Annual Financial Report

RNS Number : 6682F

QinetiQ Group plc

19 June 2012

 



19 June 2012

QINETIQ GROUP PLC

Annual Report and Accounts 2012 and Notice of 2012 Annual General Meeting

QinetiQ Group plc (the 'Company') announces that, in accordance with paragraph 9.6.1 of the Listing Rules, the Annual Report and Accounts for the year ended 31 March 2012 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do together with the following documents:

·      Notice of 2012 Annual General Meeting;

·      Chairman's Letter to Shareholders;

·      Form of Proxy; and

·      Proposed Articles of Association

The Annual Report and Accounts and the Notice of 2012 Annual General Meeting can be accessed from the Company's website at www.qinetiq.com and hard copy documents are today being posted to shareholders who have elected to receive them.

At the 2012 Annual General Meeting, it is proposed that the Company's articles of association are amended with effect from the conclusion of the meeting.  A summary of the proposed amendments are set out in the Notice of 2012 Annual General Meeting and the proposed new articles of association are available for inspection at www.hemscott.com/nsm.do. Copies of the proposed articles of association and blacklined articles of association showing the changes from the current articles of association are also available at the Company's registered office and the offices of Herbert Smith LLP, Exchange House, Primrose Street, London, EC2A 2HS, and, on the date of the 2012 Annual General Meeting, at The Royal Berkshire Hotel, London Road, Sunninghill, Ascot, Berkshire, SL5 0PP, from at least 15 minutes before the commencement of the meeting until its conclusion.

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 24 May 2012 (the 'Preliminary Results') which can be viewed on the Company's website at www.qinetiq.com.  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 in the text below refer to page numbers and notes in the Annual Report and Accounts.

PRINCIPLE RISKS AND UNCERTAINTIES

The understanding and effective management of the risks that face QinetiQ is fundamental to its success and is an integral part of managing the business.  The identification, assessment, mitigation and reporting of risks are carried out at a Group, business and project level, and are included as part of the business performance review process.

Risks are assessed according to the likelihood of an event's occurrence and its impact, both from a financial and non-financial standpoint. The Group Risk Register includes an analysis of the potential exposures and severity of each risk (as a function of its likelihood and impact), the assumptions underlying each risk and the mitigation required to manage it. The Group Risk Register is reviewed by the Executive Team and 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;

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

The risk register is reviewed by 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
A change in demand from reduced military operations in Iraq and Afghanistan	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.	QinetiQ has capitalised on increased UK and US Government spending on technology in support of operations in Iraq and Afghanistan. In particular, QinetiQ has experienced strong demand for Unmanned Ground Vehicles and survivability products across the duration of both campaigns. The focus on operational support in defence, on both sides of the Atlantic, has however, 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, which provides a degree of portfolio diversification.
A change in either US or UK Government spending on defence and security	The Strategic Defence and Security Review in the UK, the US Presidential election, and the financial burden on both UK and US Government budgets from the current economic downturn, 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 over-heating in its equipment programme. In the US, federal estimates indicate that DoD spending will reduce by 5% in 2013 and fall further in 2014, followed by a 2% annual increase through to 2017. 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 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. The UK Government is investing an additional £650m in cyber capability, which offers some opportunity to the Group.
Changes in the timing of contracts	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.
Funding of the defined benefit 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 of 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.
Policies or attitudes may change towards Organisational Conflicts of Interest (OCI)	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 our key customers' current attitudes to policies change.	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. In March 2012, the Group agreed with the MOD that the Company could adopt the generic compliance regime in use with other companies, in place of the QinetiQ-specific one previously in operation. This change will not affect the rigour of the compliance process.
Tax liabilities may change as a result of changes in 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 is 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. If this proposal is implemented, it could increase the Group's Effective Tax Rate over time towards a blend of the US and UK corporation tax rates.
A material element of the Group's revenue and operating profit 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. On 3 March 2008, the Group signed-up to a second five-year period of the LTPA with the MOD. The next break point is in 2013 and the Group is working with the MOD on the associated review. In the current year, the LTPA directly contributed 12% of the Group's revenue and supported a further 7% 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.	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 delivered services.
The Group is subject to US foreign ownership regulations	In the US, the Group undertakes work that is deemed to be of importance to US national security and, under the 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 43 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.
Failure to comply with laws and regulations, particularly trading restrictions and export controls	The Group operates in a highly-regulated environment and the majority of its revenue is generated from sales in 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. The Group recognises that its operations have the potential to have an impact on its employees, contractors, visitors, customers, and others in the community 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. Any one of these could have a material impact on the Group's financial performance.	The Group has procedures and, where appropriate, training in place to ensure that it meets all current regulations. Together, these ensure the Group manages, both corporately and at local business level, the effective identification, measurement, and control of regulatory risk and also ensure this principle is at the centre of our management of safety and other issues. 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. The terms of reference of the Compliance Committee have been expanded to review the effectiveness of the compliance risk frameworks.
Failure of information technology systems and breaches of data security	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.	The information systems are designed with consideration to 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, as well as 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.
Fixed-price contracts	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.
Highly competitive marketplace	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.
Inherent risks of trading in a global market	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.
Raising external funding and volatility in interest rates	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 £275m 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.
Exchange rate movement	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 43% are contracted in sterling, 55% in US dollars and 2% in euros.	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.
Realisation of value from intellectual property may be delayed	The funded research and development work that the Group undertakes for defence and other customers creates intellectual property that it retains and can use 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 required may have to be funded from the Group's own capital resources which may have an adverse impact on its financial performance.	The Group invests in the development of intellectual property only where it believes there is a realistic market opportunity for the technology. 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 improve the performance of certain intellectual property realisation projects.
Acquisition of businesses	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.	The risks are mitigated through the due diligence and internal approvals processes. In addition, the usual contractual protections are included in purchase agreements signed with vendors.

DIRECTORS' RESPONSIBILITY STATEMENT

The following statement is repeated here solely for the purpose of complying with DTR 6.3.5.  This statement is in compliance with DTR 4.1.12 and relates to and is extracted from page 56 of the Annual Report and Accounts and is signed by order of the Board by Mark Elliott, Chairman, Leo Quinn, Chief Executive Officer and David Mellors, Chief Financial Officer.  Details of the Board of Directors of QinetiQ Group plc can be found on pages 34 and 35 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

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.

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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