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Committed to
delivering value
QinetiQ Group plc Annual Report and Accounts 2013
Performance highlights
Robust Group performance
in tough markets
Revenue
£1,327.8m
2013
2012
Net cash/(debt)
£74.0m
£1,327.8m
£1,469.6m
2013
2012
Underlying operating profit*
£168.7m
2013
2012
Underlying operating margin*
12.7%
£168.7m
£159.6m^
2013
2012
Underlying operating cash conversion*
104%
Underlying earnings per share*
18.9p
2013
2012
Total dividend
3.80p
2013
2012
104%
148%^
2013
2012
(Loss)/profit after tax
(£133.2m)
3.80p
2.90p
2013
2012
£74.0m
(£122.2m)
12.7%
10.9%^
18.9p
13.6p^
(£133.2m)
£246.3m^
All statements other than statements of historical fact included in this Annual Report, including, without limitation, those regarding the financial condition,
results, operations and businesses of QinetiQ and its strategy, plans and objectives and the markets and economies in which it operates, are forward-
looking statements. Such forward-looking statements, which reflect management’s assumptions made on the basis of information available to it at this
time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements
of QinetiQ or the markets and economies in which QinetiQ operates to be materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. Nothing in this Annual Report should be regarded as a profit forecast.
This Annual Report is intended to provide information to shareholders and is not designed to be relied upon by any other party. The Company and its
Directors accept no liability to any other person other than under English law.
Note: Year references (2013 and 2012) relate to the year ended 31 March.
* Definitions of underlying measures of performance can be found in the glossary on page 116.
˄ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
Who we are
We are experts in defence, aerospace and security.
We employ more than 9,000 people worldwide,
and our scientists and engineers solve some of
the world’s most important problems.
What we do
We offer high-end technical knowledge underpinned by
world-class research and innovation. We supply advice,
assurance, test and evaluation, engineering solutions
and training.
Why we are different
Our customers face challenges that define the modern
world. They know that we are uniquely placed to
understand these issues and work with them to ensure
the success of their mission.
Our people make the critical difference to customers
by providing unique answers which combine technical
expertise, deep domain knowledge and rigorous
independent thinking.
How we build confidence
Our prized possession is trust. Customers around the
world rely on the drive and dedication of our people
to help them meet their goals – often in environments
where there is no second chance for failure. We aim
to deliver solutions that work first time, every time.
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www.QinetiQ.com
Overview
1
2
4
Introduction
Group overview
Chairman’s statement
Business review
Chief Executive’s review
5
Strategy and business model
8
12
Key performance indicators
14 Operations review – UK Services
18 Operations review – US Services
22 Operations review – Global Products
Chief Financial Officer’s review
24
Risks and uncertainties
30
Corporate responsibility
34
and sustainability review
Corporate governance
Board of directors
38
Corporate governance report
40
50
Remuneration report
62 Other statutory information
64
Statement of Directors’ responsibilities
Financial statements
65
66
67
Independent auditor’s report
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated statement of
changes in equity
Consolidated balance sheet
Consolidated cash flow statement
Reconciliation of movement in net
cash/debt
Notes to the financial statements
67
68
69
69
70
112 Company balance sheet
Notes to the Company
113
financial statements
Five-year record
115
Additional information
116 Glossary
117 Shareholder information
118 Additional information
QinetiQ Group plc Annual Report and Accounts 2013 1
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationOverview
Group overview
Understanding our business
QinetiQ Group plc is a global business, listed on the London Stock Exchange. It employs over 9,000 employees
principally in the UK and North America.
Our services offerings, which account for more than 80% of total sales, are focused on providing expertise and
knowledge in national markets. Our products business focuses on the provision of technology-based solutions
to meet customer requirements, complemented by contract-funded research and development on a global basis.
Under the QinetiQ brand we operate numerous businesses across multiple platforms, as illustrated below.
This diversified portfolio is underpinned by a selection of long-term contracts.
Reporting structure
Read more on pages 14-23
Markets
UK Services
Defence
US Services
Global Products
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Revenue streams
Research
Relationship-based value selling at a fixed price or cost plus
project consultancy contracts.
Advice
Contracts based on the provision of advice and specific facility
services including manpower services.
Test & Evaluation
Long-term fixed price contracts with additional ad-hoc testing
and evaluation projects.
Advanced technology solutions
Low volume, defence focused, bespoke requirements with
incremental revenue from software, services and after
sales support.
Intellectual property exploitation and licensing
Royalties and licence fees from third-party exploitation
of intellectual property.
2 QinetiQ Group plc Annual Report and Accounts 2013
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Reporting structure
Read more on pages 14-23
Markets
Revenue by division (£m)
Revenue by major customer type (£m)
19%
36%
45%
UK Services
US Services
Global Products
Total
2013
£m
597.3
475.6
254.9
1,327.8
2012
£m
610.1
534.5
325.0
1,469.6
36%
17%
47%
UK Government
US Government
Other
Total
2013
£m
480.3
620.8
2012
£m
482.8
730.5
226.7
1,327.8
256.3
1,469.6
Underlying operating profit* by division (£m)
Revenue by geography (£m)
36%
51%
13%
UK Services
US Services
Global Products
Total
2013
£m
85.8
21.9
61.0
168.7
2012^
£m
61.3
32.1
66.2
159.6
7%
42%
51%
United Kingdom
North America
Other
Total
2013
£m
560.4
672.7
94.7
1,327.8
2012
£m
570.1
788.7
110.8
1,469.6
UK Services
US Services
Global Products
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Revenue streams
Research
Relationship-based value selling at a fixed price or cost plus
project consultancy contracts.
Advice
Contracts based on the provision of advice and specific facility
services including manpower services.
Test & Evaluation
and evaluation projects.
Long-term fixed price contracts with additional ad-hoc testing
Advanced technology solutions
Low volume, defence focused, bespoke requirements with
incremental revenue from software, services and after
sales support.
Intellectual property exploitation and licensing
Royalties and licence fees from third-party exploitation
of intellectual property.
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* Definitions of underlying measures of performance can be found in the glossary on page 116.
^ IAS 19 (revised) ‘Employee benefits’ has been adopted for FY13 and the FY12 comparatives have been restated accordingly.
QinetiQ Group plc Annual Report and Accounts 2013 3
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationOverview
Chairman’s statement
Recognising the importance
of shareholder returns
Mark Elliott
Chairman
The Results
The Group delivered a robust performance with underlying operating
profit* increasing 6% to £168.7m (2012: £159.6m^). This was achieved
despite revenue decreasing 10% on an organic basis at constant currency,
principally reflecting the impact of continued budget uncertainty in the
US on federal services spending and the expected second half reduction
in conflict-related products.
The underlying operating margin* increased to 12.7% (2012: 10.9%^),
as a result of improvements in utilisation rates and project margins in UK
Services, enhanced by the mix of Global Products sales that included a large
proportion of spares. In addition, there was a one-off credit of £6m relating
to a contract extension. These improvements more than offset lower
margins in US Services.
Underlying profit before tax* was £152.1m (2012: £110.2m^) with underlying
net finance costs* falling to £16.6m (2012: £49.4m^), reflecting accelerated
interest costs of £27.4m in the prior year following the completion of the
programme to repay $177m of private placement debt.
Full year underlying earnings per share* were 18.9p (2012: 13.6p^), a 39%
increase, benefitting from the increase in operating profit and the decision
in the prior year to pay down private placement debt.
Significant adjusting items included a non-cash impairment of £255.8m
to the acquired goodwill in the US Services division and a net exceptional
restructuring cost of £16.3m (2012: £69.4m gain) primarily resulting from
actions to place the US cost base on a more competitive footing, as indicated
at the pre-close statement on 28 March 2013. Following the adoption
of IAS 19 (revised) ‘Employee benefits’, net pension finance expense of £1.3m
(2012: £7.2m^), is also included in adjusting items. Including these significant
items, the statutory loss after tax was £133.2m (2012: £246.3m^ profit).
Excluding the impact of £65m received from the Ministry Of Defence (MOD)
in April 2012, underlying cash flow from operations* was £175.9m (2012:
£235.4m) and underlying operating cash conversion* remained strong at
104% (2012: 148%^), despite increased contract-funded capital expenditure
in UK Services.
At 31 March 2013, the Group had achieved a net cash position of £74.0m,
compared with net debt of £122.2m at 31 March 2012.
Dividend
The Board proposes a final dividend of 2.70p per share for the year ended
31 March 2013 (31 March 2012: 2.00p) making the full year dividend 3.80p
(31 March 2012: 2.90p). Subject to approval at the Annual General Meeting,
the final dividend will be paid on 6 September 2013 to shareholders on the
register at 9 August 2013. The full year dividend represents an increase of 31%
on the prior period and is in line with the Group’s progressive dividend policy,
reflecting in-year growth in underlying earnings per share* and the Group’s
commitment to delivering value to shareholders.
Strategy
Good progress has also been made in implementing the next phase of QinetiQ’s
development, Organic-Plus. This programme is focused on building a leading
technology-based solutions group with growing sustainable earnings, by
applying the innovation and capabilities of our people in targeted sectors. The
Group portfolio is actively managed to maximise value from strong defensible
4 QinetiQ Group plc Annual Report and Accounts 2013
core businesses, well positioned for growth once markets stabilise, and to
explore a number of potentially scalable growth opportunities, while constantly
testing emerging technologies for commercialisation.
Our people
QinetiQ’s success lies in its ability to recruit, retain and develop the skills of its
employees. We have a track record of attracting some of the most talented
scientific and technically minded individuals in the marketplace including
apprentices and graduates, giving them the opportunity to use their skills
on the most challenging problems in today’s world. We constantly strive
to ensure we attract and develop the most diverse workforce in order that
we can leverage this to solve customer challenges. Customer feedback
recognises the unique skillset of our people and their ability to apply their
knowledge to specific challenges. We take great pride in employing ‘People
Who Know How.’ On behalf of the Board, I would like to thank all of our
employees for their commitment and effort during this year.
Corporate responsibility
As a business operating across a broad spectrum of communities and
geographies, we take our responsibilities as an employer and as a stakeholder
in those communities very seriously. We are aware of the impact of our
operations and have a range of programmes in place including environmental
management, business ethics and community investment. We are mindful of
the unique privilege that we have as a business working with customers with
critical missions at their heart.
Governance
Effective management of risks and opportunities is essential to the delivery
of the Group’s strategic objectives, as are achievement of sustainable
shareholder value, protection of the Group’s reputation and meeting the
requirements of good corporate governance. The Board is focused on
ensuring a high standard of corporate governance is upheld across the Group.
During the year, we made considerable progress to improve the effectiveness
of our risk management processes and procedures (pages 30-33).
Outlook
Overall, the Group has delivered a robust performance in tough markets.
UK Services was the stand-out performer, demonstrating its unique strengths
as well as the benefits of our self-help programme, with Global Products
continuing to diversify into non-conflict technologies such as OptaSense®,
space technology and power line sensors. The decline in performance of US
Services reflected the continuing very challenging market conditions and we
have decided to initiate a strategic review of this division to determine the
best way to maximise its value.
A key step in transforming QinetiQ has been the achievement of net cash.
Having paid down over half a billion pounds of debt in three years, we have both
financial resilience and capacity to invest. We are now committed to delivering
value by building a Group capable of both growth and high quality returns.
UK Services is expected to remain steady this year but the heightened
uncertainty around US federal services spending is causing low levels
of visibility in US Services. As anticipated, budgetary pressures and the
drawdown effect seen towards the end of last year are continuing to affect
the timing and quantity of sales in Global Products. While the range of
possible outcomes is wider than usual at this stage in the year and the full
impact of sequestration remains unclear, the Board is maintaining its
expectations for overall Group performance in the current year absent
any material changes in customer requirements.
Mark Elliott
Chairman
23 May 2013
* Definitions of underlying measures of performance can be found in the glossary
on page 116.
˄ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012
comparatives have been restated accordingly.
People Who Know How
to deliver space travel
Our ion engines are ten times more efficient than conventional rockets, making
the once impossible possible – like a new generation of leaner, faster, cheaper
communications satellites, propelling a spacecraft at seven times the speed
of a rifle bullet at the boundary of space or enabling ambitious missions
to the inner and outer planets.
People Who Know How
to provide 21st century
flight test training
The Empire Test Pilots’ School (ETPS) trains flight test
professionals from around the world. We were the first,
and have been doing it for 70 years. Research, design,
advice, disposal – QinetiQ is at the centre of aviation.
People Who Know How
to provide real-time
information
We’re the world leader in distributed acoustic sensing.
OptaSense® is revolutionising oil well completion, fracking
and seismic operations as well as ensuring pipeline integrity,
by providing real-time, decision-ready information.
We are building The Earth’s Nervous SystemTM.
People Who Know How
to keep people safe
During Hurricane Sandy, real-time social media trending information
delivered by Cyveillance® helped New Jersey’s emergency services
respond more effectively to citizens in desperate need of assistance.
People Who Know How
to build confidence
on the battlefield
If you know what’s happening on the battlefield, you know the difference
between victory and defeat. With our robotic systems and controllers,
one operator can command multiple unmanned aircraft, vehicles
and sensors to make the right decision, right away.
People Who Know How
to steer customers in
the right direction
If a submarine – or surface ship – runs aground, that’s
a crisis. The commander has to do specific things in an
optimal sequence. That’s where our decision support
tools and expert advice help in the recovery process.
People Who Know How
to work in cyberspace
Britain faces up to 1,000 cyber attacks every hour. Cyber crime
costs the UK £27 billion annually. What to do? Invest in the cyber
recruits who will defend our digital economy and national security.
That’s why we sponsor the Cyber Security Challenge.
Read more at cybersecuritychallenge.co.uk
Good progress has been
made in implementing
Organic-Plus, our next
phase of development,
to continue growing
sustainable earnings.
For more information visit:
www.QinetiQ.com
Chief Executive’s review
Committed to delivering value
QinetiQ’s transformation began with a 24 month self-help
programme. The portfolio was refocused to align with customers’
changing needs, to ensure a full understanding of profit potential,
and to determine which businesses are scalable into significant core
units. The Group is now organised as distinct businesses, each
representing one of QinetiQ’s key areas of capability, with an
accountable leader and a clear route map to maximise future
performance. The new cadre of leaders running these businesses
is building an open, commercial culture which has enabled the
recent delayering of leadership in both the UK and the US.
The self-help programme also addressed the Group’s immediate
financial situation, driving a reduction in debt of over half a billion
pounds in three years. Today the Group’s balance sheet carries net
cash and has the strength to weather challenging defence markets
and the capacity for carefully targeted investment choices.
The Organic-Plus programme continues the disciplines established
during phase one, including a focus on cash generation. This in turn
enables investments in growth managed through a rigorous process
for prioritising resources and monitoring returns. The goal is to drive
value from the portfolio by investing in ‘Core’ capabilities which can
win market share, while nurturing a select number of established
(‘Explore’) services and solutions to determine their ability to scale
into future core businesses. Early stage (‘Test for Value’)
technologies and offerings come under evaluation as they are
generated, to determine the best route to exploit value, including
potential partnerships, divestment or closure.
In parallel with the drive for profitable growth, over 1,400 projects
have been implemented to date through the My Contribution
programme, reducing costs substantially and driving improved
productivity. Many of these projects directly help customers, so that
QinetiQ’s people provide a critical point of difference for the Group
in delivering ‘more for less’. The insights, engagement and
dedication of the Group’s engineers and scientists feed directly into
winning and retaining business – a unique value captured not only
in the QinetiQ strapline of ‘People Who Know How’; but in the UK
Fellows’ network which brings together a cadre of senior people
recognised nationally and internationally for their particular
technical expertise.
A strategic review has been initiated to determine the route to
maximum value in US Services. This division, which has been
restructured, possesses some strong capabilities and market
positions, but the Group needs to determine the best way to
maximise its performance and potential.
A business-by-business update on the Organic-Plus programme
is provided in this review.
Leo Quinn
Chief Executive Officer
Highlights
Robust overall Group performance in tough markets
during 2013:
• 6% increase in underlying operating profit* driven by excellent
performance in UK Services
• Net cash position achieved through strong cash generation
• 31% increase in full year dividend, reflecting in-year growth in
underlying earnings per share* and the Group’s commitment
to delivering value
Good progress implementing Organic-Plus programme as route
to delivering value:
• Agreed five-year, £998m re-pricing of Long Term Partnering
Agreement (LTPA) with MOD, underpinning core UK Services
business
• Non-cash £256m goodwill impairment in US Services; initiating
strategic review
• Expanding Global Products portfolio to increase focus on
non-conflict markets
• Positioning for sustainable earnings growth over the
medium term
* Definitions of underlying measures of performance can be found in the glossary
on page 116.
QinetiQ Group plc Annual Report and Accounts 2013 5
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Chief Executive’s review continued
Q&A with Leo Quinn
Q Why do you call this a ‘transformation’, not a ‘turnaround’?
A In a turnaround you simply take cost out and rebuild on a
leaner base. A transformation is about changing the whole
culture to embrace new values and operating principles.
QinetiQ’s origins in Government gave it a unique legacy of
know-how. Over the last three years, we’ve begun to create
a culture from the ground up, a solid foundation that can
help the Group survive and thrive in a competitive market.
All credit to our people for accepting the challenge and
embracing such a different ethos.
Q What do you think is still left to do?
A Real cultural transformation is a marathon, not a sprint.
The most visible impact is in the early years: after that,
the task is to develop consistency and resilience in the
organisation by embedding discipline. As we implement
QinetiQ’s next phase, it’s also about positioning the portfolio
around growth, turning innovations into sustainable business
models which deliver repeatable earnings.
Q Is UK Services’ performance sustainable?
A UK Services provides important independent support for its
customers at home and abroad – R&D, test and evaluation,
specialist advice – in key relevant areas such as weapons,
airworthiness, maritime, C4ISR and security. We help them
do more with less, enabling them to build something once
and derive the benefits many times – our Weapons Science
& Technology Centre is a good example. And new
opportunities continue to emerge because both our
customers and the threats to which they must respond
continue to change.
Q What does it mean to conduct a strategic review
of US Services?
A US Services has seen their revenues and profits decline in the
face of challenging markets. The business has some strong
positions with customers and the new management has
delayered and taken out cost to retain competitive rates.
Now over the coming months we will be conducting a
strategic review to determine the best way to maximise
the performance and potential of the division.
Q How does UK Services differ from US Services?
A First and foremost, the two markets are very different in size
and structure, and so is our role. In the UK, we are a material
provider of high-end technical advice and services to the UK
Government and also an exporter. In the US, we are a
provider predominantly to the US Government. That is
a very large market, which is changing dramatically, and our
position is mid-sized. Yet in key areas, such as C4ISR, space,
cyberspace and unmanned systems, we are highly relevant
to our US customer.
6 QinetiQ Group plc Annual Report and Accounts 2013
Q Why categorise the portfolio as ‘Core’, ‘Explore’
and ‘Test for Value’?
A We need a consistent approach for tracking and extracting value
from our investments and emerging businesses. This is about
focus and choice: you have to have a strong methodology for
decision-making. Each category has a clear role. Test for Value
is our early-stage technology; Core is the robust, mature
underpinning to customer relationships, market position and
current shareholder returns. In between, Explore is exciting
because these are proven businesses we are hoping over the
mid-term to scale to significant sustainable revenue, and migrate
into our Core.
Q What of QinetiQ’s ability to generate clever new technologies?
A QinetiQ still retains at its heart the ability of our scientific and
engineering community to build innovative solutions. Over time
those that develop into businesses get supported into growth.
So our ‘People Who Know How’ provide the critical point of
difference to customers and thus to winning and retaining
new business.
Q Can you take QinetiQ beyond its current markets?
A Yes. QinetiQ has defence at its heart – but it can expand
internationally, and also by rolling out its technologies and
expertise into new sectors that offer higher growth potential.
Part of our strategy is constantly to test some of those options
to diversify through our Explore businesses. And the changing
defence market itself throws off new opportunities for our Core.
Q Where do you see QinetiQ in five years’ time?
A I believe that QinetiQ’s renewed focus on its core capabilities
will help it continue to grow as a strategic supplier to its present
customers and in multiple adjacent markets. I could also see
the Group transforming through its options in new markets.
That depends on our achieving what I call breakout success
in our strategy of turning technologies into commercial
businesses. I want QinetiQ to become a byword for all that
is innovative and expert in UK science and engineering.
A year of achievement
Investing in a new generation
QinetiQ prides itself on the quality of its workforce, employing
highly qualified and committed scientists and engineers who
are dedicated to making a difference through their work.
Our teams combine knowledge, passion, integrity and commitment.
Combined with their security level clearance, they are able to work
on some of the most complex problems that our customers face.
The UK has always been a country known for innovation and
QinetiQ is playing a key role in maintaining this. Recognised as
a company with world leading engineers and scientists, QinetiQ
gives graduates the opportunity to develop their professional skills
via mentoring schemes and professional qualifications to become
‘People Who Know How’. During 2013 we have committed to
increasing our graduate intake to over 80 graduates. Our long
established graduate programme, listed in ‘The Guardian UK 300’,
provides applicants with a structured two-year programme that
helps provide them with the skills to become future business
Supporting a changing MOD
QinetiQ has an established track record of working with
the UK Ministry of Defence, as illustrated through the Long
Term Partnering Agreement (LTPA).
MOD’s trusted advisor
The LTPA provides test and evaluation and training support to the
MOD and its military stakeholders. The contract enables accurate
assessment of military capabilities throughout their lifetime, from
concept to disposal, increasing reliability and fitness for purpose.
Under the LTPA, QinetiQ manages 17 core MOD-owned sites and
is responsible for providing test and evaluation (T&E) and training
support services; maintaining associated equipment, land and
buildings; as well as delivering an investment programme to
ensure that the capability is maintained and developed to meet
the MOD’s evolving needs.
Driving continuous productivity improvements
As a business that prides itself on innovation, QinetiQ provides
a fertile foundation for new ideas to flourish. My Contribution
is the channel by which employee insight, imagination, energy
and enthusiasm are captured for the benefit of the Company
and our customers.
Business improvement
In November 2010 My Contribution was launched to employees as
part of the 24-month self-help plan. It became a channel by which
employees could be encouraged to look at improved ways of
working, ways to drive out unnecessary cost whilst also driving
through improved productivity.
leaders. The scheme attracts the country’s best science,
maths, engineering, business/project management and IT
graduates. During the current year, QinetiQ will also be
increasing its apprentice intake from 34 to 80, helping the
Group to move towards its target of 5% of the workforce
being young engineers and scientists.
Luke Greenaway and Simon Todd celebrating their gold medals at the
prestigious 2013 WorldSkills UK competition organised by the National
Apprenticeship Service.
Providing the capability life-cycle
In February 2013, the Company successfully completed its
regular five-yearly review with the customer and, following
demonstration of cost savings being achieved and the
agreement of some minor changes in scope, a £998m
contract was signed for the third five-year term.
Commenting on the signing, Laurence Bryant, DE&S Director
Weapons, MOD said: “Test and evaluation is essential for the
effective management and mitigation of the risk in our
acquisition programmes and for the enduring support of our
front line capability. The LTPA provides this service to our
Armed Forces, the MOD and equipment suppliers, and is
crucial to maintaining our defence capability.”
Tangible outputs
Since launch, year-on-year the quantity of employee ideas has
increased to over 12,000, delivering tens of millions of pounds
in benefit for the business and our customers. Examples of
projects arising from the scheme have included the materials
management improvement project where the team designed,
configured and implemented a SAP investment and production
management system which tracks the life of a control material
from creation to when it leaves QinetiQ. Other ideas include
improving the interaction between our design, manufacturing
and supply chain process, through the use of computer aided
designs replacing the need for cardboard models.
Annually we recognise the efforts of our teams at the
My Contribution Showcase which forms an integral part
of our annual leadership conference.
QinetiQ Group plc Annual Report and Accounts 2013 7
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Chief Executive’s review continued
Maximising value by growing
sustainable earnings
Our approach
QinetiQ’s overarching strategic goal is to maximise the
Group’s value by growing sustainable earnings through
optimising the portfolio. This strategy is known as
Organic-Plus, and includes:
• Active portfolio management to optimise business returns
• Robust financial discipline to grow and maintain margins
• Selective investment in ‘Core’ and ‘Explore’ portfolios and
rigorous evaluation of investment options (‘Test for Value’).
Investment is prioritised to grow market share in the ‘Core’
and to support accelerated business development in ‘Explore’.
‘Test for Value’ options must demonstrate a viable customer
value proposition and a compelling potential to scale
• Exploitation of customer-funded research and
development into core defence and relevant markets
• Customer intimacy to be a partner of choice for
the long term, consistently striving to serve our
customers better
• Playing to QinetiQ strengths and assuming only those
risks we are qualified to manage
• Selective use of partnerships, alliances and acquisitions
to accelerate compelling business development strategies
and sustainable earnings growth
• Monetising knowledge and IP via increased use of
licensing approaches
• Investment in our people and leadership development,
particularly around commercial, customer engagement
and people leadership development skills
• Sustaining, building and leveraging our brand
• Business development and investment in new geographies
(e.g. Middle East, Scandinavia).
The Value Pipeline
The Value Pipeline consists of a portfolio of present and future
earnings streams. The Group’s principal role is to manage the
value pipeline for optimal returns, in large part by regulating the
resource flows through the cycle. Common features across the
portfolio are consistent application of the QinetiQ brand;
implementation of a common set of business processes and
robust corporate governance; all supported by shared services
and functional resources that deliver efficiently and effectively
in support of the business.
Read more on page 10
Core
Sustainable and defensible businesses,
focused on growing market share. This is the
‘engine’ on which the Group’s reputation and
customer relationships are built, the driver
for continual renewal of its expertise and
technology, and the source of the majority
of its profit and cash flow.
Explore
High potential emergent businesses, typically
with a proven competitive offering in a
growth market, for which the challenge is
to demonstrate a business model scalable
to significant and sustainable size in order
to become value accretive ‘Core’ businesses
which increase diversification of the Group.
Test for Value
Portfolio of less mature options, typically
based around innovative technology/know-
how which must be tested and managed
rigorously for commercial viability. Investment
is required to achieve commercialisation:
outcome most likely licence revenue/
partnership, discontinuation; or, in certain
exceptions, move to ‘Explore’.
8 QinetiQ Group plc Annual Report and Accounts 2013
The Role of the Group
The Executive Leadership is responsible for the strategic direction
and leadership of the Company.
Business architect
• Determination of business boundaries
Strategy
• Define the direction and shape of the Group over the
• Implementation of a ‘One QinetiQ’ approach to business
process design and functional support
long term
Budgeting and planning
• Portfolio management
Leadership and people development
• Talent and succession management framework
• Executive coaching and development
• Determination of portfolio composition
• Professional development and reward policies
• Business unit strategy approval, target setting and
performance review
• Investment appraisal and review
• Acquisition and disposal strategy
Performance monitoring
• Review and challenge divisional performance
• Resource allocation
• Allocation of capital to investment priorities
• Assignment of talented people
• Sustainment and development of the Company’s knowledge,
know-how and intellectual property
Governance/risk management
• Plc listing requirements
• Definition and implementation of Group Operating Framework
for safety, ethics, security and other regulatory requirements
• Risk management
• Governance of risk and regulatory frameworks
• Investor relations
Brand custodianship
• Sustainment and development of the QinetiQ brand
• Protection of Company’s brand, trademarks and
corporate presence
• Preservation and promotion of the Company’s reputation
Role of the business units
The business units are principally accountable for business unit
strategy, sales, delivery and compliance with Group governance
requirements. Each business unit has a diverse range of demand
drivers, customers and competitors providing the Group resilience.
Business unit strategy
• Development of domain/sector specific strategy
and business plans
• Development and presentation of investment options
for approval
Human Resource management
• Recruitment, development and motivation of people
• Assignment of people to projects
• People performance management
• Involving and leveraging people for their ideas
Risk management
• Safe and ethical delivery of business activities
• Development and management of business risk register
• Market entry, marketing and customer development plans
• Actions to mitigate risks and to capture opportunities
Customer engagement and sales
• Development and execution of key account plans
• Remediation plans, where appropriate
• Adherence to Group policy and regulatory frameworks
• Implementation and measurement of sales campaigns
• Implementation of Group Operating Framework at local level
• Establishment of specific sales channels and
supporting marketing
• Acting at all times in a manner consistent with the QinetiQ
brand and values
Performance contract delivery
• Project delivery
• Business performance management
• Investment project implementation
Read more on UK Services on page 14
Read more on US Services on page 18
Read more on Global Products on page 22
QinetiQ Group plc Annual Report and Accounts 2013 9
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Chief Executive’s review continued
Progress through Organic-Plus
The key elements of our strategy
Core
Sustainable and defensible businesses,
focused on growing market share. This is
the ‘engine’ on which the Group’s reputation
and customer relationships are built, the
driver for continual renewal of its expertise
and technology, and the source of the
majority of its profit and cash flow.
Revenue
c90%
Explore
High potential emergent businesses, typically
with a proven competitive offering in a
growth market, for which the challenge is
to demonstrate a business model scalable
to significant and sustainable size in order
to become value accretive ‘Core’ businesses
which increase diversification of the Group.
Revenue
c8%
Test for Value
Portfolio of less mature options, typically
based around innovative technology/
know-how which must be tested and
managed rigorously for commercial viability.
Investment is required to achieve
commercialisation: outcome most
likely licence revenue/partnership,
discontinuation; or, in certain exceptions,
move to ‘Explore’.
Revenue
c2%
10 QinetiQ Group plc Annual Report and Accounts 2013
These businesses are focused on
relatively resilient sectors in which the
deep domain expertise of QinetiQ’s
people is used to provide trusted
independent advice and solutions for
customers’ critical operations. These
are the Group’s core capabilities, mostly
comprising UK and US Services, and
operating largely in the aerospace,
defence and security markets. They
exhibit relatively low risk characteristics
with low capital requirements and strong,
predictable cash flows. Much of the
revenue is derived from longer-term
contracts, with known dates for renewal
and re-tender.
QinetiQ’s core businesses retain and win
market share by applying their technical
expertise and their detailed
understanding of customer domains to
provide support for customers’ ongoing
and developing needs. Core businesses
will receive investment on a sustainable
basis as these opportunities emerge and
where existing expertise can be deployed
in adjacent sectors and geographic
markets, from the proven platform
of UK or US capability.
QinetiQ’s less mature businesses will be
managed through a ‘Value Pipeline’ with
a range of new capabilities at various
stages of business readiness.
The Group will selectively invest in
these businesses to create a broader
base of significant and, therefore,
core businesses for the future.
Over the medium term, these early-stage
technologies will be managed rigorously
to resolution, whether through
investment, divestment, closure or
trade-through, until project completion.
These are businesses that have proven
technology and customers, but have yet
to prove that they can achieve significant
scale. Examples include Cyveillance®,
which delivers cyber intelligence
solutions principally for US Fortune 500
customers, the OptaSense® fibre-optic
sensing business, and Training &
Simulation Services, which is using
commercial-off-the-shelf technology to
meet customer requirements to reduce
the cost of training.
These are businesses with proven
technologies but that have yet to prove
commercial viability. In some cases,
the technology is being developed for
a customer-funded programme, such
as the E-X-Drive® hybrid electric drive
transmission which is being developed as
part of a consortium for the technology
development phase of the US Army’s
Ground Combat Vehicle Program.
In other cases, the intellectual property
is licensed out to reduce implementation
and sales risks, with revenue dependent
on third-party sales channels.
Progress in 2013
Progress in 2013
UK Services
• Re-pricing of the LTPA contract
• Performance improvement in
Australia with increased revenue
and margin
• 5-year £7m Royal Navy contract for
optimisation of ship and submarine
stealth characteristics
• New £6m framework contract for
C4ISR research
US Services
• $17m condition-based maintenance
award for the US Army
• $80m Tomahawk contract award
by Naval Air Systems Command
• Revenue continued to increase
• Maximise the Core by winning
Priorities in 2014
Priorities in 2014
market share in existing markets
and marketing capabilities into new
sectors and/or geographical markets
• Assist MOD with its defence
transformation programme
on the NASA Engineering Services
Contract at the Kennedy Space Center
• $46m infrastructure support contract
extension for the Customs and Border
Protection Agency
Global Products
• Two key orders totalling $44m for
Q-Net®
• New customer contracts from Poland
and the Czech Republic for Talon®
• $13m US Government order for
Dragon Runner™ 10 robot
OptaSense®
• £10m follow-on contract with Shell
Cyveillance®
• Grew year-on-year with improvement
Training & Simulation Services
• £7m extension to Distributed
Synthetic Air Land Training (DSALT)
programme at RAF Waddington
• £4m enhancement to Army pre-
deployment training contract
in productivity
Protective Monitoring
• Cabinet Office GPG13 Accreditation
Space
• Successful launch of Proba V satellite
for European Space Agency
• Scale the Explore portfolio
• Rigorous evaluation of investment
priorities
• OptaSense® to capitalise on end
of exclusivity period with Shell
• Training & Simulation Services to
build on its position on the approved
companies list for a $2bn IDIQ contract
• Cyveillance to focus on delivery of
commercial services, larger and
higher margin contracts
• Scale up the Space business
• Sale of Zephyr® to EADS Astrium
• New orders for ALARMTM
• Energy from Waste refocused on core
military customers
• Integrated Warrior SystemTM pipeline
opportunities
• Smart Sensor SystemsTM selected by
British Columbia Hydro to support
its smart metering programme
• Partnerships developed for GAJTTM
GPS and MEWSTM to take products
to market
• Continue to assess viability of
technology and markets
• Sustain the rigour in Test for Value
• Focus on non-conflict technologies
• Monetise intellectual property
QinetiQ Group plc Annual Report and Accounts 2013 11
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Chief Executive’s review continued
Measuring our progress
Key performance indicators (KPIs)
The Group’s strategy is underpinned by focusing on a number
of performance indicators. This includes a range of financial
and non-financial indicators to monitor Group and divisional
performance. Similar indicators are used to review performance
in each of the Group’s businesses.
The key objectives of Board committees are described in the
Governance section of the Annual Report and other non-financial
key performance indicators are shown in the Corporate
responsibility and sustainability review (pages 34-37).
Relevance to strategy
Our strategy is to grow the businesses through the Organic-Plus
programme. Progress is measured through key performance
indicators. Measurements of health and safety, productivity,
customer satisfaction and employee engagement underpin
sustainability. Financial measures such as order intake, organic
sales growth, profitability and cash conversion track performance.
Read more on page 10
Non-financial KPIs
Health and Safety
(UK RIDDOR1 rate per 1,000 employees)
1.90
2013
2012
Productivity
(UK change projects generated)
1,431
2013
2012
Employee engagement score
(UK on a scale of 0-1,000)
575.0
2013
2012
Customer satisfaction overall score
(UK MOD KSM)
8.4
2013
2012
1.90
2.12
1,431
797
575.0
569.3
8.4
8.3
Description
The RIDDOR1 rate is calculated using the total number
of incidents reportable under RIDDOR, x1,000 divided
by the average number of employees in that year.
Comment
Health and Safety performance is monitored to drive
continual improvement in minimising risks to
employees and to meet our long term objective of
zero reportable incidents. Further details of the
Group’s health and safety performance are with the
CRS review (pages 34-37).
1 Reporting of Injuries, Diseases and Dangerous
Occurrence Regulations.
Description
My Contribution is a dynamic framework designed
to fundamentally develop and grow QinetiQ. The
latent potential of thousands of ideas contributed
by employees are pulled together into a managed
process that develops and activates their concepts.
The financial returns and benefits are measured
through the My Contribution tracker.
Description
A measure of employee engagement on a scale of
0-1,000, based on the Best Companies Employee
Survey. Through this channel, employees share their
views of working at QinetiQ under the headings of
management, leadership, My Company, personal
growth, My Team, giving back to the community,
fair deal and well-being.
Comment
My Contribution improves how the business delivers
both internally and for customers. In addition, it
improves the work environment for employees.
Comment
The annual survey enables comparison between
QinetiQ and other UK companies. A separate
engagement survey is undertaken for the US business.
Description
The Key Supplier Management (KSM) Framework is a
mandatory survey administered annually by the MOD
of its top 22 key suppliers. The 360-degree survey
concentrates on the performance (delivery,
engagement and relationship) of the largest and most
strategically important contracts, totalling c40
contracts for QinetiQ.
Comment
This year the MOD suspended its KSM survey. A new
survey, agreed by industry parties, will be applied to
cover QinetiQ’s entire customer base in the coming
year. In the US, customer satisfaction metrics are
reviewed on a contract-by-contract basis and data is
therefore not available. Work will shortly commence
to seek a standardised survey measure across
QinetiQ’s entire business.
* Definitions of underlying measures of performance can be found in the glossary on page 116.
˄ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
12 QinetiQ Group plc Annual Report and Accounts 2013
Financial KPIs
Orders†
£1,076.8m
2013
2012
Organic revenue growth
-10%
2013
2012
Underlying operating profit
£168.7m
2013
2012
Underlying operating margin
12.7%
2013
2012
Underlying EPS
18.9p
2013
2012
£1,076.8m
£1,226.3m
(10%)
(11%)
£168.7m
£159.6m^
12.7%
10.9%^
18.9p
13.6p^
Underlying operating cash conversion
104%
2013
2012
Net cash/debt
£74.0m
2013
2012
104%
148%^
£74.0m
(£122.2m)
Description
The level of new orders (and amendments to existing
orders) booked in the year.
Comment
Provides a measure of the Group’s ability to
replace completed contracts/business with
new contracts/business.
† Excludes £998m LTPA repricing.
Description
The Group’s organic revenue growth is calculated
by taking the increase in revenue over pro forma
revenue, at constant exchange rates. Prior years
pro-forma revenue excludes the impact of
acquisition and disposals.
Comment
Organic revenue growth demonstrates the Group’s
capability to expand its core operations within its
chosen markets before the effect of acquisitions,
disposals and currency translation.
Description
The underlying earnings before interest and tax.
Comment
Underlying operating profit* is used by the Group
for internal performance analysis as a measure of
operating profitability that is tracked over time.
Description
The Group’s calculation of underlying operating
margin* is consistent with previous years. Underlying
operating margin is calculated by taking the earnings
before tax and interest as a percentage of revenue.
Comment
Underlying operating margin* can be used to show
the underlying profitability of the revenue delivered
by the Group. It can also be used to compare the
Group’s performance with that of our peers,
providing the definition of underlying operating
profit is consistent.
Description
The underlying earnings per share* (EPS) expressed
in pence per share.
Comment
EPS provides shareholders with a measure of the
earnings generated by the business after deducting
tax and interest. Underlying EPS performance also
determines the level of payout for certain of the
Group’s long-term incentive plans.
Description
The ratio of our net cash flow from operations
(excluding reorganisations), less outflows on the
purchase of intangible assets and property, plant and
equipment to underlying operating profit* excluding
the share of post-tax results of equity accounted
joint ventures and associates.
Comment
Provides a measure of the Group’s ability to generate
cash from normal operations and gives an indication
of its ability to pay dividends, service its debt and to
make discretionary investments.
Description
The Group’s measure of borrowings. Includes finance
lease debtors/creditors and assets/liabilities in
respect of derivative financial instruments. Refer
to note 23 to the financial statements.
Comment
The level of net cash/debt provides a measure
of the strength of the Group’s balance sheet.
QinetiQ Group plc Annual Report and Accounts 2013 13
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review UK Services
Delivering measurable value
Case study: Weapons
What we do
• Technical assurance based on data generated by experiments,
trials, modelling and research underpinned by three long-term
contracts
Our competitive advantage
• Over 1,100 employees specialising in weapons expertise
and range testing
• Complex safety critical test and evaluation
• Training support at ten sites specifically licensed to work
with energetic materials
Our people
60%
Range
engineers
40%
Weapons
systems
experts
Where we operate
• Future opportunities
include building on
presence in Australia
and Scandinavia to
deliver international
range capability and
aerial target services
1. RAF Donna Nook
2. RAF Holbeach
3. Shoeburyness
4. Fort Halstead
5. Farnborough
6. Boscombe Down
7. Larkhill
8. Bristol
9. RAF Pembrey
10. Pendine
11. Manorbier
12. Aberporth
13. Malvern
14. Eskmeals
15. West Freugh
16. Ardeer
19
20
18
17
16
15
14
1
2
12
10
9
11
13
8
67
5
4
3
17. Hebrides
18. St Kilda
19. Cape Wrath
20. Tain
14 QinetiQ Group plc Annual Report and Accounts 2013
UK Services delivered a strong performance with underlying
operating profit* increasing 40% to £85.8m (2012: £61.3m^) on
relatively flat revenues of £597.3m (2012: £610.1m). The resulting
underlying margin* of 14.4% (2012: 10.0%^) reflects improved
alignment with customer needs, plus a more competitive cost base
and processes for better project execution. The division’s
performance also benefited from short-term demand in certain
areas driving higher levels of utilisation, and the completion of final
milestones on certain projects. In February, the division successfully
completed the five-yearly periodic re-pricing of the Long Term
Partnering Agreement (LTPA), agreeing terms with the MOD for the
provision of core test and evaluation and training support services
through to March 2018.
Organic-Plus update
UK Services’ core business combines world-leading expertise with
unique facilities to provide technical assurance, test and evaluation,
and training and simulation services. These capabilities are delivered
mainly under long-term managed services contracts, which provide
strong predictable cash flows and are the target for future
sustainable expansion. The successful re-pricing of the 25-year
LTPA contract, the key underpinning contract for the division’s Air,
Weapons and Maritime businesses, represents an endorsement
by the customer of the LTPA model as a vehicle for ‘building once
using multiple times’ and delivering ‘more for less.’ In addition,
UK Services is a market leader in the provision of shorter-cycle
technical and information services in C4ISR, acquisition services
and cyber security.
QinetiQ’s Air business de-risks complex aviation programmes by
testing military aircraft and equipment, evaluating the risks and
assuring safety. Its long-standing relationships with key customers
have been enhanced by integrated working and new contracts
for test and evaluation that are delivering efficiencies and value.
The Air business is also working to build on its strong track record
in the provision of Unmanned Air System (UAS) services developed
through the delivery of turn-key surveillance solutions to NATO
forces operating in Afghanistan.
Extensive testing by QinetiQ saw the introduction of the new sidearm, Glock 17
9mm, into the British Armed Forces.
Revenue
£597.3m
2013
2012
Underlying operating profit*
£85.8m
Underlying operating margin*
14.4%
£597.3m
2013
£610.1m
2012
£85.8m
2013
£61.3m^
2012
14.4%
10.0%^
Case study: Maritime
What we do
• Enable the frontline to deliver naval advantage
and effective capability
Our competitive advantage
• A specialist body of maritime knowledge: platform design,
performance and optimisation, maritime structural analysis
and technical advice, through-life command information
systems, integrated stealth and ranges and maritime safety
• Technical breadth and depth of domain expertise
• Specialist testing facilities
• Focus on delivering through-life cost savings
Our people
35%
Naval
engineers
20%
Trials
engineers
and specialists
35%
Command
system
specialists
10%
Software
developers
Where we operate
• Operating strategic assets
across the UK including
Haslar, Portsdown and
Rosyth
• The business operates three
key strategic programmes
with the UK MOD
– Long Term Partnering
Agreement
– Naval Combat System
Integration Support
Services
– Maritime Strategic
Capabilities Agreement
10
11
12
1314
15
17
1
5
3 4
2
16
6 7 8 9
1. Bristol
2. Plymouth
3. Grove Point
4. Portland Bill
5. Winfrith
6. Haslar
7.
8. Funtington
9. Chichester Hospital
Portsdown Technology Park
10. Rona
11. Applecross
12. Kyle of Lochalsh (BUTEC)
13. Loch Goil
14. Rosneath
15. Rosyth
16. Farnborough
17. Malvern
QinetiQ Group plc Annual Report and Accounts 2013 15
Working with Lloyd’s Register and Strathclyde University, QinetiQ examined
the future shape of the marine industry in its Global Marine Trends 2030 report.
The Weapons business provides technical assurance based on data
generated by experiments, trials, modelling and research, principally
at the twenty strategically located ranges it operates and manages
on behalf of the MOD. Shortly after year end, it was awarded a
four-year contract for the management of the joint MOD/industry
Weapons Science and Technology Centre and delivery of £8m per
annum research into complex weapons, munitions and energetics.
Weapons is exploring medium-term opportunities presented by
QinetiQ’s ability to support the MOD in its defence transformation
programme and is working with the customer on the assessment
of its future options for munitions management. The business also
operates ranges in Scandinavia and provides range control and
safety systems in Australia. The pipeline includes opportunities
to expand the provision of test and evaluation services to other
international customers.
QinetiQ’s Maritime business enables the frontline to deliver naval
advantage and cost-effective capability. During the year, the
business successfully completed the MOD’s first five-year review
of the 15-year Maritime Strategic Capability Agreement (MSCA),
reaffirming its role in maintaining expertise and strategic maritime
capabilities. As such, the business has successfully negotiated the
renewal of its three long-term underpinning contracts over the past
18 months. In addition, the business was awarded a five-year £7m
contract for the operational signature services that it delivers
to the Royal Navy for the measurement and optimisation of ship
and submarine stealth characteristics.
Note: Year references (2013 and 2012) relate to the year ended 31 March.
* Definitions of underlying measures of performance can be found in the glossary
on page 116.
˄ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012
comparatives have been restated accordingly.
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review UK Services continued
Case study: C4ISR
What we do
• Use research in information management and sensor systems
to provide expert technical advice, research and solutions
• Capabilities include:
– Communications and Information Infrastructure – moving
data through all forms of radio and fixed communications
linked to data management techniques
– Command and Control Systems – uses interoperability
techniques to support system integration at all levels
– Surveillance Systems – exploits the full spectrum of sensor
sources to feed data to any communication and information
management system in an open and interoperable manner
– Survival – offers the latest techniques in saving life and
minimising infrastructure damage in military operations
and civil crisis management
Our competitive advantage
• A heritage of UK government research in information
management and sensor systems
• Joined-up thinking focused on unlocking the benefits
of meeting current and imminent technical challenges
• Largest supplier of C4ISR research to UK MOD
Our people
• The expertise of our teams covers:
– Communication system design and operation
– The efficient management of ‘big data’
– Optimising human interaction with information
handling systems
– Design and prototyping of new sensor systems
and techniques
– Design and implementation of open standard C4ISR networks
that enable existing and new systems to be made interoperable
– Enabling the survival of people in extreme environments
and dangers
– Technical and commercial customer advice in support of
complex C4ISR or survival-based procurement programmes
35%
Engineers
25%
R&D Specialists
25%
Consultants
15%
Project
managers
16 QinetiQ Group plc Annual Report and Accounts 2013
QinetiQ’s core C4ISR business manages and delivers significant
enabling research contracts on behalf of the MOD. The deep domain
expertise of its employees was reflected by the continued stream of
research tasks delivered under contracts for electronic surveillance,
secure information infrastructure and battlespace management,
and the award of a new £6m framework contract.
QinetiQ is a leading supplier of client-side technical services,
providing advice to many of the operating centres within the MOD’s
procurement agency DE&S, principally through its Acquisition
Services business. While the proposal to introduce a GoCo model
for DE&S is creating some short-term uncertainty, over the medium
term it presents potential opportunities for QinetiQ. There is also
demand for advice on the procurement of complex systems from
international and non-defence customers, and during the year
Acquisition Services extended its reach into the adjacent rail market
with the award of a new contract with Transport for London.
At the beginning of the year, a new leadership team was appointed
for the managed services business in Australia, which reports into
the UK Services division. The team’s initial focus was on integrating
the business, strengthening governance, building competitiveness
and creating conditions for growth. The business is now
demonstrating both revenue and margin progression, and changes
in the political landscape resulting from the forthcoming federal
election may present further opportunities. During the year the
business won an AU$8m contract with the Australian Directorate
General of Technical Airworthiness which underpins much of the
core aerospace revenue, and AU$1m of contracts in the rail industry
representing an entry point into a new adjacent market.
QinetiQ is a world leader in developing applications for information management
and exploitation in the intelligence, surveillance and reconnaissance space.
Secure hosting provides 24/7/52 critical services.
Within the ‘Explore’ category, the Group is investing in key
capabilities to supplement the underlying growth rates of the ‘Core’
business. A key opportunity is the Training and Simulation Services
(TSS) business, which uses Commercial-Off-The-Shelf (COTS)
technology to reduce the cost of training. TSS has grown its UK
business through an 18-month, £7m extension to its flagship
Distributed Synthetic Air Land Training (DSALT) programme at RAF
Waddington, and a £4m enhancement to the pre-deployment
training it delivers to the British Army. The US market is key to
realising the potential of TSS, building on its position on the
approved companies list for a $2bn IDIQ (indefinite delivery/
indefinite quantity) contract under which the US Navy is able to
procure training and simulation services. The business is focused on
the provision of modelling, simulation and training for the US Army,
Navy and Marine Corps, with a new Orlando office due to open in
June 2013.
QinetiQ’s UK Security business protects critical national
infrastructure and high-value commercial enterprises through
the provision of consultancy, managed security services, secure
information exchange, and threat and risk assessments. The ability
to monitor and identify incidents on IT networks is a key customer
concern and the business is investing to scale its protective
monitoring solution which this year was accredited by the Cabinet
Office under its GPG13 standards – the first time a private sector
company has achieved this landmark accreditation.
Case study: Security
What we do
• Consultancy services including bespoke Cyber Vigilance
• Managed security services covering Cyber Defence
• Commercial-off-the-shelf (COTS) products in our SyBard®
range enabling secure information exchange
• Cyber crime threat and risk assessments including
– Strategic risk assessments
– Risk management structure and risk mitigation
process development
– Incident reporting, reaction and recovery processes
– Technical supply chain management and due diligence
Our competitive advantage
• A unique 50-year heritage of acting as strategic advisor
to the UK Government at critical national security levels
• Technical expertise across a broad span of technical domains
• Independent of industry suppliers
• Secure operations centre providing 24/7 protective monitoring
• A founding member of the Cyber Security Challenge UK
• In year achieved accreditation by the Cabinet Office under
the GPG13 standards – the first time a private sector company
has achieved this landmark accreditation
Our people
100%
Cyber
specialists
Our customers
• Strong relationships with UK, Australian and Canadian
governments
• Leading the Enabling Secure Information Infrastructure (ESII)
consortium for supply to MOD’s Defence Science and
Technology Laboratory
• Supplier to numerous blue chip customers
QinetiQ Group plc Annual Report and Accounts 2013 17
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review US Services
Facing up to tough markets
Case study: Cyveillance®
What we do
• People, processes and technology for early warning of threats
from internet and social media across the globe
• Cyber intelligence required to protect information,
infrastructure and employees
• Integrated, agile, open-source, service-orientated architecture
and off-the-shelf solutions
Our competitive advantage
• Ability to combine physical and virtual security threats into
an overall threat landscape
• Global social media analysis to discover near real-time threats
and predictors
• Multi-lingual analysts analyse and prioritise predominant
languages on the internet
21%
Cyber analysts
22%
Technical
analysts
25%
Intelligence
analysts
32%
Other
Current customer base
Financial Services
Technology
Energy
Government
Insurance
Education
Other
37%
14%
8%
8%
8%
7%
18%
Revenue declined 12% on an organic basis at constant currency,
impacted by continued budget uncertainty and reduced federal
services spending. Customers continued to defer decisions, leading
to the delay of new and incremental orders, the de-scoping of some
existing work, and the cancellation of some re-competes with
shorter-term extensions being awarded in their place. Some work
was also switched to small business set-aside contracts. Actions,
principally in US Services, to place the US cost base on a more
competitive footing resulted in an exceptional charge of $26.1m.
In the annual year-end assessment of the carrying value of goodwill,
the impact of current market conditions resulted in a non-cash
impairment charge of £255.8m.
Underlying operating profit* was £21.9m (2012: £32.1m) and
the underlying margin* was 4.6% (2012: 6.0%), as a result of the
reduction in volume and the more competitive trading environment.
In addition there was a change in revenue mix as lower margin NASA
work replaced higher margin sales.
A strategic review has been initiated to determine the route to
maximum value in US Services. This division possesses some strong
capabilities and market positions, but the Group needs to determine
the best way to maximise its performance and potential.
Organic-Plus update
US Services has a broad customer base both within and beyond
defence. Its core business supports customers across the US federal
marketplace, delivering mission assurance, engineering, data
analysis, software and systems integration, cyber solutions,
modelling, training and simulation, logistics, managed services and
field support. Key sources of competitive advantage include the
division’s skilled employees, almost all of whom possess high levels
of security clearance, and the fact that these businesses enjoy
long-standing customer relationships and attractive, longer-term
contract vehicles.
Due to the ‘cost-plus’ nature of most federal services contracts,
overhead costs have a significant impact on competitiveness,
particularly in an environment where government budgets are under
pressure. Restructuring was undertaken by QinetiQ North America
during the year to reduce its cost base and maintain competitive
rates. The majority of these cost reductions, which resulted in an
exceptional charge of $26.1m, were in US Services and were focused
on cutting property and infrastructure costs, as well as reducing
18 QinetiQ Group plc Annual Report and Accounts 2013
Cyveillance provides early warning of internet and social media threats.
Revenue
£475.6m
2013
2012
Underlying operating profit*
£21.9m
Underlying operating margin*
4.6%
£475.6m
2013
£534.5m
2012
£21.9m
2013
£32.1m
2012
4.6%
6.0%
Mission Solutions designs, integrates, installs and operates enterprise IT solutions.
management layers. The focus was on reducing indirect costs while
maintaining bid and proposal activity. Despite current budget
pressures, the US Government contracting market remains large,
and the DoD is committed to protecting investments in areas such
as C4ISR, space, cyberspace and unmanned systems, in which QinetiQ
possesses deep domain expertise. At the year end, US Services had
over 100 proposals pending decision by federal customers at year
end, with a total contract value of more than $1bn.
Lifecycle Solutions provides engineering services and helps
customers manage their fleets and supply chains. New contracts
included a $17m award for condition-based maintenance from the
US Army’s Tank Automotive Command and contracts for technical
and logistics support from the US Army’s Aviation and Missile
Command. Condition-based maintenance facilitates greater
automation of current processes and QinetiQ’s track record with
the US Army presents a number of future opportunities.
The Software and Systems Engineering business supports the
delivery of C4ISR and combat systems, and provides advice on
procurement programmes and equipment lifecycles. The US
Government’s increased focus on the Asia-Pacific region represents
a resource shift to naval markets, and Software and Systems
Engineering is working to build on its good base of support contracts
in the maritime domain. During the year the business was awarded
an $80m contract by Naval Air Systems Command for Tomahawk
Command and Control work. It was also selected for a five-year
blanket purchase agreement with a total ceiling value of $27m
by the US Coast Guard National Pollution Funds Center.
Case study: Mission Solutions
What we do
• Cyber intelligence protecting customers against
cyber attack
• Design, integrate, install and operate enterprise solutions
including IT and operational systems
Our competitive advantage
• Leading industry experts
• Key client relationships
• Proven track record of best value performance
• Trusted by Government to architect and secure networks
in an increasingly hostile cyber environment
19%
Technical
experts
9%
IT specialists
32%
Engineers
6%
Scientists
34%
Other
Where we operate
1
3
2
7
6
4 5
Note: Year references (2013 and 2012) relate to the year ended 31 March.
* Definitions of underlying measures of performance can be found in the glossary
on page 116.
1. Las Vegas NV
2. Albuquerque NM
3. Denver CO
4. Reston VA
5. Springfield VA
6. Washington DC Region
7. Cleveland OH
QinetiQ Group plc Annual Report and Accounts 2013 19
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review US Services continued
Case study: Defense Solutions
At the end of the year the two defense focused businesses, SSE
and Lifecycle Solutions, were integrated creating Defense Solutions.
Software & Systems Engineering
• Support the delivery of C4ISR and combat systems, software
and IT
• Advice on systems engineering, procurement programmes
and equipment lifecycles
Lifecycle Solutions
• Aviation expertise in condition-based maintenance
• Help customers manage their fleets and supply chains
Our competitive advantage
• Highly skilled employees
• Key client relationships
• Track record of improving value for money through tools
and process-based efficiencies
• Leading edge open source, open architecture development
26%
IT specialists
11%
Training &
simulation
specialists
50%
Engineers and
program
managers
7%
Logistics
experts
6%
Other
Where we operate
1. Ft Bliss TX
2. Ft Hood TX
3. Huntsville AL
Redstone
4.
Arsenal HSV AL
5. Clarksville TN
6. St. Charles MO
7. Belcamp MD
8. Hawaii
9. Campbell CA
10. San Diego CA
11. Stennis MS
12. Panama City FL
13. Charleston SC
15 16
9
10
6
1
2
11 12
8
14. Norfolk VA
15. Quantico VA
16. Arlington VA
7
14
5
4
3
13
20 QinetiQ Group plc Annual Report and Accounts 2013
At the end of the year, the division’s two defence-focused
businesses – Lifecycle Solutions and Software & Systems
Engineering, were integrated to create Defense Solutions, aligning
existing programmes with business development initiatives and
removing duplicated overheads.
Aerospace Operations and Systems supports spaceflight through
testing, engineering and launch services and has expertise across
all aspects of a space mission from design to launch. Following
commencement of work in March 2011, revenue has continued to
increase on the NASA Engineering Services Contract at the Kennedy
Space Center. The business also secured a 16-month extension to
the contract for environmental test integration services at the
Goddard Space Center. Future opportunities exist to leverage this
growth in space services to compete for new business with NASA,
as well as with commercial space companies and the United States
Air Force (USAF). During the year, the business won new mission
planning work with the USAF’s Electronics Systems Center at the
Hanscom Air Force Base, and was selected for the TAASC II IDIQ
contract by the USAF Material Command.
Mission Solutions provides cyber security, enterprise information
technology and software solutions principally to non-defence
customers including intelligence agencies and the Department of
Homeland Security (DHS). The majority of its employees have high
levels of security clearance and work on customer sites. During
the year the business commenced the provision of cyber security
services at the Department of Transportation’s Volpe Center to
protect US transportation control systems and critical national
infrastructure. It also received a $46m contract extension from
the DHS for infrastructure support for the Customs and Border
Protection Agency. In IT and software solutions, the business
is positioned in a highly competitive market and revenue has
come under pressure during the year, but there are future
opportunities for its higher end offerings such as the provision
of Cloud-based solutions.
Software & Systems Engineering helps the US Armed Forces, primarily the Navy
and Marine Corps, deliver C4ISR and combat systems to operating forces.
Aerospace Operations and Systems is working to upgrade and modify the NASA
crawler transporter, supporting NASA’s space launch system.
The Group is nurturing a select number of ‘Explore’ businesses
including Cyveillance® which identifies and responds to critical,
real-time intelligence on the Internet that represents a threat or
risk to its customers. Its customer base, which includes the majority
of the US Fortune 50, is primarily financial services companies but
among this year’s new awards were customers in the technology,
healthcare, FMCG, energy and professional services sectors.
Following the appointment of a new leader in October 2012, the
business grew its revenues year-on-year, delivered improvements
in productivity and introduced 24/7 operations. Demand for cyber
intelligence solutions is likely to increase with growing threats to
people, infrastructure, Cloud-based systems, mobile devices and
brand reputation. Cyveillance® is responding to this demand by
focusing on the delivery of commercial services, larger contracts
and higher margin offerings, particularly those that aggregate both
physical and virtual threat information.
Case study: Aerospace Operations & Systems
What we do
• Support spaceflight by testing software and spacecraft
together with engineering and launch services
• Analyse scientific data and manage risks
Our competitive advantage
• Highly skilled people
• Involved in all aspects of a NASA mission/lifecycle
from design to launch
• Program management of complex contracts
16%
Systems
developers
and analysts
9%
Technicians
55%
Engineers
and support
service managers
17%
Program
managers
and operations
3%
Other
Where we operate
2
1
1. Los Angeles CA
2. Denver CO
3. Cleveland OH
4. NASA, Cape Canaveral FL
5. Melbourne FL
6. Greenbelt MD
3
6
4
5
QinetiQ Group plc Annual Report and Accounts 2013 21
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Global Products
Extending our offerings
into wider markets
Case study: Survivability
What we do
• Provide innovative products and solutions to US and allied
governments, enabling them to protect people and assets,
reduce operational costs and save lives
Our competitive advantage
• Sound engineering, product-focused culture
• Innovative, cutting-edge technology base
• Deep understanding of customer problems
• Advanced engineering capabilities enabling rapid innovation
to meet urgent mission challenges
• Effective, affordable and timely solutions
• The portfolio includes:
EARS®
Acoustic
sensors
enhancing
personal safety
LAST®
Armor
Field Installable
Appliqué Armor
System
Q-Net®
Protection
against
rocket-propelled
grenades
Where we operate
IWS™
Integrated
Warrior
SystemTM
PADS®
Precision Air
Drop system
1
2
Revenue was £254.9m (2012: £325.0m), a 21% decrease on an organic
basis at constant currency, and was first half weighted, illustrating the
lumpy profile of the division’s revenue and its dependency on the
timing of shipments of key orders. Q-Net® revenue was strong at
$120m but there was a reduction in demand for other conflict-related
products associated with the drawdown of the US troop presence in
Iraq and Afghanistan. Underlying operating profit* fell 8% to £61.0m
(2012: £66.2m) as the reduction in revenues was partially offset by
an improved mix of US product sales, which included a high proportion
of spares, and a one-off credit of £6m relating to a contract extension
for additional work already undertaken in the UK.
Organic-Plus update
Global Products focuses on the provision of product-based solutions
to meet customer requirements, complemented by contract-funded
research and development. The division combines a cutting edge
technology base with an intimate understanding of customer problems.
To reduce the volatility of its revenue profile over time, QinetiQ is
seeking to increase its portfolio of products and to find new markets
and applications for its existing offerings.
The Survivability business provides innovative products to US and allied
governments, enabling them to protect people and assets, thereby
saving lives. In the first half of the year, it delivered two key orders
for the Q-Net® vehicle survivability product with a combined value
of $44m. These orders were for Navistar’s MaxxPro® MRAP vehicles
and for the US Army’s Heavy Expanded Mobility Tactical Truck (HEMTT)
– the first time Q-Net® has been fitted to a large haulage vehicle. The
business is leveraging the convergence of multiple military capabilities
in order to expand its range of product offerings. At the beginning of
2013, it launched its Integrated Warrior System™ that enables a soldier
to plug-and-play multiple sensors through a lightweight, wearable vest
and access data via a tablet or smartphone.
The Unmanned Systems business is a world-leading provider of military
robots. Although demand for TALON® robots has reduced as a result of
the drawdown of US troops, the business is finding new markets and
received $8m of TALON® orders from Poland and the Czech Republic.
Unmanned Systems is also increasing its portfolio of products, receiving
a $13m order from the US Government’s Joint IED Defeat Organisation
for the new, lightweight Dragon Runner™ 10 robot and a $10m order
from the US Army’s Rapid Equipping Force for innovative robotic
applique kits that convert Bobcats into remote-control and semi-
autonomous systems for route clearance missions. Other new products
include lightweight tactical robotic controllers that can simultaneously
command a variety of unmanned assets and unattended ground sensors.
Waltham and Franklin MA
1.
2. Reston VA
22 QinetiQ Group plc Annual Report and Accounts 2013
Integrated Warrior SystemTM provides vital power and data connectivity to
improve command and control and situational awareness.
Revenue
£254.9m
2013
2012
Underlying operating profit*
£61.0m
Underlying operating margin*
23.9%
£254.9m
2013
£325.0m
2012
£61.0m
2013
£66.2m
2012
23.9%
20.4%
Case study: OptaSense®
What it does
• Distributed acoustic sensing delivering highly valuable data
• Converts standard fibre optic cable into thousands of virtual
microphones with the equivalent of one every ten metres
• Provides real-time, actionable data for oil field services
including fracking and vertical seismic processing and other
vertical markets such as security and border protection
Our competitive advantage
• Exclusive patents and licensing in rapidly expanding
global markets
• Proven technology with important commercial reference sites
127
Patent
families
40
Countries of
operation
Significant expansion
of team increasing from
4 to 140 employees
over last four years
Where we operate
Oil and Gas
Transport
Defense and Security
Utilities
QinetiQ Group plc Annual Report and Accounts 2013 23
Optasense: taking the pulse of the planet.
As military budgets are reduced, customer demand is increasing for
solutions that extend the life of existing platforms and enhance their
capability to meet new mission challenges. Global Products is also
leveraging the innovative, products-focused culture of its employees
to develop technology-based solutions for non-defence markets.
An early example of this approach is a Smart Sensor System™ that
precisely measures voltage and current on power grids to monitor
the performance of distribution networks. The system was selected
by British Columbia Hydro to support its smart metering programme
and is currently in the testing and pre-production phase.
The OptaSense® fibre-optic sensing business is the most mature of the
‘Explore’ opportunities in QinetiQ’s portfolio. The business delivered
double digit revenue and profit growth, winning key infrastructure
monitoring contracts to protect a strategic pipeline corridor in Iraq and
the state-controlled Bijwasan pipeline in India. Whilst infrastructure
services has been the key early adopter market for OptaSense®, oilfield
services represents the biggest opportunity with a multi-billion-pound
market potential. In this market, the business signed follow-on
contracts with Shell to fund £10m of product development over the
next three years and enable deployment of the technology throughout
Shell within a recurring services model, as well as to other companies.
The end of the exclusivity period with Shell is a significant milestone
in the development of the OptaSense® business, which is now starting
to contract with other companies across the oil and gas industry.
QinetiQ’s Space business has been rigorously assessed over the last
year and has the potential to deliver future profitable growth. Its key
capabilities include ion engines and the Proba family of mini satellites, the
latest of which was launched in early May by the European Space Agency.
In the ‘Test for Value’ category, early stage offerings are being tested
to determine the best route to maximise value. During the year, the
Zephyr® High-Altitude-Long-Endurance UAS technology was divested
to EADS Astrium for further development and the Energy from Waste
business was re-focused on core defence markets. A number of
capabilities, such as E-X-Drive® hybrid electric drive, continue to
be developed for customer-funded programmes. Others, such as
the GAJT™ GPS anti-jammer and the Modular Electronic Warfare
System (MEWS™) are being taken to market by partners, reducing
implementation and sales risks. Follow-on orders were received for
the ALARM™ radar system which provides warning of in-coming
rocket fire. The licensing of intellectual property remains an
important revenue stream, particularly in non-defence markets.
Note: Year references (2013 and 2012) relate to the year ended 31 March.
* Definitions of underlying measures of performance can be found in the glossary
on page 116.
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Chief Financial Officer’s review
Net cash position achieved
“ The Group has reduced its
net debt by over £600m and
the balance sheet has the
strength to weather challenging
defence markets and the
capacity for carefully targeted
investment choices.”
2013
£m
597.3
475.6
254.9
1,327.8
2012
£m
610.1
534.5
325.0
1,469.6
UK Services revenue was relatively flat at £597.3m (2012: £610.1m).
In February, the five-yearly periodic review of the Long Term
Partnering Agreement (LTPA) was successfully completed, agreeing
terms with the MOD under which the customer will pay £998m
for the provision of core test and evaluation and training support
services through to March 2018.
US Services revenue was £475.6m (2012: £534.5m), a 12% decrease
on an organic basis at constant currency, reflecting continued
budget uncertainty and reduced federal services spending.
Customers continued to defer decisions as a result of this
uncertainty, leading to the delay of new and incremental orders,
the de-scoping of some existing work, and the cancellation of some
re-competes with shorter term extensions being awarded in their
place. In the annual year-end assessment of the carrying value
of goodwill, the impact of current market conditions resulted
in a non-cash impairment charge of £255.8m.
Global Products revenue was £254.9m (2012: £325.0m), a 21%
decrease on an organic basis at constant currency, and was
weighted to the first half of the year illustrating the division’s lumpy
revenue profile and its dependency on the timing of shipment of key
orders. Q-Net® revenue was strong at $120m, but, as expected,
there was a reduction in demand for other conflict-related products
associated with the drawdown of the US troop presence in Iraq
and Afghanistan.
David Mellors
Chief Financial Officer
Group results overview
Revenue
UK Services
US Services
Global Products
Total
Strengthening of the balance sheet
£200m
£0m
(£200m)
(£400m)
(£600m)
Working Capital
Re(cid:31)rement benefit
obliga(cid:31)on (before tax)
Net (debt)/cash
2009
2010
2011
2012
2013
Group revenue was £1,327.8m (2012: £1,469.6m), down 10% on an
organic basis at constant currency, excluding a £2.4m reduction in
revenue from the divestment of Spectro in the prior year, and a
£6.2m increase due to the strengthening of the US dollar exchange
rate. This reflects the uncertain trading environment in particular
the impact of continued budget uncertainty and the expected
reduction in the demand for conflict-related products following
last year’s very strong performance.
24 QinetiQ Group plc Annual Report and Accounts 2013
Revenue by customer 2013: £1,327.8m
Revenue by customer 2012: £1,469.6m
35%
MOD
26%
DoD
2%
DHS
10%
NASA
Commercial Defence
6%
Civil/Other Government agencies 21%
31%
MOD
29%
DoD
5%
DHS
9%
NASA
Commercial Defence
7%
Civil/Other Government agencies 19%
Group summary
Revenue (£m)
Organic change at constant currency
Underlying operating profit* (£m)
Underlying operating margin*
Underlying profit before tax* (£m)
Underlying net finance expense (£m)
Underlying effective tax rate*
Basic earnings per share
Underlying earnings per share*
Dividend per share
Underlying net cash from operations (post capex) (£m)*
Underlying operating cash conversion*
Net cash/(debt) (£m)
Average US$/£ exchange rate
Closing US$/£ exchange rate
Underlying operating profit*
UK Services
US Services
Global Products
Total
Underlying operating margin*
2013
1,327.8
(10)%
168.7
12.7%
152.1
16.6
19.2%
(20.5)p
18.9p
3.80p
175.9
104%
74.0
1.58
1.52
2013
£m
85.8
21.9
61.0
168.7
12.7%
2012^
1,469.6
(11)%
159.6
10.9%
110.2
49.4
19.5%
37.9p
13.6p
2.90p
235.4
148%
(122.2)
1.60
1.60
2012^
£m
61.3
32.1
66.2
159.6
10.9%
* Definitions of underlying performance measures can be found in the glossary on page 116.
^ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
QinetiQ Group plc Annual Report and Accounts 2013 25
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Chief Financial Officer’s review continued
UK Services delivered a strong performance with underlying
operating profit* increasing 40% to £85.8m (2012: £61.3m^).
The resulting underlying margin* of 14.4% (2012: 10.0%^) reflects
improved alignment with customer needs plus a more competitive
cost base and processes for better project execution as well as the
completion of final milestones on certain projects.
US Services underlying operating profit* was £21.9m (2012: £32.1m)
and the underlying margin* was 4.6% (2012: 6.0%) as a result of the
reduction in volume and the more competitive trading environment.
In addition, there was a change in revenue mix as lower margin
NASA work replaced higher margin sales.
Global Products underlying operating profit* fell by 8% to £61.0m
(2012: £66.2m) as the reduction in revenues was partially offset
by an increase in underlying profit margin* from 20.4% in 2012
to 23.9%. The margin improvement reflects the mix of US product
sales which included a high proportion of spares and a one-off credit
of £6m relating to a contract extension for additional work already
undertaken in the UK.
The overall Group underlying operating margin* increased from
10.9%^ to 12.7%.
Finance costs
Net finance costs were £17.9m (2012: £56.6m^). The underlying
net finance costs were £16.6m (2012: £49.4m^), with an additional
£1.3m (2012: £7.2m^) in respect of the pension net finance expense
reported within specific adjusting items. The reduction in underlying
net finance costs* reflects the accelerated interest costs of £27.4m
in the prior year, following the election to make early repayment of
$177m of private placement debt, which also resulted in a reduction
in the interest payable on the debt to £11.9m (2012: £17.5m).
Taxation
The Group’s underlying effective tax rate* was 19.2% (2012:
19.5%^). The rate is primarily dependent on the geographic split
of profits between the UK and US businesses and the availability
of Research and Development relief.
The UK Government has been consulting on its proposal to
introduce an ‘above the line’ credit for research and development
to be recognised in operating profit as a replacement for the current
credit, which is recognised in the tax line. The mandatory move to
‘above the line’ treatment of R&D credits will now be delayed until
April 2016 subject to the Finance Bill receiving Royal Assent in early
summer of 2013.
At 31 March 2013 the Group has unused tax losses of £202.7m
(2012: £200.0m) that are available to offset against future profits.
Specific adjusting items*
The performance of the Group after allowing for specific adjusting items is shown below:
Underlying profit for the year attributable to equity shareholders of the parent company
Impairment of goodwill
Amortisation of intangible assets arising from acquisitions
Net restructuring (charges)/recoveries
Pension past service gain
Pension net finance expense
Net gain in respect of previously capitalised DTR programme bid costs
Impairment of property
Gain on disposal of property
Gain on business divestments and disposals of investments
Impairment of investments
Tax impact of items above
(Loss)/profit for the year attributable to equity shareholders of the parent company
2013
£m
122.9
(255.8)
(14.0)
(16.3)
–
(1.3)
–
(4.0)
–
2.9
(0.6)
33.0
(133.2)
2012^
£m
88.7
–
(20.3)
69.4
141.4
(7.2)
4.1
(1.9)
9.0
11.6
–
(48.5)
246.3
26 QinetiQ Group plc Annual Report and Accounts 2013
Net proceeds received from the disposal of investments/businesses
totalled £3.8m (2012: £13.9m), largely reflecting the disposal of its
investment in Infoscitex by QNA.
At 31 March 2013, net cash was £74.0m, (2012: net debt of
£122.2m). This reflected the strong operating cash performance
together with the receipt of £65m from MOD in April 2012.
Total committed facilities available to the Group at year end
amounted to £446.3m (2012: £429.4m) and the remaining Group
debt has no maturity before 2016.
Pensions
The net pension deficit under IAS 19 (revised), after deducting
deferred tax, was £40.4m (2012: £18.2m). The increase in net
pension deficit is primarily driven by macro-economic factors,
principally the reduction in the corporate bond yields that drive the
liability discount rate, partially offset by the impact of the increase
in the value of the equity and bond assets.
The technical provisions basis of calculating scheme funding
requirements differs from IAS 19 in that it does not use corporate
bonds as a basis for the discount rate but instead uses the risk free
rate from UK gilts, prudently adjusted for long-term expected
returns for pre-retireds. Given the current extremely low gilt yields,
perhaps exacerbated by quantitative easing, a funding valuation
of the scheme would probably have resulted in a bigger deficit than
the IAS 19 methodology if performed at the year end.
The adoption of IAS 19 (revised) ‘Employee benefits’ has no impact
on the closing net pension liability. The key assumptions used in the
IAS 19 valuation of the scheme are:
Assumption
Discount rate
Inflation
Salary increase
Life expectancy – male (currently aged 40)
Life expectancy – female (currently aged 40)
2013
4.4%
2.7%
3.7%
90
92
2012
4.8%
2.6%
3.6%
90
92
The resulting statutory loss after tax was £133.2m (2012:
£246.3m^ profit).
There has been a non-cash impairment of the acquired goodwill in
the US Services division of £255.8m, reflecting a severely constrained
budget environment, exacerbated by the enactment of sequestration
on 1 March 2013. Headroom in the cash generating units within
the UK Services and Global Products divisions remains significant.
The net restructuring cost of £16.3m primarily reflects a charge of
$26.1m in QNA resulting from actions to place the US cost base on
a more competitive footing. This programme will allow the business
to maintain competitive rates. The majority of the cost reductions
are in the US Services division and are focused on cutting property
and infrastructure costs, as well as reducing management layers.
The focus was on reducing indirect costs while maintaining bid
and proposal activity.
A charge of £4.0m (2012: £1.9m) was taken in the year against the
Group’s owned properties. These properties are no longer occupied
and, as no external tenant has been found, the assets are no longer
generating a return.
The £2.9m gain on business divestment (2012: £11.6m) reflects
the $4.8m profit on the disposal of its investment in Infoscitex
by QNA. An income statement charge of £0.6m (2012: nil) was taken
in the year as a result of the impairment of the Group’s investment
in Sciemus.
Earnings per share
Underlying earnings per share* were 18.9p compared with 13.6p^
for the year ended 31 March 2012 benefitting from the increase in
operating profit and from last year’s decision to pay down private
placement debt. Basic earnings per share reduced to (20.5)p
(2012: 37.9p^).
Dividend
The Board proposes a final dividend of 2.70p per share for the year
ended 31 March 2013 (31 March 2012: 2.00p). Subject to approval
at the Annual General Meeting, the final dividend will be paid on
6 September 2013 to shareholders on the register at 9 August 2013.
Other financials
Cash flow
The Group’s cash flow from operations before net restructuring
recoveries/costs but after capital expenditure was £175.9m (2012:
£235.4m). Underlying operating cash conversion* remained strong
at 104% (2012: 148%^), despite the impact of increased contract-
funded capital expenditure in UK Services. The net cash inflow in
the year on restructuring was £63.1m (2012: £8.9m outflow), which
includes the impact of £65m received from MOD in April 2012
relating to the March 2012 settlement which discharged the MOD
from its accumulated liabilities for rationalisation costs incurred
in previous years.
* Definitions of underlying performance can be found in the glossary on page 116.
^ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
QinetiQ Group plc Annual Report and Accounts 2013 27
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Chief Financial Officer’s review continued
Assumption
Discount rate
Inflation
Salary increase
Life expectancy
Change in assumption
Increase/decrease by 0.1%
Increase/decrease by 0.1%
Increase/decrease by 0.1%
Increase by 1 year
Indicative effect on scheme liabilities
(before deferred tax)
Decrease/increase by £25m
Increase/decrease by £26m
Increase/decrease by £4m
Increase by £28m
Each assumption is selected by the Group in consultation with the
Company actuary and takes account of industry practice amongst
comparator listed companies. The sensitivity of each of the key
assumptions is shown in the table above.
The market value of the assets at 31 March 2013 was £1,256.5m
(2012: £1,107.9m) and the present value of scheme liabilities was
£1,310.6m (2012: £1,139.4m).
The most recent full actuarial valuation of the defined benefit
section of the QinetiQ Pension Scheme was undertaken as at
30 June 2011 and resulted in an actuarially assessed deficit of
£74.7m. On the basis of this full valuation, the Trustees of the
scheme and the Company agreed the employer contribution rate
of 12.7% from 30 June 2011, and past service deficit recovery
payments of £10.5m per year for a six-year period from 1 April 2012.
As part of a package of measures to stabilise the scheme, the
Company has also contributed an asset in the form of an interest
through a Scottish limited partnership in a future income stream
of approximately £2.5m per annum, increasing in line with the
Consumer Price Index, for 20 years secured on certain properties
owned by the Group.
Finally, the Company and Trustees also agreed the key provision that
the Trustee will select the Consumer Price Index rather than the
Retail Price Index as the relevant index for the increase of pensions
in payment in respect of service before 1 June 2008 and for the
revaluation of preserved benefit, resulting in the one-off past
service credit of £141.4m in the year ended 31 March 2012.
The next scheduled triennial valuation will be performed as
at 30 June 2014.
Capital risk
The Group funds its operations through a mixture of equity funding
and debt financing, including bank and capital market borrowings.
At 31 March 2013 the Group’s total equity was £438.5m (2012:
£599.4m). Net cash as defined by the Group was £74.0m (2012:
net debt £122.2m).
The capital structure of the Group reflects the judgement of the
Directors of an appropriate balance of funding required. The
Group’s target is to maintain its gearing ratio below 2xEBITDA.
Treasury policy
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 strict control on the use of
financial instruments. Speculative trading in financial instruments is
not permitted. The policies are established to manage and control
risk in the treasury environment and to align the treasury goals,
objectives and philosophy of the Group.
Funding and debt portfolio management
The Group seeks to obtain certainty of access to funding in the
amounts and maturities required to support the Group’s medium
to long-term forecast financing requirements. Group borrowings
are arranged by the Group treasury function.
Interest risk management
The Group seeks to reduce the volatility in its interest charge caused
by rate fluctuations. A significant portion of the Group’s borrowings
are fixed in the short to medium term through fixed-rate debt.
28 QinetiQ Group plc Annual Report and Accounts 2013
Foreign exchange risk management
The principal exchange rate affecting the Group was the sterling to US dollar exchange rate.
£/US$ – average rate
£/US$ – closing rate
£/US$ – opening rate
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. The Group continues its practice of not hedging income
statement translation exposure. To minimise the impact of currency
depreciation of the net assets on its overseas subsidiaries, the
Group seeks to borrow in the currencies of those subsidiaries,
but only to the extent that its gearing covenant within its loan
documentation, as well as its facility headroom, are likely to remain
comfortably within limits.
Tax risk management
QinetiQ’s tax strategy is to ensure compliance with all relevant tax
legislation, wherever we do business, whilst managing our effective
and cash tax rates. Tax is managed in alignment with our corporate
responsibility strategy in that we strive to be responsible in all our
business dealings. These principles are applied in a consistent 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 in,
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.
2013
1.58
1.52
1.60
2012
1.60
1.60
1.60
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 prudent and 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
Year-end employee numbers have decreased by 7% to 9,498 at
31 March 2013. The decline primarily reflects headcount reductions
in the US to maintain competitiveness in the challenging market.
Accounting standards
As a UK-listed company, the Group is required to adopt EU endorsed
IFRSs and comply with the Companies Act 2006. The effect of
changes to financial reporting standards in the year is disclosed in
note 1 to the financial statements.
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 financial statements.
David Mellors
Chief Financial Officer
23 May 2013
Employees by sector 2013: 9,498
Employees by sector 2012: 10,180
UK Services
US Services
Global Products
54%
35%
11%
UK Services
US Services
Global Products
51%
39%
10%
* Definitions of underlying measures of performance can be found in the glossary on page 116.
^ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
QinetiQ Group plc Annual Report and Accounts 2013 29
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Risks and uncertainties
Understanding and
managing our risks
Considerable progress has been made in the last year to improve
the effectiveness of QinetiQ’s risk management processes. This
has included greater clarification regarding the Board’s risk appetite
specifically linked to the Company’s growth agenda and our
Organic-Plus strategy.
With the change of the Compliance Committee to the Risk & CSR
Committee and its focus on risks where the primary impact is
non-financial, the Audit Committee retains a focus on purely financial
risks. The differentiation between pure financial and non-financial risk
has aided both the Executive and Board risk review process, allowing
for greater focus on the effectiveness of relevant mitigations.
Risks continue to be assessed according to the likelihood of an
event’s occurrence and its impact. The Group risk register includes
an analysis of the potential exposures and severity of each risk (as
a function of its likelihood and impact), the assumptions underlying
each risk and the mitigation required to manage it.
The Group risk register considers:
• The authority, resources and coordination of those involved in
the identification, assessment and management of the significant
risks the organisation faces;
• The response to the significant risks which have been identified
by management and others;
• The monitoring of reports from Group management; and
• The maintenance of a control environment directed towards
the proper management of risk.
The Group risk register is reviewed by the Executive and the Board
and, in addition, the risk owners present an update of current status
and mitigating actions by rotation throughout the year.
Risk
Defence
market
Potential impact
Mitigation
The financial burden on both UK and US government
budgets from the current economic downturn and the
requirement to reduce budget deficits will lead to reduced
spending in the markets in which the Group operates.
In particular, the UK is reducing its defence budget by 8%
in real terms by 2015 and, in addition, is seeking to remove
significant overheating in its equipment programme.
In the US, sequestration was enacted on 1 March 2013
and government departments are working through its
impact on levels of expenditure and future project
priorities. Any reduction in government defence and
security spending in either the UK or the US could have
an adverse impact on the Group’s financial performance.
Our focus on a range of markets in aerospace, defence,
security and intelligence provides a degree of portfolio
diversification. The Group will continue to review trends
in defence, aerospace and security expenditure in order
to align the business with those trends.
Whilst UK government expenditure remains under
pressure the MOD has made considerable progress in
balancing its budget. In defence research, where QinetiQ
is the private sector market leader, spending has been
stabilised at about £390m pa until 2015.
Current plans of both US and UK governments are
to drawdown troops from Afghanistan by the end
of 2014. A significant shift in policy by either the US
Administration or the UK Government, which resulted
in a significant reduction in the number of forces
personnel present in Afghanistan, or a change in
the timing, may have a materially adverse impact
on the Group’s financial performance.
The Group manages this by maintaining a market focus
and competitive positioning in adjacent markets,
including defence services (which are not directly
conflict-related), aerospace, space, security and
intelligence, which provides a degree of portfolio
diversification. The Group is also seeking to increase
its portfolio of products and to find new markets
and applications for its existing offerings.
The aerospace, defence and security markets are highly
competitive. The Group’s financial performance may
be adversely affected should it not be able to compete
in the markets in which it aims to operate.
Government customers seek to prevent Organisational
Conflicts of Interest (OCI) occurring where the companies
provide solutions as part of the defence supply chain and
consultancy services as a technical advisor.
QinetiQ seeks to focus on areas within these markets
in which its deep customer understanding, domain
knowledge, technical expertise and platform
independence provide a strong proposition and
a significant advantage in competitive bidding.
QinetiQ takes proactive steps to manage any potential
OCI and to maintain its ability to provide independent
advice through its consulting and systems engineering
activities. A formal compliance regime operates in the UK
with the MOD. In March 2012, QinetiQ agreed with the
MOD that it could adopt the generic compliance regime
in use with other companies, replacing a QinetiQ-specific
one. This change will not affect the rigour of the
compliance process.
30 QinetiQ Group plc Annual Report and Accounts 2013
Risk
Contract
profile
Pension
scheme
Potential impact
Mitigation
A material element of the Group’s revenue is derived
from one contract. The Long-Term Partnering Agreement
(LTPA) is a 25-year contract to provide a variety of
evaluation, testing and training services to the MOD.
The original contract was signed in 2003. The LTPA operates
under five-year periods with specific programmes, targets
and performance measures set for each period. In the
current year, the LTPA directly contributed 14% of the
Group’s revenue and supported a further 8% through
tasking services using LTPA managed facilities. The loss,
cancellation or termination of, or significant reduction in,
this contract would have a material, adverse impact on
the Group’s future reported performance.
The amounts payable under some government contracts
can be significant and the timing of the receipt of orders
could have a material impact on the Group’s performance
in a given reporting period.
Some of the Group’s revenue is derived from contracts
that have a fixed price. There is a risk that the costs
required for the delivery of a contract could be higher
than those agreed in the contract, as a result of the
performance of new or developed products, operational
over-runs or external factors, such as inflation. Any
significant increase in costs which cannot be passed on to
a customer may reduce the profitability of a contract or
even result in a contract becoming loss-making.
The Group operates a defined benefit pension scheme
in the UK. There is currently a deficit between the
projected liability of the scheme and the value of the
assets it holds. The size of the deficit may be materially
affected by a number of factors, including inflation,
investment returns, changes in interest rates, and
improvements in life expectancy. An increase in the
deficit may require the Group to increase the cash
contributions to the scheme, which would reduce
the Group’s cash available for other purposes.
In February 2013, the Group successfully completed the
five-yearly periodic review of the LTPA, agreeing terms
with the MOD for the provision of core test, evaluation
and training support services through to March 2018.
The Group continues to achieve customer performance
and satisfaction levels, and significantly exceeded the
agreed minimum performance rating of 80% in 2012.
While achieving the performance scores, the Group
has achieved significant cost savings for the MOD on
repeated services.
The contract and orders pipeline is regularly reviewed
by senior operational management.
The nature of many of the services provided under such
fixed-price arrangements is often for a defined amount
of effort or resource rather than firm deliverables and, as
a result, mitigates the risk of costs escalating. The Group
ensures that its fixed-price bids and projects are reviewed
for early detection and management of issues which may
result in cost over-run.
Pension scheme performance is reviewed regularly by
Group management, in conjunction with the scheme’s
independent trustees. External actuarial and investment
advice is also taken on a regular basis to ensure that the
scheme is managed in the best interests of both the
Group and the scheme’s members. The most recent
triennial funding valuation of the scheme, as at 30 June
2011, resulted in a deficit of £74.7m.
The Group and trustees have agreed a package of
measures to enhance the security of the scheme,
including deficit recovery payments over six years,
the use of CPI rather than RPI for indexation purposes,
and an asset-backed funding programme. The next
funding valuation of the scheme is at 30 June 2014.
The Group and the Trustees continue to work on the
de-risking of the liability profile of the scheme.
US foreign
ownership
regulations
In the US, the Group undertakes work that is deemed
to be of importance to US national security and is
therefore subject to foreign ownership regulations.
Arrangements are in place to insulate these activities
from undue foreign influence as a result of foreign
ownership. Failure to comply with the regulations could
result in sanctions, and suspension or debarment from
government contracts, as well as reputational damage
to the QinetiQ brand.
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. This section entitled
‘Management and control of US subsidiaries’ on page 45
of this report provides details of the proxy agreement
between QinetiQ North America and the US DoD, that
regulates the ownership, management and operation
of QinetiQ’s principal US subsidiaries.
QinetiQ Group plc Annual Report and Accounts 2013 31
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Risks and uncertainties continued
Risk
Potential impact
Mitigation
Significant
breach of
relevant
laws and
regulations
The Group operates in highly-regulated environments
and is subject to numerous domestic and international
laws. The Group recognises that its operations have the
potential to have an impact on a variety of stakeholders
and that failure to comply with particular regulations
could result in a combination of fines, penalties, civil
or criminal prosecution, and suspension or debarment
from Government contracts, as well as reputational
damage to the QinetiQ brand.
Key areas of focus for the organisation include;
Safety liability from failure of a product, service
or advice as well as workplace health, safety and
environmental matters.
Bribery and Ethics
US Proxy Regime
International Trade Controls
Tax legislation
QinetiQ is liable to pay tax in the countries in which
it operates, principally in the UK and the US. Changes
in the tax legislation in these countries could have an
adverse impact on the level of tax paid on the profits
generated by the Group.
The Group has procedures and, where appropriate,
training in place to ensure that it meets all current
regulations. Together, these ensure the Group manages
corporately and at local business level, the effective
identification, measurement, and control of regulatory
risk. Local management continuously monitors local
laws and regulations, and policies are in place for the
appointment of advisors to support business development.
Professional advice is sought when engaging in new
territories to ensure that the Group complies with local
and international regulations and requirements.
Robust training, policy and processes exist to ensure
the safety of products, services and advice and to
protect employees and others affected by QinetiQ
operations. Recent successes include external
accreditation of our Safety Management System and
continuing authorisations for regulated design and
maintenance services in the aviation arena (page 34).
QinetiQ also undertakes human factor and behavioural
safety training to embed its safety culture.
The QinetiQ Code of Conduct outlines a strong stance
on anti-bribery supported by annual training of all
employees, procedures and systems for managing
international business, payments to commercial
intermediaries, gifts and hospitality. Performance
was reviewed externally and benchmarked against
others in this sector (page 34).
Procedures are in place to ensure that these regulations
are adhered to, specifically with regard to communication
with staff at QinetiQ’s principal US subsidiaries.
Compliance data is maintained and monitored by
the Executive and Board.
Ongoing compliance has been supported by a programme
to improve QinetiQ’s handling of legacy materials as well
as to improve our systems and processes for the handling
and management of new materials and electronic data.
Investment in this area supports our plans for growth
in the international arena as well as building confidence
in how we manage existing regulatory requirements.
External advice and consultation are sought on potential
changes in tax legislation in both the UK and the US. This
enables the Group to plan for and mitigate potential
changes in legislation.
The Group is currently actively engaging with HM
Treasury on the proposal to move R&D tax credits out of
the tax charge and ‘above the line’ into operating profit.
Legislation has been published in the UK which, subject
to Royal Assent, will bring a mandatory ‘above the line’
approach from 1 April 2016. This could increase the
Group’s effective tax rate over time towards a blend
of the US and UK corporation tax rates.
The Group has £202.7m of tax losses carried forward
as at 31 March 2013 (2012: £200.0m).
32 QinetiQ Group plc Annual Report and Accounts 2013
Risk
Potential impact
Mitigation
Breaches of
data security
and failure of
IT systems
The Group operates in a highly-regulated information
technology environment. The data held by QinetiQ is
highly confidential and needs to be totally secure,
particularly against a background of increasing
cyber threat. A failure of systems could have an
impact on contract delivery leading to a loss of customer
satisfaction.
A breach of data security could have an impact on our
customers’ operations and have a significant reputational
impact, as well as lead to the possibility of exclusion from
some types of government contracts, with a detrimental
impact on the Group’s financial performance.
Working in a
global market
place
The Group’s financial systems are required to be
adequate to support US and UK government contracting
regulations.
QinetiQ operates internationally. The risks associated
with having a large geographic footprint may include:
regulation and administration changes, changes in
taxation policy, political instability, civil unrest, and
differences in culture and terms of reference, leading
to a lack of common understanding with customers.
Any such events could disrupt some of the Group’s
operations and have a material impact on its future
financial performance.
The Group is exposed to volatility in exchange rates
as a result of the international nature of its operations.
This includes a translational impact on the key financial
statements as a result of the Group reporting its financial
results in sterling. The Group has limited transaction
exposure as its revenue and related costs are often borne
in the same currency, principally US dollars or sterling.
Of the Group’s total revenue, approximately 45% is
contracted in sterling, 50% in US dollars and 5% in
other currencies.
The Group relies on the proper functioning of the credit
markets which could have an impact on both the
availability and associated costs of financing. The Group
is exposed to interest rate risk to the extent borrowings
are issued at floating interest rates.
Recruitment &
retention
QinetiQ operates in many specialised engineering,
technical and scientific domains. There is a risk that key
capabilities and competencies are lost through failure to
recruit and retain employees within the organisation due
to internal factors as well as across the sector due to
macro factors affecting the desirability, intake and
training of engineers, scientists and technologists.
Information systems are designed with consideration
of single points of failure and the removal of risk through
minor and major system failures. The business maintains
business continuity plans that cover both geography,
e.g. sites and business units, and the technical capability
of staff. These plans cover a range of scenarios, including
loss of access to information technology systems.
The plans are tested at appropriate intervals. Data
security is assured through a multi-layered approach
that provides a hardened environment, including robust
physical security arrangements, data resilience strategies
and the application of security technologies, as well as
comprehensive internal and external testing of potential
vulnerabilities. In addition, the systems are monitored
and managed on a 24/7 basis.
A significant amount of effort is invested in engaging
with US and UK government contracting audit agencies
to enable them to test and opine on relevant financial
systems and data, and on implementing any recommended
improvement plans.
While the core activities of the Group are confined to the
UK and the US, it continues to explore potential customer
relationships across the globe. These new relationships
are assessed for their inherent risks, using our
International Business Opportunity Management
process before being formally entered into.
The Group actively hedges all significant transactional
foreign exchange exposure, as described in the notes
to the financial statements, and has adopted hedge
accounting. The Group’s objective is to reduce medium-
term volatility to cash flow, margins and earnings.
The Group protects its balance sheets and reserves
from adverse foreign exchange movements by financing
acquisitions in North America with US dollar-denominated
borrowings, thereby partially mitigating the risk as US
dollar earnings are used to service and repay US dollar-
denominated debt.
The Group maintains a prudent level of committed
funding facilities: a five-year multi-currency facility
totalling £282.8m was provided by its relationship banks
and signed in 2011. This is currently undrawn. The Group
also uses fixed-rate debt instruments issued to US private
placement investors with maturity dates up to 2019.
The Group conducts regular activity to identify key roles
and personnel. Succession plans are in place looking
internally at suitable candidates ready now or in need
of development to fill particular roles as well as external
activity to identify talent in industry the organisation
may wish to attract.
QinetiQ Group plc Annual Report and Accounts 2013 33
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review
Corporate responsibility and sustainability review
Meeting stakeholder
expectations
“ Managing risk, protecting
our reputation and operating
responsibly and safely are
key priorities.”
Leo Quinn, CEO
Governance and strategy
The Group Risk & CSR Committee (page 47 of this report) meets
regularly and receives reports on ethics, environment, health and
safety and broader corporate responsibility and sustainability
issues. In the US, the QNA Board oversees these activities,
obtaining independent assurance on the adequacy of its
compliance programmes on an ongoing basis.
Key policies and management systems underpin our corporate
responsibility programmes. In the UK these include our environmental
management system certified to ISO 14001, and our health and safety
management system certified to OHSAS 18001. In the UK, a business
assurance tool assists the assurance and monitoring process. Our US
business has established policies, procedures and programmes in
place to ensure compliance with US federal labour, environmental,
health and safety and other laws and regulations. QNA has ISO
9001:2008 and ISO 9001:AS9100 certified at three key sites.
In accordance with our corporate responsibility strategy, we aim to
continue to embed our programmes such that ‘how we do business’
aligns with stakeholders’ expectations of responsible business. New
initiatives that are designed to help us continuously improve our
performance are also regularly introduced.
Meaningful stakeholder engagement
We seek to engage with key stakeholders to help shape our strategy
and priorities. We regularly engage with investors directly and
provide information to relevant ratings agencies. We have a regular
dialogue with the MOD on sustainability. Employees are informed
and involved in programmes through a range of channels such as
the UK Employee Engagement Group as well as regular townhalls
and employee surveys.
Pursuing high ethical standards
The Group’s Code of Conduct provides clear guidance on ethical
standards and guides employee behaviour in business activities.
Annual business ethics training is mandatory for all employees and
the Group Board. We also run additional training for those in higher
risk roles. Our Chief Ethics Officers are senior executives. Risk
management is embedded in business processes and we use
third parties for due diligence, where appropriate.
34 QinetiQ Group plc Annual Report and Accounts 2013
Employee involvement
Safety, health and wellbeing
The safety, health and wellbeing of our people remains a priority
with a continuous focus on driving down accidents by providing
training, raising awareness of safe working practice and improved
reporting. QinetiQ’s UK occupational safety record continues to be
strong; for example, the UK RIDDOR (Reporting of Injuries, Diseases
and Dangerous Occurrences Regulations) rate for 2013 is 1.90
per 1,000 employees which is well below the Health and Safety
Executive ‘all industries’ benchmark of 4.46 per 1,000 employees.
There were no prosecutions or prohibition or improvement notices
issued by regulators during year.
Meeting our 2013 objective, our UK health and safety management
system was certified to OHSAS 18001 supported by initiatives such
as the QinetiQ Visible Active Leadership campaign, focusing on
safety culture and behaviour and the Actions Speak Louder Than
Words programme, empowering employees to take action and be
active in accident prevention.
“ We are delighted that our UK
safety management system has
been certified to OHSAS 18001,
meeting our 2013 objective.”
In our US operations, health and safety training is focused on
empowering employees to operate safely. We have rolled out five
specialist courses in health and safety within Technology Solutions.
Additionally on our NASA contracts we have 980 employees trained
in the NASA Voluntary Protection Program and 40 NASA Area Safety
Representatives.
Lost time incidents per 1,000 employees*
QinetiQ Group (excluding QNA)
QNA
QinetiQ Group
2013
5.36
1.45
3.70
2012
5.53
1.12
3.55
It is important to the Company that we support our employees in
their health and wellbeing. In the US, the Vitality Wellness Program
introduced in 2011 as part of the existing Health in Motion initiative,
supports employees and their families. Programme incentives
include reduced health insurance premiums, prizes for attaining
point levels and discounts on health clubs and equipment. 60%
of employees who participate in Company medical insurance are
engaged in the programme. The UK Wellbeing Programme provides
practical help and assistance on a wide range of personal and
work-related issues, including the provision of a confidential
resource for support and information. In the UK, employees
have access to a competitive range of employee benefits through
QinetiQ Benefits+, a flexible benefits package.
* Two QNA incidents have been reclassified and so 2012 LTI for QNA and for Group
are slightly lower than reported last year.
Safety objectives and performance
2013 objectives
Progress and achievements
Status
2014 objective
• Reduction in reportable UK
incidents to zero by 2014
• We continue to work towards
zero reportable incidents by
2014
• Ongoing
• Reduction in reportable UK incidents
by 2014.
• Attainment of OHSAS 18001 in
• We have attained OHSAS 18001
• Achieved
the UK by 2013
certification in the UK
Case study: Safety stop
On 20 July the employees in QinetiQ’s Air, Weapons and
Maritime businesses stopped their daily activities and dedicated
two hours to focus on the topic of safety. The event was
designed to signal that safety comes first. As part of the ‘Safety
Stop’ employees, together with some of our customers,
discussed safety issues and how to improve safety further.
The feedback generated over 800 safety ideas, many of which
have been taken forward into daily operation.
Safety of products, services and advice
Whether providing traditional products, specialist advice or other
services, delivering safely underpins our offering to customers.
In recent years QinetiQ has invested heavily to attract and maintain
competent engineers, technologists and scientists with specialist
safety expertise. In the UK, Technical Assurance and Independent
Design Review have been fully integrated into our day-to-day
business delivery processes. Improvements continue to be driven
by our Engineering and Technical Leadership Team, supported by
independent assurance activity. In addition to maintaining and
developing its design and maintenance accreditations for safety
critical work, through various committees and working groups,
QinetiQ actively supports collaborative working with its main UK
customer, MOD, and other industry organisations to develop and
implement common safety standards and practices. Our US
business continues to use technical excellence to improve the
safety and usability of their products and as a critical component
in delivering support services in unique and safety critical
environments for the Department of Defence and NASA.
Involving our people
An independent UK annual employee engagement survey had a
response rate of 74%. Action planning is taking place at a divisional
level to build on successes and address areas for improvement.
The UK Employee Engagement Group (EEG) comprises 40
representatives at local and national level, elected by employees
to improve engagement and act as a consultative body on
developments within the Company. In the last year the EEG has
become established and played an active role in monitoring and
feeding back on employee views, with consultation on topics such
as pay, pensions and employee wellbeing. In the US an employee
survey response rate of 63% was achieved. For every employee
submission, QNA made a charitable donation to the Fisher House
Foundation, which helps veterans and their families with housing
and medical requirements, resulting in a total donation of $13,000.
Future plans for engagement in the US business include employee
focus groups. Senior leaders from across the Group met at the
annual QinetiQ Leadership conference in April this year.
The Company operates the ‘My Contribution’ programme which
enables employees to actively take part in business improvement.
People Who Know How
At QinetiQ, we aim to grow sustainable earnings and to increase
our customer satisfaction. It is our ‘People Who Know How’,
who will give QinetiQ its competitive advantage and consistently
exceed our customers’ expectations. To ensure we increase our
capability, QinetiQ UK is building a foundation for the future in
Learning and People Development, providing our employees with
the tools and opportunities to drive their own career, maximise
potential and knowledge share. Performance will be supported
through development toolkits, increased online learning capability
and bespoke programmes delivered in house and by award winning
suppliers. Our people agenda demonstrates QinetiQ’s commitment
to offer development to all employees.
We have increased the number of UK apprenticeships and, as well
as the traditional subjects such as aeronautical engineering that
we have been offering at our apprentice school for over 40 years,
we have included new apprenticeships in areas such as facilities
management.
Sam Prichard, Apprentice (left), receiving an award for Mechanical Apprentice
of the Year from Gaz Borland, MD Air.
QinetiQ Group plc Annual Report and Accounts 2013 35
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Corporate responsibility and sustainability review continued
Case study : My Contribution – Energy Saving
My Contribution offers QinetiQ employees the opportunity
to get involved in business improvement, both in terms of making
suggestions and being empowered to put them into action.
This year’s My Contribution ‘Quick Win of the Year’ was awarded
to Norman Terrill, Advisor – Shore Integration Facility, based
at Portsdown Technology Park, whose achievements were
recognised at the 2013 My Contribution Showcase.
Norman identified a number of improvements which would
help his local site to save energy. This included installing sensors
and timers, putting in a process for turning off heavy equipment
when not in use and introducing a ‘switch-off’ activity to the
end of day security close down – all aimed at making sure
that when rooms and equipment are not in use we’re not
wasting electricity.
Dr Sam Healy, Head of Sustainability and Corporate
Responsibility, said: “It’s great to see someone with so much
passion and energy recognised for their contribution. My
Contribution empowers people to make a difference”.
Norman Terrill (centre) receiving his award from Leo Quinn (left)
and Mark Elliott (right).
In the US, the employee performance appraisal process has been
enhanced to improve employee ownership of career development,
planning by supervisors and to better align employee development
with our US business objectives. Employees are supported in the
attainment of professional and technical certifications and degrees.
Our US business is an ITIL (Information Technology Infrastructure
Library) Foundation Certification Training provider, with two
certified instructors. US employee service and accomplishments
are recognised through a variety of bonus programs.
Diversity and inclusion
QinetiQ provides an environment of respect and inclusion
that recognises and values the unique skills, experiences and
perspectives that each employee contributes toward our business
success. In the US, a Diversity Recruiting Strategy has been
introduced to focus on the recruitment of under-represented
groups. This strategy will particularly focus on creating a rich
pipeline of candidates from these target groups for future positions.
In the UK, we are committed to launching a new diversity and
inclusion programme. Currently the percentage of women working
in the UK business is 20% and 28% of the US workforce is female.
We are committed to the fair treatment of people with disabilities
in relation to applications, training, promotion and career
development. If an existing employee becomes disabled, the
Group’s policy is to provide continuing employment and training,
wherever practicable. We have Two Ticks accreditation in the UK,
demonstrating we are committed to employing disabled people.
We value the diversity of experience which drives the creativity and
innovation of our engineers and scientists – People Who Know How.
The different approaches that our people take in solving our
customers’ challenges gives us competitive advantage and the
ability to retain and win new business.
Environmental stewardship
The reduction of the environmental impact of our operations
remains a priority. Our UK Environmental Management System
is certified to ISO 14001 and covers our estate and the sites we
manage on behalf of the MOD. The delivery of test and evaluation
and training support services is conducted on MOD sites, many
of which are designated conservation areas of national and
international importance, including St Kilda, a World Heritage Site.
As a result, sustainability appraisals are regularly carried out to
identify and mitigate any impact to the flora, fauna and any other
sensitive receptors of the activities undertaken.
Greenhouse gas emissions
Monitoring of our UK carbon footprint shows a year-on-year reduction
in emissions. Arrangements for data capture of greenhouse emissions
across the Group have been rolled out using guidance and emission
factors published by the Department of Environment, Food and Rural
Affairs. A 15% reduction in carbon emissions over three years (with a
2012 baseline) is our target in the UK. This will be achieved by making
infrastructure more energy efficient and engaging employees to
change behaviour. The theme of our UK annual Environment Week
campaign in 2013 was focused on more sustainable travel.
Environmental objectives and performance
2013 objectives
Progress
Status
2014 objectives
• 15% reduction in UK carbon emissions by
• Programmes
• Ongoing
2015 – to be delivered through investment
projects, reducing business travel and
improving employee engagement
underway, absolute
emissions reduced
by 2%
• Reduce carbon emissions in the UK
by 15% (2012 baseline) by 2015.
• Data streams to capture greenhouse gas
emissions for Group.
• Continue to improve waste management
in the UK in relation to the whole waste
hierarchy, not simply recycling
• Training delivered and
improved mapping of
waste streams
• Ongoing
• Encouraging reduction in waste, increased
re-use of assets, and enhanced
segregation of waste streams for recycling.
36 QinetiQ Group plc Annual Report and Accounts 2013
The emissions data in the table below shows UK emissions for 2013.
Our Australia business reported 333 tonnes CO2e from electricity use.
UK Emissions (ktonnes CO2e)
Scope 1 – gas1
Scope 1 – oil
Scope 1 – travel2
Scope 2 – electricity
Scope 3 – travel3
Total emissions
2013
9.51
5.06
5.69
44.19
5.40
69.85
2012
8.22
5.61
5.45
45.57
6.43
71.29
1 Gas usage up due to adverse weather conditions.
2 Travel includes land vehicles and aircraft.
3 Travel includes flights and cars but excludes trains and ferries.
UK waste management
We continue to focus on improving waste management through
training, mapping waste streams, improving data collection
processes and encouraging re-use of assets. Total waste this year
was 4,904 tonnes, including 211 tonnes of hazardous waste.
This represents an increase on last year’s total due to significant
footprint rationalisation and building works, combined with the
improved capture/robustness of data. There has been a significant
diversion of waste from landfill (approximately 85%). The aim for
2014 is to continue encouraging reduction in waste, increased
re-use of assets, and enhanced segregation of waste-streams
for recycling.
Sustainable procurement
As a key supplier, our active engagement with the MOD on
sustainability reflects our commitment to sustainable procurement.
Investment in our community
Our commitment to enthusing and attracting the next generation
of scientists and engineers is reflected in our work undertaken
on STEM (Science, Technology, Engineering and Maths) Outreach.
This programme plays to the strengths of a highly skilled technical
workforce and helps young people discover new opportunities for
learning and for their future. In the UK our employee engagement
scores on ‘giving something back’ rose by 6% due to the maturing
of our volunteering programme, regularly celebrating the success
of our community activities and getting employees actively involved
in choosing our new UK charity partners. In the US we support
educational enrichment through the National Guard Youth
Foundation, World Affairs Council, Naval Historical Foundation
and various robotics education programmes. There is also
a particular focus on supporting wounded military and their
families by contributions to a range of specialist organisations.
Across the Group we have corporately donated £180,492 this year
to registered charities. Of this amount £31,314 was donated to our
UK corporate charities, £72,942 for education, £17,067 for military
charities (other than the corporately chosen military charity) and
£59,169 for diverse other causes. In addition employees have raised
£30,184 for our UK corporate charities, chosen in April 2012 (RNLI,
Cancer Research UK and Help for Heroes) for which they received
matched funding and £31,633 through UK payroll giving.
For detailed information on Corporate
Responsibility and Sustainability visit:
www.QinetiQ.com/responsibility
Case study : Powerboat Challenge
The QinetiQ Schools’ Powerboat Challenge provides pupils
with an exciting and valuable opportunity to understand the
importance of STEM within the marine industry. The annual
competition is held in the Ocean Basin at Haslar by the Maritime
Division. In 2012, 13 teams from ten schools in Hampshire and
Dorset designed, built and raced their own model powerboats.
The pupils were given a design brief by QinetiQ, along with some
of the equipment and parts they need to build the boats and
were supported by QinetiQ scientists and engineers throughout
the project. They then raced their boats against each other and
were judged by a panel of our experts. Commenting on the event
Sarah Kenny, MD Maritime, said: “This event was about
encouraging more youngsters to take up science subjects and
become the marine engineers of the future. There’s a national
skills shortage in engineering and part of QinetiQ’s commitment
is to bring local schools here.”
Sarah Kenny, MD Maritime, at the Powerboat Challenge.
QinetiQ Group plc Annual Report and Accounts 2013 37
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationBusiness review Corporate governance
Board of Directors
Mark Elliott
Non-executive
Chairman
(64)
David Mellors
Chief Financial Officer
(44)
Colin Balmer
Non-executive Director
(66)
Appointment to the Board
Appointed Non-executive Chairman in March 2010;
Non-executive Director between June 2009 and
February 2010.
Committee memberships
• Nominations Committee (Chairman)
• Remuneration Committee
• Risk & CSR Committee
Skills and experience
Mark is a Non-executive Director of G4S plc. He was a
Non-executive Director of Reed Elsevier Group plc (and
also Chairman of its Remuneration Committee) and
Reed Elsevier NV from April 2003 until April 2013.
He was previously General Manager of IBM Europe,
Middle East and Africa and was a member of IBM’s
Worldwide Management Council.
The Board considers that Mark’s extensive experience
in the technology services sector, in the US and Europe,
together with his exposure to a variety of industry
sectors on the boards of FTSE listed companies, is a
valuable asset to the Group in terms of leadership and
of addressing the strategic issues that affect the Group.
Appointment to the Board
Appointed Chief Financial Officer in August 2008.
Committee memberships
• Risk & CSR Committee
• Security Committee
Skills and experience
David was previously deputy Chief Financial Officer
of Logica plc. He was also Chief Financial Officer of
Logica’s international division, covering operations
in North America, Australia, the Middle East and Asia
and, before that, was the Group Financial Controller.
His earlier experience includes various roles with
CMG plc, Rio Tinto plc and Price Waterhouse.
He is a member of the Institute of Chartered
Accountants in England & Wales.
Appointment to the Board
Appointed Non-executive Director in February 2003.
Committee memberships
• Audit Committee
• Nominations Committee
• Remuneration Committee
• Risk & CSR Committee (Chairman)
• Security Committee (Chairman)
Skills and experience
Colin is currently a member of the Board of the Royal
Mint and Chair of its Audit Committee. He has held
senior posts in government, including Managing
Director of the Cabinet Office from 2003 until his
retirement in 2006. He was previously Finance Director
of the MOD and was responsible for QinetiQ’s
privatisation.
Notwithstanding that Colin has served on the Board
for more than nine years, the Board considers that
he remains independent in character and judgement.
Further, the Board considers that Colin’s extensive
knowledge of the development of QinetiQ, and his
in-depth understanding of the working of government,
continue to provide the Board with a unique insight
into the issues government faces in delivering its
procurement objectives.
Appointment to the Board
Appointed Chief Executive Officer in November 2009.
Committee memberships
• Nominations Committee
• Risk & CSR Committee
• Security Committee
Skills and experience
Leo was Chief Executive Officer of De La Rue plc between
2005 and 2009. He was previously Chief Operating
Officer of Invensys plc’s Production Management
Division and before that spent 16 years with Honeywell
Inc. in a variety of senior management roles in the USA,
Europe, the Middle East and Africa. He was formerly
a Non-executive Director of Tomkins plc.
Leo Quinn
Chief Executive Officer
(56)
Michael Harper
Deputy Chairman and
Senior Independent
Non-executive Director
(68)
Noreen Doyle
Non-executive Director
(64)
Appointment to the Board
Appointed Non-executive Director in November 2011.
Appointed Deputy Chairman and Senior Independent
Non-executive Director in February 2012.
Committee memberships
• Audit Committee
• Nominations Committee
• Remuneration Committee
• Risk & CSR Committee
• Security Committee
Skills and experience
Michael was appointed Chairman of BBA Aviation plc in
June 2007, having joined the Board in February 2005.
He is also Chairman of Ricardo plc. He was Chairman of
Vitec Group plc from 2004 to 2012 and was previously
a Director of Williams plc where, at the time of the
demerger in 2000, he became Chairman of Kidde plc.
The Board considers that Michael’s wealth of
operational and corporate experience enables him
to make a significant contribution to the Board.
Appointment to the Board
Appointed Non-executive Director in October 2005.
Committee memberships
• Audit Committee
• Nominations Committee
• Remuneration Committee (Chairman)
• Risk & CSR Committee
Skills and experience
Noreen is a member of the Board of Credit Suisse
Group (Zurich) and Chair of its UK regulated
subsidiaries. She is a Non-executive Director of
Newmont Mining Corporation (Denver), where she
is Chair of the Audit Committee. From 2005 through
2012 she served on the Board of Rexam plc, where she
was Chair of the Finance Committee. She was First Vice
President of the European Bank for Reconstruction
and Development (EBRD). Before EBRD, she worked
in corporate finance and leveraged financing at
Bankers Trust Company (now Deutsche Bank).
The Board considers that Noreen’s extensive
international business experience, particularly in
corporate finance, risk management and banking,
is of significant benefit to the Board.
38 QinetiQ Group plc Annual Report and Accounts 2013
Board statistics
Board experience
75% Finance
75% Operational
75% International
75% Other PLC
Board composition
25% Executive
75% Non-executive
87.5% Male
12.5% Female
Board tenure
12.5% 0-2 years
12.5% 2-3 years
50% 3-5 years
25% 5-11 years
Appointment to the Board
Appointed Non-executive Director in April 2010.
Committee memberships
• Audit Committee
• Remuneration Committee
• Risk & CSR Committee
• Nominations Committee
• Security Committee
Skills and experience
Sir James commanded the aircraft carrier HMS
Invincible and three other ships and submarines during
a 37-year career in the Royal Navy that culminated
in his appointment as Commander-in-Chief Fleet.
Between operational duties he held several positions
at the MOD and gained cross-Whitehall experience
while on secondment to HM Treasury.
The Board considers that Sir James’ expertise in the
government contracting domain, particularly with the
UK MOD and HM Treasury, is highly beneficial in the
context of QinetiQ’s government-sourced operations.
Appointment to the Board
Appointed Non-executive Director in October 2010.
Committee memberships
• Audit Committee (Chairman)
• Nominations Committee
• Remuneration Committee
• Risk & CSR Committee
• Security Committee
Skills and experience
Paul is currently a Non-executive Director and Chair of
the Audit & Risk Committee at Royal Mail Holdings plc.
He is also a Director of Naked Energy Ltd and Knowledge
Peers plc and a Trustee of Pilotlight. He was previously
Senior Independent Director of Taylor Nelson Sofres plc,
a Non-executive Director of Thomson SA and Tangent
Communications plc, and has also been Group Finance
Director of Carlton Communications plc and LASMO plc.
The Board considers that Paul brings a broad range
of experience in finance and corporate governance
from a cross-section of industries, all of which
leverage technology.
Appointment
Appointed as Company Secretary and Group General
Counsel in January 2011.
Skills and experience
Jon joined QinetiQ from Chloride Group plc where he
held a similar role. He has a background in legal private
practice as well as general counsel and company
secretarial experience in other FTSE250 companies.
Admiral Sir James
Burnell-Nugent
Non-executive Director
(63)
Paul Murray
Non-executive Director
(51)
Jon Messent
Company Secretary and
Group General Counsel
(49)
QinetiQ Group plc Annual Report and Accounts 2013 39
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance
Corporate governance
Corporate governance report
Mark Elliott
Chairman
Ensuring effective governance processes and systems of control
within the Company continues to be a priority of the Board to
ensure the optimum stewardship of the business and to provide
a solid basis on which to build value and promote the long-term
success of the Company.
In my role as Chairman of the Board, I am pleased to report that
the Board continues to demonstrate the range of expertise and
engagement to challenge constructively and help develop
strategy effectively.
During the year, the terms of reference of the Board Committees
were reviewed and updated where necessary, succession
planning at both Executive Director and Non-executive Director
level was reviewed and the skills matrix of the Board updated,
to identify areas for development and to ensure that future
appointments to the Board complement and enhance the
existing capabilities. Diversity continues to be a key factor when
considering the composition of the Board, not only in terms of
gender but also in terms of background and experience.
As a Board, we are mindful of our duties as Directors, particularly
in terms of strategy and leadership, and we continue to maintain
a dialogue with our key stakeholders on matters that are
important to them.
During the year, the Company consulted with its key investors in
respect of issues such as executive remuneration and responses
to market conditions; the Board met with business leaders in
both the US and the UK to present the strategy and general
direction of the Group as a whole; the Audit Committee
maintained an ongoing dialogue with the external auditors
and the internal audit function; non-financial risk oversight
was transferred to the Risk & CSR Committee; and the full Board
was available at the 2012 Annual General Meeting to meet with
individual shareholders.
The governance process will continue to evolve to allow for
changes in regulation and best practice and to continue to
promote the principles of good governance within the Company.
Mark Elliott
Chairman
40 QinetiQ Group plc Annual Report and Accounts 2013
The Board considers that QinetiQ has complied with the provisions
of the 2010 version of the UK Corporate Governance Code (the ‘UK
Code’) throughout the last financial year. In addition, during the year
QinetiQ took steps to comply with the changes contained in the
2012 version of the Code within the required timeframe. Both
versions of the UK Code and associated guidance are publicly
available on the Corporate Governance page of the Financial
Reporting Council’s website, www.frc.org.uk/corporate. This report
provides details of the way the principles of the UK Code have been
applied during the year.
The Board – governance, processes and systems:
Board objectives
To demonstrate the highest standards of corporate governance
in accordance with the UK Code to:
• Ensure the continuing evolution and implementation of the
Group’s strategy to deliver value to all stakeholders: customers,
employees and shareholders;
• Develop challenging objectives for the business and monitor
management performance against those goals;
• Provide a framework of effective controls to assess and manage
risks, with clear expectations of conduct to the highest standards
of ethics;
• Provide support and constructive challenges to the Chief
Executive Officer to promote the Group’s success;
• Demonstrate leadership in management systems around health,
safety and environment; and
• Manage succession planning for the Board and the Group’s
executive management.
Composition of the Board
Details of the Board of Directors are on pages 38-39. The Board
currently has eight members: the Non-executive Chairman; five
other Non-executive Directors; and two Executive Directors – the
Chief Executive Officer (CEO) and the Chief Financial Officer (CFO).
There have been no changes to the Board during the year.
Non-executive Chairman
Non-executive Directors
Executive Directors
Total
1
5
2
8
Mark Elliott has been the Non-executive Chairman of QinetiQ since
1 March 2010, having first joined the Board as a Non-executive
Director on 1 June 2009.
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 that they bring to their duties, which prevents any individual
or small group from dominating its decision-making.
The Board has due regard to the benefits of diversity (including
gender diversity) when considering its composition. It considers
that the skills and experience of its individual members, particularly
in the areas of UK/US defence and security, the commercialisation
of innovative technologies, corporate finance, mergers and
acquisitions, and risk management, have been fundamental in the
pursuit of QinetiQ’s strategic initiatives (as described in the Chief
Executive Officer’s statement on pages 5-11 of this report) in the
past year. In addition, the quoted company experience of members
of the Board in a variety of industry sectors and international markets
has also been invaluable to the Group as it seeks to consolidate its
position in its core markets and geographic territories.
Roles and responsibilities
The Board of Directors:
• is responsible for overseeing the Executive Directors’
management of operations and, in this capacity, determines
the Group’s strategic and investment policies;
• monitors the performance of the Group’s senior management
team and organises its business to have regular interaction with
key members of senior management; and
• is responsible for overseeing the management of the business
of the Group.
Its powers are subject to the Articles of Association and any
applicable legislation and regulation.
Chairman and Chief Executive Officer
The roles of Chairman and CEO are separate, and the Board has
clearly articulated their responsibilities in writing.
The Chairman, Mark Elliott
• is responsible for the effective operation of the Board; and
• is responsible for ensuring that all Directors are enabled and
encouraged to play their full part in its activities.
The CEO, Leo Quinn
• is responsible to the Board for directing and promoting the
profitable operation and development of the Group, consistent
with enhancing long-term stakeholder value.
This includes:
– the day-to-day management of the Group;
– formulating, communicating and executing Group strategy; and
– the implementation of Board policies.
Senior Independent Director
The Senior Independent Non-executive Director is Michael Harper.
Michael is also the Deputy Chairman of the Board.
The Senior Independent Director, Michael Harper:
• serves as an additional point of contact for shareholders should
they feel that their concerns are not being addressed through
the normal channels; and
• is 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.
Independence of Non-executive Directors
Of the current Directors of the Company, the Board considers all the
Non-executive Directors 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. Notwithstanding that Colin Balmer has served on the
Board for more than nine years, the Board considers that he remains
independent in character and judgement and the Board has found
no information or circumstances to lead it to conclude otherwise.
As detailed on page 38, the Board views Colin’s considerable
knowledge of the history of QinetiQ, and his experience of working
in government, as highly beneficial to the Board as a whole. Colin is
assisting with the search for a new Non-Executive director to refresh
the Board membership, as detailed in the section on the
Nominations Committee on page 46. The Board considers that more
than half its members were independent Non-executive Directors
throughout the last financial year.
Performance of the Board
In accordance with the UK Code, QinetiQ continues each year
to evaluate the performance of the Board and its Committees.
An external evaluation of the Board’s effectiveness was carried out
by Independent Audit Limited in the year ended 31 March 2012 and
reported in that year’s annual report and accounts. During the year,
the following progress was made against the actions arising from
that external review:
• With regard to risk strategy and the oversight of risk
management, the Compliance Committee has evolved into a Risk
& CSR Committee with an increased focus on reviewing the
Group’s risk appetite and overseeing the management of
non-financial risks;
• Non-executive Directors are provided with opportunities to meet
members of senior management and site visits are organised on
request;
• The manner in which information is presented to the Board has
been revised to provide greater clarity and to identify the actions
required; and
• Closer links continue to be fostered with the Board of the US
business to improve oversight of matters specific to that business.
In addition to considering progress against the external review, the
following evaluations took place during the year:
Board Effectiveness questionnaire: A Board Effectiveness
questionnaire was circulated to each member of the Board for
completion and the results evaluated by the Chairman and
considered at the May Board meeting. The questionnaire covered
the following areas:
• The role of the Board and its skills mix, including background,
knowledge, experience and diversity;
• The clarity of the Board decision-making process and information
provided to the Board;
• The assessment of Risk Appetite and the oversight of Group risks;
and
• The level of engagement with management and other
stakeholders.
QinetiQ Group plc Annual Report and Accounts 2013 41
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Individual performance reviews: The Chairman carried out a review
of the performance of the Non-executive Directors and the
Executive Directors, and the Senior Independent Non-executive
Director carried out a review of the performance of the Chairman.
In carrying out the reviews, feedback was obtained from fellow
directors, the Company Secretary and senior management.
The overall conclusion of these reviews was that the Board
continues to be effective in its fulfilment of its governance
responsibilities and that the actions agreed following the previous
year’s external evaluation were being embedded in the Board
processes and would continue to evolve and be reviewed as part
of a process of continuous improvement.
Directors’ induction, ongoing training and information
All newly-appointed Directors take part in an induction programme
which is tailored to meet their specific needs in relation to
information on the Group. The induction programme includes an
induction pack, which is refreshed to ensure that it contains the
most up-to-date information available. In addition, a series
of visits to Group sites, giving the opportunity to meet the senior
management, is provided to new Directors to enable them to gain
a full understanding of the business. All Directors are encouraged
to visit QinetiQ’s principal sites, and to meet a wide cross-section
of employees (including members of the senior management team).
Training is also available on key business issues or developments
in policy, regulation or legislation on an ‘as needed’ basis. The
Company provides business-wide computer-based training for
employees and the Board in relation to compliance with its business
ethics policies and practices.
As part of the corporate planning process, the Board has the
opportunity to question the Business Managing Directors and the
Executive Directors on the formulation of the corporate plan at
Division level and the plan’s impact on Group strategy.
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.
Re-election of Directors
Rules concerning the appointment and replacement of Directors of
the Company are contained in the Articles of Association. Changes
to the Articles must be submitted to shareholders for approval.
According to the Articles of Association, all Directors are subject
to election by shareholders at the first Annual General Meeting
(AGM) following their appointment, and to re-election thereafter
at intervals of no more than three years. In line with best practice
reflected in the UK Code, however, the Company requires each
serving member of the Board to be put forward for election or
re-election on an annual basis at each AGM.
Board meetings and attendance
The Board has regular scheduled meetings. Seven scheduled Board
meetings and one Board meeting via telephone conference were
held in the last financial year. Members of the Board were also
invited to attend a dinner on the occasion of each scheduled Board
meeting, to assist with the process of relationship building and
to ensure that key strategic initiatives were discussed thoroughly.
During the year, the Chairman and the Non-executive Directors
met on four occasions without Executive Directors present.
The table below shows the number of meetings of the Board
and its principal committees held during the last financial year,
and individual Directors’ attendance.
Matters reserved to the Board
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
Executive Directors and other layers of management in the business,
and QinetiQ’s business ethics, risk management, and health, safety
and environmental processes.
The Board devotes one entire meeting each year to consider
strategy and planning issues that have an impact on the Group,
from which the corporate plan is generated. It is also regularly
kept up to date on strategic issues throughout the year.
The Board has a clearly articulated set of matters which are
specifically reserved to it for consideration. These include:
• reviewing the annual budgets;
• raising indebtedness;
• granting security over Group assets;
• approving Group strategy and the corporate plan;
• approving the annual and interim report and accounts;
• approving significant investment, bid, acquisition and divestment
transactions;
• approving human resources policies (including pension
arrangements);
• reviewing material litigation; and
• monitoring the overall system of internal controls, including
risk management.
Attendance at meetings of the Board and its Committees – April 2012 to March 2013*
Members
Mark Elliott
Colin Balmer
Admiral Sir James Burnell-Nugent
Noreen Doyle
Michael Harper
David Mellors
Paul Murray
Leo Quinn
Board
8/8
7/8
8/8
8/8
8/8
8/8
8/8
8/8
* Any absences from meetings were owing to illness or travel difficulties.
42 QinetiQ Group plc Annual Report and Accounts 2013
Audit
5/5
4/5
5/5
5/5
5/5
–
5/5
–
Committee
Nominations
4/4
3/4
4/4
4/4
4/4
–
4/4
4/4
Remuneration
6/6
5/6
6/6
5/6
6/6
–
6/6
–
Risk & CSR
5/5
5/5
5/5
4/5
5/5
5/5
5/5
5/5
Operation of the Board
The Board receives a written report from the CEO and CFO, 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 that affect
the Group.
The CEO’s and CFO’s Executive report addresses the key strategic
initiatives which have had an impact on the Group since the
previous Board meeting, with particular focus on the progress
of each of the businesses. Other key areas of focus include health,
safety and environmental matters; employee and organisational
issues; corporate responsibility; the status of key account
management/customer relationship initiatives; the pipeline of
potential bids, acquisitions, disposals and investments; and the
post-acquisition performance of recently acquired businesses.
The Board also receives updates from key functional areas on an ‘as
needed’ basis, on issues such as human resources, treasury, corporate
responsibility, real estate, security, trade controls and pensions.
Key issues considered by the Board in the past year include:
• succession planning;
• strategy;
• the proxy regime in respect of the US business;
• liaison with the MOD in respect of specific changes to the
Company’s UK defined benefit pension scheme; and
• the review of the LTPA contract.
Conflicts of interest
The Company requires Directors to disclose proposed outside
business interests before they are entered into. This enables prior
assessment of any conflict, or potential conflict, of interest and any
impact on time commitment. An annual review of all external
interests is carried out by the Board.
Directors’ responsibilities
Statements explaining the Directors’ responsibilities for preparing
the Group’s Annual Report and financial statements and the
auditor’s responsibilities for reporting on those statements are
on pages 64-65.
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 on page 58. Copies of Directors’
service contracts and letters of appointment will be available for
inspection at the Company’s Annual General Meeting.
Other management committees
During the year, responsibility for the day-to-day management of
the Group’s activities, with the exception of QinetiQ’s US operations
(which are managed through the Proxy Board, as described in the
section on page 45 headed ‘Management and control of US
subsidiaries’), was conducted through the QinetiQ Executive Team
(QET). The QET comprised the Group CEO, Group CFO, functional
directors and the Sector MDs of each of the three UK business
divisions. The QET met on a monthly basis, and received weekly
updates on key operational issues by way of pre-scheduled
conference calls. The activities of the QET were supplemented
by the QinetiQ North America (QNA) Board and its Executive
Management Team. Since the end of the year, the QET has been
re-designated as an Operating Committee, with a specific focus on
the achievement of the Group’s strategic goals in respect of growth
and operational excellence. The Committee membership has been
adjusted to comprise the Group CEO, Group CFO, UK Divisional MDs,
HR, Business Development and Operations Directors.
Board Committees
The Board has established five principal Committees: the Audit
Committee, the Nominations Committee, the Remuneration
Committee, the Risk & CSR Committee and the Security Committee.
Each operates within written terms of reference approved by the
Board, details of which are set out in the Investor Relations section
of the website, www.QinetiQ.com.
Where a Committee is not attended by the full Board, details
of the key issues discussed, and decisions taken, are circulated to
all members of the Board after the relevant Committee meeting.
Details of each of these Committees are summarised on pages
46-49. The composition of the Committee memberships was
reviewed by the Board at its meeting in November 2012. It was
agreed to continue with all-Director membership of Committees,
other than where prohibited by the UK Code or statutory
requirements. Details of each Committee member’s attendance at
Committee meetings are set out in the table on page 42.
Risk management and internal controls
The Board is ultimately responsible for the Group’s system of
internal control and for reviewing its effectiveness in safeguarding
shareholders’ interests and the Company’s assets. The system is
designed to manage and mitigate, 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.
Identification and review of risks
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 the
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.
The Board, the Audit Committee and the Risk & CSR Committee
regularly review significant risks to the business.
Self-certification process
An annual process of hierarchical self-certification, which provides
a documented and auditable trail of accountability for the operation
of the system of internal control, has been established. This
self-certification process is informed by a rigorous and structured
self-assessment that addresses compliance with Company policy.
It 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.
QinetiQ Group plc Annual Report and Accounts 2013 43
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Internal control
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 and the UK executives are involved in the
process. A similar process is undertaken within the Company’s QNA
business, thereby providing assurance on the adequacy and efficacy
of internal controls in this business.
The risk management process and the system of internal control
necessary to manage risks are managed by the Audit Committee
(financial risks) and the Risk & CSR Committee (non-financial risks)
and each Committee presents its findings to the Board. The internal
audit function independently reviews the risk identification and
control processes implemented by management and reports
to the respective Committee.
The Audit Committee and the Risk & CSR Committee also review the
assurance process, ensuring that an appropriate mix of techniques
is used to obtain the level of assurance required by the Board.
Each Committee presents its findings to the Board on a regular basis.
The Board reviewed the effectiveness of the system of internal
control that was in operation during the financial year ended
31 March 2013. The Board also routinely challenges management
to ensure that the systems of internal control are constantly
improving to maintain their effectiveness.
The internal control and risk management systems described above,
as well as finance policy and codes of practice, apply to the
Company’s process of financial reporting and the preparation of
consolidated accounts. A structured approach to the review and
challenge of financial information is also an essential element
of the process.
Anti-bribery and the prevention of corruption
QinetiQ has internal procedures in place that are designed to
ensure compliance with the UK Bribery Act, and other international
regulations and best practice relating to the prevention of corruption,
which are applicable to its business. Compliance is managed through
a risk-based approach, using a combination of internal expertise and
external, internationally recognised organisations, such as TRACE,
international law firms and other expert service providers, who
conduct anti-corruption due diligence reviews of all third-party
commercial intermediaries used by QinetiQ’s businesses.
Going concern
The Group’s activities, combined with the factors that are likely to
affect its future development and performance, are set out in the
CEO’s Statement on pages 5-11. The CFO’s Review on pages 24-29
sets out details of the financial position of the Group, the cash flows,
committed borrowing facilities, liquidity and the Group’s policies
and processes for managing its capital and financial risks. Note 25
to the financial statements also provides details of the Group’s
hedging activities, financial instruments, and its exposure to
liquidity and credit risk.
The market conditions in which the Group operates have been,
and are expected to continue to be, challenging as spending from
the Group’s key customers in its primary markets in the UK and
US remains under pressure. Despite these challenges, the Directors
believe that the Group is well positioned to manage its overall
business risks successfully.
After making the appropriate enquiries, including a review of the
latest two-year budget, the Directors have a reasonable expectation
that the Group has adequate resources to continue in operational
existence for the foreseeable future.
Consequently, the Annual Report and Accounts have been prepared
on a going concern basis.
Communication with shareholders
The Company attaches significant importance to the effectiveness
of its communications with shareholders. During the last financial
year, the Company maintained regular dialogue with institutional
shareholders and the financial community, which included
presentations of the full-year and half-year results, investor ‘road
shows’ held in the UK and US, and regular meetings with major
shareholders and industry analysts. In addition, each member of the
Board attended the Company’s Annual General Meeting in July 2012
and was available to take questions.
The Chairman proactively offers to attend meetings with key
shareholders on a regular basis. In addition, the Chairman, the
Senior Independent Director and Non-executive Directors routinely
attend key financial calendar events and make themselves available
to meet shareholders as required. All shareholders and potential
shareholders can gain access to the Annual Report, presentations
to investors and other significant information about QinetiQ in the
‘Investors’ section of the Company’s website, www.QinetiQ.com.
Holders of ordinary shares have the opportunity to attend the
Company’s Annual General Meeting (AGM) and to ask questions.
The Chairs of the Audit, Remuneration, Nominations, Risk & CSR
and Security Committees are available at that meeting to answer
any questions on the work of the Committees. The Company
confirms that it will send the Notice of Meeting 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 in the ’Investors’ 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 Group’s website.
Responsibility for maintaining regular communications with
shareholders rests with the CEO and the CFO, assisted by an investor
relations function. The Board is informed on a regular basis of key
shareholder issues, including share price performance, the
composition of the shareholder register and City expectations.
44 QinetiQ Group plc Annual Report and Accounts 2013
The Boards and Board Committees of each of the Company and
QNA meet on a regular basis and review and discuss the important
commercial and governance activities taking place within QNA.
Group policies are shared with QNA and, to the extent they are
suitable in QNA’s security, market and operational circumstances,
are applicable within QNA, subject always to the requirement that
QNA must conduct its business affairs without external control or
influence, and to the requirements necessary to protect the US
national security interest. In addition, the Company extends its
involvement in QNA’s activities through the conduct of regular
and frequent business meetings and communications at the
CEO, CFO, HR and Legal levels in the interests of transparency
and good governance.
During the coming year, the Company will be looking to continue
to improve the quality of its engagement with shareholders and to
explore with investors any additional practical means by which it can
give effect to the requirements of the Financial Reporting Council’s UK
Stewardship Code for institutional investors, and of the UK Code.
Details of the Company’s share capital, which are required to be
disclosed in accordance with rule 7.2.6 of the FCA’s Disclosure and
Transparency Rules, and the Directors’ powers in relation to issuing
and buying back shares can be found on page 63 in the Other
Statutory Information section of this Annual Report.
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, Inc.
(QNA), a wholly-owned subsidiary of QinetiQ in the US and the
holding company for the substantive part of QinetiQ’s US
operations, and the US DoD, have entered into a proxy agreement
that regulates the management and operation of these companies.
Pursuant to this proxy agreement, QinetiQ has appointed four US
citizens (Peter Marino, Riley Mixson, John Currier and Vince Vitto),
who hold the requisite US security clearances, as proxy holders
to exercise the voting rights in QNA. 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 QNA. The proxy holders have a fiduciary duty, and agree, to
perform their role in the best interests of shareholders (including
the legitimate economic interest), and in a manner consistent
with the national security interests of the US.
QinetiQ Group plc does not have any representation on the boards
of the subsidiaries covered by the proxy agreement, but regularly
attends board meetings. QinetiQ Group plc may not remove the
proxy holders other than for acts of gross negligence or wilful
misconduct or for breach of the proxy agreement (with the consent
of the US Defense Security Service).
In terms of the power to govern, the proxy agreement vests certain
powers solely with the proxy holders and certain powers solely with
QinetiQ. For example, the proxy holders cannot carry out any of the
below without QinetiQ’s express approval:
• sell or dispose of, in any manner, capital assets or the business
of QNA;
• pledge, mortgage or encumber assets of QNA for purposes other
than obtaining working capital or funds for capital improvements;
• merge, consolidate, reorganise or dissolve QNA; and
• file or make any petition under the federal bankruptcy laws or
similar law or statute of any state or any foreign country.
Unlike minority interest holders with protective veto rights, QinetiQ
can unilaterally require the above to be carried out and these are,
therefore, considered to be significant participative features. In
addition, QinetiQ can require the payment of dividends, and the
pay-down of parent company loans, from QNA.
QinetiQ Group plc Annual Report and Accounts 2013 45
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Security Committee
Colin Balmer
Chair
Security Committee
Membership
The Security Committee is chaired by Colin Balmer. The other
Committee members are Admiral Sir James Burnell-Nugent,
Michael Harper, David Mellors, Paul Murray and Leo Quinn.
Main responsibilities
The Committee was established in June 2009 to enable UK nationals
on the Board to consider matters of a UK national security
dimension that have an impact on QinetiQ’s UK business. There
was no requirement for the Committee to meet during the year.
Nominations Committee
Mark Elliott
Chair
Nominations Committee
Membership
The Nominations Committee is chaired by Mark Elliott. The other
Committee members are Colin Balmer, Admiral Sir James Burnell-
Nugent, Noreen Doyle, Michael Harper, Paul Murray and Leo Quinn.
Main responsibilities
The role of the Committee is to ensure that the composition
of the Board and Committees has the optimum balance of skills,
knowledge and experience, and to oversee succession planning for
the Board and senior management. It considers diversity, including
skills mix, international industry experience and gender, when
seeking to appoint a new Director to the Board. The Committee
meets as necessary and when called by its Chair. During the financial
year ended 31 March 2013, the Committee met on four occasions.
Overview
Key areas of focus during the year were:
• the review of the size and composition of the Board and
its Committees;
• the review and updating of the matrix recording the skills and
experience of the current Board; and
• the review of succession planning processes at Executive Director,
Non-executive Director and senior management levels.
46 QinetiQ Group plc Annual Report and Accounts 2013
Board Diversity policy
During the year, the Nominations Committee recommended, and
the Board approved, a Board Diversity Policy. The key statement
and objectives of that policy (the full text of which is available
on the Group’s website) are as follows:
Statement:
• The QinetiQ Board recognises the benefits of diversity. Diversity
of skills, background, knowledge, international and industry
experience, and gender, amongst many other factors, will be
taken into consideration when seeking to appoint a new Director
to the Board. Notwithstanding the foregoing, all Board
appointments will always be made on merit.
Objectives:
• The Board should ensure an appropriate mix of skills
and experience to ensure an optimum Board and
efficient stewardship;
• The Board should ensure that it comprises Directors who are
sufficiently experienced and independent in character and
judgement; and
• The Board aims to increase the proportion of women on the
Board to 25% by 2015. Thereafter, the Board aims to maintain
a minimum Board composition of 25% women, such percentage
to be reviewed annually.
Details of the steps being taken in respect of diversity within the
Group generally can be found in the Corporate Responsibility and
Sustainability Review on pages 34-37.
Succession planning
As a result of the succession planning review, a specification was
prepared of the role and capabilities required to refresh the Board
within the required timescale. The Committee recommended,
and the Board appointed, two executive search firms, The Zygos
Partnership in the UK and Spencer Stuart in the USA, to progress
the search for potential Non-executive Director candidates. Both
firms are signatories to the Voluntary Code of Conduct for Executive
Search Firms, which requires them to ensure that at least 30% of
the candidates are women, and have no other connections with the
Company. As at the date of this report, the search remains ongoing.
Remuneration Committee
Noreen Doyle
Chair
Remuneration Committee
Membership
The Remuneration Committee is chaired by Noreen Doyle. The
Committee sets remuneration and incentives for Executive Directors
and approves and monitors remuneration and incentives for senior
executives of the Group. The other Committee members are Colin
Balmer, Admiral Sir James Burnell-Nugent, Mark Elliott, Michael
Harper and Paul Murray.
Other attendees
The CEO, the CFO, the HR Director and the Group Reward Director
normally attend meetings to provide information and advice.
Overview
The Committee meets as necessary, although normally at least three
times a year. During the financial year ended 31 March 2013, it met
on six occasions.
During the year, the Committee received advice from its appointed
independent advisors, Towers Watson, who also provided market
data and advice to help the Committee determine whether
performance targets had been met. Towers Watson also provided
other consulting services during the year to QinetiQ, but did not
provide advice on executive remuneration matters other than
to the Committee.
The Committee has reviewed the remuneration and rewards of the
Company’s Executive Directors and senior management and has
processes in place to ensure that:
• the level of reward given to the Executive Directors and senior
management is stretching and designed to promote the long-term
success of the Company; and
• remuneration incentives remain consistent with the Company’s
risk management policies and systems.
No Executive Director or employee of QinetiQ is permitted to be
present or participate in the Committee’s discussions about their
own remuneration.
Main responsibilities
The Committee has three primary functions:
• to oversee the sound operation of the Company’s non-financial
risk management systems;
• to monitor non-financial risk exposures, including security, trade
controls, ethics, corporate social responsibility and health,
safety and environment; and
• to monitor adherence to the generic compliance system.
The Committee has an annual calendar of activities and meets
as necessary, although normally not less than four times a year.
During the financial year ended 31 March 2013, the Committee
met on five occasions.
Overview
During the past year, the Committee continued to carry out its
core functions by way of regular reporting in accordance with
its annual calendar. The Committee continued to oversee health,
safety and environment, trade controls, ethics and security
through quarterly reports from the heads of those functions in
the business. A summary of the key focus and activities of the
health, safety and environment and ethics functions is set out
in the Corporate Responsibility and Sustainability Review on
pages 34-37.
During the year, the Committee’s Terms of Reference were reviewed
and updated to be consistent with best practice.
Key areas of focus during the year were:
• the operation of the QNA Proxy Regime;
Further information on the activities of the Remuneration
Committee during the last financial year is set out in the
Remuneration Report on pages 50-51.
Risk & CSR Committee
Colin Balmer
Chair
Risk & CSR Committee
Membership
The Risk & CSR Committee is chaired by Colin Balmer. All of the
other members of the Board are members of the Committee.
The name of the Committee was changed from the Compliance
Committee in 2012 as a result of a review of risk governance
arrangements and the move from the bespoke MOD Compliance
Regime to a generic MOD conflict of interest management system
(the “generic compliance system”) in alignment with that followed
by other defence companies. This change was effected by way of
the amendment of the rights attaching to the Special Share held by
HM Government, following receipt of the requisite MOD approval
and shareholder approval at the 2012 Annual General Meeting.
The Committee’s Terms of Reference were reviewed and updated
in 2012 to take account of the changes.
• the move to the generic MOD compliance system;
• a review of the Company’s risk management processes;
• a review of the Risk Register in accordance with FRC
recommendations;
• a review of the Company’s risk appetite and providing clarity
to executive management on acceptable levels of risk; and
• trials involving human subjects that fall within the scope
of the Helsinki Protocol.
Generic compliance system
The Committee continues to monitor the generic compliance
system, which is designed to give the MOD customer confidence
that QinetiQ is able to provide impartial advice during any
competitive evaluation of a procurement where the Company
wishes to operate on both the ‘buy’ and the ‘supply’ sides.
The aim is to achieve a balance between meeting the needs
of the procurement customers in the MOD (principally Defence
Equipment & Support) and the need to allow QinetiQ the flexibility
to exploit research into the supply chain and pursue its planned
commercial activities, without compromising the defence or
security interests of the UK. Oversight of the operation of the
system is provided by the Committee.
The Board nominates two senior executives to act as Compliance
Implementation Director and Compliance Audit Director.
It receives a bi-annual report on the compliance areas that
it monitors from the internal audit function. The Committee
addresses any issues that would arise if QinetiQ were to fail to
comply with the requirements of the generic compliance system.
No breaches were noted during the year. The Company will
continue with rigorous management of potential conflicts of
interest while ensuring that proportionate governance is
maintained by the Board.
QinetiQ Group plc Annual Report and Accounts 2013 47
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance Corporate governance report continued
Audit Committee
Paul Murray
Chair
Audit Committee
Membership
The Audit Committee is chaired by Paul Murray. The Board considers
him to have recent and relevant financial experience, given his former
roles as Group Finance Director of Carlton Communications plc
and LASMO plc, and through his current role as Audit Committee
Chairman at Royal Mail Holdings plc. The other members of the
Committee are Colin Balmer, Admiral Sir James Burnell-Nugent,
Noreen Doyle and Michael Harper, all of whom the Board considers
to be independent. The members bring extensive experience of
corporate management in senior executive positions to the Company.
Other attendees
The CEO, CFO, Director of Group Finance, Group Internal Audit
Manager, the QinetiQ North America (QNA) Internal Audit Manager
and representatives of the external auditor normally attend Audit
Committee meetings.
Main responsibilities
The Audit Committee monitors the Group’s integrity in financial
reporting and reviews the effectiveness of the financial risk
management framework. The Committee has an annual calendar
of activities, in addition to which it identifies particular areas of
focus during the year.
The Audit Committee meets as necessary and at least four times a
year. During the financial year ended 31 March 2013, the Committee
met on five occasions. The external auditor has the right to request
that a meeting of the Audit Committee be convened. During the
past financial year, and in accordance with its terms of reference,
the Committee met with QinetiQ’s external auditor on three
separate occasions, without Executive Directors present, to discuss
the audit process. The Committee also met with the Group Internal
Audit Manager on two separate occasions, without Executive
Directors present.
Overview
Key areas of focus during the year were:
• QNA risks, issues and mitigating actions;
• effectiveness of internal controls;
• effectiveness of governance arrangements;
• effectiveness of external audit; and
• review of audit process for full-year and half-year results.
QNA risks, issues and mitigating actions
As detailed on page 45 concerning ‘Management and control of US
subsidiaries’, the Company’s holding of its QNA assets is regulated
by a proxy agreement. This arrangement, whose purpose is to
insulate QNA from foreign ownership control or influence, directly
impacts the way in which the Company’s Board is able to gain
comfort on the effectiveness of QNA’s systems of internal control.
48 QinetiQ Group plc Annual Report and Accounts 2013
QNA is subject to external audit, by the same auditor as for the
Company, KPMG. The Company has the opportunity to meet with
QNA’s external auditor independently. Further, the Company is able
to review in detail, with the Chair of the QNA Audit Committee and
the QNA Internal Audit Manager, the audit work within QNA and to
gain an understanding of the systems of internal control, and their
effectiveness.
Review of internal controls
The Audit Committee continually reviews the effectiveness of the
systems of internal control to gain assurance that an effective
control framework is maintained. Reports on the effective operation
of the control framework are received from management and
reviewed by the Committee along with key policies and processes
including whistleblowing arrangements. Regular reports on the
operation of internal controls and risk management processes are
also received from the internal audit function. Particular attention
is given to the timely and effective implementation of remedial
actions, either identified by the business directly, or by internal
audit. The Committee also regularly reviews the effectiveness of
the financial risk management framework, including reviewing key
financial risks and assessing the effectiveness of management’s
remedial action plans. As detailed above, the Committee meets
regularly with the Chair of the QNA Audit Committee and the QNA
Internal Audit Manager to gain assurance on the effectiveness of
the QNA internal controls framework. In addition, the Committee,
on behalf of the Board, undertakes an annual assessment of the
control environment.
Governance reviews
As reported in the Report and Accounts in respect of the year ended
31 March 2012, during that year the Committee undertook
externally-facilitated governance reviews in respect of the
effectiveness of the Committee itself, the internal audit function
and risk governance.
The recommendations from those reviews were progressed by the
Committee Chairman during the past financial year and resulted in
the reconfiguration of the Audit and Compliance Committees into
an Audit Committee and a Risk & CSR Committee, with the former
dealing with financial risks and the latter with non-financial risks,
as well as oversight of the overall risk management process. The
Terms of Reference of both Committees were amended to reflect
the change and the schedules of annual activity updated
accordingly. In addition, changes were made to the structure
and linkage between the Committee and the QNA Audit Committee
to improve regulatory and governance reporting.
During the current year, reviews of the effectiveness of the Audit
Committee and the Internal Audit function were carried out as
follows:
• a review by the Committee Chairman of the recommendations
from the previous year’s externally-facilitated reviews and of the
performance against those recommendations; and
• high-level questions and answers completed by the Non-
executive Directors and reviewed by the Committee Chairman.
The results of the reviews were considered at the May Committee
meeting and the outcome showed that the governance
improvements had been effective and had been embedded in the
business. The implementation of some actions, particularly in relation
to QNA, remain ongoing but in line with agreed action plans.
External Audit effectiveness review
The effectiveness and independence of the external audit process
was assessed by the Internal Audit function during the year.
The review comprised the following elements:
• a questionnaire which was completed by the Non-executive
Directors and senior QinetiQ staff;
• interviews with the KPMG partner and senior managers; and
• interviews with senior business managers.
The results of the review were considered at the March Committee
meeting and it was noted that the external audit function continued
to be both independent and effective. A small number of
recommendations regarding audit scoping and reporting have been
made which will be adopted by KPMG in their future work.
Other areas of review
During the year, the Committee also reviewed the activities of the
tax, insurance and treasury functions, as well as overseeing the level
of KPMG’s audit fees.
The Committee confirms its view that it has received sufficient,
reliable and timely information from management in the last
financial year to enable it to fulfil its responsibilities.
Financial statements
The Committee reviews whether suitable accounting policies have
been adopted, whether management has made appropriate
estimates and judgements and also seeks support from the external
auditors to assess them. The Committee reviewed the following
main issues for the year ended 31 March 2013:
• The basis of and key assumptions relating to management’s
assessment of the carrying value of the goodwill associated with
the US Services business.
• The basis for and judgements made by management in
determining the liabilities recorded for litigation, potential claims
and other disputes.
• The accounting for longer term contracts and, in particular,
the basis of the estimates of forecast costs to complete on
a significant contract.
• The key assumptions and their sources used in accounting for
the Group’s defined benefit retirement obligations.
• The disclosures in the preliminary announcement and annual
report and accounts, in particular those relating to risk, goodwill,
specific overlying items and the operation of the proxy regime
in the US.
• The adoption and application of new accounting standards,
and in particular IAS19 (revised).
Based upon the business assurance process and discussions with
management and the external auditors, the Committee was
satisfied that the disclosures and assumptions were reasonable and
appropriate for a business of the Company’s size and complexity,
that the auditors had fulfilled their responsibilities in scrutinising
the financial statements for any material misstatements and that
the disclosures were satisfactory.
The Audit Committee will consider in 2013 how to adapt, if
necessary, the Group’s procedures to provide advice to the Board
to meet with the requirements of the new 2012 UK Corporate
Governance Code (as applicable to the Group for its next financial
year, ending 31 March 2014, and beyond) on whether the Annual
Report and Accounts, taken as a whole, are fair, balanced and
understandable and provide all information necessary to a
shareholder to assess the Group’s performance, business model
and strategy.
External Auditor independence: Non-audit services
The Company views it as essential that the external auditor is both
independent of any conflict of interest and perceived to be so. To
safeguard auditor independence and objectivity, the Company has a
Code of Practice within its Operating Framework which sets out the
principles for regulating the award of non-audit work to the external
auditor. The policy clearly articulates the non-audit services which are
prohibited, the non-audit services which can be purchased and the
key approval requirements for non-audit work. Pursuant to the policy,
the Committee ensures that any other advisory and/or consulting
services provided by the external auditor do not conflict with its
statutory audit responsibilities and are conducted through entirely
separate working teams; such advisory and/or consulting services
generally only cover regulatory reporting, tax, and mergers and
acquisitions work.
The cost and nature of non-audit work undertaken by the auditor
is regularly reviewed by the Committee during the financial year
and is included at regular intervals in its annual schedule as a
standing item. This process enables the Committee to take
corrective action if it believes that there is a risk of the auditor’s
independence being undermined through the award of such work.
It is also QinetiQ’s policy that no KPMG employee may be
appointed to a senior position within the QinetiQ Group without
the prior approval of the CFO.
Any non-audit services conducted by the auditor require the
consent of the CFO or the Chairman of the Audit Committee
before being initiated; any services exceeding £50,000 in value
require the consent of the Audit Committee as a whole. In the
last financial year, there have not been any non-audit services
conducted by KPMG that exceeded £50,000 in value. The
Committee concluded, therefore, that there had not been any
conflict of interest that might compromise the independence
of KPMG’s audit work.
Auditor reappointment
KPMG has been the auditor of the QinetiQ Group since its
formation in 2001 as the result of a competitive tender, and the
Company’s auditor since its incorporation in 2002. During that
time, there have been periodic changes in audit partners in
accordance with professional and regulatory standards to protect
independence and objectivity. The members of the Audit
Committee have declared themselves satisfied with the
performance of KPMG as the Company’s auditor in the last
financial year. A rotation of KPMG’s lead audit partner was last
undertaken during 2012 and it is anticipated that the new lead
audit partner will continue in this role for a maximum of five years.
Having reviewed the effectiveness and the independence of the
external auditor, the Committee has not considered it necessary
to conduct a tender process for the appointment of its auditor.
The Committee has recommended to the Board that KPMG
be reappointed for the financial year ending 31 March 2014.
In accordance with FRC guidance on transitional arrangements
for the implementation of the 2012 version of the UK Code, it is
the Company’s current intention to align the process for putting
the external audit contract out to tender with the conclusion
of the five-year tenure of the audit partner. The Committee will
continue, however, with the annual review of the performance
of the external auditor and act accordingly.
QinetiQ Group plc Annual Report and Accounts 2013 49
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance Corporate governance report continued
Remuneration report
The key purpose of the Committee is to ensure that the
remuneration structure supports the Company’s strategy
and that we are able to attract, retain and motivate the highest
calibre executives by rewarding the creation of long-term
sustainable value.
Report of the Remuneration Committee
The following Report of the Remuneration Committee has been
approved by the Board for submission to shareholders.
The Report covers the remuneration of Directors and includes
specific disclosures relating to their compensation, shares and other
interests. The report also describes the share-based incentive plans
available to Executive Directors and to other employees. This report
has been prepared and, where appropriate, audited, in accordance
with statutory and regulatory requirements.
Membership and Governance
Members of the Committee are appointed by the Board. The
Committee comprises at least three members (not including the
Group Chairman of the Board), all of whom are independent
non-Executive Directors. The Group Chairman of the Board also
serves on the Committee as an additional member if he or she
was considered independent on appointment as Chairman.
Only members of the Committee have the right to attend
Committee meetings. However, other individuals such as the Chief
Executive, the Group HR Director and external advisers are invited
to attend for all or part of any meeting, as and when appropriate.
The Board appoints the Committee Chairman who is an
independent, non-executive director. In the absence of the
Committee Chairman and/or an appointed deputy, the remaining
members present shall elect one of themselves to chair the meeting
who would qualify under these terms of reference to be appointed
to that position by the Board. The Chairman of the Board is not
permitted to be Chairman of the Committee.
The following Non-executive Directors were members of the
Remuneration Committee for the year ended 31 March 2013:
• Noreen Doyle (Chair)
• Mark Elliott (Group Chairman)
• Colin Balmer
• Admiral Sir James Burnell-Nugent
• Paul Murray
• Michael Harper
The full Terms of Reference of the Committee can be found on the
QinetiQ website (www.QinetiQ.com).
Noreen Doyle
Chair
Remuneration Committee
Introduction
I am pleased to present the Remuneration Committee’s report
on Directors’ compensation for the year to 31 March 2013.
The primary objectives of our remuneration policy are:
• Attracting and retaining top talent;
• Incentivising key executives and managers;
• Ensuring an approach which values the diversity of our workforce;
• Driving superior performance in both the short and long term; and
• Alignment with the interests of shareholders.
Beginning in 2009, QinetiQ has created and implemented a self-help
programme to support its transformation. Following on from the
success of this effort, the Company has begun its transition to the next
stage in its development. Accordingly, with input from its advisors,
Towers Watson, the Remuneration Committee undertook a market
review and developed a revised compensation package which was
endorsed at the Annual General Meeting in July 2012.
• The Value Sharing Plan (VSP) was designed in 2010 for the
Company’s self-help phase and was considered to be a time bound
Long Term Incentive Plan (LTIP). The current phase for the Company
is aimed at resumption of growth, both in the UK and the USA,
despite defence markets forecast to be flat or falling, and therefore
a new Performance Share Plan (PSP) was adopted to align with
this objective.
• To enhance further management’s alignment with shareholder
interests, the mandatory deferral for Executive Directors under
the Deferred Annual Bonus (DAB) plan was increased to 50%
of bonus earned.
• In addition, we match our stretch business objectives to an increased
Annual Cash Bonus plan opportunity for our Executive Directors.
These changes were implemented during the year ended March 2013
after shareholder approval and as we are only part way through the
next phase of our journey we are not proposing to alter our
remuneration policy for the coming financial year. We believe the
plan we have in place supports the business goals and ensures
commensurate levels of remuneration with business performance.
This is demonstrated in reward attributed to the closing financial year
as, despite challenging markets, 2013 has been a strong year which is
reflected in our Executive Directors’ performance-based remuneration.
Since 2010, our total shareholder return has increased by 60% which
demonstrates the significant return on shareholder value.
In line with our overall remuneration policy, the Committee has
determined 3% salary increases for the CEO and CFO which will
be effective July 2013.
To help develop clarity around our Executive Directors’ remuneration,
we have improved the format and flow of our report in line with
best practice.
50 QinetiQ Group plc Annual Report and Accounts 2013
Activities
During the year, the Committee met six times.
The Committee received advice from its appointed independent
advisors, Towers Watson, who also provided market data and
advised on the comparator group’s TSR so that the Committee could
determine whether share plan performance targets had been met.
The Chief Executive, Group HR Director and Group Reward Director
also provided information and advice to the Committee.
The Committee meetings covered a number of topics including:
May
July
• 2012 Annual Cash Bonus plan results
• Revised Performance Share Plan rules prior
to shareholder approval
• Share plan allocations and nominations
• Share plan performance and vesting
November • Government reforms
January
March
• Remuneration Committee programme for the year
• Review of Executive team shareholding
• Reward and retention – all employee
• IAS 19 impact on incentives*
• Executive pay trends
• Executive incentive arrangements
• Changes to the Directors’ Remuneration Report
• Projected share plan vesting
• Executive team salary review
• Executive team Annual Bonus Plan design
• Share plan allocations
* In November 2012, the Committee discussed the impact of accounting changes
on incentives. IAS 19 (revised) ‘Employee benefits’ has been adopted for the year
ended 31 March 2013 and the prior year comparatives have been restated
accordingly, which has had specific impacts on the income statement. The
reporting changes resulted in the baseline financials for the Performance Share
Plan, Deferred Annual Bonus plan and Annual Cash Bonus plan being revised to
accommodate the accounting changes while retaining the incentive structure.
Directors’ remuneration policy
The Committee aims to maintain a remuneration policy, consistent
with the Company’s business strategy and objectives, which:
• attracts, retains and motivates individuals of high calibre;
• is responsive to both Company and personal performance; and
• is competitive within relevant employment markets.
The remuneration policy is built on the following philosophy:
• remuneration packages are structured to support business
strategy and conform to current best practice;
• appropriate rewards are given for meeting specific target
objectives set at the beginning of each year;
• incremental compensation is achieved for attaining stretch
performance targets;
• objectives are measured on metrics designed to be consistent
with sustainable long-term business performance;
• all decisions are made taking into account the diversity of our
people at Director level; and
• to monitor pay and employment conditions elsewhere
in the Group.
The total remuneration levels of the Executive Directors are
reviewed annually by the Committee, taking into account:
• performance of the executive against specific targets set at the
beginning of each year;
• competitive market practice and remuneration levels based
on a consistent competitor group reviewed annually; and
• the general economic environment, particularly in the defence sector.
Each year, the packages are benchmarked independently by our
advisors, Towers Watson, using two comparator groups: one group
is based on company size, measured by market capitalisation and
revenue and the second group is sector specific. The first group
is used as the primary reference with cross checking against the
second group to capture any industry specific features; there are
approximately 20 companies in each group. The lower quartile,
mid-market and upper quartile reference points are captured and
the packages of the CEO and CFO are then benchmarked against
these to ensure they remain competitive at the mid-market level.
The Executive Directors’ remuneration package is made up of the following components:
Base Salary
Annual
Cash
Bonus
Long-Term
Incentives:
PSP & DAB
Benefits:
Pension, Car
Allowance
Remuneration
Package
Performance driven
QinetiQ Group plc Annual Report and Accounts 2013 51
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance Remuneration report continued
The table below shows our overarching policy and framework for Executive Directors’ remuneration. The application of this policy is detailed
within this report.
Element
Base salary
To attract and retain the talent
needed to lead our business.
Purpose
Operation and performance measures
Opportunity
Changes for coming financial year
Aim to pay base salaries in line with the market median against the comparator groups
No changes to policy but details of the salary
detailed above. No minimum or maximum increases to base salary are determined.
increases for the coming financial year can
be found on page 56.
For year ended 31 March 2013, the on-target and maximum bonus opportunities were
There are no changes to policy for the
increased to 75% and 150% of base salary, respectively, to bring QinetiQ’s Executive
coming financial year
Directors in line with the market median.
Executive Directors salaries are reviewed annually, along with those of all
other members of the executive team by the Remuneration Committee
and any change is effective 1 July.
Reference is made to both the internal and external environment.
Specifically to the external environment, reference is made to the market
data provided by the advisors to the Remuneration Committee which
covers all aspects of reward.
Other factors taken into account when considering whether or not to
award a base salary increase:
• The performance of the Executive over the previous twelve months;
• The business environment for the year ahead;
• Potential all employee salary review budget for the coming year;
• All other aspects of remuneration (the reward mix);
• The critical nature of the appointment with respect to delivering
business results;
• An executive’s position in terms of career development, potential
and lifecycle; and
• Retention risk and the ability to replace higher value skills if needed
in the market
Executive Directors participate in an annual bonus plan which
is non-pensionable.
Bonuses are determined by Group performance targets for operating
profit; underlying operating cash flow; and underlying EPS.
• The bonus accrues on a linear basis between entry, target and
maximum performance thresholds
• The relative performance against financial targets for each measure
will trigger a payment which may be adjusted at Remuneration
Committee discretion
The targets are set at the beginning of each year and amended if
applicable to reflect:
• Acquisitions and disposals
• Restructuring costs
• Business structure changes
• Restated corporate allocations
• Board approved budget adjustments
• Final IAS 19 pensions finance cost
A percentage of all annual cash bonuses earned are deferred and paid
in shares under the Deferred Annual Bonus Plan (DAB) as detailed below.
Specifics around the Annual Bonus Plan reward potential for Executive
Directors for the coming year can be found on page 56 and the achievement
of bonus for year ended 31 March 2013 can also be found here.
Annual Cash Bonus
To recognise exceptional and
stretching business performance
with exceptional reward.
Deferred Annual
Bonus Plan (DAB)
– Current
The Deferred Annual Bonus Plan
aligns the interests of executives
with shareholders and contributes
to the retention of key individuals
by ensuring that executives take
part of their annual bonus awards
in shares rather than cash.
Any deferred bonus will be matched by the Company based on underlying
EPS performance up to a maximum match of 100% of the deferred
element. In order for the matching shares to vest, underlying EPS growth,
measured over three years, must exceed defined targets. The matching
element of the DAB begins to vest at 25% once the underlying EPS CAGR
hits 3%, rising on a linear scale until maximising at 100% match for 10%
CAGR in EPS.
Executive Directors have a mandatory deferral of 50% of any bonus earned. For others in
No changes to policy for the coming
the executive team, the mandatory deferral is 20% with an additional voluntary deferral
financial year.
of up to 30% (50% total).
Any deferred bonus will be matched by the Company up to a maximum match of 100%.
52 QinetiQ Group plc Annual Report and Accounts 2013
Element
Base salary
Purpose
Operation and performance measures
Opportunity
To attract and retain the talent
needed to lead our business.
Executive Directors salaries are reviewed annually, along with those of all
other members of the executive team by the Remuneration Committee
Aim to pay base salaries in line with the market median against the comparator groups
detailed above. No minimum or maximum increases to base salary are determined.
Changes for coming financial year
No changes to policy but details of the salary
increases for the coming financial year can
be found on page 56.
Annual Cash Bonus
To recognise exceptional and
Executive Directors participate in an annual bonus plan which
stretching business performance
is non-pensionable.
with exceptional reward.
Bonuses are determined by Group performance targets for operating
For year ended 31 March 2013, the on-target and maximum bonus opportunities were
increased to 75% and 150% of base salary, respectively, to bring QinetiQ’s Executive
Directors in line with the market median.
There are no changes to policy for the
coming financial year
and any change is effective 1 July.
Reference is made to both the internal and external environment.
Specifically to the external environment, reference is made to the market
data provided by the advisors to the Remuneration Committee which
covers all aspects of reward.
award a base salary increase:
Other factors taken into account when considering whether or not to
• The performance of the Executive over the previous twelve months;
• The business environment for the year ahead;
• Potential all employee salary review budget for the coming year;
• All other aspects of remuneration (the reward mix);
• The critical nature of the appointment with respect to delivering
business results;
and lifecycle; and
in the market
• An executive’s position in terms of career development, potential
• Retention risk and the ability to replace higher value skills if needed
profit; underlying operating cash flow; and underlying EPS.
• The bonus accrues on a linear basis between entry, target and
maximum performance thresholds
• The relative performance against financial targets for each measure
will trigger a payment which may be adjusted at Remuneration
The targets are set at the beginning of each year and amended if
Committee discretion
applicable to reflect:
• Acquisitions and disposals
• Restructuring costs
• Business structure changes
• Restated corporate allocations
• Board approved budget adjustments
• Final IAS 19 pensions finance cost
A percentage of all annual cash bonuses earned are deferred and paid
in shares under the Deferred Annual Bonus Plan (DAB) as detailed below.
Specifics around the Annual Bonus Plan reward potential for Executive
Directors for the coming year can be found on page 56 and the achievement
of bonus for year ended 31 March 2013 can also be found here.
Deferred Annual
Bonus Plan (DAB)
– Current
The Deferred Annual Bonus Plan
aligns the interests of executives
Any deferred bonus will be matched by the Company based on underlying
EPS performance up to a maximum match of 100% of the deferred
with shareholders and contributes
element. In order for the matching shares to vest, underlying EPS growth,
Executive Directors have a mandatory deferral of 50% of any bonus earned. For others in
the executive team, the mandatory deferral is 20% with an additional voluntary deferral
of up to 30% (50% total).
No changes to policy for the coming
financial year.
Any deferred bonus will be matched by the Company up to a maximum match of 100%.
to the retention of key individuals
measured over three years, must exceed defined targets. The matching
by ensuring that executives take
element of the DAB begins to vest at 25% once the underlying EPS CAGR
part of their annual bonus awards
hits 3%, rising on a linear scale until maximising at 100% match for 10%
in shares rather than cash.
CAGR in EPS.
QinetiQ Group plc Annual Report and Accounts 2013 53
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Element
Purpose
Operation and performance measures
Opportunity
Changes for coming financial year
Performance Share
Plan (PSP) – Current
Deferred Annual
Bonus Plan (DAB)
– Closed
The objective of QinetiQ’s long-term
incentive programmes for Executive
Directors is to align their rewards
with returns to shareholders by a
focus on increasing shareholder
value over the medium to long term.
The current Long Term Incentive
Plan mechanism for Executive
Directors is the PSP which is also
provided to other senior leaders.
This replaced the Value Sharing
Plan (see below) in July 2012 and
better aligns to our current phase
of resurrecting growth.
No longer in use – unvested awards
from previous years
PSP awards are contingent on meeting pre-determined performance
criteria. Awards are earned based on an equal weighting of relative Total
Shareholder Return (TSR) performance and absolute underlying Earnings
per Share (EPS) growth.
The underlying EPS performance criterion for the PSP awards begin to
vest at 25% once the underlying EPS CAGR hits 3% rising on a linear scale
until maximising at 100% for 10% CAGR.
TSR performance is measured against the constituents of the FTSE 250
excluding Investment Trusts. 30% of the TSR awards begin to vest once
performance reaches the median of the comparator group rising on a
linear basis until performance reaches the upper quartile.
Further detail of the thresholds for both measures can be found on page 56.
For awards made prior to the year ended 31 March 2013, the matching
element of the DAB begins to vest (25%) once the underlying EPS CAGR
exceeds 7%, maximising at 100% match for 15% CAGR in underlying EPS.
Performance Share
Plan (PSP) – Closed
No longer in use – unvested awards
from previous years
Value Sharing Plan
(VSP) – Closed
The VSP was approved by
shareholders in July 2010. It is a
long-term incentive plan which was
designed to reinforce QinetiQ’s
strategy of focusing on shareholder
value creation.
This plan is no longer in use –
unvested awards from previous years.
Awards are earned based on an equal weighting of relative Total
Shareholder Return (TSR) performance and absolute underlying Earnings
per Share (EPS) growth.
The underlying EPS performance criterion for the PSP awards begin to
vest at 25% once the underlying EPS CAGR hits 7% rising on a linear scale
until maximising at 100% for 15% CAGR.
TSR performance is measured against the constituents of a bespoke
sector related peer group of companies. 30% of the TSR awards begin
to vest once performance reaches the median of the comparator group
rising on a linear basis until our performance reaches the upper quartile.
Under the VSP, additional shareholder value created is measured in two
ways:
• Total shareholder return (TSR) – QinetiQ’s TSR out-performance
of the FTSE 250 Index (excluding Investment Trusts). Participants
will be entitled to a vesting of shares under the TSR Element only if
the Committee is also satisfied that this is justified by the underlying
financial performance of the Company over the performance period.
• Underlying Profit Before Tax (PBT) – determined by PBT growth above
the cost of equity of 8.5% a year, adjusted by the dividend yield.
VSP awards granted in May 2011 were weighted equally between the two
performance indicators: 50% Total Shareholder Return (TSR) and 50%
underlying Profit Before Tax (PBT).
For awards made in July 2010, the weighting was 70% PBT and 30% TSR.
Any awards earned will vest 50% after three years and 50% after four years.
Pension and other
benefits
To ensure Executive Directors’ total
remuneration remains attractive
and competitive.
N/A
Personal
shareholding policy
The Board believes that a
meaningful way to align Executives’
interests with those of shareholders
is for the Executives to build up
and retain a personal holding
in QinetiQ shares.
In November 2011 the Committee reviewed the executive shareholding
policy and increased the length of time allowed to accumulate the
required shareholding from four to five years to align with market norms.
The CEO and CFO are required to hold shares in QinetiQ with a value
equivalent to one times their base salary in QinetiQ shares.
54 QinetiQ Group plc Annual Report and Accounts 2013
Individual participants’ award levels are determined by the Committee annually.
No changes to policy for the coming
Executive Directors are eligible to receive awards with a maximum value of 200%
of base salary per annum. However, the intention is to normally set the awards at 150%.
financial year.
Prior to the year ended 31 March 2013, Executive Directors had a mandatory deferral of
This Plan is no longer in use, however, there
40% of any bonus earned and were permitted to voluntarily defer an additional 10%
remain awards unvested.
of their bonus into QinetiQ shares up to a maximum of 50%.
Any deferred bonus will be matched up to a maximum of 100%.
Leo Quinn has outstanding awards under this plan based on his joining arrangements
This Plan is no longer in use, however, there
and details of the vesting which will occur in June 2013 can be found on page 56.
remain awards unvested.
The VSP provided executives with a pre-defined number of shares for each £1m of
This Plan is no longer in use, however, there
Additional Shareholder Value created.
remain awards unvested.
Previous awards issued to Executive Directors are due to vest between July 2013 and
May 2015.
made in July 2010.
More details of the VSP can be found on page 57, together with the vestings of awards
Benefits include a pension or contribution in lieu, car allowance, health insurance, life
No changes to policy for the coming
assurance and membership of the Group’s employee Share Incentive Plan which is open
financial year.
to all UK employees.
The Group’s policy is to offer all UK employees membership in the QinetiQ Pension
Scheme, as described in note 29 to the financial statements. 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 supplement in lieu of pension contributions.
N/A
No changes to policy for the coming
financial year.
Performance Share
Plan (PSP) – Current
The objective of QinetiQ’s long-term
PSP awards are contingent on meeting pre-determined performance
incentive programmes for Executive
criteria. Awards are earned based on an equal weighting of relative Total
Directors is to align their rewards
with returns to shareholders by a
focus on increasing shareholder
value over the medium to long term.
Shareholder Return (TSR) performance and absolute underlying Earnings
per Share (EPS) growth.
The underlying EPS performance criterion for the PSP awards begin to
vest at 25% once the underlying EPS CAGR hits 3% rising on a linear scale
The current Long Term Incentive
until maximising at 100% for 10% CAGR.
Plan mechanism for Executive
Directors is the PSP which is also
provided to other senior leaders.
This replaced the Value Sharing
Plan (see below) in July 2012 and
better aligns to our current phase
of resurrecting growth.
TSR performance is measured against the constituents of the FTSE 250
excluding Investment Trusts. 30% of the TSR awards begin to vest once
performance reaches the median of the comparator group rising on a
linear basis until performance reaches the upper quartile.
Further detail of the thresholds for both measures can be found on page 56.
per Share (EPS) growth.
The underlying EPS performance criterion for the PSP awards begin to
vest at 25% once the underlying EPS CAGR hits 7% rising on a linear scale
until maximising at 100% for 15% CAGR.
TSR performance is measured against the constituents of a bespoke
sector related peer group of companies. 30% of the TSR awards begin
to vest once performance reaches the median of the comparator group
rising on a linear basis until our performance reaches the upper quartile.
• Total shareholder return (TSR) – QinetiQ’s TSR out-performance
of the FTSE 250 Index (excluding Investment Trusts). Participants
will be entitled to a vesting of shares under the TSR Element only if
the Committee is also satisfied that this is justified by the underlying
financial performance of the Company over the performance period.
• Underlying Profit Before Tax (PBT) – determined by PBT growth above
the cost of equity of 8.5% a year, adjusted by the dividend yield.
VSP awards granted in May 2011 were weighted equally between the two
performance indicators: 50% Total Shareholder Return (TSR) and 50%
underlying Profit Before Tax (PBT).
For awards made in July 2010, the weighting was 70% PBT and 30% TSR.
Any awards earned will vest 50% after three years and 50% after four years.
long-term incentive plan which was
designed to reinforce QinetiQ’s
strategy of focusing on shareholder
value creation.
This plan is no longer in use –
unvested awards from previous years.
Pension and other
To ensure Executive Directors’ total
N/A
benefits
remuneration remains attractive
and competitive.
Element
Purpose
Operation and performance measures
Opportunity
Individual participants’ award levels are determined by the Committee annually.
Executive Directors are eligible to receive awards with a maximum value of 200%
of base salary per annum. However, the intention is to normally set the awards at 150%.
Changes for coming financial year
No changes to policy for the coming
financial year.
Deferred Annual
Bonus Plan (DAB)
– Closed
No longer in use – unvested awards
For awards made prior to the year ended 31 March 2013, the matching
from previous years
element of the DAB begins to vest (25%) once the underlying EPS CAGR
exceeds 7%, maximising at 100% match for 15% CAGR in underlying EPS.
Prior to the year ended 31 March 2013, Executive Directors had a mandatory deferral of
40% of any bonus earned and were permitted to voluntarily defer an additional 10%
of their bonus into QinetiQ shares up to a maximum of 50%.
This Plan is no longer in use, however, there
remain awards unvested.
Any deferred bonus will be matched up to a maximum of 100%.
Performance Share
No longer in use – unvested awards
Awards are earned based on an equal weighting of relative Total
Plan (PSP) – Closed
from previous years
Shareholder Return (TSR) performance and absolute underlying Earnings
Leo Quinn has outstanding awards under this plan based on his joining arrangements
and details of the vesting which will occur in June 2013 can be found on page 56.
This Plan is no longer in use, however, there
remain awards unvested.
Value Sharing Plan
The VSP was approved by
Under the VSP, additional shareholder value created is measured in two
(VSP) – Closed
shareholders in July 2010. It is a
ways:
The VSP provided executives with a pre-defined number of shares for each £1m of
Additional Shareholder Value created.
This Plan is no longer in use, however, there
remain awards unvested.
Previous awards issued to Executive Directors are due to vest between July 2013 and
May 2015.
More details of the VSP can be found on page 57, together with the vestings of awards
made in July 2010.
Personal
The Board believes that a
In November 2011 the Committee reviewed the executive shareholding
shareholding policy
meaningful way to align Executives’
policy and increased the length of time allowed to accumulate the
interests with those of shareholders
required shareholding from four to five years to align with market norms.
N/A
is for the Executives to build up
and retain a personal holding
in QinetiQ shares.
The CEO and CFO are required to hold shares in QinetiQ with a value
equivalent to one times their base salary in QinetiQ shares.
No changes to policy for the coming
financial year.
QinetiQ Group plc Annual Report and Accounts 2013 55
Benefits include a pension or contribution in lieu, car allowance, health insurance, life
assurance and membership of the Group’s employee Share Incentive Plan which is open
to all UK employees.
No changes to policy for the coming
financial year.
The Group’s policy is to offer all UK employees membership in the QinetiQ Pension
Scheme, as described in note 29 to the financial statements. 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 supplement in lieu of pension contributions.
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance
Remuneration report continued
Policy Implementation
The following section of this report details the implementation of
the above policies during year ended March 2013 (2013) and how
they will be implemented for the coming financial year (2014).
Performance Share Plan (PSP)
In 2013 the VSP was replaced by the Performance Share Plan (PSP).
The value of the awards made to the Executive Directors in 2013 are
detailed below:
Base salary
Executive
Director
Leo Quinn
David Mellors
2014
£615,322
£391,400
2013
£597,400
£380,000
Based on the market review, salary increases of £11,400 p.a. (3%)
were approved for the CFO and £17,922 (3%) for the CEO
respectively, effective 1 July 2013, based on performance and their
compensation level, vis a vis the market.
Leo Quinn
David Mellors
2014 Award
150% of base salary
150% of base salary
2013 Award
150% of base salary
150% of base salary
The graph below shows the targets against which the performance
will be measured and the vesting mechanics.
TSR Performance vs FTSE 250 (excluding investment trusts)
– 50% of award
Award vesting
Percentile performance
Annual bonus
2014
Executive
Director
Leo Quinn
David Mellors
On Target
payment
75%
75%
Maximum
payment
150%
150%
On Target
payment
75%
75%
Maximum
payment
150%
150%
100%
30%
2013
Actual
bonus
earned
150%
150%
The 2013 and 2014 bonus potential and 2013 actual awards are set
out above, expressed as a percentage of salary.
The annual cash bonus opportunity will remain unchanged for 2014
and the measures used to determine performance will also remain
unchanged. Part of all annual cash bonuses earned are deferred and
paid in shares, as described below.
Both the CFO and CEO were measured against Group targets as
shown below.
Median
Upper quartile
Underlying EPS* Performance – 50% of award
% award vesting
CAGR underlying EPS*
100%
25%
Group Underlying Operating Profit* 60%
Group Underlying Cash Flow*
20%
Underlying Earnings per Share* 20%
In 2013 the stretch financial targets were exceeded and therefore
drove the maximum bonus achievement of 150% of base salary,
which is also captured in the Directors’ Remuneration table later
in this report.
Deferred Annual Bonus (DAB) Plan
In 2013 the CEO deferred 50% and the CFO deferred 40% of
their 2012 annual cash bonus plans. These will vest in three years
(June 2015) and according to future underlying EPS performance
any deferred bonus will be matched, up to 100%, based on the
following underlying EPS* performance:
Underlying EPS* CAGR
over three years:
Less than 3%
3%
Between 3% and 10%
10% or more
Percentage of Shares Vesting
0%
25%
between 25% and 100% (linear)
100%
3%
10%
PSP vesting June 2013
When the CEO was recruited in 2009, the Board agreed to:
• an award of 420,900 shares under the PSP and
• a variation of the existing PSP whereby Leo Quinn would receive
a matching PSP award for his investment of £1m shares of
QinetiQ, which equated to 725,688 shares.
Based on the underlying EPS* and TSR performance criteria in effect
at the time of these grants, a portion of these grants will vest on
1 June 2013.
The actual and required performance for these awards is as detailed
below:
TSR Performance vs comparator Group – 50% of award
Award vesting
Percentile performance
100%
30%
Median
Upper quartile
50% of the 2013 annual cash bonus will be deferred into the DAB
and will be matched on the same performance basis as the above
in three years (June 2016).
The TSR for the performance period was 49.1% against a
comparator group median performance of 56.1% (including delisted
companies) resulting in QinetiQ’s performance being placed at the
42nd percentile. Therefore all of the TSR-related shares will lapse.
* Definitions of underlying measures of performance can be found in the glossary
on page 116.
56 QinetiQ Group plc Annual Report and Accounts 2013
Underlying EPS* Performance – 50% of award
% award vesting
CAGR EPS*
100%
25%
7%
15%
Based on underlying EPS* of 11.2p^ at 31 March 2010 and 18.9p at
31 March 2013, the three year growth of 69% exceeds the maximum
performance threshold and therefore all awards allocated to EPS
performance will vest in full resulting in 573,294 shares vesting
to Leo Quinn on 1 June 2013.
Value Sharing Plan (VSP) – closed
Since the VSP was replaced by the PSP in year ending 31 March
2013, there were no awards made under the VSP during this
financial year. However, shares previously awarded during year
ending 31 March 2011 and 2012 remain unvested.
Leo Quinn, David Mellors and a limited number of senior executives
participated in the VSP, which rewards Executives with a defined
number of shares for every £1m of value created over and above
three-year performance hurdles.
Details of outstanding awards made in previous years under this
plan can be found on page 60 within the table of interests of
Executive Directors under long-term incentive plans.
Performance of awards made in July 2010 has been measured
against Total Shareholder Return and underlying Profit Before Tax
as at 31 March 2013. Details of this performance and the relative
vesting (provided the Executive Director remains in service) in July
2013 and July 2014 are detailed below:
2010 VSP – Total Shareholder Return
30% of the shares were awarded for a TSR measure of growth in market capitalisation plus net equity cash flows
to shareholders over and above the equivalent return from investing in the FTSE 250 index (excluding investment trusts)
Leo Quinn was awarded 600 shares per £1m TSR ASV
David Mellors was awarded 300 shares per £1m TSR ASV
Calculation:
QinetiQ’s TSR over the period was 49.1%
and the TSR for the FTSE 250 Index was
56.4%
Additional shareholder value based on
TSR is therefore:
QinetiQ TSR out-performance of -7.3%
(= 49.1%-56.4%)
Therefore, despite a strong
increase in total shareholder
return, TSR awards will lapse
2010 VSP – Underlying Profit Before Tax
70% of the shares were awarded for growth in value based on PBT (times a fixed multiple, plus net equity cash flows to
shareholders) over and above a hurdle return rate of 8.5% P.A. The fixed multiple was calculated from the average market cap
in the PBT measure of growth in market capitalisation plus net equity cash flows to shareholders over and above the equivalent
return from investing in the FTSE 250 index (excluding investment trusts).
Leo Quinn was awarded 1400 shares per £1m PBT ASV
David Mellors was awarded 700 shares per £1m PBT ASV
Calculation:
QinetiQ’s average market cap over the
three months to 31 March 2010 was
£905.8m
Group adjusted PBT for the financial year
ended 31 March 2010 was £88.2m
Market cap as a (fixed) multiple of PBT
for 2010 VSP awards is therefore 10.27
( = £905.8m / £88.2m), Group adjusted
PBT for the financial year ending 31
March 2013 is £152.1m, and dividends to
shareholders over the three-year period
amount to £36.5m
Additional shareholder value based on
PBT is therefore:
PBT in 2013 of £152.1m multiplied by
the fixed multiple of 10.27 equals a value
of £1,562.07m (= £152.1m x 10.27)
plus £36.5m (paid dividends) equals
£1,598.57m (= £1,562.07m +£36.5m)
less hurdle rate of £1,157.00m
(= £905.8m x (1+8.5%)3)
equals additional shareholder value
for PBT element of award of £441.57m
(= £1,598.51m-£1,157.00m)
Therefore, Leo Quinn will be
eligible for 618,204 (1,400 x
441.57) shares;
David Mellors will be eligible for
309,102 (700 x 441.57) shares
50% of these shares will vest in
July 2013 and the remaining 50%
will vest in July 2014
^ IAS 19 (revised) ‘Employee benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
QinetiQ Group plc Annual Report and Accounts 2013 57
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance Remuneration report continued
Benefits
In 2013, Leo Quinn received contributions of 25% of base salary
(£148,262) in lieu of a pension. David Mellors is a member of the
Company’s DC pension scheme and the Company contributes 20%
of base salary with any contributions above the annual allowance
of £50,000, paid as cash in lieu of pension.
Contributions to the Defined Contribution section of the QinetiQ
Pension Scheme were as follows:
Executive Directors
David Mellors
2013
2012
£50,000
£50,000
The value of other benefits can be found in the Directors
Remuneration table which can be found on page 59.
* Contributions to the DC pension scheme paid by the Company were £38,675
with additional contributions arising through salary sacrifice.
Personal shareholding policy
The CEO achieved his required personal shareholding upon joining
the Company and the CFO reached his 100% base salary
requirement in November 2012.
Directors’ terms and conditions
Service agreements for the Executive and the Non-executive
Directors are reviewed annually and amended as appropriate.
Date of most recent
service agreement
Date of
appointment
Executive Directors
Leo Quinn
David Mellors
Non-executive Directors
Mark Elliott
(Group Chairman)
10 February 2010
June 2009
Colin Balmer
Noreen Doyle
20 January 2006
20 January 2006
February 2003
October 2005
Admiral Sir James
Burnell-Nugent
Paul Murray
Michael Harper
10 April 2010
25 October 2010
22 November 2011
April 2010
October 2010
November 2011
QinetiQ’s policy is that Executive Directors should have service
agreements with a rolling term providing for a maximum of one
year’s notice. Consequently, Executive Directors do not have 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 consider mitigation to reduce the compensation
payable to a departing Executive Director.
Non-executive Directors’ letters of appointment are renewed
on a rolling twelve-month basis subject to reappointment at the
Annual General Meeting. There are no provisions for compensation
on early termination.
Non-executive Directors’ fees
The Group Chairman reviews the fees of the Non-executive
Directors, other than his own, and makes recommendations to
the Board. Non-executive Directors receive additional fees as
agreed by the Board for chairing Board committees to take account
of the additional responsibilities of the role. The Chairman’s fees
are reviewed by the Senior Independent Non-executive Director
who makes recommendations to the Board.
58 QinetiQ Group plc Annual Report and Accounts 2013
The level of fees paid by UK organisations of a similar size and
complexity to QinetiQ is considered in setting the remuneration
policy for Non-executive Directors. The fees are neither performance-
related nor pensionable. Non-executive Directors are not eligible to
participate in bonus, profit sharing or employee share schemes.
A review of Non-executive Director’s fees was carried out in July
2012, using independent market research, which resulted in an
increase of £3,000 per annum in the basic fee for Non-executive
Directors and an increase of £2,000 per annum in the fee for
chairing a committee, as detailed in the following table:
Non-executive Chairman
Basic fee for UK Non-executive Director
Basic fee for US resident Non-executive
Director
Additional fee for chairing a committee
Additional fee to Deputy Chairman/Senior
Independent Non-executive Director
Fees from
1/4/12 to
31/7/12
£225,000
£40,000
$100,000
or £50,000
£7,000
Fees from
1/8/2012
£225,000
£43,000
$100,000
or £50,000
£9,000
£10,000
£10,000
As the Group Chairman is a US resident, the Board has agreed an
accommodation allowance of £75,000 per annum.
Excluding the Group Chairman, an additional fee of $4,000 is
payable to US-resident Non-executive Directors per UK Board
Meeting. UK resident Non-executive Directors are paid an additional
fee of £2,500 per meeting held in the USA.
Employee plans
The Share Incentive Plan is operated in the UK and Australia
in the form of a share purchase award with matching Company
contribution to encourage employee ownership and engagement
in the business.
Executive plans
In addition to the VSP and PSP, the Company operates the following
executive share plans:
• QinetiQ Share Option Scheme (QSOS) – no awards were made
during the year under QSOS but provision exists for annual
awards up to a face value of 300% of salary.
• Stock Award Plan – Restricted Stock Units (RSU) – RSU awards
are used in QinetiQ North America to retain and motivate senior
managers. The RSU awards vest in four equal tranches over a
four-year period. 2013 grants were subject to a vesting schedule
which was partly time-based and partly based on the
achievement of growth targets:
% Organic operating income growth achieved
<5%
5%-12.5%
>12.5%-15%
% RSU Award Vesting
0%
25%-100% (linear)
100%-125% (linear)
Awards are granted based on business performance, balanced with
the need to attract, retain and motivate high-calibre employees.
Executive Directors do not participate in the two plans above.
28 October 2009
20 May 2008
November 2009
August 2008
Management of share-based rewards
The Committee also oversees arrangements for share-based
rewards in respect of managers and the wider workforce.
Dilution limits
In accordance with ABI guidelines, no more than 10% of the
Company’s issued share capital will be used under all of the
Company’s share schemes during a 10-year period. The dilution as
at 31 March 2013 was significantly below this 10% level, and below
5% in respect of executive schemes. In addition, the Board intends
to continue to satisfy a proportion of awards with purchased shares
held in an employee benefit trust.
Five-year Total Shareholder Return
The graph shows the Company’s TSR over the period from 31 March
2008 to 31 March 2013 compared to the FTSE 250 index (excluding
investment trusts) over the same period based on spot values.
The Committee has chosen to demonstrate the Company’s
performance against FTSE 250 (excluding investment trusts)
as it is an appropriate sector comparison within the index in
which the Company is listed.
Qine(cid:17)Q
FTSE250 excluding
Investment Trusts
TSR Summary
200
150
100
50
0
31 M ar 08
31 M ar 09
31 M ar 10
31 M ar 11
30 M ar 12
28 M ar 13
Audited information
Directors’ remuneration
The information about Directors’ remuneration and Directors’ interests on pages 59-61 has been audited.
The table below shows the aggregate remuneration of the Directors for the year ended 31 March 2013.
Executives
Leo Quinn (d)
David Mellors (e)
Total for Executive Directors
Non Executives
Mark Elliott
Colin Balmer
Noreen Doyle
Paul Murray
Admiral Sir James Burnell-Nugent
Michael Harper
Former Directors
Sir David Lees (g)
Admiral Ed Giambastini (h)
David Langstaff (i)
Total for Non-executive Directors
Total – All Directors
Salary/fees
(a)
Bonus
(b)
Other benefits
(c)
Payment in lieu
of pension
Total
2013
Total
2012
£593,050
£377,500
£970,550
£896,100
£570,000
£1,466,100
£225,000
£55,333
£55,333
£55,333
£47,000
£57,000
–
–
–
–
–
–
–
–
–
£494,999
£1,465,549
–
–
–
–
£1,466,100
£52,106
£21,183
£73,289
£75,000
–
–
–
–
–
–
–
–
£75,000
£148,289
£148,262
£36,825
£185,087
£1,689,518
£1,005,508
£2,695,026
£1,495,284
£866,644
£2,361,928
–
–
–
–
–
–
£300,000
£55,333
£55,333
£55,333
£47,000
£57,000
£300,000
£46,167
£52,000
£52,000
£45,000
£18,577
–
–
–
–
£185,087
–
–
–
£569,999
£3,265,025
£55,834
£21,292
£2,115
£592,985
£2,954,913
a) Before adjustments to basic pay for salary sacrifice pensions.
b) The figure shown for bonus is paid in both cash and shares under the DAB.
c) Includes car allowance and health insurance benefits for executives and accommodation for Group Chairman.
d) Salary for Leo Quinn reflects increase from £580,000 to £597,400 effective 1 July 2012.
e) Salary for David Mellors reflects increase from £370,000 to £380,000 effective 1 July 2012.
f) Fees for NEDs increased on 1 August 2013 (page 58).
g) Sir David Lees resigned from the Board on 31 Jan 2012.
h) Admiral Ed Giambastini resigned from the Board on 2 August 2011.
i) David Langstaff resigned from the Board on 18 April 2011.
Pensions
Contributions to the Defined Contribution section of the QinetiQ Pension Scheme were as follows:
For the year ended 31 March
Executive Directors
David Mellors
2013
2012
£50,000
£50,000
Contributions for David Mellors to the scheme paid by the Company were £38,675 with additional contributions arising through salary sacrifice.
Leo Quinn received contributions of 25% of base salary in lieu of a pension.
QinetiQ Group plc Annual Report and Accounts 2013 59
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance
Remuneration report continued
Interests of Executive Directors under long-term incentive share plans as at 31 March 2013
Grant date
Number at
1 April 2012
Granted in
year
(maximum
potential of
awards)
Exercised/
vested in
year
Lapsed in
year
Number at
31 March
2013
Leo Quinn
Matching award TSR (b)
Matching award EPS (b)
PSP Mirror TSR (b)
PSP Mirror EPS (b)
VSP TSR
VSP TSR
VSP PBT
VSP PBT
VSP TSR
VSP TSR
VSP PBT
VSP PBT
DAB Match
PSP EPS
PSP TSR
DAB Match
16/12/09
16/12/09
16/12/09
16/12/09
29/07/10
29/07/10
29/07/10
29/07/10
26/05/11
26/05/11
26/05/11
26/05/11
01/07/11
09/08/12
09/08/12
29/06/12
362,844
362,845
210,450
210,450
271,800
271,800
634,200
634,200
382,950
382,950
382,950
382,950
226,777
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
280,032
280,032
229,596
Total Leo Quinn
4,717,166
789,660
David Mellors
PSP TSR
PSP EPS
DAB Match
VSP TSR
VSP TSR
VSP PBT
VSP PBT
VSP TSR
VSP TSR
VSP PBT
VSP PBT
DAB Match
PSP EPS
PSP TSR
DAB Match
Total David Mellors
Total Executive
Directors
04/08/09
04/08/09
01/07/09
29/07/10
29/07/10
29/07/10
29/07/10
26/05/11
26/05/11
26/05/11
26/05/11
01/07/11
09/08/12
09/08/12
29/06/12
100,000
100,000
6,859
135,900
135,900
317,100
317,100
191,475
191,475
191,475
191,475
70,379
–
–
–
1,949,138
6,666,304
–
–
–
–
–
–
–
–
–
–
–
–
178,125
178,125
117,173
473,423
1,263,083
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100,000
100,000
6,859
–
–
–
–
–
–
–
–
–
–
–
–
206,859
206,859
362,844
362,845
210,450
210,450
271,800
271,800
634,200
634,200
382,950
382,950
382,950
382,950
226,777
280,032
280,032
229,596
5,506,826
–
–
–
135,900
135,900
317,100
317,100
191,475
191,475
191,475
191,475
70,379
178,125
178,125
117,173
2,215,702
7,722,528
Market
price on
date of
grant
165p (a)
165p (a)
165p (a)
165p (a)
124.9p
124.9p
124.9p
124.9p
112.3p
112.3p
112.3p
112.3p
129.1p
166.0p
166.0p
157.1p
135.0p
135.0p
144.7p
124.9p
124.9p
124.9p
124.9p
112.3p
112.3p
112.3p
112.3p
129.1p
166.0p
166.0p
157.1p
Earliest vest
date
Latest vest
date
01/06/13
01/06/13
01/06/13
01/06/13
29/07/13
29/07/14
29/07/13
29/07/14
26/05/14
26/05/15
26/05/14
26/05/15
01/07/14
09/08/15
09/08/15
30/06/15
04/08/12
04/08/12
01/07/12
29/07/13
29/07/14
29/07/13
29/07/14
26/05/14
26/05/15
26/05/14
26/05/15
01/07/14
09/08/15
09/08/15
30/06/15
01/06/13
01/06/13
01/06/13
01/06/13
29/07/13
29/07/14
29/07/13
29/07/14
26/05/14
26/05/15
26/05/14
26/05/15
01/07/14
09/08/15
09/08/15
30/06/15
04/08/12
04/08/12
01/07/12
29/07/13
29/07/14
29/07/13
29/07/14
26/05/14
26/05/15
26/05/14
26/05/15
01/07/14
09/08/15
09/08/15
30/06/15
a) Shares awarded to the CEO in 2009 were based on an average market price of 138.0p representing the average price over the ten days before joining.
b) On appointment the CEO was granted a mirror PSP award, subject to the same EPS and TSR performance conditions as above. In addition, the CEO invested c. £1m in QinetiQ
shares, for which he received an additional matching PSP award, subject to the same EPS and TSR performance conditions.
The awards in the table above are subject to the performance conditions described on page 54. The price of a QinetiQ share at 31 March
2013 was 207.4p The highest and lowest prices of a QinetiQ share during the year ended 31 March 2013 were 214.6p and 141.5p
respectively.
There have been no changes to the interests shown above between 31 March 2013 and 23 May 2013.
There is no exercise price for any of the above awards.
60 QinetiQ Group plc Annual Report and Accounts 2013
Executive Directors’ interests in the All-Employee Share Incentive Plan (SIP)
Leo Quinn
David Mellors
Interest as at
1 April 2012
2,398
3,595
Partnership and dividend
shares acquired during year
921
947
Interest as at
31 March 2013
3,319
4,542
Interest as at
23 May 2013
3,450
4,673
The SIP is HMRC approved and under the plan rules matching shares are not awarded until the three year time condition has been satisfied.
Therefore these shares are not included in the above table.
Directors’ interests in shares
The table below shows the beneficial interests in ordinary shares (including, where applicable, shares held under the SIP and DAB) of the
Directors who were in office as at 31 March 2013 and their connected persons.
Executive Directors
Leo Quinn
David Mellors
Non-executive Directors
Mark Elliott
Colin Balmer
Noreen Doyle
Admiral Sir James Burnell-Nugent
Paul Murray
Michael Harper
Approved by the Board and signed on its behalf.
Noreen Doyle
Chair of the Remuneration Committee
23 May 2013
Number 1p
Ord Shares held
at 23 May 2013
Number 1p
Ord Shares held
at 31 March 2013
Number 1p
Ord Shares held
at 1 April 2012
1,112,580
215,860
1,112,449
215,729
125,000
7,662
24,662
11,419
56,077
20,000
125,000
7,662
24,662
11,419
56,077
20,000
882,716
98,500
125,000
7,662
24,662
11,419
56,077
10,000
QinetiQ Group plc Annual Report and Accounts 2013 61
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance Corporate governance
Other statutory information
Directors’ Report
For the purposes of the Companies Act 2006, the Directors’ Report,
which includes the Business Review, is set out on pages 1-64.
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 technical support,
training, test and evaluation, and know-how to customers in the
global defence, aerospace and security markets. Customers include
government organisations, such as the UK MOD and the US DoD,
and a range of other government and commercial customers globally.
Research and development
One of the Group’s principal business streams is the provision of
funded research and development (R&D) for customers. The Group
also invests in the commercialisation of promising technologies
across all areas of business.
The majority of R&D-related expenditure is incurred on behalf
of customers as part of specific funded research contracts.
R&D costs are included in the income statement and R&D income
is reflected within revenue. In the financial year, the Group recorded
£335.6m (2012: £346.3m) of total R&D-related expenditure,
of which £311.0m (2012: £331.1m) was customer-funded work
and £24.6m (2012: £15.2m) was internally funded. Additionally,
£0.3m (2012: £0.3m) of late-stage development costs was
capitalised and £0.9m (2012: £2.3m) of capitalised development
costs was amortised in the year.
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. The Group
has a policy of agreeing payment terms of not less than 60 days with
suppliers, except in exceptional circumstances. At 31 March 2013,
the trade payables of the Group represented 31 days of annual
purchases (2012: 24 days).
Political and charitable contributions
QinetiQ does not make political donations to parties as that term
would be commonly recognised. The legal definition of that term is,
however, quite broad and may have the effect of covering a number
of normal business activities that would not commonly be perceived
to be political donations, such as sponsorship of events.
These may include legitimate interactions in making MPs and others
in the political world aware of key industry issues and matters that
affect QinetiQ, and that make an important contribution to their
understanding of QinetiQ, the markets in which it operates, and
the work of their constituents.
Charitable donations during the year across the Group amounted to
£180,492 (2012: £108,400). Information on charitable activities can
be found in the Corporate Responsibility and Sustainability Review
on pages 34-37.
62 QinetiQ Group plc Annual Report and Accounts 2013
Share capital
As at 31 March 2013, the Company had allotted and fully paid
up 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) and one Special Share with a nominal
value of £1.
Details of the shares in issue during the financial year are shown
in note 27 on page 102.
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 that purpose.
The Special Share is held by HM Government through the Secretary
of State for Defence and it confers certain rights under the Articles
of Association which are detailed in note 27 on page 102.
These include the right to require certain persons with a material
interest in QinetiQ to dispose of some or all of their ordinary
shares on the grounds of national security or conflict of interest.
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.
In 2012, the rights attaching to the Special Share were amended
following receipt of the requisite MOD approval and shareholder
approval at the 2012 Annual General Meeting. The amendments
included removal of the MOD’s right to veto any transaction or
activity and the introduction of a generic MOD conflict of interest
management system in alignment with that followed by other
defence companies.
Directors’ interests in contracts
At the date of this Report, there is no contract or arrangement with
the Company or any of its subsidiaries that is significant in relation
to the business of the Group as a whole in which a Director of the
Company is materially interested.
Indemnities
The directors of QinetiQ Pension Scheme Trustee Limited, a Group
company and the trustee of the QinetiQ Pension Scheme (QPS),
benefit from an indemnity contained in the rules of the QPS. The
indemnity would be provided out of the QPS assets.
Change of control – significant agreements
The following significant agreements contain provisions entitling
the counterparties 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 ceases to be a UK company:
• The Combined Aerial Target Service contract is a 20-year contract
awarded to QinetiQ by the MOD on 14 December 2006. The
terms of this contract require QinetiQ Limited 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 Limited’s
share capital, unless the change relates to shares listed on a
regulated market – ‘material’ is defined as being 10% or more
of the share capital. In addition, there are restrictions on transfers
of shares to persons from countries appearing on the restricted
list as issued by HM Government;
• The Long-Term Partnering Agreement (LTPA) 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 under which the prior approval of HM
Government is required 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 the MOD is a party.
The Company is party to a multi-currency Revolving Credit Facility,
with a US$250m tranche and a £118m tranche, provided by the
Group’s six global relationship banks, that expires on 4 February
2016. Under the terms of the facility, if there is a change of control
of the Company, any lender may request, by not less than 60 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 US Holdings, Inc., formerly known
as QinetiQ North America, Inc. (as Borrower) and the Company
(as Guarantor) entered into a Note Purchase Agreement to issue
US$125m 5.50% Senior Notes due 6 December 2016. $77m has
been repaid early and the remaining debt outstanding as at
31 March 2013 was $48m. Under the terms of the agreement,
if either (1) the MOD ceases to retain in its capacity as Special
Shareholder its Special Shareholder’s Rights; or (2) there is a change
of control of the Company, and in either case where there has been
a rating downgrade, or where there are no rated securities (unless
a rating of at least investment grade is not obtained within 90 days
of the change of control), the Notes must be offered for prepayment
by the Company within 21 days of the change of control. The
prepayment date would be no later than 45 days after the offer
of prepayment by the Company.
On 5 February 2009, QinetiQ US Holdings, Inc. (as Borrower)
and the Company (as Guarantor) entered into a Note Purchase
Agreement to issue US$62m 7.13% Senior Notes due 5 February
2016 and US$238m 7.62% Senior Notes due 5 February 2019.
$100m has been repaid early and the remaining debt outstanding
as at 31 March 2013 was $43m of 7.13% Senior Notes and $157m
of 7.62% Senior Notes. Under the terms of the agreement, if either
(1) the MOD ceases to retain in its capacity as Special Shareholder
its Special Shareholder’s Rights; or (2) there is a change of control
of the Company, the Notes must be offered for prepayment within
21 days of the change of control. The prepayment date would be
no later than 45 days after the offer of prepayment by the Company.
During 2013 the Group completed the previously announced
programme to repay $177m of private placement debt.
Financial instruments
Information on the Group’s financial risk management objectives
and policies, and its exposure to credit risk, liquidity risk, interest
rate risk and foreign currency risk is in note 25 on page 93.
Branches
The Company and its subsidiaries have established branches in a
number of different countries in which they operate; their results
are, however, not material to the Group’s financial results.
Major shareholders
At 31 March 2013, the Group had been notified under DTR5 of the
following shareholdings:
Shareholder
Artisan Partners*
Ruane Cunniff & Goldfarb, Inc.
Schroders
Investec
Norges Bank
Fidelity Management and Research
Company
Fidelity International Limited
Number of
ordinary shares
92,608,147
64,117,000
35,429,785
33,160,928
33,123,896
32,986,143
% of issued
share capital
14.02
9.71
5.36
5.02
5.02
4.99
31,258,590
4.73
* Since 31 March 2013, the Company has been notified by Artisan Partners that their
interest has changed.
At 21 May 2013, being the latest practicable date prior to the issue
of this report, the most recent interest notified by Artisan consisted
of 85,419,672 ordinary shares (12.93% of the issued share capital).
The Company had received no other notification of any further
interests or of any changes in the interests detailed above.
Allotment/purchase of own shares
At the Company’s Annual General Meeting (AGM) held in July 2012,
the shareholders passed resolutions which authorised the Directors
to allot relevant securities up to an aggregate nominal value of
£4,403,174 (£2,201,587 pursuant only to a rights issue), 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
2013 AGM. During the year, the Company provided funding to the
QinetiQ Group plc Employee Benefit Trust (the ‘Trust’), which holds
shares in connection with 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 note 28 on page 103. As at
31 March 2013, the Trust held 10,478,906 ordinary shares of 1p each
(the ‘Trust Shares’). The trustees of the Trust have agreed to waive
their entitlement to dividends payable on the Trust Shares. The Trust
holds further ordinary shares in respect of deferred shares held on
behalf of participants in the Company’s Deferred Annual Bonus Plan.
Dividends received by the Trust in respect of the deferred shares are
paid direct to the plan participants on receipt and are not retained
in the Trust.
QinetiQ Group plc Annual Report and Accounts 2013 63
Business reviewCorporate governanceFinancial statementsOverviewAdditional informationCorporate governance Other statutory information continued
Restrictions on transfer of shares
As outlined in note 27 on page 102, the Special Share confers certain
rights under the Company’s Articles of Association to require certain
persons with an interest in QinetiQ’s shares that exceed certain
prescribed thresholds to dispose of some or all of their ordinary
shares on the grounds of national security or conflict of interest.
Articles of Association
Save in 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 who hold 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 using such corporate
nominee service, and will vote on all resolutions proposed at
general meetings in accordance with the instructions received.
Annual General Meeting
The Company’s AGM will be held on Thursday 25 July 2013 at
11.00am, at The Royal Berkshire Hotel, London Road, Sunninghill,
Ascot, Berkshire, SL5 0PP. Details of the business to be proposed
and voted on at the meeting are contained in the Notice of the
Annual General Meeting, which is sent to all shareholders and
is also published on the Company’s website, www.QinetiQ.com.
Auditor
Following their intention to gradually wind down the activity in the
registered firm, KPMG Audit Plc have notified the Company that
they are not seeking reappointment as auditor. A resolution to
appoint KPMG LLP, an intermediate parent of KPMG Audit Plc,
will be proposed at the AGM.
Statement of Directors’ responsibilities
in respect of the Annual Report and 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.
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 IFRSs as adopted by the EU and applicable law and
have elected to prepare the parent company financial statements
in accordance with UK Accounting Standards and applicable law
(UK Generally Accepted Accounting Practice).
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent company and
of their profit or loss for that period. In preparing each of the Group
and parent company financial statements, the Directors are
required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, state whether they have been
prepared in accordance with IFRSs as adopted by the EU;
64 QinetiQ Group plc Annual Report and Accounts 2013
• for the parent company financial statements, state whether
applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the parent
company financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
parent company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the parent company and enable them to ensure
that its financial statements comply with the Companies Act 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.
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 that law and those regulations.
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.
Statement of disclosure of information to the auditor
The Directors who held office at the date of approval of this
Directors’ report have confirmed that, so far as the Directors are
aware, there is no relevant audit information of which the
Company’s auditor is unaware; and the Directors have taken all
the steps they reasonably should have taken as Directors to make
themselves aware of any relevant audit information and to establish
that the Company’s auditor is aware of that information.
Responsibility statement of the Directors in respect of the
Annual Report
The Directors in office as at the date of this Report confirm that
to the best of their knowledge:
• The financial statements of the Group have been prepared in
accordance with IFRS 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.
By order of the Board
Jon Messent
Company Secretary
Cody Technology Park
Ively Road
Farnborough
Hampshire GU14 0LX
23 May 2013
Independent auditor’s report to the members of QinetiQ Group plc
We have audited the financial statements of QinetiQ Group plc
for the year ended 31 March 2013 set out on pages 66-114.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law
and International Financial Reporting Standards (IFRSs) as adopted
by the EU. The financial reporting framework that has been applied
in the preparation of the parent company financial statements is
applicable law and UK Accounting Standards (UK Generally Accepted
Accounting Practice).
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
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 auditor
As explained more fully in the Directors’ responsibilities statement
set out on page 64, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a
true and fair view. Our responsibility is to audit, and express an
opinion on, the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s
(APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements
is provided on the Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state
of the Group’s and of the parent company’s affairs as at 31 March
2013 and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared
in accordance with IFRSs as adopted by the EU;
• the parent company financial statements have been properly
prepared in accordance with UK Generally Accepted Accounting
Practices; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006; and, as regards
the Group financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
• the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act
2006; and
• the information given in the Directors’ report for the financial
year for which the financial statements are prepared is consistent
with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
• adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the parent company financial statements and the part of the
Directors’ remuneration report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified
by law are not made; or
• we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
• the Directors’ statement, set out on page 44, in relation
to going concern;
• the part of the corporate governance statement on pages 40-49
relating to the Company’s compliance with the nine provisions of
the UK Corporate Governance Code specified for our review; and
• certain elements of the report to shareholders by the Board
on Directors’ remuneration.
Anthony Sykes
Senior Statutory Auditor
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
23 May 2013
F
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QinetiQ Group plc Annual Report and Accounts 2013 65
Business reviewCorporate governanceOverviewAdditional information
Consolidated income statement
for the year ended 31 March
all figures in £ million
Revenue
Operating costs excluding depreciation,
amortisation and impairment
Other income
EBITDA (earnings before interest, tax,
depreciation and amortisation)
Depreciation and impairment
of property, plant and equipment
Impairment of goodwill
Amortisation of intangible assets
Group operating (loss)/profit
Gain on business divestments and
disposal and impairment of investments
Finance income
Finance expense
(Loss)/profit before tax
Taxation income/(expense)
(Loss)/profit for the year attributable
to equity shareholders
Earnings per share
Basic
Diluted
Note
2, 3
Underlying
1,327.8
2013
Specific
adjusting
items*
–
Total
1,327.8
Underlying
1,469.6
2012 (restated^)
Specific
adjusting
items*
–
Total
1,469.6
(1,132.9)
5.8
2
(16.3)
–
(1,149.2)
5.8
(1,275.6)
5.2
223.9
–
(1,051.7)
5.2
200.7
(16.3)
184.4
199.2
223.9
423.1
(28.0)
–
(4.0)
168.7
–
1.7
(18.3)
152.1
(29.2)
(4.0)
(255.8)
(14.0)
(290.1)
2.3
–
(1.3)
(289.1)
33.0
(32.0)
(255.8)
(18.0)
(121.4)
2.3
1.7
(19.6)
(137.0)
3.8
(30.6)
–
(9.0)
159.6
–
2.2
(51.6)
110.2
(21.5)
(1.9)
–
(20.3)
201.7
11.6
–
(7.2)
206.1
(48.5)
(32.5)
–
(29.3)
361.3
11.6
2.2
(58.8)
316.3
(70.0)
122.9
(256.1)
(133.2)
88.7
157.6
246.3
18.9p
18.7p
(20.5)p
(20.5)p
13.6p
13.5p
37.9p
37.6p
3, 14
12
13
3
5
6
6
4
7
11
11
* For details of ‘specific adjusting items’ refer to note 4 to the financial statements.
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
Refer to note 1 to the financial statements.
66 QinetiQ Group plc Annual Report and Accounts 2013
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v
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Consolidated statement of comprehensive income
for the year ended 31 March
all figures in £ million
(Loss)/profit for the year
Items that will not be reclassified to profit or loss:
Actuarial loss recognised in defined benefit pension schemes
Tax on items that will not be reclassified to profit and loss
Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation differences for foreign operations
Decrease in fair value of hedging derivatives
Reclassification of hedging derivatives to the income statement
Impairment loss on revalued investments
Fair value gains/(losses) on available-for-sale investments
Tax on items that may be reclassified to profit or loss
Total items that may be reclassified subsequently to profit or loss
Other comprehensive expense for the year, net of tax
2013
(133.2)
2012
(restated^)
246.3
(42.1)
10.1
(32.0)
24.6
(0.1)
–
(4.1)
0.3
–
20.7
(11.3)
(102.9)
27.0
(75.9)
(1.9)
(0.4)
0.2
–
(1.2)
0.1
(3.2)
(79.1)
Total comprehensive (expense)/income for the year
(144.5)
167.2
Consolidated statement of changes in equity
for the year ended 31 March
all figures in £ million
At 1 April 2012
Loss for the year
Other comprehensive income/
(expense) for the year, net of tax
Purchase of own shares
Share-based payments settlement
Share-based payments
Dividends
At 31 March 2013
At 1 April 2011
Profit for the year (restated^)
Other comprehensive expense for
the year, net of tax (restated^)
Purchase of own shares
Share-based payments
Dividends
At 31 March 2012
Issued
share
capital
6.6
–
Capital
redemption
reserve
39.9
–
Share
premium
147.6
–
Hedge
reserve
0.1
–
Translation
reserve
19.7
–
Retained
earnings
385.4
(133.2)
Non-
controlling
interest
0.1
–
Total
599.3
(133.2)
–
–
–
–
–
6.6
6.6
–
–
–
–
–
6.6
–
–
–
–
–
39.9
39.9
–
–
–
–
–
39.9
–
–
–
–
–
147.6
147.6
–
–
–
–
–
147.6
(0.1)
–
–
–
–
–
0.2
–
(0.1)
–
–
–
0.1
24.6
–
–
–
–
44.3
21.6
–
(1.9)
–
–
–
19.7
(35.8)
(0.4)
0.7
3.4
(20.1)
200.0
241.5
246.3
(77.1)
(12.0)
3.1
(16.4)
385.4
(11.3)
(0.4)
0.7
3.4
(20.1)
438.4
457.4
246.3
(79.1)
(12.0)
3.1
(16.4)
599.3
–
–
–
–
–
0.1
0.1
–
–
–
–
–
0.1
Total
equity
599.4
(133.2)
(11.3)
(0.4)
0.7
3.4
(20.1)
438.5
457.5
246.3
(79.1)
(12.0)
3.1
(16.4)
599.4
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly.
Refer to note 1 to the financial statements.
QinetiQ Group plc Annual Report and Accounts 2013 67
Consolidated balance sheet
as at 31 March
all figures in £ million
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Other financial assets
Investments
Deferred tax asset
Current assets
Inventories
Other financial assets
Trade and other receivables
Investments
Assets classified as held for sale
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Current tax
Provisions
Other financial liabilities
Non-current liabilities
Retirement benefit obligation
Provisions
Other 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
Non-controlling interest
Total shareholders’ funds
Note
2013
2012
12
13
14
23
15
16
17
23
19
18
20
23
21
22
23
29
22
23
21
27
290.4
57.8
241.4
4.3
0.4
32.4
626.7
25.5
2.6
284.2
1.4
–
240.4
554.1
1,180.8
(458.0)
(14.2)
(12.4)
(2.0)
(486.6)
(54.1)
(22.7)
(171.3)
(7.6)
(255.7)
(742.3)
438.5
6.6
39.9
147.6
44.3
200.0
438.4
0.1
438.5
519.3
71.8
246.6
6.9
5.8
17.0
867.4
31.2
2.4
404.8
1.1
5.1
117.8
562.4
1,429.8
(498.7)
(13.7)
(3.4)
(84.9)
(600.7)
(31.5)
(13.2)
(164.4)
(20.6)
(229.7)
(830.4)
599.4
6.6
39.9
147.6
19.8
385.4
599.3
0.1
599.4
The financial statements were approved by the Board of Directors and authorised for issue on 23 May 2013 and were signed
on its behalf by:
Mark Elliott
Chairman
Leo Quinn
Chief Executive Officer
David Mellors
Chief Financial Officer
68 QinetiQ Group plc Annual Report and Accounts 2013
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Consolidated cash flow statement
for the year ended 31 March
all figures in £ million
Net cash inflow from operations before restructuring costs
Net cash inflow/(outflow) relating to restructuring
Cash inflow from operations
Tax paid
Interest received
Interest paid
Net cash inflow from operating activities
Purchases of intangible assets
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Equity accounted investments and other investment funding
Purchase of subsidiary undertakings
Proceeds from sale of interests in subsidiary undertakings
Net cash outflow from investing activities
Repayment of bank borrowings
Settlement of forward contracts
Purchase of own shares
Dividends paid to shareholders
Capital element of finance lease rental payments
Capital element of finance lease rental receipts
Net cash outflow from financing activities
Increase 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
Reconciliation of movement in net cash/debt
for the year ended 31 March
all figures in £ million
Increase in cash and cash equivalents in the year
Add back net cash flows not impacting net debt
Change in net debt resulting from cash flows
Other movements including foreign exchange
Movement in net debt in the year
Net debt at beginning of year
Net cash/(debt) at end of year
Note
26
23
Note
23
23
23
23
23
2013
194.4
63.1
257.5
(1.6)
0.8
(35.8)
220.9
(0.6)
(27.1)
9.2
3.8
–
–
(14.7)
(63.0)
(1.3)
(0.4)
(20.1)
(2.8)
3.0
(84.6)
121.6
1.0
117.8
240.4
2013
121.6
64.1
185.7
10.5
196.2
(122.2)
74.0
2012
250.8
(8.9)
241.9
(23.3)
1.0
(39.5)
180.1
(0.7)
(22.0)
7.3
3.6
(0.9)
11.2
(1.5)
(133.6)
(1.6)
(12.0)
(16.4)
(2.8)
3.0
(163.4)
15.2
0.4
102.2
117.8
2012
15.2
135.0
150.2
(11.5)
138.7
(260.9)
(122.2)
QinetiQ Group plc Annual Report and Accounts 2013 69
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 that are considered
material in relation to the Group’s financial statements. In the income statement, the Group presents specific adjusting items separately.
In the judgement of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items
need to be disclosed separately because of their size and incidence.
Specific adjusting items include:
• amortisation of intangibles arising from acquisitions;
• pension curtailment gains/losses;
• pension past service credits/costs;
• pension net finance expense;
• gains/losses on business divestments and disposal of investments;
•
• gains/losses on disposal of property;
•
•
• net gain in respect of previously capitalised DTR programme bid costs; and
•
impairment of property;
impairment of goodwill and other intangible assets;
tax on the above items.
restructuring costs;
Pension finance income and pension finance expense were, prior to this accounting period, reported within underlying performance.
With effect from this accounting period the pension net finance expense is included within specific adjusting items in the middle column
of the income statement and the comparative financial information has been restated accordingly. In the judgement of the Directors the
exclusion of this non-cash financial item (which can swing from net expense to net income) leads to a better understanding of the
financial information, given its volatility.
Basis of preparation
The Group’s financial statements, approved by the Directors, have been prepared on a going concern basis as discussed in the Directors’
Report on page 44 and in accordance with International Financial Reporting Standards as adopted by the EU (‘IFRS’) and the Companies
Act 2006 applicable to companies reporting under IFRS. The Company has elected to prepare its parent company financial statements
in accordance with UK GAAP; these are presented on pages 112-114. The financial statements have been prepared under the historical
cost convention, as modified by the revaluation of available-for-sale financial assets and other relevant financial assets and liabilities.
Non-current assets held for sale are held at the lower of carrying amount and fair value less costs to sell. The Group’s reporting currency
is sterling and unless otherwise stated the financial statements are rounded to the nearest £100,000.
The Company has implemented IAS 19 (revised) ‘Employee benefits’ in the year ended 31 March 2013, electing to adopt this standard
early. There are three specific impacts on the income statement, as outlined below:
• A reclassification of the administration costs of the defined benefit pension scheme, including the levy for the Pension Protection
Fund, from finance expense to underlying operating profit;
• A change in the calculation of the interest income on plan assets. This was previously based on the expected returns on the various
asset types held within the investment portfolio. It is now calculated at the same rate used to calculate the interest expense on the
pension liability, being a discount rate derived from corporate bonds. The difference between this calculated return and the actual
return is reported as an actuarial gain/loss through reserves; and
• The reporting of a combined net figure within finance expense, rather than showing the pension interest income and pension interest
expense gross, within finance income and finance expense respectively.
Subsequent to the early adoption of IAS 19 (revised) ‘Employee benefits’, the Group has also elected to disclose the finance expense
on the net pension liability as a specific adjusting item within the middle column of the consolidated income statement. The comparative
figures for the income statement for the year ended 31 March 2012 have been restated to show the effect of this early adoption and the
reclassification as a specific adjusting item.
The effect of adopting IAS 19 (revised) on the Group’s profit for the prior full-year period is to reduce both underlying and total reported
profit after tax by £11.6m. The subsequent effect of the reclassification of net finance expense from underlying performance to within
specific adjusting items is to increase underlying profit by £5.5m, although it has no impact on total reported profit. The combined effect
of the two adjustments on the Group’s profit for the full-year period to 31 March 2012 is therefore to reduce the underlying profit after
tax by £6.1m to £88.7m and to reduce total reported profit after tax by £11.6m to £246.3m.
If the reclassification of pension finance income and pension finance expense had been made in isolation, without early adoption of IAS 19
(revised), there would have been no impact on the Group’s total reported profit for the period. Underlying profit after tax for the year
ended 31 March 2012 would have decreased by £4.9m, with an equal increase in profit after tax in respect of specific adjusting items
in the middle column of the income statement.
70 QinetiQ Group plc Annual Report and Accounts 2013
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The full impact on the income statement, for the year ended 31 March, is set out in the table below:
all figures in £ million
Operating profit
Gain on disposals
Finance income
Finance expense
Tax
Profit after tax
EPS – basic
EPS – diluted
2012 (restated)
Specific
adjusting
items*
201.7
11.6
–
(7.2)
(48.5)
157.6
Underlying
159.6
–
2.2
(51.6)
(21.5)
88.7
13.6p
13.5p
2012 (reported)
Specific
adjusting
items*
201.7
11.6
–
–
(50.2)
163.1
Total
361.3
11.6
2.2
(58.8)
(70.0)
246.3
37.9p
37.6p
Underlying
161.3
–
69.8
(112.8)
(23.5)
94.8
14.6p
14.5p
Total
363.0
11.6
69.8
(112.8)
(73.7)
257.9
39.6p
39.4p
* For details of ‘specific adjusting items’ refer to note 4 to the financial statements.
The impact on the statement of comprehensive income, for the year ended 31 March, is as follows:
all figures in £ million
Profit for the year
Other comprehensive income for the year, net of tax
Total comprehensive income for the year attributable to equity shareholders
2012 (restated)
246.3
(79.1)
167.2
2012 (reported)
257.9
(90.7)
167.2
There is no change to the net pension liability or to net assets as a result of the early adoption of IAS 19 (revised). As a result no
restatement of the balance sheet is required.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary undertakings to 31 March 2013.
The purchase method of accounting has been adopted. Those subsidiary undertakings acquired or disposed of 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%-50% of the equity voting rights, in
respect of 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 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 where necessary to ensure compliance with Group
accounting policies.
On consolidation, all intra-Group income, expenses and balances are eliminated.
Revenue
Revenue represents the value of work performed for customers, and is measured net of value added taxes and other sales taxes
on the following bases:
Service contracts
The Group’s service contract arrangements are accounted for under IAS 18 ‘Revenue’. Revenue is recognised once the Group has obtained
the right to consideration in exchange for its performance. No profit is recognised on contracts until the outcome of the contract can be
reliably estimated. When the outcome of a contract can be reliably estimated, revenue and costs are recognised by reference to the stage
of completion of the contract activity at the balance sheet date. This is normally measured by the proportion of contract costs incurred for
work performed to date compared with the estimated total contract costs after making suitable allowances for technical and other risks
related to performance milestones yet to be achieved. When it is probable that total contract costs will exceed total contract revenue,
the expected loss is recognised immediately as an expense. The Group generally does not undertake construction contracts.
Goods sold
Sales of goods are recognised in the income statement on delivery of the product or when the significant risks and rewards of ownership
have been transferred to the customer and revenue and costs can be reliably measured.
Royalties and intellectual property
Royalty revenue is recognised over the period to which the royalty relates. Intellectual property revenue can be attributed either to
perpetual licences or to limited licences. Limited licences are granted for a specified period and revenue is recognised over the period of
the licence. Perpetual licences are granted for unlimited time frames and revenue is recognised when the risks and rewards of ownership
are transferred to the customer.
QinetiQ Group plc Annual Report and Accounts 2013 71
Financial statements
Notes to the financial statements continued
1. Significant accounting policies continued
Segmental information
Segmental information is presented according to the Group’s management structure and the markets in which it operates. Segmental
results represent the contribution of the different segments to the profit of the Group. Corporate expenses are allocated to the
corresponding segments. Unallocated items mainly comprise specific adjusting items. Specific adjusting items are referred to in
note 4. Eliminations represent inter-company trading between the different segments.
Segmental assets and liabilities information is not regularly provided to the chief operating decision maker.
Research and development expenditure
Research and development costs incurred on behalf of a customer as part of a specific project are directly chargeable to the customer
on whose behalf the work is undertaken. These costs are recognised within operating costs and revenue is recognised in respect of the
R&D services performed. 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 finance income and finance expense. Financing also includes the net
finance expense in respect of defined benefit pension schemes.
Taxation
The taxation charge is based on the taxable 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 changes 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 offset only where there is a legally enforceable right to offset and there is an intention
to settle balances on a net basis.
Business combinations
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is
transferred to the Group. The Group measures goodwill as the acquisition-date fair value of the consideration transferred, including the
amount of any non-controlling interest in the acquiree, less the net of the acquisition-date fair values of the identifiable assets acquired
and liabilities assumed, including contingent liabilities as required by IFRS 3.
Consideration transferred includes the fair values of assets transferred, liabilities incurred by the Group to the previous owners of the
acquiree, equity interests issued by the Group to the previous owners of the acquiree, equity interests issued by the Group, contingent
consideration and share-based payment awards of the acquiree that are replaced in the business combination. Any contingent
consideration payable is recognised at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration
that is not classified as equity are recognised in the consolidated income statement. If a business combination relates to the termination
of pre-existing relationships between the Group and the acquiree, then the lower of the termination amount, as contained in the
agreement, and the value of the off-market element is deducted from the consideration transferred and recognised in other expenses.
Transaction costs that the Group incurs in connection with a business combination, such as finder’s fees, legal fees, due diligence fees,
and other professional fees and consulting fees, are expensed as incurred.
Non-controlling interests are measured either at the non-controlling interest’s proportion of the net fair value of the identifiable assets,
liabilities and contingent liabilities recognised or at fair value. The method used is determined on an acquisition-by-acquisition basis.
Goodwill
Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of joint ventures and associates is included
in the carrying value of equity accounted investments. Goodwill is tested annually for impairment and carried at cost less accumulated
impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill related to the entity sold.
72 QinetiQ Group plc Annual Report and Accounts 2013
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Intangible assets
Intangible assets arising from business combinations are recognised at fair value and are amortised over their expected useful lives,
typically between one and nine years. 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
1-4 years
1-9 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
Plant and machinery
Fixtures and fittings
Computers
Motor vehicles
20-25 years
Shorter of useful economic life and 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
and interest.
The useful lives, depreciation methods and residual values applied to property, plant and equipment are reviewed annually and, if
appropriate, adjusted accordingly.
Impairment of tangible, goodwill, intangible and held for sale assets
At each reporting date the Group assesses whether there is an indication that an asset may be impaired. If the carrying amount of any
asset exceeds its recoverable amount an impairment loss is recognised immediately in the income statement. 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 (CGU) are written down to their recoverable amounts. The recoverable amount
of an asset or CGU 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 CGU calculated using an appropriate pre-tax discount rate. Impairment losses are expensed
to the income statement.
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 those classified as available for sale
are stated at fair value, with any resultant gain or loss, other than impairment losses, being recognised directly in equity. 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
based on the price of the most recent investment by the Group or a third party, if available, or derived from the present value of forecast
future cash flows.
Inventories
Inventory and work-in-progress 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, the costs are 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, when it becomes likely that financial close will not be achieved.
Trade and other receivables
Trade and other receivables are stated net of provisions for doubtful debts. 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.
QinetiQ Group plc Annual Report and Accounts 2013 73
Financial statements
Notes to the financial statements continued
1. Significant accounting policies continued
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 initially 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. Costs associated with the
arrangement of bank facilities or the issue of loans are held net of 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.
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
which can be reliably estimated, 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 an appropriate discount rate reflecting the level of risk
and the time value of money.
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 de-recognition of a financial instrument takes place when the Group no longer controls the contractual
rights that comprise the financial instrument, when the instrument expires, or when the instrument is sold, terminated or exercised.
Derivative financial instruments
Derivative financial instruments are initially recognised 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.
Fair value hedging
Changes in the fair value of derivatives designated as 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.
Cash flow hedging
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.
Leased assets
Leases are classified as finance leases when substantially all 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.
The individual financial statements of each Group company are presented in its functional currency. On consolidation, assets and liabilities
of overseas subsidiaries, 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, 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 Comprehensive Income.
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 bi-annually. 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 cost charged to the income statement consists of current service cost, net interest cost, and past service
cost. The finance element of the pension charge is shown in finance expense and the remaining service cost element is charged as a
component of employee costs in the income statement. Actuarial gains and losses and re-measurement gains and losses are recognised
immediately in full through the statement of comprehensive income. Contributions to defined contribution plans are charged to the
income statement as incurred.
74 QinetiQ Group plc Annual Report and Accounts 2013
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Share-based payments
The Group operates share-based payment arrangements with employees. The fair value of equity-settled awards 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 awards for share-based payments is determined each period end until they are exercised or lapse.
The value is expensed straight line over the period from grant to the date of earliest unconditional exercise. 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 businesses are finalised within 12 months of the acquisition date. 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.
Recent accounting developments
Significant developments adopted by the Group in 2013
IAS 19 (revised) ‘Employee benefits’. The amendments became effective for accounting periods beginning on or after 1 January 2013.
QinetiQ has elected to early-adopt the revised standard during 2013. The main impact on QinetiQ is the change in measurement of the
expected return on scheme assets in the income statement; now measured with reference to the discount rate previously applied solely
to scheme liabilities. Under the previous requirements, expected return on assets was measured at an appropriately calculated rate which
was normally higher than the discount rate. As a result, there is likely to be an increase in the net pension finance expense in the profit
and loss account, offset by changes in the actuarial gains/losses recognised in other comprehensive income. Other amendments include
changes to the recognition and treatment of curtailment gains, presentation of scheme administration expenses and the removal
of the corridor method. The latter had not previously been applied by the Group.
Developments adopted by the Group in 2013 with no material impact on the financial statements
The following EU-endorsed amendments, improvements and interpretations of published standards are effective for accounting periods
beginning on or after 1 April 2012 and have been adopted with no material impact on the Group’s financial statements:
IFRS 7 ‘Financial Instruments – Disclosures’. The amendment introduces new requirements about transfers of financial assets including
disclosure for financial assets that are not derecognised in their entirety; and financial assets that are derecognised in their entirety but
for which the entity retains continuing involvement.
IAS 12 ‘Income Taxes’. The amendment introduces an exception to the current measurement principles of deferred tax assets and
liabilities arising from investment property measured using the fair value model in accordance with IAS 40 ‘Investment Property’.
IFRS 1 ‘First Time Adoption of IFRS’. This change adds an exemption that an entity can apply at the date of transition to IFRSs after being
subject to severe hyperinflation.
Developments expected in future periods of which the impact is being assessed
FRS 100, 101 and 102. FRS 100 sets out the application of financial reporting requirements in the UK and Republic of Ireland and FRS 101
or ‘IFRS with reduced disclosures’ outlines the reduced disclosure framework available for use by qualifying entities choosing to report
under IFRS. FRS 102 is applicable in the UK and Republic of Ireland and is known as the ‘new UK GAAP’. The mandatory effective date for
the new framework of reporting is for accounting periods beginning on or after 1 January 2015. A qualifying entity is defined as a parent
or subsidiary undertaking which is consolidated in publicly available consolidated financial statements. QinetiQ’s subsidiaries meet the
criteria; they currently report under UK GAAP and it is likely that the new FRS 102 will be the preferred option – a full analysis is currently
being undertaken.
Revenue from Contracts with Customers. The Group awaits the final publication of the new IFRS standard ‘Revenue from Contracts
with Customers’ which is expected to be published by June 2013. The new Standard will replace IAS 18 ‘Revenue’ and IAS 11 ‘Construction
Contracts’. It will become effective for accounting periods on or after 1 January 2017 and will therefore be applied for the first time
to the Group accounts in 2018; the IASB have indicated that early adoption will not be permitted. The Group has begun a systematic review
of all existing major contracts to ensure that the impact and effect of the new Standard is fully understood and any changes to current
accounting procedures are highlighted and acted upon well in advance of the effective date.
Leases. Following the issue of the first exposure draft in 2011, the IASB and FASB are reconsidering the proposed accounting standard for
lease accounting. A revised exposure draft is expected by June 2013. The first exposure draft removes the distinction between finance
leases and operating leases and requires all leased assets to be accounted for in a similar way to finance leases. A right-of-use asset and
matching liability will be recognised on the balance sheet, with lease expenditure and depreciation reported in the income statement.
QinetiQ Group plc Annual Report and Accounts 2013 75
Financial statements
Notes to the financial statements continued
1. Significant accounting policies continued
Developments expected in future periods with no material impact on the Group’s financial statements
The Directors anticipate that the adoption of the following new, revised, amended and improved published standards and interpretations,
which were in issue at the date of authorisation of these Financial Statements, will have no material impact on the Financial Statements
of the Group when they become applicable in future periods:
•
IFRS 7 ‘Financial Instruments: Disclosures’;
•
IFRS 1 ‘First-time Adoption of IFRS’;
•
IAS 1 ‘Presentation of Financial Statements’;
• Annual Improvements IFRS 2009-2011 cycle;
•
•
•
•
•
•
•
IFRS 9 ‘Financial Instruments’;
IFRS 10 ‘Consolidated Financial Statements’;
IFRS 11 ‘Joint Arrangements’;
IFRS 12 ‘Disclosure of Interests in Other Entities’;
IFRS 13 ‘Fair Value Measurement’;
IAS 27 ‘Separate Financial Statements’; and
IAS 28 ‘Investments in Associates’.
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 that are uncertain
and 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 has suffered any impairment. This process relies on the use of estimates of the future
profitability and cash flows of its CGUs which may differ from the actual results delivered. In addition, the Group reviews whether
identified intangible assets have suffered any impairment. Further details on the sensitivity of the carrying value of goodwill to changes
in the key assumptions are set out in note 12.
Consolidation of US subsidiaries
As described on page 49, the Group and the US Department of Defense (DoD) have entered into a proxy agreement that regulates the
ownership, management and operation of the Group’s 100% owned subsidiary, QinetiQ North America, Inc. and its subsidiaries. Having
considered the terms of the proxy agreement, the Directors consider that the Group has control over the operating and financial policies
of QinetiQ North America and, therefore, consolidates the subsidiaries in the consolidated accounts.
Post-retirement benefits
The Group’s defined benefit pension obligations and net income statement costs are based on key assumptions, including discount rates,
mortality, inflation and future salary and pension increases. Management exercises its 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. Any change in these assumptions would have an impact on the retirement benefit obligation recognised. Further details of these
assumptions are set out in note 29.
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 on the adequacy of future demand and the potential market for such new products in order
to justify capitalisation of internally-funded development expenditure. These can be difficult to determine when dealing with 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 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.
76 QinetiQ Group plc Annual Report and Accounts 2013
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2. Revenue and other income
Revenue and other income is analysed as follows:
Revenue by category
For the year ended 31 March
all figures in £ million
Sales of goods
Services
Royalties and licences
Revenue
Share of joint ventures’ and associates’ profit after tax
Other income
Total other income
2013
201.7
1,118.7
7.4
1,327.8
0.1
5.7
5.8
2012
253.2
1,209.4
7.0
1,469.6
0.1
5.1
5.2
Revenue and profit after tax of joint ventures and associates was £17.0m and £0.3m respectively (2012: £26.1m and £0.2m respectively).
The figures in the table above represent the Group share of this profit after tax.
Other income is in respect of property rentals and the recovery of other related property costs.
Revenue by customer geographic location
For the year ended 31 March
all figures in £ million
North America
United Kingdom
Other
Total
Revenue by major customer type
For the year ended 31 March
all figures in £ million
UK Government
US Government
Other
Total
2013
672.7
560.4
94.7
1,327.8
2013
480.3
620.8
226.7
1,327.8
2012
788.7
570.1
110.8
1,469.6
2012
482.8
730.5
256.3
1,469.6
Revenue from the UK Government was generated by the UK Services and Global Products operating segments. Revenue from the US
Government was generated by the US Services and Global Products operating segments.
QinetiQ Group plc Annual Report and Accounts 2013 77
Financial statements
Notes to the financial statements continued
3. Segmental analysis
Operating segments
For the year ended 31 March
all figures in £ million
UK Services
US Services
Global Products
Total operating segments
Operating profit before specific adjusting items1
Specific adjusting items before amortisation, depreciation
and impairment
Impairment of property
Impairment of goodwill
Amortisation of intangible assets arising from acquisitions
Operating (loss)/profit
Gain on business divestments
and disposal and impairment of investments
Net finance expense
(Loss)/profit before tax
Taxation income/(expense)
(Loss)/profit for the year
4
12
5
6
7
Note
2013
2012 (restated^)
Revenue
597.3
475.6
254.9
1,327.8
Operating
profit
85.8
21.9
61.0
168.7
168.7
(16.3)
(4.0)
(255.8)
(14.0)
(121.4)
2.3
(17.9)
(137.0)
3.8
(133.2)
Revenue
610.1
534.5
325.0
1,469.6
Operating
profit
61.3
32.1
66.2
159.6
159.6
223.9
(1.9)
–
(20.3)
361.3
11.6
(56.6)
316.3
(70.0)
246.3
1 The measure of profit presented to the chief operating decision maker is operating profit stated before specific adjusting items.
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly. For details refer
to note 1 to the financial statements.
No measure of segmental assets and liabilities has been disclosed as this information is not regularly provided to the chief operating
decision maker.
Depreciation and amortisation by business segment
For the year ended 31 March 2013
all figures in £ million
Depreciation of property, plant and equipment
Amortisation of purchased or internally developed intangible
assets
For the year ended 31 March 2012
all figures in £ million
Depreciation of property, plant and equipment and
impairment of plant and equipment
Amortisation and impairment of purchased or internally
developed intangible assets
UK Services
21.6
US Services
2.6
3.6
25.2
0.2
2.8
UK Services
US Services
23.2
8.4
31.6
3.0
0.3
3.3
Global
Products
3.8
0.2
4.0
Global
Products
4.4
0.3
4.7
Total
28.0
4.0
32.0
Total
30.6
9.0
39.6
Excludes specific adjusting items not included within the measure of operating profit reported to the chief operating decision maker.
Non-current assets (excluding deferred tax) by geographic location
all figures in £ million
Year ended 31 March 2013
Year ended 31 March 2012
UK
262.6
Rest of World
331.7
UK
281.1
Rest of World
569.3
Total
594.3
Total
850.4
78 QinetiQ Group plc Annual Report and Accounts 2013
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4. Profit/loss before tax
The following items have been charged in arriving at profit/loss before tax:
all figures in £ million
Fees payable to the auditor:
Audit of the Group’s annual accounts
Audit of the accounts of subsidiaries of the Company and its associated pension scheme
Audit-related assurance services
All other non-audit services
Total auditor’s remuneration
2013
2012
(restated^)
0.6
0.2
0.1
–
0.9
0.6
0.2
0.1
0.1
1.0
The Group has adopted the statutory changes in relation to the disclosure of the Group auditor’s remuneration in line with the UK
Companies’ Regulations 2011 (Statutory Instrument 2011/2198) for the year ended 31 March 2013. 2012 fees have been reclassified
accordingly.
all figures in £ million
Depreciation of property, plant and equipment:
Owned assets: before impairment
Owned assets: impairment
Foreign exchange gain
Research and development expenditure – customer funded contracts
Research and development expenditure – Group funded
The following specific adjusting items have been (charged)/credited in arriving at profit/loss before tax:
all figures in £ million
Net restructuring (charges)/recoveries
Pension past service gain
Gain on disposal of property
Net gain in respect of previously capitalised DTR programme bid costs
Specific adjusting items before amortisation, depreciation and impairment
Impairment of goodwill
Impairment of property
Intangible impairment and acquisition amortisation
Specific adjusting items operating (loss)/profit
Gain on business divestments and disposal of investments
Unrealised impairment of investments
Gain on business divestments and disposal/impairment of investments
Defined benefit pension scheme net finance expense
Total specific adjusting items (loss)/profit before tax
Note
12
14
13
5
5
5
2013
2012
(28.0)
(4.0)
1.0
(311.0)
(24.6)
2013
(16.3)
–
–
–
(16.3)
(255.8)
(4.0)
(14.0)
(290.1)
2.9
(0.6)
2.3
(1.3)
(289.1)
(28.2)
(4.3)
0.2
(331.1)
(15.2)
2012
(restated^)
69.4
141.4
9.0
4.1
223.9
–
(1.9)
(20.3)
201.7
11.6
–
11.6
(7.2)
206.1
The net restructuring recovery of £69.4m in 2012 primarily relates to the agreement with the UK MOD in March 2012 involving a payment
to QinetiQ of £65.0m that was received in April 2012. The agreement involves the discharging of MOD from its accumulated liabilities for
restructuring costs incurred in previous years, together with MOD agreement to changes in its Special Shareholder rights, and certain other
operational issues.
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly. For details refer
to note 1 to the financial statements.
QinetiQ Group plc Annual Report and Accounts 2013 79
Financial statements
Notes to the financial statements continued
5. Gain on business divestments and disposal and impairment of investments
For the year ended 31 March
all figures in £ million
Gain on business divestments
Gain on disposal of investments
Unrealised impairment of investments
2013
–
2.9
(0.6)
2.3
2012
8.0
3.6
–
11.6
The gain on business divestments relates to the disposal of QinetiQ’s investment in Infoscitex Inc.
The prior year gain on business divestments includes the disposal of Spectro Inc., a business within the Global Products division,
for consideration before costs of US$20.5m and a gain on disposal of £4.7m. Of the £3.6m prior year gain on disposal of investments,
£2.8m relates to the sale of QinetiQ’s investment in Nomad Holdings Limited.
6. Finance income and expense
For the year ended 31 March
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 dollar private placement debt1
Finance lease expense
Unwinding of discount on financial liabilities
Finance expense before specific adjusting items
Defined benefit pension scheme net finance expense
Finance expense
Net finance expense
2013
1.0
0.7
1.7
(0.6)
(1.4)
(14.2)
(0.6)
(1.5)
(18.3)
(1.3)
(19.6)
(17.9)
2012
(restated^)
1.3
0.9
2.2
(0.6)
(1.6)
(46.8)
(0.8)
(1.8)
(51.6)
(7.2)
(58.8)
(56.6)
1 During 2012, the Group elected to make early repayment of US$177m of private placement debt from surplus cash. Net finance expense in 2012
was affected by an accelerated interest charge of £27.4m in respect of these early repayments.
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly. For details refer
to note 1 to the financial statements.
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7. Taxation
all figures in £ million
Analysis of charge
Current UK tax expense/(income)
Overseas corporation tax
Current year
Adjustment for prior year
Current tax expense
Deferred tax expense/(income)
Deferred tax impact of change in rates
Deferred tax in respect of prior years
Taxation expense/(income)
Factors affecting tax charge in year
Principal factors reducing the Group’s current
year tax charge below the UK statutory rate
are explained below:
Profit/(loss) before tax
Tax on profit/(loss) before tax at 24%
(2012: 26%)
Effect of:
Expenses not deductible for tax purposes,
research and development relief and non-
taxable items
Current tax losses for which no deferred tax
asset was recognised
Deferred tax impact of change in rates
Deferred tax in respect of prior years
Effect of different rates in overseas
jurisdictions
Taxation expense/(income)
Effective tax rate
Before specific
adjusting
items*
2013
Specific
adjusting
items*
0.8
(0.2)
–
0.6
28.0
0.6
–
29.2
(0.2)
1.5
0.4
1.7
(34.4)
(0.9)
0.6
(33.0)
Before specific
adjusting
items*
2012 (restated^)
Specific
adjusting
items*
–
15.5
(2.3)
13.2
5.3
1.4
1.6
21.5
13.1
2.3
–
15.4
33.1
–
–
48.5
Total
0.6
1.3
0.4
2.3
(6.4)
(0.3)
0.6
(3.8)
Total
13.1
17.8
(2.3)
28.6
38.4
1.4
1.6
70.0
152.1
(289.1)
(137.0)
110.2
206.1
316.3
36.5
(69.4)
(32.9)
28.6
53.6
82.2
(12.4)
(2.2)
0.7
0.1
6.5
29.2
19.2%
49.0
–
(0.1)
–
(12.5)
(33.0)
36.6
(2.2)
0.6
0.1
(6.0)
(3.8)
2.8%
(11.8)
(2.5)
(14.3)
(4.3)
1.4
0.9
6.7
21.5
19.5%
–
–
–
(2.6)
48.5
(4.3)
1.4
0.9
4.1
70.0
22.1%
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, subject to any tax legislation
changes and the geographic mix of profits. The 2013 Finance Bill allows the continued recognition of R&D tax credits in the tax line until
April 2016, when mandatory ‘Above The Line’ treatment is introduced, which could increase the Group’s effective tax rate over time
to a blend of the US and UK corporation tax rates.
The 2013 Budget delivered on 20 March 2013 announced that the UK corporation tax rate will reduce to 21% on 1 April 2014 and to
20% on 1 April 2015. A reduction in the rate from 24% to 23% (effective from 1 April 2013) was substantively enacted on 3 July 2012.
These changes will reduce the Group’s future tax charge accordingly. The deferred tax asset at 31 March 2013 has been calculated based
on the rate of 23% substantively enacted at the balance sheet date. It has not yet been possible to quantify the full anticipated effect of the
announced rate reductions in 2014 and 2015, although these will further reduce the Group’s future tax charge and reduce the Group’s
deferred tax asset accordingly.
At 31 March 2013, the Group had unused tax losses of £202.7m (2012: £200.0m) potentially available for offset against future profits.
*Definitions of underlying measures of performance and specific adjusting items can be found in the glossary on page 116.
^IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly. For details refer
to note 1 to the financial statements.
QinetiQ Group plc Annual Report and Accounts 2013 81
Financial statements
Notes to the financial statements continued
8. Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2013 and 2012 is provided below:
Interim 2013
Final 2013 (proposed)
Total for the year ended 31 March 2013
Interim 2012
Final 2012
Total for the year ended 31 March 2012
Pence
per share
1.10
2.70
3.80
0.90
2.00
2.90
Date paid/
payable
Feb 2013
Sept 2013
Feb 2012
Sept 2012
£m
7.1
17.6
24.7
5.8
13.0
18.8
The Directors propose a final dividend of 2.70p (2012: 2.00p) per share. The dividend, which is subject to shareholder approval,
will be paid on 6 September 2013. The ex-dividend date is 7 August 2013 and the record date is 9 August 2013.
9. Analysis of employee costs and numbers
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, were:
UK Services
US Services
Global Products
Total
The aggregate payroll costs of these persons were as follows:
all figures in £ million
Wages and salaries
Social security costs
Pension costs
Share-based payments costs
Employee costs before US restructuring costs
US restructuring costs
Total employee costs
As at 31 March
2013
Number
5,145
3,350
1,003
9,498
2012
Number
5,157
3,940
1,083
10,180
Note
28
Monthly average
2013
Number
5,141
3,607
1,024
9,772
2013
496.0
38.8
41.0
5.5
581.3
7.3
588.6
2012
Number
5,170
4,349
1,118
10,637
2012
561.9
41.5
42.2
4.2
649.8
–
649.8
10. Directors and other senior management personnel
The Directors and other senior management personnel of the Group during the year to 31 March 2013 comprise the Board of Directors
and the QinetiQ Executive Team. The remuneration and benefits provided to Directors and the QinetiQ Executive Team are summarised
below:
all figures in £ million
Short-term employee remuneration including benefits
Post-employment benefits
Share-based payments costs
Termination benefits
Total
2013
6.7
0.2
2.3
0.9
10.1
2012
6.8
0.2
1.9
–
8.9
Short-term employee remuneration and benefits include salary, bonus, and benefits. Post-employment benefits relate to pension amounts.
82 QinetiQ Group plc Annual Report and Accounts 2013
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B
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e
s
s
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e
v
i
e
w
C
o
r
p
o
r
a
t
e
g
o
v
e
r
n
a
n
c
e
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
i
A
d
d
(cid:2)
o
n
a
l
11. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary
shares in issue during the year. The weighted average number of shares used excludes those shares bought by the Group and held as own
shares (see note 27). For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all
potentially dilutive ordinary shares arising from unvested share-based awards including share options. Underlying basic earnings per share
figures are presented below, in addition to the basic and diluted earnings per share, because the Directors consider this gives a more
relevant indication of underlying business performance and reflects the adjustments to basic earnings per share for the impact of specific
adjusting items, amortisation of acquired intangible assets and tax thereon.
For the year ended 31 March
Basic EPS
(Loss)/profit attributable to equity shareholders
Weighted average number of shares
Basic EPS
2013
2012
(restated^)
£ million
Million
Pence
(133.2)
648.7
(20.5)
246.3
650.5
37.9
Diluted EPS
(Loss)/profit attributable to equity shareholders
Weighted average number of shares
Effect of dilutive securities1
Diluted number of shares
Diluted EPS
1 The loss attributable to equity shareholders in the year ended March 2013 results in the effect of dilutive securities on the weighted average number
£ million
Million
Million
Million
Pence
(133.2)
648.7
–
648.7
(20.5)
246.3
650.5
4.0
654.5
37.6
of shares being nil in 2013.
Underlying basic EPS
(Loss)/profit attributable to equity shareholders
Loss/(profit) after tax in respect of acquisition amortisation and specific
adjusting items
Underlying profit after taxation
Weighted average number of shares
Underlying basic EPS
Underlying diluted EPS
(Loss)/profit attributable to equity shareholders
Loss/(profit) after tax in respect of specific adjusting items
Underlying profit after taxation
Weighted average number of shares
Effect of dilutive securities
Diluted number of shares
Underlying diluted EPS
£ million
(133.2)
246.3
£ million
£ million
Million
Pence
£ million
£ million
£ million
Million
Million
Million
Pence
256.1
122.9
648.7
18.9
(133.2)
256.1
122.9
648.7
7.1
655.8
18.7
i
n
f
o
r
m
a
(cid:2)
o
n
(157.6)
88.7
650.5
13.6
246.3
(157.6)
88.7
650.5
4.0
654.5
13.5
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly. For details refer to note 1
to the financial statements.
12. Goodwill
all figures in £ million
Cost
At 1 April
Disposals
Foreign exchange
At 31 March
Impairment
At 1 April
Disposals
Impairment
Foreign exchange
At 31 March
Net book value at 31 March
2013
2012
564.2
–
28.8
593.0
(44.9)
–
(255.8)
(1.9)
(302.6)
566.2
(3.0)
1.0
564.2
(45.1)
0.3
–
(0.1)
(44.9)
290.4
519.3
QinetiQ Group plc Annual Report and Accounts 2013 83
Financial statements
Notes to the financial statements continued
12. Goodwill continued
Goodwill at 31 March 2013 was allocated across various CGUs in the following segments: UK Services (two), Global Products (two)
and US Services (one).
Goodwill is attributable to the excess of consideration over the fair value of net assets acquired and includes expected synergies, future
growth prospects and employee knowledge, expertise and security clearances. The Group tests goodwill impairment for each CGU
annually, or more frequently if there are indications that goodwill might be impaired.
Impairment testing is dependent on management’s estimates and judgements, particularly as they relate to the forecasting of future
cash flows, the discount rates selected and expected long-term growth rates. Significant headroom exists in all CGU’s with the exception
of US Services, discussed below, and management considers that there are no likely variations in the key assumptions which would lead
to an impairment being recognised in any of the other CGU’s.
Key assumptions
Cash flows
The value-in-use calculations use discounted future cash flows based on financial plans approved by the Board covering a two-year period.
Cash flows for periods beyond this period are extrapolated based on the second year of the two-year plan, with a terminal growth-rate
assumption applied. Cash flows of the US Services division in 2013 were affected adversely by the continued budget uncertainty and
reduced Federal spending which resulted in 12% organic reduction in revenue compared to the prior year. Customers continue to defer
decisions leading to delay of new and incremental orders, the de-scoping of some existing work and the cancellation of some contract
re-competes with shorter-term extensions being awarded in their place. The cash flow assumptions for the US Services CGU reflect the
challenges described above.
Terminal growth rates
The specific plans for each of the CGUs have been extrapolated using a terminal growth rate of 2.0%-3.0% (2012: 2.0%-3.0%). Growth rates
are based on management’s estimates which take into consideration the long-term nature of the industry in which the CGUs operate and
external forecasts as to the likely growth of the industry in the longer term.
Discount rates
The Group’s weighted average cost of capital was used as a basis in determining the discount rate to be applied adjusted for risks specific
to the market characteristics of CGUs as appropriate on a pre-tax basis. This is considered to appropriately estimate a market participant
discount rate. The pre-tax discount rates applied for the two UK Services CGUs were 10.6% and 10.7%, for the US Services CGU 9.7%, and
for the Global Products CGUs 9.7% and 10.4%.
Sensitivity analysis shows that both the discount rate and growth rate assumptions are key variables that have an impact on the outcome
of the recoverable amount.
Significant CGUs
The value in use of the US Services CGU, calculated using the key assumptions discussed above, was lower than the carrying value of
the CGU’s net operating assets which resulted in an impairment of £255.8m. Sensitivity analysis shows that a decrease or increase of 1%
in the discount rate assumption would result in an impairment of £180.2m or £301.2m respectively. Sensitivity analysis also shows that
a decrease or increase of 1% in the terminal growth rate would result in an impairment of £300.0m or £182.1m. The carrying value of
goodwill for this CGU as at 31 March 2013, after impairment, was £142.8m and its net operating assets excluding goodwill were £88.0m.
A reduction of 5% in the value of the terminal year cash flows would result in an additional £12.4m reduction in the carrying value of
goodwill.
The Technology Solutions CGU in the US has significant headroom. An increase in the discount rate or a decrease in the terminal growth
rate of 1% would not cause the net operating assets to exceed their recoverable amount. The carrying value of goodwill for this CGU
as at 31 March was £111.7m.
The Technology Solutions CGU in the UK and the individual CGUs within UK Services all have significant headroom. An increase in the
discount rate or a decrease in the terminal growth rate by 1% would not cause the net operating assets to exceed their recoverable
amount. The carrying value of goodwill for the Technology Solutions CGU in the UK as at 31 March was £5.7m. The carrying value of
goodwill for the two UK Services CGUs as at 31 March was £27.5m and £2.7m.
The Directors have not identified any other likely changes in other significant assumptions between 31 March 2013 and the signing
of the financial statements that would cause the carrying value of the recognised goodwill to exceed its recoverable amount.
84 QinetiQ Group plc Annual Report and Accounts 2013
13. Intangible assets
Year ended 31 March 2013
all figures in £ million
Cost
At 1 April 2012
Additions – internally developed
Additions – purchased
Disposals
Transfers
Foreign exchange
At 31 March 2013
Amortisation and impairment
At 1 April 2012
Amortisation charge for year
Disposals
Foreign exchange
At 31 March 2013
Net book value at 31 March 2013
Year ended 31 March 2012
all figures in £ million
Cost
At 1 April 2011
Additions – internally developed
Additions – purchased
Disposals
Disposals – recognised on divestments
Transfers
Foreign exchange
At 31 March 2012
Amortisation and impairment
At 1 April 2011
Amortisation charge for year
Impairments
Disposals
Disposals – recognised on divestments
Transfers
Foreign exchange
At 31 March 2012
Net book value at 31 March 2012
O
v
e
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v
i
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w
B
u
s
i
n
e
s
s
r
e
v
i
e
w
C
o
r
p
o
r
a
t
e
g
o
v
e
r
n
a
n
c
e
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
i
A
d
d
(cid:2)
o
n
a
l
i
n
f
o
r
m
a
(cid:2)
o
n
Total
263.5
0.3
0.3
(1.2)
0.6
10.4
273.9
191.7
18.0
(1.2)
7.6
216.1
Total
267.2
0.3
0.4
(0.4)
(4.2)
–
0.2
263.5
164.0
26.8
2.5
(0.1)
(1.8)
–
0.3
191.7
36.6
–
0.3
(1.2)
0.5
0.3
36.5
33.1
3.1
(1.2)
0.3
35.3
36.8
–
0.4
(0.4)
–
(0.2)
–
36.6
26.7
4.2
2.5
(0.1)
–
(0.2)
–
33.1
1.2
57.8
Acquired intangible assets
Intellectual
property
Customer
relationships
Brand
names
Development
costs
Other
intangible
assets
Acquired intangible assets
Customer
relationships
Intellectual
property
Brand
names
Development
costs
Other
intangible
assets
147.7
–
–
–
–
7.5
155.2
92.8
10.0
–
5.0
107.8
47.4
55.2
–
–
–
–
2.1
57.3
46.5
2.6
–
1.9
51.0
6.3
9.6
–
–
–
–
0.5
10.1
6.0
1.4
–
0.4
7.8
2.3
14.4
0.3
–
–
0.1
–
14.8
13.3
0.9
–
–
14.2
0.6
147.3
–
–
–
–
–
0.4
147.7
79.5
12.9
–
–
–
–
0.4
92.8
54.9
55.3
–
–
–
–
–
(0.1)
55.2
40.9
5.7
–
–
–
–
(0.1)
46.5
8.7
13.9
–
–
–
(4.2)
–
(0.1)
9.6
6.1
1.7
–
–
(1.8)
–
–
6.0
3.6
13.9
0.3
–
–
–
0.2
–
14.4
10.8
2.3
–
–
–
0.2
–
13.3
1.1
3.5
71.8
Impairment of other intangible assets of £2.5m was incurred in the UK Services business segment and related to certain software assets no
longer being utilised.
QinetiQ Group plc Annual Report and Accounts 2013 85
Financial statements
Notes to the financial statements continued
14. Property, plant and equipment
Year ended 31 March 2013
all figures in £ million
Cost
At 1 April 2012
Additions
Disposals
Transfers
Transfer from ‘assets classified as held for sale’
Foreign exchange
At 31 March 2013
Depreciation
At 1 April 2012
Charge for year
Impairment
Disposals
Transfers
Transfer from ‘assets classified as held for sale’
Foreign exchange
At 31 March 2013
Net book value at 31 March 2013
Year ended 31 March 2012
all figures in £ million
Cost
At 1 April 2011
Additions
Disposals
Disposals – recognised on divestments
Transfer
Foreign exchange
At 31 March 2012
Depreciation
At 1 April 2011
Charge for year
Impairment
Disposals
Disposals – recognised on divestments
Transfer
At 31 March 2012
Net book value at 31 March 2012
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets under
construction
307.8
0.3
(1.1)
4.0
8.4
0.6
320.0
121.6
11.8
4.0
(0.8)
0.1
3.3
0.5
140.5
179.5
153.6
1.5
(3.1)
10.2
–
0.9
163.1
121.3
11.8
–
(2.9)
–
–
0.6
130.8
32.3
48.6
0.6
(2.8)
5.7
–
1.0
53.1
38.9
4.4
–
(2.6)
(0.1)
–
0.7
41.3
11.8
18.4
24.7
(4.9)
(20.5)
–
0.1
17.8
–
–
–
–
–
–
–
–
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets under
construction
305.8
0.5
(0.4)
(0.1)
2.0
–
307.8
110.3
10.7
1.9
(0.4)
(0.1)
(0.8)
121.6
186.2
150.1
2.8
(3.9)
(1.0)
5.6
–
153.6
112.2
12.0
0.8
(3.5)
(0.6)
0.4
121.3
32.3
48.2
1.0
(3.1)
(0.4)
2.8
0.1
48.6
33.8
5.5
1.6
(2.0)
(0.4)
0.4
38.9
13.1
17.7
(2.0)
–
(10.4)
–
18.4
–
–
–
–
–
–
–
Total
528.4
27.1
(11.9)
(0.6)
8.4
2.6
554.0
281.8
28.0
4.0
(6.3)
–
3.3
1.8
312.6
Total
517.2
22.0
(9.4)
(1.5)
–
0.1
528.4
256.3
28.2
4.3
(5.9)
(1.1)
–
281.8
Impairment of land and buildings of £4.0m (2012: £1.9m), expensed in the consolidated income statement as a specific adjusting item,
relates to vacant owned properties where there have been no external tenants following vacancies arising in the year.
17.8
241.4
9.7
18.4
246.6
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 30.
86 QinetiQ Group plc Annual Report and Accounts 2013
O
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B
u
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i
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e
s
s
r
e
v
i
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w
C
o
r
p
o
r
a
t
e
g
o
v
e
r
n
a
n
c
e
F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
i
A
d
d
(cid:2)
o
n
a
l
i
n
f
o
r
m
a
(cid:2)
o
n
15. Non-current investments
As at 31 March
all figures in £ million
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets of joint ventures and associates
Other non-current investments
Total
There were no material transactions with joint ventures and associates.
2013
2012
Joint venture
and associates
financial results
0.3
2.3
2.6
(2.0)
–
(2.0)
0.6
–
0.6
Group net
share of joint
ventures and
associates
0.1
1.1
1.2
(0.9)
–
(0.9)
0.3
0.1
0.4
Joint venture
and associates
financial results
1.7
8.7
10.4
(5.2)
(1.0)
(6.2)
4.2
–
4.2
Group net
share of joint
ventures and
associates
0.5
2.8
3.3
(2.0)
(0.3)
(2.3)
1.0
4.8
5.8
16. Deferred tax
Deferred tax assets and liabilities are offset only where there is a legally enforceable right to do so and there is an intention to settle
the balances net.
Movements in the deferred tax assets and liabilities are shown below:
Year ended 31 March 2013
Deferred tax asset
all figures in £ million
At 1 April 2012
Released through income statement
Created through equity
Prior-year adjustment
Foreign exchange
Transfer to current tax
Deferred tax impact of change in rates
Gross deferred tax asset at 31 March 2013
Less: liability available for offset
Net deferred tax asset at 31 March 2013
Deferred tax liability
all figures in £ million
At 1 April 2012
Created through the income statement
Foreign exchange
Gross deferred tax liability at 31 March 2013
Less: asset available for offset
Net deferred tax liability at 31 March 2013
Pension
liability
13.3
(9.2)
10.1
–
–
–
(0.5)
13.7
Accelerated
capital
allowances
3.1
(2.3)
–
(0.1)
–
–
(0.1)
0.6
Hedging
–
–
–
–
–
–
–
–
Short-term
timing
differences
34.2
(5.9)
–
0.3
1.9
(0.6)
–
29.9
Amortisation
(33.6)
23.8
(2.0)
(11.8)
Total
50.6
(17.4)
10.1
0.2
1.9
(0.6)
(0.6)
44.2
(11.8)
32.4
Total
(33.6)
23.8
(2.0)
(11.8)
11.8
–
At the balance sheet date the Group had unused tax losses of £202.7m (2012: £200.0m) potentially available for offset against future
profits. No deferred tax asset has been recognised in respect of this amount because of uncertainty over the timing of its utilisation.
These losses can be carried forward indefinitely.
QinetiQ Group plc Annual Report and Accounts 2013 87
Financial statements
Notes to the financial statements continued
16. Deferred tax continued
Year ended 31 March 2012
Deferred tax asset
all figures in £ million
At 1 April 2011
(Released)/created through income statement
Created through equity
Prior-year adjustment
Foreign exchange
Transfer to current tax
Deferred tax impact of change in rates
Gross deferred tax asset at 31 March 2012
Less: liability available for offset
Net deferred tax asset at 31 March 2012
Deferred tax liability
all figures in £ million
At 1 April 2011
Created through the income statement
Foreign exchange
Transfer to deferred tax asset
Gross deferred tax liability at 31 March 2012
Less: asset available for offset
Net deferred tax liability at 31 March 2012
17. Inventories
As at 31 March
all figures in £ million
Raw materials
Work in progress
Finished goods
18. Current asset investments
As at 31 March
all figures in £ million
Available for sale investment
Pension
liability
32.4
(48.7)
30.7
–
–
–
(1.1)
13.3
Accelerated
capital
allowances
0.6
3.2
–
(0.5)
–
0.1
(0.3)
3.1
Short-term
timing
differences
37.6
–
–
(1.1)
0.1
(2.4)
–
34.2
Hedging
0.1
(0.2)
0.1
–
–
–
–
–
Amortisation
(36.9)
3.6
(0.1)
(0.2)
(33.6)
2013
16.5
4.7
4.3
25.5
2013
1.4
Total
70.7
(45.7)
30.8
(1.6)
0.1
(2.3)
(1.4)
50.6
(33.6)
17.0
Total
(36.9)
3.6
(0.1)
(0.2)
(33.6)
33.6
–
2012
20.2
1.2
9.8
31.2
2012
1.1
At 31 March 2013 the Group held a 4.9% shareholding in pSivida Limited (31 March 2012: 4.9%), a company listed on NASDAQ and the
Australian and Frankfurt Stock Exchanges. The investment is held at fair value of £1.4m (2012: £1.1m) using the closing share price at
31 March 2013 of AUS$2.22 per share (31 March 2012: AUS$1.94 per share).
88 QinetiQ Group plc Annual Report and Accounts 2013
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19. Trade and other receivables
As at 31 March
all figures in £ million
Trade receivables
Amounts recoverable under contracts
Other receivables
Prepayments
2013
143.4
112.2
15.2
13.4
284.2
2012
164.5
141.6
82.9
15.8
404.8
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 to the reporting date. Credit risk is limited as a result of the high percentage of revenue derived from UK
and US defence and other government agencies. Accordingly, the Directors believe that no credit provision in excess of the allowance for
doubtful debts is required. As at 31 March 2013 the Group carried a provision for doubtful debts of £1.9m (2012: £4.0m). Other receivables
decreased significantly from 2012 due to the receipt of £65m from MOD in respect of the recovery of prior year restructuring costs.
Ageing of past due but not impaired receivables
all figures in £ million
Up to three months
Over three months
Movements in the doubtful debt provision
all figures in £ million
At 1 April
Created
Released
Utilised
At 31 March
2013
37.1
3.4
40.5
2013
4.0
0.7
(1.9)
(0.9)
1.9
2012
36.5
4.1
40.6
2012
5.8
3.7
(4.2)
(1.3)
4.0
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.
20. Assets classified as held for sale
As at 31 March
all figures in £ million
Property, plant and equipment
Total assets held for sale
2013
–
–
2012
5.1
5.1
The Group does not hold any assets classified as held for sale as at the balance sheet date. Assets previously held for sale included various
properties in the UK that are surplus to the Group’s requirements and are being marketed for sale. These assets no longer meet the criteria
for disclosure under IFRS 5; the prospective buyer has withdrawn and hence the sale of these assets is no longer expected to complete
within the forthcoming twelve months.
QinetiQ Group plc Annual Report and Accounts 2013 89
Financial statements
Notes to the financial statements continued
21. Trade and other payables
As at 31 March
all figures in £ million
Trade payables
Other tax and social security
Other payables
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
22. Provisions
Year ended 31 March 2013
all figures in £ million
At 1 April 2012
Reclassification
Created in year
Released in year
Unwind of discount
Utilised in year
Foreign exchange
At 31 March 2013
Current liability
Non-current liability
At 31 March 2013
2013
43.7
25.9
16.9
371.5
458.0
7.0
0.6
7.6
465.6
Other
16.5
(11.9)
3.5
(1.9)
–
–
–
6.2
0.1
6.1
6.2
2012
38.5
48.2
17.7
394.3
498.7
20.3
0.3
20.6
519.3
Total
16.6
–
23.5
(2.2)
0.7
(3.6)
0.1
35.1
12.4
22.7
35.1
Restructuring
0.1
–
17.0
–
–
(1.9)
0.1
15.3
9.9
5.4
15.3
Property
–
11.9
3.0
(0.3)
0.7
(1.7)
–
13.6
2.4
11.2
13.6
Restructuring provisions relate mainly to cost reduction initiatives in the US and include redundancy and vacant property provisions.
Redundancy provisions are expected to be utilised within 12 months and provisions in respect of vacant property will be utilised in line
with the remaining lease period. Lease periods extend out to 2019.
Property provisions, other than those relating to restructuring discussed above, relate to under-utilised properties in the UK. The extent
of the provision is affected by the timing of when properties can be sub-let and the proportion of space that can be sub-let. Based on
current assessment the provision will be utilised within 13 years.
Other provisions relate to environmental and other liabilities, the magnitude and timing of utilisation of which are determined by a variety
of factors.
90 QinetiQ Group plc Annual Report and Accounts 2013
23. Net cash/debt
As at 31 March
all figures in £ million
Current financial assets/(liabilities)
US$ private placement notes – 7.13%
US$ private placement notes – 7.62%
Deferred financing costs
Borrowings
Derivative financial instruments
Finance lease debtor/(creditor)
Total current financial assets/(liabilities)
Non-current assets/(liabilities)
US$ private placement notes – 7.13%
US$ private placement notes – 5.50%
US$ private placement notes – 7.62%
Deferred financing costs
Borrowings
Derivative financial instruments
Finance lease debtor/(creditor)
Total non-current financial assets/(liabilities)
Cash
Cash equivalents
Total cash and cash equivalents
Total net cash/(debt) as defined by the Group
Assets
2013
Liabilities
–
–
–
–
0.1
2.5
2.6
–
–
–
–
–
–
4.3
4.3
32.6
207.8
240.4
–
–
0.6
0.6
(0.2)
(2.4)
(2.0)
(29.2)
(32.1)
(106.4)
0.5
(167.2)
(0.1)
(4.0)
(171.3)
–
–
–
Net
–
–
0.6
0.6
(0.1)
0.1
0.6
(29.2)
(32.1)
(106.4)
0.5
(167.2)
(0.1)
0.3
(167.0)
32.6
207.8
240.4
74.0
Assets
2012
Liabilities
–
–
–
–
0.1
2.3
2.4
–
–
–
–
–
0.1
6.8
6.9
46.2
71.6
117.8
(15.9)
(67.3)
0.6
(82.6)
(0.1)
(2.2)
(84.9)
(26.6)
(30.4)
(102.0)
1.0
(158.0)
–
(6.4)
(164.4)
–
–
–
Net
(15.9)
(67.3)
0.6
(82.6)
–
0.1
(82.5)
(26.6)
(30.4)
(102.0)
1.0
(158.0)
0.1
0.4
(157.5)
46.2
71.6
117.8
(122.2)
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At 31 March 2013 £2.7m (2012: £5.2m) of cash was held by the Group’s captive insurance subsidiary, including £0.2m (2012: £0.2m)
that was restricted in its use.
All US$ private placement notes have been issued as fixed-rate bonds and have not been converted to floating-rate. Further analysis
of the terms and maturity dates for financial liabilities are set out in note 25. In the year ended 31 March 2013 the Group completed
the previously announced programme to repay US$177m of private placement debt.
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Reconciliation of net cash flow to movement in net cash/debt
all figures in £ million
Increase in cash and cash equivalents in the year
Repayment of US$ private placement notes
Settlement of forward contracts
Capital element of finance lease payments
Capital element of finance lease receipts
Change in net cash/debt resulting from cash flows
Amortisation of deferred financing costs
Finance lease receivables
Finance lease payables
Foreign exchange and other non-cash movements
Movement in net cash/debt in year
Net debt at beginning of year
Net cash/(debt) at 31 March 2013
2013
121.6
63.0
1.3
2.8
(3.0)
185.7
(0.5)
0.7
(0.6)
10.9
196.2
(122.2)
74.0
2012
15.2
133.6
1.6
2.8
(3.0)
150.2
(0.6)
0.9
(0.8)
(11.0)
138.7
(260.9)
(122.2)
QinetiQ Group plc Annual Report and Accounts 2013 91
Financial statements
Notes to the financial statements continued
23. Net cash/debt continued
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
Less: unearned finance income
Present value of minimum lease payments
Minimum lease payments
2013
2012
Present value of minimum
lease payments
2013
2012
3.0
4.5
7.5
(0.7)
6.8
3.0
7.5
10.5
(1.4)
9.1
2.5
4.3
6.8
–
6.8
2.3
6.8
9.1
–
9.1
The Group leases out certain buildings under finance leases over a 12-year term that expires 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
Less future finance charges
Present value of minimum lease payments
Classified as follows:
Financial liability – current
Financial liability – non-current
Minimum lease payments
2013
2012
Present value of minimum
lease payments
2013
2012
2.8
4.2
7.0
(0.6)
6.4
2.8
7.1
9.9
(1.2)
8.7
2.4
4.0
6.4
–
6.4
2.4
4.0
6.4
2.2
6.4
8.6
–
8.6
2.2
6.4
8.6
The Group utilises certain buildings under finance leases. Average lease terms are typically between two and ten years (31 March 2012:
between two and ten years).
24. 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 sub-lease income statement expense – minimum lease payments
The Group had the following total future minimum lease payment commitments:
all figures in £ million
Within one year
In the second to fifth years inclusive
Greater than five years
2013
7.8
23.8
3.4
35.0
2013
23.1
2013
21.4
58.1
20.5
100.0
2012
7.1
23.4
1.6
32.1
2012
22.1
2012
18.9
67.8
22.5
109.2
Operating lease payments represent rentals payable by the Group on certain property, plant and equipment. Principal operating leases
are negotiated for a term of approximately ten years.
92 QinetiQ Group plc Annual Report and Accounts 2013
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25. Financial risk management
The Group’s international operations and debt financing expose it to financial risks that include the effects of changes in foreign exchange
rates, interest rates, credit risks and liquidity risks.
Treasury and risk management policies, which are set by the Board, specify guidelines on financial risks and the use of financial instruments
to manage risk. The instruments and techniques used to manage exposures include foreign currency derivatives and interest rate
derivatives. Group treasury monitors financial risks and compliance with risk management policies.
A) Fair values of financial instruments
The fair value hierarchy is as follows:
Level 1 – measured using quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 – measured using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs).
The following table presents the Group’s assets and liabilities that are measured at fair value at 31 March 2013:
all figures in £ million
Assets
Current other investments
Current derivative financial instruments
Non-current other investments
Liabilities
Current derivative financial instruments
Non-current derivative financial instruments
Total
Note
Level 1
Level 2
Level 3
Total
18
23
23
23
1.4
–
–
–
–
1.4
–
0.1
–
(0.2)
(0.1)
(0.2)
–
–
0.1
–
–
0.1
1.4
0.1
0.1
(0.2)
(0.1)
1.3
For cash and cash equivalents, trade and other receivables and bank and current borrowings, the fair value of the financial instruments
approximate to their carrying value as a result of the short maturity periods of these financial instruments. For trade and other receivables,
allowances are made within the carrying value for credit risk. For other financial instruments, the fair value is based on market value,
where available. Where market values are not available, the fair values have been calculated by discounting cash flows to net present
value using prevailing market-based interest rates translated at the year-end rates, except for unlisted fixed asset investments where
fair value equals carrying value.
QinetiQ Group plc Annual Report and Accounts 2013 93
Financial statements
Notes to the financial statements continued
25. Financial risk management continued
All financial assets and liabilities have a fair value that is identical to book value at 31 March 2013 and 31 March 2012 except where
noted below:
Note
Available
for sale
Loans and
receivables
Financial
liabilities at
amortised cost
Derivatives
used as
hedges
Total
carrying
value
As at 31 March 2013
all figures in £ million
Financial assets
Non-current
Finance leases
Other investments
Current
Finance leases
Trade and other receivables
Derivative financial instruments
Current asset investments
Cash and cash equivalents
Total financial assets
Financial liabilities
Non-current
Trade and other payables
Bank and other borrowings
Finance leases
Derivative financial instruments
Current
Trade and other payables
Derivative financial instruments
Finance leases
Bank overdraft, finance cost and
private placement
Total financial liabilities
23
15
23
19
23
18
23
21
23
23
23
21
23
23
23
–
0.1
–
–
–
1.4
–
1.5
–
–
–
–
–
–
–
–
–
4.3
–
2.5
284.2
–
–
240.4
531.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(7.6)
(167.2)
(4.0)
–
(458.0)
–
(2.4)
0.6
(638.6)
Total
fair
value
4.4
0.1
3.0
284.2
0.1
1.4
240.4
533.6
(7.6)
(197.7)
(4.2)
(0.1)
(458.0)
(0.2)
(2.8)
–
–
–
–
0.1
–
–
0.1
4.3
0.1
2.5
284.2
0.1
1.4
240.4
533.0
–
–
–
(0.1)
(7.6)
(167.2)
(4.0)
(0.1)
–
(0.2)
–
(458.0)
(0.2)
(2.4)
–
(0.3)
0.6
(638.9)
0.6
(670.0)
Total
1.5
531.4
(638.6)
(0.2)
(105.9)
(136.4)
94 QinetiQ Group plc Annual Report and Accounts 2013
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As at 31 March 2012
all figures in £ million
Financial assets
Non-current
Finance leases
Derivative financial instruments
Other investments
Current
Finance leases
Trade and other receivables
Derivative financial instruments
Current asset investments
Cash and cash equivalents
Total financial assets
Financial liabilities
Non-current
Trade and other payables
Bank and other borrowings
Finance leases
Current
Trade and other payables
Derivative financial instruments
Finance leases
Bank overdraft, finance cost and
private placement
Total financial liabilities
Note
Available
for sale
Loans and
receivables
Financial
liabilities at
amortised
cost
Derivatives
used as
hedges
Total
carrying
value
Total
fair
value
23
23
15
23
19
23
18
23
21
23
23
21
23
23
23
–
–
4.8
–
–
–
1.1
–
5.9
–
–
–
–
–
–
–
–
6.8
–
–
2.3
404.8
–
–
117.8
531.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(20.6)
(158.0)
(6.4)
(498.7)
–
(2.2)
(82.6)
(768.5)
–
0.1
–
–
–
0.1
–
–
0.2
–
–
–
–
(0.1)
–
–
(0.1)
6.8
0.1
4.8
2.3
404.8
0.1
1.1
117.8
537.8
(20.6)
(158.0)
(6.4)
(498.7)
(0.1)
(2.2)
7.2
0.1
4.8
3.0
404.8
0.1
1.1
117.8
538.9
(20.6)
(185.7)
(6.8)
(498.7)
(0.1)
(2.8)
(82.6)
(768.6)
(82.6)
(797.3)
Total
5.9
531.7
(768.5)
0.1
(230.8)
(258.4)
QinetiQ Group plc Annual Report and Accounts 2013 95
Financial statements
Notes to the financial statements continued
25. Financial risk management continued
B) Interest rate risk
The Group operates an interest rate policy designed to optimise interest costs and to reduce volatility in reported earnings. The Group’s
current policy is to require rates to be fixed for 30-80% of the level of borrowings, which is achieved primarily through fixed-rate
borrowings, and through the use of interest rate swaps. Where there are significant changes in the level and/or structure of debt, policy
permits borrowings to be 100% fixed, with regular Board reviews of the appropriateness of this fixed percentage. At 31 March 2013 100%
(2012: 100%) of the Group’s borrowings were at fixed rates with no adjustment for interest rate swaps.
Financial assets/(liabilities)
As at 31 March 2013
all figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
As at 31 March 2012
all figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
Fixed or
capped
6.8
–
–
–
–
6.8
Fixed or
capped
9.1
–
–
–
–
9.1
Financial asset
Financial liability
Floating
219.6
9.2
0.9
8.2
2.5
240.4
Non-interest
bearing
0.1
0.1
–
1.4
–
1.6
Fixed or
capped
(6.4)
(167.7)
–
–
–
(174.1)
Floating
–
–
–
–
–
–
Non-interest
bearing
(0.3)
–
–
–
–
(0.3)
Financial asset
Financial liability
Floating
95.2
14.9
0.2
5.5
2.0
117.8
Non-interest
bearing
4.9
–
–
1.1
–
6.0
Fixed or
capped
(8.6)
(242.2)
–
–
–
(250.8)
Floating
–
–
–
–
–
–
Non-interest
bearing
(0.1)
–
–
–
–
(0.1)
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 and deferred finance costs are excluded from this analysis.
For the fixed or capped-rate financial assets and liabilities, the average interest rates (including the relevant marginal cost of borrowing)
and the average period for which the rates are fixed are:
Financial assets:
Sterling
Financial liabilities:
Sterling
US dollar
Total financial liabilities
2013
Weighted
average
interest rate
%
Weighted
average years
to maturity
13.4
12.1
7.1
7.3
2.5
2.5
4.9
4.8
Fixed or
capped
£m
6.8
(6.4)
(167.7)
(174.1)
2012
Weighted
average
interest rate
%
Weighted
average years
to maturity
13.4
12.1
7.2
7.4
3.5
3.5
4.3
4.3
Fixed or
capped
£m
9.1
(8.6)
(242.2)
(250.8)
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
The Group private placement borrowings are fixed-rate, while the revolving credit facility is floating-rate and undrawn as at 31 March.
96 QinetiQ Group plc Annual Report and Accounts 2013
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C) Currency risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from sales or purchases by businesses in currencies other than their functional
currency. It is Group policy that when such a sale or purchase is certain, the net foreign exchange exposure is hedged using forward
foreign exchange contracts. Hedge accounting documentation and effectiveness testing are undertaken for all the Group’s transactional
hedge contracts.
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.
Functional currency of the operating company
all figures in £ millions
31 March 2013 – sterling
31 March 2012 – sterling
US$
0.9
13.4
Net foreign currency monetary assets/(liabilities)
Other
1.9
2.2
AUS$
1.5
6.6
Euro
(2.5)
1.7
Total
1.8
23.9
The amounts shown in the table take into account the effect of the forward contracts entered into to manage these currency exposures.
The Group enters into forward foreign currency contracts to hedge the currency exposures that arise on sales and purchases denominated
in foreign currencies, as the transaction occurs. The principal contract amounts of the outstanding forward currency contracts as at
31 March 2013 against sterling are net US dollars bought £2.5m (US$4.0m) and net euros sold £10.8m (€12.8m).
Translational currency exposure
The Group has significant investments in overseas operations, particularly in the United States. As a result, the sterling value of the Group’s
balance sheet can be significantly affected by movement in exchange rates. The Group seeks to mitigate the effect of these translational
exposures by matching the net investment in overseas operations with borrowings denominated in their functional currencies unless the
cost of such hedging activity is uneconomic. This is achieved by borrowing in the local currency or, in some cases, indirectly through the use
of forward foreign exchange contracts.
D) Financial credit risk
The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not
currently expect any counterparties to fail to meet their obligations. Credit risk is mitigated by a Board-approved policy of only selecting
counterparties with a strong investment grade long-term credit rating for cash deposits. In the normal course of business, the Group
operates notional cash pooling systems, where a legal right of set-off applies.
The maximum credit-risk exposure in the event of other parties failing to perform their obligations under financial assets, excluding
trade and other receivables, totals £248.8m (2012: £133.0m). The Group held cash and cash equivalents of £240.4m at 31 March 2013
(2012: £117.8m), which represents the maximum credit exposure on these assets. The cash and cash equivalents were held with different
financial institutions which were rated single A or better, although £207.8m was invested in AAA-rated money funds at the year end.
QinetiQ Group plc Annual Report and Accounts 2013 97
Financial statements
Notes to the financial statements continued
25. Financial risk management continued
E) Liquidity risk
Borrowing facilities
As at 31 March 2013, the Group had a Revolving Credit Facility (RCF) of US$250m and £118m (2012: US$250m and £118m).
The RCF is contracted until 2016 and is unutilised as shown in the table below:
Committed facilities 31 March 2013
Freely available cash and cash equivalents
Available funds 31 March 2013
Committed facilities 31 March 2012
Freely available cash and cash equivalents
Available funds 31 March 2012
Interest rate:
LIBOR plus
1.20%
Total
£m
282.8
Drawn
£m
–
1.20%
274.2
–
Undrawn
£m
282.8
240.2
523.0
274.2
112.6
386.8
Gross contractual cash flows for borrowings and other financial liabilities
The following are the contractual maturities of financial liabilities, including interest payments. The cash flows associated with derivatives
that are cash flow hedges are expected to have an impact on profit or loss in the periods shown.
As at 31 March 2013
all figures in £ million
Non-derivative financial liabilities
Trade and other payables
US private placement debt
Recapitalisation fee
Finance leases
Derivative financial liabilities
Forward foreign currency contracts –
cash flow hedges
As at 31 March 2012
all figures in £ million
Non-derivative financial liabilities
Trade and other payables
US private placement debt
Recapitalisation fee
Finance leases
Derivative financial liabilities
Forward foreign currency contracts –
cash flow hedges
Book value
Contractual
cash flows
1 year or less
1-2 years
2-5 years
(465.6)
(167.7)
1.1
(6.4)
(465.6)
(226.8)
–
(7.0)
(458.0)
(11.6)
–
(2.8)
(0.3)
(638.9)
(0.3)
(699.7)
(0.2)
(472.6)
(7.6)
(11.6)
–
(2.8)
(0.1)
(22.1)
–
(89.8)
–
(1.4)
–
(91.2)
Book value
Contractual
cash flows
1 year or less
1-2 years
2-5 years
(519.3)
(242.2)
1.6
(8.6)
(519.3)
(310.9)
–
(9.8)
(498.7)
(95.3)
–
(2.8)
(0.1)
(768.6)
(0.1)
(840.1)
(0.1)
(596.9)
(20.6)
(11.1)
–
(2.8)
–
(34.5)
–
(87.8)
–
(4.2)
–
(92.0)
More than
5 years
–
(113.8)
–
–
–
(113.8)
More than
5 years
–
(116.7)
–
–
–
(116.7)
98 QinetiQ Group plc Annual Report and Accounts 2013
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F) Derivative financial instruments
As at 31 March
all figures in £ million
Forward foreign currency contracts –
cash flow hedges
Derivative assets/(liabilities) at the end
of the year
As at 31 March
all figures in £ million
Expected to be recognised:
In one year or less
Between one and two years
G) Maturity of financial liabilities
As at 31 March 2013
Asset gains
2013
Liability losses
Net
Asset gains
2012
Liability losses
0.1
0.1
(0.3)
(0.3)
(0.2)
(0.2)
0.2
0.2
(0.1)
(0.1)
Asset gains
2013
Liability losses
Net
Asset gains
2012
Liability losses
0.1
–
0.1
(0.2)
(0.1)
(0.3)
(0.1)
(0.1)
(0.2)
0.1
0.1
0.2
(0.1)
–
(0.1)
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
As at 31 March 2012
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
Trade and
other
payables
458.0
7.6
–
–
465.6
Bank
borrowings
and loan notes
(0.6)
(0.5)
61.3
106.4
166.6
Finance leases
and derivative
financial
instruments
2.6
2.8
1.3
–
6.7
Trade and
other
payables
498.7
20.6
–
–
519.3
Bank
borrowings
and loan notes
82.6
(0.6)
56.5
102.1
240.6
Finance leases
and derivative
financial
instruments
2.3
2.0
4.4
–
8.7
Net
0.1
0.1
Net
–
0.1
0.1
Total
460.0
9.9
62.6
106.4
638.9
Total
583.6
22.0
60.9
102.1
768.6
QinetiQ Group plc Annual Report and Accounts 2013 99
Financial statements
Notes to the financial statements continued
25. Financial risk management continued
H) Sensitivity analysis
The Group’s sensitivity to changes in foreign exchange rates and interest rates on financial assets and liabilities as at 31 March 2013
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. Sensitivity on Group assets other than
financial assets and liabilities is not included in this analysis.
The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming that certain market conditions
occur. Actual results in the future may differ materially from those projected as a result of developments in the global financial markets
that may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the table below, which
should not, therefore, be considered to be 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 2013, with all other
variables remaining constant. The estimated changes for foreign exchange rates are based on an instantaneous 10% weakening or
strengthening in sterling against all other currencies from the levels applicable at 31 March 2013, with all other variables remaining
constant. Such analysis is for illustrative purposes only – in practice market rates rarely change in isolation. The figures shown below
relate primarily to the translational impact on the Group’s US$ debt. This debt is held in the US so there is no transactional impact.
The impact of transactional risk on the Group’s monetary assets/liabilities that are not held in the functional currency of the entity
holding those assets/liabilities is minimal. A 10% weakening in sterling would result in a £0.1m increase in profit before tax.
1% decrease in interest rates
10% weakening in sterling
Equity
–
–
–
Profit
before tax
(2.2)
(0.1)
(0.1)
Equity
–
(17.6)
1.4
Profit
before tax
–
(1.3)
–
1% increase in interest rates
10% strengthening in sterling
Equity
–
–
–
Profit
before tax
2.2
0.1
0.1
Equity
–
14.4
(1.2)
Profit
before tax
–
1.1
–
1% decrease in interest rates
10% weakening in sterling
Equity
–
–
–
Profit
before tax
(0.7)
–
(0.1)
Equity
–
(25.3)
1.0
Profit
before tax
–
(2.0)
–
1% increase in interest rates
10% strengthening in sterling
Equity
–
–
–
Profit
before tax
1.0
0.1
0.1
Equity
–
20.7
(1.0)
Profit
before tax
–
1.6
–
As at 31 March 2013
all figures in £ million
Sterling
US dollar
Other
all figures in £ million
Sterling
US dollar
Other
As at 31 March 2012
all figures in £ million
Sterling
US dollar
Other
all figures in £ million
Sterling
US dollar
Other
100 QinetiQ Group plc Annual Report and Accounts 2013
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26. Cash flows from operations
For the year ended 31 March
all figures in £ million
(Loss)/profit after tax for the year
Adjustments for:
Taxation (income)/expense
Net finance costs
Gain on business divestments and disposal of investments
Impairment of investments
Amortisation of purchased or internally developed intangible assets
Amortisation of intangible assets arising from acquisitions and impairments
Impairment of goodwill
Depreciation and impairment of property, plant and equipment
Loss/(gain) on disposal of property, plant and equipment
Share of post-tax profit of equity accounted entities
Share-based payments charge
Gain in respect of previously capitalised DTR programme bid costs
Changes in retirement benefit obligations
Pension curtailment gain
Pension past service gain
Net movement in provisions
Decrease in inventories
Decrease in receivables
(Decrease)/increase in payables
Changes in working capital
Cash generated from operations
Add back: cash (inflow)/outflow relating to restructuring
Net cash flow from operations before restructuring costs
2013
(133.2)
2012
(restated^)
246.3
(3.8)
17.9
(2.9)
0.6
4.0
14.0
255.8
32.0
0.8
(0.1)
5.5
–
(20.1)
(0.7)
–
17.7
187.5
6.6
124.1
(60.7)
70.0
257.5
(63.1)
194.4
70.0
56.6
(11.6)
–
9.0
20.3
–
32.5
(5.8)
(0.1)
4.2
(4.1)
(60.7)
(1.1)
(141.4)
(15.8)
198.3
12.1
1.2
30.3
43.6
241.9
8.9
250.8
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly. Refer to note 1
to the financial statements.
QinetiQ Group plc Annual Report and Accounts 2013 101
Financial statements
Notes to the financial statements continued
27. Share capital and other reserves
Shares allotted, called up and fully paid:
At 1 April 2011
Issued in the year
At 31 March 2012
Issued in the year
At 31 March 2013
Ordinary shares of 1p each (equity)
Special Share of £1
(non-equity)
£
–
Number
6,604,764 660,476,373
–
6,604,764 660,476,373
–
6,604,764 660,476,373
–
£
1
–
1
–
1
Number
1
–
1
–
1
Total
£
–
Number
6,604,765 660,476,374
–
6,604,765 660,476,374
–
6,604,765 660,476,374
–
Except as noted below all shares in issue at 31 March 2013 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
on-going commercial relationship between the MOD and QinetiQ, and to promote and reinforce the Compliance Principles, the MOD
holds a Special Share in QinetiQ. QinetiQ obtained MOD consent to changes in its Special Shareholder rights, which were approved by
shareholders at the 2012 AGM. The changes to the Special Share were disclosed in the 2012 Annual Report. Subsequent to the changes
approved at the 2012 AGM 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 for its consideration in relation to the application of the Compliance Principles;
c) to require the Board to obtain Special Shareholder’s consent:
i)
ii)
if at any time when the chairman is not a British Citizen, it is proposed to appoint any person to the office of chief executive,
who is not a British Citizen; and
if at any time when the chief executive is not a British Citizen, it is proposed to appoint any person to the office of chairman,
who is not a British Citizen;
d) to require the Board to take action to 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 interests of the United Kingdom; and
e) to demand a poll at any of 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 30 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.
Other reserves
The translation reserve includes the cumulative foreign exchange difference arising on translation since the Group transitioned to IFRS.
Movements on hedge instruments, where the hedge is effective, are recorded in the hedge reserve until the hedge ceases.
The capital redemption reserve, which was created following the redemption of preference share capital and the bonus issue of shares,
cannot be distributed.
Own shares
Own shares represent shares in the Company that are held by independent trusts and include treasury shares and shares held by the
employee share ownership plan. Included in retained earnings at 31 March 2013 are 11,238,669 shares (2012: 12,819,460 shares).
102 QinetiQ Group plc Annual Report and Accounts 2013
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The Group operates a number of share-based payment plans for employees. The total share-based payment expense in the year was
£5.5m of which £3.8m related to equity settled schemes and £1.7m related to cash settled schemes (year to 31 March 2012: £4.2m,
of which £3.7m related to equity settled schemes and £0.5m to cash settled schemes).
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
Exercised during year
Forfeited during year
Outstanding at end of year
2013
2012
Weighted
average
exercise price
2.3p
2.3p
2.3p
2.3p
Number
461,242
(68,080)
(40,848)
352,314
Weighted
average
exercise price
2.3p
2.3p
2.3p
2.3p
Number
544,640
(40,848)
(42,550)
461,242
The 2003 ESOS are equity-settled awards; those outstanding at 31 March 2013 had an average remaining life of 0.3 years (2012: 1.3 years).
In respect of the share options exercised during the year, the average share price on the date of exercise was 178.2p (2012: 125.4p). The
exercise price of the outstanding options was 2.3p. Of the outstanding awards at the year end 352,314 were exercisable (2012: 461,242).
QinetiQ Share Option Scheme (QSOS)
No new options were granted during the year under the QSOS. All outstanding share options vested and were forfeited during the prior
year. The exercise price of QSOS options was equal to the average market price of the Group’s shares at the date of the grant. For 2012,
the vesting of options outstanding at the end of the year depended on the growth of earnings per share (EPS) over the measurement
period; 25% of options would vest if underlying EPS growth were 22.5% for the period and 100% would vest if growth were at least 52%.
No options would vest if EPS growth were below 22.5%. Options would vest on a straight-line basis if EPS growth were between 22.5%
and 52%. None of the performance conditions were met.
Outstanding at start of year
Forfeited during year
Outstanding at end of year
2013
2012
Weighted
average
exercise price
–
–
–
Number
–
–
–
Weighted
average
exercise price
198.7p
198.7p
–
Number
3,349,939
(3,349,939)
–
QSOS grants are equity-settled awards and those outstanding at 31 March 2013 had an average remaining life of nil years (2012: nil years).
There were no QSOS awards in 2013 (2012: nil). No options were outstanding at the year end (2012: nil).
Performance Share Plan (PSP)
In the year, the Group made awards of conditional shares to certain UK senior employees under the Performance Share Plan. The awards
vest after three years with 50% of the awards subject to total shareholder return conditions and 50% subject to EPS conditions as detailed
in the Remuneration Report.
Outstanding at start of year
Granted during year
Forfeited/lapsed during year
Outstanding at end of year
2013
Number
of shares
3,684,486
4,857,004
(1,190,283)
7,351,207
2012
Number
of shares
3,438,612
1,240,500
(994,626)
3,684,486
PSP awards are equity-settled awards and those outstanding at 31 March 2013 had an average remaining life of 1.8 years (2012: 1.1 years).
There is no exercise price for these PSP awards. Monte Carlo modelling was used to fair value the TSR element of the awards at grant date.
Assumptions used in the models included 29% (2012: 34%) for the average share price volatility of the FTSE comparator group and 47%
(2012: 36%) for the average correlation to the comparator group. The weighted average fair value of grants made during the year was
£1.35 (2012: £0.88). Of the options outstanding at the end of the year nil were exercisable (2012: nil).
QinetiQ Group plc Annual Report and Accounts 2013 103
Financial statements
Notes to the financial statements continued
28. Share-based payments continued
Restricted Stock Units (RSU)
In the year the Group granted RSU awards to certain senior US employees under the RSU plan. The awards vest over one, two, three and
four years. Of the awards granted before 2012 half are dependent on achieving QNA organic profit growth targets and half on a time-based
criterion. The time-based criterion requires the employee to have been in continual service up to the date of vesting. QNA organic profit
growth is measured over the most recent financial year compared with the previous financial year, with 125% of this element awarded
at a QNA organic profit growth rate above 15%, 100% awarded at 12.5%, 75% awarded at 10% and 25% awarded at 5%. The 2012 grants
are entirely dependent on achieving QNA organic profit growth targets. 67.5% of the 2013 grants are dependent on achieving QNA organic
profit growth targets and 32.5% are dependent on a time-based criterion.
Outstanding at start of year
Granted during year
Exercised during year
Forfeited/lapsed during year
Outstanding at end of year
2013
Number of
shares
5,458,526
2,379,877
(694,197)
(1,894,345)
5,249,861
2012
Number of
shares
7,936,513
1,651,250
(2,478,688)
(1,650,549)
5,458,526
RSUs are equity-settled awards; those outstanding at 31 March 2013 had an average remaining life of 1.4 years (2012: 1.3 years). There
is no exercise price for these RSU awards. The weighted average share price at date of exercise was £1.47 (2012: £1.14). The weighted
average fair value of grants made during the year was £1.73 (2012: £1.10). Of the awards outstanding at the end of the year 24,031
were exercisable (2012: 20,724).
Value Sharing Plan (VSP)
In 2012 and 2011, the Group granted VSP awards to certain senior UK employees under the VSP Plan. The awards vest over a three-year
performance period: 50% of the 2012 awards and 70% of the 2011 awards are dependent on creating additional shareholder value,
measured as net cash returns to investors and the increase in PBT over an 8.5% hurdle; 50% of the 2012 awards and 30% of the 2011
awards are dependent on total shareholder return (TSR) against a comparator group of FTSE 250 listed companies (less investment trusts)
over a three-year performance period. Half the awards vest three years from the date of grant, the remaining half of the awards vest four
years from the date of grant. Further details of the vesting conditions of the scheme are in the Remuneration Report on page 54.
Outstanding at start of year
Granted during year
Forfeited during year
Outstanding at end of year
2013
Number of
shares
11,105,340
–
(255,300)
10,850,040
2012
Number of
shares
6,287,640
5,361,300
(543,600)
11,105,340
VSP awards are equity-settled awards; those outstanding at 31 March 2013 had an average remaining life of 0.7 years (2012: 1.7 years).
There is no exercise price for these VSP awards. Of the awards outstanding at the end of the year nil were exercisable (2012: 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. There is no
exercise price for these SIP awards.
Outstanding at start of year
Awarded during year
Exercised during year
Forfeited during year
Outstanding at end of year
2013
Number of
matching
shares
1,319,468
217,899
(450,015)
(77,689)
1,009,663
2012
Number of
matching
shares
1,382,025
358,350
(331,536)
(89,371)
1,319,468
SIP matching shares are equity-settled awards; those outstanding at 31 March 2013 had an average remaining life of 1.5 years
(2012: 1.5 years). There is no exercise price for these SIP awards. Of the shares outstanding at the end of the year nil were exercisable
(2012: nil).
104 QinetiQ Group plc Annual Report and Accounts 2013
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Group Deferred Annual Bonus Plan (DAB)
Under the QinetiQ Deferred Annual Bonus Plan the Group requires certain senior executives to defer part of their annual bonus as shares
and be entitled to matching awards to a maximum of 1:1 based on EPS performance. The number that will vest is dependent on the growth
of EPS over the measurement period of three years as detailed in the QSOS EPS conditions above. No awards will vest if EPS CAGR is less
than 7% for options granted prior to 2013 and 3% for 2013 grants.
Outstanding at start of year
Granted during year
Forfeited during year
Outstanding at end of year
2013
Number of
matching
shares
448,682
470,119
(4,180)
914,621
2012
Number of
matching
shares
6,859
480,922
(39,099)
448,682
DAB matching shares are equity-settled awards; those outstanding at 31 March 2013 had an average remaining life of 1.8 years
(2012: 2.2 years). There is no exercise price for these DAB awards. Of the shares outstanding at the end of the year nil were exercisable
(2012: nil).
Cash Alternative Units (CAU)
In the year, the Group granted CAU awards to certain employees in the UK and US.
Outstanding at start of year
Awarded during year
Exercised during the year
Forfeited during year
Outstanding at end of year
2013
Number of
shares
1,309,000
1,407,729
(298,500)
(171,250)
2,246,979
2012
Number of
shares
–
1,321,000
–
(12,000)
1,309,000
CAUs are cash-settled awards which vest over one, two, three and four years from the date of grant. The CAUs have no performance
criteria attached, other than the requirement that the employee remains in employment with the Group. Those awards outstanding
at 31 March 2013 had an average remaining life of 1.7 years (2012: 1.8 years). There is no exercise price for these awards. The fair value
of the grants at 31 March 2013 was £2.07 (2012: £1.59) being the Group’s closing share price on that day. The share price on the date
of exercise was £1.67. The carrying amount of the liability of the grants at the balance sheet date was £1.8m (2012: £0.5m). Of the awards
outstanding at the end of the year nil were exercisable.
Share-based award pricing – other
Share-based awards that vest based on non-market performance conditions, including certain PSP, RSUs and Deferred Annual Bonus
awards, have been valued at the share price at grant, less attrition. 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 before the issue of the share options. Before the IPO in February 2006, there was no active market
for the Company’s shares and expected volatility was, therefore, determined using the average volatility for a comparable selection
of businesses. Since the Group had no established pattern of dividend payments at this time, no dividends were assumed in this model.
QinetiQ Group plc Annual Report and Accounts 2013 105
Financial statements
Notes to the financial statements continued
29. Post-retirement benefits
The Company has implemented IAS 19 (revised) ‘Employee benefits’ in the year ended 31 March 2013, electing to adopt this standard
early. Comparative figures have been restated to show the effect of this early adoption. Refer to note 1 to the financial statements.
Defined contribution plans
In the UK the Group operates the Group Personal Pension Plan (GPP) for the majority of its UK employees. This is a defined contribution
scheme managed by Zurich. A defined contribution plan is a pension plan under which the Group and employees pay fixed contributions
to a third party financial provider. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold
sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory,
contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are
recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash
refund or a reduction in the future payments is available.
Defined benefit pension plans
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit plans define an amount of
pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service
and final pensionable earnings.
The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit
obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated bi-annually
by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by
discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency
in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation.
In countries where there is no deep market in such bonds, the market rates on government bonds are used.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity
in other comprehensive income in the period in which they arise. Past-service costs are recognised immediately in income.
In the UK the Group operates the QinetiQ Pension Scheme (‘the Scheme’) for a significant proportion of its UK employees. This 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 which are part
of the Public Sector Transfer Club. The Scheme is a final salary plan, which provides benefits to members in the form of a guaranteed level
of pension payable for life. The level of benefits provided depends on the members’ length of service and their salary in the final years
leading up to retirement. In the Scheme, pensions in payment are generally updated in line with the consumer price index. The benefit
payments are made from trustee-administered funds. Plan assets held in trusts are governed by UK regulations as is the nature of the
relationship between the Group and the Trustees and their composition. Responsibility for the governance of the Scheme – including
investment decisions and contribution schedules – lies jointly with the Company and the Board of Trustees. The Board of Trustees must
be composed of representatives of the Company and plan participants in accordance with the Scheme’s regulations. The expected
employer cash contribution to the Scheme for the year ending 31 March 2014 is £20.6m (2013: £40.8m). The Group has no further
payment obligations once the contributions have been paid.
Triennial funding valuation
The most recent full actuarial valuation of the Scheme was undertaken as at 30 June 2011 and resulted in an actuarially assessed deficit
of £74.7m. On the basis of this full valuation, the Trustees of the Scheme and the Company agreed the employer contribution rate of
12.7% from 30 June 2011, past service deficit recovery payments of £10.5m a year for a six-year period from 1 April 2012 and an immediate
one-off contribution of £40m into the Scheme. As part of a package of measures to provide stability to the Scheme, the Company has
also contributed an asset in the form of an interest through a Scottish limited partnership (see below) in a future income stream of
approximately £2.5m per annum, increasing in line with the Consumer Price Index, for 20 years secured on certain properties owned
by the Group.
Finally, the Company and Trustees also agreed, in the year to 31 March 2012, the key provision that the Trustees will select the Consumer
Price Index rather than the Retail Price Index as the relevant index for the increase of pensions in payment in respect of service before
1 June 2008 and for the revaluation of preserved benefits. Prior to this the Retail Price Index had always been used as the relevant index.
This change resulted in a one-off past service credit of £141.4m in 2012. The next scheduled triennial valuation will be performed as
at 30 June 2014.
106 QinetiQ Group plc Annual Report and Accounts 2013
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QinetiQ’s Pension Funding Partnership Structure
Following the 30 June 2011 valuation, a package of pension changes has been agreed with the Trustees to provide stability to the Scheme.
As part of the package of proposals, on 26 March 2012 QinetiQ established the QinetiQ PFP Limited Partnership (the ‘Partnership’) with the
Scheme. Under this arrangement, properties to the capitalised value of £32.3m were transferred to the Partnership. The transfers were
affected through a 20-year sale and leaseback agreement. The Scheme’s interest in the Partnership entitles it to an annual distribution of
approximately £2.5m for 20 years; indexed with reference to CPI. These contributions will replace part of the regular contributions made
under the past deficit recovery payments plan. The Scheme’s interest in the Partnership will revert back to QinetiQ Limited in 2032.
The Partnership is controlled by QinetiQ and its results are consolidated by the Group. Under IAS 19, the interest held by the Scheme
in the Partnership does not qualify as a plan asset for the purposes of the Group’s consolidated financial statements and is therefore not
included within the fair value of plan assets. As a result, the Group’s consolidated financial statements are unchanged by the Partnership.
In addition, the value of the property transferred to the Partnership and leased back to QinetiQ remains on the balance sheet. QinetiQ
retains the operational flexibility to substitute properties of equivalent value within the Partnership and has the option to settle
outstanding amounts due under the interest before 2032 if it so chooses.
Other UK schemes
In the UK the Group has a small number of employees for whom benefits are secured through the Prudential Platinum Scheme. The net
pension deficits of this scheme at 31 March 2013 amounted to £nil (2012: £nil). QinetiQ also offers employees access to a Group Self
Invested Personal Pension Plan, but no Company contributions are paid to this arrangement.
QinetiQ Pension Scheme net pension liability
The fair value of the QinetiQ Pension Scheme assets, which are not intended to be realised in the short term and may be subject to
significant change before they are realised, and the present value of the Scheme’s liabilities, which are derived from cash flow projections
over long periods, and thus inherently uncertain, were:
all figures in £ million
Equities
LDI investment*
Corporate bonds
Alternative bonds**
Government bonds
Property
Other
Total market value of assets
Present value of Scheme liabilities
Net pension liability before deferred tax
Deferred tax asset
Net pension liability
2013
487.3
205.9
276.8
174.8
–
81.3
30.4
1,256.5
(1,310.6)
(54.1)
13.7
(40.4)
2012
583.2
–
194.6
–
183.5
82.4
64.2
1,107.9
(1,139.4)
(31.5)
13.3
(18.2)
2011
564.1
–
158.7
–
165.3
78.0
15.0
981.1
(1,105.7)
(124.6)
32.4
(92.2)
2010
714.6
–
69.5
–
69.6
53.4
8.8
915.9
(1,063.2)
(147.3)
41.2
(106.1)
2009
473.7
–
78.4
–
83.2
–
12.1
647.4
(752.6)
(105.2)
29.4
(75.8)
*
The Scheme has assets invested in a Liability Driven Investment portfolio. As at 31 March 2013 this hedges against approximately 14% of the interest
rate and 11% of the inflation rate risk, as measured on the Trustees’ gilt-funding basis.
**
Includes allocations to high-yield bonds, secured loans and emerging market debt.
QinetiQ Group plc Annual Report and Accounts 2013 107
Financial statements
Notes to the financial statements continued
29. Post-retirement benefits continued
Changes to the fair value of Scheme assets
all figures in £ million
Opening fair value of Scheme assets
Interest income on Scheme assets
Re-measurement gain on Scheme assets
Contributions by the employer
Contributions by plan participants
Net benefits paid out and transfers
Administrative expenses
Closing fair value of Scheme assets
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 loss/(gain) on Scheme liabilities based on:
Change in financial assumptions
Change in demographic assumptions
Experience losses/(gains)
Curtailment gain
Past service gain
Net benefits paid out and transfers
Closing defined benefit obligation
Total income/expense recognised in the income statement
all figures in £ million
Pension costs charged to the income statement:
Current service cost
Past service gain (including curtailments)
Net interest on the net defined benefit liability
Administrative expenses
Total expense/(income) recognised in the income statement (gross of deferred tax)
2013
1,107.9
53.3
78.4
40.8
0.1
(22.0)
(2.0)
1,256.5
2013
1,139.4
18.7
54.6
0.1
103.8
–
16.7
(0.7)
–
(22.0)
1,310.6
2013
18.7
(0.7)
1.3
2.0
21.3
2012
(restated^)
981.1
54.0
18.2
83.2
0.1
(27.0)
(1.7)
1,107.9
2012
(restated^)
1,105.7
20.8
61.2
0.1
113.2
18.7
(10.8)
–
(142.5)
(27.0)
1,139.4
2012
(restated^)
20.8
(142.5)
7.2
1.7
(112.8)
^ IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 comparatives have been restated accordingly. Refer to note 1
to the financial statements.
108 QinetiQ Group plc Annual Report and Accounts 2013
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Assumptions
The major assumptions (weighted to reflect individual Scheme differences) were:
Rate of increase in salaries
Discount rate applied to Scheme liabilities
CPI 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)
2013
3.7%
4.4%
2.7%
88
90
90
92
2012
3.6%
4.8%
2.6%
88
90
90
92
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, because of
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. The mortality assumptions as at
31 March 2013 were 90% of S1PMA for males and 100% of S1PFA for females, based on year of birth making allowance for improvements
in mortality in line with CMI_2011 Core Projections and a long-term rate of improvement of 1.25% per annum. These assumptions
are the same as in the prior year.
The balance sheet net pension liability is a snapshot view which can be significantly influenced by short-term market factors. The
calculation of the surplus or deficit depends, therefore, 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 and investment advisors.
The weighted average duration of the defined benefit obligation is approximately twenty years.
Sensitivity analysis of the principal assumptions used to measure Scheme liabilities
Assumption
Discount rate
Rate of inflation
Salary increase
Rate of mortality
Change in assumption
Increase/decrease by 0.1%
Increase/decrease by 0.1%
Increase/decrease by 0.1%
Increase by one year
Indicative impact on Scheme liabilities
(before deferred tax)
Decrease/increase by £25m
Increase/decrease by £26m
Increase/decrease by £4m
Increase by £28m
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this
is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit
obligation to significant actuarial assumptions the same method (projected unit credit method) has been applied as when calculating
the pension liability recognised within the statement of financial position. The methods and types of assumption did not change.
Risks
Through its defined benefit pension plans, the Group is exposed to a number of risks, the most significant of which are detailed below:
Volatility in market
conditions
Choice of accounting
assumptions
Inflation rate risk
Results under IAS 19 can change dramatically depending on market conditions. The defined benefit
obligation is linked to yields on AA-rated corporate bonds, while many of the assets of the Scheme
are invested in other assets. Changing markets in conjunction with discount rate volatility will lead to
volatility in the net pension liability on the Group’s balance sheet and in other comprehensive income.
To a lesser extent this will also lead to volatility in the IAS 19 pension expense in the Group’s income
statement.
The calculation of the defined benefit obligation (DBO) involves projecting future cash flows from
the Scheme many years into the future. This means that the assumptions used can have a material
impact on the balance sheet position and profit and loss charge. In practice future experience within
the Scheme may not be in line with the assumptions adopted. For example, members could live longer
than foreseen or inflation could be higher or lower than allowed for in the DBO calculation.
The majority of the plan’s benefit obligations are linked to inflation, and higher inflation will lead
to higher liabilities.
The accounting assumptions noted above are used to calculate the year-end net pension liability in accordance with the relevant
accounting standard, IAS 19 (revised) ‘Employee benefits’. Changes in these assumptions have no impact on the Group’s cash payments
into the Scheme. The payments into the Scheme are reassessed after every triennial valuation. The triennial valuations are calculated
on a funding basis and use a different set of assumptions, as agreed with the pension Trustees.
QinetiQ Group plc Annual Report and Accounts 2013 109
Financial statements
Notes to the financial statements continued
30. Transactions with the MOD
The MOD continues to own its Special Share in QinetiQ which conveys certain rights as set out in note 27. Transactions between the Group
and the MOD are disclosed as follows:
Recovery of UK restructuring costs
QinetiQ reached agreement with the UK MOD in March 2012 involving a payment to QinetiQ of £65m that was received after the year
end in April 2012. The agreement involves the discharging of the MOD from its accumulated liabilities for restructuring costs incurred
in previous years, together with MOD agreement to changes in its Special Shareholder rights, and certain other operational issues.
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.
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 the MOD. The MOD also has the right to purchase any strategic assets in certain circumstances.
ii) Property claw-back 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 claw-back 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 that reduces over time from 50% to 9% and at 31 March 2013 stood at 9% (2012: 16%). The July 2001 valuation
was approximately 16% greater in aggregate than the consideration paid for the land and buildings on 1 July 2001.
MOD’s generic compliance regime
In the year ended 31 March 2013 the Group moved from the bespoke MOD Compliance Regime to a generic MOD conflict of interest
management system (the ‘generic compliance system’) in alignment with that followed by other Defence companies. Adherence to the
generic compliance system is monitored by the Risk & CSR Committee. Refer to the Corporate Governance Report on page 47.
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 2013 was £1.4m (2012: £1.5m).
Long-Term Partnering Agreement
On 27 February 2003 QinetiQ Limited entered into a Long-Term Partnering Agreement to provide 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 the MOD, under which QinetiQ Limited is committed to providing T&E services with increasing efficiencies through cost saving
and innovative service delivery.
31. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of £54.3m at 31 March 2013 (2012: £55.1m) in the ordinary
course of business.
The Company has on occasion been required to take legal action to protect its intellectual property rights, to enforce commercial contracts
or otherwise and similarly to defend itself against proceedings brought by other parties. Provisions are made for the expected costs
associated with such matters, based on past experience of similar items and other known factors, taking into account professional advice
received, and represent management’s best estimate of the likely outcome. The timing of utilisation of these provisions is uncertain
pending the outcome of various court proceedings and negotiations. However, no provision is made for proceedings which have been or
might be brought by other parties unless management, taking into account professional advice received, assesses that it is more likely than
not that such proceedings may be successful. Contingent liabilities associated with such proceedings have been identified but the Directors
are of the opinion that any associated claims that might be brought can be resisted successfully and therefore the possibility of any outflow
in settlement is assessed as not probable.
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 due to the MOD pursuant to
the arrangements referred to in note 30, is potentially due on the purchasers obtaining additional planning consents, with the quantum
dependent on the scope of the consent achieved.
The Group has also not recognised contingent amounts receivable relating to property impairments in prior years that may potentially
be recovered from the MOD. Recovery is subject to future negotiations. It is not considered practicable to calculate the value of this
contingent asset.
110 QinetiQ Group plc Annual Report and Accounts 2013
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32. Capital commitments
The Group had the following capital commitments for which no provision has been made:
all figures in £ million
Contracted
2013
18.0
2012
14.1
Capital commitments at 31 March 2013 include £15.8m (2012: £13.0m) in relation to property, plant and equipment that will be wholly-
funded by a third-party customer under long-term contract arrangements.
33. Subsidiaries
The companies listed below are those which were part of the Group at 31 March 2013 and which, in the opinion of the Directors,
significantly affected the Group’s results and net assets during the year. The Directors consider that those companies not listed are not
significant in relation to the Group as a whole. A comprehensive list of all subsidiaries will be disclosed as an appendix to the Group’s
annual return.
Name of company
Subsidiaries1,2,3
QinetiQ Holdings Limited
QinetiQ Limited
QinetiQ Overseas Holdings Limited
QinetiQ North America, Inc.
QinetiQ US Holdings, Inc.
Analex Corporation
Apogen Technologies, Inc.
Foster-Miller, Inc.
Westar Aerospace & Defence Group, Inc.
Principal area of operation
Country of incorporation
UK
UK
UK
USA
USA
USA
USA
USA
USA
England & Wales
England & Wales
England & Wales
USA
USA
USA
USA
USA
USA
1 Accounting reference date is 31 March. All principal subsidiary undertakings listed above have financial year ends of 31 March and 100% of the ordinary
shares are owned by the Group.
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.
3 All companies except for holding companies are operating companies engaged in the Group’s principal activities as described on page 62.
QinetiQ Group plc Annual Report and Accounts 2013 111
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
2013
2012
2
3
4
6
6
6
6
451.4
451.4
77.7
77.7
(140.1)
(62.4)
389.0
6.6
39.9
147.6
194.9
389.0
447.6
447.6
–
–
(118.3)
(118.3)
329.3
6.6
39.9
147.6
135.2
329.3
The financial statements of QinetiQ Group plc (company number 4586941) were approved by the Board of Directors and authorised
for issue on 23 May 2013 and were signed on its behalf by:
Mark Elliott
Chairman
Leo Quinn
Chief Executive Officer
David Mellors
Chief Financial Officer
112 QinetiQ Group plc Annual Report and Accounts 2013
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
The fair value of equity-settled awards 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 awards for share-based payments is determined
at each period end until they are exercised or lapse. The value is expensed straight line over the period from grant to the date of earliest
unconditional exercise. The charges for both equity and cash-settled share-based payments are updated annually for non-market-based
vesting conditions. Further details of the Group’s share-based payment charge are disclosed in note 28 to the Group financial statements.
The cost of share-based payments is charged to subsidiary undertakings.
2. Investment in subsidiary undertaking
As at 31 March
all figures in £ million
Subsidiary undertaking – 100% of ordinary share capital of QinetiQ Holdings Limited
Capital contributions arising from share-based payments to employees of subsidiaries
2013
424.3
27.1
451.4
2012
424.3
23.3
447.6
A list of all principal subsidiary undertakings of QinetiQ Group plc is disclosed in note 33 to the Group financial statements.
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3. Debtors
As at 31 March
all figures in £ million
Amounts owed by Group undertakings
4. Creditors
As at 31 March
all figures in £ million
Amounts owed to Group undertakings
5. Share capital
The Company’s share capital is disclosed in note 27 to the Group financial statements.
2013
77.7
2012
–
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140.1
2012
118.3
QinetiQ Group plc Annual Report and Accounts 2013 113
Financial statements
Notes to the Company financial statements continued
6. Reserves
all figures in £ million
At 1 April 2012
Profit
Purchase of own shares
Share based payments – settlement
Dividend paid
Share-based payments
At 31 March 2013
At 1 April 2011
Profit
Purchase of own shares
Dividend paid
Share-based payments
At 31 March 2012
Issued share
capital
6.6
–
–
–
–
–
6.6
6.6
–
–
–
–
6.6
Capital
redemption
reserve
39.9
–
–
–
–
–
39.9
39.9
–
–
–
–
39.9
Share
premium
147.6
–
–
–
–
–
147.6
147.6
–
–
–
–
147.6
Profit
and loss
135.2
75.7
(0.4)
0.7
(20.1)
3.8
194.9
145.0
14.8
(11.9)
(16.4)
3.7
135.2
Total
equity
329.3
75.7
(0.4)
0.7
(20.1)
3.8
389.0
339.1
14.8
(11.9)
(16.4)
3.7
329.3
The capital redemption reserve is not distributable and was created following redemption of Preference Share capital.
7. Share-based payments
The Company’s share-based payment arrangements are set out in note 28 to the Group financial statements.
8. Other information
Directors’ emoluments, excluding Company pension contributions, were £3.3m (2012: £3.0m). 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 Remuneration
Report.
The remuneration of the Company’s auditors for the year to 31 March 2013 was £146,000 (2012: £15,000), which was for audit of the
Group’s annual accounts and audit related assurance services. No other services were provided by the auditors to the Company.
114 QinetiQ Group plc Annual Report and Accounts 2013
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Five-year record for the years ended 31 March (unaudited)
all figures in £ million
UK Services
US Services
Global Products
Revenue
UK Services
US Services
Global Products
Underlying operating profit1
QinetiQ North America
EMEA
Ventures
Revenue
QinetiQ North America
EMEA
Ventures
Underlying operating profit1
Underlying operating margin1
Underlying profit before tax1
Profit/(loss) before tax
Profit/(loss) after tax
Underlying basic EPS1 (pence)
Basic EPS (pence)
Diluted EPS (pence)
Dividend per share
Underlying net cash from operations
(post capex)1
Net cash/(debt)
Average number of employees
Orders
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
%
£m
£m
£m
Pence
Pence
Pence
Pence
£m
£m
£m
2013
597.3
475.6
254.9
1,327.8
85.8
21.9
61.0
168.7
20125
610.1
534.5
325.0
1,469.6
61.3
32.1
66.2
159.6
20114,5
652.7
607.3
442.6
1,702.6
45.7
45.9
52.1
143.7
12.7
152.1
(137.0)
(133.2)
18.9
(20.5)
(20.5)
3.80
175.9
74.0
9,772
1,076.8
10.9
110.2
316.3
246.3
13.6
37.9
37.6
2.90
235.4
(122.2)
10,637
1,226.3
8.4
103.8
7.9
(8.8)
13.0
(1.3)
(1.3)
1.60
265.8
(260.9)
12,033
1,559.7
20103
800.1
818.8
6.5
1,625.4
67.7
61.1
(8.5)
120.3
7.4
85.7
(66.1)
(63.3)
11.1
(9.7)
(9.7)
1.58
20092
765.6
842.3
9.4
1,617.3
83.0
84.2
(15.6)
151.6
9.4
130.2
114.0
93.6
15.9
14.3
14.3
4.75
169.2
(457.4)
13,604
1,400.9
175.2
(537.9)
13,882
1,596.0
1 Underlying measures are stated before specific adjusting items. Definitions of underlying measures of performance are in the glossary on page 116.
Underlying financial measures are presented because the Board believes these provide a better representation of the Group’s long-term performance
trend.
2 Operating profit and operating margins for 2009 have been restated to show the net finance element of the IAS 19 pension cost in the finance income
and expense lines. This was previously reported in other operating costs.
3 The Group’s management structure changed with effect from 1 April 2010. Segmental data for 2009 and 2010 has been retained on the old structure
as reported in previous financial statements.
4 The 2011 figures have been restated to reflect the transfer of businesses from Global Products to UK Services and US Services at the beginning of the
2012 financial year.
5 IAS 19 (revised) ‘Employee Benefits’ has been adopted for 2013 and the 2012 and 2011 comparatives have been restated accordingly. Refer to note 1
to the financial statements.
QinetiQ Group plc Annual Report and Accounts 2013 115
Glossary
ABI Association of British Insurers
AGM Annual General Meeting
OHSAS Occupational Health and Safety Advisory Services
Organic Growth The level of year-on-year growth, expressed as
Book to bill ratio Ratio of funded orders received in the year to
revenue for the year, adjusted to exclude revenue
from the 25-year LTPA contract
BPS Basis points
BSI British Standards Institution
a percentage, calculated at constant foreign
exchange rates, adjusting comparatives to
incorporate the results of acquired entities
but excluding the results for any disposals or
discontinued operations for the same duration
of ownership as the current period
CAGR Compound Annual Growth Rate
C4ISR Command, control, communications, computers,
intelligence, surveillance and reconnaissance
COTS Commercial off-the-shelf
CPI Consumer Price Index
CR Corporate Responsibility
DAB Deferred Annual Bonus
DERA Defence Evaluation and Research Agency, the
majority of which was transferred into QinetiQ
in 2001
DHS US Department of Homeland Security
DoD US Department of Defense
DTR MOD’s Defence Training Rationalisation programme
DE&S MOD’s Defence, Equipment and Support
organisation
EBITDA Earnings before interest, tax, depreciation
and amortisation
EMEA Europe, Middle East and Australasia
EPS Earnings per share
Funded backlog The expected future value of revenue from
contractually committed and funded customer
orders (excluding £3.4bn value of the remaining
15 years of the LTPA contract)
Gearing ratio This is the ratio of net debt to adjusted EBITDA in
accordance with the Group’s credit-facility ratios.
EBITDA is adjusted to exclude charges for share-
based payments. Net debt is adjusted to reflect the
same exchange rates as used for EBITDA and to
reflect other requirements of the debt-holders’
covenant calculations
GWh Giga-Watt hours
IAS
IDIQ
IFRS
IPO
International Accounting Standards
Indefinite Delivery/Indefinite Quantity
International Financial Reporting Standards
Initial Public Offering
KPI Key Performance Indicator
LIBID London inter-bank bid rate
LIBOR London inter-bank offered rate
LSE London Stock Exchange
LTPA Long-Term Partnering Agreement – 25-year contract
established in 2003 to manage the MOD’s test and
evaluation ranges
MOD UK Ministry of Defence
PBT Profit before tax
PSP Performance Share Plan
QNA QinetiQ North America
QSOS QinetiQ Share Option Scheme
R&D Research and development
ROCE Return on Capital Employed
RSU Restricted Stock Unit
Specific adjusting
items
Net restructuring charges/recoveries; net pension
finance expense; pension curtailment gains; pension
past service gains; contingent payments on
acquisition treated as remuneration; net gain/loss in
respect of previously capitalised DTR programme
bid costs; impairment of property; impairment of
intangible assets; gain/loss on business
combinations and divestments; gain/loss on disposal
of investments; and tax thereon
TSR Total Shareholder Return
UK Corporate
Governance Code
Guidelines of the Financial Reporting Council to
address the principal aspects of corporate governance
UK GAAP UK Generally Accepted Accounting Practice
Underlying basic
earnings per share
Underlying effective
tax rate
Underlying net cash
from operations
(post capex)
Underlying net
finance costs
Underlying operating
cash conversion
Underlying operating
margin
Underlying operating
profit
Underlying profit
before tax
Basic earnings per share as adjusted to exclude
‘specific adjusting items’
The tax charge for the year excluding the tax impact
of ‘specific adjusting items’ expressed as a
percentage of underlying profit before tax
Net cash inflow from operations before
restructuring costs less net cash outflow on
purchase/sale of intangible assets and property,
plant and equipment
Interest cost on the defined benefit pension
scheme’s liability offset by the interest income on
the scheme’s assets
The ratio of underlying net cash from operations
(post capex) to underlying operating profit excluding
share of post-tax result of equity-accounted joint
ventures and associates
Underlying operating profit expressed as a
percentage of revenue
Operating profit as adjusted to exclude ‘specific
adjusting items’
Profit before tax as adjusted to exclude ‘specific
adjusting items’
Unfunded Orders Typically long-term contracts awarded by the
US Government which the customer funds
incrementally over the life of the contract.
The Group does not recognise such awards into
the reported backlog until funding is confirmed
NASA National Aeronautics and Space Administration
(USA)
VSP Value Sharing Plan
116 QinetiQ Group plc Annual Report and Accounts 2013
Shareholder information
Share administration
The Company’s registrar is Equiniti. If you have any queries
regarding your shareholding, including dividend payments and
change of address notifications, please contact Equiniti, either in
writing at the address shown on the next page, by telephone on
0871 384 2021* or online at https://help.shareview.co.uk – from
here, if you need further assistance, you will be able to email
Equiniti securely. Equiniti also offers Shareview, a free of charge
service enabling you to access and maintain your shareholding
online. Through Shareview you can register for electronic
communications, see details of balance movements and complete
certain amendments online, such as changes to dividend mandate
instructions. To take advantage of Shareview, register online at
www.shareview.co.uk, click on ‘Register’ and follow the steps.
* Lines are open 8.30am to 5.30pm, Monday to Friday, excluding Bank Holidays.
Calls to 0871 numbers are charged at 8p per minute plus network extras.
Direct dividend payments
If you would like to have your dividend paid directly into a UK bank
or building society account, please contact Equiniti or complete the
dividend mandate attached to your dividend cheque. The associated
tax voucher will still be sent to your registered address. If you live
outside the UK, Equiniti offers a global payments service which is
available in certain countries and could enable you to receive your
dividends direct into your bank account in your local currency.
Further details can be obtained direct from Equiniti or online at
www.shareview.co.uk.
Consolidated tax vouchers
Shareholders who have dividends paid direct into a bank or building
society account receive a Consolidated Tax Voucher which details
all dividends paid for the year. Under this process, a shareholder’s
dividend is paid direct to their bank account each time a dividend
is paid and once a year they receive a tax voucher detailing all
dividends paid for that year. Shareholders who prefer to continue
receiving tax vouchers with each dividend payment can contact
Equiniti Registrars to request this.
Electronic communications
The Company offers shareholders the option to receive
documentation and communications electronically, via the
Company’s website. The wider use of electronic communications
enables fast receipt of documents, reduces the Company’s printing,
paper and postal costs and reduces the Company’s environmental
impact. Shareholders can register for electronic communications at
www.shareview.co.uk and may also cast their vote for the 2013
AGM online quickly and easily using the Sharevote service by visiting
www.sharevote.co.uk.
Donating shares to charity
Analysis of Share Register at 31 March 2013
Shareholders with small numbers of shares which may be
uneconomic to sell may wish to consider donating them to the
charity ShareGift (registered charity no. 1052686). Details are
available at www.sharegift.org.uk or by telephone on
020 7930 3737.
Unsolicited telephone calls or correspondence
We are aware that some shareholders might have received
unsolicited telephone calls or correspondence concerning
investment matters. These are typically from overseas-based
‘brokers’ who target UK shareholders, offering to sell them what
often turn out to be worthless or high risk shares in US or UK
investments. These ‘brokers’ can be very persistent and extremely
persuasive. If you receive any unsolicited investment advice, check
that the firm is properly authorised by the Financial Conduct
Authority by visiting www.fca.gov.uk and selecting Financial Services
Register, or report the matter to the FCA by calling 0800 111 6768.
If the calls persist, hang up. If you deal with an unauthorised firm,
you will not be eligible to receive payment under the Financial
Services Compensation Scheme.
Share price
Details of current and historical share prices can be found on the
Company’s website at www.QinetiQ.com/investors. The table below
shows the share price trend during the year ended 31 March 2013.
220
210
200
190
180
170
160
150
140
130
120
M ar 12
Apr 12
M ay 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
N ov 12
Dec 12
Jan 13
Feb 13
M ar 13
The share prices used in the graph above are the mid-market closing prices as derived
from the London Stock Exchange Daily Official List.
By type of holder
By size of holding
Individuals
Institutions and Others
Total
1-500
501-1,000
1,001-5,000
5,001-10,000
10,001-100,000
Over 100,000
Total
Number of holdings
6,338
936
7,274
4,534
710
1,288
252
260
230
7,274
% of total holdings
87.13%
12.87%
100.00%
62.33%
9.76%
17.71%
3.46%
3.58%
3.16%
100.00%
Shares held
7,623,106
652,853,267
660,476,373
937,002
573,836
3,150,133
1,883,532
9,257,487
644,674,383
660,476,373
% of share capital
1.15%
98.85%
100.00%
0.14%
0.09%
0.48%
0.28%
1.40%
97.61%
100.00%
QinetiQ Group plc Annual Report and Accounts 2013 117
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Business reviewCorporate governanceFinancial statementsOverview
Additional information
Key dates
25 July 2013
25 July 2013
7 August 2013
9 August 2013
6 September 2013
30 September 2013
21 November 2013
February 2014
31 March 2014
May 2014
Corporate website
The Company’s website is www.QinetiQ.com. The QinetiQ Annual
Report 2013 can be viewed at www.QinetiQ.com/Investors together
with shareholder information and information on the Company, its
performance, the Annual General Meeting and latest presentations.
From the website, you can access the following:
Latest information
• Latest and historic share prices
• Financial calendar
• Regulatory (RNS) news
• Corporate governance
Shareholder services
• Register online via Shareview
• Common questions
• Dividend history
Archive information
• Financial results and trading updates
• Company reports
• Company presentations
Contacts
• Investor contacts
Corporate responsibility
• Further details of our corporate responsibility policy can be found
at www.QinetiQ.com/cr
Investor relations app
The QinetiQ Annual Report 2013 can also be viewed on our investor
relations app for the iPad downloadable from the App Store.
118 QinetiQ Group plc Annual Report and Accounts 2013
Interim management statement
Annual General Meeting
Ordinary shares marked ex-dividend
Final 2013 dividend record date
Final 2013 dividend payment date
Half year financial period end
Half-yearly results announcement
Interim management statement (provisional date)
Financial year end
Preliminary results announcement
Company information
Registered office
Cody Technology Park
Ively Road
Farnborough
Hampshire
GU14 0LX
Tel: +44 (0) 8700 100 942
Company Registration Number 4586941
Auditor
KPMG Audit Plc
Chartered Accountants
15 Canada Square
London
E14 5GL
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Advisors
Corporate brokers
J.P.Morgan
25 Bank Street
London
E14 5JP
UBS Investment Bank
1 Finsbury Avenue
London
EC2M 2PP
Principal legal advisor
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Designed by www.luminous.co.uk
Photography
Page 14 Glock © Crown copyright 2012
Page 15 Global Marine Trends fourtwentyseven design
Registered office
Cody Technology Park
Ively Road, Farnborough
Hampshire GU14 0LX
United Kingdom
Tel: +44 (0) 8700 100 942
www.QinetiQ.com
Company Registration Number
4586941
©QinetiQ Group plc
QINETIQ/13/01287
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