Half Yearly Report

RNS Number : 3885W

QinetiQ Group plc

18 November 2010

 



Interim Results for half year ended 30 September 2010

Restoring QinetiQ to Strength - Solid Progress in First Half

		H1 FY2011	H1 FY2010
Business Performance
Revenue		£864.9m	£806.3m
Organic change at constant currency		6%	(1)%
Underlying operating profit*		£64.9m	£62.5m
Underlying operating margin*		7.5%	7.8%
Underlying profit before tax*		£51.6m	£45.1m
Underlying net cash from operations*		£149.9m	£92.4m
Underlying cash conversion ratio*		231%	148%
Net debt		£327.0m	£452.3m
Underlying earnings per share*		6.5p	5.7p
Dividend per share		-	1.58p
Statutory Reporting
Operating (loss)/profit		£(24.3)m	£9.6m
Loss before tax		£(37.6)m	£(1.3)m
Earnings per share		(6.4)p	0.1p

Headlines

·      Group revenues up 7%, driven by strong sales of survivability products;

·      Balance sheet strengthened:

o  Very strong cash generation;

o  Net debt at 30 September 2010 £327.0m (H1 FY10: £452.3m);

o  Gearing ratio** of 1.9x achieved ahead of plan;

·      Significant progress in first six months of the 24 month self-help programme:

o  Simplified structure implemented: US Services, UK Services and Global Products;

o  Action to eliminate loss-making and/or non-core activities; sale of S&IS;

o  Leadership teams upgraded;

o  UK employee terms and conditions renegotiated; restructuring programme on track.

Leo Quinn, Chief Executive Officer of QinetiQ Group plc, said: "Our reduction in the Group's debt is a yardstick of our progress in building the right foundation for the Group going forward. Our goal is to become more competitive and to use our deep relationships with customers to help them find solutions to the challenges they face.  Government policy reviews in both the US and UK have impacted the letting of contracts in our services businesses, but tight control on costs and the strong demand in Global Products have produced a solid performance. At the same time, the level of cash generation demonstrates our determination to strengthen the balance sheet.

"Work continues on streamlining the Group structure and processes, building up the leadership team and embedding the changes we have put in place.

"As yet the effect of new Government policy, in both the US and UK, has not worked through to detailed implementation.  Absent any immediate material change in customer requirements, overall the Board believes that the Group will meet its expectations for the current financial year, as the Global Products business fulfils current order demand. We will continue to position the Group for profitable growth in the medium term."

Other Information

There will be a presentation of the interim results to analysts at 9.00am UK time on 18 November 2010 at UBS Ground Floor Conference Centre, 1 Finsbury Avenue, London, EC2M 2PP.  Registration for the webcast is available at www.QinetiQ.com/investors. An audiocast of the event can be heard using the following numbers:

UK freephone:    0800 634 5205

International:      [phone]

The presentation will also be available at:  www.QinetiQ.com/investors on the morning of our results.

QinetiQ provides technical advice to customers in the global aerospace, defence and security markets. We are a trusted partner to government organisations, predominantly in the UK and the US, including defence departments, intelligence services and security agencies.

For further information please contact:

Media relations:	QinetiQ press office	[phone]
	Liz Morley, Maitland	[phone]
	Brian Hudspith, Maitland	[phone]
Investor relations:	David Bishop, QinetiQ	[phone]

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.

* Definitions of underlying measures of performance can be found in the glossary. Underlying financial measures, excluding amortisation of intangible assets arising from acquisitions and specific non-recurring items, are presented as the Board believes these provide a better representation of the Group's long-term performance trends. Specific non-recurring items include gains on business divestments, impairments of investments, impairment of property, plant and equipment, restructuring costs, inventory provisions in respect of capitalised DTR-programme bid costs, and tax thereon.

** The gearing ratio (adjusted net debt:EBITDA) is the ratio of net borrowings at the balance sheet date translated at average exchange rates for the period to EBITDA generated in the 12 month period to the balance sheet date, and calculated in accordance with the Group's credit facility ratios.

Group Overview

Group revenues were up 7% to £864.9m (H1 FY10: £806.3m), including a £19.2m benefit from the strengthening US dollar exchange rate. Within this, the Global Products business grew 65%, driven by demand for its Q-NET vehicle survivability product to support operations in Afghanistan. US Services revenues were impacted by in-sourcing from the US Department of Defense (DoD) largely in the second half of last year.  UK Services declined primarily due to reduced order flow from the UK Ministry of Defence (MOD) in the lead up to the Strategic Defence and Security Review (SDSR). 

Underlying operating profit* increased to £64.9m (H1 FY10: £62.5m), resulting in an underlying margin* of 7.5% (H1 FY10: 7.8%).  This reflected somewhat lower margins in the Services businesses, offset by a strong volume-led margin recovery in Global Products.  Net interest benefited from a pension finance credit of £4.3m (H1 FY10: cost £1.3m).  Underlying profit before tax* for the Group was £51.6m (H1 FY10: £45.1m).

The Group incurred a restructuring charge of £33.4m (H1 FY10: £40.0m) for the rationalisation of the UK businesses. Other non-recurring items include a £37.1m (H1 FY10: £nil) provision relating to the Defence Training Review (DTR) bid costs capitalised prior to the MOD's recent announcement of the cancellation of the programme.

The Group-wide focus on debt reduction resulted in a strong underlying operating cash conversion* of 231% (H1 FY10: 148%) as underlying cash flow from operations* increased to £149.9m (H1 FY10: £92.4m).  Closing net debt at 30 September 2010 was £327.0m, compared with £452.3m at 30 September 2009.  This translated into a net debt to EBITDA ratio** of 1.9x at 30 September 2010.

Half year underlying earnings per share* were 6.5p (H1 FY10: 5.7p).

At the preliminary results in May 2010, the Board recommended that no interim dividend be paid for the current year. It is the Board's expectation that the Group will pay a final dividend with respect to the financial year ending 31 March 2011.

Update on Priorities

Implementation is well underway on the 24 month self-help programme announced in May to refocus the businesses, build a more commercial performance-oriented culture and strengthen the balance sheet.  

Focus

§ A simplified structure has been implemented comprising three divisions: US Services, UK Services and Global Products. This enables greater clarity around markets and customers in order to leverage existing strengths, address weaknesses systematically and eliminate unprofitable activities.

§ A common framework has been developed for the Global Products business. During the period, sales for Q-NETS, Talon® and Optasense illustrated the potential within the Global Products IP portfolio.  

§ The businesses are reviewed on an ongoing basis to identify and eliminate loss-making and/or non-core activities. During the period, the divestment of the S&IS business in the US for $60m was announced and this was completed in October.   

Cultural Transformation

§ Upgrading leadership is a key initiative, with roughly two thirds of the Group executive team changed this year, followed by about half of UK senior management as the businesses have been de-layered.  

§ A standard management reporting pack and common business review process have been implemented across the Group.

§ Two self-help initiatives have been launched in the UK - one to streamline processes and reduce costs, the other to engage employees on raising productivity.

§ In June, three quarters of union members in the UK workforce voted to support changes to UK employee terms and conditions. The agreed changes, including pay increases and revised redundancy arrangements, came into effect on 1 July 2010.  The programme to restructure the UK businesses is on track at a total expected cost of approximately £40m, in order to bring costs back into line with previous reductions in science and technology expenditure and to enable greater competitiveness.

§ In the US, the Global Products workforce was reduced by 90 to raise productivity within the business.  The business development function in US Services has been restructured to focus on more sustainable revenue streams.

Balance Sheet

§ The Group's closing net debt at 30 September 2010 was £327.0m (31 March 2010: £452.3m). This translated into a gearing ratio of 1.9x net debt:EBITDA^**.

§ Strong cash conversion has been driven by tight controls on working capital assisted by the close-out of the DoD fiscal year, with some deferred capital expenditure. 

The above actions are intended to create a strong foundation for development of the best opportunities for  long-term profitable growth for the Group. 

Trading Environment

The US trading environment is likely to remain challenging, with defence budgets under pressure in support of deficit reductions.  However, the markets in which QinetiQ is well placed, including IT solutions, cyber security, logistics and sustainment, remain attractive.  Although the US Services business has seen some impact from in-sourcing, current indications are that the US Secretary of Defense's support service contracting reductions are expected to have greater impact on contracts to which QinetiQ has limited exposure. At the same time, the stated drive for fewer and lower-cost suppliers is likely to maintain overall pressure on margins as customers look to save money and competition intensifies.

The UK Government has now published the findings of its SDSR and the Comprehensive Spending Review, announcing a four year 8% cumulative reduction in defence budgets. The Group welcomes the decision to invest in cyber security and the recognition within the SDSR that science and technology have vital implications for national security. QinetiQ has in-depth knowledge to advise Government on how to exploit technology to enhance the effectiveness of both new and existing systems.  The Review confirmed the early retirement of the Harrier fleet and cancellation of the Nimrod MRA4, both of which will have a modest negative impact on UK Services revenues; but this is expected to be partially offset by continued support to the Tornado fleet and rotary wing aircraft and by the opportunities offered by the F-35 JSF. Reductions in MOD and agency personnel provide an opportunity for QinetiQ, as a trusted advisor, to demonstrate how more can be delivered by spending less.  The Group is actively participating in the development of the Defence and Security Industrial and Technology Policy to be published in 2011. Overall, QinetiQ looks forward to working with the MOD to address the detailed implications of the SDSR and to help it deliver improvements in productivity, value for money and defence procurement.

Board Changes

On 25 October Paul Murray joined the Board as a non-executive director. Paul brings a range of experience in finance and corporate governance from a cross section of industries, all of which leverage technology.

Outlook

The Group's self-help plan is underway to refocus the businesses, build a more commercial performance-oriented culture and strengthen the balance sheet. Work continues on reshaping the Group structure and processes, building up the leadership team and embedding the changes put in place.

As yet the effect of new Government policy in the US and UK has not worked through to detailed implementation.  Absent any immediate material change in customer requirements, overall the Board believes that the Group will meet its expectations for the current financial year, as the Global Products business fulfils current order demand. The Group will continue to position its businesses for profitable growth in the medium term.

* Definitions of underlying measures of performance can be found in the glossary.

^** The gearing ratio is adjusted net debt:EBITDA and the definition can be found in the glossary

Operations overview

US Services

	H1 FY11	H1 FY10
	£m	£m
Orders Revenue	317.3 318.6	294.1 320.1
Underlying operating profit*	25.0	28.1
Underlying operating profit margin*	7.8%	8.8%
Book to bill ratio	1.0:1	0.9:1

Revenues were flat on a reported basis but declined 6% on an organic basis at constant currency against the prior period, influenced by the impact in the second half of last year of US Government in-sourcing, as well as the switching of some work to small business preference contracts. The business also saw some delay in the letting of new contracts and the termination of some procurements.

Underlying operating profit* was £25.0m (H1 FY10 £28.1m), delivering an underlying margin* of 7.8% (H1 FY10: 8.8%), impacted by investment in the development of the cyber business following the acquisition of Cyveillance in the prior period.

The strength of ongoing relationships with key customers was evidenced by the receipt of $20m in incremental funding to provide Environmental Test and Integration Services to NASA.  In addition the business was awarded a five-year $36m contract to supply training development and delivery services to the US Navy's Space and Naval Warfare Systems Centre (SPAWAR) Atlantic and the $20m CINS contract to supply technical and engineering services to the US Marine Corps.

As part of the programme to exit non-core capabilities, the sale was agreed of S&IS, an access control and security operations business, for a total cash consideration of $60m. This will generate approximately $40m after-tax proceeds to strengthen the Group balance sheet.  This transaction was completed on 8 October 2010. 

UK Services

	H1 FY11	H1 FY10
	£m	£m
Orders	194.2	222.9
Revenue	299.1	336.7
Underlying operating profit *	21.9	30.5
Underlying operating margin*	7.3%	9.1%
Book to bill ratio (1)	0.9:1	0.9:1

(1)       Excludes remaining £4.0bn (31 March 2010: £4.3bn), in respect of LTPA contract

Revenues declined 7% on an organic basis as the division continued to experience a hiatus in decision-making and spending approvals ahead of the publication of the SDSR.  This resulted in delays in contract awards and shorter duration contracts being let, particularly for advice.  The prior period included the contribution of the Underwater Systems and Calibration businesses sold in 2009.

Underlying operating profit* was £21.9m (H1 FY10 £30.5m), delivering an underlying margin* of 7.3% (H1 FY10: 9.1%), reflecting the reduced utilisation impact ahead of the completion of restructuring, higher pension service costs and reduced property income following a major tenant vacating premises in Farnborough, Hampshire in the second half of last year.

Contract wins included a managed services contract with FMV, the Swedish defence administration, to run its flight physiological centre in Sweden. This strategic partnership is expected to provide a foundation for new opportunities in the provision of technical managed services in this marketplace.  The advice business continued to maintain strong relationships with key customers as evidenced by the provision of procurement and programme support to the Future Submarine Programme and orders for C4ISTAR research and advice at the end of the reporting period.

The Australian business performed well with increased revenues, profits and orders including a five year contract from the Australian Department of Defence, to provide engineering services to the Defence Science and Technology Organisation at their Melbourne facility.

Defence Training Review (DTR)

On 19 October 2010 the UK MOD terminated the Defence Training Review programme for which QinetiQ was preferred bidder as a 50/50 equity partner in the Metrix joint venture. Cash costs incurred totalling £37.1m which were previously capitalised on the Group balance sheet have been provided for as an exceptional item. The MOD has indicated that it will be publishing a revised procurement strategy in 2011. Given QinetiQ's expertise in training, which will remain a priority across the Forces, and the Group's specific knowledge and expertise of the DTR programme, the Group looks forward to discussing new ways to deliver this objective within current budgetary constraints.

Global Products

	H1 FY11	H1 FY10
	£m	£m
Orders	413.0	158.5
Revenue	247.2	149.5
Underlying operating profit *	18.0	3.9
Underlying operating margin*	7.3%	2.6%
Book to bill ratio	1.7:1	1.1:1

Revenues were £247.2m (H1 FY10: £149.5m), a 61% organic increase at constant currency, driven by orders for survivability products in support of operations in Afghanistan. The underlying operating profit* of £18.0m (H1 FY10: £3.9m) produced an underlying margin* of 7.3% (H1 FY10: 2.6%). This performance demonstrates the contribution potential of the products business and also the lumpiness of its revenue profile. 

TALON® robots experienced some revenue growth over the comparator period, but, this strong first half performance was primarily driven by sales of the Q-NET vehicle survivability product. This was provided mainly for the MRAP Lite vehicle, although trial first time orders were also received for the Stryker vehicle.  With the production facility now running at full capacity, the business expects to deliver the bulk of existing orders for the MRAP Lite fleet within the current financial year.

Improved performance in the US part of the Global Products business was largely offset by the decline in UK product revenues due to contract delays and cancellations from the MOD. However, in September the business was awarded a multi-million pound contract to provide radar protection to UK bases. In addition, the Optasense fibre-optic Distributed Acoustic Sensing business made good progress in the energy sector with a new three year, £26.5m contract with Shell.

Financial Items

Tax

The Group's underlying effective tax rate* was 17.1% (H1 FY10: 18.2%).  The Group continues to benefit from the availability of UK research and development relief.

Earnings per share

Underlying earnings per share* were 6.5p compared with 5.7p for the half year period to 30 September 2009.  Basic earnings per share constituted a loss of (6.4)p (H1 FY10: 0.1p) over the same period.

Dividend

In line with QinetiQ's self-help programme detailed in the Board's statement on 27 May 2010, no interim dividend payment will be made for the current year. It is the Board's expectation that the Group will pay a final dividend with respect to the financial year ending 31 March 2011.

Cash flow, net debt and liquidity

Cash flow remains a top priority and the Group's closing net debt at 30 September 2010 was £327.0m, compared with £452.3m at 30 September 2009.  This translated into a net debt to EBITDA** ratio of 1.9x at 30 September 2010.

The Group's underlying operating cash conversion* post capital expenditure was 231% (H1 FY10: 148%), as a result of a keen focus on cash generation, the close out of the DoD fiscal year and some deferred capital expenditure.  Although working capital was reduced in the period, some reversals are likely in H2 with the start of the DoD fiscal year.

As the Group's borrowings are largely drawn in US dollars, the impact of the movement in the period of £/US$ exchange rate reduced the reported net debt by £16.8m in the period.

The total committed facilities available to the Group at 30 September 2010 were £854.4m. The earliest maturity date of the Group's committed facilities is August 2012.

Foreign exchange

	6 months to 30 September 2010	6 months to 30 September 2009	12 month to 31 March 2010
£/US$ - average	1.52	1.59	1.59
£/US$ - closing	1.58	1.60	1.52
£/US$ - opening	1.52	1.44	1.44

Pensions

The net pension liability under IAS 19, after deferred tax, was £134.8m as at 30 September 2010 (30 September 2009: £113.1m; 31 March 2010: £106.1m).

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

Assumption	30 September 2010	30 September 2009	31 March 2010
Discount rate	5.0%	5.5%	5.6%
Inflation	3.2%	3.1%	3.6%
Salary increase	4.2%	4.1%	4.6%
Life expectancy - male  (currently aged 40)	89	89	89
Life expectancy - female (currently aged 40)	90	90	90

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

Assumption	Change in assumption	Indicative effect on scheme liabilities (before deferred tax)
Discount rate	Increase / decrease by 0.1%	Decrease/increase by £24m
Inflation	Increase / decrease by 0.1%	Increase/decrease by £24m
Salary increase	Increase / decrease by 0.1%	Increase/decrease by £7m
Life expectancy	Increase by 1 year	Increase by £23m

The market value of the assets at 30 September 2010 was £923.7m (30 September 2009:  £795.8m; 31 March 2010: £915.9m) and the present value of scheme liabilities was £1,108.4m (30 September 2009:  £952.9m; 31 March 2010:  £1,063.2m).

ENDS

* Definitions of underlying measures of performance can be found in the glossary.

^** The gearing ratio is adjusted net debt:EBITDA and the definition can be found in the glossary. 

Condensed consolidated income statement

		6 months ended 30 September 2010 (unaudited)			6 months ended 30 September 2009 (unaudited)
all figures in £ million	note	Before acquisition amortisation and specific non-recurring items	Acquisition amortisation and specific non-recurring items*	Total	Before acquisition amortisation and specific non-recurring items	Acquisition amortisation and specific non-recurring items*	Total
Revenue		864.9	-	864.9	806.3	-	806.3
Other operating costs excluding depreciation and amortisation		(782.5)	(70.5)	(853.0)	(725.5)	(40.0)	(765.5)
Share of post-tax profit of equity accounted joint ventures and associates		0.1	-	0.1	0.1	-	0.1
Other income		1.7	-	1.7	3.2	-	3.2
EBITDA (earnings before interest, tax, depreciation and amortisation)		84.2	(70.5)	13.7	84.1	(40.0)	44.1
Depreciation and impairment of property, plant and equipment		(15.8)	(4.8)	(20.6)	(16.5)	-	(16.5)
Amortisation of intangible assets		(3.5)	(13.9)	(17.4)	(5.1)	(12.9)	(18.0)
Operating profit		64.9	(89.2)	(24.3)	62.5	(52.9)	9.6
Net gain on business divestments and unrealised impairment of investments		-	-	-	-	6.5	6.5
Finance income	3	34.5	-	34.5	23.8	-	23.8
Finance expense	3	(47.8)	-	(47.8)	(41.2)	-	(41.2)
Profit/(loss) before tax		51.6	(89.2)	(37.6)	45.1	(46.4)	(1.3)
Taxation	4	(8.8)	4.3	(4.5)	(8.2)	10.3	2.1
Profit/(loss) for the period attributable to equity shareholders		42.8	(84.9)	(42.1)	36.9	(36.1)	0.8
Earnings per share
Basic	6			(6.4)p			0.1p
Diluted	6			(6.4)p			0.1p

*    Specific non-recurring items include net gains on business divestments, impairments of investments, impairment of property, plant and equipment, restructuring costs, inventory provisions in respect of capitalised DTR-programme bid costs and tax thereon.

 Condensed consolidated statement of comprehensive income

all figures in £ million	6 months ended 30 September 2010 (unaudited)	6 months ended 30 September 2009 (unaudited)
(Loss)/profit for the period	(42.1)	0.8
Other comprehensive income:
Effective portion of change in fair value of net investment hedges	-	6.7
Foreign currency translation differences for foreign operations	(14.7)	(43.0)
Increase in fair value of hedging derivatives	4.8	18.8
Movement in deferred tax on hedging derivatives	(1.3)	(5.3)
Revaluation of previously impaired investments	0.4	1.8
Actuarial loss recognised in defined benefit pension schemes	(48.0)	(59.6)
Increase in deferred tax asset due to actuarial movement in pension deficit	13.4	16.7
Other comprehensive income for the period, net of tax	(45.4)	(63.9)
Total comprehensive income for the period attributable to equity holders	(87.5)	(63.1)

Condensed consolidated statement of changes in equity

all figures in £ million	Issued share capital	Capital redemption reserve	Share premium	Hedge reserve	Translation reserve	Retained earnings	Total	Non-controlling interest	Total equity
At 1 April 2010	6.6	39.9	147.6	(12.1)	54.4	237.2	473.6	0.1	473.7
Total comprehensive income for the period	-	-	-	3.5	(14.7)	(76.3)	(87.5)	-	(87.5)
Purchase of own shares	-	-	-	-	-	(0.3)	(0.3)	-	(0.3)
Share-based payments	-	-	-	-	-	3.8	3.8	-	3.8
At 30 September 2010	6.6	39.9	147.6	(8.6)	39.7	164.4	389.6	0.1	389.7
At 1 April 2009	6.6	39.9	147.6	(16.7)	56.5	368.7	602.6	0.1	602.7
Total comprehensive income for the period	-	-	-	13.5	(36.3)	(40.3)	(63.1)	-	(63.1)
Dividends paid	-	-	-	-	-	(21.3)	(21.3)	-	(21.3)
Purchase of own shares	-	-	-	-	-	(0.4)	(0.4)	-	(0.4)
Share-based payments	-	-	-	-	-	3.2	3.2	-	3.2
At 30 September 2009	6.6	39.9	147.6	(3.2)	20.2	309.9	521.0	0.1	521.1

Condensed consolidated balance sheet

all figures in £ million	Note	30 September 2010 (unaudited)	30 September 2009 (unaudited)	31 March 2010 (restated*)
Non-current assets
Goodwill		531.2	593.9	577.8
Intangible assets		118.5	159.9	141.7
Property, plant and equipment		271.7	318.8	285.5
Other financial assets		9.2	12.3	10.0
Equity accounted investments		1.0	0.7	0.9
Other investments		4.8	13.8	4.8
Deferred tax asset		52.7	-	28.7
		989.1	1,099.4	1,049.4
Current assets
Inventories		53.1	64.6	79.8
Other financial assets		4.2	3.0	7.8
Trade and other receivables		348.4	425.6	423.8
Current tax		-	1.5	-
Investments		2.7	2.4	2.3
Assets classified as held for sale	7	38.0	6.4	5.1
Cash and cash equivalents		38.1	63.0	63.9
		484.5	566.5	582.7
Total assets		1,473.6	1,665.9	1,632.1
Current liabilities
Trade and other payables		(424.0)	(372.3)	(396.4)
Current tax		(6.2)	-	(7.5)
Provisions		(44.2)	(33.3)	(16.1)
Other financial liabilities		(2.6)	(7.3)	(8.9)
		(477.0)	(412.9)	(428.9)
Non-current liabilities
Retirement benefit obligation	11	(184.7)	(157.1)	(147.3)
Deferred tax liability		(12.5)	-	(8.9)
Provisions		(7.2)	(6.4)	(7.9)
Other financial liabilities		(375.9)	(523.3)	(530.2)
Other payables		(26.6)	(45.1)	(35.2)
		(606.9)	(731.9)	(729.5)
Total liabilities		(1,083.9)	(1,144.8)	(1,158.4)
Net assets		389.7	521.1	473.7
Capital and reserves
Ordinary shares		6.6	6.6	6.6
Capital redemption reserve		39.9	39.9	39.9
Share premium account		147.6	147.6	147.6
Hedging and translation reserve		31.1	17.0	42.3
Retained earnings		164.4	309.9	237.2
Capital and reserves attributable to shareholders of the parent company		389.6	521.0	473.6
Non-controlling interest		0.1	0.1	0.1
Total shareholders' funds		389.7	521.1	473.7

*    Goodwill and deferred tax liabilities have been restated to reflect fair value changes in respect of an acquisition in the year ended 31 March 2010 (note 1).

Condensed consolidated cash flow statement

all figures in £ million	Note	6 months ended 30 September 2010 (unaudited)	6 months ended 30 September 2009 (unaudited)	Year ended 31 March 2010 (audited)
Net cash inflow from operations before reorganisation costs	8	158.0	105.7	204.6
Net cash outflow relating to reorganisation		(5.8)	(13.7)	(35.4)
Net cash inflow from operations		152.2	92.0	169.2
Tax (paid)/received		(13.4)	4.5	1.5
Interest received		0.2	0.4	0.4
Interest paid		(17.4)	(21.1)	(36.8)
Net cash inflow from operating activities		121.6	75.8	134.3
Purchases of intangible assets		(0.5)	(1.1)	(6.2)
Purchases of property, plant and equipment		(7.6)	(12.2)	(24.1)
Costs from sale of property, plant and equipment		-	(0.2)	(0.7)
Equity accounted investments and other investment funding		(0.2)	(1.0)	(1.1)
Purchase of subsidiary undertakings		-	(33.6)	(46.3)
Net cash acquired with subsidiary undertakings		-	0.8	0.7
Proceeds from sale of interests in subsidiary undertakings		-	22.7	21.1
Net cash outflow from investing activities		(8.3)	(24.6)	(56.6)
Repayment of bank borrowings		(139.0)	(213.5)	(232.1)
Proceeds from bank borrowings		4.9	-	-
Settlement of forward contracts designated as net investment hedges		-	(14.3)	(14.3)
Purchase of own shares		(0.3)	(0.4)	(0.8)
Dividends paid to shareholders		-	(21.3)	(31.6)
Capital element of finance lease rental payments		(1.4)	(1.4)	(2.8)
Capital element of finance lease rental receipts		1.5	1.5	3.0
Net cash outflow from financing activities		(134.3)	(249.4)	(278.6)
Decrease in cash and cash equivalents		(21.0)	(198.2)	(200.9)
Effect of foreign exchange changes on cash and cash equivalents		(1.6)	(0.9)	(0.5)
Cash and cash equivalents at beginning of period		60.7	262.1	262.1
Cash and cash equivalents at end of period		38.1	63.0	60.7

Reconciliation of movement in net debt

all figures in £ million	Note	6 months ended 30 September 2010 (unaudited)	6 months ended 30 September 2009 (unaudited)	Year ended 31 March 2010 (audited)
Decrease in cash and cash equivalents		(21.0)	(198.2)	(200.9)
Cash flows from repayment of loans, private placement and other financial instruments		134.0	227.7	246.2
Change in net debt resulting from cash flows		113.0	29.5	45.3
Other non-cash movements including foreign exchange		17.4	56.1	35.2
Decrease in net debt		130.4	85.6	80.5
Net debt at beginning of period		(457.4)	(537.9)	(537.9)
Net debt at end of period	9	(327.0)	(452.3)	(457.4)

Notes to the condensed interim financial statements

1.  Significant accounting policies

Basis of preparation

QinetiQ Group plc is a company domiciled in the United Kingdom. The condensed consolidated interim financial statements of the Group for the six months ended 30 September 2010 comprise the Group and its subsidiaries (together referred to as the "Group") and were approved by the Board of Directors on 16 November 2010.

These condensed Group interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the requirements of the Disclosure and Transparency Rules (DTR) of the Financial Services Authority. They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's financial statements for the year ended 31 March 2010. These condensed interim financial statements do not comprise statutory accounts within the meaning of Section 498 (2) or (3) of the Companies Act 2006, and should be read in conjunction with the Group's financial statements for the year ended 31 March 2010.

The Group separately presents acquisition amortisation and specific non-recurring items in the income statement which, in the judgement of the Directors, need to be disclosed separately by virtue of their size and incidence in order for the reader to obtain a proper understanding of the financial information. Specific non-recurring items include net gains on business divestments, impairments of investments, impairment of property, plant and equipment, restructuring costs, inventory provisions in respect of capitalised DTR-programme bid costs and tax thereon. 

Comparative data and restatement

The comparative figures for the balance sheet for the year ended 31 March 2010 have been restated to update the initial estimate of the fair value of assets acquired with Cyveillance, Inc. on 1 July 2009. The tax losses acquired at the time have subsequently been valued. The financial effect of this is to reduce goodwill and decrease the deferred tax liability on the balance sheet by £1.9m. There is no effect on the Group's reported profit before tax for these periods. An additional column has not been included on the balance sheet to show the opening position in relation to the restated amounts as the restatement would not have affected the opening position.

The comparative figures for the segmental analysis for the six months to 30 September 2009 have been restated to reflect the reorganised structure.

The comparative figures for the year ended 31 March 2010 do not contain all of the information required for full annual financial statements. The Group's full annual financial statements for the year ended 31 March 2010 have been reported on by the Group's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's financial statements for the year ended 31 March 2010 are available upon request from the Company's registered office at 85 Buckingham Gate, London, SW1E 6PD.

 

Recent accounting developments

Except as described below, the accounting policies adopted in the preparation of these condensed consolidated financial statements are consistent with the policies applied by the Group in its consolidated financial statements for the year ended 31 March 2010.

The following EU-endorsed, new, revised and amended published standards and interpretations are effective for accounting periods beginning on or after 1 April 2010 and have been adopted:

·      IFRS 3 (revised), Business Combinations and amendments to IAS 27, Consolidated and Separate Financial Statements. The standard continues to apply the acquisition method to business combinations with some significant changes. For example, all acquisition related costs will be expensed and all payments to purchase a business will be recorded at fair value at the acquisition date, with contingent payments subsequently re-measured at fair value through the income statement. There are also changes to the reporting of non-controlling interest. These revisions will impact the way in which the Group reports all future business combinations.

·      Improvements to IFRSs 2009(effective from various period-beginning dates, the first being on or after 1 January 2010).

The following EU-endorsed amendments, improvements and interpretations of published standards are effective for accounting periods beginning on or after 1 April 2010 and have been adopted with no material impact on the Group's financial statements:

·      IFRS 1 (revised), First-time Adoption of IFRS;

·      Amendments to IFRS 1, First-time Adoption of IFRS;

·      Amendments to IFRS 2, Share-based payment;

·      Amendment to IAS 32, Financial Instruments: Presentation;

·      Amendment to IAS 39, Financial Instruments: Recognition and Measurement;

·      Amendment to IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction;

·      IFRIC 16, Hedges of a Net investment in a Foreign operation; and

·      IFRIC 17, Distribution of Non-cash assets to Owners.

2.  Segmental analysis

Operating segments

all figures in £ million	Six months ended 30 September 2010 (unaudited)				Six months ended 30 September 2009 (unaudited) restated(2)
	Revenue		Operating Profit(1)		Revenue		Operating Profit(1)
US Services	318.6		25.0		320.1		28.1
UK Services	299.1		21.9		336.7		30.5
Global Products	247.2		18.0		149.5		3.9
Total operating segments	864.9		64.9		806.3		62.5
Operating profit before acquisition amortisation and specific non-recurring items(1)				64.9				62.5
Restructuring charge				(33.4)				(40.0)
Inventory provisions in respect of capitalised DTR-programme bid costs				(37.1)				-
Non-recurring operating costs before amortisation, depreciation and impairment				(70.5)				(40.0)
Impairment of property, plant and equipment				(4.8)				-
Amortisation of intangible assets arising from acquisitions				(13.9)				(12.9)
Operating (loss)/profit				(24.3)				9.6
Gain on business divestments and unrealised impairment of investments				-				6.5
Net finance expense				(13.3)				(17.4)
Loss before tax				(37.6)				(1.3)
Taxation				(4.5)				2.1
(Loss)/profit for the period				(42.1)				0.8

 ⁽¹⁾ Operating profit before acquisition amortisation is stated before specific non-recurring items. Specific non-recurring items include gains on business divestments, impairments of investments, impairment of property, plant and equipment, restructuring costs, inventory provisions in respect of capitalised DTR-programme bid costs and tax thereon. This is the measure of profit presented to the chief operating decision maker.

⁽²⁾ The comparative figures for the six months ended 30 September 2009 have been restated to reflect the reorganised structure adopted at the start of the current financial year. The segments previously reported were Europe, Middle East and Australasia (EMEA), QinetiQ North America (QNA) and Ventures.

Six months ended 30 September 2010 (unaudited)
all figures in £ million	US Services	UK Services	Global Products	Unallocated	Total
Segment assets+	613.7	431.2	317.3	7.2	1,369.4
Unallocated financial assets	-	-	-	51.5	51.5
Unallocated tax assets	-	-	-	52.7	52.7
Total assets	613.7	431.2	317.3	111.4	1,473.6
Six months ended 30 September 2009 (unaudited) restated
all figures in £ million	US Services	UK Services	Global Products	Unallocated	Total
Segment assets+	649.0	555.0	375.0	7.1	1,586.1
Unallocated financial assets	-	-	-	78.3	78.3
Unallocated tax asset	-	-	-	1.5	1.5
Total assets	649.0	555.0	375.0	86.9	1,665.9

⁺    Segment assets exclude unallocated financial assets and unallocated tax assets

3.   Finance income and expense

All figures in £ million	Six months ended 30 September 2010 (unaudited)	Six months ended 30 September 2009 (unaudited)
Receivable on bank deposits	0.2	0.4
Finance lease income	0.6	0.7
Expected return on pension scheme assets	33.7	22.7
Finance income	34.5	23.8
Amortisation of recapitalisation fee	(0.2)	(0.3)
Interest on bank loans and overdrafts	(5.2)	(4.3)
Interest on US-dollar private placement debt	(12.2)	(11.6)
Finance lease expense	(0.5)	(0.6)
Unwinding of discount on financial liabilities	(0.3)	(0.4)
Interest on pension scheme liabilities	(29.4)	(24.0)
Finance expense	(47.8)	(41.2)
Net finance expense	(13.3)	(17.4)

4.   Taxation

The tax charge has been based on the expected tax rate of 17.1% for the year ending 31 March 2011 (31 March 2010: 18.2%) on the Group's profit before tax, amortisation of intangible assets arising from acquisition and specific non-recurring items. The tax impact of the amortisation of intangible assets arising from acquisition and specific non-recurring items is £4.3m for the six months ended 30 September 2010 (£10.3m for the six months ended 30 September 2009).

5.  Dividends

An analysis of the dividends paid and proposed in respect of the period ended 30 September 2010 and comparative periods is provided below:

	Pence per share	£m	Date paid/payable
Interim 2011	-	-	-
Interim 2010	1.58	10.4	Feb 2010
Final 2010	-	-	-
Total for the year ended 31 March 2010	1.58	10.4

6.  Earnings per share

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

			Six months ended 30 September 2010 (unaudited)	Six months ended 30 September 2009 (unaudited)
Basic EPS
(Loss)/profit attributable to equity shareholders	£m		(42.1)	0.8
Weighted average number of shares	million		654.4	653.0
Basic EPS	pence		(6.4)	0.1
Diluted EPS
(Loss)/profit attributable to equity shareholders	£m		(42.1)	0.8
Weighted average number of shares	million		654.4	653.0
Effect of dilutive securities(1)	million		-	3.5
Dilutive number of shares	million		654.4	656.5
Diluted EPS	pence		(6.4)	0.1

(1)  The loss attributable to equity shareholders in the period ended 30 September 2010 results in no effect of dilutive securities to the weighted average number of shares. If there had been a profit in the period ended 30 September 2010 the effect of dilutive securities would have been to increase the diluted number of shares by 3.4m. 

			Six months ended 30 September 2010 (unaudited)	Six months ended 30 September 2009 (unaudited)
Underlying basic EPS
(Loss)/profit attributable to equity shareholders	£m		(42.1)	0.8
Reorganisation costs	£m		33.4	40.0
Gain on business divestments and unrealised impairment of investments	£m		-	(6.5)
Inventory provisions in respect of capitalised DTR-programme bid costs	£m		37.1	-
Impairment of property, plant and equipment	£m		4.8	-
Amortisation of intangible assets arising from acquisitions	£m		13.9	12.9
Tax impact of items above	£m		(4.3)	(10.3)
Underlying profit after taxation	£m		42.8	36.9
Weighted average number of shares	million		654.4	653.0
Underlying basic EPS	pence		6.5	5.7

7. Assets held for sale

Assets held for sale include the net assets of S&IS, a non-core security operations and access control business within QinetiQ's US Services operation. Agreement has been reached to sell this business to ManTech International Corporation for total consideration of $60m. The net assets of S&IS include £26.2m goodwill, £2.7m other intangibles and £4.0m working capital.

8. Cash flows from operations

all figures in £ million	Six months ended 30 September 2010 (unaudited)	Six months ended 30 September 2009 (unaudited)	Year ended 31 March 2010 (audited)
(Loss)/profit after tax for the period	(42.1)	0.8	(63.3)
Adjustments for:
Taxation	4.5	(2.1)	(2.8)
Net finance costs	13.3	17.4	34.6
(Gain)/loss on business divestments and impairment of investments	-	(6.5)	6.2
Inventory provisions in respect of capitalised DTR-programme bid costs	37.1	-	-
Amortisation of purchased or internally developed intangible assets	3.5	5.1	11.3
Amortisation of intangible assets arising from acquisitions and impairments	13.9	12.9	79.5
Depreciation and impairment of property, plant and equipment	20.6	16.5	59.1
Share of post-tax profit of equity accounted entities	(0.1)	(0.1)	(0.2)
Share-based payments charge	3.8	3.2	5.8
Changes in retirement benefit obligations	(6.3)	(3.1)	(13.0)
Net movement in provisions	27.4	26.6	10.9
	75.6	70.7	128.1
(Increase)/decrease in inventories	(11.7)	1.2	(13.1)
Decrease in trade and other receivables	63.1	86.3	89.9
Increase/(decrease) in payables	25.2	(66.2)	(35.7)
Changes in working capital	76.6	21.3	41.1
Cash generated from operations	152.2	92.0	169.2
Add back: cash outflow relating to business reorganisation	5.8	13.7	35.4
Net cash flow from operations before reorganisation costs	158.0	105.7	204.6

9. Analysis of net debt

all figures in £ million	Six months ended 30 September 2010 (unaudited)	Six months ended 30 September 2009 (unaudited)	Year ended 31 March 2010 (audited)
Due within one year:
Bank and cash	38.1	63.0	63.9
Bank overdraft	-	-	(3.2)
Recapitalisation fee	0.7	0.7	0.7
Finance lease receivables	3.0	3.0	3.0
Finance lease payables	(2.8)	(2.8)	(2.8)
Derivative financial assets	1.2	-	4.8
Derivative financial liabilities	(0.5)	(5.2)	(3.6)
	39.7	58.7	62.8
Due after one year:
Bank loan	(5.0)	(155.5)	(143.7)
Recapitalisation fee	0.6	1.3	0.9
US private placement	(362.8)	(357.0)	(376.7)
Finance lease receivables	9.1	10.8	10.0
Finance lease payables	(8.8)	(10.5)	(9.7)
Derivative financial assets	0.2	1.5	-
Derivative financial liabilities	-	(1.6)	(1.0)
	(366.7)	(511.0)	(520.2)
Total net debt as defined by the Group	(327.0)	(452.3)	(457.4)

10. Own shares and share-based awards

Own shares represent shares in the Company that are held by independent trusts and include treasury shares and shares held by the employee share ownership plan.  Included in retained earnings at 30 September 2010 are 5,612,704 shares (30 September 2009: 6,813,109).        

In the six months to 30 September 2010 the Group granted 5.7 million new share-based awards to certain employees under the Value Sharing Plan.  In the six months ended 30 September 2009 the Group granted 6.3 million new share-based awards to certain employees under the Group Share Option Scheme.

11. Post-retirement benefits

Set out below is a summary of the financial position of the Group's defined benefit pension schemes. 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, are as follows:

all figures in £ million	30 September 2010 (unaudited)	30 September 2009 (unaudited)	31 March 2010 (audited)
Total market value of scheme assets	923.7	795.8	915.9
Present value of scheme liabilities	(1,108.4)	(952.9)	(1,063.2)
Net pension liability before deferred tax	(184.7)	(157.1)	(147.3)
Deferred tax asset	49.9	44.0	41.2
Net pension liability	(134.8)	(113.1)	(106.1)

 

Changes to the net pension liability before deferred tax
all figures in £ million	30 September 2010 (unaudited)	30 September 2009 (unaudited)	31 March 2010 (audited)
Opening net pension liability before tax	(147.3)	(105.2)	(105.2)
Expected return on scheme assets	33.7	22.7	46.3
Actuarial loss on scheme assets	(48.0)	(59.6)	(60.2)
Contributions by the employer	18.6	19.7	38.4
Current service cost	(12.3)	(10.7)	(20.0)
Interest cost	(29.4)	(24.0)	(48.8)
Curtailment gain	-	-	2.0
Scheme disposal	-	-	0.2
Closing net pension liability before deferred tax	(184.7)	(157.1)	(147.3)

 

Assumptions

The major assumptions (weighted to reflect individual scheme differences) were:

	30 September 2010 (unaudited)	30 September 2009 (unaudited)	31 March 2010 (audited)
Rate of increase in salaries	4.2%	4.1%	4.6%
Rate of increase in pensions in payment	3.2%	3.1%	3.6%
Rate of increase in pensions in deferment	3.2%	3.1%	3.6%
Discount rate applied to scheme liabilities	5.0%	5.5%	5.6%
Inflation assumption	3.2%	3.1%	3.6%
Assumed life expectancies in years:
Future male pensioners (currently aged 60)	87	87	87
Future female pensioners (currently aged 60)	89	89	89
Future male pensioners (currently aged 40)	89	89	89
Future female pensioners (currently aged 40)	90	90	90

12. Contingent liabilities and assets

The Group, including subsidiary undertakings, has given unsecured guarantees primarily on leased properties and bank lines of £56.6m at 30 September 2010 (30 September 2009: £54.3m) in the ordinary course of business.

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

The Group has not recognised contingent amounts receivable relating to the Chertsey property which was disposed of during 2004 or the Fort Halstead property disposed of in September 2005. Additional consideration, subject to clawback to the MOD pursuant to the arrangements referred to in note 35 of the 2010 annual report, is potentially due upon the purchasers obtaining additional planning consents, with the quantum dependent on the scope of the consent achieved.

13. Related party transactions with equity accounted investments

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. During the period ended 30 September 2010 there were sales to joint ventures and associates of £1.0m (30 September 2009: £0.9m, 31 March 2010: £1.9m). There were no other related party transactions between the Group and its joint ventures and associates in the period.

14. Post balance sheet events

On 11 October 2010 the Group announced the completion of the disposal of S&IS - a non-core security operations and access control business within QinetiQ's US Services operation - to ManTech International Corporation. The total consideration was $60m, payable in cash, which will generate approximately $40m of net proceeds after tax.

Principal risks and uncertainties

The Group continues to be exposed to a number of risks and uncertainties which management continue to assess, manage and mitigate to minimise their potential impact on the reported performance of the Group. Pages 18-21 of the 2010 Annual Report and Accounts detail the principal risks and uncertainties which have not materially changed and these are expected to continue to be relevant for the remaining six months of the year.

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

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

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

·      Changing in the timing of contracts;

·      Financial position of the defined benefit pension scheme;

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

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

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

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

·      Exchange rate movement;

·      Raising external funding and volatility in interest rates;

·      Fixed price contracts;

·      Acquisition of businesses;

·      Inherent risks from trading in a global marketplace;

·      Highly competitive marketplace;

·      Realisation of value from intellectual property may be delayed.

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

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

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

b.     The interim management report includes a fair review of the information required 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 related party transactions that have taken place in the interim period and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board

Leo Quinn	David Mellors
Chief Executive Officer	Chief Financial Officer
18 November 2010	18 November 2010

Independent review report to QinetiQ Group plc

We have been engaged by the Company to review the condensed set of financial statements in the interim financial report for the six months ended 30 September 2010 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (the DTR) of the UK's Financial Services Authority (the UK FSA). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the DTR of the UK FSA.

The annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union (EU). The condensed set of financial statements included in this interim financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

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

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 30 September 2010 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

Mike Maloney

For and on behalf of KPMG Audit Plc

Chartered Accountants

15 Canada Square

London

E14 5GL

18 November 2010

Glossary

AGM		Annual General Meeting
Backlog		The expected future value of revenue from contractually committed and funded customer orders (excluding £4.0bn value of the remaining 18 years of LTPA contract)
Book to bill ratio		Ratio of funded orders received in the year to revenue for the year, adjusted to exclude revenue from the 25-year LTPA contract
DoD		US Department of Defense
DTR		MOD's Defence Training Review programme
EBITDA		Earnings before interest, tax, depreciation and amortisation, gain on business divestment, impairments of investments, impairment of property, plant and equipment, restructuring costs and inventory provisions in respect of capitalised DTR-programme bid costs
EPS		Earnings per share
ETIS		NASA Environmental Test and Integration Services
EU		European Union
IAS		International Accounting Standards
IFRS		International Financial Reporting Standards
LTPA		Long-Term Partnering Agreement - 25 year contract established in 2003 to manage the MOD's test and evaluation ranges
MOD		UK Ministry of Defence
NASA		National Aeronautics and Space Administration (USA)
OCI		Organisational Conflicts of Interest
Organic Growth		The level of year-on-year growth, expressed as a percentage, calculated at constant foreign exchange rates, adjusting comparatives to incorporate the results of acquired entities and excluding the results for any disposals or discontinued operations for the same duration of ownership as the current period
Specific non-recurring items		Gain on business divestment, impairments of investments, impairment of property, plant and equipment, restructuring costs, inventory provisions in respect of capitalised DTR-programme bid costs and tax thereon
Underlying basic earnings per share		Basic earnings per share as adjusted for amortisation of intangible assets arising from acquisitions, specific non-recurring items and tax thereon
Underlying cash flow from operations		The net cash flow from operations (excluding major reorganisations) less outflows on the purchase of intangible assets and property, plant and equipment
Underlying effective tax rate		The tax charge for the year excluding the tax on specific non-recurring items expressed as a percentage of underlying profit before tax
Underlying operating cash conversion		The ratio of net cash flow from operations (excluding major reorganisations), less outflows on the purchase of intangible assets and property, plant and equipment to underlying operating profit excluding share of post tax result of equity accounted joint ventures and associates
Underlying operating margin		Underlying operating profit expressed as a percentage of revenue
Underlying operating profit		Earnings before interest, tax, amortisation of intangibles arising on acquisitions and specific non-recurring items
Underlying profit before tax		Profit before tax excluding amortisation of intangible assets arising from acquisitions and specific non-recurring items.

 

END

 

 

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