Annual Financial Report and Notice of AGM

RNS Number : 0506B

QinetiQ Group plc

14 June 2016

 

14 June 2016

QINETIQ GROUP PLC

Availability of Annual Report and Accounts 2016 and Notice of 2016 Annual General Meeting

QinetiQ Group plc has today published the following documents:

·      QinetiQ 2016 Annual Report and Accounts;

·      Notice of 2016 Annual General Meeting; and

·      Chairman's Letter to Shareholders.

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

In compliance with Listing Rule 9.6.1, copies of the above documents, together with a copy of the Form of Proxy for the 2016 Annual General Meeting, have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

These documents are today being posted or otherwise made available to shareholders.

The 2016 Annual General Meeting will be held at 11.00 am on Wednesday, 20 July 2016 at the offices of Ashurst LLP, Broadwalk House, 5 Appold Street, London EC2A 2HA.

In compliance with paragraph 6.3.5 of the Disclosure and Transparency Rules, the information in respect of Principal Risks and Uncertainties, Related Party Transactions and the Directors' Responsibility Statement, contained in the Appendix, is extracted from the Annual Report and Accounts and should be read in conjunction with the Group's preliminary results announcement of 26 May 2016 (the 'Preliminary Results') which can be viewed on the Company's website at www.qinetiq.com/investors.  The information in the Appendix and the Preliminary Results together constitute the material required by DTR 6.3.5 to be communicated in unedited full text through a Regulatory Information Service.  This is not a substitute for reading the full Annual Report and Accounts.  Page and note references in the Appendix refer to page numbers and notes in the 2016 Annual Report and Accounts.

Enquiries:

Jon Messent - Company Secretary, QinetiQ Group plc

Telephone [phone]

Press Office, QinetiQ Group plc

Telephone [phone]

David Bishop - Investor Relations, QinetiQ Group plc

Telephone [phone]

APPENDIX

PRINCIPAL RISKS AND UNCERTAINTIES

UNDERSTANDING AND MANAGING OUR RISKS

The Board recognises that QinetiQ operates in varied business environments and that risk management must reflect both the need to take risk and to avoid harm.  The Board is accountable for effective risk management across the Group and Board level oversight is discharged through two committees, the Audit Committee, which focuses on risks where the primary impact is financial, and the Risk & CSR Committee, which focuses on risks where the primary impact is non-financial; both committees retain visibility of both the financial and non-financial risks.  The reports of the Audit Committee and the Risk & CSR Committee can be found on pages 70 to 77.  Details of the Group's system of risk management and internal control can be found in the Corporate governance statement on pages 64 to 77.

The Board agrees and reviews its tolerance of risk through establishing a clear risk appetite and setting appropriate delegations of authority to the executive and senior leaders.  The Board's risk appetite is set to provide boundaries and guidance to support executives and senior leaders in their decision-making and allow operational flexibility.

Our areas of risk:

1   Risks relating to strategy:

·      Defence and security spending

·      Complex market characteristics and contract profile

·      Trading in a global market

·      Business transformation

2   Risks relating to people:

·      Recruitment and retention

·      Breaches of security and IT systems failure

·      Significant breach of relevant laws and regulations

3   Risks relating to financial management and markets:

·      Defined benefit pension obligations

·      Changes in tax legislation

·      Defined benefit pension obligations

Local decision-making is supported within defined delegation of authority and the Board requires all employees to abide by relevant legal requirements as a minimum. The Board recognises that some risks may be affected by factors outside the control of the company.

Risk appetite within QinetiQ focuses on those critical risk areas necessary to achieve our strategic goals. The risk appetite is articulated by defining three categories of appetite which describe the balance of scrutiny and mitigation activity against likely benefit or reward.

The three categories are:

·      Eager:  Willing to consider all delivery options and eager to be innovative and to choose options offering potentially higher business rewards, with a mature understanding of inherent risk, less investment in mitigation and control is accepted.

·      Balanced:  Preference for delivery options that have a low or moderate degree of residual risk and where successful delivery also provides an acceptable level of reward and value for money.

·      Cautious:  Avoidance of risk and uncertainty is the key objective, a greater level of control and mitigation may be required.  Significantly greater returns expected for commercial opportunities to offset risk.

These three categories are then used within the context of the business strategy to define the Board's commercial appetite as:

·      Eager for opportunities relating to increased market share where we have proven delivery, existing and potential new customers.

·      Balanced for opportunities that translate proven delivery into new markets or new capability/delivery into existing customers.

·      Cautious for opportunities that involve new capability or delivery into new markets and any opportunity into a new country outside the US and UK.

The Board agrees and reviews its tolerance of risk through appropriate delegations of authority to the Executive and senior leaders.

The management of risk is key to ensuring QinetiQ is successful in delivering its objectives, whilst protecting the interests of its stakeholders.  QinetiQ's risk management methods and processes provide a framework which allows:

·      Risk identification: identification of risks and opportunities relevant to the Group's objectives.

·      Risk analysis: assessment of risks in terms of likelihood and impact.

·      Risk evaluation: determine and prioritise which risks need treatment.

·      Risk treatment: appropriate management strategies put in place.

·      Monitor and review: monitoring and oversight of risk management.

The Group Risk Register consists of material risks relating to effective delivery of our strategy.  These risks may emerge as standalone risks or be present through the aggregation or interlinking of risks.  Our reputation is a highly valuable asset and reputational impact is considered as a factor in assessing overall risk impact.  The Group Risk Register is reviewed by the Executive and the Board.  In addition, the risk owners present to them an update of current status and mitigating actions by rotation throughout the year.  The Board recognizes that however good the risk management processes are they cannot provide absolute assurance and unknown risks may manifest without warning; the company has processes in place to deploy appropriate management to such risks.

Key risk	Description, link to strategy and impact	Mitigation	Associated KPIs	Responsibility	Risk appetite	Likelihood/impact
Defence spending	• Any reduction in government defence and security spending in either the UK or the US could have an adverse impact on the Group's financial performance. 70% of the Group's revenue comes directly from contracts held with the UK Government and 7% directly from contracts with the US Government. • The financial burden on both UK and US Government budgets from economic downturn may lead to reduced spending in the markets in which the Group operates. • However, the 2015 Strategic Defence and Security Review confirmed that defence spending (which may include some spending from Departments other than the MOD) would remain at least 2% of GDP, and that the MOD Budget would rise slightly in real terms over the next ten years. The MOD has ambitious plans to plug capability gaps which require significant budget cuts elsewhere, including a reduction in civilian posts of up to 30% and a reduction in MOD estate of 30%. These cuts could impact QinetiQ's core support contracts. The Group's main contracts are exposed to spend on test and evaluation, and research and technology. • QinetiQ North America (approximately £60m annual revenue) has been largely funded through overseas contingency budgets which have declined in recent years.	• Our focus on a range of markets in aerospace, defence and security as well as adjacent sectors provides a degree of portfolio diversification. The Group will continue to monitor expenditure changes in its traditional markets and will adjust business activities where appropriate. • The MOD has made considerable progress in balancing its budget. In defence research, where QinetiQ is the private sector market leader, spending appears to have stabilised at 1.2% of the UK defence budget. • QinetiQ monitors and responds to potential opportunities arising from the MOD's actions to deliver improved value for money by making proactive proposals that deliver the desired outcome. • Further investment in the pursuit of international opportunities assists in the diversification away from the dependency on UK and US Government spending. US Products (such as unmanned systems) are targeted to be funded though Programs of Record (ie in the US Base budget) over the next two years	• Customer satisfaction • Underlying operating profit • Underlying operating cash flow	• Group Director Business Development	Eager	Medium/ High
Complex Market Character-istics	• The aerospace, defence and security markets are highly competitive. The Group's performance may be adversely affected should it not be able to compete in the markets in which it aims to operate. • The Single Source Regulations Office (SSRO) has confirmed the baseline profit rate for new single source defence contracts is 8.95% for FY17 (FY16: 10.6%) and that over the course of FY17 it will consult again and develop the methodology for calculating the baseline profit rate in future years, potentially introducing multiple profit rates. This baseline rate acts as the starting point for agreeing the profit rates of new and renewed contracts, and suppliers can both under and over-perform the contracted rate depending on, for example, risk, capital servicing and project execution. Further updates and clarifications are expected to be published by the SSRO on other topics affecting QDCs, eg allowable cost. Our combination of capabilities is unique in the UK and, consequently, approximately 70% of total EMEA Services revenue is derived from single source contracts, including the non-tasking element of the Long Term Partnering Agreement (LTPA). We anticipate that the majority of our single source revenue will fall under the regulations within approximately three years. • The timing of the orders receipt could have a material impact on the Group's performance in a given reporting period as the amounts payable under some government contracts can be significant. • Some of the Group's revenue is derived from contracts that have a fixed price. There is a risk that the costs required for the delivery of a contract could be higher than those agreed in the contract as a result of the performance of new or developed products, operational over-runs or external factors. Any significant increase in costs which cannot be passed on to a customer may reduce the profitability of a contract or even result in a contract becoming loss making. • Some of the Group's contracts have terms, not unusual in defence, that provide for unlimited liabilities for the Group, or termination rights for the customer.	•  QinetiQ seeks to focus on areas within these markets in which its deep customer understanding, domain knowledge, technical expertise and platform independence provide a strong proposition and a significant advantage in competitive bidding. •  QinetiQ and defence industry partners have been fully engaged with the MOD in the development of the new framework and its practical application. QinetiQ and defence industry partners expect to be consulted by the SSRO on the Statutory Guidance. •  QinetiQ is supporting an industry review of the profit rate methodology prior to the consultation on the changes for 2017. The baseline profit rate is the starting point for profitability on single source contracts - other factors include capital servicing, risk and project execution. •  The contracts and orders pipeline is regularly reviewed by senior operational management. •  The nature of many of the services provided under fixed-price arrangements is often for a defined amount of effort or resource rather than firm deliverables and, as a result, mitigates the risk of costs escalating. The Group ensures that its fixed-price bids and projects are reviewed for early detection and management of issues which may result in cost over-run or excessive delivery risk.	• Underlying operating profit • Underlying operating cash flow • Customer satisfaction	• Group Director, Business Development	Balanced	Medium/ High
	• Organisational Conflicts of Interest (OCI) may occur where the Group provides services to both a defence end-user customer as well as those within the defence supply chain.	• QinetiQ takes proactive steps to manage any potential OCI and maintain its ability to provide independent advice. QinetiQ operates under the generic formal compliance regime and applies a rigorous compliance process. • Where QinetiQ wishes to operate on both the advice and supply chain side of an opportunity we do so only after receiving approval from the MOD.	• Customer satisfaction	•  Group General Counsel & Company Secretary •  Compliance Implement-ation Director	Balanced	Low/ Medium
Complex market characteris-tics (continued)	• The Group is reliant on a limited number of major customers. • A material element of the Group's revenue is derived from one contract. The LTPA is a 25-year contract to provide test, evaluation, and training services to the MOD. The original contract was signed in 2003. The LTPA operates under five-year periods with specific programmes, targets and performance measures set for each period. The LTPA directly contributed 27% of the Group's revenue and supported a further 16% through tasking services using LTPA managed facilities.	• In February 2013 the Group signed the LTPA for a third five-year period with the MOD. The next scheduled 're-pricing' point is March 2018. • The Group continues to achieve strong customer performance and satisfaction levels, and significantly exceeded the agreed minimum performance rating of 80% in 2016. • The Group has achieved significant cost savings for the MOD on delivered services, and is on track to deliver £700m of additional savings originally projected over the life of the contract. • The Group is proactively engaging with the MOD regarding future plans for test and evaluation services as a result of SDSR.	• Underlying operating profit • Underlying operating cash flow • Customer satisfaction	• Group Director Business Develop-ment • Group Director Test & Evaluation	Balanced	Medium/ High
Recruit-ment and retention	• The Group operates in many specialised engineering, technical and scientific domains. • The lack of graduates in the science, technology, engineering and mathematics (STEM) domains leads to future skills shortage. • Key capabilities and competences may be lost through failure to recruit and retain employees due to internal factors, as well as macro factors across the sector affecting the desirability, intake and training of engineers, scientists and technologists. • The regulatory framework in some countries where the Group operates reduces the candidate pool for recruitment and deployment. • The UK workforce has a skewed age distribution which creates risk on future skills shortage.	• The Group conducts regular activities to identify key roles and personnel. Some succession planning is undertaken looking internally at candidates ready now or in need of development to fill particular roles and externally to identify people QinetiQ may wish to attract. • QinetiQ has made improvements in employee engagement and conducts an annual satisfaction survey. • STEM outreach from primary school age through to work experience and graduate opportunities. • QinetiQ is leading industry in The 5% Club, a campaign to increase the recruitment of graduates and apprentices.	•  Employee engage-ment • % of apprentices and graduates • Voluntary employee turnover	• Group Director Human Resources	Balanced	Medium/ High
Breaches of security and IT systems failure	• The Group operates in a highly regulated IT environment. • The data held by QinetiQ is confidential and needs to be secure, against a background of increasing cyber threat. • A breach of data security or IT systems failure could have an adverse impact on our customers' operations, resulting in significant reputational damage, as well as the possibility of exclusion from some types of government contracts. • The Group's financial systems are required to be adequate to support US and UK Government contracting regulations.	• Data security is assured through a multi-layered approach that provides a hardened environment, including robust physical security arrangements and data resilience strategies. • Comprehensive internal and external testing of potential vulnerabilities is conducted along with 24/7 monitoring. • The Group engages with US and UK Government contracting audit agencies, to enable them to test relevant financial systems and data, and implements any recommended improvement plans. • Information systems are designed with consideration to single points of failure and the removal of risk of minor and major system failures. • The Group maintains business continuity plans that cover geographical assets as well as the technical capability of employees. These plans cover a range of scenarios (including loss of access to IT) and are regularly tested.	• Underlying operating profit • Profit after tax • Underlying EPS • Underlying operating cash flow	• Executive Committee	Cautious	High/High
Business transformation	• A strategic priority is to innovate for value, focusing on markets where customers have a clear need for our skills. • Failure to create a culture of innovation or invest adequately in, or create value from, our innovation investment will impact negatively on the Group's market position.	• Innovation will be driven through cultural change, investment in, and application of, our core competences for our customers' advantage in defence and commercial markets. • The Internal R&D investment process is in place.	• Customer satisfaction • Employee engagement	• Group Director Engineer-ing & Opera-tions • Group Director Human Resources	Eager	Medium/ High
	•  Resources have historically been deployed within divisional teams. This encourages an internal culture which makes it difficult to use resource flexibly across the company to meet customer demands.	•  Our way of working has been designed to support the delivery of our strategy, increase customer focus, improve our competitiveness and deliver collaboration across the company.	• Customer satisfaction • Employee engagement	• Group Director Human Resources	Eager	High/High
Trading in a global market	• A strategic priority is to build an International business that delivers additional value to our customers. • Failure to execute this strategy soundly would negatively impact future growth.	• The Group's Integrated Strategic Business Planning process is used to clearly articulate strategy, appropriate objectives and metrics. • The Group has established and is investing in a new International business. • The Group has been reorganised to enhance customer focus and collaboration, aligning it with the strategy.	• Orders • Organic revenue growth	• CEO	Cautious	Medium/ High
	• QinetiQ operates internationally. Risks include: regulation and administration changes, taxation policy, political instability, civil unrest and differences in culture. • Negative events could disrupt some of the Group's operations and have a material impact on its future financial performance. • The UK EU referendum scheduled for 23 June may create uncertainty.	• While the Group has a growing geographical footprint, its traditional activities are confined to the UK and the US. • Relationships or contracts in new markets are assessed for their inherent risks, using our International Business Risk Assessment process, before being formally agreed. This allows opportunities to be reviewed at different levels of management according to their inherent risk. • Regular review within the Group's Integrated Strategic Business Planning process.	• Orders • Organic revenue growth	• CEO	Cautious	Medium/ High
Significant breach of relevant laws and regulations	• The Group operates in highly regulated environments and recognises that its operations have the potential to have an impact on a variety of stakeholders. • Failure to comply with particular regulations could result in a combination of fines, penalties, civil or criminal action. • In addition, failure may also lead to suspension or debarment from government contracts, as well as reputational damage to the QinetiQ brand. • Key areas of focus for the Group include the following: - Safety liability of products, services and advice. - Workplace and occupational health, safety and environmental matters. - Bribery and ethics. - International trade controls.	• The Group has robust policy, procedures and training in place to ensure that it meets all current regulations; for example, annual business ethics training is mandatory for all employees across the Group and the Board; role specific safety training. • The QinetiQ Code of Conduct defines clear expectations for the Group and its employees; for example, it states that the Group does not tolerate bribery and corruption and will comply with relevant international trade regulations. • The Group manages the effective identification, measurement and control of regulatory risk. • Local management continuously monitor local laws. Professional advice is sought when engaging in new territories to ensure that the Group complies with local and international regulations. • Accreditation to external standards; for example, safety and environmental systems continue to be accredited to international standards; external authorisation for regulated design and maintenance services in the aviation sector.	• Underlying operating profit • Profit after tax • Underlying EPS • Underlying operating cash flow	• Executive Committee	Cautious	Medium/ High
Changes in tax legisla-tion	• QinetiQ is liable to pay tax in the countries in which it operates, principally the UK, the US, Australia and Belgium. Changes in tax legislation in these countries could have an adverse impact on the level of tax paid on profits generated by the Group. The majority of the trading losses in the UK were utilised during the year to 31 March 2016 on transition to the RDEC scheme and are no longer available to offset future taxable profits. • In the UK, QinetiQ claims significant levels of tax relief in respect of its R&D activities. This is claimed via the Government's R&D Expenditure Credits (RDEC) scheme, which currently provides a rebate of 11% of allowable R&D expenditure. Hence, in addition to the risk of changes to the headline level of corporation tax, the Group is exposed to changes to the level of this R&D rebate percentage and the level of R&D expenditure deemed to be allowable for tax purposes. The SSRO has stated that any tax reliefs or credits claimed by a contractor in respect of single-source qualifying defence contracts should be reimbursed to the MOD. As new customer contracts are entered into and as the mix of single-source, non- competed MOD contracts to other contracts changes, the value of the R&D tax benefit passed back to the customer will also change.	• External advice and consultation are sought on potential changes in tax legislation in the UK, the US and elsewhere as necessary enabling the Group to plan for and mitigate potential changes. • The Group does not have a significant level of cross-border activity but where it does have such transactions controls are in place to ensure pricing reflects 'arm's length' principles. The Group does not, therefore, have a significant exposure to transfer-pricing legislation. • The Group does not make use of 'off-shore' entities or tax structures to focus taxable profits in jurisdictions that legislate for low tax rates. • Opportunities continue to be explored to manage both effective tax rate (ETR) and cash tax impacts in line with the Board endorsed tax strategy. • QinetiQ seeks to be open and transparent in its engagement with the UK tax authorities by sharing with HMRC the methodologies adopted in its tax returns. • The Group has £154.8m of tax losses carried forward as at 31 March 2016 (2015: £291.6m).	• Profit after tax • Underlying EPS	• Chief Finance Officer	Cautious	Medium/ High
Defined benefit pension obliga-tions	• The Group operates a defined benefit pension scheme closed to future accrual. • At the year end the DB pension scheme was in deficit under an IAS19 basis. The deficit was £37.7m • The size of the deficit may be materially affected by a number of factors, including investment returns, changes in interest rates and inflation and improvements in life expectancy of members. • Any change to the deficit may require the Group to increase the cash contributions to the scheme, which would reduce the Group's cash available for other purposes. • At the last triennial valuation as at 30 June 2014 the scheme funding (on a technical provisions basis) was a surplus of £31.0m.	• Scheme performance is reviewed regularly by the Trustee in conjunction with Group management. • External actuarial and investment advice is regularly taken to ensure the best interests of both the Group and the scheme members. • The Group works in collaboration with the Trustee to agree an investment strategy that progressively de-risks the scheme as the funding level improves. • The company continues to pay the deficit recovery payments outstanding from the 2011 valuation. This will require £10.5m pa until 2018. • The Group and Trustee reduced future liabilities by switching from RPI to CPI for indexation and revaluation purposes as part of the 2012 Strategy Agreement. • The scheme was closed to future accrual on 31 October 2013. • At the year end 100% of the inflation risk (CPI basis) is hedged and 44% of interest rate risk hedged, measured on a gilts basis. • A contingent asset in the form of an asset backed funding structure provides the Scheme with an additional £2.5m per annum (indexed by CPI) for 20 years to 2032.	• Profit after tax • Underlying EPS • Underlying operating cash flow	• Chief Finance Officer • Group Treasurer	Balanced	High/High

RELATED PARTY TRANSACTIONS

This statement is extracted from note 17 in respect of non-current investments which can be found on page 124 of the Annual Report and Accounts. 

During the year ended 31 March 2016 there were sales to associates of £3.2m (2015: £3.0m).  At the year end there were outstanding receivables from associates of £0.4m (2015: £0.3m).

DIRECTORS' RESPONSIBILITY STATEMENT

This statement is in compliance with DTR 4.1.12 and relates to and is extracted from page 99 of the Annual Report and Accounts and is signed by order of the Board by Jon Messent, Company Secretary.  Details of the Board of Directors of QinetiQ Group plc can be found on pages 58 and 59 of the Annual Report and Accounts.  Responsibility is for the full Annual Report and Accounts and not the extracted information presented in this announcement or in the Preliminary Results.

Responsibility statement of the Directors in respect of the Annual Report

The Directors in office as at the date of this report confirm that to the best of their knowledge:

·       the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company, and the undertakings included in the consolidation taken as a whole; and

·       the Directors' report includes a fair review of the development and performance of the business, and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

END

 

 

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