Interim Results
QinetiQ Group plc
28 November 2007
28 November 2007
QinetiQ Group plc
Interim Results Announcement
Six months ended 30 September 2007
Financial highlights
• Revenue increased 18.5% to £638.8m (2006: £539.2m), with organic growth
of 8.4%
• Underlying operating profit up 34.5% to £46.0m (£2006: £34.2m), with
organic growth of 21.6%
• Underlying operating cash conversion of 159% (2006: 51%)
• Profit before tax up 9.3% to £25.9m (2006: £23.7m)
• Underlying earnings per share increased 29.3% to 4.6p (2006: 3.6p per
share)
• Basic earnings per share increased 8.4% to 3.4p (2006:3.1p per share)
• Interim dividend increased 10.8% to 1.33p (2006:1.2p)
Operating highlights
• Orders won in period grew 12.9% to £592.2m (2006: £524.6m)
• Contracted and funded backlog (excluding LTPA) increased 8.4% to £922.5m
(31 March 2007: £850.9m). Backlog is £5.6bn including LTPA contract (31
March 2007: £5.7bn).
• QinetiQ North America revenue increased 54.8% to £256.6m (2006:
£165.8m), with organic growth of 24% and a strong book to bill ratio of
1.2:1
• Strategic review of EMEA has identified opportunities to drive
efficiencies - at least £10m per annum operating profit improvement. Cost
of £30m to £35m in the second half of the year
• Group operating margin target increased to 11%
• Confirmation of progress on DTR Package 1 opportunity. Package 2 remains
under evaluation
See Glossary section on page 25 for definitions of Non GAAP terms used
throughout this statement
Commenting on the results, Graham Love, Chief Executive Officer, said:
'The Group produced a strong performance in the six months to 30 September 2007
confirming continued delivery against our strategy. The North American defence
and security market continues to provide the greatest opportunity for expansion
within the Group and in the period this sector has driven strong order and
turnover growth. With the establishment of the EMEA sector this year we are
planning to continue to focus on growth opportunities in the UK, supplemented by
replicating selected service offerings from our core UK market into appropriate
other defence markets globally.
As a result of the strong trading performance and forward order visibility in
QNA, together with a lower tax cost, the Board anticipates that underlying
performance for the Group for the year as a whole will be at the upper end of
previous expectations.'
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.
Chief Executive Statement
Progress in the period
The Group has performed strongly in the period and continued to deliver against
its strategy. A key element of this strategy is developing the Group's footprint
in the North American market. QinetiQ has been able to pinpoint particular
technology focused growth markets within the North American defence and security
sector to acquire and develop strong individual companies into a successful,
integrated and fast growing business with annualised revenues now in excess of
$1bn.
During the six month period the QNA business continued to demonstrate strong
organic growth across all business streams. This was supplemented by the first
time contribution from four further acquisitions made in the period and a full
contribution from Analex which was acquired in March 2007. The Technology
business stream performed exceptionally well. Strong demand across its product
portfolio, most notably for the TALON(R) robots, which generated in excess of
$175m of new orders in the period and reported strong revenues from shipments of
new units and exceptionally high revenues from spares in the period, resulted in
organic growth of 50%.
On 1 April 2007 QinetiQ combined the previous UK based Defence & Technology and
Security & Dual Use sectors under a new Europe, Middle East and Australasia
(EMEA) sector highlighting the Group's ambition to replicate its UK defence
technology platform in relevant defence markets globally.
In the core EMEA business, Managed Services has performed strongly in the period
and the Group continued to deliver good win rates in MOD Research resulting in a
lower than expected decline from the continuing introduction of competition into
this stream. These healthy performances were partly offset by lower than
expected growth rates in other EMEA business streams, largely due to delays in
the letting of supply contracts from the MOD as it assesses the implications of
the Comprehensive Spending Review. Whilst the Comprehensive Spending Review has
resulted in some delays to Technology Supply contracts, we are confident that
our strategy here remains sound, and that budgetary pressures will lead to fewer
new platforms and more technology insertion favouring our market position.
In October, positive confirmation that progress has been made on the largest
incremental opportunity for the UK business, the Defence Training
Rationalisation programme (DTR), was received in a Ministerial Statement. The
MOD confirmed that Package 1 of DTR would progress with the aim for a commitment
to the final development phase by Spring 2008 with financial close expected
within a year from that date. We continue to work with the MOD on affordable
options for Package 2 although this is on a slower and less certain timetable.
Coincident with the launch of the EMEA sector the Ventures businesses were split
out to promote greater management focus. In August, the Group completed a
transaction to establish a technology venture fund with Coller Capital
consisting of seven of QinetiQ's ventures. The creation of the fund enables
these ventures to be managed by an independent team focused on accelerated
growth with access to Coller Capital's expertise and a further combined capital
commitment totalling £40m from QinetiQ and Coller Capital. Further progress has
been made with the Tarsier business, including a sale to Doha and successful
trials of the camera solution.
Recognising the Group's strong performance, the Board is pleased to increase the
interim dividend by 10.8% to 1.33p.
Outlook
Growth in QNA is anticipated to continue organically from the recently completed
acquisitions. QNA's positioning as a provider of critical services for defence,
security, intelligence and homeland security customers, and its access to
important contracts, is expected to deliver organic revenue growth rates of at
least 10% into the medium term. Demand for TALON(R) within the QNA Technology
stream is expected to remain strong with good visibility to funding for new
units well into 2008, although the exceptional growth in spares demand seen in
the current period may not be repeated at the same level going forward.
The medium term outlook for EMEA in its core UK market is more mixed, with
strong prospects in areas such as Managed Services offsetting pressures caused
by continuing strains on the UK defence budget which were reinforced by the
recent Comprehensive Spending Review. To respond to these challenges, the EMEA
business will position itself to compete more effectively in those areas of the
UK defence market offering sustainable long term growth opportunities. The
medium term growth opportunities for Technology Supply remain positive as
technology insertion underpins the MOD strategy and the national defence
covenant. Additionally EMEA will address adjacent markets including Security and
Energy & Environment. As previously announced, more focus will also be directed
towards expanding the geographical footprint into other international defence
markets in addition to the UK and North America, with initial focus being in
Australia and selected Middle and Far East markets.
As a result of these changes, a portfolio review of the EMEA business is in
progress to ensure that the capabilities and resources are aligned with the
strategic direction and market demand. The EMEA business will be reorganised
from April 2008 into four larger business units focused on Managed Services,
Technology Solutions, Consulting and Products which positions us to better
address growth markets and at the same time will provide the opportunity to
eliminate duplicate overheads. It is anticipated that the reorganisation will
result in an exceptional restructuring charge in the second half of the year of
£30m to £35m. The restructuring is expected to be completed by Summer 2008 and
improve EMEA operating profit by at least £10m per annum from the second half of
the year ending 31 March 2009. As a result the Group operating profit margin
target is raised from 10% to 11%.
The Group will actively continue its strategy to commercialise appropriate
elements of its intellectual property base and believes that the use of
innovative structures, such as the newly established venture fund, will
accelerate and enhance value creation going forward.
The Group continues to see a strong pipeline of acquisition opportunities and
will continue to supplement organic growth in both QNA and EMEA by selected
acquisitions where they can be secured at sensible prices.
The Group's results for the six months to 30 September 2007 reflect the
historical seasonality in the UK business with a stronger performance expected
in the second half of the year. As a result of the strong trading performance
and forward order visibility in QNA, together with a lower tax cost, the Board
anticipates that underlying performance for the Group for the year as a whole
will be at the upper end of previous expectations.
Graham Love
Chief Executive
Group Trading Performance
Group summary
----------- ------- ------ -------
6 months 6 months 12 months
to 30 Sept 2007 to 30 Sept 2006 to 31 March
2007
£m £m £m
----------- ------- ------ -------
Orders 592.2 524.6 1,214.0
Revenue 638.8 539.2 1,149.5
Underlying EBITDA(3) 64.1 50.3 140.5
Underlying operating
profit (2) 46.0 34.2 106.0
Underlying operating
margin 7.2% 6.3% 9.2%
----------- ------- ------ -------
(Loss)/gain on business
divestments and
unrealised impairment (4.2) 0.7 4.6
----------- ------- ------ -------
Underlying profit
before tax (3) 37.6 28.9 94.0
----------- ------- ------ -------
Underlying effective
tax rate 19% 22% 21%
----------- ------- ------ -------
Underlying cash
conversion ratio 159% 51% 56%
Net debt 325.5 255.1 300.8
Backlog(1) 922.5 697.6 850.9
Headcount 13,414 11,359 12,781
Profit before tax 25.9 23.7 89.3
Basic earnings per
share 3.4p 3.1p 10.5p
Underlying earnings per
share 4.6p 3.6p 11.3p
Dividend per share 1.33p 1.20p 3.65p
----------- ------- ------ -------
(1) Excluding remaining £4.7bn (30 Sept 2006: £4.9bn, 31 March 2007: £4.8bn) in
respect of LTPA contract
(2) Underlying operating profit is operating profit before amortisation of
intangible assets arising from acquisitions
(3) Excluding business divestments and investment impairment and disposal of
non-current assets
The Group continued to maintain a book to bill ratio at its target level of 1.1:
1 (excluding the impact of the LTPA) with orders up £67.6m on the prior period.
Revenue increased £99.6m with organic revenue growth of 8.4%. Underlying
operating profit increased by 34.5% to £46.0m, including organic growth
excluding ventures of 21.6%. Consistent with prior years the Group's results
reflect the historical seasonality in the UK business with a stronger
performance expected in the second half of the year.
QinetiQ continues to generate strong levels of operating cash flow and this
allows the Group to fund acquisitions, ventures investment and organic
opportunities, such as DTR, to drive growth.
Revenue
----------- ------ ------ -------
6 months 6 months 12 months
to 30 Sept 2007 to 30 Sept 2006 to 31 March
2007
£m £m £m
----------- ------ ------ -------
Revenue
EMEA 377.2 369.9 779.3
QinetiQ North America 256.6 165.8 358.2
Ventures 5.0 3.5 12.0
----------- ------ ------ -------
Total 638.8 539.2 1,149.5
----------- ------ ------ -------
Group revenue increased 18.5% to £638.8m through very strong organic growth in
QNA supplemented by the contributions from recent acquisitions and modest
organic growth in EMEA.
QNA revenue grew £90.8m with organic growth of 24.0% contributing £38.3m of this
increase. The weakening of the US Dollar to Sterling exchange rate impacted the
translation of QNA revenue by £18.9m compared to a constant currency basis.
EMEA revenue increased by £7.3m as organic growth in Managed Services (4.5%) and
Procurement & Capability Supply (5.0%) more than offset a smaller than expected
fall in MOD Research.
Orders and backlog
----------- ------ ------- -------
6 months to 30 6 months 12 months
Sept 2007 to 30 Sept 2006 to 31 March
2007
£m £m £m
----------- ------ ------- -------
Orders
EMEA 269.8 299.4 783.7
QinetiQ North America 315.4 217.0 416.0
Ventures 7.0 8.2 14.3
----------- ------ ------- -------
Total 592.2 524.6 1,214.0
----------- ------ ------- -------
Backlog
EMEA (1) 610.6 507.5 632.6
QinetiQ North America 297.9 170.7 210.7
Ventures 14.0 19.4 7.6
----------- ------ ------- -------
Total (1) 922.5 697.6 850.9
----------- ------ ------- -------
(1) Excludes remaining £4.7bn (30 September 2006: £4.9bn, 31 March 2007: £4.8bn)
in respect of LTPA contract
Group orders have increased by 12.9% to £592.2m compared to the six months to 30
September 2006. The QNA book to bill ratio of 1.2:1 was above the Group long
term target of 1.1:1. EMEA book to bill was 0.9:1 (excluding the impact of the
LTPA) principally due to delays in the letting of supply contracts from the MOD.
Operating profit
----------- ------ ------ -------
6 months 6 months 12 months
to 30 Sept 2007 to 30 Sept 2006 to 31 March
2007
£m £m £m
----------- ------ ------ -------
Underlying operating profit
EMEA 22.1 21.4 73.0
QinetiQ North America 30.7 17.7 39.9
Ventures (6.8) (4.9) (6.9)
----------- ------ ------ -------
Total 46.0 34.2 106.0
----------- ------ ------ -------
Underlying operating
profit margin 7.2% 6.3% 9.2%
----------- ------ ------ -------
Underlying operating profit has increased by 34.5% to £46.0m due to organic
growth of 21.6%, supplemented by the contribution from new acquisitions. This
was partially offset by the translation impact of the weakening US dollar and a
higher level of investment in ventures. On a constant currency basis, using the
average rate for the six month period to 30 September 2006, QNA would have
contributed an additional £2.3m of operating profit.
Tax
The Group's underlying effective tax rate was 18.9% (2006: 22.1%). During the
interim period the Group made progress with certain UK tax arrangements relating
to prior years which are expected to result in a lower effective tax rate for
the UK business going forward. Additionally the UK business will benefit from
the impact of the change in corporation tax rates from 30% to 28% as announced
in the 2007 Government Budget, which has resulted in a £1.0m benefit in the
current year on restatement of deferred tax balances. The underlying effective
tax rate is expected to rise from the 31 March 2008 level by 100 - 200 basis
points over the next two years as the proportion of Group profit generated in
North America increases.
Profit for the period
The Group's underlying performance, after allowing for non-recurring events and
amortisation of acquired intangible assets, is shown below:
----------- ------- ------- -------
6 months to 30 6 months 12 months to 31
Sept 2007 to 30 Sept 2006 March 2007
£m £m £m
----------- ------- ------- -------
Profit for the
period 22.1 19.4 69.0
Minority
interest - (0.9) -
----------- ------- ------- -------
Profit for the
period
attributable
to equity
shareholders
of the parent
company 22.1 20.3 69.0
Loss/(gain) on
business
divestments
and unrealised
impairment of
investment 4.2 (0.7) (4.6)
Loss/(profit)
on disposal of
non current
assets 0.1 (0.1) (3.3)
Amortisation
of intangible
assets arising
from
acquisitions 7.4 6.0 12.6
Tax impact of
items above (2.3) (2.1) 0.4
Change in UK
tax rate (1.0) - -
----------- ------- ------- -------
Underlying
profit for the
period
attributable
to equity
shareholders
of the parent
company 30.5 23.4 74.1
----------- ------- ------- -------
Non-recurring items have been excluded from underlying profit as the Board
believes that the underlying profit provides a better representation of the
Group's long term performance.
Earnings per share
Underlying earnings per share increased by 29.3% to 4.6p compared to 3.6p for
the six months to 30 September 2006. Basic earnings per share increased 8.4%
from 3.1p to 3.4p over the same period.
Dividend
The Company will pay an interim dividend of 1.33 pence per share (2006: 1.20
pence per share) on 22 February 2008. The record date will be 25 January 2008.
The Board anticipates that QinetiQ will follow past practice with the interim
dividend representing approximately one third of the full annual dividend.
EMEA
------------ ------- ------ -------
6 months 6 months 12 months
to 30 Sept 2007 to 30 Sept 2006 to 31 March
2007
£m £m £m
------------ ------- ------ -------
Revenue
MOD Research 65.4 67.1 150.5
Technology Supply 63.1 62.4 133.7
Procurement &
Capability Support 88.2 84.0 182.6
Managed Services 102.4 98.0 191.1
Security & Dual Use 58.1 58.4 121.4
------------ ------- ------ -------
Total 377.2 369.9 779.3
------------ ------- ------ -------
Underlying operating
profit 22.1 21.4 73.0
Underlying operating
margin 5.9% 5.8% 9.4%
Orders
MOD Research 53.1 52.2 164.5
Technology Supply 53.2 70.0 153.0
Procurement &
Capability Support 110.0 133.0 214.0
Managed Services 2.1 3.0 119.3
Security & Dual Use 51.4 41.2 132.9
------------ ------- ------ -------
Total 269.8 299.4 783.7
------------ ------- ------ -------
Book to bill ratio 0.9:1 1.1:1 1.3:1
Backlog (1) 610.6 507.5 632.6
------------ ------- ------ -------
(1) Excludes remaining £4.7bn (30 September 2006: £4.9bn, 31 March 2007: £4.8bn)
in respect of LTPA contract
Performance
Overall, the EMEA business has traded in line with the comparative period in the
previous year, with good progress being made on repositioning the business at
the sub-sector level with a similar level of restructuring charge taken against
operating profit as in the prior period.
Revenue in the six months to 30 September 2007 increased by £7.3m to £377.2m.
The increase has been primarily driven by organic growth in Procurement &
Capability Support (5.0% increase) and Managed Services (4.5% increase) slightly
offset by a lower than anticipated fall in MOD Research income reflecting the
success in maintaining strong win rates in this area despite the continuing
introduction of competition into the MOD Research programme.
Growth in Technology Supply was held back by customer budget pressures and the
impact on MOD resources of the completion of the Comprehensive Spending Review
contributing to delays in new contract awards and restricting growth in revenue
to 1.0%.
The book to bill ratio for Procurement & Capability Support of 1.2:1 was
particularly strong given that the current period did not benefit from any
significant multi year awards as was the case in the six months to 30 September
2006, which included the 3 year £52.5m Typhoon support order. Excluding this
order the sector delivered an increase in orders of 9.3% over the comparative
period with strong performance in all streams except Technology Supply.
Underlying operating profit has risen £0.7m resulting in an increase in
underlying operating margin of 0.1% to 5.9%. The benefit of lower pension costs
as a result of higher bond yields at the beginning of the year was offset by a
small number of project over-runs in the Technology Supply stream. Consistent
with prior years the EMEA results reflect the historical seasonality in the UK
business with a stronger performance expected in the second half of the year.
Highlights
EMEA secured a five-year £9.3m programme from the MOD's Research Acquisition
Organisation to focus on de-risking future procurement and raise technology
readiness levels for the development and exploitation of advanced Electronic
Surveillance technology.
Zephyr, QinetiQ's High Altitude Long Endurance Unmanned Aerial Vehicle, exceeded
the official world record time for the longest duration unmanned flight with a
54 hour flight achieved during trials funded through a MOD research programme.
QinetiQ demonstrated network enabling operational extensions at CWID (Coalition
Warrior Interoperability Demonstration). The capability enables all platforms to
access the common operational picture and command and control systems using High
Frequency radios already fitted on ships.
QinetiQ secured a £5.5m contract from the MOD to use the Tornado F3 as the
alternative test platform to the Typhoon to support trials for the Beyond Visual
Range Air-Air Missile (Meteor).
QinetiQ secured a 10-year service agreement with the European Space Agency to
maintain and operate the REDU satellite ground station in Belgium, in
partnership with SES ASTRA, an SES company.
In October, QinetiQ completed the acquisition of Boldon James Holdings Limited
for an initial consideration of £12.9m and assumed net debt of £2.3m on
completion. A further amount of £4.3m is payable dependent on the achievement of
specific performance criteria. Boldon James is a UK-based provider of software
solutions for high end secure messaging, primarily for military, government and
security customers worldwide. This acquisition will enhance QinetiQ's portfolio
of security based software products, providing additional routes to market in
the USA, Europe and the Asia Pacific regions and broadening its customer base.
QinetiQ North America
--------- ------- ------ ------ ------
6 months 6 months to 30 6 months 6 months to 30
to 30 Sept Sept 2006(1) to 30 Sept Sept 2006 (1)
2007(2) 2007(2)
£m £m $m $m
--------- ------- ------ ------ ------
Revenue
Technology 80.5 56.9 161.6 106.2
SETA 51.9 50.4 104.2 94.2
IT Services 77.4 58.5 155.4 109.4
Mission
Solutions 46.8 - 93.9 -
--------- ------- ------ ------ ------
Total 256.6 165.8 515.1 309.8
--------- ------- ------ ------ ------
Underlying
operating
profit 30.7 17.7 61.6 33.1
Underlying
operating
margin 12.0% 10.7%
Orders
Technology 139.9 98.0 281.4 183.3
SETA 64.5 69.1 129.6 129.2
IT Services 68.3 49.9 136.7 93.2
Mission
Solutions 42.7 - 85.7 -
--------- ------- ------ ------ ------
Total 315.4 217.0 633.4 405.7
--------- ------- ------ ------ ------
Book to bill ratio 1.2:1 1.3:1
Backlog 297.9 170.7 589.1 319.1
--------- ------- ------ ------ ------
(1) Prior year Technology and IT Services results have been restated to reflect
the transfer of part of the IT Services business to the Technology business. The
business unit transferred reported turnover of £3.6m ($6.7m) in the prior period
and orders of £2.9m ($5.5m).Total QinetiQ North America results are unchanged.
(2) The Mission Solutions Group was formed on the acquisition of Analex in March
2007. From 1 April 2007 an element of the OSEC business previously part of the
IT Services business was transferred to Mission Solutions. In the comparative
period this business unit reported revenues of £5.8m ($10.9m) and orders of
£2.2m ($4.2m) within the IT Services stream.
Performance
QinetiQ North America (QNA) revenue increased 54.8% to £256.6m or 66.2% in
constant currency to $515.1m compared to the six months to 30 September 2006.
The increase reflects strong organic growth of 24.0% and the benefit of
acquisitions. Even when compared with the stronger second half results from the
prior year, organic growth on an annualised basis exceeded 10%. Revenue in the
period benefited from the acquisitions of Analex (March 2007), ITS Corporation
(April 2007), Automatika (June 2007) Applied Perception (June 2007) and 3H
Technology (June 2007) and a full six month contribution from OSEC (May 2006).
These acquisitions contributed incremental revenue of $125.4m.
The Technology stream has experienced a continuation of the strong demand for
TALON(R) robots (revenue up 19.0%) and exceptionally strong demand for TALON(R)
spares, which along with other technology offerings resulted in a 50.3% organic
increase in Technology revenue. Talon revenue was $80.2m in the six months to 30
September 2007 (30 Sept 2006: $44.5m) of which new product shipments contributed
$33.9m (30 Sept 2006: $28.6m).
SETA revenue grew organically by 21.2%, compared to the first half of last year
after excluding £4.4m ($8.2m) of revenue from the Group's Air Filtration Systems
business which was disposed in February 2007. Revenue growth has been driven
largely by increased demand for both logistics work and software engineering
services by SETA's US Army customers
IT Services revenue has increased organically by
5.3% (excluding the part of OSEC that has now moved to Mission Solutions),
reflecting the strong position of this business, in particular with the DHS, at
the differentiated high value-add end of the market.
The Missions Solutions stream was formed within QNA following the acquisition of
Analex. This stream operates primarily in markets associated with NASA and US
Intelligence agencies, both defence and non-defence and is principally focused
on providing solutions in the C4ISR area to help customers meet their mission
critical needs. Mission Solutions has made a strong start and Analex has
performed at the upper end of the Group's expectations at the time of
acquisition.
Underlying operating profit, excluding business realisations, has increased
73.4%, with 43.3% organic growth and contributions from acquired businesses more
than offsetting the impact on translation of the results of the weaker US
dollar.
QNA orders were significantly higher than the previous period with particular
success in Technology and important new contracts and re-competes won across all
business streams. The sector book to bill ratio was 1.2:1.
The Mission Solutions book to bill ratio was lower than anticipated at 0.9:1 as
the funded element of a $35.8m five-year contract award for the Army Research &
Technology Protection Center was awarded later than expected in early October
2007. In addition, Mission Solutions was awarded a $96.0m contract during
September 2007 to provide IV&V (independent verification and validation)
services to one of the US intelligence agencies. This five-year contract award
is also funded by the customer on an incremental basis and consequently only a
small portion of this award has been counted in orders at 30 September 2007.
Acquisitions
During the period the Group acquired ITS Corporation for consideration of up to
£47.3m ($94.2m) in April 2007, 3H Technology LLC for consideration of up to
£25.6m ($51.2m) in June 2007, Applied Perception Inc. for consideration of up to
£5.0m ($10.0m) and Automatika Inc for up to £4.7m ($9.4m). Initial trading from
these businesses has been positive.
Integration of the North American acquisitions is progressing well, with
increasing recognition of the QinetiQ brand, tangible evidence of bidding
synergies emerging and integration cost savings being ploughed back into
business development initiatives. The Group continues to see a healthy pipeline
of further acquisition opportunities in North America, although vendor pricing
expectations remain high.
Highlights
IT Services has won the right to participate in the US's largest government-wide
acquisition contract (GWAC). The General Service Administration's Alliant
contract is a 10-year indefinite delivery indefinite quantity contract with a
ceiling of $50bn. It will enable US government agencies and military services to
purchase innovative IT solutions. ITS is one of around 30 contractors accepted
under the Alliant contract vehicle. The first task orders under this GWAC are
expected to be let in 2008.
IT Services was awarded a $34m contract to provide IT operations centre support
to the US Department of Homeland Security's Immigration and Customs Enforcement
agency.
The Technology business has received over $175m of further funding for TALON(R)
robots and spares in the six month period.
The Technology business won a $10m contract from the US Army's Natick Soldier
Center for PSI's Precision Airdrop System (PADSTM) equipment and support.
The Army Material Systems Analysis Activity awarded the SETA business a
five-year, $100m re-compete contract for continued support to its Sample Data
Collection program.
The U.S. Army Aviation Technical Test Center awarded the SETA business a
five-year $22 million re-compete contract for engineering and aviation testing
services.
Ventures
--------- ------ ------ -------
6 months 6 months 12 months
to 30 Sept 2007 to 30 Sept 2006 to 31 March
2007
£m £m £m
--------- ------ ------ -------
Revenue 5.0 3.5 12.0
Operating loss (6.8) (4.9) (6.9)
Orders 7.0 8.2 14.3
Backlog 14.0 19.4 7.6
--------- ------ ------ -------
In August 2007 QinetiQ completed the transaction to create a new technology
venture fund to accelerate the development and realisation of seven of its
venture investments. The Group has retained its core venture businesses,
including QinetiQ Airport Technologies (with its Tarsier runway debris detection
system) and the high-sensitivity GPS business. These activities will remain
within QinetiQ's internal venture structure.
In-house Ventures
On 1 April 2007 QinetiQ transferred the cueSim business from the EMEA sector to
the Ventures portfolio. CueSim provides a range of high quality advanced flight
simulation products and services which, using its Real Time All Vehicle
Simulator software, allows tailored solutions to be implemented rapidly and at a
reduced cost compared with traditional full motion simulators. In addition to
its successful aerospace applications, cueSim has won contracts with the Red
Bull Racing Formula 1 team to develop a simulator to evaluate vehicle dynamics
and performance characteristics.
The development of the day and night vision camera to supplement the existing
Tarsier system is progressing well with successful prototype demonstrations at
London Heathrow in October. In early November, a contract was signed to supply 3
Tarsier units to cover the main runway at Doha airport. Tarsier trials are also
taking place at Providence, Rhode Island and we expect the Dubai installation to
be completed shortly.
In September 2007 Sciemus completed an external funding round in which the Group
participated, allowing an increase in fair value of £3.2m to be recognised
through equity.
Technology venture fund
At inception in August, QinetiQ contributed seven of its venture investments
with an ascribed value of £40m into the fund, with QinetiQ and its partner,
Coller Capital, each committed to contribute up to £20m of follow on funding to
accelerate development of the fund's portfolio companies. Depending on the
performance of the fund, QinetiQ will own up to 75 per cent of future economic
value.
The fund has been established to drive faster growth from its venture portfolio
by creating an independent team with exclusive management focus and long term
capital commitment. The fund is treated as a joint venture and as such the Group
no longer fully consolidates the results of Aurix, Omni-ID, Nanomaterials and
Quintel after their transfer to the fund.
One of the fund's investments, Metalysis, a leading technology business for the
global specialty metals industry, completed a £13m funding round in July 2007 to
support it in taking three product lines to commercial production using its
patented technologies.
Performance
Ventures revenue has increased to £5.0m largely due to the first time inclusion
of the results of cueSim from 1 April 2007. During the period operating losses
increased to £6.8m (2006: £4.9m loss). As previously indicated, for the full
year, the level of QinetiQ revenue investment in the ventures is expected to be
at a higher level than in the prior year.
Other Financials
Cash flow, net debt and liquidity
Group cash inflow from operations before investing activities increased 175% to
£90.9m compared to £33.1m for the interim period to 30 September 2006. The
increase in cash inflow was driven by a strong operating performance and a
reversal of £20m of excess working capital at 31 March 2007 in EMEA, which arose
due to delays in the award of contracts from the MOD at the end of the prior
year. The Group's operating cash conversion was 159% compared to 51% in the six
months to 30 September 2006 (excluding the cash flow from prior period
restructuring in 2006) and 56% in the year to 31 March 2007. Excluding the
reversal of 31 March 2007 excess working capital, the operating cash conversion
in the six months to 30 September 2007 was approximately 116%, well above the
Group's long term 80% target.
During the period the Group's investment in acquisitions totalled £75.0m
including £42.0m for ITS and £24.6m for 3H Technology.
QinetiQ received £15.2m of net proceeds from the disposal of surplus property at
Bedford which completed at the end of March 2007.
During the period the company has provided £12.4m of funding to the trustees of
its employee share schemes to allow them to purchase shares in the company to
hedge outstanding share options and other share based awards that have been made
since IPO. The trust acquired 7m shares at an average price of 177p.
Net finance costs increased by £3.1m to £8.4m principally due to the increase in
acquisition related debt. The net benefit of the weakening US dollar:sterling
exchange rate on the translation of US dollar interest charges was broadly
offset by an increase in the effective annual interest rate on US borrowings.
At 30 September 2007 net debt was £325.5m compared to £300.8m at 31 March 2007.
Net debt was principally denominated in US dollars. The rise in net debt is
primarily due to acquisition investment partially offset by strong operating
cashflow and a 3% weakening of the period-end US dollar: sterling exchange rate.
The Group had £304.9m of further borrowing capacity at 30 September 2007 on the
basis of the unutilised element of its principal revolving credit facility. In
August 2007 the Group exercised its second and final option to extend the term
of this facility by a further year to August 2012 and also negotiated a number
of beneficial changes to its terms, including a lower margin on amounts drawn
under the facility.
Foreign exchange
--------- -------- ------- --------
6 months 6 months 12 months to 31
to 30 Sept to 30 Sept 2006 March 2007
2007
--------- -------- ------- --------
£/US$ - average 2.01 1.87 1.92
£/US$ - closing 2.02 1.87 1.96
--------- -------- ------- --------
The impact on translation of a one cent movement in the average rate in the six
month period on revenue and operating profit was approximately £1.4m and £0.16m
respectively.
Pensions
The Group provides both defined contribution and defined benefit pension
arrangements. The principal defined benefit scheme is the QinetiQ Pension
Scheme. A consolidated summary of the position of the defined benefit schemes is
shown below:
----------- ------ ------ -------
30 Sept 2007 30 Sept 2006 31 March
£m £m 2007
£m
----------- ------ ------ -------
Schemes' assets 837.6 732.9 794.1
Schemes' liabilities (874.1) (898.8) (884.9)
----------- ------ ------ -------
Schemes' deficit before deferred
tax (36.5) (165.9) (90.8)
Deferred tax asset 10.2 49.5 27.1
----------- ------ ------ -------
Net pension liability (26.3) (116.4) (63.7)
----------- ------ ------ -------
The £37.4m reduction in net pension liability in the first half is principally
driven by an increase in the discount rate, partly offset by an increase in the
inflation rate and mortality assumptions, used to value the scheme liabilities.
For the mortality assumptions applied in valuing the scheme the Group has now
moved from using the short cohort effect tables to medium cohort effect tables.
As previously indicated the prevailing higher discount rate at the start of the
year has had a positive impact on the pension service cost for the period.
In the period the Group announced plans to change the terms of the defined
benefit section of the pension scheme from June 2008, on which the Group is
currently consulting with employees. Core changes include raising the normal
pension age from 60 to 65 supplemented by a range of options that allow the
employee to maintain future benefit accrual at rates similar to their current
levels, based on a higher rate of employee contribution, or to retain current
employee contribution levels by accepting a reduction in the rate of future
benefit accrual. The changes do not affect past service obligations or the past
service deficit and the Group is not making any additional cash funding
commitments to the scheme as part of these arrangements. Future cost increases
will be dealt with through a risk sharing agreement between the company and
employees.
Principal risks and uncertainties
The principal risks and uncertainties to which the group is exposed remain
unchanged from those as detailed in the Annual Report for the year to 31 March
2007.
Consolidated Income Statement
(A) (A) 6 months ended 6 months ended Year ended 31
30 September 30 September March
2007 2006 2007
(unaudited) (unaudited) (audited)
Notes £m £m £m
Revenue 2 638.8 539.2 1,149.5
Employee costs (301.4) (273.1) (513.4)
Third-party
project costs (151.2) (112.2) (258.7)
Other
operating
costs
excluding
depreciation
and
amortisation (128.3) (111.1) (246.7)
Share of post
tax loss of
equity
accounted
joint ventures
and associates (0.8) (0.4) (1.2)
Other income 7.0 7.9 11.0
------------------------- ------------ ------------ ---------
EBITDA
(earnings
before
interest, tax,
depreciation
and
amortisation) 64.1 50.3 140.5
Depreciation
of property,
plant and
equipment (16.8) (15.4) (31.7)
Amortisation
of purchased
or internally
developed
intangible
assets (1.3) (0.7) (2.8)
------------------------- ------------ ------------ ---------
Group
operating
profit before
acquisition
amortisation 46.0 34.2 106.0
Amortisation of intangible
assets arising
from
acquisitions (7.4) (6.0) (12.6)
------------------------- ------------ ------------ ---------
Group
operating
profit 38.6 28.2 93.4
(Loss)/gain on
business
divestments
and unrealised
impairment of
investment 3 (4.2) 0.7 4.6
(Loss)/profit
on disposal of
non-current
assets (0.1) 0.1 3.3
Finance income 4 1.9 2.4 4.2
Finance
expense 4 (10.3) (7.7) (16.2)
------------------------- ------------ ------------ ---------
Profit before
tax 25.9 23.7 89.3
Taxation
expense 5 (3.8) (4.3) (20.3)
------------------------- ------------ ------------ ---------
Profit for the
period 22.1 19.4 69.0
------------------------- ------------ ------------ ---------
Profit attributable
to:
Equity
shareholders
of the parent
company 22.1 20.3 69.0
Minority
interest - (0.9) -
------------------------ ------------ ------------ ---------
22.1 19.4 69.0
------------------------- ------------ ------------ ---------
Earnings per share
Basic 7 3.4p 3.1p 10.5p
Diluted 7 3.3p 3.0p 10.3p
Underlying (30
September 2006
Restated) 7 4.6p 3.6p 11.3p
Consolidated Balance Sheet
30 September 30 September 31 March
2007 2006 2007
(unaudited) (unaudited) (audited)
Notes £m £m £m
Non-current assets
Goodwill 418.3 316.5 373.1
Intangible
assets 74.7 56.1 65.0
Property,
plant and
equipment 334.7 344.2 341.5
Financial
assets 17.5 19.5 18.8
Investments 16.3 2.0 28.5
Investments
accounted for
using the
equity method 9.2 0.2 0.3
Deferred tax
asset - 5.4 11.0
------------------------ ------ --------- --------- --------
870.7 743.9 838.2
Current assets
Inventories 46.2 31.0 39.5
Financial
assets 3.6 3.0 4.0
Trade and
other
receivables 365.2 306.0 401.2
Cash and cash
equivalents 21.5 17.9 20.0
Investments 1.7 4.3 4.0
Non-current
assets
classified as
held for sale 1.8 7.6 1.8
------------------------ ------ --------- --------- --------
440.0 369.8 470.5
------------------------ ------ --------- --------- --------
Total assets 1,310.7 1,113.7 1,308.7
------------------------ ------ --------- --------- --------
Current liabilities
Trade and
other payables (347.6) (276.8) (339.4)
Current tax (4.3) - (6.9)
Provisions (10.6) (5.9) (1.1)
Financial
liabilities (5.7) (4.1) (15.9)
------------------------ ------ --------- --------- --------
(368.2) (286.8) (363.3)
Non-current liabilities
Retirement
benefit
obligation
(gross of
deferred tax) 12 (36.5) (165.9) (90.8)
Deferred tax
liability (23.8) (0.8) (30.9)
Provisions (4.1) (8.0) (13.1)
Financial
liabilities (362.4) (291.4) (327.7)
Other payables (9.4) (4.5) (5.5)
------------------------ ------ --------- --------- --------
(436.2) (470.6) (468.0)
------------------------ ------ --------- --------- --------
Total
liabilities (804.4) (757.4) (831.3)
------------------------ ------ --------- --------- --------
------------------------ ------ --------- --------- --------
Net assets 506.3 356.3 477.4
------------------------ ------ --------- --------- --------
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
Own shares (12.5) - (0.1)
Hedging and
translation
reserve (20.7) 4.0 (13.1)
Retained
earnings 345.3 159.4 296.4
--------------------------- --- --- --------- --------- --------
Capital and
reserves
attributable
to
shareholders
of the parent
company 506.2 357.5 477.3
Minority
interest 0.1 (1.2) 0.1
------------------------ ------ --------- --------- --------
Total
shareholders'
funds 11 506.3 356.3 477.4
------------------------ ------ --------- --------- --------
Consolidated Cash Flow Statement
6 months ended 6 months ended Year ended 31
30 September 30 September March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m £m
Profit for the
period 22.1 19.4 69.0
Taxation
expense 3.8 4.3 20.3
Net finance
costs 8.4 5.3 12.0
Loss/(gain) on
business
divestments
and unrealised
impairment of
investment 4.2 (0.7) (4.6)
Loss/(profit)
on disposal of
non-current
assets 0.1 (0.1) (3.3)
Depreciation
of property,
plant and
equipment 16.8 15.4 31.7
Amortisation
of intangible
assets 8.7 6.7 15.4
Share of post
tax loss of
equity
accounted
entities 0.8 0.4 1.2
Increase in
inventories (6.7) (5.6) (15.5)
Decrease/(incr
ease) in
receivables 32.1 32.0 (33.9)
Increase/(decr
ease) in
payables 0.2 (31.4) 27.0
Increase/(decr
ease) in
provisions 0.4 (12.6) (12.3)
----------------------------- --------- -------- --------
Cashflow from
operations 90.9 33.1 107.0
Tax paid (10.8) (0.3) (3.3)
Interest
received 0.5 1.2 4.2
Interest paid (10.0) (6.5) (13.8)
----------------------------- --------- -------- --------
Net cash flow
from operating
activities 70.6 27.5 94.1
----------------------------- --------- -------- --------
Capitalised
development
costs - (2.2) (3.2)
Purchase and
capitalisation
of other
intangible
assets (5.5) (3.4) (8.9)
Purchase of
property,
plant and
equipment (11.2) (17.8) (34.8)
Sale of
property,
plant and
equipment 15.2 4.0 8.6
Investments in
associate
undertaking
and
investments (3.8) (0.6) (9.4)
Purchase of
subsidiary
undertakings (75.0) (35.7) (134.3)
Sale of
interest in
subsidiary
undertakings - 1.1 17.9
----------------------------- --------- -------- --------
Net cash flow
from investing
activities (80.3) (54.6) (164.1)
----------------------------- --------- -------- --------
Net costs from
initial public
offering - (1.4) (2.0)
Cash outflow
from repayment
of loans - - (79.2)
Cash outflow
from repayment
of loan notes - (1.3) (1.4)
Cash inflow
from loans
received 44.5 4.8 131.3
Cash inflow
from loan
notes - - 1.3
Payment of
deferred
finance costs - - (0.4)
Shares
purchased by
employee
trusts (12.4) - -
Equity
dividends paid (16.2) (14.8) (22.7)
Capital
element of
finance lease
rental
payments (1.7) (2.4) (5.9)
Capital
element of
finance lease
rental
receipts 1.7 1.5 3.5
----------------------------- --------- -------- --------
Net cash flow
from financing
activities 15.9 (13.6) 24.5
----------------------------- --------- -------- --------
Increase/(decr
ease) in cash
and cash
equivalents 6.2 (40.7) (45.5)
Effect of
foreign
exchange
changes on
cash and cash
equivalents - - (0.5)
Cash and cash
equivalents at
beginning of
period 12.6 58.6 58.6
----------------------------- --------- -------- --------
Cash and cash
equivalents at
end of period 18.8 17.9 12.6
----------------------------- --------- -------- --------
Cash and cash
equivalents 21.5 17.9 20.0
Overdrafts (2.7) - (7.4)
----------------------------- --------- -------- --------
Cash and cash
equivalents at
end of period 18.8 17.9 12.6
----------------------------- --------- -------- --------
Consolidated statement of recognised income and expense
6 months ended 6 months ended Year ended 31
30 September 30 September March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m
Net loss on
hedge of net
investment in
foreign
subsidiary (6.7) (10.4) (14.4)
Decrease in
fair value of
hedging
derivatives (1.2) (1.4) (5.6)
Movement in
deferred tax
on hedging
derivatives 0.3 - 2.0
Gain/(loss) on
available for
sale financial
assets 0.3 (6.9) 10.0
Gain on
available for
sale financial
assets
recycled on
disposal (3.6) - -
Actuarial gain
recognised in
the defined
benefit
pension
schemes 53.5 7.1 85.8
Decrease in
deferred tax
due on
movement in
pension
deficit (8.2) (0.9) (17.9)
------------------------------ -------- -------- --------
Net
income/(expense) recognised
directly in
equity 34.4 (12.5) 59.9
Profit for the
period 22.1 19.4 69.0
------------------------------ -------- -------- --------
Total
recognised
income and
expense for
the period 56.5 6.9 128.9
------------------------------ -------- -------- --------
Attributable to:
Equity
shareholders
of the parent
company 56.5 7.8 128.9
Minority
interest - (0.9) -
------------------------------ -------- -------- --------
56.5 6.9 128.9
------------------------------ -------- -------- --------
1. Significant accounting policies
Basis of preparation
QinetiQ Group plc is a company domiciled in the United Kingdom. The condensed
interim financial statements of the Group for the six months ended 30 September
2007 comprise the Group and its subsidiaries (together referred to as the
'Group').
The Group financial statements for the year ended 31 March 2007 are available
upon request from the Company's registered office at 85 Buckingham Gate, London,
SW1E 6PD.
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 Disclosures and Transparency Rules. They do not include
all of the information required for full annual financial statements and should
be read in conjunction with the Group financial statements for the year ended 31
March 2007. These condensed interim financial statements were approved by the
Board of Directors on 28 November 2007.
The comparative figures for the year ended 31 March 2007 have been extracted
from the Company's statutory accounts for that financial year. Those accounts
have been reported on by the Company's auditors and delivered to the registrar
of companies. The report to the auditors was (i) unqualified; (ii) did not
include a reference to matters to which the auditors drew attention by way
emphasis without qualifying their report; and (iii) did not contain a statement
under section 237(2) or (3) of the Companies Act 1985.
The accounting policies applied by the Group in these condensed Group interim
financial statements are the same as those applied by the Group in its Group
financial statements for the year ended 31 March 2007 except that 'IFRS 7
Financial Instruments: Disclosures' has been adopted in the current year. IFRS 7
has not had any impact on the disclosures presented in these condensed Group
interim financial statements.
2. Business segments
Six months ended 30 September 2007 (unaudited)
EMEA QinetiQ North Ventures Consolidated
America
£m £m £m £m
Revenue 377.2 256.6 5.0 638.8
------------------------- --- ------- ------- ------- ---------
Other information
EBITDA before
share of equity
accounted
entities 37.3 32.9 (5.3) 64.9
Share of loss
of equity
accounted
entities - - (0.8) (0.8)
------------------------- --- ------- ------- ------- ---------
EBITDA 37.3 32.9 (6.1) 64.1
Depreciation of
property, plant
and equipment (14.2) (2.2) (0.4) (16.8)
Amortisation of
purchased or
internally
developed
intangible
assets (1.0) - (0.3) (1.3)
------------------------- --- ------- ------- ------- ---------
Group operating
profit/(loss)
before
acquisition
amortisation 22.1 30.7 (6.8) 46.0
Amortisation of
intangible
assets arising
from
acquisitions (0.4) (7.0) - (7.4)
------------------------- --- ------- ------- ------- ---------
Group operating
profit/(loss) 21.7 23.7 (6.8) 38.6
------------------------- --- ------- ------- ------- ---------
2. Business segments (continued)
6 months ended 30 September 2006 (unaudited) Restated*
EMEA QinetiQ North Ventures Consolidated
America
£m £m £m £m
Revenue 369.9 165.8 3.5 539.2
------------------------- ----- ------ ------- ------- ---------
Other information
EBITDA before
share of equity
accounted
entities 35.4 19.3 (4.0) 50.7
Share of loss
of equity
accounted
entities - - (0.4) (0.4)
------------------------- ----- ------ ------- ------- ---------
EBITDA 35.4 19.3 (4.4) 50.3
Depreciation of
property, plant
and equipment (13.5) (1.6) (0.3) (15.4)
Amortisation of
purchased or
internally
developed
intangible
assets (0.5) - (0.2) (0.7)
------------------------- ----- ------ ------- ------- ---------
Group operating
profit/(loss)
before
acquisition
amortisation 21.4 17.7 (4.9) 34.2
Amortisation of
intangible
assets arising
from
acquisitions (1.2) (4.8) - (6.0)
------------------------- ----- ------ ------- ------- ---------
Group operating
profit/(loss) 20.2 12.9 (4.9) 28.2
------------------------- ----- ------ ------- ------- ---------
* The segmental results for the 6 months ended 30 September 2006 have been
restated to align with the sector structure used in the year ended 31 March 2007
and the 6 months ended 30 September 2007. This has involved the restatement of
the former Defence & Technology and Security & Dual Use sectors into the EMEA
and Ventures sectors.
Year ended 31 March 2007
EMEA QinetiQ North Ventures Consolidated
America
£m £m £m £m
Revenue 779.3 358.2 12.0 1,149.5
------------------------- ---- ------- ------ ------- ---------
Other information
EBITDA before
share of equity
accounted
entities 102.2 43.1 (3.6) 141.7
Share of loss
of equity
accounted
entities - 0.1 (1.3) (1.2)
------------------------- ---- ------- ------ ------- ---------
EBITDA 102.2 43.2 (4.9) 140.5
Depreciation of
property, plant
and equipment (27.8) (3.2) (0.7) (31.7)
Amortisation of
purchased or
internally
developed
intangible
assets (1.4) (0.1) (1.3) (2.8)
------------------------- ---- ------- ------ ------- ---------
Group operating
profit/(loss)
before
acquisition
amortisation 73.0 39.9 (6.9) 106.0
Amortisation of
intangible
assets arising
from
acquisitions (1.9) (10.7) - (12.6)
------------------------- ---- ------- ------ ------- ---------
Group operating
profit/(loss) 71.1 29.2 (6.9) 93.4
------------------------- ---- ------- ------ ------- ---------
3. (Loss)/gain on business divestments and unrealised impairment of investment
6 months ended 6 months ended Year ended
30 September 30 September 31 March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m
(Loss)/gain on business
divestments (1.9) 0.7 13.4
Unrealised impairment of
investment (2.3) - (8.8)
------------------------ ---------- ------------ ---------
(4.2) 0.7 4.6
------------------------ ---------- ------------ ---------
The loss on business divestment of £1.9m in the 6 months to 30 September 2007
represents the net book loss arising on the establishment of the QinetiQ Venture
Fund with Coller Capital and the deconsolidation of certain previously
consolidated subsidiaries that were transferred into the fund at inception.
The unrealised impairment of investment in the 6 months to 30 September 2007
relates to the impairment of the pSivida investment reflecting the decrease in
the share price of pSivida from A$0.27 per share at 31 March 2007 to A$0.11 at
30 September 2007.
4. Finance income and expense
6 months ended 6 months ended Year ended
30 September 30 September 31 March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m £m
Receivable on
bank deposits 0.9 1.3 2.1
Finance lease
income 0.8 1.1 2.1
Amortisation
of discount on
financial
asset 0.2 - -
------------------------- ------ ------ ------ ------- ----- ------
Finance income 1.9 2.4 4.2
------------------------- ------ ------ ------ ------- ----- ------
Amortisation
of
recapitalisation fee (0.1) (0.1) (0.2)
Payable on
bank loans and
overdrafts (5.6) (6.6) (12.3)
Payable on US$
private
placement debt (3.6) - (1.6)
Finance lease
expense (0.6) (1.0) (1.9)
Amortisation
of discount on
financial
liability (0.4) - (0.2)
------------------------- ------ ------ ------ ------- ----- ------
Finance
expense (10.3) (7.7) (16.2)
------------------------- ------ ------ ------ ------- ----- ------
------------------------- ------ ------ ------ ------- ----- ------
Net finance
expense (8.4) (5.3) (12.0)
------------------------- ------ ------ ------ ------- ----- ------
5. Taxation expense
The tax charge has been based on the expected tax rate for the year ending 31
March 2008 on the Group's profit before tax, acquisition intangible
amortisation, and loss on disposal of non current assets and unrealised
impairment of investment.
6. Dividends
On 27 November 2007 the Directors declared an interim dividend of 1.33p (6
months ended 30 September 2006: 1.20p) pence per ordinary share payable on 22
February 2008. The record date for the dividend will be 25 January 2008. The
QinetiQ Group plc Employee Benefit Trust has waived its entitlement to dividends
in the amount of £0.1m (2006: nil). On 31 August 2007 the Group paid a final
dividend of 2.45 pence per ordinary share totalling £16.2m in respect of the
year ended 31 March 2007.
7. 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 period (less those non-vested shares held by employee
ownership trusts). 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 are presented in addition to basic and diluted earnings per share as the
directors consider this gives a more relevant indication of underlying
performance and reflect the adjustments for the impact of non-recurring and
other unrepresentative items on basic earnings per share.
6 months ended 30 September 2007 (unaudited)
Earnings Weighted Per share
average number amount
of shares pence
£m million
Basic 22.1 658.6 3.36
Effect of
dilutive
securities -
options 2.9 (0.02)
-------------------- ------- ------ -------- ----------- -------
Diluted 22.1 661.5 3.34
------------------------- ------ -------- ----------- -------
Underlying earnings per share Earnings Weighted Per share
average number amount
of shares pence
£m Million
Basic 22.1 658.6 3.36
Loss on
business
divestments
and unrealised
impairment of
investment 4.2 0.63
Loss on
disposal of
non-current
assets 0.1 0.02
Amortisation
of intangible
assets arising
from
acquisitions 7.4 1.12
Tax rate
change (1.0) (0.15)
Tax impact of
items above (2.3) (0.35)
------------------------------ ------- ----------- -------
Underlying 30.5 658.6 4.63
------------------------------ ------- ----------- -------
6 months ended 30 September 2006 (unaudited)
Earnings Weighted Per share
average number amount
of shares pence
£m million
Basic 20.3 654.5 3.10
Effect of
dilutive
securities -
options 12.3 (0.06)
---------------------- ------- ---- -------- ----------- -------
Diluted 20.3 666.8 3.04
--------------------------- ---- -------- ----------- -------
Underlying earnings per share (restated) Earnings Weighted Per share
average number amount
of shares pence
£m Million
Basic 20.3 654.5 3.10
Profit on
business
divestments (0.7) (0.11)
Profit on
disposal of
non-current
assets (0.1) (0.01)
Amortisation
of intangible
assets arising
from
acquisitions 6.0 0.92
Tax impact of
items above (2.1) (0.32)
------------------------------ ------- ----------- -------
Underlying 23.4 654.5 3.58
------------------------------ ------- ----------- -------
Underlying earnings per share has been restated to exclude from underlying
earnings the profit on business divestments in order to be consistent with the
current interim period and prior year end analysis. The tax impact of earnings
has also been adjusted to reflect this change.
7. Earnings per share (continued)
Year ended 31 March 2007
Earnings £m Weighted Per share
average number amount pence
of shares
million
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 £m Weighted Per share
average number amount pence
of shares
million
Basic 69.0 656.6 10.51
Gain on
business
divestments
and unrealised
impairment of
investment (4.6) (0.70)
Profit on
disposal of
non-current
assets (3.3) (0.50)
Amortisation
of intangible
assets arising
from
acquisitions 12.6 1.92
Tax impact of
items above 0.4 0.06
------------------------------ ------- ----------- -------
Underlying 74.1 656.6 11.29
------------------------------ ------- ----------- -------
8. Business combinations
On 16 April 2007 the Group completed the acquisition of ITS Corporation for
initial net consideration of £41.5m ($82.6m), a further £5.0m ($10.0m) to be
paid following the satisfaction of certain performance criteria, additional
deferred consideration of £0.3m ($0.6m) payable two years after completion and
acquisition costs of £0.5m ($1.0m). The provisional fair value of net assets
acquired was £17.1m ($34.0m) resulting in goodwill of £30.2m ($60.2m).
On 5 June 2007 the Group completed the acquisition of Automatika, Inc. for
initial consideration of £4.0m ($8.0m), an additional deferred consideration of
£0.6m ($1.2m) payable two years after completion and acquisition costs of £0.1m
($0.2m). The provisional fair value of net assets acquired was £0.2m ($0.4m)
resulting in goodwill of £4.5m ($9.0m).
On 5 June 2007 the Group completed the acquisition of Applied Perception, Inc.
for initial consideration of £4.3m ($8.6m), an additional deferred consideration
of £0.6m ($1.2m) payable two years after completion and acquisition costs of
£0.1m ($0.2m). The provisional fair value of net assets acquired was £0.4m
($0.8m) resulting in goodwill of £4.6m ($9.2m).
On 26 June 2007 the Group completed the acquisition of 3H Technologies LLC for
initial net consideration of £24.5m ($49.0m), an additional contingent
consideration of up to £1.0m ($2.0m) payable 18 months after completion and
acquisition costs of £0.1m ($0.2m). The provisional fair value of net assets
acquired was £7.8m ($15.6m) resulting in goodwill of £17.8m ($35.6m).
9. Analysis of net debt
30 September 30 September 31 March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m £m
Due within one year
Bank and cash 21.5 17.9 20.0
Bank overdraft (2.7) - (7.4)
Recapitalisation fee 0.2 0.2 0.2
Loan notes (0.1) (0.2) (5.2)
Finance lease
debtor 3.0 3.0 3.0
Finance lease
creditor (2.9) (4.1) (3.2)
Derivative
financial
assets 0.6 - 1.0
Derivative
financial
liabilities (0.2) - (0.3)
----------------------------- ---- --------- ---------- ---------
19.4 16.8 8.1
----------------------------- ---- --------- ---------- ---------
Due after one year
Bank Loan (219.3) (273.4) (180.1)
Recapitalisation fee 0.6 0.7 0.6
US$ 260m loan
repayable 2013
& 2016 (130.3) - (134.3)
Loan notes - (3.8) -
Finance lease
debtor 13.5 14.5 14.1
Finance lease
creditor (13.3) (14.5) (13.9)
Escrow cash 3.0 - 3.1
Derivative
financial
assets 1.0 5.0 1.6
Derivative
financial
liabilities (0.1) (0.4) -
----------------------------- ---- --------- ---------- ---------
(344.9) (271.9) (308.9)
----------------------------- ---- --------- ---------- ---------
----------------------------- ---- --------- ---------- ---------
Total net debt (325.5) (255.1) (300.8)
----------------------------- ---- --------- ---------- ---------
10. Reconciliation of net cash flow to movement in net debt
6 months ended 6 months ended Year ended 31
30 September 30 September March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m £m
Increase/(decrease) in
cash in the
period 6.2 (40.7) (45.5)
New loans (44.5) (4.8) (131.3)
New loan notes - - (1.3)
Bank loan
repayments - - 79.2
Loan note
repayments - 1.3 1.4
Payment of
deferred
financing costs - 0.4 0.4
Capital element
of finance lease
payments 1.7 2.4 5.9
Capital element
of finance lease
receipts (1.7) (1.5) (3.5)
------------------------------ ---------- --------- ---------
Change in net
debt resulting
from cash flows (38.3) (42.9) (94.7)
Amortisation of
deferred
financing costs (0.2) (0.1) (0.2)
Foreign exchange
movements 9.4 22.8 30.2
Accrued US$ 260m
loan interest - - (1.6)
Loan note
disposed with
business
divestment 5.1 - -
Finance lease
receivables 1.1 1.0 2.6
Finance lease
payables (0.8) (0.9) (2.9)
Movement on
escrow cash - - 3.1
Movement on
derivatives (1.0) (2.0) (4.3)
Net debt at the
start of the
period (300.8) (233.0) (233.0)
------------------------------ ---------- --------- ---------
Net debt at the
end of the period (325.5) (255.1) (300.8)
------------------------------ ---------- --------- ---------
11. Changes in equity
6 months ended 6 months ended Year ended 31
30 September 30 September March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m £m
Shareholders'
funds at the
start of the
period 477.4 362.9 362.9
Exchange loss (6.7) (10.4) (14.4)
Profit for the
period 22.1 19.4 69.0
Dividends paid (16.2) (14.8) (22.7)
Issue of new
shares - 0.2 0.2
Purchase of
own shares (12.4) (0.1) (0.1)
Share based
payments 1.0 1.0 1.1
Deferred tax
on exercise of
share options - - 4.8
Impairment of
available for
sale financial
assets - - 1.6
Net
gain/(loss) on
available for
sale financial
assets 0.3 (6.9) 10.0
Gain on
available for
sale financial
assets
recycled on
disposal (3.6) - -
Decrease in
fair value of
hedging
derivatives (1.2) (1.4) (5.6)
Deferred tax
on hedging
derivatives 0.3 - 2.0
Minority
interest
arising on
acquisition
and disposal - 0.2 0.7
Actuarial gain
recognised in
the defined
benefit
pension
schemes 53.5 7.1 85.8
Reduction in
deferred tax
asset on
pension
deficit (8.2) (0.9) (17.9)
--------------------------- ---------- ---------- --------
Shareholders'
funds at the
end of the
period 506.3 356.3 477.4
--------------------------- ---------- ---------- --------
In the six months to 30 September 2007 the Group granted 7.5 million of new
share options to certain employees under the Group Share Option Scheme.
The total number of ordinary shares in issue at 30 September 2007 was 660.5m (31
March 2007: 660.1m)
12. 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 its defined benefit
pension 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 schemes
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 2006: £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:
30 September 30 September 31 March
2007 2006 2007
(unaudited) (unaudited) (audited)
£m £m £m
Equities 675.8 562.8 641.5
Corporate
bonds 75.1 86.6 74.5
Government
bonds 77.5 79.0 74.7
Cash 9.2 4.5 3.4
----------------------------- ---------- ---------- ---------
Total market
value of
assets 837.6 732.9 794.1
Present value
of scheme
liabilities (874.1) (898.8) (884.9)
----------------------------- ---------- ---------- ---------
Net pension
liability
before
deferred tax (36.5) (165.9) (90.8)
Deferred tax
asset 10.2 49.5 27.1
----------------------------- ---------- ---------- ---------
Net pension
liability (26.3) (116.4) (63.7)
----------------------------- ---------- ---------- ---------
Assumptions
The major assumptions (weighted to reflect individual scheme differences) were:
30 September 30 September 31 March
2007 2006 2007
(unaudited) (unaudited) (audited)
Rate of
increase in
salaries 4.8% 4.4% 4.6%
Rate of
increase in
pensions in
payment 3.3% 2.9% 3.1%
Rate of
increase in
pensions in
deferment 3.3% 2.9% 3.1%
Discount rate
applied to
scheme
liabilities 5.9% 5.0% 5.4%
Inflation rate 3.3% 2.9% 3.1%
----------
Average life
expectancy
beyond 60 for
scheme members
not currently
retired
(years) 27 26 26
Male
----------
Female 30 29 29
----------
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 Indicative
assumption effect on the
scheme
liabilities
Discount rate Increase/decrease Decrease/increase
by 0.1% by £22m
Inflation and Increase/decrease Increase/decrease
salary increase by 0.1% by £21m
Life Increase by 1 Increase by
expectations year £21m
6 months ended 6 months ended Year ended
30 September 30 September 31 March
2006 2006 2007
(unaudited) (unaudited) (audited)
£m £m £m
Changes to the fair value of
scheme assets:
Opening fair
value of
scheme assets 794.1 716.0 716.0
Actual return
on assets 35.8 5.2 51.9
Contributions
by the
employer 16.3 16.8 33.3
Contributions
by plan
participants 3.3 2.8 5.6
Net benefits
paid out (10.4) (10.9) (18.8)
Business
disposal in
the period (1.5) - -
Curtailments - 3.0 6.1
-------------------------- ---------- ----------- ---------
Closing fair
value of
scheme assets 837.6 732.9 794.1
-------------------------- ---------- ----------- ---------
6 months ended 6 months ended Year ended 31
30 September 30 September March 2007
2007 2006
(unaudited) (unaudited) (audited)
£m £m £m
Changes to the present value of the
defined benefit obligation:
Opening defined
benefit
obligation 884.9 884.4 884.4
Current service
cost 19.7 24.3 47.7
Interest cost 23.7 21.8 44.3
Contributions by
plan
participants 3.3 2.8 5.6
Actuarial gain
on scheme
liabilities (45.5) (26.6) (84.3)
Net benefits
paid out (10.4) (10.9) (18.9)
Curtailments - 3.0 6.1
Business
disposal in the
period (1.6) - -
----------------------------- ---------- ----------- ---------
Closing defined
benefit
obligation 874.1 898.8 884.9
----------------------------- ---------- ----------- ---------
13. Transactions with MOD
The MOD is an 18.9% (2006: 19.2%) shareholder in the Group. Transactions between
the Group and the MOD are disclosed as follows:
Trading
The MOD is a major customer of the Group. An analysis of trading with the MOD is
presented below
6 months ended 6 months ended Year ended 31
30 September 30 September March 2007
2007 2006
(unaudited) (unaudited) (audited)
£m £m £m
Sale to the
MOD excluding
property
rental income 276.6 267.8 584.5
Property
rental income 3.4 3.3 6.8
--------------------------- ---------- ---------- ---------
Total income
from the MOD 280.0 271.1 591.3
--------------------------- ---------- ---------- ---------
Purchased
services from
the MOD 5.1 7.5 12.4
Trade debtors 53.8 34.1 81.3
Trade
creditors 0.0 0.2 0.1
14. Related party transactions
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 to 30 September 2007 there were sales to associates, Redu
Space Services SA, of £0.4m (30 September 2006: £nil, 31 March 2007: £nil) and
Infoscitex, Inc., of £nil (30 September 2006: £0.1m, 31 March 2007: £0.2m).
There were no other related party transactions between the Group and its joint
ventures and associates during the period.
15. Post balance sheet events
On 24 October 2007 the Group completed the acquisition of Boldon James Holdings
Limited for an initial consideration of £12.9m and assumed net debt of £2.3m on
completion. A further amount of £4.3m is payable dependent on the achievement of
specific performance criteria. Boldon James Holdings Limited is a UK-based
provider of software solutions for high end secure messaging, primarily for
military, government and security customers worldwide.
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
G Love D Webb
Chief Executive Officer Chief Financial Officer
Independent review report to QinetiQ Group plc
Introduction
We have been engaged by the group to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
September 2007 which comprise the Income Statement, Balance Sheet, Cash Flow,
Statement of Recognised Income and Expenses and the related explanatory notes.
We have read the other information contained in the half-yearly financial report
and considered whether it contains any apparent misstatements or material
inconsistencies with the condensed set of financial statements.
This report is made solely to the group 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 group for our review work, for this
report, or for the conclusions we have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved
by, the directors. The directors are responsible for preparing the half-yearly
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 EU. The condensed set of
financial statements included in this half-yearly 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 group a conclusion on the condensed set
of financial statements in the half-yearly 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 on the financial information.
Review 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 half-yearly financial
report for the six months ended 30 September 2007 is not prepared, in all
material respects, in accordance with IAS 34 as adopted by the EU and the DTR of
the UK FSA.
KPMG Audit Plc
Chartered Accountants
London
28 November 2007
GLOSSARY
Backlog - The expected future value of turnover from
contractually-committed customer orders (excluding £4.7bn
value of remaining 21 years of LTPA contract)
Book to bill - Ratio of orders in year to turnover in year, excluding
ratio LTPA
C4ISR - Command, Control, Communications Computers, Intelligence,
Surveillance and Reconasissance
DoD - US Department of Defense
DTR - Defence Training Rationalisation programme
EMEA - QinetiQ's Europe, Middle East and Australasia sector
GPS - Global Positioning System
IV&V - Independent Verification and Validation
MOD - UK Ministry of Defence
NASA - National Aeronautics and Space Administration
Organic Growth - The level of year-on-year growth on a constant currency
basis, expressed as a percentage, based on the businesses
that have been part of the Group for at least 12 months
QNA - QinetiQ's North American sector
SETA - Systems Engineering and Technical Assistance
Underlying - Earnings per share as adjusted for non-recurring and other
earnings per items as set out in note 7 to the interim results
share
Underlying - The tax charge for the year excluding the tax impact on
effective tax non-recurring items expressed as a percentage of underlying
rate profit before tax
Underlying - The ratio of net cash flow from operations, less cash
operating cash outflows on the purchase of intangible assets and property,
conversion plant and equipment to underlying operating profit
Underlying - Earnings before interest and tax (excluding property, plant
operating and equipment disposals and amortisation of intangibles
margin arising on acquisitions) as a percentage of turnover
Underlying - Earnings before interest and tax (excluding property, plant
operating and equipment disposals and amortisation of intangibles
profit arising on acquisitions)
Underlying - Profit before tax excluding, property, plant and equipment
profit before disposals, sale of interest in equity accounted associate
tax and amortisation of intangible assets arising from
acquisitions
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