Annual Financial Report

RNS Number : 7558J

QinetiQ Group plc

17 June 2014

 



17 June 2014

QINETIQ GROUP PLC

Availability of Annual Report and Accounts 2014 and Notice of 2014 Annual General Meeting

QinetiQ Group plc has today published the following documents:

·      QinetiQ 2014 Annual Report and Accounts;

·      Notice of 2014 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 paragraph 9.6.1 of the Listing Rules, copies of the above documents, together with a copy of the Form of Proxy for the 2014 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 2014 Annual General Meeting will be held at 11.00 am on Tuesday, 22 July 2014 at Pennyhill Park Hotel, London Road, Bagshot, Surrey GU19 5EU.

In compliance with paragraph 6.3.5 of the Disclosure and Transparency Rules, the following information is extracted from the Annual Report and Accounts and should be read in conjunction with the Group's preliminary results announcement of 22 May 2014 (the 'Preliminary Results') which can be viewed on the Company's website at www.qinetiq.com/investors.  The information below and the Preliminary Results together constitute the material required by DTR 6.3.5 to be communicated in unedited full text through a Regulatory Information Service.  This is not a substitute for reading the full Annual Report and Accounts.  Page and note references below refer to page numbers and notes in the 2014 Annual Report and Accounts.

RISKS AND UNCERTAINTIES

UNDERSTANDING AND MANAGING OUR RISKS

Risk management

Risk management includes the methods and processes used by QinetiQ to manage risks and seize opportunities related to the achievement of our strategic objectives.  It provides a framework for identifying particular events or circumstances relevant to the Group's objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy and monitoring progress.  By identifying and proactively addressing risks and opportunities, we are better able to protect and create value for our stakeholders.

Progress continues to be made to fully embed these processes and to improve their effectiveness.  The Risk & CSR Committee has run for a full year focusing on risks where the primary impact is non-financial, with the Audit Committee retaining a focus on what might be termed purely financial risks.  The differentiation between pure financial and non-financial risk has aided both the Executive and Board risk review process, allowing for greater focus on the effectiveness of relevant mitigations.

Risk Appetite

The QinetiQ Board recognises that risk management is a complex process and should reflect both the need to take risk and avoid harm.  It also recognises that in today's operational environment closed statements do not help the organisation, as inevitably issues are rarely black and white and ultimately success or failure will be determined by shareholders and regulators as well as public opinion.

The QinetiQ risk appetite focuses on critical risk areas necessary to achieve our strategic goals.  It aims to provide clear boundaries, operational flexibility and guidance to support the thinking of executives and senior leaders so that they can make and provide evidence for decisions that reflect the need to protect our prized possession, trust.  Three categories of appetite are defined as follows:

·       Hungry: 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

·       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

All QinetiQ business operations are graded within a Value Pipeline.  Within the context of the 'Core', 'Explore' and 'Test for Value' strategy the Board's commercial appetite is:

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

·       Balancedfor opportunities that translate proven delivery into new markets or new capability/delivery into existing customers or that commit QinetiQ to unlimited or excessive liabilities

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

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

The Board recognises that QinetiQ operates in complex geographical and regulatory environments and supports local decision making within defined delegation of authority. The Board requires all employees to abide by relevant legal requirements as a minimum.

The Group Risk Register

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.  The register considers:

·       The authority, resources and coordination of those involved in the identification, assessment and management of the significant risks face by the Group

·       The response to the significant risks which have been identified by management and others

·       The monitoring of reports from Group management

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

The Group Risk Register is reviewed by the Executive and the Board. In addition, the risk owners present an update of current status and mitigating actions by rotation throughout the year.

Risks Relating to Strategy

Potential Impact	Mitigation	Associated Strategic Driver
Defence Market
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. The financial burden on both UK and US Government budgets from the current economic downturn may lead to reduced spending in the markets in which the Group operates. This could be exacerbated by: - Structural changes in UK MOD Defence Equipment and Support - UK General Election in May 2015 and the next Strategic Defence and Security Review (SDSR) - Current plans of both US and UK Governments are to drawdown troops from Afghanistan by the end of 2014.	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 review trends in its traditional markets expenditure in order to align the business with those trends. The MOD has made considerable progress in balancing its budget. In defence research, where QinetiQ is the private sector market leader, spending has been stabilised at about £400m p.a. until 2015. The sale of US Services removes the Group's exposure to the US federal services market. The Group is managing the impact of drawdown from Afghanistan by maintaining a market focus and competitive positioning in adjacent markets, which are not directly conflict-related.	Customers Innovation
Following the Currie Review, a Bill and regulations to introduce the Single Source Procurement Reform are now subject to the Parliamentary process and scheduled to be approved mid-2014. The impact will be to replace the Yellow Book in 2015 with a legally binding framework for how single sourced work must be contracted to ensure that a fair and reasonable price is paid for goods and services procured in the absence of competition. This could have an adverse impact on the Group's financial performance. The Reform Bill as currently drafted only affects new single sourced contracts from the beginning of 2015.	QinetiQ and other defence industry partners have been fully engaged with the MOD in the development of the new framework and its practical application. The MOD has requested that industry test and provide feedback on the proposed new reporting as it is developed prior to implementation, so that the transition is effective for all parties.
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. Since March 2012, QinetiQ has operated under the generic formal compliance regime, replacing a QinetiQ-specific one. This change has not affected the rigour of the compliance process.
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.	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.
Contract Profile
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 16% of the Group's revenue and supported a further 10% 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 break point is in 2018. The Group continues to achieve strong customer performance and satisfaction levels, and significantly exceeded the agreed minimum performance rating of 80% in 2013. The Group has achieved significant cost savings for the MOD on delivered services, and is on track to deliver £180m of savings over the life of the contract.	Customers Productivity
The amounts payable under some government contracts can be significant and the timing of the receipt of orders could have a material impact on the Group's performance in a given reporting period.	The contracts and orders pipeline is regularly reviewed by senior operational management.
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.	The nature of many of the services provided under such fixed-price arrangements is often for a defined amount of effort or resource rather than firm deliverables and, as a result, mitigates the risk of costs escalating. The Group ensures that its fixed-price bids and projects are reviewed for early detection and management of issues which may result in cost over-run or excessive delivery risk.
Working in a global marketplace
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.	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.	Innovation
Emerging and reputational risk
Our reputation is a highly valuable asset and as an innovative company we can operate at the cutting edge of current scientific and regulatory thinking. Failure to identify, measure and manage emerging, political, public, regulatory and reputational trends could materially impact Group performance and shareholder value.	An internal project has been launched to identify potential emerging reputational risks and evaluate their materiality on an ongoing basis.	Customers People Innovation Productivity
US foreign ownership regulations
In the US, the Group undertakes work that is deemed to be of importance to US national security and is therefore conducted under foreign ownership regulations, which require operation under a Proxy agreement. The regulations are designed to insulate these activities from undue foreign influence as a result of foreign ownership. Failure to comply with the regulations could result in sanctions, suspension or debarment from government contracts, as well as reputational damage to our brand. The Proxy agreement itself may present operational/management challenges impacting performance.	The Group maintains procedures to ensure that extant arrangements remain effective and to respond to any changes that might occur in US attitudes to foreign ownership of such activities. Successful migration of Cyveillance® to a legal entity not governed by these regulations, the creation of a revised proxy regime for Global Products and the agreed divestment of the US Services division have reduced the burden of these regulations. The section entitled 'Management and control of US subsidiaries' on page 61 of this report provides details of the Proxy agreement.	Customers

Risks relating to people

Potential Impact	Mitigation	Associated Strategic Driver
Recruitment and retention
The Group operates in many specialised engineering, technical and scientific domains. Key capabilities and competencies 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 Group conducts regular activities to identify key roles and personnel. Succession plans are in place 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. QinetiQ is leading industry in The 5% Club, a campaign to increase the recruitment of graduates and apprentices.	People
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 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.	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. 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.	Customers
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.	The Group has robust policy, procedures and training in place to ensure that it meets all current 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.	Customers People Innovation Productivity

Key Areas of focus for the Group include the following:

Safety liability of products, services and advice.	QinetiQ continues to be externally authorised for regulated design and maintenance services in the aviation sector. A Director of Engineering and Technology has been appointed and is leading programmes focused on engineering and technical competency and independent technical assurance.
Workplace and occupational health, safety and environmental matters.	Safety and environmental systems continue to be accredited to international standards. QinetiQ is building on existing programmes to focus on human factors and behavioural safety training to embed its safety culture. See page 37
Bribery and ethics.	The QinetiQ Code of Conduct states that the Group does not tolerate bribery and corruption. Annual business ethics training is mandatory for all employees across the Group and the Board. Systems exist for managing international business, agents, gifts and hospitality. Performance is reviewed externally and benchmarked against others in this sector. See page 36
International trade controls.	Continual compliance has been supported by a programme to improve QinetiQ's handling of legacy materials as well as to further improve our systems and processes for the handling and management of new materials and electronic data. Investment in this area supports our plans for growth in the international arena as well as building confidence in managing existing requirements.

Risks relating to financial management and markets

Potential Impact	Mitigation	Associated Strategic Driver
Defined benefit pension obligations
The Group operates a defined benefit pension scheme. There is currently a deficit between the projected liability of the scheme and the value of the assets it holds. The size of the deficit may be materially affected by a number of factors, including inflation, investment returns, changes in interest rates and improvements in life expectancy of members. An increase in the deficit may require the Group to increase the cash contributions to the scheme, which would reduce the Group's cash available for other purposes. At the last triennial funding valuation on 30 June 2011, the deficit was £74.7m; the likely cost of a 'buyout' would be significantly higher.	Scheme performance is reviewed regularly by Group management in conjunction with the scheme's independent Trustees. External actuarial and investment advice is regularly taken to ensure the best interests of both the Group and the scheme members. The Group and Trustees reduced future liabilities in March 2012 by switching from RPI to CPI for indexation purposes and agreeing recovery payments of £10.5m per annum over six years. The scheme was closed to future accrual on 31 October 2013. A hedge of 20% of liabilities and an inflation cap for liabilities was agreed in 2013.	Productivity
Tax legislation
QinetiQ is liable to pay tax in the countries in which it operates, principally the UK and the US. Changes in tax legislation in these countries could have an adverse impact on the level of tax paid on profits generated by the Group.  In the UK, R&D Expenditure Credits (RDEC) were introduced from 1 April 2013 and will be mandatory from 1 April 2016, replacing the R&D super deduction. Until that date, QinetiQ will continue to claim the super deduction while the treatment of RDEC for MOD single source contracts remains under discussion between industry and the Government.	External advice and consultation are sought on potential changes in tax legislation in the UK and the US enabling the Group to plan for and mitigate potential changes. The Group is currently actively engaging with industry, MOD and industry bodies regarding R&D tax credits. Opportunities continue to be explored to manage both effective tax rate (ETR) and cash tax impacts in line with the Board endorsed Tax Strategy. The Group has £191.4m of UK tax losses carried forward as at 31 March 2014 (2013: £202.7m).	Productivity
Exchange rates
The Group is exposed to volatility in exchange rates as a result of the international nature of its operations. This includes a translational impact on the key financial statements as a result of the Group reporting its financial results in sterling. The Group has limited transaction exposure as its revenue and related costs are often borne in the same currency, principally US dollars or sterling. Of the Group's total revenue, approximately 50% is contracted in sterling, 40% in US dollars and 3% in euros.	The Group actively hedges all significant transactional foreign exchange exposure as described in the notes to the financial statements and has adopted hedge accounting. The Group's objective is to reduce medium-term volatility to cash flow, margins and earnings. The Group protects its balance sheet and reserves from adverse foreign exchange movements by financing acquisitions in North America with US dollar-denominated borrowings, thereby partially mitigating the risk as US dollar earnings are used to service and repay US dollar-denominated debt.	Productivity
Inflation, credit and interest rates
The Group relies on the proper functioning of the credit markets which could have an impact on both the availability and associated costs of financing.  The Group is exposed to interest rate risk to the extent that borrowings are issued at floating interest rates.	The Group maintains a prudent level of committed funding facilities: a five-year multi-currency facility totalling £268m was provided by its relationship banks and signed in 2011. This is currently undrawn. The Group also uses fixed-rate debt instruments issued to US private placement investors with maturity dates up to 2019.	Productivity
The Group is exposed to inflation spikes above the long-term average.	The Group manages inflation risks through appropriate contractual terms.

RELATED PARTY TRANSACTIONS

This statement is extracted from note 15 in respect of non-current investments which can be found on page 121 of the Annual Report and Accounts. 

During the year ended 31 March 2014, there were sales to associates of £3.3m (2013: £nil).  At the year end there were outstanding receivables from associates of £0.1m (2013: £nil).

DIRECTORS' RESPONSIBILITY STATEMENT

This statement is in compliance with DTR 4.1.12 and relates to and is extracted from page 96 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 54 and 55 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.

For further information, please contact:

Jon Messent - Company Secretary, QinetiQ Group plc

Telephone [phone]

Press Office, QinetiQ Group plc

Telephone [phone]

David Bishop - Investor Relations, QinetiQ Group plc

Telephone [phone]

 

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