Inspired solutions for a changing world
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QinetiQ Group plc Annual Report and Accounts 2008
today’s big problems demand
inspired solutions. At QinetiQ,
we provide research, technical advice,
technology solutions and services
to customers in core markets
of defence and security. we are
increasingly working to transfer
our expertise and capabilities
into adjacent markets such as
energy and environment. we operate
principally in the uK and north America
and have recently entered the
Australian defence consulting market.
oveRvIew
BusIness RevIew
GoveRnAnce
FInAncIAl stAtements
shAReholdeR InFoRmAtIon
Inside flap
Our business at a glance
11
Group trading performance
50
Our Board of Directors
69
Independent Auditors’ Report
122
Five-year review
01
Performance overview
02
Chairman’s statement
04
Chief Executive Officer’s
review
05
Our vision
10
Key performance indicators
13
QinetiQ North America
23
QinetiQ EMEA
35
QinetiQ Ventures
39
Other Group
financial information
42
Management of principal risks
and uncertainties
45
Corporate Responsibility
52
Corporate Governance
Report
70
Consolidated income
statement
58
Report of the Remuneration
Committee
65
Report of the Directors
68
Statement of Directors’
responsibilities
71
Consolidated balance sheet
72
Consolidated cash flow
statement
73
Consolidated statement
of recognised income
and expense
74
Notes to the financial
statements
119
Company balance sheet
120
Notes to the Company
financial statements
123
Glossary
124
Financial calendar
Analysis of shareholders
Advisors
Company Registration
Number 4586941
Registered office:
85 Buckingham Gate
London
SW1E 6PD
Customer Contact Team
QinetiQ
Cody Technology Park
Ively Road, Farnborough
Hampshire GU14 0LX
United Kingdom
Tel +44 (0)8700 100 942
www.QinetiQ.com
© QinetiQ Group plc
QinetiQ/CF/SS/PUB0800017
QinetiQ Group plc Annual Report and Accounts 2008
Inspired solutions for a changing world
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QinetiQ Group plc Annual Report and Accounts 2008
today’s big problems demand
inspired solutions. At QinetiQ,
we provide research, technical advice,
technology solutions and services
to customers in core markets
of defence and security. we are
increasingly working to transfer
our expertise and capabilities
into adjacent markets such as
energy and environment. we operate
principally in the uK and north America
and have recently entered the
Australian defence consulting market.
oveRvIew
BusIness RevIew
GoveRnAnce
FInAncIAl stAtements
shAReholdeR InFoRmAtIon
Inside flap
Our business at a glance
11
Group trading performance
50
Our Board of Directors
69
Independent Auditors’ Report
122
Five-year review
01
Performance overview
02
Chairman’s statement
04
Chief Executive Officer’s
review
05
Our vision
10
Key performance indicators
13
QinetiQ North America
23
QinetiQ EMEA
35
QinetiQ Ventures
39
Other Group
financial information
42
Management of principal risks
and uncertainties
45
Corporate Responsibility
52
Corporate Governance
Report
70
Consolidated income
statement
58
Report of the Remuneration
Committee
65
Report of the Directors
68
Statement of Directors’
responsibilities
71
Consolidated balance sheet
72
Consolidated cash flow
statement
73
Consolidated statement
of recognised income
and expense
74
Notes to the financial
statements
119
Company balance sheet
120
Notes to the Company
financial statements
123
Glossary
124
Financial calendar
Analysis of shareholders
Advisors
Company Registration
Number 4586941
Registered office:
85 Buckingham Gate
London
SW1E 6PD
Customer Contact Team
QinetiQ
Cody Technology Park
Ively Road, Farnborough
Hampshire GU14 0LX
United Kingdom
Tel +44 (0)8700 100 942
www.QinetiQ.com
© QinetiQ Group plc
QinetiQ/CF/SS/PUB0800017
QinetiQ Group plc Annual Report and Accounts 2008
QinetiQ Group plc Annual Report and Accounts 2008
Our business at a glance
QinetiQ Group plc Annual Report and Accounts 2008
Our business at a glance continued
Our business at a glance
We create value by delivering inspired solutions to the important problems
faced by business, governments and society, utilising our extensive experience,
skills and capabilities in the field of science and technology.
QinetiQ North America
QinetiQ EMEA
QinetiQ Ventures
QinetiQ Ventures is the pipeline through which we
manage our portfolio of emerging technologies,
providing new solutions and services for the future.
QinetiQ generates Intellectual Property (IP) from
customer-funded research and development work and
other services provided to our core defence and security
customers. In certain circumstances, this IP is available
for use in alternative applications outside our core
markets. QinetiQ unlocks value from IP through routes
including organic growth, partnering with third parties,
IP licensing and business realisations.
Key points from 2008
n Creation of a new technology venture fund with Coller
Capital to accelerate the development and realisation
of seven of QinetiQ’s venture investments
n Development of a high-power camera system which
enhances the capability of the Tarsier® runway foreign
object debris detection system.
QinetiQ North America has quickly established
itself as a major provider of technology-based
solutions and services to customers primarily
within the US Government. Our employees work
in partnership with our customers to develop
world-class technology and responsive solutions
that meet the challenges of national defence,
homeland security, communication and
information access.
40%
£540.2m
Share of 2008 Group revenue
41%
5,699
Number of employees
Our core capabilities
Key points from 2008
Technology Solutions: Delivering high-technology research
services and development of defence and security-related
products to the US defence, civilian government and
commercial markets.
Systems Engineering: Providing independent procurement
services, systems engineering, education/training and support
for the development, modification, fielding and sustainment
of military equipment.
IT Services: Providing information technology services,
including computer systems integration, network engineering
and operations, IT architectures and software development.
Mission Solutions: Delivering software, enterprise systems
engineering and integration and other consulting services
requiring specialised customer/mission knowledge.
n Continued growth in technology business fuelled by demand
for the TALON® robot
n Strong organic growth in Systems Engineering
n Successful integration of 13 acquisitions since 2004 and the
development of a trusted QinetiQ brand in North America
n Positions established on major acquisition contracts including
EAGLE and ENCORE II and selection for Alliant
n Scale and brand recognition leading to larger contract wins,
such as for the $190m NASA environmental test and integrated
services (ETIS) programme and the $100m US Army Sample
Data Collection programme.
EMEA (Europe, Middle East and Australasia)
is focused on providing services to the defence,
security and energy & environment markets.
Operating in these sectors requires our employees
to adapt their capabilities to meet the changing
needs of our customer base, particularly as we
move into new territories such as Australia.
60%
£820.1m
Share of 2008 Group revenue
58%
8,209
Number of employees
Our core capabilities
Managed Services: Work on behalf of clients delivering
independent expertise to enable them to meet their challenges
Key points from 2008
n Growth in services delivered to UK MOD – revenue up 2.5%
n Restructuring to align business on four focused
Consulting: Technical advice provided by high-quality consultants
with deep technical knowledge and domain experience
offerings to drive growth: Managed Services, Consulting,
Integrated Systems and Applied Technologies
Integrated Systems: Supplies integrated systems, sub-systems or
technology to meet the specific challenges our customers face
with their information, mission or platform solutions
Applied Technologies: Delivers a range of solutions to
our customers’ toughest problems through the repeatable
application of technology, fuelled by research.
n Restructuring designed to provide sustainable margin
improvement through business efficiency
n Reconfirmed our position as a trusted supplier of defence
managed services through agreement of the scope
and pricing of the second five-year term of the 25-year
MOD Long-Term Partnering Agreement (LTPA) and progression
of the UK Defence Training Rationalisation (DTR) bid
n Commenced geographic expansion in selected overseas
markets, starting with Australia
n MOD research – continued success on competed programmes.
Designed and produced by salterbaxter
Picture credits:
Feature photography: Liam Bailey (UK), Eric Anderson (US)
Board photography: Patrick Harrison
p25 airport ©iStockphoto.com/ALiJA
p25 arrivals board ©iStockphoto.com/Jorgen Udvang
p33 test munition: MOD
p34 well perforation: GeoDynamics
p36 James Brown: Paul Drane
p36 laptop: Getty/Sean Russell
p37 plane landing on runway: Getty/Noeru Takizawa
p38 satellite ©iStockphoto.com/Cristian Matei
p49 Morgan car: Morgan
p49 rubbish heap ©iStockphoto.com/Roger Milley
Printed by St Ives Westerham Press
Printed on Hello Matt, which is produced using wood fibre from fully sustainable
forests in Europe, Canada, the USA and Chile, with FSC certification. All pulps used
are Elemental Chlorine Free (ECF) and manufactured at a mill that has been awarded
the ISO 14001 and EMAS certificates for environmental management. The use of the
FSC logo identifies products which contain wood from well-managed forests certified
in accordance with the rules of the Forest Stewardship Council.
QinetiQ Group plc Annual Report and Accounts 2008
Our business at a glance
QinetiQ Group plc Annual Report and Accounts 2008
Our business at a glance continued
Our business at a glance
We create value by delivering inspired solutions to the important problems
faced by business, governments and society, utilising our extensive experience,
skills and capabilities in the field of science and technology.
QinetiQ North America
QinetiQ EMEA
QinetiQ Ventures
QinetiQ Ventures is the pipeline through which we
manage our portfolio of emerging technologies,
providing new solutions and services for the future.
QinetiQ generates Intellectual Property (IP) from
customer-funded research and development work and
other services provided to our core defence and security
customers. In certain circumstances, this IP is available
for use in alternative applications outside our core
markets. QinetiQ unlocks value from IP through routes
including organic growth, partnering with third parties,
IP licensing and business realisations.
Key points from 2008
n Creation of a new technology venture fund with Coller
Capital to accelerate the development and realisation
of seven of QinetiQ’s venture investments
n Development of a high-power camera system which
enhances the capability of the Tarsier® runway foreign
object debris detection system.
QinetiQ North America has quickly established
itself as a major provider of technology-based
solutions and services to customers primarily
within the US Government. Our employees work
in partnership with our customers to develop
world-class technology and responsive solutions
that meet the challenges of national defence,
homeland security, communication and
information access.
40%
£540.2m
Share of 2008 Group revenue
41%
5,699
Number of employees
Our core capabilities
Key points from 2008
Technology Solutions: Delivering high-technology research
services and development of defence and security-related
products to the US defence, civilian government and
commercial markets.
Systems Engineering: Providing independent procurement
services, systems engineering, education/training and support
for the development, modification, fielding and sustainment
of military equipment.
IT Services: Providing information technology services,
including computer systems integration, network engineering
and operations, IT architectures and software development.
Mission Solutions: Delivering software, enterprise systems
engineering and integration and other consulting services
requiring specialised customer/mission knowledge.
n Continued growth in technology business fuelled by demand
for the TALON® robot
n Strong organic growth in Systems Engineering
n Successful integration of 13 acquisitions since 2004 and the
development of a trusted QinetiQ brand in North America
n Positions established on major acquisition contracts including
EAGLE and ENCORE II and selection for Alliant
n Scale and brand recognition leading to larger contract wins,
such as for the $190m NASA environmental test and integrated
services (ETIS) programme and the $100m US Army Sample
Data Collection programme.
EMEA (Europe, Middle East and Australasia)
is focused on providing services to the defence,
security and energy & environment markets.
Operating in these sectors requires our employees
to adapt their capabilities to meet the changing
needs of our customer base, particularly as we
move into new territories such as Australia.
60%
£820.1m
Share of 2008 Group revenue
58%
8,209
Number of employees
Our core capabilities
Managed Services: Work on behalf of clients delivering
independent expertise to enable them to meet their challenges
Key points from 2008
n Growth in services delivered to UK MOD – revenue up 2.5%
n Restructuring to align business on four focused
Consulting: Technical advice provided by high-quality consultants
with deep technical knowledge and domain experience
offerings to drive growth: Managed Services, Consulting,
Integrated Systems and Applied Technologies
Integrated Systems: Supplies integrated systems, sub-systems or
technology to meet the specific challenges our customers face
with their information, mission or platform solutions
Applied Technologies: Delivers a range of solutions to
our customers’ toughest problems through the repeatable
application of technology, fuelled by research.
n Restructuring designed to provide sustainable margin
improvement through business efficiency
n Reconfirmed our position as a trusted supplier of defence
managed services through agreement of the scope
and pricing of the second five-year term of the 25-year
MOD Long-Term Partnering Agreement (LTPA) and progression
of the UK Defence Training Rationalisation (DTR) bid
n Commenced geographic expansion in selected overseas
markets, starting with Australia
n MOD research – continued success on competed programmes.
Designed and produced by salterbaxter
Picture credits:
Feature photography: Liam Bailey (UK), Eric Anderson (US)
Board photography: Patrick Harrison
p25 airport ©iStockphoto.com/ALiJA
p25 arrivals board ©iStockphoto.com/Jorgen Udvang
p33 test munition: MOD
p34 well perforation: GeoDynamics
p36 James Brown: Paul Drane
p36 laptop: Getty/Sean Russell
p37 plane landing on runway: Getty/Noeru Takizawa
p38 satellite ©iStockphoto.com/Cristian Matei
p49 Morgan car: Morgan
p49 rubbish heap ©iStockphoto.com/Roger Milley
Printed by St Ives Westerham Press
Printed on Hello Matt, which is produced using wood fibre from fully sustainable
forests in Europe, Canada, the USA and Chile, with FSC certification. All pulps used
are Elemental Chlorine Free (ECF) and manufactured at a mill that has been awarded
the ISO 14001 and EMAS certificates for environmental management. The use of the
FSC logo identifies products which contain wood from well-managed forests certified
in accordance with the rules of the Forest Stewardship Council.
QinetiQ Group plc Annual report and Accounts 2008
Performance overview
Performance overview
Welcome to our Annual Report for 2008 – another year of strong
growth and positive change for QinetiQ
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revenue
£1,366.0m
Underlying operating profit
£127.0m
(cid:153)(cid:40)(cid:35)(cid:42)(cid:45)(cid:45)(cid:37)(cid:39)(cid:100)
(cid:153)(cid:40)(cid:35)(cid:40)(cid:43)(cid:48)(cid:37)(cid:44)(cid:100)
(cid:153)(cid:40)(cid:35)(cid:39)(cid:44)(cid:40)(cid:37)(cid:46)(cid:100)
(cid:153)(cid:47)(cid:44)(cid:44)(cid:37)(cid:48)(cid:100)
(cid:153)(cid:46)(cid:48)(cid:44)(cid:37)(cid:43)(cid:100)
(cid:41)(cid:39)(cid:39)(cid:47)
(cid:41)(cid:39)(cid:39)(cid:46)
(cid:41)(cid:39)(cid:39)(cid:45)
(cid:41)(cid:39)(cid:39)(cid:44)
(cid:41)(cid:39)(cid:39)(cid:43)
£127.0m
£106.0m
£90.7m
£65.2m
£54.1m
orders
Underlying operating profit margin
£1,277.1m
9.3%
£1,277.1m
£1,214.0m
2008
2007
2006
2005
2004
£816.7m
£668.3m
£725.4m
9.3%
9.2%
8.6%
7.6%
6.8%
2008
2007
2006
2005
2004
2008
2007
2006
2005
2004
Financial summary
Group revenue
Underlying operating profit
Underlying operating profit margin
Underlying profit before tax
Profit before tax
Underlying earnings per share
interest cover
Net debt
Basic earnings per share
Cash flow from operating activities
orders
Funded backlog (excluding LTPA)
Underlying effective tax rate
Dividend per ordinary share
2008
£1,366.0m
£127.0m
9.3%
£109.0m
£51.4m
13.4p
9.2 times
£379.9m
7.2p
£102.3m
£1,277.1m
£947.7m
19.3%
4.25p
2007
£1,149.5m
£106.0m
9.2%
£94.0m
£89.3m
11.3p
11.7 times
£300.8m
10.5p
£94.1m
£1,214.0m
£850.9m
21.2%
3.65p
Underlying financial measures are presented as the Board believes these provide a better representation of the Group’s long-term
performance trends. Definitions of underlying measures of performance can be found in the glossary on page 123. A reconciliation between
basic and underlying earnings can be found in note 10 to the accounts on page 87.
Cautionary statement
All statements other than historical fact included in this document, including, without limitation, those regarding the financial condition,
results, operations and businesses of QinetiQ and its strategy, plans and objectives and the markets and economies in which it operates, are
forward-looking statements. Such forward-looking statements, which reflect management’s assumptions made on the basis of information
available to it at the time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results,
performance or achievements of QinetiQ or the markets and economies in which QinetiQ operates to be materially different from future
results, performance or achievements expressed or implied by such forward-looking statements. Nothing in this document should be
regarded as a profit forecast.
01
QinetiQ Group plc Annual report and Accounts 2008
Chairman’s statement
Chairman’s statement
“I am pleased to report on another year of strong performance, our second as a
publicly listed company. The Group has a distinctive strategy to address a robust
core market, which has enabled good growth across all of our key financial
metrics. As a result of these strong results, we are continuing with our
progressive dividend policy with a proposed final dividend of 2.92p per share
giving a total dividend up 16% to 4.25p per share (2007: 3.65p per share),
reflecting our confidence in the prospects for the Group.”
Sir John Chisholm, Chairman
02
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QinetiQ Group plc Annual report and Accounts 2008
Chairman’s statement continued
The challenges to global peace and security are as persistent now as they have ever been.
Globalisation is delivering enormous benefit to the world in terms of total GDP growth;
however, the level of particular community imbalances leads to ethnic tensions, commodity
shortages and population dislocation. Advanced nations have a need and an obligation to
equip themselves to defend their own populations and to participate in international action
to intervene in trouble spots. The Group has a special role to play in bringing innovation and
technology-based services to assist nations discharge this mission effectively, economically
and with minimum risk of casualties.
Our historic focus is in North America and the UK, but this year we have begun broadening
our reach. In all our principal markets, the demand for our services is driven by factors above
and beyond the current issues in financial markets, giving the Group visible earnings,
sustainable growth and strong cash generation.
This year’s results show that our North American region is again the fastest growing part of
the Group, delivering strong organic growth, which we continue to supplement with selective
acquisitions. We are addressing a very large market within which we have carefully chosen
to target specific high-end segments in defence, security and intelligence where demand
is increasing rapidly. The need is such that it is likely to prove resilient to changes in the
US Administration.
Within EMEA, the UK remains the primary market that we serve and the inevitable changes
in our relationships with the UK Ministry of Defence (MOD) have enabled the Group to
reposition itself away from legacy activity and into competitively acquired roles. The MOD’s
budget faces tough spending challenges following the conclusion of the Comprehensive
Spending Review in 2007. We are well positioned to respond positively to these challenges
through our wide range of technology services and solutions that address the value-
for-money issues that the MOD faces, as well as enhancing their use and application of
technology. During the year, we identified Australia as a country with strong and persistent
needs in our field and, after careful analysis, we entered the market with three quality
acquisitions.
A key focus of my activity as Chairman has been to ensure we have the strongest Board to
oversee the activities of the Group. George Tenet has provided great insight to the Board on
the North American market to the extent that, given his other increasing commitments, we
agreed that his time with us would be better spent through membership of our QinetiQ
North America Board. In addition, we are pleased to have recruited Admiral Edmund
Giambastiani Jr who joined the Board in February 2008 as an independent Non-executive
Director. He brings with him a vast reservoir of experience from a military career that
included service as the second highest-ranking military officer in the United States, serving
as the Vice Chairman of the Joint Chiefs of Staff between 2005 and 2007.
Doug Webb leaves the Group at the end of May 2008 to join the London Stock Exchange
as its Chief Financial Officer. I would like to take this opportunity to thank him for his
considerable contribution to the Group through the IPO process and during QinetiQ’s early
years as a public company. He will be succeeded by David Mellors who will join the Board
as Chief Financial Officer in August 2008 from Logica plc.
Following another successful year for QinetiQ, I would like to thank and congratulate all
our people for their continued commitment, hard work and dedication to the Group, in
particular our QinetiQ North America team for their success in growing our business and our
EMEA employees for their diligent work in reorganising their business to further strengthen
our position.
Sir John Chisholm
Chairman
28 May 2008
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QinetiQ Group plc Annual report and Accounts 2008
Chief executive officer’s review
Chief executive officer’s review
“This has been another year of excellent all-round progress
for the Group. We have increasingly good traction in our
core markets of defence and security, which has translated
into a strong financial performance and we continue to see
exciting opportunities in a number of adjacent markets.”
Graham Love, Chief executive officer
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QinetiQ Group plc Annual report and Accounts 2008
Chief executive officer’s review – our vision
our vision
To be the world’s leading provider of defence and security
technology-based solutions and services
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How we will achieve it
Ensure we have outstanding people, facilities and technologies
available to provide innovative, high-value solutions to our customers’
important problems.
Provide research, technical advice, technology solutions and services
to customers in our core markets of defence and security, and transfer
know-how and capability into important adjacent markets.
Group strategies
Strengthen our North American presence
Continue building our business in North America, delivering good
organic growth supplemented by targeted acquisitions.
Maintain and build existing relationships
Build on our powerful UK defence franchise, growing our market
share in technology insertion, advice and managed services, whilst
robustly defending our market-leading position in MOD research.
Further penetrate established defence markets
Build valuable new market positions in selected
EMEA markets outside the UK.
Apply our technologies to commercial markets
Take selected defence technologies into new markets, through
direct exploitation, venturing and licensing.
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QinetiQ Group plc Annual report and Accounts 2008
Chief executive officer’s review continued
Performance overview
2008 was another year of strong operating and financial performance and we are well
positioned for further growth as a result of effective execution against our key strategies.
QinetiQ North America (QNA) once again delivered significant organic growth, supplemented
by five further targeted acquisitions. The range of products and services offered to customers
continued to grow and diversify, whilst a planned consolidation of our business groups to
give greater critical mass will allow us to pursue increasingly larger opportunities.
Europe, Middle East and Australasia (EMEA) delivered good growth in both Managed Services
and Consulting and we continue to see good opportunities in Integrated Systems and
Applied Technologies, including further penetration of overseas markets. Restructuring into
fewer business units will improve customer focus whilst delivering measurable benefits to
profit margins. Our entry into the Australian market will provide improved access to growing
international markets.
Opportunities for technology ventures have developed further and seven ventures were
successfully spun out into a separate fund with an external partner. We continue to believe
that our selective and targeted approach to investment will generate attractive returns over
the medium term.
Financial overview
Revenue increased 19% to £1,366.0m, including organic growth of 8.6%, and underlying
operating profit increased 20% to £127.0m. Order intake continues to be robust with a book
to bill ratio achieving our Group target of 1.1:1. Total funded backlog, including the LTPA,
is £5.7bn, which gives us excellent forward visibility for the business.
Net cash inflow from operating activities of £102.3m translates into an underlying operating
cash conversion of 77% for the year, up from 56% last year.
Underlying earnings per share increased by 19% to 13.4p per share. We propose to increase the
final dividend to 2.92p per share bringing the total dividend to 4.25p per share. This represents
an increase in total dividend of 16.4% over last year and is covered 3.2 times by earnings.
Delivery against our strategy
Continue building our business in North America, delivering good organic growth
supplemented by targeted acquisitions
QNA has seen another year of strong performance with 17.5% organic growth in revenue.
This has been supplemented by our continuing acquisition programme in North America
which added five further businesses. The acquisitions of ITS, 3H Technology and
Pinnacle CSI provide the IT Services and Mission Solutions businesses with enhanced
access to the homeland security and intelligence communities through excellent
customer relationships and strong contractual positions. The acquisitions of Automatika
and Applied Perception continue to build on our expertise in robotic and autonomous
platforms in the Technology Solutions business.
The existing QNA businesses have delivered impressive operating results in the period.
In particular, the Technology Solutions business has had an exceptional year through very
strong orders and sales of the TALON® robot range. Over $200m of further funding for TALON
robots was received in the year and in excess of 800 TALON robots were shipped. A $400m
follow on indefinite delivery/indefinite quantity (IDIQ) contract was received in May 2008.
Over 2,000 units have now been shipped to Iraq and Afghanistan, most of which are being
used to locate and remotely disable roadside bombs. QNA has also shown an increasing
diversity in product offerings such as LAST® Armor and the EARS Sniper Detection systems
gaining traction in the year.
Integration of the QNA businesses has made significant progress with a clear focus on business
development activities to ensure that QNA continues to bid for, and win, larger opportunities
than its constituent parts have previously been able to achieve. One such example was
NASA’s award of a $190m five-year contract to our Mission Solutions business to provide
environmental test and integration support (ETIS) services. QNA is now a $1bn plus integrated
business and has been successful in recruiting highly experienced defence industry
professionals, with excellent customer insights, to help continue driving strong organic growth
from our resilient positions in the defence, security and intelligence markets. At a business
unit level, we see further integration opportunities and during the course of the coming year,
will merge the IT Services operations into the Systems Engineering and Mission Solutions
businesses thereby continuing to improve customer focus and opportunity exploitation.
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Build on our powerful UK defence franchise, growing our market share in technology
insertion, advice and managed services, whilst robustly defending our market-leading
position in MOD research
At the start of the year, we created our EMEA sector by combining the Defence & Technology
and Security & Dual Use businesses. We are pleased that these integrated EMEA operations
have returned to growth in the year, with revenue increasing organically by 4.5% and direct
revenue from the MOD increasing by £14.6m to £599.1m. In March, we also successfully
completed the £951m re-pricing agreement covering the second five-year term of the 25-year
Long-Term Partnering Agreement (LTPA) with the MOD. We continue to work with the MOD
towards finalising the 30-year Defence Training Rationalisation (DTR) contract, for which we
are the preferred bidder. We expect to agree the customer requirements and pricing in 2008
and to finalise the contract by the end of March 2010.
During the course of the year, we have conducted a review of the EMEA structure and,
with effect from 1 April 2008, have reorganised the sector into four offering-focused
businesses: Managed Services; Consulting; Integrated Systems and Applied Technologies.
This reorganisation will improve the engagement with our defence customer base and has
also allowed us to remove a significant amount of duplication, as we have consolidated a
large number of units into these four businesses. This process will be completed in the first
half of the coming year and, once finalised, we expect to deliver full-year annual savings of
at least £12m. We have taken the cost of achieving this reorganisation of some £33m as
a non-recurring charge in the income statement.
Good progress has been made on using the excellent customer access provided by our
North American business to accelerate the deployment of EMEA technology into the largest
accessible global market. During the year, we successfully sold our SPO stand-off detectors
developed in EMEA to the US Transportation Security Administration through QNA and we
are currently pursuing a pipeline of other similar cross-sector opportunities.
Build valuable new market positions in selected EMEA markets outside the UK
The creation of the EMEA sector also underlined our ambition to deliver growth from defence
markets beyond the UK and North America. We believe that the structure and team we have
created will allow us to pursue exciting opportunities to replicate offerings from EMEA’s core
UK market into selected international defence markets. As other defence markets mature
over the coming years, our value-based services and solutions become more relevant to these
potential new customers. Our initial view of the likely markets that offer the best prospect in
the medium term are in Asia Pacific, Scandinavia and the Middle East.
During the year, we established a footprint in Australia with the acquisition and subsequent
integration of three defence consulting businesses as QinetiQ Consulting Pty. Historically,
we have provided services to the Australian defence marketplace from the UK and the
establishment of a QinetiQ base in Australia, with an in-country capability of over 300
employees, provides the mechanism to leverage the wider range of our services to our
Australian customers.
We continue to review other geographical markets, although our immediate priority is to
bed down our Australian operations. Once achieved, they will provide us with a basis to
expand our offering through parts of the South East Asian market. Closer to home, we are
looking to establish a representative office in Scandinavia, with the volume of business
opportunities making it increasingly important for us to maintain a closer interface with
our customers in this region.
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Take selected defence technologies into new markets, through direct exploitation,
venturing and licensing
The EMEA reorganisation will allow us to improve our targeting of key non-defence markets
such as security and energy & environment, where many of our consulting-led solutions and
services are in demand as these markets develop. Evidence of the significant role we can
undertake in these markets was demonstrated through the award of a contract worth up to
£33m as part of the UK Home Office’s e-Borders programme where we are providing security
accreditation and human factors services. We have added to our capabilities in the security
marketplace through the October 2007 acquisition of Boldon James, a company offering high-
end secure messaging solutions for government, military and security customers worldwide.
We continue to develop a pipeline of new ventures where we believe these will deliver
attractive returns on investment in the medium term. In August 2007, we completed a
transaction with Coller Capital to establish a technology venture fund consisting of seven
of our ventures. The creation of the fund enables these ventures to be managed by an
independent team focused on accelerated growth with access to Coller Capital’s expertise
in commercialising technology and further funding from QinetiQ and Coller Capital.
These businesses continue to make satisfactory progress. The Tarsier® integrated
camera enhancement programme has attracted significant additional interest, with an
order placed for a radar and camera system from BAA for London Heathrow Airport and
a camera system order from Vancouver International Airport, our original launch customer
for the radar system.
Our people
The expertise, commitment and integrity of our people is an essential component of the
strong results delivered this year and the continued successful implementation of our
strategy. During the year, we have welcomed new employees into the Group who will further
enhance our strong existing capabilities. Over 1,300 new employees have joined the Group
through acquisitions with many more joining to meet the demand of our organic growth.
I thank all our people for their hard work and dedication during the year. We place great
emphasis on talent management to ensure the effective recruitment, retention and
development of key skills across the organisation. The professionalism and quality of our
people is paramount to our continued success.
Our recruitment strategy recognises the need to replenish and refresh our capabilities and
we look to maximise this pipeline by using a comprehensive programme encompassing
graduate recruitment, student placement and apprenticeships to ensure that a broad mix
of scientific, engineering, technical and managerial talent joins the Group and provides
leadership to the organisation. We also continue to strengthen our senior management team,
with key additions in both QNA and EMEA.
To keep the Group’s capability at the leading edge of our customers’ expectations and to
provide opportunities for our employees to develop and fulfil their potential, we continually
invest in programmes and activities alongside customer delivery. The ‘Competing to Win’
project launched in the UK last year, which focused on developing staff to lead and win
major new business opportunities, has become an invaluable training and development
programme. Graduates of the programme have taken key roles throughout the business,
including leadership of our successful bid into the Home Office e-Borders programme.
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Future prospects and outlook
We are well positioned in our key primary markets and will continue to execute our strategy
effectively in the coming year.
In North America, our business has delivered strong organic growth and is well positioned
to continue to benefit from the market opportunities that exist. We believe that the specific
markets we serve, and the high-end solutions and services we provide, are key to the defence,
homeland security and intelligence policies of any future US Administration. We believe our
highly focused North American business will continue outpacing the expected growth rate of
the overall US defence budget and we are targeting continued double-digit organic growth.
Our newly restructured EMEA business is well positioned to respond in a flexible and agile
way to meet its customers’ needs. Our opportunity going forward is to respond to the
challenges faced by our customers and to use technology-rich solutions to provide them with
value-for-money propositions. Technology development and insertion into new platforms
to extend the life of existing platforms is a key strength that we add to the defence supply
chain. On the Consulting and Managed Services axis, our specialist procurement, test and
evaluation services help ensure the MOD acquires and utilises equipment that gives the
right balance of through-life capability and value to the UK armed forces. The EMEA business
has the organisation and capabilities in place to maintain the growth trajectory it has
now established. Looking further out, as the headwind of MOD research fully opening to
competition recedes, we are well placed to deliver accelerated growth from EMEA.
We will continue to target selective acquisitions to complement and grow our capabilities
and to access new markets. The Group’s strong balance sheet position, inherently cash
generative operations and access to committed financing facilities allow us to continue to
make value-enhancing acquisitions at a similar rate to that delivered in recent years. We will
also continue to invest in opportunities to exploit our defence technologies in other markets,
where these opportunities offer attractive projected returns.
Our business model and forward visibility to earnings are robust. Our ability to innovate
and respond quickly to our customers’ needs with value-for-money solutions through the
deep expertise of our people ensures that the Group is well positioned to benefit from the
opportunities that exist in all of our key markets. We enter the new year with confidence and
expect to continue making good progress towards our Group targets including our increased
medium-term operating margin of 11%.
Graham Love
Chief executive officer
28 May 2008
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Key performance indicators
Key performance indicators
To assess Group performance, the Board uses a range of key
performance indicators (KPIs) comprising both financial
and non-financial metrics including:
KPi
2008
2007
2006
Comment
organic revenue growth
8.6%
2.3%
2.3%
The rate of organic growth in revenue. The Group is targeting to deliver
sustainable organic growth of at least 6-7% per annum, supplemented
by growth from major opportunities such as DTR.
Proportion of
revenue generated
by QNA
39.5%
31.2%
23.6%
The Group aims to generate 50% of its revenue in the medium term from
QNA, through a combination of organic growth and acquisitions.
Book to bill ratio
1.09:1
1.24:1
0.93:1
Funded backlog
£947.7m
£850.9m
£608.4m
The ratio of orders to revenue to identify the rate of prospective growth in
the business. LTPA non-tasking revenue is excluded from this calculation as
no annual order is associated with this revenue. The Group aims to achieve
an average of at least 1.1:1 over the medium term.
The value of contractually funded future orders (excluding the LTPA)
providing visibility over future revenues. Total funded backlog including
the LTPA is £5.7bn.
Underlying operating
profit margin
9.3%
9.2%
8.6%
The percentage return on sales achieved based on underlying operating
profit. The Group is targeting an underlying operating margin of 11% in
the medium term.
Underlying ePS growth
18.8%
10.4%
16.3%
The rate at which underlying earnings per share increased over the prior
year expressed as a percentage. The entry point for the Group’s long-term
incentive schemes equates to an average EPS growth rate of 7.0% per
annum with full vesting achieved if the EPS growth rate averages 15.0%
per annum.
Total shareholder return
4.5%
(2.3)%
n/a
The measure of total shareholder value creation (including dividends)
each year expressed as a percentage.
77%
56%
84%
operating cash
conversion
Health and safety
of employees:
UK riDDor
2.28
3.47
3.85
USA oSHA
5.66
10.78
n/a
employee attrition rate
10.3%
7.1%
5.8%
The percentage of underlying operating profit converted into underlying
operating cash flow (after capital expenditure). The Group targets an
underlying operating cash conversion rate of 80%.
UK Reporting of Injuries, Diseases & Dangerous Occurrences Regulations
(RIDDOR) is expressed as the number of RIDDOR events in any period
per 1,000 people amongst our EMEA employee base. Our target is to
remain below the industrial average for all industries, which was 5.36
for 2006/2007. The average for public administration and defence
companies was 13.46 in 2006/2007.
Expressed as the number of Occupational Safety & Health Administration
(OSHA) ‘days away from work’ cases per 1,000 employees amongst our
North America employee base.
Employee turnover (excluding redundancies) measured as the number
of resignations expressed as a percentage of total headcount per annum.
The increase in attrition reflects the increasing proportion of our business
in North America where the workforce is historically more mobile.
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Business review – Group trading performance
Group trading performance
QinetiQ delivered improved organic growth in 2008 whilst investing for the future
through complementary acquisitions and a margin-enhancing reorganisation
of the EMEA business. Our balance sheet remains strong, our financing is secure
and free cash flow improved.
Group summary
all figures in £ million except where stated 2008
2007
2006
Orders
Revenue
Underlying1 EBITDA
Underlying1 operating profit
Underlying1 operating margin
Operating profit
Underlying1 profit before tax
Profit before tax
Underlying1 operating cash flow
Operating cash conversion
Net debt
Funded backlog2
Underlying1 effective tax rate
Underlying1 earnings per share
Dividend per share
1,277.1 1,214.0
816.7
1,366.0 1,149.5 1,051.7
124.5
90.7
8.6%
69.5
80.1
72.5
76.9
84%
233.0
608.4
23%
10.2p
2.25p
165.0
127.0
9.3%
76.4
109.0
51.4
100.3
77%
379.9
947.7
19%
13.4p
4.25p
140.5
106.0
9.2%
93.4
94.0
89.3
60.1
56%
300.8
850.9
21%
11.3p
3.65p
1 Underlying financial measures are presented as the Board
believes these provide a better representation of the Group’s
long-term performance trends. Definitions of underlying measures
of performance can be found in the glossary on page 123.
A reconciliation between basic and underlying earnings can be
found in note 10 to the accounts on page 87.
2 Excluding remaining £4.7bn (2007: £4.8bn, 2006: £5.0bn) backlog in
respect of LTPA contract.
Revenue increased £216.5m with organic revenue
growth of 8.6%. Underlying operating profit increased by
20% to £127.0m, with organic growth across QNA and
EMEA of 16%. Orders increased £63.1m on the prior year,
with the Group maintaining a healthy book to bill ratio
of 1.1:1 (excluding the LTPA).
The EMEA sector was reorganised during the year into
four businesses focused on the delivery of discrete
capabilities and offerings. A charge of £32.6m was
incurred which is expected to yield annual benefits
of at least £12m from the second half of calendar 2008.
A strong level of cash conversion was maintained
allowing the Group to continue to fund both acquisitions
and organic growth opportunities.
Revenue
Engineering business delivered organic growth of 18%.
IT Services revenue increased by £53.0m with good
organic growth of 6.7% in a market adversely impacted
by budget pressures faced by federal customers.
The EMEA sector grew revenue from £779m to £820m
with growth in Consulting and Managed Services more
than offsetting a reduction in Integrated Systems. EMEA
achieved organic growth in revenue of 4.5% (2007: 2.2%
decline).
Revenue by customer type (£m)
90.3
110.0
83.9
104.9
377.8
2008
599.1
127.4
62.2
82.6
67.4
225.4
2007
584.5
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MOD
Other governmental agencies
Civil
Commercial defence
DHS
MOD remains the Group’s largest customer accounting
for 44% of 2008 revenues (2007: 51%). The absolute level
of revenue from MOD work increased by £14.6m despite
considerable pressure on MOD budgets, highlighting
QinetiQ’s trusted advisor relationship with our key core
customers. As the Group grows, the relative dependence
on MOD is expected to continue to decrease.
Orders and backlog
all figures in £ million
2008
2007
2006
Orders
QinetiQ North America
EMEA
Ventures
Total
Funded backlog
QinetiQ North America
EMEA 1
Ventures
Total
607.1
662.5
7.5
1,277.1
416.0
783.7
14.3
1,214.0
300.5
640.8
6.4
947.7
210.7
632.6
7.6
850.9
227.9
579.0
9.8
816.7
129.2
474.7
4.5
608.4
all figures in £ million
2008
2007
2006
1 Excluding remaining £4.7bn (2007: £4.8bn, 2006: £5.0bn) backlog in
Revenue
QinetiQ North America
EMEA
Ventures
Total
respect of LTPA contract.
540.2
820.1
5.7
1,366.0
358.2
779.3
12.0
1,149.5
248.4
797.2
6.1
1,051.7
Total orders increased by 5.2% during the year against
a strong comparative that included £157m total orders
from the large multi-year contracts for the Combined
Aerial Target System and the Typhoon programme.
Group revenue increased 19% to £1,366m due to
a combination of strong organic growth and the
contributions made by recent acquisitions. In constant
currency terms using the average rate from the prior year,
the Group would have reported revenues of £1,391m.
QNA revenue increased £182.0m with organic growth
of 17.5%. Strong demand for both TALON® robots and
LAST® Armor products provided organic growth of 35%
within the Technology Solutions business. The Systems
QNA order growth was driven by strong levels of
contract awards across the sector. In particular, the
business received over $200m of additional contract
funding for TALON robots. In addition to the funded
backlog, the QNA sector has unfunded backlog of over
£350m ($700m). The unfunded backlog principally
derives from multi-year US Government contracts for
which only one year of funding has yet been released.
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QinetiQ’s positions on Government Wide Acquisition
Contracts (GWACs) and indefinite delivery/indefinite
quantity (IDIQ) contracts add significant further visibility
to the accessibility of future revenues.
The Group’s strong orders performance has resulted in a
book to bill ratio (excluding the LTPA) of 1.1:1 (2007: 1.2:1),
in line with our target of 1.1:1.
Underlying operating profit
all figures in £ million
except where stated
Underlying operating profit
QinetiQ North America
EMEA
Ventures
Total
Underlying operating
profit margin
2008
2007
2006
62.1
80.0
(15.1)
127.0
39.9
73.0
(6.9)
106.0
24.5
73.7
(7.5)
90.7
9.3%
9.2%
8.6%
Underlying operating profit has increased by 20% to
£127.0m through organic growth in the EMEA and QNA
sectors and the contribution from the new acquisitions
partly offset by the planned increase in investment in
Ventures. On a constant currency basis, using the
average exchange rate for the prior year, QNA would
have contributed an additional £3.0m of operating profit.
Underlying operating profit margin has improved to 9.3%
(2007: 9.2%), driven largely by changes in the revenue
mix with strong product and spares demand in the
Technology Solutions business in QNA, offset by the
planned increase in investment in Ventures.
Finance costs
Net finance costs increased to £18.0m (2007: £12.0m).
A higher level of average borrowings from acquisitions
at the end of last year and in the first quarter of this year
was partially offset by lower average interest rates on
the predominantly dollar-denominated borrowings.
The interest cover ratio, measured as underlying EBITDA:
net finance costs was 9.2 times (2007: 11.7 times).
Profit before tax
Profit before tax, non-recurring items, disposals and
acquisition amortisation increased by £15.0m to
£109.0m, a rise of 16%. The growth includes the
acquisitions made in this financial year and the benefit
of a full-year contribution from the Analex acquisition,
completed in March 2007.
Tax
The underlying effective tax rate for the year is 19%
compared to 21% in the prior year. The Group’s statutory
effective tax rate was 8% (2007: 23%).
As a technology business with significant involvement in
research and development, the Group benefits from UK
tax incentives designed to encourage greater investment
in innovation. The UK Government recognises the
importance of research and development as a driver of
productivity growth. The Group reinvests the benefits
of these tax incentives into ventures and other
intellectual property commercialisation investments.
The business will benefit from the reduction in
corporation tax rates from 30% to 28% as announced
in the 2007 UK Government Budget. Restatement of
deferred tax balances resulted in a £1.5m benefit in
year. However, over the next two years, the underlying
Group effective tax rate is expected to rise by 1-2%
as the proportion of Group profit generated in North
America continues to increase.
Due to the availability of research and development
relief and deductions for past service pension
contributions made in prior years, the Group has not
paid corporation tax on UK profits in-year and does not
anticipate paying cash tax in the UK in the near term.
Profit for the year
The underlying performance of the Group, after allowing
for non-recurring events and amortisation of acquired
intangible assets, is shown below:
all figures in £ million
Profit for the period
Minority interest
Profit for the period attributable
to equity shareholders of the
parent company
EMEA reorganisation
Loss/(gain) on business
divestments and unrealised
impairment of investment
Profit on disposal of
non-current assets
Amortisation of intangible assets
arising from acquisitions
IPO related items
Tax impact of items above
Brought forward tax
losses utilised
Underlying profit for the year
attributable to equity shareholders
of the parent company
2008
47.4
–
47.4
32.6
7.0
–
18.0
–
(17.0)
2007
2006
69.0
–
60.4
(2.3)
69.0
–
58.1
–
(4.6)
–
(3.3)
(8.9)
12.6
–
0.4
12.3
4.2
(0.7)
–
–
(5.4)
88.0
74.1
59.6
Non-recurring items that have been excluded from
underlying profit relate to gains on business divestments,
EMEA reorganisation costs, investment impairment and
profits on disposal of non-current assets, principally
surplus property. The Board believes that the underlying
profit provides a better representation of the Group’s
long-term performance trends.
Earnings per share
Underlying earnings per share increased by 19% to 13.4p
compared to 11.3p in the prior year. Basic earnings per
share decreased from 10.5p to 7.2p, principally as a result
of the £32.6m costs of the EMEA reorganisation.
Dividend
The Board is recommending a final dividend of 2.92p per
share (2007: 2.45p) bringing the total dividend for the
year to 4.25p per share (2007: 3.65p), representing an
increase of 16%. The proposed dividend is 3.2 times
covered by underlying earnings (2007: 3.1 times).
The record date for the final dividend will be 8 August
2008. Subject to approval at the Annual General Meeting,
the final dividend will be paid on 5 September 2008.
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Business review – QinetiQ North America
QinetiQ North America
QinetiQ North America has established itself as a significant provider of
technology-based solutions and services to US defence, security and
intelligence customers. With annual revenues of $1.1bn, the business
is well placed to target larger sales opportunities. Successful integration
of the acquisitions completed since we entered North America in 2004
has yielded benefits from brand recognition, increased breadth and depth
of offerings, cross-selling opportunities, major new umbrella contract
vehicles and cost efficiencies.
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US Department of Defense (DoD)
Department of Homeland Security (DHS)
National Aeronautics and Space Administration (NASA)
Duane Andrews, Chief executive,
QinetiQ North America
US security intelligence community
Share of Group revenue
Achievements
As a $1.1bn revenue business, QNA has achieved a critical mass that allows it to
target larger contract opportunities. Integration of the 13 businesses acquired
since 2004 is largely complete allowing the separate acquired businesses to
consolidate under one consistent umbrella whilst retaining a focus on local
customer delivery.
The Technology Solutions business received over $200m of further funding for
TALON® robots and spares. Over 800 TALON robots were shipped during the
year. The cumulative number of robots shipped is now over 2,000 units.
The Technology Solutions business was also awarded a $15.4m contract by the
Naval Research Laboratory, for research in the areas of ocean dynamics and
predictive oceanography.
The Systems Engineering business was awarded a $13.3m contract to provide
technical services, systems engineering and management expertise to the
Apache Attack Helicopter Project Manager’s Office for one year plus four
further option years.
The IT Services business was awarded a position (subject to resolution of
protests from other bidders) on the $50bn, ten-year, Alliant contract and
a second-term position on the $12bn Encore II contract. These umbrella
agreements provide significant opportunities for growth in the medium term.
The Mission Solutions business won a contract to provide a wide range of
environmental test and integration services (ETIS) to support projects at NASA’s
Goddard Space Flight Center. The contract is expected to yield $190m in total
revenue for the business over its five-year life.
Year-end headcount has increased to 5,699 (2007: 4,258) including 988 from
the acquisitions made in the year.
During April 2008, QNA realigned the resources of the IT Services business
into the existing Mission Solutions and Systems Engineering businesses. The
reorganisation provides increased reach and resources for new and improved
solutions, providing additional growth opportunities for the sector.
40%
£540m
Share of 2008 Group revenue
revenue increased
£182m
£540.2m
£358.2m
£248.4m
£70.1m
£0.3m
2008
2007
2006
2005
2004
Underlying operating profit
+56%
£62.1m
£39.9m
£24.5m
£8.0m
£(0.6)m
2008
2007
2006
2005
2004
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$42m
contract
QNA is providing support to C4i Acquisition engineering and
integration (CAei) in a $4.7m indefinite delivery/indefinite
quantity, cost-plus-fixed fee performance-based contract.
This contract is for a base year with four option periods and
three award term provisions, which if exercised, would bring
the cumulative value of the contract to an estimated $42m.
The CAei department provides integration of command,
control, communications, computers and intelligence (C4i)
systems for new ships and also the conversion of land
vehicles, ships, submarines and other systems used by
the US Navy and other services.
The contract includes support by QinetiQ in the following
areas: data systems engineering; iT support; project
monitoring and tracking, measurement and analysis;
quality assurance and risk management.
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Helping the US Navy manage contracts
The contract for land vehicles includes equipping of the
high-profile mine-resistant ambush-protected (MRAP) vehicle,
currently used for operations in Iraq and Afghanistan.
The Program Engineering Management Analysis (PEMA)
programme oversees four contracts supporting CAEI
at the Space and Naval Warfare System Center in
Charleston, USA.
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“Our team members are trusted advisors to CAEI, committed to improving performance and productivity. We support CAEI
with project monitoring by measurement and analysis at all levels to improve efficiencies and save costs. CAEI’s aim is to
ensure that their contracts are executed in the most efficient way – better than any other department in the US Navy.
QinetiQ’s operations in Charleston provide quality advice to manage CAEI’s interests effectively and with integrity, ultimately
making sure that CAEI achieves its goals over the next five to eight years.” Michael Henson, Programme Manager
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$100m
contract
QinetiQ has provided the US Army
with sample data collection and
analysis services since 1992. The
current re-compete contract,
worth $100m, provides continued
support to the US Army’s Sample
Data Collection programme.
“ From our base at Fort Hood in Texas,
we coordinate the data collection
activities of 28 locations worldwide,
encompassing three continents and
two war zones. Our main challenges
are time and distance.”
Maurice Squires, Weapons System Analyst
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Keeping track of US Army equipment
Under the contract, QNA continues to meet the challenge of
collecting data on all US Army equipment – ground combat
systems, tactical wheeled vehicles and aviation systems – from
across the US and all areas overseas in which the US Army has
a presence. QNA then provides the Army with timely and accurate
logistics data for comprehensive studies and analyses.
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“we carry out lifecycle tracking on all US Army equipment, from small arms, wheeled and tracked land vehicles, to aircraft –
mainly helicopters. we will take statistically valid samples of, say, a group of vehicles or other equipment; for instance, a
sample of 100 vehicles of the same model used in different locations worldwide. This enables us to show how the same model
of vehicle performs in different areas, under different conditions in different terrains, whether in the US or overseas.
we faced fierce competition in the bidding to retain this contract, but the Army is very happy with the service we provide.
we have experienced people and undertake quality work.” Ed Williams, Data Supervisory Monitor
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“We are proud to have been chosen
to design and deliver our add-on
armour for the C-5 transport fleet.
This contract will help protect
aircrew and allow them to operate
the aircraft in critical situations.”
Michael McCormack, Vice President, LAST® Armor
$16.3m
contract
Under a $16.3m contract from the US Air Force,
QNA is designing and delivering LAST® Armor
kits for C-5 aircraft. QNA’s LAST Armor
division is the largest approved supplier of
add-on armour for fixed-wing aircraft in the
United States.
LAST Armor is an add-on armour, attached to
vehicles without the need for welding or drilling
the base vehicle or aircraft. The aircraft armour
kits are tailored to defeat primarily small arms
fire and the installation can be performed in
the field by the crew.
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Helping protect aircraft for the US Air Force
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“in the past, QNA worked with the US Air Force to armour C-130 Hercules and C-17 Globemaster aircraft, so
LAST Armor is a proven system. we have already supported the US Air Force’s operational tours in iraq and
Afghanistan and have in place a spares and support network covering the entire US Air Force.
There are over 100 people in the team working on the programme, some with over 15 years’ experience of
working with LAST Armor. Their effort and dedication is vital in responding to the compelling need for the
US Air Force to armour the entire C-5 fleet.” Michael McCormack, vice President, LAST Armor
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Market review
US defence
The US defence market is by far the world’s largest
accessible market for QinetiQ. In the US Fiscal Year 2009
(year ending 30 September 2009) the US DoD budget
request rose 7.3% to $515bn (FY08: $480bn) continuing
the trend of strong growth seen in recent years. In
addition to the base budget there have been additional
supplemental requests in recent years which have
primarily been directed towards US ‘Global War on
Terror’ programmes primarily funding the campaigns
in Iraq and Afghanistan. In US Fiscal Year 2008, the
supplemental request totalled $189bn and in Fiscal Year
2009, while visibility has so far been limited to the first
of two expected supplemental requests which covered
$70bn of bridge funding, a further request is expected
later in 2008. Overall growth in the DoD budget is
expected to moderate from 2010 onwards; however
QinetiQ’s position in this market is directed towards
high-priority, critical focus areas and the increasing
trend to outsource means our available market is
growing faster than the overall budget. These factors
position QNA to continue to grow at a rate above the
headline growth in the budget.
Should there be a significant reduction in the scale
of current campaigns then the level of supplemental
budgets will more than likely decline, although
significant reset work to refresh US defence inventory is
likely to provide some mitigation against such change.
QinetiQ’s mix of business streams in QNA is such that it
has limited exposure to campaign-related expenditure.
Any impact on the levels of campaign funding is likely to
be mitigated by such reset work or the return of funding
to areas of government spending that had been under
pressure during the campaigns.
One area affected by the redirection of budgets is the
federal IT services market, which has been subject to
significant budget pressures. QinetiQ’s offerings in this
market are highly technical, built on a strong foundation
of excellent customer relationships and a strong cadre
of security-cleared employees ensuring that this
business is well placed within the more robust, high-end
sector of this market place. Were operations abroad to
be condensed, the markets for outsourced services, IT
and training could see budget pressures dissipate and
QinetiQ would be in a strong position to benefit from
the resultant increased funding.
The winner of the presidential elections in November
2008 will submit their first defence budget for US Fiscal
Year 2011, but will have significant influence over
spending before this. The most likely influence will be
over the level of supplemental funding predominantly in
relation to ongoing operations in Iraq and Afghanistan,
which on balance are broadly neutral for QNA.
Security and counter terrorism
In the US, there is increasing emphasis on homeland
security, intelligence and cyber-security and these are
key issues for all of the US Presidential candidates.
QinetiQ’s acquisition of ITS, 3H Technology and Pinnacle
CSI complement and broaden the existing security-
related services provided by the North American
operations and build on existing relationships within
the security and intelligence community.
Trend/forecast in US defence spending
US defence budget $ billions
800
700
600
500
400
300
200
100
0
2004
Budget
2005
2006
2007
2008
2009
Supplemental/expected supplemental
Source: US DoD Congressional Research Service, Congressional Budget
Office, Company estimates
Note: US fiscal years ended 30 September
Financials
Revenue
Technology Solutions
Systems Engineering
IT Services
Mission Solutions
Total
Underlying
operating profit
Underlying
operating margin
Orders
Technology Solutions
Systems Engineering
IT Services
Mission Solutions
Total
2008
£m
20071
£m
2008
$m
2007 1
$m
176.0
104.0
164.8
95.4
540.2
134.8
98.4
111.8
13.2
353.2
208.7
330.6
191.5
358.2 1,084.0
257.9
188.3
213.8
25.3
685.3
62.1
39.9
124.9
75.8
11.5%
11.1%
11.5%
11.1%
211.2
121.8
173.8
100.3
607.1
155.4
128.1
125.2
7.3
424.3
244.7
349.2
201.4
416.0 1,219.6
296.5
244.5
238.8
13.9
793.7
Book to bill ratio
Funded backlog
1.12:1
300.5
1.16:1
210.7
1.13:1
598.0
1.16:1
413.0
1 Prior year Technology Solutions and IT Services results have been
restated to reflect the transfer of part of the IT Services business
to the Technology Solutions business. The transferred business unit
reported turnover of £7.7m ($15.4m) in the prior period and orders
of £8.4m ($16.9m). Total QinetiQ North America results are
unchanged.
The Mission Solutions business was formed with the acquisition of
Analex Corporation in March 2007. Prior period Mission Solutions
and IT Services results have been restated to reflect the transfer of
an element of the IT Services business acquired with OSEC in 2007
to the Mission Solutions business.
Revenue increased by 51% to £540m. 2008 included first
time contributions of £55.3m from acquisitions made in
the year. The business delivered strong organic growth
of 17.5% on a constant-currency basis.
Underlying operating margin has improved 40 basis
points to 11.5% driven by strong product revenue,
principally from TALON® and LAST® Armor and an
unusually high level of TALON spares sales.
The book to bill ratio continues to be above the Group’s
medium-term target of 1.1:1 reflecting the business’
ability to grow at a rate above the overall level of growth
in US Government defence and security budgets.
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oCeANoGrAPHiC reSeArCH
TALoN® roBoTiC SySTeMS
QNA’s Technology Solutions business was awarded a $15m
contract by the Naval research Laboratory (NrL) for research
in the areas of ocean dynamics and prediction oceanography.
The research benefits the Navy’s capabilities for real-time ocean
monitoring and forecasting. it supports NrL’s oceanography
Division’s mission of planning and executing a broad-spectrum
research, development, test and evaluation programme.
Image: Naval Research Laboratory, Washington DC
Sales of TALoN robots and spares continued to grow throughout
the year with major orders from the robotic Systems Joint
Program office in the Naval Air warfare Training Systems
Division (NAvAir) and the Naval explosive ordnance Disposal
Technology Division (NAveoDTeCHDiv).
During the year, a new addition to the TALoN family was
introduced – the ‘transformer-like’ armed robotic platform
named Modular Advanced Armed robotic System (MAArS).
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organisations and develops products using the
intellectual property derived from such research.
Revenue grew by 31%. The business has experienced
strong organic growth (in constant currency) of 35% due
to continued high demand for TALON robots and spares,
and LAST® Armor products. In the year, the business
delivered $176.3m (2007: $111.6m) of TALON revenue
with new product shipments of 800 units contributing
$94.0m (2007: $66.0m). LAST Armor contributed $41.3m
to revenue in the year. The book to bill ratio for the
Technology Solutions business was 1.20:1 (2007: 1.15:1).
NASA
A five-year, $190m contract with NASA is using a simulated space
environment for the testing of spacecraft and payloads prior to
launching them into space. it is providing support to projects at
NASA’s Goddard Space Flight Center in Maryland, USA, including
structural and electromagnetic testing, engineering design and
analysis, and vibration and acoustic test support for advanced
space systems like the Hubble Space Telescope and the James
webb Space Telescope. The programme will help ensure that
all future spacecraft can endure the environmental hardships
of space travel.
Joseph Broadwater,
executive vice President,
Mission Solutions
In addition to the funded orders reflected in the table,
QNA has further forward visibility of income through
unfunded backlog of over $700m principally reflecting
business awarded to QinetiQ on multi-year contract
awards, where funding is released on an annual basis.
Further opportunities exist through QinetiQ’s position
on large IDIQ contracts such as the $400m IDIQ award
for TALON® and from GWAC vehicles such as the
$50bn Alliant (subject to resolution of protests from
other bidders) ETIS contract, $45bn EAGLE contract
and $12bn Encore II contract to provide IT Services to
US Government agencies.
Acquisitions
QNA made five acquisitions during the year,
strengthening its capabilities in robotics technologies,
IT programmes and mission critical services provided
to the US intelligence community.
The two largest acquisitions in the year were ITS
Corporation for £43.1m and 3H Technology LLC for
£26.2m. These acquisitions enhanced our IT Services
business.
The integration of the North American acquisitions
continues to progress well, with increasing recognition
of the QinetiQ brand, tangible evidence of bidding
synergies and integration cost savings funding business
development initiatives. The Group continues to see a
healthy pipeline of further acquisition opportunities in
North America, although vendor price expectations
remain high.
Technology Solutions
The Technology Solutions business provides high-end
technology research services and defence and security
related products to the US DoD, other government
agencies and commercial customers in North America.
The business conducts funded technology research and
development services for US defence and security
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Systems Engineering
The Systems Engineering business offers expertise in
independent support for the procurement, development,
modification and fielding of key military and missile
defence equipment to US Government agencies, of
which the US DoD is the prime customer. After excluding
£6.1m ($11.8m) of revenue generated from the Air
Filtration Systems business sold in February 2007,
organic growth in revenue was 18.2%. This has been
driven largely by increased demand for both logistics
services and software engineering work by the business
US Army customers.
The business won a five-year task order valued at
over $35m to provide technical publication services
to support the US Army Aviation & Missile Command.
The business was also awarded a $13.3m, five-year
contract (including options) to provide technical services,
systems engineering and management expertise to the
Apache Attack Helicopter Project Manager’s Office.
IT Services
The IT Services business provides solutions to a range of
US Government agencies, particularly the US DoD and
the DHS. Key offerings include enterprise architecture;
software development and systems integration;
network engineering and operations; and energy
and environmental engineering.
Despite US federal IT spending budget pressures with
funds diverted to ongoing operations in Iraq and
Afghanistan, the business achieved organic growth of
6.7% during the year. This reflects the focus of high-end
IT services for mission critical systems which are less
exposed to fluctuations in US federal IT spending.
The QNA position on the $45bn EAGLE and $12bn Encore II
contract vehicles provide the business with significant
opportunities for future growth. QNA was also awarded
a position on the $50bn, ten-year Alliant contract. The
Alliant contract vehicle is currently being protested by
unsuccessful bidders, but we are confident that QinetiQ
will remain as a participant when this protest is resolved.
Mission Solutions
The Mission Solutions business was established
following the acquisition of Analex Corporation in March
2007. The business has trusted experts in the fields of
information technology, mission assurance, system
design and programme security. Services are provided to
NASA and US intelligence agencies on both defence and
security applications. Mission Solutions focuses on high-
growth markets and is principally centred on providing
solutions in command, control, communications,
computers, intelligence, surveillance and reconnaissance
to support customers in meeting their mission-critical
needs. The business achieved organic growth in revenue
of 4.5%.
The Mission Solutions business was awarded a five-year,
$30m follow-on contract to provide support to the
Counterintelligence Field Activity (CIFA). The award
of this contract highlights the business’s trusted
relationships with CIFA as this contract follows an
earlier agreement awarded in December 2003.
reSeArCH AND TeCHNoLoGy ProTeCTioN
The Security and intelligence unit of QNA’s Mission Solutions
business was awarded a $35.8m, five-year firm fixed price
contract with the US Army to operate the Army research and
Technology Protection Center (ArTPC).
QNA is providing research and technology protection expertise
and support to research and engineering centres and acquisition
programmes throughout the US Army.
Image: ARTPC at Fort Monroe, VA
SPAwAr SUPPorT
The US department of Navy, Space and Naval warfare Systems
Command has awarded the Mission Solutions business a
five-year, $24m task order to supply systems engineering
technical support to include systems engineering technical
review process execution, technical studies and acquisition
documentation drafting.
eNGiNeeriNG AND AviATioN TeSTiNG ServiCeS
The US Army Aviation Technical Test Center awarded QNA a
five-year, $22m contract for engineering and aviation testing
services ranging from developmental testing of advanced
aircraft survivability systems to complex preliminary
airworthiness evaluations of the MH-60M Black Hawk helicopter
for the Army’s special operations forces. The contract is being
delivered by a 54-member team which includes flight test
engineers, instrumentation and electrical engineers, technicians,
structural engineers, human factors engineers, test coordinators
and special project officers.
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QinetiQ Group plc Annual report and Accounts 2008
Business review – QinetiQ eMeA
QinetiQ eMeA
Our EMEA business is built on a heritage of deep technical expertise at the
forefront of research in a wide field of technologies. Our position as a
trusted advisor to the MOD provides us with access to every major UK
military programme and enables expansion into other maturing defence
and security markets. The EMEA business was reorganised in April 2008,
and now focuses on Managed Services, technology-led Consulting,
Integrated Systems and Applied Technologies.
our principal markets and customers
Our primary markets are defence, security and energy & environment.
We serve the following principal customers:
Clive Richardson, Chief operating
officer, QinetiQ eMeA
UK Ministry of Defence (MOD)
US Department of Defense (DoD)
Australian Department of Defence
UK National Security Agencies
Other UK Government agencies
Achievements
Share of Group revenue
The reorganisation of the EMEA business into four offering-focused businesses
was completed with effect from 1 April 2008. Consolidation of multiple
existing business groups into the four sectors provided opportunity for
elimination of duplicate overheads. It is expected that the charge of £32.6m will
yield benefits of at least £12m per annum from the second half of 2008.
60%
£820m
Share of 2008 Group revenue
MOD confirmed that Package 1 of the Defence Training Rationalisation (DTR)
programme would progress with financial close now expected by the end of
2009. DTR is the largest incremental opportunity for the UK business.
A £951m firm price agreement in respect of the second five-year term of the
Long-Term Partnering Agreement (LTPA) from 1 April 2008 was signed during
March 2008.
Our Consulting business was part of Trusted Borders, the winning consortium
for the Home Office’s e-Borders programme, an order worth up to £33m
to QinetiQ.
The Managed Services business won several contracts worth up to £16m for
the modification work required to release eight heavy-lift Chinook helicopters
to service. We expect the first of the Chinooks will be operational in 2009.
revenue increased
£41m
£820.1m
£779.3m
£797.2m
£780.8m
£790.7m
2008
2007
2006
2005
2004
Underlying operating profit
The US Transportation Security Administration (TSA) purchased 12 SPO threat
detection systems from the Applied Technologies business as part of a package
of measures that will enhance security technology for travellers in the US.
+9.6%
The Integrated Systems business sold four Towed Array Handling Systems
(TAHS) to the Spanish Navy, utilising electronic drive technology that provides
a compact, robust and reliable solution, minimising the impact on other
inboard systems.
£80.0m
£73.0m
£73.7m
£67.2m
£62.6m
2008
2007
2006
2005
2004
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Delivering long-term partnerships
The Long-Term Partnering Agreement (LTPA) for test and evaluation and training
support services between QinetiQ and the Ministry of Defence (MoD) provides
significant and steadfast support for the MoD’s capabilities on the front line.
one of the largest contracts of its kind in the United Kingdom, the 25-year LTPA,
which includes four pricing reviews, is valued at £5.6bn to 2028.
over its second five-year term, the LTPA will provide services
to the MoD at a firm price of £951m.
£951m
second term agreement
The test and evaluation and training support services provided
under the LTPA covers air, maritime and land environments. it
includes MoD Boscombe Down, which is the primary national
centre for the provision of independent advice, research support,
development, and test and evaluation services to the MoD for
Air Systems. The site provides an integrated offering of complex
services and facilities that support capability improvement for
every current UK air platform in the defence area. The diverse and
numerous range of services provided throughout the UK by the
LTPA includes missile and air flight weapon testing, environmental
testing of explosives and munitions, ordnance disposal and
maritime operational signature measurement.
“The Long-Term Partnering Agreement is a contract for change. No one can predict what may happen in the military arena
in 20 years, so our job is to prepare for the unexpected challenges that will inevitably arise in the future. we have devoted
time to developing performance management systems and continuous improvement programmes which have achieved
enhanced quality systems, working practices, training programmes, safety regimes and a better understanding of the
MoD’s needs. working as a team with other divisions within QinetiQ, we have already delivered annual cost savings of
£22m to the MoD during the first five years of the LTPA.” Shaun Pethybridge, Head of Contract Negotiation Team
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Keeping UK borders safe
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e-Borders is an advanced border control and security
programme, for the UK Home office. The programme
is being delivered by Trusted Borders, the consortium
led by raytheon Systems Limited and including
QinetiQ. it will be implemented by 2011, when the
maintenance phase will commence, and will deliver
increased security at strategic border sites in the
UK – ports, harbours, stations and airports.
“i make sure that the team meets the Home office requirements for QinetiQ’s part of the programme in conformance
with regulatory and industry standards. our team’s responsibility is two-fold. we advise on the border security system
and its accreditation, including the documentation, making sure the iT is secure. we also provide human factors
consultancy and support. These are two of QinetiQ’s major strengths and contribute to the smooth functioning of the
system as a whole.” Luisa Godfrey, Practice Leader, Transport and Security
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Helping improve Sea King helicopter performance
Limited aircraft performance at higher altitudes
was preventing the Joint Helicopter Command
Sea King Mk 4 from being deployed in battlefield
operations. Modified main rotor blades,
manufactured by Carson Helicopters, a US-based
commercial operator, offered the potential to
address the shortfall in performance without
redesign of the helicopter.
£5.25m
contract
in response to an MoD Urgent operation requirement
(Uor), the Aircraft Test and evaluation Centre, a unique
collaboration between MoD and QinetiQ, put forward
a solution for the fitting and certification of modified
blades. The successful £5.25m, 12-month project was
delivered in partnership with Agustawestland, who
supplied a modified tail rotor, and has enabled increased
forward speeds of Sea King helicopters, with performance
gains of up to 20%. The result gives greater operational
flexibility and increased support by UK battlefield
helicopters to the multi-national task force in Afghanistan.
“A rigorous and intensive programme of performance evaluation and flight testing was carried out on a QinetiQ-owned
Sea King helicopter, which we needed to fully instrument to collect the data required. we designed, manufactured and
installed the instrumentation on the aircraft. The system was designed to allow on-board monitoring of all parameters
in real-time, enabling trials to be carried out safely and efficiently.” Charles Ford, Project Manager
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“We were able to complete the
testing in a short timeframe
which allowed Joint Helicopter
Command Sea King HC Mk 4
helicopters to be deployed in
action as quickly as possible and
provide the much needed added
capability to operations.”
Charles Ford, Project Manager
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Supporting the royal Air Force with front line operations
Converting and flight testing eight
Chinook helicopters for heavy-lift
front line duties as soon as possible is
the challenge facing the QinetiQ team
at MoD Boscombe Down. This major
modification programme involves
QinetiQ working with Boeing in a
deal worth approximately £11m.
During the course of the work, the aircraft
will be stripped, modified, reassembled
and tested. once converted, all eight
Chinooks will join the existing fleet of the
UK royal Air Force Chinook helicopters
supporting front line operations.
“My team provides the coordination of the whole supply chain involved in the conversion of eight Chinook Mk 3 helicopters
for heavy-lift front line duties. our responsibility is to control the supply of all the parts we need for the programme and
the development of the control-metrics to ensure we deliver the programme to schedule. The time scales are extremely
demanding. in our coordinating role, we are responsible for manufactured parts made at MoD Boscombe Down
and all government-furnished assets, as well as equipment supplied by Boeing and third-party suppliers. we ensure that
all equipment is available at the correct time, together with the supporting documentation. This is typical of the kind of
agile engineering work carried out by QinetiQ Flight engineering Services.” Peter Hoadley, Head of engineering,
Logistics and Support Services, Flight engineering Services
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Helping the Ministry of Defence prepare for airborne threats
Mission Training through Distributed
Simulation Capability Concept Demonstrator
(MTDS-CCD) provides a realistic virtual
synthetic training environment for training
aircrews. The facility comprises a mix of
immersive air and land ‘front line’ capabilities,
enabling participants to experience combat
conditions and allowing air crews to conduct
realistic exercises simultaneously with remote
sites. The principal aim of the programme is
to address key investigative areas, defined by
MoD, and provide recommendations to support
the requirements of a future ‘full’ MTDS.
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£7.8m
contract
The 30-month £7.8m programme is being
delivered by Team ACTive, the QinetiQ-led
consortium which includes Boeing as principal
partner, Aviation Training international Ltd
and rockwell Collins.
“i am a member of a team providing technical input for the MTDS-CCD programme. one aspect of the team’s responsibility
is to integrate all aspects of a synthetic environment – from flight simulators and exercise management to the briefings
delivered to the training audience – carried out over distributed networks to support a series of pre-planned events. The
continually evolving nature of the programme makes it exciting to be a part of.” Fraser Bruce, Systems and Software engineer
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DeFeNCe TrAiNiNG rATioNALiSATioN
SoLAr-PowereD SPACeCrAFT ProPULSioN
The Defence Training rationalisation (DTr) is a nationally
important programme for the delivery of specialist training to
the UK Armed Forces. in January 2007, the Metrix consortium,
a joint venture between QinetiQ and Land Securities Trillium,
was awarded Preferred Bidder status for Package 1 of the DTr.
Package 1 involves training in aeronautical and electro-
mechanical engineering, communications and information
systems. in March 2008, QinetiQ received a commitment from
the MoD to underwrite costs for a body of preparatory work in
advance of the contract award for Package 1, which is expected
in late 2009.
QinetiQ has developed an advanced spacecraft propulsion
technology that will enable the european Space Agency (eSA)
to propel future spacecraft using electrical energy from solar
arrays. The ion engine, which uses accelerated beams of xenon
ions to provide thrust, will be flown for the first time on the
eSA’s Gravity Field and Steady State ocean Circulation explorer
(GoCe) spacecraft, in a mission to measure and map the earth’s
gravity. The spacecraft is due for launch in the summer of 2008.
Market review
UK defence
The UK Government completed its Comprehensive
Spending Review in late 2007 and the MOD announced
that the defence budget would grow at an average 1.5%
per annum in real terms over the next three years. With
the Government committed to the current campaigns in
Afghanistan and Iraq as well as several significant new
platform programmes, such as the plans for new aircraft
carriers and replacing the nuclear deterrent capability,
MOD have confirmed budgets are under pressure. This
has resulted in uncertainty and delays in letting new
contracts more widely. However, the budget challenges
that this presents in the medium term are likely to
provide QinetiQ with opportunities for technology
insertion and consulting to enhance existing military
capabilities and extend their life span, and to facilitate
the affordability of these larger programmes over a
longer timeframe.
The MOD continues to utilise outsourcing, partnering
and managed services arrangements to deliver improved
defence services in support of the front line. The success
of the Long-Term Partnering Agreement (LTPA) between
QinetiQ and MOD positions QinetiQ well for future
managed service operations as they arise. Our success
in achieving preferred bidder status for Package 1 of
the Defence Training Rationalisation (DTR) programme
highlights QinetiQ’s position as a trusted advisor to key
customers. Across other areas of technical support,
procurement advice and efficiency programmes, the
MOD continues to increase its use of flexible third-party
service providers to balance the cost and improved front
line delivery challenges it faces.
The MOD is keen to combine its own technology
strategy with those within industry with the aim of
producing a joint national strategy. MOD has been
seeking to do this through the Technology Foresight
programme to identify areas in which technological
excellence might best be concentrated and developed.
QinetiQ’s extensive network within universities and
SMEs positions the Group well to meet the MOD’s desire
to draw knowledge and technology from a wider science
base in delivering research programmes.
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Energy & environment
The level of concern about the impact of the global
economy on the levels of energy usage and on climate
change is at an all-time high. At a governmental
level, there are an increasing number of international
harmonisation agreements being established. At a
business level, there is a greater awareness and focus
on tackling the increasing environmental and economic
costs of effectively using scarce natural resources.
Funding has historically been fragmented in these areas,
however there is now an improving level of clarity in
national budgets and it is estimated that climate change,
environment & energy and resource efficiency budgets
available from EU and US Governments are in the region
of £3bn. Responding to these opportunities, QinetiQ’s
technical expertise focuses on areas such as primary
energy supply solutions, through our work on fuel cells
and gas turbines, renewable energy expertise, low-
carbon transport technologies and environmental
impact management.
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Australian defence
The Australian defence budget is set to grow in real
terms at an average of 3% per annum until 2015 as
originally outlined in the 2000 Defence White Paper.
The new Australian Government reiterated its
commitment to this level of growth in the Defence
Capability Plan 2006-2016. The market structure and
dynamics in Australia are similar to those in the UK and
QinetiQ already has a good working relationship with
the Australian Department of Defence. In February
2008, QinetiQ made its first three acquisitions in
Australia establishing an in-country presence focused
on the provision of independent technical consulting to
the Australian Department of Defence. This business
will be able to enhance its offerings into the Australian
market by leveraging the broader and deeper technical
consulting and advisory capabilities from our UK and
North American businesses.
Other defence markets
QinetiQ provides services across other international
defence markets, principally from its UK operational
base. As these markets continue to mature, they become
more focused on procuring bespoke technology solutions
and ensuring that they retain the ability to manage the
development path through the life of a platform or
capability. The technical consulting support services,
innovative performance enhancements and test and
evaluation services offered by QinetiQ are becoming
increasingly relevant to such customers in selective
Asia Pacific, Scandinavian and Middle Eastern markets.
Security and counter terrorism
Governments across the world continue to increase their
spending on homeland security, intelligence and counter-
terrorism in response to the emergence of new, rapidly-
evolving local and global threats. There is a growing
focus on heightened security in public spaces such as
large events and public transport. There is also a large
commercial market, in particular for information security.
It is likely that a significant proportion of this demand will
be satisfied through the effective use of high-technology
solutions and intelligence services such as QinetiQ’s
stand-off people scanning technology which is being
used in mass transit screening applications by the
Transportation Security Administration in North America.
The first National Security Strategy for the UK was
released in March 2008, setting out the nature of new
security challenges and how the UK Government will
respond. Funding for counter-terrorism is set to increase
to £3.5bn by 2010/11, with the Government continuing
to invest in order to strengthen security and build
capacity. QinetiQ is well placed within this community
through its existing relationships with national security
agencies and police forces to provide services, as
evidenced by the award of a substantial contract under
the Home Office’s e-Borders programme in the year.
TorNADo F3 For BvrAAM
QinetiQ secured a £5.1m contract from the MoD to use the
Tornado F3 as the test platform on which to support trials for
the Beyond visual range Air-Air Missile (BvrAAM – Meteor).
The programme of work offers the MoD a low-risk and
cost-effective alternative option to Typhoon in the Meteor
trials while protecting other issues such as agreed work shares
with the five other european nations involved: Sweden, Spain,
Germany, italy and France.
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Trend in UK defence spending
UK defence budget £ billions
40
35
30
25
20
15
10
5
0
2004
Budget
2005
2006
2007
2008
Supplement
Source: UK MOD
Note: UK fiscal years ended 31 March
Financials
Revenue
Managed Services
Consulting
Integrated Systems
Applied Technologies
Total
Underlying operating profit
Underlying operating margin
Orders
Managed Services
Consulting
Integrated Systems
Applied Technologies
Total
Book to bill ratio
Funded backlog 1
2008
£m
2007
£m
370.7
105.4
268.2
75.8
820.1
336.2
97.5
270.7
74.9
779.3
80.0
9.8%
73.0
9.4%
195.5
121.2
264.9
80.9
662.5
301.8
117.2
288.6
76.1
783.7
1.05:1
640.8
1.29:1
632.6
1 Excluding remaining £4.7bn (2007: £4.8bn, 2006: £5.0bn) backlog in
respect of the LTPA contract.
Revenue increased by 5.2% in EMEA (2007: 2.2% decline),
with organic growth of 4.5%. The Managed Services and
Consulting businesses in particular have strengthened
their position, delivering revenue from the Combined
Aerial Target System (CATS) and Typhoon contracts
won in 2007.
Underlying operating profit improved by 40 basis
points to 9.8% reflecting the benefits of improved
revenue growth and ongoing programmes to improve
business efficiency.
Funded backlog, including the remainder of the LTPA,
amounted to £5.3bn at the year end (2007: £5.3bn).
EMEA reorganisation and portfolio review
The EMEA sector was reorganised during the year
and, with effect from 1 April 2008, operates through
four offering-based businesses; Managed Services,
Consulting, Integrated Systems and Applied
Technologies. The analysis of 2007 and 2008 orders
and revenue is reported in line with the new sectors.
The principal movements are in the reallocation of the
MOD Research and Security & Dual Use businesses
which largely move to Integrated Systems and Applied
Technologies respectively. Additionally, tasking orders
and certain other accreditation services move from
Procurement & Capability Support to Managed Services.
The reorganisation provided the opportunity to
consolidate business groups into the four new sectors,
eliminating duplicate overhead roles. An investment
of £32.6m in rationalisation is now expected to yield
sustainable annual benefits of at least £12m per annum
from the second half of calendar 2008.
A portfolio review of the EMEA sector is under way to
identify any non-core activities. The review may lead to
further strategic partnering, IP licensing, new venture
creation or exit from certain non-core activities.
Managed Services
The Managed Services business provides long-term,
technology-rich outsourced services to Government
customers and independent accreditation services.
The business focuses on transformational opportunities
through the deployment of QinetiQ’s broad and
distinctive technical capabilities.
Revenue growth of 10% in Managed Services reflects
the strong order flow in both 2007 and 2008 and £9m
of additional LTPA revenue on closing out the first
five-year pricing period.
The 25-year LTPA established QinetiQ as a trusted advisor
to MOD. It provides a platform for further growth
and positions QinetiQ as a technology independent
accreditation services supplier to government and prime
manufacturer organisations. Our composite average
performance scoring during the first five-year period
of the LTPA to 31 March 2008 was 92.6% against a
minimum target of 80%, with a score of 95.1% last year.
The pricing negotiations for the second five-year period
that commenced on 1 April 2008 set the price and
confirmed the capabilities required by the customer
for this period.
The single largest incremental growth opportunity for
Managed Services is Package 1 of the UK MOD Defence
Training Rationalisation (DTR) programme. Pre-contract
funding was confirmed in April 2008, which will support
detailed planning for the contract. During the year,
£7.1m of bid costs were capitalised with respect to the
Group’s preferred bidder status, which is lower than the
expected spend due principally to the timing of due
diligence work streams. Up to £15m of costs are
expected to be capitalised during the next 12 months
as the contract progresses through to financial close
expected by the end of 2009.
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ZePHyr® UNMANNeD Air veHiCLe
over-rooFiNG STrUCTUre TeSTiNG
An ultra-lightweight carbon fibre aircraft, weighing just 30kg,
despite a wingspan of 18 metres, the Zephyr Unmanned Air
vehicle (UAv) flies on solar power. The aircraft uses a bespoke
autopilot system to navigate between way points.
Zephyr secured a place in the history of UAv development
by establishing the British record for the longest duration
unmanned flight. The high-altitude long-endurance (HALe)
aircraft achieved a 54-hour flight, reaching an altitude of
58,370 feet in July 2007.
UK military forces currently experience mortar and rocket
attacks on a daily basis in camps across both iraq and
Afghanistan. QinetiQ conducted a series of trials during 2007
to establish design data for protective structures capable of
resisting the blast, fragmentation and ballistic penetrative
capabilities of dynamically fired rockets and mortars. The trial
series was a success and the advice provided to MoD has
contributed to the improved protection of UK forces.
Image: Test munition
Consulting
Consulting provides technical advice as a result of
harnessing our unique and distinctive combination of
technical and process insight, innovation and integrity.
The business delivers decision and project support
for both civil and defence customers, reducing risk,
increasing programme coherence and providing cost-
modelling services. Areas of expertise include security,
transportation, aerospace, energy, environment
and safety.
Revenue increased by 8.1% to £105.4m, of which organic
growth was 5.6%. The book to bill ratio of 1.15:1
supports the growth objectives for the business.
The Consulting business was part of the winning
consortium for the Home Office’s e-Borders programme,
an order worth up to £33m. It is well positioned to target
a pipeline of larger opportunities, similar to the e-Borders
programme, and benefit from greater outsourcing by
defence ministries across the EMEA region.
In line with QinetiQ’s strategy to build valuable new
market positions outside the UK, the Group made its
first three acquisitions in Australia in February 2008.
The Australian defence market is similar to that in the
UK and the budget of A$22bn (£10bn) is set to grow at
3% per annum in real terms to 2015. The acquisitions of
Ball Solutions Group, Novare Group and AeroStructures
Group, with collectively 300 employees, provide the
opportunity to build on existing relationships that
QinetiQ has developed with the Australian Department
of Defence.
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Integrated Systems
The Integrated Systems business focuses on delivering
leading-edge technology capabilities into the air, land
and sea arenas, primarily to defence customers. This
business specialises in underwater systems, maritime
platform systems, ground systems, sonar systems,
intelligence solutions, distributed training and
simulation, integrated airborne surveillance and space
technologies. Its strategy is to grow through the pull-
through of research technology into the supply chain,
which will be achieved both by leading consortia on
research and development programmes and by acting
as the technical authority or system integrator in the
implementation of solutions in the defence supply chain.
Revenue and order intake remained relatively flat in year
at £268.2m and £264.9m respectively. Growth in the
Integrated Systems business was held back by the well-
publicised budget pressures at the MOD following the
UK Government Comprehensive Spending Review, which
has significantly delayed the letting of new supply
contracts, as well as by the expected decline in MOD
research revenue.
The Integrated Systems business conducts a significant
amount of the total customer-funded research and
development activities within EMEA. QinetiQ continues
to retain its position as the leading independent provider
of research services to MOD. The 3.3% decline in MOD
research across the Group was lower than expected
despite the further opening of the MOD research budget
to competition. Total MOD research revenue across
the EMEA business was £166.7m (2007: £172.4m).
The success in maintaining research revenue reflects
QinetiQ’s deep understanding of its customers’ needs
allied to the increased partnering with internationally
recognised experts within universities and industry.
The MOD research budget available to industry is fully
open to competition with effect from 1 April 2008
(2007: 83%).
Applied Technologies
The Applied Technologies business addresses
opportunities in the core defence market together
with growing physical security, digital security and
energy & environment sectors. The repeatable
technology propositions it develops principally derive
from customer-funded research and development
programmes.
Total revenue increased by £0.9m to £75.8m during
the year, reflecting the part-year benefit of the Boldon
James acquisition. Boldon James is a provider of secure
messaging software for military, government and
security customers worldwide, enhancing QinetiQ’s
portfolio of security-based products, broadening the
customer base and providing additional routes to market.
The Applied Technologies business developed the SPO
stand-off threat detection system, a passive device
capable of identifying potential concealed threats
located on individuals from distance, without requiring
people to slow their pace or pass through a physical
portal. A number of units were sold by our North
American business to the US Transportation Security
Administration (TSA) as part of a package of measures
under an indefinite delivery/indefinite quantity (IDIQ)
contract that allows for additional purchases over the
next two years.
industry leader
CoNNeX™
weLL PerForATioN
in a concentrated three-year joint effort, Shell international
e&P, QinetiQ and GeoDynamics have succeeded in
developing a breakthrough perforating technology called
reActiveTM Perforating that has the potential to substantially
improve hydrocarbon recovery by producing clean, debris-free
perforating tunnels. This is achieved by applying a revolutionary
concept created and patented by QinetiQ, utilising a new shaped
charge liner technology that creates a beneficial secondary
reaction upon detonation. This novel well perforation solution
started as a Shell GameChanger project and is now marketed by
GeoDynamics as CoNNeXTM Perforating. (reActiveTM and
CoNNeXTM are trademarks of GeoDynamics, inc.)
Image: Comparative penetration tests
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QinetiQ ventures
QinetiQ Ventures is responsible for realising value from QinetiQ
technology outside our core markets. Value is created through the
development of new revenue streams, the creation of spin-out
businesses and the sale or licensing of intellectual property.
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Achievements
The Tarsier® runway foreign object detection (FOD) system was designed to
monitor operating runways and provide real-time information in support of
improving safety standards and aircraft throughput at airports across the
world. A supplemental camera system has been developed during the year to
provide day and night visual capabilities alongside the radar detection and
imaging. Operational highlights from Tarsier include:
n
n
n
n
n
Landmark order from BAA for an installation of four units covering both
runways at London Heathrow Airport
Radar installation at Dubai airport now ready to go live
Order from Doha International Airport for radar units secured
Order from Vancouver International Airport for camera units secured
Ongoing successful trials at TF Green Airport in Warwick, Rhode Island on
behalf of the Federal Aviation Administration (FAA).
In August 2007, QinetiQ created, with Coller Capital, a new Technology Venture
Fund to accelerate the development and value realisation of seven of its
venture investments. Both QinetiQ and Coller Capital have committed to
provide funding up to £20m each over the initial five-year life of the fund.
Clive Richardson, Chairman,
QinetiQ ventures
our strategy
QinetiQ ventures strategy is to
deliver incremental value from
intellectual property developed
through the funded research &
development and other core
operations of the Group.
The business exploits QinetiQ
intellectual property (iP) in
sectors adjacent to our core
defence and security technology
markets.
value is optimised for each
venture through a number of
routes including organic growth,
partnering with third parties,
iP licensing and business
realisations.
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Monitoring and tracking valuable assets
one of the seven companies in the QinetiQ
ventures LP fund, omni-iD was granted
its first patent in August 2007. Further
patents are pending.
Historically, radio Frequency identification (rFiD) tags could not be used with
items or products which had any metallic or liquid component. Now, after two
years’ research, omni-iD™ has overcome this problem with a major breakthrough
in rFiD technology. The result is the omni-iD (passive UHF) rFiD tag, which can be
used to track and identify assets no matter what material they are made from.
This has enabled the use of rFiD in applications such as the tracking of high-value
iT assets where the presence of metals has historically prevented rFiD being used.
“My role is to oversee and improve the development of our rFiD tag technology. with data security and iT asset
management becoming ever more important, omni-iD™ tags are set to play a key role in enabling more streamlined
business processes and greatly reduced iT infrastructure costs. Unlike conventional rFiD tags, ours are immune to the
detrimental effects of metals and liquids and have a small form factor: our smallest tag, the omni-iD Prox™ has a
footprint half that of a postage stamp and is only 3mm thick. our tags have enabled rFiD to be used where previously it
couldn’t be, so now everything can have an omni-iD tag instead of a barcode, which represents a significant potential
market for our products.” James Brown, Technical Manager, omni-iD
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improving airport operations
Developed to meet the challenge of foreign
object debris (FoD) on airport runways, the
QinetiQ Tarsier® runway debris detection
system solves an age-old problem which
threatens safety and costs airlines and airport
authorities around £4bn a year worldwide.
while current FoD detection and removal
methods involve scheduled visual runway
inspections, typically every few hours, the
Tarsier radar system scans a runway once
every minute, throughout the day and night.
installed by QinetiQ for BAA at London
Heathrow Airport, the system is assisting
operational teams by ensuring that FoD is
quickly detected and removed, thereby easing
congestion by minimising flight disruptions
and delays.
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“BAA was an early adopter of the technology
and needed to know that it was fit for the
proposed task. My role was to support and
work with BAA to help them understand
how the system would benefit them, both
operationally and in terms of safety. As
the system helps avoid flight disruptions
and passenger delays caused by FOD, it is
of benefit to the airlines and the airport.”
Andy Blay, BAA Account Manager
“Tarsier is a world first, no other automatic FoD detection system of any kind is deployed and integrated into an airport’s
operations. My job at Heathrow was to put the Tarsier system into operation, including the management of the physical
installation and its components, from the iT infrastructure, concrete foundations and steel tower to the innovative
electronics and software. our challenge was to demonstrate the capability of the system at Heathrow and to work with
them to develop appropriate operational procedures.” Andy Wicks, Project Lead
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SCieMUS
STiNGrAy GeoPHySiCAL LTD
The space sector was Sciemus’ entry point into the insurance
market when it was established in 2002, providing advanced risk
modelling and quantification. QinetiQ, which holds a minority
stake in the company, contributes with its proprietary
intelligence and mathematical modelling capability.
Listening with light® Fosar® is a passive fibre optic seismic
monitoring system which can be deployed permanently on
the seabed to provide high-quality time-lapse images of oil and
gas reservoirs. This data can be used to help oil companies to
increase the amount of oil and gas extracted.
in partnership with Liberty Syndicates, the LibSat consortium
was formed, which is now the largest satellite insurance
provider in the world. Sciemus has three further models in
the pipeline, developed in partnership with QinetiQ: Power
Station risk, Property risk and Cyber risk.
During 2007, Stingray Geophysical Ltd continued the
development and testing of its Fosar system, based on
technology licensed from QinetiQ. it was awarded grants
totalling almost £2.5m from the UK’s Technology Strategy
Board and Norway’s Demo 2000 programme.
Stingray became part of the QinetiQ ventures LP fund in
August 2007.
Operations
The QinetiQ Ventures LP fund has made good progress
during the short period since its creation in August
2007. The ZBD zero power, shelf-edge, labelling display
business announced further trials with Tesco in March
2008. Omni-ID won the ‘Best in show’ award at the RFID
Journal’s 2008 showcase exhibition which provided
exposure to a number of potential customers.
Ventures transferred into the QinetiQ Ventures LP
fund include:
ownership
at the point of
Name
contribution Activity
Intrinsiq Materials Ltd
100%
Test and production
Omni-ID Ltd
Quintel Technology Ltd
Aurix Ltd
ZBD Displays Ltd
Stingray Geophysical Ltd
Metalysis Ltd
of nanomaterials
100%
Low cost RFID tagging
50% 3G mast sharing
antennas
88% Audio data mining
31.6% Zero power LCD
displays for retailers
19.9% Geophysical survey
technologies
Low cost production
16.3%
of metal powder
Financials
Revenue
Operating loss
Orders
Funded backlog
2008
£m
5.7
(15.1)
7.5
6.4
2007
£m
12.0
(6.9)
14.3
7.6
The reduction in reported orders, revenue and backlog
in 2008 reflects the transfer of businesses previously
consolidated into the QinetiQ Venture fund, which is
now equity accounted, and certain one-off licence
revenue booked in the prior year.
Operating losses, which include the Group’s share of the
QinetiQ Venture fund, increased to £15.1m for the year
reflecting the planned increased level of QinetiQ revenue
investment in the Ventures portfolio.
£3.3m of cash funding was contributed to the QinetiQ
Venture fund to accelerate development of the fund’s
portfolio companies.
Sciemus, the insurance risk assessment specialist, in
which the Group holds a 10.7% interest, completed an
external funding round in which the Group participated,
allowing an increase in fair value of £3.2m to be
recognised through equity.
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QinetiQ Group plc Annual report and Accounts 2008
Business review – other Group financial information
other Group financial information
Cash flow
Group cash inflow from operations before investing
activities was £138.3m (2007: £107.0m). The Group had
an underlying operating cash conversion of 77%, in line
with the Group target of 80% over the medium term,
compared to 56% in the prior year. The benefit of
approximately £20m cash collection from high levels
of MOD debtors during the first few weeks of the year
was offset by investment in product-related working
capital and pre-contract costs relating to the DTR bid.
Investment in acquisitions in the year totalled £106.7m
(2007: £137.2m) as set out in note 13 to the financial
statements.
The Group paid £17.7m in US corporation tax in the year,
£5.9m of which relates to the prior-year disposal of AFS.
In the UK, no cash tax was paid due to the availability
of deductions for research and development relief and
additional pension contributions made in previous years.
Going forward, this cash tax profile is expected to
continue for the next two to three years.
Dividend payments of £24.9m were made in the year
comprising the final dividend of £16.2m for the year
ended 31 March 2007 (paid in August 2007) and an
interim dividend of £8.7m (paid in February 2008).
During the period, the Company has provided £12.8m
of funding to the trustees of its employee share scheme
trusts to facilitate the purchase of shares in the
Company to hedge outstanding share options and other
share-based awards that have been made since IPO. The
trusts acquired 7.3m shares at an average price of 175p.
As part of the EMEA reorganisation programme to
re-position the business in the year to 31 March 2008,
there was a cash outflow of £5.6m. A further outflow
of £27.0m is expected in the first half of the year to
31 March 2009 when the programme completes.
Net debt and liquidity
At 31 March 2008, net debt was £379.9m, an increase
of £79.1m on the prior year. 91% of the Group’s debt
is denominated in dollars. The ratio of net debt to
pro-forma EBITDA was 2.27:1 (2007: 2.11:1). The increase
in net debt reflects investment in acquisitions.
As at 31 March 2008, £233.3m of additional borrowing
capacity was available to the Group, representing the
unutilised element of the principal revolving credit
facility. In August 2007, the Group exercised its second
and final option to extend the duration of this facility
by a further year to August 2012 and also negotiated
a number of beneficial changes to its terms, including
a lower margin on amounts drawn under the facility.
The Group operated comfortably within its banking
covenants during the year.
Facilities and borrowings maturity profile
800
700
600
500
400
300
200
100
0
2008
2009
2010
Utilised facility
2012
2011
Total facility
2013
2014
2015
2016
Capital expenditure and fixed asset disposals
Purchase of property, plant and equipment and
intangible assets totalled £43.6m (2007: £46.9m),
including £13.7m (2007: £16.9m) in relation to assets
funded as part of the LTPA contract.
QinetiQ received £14.9m of net proceeds from the
disposal of surplus property at Bedford which completed
at the end of March 2007.
Pensions
The Group provides both defined contribution and
defined benefit pension arrangements. The principal
defined benefit scheme is the QinetiQ Pension Scheme.
New entrants to QinetiQ in EMEA join the Defined
Contribution section of the QinetiQ Pension Scheme.
Pension benefits in QNA are provided on a defined
contribution basis through 401k plans.
A consolidated summary of the position of the defined
benefit schemes is shown below:
Schemes’ assets
Schemes’ liabilities
Schemes’ deficit before deferred tax
Deferred tax asset
Net pension liability
2008
£m
784.2
(807.6)
(23.4)
6.5
(16.9)
2007
£m
794.1
(884.9)
(90.8)
27.1
(63.7)
The £46.8m reduction in net pension liability in the year
is primarily driven by an increase in the discount rate.
The higher discount rate reflects current volatility in
global equity and debt markets and consequent wider
spreads in the AA bond yields mandated for accounting
purposes. This is partially offset by increases in inflation
rate and mortality assumptions used to value the
scheme liabilities. The net pension liability, based on a
notional discount rate of 5.6% reflecting average credit
spreads over the past nine years, would be closer to
£220m, assuming all other factors influencing the
scheme valuation remain unchanged.
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The key assumptions used in the IAS 19 valuation are:
Assumption
Discount rate
Inflation
Salary increase
Mortality male*
Mortality female*
31 March 31 March
2007
2008
6.6%
3.5%
5.0%
88
91
5.4%
3.1%
4.6%
86
89
*Future pensioner (currently aged 40)
Each assumption is selected by management in
consultation with the Company actuary and taking
account of the industry practice amongst comparator
listed companies. During the year, the Group adjusted
its mortality assumptions from the short cohort to
medium cohort basis. The sensitivity of each of these
key assumptions is shown in the table below and this
illustrates how a small change in each assumption can
have a material effect on the magnitude of the IAS 19
calculated deficit.
Assumption
Discount rate
Change in
assumption
indicative effect on
scheme liabilities
Increase/decrease
by 0.1%
Decrease/increase by
£21m
Inflation and
salary increase
Increase/decrease
by 0.1 %
Increase/decrease by
£19m
Life expectancy
Increase by 1 year
Increase by £16m
The current investment policy of the QinetiQ Pension
Scheme, as determined by the trustees in consultation
with QinetiQ, is weighted towards equity investments.
The trustees believe this is appropriate at the current
time due to the relative youth of the scheme, which is
expected to be cash flow positive for approximately the
next eight years.
The funding of the defined benefit schemes is decided
by the Group in conjunction with the trustees of the
schemes and the advice of external actuaries. The next
full actuarial valuation of the QinetiQ Pension Scheme is
due to be undertaken in June 2009 and will be the first
valuation under the new regulations for scheme-specific
funding of defined benefit schemes.
During the year, the net pension cost charged to
the income statement, before curtailments, for the
defined benefit scheme was £30.5m (2007: £41.6m).
Contributions to defined contribution pension schemes
amounted to £14.6m (2007: £13.4m).
During the year, the Group announced its intention to
change the terms of the defined benefit section of
the pension scheme from June 2008. Key changes
include raising the normal pension age from 60 to 65,
supplemented by a range of options that allow the
employee to maintain future benefit accrual at rates
similar to their current levels, based on a higher rate of
employee contribution, or to retain current employee
contribution levels by accepting a reduction in the rate
of future benefit accrual. The changes will not affect
past service obligations and the Group is not making any
additional cash funding to the scheme as part of these
arrangements. Future cost increases driven by changes
to actuarial assumptions such as mortality rates will be
dealt with through a risk-sharing agreement between
the Company and its employees.
The pension charge for the year to March 2009 is
expected to be lower than the current year due to the
changes in the terms of the defined benefit pension
schemes, based on the assumptions prevailing at the
year end. The Group’s cash funding of the QinetiQ
Pension Scheme will remain unchanged at 17.5% of
pensionable salaries.
Research & development
Research & development (R&D) is a significant
focus for the Group with the majority of R&D-related
expenditure incurred on behalf of customers as part
of specific funded research contracts. R&D costs are
included in the relevant income statement cost category
and R&D income is reflected within revenue. In the
financial year, the Group recorded £560.6m (2007:
£520.1m) of total R&D related expenditure, of which
£547.8m was customer funded work (2007: £511.1m).
In the year to 31 March 2008, £12.8m (2007: £9.0m)
of internally-funded R&D was charged to the income
statement. £1.4m (2007: £3.2m) of late stage
development costs were capitalised and £1.5m (2007:
£1.5m) of capitalised development costs were amortised
in the year.
Treasury risks
The Group Treasury department works within a
framework of policies and procedures approved
by the Audit Committee. As part of these policies
and procedures, there is a strict control on the use
of financial instruments and speculative trading in
financial instruments is not permitted.
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Interest rate risk management
At 31 March 2008, 66% (31 March 2007: 80%) of the
Group’s borrowings are fixed or capped through a
combination of interest rate swaps, collars and fixed
rate debt.
Foreign exchange risk management
The principal exchange rate affecting the Group was the
sterling to US dollar exchange rate.
£/US$ – average
£/US$ – closing rate
£/US$ – opening rate
2008
2.01
1.99
1.96
2007
1.92
1.96
1.73
The Group’s income and expenditure is largely settled
in the functional currency of the relevant Group entity,
mainly sterling or US dollar. The Group has a policy in
place to hedge all material transaction exposure at the
point of commitment to the underlying transaction.
Uncommitted future transactions are not routinely
hedged by the Group. The Group continues its practice
of not hedging income statement translation exposure.
A one cent movement in the average exchange rate
for the year has approximately £3m of turnover and
£0.3m of operating profit impact on the translation
of the QNA results.
Tax risk management
The central principle of QinetiQ’s tax strategy is to
manage effective and cash tax rates whilst fully
complying with relevant legislation. Tax is managed in
alignment with the corporate strategy and with regard
to QinetiQ’s core value of integrity in all business
dealings. These principles are applied in a responsible
and transparent manner in pursuing the Group’s tax
strategy and in all dealings with tax authorities around
the world.
Credit risk
Credit risk arises when a counterparty fails to perform
its obligations. The Group is exposed to credit risk on
financial instruments such as liquid assets, derivative
assets and trade receivables. Credit risk is managed
by investing liquid assets and acquiring derivatives
from high-credit quality financial institutions. Trade
receivables are subject to credit limits, control and
approval procedures across the Group. The nature of
the Group’s operations leads to concentrations of credit
risk on its trade receivables. The majority of the Group’s
credit risk is with the UK and US Governments and
is therefore considered minimal.
Insurance
The Group continually assesses the balance of risk arising
from the operations undertaken against the insurance
cover available for such activities and associated
premiums payable for such cover. A consistent approach
to risk retention and scope of cover is applied across the
Group. The Group has a policy of self-insurance through
its captive insurance company on the first layer of
specific risks with insurance cover above these levels
placed in the external market with third-party insurers.
Employees
At 31 March
QNA
EMEA
Ventures
Corporate
Group
2008
2007
5,699
8,209
77
80
14,065
4,258
8,231
82
210
12,781
As at 31 March 2008, the Group employed 14,065
people, a rise of 10% on the prior year. In EMEA, the
net decrease in the UK employee base through normal
in-year attrition and departures under the restructuring
programme was offset by the acquisitions in Australia
and of Boldon James in the UK. The acquisitions in North
America increased staff numbers by 988. Reorganisation
of the EMEA business is expected to result in a reduction
of up to 320 positions, as a result of which 51 employees
had left at 31 March 2008.
Accounting standards
There have been no significant changes to financial
reporting standards in the year and no impact on Group
profit for the year. The Group has implemented the
enhanced disclosures as required by IFRS 7 Financial
Instruments for the first time this year. As required by
IFRS 3 Business Combinations, the formal valuation of
goodwill and intangibles relating to acquisitions made in
the prior year was completed in the year and is reflected
in a restated balance sheet. The adjustments were not
significant and did not affect profit or net assets.
Critical accounting estimates and judgements in
applying accounting policies
A description and consideration of the critical accounting
estimates and judgements made in preparing these
financial statements is set out in note 1 to the Group
financial statements.
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Business review – Management of principal risks and uncertainties
Management of principal risks and uncertainties
The Group operates on an international basis with its
primary activities derived from the UK and US defence
markets. As such, the Group’s operations are exposed
to a number of risks and uncertainties which could have
an impact on the Group’s future performance and
cause actual results to differ materially from historic
and expected performance. The principal risks and
uncertainties are described below, together with
management’s view on how these are assessed,
managed and mitigated to minimise their potential
impact on the reported performance of the Group.
There are high levels of competition in the markets in
which the Group operates
The defence and security markets are highly competitive.
The Group places great importance on the capabilities
of its employees and their track record for delivering
innovative solutions to complex customer requirements.
QinetiQ’s expertise and capabilities provide a compelling
proposition for customers, which is a significant
advantage for the Group in competitive bidding.
QinetiQ’s long-standing relationships with its customers,
coupled with the investment made to sustain and
enhance its offerings, provides QinetiQ with a deep
understanding of its customers’ needs and how to
respond to them. QinetiQ North America has improved
its competitive position by gaining access to a number
of Government Wide Acquisition Contracts (GWACs).
US Government spending on certain activities is
restricted to businesses which have been awarded a
position to supply their services under such GWACs.
The Group is dependent on governmental defence and
security spending levels
A reduction in UK and US Government defence and
security spending could adversely impact the Group.
Current UK and US defence and security spending
forecasts do not indicate budget reductions but the
focus of spending within the budgets will change to
meet emerging needs. The asymmetric nature of modern
warfare and current high threat level from terrorism
have resulted in increasing expenditure on capabilities
that QinetiQ offers. QinetiQ is positioned in important
focus areas of defence and security spending in
accordance with the MOD Defence Industrial Strategy,
MOD Defence Technology Strategy and DoD Quadrennial
Defense Review. The Group will continue to review
trends in defence and security expenditure in order to
align the business with those trends. QinetiQ’s broad
reach across the defence spectrum ensures that any
single delay or cancellation of a new or replacement
defence platform in the UK or US defence budgets
would not materially impact the Group. As a technology
specialist, QinetiQ is well positioned to benefit from
any delay or cancellation as this will often lead to the
requirement for technology insertion and upgrades
to extend an existing platform’s operational lifespan.
The regulatory environment may adversely change
The Group’s operations deal with sensitive defence and
security technologies and revenue generation could
be affected by regulatory changes in the geographical
markets in which it can operate, or restrictions on
technology transfer. The majority of revenue is derived
from domestic sales of services and products within the
UK and US and is therefore largely unaffected by export
controls and other such restrictions. QinetiQ’s ability to
export outside of these jurisdictions is subject to export
controls and other regulations, and significant changes
in the regulatory environment may limit QinetiQ’s ability
to expand into other export markets. The Group has
formal procedures in place to ensure that it meets
all current export regulations. In the US, the Group
undertakes work that is deemed to be of importance for
US national security, and arrangements are in place to
insulate these activities from undue foreign influence as
a result of foreign ownership. The Group has procedures
in place to ensure that these arrangements remain
effective and to respond to any changes that might
occur in US attitudes to foreign ownership of such
activities.
Policies or attitudes towards Organisational Conflict of
Interest (OCI) may change
The Group provides services to its defence customers
that meet their needs as part of the defence supply
chain and also as a technical advisor through
consultancy services. To mitigate against the potential
conflict of interest that could arise, the Group takes
proactive steps to manage any potential OCI and to
maintain its ability to provide independent advice
through its consulting and systems engineering
activities. In the UK, a formal compliance regime
operates with the MOD to monitor and assess potential
conflicts of interest as part of its sales acceptance
process. Should the attitudes or policies adopted by our
customers change such that greater restrictions are
placed over the ability to undertake supply and advisory
contracts by the same organisation, this could materially
impact the rate of future growth of these businesses.
Significant change in demand from reduced military
operations in Iraq and Afghanistan
QinetiQ’s overall performance in recent years has not
been significantly reliant on the current allied operations
in Iraq and Afghanistan. While individual operating
units, such as QNA’s Technology Solutions business, have
experienced high levels of demand for products such
as the TALON® robot to help counter the threat of
improvised explosive devices (IEDs), other parts of the
business have been adversely affected by customer
budgetary pressures reducing demand, such as for
services to improve the efficiency of government
processes. In the event of a reduction in the level
of operations in Iraq and Afghanistan it is expected
that such discretionary expenditure will resume.
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Additionally, were financial close not to be reached on
the DTR contract, the bid costs incurred since preferred
bidder status was achieved would need to be expensed
through the income statement. It is anticipated that the
Group would be able to recover certain of these costs in
such circumstances.
Volatility in foreign exchange rates impact Group
financial performance
The Group is exposed to volatility in foreign exchange
rates due to its international operations. The Group
has limited transactional foreign exchange exposure as
most of its revenues and related costs arise in the same
currencies, principally sterling and US dollars. The Group
hedges all significant transactional foreign exchange
exposure. Foreign currency income statement and
balance sheet translation risks are not fully hedged.
QinetiQ North America represents more than 39.5%
of Group revenue and profit and a one cent movement
in the dollar exchange rate has an approximate £3m
impact on revenue and £0.3m on operating profit.
US acquisitions have been funded through US dollar
borrowings, thus partially mitigating the economic
risk as US dollar earnings are used to service and repay
US dollar-denominated indebtedness.
Availability of financing and volatility of interest rates
may impact the Group
The Group is exposed to fluctuations in the credit
markets which could impact the availability and cost
of financing for the Group. The Group manages this risk
by maintaining a sufficient level of committed funding
facilities, with a phased maturity profile, and by the use
of fixed-rate debt instruments and interest-rate swap
derivatives to provide stability in the ongoing cost of
utilising these facilities. There is a risk that a substantial
expansion of the Group’s operations could not be
financed through debt financing if sufficient facilities
were not available in the credit markets on economically
viable terms.
A material element of Group revenue is derived from a
single large contract
In the current year, the LTPA directly contributed 14% of
Group revenue and supported a further 7.2% through
tasking services using LTPA managed facilities. These
percentages will decrease proportionately as the Group
grows. The Group continues to achieve high customer
performance and satisfaction ratings, maintain excellent
relations with key customers and anticipates that the
contract will continue to run for the full duration of its
initial 25-year term through to 2028. The first break point
in the contract is 2013. QinetiQ’s performance is regularly
monitored across a number of key performance indicators.
QinetiQ achieved a weighted performance rating of
95.1% for the year ended 31 March 2008 and earned a
performance bonus on this contract. The LTPA operates
under five-year periods with specific programmes,
targets and performance measures set for each period.
On 3 March 2008, the Group signed a five-year pricing
agreement with the MOD covering the second period of
the LTPA after a successful first, five-year period. The loss,
cancellation or termination of this contract would have a
material adverse impact on the Group’s future reported
performance.
Acquired businesses could fail to perform as expected
QinetiQ continues to supplement its organic growth
through selected acquisitions in both its North American
and EMEA businesses. Detailed processes exist to
conduct appropriate due diligence and integration
planning to ensure the business is a robust and well
managed concern. The Group focuses on acquiring well-
established companies where the management and
business have demonstrated a strong track record of
delivery. There is a risk with any acquisition programme
that an acquired company may not perform as expected
once under new ownership and a significant downturn
in the post-acquisition performance of one or more of
the acquired businesses could have a material adverse
impact on the Group’s trading performance.
Defence Training Rationalisation (DTR) programme
Package 1 is not brought to financial close
In January 2007, Metrix, the Group’s joint venture with
Land Securities Trillium, was confirmed as the preferred
bidder for Package 1 for the proposed 30-year DTR
contract to outsource technical training for the UK
Armed Forces. Currently, the Group is working with MOD
to refine the final scope of work as the next stage in
moving to financial close. The Group anticipates that
financial close will occur by the end of 2009. In January
2008, the MOD confirmed negotiations for Package 1
were progressing successfully. DTR is expected to
generate a significant level of revenue and profit once
it is operational. There is a risk that the MOD may
materially change the final scope or delay or cancel
the implementation of the programme, which would
have a significant effect on the future expected growth
of the Group.
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QinetiQ Group plc Annual report and Accounts 2008
Defined benefit pension scheme deficit and/or cash
funding contributions may increase
The Group’s defined benefit pension scheme valuation is
subject to market changes beyond the control of
QinetiQ. Actual returns achieved on assets may be lower
than expected, inflation could be higher than expected
and life expectancy may rise faster than expected. All
these factors could contribute to the reported deficit
increasing significantly beyond the current level. The
Group has made considerable additional contributions
to the scheme in previous years to reduce the funding
deficit over the long term and scheme member
contributions have also been increased. With effect from
June 2008, QinetiQ is implementing changes to future
benefit accruals and in addition future cost increases will
be dealt with through a risk-sharing agreement between
the Company and employees. The Group has taken these
actions in conjunction with the scheme trustees and
maintains an active dialogue with the trustees, to seek
to manage and contain the magnitude and volatility of
the pension scheme deficit, and associated cash funding,
and their impact on the performance of the Group.
The Group’s tax liabilities may increase due to changes
in tax legislation
QinetiQ is liable to taxation in the countries in which it
operates, principally the United Kingdom and the United
States. Changes to the tax legislation in these countries
could have an adverse impact on the quantum of tax
paid on the profits generated by the Group.
The realisation of value from intellectual property
may be delayed
The funded research and development work the Group
undertakes for defence and other customers creates
intellectual property that the Group retains and can
utilise for commercial applications. Where opportunities
exist, the Group may seek to realise the value of the
intellectual property through licence sales, development
of new business streams or creation of spin-out
ventures. The uncertainty that exists over new
technologies and markets may result in delays or failure
to realise value from intellectual property or in a higher
level of investment required for the opportunity to be
realised. The Group only invests in the development
of intellectual property where it believes there is a
substantial and realistic market opportunity for the
technology and it undertakes a portfolio approach,
recognising that not all investments will be successful.
The performance of intellectual property realisation
programmes is actively monitored to increase support
for successful prospects and reduce expenditure where
realisation appears less likely. The Group brings in
external experts and funders as partners in a variety
of structures to enhance the performance of certain
intellectual property realisation projects, as evidenced
by the creation of the Venture fund with Coller Capital.
Fixed-price contracts may cost more to complete
than envisaged
The Group enters into fixed-price contracts with
customers. The Group seeks to minimise the exposure
to changes in the cost of completing these contracts by
only taking on delivery obligations that it can manage
and by regular review of forecast costs throughout
contract bidding and delivery stages. Additionally the
nature of much of the services provided under such
fixed-price arrangements for contract R&D, advisory and
consulting services are often for a defined amount of
effort or resource rather than firm product deliverables
and as such the risk of cost escalation in such contracts
is substantially mitigated. With the exception of the
LTPA, no individual fixed-priced contract is material to
the revenue of the Group.
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Business review – Corporate Responsibility
Corporate Responsibility
We are embedding Corporate Responsibility (CR) in our organisation
through the management of our sites, the delivery of our operations,
the values of our people and our stakeholder relationships.
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Our framework for delivering a responsible and sustainable business
is to structure our initiatives into four themes – Our People,
Community, Environment and Marketplace.
Graham Love, Chief Executive Officer
Highlights
Royal Society for the Prevention
of Accidents (RoSPA) Gold Awards
for Health and Safety practices
in the UK
UK Report for Injuries, Diseases
and Dangerous Occurrences
Regulations (RIDDOR) rate at
2.28 accidents per 1,000
employees, well below the HSE
industries average
Investors in People accreditation
in the UK
New learning and development
programmes on business ethics
and corporate responsibility for
employees in the UK
Education outreach programmes
in the US and UK
Science for Society programme
ISO 14001 certification gained for
three further sites in the UK
Recycling up by 8% at major
UK sites
Increase in customer satisfaction
“ With a dedicated CR manager and board level support, we are
making good progress and have much to be proud of. There
is genuine commitment and enthusiasm to deliver tangible
improvements, building on strong foundations within the
organisation, but we recognise that there is still work to be
done and we are committed to our programmes going forward.
With CR integral to our values and business practice, we
will ensure our business sustainability. In recognition of our
commitment to responsible business practice, QinetiQ joined
Business in the Community in November 2007. This section
demonstrates how we met our 2008 objectives and outlines
our goals for further improvement in 2009.”
Graham Love, Chief Executive Officer
“ QinetiQ has already developed innovative and meaningful ways
to engage with its community stakeholders and address the sciences
talent and skills shortage faced by many of today’s businesses in the
UK. The ‘Lab in a Lorry’ is a great example of a fun programme that
both stimulates interest in the sciences for young learners and is
rewarding for QinetiQ employees. We are excited to assist as QinetiQ
further develops business practices and programmes that integrate
its key stakeholder and sustainable business priorities into its overall
business strategy.”
Business in the Community
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QinetiQ Group plc Annual report and Accounts 2008
Business review – Corporate responsibility continued
our People
At QinetiQ, we know it is our people that make us successful and we
create a climate and culture to enable them to deliver outstanding performance.
Our aim is to attract and engage the best people, providing a framework where
they can realise their full potential.
Nurturing our talent – investing in people
QinetiQ is committed to retaining our status as a top-
quartile investor in employee learning and development.
In 2008, we met this target with employees receiving
in the UK, on average, five days of training. We provide
a range of programmes, including our three-year
engineering apprenticeship, the early career
management scheme and the Competing to Win
programme for bid managers.
Since 2001, QinetiQ in the UK has maintained Investors
in People accreditation and we are delighted that we are
now demonstrating areas of best practice.
We were encouraged by the high response rate to the
UK annual employee engagement survey. Improvements
were seen in the areas relating to performance
management and communication, demonstrating the
successful impact of the initiatives introduced last year.
We aim for further improvements to address
development areas highlighted by the survey.
Health and Safety
QinetiQ is committed to the safety and well-being of
our people. Support to employees is provided through
a network of professionally qualified health, safety and
environment advisors, occupational health nurses and
the Employee Assistance Programme in the UK. Health
and Safety campaigns this year focused on ensuring the
safety and well-being of contractors and on
muscular-skeletal issues.
In 2008, the Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations (RIDDOR) rate for
QinetiQ’s UK employees was 2.28 accidents per 1,000
employees, compared with the Health and Safety
Executive (HSE) ‘all industries’ rate of 5.36. This is an
improvement on last year’s rate of 3.47 accidents per
1,000 employees.
“ Across the organisation,
high regard is given to
Health and Safety.”
Investors in People report,
December 2007
Accidents per 1,000 UK employees
8
6
4
2
0
2001/2
2002/3 2003/4 2004/5 2005/6 2006/7 2007/8
HSE all industries’ rate
QinetiQ UK RIDDOR rate
Work at QNA is generally low risk and so there is no
formal requirement to report accidents according to
the Occupational Safety and Health Administration
(OSHA) code. Our North American business monitors
accidents and recorded 5.66 days away from work per
1,000 employees in 2008 (2007: 10.78).
“ The high standard of Health and
Safety management was recognised
by RoSPA, with the award of Gold
Achievement Awards to significant
parts of the Company.”
Colin Shimell, UK Chief Health, Safety
and environment Advisor
What next?
n
n
Continue to retain our status as a top-quartile investor
in employee learning and development
Continue to maintain UK RIDDOR rates at better than
the HSE benchmark rate and develop appropriate US
benchmarks
n Increase programmes to support safer driving
n
Increase levels of health, safety and environmental
training for all appropriate managers.
The QinetiQ inventor Awards Scheme recognises and rewards
employees for both invention and the commercial benefits
from invention. Chris Lyddon, head of the QinetiQ team that
developed X-Net®, has been honoured under the QinetiQ
inventors Awards Scheme along with his colleague Julian
Moody, for his pioneering work on the product. To date,
X-Net has earned £12m in revenues for QinetiQ.
Chris Lyddon, X-Net inventor
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Community
Investing in Community programmes enables our people to commit their time and
expertise to support local and wider society issues. As well as fundraising activities
for a range of good causes, we are proud of our education outreach programme, where
we aim to inspire the next generation of scientists and engineers. Our Science for
Society initiative uses our technical skills and technology to make a difference.
Education
As one of Europe’s largest employers of scientists and
engineers, QinetiQ has for many years been committed
to Science Technology Engineering and Maths (STEM)
outreach programmes. Engaging with young people in a
variety of STEM activities encourages them to consider
careers in science and engineering. Increasing the
number of scientists and engineers in the workforce
will benefit the UK in an ever more competitive global
marketplace. In November 2007, QinetiQ set up a
steering group to provide coherency and a stronger
direction to our programmes. Key achievements in the
past year have been the Lab in the Lorry tours to schools
near our sites in Scotland, Essex and Kent, projects
organised with schools across the UK as part of the
Engineering Education Scheme, our own School
Link Scheme and placements through Nuffield Science
Bursaries and Year in Industry Scheme. In North America,
the Systems Engineering Group provided a number of
educational scholarships, for example at the University
of Missouri-Columbia, under the Westar Systems
Engineering and Software Development Scholarships.
QinetiQ North America (QNA) also sponsored the
winning team of the FIRST Robotics Competition
in Colorado.
Science for society
QinetiQ recognises that through the unique capabilities
of our employees and our technology, it is possible to
make a real difference to society.
In December 2007, QinetiQ employees made their third
visit to the remote village of Kongtayoun, Southern Laos,
to assist with the clearance of unexploded ordnance
(UXO). Working with the Swiss de-mining organisation
FSD, the team’s aim was to build local capability in
UXO detection techniques and mapping, as well as
developing simple and inexpensive equipment to
improve transport in rough terrain.
QinetiQ has over 100 Science and engineering Ambassadors
(SeAs) and they work on a wide range of projects with schools.
Annette Smart was chosen from over 1,000 SeAs in the west
Midlands for an award in recognition of her significant
contribution to the programme.
Charitable giving and community support
Throughout the Group, we support a number of charities
that are important to our employees. Charitable giving
initiatives included matched giving, payroll giving and
volunteering. Total charitable giving across the Group
in 2008 was £184,000, of which £97,000 was to
UK-registered charities. In addition, employees in
the UK raised a further £64,000.
Our sites continue to support a range of local issues in
their communities. Some of the highlights this year in the
UK include provision of funding for a community centre
in Benbecula and funding for a library in a school near
Boscombe Down. Aberporth employees improved
playground facilities at a local school and employees
from our site in the Kyle of Lochalsh worked with a local
school to highlight health and safety issues. We also
contributed to the Motov8 scheme at Pershore,
supporting increased education and awareness among
disaffected young people. In QNA, employees are actively
involved in a number of community initiatives including
Habitat for Humanity, Women in Technology and the
Junior League of Huntsville Alabama Sports Festival.
B
U
S
i
N
e
S
S
r
e
v
i
e
w
What next?
n
9,000 students will be visited by Lab in the Lorry
by the end of 2009
Continue to focus and deliver our STEM outreach
programmes.
“ The technology and skills that the QinetiQ team have taken
to Laos are sustainable so local people can clear the land of
unexploded ordnance after the team leave. The ultimate aim
of the project is to return the land to economic use by restoring
the roads and making land available for the production of
rice and silk.”
Brett Lowery, engineer, Laos UXo project
n
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environment
We recognise the need to understand the impact we have on the environment
and to put in place measures to reduce our carbon footprint and our waste.
We are also adding positive benefit through our conservation initiatives.
Environmental management
QinetiQ has in place an environmental management
system for all of our UK estate. We have an ongoing
programme of gaining ISO 14001 certification and, in
2008, we met an important target and successfully
gained certification for two of our major sites, Malvern
and Farnborough. Ahead of schedule we have also
gained certification for our Rosyth site. This takes the
total with certification to 23 sites and includes all of the
sites we manage under the LTPA, as well as the major
QinetiQ-owned sites.
Resource and energy management
Across our sites, we have many programmes to reduce
our consumption of energy and resources and to ensure
that we reduce, reuse and recycle where possible.
waste: Reuse of surplus equipment by other
departments is routinely considered before recycling or
disposal. Most sites recycle a variety of materials – from
paper to batteries. An awareness campaign was run
in October 2007 to provide information and advice to
employees. Total waste for our major UK sites in 2008
was 2,115 tonnes, of which 638 tonnes (30%) was
recycled, compared to 22% recycled in 2007.
water: A 2008 objective was to continue to monitor our
water usage. Across the QinetiQ estate, water metering
has been in place for several years. This allows early
detection of leaks and prompt repairs. Steady and lasting
progress continues to be made in water conservation by
introducing more efficient systems, detection and repair
of leaks and by educating employees.
energy: We successfully met our target to ensure we
did not exceed current levels of CO2 emissions from
UK energy consumption relative to business output
(94 tonnes CO2 per £m revenue in 2008, 2007: 144
tonnes). This has been achieved by investment in, and
expansion of site building energy management systems,
installation of more remote utility metering systems,
energy awareness campaigns, investment in automated
lighting systems and lower use of our high-pressure
wind tunnel. Total energy used in 2008 was equivalent
to 77,781 tonnes of CO2 compared to 90,483 tonnes in
2007. (CO2 calculated with the new Defra and Carbon
Trust recommended conversion factor for electric of
0.523kgCO2/kWh.)
UK energy consumption and CO2 emissions
)
H
W
G
(
e
s
u
y
g
r
e
n
E
500
450
400
350
300
250
200
150
100
50
0
)
0
0
0
’
s
e
n
n
o
t
(
s
n
o
i
s
s
i
m
e
2
O
C
120
108
96
84
72
60
48
36
24
12
0
2001/2
2002/3 2003/4 2004/5 2005/6 2006/7 2007/8
Energy use (GWH)
CO2 (tonnes ’000)2
CO2 (tonnes ’000)1
1 CO2 calculated with the historical recognised conversion factor for
electric of 0.43kgCO2/kWh.
2 CO2 calculated with the new recommended conversion factor for
electric of 0.523kgCO2/kWh.
Conservation
QinetiQ owns and operates sites that contain valuable
conservation areas, many of which are of national or
international importance, including Sites of Special
Scientific Interest (SSSI) and Special Areas of
Conservation. The sites provide areas of undisturbed
land for wildlife to flourish and help preserve habitats
that would otherwise be lost. By maintaining and
enhancing the condition of conservation areas, we make
a valuable contribution to national biodiversity
objectives. This is a long-term commitment and, in
August 2007, the Boscombe Down Conservation Group
marked 20 years of conservation effort.
we have been working with Marwell Zoological Park to restore
the 79-hectare eelmoor Marsh at Farnborough, Hampshire,
which is now a nature reserve and home to many species of rare
plants and wildlife. Not only is the site restored as heathland, it
also provides a soft release environment that will ensure the
preservation of the endangered Przewalski’s horse, which
was introduced to the marsh in conjunction with Marwell.
What next?
n
n
Extend ISO 14001 certification to all significant sites
Introduce an enhanced carbon footprint management
programme
Increase our recycling rates by 3% in 2009.
n
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Marketplace
QinetiQ strives to be a responsible business to work with and we place
great value on our relationships with our customers and supply chain.
Energy and environment solutions
QinetiQ recognises the importance of technology
solutions in addressing issues such as climate change.
Our scientists and engineers are developing a range of
solutions, looking at low-carbon transport, renewable
energy and waste management.
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A prototype of a Stirling power system that will use landfill and
other waste gases to generate electricity is being developed by
QinetiQ North America. The Stirling system offers the potential
for significant economic and environmental benefits.
What next?
n
Introduce responsible purchasing criteria into all our
key procurement activities
Continue to embed a customer-focused culture
throughout the Group.
n
The Customer Equation programme
Our Customer Equation programme is helping us to
understand and improve our performance relative to
customer needs, for today and for the future. We are
working to use ‘voice of the customer’ feedback to
support improvement and help us all to further develop
a customer-focused culture throughout our organisation.
QinetiQ has been rapidly changing and we recognise the
need to work with our customers so they understand
our capability. Results from the 2007 survey showed an
increase in customer satisfaction over the last three
years, and highlighted the positive relationships
between our customers and account managers.
Business ethics
QinetiQ’s business ethics policy continues to be guided
by our core values of integrity, excellence, care,
teamwork and commitment and with respect for
human rights and the best interests of employees and
stakeholders. This policy is implemented throughout the
Group, irrespective of business or operational context.
QinetiQ is a member of the UK Anti-Corruption Forum.
In QNA, each employee is required to undergo periodic
ethics training. Training on business ethics has been
developed as part of the induction programme for all
new employees in the UK. This accompanies the training
course on CR, which informs employees of QinetiQ’s
wider approach to responsible business.
Responsible purchasing
A key priority for our purchasing team is ensuring that
we are working responsibly with our supply chain to
address improvements in both environmental and
societal issues. The process of establishing a clear set
of criteria with which to engage all QinetiQ suppliers
is under way, with initial focus being placed on key
suppliers. Plans for the future include working with
our preferred suppliers to identify ways in which
our procurement activities can directly support
our objectives.
QinetiQ was part of the development consortium behind the
Morgan Life Car that was showcased at the Geneva Motor Show
and has been responsible for the design of the proton membrane
exchange fuel cell which converts hydrogen, plus oxygen taken
from the air around it, into electrical energy.
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our Board of Directors
our Board of Directors
1
3
2
7
5
1 Sir John Chisholm a b
4 Sir David Lees a*b*d
Deputy Chairman (Senior independent
Non-executive Director)
Sir David Lees (71) joined the Board of QinetiQ in August 2005.
He is currently Chairman of Tate & Lyle plc. He has also been a
member of the UK Panel on Takeovers and Mergers since June
2001. Sir David joined GKN plc in 1970 and became Group
Finance Director in 1982. He was appointed Group Managing
Director in 1987, and Chairman and Chief Executive in 1988
before becoming Non-executive Chairman in 1997 until his
retirement in May 2004. Other notable roles include being a
member of the National Defence Industries Council between
1995 and 2004, Chairman of Courtaulds plc from 1996 to 1998, a
Non-executive Director of the Bank of England between 1991 and
1999 and Chairman of the CBI Economic Affairs Committee from
1988 until 1994, as well as being a member of the CBI President’s
Committee from 1988 to 1996. From 2001 to 2006, he was
Non-executive Joint Deputy Chairman of Brambles Industries plc
and Brambles Industries Limited. Sir David is currently a
Non-executive Director of the Royal Opera House and he is also a
Fellow of the Institute of Chartered Accountants in England and
Wales. The Board considers that Sir David’s detailed understanding
of the Defence sector, coupled with his extensive experience of
corporate governance and the City and its institutions, significantly
enhances the operation of the Board, particularly in the context
of Sir David’s dual role of Deputy Chairman and Senior
Independent Non-executive Director.
5 Colin Balmer a
Non-executive Director
Colin Balmer CB (61) was appointed to the Board of QinetiQ in
February 2003. He served as Managing Director of the Cabinet
Office from 2003 until his retirement in 2006. Previously,
Colin was Finance Director of the MOD, with responsibility for
QinetiQ’s privatisation and the subsequent investment by Carlyle
as part of the PPP Transaction. He has extensive experience
across the MOD including periods as Private Secretary of two
Ministers for Defence Procurement, a secondment to the UK
Delegation to the North Atlantic Treaty Organisation (NATO)
and as a Minister for Defence Materiel in Washington DC,
United States. Colin was formerly a member of the Independent
Financial Reporting Advisory Board and the Advisory Council of
Partnerships UK and is currently a member of the Foreign and
Commonwealth Office’s Audit and Risk Committee and is on
the Board of the Royal Mint, chairing their Audit Committee.
The Board considers that Colin’s extensive knowledge of the
development of QinetiQ throughout its public-private partnership,
and his in-depth understanding of the working of Government,
particularly the UK MOD, provides the Board with a unique
insight into the issues facing Government in delivering its
procurement objectives and partnering with industry suppliers.
Chairman (Non-executive Director)
Sir John Chisholm (61), the Non-executive Chairman of QinetiQ,
was Chief Executive Officer of QinetiQ (previously DERA) from
1991 to 2005, transforming it into a successful trading fund and
developing its commercial business. Until October 2006, he was
the Executive Chairman of QinetiQ. Previously Sir John was UK
Managing Director of Sema Group plc and prior to that he was
a Director of CAP Group plc. In 1979, he founded and became
Managing Director of CAP Scientific Ltd. After a degree at
Cambridge in Mechanical Sciences, Sir John’s work experience
included periods at General Motors and Scicon Ltd, part of BP.
Sir John was formerly President of the Institution of Engineering
and Technology and is currently Chairman of the Medical Research
Council. He is also a Fellow of the Royal Academy of Engineering,
the Royal Aeronautical Society and the Institute of Physics. The
Board considers Sir John’s extensive knowledge of Defence and
Security Technology markets, and his unrivalled experience of
QinetiQ’s business gained whilst Chief Executive Officer, to be
a valuable asset to the Board in terms of decision-making and
understanding the strategic issues affecting the Group.
2 Graham Love a
Chief executive officer (executive Director)
Graham Love (54) is the Chief Executive Officer of QinetiQ, having
previously been Chief Financial Officer. Prior to rejoining DERA in
2001, he was Chief Executive of Comax Secure Business Services
Ltd, leading it through its privatisation in 1997 before its sale to
Amey plc in 1999. Before that, Graham was Finance Director of
DERA from 1992 to 1996. After a degree in English at Cambridge,
his career included management roles with Ernst & Young, KPMG
and Shandwick plc, as well as several years in international
consulting. He is a Fellow of the Institute of Chartered
Accountants in England and Wales.
3 Doug Webb
Chief Financial officer (executive Director)
Doug Webb (47) is the Chief Financial Officer of QinetiQ. Doug
was appointed to the Board in September 2005, having previously
been Group Financial Controller. He joined QinetiQ in June 2003
from LogicaCMG, where he had most recently been the Regional
Finance Director for Continental Europe. During his eight years
with Logica, Doug spent the period from 1995 to 2000 in the US
in various management roles at its US subsidiary, including Chief
Operating Officer, Chief Financial Officer and Executive Vice
President, Telecoms Division. He trained as an accountant with
Price Waterhouse and is a Fellow of the Institute of Chartered
Accountants in England and Wales. On 17 January 2008, Doug
announced his intention to take up the position of Chief Financial
Officer with London Stock Exchange Group plc and resigned as
a Director on 30 May 2008.
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4
8
6
9
6 Noreen Doyle c d
8 Edmund P. Giambastiani Jr
Non-executive Director
Noreen Doyle (59) was appointed to the Board of QinetiQ in
October 2005 and serves as an independent Non-executive
Director. She also sits on the Board and Audit Committee of
Credit Suisse Group (Zurich) and is a Non-executive Director of
Newmont Mining Corporation (Denver) and Rexam plc. In August
2005, Noreen completed her four-year term as First Vice President
of the European Bank for Reconstruction and Development
(EBRD), where she chaired the EBRD’s Operations Committee
and was a member of the Executive Committee. Prior to her
appointment as First Vice President, Noreen was firm-wide head
of Risk Management. She joined the EBRD in 1992 to establish its
syndications functions. Before joining the EBRD, Noreen had a
distinguished career at Bankers Trust Company (now Deutsche
Bank) in corporate finance and leveraged financing with a
concentration in oil, gas and mining. Noreen has a BA from the
College of Mount Saint Vincent, Riverdale, New York and an MBA
from Tuck School at Dartmouth College. The Board considers that
Noreen’s extensive international business experience, particularly
in the areas of corporate finance, risk management and banking,
to be of significant benefit to the Board as QinetiQ continues its
strategy of developing new business opportunities outside its
traditional UK market, particularly in North America.
Non-executive Director
Admiral Giambastiani (60) was appointed to the Board of QinetiQ
in February 2008 and serves as an independent Non-executive
Director. Between 2005 and 2007, Ed was the second highest-
ranking military officer in the United States, having served as the
seventh Vice Chairman of the Joint Chiefs of Staff, which was the
culmination of a 37-year career in the US Navy. Ed’s distinguished
career has also included assignments as Special Assistant to the
CIA’s Deputy Director for Intelligence, Senior Military Assistant
to the US Defense Secretary and Commander, US Joint Forces
Command. He also served as NATO’s first Supreme Allied
Commander Transformation, when he led the transformation
of the military alliance. Ed currently serves as the Non-executive
Chairman of the Board of Directors for Alenia North America, Inc
and is a Non-executive Director of SRA International, Inc and
Monster Worldwide Inc. The Board considers that Ed’s extensive
knowledge of the US Defence and Security domain significantly
enhances the operation of the Board, as QinetiQ continues to
pursue its strategy of growing its US platform in the defence and
security technology sector.
9 Nick Luff c*
G
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7 Dr Peter Fellner b c d*
Non-executive Director
Dr Peter Fellner (64) joined the Board of QinetiQ in September
2004. Peter is Executive Chairman of Vernalis plc and is also
the Chairman of both Acambis plc, and the privately held
biotechnology company, Astex Therapeutics Limited. In addition,
he serves as a Director of two European biotechnology
companies, UCB SA and Evotec AG and also Consort Medical plc.
Previously, Peter served as Chairman of Celltech Group plc from
2003 to July 2004, having been Chief Executive Officer from 1990
onwards. Before joining Celltech, he was Chief Executive of Roche
UK from 1986 to 1990, having previously been a Director of Roche
UK Research Centre. The Board considers that Peter’s detailed
understanding of the commercialisation of innovative
technologies, and his experience of bringing high-technology
businesses to the public markets, are a valuable asset to the
Board in terms of the development of QinetiQ’s portfolio of
leading technologies and the evolution of QinetiQ’s remuneration
policies, particularly in the context of his role as Chairman of the
Remuneration Committee.
Non-executive Director
Nick Luff (41) joined the Board of QinetiQ in June 2004 and serves
as an independent Non-executive Director. Nick was appointed
Finance Director of Centrica plc in March 2007, having previously
served as CFO of the P&O Group. He trained as a chartered
accountant with KPMG and is a member of the Institute of
Chartered Accountants in England and Wales. Nick joined P&O
in 1991 and held various finance roles before joining the Board
as Finance Director in 1999. In October 2000, he became Chief
Financial Officer of P&O Princess Cruises plc on its demerger from
the P&O Group and returned as Chief Financial Officer of P&O
in May 2003. Nick has also served as a Non-executive Director
on the board of Royal P&O Nedlloyd NV, the Dutch-listed
international container shipping company. The Board considers
that Nick’s experience of operating as Chief Financial Officer/
Finance Director with P&O and Centrica, coupled with his
extensive exposure to a variety of industrial sectors, provides the
rigorous financial and commercial scrutiny required of a FTSE-
listed company at the Board level, particularly in the context of
his role as Chairman of the Audit Committee.
a Member of Compliance Committee
b Member of Nomination Committee
c Member of Audit Committee
d Member of Remuneration Committee
* Chair of Committee
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Corporate Governance Report
Corporate Governance Report
This part of the Annual Report, together with the Report of the
Remuneration Committee on pages 58 to 64, describes how QinetiQ
has applied the principles contained in the revised Combined Code
on Corporate Governance published in June 2006 (‘the Combined Code’).
Combined Code
On appointment as Chairman in 2005, Sir John Chisholm was not
regarded as independent under the Combined Code as he was
formerly QinetiQ’s Chief Executive Officer. The Combined Code
recommends that a company’s chairman should be independent on
appointment, and that its Chief Executive Officer should not become
chairman of the same company. The Board considers that departure
from the Combined Code in this area is appropriate and gave its
reasons for non-compliance both in the prospectus published as part
of the Company’s Initial Public Offering (IPO) in 2006 and the 2007
Annual Report.
Save as stated above, QinetiQ has complied with the provisions of
the Combined Code throughout the last financial year.
The Board – governance, processes and systems
Composition of the Board
Sir John Chisholm is the Non-executive Chairman of QinetiQ. The
roles of Chairman and Chief Executive Officer are separate, with their
responsibilities having been clearly articulated by the Board in
writing. The Chairman is responsible for the effective operation of
the Board and ensures that all Directors are enabled and encouraged
to play their full part in Board activities. The Chief Executive Officer is
responsible to the Board for directing and promoting the profitable
operation and development of the Group consistent with enhancing
long-term shareholder value, which includes the day-to-day
management of the Group, formulating, communicating and
executing Group strategy, and the implementation of Board policies.
The Board comprises a Non-executive Chairman, six Non-executive
Directors and two Executive Directors, namely the Chief Executive
Officer and the Chief Financial Officer1, with the objective of
achieving a balance of Executive and Non-executive Directors. The
Board considers its overall size and composition to be appropriate,
having regard in particular to the independence of character and
integrity of all the Directors and the experience and skills which they
bring to their duties, which prevents any individual or small group
from dominating the Board’s decision making.
The Senior Independent Non-executive Director is Sir David Lees.
Sir David is also Deputy Chairman of the Board and serves as an
additional point of contact for shareholders should they feel that
their concerns are not being addressed through the normal channels.
Sir David is, furthermore, available to fellow Non-executive Directors,
either individually or collectively, should they wish to discuss matters
of concern in a forum that does not include the Chairman, the
Executive Directors or the senior management of QinetiQ.
The Shareholder Relationship Agreement entered into between
QinetiQ and MOD at IPO entitles the MOD to nominate one
Non-executive Director to the Board, for so long as the MOD does
not dispose of any further ordinary shares in the Company, and
thereafter, for so long as it holds at least 10% of QinetiQ’s issued
ordinary share capital.
Directors’ independence
Of the current Directors of the Company, the Board considers Sir
David Lees, Nick Luff, Dr Peter Fellner, Noreen Doyle and Admiral
Edmund P. Giambastiani to be independent of QinetiQ’s executive
management and free from any business or other relationships that
could materially interfere with the exercise of their independent
judgement. Of the remaining Non-executive Directors, the Board
considers that both Sir John Chisholm and Colin Balmer are not
independent for Combined Code purposes, Sir John on the basis
that he was formerly QinetiQ’s Chief Executive Officer and
exercised certain executive responsibilities until 1 October 2006,
and Mr Balmer as he is a nominee of the MOD, which is the largest
shareholder on QinetiQ’s share register.
In February 2008, Admiral Edmund P. Giambastiani replaced
George Tenet as an independent Non-executive Director. Admiral
Giambastiani has extensive knowledge of the US Defence and
Security domain which will enhance the operation of the Board
as QinetiQ continues its strategy of growing its US platform in the
Defence and Security Technology sector. Admiral Giambastiani
was selected through an open process with the assistance of an
international search and selection consultant.
Based on the above, the Board considers that over half of its
members were independent Non-executive Directors throughout
the last financial year.
Board structure
The Board considers that the skills and experience of its individual
members, particularly in the areas of UK defence and security, the
commercialisation of innovative technologies, corporate finance and
mergers and acquisitions, have been fundamental in the pursuit of
QinetiQ’s growth strategies (as described in the Business Review
section of this Annual Report) in the past year. In addition, the
quoted company experience available to members of the Board in a
variety of industry sectors and international markets has also been
invaluable to the Company as it seeks to penetrate new markets and
geographic territories.
Operation of the Board
The Board is responsible for managing the Group’s operations and
in this capacity determines the Group’s strategic and investment
policies. The Board also monitors the performance of the Group’s
senior management team and organises its business to have regular
interaction with key members of the Group, including those based
in North America. The following is a summary of the approach taken
by the Board to corporate governance in the financial year ended
31 March 2008:
n
The Board has agreed a schedule which contemplates eight Board
meetings being held in each financial year. Members of the Board
are also invited to attend a dinner on the occasion of each Board
meeting, which assists in the process of relationship building and
ensuring that key strategic initiatives are thoroughly discussed. In
the last financial year the Board met on ten separate occasions;
two of these meetings were unscheduled and were convened to
allow the Board to consider the merits of acquisition opportunities
in both the US and Australia. The Board intends to hold two of its
scheduled meetings in the US in each financial year, to give
members of the Board an opportunity to meet with senior
management in the QinetiQ North America region. It is proposed
1 Doug Webb, the Chief Financial Officer of the Company throughout the financial year ended 31 March 2008, announced on 17 January 2008 his intention to
take up the position of Chief Financial Officer with The London Stock Exchange Group plc. Mr Webb will resign as a Director of the Company on 30 May 2008.
Following the announcement made on 21 May 2008, we anticipate that David Mellors will be appointed as Chief Financial Officer from the end of August 2008.
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that a further two Board meetings will be held at QinetiQ UK sites
each year to provide members of the Board with greater
opportunity to understand the operational dynamics of the EMEA
business at first hand.
n
The Board receives written reports from the CEO and CFO each
month, together with a separate report on investor relations
(which is prepared in consultation with QinetiQ’s brokers) and
a report produced by the Company Secretary on key legal and
regulatory issues affecting the Group. The Board also considers
reports from the respective Chairmen of the Committees of the
Board at the next scheduled Board meeting following the date on
which each such Committee Meeting was held. The CEO’s monthly
report addresses the key strategic initiatives impacting the Group
since the last meeting of the Board, and focuses in particular on
the strategic progress of each of the EMEA, QNA and Ventures
businesses. Other key areas of focus include health, safety,
environmental, employee and organisational issues, the status of
key account management/customer relationship initiatives and
the pipeline of potential acquisitions, disposals and investments.
Of particular significance in the last financial year was the
consideration given to a number of acquisition opportunities,
which culminated in the completion of the Boldon James
transaction in the UK, the Automatika, Applied Perception,
3H Technology, ITS and Pinnacle CSI acquisitions in the US,
and QinetiQ’s entry into the Australian Defence consultancy
business through the acquisitions of Ball Solutions, Novare and
Aerostructures. The Board also oversaw the restructuring activity
in the EMEA region during the second half of the financial year,
together with the creation of a new Technology Venture fund
in collaboration with Coller Capital, and the programme of work
for progressing the contractual arrangements for the Defence
Training Rationalisation programme (conducted through Metrix).
Any proposed acquisitions, disposals and investments which
exceed the CEO’s delegated authority are considered by the Board
in the context of the CEO’s report.
n
The CFO’s monthly report addresses the financial performance and
outlook of the Group and each of the sectors, both on a monthly
and year-to-date basis, with the key performance indicators
analysed being those identified on page 10 of the CEO review.
The Group Risk Register also forms part of the CFO’s report on
a quarterly basis and highlights the dozen or so principal risks
capable of having a material impact at a Group level, the
materiality of each risk, the assumptions underlying each such risk,
the actions required to manage the risk and the relevant key
performance indicators for each headline risk. The risks covered by
the Group Risk Register cover a range of financial and non-financial
items, based on the ‘Principal risks and uncertainties’ identified on
pages 42 to 44 of the Business Review. The CFO also reports on a
monthly basis, as part of his investor relations report, on the key
issues raised by shareholders, potential investors and other important
stakeholders on QinetiQ’s performance and key strategic initiatives.
n
On at least two occasions each year, one of the sector heads will
give a presentation to the Board on the key strategic, operational
and performance issues impacting their business. The Board also
receives updates from the CEO’s key functional reports on an ‘as
needed’ basis, on issues such as Human Resources, Real Estate and
Pensions, throughout the financial year. The Board devotes one
entire meeting each year to consider strategy and planning issues
impacting the Group, from which the five-year corporate plan is
generated. A key part of this process involves the Board having
the opportunity to question the sector heads and the Executive
Directors in relation to the formulation of the corporate plan at
sector level and the impact of these plans on the Group strategy
as a whole. The Non-executive Directors also have an opportunity
to meet with other members of staff within the QinetiQ Group
(including, but not limited to, other members of the senior
management team) at lunchtime events, which are scheduled to
coincide with Board meetings. During the last financial year, two
such events were held in Farnborough and Washington DC and
the Board also had the opportunity to review QinetiQ’s LTPA
operations at Boscombe Down.
n
n
The Board operates through a comprehensive set of processes,
which define the schedule of matters to be considered by the
Board and its Committees during the annual business cycle, the
level of delegated authorities (both financial and non-financial)
available to both Executive Directors and other layers of
management within the business, and QinetiQ’s Business Ethics,
Risk Management and Health, Safety and Environmental
processes. The Board also has a clearly articulated set of matters
which are specifically reserved to it for consideration, which
include reviewing the annual budgets, raising indebtedness,
granting security over Group assets, approving Group strategy and
the corporate plan, approval of the annual and interim report and
accounts, approval of significant investment, bid, acquisition and
divestment transactions, approval of Human Resources policies
(including pension arrangements), reviewing material litigation
and monitoring the overall system of internal controls, including
risk management.
QinetiQ has been a member of the UK Defence Industry Anti-
corruption Forum since 2006, the primary objective of which is to
promote ‘the prevention of corruption in the international defence
markets’. In furtherance of this objective, QinetiQ has enhanced its
existing internal procedures which are designed not only to
comply with, but to exceed, international best practice in this area.
This is facilitated by the engagement of an independent,
internationally recognised organisation known as TRACE
(Transparent Agents and Contracting Entities) which conducts
anti-bribery due diligence reviews and compliance training on
behalf of the Group, particularly in circumstances in which QinetiQ
is planning to engage third-party agents overseas.
Performance of the Board
During the financial year ended 31 March 2008, the Board repeated
the self-assessment process first used in the previous year to
evaluate the performance of the Board, its Committees and
individual Directors. This evaluation process was based on a detailed
questionnaire, covering issues ranging from ‘value creation’ and
‘strategic planning’ through to the operation of the Board/its
Committees and ‘risk management’. The evaluation process was led
by the Chairman, who supplemented the detailed responses derived
from the self-assessment questionnaire with a series of meetings
held individually with each of the Directors, at which the
performance of the Board as a whole, as well as the Committees and
individual Board members were discussed. In addition, Sir David Lees,
in his capacity as the Senior Independent Non-executive Director,
met with individual members of the Board to evaluate the
performance of the Chairman. The evaluation process revealed that,
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in virtually all areas, the operation of the Board and its Committees
had improved in the past 12 months. The Board concluded from the
evaluation exercise that its business is conducted in a positive and
open manner, with the Board possessing the requisite skills and
diversity necessary to fulfil its leadership role and having a detailed
understanding of its stewardship responsibilities. The Board agreed
that in the financial year ending 31 March 2009, and once every
three years thereafter, it would conduct the evaluation process
through an external facilitator.
As a separate exercise, the Chairman has held various meetings
with the Non-executive Directors in the last financial year, without
the Executive Directors present, in order to review both the
operation of the Board and the performance of the Executive
Directors. In addition, the Executive Directors were appraised as
part of the annual salary review process, which was overseen by
the Remuneration Committee.
Directors’ induction, training and information
All newly appointed Directors participate in an induction programme,
which is tailored to meet their specific needs in relation to
information on the Group. This induction programme includes an
induction pack, which is refreshed to ensure it contains the most
up-to-date information available on the Group.
All Directors are encouraged to visit QinetiQ’s principal sites and to
meet a wide cross-section of QinetiQ’s employee base. During the last
financial year, the Board held two of its meetings at QinetiQ facilities
located in the Washington DC area, which allowed members of the
Board to better appreciate the dynamics of QinetiQ’s newly acquired
ITS and Analex businesses. The Board also held one of its meetings at
QinetiQ’s Boscombe Down site, during which a tour was undertaken
of the LTPA facilities located at the site, which provided members of
the Board with exposure to a range of Managed Services capabilities
in the fixed wing/rotary aircraft and environmental sectors.
Training is also available to the Board on key business issues or
developments in policy, regulation or legislation on an ‘as needed’
basis. By way of example, the Board was provided with a detailed
presentation on recent changes in legislation and corporate practice
as a result of the introduction of parts of the Companies Act 2006
and amendments to the Listing Rules, with particular emphasis on
the clarification of the law relating to director’s duties. Each of the
Directors has access to the services of the Company Secretary, and
there is also an agreed procedure for the Directors to seek
independent advice at the Company’s expense.
Directors’ responsibilities
Statements explaining the Directors’ responsibilities for preparing
the Group’s financial statements and the auditors’ responsibilities
for reporting on those statements are set out on pages 68 and 69.
Other Directors’ information
Details of Executive Directors’ service contracts and the Non-
executive Directors’ letters of appointment are set out in the Report
of the Remuneration Committee. Copies of Directors’ service
contracts and letters of appointment will be available for inspection
at the Company’s Annual General Meeting.
In October 2006, Sir John Chisholm, was appointed Chairman of the
Medical Research Council, a role for which he does not take a fee.
Each serving member of the Board will be put forward for re-election
at the Annual General Meeting of the Company in 2008.
Committees of Directors
The Board has established four principal committees, being the
Audit Committee, the Remuneration Committee, the Nominations
Committee and the Compliance Committee, each of which operates
within written terms of reference approved by the Board, details of
which are set out in the Investor Relations section of QinetiQ’s
website (www.QinetiQ.com). Each Chairman of the Board Committees
reports on the key issues discussed, and decisions taken, at the next
meeting of the Board following the Committee meeting in question.
Details of each of these Committees are summarised below.
Audit Committee
Each member of the Audit Committee is an independent Non-
executive Director. The Committee is chaired by Nick Luff, who has
been a member of the Institute of Chartered Accountants in England
and Wales since 1991, and the Board considers him to have recent
and relevant financial experience given his former roles as CFO of
P&O and P&O Princess Cruises and his current position as Finance
Director of Centrica. The other members of the Committee are
Dr Peter Fellner and Noreen Doyle. The Audit Committee meets as
necessary and at least four times a year. During the financial year
ended 31 March 2008, the Committee met on five occasions. The
external auditors have the right to request that a meeting of the
Audit Committee be convened. During the past financial year, the
Committee met with QinetiQ’s external auditors on two separate
occasions without Executive Directors present to discuss the audit
process, and the Committee Chairman also met with the Group Head
of Internal Audit on the same basis. The Group Chairman, Chief
Executive Officer, Chief Financial Officer, Group Financial Controller,
Group Head of Internal Audit, the Internal Audit Manager and a
representative of the external auditors normally attend Audit
Committee meetings except where not permitted.
During the last financial year, consideration of the audit process for
the full year and interim results represented the principal area of
focus for the Audit Committee. The Committee also continued to
assess the effectiveness of the Internal Audit function though the
review of a balanced scorecard process designed to measure the
achievement of Internal Audit objectives, which also resulted in the
approval of a detailed 12-month work programme for the function.
In the context of the Group’s North American business, the
Committee held its first meeting with the newly appointed Head
of Internal Audit for QNA in the last financial year, which included
a review of the application of internal controls in respect of the proxy
regime and considered KPMG’s approach to auditing the newly
acquired US businesses. As part of its regular review of internal
controls, the Committee considered in detail the operations of
QinetiQ’s Treasury function, and paid particular attention to those
areas of internal audit review which had failed to achieve at least
a ‘satisfactory’ rating. As part of the regular reporting process, the
Committee also reviewed the activities of the tax and insurance
functions, as well as overseeing the level of KPMG’s audit fees. The
Committee has also been involved in the recruitment process to
replace the Group Head of Internal Audit, Graham Coley, who retired
in February 2008.
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In order to safeguard auditor independence and objectivity, the
Committee ensures that any other advisory/consulting services
provided by the auditors do not conflict with their statutory audit
responsibilities and are conducted through entirely separate working
teams; such advisory and/or consulting services only generally cover
regulatory reporting, tax and mergers and acquisitions work. Any
non-audit services conducted by the auditors require the consent of
the Chief Financial Officer or the Chairman of the Audit Committee
before being initiated, with any such services exceeding £50,000 in
value requiring the consent of the Audit Committee as a whole. In
the last financial year, the only non-audit activity conducted by
KPMG on behalf of QinetiQ which exceeded this £50,000 threshold
related to the provision of M&A and taxation advisory services to the
Group, which the Committee concluded did not create any conflict of
interest issues which might compromise the independence of KPMG
audit work. It is also QinetiQ’s policy that no KPMG employee may be
appointed into a senior position within the QinetiQ Group without
the prior approval of the Chief Financial Officer. The cost of non-audit
work undertaken by the auditors was reviewed by the Committee on
several occasions during the last financial year; this process allows
the Committee to take corrective action if it believes that there is a
risk of the auditors’ independence being undermined through the
award of such work.
KPMG has been the Company’s auditors since 2003. The members of
the Audit Committee have declared themselves satisfied with the
performance of KPMG as the Company’s auditors in the last financial
year. There has been a rotation of KPMG’s lead audit partner during
the financial year ended 31 March 2008; it is anticipated that he will
continue in this role for a maximum term of five years.
Remuneration Committee
Each member of the Remuneration Committee is an independent
Non-executive Director. The Committee is chaired by Dr Peter Fellner.
The other members of the Remuneration Committee are Sir David
Lees and Noreen Doyle. The Committee meets as necessary although
normally not less than three times a year. During the financial year
ended 31 March 2008, the Remuneration Committee met on six
occasions. Although not members of the Committee, the Group
Chairman, the Chief Executive Officer, the Group Head of Human
Resources and the Head of Performance and Reward normally
attend Committee meetings, together with representatives of
QinetiQ’s external consultants, Deloitte & Touche LLP, as necessary.
Executive Directors are not present when their own remuneration
is being discussed.
Nominations Committee
The Nominations Committee consists of the Committee Chairman,
Sir David Lees, together with Dr Peter Fellner and Sir John Chisholm.
A majority of the Committee throughout the year were Non-
executive Directors. The Committee meets as necessary and when
called by its Chair. During the financial year ended 31 March 2008,
the Committee met formally on one occasion and consulted
informally on several other occasions.
planning to cover vacancies arising over a two to five-year timeframe.
The Committee also oversaw the selection process for a new
independent Non-executive Director with experience of the US
Defence and Security sector, which culminated in the appointment of
Admiral Edmund P. Giambastiani to the Board in February 2008. The
Committee was responsible for initiating this recruitment process,
using external recruitment agents, and retained responsibility for
finalising the terms of Admiral Giambastiani’s engagement through
to completion of his appointment. The Committee also initiated the
recruitment process for a new Chief Financial Officer to replace Doug
Webb, who announced on 17 January 2008 his intention to take up
the position of Chief Financial Officer with The London Stock
Exchange Group plc.
Compliance Committee
QinetiQ’s breadth of technical knowledge and its depth of
understanding of the defence operating environment allows it
to serve the interests of the MOD in two distinct ways. It is able
to partner with other manufacturers in the defence supply chain to
develop and deliver capabilities that give an operational advantage
to the armed forces and also to provide advice to the MOD during
the entire procurement cycle.
However, these distinct offerings may lead to conflict of interest,
which, if unmanaged, could bring into question the MOD’s ability to
be able to rely on impartial advice during any competitive evaluation
of a procurement where QinetiQ wishes to operate on both the ‘buy’
and the ‘supply’ sides. To give MOD customers confidence that
QinetiQ is able to perform these activities, QinetiQ is required by its
Articles of Association to implement a Compliance Regime, which
was established on its creation out of DERA. Central to this Regime is
the requirement for QinetiQ to seek permission from the MOD prior
to providing commercial defence services to others where there is
potential for a conflict of interest with the services that QinetiQ
provides to the MOD.
In designing the Compliance Regime, the MOD and QinetiQ sought
to achieve a balance between meeting the needs of the procurement
customers within the MOD (principally Defence Equipment and
Support) and the need to allow QinetiQ flexibility to exploit research
into the supply chain and pursue its planned commercial activities,
without compromising the defence or security interests of the UK.
The Compliance Regime is largely self-policing, in that it is applied by
QinetiQ in respect of its activities without extensive intervention or
oversight by the MOD. Since the inception of the Compliance Regime,
over 97% of the requests to the MOD to allow QinetiQ to operate on
the supply side of the commercial defence market have been
approved. Oversight of the operation of the Regime is provided by
the Compliance Committee, chaired by Sir David Lees. Colin Balmer,
a Non-executive Director, is a member of the Committee and the
Group Chairman, Chief Executive Officer and Compliance Audit
Director are also members. The Board nominates two senior
executives to act as Compliance Implementation Director and
Compliance Audit Director.
The principal focus of the Committee’s activities during the financial
year ended 31 March 2008 was to review QinetiQ’s succession
planning processes at both the Executive and Non-executive Director
level, and for other key management positions within the Group,
which the Committee considered in terms of the need to plan for
immediate cover in respect of key roles, as well as succession
QinetiQ’s Compliance Committee meets on four occasions each year
to monitor the operation of the Regime. It receives a report from the
Company’s Compliance Implementation Director which describes the
permissions which have been sought and granted since the last
meeting of the Committee, and the status of projects where the
potential conflicts of interest are being managed. The Committee
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also receives, from the Compliance Audit Director, a report on the
effectiveness of the controls that are in place to ensure that the
Regime is operated correctly. The Committee reviews the systems
that support the Compliance Regime and those that may impact it,
directing changes if appropriate. The Committee is the forum that
would address any issues arising out of QinetiQ’s failure to comply
with the requirements of the Regime. The Committee has supported
the MOD in conducting its own internal audit review of the
Compliance Regime during the course of the last financial year.
A computer-based training package continues to be used to ensure
that all relevant employees have a satisfactory knowledge of the
operation of the Regime. For key roles, competence is demonstrated
by passing a mandatory test annually.
The MOD reviews the operation and effectiveness of the Compliance
Regime, through its right to have an observer at the Compliance
Committee meetings.
Communication with shareholders
The Company attaches significant importance to the effectiveness of
its communications with shareholders. During the last financial year,
the Company has maintained regular dialogue with institutional
shareholders and the financial community, which has included
presentations of the full-year and interim results (including investor
‘road shows’ held in the UK, Europe and US), regular meetings with
major shareholders and industry analysts, participation in
stockbrokers’ seminars and investor site visits held at Malvern and
Boscombe Down. In addition, each member of the Board attended
the Company’s Annual General Meeting in July 2007 and a number
of Non-executive Directors attended key shareholder events in the
last financial year, including the full-year and interim results
presentations, at which they were available to take questions from
shareholders. All shareholders and potential shareholders can gain
access to the Annual Report, presentations to investors and other
significant information about the QinetiQ Group on the Company’s
website at www.QinetiQ.com.
During the year, a total of eight new permissions were sought from
the MOD under the Compliance Regime, where potential conflicts
of interest were identified by QinetiQ, with one permission request
being outstanding from the previous year. Of these nine requests
two were approved, three were not pursued, one was rejected and
three remained outstanding at the end of March 2008. At the end of
the year, 27 firewalls were in place, with seven being established and
16 being closed down during the year. Since vesting in 2001, a total
of 110 firewalls have operated with 83 now closed. No breaches of
the MOD Compliance Regime have been noted during the year.
A firewall is a series of rules and procedures governing written and
oral communication between staff contributing to products in an
MOD competition with industry (outside the wall) and staff assessing
those products for MOD (inside the wall).
The Compliance Committee also provides oversight of QinetiQ’s
activities that fall within the scope of the Helsinki Protocol covering
trials involving human volunteers.
Going concern
The Directors are of the opinion that the Group has adequate
resources to continue to operate for the foreseeable future and have
prepared the accounts on a going concern basis.
Attendance at Board and Committee meetings April 2007 – March 2008
Holders of ordinary shares may attend the Company’s AGM at which
the Company highlights key business developments during the year
and at which shareholders have an opportunity to ask questions. The
chairmen of the Audit, Remuneration, Nominations and Compliance
Committees will be available to answer any questions
on the work of the Committees. The Company confirms that it will
send the AGM notice and relevant documentation to all shareholders
at least 20 working days before the date of the AGM. For those
shareholders who have elected to receive communications
electronically, notice is given of the availability of documents on the
Investor Relations section of the Group’s website. All shareholders
will be entitled to vote on the resolutions put to the AGM and, to
ensure that all votes are counted, a poll will be taken on all the
resolutions in the Notice of Meeting. The results of the votes on
the resolutions will be published on the Company’s website.
Responsibility for maintaining regular communications with
shareholders rests with the Executive Team, led by the Chief
Executive Officer, assisted by an investor relations function which
reports to the Chief Financial Officer. The Board is informed on
a regular basis of key shareholder issues, including share price
Colin Balmer
Sir John Chisholm
Noreen Doyle
Dr Peter Fellner
Sir David Lees
Graham Love
Nick Luff
George Tenet 1
Doug Webb
Edmund P. Giambastiani 2
Board
9/10
10/10
9/10
9/10
8/10
10/10
9/10
4/10
10/10
–
Remuneration
Committee
Audit
Committee
Compliance
Committee
nomination
Committee
–
–
6/6
6/6
5/6
–
–
–
–
–
–
–
5/5
5/5
–
–
5/5
–
–
–
4/4
4/4
–
3/4
4/4
–
–
–
–
–
1/1
–
1/1
1/1
–
–
–
–
–
1 George Tenet resigned from the Board on 1 February 2008.
2 Admiral Edmund P. Giambastiani was appointed to the Board on 1 February 2008, which followed the date of last Board meeting held in the financial year ended
31 March 2008.
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performance, the composition of the shareholder register and City
expectations. The Chairman, the Senior Independent Director and
Non-executive Directors make themselves available to meet with
shareholders as required.
Management and control of US subsidiaries
QinetiQ’s principal US subsidiaries are currently required by the US
National Industrial Security Program to maintain facility security
clearances and to be insulated from foreign ownership, control or
influence. To comply with these requirements, QinetiQ North
America Operations, LLC (a wholly-owned subsidiary of QinetiQ in the
US and the holding company for the substantive part of QinetiQ’s
North American operations) and the US DoD have entered into a
proxy agreement that regulates the ownership, management and
operation of these companies. Pursuant to this proxy arrangement,
QinetiQ appointed three US citizens holding requisite US security
clearances as proxy holders to exercise the voting rights of QinetiQ
North America Operations, LLC’s shares in the US subsidiaries. The
proxy holders are also appointed as directors of the relevant US
subsidiaries and, in addition to their powers as directors, have power
under the proxy arrangements to exercise all prerogatives of share
ownership of QinetiQ North America Operations, LLC. The proxy
holders agree to perform their role in the best interests of QinetiQ
North America Operations, LLC and consistent with the national
security concerns of the United States. QinetiQ does not have any
representation on the boards of the subsidiaries covered by the proxy
agreement and does not have the right to attend board meetings.
QinetiQ may not remove the proxy holders except for acts of
gross negligence or wilful misconduct or for breach of the proxy
agreements (with the consent of the US Defense Security Service).
Internal controls
The Board is ultimately responsible for the Group’s system of internal
control and for reviewing its effectiveness in safeguarding the
shareholders’ interests and the Company’s assets. However, such
a system is designed to manage rather than eliminate the risk of
failure to achieve business objectives, and can provide only
reasonable and not absolute assurance against material
misstatement or loss. QinetiQ managers are responsible for the
identification and evaluation of significant risks applicable to their
areas of business, together with the design and operation of suitable
internal controls to ensure effective mitigation. These risks, which
are related to achievement of business objectives, are assessed on a
continual basis and may be associated with a variety of internal and
external events, including control breakdowns, competition,
disruption, regulatory requirements and natural and other
catastrophes.
A process of hierarchical self-certification has been established
within the organisation which provides a documented and auditable
trail of accountability for the operation of the system of internal
control. This process is informed by a rigorous and structured self-
assessment that addresses all of the guidance cited in the Combined
Code. The process provides for successive assurances to be given at
increasingly higher levels of management and, finally, to the Board.
The process is informed by the Internal Audit function, which also
provides a degree of assurance as to the operation and validity of the
system of internal control. Planned corrective actions are
independently monitored for their timely completion. The managers
report on risks (which are recorded at corporate, sector and divisional
level of profit and loss, as well as within all customer-facing projects)
and how these are managed on a monthly basis to the QinetiQ
Executive Team and the Board, formally, on a quarterly basis.
The QinetiQ Executive Team reviews on a monthly basis the risk
management and control process and considers:
n
n
the authority, resources and coordination of those involved in the
identification, assessment and management of significant risks
faced by the organisation;
the response to the significant risks which have been identified by
management and others; the monitoring of reports from Group
management; and
n
the maintenance of a control environment directed towards the
proper management of risk.
The centrally provided internal audit programme is prioritised
according to risks identified by the Company and is integrated across
all business and functional dimensions, thereby reducing issues of
overlap or gaps in coverage. These risks are identified dynamically
and the Board is involved in this process as well as the QinetiQ
Executive Team.
The Chief Financial Officer provides to the Board monthly
information that includes key performance and risk indicators.
Where areas for improvement in the system of internal control are
identified, the Board considers the recommendations made by the
QinetiQ Executive Team, the Audit Committee and the Compliance
Committee. The Audit Committee reviews, on behalf of the Board,
the key risks inherent in the business and the system of internal
control necessary to manage such risks and presents its findings to
the Board. Internal Audit independently reviews the risk identification
and control processes implemented by management and reports to
the Audit Committee.
The Audit Committee also reviews the assurance process, ensuring
that an appropriate mix of techniques is used to obtain the level of
assurance required by the Board. It presents its findings to the Board
on a regular basis. The Board has reviewed the effectiveness of the
system of internal control that has been in operation during the
financial year ended 31 March 2008. The Board also routinely
challenges the management to ensure that the systems of internal
control are constantly improving to maintain their continuing
effectiveness.
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Report of the Remuneration Committee
Report of the Remuneration Committee
Dr Peter Fellner,
Chairman of the Remuneration Committee
Our aim is to drive QinetiQ’s business performance and shareholder
value through the Group’s remuneration strategy and to ensure
governance of executive reward. The key purpose of the Committee
is to ensure that the remuneration strategy is aligned to the Group’s
strategy and that we are able to attract, retain and motivate
the very best calibre executives in an increasingly competitive
market for talent.
The following report and recommendation of the Remuneration
Committee have been approved by the Board for submission to
shareholders. The report covers the remuneration for Directors and
includes specific disclosures relating to their emoluments, shares and
other interests. It also describes the share-based incentive plans
available to Executive Directors and to other employees. This report
has been produced in accordance with the Directors’ Remuneration
Report Regulations 2002.
We are committed to providing transparent disclosure of Executive
Directors’ remuneration to all stakeholders. This report provides clear
details of the component parts of each Executive’s remuneration and
explains the policies and principles to which we have adhered.
Membership
The Committee is composed of the following independent
Non-executive Directors:
The Remuneration Committee remains confident that the existing
reward structure is appropriate to support the business strategy. As a
result of this year’s annual review, the following changes were made:
n Dr Peter Fellner;
n Sir David Lees; and
n
In line with US market practice, in order to retain and motivate
US executives, we implemented a Restricted Stock Plan. This was
listed in our IPO Prospectus and approved by shareholders. The
plan is in line with share structures operating in the US. Executives
receive a share grant, equal amounts of which vest based on time
and the rate of organic growth within the US business. Vesting
occurs annually over a four-year period.
n
Within the UK, we introduced a Performance Share Plan and a
Deferred Annual Bonus Plan, both of which were approved by
Shareholders at our July 2007 AGM.
These new arrangements will become the key mechanism for
long-term incentivisation amongst our senior executives.
The Remuneration Committee continues to review the total reward
package to assess how well incentive awards match with the Group’s
performance. I am confident that we continue to align executives’
and shareholders’ interests whilst enabling the Group to engage a
high-calibre team.
The Board recommends that shareholders vote to approve the Report
on Directors’ Remuneration.
n Noreen Doyle.
The full Terms of Reference of the Committee can be found on the
QinetiQ website (www.QinetiQ.com) and copies are available on
request.
Governance
The Committee is chaired by Dr Peter Fellner and all of its members
are independent Non-executive Directors. In 2008, the Committee
met six times.
During the year the Committee received advice from its appointed
independent advisors, Deloitte & Touche LLP (Deloitte). Towers
Perrin and Monks Partnership provided market information. Deloitte
provided other consulting services during the year to QinetiQ, but did
not provide advice on executive remuneration matters other than to
the Committee.
Sir John Chisholm (Chairman), Graham Love (CEO), Stephen Luckhurst
(Group Human Resources Director) and John Leighton-Jones (Group
Head of Reward & Performance) provided advice to the Committee,
other than in relation to their own remuneration.
Dr Peter Fellner
Chairman of the Remuneration Committee
28 May 2008
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Report of the Remuneration Committee continued
Activities
During the year the following activities were undertaken by the
Committee:
Directors’ remuneration policy
The Committee aims to maintain a remuneration policy, consistent
with the Group’s business objectives, which:
n
n
evaluation of Executive Directors and senior management
performance to determine salaries and prior-year bonus payments;
n attracts, retains and motivates individuals of high calibre; and
n is responsive to both business and personal performance.
establishment of parameters and performance targets for annual
bonus plans;
The remuneration policy is built on the following philosophy:
n group Share Option Scheme grants to managers in the UK and US;
n review of Long-Term Incentive arrangements;
n
grants under the QinetiQ North America Stock Award Plan;
n
introduction of the 2007 Performance Share Plan and a Deferred
Annual Bonus Plan;
n approval of awards under the Performance Share Plan;
n
n
market-based review of the total compensation packages of the
Group’s most senior executives; and
review of remuneration for Non-executive Directors of the Group,
including the Chairman. Independent advice was provided by
Deloitte. Recommendations were made to the Board with regard
to the level of remuneration.
n
n
remuneration packages will be structured in order to support
business strategy whilst conforming to current best practice;
total rewards are achieved through the attainment of stretching
performance targets based on measures which are consistent with
the interests of shareholders; and
n
transparent disclosure of remuneration will be provided to the
Company’s shareholders.
The current structure of remuneration (excluding pension) for Executive Directors under this policy is illustrated below:
Fixed (c40%)
Base Salary
variable (c60%)
Short/Medium-Term incentive
Annual cash bonus with an element deferred
into the Deferred Annual Bonus Plan
Long-Term Incentive
Performance Shares
Deferred Annual Bonus
Each element of an Executive Director’s remuneration package aligns and supports the achievement of different Company objectives.
This alignment is illustrated below:
element
Base Salary
Annual Bonus with a deferred element
Performance Share Plan
(replaces share options for Executives)
Objective
Performance Metric
Reflects market practice based on size
of role and complexity.
– Drives achievement of medium-term metrics
– Provides a co-investment opportunity
– Drives achievement of annual
business metrics
– Facilitates greater alignment
with shareholders
– Drives earnings growth,
share price and dividend growth.
– Aligns with shareholders
Based on individual performance
– Profit Before Tax
– Earnings Per Share
– Cash Flow
– Turnover
– Orders
– EPS Growth
– Total Shareholder Return
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Report of the Remuneration Committee continued
QinetiQ Share Option Scheme (QSOS)
Share options align rewards of managers with returns to
shareholders by focusing on increases in the share price over the
medium to long term.
The QSOS is used to retain and motivate key managers below the
level of the CEO’s direct reports, who do not receive awards under
the PSP. Annual share option awards with a value up to 300% of
salary can be made.
In line with market practice, the performance target is QinetiQ’s
earnings per share growth. EPS growth of at least 22.5% must be
achieved over the performance period. 25% of the award vests at that
level of performance with full vesting for achieving 52% as illustrated
in the graph below. EPS growth performance is measured over three
years and there is no re-testing of performance.
100%
%
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25%
22.5%
52%
EPS Performance
2007 Performance Share Plan (PSP) and Deferred Annual Bonus
Plan (DAB)
In 2007 the Remuneration Committee received shareholder approval
for the establishment of the following new plans:
100%
n 2007 Performance Share Plan (2007 PSP); and
n 2007 Deferred Annual Bonus Plan (2007 DAB).
%
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30%
These new arrangements will become the key mechanism for
long-term incentivisation for Executive Directors and direct reports
of the CEO. Participants in the 2007 PSP do not receive QSOS grants.
Median
2007 Performance Share Plan (2007 PSP)
Awards of performance shares were made to Executive Directors
and other senior executives in July 2007. Conditional share awards
are contingent on meeting pre-determined performance criteria.
Individual participants’ award levels are determined by the
Remuneration Committee annually, with due regard to seniority
as well as business and individual performance.
TSR Performance
Upper Quartile
Executive Directors are eligible to receive awards with a face value
of up to 100% of base salary, with awards for other participants not
exceeding 75% of base salary.
Awards are earned based on an equal weighting of relative total
shareholder return (TSR) performance and absolute underlying
earnings per share (EPS) growth.
Base salary
Executive Directors’ base salaries are reviewed annually on the same
basis as all other employees and adjustments may be made to reflect
competitive pay levels, business and individual performance. External
remuneration consultants provide data about market salary levels.
For market comparison purposes account is taken of company type,
sector and measures of company size in terms of both market
capitalisation and turnover.
Annual bonus
Executive Directors have annual cash bonus arrangements, which
are non-pensionable. Bonuses are linked to Group and personal
performance targets. The maximum annual bonus opportunity for
the Executive Directors is 100% of salary.
The 2008 bonus scheme was based on a target of 50% of base salary
and measured against the five key performance indicators (KPIs):
Profit before tax; earnings per share; cash generation; turnover
and orders.
An entry level is defined for each KPI and no payment will be made
unless it is achieved. Performance against the KPIs is measured
independently. However, if the entry level trigger for the profit KPI is
not satisfied, the Committee has the discretion to reduce the bonus
applicable to the other KPIs.
Where Group performance exceeds the entry level, bonus elements
for each KPI accrue on a straight line to the target level. If there is
over-achievement against one or more KPIs, then the proportion of
bonus increases linearly to the maximum level.
Consideration is also given to the achievement of personal objectives.
As a percentage of salary the on-target, maximum and actual
bonuses paid to Executive Directors are as illustrated below:
Graham Love
Doug Webb
On Target %
Maximum %
2008 Actual %
50
50
100
100
61.28
61.28
Benefits
Benefits include a pension or contribution in lieu, car allowance,
health insurance, life insurance and membership of the Group’s
employee Share Incentive Plan which is open to all UK employees.
The Company also pays an insurance premium in respect of death
in service cover for those Executives not covered by the QinetiQ
Pension Scheme.
Executives whose benefits are likely to exceed the Lifetime Allowance
may opt out of the QinetiQ Pension Plan. In such cases, the individual
will be paid a salary supplement in lieu of pension contributions.
Long-term incentives
The objective is to align the rewards of Executives with returns to
shareholders by focusing on increasing the share price over the
medium to long term. Executive Directors are eligible to participate in
both the Performance Share Plan and the Deferred Annual Bonus plan.
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Report of the Remuneration Committee continued
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All Employee Share Schemes
QinetiQ has historically operated an HMRC-approved Share Incentive
Plan (SIP) for its UK employees, including Executive Directors. Under
this arrangement employees may purchase ordinary shares in
QinetiQ on a monthly basis. QinetiQ provides a matching share for
every three shares purchased by an employee. Dividends paid in
respect of shares accumulated through the SIP are reinvested as
dividend shares.
Due to expansion into overseas territories, the Company will be
launching all employee share plans in North America and Australia.
Within North America the plan will operate through an approved
Shareholder Stock Purchase Plan, more commonly referred to as a
S423 plan. Subject to certain restrictions, eligible employees will be
able to purchase QinetiQ shares at a discount to the prevailing
market rate. These purchased shares will be subject to a 12-month
holding period. The envisaged all employee share plan for Australia
will operate on a similar premise.
QinetiQ North America – Equity-Based Incentives
During the year, valid share awards reflecting local market practice
were made to 250 executives and senior managers in our North
American business. Initial awards were made in the form of Restricted
Stock Units (RSU) under the Stock Award Plan adopted at IPO and/or
in the form of Share Options. Share option awards were made under
the QSOS.
The RSU awards vest progressively over a four-year period, with 30%
vesting after two years, a further 30% after three years and the
balance after four years. Half of the award vests based on a time
basis with half vesting based on the organic revenue growth of QNA.
In the year, 7.8m equity-settled awards were granted (2007:10.2m) of
these 5.4m were under QSOS, 0.7m under PSP and 1.7m under RSU.
The quantum of awards reflects both the performance of the QNA
business and our determination to recruit, retain and motivate
high-calibre employees in an increasingly competitive employment
market, where equity incentivisation forms a significant part of an
executive’s and senior manager’s remuneration package.
Personal Shareholding Policy
The Committee believes that a powerful way to align Executives
interests with those of shareholders is for the Executives to build
up and retain a personal holding in QinetiQ shares.
The CEO and CFO will be required to hold the equivalent of one times
their base salary in QinetiQ shares. Each Executive Director currently
meets the Committee’s guideline on minimum shareholding
requirement. Direct reports to the CEO will be required to accumulate
a shareholding equivalent to 50% of base salary over a four-year
period from appointment.
Dilution limits
The Committee has agreed that with regard to new issue or treasury
shares, no more than 10% of the Company’s issued share capital will
be used under all the Company’s share schemes over a period of ten
years in accordance with ABI guidelines. The dilution as at 31 March
2008 was significantly below this 10% level and, equally significantly,
under the 5% level for Executive schemes. The Board intends to
continue to satisfy a proportion of awards with shares purchased by
the employee benefit trusts.
The TSR part of the award is measured against the constituents of a
comparator group of companies:
Babcock International plc
BAE Systems plc
BBA Aviation plc
Bodycote International plc
100%
Capita Group plc
Chemring Group plc
Cobham plc
Cookson Group plc
Detica plc
Enodis plc
FKI plc
25%
GKN plc
Halma plc
%
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IMI plc
Invensys plc
Logica plc
Meggitt plc
The Morgan Crucible Company plc
Rolls-Royce plc
Serco plc
Tomkins plc
Ultra Electronics plc
Victrex Group plc
VT Group plc
WS Atkins plc
22.5%
52%
EPS Performance
The TSR element is earned only if relative performance is at least at
median against this comparator group over a three-year performance
period, calculated by an independent third party. The graph below
illustrates the TSR performance conditions.
100%
%
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30%
Median
Upper Quartile
TSR Performance
The EPS element of the award requires a minimum absolute growth
of 22.5% over the three-year performance period, for which 25%
of the EPS part of the award would vest. This will increase on a
straight line basis to full vesting if EPS growth of 52% is achieved.
This is the same as applies for QSOS as illustrated in the EPS
performance graph.
2007 Deferred Annual Bonus Plan (DAB)
The Deferred Annual Bonus aligns the interests of Executives with
shareholders and aids retention of key individuals by ensuring that
Executives are incentivised to take part of their annual bonus awards
in shares rather than cash.
Awards are in the form of matching shares delivered after three
years, subject to the achievement of performance conditions.
In this first year of application (2008) Executives can voluntarily defer
up to 50% of their bonus under this plan, with the Committee setting
a mandatory 20% deferral for the next financial year (2009). Deferred
bonus will be matched to a maximum of 1:1 based on EPS performance.
Where an individual participates in the Deferred Annual Bonus and
also participates in the PSP, they will not receive share awards which,
in aggregate, exceed 150% of their base salary in any one year.
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Report of the Remuneration Committee continued
Performance Graph
The graph below compares the Company’s Total Shareholder Return
over the period from IPO to 31 March 2008 with the FTSE 250 and
FTSE 350 Aerospace & Defence sector Total Return Indices over the
same period. These were chosen for comparison as QinetiQ is a
constituent of both indices.
Relative share price performance
140
130
120
110
R
S
T
100
90
80
70
60
Non-executive Directors’ terms, conditions and fees
The Chairman reviews the fees of the Non-executive Directors on a
biennial basis and makes recommendations to the Board. Non-
executive Directors receive additional fees as agreed by the Board for
the chairmanship of Board committees to take account of the
additional responsibilities of the role. The level of fees paid in UK
organisations of a similar size and complexity to QinetiQ are
considered in setting remuneration policy for Non-executive
Directors. The fees are not performance related or pensionable. Non-
executive Directors are not eligible to participate in bonus, profit
sharing or employee share schemes.
Current fee structures for Non-executive Directors are shown below:
Non-executive Chairman
Board Member base fee
Committee Chairmanship additional fee
Deputy Chairman/Senior Independent
NED additional fee
£215,000
£40,000
£7,000
£10,000
The annual fees were reviewed in September 2007 and are due for
further review in October 2009.
09 February 06
31 March 07
31 March 08
FTSE 250
FTSE 350 Aerospace & Defence
QinetiQ
Directors’ terms and conditions
Service Agreements for the most senior Executives and the Non-executives are reviewed annually and amended as appropriate.
Executives
Graham Love
Doug Webb1
Non-executives
Sir John Chisholm
Sir David Lees
Nick Luff
Dr Peter Fellner
Noreen Doyle
Colin Balmer
Admiral Ed Giambastiani2
Former Directors
George Tenet3
notice to be
given by the
Company
Date of most
recent Service
Agreement
Date of
appointment
12 months
12 months 1
1 December 2005
1 October 2005
February 2003
September 2005
–
–
–
–
–
–
–
–
1 October 2006
16 February 2006
16 February 2006
16 February 2006
16 February 2006
16 February 2006
1 February 2008
February 2003
August 2005
June 2004
September 2004
October 2005
February 2003
February 2008
26 October 2006
October 2006
1 Doug Webb has resigned and will leave the Board on 30 May 2008.
2 Admiral Ed Giambastiani joined the Board on 1 February 2008.
3 George Tenet resigned from the Board on 1 February 2008 to join the Board of QinetiQ North America.
QinetiQ’s policy is that Executive Directors should have contracts with a rolling term providing for a maximum of one year’s notice.
Consequently, no Executive Director has a contractual notice period in excess of 12 months. In the event of early termination, this ensures
that compensation is restricted to a maximum of 12 months’ basic salary and benefits. The Committee will generally require mitigation to
reduce the compensation payable to a departing Executive Director.
Non-executive Directors’ contracts are renewed on a rolling 12-month basis subject to reappointment at the Annual General Meeting.
There are no provisions in their contracts for compensation on early termination.
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Report of the Remuneration Committee continued
External appointments
QinetiQ allows Executives to broaden their knowledge and experience by becoming Non-executive Directors of other companies.
Appointments are approved by the Board or Committee on the basis that there is no conflict of interest or deterioration in the Executives’
performance. Fees are normally retained by the individual. During the year ended 31 March 2008, neither of the Executive Directors held such
an appointment at a public company.
Audited information
The information about Directors’ remuneration and Directors’ interests on pages 63 and 64 has been audited.
Executives
Graham Love
Doug Webb
Non-executives
Sir John Chisholm
Sir David Lees
Nick Luff
Dr Peter Fellner
Noreen Doyle
Colin Balmer
Admiral Ed Giambastiani f
Former Directors
George Tenet g
Salary/fees
Bonusa
Benefitsb
Total 2008
Total 2007
£341,817
£305,580d
£214,480
£193,032
£83,748c
£16,730e
£640,045
£515,342
£544,899
£415,279
£207,500
£57,000
£43,500
£43,500
£37,500
£37,500
£29,128
–
–
–
–
–
–
–
£13,265
–
–
–
–
–
–
£220,765
£57,000
£43,500
£43,500
£37,500
£37,500
£29,128
£388,653
£50,000
£40,000
£40,000
£35,000
£35,000
–
£50,464
£1,153,489
–
£407,512
–
£113,743
£50,464
£1,674,744
£47,754
£1,596,585
Includes car allowance, health insurance benefits and payment in lieu of pension contributions.
a 2008 Performance bonuses were earned but not paid in the financial year.
b Benefits apart from pensions.
c
d Before deductions to basic salary for SMART pensions (salary sacrifice arrangements).
e
f Admiral Ed Giambastiani joined the Board on 1 February 2008. Fees are inclusive of initial fee of $40,000 for joining the Board.
g George Tenet resigned from the Board on 1 February 2008 to join the Board of QinetiQ North America.
Includes car allowance, life assurance and health insurance benefits.
Pensions
The Group’s policy is to offer all UK employees membership of the QinetiQ Pension Scheme, as described in note 39 to the financial
statements. This scheme contains both defined benefit and defined contribution sections. Doug Webb is a member of the defined
contribution section of the QinetiQ Pension Scheme, Graham Love receives contributions in lieu of a pension.
Disclosures in respect of Doug Webb
Details of the contributions payable to the Defined Contribution section of the QinetiQ Pension Scheme, as required under Schedule 7A
section 12(3) of the Companies Act 1985 and LR 9.8.8 (11) of the FSA’s Listing Rules are shown below:
The Company contributions payable in respect of the 12 months to 31 March 2008 were £59,545. These represent payments before SMART
pension arrangements.
Directors’ interests
The interests of the Directors in office at 31 March 2008 in the shares of QinetiQ Group plc at that date were as follows:
Directors interest in the All Employee Share Incentive Plan
Sir John Chisholm
Graham Love
Doug Webb
Interest
as at
1 April
2007
254
1,263
1,263
Partnership
Shares
acquired
during year
Matching
Shares
appropriated
during year
Dividend
Shares
allocated
during year
–
808
808
–
269
269
6
37
37
Interest
as at
31 March
2008
260
2,377
2,377
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Report of the Remuneration Committee continued
Interests of Directors in office as at 31 March 2008 including shares held under SIP
Executives
Graham Love
Doug Webb
Non-executives
Sir John Chisholm
Sir David Lees
Nick Luff
Dr Peter Fellner
Noreen Doyle
number 1p
Ord Shares
held at
number 1p
Ord Shares
held at
1 April 2007 31 March 2008
number 1p
Ord Shares
held at
28 May 2008
7,779,513
619,130
4,930,627
320,244
4,930,796
320,413
13,001,004
17,000
27,000
17,000
17,000
3,731,8081
63,000
27,000
17,000
17,000
3,731,808
63,000
50,000
17,000
17,000
1 The decrease in the interest of Sir John Chisholm reflects a transfer made into a trust established for the benefit of his family. Sir John Chisholm and Mr Nicolas
John Shaw are the Trustees. Sir John has confirmed that the transfer was effected for CGT planning purposes and that he will reacquire the shares on 26 June
2008. The Trustees held 9,269,202 1p ordinary shares as at 31 March 2008 (1 April 2007: nil).
Interests of Directors in office as at 31 March 2008 under long-term incentives
Grant
Date
number at
1 April 2007
Granted
in Year
exercised
in Year
Lapsed
in Year
executive Directors
Graham Love
PSP-TSR
PSP-EPS
Doug Webb 1
QinetiQ Share
Option Scheme
(Approved)
QinetiQ Share
Option Scheme
(Unapproved)
PSP-TSR
PSP-EPS
Total
26/07/07
26/07/07
–
–
50,288
50,287
22/02/06
14,403
22/02/06
230,789
–
–
26/07/07
26/07/07
–
–
245,192
45,259
45,258
191,092
–
–
–
–
–
–
–
number at
31 March
2008
50,288
50,287
exercise
price
earliest
exercise date
expiry
Date
–
–
26/07/10
26/07/10
26/07/11
26/01/11
14,403
208p
22/02/09
22/08/09
–
–
–
–
230,789
208p
22/02/09
22/08/09
–
–
–
45,259
45,258
436,284
–
–
26/07/10
26/07/10
26/01/11
26/01/11
1 Due to resignation, awards made under the Performance Share plan, Group Share Option and matching shares in the SIP plan will lapse on 30 May 2008.
The interests in the table above are subject to the performance conditions described on pages 60 and 61. The price of a QinetiQ share
at 31 March 2008 was 193p. The highest and lowest price of a QinetiQ share at 31 March 2008 were 206.5p and 165p respectively.
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QinetiQ Group plc Annual Report and Accounts 2008
Report of the Directors
Report of the Directors
The Directors present their report and the audited financial
statements for the year to 31 March 2008. The report from the
Directors on Corporate Governance is set out on pages 52 to 57
and the Remuneration Committee report on pages 58 to 64.
Principal activity
QinetiQ Group plc is a public limited company, listed on the London
Stock Exchange and incorporated in England and Wales with
registered number 4586941.
QinetiQ Group plc is the parent company of a Group whose principal
activities during the year were the supply of technology-based
solutions and products and provision of technology-rich support
services for government defence and security organisations, such as
the UK MOD and the US DoD, and for commercial customers around
the world.
Business review and Group results
The profit on ordinary activities of the Group before tax was £51.4m
(2007: £89.3m). The profit attributable to ordinary shareholders of
the parent company was £47.4m (2007: £69.0m).
A description of the Group’s performance during the year and the
likely future developments is contained in the reports of the
Chairman and Chief Executive Officer on pages 2 to 10 and in the
Business Review on pages 11 to 49.
Principal risks and uncertainty
A description of the Group’s principal risks and uncertainty is
contained in the Business Review on pages 42 to 44.
Principal changes to the Group
The Group made a number of acquisitions and disposals in the year
which are disclosed in detail in notes 13 and 5 respectively.
Research & development
One of the Group’s principal business streams is the provision
of funded research and development for customers. The Group
also invests in the commercialisation of promising technologies
across all areas of business. Further description of the Group’s
research & development activity is contained in the Business
Review on page 40.
Proposed dividend
During the year the Group paid an interim dividend of 1.33p per
share (2007: 1.20p). The Directors recommend the payment of a
final dividend of 2.92p per ordinary share (2007: 2.45p). Subject
to the approval of shareholders the final dividend will be paid
on 5 September 2008 to shareholders on the share register on
8 August 2008.
Policy and practice on payment of suppliers
The policy of the Group is to agree terms of payment prior to
commencing trade with a supplier and to abide by those terms based
on the timely submission of satisfactory invoices. At 31 March 2008,
the trade creditors of the Group represented 35 days of annual
purchases (2007: 31 days).
Principal financial instruments risks and uncertainty
The Group’s principal risks in relation to the use of financial
instruments arise on contracting with customers in foreign
currencies and through the use of interest rate swaps and caps to
manage interest rate exposure on the Group’s borrowings. A more
detailed description of the Group’s principal risks and uncertainties
and policies related to the use of financial instruments is contained
in the Business Review on pages 42 to 44.
Directors and Directors’ interests
The Directors in office at the date of this report and details of the
Board committees on which they sit are detailed on pages 50 and 51.
The dates of Director appointments can be found on page 62. Details
of the Directors’ emoluments and interests are shown in the Report
of the Remuneration Committee on pages 58 to 64.
Directors’ appointment, removal and powers
Rules concerning the appointment and replacement of Directors
of the Company are contained in the Articles of Association and
changes to these Articles must be submitted to shareholders for
approval. The Shareholder Relationship Agreement entered into
between QinetiQ and MOD at IPO entitles MOD to nominate one
Non-executive Director to the Board, for so long as MOD does not
dispose of any further ordinary shares in the Company, and
thereafter for so long as it holds at least 10% of QinetiQ’s issued
ordinary share capital. The Directors are responsible for the
management of the business of the Company and their powers
are subject to the Memorandum and Articles of Association and
any applicable legislation and regulation.
Employees
The Group is an equal opportunities employer, upholds the principles
of the UK Employment Service’s ‘Two Ticks’ symbol and is accredited
by Investors in People. Every possible consideration is given to
applications for employment, regardless of gender, religion, disability
or ethnic origin, having regard only to skills and competencies. This
policy is extended to existing employees and any change which may
affect their personal circumstances. The policy is supported by
strategies for professional and career development.
QinetiQ seeks to utilise a range of communication channels to
employees in order to involve them in the running of the organisation.
This is done using various media including in-house magazines,
intranet, regular newsletters, bulletins, management briefings, trade
union consultation and widespread training programmes.
Environment
Details of the Group’s policy and practice in relation to the
environment is detailed in the Corporate Responsibility report,
contained in the Business Review on pages 45 to 49.
Political and charitable contributions
The Group made no political donations in the year. Donations during
the year to UK charities amounted to £184,000 (2007: £19,000).
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QinetiQ Group plc Annual Report and Accounts 2008
Report of the Directors continued
Corporate Governance
The Company’s application of the principles of good governance in
respect of the Combined Code, as revised by the Financial Reporting
Council June 2006, is described in the Corporate Governance Report
on pages 52 to 57.
Share capital
As at 31 March 2008 the Company had:
(1) Authorised share capital of 1,400,000,000 of ordinary 1p shares
with aggregate nominal value of £14,000,000 and 1 Special Share
with an aggregate nominal value of £1.
(2) Allotted and fully paid share capital of 660,476,373 ordinary
shares of 1p each with an aggregate nominal value of £6.6m
(including shares held by employee share trusts).
Details of the shares issued during the financial year are shown in
note 32 on page 108.
The rights of ordinary shareholders are set out in the Articles of
Association. The holders of ordinary shares are entitled to receive the
Company’s reports and accounts, to attend and speak at General
Meetings of the Company, to exercise voting rights in person or by
appointing a proxy and to receive a dividend where declared or paid
out of profits available for such a purpose.
The Special Share is held by HM Government and it confers certain
rights under the Articles of Association which are detailed in note 32
on page 108. These include the right to require certain persons with a
material interest in QinetiQ to dispose of some or all of their ordinary
shares. The Special Share may only be held by and transferred to
HM Government. At any time the Special Shareholder may require
QinetiQ to redeem the share at par and if wound up the Special
Shareholder would be entitled to be repaid capital before other
shareholders. Any variation of the rights attaching to the Special
Share requires the written approval of the MOD.
Change of control – significant agreements
The following significant agreements contain provisions entitling the
counter-parties to require prior approval, exercise termination,
alteration or other similar rights in the event of a change of control
of the Company or if the Company no longer remains a UK company.
The Combined Aerial Target Service contract is a 20-year contract
awarded to QinetiQ by MOD on 14 December 2006. The terms of this
contract require QinetiQ Ltd to remain a UK company which is
incorporated under the laws of any part of the UK or an overseas
company registered in the UK and that at least 50% of the Board of
Directors are UK nationals. The terms also contain change of control
conditions and restricted share transfer conditions which require
prior approval from HM Government if there is a material change
in the ownership of QinetiQ Ltd’s share capital, unless the change
relates to shares listed on a regulated market, with material defined
as being 10% or more of the share capital. Additionally there are
restrictions on transfers of shares to persons from countries
appearing on the restricted list as issued by HM Government.
if the contractor QinetiQ Limited ceases to be a subsidiary of the
QinetiQ Group, except where such change in control is permitted
under the Shareholders’ Agreement to which MOD is a party.
The Company is party to a £500m Revolving Credit Facility with
Lloyds TSB Bank plc (as agent) expiring 19 August 2012. Under the
terms of the Facility, if either (1) the MOD ceases to retain in its
capacity as Special Shareholder its Special Shareholders Rights;
or (2) there is a change of control of the Company, any Lender
may request by not less than 90 days’ notice to the Company,
that its commitment be cancelled and all outstanding amounts
be repaid to that lender at the expiry of such notice period.
On 6 December 2006, QinetiQ North America, Inc (as Borrower)
and the Company (as Guarantor) entered into a Note Purchase
Agreement to issue $135m 5.44% Senior Notes due 6 December 2013
and $125m 5.50% Senior Notes due 6 December 2016. Under the
terms of the agreement, if either (1) the MOD ceases to retain in its
capacity as Special Shareholder its Special Shareholders Rights;
or (2) there is a change of control of the Company, the Notes must be
prepaid within 90 days of the change of control, provided only that
there is no rating downgrade, or where there are no rated securities,
a rating of at least investment grade is obtained.
Major shareholders
At 19 May 2008 being the latest practicable date prior to the
issuance of this report the Group had been notified of the following
shareholdings of at least 3% in the ordinary share capital of
the Group:
UK Ministry of Defence
Lansdowne Partners Ltd
BlackRock Investment Management Ltd
Fidelity International Ltd
Allianz SE
Legal & General Group plc
18.9%
9.1%
5.0%
5.0%
3.1%
3.0%
Allotment/purchase of own shares
At the Company’s AGM held in July 2007, the shareholders passed
resolutions which authorised the Directors to allot relevant securities
up to an aggregate nominal value of £2,322,756 to disapply
pre-emption rights (up to 5% of the issued ordinary share capital)
and for the Company to purchase Ordinary Shares (up to 10% of its
ordinary share capital). Equivalent resolutions will be laid before the
2008 AGM.
During the year the Company provided funding to the trustees of
its employee share schemes to make market purchases of the
Company’s ordinary shares to cover future obligations under
outstanding share option and other share-based awards. Further
details are disclosed in the Business Review on page 39.
Restrictions on Transfer Shares
As outlined on page 108, the Special Share confers certain rights
under the Company’s Articles of Association to require certain
persons with an interest in QinetiQ’s shares which exceed certain
prescribed thresholds to dispose of some or all of their ordinary
shares on grounds of national security or conflict of interest.
The Long-Term Partnering Agreement is a 25-year contract which
QinetiQ Limited signed on 28 February 2003 to provide test,
evaluation and training services to the MOD. This contract contains
conditions where the prior approval of HM Government is required
In addition, at IPO, certain members of the senior management team
(which includes the Chairman and the Executive Directors) entered
into a Lock Up agreement, which prohibited the disposal of ordinary
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QinetiQ Group plc Annual Report and Accounts 2008
Report of the Directors continued
shares in the Company (save in certain limited circumstances) for
a period of three years ending on 15 February 2009. The practical
impact of such arrangements is that for each member of the senior
management team subject to the Lock Up agreement, 28% of their
respective ordinary shares held at IPO continue to be subject to the
prohibition on disposal.
Articles of Association
Save in the respect of any variation to the rights attaching to the
Special Share, the Company has not adopted any special rules
relating to the amendment of the Company’s Articles of Association
other than as provided under UK corporate law.
Employee Share Scheme
Equiniti Share Plan Trustees Limited acts as trustee in respect of
all ordinary shares held by employees under the QinetiQ Group plc
Share Incentive Plan (‘the Plan’). Equiniti Share Plan Trustees Limited
will send a Form of Direction to all employees holding shares under
the Plan, and will vote on all resolutions proposed at general
meetings in accordance with the instructions received. In
circumstances where ordinary shares are held by the corporate
sponsored nominee service, Equiniti Corporate Nominees Limited
will send a Proxy Form to all shareholders utilising such corporate
nominee service, and will vote on all resolutions proposed at
general meetings in accordance with the instructions received.
Auditors
KPMG Audit Plc has expressed their willingness to continue in office
as auditors and a resolution to reappoint them will be proposed at
the Annual General Meeting.
Statement of disclosure of information to auditors
The Directors who held office at the date of approval of this
Directors’ Report confirmed that, so far as the Directors are aware,
there is no relevant audit information of which the Company’s
auditors are unaware; and the Directors have taken all the steps
they reasonably ought to have taken as Directors to make themselves
aware of any relevant audit information and to establish that the
Company’s auditors are aware of that information.
Annual General Meeting
The Company’s Annual General Meeting will be held on Wednesday
30 July 2008 at 2.00 pm at the Institute of Mechanical Engineers,
1 Birdcage Walk, Westminster, London SW1H 9JJ. Details of the
business to be proposed and voted upon at the meeting is contained
in the Notice of the Annual General Meeting which is sent to all
shareholders and also published on the website www.QinetiQ.com
By order of the Board
Lynton Boardman
Company Secretary
85 Buckingham Gate
London SW1E 6PD
28 May 2008
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Statement of Directors’ responsibilities in respect of the Annual Report and the Financial Statements
QinetiQ Group plc Annual Report and Accounts 2008
Statement of Directors’ responsibilities in respect of the
Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and
the Group and parent company financial statements, in accordance
with applicable law and regulations.
Under applicable law and regulations, the Directors are also
responsible for preparing a Directors’ Report, Directors’ Remuneration
Report and Corporate Governance Statement that comply with the
law and those regulations.
Company law requires the Directors to prepare Group and parent
company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements
in accordance with IFRS as adopted by the EU and have elected to
prepare the parent company financial statements in accordance
with UK Accounting Standards.
The Group financial statements are required by law and IFRS as
adopted by the EU to present fairly the financial position and
performance of the Group; the Companies Act 1985 provides in
relation to such financial statements that references in the relevant
part of that Act to financial statements giving a true and fair view
are references to their achieving a fair presentation.
The parent company financial statements are required by law to give
a true and fair view of the state of affairs of the parent company.
In preparing each of the Group and parent company financial
statements, the Directors are required:
n
to select suitable accounting policies and then apply them
consistently;
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Responsibility statement of the Directors in respect
of the Annual Report
We, the Directors of the Company, confirm that to the best of our
knowledge:
n
n
the financial statements of the Group have been prepared in
accordance with IFRSs as adopted by the EU, and for the Company
under UK GAAP, in accordance with applicable United Kingdom
law and give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Group; and
the Directors’ Report includes a fair review of the development
and performance of the business and the position of the Group,
together with a description of the principal risks and uncertainties
that face the Group.
n
to make judgements and estimates that are reasonable and prudent;
By order of the Board
Graham Love
Chief executive Officer
Doug Webb
Chief Financial Officer
n
n
to state for the Group financial statements, whether they have
been prepared in accordance with IFRS as adopted by the EU;
to state for the parent company financial statements, whether
applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the parent
company financial statements; and
n
prepare the financial statements on a going concern basis unless
it is inappropriate to presume the Group and the parent company
will continue in operational business for the foreseeable future.
The Directors confirm they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping proper accounting records
that disclose with reasonable accuracy at any time the financial
position of the Group and the parent company and enable them to
ensure that its financial statements comply with the Companies Act
1985 and 2006. They have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the Group
and to prevent and detect fraud and other irregularities.
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QinetiQ Group plc Annual Report and Accounts 2008
Independent Auditors’ Report to the Members of QinetiQ Group plc
Independent Auditors’ Report to the Members
of QinetiQ Group plc
We have audited the Group and parent company financial
statements (the ‘financial statements’) of QinetiQ Group plc for
the year ended 31 March 2008 which comprise the Group Income
Statement, the Group and Parent Company Balance Sheets, the
Group Cash Flow Statement, the Group Statement of Recognised
Income and Expense and the related notes. These financial
statements have been prepared under the accounting policies set
out therein. We have also audited the information in the Directors’
Remuneration Report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in
accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s members
as a body, for our audit work, for this report, or for the opinions
we have formed.
Respective responsibilities of Directors and auditors
The Directors’ responsibilities for preparing the Annual Report and
the Group financial statements in accordance with applicable law
and International Financial Reporting Standards (IFRSs) as adopted
by the EU, and for preparing the parent company financial
statements and the Directors’ Remuneration Report in accordance
with applicable law and UK Accounting Standards (UK Generally
Accepted Accounting Practice) are set out in the Statement of
Directors’ responsibilities on page 68.
Our responsibility is to audit the financial statements and the part of
the Directors’ Remuneration Report to be audited in accordance with
relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements
give a true and fair view and whether the financial statements and the
part of the Directors’ Remuneration Report to be audited have been
properly prepared in accordance with the Companies Act 1985 and, as
regards the Group financial statements, Article 4 of the IAS Regulation.
We also report to you whether in our opinion the information given
in the Directors’ Report is consistent with the financial statements.
The information given in the Directors’ Report includes that specific
information presented in the reports of the Chairman, Chief Executive
Officer and the Business Review that is cross referred from the
Business Review section of the Directors’ Report.
In addition we report to you if, in our opinion, the Company has
not kept proper accounting records, if we have not received all
the information and explanations we require for our audit, or if
information specified by law regarding Directors’ remuneration
and other transactions is not disclosed.
We review whether the Corporate Governance Statement reflects
the Company’s compliance with the nine provisions of the 2006
Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are not
required to consider whether the Board’s statements on internal
control cover all risks and controls, or form an opinion on the
effectiveness of the Group’s corporate governance procedures or
its risk and control procedures.
We read the other information contained in the Annual Report
and consider whether it is consistent with the audited financial
statements. We consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies
with the financial statements. Our responsibilities do not extend to
any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant
to the amounts and disclosures in the financial statements and the
part of the Directors’ Remuneration Report to be audited. It also
includes an assessment of the significant estimates and judgments
made by the Directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the
Group’s and Company’s circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance that the financial statements and the part of the
Directors’ Remuneration Report to be audited are free from material
misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements and the part
of the Directors’ Remuneration Report to be audited.
Opinion
In our opinion:
n
n
n
n
the Group financial statements give a true and fair view, in
accordance with IFRSs as adopted by the EU, of the state of the
Group’s affairs as at 31 March 2008 and of its profit for the year
then ended;
the Group financial statements have been properly prepared in
accordance with the Companies Act 1985 and Article 4 of the IAS
Regulation;
the parent company financial statements give a true and fair view,
in accordance with UK Generally Accepted Accounting Practice, of
the state of the parent company’s affairs as at 31 March 2008;
the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985; and
n
the information given in the Directors’ Report is consistent with
the financial statements.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London
28 May 2008
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QinetiQ Group plc Annual Report and Accounts 2008
Consolidated income statement
Consolidated income statement
for the year ended 31 March
2008
2007
all figures in £ million
Revenue
Employee costs
Third-party project costs
Other operating costs excluding depreciation
and amortisation
Share of post-tax loss of equity accounted
joint ventures and associates
Other income
EBITDA (earnings before interest,
tax, depreciation and amortisation)
Depreciation of property, plant and equipment
Amortisation of intangible assets
Group operating profit
(Loss)/gain on business divestments and
unrealised impairment of investment
Profit on disposal of non-current assets
Finance income
Finance expense
Profit before tax
Taxation expense
Profit for the year
Profit attributable to:
Equity shareholders of the parent company
Minority interest
Earnings per share
Basic
Diluted
Underlying
Before
restructuring
EMEA
reorganisation
and acquisition and acquisition
amortisation
amortisation
note
Before
acquisition
amortisation
Total
Acquisition
amortisation
2, 3
1,366.0
–
1,366.0
1,149.5
9
17
4
14
3
5a
5b
6
6
4
7
33
33
10
10
10
(576.2)
(333.2)
(296.6)
(4.0)
9.0
(32.6)
–
(608.8)
(333.2)
(513.4)
(258.7)
–
–
–
(296.6)
(246.7)
(4.0)
9.0
(1.2)
11.0
165.0
(32.6)
132.4
140.5
(33.0)
(5.0)
127.0
(7.0)
–
3.6
(21.6)
102.0
(20.2)
81.8
81.8
–
81.8
–
(18.0)
(50.6)
–
–
–
–
(50.6)
16.2
(34.4)
(34.4)
–
(34.4)
(31.7)
(2.8)
106.0
4.6
3.3
4.2
(16.2)
101.9
(25.0)
76.9
76.9
–
76.9
(33.0)
(23.0)
76.4
(7.0)
–
3.6
(21.6)
51.4
(4.0)
47.4
47.4
–
47.4
7.2p
7.2p
13.4p
–
–
–
–
–
–
–
–
(12.6)
(12.6)
–
–
–
–
(12.6)
4.7
(7.9)
(7.9)
–
(7.9)
Total
1,149.5
(513.4)
(258.7)
(246.7)
(1.2)
11.0
140.5
(31.7)
(15.4)
93.4
4.6
3.3
4.2
(16.2)
89.3
(20.3)
69.0
69.0
–
69.0
10.5p
10.3p
11.3p
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QinetiQ Group plc Annual Report and Accounts 2008
Consolidated balance sheet
Consolidated balance sheet
as at 31 March
all figures in £ million
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Financial assets
Equity accounted investments
Other investments
Deferred tax asset
Current assets
Inventories
Financial assets
Trade and other receivables
Current tax
Investments
Non-current assets classified as held for sale
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Current tax
Provisions
Financial liabilities
Non-current liabilities
Retirement benefit obligation (gross of deferred tax)
Deferred tax liability
Provisions
Financial liabilities
Other payables
Total liabilities
Net assets
Capital and reserves
Ordinary Shares
Capital redemption reserve
Share premium account
Hedging and translation reserve
Retained earnings
Capital and reserves attributable to shareholders of the parent company
Minority interest
Total shareholders’ funds
note
2008
2007
Restated
371.9
66.1
341.5
18.8
0.3
28.5
11.0
838.1
39.5
4.0
401.2
–
4.0
1.8
20.0
470.5
1,308.6
(340.0)
(6.9)
(1.1)
(15.9)
(363.9)
(90.8)
(30.2)
(13.1)
(327.7)
(5.5)
(467.3)
(831.2)
437.4
109.1
332.4
15.3
9.3
14.7
–
918.2
56.9
7.4
469.0
3.0
1.3
1.8
24.5
563.9
1482.1
(374.4)
–
(31.8)
(11.8)
(418.0)
(23.4)
(30.8)
(13.9)
(415.3)
(47.7)
(531.1)
(949.1)
11
12
14
16
17
18
25
19
16
20
21
22
23
24
26
39
25
24
27
23
32
33
33
33
33
33
I
F
I
n
A
n
C
A
l
s
T
A
T
E
m
E
n
T
s
533.0
477.4
6.6
39.9
147.6
(21.3)
360.1
532.9
0.1
533.0
6.6
39.9
147.6
(13.1)
296.3
477.3
0.1
477.4
The financial statements were approved by the Board of Directors and authorised for issue on 28 May 2008 and were signed on its behalf by:
Graham Love
Chief Executive Officer
Doug Webb
Chief Financial Officer
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Consolidated cash flow statement
Consolidated cash flow statement
for the year ended 31 March
all figures in £ million
note
2008
47.4
4.0
18.0
7.0
–
33.0
23.0
4.0
(17.3)
(49.0)
36.7
31.5
138.3
(17.7)
1.7
(20.0)
102.3
(19.9)
(23.7)
14.9
(7.3)
(106.7)
(2.0)
–
(144.7)
–
–
(0.1)
87.6
0.5
(0.5)
(12.8)
(24.9)
(3.2)
3.0
49.6
7.2
(0.3)
12.6
19.5
24.5
(5.0)
19.5
29
22
30
Profit for the year
Taxation expense
Net finance costs
(Loss)/gain on business divestments and unrealised impairment of investment
Profit on disposal of non-current assets
Depreciation of property, plant and equipment
Amortisation of intangible assets
Share of post-tax loss of equity accounted joint ventures and associates
Increase in inventories
Increase in receivables
Increase in payables
Increase/(decrease) in provisions
Cash inflow from operations
Tax paid
Interest received
Interest paid
Net cash inflow from operating activities
Purchase of intangible assets
Purchase of property, plant and equipment
Sale of property, plant and equipment
Equity accounted investments and other investment funding
Purchase of subsidiary undertakings
Net (debt)/cash acquired with subsidiary undertakings
Sale of interest in subsidiary undertakings
Net cash outflow from investing activities
Net costs from IPO
Cash outflow from repayment of loans
Cash outflow from repayment of loan notes
Cash inflow from loans received
Cash inflow from loan notes issued
Payment of deferred finance costs
Purchase of own shares
Equity dividends paid
Capital element of finance lease rental payments
Capital element of finance lease rental receipts
Net cash inflow from financing activities
Increase/(decrease) in cash and cash equivalents
Effect of foreign exchange changes on cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash and cash equivalents
Overdrafts
Cash and cash equivalents at end of year
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2007
69.0
20.3
12.0
(4.6)
(3.3)
31.7
15.4
1.2
(15.5)
(33.9)
27.0
(12.3)
107.0
(3.3)
4.2
(13.8)
94.1
(12.1)
(34.8)
8.6
(9.4)
(137.2)
2.9
17.9
(164.1)
(2.0)
(79.2)
(1.4)
131.3
1.3
(0.4)
–
(22.7)
(5.9)
3.5
24.5
(45.5)
(0.5)
58.6
12.6
20.0
(7.4)
12.6
QinetiQ Group plc Annual Report and Accounts 2008
Consolidated statement of recognised income and expense
Consolidated statement of recognised income and expense
for the year ended 31 March
all figures in £ million
Net loss on hedge of net investment in foreign subsidiaries
Decrease in fair value of hedging derivatives
Movement in deferred tax on hedging derivatives
Fair value gains on available for sale investments
Impairment of available for sale investments
Recycle of unrealised gain on disposal of businesses
Actuarial gains recognised in the defined benefit pension schemes
Decrease in deferred tax asset due to actuarial gains in pension deficit
Net income recognised directly in equity
Profit for the year
Total recognised income and expense for the year
Attributable to:
Equity shareholders of the parent company
Minority interest
note
33
33
33
33
33
33
33
33
2008
(3.3)
(6.8)
1.9
3.2
(2.9)
(3.5)
65.5
(12.2)
41.9
47.4
89.3
89.3
–
89.3
2007
(14.4)
(5.6)
2.0
10.0
–
–
85.8
(17.9)
59.9
69.0
128.9
128.9
–
128.9
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notes to the financial statements
notes to the financial statements
1.
significant accounting policies
Accounting policies
The following accounting policies have been applied consistently to
all periods presented in dealing with items which are considered
material in relation to the Group’s financial statements. Certain
comparatives have been restated following the finalisation during
the year of the fair values of acquisitions completed in the prior year.
Further details on the restatements are provided in note 40.
Basis of preparation
The Group’s financial statements have been prepared and approved
by the Directors in accordance with International Financial Reporting
Standards and Interpretation pronouncements as adopted by the
EU (‘Adopted IFRS’) and the Companies Act 1985 applicable to
companies reporting under IFRS. The consolidated financial
statements also comply fully with IFRSs as issued by the International
Accounting Standards Board. The Company has elected to prepare
its parent company financial statements in accordance with UK
GAAP; these are presented on pages 119 to 121.
The financial statements have been prepared under the historical
cost convention, as modified by the revaluation of certain financial
assets and liabilities (including derivative financial instruments,
financial instruments classified as fair value through profit and loss
or as available for sale). Non-current assets held for sale are held at
the lower of historic cost and fair value. The Group is domiciled in
the United Kingdom. The Group’s functional currency is sterling and
unless otherwise stated the financial statements are rounded to the
nearest hundred thousand.
Basis of consolidation
The consolidated financial statements comprise the financial
statements of the Company and its subsidiary undertakings up to
31 March 2008. The purchase method of accounting has been
adopted. Under this method, the results of subsidiary undertakings
acquired or disposed in the period are included in the consolidated
income statement from the date control is obtained to the date that
control is lost (usually on acquisition and disposal respectively).
A subsidiary is an entity over which the Group has the power to
govern financial and operating policies in order to obtain benefits.
Potential voting rights that are currently exercisable or convertible
are considered when determining control.
An associate is an undertaking over which the Group exercises
significant influence (usually from 20% to 50% of the equity voting
rights) over financial and operating policy. A joint venture is an
undertaking over which the Group exercises joint control. Associates
and joint ventures are accounted for using the equity method from
the date of acquisition up to the date of disposal. The Group’s
investments in associates and joint ventures are held at cost
including goodwill on acquisition and any post-acquisition changes
in the Group’s share of the net assets of the associate less any
impairment to the recoverable amount. Where an associate or joint
venture has net liabilities full provision is made for the Group’s
share of liabilities where there is a constructive or legal obligation to
provide additional funding to the associate or joint venture.
The financial statements of subsidiaries, joint ventures and
associates are adjusted if necessary to ensure compliance with
Group accounting policies.
On consolidation all intra-Group income, expenses and balances are
eliminated.
Revenue
Revenue (net of value added and other sales taxes) represents the
value of work performed for customers, measured on the following
bases:
n revenue from fixed-price contracts is recognised in proportion to
the value of the work performed and includes attributable profit.
Depending on the nature of the contract, revenue is recognised as
contractually agreed-upon milestones are reached, as units are
delivered or as the work progresses. Variations, incentive
payments and other claims are included where there is
reasonable certainty that they will be settled;
n revenue on cost plus and time and materials contracts is
recognised as work is performed;
n royalty revenue is recognised on the earlier of the date on which
the income is earned and measurable with reasonable certainty
or cash is received; and
n revenue from sales of products and licensing of technology is
recognised on acceptance by the customer and when the amount
of revenue can be measured reliably.
Third-party project costs
Third-party project costs primarily consist of subcontracted research
and development costs and purchased materials incurred on behalf
of customers as part of funded projects, together with direct
material costs used in product manufacture.
Profit recognition
Profit on the supply of professional services on cost plus or time and
materials contracts is recognised as the work is performed. Profit on
fixed-price contracts is recognised on a percentage of completion
basis once the contract’s ultimate outcome can be foreseen with
reasonable certainty. The principal estimation method used by the
Group in attributing profit on contracts to a particular accounting
period is the preparation of forecasts on a contract by contract basis.
These focus on the costs to complete and enable an assessment to
be made of the most likely final out-turn of each contract.
Consistent contract review procedures are in place in respect of
contract forecasting. Losses on completion are recognised in full as
soon as they are foreseen.
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1.
significant accounting policies continued
Segmental information
Segmental information is presented in two formats: the primary
format reflects the Group’s management structure and markets in
which the Group operates, whereas the secondary format is based
on geography (i.e. location of customers). The principal activities of
the Group are managed through three sectors organised according
to the distinct markets in which the Group operates:
n EMEA (Europe, Middle East and Australasia) which primarily
delivers technology solutions, consultancy and managed services
to the Ministry of Defence in the UK, and civil and other
government customers in the UK and Australia;
n QinetiQ North America which primarily provides technology and
services to the US Government; and
n Ventures which primarily comprises commercial product
businesses and business venturing activities.
Segment results represent the contribution of the different
segments to the profit of the Group. Corporate expenses are
allocated to the corresponding segments. Unallocated items
comprise mainly profit on disposal of non-current assets, business
divestments and unrealised impairment of investments, IPO costs,
financing costs and taxation. Eliminations represent inter-company
trading between the different segments.
Segment assets comprise property, plant and equipment, goodwill
and other intangible assets, trade and other receivables, inventories
and prepayments and accrued income. Unallocated assets represent
mainly corporate assets, including cash and cash equivalents and
deferred tax asset balances. Segment liabilities comprise trade and
other payables, accruals and deferred income and retirement
benefit obligations. Unallocated liabilities represent mainly
corporate liabilities, current and deferred tax liabilities and bank
and other borrowings. Segment assets and liabilities are as at the
end of the year.
Research and development expenditure
Research and development costs incurred on behalf of a customer
as part of a specific project are chargeable to the customer on whose
behalf the work is undertaken. The costs and the related income
are included in their relevant income statement cost category and
revenue respectively.
Internally funded development expenditure is capitalised in the
balance sheet where there is a clearly defined project, the
expenditures are separately identifiable, the project is technically
and commercially feasible, all costs are recoverable by future
revenue and the resources are committed to complete the project.
Such capitalised costs are amortised over the forecast period of sales
resulting from the development. All other research and development
costs are expensed to the income statement in the period in
which they are incurred. If the research phase cannot be clearly
distinguished from the development phase, the respective project-
related costs are treated as if they were incurred in the research
phase only and expensed.
Financing
Financing represents the financial expense on borrowings accounted
for using the effective rate method and the financial income earned
on funds invested. Exchange differences on financial assets and
liabilities and the income or expense from interest hedging
instruments that are recognised in the income statement are
included within interest income and expense in financing.
Taxation
The taxation charge is based on the profit for the year and takes into
account taxation deferred because of temporary differences
between the treatment of certain items for taxation and accounting
purposes. Current tax and deferred tax are charged or credited to
the income statement, except where they relate to items charged or
credited to equity in which case the relevant tax is charged or
credited to equity.
Deferred taxation is the tax attributable to the temporary
differences that appear when taxation authorities recognise and
measure assets and liabilities with rules that differ from those of
the consolidated financial statements. The amount of deferred tax
provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using
rates enacted or substantively enacted at the balance sheet date.
Any change in the tax rates are recognised in the income statement
unless related to items directly recognised in equity. Deferred tax
liabilities are recognised on all taxable temporary differences
excluding non-deductible goodwill. Deferred tax assets are
recognised on all deductible temporary differences provided that it
is probable that future taxable income will be available against
which the asset can be utilised. Deferred tax assets and liabilities are
only offset where there is a legally enforceable right to offset and
there is an intention to settle balances net.
Goodwill
Business combinations are accounted for under the purchase
accounting method. All identifiable assets acquired and liabilities
and contingent liabilities incurred or assumed are recorded at fair
value at the date control is transferred to QinetiQ, irrespective of the
extent of any minority interest. The cost of a business combination
is measured at the fair value of assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange,
plus costs directly attributable to the acquisition. Any excess of the
cost of the business combination over the Group’s interest in the
net fair value of the identifiable assets, liabilities and contingent
liabilities recognised is capitalised as goodwill. Goodwill is subject
to annual impairment reviews (see overleaf). If the cost of an
acquisition is less than the fair value of the net assets acquired,
the difference is immediately recognised in the Consolidated
Income Statement.
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Inventories
Inventory and work-in-progress (including contract costs) are stated
at the lower of cost and net realisable value. Work-in-progress
and manufactured finished goods are valued at production cost.
Production cost includes direct production costs and an appropriate
proportion of production overheads. A provision is established when
the net realisable value of any inventory item is lower than its cost.
Bid costs
Costs incurred in bidding for work are normally expensed as
incurred. In the case of large multi-year government contracts the
bidding process typically involves a competitive bid process to
determine a preferred bidder and then a further period to reach
financial close with the customer. In these cases, the costs incurred
after announcement of the Group achieving preferred bidder status
are deferred to the balance sheet within work-in-progress from the
point financial close is reached and amortised over the life of the
contract. If an opportunity for which the Group was awarded
preferred bidder status fails to reach financial close the costs
deferred to that point will be expensed in the income statement
immediately it becomes likely that financial close will not be achieved.
Amounts recoverable on contracts and payments received
on account
Amounts recoverable on contracts are included in trade and other
receivables and represent revenue recognised in excess of amounts
invoiced. Payments received on account are included in trade
and other payables and represent amounts invoiced in excess of
revenue recognised.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and short-term
deposits that are readily convertible into cash. In the cash flow
statement overdraft balances are included in cash and equivalents.
Current and non-current liabilities
Current liabilities include amounts due within the normal operating
cycle of the Group.
Interest-bearing current and non-current liabilities are recognised at
fair value and then stated at amortised cost with any difference
between the cost and redemption value being recognised in the
income statement over the period of the borrowings on an effective
interest rate basis.
Provisions
A provision is recognised in the balance sheet when the Group has
a present legal or constructive obligation as a result of a past event,
and it is probable that an outflow of economic benefits will be
required to settle the obligation. Where appropriate provisions are
determined by discounting the expected cash flows at the Group’s
weighted average cost of capital.
Non-current assets held for sale
Where the carrying value of an asset will be recovered principally
through a sale transaction rather than continuing use the asset is
classified as held for sale. Held for sale assets are held at the lower
of net book value and net realisable value. Depreciation is not
charged on assets classified as held for sale.
1.
significant accounting policies continued
Intangible assets
Intangible assets are recognised on business combinations at fair
value, which is calculated as the present value of future cash flows
expected to be derived from those assets. Internally generated
intangible assets are recorded at cost, including labour, directly
attributable costs and any third-party expenses. Purchased
intangible assets are recognised at cost less amortisation. Intangible
assets are amortised over their respective useful lives on a straight
line basis as follows:
Intellectual property rights
Development costs
Other
2–8 years
Useful economic life or unit of
production method subject to a
minimum amortisation of no less
than straight line method over
economic life of 1–4 years
1–7 years
Property, plant and equipment
Property, plant and equipment are stated at cost less depreciation.
Freehold land is not depreciated. Other tangible non-current assets
are depreciated on a straight line basis over their useful economic
lives to their estimated residual value as follows:
Freehold buildings
Leasehold land and buildings Shorter of useful economic life and
20–25 years
Plant and machinery
Fixtures and fittings
Computers
Motor vehicles
the period of the lease
3–10 years
5–10 years
3–5 years
3–5 years
Assets under construction are included in property, plant and
equipment on the basis of expenditure incurred at the balance sheet
date. In the case of assets constructed by the Group, the value
includes the cost of own work completed, including directly
attributable costs but excluding interest.
The useful lives, depreciation methods and residual values applied
to property, plant and equipment are reviewed annually and if they
change significantly depreciation charges for current and future
periods are adjusted accordingly. If the carrying amount of any asset
exceeds its recoverable amount an impairment loss is recognised
immediately in the income statement.
Investment property
The Group accounts for investment property using the cost model.
Investment property is recorded on the balance sheet at cost less
any accumulated depreciation and any accumulated impairment
losses. The fair value of investment property is reviewed annually by
management or expert valuers where appropriate.
Impairment of tangible, goodwill, intangible and held for sale assets
The Group assesses at each reporting date whether there is an
indication that an asset may be impaired. In addition, goodwill is
tested for impairment annually irrespective of any indication of
impairment. If the carrying amount exceeds the recoverable
amount, the respective asset or the assets in the cash generating
unit are written down to their recoverable amounts. The recoverable
amount of an asset or a cash generating unit is the higher of its fair
value less costs to sell and its value in use. The value in use is the
present value of the future cash flows expected to be derived
from an asset or cash generating unit calculated using an
appropriate discount rate. Impairment losses are expensed to the
income statement.
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QinetiQ Group plc Annual Report and Accounts 2008
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1.
significant accounting policies continued
Financial instruments
Financial assets and financial liabilities are recognised on the
Group’s balance sheet when the Group becomes a party to the
contractual provisions of the instrument. The derecognition of a
financial instrument takes place when the Group no longer controls
the contractual rights that comprise the financial instrument, which
is normally the case when the instrument expires or is sold,
terminated or exercised.
Investments in debt and equity securities
Investments held by the Group are classified as either a current
asset or as a non-current asset and being classified as available
for sale are stated at fair value, with any resultant gain or loss
being recognised directly in equity, except for impairment losses.
When these investments are derecognised, the cumulative gain
or loss previously recognised directly in equity is recognised in the
income statement.
The fair value of quoted financial instruments is their bid price at
the balance sheet date.
The fair value of unquoted equity investments is measured in
accordance with British Venture Capital Association (BVCA)
guidelines. The Group’s unlisted investments are usually held at fair
value based upon the price of the most recent investment by the
Group or a third-party less any impairment.
Derivative financial instruments
Derivative financial instruments are initially recognised at cost and
thereafter held at fair value, being the market value for quoted
instruments or valuation based on models and discounted cash flow
calculations for unlisted instruments.
Hedging – fair value
Changes in the fair value of fair value hedges of currency risk or
interest rate risk are recognised in the income statement. The
hedged item is held at fair value with respect to the hedged risk
with any gain or loss recognised in the income statement.
Hedging – cash flow
Changes in the fair value of derivatives designated as a cash flow
hedge that are regarded as highly effective are recognised in equity.
The ineffective portion is recognised immediately in the income
statement. Where a hedged item results in an asset or a liability,
gains and losses previously recognised in equity are included in the
cost of the asset or liability. Gains and losses previously recognised
in equity are removed and recognised in the income statement at
the same time as the hedged transaction.
Hedging – net investment
The changes in fair value of derivatives used to hedge the net
investment in a foreign entity are recognised in equity until the net
investment is sold or disposed. Any ineffective portion is recognised
directly in the income statement.
Loan issue costs
Costs associated with the arrangement of bank facilities or the issue
of loans are capitalised and deducted from the associated liability
presented in the balance sheet. Capitalised issue costs are released
over the estimated life of the facility or instrument to which they
relate using the effective interest rate method. If it becomes clear
that the facility or instrument will be redeemed early, the
amortisation of the issue costs will be accelerated.
Leased assets
Leases are classified as finance leases when substantially all of the
risks and rewards of ownership are held by the lessee.
Assets held under finance leases are capitalised and included in
property, plant and equipment at the lower of the present value of
minimum lease payments and fair value at the inception of the
lease. Assets are then depreciated over the shorter of their useful
economic lives or the lease term. Obligations relating to finance
leases, net of finance charges arising in future periods, are included
under financial liabilities. Rentals payable under operating leases are
charged to the income statement on a straight line basis over the
term of the lease.
Foreign currencies
Transactions in foreign currencies are recorded using the rate of
exchange ruling at the date of the transaction. Monetary assets and
liabilities in foreign currencies are translated at period-end rates.
Any resulting exchange differences are taken to the income
statement. Gains and losses on designated forward foreign
exchange hedging contracts are matched against the foreign
exchange movements on the underlying transaction.
Assets and liabilities of overseas subsidiaries and associated
undertakings and joint ventures, including any related goodwill, are
translated to sterling at the rate of exchange at the balance sheet
date. The results and cash flows of overseas subsidiaries and
associated undertakings and joint ventures are translated to sterling
using the average rates of exchange during the period. Exchange
adjustments arising from the re-translation of the opening net
investment and the results for the period to the period-end rate are
taken directly to equity and reported in the Statement of Recognised
Income and Expense.
Post-retirement benefits
The Group provides both defined contribution and defined benefit
pension arrangements. The liabilities of the Group arising from
defined benefit obligations, and the related current service cost, are
determined using the projected unit credit method. Valuations for
accounting purposes are carried out half yearly for the largest plans
and on a regular basis for other plans. Actuarial advice is provided by
external consultants. For the funded defined benefit plans, the
excess or deficit of the fair value of plan assets less the present
value of the defined benefit obligation are recognised as an asset or
a liability respectively.
For defined benefit plans the actuarial cost charged to the income
statement consists of current service cost, interest cost, expected
return on plan assets and past service cost. All of these elements are
charged as a component of employee costs in the income statement.
Actuarial gains and losses are recognised in full immediately through
the Statement of Recognised Income and Expense.
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QinetiQ Group plc Annual Report and Accounts 2008
notes to the financial statements continued
1.
significant accounting policies continued
Contributions to defined contribution plans are charged to the
income statement as incurred.
The following new standards or interpretations to existing
standards have been published and are mandatory for the Group’s
future accounting periods. They have not been early adopted in
these financial statements:
IFRs 8, Operating segments (effective for annual periods beginning
on or after 1 January 2009). IFRS 8 requires an entity to report
financial and descriptive information about its reportable segments.
The Group will apply IFRS 8 from 1 April 2009 but it is not expected
to have any significant impact on the Group’s financial statements.
The following standards and interpretations to existing standards
have not yet been endorsed by the EU:
IAs 1, (Amended) Presentation of Financial statements: A Revised
Presentation (effective for annual periods beginning on or after
1 January 2009). This revision is intended to improve users’ ability to
analyse and compare information given in financial statements and
included within the changes is the introduction of a statement of
comprehensive income. This is not expected to have any significant
impact on the Group’s financial statements.
IAs 23 (Amendment), Borrowing Costs (effective for qualifying
assets for which the commencement date for capitalisation is on or
after 1 January 2009). The amendment to IAS 23 requires borrowing
costs that relate to assets that take a substantial period of time
to get ready for use or sale to be capitalised as part of the cost of
such assets. The Group has reviewed the potential impact of this
amendment and does not consider it would have any material impact
on the Group’s financial statements based on its current operations.
IAs 32, Financial Instruments and related amended to IAs 1
Presentation of Financial statements (effective for annual periods
beginning on or after 1 January 2009). These amendments deal with
the balance sheet classification of puttable financial instruments
and obligations arising only on liquidation. This is not expected to
have any significant impact on the Group’s financial statements.
IFRs 2, share-based payment (Amendment) Vesting conditions and
cancellations (effective for annual periods beginning on or after
1 January 2009). This amendment clarifies that vesting conditions
are only service conditions and performance conditions and that
other features of share-based payments are non-vesting conditions.
It also specifies that all cancellations, whether by the entity or by
other parties, should receive the same accounting treatment. This
is expected to accelerate the recognition of share-based payment
charges in respect of leavers which would not have any significant
impact on the Group’s financial statements given current employee
attrition rates.
Share-based payments
The Group operates share-based payment arrangements with
employees. The fair value of equity settled options for share-based
payments is determined on grant and expensed straight line over
the period from grant to the date of earliest unconditional exercise.
The fair value of cash-settled options for share-based payments is
determined each period end until exercised or they lapse. The value
is expensed straight line over the period from grant to the date of
earliest unconditional exercise. The fair value of both equity settled
and cash settled share options is calculated by a binomial option
pricing model. The charges for both equity and cash-settled share-
based payments are updated annually for non-market-based
vesting conditions.
Share capital
Ordinary share capital of the Company is recorded as the proceeds
received less issue costs.
Company shares held by the employee benefit trusts are held at the
consideration paid. They are classified as own shares within equity.
Any gain or loss on the purchase, sale or issue of Company shares is
recorded in equity.
Restatement of prior periods for finalisation of fair values arising on
acquisitions
The fair values of the net assets of acquired business are finalised
within 12 months of the acquisition date, with the exception of
certain deferred tax balances. All fair value adjustments are recorded
with effect from the date of acquisition and consequently may
result in the restatement of previously reported financial results
(see note 40).
Recent accounting developments
With effect from 1 April 2007 the Group has adopted IFRS 7,
Financial Instruments: Disclosures. This introduces additional
required disclosures for financial instruments, but does not have any
impact on the consolidated income statement or balance sheet.
The following amendments and interpretations to published
standards are also effective for accounting periods beginning on
or after 1 April 2007:
IFRIC 7, Applying the restatement approach under IAS 29;
IFRIC 8, Scope of IFRS 2;
IFRIC 9, Reassessment of embedded derivatives;
IFRIC 10, Interim financial reporting and impairment;
IFRIC 11, IFRS2, Group and Treasury Share Transactions; and
Amendment to IAS1, Presentation of financial statements –
capital disclosures.
None of these have any significant impact on the Group’s
financial statements.
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1.
significant accounting policies continued
IFRs 3, Business Combinations (Revised) and related revisions to IAs
27 Consolidated and separate Financial statements (Revised) (both
effective for annual periods beginning on or after 1 July 2009).
These revisions introduce some changes to the application of the
acquisition method of accounting for business combinations. For
example, all transaction costs will be expensed, all payments to
purchase a business will be recorded at fair value at the acquisition
date, with some contingent payments subsequently re-measured at
fair value through the income statement, and goodwill may be
calculated based on the parent’s share of net assets or it may
include goodwill related to the minority interest. These revisions will
impact the way in which the Group reports business combinations
in future periods, in particular the expensing of transaction costs
and adjustments to the fair value of contingent consideration
through the income statement.
IFRIC 12, service Concession Arrangements (effective for annual
periods beginning on or after 1 January 2008). IFRIC 12 requires that
certain elements of service concession agreements may be treated
as either a financial asset or an intangible asset. The Group has
reviewed its long-term managed services agreements and does not
consider that IFRIC 12 is relevant to any of its operations.
IFRIC 13, Customer loyalty Programmes (effective for annual periods
beginning on or after 1 July 2008). IFRIC 13 addresses accounting for
loyalty award credits to customers who buy other goods and
services. This is not expected to have any impact on the Group’s
financial statements.
IFRIC 14, IAs 19 The limit on a Defined Benefit Asset, minimum
Funding Requirements and their Interaction (effective for annual
periods beginning on or after 1 January 2008). IFRIC 14 requires an
entity to only recognise a surplus on a defined benefit post-
retirement scheme if there is an unconditional right to realise them
at some point during the life of the plan or when the plan is settled.
It can also require schemes with deficits to recognise additional
deficits to reflect agreed future funding commitments.
Critical accounting estimates and judgements in applying
accounting policies
The following commentary is intended to highlight those policies
that are critical to the business based on the level of management
judgement required in their application, their complexity and their
potential impact on the results and financial position reported for
the Group. The level of management judgement required includes
assumptions and estimates about future events which are
uncertain, the actual outcome of which may result in a materially
different outcome from that anticipated.
Revenue and profit recognition
The estimation process required to evaluate the potential outcome
of contracts and projects requires skill, knowledge and experience
from a variety of sources within the business to assess the status
of the contract, costs to complete, internal and external labour
resources required and other factors. This process is carried out
continuously throughout the business to ensure that project
and contract assessments reflect the latest status of such work.
No profit is recognised on a contract until the outcome can be
reliably estimated.
Business combinations
Intangible assets recognised on business combinations have been
valued using established methods and models to determine
estimated value and useful economic life, with input, where
appropriate, from external valuation consultants. Such methods
require the use of estimates which may produce results that are
different from actual future outcomes.
The Group tests annually whether goodwill and reviews whether
identified intangible assets have suffered any impairment. This
process is reliant on the use of estimates of the future profitability
and cash flows of its cash generating units which may differ from
the actual results delivered.
Post-retirement benefits
The Group’s defined benefit pension obligations and net income
statement costs are based on key assumptions including return on
plan assets, discount rates, mortality, inflation and future salary and
pension increases. Management exercise their best judgement, in
consultation with actuarial advisors, in selecting the values for these
assumptions that are the most appropriate to the Group. Small
changes in these assumptions at the balance sheet date, individually
or collectively, may result in significant changes in the size of the
deficit or the net income statement costs.
Research and development expenditure
Internally funded development expenditure is capitalised when
criteria are met and is written off over the forecast period of sales
resulting from the development. Management decides upon the
adequacy of future demand and market for such new products in
order to justify capitalisation of internally funded development
expenditure, which can be difficult to determine when dealing with
such innovative technologies. Actual product sales may differ from
these estimates.
Tax
In determining the Group’s provisions for income tax and deferred
tax it is necessary to assess the likelihood and timing of recovery of
tax losses created and to consider transactions in a small number
of key tax jurisdictions for which the ultimate tax determination is
uncertain. To the extent that if the final outcome differs from the
tax that has been provided, adjustments will be made to income tax
and deferred tax provisions held in the period the determination
is made.
Provisions
Provisions relate to constructive obligations arising principally from
restructuring programmes. Such provisions are calculated based on
estimates such as the expected calculation of redundancy costs or
the future marketability of surplus property from such programmes.
Actual costs incurred may differ from these estimates.
Unquoted equity investments
The Group usually judges the fair value of unquoted equity
investments using the valuation ascribed to the investment by
a third-party funding round or similar valuation event for that
investment. In determining the value of an investment the Group
may use information from funding rounds, business plans and
forecasts, market projections and other estimation techniques as
a guide. These valuation techniques require estimates of the
business’s future performance. The actual business’s performance
of investments may differ from these estimates.
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2.
Revenue
Revenue and other income is analysed as follows:
all figures in £ million
Sales of goods
Services
Royalties
Revenue
Property rental income
3.
segmental analysis
Business segments
Year ended 31 March 2008
all figures in £ million
Revenue
External sales
Internal sales 1
Other information
EBITDA before restructuring costs and share of equity accounted
joint ventures and associates
Share of equity accounted joint ventures and associates
EBITDA before restructuring costs
Depreciation of property, plant and equipment – own equipment
Depreciation of property, plant and equipment – LTPA funded
Amortisation of purchased or internally developed
intangible assets
Group operating profit/(loss) before EMEA reorganisation and
amortisation of intangible assets arising from acquisitions
Amortisation of intangible assets arising from acquisitions
EMEA reorganisation
Group operating profit/(loss)
Loss on business divestments and unrealised impairment
of investments
Net finance expense
Profit before tax
Taxation expense
Profit for the year
2008
2007
143.9
1,217.4
4.7
1,366.0
133.5
1,009.1
6.9
1,149.5
9.0
11.0
QinetiQ
North
Europe,
Middle East
America and Australasia
Ventures
Eliminations
Total
540.2
0.3
540.5
66.2
0.1
66.3
(4.1)
–
(0.1)
62.1
(16.2)
–
45.9
820.1
0.5
820.6
112.1
0.1
112.2
(17.9)
(10.3)
5.7
–
5.7
(9.3)
(4.2)
(13.5)
(0.7)
–
(4.0)
(0.9)
80.0
(1.8)
(32.0)
46.2
(15.1)
–
(0.6)
(15.7)
–
(0.8)
(0.8)
1,366.0
–
1,366.0
–
–
–
–
–
–
–
–
–
–
169.0
(4.0)
165.0
(22.7)
(10.3)
(5.0)
127.0
(18.0)
(32.6)
76.4
(7.0)
(18.0)
51.4
(4.0)
47.4
1 Inter-segment sales are priced at fair value and treated as an arm’s length transaction.
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3.
segmental analysis continued
Business segments
Year ended 31 March 2007
all figures in £ million
Revenue
External sales
Internal sales 1
Other information
EBITDA before share of equity accounted associates
Share of equity accounted associates
EBITDA
Depreciation of property, plant and equipment – own equipment
Depreciation of property, plant and equipment – LTPA funded
Amortisation of purchased or internally developed
intangible assets
Group operating profit/(loss) before amortisation of intangible
assets arising from acquisitions
Amortisation of intangible assets arising from acquisitions
Group operating profit/(loss)
Gain on business divestments and unrealised impairment
of investment
Profit on disposal of non-current assets
Net finance expense
Profit before tax
Taxation expense
Profit for the year
QinetiQ
north
Europe,
middle East
America and Australasia
Ventures
Eliminations
Total
358.2
0.6
358.8
43.1
0.1
43.2
(3.2)
–
(0.1)
39.9
(10.7)
29.2
779.3
–
779.3
102.2
–
102.2
(20.8)
(7.0)
(1.4)
73.0
(1.9)
71.1
12.0
–
12.0
(3.6)
(1.3)
(4.9)
(0.7)
–
(1.3)
(6.9)
–
(6.9)
–
(0.6)
(0.6)
1,149.5
–
1,149.5
–
–
–
–
–
–
–
–
–
141.7
(1.2)
140.5
(24.7)
(7.0)
(2.8)
106.0
(12.6)
93.4
4.6
3.3
(12.0)
89.3
(20.3)
69.0
1 Inter-segment sales are priced at fair value and treated as an arm’s length transaction.
The segmental analysis has been modified from the prior year to align with the operational change in the year in which the Defence
& Technology and Security & Dual Use sectors have been combined to form the EMEA segment.
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QinetiQ
North
Europe,
Middle East
America and Australasia
Ventures
Unallocated
Consolidated
644.0
(91.1)
755.7
(398.9)
41.4
(6.9)
552.9
356.8
34.5
41.0
(47.8)
(404.4)
(411.2)
1,482.1
(544.7)
(404.4)
533.0
6.8
–
24.9
13.7
0.4
–
–
–
32.1
13.7
QinetiQ
North
Europe,
Middle East
America and Australasia
546.7
(77.1)
680.7
(326.3)
469.6
354.4
27.8
Ventures
Unallocated
Consolidated
33.0
(5.2)
48.2
(101.8)
(320.8)
(374.4)
1,308.6
(510.4)
(320.8)
477.4
4.1
–
25.0
16.9
0.9
–
–
–
30.0
16.9
3.
segmental analysis continued
Year ended 31 March 2008
all figures in £ million
Segment assets+
Segment liabilities+
Unallocated net debt excluding cash
Net assets
Other information
Capital expenditure – own equipment*
Capital expenditure – LTPA funded*
Year ended 31 March 2007
all figures in £ million
Segment assets – restated+
Segment liabilities – restated+
Unallocated net debt excluding cash
Net assets – restated
Other information
Capital expenditure – own equipment*
Capital expenditure – LTPA funded*
+ Segment assets and liabilities exclude unallocated net debt before cash.
* Capital expenditure is defined as cash paid for property, plant and equipment additions and purchased and internally developed intangible assets.
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2008
2007
566.1
760.0
39.9
1,366.0
385.7
729.9
33.9
1,149.5
Gross assets
Gross liabilities
2008
2007 Restated
2008
2007 Restated
644.3
808.8
29.0
1,482.1
557.0
743.7
7.9
1,308.6
(340.0)
(585.7)
(23.4)
(949.1)
(213.4)
(614.1)
(3.7)
(831.2)
2008
6.8
39.0
45.8
2007
4.1
42.8
46.9
2008
2007
0.7
0.2
0.1
0.5
1.5
9.0
66.0
32.5
0.5
547.8
12.8
0.7
0.2
0.2
0.1
1.2
11.0
74.6
29.6
2.1
511.1
9.0
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Geographical segments
Revenue by customer location
all figures in £ million
North America
United Kingdom
Other
Total
Assets/liabilities by location
all figures in £ million
North America
United Kingdom
Other
Total
Capital expenditure by location
all figures in £ million
North America
United Kingdom
Total
4.
Profit before tax
The following items have been charged in arriving at profit before tax:
all figures in £ million
Fees payable to the auditor
– Statutory audit
– Other services supplied pursuant to legislation
– Other services relating to taxation
– Other services
Total auditor’s remuneration
Property rental income
Inventories recognised as an expense
Depreciation of property, plant and equipment:
– Owned assets
– Under finance lease
Research and development expenditure under customer-funded contracts
Research and development expenditure – Group funded
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5a.
(loss)/gain on business divestments and unrealised impairment of available for sale
investments
all figures in £ million
(Loss)/gain on business divestments
Unrealised impairment of available for sale investment
2008
(1.8)
(5.2)
(7.0)
2007
13.4
(8.8)
4.6
The loss on business divestment of £1.8m represents the net book loss arising on the establishment of QinetiQ Ventures LP with Coller Capital
involving the deconsolidation of certain previously consolidated subsidiaries (Intrinsiq Materials Ltd formerly named QinetiQ Nanomaterials
Ltd, Aurix Ltd, Omni-ID Ltd and Quintel Technology Ltd) and investments (Metalysis Ltd, ZBD Displays Ltd and Stingray Geophysical Ltd) that
were transferred into the fund at completion of the transaction.
The current year unrealised impairment of investments relates to a £2.9m (2007:£8.8m) charge to the income statement in respect of the
impairment in the carrying value of the quoted pSivida investment (see note 21 for further details) and a £2.3m charge in relation to the
carrying value of other investments.
5b.
Profit on disposal of non-current assets
all figures in £ million
Profit on disposal of non-current assets
2008
–
2007
3.3
Prior year disposals
On 29 March 2007 the Group unconditionally exchanged on the contract to dispose of its Bedford site resulting in the recognition of £2.5m
of profit on disposal, net of costs. Initial proceeds of £1.8m were received on exchange of contracts. The sale completed on 13 April 2007
and a further £15.7m was received at that date. Other disposals in the year generated a net profit of £0.8m, of which £0.7m came from
property disposals.
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6.
Finance income and expense
all figures in £ million
Receivable on bank deposits
Finance lease income
Finance income
Amortisation of recapitalisation fee
Payable on bank loans and overdrafts
Payable on US$ private placement debt
Finance lease expense
Unwinding of discount on financial liability
Finance expense
Net finance expense
7.
Taxation expense
all figures in £ million
Analysis of charge
UK corporation tax
Overseas corporation tax
Overseas corporation tax in respect of prior years
Total corporation tax
Deferred tax
Deferred tax in respect of prior years
Taxation expense
Factors affecting the tax charge in year
The principal factors reducing the Group’s current year tax
charge below the UK statutory rate are explained below:
Profit before tax
Tax on profit before tax at 30% (2007: 30%)
Effect of:
Expenses not deductible for tax purposes, research and development
relief and non-taxable items arising on consolidation
Unprovided tax losses of overseas subsidiaries, joint ventures and associates
Effect of change in deferred tax rate
Deferred tax in respect of prior years
Effect of different rates in overseas jurisdictions
Taxation expense
2008
1.7
1.9
3.6
(0.2)
(11.9)
(7.1)
(1.6)
(0.8)
(21.6)
(18.0)
2007
2.1
2.1
4.2
(0.2)
(12.3)
(1.6)
(1.9)
(0.2)
(16.2)
(12.0)
2008
2007
–
10.1
–
10.1
(4.6)
(1.5)
4.0
51.4
15.4
(13.4)
2.3
(1.5)
(1.5)
2.7
4.0
–
13.9
(0.2)
13.7
6.6
–
20.3
89.3
26.8
(10.3)
1.0
–
(0.2)
3.0
20.3
Factors affecting future tax charges
The effective tax rate continues to be below the statutory rate in the UK primarily as a result of the benefit of research and development relief
in the UK. The effective tax rate is expected to remain below the UK statutory rate in the medium term but is expected to rise as an increasing
proportion of taxable profits are generated from the USA.
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8.
Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2008 and 2007 are provided below:
Interim
Final (proposed)
Total for the year ended 31 March 2008
Interim
Final
Total for the year ended 31 March 2007
Pence per share
1.33
2.92
4.25
1.20
2.45
3.65
£m
8.7
19.3*
28.0
7.9
16.2
24.1
Date paid/payable
February 2008
September 2008
February 2007
August 2007
* Estimated cost for final proposed dividend in respect of the year ended 31 March 2008. The record date for this dividend will be 8 August 2008.
9.
Analysis of employee costs
The largest component of operating expenses is employee costs. The year end and average monthly number of persons employed by the
Group including Directors analysed by business segment, was:
Year end
monthly average
QinetiQ North America
Europe, Middle East & Australasia
Ventures
Corporate
Total
The aggregate payroll costs of these persons were as follows:
all figures in £ million
Wages and salaries
Social security costs
Other pension costs
Cost of share based payments
Employee costs before EMEA reorganisation costs
EMEA reorganisation costs
Total employee costs
2008
number
5,699
8,209
77
80
14,065
2007
number
4,258
8,231
82
210
12,781
note
34
2008
number
5,479
7,993
75
80
13,627
2008
485.9
41.4
45.1
3.8
576.2
32.6
608.8
2007
number
3,154
8,417
85
214
11,870
2007
414.9
36.4
61.0
1.1
513.4
–
513.4
The EMEA reorganisation costs principally comprise redundancy costs resulting from the restructuring of EMEA into four capability-focused
businesses.
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10.
Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the year (less those non-vested shares held by employee ownership trusts). For diluted earnings per share
the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares arising from
unvested share-based awards including share options. Underlying earnings per share figures are presented below in addition to the basic and
diluted earnings per share as the Directors consider this gives a more relevant indication of underlying business performance and reflects the
adjustments for the impact of non-recurring items, amortisation of acquired intangible assets and tax thereon on basic earnings per share.
Year ended 31 March 2008
Basic
Effect of dilutive securities – options
Diluted
Underlying earnings per share
Basic
EMEA reorganisation costs
Amortisation of intangible assets arising from acquisitions
Loss on business divestments and unrealised impairment of investments
Tax impact of items above
Tax rate change
Underlying
* The weighted average number of shares is calculated net of the shares held by the employee benefit trusts.
Year ended 31 March 2007
Basic
Effect of dilutive securities – options
Diluted
Underlying earnings per share
Basic
Amortisation of intangible assets arising from acquisitions
Gain on business divestments and unrealised impairment of investment
Profit on disposal of non-current assets
Tax impact of items above
Underlying
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Weighted
average
number
of shares
million*
656.2
3.5
659.7
Weighted
average
number
of shares
million*
656.2
656.2
Weighted
average
number
of shares
million
656.6
11.0
667.6
Weighted
average
number
of shares
million
656.6
656.6
Earnings
£m
47.4
47.4
Earnings
£m
47.4
32.6
18.0
7.0
(15.5)
(1.5)
88.0
Earnings
£m
69.0
69.0
Earnings
£m
69.0
12.6
(4.6)
(3.3)
0.4
74.1
Per share
amount
pence
7.22
(0.03)
7.19
Per share
amount
pence
7.22
4.97
2.74
1.07
(2.36)
(0.23)
13.41
Per share
amount
pence
10.51
(0.17)
10.34
Per share
amount
pence
10.51
1.92
(0.70)
(0.50)
0.06
11.29
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11.
Goodwill
all figures in £ million
Cost
At 1 April
Acquisitions
Disposals
Foreign exchange
At 31 March
Impairment
At 1 April and 31 March
Net book value at 31 March – restated
Net book value of goodwill at 31 March 2006 amounted to £314.9m.
note
2008
2007
Restated
40
13
372.4
72.3
(2.2)
(4.6)
437.9
(0.5)
437.4
315.4
100.5
(7.1)
(36.4)
372.4
(0.5)
371.9
Goodwill at 31 March 2008 was primarily allocated to cash generating units (CGUs) in QNA: Technology Solutions £85.0m, Systems
Engineering £59.5m, IT Services £169.9m and Mission Solutions £84.5m. Other allocations of goodwill include goodwill in relation to HVR,
Boldon James, Verhaert and the three Australian acquisitions. Goodwill is attributable to the excess of consideration over the fair value of net
assets acquired and includes expected synergies, future growth prospects and staff knowledge, expertise and customer contacts. The Group
tests goodwill for impairment annually and uses discounted cash flow as the recoverable amount. The Group has made a number of
assumptions in determining the value in use of goodwill allocated to a cash generating unit. It is assumed that cash generating units perform
to the five-year corporate plan. This is consistent with the current and prior performance of the cash generating units and current UK and US
defence and security spending forecasts. The estimates of the long-term growth rates for the CGUs are based on macro-economic
assumptions and do not exceed the long-term estimate for the sectors in which CGUs operate. Future cash flows have been discounted at a
post-tax discount rate of 8.7%. Sensitivity analysis has indicated that no reasonably foreseeable changes in the key assumptions in the
impairment model would result in significant impairment charges being recorded in the financial statements.
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12.
Intangible assets
Year ended 31 March 2008
all figures in £ million
Cost
At 1 April 2007 – restated
Additions – internally developed
Additions – purchased
Additions – recognised on acquisitions
Disposals
Foreign exchange
At 31 March 2008
Amortisation and impairment
At 1 April 2007
Amortisation charge for the year
Disposals
At 31 March 2008
Net book value at 31 March 2008
Year ended 31 March 2007
all figures in £ million
Cost
At 1 April 2006
Additions – internally developed
Additions – purchased
Additions – recognised on acquisitions – restated
Disposals
Transfers to plant, property and equipment
Foreign exchange
At 31 March 2007 – restated
Amortisation and impairment
At 1 April 2006
Amortisation charge for the year
Disposals
Foreign exchange
At 31 March 2007
Net book value at 31 March 2007 – restated
Net book value at 31 March 2006
Acquired
intangible
assets*
Development
costs
Other
intangible
assets
note
13, 40
40
note
40
13
74.8
–
–
45.6
–
(1.0)
119.4
27.2
18.0
–
45.2
74.2
10.1
1.4
–
–
(0.8)
–
10.7
0.7
1.5
(0.1)
2.1
8.6
11.1
0.2
20.6
–
(0.1)
–
31.8
2.0
3.5
–
5.5
26.3
Acquired
intangible
assets*
Development
costs
Other
intangible
assets
63.7
–
–
18.7
(1.2)
–
(6.4)
74.8
16.8
12.6
(0.7)
(1.5)
27.2
47.6
46.9
8.6
3.2
–
–
(1.3)
(0.4)
–
10.1
0.5
1.5
(1.3)
–
0.7
9.4
8.1
2.9
3.5
5.4
–
(0.7)
–
–
11.1
0.8
1.3
(0.1)
–
2.0
9.1
2.1
Total
96.0
1.6
20.6
45.6
(0.9)
(1.0)
161.9
29.9
23.0
(0.1)
52.8
109.1
Total
75.2
6.7
5.4
18.7
(3.2)
(0.4)
(6.4)
96.0
18.1
15.4
(2.1)
(1.5)
29.9
66.1
57.1
* Acquired intangible assets principally consist of the value of orders, backlog and certain customer relationships, technology and patents/licences. No value is
attributed to customer relationships where short-term contracts are held that are subject to regular re-competition.
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13.
Business combinations
In the year to 31 March 2008 the Group made nine acquisitions. If these acquisitions had been completed as at 1 April 2007 Group revenue for
the year ended 31 March 2008 would have increased by £30.6m to £1,396.6m and Group profit before tax would have increased by £2.1m to
£53.5m. The Group acquired five businesses based in the USA, three in Australia and one in the UK.
Acquisitions in the year to 31 March 2008
all figures £ million
Company acquired
QNA acquisitions
ITS Corporation
Automatika, Inc.
Applied Perception, Inc.
3H Technology LLC
Pinnacle CSI
EMEA acquisitions
Boldon James Holdings Ltd
Ball Solutions Group Pty Ltd
AeroStructures Group
Novare Services Pty Ltd
Current year acquisitions
Update in respect of acquisitions
made in the year to 31 March 20073
Total
Date acquired
Initial cash
consideration1
Deferred
consideration
Fair value of
Goodwill assets acquired2
Revenue
Operating
profit
Contribution post acquisition
16 Apr 07
5 June 07
5 June 07
26 June 07
21 Jan 08
24 Oct 07
15 Feb 08
15 Feb 08
15 Feb 08
43.1
4.2
4.4
26.2
3.0
13.2
3.5
5.5
3.6
106.7
–
106.7
5.3
0.6
0.6
1.0
–
4.3
–
–
0.4
12.2
0.4
12.6
29.9
1.8
1.8
14.6
0.7
15.1
3.4
1.9
2.7
71.9
0.4
72.3
18.5
3.0
3.2
12.6
2.3
2.4
0.1
3.6
1.3
47.0
–
47.0
35.0
1.4
1.7
16.0
1.2
3.4
0.9
0.8
0.3
60.7
–
60.7
3.2
0.2
0.0
1.4
0.1
0.2
0.0
0.1
0.1
5.3
–
5.3
1 Initial cash consideration includes acquisition costs and price adjustments for working capital and net debt.
2 Fair value of assets acquired are provisional.
3 Goodwill in relation to the OSEC and Analex acquisitions completed in the prior year increased by £0.4m ($0.8m) due to additional payments being accrued to
the vendors.
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13.
Business combinations continued
Set out below are the allocations of purchase consideration, assets and liabilities of the acquisitions made in the year and the adjustments
required to the book values of the assets and liabilities in order to present the net assets of these businesses at fair value and in accordance
with Group accounting policies. These allocations and adjustments are provisional.
Acquisitions in the year to 31 March 2008
all figures in £ million
Intangible assets
Property, plant and equipment
Trade and other receivables
Other current assets
Trade and other payables
Cash and cash equivalents
Debt and other borrowings
Deferred taxation
Net assets acquired
Goodwill
Consideration satisfied by:
Cash
Deferred consideration
Total consideration
Related costs of acquisition
note
Book value
Fair value
adjustment
Fair value at
acquisition
1.4
2.5
16.6
3.9
(10.3)
4.5
(6.5)
(0.5)
11.6
44.2
–
(0.1)
(0.5)
–
–
(8.2)
35.4
25
45.6
2.5
16.5
3.9
(10.8)
4.5
(6.5)
(8.7)
47.0
71.9
118.9
105.8
12.2
118.0
0.9
118.9
The fair value adjustments include £44.2m in relation to the recognition of acquired intangible assets less the recognition of a deferred tax
liability of £8.2m in relation to these intangible assets.
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14.
Property, plant and equipment
Year ended 31 March 2008
all figures in £ million
Cost
At 1 April 2007
Additions
Acquisition of subsidiaries
Disposals
Disposal of businesses
Transfers
Foreign exchange
At 31 March 2008
Depreciation
At 1 April 2007
Charge for the year
Disposals
Disposal of businesses
Foreign exchange
At 31 March 2008
Net book value at 31 March 2008
Year ended 31 March 2007
all figures in £ million
Cost
At 1 April 2006
Additions
Acquisition of subsidiaries
Disposals
Disposal of businesses
Transfers from development costs
Transfers
Foreign exchange
At 31 March 2007
Depreciation
At 1 April 2006
Charge for the year
Disposals
Disposal of businesses
Foreign exchange
At 31 March 2007
Net book value at 31 March 2007
Net book value 31 March 2006
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets
under
construction
304.0
1.3
0.3
–
–
1.2
–
306.8
43.3
11.3
–
–
–
(54.6)
252.2
104.9
3.5
0.6
(2.1)
(1.7)
10.4
(0.1)
115.5
61.6
15.0
(2.0)
(0.6)
(0.1)
(73.9)
41.6
31.9
3.7
1.6
(0.2)
(0.8)
6.1
(0.3)
42.0
19.6
6.7
(0.2)
(0.5)
(0.2)
(25.4)
16.6
25.2
15.2
–
(0.2)
(0.5)
(17.7)
–
22.0
–
–
–
–
–
–
22.0
land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets
under
construction
299.4
0.3
–
(3.4)
–
–
8.2
(0.5)
304.0
33.5
11.3
(1.1)
–
(0.4)
43.3
260.7
265.9
87.3
3.3
–
(0.6)
–
–
15.5
(0.6)
104.9
51.9
10.6
(0.6)
–
(0.3)
61.6
43.3
35.4
26.4
3.3
2.0
(2.6)
(0.4)
–
4.5
(1.3)
31.9
13.1
9.8
(2.3)
(0.1)
(0.9)
19.6
12.3
13.3
25.7
27.9
–
(0.5)
–
0.4
(28.2)
(0.1)
25.2
–
–
–
–
–
–
25.2
25.7
Total
466.0
23.7
2.5
(2.5)
(3.0)
–
(0.4)
486.3
124.5
33.0
(2.2)
(1.1)
(0.3)
(153.9)
332.4
Total
438.8
34.8
2.0
(7.1)
(0.4)
0.4
–
(2.5)
466.0
98.5
31.7
(4.0)
(0.1)
(1.6)
124.5
341.5
340.3
Assets held under finance leases, capitalised and included in computers and equipment, have:
n
n
n
a cost of £5.2m (31 March 2007: £5.7m);
aggregate depreciation of £5.2m (31 March 2007: £5.0m); and
a net book value of £nil (31 March 2007: £0.7m).
Under the terms of the Business Transfer Agreement with the MOD, certain restrictions have been placed on freehold land and buildings, and
certain plant and machinery related to them. These restrictions are detailed in note 36.
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15.
Investment property
all figures in £ million
Cost and net book value
At 1 April
Disposals
At 31 March
all figures in £ million
The following amounts have been credited/(charged) in arriving at Group operating profit:
Rental income from investment property
Direct operating expenses arising on investment property generating rental income
16.
Financial assets
all figures in £ million
Derivative financial instruments
Escrow financial assets
Net investment in finance lease
Total current financial assets
Net investment in finance lease
Escrow financial assets
Derivative financial instruments
Total non-current financial assets
Total financial assets
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2008
2007
–
–
–
5.8
(5.8)
–
2008
2007
–
–
0.7
(0.2)
2008
1.4
3.0
3.0
7.4
13.0
–
2.3
15.3
22.7
2007
1.0
–
3.0
4.0
14.1
3.1
1.6
18.8
22.8
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17.
Equity accounted investments
Year ended 31 March 2008
all figures in £ million
Revenue
Loss after tax
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Year ended 31 March 2007
all figures in £ million
Revenue
Loss after tax
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Joint venture
and associates
financial
results
Group net
share of joint
ventures and
associates
9.0
(8.0)
21.1
9.1
30.2
(5.8)
(5.2)
(11.0)
19.2
2.9
(4.0)
10.4
4.1
14.5
(2.6)
(2.6)
(5.2)
9.3
Associates
financial
results
Group net
share of
associates
6.1
(3.1)
0.5
2.8
3.3
(3.0)
(11.0)
(14.0)
(10.7)
2.0
(1.2)
0.1
0.6
0.7
(0.4)
–
(0.4)
0.3
In August 2007, the Group completed the establishment of a new technology venture fund, QinetiQ Ventures LP, with Coller Capital. The fund
is accounted for as a joint venture with a 50% economic interest held by the Group but with the potential for an increase to 75% dependent
on the future financial results of the fund. The Group transferred the following businesses into the fund which had previously been partially
or wholly owned: Intrinsiq Materials Limited (formerly named QinetiQ Nanomaterials Limited, and formerly a 100% subsidiary), Aurix Limited
(formerly 88% subsidiary), Omni-ID Limited (formerly 100% subsidiary), Quintel Technology Limited (formerly 50% subsidiary), Metalysis
Limited (formerly 16.3% investment), ZBD Displays Limited (formerly 31.6% investment), Stingray Geophysical Limited (formerly 19.9%
investment). The Group invested cash of £3.5m into the fund during the year and there were losses of £4.0m recorded in the income
statement. There was a loss on business divestment of £1.8m recorded in the income statement on the establishment of the fund
(see note 5a for further details) and there was a charge of £3.5m to equity for the recycling of unrealised gains on previous revaluations
of these businesses.
The unrecognised share of losses of equity accounted investments at 31 March 2008 was £nil (31 March 2007: £nil). During the year ended
31 March 2008 there were sales to joint ventures of £1.3m (2007: £nil) and to associates of £1.4m (2007: £nil). At year end there were
outstanding receivables from joint ventures of £0.4m (2007: £nil) and £nil (2007: £nil) from associates. There were no other related party
transactions between the Group and its joint ventures and associates in the year.
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18.
Other non-current investments
all figures in £ million
Available for sale investments at 1 April
Cash invested in year
Non-cash addition in year
Impairment charged to income statement in year
Unwind of discount credited to income statement
Impairment of a previously revalued investment charged to equity
Increase in fair value in year credited to equity
Disposals
Available for sale investments at 31 March
2008
28.5
4.1
–
(2.3)
0.2
(2.9)
3.2
(16.1)
14.7
2007
1.3
7.7
9.5
–
–
–
10.0
–
28.5
In August 2007, the Group transferred its holding in Metalysis Limited, Stingray Geophysical Ltd and ZBD Displays Limited to a venture fund in
which QinetiQ holds a 50% interest and Coller Capital holds the remaining interest. The interest in this joint venture fund is disclosed in
equity accounted investments in note 17. Prior to this date the Group invested cash of £1.2m in Metalysis Limited.
During the year the Group made other cash investments of £2.9m. There were revaluation gains of £3.2m in the Sciemus Limited investment
following a funding round that established a new fair value and £2.3m impairments of other investments.
2008
6.1
19.9
30.9
56.9
2007
3.5
17.7
18.3
39.5
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19.
Inventories
all figures in £ million
Raw materials
Work in progress
Finished goods
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20.
Trade and other receivables
all figures in £ million
Trade debtors
Amounts recoverable under contracts
Other debtors
Prepayments
2008
300.1
134.2
9.4
25.3
469.0
2007
250.7
106.3
21.8
22.4
401.2
In determining the recoverability of trade receivables the Group considers any changes in the credit quality of the trade receivable from the
date credit was granted up to the reporting date. Credit risk is limited due to the high percentage of turnover being derived from UK and US
defence and other government agencies. Accordingly the Directors believe there is no further credit provision required in excess of the
allowance for doubtful debts. As at 31 March 2008 the Group carried a provision for doubtful debts of £6.2m (2007: £2.5m).
Ageing of past due but not impaired receivables
all figures in £ million
Up to 3 months
Over 3 months
Movements on the Group doubtful debt provision
all figures in £ million
At 1 April
Created
Released
Utilised
At 31 March
2008
48.0
3.3
51.3
2008
2.5
4.5
(0.5)
(0.3)
6.2
2007
20.8
6.6
27.4
2007
3.5
0.3
(1.3)
–
2.5
The maximum exposure to credit risk in relation to trade receivables at the reporting date is the fair value of trade receivables. The Group
does not hold any collateral as security.
21.
Current asset investments
all figures in £ million
Available for sale investment
2008
1.3
2007
4.0
At 31 March 2008 the Group held 35.7 million shares in pSivida Limited (31 March 2007: 35.7 million) a company listed on NASDAQ and the
Australian and Frankfurt Stock Exchanges. The investment is held at fair value using the closing share price at 31 March 2008 of A$0.08 per
share (31 March 2007: A$0.27). During the year the reduction in value of £2.9m (2007: £8.8m) before £0.2m of foreign exchange gain has
been recognised in the income statement as an impairment.
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22.
Cash and cash equivalents
all figures in £ million
Cash
2008
24.5
2007
20.0
At 31 March 2008 £14.7m (31 March 2007: £12.7m) of cash is held by the Group’s captive insurance subsidiary. The amount is included
in the above but can only be used for insurance purposes or utilised by the Group with prior approval by the subsidiary Board and relevant
insurance regulator.
23.
Trade and other payables
all figures in £ million
Payments received on account
Trade creditors
Other tax and social security
Other creditors
Accruals and deferred income
Total current trade and other payables
Payments received on account
Other payables
Total non-current trade and other payables
Total trade and other payables
24.
Provisions
Year ended 31 March 2008
all figures in £ million
At 1 April 2007
Created in year
Released in year
Utilised in year
At 31 March 2008
Current liability
Non-current liability
At 31 March 2008
Year ended 31 March 2007
all figures in £ million
At 1 April 2006
Created in year
Released in year
Utilised in year
At 31 March 2007
Current liability
Non-current liability
At 31 March 2007
2008
77.0
51.3
47.2
31.4
167.5
374.4
36.1
11.6
47.7
422.1
2007
Restated
96.9
31.3
46.3
20.4
145.1
340.0
–
5.5
5.5
345.5
Reorganisation
Other
0.9
36.6
(0.4)
(7.8)
29.3
29.3
–
29.3
Reorganisation
9.4
0.7
(0.8)
(8.4)
0.9
0.9
–
0.9
13.3
5.4
(0.3)
(2.0)
16.4
2.5
13.9
16.4
Other
17.1
5.9
(7.5)
(2.2)
13.3
0.2
13.1
13.3
Total
14.2
42.0
(0.7)
(9.8)
45.7
31.8
13.9
45.7
Total
26.5
6.6
(8.3)
(10.6)
14.2
1.1
13.1
14.2
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Reorganisation provisions relate to current-year and prior-year restructuring of the Group. Other provisions comprise legal, environmental,
statutory, property and other liabilities.
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25.
Deferred tax
Deferred tax assets and liabilities are only offset where there is a legally enforceable right to offset and there is an intention to settle the
balances net.
Movements on the deferred tax assets and liabilities are shown below:
Year ended 31 March 2008
Deferred tax asset
all figures in £ million
At 1 April 2007
Created
Transfer from deferred tax liability
Released
Gross deferred tax asset at 31 March 2008
Less liability available for offset
Net deferred tax asset at 31 March 2008
Pension liability
Hedging
27.1
–
–
(20.6)
6.5
–
1.9
(0.7)
–
1.2
Other
0.7
11.1
–
–
11.8
Total
27.8
13.0
(0.7)
(20.6)
19.5
(19.5)
–
The net deferred tax asset released in the year relating to the pension liability includes £12.2m (2007: £17.9m) released to equity.
Deferred tax liability
all figures in £ million
At 1 April 2007 – restated
Acquisitions
Created
Transfer to deferred tax asset
Foreign exchange
Gross deferred tax liability at 31 March 2008
Less asset available for offset
Net deferred tax liability at 31 March 2008
Accelerated tax
depreciation and
amortisation
(47.0)
(8.7)
4.4
0.7
0.3
(50.3)
19.5
(30.8)
Deferred tax movements on hedging have been recognised in equity. At the balance sheet date, the Group had unused tax losses of £53.8m
(2007: £46.2m) potentially available for offset against future profits. No deferred tax asset has been recognised in respect of this amount due
to uncertainty over the timing of their utilisation. These losses can be carried forward indefinitely.
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25.
Deferred tax continued
Year ended 31 March 2007
Deferred tax asset
all figures in £ million
At 1 April 2006
Released
Transferred from deferred tax liabilities
Gross deferred tax asset at 31 March 2007
Less liability available for offset
Net deferred tax asset at 31 March 2007
Deferred tax liability
all figures in £ million
At 1 April 2006
Acquisitions – restated
Created
Released
Transferred to deferred tax assets
Foreign exchange
Gross deferred tax liability at 31 March 2007 – restated
Less asset available for offset
Net deferred tax liability at 31 March 2007 – restated
26.
Financial liabilities – current
all figures in £ million
Bank overdraft
Loan notes
Deferred financing costs
Finance lease creditor
Derivative financial investments
Pension
liability
50.4
(23.3)
–
27.1
Other
–
–
0.7
0.7
Accelerated tax
depreciation and
amortisation
Other
Hedging
(43.2)
(5.4)
(0.6)
1.9
–
0.3
(47.0)
(1.6)
–
–
2.3
(0.7)
–
–
(2.0)
–
–
2.0
–
–
–
2008
5.0
0.5
(0.2)
2.8
3.7
11.8
Total
50.4
(23.3)
0.7
27.8
(16.8)
11.0
Total
(46.8)
(5.4)
(0.6)
6.2
(0.7)
0.3
(47.0)
16.8
(30.2)
2007
7.4
5.2
(0.2)
3.2
0.3
15.9
Further analysis of the terms and maturity dates for financial liabilities are set out in note 28.
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27.
Financial liabilities – non-current
all figures in £ million
Bank loan
Deferred financing costs
US$260m loan, repayable 2013 and 2016
Finance lease creditor
Derivative financial instruments
Further analysis of the terms and maturity dates for financial liabilities are set out in note 28.
2008
266.7
(0.9)
265.8
132.3
12.8
4.4
415.3
2007
180.1
(0.6)
179.5
134.3
13.9
–
327.7
28.
Financial risk management
Financial assets and liabilities comprise:
all figures in £ million
Trade and other receivables/(payables)
Cash and cash equivalents
Bank borrowings, loans and loan notes
Finance leases
Investments
Derivative financial instruments
Escrow financial asset
2008
2007
Financial
assets
Financial
liabilities
Financial
assets
Financial
liabilities
469.0
24.5
–
16.0
16.0
3.7
3.0
532.2
(422.1)
–
(403.4)
(15.6)
–
(8.1)
–
(849.2)
401.2
20.0
–
17.1
32.5
2.6
3.1
476.5
(345.5)
–
(326.2)
(17.1)
–
(0.3)
–
(689.1)
(A) Fair values of financial instruments
All financial assets and liabilities have a fair value identical to book value at 31 March 2008 and 31 March 2007 except the following:
all figures in £ million
Primary financial instruments held or issued to finance the Group’s operations:
Bank borrowings, loans and loan notes
Other financial assets/(liabilities):
Finance lease assets
Finance lease liabilities
2008
2007
Fair value
Book value
Fair value
Book value
(403.7)
(403.4)
(324.1)
(326.2)
19.2
(17.7)
16.0
(15.6)
23.1
(21.9)
17.1
(17.1)
Market values, where available, have been used to determine fair values. Where market values are not available, fair values have been
calculated by discounting cash flows to net present values using prevailing market-based interest rates translated at year-end exchange rates,
except for unlisted fixed asset investments where a fair value equals book value.
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Financial risk management continued
(B) Interest rate risk
At 31 March 2008
all figures in £ million
Sterling
US dollar
Euro
Australian dollar
31 March 2007
all figures in £ million
Sterling
US dollar
Euro
Australian dollar
Financial asset
Financial liability
Fixed or
capped
Floating
Non-interest
bearing
16.0
–
–
–
16.0
10.2
16.7
0.6
–
27.5
18.4
–
–
1.3
19.7
Financial asset
Fixed or
capped
Floating
Non-interest
bearing
17.1
–
–
–
17.1
14.3
8.4
0.4
–
23.1
28.5
2.4
0.2
4.0
35.1
Fixed or
capped
(15.6)
(268.0)
–
–
(283.6)
Fixed or
capped
(22.2)
(256.6)
–
–
(278.8)
Floating
(19.4)
(90.4)
(10.0)
(15.6)
(135.4)
Non-interest
bearing
(6.1)
(2.0)
–
–
(8.1)
Financial liability
Floating
Non-interest
bearing
(12.7)
(41.4)
(6.8)
(3.6)
(64.5)
–
(0.1)
(0.2)
–
(0.3)
Floating rate financial assets attract interest based on the relevant national LIBID equivalent. Floating rate financial liabilities bear interest at
the relevant national LIBOR equivalent. Trade and other receivables/(payables) are excluded from this analysis.
For the fixed or capped rate financial assets and liabilities, the average interest rates and the average period for which the rates are fixed are:
Financial assets:
Sterling
Financial liabilities:
Sterling
US dollar
Weighted
Fixed or
capped
£m
2008
Weighted
average
interest rate
%
average
years
to maturity
Fixed or
capped
£m
2007
Weighted
average
interest rate
%
Weighted
average years
to maturity
16.0
13.4%
(15.6)
(268.0)
(283.6)
12.1%
4.8%
5.2%
6.9
7.4
5.2
5.3
17.1
13.4%
(22.2)
(256.6)
(278.8)
10.9%
4.9%
5.3%
7.9
6.3
5.8
5.8
Sterling assets and liabilities consist primarily of finance leases with the weighted average interest rate reflecting the internal rate of return of
those leases.
Interest rate risk management
At 31 March 2008 66% (31 March 2007: 80%) of the Group’s bank borrowings, loans and loan notes were fixed or capped through a
combination of interest rate swaps, collars and fixed rate debt.
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28.
Financial risk management continued
(C) Currency risk
The table below shows the Group’s currency exposures, being exposures on currency transactions that give rise to net currency gains and
losses recognised in the income statement. Such exposures comprise the monetary assets and liabilities of the Group that are not
denominated in the functional currency of the operating company involved, other than certain non-sterling borrowings treated as hedges of
net investments in overseas entities.
Functional currency of the operating company
all figures in £ million
31 March 2008 – sterling
31 March 2007 – sterling
net foreign currency monetary assets/(liabilities)
Us dollar
12.3
0.5
Euro
0.8
(0.3)
Australian
dollar
(0.1)
–
Other
(0.3)
1.2
Total
12.7
1.4
The amounts shown in the table take into account the effect of the forward contracts entered into to manage these currency exposures.
(D) Liquidity risk
The following are the contractual maturities of financial liabilities, including interest payments.
At 31 March 2008
all figures in £ million
Non-derivative financial liabilities
Trade and other payables
Bank overdrafts
US$260m loan, repayable 2013 and 2016
Multi-currency revolving facility*
Loan notes
Finance leases
Derivative financial liabilities
Interest rate swaps used for hedging
Forward exchange contracts used for hedging
Book value
Contractual
cash flows
1 year or less
1-2 years
2-5 years
More than
5 years
(422.1)
(5.0)
(132.3)
(265.6)
(0.5)
(15.6)
(4.8)
(3.3)
(849.2)
(422.1)
(5.0)
(159.1)
(267.4)
(0.5)
(21.1)
(4.8)
(3.3)
(883.3)
(374.4)
(5.0)
(7.1)
(267.4)
(0.5)
(2.8)
(2.0)
(1.7)
(660.9)
(7.8)
–
(7.1)
–
–
(2.8)
(2.0)
(1.1)
(20.8)
(39.9)
–
(7.1)
–
–
(8.5)
(0.8)
(0.5)
(56.8)
–
–
(137.8)
–
–
(7.0)
–
–
(144.8)
* Although the contractual maturities of the loans drawn under the £500m committed multi-currency revolving facility fall within 12 months, the facility is
available until 19 August 2012.
At 31 March 2007
all figures in £ million
Non-derivative financial liabilities
Trade and other payables
Bank overdrafts
US$260m loan, repayable 2013 and 2016
Multi-currency revolving facility
Loan notes
Finance leases
Derivative financial liabilities
Interest rate swaps used for hedging
Forward exchange contracts used for hedging
Book value
Contractual
cash flows
1 year or less
1-2 years
2-5 years
more than
5 years
(345.5)
(7.4)
(134.3)
(179.3)
(5.2)
(17.1)
–
(0.3)
(689.1)
(345.5)
(7.4)
(161.8)
(183.0)
(5.2)
(24.2)
–
(0.3)
(727.4)
(340.0)
(7.4)
(7.3)
(183.0)
(5.2)
(3.2)
–
(0.3)
(546.4)
(5.5)
–
(7.3)
–
–
(2.8)
–
–
(15.6)
–
–
(7.3)
–
–
(8.5)
–
–
(15.8)
–
–
(139.9)
–
–
(9.7)
–
–
(149.6)
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28.
Financial risk management continued
(E) Gains and losses on cash flow hedges
all figures in £ million
Derivative assets/(liabilities) at the
beginning of the year
Removed from equity and included in income
statement within interest expense
Recognised in equity during the year
Derivative assets/(liabilities) at the end of the year
2008
Gains
Losses
2.7
(1.1)
2.1
3.7
(0.3)
–
(7.8)
(8.1)
Net
2.4
(1.1)
(5.7)
(4.4)
2007
Gains
losses
8.5
(1.7)
(4.1)
2.7
(0.5)
0.3
(0.1)
(0.3)
all figures in £ million
Gains
Losses
Net
Gains
losses
2008
2007
Expected to be recognised:
In one year or less
In more than one year but not less than five years
(F) Maturity of financial liabilities
At 31 March 2008
all figures in £ million
Due in one year or less
Due in more than one year but not more than two years
Due in more than two years but not more than five years
Due in more than five years
At 31 March 2007
all figures in £ million
Due in one year or less
Due in more than one year but not more than two years
Due in more than two years but not more than five years
Due in more than five years
1.4
2.3
3.7
(3.7)
(4.4)
(8.1)
(2.3)
(2.1)
(4.4)
1.0
1.7
2.7
(0.3)
–
(0.3)
Trade and
other payables
Bank
borrowings
and loan notes
Finance leases
and derivative
financial
instruments
374.4
7.8
39.9
–
422.1
5.3
–
265.8
132.3
403.4
6.5
3.3
10.0
3.9
23.7
Trade and
other payables
Bank
borrowings
and loan notes
Finance leases
and derivative
financial
instruments
340.0
5.5
–
–
345.5
12.4
–
179.5
134.3
326.2
3.5
2.2
6.7
5.0
17.4
net
8.0
(1.4)
(4.2)
2.4
net
0.7
1.7
2.4
Total
386.2
11.1
315.7
136.2
849.2
Total
355.9
7.7
186.2
139.3
689.1
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28.
Financial risk management continued
(G) Borrowing facilities
At 31 March 2008, the following committed facilities were available to the Group:
Multi-currency revolving facility
US$135m loan repayable 2013
US$125m loan repayable 2016
Loan notes
Committed facilities 31 March 2008
Committed facilities 31 March 2007
Interest rate
%
LIBOR plus 0.30%
5.44%
5.50%
Base minus 1.0%
Total
£m
500.0
68.8
63.5
0.5
632.8
639.5
Drawn
£m
266.7
68.8
63.5
0.5
399.5
319.6
Undrawn
£m
233.3
0.0
0.0
0.0
233.3
319.9
Loans drawn under the £500m multi-currency revolving facility are repayable within 12 months, but have been classified as due in more than
two years as the relevant committed facilities are available until 19 August 2012. The loans bear interest at a variable margin over LIBOR of
between 0.30% and 0.525% dependent on the ratio of EBITDA to Net Debt and the level of utilisation.
Loan notes total £0.5m of which £0.4m relates to the acquisition of Boldon James and £0.1m relates to the acquisition of HVR Consulting Ltd.
The Boldon James notes were repaid in April 08 and the HVR loan notes are repayable on request of the holders, but no later than 31 July 2009
and bear interest at a discount to the Lloyds TSB Base Rate.
(H) Sensitivity and analysis
The Group’s sensitivity to changes in market rates on financial assets and liabilities as at 31 March 2008 is set out in the table below. The
impact of a weakening in sterling on the Group’s financial assets and liabilities would be more than offset in equity and income by its impact
on the Group’s overseas net assets and earnings respectively.
The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming certain adverse market conditions
occur. Actual results in the future may differ materially from those projected results due to developments in the global financial markets
which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the table below, which
therefore should not be considered a projection of likely future events and losses.
The estimated changes for interest rate movements are based on an instantaneous decrease or increase of 1% (100 basis points) in the
specific rate of interest applicable to each class of financial instruments from the levels effective at 31 March 2008, with all other variables
remaining constant. The estimated changes for foreign exchange rates are based on an instantaneous 10% weakening in sterling against all
other currencies from the levels applicable at 31 March 2008, with all other variables remaining constant. An increase in interest rates or a
strengthening in sterling would have an equal and opposite effect. Such analysis is for illustrative purposes only – in practice market rates
rarely change in isolation.
At 31 March 2008
all figures in £ million
US dollars
Other
At 31 March 2007
all figures in £ million
US dollars
Other
1% decrease in interest rates
10% weakening in sterling
Equity
(4.0)
–
(4.0)
Profit
before tax
0.7
0.2
0.9
Equity
(38.5)
(2.7)
(41.2)
Profit
before tax
(1.7)
(0.2)
(1.9)
1% decrease in interest rates
10% weakening in sterling
Equity
(3.0)
–
(3.0)
Profit
before tax
0.3
0.1
0.4
Equity
(31.9)
(0.7)
(32.6)
Profit
before tax
(2.0)
(0.1)
(2.1)
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29.
Reconciliation of net cash flow to movement in net debt
all figures in £ million
Increase/(decrease) in cash in the year
New loans
New loan notes
Bank loan repayments
Loan note repayments
Payment of deferred financing costs
Capital element of finance lease payments
Capital element of finance lease receipts
Change in net debt resulting from cash flows
Amortisation of deferred financing costs
Foreign exchange movements
Accrued US$ loan interest
Loan note disposed as part of business disposal
Finance lease receivables
Finance lease payables
Movement on escrow cash
Movement on derivatives
Net debt at the start of the year
Net debt at the end of the year
Year ended
note 31 March 2008
Year ended
31 march 2007
7.2
(87.6)
(0.5)
–
0.1
0.5
3.2
(3.0)
(80.1)
(0.2)
2.7
–
5.1
1.9
(1.7)
(0.1)
(6.7)
(300.8)
(379.9)
(45.5)
(131.3)
(1.3)
79.2
1.4
0.4
5.9
(3.5)
(94.7)
(0.2)
30.2
(1.6)
–
2.6
(2.9)
3.1
(4.3)
(233.0)
(300.8)
30
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30.
Analysis of net debt
all figures in £ million
Due within one year
Bank and cash
Bank overdraft
Recapitalisation fee
Loan notes
Finance lease debtor
Finance lease creditor
Escrow cash
Derivative financial assets
Derivative financial liabilities
Due after one year
Bank loan
Recapitalisation fee
US$260m loan repayable 2013 and 2016
Finance lease debtor
Finance lease creditor
Escrow cash
Derivative financial assets
Derivative financial liabilities
Total net debt as defined by the Group
Year ended
31 march 2007
Cash flow
non-cash
Year ended
movements 31 March 2008
20.0
(7.4)
0.2
(5.2)
3.0
(3.2)
–
1.0
(0.3)
8.1
(180.1)
0.6
(134.3)
14.1
(13.9)
3.1
1.6
–
(308.9)
(300.8)
4.8
2.4
–
(0.4)
(3.0)
3.2
–
–
–
7.0
(87.6)
0.5
–
–
–
–
–
–
(87.1)
(80.1)
(0.3)
–
–
5.1
3.0
(2.8)
3.0
0.4
(3.4)
5.0
1.0
(0.2)
2.0
(1.1)
1.1
(3.1)
0.7
(4.4)
(4.0)
1.0
24.5
(5.0)
0.2
(0.5)
3.0
(2.8)
3.0
1.4
(3.7)
20.1
(266.7)
0.9
(132.3)
13.0
(12.8)
–
2.3
(4.4)
(400.0)
(379.9)
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31.
Finance leases
Group as a lessor
The minimum lease receivables under finance leases fall as follows:
all figures in £ million
Amounts receivable under finance leases
Within one year
In the second to fifth years inclusive
Greater than five years
Less unearned finance income
Present value of minimum lease payments
Classified as follows:
Financial asset – current
Financial asset – non-current
minimum lease payments
Present value
of minimum lease payments
2008
2007
2008
2007
3.0
12.0
7.5
22.5
(6.5)
16.0
3.0
12.0
10.5
25.5
(8.4)
17.1
3.0
8.9
4.1
3.0
8.9
5.2
16.0
17.1
3.0
13.0
16.0
3.0
14.1
17.1
The Group leases out certain buildings under finance leases over a 12-year term expiring in 2015.
Group as a lessee
The minimum lease payments under finance leases fall due as follows:
all figures in £ million
Amounts payable under finance leases
Within one year
In the second to fifth years inclusive
Greater than five years
Less future finance charges
Present value of minimum lease payments
Classified as follows:
Financial liability – current
Financial liability – non-current
minimum lease payments
Present value
of minimum lease payments
2008
2007
2008
2007
2.8
11.3
7.0
21.1
(5.5)
15.6
3.2
11.3
9.7
24.2
(7.1)
17.1
2.8
8.9
3.9
3.2
8.9
5.0
15.6
17.1
2.8
12.8
15.6
3.2
13.9
17.1
The Group utilises certain buildings and computer equipment under finance leases. Average lease terms are typically between two and ten
years (31 March 2007 between two and ten years).
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32.
share capital
Authorised share capital at 31 March 2008 and 2007:
Attributable to equity interests:
Ordinary Shares of 1p each
Attributable to non-equity interests:
Special Share of £1
Total authorised share
Shares allotted, called up and fully paid:
At 1 April 2006
Issued in year
At 31 March 2007
Issued in year
At 31 March 2008
£
Number
14,000,000 1,400,000,000
1
14,000,001 1,400,000,001
1
Ordinary shares
of 1p each (equity)
special shares of £1
(non-equity)
Total
£
95,500
number
6,505,650 650,565,024
9,550,032
6,601,150 660,115,056
361,317
6,604,764 660,476,373
3,614
£
1
–
1
–
1
number
1
–
1
–
1
£
95,500
Number
6,505,651 650,565,025
9,550,032
6,601,151 660,115,057
361,317
6,604,765 660,476,374
3,614
Except as noted below all shares at 31 March 2008 rank pari passu in all respects.
Rights attaching to the Special Share
QinetiQ carries out activities which are important to UK defence and security interests. To protect these interests in the context of the
ongoing commercial relationship between the MOD and QinetiQ, and to promote and reinforce the Compliance Principles, the MOD holds a
Special Share in QinetiQ. The Special Share confers certain rights on the holder:
a) to require the Group to implement and maintain the Compliance System (as defined in the Articles of Association) so as to make at all
times effective its and each member of QinetiQ Controlled Group’s application of the Compliance Principles, in a manner acceptable to the
Special Shareholder;
b) to refer matters to the Board or the Compliance Committee for its consideration in relation to the application of the Compliance Principles;
c) to veto any contract, transaction, arrangement or activity which the Special Shareholder considers:
i) may result in circumstances which constitute unacceptable ownership, influence or control over QinetiQ or any other member of the
QinetiQ consolidated Group contrary to the defence or security interests of the United Kingdom; or
ii) would not, or does not, ensure the effective application of the Compliance Principles to and/or by all members of the QinetiQ Controlled
Group or would be or is otherwise contrary to the defence or security interests of the United Kingdom;
d) to require the Board to take any action (including but not limited to amending the Compliance Principles), or rectify any omission in the
application of the Compliance Principles, if the Special Shareholder is of the opinion that such steps are necessary to protect the defence or
security interest of the United Kingdom;
e) to exercise any of the powers contained in the articles in relation to the Compliance Committee; and
f) to demand a poll at any of the QinetiQ’s meetings (even though it may have no voting rights except those specifically set out in the
Articles).
The Special Shareholder has an option to purchase defined Strategic Assets of the Group in certain circumstances. The Special Shareholder
has, inter alia, the right to purchase any Strategic Assets which the Group wishes to sell. Strategic Assets are normally testing and research
facilities (see note 36 for further details).
The Special Share may only be issued to, held by and transferred to HM Government (or as it directs). At any time the Special Shareholder may
require QinetiQ to redeem the Special Share at par. If QinetiQ is wound up the Special Shareholder will be entitled to be repaid the capital paid
up on the Special Share before other shareholders receive any payment. The Special Shareholder has no other right to share in the capital or
profits of QinetiQ.
The Special Shareholder must give consent to a general meeting held on short notice.
The Special Share entitles the Special Shareholder to require certain persons who hold (together with any person acting in concert with them)
a material interest in QinetiQ to dispose of some or all of their Ordinary Shares in certain prescribed circumstances on the grounds of national
security or conflict of interest.
The Directors must register any transfer of the Special Share within seven days.
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33.
Changes in equity
all figures in £ million
At 1 April 2006
Effective portion of change in
fair value of net investment hedges
Foreign currency translation
differences for foreign operations
Profit for the year
Dividends paid
Issue of new shares
Share-based payments
Deferred tax on exercise
of share options
Gain on fair value of available for
sale financial assets
Increase in fair value of available
for sale investments
Decrease in fair value of
hedging derivatives
Deferred tax on hedging derivatives
Arising on acquisition/disposal
Actuarial gain recognised in the
defined benefit pension schemes
Deferred tax asset on pension deficit
At 31 March 2007
Effective portion of change in
fair value of net investment hedges
Foreign currency translation
differences for foreign operations
Profit for the year
Dividends paid
Purchase of own shares
Share-based payments
Deferred tax on share-based payments
Impairment of a previously revalued
available for sale investment
Increase in fair value of available
for sale investments
Decrease in fair value of hedging
derivatives
Deferred tax on hedging
derivatives
Release unrealised gain on disposal
of businesses
Actuarial gain recognised in the
defined benefit pension schemes
Deferred tax asset on
pension deficit
At 31 March 2008
Issued
Capital
share redemption
reserve
capital
share
premium
Hedge Translation
reserve
reserve
Retained
earnings
minority
interest
Total
Total
equity
6.5
39.9
147.5
4.7
0.2
164.7
363.5
(0.6)
362.9
–
–
–
–
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
–
–
–
–
–
–
–
–
–
6.6
–
–
39.9
–
–
147.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5.6)
2.0
–
–
–
1.1
–
–
–
–
–
–
–
–
(6.8)
1.9
–
–
31.3
–
31.3
(45.7)
–
–
–
–
–
–
–
–
–
–
–
69.0
(22.7)
(0.1)
1.1
4.8
1.6
(45.7)
69.0
(22.7)
0.1
1.1
4.8
1.6
10.0
10.0
–
–
–
(5.6)
2.0
–
–
–
(14.2)
85.8
(17.9)
296.3
85.8
(17.9)
477.3
1.0
(4.3)
–
–
–
–
–
–
–
–
–
–
–
–
1.0
–
47.4
(24.9)
(12.8)
3.8
0.2
(4.3)
47.4
(24.9)
(12.8)
3.8
0.2
(2.9)
(2.9)
3.2
3.2
–
–
(6.8)
1.9
(3.5)
(3.5)
65.5
65.5
–
–
–
–
–
–
–
–
–
–
–
0.7
–
–
0.1
–
–
–
–
–
–
–
–
–
–
–
–
31.3
(45.7)
69.0
(22.7)
0.1
1.1
4.8
1.6
10.0
(5.6)
2.0
0.7
85.8
(17.9)
477.4
1.0
(4.3)
47.4
(24.9)
(12.8)
3.8
0.2
(2.9)
3.2
(6.8)
1.9
(3.5)
65.5
–
6.6
–
39.9
–
147.6
–
(3.8)
–
(17.5)
(12.2)
360.1
(12.2)
532.9
–
0.1
(12.2)
533.0
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The translation reserve consists of the cumulative foreign exchange difference arising on translation since the Group transitioned to IFRS.
Movements on hedge instruments and hedged items, where the hedge is effective, are recorded in the hedge reserve until the hedge ceases.
The capital redemption reserve is not distributable and was created following redemption of preference share capital and the bonus issue
of shares.
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34.
share-based payments
The Group operates a number of share-based payment plans for employees. The total share-based payment expense in the year was £3.8m
(year to 31 March 2007: £1.1m).
2003 employee share option scheme (2003 ESOS)
Under the employee share option scheme all employees as at 25 July 2003 received share options which vested when the Group completed its
IPO and which must be exercised within ten years of grant. The options are settled by shares.
Outstanding at start of year
Forfeited in year
Exercised in year
Outstanding and exercisable at end of year
2008
2007
Weighted
average
exercise
price
number
2.3p
2.3p
2.3p
2.3p
12,121,644
(275,724)
(10,120,092)
1,725,828
Weighted
average
exercise
price
2.3p
2.3p
2.3p
2.3p
Number
1,725,828
(95,312)
(420,394)
1,210,122
The 2003 ESOS are equity settled awards and those outstanding at 31 March 2008 had an average remaining life of 5.3 years
(31 March 2007: 6.3 years).
QinetiQ Share Option Scheme (QSOS)
In the year, the Group granted options to certain senior employees under the QSOS. The exercise price of the options is equal to the average
market price of the Group’s shares on the date of the grant. The options vest after three years. For 13,631,708 (2007: 10,382,585) of the
options outstanding at the end of the year the number that will vest is dependent upon the growth of earnings per share (‘EPS’) over the
measurement period. 25% of options will vest if EPS growth is 22.5% for the period and 100% will vest if growth is at least 52%. No options
will vest if EPS growth is below 22.5%. Options will vest on a straight line basis if EPS growth is between 22.5% and 52%. For the remaining
411,876 (2007: 160,112) options the EPS growth target is replaced by a performance target based on QinetiQ’s ranking by reference to total
shareholder return (‘TSR’) against a comparator group of FTSE listed companies over a three-year performance period such that a below
median ranking will result in nil shares vesting, at the median level 30% of the options would vest and the amount vested will increase on a
straight line basis such that 100% would vest if TSR reaches the upper quartile of the ranking over a three-year period.
Outstanding at the start of the year
Granted during the year
Lapsed during the year
Outstanding at end of year
2008
2007
Weighted
average
exercise
price
195p
174p
195p
187p
number
377,917
10,178,883
(14,103)
10,542,697
Weighted
average
exercise
price
.208p
.195p
.195p
.195p
Number
10,542,697
5,356,392
(1,855,505)
14,043,584
QSOS grants are equity settled awards and those outstanding at 31 March 2008 had an average remaining life of 1.5 years (2007: 2.5 years).
QSOS option awards in the year were made at an exercise price of 174p (2007: exercise prices from 188p–208p).
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34.
share-based payments continued
Performance Share Plan (PSP)
In the year the Group made awards to certain UK senior executives under the Performance Share Plan. The options vest after three years with
50% of the awards subject to total shareholder return conditions and 50% subject to earnings per share conditions as detailed in the QSOS
TSR and EPS conditions above.
Outstanding at the start of the year
Granted during the year
Lapsed during the year
Outstanding at end of year
number of shares
–
700,804
–
700,804
PSP are equity settled awards and those outstanding at 31 March 2008 had an average remaining life of 2.3 years. The exercise price for the
PSP is £nil.
Restricted Stock Units (RSU)
In the year, the Group granted awards to certain senior US employees under the Restricted Stock Unit Plan. 30% of the options vest over two
years, 30% over three years and 40% over four years. Half of the awards vest on conditions of QNA organic growth and half on a time-based
criteria. QNA organic revenue growth is measured over a two, three and four-year period, with 125% awarded at annual QNA organic revenue
growth rates above 15%, 100% at 12.5%, 75% at 10% and 25% at 5%. The time-based criteria requires continued employment for vesting
eligibility for the relevant two, three or four-year period.
Outstanding at the start of the year
Granted during the year
Lapsed during the year
Outstanding at end of year
number of shares
–
1,739,869
(82,539)
1,657,330
RSU are equity settled awards and those outstanding at 31 March 2008 had an average remaining life of 2.3 years. The exercise price for the
RSU is £nil.
Group Share Incentive Plan (SIP)
Under the QinetiQ Share Incentive Plan the Group offers UK employees the opportunity of purchasing up to £125 worth of shares a month
at the prevailing market rate. The Group will make a matching share award of a third of the employee’s payment. The Group’s matching
shares may be forfeited if the employee ceases to be employed by QinetiQ within three years of the award of the shares.
Outstanding at the start of the year
Granted during the year
Lapsed during the year
Outstanding at end of year
number of
matching shares
428,878
489,850
(47,397)
871,331
SIP matching shares are equity-settled awards and those outstanding at 31 March 2008 had an average remaining life of two years.
The exercise price for the SIP matching shares is £nil.
Option pricing
Share-based payments have been valued using a binomial option pricing model. Assumptions used within the model include expected
volatility of 22%–30%, an expected life of three years and a risk-free rate of return of 4.5%–5.5%. The average share price in the year was
186p (2007: 185p).
For the 2003 Share Option scheme, there was a pre-bonus issue-weighted average share price of £1 and a weighted average exercise price of
£1 based on third-party transactions in the Company’s shares in the period immediately prior to the issue of the share options. Prior to IPO in
February 2006 there was no active market for the Company’s shares therefore expected volatility was determined using the average volatility
for a comparable selection of businesses. At this time the Group had no established pattern of dividend payments therefore no dividends
were assumed in this model.
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35.
Operating leases
Group as a lessor
The Group receives rental income on certain properties. The Group had contracted with tenants for the following future minimum lease
payments:
all figures in £ million
Within one year
In the second to fifth years inclusive
Greater than five years
Group as a lessee
all figures in £ million
Lease and sublease income statement expense – minimum lease payments
The Group had the following future minimum lease payment commitments:
all figures in £ million
Within one year
In the second to fifth years inclusive
Greater than five years
2008
8.1
19.1
–
27.2
2008
16.6
2008
13.8
36.7
25.4
75.9
2007
5.4
4.6
2.2
12.2
2007
12.2
2007
18.0
31.2
13.7
62.9
Operating lease payments represent rentals payable by the Group on certain office property and plant. Leases are negotiated for an average
of three to ten years.
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36.
Transactions with the mOD
The MOD is an 18.9% (2007: 18.9%) shareholder in the Group. Detailed below are the agreements that have been entered into and the trading
that has taken place with the MOD.
Trading
The MOD is a major customer of the Group. An analysis of trading with the MOD is presented below.
all figures in £ million
Sales to the MOD excluding property rental income
Property rental income
Total income from the MOD
Purchased services from the MOD
all figures in £ million
Trade debtors
Trade creditors
2008
599.1
6.4
605.5
2007
584.5
6.8
591.3
8.8
12.4
2008
104.8
–
2007
81.3
0.1
Freehold land and buildings and surplus properties
Under the terms of the Group’s acquisition of part of the business and certain assets of DERA from the MOD on 1 July 2001, the MOD retained
certain rights in respect of the freehold land and buildings transferred. These are:
i) Restrictions on transfer of title
The title deeds of those properties with strategic assets (see below) include a clause that prevents their transfer without the approval of MOD.
The MOD also has the right to purchase any strategic assets in certain circumstances.
ii) Property clawback agreement
The MOD retains an interest in future profits on disposal following a ‘trigger event’. A ‘trigger event’ includes the granting of planning
permission for development and/or change of use, and the disposition of any of the acquired land and buildings. During the 12 years from
1 July 2001, following a ‘trigger event’, the MOD is entitled to clawback a proportion of the gain on each individual property transaction in
excess of a 30% gain on a July 2001 professional valuation. The proportion of the excess gain due to the MOD is based on a sliding scale which
reduces over time from 50% to 9% and at 31 March 2008 stands at 37%. The July 2001 valuation was approximately 16% greater in aggregate
than the consideration paid for the land and buildings on 1 July 2001.
Compliance Regime
The Compliance Committee monitors the effective application of the Compliance Regime required by the MOD to maintain the position of
QinetiQ as a supplier of independent and impartial scientific/technical advice to the MOD and ensures that the required standards are met in
trials involving human volunteers.
Strategic assets
Under the Principal Agreement with the MOD, the QinetiQ controlled Group is not permitted without the written consent of the MOD, to:
i) dispose of or destroy all or any part of a strategic asset; or
ii) voluntarily undertake any closure of, or cease to provide a strategic capability by means of, all or any part of a strategic asset.
The net book value of assets identified as being strategic assets as at 31 March 2008 was £2.9m (31 March 2007: £3.1m), the principal items
being plant and machinery.
Long-Term Partnering Agreement
On 27 February 2003 QinetiQ Limited entered into a Long-Term Partnering Agreement to provide the Test and Evaluation (T&E) facilities and
training support services to the MOD. This is a 25-year contract with a total revenue value of up to £5.6bn, dependent on the level of usage by
MOD, under which QinetiQ Limited is committed to providing the T&E services with increasing efficiencies through cost saving and innovative
service delivery.
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37.
Directors and other senior management personnel
The Directors and other senior management personnel of the Group during the year to 31 March 2008 comprise the Board of Directors and
the QinetiQ Executive Committee.
all figures in £ 000’s
Directors
Short-term employee benefits
Post-employment benefits
Total
Other senior management personnel
Short-term employee benefits
Post-employment benefits
Total
2008
2007
1,675
60
1,735
1,443
128
1,571
1,597
57
1,654
982
80
1,062
Short-term employee benefits include salary, bonus, and benefits. Post-employment benefits relate to pension amounts.
38.
Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of £5.8m at 31 March 2008 (31 March 2007: £2.0m) in the
ordinary course of business.
The Group is aware of claims and potential claims by or on behalf of current and former employees, including former employees of the MOD,
DERA and contractors, in respect of intellectual property, employment rights and industrial illness and injury which involve or may involve
legal proceedings against the Group. The Directors are of the opinion, having regard to legal advice received, the Group’s insurance
arrangements and provisions carried in the balance sheet, that it is unlikely that these matters will, in aggregate, have a material effect on
the Group’s financial position, results of operations and liquidity.
The Group has not recognised contingent amounts receivable relating to the Chertsey property which was disposed of during 2004 or the Fort
Halstead property disposed of in September 2005. Additional consideration, subject to clawback to the MOD pursuant to the arrangements
referred to in note 36, is potentially due upon the purchasers obtaining additional planning consents, with the quantum dependent on the
scope of the consent achieved.
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39.
Post-retirement benefits
Introduction and background to IAS 19
International Accounting Standard 19 (Employee Benefits) requires the Group to include in the balance sheet the surplus or deficit on defined
benefit schemes calculated as at the balance sheet date. It is a snapshot view which can be significantly influenced by short-term market
factors. The calculation of the surplus or deficit is, therefore, dependent on factors which are beyond the control of the Group – principally the
value at the balance sheet date of equity shares in which the scheme has invested and long-term interest rates which are used to discount
future liabilities. The funding of the scheme is based on long-term trends and assumptions relating to market growth, as advised by qualified
actuaries.
The QinetiQ Pension Scheme
In the UK the Group operates the QinetiQ Pension Scheme for the majority of its UK employees, a mixed benefit scheme. The Defined Benefit
(DB) section of the scheme provides future service pension benefits to transferring Civil Service employees. All Group employees who were
members, or eligible to be members, of the Principal Civil Service Pension Scheme or the UKAEA principal Non-Industrial Superannuation
Scheme were invited to join the DB section of the scheme from 1 July 2001, together with all new employees who were previously members
of schemes who are part of the Public Sector Transfer Club. The Group has given notice to withdraw from the Public Sector Transfer Club from
31 March 2009. The Defined Contribution (DC) section of the scheme was set up for employees who were not eligible or did not wish to join
the DB section of the scheme.
The most recent full actuarial valuation of the DB section was undertaken as at 31 March 2005 and resulted in an actuarially assessed deficit
of £106.5m. On the basis of this full valuation the Trustees of the scheme and the Company agreed that the 17.5% employer contribution rate
would continue. The Company paid £90.3m into the scheme on 30 March 2006 and there were no additional employer contributions in the
year to 31 March 2007 and 31 March 2008.
Other UK schemes
In the UK the Group operates a further two small defined benefit schemes, QinetiQ Prudential Platinum Scheme and a scheme for the
subsidiary company ASAP Calibration Limited. The net pension deficits of these schemes at 31 March 2008 amounted to £0.2m
(31 March 2007: £0.3m). The defined benefit scheme relating to ASAP Calibration Limited was closed to future benefit accruals in the year
to 31 March 2007.
There were no outstanding or prepaid contributions at the balance sheet date (March 2007: £nil). Set out below is a summary of the overall
IAS 19 defined benefit pension schemes’ liabilities. The fair value of the schemes’ assets, which are not intended to be realised in the short
term and may be subject to significant change before they are realised, and the present value of the schemes’ liabilities, which are derived
from cash flow projections over long periods, and thus inherently uncertain, were:
all figures in £ million
Equities
Corporate bonds
Government bonds
Cash
Total market value of assets
Present value of scheme liabilities
Net pension liability before deferred tax
Deferred tax asset
Net pension liability
2008
620.8
83.9
76.3
3.2
784.2
(807.6)
(23.4)
6.5
(16.9)
2007
641.5
74.5
74.7
3.4
794.1
(884.9)
(90.8)
27.1
(63.7)
2006
551.1
85.2
74.8
4.9
716.0
(884.4)
(168.4)
50.4
(118.0)
2005
361.6
44.4
45.7
2.4
454.1
(617.2)
(163.1)
48.8
(114.3)
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39.
Post-retirement benefits continued
Assumptions
The major assumptions (weighted to reflect individual scheme differences) were:
Rate of increase in salaries
Rate of increase in pensions in payment
Rate of increase in pensions in deferment
Discount rate applied to scheme liabilities
Inflation assumption
Assumed life expectancies in years:
Future male pensioners (currently aged 60)
Future female pensioners (currently aged 60)
Future male pensioners (currently aged 40)
Future female pensioners (currently aged 40)
2008
2007
5.0%
3.5%
3.5%
6.6%
3.5%
87
90
88
91
4.6%
3.1%
3.1%
5.4%
3.1%
85
88
86
89
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the
timescale covered, may not necessarily be borne out in practice. It is important to note that these assumptions are long term, and in the case
of the discount rate and the inflation rate are measured by external market indicators. In light of evidence of improvements in life expectancy
the assumptions for mortality have changed in the year to 31 March 2008 so that the allowance for improvements in life expectancy is in line
with the Medium Cohort projections rather than the Short Cohort assumptions used in the prior year. The Medium Cohort assumptions use
the mortality tables PMA92MC (for males) and PFA92MC (for females) for the year of birth, with no underpin for the annual improvement
beyond Medium Cohort improvements, as published by the Continuous Mortality Investigation and adopted by the actuarial profession.
Scheme assets
Expected long-term rates of return on scheme assets (weighted to reflect individual scheme differences) were:
Equities
Corporate bonds
Government bonds
Cash
Weighted average
Return on scheme assets
all figures in £ million
Actual return on plan assets:
Expected return on scheme assets
Actuarial (loss)/gain on scheme assets
Actual (loss)/return on scheme assets
Value of scheme assets
all figures in £ million
Changes to the fair value of scheme assets:
Opening fair value of scheme assets
Expected return on assets
Actuarial (loss)/gain
Contributions by the employer
Curtailment contributions by employer
Contributions by plan participants
Scheme disposal – Aurix Limited
Net benefits paid out and transfers
Closing fair value of scheme assets
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2007
7.7%
6.2%
4.4%
6.0%
7.2%
7.7%
5.3%
4.6%
5.5%
7.2%
2008
2007
56.8
(84.0)
(27.2)
50.4
7.5
57.9
2008
2007
794.1
56.8
(84.0)
32.3
–
6.5
(1.5)
(20.0)
784.2
716.0
50.4
7.5
33.4
6.1
5.6
–
(24.9)
794.1
QinetiQ Group plc Annual Report and Accounts 2008
notes to the financial statements continued
39.
Post-retirement benefits continued
Changes to the present value of the defined benefit obligation
all figures in £ million
Opening defined benefit obligation
Current service cost
Interest cost
Contributions by plan participants
Actuarial gains on scheme liabilities
Scheme disposal – Aurix Limited
Net benefits paid out and transfers
Curtailments
Closing defined benefit obligation
Total expense recognised in the income statement
all figures in £ million
Pension costs charged to the income statement:
Current service cost
Interest cost
Expected return on plan assets
Curtailment cost
Total expense recognised in the income statement (gross of deferred tax)
Analysis of amounts recognised in statement of recognised income and expenses
all figures in £ million
Total actuarial gain/(loss) (gross of deferred tax)
Cumulative total actuarial losses recognised in the
Statement of Recognised Income and Expense
History of scheme experience gains and losses*
Experience (losses)/gains on scheme assets
Experience gains/(losses) on scheme liabilities
2008
884.9
38.9
48.4
6.5
(149.5)
(1.6)
(20.0)
–
807.6
2007
884.4
47.7
44.3
5.6
(78.3)
–
(24.9)
6.1
884.9
2008
2007
38.9
48.4
(56.8)
–
30.5
47.7
44.3
(50.4)
6.1
47.7
2008
65.5
2007
85.8
2006
(105.4)
2005
(9.9)
(97.5)
(163.0)
(248.8)
(143.4)
(83.9)
(1.0)
7.4
–
85.7
(81.0)
12.0
(8.3)
* Experience gains and losses exclude the impact of changes in assumptions.
The expected employer cash contribution to the defined benefit scheme for the year ending 31 March 2009 is expected to be £29.1m.
Defined contribution schemes
Payments to the defined contribution schemes totalled £14.6m (March 2007: £13.3m).
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40.
Restatement of prior-year comparatives
IFRS 3 Business Combinations requires the Group to finalise the fair value of the provisional value of assets and liabilities acquired from
business combinations within one year of the acquisition date except certain deferred tax balances. During the year the Group was required
to adjust goodwill, intangible assets, deferred tax and accrued costs balances upon finalisation of the fair value of assets and liabilities on the
prior-year acquisitions of OSEC and Analex. These balances have been restated in the prior-year comparatives as follows:
all figures in £ million
Goodwill
Intangible assets
Deferred tax liability
Other net assets
Net assets
2007
As reported
2007
Adjustment
2007
Restated
373.1
65.0
(30.9)
70.2
477.4
(1.2)
1.1
0.7
(0.6)
–
371.9
66.1
(30.2)
69.6
477.4
41.
Capital commitments
The Group had the following capital commitments for which no provision has been made:
all figures in £ million
Contracted
2008
9.4
2007
13.2
Capital commitments at 31 March 2008 include £7.4m (2007: £11.7m) in relation to property, plant and equipment that will be wholly funded
by a third-party customer under long-term contract arrangements.
42.
subsidiaries
The principal subsidiary undertakings at 31 March 2008, all of which are included in the consolidated financial statements, are shown below:
name of company
Subsidiaries1
QinetiQ Holdings Limited
QinetiQ Limited
QinetiQ Overseas Holdings Limited
QinetiQ Overseas Trading Limited
QinetiQ North America Operations, LLC
QinetiQ North America, Inc.
Analex Corporation
Apogen Technologies, Inc.
Foster-Miller, Inc.
Westar Aerospace & Defence Group, Inc.
Principal area
of operation
Country of
incorporation
Proportion of
voting rights held2
nature of business
UK
UK
UK
UK
USA
USA
USA
USA
USA
USA
England & Wales
England & Wales
England & Wales
England & Wales
USA
USA
USA
USA
USA
USA
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Holding company
Research and development
Holding company
Research and development
Holding company
Holding company
Research and development
Research and development
Research and development
Research and development
1 Accounting reference date is 31 March. All principal subsidiary undertakings listed above have financial year ends of 31 March.
2 QinetiQ Holdings Limited is a direct subsidiary of QinetiQ Group plc. All other subsidiaries are held indirectly by other subsidiaries of QinetiQ Group plc.
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Company balance sheet
Company balance sheet
as at 31 March
all figures in £ million
Fixed assets
Investments in subsidiary undertaking
Current assets
Debtors
Current liabilities
Creditors amounts falling due within one year
Net current assets
Net assets
Capital and reserves
Equity share capital
Capital redemption reserve
Share premium account
Profit and loss account
Capital and reserves attributable to shareholders
There are no other recognised gains and losses.
note
2008
2007
2
3
4, 5
5
5
5
97.3
97.3
182.4
182.4
–
182.4
92.3
92.3
170.7
170.7
–
170.7
279.7
263.0
6.6
39.9
147.6
85.6
279.7
6.6
39.9
147.6
68.9
263.0
The financial statements were approved by the Board of Directors and authorised for issue on 28 May 2008 and they were signed on its
behalf by:
Graham Love
Chief Executive Officer
Doug Webb
Chief Financial Officer
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QinetiQ Group plc Annual Report and Accounts 2008
notes to the Company financial statements
notes to the Company financial statements
1.
Accounting policies
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the
Company’s financial statements.
Basis of preparation
The financial statements have been prepared under the historical cost convention and in accordance with applicable UK accounting
standards. As permitted by section 408(4) of the Companies Act 2006, a separate profit and loss account dealing with the results of the
Company has not been presented.
Investments
In the Company’s financial statements, investments in subsidiary undertakings are stated at cost less any impairment in value.
Share-based payments
FRS 20 share-based payments became effective for accounting periods beginning on or after 1 January 2005. The fair value of equity settled
options for share-based payments is determined on grant and expensed straight line over the period from grant to the date of earliest
exercise. The fair value of cash settled options for share-based payments is determined each period end until exercised or they lapse. The
value is expensed on a straight line basis over the period from grant to the date of earliest exercise. The fair value of both equity settled and
cash settled share options is calculated by a binomial option pricing model. The cost of share-based payments is charged to subsidiary
undertakings.
2.
Investment in subsidiary undertaking
all figures in £ million
Subsidiary undertaking – 100% of ordinary share capital of QinetiQ Holdings Limited
2008
97.3
2007
92.3
A list of all principal subsidiary undertakings of QinetiQ Group plc is disclosed in note 42 to the Group financial statements. The £5.0m
increase in investment in the year relates to the capital contribution in relation to share-based payments for employees of subsidiary
companies.
3.
Debtors
all figures in £ million
Amounts owed by Group undertakings
Other debtors
4.
share capital
The Company’s share capital is disclosed in note 32 to the Group financial statements.
2008
182.3
0.1
182.4
2007
170.6
0.1
170.7
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5.
Reserves
all figures in £ million
At 1 April 2006
Profit
Dividend paid
Share-based payments
Issue of new shares
At 31 March 2007
Profit
Purchase of own shares
Dividend received
Dividend paid
Share-based payments
At 31 March 2008
Issued
share capital
Capital
redemption
reserve
share
premium
Profit
and loss
6.5
–
–
–
0.1
6.6
–
–
–
–
–
6.6
39.9
–
–
–
–
39.9
–
–
–
–
–
39.9
147.5
–
–
–
0.1
147.6
–
–
–
–
–
147.6
51.6
38.1
(22.7)
1.9
–
68.9
11.5
(12.8)
40.0
(24.9)
2.9
85.6
Total
equity
245.5
38.1
(22.7)
1.9
0.2
263.0
11.5
(12.8)
40.0
(24.9)
2.9
279.7
The capital redemption reserve is not distributable and was created following redemption of Preference Share capital.
6.
share-based payments
The Company’s share-based payment arrangements are set out in note 34 to the Group financial statements.
7.
Other information
The Company had no employees during the year. Details of the employees of the Group are shown in note 9 to the Group financial
statements. Directors’ emoluments, excluding Company pension contributions, were £1.7m (2007: £1.6m). These emoluments were all in
relation to services provided on behalf of the QinetiQ Group with no amount specifically relating to their work for the Company. Details of the
Directors’ emoluments, share schemes and entitlements under money purchase pension schemes are disclosed in the Report of the
Remuneration Committee.
The remuneration of the Company’s auditors for the year to 31 March 2008 was £5,000 (2007: £5,000) all of which was for statutory audit
services. No other services were provided by the auditors to the Company.
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Five-year review for the years ended 31 march (unaudited)
Five-year review
for the years ended 31 March (unaudited)
all figures in £ million
QinetiQ North America
EMEA
Ventures
Central
Revenue
QinetiQ North America
EMEA
Ventures
Central
Operating profit 1
Operating margin 1
Profit before tax
Profit after tax
Average number of employees
Cash flow from operations
Free cash flow
Net debt
Orders
IFRS
2008
540.2
820.1
5.7
–
1,366.0
62.1
80.0
(15.1)
–
127.0
9.3%
51.4
47.4
13,627
138.3
73.6
379.9
1,277.1
IFRs
2007
358.2
779.3
12.0
–
1,149.5
39.9
73.0
(6.9)
–
106.0
9.2%
89.3
69.0
11,870
107.0
55.8
300.8
1,214.0
IFRs
2006
248.4
797.2
6.1
–
1,051.7
24.5
73.7
(7.5)
–
90.7
8.6%
72.5
60.4
11,024
107.6
141.3
233.0
816.7
IFRs
2005
70.1
780.8
5.0
–
855.9
8.0
67.2
(10.0)
–
65.2
7.6%
78.0
72.3
9,632
36.9
55.7
176.6
668.3
UK GAAP
2004
0.3
790.7
1.5
2.9
795.4
(0.6)
62.6
(9.9)
2.0
54.1
6.8%
51.3
41.2
8,898
142.7
135.9
3.6
725.4
1 Before amortisation of intangibles arising from acquisitions, EMEA reorganisation costs in 2008 and restructuring costs in 2005, IPO costs in 2006, gains/(losses)
on business divestments 2005, 2007 and 2008 and unrealised impairment of investments in 2007 and 2008.
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QinetiQ Group plc Annual Report and Accounts 2008
Glossary
Glossary
AGM
Backlog
bn
Book to
bill ratio
BPS
C4I
C4ISR
CATS
CIFA
Annual General Meeting
the expected future value of revenue from
contractually committed and funded customer
orders (excluding £4.7bn value of remaining
21 years of LTPA contract)
billion
ratio of orders received in the year to revenue for
the year, adjusted to exclude revenue from the
25-year LTPA contract
Basis points
command, control, communications, computers
and intelligence
command, control, communications, computers,
intelligence, surveillance and reconnaissance
Combined Aerial Target Service
US Department of Defense Counterintelligence
Field Activity
Compliance The principles underlying the Compliance Regime,
Principles
covering impartiality, integrity, conflicts,
confidentiality and security
CR
Corporate Responsibility
DARPA
US Defense Advanced Research Projects Agency
DHS
DoD
dstl
DTR
EBITDA
US Department of Homeland Security
US Department of Defense
Defence Science & Technology Laboratory
MOD’s Defence Training Rationalisation
programme
earnings before interest, tax, depreciation,
amortisation, gains on business divestments,
unrealised impairment of investment and disposal
of non-current assets
EMEA
Europe, Middle East and Australasia
EPS
ESA
ETIS
EU
Free cash
flow
Earnings per share
European Space Agency
environmental test and integration support
European Union
net cash flow from operating activities less
the net cash flow from the purchase and sale
of intangible assets and the purchase and sale
of plant, property and equipment
GWAC
Government Wide Acquisition Contract
IAS
IDIQ
IFRS
International Accounting Standard
Indefinite delivery indefinite quantity
International Financial Reporting Standard
Interest
cover
the number of times that net finance costs
are covered by EBITDA
IP
IPO
KPI
LIBID
LIBOR
Intellectual property
Initial Public Offering
Key Performance Indicator
London inter-bank bid
London inter-bank borrowing rate
LSE
LTPA
m
MOD
NASA
Non-
recurring
items and
acquisition
amortisation
OEM
Organic
growth
OSEC
OSHA
QNA
R&D
RFID
RIDDOR
London Stock Exchange
Long-Term Partnering Agreement – 25-year contract
established in 2003 to manage the MOD’s test and
evaluation ranges
million
Ministry of Defence
National Aeronautics and Space Administration
(USA)
IPO costs, major restructuring costs, disposal
of non-current assets, business divestments,
amortisation of intangible assets arising from
acquisitions and impairment of investments
Original Equipment Manufacturer
The level of year-on-year growth, expressed as a
percentage, based on the businesses that were
part of the Group at the start of the initial period
Ocean Systems Engineering Corporation
Occupational Safety & Health Administration
QinetiQ North America sector
Research and development
Radio frequency identification
Reporting of Injuries, Diseases & Dangerous
Occurrences Regulations
RoSPA
Royal Society for the Prevention of Accidents
SME
TSR
Small and medium sized enterprises
Total shareholder Return
UK GAAP
UK Generally Accepted Accounting Practices
Underlying
effective
tax rate
Underlying
operating
cash
conversion
Underlying
operating
margin
Underlying
operating
profit
Underlying
profit
before tax
the tax charge for the year excluding
the tax impact of non-recurring items
and acquisition amortisation expressed as a
percentage of underlying profit before tax
the ratio of cash flow from operations
(excluding impact of major restructuring),
less outflows on purchase of intangible assets
and property, plant and equipment to underlying
operating profit excluding share of post tax loss
of equity accounted joint ventures and associates
underlying operating profit expressed
as a percentage of revenue
earnings before interest, tax, IPO-related items
(2006 only) gains on business realisations, major
restructuring costs, impairment of investments,
profit on disposal of non-current assets and
amortisation of intangible assets arising on
acquisitions
profit before tax excluding IPO-related items
(2006 only), gains on business realisations, major
restructuring costs, impairment of investments,
profit on disposal of non-current assets and
amortisation of intangible assets arising
from acquisitions
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Financial calendar, analysis of shareholders and advisors
Financial calendar
30 July 2008
Interim management statement
30 July 2008
Annual General meeting
6 August 2008
Ex-dividend date
5 September 2008
Final ordinary dividend payable
30 September 2008
Interim financial period end
26 November 2008
Interim results announcement
January 2009
Interim management statement (provisional date)
February 2009
Interim dividend payment (provisional date)
31 March 2009
Financial year end
May 2009
Preliminary announcement
Analysis of shareholders*
Financial institutions with shareholding greater than 0.5m shares
Ministry of Defence
Other (including employees, management and financial institutions
with shareholding less than 0.5m)
62%
19%
19%
100%
* Analysis as at 19 May 2008
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Auditors
KPMG Audit Plc
8 Salisbury Square
London EC4Y 8BB
Advisors
Principal Legal
Advisors
Herbert Smith LLP
Exchange House
Primrose Street
London EC2A 2HS
Corporate Brokers
JPMorgan Cazenove
20 Moorgate
London EC2R 6DA
Principal Bankers
Lloyds TSB Bank plc
25 Gresham Street
London EC2V 7HN
Merrill Lynch
International
2 King Edward Street
London EC1A 1HQ
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QinetiQ Group plc Annual Report and Accounts 2008
our business at a glance
QinetiQ Group plc Annual Report and Accounts 2008
our business at a glance continued
our business at a glance
We create value by delivering inspired solutions to the important problems
faced by business, governments and society, utilising our extensive experience,
skills and capabilities in the field of science and technology.
QinetiQ north America
QinetiQ emeA
QinetiQ Ventures
QinetiQ Ventures is the pipeline through which we
manage our portfolio of emerging technologies,
providing new solutions and services for the future.
QinetiQ generates Intellectual Property (IP) from
customer-funded research and development work and
other services provided to our core defence and security
customers. In certain circumstances, this IP is available
for use in alternative applications outside our core
markets. QinetiQ unlocks value from IP through routes
including organic growth, partnering with third parties,
IP licensing and business realisations.
Key points from 2008
n Creation of a new technology venture fund with Coller
Capital to accelerate the development and realisation
of seven of QinetiQ’s venture investments
n Development of a high-power camera system which
enhances the capability of the Tarsier® runway foreign
object debris detection system.
QinetiQ north America has quickly established
itself as a major provider of technology-based
solutions and services to customers primarily
within the us Government. our employees work
in partnership with our customers to develop
world-class technology and responsive solutions
that meet the challenges of national defence,
homeland security, communication and
information access.
40%
£540.2m
Share of 2008 Group revenue
41%
5,699
Number of employees
Our core capabilities
Key points from 2008
technology solutions: Delivering high-technology research
services and development of defence and security-related
products to the US defence, civilian government and
commercial markets.
systems engineering: Providing independent procurement
services, systems engineering, education/training and support
for the development, modification, fielding and sustainment
of military equipment.
It services: Providing information technology services,
including computer systems integration, network engineering
and operations, IT architectures and software development.
mission solutions: Delivering software, enterprise systems
engineering and integration and other consulting services
requiring specialised customer/mission knowledge.
n Continued growth in technology business fuelled by demand
for the TALON® robot
n Strong organic growth in Systems Engineering
n Successful integration of 13 acquisitions since 2004 and the
development of a trusted QinetiQ brand in North America
n Positions established on major acquisition contracts including
EAGLE and ENCORE II and selection for Alliant
n Scale and brand recognition leading to larger contract wins,
such as for the $190m NASA environmental test and integrated
services (ETIS) programme and the $100m US Army Sample
Data Collection programme.
emeA (europe, middle east and Australasia)
is focused on providing services to the defence,
security and energy & environment markets.
operating in these sectors requires our employees
to adapt their capabilities to meet the changing
needs of our customer base, particularly as we
move into new territories such as Australia.
60%
£820.1m
Share of 2008 Group revenue
58%
8,209
Number of employees
Our core capabilities
managed services: Work on behalf of clients delivering
independent expertise to enable them to meet their challenges
Key points from 2008
n Growth in services delivered to UK MOD – revenue up 2.5%
n Restructuring to align business on four focused
consulting: Technical advice provided by high-quality consultants
with deep technical knowledge and domain experience
offerings to drive growth: Managed Services, Consulting,
Integrated Systems and Applied Technologies
Integrated systems: Supplies integrated systems, sub-systems or
technology to meet the specific challenges our customers face
with their information, mission or platform solutions
Applied technologies: Delivers a range of solutions to
our customers’ toughest problems through the repeatable
application of technology, fuelled by research.
n Restructuring designed to provide sustainable margin
improvement through business efficiency
n Reconfirmed our position as a trusted supplier of defence
managed services through agreement of the scope
and pricing of the second five-year term of the 25-year
MOD Long-Term Partnering Agreement (LTPA) and progression
of the UK Defence Training Rationalisation (DTR) bid
n Commenced geographic expansion in selected overseas
markets, starting with Australia
n MOD research – continued success on competed programmes.
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Inspired solutions for a changing world
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QinetiQ Group plc Annual Report and Accounts 2008
today’s big problems demand
inspired solutions. At QinetiQ,
we provide research, technical advice,
technology solutions and services
to customers in core markets
of defence and security. we are
increasingly working to transfer
our expertise and capabilities
into adjacent markets such as
energy and environment. we operate
principally in the uK and north America
and have recently entered the
Australian defence consulting market.
oveRvIew
BusIness RevIew
GoveRnAnce
FInAncIAl stAtements
shAReholdeR InFoRmAtIon
Inside flap
Our business at a glance
11
Group trading performance
50
Our Board of Directors
69
Independent Auditors’ Report
122
Five-year review
01
Performance overview
02
Chairman’s statement
04
Chief Executive Officer’s
review
05
Our vision
10
Key performance indicators
13
QinetiQ North America
23
QinetiQ EMEA
35
QinetiQ Ventures
39
Other Group
financial information
42
Management of principal risks
and uncertainties
45
Corporate Responsibility
52
Corporate Governance
Report
70
Consolidated income
statement
58
Report of the Remuneration
Committee
65
Report of the Directors
68
Statement of Directors’
responsibilities
71
Consolidated balance sheet
72
Consolidated cash flow
statement
73
Consolidated statement
of recognised income
and expense
74
Notes to the financial
statements
119
Company balance sheet
120
Notes to the Company
financial statements
123
Glossary
124
Financial calendar
Analysis of shareholders
Advisors
Company Registration
Number 4586941
Registered office:
85 Buckingham Gate
London
SW1E 6PD
Customer Contact Team
QinetiQ
Cody Technology Park
Ively Road, Farnborough
Hampshire GU14 0LX
United Kingdom
Tel +44 (0)8700 100 942
www.QinetiQ.com
© QinetiQ Group plc
QinetiQ/CF/SS/PUB0800017
QinetiQ Group plc Annual Report and Accounts 2008