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QinetiQ Group plc (QQ.)

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Wednesday 13 June, 2018

QinetiQ Group plc

Annual Financial Report

RNS Number : 2834R
QinetiQ Group plc
13 June 2018
 

 

QINETIQ GROUP PLC

 

13 June 2018

 

Availability of Annual Report and Accounts 2018 and Notice of 2018 Annual General Meeting

 

QinetiQ Group plc has today published the following documents:

 

·      QinetiQ 2018 Annual Report and Accounts;

·      Notice of 2018 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 2018 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 2018 Annual General Meeting will be held at 11.00 am on Wednesday, 25 July 2018 at the offices of Ashurst LLP, Broadwalk House, 5 Appold Street, London EC2A 2AG.

 

In compliance with paragraph 6.3.5 of the Disclosure Guidance and Transparency Rules, the information in respect of Principal Risks, 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 24 May 2018 (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 2018 Annual Report and Accounts.

 

Enquiries:

 

Jon Messent - Company Secretary

+44 (0) 1252 392000

Ian Brown - Group Head of Investor Relations

+44 (0) 7908 251123

Press Office

+44 (0) 1252 393500



 

APPENDIX

 

PRINCIPAL RISKS

AN INTERGRATED APPROACH TO RISK MANAGEMENT

Risk management framework

Effective risk management plays an integral role in everything we do: ensuring we utilise the Group-wide risk management framework to inform our decision-making, support the successful delivery of our objectives and increase our operational efficiency.

 

Our strategic focus on commercial innovation and changes in our core customers' approach to risk are key business drivers shaping our application of risk management. Proposing innovative business models and taking a more outputs-based approach to existing and new contracts are examples of how we are taking on more risk to pursue opportunities, while simultaneously innovating for our customers' advantage.

 

Our risk management framework, including key responsibilities is shown to the right. The reports of the Audit Committee and Risk & CSR Committee can be found on pages 55 to 61. Details of the Group's system of risk management and internal control can be found in the corporate governance statement on pages 50 to 54.

 

Top down

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bottom

up

 

Board of Directors

Responsible for effective risk management across QinetiQ Group. Sets risk appetite and assesses principal risks.

Risk & CSR Committee

Focuses on risks where the primary impact is non-financial.

Audit Committee

Focuses on risks where the primary impact is financial.

Executive Committee

Identifies and monitors the principal risks, as well as the material risks (including operational) reported from the Business and Group Functions.

Risk Management

Designs and facilitates the risk management processes across the organisation, provides risk expertise and support to the businesses and reports risk information across the Group.

Internal Audit

Provides assurance to senior management and the Board on the effective implementation of risk management processes and internal control systems, through an ongoing programme of risk-based audits.

Business and Operational Management

Own and review Business and Operational risks, operate controls and implement mitigation actions.

 

 

 

QinetiQ risk appetite

The Board defines and reviews its tolerance of risk through establishing a clear risk appetite and setting appropriate delegations of authority to the executive and senior leaders. QinetiQ focuses on those critical risk areas necessary to achieve our strategic goals. The risk appetite is articulated by defining three categories which describe the balance of scrutiny and mitigation activity against likely benefit or reward:

 

Cautious

Avoidance of uncertainty - with negligible or low residual risk. Applying innovation prudently where the risks are fully understood.

 

Balanced

Preference for delivery options that have a low or moderate degree of residual risk. Applying innovation only where successful delivery is likely.

 

Eager

Willing to consider all delivery options despite greater inherent risk and eager to be innovative.

 

Commercial

Opportunities relating to increased market share where we have proven delivery into existing markets

Eager

Opportunities that translate proven delivery into new markets

Balanced to Eager

Opportunities that translate new capability/delivery into existing customers.

Balanced

Opportunities that involve new capability or delivery into new markets.

Cautious to Balanced

Operational

Operational delivery

Cautious to Balanced

Compliance with legal and regulatory requirements

Cautious

 

 

Risk register

The Group risk register consists of material risks relating to effective delivery of our strategy. The Board recognises that some risks may be affected by factors outside the control of the Company and also recognises that however robust 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.

 

Note: The Transformation Programme risk included in the 2017 Annual Report has been retired following the successful completion of the initial Programme. However, focus remains on ensuring subsequent changes are embedded.

 

 

Strategic risks

UK Defence Test and Evaluation strategy

International strategy

Risk

UK Government budget constraints lead to reduced spending in the core markets in which the Group operates. EU exit causes a loss of market confidence and reduction in collaborative EU funding.

Risk

Plans to grow our international business may be impacted by external influences outside of our control, such as geopolitical risks, or specific risks arising from working in new markets.

Impact

A reduction in revenue and associated profitability from the Group's government and defence contracts.

Impact

Unable to realise expected growth in the planned time-frames.

Mitigation

Our strategy is focused on leading and modernising UK Test and Evaluation in support of our customers' objectives.

 

Proactive engagement with our major customers allows us to support their objectives and our investment into core contracts helps to ensure that we are able to provide the right services as the threat environment continues to evolve.

 

Read more in the Strategic report on page 8.

Mitigation

Our international strategy is focused on the markets we feel we have the best routes to access with the most appropriate products or services.

 

Adopting a focused approach ensures we can closely monitor our progress, adapting and responding as necessary.

 

We undertake extensive due diligence, taking the appropriate professional advice to ensure structural, regulatory, legal and political risks are understood and minimised.

 

We partner, where appropriate, with high-quality local businesses to leverage their infrastructure and de-risk the process.

 

Read more about our addressable markets on page 16.

Metrics

-    Customer satisfaction

-    All financial KPIs

Metrics

-  All financial KPIs

-  International revenue

Responsibility

Group Director Business Development

Responsibility

Managing Director International

Risk appetite

Eager

Risk appetite

Balanced to Eager

Likelihood/Impact

Medium/High

Likelihood/Impact

Medium/High

Proximity/Velocity

0 -1 years / medium

Proximity/Velocity

0 -1 years / medium

 

 

Strategic risks

Innovation strategy

A material element of the Group's revenue is derived from one contract

Single source contract regulations

 

Risk

Failure to create a culture of innovation or to invest adequately in, or create value from, our innovation investment. As well as the risks arising from the introduction of disruptive technologies/alternative business models.

Risk

The Long Term Partnering Agreement (LTPA) is a 25-year partnering relationship with UK MOD to provide test, evaluation, and training services. UK Government budget constraints could lead to a material change to the contract.

Risk

Group performance is adversely affected by application of regulations from the Single Source Regulations Office (SSRO).

Impact

Negative impact on the Group's market position, competitiveness, and future growth.

Impact

The LTPA directly contributes a material proportion of the Group's revenue and earnings.

Impact

The regulations could have an adverse impact on the Group's financial performance.

Mitigation

We have a strong track record of innovation.

 

Our overall strategy helps us to ensure that we focus our innovation on areas with clear commercial opportunities.

 

We are focused on effective collaboration to find the best routes to market for our technology, such as our partnership with Rockwell Collins.

 

Our operating model, based on matrix working, helps to ensure that any internal barriers to collaboration and knowledge sharing are removed.

 

Read more about our approach to innovation on page 15.

Mitigation

Our aim is to provide our customer with the capabilities they need to test and train against current and future threats in a cost-effective manner - leading and modernising UK T&E.

 

As a business we have become more customer focused and we are applying this to understanding requirements for the remainder of the LTPA which we are in the process of negotiating.

 

Our recent investment into a core part of this contract continues to ensure it meets our customer's expectations and remains relevant in an evolving threat environment.

Mitigation

Our strategy to lead and modernise UK T&E and invest in our core contracts allows us to put a greater volume of our UK single sourced work onto longer-term firm-price contracts, reducing the proportion of our revenues exposed to changes

in the SSRO rate.

 

Our growing international business provides the opportunity for us to earn higher-margin work which further mitigates SSRO margin pressure on qualifying work within the UK.

 

QinetiQ continues to support a joint industry position in refining the SSRO framework and its practical application.

Metrics

- Customer satisfaction

- Employee engagement

- IRAD investment

Metrics

- All financial KPIs except orders

- Customer satisfaction

Metrics

- Customer satisfaction

- All financial KPIs

Responsibility

Group Director Business Development

Responsibility

Managing Director Maritime, Land and Weapons Group Director Test & Evaluation

Responsibility

Chief Financial Officer

Risk Appetite

Balanced

Risk Appetite

Balanced

Risk Appetite

Cautious

Likelihood/Impact

Medium/High

Likelihood/Impact

Medium/High

Likelihood/Impact

Medium/High

Proximity/Velocity

1 - 2 years / low

Proximity/Velocity

1 - 2 years / low

Proximity/Velocity

0 - 1 years / medium

 

Operational risks

Recruitment and retention

Significant breach of relevant

laws and regulations

Security and IT systems

Risk

The Group operates in many specialised engineering, technical and scientific domains where key capabilities and competencies may be lost through failure to recruit and retain employees or a lack of domain-specific graduates leads to a future skills shortage.

Risk

The Group operates in highly regulated environments and recognises that non-compliance has the potential to compromise our ability to conduct business in certain jurisdictions and  would potentially have an impact on a variety

of stakeholders.

Risk

A breach of physical or data security, cyber- attacks or IT systems failure could have an adverse impact on our customers' operations.

Impact

Delivery of business strategies, plans and projects would be impacted negatively

Impact

Failure to comply with particular regulations could result in a combination of fines, penalties, civil or criminal action, suspension or debarment from government contracts, as well as damage to the QinetiQ brand.

Impact

Significant reputational damage, as well as

the possibility of exclusion from some types of government contracts resulting in reduced orders, revenue and profit

Mitigation

Ensuring regular communication and greater connectivity for our people via the Employee Engagement Group, face-to-face

communications, and the launch of the Global Portal, our new intranet.

 

Helping our people to develop and fulfil their potential via the QinetiQ Academy and clear succession planning.

 

Ensuring we have access to talent now and in the future such as the STEM outreach programme and as founding members of The 5% Club.

 

Read more about our people on page 32.

Mitigation

Instilling the right behaviours and culture within QinetiQ is a key part in minimising the risks.

 

In addition, the Group's robust policy, procedures and mandatory training defines clear expectations for the Group and its employees.

 

Key areas of focus include:

Safety of product and services, health, safety & environment, international trade controls, bribery and ethics, where the Group adopts a zero tolerance approach to bribery and corruption.

 

Read more on page 34.

Mitigation

Data security is assured through a multi-layered approach that provides a hardened environment, including robust physical security arrangements and data resilience strategies.

 

Information systems are designed with consideration to single points of failure and  comply with relevant accreditation standards. Mandatory security awareness training for all staff.

 

Metrics

- Employee engagement

- Apprentices and graduates

- Voluntary employee turnover

Metrics

- Health and safety

- Mandatory training compliance

- Commercial intermediary monitoring

Metrics

- Cyber dashboard

- Security dashboard

Responsibility

Group Director Human Resources

Responsibility

Company Secretary/Group General Counsel

Responsibility

Chief Financial Officer

Risk Appetite

Balanced

Risk Appetite

Cautious

Risk Appetite

Cautious

Likelihood/Impact

Low/Medium

Likelihood/Impact

Medium/High

Likelihood/Impact

Medium/High

Proximity/Velocity

2 + years / low

Proximity/Velocity

0 - 1 years / high

Proximity/Velocity

0 - 1 years / high

 

 

RISK MANAGEMENT IN ACTION

Using our risk appetite to inform our approach to international business 

Our international business growth targets are ambitious and in order to achieve these we need to be clear about the specific risks we face and the level of risk we are prepared to accept (see 'International strategy' risk). We have a Balanced to Eager approach to opportunities where we are able to translate proven capabilities into new markets; with a preference for delivery options that have a high chance of success but a low or moderate degree of residual delivery risk.

 

Our approach to developing our presence in new markets has been to amalgamate local knowledge, business capability, regulatory awareness and cultural values, with our proven capability and technology. The most advantageous approach to achieving this outcome has been to utilise partnerships which deliver a solid platform for growth, minimising our capital investment requirements and deliver an accretive low risk value proposition. Minimising our residual risk exposure in this way strengthens the realisation of sustainable and profitable revenue growth for the International business.

 

Investing into the Long Term Partnering Agreement (LTPA) - Considering risk in how we deploy our capital

Considering the balance between risk and reward is a key part of determining how and where we deploy our capital. We have an Eager risk appetite for opportunities which

increase market share where we have proven delivery into existing markets, ensuring we have considered all delivery options and are innovative.

 

The investment we are making into the LTPA is an example of how risk-based decision-making has been used to identify and progress an opportunity for the mutual benefit of our customer and our business, and is aligned to our strategy of leading and modernising UK T&E.

 

See risks 'UK Defence Test and Evaluation strategy' and 'A material element of the Group's revenue is derived from one contract'.

 

This approach made strategic sense: the long-term contractual revenues, margin and capital repayment profiles, which provide a reasonable rate of return, were complemented by the opportunities to attract a growing share of international work to our UK facilities.

 

LONGER-TERM VIABILITY ASSESSMENT

Assessing the prospects of the Group

The Group's corporate planning processes involve the following individual processes covering differing time frames:

 

1.  An annual Integrated Strategic Business Plan (ISBP) process that looks at the financial outlook for the following five years. This process commences with an assessment of the orders pipeline producing an Order Intake Scenario. A review of the phased delivery profile and the cost base required to support this enables generation of base-case, high-case and low-case profit forecasts. Capex and working capital requirements are also collected, reviewed, approved and a cash flow produced for the Plan period;

2. An annual budget process that covers the first year of the five-year planning horizon in detail;

3. A bi-annual forecast process to update the view of the first budget year (the year which would be in progress);

4. A rolling monthly 'latest best estimate' process to assess significant changes to the budget/forecast for the year in progress.

 

The corporate planning process is underpinned by assessing scenarios and risks that encompass a wide spectrum of potential outcomes, both favourable and adverse.

The downside risk scenarios are designed to explore the resilience of the Group to the potential impact of all the significant risks set out on pages 22 to 25, or a combination of those risks.

 

The scenarios are designed to be severe but plausible, and take full account of the availability and likely effectiveness of the mitigating actions that could be taken to avoid or reduce the impact or occurrence of the underlying risks, and that realistically would be open to them in the circumstances. In considering the likely effectiveness  of such actions, the conclusions of the Board's regular monitoring and review of risk and internal control systems, as discussed on page 60, is taken into account. It is assumed that existing, undrawn bank facilities could be re-financed before they mature in FY20.

 

Alongside the annual review of risk scenarios applied to the strategic plan, performance is rigorously monitored to alert the Board and Executive Committee to the potential crystallisation of a key risk.

 

We consider that this stress-testing based assessment of the Group's prospects is reasonable in the circumstances of the inherent uncertainty involved.

 

The period over which we confirm longer-term viability

The period over which the Directors consider it possible to form a reasonable expectation as to the Group's longer-term viability is the three-year period to

31 March 2021. This is within the period covered by our strategic planning process and is subject to stress-testing and scenario planning around potential risks. It

has been selected because it presents the Board and readers of the Annual Report with a reasonable degree of confidence whilst still providing an appropriate longer- term outlook.

 

Confirmation of longer-term viability

As noted on page 53, the Directors confirm that their assessment of the principal risks facing the Group was robust. Based upon the robust assessment of the principal risks facing the Group and their stress-testing based assessment of the Group's prospects, all of which are described in this statement, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 31 March 2021.

 

RELATED PARTY TRANSACTIONS

This statement is extracted from note 16 in respect of equity accounted investments which can be found on page 111 of the Annual Reports and Accounts.

 

During the year ended 31 March 2018 there were sales to associates and joint ventures of £10.4m (2017: £3.4m). At the year-end there were outstanding receivables from associates and joint ventures of £4.5m (2017: £0.4m).

 

DIRECTORS' RESPONSIBILITY STATEMENT

This statement is in compliance with DTR 4.1.12 and relates to and is extracted from page 80 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 48 and 49 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 Company financial statements, which have been prepared in accordance with the United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company

·       The Group's financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group

·       The management reporting (comprising the Directors' report and the Strategic report) includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

 

 

 

 


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