Final Results

QinetiQ Group plc 31 May 2007 QinetiQ Group plc audited preliminary results for the year ended 31 March 2007 Financial summary 2007 2006 Revenue Â£1,149.5m Â£1,051.7m Underlying operating profit Â£106.0m Â£90.7m Underlying operating margin 9.2% 8.6% Underlying profit before tax Â£94.0m Â£80.1m Statutory profit before tax Â£89.3m Â£72.5m Underlying earnings per share 11.3p 10.2p Basic earnings per share 10.5p 10.0p Net debt Â£300.8m Â£233.0m Cash flow from operations Â£107.0m Â£107.6m Orders Â£1,214.0m Â£816.7m Backlog (excluding LTPA) Â£850.9m Â£608.4m Underlying effective tax rate 21.2% 22.7% Dividend per ordinary share 3.65p 2.25p See Glossary section for definitions of Non GAAP terms used throughout this statement Operational summary â€¢ Strong orders growth of 48.6% (organic orders growth of 41.6%) â€¢ Book to bill ratio of 1.2:1 (2006: 0.9:1) â€¢ Revenue increased by 9.3% (QinetiQ North America organic revenue growth of 14.2%) â€¢ Continued improvement in underlying operating margin to 9.2% (2006: 8.6%) â€¢ Underlying profit before tax up by 17.4% â€¢ Underlying earnings per share up by 10.4% to 11.3p â€¢ Final dividend increased by 8.9% to 2.45 pence per share (2006: 2.25 pence per share) QinetiQ CEO Graham Love commented: 'I am delighted to report that QinetiQ performed strongly in the year, proving that our strategy remains effective, our business model robust and that we continue to execute well against both. Our selection as preferred bidder for the Defence Training Rationalisation programme shows that we have successfully repositioned ourselves in the UK defence market, with a track record of delivering technology-rich support services and supplying technology into major programmes. In North America we have seen strong organic growth, supplemented by our continued acquisition of good companies which gives us the critical mass to bid into the bigger defence programmes. 'Looking forward, our principal markets in the United Kingdom and North America continue to provide good opportunities for growth, and we believe we are well positioned as an innovative, technology-based company to perform strongly in future years.' Outlook Going forward QinetiQ's strategy remains consistent with previous plans, and the focus is on execution. In the UK defence market the Group believes that the rapidly changing needs of defence and security forces can only be met by the kind of agile and innovative technological services in which QinetiQ specialises. In the short to medium term the effect on revenues of the introduction of competition into the MOD Research funding will broadly be countered by continued growth in Technology Supply. Demand for QinetiQ's consultancy and advisory services to the MOD remains robust, and the Group continues to develop important new business in systems engineering and integration. The Group looks forward to entering the second five year period of the 25 year LTPA with confidence. Significant incremental growth in the UK defence managed service business will be driven from the expected financial close of both packages of DTR in late 2008/early 2009. In North America QinetiQ's positioning as a technology rich provider across a wide and deep customer base provides it with the platform to continue to grow at rates above the forecast overall increases predicted in US DoD budgets in the medium term. Additionally the high end nature of QinetiQ's service offerings will provide it with a significant degree of insulation from the impact of future US government budget pressures. Commercial markets for services and products for QinetiQ's Ventures businesses present a tremendous opportunity for the Group. QinetiQ aims to grow these businesses into profitable contributors to the Group and to seek external partners and funders to support their development as appropriate. QinetiQ looks forward to the coming year with confidence that its robust business model, the quality and commitment of its people and the strength and depth of its customer relationships provide it with a platform for continued growth in core defence and security markets, together with increasing success in taking its technology into other markets of global significance. There will be a webcast of the presentation of the preliminary results to analysts at 09:30 am 31 May 2007. If you wish to watch this broadcast you will need to register in advance at http://www.axisto.com/webcasting/investis/qinetiq/full-year-results-2006/. The event will be broadcast at the same address. There will also be an audiocast of the event which can be heard using the following numbers: UK participants: 0800 634 5205 Other participants: +44 208 817 9301 The presentation will be available at our investor relations page http://www.qinetiq.com/home/investor_centre.html on the morning of our results and the video conference will be uploaded to the site following the event. Notes for Editors: â€¢ QinetiQ (pronounced ki net ik as in 'kinetic energy') is a leading international defence and security technology business that was formed in July 2001 from the UK Government's Defence Evaluation & Research Agency (DERA). QinetiQ has approximately 13,500 employees, who deliver technology-based services and exploit QinetiQ's strengths in technology research by selling systems solutions, products and licences to government and commercial customers in a spectrum of defence, security and related commercial markets. For further information please contact: QinetiQ: Nicky Louth-Davies , Media relations +44 (0)7795 290593 Adrian Colman, Investor relations +44 (0)7740 432699 Citigate Dewe Rogerson: Andrew Hey +44 (0)20 7216 4729 Disclaimer All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of QinetiQ and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements, which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of QinetiQ or the markets and economies in which QinetiQ operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Nothing in this document should be regarded as a profit forecast. Group Trading Performance Group summary 2007 2006 2005 Â£m Â£m Â£m Orders 1,214.0 816.7 668.3 Revenue 1,149.5 1,051.7 855.9 Underlying EBITDA(1) 140.5 124.5 104.3 Underlying operating profit (3) 106.0 90.7 65.2 Underlying operating margin 9.2% 8.6% 7.6% ----------------------------------------------- ------- ------- ------- Business divestments and investment impairment 4.6 - 17.1 ----------------------------------------------- ------- ------- ------- Underlying profit before tax (4) 94.0 80.1 58.2 Net debt 300.8 233.0 176.6 Backlog(2) 850.9 608.4 572.0 Underlying effective tax rate 21.2% 22.7% 16.2% ----------------------------------------------- ------- ------- ------- Underlying earnings per share 11.3p 10.2p 8.8p ----------------------------------------------- ------- ------- ------- Dividend per share 3.65p 2.25p Nil ----------------------------------------------- ------- ------- ------- (1) Underlying EBITDA excluding IPO related items(2006) (2) Excluding remaining Â£4.8bn (2006: Â£5.0bn 2005: Â£5.2bn) in respect of LTPA contract (3) Underlying operating profit is operating profit before acquisition amortisation and IPO related items and restructuring (2005) (4) Excluding business divestments and investment impairment and disposal of non-current assets and restructuring (2005) In February 2007 QinetiQ announced that it planned to create, from 1 April 2007, an EMEA (Europe, Middle East and Australasia) region to develop the Group's provision of its existing UK services globally. The EMEA region comprises all of the Group's operations with the exception of QinetiQ North America and Ventures activities. In order to identify the results covered by the EMEA region and to provide greater clarity on the development of commercial businesses from the defence technology base, the operating results of Ventures have been split out from within Security & Dual Use in the analysis below. Revenue 2007 2006 2005 Â£m Â£m Â£m ----------------------------- --------- ------- ------- Revenue Defence & Technology 657.9 669.6 664.9 Security & Dual Use 121.4 127.6 115.9 ----------------------------- --------- ------- ------- EMEA 779.3 797.2 780.8 QinetiQ North America 358.2 248.4 70.1 Ventures 12.0 6.1 5.0 ----------------------------- --------- ------- ------- Total 1,149.5 1,051.7 855.9 ----------------------------- --------- ------- ------- Group revenue increased 9.3% to Â£1,149.5m due primarily to acquisitions and organic growth in QNA. The overall level of organic growth in revenue in constant currency terms was 2.3% (2006: 2.3%). The acquisitions of OSEC (May 2006) and Analex (March 2007) and the first time full year contributions from Apogen (September 2005) and PSI (September 2005) were complemented by organic growth in particular from Technology Supply (7.6%) within D&T and 14% from QNA at constant rates of exchange. These increases in revenue more than offset the lower than anticipated reductions in MOD Research (8.4%), the non recurrence of LCD patent royalty income in S&DU (Â£13m) and the effect of the weakening US dollar on the translation of the results of QNA (Â£28.9m compared to the level that would have been reported on a constant currency basis). Orders and backlog 2007 2006 2005 Â£m Â£m Â£m ----------------------------- --------- ------- ------- Orders Defence & Technology 650.8 420.7 472.6 Security & Dual Use 132.9 158.3 124.7 ----------------------------- --------- ------- ------- EMEA 783.7 579.0 597.3 QinetiQ North America 416.0 227.9 67.9 Ventures 14.3 9.8 3.1 ----------------------------- --------- ------- ------- Total 1,214.0 816.7 668.3 ----------------------------- --------- ------- ------- Backlog Defence & Technology (1) 520.0 366.6 410.0 Security & Dual Use 112.6 108.1 93.4 ----------------------------- --------- ------- ------- EMEA 632.6 474.7 503.4 QinetiQ North America 210.7 129.2 68.6 Ventures 7.6 4.5 - ----------------------------- --------- ------- ------- Total (1) 850.9 608.4 572.0 ----------------------------- --------- ------- ------- (1) Excludes remaining Â£4.8bn (2006: Â£5.0bn) in respect of LTPA contract Orders have increased by 49% to Â£1,214.0m with strong performance from all sectors of the Group. A 55% increase in orders was delivered within D&T, with the finalisation of the 20 year CATS contract (Â£104m) and the Typhoon support three year contract extension (Â£53m) particularly notable. The continued high levels of funding for TALON(R) robots and robust funding for SETA work, together with the benefit of acquisitions in the prior and current year, has increased order levels in QNA by 97% in constant currency terms. The Group's strong orders performance has resulted in a book to bill ratio (excluding the LTPA) of 1.2:1(2006:0.9:1). Backlog increased by 40% from Â£608.4m to close at Â£850.9m. LTPA backlog at 31 March 2007 stood at Â£4.8bn (2006: Â£5.0bn). The increase was primarily in D&T where the CATS contract added Â£104m to backlog and in North America where backlog has risen in all operating units. There has also been an additional Â£44.6m of backlog added from the acquisitions of Analex and OSEC. Operating profit 2007 2006 2005 Â£m Â£m Â£m ----------------------------- --------- ------- ------- Defence & Technology 59.1 56.5 51.3 Security & Dual Use 13.9 17.2 15.9 ----------------------------- --------- ------- ------- EMEA 73.0 73.7 67.2 QinetiQ North America 39.9 24.5 8.0 Ventures (6.9) (7.5) (10.0) ----------------------------- --------- ------- ------- Total 106.0 90.7 65.2 ----------------------------- --------- ------- ------- ----------------------------- --------- ------- ------- Underlying operating profit margin 9.2% 8.6% 7.6% ----------------------------- --------- ------- ------- Underlying operating profit has increased by 17% to Â£106.0m due to the benefit of the acquisitions noted above, organic growth in QNA and margin improvements within underlying operations, despite the impact of the weakening US dollar on the translation of QNA operating profits. On a constant currency basis, using the average rate for the prior year, QNA would have contributed an additional Â£2.9m of operating profit. Underlying operating profit includes charges for UK rationalisation of Â£8.0m (2006: Â£9.4m). Underlying operating margin has improved in the year by 60 basis points to 9.2% (2006: 8.6%), driven by further improvements in existing business performance and benefiting from the increased contribution from QNA, whose operations are typically higher margin than the EMEA businesses. Cash flow Cash inflow from operations before investing activities was Â£107.0m (2006: Â£107.6m). The UK business experienced delays in the award of contracts from the MOD during the year leading to a build in working capital at the year end of approximately Â£20m. This position has reversed in the new financial year. This contributed to an operating cash conversion of 56% compared to 84% in 2006 and the Group's long term 80% target. Investment in acquisitions in the year amounted to Â£134.3m (2006: Â£202.5m) comprising Â£96.4m on Analex, Â£28.6m on OSEC and Â£9.3m of deferred consideration relating to prior year acquisitions, principally Westar, following the satisfaction of post acquisition performance criteria. Other investments totalled Â£9.4m (2006: Â£1.2m), the most significant of which were further funding of Â£4.4m for ZBD, Â£2.1m for Metalysis and Â£1.5m for Nomad. Â£17.9m of proceeds were received from business realisations (primarily the AFS sale) and Â£8.6m from fixed asset disposals. The Group paid Â£3.3m of tax in the year, all in the US. The payment was below the US statutory rate due to the utilisation of tax losses and higher than required payments on account in the prior year. In the UK no cash tax was paid due to the availability of deductions for research and development relief and pension contributions made in the year to 31 March 2006. The Group expects that future tax payments in the US will broadly follow the US statutory rate. In the UK the business is not expected to be in a tax paying position in the short to medium term as the Group continues to benefit from deductions for research and development relief and past pension contributions. Dividend payments of Â£22.7m were made in the year comprising the final dividend of Â£14.8m for the year ended 31 March 2006 (paid in August 2006) and an interim dividend of Â£7.9m (paid in February 2007). Outlook The Group has maintained the strategy it outlined at IPO and performed in line with the Board's expectations. The UK defence business is expected to show improved levels of growth in the coming year. The Group will actively continue its strategy to commercialise appropriate elements of its intellectual property base and look to structures and resource allocations that will accelerate and enhance value creation from the portfolio. Growth in QNA is anticipated both organically and from the recently completed acquisitions of Analex and ITS. The Group continues to target selective acquisitions in its key markets to complement and expand its capabilities as a technology rich defence and security services provider. EMEA - Defence & Technology 2007 2006 2005 Â£m Â£m Â£m ------------- ------ ------ ------ Revenue MOD Research 150.5 164.3 188.8 Technology Supply 133.7 124.2 96.9 Procurement & Capability Support 182.6 197.3 182.3 Managed Services 191.1 183.8 196.9 ------------- ------ ------ ------ Total 657.9 669.6 664.9 ------------- ------ ------ ------ Underlying operating profit 59.1 56.5 51.3 Underlying operating margin 9.0% 8.4% 7.7% Orders MOD Research 164.5 99.8 202.5 Technology Supply 153.0 137.3 98.3 Procurement & Capability Support 214.0 177.1 171.8 Managed Services 119.3 6.5 - ------------- ------ ------ ------ Total 650.8 420.7 472.6 ------------- ------ ------ ------ Book to bill ratio 1.3:1 0.8:1 1.0:1 Backlog 520.0 366.6 410.0 ------------- ------ ------ ------ Operations - Preferred bidder on DTR Package 1 and provisional preferred bidder on DTR Package 2 awarded to Metrix, a QinetiQ joint venture with Land Securities Trillium. - Combined Aerial Target Service (CATS) contract signed. Worth up to Â£308m over 20 years. - Typhoon programme contract extension signed to provide Â£50m of defined technical support, advice and safety clearance activity, together with Â£2.5m allocated to sub-contracts and future emergent work over three years. - World's first flight demonstration of a system capable of controlling and autonomously organising multiple unmanned aircraft. The successful flight trial consisted of a package of self-organising unmanned air vehicles under the control of an operator flying in a fast jet. - Contract from Northrop Grumman's Remotec UK subsidiary to design and manufacture the command and control systems for the MOD CUTLASS robotics programme. CUTLASS will provide the next generation of explosive ordinance disposal (EOD) unmanned ground vehicle. - Â£9.5m MOD research contract to deliver the Vehicle Technology Integration Demonstrator programme. Three-year programme will investigate and implement a layered protection approach to survivability for armoured vehicles to reduce their vulnerability to attack. - 2000th X-Net vehicle arresting device sold in year. X-Nets have generated revenue in excess of Â£3.5m - Â£10.5m weapons systems upgrade programme on the Philippine Navy's three Jacinto Class Patrol Vessels completed on time and to budget. - QinetiQ Rail sold resulting in a Â£2.8m profit. Financials - Revenue increased by 7.6% in Technology Supply broadly offsetting the continued impact of MOD Research opening to competition. - Restructuring costs of Â£8.0m (2006: Â£4.4m) to align D&T capabilities with market requirements. - Underlying operating profit margin improvement of 60 basis points to 9.0%. - Strong orders performance in year resulting in book to bill ratio of 1.3:1 (2006: 0.8:1). - Backlog including remainder of LTPA Â£5.3bn (2006: Â£5.4bn). MOD Research The MOD Research stream consists of customer-funded defence research revenues. QinetiQ has retained its position as the leading independent provider of research services to the MOD and continued to win in excess of half of the competed MOD research bids in which it participated, resulting in a lower than expected 8.4% (2006: 13.0%) decline in stream revenue to Â£150.5m. Order flow into MOD Research has been stronger than expected at Â£164.5m including a number of awards for multi-year programmes. The strong win rate has given rise to a book to bill ratio of 1.1:1. The MOD continues to increase competition in its research programme and by the end of 2008 new contracts available to industry will be fully open to competition. Group revenue from MOD Research is therefore expected to continue to decline in the coming years. The Group also conducts elements of MOD Research through the divisions in the Security & Dual Use sector. The total value of MOD research undertaken across the Group declined by 10.7% to Â£172.4m (2006: Â£193.1m). Technology Supply The Technology Supply business stream focuses on using intellectual property from customer-funded defence research to provide technology-based solutions to defence Original Equipment Manufacturers (OEMs), defence prime contractors, MOD and other UK Government agencies, US DoD and a number of technology-driven civil industries. QinetiQ has been successful in continuing to gain positions on new and existing major MOD programmes, although delays by the MOD in placing major procurement contracts resulted in revenue growth lower than expected at 7.6% in year to Â£133.7m (2006: Â£124.2m). Order intake of Â£153.0m resulted in a book to bill ratio of 1.1:1 providing good visibility for continued future growth. On 5th March 2007 QinetiQ Rail Limited, a subsidiary specialising in wireless broadband for the rail industry, was sold for consideration of Â£4.5m in shares in the acquiring company, Nomad Holdings Limited (Nomad), representing an 8.6% shareholding in Nomad. The transaction resulted in a net gain of Â£2.8m. Procurement & Capability Support Procurement & Capability Support provides advice to the MOD in relation to the acquisition, effective sustainment and use of defence equipment together with systems engineering, integration and other support services and tasking services under the LTPA. Revenue in year declined by 7.5% to Â£182.6m principally due to delays in commissioning work by MOD and lower levels of Urgent Operational Requests (UORs). This was partly offset by the high level of tasking work undertaken in the year which rose by 23% from Â£63.3m in 2006 to Â£77.6m in 2007. The order flow from the MOD was stronger in the final quarter of the year providing good order cover into the next year. Managed Services Managed Services provides long-term technology rich managed services to the MOD. Currently this is principally through the LTPA whereby QinetiQ provides the UK's test and evaluation capabilities to the MOD. The LTPA is QinetiQ's single largest current contract and is expected to provide revenues of up to Â£5.6bn (for the non-tasking services only) over the 25 years from its commencement in 2003. The LTPA operates under five year periods with specific programmes, targets and performance measures set for each period. As QinetiQ enters the fifth year of the contract it has again increased its performance score under the contract from 92% in 2006 to 94% in 2007. During the coming year QinetiQ and the MOD will finalise the nature of any refinements to the scope, specific changes to targets and agree relevant performance metrics and pricing for the next five year period which is due to commence in April 2008. During the year the Group reached financial close on the CATS contract which is worth up to Â£308m over the next 20 years. This contract enhances the service already provided under the LTPA and is expected to provide Â£104m of incremental revenue to the Group over the duration of the contract. Defence Training Rationalisation Programme In January 2007, the MOD announced that Metrix, QinetiQ's joint venture with Land Securities Trillium, had been selected as the preferred bidder for Package 1 and provisional preferred bidder for Package 2 of the 25 year DTR managed services contract to provide the UK armed forces with elements of their technical training programme. Package 1 primarily comprises technical training, including aeronautical engineering and communications and information systems. Package 2 incorporates logistics, joint personnel administration, security, languages, intelligence and photography as well as supply training. Negotiations are ongoing with the MOD to refine the scope of the packages to address customer affordability. The target remains to agree the final scope by Autumn 2007, with financial close expected 12 to 18 months thereafter. Since attaining preferred bidder and provisional preferred bidder status bid costs have been capitalised. Up to Â£25m of costs are expected to be capitalised during the next 12 months. EMEA - Security & Dual Use 2007 2006 2005 Â£m Â£m Â£m --------------------------------------- ------ ------ ----- Revenue Security 26.8 27.2 22.1 Space 20.7 25.5 17.9 Technology Development & Exploitation 46.3 49.1 53.5 Managed Services 27.6 25.8 22.4 --------------------------------------- ------ ------ ----- Total 121.4 127.6 115.9 --------------------------------------- ------ ------ ----- Underlying operating profit 13.9 17.2 15.9 Underlying operating margin 11.4% 13.5% 13.7% Orders Security 29.6 32.8 25.2 Space 20.1 18.7 12.5 Technology Development & Exploitation 51.6 66.4 55.9 Managed Services 31.6 40.4 31.1 --------------------------------------- ------ ------ ----- Total 132.9 158.3 124.7 --------------------------------------- ------ ------ ----- Book to bill ratio 1.1:1 1.2:1 1.1:1 Backlog 112.6 108.1 93.4 --------------------------------------- ------ ------ ----- Operations - Secured a two-year $5m research contract from the DARPA in support of its Large Area Coverage Optical Search While Track and Engage (LACOSTE) programme. The concept is to develop a suite of sensors that can be operated at high altitude, possibly on an airship or long endurance UAV, that detect and simultaneously track large numbers of moving vehicles in dense urban areas with a high degree of accuracy, 24 hours a day. - Won a Â£1.6m, three year secure hosting contract for Aegate to keep sensitive information, generated as part of a drug authentication process, secure and confidential. - Awarded a two year contract extension worth Â£7m to continue the provision of technical support to the MOD's Defence Fuels Group (DFG) for fuels and lubricants. - Announced as preferred bidder on a 10 year contract to operate an ESA tracking station. - Partnered with Advantage West Midlands in a Â£20m advanced sensors project which will assist SMEs in the development and integration of advanced sensors. Financials - S&DU revenue declined slightly, following the completion of LCD patent royalty income in the prior year (Â£13m). Underlying growth excluding the LCD royalties was 5.9%. - Â£2.8m of revenue was generated through a number of smaller transactions to licence or dispose of surplus intellectual property in the Group's portfolio. - Underlying operating profit margin declined from 14% to 11% reflecting the cessation of LCD royalties, partially mitigated by the revenue generated from the smaller licence transactions, and a Â£2.5m reduction in rental income following the sales of surplus property in recent years. - The absolute margin continued to benefit from strong performance by the Estates division within Managed Services. - The sector orders were strong at Â£132.9m and continued to support future growth with a book to bill ratio of 1.1:1. - Orders won typically had an average value of around Â£0.1m complemented by approximately 30 contracts in excess of Â£1m each. Security The Group's Security stream offers world-class capabilities in information security and assurance, physical security, people screening, 24-hour monitoring of complex networks, forensic work in law enforcement and specialised IT security and security technology. Revenue in the year was broadly consistent with the prior year. We have made certain management changes to drive a return to growth. Space QinetiQ's Space stream is a leading European player in the development of ion engines, small low-cost, fast-to-launch satellites, and mission design and geospatial information systems. The nature of the industry is one of large individual projects which in turn can result in an irregular sales profile which was evidenced in 2007 with a Â£4.8m reduction in revenue despite the inclusion of a full year contribution from Verhaert. The business is working an expanded pipeline of opportunities with customer decisions expected in the coming year. Technology Development & Exploitation The Technology Development & Exploitation stream delivers research and development offerings from its leading Optronics, Materials and Energy technical capabilities. In addition, it facilitates the transition of intellectual capital generated from QinetiQ's funded technology research and development work into a viable range of products and solutions for the commercial marketplace. Applications include optical devices and portable power units. Revenue declined by only Â£2.8m despite the loss of the LCD royalty revenue, as a result of strong growth in Optronics and further sales of IP not selected for internal exploitation generating Â£2.8m of licence revenue. Managed Services Managed Services offers a portfolio of services in areas such as fuel and lubricant testing and analysis, instrument calibration and supporting technical services together with real estate, facilities and equipment management services. The Estates division continues to be a very strong profit generator for the sector from the rental income on surplus property. The property disposal programme is leading to a reduction in rental and other property income, with the disposals over the past two years resulting in a Â£2.5m reduction in rental income in year. Actions are also underway to seek alternative tenants for part the Group's Farnborough site as dstl, a significant sub-tenant has indicated that it intends to consolidate its operations elsewhere, although no formal termination notice has been received. QinetiQ North America 2007 2006 2007 2006 Â£m Â£m $m $m Organic Growth at constant currency (1) % -------------------- ----- ----- ------- ------ ------------- Revenue Technology 126.9 82.9 242.5 146.9 42% SETA 98.5 105.3 188.3 187.5 (1.6)% IT Services 128.5 60.2 246.1 105.3 0.4% Mission Solutions 4.3 - 8.4 - -------------------- ----- ----- ------- ------ ------------- Total 358.2 248.4 685.3 439.7 14% -------------------- ----- ----- ------- ------ ------------- Underlying operating profit (1) 39.9 24.5 75.8 43.4 Underlying operating margin 11.1% 9.9% 11.1% 9.9% Orders Technology 147.4 73.2 279.6 129.6 SETA 128.0 97.4 244.5 172.6 IT Services 140.6 57.3 269.6 100.2 -------------------- ----- ----- ------- ------ ------------- Total 416.0 227.9 793.7 402.4 -------------------- ----- ----- ------- ------ ------------- Book to bill ratio 1.2 0.9 1.2 0.9 Backlog 210.7 129.2 413.0 223.5 (1) Organic growth reflects the growth in businesses that were part of the Group at the start of the financial year Operations - The MOD placed a $10m order to supply LAST(R) Armor for 85 Mastiff Protected Patrol Vehicles. - New $63.9m indefinite delivery/indefinite quantity (IDIQ) contract from NAVAIR for TALON(R) robots and spares of which $54m was funded in year. An extra $77m of funding released against the six-year, $257m IDIQ contract from NAVSEA announced in September 2005 - IT Services was awarded the Field Operations Authoring Support contract by the US Department of Commerce in support of the Census Bureau. The $6.8m contract is to provide programming tools used in development of computer-assisted interviewing systems that enable the Census Bureau to conduct research for multiple federal agencies. - IT Services was awarded three contracts worth $11.3m with the Marine Corps System Command Acquisition Center for Support Services unit to provide engineering, technical, acquisition and logistics support services. - Systems Engineering & Technology Assistance (SETA) won a contract to provide test support services to the US Army Aviation Technical Test Center under a five-year contract valued at more than $21m for planning, conducting, analysing and reporting on the development and airworthiness qualifications of aircraft, aviation systems, and associated equipment throughout their life-cycles. - In June 2006 Duane Andrews was appointed CEO of QNA. Duane was previously the COO of SAIC and has also worked extensively for the US DoD. - Three acquisitions were announced in year: Ocean Systems Engineering Corporation (OSEC) ($53.7m - completed May 2006); Analex ($193.6m - March 2007) and ITS Corporation (ITS) ($80m - April 2007) - With the addition of Analex a fourth revenue stream of Mission Solutions has been established. - Year end headcount has risen to 4,258 (2006: 2,640) including 1,440 from the acquisitions of OSEC and Analex. ITS added a further 700 staff in April 2007. Financials - Revenue increased 44% to Â£358.2m or 56% in constant currency to $685.3m. 2007 included first time contributions from OSEC and Analex and full year contributions from Apogen and PSI. - Revenue growth from acquisitions was complemented by organic growth of 14% on a constant currency basis. - SETA stream without the contributions of Aerospace Filtration Systems (AFS) delivered organic revenue growth of 10%. - Underlying operating margin, excluding business realisations, has improved 120 basis points to 11% primarily driven by the strong TALON(R) product sales in Technology. - All QNA streams won orders significantly higher than the previous year and the sector book to bill ratio was 1.2:1. Acquisitions and disposals On 15 May 2006 the Group acquired San Diego based OSEC for cash consideration, before acquisition costs and assumed net cash, of Â£28.2m ($53.7m). OSEC is a leading provider of research, design, development and integration of advanced information technology systems to key defence agencies in the US, with some 340 staff. OSEC has performed in line with expectations, and delivered Â£25.0m ($48.1m) of revenue and Â£2.1m ($4.1m) of operating profit since acquisition. On 14 March 2007 the Group acquired Analex for a cash consideration, before acquisition costs and assumed net cash, of Â£98.8m ($193.6m). Analex's 1,100 employees provide high technology professional services mainly to US Government agencies. Analex has delivered Â£4.3m ($8.4m) of revenue and Â£0.6m ($1.1m) of operating profit since acquisition. Subsequent to the year end, on 16 April 2007 the Group acquired ITS for an initial cash consideration of Â£40.8m ($80.0m). ITS specialises in IT systems, business process management and operational support to federal government customers including the US Army, Navy and Department of Homeland Security. The Group disposed of its high performance engine inlet barrier AFS business on 28 February 2007 for Â£19.9m ($39.0m) to Donaldson, Inc. The disposal allowed the Group to realise the value from the AFS technology and business at an appropriate stage in its development. A profit of Â£9.9m ($19.4m) has been recognised on disposal. Technology The Technology stream provides high technology research services and defence and security related products to the US DoD, other government agencies and commercial customers in North America. Specialisms in this stream include a dvanced materials, biomedical technology, robotics, electromagnetics, sensors, thermal systems, human performance, embedded software, non-destructive inspection & evaluation and diagnostics & prognostics. Revenue grew organically by 42% as the strong demand for TALON(R) robots continued and additional LAST armor orders were won. During the year the Group recorded $111.6m TALON(R) revenue and shipped 546 TALON(R) robots including the first to non-US customers. A book to bill ratio of 1.2:1 supports a positive outlook for the coming year, albeit that the rate of growth is expected to moderate. Systems Engineering & Technical Assistance The Systems Engineering & Technical Assistance (SETA) stream provides independent support for the procurement, development, modification, fielding and sustainment of major army and missile defence equipment in North America. Revenue was flat on prior year due to the $19.2m fall in revenue from AFS to $11.8m (2006: $31.0m). The continuing business grew 10.1% primarily due to logistics services and the delivery of a number of aircraft flight simulation solution installations. IT Services The IT Services stream offers high value-added capabilities including enterprise architecture, software development and systems integration, network engineering and operations, energy and environmental engineering and program management to US Government agencies, particularly to the US DoD and DHS. Revenue growth occurred through the acquisition of OSEC and the full year contribution of Apogen. Growth in Apogen, in common with others operating in the market, was held back by delays in new staff receiving security clearance to work at the DHS, which has continued to delay the commencement of revenue generation from new contracted positions won in the year. When combined with the expected loss of contracts previously awarded under US small business set aside rules, this resulted in Apogen's revenue being flat year on year. The stream delivered a good order intake, resulting in a book to bill of 1.1:1. Mission Solutions Following the acquisition of Analex in March 2007 a new business stream, Mission Solutions, has been created comprising Analex and from 1 April 2007, elements of OSEC. The business has capabilities principally in information technology, mission assurance and operations, system design, engineering and integration, system and program security, intelligence and counter-intelligence support, enterprise systems engineering and integration and other consulting services requiring specialised customer or mission knowledge. Mission Solutions is focused on high margin/high growth markets such as intelligence and security with customers largely drawn from the US government, particularly NASA and the DHS, directly or through commercial subcontracts. In the year to 31 December 2006 Analex reported revenue of Â£78m and operating profit of Â£5.4m. Ventures 2007 2006 2005 Â£m Â£m Â£m --------------- ------ ------ ------ Revenue 12.0 6.1 5.0 Operating loss (6.9) (7.5) (10.0) Orders 14.3 9.8 3.1 Backlog 7.6 4.5 - Operations - Tarsier(R) runway foreign object detection system: â€¢ first installation at Vancouver International airport now operationally live â€¢ second installation at Dubai International delayed pending completion of groundworks but expected to be complete in the second quarter of the coming year â€¢ extended evaluations being installed at London Heathrow and with the FAA at Providence, Rhode Island airport â€¢ winner of Top Award for defence to civil technology transfer at Defence Technology Exchange Awards - Licensed the ZephIR(TM) laser anemometer technology for wind speed detection to Natural Power for Â£2.5m, a leading consultant to the international renewable energy industry. - Sale of 12% stake in Aurix to strategic licensing partner values Aurix at Â£9m - Successful fund raising round for ZBD Displays in March 2007 into which QintetiQ invested an additional Â£3.5m as part of the total Â£10.5m funding round. QinetiQ increased its stake in the company by 1.2% to hold 32% following its total Â£4.4m investment in the year and saw the value of its investment increase by Â£6.1m. - Extensive trials continuing with UK and European retailers Tesco, Dixons, Metro and PC World for ZBD displays - Omni-ID signed agreement with Crown Packaging to develop low cost RFID packaging solution - Initial export orders for Quintel mobile telephone antenna sharing equipment - Invested in development of new US focussed product in Quintel Financials - Ventures revenue has doubled as a number of the businesses and technologies progressed into initial revenue generating phases, including a strategic licensing agreement for ZephIR(TM) and the initial Tarsier(R) revenue in respect of Vancouver. - Stream losses temporarily decreased due to the ZephIR(TM) licensing revenue offsetting increased marketing costs to push products to greater levels of customer awareness (principally Tarsier(R)) and further product development, particularly a new US focused product in Quintel. - Investment in Ventures is expected to increase by up to Â£5m in the coming year to support accelerated development of promising opportunities such as Aurix and Omni-ID. QinetiQ continues to explore a variety of routes to accelerate value creation from the ventures, with a drive to inject more management and financial resource, and to find valuable partners to help take products to market. This will allow greater management and investment focus on accelerating the growth of individual ventures while allowing the Group to focus on bringing forward new venture opportunities. Other financials Net debt and liquidity At 31 March 2007 net debt was Â£300.8m representing an increase of Â£67.8m in the year. Net debt was principally denominated in US dollars and consequently the 12% weakening of the US dollar : sterling exchange rate in the year from $1.73 at the start of the year to $1.96 at 31 March 2007 resulted in a Â£30.2m exchange gain on the translation of net debt in the year. In August 2006 the Group extended its five year, Â£500m revolving credit facility (RCF) by a further year to August 2011. On 6 December 2006 the Group completed a private debt placement with US financial institutions to refinance $260m of existing debt. This was secured at favourable interest rates and provides a longer debt maturity profile of 7 years for $135m and 10 years for $125m. The Group had Â£319.9m of further borrowing capacity at 31 March 2007 on the basis of the unutilised element of the RCF. The Group operated comfortably within its banking covenants during the year. Capital expenditure and fixed asset disposals Property, plant and equipment expenditure totalled Â£34.8m (2006:Â£45.0m), of which Â£16.9m (2006: Â£23.5m) related to assets which are funded as part of the LTPA contract. The Group has future capital commitments of Â£13.2m (2006:Â£26.2m) largely in relation to planned capital expenditure under the LTPA. Capital expenditure in the year ending 31 March 2008 is expected to be some Â£15-20m higher than in 2007 due to higher LTPA spend and new systems investment in the UK. Pensions The Group provides both defined contribution and defined benefit pension arrangements. The principal defined benefit scheme is the QinetiQ Pension Scheme. The majority of new entrants to QinetiQ in EMEA join the Defined Contribution Section of the QinetiQ Pension Scheme. Pension benefits in QNA are provided on a defined contribution basis through 401k plans. A consolidated summary of the position of the defined benefit schemes is shown below: 2007 2006 Â£m Â£m Schemes' assets 794.1 716.0 Schemes' liabilities (884.9) (884.4) ------- ----- Schemes' deficit before deferred tax (90.8) (168.4) Deferred tax asset 27.1 50.4 ------- ------ Net pension liability (63.7) (118.0) ------- ------ In the year the value of assets increased by 7.4%, close to the expected rate of return for the year of 7.7%, with the 46% reduction in net pension liability being principally driven by a reduction in the discount rate, partly offset by an increase in the inflation rate assumptions, used to value the scheme liabilities. The current investment policy of the QinetiQ Pension scheme, as determined by the trustees in consultation with QinetiQ, is weighted towards equity investments. The trustees believe this is appropriate at the current time due to the relative youth of the scheme, which is expected to be cash flow positive for approximately the next nine years. The funding of the defined benefit schemes is decided by the Group in conjunction with the trustees of the schemes and the advice of external actuaries. The next full actuarial valuation is due as of 31 March 2008 and will be the first valuation under the new regulations for funding defined benefits. During the year the net pension cost charged to the income statement, before curtailments, for the defined benefit scheme, represented 23% of pensionable pay and this compared to 21% in the year to 31 March 2006. The key assumptions used in the IAS19 valuation are: Assumption 31 March 07 assumption 31 March 06 assumption ---------- -------- -------- Discount rate 5.4% 4.9% Inflation 3.1% 2.9% Salary increase 4.6% 4.4% Mortality male 86 86 Mortality female 89 89 The increase in the discount rate follows the movement in the 15 year AA bond yield at the year end dates. Each assumption is selected by management in consultation with the company actuary and taking account of the industry practice amongst comparator listed companies. The sensitivity of each of these key assumptions is shown in the table below and this illustrates how a small change in each assumption can have a material effect on the magnitude of the IAS19 calculated deficit. Assumption Change in Indicative effect on scheme --------- assumption liabilities --------- ----------- Discount rate Increase/ Decrease /increase by 2.6% decrease 0.1% Inflation and salary Increase/ Increase/decrease by 2.5% increase decrease 0.1% Life expectancy Increase 1 year Increase by 2.5% Based on the assumptions prevailing at the year end the expected pension charge for the year to March 2008 will be lower than the current year, principally due to the impact of the higher bond rate at the year end. Research and development Research and development (R&D) represents a significant focus for the Group with the majority of R&D related expenditure incurred on behalf of customers as part of specific funded research contracts from customers. The costs and related income for this R&D is included in the relevant income statement cost category and revenue respectively. In the year to 31 March 2007 the Group recorded Â£511.1m of customer funded R&D related expenditure up 1.3% on the prior year amount of Â£504.7m. Â£9.0m (2006: Â£5.6m) of internally funded R&D was charged to the income statement in the year and Â£3.2m (2006: Â£6.3m) of late stage development costs were capitalised, relating to development work on Tarsier(R) and Aurix. Â£1.5 m (2006: Â£0.5m) of capitalised development costs were amortised in the year. Finance costs Net finance costs increased by Â£4.5m to Â£12.0m (2006: Â£7.5m before IPO related MOD indemnity income and preference share interest) due to the increase in acquisition related debt partly offset by the proceeds from the IPO in February 2006 and the prior year redemption of high cost preference shares. The interest cover ratio, measured as underlying EBITDA: net finance costs was 11.7 times (2006: 11.7 times before IPO related MOD indemnity income). Profit before tax Profit before tax, non recurring items, disposals and acquisition amortisation increased by 17% from Â£80.1m to Â£94.0m. The growth included the benefit of the acquisitions in the year of OSEC and Analex and a full year of trading results for Apogen, PSI and Verhaert. The acquisitions made in the current year contributed Â£1.6m of profit before tax and the full year effect of acquisitions made in the prior year contributed an incremental Â£4.5m of profit before tax to the current year. Tax The effective tax rate was 23% (2006: 17%). The underlying effective tax rate for the year is 21% compared to 23% in the prior year. The Group's effective rate continues to be below the statutory rates in the UK primarily due to the benefit of research and development relief. The effective rate is expected to rise as an increasing proportion of taxable profits arise in the US. The US effective rate is a little above the US statutory rate due to the US State tax mix. This more than offsets the benefits from the March 2007 UK Budget which further enhanced research and development relief and reduced the UK corporation tax rate to 28% from April 2008. Profit for the year The underlying performance of the Group, after allowing for non-recurring events and amortisation of acquired intangible assets, is shown below: 2007 2006 Â£m Â£m Profit for the year 69.0 60.4 Minority interest - (2.3) ------------------- ------ ------ Profit for the year attributable to equity shareholders of the parent company 69.0 58.1 IPO related items - 4.2 Profit on business divestments and unrealised impairment of investment (4.6) - Profit on disposal of non current assets (3.3) (8.9) Amortisation of intangible assets arising from acquisitions 12.6 12.3 Tax impact of items above 0.4 (0.7) Brought forward tax losses utilised - (5.4) ------------------- ------ ------ Underlying profit for the year attributable to equity shareholders of the parent company 74.1 59.6 ------------------- ------ ------ Non-recurring items that have been excluded from underlying profit relate to profit on business divestments and investment impairment, costs associated with the IPO in the previous year and profit on disposal of non current assets, principally surplus property. Earnings per share Underlying earnings per share increased by 10% to 11.3p compared to 10.2p in the prior year. Basic earnings per share increased 5.3% from 10.0p to 10.5p. Dividend The Board is recommending a final dividend of 2.45p per share bringing the total dividend for the year to 3.65p per share, with the final dividend increasing 8.9% from the 2.25p maiden final dividend paid in respect of the year ended 31 March 2006. The full year dividend per share is 3.1 times covered by underlying earnings per share. Consolidated income statement for the year ended 31 March all figures in Â£ million notes 2007 2007 2007 2006 2006 2006 Before Acquisition Total Before IPO IPO Total acquisition amortisation related items related items amortisation and acquisition and acquisition amortisation amortisation ------------------ ----- -------- -------- -------- -------- -------- -------- Revenue 2 1,149.5 - 1,149.5 1,051.7 - 1,051.7 ------------------ ----- -------- -------- -------- -------- -------- -------- Employee costs (513.4) - (513.4) (492.0) (6.8) (498.8) Third party project costs (258.7) - (258.7) (230.8) - (230.8) Other operating costs excluding depreciation and amortisation (246.7) - (246.7) (217.5) (2.1) (219.6) Share of post tax loss of equity accounted joint ventures and associates (1.2) - (1.2) (0.4) - (0.4) Other income 11.0 - 11.0 13.5 - 13.5 ------------------ ----- -------- -------- -------- -------- -------- -------- EBITDA (earnings before interest, tax, depreciation and amortisation) 140.5 - 140.5 124.5 (8.9) 115.6 ------------------ ----- -------- -------- -------- -------- -------- -------- Depreciation of property, plant and equipment (31.7) - (31.7) (32.7) - (32.7) Amortisation of intangible assets (2.8) (12.6) (15.4) (1.1) (12.3) (13.4) ------------------ ----- -------- -------- -------- -------- -------- -------- Group operating profit 2 106.0 (12.6) 93.4 90.7 (21.2) 69.5 ------------------ ----- -------- -------- -------- -------- -------- -------- Gain on business divestments and unrealised impairment of investment 3a 4.6 - 4.6 - - - Profit on disposal of non-current assets 3b 3.3 - 3.3 8.9 - 8.9 Finance income 4.2 - 4.2 8.4 4.7 13.1 Finance expense (16.2) - (16.2) (19.0) - (19.0) ------------------ ----- -------- -------- -------- -------- -------- -------- Profit before tax 101.9 (12.6) 89.3 89.0 (16.5) 72.5 ------------------ ----- -------- -------- -------- -------- -------- -------- Taxation expense (25.0) 4.7 (20.3) (16.6) 4.5 (12.1) ------------------ ----- -------- -------- -------- -------- -------- -------- Profit for the year 76.9 (7.9) 69.0 72.4 (12.0) 60.4 ------------------ ----- -------- -------- -------- -------- -------- -------- Profit attributable to: Equity shareholders of the parent company 76.9 (7.9) 69.0 70.1 (12.0) 58.1 Minority interest - - - 2.3 - 2.3 ------------------ ----- -------- -------- -------- -------- -------- -------- 76.9 (7.9) 69.0 72.4 (12.0) 60.4 ------------------ ----- -------- -------- -------- -------- -------- -------- Earnings per share Basic 4 10.5p 10.0p Diluted 4 10.3p 9.8p Underlying 4 11.3p 10.2p ------------------ ----- -------- -------- -------- -------- -------- -------- Consolidated balance sheet as at 31 March all figures in Â£ million 2007 2006 Restated --------------------------------------------------------- --------- --------- Non-current assets Goodwill 373.1 314.9 Intangible assets 65.0 57.1 Property, plant and equipment 341.5 340.3 Investment property - 5.8 Financial assets 18.8 22.1 Investments 28.5 1.3 Investments accounted for using the equity method 0.3 0.6 Deferred tax asset 11.0 11.8 --------------------------------------------------------- --------- --------- 838.2 753.9 --------------------------------------------------------- --------- --------- Current assets Inventories 39.5 25.4 Financial assets 4.0 3.0 Trade and other receivables 401.2 332.6 Cash and cash equivalents 20.0 58.9 Investments 4.0 11.2 Non-current assets classified as held for sale 1.8 3.6 --------------------------------------------------------- --------- --------- 470.5 434.7 --------------------------------------------------------- --------- --------- Total assets 1,308.7 1,188.6 --------------------------------------------------------- --------- --------- Current liabilities Trade and other payables (339.4) (300.1) Current tax (6.9) (2.6) Provisions (1.1) (17.3) Financial liabilities (15.9) (6.6) --------------------------------------------------------- --------- --------- (363.3) (326.6) --------------------------------------------------------- --------- --------- Non-current liabilities Retirement benefit obligation (gross of deferred tax) (90.8) (168.4) Deferred tax liability (30.9) (8.2) Provisions (13.1) (9.2) Financial liabilities (327.7) (310.4) Other payables (5.5) (2.9) --------------------------------------------------------- --------- --------- (468.0) (499.1) --------------------------------------------------------- --------- --------- Total liabilities (831.3) (825.7) --------------------------------------------------------- --------- --------- Net assets 477.4 362.9 --------------------------------------------------------- --------- --------- Capital and reserves Ordinary shares 6.6 6.5 Capital redemption reserve 39.9 39.9 Share premium account 147.6 147.5 Own shares (0.1) - Hedging and translation reserve (13.1) 4.9 Retained earnings 296.4 164.7 --------------------------------------------------------- --------- --------- Capital and reserves attributable to shareholders of the parent company 477.3 363.5 --------------------------------------------------------- --------- --------- Minority interest 0.1 (0.6) --------------------------------------------------------- --------- --------- Total shareholders' funds 477.4 362.9 --------------------------------------------------------- --------- --------- Consolidated cash flow statement for the year ended 31 March all figures in Â£ million 2007 2006 --------------------------------------------------------- --------- -------- Profit for the year 69.0 60.4 Taxation expense 20.3 12.1 Net finance costs 12.0 5.9 IPO costs - 8.9 Gain on business divestment and unrealised impairment of investment (4.6) - Profit on disposal of non-current assets (3.3) (8.9) Depreciation of property, plant and equipment 31.7 32.7 Amortisation of intangible assets 15.4 13.4 Share of post tax loss of equity accounted joint ventures and 1.2 0.4 associates Increase in inventories (15.5) (9.9) (Increase)/decrease in receivables (33.9) 42.2 Increase/(decrease) in payables 27.0 (31.8) Decrease in provisions (12.3) (17.8) --------------------------------------------------------- --------- -------- Cash inflow from operations 107.0 107.6 Tax paid (3.3) (4.4) Interest received 4.2 3.4 Interest paid (13.8) (12.8) Preference share interest paid - (10.5) --------------------------------------------------------- --------- -------- Net cash inflow from operating activities 94.1 83.3 --------------------------------------------------------- --------- -------- Purchase of intangible assets (12.1) (8.5) Purchase of property, plant and equipment (34.8) (45.0) Sale of property, plant and equipment 8.6 111.5 Investments in associate undertaking and other (9.4) (1.2) investments Purchase of subsidiary undertakings (134.3) (202.5) Sale of interest in subsidiary undertakings 17.9 - --------------------------------------------------------- --------- -------- Net cash outflow from investing activities (164.1) (145.7) --------------------------------------------------------- --------- -------- Net (costs)/proceeds from IPO (2.0) 136.2 Cash outflow from repayment of loans (79.2) (75.4) Cash outflow from repayment of loan note (1.4) (45.9) Cash inflow from loans received 131.3 198.9 Cash inflow from loans notes 1.3 - Payment of deferred finance costs (0.4) - Preference share repayment - (37.5) Equity dividends paid (22.7) - Receipt of MOD indemnity - 45.3 Additional pension contributions - (106.4) Capital element of finance lease rental payments (5.9) (2.2) Capital element of finance lease rental 3.5 3.0 receipts --------------------------------------------------------- --------- -------- Net cash inflow from financing activities 24.5 116.0 --------------------------------------------------------- --------- -------- (Decrease)/increase in cash and cash equivalents (45.5) 53.6 Effect of foreign exchange changes on cash and cash equivalents (0.5) - Cash and cash equivalents at beginning of year 58.6 5.0 --------------------------------------------------------- --------- -------- Cash and cash equivalents at end of year 12.6 58.6 --------------------------------------------------------- --------- -------- Cash and cash equivalents 20.0 58.9 Overdrafts (7.4) (0.3) --------------------------------------------------------- --------- -------- Cash and cash equivalents at end of year 12.6 58.6 --------------------------------------------------------- --------- -------- Consolidated statement of recognised income and expense for the year ended 31 March all figures in Â£ million 2007 2006 ---------------------------------- -------- --------- Net loss on hedge of net investment in foreign subsidiary (14.4) (2.0) (Decrease)/increase in fair value of hedging derivatives (5.6) 4.9 Movement in deferred tax on hedging derivatives 2.0 (1.5) Gain/(loss) on available for sale financial assets 10.0 (1.6) Actuarial gains/(losses) recognised in the defined benefit pension schemes 85.8 (105.4) (Decrease)/increase in deferred tax asset due to movement in pension deficit (17.9) 8.7 ---------------------------------- -------- --------- Net income recognised directly in equity 59.9 (96.9) Profit for the year 69.0 60.4 ---------------------------------- -------- --------- Total recognised income and expense for the year 128.9 (36.5) ---------------------------------- -------- --------- Attributable to: Equity shareholders of the parent company 128.9 (38.8) Minority interest - 2.3 ---------------------------------- -------- --------- 128.9 (36.5) ---------------------------------- -------- --------- Notes to the preliminary results announcement 1. Basis of preparation Accounting policy The financial information included within the preliminary announcement has been prepared using accounting policies consistent with International Financial Reporting Standards (IFRSs) as endorsed by the European Union. The accounting policies followed are the same as those published by the Group within its Annual Report for the year ended 31 March 2006 which is available on the Group's website, www.QinetiQ.com. Certain comparatives have been restated following the finalisation during the year of the fair values of acquisitions completed in the prior year. Further details as the restatements are provided in note 6. Statutory information The Board of Directors approved the preliminary announcement on 31 May 2007. Whilst the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union, this announcement does not itself contain sufficient information to comply with the all the disclosure requirements of IFRS and does not constitute statutory accounts of the Company within the meaning of section 240 of the Companies Act 1985. The auditors have reported on the results for the years ended 31 March 2007 and 31 March 2006. Their reports were not qualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. Statutory accounts for the year ended 31 March 2007 will be delivered to the Registrar of Companies following the Company's Annual General Meeting on 26 July 2007. Details of the resolutions to be proposed at that meeting will be included in the notice of Annual General Meeting that will be sent to shareholders. 2. Segmental analysis Business segments Year ended 31 March 2007 all figures in Â£ million Defence & Security & Ventures QinetiQ North Eliminations Consolidated Technology Dual America Use --------------------------- ------- ------- ------- ------- ------- ------- Revenue External sales 657.9 121.4 12.0 358.2 - 1,149.5 Internal sales(1) 5.3 10.8 - 0.6 (16.7) - --------------------------- ------- ------- ------- ------- ------- ------- 663.2 132.2 12.0 358.8 (16.7) 1,149.5 --------------------------- ------- ------- ------- ------- ------- ------- Other information EBITDA before share of equity accounted associates 81.0 21.2 (3.6) 43.1 - 141.7 Share of equity accounted associates - - (1.3) 0.1 - (1.2) --------------------------- ------- ------- ------- ------- ------- ------- EBITDA 81.0 21.2 (4.9) 43.2 - 140.5 Depreciation of property, plant and equipment - own equipment (13.9) (6.9) (0.7) (3.2) - (24.7) Depreciation of property, plant and equipment - LTPA funded (7.0) - - - - (7.0) Amortisation of purchased or internally developed intangible assets (1.0) (0.4) (1.3) (0.1) - (2.8) --------------------------- ------- ------- ------- ------- ------- ------- Group operating profit/(loss) before amortisation of intangible assets arising from acquisitions 59.1 13.9 (6.9) 39.9 - 106.0 Amortisation of intangible assets arising from acquisitions (0.8) (1.1) - (10.7) - (12.6) --------------------------- ------- ------- ------- ------- ------- ------- Group operating profit/(loss) 58.3 12.8 (6.9) 29.2 - 93.4 Gain on business divestments and unrealised impairment of investment 4.6 Profit on disposal of non-current assets 3.3 Net finance expense (12.0) --------------------------- ------- ------- ------- ------- ------- ------- Profit before tax 89.3 Taxation expense (20.3) --------------------------- ------- ------- ------- ------- ------- ------- Profit for the year 69.0 --------------------------- ------- ------- ------- ------- ------- ------- (1) Inter segment sales are priced at fair value and treated as an arm's length transaction. 2. Segmental analysis continued Year ended 31 March 2006 all figures in Â£ million Defence & Security & Ventures QinetiQ North Eliminations Consolidated Technology Dual Use America ------------------------- -------- -------- -------- ------------- ------------ ------------ Revenue External sales 669.6 127.6 6.1 248.4 - 1,051.7 Internal sales (1) 9.8 11.3 - - (21.1) - ------------------------- -------- -------- -------- ------------- ------------ ------------ 679.4 138.9 6.1 248.4 (21.1) 1,051.7 ------------------------- -------- -------- -------- ------------- ------------ ------------ Other information EBITDA before IPO costs and share of equity accounted joint ventures and associates 79.0 25.0 (6.2) 27.1 124.9 Share of equity accounted joint ventures and associates - - (0.4) - (0.4) ------------------------- -------- -------- -------- ------------- ------------ ------------ EBITDA before IPO costs 79.0 25.0 (6.6) 27.1 124.5 Depreciation of property, plant and equipment - own equipment (13.2) (7.3) (0.9) (2.5) (23.9) Depreciation of property, plant and equipment -LTPA funded (8.8) - - - (8.8) Amortisation from purchased or internally developed intangible assets (0.5) (0.5) - (0.1) (1.1) ------------------------- -------- -------- -------- ------------- ------------ ------------ Group operating profit/(loss) before IPO costs and amortisation of intangible assets arising from acquisitions 56.5 17.2 (7.5) 24.5 90.7 Amortisation of intangible assets arising from acquisitions (2.0) (0.7) - (9.6) (12.3) ------------------------- -------- -------- -------- ------------- ------------ ------------ Group operating profit/(loss) before IPO costs 54.5 16.5 (7.5) 14.9 78.4 IPO costs (8.9) ------------------------- -------- -------- -------- ------------- ------------ ------------ Group operating profit 69.5 Profit on disposal of non-current assets 8.9 Net finance expense (5.9) ------------------------- -------- -------- -------- ------------- ------------ ------------ Profit before tax 72.5 Taxation expense (12.1) ------------------------- -------- -------- -------- ------------- ------------ ------------ Profit for the year 60.4 ------------------------- -------- -------- -------- ------------- ------------ ------------ (1) Inter segment sales are priced at fair value and treated as an arm's length transaction The segmental analysis has been modified from the prior year to align with the operational change in the year in which the ventures are now separately reported from the rest of the Security & Dual Use sector. 3a. Gains on Business Divestments and Impairment of Investment all figures in Â£ million 2007 2006 -------------------------------------- --------- --------- Profit on disposal of interests in subsidiaries 13.4 - Unrealised impairment of investment (8.8) - -------------------------------------- --------- --------- 4.6 - -------------------------------------- --------- --------- On 28 February 2007 Aerospace Filtration Systems, Inc. was sold to Donaldson, Inc. for Â£19.9m ($39.0m) resulting in a profit on disposal of Â£9.9m ($19.4m). Included in the proceeds was Â£3.1m ($6.0m) of cash held in escrow for a period of two years from the transaction date and recorded as a financial asset. On 5 March 2007 QinetiQ Rail Limited was sold to Nomad Holdings Limited (Nomad) in exchange for an 8.6% shareholding in Nomad valued at Â£4.5m, resulting in a profit on disposal of Â£2.8m. At the transaction date QinetiQ also purchased Â£1.5m of initially zero coupon preference shares in Nomad and these have been recorded at their fair value at 31 March 2007 of Â£1.2m. On 3 August 2006 a 12% stake in Aurix Limited was sold to a strategic licensing partner for cash consideration of Â£1.1m resulting in a profit on disposal of Â£0.7m. The unrealised impairment of investment relates to an Â£8.8m charge to the income statement in respect of the impairment in the carrying value of the quoted pSivida investment. 3b. Profit on Disposal of Non-Current Assets all figures in Â£ million 2007 2006 -------------------------------------- --------- --------- Profit on disposal of non-current assets 3.3 8.9 -------------------------------------- --------- --------- Current year disposals On 29 March 2007 the Group unconditionally exchanged on the contract to dispose of its Bedford site resulting in the recognition of Â£2.5m of profit on disposal, net of costs. Initial proceeds of Â£1.8m were received on exchange of contracts. The sale completed on 13 April 2007 and a further Â£15.7m was received at that date. The disposal was to Carlyle Shilton, a company which was at the date of the transaction 50% owned by the Carlyle group of companies. From the start of the year through to 14 February 2007, when they disposed of their entire shareholding, Carlyle was a related party of the Group by virtue of its 10.2% interest in the ordinary share capital of QinetiQ Group plc. The transaction was completed on an arms length basis as part of a competitive bidding process. Other disposals in the year generated a net profit of Â£0.8m, of which Â£0.7m came from property disposals. Prior year disposals In the year to 31 March 2006 the Group disposed of fixed assets for proceeds of Â£121.6m, with Â£6.0m of these proceeds due in the following financial year. There was a net profit of Â£8.9m recognised on these disposals. 4. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. For the year ended 31 March 2006 this is presented on an adjusted basis to reflect the share restructuring that took place at IPO. For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares arising from share options granted. Underlying earnings per share figures are presented below, as the Directors believe this to be a good measure of recurring business performance. Underlying earnings per share reflect adjustments for the impact of non-recurring and other items on basic earnings per share. Year ended 31 March 2007 -------------------------------- --------- --------- --------- Earnings Weighted Per share Â£m average number amount pence of shares mllion -------------------------------- --------- --------- --------- Basic 69.0 656.6 10.51 Effect of dilutive securities - options 11.0 (0.17) -------------------------------- --------- --------- --------- Diluted 69.0 667.6 10.34 -------------------------------- --------- --------- --------- -------------------------------- --------- --------- --------- Underlying earnings per share Earnings Weighted Per share Â£m average number amount pence of shares million -------------------------------- --------- --------- --------- Basic 69.0 656.6 10.51 Amortisation of intangible assets arising from acquisitions 12.6 1.92 Gain on business realisations and impairment of investment (4.6) (0.70) Profit on disposal of non-current assets (3.3) (0.50) Tax impact of items above 0.4 0.06 -------------------------------- --------- --------- --------- Underlying 74.1 656.6 11.29 -------------------------------- --------- --------- --------- Year ended 31 March 2006 -------------------------------- --------- --------- --------- Earnings Weighted Per share Â£m average number amount pence of shares million -------------------------------- --------- --------- --------- Basic 58.1 582.4 9.98 Effect of dilutive securities - options 12.4 (0.21) -------------------------------- --------- --------- --------- Diluted 58.1 594.8 9.77 -------------------------------- --------- --------- --------- Underlying earnings per share -------------------------------- --------- --------- --------- Earnings Â£m Weighted Per share average number amount pence of shares million -------------------------------- --------- --------- --------- Basic 58.1 582.4 9.98 IPO related items 4.2 0.72 Amortisation of intangible assets arising from acquisitions 12.3 2.11 Profit on disposal of non-curent assets (8.9) (1.53) Tax impact of items above (0.7) (0.12) Brought forward unprovided tax losses utilised in year (5.4) (0.93) -------------------------------- --------- --------- --------- Underlying 59.6 582.4 10.23 -------------------------------- --------- --------- --------- 5. Business combinations In the year to 31 March 2007 the Group made two principal acquisitions, both in North America, Ocean Systems Engineering Corp (OSEC) and Analex Corporation (Analex). If these acquisitions had been completed at 1 April 2006 Group revenue for the year ended 31 March 2007 would have been Â£1,228.1m and Group profit before tax would have been Â£92.3m. US acquisitions On 15 May 2006 the Group acquired the whole of the trade and assets of OSEC for cash consideration, before acquisition costs, of Â£28.2m ($53.7m). On 14 March 2007 the Group acquired the whole of the share capital of Analex for consideration, before acquisition costs, of Â£98.8m ($193.6m). Summary profit and loss accounts for the two acquisitions in the year, OSEC and Analex, prior to acquisition are shown below. These results are extracted from the audited financial statements for the relevant periods, which were prepared under US GAAP. The results have been converted into Sterling at the exchange rates ruling at that time and have not been adjusted to IFRS. OSEC ------------------------------- --------- --------- --------- all figures in Â£ million Period from Year from Period 1 January 2006 1 January 2005 1 January 2004 to to to 14 May 31 December 31 December 2006 2005 2004 ------------------------------- --------- --------- --------- Income statement Revenue 5.1 24.6 16.5 ------------------------------- --------- --------- --------- Operating income 0.5 2.3 1.9 ------------------------------- --------- --------- --------- Profit before taxation 0.5 2.3 1.9 Taxation expense (0.2) (0.9) (0.8) ------------------------------- --------- --------- --------- Profit after tax 0.3 1.4 1.1 ------------------------------- --------- --------- --------- Analex ------------------------------- --------- --------- --------- all figures in Â£ million Period from Year from Year from 1 January 2007 1 January 2006 1 January 2005 to to to 13 March 31 December 31 December 2007 2006 2005 ------------------------------- --------- --------- --------- Income statement Revenue 16.3 78.4 72.0 ------------------------------- --------- --------- --------- Operating income 1.1 5.4 4.6 ------------------------------- --------- --------- --------- Profit before taxation 0.6 3.0 2.6 Taxation expense (0.3) (1.4) (1.6) ------------------------------- --------- --------- --------- Profit after tax 0.3 1.6 1.0 ------------------------------- --------- --------- --------- Set out below are the allocations of purchase consideration, assets and liabilities of the North America acquisitions made in the period and the adjustments required to the book values of the assets and liabilities of the businesses acquired in order to present the net assets of these businesses at fair values and in accordance with Group accounting policies. In the case of Analex allocations and adjustments are provisional. --------------------- ------- ------- ------- ------- ------- ------- all figures in Book value OSEC Fair value at Book value Analex Fair value at Â£ million Fair value acquisition Fair Value acquisition adjustment adjustment --------------------- ------- ------- ------- ------- ------- ------- Intangible assets - 4.1 4.1 - 12.8 12.8 Property, plant and equipment 0.6 - 0.6 1.4 - 1.4 Trade and other receivables 6.4 - 6.4 20.3 - 20.3 Trade and other payables (4.1) - (4.1) (9.4) - (9.4) Cash and cash equivalents 0.1 - 0.1 2.8 - 2.8 Deferred taxation - - - (1.0) (5.1) (6.1) --------------------- ------- ------- ------- ------- ------- ------- Net assets acquired 3.0 4.1 7.1 14.1 7.7 21.8 Goodwill 21.6 77.4 --------------------- ------- ------- ------- ------- ------- ------- 28.7 99.2 --------------------- ------- ------- ------- ------- ------- ------- Consideration satisfied by: Cash 28.2 98.8 --------------------- ------- ------- ------- ------- ------- ------- Total consideration 28.2 98.8 Related costs of acquisition 0.5 0.4 --------------------- ------- ------- ------- ------- ------- ------- 28.7 99.2 --------------------- ------- ------- ------- ------- ------- ------- The OSEC fair value adjustment of Â£4.1m relates to the recognition of acquired intangible assets. From the date of acquisition to 31 March 2007 OSEC has contributed revenue of Â£25.0m and operating profit of Â£2.1m. The Analex fair value adjustment of Â£7.7m relates to the recognition of Â£12.8m of acquired intangible assets less the recognition of a deferred tax liability of Â£5.1m in relation to these intangible assets. From the date of acquisition to 31 March 2007 Analex has contributed revenue of Â£4.3m and an operating profit of Â£0.6m. Other acquisitions and disposals in year to 31 March 2007 On 3 May 2006 the Group purchased the remaining 19.9% minority interest in Aurix Limited for nil consideration resulting in goodwill on acquisition of Â£2.0m. On 28 March 2007 the Group acquired the remaining 10% minority interest share in Verhaert Design and Development NV for Â£0.6m (â‚¬0.95m), resulting in additional goodwill on acquisition of Â£0.6m. There was a net increase of Â£0.6m in goodwill in relation to the adjustment of deferred tax on the following acquisitions: Planning Systems, Inc. reduction of Â£0.3m ($0.5m), Apogen Technologies, Inc. an increase of Â£0.5m ($1.0m) and SimAuthor, Inc. an increase of Â£0.4m ($0.8m). These adjustments followed the finalisation of the estimated deferred tax made at the time of the acquisitions. On 28 February 2007 Aerospace Filtration Systems, Inc., was sold to Donaldson, Inc for Â£19.9m ($39.0m) resulting in a profit on disposal of Â£9.9m ($19.4m). This transaction resulted in the disposal of Â£7.1m ($14.0m) of goodwill. On 5 March 2007 QinetiQ Rail Limited was sold to Nomad Holdings Limited (Nomad) in exchange for an 8.6% shareholding in Nomad valued at Â£4.5m, resulting in a profit on disposal of Â£2.8m. There was no goodwill associated with this disposal. On 3 August 2006 a 12% stake in Aurix Limited was sold to a strategic licensing partner for cash consideration of Â£1.1m resulting in a profit on disposal of Â£0.7m. There was no change in goodwill associated with this disposal. Update in respect of acquisitions made in the year ended 31 March 2006 At the date of acquisition of Planning Systems Inc provision was made for additional consideration payable on the achievement of certain performance criteria in the 12 months ended 31 December 2005 of Â£0.9m and Â£0.8m for the performance criteria in the 12 months to 31 December 2006. The performance criteria for the 12 months to December 2005 was paid in full, however the criteria for the 12 months to 31 December 2006 were not met and consequently the accrual was released resulting in a reduction in goodwill of Â£0.8m in the year to 31 March 2007. In the year to 31 March 2007 additional goodwill of Â£1.0m ($1.9m) was recognised in relation to the acquisition of Apogen as additional contingent consideration was paid as specific post acquisition criteria were met. During the year the Group paid deferred consideration amounting to Â£4.8m, Â£1.4m and Â£0.6m in respect of the acquisitions of Westar, Verhaert and Graphics Research Corporation respectively. The previously estimated fair value of assets and liabilities on the acquisitions of Apogen Inc, Planning Systems Inc and SimAuthor Inc were finalised during the year. The goodwill on the SimAuthor acquisition was reduced by Â£0.7m ($1.3m) as the previously estimated fair value of intangibles was finalised following receipt of an external valuation report partially offset by a Â£0.4m ($0.7m) increase in deferred tax liabilities. The Group recognised Â£0.5m ($1.0m) of additional goodwill on the acquisition of Apogen on finalisation of deferred tax liabilities. Goodwill on the acquisition of Planning Systems Inc was reduced by Â£0.3m ($0.6m) on finalisation of deferred tax liabilities. 6. Restatement of prior year comparatives IFRS 3 Business Combinations requires the Group to finalise the fair value of assets and liabilities acquired from business combinations within one year of the acquisitions date except certain deferred tax balances. During the year the Group was required to adjust goodwill, intangible assets and deferred tax balances upon finalisation of the fair value of assets and liabilities on the acquisitions of Apogen Inc., Planning Systems Inc. and SimAuthor Inc. these balances have been restated in the prior year comparatives as follows: ------------------------ ------ ------- --------- all figures in Â£ million 2006 2006 2006 As reported Adjustment Restated ------------------------ ------ ------- --------- Goodwill 315.0 (0.1) 314.9 Intangible assets 56.4 0.7 57.1 Deferred tax asset 12.4 (0.6) 11.8 Other net liabilities not restated (20.9) - (20.9) ------------------------ ------ ------- --------- Net assets 362.9 - 362.9 ------------------------ ------ ------- --------- 7. Post balance sheet events On 16 April 2007 the Group acquired ITS Corporation (ITS) for an initial cash consideration of Â£40.8m ($80.0m). The agreement to purchase ITS includes an additional deferred payment of Â£5.1m ($10.0m) based on the achievement of certain short-term performance milestones. ITS had revenues of Â£39.5m ($77.5m) for the 12 months ended 31 December 2006, EBITDA of Â£3.3m ($6.4m), and reported operating profit of Â£3.1m ($6.0m), after charging Â£0.6m ($1.2m) of non-recurring costs related to acquisitions completed in late 2005. On 23 April 2007 the Group announced that it had agreed to purchase all the shares of Applied Perception Inc. (API) and Automatika Inc. (Automatika), both providers of robotics technologies, for up to Â£4.7m ($9.2m) each. The transactions will close upon receipt of appropriate US government regulatory approvals. The acquisition of each company will be settled for an initial cash consideration of Â£3.1m ($6.0m), with an additional deferred consideration of up to Â£1.6m ($3.2m) two years after closing. Due to the recent announcement of the above acquisitions it is not practicable to provide information about the assets and liabilities as at the date of acquisition. Glossary AFS - Aerospace Filtration Systems, Inc. AGM - Annual General Meeting Backlog - the expected future value of revenue from contractually-committed and funded customer orders (excluding Â£4.8bn value of remaining 21 years of LTPA contract) Bn - billion Book to - ratio of orders received in the year to revenue for the bill ratio year, adjusted to exclude revenue from the 25 year LTPA contract BPS - Basis points Carlyle - Former major investor and co-owner of QinetiQ. Carlyle sold its remaining share holding in QinetiQ on 14 February 2007. CATS - Combined Aerial Target Service CR - Corporate Responsibility D&T - QinetiQ's Defence & Technology Sector DARPA - US Defense Advanced Research Projects Agency dstl - Defence Science & Technology Laboratory DHS - US Department of Homeland Security DoD - US Department of Defence DTR - MOD's Defence Training Rationalisation programme EBITDA - earnings before interest, tax, depreciation, amortisation, gain on business divestments, unrealised impairment of investment and gain on disposal of non-current assets ESA - European Space Agency EU - European Union Free cash - net cash flow from operating activities less the net flow cash from the purchase and sale of intangible assets and the purchase and sale of plant, property and equipment GPS - Global Positioning System IAS - International Accounting Standard IFRS - International Financial Reporting Standard IP - Intellectual property IPO - Initial Public Offering KPI - Key Performance Indicator LCD - Liquid Crystal Display LSE - London Stock Exchange LTPA - Long Term Partnering Agreement - 25 year contract established in 2003 to manage the MOD's test and evaluation ranges m - million MOD - Ministry of Defence Non- - IPO costs, major restructuring costs, disposals of recurring property, plant and equipment, amortisation of items intangible assets arising from acquisitions and and impairment of goodwill and current assets (2005 only) acquisition amortisation OEM - Original Equipment Manufacturer Operating - the ratio of cash flow from operations, less cash cash outflows on the purchase of intangible assets conversion and property, plant and equipment and before additional pension contributions to operating profit excluding share of post-tax loss of equity accounted joint ventures and associates Organic - The level of year-on-year growth, expressed as a growth percentage, based on the businesses that were part of the Group at the start of the initial period. OSEC - Ocean Systems Engineering Corporation QNA - QinetiQ's North America Sector R&D - Research and development RFID - Radio frequency identification S&DU - QinetiQ's Security & Dual Use Sector SAIC - Science Applications International Corporation SETA - Systems Engineering and Technology Assistance SME - Small and medium sized enterprises UK GAAP - UK Generally Accepted Accounting Practices Underlying - the tax charge for the year excluding the tax impact of effective non-recurring items and acquisition amortisation tax rate expressed as a percentage of underlying profit before tax Underlying - the ratio of cash flow from operations (excluding cash operating spend on major restructuring items in 2006), cash less cash outflows on the purchase of intangible assets conversion and property, plant and equipment before additional pension contributions to underlying operating profit excluding share and of post-tax loss of equity accounted join ventures and associates Underlying - underlying operating profit expressed as a percentage operating of revenue margin Underlying - earnings before interest, tax, IPO related items (2006 operating only) gains on business divestments and impairment profit of investment (2007 only), profit on disposal on non-current realisations assets and amortisation of intangible assets arising on acquisitions Underlying - profit before tax excluding IPO related items (2006 profit only) gains on business divestments and impairment of before tax investment (2007 only), profit on disposal on non-current assets and amortisation of intangible assets arising from acquisitions VOIP - Voice over Internet Protocol This information is provided by RNS The company news service from the London Stock Exchange

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