Annual Financial Report

RNS Number : 2800O

QinetiQ Group plc

25 June 2010

 



QinetiQ Group plc

25 June 2010

QinetiQ Group plc ("the Company") - Documents re: Notice of AGM

Annual Report & Accounts 2010

Notice of 2010 Annual General Meeting

Proxy Forms

Copies of the above-mentioned documents have been submitted to the UK Listing Authority, in accordance with Listing Rule 9.6.1, and will shortly be available for inspection at the UK Document Viewing Facility, which is situated at:-

Financial Services Authority

25 The North Colonnade

Canary Wharf

London

E14 5HS

Furthermore, in accordance with Disclosure and Transparency Rule 6.1.2, copies of the proposed new Articles of Association have been forwarded to the Financial Services Authority.

Copies of all these documents are also available on the Company's website (www.QinetiQ.com)

Disclaimer

The information below, which is extracted from the 2010 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5 and the requirements it imposes on issuers as to how to make public annual financial reports. It should be read in conjunction with QinetiQ Group plc's Preliminary Announcement issued on 27 May 2010. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2010 Annual Report and Accounts. Page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the 2010 Annual Report and Accounts.

Principal Risks and uncertainties

A change in demand from reduced military operations in Iraq and Afghanistan

Potential Impact:        

A significant shift in policy by either the Administration in the US or the new Government in the UK, which results in a significant reduction in the number of forces personnel present in Iraq and Afghanistan, may have a materially adverse impact on the Group's financial performance.

Mitigation:                   

QinetiQ has capitalised on increased UK and US Government spending on technology in support of operations in Iraq and Afghanistan. Notably, QinetiQ has experienced strong demand for Unmanned Ground Vehicles and survivability products across the duration of both campaigns. However, the focus on operational support in defence, on both sides of the Atlantic, has given rise to a decline in defence expenditure in other areas, such as services to improve procurement efficiency and innovative research. The Group mitigates this by maintaining a market focus and competitive positioning in adjacent markets, including defence services (which are not directly conflict-related); aerospace, security and intelligence, providing a degree of portfolio diversification.

A change in either US or UK Government spending on defence and security

Potential Impact:        

The Strategic Defence and Security Review in the UK, and the financial burden on both UK and US Government budgets from the recent economic downturn, may lead to reduced spending in the markets in which the Group operates. Any reduction in Government defence and security spending in either the UK or the US could have an adverse impact on the Group's financial performance.

Mitigation:                   

The Group is focused on a range of markets in defence, security and intelligence, providing a degree of portfolio diversification. The Group will continue to review trends in defence, aerospace and security expenditure in order to align the business with those trends.

Defence Training Review (DTR) Package 1 may not reach financial close

Potential Impact:        

In 2007 Metrix, the Group's joint venture with Land Securities Trillium, was confirmed as the preferred bidder for Package 1 of the proposed 30-year DTR contract to outsource training for UK armed forces. The Group is responsible for the design and provision of training to Metrix. In January 2009, Sodexo replaced Land Securities Trillium as the joint venture partner. Metrix and the partners continue to work with the MOD to finalise the scope of the programme as the next stage in moving to a financial close. There is a risk that the DTR programme may suffer material change to the final scope, delay, inability to be financed or even cancellation. This would have a significant impact on the expected future growth of the Group. In addition, if financial close were not reached, the bid costs incurred since preferred bidder status was achieved would have to be written off and expensed through the income statement. These costs capitalised to date amount to £30.8m as at 31 March 2010.

Mitigation:                   

QinetiQ maintains close contact with Metrix, Sodexo and the MOD in relation to the DTR programme, including the potential timing of reaching a financial close. In addition, the MOD has signed some Pre-Contract Award Letters (PCAL) which effectively underwrite a small portion of the external costs incurred by the joint venture partners to date. A funded early training transformation agreement, which will study the proposed technical design and delivery of the training programmes, has been let.

Changing in the timing of contracts

Potential Impact:        

The amounts payable under some Government contracts can be significant and the timing of receiving orders could have a material impact on the Group's performance in a given reporting period.

Mitigation:                   

The contract and orders pipeline is regularly reviewed by senior operational management.

Funding of the defined benefit pension scheme

Potential Impact:        

The Group operates a defined benefit pension scheme in the UK. Presently there is a deficit between the projected liability of the scheme and the value of the assets held by the scheme. The size of the deficit may be materially affected by a number of factors, including inflation, investment returns, changes in interest rates and improvements in life expectancy. An increase in the deficit may require the Group to increase the cash contributions to the scheme which would reduce the Group's available cash for other purposes.

Mitigation:                   

The performance of the pension scheme is reviewed regularly by Group management in conjunction with the scheme's independent trustees. External actuarial and investment advice is also taken on a regular basis to ensure that the scheme is managed in the best interests of both the Group and the scheme's members. The most recent triennial funding valuation of the scheme as at 30 June 2008 resulted in a deficit of £111.3m. The Group and trustees have agreed a ten-year recovery period to make up this deficit.

Policies or attitudes may change towards Organisational Conflicts of Interest (OCI)

Potential Impact:        

The Group provides services to defence customers that meet their needs as part of the defence supply chain and also as technical advisor through its consultancy services. The future growth of the business could be compromised should the current attitudes to policies adopted by our key customers, especially in the UK, change.

Mitigation:                   

The Group takes proactive steps to manage any potential OCI and to maintain its ability to provide independent advice through its consulting and systems engineering activities. In the UK, a formal compliance regime operates with the MOD to monitor and assess potential OCI as part of the sales acceptance process.

Tax liabilities may change as a result of changes in tax legislation

Potential Impact:        

QinetiQ is liable to pay tax in the countries in which it operates, principally in the UK

and the US. Changes in the tax legislation in these countries could have an adverse impact on the level of tax paid on the profits generated by the Group.

Mitigation:                   

External advice and consultation is sought on potential changes in tax legislation in both the UK and the US. This enables us to plan for and mitigate potential changes in legislation.

A material element of the Group's revenue and operating profit is derived from one contract

Potential Impact:        

The Long-Term Partnering Agreement (LTPA) is a 25-year contract to provide a variety of evaluation and testing services to the MOD. The original contract was signed in 2003. The LTPA operates under five-year periods with specific programmes, targets and performance measures set for each period. On 3 March 2008, the Group signed up to a second five-year period of the LTPA with the MOD. The first break point is in 2013. In the current year, the LTPA directly contributed 11% of the Group's revenue and  supported a further 8% through tasking services using LTPA managed facilities. The loss, cancellation or termination of this contract would have a material, adverse impact on the Group's future reported performance.

Mitigation:                   

The Group continues to achieve customer performance and satisfaction levels. QinetiQ achieved a weighted performance rating of 90% against an agreed minimum rating of 80%.

Failure to comply with laws and regulations, particularly trading restrictions and export controls

Potential Impact:        

The Group operates in a highly-regulated environment and the majority of its revenues are generated from sales within the UK and the US. The Group is subject to numerous domestic and international laws, including import and export controls, financial and fiscal laws, health and safety, environmental, money laundering, anti-bribery, etc. Failure to comply with particular regulations could result in a combination of fines, penalties, civil or criminal prosecution, and suspension or debarment from Government contracts, as well as reputational damage to the QinetiQ brand. Any one of these could have a material impact on the Group's financial performance.

Mitigation:                   

The Group has procedures in place to ensure that it meets all current regulations. Local management continuously monitors local laws and regulations, and policies are in place for the appointment of advisors to support business development. Professional advice is sought when engaging in new territories to ensure that the Group complies with local and international regulations and requirements. In the US, the Group undertakes work that is deemed to be of importance to US national security, and arrangements are in place to insulate these activities from undue foreign influence as a result of foreign ownership. The Group has procedures in place to ensure that these arrangements remain effective and to respond to any changes that might occur in US attitudes to foreign ownership of such activities. The terms of reference of the Compliance Committee have been expanded to review the effectiveness of the compliance risk frameworks.

Exchange rate movement

Potential Impact:        

The Group is exposed to volatility in exchange rates due to the international nature of its operations; this includes a translational impact on the key financial statements as a result of the Group reporting its financial results in sterling. The Group has limited transaction exposure as its revenues and related costs are often borne in the same currency, principally US dollars or sterling. QinetiQ North America represents 49% of the Group's consolidated revenues. These operations are funded by US dollar denominated debt. Any significant movement in the foreign exchange markets could have a material impact on the Group's reported financial performance in a given period.

Mitigation:                   

The Group actively hedges all significant transactional foreign exchange exposure as described on page 78 of the notes to the financial statements and has adopted hedge accounting. The Group's objective is to reduce medium-term volatility to cash flow, margins and earnings. The Group protects its balance sheets and reserves from adverse foreign exchange movements by financing acquisitions in North America with US dollar denominated borrowings, partially mitigating the risk as US dollar earnings are used to service and repay US dollar denominated debt.

Raising external funding and volatility in interest rates

Potential Impact:        

The Group relies on the proper functioning of the credit markets which could have an impact on both the availability and associated costs of financing. The Group is exposed to interest rate risk derived mainly from long-term indebtedness and related to borrowings which have been issued at floating interest rates.

Mitigation:                   

The Group maintains a sufficient level of committed funding facilities, with a phased maturity profile, from commercial banks and private placement investors. The Group

also uses fixed-rate debt instruments and interest rate swap derivatives to provide some certainty in the future cost of maintaining these facilities.

Fixed price contracts

Potential Impact:        

Some of the Group's revenue is derived from contracts which have a fixed price. There is a risk that the costs required for delivery of a contract could be higher than those agreed in the contract due to operational overruns or external factors, such as inflation. Any significant increase in costs which cannot be passed on to a customer may reduce the profitability of a contract or even result in a contract becoming loss-making.

Mitigation:                   

The nature of much of the services provided under such fixed-price arrangements is often for a defined amount of effort or resource rather than firm product deliverables and, as such, the risk of cost escalation is substantially mitigated. The Group ensures that its fixed-price bids and projects are reviewed for early detection and management of issues which may result in cost overrun.

Acquisition of businesses

Potential Impact:        

The Group has the ability to acquire other businesses and companies. These acquisitions may not perform in line with expectations, thereby having a detrimental impact on the Group's financial performance.

Mitigation:                   

The risks are mitigated through the due diligence and internal approvals processes. In addition, the usual contractual protections are included in the purchase agreements signed with the vendors.

Inherent risks from trading in a global marketplace

Potential Impact:        

QinetiQ operates internationally. The risks associated with having a large geographic

footprint may include: regulation and administration changes; changes in taxation policy; political instability; civil unrest; and cultural and terms of reference differences leading to a lack of common understanding with customers. Any such events could disrupt some of the Group's operations and have a material impact on its future financial performance.

Mitigation:                   

While the core activities of the Group are confined to the UK and the US, the Group

continues to explore potential client relationships internationally.

Highly-competitive marketplace

Potential Impact:        

The aerospace, defence and security markets overall are highly competitive. The Group's financial performance may be adversely affected should it not be able to compete in the markets in which it aims to operate.

Mitigation:                   

QinetiQ seeks to focus on areas within these markets in which its deep customer understanding, domain knowledge, technical expertise and platform independence provide a strong proposition and significant advantage in competitive bidding.

Realisation of value from intellectual property may be delayed

Potential Impact:        

The funded research and development work that the Group undertakes for defence and other customers creates intellectual property that the Group retains and can utilise for commercial applications. The uncertainty that exists over new technologies and markets may result in delays, failure to realise value from intellectual property, or the need for a higher level of investment for the opportunity to be realised. The additional investment requirements may have to be funded from the Group's own capital resources which may have an adverse impact on the Group's financial performance.

Mitigation:                   

The Group invests in the development of intellectual property only where it believes there is a substantial and realistic market opportunity for the technology, and it undertakes a portfolio approach, in recognition that not all investments will be

successful. The performance of intellectual property realisation programmes is

monitored to increase support for successful prospects and reduce expenditure where realisation appears less likely. The Group uses external experts and financial backers as partners in a variety of structures to enhance the performance of certain intellectual property realisation projects.

Directors' responsibility statement

The following statement which was prepared for the purposes of the 2010 Annual Report and Accounts is set out on page 44of that document.  As set out above, this statement is repeated here solely for the purpose of complying with DTR 6.3.5.  This statement relates to and is extracted from the 2010 Annual Report and Accounts. It is not connected to the extracted and summarised information presented in this announcement and in QinetiQ Group plc's Preliminary Announcement that was published on 27 May 2010.  The names and functions of the Directors of the Company are set out on pages 26 and 27 of the Annual Report and Accounts.

We, the Directors of the Company, confirm that to the best of our knowledge:

- the financial statements of the Group have been prepared in accordance with IFRS as adopted by the EU, and for the Company under UK GAAP, in accordance with applicable United Kingdom law and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

- the Directors' Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that face the Group.

Lynton D. Boardman

General Counsel/Company Secretary

Tel:   [phone]

 

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