Annual Financial Report

RNS Number : 1984H

QinetiQ Group plc

18 June 2013

 



18 June 2013

QINETIQ GROUP PLC

Availability of Annual Report and Accounts 2013 and Notice of 2013 Annual General Meeting

QinetiQ Group plc has today published the following documents:

·      QinetiQ 2013 Annual Report and Accounts;

·      Notice of 2013 Annual General Meeting; and

·      Chairman's Letter to Shareholders.

The documents are available to view or download from the Company's website at www.qinetiq.com/investors.

In compliance with paragraph 9.6.1 of the Listing Rules, copies of the above documents, together with a copy of the Form of Proxy for the 2013 Annual General Meeting, have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Printed copies of these documents are today being posted to shareholders who have elected to receive them.

The 2013 Annual General Meeting will be held at 11.00 am on Thursday, 25 July 2013 at The Royal Berkshire Hotel, London Road, Sunninghill, Ascot, Berkshire, SL5 0PP.

In compliance with paragraph 6.3.5 of the Disclosure and Transparency Rules and paragraph 9.6.3 of the Listing Rules, the following information is extracted from the Annual Report and Accounts and should be read in conjunction with the Group's preliminary results announcement of 23 May 2013 (the 'Preliminary Results') which can be viewed on the Company's website at www.qinetiq.com/investors.  The information below and the Preliminary Results together constitute the material required by DTR 6.3.5 to be communicated in unedited full text through a Regulatory Information Service.  This is not a substitute for reading the full Annual Report and Accounts.  Page and note references below refer to page numbers and notes in the 2013 Annual Report and Accounts.

PRINCIPAL RISKS AND UNCERTAINTIES

Considerable progress has been made in the last year to improve the effectiveness of QinetiQ's risk management processes. This has included greater clarification regarding the Board's risk appetite specifically linked to the Company's growth agenda and our Organic-Plus strategy.

With the change of the Compliance Committee to the Risk & CSR Committee and its focus on risks where the primary impact is non-financial, the Audit Committee retains a focus on purely financial risks. The differentiation between pure financial and non-financial risk has aided both the Executive and Board risk review process, allowing for greater focus on the effectiveness of relevant mitigations.

Risks continue to be assessed accordingto the likelihoodof an event's occurrence and its impact. The Group risk register includes an analysis of the potential exposures and severity of each risk (as a function of its likelihoodand impact), the assumptions underlying each risk and the mitigation required to manage it.

The Group risk register considers:

•    The authority, resources and coordination of those involved in the identification, assessment and management of the significant risks the organisation faces;

•    The response to the significant risks which have been identified by management and others;

•    The monitoring of reports from Group management; and

•    The maintenance of a control environment directed towards the proper management of risk.

The Group risk register is reviewed by the Executive and the Board and, in addition, the risk owners present an update of current status and mitigating actions by rotation throughout the year.

Risk	Potential impact	Mitigation
Defence market	The financial burden on both UK and US government budgets from the current economic downturn and the requirement to reduce budget deficits will lead to reduced spending in the markets in which the Group operates.  In particular, the UK is reducing its defence budget by 8% in real terms by 2015 and, in addition, is seeking to remove significant overheating in its equipment programme.  In the US, sequestration was enacted on 1 March 2013 and government departments are working through its impact on levels of expenditure and future project priorities. 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.	Our focus on a range of markets in aerospace, defence, security and intelligence provides 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. Whilst UK government expenditure remains under pressure the MOD has made considerable progress in balancing its budget. In defence research, where QinetiQ is the private sector market leader, spending has been stabilised at about £390m pa until 2015.
	Current plans of both US and UK governments are to drawdown troops from Afghanistan by the end of 2014. A significant shift in policy by either the US Administration or the UK Government, which resulted in a significant reduction in the number of forces personnel present in Afghanistan, or a change in the timing, may have a materially adverse impact on the Group's financial performance.	The Group manages this by maintaining a market focus and competitive positioning in adjacent markets, including defence services (which are not directly conflict-related), aerospace, space, security and intelligence, which provides a degree of portfolio diversification. The Group is also seeking to increase its portfolio of products and to find new markets and applications for its existing offerings.
	The aerospace, 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.	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 a significant advantage in competitive bidding.
	Government customers seek to prevent Organisational Conflicts of Interest (OCI) occurring where the companies provide solutions as part of the defence supply chain and consultancy services as a technical advisor.	QinetiQ takes proactive steps to manage any potential OCI and to maintain its ability to provide independent advice through its consulting and systems engineering activities. A formal compliance regime operates in the UK with the MOD. In March 2012, QinetiQ agreed with the MOD that it could adopt the generic compliance regime in use with other companies, replacing a QinetiQ-specific one. This change will not affect the rigour of the compliance process.
Contract profile	A material element of the Group's revenue is derived from one contract. The Long-Term Partnering Agreement (LTPA) is a 25-year contract to provide a variety of evaluation, testing and training 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. In the current year, the LTPA directly contributed 14% of the Group's revenue and supported a further 8% through tasking services using LTPA managed facilities. The loss, cancellation or termination of, or significant reduction in, this contract would have a material, adverse impact on the Group's future reported performance.	In February 2013, the Group successfully completed the five-yearly periodic review of the LTPA, agreeing terms with the MOD for the provision of core test, evaluation and training support services through to March 2018. The Group continues to achieve customer performance and satisfaction levels, and significantly exceeded the agreed minimum performance rating of 80% in 2012.  While achieving the performance scores, the Group has achieved significant cost savings for the MOD on repeated services.
	The amounts payable under some government contracts can be significant and the timing of the receipt of orders could have a material impact on the Group's performance in a given reporting period.	The contract and orders pipeline is regularly reviewed by senior operational management.
	Some of the Group's revenue is derived from contracts that have a fixed price. There is a risk that the costs required for the delivery of a contract could be higher than those agreed in the contract, as a result of the performance of new or developed products, operational over-runs 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.	The nature of many of the services provided under such fixed-price arrangements is often for a defined amount of effort or resource rather than firm deliverables and, as a result, mitigates the risk of costs escalating. The Group ensures that its fixed-price bids and projects are reviewed for early detection and management of issues which may result in cost over-run.
Pension scheme	The Group operates a defined benefit pension scheme in the UK. There is currently a deficit between the projected liability of the scheme and the value of the assets it holds. 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 cash available for other purposes.	Pension scheme performance 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 2011, resulted in a deficit of £74.7m. The Group and trustees have agreed a package of measures to enhance the security of the scheme, including deficit recovery payments over six years, the use of CPI rather than RPI for indexation purposes, and an asset-backed funding programme. The next funding valuation of the scheme is at 30 June 2014. The Group and the Trustees continue to work on the de-risking of the liability profile of the scheme.
US foreign ownership regulations	In the US, the Group undertakes work that is deemed to be of importance to US national security and is therefore subject to foreign ownership regulations. Arrangements are in place to insulate these activities from undue foreign influence as a result of foreign ownership. Failure to comply with the regulations could result in sanctions, and suspension or debarment from government contracts, as well as reputational damage to the QinetiQ brand.	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. This section entitled 'Management and control of US subsidiaries' on page 45 of this report provides details of the proxy agreement between QinetiQ North America and the US DoD, that regulates the ownership, management and operation of QinetiQ's principal US subsidiaries.
Significant breach of relevant laws and regulations	The Group operates in highly-regulated environments and is subject to numerous domestic and international laws. The Group recognises that its operations have the potential to have an impact on a variety of stakeholders and that 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.	The Group has procedures and, where appropriate, training in place to ensure that it meets all current regulations. Together, these ensure the Group manages corporately and at local business level, the effective identification, measurement, and control of regulatory risk. 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.
	Key areas of focus for the organisation include:
	Safety liability from failure of a product, service or advice as well as workplace health, safety and environmental matters.	Robust training, policy and processes exist to ensure the safety of products, services and advice and to protect employees and others affected by QinetiQ operations. Recent successes include external accreditation of our Safety Management System and continuing authorisations for regulated design and maintenance services in the aviation arena (page 34). QinetiQ also undertakes human factor and behavioural safety training to embed its safety culture.
	Bribery and Ethics	The QinetiQ Code of Conduct outlines a strong stance on anti-bribery supported by annual training of all employees, procedures and systems for managing international business, payments to commercial intermediaries, gifts and hospitality. Performance was reviewed externally and benchmarked against others in this sector (page 34).
	US Proxy Regime	Procedures are in place to ensure that these regulations are adhered to, specifically with regard to communication with staff at QinetiQ's principal US subsidiaries.  Compliance data is maintained and monitored by the Executive and Board.
	International Trade Controls	Ongoing compliance has been supported by a programme to improve QinetiQ's handling of legacy materials as well as to improve our systems and processes for the handling and management of new materials and electronic data.  Investment in this area supports our plans for growth in the international arena as well as building confidence in how we manage existing regulatory requirements.
Tax legislation	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.	External advice and consultation are sought on potential changes in tax legislation in both the UK and the US. This enables the Group to plan for and mitigate potential changes in legislation. The Group is currently actively engaging with HM Treasury on the proposal to move R&D tax credits out of the tax charge and 'above the line' into operating profit. Legislation has been published in the UK which, subject to Royal Assent, will bring a mandatory 'above the line' approach from 1 April 2016. This could increase the Group's effective tax rate over time towards a blend of the US and UK corporation tax rates. The Group has £202.7m of tax losses carried forward as at 31 March 2013 (2012: £200.0m).
Breaches of data security and failure of IT systems	The Group operates in a highly-regulated information technology environment. The data held by QinetiQ is highly confidential and needs to be totally secure, particularly against a background of increasing cyber threat. A failure of systems could have an impact on contract delivery leading to a loss of customer satisfaction. A breach of data security could have an impact on our customers' operations and have a significant reputational impact, as well as lead to the possibility of exclusion from some types of government contracts, with a detrimental impact on the Group's financial performance.	Information systems are designed with consideration of single points of failure and the removal of risk through minor and major system failures. The business maintains business continuity plans that cover both geography, e.g. sites and business units, and the technical capability of staff. These plans cover a range of scenarios, including loss of access to information technology systems. The plans are tested at appropriate intervals. Data security is assured through a multi-layered approach that provides a hardened environment, including robust physical security arrangements, data resilience strategies and the application of security technologies, as well as comprehensive internal and external testing of potential vulnerabilities. In addition, the systems are monitored and managed on a 24/7 basis.
	The Group's financial systems are required to be adequate to support US and UK government contracting regulations.	A significant amount of effort is invested in engaging with US and UK government contracting audit agencies to enable them to test and opine on relevant financial systems and data, and on implementing any recommended improvement plans.
Working in a global market place	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 differences in culture and terms of reference, 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.	While the core activities of the Group are confined to the UK and the US, it continues to explore potential customer relationships across the globe. These new relationships are assessed for their inherent risks, using our International Business Opportunity Management process before being formally entered into.
	The Group is exposed to volatility in exchange rates as a result of 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 revenue and related costs are often borne in the same currency, principally US dollars or sterling.  Of the Group's total revenue, approximately 45% is contracted in sterling, 50% in US dollars and 5% in other currencies.	The Group actively hedges all significant transactional foreign exchange exposure, as described in 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, thereby partially mitigating the risk as US dollar earnings are used to service and repay US dollar-denominated debt.
	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 to the extent borrowings are issued at floating interest rates.	The Group maintains a prudent level of committed funding facilities: a five-year multi-currency facility totalling £282.8m was provided by its relationship banks and signed in 2011. This is currently undrawn. The Group also uses fixed-rate debt instruments issued to US private placement investors with maturity dates up to 2019.
Recruitment & retention	QinetiQ operates in many specialised engineering, technical and scientific domains. There is a risk that key capabilities and competencies are lost through failure to recruit and retain employees within the organisation due to internal factors as well as across the sector due to macro factors affecting the desirability, intake and training of engineers, scientist and technologists.	The Group conducts regular activity to identify key roles and personnel. Succession plans are in place looking internally at suitable candidates ready now or in need of development to fill particular roles as well as external activity to identify talent in industry the organisation may wish to attract.

DIRECTORS' RESPONSIBILITY STATEMENT

This statement is in compliance with DTR 4.1.12 and relates to and is extracted from page 64 of the Annual Report and Accounts and is signed by order of the Board by Jon Messent, Company Secretary.  Details of the Board of Directors of QinetiQ Group plc can be found on pages 38 and 39 of the Annual Report and Accounts.  Responsibility is for the full Annual Report and Accounts and not the extracted information presented in this announcement or in the Preliminary Results.

Responsibility statement of the Directors in respect of the Annual Report

The Directors in office as at the date of this Report confirm that to the best of their 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.

For further information, please contact:

Jon Messent - Company Secretary, QinetiQ Group plc

Telephone [phone]

Press Office, QinetiQ Group plc

Telephone [phone]

David Bishop - Investor Relations, QinetiQ Group plc

Telephone [phone]

 

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