REG - QinetiQ Group plc - Interim Results
16/11/2023 07:00
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RNS Number : 6188T QinetiQ Group plc 16 November 2023
Interim Results
16 November 2023
Delivering long-term sustainable growth
Results for six months to 30 September 2023 ('H1 FY24')
Statutory results Underlying* results
H1 FY24 H1 FY23 H1 FY24 H1 FY23
Revenue £883.1m £673.4m £883.1m £673.4m
Operating profit(2) £91.3m £127.2m(1) £100.1m £74.1m
Profit after tax £63.7m £110.2m(1) £77.3m £65.4m
Earnings per share 11.0p 19.2p(1) 13.4p 11.4p
Interim dividend per share 2.6p 2.4p 2.6p 2.4p
Orders £952.7m £798.8m
Order backlog £3,132.0m £2,968.6m
Net cash flow from operations £62.2m £99.5m(1) £71.7m £106.8m(1)
Net (debt)/cash £(273.8)m £264.0m
Strong and consistent operational performance globally
- Orders up 19% at a record-high of £953m, up 2% organically, with a
book-to-bill of 1.3x
- Revenue is up 31%, 19% on an organic basis
- Underlying operating profit is up 35%, 25% on an organic basis, with improved
margin at 11.3%
- Cash conversion at 50% due to short-term timing and on-track to deliver FY
guidance
- Statutory operating profit of £91m, H1 FY23 higher due to temporary FX
related to Avantus
A differentiated company responding to national and global security needs
- A unique value proposition, highly relevant to an evolving and increasing
threat
- Structurally aligned to high-priority and high-growth segments
- Delivering organic revenue at double growth rate of national defence budgets
- Avantus won $657m(3) contract awards, driving future revenue growth
Full year performance in-line with market expectations, longer-term guidance
unchanged
- FY24 performance will deliver high single digit organic revenue growth and
high teens total revenue growth at a stable operating profit margin
- On-track for high single digit organic revenue growth to c.£2.4bn at c.12%
margin by FY27
- Disciplined capital allocation and bolt-on acquisition optionality to c.£3bn
revenue by FY27
- Focused on our AUKUS customers' mission and increasing shareholder returns
Steve Wadey, Group Chief Executive Officer of QinetiQ said:
"I'm delighted with our strong first half results that have been achieved as a
result of consistent operational performance from across the Group and the
continued dedication of our people to deliver high value services and products
critical to national defence and security. We have delivered excellent organic
growth and improved our margin performance. We have also won significant new
business and major contract renewals, with a major highlight being the
outstanding orders performance of Avantus with $657m of contract awards since
the start of the financial year.
"We enter the second half of the year with confidence and positive momentum.
Our relevance in the market is evidenced by the increasing demand for our
distinctive offerings and growing order pipeline. We remain focused on
supporting our customers' mission and increasing returns for shareholders."
* Definitions of the Group's 'Alternative Performance Measures' can be found in
the glossary
1 Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits. See note 18
to the interim financial statements.
2 Underlying operating profit refers to operating profit from segments. See note
2 to the interim financial statements.
3 Total contract awards since the start of the financial year, $195m orders
recognised in H1 FY24
Interim results presentation:
We will be hosting an in-person results presentation at 09:30 GMT at the
London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Registration
to join in-person or via the live webcast is available here:
https://www.qinetiq.com/en/investors/results-reports-and-presentations/fy24-interim-results
(https://www.qinetiq.com/en/investors/results-reports-and-presentations/fy24-interim-results)
About QinetiQ:
QinetiQ is an integrated global defence and security company focused on
mission-led innovation. QinetiQ employs circa 8,500 highly-skilled people,
committed to creating new ways of protecting what matters most; testing
technologies, systems, and processes to make sure they meet operational needs;
and enabling customers to deploy new and enhanced capabilities with the
assurance they will deliver the performance required.
For further information please contact:
John Haworth, Group Director Investor Relations: +44 (0) 7920 545841
Lindsay Walls, Group Director Communications (Media enquiries): +44 (0) 7793 427582
Basis of preparation:
Throughout this Interim Report, certain measures are used to describe the
Group's financial performance which are not recognised under UK-adopted
International Accounting Standards. The Group's Directors and management
assess financial performance based on underlying measures of performance,
which are adjusted to exclude certain 'specific adjusting items'. In the
judgement of the Directors, the use of adjusted performance measures (APMs)
such as underlying operating profit and underlying earnings per share are more
representative of ongoing trading, facilitate meaningful year-to-year
comparison and, therefore, allow the reader to obtain a fuller understanding
of the financial information. The adjusted measures used by QinetiQ may differ
from adjusted measures used by other companies. Details of QinetiQ's APMs are
set out in the glossary to this document.
Year references (FY24, FY23, 2024, 2023) refer to the year ended 31 March. H1
FY24 and H1 FY23 refer to the six months ended 30 September.
Disclaimer
This document contains certain forward-looking statements relating to the
business, strategy, financial performance and results of the Company and/or
the industry in which it operates. Actual results, levels of activity,
performance, achievements and events are most likely to vary materially from
those implied by the forward-looking statements. The forward-looking
statements concern future circumstances and results and other statements that
are not historical facts, sometimes identified by the words 'believes','
expects', 'predicts', 'intends', 'projects', 'plans', 'estimates', 'aims',
'foresees', 'anticipates', 'targets', 'goals', 'due', 'could', 'may',
'should', 'potential', 'likely' and similar expressions, although these words
are not the exclusive means of doing so. These forward-looking statements
include, without limitation, statements regarding the Company's future
financial position, income growth, impairment charges, business strategy,
projected levels of growth in the relevant markets, projected costs, estimates
of capital expenditures, and plans and objectives for future operations.
Forward-looking statements contained in this announcement regarding past
trends or activities should not be taken as a representation that such trends
or activities will continue in the future. Nothing in this document should be
regarded as a profit forecast.
The forward-looking statements, including assumptions, opinions and views of
the Company or cited from third party sources, contained in this announcement
are solely opinions and forecasts which are uncertain and subject to risks.
Although the Company believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no assurance that these
expectations will prove to be correct. Actual results may differ materially
from those expressed or implied by these forward-looking statements. A number
of factors could cause actual events to differ significantly and these are set
out in the principal risks and uncertainties section of this
document.
Most of these factors are difficult to predict accurately and are generally
beyond the control of the Company. Any forward-looking statements made by, or
on behalf of, the Company speak only as of the date they are made. Save as
required by law, the Company will not publicly release the results of any
revisions to any forward-looking statements in this document that may occur
due to any change in the Directors' expectations or to reflect events or
circumstances after the date of this document.
Chief Executive Officer's Review
We delivered strong and consistent operational performance globally through
the first half of the year. We secured a record first half order intake of
£953m, with a book-to-bill ratio of 1.3x, demonstrating the continued high
demand for our distinctive offerings. We achieved 31% revenue growth, 19% on
an organic constant currency basis, with underlying operating profit margin at
11.3%, an improvement on first half performance last year. Whilst cash
conversion in the first half was 50%, lower than the prior year due to
short-term timing effects, full year cash conversion will be in-line with our
previous guidance.
EMEA Services continues to perform particularly well, maintaining the momentum
and strong performance from FY23. EMEA Services delivered 23% organic revenue
growth compared to the prior year first half, consistent revenue compared to
the prior year second half, and margin improved to 11.8%. Global Solutions has
benefitted from the first half performance of Avantus, that we acquired in
late-November 2022, and on an organic basis is broadly flat compared to the
first half of last year.
Avantus has won $657m of new contract awards since the start of the financial
year - this positions us well to drive future revenue growth. First half
revenue was slower than expected, due to the US continuing resolution and
competitor protests, but with the significant step-up in contract awards we
have confidence in delivering good growth in the second half of the year. We
remain confident in delivering double digit revenue growth at stable margin in
the future.
We are deeply saddened to report that one of the PC-9 aircraft that we operate
crashed in September 2023 in the Neuenstein area of Germany whilst on a
customer training exercise and the two aircrew on-board did not survive the
crash. We are continuing to support the families of our two colleagues that
were on-board and the team in Germany. The safety of our employees remains our
highest priority and we are working closely with all relevant authorities to
support the external investigations into this tragic incident.
Strategic achievements
We have continued to make good progress implementing our strategy. Our major
strategic achievements delivered in the first half include:
- $657m orders won in Avantus - Avantus has won $657m of new contract awards
since the start of the financial year, positioning us well to drive future
revenue growth. Orders won include two strategic recompetes with significant
on-contract growth: a 5-year $224m Space Development Agency (SDA) contract and
a $127m Strategic Capabilities Office (SCO) contract.
- US business successfully transitioning from prototypes to production - We have
won two significant contracts in the US demonstrating our advanced technology
capabilities moving from prototypes into larger production. Firstly, we have
been awarded a $84m 5-year contract for the testing and production of the Next
Generation Advanced Bomb Suit (NGABS), a Program of Record to deliver over 700
suits to the US Army. And secondly, based on successful operational trials
with our Oshkosh partner we were one of four awardees for the Robotic Combat
Vehicle Light (RCV-L) full scale prototype. This positions us well to compete
for the future $500m production phase.
- Engineering Delivery Partner (EDP) delivering customer benefits - We secured a
further £190m of orders in H1 through our EDP framework, taking overall
orders over the first 5 years of operation to £1.5bn. Notably, we have
secured a £3.5m, 6 month initial task as Capability Partner to the MOD in
support of the new AUKUS submarine programme.
- UK Intelligence delivery - We delivered Full Operating Capability three months
early on the 10-year, £80m SOCIETAS contract for the MOD Joint Electronic
Warfare Operational Support Centre, enabling them to accelerate the production
of mission data for UK military platforms. In addition, we were awarded a
multi-million pound, 3-year design and delivery contract for a major UK
customer to deliver national cyber exercising for advanced training and
mission rehearsal in the cyber domain.
- Extension to MSP framework and delivery of the JATTS programme in Australia -
Our Australian business continues to successfully deliver through the Managed
Service Provider framework with a 3-year extension and a further A$58m of
business in H1 through securing significant land systems and explosive
ordinance tasks. Augmenting this, our Air Affairs business has seen 24%
increased demand in flying hours through the Joint Adversarial Training and
Testing Services (JATTS) and successfully contributed threat representation
services to the Talisman Sabre training exercise involving 13 nations and
30,000 military personnel.
- Principles Agreement signed with the UK MOD for 5-year Long Term Partnering
Agreement (LTPA) extension - We have signed a Principles Agreement with UK MOD
to jointly develop how the LTPA test, trials, training and evaluation (T3E)
capabilities are sustained and modernised beyond 2028, to enable next
generation military capability, such as directed energy weapons. By exercising
the LTPA contract option for the 5-year extension, subject to negotiation and
approval, we will continue as UK MOD's strategic partner for T3E services
until 2033.
The growing market opportunity
The geopolitical climate is increasingly uncertain as the global security
situation continues to deteriorate. The Hamas attack on Israel has elevated
tensions and increased the threat of a broader regional conflict in the Middle
East. In Europe, Russia's invasion of Ukraine is reshaping their relationship
with the West, and the threat from China remains uncertain. These dynamics are
driving defence and security policies, increasing prioritisation of budgets
and modernisation of capabilities. Our major focus is on supporting our three
home countries which have a shared defence and security mission under the
trilateral partnership known as AUKUS.
The US has requested the largest ever Research & Development and Test
& Evaluation budget at $145bn, a 40% increase since 2020. The UK refreshed
its Integrated Review earlier in the year and is investing £6.6bn in R&D
and experimentation over four years. The Australian government has completed
its Defence Strategic Review and is increasing defence spending by 7% to
$53bn.
All three countries are committed to working together on a range of advanced
capabilities and technologies, critical to future warfare, such as advanced
cyber and directed energy, as well as the new nuclear submarine programme.
These areas align well with our strengths and provide attractive opportunities
over the long-term.
A differentiated company responding to national and global security needs
Within this geopolitical context, we are a differentiated company that helps
our customers respond to their national and global security needs. Our unique
value proposition is to rapidly develop and experiment with new capabilities,
test those capabilities are safe and perform as intended against the threat,
and ensure our warfighters are trained and operationally ready. With us, our
customers can accelerate through this critical cycle and be prepared and ready
to counter the increasing threat.
We are a purpose-driven company and our purpose has never been more relevant:
protecting lives and serving the national security interests of our customers.
Our purpose drives our strategy, which has three inter-related components:
1. Delivering six distinctive and mutually supportive offerings: We co-create
high-value differentiated solutions for our customers in experimentation,
test, training, information, engineering and autonomous systems;
2. Applying disruptive and innovative technology and business models: We invest
in and apply disruptive business models, digitisation and advanced
technologies to enable our customers' operational mission at pace; and
3. Leveraging those capabilities across our global operations: We are building an
integrated global defence and security company to leverage our capability
through single routes to market in UK, the US, Australia, Canada and Germany
In order to counter the increasing threat, our customers are prioritising
their budgets on rapid defence modernisation. Our value proposition is
structurally aligned to their high-priority and high-growth segments, such as
RDT&E (Research, Development, Test and Evaluation) and C5ISR (Command,
Control, Communications, Computers, Cyber, Intelligence, Surveillance and
Reconnaissance), Cyber and Electronic Warfare and Autonomy and AI. Our
alignment to higher growth segments is why our growth is outpacing headline
defence spending: QinetiQ has delivered organic revenue at double the growth
rate of national defence budgets over the last five years.
Building our global platform to deliver sustainable growth
At our full year results in May 2023 and re-confirmed at our Investor Seminar
in New York a few weeks ago, we have a robust plan to deliver organic growth
to c.£2.4bn revenue by FY27. With our highly cash generative business model
this plan provides optionality to deploy our capital to further accelerate our
growth and shareholder returns. Through strategy-led bolt-on acquisitions, we
see an opportunity to build a business of circa £3bn revenue by FY27.
Our organic growth plan is underpinned by a disciplined approach to bid and
programme delivery performance, to ensure consistent operational performance
through both winning and contract delivery. We continue to invest in our
people, technologies and capabilities to ensure we retain and recruit the best
talent to deliver for our customers and enhance our offerings and capabilities
through organic investments. We are seeing success in leveraging our
distinctive offerings across our global business to drive synergies; recent
examples include establishing a US final assembly and test capability for
Banshee Jet 80 aerial targets to support future US customer demand, SPUR robot
sales into Australia from the US, bringing advanced sensing and robotics to
our Avantus Intelligence customers, and selling our threat representation and
targets capabilities globally.
Our priority is to deliver on our organic growth ambitions. Alongside this we
continue to actively manage our portfolio, as evidenced by the nine
acquisitions and four disposals that we have completed over the last eight
years. We have an active pipeline of acquisition opportunities and remain
disciplined in the evaluation of opportunities, considering their strategic
fit, financial returns and the right approach to integration. We are
prioritising bolt-on acquisitions in the US and Australia, with our plan for
leverage to remain under 1.5x (net debt to EBITDA). We have a clear and active
capital allocation policy which alongside our strategy, governs our long-term
investment choices. We consider capital allocation proactively, evaluating
organic and inorganic investments and shareholder returns on their short and
long-term benefits, seeking to maximise long-term shareholder return.
Outlook: FY24 in-line with market expectations
We enter the second half of FY24 with confidence, a healthy order-book and
positive momentum with 92% revenue under contract. We confirm that our full
year performance will be in-line with market expectations(1). We expect to
deliver high single-digit organic revenue growth and high teens total revenue
growth at a stable operating profit margin. Capital expenditure is expected to
remain within the £90m to £120m range.
(1) - Analyst expectations (average) for FY24 as at 14/11/23: Revenue
£1,868m, Op profit £209m
Outlook: Longer-term guidance unchanged
We are targeting high single-digit organic revenue growth, to deliver
c.£2.4bn organic revenue at c.12% margin by FY27. With our highly cash
generative business model, this provides optionality to deploy our capital to
compound our growth and shareholder returns - through bolt-on acquisitions we
see an opportunity to build a company of circa £3bn revenue at 11-12% margin
by FY27. This delivers attractive return on capital employed at the upper end
of the 15-20% range.
Trading environment
Global context
We are operating in an environment where there is an increasing threat of
wider global conflict. This follows Russia's full-scale invasion of Ukraine;
the threat posed by China's growing military power coupled with its push to
change global norms and potentially threaten its neighbours; the rise of
extremism in Africa; and ongoing tensions and conflict in the Middle East.
In parallel, rapidly emerging and evolving technologies, such as Generative
AI, continue to disrupt traditional business and society with both positive
and negative outcomes as well as creating unprecedented vulnerabilities.
Strategic response
To meet these increasing challenges, the UK, US and Australia have reviewed
their strategic defence and security capabilities and investment priorities as
well as their allied activities.
UK
The 2023 Integrated Review Refresh (IRR). As announced in 2021, the UK MOD is
also investing over £6.6bn in research and development to develop
next-generation and emerging technologies in areas such as cyber, space,
directed-energy weapons, and advanced high-speed missiles.
As the UK seeks to develop and deploy next-generation capabilities faster than
adversaries, we are well positioned to support them in applying mission-led
innovation to achieve this. Our unrivalled expertise in Research &
Development and Test & Evaluation combined with our investment to
modernise UK test ranges help our customers generate and assure new and
emerging technologies at pace. Delivering value for money remains critical to
our customers and we will continue to utilise innovative delivery models to
support our customers in achieving this.
US
The 2022 National Defense Strategy and National Security Strategy recognised
an intensifying competitive landscape and the urgent need to sustain and
strengthen deterrence. The 2024 Department of Defense Budget Request builds on
the principles of National Security Strategy and has grown by nearly $100bn
(13%) to $842bn since 2022. As part of this, the FY24 Research Development
Test and Evaluation budget request is the largest ever at $145bn. This
represents an increase of $26bn (22%) since FY22.
Investment in critical technology areas aimed at strengthening technological
advantage include: directed energy, hypersonics and integrated sensing and
cyber.
In the US, we are a market leader in robotics, autonomy and advanced sensing
solutions, an area of budget growth, delivering value to our customers through
the rapid development and deployment of disruptive solutions. With the
acquisition of Avantus we are also a leading cyber, data analytics and
software development provider. There is a growing need to provide actionable
intelligence into war-fighters' hands quicker, and a push to develop and
integrate multiple autonomous and semi-autonomous systems as the US seeks to
invest in next-generation technologies to maintain technological advantage.
Australia
The 2023 Defence Strategic Review addresses the prospect of major conflict in
the Indo-Pacific that directly threatens Australia's national interest. It
frames the priority of investment in Defence capability and posture to meet
Australia's security challenges through to 2032-33. In the 2023 Budget,
Defence spending will increase by 7% to AUD$52.6bn in 2023-24.
The Australian government reinforced its commitment to delivering on the
recommendations of the Defence Strategic Review, with plans to commence the
work to deliver Australia's nuclear-powered submarine program. Defence
spending as a proportion of GDP will lift above its current trajectory to be
0.2% higher by 2032-33.
We continue to support the Australian forces in modernising sovereign defence
capabilities, leveraging expertise across the global business.
The significance of the AUKUS Alliance
In September 2021, leaders of Australia, the United Kingdom, and the United
States announced the creation of AUKUS, the enhanced trilateral security
partnership. AUKUS is intended to strengthen the ability of each government to
support security and defence interests, building on longstanding and ongoing
bilateral ties. It will promote deeper information sharing and technology
sharing; and foster deeper integration of security and defence-related
science, technology, industrial bases and supply chains.
The first initiative under AUKUS is a commitment to support Australia in
acquiring nuclear-powered submarines for the Royal Australian Navy. The second
initiative centres on enhancing joint capabilities and interoperability,
focusing on cyber and electronic warfare capabilities, artificial
intelligence, quantum technologies, additional undersea capabilities, as well
as hypersonic and counter-hypersonic capabilities.
With these collaboration activities involving technology development, trials
and experimentation, we anticipate increasing demand for support across each
of our three 'home' nations.
Broader international markets
The strategic landscape has undergone a seismic shift following Russia's
invasion of Ukraine in February 2022. This has provoked NATO to increase its
defence capabilities and readiness to respond, adding to the pressure for the
NATO member countries to increase their defence spending of at least 2% of
GDP. Following the announcement of Germany to increase defence spending by
€100bn over the next five years, many other NATO and European countries are
also increasing their defence and security investment.
While our priority and investment focus is aligned to our three home country
strategies (UK, US and Australia), we will continue to conduct business in the
support of allies in 5-Eyes, NATO and Continental Europe.
Chief Financial Officer's Review
Operating performance
We delivered excellent order performance in the period with orders of £952.7m
(H1 FY23: £798.8m), up 19% on a reported basis. Organically and on a
consistent currency basis, orders grew 2% year on year against a strong prior
year comparator. Orders won include £190m Engineering Delivery Partner (EDP)
orders, a $84m full production contract for NGABS ($34m recognised in H1
FY24), a continuation of the threat representation training contract that
underpins our German business and a £39m renewal of the battlefield
communication programme (BATCIS) in the UK. Avantus has had impressive
contract awards of $657m since the start of the financial year. Due to the
multi-year phasing and funding approach to contract awards in the US, we have
only recognised $195m in first half orders, in-line with our prudent order
recognition policy.
Revenue visibility remains good and the Group's total funded order backlog at
30 September 2023 stood at £3.1bn, a modest increase on the same period last
year. As we deliver revenue on our large long-term contracts (with orders
booked in prior years, most significantly with the Long Term Partnering
Agreement) backlog will naturally reduce, it is therefore pleasing to see
backlog continuing to grow year-on-year due to the strong orders growth across
the Group. At the start of H2 FY24, the Group had approximately £840m of H2
FY24 revenue under contract. This compares with approximately £700m of H2
FY23 revenue at the same time last year.
Revenue was £883.1m (H1 FY23: 673.4m), up 31% on a reported basis.
Organically and on a consistent currency basis, revenue grew 19% compared to
the same period last year. Organic growth was driven by strong performance in
EMEA Services delivering revenue from the excellent order in-take in the prior
year, particularly in the UK, which saw continued growth in EDP, short-term
operational priorities and inflation. Global Solutions revenue was flat
organically with total growth driven by the addition of Avantus.
Operating profit from segments was £100.1m (H1 FY23: £74.1m), up 35% on a
reported basis. Organically and on a consistent currency basis, underlying
operating profit grew by 25% compared to the same period last year. The
significant improvement in profit is largely driven from EMEA Services revenue
growth and improving margin in both segments. Our acquisitions achieved
margins in-line with expectations with Avantus maintaining double digit
operating profit margin.
Operating profit margin from segments was 11.3%, an improvement from H1 FY23
(11.0%) and consistent with our FY23 performance. The modest increase from H1
FY23 is due to margin improvement across both segments; most significantly
Global Solutions profit margin increased up to 10% due to good margin
stability in the US and higher margin product deliveries (global threat
representation and niche intelligence products).
Operating profit from segments excludes income from Research and Development
Expenditure Credits (RDEC). RDEC income increased from £7.5m in H1 FY23 to
£11.9m in H1 FY24 due to the UK RDEC rate increase from 13% to 20%.
Seasonality / cyclicality has not had a material impact on the interim income
statement performance of the Group.
Specific adjusting items
The total impact of specific adjusting items on operating profit (which are
excluded from underlying performance) before tax was an expense of £20.7m (H1
FY23 restated: income of £45.6m). H1 FY23 included a £42.9m gain from the
foreign exchange derivative contract which was taken out to hedge the foreign
exchange exposure on the $590m Avantus acquisition and was executed in
accordance with the Group's Treasury Policy - this was a one-off timing gain
at H1 FY23 which unwound in H2 FY23 by the time of the transaction completion.
H1 FY23 restated also includes a £19.6m gain from the release of the
liability for MOD appropriation of RDEC.
Acquisition and disposal costs of £0.6m (H1 FY23: £6.4m) comprise costs
associated with various ongoing projects and acquisitions that we have decided
not to pursue, demonstrating our disciplined capital allocation policy. The H1
FY23 amount related to Avantus and Air Affairs. Acquisition related
remuneration of £1.1m relates to specific post-acquisition retention
arrangements for Avantus employees which were anticipated at the time of the
transaction. Acquisition integration costs of £2.6m relate to the one-off
costs of integrating both Avantus and Air Affairs with the existing Group
operations.
Our digital investment programme continues to deliver improvements to the
infrastructure, digital tools and operating systems of the company - roughly
two thirds of the costs in the first half are reported as specific adjusting
items in the P&L given their one-off nature, with ongoing recurring
operating costs (such as licence costs and overheads) remaining within
underlying operating costs. In H1 FY24 the exceptional cost element of the
digital investment programme within specific adjusting items totals £5.1m (H1
FY23: £2.5m).
Also included within specific adjusting items were a gain on the sale of
property in the UK of £2.1m (H1 FY23 £0.9m) and impairment of right of use
lease assets in the US following space relocation of £0.7m. Amortisation of
acquisition intangibles of £12.7m (H1 FY23: £5.6m) has increased due to the
inclusion of amortisation of the intangible assets relating to the Avantus
acquisition.
Net finance costs
Underlying finance income on the group's cash reserves increased from £1.4m
to £8.9m due to the increase in interest rates. Underlying finance expense
increased from £1.9m to £16.6m due to the interest payable on the debt
financing which was taken out at the time of the Avantus acquisition. The
underlying net finance expense, which excludes the pension net finance income,
was £7.7m (H1 FY23: £0.5m).
The pension net finance income, which is a specific adjusting item of £2.2m
(H1 FY23: £4.9m) reduced due to a lower opening net pension surplus. Net
finance expense was £5.5m (H1 FY23: net finance income of £4.4m).
Tax
The total tax charge is £22.1m (H1 FY23 restated charge: £21.4m). The
underlying tax charge of £27.0m (H1 FY23 restated: £15.7m) is calculated by
applying the expected underlying effective tax rate at a geographic level for
the year ending 31 March 2024 to the underlying profit before tax for the six
months to 30 September 2023.
The Group's full year expected underlying effective tax rate is 26.1% which is
higher than the half year underlying effective tax rate of 25.9% (H1 FY23
restated: 19.4%) due to the geographic mix of profits in H1 FY24.
The underlying effective tax rate has risen due to the increase in the UK
statutory rate effective from 19% to 25% from 1st April 2023. In future we
expect the effective rate to be above the UK statutory rate subject to the
geographic mix of profits and the recognition of deferred tax in respect of
overseas tax losses and excess interest deductions.
On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK,
introducing a global minimum effective tax rate of 15%. The legislation
implements a domestic top-up tax and a multinational top-up tax, effective for
accounting periods starting on or after 31 December 2023. The Group has
applied the exception under the amendment to IAS 12 to recognising and
disclosing information about deferred tax assets and liabilities related to
top-up income taxes.
Research and Development Expenditure Credits (RDEC) are now recognised within
other operating income following the change in accounting policy in FY23.
Amounts receivable in respect of RDEC are recognised as 'other receivables'
within 'trade and other receivables'. Amounts receivable are offset against
outstanding UK corporation tax liabilities at the year-end only to the extent
that the balances can be and are intended to be settled on a net basis.
At the FY23 balance sheet date the FY23 RDEC of £15.4m was outstanding and
was expected to be received as a step 1 offset against the UK corporation tax
liability. Part of the FY23 corporation tax liability was already paid as
Quarterly Instalment Payments during FY23 with a residual corporation tax
liability of £3.8m outstanding at the year end. This residual liability was
paid to HMRC in April 2023.
Tax on specific adjusting items includes a £3.4m credit for tax on the
amortisation of acquisition intangibles and a £1.5m credit in respect of
other pre-tax specific adjusting items, the total specific adjusting items tax
credit was £4.9m (H1 FY23 restated: charge of £5.7m).
Return on Capital Employed (ROCE)
Due to our focus on returns, we have included Return on Capital Employed in
our interim results for the first time, using the calculation of: Underlying
operating profit less amortisation for the previous 12 months / (average
capital employed less net pension asset), where average capital employed is
defined as shareholders' equity plus net debt (or minus net cash).
For H1 FY24 Group ROCE was 25.5% (H1 FY23: 28.8%), modestly lower due to the
increased capital employed with the acquisitions completed in H2 FY23. As we
continue to invest in our business to support sustainable long-term growth,
our ROCE is forecast to remain attractive at the upper end of the 15-20%
range.
Earnings per share
Underlying basic earnings per share for the Group was 13.4p up 18% on the
prior year first half (H1 FY23: 11.4p), with the increase primarily due to the
increase in profits. Statutory basic earnings per share (including specific
adjusting items) were 11.0p (H1 FY23 restated: 19.2p) with the prior half year
comparative period enhanced by the £42.9m foreign exchange gain on the
derivatives taken out to hedge the exposure on the Avantus acquisition and the
£19.6m release of the liability in respect of UK MOD appropriation of RDEC.
Dividend
An interim dividend of 2.6p (H1 FY23: 2.4p) will be paid on 2 February 2024 to
shareholders on the register on 4 January 2024. The interim dividend
represents one third of the prior year total dividend reflecting our
previously communicated methodology. The full year dividend will be announced
with our full year preliminary results in May 2024.
Cash performance
Underlying net cash flows from operations was £71.7m (H1 FY23: £106.8m),
resulting in cash conversion before capital expenditure of 50% (H1 FY23
restated: 98%). H1 FY24 operating cash flow was impacted by the timing of
customer billing milestones (which impacts deferred income) and receipts.
There are also some normal cash flow differences between the first and the
second half which impacted our H1 FY24 cash conversion, such as the timing of
receiving RDEC income (the prior year income is received in cash in H2).
Changes in net working capital of £74.2m in H1 FY24 included a £71.5m
reduction in trade and other payables. This comprises timing related movements
within deferred income, trade payables and accrued expenses. These timing
impacts are already reversing and we are on-track to deliver full year
underlying operating cash conversion of at least 90%, in-line with our
previous guidance.
Capex for the period was £46.9m (H1 FY23: £48.5m). We continue to invest in
core contracts including the LTPA following the contract amendment announced
in April 2019. Full year total capex is expected to be in-line with previous
guidance of £90-120m.
At 30 September 2023 the Group had £273.8m net debt, compared to £206.9m at
31 March 2023. The increase is due to neutral free cash flow, the dividend
payment and £26.4m of new lease obligations. The reported H2 FY23 and H1 FY24
EBITDA and 30 September 2023 net debt position result in a leverage ratio of
0.9x (31 March 2023: 0.8x), below our maximum leverage guidance of 1.5x
introduced at our recent Investor Seminar.
The net debt balance as at 30 September 2023 includes £12.3m of net financial
derivative assets, predominantly the interest rate swaps which have been taken
out to hedge future interest rate exposure on the term loan, £2.7m of
capitalised bank fees and £54.3m of lease liabilities. Lease liabilities
increased from £31.3m as at 31 March 2023 due to new property arrangements
entered into on a long term basis in both the UK and US.
We maintain a rigorous approach to the deployment of our capital, scrutinising
organic and inorganic opportunities to ensure returns to our shareholders are
appropriate. At our recent Investor Seminar we provided modest refinements to
our capital allocation policy as follows:
1. Invest in our organic capabilities;
2. Complement with bolt-on acquisitions;
3. A progressive dividend; and
4. Return excess cash to shareholders.
Committed facilities
The acquisition of Avantus last year was financed using a combination of cash
and debt from a multicurrency floating rate Term Loan placed with our
relationship banks, acquisition financing totalled £340m. The Loan is split
into two Tranches: GBP Term Loan £273m (Tranche A); and, USD Term Loan £67m
(Tranche B), and has a 3-year term with two 1-year extension options.
Participating banks have lent on a 2-tier basis, 3-banks at £67m and 4-banks
at £35m. In-line with Group policy, £270m (c.80%) of the floating rate debt
has been fixed using SONIA interest rate swaps split over a 3-year and 5-year
tenure at a weighted average rate of 3.29%. Including all fees and charges,
the weighted average cost of debt is 5.21%.
The Group has a £275m bank revolving credit facility with an additional
'accordion' facility to increase the limit up to £400m. The facility which
will mature on 27 September 2025 was undrawn at 30 September 2023 and provides
the Group with significant scope to execute its strategic growth plans.
We adopt a strict policy on managing counterparty risk through a combination
of diversification of investments and regular reviews of counterparty limits
using credit rating assessments. We are proud that our debt sits with our key
relationship banks who have strong credit ratings and diverse portfolios
demonstrating their resilience to the bank turmoil. The banks have been
selected for their capabilities in our home countries to support our
business.
Foreign exchange
The Group's income and expenditure is largely settled in the functional
currency of the relevant Group entity, mainly Sterling, US Dollar or
Australian Dollar. The Group has a policy to hedge all material transaction
exposure at the point of commitment to the underlying transaction. Uncommitted
future transactions are not routinely hedged. The Group does not hedge its
exposure to translation of the income statement. The principal exchange rates
affecting the Group were the Sterling to US Dollar and Sterling to Australian
Dollar exchange rates.
H1 FY24 H1 FY23
£/US$ - average 1.25 1.21
£/US$ - closing 1.22 1.11
£/US$ - opening 1.24 1.31
£/A$ - average 1.91 1.75
£/A$ - closing 1.89 1.72
£/A$ - opening 1.85 1.75
Foreign exchange translation has provided a modest headwind to revenue and
operating profit in the first half. Most significantly, the US Dollar has
weakened against the Sterling with the average exchange rate increasing from
1.21 to 1.25. Our guidance assumes FX rates as at the closing rate above
(£/US$ 1.22, £/A$ 1.89).
In H1 FY24, 22% of our total Group revenue was generated in the US. As a
result of the weakening of the US Dollar and other FX movements in the half,
revenue decreased by £6.5m and operating profit decreased by £1.2m. Looking
ahead we expect US revenues to represent 25-30% of Group revenues, so for
every 1% move in the FX rate this would impact Group revenue by c.£5m and
Group profit by c.£0.5m.
Pensions
The net pension asset under IAS 19, before adjusting for deferred tax, was
£95.0m (31 March 2023: £119.8m). The key driver for the decrease in the net
pension asset since the March 2023 year end was a reduction in asset values,
driven by the Liability Driven investments (LDI), in excess of the reduction
in Scheme liabilities (which have also fallen substantially, due to an
increase in the discount rates). The triennial valuation as at 30 June 2023 is
ongoing and is not expected to result in a requirement for the Group to make a
contribution into the scheme.
The key assumptions used in the IAS 19 valuation of the scheme are set out in
note 13.
Operating review
EMEA Services
H1 FY24 H1 FY23
£m £m
Orders 631.1 600.8
Revenue 654.8 524.3
Underlying operating profit* 77.4 61.5
Underlying operating margin* 11.8% 11.7%
Book to bill ratio((1)) 1.2x 1.4x
Order backlog 2,732.8 2,601.2
* Definitions of the Group's 'Alternative Performance Measures' can be found in
the glossary
(1) B2B ratio is orders won divided by revenue recognised, excluding the LTPA
contract
Overview
EMEA (Europe, Middle East and Australasia) Services combines world-leading
expertise with unique facilities to provide capability generation and
assurance, underpinned by long-term contracts that provide good visibility of
revenue and cash flows.
Financial performance
Orders were up 5% to £631.1 (H1 FY23: £600.8m), driven by £190m orders in
EDP, a £39m renewal to the battlefield communication contract (BATCIS) in the
UK Intelligence sector, a continuation of the threat representation training
contract that underpins our German business and a £54m uplift to the LTPA
contract to reflect inflationary effects in the UK.
Revenue increased 23% on an organic basis driven by revenue delivery on the
excellent orders won in the prior year, particularly with good continued
growth in EDP and strong execution across our contracts, as well as growth in
the LTPA due to contractually covered cost inflation, and short-term
operational priorities.
Underlying operating profit increased by 26% to £77.4m (H1 FY23: £61.5m).
This has been achieved through the strong revenue growth mentioned above and
modest margin improvement to 11.8% (H1 FY23: 11.7%), demonstrating consistent
operational performance.
Including the LTPA, approximately 67% of EMEA Services revenue is derived from
single source contracts (H1 FY23: approximately 65%) demonstrating our
critical and unique capabilities for our customers.
Sector commentary
UK Defence (61% of EMEA Services revenue)
The UK Defence sector delivers mission critical solutions, innovating for our
Air, Maritime and Land customers' advantage. The sector provides a focus on
our strategy of maximising growth through our framework contracts, building
new core offerings through our global campaigns and exploring new growth
opportunities; it improves coherence of our distinctive offerings across our
customer base, with the embedding of enabling functions bringing greater
cohesion to operational strategy execution for business performance
excellence.
- The Long Term Partnering Agreement (LTPA) remains our largest contract
delivering world-leading test, trials, training and evaluation (T3E) for the
UK MOD. We have signed a Principles Agreement with UK MOD to jointly develop
how the LTPA test, trials, training and evaluation (T3E) capabilities are
sustained and modernised beyond 2028, to enable next generation military
capability, such as directed energy weapons. By exercising the LTPA contract
option for the 5-year extension, subject to negotiation and approval, we will
continue as UK MOD's strategic partner for T3E services until 2033.
- As with a number of our large long-term contracts, the commercial arrangement
within the LTPA enables us to be reimbursed for future allowable cost
increases in-line with the Single Source Regulation Office (SSRO) aligned to
an agreed index; this represented a £54m order uplift on the LTPA in H1 FY24
(£26m in H1 FY23).
- Operationally, the ongoing modernisation of LTPA ranges continue, with joint
operation successfully tested between Aberporth, Hebrides and RAF Waddington
to connect high classification computer networks enabling more rapid
distribution of data and greater use of analytics for new and in-service
capabilities.
- During May 2023, we successfully demonstrated our central role in global
defence and security, through one of the world's largest tests of naval and
missile defences, Formidable Shield 2023. The exercise harnessed the power of
some of the most advanced technologies in the world to enable a joint NATO
force to operate seamlessly together and to better understand and defeat
complex evolving threats. Hosted at MOD Hebrides, operated by QinetiQ on
behalf of the UK MOD, the exercise saw more than 20 ships, 35 aircraft, and
nearly 4,000 Allied military personnel from 13 NATO nations come together to
test missiles, systems, sensors and software against ballistic, subsonic and
supersonic targets in a realistic, live-fire mission rehearsal event.
- The Engineering Delivery Partner (EDP) programme continues to deliver for our
customer with a collaborative mind-set and commitment to transparency helping
to maximise and accelerate outputs for vitally important UK MOD programmes.
Alongside our partners Atkins and BMT, in H1 we have won orders totalling
£190m and revenue of £185m (roughly two thirds in UK Defence and one third
through UK Intelligence), and we have secured a £3.5m initial task as
Capability Partner to the MOD in support of the new AUKUS submarine programme.
Since inception over the last five years we have won overall orders totalling
£1.5bn.
- In the half we have delivered a number of critical experimentation and
training exercises. Two such examples are as follows: 1) The Platform Enabled
Training Capability demonstration of synthetic training technology involving
HMS Queen Elizabeth aircraft carrier, HMS Kent frigate and HMS Diamond
destroyer - utilising internally developed software tools and in partnership
with BAE Systems we delivered this event positioning us well for future
Maritime training opportunities. 2) Support to the Royal Navy at the NATO
REPMUS23 Operational Experimentation exercise in the Portuguese North Atlantic
Exercise Area, set in the context of a coalition operation. We led a UK team
delivering the experimental Command & Control architecture, and planning
and executing the exercises: evaluating concepts for the mission management of
multiple uncrewed systems across a task group, sharing the tactical picture
generated and the integration into the warship. These exercises are designed
to allow large scale experimentation where Operational Communities work
together with academia and industry to develop and test operational concepts
and requirements.
UK Intelligence (29% of EMEA Services revenue)
The UK Intelligence sector helps government and commercial customers respond
to fast-evolving threats based on its expertise in training, secure
communication networks and devices, intelligence gathering and surveillance
sensors, and cyber security. Contained within UK Intelligence are three
acquired businesses: QinetiQ Training and Simulation Limited (QTSL, formerly
NSC), Inzpire and Naimuri.
- In May 2023, we announced the SOCIETAS £80m win with the UK MOD to provide
specialist mission data and electronic warfare skills. In the first half we
have achieved Full Operating Capability (FOC) on this project, ahead of
schedule, supporting our customers' mission. The Programme requires us to
sustain and enhance delivery of Electronic Warfare Mission Data and related
intelligence outputs to the UK joint force on an assured and enduring basis.
This reinforces our close coupling with the customer's mission and our
successful delivery.
- The Serapis framework enables the UK Defence Science and Technology Laboratory
(Dstl), UK MOD and the frontline commands to quickly and efficiently place
contracts for scientific and technical research and development (R&D). Of
the six 'Lots', QinetiQ is leading three for R&D of command and control
systems, communications and networks, and training and simulation projects. By
working collaboratively with Dstl, we have efficiently delivered over £30m of
technical R&D in the first half, both our own expert scientists and
engineers, and through a supply chain of 200 companies. This is supporting
exploitation of technology with the front line commands, and de-risking
generation-after-next capabilities.
- We continue to deliver well on the Battlefield Tactical Communication and
Information Systems (BATCIS) contract, having secured the year six extension
worth £39m. This is the public sector support programme for Defence Digital,
delivering procurement and engineering expertise for this transformational
digital backbone programme. With our partners ATOS, BMT and Roke we deliver
specialist expertise across a complex set of projects covering a wide array of
disciplines; developing concepts, engineering solutions, managing obsolescence
issues, supporting critical operational requirements and enabling procurement
competitions.
- We won the Vivace contract with the Home Office in 2017 to deliver our
Accelerated Capability Environment (ACE). ACE leverages a wide and diverse
ecosystem of suppliers to drive innovation into the delivery of mission
critical capability, and it operates at high tempo greatly accelerating
delivery of deployable capability. Following the successful recompete of the
next phase the Vivace contract last year, delivery into the Home Office and
other government departments continues positively. Over the last six years
over 200+ commissions have been delivered across 40 government departments
including the Home Office, National Crime Agency, Intelligence Agencies,
Department for Transport, Ministry of Justice, Cabinet Office and OFCOM, with
revenue totalling over £150m. Mission challenges included counter-terror
operations, serious organised crime, online harms, aviation security and COVID
vaccine security, centred on dealing with the fast-paced developments in
Digital and Data technologies that are prevalent in today's society - central
to many government departments' most challenging programmes. Vivace has
developed a dynamic community of over 320 organisations ranging from tech
giants through to Small Medium Enterprises and academia. Vivace provides an
agnostic team that blends suppliers together using bespoke commercial
arrangements that drive co-investment opportunities. Given current Government
finance pressures and national security challenges this unique model is set
for further growth as it provides both rapid insertion of capabilities (in
weeks or months rather than years) and offers excellent value for money over
traditional procurement approaches.
- The three historic acquisitions in UK Intelligence continue to perform well,
all delivering greater than 10% growth, and in some instances materially
higher growth rates. Inzpire and QTSL are both generating good growth through
our large framework contracts of EDP and Serapis, and Naimuri is growing well
with our Data Intelligence offering into the UK Intel customers.
Australia (10% of EMEA Services revenue)
Our Australia sector is a specialist advisory, engineering and threat
representation products and services business in the Australian, German and
Canadian markets. It has both an Australian country-focus in advisory and
engineering services, as well as a focus on exploitation of our threat
representation capabilities globally.
- The Australian Defence Force's Defence Strategic Review, released in April
2023, set an ambitious agenda of reform and savings; this has delayed some
contract renewals and withdrawn funding to some new projects. As part of this
the Australian Department of Defence has been instructed to maximise the use
of the Major Service Provider (MSP) contracts for professional support.
Therefore, the impact of these two dynamics is that some of our advisory work
has been slower in the first half whilst other areas of the business
(including our MSP contract) are performing and growing well, yielding overall
good organic growth in Australia. We have achieved a 3-year extension to the
MSP and a further A$58m of business in H1 through securing significant land
vehicles and explosive ordinance tasks.
- Over the last year we have invested A$4m to develop an Engineering facility in
South Melbourne (named QTech) and we are starting to see initial demand for
the facility including a recent contract win to deliver specialist command and
control vehicles. The facility is open and will be a cornerstone facility for
further growth through the Robotics and Autonomous Systems and the Test and
Evaluation Campaigns.
- Since completion of the acquisition of Air Affairs in December 2023,
performance has continued in-line with our expectations with good demand for
our services. In particular the Joint Adversarial Training and Testing
Services (JATTS) contract has seen 24% increased demand in flying hours and
successful contributed threat representation services to the multi-national
Talisman Sabre '23 exercise.
- In Germany, we have secured the renewal of our main threat representation
training contract demonstrating the positive service we provide to our
customer. We are also seeing good increased demand for our threat
representation capabilities, delivered through the aircraft fleet acquired
last year.
Global Solutions
H1 FY24 H1 FY23
£m £m
Orders 321.6 198.0
Revenue 228.3 149.1
Underlying operating profit* 22.7 12.6
Underlying operating margin* 9.9% 8.5%
Book to bill ratio 1.4x 1.3x
Order backlog 399.2 367.4
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary
Global Solutions combines our world-leading technology-based products and
services. Our strategy is to expand the portfolio of solutions to win larger,
longer-term programmes providing good visibility of revenue and cash flows.
Financial performance
Orders increased by 62% to £321.6m (H1 FY23: £198.0m). Organically and on a
consistent currency basis, orders were broadly flat, following a strong prior
year performance in the US. Avantus has had impressive contract awards of
$657m since the start of the financial year. Due to the multi-year phasing and
funding approach to contract awards in the US, we have only recognised $195m
in first half orders, in-line with our prudent order recognition policy.
Revenue was up 53% to £228.3m (H1 FY23: £149.1m). Organically and on a
consistent currency basis, revenue was broadly flat with the same period last
year, with the Avantus contribution driving the total reported growth.
Underlying operating profit increased to £22.7m (H1 FY23: £12.6m), with an
underlying operating profit margin of 9.9% (H1 FY23: 8.5%). The significant
improvement in profit is as a result of good margin stability in the US and
higher margin products with QTS and niche intelligence products.
Sector commentary
United States (84% of Global Solutions revenue)
Our US sector provides technical advice, design and manufacture of innovative
defence products specialising in robotics, autonomy and sensing solutions, and
with the acquisition of Avantus is an expert in cyber, data analytics and
software development. We have invested to support the long-term growth of our
US sector, in leadership, integration, systems and tools; the business is now
a fully integrated single US sector.
- Avantus has won $657m of new contract awards since the start of the financial
year - this positions us well to drive future revenue growth. First half
revenue was slower than expected, due to the US continuing resolution and
competitor protests, but with the significant step-up in contract awards we
have confidence in delivering good growth in the second half of the year and
we remain confident in delivering double digit revenue growth at stable
margins in the future.
- In the former Avantus business we have been awarded a $224m 5-year contract to
provide mission support to the US SDA. This contract builds on an existing
strong customer relationship with the SDA, generating incremental growth on
previous work. Under the 5-year contract, QinetiQ will deliver management and
professional services, acquisition support, engineering and technical
assistance needed to deliver the Proliferated Warfighter Space Architecture
programme. The QinetiQ team, along with its strategic partners, provide
engineering services in support of SDA's most critical space missions.
- In the former Avantus business we have been awarded a $127m 5-year contract in
the US from the Office of the Secretary of Defense Strategic Capabilities
Office (SCO). QinetiQ will provide secure, technologically advanced services
and products that will enable SCO to deploy new and enhanced capabilities in
support of strategic operations.
- We have been awarded a $84m 5-year contract in the US for the testing and
production of the NGABS. The NGABS contract is a Program of Record where we
will deliver over 700 NGAB suits to the US Army. The new suit will replace the
current 20-year-old bomb suit, and will provide enhanced protection to its
users in their daily operations to identify, render safe, and dispose of
improvised explosive devices and other explosive threats. The new suit will
increase soldier survivability and readiness to respond to evolving threats by
providing them with 360-degree ballistic protection and significantly
increasing situational awareness with built-in technology enhancements. This
contract win is a great example of our advanced sensor and data processing
capability delivering success and growth in our US business (formerly MTEQ),
taking products from prototype into full-scale production.
- We are seeing continued demand for our Electromagnetic Aircraft Launch System
(EMALS) and Advanced Arresting Gear (AAG) systems from the US Navy. Last year
we supplied the EMALS/AAG system onto CVN-78, which has just surpassed 20,000
launch and recoveries and has achieved Blue Water Certification allowing the
carrier to deploy anywhere globally. And we have recently received a $51m
commitment to supply our EMALS/AAG system for the CVN-81, the fourth carrier
in the Gerald R. Ford class.
- Our work on the RCV-L (Robotic Combat Vehicle Light) is progressing well. We
have successfully delivered the 11(th) and 12(th) Surrogate Prototype units to
the customer for continued testing and evaluation. The Soldier operational
trials have been successful resulting in the RCV-L moving forward to the next
phase of evaluation (Human Machine Integrated Force trials). We're also
pleased to confirm that our Oshkosh-led team was one of four awardees for the
RCV-L full scale prototype full and open competition. Based on the successful
field trials and downselect for the next phase, we are well positioned to
compete for the future $500m full production phase.
- We continue to make good progress on the Full Rate Production contract on
Common Robotic System-Individual (CRS-I). We have delivered over 1,000 CRS-I
robots to the US Army and have achieved a significant operational, safety and
suitability milestone.
- We are seeing continued strong demand Advanced sensing systems. For example
technology enabling the US Army's first AI enabled target solution by
identifying potential threat vehicles at a distance of seven kilometres, and
an advanced uncrewed optic sensor used to identify samples on a test range
under a variety of operating and lighting conditions.
Other Products and Solutions (16% of Global Solutions revenue)
The portfolio of our other products and solutions provide research services
and bespoke technological solutions developed from intellectual property spun
out from EMEA Services, and includes our threat representation product sales
in QinetiQ Target Systems (QTS).
- QTS has continued to perform well, building on the strong orders and revenue
in FY23. We have responded to a number of operational requirements with UK MOD
and are successfully leveraging our target capabilities globally.
- In the US, we are completing final assembly and test of the Banshee Jet 80
aerial targets to support future US customer demands and needs.
- We continue to see good demand for our sensors and communication product
portfolio. In the half we have achieved strong sales and deliveries of our Q20
secure PNT (Position Navigation and Timing) product, and our advanced sensing
products for the intelligence communities.
Principal risks and uncertainties
There are a number of risks and uncertainties which management continue to
identify, assess and mitigate to minimise their potential impact on
performance. An explanation of risks and their mitigations, together with
details of our risk management framework can be found in the 2023 Annual
Report and Accounts (on pages 75 to 83) which is available for download at:
https://www.qinetiq.com/investors (https://www.qinetiq.com/investors) .
Having considered recent geopolitical and macroeconomic events, the Group
believes the principal risks and uncertainties for the remainder of FY24 are
included in, and are therefore unchanged from, those reported in the 2023
Annual Report and Accounts. The Group's principal risks and uncertainties at
31 March 2023 related to the following areas: UK large contract renewals,
acquisition integration, the digital and data programme, significant breaches
of laws and regulations, security, P3M (project, programme and portfolio
management), climate change resilience and net-zero, cyber, health and safety,
strategic workforce planning, culture and macroeconomic volatility.
Condensed consolidated income statement
H1 FY24 H1 FY23 restated^
(unaudited) (unaudited)
All figures in £ million unless stated otherwise Note Underlying* Specific adjusting items* Total Underlying* Specific adjusting items* Total
Revenue 1,2 883.1 - 883.1 673.4 - 673.4
Operating costs excluding depreciation, impairment and amortisation (757.8) (9.4) (767.2) (577.6) 30.7 (546.9)
Other income 1 18.2 2.1 20.3 12.7 20.5 33.2
EBITDA* (earnings before interest, tax, depreciation and amortisation) 143.5 (7.3) 136.2 108.5 51.2 159.7
Depreciation and impairment of property, plant and equipment (28.1) (0.7) (28.8) (23.5) - (23.5)
Amortisation of intangible assets (3.4) (12.7) (16.1) (3.4) (5.6) (9.0)
Operating profit/(loss) 2 112.0 (20.7) 91.3 81.6 45.6 127.2
Finance income 5 8.9 2.2 11.1 1.4 4.9 6.3
Finance expense 5 (16.6) - (16.6) (1.9) - (1.9)
Profit/(loss) before tax 104.3 (18.5) 85.8 81.1 50.5 131.6
Taxation (expense)/income 6 (27.0) 4.9 (22.1) (15.7) (5.7) (21.4)
Profit/(loss) for the period 77.3 (13.6) 63.7 65.4 44.8 110.2
Attributable to:
Owners of the Company 77.3 (13.6) 63.7 65.4 44.8 110.2
Non-controlling interests - - - - - -
Profit/(loss) for the period 77.3 (13.6) 63.7 65.4 44.8 110.2
Earnings per share for profit attributable to the owners of the Company
7 13.4 11.0 11.4 19.2
Basic (pence)
Diluted (pence) 7 13.2 10.9 11.3 19.0
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
* Alternative performance measures are used to supplement the statutory
figures. These are additional financial indicators used by management
internally to assess the underlying performance of the Group. Definitions can
be found in the glossary.
Condensed consolidated statement of comprehensive income
All figures in £ million H1 FY24 (unaudited) H1 FY23
restated^ (unaudited)
Profit for the period 63.7 110.2
Items that will not be reclassified to the income statement:
Actuarial loss recognised in defined benefit pension schemes (26.5) (157.5)
Tax on items that will not be reclassified to the income statement 6.6 39.4
Total items that will not be reclassified to the income statement (19.9) (118.1)
Items that may be reclassified to the income statement:
Foreign currency translation gains for foreign operations 6.7 19.7
Movement in deferred tax on foreign currency translation (0.1) (1.7)
Increase in fair value of hedging derivatives 5.3 16.5
Movement on deferred tax on hedging derivatives (1.3) (0.3)
Total items that may be reclassified to the income statement 10.6 34.2
Other comprehensive expense for the period, net of tax (9.3) (83.9)
Total comprehensive income for the period, net of tax 54.4 26.3
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Condensed consolidated statement of changes in equity
All figures in £ million Issued share capital Capital redemption reserve Share premium Hedging reserve Translation reserve Retained earnings Total Non-controlling interest Total equity
At 1 April 2023 5.8 40.8 147.6 6.3 (4.2) 772.0 968.3 - 968.3
Profit for the period - - - - - 63.7 63.7 - 63.7
Other comprehensive income/(expense), net of tax - - - 4.0 6.6 (19.9) (9.3) - (9.3)
Purchase of own shares - - - - - (0.4) (0.4) - (0.4)
Share-based payments charge - - - - - 4.2 4.2 - 4.2
Deferred tax on share-based payments - - - - - (0.2) (0.2) - (0.2)
Dividends - - - - - (30.6) (30.6) - (30.6)
At 30 September 2023 (unaudited) 5.8 40.8 147.6 10.3 2.4 788.8 995.7 - 995.7
At 1 April 2022 - previously reported 5.8 40.8 147.6 0.1 1.9 847.0 1,043.2 0.2 1,043.4
Change in accounting policy^ - - - - - (2.0) (2.0) - (2.0)
At 1 April 2022 - restated^ 5.8 40.8 147.6 0.1 1.9 845.0 1,041.2 0.2 1,041.4
Profit for the period - - - - - 110.2 110.2 - 110.2
Other comprehensive income/(expense), net of tax - - - 16.2 18.0 (118.1) (83.9) - (83.9)
Purchase of own shares - - - - - (0.4) (0.4) - (0.4)
Share-based payments charge - - - - - 0.8 0.8 - 0.8
Deferred tax on share-based payments - - - - - 0.3 0.3 - 0.3
Dividends - - - - - (28.8) (28.8) - (28.8)
At 30 September 2022^ (unaudited) 5.8 40.8 147.6 16.3 19.9 809.0 1,039.4 0.2 1,039.6
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Condensed consolidated balance sheet
All figures in £ million Note 30 September 2023 (unaudited) 30 September 2022 restated^ (unaudited) 31 March
2023
(audited)
Non-current assets
Goodwill 12 413.2 158.3 409.0
Intangible assets 333.4 140.2 343.0
Property, plant and equipment 518.0 431.6 477.8
Other financial assets 8.9 12.8 6.2
Equity accounted investments 1.6 1.1 1.4
Net pension asset 13 95.0 209.0 119.8
Deferred tax asset 33.4 25.5 32.6
1,403.5 978.5 1,389.8
Current assets
Inventories 75.9 63.9 68.8
Other financial assets 7.3 54.3 5.7
Trade and other receivables 448.7 353.8 452.6
Current tax asset 5.7 5.5 4.0
Assets classified as held for sale - 39.5 -
Cash and cash equivalents 104.0 220.3 151.2
641.6 737.3 682.3
Total assets 2,045.1 1,715.8 2,072.1
Current liabilities
Trade and other payables (485.5) (454.2) (575.2)
Current tax payable (4.7) - (4.6)
Provisions (20.1) (21.1) (19.7)
Liabilities of disposal group classified as held for sale - (29.1) -
Other financial liabilities (7.9) (6.0) (8.2)
(518.2) (510.4) (607.7)
Non-current liabilities
Deferred tax liability (112.3) (133.5) (112.0)
Provisions (3.6) (4.5) (7.1)
Borrowings and other financial liabilities (386.1) (17.4) (361.8)
Other payables (29.2) (10.4) (15.2)
(531.2) (165.8) (496.1)
Total liabilities (1,049.4) (676.2) (1,103.8)
Net assets 995.7 1,039.6 968.3
Equity
Issued share capital 5.8 5.8 5.8
Capital redemption reserve 40.8 40.8 40.8
Share premium 147.6 147.6 147.6
Hedging reserve 10.3 16.3 6.3
Translation reserve 2.4 19.9 (4.2)
Retained earnings 788.8 809.0 772.0
Capital and reserves attributable to shareholders of the parent company 995.7 1,039.4 968.3
Non-controlling interest - 0.2 -
Total equity 995.7 1,039.6 968.3
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Condensed consolidated cash flow statement
All figures in £ million Note H1 FY24 (unaudited) H1 FY23 restated^ (unaudited) FY23 (audited)
Underlying net cash inflow from operations 9 71.7 106.8 270.1
Less specific adjusting items 9 (9.5) (7.3) (29.5)
Net cash inflow from operations 9 62.2 99.5 240.6
Tax paid (18.9) (18.2) (30.2)
Interest received 8.9 1.4 5.5
Interest paid (15.7) (1.0) (9.9)
Net cash inflow from operating activities 36.5 81.7 206.0
Purchases of intangible assets (4.0) (3.5) (13.8)
Purchases of property, plant and equipment (42.9) (45.0) (95.2)
Proceeds from sale of property 2.1 1.1 2.4
Proceeds from disposal of business - - 28.1
Acquisition of businesses (4.9) (1.6) (385.9)
Net cash outflow from investing activities (49.7) (49.0) (464.4)
Purchase of own shares (0.4) (0.4) (0.8)
Dividends paid to shareholders (30.6) (28.8) (42.6)
Payment of debt financing arrangement fees (0.5) (0.6) (2.7)
Capital element of finance lease payments (3.2) (3.1) (7.4)
Cash flow relating to intercompany loan hedges 1.3 (29.2) (10.0)
Drawdown of new borrowings - - 481.1
Repayments of borrowings - - (140.0)
Repayment of acquired borrowings - - (117.9)
Net cash (outflow)/inflow from financing activities (33.4) (62.1) 159.7
Decrease in cash and cash equivalents (46.6) (29.4) (98.7)
Effect of foreign exchange changes on cash and cash equivalents (0.6) 1.6 1.8
Cash and cash equivalents at beginning of period 151.2 248.1 248.1
Cash and cash equivalents at end of period 104.0 220.3 151.2
Reconciliation of movement in net (debt)/cash
All figures in £ million Note H1 FY24 (unaudited) H1 FY23 (unaudited) FY23
(audited)
Decrease in cash and cash equivalents (46.6) (29.4) (98.7)
Add back net cash flows not impacting net (debt)/cash 3.7 3.7 (331.0)
Change in net (debt)/cash resulting from cash flows (42.9) (25.7) (429.7)
Net increase in lease obligation (26.4) (1.4) (15.3)
Net movement in derivative financial instruments 4.3 67.2 9.8
Other movements including foreign exchange (1.9) (1.2) 3.2
Movement in net (debt)/cash as defined by the Group (66.9) 38.9 (432.0)
Opening net (debt)/cash as defined by the Group (206.9) 225.1 225.1
Closing net (debt)/cash as defined by the Group 8 (273.8) 264.0 (206.9)
Less: non-cash net financial liabilities/(assets) 8 377.8 (43.7) 358.1
Total cash and cash equivalents 8 104.0 220.3 151.2
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Notes to the condensed interim financial statements
1. Revenue from contracts with customers and other income
Revenue by category and reconciliation to revenue on an organic, constant
currency basis
All figures in £ million H1 FY24 (unaudited) H1 FY23 (unaudited)
Service contracts with customers 843.6 640.1
Sale of goods contracts with customers 37.9 31.8
Royalties and licences 1.6 1.5
Total revenue 883.1 673.4
Adjust current period for acquired businesses (118.7) -
Adjust prior period for disposed business - (23.8)
Adjust to constant prior year exchange rates 6.5 -
Total revenue on an organic, constant currency basis 770.9 649.6
Organic revenue growth at constant currency 19% 10%
Other income
All figures in £ million H1 FY24 H1 FY23^ (unaudited)
(unaudited)
Share of joint ventures' and associates' profit after tax 0.2 0.3
Research and development expenditure credits (RDEC) 11.9 7.5
Other income (property related) 6.1 4.9
Other income - underlying 18.2 12.7
Specific adjusting item: gain on sale of property 2.1 0.9
Specific adjusting item: release of RDEC MOD appropriation liability - 19.6
Other income - total 20.3 33.2
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Revenue by customer geographical location
All figures in £ million H1 FY24 (unaudited) H1 FY23 (unaudited)
United Kingdom (UK) 581.4 459.4
United States of America (US) 196.3 102.0
Australia 63.8 57.4
Home countries (95% and 92% of total revenue for H1 FY24 and H1 FY23 841.5 618.8
respectively)
Europe 22.5 42.8
Rest of World 19.1 11.8
Total revenue 883.1 673.4
Revenue by major customer type
For the six months ended 30 September
All figures in £ million H1 FY24 (unaudited) H1 FY23 (unaudited)
UK Government 543.8 423.8
US Government 186.0 97.7
Other 153.3 151.9
Total revenue 883.1 673.4
2. Segmental analysis
Operating segments
H1 FY24 H1 FY23^
All figures in £ million (unaudited) (unaudited)
Revenue from external customers Underlying* operating profit(*) Revenue from external customers Underlying* operating profit
EMEA Services 654.8 77.4 524.3 61.5
Global Solutions 228.3 22.7 149.1 12.6
Total operating segments 883.1 100.1 673.4 74.1
Operating profit margin from segments* 11.3% 11.0%
Total operating segments 883.1 100.1 673.4 74.1
Research and development expenditure credits (RDEC) 11.9 7.5
Underlying operating profit 112.0 81.6
( )
* Definitions of the Group's 'Alternative Performance Measures' can be found
in the glossary
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Reconciliation of segmental results to total profit
All figures in £ million H1 FY24 H1 FY23^ (unaudited)
Note (unaudited)
Operating profit from segments* 100.1 74.1
Research and development expenditure credits (RDEC) 11.9 7.5
Underlying operating profit* 112.0 81.6
Specific adjusting items operating (loss)/profit 3 (20.7) 45.6
Operating profit 91.3 127.2
Net finance (expense)/income (5.5) 4.4
Profit before tax 85.8 131.6
Taxation expense (22.1) (21.4)
Profit for the period attributable to equity shareholders 63.7 110.2
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
3. Specific adjusting items
In the income statement, the Group presents specific adjusting items
separately. In the judgement of the Directors, for the reader to obtain a
proper understanding of the financial information, specific adjusting items
need to be disclosed separately because of their size and nature. Underlying
measures of performance exclude specific adjusting items. The following
specific adjusting items have been (charged)/credited in the consolidated
income statement:
All figures in £ million Note H1 FY24 H1 FY23^ (unaudited)
(unaudited)
FX gain on acquisition funding derivatives - 42.9
Acquisition and disposal costs 4 (0.6) (6.4)
Acquisition integration costs (2.6) -
Acquisition related remuneration (1.1) -
Restructuring costs - (3.3)
Digital investment (5.1) (2.5)
Release of RDEC appropriation liability - 19.6
Gain on sale of property 2.1 0.9
Specific adjusting items before depreciation, amortisation and impairment (7.3) 51.2
Impairment of property (0.7) -
Amortisation of intangible assets arising from acquisition (12.7) (5.6)
Specific adjusting items operating (loss)/profit (20.7) 45.6
Defined benefit pension scheme net finance income 13 2.2 4.9
Specific adjusting items (loss)/profit before tax (18.5) 50.5
Specific adjusting items - tax income/(expense) 6 4.9 (5.7)
Total specific adjusting items (loss)/profit after tax (13.6) 44.8
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Reconciliation of underlying profit for the period to total profit for the
period
All figures in £ million H1 FY24 H1 FY23^ (unaudited)
(unaudited)
Underlying profit after tax 77.3 65.4
Total specific adjusting items (loss)/profit after tax (see above) (13.6) 44.8
Total profit for the period attributable to equity shareholders 63.7 110.2
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
The total impact of specific adjusting items on operating profit (which are
excluded from underlying performance) before tax was an expense of £20.7m (H1
FY23 restated: income of £45.6m). H1 FY23 included a £42.9m gain from the
foreign exchange derivative contract which was taken out to hedge the foreign
exchange exposure on the $590m Avantus acquisition and was executed in
accordance with the Group's Treasury Policy - this was a one-off timing gain
at H1 FY23 which unwound in H2 FY23 by the time of the transaction completion.
H1 FY23 restated also includes a £19.6m gain from the release of the
liability for MOD appropriation of RDEC.
Acquisition and disposal costs of £0.6m (H1 FY23: £6.4m) comprise costs
associated with various ongoing projects and acquisitions that we have decided
not to pursue, demonstrating our disciplined capital allocation policy. The H1
FY23 amount related to Avantus and Air Affairs. Acquisition related
remuneration of £1.1m relates to specific post-acquisition retention
arrangements for Avantus employees which were anticipated at the time of the
transaction. Acquisition integration costs of £2.6m relate to the one-off
costs of integrating both Avantus and Air Affairs with the existing Group
operations.
Our digital investment programme continues to deliver improvements to the
infrastructure, digital tools and operating systems of the company - roughly
two thirds of the costs in the first half are reported as specific adjusting
items in the P&L given their one-off nature, with ongoing recurring
operating costs (such as licence costs and overheads) remaining within
underlying operating costs. In H1 FY24 the exceptional cost element of the
digital investment programme within specific adjusting items totals £5.1m (H1
FY23: £2.5m).
Also included within specific adjusting items were a gain on the sale of
property in the UK of £2.1m (H1 FY23 £0.9m) and impairment of right of use
lease assets in the US following space relocation of £0.7m. Amortisation of
acquisition intangibles of £12.7m (H1 FY23: £5.6m) has increased due to the
inclusion of amortisation of the intangible assets relating to the Avantus
acquisition.
4. Business combinations
There were no acquisitions in H1 FY24 or H1 FY23. The cash flow statement
includes £3.8m of deferred consideration which was settled in respect of the
Air Affairs acquisition. A further £1.1m of deferred consideration was
settled in respect of legacy acquisitions made by the Avantus business before
its acquisition by QinetiQ.
In H1 FY23, the Group incurred £6.4m costs in respect of the acquisitions of
Avantus Federal and Air Affairs, and the disposal of Space NV. A £1.6m
deposit payment had been made on the Air Affairs acquisition which was
included within trade and other receivables as at 30 September 2022 and the
cash flows from investing activities for H1 FY23.
5. Finance income and expense
All figures in £ million H1 FY24 H1 FY23
(unaudited) (unaudited)
Receivable on bank deposits 8.9 1.4
Underlying finance income 8.9 1.4
Amortisation of recapitalisation fee (0.6) (0.2)
Interest on bank loans and overdrafts (14.6) (0.4)
Lease expense (1.3) (0.5)
Other interest expense (0.1) (0.8)
Underlying finance expense (16.6) (1.9)
Underlying net finance expense (7.7) (0.5)
Specific adjusting items:
Defined benefit pension scheme net finance income 2.2 4.9
Net finance (expense)/income (5.5) 4.4
6. Taxation
H1 FY24 H1 FY23^
(unaudited) (unaudited)
All figures in £ million unless stated otherwise Underlying Specific Total Underlying Specific Total
adjusting
adjusting items
items
Profit/(loss) before tax 104.3 (18.5) 85.8 81.1 50.5 131.6
Taxation (expense)/income (27.0) 4.9 (22.1) (15.7) (5.7) (21.4)
Profit/(loss) for the period attributable to equity shareholders 77.3 (13.6) 63.7 65.4 44.8 110.2
Effective tax rate 25.9% 19.4%
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
The total tax charge is £22.1m (H1 FY23 restated charge: £21.4m). The
underlying tax charge of £27.0m (H1 FY23 restated: £15.7m) is calculated by
applying the expected underlying effective tax rate at a jurisdictional level
for the year ending 31 March 2024 to the underlying profit before tax for the
six months to 30 September 2023.
The Group's full year expected underlying effective tax rate is 26.1% which is
higher than the half year underlying effective tax rate of 25.9% (H1 FY23
restated: 19.4%) due to the jurisdictional mix of profits in H1 FY24.
The underlying effective tax rate has risen due to the increase in the UK
statutory rate effective from 19% to 25% from 1st April 2023. In future we
expect the effective rate to be above the UK statutory rate subject to the
jurisdictional mix of profits and the recognition of deferred tax in respect
of overseas tax losses and excess interest deductions.
On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK,
introducing a global minimum effective tax rate of 15%. The legislation
implements a domestic top-up tax and a multinational top-up tax, effective for
accounting periods starting on or after 31 December 2023. The Group has
applied the exception under the amendment to IAS 12 to recognising and
disclosing information about deferred tax assets and liabilities related to
top-up income taxes.
Tax losses and specific adjusting items
At 30 September 2023 the Group had unused tax losses and surplus interest
costs of £182.3m (31 March 2023: £175.6m) which are available for offset
against future profits.
Within deferred tax assets recognised on the balance sheet is £18.4m in
respect of £87.8m of US net operating losses, £4.9m in respect of £21.3m of
Canadian net operating losses and £2.5m in respect of £7.7m of German trade
losses.
No deferred tax asset is recognised in respect of the £65.5m of US interest
deductions due to uncertainty over the timing and extent of their utilisation.
Full recognition of the US interest deductions would increase the deferred tax
asset by £17.7m. The Group has recognised £32.8m of time-limited US net
operating losses of which £23.2m will expire in 2035 and £9.6m in 2036.
Deferred tax has been calculated using the enacted future statutory tax rates.
Tax on specific adjusting items includes a £3.4m credit for tax on the
amortisation of acquisition intangibles and a £1.5m credit in respect of
other pre-tax specific adjusting items, the total specific adjusting items tax
credit was £4.9m (H1 FY23 restated: charge of £5.7m).
7. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
owners of the Company by the weighted average number of ordinary shares in
issue during the period. The weighted average number of shares used excludes
those shares bought by the Group and held as own shares. For diluted earnings
per share the weighted average number of shares in issue is adjusted to assume
conversion of potentially dilutive ordinary shares arising from unvested
share-based awards including share options.
H1 FY24 H1 FY23
(unaudited)
(unaudited)
Weighted average number of shares Million 577.3 575.4
Effect of dilutive securities Million 7.1 5.5
Diluted number of shares Million 584.4 580.9
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 basic and diluted EPS H1 FY24 H1 FY23^
(unaudited)
(unaudited)
Profit attributable to the owners of the Company £ million 63.7 110.2
Remove loss/(profit) after tax in respect of specific adjusting items £ million 13.6 (44.8)
Underlying profit after taxation £ million 77.3 65.4
Weighted average number of shares Million 577.3 575.4
Underlying basic EPS Pence 13.4 11.4
Diluted number of shares Million 584.4 580.9
Underlying diluted EPS Pence 13.2 11.3
H1 FY24 H1 FY23^
(unaudited)
(unaudited)
Basic and diluted EPS
Profit attributable to the owners of the Company £ million 63.7 110.2
Weighted average number of shares Million 577.3 575.4
Basic EPS - total Group Pence 11.0 19.2
Diluted number of shares Million 584.4 580.9
Diluted EPS - total Group Pence 10.9 19.0
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
8. Net (debt)/cash
All figures in £ million 30 September 2023 (unaudited) 30 September 2022 (unaudited) 31 March
2023
(audited)
Current financial (liabilities)/assets
Deferred financing costs 1.2 0.6 1.3
Derivative financial assets 6.1 53.7 4.4
Lease liabilities (7.0) (5.8) (7.6)
Derivative financial liabilities (0.9) (0.2) (0.6)
Total current net financial (liabilities)/assets (0.6) 48.3 (2.5)
Non-current financial (liabilities)/assets
Deferred financing costs 1.5 0.7 1.5
Derivative financial assets 7.4 12.1 4.7
Lease liabilities (47.3) (17.2) (23.7)
Borrowings - Term loan (338.5) - (337.6)
Derivative financial liabilities (0.3) (0.2) (0.5)
Total non-current net financial liabilities (377.2) (4.6) (355.6)
Total net financial (liabilities)/assets (377.8) 43.7 (358.1)
Cash and cash equivalents 104.0 220.3 151.2
Total net (debt)/cash as defined by the Group (273.8) 264.0 (206.9)
9. Cash flows from operations
All figures in £ million H1 FY24 H1 FY23^ (unaudited) FY23 (audited)
(unaudited)
Profit after tax for the period 63.7 110.2 154.4
Adjustments for:
Taxation expense 22.1 21.4 37.6
Net finance expense/(income) 5.5 (4.4) (3.3)
Gain on acquisition funding foreign exchange derivatives - (42.9) -
Gain on disposal of business - - (15.9)
Loss on disposal of plant and equipment - - 0.2
Gain on sale of property (2.1) (0.9) (2.0)
Impairment of property, plant and equipment 0.7 - -
Amortisation of purchased or internally developed intangible assets 3.4 3.4 7.5
Amortisation of intangible assets arising from acquisitions 12.7 5.6 15.6
Depreciation of property, plant and equipment 28.1 23.5 51.5
Share of post-tax gain of equity accounted entities (0.2) (0.3) (0.8)
Share-based payments charge 4.6 1.0 6.1
Retirement benefit contributions lower/(higher) than income statement expense 0.5 0.6 (1.6)
Net movement in provisions (2.6) - (1.0)
Increase in inventories (6.8) (3.9) (9.6)
Decrease/(Increase) in receivables 4.1 8.3 (56.7)
(Decrease)/Increase in payables (71.5) (22.1) 58.6
Changes in working capital (74.2) (17.7) (7.7)
Net cash flow from operations 62.2 99.5 240.6
Reconciliation of net cash flow from operations to underlying net cash flow
from operations to free cash flow
All figures in £ million H1 FY24 (unaudited) H1 FY23^ (unaudited) FY23 (audited)
Net cash flow from operations 62.2 99.5 240.6
Add back cash impact of specific adjusting item: acquisition and disposal 4.4 2.4 18.7
costs (including integration and acquisition related remuneration costs)
Add back cash impact of specific adjusting item: restructuring costs - 2.4 5.0
Add back cash impact of specific adjusting item: digital investment 5.1 2.5 5.8
Underlying net cash flow from operations 71.7 106.8 270.1
Less: tax and net interest payments (25.7) (17.8) (34.6)
Less: purchases of intangible assets and property, plant & equipment (46.9) (48.5) (109.0)
Free cash flow (0.9) 40.5 126.5
^ Prior period comparatives have been restated due to a change in accounting
policy in respect of Research and Development Expenditure Credits (RDEC). See
note 18.
Underlying cash conversion ratio
H1 FY24 (unaudited) H1 FY23 (unaudited) FY23 (audited)
Underlying EBITDA - £ million 143.5 108.5 255.3
Underlying net cash flow from operations - £ million 71.7 106.8 270.1
Underlying cash conversion ratio - % 50% 98% 106%
10. Financial risk management
The interim financial statements do not include all financial risk management
information and disclosures required in annual financial statements; they
should be read in conjunction with the Group's annual financial statements as
at 31 March 2023. There have been no changes in any risk management policies
since the year end. The table below analyses financial instruments carried at
fair value, by valuation method. The different levels have been defined as
follows:
Level 1 - measured using quoted prices (unadjusted) in active markets for
identical assets or liabilities;
Level 2 - measured using inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices). Level 2 derivatives comprise
forward foreign exchange contracts which have been fair valued using forward
exchange rates that are quoted in an active market; and
Level 3 - measured using inputs for the assets or liability that are not based
on observable market data (i.e. unobservable inputs).
The Group's assets and liabilities that are measured at fair value, as at 30
September 2023, are as follows:
All figures in £ million Level 1 Level 2 Level 3 Total
Assets:
Current derivative financial instruments - 6.1 - 6.1
Non-current derivative financial instruments - 7.4 - 7.4
Liabilities:
Current derivative financial instruments - (0.9) - (0.9)
Non-current derivative financial instruments - (0.3) - (0.3)
Total - 12.3 - 12.3
The following table presents the Group's assets and liabilities that are
measured at fair value as at 31 March 2023:
All figures in £ million Level 1 Level 2 Level 3 Total
Assets:
Current derivative financial instruments - 4.4 - 4.4
Non-current derivative financial instruments - 4.7 - 4.7
Liabilities:
Current derivative financial instruments - (0.6) - (0.6)
Non-current derivative financial instruments - (0.5) - (0.5)
Total - 8.0 - 8.0
For cash and cash equivalents, trade and other receivables and bank and
current borrowings, the fair value of the financial instruments approximate to
their carrying value as a result of the short maturity periods of these
financial instruments. For trade and other receivables, allowances are made
within the carrying value for credit risk. For other financial instruments,
the fair value is based on market value, where available. Where market values
are not available, the fair values have been calculated by discounting cash
flows to net present value using prevailing market-based interest rates
translated at the year-end rates, except for unlisted fixed asset investments
where fair value equals carrying value. There have been no transfers between
levels.
11. Dividends
An analysis of the dividends paid and proposed in respect of the period ended
30 September 2023 and comparative periods is provided below:
Pence per ordinary share £m Date paid/payable
Interim FY24 2.6 15.0 Feb 2024
Interim FY23 2.4 13.8 Feb 2023
Final FY23 5.3 30.6 Aug 2023
Total for the year ended 31 March 2023 7.7 44.4
The interim dividend is 2.6p (Interim FY23: 2.4p). The dividend will be paid
on 2 February 2024. The ex-dividend date is 4 January 2024 and the record date
is 5 January 2024.
12. Goodwill
Goodwill is allocated across six Cash Generating Units (CGUs) within the EMEA
Services segment and four CGUs within the Global Solutions segment. The full
list of CGUs that have goodwill allocated to them is as follows:
All figures in £ million 30 September 2023 (unaudited) 30 September 2022 31 March
2023
Primary reporting segment (unaudited)
(audited)
US Technology Solutions Global Solutions 44.6 49.0 44.1
US C5ISR Global Solutions 37.3 40.9 36.8
Avantus Global Solutions 261.2 - 257.8
Target Systems Global Solutions 24.5 25.1 24.5
QinetiQ Germany EMEA Services 2.7 2.7 2.7
Inzpire EMEA Services 11.7 11.7 11.7
QinetiQ Training and Simulation EMEA Services 7.8 7.8 7.8
Naimuri EMEA Services 14.8 14.8 14.8
Australia EMEA Services 5.7 6.3 5.8
Air Affairs EMEA Services 2.9 - 3.0
Net book value 413.2 158.3 409.0
Goodwill is attributable to the excess of consideration over the fair value of
net assets acquired and includes expected synergies, future growth prospects
and employee knowledge, expertise and security clearances. The Group tests
each CGU for impairment annually, or more frequently if there are indications
that goodwill might be impaired. Impairment testing is dependent on
management's estimates and judgments, particularly as they relate to the
forecasting of future cash flows, the discount rates selected and expected
long-term growth rates. As at 31 March 2023, significant headroom existed in
all CGUs with the exception of QinetiQ Germany (see below) and management
considers that there are no likely variations in the key assumptions which
would lead to an impairment being recognised in those other CGUs.
The carrying value of the goodwill for the Germany CGU as at 30 September 2023
was £2.7m (31 March 2023: £2.7m). As at 31 March 2023, the recoverable
amount based on the value in use calculations was £6.4m higher than the
carrying value of assets. Confidence remains in the business prospects over
the next five years, with a new leadership team on board and a healthy
pipeline of opportunities.
13. Post-retirement benefits
In the UK the Group operates the QinetiQ Pension Scheme (the Scheme) for
approximately one quarter of its UK employees. The Scheme closed to future
accrual on 31 October 2013 and there is no on-going service cost. The Scheme
is in a net asset position with the market value of assets in excess of the
present value of Scheme liabilities. These have the values set out below as at
each period end.
All figures in £ million 30 September 2023 30 September 2022 31 March
2023
(unaudited) (unaudited)
(audited)
Fair value of plan assets 1,236.2 1,429.6 1,355.2
Present value of Scheme liabilities (1,141.2) (1,220.6) (1,235.4)
Net pension asset before deferred tax 95.0 209.0 119.8
Deferred tax liability (29.4) (58.3) (35.4)
Net pension asset after deferred tax 65.6 150.7 84.4
The balance sheet net pension asset is a snapshot view which can be
significantly influenced by short-term market factors. The calculation of the
net asset depends on factors which are beyond the control of the Group -
principally the value at the balance sheet date of the various categories of
assets in which the Scheme has invested and long-term interest rates and
inflation rates used to value the Scheme's liabilities. This is particularly
pertinent in the current economic climate whilst markets are extremely
volatile. Sensitivities and risks are described below.
Per the Scheme rules the Company has an unconditional right to a refund of any
surplus, assuming gradual settlement of all liabilities over time. Such
surplus may arise on cessation of the Scheme in the context of IFRIC 14
paragraphs 11(b) and 12 and therefore the full net pension asset can be
recognised on the Group's balance sheet and the Group's minimum funding
commitments to the Scheme do not give rise to an additional balance sheet
liability.
The fair value of the QinetiQ Pension Scheme assets, which are not intended to
be realised in the short term and may be subject to significant changes before
they are realised, were:
All figures in £ million 30 September 2023 30 September 2022 31 March
2023
(unaudited) (unaudited)
(audited)
Equities - quoted 181.8 176.9 177.4
Equities - unquoted 24.6 41.2 32.9
Liability driven investment 130.9 252.4 227.2
Asset backed security investments 4.5 116.2 4.3
Alternative bonds 263.1 242.7 256.4
Corporate bonds 113.5 94.4 117.6
Property funds - 13.9 -
Cash and other equivalents 31.4 16.9 17.2
Derivatives (6.3) (21.8) 6.7
Insurance buy-in policy 492.7 496.8 515.5
Total market value of Scheme assets 1,236.2 1,429.6 1,355.2
The Scheme's assets do not include any of the Group's own transferable
financial instruments, property occupied by, or other assets used by the
Group.
The movement in the net pension asset (before deferred tax) is set out below:
All figures in £ million 30 September 2023 30 September 2022 31 March
2023
(unaudited) (unaudited)
(audited)
Opening net pension asset before deferred tax 119.8 362.2 362.2
Net finance income 2.2 4.9 9.9
Net actuarial loss (26.5) (157.5) (253.9)
Contributions by the employer - - 3.0
Administration expenses (0.5) (0.6) (1.4)
Closing net pension asset before deferred tax 95.0 209.0 119.8
Assumptions
The major assumptions used in the IAS 19 valuations of the Scheme were:
30 September 2023 (unaudited) 30 September 2022 (unaudited) 31 March 2023
(audited)
Un-insured members Insured members Un-insured members Insured members Un-insured members Insured members
Discount rate applied to Scheme liabilities 5.40% 5.50% 4.95% 5.35% 4.65% 4.80%
CPI inflation assumption 2.70% 2.65% 3.00% 2.95% 2.70% 2.55%
Net rate (discount rate less inflation) 2.70% 2.85% 1.95% 2.40% 1.95% 2.25%
Assumed life expectancies(at age 60) in years:
For males currently aged 40 27.9 n/a 28.4 n/a 27.9 n/a
For females currently aged 40 30.3 n/a 30.7 n/a 30.3 n/a
For males currently aged 60^ 26.2 21.5 26.7 22.0 26.2 21.6
For females currently aged 60^ 28.2 23.3 28.6 23.7 28.2 23.3
^For pensioners (insured members) at age 65 currently aged 65
Risks
The Group is exposed to a number of risks in respect to the valuation of the Scheme, the most significant of which are detailed below:
Volatility in market conditions
Results under IAS 19 can change dramatically depending on market conditions.
The present value of Scheme liabilities is linked to yields on AA-rated
corporate bonds, while many of the assets of the Scheme are invested in
various forms of assets subject to fluctuating valuations. Changing markets in
conjunction with discount rate volatility will lead to volatility in the net
pension asset on the Group's balance sheet and in other comprehensive income.
To a lesser extent this will also lead to volatility in the IAS 19 pension net
finance income in the Group's income statement.
Choice of accounting assumptions
The calculation of the present value of Scheme liabilities involves projecting
future cash flows from the Scheme many years into the future. This means that
the assumptions used can have a material impact on the balance sheet position
and profit and loss charge. In practice future experience within the Scheme
may not be in-line with the assumptions adopted. For example, members could
live longer than foreseen or inflation could be higher or lower than allowed
for in the calculation of the liabilities. Sensitivities to the main
assumptions are set out below.
Key assumptions Indicative impact on Scheme assets Indicative impact on Scheme liabilities Indicative impact on net pension asset
Decrease discount rate by 0.25% Increase by £12.3m Increase by £39.3m Decrease by £27.0m
Increase rate of inflation by 0.1% Increase by £4.8m Increase by £15.8m Decrease by £11.0m
Increase life expectancy by one year Increase by £12.7m Increase by £28.6m Decrease by £15.8m
The impact of movements in Scheme liabilities will, to an extent, be offset by
movements in the value of Scheme assets as the Scheme has assets invested in a
Liability Driven Investment Portfolio. As at 30 September 2023 this hedges
against approximately 70% of the interest rate risk and also 85% of the
inflation rate risk, as measured on the Trustees' gilt-funded basis.
Subsequent to 30 September 2023, the hedging of the interest rate risk has
increased to approximately 80%.
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method (projected unit credit method) has been
applied as when calculating the pension liability recognised within the
statement of financial position. The methods and types of assumption did not
change.
In addition to the sensitivity of the liability side of the net pension asset
(which will impact the value of the net pension asset) the net pension asset
is also exposed to significant variation due to changes in the fair value of
Scheme assets. A specific sensitivity on assets has not been included in the
above table but any change in valuation of assets flows straight through to
the value of the net pension asset e.g. if equities fall by £10m then the net
pension asset falls by £10m. The values of unquoted assets assume that an
available buyer is willing to purchase those assets at that value. For the
Group's portfolio of assets, the unquoted alternative bonds, unquoted
corporate bonds and unquoted equities of £263.1m, £113.5m and £24.6m
respectively are the assets with most uncertainty as to valuation as at 30
September 2023.
The accounting assumptions noted above are used to calculate the period end
present value of Scheme liabilities in accordance with the relevant accounting
standard, IAS 19 (revised) 'Employee benefits'. Changes in these assumptions
have no impact on the Group's cash payments into the Scheme. The payments
into the Scheme are reassessed after every triennial valuation. The latest
completed triennial valuation of the Scheme was a net surplus of £176.5m as
at 30 June 2020. The triennial valuation as at 30 June 2023 is ongoing and is
not expected to result in a requirement for the Group to make a contribution
into the scheme.
The triennial valuations are calculated on a 'funding basis' and use a
different set of assumptions, as agreed with the pension Trustees. The key
assumption that varies between the two methods of valuation is the discount
rate. The funding basis valuation uses the risk-free rate from UK gilts as the
base for calculating the discount rate, whilst the IAS 19 accounting basis
valuation uses corporate bond yields as the base.
14. Own shares and share-based awards
Own shares represent shares in the Company that are held by independent trusts
and include treasury shares and shares held by the employee share ownership
plan. Included in retained earnings at 30 September 2023 are 2,857,591 shares
(31 March 2023: 4,208,899 shares).
In H1 FY24 the Group granted 7.4 million new share-based awards to employees
(H1 FY23: 0.2 million). The increase is due to the Group's new LTIP scheme
granting conditional shares at the beginning of the performance period.
Further details can be found in the Remuneration Report within the 31 March
2023 Annual Report and Accounts.
15. Related party transactions with equity accounted investments
During H1 FY24 there were sales to associates and joint ventures of £1.4m (H1
FY23: £0.3m). At the period end there were outstanding receivables from
associates and joint ventures of £1.4m (31 March 2023: £0.5m).
16. Capital commitments
The Group has the following capital commitments for which no provision has
been made:
All figures in £ million 30 September 2023 (unaudited) 31 March 2023
(audited)
Contracted 32.9 43.4
Capital commitments at 30 September 2023 include £19.3m (31 March 2023:
£21.2m) in relation to property, plant and equipment that will be wholly
funded by a third party customer under a long-term contract arrangement. These
primarily relate to investments under the LTPA contract.
17. Contingent liabilities
The Company has on occasion been required to take legal action to protect its
intellectual property rights, to enforce commercial contracts or otherwise and
similarly to defend itself against proceedings brought by other parties,
including in respect of environmental, health & safety and regulatory
issues. Provisions are made for the expected costs associated with such
matters, based on past experience of similar items and other known factors,
taking into account professional advice received, and represent management's
best estimate of the likely outcome. The timing of utilisation of these
provisions is uncertain pending the outcome of various court proceedings,
ongoing investigations and negotiations. However, no provision is made for
proceedings which have been or might be brought by other parties unless
management, taking into account professional advice received, assesses that it
is more likely than not that such proceedings may be successful. Contingent
liabilities associated with such proceedings have been identified but the
Directors are of the opinion that any associated claims that might be brought
can be resisted successfully and therefore the possibility of any outflow in
settlement is assessed as remote.
18. Significant accounting policies
Basis of preparation
QinetiQ Group plc is a public limited company, which is listed on the London
Stock Exchange and is incorporated and domiciled in England.
The condensed consolidated interim financial statements of the Group for the
six months ended 30 September 2023 comprise statements for the Company and its
subsidiaries (together referred to as the 'Group') and were approved by the
Board of Directors on 16 November 2023.
The financial statements have been reviewed, not audited.
This condensed consolidated interim financial report for the half-year
reporting period ended 30 September 2023 has been prepared in accordance with
the UK-adopted International Accounting Standard 34, 'Interim Financial
Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
In the income statement, the Group presents specific adjusting items
separately. In the judgement of the Directors, for the reader to obtain a
proper understanding of the financial information, 'specific adjusting items'
need to be disclosed separately because of their size and nature. Specific
adjusting items include:
Item Distorting due to irregular nature year on year Distorting due to fluctuating nature (size and/or sign) Does not reflect in-year operational performance
of continuing business
Amortisation of intangible assets arising from acquisitions P
Pension net finance income P P
Gains/losses on business divestments and disposal of property and investments P P P
Transaction, integration and acquisition related remuneration costs in respect P P P
of business acquisitions and disposals
Digital investment P P P
One-off FX gain on acquisition funding arrangements P P P
Costs of group-wide restructuring programmes P P
Impairment of goodwill and property P P P
The tax impact of the above P P P
Other significant non-recurring tax and RDEC movements P P P
All items treated as a specific adjusting item in the current and prior period
are detailed in note 3 and are excluded from the 'underlying' measures of
performance. These Alternative Performance Measures (APMs), definitions of
which can be found in the glossary at the end of this document, are used to
monitor performance and also used for management remuneration purposes.
In periods where there are significant one-off trading items impacting on
performance (such as a contract write-down which is not of the nature/type
detailed above and hence not reported as a specific adjusting item) then these
are still reported within underlying measures of performance but narrative
explanation is provided to quantify the impact on such measures (where
appropriate).
The accounting policies adopted in the preparation of these condensed
consolidated financial statements are consistent with the policies applied by
the Group in its consolidated financial statements for the year ended 31 March
2023.
Changes in accounting policies
Following a routine Financial Reporting Council (FRC) review of the
consolidated financial statements for the year ended
31 March 2022, the Group changed its accounting policy relating to RDEC for
the year ended 31 March 2023. The Group's accounting policy had historically
been to account for RDEC under IAS12 Income Tax, as a credit within the tax
charge. Following engagement with the FRC, and a review of common market
practice, the Group decided to account for RDEC as other operating income
under IAS20 Government grants.
The impact of this change is to move £27.1m of RDEC income for the period
ending 30 September 2022 from the tax charge into other operating income. This
consists of £7.5m of underlying income and a £19.6m specific adjusting item
in relation to the release of MoD appropriation liability.
The impact on the balance sheet is to reclassify a £23.0m receivable from
current tax payable to other receivables as at 30 September 2022 as well as
£14.9m from current tax to accrued expenses and other payables. There is an
impact on net assets of £4.2m at 30 September 2022 due to the deferred income
impact of the updated income recognition under IAS12.
The following tables show the adjustments recognised for each individual line
item as at 30 September 2022.
Impact on the condensed consolidated income statement for H1 FY23
All figures in £ million As originally presented Impact of restatement Restated
Revenue 673.4 - 673.4
Operating costs (546.9) - (546.9)
Other income 6.1 27.1 33.2
EBITDA (earnings before interest, tax, depreciation and amortisation) 132.6 27.1 159.7
Depreciation and amortisation (32.5) - (32.5)
Operating profit 100.1 27.1 127.2
Finance income 6.3 - 6.3
Finance expense (1.9) - (1.9)
Profit before tax 104.5 27.1 131.6
Taxation expense 7.9 (29.3) (21.4)
Profit/(loss) for the year attributable to equity shareholders 112.4 (2.2) 110.2
Impact on the condensed consolidated balance sheet at 30 September 2022
All figures in £ million As originally presented Impact of restatement Restated
Assets/liabilities
Trade and other receivables 330.8 23.0 353.8
Trade and other payables (439.3) (14.9) (454.2)
Current tax asset 18.4 (12.9) 5.5
Deferred tax liability (134.1) 0.6 (133.5)
Other net assets 1,268.0 - 1,268.0
Net assets 1,043.8 (4.2) 1,039.6
Equity
Retained earnings 813.2 (4.2) 809.0
Share capital and other reserves 230.4 - 230.4
Non-controlling interest 0.2 - 0.2
Total equity 1,043.8 (4.2) 1,039.6
Impact on net cash
Net cash (as defined by the Group - see glossary) 264.0 - 264.0
Going-concern basis
The Group is exposed to various risks and uncertainties, the principal ones
being summarised in the 'Principal risks and uncertainties' section.
Crystallisation of such risks, to the extent not fully mitigated, would lead
to a negative impact on the Group's financial results but none are deemed
sufficiently material to prevent the Group from continuing as a going concern
for at least the next 12 months. The Directors have a reasonable expectation
that the Group has adequate resources to continue in operational existence for
the foreseeable future. The Group therefore continues to adopt the
going-concern basis in preparing its interim financial statements.
Comparative data
These condensed interim financial statements do not comprise statutory
accounts within the meaning of section 434 of the Companies Act 2006. The
comparative figures for the year ended 31 March 2023 (and half year ended 30
September 2022) do not contain all of the information required for full annual
financial statements. The Group's full annual financial statements for the
year ended 31 March 2023 have been delivered to the registrar of companies.
The report of the auditors (i) was unqualified; (ii) did not include a
reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report; and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006. The Group's
financial statements for the year ended 31 March 2023 are available upon
request from the Company's registered office at Cody Technology Park, Ively
Road, Farnborough, Hampshire, GU14 0LX, or at the Company's website
(www.QinetiQ.com).
Responsibility statements of the Directors in respect of the interim financial
report
The Directors confirm that these condensed interim financial statements have
been prepared in accordance with UK adopted International Accounting Standard
34, 'Interim Financial Reporting' and Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct Authority and that
the interim management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8, namely:
● an indication of important events that have occurred during the first six
months and their impact on the condensed set of financial statements, and a
description of the principal risks and uncertainties for the remaining six
months of the financial year; and
● material related-party transactions in the first six months and any material
changes in the related-party transactions described in the last annual report.
The Directors of QinetiQ Group plc are listed in the QinetiQ Group plc Annual
Report for 31 March 2023. A list of current directors is maintained on the
QinetiQ Group plc website: www.qinetiq.com (http://www.QinetiQ.com) .
By order of the Board
Steve Wadey Carol Borg
Chief Executive Officer Chief Financial Officer
16 November 2023 16 November 2023
Independent review report to QinetiQ Group plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed QinetiQ Group plc's condensed consolidated interim financial
statements (the 'interim financial statements') in the Interim Results of
QinetiQ Group plc for the 6 month period ended 30 September 2023 (the
"period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim financial statements comprise:
· the Condensed consolidated balance sheet as at 30 September 2023;
· the Condensed consolidated income statement and Condensed consolidated
statement of comprehensive income for the period then ended;
· the Condensed consolidated cash flow statement for the period then ended;
· the Condensed consolidated statement of changes in equity for the period then
ended; and
· the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Results of QinetiQ
Group plc have been prepared in accordance with UK adopted International
Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council for use in the United Kingdom ("ISRE (UK) 2410"). A review of interim
financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the Interim Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with ISRE (UK) 2410. However, future events
or conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Interim Results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the Interim Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the Interim Results, including the
interim financial statements, the directors are responsible for assessing the
group's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the Interim Results of based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
Southampton
16 November 2023
Glossary
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation and amortisation
EPS Earnings per share
IAS International Accounting Standards
IFRS International Financial Reporting Standards
MOD UK Ministry of Defence
RDEC Research and Development Expenditure Credits
SSRO Single Source Regulations Office
Alternative performance measures ('APMs')
The Group uses various non-statutory measures of performance, or APMs. Such
APMs are used by management internally to monitor and manage the Group's
performance and also allow the reader to obtain a proper understanding of
performance (in conjunction with statutory financial measures of performance).
The APMs used by QinetiQ are set out below:
Measure Explanation Note reference to calculation or reconciliation to statutory measure
Organic growth The level of year-on-year growth, expressed as a percentage, calculated at Note 1
constant prior year foreign exchange rates, adjusting for business
acquisitions and disposals to reflect equivalent composition of the Group
Operating profit from segments Total operating profit from segments which excludes 'specific adjusting items' Note 2
and research and development expenditure credits ('RDEC')
Operating profit margin from segments Operating profit from segments expressed as a percentage of revenue Note 2
Underlying operating profit Operating profit as adjusted to exclude 'specific adjusting items' Note 2
Underlying operating margin Underlying operating profit expressed as a percentage of revenue Operating Review
Underlying net finance income/expense Net finance income/expense as adjusted to exclude 'specific adjusting items' Note 5
Underlying profit before/after tax Profit before/after tax as adjusted to exclude 'specific adjusting items' Note 6
Underlying effective tax rate The tax charge for the year excluding the tax impact of 'specific adjusting Note 6
items' expressed as a percentage of underlying profit before tax
Underlying basic and diluted EPS Basic and diluted earnings per share as adjusted to exclude 'specific Note 7
adjusting items'
Orders The level of new orders (and amendments to existing orders) booked in the year N/A
Backlog, funded backlog or order book The expected future value of revenue from contractually committed and funded N/A
customer orders
Book to bill ratio Ratio of funded orders received in the year to revenue for the year, adjusted N/A
to exclude revenue from the 25-year LTPA contract due to significant size and
timing differences of LTPA order and revenue recognition which distort the
ratio calculation
Underlying net cash flow from operations Net cash flow from operations before cash flows of specific adjusting items Note 9
Underlying operating cash conversion or cash conversion ratio The ratio of underlying net cash from operations to underlying EBITDA. Note 9
Free cash flow Underlying net cash flow from operations less net tax and interest payments Note 9
less purchases of intangible assets and property, plant and equipment plus
proceeds from disposals of plant and equipment
Net (debt)/cash Net (debt)/cash as defined by the Group combines cash and cash equivalents Note 8
with borrowings and other financial assets and liabilities, primarily
available for sale investments, derivative financial instruments and lease
liabilities
Return on capital employed Calculated as: Underlying EBITA / (average capital employed less net pension CFO Review
asset), where average capital employed is defined as shareholders equity plus
net debt (or minus net cash)
Specific adjusting items Amortisation of intangible assets arising from acquisitions; impairment of Note 3
property and goodwill; gains/losses on disposal of property, investments and
businesses; net pension finance income; transaction, integration and
acquisition-related remuneration costs in respect of business acquisitions and
disposals; digital investment; tax impact of the preceding items and
significant non-recurring tax and RDEC movements
FY The financial year ended 31 March n/a
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