Annual Financial Report

RNS Number : 1809U

QinetiQ Group plc

19 June 2009

 



QinetiQ Group plc 

19 June 2009 

QinetiQ Group plc ('the Company') - Annual Report and Accounts

Annual Report & Accounts 2009

Notice of 2009 Annual General Meeting

Proxy Forms

Copies of the above-mentioned documents have been submitted to the UK Listing Authority 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

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

Disclaimer 

The information below, which is extracted from the 2009 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 21 May 2009. 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 2009 Annual Report and Accounts. Page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the 2009 Annual Report and Accounts.

Principal risks and uncertainties 

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

Potential impact: A significant shift in policy by either the new Administration in the United States of America or Government in the United Kingdom which results in a material 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: The Group is focused on a range of markets in defence, security and intelligence, providing a degree of portfolio diversification. While certain areas of the Group's operations, such as QNA's Technology Solutions Group, have experienced strong demand for their TALON® robots or LAST® Armor for deployment in both Iraq and Afghanistan, other areas of Government spend have been held back, for example, such as services to improve the efficiency of Government processes. The expectation is that any reduction in the level of spend in Iraq and Afghanistan may result in the resumption of such discretionary spend to which the Group could benefit from.

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

Potential impact: The forthcoming election in the UK and the change in Administration in the US combined with 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, for example, in the area of research in the UK, could adversely impact 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. Current UK and US defence and security spending forecasts do not indicate material budget reductions but the focus of the spending will change to meet emerging needs. The asymmetric nature of modern warfare and the threat from terrorism have resulted in increased expenditure on many capabilities that QinetiQ offers and we believe that many of our markets (eg security, intelligence and cyber security) are growth markets. The Group will continue to review trends in defence and security expenditure in order to align the business with those trends. As an independent technology specialist, QinetiQ is well placed to benefit from any delay or cancellation of major procurement projects as this will often lead to the requirement for technology insertion and upgrades to an existing platform's operational lifespan.

Risk: Defence Training Rationalisation (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 the 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 either 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. Additionally, 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.

Mitigation: QinetiQ maintains a close contact with Metrix, Sodexo and the MOD in relation to the DTR, including with regard to the potential timing of obtaining a financial close on the contract. In addition, the MOD has signed some Pre-Contract Award Letters (PCAL) which effectively underwrite a portion, but not all, of the external costs incurred by the joint venture partners to date. A funded early works contract may be let before financial close which will study the proposed technical design and delivery of the training programmes.

Risk: Changing in the timing of contracts

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

Mitigation: The contract and orders pipeline is regularly reviewed by senior operational management and the Executive Committee.

Risk: Funding of a 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 impacted 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 Company and the scheme's members. In June 2008, the Group and the trustees, acting on behalf of the scheme members agreed in principle to four key changes to the terms of the pension scheme aimed at reducing the cost to the Group of maintaining the pension scheme: an increase in the normal retirement age; to cap the level of pensionable earnings; paying pension contributions via salary sacrifice; and removing the ability to purchase 'additional years'. The most recent funding valuation of the scheme as at 30 June 2008 has resulted in a deficit of £111.3m. The Company and trustees have agreed a ten-year recovery period to make up this deficit.

Risk: 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. 

Risk: 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 United Kingdom and United States of America.

Risk: 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. In the current year, the LTPA directly contributed 11% of the Group's revenue and supported a further 7% through tasking services using LTPA managed facilities. These percentages are expected to decrease proportionally over time as the Group grows in other areas. 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 high customer performance and satisfaction ratings, maintain excellent relationships with key customers and anticipates that the contract will run for the full duration of its 25-year term through to 2028. The first break point in the contract is 2013. QinetiQ achieved a weighted performance rating of 99% for the year ended 31 March 2009 against an agreed minimum rating of 80%. 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 period of the LTPA with the MOD.

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

Potential impact: The majority of the Group's 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, money laundering etc. Failure to comply with particular regulations could result in a combination of fines, penalties, and civil or criminal prosecution. 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 export regulations. Local management continuously monitor local laws and regulations. Professional advice is sought when engaging in new territories to ensure that the Group is in compliance 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.

Risk: 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 transactional exposure as its revenues and related costs are often borne in the same currency, principally either US dollar or sterling. QinetiQ North America represents 47% of the Group's consolidated revenues. The 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 pages 90 to 94 of the notes to the financial statements. Acquisitions in North America have been funded by US dollar denominated bank borrowings, partially mitigating the risk as US dollar earnings are used to service and repay US dollar denominated facilities.

Risk: Raising external funding and volatility in interest rates

Potential impact: The Group is exposed to fluctuations in the credit markets which could impact both the availability and associated costs of financing. A substantial expansion of the Group's operations could not be financed through debt financing if sufficient liquidity were not available in the external market on commercially acceptable terms.

Mitigation: The Group manages this risk by maintaining a sufficient level of committed funding facilities, with a phased maturity profile from both 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.

Risk: 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. Any significant increase in costs which cannot be passed on to a customer may either 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 in such contracts is substantially mitigated. The Group ensures that its fixed price bids and projects are reviewed for early detection of issues which may result in cost overrun.

Risk: Acquisition of businesses

Potential impact: The Group is an active acquirer of 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 process. Additionally, the usual contractual protections are included in the purchase agreements signed with the vendors.

Risk: Inherent risks from trading in a global marketplace

Potential impact: QinetiQ operates internationally. The risks associated with having a large geographical footprint may include: regulation and administration changes, changes in taxation policy, political instability and civil unrest. Any such events could disrupt some of the Group's operations and have a material impact on the Group's 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 across the globe. These new relationships are assessed for their inherent risks before being formally entered into.

Risk: Highly competitive marketplace

Potential impact: The defence and security markets 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's domain knowledge, expertise, platform independence and capabilities within its selected markets provide a compelling proposition for customers, which is a significant advantage for the Group in competitive bidding.

Risk: 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 or failure to realise value from intellectual property or in a higher level of investment required 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 only invests in the development of intellectual property where it believes there is a substantial and realistic market opportunity for the technology and it undertakes a portfolio approach, recognising that not all investments will be successful. The performance of intellectual property realisation programmes is actively 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 2009 Annual Report and Accounts is set out on page 64 of 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 2009 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 21 May 2009.  The names and functions of the Directors of the Company are set out at pages 48 to 49 of the 2009 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 IFRSs 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.

By order of the Board

Graham Love, Chief Executive officer

David Mellors, Chief Financial officer

Lynton D. Boardman

General Counsel/Company Secretary

Tel: [phone]

 

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