TIDMQQ.
RNS Number : 6188T
QinetiQ Group plc
16 November 2023
Interim Results
16 November 2023
Delivering long-term sustainable growth
Results for six months to 30 September 2023 ('H1 FY24')
Statutory results Underlying* results
H1 FY24 H1 FY23 H1 FY24 H1 FY23
Revenue GBP883.1m GBP673.4m GBP883.1m GBP673.4m
Operating profit(2) GBP91.3m GBP127.2m GBP100.1m GBP74.1m
(1)
Profit after tax GBP63.7m GBP110.2m GBP77.3m GBP65.4m
(1)
Earnings per share 11.0p 19.2p (1) 13.4p 11.4p
Interim dividend per share 2.6p 2.4p 2.6p 2.4p
Orders GBP952.7m GBP798.8m
Order backlog GBP3,132.0m GBP2,968.6m
Net cash flow from operations GBP62.2m GBP99.5m GBP71.7m GBP106.8m
(1) (1)
Net (debt)/cash GBP(273.8)m GBP264.0m
Strong and consistent operational performance globally
- Orders up 19% at a record-high of GBP953m, up 2% organically, with
a book-to-bill of 1.3x
- Revenue is up 31%, 19% on an organic basis
- Underlying operating profit is up 35%, 25% on an organic basis,
with improved margin at 11.3%
- Cash conversion at 50% due to short-term timing and on-track to
deliver FY guidance
- Statutory operating profit of GBP91m, H1 FY23 higher due to temporary
FX related to Avantus
A differentiated company responding to national and global
security needs
- A unique value proposition, highly relevant to an evolving
and increasing threat
- Structurally aligned to high-priority and high-growth segments
- Delivering organic revenue at double growth rate of national
defence budgets
- Avantus won $657m(3) contract awards, driving future revenue
growth
Full year performance in-line with market expectations,
longer-term guidance unchanged
- FY24 performance will deliver high single digit organic revenue
growth and high teens total revenue growth at a stable operating
profit margin
- On-track for high single digit organic revenue growth to c.GBP2.4bn
at c.12% margin by FY27
- Disciplined capital allocation and bolt-on acquisition optionality
to c.GBP3bn revenue by FY27
- Focused on our AUKUS customers' mission and increasing shareholder
returns
Steve Wadey, Group Chief Executive Officer of QinetiQ said:
"I'm delighted with our strong first half results that have been
achieved as a result of consistent operational performance from
across the Group and the continued dedication of our people to
deliver high value services and products critical to national
defence and security. We have delivered excellent organic growth
and improved our margin performance. We have also won significant
new business and major contract renewals, with a major highlight
being the outstanding orders performance of Avantus with $657m of
contract awards since the start of the financial year.
"We enter the second half of the year with confidence and
positive momentum. Our relevance in the market is evidenced by the
increasing demand for our distinctive offerings and growing order
pipeline. We remain focused on supporting our customers' mission
and increasing returns for shareholders."
* Definitions of the Group's 'Alternative Performance Measures' can
be found in the glossary
1 Prior period comparatives have been restated due to a change in
accounting policy in respect of Research and Development Expenditure
Credits. See note 18 to the interim financial statements.
2 Underlying operating profit refers to operating profit from segments.
See note 2 to the interim financial statements.
3 Total contract awards since the start of the financial year, $195m
orders recognised in H1 FY24
Interim results presentation:
We will be hosting an in-person results presentation at 09:30
GMT at the London Stock Exchange, 10 Paternoster Square, London,
EC4M 7LS. Registration to join in-person or via the live webcast is
available here:
https://www.qinetiq.com/en/investors/results-reports-and-presentations/fy24-interim-results
About QinetiQ:
QinetiQ is an integrated global defence and security company
focused on mission-led innovation. QinetiQ employs circa 8,500
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.
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 Interim Report, certain measures are used to
describe the Group's financial performance which are not recognised
under UK-adopted International Accounting Standards. 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 judgement of the
Directors, the use of adjusted 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 this document.
Year references (FY24, FY23, 2024, 2023) refer to the year ended
31 March. H1 FY24 and H1 FY23 refer to the six months ended 30
September.
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.
Chief Executive Officer's Review
We delivered strong and consistent operational performance
globally through the first half of the year. We secured a record
first half order intake of GBP953m, with a book-to-bill ratio of
1.3x, demonstrating the continued high demand for our distinctive
offerings. We achieved 31% revenue growth, 19% on an organic
constant currency basis, with underlying operating profit margin at
11.3%, an improvement on first half performance last year. Whilst
cash conversion in the first half was 50%, lower than the prior
year due to short-term timing effects, full year cash conversion
will be in-line with our previous guidance.
EMEA Services continues to perform particularly well,
maintaining the momentum and strong performance from FY23. EMEA
Services delivered 23% organic revenue growth compared to the prior
year first half, consistent revenue compared to the prior year
second half, and margin improved to 11.8%. Global Solutions has
benefitted from the first half performance of Avantus, that we
acquired in late-November 2022, and on an organic basis is broadly
flat compared to the first half of last year.
Avantus has won $657m of new contract awards since the start of
the financial year - this positions us well to drive future revenue
growth. First half revenue was slower than expected, due to the US
continuing resolution and competitor protests, but with the
significant step-up in contract awards we have confidence in
delivering good growth in the second half of the year. We remain
confident in delivering double digit revenue growth at stable
margin in the future.
We are deeply saddened to report that one of the PC-9 aircraft
that we operate crashed in September 2023 in the Neuenstein area of
Germany whilst on a customer training exercise and the two aircrew
on-board did not survive the crash. We are continuing to support
the families of our two colleagues that were on-board and the team
in Germany. The safety of our employees remains our highest
priority and we are working closely with all relevant authorities
to support the external investigations into this tragic
incident.
Strategic achievements
We have continued to make good progress implementing our
strategy. Our major strategic achievements delivered in the first
half include:
- $657m orders won in Avantus - Avantus has won $657m of new
contract awards since the start of the financial year, positioning
us well to drive future revenue growth. Orders won include
two strategic recompetes with significant on-contract growth:
a 5-year $224m Space Development Agency (SDA) contract and
a $127m Strategic Capabilities Office (SCO) contract.
- US business successfully transitioning from prototypes to
production - We have won two significant contracts in the US
demonstrating our advanced technology capabilities moving from
prototypes into larger production. Firstly, we have been awarded
a $84m 5-year contract for the testing and production of the
Next Generation Advanced Bomb Suit (NGABS), a Program of Record
to deliver over 700 suits to the US Army. And secondly, based
on successful operational trials with our Oshkosh partner we
were one of four awardees for the Robotic Combat Vehicle Light
(RCV-L) full scale prototype. This positions us well to compete
for the future $500m production phase.
- Engineering Delivery Partner (EDP) delivering customer benefits
- We secured a further GBP190m of orders in H1 through our
EDP framework, taking overall orders over the first 5 years
of operation to GBP1.5bn. Notably, we have secured a GBP3.5m,
6 month initial task as Capability Partner to the MOD in support
of the new AUKUS submarine programme.
- UK Intelligence delivery - We delivered Full Operating Capability
three months early on the 10-year, GBP80m SOCIETAS contract
for the MOD Joint Electronic Warfare Operational Support Centre,
enabling them to accelerate the production of mission data
for UK military platforms. In addition, we were awarded a multi-million
pound, 3-year design and delivery contract for a major UK customer
to deliver national cyber exercising for advanced training
and mission rehearsal in the cyber domain.
- Extension to MSP framework and delivery of the JATTS programme
in Australia - Our Australian business continues to successfully
deliver through the Managed Service Provider framework with
a 3-year extension and a further A$58m of business in H1 through
securing significant land systems and explosive ordinance tasks.
Augmenting this, our Air Affairs business has seen 24% increased
demand in flying hours through the Joint Adversarial Training
and Testing Services (JATTS) and successfully contributed threat
representation services to the Talisman Sabre training exercise
involving 13 nations and 30,000 military personnel.
- Principles Agreement signed with the UK MOD for 5-year Long
Term Partnering Agreement (LTPA) extension - We have signed
a Principles Agreement with UK MOD to jointly develop how the
LTPA test, trials, training and evaluation (T3E) capabilities
are sustained and modernised beyond 2028, to enable next generation
military capability, such as directed energy weapons. By exercising
the LTPA contract option for the 5-year extension, subject
to negotiation and approval, we will continue as UK MOD's strategic
partner for T3E services until 2033.
The growing market opportunity
The geopolitical climate is increasingly uncertain as the global
security situation continues to deteriorate. The Hamas attack on
Israel has elevated tensions and increased the threat of a broader
regional conflict in the Middle East. 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, increasing prioritisation of budgets
and modernisation of capabilities. Our major focus is on supporting
our three home countries which 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, a 40% increase since
2020. The UK refreshed its Integrated Review earlier in the year
and is investing GBP6.6bn in R&D and experimentation over four
years. The Australian government has completed its Defence
Strategic Review and is increasing defence spending by 7% to
$53bn.
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, as well as the
new nuclear submarine programme. These areas align well with our
strengths and provide attractive opportunities over the
long-term.
A differentiated company responding to national and global
security needs
Within this geopolitical context, we are a differentiated
company that helps our customers respond to their national and
global security needs. Our unique value proposition is to rapidly
develop and experiment with new capabilities, test those
capabilities are safe and perform as intended against the threat,
and ensure our warfighters are trained and operationally ready.
With us, our customers can accelerate through this critical cycle
and be prepared and ready to counter the increasing threat.
We are a purpose-driven company and our purpose has never been
more relevant: protecting lives and serving the national security
interests of our customers. Our purpose drives our strategy, which
has three inter-related components:
1. Delivering six distinctive and mutually supportive offerings:
We co-create high-value differentiated solutions for our customers
in experimentation, test, training, information, engineering
and autonomous systems;
2. Applying disruptive and innovative technology and business models:
We invest in and apply disruptive business models, digitisation
and advanced technologies to enable our customers' operational
mission at pace; and
3. Leveraging those capabilities across our global operations:
We are building an integrated global defence and security company
to leverage our capability through single routes to market in
UK, the US, Australia, Canada and Germany
In order to counter the increasing threat, our customers are
prioritising their budgets on rapid defence modernisation. Our
value proposition is structurally aligned to their high-priority
and high-growth segments, such as RDT&E (Research, Development,
Test and Evaluation) and C5ISR (Command, Control, Communications,
Computers, Cyber, Intelligence, Surveillance and Reconnaissance),
Cyber and Electronic Warfare and Autonomy and AI. Our alignment to
higher growth segments is why our growth is outpacing headline
defence spending: QinetiQ has delivered organic revenue at double
the growth rate of national defence budgets over the last five
years.
Building our global platform to deliver sustainable growth
At our full year results in May 2023 and re-confirmed at our
Investor Seminar in New York a few weeks ago, we have a robust plan
to deliver organic growth to c.GBP2.4bn revenue by FY27. With our
highly cash generative business model this plan provides
optionality to deploy our capital to further accelerate our growth
and shareholder returns. Through strategy-led bolt-on acquisitions,
we see an opportunity to build a business of circa GBP3bn revenue
by FY27.
Our organic growth plan is underpinned by a disciplined approach
to bid and programme delivery performance, to ensure consistent
operational performance through both winning and contract delivery.
We continue to invest in our people, technologies and capabilities
to ensure we retain and recruit the best talent to deliver for our
customers and enhance our offerings and capabilities through
organic investments. We are seeing success in leveraging our
distinctive offerings across our global business to drive
synergies; recent examples include establishing a US final assembly
and test capability for Banshee Jet 80 aerial targets to support
future US customer demand, SPUR robot sales into Australia from the
US, bringing advanced sensing and robotics to our Avantus
Intelligence customers, and selling our threat representation and
targets capabilities globally.
Our priority is to deliver on our organic growth ambitions.
Alongside this we continue to actively manage our portfolio, as
evidenced by the nine acquisitions and four disposals that we have
completed over the last eight years. We have an active pipeline of
acquisition opportunities and remain disciplined in the evaluation
of opportunities, considering their strategic fit, financial
returns and the right approach to integration. We are prioritising
bolt-on acquisitions in the US and Australia, with our plan for
leverage to remain under 1.5x (net debt to EBITDA). We have a clear
and active capital allocation policy which alongside our strategy,
governs our long-term investment choices. We consider capital
allocation proactively, evaluating organic and inorganic
investments and shareholder returns on their short and long-term
benefits, seeking to maximise long-term shareholder return.
Outlook: FY24 in-line with market expectations
We enter the second half of FY24 with confidence, a healthy
order-book and positive momentum with 92% revenue under contract.
We confirm that our full year performance will be in-line with
market expectations(1) . We expect to deliver high single-digit
organic revenue growth and high teens total revenue growth at a
stable operating profit margin. Capital expenditure is expected to
remain within the GBP90m to GBP120m range.
(1) - Analyst expectations (average) for FY24 as at 14/11/23:
Revenue GBP1,868m, Op profit GBP209m
Outlook: Longer-term guidance unchanged
We are targeting high single-digit organic revenue growth, to
deliver c.GBP2.4bn organic revenue at c.12% margin by FY27. With
our highly cash generative business model, this provides
optionality to deploy our capital to compound our growth and
shareholder returns - through bolt-on acquisitions we see an
opportunity to build a company of circa GBP3bn revenue at 11-12%
margin by FY27. This delivers attractive 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, such as
Generative AI, 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). 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 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 investment to modernise UK test
ranges 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. 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 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% higher by
2032-33.
We continue to support the Australian forces in modernising
sovereign defence capabilities, leveraging expertise across the
global business.
The significance of the AUKUS Alliance
In September 2021, leaders of Australia, the United Kingdom, and
the United States announced the creation of AUKUS, the enhanced
trilateral security partnership. 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 our priority and investment focus is aligned to 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.
Chief Financial Officer's Review
Operating performance
We delivered excellent order performance in the period with
orders of GBP952.7m (H1 FY23: GBP798.8m), up 19% on a reported
basis. Organically and on a consistent currency basis, orders grew
2% year on year against a strong prior year comparator. Orders won
include GBP190m Engineering Delivery Partner (EDP) orders, a $84m
full production contract for NGABS ($34m recognised in H1 FY24), a
continuation of the threat representation training contract that
underpins our German business and a GBP39m renewal of the
battlefield communication programme (BATCIS) in the UK. Avantus has
had impressive contract awards of $657m since the start of the
financial year. Due to the multi-year phasing and funding approach
to contract awards in the US, we have only recognised $195m in
first half orders, in-line with our prudent order recognition
policy.
Revenue visibility remains good and the Group's total funded
order backlog at 30 September 2023 stood at GBP3.1bn , a modest
increase on the same period last year. As we deliver revenue on our
large long-term contracts (with orders booked in prior years, most
significantly with the Long Term Partnering Agreement) backlog will
naturally reduce, it is therefore pleasing to see backlog
continuing to grow year-on-year due to the strong orders growth
across the Group. At the start of H2 FY24, the Group had
approximately GBP840m of H2 FY24 revenue under contract. This
compares with approximately GBP700m of H2 FY23 revenue at the same
time last year.
Revenue was GBP883.1m (H1 FY23: 673.4m), up 31% on a reported
basis. Organically and on a consistent currency basis, revenue grew
19% compared to the same period last year. Organic growth was
driven by strong performance in EMEA Services delivering revenue
from the excellent order in-take in the prior year, particularly in
the UK, which saw continued growth in EDP, short-term operational
priorities and inflation. Global Solutions revenue was flat
organically with total growth driven by the addition of
Avantus.
Operating profit from segments was GBP100.1m (H1 FY23:
GBP74.1m), up 35% on a reported basis. Organically and on a
consistent currency basis, underlying operating profit grew by 25%
compared to the same period last year. The significant improvement
in profit is largely driven from EMEA Services revenue growth and
improving margin in both segments. Our acquisitions achieved
margins in-line with expectations with Avantus maintaining double
digit operating profit margin.
Operating profit margin from segments was 11.3%, an improvement
from H1 FY23 (11.0%) and consistent with our FY23 performance. The
modest increase from H1 FY23 is due to margin improvement across
both segments; most significantly Global Solutions profit margin
increased up to 10% due to good margin stability in the US and
higher margin product deliveries (global threat representation and
niche intelligence products).
Operating profit from segments excludes income from Research and
Development Expenditure Credits (RDEC). RDEC income increased from
GBP7.5m in H1 FY23 to GBP11.9m in H1 FY24 due to the UK RDEC rate
increase from 13% to 20%. Seasonality / cyclicality has not had a
material impact on the interim income statement performance of the
Group.
Specific adjusting items
The total impact of specific adjusting items on operating profit
(which are excluded from underlying performance) before tax was an
expense of GBP20.7m (H1 FY23 restated: income of GBP45.6m). H1 FY23
included a GBP42.9m gain from the foreign exchange derivative
contract which was taken out to hedge the foreign exchange exposure
on the $590m Avantus acquisition and was executed in accordance
with the Group's Treasury Policy - this was a one-off timing gain
at H1 FY23 which unwound in H2 FY23 by the time of the transaction
completion. H1 FY23 restated also includes a GBP19.6m gain from the
release of the liability for MOD appropriation of RDEC.
Acquisition and disposal costs of GBP0.6m (H1 FY23: GBP6.4m)
comprise costs associated with various ongoing projects and
acquisitions that we have decided not to pursue, demonstrating our
disciplined capital allocation policy. The H1 FY23 amount related
to Avantus and Air Affairs. Acquisition related remuneration of
GBP1.1m relates to specific post-acquisition retention arrangements
for Avantus employees which were anticipated at the time of the
transaction. Acquisition integration costs of GBP2.6m relate to the
one-off costs of integrating both Avantus and Air Affairs with the
existing Group operations.
Our digital investment programme continues to deliver
improvements to the infrastructure, digital tools and operating
systems of the company - roughly two thirds of the costs in the
first half are reported as specific adjusting items in the P&L
given their one-off nature, with ongoing recurring operating costs
(such as licence costs and overheads) remaining within underlying
operating costs. In H1 FY24 the exceptional cost element of the
digital investment programme within specific adjusting items totals
GBP5.1m (H1 FY23: GBP2.5m).
Also included within specific adjusting items were a gain on the
sale of property in the UK of GBP2.1m (H1 FY23 GBP0.9m) and
impairment of right of use lease assets in the US following space
relocation of GBP0.7m. Amortisation of acquisition intangibles of
GBP12.7m (H1 FY23: GBP5.6m) has increased due to the inclusion of
amortisation of the intangible assets relating to the Avantus
acquisition.
Net finance costs
Underlying finance income on the group's cash reserves increased
from GBP1.4m to GBP8.9m due to the increase in interest rates.
Underlying finance expense increased from GBP1.9m to GBP16.6m due
to the interest payable on the debt financing which was taken out
at the time of the Avantus acquisition. The underlying net finance
expense, which excludes the pension net finance income, was GBP7.7m
(H1 FY23: GBP0.5m).
The pension net finance income, which is a specific adjusting
item of GBP2.2m (H1 FY23: GBP4.9m) reduced due to a lower opening
net pension surplus. Net finance expense was GBP5.5m (H1 FY23: net
finance income of GBP4.4m).
Tax
The total tax charge is GBP22.1m (H1 FY23 restated charge:
GBP21.4m). The underlying tax charge of GBP27.0m (H1 FY23 restated:
GBP15.7m) is calculated by applying the expected underlying
effective tax rate at a geographic level for the year ending 31
March 2024 to the underlying profit before tax for the six months
to 30 September 2023.
The Group's full year expected underlying effective tax rate is
26.1% which is higher than the half year underlying effective tax
rate of 25.9% (H1 FY23 restated: 19.4%) due to the geographic mix
of profits in H1 FY24.
The underlying effective tax rate has risen due to the increase
in the UK statutory rate effective from 19% to 25% from 1st April
2023. In future we expect the effective rate to be above the UK
statutory rate subject to the geographic mix of profits and the
recognition of deferred tax in respect of overseas tax losses and
excess interest deductions.
On 20 June 2023, Finance (No.2) Act 2023 was substantively
enacted in the UK, introducing a global minimum effective tax rate
of 15%. The legislation implements a domestic top-up tax and a
multinational top-up tax, effective for accounting periods starting
on or after 31 December 2023. The Group has applied the exception
under the amendment to IAS 12 to recognising and disclosing
information about deferred tax assets and liabilities related to
top-up income taxes.
Research and Development Expenditure Credits (RDEC) are now
recognised within other operating income following the change in
accounting policy in FY23. Amounts receivable in respect of RDEC
are recognised as 'other receivables' within 'trade and other
receivables'. Amounts receivable are offset against outstanding UK
corporation tax liabilities at the year-end only to the extent that
the balances can be and are intended to be settled on a net
basis.
At the FY23 balance sheet date the FY23 RDEC of GBP15.4m was
outstanding and was expected to be received as a step 1 offset
against the UK corporation tax liability. Part of the FY23
corporation tax liability was already paid as Quarterly Instalment
Payments during FY23 with a residual corporation tax liability of
GBP3.8m outstanding at the year end. This residual liability was
paid to HMRC in April 2023.
Tax on specific adjusting items includes a GBP3.4m credit for
tax on the amortisation of acquisition intangibles and a GBP1.5m
credit in respect of other pre-tax specific adjusting items, the
total specific adjusting items tax credit was GBP4.9m (H1 FY23
restated: charge of GBP5.7m).
Return on Capital Employed (ROCE)
Due to our focus on returns, we have included Return on Capital
Employed in our interim results for the first time, using the
calculation of: Underlying operating profit less amortisation for
the previous 12 months / (average capital employed less net pension
asset), where average capital employed is defined as shareholders'
equity plus net debt (or minus net cash).
For H1 FY24 Group ROCE was 25.5% (H1 FY23: 28.8%), modestly
lower due to the increased capital employed with the acquisitions
completed in H2 FY23. 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 for the Group was 13.4p up
18% on the prior year first half (H1 FY23: 11.4p), with the
increase primarily due to the increase in profits. Statutory basic
earnings per share (including specific adjusting items) were 11.0p
(H1 FY23 restated: 19.2p) with the prior half year comparative
period enhanced by the GBP42.9m foreign exchange gain on the
derivatives taken out to hedge the exposure on the Avantus
acquisition and the GBP19.6m release of the liability in respect of
UK MOD appropriation of RDEC .
Dividend
An interim dividend of 2.6p (H1 FY23: 2.4p) will be paid on 2
February 2024 to shareholders on the register on 4 January 2024.
The interim dividend represents one third of the prior year total
dividend reflecting our previously communicated methodology. The
full year dividend will be announced with our full year preliminary
results in May 2024.
Cash performance
Underlying net cash flows from operations was GBP71.7m (H1 FY23:
GBP106.8m), resulting in cash conversion before capital expenditure
of 50% (H1 FY23 restated: 98%). H1 FY24 operating cash flow was
impacted by the timing of customer billing milestones (which
impacts deferred income) and receipts. There are also some normal
cash flow differences between the first and the second half which
impacted our H1 FY24 cash conversion, such as the timing of
receiving RDEC income (the prior year income is received in cash in
H2).
Changes in net working capital of GBP74.2m in H1 FY24 included a
GBP71.5m reduction in trade and other payables. This comprises
timing related movements within deferred income, trade payables and
accrued expenses. These timing impacts are already reversing and we
are on-track to deliver full year underlying operating cash
conversion of at least 90%, in-line with our previous guidance.
Capex for the period was GBP46.9m (H1 FY23: GBP48.5m). We
continue to invest in core contracts including the LTPA following
the contract amendment announced in April 2019. Full year total
capex is expected to be in-line with previous guidance of
GBP90-120m.
At 30 September 2023 the Group had GBP273.8m net debt, compared
to GBP206.9m at 31 March 2023. The increase is due to neutral free
cash flow, the dividend payment and GBP26.4m of new lease
obligations. The reported H2 FY23 and H1 FY24 EBITDA and 30
September 2023 net debt position result in a leverage ratio of 0.9x
(31 March 2023: 0.8x), below our maximum leverage guidance of 1.5x
introduced at our recent Investor Seminar.
The net debt balance as at 30 September 2023 includes GBP12.3m
of net financial derivative assets, predominantly the interest rate
swaps which have been taken out to hedge future interest rate
exposure on the term loan, GBP2.7m of capitalised bank fees and
GBP54.3m of lease liabilities. Lease liabilities increased from
GBP31.3m as at 31 March 2023 due to new property arrangements
entered into on a long term basis in both the UK and US.
We maintain a rigorous approach to the deployment of our
capital, scrutinising organic and inorganic opportunities to ensure
returns to our shareholders are appropriate. At our recent Investor
Seminar we provided modest refinements to our capital allocation
policy as follows:
1. Invest in our organic capabilities;
2. Complement with bolt-on acquisitions;
3. A progressive dividend; and
4. Return excess cash to shareholders.
Committed facilities
The acquisition of Avantus last year 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 30 September 2023 and provides the Group with
significant scope to execute its strategic growth plans.
We adopt 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.
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.
H1 FY24 H1 FY23
------------------- -------- --------
GBP/US$ - average 1.25 1.21
GBP/US$ - closing 1.22 1.11
GBP/US$ - opening 1.24 1.31
GBP/A$ - average 1.91 1.75
GBP/A$ - closing 1.89 1.72
GBP/A$ - opening 1.85 1.75
------------------- -------- --------
Foreign exchange translation has provided a modest headwind to
revenue and operating profit in the first half. Most significantly,
the US Dollar has weakened against the Sterling with the average
exchange rate increasing from 1.21 to 1.25. Our guidance assumes FX
rates as at the closing rate above (GBP/US$ 1.22, GBP/A$ 1.89).
In H1 FY24, 22% of our total Group revenue was generated in the
US. As a result of the weakening of the US Dollar and other FX
movements in the half, revenue decreased by GBP6.5m and operating
profit decreased by GBP1.2m. Looking ahead we expect US revenues to
represent 25-30% of Group revenues, so for every 1% move in the FX
rate this would impact Group revenue by c.GBP5m and Group profit by
c.GBP0.5m.
Pensions
The net pension asset under IAS 19, before adjusting for
deferred tax, was GBP95.0m (31 March 2023: GBP119.8m). The key
driver for the decrease in the net pension asset since the March
2023 year end was a reduction in asset values, driven by the
Liability Driven investments (LDI), in excess of the reduction in
Scheme liabilities (which have also fallen substantially, due to an
increase in the discount rates). The triennial valuation as at 30
June 2023 is ongoing and is not expected to result in a requirement
for the Group to make a contribution into the scheme.
The key assumptions used in the IAS 19 valuation of the scheme
are set out in note 13.
Operating review
EMEA Services
H1 FY24 H1 FY23
GBPm GBPm
--------------------------------------------- -------------------------- -----------------------------
Orders 631.1 600.8
Revenue 654.8 524.3
Underlying operating profit* 77.4 61.5
Underlying operating margin* 11.8% 11.7%
Book to bill ratio(1) 1.2x 1.4x
Order backlog 2,732.8 2,601.2
--------------------------------------------- -------------------------- -----------------------------
* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary
(1) B2B ratio is orders won divided by revenue recognised, excluding the LTPA contract
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 were up 5% to GBP631.1 (H1 FY23: GBP600.8m), driven by
GBP190m orders in EDP, a GBP39m renewal to the battlefield
communication contract (BATCIS) in the UK Intelligence sector, a
continuation of the threat representation training contract that
underpins our German business and a GBP54m uplift to the LTPA
contract to reflect inflationary effects in the UK.
Revenue increased 23% on an organic basis driven by revenue
delivery on the excellent orders won in the prior year,
particularly with good continued growth in EDP and strong execution
across our contracts, as well as growth in the LTPA due to
contractually covered cost inflation, and short-term operational
priorities.
Underlying operating profit increased by 26% to GBP77.4m (H1
FY23: GBP61.5m). This has been achieved through the strong revenue
growth mentioned above and modest margin improvement to 11.8% (H1
FY23: 11.7%), demonstrating consistent operational performance.
Including the LTPA, approximately 67% of EMEA Services revenue
is derived from single source contracts (H1 FY23: approximately
65%) demonstrating our critical and unique capabilities for our
customers.
Sector commentary
UK Defence (61% of EMEA Services revenue)
The UK Defence sector delivers mission critical solutions,
innovating for our Air, Maritime and Land customers' advantage. The
sector provides a focus on our strategy of maximising growth
through our framework contracts, building new core offerings
through our global campaigns and exploring new growth
opportunities; it 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.
- The Long Term Partnering Agreement (LTPA) remains our largest
contract delivering world-leading test, trials, training and
evaluation (T3E) for the UK MOD. We have signed a Principles
Agreement with UK MOD to jointly develop how the LTPA test,
trials, training and evaluation (T3E) capabilities are sustained
and modernised beyond 2028, to enable next generation military
capability, such as directed energy weapons. By exercising
the LTPA contract option for the 5-year extension, subject
to negotiation and approval, we will continue as UK MOD's strategic
partner for T3E services until 2033.
- As with a number of our large long-term contracts, the commercial
arrangement within the LTPA enables us to be reimbursed for
future allowable cost increases in-line with the Single Source
Regulation Office (SSRO) aligned to an agreed index; this represented
a GBP54m order uplift on the LTPA in H1 FY24 (GBP26m in H1
FY23).
- Operationally, the ongoing modernisation of LTPA ranges continue,
with joint operation successfully tested between Aberporth,
Hebrides and RAF Waddington to connect high classification
computer networks enabling more rapid distribution of data
and greater use of analytics for new and in-service capabilities.
- During May 2023, we successfully demonstrated our central role
in global defence and security, through one of the world's
largest tests of naval and missile defences, Formidable Shield
2023. The exercise harnessed the power of some of the most
advanced technologies in the world to enable a joint NATO force
to operate seamlessly together and to better understand and
defeat complex evolving threats. Hosted at MOD Hebrides, operated
by QinetiQ on behalf of the UK MOD, the exercise saw more than
20 ships, 35 aircraft, and nearly 4,000 Allied military personnel
from 13 NATO nations come together to test missiles, systems,
sensors and software against ballistic, subsonic and supersonic
targets in a realistic, live-fire mission rehearsal event.
- The Engineering Delivery Partner (EDP) programme continues
to deliver for our customer with a collaborative mind-set and
commitment to transparency helping to maximise and accelerate
outputs for vitally important UK MOD programmes. Alongside
our partners Atkins and BMT, in H1 we have won orders totalling
GBP190m and revenue of GBP185m (roughly two thirds in UK Defence
and one third through UK Intelligence), and we have secured
a GBP3.5m initial task as Capability Partner to the MOD in
support of the new AUKUS submarine programme . Since inception
over the last five years we have won overall orders totalling
GBP1.5bn .
- In the half we have delivered a number of critical experimentation
and training exercises. Two such examples are as follows: 1)
The Platform Enabled Training Capability demonstration of synthetic
training technology involving HMS Queen Elizabeth aircraft
carrier, HMS Kent frigate and HMS Diamond destroyer - utilising
internally developed software tools and in partnership with
BAE Systems we delivered this event positioning us well for
future Maritime training opportunities. 2) Support to the Royal
Navy at the NATO REPMUS23 Operational Experimentation exercise
in the Portuguese North Atlantic Exercise Area, set in the
context of a coalition operation. We led a UK team delivering
the experimental Command & Control architecture, and planning
and executing the exercises: evaluating concepts for the mission
management of multiple uncrewed systems across a task group,
sharing the tactical picture generated and the integration
into the warship. These exercises are designed to allow large
scale experimentation where Operational Communities work together
with academia and industry to develop and test operational
concepts and requirements.
UK Intelligence (29% 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 are three acquired
businesses: QinetiQ Training and Simulation Limited (QTSL, formerly
NSC), Inzpire and Naimuri.
- In May 2023, we announced the SOCIETAS GBP80m win with the
UK MOD to provide specialist mission data and electronic warfare
skills. In the first half we have achieved Full Operating Capability
(FOC) on this project, ahead of schedule, supporting our customers'
mission. The Programme requires us to sustain and enhance delivery
of Electronic Warfare Mission Data and related intelligence
outputs to the UK joint force on an assured and enduring basis.
This reinforces our close coupling with the customer's mission
and our successful delivery.
- The Serapis framework enables the UK Defence Science and Technology
Laboratory (Dstl), UK MOD and the frontline commands to quickly
and efficiently place contracts for scientific and technical
research and development (R&D). Of the six 'Lots', QinetiQ
is leading three for R&D of command and control systems, communications
and networks, and training and simulation projects. By working
collaboratively with Dstl, we have efficiently delivered over
GBP30m of technical R&D in the first half, both our own expert
scientists and engineers, and through a supply chain of 200
companies. This is supporting exploitation of technology with
the front line commands, and de-risking generation-after-next
capabilities.
- We continue to deliver well on the Battlefield Tactical Communication
and Information Systems (BATCIS) contract, having secured the
year six extension worth GBP39m. 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 a complex set of projects
covering a wide array of disciplines; developing concepts,
engineering solutions, managing obsolescence issues, supporting
critical operational requirements and enabling procurement
competitions.
- 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.
Following the successful recompete of the next phase the Vivace
contract last year, delivery into the Home Office and other
government departments continues positively. Over the last
six years over 200+ commissions have been delivered across
40 government departments including the Home Office, National
Crime Agency, Intelligence Agencies, Department for Transport,
Ministry of Justice, Cabinet Office and OFCOM, with revenue
totalling over GBP150m. Mission challenges included counter-terror
operations, serious organised crime, online harms, aviation
security and COVID vaccine security, centred on dealing with
the fast-paced developments in Digital and Data technologies
that are prevalent in today's society - central to many government
departments' most challenging programmes. Vivace has developed
a dynamic community of over 320 organisations ranging from
tech giants through to Small Medium Enterprises and academia.
Vivace provides an agnostic team that blends suppliers together
using bespoke commercial arrangements that drive co-investment
opportunities. Given current Government finance pressures and
national security challenges this unique model is set for further
growth as it provides both rapid insertion of capabilities
(in weeks or months rather than years) and offers excellent
value for money over traditional procurement approaches.
- The three historic acquisitions in UK Intelligence continue
to perform well, all delivering greater than 10% growth, and
in some instances materially higher growth rates. Inzpire and
QTSL are both generating good growth through our large framework
contracts of EDP and Serapis, and Naimuri is growing well with
our Data Intelligence offering into the UK Intel customers.
Australia (10% of EMEA Services revenue)
Our Australia sector is a specialist advisory, engineering and
threat representation products and services business in the
Australian, German and Canadian markets. It has both an Australian
country-focus in advisory and engineering services, as well as a
focus on exploitation of our threat representation capabilities
globally.
- The Australian Defence Force's Defence Strategic Review, released
in April 2023, set an ambitious agenda of reform and savings;
this has delayed some contract renewals and withdrawn funding
to some new projects. As part of this the Australian Department
of Defence has been instructed to maximise the use of the Major
Service Provider (MSP) contracts for professional support.
Therefore, the impact of these two dynamics is that some of
our advisory work has been slower in the first half whilst
other areas of the business (including our MSP contract) are
performing and growing well, yielding overall good organic
growth in Australia. We have achieved a 3-year extension to
the MSP and a further A$58m of business in H1 through securing
significant land vehicles and explosive ordinance tasks.
- Over the last year we have invested A$4m to develop an Engineering
facility in South Melbourne (named QTech) and we are starting
to see initial demand for the facility including a recent contract
win to deliver specialist command and control vehicles. The
facility is open and will be a cornerstone facility for further
growth through the Robotics and Autonomous Systems and the
Test and Evaluation Campaigns.
- Since completion of the acquisition of Air Affairs in December
2023, performance has continued in-line with our expectations
with good demand for our services. In particular the Joint
Adversarial Training and Testing Services (JATTS) contract
has seen 24% increased demand in flying hours and successful
contributed threat representation services to the multi-national
Talisman Sabre '23 exercise.
- In Germany, we have secured the renewal of our main threat
representation training contract demonstrating the positive
service we provide to our customer. We are also seeing good
increased demand for our threat representation capabilities,
delivered through the aircraft fleet acquired last year.
Global Solutions
H1 FY24 H1 FY23
GBPm GBPm
----------------------------- ------- -------
Orders 321.6 198.0
Revenue 228.3 149.1
Underlying operating profit* 22.7 12.6
Underlying operating margin* 9.9% 8.5%
Book to bill ratio 1.4x 1.3x
Order backlog 399.2 367.4
* Definitions of the Group's 'Alternative Performance Measures'
can be found in the glossary
Global Solutions combines our world-leading technology-based
products and services. Our strategy is to expand the portfolio of
solutions to win larger, longer-term programmes providing good
visibility of revenue and cash flows.
Financial performance
Orders increased by 62% to GBP321.6m (H1 FY23: GBP198.0m).
Organically and on a consistent currency basis, orders were broadly
flat, following a strong prior year performance in the US. Avantus
has had impressive contract awards of $657m since the start of the
financial year. Due to the multi-year phasing and funding approach
to contract awards in the US, we have only recognised $195m in
first half orders, in-line with our prudent order recognition
policy.
Revenue was up 53% to GBP228.3m (H1 FY23: GBP149.1m).
Organically and on a consistent currency basis, revenue was broadly
flat with the same period last year, with the Avantus contribution
driving the total reported growth.
Underlying operating profit increased to GBP22.7m (H1 FY23:
GBP12.6m), with an underlying operating profit margin of 9.9% (H1
FY23: 8.5%). The significant improvement in profit is as a result
of good margin stability in the US and higher margin products with
QTS and niche intelligence products.
Sector commentary
United States (84% of Global Solutions 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 .
- Avantus has won $657m of new contract awards since the start
of the financial year - this positions us well to drive future
revenue growth. First half revenue was slower than expected,
due to the US continuing resolution and competitor protests,
but with the significant step-up in contract awards we have
confidence in delivering good growth in the second half of
the year and we remain confident in delivering double digit
revenue growth at stable margins in the future .
- In the former Avantus business we have been awarded a $224m
5-year contract to provide mission support to the US SDA.
This contract builds on an existing strong customer relationship
with the SDA, generating incremental growth on previous work.
Under the 5-year contract, QinetiQ will deliver management
and professional services, acquisition support, engineering
and technical assistance needed to deliver the Proliferated
Warfighter Space Architecture programme. The QinetiQ team,
along with its strategic partners, provide engineering services
in support of SDA's most critical space missions.
- In the former Avantus business we have been awarded a $127m
5-year contract in the US from the Office of the Secretary
of Defense Strategic Capabilities Office (SCO). QinetiQ will
provide secure, technologically advanced services and products
that will enable SCO to deploy new and enhanced capabilities
in support of strategic operations.
- We have been awarded a $84m 5-year contract in the US for
the testing and production of the NGABS. The NGABS contract
is a Program of Record where we will deliver over 700 NGAB
suits to the US Army. The new suit will replace the current
20-year-old bomb suit, and will provide enhanced protection
to its users in their daily operations to identify, render
safe, and dispose of improvised explosive devices and other
explosive threats. The new suit will increase soldier survivability
and readiness to respond to evolving threats by providing
them with 360-degree ballistic protection and significantly
increasing situational awareness with built-in technology
enhancements. This contract win is a great example of our
advanced sensor and data processing capability delivering
success and growth in our US business (formerly MTEQ), taking
products from prototype into full-scale production.
- We are seeing continued demand for our Electromagnetic Aircraft
Launch System (EMALS) and Advanced Arresting Gear (AAG) systems
from the US Navy. Last year we supplied the EMALS/AAG system
onto CVN-78, which has just surpassed 20,000 launch and recoveries
and has achieved Blue Water Certification allowing the carrier
to deploy anywhere globally. And we have recently received
a $51m commitment to supply our EMALS/AAG system for the
CVN-81, the fourth carrier in the Gerald R. Ford class.
- Our work on the RCV-L (Robotic Combat Vehicle Light) is progressing
well. We have successfully delivered the 11(th) and 12(th)
Surrogate Prototype units to the customer for continued testing
and evaluation. The Soldier operational trials have been
successful resulting in the RCV-L moving forward to the next
phase of evaluation (Human Machine Integrated Force trials).
We're also pleased to confirm that our Oshkosh-led team was
one of four awardees for the RCV-L full scale prototype full
and open competition. Based on the successful field trials
and downselect for the next phase, we are well positioned
to compete for the future $500m full production phase.
- We continue to make good progress on the Full Rate Production
contract on Common Robotic System-Individual (CRS-I). We
have delivered over 1,000 CRS-I robots to the US Army and
have achieved a significant operational, safety and suitability
milestone.
- We are seeing continued strong demand Advanced sensing systems.
For example technology enabling the US Army's first AI enabled
target solution by identifying potential threat vehicles
at a distance of seven kilometres, and an advanced uncrewed
optic sensor used to identify samples on a test range under
a variety of operating and lighting conditions.
Other Products and Solutions (16% of Global Solutions
revenue)
The portfolio of our other products and solutions provide
research services and bespoke technological solutions developed
from intellectual property spun out from EMEA Services, and
includes our threat representation product sales in QinetiQ Target
Systems (QTS).
- QTS has continued to perform well, building on the strong orders
and revenue in FY23. We have responded to a number of operational
requirements with UK MOD and are successfully leveraging our
target capabilities globally.
- In the US, we are completing final assembly and test of the
Banshee Jet 80 aerial targets to support future US customer
demands and needs.
- We continue to see good demand for our sensors and communication
product portfolio. In the half we have achieved strong sales
and deliveries of our Q20 secure PNT (Position Navigation and
Timing) product, and our advanced sensing products for the
intelligence communities.
Principal risks and uncertainties
There are a number of risks and uncertainties which management
continue to identify, assess and mitigate to minimise their
potential impact on performance. 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 (on pages 75 to
83) which is available for download at:
https://www.qinetiq.com/investors .
Having considered recent geopolitical and macroeconomic events,
the Group believes the principal risks and uncertainties for the
remainder of FY24 are included in, and are therefore unchanged
from, those reported in the 2023 Annual Report and Accounts. The
Group's principal risks and uncertainties at 31 March 2023 related
to the following areas: UK large contract renewals, acquisition
integration, the digital and data programme, significant breaches
of laws and regulations, security, P3M (project, programme and
portfolio management), climate change resilience and net-zero,
cyber, health and safety, strategic workforce planning, culture and
macroeconomic volatility.
Condensed consolidated income statement
H1 FY24 H1 FY23 restated^
(unaudited) (unaudited)
-------------------------------- --------------------------------
Specific Specific
All figures in GBP million adjusting adjusting
unless stated otherwise Note Underlying* items* Total Underlying* items* Total
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Revenue 1,2 883.1 - 883.1 673.4 - 673.4
Operating costs excluding
depreciation, impairment
and amortisation (757.8) (9.4) (767.2) (577.6) 30.7 (546.9)
Other income 1 18.2 2.1 20.3 12.7 20.5 33.2
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
EBITDA * (earnings
before interest, tax,
depreciation and amortisation) 143.5 (7.3) 136.2 108.5 51.2 159.7
Depreciation and impairment
of property, plant and
equipment (28.1) (0.7) (28.8) (23.5) - (23.5)
Amortisation of intangible
assets (3.4) (12.7) (16.1) (3.4) (5.6) (9.0)
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Operating profit/(loss) 2 112.0 (20.7) 91.3 81.6 45.6 127.2
Finance income 5 8.9 2.2 11.1 1.4 4.9 6.3
Finance expense 5 (16.6) - (16.6) (1.9) - (1.9)
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit /(loss) before
tax 104.3 (18.5) 85.8 81.1 50.5 131.6
Taxation (expense)/income 6 (27.0) 4.9 (22.1) (15.7) (5.7) (21.4)
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit/(loss) for the
period 77.3 (13.6) 63.7 65.4 44.8 110.2
Attributable to:
Owners of the Company 77.3 (13.6) 63.7 65.4 44.8 110.2
Non-controlling interests - - - - - -
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Profit/(loss) for the
period 77.3 (13.6) 63.7 65.4 44.8 110.2
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Earnings per share
for profit attributable
to the owners of the
Company
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
Basic (pence) 7 13.4 11.0 11.4 19.2
Diluted (pence) 7 13.2 10.9 11.3 19.0
-------------------------------- ---- ----------- ---------- ------- ----------- ---------- -------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
* 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.
Condensed consolidated statement of comprehensive income
H1 FY23
restated^
All figures in GBP million H1 FY24 (unaudited) (unaudited)
-------------------------------------------------- ------------------- ------------
Profit for the period 63.7 110.2
Items that will not be reclassified to the income
statement:
Actuarial loss recognised in defined benefit
pension schemes (26.5) (157.5)
Tax on items that will not be reclassified to
the income statement 6.6 39.4
-------------------------------------------------- ------------------- ------------
Total items that will not be reclassified to
the income statement (19.9) (118.1)
Items that may be reclassified to the income
statement:
Foreign currency translation gains for foreign
operations 6.7 19.7
Movement in deferred tax on foreign currency
translation (0.1) (1.7)
Increase in fair value of hedging derivatives 5.3 16.5
Movement on deferred tax on hedging derivatives (1.3) (0.3)
Total items that may be reclassified to the
income statement 10.6 34.2
-------------------------------------------------- ------------------- ------------
Other comprehensive expense for the period,
net of tax (9.3) (83.9)
-------------------------------------------------- ------------------- ------------
Total comprehensive income for the period, net
of tax 54.4 26.3
-------------------------------------------------- ------------------- ------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Condensed consolidated statement of changes in equity
All figures in Issued Capital
GBP share redemption Share Hedging Translation Retained Non-controlling Total
million capital reserve premium reserve reserve earnings Total interest equity
----------------- -------- ---------- -------- -------- ----------- --------- ------- --------------- -------
At 1 April 20 23 5.8 40.8 147.6 6.3 (4.2) 772.0 968.3 - 968.3
Profit for the
period - - - - - 63.7 63.7 - 63.7
Other
comprehensive
income/(expense)
,
net of tax - - - 4.0 6.6 (19.9) (9.3) - (9.3)
Purchase of own
shares - - - - - (0.4) (0.4) - (0.4)
Share-based
payments
charge - - - - - 4.2 4.2 - 4.2
Deferred tax on
share-based
payments - - - - - (0.2) (0.2) - (0.2)
Dividends - - - - - (30.6) (30.6) - (30.6)
At 30 September
20
23 (unaudited) 5.8 40.8 147.6 10.3 2.4 788.8 995.7 - 995.7
----------------- -------- ---------- -------- -------- ----------- --------- ------- --------------- -------
At 1 April 20 22
- 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^ - - - - - (2.0) (2.0) - (2.0)
At 1 April 20 22
- restated^ 5.8 40.8 147.6 0.1 1.9 845.0 1,041.2 0.2 1,041.4
Profit for the
period - - - - - 110.2 110.2 - 110.2
Other
comprehensive
income/(expense)
,
net of tax - - - 16.2 18.0 (118.1) (83.9) - (83.9)
Purchase of own
shares - - - - - (0.4) (0.4) - (0.4)
Share-based
payments
charge - - - - - 0.8 0.8 - 0.8
Deferred tax on
share-based
payments - - - - - 0.3 0.3 - 0.3
Dividends - - - - - (28.8) (28.8) - (28.8)
At 30 September
20
22^ (unaudited) 5.8 40.8 147.6 16.3 19.9 809.0 1,039.4 0.2 1,039.6
----------------- -------- ---------- -------- -------- ----------- --------- ------- --------------- -------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Condensed consolidated balance sheet
31 March
2023
30 September
30 September 2022 restated^
All figures in GBP million Note 2023 (unaudited) (unaudited) (audited)
-------------------------------------------- ----- ------------------ ---------------- -----------
Non-current assets
Goodwill 12 413.2 158.3 409.0
Intangible assets 333.4 140.2 343.0
Property, plant and equipment 518.0 431.6 477.8
Other financial assets 8.9 12.8 6.2
Equity accounted investments 1.6 1.1 1.4
Net pension asset 13 95.0 209.0 119.8
Deferred tax asset 33.4 25.5 32.6
-------------------------------------------- ----- ------------------ ---------------- -----------
1,403.5 978.5 1,389.8
-------------------------------------------- ----- ------------------ ---------------- -----------
Current assets
Inventories 75.9 63.9 68.8
Other financial assets 7.3 54.3 5.7
Trade and other receivables 448.7 353.8 452.6
Current tax asset 5.7 5.5 4.0
Assets classified as held for sale - 39.5 -
Cash and cash equivalents 104.0 220.3 151.2
-------------------------------------------- ----- ------------------ ---------------- -----------
641.6 737.3 682.3
-------------------------------------------- ----- ------------------ ---------------- -----------
Total assets 2,045.1 1,715.8 2,072.1
-------------------------------------------- ----- ------------------ ---------------- -----------
Current liabilities
Trade and other payables (485.5) (454.2) (575.2)
Current tax payable (4.7) - (4.6)
Provisions (20.1) (21.1) (19.7)
Liabilities of disposal group classified - (29.1) -
as held for sale
Other financial liabilities (7.9) (6.0) (8.2)
-------------------------------------------- ----- ------------------ ---------------- -----------
(518.2) (510.4) (607.7)
-------------------------------------------- ----- ------------------ ---------------- -----------
Non-current liabilities
Deferred tax liability (112.3) (133.5) (112.0)
Provisions (3.6) (4.5) (7.1)
Borrowings and other financial liabilities (386.1) (17.4) (361.8)
Other payables (29.2) (10.4) (15.2)
-------------------------------------------- ----- ------------------ ---------------- -----------
(531.2) (165.8) (496.1)
-------------------------------------------- ----- ------------------ ---------------- -----------
Total liabilities (1,049.4) (676.2) (1,103.8)
-------------------------------------------- ----- ------------------ ---------------- -----------
Net assets 995.7 1,039.6 968.3
-------------------------------------------- ----- ------------------ ---------------- -----------
Equity
Issued share capital 5.8 5.8 5.8
Capital redemption reserve 40.8 40.8 40.8
Share premium 147.6 147.6 147.6
Hedging reserve 10.3 16.3 6.3
Translation reserve 2.4 19.9 (4.2)
Retained earnings 788.8 809.0 772.0
-------------------------------------------- ----- ------------------ ---------------- -----------
Capital and reserves attributable
to shareholders of the parent company 995.7 1,039.4 968.3
Non-controlling interest - 0.2 -
-------------------------------------------- ----- ------------------ ---------------- -----------
Total equity 995.7 1,039.6 968.3
-------------------------------------------- ----- ------------------ ---------------- -----------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Condensed consolidated cash flow statement
Note H1 FY23
H1 FY24 restated^
All figures in GBP million (unaudited) (unaudited) FY23 (audited)
------------------------------------------- ----- ------------- ------------- ---------------
Underlying net cash inflow from
operations 9 71.7 106.8 270.1
Less specific adjusting items 9 (9.5) (7.3) (29.5)
Net cash inflow from operations 9 62.2 99.5 240.6
Tax paid (18.9) (18.2) (30.2)
Interest received 8.9 1.4 5.5
Interest paid (15.7) (1.0) (9.9)
------------------------------------------- ----- ------------- ------------- ---------------
Net cash inflow from operating activities 36.5 81.7 206.0
------------------------------------------- ----- ------------- ------------- ---------------
Purchases of intangible assets (4.0) (3.5) (13.8)
Purchases of property, plant and
equipment (42.9) (45.0) (95.2)
Proceeds from sale of property 2.1 1.1 2.4
Proceeds from disposal of business - - 28.1
Acquisition of businesses (4.9) (1.6) (385.9)
Net cash outflow from investing
activities (49.7) (49.0) (464.4)
------------------------------------------- ----- ------------- ------------- ---------------
Purchase of own shares (0.4) (0.4) (0.8)
Dividends paid to shareholders (30.6) (28.8) (42.6)
Payment of debt financing arrangement
fees (0.5) (0.6) (2.7)
Capital element of finance lease
payments (3.2) (3.1) (7.4)
Cash flow relating to intercompany
loan hedges 1.3 (29.2) (10.0)
Drawdown of new borrowings - - 481.1
Repayments of borrowings - - (140.0)
Repayment of acquired borrowings - - (117.9)
Net cash (outflow)/inflow from financing
activities (33.4) (62.1) 159.7
------------------------------------------- ----- ------------- ------------- ---------------
Decrease in cash and cash equivalents (46.6) (29.4) (98.7)
Effect of foreign exchange changes
on cash and cash equivalents (0.6) 1.6 1.8
Cash and cash equivalents at beginning
of period 151.2 248.1 248.1
Cash and cash equivalents at end
of period 104.0 220.3 151.2
------------------------------------------- ----- ------------- ------------- ---------------
Reconciliation of movement in net (debt)/cash
FY23
H1 FY24 H1 FY23
All figures in GBP million Note (unaudited) (unaudited) (audited)
--------------------------------------------------- ----- ------------- ------------- ------------
Decrease in cash and cash equivalents (46.6) (29.4) (98.7)
Add back net cash flows not impacting
net (debt)/cash 3.7 3.7 (331.0)
--------------------------------------------------- ----- ------------- ------------- ------------
Change in net (debt)/cash resulting
from cash flows (42.9) (25.7) (429.7)
Net increase in lease obligation (26.4) (1.4) (15.3)
Net movement in derivative financial
instruments 4.3 67.2 9.8
Other movements including foreign
exchange (1.9) (1.2) 3.2
--------------------------------------------------- ----- ------------- ------------- ------------
Movement in net (debt)/cash as defined
by the Group (66.9) 38.9 (432.0)
Opening net (debt)/cash as defined
by the Group (206.9) 225.1 225.1
--------------------------------------------------- ----- ------------- ------------- ------------
Closing net (debt)/cash as defined
by the Group 8 (273.8) 264.0 (206.9)
Less: non-cash net financial liabilities/(assets) 8 377.8 (43.7) 358.1
--------------------------------------------------- ----- ------------- ------------- ------------
Total cash and cash equivalents 8 104.0 220.3 151.2
--------------------------------------------------- ----- ------------- ------------- ------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Notes to the condensed interim financial statements
Revenue from contracts with customers and other income
1.
Revenue by category and reconciliation to revenue on an organic,
constant currency basis
H1 FY24 H1 FY23
All figures in GBP million (unaudited) (unaudited)
--------------------------------------- ------------ ------------
Service contracts with customers 843.6 640.1
Sale of goods contracts with customers 37.9 31.8
Royalties and licences 1.6 1.5
---------------------------------------- ------------ ------------
Total revenue 883.1 673.4
Adjust current period for acquired
businesses (118.7) -
Adjust prior period for disposed
business - (23.8)
Adjust to constant prior year exchange
rates 6.5 -
---------------------------------------- ------------ ------------
Total revenue on an organic, constant
currency basis 770.9 649.6
---------------------------------------- ------------ ------------
Organic revenue growth at constant
currency 19% 10%
---------------------------------------- ------------ ------------
Other income
H1 FY24
H1 FY23^
All figures in GBP million (unaudited) (unaudited)
----------------------------------------- ------------- ------------
Share of joint ventures' and associates'
profit after tax 0.2 0.3
Research and development expenditure
credits (RDEC) 11.9 7.5
Other income (property related) 6.1 4.9
------------------------------------------------- ------------- ------------
Other income - underlying 18.2 12.7
Specific adjusting item: gain on sale
of property 2.1 0.9
Specific adjusting item: release of RDEC
MOD appropriation liability - 19.6
------------------------------------------------- ------------- ------------
Other income - total 20.3 33.2
------------------------------------------------- ------------- ------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Revenue by customer geographical location
H1 FY24 H1 FY23
All figures in GBP million (unaudited) (unaudited)
------------------------------------------------- ------------ ------------
United Kingdom (UK) 581.4 459.4
United States of America (US) 196.3 102.0
Australia 63.8 57.4
Home countries (95% and 92% of total revenue for
H1 FY24 and H1 FY23 respectively) 841.5 618.8
Europe 22.5 42.8
Rest of World 19.1 11.8
-------------------------------------------------- ------------ ------------
Total revenue 883.1 673.4
-------------------------------------------------- ------------ ------------
Revenue by major customer type
For the six months ended 30 September
H1 FY24 H1 FY23
All figures in GBP million (unaudited) (unaudited)
--------------------------- ------------ ------------
UK Government 543.8 423.8
US Government 186.0 97.7
Other 153.3 151.9
Total revenue 883.1 673.4
---------------------------- ------------ ------------
Segmental analysis
2.
Operating segments
H1 FY24 H1 FY23^
All figures in GBP million (unaudited) (unaudited)
------------------------------------- --------------------------- ---------------------------
Revenue Underlying* Revenue Underlying*
from external operating from external operating
customers profit(*) customers profit
------------------------------------- -------------- ----------- -------------- -----------
EMEA Services 654.8 77.4 524.3 61.5
Global Solutions 228.3 22.7 149.1 12.6
----------------------------------------- -------------- ----------- -------------- -----------
Total operating segments 883.1 100.1 673.4 74.1
Operating profit margin from
segments* 11.3% 11.0%
Total operating segments 883.1 100.1 673.4 74.1
Research and development expenditure
credits (RDEC) 11.9 7.5
----------------------------------------- -------------- ----------- -------------- -----------
Underlying operating profit 112.0 81.6
----------------------------------------- -------------- ----------- -------------- -----------
* Definitions of the Group's 'Alternative Performance Measures'
can be found in the glossary
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Reconciliation of segmental results to total profit
H1 FY24
Note H1 FY23^
All figures in GBP million (unaudited) (unaudited)
------------------------------------- ----- ------------- ------------
Operating profit from segments* 100.1 74.1
Research and development expenditure
credits (RDEC) 11.9 7.5
---------------------------------------- ----- ------------- ------------
Underlying operating profit* 112.0 81.6
Specific adjusting items operating
(loss)/profit 3 (20.7) 45.6
---------------------------------------- ----- ------------- ------------
Operating profit 91.3 127.2
Net finance (expense)/income (5.5) 4.4
---------------------------------------- ----- ------------- ------------
Profit before tax 85.8 131.6
Taxation expense (22.1) (21.4)
---------------------------------------- ----- ------------- ------------
Profit for the period attributable
to equity shareholders 63.7 110.2
---------------------------------------- ----- ------------- ------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Specific adjusting items
3.
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:
H1 FY24
H1 FY23^
All figures in GBP million Note (unaudited) (unaudited)
------------------------------------------------- ---- ------------- ------------
FX gain on acquisition funding derivatives - 42.9
Acquisition and disposal costs 4 (0.6) (6.4)
Acquisition integration costs (2.6) -
Acquisition related remuneration (1.1) -
Restructuring costs - (3.3)
Digital investment (5.1) (2.5)
Release of RDEC appropriation liability - 19.6
Gain on sale of property 2.1 0.9
Specific adjusting items before depreciation,
amortisation and impairment (7.3) 51.2
Impairment of property (0.7) -
Amortisation of intangible assets arising from
acquisition (12.7) (5.6)
------------------------------------------------- ---- ------------- ------------
Specific adjusting items operating (loss)/profit (20.7) 45.6
Defined benefit pension scheme net finance
income 13 2.2 4.9
Specific adjusting items (loss)/profit before
tax (18.5) 50.5
Specific adjusting items - tax income/(expense) 6 4.9 (5.7)
------------------------------------------------- ---- ------------- ------------
Total specific adjusting items (loss)/profit
after tax (13.6) 44.8
------------------------------------------------- ---- ------------- ------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Reconciliation of underlying profit for the period to total
profit for the period
H1 FY24
H1 FY23^
All figures in GBP million (unaudited) (unaudited)
--------------------------------------------- ------------- ------------
Underlying profit after tax 77.3 65.4
Total specific adjusting items (loss)/profit
after tax (see above) (13.6) 44.8
------------------------------------------------- ------------- ------------
Total profit for the period attributable to
equity shareholders 63.7 110.2
------------------------------------------------- ------------- ------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
The total impact of specific adjusting items on operating profit
(which are excluded from underlying performance) before tax was an
expense of GBP20.7m (H1 FY23 restated: income of GBP45.6m). H1 FY23
included a GBP42.9m gain from the foreign exchange derivative
contract which was taken out to hedge the foreign exchange exposure
on the $590m Avantus acquisition and was executed in accordance
with the Group's Treasury Policy - this was a one-off timing gain
at H1 FY23 which unwound in H2 FY23 by the time of the transaction
completion. H1 FY23 restated also includes a GBP19.6m gain from the
release of the liability for MOD appropriation of RDEC.
Acquisition and disposal costs of GBP0.6m (H1 FY23: GBP6.4m)
comprise costs associated with various ongoing projects and
acquisitions that we have decided not to pursue, demonstrating our
disciplined capital allocation policy. The H1 FY23 amount related
to Avantus and Air Affairs. Acquisition related remuneration of
GBP1.1m relates to specific post-acquisition retention arrangements
for Avantus employees which were anticipated at the time of the
transaction. Acquisition integration costs of GBP2.6m relate to the
one-off costs of integrating both Avantus and Air Affairs with the
existing Group operations.
Our digital investment programme continues to deliver
improvements to the infrastructure, digital tools and operating
systems of the company - roughly two thirds of the costs in the
first half are reported as specific adjusting items in the P&L
given their one-off nature, with ongoing recurring operating costs
(such as licence costs and overheads) remaining within underlying
operating costs. In H1 FY24 the exceptional cost element of the
digital investment programme within specific adjusting items totals
GBP5.1m (H1 FY23: GBP2.5m).
Also included within specific adjusting items were a gain on the
sale of property in the UK of GBP2.1m (H1 FY23 GBP0.9m) and
impairment of right of use lease assets in the US following space
relocation of GBP0.7m. Amortisation of acquisition intangibles of
GBP12.7m (H1 FY23: GBP5.6m) has increased due to the inclusion of
amortisation of the intangible assets relating to the Avantus
acquisition.
4. Business combinations
There were no acquisitions in H1 FY24 or H1 FY23. The cash flow
statement includes GBP3.8m of deferred consideration which was
settled in respect of the Air Affairs acquisition. A further
GBP1.1m of deferred consideration was settled in respect of legacy
acquisitions made by the Avantus business before its acquisition by
QinetiQ.
In H1 FY23, the Group incurred GBP6.4m costs in respect of the
acquisitions of Avantus Federal and Air Affairs, and the disposal
of Space NV. A GBP1.6m deposit payment had been made on the Air
Affairs acquisition which was included within trade and other
receivables as at 30 September 2022 and the cash flows from
investing activities for H1 FY23.
5. Finance income and expense
All figures in GBP million H1 FY24 H1 FY23
(unaudited (unaudited)
)
------------------------------------------------------ ------------ --------------
Receivable on bank deposits 8.9 1.4
Underlying finance income 8.9 1.4
------------------------------------------------------ ------------ --------------
Amortisation of recapitalisation fee (0.6) (0.2)
Interest on bank loans and overdrafts (14.6) (0.4)
Lease expense (1.3) (0.5)
Other interest expense (0.1) (0.8)
Underlying finance expense (16.6) (1.9)
------------------------------------------------------ ------------ --------------
Underlying net finance expense (7.7) (0.5)
Specific adjusting items:
Defined benefit pension scheme net finance income 2.2 4.9
------------------------------------------------------ ------------ --------------
Net finance (expense)/income (5.5) 4.4
------------------------------------------------------ ------------ --------------
6. Taxation
H1 FY24 H1 FY23^
(unaudited) (unaudited)
------------------------------ ------------------------------
Specific Specific
All figures in GBP million adjusting adjusting
unless stated otherwise Underlying items Total Underlying items Total
--------------------------- ---------- ---------- ------ ---------- ---------- ------
Profit /(loss) before
tax 104.3 (18.5) 85.8 81.1 50.5 131.6
Taxation (expense)/income (27.0) 4.9 (22.1) (15.7) (5.7) (21.4)
------------------------------- ---------- ---------- ------ ---------- ---------- ------
Profit/(loss) for the
period attributable to
equity shareholders 77.3 (13.6) 63.7 65.4 44.8 110.2
------------------------------- ---------- ---------- ------ ---------- ---------- ------
Effective tax rate 25.9% 19.4%
------------------------------- ---------- ---------- ------ ---------- ---------- ------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
The total tax charge is GBP22.1m (H1 FY23 restated charge:
GBP21.4m). The underlying tax charge of GBP27.0m (H1 FY23 restated:
GBP15.7m) is calculated by applying the expected underlying
effective tax rate at a jurisdictional level for the year ending 31
March 2024 to the underlying profit before tax for the six months
to 30 September 2023.
The Group's full year expected underlying effective tax rate is
26.1% which is higher than the half year underlying effective tax
rate of 25.9% (H1 FY23 restated: 19.4%) due to the jurisdictional
mix of profits in H1 FY24.
The underlying effective tax rate has risen due to the increase
in the UK statutory rate effective from 19% to 25% from 1st April
2023. In future we expect the effective rate to be above the UK
statutory rate subject to the jurisdictional mix of profits and the
recognition of deferred tax in respect of overseas tax losses and
excess interest deductions.
On 20 June 2023, Finance (No.2) Act 2023 was substantively
enacted in the UK, introducing a global minimum effective tax rate
of 15%. The legislation implements a domestic top-up tax and a
multinational top-up tax, effective for accounting periods starting
on or after 31 December 2023. The Group has applied the exception
under the amendment to IAS 12 to recognising and disclosing
information about deferred tax assets and liabilities related to
top-up income taxes.
Tax losses and specific adjusting items
At 30 September 2023 the Group had unused tax losses and surplus
interest costs of GBP182.3m (31 March 2023: GBP175.6m) which are
available for offset against future profits.
Within deferred tax assets recognised on the balance sheet is
GBP18.4m in respect of GBP87.8m of US net operating losses, GBP4.9m
in respect of GBP21.3m of Canadian net operating losses and GBP2.5m
in respect of GBP7.7m of German trade losses.
No deferred tax asset is recognised in respect of the GBP65.5m
of US interest deductions due to uncertainty over the timing and
extent of their utilisation. Full recognition of the US interest
deductions would increase the deferred tax asset by GBP17.7m. The
Group has recognised GBP32.8m of time-limited US net operating
losses of which GBP23.2m will expire in 2035 and GBP9.6m in 2036.
Deferred tax has been calculated using the enacted future statutory
tax rates.
Tax on specific adjusting items includes a GBP3.4m credit for
tax on the amortisation of acquisition intangibles and a GBP1.5m
credit in respect of other pre-tax specific adjusting items, the
total specific adjusting items tax credit was GBP4.9m (H1 FY23
restated: charge of GBP5.7m).
Earnings per share
7.
Basic earnings per share is calculated by dividing the profit
attributable to owners of the Company by the weighted average
number of ordinary shares in issue during the period. The weighted
average number of shares used excludes those shares bought by the
Group and held as own shares. For diluted earnings per share the
weighted average number of shares in issue is adjusted to assume
conversion of potentially dilutive ordinary shares arising from
unvested share-based awards including share options.
H1 FY24 H1 FY23
(unaudited) (unaudited)
---------------------------------- -------- ------------- -------------
Weighted average number of shares Million 577.3 575.4
Effect of dilutive securities Million 7.1 5.5
---------------------------------- -------- ------------- -------------
Diluted number of shares Million 584.4 580.9
---------------------------------- -------- ------------- -------------
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.
H1 FY24 H1 FY23^
Underlying basic and diluted EPS (unaudited) (unaudited)
------------------------------------------ ------------ ------------- -------------
Profit attributable to the owners of the
Company GBP million 63.7 110.2
Remove loss/(profit) after tax in respect
of specific adjusting items GBP million 13.6 (44.8)
------------------------------------------ ------------ ------------- -------------
Underlying profit after taxation GBP million 77.3 65.4
------------------------------------------ ------------ ------------- -------------
Weighted average number of shares Million 577.3 575.4
------------------------------------------ ------------ ------------- -------------
Underlying basic EPS Pence 13.4 11.4
------------------------------------------ ------------ ------------- -------------
Diluted number of shares Million 584.4 580.9
------------------------------------------ ------------ ------------- -------------
Underlying diluted EPS Pence 13.2 11.3
------------------------------------------ ------------ ------------- -------------
H1 FY24 H1 FY23^
Basic and diluted EPS (unaudited) (unaudited)
------------------------------------------ ------------ ------------- -------------
Profit attributable to the owners of the
Company GBP million 63.7 110.2
Weighted average number of shares Million 577.3 575.4
------------------------------------------ ------------ ------------- -------------
Basic EPS - total Group Pence 11.0 19.2
------------------------------------------ ------------ ------------- -------------
Diluted number of shares Million 584.4 580.9
Diluted EPS - total Group Pence 10.9 19.0
------------------------------------------ ------------ ------------- -------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
8. Net (debt)/cash
30 September 30 September 31 March
2023 (unaudited) 2022 (unaudited)
2023
All figures in GBP million (audited)
----------------------------------------------------- ------------------ ------------------ ------------
Current financial (liabilities)/assets
Deferred financing costs 1.2 0.6 1.3
Derivative financial assets 6.1 53.7 4.4
Lease liabilities (7.0) (5.8) (7.6)
Derivative financial liabilities (0.9) (0.2) (0.6)
----------------------------------------------------- ------------------ ------------------ ------------
Total current net financial (liabilities)/assets (0.6) 48.3 (2.5)
Non-current financial (liabilities)/assets
Deferred financing costs 1.5 0.7 1.5
Derivative financial assets 7.4 12.1 4.7
Lease liabilities (47.3) (17.2) (23.7)
Borrowings - Term loan (338.5) - (337.6)
Derivative financial liabilities (0.3) (0.2) (0.5)
----------------------------------------------------- ------------------ ------------------ ------------
Total non-current net financial liabilities (377.2) (4.6) (355.6)
----------------------------------------------------- ------------------ ------------------ ------------
Total net financial (liabilities)/assets (377.8) 43.7 (358.1)
Cash and cash equivalents 104.0 220.3 151.2
----------------------------------------------------- ------------------ ------------------ ------------
Total net (debt)/cash as defined by the
Group (273.8) 264.0 (206.9)
----------------------------------------------------- ------------------ ------------------ ------------
Cash flows from operations
9.
H1 FY24
H1 FY23^
All figures in GBP million (unaudited) (unaudited) FY23 (audited)
--------------------------------------------------- ------------- ------------ -----------------
Profit after tax for the period 63.7 110.2 154.4
Adjustments for:
Taxation expense 22.1 21.4 37.6
Net finance expense/(income) 5.5 (4.4) (3.3)
Gain on acquisition funding foreign exchange
derivatives - (42.9) -
Gain on disposal of business - - (15.9)
Loss on disposal of plant and equipment - - 0.2
Gain on sale of property (2.1) (0.9) (2.0)
Impairment of property, plant and equipment 0.7 - -
Amortisation of purchased or internally
developed intangible assets 3.4 3.4 7.5
Amortisation of intangible assets arising
from acquisitions 12.7 5.6 15.6
Depreciation of property, plant and equipment 28.1 23.5 51.5
Share of post-tax gain of equity accounted
entities (0.2) (0.3) (0.8)
Share-based payments charge 4.6 1.0 6.1
Retirement benefit contributions lower/(higher)
than income statement expense 0.5 0.6 (1.6)
Net movement in provisions (2.6) - (1.0)
Increase in inventories (6.8) (3.9) (9.6)
Decrease/(Increase) in receivables 4.1 8.3 (56.7)
(Decrease)/Increase in payables (71.5) (22.1) 58.6
--------------------------------------------------- ------------- ------------ -----------------
Changes in working capital (74.2) (17.7) (7.7)
Net cash flow from operations 62.2 99.5 240.6
--------------------------------------------------- ------------- ------------ -----------------
Reconciliation of net cash flow from operations to underlying
net cash flow from operations to free cash flow
H1 FY23^ FY23 (audited)
All figures in GBP million H1 FY24 (unaudited) (unaudited)
-------------------------------------------------- ------------------- ------------ --------------
Net cash flow from operations 62.2 99.5 240.6
Add back cash impact of specific adjusting
item: acquisition and disposal costs (including
integration and acquisition related remuneration
costs) 4.4 2.4 18.7
Add back cash impact of specific adjusting
item: restructuring costs - 2.4 5.0
Add back cash impact of specific adjusting
item: digital investment 5.1 2.5 5.8
Underlying net cash flow from operations 71.7 106.8 270.1
Less: tax and net interest payments (25.7) (17.8) (34.6)
Less: purchases of intangible assets and
property, plant & equipment (46.9) (48.5) (109.0)
--------------------------------------------------- ------------------- ------------ --------------
Free cash flow (0.9) 40.5 126.5
--------------------------------------------------- ------------------- ------------ --------------
^ Prior period comparatives have been restated due to a change
in accounting policy in respect of Research and Development
Expenditure Credits (RDEC). See note 18.
Underlying cash conversion ratio
H1 FY23 FY23 (audited)
H1 FY24 (unaudited) (unaudited)
----------------------------------------- ------------------- ------------ --------------
Underlying EBITDA - GBP million 143.5 108.5 255.3
Underlying net cash flow from operations
- GBP million 71.7 106.8 270.1
------------------------------------------ ------------------- ------------ --------------
Underlying cash conversion ratio - % 50% 98% 106%
------------------------------------------ ------------------- ------------ --------------
Financial risk management
10.
The interim financial statements do not include all financial
risk management information and disclosures required in annual
financial statements; they should be read in conjunction with the
Group's annual financial statements as at 31 March 2023. There have
been no changes in any risk management policies since the year end.
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
Level 3 - measured using inputs for the assets or liability that
are not based on observable market data (i.e. unobservable
inputs).
The Group's assets and liabilities that are measured at fair
value, as at 30 September 2023, are as follows:
All figures in GBP million Level 1 Level 2 Level 3 Total
--------------------------------------------- ------- ------- ------- -----
Assets:
Current derivative financial instruments - 6.1 - 6.1
Non-current derivative financial instruments - 7.4 - 7.4
Liabilities:
Current derivative financial instruments - (0.9) - (0.9)
Non-current derivative financial instruments - (0.3) - (0.3)
Total - 12.3 - 12.3
--------------------------------------------- ------- ------- ------- -----
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
--------------------------------------------- ------- ------- ------- -----
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.
11. Dividends
An analysis of the dividends paid and proposed in respect of the
period ended 30 September 2023 and comparative periods is provided
below:
Pence per
ordinary
share GBPm Date paid/payable
---------------------------------------- --------- ---- -----------------
Interim FY24 2.6 15.0 Feb 2024
---------------------------------------- --------- ---- -----------------
Interim FY23 2.4 13.8 Feb 2023
Final FY23 5.3 30.6 Aug 2023
---------------------------------------- --------- ---- -----------------
Total for the year ended 31 March 20 23 7.7 44.4
---------------------------------------- --------- ---- -----------------
The interim dividend is 2.6p (Interim FY23: 2.4p). The dividend
will be paid on 2 February 2024. The ex-dividend date is 4 January
2024 and the record date is 5 January 2024.
Goodwill
12.
Goodwill is allocated across six Cash Generating Units (CGUs)
within the EMEA Services segment and four CGUs within the Global
Solutions segment. The full list of CGUs that have goodwill
allocated to them is as follows:
30 September 30 September 31 March
2023 (unaudited) 2022
Primary reporting (unaudited) 2023
segment
All figures in GBP million (audited)
-------------------------------- -------------------- ----------------- ------------- -------------
US Technology Solutions Global Solutions 44.6 49.0 44.1
US C5ISR Global Solutions 37.3 40.9 36.8
Avantus Global Solutions 261.2 - 257.8
Target Systems Global Solutions 24.5 25.1 24.5
QinetiQ Germany EMEA Services 2.7 2.7 2.7
Inzpire EMEA Services 11.7 11.7 11.7
QinetiQ Training and Simulation EMEA Services 7.8 7.8 7.8
Naimuri EMEA Services 14.8 14.8 14.8
Australia EMEA Services 5.7 6.3 5.8
Air Affairs EMEA Services 2.9 - 3.0
-------------------------------- -------------------- ----------------- ------------- -------------
Net book value 413.2 158.3 409.0
------------------------------------------------------ ----------------- ------------- -------------
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 judgments, particularly as they relate to the
forecasting of future cash flows, the discount rates selected and
expected long-term growth rates. As at 31 March 2023, significant
headroom existed in all CGUs with the exception of QinetiQ Germany
(see below) and management considers that there are no likely
variations in the key assumptions which would lead to an impairment
being recognised in those other CGUs.
The carrying value of the goodwill for the Germany CGU as at 30
September 2023 was GBP2.7m (31 March 2023: GBP2.7m). As at 31 March
2023, the recoverable amount based on the value in use calculations
was 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.
Post-retirement benefits
13.
In the UK the Group operates the QinetiQ Pension Scheme (the
Scheme) for approximately one quarter of its UK employees. The
Scheme closed to future accrual on 31 October 2013 and there is no
on-going service cost. 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 each period
end.
30 September 30 September 31 March
2023 2022
(unaudited) (unaudited) 2023
All figures in GBP million (audited)
-------------------------------------- ------------- ------------- -----------
Fair value of plan assets 1,236.2 1,429.6 1,355.2
Present value of Scheme liabilities (1,141.2) (1,220.6) (1,235.4)
-------------------------------------- ------------- ------------- -----------
Net pension asset before deferred tax 95.0 209.0 119.8
Deferred tax liability (29.4) (58.3) (35.4)
-------------------------------------- ------------- ------------- -----------
Net pension asset after deferred tax 65.6 150.7 84.4
-------------------------------------- ------------- ------------- -----------
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's liabilities. This is particularly pertinent
in the current economic climate whilst markets are extremely
volatile. Sensitivities and risks are described below.
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.
The fair value of the QinetiQ Pension Scheme assets, which are
not intended to be realised in the short term and may be subject to
significant changes before they are realised, were:
30 September 30 September 31 March
2023 2022
(unaudited) (unaudited) 2023
All figures in GBP million (audited)
------------------------------------ ------------- ------------- -----------
Equities - quoted 181.8 176.9 177.4
Equities - unquoted 24.6 41.2 32.9
Liability driven investment 130.9 252.4 227.2
Asset backed security investments 4.5 116.2 4.3
Alternative bonds 263.1 242.7 256.4
Corporate bonds 113.5 94.4 117.6
Property funds - 13.9 -
Cash and other equivalents 31.4 16.9 17.2
Derivatives (6.3) (21.8) 6.7
Insurance buy-in policy 492.7 496.8 515.5
------------------------------------ ------------- ------------- -----------
Total market value of Scheme assets 1,236.2 1,429.6 1,355.2
------------------------------------ ------------- ------------- -----------
The Scheme's assets do not include any of the Group's own
transferable financial instruments, property occupied by, or other
assets used by the Group.
The movement in the net pension asset (before deferred tax) is
set out below:
30 September 30 September 31 March
2023 2022
(unaudited) (unaudited) 2023
All figures in GBP million (audited)
------------------------------------------ ------------- ------------- -----------
Opening net pension asset before deferred
tax 119.8 362.2 362.2
Net finance income 2.2 4.9 9.9
Net actuarial loss (26.5) (157.5) (253.9)
Contributions by the employer - - 3.0
Administration expenses (0.5) (0.6) (1.4)
Closing net pension asset before deferred
tax 95.0 209.0 119.8
------------------------------------------ ------------- ------------- -----------
Assumptions
The major assumptions used in the IAS 19 valuations of the
Scheme were:
30 September 30 September 31 March 2023
2023 (unaudited) 2022 (unaudited)
(audited)
Un-insured Insured Un-insured Insured Un-insured Insured
members members members members members members
-------------------------------- ---------- -------- ---------- -------- ---------- --------
Discount rate applied to Scheme
liabilities 5.40% 5.50% 4.95% 5.35% 4.65% 4.80%
CPI inflation assumption 2.70% 2.65% 3.00% 2.95% 2.70% 2.55%
Net rate (discount rate less
inflation) 2.70% 2.85% 1.95% 2.40% 1.95% 2.25%
Assumed life expectancies(at
age 60) in years:
For males currently aged
40 27.9 n/a 28.4 n/a 27.9 n/a
For females currently aged
40 30.3 n/a 30.7 n/a 30.3 n/a
For males currently aged
60^ 26.2 21.5 26.7 22.0 26.2 21.6
For females currently aged
60^ 28.2 23.3 28.6 23.7 28.2 23.3
-------------------------------- ---------- -------- ---------- -------- ---------- --------
^For pensioners (insured members) at age 65 currently aged
65
Risks
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 AA-rated 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.
Sensitivities to the main assumptions are set out below.
Indicative Indicative impact
impact on Scheme Indicative impact on net pension
Key assumptions assets on Scheme liabilities asset
----------------- ----------------------
Decrease discount rate Increase by
by 0.25% GBP12.3m Increase by GBP39.3m Decrease by GBP27.0m
Increase rate of inflation Increase by
by 0.1% GBP4.8m Increase by GBP15.8m Decrease by GBP11.0m
Increase life expectancy Increase by
by one year GBP12.7m Increase by GBP28.6m Decrease by GBP15.8m
-------------------------- ----------------- ---------------------- --------------------
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 30 September 2023 this hedges against
approximately 70% of the interest rate risk and also 85% of the
inflation rate risk, as measured on the Trustees' gilt-funded
basis. Subsequent to 30 September 2023, the hedging of the interest
rate risk has increased to approximately 80%.
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
asset) 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, unquoted corporate bonds
and unquoted equities of GBP263.1m, GBP113.5m and GBP24.6m
respectively are the assets with most uncertainty as to valuation
as at 30 September 2023.
The accounting assumptions noted above are used to calculate the
period end present value of Scheme liabilities 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 latest
completed triennial valuation of the Scheme was a net surplus of
GBP176.5m as at 30 June 2020. The triennial valuation as at 30 June
2023 is ongoing and is not expected to result in a requirement for
the Group to make a contribution into the scheme.
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.
14. Own shares and share-based awards
Own shares represent shares in the Company that are held by
independent trusts and include treasury shares and shares held by
the employee share ownership plan. Included in retained earnings at
30 September 2023 are 2,857,591 shares (31 March 2023: 4,208,899
shares).
In H1 FY24 the Group granted 7.4 million new share-based awards
to employees (H1 FY23: 0.2 million). The increase is due to the
Group's new LTIP scheme granting conditional shares at the
beginning of the performance period. Further details can be found
in the Remuneration Report within the 31 March 2023 Annual Report
and Accounts.
15. Related party transactions with equity accounted investments
During H1 FY24 there were sales to associates and joint ventures
of GBP1.4m (H1 FY23: GBP0.3m). At the period end there were
outstanding receivables from associates and joint ventures of
GBP1.4m (31 March 2023: GBP0.5m).
Capital commitments
16.
The Group has the following capital commitments for which no
provision has been made:
31 March 2023
30 September
All figures in GBP million 2023 (unaudited) (audited)
--------------------------- ----------------- -------------
Contracted 32.9 43.4
------------------------------- ----------------- -------------
Capital commitments at 30 September 2023 include GBP19.3m (31
March 2023: GBP21.2m) in relation to property, plant and equipment
that will be wholly funded by a third party customer under a
long-term contract arrangement. These primarily relate to
investments under the LTPA contract.
17. Contingent liabilities
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, health & safety 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.
Significant accounting policies
18.
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
England.
The condensed consolidated interim financial statements of the
Group for the six months ended 30 September 2023 comprise
statements for the Company and its subsidiaries (together referred
to as the 'Group') and were approved by the Board of Directors on
16 November 2023.
The financial statements have been reviewed, not audited.
This condensed consolidated interim financial report for the
half-year reporting period ended 30 September 2023 has been
prepared in accordance with the UK-adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
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. 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/or sign) business
----------------------------------------- ----------------- ------------------- --------------------
Amortisation of intangible assets P
arising from acquisitions
----------------------------------------- ----------------- ------------------- --------------------
Pension net finance income P P
----------------------------------------- ----------------- ------------------- --------------------
Gains/losses on business divestments P P P
and disposal of property and investments
----------------------------------------- ----------------- ------------------- --------------------
Transaction, integration and acquisition P P P
related remuneration costs in respect
of business acquisitions and disposals
----------------------------------------- ----------------- ------------------- --------------------
Digital investment P P P
----------------------------------------- ----------------- ------------------- --------------------
One-off FX gain on acquisition P P P
funding arrangements
----------------------------------------- ----------------- ------------------- --------------------
Costs of group-wide restructuring P P
programmes
----------------------------------------- ----------------- ------------------- --------------------
Impairment of goodwill and property P P P
----------------------------------------- ----------------- ------------------- --------------------
The tax impact of the above P P P
----------------------------------------- ----------------- ------------------- --------------------
Other significant non-recurring P P P
tax and RDEC movements
----------------------------------------- ----------------- ------------------- --------------------
All items treated as a specific adjusting item in the current
and prior period are detailed in note 3 and are excluded from the
'underlying' measures of performance. These Alternative Performance
Measures (APMs), definitions of which can be found in the glossary
at the end of this document, are used to monitor performance and
also used for management remuneration purposes.
In periods where there are significant one-off trading items
impacting on performance (such as a contract write-down which is
not of the nature/type detailed above and hence not reported as a
specific adjusting item) then these are still reported within
underlying measures of performance but narrative explanation is
provided to quantify the impact on such measures (where
appropriate).
The accounting policies adopted in the preparation of these
condensed consolidated financial statements are consistent with the
policies applied by the Group in its consolidated financial
statements for the year ended 31 March 2023.
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 changed its accounting policy relating
to RDEC for the year ended 31 March 2023. The Group's accounting
policy had 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 decided
to account for RDEC as other operating income under IAS20
Government grants.
The impact of this change is to move GBP27.1m of RDEC income for
the period ending 30 September 2022 from the tax charge into other
operating income. This consists of GBP7.5m of underlying income and
a GBP19.6m specific adjusting item in relation to the release of
MoD appropriation liability.
The impact on the balance sheet is to reclassify a GBP23.0m
receivable from current tax payable to other receivables as at 30
September 2022 as well as GBP14.9m from current tax to accrued
expenses and other payables. There is an impact on net assets of
GBP4.2m at 30 September 2022 due to the deferred income impact of
the updated income recognition under IAS12.
The following tables show the adjustments recognised for each
individual line item as at 30 September 2022.
Impact on the condensed consolidated income statement for H1
FY23
All figures in GBP million As originally Impact of
presented restatement Restated
------------------------------ ------------- ------------ --------
Revenue 673.4 - 673.4
Operating costs (546.9) - (546.9)
Other income 6.1 27.1 33.2
EBITDA (earnings before
interest, tax, depreciation
and amortisation) 132.6 27.1 159.7
( 32.5
Depreciation and amortisation ) - (32.5)
Operating profit 100.1 27.1 127.2
Finance income 6.3 - 6.3
Finance expense ( 1.9 ) - ( 1.9 )
---------------------------------- ------------- ------------ --------
Profit before tax 104.5 27.1 131.6
Taxation expense 7.9 (29.3) ( 21.4 )
---------------------------------- ------------- ------------ --------
Profit/(loss) for the
year attributable to equity
shareholders 112.4 (2.2) 110.2
---------------------------------- ------------- ------------ --------
Impact on the condensed consolidated balance sheet at 30
September 2022
As originally Impact
All figures in GBP million presented of restatement Restated
------------------------------- -------------- ---------------- ---------
Assets/liabilities
Trade and other receivables 330.8 23.0 353.8
Trade and other payables (439.3) (14.9) (454.2)
Current tax asset 18.4 (12.9) 5.5
Deferred tax liability (134.1) 0.6 (133.5)
Other net assets 1,268.0 - 1,268.0
Net assets 1,043.8 (4.2) 1,039.6
---------------------------------- -------------- ---------------- ---------
Equity
Retained earnings 813.2 (4.2) 809.0
Share capital and other
reserves 230.4 - 230.4
Non-controlling interest 0 .2 - 0.2
---------------------------------- -------------- ---------------- ---------
Total equity 1,043.8 (4.2) 1,039.6
---------------------------------- -------------- ---------------- ---------
Impact on net cash
------------------------------- -------------- ---------------- ---------
Net cash (as defined
by the Group - see glossary) 264.0 - 264.0
---------------------------------- -------------- ---------------- ---------
Going-concern basis
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 . The Directors have 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 interim financial statements.
Comparative data
These condensed interim financial statements do not comprise
statutory accounts within the meaning of section 434 of the
Companies Act 2006. The comparative figures for the year ended 31
March 2023 (and half year ended 30 September 2022) do not contain
all of the information required for full annual financial
statements. The Group's full annual financial statements for the
year ended 31 March 2023 have been delivered to the registrar of
companies. The report of the auditors (i) was unqualified; (ii) did
not include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report; and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006. The Group's financial statements for the
year ended 31 March 2023 are available upon request from the
Company's registered office at Cody Technology Park, Ively Road,
Farnborough, Hampshire, GU14 0LX, or at the Company's website
(www.QinetiQ.com) .
Responsibility statements of the Directors in respect of the
interim financial report
The Directors confirm that these condensed interim financial
statements have been prepared in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and Disclosure Guidance and Transparency Rules sourcebook of the
United Kingdom's Financial Conduct Authority and that the interim
management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8, namely:
-- an indication of important events that have occurred during
the first six months and their impact on the condensed set
of financial statements, and a description of the principal
risks and uncertainties for the remaining six months of the
financial year; and
-- material related-party transactions in the first six months
and any material changes in the related-party transactions
described in the last annual report.
The Directors of QinetiQ Group plc are listed in the QinetiQ
Group plc Annual Report for 31 March 2023. A list of current
directors is maintained on the QinetiQ Group plc website:
www.qinetiq.com .
By order of the Board
Steve Wadey Carol Borg
Chief Executive Officer Chief Financial
Officer
16 November 2023 16 November 2023
Independent review report to QinetiQ Group plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed QinetiQ Group plc's condensed consolidated
interim financial statements (the 'interim financial statements')
in the Interim Results of QinetiQ Group plc for the 6 month period
ended 30 September 2023 (the "period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
-- the Condensed consolidated balance sheet as at 30 September
2023;
-- the Condensed consolidated income statement and Condensed consolidated
statement of comprehensive income for the period then ended;
-- the Condensed consolidated cash flow statement for the period
then ended;
-- the Condensed consolidated statement of changes in equity for
the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Results
of QinetiQ Group plc have been prepared in accordance with UK
adopted International Accounting Standard 34, 'Interim Financial
Reporting' and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom ("ISRE (UK) 2410"). A review of interim financial
information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim
Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on
the review procedures performed in accordance with ISRE (UK) 2410.
However, future events or conditions may cause the group to cease
to continue as a going concern.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Interim Results, including the interim financial statements,
is the responsibility of, and has been approved by the directors.
The directors are responsible for preparing the Interim Results in
accordance with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority. In
preparing the Interim Results, including the interim financial
statements, the directors are responsible for assessing the group's
ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
Our responsibility is to express a conclusion on the interim
financial statements in the Interim Results of based on our review.
Our conclusion, including our Conclusions relating to going
concern, is based on procedures that are less extensive than audit
procedures, as described in the Basis for conclusion paragraph of
this report. This report, including the conclusion, has been
prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority and for no other
purpose. We do not, in giving this conclusion, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
Southampton
16 November 2023
Glossary
CPI Consumer Price Index
EBITDA Earnings before interest, tax, depreciation and amortisation
EPS Earnings per share
IAS International Accounting Standards
IFRS International Financial Reporting Standards
MOD UK Ministry of Defence
RDEC Research and Development Expenditure Credits
SSRO Single Source Regulations Office
Alternative performance measures ('APMs')
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 1
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 Operating
margin as a percentage of revenue Review
--------------------------------------------- -------------------
Underlying net finance Net finance income/expense as adjusted Note 5
income/expense to exclude 'specific adjusting items'
--------------------------------------------- -------------------
Underlying profit Profit before/after tax as adjusted Note 6
before/after tax to exclude 'specific adjusting items'
--------------------------------------------- -------------------
Underlying effective The tax charge for the year excluding Note 6
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 7
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 9
flow from operations cash flows of specific adjusting
items
--------------------------------------------- -------------------
Underlying operating The ratio of underlying net cash Note 9
cash conversion or from operations to underlying EBITDA.
cash conversion ratio
--------------------------------------------- -------------------
Free cash flow Underlying net cash flow from operations Note 9
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 (debt)/cash Net (debt)/cash as defined by the Note 8
Group combines cash and cash equivalents
with borrowings and 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, integration
and acquisition-related remuneration
costs in respect of business acquisitions
and disposals; 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
IR FFUESIEDSESF
(END) Dow Jones Newswires
November 16, 2023 02:00 ET (07:00 GMT)
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