items (including GBP0.7m of deferred tax movements
following the decision not to reduce the UK tax rate to 17% as
previously enacted), the total specific adjusting items tax credit
was GBP1.9m (2019: GBP3.2m).
At 31 March 2020 the Group had unused tax losses and surplus
interest costs of GBP90.3m which are available for offset against
future taxable profits. Deferred tax assets are recognised on the
balance sheet of GBP7.8m in respect of GBP37.3m of US net operating
losses and GBP1.5m in respect of GBP5.8m of US net interest
expense. No deferred tax asset is recognised in respect of the
remaining GBP47.2m of losses/interest costs due to uncertainty over
the timing and extent of their utilisation. Full recognition of the
remaining losses/interest would increase the deferred tax asset by
GBP12.2m. The Group has GBP33.8m of time-limited US net operating
losses of which GBP22.8m will expire in 2035, GBP9.5m in 2036 and
GBP1.5m in 2038. US capital losses of GBP28.2m expired in 2020.
Deferred tax has been calculated using the enacted future statutory
tax rates.
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.
Factors affecting future tax charges
The effective tax rate is expected to remain below the UK
statutory rate in the medium term, subject to the impact of any tax
legislation changes, the geographic mix of profits and the
assumption that the benefits of net R&D expenditure credits
retained by the Group remain in the tax line. Future recognition of
unrecognised tax losses will also affect future tax charges.
8. Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to equity shareholders by the weighted average number
of ordinary shares in issue during the year. The weighted average
number of shares used excludes those shares bought by the Group and
held as own shares. For diluted earnings per share the weighted
average number of shares in issue is adjusted to assume conversion
of all potentially dilutive ordinary shares arising from unvested
share-based awards including share options.
for the year ended 31 March 2020 2019
---------------------------------- -------- ----- -----
Weighted average number of shares Million 567.0 566.0
Effect of dilutive securities Million 5.4 4.0
---------------------------------- -------- ----- -----
Diluted number of shares Million 572.4 570.0
---------------------------------- -------- ----- -----
Underlying basic earnings per share figures are presented below,
in addition to the basic and diluted earnings per share, because
the Directors consider this gives a more relevant indication of
underlying business performance and reflects the adjustments to
basic earnings per share for the impact of specific adjusting items
(see note 3) and tax thereon.
Underlying EPS
for the year ended 31 March 2020 2019
------------------------------------------- ------------ ----- -----
Profit attributable to equity shareholders GBP million 106.3 113.9
Remove loss/(profit) after tax in respect
of specific adjusting items GBP million 7.2 (2.4)
------------------------------------------- ------------ ----- -----
Underlying profit after taxation GBP million 113.5 111.5
------------------------------------------- ------------ ----- -----
Weighted average number of shares Million 567.0 566.0
------------------------------------------- ------------ ----- -----
Underlying basic EPS Pence 20.0 19.7
------------------------------------------- ------------ ----- -----
Diluted number of shares Million 572.4 570.0
------------------------------------------- ------------ ----- -----
Underlying diluted EPS Pence 19.8 19.6
------------------------------------------- ------------ ----- -----
Basic and diluted EPS
for the year ended 31 March 2020 2019
---------------------------------------------- -------------- ------- ------
Profit attributable to equity shareholders GBP million 106.3 113.9
Weighted average number of shares Million 567.0 566.0
---------------------------------------------- -------------- ------- ------
Basic EPS - total Group Pence 18.7 20.1
---------------------------------------------- -------------- ------- ------
Diluted number of shares Million 572.4 570.0
Diluted EPS - total Group Pence 18.6 20.0
------------------------------------------ ------------------ ------- ------
9. Cash flows from operations
All figures in GBP million 2020 2019 (restated)
---------------------------------------------- ------ ---------------
Profit after tax for the year 106.5 113.9
Adjustments for:
Taxation expense 16.6 9.3
Net finance income (5.5) (7.3)
Gain on sale of investment - (1.1)
Gain on sale of property (14.0) (0.2)
Impairment (reversal)/charge in respect
of property, plant and equipment (0.4) 6.4
Impairment of goodwill 14.1 -
Acquisition transaction costs unpaid as
at year end - 1.3
Acquisition related remuneration costs
unpaid as at year end 0.5 -
Pension past service cost - 0.7
Amortisation of purchased or internally
developed intangible assets 4.3 3.2
Amortisation of intangible assets arising
from acquisitions 7.5 3.9
Depreciation of property, plant and equipment 41.4 37.4
Profit on disposal of plant and equipment (1.6) (5.5)
Share of post-tax loss/(profit) of equity
accounted entities 0.7 (0.6)
Share-based payments charge 7.4 6.1
Retirement benefit contributions in excess
of income statement expense (4.3) (1.8)
Net movement in provisions (5.4) (3.6)
----------------------------------------------- ------ ---------------
167.8 162.1
---------------------------------------------- ------ ---------------
Increase in inventories (11.3) (0.5)
Increase in receivables (25.5) (48.7)
Increase in payables 35.5 21.7
----------------------------------------------- ------ ---------------
Changes in working capital (1.3) (27.5)
Net cash flow from operations 166.5 134.6
----------------------------------------------- ------ ---------------
Reconciliation of net cash flow from operations to underlying
net cash flow from operations and to free cash flow
All figures in GBP million 2020 2019 (restated)
---------------------------------------------- ------- ---------------
Net cash flow from operations 166.5 134.6
Add back specific adjusting item: acquisition
integration costs 3.8 -
Add back specific adjusting item: acquisition
transaction costs 7.5 -
Add back specific adjusting item: proceeds
from sale of intellectual property - 0.7
----------------------------------------------- ------- ---------------
Underlying net cash flow from operations 177.8 135.3
Add: proceeds from disposal of plant and
equipment 1.6 6.9
Less: tax and net interest payments (10.5) (11.1)
Less: purchases of intangible assets and
property, plant & equipment (109.4) (87.6)
----------------------------------------------- ------- ---------------
Free cash flow 59.5 43.5
----------------------------------------------- ------- ---------------
Underlying cash conversion ratio
2020 2019 (restated)
------------------------------------------ ----- ---------------
Underlying operating profit - GBP million 133.2 124.9
Underlying net cash flow from operations
- GBP million 177.8 135.3
------------------------------------------- ----- ---------------
Underlying cash conversion ratio - % 133% 108%
------------------------------------------- ----- ---------------
10. Net cash
All figures in GBP million 2020 2019 (restated)
-------------------------------------------- ------ ---------------
Current financial assets/(liabilities)
Deferred financing costs 0.4 0.4
Derivative financial assets 6.3 0.1
Leases (8.6) (9.7)
Derivative financial liabilities (0.3) (1.1)
--------------------------------------------- ------ ---------------
Total current net financial liabilities (2.2) (10.3)
Non-current financial assets/(liabilities)
Deferred financing costs 0.9 0.9
Derivative financial assets 0.1 -
Leases (19.3) (20.6)
Derivative financial liabilities (0.6) (0.3)
--------------------------------------------- ------ ---------------
Total non-current net financial liabilities (18.9) (20.0)
--------------------------------------------- ------ ---------------
Total net financial liabilities (21.1) (30.3)
Cash and cash equivalents 105.8 190.8
--------------------------------------------- ------ ---------------
Total net cash as defined by the Group 84.7 160.5
--------------------------------------------- ------ ---------------
11. Financial risk management
The table below analyses financial instruments carried at fair
value, by valuation method. The different levels have been defined
as follows:
Level 1 - measured using quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level 2 - measured using inputs other than quoted prices
included within Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices). Level 2 derivatives comprise forward foreign
exchange contracts which have been fair valued using forward
exchange rates that are quoted in an active market; and
Level 3 - measured using inputs for the assets or liability that
are not based on observable market data (i.e. unobservable
inputs).
The Group's assets and liabilities that are measured at fair
value, as at 31 March 2020, are as follows:
All figures in GBP million Level 1 Level 2 Level 3 Total
----------------------------------------- ------- ------- ------- -----
Assets:
Current derivative financial instruments - 6.3 - 6.3
Non-current derivative financial
instruments - 0.1 - 0.1
Liabilities:
Current derivative financial instruments - (0.3) - (0.3)
Non-current derivative financial
instruments - (0.6) - (0.6)
Total - 5.5 - 5.5
----------------------------------------- ------- ------- ------- -----
The following table presents the Group's assets and liabilities
that are measured at fair value at 31 March 2019:
Level
All figures in GBP million Level 1 Level 2 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.
12. Dividends
An analysis of the dividends paid and proposed in respect of the
years ended 31 March 2020 and 31 March 2019 is provided below:
Pence per
ordinary
share GBPm Date paid/payable
--------------------------------------- --------- ---- -----------------
Interim 2020 2.2 12.5 Feb 2020
Final 2020 (proposed) - - See below
--------------------------------------- --------- ---- -----------------
Total for the year ended 31 March 2020 2.2 12.5
--------------------------------------- --------- ---- -----------------
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
--------------------------------------- --------- ---- -----------------
Given the unprecedented nature of COVID-19 and the Board's wish
to adopt a prudent course of action to protect the long term, it
will postpone the decision on the proposal of a dividend until a
later date.
13. Goodwill
All figures in GBP million 2020 2019
--------------------------- ------- -------
Cost
At 1 April 257.4 203.0
Acquisitions 42.7 45.0
Foreign exchange 7.8 9.4
--------------------------- ------- -------
At 31 March 307.9 257.4
--------------------------- ------- -------
Impairment
At 1 April (108.8) (101.5)
Impairment in the year (14.1) -
Foreign exchange (4.2) (7.3)
--------------------------- ------- -------
At 31 March (127.1) (108.8)
--------------------------- ------- -------
Net book value at 31 March 180.8 148.6
--------------------------- ------- -------
The goodwill acquired of GBP42.7m arises from the acquisitions
of MTEQ and NSC in the year, generating goodwill of GBP35.1m and
GBP7.6m respectively. Foreign exchange movements in respect of
MTEQ's goodwill post acquisition result in the MTEQ closing
goodwill as at 31 March 2020 increasing to GBP36.6m (as per the
following table). The impairment in the year relates to the Group's
Advisory Services business unit (GBP9.8m) and the Germany business
unit (GBP4.3m), see below.
Cash-generating units (CGU)
Goodwill is allocated across four cash generating units ('CGUs')
within the EMEA Services segment and six CGUs within the Global
Products segment. The full list of CGUs that have goodwill
allocated to them is as follows:
All figures in GBP million Primary reporting segment 2020 2019
--------------------------------- -------------------------- ----- -----
QinetiQ North America ('QNA') Global Products 43.9 41.9
MTEQ (acquired in year, see note
5) Global Products 36.6 -
Target Systems Global Products 24.2 24.3
Boldon James Global Products 10.7 10.7
Commerce Decisions Global Products 6.4 6.4
Space Products Global Products 5.8 5.7
QinetiQ Germany EMEA services 28.7 32.2
Inzpire EMEA services 11.7 11.7
NSC (acquired in year, see note
5) EMEA services 7.6 -
Advisory Services EMEA services - 9.8
Australia EMEA Services 5.2 5.9
Net book value at 31 March 180.8 148.6
------------------------------------------------------------- ----- -----
Goodwill is attributable to the excess of consideration over the
fair value of net assets acquired and includes expected synergies,
future growth prospects and employee knowledge, expertise and
security clearances. The Group tests each CGU for impairment
annually, or more frequently if there are indications that goodwill
might be impaired. Impairment testing is dependent on management's
estimates and judgments, particularly as they relate to the
forecasting of future cash flows, the discount rates selected and
expected long-term growth rates. Significant headroom exists in all
CGUs with the exception of QinetiQ Germany (see below) and
management considers that there are no likely variations in the key
assumptions which would lead to an impairment being recognised in
those CGUs.
Key assumptions
Cash flows
The value in use calculations generally use discounted future
cash flows based on financial plans approved by the Board covering
a five-year period (aligned with the Group's Integrated Strategic
Business Plan process and the longer-term viability assessment
period). These are 'bottom-up' forecasts based on detailed analysis
by contract for the revenue under contract and by opportunity for
the pipeline. Pipeline opportunities are categorised as 'base case'
and 'high case' by management and only 'base case' opportunities
are included in the financial plans used for the value-in-use
calculations. Cash flows for periods beyond these periods are
extrapolated based on the last year of the plans, with a terminal
growth-rate assumption applied.
Terminal growth rates and discount rates
The specific plans for each of the CGUs have been extrapolated
using the terminal growth rates as detailed below. Growth rates are
based on management's estimates which take into consideration the
long-term nature of the industry in which the CGUs operate and
external forecasts as to the likely growth of the industry in the
longer term. The Group's weighted average cost of capital was used
as a basis in determining the discount rate to be applied, adjusted
for risks specific to the market characteristics of CGUs, as
appropriate on a pre-tax basis. This is considered an appropriate
estimate of a market participant discount rate.
All figures QNA Target Space Boldon Commerce MTEQ Inzpire Australia QinetiQ NSC
% Systems NV James Decisions Germany
2020: (2019)
------------- -------- -------- -------- -------- --------- --------- --------- --------- -------- ---------
Terminal 2.1 1.8 1.8 1.8 1.8 (1.9) 2.1 (N/A) 1.8 (1.9) 2.3 (2.4) 1.5 1.8 (N/A)
growth (1.9) (1.9) (1.0) (1.9) (1.0)
rate
Pre-tax 11.3 10.2 9.8 9.9 11.1 11.3 11.3 10.0 8.7 10.3
discount (14.6) (11.3) (12.0) (11.8) (11.4) (N/A) (12.3) (11.3) (10.0) (N/A)
rate
------------- -------- -------- -------- -------- --------- --------- --------- --------- -------- ---------
Sensitivity analysis shows that the value of the terminal year
cash flow, the discount rate and the terminal growth rates have a
significant impact on the value of the discounted cash flow.
Significant CGUs
QinetiQ North America ('QNA')
The carrying value of the goodwill for QNA CGU, was GBP43.9m as
at 31 March 2020 (2019: GBP41.9m). The recoverable amount of this
CGU as at 31 March 2020, based on value in use and calculated using
the assumptions noted above, is higher than the carrying value of
net operating assets (of GBP71.9m). The key sensitivity impacting
on the value in use calculations is the terminal year cash flows.
These cash flows include certain assumptions about revenue and
profit in respect of new product lines still to be launched and the
success of winning certain government contracts. An increase in the
discount rate by 1%, a decrease in the terminal growth rate by 1%
or a decrease in the terminal year cash flows of GBP2.0m would not
cause the net operating assets to exceed their recoverable
amount.
MTEQ
The carrying value of the goodwill for the MTEQ CGU as at 31
March 2020 was GBP36.6m (2019: nil). The recoverable amount of this
CGU as at 31 March 2020, based on value in use and calculated using
the assumptions noted above, is higher than the carrying value of
net operating assets (of GBP85m). The key sensitivity impacting on
the value in use calculations is the terminal year cash flows. An
increase in the discount rate by 1%, a decrease in the terminal
growth rate by 1% or a decrease in the terminal year cash flows of
GBP2.0m would not cause the net operating assets to exceed their
recoverable amount.
Target Systems
The carrying value of the goodwill for the MTEQ CGU as at 31
March 2020 was GBP24.2m (2019: GBP24.3m). The recoverable amount of
this CGU as at 31 March 2020, based on value in use and calculated
using the assumptions noted above, is higher than the carrying
value of net operating assets (of GBP93.9m). The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate by 1%, a decrease in
the terminal growth rate by 1% or a decrease in the terminal year
cash flows of GBP2.0m would not cause the net operating assets to
exceed their recoverable amount. COVID-19 has resulted in temporary
closure of this businesses' manufacturing site and employees being
furloughed. This short-term impact on trading is not considered to
have a significant impact on the long-term cash flows of this
CGU.
Boldon James
The carrying value of the goodwill for the Boldon James CGU as
at 31 March 2020 was GBP10.7m (2019: GBP10.7m). The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate by 1%, a decrease in
the terminal growth rate by 1% or a decrease in the terminal year
cash flows of GBP2.0m would not cause the net operating assets to
exceed their recoverable amount.
Germany
The carrying value of the goodwill for the Germany CGU as at 31
March 2020 was GBP28.7m (2019: GBP32.2m). The decrease results from
an impairment of GBP4.3m in the year following a reduction in the
value in use, calculated using the assumptions noted above. Our
German operations performed in line with expectations for orders
with some significant contract wins during the period. Delivery
performance and profitability was, however, impacted by other
operational and cost issues and towards the end of the financial
year by the effects of COVID-19. We have written down GBP4.3m of
goodwill associated with the acquisition in anticipation of the
financial impact of lower revenue and margins. The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate by 1%, a decrease in
the terminal growth rate by 1% or a decrease in the terminal year
cash flows of GBP2.0m would have increased the impairment charge by
GBP11.1m, GBP8.9m and GBP19.7m respectively.
Inzpire
The carrying value of the goodwill for the Inzpire CGU as at 31
March 2020 was GBP11.7m (2019: GBP11.7m). The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate by 1%, a decrease in
the terminal growth rate by 1% or a decrease in the terminal year
cash flows of GBP2.0m would not cause the net operating assets to
exceed their recoverable amount.
Advisory Services
The goodwill in respect of the Advisory Services CGU was written
off in the current year and the carrying value is now nil (2019:
GBP9.8m). Trading in this CGU has recently declined and following
an internal reorganisation it no longer remains a viable CGU in its
own right. Any residual contract activity has been transferred to
other CGUs.
14. Post-retirement benefits
In the UK the Group operates a defined benefit pension scheme
('the Scheme') for approximately one quarter of its UK employees.
The Scheme closed to future accrual on 31 October 2013 and there is
no on-going service cost. After this date, defined benefit members
transferred to a defined contribution section of the Scheme. The
Scheme is a final salary plan, which provides benefits to members
in the form of a guaranteed level of pension payable for life.
The Scheme is in a net asset position with the market value of
assets in excess of the present value of Scheme liabilities. These
have the values set out below as at 31 March of each year end.
All figures in GBP million 2020 2019
--------------------------------------------------- --------- ---------
Total market value of assets - see following table
for analysis by category of asset 1,912.3 1,963.6
Present value of Scheme liabilities (1,602.6) (1,704.5)
---------------------------------------------------- --------- ---------
Net pension asset before deferred tax 309.7 259.1
Deferred tax liability (63.8) (48.6)
---------------------------------------------------- --------- ---------
Net pension asset after deferred tax 245.9 210.5
---------------------------------------------------- --------- ---------
The balance sheet net pension asset is a snapshot view which can
be significantly influenced by short-term market factors. The
calculation of the surplus or deficit depends, therefore, on
factors which are beyond the control of the Group - principally the
value at the balance sheet date of the various categories of assets
in which the Scheme has invested and long-term interest rates and
inflation rates used to value the Scheme liabilities. This is
particularly pertinent during the COVID-19 pandemic whilst markets
are extremely volatile. Sensitivities are described on the
following page.
Total expense recognised in the income statement
All figures in GBP million 2020 2019
---------------------------------------------------- ----- -----
Net finance income 6.5 8.2
Past service cost - (0.7)
Administrative expenses (1.2) (0.9)
Total net income recognised in the income statement
(gross of deferred tax) 5.3 6.6
----------------------------------------------------- ----- -----
Movement in the net pension asset
The movement in the net pension asset (before deferred tax) is
set out below:
All figures in GBP million 2020 2019
------------------------------ ----- ------
Opening net pension asset 259.1 316.2
Net finance income 6.5 8.2
Net actuarial gain/(loss) 39.8 (66.4)
Administration expenses (1.2) (0.9)
Past service cost - (0.7)
Contributions by the employer 5.5 2.7
Closing net pension asset 309.7 259.1
------------------------------- ----- ------
The fair value of the Scheme's assets, which are not intended to
be realised in the short term and may be subject to significant
change before they are realised, were:
All figures in GBP million 2020 2019
----------------------------- ------- ---------- ------- ------- ---------- -------
Quoted Not quoted Total Quoted Not quoted Total
in an in an
active active
market market
----------------------------- ------- ---------- ------- ------- ---------- -------
Equities 113.5 47.3 160.8 127.0 51.8 178.8
Liability Driven Investment 347.5 - 347.5 690.8 - 690.8
Asset backed securities 465.0 - 465.0 - - -
Corporate bonds - - - 96.0 - 96.0
Alternative bonds 215.3 - 215.3 304.4 - 304.4
Property fund - 167.0 167.0 - 145.6 145.6
Cash and cash equivalents - 15.8 15.8 - 75.1 75.1
Insurance buy-in policy - 546.0 546.0 - 566.4 566.4
Outstanding payment due in
respect of buy-in - - - - (96.0) (96.0)
Derivatives - (5.1) (5.1) - 2.5 2.5
----------------------------- ------- ---------- ------- ------- ---------- -------
Total market value of scheme
assets 1,141.3 771.0 1,912.3 1,218.2 745.4 1,963.6
----------------------------- ------- ---------- ------- ------- ---------- -------
Per the Scheme rules the Company has an unconditional right to a
refund of any surplus, assuming gradual settlement of all
liabilities over time. Such surplus may arise on cessation of the
Scheme in the context of IFRIC 14 paragraphs 11(b) and 12 and
therefore the full net pension asset can be recognised on the
Group's balance sheet and the Group's minimum funding commitments
to the Scheme do not give rise to an additional balance sheet
liability.
Assumptions
The major assumptions used in the IAS 19 valuation of the
Scheme's liabilities were:
2020 2019
--------------------------------------------- ----- -----
Discount rate applied to Scheme liabilities 2.30% 2.45%
CPI inflation assumption 1.90% 2.35%
---------------------------------------------- ----- -----
Assumed life expectancies in years:
Future male pensioners (currently aged 60) 87 87
Future female pensioners (currently aged 60) 90 89
Future male pensioners (currently aged 40) 89 89
Future female pensioners (currently aged 40) 91 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 gross Scheme liabilities on
Key assumptions Change in assumption before deferred tax net pension asset
-------------------- ----------------------------
Increase/decrease Decrease/increase Decrease/increase
Discount rate by 0.1% by GBP30m by GBP18m
Increase/decrease Increase/decrease Increase/decrease
Rate of inflation by 0.1% by GBP29m by GBP14m
Increase by one Decrease by GBP35m
Life expectancy year Increase by GBP53m
----------------- -------------------- ---------------------------- ------------------
The impact of movements in Scheme liabilities will, to an
extent, be offset by movements in the value of Scheme assets as the
Scheme has assets invested in a Liability Driven Investment
portfolio. As at 31 March 2020 this hedges against approximately
90% of the interest rate and also 90% of the inflation rate risk,
as measured on the Trustees' gilt-funded basis.
The above sensitivity analyses are based on a change in an
assumption while holding all other assumptions constant. In
practice, this is unlikely to occur, and changes in some of the
assumptions may be correlated. When calculating the sensitivity of
the defined benefit obligation to significant actuarial assumptions
the same method (projected unit credit method) has been applied as
when calculating the pension liability recognised within the
statement of financial position. The methods and types of
assumption did not change.
In addition to the sensitivity of the liability side of the net
pension surplus (which will impact the value of the net pension
surplus) the net pension surplus is also exposed to significant
variation due to changes in the fair value of Scheme assets. A
specific sensitivity on assets has not been included in the above
table but any change in valuation of assets flows straight through
to the value of the net pension surplus e.g. if equities fall by
GBP10m then the net pension surplus falls by GBP10m. The values of
unquoted assets assume that an available buyer is willing to
purchase those assets at that value. For the Group's portfolio of
assets, the property portfolio of GBP167.0m and the unquoted
equities of GBP47.3m are the assets with most uncertainty as to
valuation as at 31 March 2020.
The accounting assumptions noted above are used to calculate the
period end net pension asset in accordance with the relevant
accounting standard, IAS 19 (revised) 'Employee benefits'. Changes
in these assumptions have no impact on the Group's cash payments
into the scheme. The payments into the scheme are reassessed after
every triennial valuation. The triennial valuations are calculated
on a 'funding basis' and use a different set of assumptions, as
agreed with the pension Trustees. The key assumption that varies
between the two methods of valuation is the discount rate. The
funding basis valuation uses the risk-free rate from UK gilts as
the base for calculating the discount rate, whilst the IAS 19
accounting basis valuation uses corporate bond yields as the
base.
15. Own shares and share-based awards
Own shares represent shares in the Company that are held by
independent trusts and include treasury shares and shares held by
the employee share ownership plan. Included in retained earnings at
31 March 2020 are 6,123,406 shares (2019: 6,946,678 shares). In the
year ended 31 March 2020 the Group granted/awarded 1.0m new
share-based awards to employees (2019: 4.0m).
16. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured
guarantees of GBP40.4m at 31 March 2020 (2019: GBP29.9m) in the
ordinary course of business.
The Company has on occasion been required to take legal action
to protect its intellectual property rights, to enforce commercial
contracts or otherwise and similarly to defend itself against
proceedings brought by other parties, including in respect of
environmental and regulatory issues. Provisions are made for the
expected costs associated with such matters, based on past
experience of similar items and other known factors, taking into
account professional advice received, and represent management's
best estimate of the likely outcome. The timing of utilisation of
these provisions is uncertain pending the outcome of various court
proceedings, ongoing investigations and negotiations. However, no
provision is made for proceedings which have been or might be
brought by other parties unless management, taking into account
professional advice received, assesses that it is more likely than
not that such proceedings may be successful. Contingent liabilities
associated with such proceedings have been identified but the
Directors are of the opinion that any associated claims that might
be brought can be resisted successfully and therefore the
possibility of any outflow in settlement is assessed as remote.
17. Related party transactions with equity accounted
investments
During the year there were sales to associates and joint
ventures of GBP5.7m (2019: GBP10.1m). At the year end there were
outstanding receivables from associates and joint ventures of
GBP2.1m (2019: GBP1.4m).
18. Capital commitments
The Group had the following capital commitments for which no
provision has been made:
All figures in GBP million 2020 2019
--------------------------- ---- ----
Contracted 32.0 40.6
---------------------------- ---- ----
Capital commitments at 31 March 2020 include GBP19.1m (2019:
GBP20.6m) in relation to property, plant and equipment that will be
wholly funded by a third party customer under long-term contract
arrangements. These primarily relate to investments under the LTPA
contract.
Glossary
C4ISR Command, control, communications, computers, intelligence,
surveillance and reconnaissance
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation and amortisation
EPS Earnings per share
IAS International Accounting Standards
IFRS International Financial Reporting Standards
LTPA Long Term Partnering Agreement: 25-year contract established
in 2003 to manage the MOD's test and evaluation ranges
MOD UK Ministry of Defence
SSRO Single Source Regulations Office
Alternative performance measures ('APM's)
The Group uses various non-statutory measures of performance, or
APMs. Such APMs are used by management internally to monitor and
manage the Group's performance and also allow the reader to obtain
a proper understanding of performance (in conjunction with
statutory financial measures of performance). The APMs used by
QinetiQ are set out below:
Measure Explanation Note reference
to calculation
or reconciliation
to statutory
measure
Organic growth The level of year-on-year growth, Note 2
expressed as a percentage, calculated
at constant prior year foreign exchange
rates, adjusting for business acquisitions
and disposals to reflect equivalent
composition of the Group
-------------------------------------------- -------------------
Underlying operating Operating profit as adjusted to exclude Note 2
profit 'specific adjusting items'
-------------------------------------------- -------------------
Underlying operating Underlying operating profit expressed Note 2
margin as a percentage of revenue
-------------------------------------------- -------------------
Underlying net finance Net finance income/expense as adjusted Note 6
income/expense to exclude 'specific adjusting items'
-------------------------------------------- -------------------
Underlying profit Profit before/after tax as adjusted Note 3
before/after tax to exclude 'specific adjusting items'
-------------------------------------------- -------------------
Underlying effective The tax charge for the year excluding Note 7
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 8
and diluted EPS as adjusted to exclude 'specific adjusting
items'
-------------------------------------------- -------------------
Orders The level of new orders (and amendments N/A
to existing orders) booked in the
year. Includes share of orders won
by joint ventures
-------------------------------------------- -------------------
Backlog, funded backlog The expected future value of revenue N/A
or order book from contractually committed and funded
customer orders
-------------------------------------------- -------------------
Book to bill ratio Ratio of funded orders received in N/A
the year to revenue for the year,
adjusted to exclude revenue from the
25-year LTPA contract due to significant
size and timing differences of LTPA
order and revenue recognition which
may distort the ratio calculation.
-------------------------------------------- -------------------
Underlying net cash Net cash flow from operations before Note 9
flow from operations cash flows of specific adjusting items
-------------------------------------------- -------------------
Underlying operating The ratio of underlying net cash flow Note 9
cash conversion or from operations to underlying operating
cash conversion ratio profit
-------------------------------------------- -------------------
Free cash flow Underlying net cash flow from operations Note 9
less net tax and interest payments
less purchases of intangible assets
and property, plant and equipment
plus proceeds from disposals of plant
and equipment
-------------------------------------------- -------------------
Net cash Net cash as defined by the Group combines Note 10
cash and cash equivalents with other
financial assets and liabilities,
primarily available for sale investments
and derivative financial instruments.
-------------------------------------------- -------------------
Specific adjusting Amortisation of intangible assets Note 3
items arising from acquisitions; impairment
of property and goodwill; 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 deferred tax movements
-------------------------------------------- -------------------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR DGGDUXGDDGGG
(END) Dow Jones Newswires
May 21, 2020 02:00 ET (06:00 GMT)
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