Half Yearly Report

RNS Number : 0333D

QinetiQ Group plc

25 November 2009

 



For release at 0700 hours on 25 November 2009

QinetiQ Group plc

    Interim Results Announcement    

Six months ended 30 September 2009

Headlines

• Group revenue up 11% to £806.3m (H1 FY09: £727.4m), organic revenue broadly flat at constant currency;

• Operating profit margin* improved to 7.8% (H1 FY09: 7.4%); 

• Strong operating cash conversion* of 148% (H1 FY09: 129%);

• Net debt reduced to £452.3m (31 March 2009: £537.9m, 30 Sept 2008: £414.3m) due to continued cash generation and weakening of US dollar since 31 March 2009;

• EPS* increased 2% to 5.7p (H1 FY09: 5.6p);

• Dividend increased 5% to 1.58p (H1 FY09: 1.50p);

• Mark Elliott appointed non-executive director and Chairman designate on 1 June 2009; and

• Leo Quinn appointed Chief Executive Officer on 16 November 2009

	H1 FY10	H1 FY09	Reported change %	Organic change at constant currency
Business Performance
Revenue	£806.3m	£727.4m	11%	(1)%
Operating profit*	£62.5m	£53.5m	17%
Operating margin*	7.8%	7.4%
Profit before tax*	£45.1m	£45.9m	(2)%
Cash conversion ratio*	148%	129%
Net debt	£452.3m	£414.3m
Earnings per share*	5.7p	5.6p	2%
Dividend per share	1.58p	1.50p	5%
Statutory Results
Operating profit	£9.6m	£44.2m	(78)%
Profit before Tax	£(1.3)m	£36.6m	(104)%
Basic earnings per share	0.1p	4.3p	(98)%

*Underlying financial measures are presented as the Board believes these provide a better representation of the Group's long-term performance trends. Definitions of underlying measures of performance can be found in the glossary on page 24. Specific non-recurring items include amounts relating to gain on business divestments, unrealised impairments of investments and the EMEA reorganisation costs.
Prior year comparatives have been restated to show the finance elements of the IAS 19 pension cost in the finance income and expense lines. There is no impact on reported profit before tax from this restatement.

Trading Environment and Outlook

The Board continues to believe that QinetiQ is well positioned to take advantage of the longer term trends in the defence and security markets. However currently both its main geographic markets are experiencing short term uncertainties in specific areas. In the UK, political and economic factors are delaying the letting of contracts; in the US, the finalisation of policy for Afghanistan continues to impact Government decision-making.

Historically the EMEA business experiences a seasonally stronger second half, including the letting of a large number of shorter term contracts. At this point in time and in the current environment the business therefore has more limited visibility on the amount and timing of these orders.

In the US the services businesses continue to grow, but as previously stated, Technology Solutions is experiencing delays on certain orders in its pipeline for survivability products and Unmanned Ground Vehicles (UGVs).

Given the risks around closing pending orders in the US, and achieving the normal pattern of contract wins in UK, the Board considers that it is unlikely to achieve its previous expectations.

Other Information

There will be a webcast of the presentation of the preliminary results to analysts at 09:30 am on 25 November 2009 at 1st Floor, MWB, 55 Old Broad Street, London, EC2M 1RX. If you wish to watch this broadcast you will need to register in advance at www.qinetiq.com/home/investor_centre.html. 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: 

Local London:     0208 817 9301

UK freephone:     0800 634 5205

International:    [phone]

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. 

For further information please contact: 

Media relations:      David Bishop, QinetiQ                                                 [phone] 

                                Chris Barrie/Andrew Hey, Citigate Dewe Rogerson    [phone]

Investor relations:    Lucinda Davies, QinetiQ                                             [phone]

Description

QinetiQ is a leading international provider of technology-based services and solutions to the defence, security and related markets. The company develops and delivers services and solutions for government organisations, predominantly in the UK and US, including defence departments, intelligence services and security agencies. In addition, QinetiQ provides technology insertion and consultancy services to commercial and industrial customers around the world.

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 Overview

Group revenue increased 11% to £806.3m (H1 FY09: £727.4m), including a £69m effect from the strengthening US dollar exchange rate compared to the prior period.

Operating profit* increased 17% to £62.5m (H1 FY09: £53.5m) resulting in an improvement in the operating margin* to 7.8% (H1 FY09: 7.4%). This was driven by a margin increase in EMEA to 7.6% (H1 FY09: 6.8%) resulting from continued cost control. The Group also benefited from the removal of the equity accounted results of Cody Gate Ventures (H1 FY09: £3.2m loss) following part disposal last year. The improvement in the operating margin* was partly offset by a reduction in the QNA H1 margin* to 8.8% (H1 FY09: 10.7%) due to the predicted slowdown in product orders in QNA. Profit before tax* was £45.1m (H1 FY09: £45.9m).

The Group achieved a strong operating cash conversion of 148% (H1 FY09: 129%) due to a continued focus on cash generation and the seasonal pattern of revenues and receipts from UK MOD. Cash flow from operations increased to £105.7m (H1 FY09: £89.2m), before the costs of the EMEA reorganisation. 

Net debt, as at 30 September 2009, was £452.3m (31 March 2009: £537.9m, 30 September 2008 £414.3m) as a result of the strong cash flow and the translation impact of the US dollar exchange rate, as the majority of the Group's debt is drawn in US dollars. 

Orders decreased to £675.9m (H1 FY09: £777.9m) generating a book to bill ratio of 0.9:1 (excluding the LTPA). The prior period benefited from the 15-year £150m MSCA contract win in EMEA. Funded backlog remained stable at £1,135m at 30 September 2009 (H1 FY09: £1,154m), excluding £4.4bn in respect of the LTPA contract and additional unfunded orders within QNA of c$1.5bn.

Earnings per share* were 5.7p, 2% higher than the prior year (H1 FY09: 5.6p). The Group announces an interim dividend of 1.58p (H1 FY09: 1.50p), an increase of 5% which will be paid on 19 February 2010 to shareholders on the register at 22 January 2010. 

Board Changes

Mark Elliott and David Langstaff joined the Board as non-executive directors during the period. Mr Elliott will assume the role of Chairman when Sir John Chisholm retires from the QinetiQ Board at the AGM in 2010. Dr Peter Fellner stepped down from the Board on 4 August 2009. The Board would like to take the opportunity to thank Peter for his considerable contribution to the Group both through his position as Chairman of the Remuneration Committee and his valued input as part of the wider Board.

Graham Love, Chief Executive Officer, is standing down from the company with effect from 30 November 2009. Leo Quinn joined the Board as Chief Executive Officer with effect from 16 November 2009.  The Board would like to thank Graham for his key role in QinetiQ's success to date, particularly its expansion into North America and wishes him every success for the future.

Sir John Chisholm

Chairman

25 November 2009

*Underlying financial measures are presented as the Board believes these provide a better representation of the Group's long-term performance trends. Definitions of underlying measures of performance can be found in the glossary on page 24. 

Prior year comparatives have been restated to show the finance elements of the IAS19 pension cost in the finance income and expense lines. There is no impact on reported profit before tax from this restatement.

  Operations overview 

QinetiQ North America

	6 months to  30 Sept 2009	6 months to  30 Sept 2008
	£m	£m
Revenue
Mission Solutions	181.4	116.7
Systems Engineering	138.4	104.0
Technology Solutions QNA	83.9	105.9
Total	403.7	326.6
Operating profit*	35.6	34.9
Operating profit margin*	8.8%	10.7%
Funded Orders
Mission Solutions	168.6	105.4
Systems Engineering	125.5	92.1
Technology Solutions QNA	93.7	98.0
Total	387.8	295.5
Book to bill ratio	1:1	0.9:1
Backlog	332.3	331.7

Reported revenue in the period increased 24% to £403.7m (H1 FY09: £326.6m), a 3% organic decline at constant currency. On an organic basis, the services businesses (Mission Solutions and Systems Engineering), which account for c80% of QNA's revenue, grew by 12%. This growth was offset by the anticipated slowdown in military product sales as the new US Administration completes many of its key Department of Defense (DoD) leadership appointments and finalises its strategy for the US's continued involvement in Afghanistan. Operating profit* increased to £35.6m (H1 FY09: £34.9m) delivering a margin* of 8.8% (H1 FY09: 10.7%). The decline in operating margin is principally reflective of the composition of QNA's revenue, which included a smaller proportion of its higher margin product sales. 

The Mission Solutions business grew organically by 13% in the period and continued to broaden its customer base with contract wins from a number of new customers, including the US Department of State, the US Federal Emergency Management Agency and the US Secret Service. The five-year $100m Janus II contract was awarded in June 2009. Under this contract, QNA is to replace and upgrade the Department of State's telecommunications systems at American embassies and other locations worldwide. During the period, the business also received a prestigious award from US NASA when the company was named as NASA's Large Business Prime Contractor of 2009 for services to the NASA Launch Service Program. 

The Systems Engineering business grew organically by 10% with increased demand on a large number of contracts from customers across the US Army, Navy, Marines and Special Forces. Contract wins included support services to the US Marine Corps Systems Command Acquisition Center worth up to $17m, and a five-year contract, worth up to $28m, to provide information technology services to the US DoD's National Defense University. In addition, the Systems Engineering business continues to deliver successfully Iraqi flight training services as part of its multi-year contract worth in excess of $100m. The fourth option year of this contract was recently exercised by the customer and awarded to Systems Engineering.

Technology Solutions QNA experienced the predicted slowdown in product sales during the period, principally as a result of the new US Administration completing its key DoD appointments and finalising its strategy for the continued US involvement in the Afghanistan conflict. As a result, the business reported revenue of £83.9m for the first six months of the year, which was down against a very strong comparable period of the prior year. As appointments were gradually made, QNA saw its order flows increase during the period, and expects to see a further increase in order flow once the Afghanistan strategy is finalised. Technology Solutions saw an increase in the sale of its robot products internationally during the period, cementing QinetiQ as the world's leading provider of military robots. In August 2009, the Australian Department of Defence placed a AUD$23m contract for TALON® robots and replacement parts to support Australian Defence Force deployed on operations, and the UK Ministry of Defence procured a number of the lightweight Dragon Runner™ Small Unmanned Ground Vehicles for deployment in theatre. Recently JD Crouch joined Technology Solutions QNA as its President. JD Crouch was formerly Deputy National Security Advisor and has held a number of senior posts in the US Government.

During the period, QNA maintained its level of contract backlog at c$2.0bn ($0.5bn in funded backlog and $1.5bn in unfunded backlog). The unfunded backlog is principally comprised of single-award contracts that are either incrementally funded or include unfunded contract option years. The unfunded backlog does not include any estimate for work to be awarded under the various high ceiling, multi-award contract vehicles that QNA has in place. The Group does not recognise such awards into the reported backlog until funding is confirmed, but they do provide further visibility of future revenues. The majority of such awards are expected to convert into funded orders over time. 

In July 2009 the Group acquired Cyveillance, Inc., for an initial cash consideration of £26.0m ($42.1m). A potential further payment to a maximum of £24.7m ($40m) will be payable depending on the company's performance during the two-year period ending 31 December 2010. Cyveillance develops and operates online monitoring technology to identify and track data on the internet providing proactive preventative solutions for customers in the cyber security market.

EMEA 

	6 months to  30 Sept 2009	6 months to  30 Sept 2008
	£m	£m
Revenue
Managed Services	193.6	180.0
Consulting	71.3	68.6
Technology Solutions EMEA	135.7	148.7
Total	400.6	397.3
Operating profit *(2)	30.6	27.2
Operating margin* (2)	7.6%	6.8%
Orders
Managed Services	104.3	86.7
Consulting	63.8	243.8
Technology Solutions EMEA	118.2	149.1
Total	286.3	479.6
Book to bill ratio (1)	0.9:1	1.6:1
Backlog (1)	801.6	814.5

(1)     Excludes remaining £4.4bn (30 September 2008: £4.6bn, 31 March 2009: £4.5bn) in respect of LTPA contract.

(2)     Restated H1FY09 to reclassify pension finance credit £1.6m into the finance cost line of the income statement

Revenue for the period was £400.6m (H1 FY09: £397.3m) representing organic growth of 1%. The EMEA results reflect the historical seasonality in the UK business with a greater proportion of revenues normally expected in the second half of the year. MOD research revenues, which now represent 13% of total EMEA revenue (6% of the Group), declined 21% in the period. The remainder of the business grew 5% despite the wider UK budget pressures and delays in contract awards. Operating profit* increased to £30.6m (H1 FY09: £27.2m) reflecting a continued focus on controlling costs and improving the efficiency of the business. 

Managed Services revenue for the period was £193.6m (H1 FY09: £180.0m), representing an 8% increase over the prior period, a growth rate which was enhanced by some pass through revenues on the LTPA contract. At the beginning of the period, the contract commenced to provide a managed Unmanned Aerial Vehicles (UAV) service for an overseas government. Just after the period end, the business won a £38m, three year contract to support the Typhoon programme. During the period Mike Howarth joined Managed Services from Serco as Managing Director.

Package 1 of the UK MOD Defence Training Rationalisation Programme (DTR) progresses. During the period £4.5m of bid costs were capitalised. The total amount of bid costs capitalised as at 30 September 2009 was £24.1m (H1 FY09: £16.1m). In August, Metrix was awarded a £31m Early Training Transformation (ETT) contract by the MOD to introduce improvements to elements of the Armed Forces' specialist training programmes. This contract involves QinetiQ and Raytheon, both members of the Metrix consortium. In September, the Vale of Glamorgan Council approved planning permission for the Defence Technical College (DTC) at MOD St. Athan. The next customer review milestone is in December and financial close is expected towards the end of 2010.

Consulting reported revenues grew by 4% on the prior year to £71.3m (H1 FY09: £68.6m), which represents 1% organic growth. Commerce Decisions, acquired in October 2008, has now been integrated and branded as a QinetiQ consulting offering. This business is performing well and enhances QinetiQ's existing consulting capabilities within the tender evaluation market place. Within Consulting, QinetiQ Australia is increasingly integrated into the wider group and is beginning to target larger opportunities, leveraging the experience of the wider Group.

Technology Solutions EMEA delivered £135.7m (H1 FY09: £148.7m) of revenue during the period, a reduction primarily caused by the expected decline in MOD research revenues of 21% to £52m. Technology Solutions EMEA has worked closely with QNA in enabling transfer of technologies across the Atlantic, as evidenced by the sale of Dragon Runner™ UGVs to the UK MOD and the initial funding of Zephyr UAV trials in North America. In August, Technology Solutions was awarded a £23m contract to supply a solar-electric propulsion system for European Space Agency's (ESA's) BepiColombo spacecraft mission to the planet Mercury, due to launch in 2014. 

The EMEA restructuring programme announced in May is on schedule to complete this financial year and is expected to generate £14m of annualised savings. The cost of this programme is £40m, all of which has been expensed to the income statement in the period as a non-recurring item. 

During the period the EMEA business disposed of a number of non-core assets, including the Underwater Systems business in September (yielding a cash consideration before costs of £23.5m) and ASAP Calibration Services Ltd in July for a nominal consideration.

Ventures 

	6 months to  30 Sept 2009	6 months to  30 Sept 2008
	£m	£m
Revenue	2.0	3.5
Operating loss	(3.7)	(8.6)
Orders	1.8	2.8
Backlog	1.1	7.9

Following the part disposal of Cody Gate Ventures I LP (CGV) in March 2009, QinetiQ now holds a passive investment and therefore no longer equity accounts for its share of CGV results in the income statement (H1 FY09: loss £3.2m). The Ventures business is now characterised by three businesses: Tarsier (Foreign Object Detection), GPS Enabled Telematics (a high sensitivity business which delivers tracking solutions in difficult operational environments) and Optasense (an acoustic sensing detection solution). 

Financial Items

Tax

The Group's effective tax rate* was 18.2% (H1 FY09: 20.5%). The reduction on prior period is due to the combination of the cessation of equity accounted losses of Cody Gate Ventures and certain favourable outcomes and settlements to date. The Group continues to benefit from the availability of research and development relief and in future years, the Group will benefit from enacted tax law changes impacting US State taxes. Overall, the Group effective tax rate is not anticipated to rise significantly in the medium term, subject to any future tax legislation changes.

Earnings per share 

Earnings per share* increased by 2% to 5.7p compared to 5.6p for the six months to 30 September 2008. Basic earnings per share reduced to 0.1p (H1 FY09: 4.3p) over the same period. 

Dividend

The Company will pay an interim dividend of 1.58 pence per share (H1 FY09: 1.50 pence per share), an increase of 5%, to shareholders on 19 February 2010. The record date will be 22 January 2010.  

Cash flow, net debt and liquidity

The Group's underlying operating cash conversion post capital expenditure was 148%, well above the Group's long term target of 80% as a result of a keen focus on cash generation and the seasonal pattern of revenues and receipts from UK MOD. 

At 30 September 2009, net debt was £452.3m compared to £537.9m at 31 March 2009 (30 September 2008: £414.3m). As the Group's borrowings are principally drawn in US dollars, the impact of the movement in the period of £/US$ exchange rate reduced the reported net debt by £52m since 31 March 2009. The Group's borrowings remained comfortably within its banking covenants.

The total committed facilities available to the Group, at 30 September 2009, were £850m. The earliest maturity date of the Group's committed facilities is August 2012. 

Foreign exchange

	6 months to  30 Sept 2009	6 months to  30 Sept 2008	12 months to  31 March 2009
£/US$ - average	1.59	1.93	1.68
£/US$ - closing	1.60	1.78	1.44
£/US$ - opening	1.44	1.99	1.99

Pensions 

The net pension liability under IAS 19, after deferred tax, was £113.1m as at 30 September 2009 (31 March 2009: £75.8m, 30 September 2008: £52.2m).The increase in the net pension liability is primarily driven by reductions in the corporate bond rate which reduces the extent by which the pension liability is discounted. 

The key assumptions used in the IAS 19 valuation of the scheme are:

Assumption	30 Sept 2009	30 Sept 2008	31 March 2009
Discount rate	5.5%	6.8%	6.5%
Inflation	3.1%	3.5%	3.1%
Salary increase	4.1%	5.0%	4.1%
Life expectancy - male (currently aged 40)	89	88	89
Life expectancy - female (currently aged 40)	90	91	90

Each assumption is selected by the Group in consultation with the Company actuary and taking account of industry practice amongst comparator listed companies. The sensitivity of each of the key assumptions is shown in the table below.

Assumption	Change in assumption	Indicative effect on scheme liabilities  (before deferred tax)
Discount rate	Increase / decrease by 0.1%	Decrease/increase by £22m
Inflation and salary increase	Increase / decrease by 0.1%	Increase/decrease by £22m
Life expectancy	Increase by 1 year	Increase by £23m

The market value of the assets at 30 September 2009 was £795.8m (30 September 2008: £714.7m) and the present value of scheme liabilities was £952.9m (30 September 2008: £787.1m).

During the period, the Group has elected to align the treatment of the Group's IAS 19 pension charge with that of its peer listed companies by showing the finance element of the pension charge in the finance costs line and the service cost remaining in operating expenses, in prior reported periods these elements had been combined and reported in operating costs. IAS 19 Employee Benefits permits both treatments. The Group's comparative figures have been restated to reflect this change although there is no impact on the Group's profit before tax or retained profit. This pension liability sits within the EMEA business and therefore the operating segment comparatives have also been restated. 

 Condensed consolidated income statement

		6 months ended 30 September 2009  (unaudited)			6 months ended 30 September 2008 (unaudited)
all figures in £ million	Note	Before acquisition amortisation and specific non-recurring items	Acquisition amortisation and specific non-recurring items*	Total	Before  acquisition amortisation and specific non-recurring items (restated) **	Acquisition amortisation and specific non-recurring items*	Total (restated) **
Revenue		806.3	-	806.3	727.4	-	727.4
Other operating costs excluding depreciation and amortisation		(725.5)	(40.0)	(765.5)	(655.4)	-	(655.4)
Share of post-tax profit/(loss) of equity accounted joint ventures and associates		0.1	-	0.1	(3.2)	-	(3.2)
Other income		3.2	-	3.2	4.6	-	4.6
EBITDA (earnings before interest, tax, depreciation and amortisation)		84.1	(40.0)	44.1	73.4	-	73.4
Depreciation of property, plant and equipment		(16.5)	-	(16.5)	(15.6)	-	(15.6)
Amortisation of intangible assets		(5.1)	(12.9)	(18.0)	(4.3)	(9.3)	(13.6)
Group operating profit		62.5	(52.9)	9.6	53.5	(9.3)	44.2
Gain on business divestments and unrealised impairment of investments	3	-	6.5	6.5	-	-	-
Finance income	4	23.8	-	23.8	29.1	-	29.1
Finance expense	4	(41.2)	-	(41.2)	(36.7)	-	(36.7)
Profit before tax		45.1	(46.4)	(1.3)	45.9	(9.3)	36.6
Taxation	5	(8.2)	10.3	2.1	(9.4)	1.0	(8.4)
Profit for the year attributable to equity shareholders		36.9	(36.1)	0.8	36.5	(8.3)	28.2
Earnings per share
Basic	7			0.1p			4.3p
Diluted	7			0.1p			4.3p

*     Specific non-recurring items include amounts relating to gain on business divestments, unrealised impairments of investments and the EMEA reorganisation costs.

**    Restatement relates to the transfer of the finance element of the IAS19 pension cost to the finance income and expense lines. These were previously reported in other operating costs, see note 1 for further details. 

  Condensed consolidated statement of comprehensive income

all figures in £ million	6 months ended 30 September 2009 (unaudited)	6 months ended 30 September 2008 (unaudited)
Profit for the period	0.8	28.2
Other comprehensive income:
Currency translation differences	(36.3)	20.8
Increase/(decrease) in fair value of hedging derivatives	18.8	1.0
Movement in deferred tax on hedging derivatives	(5.3)	(0.3)
Fair value gains on available for sale investments	-	0.9
Impairment of available for sale investments	-	(0.5)
Revaluation of previously impaired investment	1.8	-
Actuarial loss recognised in defined benefit pension schemes	(59.6)	(55.0)
Increase in deferred tax asset due to actuarial movement in pension deficit	16.7	22.7
Other comprehensive income for the year, net of tax	(63.9)	(10.4)
Total comprehensive income for the period	(63.1)	17.8

  Condensed consolidated balance sheet 

all figures in £ million	Note	30 September 2009 (unaudited)	30 September 2008 (unaudited)	31 March  2009 (audited)
Non-current assets
Goodwill		593.9	488.9	638.5
Intangible assets		159.9	105.8	164.2
Property, plant and equipment		318.8	332.1	332.4
Financial assets		12.3	14.0	11.6
Equity accounted investments		0.7	9.2	0.7
Other investments		13.8	11.7	15.7
		1,099.4	961.7	1,163.1
Current assets
Inventories		64.6	66.6	68.3
Financial assets		3.0	8.5	3.1
Trade and other receivables		425.6	463.3	532.9
Current tax		1.5	-	8.6
Investments		2.4	0.8	0.6
Non-current assets classified as held for sale		6.4	1.8	1.8
Cash and cash equivalents		63.0	52.6	262.1
		566.5	593.6	877.4
Total assets		1,665.9	1,555.3	2,040.5
Current liabilities
Trade and other payables		(372.3)	(391.5)	(447.2)
Current tax		-	(9.9)	-
Provisions		(33.3)	(3.3)	(4.3)
Financial liabilities		(7.3)	(5.1)	(22.1)
		(412.9)	(409.8)	(473.6)
Non-current liabilities
Retirement benefit obligation	13	(157.1)	(72.4)	(105.2)
Deferred tax liability		-	(7.2)	(8.9)
Provisions		(6.4)	(12.8)	(8.8)
Financial liabilities		(523.3)	(484.3)	(792.6)
Other payables		(45.1)	(34.8)	(48.7)
		(731.9)	(611.5)	(964.2)
Total liabilities		(1,144.8)	(1,021.3)	(1,437.8)
Net assets		521.1	534.0	602.7
Capital and reserves
Ordinary shares		6.6	6.6	6.6
Capital redemption reserve		39.9	39.9	39.9
Share premium account		147.6	147.6	147.6
Hedging and translation reserve		17.0	0.1	39.8
Retained earnings		309.9	339.7	368.7
Capital and reserves attributable to shareholders of the parent company		521.0	533.9	602.6
Minority interest		0.1	0.1	0.1
Total shareholders' funds		521.1	534.0	602.7

   Condensed consolidated cash flow statement 

all figures in £ million	Note	6 months ended 30 September 2009 (unaudited)	6 months ended 30 September 2008 (unaudited)	Year ended 31 March 2009 (audited)
Net cash inflow from operations before EMEA reorganisation costs	9	105.7	89.2	202.2
Net cash outflow relating to EMEA reorganisation		(13.7)	(27.0)	(27.0)
Cash inflow from operations		92.0	62.2	175.2
Tax received/(paid)		4.5	(4.3)	(2.5)
Interest received		0.4	0.6	1.0
Interest paid		(21.1)	(9.6)	(21.3)
Net cash inflow from operating activities		75.8	48.9	152.4
Purchases of intangible assets		(1.1)	(2.9)	(3.3)
Purchases of property, plant and equipment		(12.2)	(13.3)	(29.1)
Costs from sale of property, plant and equipment		(0.2)	-	(1.2)
Equity accounted investments and other investment funding		(1.0)	(2.7)	(5.8)
Purchase of subsidiary undertakings		(33.6)	(6.2)	(92.9)
Net cash acquired with subsidiary undertakings		0.8	-	3.7
Proceeds from sale of equity accounted investment		-	-	13.7
Proceeds from sale of interests in subsidiary undertakings		22.7	3.0	7.2
Net cash outflow from investing activities		(24.6)	(22.1)	(107.7)
Purchase of own shares		(0.4)	(0.4)	(0.8)
Proceeds from bank borrowings		-	25.2	13.3
Proceeds from US Private Placement		-	-	210.4
Cash outflow from repayment of loans		(213.5)	-	-
Cash outflow from repayment of loan notes		-	(0.5)	(0.5)
Payment of deferred finance costs		-	-	(1.5)
Settlement of forward contracts designated as net investment hedges		(14.3)	-	-
Capital element of finance lease rental payments		(1.4)	(1.4)	(2.8)
Capital element of finance lease rental receipts		1.5	1.5	3.0
Dividends paid to shareholders		(21.3)	(19.1)	(28.9)
Net cash inflow from financing activities		(249.4)	5.3	192.2
(Decrease)/increase in cash and cash equivalents		(198.2)	32.1	236.9
Effect of foreign exchange changes on cash and cash equivalents		(0.9)	1.0	5.7
Cash and cash equivalents at beginning of period		262.1	19.5	19.5
Cash and cash equivalents at end of period		63.0	52.6	262.1

Reconciliation of movement in net debt 

all figures in £ million	Note	6 months ended 30 September 2009 (unaudited)	6 months ended 30 September 2008 (unaudited)	Year ended 31 March 2009 (audited)
(Decrease)/increase in cash and cash equivalents		(198.2)	32.1	236.9
Cash flows from repayment/(drawdown) of loans, private placement and other financial instruments		227.7	(24.8)	(226.1)
Change in net debt resulting from cash flows		29.5	7.3	10.8
Other non cash movements including foreign exchange		56.1	(41.7)	(168.8)
Movement in net debt in the period		85.6	(34.4)	(158.0)
Net debt at beginning of period	10	(537.9)	(379.9)	(379.9)
Net debt at end of the period	10	(452.3)	(414.3)	(537.9)

Condensed consolidated statement of changes in equity 

all figures in £ million	Issued share capital	Capital redemption reserve	Share premium	Hedge reserve	Translation reserve	Retained earnings	Total	Minority interest		Total equity
At 1 April 2009	6.6	39.9	147.6	(16.7)	56.5	368.7	602.6		0.1	602.7
Effective portion of change in fair value of net investment hedges	-	-	-	-	6.7	-	6.7		-	6.7
Foreign currency translation for foreign operations	-	-	-	-	(43.0)	-	(43.0)		-	(43.0)
Profit for the period	-	-	-	-	-	0.8	0.8		-	0.8
Dividends paid	-	-	-	-	-	(21.3)	(21.3)		-	(21.3)
Purchase of own shares	-	-	-	-	-	(0.4)	(0.4)		-	(0.4)
Share-based payments	-	-	-	-	-	3.2	3.2		-	3.2
Revalue of previously impaired available for sale investments	-	-	-	-	-	1.8	1.8		-	1.8
Increase in fair value of hedging derivatives	-	-	-	18.8	-	-	18.8		-	18.8
Deferred tax on hedging derivatives	-	-	-	(5.3)	-	-	(5.3)		-	(5.3)
Actuarial loss recognised in the pension scheme	-	-	-	-	-	(59.6)	(59.6)		-	(59.6)
Deferred tax on pension	-	-	-	-	-	16.7	16.7		-	16.7
At 30 September 2009	6.6	39.9	147.6	(3.2)	20.2	309.9	521.0		0.1	521.1
At 1 April 2008	6.6	39.9	147.6	(3.8)	(17.5)	360.1	532.9		0.1	533.0
Effective portion of change in fair value of net investment hedges	-	-	-	-	(29.4)	-	(29.4)		-	(29.4)
Foreign currency translation for foreign operations	-	-	-	-	50.2	-	50.2		-	50.2
Profit for the period	-	-	-	-	-	28.2	28.2		-	28.2
Dividends paid	-	-	-	-	-	(19.1)	(19.1)		-	(19.1)
Purchase of own shares	-	-	-	-	-	(0.4)	(0.4)		-	(0.4)
Share-based payments	-	-	-	-	-	2.8	2.8		-	2.8
Deferred tax on share-based payments	-	-	-	-	-	(0.1)	(0.1)		-	(0.1)
Impairment of available for sale investments	-	-	-	-	-	(0.5)	(0.5)		-	(0.5)
Increase in fair value of available for sale assets	-	-	-	-	-	0.9	0.9		-	0.9
Increase in fair value of hedging derivatives	-	-	-	1.0	-	-	1.0		-	1.0
Deferred tax on hedging derivatives	-	-	-	(0.3)	-	-	(0.3)		-	(0.3)
Actuarial loss recognised in the pension schemes	-	-	-	-	-	(55.0)	(55.0)		-	(55.0)
Deferred tax on pension	-	-	-	-	-	22.7	22.7		-	22.7
At 30 September 2008	6.6	39.9	147.6	(3.1)	3.3	339.6	533.9		0.1	534.0

Notes to the condensed interim financial statements

1. Significant accounting policies

Basis of preparation

QinetiQ Group plc is a company domiciled in the United Kingdom. The condensed consolidated interim financial statements of the Group for the six months ended 30 September 2009 comprise the Group and its subsidiaries (together referred to as the "Group") and were approved by the Board of Directors on 25 November 2009.

These condensed Group interim financial statements have been prepared in accordance with, IAS 34 Interim Financial Reporting as adopted by the EU, and the requirements of the Disclosure and Transparency Rules (DTR) of the Financial Services Authority. They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's financial statements for the year ended 31 March 2009. These condensed interim financial statements do not comprise statutory accounts within the meaning of Section 498 (2) or (3) of the Companies Act 2006, and should be read in conjunction with the Group's financial statements for the year ended 31 March 2009. 

The Group separately presents acquisition amortisation and specific non-recurring items in the income statement which, in the judgement of the Directors, need to be disclosed separately by virtue of their size and incidence in order for the reader to obtain a proper understanding of the financial information. Specific non-recurring items include amounts relating to gains and losses on business divestments, unrealised impairments of investments and EMEA reorganisation costs.

Comparative data and restatement

The comparative figures for the income statement for the 6 months to 30 September 2008 have been restated to show the finance elements of the IAS19 pension cost in the finance income and finance expenses lines. These were previously reported within other operating costs. The financial effect of this is to reduce Group operating income by £1.6m in the 6 months to 30 September 2008, with a corresponding change to the finance income and expense line. There is no effect on the Group's reported profit before tax for these periods. 

The comparative figures for the year ended 31 March 2009 do not contain all of the information required for full annual financial statements. The Group's full annual financial statements for the year ended 31 March 2009 have been reported on by the Group's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (ii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The Group's financial statements for the year ended 31 March 2009 are available upon request from the Company's registered office at 85 Buckingham Gate, London, SW1E 6PD.

Changes in accounting policies

Except as described below, the accounting policies adopted in the preparation of these condensed consolidated financial statements are consistent with the policies applied by the Group in its consolidated financial statements for the year ended 31 March 2009. 

The following accounting standard became effective during the current period:

- IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). This standard replaces IAS 14 Segmental Reporting and requires an entity to present segment information on the same basis as used for internal management reporting as provided to the chief operating decision maker. 

The following revisions to existing standards are effective for the Group for the half year ended 30 September 2009:

- IAS 1 (revised), Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2009). The interim financial statements have been prepared in accordance with the revised standard and accordingly the Group has elected to present two performance statements: a consolidated income statement and a consolidated statement of comprehensive income. This standard is concerned with disclosure only and has no impact on the reported results of financial position of the Group;

- IAS 23 (revised), Borrowing Costs (effective for annual periods beginning on or after 1 January 2009). The amendment to IAS 23 requires borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale to be capitalised as part of the cost of such assets. This has not had a significant impact on the Group's financial statements for the six months ended 30 September 2009. 

The following amendments to existing standards and new interpretations became effective during the current period, but have had no significant impact on the Group's financial statements:

- Amendments to IFRS 1, First time adoption of IFRS and IAS 27, Consolidation and separate financial statements: Cost of an investment in a subsidiary, jointly controlled entity or associate (effective for annual periods beginning on or after 1 January 2009)

- Amendments to IFRS 2, Share-based payment, vesting conditions and cancellations (effective for annual periods beginning on or after 1 January 2009)

- Amendments to IFRS 7, Financial instruments: Disclosures and IAS 39, Financial Instruments: Recognition and Measurement - reclassification of financial assets (effective for annual periods beginning on or after 1 July 2008) 

  Notes to the condensed interim financial statements (continued)

1. Significant accounting policies (continued)

- Amendments to IAS 32, Financial Instruments and related amendments to IAS 1, Presentation of Financial Statements - puttable financial instrument and obligations arising on liquidation (effective for annual periods beginning on or after 1 January 2009)

- Improvements to IFRSs 2008 (effective from various period beginning dates the first being on or after 1 January 2009) 

- IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008)

- IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009)

The following amendments to existing standards are also effective for the half year ended 30 September 2009 but have not yet received EU endorsement. Therefore, they have not been adopted in preparing these interim financial statements. 

- Amendments to IFRS 7 (amendment), Financial instruments: Disclosures - improving Disclosures about Financial Instruments (effective for annual periods beginning on or after 1 January 2009). Once endorsed and adopted this amendment is expected to result in some changes to the disclosures to be made in the financial statements to 31 March 2010. 

- Amendments to IFRIC 9, Reassessment of embedded derivatives and IAS 39, Financial Instruments: Recognition and Measurement - embedded derivatives (effective for annual periods ending on or after 30 June 2009). 

- IFRIC 18, Transfer of assets from customers (effective for the transfer of assets on or after 1 July 2009)

The following revisions, amendments and interpretations to existing standards will be effective for the Group for the year ended 31 March 2011. They have not been early adopted:

- IFRS 3 (revised), Business Combinations and IAS 27, Consolidation and separate financial statements (effective for annual periods beginning on or after 1 July 2009)

- IFRS 1 (revised), First- time Adoption of IFRS (effective for annual periods beginning on or after 1 July 2009, subject to EU endorsement)

- Amendments to IFRS 1, First- time Adoption of IFRS - additional exemptions for first time adopters (effective for annual periods beginning on or after 1 January 2010, subject to EU endorsement)

- Amendments to IFRS 2, Share based payment - group cash-settled share-based payment transactions (effective for annual periods beginning on or after 1 January 2010, subject to EU endorsement)

- Amendment to IAS 32, Financial Instruments: Presentation- Classification of rights issues- (effective for annual periods beginning on or after 1 February 2010)

- Amendment to IAS 39, Financial Instruments: Recognition and Measurement - eligible hedged items (effective for annual periods beginning on or after 1 July 2009)

- Improvements to IFRSs 2008-2009 (effective from various period beginning dates the first being on or after 1 January 2009, subject to EU endorsement)

- IFRIC 16, Hedges of a Net investment in a Foreign operation (effective for annual periods beginning on or after 1 October 2009)

- IFRIC 17, Distribution of Non-cash assets to Owners (effective for annual periods beginning on or after 1 July 2009, subject to EU endorsement) 

  Notes to the condensed interim financial statements (continued)

2. Segmental analysis

Business segments

	Six months ended  30 September 2009 (unaudited)		Six months ended  30 September 2008 (unaudited)  restated
all figures in £ million	Revenue	Operating profit*	Revenue	Operating profit*
QinetiQ North America	403.7	35.6	326.6	34.9
EMEA	400.6	30.6	397.3	27.2
Ventures	2.0	(3.7)	3.5	(8.6)
Total	806.3	62.5	727.4	53.5
EMEA re-organisation		(40.0)		-
Acquisition amortisation		(12.9)		(9.3)
Operating profit		9.6		44.2
Gain on business divestments and unrealised impairment of investments		6.5		-
Finance income		23.8		29.1
Finance expense		(41.2)		(36.7)
(Loss)/profit before tax		(1.3)		36.6
Taxation		2.1		(8.4)
Profit for the year attributable to equity shareholders		0.8		28.2

*Operating profit is stated before acquisition amortisation and specific non-recurring items

3. Gain on business divestments and unrealised impairment of available for sale

investments

all figures in £ million	Six months ended  30 September 2009 (unaudited)	Six months ended  30 September 2008 (unaudited)
Gain on business divestments	8.3	3.6
Unrealised impairment of available for sale investments	(1.8)	(3.6)
	6.5	-

On 30 September 2009 the Group completed the disposal of it Underwater Systems business to Altlas Elektronik UK Limited for consideration before costs of £23.5m and resulted in a profit on disposal of £10.2m. On 31 July 2009 the Calibration business of the Group, ASAP Calibration Limited, was sold for proceeds before costs of £0.4m and resulted in a loss on disposal of £1.9m. There was an impairment of an investment held for sale of £1.8m in the period. 

  Notes to the condensed interim financial statements (continued)

4. Finance income and expense

all figures in £ million	Six months ended  30 September 2009 (unaudited)	Six months ended  30 September 2008 (unaudited) restated
Receivable on bank deposits	0.4	0.6
Finance lease income	0.7	0.8
Expected return on pension scheme assets	22.7	27.7
Finance income	23.8	29.1
Amortisation of recapitalisation fee	(0.3)	(0.1)
Payable on bank loans and overdrafts	(4.3)	(5.6)
Payable on US dollar private placement debt	(11.6)	(3.7)
Finance lease expense	(0.6)	(0.7)
Unwinding of discount on financial liabilities	(0.4)	(0.5)
Interest on pension scheme liabilities	(24.0)	(26.1)
Finance expense	(41.2)	(36.7)
Net finance expense	(17.4)	(7.6)

5.    Taxation expense

The tax charge has been based on the expected tax rate of 18.2% for the year ending 31 March 2010 (31 March 2009: 20.5%) on the Group's profit before tax, acquisition intangible amortisation, gain on business divestment and unrealised impairment of investment. The tax impact of acquisition intangible amortisation, gain on business divestments and unrealised impairment of investment and reorganisation costs is £10.3m for the six months ended 30 September 2009 (£1.0m for the six months ended 30 September 2008). 

6.    Dividends

An analysis of the dividends in respect of the six months ended 30 September 2009 and comparative periods are provided below:

	Pence per share	£m	Date paid/payable
Interim 2010	1.58	10.4	Feb 2010
Interim 2009	1.50	9.8	Feb 2009
Interim 2009	1.50	9.8	Feb 2009
Final 2009	3.25	21.3	Sep 2009
Total for the year ended 31 March 2009	4.75	31.1

  Notes to the condensed interim financial statements (continued)

7.    Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year. The weighted average number of shares used excludes those shares bought by the Group and held as own shares. For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares arising from unvested share based awards including share options. Underlying earnings per share figures are presented below in addition to the basic and diluted earnings per share as the Directors consider this gives a more relevant indication of underlying business performance and reflects the adjustments to basic earnings per share for the impact of non-recurring items, amortisation of acquired intangible assets and tax thereon.

			Six months ended  30 September 2009 (unaudited)	Six months ended  30 September 2008 (unaudited)
Basic EPS
Profit attributable to equity shareholders	£m		0.8	28.2
Weighted average number of shares	million		653.0	652.8
Basic EPS	pence		0.1	4.3
Diluted EPS
Profit attributable to equity shareholders	£m		0.8	28.2
Weighted average number of shares	million		653.0	652.8
Effect of dilutive securities	million		3.5	3.3
Diluted number of shares	million		656.5	656.1
Diluted EPS	pence		0.1	4.3
Underlying basic EPS
Profit attributable to equity shareholders	£m		0.8	28.2
EMEA Reorganisation costs	£m		40.0	-
Gain on business divestments and unrealised impairment of investments	£m		(6.5)	-
Amortisation of intangible assets arising from acquisitions	£m		12.9	9.3
Tax impact of items above	£m		(10.3)	(1.0)
Underlying profit after taxation	£m		36.9	36.5
Weighted average number of shares	million		653.0	652.8
Underlying basic EPS	pence		5.7	5.6

8. Business combinations

On 1 July 2009 the Group completed the acquisition of 100% of the share capital of Cyveillance, Inc. (Cyveillance) for initial net consideration, including acquisition costs, of £26.0m ($42.1m). Estimated further additional deferred contingent consideration of up to £24.7m ($40.0m) is to be paid following the satisfaction of certain performance criteria for the two year period ending 31 December 2010 and there is £0.6m ($1.0m) of deferred consideration payable on the first year anniversary of the acquisition. The provisional fair value of net assets acquired was £11.8m ($19.1m) resulting in provisional goodwill arising on consolidation of £14.8m ($24.0m). Goodwill is attributable to the excess of consideration over the fair value of net assets acquired and includes expected synergies, future growth prospects and staff knowledge, expertise and security clearances.  Fair values assigned to the net assets acquired are provisional and are subject to potential subsequent adjustment as required given subsequent knowledge or events to the extent that these reflect conditions as at the date of acquisition. Cyveillance is based in Virginia and provides online monitoring technology to identify and track data in cyberspace. 

If this acquisition had been completed on 1 April 2009 the Group revenue for the 6 months to 30 September 2009 would have increased by £2.0m to £808.3m and Group loss before tax would have increased by £0.2m to a loss before tax of £1.5m.

all figures in £ million	Date acquired	Initial cash consideration1	Deferred consideration3	Goodwill	Fair value of assets acquired2	Post acquisition Revenue	Post acquisition operating profit
Cyveillance, Inc.	1 July 2009	26.0	0.6	14.8	11.8	2.0	(0.1)
Prior year acquisitions: ITS Corporation		6.3	-	-	-	-	-
Spectro, Inc.		0.5	-	-	-	-	-
Novare Service Pty Ltd		0.4	-	-	-	-	-
Other acquisitions		0.4	-
Total		33.6	0.6	14.8	11.8	2.0	(0.1)

Notes to the condensed interim financial statements (continued)

8. Business combinations (continued)

1. Initial cash consideration includes acquisition costs. 
2. Fair value of assets acquired are provisional.
3. The maximum amount of contingent deferred consideration payable on the Cyveillance, Inc. acquisition is £24.7m ($40m) should all performance criteria be achieved. In addition there is £0.6m ($1.0m) of deferred consideration that will be payable on the first year anniversary of this acquisition. 

Cyveillance acquisition
all figures in £ million			Book value	Fair value adjustment	Fair value at acquisition
Intangible assets			0.1	23.7	23.8
Property, plant and equipment			0.3	-	0.3
Trade and other receivables			1.6	-	1.6
Trade and other payables			(5.2)	-	(5.2)
Cash and cash equivalents			0.8	-	0.8
Deferred tax liability			-	(9.5)	(9.5)
Net (liabilities)/assets acquired			(2.4)	14.2	11.8
Goodwill					14.8
					26.6
Consideration satisfied by:
Cash					25.6
Deferred consideration					0.6
Total consideration before costs					26.2
Related costs of acquisition					0.4
					26.6

The fair value adjustments include £23.7m in relation to the recognition of acquired intangible assets less the recognition of a deferred tax liability of £9.5m in relation to these intangible assets.

9. Cash flow from operations

all figures in £ million	Six months ended 30 September 2009 (unaudited)	Six months ended 30 September 2008 (unaudited)	Year  ended 31 March  2009  (audited)
Profit after tax for the period	0.8	28.2	93.6
Taxation	(2.1)	8.4	20.4
Net finance costs	17.4	7.6	21.4
Gain on business divestments	(8.3)	(3.6)	(13.0)
Unrealised impairment of investment	1.8	3.6	5.7
Depreciation of property, plant and equipment	16.5	15.6	33.5
Amortisation of purchased or internally developed intangible assets	5.1	4.3	8.9
Amortisation of intangible assets arising from acquisitions	12.9	9.3	23.5
Share of post tax (profit)/loss of equity accounted entities	(0.1)	3.2	7.2
Net movement in provisions	26.6	(29.6)	(32.6)
	70.6	47.0	168.6
Decrease/(increase) in inventories	1.2	(6.1)	(2.9)
Decrease in receivables	86.3	24.3	4.4
(Decrease)/Increase in payables	(66.1)	(3.0)	5.1
Changes in working capital	21.4	15.2	6.6
Cash generated from operations	92.0	62.2	175.2
Add back: cash outflow relating to EMEA reorganisation	13.7	27.0	27.0
Net cash flow from operations before EMEA reorganisation costs	105.7	89.2	202.2

  Notes to the condensed interim financial statements (continued)

10.    Analysis of net debt

all figures in £ million		Six months ended 30 September 2009 (unaudited)	Six months ended 30 September 2008 (unaudited)	Year  ended 31 March  2009  (audited)
Due within one year
Bank and cash		63.0	52.6	262.1
Recapitalisation fee		0.7	0.2	0.7
Finance lease receivables		3.0	3.0	3.0
Finance lease payables		(2.8)	(2.8)	(2.8)
Escrow cash receivables		-	3.4	-
Derivative financial assets		-	2.1	0.1
Derivative financial liabilities		(5.2)	(2.5)	(20.0)
		58.7	56.0	243.1
Due after one year
Bank loan		(155.5)	(321.3)	(386.2)
Recapitalisation fee		1.3	0.7	1.6
US private placement		(357.0)	(148.0)	(393.0)
Finance lease receivables		10.8	12.3	11.6
Finance lease payables		(10.5)	(12.1)	(11.4)
Escrow cash		-	0.8	-
Derivative financial assets		1.5	0.9	-
Derivative financial liabilities		(1.6)	(3.6)	(3.6)
		(511.0)	(470.3)	(781.0)
Total net debt as defined by the Group		(452.3)	(414.3)	(537.9)

11.    Own shares and share based awards

Own shares represent shares in the Company that are held by independent trusts and include treasury shares and shares held by the employee share ownership plan. Included in retained earnings at 30 September 2009 are 6,813,109 shares (30 September 2008: 7,503,584).  

In the six months to 30 September 2009 the Group granted 6.3 million (6 months ended 30 September 2008: 8.4 million) of new share based awards to certain employees under the Group Share Option Scheme. 

12. Contingent liabilities 

Subsidiary undertakings within the Group have given unsecured guarantees of £7.4m at 30 September 2009 (31 March 2009: £8.5m) in the ordinary course of business.  

The Group is aware of claims and potential claims by or on behalf of current and former employees, including former employees of the MOD and DERA and contractors, in respect of intellectual property, employment rights and industrial illness and injury which involve or may involve legal proceedings against the Group. The Directors are of the opinion, having regard to legal advice received, the Group's insurance arrangements and provisions carried in the balance sheet, that it is unlikely that these matters will, in aggregate, have a material effect on the Group's financial position, results of operations and liquidity.

The Group has not recognised contingent amounts receivable relating to the Chertsey property which was disposed of during 2004 or the Fort Halstead property disposed of in September 2005. Additional consideration, subject to clawback to the MOD is potentially due upon the purchasers obtaining additional planning consents, with the quantum dependent on the scope of the consent achieved.

  Notes to the condensed interim financial statements (continued)

13.    Post-retirement benefits

Introduction and background to IAS 19

International Accounting Standard 19 (Employee Benefits) requires the Group to include in the balance sheet the surplus or deficit on defined benefit schemes calculated as at the balance sheet date. It is a snapshot view which can be significantly influenced by short-term market factors. The calculation of the surplus or deficit is, therefore, dependent on factors which are beyond the control of the Group - principally the value at the balance sheet date of equity shares in which the scheme has invested and long-term interest rates which are used to discount future liabilities. The funding of the scheme is based on long-term trends and assumptions relating to market growth, as advised by qualified actuaries.

There were no outstanding or prepaid contributions at the balance sheet date (September 2008: £nil). Set out below is a summary of the overall IAS 19 defined benefit pension schemes' liabilities. The fair value of the schemes' assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the schemes' liabilities, which are derived from cash flow projections over long periods, and thus inherently uncertain, were:

all figures in £ million		30 September 2009 (unaudited)	30 September 2008 (unaudited)	31 March  2009  (audited)
Equities		628.0	539.3	473.7
Corporate bonds		79.7	78.5	78.4
Government bonds		79.6	81.4	83.2
Cash		8.5	15.5	12.1
Total market value of assets		795.8	714.7	647.4
Present value of scheme liabilities		(952.9)	(787.1)	(752.6)
Net pension liability before deferred tax		(157.1)	(72.4)	(105.2)
Deferred tax asset		44.0	20.2	29.4
Net pension liability		(113.1)	(52.2)	(75.8)

Assumptions

The major assumptions were:

	30 September 2009 (unaudited)	30 September 2008 (unaudited)	31 March  2009  (audited)
Rate of increase in salaries	4.1%	5.0%	4.1%
Rate of increase in pensions in payment	3.1%	3.5%	3.1%
Rate of increase in pensions in deferment	3.1%	3.5%	3.1%
Discount rate applied to scheme liabilities	5.5%	6.8%	6.5%
Inflation assumption	3.1%	3.5%	3.1%
Assumed life expectancies in years
Male pensioners (currently aged 60)	87	87	87
Female pensioners (currently aged 60)	89	90	89
Future male pensioners (currently aged 40)	89	88	89
Future female pensioners (currently aged 40)	90	91	90

The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. It is important to note that these assumptions are long term, and in the case of the discount rate and the inflation rate are measured by external market indicators. The principal sensitivities regarding the key assumptions in the IAS19 valuation are: 

Assumption	Change in assumption	Indicative effect on the scheme liabilities before deferred tax
Discount rate	Increase/decrease by 0.1%	Decrease/increase by c.£22m
Inflation and salary increase	Increase/decrease by 0.1%	Increase/decrease by c.£22m
Life expectancy	Increase by 1 year	Increase by c.£23m

  Notes to the condensed interim financial statements (continued)

13.    Post-retirement benefits (continued)

Value of scheme assets

The overall expected rate of return on plan assets is based upon the expected return rates for each asset class. Equity return rates are the long term expected return rates based upon the market rates of return for risk free investments, typically government bonds, together with the historical level of risk premium associated with equities; with the resulting rate then being reviewed and benchmarked against a peer group of listed companies.

Scheme assets

all figures in £ million	30 September 2009 (unaudited)	30 September 2008 (unaudited)	31 March  2009  (audited)
Changes to the fair value of scheme assets:
Opening fair value of scheme assets	647.4	784.2	784.2
Expected return on assets	22.7	27.7	56.5
Actuarial gain/(loss)	117.2	(105.5)	(212.8)
Contributions by the employer	19.5	18.2	37.3
Contributions by plan participants	0.1	1.1	1.3
Net benefits paid out and transfers	(10.5)	(11.0)	(19.1)
Disposal of scheme	(0.6)	-	-
Closing fair value of scheme assets	795.8	714.7	647.4

Changes to the present value of the defined benefit obligation

all figures in £ million	30 September 2009 (unaudited)	30 September 2008 (unaudited)	31 March  2009  (audited)
Opening defined benefit obligation	752.6	807.6	807.6
Current service cost	10.7	13.8	26.8
Interest cost	24.0	26.1	53.1
Contributions by plan participants	0.1	1.1	1.3
Actuarial loss/(gain) on scheme liabilities	176.8	(50.5)	(117.1)
Net benefits paid out and transfers	(10.5)	(11.0)	(19.1)
Disposal of scheme	(0.8)	-	-
Closing defined benefit obligation	952.9	787.1	752.6

14.    Related party transactions with equity accounted investments

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. During the period ended 30 September 2009 there were sales to joint ventures and associates of £1.5m (30 September 2008: £1.0m, 31 March 2009: £2.6m). There were no other related party transactions between the Group and its joint ventures and associates in the period.

  Principal risks and uncertainties 

The Group continues to be exposed to a number of risks and uncertainties which management continue to assess, manage and mitigate to minimise their potential impact on the reported performance of the Group. Pages 40-42 of the 2009 Annual Report and Accounts detail the principal risks and uncertainties which have not materially changed and these are expected to continue to be relevant for the remaining six months of the year. 

A summary of the significant risks and uncertainties is set out below:

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

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

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

• Changing in the timing of contracts;

• Funding of a defined benefit pension scheme;

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

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

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

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

• Exchange rate movement;

• Raising external funding and volatility in interest rates;

• Fixed price contracts;

• Acquisition of businesses;

• Inherent risks from trading in a global marketplace;

• High competitive marketplace;

• Realisation of value from intellectual property may be delayed.

Responsibility statements of the directors in respect of the interim financial report

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

a.   The condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as
      adopted by the EU:

b.   The interim management report includes a fair review of the information requited by DTR 4.2.7R, being an indication of
      important events that have occurred during the interim period and their impact on the condensed set of financial 
      statements and a description of the principal risks and uncertainties for the remainder of the financial year; and

c.   The interim management report includes a fair review of the information required by DTR 4.2.8R, being disclosure of
      related party transactions and changes therein since the last annual report.

By order of the Board

Sir John Chisholm                                D Mellors

Chairman                                    Chief Financial Officer    

Independent review report to QinetiQ Group plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the interim financial report for the six months ended 30 September 2009 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement, the Condensed Consolidated Statement of Changes in Equity and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (the DTR) of the UK's Financial Services Authority (the UK FSA). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the DTR of the UK FSA. As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union (EU). The condensed set of financial statements included in this interim financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 30 September 2009 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

M Maloney 

for and on behalf of KPMG Audit Plc

Chartered Accountants

8 Salisbury Square

London

EC4Y 8BB

25 November 2009 

Glossary
AGM	Annual General Meeting
Book to bill ratio	Ratio of funded orders received in the year to revenue for the year, adjusted to exclude revenue from the 25-year LTPA contract
BPS	Basis points
Compliance principles	The principles underlying the Compliance Regime, covering impartiality, integrity, conflicts, confidentiality and security
DARPA	US Defense Advanced Research Projects Agency
DHS	US Department of Homeland Security
DoD	US Department of Defense
Dragon Runner™	A small unmanned, man-portable ground vehicle intended for use in urban environments
DSALT	Distributed Synthetic Air Land Training
DTR	MOD's Defence Training Review programme
EBITDA	Earnings before interest, tax, depreciation, amortisation, gains/loss on business divestments, unrealised impairment of investment and disposal of non-current assets
EMEA	Europe, Middle East and Australasia
EPS	Earnings per share
ESA	European Space Agency
ETIS	NASA Environmental Test and Integration Services
EU	European Union
Free cash flow	Net cash flow from operating activities less the net cash flow from the purchase and sale of intangible assets and the purchase and sale of plant, property and equipment
Funded backlog	The expected future value of revenue from contractually committed and funded customer orders (excluding £4.4bn value of the remaining 19 years of LTPA contract)
GSA	General Services Administration
IAS	International Accounting Standards
IDIQ	Indefinite delivery indefinite quantity
IFRS	International Financial Reporting Standards
Interest cover	The number of times that net finance costs are covered by EBITDA
IP	Intellectual property
KPI	Key Performance Indicator
LSE	London Stock Exchange
LTPA	Long-Term Partnering Agreement - 25 year contract established in 2003 to manage the MOD's test and evaluation ranges
Metrix	Joint venture company between Sodexo and QinetiQ which has been appointed preferred bidder for the MOD's Defence Training Review programme
MOD	Ministry of Defence
MSCA	Maritime Strategic Capabilities Agreement
NASA	National Aeronautics and Space Administration (USA)
Organic growth	The level of year-on-year growth, expressed as a percentage, calculated at constant foreign exchange rates, adjusting comparatives to incorporate the results of acquired entities and excluding the results for any disposals for the same duration of ownership as the current period
QNA	QinetiQ North America
R&D	Research & Development
Specific non-recurring items and acquisition amortisation	Major restructuring costs, disposal of non-current assets, business divestments, amortisation of intangible asserts arising from acquisitions and impairment of investments
TSR	Total Shareholder Return
UAV	Unmanned Aerial Vehicle
UGV	Unmanned Ground Vehicle
UOR	Urgent Operational Requirements
Underlying earnings  per share	Basic earnings per share as adjusted for gain/loss on business divestments, disposal of non-current assets, unrealised impairment of investments, major reorganisation costs and amortisation of intangible assets arising from acquisitions and tax thereon
Underlying effective  tax rate	The tax charge for the year excluding the tax impact on gain/loss on business divestments, disposal of non-current assets, unrealised impairment of investments, major reorganisation costs, acquisition amortisation and any tax rate change effect expressed as a percentage of underlying profit before tax
Underlying operating cash conversion	The ratio of net cash flow from operations (excluding major reorganisations), less outflows on the purchase of intangible assets and property, plant and equipment to underlying operating profit excluding share of post tax loss of equity accounted joint ventures and associates
Underlying  operating margin	Underlying operating profit expressed as a percentage of revenue
Underlying  operating profit	Earnings before interest, tax, gain/loss on business divestments, disposal of non-current assets, unrealised impairment of investments, major reorganisation costs and amortisation of intangibles arising on acquisitions
Underlying profit before tax	Profit before tax excluding gain/loss on business divestments, disposal of non-current assets, unrealised impairment of investments, major reorganisation costs and amortisation of intangible assets arising from acquisitions
Unfunded orders	Typically long term contracts awarded by the US government which the customer funds incrementally over the life of the contract. The Group does not recognise such awards into the reported backlog until funding is confirmed

 

END

 

 

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