TIDMQQ.
RNS Number : 5828A
QinetiQ Group plc
25 May 2023
Preliminary Results
25 May 2023
Serving the national security interests of our customers
Results for the year ended 31 March 2023
Statutory results Underlying* results
FY23 FY22 FY23 FY22
Revenue GBP1,580.7m GBP1,320.4m GBP1,580.7m GBP1,320.4m
GBP123.7m
Operating profit (2) GBP172.8m (1) GBP178.9m GBP137.4m
Profit after tax GBP154.4m GBP90.0m GBP152.9m GBP118.1m
Earnings per share 26.8p 15.7p 26.5p 20.6p
Full year dividend per
share 7.7p 7.3p 7.7p 7.3p
Funded order backlog GBP3,070.3m GBP2,828.8m
Orders GBP1,724.1m GBP1,226.6m
Net cash inflow from GBP215.1m GBP220.7m
operations GBP240.6m (1) GBP270.1m (1)
Net (debt)/cash GBP(206.9)m GBP225.1m GBP(206.9)m GBP225.1m
Excellent operational performance across the Group
- Orders up 41%, a record-high of GBP1.7bn, growing our backlog
to GBP3.1bn
- Revenue is up 20% and profit is up 30%; up 11% and 12% respectively
on an organic basis, excluding the impact of the write-down
in FY22
- Cash performance remains strong with 106% conversion
- Statutory operating profit of GBP172.8m, an increase of 40%
- Returns are healthy with underlying EPS up to 26.5p and the
full year dividend up 5% to 7.7p
The defence & security context is heightening market demand for
our distinctive offerings
- We now see an addressable market of more than GBP30bn per year
- We have delivered a step-change in our global growth platform
with two strategic acquisitions in the US and Australia, both
are performing well and the integrations are on-track
FY24 expectations unchanged, upgraded long-term guidance
- We are targeting high single digit organic revenue growth at
11-12% margin
- We have increased the scale of our ambition to grow the company
to approx. GBP3bn revenue by FY27, including further strategic
acquisitions
- This upgraded guidance will approximately double our revenue
and profit over the next 4 years, a 20% improvement to our previous
guidance
* Definitions of the Group's 'Alternative Performance Measures'
can be found in the glossary
(1) Prior year comparatives have been restated due to a change
in accounting policy for Research and Development Expenditure
Credits (RDEC). See note 20 to the financial statements for
details.
(2) Underlying operating profit refers to operating profit from
segments. See note 2 for details.
Steve Wadey, Group Chief Executive Officer said:
"We have delivered an excellent set of results characterised by
a record order intake and strong operational performance across the
Group. The integration of the two strategically significant
acquisitions of Avantus and Air Affairs gives us a compelling
global platform from which to grow.
"We are operating in an uncertain world and the heightened
threat environment is increasing demand for our distinctive
offerings, which are closely aligned to our customers' priorities.
We are now seeing an increased addressable market presenting
opportunities for further growth and enhanced shareholder
returns.
"As a result we have accelerated our global ambition to build an
integrated global company with c.GBP3bn revenue by FY27. We move
forward into FY24 with optimism due to our track-record of
performance and confidence in our strategy. We are proud of the
critical role we play serving the national security interests of
our customers."
Preliminary results presentation:
Management will host a presentation at 09:30 hours BST on 25 May
2023 at Numis' auditorium, 45 Gresham Street, London EC2V 7BF. The
presentation will also be shared as a live webcast. To register to
join this event, please see details on our website here:
https://www.qinetiq.com/en/investors/results-reports-and-presentations/full-year-results-webcast-2023
You are warmly invited to join, either in person or
virtually.
About QinetiQ:
QinetiQ is an integrated global defence and security company
focused on mission-led innovation. QinetiQ employs more than 8,000
highly-skilled people, committed to creating new ways of protecting
what matters most; testing technologies, systems, and processes to
make sure they meet operational needs; and enabling customers to
deploy new and enhanced capabilities with the assurance they will
deliver the performance required.
Visit our website www.QinetiQ.com. Follow us on LinkedIn and
Twitter @QinetiQ.
For further information please contact:
John Haworth, Group Director Investor Relations: +44 (0) 7920 545841
Lindsay Walls, Group Director Communications
(Media enquiries): +44 (0) 7793 427582
Basis of preparation:
Throughout this document, certain measures are used to describe
the Group's financial performance which are not recognised under
IFRS or other generally accepted accounting principles (GAAP). The
Group's Directors and management assess financial performance based
on underlying measures of performance, which are adjusted to
exclude certain 'specific adjusting items'. In the judgment of the
Directors, the use of alternative performance measures (APMs) such
as underlying operating profit and underlying earnings per share
are more representative of ongoing trading, facilitate meaningful
year-to-year comparison and, therefore, allow the reader to obtain
a fuller understanding of the financial information. The adjusted
measures used by QinetiQ may differ from adjusted measures used by
other companies. Details of QinetiQ's APMs are set out in the
glossary to the document.
Year references (FY23, FY22, FY21, 2023, 2022, 2021) refer to
the year ended 31 March .
Disclaimer
This document contains certain forward-looking statements
relating to the business, strategy, financial performance and
results of the Company and/or the industry in which it operates.
Actual results, levels of activity, performance, achievements and
events are most likely to vary materially from those implied by the
forward-looking statements. The forward-looking statements concern
future circumstances and results and other statements that are not
historical facts, sometimes identified by the words 'believes','
expects', 'predicts', 'intends', 'projects', 'plans', 'estimates',
'aims', 'foresees', 'anticipates', 'targets', 'goals', 'due',
'could', 'may', 'should', 'potential', 'likely' and similar
expressions, although these words are not the exclusive means of
doing so. These forward-looking statements include, without
limitation, statements regarding the Company's future financial
position, income growth, impairment charges, business strategy,
projected levels of growth in the relevant markets, projected
costs, estimates of capital expenditures, and plans and objectives
for future operations. Forward-looking statements contained in this
announcement regarding past trends or activities should not be
taken as a representation that such trends or activities will
continue in the future. Nothing in this document should be regarded
as a profit forecast.
The forward-looking statements, including assumptions, opinions
and views of the Company or cited from third party sources,
contained in this announcement are solely opinions and forecasts
which are uncertain and subject to risks. Although the Company
believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that these
expectations will prove to be correct. Actual results may differ
materially from those expressed or implied by these forward-looking
statements. A number of factors could cause actual events to differ
significantly and these are set out in the principal risks and
uncertainties section of this document.
Most of these factors are difficult to predict accurately and
are generally beyond the control of the Company. Any
forward-looking statements made by, or on behalf of, the Company
speak only as of the date they are made. Save as required by law,
the Company will not publicly release the results of any revisions
to any forward-looking statements in this document that may occur
due to any change in the Directors' expectations or to reflect
events or circumstances after the date of this document.
Group Chief Executive Officer's Review
We delivered excellent operational performance throughout the
year, reflecting continued disciplined execution of our strategy.
We grew orders by 41% at a record-high of more than GBP1.7bn,
demonstrating the continued high demand for our distinctive
offerings. We achieved 20% revenue growth, 11% on an organic
constant currency basis excluding the impact of the write-down in
the prior year, with underlying operating profit margin at 11.3%.
In addition to the robust orders, revenue and profit performance,
cash flow management continues to remain strong with 106%
underlying cash conversion. We have successfully reduced leverage
to 0.8x net debt to EBITDA, a year ahead of our original
guidance.
EMEA Services continues to perform well, delivering 10% organic
revenue growth and margins of 11.6%, with ongoing investment in our
people supporting long-term growth. Global Products performance has
been strong with revenue growth of 20% organically and profit
margin of 10.4%. In particular our US business has performed well,
with high order intake of $280m and impressive revenue growth of
25%, prior to the benefit of the Avantus acquisition. We have won a
number of key contracts in the US that will support the delivery of
our ambitious growth targets. The performance throughout the year
in the US demonstrates greater stability and resilience, providing
a strong platform for continued growth .
We completed three M&A transactions in late-2022, the
disposal of QinetiQ Space NV in Belgium, the acquisition of Air
Affairs in Australia, and of most strategic significance the
acquisition of Avantus in the US. These transactions demonstrate
the disciplined execution of our strategy and focused deployment of
capital to drive long-term growth, building one integrated global
defence and security company operating in our three home countries
with six distinctive offerings.
Today we are announcing an increase in our global ambition for
the company. We are targeting high single digit organic revenue
growth at stable 11-12% margins, supplemented by strategically
aligned acquisitions to build a business with revenues of c.GBP3bn
by FY27. As we pursue our strategy the geographic mix of the
company will change. Whilst the UK will scale by 50%, we will more
than double the scale of our businesses in Australia and the US.
This evolving mix across our home countries will result in
delivering higher revenue growth at 11-12% margins, representing
upper quartile performance. The result of this upgrade in our
long-term guidance will deliver an increase of approximately 20%
profit by FY27, compared to our previous guidance.
Strategic achievements
We have continued to make good progress implementing our
strategy. Our major strategic achievements as we are building an
integrated global defence and security company are:
- Partnering to deliver experimentation, test and evaluation
for the Royal Navy's fleet - We renewed our Maritime Strategic
Capability Agreement (MSCA) with the Submarine Delivery Agency.
The 10 year, GBP260m contract, will deliver critical capabilities
in Hydromechanics, Stealth and Signatures, Structures and Maritime
Life Support that assure the UK's ability to design, build
and safely operate the Royal Navy's surface and subsurface
fleet, including the UK's Continuous at Sea Deterrent. This
significant 10 year commitment from the MoD, which includes
an option for an additional 5 years, is a testament to the
value that QinetiQ has delivered since 2008 when the original
15 year contract was secured.
- Transforming Mission Data for the UK MOD - The UK MOD has
signed an GBP80m, 10 year industry partnership, with QinetiQ-led
Team Pegasus enhancing the UK's ability to provide its military
platforms and systems with the data needed to keep them safe
and effective. Team Pegasus will work in partnership with the
MOD for a 10 year period on the transformation project, known
as SOCIETAS, providing a specialist mission data and electronic
warfare skills solution alongside training and IT support.
- Delivering Digital Night Vision Technology for US Army - We
have been awarded a $93m single award four year contract to
support the US Army with the development, testing, deployment
and training of Digital Night Vision Technology (DNVT) to support
military operations. DNVT will substantially enhance the user's
situational awareness and decision-making abilities by fielding
digital night vision capabilities coupled with component technology
enhancements.
- Acquisition of Avantus extending into US intelligence customer
- At the end of November 2022 we completed the acquisition
of Avantus for an enterprise value of $590 million. Avantus
is a leading provider of mission-focused cyber, data analytics
and software development solutions to the US Department of
Defense, Intelligence Community, Department of Homeland Security
and other Federal civilian agencies. Avantus has a strong track
record of achieving speed-to-mission impact. Since completion,
Avantus has continued to perform well, including two successful
re-competes and selection for a new $80m multi-year contract
with a national intelligence customer.
- Acquisition of Air Affairs expanding Australian threat representation
- In December 2022 we completed the acquisition of Air Affairs
(Australia) Pty Ltd for a cash consideration of A$53m. Air
Affairs provides targets and training services, and electronic
warfare capabilities to the Australian Defence Force, as well
as aerial surveillance and reconnaissance in support of government
firefighting efforts. The business positions QinetiQ as a market
leader in air threat representation and aerial target services
and further extends the scope of our capabilities.
- Developing new laser technology with Australian Armed Forces
- We have partnered with the Australian Department of Defence
to develop and manufacture a high energy defensive laser weapon
system prototype. The contract involves leveraging QinetiQ's
high-power laser technology and test and evaluation expertise
from the UK in collaboration with DST's scientific innovation,
to deliver enhanced sovereign capability to the Australian
Defence Force.
The growing market opportunity
The global security situation continues to worsen and tensions
remain high. In Europe, Russia's invasion of Ukraine is reshaping
their relationship with the West, and the threat from China remains
uncertain. These dynamics are driving defence and security
policies, prioritisation of budgets and modernisation of
capabilities. Our major focus is on our three home countries who
have a shared defence and security mission under the trilateral
partnership known as AUKUS.
The US has requested the largest ever Research & Development
and Test & Evaluation, budget at $145bn, increasing 40% since
2020. The UK has refreshed its Integrated Review and is investing
GBP6.6bn in R&D and experimentation over 4 years. And the
Australian government has completed its Defence Strategic Review
and is increasing defence spending by 7% to $53bn.
Beyond the new nuclear submarine programme, all three countries
are committed to working together on a range of advanced
capabilities and technologies, critical to future warfare, such as
advanced cyber and directed energy. These areas align well with our
strengths and provide attractive opportunities over the
long-term.
In response to this geo-political context, we see greater
opportunity from the widening threat spectrum and our enhanced
offerings. As a result, we have increased our addressable market
from GBP20bn to more than GBP30bn per year. This increase is driven
by RDT&E markets growing in each of our home countries, adding
intelligence and security markets for the first time, and our
offerings are increasingly aligned with high-priority customer
needs, enabling us to grow market share.
Building a GBP3bn defence and security company
QinetiQ is a purpose-driven company: protecting lives and
securing the vital interests of our customers. Our purpose drives
our strategy: to build an integrated global defence and security
company, operating in attractive markets with distinctive
offerings, to deliver sustainable growth for our shareholders.
Our strategy is increasingly relevant and provides focus for our
business decisions, our people and our investment choices. Our
multi-domestic strategy has a clear focus on building one
integrated global defence and security company, in three home
countries, with six distinctive offerings:
1. Global leverage 2. Distinctive offerings 3. Disruptive innovation
Build an integrated Co-create high-value Invest in and apply
global defence and security differentiated solutions disruptive business
company to leverage for our customers in models, digitisation
our capability through experimentation, test, and advanced technologies
single routes to market training, information, to enable our customers'
in UK, the US, Australia, engineering and autonomous operational mission
Canada and Germany systems at pace
------------------------------ ------------------------------
We have a clear business plan, guiding our strategic focus and
investment choices, to enhance our global platform for growth.
The integration of Avantus is ahead of plan and will complete
before the end of the year. The business continues to perform well,
delivering high quality operational outcomes for our customers, and
winning $100m of customer business including 100% of re-competes.
The leadership team is now fully integrated and working together to
pursue a number of revenue synergies by leveraging and
cross-selling our offerings to existing and new customers, for
example our sensor solutions for the US Army into the US
Intelligence community. We've had a strong start to the year and we
remain excited about the opportunity we've created, building a
disruptive mid-tier defence and intelligence company, in the
largest defence and security market in the world.
Following the acquisitions of Avantus and Air Affairs, we will
now achieve our previous FY27 growth ambition and guidance
organically. Given our significant growth potential, we have chosen
to increase the scale of our ambition. We are upgrading our revenue
target to deliver high single digit organic growth, supplemented by
further strategic acquisitions, to build the company to GBP3bn
revenue approximately doubling revenue and profit over the next
four years.
As we pursue our strategy the geographic mix of the company will
change. Whilst the UK will scale by 50%, we will more than double
the scale of our businesses in Australia and the US. This evolving
mix across our home countries will result in delivering higher
revenue growth at 11-12% margins, representing upper quartile
performance. The result of this upgrade in our long-term guidance
will deliver an increase of approximately 20% profit by FY27,
compared to our previous guidance. We remain disciplined in the
execution of our strategy and have a robust plan to achieve this
increased ambition, which will accelerate sustainable profitable
growth.
Creating an environment for our people to thrive is critical to
our performance and growth. We have increased employee engagement
to a new high and invested in our response to ongoing cost of
living pressures to retain, attract and reward the best talent
across the whole company. We have also continued to strengthen our
leadership with over 35% of our Top 100 leaders being American or
Australian. We have a leadership team with the diversity, skills
and experience to deliver the scale of our AUKUS growth
ambition.
In response to today's threat environment, our people are
delivering for our customers with increasing agility and pace. They
are focused on co-creating innovative solutions that are directly
aligned with the priorities of the AUKUS customers in advanced
technologies, such as sensing, autonomy and directed energy. To
maintain our relevance at the forefront of innovation, we continue
to invest in our ongoing Internal Research and Development
programme of c.GBP20m per year.
Our people are also passionate about protecting the environment
and delivering sustainable solutions for our customers. This year
we have continued to make progress on our net zero plan and reduced
our Scope 1 & 2 emissions by a further 12%. To accelerate
progress, our top 1,000 managers have 17.5% of their incentives
aligned to delivery of our ESG commitments. This is just one
example of why we have been rated as a top ESG company in our
industry by Sustainalytics.
Outlook: FY24 expectations unchanged(1)
We enter FY24 with confidence, a healthy order-book and positive
momentum with 61% revenue under contract. Consistent with our
upgraded long-term guidance, we expect to deliver high single digit
revenue growth compared to the FY23 pro-forma revenue (full year
effect of FY23 M&A activity); this equates to high teens total
revenue growth versus the FY23 reported revenue. Operating profit
margin will be at the lower end of the 11-12% range. Capital
expenditure is expected to remain within the GBP90m to GBP120m
range.
(1) Analyst expectations (average) for FY24 operating profit as
at 23/05/23: GBP206m
Outlook: Longer-term upgraded guidance
We are targeting high single-digit organic revenue growth,
supplemented by strategically aligned acquisitions to build a circa
GBP3bn company by FY27.
This increased level of growth will be delivered at stable
margins of 11-12%, reflecting the evolving geographic mix of the
global company. Cash conversion will remain strong at over 90%,
supporting our ability to deploy capital effectively to achieve our
long-term growth ambition and deliver a return on capital employed
at the upper end of the 15-20% range.
Trading Environment
Global context
We are operating in an environment where there is an increasing
threat of wider global conflict. This follows Russia's full-scale
invasion of Ukraine; the threat posed by China's growing military
power coupled with its push to change global norms and potentially
threaten its neighbours; the rise of extremism in Africa; and
ongoing tensions and conflict in the Middle East.
In parallel, rapidly emerging and evolving technologies continue
to disrupt traditional business and society with both positive and
negative outcomes as well as creating unprecedented
vulnerabilities.
Strategic response
To meet these increasing challenges, the UK, US and Australia
have reviewed their strategic defence and security capabilities and
investment priorities as well as their allied activities.
UK
The 2023 Integrated Review Refresh (IRR) recognised the urgent
and immediate pressures brought about by the deteriorating security
situation. In the Spring 2023 budget statement, the government
announced that the UK defence budget would be increased by GBP11bn
over the next five years in response to these growing threats. The
IRR emphasised that strategic advantage in science and technology
is a core national priority. As announced in 2021, the UK MOD is
also investing over GBP6.6bn in research and development to develop
next-generation and emerging technologies in areas such as cyber,
space, directed-energy weapons, and advanced high-speed
missiles.
As the UK seeks to develop and deploy next-generation
capabilities faster than their adversaries, we are well-positioned
to support them in applying mission-led innovation to achieve this.
Our unrivalled expertise in Research & Development and Test
& Evaluation combined with our recent investment to modernise
UK test ranges will help our customers generate and assure new and
emerging technologies at pace. Delivering value for money remains
critical to our customers and we will continue to utilise
innovative delivery models to support our customers in achieving
this.
US
The 2022 National Defense Strategy and National Security
Strategy recognised an intensifying competitive landscape and the
urgent need to sustain and strengthen deterrence, with China as its
pacing challenge. The 2024 Department of Defense Budget Request
builds on the principles of National Security Strategy and has
grown by nearly $100bn (13%) to $842bn since 2022. As part of this,
the FY24 research development test and evaluation budget request is
the largest ever at $145bn. This represents an increase of $26bn
(22%) since FY22.
Investment in critical technology areas aimed at strengthening
technological advantage include: directed energy, hypersonics and
integrated sensing and cyber.
In the US, we are a market leader in robotics, autonomy and
advanced sensing solutions, an area of budget growth, delivering
value to our customers through the rapid development and deployment
of disruptive solutions. With the acquisition of Avantus we are
also a leading cyber, data analytics and software development
provider. There is a growing need to provide actionable
intelligence into war-fighters' hands quicker, and a push to
develop and integrate multiple autonomous and semi-autonomous
systems as the US seeks to invest in next-generation technologies
to maintain a technological advantage.
Australia
The 2023 Defence Strategic Review addresses the prospect of
major conflict in the Indo-Pacific that directly threatens
Australia's national interest. It frames the priority of investment
in Defence capability and posture to meet Australia's security
challenges through to 2032-33. In the 2023 Budget, Defence spending
will increase by 7% to AUD$52.6bn in 2023-24.
The Australian government reinforced its commitment to
delivering on the recommendations of the Defence Strategic Review,
with plans to commence the work to deliver Australia's
nuclear-powered submarine program. Defence spending as a proportion
of GDP will lift above its current trajectory to be 0.2 per cent
higher by 2032-33. As part of this, the Government announced it
would invest more than $19bn to implement the immediate priorities
identified in response to the Defence Strategic Review, namely:
-- $9bn for the nuclear-powered submarine programme through AUKUS;
-- $4.1bn for long-range strike capabilities;
-- $3.8bn for northern base infrastructure and;
-- $900m on defence innovation, to establish the Advanced Strategic
Capabilities Accelerator and through AUKUS Pillar 2.
We see many opportunities to support the Australian forces in
modernising sovereign defence capabilities, leveraging expertise
from across QinetiQ.
The significance of the AUKUS Alliance
In September 2021, leaders of Australia, the United Kingdom, and
the United States announced the creation of an enhanced trilateral
security partnership called "AUKUS". AUKUS is intended to
strengthen the ability of each government to support security and
defence interests, building on longstanding and ongoing bilateral
ties. It will promote deeper information sharing and technology
sharing; and foster deeper integration of security and
defence-related science, technology, industrial bases and supply
chains.
The first initiative under AUKUS is a commitment to support
Australia in acquiring nuclear-powered submarines for the Royal
Australian Navy. The second initiative centres on enhancing joint
capabilities and interoperability, focusing on cyber and electronic
warfare capabilities, artificial intelligence, quantum
technologies, additional undersea capabilities, as well as
hypersonic and counter-hypersonic capabilities.
With these collaboration activities involving technology
development, trials and experimentation, we anticipate increasing
demand for support across each of our three 'home' nations.
Broader international markets
The strategic landscape has undergone a seismic shift following
Russia's invasion of Ukraine in February 2022. This has provoked
NATO to increase its defence capabilities and readiness to respond,
adding to the pressure for the NATO member countries to increase
their defence spending of at least 2% of GDP. Following the
announcement of Germany to increase defence spending by EUR100bn
over the next five years, many other NATO and European countries
are also increasing their defence and security investment.
While priority and investment focus will be attached to the
prosecution of our three home country strategies (UK, US and
Australia), we will continue to conduct business in the support of
allies in 5-Eyes, NATO and Continental Europe.
Group Chief Financial Officer's Review
Overview of full year results
The Group has delivered excellent growth and underlying
performance across all metrics, reflecting continued disciplined
execution of our strategy. We have deployed our balance sheet to
acquire Avantus and Air Affairs in the year, expanding our
capabilities in the US and Australia. Strong cash generation,
driven by disciplined working capital management, with underlying
cash conversion of 106% ( FY22 restated: 113%), has successfully
reduced leverage to 0.8x net debt to EBITDA, well ahead of our
original guidance. The acquisitions are performing as expected with
integration on-track. The Global Products segment has performed
particularly well during FY23, driven by strong US performance. The
full year dividend is up 5% at 7.7p per share.
Record orders in the year, totalling GBP1,724.1m (FY22:
GBP1,226.6m), a year-on-year 41% increase, 37% on an organic basis
excluding the impact of the write-down in prior year; this
demonstrates the continued high demand for our six distinctive
offerings . This has been driven by multi-year framework contracts
including a GBP260m, 10-year extension of the Maritime Strategic
Capability Arrangement (MSCA) contract to deliver critical
sovereign capabilities to the UK MoD, GBP404m of Engineering
Delivery Partner (EDP) framework orders and GBP80m for SOCIETAS
within EMEA Services, and in Global Products a $93m award for the
Digital Night Vision Technology (DNVT) over 4-years .
We continue to see positive trends in our order book
progression:
-- Backlog: The Long-term Partnering Agreement (LTPA) is a large
multi-year contract that was booked in prior years - as we
deliver non-tasking revenue (c.GBP225m per annum) this will
naturally reduce the LTPA order backlog. Outside of the LTPA,
with our high orders in FY23 and the addition of Avantus, our
backlog has seen significant growth: total order backlog as
at 31 March 2023 was GBP3.1bn (FY22: GBP2.8bn).
-- Opportunity size: As part of our previously stated strategy,
we are also seeing success in winning and delivering on larger
longer-term contracts, with 47% of our FY23 orders from contracts
over GBP5m in size, up from 28% three years ago.
At the beginning of FY24 approximately GBP 1.1bn of the Group's
FY24 revenue was under contract, compared to GBP900m (of the FY23
revenue) at the same point last year. This notable increase
reflects the strong performance on our key framework contracts in
EMEA Services and the good FY23 order intake in the US.
We delivered strong revenue growth of 20% to GBP1,580.7m (FY22:
GBP1,320.4m), 11% on an organic basis excluding the impact of the
write-down in prior year , with operating profit margins within our
guidance range at 11.3%, demonstrating increasing demand for our
six distinctive offerings. We saw a 10% organic revenue increase in
EMEA Services primarily due to a 37% year-on-year growth in EDP
delivery and work delivered under the Major Service Provider (MSP)
contract in Australia. Global Products revenue increased 15%
organically excluding the write-down in the prior year, due to the
strong performance in the US business with the full rate CRS-I
production contract now underway following delays due to
COVID-related delivery and supply chain issues during the previous
year. Our Targets business also delivered good growth.
Operating profit from segments of GBP178.9m (FY22: GBP137.4m)
was up 30%, this represents 11.3% operating margin (FY22: 10.4%),
consistent with our guidance range of 11-12% demonstrating
sustainable revenue growth at stable margins. Global Products was
the largest contributor to year-on-year growth, with this segment
at double-digit margins, 10.4% (FY22: 0.7%). The increase has been
driven by strong performance across the US business and the prior
year being impacted by the write-down. EMEA Services saw a modest
decrease in operating margin to 11.6% (FY22: 12.8%), driven by our
investment in our people, capabilities and tools.
Following a routine Financial Reporting Council (FRC) review of
the consolidated financial statements for the year ended 31 March
2022, the Group engaged with the FRC which resulted in the decision
to change its accounting policy for Research and Development
Expenditure Credits (RDEC). We welcomed the FRC's review and have
set out the impact of the change in accounting policy in note 20.
As a result we are now reporting RDEC under IAS 20 within
underlying operating profit.
To ensure consistency and clarity on our headline profit
figures, our headline profit figure remains as Operating profit
from segments and we have determined that any benefit arising from
the RDEC change should not be attributed to segmental performance.
Statutory operating profit, as set out below, was GBP172.8m (FY22
restated: GBP123.7m), including the impact of specific adjusting
items and RDEC income.
Underlying profit before tax increased 33% to GBP189.7m (FY22
restated: GBP142.2m) in line with the increase in underlying
operating profit, with underlying net finance expense at GBP6.6m
(FY22: GBP1.4m). Underlying net finance expense increased due to
the interest payable on the term loan drawn down to fund the
Avantus acquisition.
The acquisitions of Avantus and Air Affairs have together
contributed GBP91.1m revenue and GBP9.4m underlying operating
profit in the year. Since completion of the acquisitions, the
businesses have continued to perform as expected and integration is
progressing on-track.
Specific adjusting items
In line with our previously approved policy, the total impact of
specific adjusting items (which are excluded from underlying
performance due to their distorting nature) on operating profit was
a GBP23.5m cost (FY22: cost of GBP19.9m). M&A activity during
the year has contributed to the overall level of specific adjusting
items.
Acquisition and integration costs of GBP18.7m (FY22: GBP5.0m)
comprise costs associated with the Avantus and Air Affairs
acquisitions which completed in FY23.
Restructuring costs of GBP5.0m have been incurred as part of
significant Group-wide organisation redesign completed in FY23 to
better align the organisation structure with future growth
ambitions of the Company. These restructuring costs have been
completed in year to enable our next step-change in growth.
We continue to deliver on our digital investment programme to
modernise the IT infrastructure to support our future growth
ambitions. The non-recurring costs will be reported as specific
adjusting items in the P&L, with ongoing recurring operating
costs (such as licence costs and overheads) remaining within
underlying operating costs. In FY23 the non-recurring cost of the
digital investment programme is GBP5.8m (FY22: GBP1.9m).
In FY23 specific adjusting items includes a GBP19.6m credit in
respect of UK MOD appropriation for RDEC. Following a determination
by the Single Source Regulations Office (SSRO) on the
interpretation of the Statutory Guidance for Allowable Costs
regulations (SGAC), the accounting judgement is that RDEC on single
source contracts from 1 April 2019 onwards will no longer be paid
on to the UK MoD, which is a change from the accounting judgement
at FY22 year end. Therefore the release of the liability is
reported as a specific adjusting item through operating profit.
Also included within specific adjusting items are a gain of
disposal of the Space NV business in Belgium of GBP15.9m, a gain on
the sale of property of GBP2.0m (FY22: GBP0.7m), financing income
from pensions of GBP9.9m (FY22: GBP4.5m) and amortisation of
acquisition intangibles of GBP15.6m (FY22: GBP10.7m), the last of
which has increased due to the amortisation of new intangible
assets recognised on the FY23 acquisitions (primarily the Customer
Relationships asset associated with Avantus).
Tax
The total tax charge was GBP37.6m (FY22: GBP35.9m restated). The
underlying tax charge was GBP36.8m (FY22: GBP24.1m restated), on a
higher underlying profit before tax, with an underlying effective
tax rate (ETR) of 19.4% for the year ended 31 March 2023 (FY22:
16.9% restated). The underlying effective tax rate is above the UK
statutory rate primarily as a result of higher tax rates in
overseas jurisdictions.
The total specific adjusting items tax charge was GBP0.8m (FY22
charge: GBP11.8m). The tax charge arises on the UK statutory rate
change to 25% from 1 April 2023 (GBP4.6m) and a taxable Research
and Development Allowances clawback (GBP1.2m), offset by
non-taxable profit on sale of Space NV (GBP3.0m) and overseas rate
differences (GBP2.5m).
In the Spring Budget 2021, the UK Government announced that from
1 April 2023 the corporation tax rate will increase from 19% to
25%. The 25% rate has been substantively enacted at the balance
sheet date. An adjustment was made in FY22 and a further GBP4.6m
adjustment has been made in FY23 to reflect that the revised UK
deferred tax balances that are expected to unwind at the new rate
of 25%.
The effective tax rate is expected to remain above the UK
statutory rate, subject to the impact of any tax legislation
changes and the geographic mix of profits. The OECD has released
model rules for Pillar II of the Base Erosion and Profit Shifting
regulations covering application of a Global Minimum Tax. The Group
is monitoring progress of these rules and will engage with advisers
to assess any potential future impact on the tax charge.
RDEC was previously included as a tax benefit and included in
the tax line, reducing the ETR. Due to the change in treatment of
RDEC, this has moved it out of the tax line and into underlying
operating profit, therefore the headline tax rate has increased
compared to prior year reporting periods. As explained above, to be
consistent with prior reporting and guidance the RDEC benefit is
not included in our headline reported operating p rofit from
segments, but is included in reported underlying operating profit.
The table below illustrates the impact of the accounting change on
the tax rate:
FY23 FY22
GBPm GBPm
Underlying operating profit 196.3 143.6
-------- -------
Underlying tax charge 36.8 24.1
-------- -------
Underlying tax rate 19.4% 16.9%
-------- -------
Illustrative effective tax rate, with impact of RDEC income included
in the tax charge
Operating profit from segments 178.9 137.4
-------- -------
Tax charge including RDEC income 19.4 17.9
-------- -------
Effective tax rate including RDEC income 11.3% 13.2%
-------- -------
For comparison and modelling purposes, if using operating profit
from segments the equivalent tax rate is 11.3% (not the headline
19.4% ETR). With the increase in UK statutory rate, this 11.3%
baseline ETR is expected to increase to c.19% in FY24.
Capital allocation policy
Working capital management and overall cash performance has
remained consistently strong. Underlying net cash flow from
operations was GBP270.1m (FY22 restated: GBP220.7m). Our cash
conversion definition reflects our pre-capital expenditure cash
flows as a proportion of EBITDA in order to demonstrate how we
convert our profit (excluding interest, tax, depreciation and
amortisation) into cash flow - under this definition we achieved
underlying cash conversion of 106%, (FY22 restated: 113%).
As at 31 March 2023 the Group had GBP206.9m net debt (FY22:
GBP225.1m net cash), a transition into debt and a more efficient
balance sheet position, due to the strategic acquisitions completed
in the year and higher capital expenditure to support the Group
strategic growth ambitions. We have successfully reduced leverage
to 0.8x, within 4 months of the completion of the Avantus and Air
Affairs acquisitions, ahead of our original guidance by 12
months.
Through FY23 we have demonstrated our capital allocation policy
in action:
1. Organic and inorganic investment - increased capital expenditure
to GBP109.0m (FY22: GBP84.3m), focused on contractual commitments
(GBP44m into the LTPA), sustainment of the portfolio and investment
to support future growth. Inorganic investment to acquire Avantus
and Air Affairs.
2. The maintenance of balance sheet strength - continued discipline
and cash generative nature of the business model, further reinforced
by the strategic disposal of Space NV.
3. A progressive dividend policy with a proposed 5% year-on-year
increase.
4. Return of excess cash to shareholders - we continue to review
this element of the capital allocation policy in the best interests
of all our stakeholders to support long-term sustainable growth.
The Group is not subject to any externally imposed capital
requirements.
Committed facilities
The acquisition of Avantus was financed using a combination of
cash and debt from a multicurrency floating rate Term Loan placed
with our relationship banks, acquisition financing totalled
GBP340m. The Loan is split into two Tranches: GBP Term Loan GBP273m
(Tranche A); and, USD Term Loan GBP67m (Tranche B), and has a
3-year term with two 1-year extension options. Participating banks
have lent on a 2-tier basis - 3-banks at GBP67m and 4-banks at
GBP35m. In line with Group policy, GBP270m (c.80%) of the floating
rate debt has been fixed using SONIA interest rate swaps split over
a 3-year and 5-year tenure at a weighted average rate of 3.29%.
Including all fees and charges, the weighted average cost of debt
is 5.21%.
The Group has a GBP275m bank revolving credit facility with an
additional 'accordion' facility to increase the limit up to
GBP400m. The facility which will mature on 27 September 2025 was
undrawn at 31 March 2023 and provides the Group with significant
scope to execute its strategic growth plans.
We highlight that the Group adopts a strict policy on managing
counterparty risk through a combination of diversification of
investments and regular reviews of counterparty limits using credit
rating assessments. We are proud that our debt sits with our key
relationship banks who have strong credit ratings and diverse
portfolios demonstrating their resilience to the bank turmoil. The
banks have been selected for their capabilities in our home
countries to support our business.
Return on Capital Employed (ROCE)
In order to help understand the overall return profile of the
Group, we continue to report our Return on Capital Employed, using
the calculation of: profit from segments less amortisation /
(average capital employed less net pension asset), where average
capital employed is defined as shareholders' equity plus net debt
(or minus net cash).
For FY23 Group ROCE was 23% (FY22: 26%), modestly lower due to
the increased capital employed with the acquisitions completed in
year. As we continue to invest in our business to support
sustainable long-term growth our ROCE is forecast to remain
attractive, at the upper end of the 15-20% range.
Earnings per share
Underlying basic earnings per share increased by 29% to 26.5p
(FY22: 20.6p) driven by the higher underlying profit after tax.
Basic earnings per share for the total Group (including specific
adjusting items) increased 71% to 26.8p (FY22: 15.7p).
The average number of shares in issue during the year, as used
in the basic earnings per share calculations, was 575.9m (FY22:
573.2m) and there were 578.8m shares in issue at 31 March 2023 (all
net of Treasury shares).
Dividend
The Board proposes a final FY23 dividend per share of 5.3p
(FY22: 5.0p) making the full year dividend 7.7p (FY22: 7.3p). The
full year dividend represents an increase of 5% in line with the
Group's progressive dividend policy.
Subject to approval at the Annual General Meeting, the final
FY23 dividend will be paid on 24 August 2023 to shareholders on the
register at 28 July 2023.
Pensions
The key driver for the decrease in the net pension asset since
31 March 2022 was the turmoil in financial markets following the
Government's 'mini-budget' in September 2022, particularly a sharp
increase in gilt yields (and reduced gilt prices) which
significantly reduced the value of the Scheme's Liability Driven
Investments (LDIs) and related asset-backed securities. Together
with falls in other assets the reduction across the whole
investment portfolio was in excess of the reduction in Scheme
liabilities (which have also fallen substantially, due to an
increase in the discount rate). As with previous years, Aon have
undertaken the IAS19 valuation.
During the current financial year, due to the increased
volatility in gilt yields and reflecting increased liquidity
requirements for Schemes running LDI portfolios, the hedges have
been amended to cover approximately 65% of the interest rate risk
and 80% of the inflation rate risk as at 31 March 2023, as measured
on the Trustees' gilt-funded basis.
The key assumptions used in the IAS 19 valuation of the Scheme
are set out in note 16.
Net finance costs
Net finance income was GBP3.3m (FY22: GBP3.1m). The underlying
net finance expense was GBP6.6m (FY22: GBP1.4m), increased due to
the interest payable on the Avantus funding borrowings, with
additional income of GBP9.9m (FY22: GBP4.5m) in respect of the
defined benefit pension net surplus reported within specific
adjusting items. The pension net finance income is calculated as a
percentage of the opening net asset. In FY23 the opening net asset
(GBP362.2m) was larger than the net asset at the start of FY22
(GBP214.3m) generating an increase in the level of net finance
income. Similarly, the decrease in the net surplus within FY23
(closing at GBP119.8m) will lead to a decrease in the pension net
finance income in FY24.
Foreign exchange
The Group's income and expenditure is largely settled in the
functional currency of the relevant Group entity, mainly Sterling,
US Dollar or Australian Dollar. The Group has a policy to hedge all
material transaction exposure at the point of commitment to the
underlying transaction. Uncommitted future transactions are not
routinely hedged. The Group does not hedge its exposure to
translation of the income statement.
The principal exchange rates affecting the Group were the
Sterling to US Dollar and Sterling to Australian Dollar exchange
rates.
FY23 FY22
------------------- ----- -----
GBP/US$ - opening 1.31 1.38
GBP/US$ - average 1.21 1.36
GBP/US$ - closing 1.24 1.31
GBP/A$ - opening 1.75 1.81
GBP/A$ - average 1.76 1.85
GBP/A$ - closing 1.85 1.75
------------------- ----- -----
Foreign exchange translation has provided a modest tailwind to
revenue and operating profit in the year. Most significantly, the
US Dollar has strengthened with the average exchange rate to
Sterling decreasing from 1.36 to 1.21. In FY23, 19% of our total
Group revenue was generated in the US. As a result of the
strengthening US Dollar and other FX movements in year, revenue
increased by GBP31.9m and operating profit increased by GBP1.3m.
Looking ahead we expect US revenues to represent 25-30% of Group
revenues in FY24, so for every 1% move in the FX rate this would
impact Group revenue by c.GBP5m and Group profit by c.GBP0.5m.
Operating Review
EMEA Services
FY23 FY22
GBPm GBPm
---------------------------- ------- -------
Orders 1,372.2 918.9
Revenue 1,179.3 1,059.2
Underlying operating profit 137.1 135.6
Underlying operating margin 11.6% 12.8%
Book to bill ratio(*) 1.4x 1.1x
Total funded order backlog 2,768.8 2,541.6
---------------------------- ------- -------
* B2B ratio is orders won divided by revenue recognised,
excluding the LTPA non-tasking services revenue of GBP225m (FY22:
GBP222m)
Overview
EMEA (Europe, Middle East and Australasia) Services combines
world-leading expertise with unique facilities to provide
capability generation and assurance, underpinned by long-term
contracts that provide good visibility of revenue and cash
flows.
Financial performance
Orders for the year increased by 49% to GBP1,372.2m (FY22:
GBP918.9m), driven by a GBP260m MSCA contract in the UK, for the
delivery of critical sovereign capabilities to the UK and continued
growth in orders through the EDP framework, totalling GBP404m
orders in-year.
Revenue increased by 11% to GBP1,179.3m (FY22: GBP1,059.2m), and
grew by 10% on an organic basis, as a result of new work under the
EDP framework and under the Major Service Provider (MSP) contract
in Australia.
At the beginning of FY24, we had GBP0.8bn of EMEA Services' FY24
revenue under contract, compared to GBP0.7bn (of the FY23 revenue)
at the same point last year. This increase is driven by the 49%
orders growth in the year.
Underlying operating profit grew by 1% to GBP137.1m (FY22:
GBP135.6m) . Operating margin decreased to 11.6% reflecting the
investment in our people in response to the cost of living
crisis.
Approximately 64% of EMEA Services revenue is derived from
single source contracts, including the LTPA (FY22: approximately
67%). By investing in our core contracts and extending their
duration the high proportion of single source revenue contracted on
a long-term basis provides visibility and reduces our exposure to
future changes in the baseline profit rate set annually by the
Single Source Regulations Office.
Sector commentary
UK Defence (58% of EMEA Services revenue)
The UK Defence Sector delivers mission critical solutions,
innovating for our Air, Maritime and Land customers' advantage.
This Sector represents the previously reported Air and Space, and
Maritime and Land business units. Its formation provides a sharper
focus on our strategy of maximising growth through our framework
contracts, building new core offerings through our global campaigns
and exploring new growth opportunities. The new Sector improves
coherence of our distinctive offerings across our customer base,
with the embedding of enabling functions bringing greater cohesion
to operational strategy execution for business performance
excellence.
- We secured a GBP260m contract with the Submarine Delivery Agency
for a further ten years of the Maritime Strategic Capability
Arrangement (MSCA), which also includes an option for an additional
five years. The MSCA delivers critical sovereign capabilities
that contribute to the assurance of the UK's ability to design,
build and safely operate the Royal Navy's surface and subsurface
fleet, including the UK's continuous at sea deterrent.
- We have also seen a high level of usage of LTPA capabilities
over the last 12 months supporting operational training needs
and urgent capability requirements:
- We have completed our Air Range Modernisation investment programme,
securing recognition by the Ministry of Defence (MoD) Sanctuary
Awards for achievements in conservation and sustainability
in relation to the renovation programme on St Kilda in the
Outer Hebrides;
- Usage of LTPA capabilities by allies continues to increase
and included the Atlantic Thunder 22 live-fire exercise. This
involved the US Naval Forces Europe, US Air Forces Europe,
the UK Royal Navy and UK Royal Air Force developing combined
proficiency in tactics, targeting and live-firing against a
surface target at sea;
- We continue to work in partnership with our customer to develop
new approaches to test and evaluation increasing the adoption
of modelling, synthetics and artificial intelligence (AI) techniques;
and
- Investment to pilot the transition to Net-Zero site operations
has been secured and is underway.
- The Engineering Delivery Partner (EDP) programme has now delivered
over GBP1.3bn of orders since inception in October 2018, and
our partnership continues to evolve in support of our customers'
need to transform their approach to capability acquisition. Key
achievements this year include:
- Securing the GBP32m contract to provide technical support to
the UK MoD's Future Combat Air System (FCAS) Enterprise and
the Defence Equipment & Support (DE&S) Catalyst delivery team,
which is responsible for delivering the latest combat air capabilities
to UK frontline commands;
- Increasing the EDP supplier network by c.25% and the volume
of work delivered through them;
- Continuing to deliver over 97% of outputs on time and right
first time;
- Embedding new services supporting the adoption of digital design
technologies; and
- Starting to provide Net-Zero engineering services.
- Science and technology is a priority area where we continue to
make progress primarily through contracting with Defence Science
and Technology Laboratory (DSTL), but also through increasing
international collaboration across the Group which provides a
great platform to support the priorities of AUKUS:
- Delivering the UK's first high-powered, long-range laser-directed
energy weapon (LDEW) trial at DSTL Porton Down in partnership
with Leonardo and MBDA, demonstrating the capabilities of our
phase-combined laser technology;
- Leading the Weapons Sector Research Framework with an increasing
focus on novel and hypersonic weapons, including an annual
conference with over 300 representatives from across the MOD
and industry;
- Developing our E-X Drive technology through our US Sector for
the BAE Systems solution to the US Army's Optionally Manned
Fighting Vehicle (OMFV) programme;
- Supporting our Australian Sector to secure and deliver a higher
energy laser development programme to their Australian Defence
Science and Technology (DST) customer.
- We continue to develop our mission rehearsal offerings through:
- Securing the second demonstration phase in partnership with
BAE Systems for the Platform Enabled Training Capability (PETC)
programme delivering multi-platform innovative synthetic training
capability to the Royal Navy in support of the wider Defence
Operational Training Capability (Maritime) (DOTC(M)) programme;
- Fielding a new threat representation training capability with
the Royal Navy through securing the four-year Vampire Phase
1 contract to support the Royal Navy's future high-performance
Unmanned Aerial Systems (UAS) operations;
- Delivering enhanced mission support through the Royal Navy
Sharpshooter training exercise providing operationally realistic
scenarios to train as they would fight with close-in weapon
systems.
UK Intelligence (30% of EMEA Services revenue)
The UK Intelligence Sector helps government and commercial
customers respond to fast-evolving threats based on its expertise
in training, secure communication networks and devices,
intelligence gathering and surveillance sensors, and cyber
security. Contained within UK Intelligence (UK-I) are three
acquired businesses: QinetiQ Training and Simulation Limited (QTSL,
formerly NSC), Inzpire and Naimuri. This Sector represents the
previously reported Cyber and Information business unit.
- We won an GBP80m transformation programme focused on accelerating
the production of mission data, enabling the UK's military platforms
and personnel to be better protected in a rapidly changing threat
landscape. We formed and led a winning industrial partnership
team that included Inzpire, SRC, CGI and an ecosystem of other
expert SMEs. The team will contribute to the UK's export agenda
by providing our allies with access to world-class mission data.
In demonstrating our commitment to the Social Value Act, this
programme includes a significant investment to create at least
70 highly skilled data science jobs in the Lincolnshire Area,
and upskill customer personnel in advanced data analysis techniques
and technology.
- Through the SERAPIS framework contract, we have won a GBP5m 18-month
research contract focused on helping the UK MOD solve one of
its most enduring and significant capability challenges: pervasive,
full spectrum, multi-domain ISR (intelligence, surveillance and
reconnaissance). The aim is to use coherent real-time multi-modal
sensing to find and identify difficult land targets on a complex
battlefield.
- The partnership with Defence Intelligence in the UK has continued
to grow strongly with orders exceeding GBP100m in the year. Using
the EDP framework, combined with the rapid innovation it enables,
we have pulled through expertise from across industry and led
delivery of a wide portfolio which is helping Defence Intelligence
to drive its transformation strategy.
- We won the Vivace contract with the Home Office in 2017 to deliver
our Accelerated Capability Environment (ACE). ACE leverages a
wide and diverse ecosystem of suppliers to drive innovation into
the delivery of mission critical capability, and it operates
at high tempo greatly accelerating delivery of deployable capability.
In the past year Vivace has extended its core team and under
open competition was awarded the next phase in development of
ACE through the Private Sector Partner contract.
- We continue to deliver well on the Battlefield Tactical Communication
and Information Systems (BATCIS) contract, winning the fifth
year option contract award worth GBP35m. This is the public sector
support programme for Defence Digital, delivering procurement
and engineering expertise for this transformational digital backbone
programme. With our partners ATOS, BMT and Roke we deliver specialist
expertise across this complex set of projects (Trinity, Niobe,
Morpheus, DSA etc.) covering a wide array of disciplines; developing
concepts, engineering solutions, managing obsolescence issues,
supporting critical operational requirements and enabling procurement
competitions.
- We continue to demonstrate our ability to take acquisitions and
position them for future success:
- This year has seen Inzpire reach a major milestone in the delivery
of the GECO Mission planning system to the UK's Military Flying
Training System. GECO is now used on the RAF's Prefect, Phenom
and Texan Fixed Wing aircraft and also Juno and Jupiter Rotary
Wing platforms as well as integration into the simulators.
In total, more than 100 systems will be rolled out.
- We have established the Training and Simulation Centre of Excellence
at our Farnborough site combining expertise from the NSC acquisition
with its extant training business unit (NSC now rebranded as
QinetiQ Training and Simulation Limited: QTSL). This business
area is growing strongly with recent key wins in the Land (Army
Virtual Proving Ground), Maritime (T23 and T45 training simulation
systems), and secure Cyber domains coupled with a significant
increase in simulation research and war-gaming demand as the
UK Armed Forces consider future operating requirements.
- Similarly, Naimuri's portfolio has significantly diversified
beyond National Security into Homeland Security, and the UK
MOD. Naimuri continues to be cited as an example of a high-performing
SME working on the highest priority government systems and
highly engaged in supporting social values growth.
- We remain committed to providing operational support to the UK
Government including 24/7 support to operations and deployment,
which has enabled UK platforms to support burden sharing with
Allies, assisting with military aid provision.
Australia (12% of EMEA Services revenue)
Our Australia Sector provides advisory services, engineering
services and training and mission rehearsal in the Australian and
German markets.
- The Australian business has continued to deliver impressive growth
in the year with a significant improvement in revenue coming
from the Advisory Services business. Notably, the business has
responded successfully to an increase in delivering to operations
and exercises as our customer uplifts activity in response to
geo-political challenges. An increase in deployments and training
events has seen a positive impact on the engineering, technical
and advisory services contracts.
- In December 2022 we completed the acquisition of Air Affairs
(Australia) Pty Ltd for A$53m. Air Affairs is an Australian defence
services company - a leader in air threat representation, Test
and Evaluation (T&E), unmanned targets and mission rehearsal.
Air Affairs provides targets and training services, and electronic
warfare capabilities to the Australian Defence Force, as well
as aerial surveillance and reconnaissance in support of government
firefighting efforts. It owns and operates a fleet of special
mission aircraft and maintains an advanced manufacturing and
engineering facility providing design, manufacture and certification
operations. Air Affairs employs c.180 people, headquartered in
Nowra, New South Wales.
- Integration of Air Affairs is progressing to plan and the business
is performing well, including securing the next phase of airborne
training services for the Australian Defence Force. As demand
for threat representation increases across all our home countries,
we are focused on leveraging our airborne training and target
capabilities across QTS, GmbH and Air Affairs to pursue new customer
opportunities. A recent example is the successful sale of our
Banshee target into the US Army's Threat Systems Management Office.
- The engineering services facility in South Melbourne (named "QTech")
is now open and will be a cornerstone facility for further growth
through the Robotics and Autonomous Systems and the Test and
Evaluation Campaigns. Additionally, the inaugural Test and Evaluation
Sovereign Skills Programme has commenced with the 2023 cohort
in the United Kingdom undertaking T&E training already.
- In Germany, we have continued to invest in the business with
a strategic uplift in fleet composition with a number of aircraft
added to the fleet. The fleet has seen further improvement with
modifications to target towing and cameras resulting in increased
capability and capacity. In the year, the business delivered
more flying hours than in any previous contract year. These successes
continue to mature our flexibility and credibility in our Air
Services growth plans. In response to the ongoing and increased
customer demand for live environment target simulations, the
German business has proactively responded with precision and
professionalism to an increased tempo, by delivering an increase
of 50% in aerial target service tasks in the last two years.
The Government's commitment to increased defence spending supports
a positive view of business growth into the future.
Global Products
FY23 FY22
GBPm GBPm
---------------------------- ----- -----
Orders 351.9 307.7
Revenue 401.4 261.2
Underlying operating profit 41.8 1.8
Underlying operating margin 10.4% 0.7%
Book to bill ratio(1) 0.9x 1.2x
Funded backlog 301.5 287.2
---------------------------- ----- -----
(1) B2B ratio is orders won divided by revenue recognised
Overview
Global Products delivers innovative solutions to meet customer
requirements. The segment is technology-based and has shorter order
cycles than EMEA Services. Our strategy is to expand the product
portfolio and win larger, longer-term programmes to improve the
consistency of the financial performance of this segment.
Financial performance
Orders increased by 14% to GBP351.9m (FY22: GBP307.7m). This was
driven by a good order intake in the US and the effect of the
complex project write-down in the prior year.
Revenue was up 54% on a reported basis at GBP401.4m (FY22:
GBP261.2m), due to strong US growth following prior year
supply-chain challenges on the initial production ramp-up of CRS-I
robots. Furthermore there was an increase in revenue from the
acquisition of Avantus of GBP83.0m offset partially by the disposal
of Space NV. Excluding the impact of this acquisition and foreign
exchange, revenue was up 20% (GBP48.9m) on an organic basis.
At the beginning of FY24, we had GBP0.3bn of Global Products'
FY24 revenue under contract, compared to GBP0.2bn (of the FY23
revenue) at the same point last year. This increase is driven by
the significant orders growth in year plus the contribution from
the Avantus acquisition.
Underlying operating profit increased to GBP41.8m (FY22:
GBP1.8m), with an underlying operating profit margin of 10.4%
(FY22: 0.7%). This was driven by strong performance in both the US
and within QinetiQ Target Systems, and the acquisition of Avantus.
FY22 operating profit included the GBP14.5m write-down on the
complex project.
Sector commentary
United States (75% of Global Products revenue)
Our US Sector provides technical advice, design and manufacture
of innovative defence products specialising in robotics, autonomy
and sensing solutions, and with the acquisition of Avantus is an
expert in cyber, data analytics and software development. We have
invested to support the long-term growth of our US Sector, in
leadership, integration, systems and tools; the business is now a
fully integrated single US Sector.
- The US Sector has had a strong year, with high order intake
of $280m and impressive revenue growth of 25%, prior to the
benefit of Avantus. We have won a number of key contracts in
the US that will support the delivery of our ambitious growth
targets.
- We have won a $93m single award Indefinite Delivery Indefinite
Quantity (IDIQ) by the US Army for a Digital Night Vision Technology
(DNVT) contract to support the continued evolution of DNVT
capabilities through development, integration, experimentation
and laboratory and platform test and evaluation including using
digital imaging, display, processing and network architecture
technologies. DNVT will substantially enhance the user's situational
awareness and decision-making abilities by developing digital
night vision capabilities coupled with component technology
enhancements including fused imagers, display enhancements,
and image processing hardware and algorithms.
- We secured a contract to provide technical services to the
US Army. The five year contract, worth up to $45m, will provide
services for the Development Command (DEVCOM) Command, Control,
Computers, Communications, Cyber, Intelligence, Surveillance
and Reconnaissance (C5ISR) at the Fort Belvoir Prototyping
Integration Facility (PIF). The contract, a one-year base period
followed by four one-year option periods, will provide technical
services for system development, fabrication, sensor and system
integration, prototyping of multi-function sensor suites, and
technology assessment efforts aimed at supporting current and
future DEVCOM C5ISR PIF Belvoir customers. This contract is
an important competitive win for the business and reinforces
our continued value to our customers.
- We also won a multi-year research, development and technology
integration contract, worth up to $49m, with the US Army C5ISR
Center, Research & Technology Integration Directorate's Image
Processing Division for Image Processing and advanced Optics
Technologies.
- We completed the RCV-L Surrogate Prototype base program activities
through the successful completion of US Army Performance Testing.
We delivered four (of eight) option vehicles (awarded in FY22)
and received circa $20m in orders to support ongoing experimentation
through the provision of spare parts, platform integration
and updates, technology insertions, and support and maintenance
activities.
- Following successful completion of the Low Rate Production
(LRIP) phase we made significant progress on the Common Robotic
System-Individual (CRS-I) programme, entering into Full Rate
Production in September 2022. In the year over 600 units were
delivered bringing the total delivery to over 900, with over
500 systems fielded to Combat Engineering and Explosive Ordnance
Disposal (EOD) units. Production remains on track with full
production continuing through FY24.
- We completed Optionally Manned Fighting Vehicle (OMFV) Phase
2, supporting prime contractor Oshkosh Defense. This phase
delivered a successful concept design to the US Army with QinetiQ
US supporting the development of the modular open architecture
next generation infantry fighting vehicle to replace the US
Army Bradley fighting vehicle.
- At the end of November 2022 we completed the acquisition of
Avantus for $590m. Avantus has a strong track record of achieving
speed-to-mission impact. Over the last three years, Avantus
has demonstrated a strong track record of consistent double-digit
revenue growth on a proforma organic basis, at attractive margins.
- Since completion, Avantus has continued to perform well, including
two successful re-competes and selection for a new $80m multi-year
contract with a national intelligence customer. In the first
four months of our ownership, while new business awards were
lower than assumed, we achieved good performance across our
contracts delivering $100m revenue at our expected margin of
10.8%. Integration is progressing ahead of plan and we are
actively pursuing revenue synergies by leveraging and cross
selling our offerings to our existing and new customer base.
The combination of capabilities across QinetiQ and Avantus
has created a disruptive defence and intelligence business
in the US and we remain on track to deliver on the strategic
and financial returns outlined previously.
Other Products (18% of Global Products revenue)
The portfolio of our other Global Products provide research
services and bespoke technological solutions developed from
intellectual property spun out from EMEA Services, and includes
QinetiQ Target Systems (QTS).
- QTS continues to make positive progress with customers resuming
trials and exercises. In response to increased customer demand
for live environment target simulations, QTS has successfully
delivered a significant improvement in production throughput
which has been positively received by our UK MOD customer and
has delivered positive growth.
- QTS has responded with agility to customer requirements including
the delivery of a Dutch and German training exercise led by
the Royal Netherlands Army where QTS provided products and
services to support a bi-national Tactical Firing event with
Germany at the NATO Missile Firing Installation on Crete. QTS
has also made good progress in the US with the integration
of the Army Ground Aerial Target Control System and our QTS
targets. This represents a major milestone in US market penetration.
- Following the successful demonstration of Banshee Jet80+ from
the deck of the Royal Navy's HMS Prince of Wales aircraft carrier
late last year, QTS has recently won a contract that enables
the test and evaluation of the capability of small fixed wing,
jet-powered uncrewed systems to support Carrier Aviation.
- We continue to experience strong demand for QTS products and
services arising from an increased demand from many of our
global customers which has resulted in March 2023 being the
biggest production month to date with over 100 aerial and surface
targets delivered.
- We continue to invest in and see demand for our sensors and
communication product portfolio. This past year saw record
demand for its Position Navigation and Timing (PNT) product
(Q20) across a number of customers. This gives a high degree
of confidence that the market potential remains strong ahead
of launching the next generation product (Q40) in the near
future.
Space Products (7% of Global Products revenue)
Space NV is a Belgium-based commercial space business providing
design and integration of small commercial satellites, docking and
berthing systems, and instruments for end-to-end space missions;
its principal customer is the European Space Agency. In October
2022, we completed the disposal of QinetiQ Space NV in Belgium to
Redwire Space Europe for an enterprise value of EUR32m. Space NV is
an attractive and well-positioned business in the commercial space
sector, which has delivered good operational performance and growth
under our ownership. Whilst the space domain remains an integral
part of our core defence and security strategy, Space NV products
provided limited operational synergies and alignment with our
global ambition.
Principal risks and uncertainties
The Group continues to be exposed to a number of risks and
uncertainties which management continue to identify, assess and
mitigate to minimise their potential impact on the reported
performance of the Group. An explanation of risks and their
mitigations, together with details of our risk management framework
can be found in the 2023 Annual Report and Accounts which is
available for download at: https://www.qinetiq.com/investors .
A summary of the significant risks and uncertainties are set out
below:
-- Failure to grow and adapt our ways of working in order to ensure
that we attract, develop and retain the right capability to deliver
excellence for our customers to support QinetiQ's future growth;
-- Failure to develop an inclusive, high-performing culture where
our people can thrive and maximise potential in a rapidly changing
and disruptive global landscape;
-- Failure to anticipate, plan and scenario-test for volatile macroeconomic
environments that could impact customer spending, inflationary
impacts on our cost-base, interest rates and foreign currency
exchange movements;
-- Large long-term UK contracts that contribute a material element
of the Group's revenue do not continue or are not renewed;
-- The M&A strategy, which is a key element of our strategic growth,
does not realise the maximum potential benefits;
-- The Group operates in highly regulated environments and recognises
that non-compliance could pose a risk to both our ability to conduct
business, and to our stakeholders;
-- A breach of physical, personnel or sensitive asset security could
lead to loss of information or harm to our employees, customers
and broader stakeholders;
-- A successful Cyber-attack could impact our customer deployed capabilities,
our ability to operate as a business or exclude us from some types
of future government or cyber domain work
-- Our Portfolio, Programme and Project Management (P3M) maturity
fails to keep pace with our growth plans and the successful delivery
of larger, longer-term contracts;
-- Failure to manage our climate change resilience would leave operations
on our estates and our supply chains exposed and we may not meet
legislative or customer requirements, stakeholder expectations
and may not be correctly positioned in a decarbonised future;
-- Failure to achieve the intended outcomes of the Digital and Data
Programme within budget will constrain our growth strategy; and
-- Failure of our Health and Safety Strategy could increase the risk
of serious injury to our employees, contractors or third parties,
potentially resulting in regulatory enforcement and reputation
loss.
Consolidated income statement for the year ended 31 March
FY23 FY22^
---------------------------------- ----------------------------------
Specific Specific
adjusting adjusting
All figures in GBP million Note Underlying* items* Total Underlying* items* Total
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
Revenue 1,2 1,580.7 - 1,580.7 1,320.4 - 1,320.4
Operating costs excluding
depreciation and amortisation (1,353.4) (29.5) (1,382.9) (1,140.7) (8.7) (1,149.4)
Other income 28.0 21.6 49.6 16.0 0.7 16.7
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 255.3 (7.9) 247.4 195.7 (8.0) 187.7
Depreciation and impairment
of property, plant and
equipment (51.5) - (51.5) (46.7) (1.2) (47.9)
Amortisation of intangible
assets (7.5) (15.6) (23.1) (5.4) (10.7) (16.1)
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
Operating profit/(loss) 2 196.3 (23.5) 172.8 143.6 (19.9) 123.7
Gain/(loss) on business
divestments 6 - 15.9 15.9 - (0.9) (0.9)
Finance income 7 6.8 9.9 16.7 0.5 4.5 5.0
Finance expense 7 (13.4) - (13.4) . (1.9) - (1.9)
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
Profit /(loss) before
tax 189.7 2.3 192.0 142.2 (16.3) 125.9
Taxation charge 8 (36.8) (0.8) (37.6) (24.1) (11.8) (35.9)
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
Profit/(loss) for the
year 152.9 1.5 154.4 118.1 (28.1) 90.0
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
Profit/(loss) is attributable
to:
Owners of the parent
company 152.9 1.5 154.4 118.1 (28.1) 90.0
Non-controlling interests - - - - - -
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
Profit/(loss) for the
year 152.9 1.5 154.4 118.1 (28.1) 90.0
------------------------------- ---- ----------- ---------- --------- ----------- ---------- ---------
Earnings per share for
profit attributable to
the owners of the parent
company FY23 FY22
------------------ ------------------
All figures in pence Note Underlying* Total Underlying* Total
-------------------------- ---- ----------- ----- ----------- -----
Basic 9 26.5 26.8 20.6 15.7
Diluted 9 26.3 26.5 20.4 15.5
-------------------------- ---- ----------- ----- ----------- -----
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
* Alternative performance measures are used to supplement the
statutory figures. These are additional financial indicators used
by management internally to assess the underlying performance of
the Group. Definitions can be found in the glossary. Also refer to
note 3 for details of 'specific adjusting items'.
Consolidated comprehensive income statement
for the year ended 31 March
All figures in GBP million FY23 FY22
--------------------------------------------------------- ------- ------
Profit for the year 154.4 90.0
Items that will not be reclassified to profit
and loss:
Actuarial (loss)/gain recognised in defined benefit
pension schemes (253.9) 144.0
Tax on items that will not be reclassified to
profit and loss 63.5 (47.6)
--------------------------------------------------------- ------- ------
Total items that will not be reclassified to
profit and loss (190.4) 96.4
Items that may be reclassified to profit and
loss:
Foreign currency translation (losses)/gains on
foreign operations (6.5) 5.6
Movement in deferred tax on foreign currency translation (0.5) (0.8)
Increase in the fair value of hedging derivatives 7.8 0.6
Movement in deferred tax on hedging derivatives (1.6) (0.1)
Total items that may be reclassified to profit
and loss (0.8) 5.3
--------------------------------------------------------- ------- ------
Other comprehensive (expense)/income for the
year, net of tax (191.2) 101.7
--------------------------------------------------------- ------- ------
Total comprehensive (expense)/income for the
year (36.8) 191.7
--------------------------------------------------------- ------- ------
Total comprehensive (expense)/income is attributable
to:
Owners of the parent company (36.8) 191.5
Non-controlling interests - 0.2
--------------------------------------------------------- ------- ------
Total comprehensive (expense)/income for the
year (36.8) 191.7
--------------------------------------------------------- ------- ------
Consolidated statement of changes in equity
for the year ended 31 March
Capital Non
All figures in GBP Share redemption Share Hedge Translation Retained controlling Total
million capital reserve premium reserve reserve earnings Total interest equity
------------------- -------- ----------- -------- -------- ----------- --------- ------- ------------ -------
At 31 March 2022 -
previously
reported 5.8 40.8 147.6 0.1 1.9 847.0 1,043.2 0.2 1,043.4
Change in
accounting
policy^ (note 20) - - - - - (2.0) (2.0) - (2.0)
------------------- -------- ----------- -------- -------- ----------- --------- ------- ------------ -------
At 1 April 2022 -
restated^ 5.8 40.8 147.6 0.1 1.9 845.0 1,041.2 0.2 1,041.4
Profit for the year - - - - - 154.4 154.4 - 154.4
Other comprehensive
income/(expense)
for the year , net
of
tax - - - 6.2 (7.0) (190.4) (191.2) - (191.2)
Purchase of own
shares - - - - - (0.8) (0.8) - (0.8)
Share-based
payments - - - - - 5.7 5.7 - 5.7
Deferred tax on
share-based
payments - - - - - 0.7 0.7 - 0.7
Movements on
business
divestment - - - - 0.9 - 0.9 (0.2) 0.7
Dividends - - - - - (42.6) (42.6) - (42.6)
------------------- -------- ----------- -------- -------- ----------- --------- ------- ------------ -------
At 3 1 March 2023 5.8 40.8 147.6 6.3 (4.2) 772.0 968.3 - 968.3
------------------- -------- ----------- -------- -------- ----------- --------- ------- ------------ -------
At 31 March 2021 -
previously
reported 5.7 40.8 147.6 (0.4) (2.9) 693.8 884.6 0.3 884.9
Change in
accounting
policy^ (note 20) - - - - - (2.0) (2.0) - (2.0)
------------------- -------- ----------- -------- -------- ----------- --------- ------- ------------ -------
At 1 April 2021 -
restated^ 5.7 40.8 147.6 (0.4) (2.9) 691.8 882.6 0.3 882.9
Profit for the year - - - - - 90.0 90.0 - 90.0
Other comprehensive
income
for the year, net
of
tax - - - 0.5 4.8 96.4 101.7 - 101.7
Purchase of own
shares - - - - - (0.8) (0.8) - (0.8)
Issues of new
shares 0.1 - - - - - 0.1 - 0.1
Share-based
payments - - - - - 7.4 7.4 - 7.4
Deferred tax on
share-based
payments - - - - - (0.3) (0.3) - (0.3)
Fair value
adjustment
in respect of
equity-based
contingent
consideration - - - - - 0.7 0.7 - 0.7
Dividends - - - - - (40.2) (40.2) (0.1) (40.3)
------------------- -------- ----------- -------- -------- ----------- --------- ------- ------------ -------
At 3 1 March 2022 5.8 40.8 147.6 0.1 1.9 845.0 1,041.2 0.2 1,041.4
------------------- -------- ----------- -------- -------- ----------- --------- ------- ------------ -------
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
Consolidated balance sheet as at 31 March
31 March 31 March 31 March
All figures in GBP million Note 2023 2022^ 2021^
----------------------------------- ----- ---------- --------- ---------
Non-current assets
Goodwill 14 409.0 149.4 145.5
Intangible assets 343.0 140.3 133.1
Property, plant and equipment 477.8 414.5 397.2
Other financial assets 6.2 0.5 0.8
Financial assets at fair value
through profit or loss - - 0.9
Equity accounted investments 1.4 2.6 4.2
Net pension asset 15 119.8 362.2 214.3
Deferred tax asset 32.6 21.0 11.7
------------------------------------ ----- ---------- --------- ---------
1,389.8 1,090.5 907.7
----------------------------------- ----- ---------- --------- ---------
Current assets
Inventories 68.8 54.9 54.4
Other financial assets 5.7 0.6 0.9
Trade and other receivables 452.6 373.2 338.5
Current tax asset 4.0 1.4 0.7
Cash and cash equivalents 151.2 248.1 190.1
------------------------------------ ----- ---------- --------- ---------
682.3 678.2 584.6
----------------------------------- ----- ---------- --------- ---------
Total assets 2,072.1 1,768.7 1,492.3
------------------------------------ ----- ---------- --------- ---------
Current liabilities
Trade and other payables (575.2) (474.7) (424.3)
Current tax payable (4.6) (5.9) (3.7)
Provisions (19.7) (21.1) (4.2)
Other financial liabilities (8.2) (6.9) (7.0)
------------------------------------ ----- ---------- --------- ---------
(607.7) (508.6) (439.2)
----------------------------------- ----- ---------- --------- ---------
Non-current liabilities
Deferred tax liability (112.0) (156.7) (89.7)
Provisions (7.1) (6.0) (7.8)
Borrowings and other financial
liabilities (361.8) (17.2) (20.7)
Other payables (15.2) (38.8) (52.0)
------------------------------------ ----- ---------- --------- ---------
(496.1) (218.7) (170.2)
----------------------------------- ----- ---------- --------- ---------
Total liabilities (1,103.8) (727.3) (609.4)
------------------------------------ ----- ---------- --------- ---------
Net assets 968.3 1,041.4 882.9
------------------------------------ ----- ---------- --------- ---------
Equity
Ordinary shares 5.8 5.8 5.7
Capital redemption reserve 40.8 40.8 40.8
Share premium account 147.6 147.6 147.6
Hedging reserve 6.3 0.1 (0.4)
Translation reserve (4.2) 1.9 (2.9)
Retained earnings 772.0 845.0 691.8
------------------------------------ ----- ---------- --------- ---------
Capital and reserves attributable
to shareholders of the parent
company 968.3 1,041.2 882.6
Non-controlling interest - 0.2 0.3
------------------------------------ ----- ---------- --------- ---------
Total equity 968.3 1,041.4 882.9
------------------------------------ ----- ---------- --------- ---------
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
Consolidated cash flow statement for year ended 31 March
All figures in GBP million Note FY23 FY22^*
-------------------------------------------------- ----- -------- -------
Underlying net cash inflow from operations 10 270.1 220.7
Less specific adjusting items: 10 (29.5) (5.6)
Net cash inflow from operations 10 240.6 215.1
Tax paid (30.2) (25.4)
Interest received 5.5 0.5
Interest paid (9.9) (1.5)
--------------------------------------------------- ----- -------- -------
Net cash inflow from operating activities 206.0 188.7
--------------------------------------------------- ----- -------- -------
Purchases of intangible assets (13.8) (21.4)
Purchases of property, plant and equipment (95.2) (62.9)
Proceeds from sale of property 2.4 1.5
Proceeds from disposal of business 28.1 -
Dividends from joint venture and associates - 2.0
Acquisition of businesses 5 (385.9) (0.8)
Net cash outflow from investing activities (464.4) (81.6)
--------------------------------------------------- ----- -------- -------
Purchase of own shares (0.8) (0.8)
Dividends paid to shareholders (42.6) (40.2)
Payment of bank facility arrangement fees (2.7) -
Capital element of lease payments (7.4) (6.2)
Drawdown of new borrowings 481.1 -
Repayment of borrowings (140.0) -
Repayment of acquired borrowings (117.9) -
Cash flow relating to intercompany loan
hedges (10.0) (3.1)
Transaction with non-controlling interests - (0.1)
Net cash inflow/(outflow) from financing
activities 159.7 (50.4)
--------------------------------------------------- ----- -------- -------
(Decrease)/increase in cash and cash equivalents (98.7) 56.7
Effect of foreign exchange changes on cash
and cash equivalents 1.8 1.3
Cash and cash equivalents at beginning of
year 248.1 190.1
--------------------------------------------------- ----- -------- -------
Cash and cash equivalents at end of year 151.2 248.1
--------------------------------------------------- ----- -------- -------
Reconciliation of movement in net (debt)/cash for the year ended
31 March
All figures in GBP million Note FY23 FY22^
-------------------------------------------------- ----- -------- ------
(Decrease)/increase in cash and cash equivalents
in the year (98.7) 56.7
Add back net cash flows not impacting net
(debt)/cash (331.0) 6.2
--------------------------------------------------- ----- -------- ------
Movement in net (debt)/cash resulting from
cash flows (429.7) 62.9
Net increase in lease obligations (15.3) (1.3)
Net movement in derivative financial instruments 9.8 (1.3)
Other movements including foreign exchange 3.2 0.7
--------------------------------------------------- ----- -------- ------
Movement in net (debt)/cash as defined by
the Group (432.0) 61.0
Net cash as defined by the Group at beginning
of the year 225.1 164.1
--------------------------------------------------- ----- -------- ------
Net (debt)/cash as defined by the Group
at end of the year 11 (206.9) 225.1
Less: total net financial liabilities 11 358.1 23.0
--------------------------------------------------- ----- -------- ------
Total cash and cash equivalents 11 151.2 248.1
--------------------------------------------------- ----- -------- ------
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
* To be consistent with FY23, the prior year has been
re-presented in respect of the cash flow impact of intercompany
loan hedging.
Notes to the financial statements
1. Revenue from contracts with customers and other income
Revenue by category
All figures in GBP million FY23 FY22
--------------------------------------- ------- -------
Service contracts with customers 1,481.4 1,234.4
Sale of goods contracts with customers 96.1 82.9
Royalties and licences 3.2 3.1
---------------------------------------- ------- -------
Total revenue 1,580.7 1,320.4
Less: adjust current year for acquired
businesses(^) (91.1) -
Less: adjust prior year for disposed
businesses(^) - (17.7)
Adjust to constant prior year exchange
rates (31.9) -
---------------------------------------- ------- -------
Total revenue on an organic, constant
currency basis(*) 1,457.7 1,320.7
---------------------------------------- ------- -------
Organic revenue growth at constant
currency(*) 12% 5%
---------------------------------------- ------- -------
^ For the period of which there was no contribution in the
equivalent period in the comparator year which was pre-ownership
(for acquisitions) or post-ownership (for disposals) by the
Group.
* Alternative performance measures are used to supplement the
statutory figures. See Glossary.
Other income
All figures in GBP million FY23 FY22^
----------------------------------------- ---- -------
Share of associates' and joint ventures'
profit after tax 0.8 0.3
Research and development expenditure
credits (RDEC) 17.4 6.2
Other income 9.8 9.5
------------------------------------------ ---- -------
Underlying other income 28.0 16.0
Specific adjusting item: gain on sale
of property 2.0 0.7
Specific adjusting item: release of RDEC
MOD appropriation liability 19.6 -
------------------------------------------ ---- -----
Total other income 49.6 16.7
------------------------------------------ ---- -------
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
Revenue by customer geographical location
All figures in GBP million FY23 FY22
------------------------------- ------- -------
United Kingdom (UK) 1,045.7 961.9
United States of America (US) 301.0 153.0
Australia 124.1 98.2
-------------------------------- ------- -------
Home countries 1,470.8 1,213.1
Europe 69.4 76.9
Rest of World 40.5 30.4
Total revenue 1,580.7 1,320.4
-------------------------------- ------- -------
Home countries revenue % 93% 92%
-------------------------------- ------- -------
International (non-UK) revenue
% 34% 27%
-------------------------------- ------- -------
Revenue by major customer type
All figures in GBP million FY23 FY22
------------------------------- ------------------- --------- ----------
UK government 969.4 881.7
US government 230.8 104.7
Other* 380.5 334.0
Total revenue 1,580.7 1,320.4
---------------------------------------------------- --------- --------
* 'Other' does not contain any customers with revenue in excess
of 10% of total Group revenue.
2. Segmental analysis
Operating segments
All figures in GBP million FY23 FY22^
------------------------------------- -------------------------- --------------------------
Revenue Underlying Revenue Underlying
from external operating from external operating
customers profit(*) customers profit(*)
------------------------------------- -------------- ---------- -------------- ----------
EMEA Services 1,179.3 137.1 1,059.2 135.6
Global Products 401.4 41.8 261.2 1.8
-------------------------------------- -------------- ---------- -------------- ----------
Operating profit from segments 1,580.7 178.9 1,320.4 137.4
Research and development expenditure
credits (RDEC) 17.4 6.2
-------------------------------------- -------------- ---------- -------------- ----------
Underlying operating profit 196.3 143.6
-------------------------------------- -------------- ---------- -------------- ----------
Operating profit margin from
segments* 11.3% 10.4%
-------------------------------------- -------------- ---------- -------------- ----------
Reconciliation of segmental results to total profit
All figures in GBP million Note FY23 FY22^
------------------------------------- ---- ------ ------
Operating profit from segments* 178.9 137.4
Research and development expenditure
credits (RDEC) 17.4 6.2
------------------------------------- ---- ------ ------
Underlying operating profit* 196.3 143.6
Specific adjusting items loss 3 (23.5) (19.9)
------------------------------------- ---- ------ ------
Operating profit 172.8 123.7
Gain/(loss) on business divestments 15.9 (0.9)
Net finance income 3.3 3.1
------------------------------------- ---- ------ ------
Profit before tax 192.0 125.9
Taxation expense (37.6) (35.9)
------------------------------------- ---- ------ ------
Profit for the year 154.4 90.0
------------------------------------- ---- ------ ------
* Definitions of the Group's 'Alternative Performance Measures'
can be found in the glossary.
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
3. Specific adjusting items
In the income statement, the Group presents specific adjusting
items separately. In the judgement of the Directors, for the reader
to obtain a proper understanding of the financial information,
specific adjusting items need to be disclosed separately because of
their size and nature. Underlying measures of performance exclude
specific adjusting items. The following specific adjusting items
have been (charged)/credited in the consolidated income
statement:
All figures in GBP million Note FY23 FY22
------------------------------------------------------- ---- ------ ------
Acquisition and disposal costs (16.4) (3.7)
Acquisition related remuneration costs (0.3) (1.3)
Acquisition integration costs (2.0) -
Pension past service cost - (2.4)
Digital investment (5.8) (1.9)
Restructuring costs (5.0) -
Release of RDEC MOD appropriation liability 19.6 -
Fair value adjustment in respect of contingent
consideration - 0.6
------------------------------------------------------- ---- ------ ------
Gain on sale of property 2.0 0.7
------------------------------------------------------- ---- ------ ------
Specific adjusting items loss before interest,
tax, depreciation and amortisation (7.9) (8.0)
Impairment of property - (1.2)
Amortisation of intangible assets arising from
acquisitions (15.6) (10.7)
------------------------------------------------------- ---- ------ ------
Specific adjusting items operating loss (23.5) (19.9)
Gain/(loss) on business divestments 6 15.9 (0.9)
Defined benefit pension scheme net finance income 9.9 4.5
------------------------------------------------------- ---- ------ ------
Specific adjusting items gain/(loss) before
tax 2.3 (16.3)
Specific adjusting items - tax 8 3.8 4.1
Deferred tax impact of change in future UK corporation
tax rate 8 (4.6) (15.9)
------------------------------------------------------- ---- ------ ------
Total specific adjusting items gain/(loss)
after tax 1.5 (28.1)
------------------------------------------------------- ---- ------ ------
Reconciliation of underlying profit for the year to total profit
for the year
All figures in GBP million FY23 FY22
------------------------------------------------- ----- ------
Underlying profit after tax - total Group 152.9 118.1
Total specific adjusting items gain/(loss) after
tax 1.5 (28.1)
-------------------------------------------------- ----- ------
Total profit for the year 154.4 90.0
-------------------------------------------------- ----- ------
4. Profit before tax
The following items have been charged in arriving at profit
before tax for continuing operations:
All figures in GBP million FY23 FY22
------------------------------------------------------- ----- -----
Cost of inventories expensed 55.2 47.1
Owned assets: depreciation 45.3 40.3
Leases assets: depreciation 6.2 5.9
Foreign exchange gain (0.6) (0.7)
Research and development expenditure - customer funded
contracts 313.8 287.5
Research and development expenditure - Group funded 14.6 14.6
------------------------------------------------------- ----- -----
5. Business combinations
Acquisitions in the year to 31 March 2023
Contribution post-acquisition
Fair value
of net assets Operating
All figures in GBP million Date acquired Total consideration Goodwill acquired Revenue profit
-------------------------------- ---------------- ------------------- -------- -------------- ------- ---------
23 November
Avantus Federal LLC 2022 392.2 264.6 127.6 82.9 8.9
Air Affairs Australia 1 December 2022 12.6 3.1 9.5 8.2 0.5
-------------------------------- ---------------- ------------------- -------- -------------- ------- ---------
Total 404.8 267.7 137.1 91.1 9.4
-------------------------------- ---------------- ------------------- -------- -------------- ------- ---------
Less: deferred consideration (4.0)
Less: cash acquired (14.9)
-------------------------------- ---------------- -------------------
Net cash outflow for the
year 385.9
-------------------------------- ---------------- -------------------
Total acquisition costs of GBP16.4m relating to the two
acquisitions, as well as an aborted disposal, are included within
operating profit as a specific adjusting item (see note 3). A
further GBP2.3m of integration costs and acquisition related
remuneration costs, both relating to Avantus, are also included
within operating profit as a specific adjusting item (see note
3).
Avantus Federal LLC
On 23 November 2022, the Group acquired 100% of the issued share
capital of Avantus for an enterprise value of $590m, on a
cash-free, debt-free valuation basis. Avantus is a leading provider
of mission-focused cyber, data analytics and software development
solutions to the US Department of Defense, Intelligence Community,
Department of Homeland Security and other Federal civilian
agencies. The Avantus acquisition will significantly enhance our US
offering and provide a strong platform from which to further grow
our US operations. Avantus has a track record of high growth at
attractive margins and is well-positioned across priority areas for
key defence and intelligence customers in the US.
Avantus forms part of QinetiQ's US Sector and is reported within
the Global Products segment. If the acquisition had occurred on the
first day of the financial year, Group revenue for the period would
have been GBP1,740.6m and the Group profit before tax
GBP209.7m.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets
acquired and liabilities assumed at the date of acquisition, at
fair value and in accordance with Group accounting policies. The
fair values remain provisional, but will be finalised within 12
months of acquisition.
Fair value
All figures in GBP million Note at acquisition
------------------------------ ---- ---------------
Intangible assets 209.2
Property, plant and equipment 8.3
Trade and other receivables 39.0
Cash and cash equivalents 14.5
Trade and other payables (34.3)
Lease liabilities (7.2)
Borrowings (104.9)
Deferred tax 6.0
Other assets and liabilities (3.0)
Net assets acquired 127.6
-------------------------------- ---- ---------------
Goodwill 14 264.6
-------------------------------- ---- ---------------
Total consideration 392.2
-------------------------------- ---- ---------------
The consideration of GBP392.2m was satisfied entirely in cash in
the financial year, with no deferred consideration. The borrowings
of GBP104.9m were repaid as part of the acquisition, which is
presented separately in the cash flow statement. The fair value
adjustments include GBP171.9m in relation to the step-up in value
and recognition of acquired intangible assets. GBP163.1m relates to
the step up in value of customer relationship assets, GBP2.2m
relates to the recognition of existing technology assets and
GBP6.6m relates to recognition of the Avantus trading name asset.
These fair value adjustments will unwind as the assets themselves
are amortised, over 16 years for the customer relationships and
five years for the existing technology and trade name.
There has been no adjustment to the fair value of acquired
receivables given the low credit risk of the customers. The gross
contractual and net amounts of receivables acquired were the same
and there was no allowance for credit loss recognised at
acquisition.
Customer relationships have been valued based on an income
approach using an excess earnings method. The key assumptions are
the revenue and profit projections, customer contract
retention/attrition assumptions, discount rate and contributory
asset charges. Existing technology has been valued using a
replacement cost approach and the trade name has been valued using
a relief from royalty method.
The goodwill is attributable mainly to the skills, technical
talent and security clearances of Avantus' work force and the
synergies expected to be achieved from integrating the company into
the existing US business. The goodwill recognised on acquisition is
tax deductible over a 15 year period as the purchase is as an asset
deal rather than a share purchase for tax purposes.
Air Affairs Australia PTY
On 1 December 2022, the Group acquired 100% of the issued share
capital of the Air Affairs Australia group of companies for an
enterprise value of A$53m, on a cash-free, debt-free valuation
basis. Air Affairs is an Australian defence services company - a
leader in air threat representation, Test and Evaluation, unmanned
targets and mission rehearsal. Air Affairs provides targets and
training services, and electronic warfare capabilities to the
Australian Defence Force, as well as aerial surveillance and
reconnaissance in support of government firefighting efforts. It
owns and operates a fleet of special mission aircraft and maintains
an advanced manufacturing and engineering facility providing
design, manufacture and certification operations. Air Affairs
employs c.180 people, headquartered in Nowra, New South Wales.
The acquisition of Air Affairs further establishes us as a
long-term, strategic partner to the Australian Defence Force and
underpins QinetiQ's strategic position as market leader in test
& evaluation and air threat representation, now with a
significant presence across the UK, Canada and Australia, and
training and special operations in Germany.
Air Affairs forms part of QinetiQ's Australia business unit and
is reported within the EMEA Services segment. If the acquisition
had occurred on the first day of the financial year, Group revenue
for the period would have been GBP1,599.3m and the Group profit
before tax would have been GBP192.8m.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets
acquired and liabilities assumed at the date of acquisition, at
fair value and in accordance with Group accounting policies. The
fair values remain provisional, but will be finalised within 12
months of acquisition.
Fair value
All figures in GBP million Note at acquisition
------------------------------ ---- ---------------
Intangible assets 2.4
Property, plant and equipment 29.8
Inventory 3.2
Trade and other receivables 5.1
Cash and cash equivalents 0.4
Trade and other payables (8.8)
Lease liabilities (7.9)
Borrowings (13.0)
Current tax (0.1)
Deferred tax (1.6)
Net assets acquired 9.5
Goodwill 14 3.1
-------------------------------- ---- ---------------
Total consideration 12.6
-------------------------------- ---- ---------------
The consideration of GBP12.6m includes GBP8.6m which was
satisfied by cash in the financial year, and GBP4.0m of deferred
consideration which is expected to be settled within one year. The
borrowings of GBP13.0m were repaid as part of the acquisition,
which is presented separately in the cash flow statement. There has
been no adjustment to the fair value of acquired receivables given
the low credit risk of the customers. The gross contractual and net
amounts of receivables acquired were the same and there was no
allowance for credit loss recognised at acquisition.
The most significant asset on the opening balance sheet is the
PPE (Property, Plant and Equipment). A fair value uplift of GBP5.5m
has been applied to the aircraft, increasing the book value of
GBP13.2m to GBP18.7m. The aircraft were valued based on a desktop
exercise performed by professional specialists. The key assumption
relates to the market value of the aircraft. The fair value
adjustments to PPE also include a step-down to the value of
leasehold improvements.
The fair value adjustments also include GBP2.4m in relation to
the step-up in value and recognition of acquired intangible assets.
GBP2.3m relates to the recognition of existing technology assets
and GBP0.1m relates to recognition of the Air Affairs trading name
asset. These fair value adjustments will unwind as the assets
themselves are amortised. This is ten years for the existing
technology and three years for the trade name. Deferred tax of
GBP0.7m was recognised on the intangibles.
Existing technology has been valued using a replacement cost
approach and the trade name has been valued using a relief from
royalty method.
The goodwill is attributable mainly to the skills and technical
talent of Air Affairs' work force and the synergies expected to be
achieved from integrating the company into Australia sector and
wider existing business. The goodwill recognised on acquisition is
not tax deductible.
Acquisitions in the year to 31 March 2022
There were no acquisitions in the year to 31 March 2022.
Deferred consideration of GBP0.8m was paid in the year to 31 March
2022 in respect of the acquisition of QinetiQ Training &
Simulation Limited (formerly known as Newman & Spurr
Consultancy Limited) in the year to 31 March 2021.
6. Gain/(loss) on business divestments
All figures in GBP million FY23 FY22
------------------------------------ ---- -----
Space NV business 15.9 -
Commerce Decisions business - (0.9)
Gain/(loss) on business divestments 15.9 (0.9)
------------------------------------ ---- -----
The gain on business divestments relates to the sale of the
Space NV for disposal proceeds of GBP32.3m (EUR37.0m). The
enterprise value was EUR32.0m. Proceeds received in the period, net
of transaction costs of GBP1.2m and GBP3.0m of cash divested with
the businesses, were GBP28.1m. All consideration is settled
entirely in cash.
Deferred consideration of GBP1.5m was potentially receivable in
respect of the Commerce Decisions business, contingent on
performance of the disposed business in the year to 31 March 2022.
The fair value of which had been estimated at GBP0.9m as at 31
March 2021. The required performance was not achieved, nil deferred
consideration became due and the receivable has been written off to
the income statement in the current year, classified as a specific
adjusting item.
7. Finance income and expense
All figures in GBP million FY23 FY22
------------------------------------------------- ------ ------
Receivable on bank deposits 6.8 0.5
Finance income before specific adjusting items 6.8 0.5
------------------------------------------------- ------ ------
Amortisation of deferred financing costs (0.8) (0.4)
Bank interest and commitment fees (10.6) (0.5)
Lease expense (1.1) (1.0)
Unwinding of discount on financial liabilities (0.1) -
Other interest (0.8) -
------------------------------------------------- ------ ------
Finance expense (13.4) (1.9)
------------------------------------------------- ------ ------
Underlying net finance expense (6.6) (1.4)
------------------------------------------------- ------ ------
Plus: specific adjusting items - defined benefit
pension scheme net finance income 9.9 4.5
------------------------------------------------- ------ ------
Net finance income 3.3 3.1
------------------------------------------------- ------ ------
8. Taxation
All figures in GBP million FY23 FY22^
--------------------------- ------------------------------ ------------------------------
Specific Specific
adjusting adjusting
Underlying items Total Underlying items Total
--------------------------- ---------- ---------- ------ ---------- ---------- ------
Profit /(loss) before
tax 189.7 2.3 192.0 142.2 (16.3) 125.9
Taxation (expense)/income (36.8) (0.8) (37.6) (24.1) (11.8) (35.9)
---------------------------- ---------- ---------- ------ ---------- ---------- ------
Profit/(loss) for the
year 152.9 1.5 154.4 118.1 (28.1) 90.0
---------------------------- ---------- ---------- ------ ---------- ---------- ------
Effective tax rate 19.4% 19.6% 16.9% 28.5%
---------------------------- ---------- ---------- ------ ---------- ---------- ------
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
The total tax charge was GBP37.6m (FY22 restated: GBP35.9m). The
underlying tax charge was GBP36.8m (FY22 restated: GBP24.1m), on a
higher underlying profit before tax, with an underlying effective
tax rate of 19.4% for the year ended 31 March 2023 (FY22 restated:
16.9%). The underlying effective tax rate is above the UK statutory
rate, primarily as a result of higher tax rates in overseas
jurisdictions.
Tax on specific adjusting items
The total specific adjusting items tax charge was GBP0.8m (FY22
charge: GBP11.8m). The tax charge arises on the UK statutory rate
change to 25% from 1 April 2023 (GBP4.6m) and a taxable Research
and Development Allowances clawback (GBP1.2m), offset by
non-taxable profit on sale of Space NV (GBP3.0m) and overseas rate
differences (GBP2.5m).
Factors affecting future tax charges
The effective tax rate is expected to remain above the UK
statutory rate, subject to the impact of any tax legislation
changes and the geographic mix of profits. The OECD has released
model rules for Pillar II of the Base Erosion and Profit Shifting
regulations covering application of a Global Minimum Tax. The Group
is monitoring progress of these rules and will engage with advisers
to assess any potential future impact on the tax charge.
Changes in tax rates
In the Spring Budget 2021, the UK Government announced that from
1 April 2023 the corporation tax rate will increase from 19% to
25%. The 25% rate has been substantively enacted at the balance
sheet date. An adjustment was made in FY22 and a further adjustment
has been made in FY23 of GBP4.6m to reflect that the revised UK
deferred tax balances that are expected to unwind at the new rate
of 25%.
Tax losses
At 31 March 2023 the Group had unused tax losses and US carried
forward interest expense of GBP175.6m (31(st) March 2022:
GBP128.1m) which are available for offset against future taxable
profits. Deferred tax assets are recognised on the balance sheet of
GBP22.7m in respect of GBP88.0m of US net operating losses, GBP5.4m
in respect of GBP21.5m of Canadian net operating losses and GBP2.5m
in respect of GBP8.3m of German trade losses. No deferred tax asset
is recognised in respect of the GBP57.8m of US interest deductions
due to uncertainty over the timing and extent of their utilisation.
Full recognition of the US carried forward interest expense would
increase the deferred tax asset by GBP15.6m. The Group has GBP32.4m
of time-limited US net operating losses of which GBP22.9m will
expire in 2035 and GBP9.5m in 2036. The Group made overseas losses
in the period ended 31 March 2023 and recognition of deferred tax
assets is dependent on future forecast taxable profits. The Group
has reviewed the latest forecasts for these businesses which
incorporate the unsystematic risks of operating in the defence
business. In the period beyond the 5 year forecast we have reviewed
the terminal period profits and based on these and our expectations
for these businesses we believe it is probable the losses, with the
exception of the interest deductions, will be fully utilised. Based
on the current forecasts the losses will be fully utilised over the
next 4-7 years. A 10% change in the forecast profits would alter
the utilisation period by 1 year.
9. 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 year. 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.
FY23 FY22
---------------------------------- -------- ----- -----
Weighted average number of shares Million 575.9 573.2
Effect of dilutive securities Million 6.4 6.4
---------------------------------- -------- ----- -----
Diluted number of shares Million 582.3 579.6
---------------------------------- -------- ----- -----
Underlying basic earnings per share figures are presented below,
in addition to the basic and diluted earnings per share, because
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 adjusting items
(see note 3) and tax thereon.
Underlying EPS
FY23 FY22
------------------------------------------ ------------ ----- -----
Profit attributable to the owners of the
Company GBP million 154.4 90.0
Remove (profit)/loss after tax in respect
of specific adjusting items GBP million (1.5) 28.1
------------------------------------------ ------------ ----- -----
Underlying profit after taxation GBP million 152.9 118.1
------------------------------------------ ------------ ----- -----
Weighted average number of shares Million 575.9 573.2
------------------------------------------ ------------ ----- -----
Underlying basic EPS Pence 26.5 20.6
------------------------------------------ ------------ ----- -----
Diluted number of shares Million 582.3 579.6
------------------------------------------ ------------ ----- -----
Underlying diluted EPS Pence 26.3 20.4
------------------------------------------ ------------ ----- -----
Basic and diluted EPS
FY23 FY22
-------------------------------------------- -------------- ------- ------
Profit attributable to the owners of the
Company GBP million 154.4 90.0
Weighted average number of shares Million 575.9 573.2
-------------------------------------------- -------------- ------- ------
Basic EPS - total Group Pence 26.8 15.7
-------------------------------------------- -------------- ------- ------
Diluted number of shares Million 582.3 579.6
Diluted EPS - total Group Pence 26.5 15.5
---------------------------------------- ------------------ ------- ------
10. Cash flows from operations
All figures in GBP million FY23 FY22^
----------------------------------------------- ------ ------
Profit after tax for the year 154.4 90.0
Adjustments for:
Taxation expense 37.6 35.9
Net finance income (3.3) (3.1)
(Gain)/loss on disposal of businesses (15.9) 0.9
Loss on disposal of plant and equipment 0.2 -
Gain on sale of property (2.0) (0.7)
Impairment of plant and equipment - 0.5
Impairment of property - 1.2
Amortisation of purchased or internally
developed intangible assets 7.5 5.4
Amortisation of intangible assets arising
from acquisitions 15.6 10.7
Depreciation of property, plant and equipment 51.5 46.2
Share of post-tax profit of equity accounted
entities (0.8) (0.3)
Share-based payments charge 6.1 7.4
Retirement benefit contributions in excess
of income statement expense (1.6) (1.8)
Pension past service cost - 2.4
Fair value adjustment in respect of contingent
consideration - (0.6)
Net movement in provisions (1.0) (1.0)
------------------------------------------------ ------ ------
248.3 193.1
----------------------------------------------- ------ ------
(Increase)/decrease in inventories (9.6) 1.4
Increase in receivables (56.7) (13.0)
Increase in payables 58.6 33.6
------------------------------------------------ ------ ------
Changes in working capital (7.7) 22.0
Net cash flow from operations 240.6 215.1
------------------------------------------------ ------ ------
Reconciliation of net cash flow from operations to underlying
net cash flow from operations and to free cash flow
All figures in GBP million FY23 FY22^
----------------------------------------------------- ------- -------
Net cash flow from operations 240.6 215.1
Add back specific adjusting item: digital investment 5.8 1.9
Add back specific adjusting item: restructuring
costs 5.0 -
Add back specific adjusting item: acquisition
integration and remuneration costs 2.3 -
Add back specific adjusting item: acquisition
transaction costs 16.4 3.7
Underlying net cash flow from operations 270.1 220.7
Less: tax and net interest payments (34.6) (26.4)
Less: purchases of intangible assets and property,
plant and equipment (109.0) (84.3)
------------------------------------------------------ ------- -------
Free cash flow 126.5 110.0
------------------------------------------------------ ------- -------
Underlying cash conversion ratio
FY23 FY22^
----------------------------------------- ----- -----
Underlying EBITDA - GBP million 255.3 195.7
Underlying net cash flow from operations
- GBP million 270.1 220.7
------------------------------------------ ----- -----
Underlying cash conversion ratio - % 106% 113%
------------------------------------------ ----- -----
^ Prior year comparatives have been restated due to a change in
accounting policy for Research and Development Expenditure Credits
(RDEC). See note 20 for details.
11. Net (debt)/cash
31 March 31 March
All figures in GBP million 2023 2022
-------------------------------------------- -------- --------
Current financial assets/(liabilities)
Deferred financing costs 1.3 0.4
Derivative financial assets 4.4 0.2
Lease liabilities (7.6) (5.5)
Derivative financial liabilities (0.6) (1.4)
--------------------------------------------- -------- --------
Total current net financial liabilities (2.5) (6.3)
--------------------------------------------- -------- --------
Non-current financial assets/(liabilities)
Deferred financing costs 1.5 0.5
Derivative financial assets 4.7 -
Lease liabilities (23.7) (16.6)
Borrowings - Term loan (337.6) -
Derivative financial liabilities (0.5) (0.6)
--------------------------------------------- -------- --------
Total non-current net financial liabilities (355.6) (16.7)
--------------------------------------------- -------- --------
Total net financial liabilities (358.1) (23.0)
Total cash and cash equivalents 151.2 248.1
--------------------------------------------- -------- --------
Total net (debt)/cash as defined by the
Group (206.9) 225.1
--------------------------------------------- -------- --------
12. Financial risk management
The table below analyses financial instruments carried at fair
value, by valuation method. The different levels have been defined
as follows:
Level 1 - measured using quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level 2 - measured using inputs other than quoted prices
included within Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices). Level 2 derivatives comprise forward foreign
exchange contracts which have been fair valued using forward
exchange rates that are quoted in an active market; and interest
rate swaps which have been fair valued using interest rates that
are quoted in an active market
Level 3 - measured using inputs for the assets or liability that
are not based on observable market data (i.e. unobservable
inputs).
The following table presents the Group's assets and liabilities
that are measured at fair value as at 31 March 2023:
All figures in GBP million Level 1 Level 2 Level 3 Total
--------------------------------------------- ------- ------- ------- -----
Assets:
Current derivative financial instruments - 4.4 - 4.4
Non-current derivative financial instruments - 4.7 - 4.7
Liabilities:
Current derivative financial instruments - (0.6) - (0.6)
Non-current derivative financial instruments - (0.5) - (0.5)
Total - 8.0 - 8.0
--------------------------------------------- ------- ------- ------- -----
The following table presents the Group's assets and liabilities
that are measured at fair value at 31 March 2022:
All figures in GBP million Level 1 Level 2 Level 3 Total
--------------------------------------------- ------- ------- ------- -----
Assets:
Current derivative financial instruments - 0.2 - 0.2
Non-current derivative financial instruments - - - -
Liabilities:
Current derivative financial instruments - (1.4) - (1.4)
Non-current derivative financial instruments - (0.6) - (0.6)
Total - (1.8) - (1.8)
--------------------------------------------- ------- ------- ------- -----
For cash and cash equivalents, trade and other receivables and
bank and current borrowings, the fair value of the financial
instruments approximate to their carrying value as a result of the
short maturity periods of these financial instruments. For trade
and other receivables, allowances are made within the carrying
value for credit risk. For other financial instruments, the fair
value is based on market value, where available. Where market
values are not available, the fair values have been calculated by
discounting cash flows to net present value using prevailing
market-based interest rates translated at the year-end rates,
except for unlisted fixed asset investments where fair value equals
carrying value. There have been no transfers between levels.
13. Dividends
An analysis of the dividends paid and proposed in respect of the
years ended 31 March 2023 and 31 March 2022 is provided below:
Pence per
share GBPm Date paid/payable
--------------------------------------- --------- ---- -----------------
Interim 2023 2.4 13.8 Feb 2023*
Final 2023 (proposed) 5.3 30.6 Aug 2023
--------------------------------------- --------- ---- -----------------
Total for the year ended 31 March 2023 7.7 44.4
--------------------------------------- --------- ---- -----------------
Interim 2022 2.3 13.2 Feb 2022
Final 2022 5.0 28.8 Aug 2022*
--------------------------------------- --------- ---- -----------------
Total for the year ended 31 March 2022 7.3 42.0
--------------------------------------- --------- ---- -----------------
*Total cash paid in the year to 31 March 2023 was GBP42.6m
(FY22: GBP40.2m).
The proposed final dividend in respect of the year ending 31
March 2023 will be paid on 24 August 2023. The ex-dividend date is
27 July 2023 and the record date is 28 July 2023.
14. Goodwill
31 March 31 March
All figures in GBP million 2023 2022
--------------------------- -------- --------
Cost
At 1 April 296.1 287.6
Acquisitions 267.7 -
Disposals (5.6) -
Foreign exchange 4.5 8.5
--------------------------- -------- --------
At 31 March 562.7 296.1
--------------------------- -------- --------
Accumulated impairment
At 1 April (146.7) (142.1)
Foreign exchange (7.0) (4.6)
--------------------------- -------- --------
At 31 March (153.7) (146.7)
--------------------------- -------- --------
Net book value at 31 March 409.0 149.4
--------------------------- -------- --------
Goodwill analysed by cash-generating unit (CGU)
Goodwill is allocated across six cash generating units within
the EMEA Services segment and four CGUs within the Global Products
segment. The full list of CGUs that have goodwill allocated to them
is as follows:
31 March 31 March
All figures in GBP million Primary reporting segment 2023 2022
------------------------------ -------------------------- -------- --------
US Technology Solutions Global Products 44.1 41.5
US C5ISR Global Products 36.8 34.6
Target Systems Global Products 24.5 24.7
Space Products Global Products - 5.6
Avantus Federal LLC Global Products 257.8 -
QinetiQ Germany EMEA services 2.7 2.6
Inzpire EMEA services 11.7 11.7
QinetiQ Training & Simulation EMEA services 7.8 7.8
Naimuri EMEA services 14.8 14.8
Australia EMEA Services 5.8 6.1
Air Affairs Australia EMEA Services 3.0 -
Net book value at 31 March 409.0 149.4
---------------------------------------------------------- -------- --------
Goodwill is attributable to the excess of consideration over the
fair value of net assets acquired and includes expected synergies,
future growth prospects and employee knowledge, expertise and
security clearances. The Group tests each CGU for impairment
annually, or more frequently if there are indications that goodwill
might be impaired. Impairment testing is dependent on management's
estimates and judgements, particularly as they relate to the
forecasting of future cash flows, the discount rates selected and
expected long-term growth rates. As a result of impairment in prior
years, QinetiQ Germany has limited headroom and a critical
sensitivity is discussed further below. For all other CGUs,
management considers that there are no likely variations in the key
assumptions which would lead to an impairment being recognised.
Key assumptions
Cash flows
The value-in-use calculations generally use discounted future
cash flows based on financial plans approved by the Board covering
a five-year period (aligned with the Group's Integrated Strategic
Business Plan process and the longer-term viability assessment
period). These are 'bottom-up' forecasts based on detailed analysis
by contract for the revenue under contract and by opportunity for
the pipeline. Pipeline opportunities are categorised as 'base case'
and 'high case' by management and only 'base case' opportunities
are included in the financial plans used for the value in-use
calculations.
Cash flows beyond these periods are extrapolated based on the
last year of the plans, with a terminal growth-rate assumption
applied.
Terminal growth rates and discount rates
The specific plans for each of the CGUs have been extrapolated
using the terminal growth rates as detailed below. Growth rates are
based on management's estimates which take into consideration the
long-term nature of the industry in which the CGUs operate and
external forecasts as to the likely growth of the industry in the
longer term. The discount rates used are calculated based on the
weighted average cost of capital of a portfolio of comparable
companies, adjusted for risks specific to the market
characteristics of each CGU, on a pre-tax basis. This is considered
an appropriate estimate of a market participant discount rate.
All figures % US Technology Solutions Target Systems US Avantus US C5ISR Inzpire Australia Air Affairs Australia QinetiQ Germany QinetiQ Training & Simulation Naimuri
31 March 2023: (2022)
---------------------- ----------------------- -------------- ---------- -------- ------- --------- --------------------- --------------- ----------------------------- -------
Terminal growth rate 2.3 (2.3) 2.2 (2.1) 2.3 (n/a) 2.3 2.2 2.3 (2.3) 2.3 (n/a) 2.2 (1.6) 2.2 (2.1) 2.2
(2.3) (2.1) (2.1)
Pre-tax discount rate 11.1 (10.8) 10.9 (11.6) 11.2 (n/a) 11.2 12.0 12.9 12.9 (n/a) 8.9 (9.1) 10.9 (11.5) 11.8
(10.8) (12.2) (9.4) (12.2)
---------------------- ----------------------- -------------- ---------- -------- ------- --------- --------------------- --------------- ----------------------------- -------
Sensitivity analysis shows that the value of the terminal year
cash flow, the discount rate and the terminal growth rates have a
significant impact on the value of the discounted cash flows.
Sensitivities are provided below for each of the CGUs.
Significant CGUs
US Technology Solutions
The carrying value of the goodwill for the US Technology
Solutions CGU was GBP44.1m as at 31 March 2023 (2022: GBP41.5m).
The recoverable amount of this CGU as at 31 March 2023, based on
value in use and calculated using the assumptions noted above, is
higher than the carrying value of net operating assets (of
GBP111.7m). The key sensitivity impacting on the value in use
calculations is the terminal year cash flows. These cash flows
include certain assumptions around growth of new product lines in
development, with clear market opportunity, and winning identified
future government contracts. US organic revenue grew by 25%
compared to prior year, following a year of decline in FY22 which
was impacted by the US defence budget being constrained by the
extended Continuing Resolution.
Confidence remains in continued growth into FY24 having secured
significant growth in order intake in H2 FY22 and FY23 which,
coupled with the new leadership team provides a strong foundation
for delivery of our strategy in the US. An increase in the discount
rate of 1%, a decrease in the terminal growth rate of 1% or a
decrease in the terminal year cash flows of $2.0m, all of which are
reasonably possible changes, would not cause the net operating
assets to exceed their recoverable amount.
US C5ISR
The carrying value of the goodwill for the US C5ISR CGU as at 31
March 2023 was GBP36.8m (2022: GBP34.6m). The recoverable amount of
this CGU as at 31 March 2023, based on value in use and calculated
using the assumptions noted above, is higher than the carrying
value of net operating assets (of GBP88.9m). The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate of 1%, a decrease in
the terminal growth rate of 1% or a decrease in the terminal year
cash flows of $2.0m, all of which are reasonably possible changes,
would not cause the net operating assets to exceed their
recoverable amount.
Target Systems
The carrying value of the goodwill for the Target Systems CGU as
at 31 March 2023 was GBP24.5m (2022: GBP24.7m). The recoverable
amount of this CGU as at 31 March 2023, based on value in use and
calculated using the assumptions noted above, is higher than the
carrying value of net operating assets (of GBP88.6m). The key
sensitivity impacting on the value in use calculations is the
terminal year cash flows. An increase in the discount rate of 1%, a
decrease in the terminal growth rate of 1% or a decrease in the
terminal year cash flows of GBP2.0m, all of which are reasonably
possible changes, would not cause the net operating assets to
exceed their recoverable amount.
Germany
The carrying value of the goodwill for the Germany CGU as at 31
March 2023 was GBP2.7m (2022: GBP2.6m). The current forecasts
result in the recoverable amount based on the value in use
calculations being GBP6.4m higher than the carrying value of
assets. Confidence remains in the business prospects over the next
five years, with a new leadership team on board and a healthy
pipeline of opportunities.
The key sensitivity impacting on the value in use calculations
is the terminal year cash flows. These cash flows include certain
assumptions around utilisation of aircraft, renewal of existing
contracts and successful winning of new business opportunities. A
reduction in the terminal value year cash flows of EUR3m, which
would be a reasonably possible change, would lead to an impairment
of the GBP2.7m carrying value of goodwill together with an
impairment charge against the carrying value of intangible assets
of approximately GBP12.8m. An increase in the discount rate of 1%
or a decrease in the terminal growth rate of 1%, both of which are
also reasonably possible changes, would result in an impairment of
GBP4.1m and GBP2.1m respectively.
Inzpire
The carrying value of the goodwill for the Inzpire CGU as at 31
March 2023 was GBP11.7m (2022: GBP11.7m). The recoverable amount of
this CGU as at 31 March 2023, based on value in use and calculated
using the assumptions noted above, is higher than the carrying
value of net operating assets (of GBP23.3m). The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate of 1%, a decrease in
the terminal growth rate of 1% or a decrease in the terminal year
cash flows of GBP1.0m, all of which are reasonably possible
changes, would not cause the net operating assets to exceed their
recoverable amount.
Naimuri
The carrying value of the goodwill for the Naimuri CGU as at 31
March 2023 was GBP14.8m (2022: GBP14.8m). The recoverable amount of
this CGU as at 31 March 2023, based on value in use and calculated
using the assumptions noted above, is higher than the carrying
value of net operating assets (of GBP25.3m). The key sensitivity
impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate of 1%, a decrease in
the terminal growth rate of 1% or a decrease in the terminal year
cash flows of GBP1.0m, all of which are reasonably possible
changes, would not cause the net operating assets to exceed their
recoverable amount.
Australia
The carrying value of the goodwill for the Australia CGU, as at
31 March 2023 was GBP5.8m (2022: GBP6.1m). The recoverable amount
of this CGU as at 31 March 2023, based on value in use and
calculated using the assumptions noted above, is higher than the
carrying value of net operating assets (of GBP10.8m). The key
sensitivity impacting on the value in use calculations is the
terminal year cash flows. An increase in the discount rate of 1%, a
decrease in the terminal growth rate of 1% or a decrease in the
terminal year cash flows of A$2.0m, all of which are reasonably
possible changes, would not cause the net operating assets to
exceed their recoverable amount.
Avantus
The carrying value of the goodwill for the Avantus CGU, which
was acquired during the year, as at 31 March 2023 was GBP257.8m.
The recoverable amount of this CGU as at 31 March 2023, based on
value in use and calculated using the assumptions noted above, is
higher than the carrying value of net operating assets (of
GBP431.1m). The key sensitivity impacting on the value in use
calculations is the terminal year cash flows. An increase in the
discount rate of 1%, a decrease in the terminal growth rate of 1%
or a decrease in the terminal year cash flows of $2.0m, all of
which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
Air Affairs Australia
The carrying value of the goodwill for the Air Affairs Australia
CGU, which was acquired during the year, as at 31 March 2023 was
GBP3.0m. The recoverable amount of this CGU as at 31 March 2023,
based on value in use and calculated using the assumptions noted
above, is higher than the carrying value of net operating assets
(of GBP35.9m). The key sensitivity impacting on the value in use
calculations is the terminal year cash flows. An increase in the
discount rate of 1%, a decrease in the terminal growth rate of 1%
or a decrease in the terminal year cash flows of A$1.0m, all of
which are reasonably possible changes, would not cause the net
operating assets to exceed their recoverable amount.
QinetiQ Training and Simulation
The carrying value of the goodwill for the QinetiQ Training and
Simulation CGU as at 31 March 2023 was GBP7.8m. The recoverable
amount of this CGU as at 31 March 2023, based on value in use and
calculated using the assumptions noted above, is higher than the
carrying value of net operating assets (of GBP14.1m). The key
sensitivity impacting on the value in use calculations is the
terminal year cash flows. An increase in the discount rate of 1%, a
decrease in the terminal growth rate of 1% or a decrease in the
terminal year cash flows of GBP1.0m, all of which are reasonably
possible changes, would not cause the net operating assets to
exceed their recoverable amount.
15. Post-retirement benefits
In the UK the Group operates the QinetiQ Pension Scheme ('the
Scheme') for approximately one fifth of its UK employees. The
Scheme closed to future accrual on 31 October 2013 and there is no
on-going service cost. After this date, defined benefit members
transferred to a defined contribution section of the Scheme. The
Scheme is a final salary plan, which provides benefits to members
in the form of a guaranteed level of pension payable for life. The
Scheme is in a net asset position with the market value of assets
in excess of the present value of Scheme liabilities. These have
the values set out below as at 31 March of each year end.
All figures in GBP million FY23 FY22
--------------------------------------------------- --------- ---------
Total market value of assets - see following table
for analysis by category of asset 1,355.2 2,065.7
Present value of Scheme liabilities (1,235.4) (1,703.5)
---------------------------------------------------- --------- ---------
Net pension asset before deferred tax 119.8 362.2
Deferred tax liability (35.4) (96.4)
---------------------------------------------------- --------- ---------
Net pension asset after deferred tax 84.4 265.8
---------------------------------------------------- --------- ---------
The balance sheet net pension asset is a snapshot view which can
be significantly influenced by short-term market factors. The
calculation of the net asset depends on factors which are beyond
the control of the Group - principally the value at the balance
sheet date of the various categories of assets in which the Scheme
has invested and long-term interest rates and inflation rates used
to value the Scheme liabilities.
The key driver for the decrease in the net pension asset since
the March 2022 year end was the turmoil in financial markets
following the Government's 'mini-budget' in September 2022,
particularly a sharp increase in gilt yields (and reduced gilt
prices). Prior to the 'mini-budget' the Scheme was 100% hedged on
both interest rate and inflation risk, and significant levels of
collateral were required to maintain such hedging levels. The spike
in gilt yields in October 2022 eroded the collateral required to be
held in the LDI portfolio to such an extent that the hedges needed
to be reduced to a lower level, covering approximately 65% of the
interest rate risk and 80% of the inflation rate risk. Subsequent
falls in gilt yields meant that, as interest rate risk was then 35%
unhedged, the Scheme suffered a loss in value. This reduced level
of hedging was maintained through to 31 March 2023, as measured on
the Trustees' gilt-funded basis. Over the course of the year, the
fall in value of assets across the whole investment portfolio
(primarily LDI-related collateral) was in excess of the reduction
in Scheme liabilities (which also fell substantially, primarily due
to an increase in the discount rate).
Total expense recognised in the income statement
All figures in GBP million FY23 FY22
---------------------------------------------------- ----- -----
Net finance income 9.9 4.5
Past service cost - (2.4)
Administrative expenses (1.4) (1.1)
Total net income recognised in the income statement
(gross of deferred tax) 8.5 1.0
----------------------------------------------------- ----- -----
Movement in the net pension asset
The movement in the net pension asset (before deferred tax) is
set out below:
All figures in GBP million FY23 FY22
------------------------------ ------- -----
Opening net pension asset 362.2 214.3
Net finance income 9.9 4.5
Net actuarial (loss)/gain (253.9) 144.0
Administration expenses (1.4) (1.1)
Past service cost - (2.4)
Contributions by the employer 3.0 2.9
Closing net pension asset 119.8 362.2
------------------------------- ------- -----
The fair value of the Scheme's assets, which are not intended to
be realised in the short term and may be subject to significant
change before they are realised, were:
All figures in GBP million 31 March 2023 31 March 2022
----------------------------- ------ ---------------------- ------ -------------------
Quoted Not quoted Total Quoted Not quoted Total
in an active in an
market active
market
----------------------------- ------ ------------- ------- ------ ---------- -------
Equities 177.4 32.9 210.3 176.1 44.7 220.8
Liability Driven Investment 227.2 - 227.2 291.8 - 291.8
Asset backed securities(1) 4.3 - 4.3 501.7 - 501.7
Alternative bonds(2) - 256.4 256.4 - 208.6 208.6
Corporate bonds(3) - 117.6 117.6 - 97.4 97.4
Property fund - - - - 29.5 29.5
Cash and cash equivalents - 17.2 17.2 - 78.5 78.5
Derivatives - 6.7 6.7 - (8.5) (8.5)
Insurance buy-in policies - 515.5 515.5 - 645.9 645.9
----------------------------- ------ ------------- ------- ------
Total market value of assets 408.9 946.3 1,355.2 969.6 1,096.1 2,065.7
----------------------------- ------ ------------- ------- ------ ---------- -------
(1) Asset backed securities are used as collateral for the LDI.
As gilt yields spiked during the year, the LDI drew down on
significant levels of security, causing the year on year drop shown
above.
(2) Primarily private market debt investments.
(3) Unlisted corporate bonds with commercial property held as
security.
Per the Scheme rules the Company has an unconditional right to a
refund of any surplus, assuming gradual settlement of all
liabilities over time. Such surplus may arise on cessation of the
Scheme in the context of IFRIC 14 paragraphs 11(b) and 12 and
therefore the full net pension asset can be recognised on the
Group's balance sheet and the Group's minimum funding commitments
to the Scheme do not give rise to an additional balance sheet
liability.
Assumptions
The major assumptions used in the IAS 19 valuations of the
Scheme were:
31 March 2023 31 March 2022
Insured Uninsured Insured Uninsured
members members members members
-------------------------------------------- -------- --------- -------- -----------
Discount rate applied to Scheme liabilities 4.80% 4.65% 2.80% 2.70%
CPI inflation assumption 2.55% 2.70% 3.00% 2.90%
Net rate (discount rate less inflation) 2.25% 1.95% (0.20%) (0.20%)
Assumed life expectancies in years:
At 60 for males currently aged 40 n/a 27.9 n/a 28.4
At 60 for females currently aged
40 n/a 30.3 n/a 30.7
At 60 for males currently aged 60 n/a 26.2 n/a 26.7
At 60 for females currently aged
60 n/a 28.2 n/a 28.6
At 65 for males currently aged 65 21.6 n/a 22.0 n/a
At 65 for females currently aged
65 23.3 n/a 23.7 n/a
-------------------------------------------- -------- --------- -------- -----------
The sensitivity of the gross Scheme liabilities to each of the
key assumptions is shown in the following table:
Indicative impact Indicative impact
on Scheme assets Indicative impact on net pension
Key assumptions on Scheme liabilities asset
-------------------- ----------------------
Increase discount
rate by 0.1% Decrease by GBP7.0m Decrease by GBP21.7m Decrease by GBP14.7m
Increase rate of inflation
by 0.1% Increase by GBP5.5m Increase by GBP20.6m Increase by GBP15.1m
Increase life expectancy
by one year Increase by GBP14.3m Increase by GBP34.0m Decrease by GBP19.7m
-------------------------- -------------------- ---------------------- --------------------
The impact of movements in Scheme liabilities will, to an
extent, be offset by movements in the value of Scheme assets as the
Scheme has assets invested in a Liability Driven Investment
portfolio. As at 31 March 2022 this portfolio hedged against
approximately 95% of the interest rate and also 95% of the
inflation rate risk, as measured on the Trustees' gilt-funded
basis. During the current financial year, due to the increased
volatility in gilt yields and reflecting increased liquidity
requirements for Schemes running LDI portfolios, the hedges have
been amended to cover approximately 65% of the interest rate risk
and 80% of the inflation rate risk as at 31 March 2023, as measured
on the Trustees' gilt-funded basis.
The above sensitivity analyses are based on a change in an
assumption while holding all other assumptions constant. In
practice, this is unlikely to occur, and changes in some of the
assumptions may be correlated. When calculating the sensitivity of
the defined benefit obligation to significant actuarial assumptions
the same method (projected unit credit method) has been applied as
when calculating the pension liability recognised within the
statement of financial position. The methods and types of
assumption did not change.
In addition to the sensitivity of the liability side of the net
pension asset (which will impact the value of the net pension
surplus) the net pension asset is also exposed to significant
variation due to changes in the fair value of Scheme assets. A
specific sensitivity on assets has not been included in the above
table but any change in valuation of assets flows straight through
to the value of the net pension asset e.g. if equities fall by
GBP10m then the net pension asset falls by GBP10m. The values of
unquoted assets assume that an available buyer is willing to
purchase those assets at that value. For the Group's portfolio of
assets, the unquoted alternative bonds of GBP256.4m; the unquoted
corporate bonds of GBP117.6m and the unquoted equities of GBP32.9m
are the assets with most uncertainty as to valuation as at 31 March
2023.
The accounting assumptions noted are used to calculate the year
end net pension asset in accordance with the relevant accounting
standard, IAS 19 (revised) 'Employee Benefits'. Changes in these
assumptions have no impact on the Group's cash payments into the
scheme. The payments into the scheme are reassessed after every
triennial valuation. The triennial valuations are calculated on a
funding basis and use a different set of assumptions, as agreed
with the pension Trustees. The key assumption that varies between
the two methods of valuation is the discount rate. The funding
basis valuation uses the risk-free rate from UK gilts as the base
for calculating the discount rate, whilst the IAS 19 accounting
basis valuation uses corporate bond yields as the base.
Risks
Through its defined benefit pension plan, the Group is exposed
to a number of risks in respect to the valuation of the Scheme, the
most significant of which are detailed below:
Volatility in market conditions
Results under IAS 19 can change dramatically depending on market
conditions. The present value of Scheme liabilities is linked to
yields on corporate bonds, while many of the assets of the Scheme
are invested in various forms of assets subject to fluctuating
valuations. Changing markets in conjunction with discount rate
volatility will lead to volatility in the net pension asset on the
Group's balance sheet and in other comprehensive income. To a
lesser extent this will also lead to volatility in the IAS 19
pension net finance income in the Group's income statement.
Choice of accounting assumptions
The calculation of the present value of Scheme liabilities
involves projecting future cash flows from the Scheme many years
into the future. This means that the assumptions used can have a
material impact on the balance sheet position and profit and loss
charge. In practice future experience within the Scheme may not be
in line with the assumptions adopted. For example, members could
live longer than foreseen or inflation could be higher or lower
than allowed for in the calculation of the liabilities.
16. 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
are 4,208,899 shares (FY22: 6,816,291 shares). In the year ended 31
March 2023 the Group granted/awarded 1.5m new share-based awards to
employees (FY22: 1.3m).
17. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured
guarantees of GBP33.6m at 31 March 2023 (31 March 2022: GBP37.2m)
in the ordinary course of business, typically in respect of
performance bonds and rental guarantees.
The Company has on occasion been required to take legal action
to protect its intellectual property rights, to enforce commercial
contracts or otherwise and similarly to defend itself against
proceedings brought by other parties, including in respect of
environmental and regulatory issues. Provisions are made for the
expected costs associated with such matters, based on past
experience of similar items and other known factors, taking into
account professional advice received, and represent management's
best estimate of the likely outcome. The timing of utilisation of
these provisions is uncertain pending the outcome of various court
proceedings, ongoing investigations and negotiations. However, no
provision is made for proceedings which have been or might be
brought by other parties unless management, taking into account
professional advice received, assesses that it is more likely than
not that such proceedings may be successful. Contingent liabilities
associated with such proceedings have been identified but the
Directors are of the opinion that any associated claims that might
be brought can be resisted successfully and therefore the
possibility of any outflow in settlement is assessed as remote.
18. Related parties
During the year ended 31 March 2023 there were sales to
associates and joint ventures of GBP0.4m (FY22: GBP5.2m). At the
year end there were outstanding receivables from associates and
joint ventures of GBP0.5m (FY22: GBP1.0m).
19. Capital commitments
The Group had the following capital commitments for which no
provision has been made:
31 March 31 March
All figures in GBP million 2023 2022
--------------------------- -------- --------
Total contracted 43.4 34.7
---------------------------- -------- --------
Capital commitments at 31 March 2023 include GBP21.2m (2022:
GBP24.5m) in relation to property, plant and equipment that will be
wholly funded by a third party customer under long-term contract
arrangements. These primarily relate to investments under the LTPA
contract.
20. Significant accounting policies
Basis of preparation
QinetiQ Group plc is a public limited company, which is listed
on the London Stock Exchange and is incorporated and domiciled in
the United Kingdom.
Statutory Consolidated Financial Statements for the Group for
the year ended 31 March 2022, prepared in accordance with adopted
IFRS, have been delivered to the Registrar of Companies. The
auditors have reported on those accounts; their report was (i)
unqualified, (ii) did not include a reference to any matters to
which the auditors drew attention by way of any emphasis without
qualifying their opinion and (iii) did not contain a statement
under Section 498 (2) or (3) of the Companies Act 2006. This
preliminary announcement does not constitute the Group's full
financial statements for the year ended 31 March 2023. This report
is based on the accounts which are approved by the Board and will
subsequently be filed with the Registrar of Companies in the United
Kingdom.
The financial information included within the preliminary
announcement has been prepared in accordance with UK-adopted
International Accounting Standards and with the requirements of the
Companies Act 2006. The accounting policies followed are the same,
subject to the changes noted below under 'change in accounting
policies', as those published by the Group within its Annual Report
for the year ended 31 March 2022 which is available on the Group's
website, www.QinetiQ.com .
The preliminary announcement was approved by the Board of
Directors on 25 May 2023. The financial information in this
preliminary announcement does not constitute the statutory accounts
of QinetiQ Group plc ('the Company') within the meaning of section
435 of the Act.
In the income statement, the Group presents specific adjusting
items separately. In the judgement of the Directors, for the reader
to obtain a proper understanding of the financial information,
specific adjusting items need to be disclosed separately because of
their size and nature. Underlying measures of performance exclude
specific adjusting items. Specific adjusting items include:
Does not reflect
Distorting Distorting in-year operational
due to irregular due to fluctuating performance
nature year nature (size of continuing
Item on year and sign) business
------------------------------------- ------------------ -------------------- ---------------------
Amortisation of intangible assets
arising from acquisitions P
------------------------------------- ------------------ -------------------- ---------------------
Pension net finance income P P
------------------------------------- ------------------ -------------------- ---------------------
Gains/losses on disposal of property
and investments P P P
------------------------------------- ------------------ -------------------- ---------------------
Transaction & integration costs
in respect of business acquisitions
and disposals P P
------------------------------------- ------------------ -------------------- ---------------------
Impairment of property and goodwill P
------------------------------------- ------------------ -------------------- ---------------------
Digital investment P P P
------------------------------------- ------------------ -------------------- ---------------------
Costs of group-wide restructuring
programmes P P
------------------------------------- ------------------ -------------------- ---------------------
The tax impact of the above P P P
------------------------------------- ------------------ -------------------- ---------------------
Other significant non-recurring
tax and RDEC movements P P P
------------------------------------- ------------------ -------------------- ---------------------
All items treated as a specific adjusting item in the current
and prior year are detailed in note 3. These 'specific adjusting
items' are of a 'non-operational' nature and do not include all
significant, irregular items that are of an operational nature, for
example contract risk provisions, cost of redundancy exercises and
gains/losses on disposal of plant and equipment. Such
'non-recurring trading items' are referred to in the business
performance narrative to aid readers from a 'quality of earnings
perspective'. They are considered by the Directors to be irregular
but still part of our businesses' normal 'operating' performance
and are included within the KPIs used to measure those business
units (and total Group performance for remuneration purposes).
Going concern basis
The Group meets its day-to-day working capital requirements
through its available cash funds and its bank facilities. The
market conditions in which the Group operates are expected to be
challenging as spending from key customers comes under pressure,
however the Group enters the year with a very strong balance sheet
and a healthy order book. After making enquiries, the Directors
have a reasonable expectation that the Group is well-positioned to
manage its overall business risks successfully and has a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. The Group
therefore continues to adopt the going-concern basis in preparing
its financial statements.
The Group is exposed to various risks and uncertainties, the
principal ones being summarised in the 'Principal risks and
uncertainties' section. Crystallisation of such risks, to the
extent not fully mitigated, would lead to a negative impact on the
Group's financial results but none are deemed sufficiently material
to prevent the Group from continuing as a going concern for at
least the next 12 months.
Changes in accounting policies
Following a routine Financial Reporting Council ("FRC") review
of the consolidated financial statements for the year ended 31
March 2022, the Group has changed its accounting policy relating to
RDEC. The Group's accounting policy has historically been to
account for RDEC under IAS12 Income Tax, as a credit within the tax
charge. Following engagement with the FRC, and a review of common
market practice, the Group has now decided to account for RDEC as
other operating income under IAS20 Government grants.
The impact of this change is to move GBP6.2m of RDEC income for
the year ending 31 March 2022 from the tax charge into other
operating income. The impact on the balance sheet and related notes
is to reclassify a GBP12.0m receivable from current tax payable to
other receivables as at 31 March 2022 (GBP11.8m as at 31 March
2021) as well as GBP12.0m (GBP12.6m as at 31 March 2021) from
current tax to accrued expenses and other payables. There is an
impact on net assets of GBP2.0m as at both 31 March 2022 and 31
March 2021 due to the deferred income impact of the updated income
recognition under IAS12. There is nil impact on profit after tax
for FY22.
The following tables show the adjustments recognised for each
individual line item as at 31 March 2023, 31 March 2022 and 1 April
2021.
Impact on the balance sheet (extract) at 31 March 2023 and 31
March 2022
31 March 2023 31 March 2022
---------------------------- --------- -------------------------- -------------- ---------------------------
Previous Change As originally Impact
All figures in GBP million policy in policy As presented presented of restatement Restated
---------------------------- --------- ----------- ------------- -------------- ---------------- ---------
Assets/(liabilities)
Other receivables 27.9 15.4 43.3 26.8 12.0 38.8
Accrued expenses and other
payables (153.8) (12.9) (166.7) (139.5) (12.0) (151.5)
Current tax payable 3.7 (8.3) (4.6) (3.9) (2.0) (5.9)
Deferred tax liability (112.6) 0.6 (112.0) (156.7) (156.7)
Other net assets 1,208.3 - 1,208.3 1,316.7 - 1,316.7
Net assets 973.5 (5.2) 968.3 1,043.4 (2.0) 1,041.4
Impact on the balance sheet (extract) at 1 April 2021
1 April 2021
As originally Impact
All figures in GBP million presented of restatement Restated
Assets/(liabilities)
Other receivables 7.8 11.8 19.6
Accrued expenses and other
payables (133.4) (12.6) (146.0)
Current tax payable (2.5) (1.2) (3.7)
Deferred tax liability (89.7) - (89.7)
Other net assets 1,102.7 - 1,102.7
Net assets 884.9 (2.0) 882.9
Impact on the income statement (extract)
The impact on the Group's consolidated income statement of
applying the restatement is set below:
FY23 FY22
Previous Change As originally Impact
All figures in GBP million policy in policy As presented presented of restatement Restated
Operating profit 135.8 37.0 172.8 117.5 6.2 123.7
Gain/(loss) on business
divestment 15.9 - 15.9 (0.9) - (0.9)
Finance income 16.7 - 16.7 5.0 - 5.0
Finance expense (13.4) - (13.4) (1.9) - (1.9)
Profit/(loss) before tax 155.0 37.0 192.0 119.7 6.2 125.9
Taxation expense 2.6 (40.2) (37.6) (29.7) (6.2) (35.9)
Profit/(loss) for the
year attributable to equity
shareholders 157.6 (3.2) 154.4 90.0 - 90.0
Impact on underlying measures
of performance
Operating profit from segments 178.9 - 178.9 137.4 - 137.4
Underlying operating profit 178.9 17.4 196.3 137.4 6.2 143.6
Glossary
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation and amortisation
EBITA Earnings before interest, tax and amortisation
EPS Earnings per share
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
SSRO Single Source Regulations Office
Alternative performance measures ('APM's)
The Group uses various non-statutory measures of performance, or
APMs. Such APMs are used by management internally to monitor and
manage the Group's performance and also allow the reader to obtain
a proper understanding of performance (in conjunction with
statutory financial measures of performance). The APMs used by
QinetiQ are set out below:
Measure Explanation Note reference
to calculation
or reconciliation
to statutory
measure
Organic growth The level of year-on-year growth, Note 2
expressed as a percentage, calculated
at constant prior year foreign exchange
rates, adjusting for business acquisitions
and disposals to reflect equivalent
composition of the Group
Operating profit Total operating profit from segments Note 2
from segments which excludes 'specific adjusting
items' and research and development
expenditure credits ('RDEC')
Operating profit Operating profit from segments expressed Note 2
margin from segments as a percentage of revenue
Underlying operating Operating profit as adjusted to exclude Note 2
profit 'specific adjusting items'
Underlying operating Underlying operating profit expressed Note 2
margin as a percentage of revenue
Underlying net finance Net finance income/expense as adjusted Note 7
income/expense to exclude 'specific adjusting items'
Underlying profit Profit before/after tax as adjusted Note 8
before/after tax to exclude 'specific adjusting items'
Underlying effective The tax charge for the year excluding Note 8
tax rate the tax impact of 'specific adjusting
items' expressed as a percentage of
underlying profit before tax
Underlying basic Basic and diluted earnings per share Note 9
and diluted EPS as adjusted to exclude 'specific adjusting
items'
Orders The level of new orders (and amendments N/A
to existing orders) booked in the
year
Backlog, funded backlog The expected future value of revenue N/A
or order book from contractually committed and funded
customer orders
Book to bill ratio Ratio of funded orders received in N/A
the year to revenue for the year,
adjusted to exclude revenue from the
25-year LTPA contract due to significant
size and timing differences of LTPA
order and revenue recognition which
distort the ratio calculation
Underlying net cash Net cash flow from operations before Note 10
flow from operations cash flows of specific adjusting items
Underlying operating The ratio of underlying net cash from Note 10
cash conversion or operations to underlying EBITDA.
cash conversion ratio
Free cash flow Underlying net cash flow from operations Note 10
less net tax and interest payments
less purchases of intangible assets
and property, plant and equipment
plus proceeds from disposals of plant
and equipment
Net cash Net cash as defined by the Group combines Note 11
cash and cash equivalents with other
financial assets and liabilities,
primarily available for sale investments,
derivative financial instruments and
lease liabilities
Return on capital Calculated as: Underlying EBITA / CFO Review
employed (average capital employed less net
pension asset), where average capital
employed is defined as shareholders
equity plus net debt (or minus net
cash)
Amortisation of intangible assets Note 3
Specific adjusting arising from acquisitions; impairment
items of property and goodwill; gains/losses
on disposal of property, investments
and businesses; net pension finance
income; transaction and integration
costs in respect of business acquisitions;
digital investment; tax impact of
the preceding items and significant
non-recurring tax and RDEC movements
FY The financial year ended 31 March n/a
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END
FR KZGZKZDVGFZZ
(END) Dow Jones Newswires
May 25, 2023 02:00 ET (06:00 GMT)
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